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 June
      30, 2006





OR





o **TRANSITION REPORT PURSUANT TO SECTION 13 OR**


**15(d)
      OF THE SECURITIES EXCHANGE ACT OF 1934**





For
      the
      transition period from  to  .








Commission
                File Number
            Exact
                name of registrants as specified in their charters, states of
                incorporation,
              addresses
                of principal executive offices,and
                telephone numbers
            I.R.S.
                Employer Identification Number1-15929
            **Progress
                Energy, Inc.**
              410
                South Wilmington Street
              Raleigh,
                North Carolina 27601-1748
              Telephone:
                (919) 546-6111
              State
                of Incorporation: North Carolina
            56-21554811-3382
            **Carolina
                Power & Light Company**
              **d/b/a
                Progress Energy Carolinas, Inc.**
              410
                South Wilmington Street
              Raleigh,
                North Carolina 27601-1748
              Telephone:
                (919) 546-6111
              State
                of Incorporation: North Carolina
            56-01654651-3274
            **Florida
                Power Corporation**
              **d/b/a
                Progress Energy Florida, Inc.**
              100
                Central Avenue
              St.
                Petersburg, Florida 33701
              Telephone
                (727) 820-5151
              State
                of Incorporation: Florida
            59-0247770





NONE


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





Indicate
      by check mark whether each registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrants were
      required to file such reports), and (2) has been subject to such filing
      requirements for the past 90 days.


Yes x No o








Indicate
      by check mark whether each registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
      Act.:





Progress
                Energy, Inc. (Progress Energy)
            Large
                accelerated filer
            x
            Accelerated
                filer
            o
            Non-accelerated
                filer
            oCarolina
                Power & Light Company (PEC)
            Large
                accelerated filer
            o
            Accelerated
                filer
            o
            Non-accelerated
                filer
            xFlorida
                Power Corporation (PEF)
            Large
                accelerated filer
            o
            Accelerated
                filer
            o
            Non-accelerated
                filer
            x





Indicate
      by check mark whether each registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).





Progress
                Energy
            Yes
            o
            No
            xPEC
            Yes
            o
            No
            xPEF
            Yes
            o
            No
            x





Indicate
      the number of shares outstanding of each registrants’ classes of common stock,
      as of the latest practicable date. At July 31, 2006, each registrant had the
      following shares of common stock outstanding:





**Registrant**
            **Description**
            **Shares**Progress
                Energy
            Common
                Stock (Without Par Value)
            253,348,322PEC
            Common
                Stock (Without Par Value)
            159,608,055
                (all of which were held directly by Progress Energy,
                Inc.)PEF
            Common
                Stock (Without par value)
            100
                (all of which were held indirectly by Progress Energy,
                Inc.)





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





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


2


**PROGRESS
      ENERGY, INC., PROGRESS ENERGY CAROLINAS, INC.**


**AND
      PROGRESS ENERGY FLORIDA, INC.**


**FORM
      10-Q - For the Quarter Ended June 30, 2006**











Glossary
      of Terms




Safe
      Harbor for Forward-Looking Statements




PART
                I.
            FINANCIAL
                INFORMATION




Item
                1.
            Financial
                Statements




Unaudited
                    Interim Financial Statements:Progress
                    Energy, Inc. (Progress Energy)Unaudited
                    Consolidated Statements of IncomeUnaudited
                    Consolidated Balance SheetsUnaudited
                    Consolidated Statements of Cash FlowsCarolina
                    Power & Light Companyd/b/a
                    Progress Energy Carolinas, Inc. (PEC)Unaudited
                    Consolidated Statements of IncomeUnaudited
                    Consolidated Balance SheetsUnaudited
                    Consolidated Statements of Cash FlowsFlorida
                    Power Corporationd/b/a
                    Progress Energy Florida, Inc. (PEF)Unaudited
                    Statements of IncomeUnaudited
                    Balance SheetsUnaudited
                    Statements of Cash Flows
  Combined
            Notes to Unaudited Interim Financial Statements for Progress Energy,
            Inc.,
            Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. and
            Florida Power Corporation d/b/a Progress Energy Florida,
            Inc.




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
                1A.
            Risk
                Factors




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




Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders




Item
                6.
            Exhibits




Signatures




3


GLOSSARY
      OF TERMS





We
      use
      the words “Progress Energy,” “we”, “us” or “our” with respect to certain
      information to indicate that such information relates to Progress Energy, Inc.
      and its subsidiaries on a consolidated basis. When appropriate, the parent
      holding company or the subsidiaries of Progress Energy are specifically
      identified on an unconsolidated basis as we discuss their various business
      activities.




The
      following abbreviations or acronyms are used by the Progress
      Registrants:




