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 March 31, 2005

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

                                      NONE
              (Former name, former address and former fiscal year,
                         if changed since last report)

Indicate  by check mark  whether  the  registrants  (1) have  filed all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrants  were required to file such  reports),  and (2) have been subject to
such filing requirements for the past 90 days. Yes X   No

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

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

This combined Form 10-Q is filed separately by two registrants:  Progress Energy
and Carolina Power & Light Company d/b/a Progress Energy Carolinas,  Inc. (PEC).
Information  contained herein relating to either individual  registrant is filed
by  such  registrant  solely  on  its  own  behalf.  Each  registrant  makes  no
representation as to information relating exclusively to the other registrant.

Indicate the number of shares  outstanding  of each of the  issuers'  classes of
common stock,  as of the latest  practicable  date.  As of April 30, 2005,  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)              248,680,504
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 March 31, 2005



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.  Unregistered Sales of Equity Securities and Use of Proceeds

Item 6.  Exhibits

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

401(k)                         Progress Energy 401(k) Savings and Stock Ownership Plan
AFUDC                          Allowance for funds used during construction
the Agreement                  Stipulation and Settlement Agreement related to retail rate matters
ARO                            Asset retirement obligation
Bcf                            Billion cubic feet
Btu                            British thermal unit
CAIR                           Clean Air Interstate Rule
CAMR                           Clean Air Mercury Rule
CCO                            Competitive Commercial Operations business segment
CERCLA or Superfund            Comprehensive Environmental Response, Compensation and Liability Act of
                               1980, as amended
Code                           Internal Revenue Code
Colona                         Colona Synfuel Limited Partnership, LLLP
the Company                    Progress Energy, Inc. and subsidiaries
CP&L                           Carolina Power & Light Company, d/b/a Progress Energy Carolinas, Inc.
CR3                            Crystal River Unit No. 3
CVO                            Contingent value obligation
DOE                            United States Department of Energy
DWM                            North Carolina Department of Environment and Natural Resources, Division of
                               Waste Management
ECRC                           Environmental Cost Recovery Clause
EITF                           Emerging Issues Task Force
EMCs                           Electric Membership Cooperatives
EPA of 1992                    Energy Policy Act of 1992
FASB                           Financial Accounting Standards Board
FDEP                           Florida Department of Environment and Protection
FERC                           Federal Energy Regulatory Commission
FIN No. 45                     Financial Accounting Standards Board (FASB) Interpretation No. 45,
                               "Guarantor's Accounting and Disclosure Requirements for Guarantees,
                               Including Indirect Guarantees of Indebtedness of Others"
FIN No. 46R                    FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities -
                               an Interpretation of ARB No. 51"
Florida Progress or FPC        Florida Progress Corporation
FPSC                           Florida Public Service Commission
Fuels                          Fuels business segment
GAAP                           Accounting Principles Generally Accepted in the United States of America
Global                         U.S. Global LLC
the holding company            Progress Energy Corporate
IRS                            Internal Revenue Service
Jackson                        Jackson Electric Membership Corporation
LIBOR                          London Inter Bank Offering Rate
MACT                           Maximum Achievable Control Technology
Medicare Act                   Medicare Prescription Drug, Improvement and Modernization Act of 2003
MGP                            Manufactured Gas Plant
MW                             Megawatt
MWh                            Megawatt-hour
NCUC                           North Carolina Utilities Commission
NOx                            Nitrogen Oxide
NOx SIP Call                   EPA rule which requires 22 states including North and South Carolina to
                               further reduce nitrogen oxide emissions.
NRC                            United States Nuclear Regulatory Commission
Nuclear Waste Act              Nuclear Waste Policy Act of 1982

                                       3
<PAGE>

O&M                            Operations & Maintenance Expense
OPEB                           Postretirement benefits other than pensions
PEC                            Progress Energy Carolinas, Inc., formerly referred to as Carolina Power &
                               Light Company
PEC Electric                   PEC Electric business segment made up of the utility operations and
                               excludes operations of nonregulated subsidiaries
PEF                            Progress Energy Florida, formerly referred to as Florida Power Corporation
PFA                            IRS Prefiling Agreement
PLR                            Private Letter Ruling
Progress Energy                Progress Energy, Inc.
Progress Fuels                 Progress Fuels Corporation, formerly Electric Fuels Corporation
Progress Rail                  Progress Rail Services Corporation
Progress Ventures              Business unit of Progress Energy primarily made up of nonregulated energy
                               generation and marketing activities, as well as gas, coal and synthetic
                               fuel operations
PRP                            Potentially responsible party, as defined in CERCLA
PTC                            Progress Telecommunications Corporation
PT LLC                         Progress Telecom, LLC
PUHCA                          Public Utility Holding Company Act of 1935, as amended
PVI                            Progress Energy Ventures, Inc. (formerly referred to as CPL Energy
                               Ventures, Inc.)
Rail Services                  Rail Services business segment
RCA                            Revolving credit agreement
ROE                            Return on Equity
SCPSC                          Public Service Commission of South Carolina
SEC                            United States Securities and Exchange Commission
Section 29                     Section 29 of the Internal Revenue Service Code
Service Company                Progress Energy Service Company, LLC
SFAS                           Statement of Financial Accounting Standards
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. 123R                  Statement of Financial Accounting Standards No. 123R, "Accounting for
                               Stock-Based Compensation"
SFAS No. 133                   Statement of Financial Accounting Standards No. 133, "Accounting for
                               Derivative and Hedging Activities"
SFAS No. 138                   Statement of Financial Accounting Standards No. 138, "Accounting for
                               Certain Derivative Instruments and Certain Hedging Activities - An
                               Amendment of FASB Statement No. 133"
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"
Smokestacks Act                North Carolina Clean Smokestacks Act enacted in June 2002
SO2                            Sulfur dioxide
SRS                            Strategic Resource Solutions Corp.
the Trust                      FPC Capital I
</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  "Results of
Operations" about trends and  uncertainties,  "Liquidity and Capital  Resources"
about future  liquidity  requirements  and "Other  Matters"  about the Company's
synthetic fuel facilities.

Any forward-looking  statement is based on information current as of the date of
this report and speaks only as of the date on which such  statement is made, and
neither  Progress  Energy,  Inc.  (Progress  Energy or the Company) nor Progress
Energy   Carolinas,   Inc.  (PEC)   undertakes  any  obligation  to  update  any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made.

Examples of factors that you should consider with respect to any forward-looking
statements made throughout  this document  include,  but are not limited to, the
following:  the impact of fluid and  complex  government  laws and  regulations,
including those relating to the  environment;  deregulation or  restructuring in
the electric  industry that may result in increased  competition and unrecovered
(stranded) costs; the uncertainty  regarding the timing,  creation and structure
of  regional  transmission  organizations;   weather  conditions  that  directly
influence the demand for electricity;  the Company's  ability to recover through
the regulatory process, and the timing of such recovery of, the costs associated
with the four  hurricanes  that impacted our service  territory in 2004 or other
future significant weather events; recurring seasonal fluctuations in demand for
electricity;  fluctuations  in the price of  energy  commodities  and  purchased
power; economic fluctuations and the corresponding impact on the Company and its
subsidiaries'  commercial and industrial customers; the ability of the Company's
subsidiaries to pay upstream dividends or distributions to it; the impact on the
facilities  and the  businesses  of the  Company  from a terrorist  attack;  the
inherent risks  associated with the operation of nuclear  facilities,  including
environmental,   health,   regulatory  and  financial   risks;  the  ability  to
successfully  access  capital  markets on  favorable  terms;  the ability of the
Company to maintain its current  credit  ratings and the impact on the Company's
financial condition and ability to meet its cash and other financial obligations
in the event its credit  ratings are  downgraded  below  investment  grade;  the
impact  that  increases  in  leverage  may have on the  Company;  the  impact of
derivative  contracts  used in the normal  course of  business  by the  Company;
investment  performance of pension and benefit plans;  the Company's  ability to
control  costs,  including  pension  and benefit  expense,  and achieve its cost
management  targets for 2007; the  availability and use of Internal Revenue Code
Section  29  (Section  29) tax  credits  by  synthetic  fuel  producers  and the
Company's  continued  ability to use Section 29 tax credits  related to its coal
and synthetic fuel businesses;  the impact to the Company's  financial condition
and  performance  in the event it is  determined  the Company is not entitled to
previously  taken  Section  29 tax  credits;  the  impact of  future  accounting
pronouncements regarding uncertain tax positions; the outcome of Progress Energy
Florida's  (PEF) rate  proceeding in 2005  regarding its future base rates;  the
Company's  ability  to  manage  the risks  involved  with the  operation  of its
nonregulated   plants,   including  dependence  on  third  parties  and  related
counter-party  risks, and a lack of operating history;  the Company's ability to
manage the risks associated with its energy marketing operations; the outcome of
any ongoing or future  litigation or similar disputes and the impact of any such
outcome or related settlements;  and unanticipated changes in operating expenses
and capital  expenditures.  Many of these risks  similarly  impact the Company's
subsidiaries.

These and other risk factors are detailed from time to time in the Company's and
PEC's filings with the United States  Securities and Exchange  Commission (SEC).
Many,  but not all, of the factors that may impact actual  results are discussed
in the Risk Factors  sections of Progress  Energy's and PEC's annual  reports on
Form 10-K for the year ended December 31, 2004, which were filed with the SEC on
March 16, 2005. All such factors are difficult to predict, contain uncertainties
that may  materially  affect  actual  results  and may be beyond 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
                                 March 31, 2005

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
UNAUDITED CONSOLIDATED STATEMENTS of INCOME
----------------------------------------------------------------------------------------
(in millions except per share data)
Three months ended March 31,                                          2005         2004
----------------------------------------------------------------------------------------
Operating revenues
   Utility                                                        $  1,783     $  1,685
   Diversified business                                                415          321
----------------------------------------------------------------------------------------
      Total operating revenues                                       2,198        2,006
----------------------------------------------------------------------------------------
Operating expenses
Utility
   Fuel used in electric generation                                    550          493
   Purchased power                                                     198          183
   Operation and maintenance                                           406          363
   Depreciation and amortization                                       208          202
   Taxes other than on income                                          117          105
Diversified business
   Cost of sales                                                       395          311
   Depreciation and amortization                                        39           41
   Other                                                                32           30
----------------------------------------------------------------------------------------
        Total operating expenses                                     1,945        1,728
----------------------------------------------------------------------------------------
Operating income                                                       253          278
----------------------------------------------------------------------------------------
Other income (expense)
   Interest income                                                       4            2
   Other, net                                                            2         (22)
----------------------------------------------------------------------------------------
        Total other income (expense)                                     6         (20)
----------------------------------------------------------------------------------------
Interest charges
   Net interest charges                                                166          161
   Allowance for borrowed funds used during construction                (3)          (1)
----------------------------------------------------------------------------------------
        Total interest charges, net                                    163          160
----------------------------------------------------------------------------------------
Income from continuing operations before income tax and                 96           98
   minority interest
Income tax benefit                                                       1            2
----------------------------------------------------------------------------------------
Income from continuing operations before minority interest              97          100
Minority interest in subsidiaries' loss (income), net of tax             8          (1)
----------------------------------------------------------------------------------------
Income from continuing operations                                      105           99
Discontinued operations, net of tax                                    (12)           9
----------------------------------------------------------------------------------------
Net income                                                        $     93     $    108
----------------------------------------------------------------------------------------
Average common shares outstanding                                      244          241
----------------------------------------------------------------------------------------
Basic earnings per common share
    Income from continuing operations                             $   0.43     $   0.41
    Discontinued operations, net of tax                              (0.05)        0.04
    Net income                                                    $   0.38     $   0.45
----------------------------------------------------------------------------------------
Diluted earnings per common share
    Income from continuing operations                             $   0.43     $   0.41
    Discontinued operations, net of tax                              (0.05)        0.04
    Net income                                                    $   0.38     $   0.45
----------------------------------------------------------------------------------------
Dividends declared per common share                               $  0.590     $  0.575
----------------------------------------------------------------------------------------
</TABLE>

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

                                       6
<PAGE>


<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
PROGRESS ENERGY, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------------
(in millions)                                                               March 31,       December 31,
                                                                                2005               2004
--------------------------------------------------------------------------------------------------------
ASSETS
Utility plant
  Utility plant in service                                                  $ 22,117           $ 22,103
  Accumulated depreciation                                                    (9,231)            (8,783)
--------------------------------------------------------------------------------------------------------
        Utility plant in service, net                                         12,886             13,320
  Held for future use                                                             13                 13
  Construction work in progress                                                  972                799
  Nuclear fuel, net of amortization                                              251                231
--------------------------------------------------------------------------------------------------------
     Total utility plant, net                                                 14,122             14,363
--------------------------------------------------------------------------------------------------------
Current assets
  Cash and cash equivalents                                                      280                 56
  Short-term investments                                                         229                 82
  Receivables                                                                    931                911
  Inventory                                                                      772                805
  Deferred fuel cost                                                             235                229
  Deferred income taxes                                                           65                111
  Assets of discontinued operations                                                -                574
  Prepayments and other current assets                                           291                174
--------------------------------------------------------------------------------------------------------
     Total current assets                                                      2,803              2,942
--------------------------------------------------------------------------------------------------------
Deferred debits and other assets
  Regulatory assets                                                            1,021              1,064
  Nuclear decommissioning trust funds                                          1,078              1,044
  Diversified business property, net                                           1,861              1,838
  Miscellaneous other property and investments                                   480                444
  Goodwill                                                                     3,719              3,719
  Intangibles, net                                                               330                337
  Other assets and deferred debits                                               282                265
--------------------------------------------------------------------------------------------------------
     Total deferred debits and other assets                                    8,771              8,711
--------------------------------------------------------------------------------------------------------
           Total assets                                                     $ 25,696           $ 26,016
--------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
--------------------------------------------------------------------------------------------------------
Common stock equity
  Common stock without par value, 500 million shares authorized,
      249 and 247 million shares issued and outstanding, respectively       $  5,428           $  5,360
  Unearned restricted shares (1 and 1 million shares, respectively)              (16)               (13)
  Unearned ESOP shares (3 and 3 million shares, respectively                     (65)               (76)
  Accumulated other comprehensive loss                                          (159)              (164)
  Retained earnings                                                            2,475              2,526
--------------------------------------------------------------------------------------------------------
        Total common stock equity                                              7,663              7,633
--------------------------------------------------------------------------------------------------------
Preferred stock of subsidiaries-not subject to mandatory redemption               93                 93
Minority interest                                                                 38                 36
Long-term debt, affiliate                                                        270                270
Long-term debt, net                                                            8,728              9,251
--------------------------------------------------------------------------------------------------------
        Total capitalization                                                  16,792             17,283
--------------------------------------------------------------------------------------------------------
Current liabilities
  Current portion of long-term debt                                            1,148                349
  Accounts payable                                                               582                630
  Interest accrued                                                               165                219
  Dividends declared                                                             146                145
  Short-term obligations                                                         691                684
  Customer deposits                                                              186                180
  Liabilities of discontinued operations                                           -                149
  Other current liabilities                                                      620                703
--------------------------------------------------------------------------------------------------------
        Total current liabilities                                              3,538              3,059
--------------------------------------------------------------------------------------------------------
Deferred credits and other liabilities
  Noncurrent income tax liabilities                                              603                625
  Accumulated deferred investment tax credits                                    173                176
  Regulatory liabilities                                                       2,402              2,654
  Asset retirement obligations                                                 1,211              1,282
  Other liabilities and deferred credits                                         977                937
--------------------------------------------------------------------------------------------------------
        Total deferred credits and other liabilities                           5,366              5,674
--------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 14)
--------------------------------------------------------------------------------------------------------
           Total capitalization and liabilities                             $ 25,696           $ 26,016
--------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       7
<PAGE>


<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
PROGRESS ENERGY, INC.
UNAUDITED CONSOLIDATED STATEMENTS of CASH FLOWS
-----------------------------------------------------------------------------------------------------
(in millions)
Three Months Ended March 31,                                                   2005           2004
-----------------------------------------------------------------------------------------------------
Operating activities
Net income                                                                  $    93          $ 108
Adjustments to reconcile net income to net cash provided by operating
activities:
      Discontinued operations, net of tax                                        12             (9)
      Depreciation and amortization                                             276            271
      Deferred income taxes                                                      13             (7)
      Investment tax credit                                                      (3)            (4)
      Deferred fuel cost                                                         19             63
      Other adjustments to net income                                            42             16
      Cash provided (used) by changes in operating assets and
      liabilities:
         Receivables                                                              4             50
         Inventory                                                              (23)             6
         Prepayments and other current assets                                   (10)           (20)
         Accounts payable                                                        38            (35)
         Other current liabilities                                             (156)          (131)
         Regulatory assets and liabilities                                      (55)            (7)
         Other                                                                   29             66
-----------------------------------------------------------------------------------------------------
         Net cash provided by operating activities                              279            367
-----------------------------------------------------------------------------------------------------
Investing activities
Gross utility property additions                                               (263)          (242)
Diversified business property additions                                         (49)           (45)
Nuclear fuel additions                                                          (64)           (39)
Proceeds from sales of subsidiaries and other investments                       406             84
Purchases of short-term investments                                          (1,840)          (601)
Proceeds from sales of short-term investments                                 1,693            828
Other                                                                           (49)            (9)
-----------------------------------------------------------------------------------------------------
          Net cash used in investing activities                                (166)           (24)
-----------------------------------------------------------------------------------------------------
Financing activities
Issuance of common stock                                                         60             29
Issuance of long-term debt                                                      495              -
Net increase in short-term indebtedness                                           7            503
Retirement of long-term debt                                                   (216)          (675)
Dividends paid on common stock                                                 (145)          (141)
Other                                                                           (48)           (62)
---------------------------------------------------------------------------------------------------
           Net cash provided by (used in) financing activities                  153           (346)
-----------------------------------------------------------------------------------------------------
Cash (used) provided by discontinued operations                                 (42)             6
Net increase in cash and cash equivalents                                       224              3
Cash and cash equivalents at beginning of period                                 56             34
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                  $   280          $  37
-----------------------------------------------------------------------------------------------------
</TABLE>

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


                                       8
<PAGE>



PROGRESS ENERGY, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.   BASIS OF PRESENTATION

     A. Basis of Presentation

     These financial statements have been prepared in accordance with accounting
     principles  generally  accepted in the United States of America  (GAAP) for
     interim  financial  information and with the  instructions to Form 10-Q and
     Regulation S-X. Accordingly, they do not include all of the information and
     footnotes required by GAAP for annual statements.  Because the accompanying
     consolidated  interim  financial  statements  do  not  include  all  of the
     information  and  footnotes  required  by  GAAP,  they  should  be  read in
     conjunction  with the audited  financial  statements  for the period  ended
     December 31, 2004,  and notes  thereto  included in Progress  Energy's Form
     10-K for the year ended December 31, 2004.

     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
     increased  by $3 million and $39 million for the three  months  ended March
     31, 2005 and 2004, respectively, in order to maintain an effective tax rate
     consistent  with the estimated  annual rate.  The income tax provisions for
     the Company differ from amounts computed by applying the Federal  statutory
     tax rate to income before income taxes, primarily due to the recognition of
     synthetic fuel tax credits.

     PEC and PEF collect from customers certain excise taxes levied by the state
     or local  government  upon the  customers.  PEC and PEF  account for excise
     taxes on a gross basis. For the three months ended March 31, 2005 and 2004,
     gross receipts tax, franchise taxes and other excise taxes of approximately
     $57 million and $53 million, respectively, are included in utility revenues
     and taxes other than on income in the Consolidated Statements of Income.

     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 2004 have been reclassified to conform
     to the 2005 presentation.

     B. 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" (SFAS No. 148),  the  estimated  fair
     value of the  Company's  stock  options is  amortized  to expense  over the
     options' vesting period.  The following table illustrates the effect on net
     income and  earnings per share if the fair value method had been applied to
     all outstanding and unvested awards in each period:

                                       9
<PAGE>


<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     -----------------------------------------------------------------------------------------------
     (in millions except per share data)                                Three Months Ended March 31,
                                                                              2005             2004
     -----------------------------------------------------------------------------------------------
     Net income, as reported                                                $   93           $  108
     Deduct:  Total stock option expense determined under fair
       value method for all awards, net of related tax effects                   1                3
     -----------------------------------------------------------------------------------------------
     Pro forma net income                                                   $   92           $  105
     -----------------------------------------------------------------------------------------------

     -----------------------------------------------------------------------------------------------
     Basic earnings per share
       As reported                                                          $ 0.38           $ 0.45
       Pro forma                                                            $ 0.38           $ 0.44

     Fully diluted earnings per share
       As reported                                                          $ 0.38           $ 0.45
       Pro forma                                                            $ 0.38           $ 0.43
     -----------------------------------------------------------------------------------------------
</TABLE>

     The Company  expects to begin  expensing stock options on July 1, 2005 (See
     Note 2).

     C. Consolidation of Variable Interest Entities

     The Company  consolidates  all voting interest  entities in which it owns a
     majority voting interest and all variable interest entities for which it is
     the primary  beneficiary in accordance  with FASB  Interpretation  No. 46R,
     "Consolidation of Variable Interest Entities - An Interpretation of ARB No.
     51"  (FIN  No.  46R).  The  Company  is  the  primary  beneficiary  of  and
     consolidates two limited  partnerships that qualify for federal  affordable
     housing and historic tax credits under  Section 42 of the Internal  Revenue
     Code  (Code).  As of March 31,  2005,  the total assets of the two entities
     were $37 million,  the majority of which are  collateral  for the entities'
     obligations  and are  included in other  current  assets and  miscellaneous
     other property and investments in the Consolidated Balance Sheets.

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

     The Company also has interests in several other variable  interest entities
     for which the Company is not the primary  beneficiary.  These  arrangements
     include  investments  in  approximately  28 limited  partnerships,  limited
     liability  corporations  and venture  capital funds and two building leases
     with special-purpose entities. The aggregate maximum loss exposure at March
     31,  2005,  that the  Company  could be  required  to record in its  income
     statement  as a  result  of these  arrangements  totals  approximately  $38
     million.  The  creditors of these  variable  interest  entities do not have
     recourse  to the general  credit of the Company in excess of the  aggregate
     maximum loss exposure.

2.   IMPACT OF NEW ACCOUNTING STANDARDS

     PROPOSED FASB INTERPRETATION OF SFAS NO. 109, "ACCOUNTING FOR INCOME TAXES"

     In July 2004, the Financial  Accounting  Standards Board (FASB) stated that
     it plans to issue an exposure  draft of a proposed  interpretation  of SFAS
     No. 109,  "Accounting  for Income Taxes" (SFAS No. 109), that would address
     the accounting for uncertain tax positions. The FASB has indicated that the
     interpretation  would  require that  uncertain  tax benefits be probable of
     being  sustained  in order to  record  such  benefits  in the  consolidated
     financial  statements.  The exposure  draft is expected to be issued in the
     second  quarter of 2005.  The Company  cannot predict what actions the FASB

                                       10
<PAGE>

     will take or how any such actions  might  ultimately  affect the  Company's
     financial position or results of operations,  but such changes could have a
     material  impact on the Company's  evaluation and recognition of Section 29
     tax credits (See Note 14).

     SFAS NO. 123 (REVISED 2004), "SHARE-BASED PAYMENT" (SFAS NO. 123R)

     In December  2004,  the FASB issued SFAS No. 123R,  which  revises SFAS No.
     123, "Accounting for Stock-Based  Compensation," and supersedes  Accounting
     Principles  Board (APB)  Opinion No. 25,  "Accounting  for Stock  Issued to
     Employees."  The key  requirement  of SFAS  No.  123R is that  the  cost of
     share-based  awards to employees  will be measured based on an award's fair
     value  at  the  grant  date,  with  such  cost  to be  amortized  over  the
     appropriate  service period.  Previously,  entities could elect to continue
     accounting  for such awards at their grant date  intrinsic  value under APB
     Opinion No. 25, and the Company made that  election.  The  intrinsic  value
     method resulted in the Company recording no compensation  expense for stock
     options granted to employees (See Note 1B).

     As written,  SFAS No. 123R had an original  effective  date of July 1, 2005
     for the  Company.  In April 2005,  the SEC delayed the  effective  date for
     public companies, which resulted in a required effective date of January 1,
     2006 for the Company.  The SEC delayed the  effective  date due to concerns
     that  implementation  in mid-year could make  compliance more difficult and
     make comparisons of quarterly reports more difficult. The Company currently
     intends to implement  SFAS No. 123R on the original  effective date of July
     1, 2005.  The Company  intends to implement the standard using the required
     modified  prospective  method.  Under  that  method and with a July 1, 2005
     implementation, the Company will record compensation expense under SFAS No.
     123R for all  awards it  grants  after  July 1,  2005,  and it will  record
     compensation expense (as previous awards continue to vest) for the unvested
     portion of previously  granted  awards that remain  outstanding  at July 1,
     2005.  In 2004,  the  Company  made the  decision to cease  granting  stock
     options  and  replaced  that   compensation   with  alternative   forms  of
     compensation.  Therefore, the amount of stock option expense expected to be
     recorded in 2005 is below the amount  that would have been  recorded if the
     stock  option  program  had  continued.   The  Company  expects  to  record
     approximately $3 million of pre-tax expense for stock options in 2005.

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

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

3.   DIVESTITURES

     Progress Rail Divestiture

     On March 24, 2005,  the Company  completed the sale of Progress Rail to One
     Equity  Partners LLC, a private equity firm unit of J.P. Morgan Chase & Co.
     Gross  cash  proceeds  from  the  sale are  estimated  to be $433  million,
     consisting of $405 million base proceeds plus an estimated  working capital
     adjustment. Proceeds from the sale were used to reduce debt.

     Based on the  estimated  gross  proceeds  associated  with the sale of $433
     million,  the Company  recorded an estimated  after-tax loss on disposal of
     $17  million  during the first  quarter of 2005.  The  Company  anticipates
     adjustments  to the loss on the  divestiture  during the second  quarter of
     2005 related to employee  benefit  settlements and the  finalization of the
     working capital adjustment and other operating estimates.


                                       11
<PAGE>


     The  accompanying  consolidated  interim  financial  statements  have  been
     restated for all periods  presented to reflect the  operations  of Progress
     Rail as discontinued  operations in the Consolidated  Statements of Income.
     Interest expense has been allocated to discontinued operations based on the
     net assets of Progress Rail, assuming a uniform debt-to-equity ratio across
     the Company's  operations.  Interest expense allocated for the three months
     ended  March 31,  2005 and 2004 was $4 million  each  period.  The  Company
     ceased  recording   depreciation  upon  classification  of  the  assets  as
     discontinued  operations in February 2005.  After-tax  depreciation expense
     recorded by Progress  Rail during the three months ended March 31, 2005 and
     2004 was $3 million and $2 million,  respectively.  Results of discontinued
     operations were as follows:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     ------------------------------------------------------------------------------
                                                                 Three Months Ended
                                                                      March 31,
     (in millions)                                                  2005       2004
     ------------------------------------------------------------------------------
     Revenues                                                      $ 358      $ 239
     ------------------------------------------------------------------------------

     Earnings before income taxes                                  $   8      $  12
     Income tax expense                                                3          3
     ------------------------------------------------------------------------------
     Net earnings from discontinued operations                         5          9
     Estimated loss on disposal of discontinued operations,
         including income tax benefit of $14                         (17)         -
     ------------------------------------------------------------------------------
     Earnings (loss) from discontinued operations                  $ (12)     $   9
     ------------------------------------------------------------------------------
</TABLE>

     Prior to the sale of Progress  Rail,  the results of operations of Progress
     Rail were  reported  one month in arrears.  Accordingly,  the net loss from
     discontinued  operations for the first quarter of 2005 includes four months
     of Progress Rail's operations.

     In connection  with the sale,  Progress Fuels and Progress  Energy provided
     guarantees and  indemnifications  of certain legal,  tax and  environmental
     matters  to One Equity  Partners,  LLC.  See  discussion  of the  Company's
     guarantees at Note 14A.

     The major  balance  sheet  classes  included in assets and  liabilities  of
     discontinued  operations in the Consolidated  Balance Sheets as of December
     31, 2004 are as follows:

     ----------------------------------------------------------
     (in millions)
     ----------------------------------------------------------
     Accounts receivable                                 $ 172
     ----------------------------------------------------------
     Inventory                                             177
     ----------------------------------------------------------
     Other current assets                                   18
     Total property, plant and equipment, net              174
     Total other assets                                     33
     ----------------------------------------------------------
         Assets of discontinued operations               $ 574
     ----------------------------------------------------------
     Accounts payable                                    $ 112
     Accrued expenses                                       37
     ----------------------------------------------------------
         Liabilities of discontinued operations          $ 149
     ----------------------------------------------------------

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

4.   REGULATORY MATTERS

     PEF Retail Rate Matters

     Hearings on PEF's  petition  for  recovery  of $252  million of storm costs
     filed with the  Florida  Public  Service  Commission  (FPSC) were held from
     March  30,  2005 to April 1,  2005.  The FPSC is  scheduled  to vote on the
     Company's  petition  on June 14,  2005,  with an order  expected on July 5,
     2005. The Company cannot predict the outcome of this matter.

                                       12
<PAGE>

     On May 4, 2005, a bill was approved by the Florida  Legislature  that would
     authorize  the  FPSC  to  consider  allowing  the  state's   investor-owned
     utilities to issue bonds that are secured by surcharges on utility customer
     bills.  These bonds would be issued for  recovery of storm damage costs and
     potentially  to  restore  depleted  storm  reserves.  The  amount  of funds
     established for recovery is subject to the review and approval of the FPSC.
     The bill  will now be sent to  Governor  Bush  for his  consideration.  The
     Governor  has  indicated  that he supports  the bill.  The  Company  cannot
     predict the outcome of this matter.

     On April 29, 2005, PEF submitted  minimum filing  requirements,  based on a
     2006 projected test year, to initiate a base rate proceeding  regarding its
     future base rates.  In its filing,  PEF has requested a $206 million annual
     increase  in base rates  effective  January 1, 2006.  PEF's  request for an
     increase in base rates reflects an increase in  operational  costs with (i)
     the addition of Hines 2 generation facility into base rates rather than the
     Fuel Clause as was permitted  under the terms of existing  Stipulation  and
     Settlement  Agreement  (the  Agreement),  (ii)  completion  of the  Hines 3
     generation  facility,  (iii) the need to  replenish  PEF's  depleted  storm
     reserve by  adjusting  the annual  accrual in light of recent  history on a
     going-forward basis, (iv) the expected infrastructure  investment necessary
     to meet high  customer  expectations,  coupled  with the demands  placed on
     PEF's strong customer  growth,  (v) significant  additional costs including
     increased  depreciation and fossil dismantlement  expenses and (vi) general
     inflationary pressures.

     Hearings on the base rate  proceeding are expected during the third quarter
     of 2005 and a final  decision is  expected by the end of 2005.  The Company
     cannot predict the outcome of this matter.

     The FPSC requires that PEF perform a depreciation  study no less than every
     four years. PEF filed a depreciation study with the FPSC on April 29, 2005,
     as part of the Company's base rate filing, which will increase depreciation
     expense in 2006 by $14 million  and  forward if  approved by the FPSC.  The
     Company  cannot  predict the outcome or impact of this matter.  PEF reduced
     its estimated  removal costs to take into account the estimates used in the
     depreciation  study.  This  resulted  in a  downward  revision  in the  PEF
     estimated  removal costs and equal increase in accumulated  depreciation of
     approximately $379 million.

     The  FPSC   requires   that  PEF  update  its  cost   estimate  for  fossil
     dismantlement  every four years. PEF filed an updated fossil  dismantlement
     study with the FPSC on April 29, 2005, as part of the  Company's  base rate
     filing,  which  will  increase  the  accrual  by $10  million  and what PEF
     collects  in base rates for  fossil  dismantlement  in 2006 and  forward if
     approved by the FPSC.  PEF's retail reserve for fossil plant  dismantlement
     was approximately  $133 million at March 31, 2005. Retail accruals on PEF's
     reserves  for  fossil   dismantlement  were  previously  suspended  through
     December  2005 under the terms of PEF's  existing  Agreement.  The  Company
     cannot predict the outcome or impact of this matter.

     The  FPSC   requires   that  PEF  update  its  cost  estimate  for  nuclear
     decommissioning every five years. PEF filed a new site-specific estimate of
     decommissioning  costs for the Crystal  River  Nuclear Plant (CR3) with the
     FPSC on April 29, 2005 as part of the  Company's  base rate  filing.  PEF's
     estimate  was  based  on  prompt  decommissioning.  The  estimate,  in 2005
     dollars,  is $614  million  and is subject to change  based on a variety of
     factors  including,  but  not  limited  to,  cost  escalation,  changes  in
     technology  applicable to nuclear  decommissioning  and changes in federal,
     state  or  local  regulations.  The  cost  estimate  excludes  the  portion
     attributable to other  co-owners of CR3. The NRC operating  license held by
     PEF for Crystal River Unit No. 3 (CR3) currently  expires in December 2016.
     An  application to extend this license 20 years is expected to be submitted
     in the first  quarter of 2009.  As part of this new  estimate  and  assumed
     license  extension,  PEF reduced its ARO  liability  by  approximately  $88
     million at March 31, 2005.  Retail  accruals on PEF's  reserves for nuclear
     decommissioning  were previously  suspended through December 2005 under the
     terms of the Agreement and the new study  supports a  continuation  of that
     suspension.  The  Company  cannot  predict  the  outcome  or impact of this
     matter.

                                       13
<PAGE>

     PEC Retail Rate Matters

     On April 27,  2005,  PEC filed for an increase in the fuel rate  charged to
     its South Carolina  customers  with the Public Service  Commission of South
     Carolina (SCPSC).  PEC is asking the SCPSC to approve a $97 million,  or 21
     percent,  increase in rates. PEC requested the increase for  underrecovered
     fuel costs for the  previous  15 months and to meet  future  expected  fuel
     costs.  This request  reflects  increases in the prices of coal and natural
     gas. If approved,  the increase would take effect July 1, 2005. The Company
     cannot predict the outcome of this matter.

5.   GOODWILL AND OTHER INTANGIBLE ASSETS

     The Company  performed the annual  goodwill  impairment  test in accordance
     with SFAS No. 142,  "Goodwill  and Other  Intangible  Assets,"  for the CCO
     segment in the first quarter of 2005,  which  indicated no  impairment  was
     necessary.  The  annual  impairment  tests  for  the PEC  Electric  and PEF
     segments will be performed in the second quarter of 2005.

     The changes in the carrying  amount of goodwill for the periods ended March
     31, 2005 and December 31, 2004, by reportable segment, are as follows:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     ---------------------------------------------------------------------------------------------
     (in millions)                        PEC Electric      PEF        CCO       Other    Total
     ---------------------------------------------------------------------------------------------
     Balance as of January 1, 2004             $ 1,922    $ 1,733      $ 64       $ 7   $ 3,726
     Purchase accounting adjustment                  -          -         -        (7)       (7)
     ---------------------------------------------------------------------------------------------
     Balance as of December 31, 2004           $ 1,922    $ 1,733      $ 64       $ -   $ 3,719
     ---------------------------------------------------------------------------------------------
     Balance as of March 31, 2005              $ 1,922    $ 1,733      $ 64       $ -   $ 3,719
     ---------------------------------------------------------------------------------------------
</TABLE>

     The gross carrying  amount and  accumulated  amortization  of the Company's
     intangible assets at March 31, 2005 and December 31, 2004, are as follows:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     ------------------------------------------------------------------------------------------------
                                              March 31, 2005                 December 31, 2004
     ------------------------------------------------------------------------------------------------
                                         Gross                           Gross
                                       Carrying       Accumulated       Carrying       Accumulated
      (in millions)                     Amount        Amortization       Amount       Amortization
     ------------------------------------------------------------------------------------------------
      Synthetic fuel intangibles        $ 134           $  (84)          $  134        $  (80)
      Power agreements acquired           188               (8)             188            (6)
      Other                               119              (19)             119           (18)
     ------------------------------------------------------------------------------------------------
      Total                             $ 441           $ (111)          $  441        $ (104)
     ------------------------------------------------------------------------------------------------
</TABLE>

     Amortization  expense  recorded on  intangible  assets for the three months
     ended  March  31,  2005  and  2004,   was  $7  million  and  $10   million,
     respectively.  The estimated  annual  amortization  expense for  intangible
     assets for 2005 through 2009, in millions,  is approximately $35, $36, $36,
     $18 and $18, respectively.

6.   EQUITY AND COMPREHENSIVE INCOME

     A. Earnings Per Common Share

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

     ---------------------------------------------------------------------------
                                                    Three Months Ended March 31,
     (in millions)                                         2005            2004
     ---------------------------------------------------------------------------
     Weighted-average common shares - basic                 244             241
     Restricted stock awards                                  1               1
     --------------------------------------------------------------------------
     Weighted-average shares - fully dilutive               245             242
     ---------------------------------------------------------------------------


                                       14
<PAGE>


     B. Comprehensive Income

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
      -------------------------------------------------------------------------------------------
                                                                              Three Months Ended
                                                                                    March 31,
      (in millions)                                                              2005       2004
      ------------------------------------------------------------------------------------------
      Net income                                                               $   93     $  108
      Other comprehensive income (loss):
      Reclassification adjustments included in net income:
           Change in cash flow hedges (net of tax expense of
               $1 and $2, respectively)                                             2          4
           Foreign currency translation adjustments included in
                discontinued operations                                            (6)         -
           Minimum pension liability adjustment included in
                discontinued operations (net of tax expense of $1)                  1          -
        Changes in net unrealized gains (losses) on cash flow hedges
            (net of tax expense (benefit) of $5 and ($8), respectively)             6        (17)
        Foreign currency translation adjustment and other                           2          2
      ------------------------------------------------------------------------------------------
              Other comprehensive income (loss)                                $    5     $  (11)
      ------------------------------------------------------------------------------------------
         Comprehensive income                                                  $   98     $   97
      ------------------------------------------------------------------------------------------
</TABLE>

     C. Common Stock

     At December 31, 2004,  the Company had  approximately  63 million shares of
     common stock  authorized by the Board of Directors  that remained  unissued
     and  reserved.  In 2002,  the Board of  Directors  authorized  meeting  the
     requirements of the Progress Energy 401(k) Savings and Stock Ownership Plan
     and the Investor Plus Stock Purchase Plan with original  issue shares.  For
     the three months ended March 31, 2005, the Company issued approximately 1.3
     million  shares  under these plans for net  proceeds of  approximately  $58
     million.

7.   DEBT AND CREDIT FACILITIES AND FINANCING ACTIVITIES

     Changes to the  Company's  debt and credit  facilities  since  December 31,
     2004,  discussed  in Note 13 of the  Company's  2004 Annual  Report on Form
     10-K, are described below.

     In January 2005,  the Company used proceeds from the issuance of commercial
     paper to pay off $260 million of revolving  credit  agreement  (RCA) loans,
     which included $90 million at PEC and $170 million at PEF.

     On January 31, 2005,  Progress Energy, Inc. entered into a new $600 million
     RCA,  which expires  December 30, 2005.  This facility was added to provide
     additional  liquidity  during  2005 due in part to the  uncertainty  of the
     timing of storm  restoration  cost recovery from the  hurricanes in Florida
     during 2004. The RCA includes a defined maximum total debt to total capital
     ratio of 68% and a  minimum  interest  coverage  ratio of 2.5 to 1. The RCA
     also contains various cross-default and other acceleration  provisions.  On
     February 4, 2005,  $300  million was drawn under the new facility to reduce
     commercial  paper and pay off the  remaining  amount  of loans  outstanding
     under other RCA  facilities,  which  consisted  of $160 million at Progress
     Energy and $55 million at PEF. As discussed below, the maximum size of this
     RCA was reduced to $300 million on March 22, 2005.

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

     In March 2005,  Progress  Energy,  Inc.'s  five-year  credit  facility  was
     amended to increase the maximum  total debt to total capital ratio from 65%
     to 68% due to the  potential  impacts  of  proposed  accounting  rules  for
     uncertain tax positions (See Note 2).

                                       15
<PAGE>

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

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

8.   BENEFIT PLANS

     The Company and some of its  subsidiaries  have a  noncontributory  defined
     benefit   retirement   (pension)  plan  for   substantially  all  full-time
     employees. The Company also has supplementary defined benefit pension plans
     that provide  benefits to  higher-level  employees.  In addition to pension
     benefits,  the Company and some of its  subsidiaries  provide  contributory
     other  postretirement  benefits (OPEB),  including  certain health care and
     life insurance benefits, for retired employees who meet specified criteria.
     The components of the net periodic  benefit cost for the three months ended
     March 31 are:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     ----------------------------------------------------------------------------------------------
                                                                              Other Postretirement
                                                     Pension Benefits               Benefits
                                                  -----------------------    ----------------------
     (in millions)                                    2005        2004          2005        2004
     ----------------------------------------------------------------------------------------------
     Service cost                                    $  15       $  13         $   3       $   4
     Interest cost                                      29          28             8           8
     Expected return on plan assets                    (37)        (37)           (1)         (1)
     Amortization of actuarial loss                      6           5             1           1
     Other amortization, net                             1           -             -           1
     ----------------------------------------------------------------------------------------------
     Net periodic cost                               $  14       $   9         $  11       $  13
     Additional cost / (benefit) recognition (a)        (4)         (4)              1         1
     ----------------------------------------------------------------------------------------------
     Net periodic cost recognized                    $  10       $   5         $  12       $  14
     ----------------------------------------------------------------------------------------------
</TABLE>

     (a) Relates to the  acquisition  of FPC. See Note 17B of Progress  Energy's
     Form 10-K for year ended December 31, 2004.

9.   RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS

     Progress Energy and its  subsidiaries  are exposed to various risks related
     to  changes  in  market  conditions.  The  Company  has a  risk  management
     committee that includes senior executives from various business groups. The
     risk management  committee is responsible for administering risk management
     policies and monitoring compliance with those policies by all subsidiaries.
     Under  its risk  policy,  the  Company  may use a variety  of  instruments,
     including  swaps,  options and  forward  contracts,  to manage  exposure to
     fluctuations  in commodity  prices and  interest  rates.  Such  instruments
     contain  credit  risk  if the  counterparty  fails  to  perform  under  the

                                       16
<PAGE>

     contract.  The Company  minimizes  such risk by performing  credit  reviews
     using,  among  other  things,  publicly  available  credit  ratings of such
     counterparties. See Note 18 to the Company's Annual Report on Form 10-K for
     the year ended December 31, 2004.

     A. Commodity Derivatives

     General

     Most of the Company's commodity  contracts are not derivatives  pursuant to
     SFAS No. 133 or qualify as normal  purchases or sales  pursuant to SFAS No.
     133. Therefore, such contracts are not recorded at fair value.

     In 2003, PEC recorded a $38 million  pre-tax ($23 million  after-tax)  fair
     value loss  transition  adjustment  pursuant to the provisions of DIG Issue
     C20, "Scope  Exceptions:  Interpretation  of the Meaning of Not Clearly and
     Closely  Related  in  Paragraph  10(b)  regarding  Contracts  with a  Price
     Adjustment  Feature." The related  liability is being amortized to earnings
     over the term of the related  contract (See Note 12). At March 31, 2005 and
     December 31, 2004, the remaining liability was $25 million and $26 million,
     respectively.

     Economic Derivatives

     Derivative products,  primarily electricity and natural gas contracts,  may
     be entered  into from time to time for  economic  hedging  purposes.  While
     management  believes the economic hedges mitigate exposures to fluctuations
     in commodity  prices,  these  instruments  are not designated as hedges for
     accounting  purposes and are monitored  consistent with trading  positions.
     The Company  manages open  positions  with strict  policies  that limit its
     exposure  to market risk and  require  daily  reporting  to  management  of
     potential  financial  exposures.  The Company recorded a $2 million pre-tax
     gain and a $12 million  pre-tax loss on such contracts for the three months
     ended  March 31,  2005 and 2004,  respectively.  The  Company  did not have
     material  outstanding  positions  in such  contracts  at March 31, 2005 and
     December 31, 2004.

     PEF  has   derivative   instruments   related  to  its  exposure  to  price
     fluctuations  on fuel oil purchases.  At March 31, 2005, the fair values of
     these instruments were a $34 million  short-term  derivative asset position
     included in other  current  assets and a $23 million  long-term  derivative
     asset position  included in other assets and deferred  debits.  At December
     31, 2004, the fair values of these  instruments were a $2 million long-term
     derivative asset position  included in other assets and deferred debits and
     a $5 million  short-term  derivative  liability  position included in other
     current  liabilities.   These  instruments  receive  regulatory  accounting
     treatment.   Unrealized   gains  and  losses  are  recorded  in  regulatory
     liabilities and regulatory assets, respectively.

     Cash Flow Hedges

     Progress Energy's subsidiaries  designate a portion of commodity derivative
     instruments  as cash flow hedges  under SFAS No.  133.  The  objective  for
     holding these  instruments is to hedge  exposure to market risk  associated
     with fluctuations in the price of natural gas for the Company's  forecasted
     purchases  and  sales.  Realized  gains  and  losses  are  recorded  net in
     operating revenues or operating expenses,  as appropriate.  The ineffective
     portion of commodity cash flow hedges for the three months ending March 31,
     2005 and 2004 was not material to the Company's results of operations.

     The fair  values  of  commodity  cash flow  hedges  at March  31,  2005 and
     December 31, 2004 were as follows:

     --------------------------------------------------------
     (in millions)                  March 31,    December 31,
                                        2005            2004
     --------------------------------------------------------
     Fair value of assets              $  19           $   -
     Fair value of liabilities           (26)            (15)
     --------------------------------------------------------
     Fair value, net                   $  (7)          $ (15)
     --------------------------------------------------------


                                       17
<PAGE>


     The following table presents selected  information related to the Company's
     commodity cash flow hedges at March 31, 2005:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     ------------------------------------------------------------------------------------
                                           Accumulated Other        Portion Expected to
                                             Comprehensive          be Reclassified to
        (term in years/       Maximum    Income/(Loss), net of      Earnings during the
      millions of dollars)    Term(a)             tax                Next 12 Months(b)
     ------------------------------------------------------------------------------------

      Commodity cash flow
             hedges             10               $ (5)                    $ (16)
     ------------------------------------------------------------------------------------
</TABLE>

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

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

     The Company uses cash flow hedging  strategies to hedge  variable  interest
     rates on long-term and  short-term  debt and to hedge  interest  rates with
     regard to future  fixed-rate  debt  issuances.  The Company uses fair value
     hedging  strategies  to manage  its  exposure  to fixed  interest  rates on
     long-term debt. The notional  amounts of interest rate  derivatives are not
     exchanged  and do not  represent  exposure to credit loss.  In the event of
     default by the counterparty,  the risk in these transactions is the cost of
     replacing the agreements at current market rates.

     The fair values of interest  rate hedges at March 31, 2005 and December 31,
     2004 were as follows:

     ------------------------------------------------------------------
                                            March 31,     December 31,
     (in millions)                              2005            2004
     ------------------------------------------------------------------
     Interest rate cash flow hedges            $    2          $  (2)
     Interest rate fair value hedges           $    -          $   3
     ------------------------------------------------------------------

     Cash Flow Hedges

     Gains and losses  from cash flow  hedges are  recorded  in OCI and  amounts
     reclassified to earnings are included in net interest charges as the hedged
     transactions  occur.  Amounts  in OCI  related  to  terminated  hedges  are
     reclassified  to  earnings  as the  hedged  interest  payments  occur.  The
     ineffective  portion of interest rate cash flow hedges for the three months
     ending March 31, 2005 and 2004 was not material to the Company's results of
     operations

     The following table presents selected  information related to the Company's
     interest rate cash flow hedges included in OCI at March 31, 2005:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     -------------------------------------------------------------------------------------
                                           Accumulated Other        Portion Expected to
                                             Comprehensive           be Reclassified to
        (term in years/       Maximum    Income/(Loss), net of      Earnings during the
      millions of dollars)     Term             tax(a)               Next 12 Months(b)
     -------------------------------------------------------------------------------------

       Interest rate cash
          flow hedges            1              $ (15)                     $ (3)
     -------------------------------------------------------------------------------------
</TABLE>

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

     As of March 31, 2005 and December  31,  2004,  the Company had $275 million
     notional and $331 million  notional,  respectively,  of interest  rate cash
     flow hedges.


                                       18
<PAGE>


     Fair Value Hedges

     For interest  rate fair value  hedges,  the change in the fair value of the
     hedging derivative is recorded in net interest charges and is offset by the
     change in the fair  value of the  hedged  item.  As of March  31,  2005 and
     December 31, 2004,  the Company had $150 million  notional of interest rate
     fair value hedges.

10.  SEVERANCE COSTS

     On February 28, 2005,  as part of a previously  announced  cost  management
     initiative,  the  Company  approved  a  workforce  restructuring  which  is
     expected to be  completed  in  September  2005 and result in a reduction of
     approximately 450 positions.  The cost management initiative is designed to
     permanently  reduce by $75 million to $100 million the projected  growth in
     the Company's annual operation and maintenance (O&M) expenses by the end of
     2007.  In  addition to the  workforce  restructuring,  the cost  management
     initiative  includes a voluntary enhanced retirement program. In connection
     with this  initiative,  the Company  currently  expects to incur  estimated
     pre-tax   charges  of   approximately   $210  million  for   severance  and
     postretirement  benefits  as  described  below.  In  addition,  the Company
     expects  to incur  certain  incremental  costs  other  than  severance  and
     postretirement  benefits for  recruiting,  training and staff  augmentation
     activities that cannot be quantified at this time.

     The Company  recorded  $31 million of expense  during the first  quarter of
     2005 for the  estimated  severance  benefits  to be paid as a result of the
     approximate  number of positions to be eliminated  under the  restructuring
     and due to the  implementation of an automated meter reading  initiative at
     PEF.  These  amounts  will be paid over time and are subject to revision in
     future  quarters based on the impact of the voluntary  enhanced  retirement
     program.  The severance  expenses are primarily  included in O&M expense on
     the Consolidated Statements of Income.

     The activity in the severance liability is as follows:

     --------------------------------------------------------
     (in millions)
     --------------------------------------------------------
     Balance as of January 1, 2005                    $    5
     Severance Costs Accrued                              31
     Payments                                             (1)
     --------------------------------------------------------
     Balance as of March 31, 2005                     $   35
     --------------------------------------------------------

     The Company has estimated  that an additional  $180 million  charge will be
     recognized  in the  second  quarter  of  2005  that  relates  primarily  to
     postretirement  benefits  that  will be paid  over  time to those  eligible
     employees who elected to participate in the voluntary  enhanced  retirement
     program.  Approximately  3,500  of  the  Company's  12,300  employees  were
     eligible to participate in the voluntary enhanced retirement  program.  The
     results from the employee  elections  indicate  that 1,447 of the Company's
     employees have elected to participate in the voluntary enhanced  retirement
     program. The cost management  initiative charges could change significantly
     primarily  due to the  demographics  of the specific  employees who elected
     enhanced retirement and its impact on the postretirement  benefit actuarial
     studies.

11.  FINANCIAL INFORMATION BY BUSINESS SEGMENT

     The Company  currently  provides  services  through the following  business
     segments: PEC Electric, PEF, Fuels, CCO and Synthetic Fuels. Prior to 2005,
     Rail Services was reported as a separate  segment.  In connection  with the
     divestiture  of Progress Rail (see Note 3), the operations of Rail Services
     were  reclassified to discontinued  operations in the first quarter of 2005
     and  therefore are not included in the results from  continuing  operations
     during the periods  reported.  In addition,  Synthetic Fuel activities were
     reported  in the  Fuels  segment  prior  to 2005 and now are  considered  a
     reportable  segment.  These reportable  segment changes reflect the current
     reporting structure.  For comparative purposes, the prior year results have
     been restated to align with the current presentation.

                                       19
<PAGE>

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

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

     CCO's operations,  which are located  primarily in Georgia,  North Carolina
     and  Florida,  include  nonregulated  electric  generation  operations  and
     marketing activities.

     Synthetic Fuel operations include the production and sale of synthetic fuel
     as defined  under the Internal  Revenue Code and the operation of synthetic
     fuel facilities for outside  parties.  These facilities are located in West
     Virginia, Virginia and Kentucky. See Note 14 for more information.

     In  addition  to these  reportable  operating  segments,  the  Company  has
     Corporate and other  activities  that include  holding  company and service
     company  operations as well as other  nonregulated  business  areas.  These
     nonregulated business areas include  telecommunications  and energy service
     operations and other nonregulated  subsidiaries that do not separately meet
     the disclosure requirements of SFAS No. 131, "Disclosures about Segments of
     an  Enterprise  and  Related  Information."  The  profit  or  loss  of  the
     identified  segments  plus the loss of Corporate and Other  represents  the
     Company's total income from continuing operations.

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     ------------------------------------------------------------------------------------------------------------
                                                  Revenues
                               -----------------------------------------------
     (in millions)             Unaffiliated      Intersegment      Total            Income from           Assets
                                                                                     Continuing
                                                                                     Operations
     ------------------------------------------------------------------------------------------------------------
     FOR THE THREE MONTHS
     ENDED MARCH 31, 2005
     --------------------------
     PEC Electric                 $    935         $    -         $   935              $  116          $  10,953
     PEF                               848              -             848                  43              7,663
     Fuels                             136            307             443                  10                721
     CCO                                65              -              65                  (5)             1,699
     Synthetic Fuels                   198              -             198                  (1)               302
     Corporate and Other                16            102             118                 (58)            17,778
     Eliminations                        -           (409)           (409)                  -            (13,420)
     ------------------------------------------------------------------------------------------------------------
     Consolidated totals          $  2,198         $    -         $ 2,198              $  105          $  25,696
     ------------------------------------------------------------------------------------------------------------

     ------------------------------------------------------------------------------------------------------------
     FOR THE THREE MONTHS
     ENDED MARCH 31, 2004
          -
     --------------------------
     PEC Electric                 $    901         $    -         $   901              $  116
     PEF                               784              -             784                  49
     Fuels                              98            269             367                  10
     CCO                                33              -              33                  (8)
     Synthetic Fuels                   172              4             176                  36
     Corporate and Other                18             97             115                (104)
     Eliminations                        -           (370)           (370)                  -
     ----------------------------------------------------------------------------------------------
     Consolidated totals          $  2,006         $    -         $ 2,006              $   99
     ----------------------------------------------------------------------------------------------
</TABLE>


                                       20
<PAGE>


12.  OTHER INCOME AND OTHER EXPENSE

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

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     ---------------------------------------------------------------------------------
                                                                 Three Months Ended
                                                                      March 31,
     (in millions)                                                 2005       2004
     ---------------------------------------------------------------------------------
     Other income
     Nonregulated energy and delivery services income             $   6      $   6
     DIG Issue C20 amortization (See Note 9)                          1          2
     Investment gains                                                 2          2
     AFUDC equity                                                     3          2
     Other                                                            7          5
     ---------------------------------------------------------------------------------
         Total other income                                       $  19      $  17
     ---------------------------------------------------------------------------------

     Other expense
     Nonregulated energy and delivery services expenses           $   5      $   4
     Donations                                                        4          7
     Contingent value obligations unrealized loss                     -          7
     Loss from equity investments                                     3          2
     Write-off of non-trade receivables                               -          7
     Other                                                            5         12
     ---------------------------------------------------------------------------------
        Total other expense                                       $  17      $  39
     ---------------------------------------------------------------------------------

     Other, net                                                   $   2      $ (22)
     ---------------------------------------------------------------------------------
</TABLE>

     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.

13.  ENVIRONMENTAL MATTERS

     The Company is subject to federal,  state and local regulations  addressing
     hazardous  and solid  waste  management,  air and water  quality  and other
     environmental  matters.  See Note 22 of the Company's 2004 Annual Report on
     Form 10-K for a more  detailed,  historical  discussion  of these  federal,
     state, and local regulations.

     HAZARDOUS AND SOLID WASTE MANAGEMENT

     The provisions of the Comprehensive  Environmental  Response,  Compensation
     and  Liability  Act of 1980,  as  amended  (CERCLA),  authorize  the EPA to
     require  the  cleanup  of  hazardous  waste  sites.  This  statute  imposes
     retroactive joint and several liabilities. Some states, including North and
     South Carolina and Florida, have similar types of legislation.  The Company
     and its subsidiaries are periodically notified by regulators, including the
     EPA  and  various  state  agencies,   of  their  involvement  or  potential
     involvement  in sites that may require  investigation  and/or  remediation.
     There are  presently  several  sites with  respect to which the Company has
     been  notified  by the EPA,  the  State of North  Carolina  or the State of
     Florida of its potential  liability,  as described below in greater detail.
     The Company also is currently in the process of assessing  potential  costs
     and  exposures  at other  sites.  For all  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. A discussion
     of sites by legal entity follows.

     Various  organic  materials  associated with the production of manufactured
     gas,  generally  referred to as coal tar, are  regulated  under federal and
     state laws. PEC and PEF are each potentially  responsible parties (PRPs) at
     several manufactured gas plant (MGP) sites.

                                       21
<PAGE>

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

     PEC

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

     During the fourth  quarter of 2004,  the EPA  advised  PEC that it had been
     identified as a PRP at the Ward Transformer site located in Raleigh,  North
     Carolina.  The EPA  offered  PEC  and 34  other  PRPs  the  opportunity  to
     negotiate  cleanup of the site and reimbursement of less than $2 million to
     the EPA for EPA's past  expenditures in addressing  conditions at the site.
     Although a loss is  considered  probable,  an agreement  among PRPs has not
     been reached;  consequently,  it is not possible at this time to reasonably
     estimate the total amount of PEC's  obligation for  remediation of the Ward
     Transformer site.

     As of March 31, 2005 and December 31, 2004, PEC's accruals for probable and
     estimable costs related to various  environmental sites, which are included
     in other  liabilities and deferred  credits and are expected to be paid out
     over many years, were:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     ---------------------------------------------------------------------------------------
     (in millions)                                    March 31, 2005      December 31, 2004
     ---------------------------------------------------------------------------------------
     Insurance fund                                             $  5                   $  7
     Transferred from North Carolina Natural Gas                   2                      2
         Corporation at time of sale
     ---------------------------------------------------------------------------------------
     Total accrual for environmental sites                      $  7                   $  9
     ---------------------------------------------------------------------------------------
</TABLE>

     The  insurance  fund in the table above was  established  when PEC received
     insurance   proceeds  to  address  costs   associated  with   environmental
     liabilities  related  to its  involvement  with some  sites.  All  eligible
     expenses  related to these are charged  against a specific fund  containing
     these proceeds.  PEC made no additional  accruals,  spent  approximately $2
     million  related to  environmental  remediation  and  received no insurance
     proceeds for the three months ended March 31, 2005.

     This accrual has been recorded on an undiscounted  basis.  PEC measures its
     liability  for  these  sites  based on  available  evidence  including  its
     experience in investigating and remediating environmentally impaired sites.
     The  process  often   involves   assessing  and   developing   cost-sharing
     arrangements  with other PRPs.  PEC will accrue  costs for the sites to the
     extent its liability is probable and the costs can be reasonably estimated.
     Because the extent of environmental  impact,  allocation among PRPs for all
     sites,  remediation  alternatives  (which could involve  either  minimal or
     significant  efforts),  and concurrence of the regulatory  authorities have
     not yet reached the stage where a  reasonable  estimate of the  remediation
     costs  can be made,  PEC  cannot  determine  the  total  costs  that may be
     incurred in connection  with the  remediation of all sites at this time. It
     is  anticipated  that  sufficient  information  will become  available  for
     several  sites  during  2005  to  allow  a  reasonable  estimate  of  PEC's
     obligation for those sites to be made.

     On March 30, 2005, the North Carolina  Division of Water Quality  renewed a
     PEC permit for the continued use of coal combustion  products  generated at
     any of the Company's  coal-fired  plants located in the state.  The Company
     has reviewed the permit conditions,  which could significantly restrict the
     reuse of coal ash and  result in higher ash  management  costs and plans to
     adjudicate the permit conditions. The Company cannot predict the outcome of
     this matter.

                                       22
<PAGE>

     PEF

     As of March 31, 2005 and December 31, 2004, PEF's accruals for probable and
     estimable costs related to various  environmental sites, which are included
     in other  liabilities and deferred  credits and are expected to be paid out
     over many years, were:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     -------------------------------------------------------------------------------------------------
     (in millions)                                              March 31, 2005      December 31, 2004
     -------------------------------------------------------------------------------------------------
     Remediation of distribution and substation transformers             $  25                  $  27
     MGP and other sites                                                    18                     18
     -------------------------------------------------------------------------------------------------
     Total accrual for environmental sites                               $  43                  $  45
     -------------------------------------------------------------------------------------------------
</TABLE>

     PEF has received  approval  from the FPSC for recovery of costs  associated
     with the remediation of distribution  and substation  transformers  through
     the  Environmental  Cost Recovery Clause (ECRC).  Under agreements with the
     Florida  Department  of  Environmental  Protection  (FDEP),  PEF  is in the
     process of examining  distribution  transformer  sites and substation sites
     for potential  equipment integrity issues that could result in the need for
     mineral  oil  impacted  soil  remediation.  PEF has  reviewed  a number  of
     distribution  transformer  sites and all substation  sites.  PEF expects to
     have completed its review of distribution  transformer  sites by the end of
     2007.  Should further sites be identified,  PEF believes that any estimated
     costs would also be recovered  through the ECRC. For the three months ended
     March 31, 2005, PEF made no additional  accruals and spent approximately $2
     million  related to the  remediation  of  transformers.  PEF has recorded a
     regulatory asset for the probable recovery of these costs through the ECRC.

     The  amounts for MGP and other  sites,  in the table  above,  relate to two
     former MGP sites and other sites  associated with PEF that have required or
     are anticipated to require  investigation and/or remediation.  In 2004, PEF
     received  approximately $12 million in insurance claim settlement  proceeds
     and recorded a related accrual for associated  environmental  expenses,  as
     these  insurance  proceeds  are  restricted  for  use in  addressing  costs
     associated with environmental liabilities.  PEF made no additional accruals
     or material expenditures and received no insurance proceeds,  for the three
     months ended March 31, 2005.

     These accruals have been recorded on an  undiscounted  basis.  PEF measures
     its  liability  for these sites based on available  evidence  including its
     experience in investigating and remediating environmentally impaired sites.
     This  process  often  includes   assessing  and   developing   cost-sharing
     arrangements with other PRPs.  Because the extent of environmental  impact,
     allocation among PRPs for all sites,  remediation alternatives (which could
     involve  either  minimal or significant  efforts),  and  concurrence of the
     regulatory  authorities  have  not  yet  advanced  to  the  stage  where  a
     reasonable  estimate of the remediation costs can be made, at this time PEF
     is unable to provide an estimate of its obligation to remediate these sites
     beyond what is currently  accrued.  As more activity occurs at these sites,
     PEF will assess the need to adjust the  accruals.  It is  anticipated  that
     sufficient  information  will become available in 2005 to make a reasonable
     estimate of PEF's obligation for one of the MGP sites.

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

     Florida Progress Corporation

     In 2001, FPC established an accrual to address  indemnities and retained an
     environmental  liability  associated  with  the sale of its  Inland  Marine
     Transportation  business.  In 2003,  the  accrual was reduced to $4 million
     based on a change in estimate.  As of March 31, 2005 and December 31, 2004,
     the remaining  accrual balance was  approximately $3 million.  Expenditures
     related to this  liability  were not  material to the  Company's  financial
     condition  for the three  months  ended March 31,  2005.  FPC  measures its
     liability for these exposures  based on estimable and probable  remediation
     scenarios.

                                       23
<PAGE>


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

     Progress Rail

     On March 24,  2005,  the Company  closed on the sale of its  Progress  Rail
     subsidiary.  In connection  with the sale, the Company  incurred  indemnity
     obligations related to certain pre-closing  liabilities,  including certain
     environmental matters (see discussion under Guarantees in Note 14A).

     AIR QUALITY

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

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

     Total capital expenditures to meet the requirements of the final rule under
     Section 110 of the Clean Air Act (NOx SIP Call) in North and South Carolina
     could reach approximately $370 million.  This amount also includes the cost
     to  install  NOx  controls  under  North  Carolina's  and South  Carolina's
     programs to comply with the federal 8-hour ozone standard. However, further
     technical analysis and rulemaking may result in requirements for additional
     controls at some units. To date, the Company has spent  approximately  $303
     million  related  to  these  projected  amounts.  Increased  operation  and
     maintenance  costs  relating  to the NOx SIP  Call are not  expected  to be
     material to the  Company's  results of  operations.  Further  controls  are
     anticipated  as  electricity  demand  increases.  Parties  unrelated to the
     Company have undertaken  efforts to have Georgia excluded from the rule and
     its requirements. Georgia has not yet submitted a state implementation plan
     to comply with the Section 110 NOx SIP Call. The Company cannot predict the
     outcome of this  matter for the impact to its  nonregulated  operations  in
     Georgia.

     The Company  projects that its capital  costs to meet emission  targets for
     NOx and SO2 from coal-fired  power plants under the  Smokestacks  Act, will
     total  approximately  $895  million  by the end of 2013.  PEC has  expended
     approximately  $141 million of these  capital costs through March 31, 2005.
     The law requires PEC to amortize 70% of the original  cost estimate of $813
     million, during a five-year rate freeze period. PEC recognized amortization
     of $27  million  for  the  three  months  ended  March  31,  2005,  and has
     recognized $275 million in cumulative  amortization through March 31, 2005.
     The  remaining  amortization  requirement  will be recorded over the future
     period ending  December 31, 2007.  The law permits PEC the  flexibility  to
     vary the  amortization  schedule for recording the compliance costs from no
     amortization  expense  up to $174  million  per year.  The NCUC will hold a
     hearing prior to December 31, 2007, to determine cost recovery  amounts for
     2008 and future periods. O&M expense will significantly increase due to the

                                       24
<PAGE>

     additional materials, personnel and general maintenance associated with the
     equipment.  O&M expenses are recoverable through base rates, rather than as
     part of this  program.  The Company  cannot  predict the future  regulatory
     interpretation, implementation or impact of this law.

     On March 10,  2005,  the EPA issued  the final  Clean Air  Interstate  Rule
     (CAIR).  The EPA's rule  requires 28 states and the  District of  Columbia,
     including North Carolina,  South Carolina,  Georgia and Florida,  to reduce
     NOx and SO2  emissions  in  order to  attain  state  NOx and SO2  emissions
     levels. The Company is reviewing the final rule. Installation of additional
     air quality controls is likely to be needed to meet the CAIR  requirements.
     The Company is in the process of determining  compliance plans and the cost
     to comply with the rule.  The air quality  controls  already  installed for
     compliance  with the NOx SIP Call and  currently  planned by the Company to
     comply with the  Smokestacks Act will reduce the costs required to meet the
     CAIR requirements for the Company's North Carolina units.

     On March 15, 2005,  the EPA finalized two separate but related  rules:  the
     Clean Air Mercury Rule (CAMR) that sets  emissions  limits to be met in two
     phases and encourages a cap and trade approach to achieving those caps, and
     a  de-listing  rule that  eliminated  any  requirement  to pursue a maximum
     achievable   control   technology  (MACT)  approach  for  limiting  mercury
     emissions  from  coal-fired  power  plants.  NOx and SO2 controls  also are
     effective in reducing mercury emissions,  however, according to the EPA the
     second  phase cap  reflects a level of  mercury  emissions  reduction  that
     exceeds  the  level  that  would be  achieved  solely  as a  co-benefit  of
     controlling  NOx and SO2 under  CAIR.  The  Company  is in the  process  of
     determining  compliance  plans  and  the  cost to  comply  with  the  CAMR.
     Installation  of additional air quality  controls is likely to be needed to
     meet the CAMR's requirements.  The de-listing rule has been challenged by a
     number of  parties;  the  resolution  of the  challenges  could  impact the
     Company's final compliance plans and costs.

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

     PEF is filing a petition through the ECRC program for recovery of costs for
     development and implementation of an integrated strategy to comply with the
     CAIR and CAMR. PEF is developing an integrated  compliance strategy for the
     CAIR and CAMR rules  because NOx and SO2  controls  also are  effective  in
     reducing  mercury  emissions.  PEF  estimates  the  program  costs  for the
     remainder  of  2005  to  be   approximately   $2  million  for  preliminary
     engineering activities and strategy development work necessary to determine
     the Company's integrated  compliance strategy.  PEF projects  approximately
     $62 million in program costs for 2006. These costs may increase or decrease
     depending  upon the results of the  engineering  and  strategy  development
     work.  Among  other  things,  subsequent  rule  interpretations,  equipment
     availability,  or the unexpected  acceleration  of the initial NOx or other
     compliance dates could require  acceleration of some projects and therefore
     result  in  additional  costs  in 2005  and  2006.  PEF  expects  to  incur
     significant additional capital and O&M costs to achieve compliance with the
     CAIR and CAMR through  2015 and beyond.  The timing and extent of the costs
     for future projects will depend upon the final compliance strategy.

     In March 2004,  the North Carolina  Attorney  General filed a petition with
     the EPA  under  Section  126 of the  Clean  Air  Act,  asking  the  federal
     government to force coal-fired  power plants in 13 other states,  including
     South Carolina,  to reduce their NOx and SO2 emissions.  The state of North
     Carolina  contends  these  out-of-state   emissions  interfere  with  North
     Carolina's  ability to meet  national air quality  standards  for ozone and
     particulate  matter.  The EPA has  agreed  to make a  determination  on the
     petition by August 1, 2005.  The Company cannot predict the outcome of this
     matter.

     WATER QUALITY

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

     Based on new cost  information  and changes to the estimated  time frame of
     expenditures, the Company has revised the estimated amounts and time period
     for  expenditures  to meet Section 316(b)  requirements  of the Clean Water
     Act. The Company currently  estimates that from 2005 through 2010 the range
     of  expenditures  will be  approximately  $80 million to $110 million.  The
     range  includes  $15  million to $25  million at PEC and $65 million to $85
     million at PEF.

                                       25
<PAGE>

     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 treaty went into effect on February 16,  2005.  The
     United   States  has  not  adopted  the  Kyoto   Protocol,   and  the  Bush
     administration has stated it favors voluntary programs.  A number of carbon
     dioxide  emissions  control  proposals  have  been  advanced  in  Congress.
     Reductions in carbon dioxide emissions to the levels specified by the Kyoto
     Protocol and some legislative  proposals could be materially adverse to the
     Company's  consolidated  financial  position  or results of  operations  if
     associated  costs  of  control  or  limitation  cannot  be  recovered  from
     customers. The Company favors the voluntary program approach recommended by
     the  Bush   administration  and  continually   evaluates  options  for  the
     reduction,  avoidance and sequestration of greenhouse gases.  However,  the
     Company cannot predict the outcome of this matter.

     Progress  Energy has  announced its plan to issue a report on the Company's
     activities  associated with current and future environmental  requirements.
     The report will include a discussion of the environmental requirements that
     the Company  currently faces and expects to face in the future with respect
     to its air  emissions.  The  report is  expected  to be issued by March 31,
     2006.

14.  COMMITMENTS AND CONTINGENCIES

     Contingencies and significant changes to the commitments  discussed in Note
     23 of the Company's 2004 Annual Report on Form 10-K are described below.

     A. Guarantees

     As a part of normal  business,  Progress  Energy and  certain  wholly-owned
     subsidiaries  enter into various  agreements  providing future financial or
     performance  assurances  to third  parties,  which are outside the scope of
     FASB  Interpretation  No.  45,   "Guarantor's   Accounting  and  Disclosure
     Requirements for Guarantees,  Including Indirect Guarantees of Indebtedness
     of Others"  (FIN No.  45).  Such  agreements  include  guarantees,  standby
     letters of credit and surety bonds. At March 31, 2005, the Company does not
     believe  conditions  are likely for  significant  performance  under  these
     guarantees.  To the  extent  liabilities  are  incurred  as a result of the
     activities covered by the guarantees,  such liabilities are included in the
     accompanying Consolidated Balance Sheets.

     At March 31, 2005, the Company had issued  guarantees and  indemnifications
     of  certain  legal,  tax and  environmental  matters  to third  parties  in
     connection  with sales of businesses  and for timely payment of obligations
     in support of its non-wholly  owned synthetic fuel  operations.  Related to
     the sales of  businesses,  the  notice  period  extends  until 2012 for the
     majority of matters  provided for in the  indemnification  provisions.  For
     matters  which the  Company  has  received  timely  notice,  the  Company's
     indemnity  obligations  may  extend  beyond  the  notice  period.   Certain
     environmental  indemnifications  related  to the  sale  of  synthetic  fuel
     operations  have no  limitations  as to time or  maximum  potential  future
     payments.  Other guarantees and indemnifications  have an estimated maximum
     exposure of approximately $111 million.  At March 31, 2005, the Company has
     recorded   liabilities  related  to  guarantees  and   indemnifications  to
     third-parties  of $22 million.  Management does not believe  conditions are
     likely for significant  performance under these agreements in excess of the
     recorded liabilities.

     B. Insurance

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

                                       26
<PAGE>

     C. Other Commitments

     As discussed in Note 23B of the Progress  Energy annual report on Form 10-K
     for the year ended  December  31,  2004,  the Company  has  certain  future
     commitments  related  to four  synthetic  fuel  facilities  purchased  that
     provide for contingent payments (royalties).  The Company has exercised its
     right in the  related  agreements  to  escrow  those  payments  if  certain
     conditions in the agreements were met. The Company  previously  accrued and
     retained 2004 and 2003 royalty  payments of  approximately  $42 million and
     $48 million, respectively. In May 2005, these funds were placed into escrow
     upon establishment of the necessary escrow accounts.

     D. Other Contingencies

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

     DOE failed to begin  taking  spent  nuclear  fuel by January 31,  1998.  In
     January  2004,  PEC and PEF filed a complaint in the United States Court of
     Federal Claims against the DOE, claiming that the DOE breached the Standard
     Contract for Disposal of Spent  Nuclear Fuel (SNF) by failing to accept SNF
     from various  Progress  Energy  facilities  on or before  January 31, 1998.
     Damages due to DOE's breach will likely exceed $100 million.  Approximately
     60 cases  involving  the  Government's  actions  in  connection  with spent
     nuclear fuel are currently pending in the Court of Federal Claims.

     DOE and the PEC/PEF parties have agreed to a stay of the lawsuit, including
     discovery.  The parties agreed to, and the trial court  entered,  a stay of
     proceedings,  in  order  to  allow  for  possible  efficiencies  due to the
     resolution of legal and factual  issues in previously  filed cases in which
     similar  claims are being  pursued by other  plaintiffs.  These  issues may
     include,  among others,  so-called "rate issues," or the minimum  mandatory
     schedule for the  acceptance of SNF and high level waste (HLW) by which the
     Government  was  contractually  obligated to accept  contract  holders' SNF
     and/or HLW, and issues regarding recovery of damages under a partial breach
     of  contract  theory  that will be  alleged to occur in the  future.  These
     issues  have been or are  expected to be  presented  in the trials that are
     currently  scheduled to occur during  2005.  Resolution  of these issues in
     other  cases  could  facilitate  agreements  by the  parties in the PEC/PEF
     lawsuit,  or at a minimum,  inform the Court of decisions  reached by other
     courts if they remain  contested and require  resolution in this case.  The
     trial court has continued this stay until June 24, 2005.

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

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

     With certain  modifications and additional  approval by the NRC,  including
     the  installation  of onsite dry storage  facilities at PEF's nuclear unit,
     Crystal River Unit No. 3 (CR3), PEF's spent nuclear fuel storage facilities
     will be  sufficient to provide  storage  space for spent fuel  generated on
     PEF's system through the expiration of the operating license for CR3.

     In July 2002,  Congress  passed an override  resolution to Nevada's veto of
     DOE's  proposal to locate a permanent  underground  nuclear  waste  storage
     facility at Yucca Mountain,  Nevada.  In January 2003, the State of Nevada,
     Clark County,  Nevada,  and the City of Las Vegas petitioned the U.S. Court
     of  Appeals  for  the  District  of  Columbia  Circuit  for  review  of the
     Congressional override resolution. These same parties also challenged EPA's
     radiation standards for Yucca Mountain. On July 9, 2004, the Court rejected
     the challenge to the  constitutionality  of the resolution  approving Yucca
     Mountain,  but ruled that the EPA was wrong to set a 10,000-year compliance
     period in the radiation protection standard. EPA is currently reworking the
     standard but has not stated when the work will be complete.  DOE originally
     planned to submit a license  application  to the NRC to construct the Yucca

                                       27
<PAGE>

     Mountain  facility  by the end of 2004.  However,  in  November  2004,  DOE
     announced  it would not submit the license  application  until  mid-2005 or
     later.  Also in November  2004,  Congressional  negotiators  approved  $577
     million for fiscal year 2005 for the Yucca Mountain project,  approximately
     $300  million  less than  requested  by DOE but  approximately  the same as
     approved in 2004. The DOE has acknowledged  that a working  repository will
     not be  operational  until  sometime  after  2010,  but  the  DOE  has  not
     identified  a new target  date.  PEC  cannot  predict  the  outcome of this
     matter.

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

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

     On May 4, 2004,  PEC  authorized  its  outside  counsel to file a notice of
     appeal of the April 6, 2004,  judgment,  and on May 7, 2004,  the notice of
     appeal  was filed with the United  States  Court of Appeals  for the Fourth
     Circuit.  On June 8, 2004,  DMT filed a motion to dismiss the appeal on the
     ground that PEC's notice of appeal  should have been filed on or before May
     6,  2004.  On June 16,  2004,  PEC  filed a motion  with  the  trial  court
     requesting  an  extension  of the  deadline for the filing of the notice of
     appeal.  By order dated  September  10,  2004,  the trial court  denied the
     extension  request.  On September 15, 2004, PEC filed a notice of appeal of
     the September 10, 2004 order,  and by order dated  September 29, 2004,  the
     appellate court consolidated the first and second appeals.  DMT's motion to
     dismiss the first  appeal  remains  pending.  Argument on the  consolidated
     appeal is scheduled for May 25, 2005.

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

     3.  On  February  1,  2002,   PEC  filed  a  complaint   with  the  Surface
     Transportation  Board  (STB)  challenging  the  rates  charged  by  Norfolk
     Southern  Railway Company  (Norfolk  Southern) for coal  transportation  to
     certain  generating  plants. In a decision dated December 23, 2003, the STB
     found that the rates were unreasonable,  awarded reparations and prescribed
     maximum rates. Both parties  petitioned the STB for  reconsideration of the
     December 23, 2003 decision.  On October 20, 2004, the STB  reconsidered its
     December 23, 2003 decision and concluded  that the rates charged by Norfolk
     Southern  were  not  unreasonable.  Because  PEC  paid  the  maximum  rates
     prescribed by the STB in its December 23, 2003 decision for several  months
     during  2004,  which  were  less  than  the  rates  ultimately  found to be
     reasonable,  the STB ordered PEC to pay to Norfolk  Southern the difference
     between the rate levels plus interest.

     PEC  subsequently  filed a petition  with the STB to phase in the new rates
     over a period of time,  and filed a notice of appeal with the U.S. Court of
     Appeals for the D.C.  Circuit.  Pursuant  to an order  issued by the STB on
     January 6, 2005,  the phasing  proceeding  will proceed on a schedule  that
     appears  likely to  produce  an STB  decision  before  the end of 2005.  On
     January 12,  2005,  the STB filed a Motion to Dismiss  PEC's  appeal on the
     grounds  that its October  20, 2004 order is not final until PEC's  phasing
     application  has been decided.  PEC responded to this motion on January 26,
     2005. The court has not yet ruled on the motion.

     As of March 31, 2005, PEC has accrued a liability of $42 million,  of which
     $23 million represents  reparations  previously  remitted to PEC by Norfolk
     Southern that are now subject to refund. Of the remaining $19 million,  $17
     million has been recorded as deferred fuel cost on the Consolidated Balance
     Sheet, while the remaining $2 million  attributable to wholesale  customers
     has been charged to fuel used in electric  generation  on the  Consolidated
     Statements  of Income.  PEC or Norfolk  Southern,  as the case may be, will
     make the  appropriate  payment  to the  other  to  reconcile  all  charges,
     including interest,  once a final STB decision in the phasing proceeding is
     served.

                                       28
<PAGE>

     The Company cannot predict the outcome of this matter.

     4. The  Company,  through  its  subsidiaries,  is a majority  owner in five
     entities  and a minority  owner in one  entity  that owns  facilities  that
     produce  synthetic fuel as defined under the Internal  Revenue Code (Code).
     The production and sale of the synthetic fuel from these facilities qualify
     for tax credits under  Section 29 if certain  requirements  are  satisfied,
     including a requirement  that the synthetic fuel differs  significantly  in
     chemical  composition from the coal used to produce such synthetic fuel and
     that the fuel was  produced  from a  facility  that was  placed in  service
     before July 1, 1998.  The amount of Section 29 tax credits that the Company
     is  allowed to claim in any  calendar  year is limited by the amount of the
     Company's  regular federal income tax liability.  Synthetic fuel tax credit
     amounts  allowed but not  utilized  are  carried  forward  indefinitely  as
     deferred  alternative minimum tax credits.  All entities have received PLRs
     from the IRS with  respect to their  synthetic  fuel  operations.  However,
     these PLRs do not address the  placed-in-service  date  determination.  The
     PLRs do not limit the  production  on which  synthetic  fuel credits may be
     claimed.  Total  Section  29 credits  generated  to date  (including  those
     generated by FPC prior to its acquisition by the Company) are approximately
     $1.5 billion, of which $719 million has been used to offset regular federal
     income tax liability and $777 million are being carried forward as deferred
     alternative minimum tax credits.  Also, $27 million has not been recognized
     due to the decrease in tax liability  resulting from expenses  incurred for
     the 2004  hurricane  damage and loss on sale of Progress  Rail. The current
     Section 29 tax credit program expires at the end of 2007.

     The sale of Progress  Rail in 2005 (see Note 3) resulted in a capital  loss
     for tax  purposes.  Capital  losses that are not offset with capital  gains
     generated in 2005 will be carried back to reduce the regular federal income
     tax  liability  in 2004.  The  estimated  impact of the sale will result in
     approximately  $17  million in tax  credits no longer  being  realized  and
     reflected as a deferred tax asset.

     On November  2, 2004,  PEF filed a petition  with the FPSC to recover  $252
     million of storm costs plus interest from customers over a two-year  period
     (see Note 4).  Based on the  reasonable  expectation  at December 31, 2004,
     that the FPSC will grant the  requested  recovery of the storm  costs,  the
     Company's loss from the casualty was reduced. Therefore, the Company's 2004
     tax  liability  was greater  than  originally  anticipated,  along with its
     ability to record Section 29 tax credits from its synthetic fuel facilities
     in 2004.

     The Company believes its right to recover storm costs is well  established;
     however,  the Company  cannot predict the timing or outcome of this matter.
     If the FPSC should deny PEF's  petition  for the recovery of storm costs in
     2005,  there  could be a material  impact on the  amount of 2005  synthetic
     fuels production and results of operations.

     IRS PROCEEDINGS

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

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

     In July 2004,  Progress  Energy was  notified  that the IRS field  auditors
     anticipated taking an adverse position regarding the placed-in-service date
     of the Company's  four Earthco  synthetic fuel  facilities.  Due to the IRS
     auditors' position,  the IRS decided to exercise its right to withdraw from
     the PFA program with Progress  Energy.  With the IRS's  withdrawal from the
     PFA program,  the review of Progress Energy's Earthco facilities is back on
     the normal procedural audit path of the Company's tax returns.

                                       29
<PAGE>

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

     Because of the  disagreement  between the Company and the field auditors as
     to the proper  legal  standard to apply,  the Company  believes  that it is
     appropriate  and helpful to have this issue reviewed by the National Office
     of the IRS,  just as the  National  Office  reviewed  the issues  involving
     chemical  change.  Therefore,  the Company is asking the National Office to
     clarify the legal standard and has initiated this process with the National
     Office.   The  Company  believes  that  the  appeals   process,   including
     proceedings  before  the  National  Office,  could  take up to two years to
     complete;  however,  it cannot  control the actual timing of resolution and
     cannot predict the outcome of this matter.

     Through March 31, 2005, the Company,  on a consolidated  basis, has used or
     carried  forward  approximately  $1.1  billion of tax credits  generated by
     Earthco  facilities.  If  these  credits  were  disallowed,  the  Company's
     one-time  exposure for cash tax payments  would be $300 million  (excluding
     interest),  and earnings and equity would be reduced by approximately  $1.1
     billion, excluding interest. Progress Energy's amended $1.13 billion credit
     facility includes a covenant that limits the maximum  debt-to-total capital
     ratio to 68%.  This ratio  includes  other  forms of  indebtedness  such as
     guarantees issued by PGN, letters of credit and capital leases. As of March
     31, 2005, the Company's  debt-to-total capital ratio was 61.1% based on the
     credit  agreement  definition  for this ratio.  The impact on this ratio of
     reversing approximately $1.1 billion of tax credits and paying $300 million
     for taxes would be to increase the ratio to 65.2%.

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

     As discussed in Note 8F of the Progress  Energy  annual report on Form 10-K
     for the year ended  December 31, 2004, the Company  implemented  changes in
     its  capitalization  policies for its Energy Delivery business units in PEC
     and PEF effective January 1, 2005. As a result of the changes in accounting
     estimates for the outage and emergency  work and indirect  costs,  a lesser
     proportion  of PEC's and PEF's costs will be  capitalized  on a prospective
     basis.  The Company has  requested a method change from the IRS. If the IRS
     does not grant the Company's  request,  the Company  cannot predict how the
     IRS  would  suggest  that  the  method  change  be  applied.  However,  the
     application  of the method  change to past periods  could be reflected in a
     cumulative  adjustment to taxable income in 2005, which likely would have a
     material impact on income from synthetic fuel tax credits.

     PROPOSED ACCOUNTING RULES FOR UNCERTAIN TAX POSITIONS

     In July 2004, the FASB stated that it plans to issue an exposure draft of a
     proposed  interpretation  of SFAS No. 109,  "Accounting  for Income Taxes,"
     that would address the accounting for uncertain tax positions. The FASB has
     indicated that the interpretation would require that uncertain tax benefits
     be probable  of being  sustained  in order to record  such  benefits in the
     financial  statements.  The exposure  draft is expected to be issued in the
     second  quarter of 2005.  The Company  cannot predict what actions the FASB
     will take or how any such actions  might  ultimately  affect the  Company's
     financial position or results of operations,  but such changes could have a
     material  impact on the Company's  evaluation and recognition of Section 29
     tax credits.

                                       30
<PAGE>

     PERMANENT SUBCOMMITTEE

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

     IMPACT OF CRUDE OIL PRICES

     Although  the  Internal  Revenue  Code  Section  29 tax  credit  program is
     expected to continue through 2007,  recent  unprecedented  increases in the
     price of oil could  limit the  amount of those  credits or  eliminate  them
     entirely for one or more of the years following  2004. This  possibility is
     due to a provision of Section 29 that provides that if the average wellhead
     price  per  barrel  for  unregulated  domestic  crude oil for the year (the
     Annual  Average  Price)  exceeds a certain  threshold  price (the Threshold
     Price),  the amount of Section 29 tax  credits  are  reduced for that year.
     Also,  if the Annual  Average  Price  increases  high enough (the Phase Out
     Price),  the Section 29 tax credits are eliminated for that year. For 2004,
     the  Threshold  Price was  $51.35  per  barrel  and the Phase Out Price was
     $64.47 per barrel. The Threshold Price and the Phase Out Price are adjusted
     annually for inflation.

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

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

     The Company  estimates that the 2005 Threshold Price will be  approximately
     $52 and  the  Phase  Out  price  will be  approximately  $65,  based  on an
     estimated 2005 inflation  adjustment.  The monthly Domestic Crude Oil First
     Purchases  price published by the EIA has recently been $5 to $6 lower than
     the corresponding  monthly New York Mercantile  Exchange (NYMEX) settlement
     price for light, sweet crude oil. Through April 30, 2005, the average NYMEX
     settlement  prices for light,  sweet  crude oil were  $50.55.  The  Company
     estimates that NYMEX settlement prices would have to average  approximately
     $63 for the remainder of 2005 for the Threshold Price to be reached.

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

     In  response  to the  historically  high oil  prices  to date in 2005,  the
     Company has adjusted its planned production schedule for its synthetic fuel
     plants by shifting some of its production planned for April and May 2005 to
     the second half of 2005.  If oil prices rise and stay at levels high enough
     to  cause a phase  out of tax  credits,  the  Company  may  reduce  planned
     production  or  suspend  production  at some or all of its  synthetic  fuel
     facilities.

                                       31
<PAGE>

     SALE OF PARTNERSHIP INTEREST

     In June 2004, the Company,  through its subsidiary  Progress Fuels, sold in
     two  transactions a combined 49.8%  partnership  interest in Colona Synfuel
     Limited   Partnership,   LLLP,  one  of  its  synthetic  fuel   facilities.
     Substantially all proceeds from the sales will be received over time, which
     is  typical  of such  sales in the  industry.  Gain from the sales  will be
     recognized  on a cost  recovery  basis as the  facility  produces and sells
     synthetic  fuel  and when  there  is  persuasive  evidence  that the  sales
     proceeds have become fixed or determinable and collectability is reasonably
     assured.  Based on projected  production and tax credit levels, the Company
     anticipates  receiving total gross proceeds of approximately $24 million in
     2005,  approximately $31 million in 2006, approximately $32 million in 2007
     and  approximately  $8 million  through  the second  quarter of 2008.  Gain
     recognition  is dependent on the synthetic fuel  production  qualifying for
     Section  29 tax  credits  and the value of such tax  credits  as  discussed
     above.  Until the gain  recognition  criteria  are met,  gains from selling
     interests  in Colona will be  deferred.  It is possible  that gains will be
     deferred  in the first,  second  and/or  third  quarters of each year until
     there is  persuasive  evidence  that no tax credit phase out will occur for
     the applicable  calendar year. This could result in shifting  earnings from
     earlier  quarters to later  quarters in a calendar  year. In the event that
     the  synthetic  fuel tax  credits  from the Colona  facility  are  reduced,
     including  an increase  in the price of oil that could  limit or  eliminate
     synthetic fuel tax credits,  the amount of proceeds  realized from the sale
     could be significantly impacted.

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

                                       32
<PAGE>


                         CAROLINA POWER & LIGHT COMPANY
                      d/b/a PROGRESS ENERGY CAROLINAS, INC.
                    CONSOLIDATED INTERIM FINANCIAL STATEMENTS
                                 March 31, 2005

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
UNAUDITED CONSOLIDATED STATEMENTS of INCOME
--------------------------------------------------------------------------------------
(in millions)
Three months ended March 31,                                       2005       2004
----------------------------------------------------------------------------------- --
Operating revenues                                               $  935     $  901

Operating expenses
   Fuel used in electric generation                                 248        224
   Purchased power                                                   67         62
   Operation and maintenance                                        224        209
   Depreciation and amortization                                    129        127
   Taxes other than on income                                        46         43
----------------------------------------------------------------------------------- --
        Total operating expenses                                    714        665
----------------------------------------------------------------------------------- --
Operating income                                                    221        236
----------------------------------------------------------------------------------- --
Other income (expense)
   Interest income                                                    2          1
   Other, net                                                         1        (12)
----------------------------------------------------------------------------------- --
        Total other income (expense)                                  3        (11)
----------------------------------------------------------------------------------- --
Interest charges
   Interest charges                                                  52         49
   Allowance for borrowed funds used during construction             (1)        (1)
----------------------------------------------------------------------------------- --
        Total interest charges, net                                  51         48
----------------------------------------------------------------------------------- --
Income before income tax                                            173        177
Income tax expense                                                   57         62
----------------------------------------------------------------------------------- --
Net income                                                          116        115
Preferred stock dividend requirement                                  1          1
----------------------------------------------------------------------------------- --
Earnings for common stock                                        $  115     $  114
----------------------------------------------------------------------------------- --
</TABLE>

See Notes to Consolidated Interim Financial Statements.

                                       33
<PAGE>


<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
CAROLINA POWER & LIGHT COMPANY
d/b/a PROGRESS ENERGY CAROLINAS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------
(in millions)                                                          March 31,          December 31,
                                                                           2005                  2004
------------------------------------------------------------------------------------------------------
ASSETS
Utility plant
  Utility plant in service                                             $ 13,567              $ 13,521
  Accumulated depreciation                                               (5,877)               (5,806)
------------------------------------------------------------------------------------------------------
        Utility plant in service, net                                     7,690                 7,715
  Held for future use                                                         5                     5
  Construction work in progress                                             470                   379
  Nuclear fuel, net of amortization                                         178                   186
------------------------------------------------------------------------------------------------------
        Total utility plant, net                                          8,343                 8,285
------------------------------------------------------------------------------------------------------
Current assets
  Cash and cash equivalents                                                 183                    18
  Short-term investments                                                    135                    82
  Receivables                                                               398                   397
  Receivables from affiliated companies                                      36                    20
  Inventory                                                                 395                   390
  Deferred fuel cost                                                        163                   140
  Prepayments and other current assets                                       95                   135
------------------------------------------------------------------------------------------------------
        Total current assets                                              1,405                 1,182
------------------------------------------------------------------------------------------------------
Deferred debits and other assets
  Regulatory assets                                                         464                   473
  Nuclear decommissioning trust funds                                       603                   581
  Miscellaneous other property and investments                              184                   158
  Other assets and deferred debits                                          107                   108
------------------------------------------------------------------------------------------------------
        Total deferred debits and other assets                            1,358                 1,320
------------------------------------------------------------------------------------------------------
           Total assets                                                $ 11,106              $ 10,787
------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
------------------------------------------------------------------------------------------------------
Common stock equity
  Common stock without par value, authorized 200 million shares,
     160 million shares issued and outstanding                         $  1,988              $  1,975
  Unearned ESOP common stock                                                (65)                  (76)
  Accumulated other comprehensive loss                                     (112)                 (114)
  Retained earnings                                                       1,256                 1,287
------------------------------------------------------------------------------------------------------
        Total common stock equity                                         3,067                 3,072
------------------------------------------------------------------------------------------------------
  Preferred stock - not subject to mandatory redemption                      59                    59
  Long-term debt, net                                                     3,247                 2,750
------------------------------------------------------------------------------------------------------
        Total capitalization                                              6,373                 5,881
------------------------------------------------------------------------------------------------------
Current liabilities
  Current portion of long-term debt                                         300                   300
  Accounts payable                                                          253                   254
  Payables to affiliated companies                                           60                    83
  Notes payable to affiliated companies                                      23                   116
  Short-term obligations                                                    108                   221
  Customer deposits                                                          46                    45
  Other current liabilities                                                 227                   256
------------------------------------------------------------------------------------------------------
        Total current liabilities                                         1,017                 1,275
------------------------------------------------------------------------------------------------------
Deferred credits and other liabilities
  Noncurrent income tax liabilities                                       1,005                   991
  Accumulated deferred investment tax credits                               139                   140
  Regulatory liabilities                                                  1,104                 1,052
  Asset retirement obligations                                              937                   924
  Other liabilities and deferred credits                                    531                   524
------------------------------------------------------------------------------------------------------
        Total deferred credits and other liabilities                      3,716                 3,631
------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
------------------------------------------------------------------------------------------------------
            Total capitalization and liabilities                       $ 11,106              $ 10,787
------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Interim Financial Statements.

                                       34
<PAGE>


<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
CAROLINA POWER & LIGHT COMPANY
d/b/a PROGRESS ENERGY CAROLINAS, INC.
UNAUDITED CONSOLIDATED STATEMENTS of CASH FLOWS
----------------------------------------------------------------------------------------------------------------
(in millions)
Three Months Ended March 31,                                                             2005         2004
-------------------------------------------------------------------------------------------------------------
Operating activities
Net income                                                                             $  116       $  115
Adjustments to reconcile net income to net cash provided by operating activities:
      Depreciation and amortization                                                       149          149
      Deferred income taxes                                                                30           22
      Investment tax credit                                                                (2)          (3)
      Deferred fuel (credit) cost                                                         (17)          13
      Other adjustments to net income                                                       5           13
      Cash provided (used) by changes in operating assets and liabilities:
         Receivables                                                                       (1)          27
         Receivables from affiliated companies                                            (16)           4
         Inventory                                                                         (5)          31
         Prepayments and other current assets                                             (12)           4
         Accounts payable                                                                  27           (4)
         Payables to affiliated companies                                                 (23)         (84)
         Other current liabilities                                                         (7)          13
         Other                                                                             37           30
-------------------------------------------------------------------------------------------------------------
         Net cash provided by operating activities                                        281          330
-------------------------------------------------------------------------------------------------------------
Investing activities
Gross property additions                                                                 (142)        (121)
Nuclear fuel additions                                                                    (30)         (39)
Net contributions to nuclear decommissioning trust                                        (10)         (10)
Purchases of short-term investments                                                      (763)        (601)
Proceeds from sales of short-term investments                                             710          828
Other investing activities                                                                (23)           3
-------------------------------------------------------------------------------------------------------------
         Net cash (used in) provided by investing activities                             (258)          60
-------------------------------------------------------------------------------------------------------------
Financing activities
Issuance of long-term debt, net                                                           495            -
Net decrease in short-term obligations                                                   (113)          (4)
Net change in intercompany notes                                                          (93)        (109)
Retirement of long-term debt                                                                -         (150)
Dividends paid to parent                                                                 (146)        (125)
Dividends paid on preferred stock                                                          (1)          (1)
-------------------------------------------------------------------------------------------------------------
         Net cash provided by (used in) financing activities                              142         (389)
-------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents                                                 165            1
Cash and cash equivalents at beginning of period                                           18           12
-------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                             $  183       $   13
-------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Interim Financial Statements.


                                       35
<PAGE>


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

1.   BASIS OF PRESENTATION

     A. Basis of Presentation

     These financial statements have been prepared in accordance with accounting
     principles  generally  accepted in the United States of America  (GAAP) for
     interim  financial  information and with the  instructions to Form 10-Q and
     Regulation S-X. Accordingly, they do not include all of the information and
     footnotes required by GAAP for annual statements.  Because the accompanying
     consolidated  interim  financial  statements  do  not  include  all  of the
     information  and  footnotes  required  by  GAAP,  they  should  be  read in
     conjunction  with the audited  financial  statements  for the period  ended
     December 31, 2004 and notes thereto included in Progress Energy  Carolinas,
     Inc.'s (PEC) Form 10-K for the year ended December 31, 2004.

     PEC collects  from  customers  certain  excise taxes levied by the state or
     local  government  upon the  customer.  PEC  accounts for excise taxes on a
     gross  basis.  For the three  months  ended March 31, 2005 and 2004,  gross
     receipts tax and other excise  taxes of  approximately  $22 million and $21
     million,  respectively,  are  included in electric  revenue and taxes other
     than on income on the Consolidated Statements of Income.

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

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

     B. Stock-Based Compensation

     PEC  measures  compensation  expense  for stock  options as the  difference
     between the market price of Progress Energy's common stock and the exercise
     price of the option at the grant date.  The exercise price at which options
     are granted by Progress  Energy  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" (SFAS No. 148),  the
     estimated  fair value of PEC's stock  options is  amortized to expense over
     the options' vesting period.  The following table illustrates the effect on
     net income and earnings per share if the fair value method had been applied
     to all outstanding and unvested awards in each period:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     ----------------------------------------------------------------------------------------
     (in millions)                                                    2005           2004
     ----------------------------------------------------------------------------------------
     Net Income, as reported                                        $  116         $  115
     Deduct:  Total stock option expense determined under fair
       value method for all awards, net of related tax effects           1              2
     ----------------------------------------------------------------------------------------
     Pro forma net income                                           $  115         $  113
     ----------------------------------------------------------------------------------------
</TABLE>

     PEC expects to begin expensing stock options on July 1, 2005 (See Note 2).

                                       36
<PAGE>


     C. Consolidation of Variable Interest Entities

     PEC consolidates  all voting interest  entities in which it owns a majority
     voting  interest  and all  variable  interest  entities for which it is the
     primary  beneficiary  in  accordance  with  FASB  Interpretation  No.  46R,
     "Consolidation of Variable Interest Entities - An Interpretation of ARB No.
     51" (FIN No. 46R). PEC is the primary  beneficiary of and  consolidates two
     limited  partnerships  that  qualify  for  federal  affordable  housing and
     historic tax credits under Section 42 of the Internal  Revenue Code (Code).
     As of March  31,  2005,  the  total  assets  of the two  entities  were $37
     million, the majority of which are collateral for the entities' obligations
     and are included in other current assets and  miscellaneous  other property
     and investments in the Consolidated Balance Sheets.

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

     PEC also has  interests in several  other  variable  interest  entities for
     which  PEC is not  the  primary  beneficiary.  These  arrangements  include
     investments in approximately  22 limited  partnerships,  limited  liability
     corporations  and  venture  capital  funds  and two  building  leases  with
     special-purpose  entities. The aggregate maximum loss exposure at March 31,
     2005,  that PEC could be  required to record in its income  statement  as a
     result  of  these  arrangements  totals   approximately  $24  million.  The
     creditors of these variable  interest  entities do not have recourse to the
     general credit of PEC in excess of the aggregate maximum loss exposure.

2.   NEW ACCOUNTING STANDARDS

     STATEMENT  OF  FINANCIAL  ACCOUNTING  STANDARDS  NO.  123  (REVISED  2004),
     "SHARE-BASED PAYMENT" (SFAS NO. 123R)

     In December 2004, the Financial  Accounting  Standards  Board (FASB) issued
     SFAS No. 123R,  which  revises SFAS No. 123,  "Accounting  for  Stock-Based
     Compensation" and supersedes  Accounting Principles Board (APB) Opinion No.
     25, "Accounting for Stock Issued to Employees." The key requirement of SFAS
     No.  123R is that the  cost of  share-based  awards  to  employees  will be
     measured  based on an award's fair value at the grant date,  with such cost
     to be amortized over the appropriate service period.  Previously,  entities
     could  elect to  continue  accounting  for such  awards at their grant date
     intrinsic  value under APB Opinion No. 25, and PEC made that election.  The
     intrinsic value method  resulted in PEC recording no  compensation  expense
     for stock options granted to employees (See Note 1B).

     As written,  SFAS No. 123R had an original  effective  date of July 1, 2005
     for PEC. In April  2005,  the SEC  delayed  the  effective  date for public
     companies,  which resulted in a required  effective date of January 1, 2006
     for  PEC.  The  SEC  delayed  the  effective  date  due  to  concerns  that
     implementation  in mid-year could make  compliance  more difficult and make
     comparisons of quarterly  reports more difficult.  PEC currently intends to
     implement SFAS No. 123R on the original effective date of July 1, 2005. PEC
     intends to implement the standard using the required  modified  prospective
     method. Under that method and with a July 1, 2005 implementation,  PEC will
     record  compensation  expense  under SFAS No. 123R for all awards it grants
     after July 1, 2005,  and it will record  compensation  expense (as previous
     awards  continue to vest) for the unvested  portion of  previously  granted
     awards that remain  outstanding at July 1, 2005. In 2004,  Progress  Energy
     made the  decision  to cease  granting  stock  options  and  replaced  that
     compensation with alternative forms of compensation.  Therefore, the amount
     of stock option expense expected to be recorded in 2005 is below the amount
     that would have been  recorded if the stock option  program had  continued.
     PEC expects to record approximately $1 million of pre-tax expense for stock
     options in 2005.

                                       37
<PAGE>

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

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

3.   REGULATORY MATTERS

     On April 27,  2005,  PEC filed for an increase in the fuel rate  charged to
     its South Carolina  customers  with the Public Service  Commission of South
     Carolina (SCPSC).  PEC is asking the SCPSC to approve a $97 million,  or 21
     percent,  increase in rates. PEC requested the increase for  underrecovered
     fuel costs for the  previous  15 months and to meet  future  expected  fuel
     costs.  This request  reflects  increases in the prices of coal and natural
     gas. If approved,  the increase would take effect July 1, 2005. The Company
     cannot predict the outcome of this matter.

4.   COMPREHENSIVE INCOME

     --------------------------------------------------------------------------
     (in millions)
     Three Months Ended March 31,                               2005       2004
     --------------------------------------------------------------------------
     Net income                                               $  116     $  115
     Other comprehensive income:
       Changes in net unrealized gains on cash flow hedges
           (net of tax expense of $1)                              2          -
       Other                                                       -          1
     --------------------------------------------------------------------------
             Other comprehensive income                       $    2     $    1
     --------------------------------------------------------------------------
        Comprehensive income                                  $  118     $  116
     --------------------------------------------------------------------------

5.   DEBT AND CREDIT FACILITIES AND FINANCING ACTIVITIES

     Changes  to PEC's debt and  credit  facilities  since  December  31,  2004,
     discussed in Note 9 of PEC's 2004 Annual Report on Form 10-K, are described
     below.

     In January 2005, PEC used proceeds from the issuance of commercial paper to
     pay off $90 million of revolving credit agreement (RCA) loans.

     On March 22, 2005, PEC issued $300 million of First Mortgage  Bonds,  5.15%
     Series due 2015, and $200 million of First Mortgage Bonds, 5.70% Series due
     2035. The net proceeds from the sale of the bonds were used to pay off $300
     million  of its  7.50%  Senior  Notes  on  April 1,  2005  and  reduce  the
     outstanding balance of commercial paper.

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

                                       38

<PAGE>

6.   BENEFIT PLANS

     PEC has a  noncontributory  defined benefit  retirement  (pension) plan for
     substantially all full-time employees.  PEC also has supplementary  defined
     benefit pension plans that provide benefits to higher-level  employees.  In
     addition   to   pension   benefits,   PEC   provides   contributory   other
     postretirement  benefits  (OPEB),  including  certain  health care and life
     insurance benefits,  for retired employees who meet specified criteria. The
     components  of the net  periodic  benefit  cost for the three  months ended
     March 31 are:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     -----------------------------------------------------------------------------------
                                                                    Other Postretirement
                                              Pension Benefits            Benefits
                                              ----------------      --------------------
     (in millions)                             2005      2004         2005       2004
     -----------------------------------------------------------------------------------
     Service cost                             $   7     $   6        $   2      $   2
     Interest cost                               13        13            4          4
     Expected return on plan assets             (16)      (17)          (1)        (1)
     Amortization, net                            2         -            -          1
     -----------------------------------------------------------------------------------
     Net periodic cost / (benefit)            $   6     $   2        $   5      $   6
     -----------------------------------------------------------------------------------
</TABLE>

7.   RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS

     PEC is exposed to various  risks  related to changes in market  conditions.
     PEC's  parent,  Progress  Energy,  has a  risk  management  committee  that
     includes  senior   executives  from  various  business  groups.   The  risk
     management  committee is  responsible  for  administering  risk  management
     policies and monitoring compliance with those policies by all subsidiaries.
     Under its risk  management  policy,  PEC may use a variety of  instruments,
     including  swaps,  options and  forward  contracts,  to manage  exposure to
     fluctuations  in commodity  prices and  interest  rates.  Such  instruments
     contain  credit  risk  if the  counterparty  fails  to  perform  under  the
     contract. PEC minimizes such risk by performing credit reviews using, among
     other things,  publicly  available  credit ratings of such  counterparties.
     Potential  nonperformance  by  counterparties  is not  expected  to  have a
     material  effect on the  consolidated  financial  position or  consolidated
     results of  operations  of PEC. See Note 13 to PEC's Annual  Report on Form
     10-K for the year ended December 31, 2004.

     A. Commodity Derivatives

     General

     Most of PEC's commodity contracts are not derivatives  pursuant to SFAS No.
     133 or qualify  as normal  purchases  or sales  pursuant  to SFAS No.  133.
     Therefore, such contracts are not recorded at fair value.

     In 2003, PEC recorded a $38 million  pre-tax ($23 million  after-tax)  fair
     value loss  transition  adjustment  pursuant to the provisions of DIG Issue
     C20, "Scope  Exceptions:  Interpretation  of the Meaning of Not Clearly and
     Closely  Related  in  Paragraph  10(b)  regarding  Contracts  with a  Price
     Adjustment  Feature." The related  liability is being amortized to earnings
     over the term of the related  contract (See Note 10). At March 31, 2005 and
     December 31, 2004, the remaining liability was $25 million and $26 million,
     respectively.

     Economic Derivatives

     Derivative products,  primarily electricity and natural gas contracts,  may
     be entered  into from time to time for  economic  hedging  purposes.  While
     management  believes the economic hedges mitigate exposures to fluctuations
     in commodity  prices,  these  instruments  are not designated as hedges for
     accounting  purposes and are monitored  consistent with trading  positions.
     PEC manages open positions with strict  policies that limit its exposure to
     market  risk  and  require  daily  reporting  to  management  of  potential
     financial exposures. Gains and losses from such contracts were not material
     to results of operations  during the three months ending March 31, 2005 and
     2004 and PEC did not have material outstanding  positions in such contracts
     at March 31, 2005 and December 31, 2004.

                                       39
<PAGE>


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

     PEC uses cash flow hedging  strategies to hedge variable  interest rates on
     long-term and  short-term  debt and to hedge  interest rates with regard to
     future fixed-rate debt issuances. PEC uses fair value hedging strategies to
     manage its exposure to fixed interest rates on long-term debt. The notional
     amounts of interest rate derivatives are not exchanged and do not represent
     exposure to credit loss. In the event of default by the  counterparty,  the
     risk in these  transactions  is the cost of  replacing  the  agreements  at
     current market rates.

     Cash Flow Hedges

     Gains and losses from cash flow hedges are  recorded in  accumulated  other
     comprehensive  income  (OCI)  and  amounts  reclassified  to  earnings  are
     included in net interest charges as the hedged transactions occur.  Amounts
     in OCI related to  terminated  hedges are  reclassified  to earnings as the
     hedged interest  payments occur.  The ineffective  portion of interest rate
     cash flow hedges for the three  months  ending  March 31, 2005 and 2004 was
     not material to PEC's results of operations.  As of March 31, 2005, PEC had
     $5 million  of  after-tax  deferred  losses in OCI  related  to  terminated
     hedges,  of which an immaterial  amount is expected to be  reclassified  to
     earnings within the next 12 months.

     During the three months ending March 31, 2005,  PEC  terminated  all of its
     cash flow  hedges  which  were open at  December  31,  2004 and had no open
     interest  rate cash flow hedges at March 31, 2005. As of December 31, 2004,
     PEC had $131 million notional of open interest rate cash flow hedges.

     Fair Value Hedges

     At March 31, 2005 and December 31, 2004, PEC had no open interest rate fair
     value hedges.

8.   SEVERANCE COSTS

     On February 28, 2005,  as part of a previously  announced  cost  management
     initiative,  Progress Energy approved a workforce  restructuring,  which is
     expected to be completed in September of 2005. In addition to the workforce
     restructuring, the cost management initiative includes a voluntary enhanced
     retirement program. In connection with the cost management initiative,  PEC
     currently  expects to incur estimated  pre-tax charges of approximately $75
     million. In addition,  PEC expects to incur certain incremental costs other
     than severance and  postretirement  benefits for  recruiting,  training and
     staff augmentation activities that cannot be quantified at this time.

     PEC  recorded $14 million of expense  during the first  quarter of 2005 for
     the estimated  severance benefits to be paid as a result of the approximate
     number of positions to be eliminated under the  restructuring.  This amount
     includes  approximately  $4  million  of  severance  costs  allocated  from
     Progress Energy Service  Company.  These amounts will be paid over time and
     are  subject  to  revision  in future  quarters  based on the impact of the
     voluntary enhanced retirement program. The severance expenses are primarily
     included in operations and maintenance  (O&M) expenses on the  Consolidated
     Statements of Income.

     The activity in the severance liability is as follows:

     ---------------------------------------------------
     (in millions)
     ---------------------------------------------------
     Balance as of January 1, 2005                 $  2
     Severance Costs Accrued                         10
     Payments                                         -
     ---------------------------------------------------
     Balance as of March 31, 2005                  $ 12
     ---------------------------------------------------

     PEC has estimated  that an additional $65 million charge will be recognized
     in the  second  quarter of 2005 and  relates  primarily  to  postretirement
     benefits  that  will be paid  over  time to those  eligible  employees  who
     elected to participate in the voluntary enhanced  retirement  program.  The
     results from the employee  elections  indicate that 553 of PEC's  employees
     have elected to participate in the voluntary enhanced  retirement  program.
     The cost management initiative charges could change significantly primarily
     due to the  demographics  of the specific  employees  who elected  enhanced
     retirement and its impact on the postretirement benefit actuarial studies.

                                       40
<PAGE>


9.   FINANCIAL INFORMATION BY BUSINESS SEGMENT

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

     The Other segment,  whose operations are primarily in the United States, is
     made up of other  nonregulated  business areas 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.

     The financial information for PEC segments for the three months ended March
     31, 2005 and 2004 is as follows:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     -----------------------------------------------------------------------------------------------
     (in millions)                          2005                                   2004
     -----------------------------------------------------------------------------------------------
                                 PEC                                    PEC
                               Electric    Other      Total          Electric     Other      Total
     -----------------------------------------------------------------------------------------------
     Total revenues           $  935       $   -     $  935           $  901       $  -     $  901
     Segment profit (loss)       116          (1)       115              116         (2)       114
     -----------------------------------------------------------------------------------------------
</TABLE>

10.  OTHER INCOME AND OTHER EXPENSE

     Other  income and expense  includes  interest  income and other  income and
     expense items as discussed  below. The components of other, net as shown on
     the  accompanying  Consolidated  Statements  of Income for the three months
     ended March 31, 2005 and 2004, are as follows:

     ---------------------------------------------------------------------------
     (in millions)                                            2005         2004
     ---------------------------------------------------------------------------
     Other income
     Nonregulated energy and delivery services income        $   2        $   2
     DIG Issue C20 amortization (See Note 7)                     1            2
     AFUDC equity                                                -            1
     Other                                                       3            3
     ---------------------------------------------------------------------------
         Total other income                                  $   6        $   8
     ---------------------------------------------------------------------------

     Other expense
     Nonregulated energy and delivery services expenses      $   2        $   2
     Donations                                                   2            4
     Write-off of non-trade receivables                          -            7
     Other                                                       1            7
     ---------------------------------------------------------------------------
        Total other expense                                  $   5        $  20
     ---------------------------------------------------------------------------

     Other, net                                              $   1        $ (12)
     ---------------------------------------------------------------------------

     Nonregulated energy and delivery services include power protection services
     and mass market programs such as surge protection,  appliance  services and
     area light sales, and delivery,  transmission and substation work for other
     utilities.

11.  ENVIRONMENTAL MATTERS

     PEC is subject to federal, state and local regulations addressing hazardous
     and solid waste management,  air and water quality and other  environmental
     matters.  See Note 17 of PEC's 2004  Annual  Report on Form 10-K for a more
     detailed,   historical  discussion  of  these  federal,  state,  and  local
     regulations.

                                       41
<PAGE>

     HAZARDOUS AND SOLID WASTE MANAGEMENT

     The provisions of the Comprehensive  Environmental  Response,  Compensation
     and  Liability  Act of 1980,  as  amended  (CERCLA),  authorize  the EPA to
     require  the  cleanup  of  hazardous  waste  sites.  This  statute  imposes
     retroactive joint and several liabilities. Some states, including North and
     South  Carolina,  have similar types of  legislation.  PEC is  periodically
     notified by regulators,  including the EPA and various state  agencies,  of
     their  involvement  or  potential  involvement  in sites  that may  require
     investigation  and/or  remediation.  There are presently several sites with
     respect  to which PEC has been  notified  by the EPA and the State of North
     Carolina of its potential liability,  as described below in greater detail.
     PEC is also  currently  in the  process of  assessing  potential  costs and
     exposures at other sites.  For all sites,  as assessments are developed and
     analyzed,  PEC will accrue  costs for the sites to the extent the costs are
     probable and can be reasonably estimated.

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

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

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

     During the fourth  quarter of 2004,  the EPA  advised  PEC that it had been
     identified as a PRP at the Ward Transformer site located in Raleigh,  North
     Carolina.  The EPA  offered  PEC  and 34  other  PRPs  the  opportunity  to
     negotiate  cleanup of the site and reimbursement of less than $2 million to
     the EPA for EPA's past  expenditures in addressing  conditions at the site.
     Although a loss is  considered  probable,  an agreement  among PRPs has not
     been reached;  consequently,  it is not possible at this time to reasonably
     estimate the total amount of PEC's  obligation for  remediation of the Ward
     Transformer site.

     As of March 31, 2005 and December 31, 2004, PEC's accruals for probable and
     estimable costs related to various  environmental sites, which are included
     in other  liabilities and deferred  credits and are expected to be paid out
     over many years, were:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     ---------------------------------------------------------------------------------------
     (in millions)                                    March 31, 2005      December 31, 2004
     ---------------------------------------------------------------------------------------
     Insurance fund                                             $  5                   $  7
     Transferred from North Carolina Natural Gas
         Corporation at time of sale                               2                      2
     ---------------------------------------------------------------------------------------
     Total accrual for environmental sites                      $  7                   $  9
     ---------------------------------------------------------------------------------------
</TABLE>

     The  insurance  fund in the table above was  established  when PEC received
     insurance   proceeds  to  address  costs   associated  with   environmental
     liabilities  related  to its  involvement  with some  sites.  All  eligible
     expenses  related to these are charged  against a specific fund  containing
     these proceeds.  PEC made no additional  accruals,  spent  approximately $2
     million  related to  environmental  remediation  and  received no insurance
     proceeds, for the three months ended March 31, 2005.

     This accrual has been recorded on an undiscounted  basis.  PEC measures its
     liability  for  these  sites  based on  available  evidence  including  its
     experience in investigating and remediating environmentally impaired sites.
     The  process  often   involves   assessing  and   developing   cost-sharing
     arrangements  with other PRPs.  PEC will accrue  costs for the sites to the
     extent its liability is probable and the costs can be reasonably estimated.
     Because the extent of environmental  impact,  allocation among PRPs for all
     sites,  remediation  alternatives  (which could involve  either  minimal or
     significant  efforts),  and concurrence of the regulatory  authorities have

                                       42
<PAGE>

     not yet reached the stage where a  reasonable  estimate of the  remediation
     costs  can be made,  PEC  cannot  determine  the  total  costs  that may be
     incurred in connection  with the  remediation of all sites at this time. It
     is  anticipated  that  sufficient  information  will become  available  for
     several  sites  during  2005  to  allow  a  reasonable  estimate  of  PEC's
     obligation for those sites to be made.

     On March 30, 2005, the North Carolina  Division of Water Quality  renewed a
     PEC permit for the continued use of coal combustion  products  generated at
     any of the  Company's  coal-fired  plants  located  in the  state.  PEC has
     reviewed  the permit  conditions,  which could  significantly  restrict the
     reuse of coal ash and result in higher ash management  costs,  and plans to
     adjudicate the permit conditions. The Company cannot predict the outcome of
     this matter.

     AIR QUALITY

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

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

     Total capital  expenditures  to meet the  requirements  of the NOx SIP Call
     Rule in North and South  Carolina could reach  approximately  $370 million.
     This amount also  includes  the cost to install  NOx  controls  under North
     Carolina's and South Carolina's  programs to comply with the federal 8-hour
     ozone  standard.  However,  further  technical  analysis and rulemaking may
     result in requirements for additional controls at some units. PEC has spent
     approximately  $303  million to date  related to these  projected  amounts.
     Increased  operation and maintenance costs relating to the NOx SIP Call are
     not  expected  to be  material  to PEC's  results  of  operations.  Further
     controls are anticipated as electricity demand increases.

     PEC projects that its capital  costs to meet  emission  targets for NOx and
     SO2 from  coal-fired  power plants under the  Smokestacks  Act,  will total
     approximately   $895  million  by  the  end  of  2013.   PEC  has  expended
     approximately  $141 million of these  capital costs through March 31, 2005.
     The law requires PEC to amortize 70% of the original  cost estimate of $813
     million, during a five-year rate freeze period. PEC recognized amortization
     of $27  million  for  the  three  months  ended  March  31,  2005,  and has
     recognized $275 million in cumulative  amortization through March 31, 2005.
     The  remaining  amortization  requirement  will be recorded over the future
     period ending  December 31, 2007.  The law permits PEC the  flexibility  to
     vary the  amortization  schedule for recording the compliance costs from no
     amortization  expense  up to $174  million  per year.  The NCUC will hold a
     hearing prior to December 31, 2007, to determine cost recovery  amounts for
     2008 and future  periods.  O&M expense will increase due to the  additional
     materials, personnel and general maintenance associated with the equipment.
     O&M expenses  are  recoverable  through base rates,  rather than as part of
     this  program.  PEC cannot  predict the future  regulatory  interpretation,
     implementation or impact of this law.

                                       43
<PAGE>

     On March 10,  2005,  the EPA issued  the final  Clean Air  Interstate  Rule
     (CAIR).  The EPA's rule  requires 28 states and the  District of  Columbia,
     including North Carolina,  South Carolina,  Georgia and Florida,  to reduce
     NOx and SO2  emissions  in  order to  attain  state  NOx and SO2  emissions
     levels. The Company is reviewing the final rule. Installation of additional
     air quality controls is likely to be needed to meet the CAIR  requirements.
     The Company is in the process of determining  compliance plans and the cost
     to comply with the rule.  The air quality  controls  already  installed for
     compliance  with the NOx SIP Call and  currently  planned by the Company to
     comply with the  Smokestacks Act will reduce the costs required to meet the
     CAIR requirements for the Company's North Carolina units.

     On March 15, 2005,  the EPA finalized two separate but related  rules:  the
     Clean Air Mercury Rule (CAMR) that sets  emissions  limits to be met in two
     phases and encourages a cap and trade approach to achieving those caps, and
     a  de-listing  rule that  eliminated  any  requirement  to pursue a maximum
     achievable   control   technology  (MACT)  approach  for  limiting  mercury
     emissions  from  coal-fired  power  plants.  NOx and SO2 controls  also are
     effective in reducing mercury emissions;  however, according to the EPA the
     second  phase cap  reflects a level of  mercury  emissions  reduction  that
     exceeds  the  level  that  would be  achieved  solely  as a  co-benefit  of
     controlling  NOx and SO2 under  CAIR.  The  Company  is in the  process  of
     determining  compliance  plans  and  the  cost to  comply  with  the  CAMR.
     Installation  of additional air quality  controls is likely to be needed to
     meet the CAMR's requirements.  The de-listing rule has been challenged by a
     number of  parties;  the  resolution  of the  challenges  could  impact the
     Company's final compliance plans and costs.

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

     In March 2004,  the North Carolina  Attorney  General filed a petition with
     the EPA  under  Section  126 of the  Clean  Air  Act,  asking  the  federal
     government to force coal-fired  power plants in 13 other states,  including
     South Carolina,  to reduce their NOx and SO2 emissions.  The state of North
     Carolina  contends  these  out-of-state   emissions  interfere  with  North
     Carolina's  ability to meet  national air quality  standards  for ozone and
     particulate  matter.  The EPA has  agreed  to make a  determination  on the
     petition by August 1, 2005. PEC cannot predict the outcome of this matter.

     WATER QUALITY

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

     Based on new cost  information  and changes to the estimated  time frame of
     expenditures,  PEC has  revised the  estimated  amounts and time period for
     expenditures  to meet Section 316(b)  requirements  of the Clean Water Act.
     PEC  currently   estimates  that  from  2005  through  2010  the  range  of
     expenditures will be approximately $15 million to $25 million.

     OTHER ENVIRONMENTAL MATTERS

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

     Progress  Energy has  announced its plan to issue a report on the Company's
     activities  associated with current and future environmental  requirements.
     The report will include a discussion of the environmental requirements that
     PEC  currently  faces and expects to face in the future with respect to its
     air emissions. The report is expected to be issued by March 31, 2006.

12.  COMMITMENTS AND CONTINGENCIES

     Contingencies  existing as of the date of these  statements  are  described
     below.  No significant  changes have occurred since December 31, 2004, with
     respect to the commitments discussed in Note 18 of PEC's 2004 Annual Report
     on Form 10-K.

                                       44

<PAGE>


     A. Guarantees

     As a part of normal business,  PEC enters into various agreements providing
     future  financial or  performance  assurances to third  parties,  which are
     outside  the  scope  of  Financial   Accounting   Standards   Board  (FASB)
     Interpretation No. 45, "Guarantor's  Accounting and Disclosure Requirements
     for Guarantees,  Including  Indirect  Guarantees of Indebtedness of Others"
     (FIN No. 45). Such agreements include guarantees, standby letters of credit
     and surety bonds.  At March 31, 2005,  PEC does not believe  conditions are
     likely for significant  performance under these  guarantees.  To the extent
     liabilities  are  incurred  as a result of the  activities  covered  by the
     guarantees,  such liabilities are included in the accompanying Consolidated
     Balance Sheets.  At March 31, 2005, PEC had no guarantees  issued on behalf
     of unconsolidated subsidiaries or other third parties.

     B. Insurance

     PEC is a  member  of  Nuclear  Electric  Insurance  Limited  (NEIL),  which
     provides primary and excess  insurance  coverage against property damage to
     members' nuclear generating  facilities.  Under the primary program, PEC is
     insured  for $500  million at each of its  nuclear  plants.  In addition to
     primary   coverage,   NEIL   also   provides   decontamination,   premature
     decommissioning  and excess property insurance with limits of $1.75 billion
     on each plant.

     C. Other Contingencies

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

     DOE failed to begin  taking  spent  nuclear  fuel by January 31,  1998.  In
     January  2004,  PEC filed a complaint in the United States Court of Federal
     Claims  against  the DOE,  claiming  that  the DOE  breached  the  Standard
     Contract for Disposal of Spent  Nuclear Fuel (SNF) by failing to accept SNF
     from various PEC facilities on or before  January 31, 1998.  Damages due to
     DOE's  breach  will  likely  exceed $100  million.  Approximately  60 cases
     involving the  Government's  actions in connection  with spent nuclear fuel
     are currently pending in the Court of Federal Claims.

     DOE and the PEC  parties  have agreed to a stay of the  lawsuit,  including
     discovery.  The parties agreed to, and the trial court  entered,  a stay of
     proceedings,  in  order  to  allow  for  possible  efficiencies  due to the
     resolution of legal and factual  issues in previously  filed cases in which
     similar  claims are being  pursued by other  plaintiffs.  These  issues may
     include,  among others,  so-called "rate issues," or the minimum  mandatory
     schedule for the  acceptance of SNF and high level waste (HLW) by which the
     Government  was  contractually  obligated to accept  contract  holders' SNF
     and/or HLW, and issues regarding recovery of damages under a partial breach
     of  contract  theory  that will be  alleged to occur in the  future.  These
     issues  have been or are  expected to be  presented  in the trials that are
     currently  scheduled to occur during  2005.  Resolution  of these issues in
     other cases could facilitate  agreements by the parties in the PEC lawsuit,
     or at a minimum,  inform the Court of decisions  reached by other courts if
     they remain contested and require  resolution in this case. The trial court
     has continued this stay until June 24, 2005.

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

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

                                       45
<PAGE>

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

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

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

     On May 4, 2004,  PEC  authorized  its  outside  counsel to file a notice of
     appeal of the April 6, 2004,  judgment  and on May 7,  2004,  the notice of
     appeal  was filed with the United  States  Court of Appeals  for the Fourth
     Circuit.  On June 8, 2004,  DMT filed a motion to dismiss the appeal on the
     ground that PEC's notice of appeal  should have been filed on or before May
     6,  2004.  On June 16,  2004,  PEC  filed a motion  with  the  trial  court
     requesting  an  extension  of the  deadline for the filing of the notice of
     appeal.  By order dated  September  10,  2004,  the trial court  denied the
     extension  request.  On September 15, 2004, PEC filed a notice of appeal of
     the  September 10, 2004 order and by order dated  September  29, 2004,  the
     appellate court consolidated the first and second appeals.  DMT's motion to
     dismiss the first  appeal  remains  pending.  Argument on the  consolidated
     appeal is scheduled for May 25, 2005.

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

     3.  On  February  1,  2002,   PEC  filed  a  complaint   with  the  Surface
     Transportation  Board  (STB)  challenging  the  rates  charged  by  Norfolk
     Southern  Railway Company  (Norfolk  Southern) for coal  transportation  to
     certain  generating  plants. In a decision dated December 23, 2003, the STB
     found that the rates were unreasonable,  awarded reparations and prescribed
     maximum rates. Both parties  petitioned the STB for  reconsideration of the
     December 23, 2003 decision.  On October 20, 2004, the STB  reconsidered its
     December 23, 2003 decision and concluded  that the rates charged by Norfolk
     Southern  were  not  unreasonable.  Because  PEC  paid  the  maximum  rates
     prescribed by the STB in its December 23, 2003 decision for several  months
     during  2004,  which  were  less  than  the  rates  ultimately  found to be
     reasonable,  the STB ordered PEC to pay to Norfolk  Southern the difference
     between the rate levels plus interest.

                                       46
<PAGE>

     PEC  subsequently  filed a petition  with the STB to phase in the new rates
     over a period of time,  and filed a notice of appeal with the U.S. Court of
     Appeals for the D.C.  Circuit.  Pursuant  to an order  issued by the STB on
     January 6, 2005,  the phasing  proceeding  will proceed on a schedule  that
     appears  likely to  produce  an STB  decision  before  the end of 2005.  On
     January 12,  2005,  the STB filed a Motion to Dismiss  PEC's  appeal on the
     grounds  that its October  20, 2004 order is not final until PEC's  phasing
     application  has been decided.  PEC responded to this motion on January 26,
     2005. The court has not yet ruled on the motion.

     As of March 31, 2005, PEC has accrued a liability of $42 million,  of which
     $23 million represents  reparations  previously  remitted to PEC by Norfolk
     Southern that are now subject to refund. Of the remaining $19 million,  $17
     million has been recorded as deferred fuel cost on the Consolidated Balance
     Sheet, while the remaining $2 million  attributable to wholesale  customers
     has been charged to fuel used in electric  generation  on the  Consolidated
     Statements  of Income.  PEC or Norfolk  Southern,  as the case may be, will
     make the  appropriate  payment  to the  other  to  reconcile  all  charges,
     including interest,  once a final STB decision in the phasing proceeding is
     served.

     PEC cannot predict the outcome of this matter.

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


                                       47
<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 and the Risk
Factors  sections of Progress  Energy's and  Progress  Energy  Carolina's  (PEC)
annual report on Form 10-K for the year ended December 31, 2004.

Amounts  reported  in the  interim  Consolidated  Statements  of Income  are not
necessarily  indicative of amounts expected for the respective  annual or future
periods  due to  the  effects  of  seasonal  temperature  variations  on  energy
consumption and the timing of maintenance on electric  generating  units,  among
other factors.

This discussion  should be read in conjunction with the  accompanying  financial
statements  found elsewhere in this report and in conjunction with the 2004 Form
10-K.

RESULTS OF OPERATIONS

The Company's reportable business segments and their primary operations include:

o    Progress Energy  Carolinas  Electric (PEC Electric) - primarily  engaged in
     the  generation,  transmission,  distribution  and sale of  electricity  in
     portions of North Carolina and South Carolina;
o    Progress  Energy  Florida  (PEF) -  primarily  engaged  in the  generation,
     transmission, distribution and sale of electricity in portions of Florida;
o    Competitive  Commercial Operations (CCO) - engaged in nonregulated electric
     generation operations and marketing activities primarily in Georgia,  North
     Carolina and Florida;
o    Fuels - primarily engaged in natural gas production in Texas and Louisiana,
     coal mining, coal terminal services and fuel transportation and delivery in
     Kentucky, West Virginia and Virginia; and
o    Synthetic Fuels - engaged in the production and sale of synthetic fuels and
     the operation of synthetic fuel facilities for outside parties in Kentucky,
     West Virginia and Virginia.

The Corporate and Other  category  includes  other  businesses  engaged in other
nonregulated  business  areas,  including  telecommunications,  primarily in the
eastern  United  States,  and energy  services  operations  and holding  company
results,  which do not meet the  requirements  for  separate  segment  reporting
disclosure.

Prior to 2005, Rail Services was reported as a separate  segment.  In connection
with the  divestiture  of  Progress  Rail  (see  Note 3 of the  Progress  Energy
Consolidated Interim Financial Statements), the operations of Rail Services were
reclassified  to  discontinued  operations  in the  first  quarter  of 2005  and
therefore  are no longer a  reportable  segment.  In  addition,  synthetic  fuel
activities  were  reported  in the  Fuels  segment  prior  to  2005  and now are
considered a reportable  segment.  These reportable  segment changes reflect the
current reporting structure.  For comparative  purposes,  the prior year results
have been restated to align with the current presentation.

In this  section,  earnings  and the factors  affecting  earnings  for the three
months  ended  March  31,  2005 as  compared  to the  same  period  in 2004  are
discussed.  The  discussion  begins with a summarized  overview of the Company's
consolidated  earnings,  which is followed  by a more  detailed  discussion  and
analysis by business segment.

OVERVIEW

For the  quarter  ended  March 31 2005,  Progress  Energy's  net  income was $93
million,  or $0.38 per share,  compared to $108 million, or $0.45 per share, for
the same  period in 2004.  The  decrease in net income as compared to prior year
was due primarily to:
     o    Severance charges recorded  throughout the Company related to the cost
          management initiative.
     o    Unfavorable weather at both utilities.
     o    Increased  O&M  charges  at  PEF  related  to a  workers  compensation
          adjustment.
     o    Decreased synthetic fuel earnings.


                                       48
<PAGE>


Partially offsetting these items were:
     o    Utility customer growth in the Carolinas and Florida.
     o    Favorable wholesale sales in both the Carolinas and Florida.
     o    Increased  nonregulated  generation  earnings due primarily to reduced
          interest expense.
     o    Reduced losses recorded on contingent value obligations.
     o    The impact of tax levelization.

Basic earnings per share  decreased in 2005 due in part to the factors  outlined
above. Dilution related to the issuances under the Company's Investor Plus Stock
Purchase Plan and employee  benefit programs in 2005 and 2004 also reduced basic
earnings per share by $0.01 in the first quarter of 2005.

The Company's segments contributed the following profits or losses for the three
months ended March 31, 2005 and 2004:

----------------------------------------------------------------------
(in millions)                              Three Months Ended March 31,
Business Segment                                  2005           2004
----------------------------------------------------------------------
PEC Electric                                   $   116        $   116
PEF                                                 43             49
Fuels                                               10             10
CCO                                                 (5)            (8)
Synthetic Fuel                                      (1)            36
----------------------------------------------------------------------
    Total Segment Profit                           163            203
----------------------------------------------------------------------
Corporate & Other                                  (58)          (104)
----------------------------------------------------------------------
Income from continuing operations                  105             99
Discontinued operations, net of tax                (12)             9
----------------------------------------------------------------------
    Net income                                 $    93        $   108
----------------------------------------------------------------------

COST MANAGEMENT INITIATIVE

On  February  28,  2005,  as  part of a  previously  announced  cost  management
initiative,  the Company approved a workforce restructuring which is expected to
be completed in September  2005 and result in a reduction of  approximately  450
positions.  The cost management  initiative is designed to permanently reduce by
$75  million  to $100  million  the  projected  growth in the  Company's  annual
operation and maintenance  (O&M) expenses by the end of 2007. In addition to the
workforce  restructuring,  the cost management  initiative  includes a voluntary
enhanced  retirement  program.  In connection with this initiative,  the Company
currently  expects to incur  estimated  pre-tax  charges of  approximately  $210
million.  In addition,  the Company expects to incur certain  incremental  costs
other than severance and  postretirement  benefits for recruiting,  training and
staff augmentation activities that cannot be quantified at this time.

The Company recorded $31 million of expense during the first quarter of 2005 for
the  estimated  severance  benefits  to be paid as a result  of the  approximate
number of  positions to be  eliminated  under the  restructuring  and due to the
implementation  of an automated  meter reading  initiative at PEF. These amounts
will be paid over time and are subject to revision in future  quarters  based on
the impact of the voluntary enhanced retirement program.  The severance expenses
are primarily included in O&M expense on the Consolidated Statements of Income.

The  Company  has  estimated  that an  additional  $180  million  charge will be
recognized in the second quarter of 2005 and relates primarily to postretirement
benefits that will be paid over time to those eligible  employees who elected to
participate in the voluntary enhanced retirement program. Approximately 3,500 of
the Company's  12,300  employees  were eligible to  participate in the voluntary
enhanced  retirement  program.  The results from the employee elections indicate
that  1,447 of the  Company's  employees  have  elected  to  participate  in the
voluntary enhanced  retirement program.  The cost management  initiative charges
could change  significantly  primarily due to the  demographics  of the specific
employees who elected enhanced  retirement and its impact on the  postretirement
benefit actuarial studies.

                                       49
<PAGE>

PROGRESS ENERGY CAROLINAS ELECTRIC

PEC Electric  contributed  segment  profits of $116 million for the three months
ended March 31,  2005 and 2004,  respectively.  Results for 2005 were  favorably
impacted by increased  revenues due to customer  growth and usage.  In addition,
results in 2004 included the write-off of non-trade receivables. These favorable
items were offset by unfavorable  weather,  higher O&M expenses due primarily to
severance accruals related to the announced cost management initiative.

Revenues

PEC Electric's  revenues for the three months ended March 31, 2005 and 2004, and
the percentage change by customer class are as follows:

---------------------------------------------------------------------------
(in millions of $)                   Three Months Ended March 31,
Customer Class                   2005       Change      % Change     2004
---------------------------------------------------------------------------
Residential                    $   374       $   3      0.8         $ 371
Commercial                         215           7      3.4           208
Industrial                         149           2      1.4           147
Governmental                        19           -       -             19
---------------------------------------------------              ----------
    Total retail revenues          757          12      1.6           745
Wholesale                          174          18     11.5           156
Unbilled                           (19)          4       -            (23)
Miscellaneous                       23           -       -             23
---------------------------------------------------              ----------
  Total electric revenues      $   935       $  34      3.8         $ 901
---------------------------------------------------              ----------
Less:
Pass-through fuel revenues        (271)        (32)   (13.4)         (239)
---------------------------------------------------              ----------
Revenues excluding fuel        $   664       $   2      0.3         $ 662
---------------------------------------------------------------------------

PEC Electric's  energy sales for the three months ended March 31, 2005 and 2004,
and the amount and percentage change by customer class are as follows:

---------------------------------------------------------------------------
(in millions of kWh)                 Three Months Ended March 31,
Customer Class                   2005       Change      % Change     2004
---------------------------------------------------------------------------
Residential                      4,672        (69)     (1.5)         4,741
Commercial                       3,080         22       0.7          3,058
Industrial                       2,931        (62)     (2.1)         2,993
Governmental                       327        (18)     (5.2)           345
---------------------------------------------------              ----------
   Total retail energy sales    11,010       (127)     (1.1)        11,137
Wholesale                        3,938        147       3.9          3,791
Unbilled                          (303)        82        -            (385)
---------------------------------------------------              ----------
    Total kWh sales             14,645        102       0.7         14,543
---------------------------------------------------------------------------

PEC Electric's revenues, excluding recoverable fuel revenues of $271 million and
$239 million for the three  months ended March 31, 2005 and 2004,  respectively,
increased  $2 million.  The  increase in revenues is  attributable  to favorable
customer  growth of $20  million and an  increase  in  wholesale  revenues of $1
million. Favorable growth was driven by an increase in customers of 27,000 as of
March 31, 2005 as compared to March 31, 2004. The increase in wholesale revenues
is due  primarily  to favorable  prices on excess  generation  sales.  Favorable
customer  growth and  wholesale  revenues were offset  partially by  unfavorable
weather of $19 million with heating degree days 8% below prior year.

Expenses

Fuel and Purchased Power

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

                                       50
<PAGE>

Fuel and purchased power expenses were $315 million for 2005, which represents a
$29 million increase compared to the same period in the prior year. Fuel used in
electric generation  increased $24 million to $248 million compared to the prior
year.  This  increase is due to an increase  in fuel used in  generation  of $53
million due  primarily  to higher fuel costs are being  driven  primarily  by an
increase in coal prices.  The increase in fuel used in generation is offset by a
reduction in deferred fuel expense as a result of the  under-recovery of current
period fuel costs.  Purchased power expense  increased $5 million to $67 million
compared to prior year.  The increase in  purchased  power during the quarter is
due to resource availability and increased fuel costs.

Operations and Maintenance (O&M)

O&M expenses were $224 million for the three months ended March 31, 2005,  which
represents a $15 million increase compared to the same period in 2004. Severance
expense related to the cost management  initiative increased O&M expenses by $13
million during 2005. In addition,  outage costs were $7 million higher  compared
to prior year due to a planned  outage at a  coal-fired  plant in March 2005 and
O&M expenses also increased $6 million  related to the change in Energy Delivery
capitalization  practice. These unfavorable items were partially offset by lower
compensation and benefits of $6 million and a reduction in storm costs.  Results
for 2004 included $6 million of costs  associated with an ice storm that hit the
Carolinas  service  territory.  See  discussion  of change  in  Energy  Delivery
capitalization  practice in Note 8F of the Progress Energy annual report on Form
10-K for the year ended December 31, 2004.

Depreciation and Amortization

Depreciation  and  amortization  expense was $129  million for the three  months
ended March 31, 2005,  which  represents a $2 million  increase  compared to the
same  period  in 2004.  The  increase  is  attributable  to  higher NC Clean Air
amortization  of $11  million  and  higher  depreciation  for  assets  placed in
services of $2 million.  These increases were partially offset by a reduction in
depreciation expense of $11 million related to the depreciation studies filed in
2004.  Depreciation rates are the same for 2005 and 2004; however, the 2004 year
to date retroactive adjustment for the new rates adopted related to the expanded
lives of the nuclear units was made in November 2004.

Taxes Other than on Income

Taxes other than on income were $46 million for the three months ended March 31,
2005,  which  represents  a $3 million  increase  compared to the same period in
2005.  This increase is due to higher property taxes of $1 million due to higher
property  appraisals and higher payroll taxes of $1 million related to severance
accruals recorded during 2005.

Other income, net

Other income, net has increased $12 million for the period ending March 31, 2005
as compared to the same period in the prior year. This increase is due primarily
to a write-off  of $7 million of  non-trade  receivables  in the prior year.  In
addition, investment losses have decreased $2 million compared to prior year.

PROGRESS ENERGY FLORIDA

PEF  contributed  segment  profits of $43  million  and $49 million in the three
months ended March 31, 2005 and 2004, respectively.  The decrease in profits for
the three months ended March 31, 2005 when  compared to 2004 is primarily due to
the impact of milder weather,  weaker  industrial sales and higher O&M expenses,
partially offset by higher wholesale sales and increased customer growth.

                                       51
<PAGE>

PEF's electric  revenues for the three months ended March 31, 2005 and 2004, and
the amount and percentage change by customer class are as follows:

---------------------------------------------------------------------------
(in millions of $)                   Three Months Ended March 31,
Customer Class                   2005       Change      % Change     2004
---------------------------------------------------------------------------
Residential                     $  431        $ 29      7.2          $ 402
Commercial                         201          20     11.0            181
Industrial                          63           -       -              63
Governmental                        53           7     15.2             46
Retail revenue sharing              (2)          2       -              (4)
---------------------------------------------------              ----------
    Total retail revenues          746          58      8.4            688
Wholesale                           73           6      9.0             67
Unbilled                           (5)           1       -              (6)
Miscellaneous                       34          (1)    (2.9)            35
---------------------------------------------------              ----------
    Total electric revenues     $  848        $ 64      8.2          $ 784
Less:
---------------------------------------------------              ----------
Pass-through revenues             (501)        (54)   (12.1)          (447)
---------------------------------------------------              ----------
Revenues excluding pass-
   through revenues             $  347        $ 10      3.0          $ 337
---------------------------------------------------------------------------

PEF's electric  energy sales for the three months ended March 31, 2005 and 2004,
and the amount and percentage change by customer class are as follows:

----------------------------------------------------------------------------
(in millions of kWh)                  Three Months Ended March 31,
Customer Class                   2005       Change      % Change     2004
----------------------------------------------------------------------------
Residential                       4,347          56      1.3          4,291
Commercial                        2,571          80      3.2          2,491
Industrial                          940         (83)    (8.1)         1,023
Governmental                        709          37      5.5            672
----------------------------------------------------              ----------
    Total retail energy sales     8,567          90      1.1          8,477
Wholesale                         1,338          15      1.1          1,323
Unbilled                           (103)         32       -            (135)
----------------------------------------------------              ----------
    Total kWh sales               9,802         137      1.4          9,665
----------------------------------------------------------------------------

Revenues

PEF's revenues,  excluding  recoverable fuel and other pass-through  revenues of
$501  million  and $447  million for the three  months  ended March 31, 2005 and
2004,  respectively,  increased $10 million.  The increase in revenues is due to
favorable  customer growth and increased  wholesale revenues of $7 million each.
Favorable  customer  growth was driven by a 35,000  increase  in average  retail
customers compared to prior year. Wholesale revenue favorability is attributable
primarily to new contracts  entered into since March 31, 2004.  These  increases
were  partially  offset by the impacts of milder  weather and weaker  industrial
sales of $3 million each.

Expenses

Fuel and Purchased Power

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

                                       52
<PAGE>

Fuel and purchased  power  expenses were $433 million for the three months ended
March 31, 2005, which represents a $43 million increase  compared to prior year.
This  increase  is due to  increases  in fuel used in  electric  generation  and
purchased  power expenses of $33 million and $10 million,  respectively.  Higher
system requirements and increased fuel costs in the current year account for $41
million of the increase in fuel used in electric  generation.  This increase was
partially  offset by a decrease  in  deferred  fuel  expense as recovery of fuel
expenses in the prior year (that were  previously  deferred) was greater than in
the current year. In December  2004,  the FPSC approved PEF's request for a cost
recovery  adjustment in its annual  filing due to the rising cost of fuel.  Fuel
recovery rates  increased  effective  January 1, 2005. The increase in purchased
power  expense was  primarily  due to higher  prices of purchases in the current
year as a result of increased fuel costs.

Operations and Maintenance (O&M)

O&M expenses were $189 million for the three months ended March 31, 2005,  which
represents  an  increase  of $29  million,  when  compared  to the $160  million
incurred during the three months ended March 31, 2004. Severance expense related
to the cost  management  initiative  increased  O&M costs by $14 million  during
2005. In addition,  PEF recorded a workers compensation benefit adjustment of $8
million during 2005 as a result of an annual  actuarial  study. O&M expense also
increased  $8 million  related to the change in Energy  Delivery  capitalization
practice. See discussion of change in Energy Delivery capitalization practice in
Note 8F of the  Progress  Energy  annual  report on Form 10-K for the year ended
December 31, 2004.

Taxes Other than on Income

Taxes other than on income were $67 million for the three months ended March 31,
2005,  which  represents an increase of $5 million  compared to prior year. This
increase is due to increases in franchise and gross receipts taxes of $2 million
and $1 million, respectively, related to an increase in revenues and an increase
in property taxes of $1 million due to property additions.

DIVERSIFIED BUSINESSES

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

FUELS

The Fuels' segment  operations  include natural gas production,  coal extraction
and terminal operations. The following summarizes Fuels' segment profits for the
three months ended March 31, 2005 and 2004:

--------------------------------------------------------
(in millions)                            2005      2004
--------------------------------------------------------
  Gas production                        $  12     $  13
  Coal fuel and other operations           (2)       (3)
--------------------------------------------------------
     Segment Profits                    $  10     $  10
--------------------------------------------------------

Natural Gas Operations

Natural gas operations  generated profits of $12 million and $13 million for the
three  months ended March 31, 2005 and 2004,  respectively.  The decrease in gas
earnings  compared  to prior year is  attributable  to reduced  production  as a
result of the sale of gas assets in 2004 offset  partially by higher natural gas
prices. In December 2004, the Company sold certain gas-producing  properties and
related  assets owned by Winchester  Production  Company,  Ltd., a subsidiary of
Progress Fuels (North Texas gas  operations).  The following  summarizes the gas
production, revenues and gross margins for the three months ended March 31, 2005
and 2004 by production facility:

                                       53
<PAGE>

------------------------------------------------------------------------
                                              2005         2004
------------------------------------------------------------------------
      Production in Bcf equivalent
East Texas/LA gas operations                    5.4          4.0
North Texas gas operations                        -          2.7
------------------------------------------------------------------------
    Total Production                            5.4          6.7
------------------------------------------------------------------------

          Revenues in millions
East Texas/LA gas operations                  $  33        $  22
North Texas gas operations                        -           13
------------------------------------------------------------------------
    Total Revenues                            $  33        $  35
------------------------------------------------------------------------

              Gross Margin
in millions of $                              $  28        $  27
As a % of revenues                              85%          77%
------------------------------------------------------------------------

Coal Fuel and Other Operations

Coal fuel and other  operations  generated  segment losses of $2 million for the
three months ended March 31, 2005 compared to losses of $3 million for the three
months  ended  March 31,  2004.  The  decrease  in losses of $1  million  is due
primarily  to  increased  revenues  as a result  of  higher  coal  prices.  This
favorability  was  partially  offset by higher coal mining  costs (due to rising
prices of fuel and steel),  a workers  compensation  accrual  adjustment  booked
during 2005 and reduced  rates  related to the  waterborne  coal  transportation
settlement in 2004. In addition,  results were unfavorably impacted by severance
expense of $1 million  pre-tax  recorded in 2005 related to the cost  management
initiative.

COMPETITIVE COMMERCIAL OPERATIONS

CCO's  operations  generated  segment  losses of $5 million for the three months
ended March 31, 2005 compared to losses of $8 in the prior year. The decrease in
losses  compared to prior year is due  primarily to a reduction in  depreciation
and  amortization  expense and interest  expense.  Depreciation and amortization
expenses  decreased $4 million pre-tax ($2 million after-tax) as a result of the
expiration  of certain  acquired  contracts  that were subject to  amortization.
Interest expense decreased $3 million pre-tax ($2 million  after-tax) due to the
termination  of the Genco  financing  arrangement in December 2004. In addition,
results were favorably  impacted by a mark to market gain in the current quarter
compared to a loss in the prior year. This  favorability was offset partially by
lower  contract  margins  as a  result  of the  expiration  of  certain  tolling
agreements.

-----------------------------------------------------
(in millions)                      2005        2004
-----------------------------------------------------
Total revenues                    $  65        $ 33
Gross margin
   In millions of $               $  21        $ 23
   As a % of revenues                32%         70%
Segment losses                    $  (5)       $ (8)
-----------------------------------------------------

The Company has contracts for its planned  production  capacity,  which includes
callable  resources  from  the  cooperatives,  of  approximately  77% for  2005,
approximately 81% for 2006 and approximately 75% for 2007. The Company continues
to seek opportunities to optimize its nonregulated generation portfolio.

SYNTHETIC FUEL

The synthetic  fuel  operations  generated  segment losses of $1 million for the
three months ended March 31, 2005 compared to segment profits of $36 million for
the three months ended March 31, 2004. The production and sale of synthetic fuel
generate  operating losses,  but qualify for tax credits under Section 29 of the
Code, which typically more than offset the effect of such losses. See Note 14 to
the Progress Energy Consolidated Interim Financial Statements.

                                       54
<PAGE>

The  operations  resulted in the  following for the three months ended March 31,
2005 and 2004:

------------------------------------------------------------------
(in millions)                                   2005         2004
------------------------------------------------------------------
Tons sold                                        2.0          2.9
------------------------------------------------------------------

Operating losses, excluding tax credits       $  (38)      $  (42)
Tax credits generated, net                        37           78
------------------------------------------------------------------
    Segment (losses) profits                  $   (1)      $   36
------------------------------------------------------------------

Synthetic fuels' earnings were negatively impacted by lower sales, forfeiture of
tax credits as a result of the sale of Progress Rail and decreased margins.  The
decrease in sales quarter over quarter is primarily  attributable to an internal
change in the quarterly  production  schedule in 2005 compared to 2004. The sale
of Progress  Rail  resulted in a capital loss for tax  purposes,  therefore  $17
million of previously  recorded tax credits were  forfeited  during the quarter.
See Note 14 to the Progress Energy Consolidated Interim Financial Statements for
further discussion.

In response to the historically high oil prices to date in 2005, the Company has
adjusted  its  planned  production  schedule  for its  synthetic  fuel  plant by
shifting  some of its  production  planned  for April and May 2005 to the second
half of 2005. If oil prices rise and stay at levels high enough to cause a phase
out of tax  credits,  the  Company  may  reduce  planned  production  or suspend
production at some or all of its synthetic fuel facilities.

CORPORATE & OTHER

Corporate & Other consists of the operations of Progress  Energy Holding Company
(the holding company),  Progress Energy Service Company and other  consolidating
and non-operating  entities.  Corporate & Other also includes other nonregulated
business  areas   including  the   telecommunications   operations  of  Progress
Telecommunications   Corp.  (PTC)  and  the  operations  of  Strategic  Resource
Solutions (SRS). PTC LLC operations provide broadband  capacity  services,  dark
fiber and wireless  services in Florida and the eastern United  States.  SRS was
engaged in providing energy services to industrial, commercial and institutional
customers to help manage  energy  costs  primarily  in the  southeastern  United
States.  During 2004, SRS sold its subsidiary,  Progress Energy Solutions (PES).
With the disposition of PES, the Company exited this business area.

Other nonregulated business areas

Other nonregulated  businesses  contributed segment losses of $1 million for the
three months ended March 31, 2005  compared to segment  losses of $3 million for
the three months ended March 31, 2004. PTC earnings were  essentially  breakeven
for the quarter ended March 31, 2005,  compared with segment loss $1 million for
the same period last year.  PTC's results for 2004 were  negatively  impacted by
integration  costs  associated with its combination  with EPIK in December 2003.
The remaining  favorability is attributable to a reduction in investment  losses
recognized by the nonutility subsidiaries of PEC.

Corporate Services

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

--------------------------------------------------------------------
                                        Three Months Ended March 31,
--------------------------------------------------------------------
Income (expense) in millions                       2005        2004
--------------------------------------------------------------------
  Other interest expense                        $  (71)     $  (73)
  Contingent value obligations                       -          (7)
  Tax levelization                                  (3)        (39)
  Tax reallocation                                  (9)         (9)
  Other income taxes                                29          30
  Other                                             (3)         (3)
--------------------------------------------------------------------
    Segment profit (loss)                       $  (57)     $ (101)
--------------------------------------------------------------------

                                       55
<PAGE>

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 March 31, 2005 and 2004, the
CVOs had fair  market  values of  approximately  $13  million  and $30  million,
respectively. Progress Energy recorded an unrealized gain of $0.5 million and an
unrealized  loss of $7 million  for the three  months  ended  March 31, 2005 and
2004,  respectively,  to record the changes in fair value of the CVOs, which had
average unit prices of $0.13 and $0.31 at March 31, 2005 and 2004, 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  increased  by $3 million and $39 million for the three  months
ended March 31, 2005 and 2004,  respectively,  in order to maintain an effective
tax rate consistent with the estimated  annual rate. 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

On March 24, 2005, the Company completed the sale of Progress Rail to One Equity
Partners LLC a private  equity firm unit of J.P.  Morgan Chase & Company.  Gross
cash proceeds from the sale are estimated to be $433 million, consisting of $405
million base proceeds plus an estimated  working  capital  adjustment.  Proceeds
from the sale were used to reduce debt. The  accompanying  consolidated  interim
financial  statements  have been  restated  for all  periods  presented  for the
discontinued  operations of Progress  Rail.  See Notes 3 and 14A to the Progress
Energy Consolidated Interim Financial Statements for additional discussion.

Rail  discontinued  operations  resulted  in losses of $12 million for the three
months  ended  March 31,  2005  compared  to profits of $9 million for the three
months  ended March 31, 2004.  Earnings for 2005 include an estimated  after-tax
loss on the sale of $17 million. The Company anticipates adjustments to the loss
on the divestiture during the second quarter of 2005 related to employee benefit
settlements  and the  finalization  of  working  capital  adjustments  and other
operating estimates.  The remaining unfavorability in earnings compared to prior
year is attributable  primarily to increased  transaction  costs associated with
the sale.

LIQUIDITY AND CAPITAL RESOURCES

Progress Energy, Inc.

Progress Energy is a registered  holding company and, as such, has no operations
of its own. The  Company's  primary cash needs at the holding  company level are
its common stock  dividend and interest  expense and  principal  payments on its
$4.3  billion of senior  unsecured  debt.  The  ability  to meet these  needs is
dependent on its access to the capital  markets,  the earnings and cash flows of
its two electric  utilities and  nonregulated  subsidiaries,  and the ability of
those subsidiaries to pay dividends or repay funds to Progress Energy.

Cash Flows from Operations

Net cash  provided by operating  activities  decreased $88 million for the three
months ended March 31, 2005,  when compared to the  corresponding  period in the
prior year. The decrease in cash from  operating  activities for the 2004 period
is primarily due to lower net income, an under-recovery of fuel costs in 2005 of
$44 million when  compared  with 2004,  and  approximately  $62 million in storm
restoration expenditures at PEF.

Investing Activities

Net cash used in investing activities increased by $142 million primarily due to
net  purchases of short-term  investments  in 2005 compared to net proceeds from
short-term investments in 2004. Excluding this activity,  cash used in investing
activities decreased $232 million. The decrease is due primarily to $405 million
in  proceeds  from the sale of Progress  Rail in March  2005.  See Note 3 to the
Progress Energy Consolidated  Interim Financial  Statements.  This was partially
offset by  additional  capital  expenditures  for utility  additions and nuclear
fuel.

                                       56
<PAGE>

Financing Activities

Net cash provided by financing  activities was $153 million for the three months
ended March 31, 2005, compared to net cash used in financing  activities of $346
million for the three  months  ended March 31,  2004,  or a net increase of $499
million. The change in cash provided from financing activities was due primarily
to the March 1, 2004  maturity of $500  million  6.55% senior  unsecured  notes.
These notes were paid with cash and commercial  paper capacity which was created
from the sale of assets during 2003.

In January 2005, the Company used proceeds from the issuance of commercial paper
to pay off $260  million  of  revolving  credit  agreement  (RCA)  loans,  which
included $90 million at PEC and $170 million at PEF.

On January 31, 2005,  Progress Energy, Inc. entered into a new $600 million RCA,
which expires  December 30, 2005. This facility was added to provide  additional
liquidity  during  2005 due in part to the  uncertainty  of the  timing of storm
restoration  cost recovery from the  hurricanes in Florida  during 2004. The RCA
includes  a  defined  maximum  total  debt to total  capital  ratio of 68% and a
minimum  interest  coverage  ratio of 2.5 to 1. The RCA  also  contains  various
cross-default  and other  acceleration  provisions.  On February  4, 2005,  $300
million was drawn under the new facility to reduce  commercial paper and pay off
the remaining  amount of loans  outstanding  under other RCA  facilities,  which
consisted  of $160  million  at  Progress  Energy  and $55  million  at PEF.  As
discussed  below,  the maximum  size of this RCA was reduced to $300  million on
March 22, 2005.

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

In March 2005, Progress Energy,  Inc.'s five-year credit facility was amended to
increase the maximum  total debt to total  capital  ratio from 65% to 68% due to
the potential impacts of proposed  accounting rules for uncertain tax positions.
See Note 2 to the Progress Energy Consolidated Interim Financial Statements.

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

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

For the three months ended March 31, 2005, the Company issued  approximately 1.4
million  shares  representing  approximately  $60 million in  proceeds  from its
Investor  Plus Stock  Purchase  Plan and its  employee  benefit and stock option
plans,  net of purchases of restricted  shares.  The Company  expects to realize
approximately  $125 million of cash from the sale of stock  through  these plans
during 2005.

                                       57
<PAGE>

Future Liquidity and Capital Resources

As of March 31, 2005, there were no material  changes in the Company's  "Capital
Expenditures,"  "Other  Cash  Needs,"  "Credit  Facilities,"  or "Credit  Rating
Matters" as compared to those discussed under in Item 7 of the Form 10-K,  other
than  "Environmental  Matters"  and as  described  below  and  under  "Financing
Activities."

As of March 31, 2005,  the current  portion of long-term  debt was $1.1 billion,
which  the  Company  expects  to fund  from  issuances  of new  long-term  debt,
commercial paper borrowings and/or issuance of new equity securities.

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.

On April 29, 2005, PEF made its initial filing with the FPSC seeking annual base
revenue increase of $206 million. See Note 4 to the Progress Energy Consolidated
Interim Financial Statements. Hearings for this proceeding are expected to occur
during the third  quarter of 2005.  A final  ruling from the FPSC is expected in
December 2005 with new rates in effect January 2006.

PEF's  petition for  recovery of $252  million of storm costs is  scheduled  for
final order July 5, 2005. PEF has filed for a two-year recovery of storm costs.

On May 4,  2005,  a bill was  approved  by the  Florida  Legislature  that would
authorize the FPSC to consider allowing the state's investor-owned  utilities to
issue bonds that are secured by  surcharges  on utility  customer  bills.  These
bonds would be issued for  recovery of storm  damage  costs and  potentially  to
restore depleted storm reserves. The amount of funds established for recovery is
subject  to the review and  approval  of the FPSC.  The bill will now be sent to
Governor Bush for his consideration. The Governor has indicated that he supports
the bill. The Company cannot predict the outcome of this matter.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

The Company's  off-balance  sheet  arrangements and contractual  obligations are
described below.

Guarantees

As a  part  of  normal  business,  Progress  Energy  and  certain  wholly  owned
subsidiaries  enter  into  various  agreements  providing  future  financial  or
performance  assurances to third parties that are outside the scope of Financial
Accounting Standards Board (FASB) Interpretation No. 45, "Guarantor's Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness  of  Others"  (FIN No.  45).  These  agreements  are  entered  into
primarily to support or enhance the  creditworthiness  otherwise  attributed  to
Progress Energy and subsidiaries on a stand-alone  basis,  thereby  facilitating
the extension of  sufficient  credit to accomplish  the  subsidiaries'  intended
commercial purposes.  The Company's  guarantees include performance  obligations
under power supply agreements, tolling agreements,  transmission agreements, gas
agreements,  fuel procurement  agreements and trading operations.  The Company's
guarantees also include  standby letters of credit,  surety bonds and guarantees
in support of nuclear decommissioning. At March 31, 2005, the Company had issued
$1.3 billion of guarantees for future  financial or performance  assurance.  The
Company does not believe conditions are likely for significant performance under
the guarantees of performance issued by or on behalf of affiliates.

The majority of contracts  supported by the guarantees  contain  provisions that
trigger  guarantee  obligations  based on downgrade  events to below  investment
grade (below BBB- or Baa3), ratings triggers, monthly netting of exposure and/or
payments and offset provisions in the event of a default.  As of March 31, 2005,
no guarantee  obligations had been triggered.  If the guarantee obligations were
triggered,  the maximum  amount of  liquidity  requirements  to support  ongoing
operations within a 90-day period,  associated with guarantees for the Company's
nonregulated portfolio and power supply agreements was $457 million. The Company
would meet this obligation with cash or letters of credit.

                                       58
<PAGE>

At March 31, 2005,  the Company had issued  guarantees and  indemnifications  of
certain legal, tax and environmental matters to third parties in connection with
sales of  businesses  and for timely  payment of  obligations  in support of its
non-wholly owned synthetic fuel operations.  Related to the sales of businesses,
the notice period extends until 2012 for the majority of matters provided for in
the  indemnification  provisions.  For matters  which the  Company has  received
timely notice, the Company's indemnity  obligations may extend beyond the notice
period. Certain environmental  indemnifications related to the sale of synthetic
fuel  operations  have no  limitations  as to time or maximum  potential  future
payments.  Other  guarantees  and  indemnifications  have an  estimated  maximum
exposure of  approximately  $111  million.  At March 31,  2005,  the Company has
recorded liabilities related to guarantees and indemnifications to third-parties
of  $22  million.   Management  does  not  believe  conditions  are  likely  for
significant  performance  under  these  agreements  in  excess  of the  recorded
liabilities.

Market Risk and Derivatives

Under its risk management  policy, the Company may use a variety of instruments,
including  swaps,   options  and  forward  contracts,   to  manage  exposure  to
fluctuations in commodity  prices and interest rates. See Note 9 to the Progress
Energy Consolidated  Interim Financial  Statements and Item 3, "Quantitative and
Qualitative  Disclosures About Market Risk," for a discussion of market risk and
derivatives.

Contractual Obligations

As of March 31, 2005,  the  Company's  contractual  cash  obligations  and other
commercial commitments have not changed materially from what was reported in the
2004 Annual Report on Form 10-K.

OTHER MATTERS

Synthetic Fuels Tax Credits

The  Company  has  substantial  operations  associated  with the  production  of
coal-based  synthetic fuels. The production and sale of these products qualifies
for federal  income tax credits so long as certain  requirements  are satisfied.
These operations are subject to numerous risks.

Although the Company  believes that it operates its synthetic fuel facilities in
compliance with applicable legal requirements for claiming the credits, its four
Earthco  facilities are under audit by the IRS. IRS field auditors have taken an
adverse  position  with respect to the  Company's  compliance  with one of these
legal  requirements,  and if the Company  fails to prevail  with respect to this
position,  it could incur significant liability and/or lose the ability to claim
the  benefit  of tax  credits  carried  forward  or  generated  in  the  future.
Similarly,  the Financial  Accounting  Standards  Board may issue new accounting
rules that would require that uncertain tax benefits  (such as those  associated
with the Earthco  plants) be probable of being sustained in order to be recorded
on the financial  statements;  if adopted,  this provision could have an adverse
financial impact on the Company.

The Company's  ability to utilize tax credits is dependent on having  sufficient
tax  liability.   Any  conditions  that  negatively  impact  the  Company's  tax
liability, such as weather, could also diminish the Company's ability to utilize
credits,  including  those  previously  generated,  and  the  synthetic  fuel is
generally not economical to produce absent the credits. Finally, the tax credits
associated with synthetic fuels may be phased out if market prices for crude oil
exceed certain prices.

The Company's  synthetic fuel operations and related risks are described in more
detail  in  Note  14 to  the  Progress  Energy  Consolidated  Interim  Financial
Statements and in the Risk Factors section of Progress Energy's Annual Report on
Form 10-K for the year ended December 31, 2004,  which was filed with the SEC on
March 16, 2005.


                                       59
<PAGE>

PEF Rate Case Filing

On April 29, 2005, PEF submitted  minimum filing  requirements,  based on a 2006
projected  test year,  to initiate a base rate  proceeding  regarding its future
base rates.  In its filing,  PEF has requested a $206 million annual increase in
base rates  effective  January 1, 2006.  PEF's  request  for an increase in base
rates reflects an increase in operational costs with (i) the addition of Hines 2
generation facility into base rates rather than the Fuel Clause as was permitted
under  the  terms  of  existing   Stipulation  and  Settlement   Agreement  (the
Agreement),  (ii) completion of the Hines 3 generation facility,  (iii) the need
to replenish  PEF's  depleted  storm reserve by adjusting the annual  accrual in
light  of  recent  history  on  a   going-forward   basis,   (iv)  the  expected
infrastructure investment necessary to meet high customer expectations,  coupled
with the  demands  placed  on PEF's  strong  customer  growth,  (v)  significant
additional  costs  including  increased  depreciation  and fossil  dismantlement
expenses and (vi) general inflationary pressures.

Hearings on the base rate  proceeding  are expected  during the third quarter of
2005 and a final  decision is expected  by the end of 2005.  The Company  cannot
predict the outcome of this matter.

PEF Storm Cost Filing

Hearings on PEF's  petition  for  recovery of $252  million of storm costs filed
with the FPSC were  held  from  March  30,  2005 to April 1,  2005.  The FPSC is
scheduled  to vote on the  Company's  petition on June 14,  2005,  with an order
expected on July 5, 2005. The Company cannot predict the outcome of this matter.

On May 4,  2005,  a bill was  approved  by the  Florida  Legislature  that would
authorize the FPSC to consider allowing the state's investor-owned  utilities to
issue bonds that are secured by  surcharges  on utility  customer  bills.  These
bonds would be issued for  recovery of storm  damage  costs and  potentially  to
restore depleted storm reserves. The amount of funds established for recovery is
subject  to the review and  approval  of the FPSC.  The bill will now be sent to
Governor Bush for his consideration. The Governor has indicated that he supports
the bill. The Company cannot predict the outcome of this matter.

Franchise Litigation

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

Arbitration in one of the cases (with the  13,000-customer  City of Winter Park)
was completed in February 2003.  That  arbitration  panel issued an award in May
2003 setting the value of PEF's  distribution  system  within the City of Winter
Park (the City) at  approximately  $32 million,  not  including  separation  and
reintegration and construction work in progress, which could add several million
dollars to the award.  The panel also awarded PEF  approximately  $11 million in
stranded costs, which,  according to the award, decrease over time. In September
2003,  Winter Park voters passed a referendum  that would  authorize the City to
issue  bonds of up to  approximately  $50  million  to  acquire  PEF's  electric
distribution  system. While the City has not yet definitively decided whether it
will acquire the system, on April 26, 2004, the City Commission voted to proceed
with the acquisition.  The City sought and received  wholesale power supply bids
and on June 24, 2004, executed a wholesale power supply contract with PEF with a
five-year  term from the date service  begins and a renewal  option.  On May 12,
2004, the City solicited  bids to operate and maintain the  distribution  system
and awarded a contract in January 2005.  The City has indicated that its goal is
to begin  electric  operations in June 2005.  On February 10, 2005,  PEF filed a
petition  with the  Florida  Public  Service  Commission  (FPSC) to relieve  the
Company of its statutory obligation to serve customers in Winter Park on June 1,
2005, or at such time when the City is able to provide retail service.  On April
19, 2005, the FPSC voted to approve PEF's  petition.  At this time,  whether and
when there will be further proceedings  regarding the City of Winter Park cannot
be determined.

                                       60
<PAGE>

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

Arbitration  in the remaining  city's  litigation  (the  1,500-customer  City of
Edgewood) has not yet been scheduled.  On February 17, 2005, the parties filed a
joint motion to stay the litigation for a 90-day period during which the parties
will discuss potential  settlement.  In April, the City Council voted to proceed
with  arbitration.  At this  time,  whether  and  when  there  will  be  further
proceedings regarding the City of Edgewood cannot be determined.

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

As  part  of  the  above  litigation,  two  appellate  courts  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 filed an appeal  with the  Florida  Supreme  Court to resolve  the  conflict
between the two  appellate  courts.  On October  28,  2004,  the Court  issued a
decision  holding  that PEF must  collect  from its  customers  and remit to the
cities  franchise  fees during the interim  period when the city  exercises  its
purchase  option or executes a new franchise.  The Court's  decision  should not
have a material impact on the Company.

Environmental Matters

The Company is subject to federal,  state and local  regulations  addressing air
and water quality,  hazardous and solid waste management and other environmental
matters.  These  environmental  matters are discussed in detail in Note 13. This
discussion  identifies specific  environmental issues, the status of the issues,
accruals  associated with issue resolutions and the associated  exposures to the
Company.  The Company  accrues  costs to the extent they are probable and can be
reasonably  estimated.  It is reasonably possible that additional losses,  which
could be material, may be incurred in the future.

Progress Energy Carolinas, Inc.

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

RESULTS OF OPERATIONS

The results of operations for the PEC Electric segment are identical between PEC
and Progress Energy. The results of operations for PEC's nonutility subsidiaries
for the three  months  ended March 31,  2005 and 2004 are not  material to PEC's
consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities decreased $49 million for the three months
ended March 31, 2005,  when  compared to the  corresponding  period in the prior
year. The decrease was caused  primarily by the impact of an  under-recovery  of
fuel costs in 2005 and increase in working capital requirements.

Cash used in investing  activities  increased  $318 million for the three months
ended March 31, 2005,  when  compared to the  corresponding  period in the prior
year  primarily due to net purchases of short-term  investments in 2005 compared
to net proceeds from short-term investments in 2004.

                                       61
<PAGE>

The current  portion of  long-term  debt  includes  $300 million of 7.50% Senior
Notes which matured on April 1, 2005.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

PEC's off-balance sheet  arrangements and contractual  obligations are described
below.

Market Risk and Derivatives

Under  its  risk  management  policy,  PEC may  use a  variety  of  instruments,
including  swaps,   options  and  forward  contracts,   to  manage  exposure  to
fluctuations  in  commodity  prices  and  interest  rates.  See  Note 7 to PEC's
Consolidated   Interim  Financial  Statements  and  Item  3,  "Quantitative  and
Qualitative  Disclosures About Market Risk," for a discussion of market risk and
derivatives.

Contractual Obligations

As of March 31, 2005,  PEC's  contractual  cash obligations and other commercial
commitments  have not  changed  materially  from what was  reported  in the 2004
Annual Report on Form 10-K.


                                       62
<PAGE>



Item 3. Quantitative and Qualitative Disclosures About Market Risk

Progress Energy, Inc.

Other than described below, the various risks that the Company is exposed to has
not materially changed since December 31, 2004.

Progress  Energy and its  subsidiaries  are exposed to various  risks related to
changes in market conditions.  Market risk represents the potential loss arising
from  adverse  changes  in  market  rates and  prices.  The  Company  has a risk
management  committee  that includes  senior  executives  from various  business
groups.  The risk  management  committee is responsible for  administering  risk
management  policies  and  monitoring  compliance  with  those  policies  by all
subsidiaries.  Under  its  risk  policy,  the  Company  may  use  a  variety  of
instruments,  including swaps, options and forward contracts, to manage exposure
to fluctuations in commodity prices and interest rates. Such instruments contain
credit risk if the counterparty fails to perform under the contract. The Company
minimizes  such risk by performing  credit  reviews  using,  among other things,
publicly available credit ratings of such counterparties.

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,  fluctuations  in the return on marketable
securities with respect to its nuclear  decommissioning  trust funds, changes in
the market value of CVOs, and changes in energy related commodity prices.

Interest Rate Risk

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

The  exposure to changes in  interest  rates from the  Company's  fixed rate and
variable  rate  long-term  debt at March 31, 2005 has changed from  December 31,
2004.  The total fixed rate  long-term debt at March 31, 2005 was $9.36 billion,
with an average  interest rate of 6.50% and fair market value of $9.88  billion.
The total  variable rate  long-term  debt at March 31, 2005,  was $0.86 billion,
with an average interest rate of 2.12% and fair market value of $0.86 billion.

The Company  maintains a portion of its outstanding debt with floating  interest
rates.  As of March 31, 2005  approximately  13.8% of  consolidated  debt was in
floating  rate mode compared to 16.1% at the end of 2004.

Progress  Energy uses interest rate  derivative  instruments to adjust the fixed
and variable rate debt  components of its debt  portfolio and to hedge  interest
rates with regard to future fixed rate debt  issuances.  In accordance  with FAS
133 interest rate  derivatives that qualify as hedges are broken into one of two
categories,  cash flow hedges or fair value hedges. Cash flow hedges are used to
reduce exposure to changes in cash flow due to fluctuating  interest rates. Fair
value  hedges  are used to  reduce  exposure  to  changes  in fair  value due to
interest rate changes.

The notional  amounts of interest rate  derivatives are not exchanged and do not
represent  exposure to credit loss.  In the event of default by a  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.

                                       63
<PAGE>


Fair Value Hedges:

As of March 31,  2005,  Progress  Energy  had $150  million  of fixed  rate debt
swapped to floating  rate debt by executing  receive  fixed  interest  rate swap
agreements. Under terms of these swap agreements, Progress Energy will receive a
fixed rate and pay a floating rate based on 3-month LIBOR.

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
------------------------------------------------------------------------------------------------------------------
Fair Value Hedges (dollars in millions)
                                             Notional
Progress Energy, Inc.                         Amount      Receive        Pay(b)      Fair Value   Exposure (c)
------------------------------------------------------------------------------------------------------------------
Risk hedged as of March 31, 2005:
------------------------------------------------------------------------------------------------------------------
5.85% Notes due 10/30/2008                     $ 100       4.10%      3-month LIBOR      $ -          $ (1)
7.10% Notes due 3/1/2011                       $  50       4.65%      3-month LIBOR      $ -          $ (1)
------------------------------------------------------------------------------------------------------------------
Total                                          $ 150       4.28%(a)   3-month LIBOR      $ -          $ (2)
------------------------------------------------------------------------------------------------------------------

Risk hedged as of December 31, 2004:
------------------------------------------------------------------------------------------------------------------
5.85% Notes due 10/30/2008                     $ 100       4.10%      3-month LIBOR      $ 1          $ (1)
7.10% Notes due 3/1/2011                       $  50       4.65%      3-month LIBOR      $ 2          $ (1)
------------------------------------------------------------------------------------------------------------------
Total                                          $ 150       4.28%(a)   3-month LIBOR      $ 3          $ (2)
------------------------------------------------------------------------------------------------------------------
</TABLE>

(a)Weighted average rate
(b) 3-month  LIBOR rate was 3.12% at March 31,  2005 and 2.56% at  December  31,
2004.
(c) Exposure  indicates change in value due to 25 basis point  unfavorable shift
in interest rates.

Cash Flow Hedges:

As of March 31,  2005  Progress  Energy  had $75  million of  pay-fixed  forward
starting  swaps in  place  to hedge  cash  flow  risk  due to  future  financing
transactions  and $200  million  of  pay-fixed  swaps to  hedged  cash  flow for
commercial paper interest. Under terms of these swap agreements, Progress Energy
will pay a fixed  rate and  receive a floating  rate based on either  1-month or
3-month LIBOR.

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
------------------------------------------------------------------------------------------------------------------
Cash Flow Hedges (dollars in millions)
                                             Notional
Progress Energy, Inc.                         Amount        Pay         Receive(b)    Fair Value  Exposure(c)
------------------------------------------------------------------------------------------------------------------
Risk hedged as of March 31, 2005:

Commercial Paper interest risk through
2005                                           $ 200       3.07%      1-month LIBOR      $  1          $  -
Anticipated 10-year debt issue(d)              $  75       4.92%      3-month LIBOR      $  1          $ (1)
------------------------------------------------------------------------------------------------------------------
Total                                          $ 275       4.91%(a)   3-month LIBOR      $  2          $ (1)
------------------------------------------------------------------------------------------------------------------

Risk hedged as of December 31, 2004:

Commercial Paper interest risk from 2005
through 2008                                   $ 200       3.07%      1-month LIBOR      $  -          $  -

Progress Energy Carolinas
------------------------------------------------------------------------------------------------------------------
Risk hedged as of March 31, 2005:              None

Risk hedged as of December 31, 2004:
------------------------------------------------------------------------------------------------------------------
Anticipated 10-year debt issue                 $ 110       4.85%      3-month LIBOR      $ (1)         $ (2)
Rail car lease payment                         $  21       5.17%      3-month LIBOR      $ (1)         $  -
------------------------------------------------------------------------------------------------------------------
Total                                          $ 131       4.90%(a)   3-month LIBOR      $ (2)         $ (2)
------------------------------------------------------------------------------------------------------------------
</TABLE>

(a)Weighted average rate
(b)3-month  LIBOR  rate was 3.12% at March 31,  2005 and 2.56% at  December  31,
2004.  1-month  LIBOR rate was 2.87% at March 31, 2005 and 2.40% at December 31,
2004.
(c)Exposure indicates change in value due to 25 basis point unfavorable shift in
interest rates.
(d)Anticipated  10-year  debt issue  hedges  mature on March 1, 2016 and require
mandatory cash settlement on March 1, 2006.

                                       64
<PAGE>

Marketable Securities Price Risk

The  Company's  exposure  to return on  marketable  securities  for the  nuclear
decommissioning trust funds has not changed materially since December 31, 2004.

CVO Market Value Risk

The  Company's  exposure to market  value risk with  respect to the CVOs has not
changed materially since December 31, 2004.

Commodity Price Risk

The  Company is exposed to the  effects of market  fluctuations  in the price of
natural gas,  coal,  fuel oil,  electricity  and other  energy-related  products
marketed and  purchased as a result of its ownership of  energy-related  assets.
The Company's  exposure to these  fluctuations is  significantly  limited by the
cost-based  regulation of PEC and PEF.  Each state  commission  allows  electric
utilities  to recover  certain of these  costs  through  various  cost  recovery
clauses to the extent the respective  commission  determines that such costs are
prudent.  Therefore, while there may be a delay in the timing between when these
costs are  incurred  and when these  costs are  recovered  from the  ratepayers,
changes  from year to year have no  material  impact on  operating  results.  In
addition,   many  of  the  Company's   long-term  power  sales  contracts  shift
substantially all fuel responsibility to the purchaser. The Company also has oil
price risk exposure related to synfuel tax credits. See discussion in Note 14 to
the Progress Energy Consolidated Interim Financial Statements.

Derivative  products,  primarily  electricity and natural gas contracts,  may be
entered into from time to time for economic hedging  purposes.  While management
believes the economic  hedges  mitigate  exposures to  fluctuations in commodity
prices,  these instruments are not designated as hedges for accounting  purposes
and are monitored  consistent with trading  positions.  The Company manages open
positions  with  strict  policies  that limit its  exposure  to market  risk and
require  daily  reporting to management of potential  financial  exposures.  The
Company  recorded a $2 million  pre-tax  gain and a $12 million  pre-tax loss on
such contracts for the three months ended March 31, 2005 and 2004, respectively.
The Company did not have  material  outstanding  positions in such  contracts at
March 31, 2005 or December 31, 2004.

PEF has derivative  instruments related to its exposure to price fluctuations on
fuel oil purchases. At March 31, 2005, the fair values of these instruments were
a $34 million  short-term  derivative  asset position  included in other current
assets and a $23 million  long-term  derivative asset position included in other
assets and  deferred  debits.  At December  31,  2004,  the fair values of these
instruments were a $2 million  long-term  derivative asset position  included in
other  assets  and  deferred  debits  and  a $5  million  short-term  derivative
liability  position  included in other current  liabilities.  These  instruments
receive  regulatory  accounting  treatment.  Unrealized  gains  and  losses  are
recorded in regulatory liabilities and regulatory assets, respectively.

The Company  uses  natural gas  hedging  instruments  to manage a portion of the
market risk associated with fluctuations in the future purchase and sales prices
of the Company's  natural gas. The fair values of commodity  cash flow hedges at
March 31, 2005 and December 31, 2004 were as follows:

--------------------------------------------------------
 (in millions)                 March 31,    December 31,
                                   2005            2004
--------------------------------------------------------
 Fair value of assets            $  19           $   -
 Fair value of liabilities         (26)            (15)
--------------------------------------------------------
 Fair value, net                 $  (7)          $ (15)
--------------------------------------------------------

The Company performs sensitivity analyses to estimate its exposure to the market
risk of its commodity positions.  The Company's exposure to commodity price risk
has not changed  materially since December 31, 2004. A hypothetical 10% increase
or decrease in quoted market prices in the near term on the Company's derivative
commodity  instruments  would not have had a  material  effect on the  Company's
consolidated financial position, results of operations or cash flows as of March
31, 2005.

Refer  to  Note 9 for  additional  information  with  regard  to  the  Company's
commodity contracts and use of derivative financial instruments.

                                       65
<PAGE>


Progress Energy Carolinas, Inc.


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

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





                                       66
<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 its  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  Chief  Executive  Officer  and Chief  Financial
Officer  concluded that its disclosure  controls and procedures are effective to
ensure that  information  required  to be  disclosed  by Progress  Energy in the
reports that it files or submits under the Exchange Act, is recorded, processed,
summarized  and reported,  within the time periods  specified in the SEC's rules
and forms, and that such information is accumulated and communicated to Progress
Energy's  management,  including the Chief Executive Officer and Chief Financial
Officer,   as  appropriate,   to  allow  timely  decisions   regarding  required
disclosure.

There has been no change in Progress  Energy's  internal  control over financial
reporting during the quarter ended March 31, 2005, that has materially affected,
or is reasonably likely to materially affect, Progress Energy's internal control
over financial reporting.

Progress Energy Carolinas, Inc.

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

There has been no change in PEC's  internal  control  over  financial  reporting
during the quarter ended March 31, 2005,  that has  materially  affected,  or is
reasonably  likely to materially  affect,  its internal  control over  financial
reporting.




                                       67
<PAGE>



                           PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Legal aspects of certain matters are set forth in Part I, Item 1. See Note 14 to
the Progress Energy, Inc.  Consolidated Interim Financial Statements and Note 10
to the PEC Consolidated Interim Financial Statements.

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

a. RESTRICTED STOCK AWARDS:

(a)  Securities Delivered. On January 1, 2005, March 7, 2005, March 15, 2005 and
     March  21,  2005,  13,000,  2,200,  101,500  and 3,500  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.
     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.

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

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
------------------------------------------------------------------------------------------------------------------
         Period                  (a)             (b)                  (c)                        (d)
                                                            Total Number of Shares        Maximum Number (or
                           Total Number of  Average Price   (or Units) Purchased as   Approximate Dollar Value)
                               Shares          Paid Per        Part of Publicly       of Shares (or Units) that
                             (or Units)         Share         Announced Plans or      May Yet Be Purchased Under
                            Purchased(1)      (or Unit)           Programs(1)          the Plans or Programs(1)
------------------------------------------------------------------------------------------------------------------
January 1 - January 31         13,000           $45.11                N/A                        N/A
------------------------------------------------------------------------------------------------------------------
February 1- February 28           0              N/A                  N/A                        N/A
------------------------------------------------------------------------------------------------------------------
March 1 - March 31             107,200          $42.26                N/A                        N/A
------------------------------------------------------------------------------------------------------------------
Total:                       120,200(2)         $42.57                N/A                        N/A
------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  As of March 31, 2005,  Progress Energy does not have any publicly announced
     plans or programs to purchase shares of its common stock.

(2)  Shares of common  stock  were  purchased  in  open-market  transactions  in
     connection  with  restricted  stock awards that were granted to certain key
     employees  pursuant  to  the  terms  of the  Progress  Energy  2002  Equity
     Incentive Plan, which was approved by Progress Energy's Shareholders on May
     8, 2002.

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<PAGE>



Item 6. Exhibits

(a)  Exhibits

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     Exhibit                                                              Progress          Progress Energy
     Number                          Description                        Energy, Inc.        Carolinas, Inc.
     ------                          -----------                        ------------        ---------------

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

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

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

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





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<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: May 6, 2005                       (Registrants)

                                        By: /s/Geoffrey S. Chatas
                                        -----------------------------
                                        Geoffrey S. Chatas
                                        Executive Vice President and
                                        Chief Financial Officer

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


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