**TERM**
            **DEFINITION**2005
                Form 10-K
            Progress
                Registrants’ annual report on Form 10-K for the fiscal year ended December
                31, 2005401(k)
                Plan
            Progress
                Energy 401(k) Savings and Stock Ownership PlanAFUDC
            Allowance
                for funds used during constructionAHI
            Affordable
                housing investmentAPB
            Accounting
                Principles BoardAPB
                No. 25
            Accounting
                Principles Board Opinion No. 25, “Accounting for Stock Issued to
                Employees”APB
                No. 28
            Accounting
                Principles Board Opinion No. 28, “Interim Financial
                Reporting”ARO
            Asset
                retirement obligationAnnual
                Average Price
            Average
                wellhead price per barrel for unregulated domestic crude oil for
                the
                yearBART
            Best
                Available Retrofit TechnologyBcf
            Billion
                cubic feetBroad
                River
            Broad
                River LLC’s Broad River FacilityBrunswick
            Brunswick
                Nuclear PlantBtu
            British
                thermal unitCAIR
            Clean
                Air Interstate RuleCAMR
            Clean
                Air Mercury RuleCAVR
            Clean
                Air Visibility RuleCERCLA
                or Superfund
            Comprehensive
                Environmental Response, Compensation and Liability Act of 1980, as
                amendedClean
                Smokestacks Act
            North
                Carolina Clean Smokestacks Act, enacted in June 2002Coal
            Coal
                terminals and marketing operations that blend and transload coal
                as part
                of the transportation network for coal deliveryCoal
                and Synthetic Fuel
            Business
                segment primarily engaged in synthetic fuel production and sales
                operations, the operation of synthetic fuel facilities for third
                parties
                and coal terminal servicesthe
                Code
            Internal
                Revenue CodeCO2
            Carbon
                dioxideCOL
            Combined
                licenseColona
            Colona
                Synfuel Limited Partnership, LLLPCorporate
            Collectively,
                the Parent, PESC and consolidation entitiesCorporate
                and Other
            Corporate
                and Other segment includes Corporate as well as other nonregulated
                business areasCR3
            Crystal
                River Unit No. 3 Nuclear PlantCVO
            Contingent
                value obligationDeSoto
            DeSoto
                County Generating Co., LLCDIG
                Issue C20
            FASB
                Derivatives Implementation Group Issue C20, “Interpretation of the Meaning
                of Not Clearly and Closely Related in Paragraph 10(b) regarding Contracts
                with a Price Adjustment Feature”Dixie
                Fuels
            Dixie
                Fuels LimitedDOE
            United
                States Department of EnergyEarthco
            Four
                wholly owned coal-based solid synthetic fuel limited liability
                companiesECRC
            Environmental
                Cost Recovery ClauseEIA
            Energy
                Information AgencyEIP
            Progress
                Energy 2002 Equity Incentive Plan




4


EITF
            Emerging
                Issues Task ForceEITF
                03-1
            Emerging
                Issues Task Force No. 03-1, “The Meaning of Other-Than-Temporary
                Impairments and Its Application to Certain Investments”EITF
                03-4
            Emerging
                Issues Task Force No. 03-4, “Determining the Classification and Benefit
                Attribution Method for a ‘Cash Balance’ Pension Plan”EMCs
            Electric
                Membership CooperativesEnergy
                Delivery
            Distribution
                operations of the UtilitiesEPA
            Environmental
                Protection AgencyEPACT
            Energy
                Policy Act of 2005ESOP
            Employee
                Stock Ownership PlanFASB
            Financial
                Accounting Standards BoardFDEP
            Florida
                Department of Environmental ProtectionFERC
            Federal
                Energy Regulatory CommissionFGT
            Florida
                Gas Transmission CompanyFIN
                45
            FASB
                Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements
                for Guarantees, Including Indirect Guarantees of Indebtedness of
                Others”FIN
                46R
            FASB
                Interpretation No. 46R, “Consolidation of Variable Interest Entities - an
                Interpretation of ARB No. 51”FIN
                47
            FASB
                Interpretation No. 47, “Accounting for Conditional Asset Retirement
                Obligations - an Interpretation of FASB Statement No.
                143”FIN
                48
            FASB
                Interpretation No. 48, “Accounting for Uncertainty in Income
                Taxes”Fitch
            Fitch
                RatingsFlorida
                Global Case
            U.S.
                Global LLC v. Progress Energy, Inc. et alFlorida
                Progress or FPC
            Florida
                Progress Corporation, one of our wholly owned
                subsidiariesFPSC
            Florida
                Public Service CommissionFunding
                Corp.
            Florida
                Progress Funding Corporation, a wholly owned subsidiary of Florida
                ProgressGAAP
            Accounting
                principles generally accepted in the United States of
                AmericaGas
            Progress
                Ventures’ natural gas drilling and production businessGeorgia
                Power
            Georgia
                Power Company, a subsidiary of Southern CompanyGeorgia
                Region
            Reporting
                unit consisting of our Effingham, Monroe, Walton and Washington
                nonregulated generation plants in serviceGITS
            Georgia
                Integrated Transmission SystemGlobal
            U.S.
                Global LLCGulfstream
            Gulfstream
                Gas System, L.L.C.Harris
            Shearon
                Harris Nuclear PlantIBEW
            International
                Brotherhood of Electrical WorkersIRS
            Internal
                Revenue ServiceJackson
            Jackson
                Electric Membership CorporationkV
            KilovoltkVA
            Kilovolt-amperekW
            KilowattkWh/s
            Kilowatt-hour/sLevel
                3
            Level
                3 Communications, Inc.LIBOR
            London
                Inter Bank Offering RateMACT
            Maximum
                Achievable Control TechnologyMDC
            Maximum
                Dependable CapabilityMedicare
                Act
            Medicare
                Prescription Drug, Improvement and Modernization Act of
                2003MGP
            Manufactured
                gas plantMW
            MegawattMWh
            Megawatt-hourMoody’s
            Moody’s
                Investors Service, Inc.NAAQS
            National
                Ambient Air Quality StandardsNCNG
            North
                Carolina Natural Gas CorporationNSR
            New
                Source Review requirement by EPANCUC
            North
                Carolina Utilities Commission




5


NEIL
            Nuclear
                Electric Insurance LimitedNorth
                Carolina Global Case
            Progress
                Synfuel Holdings, Inc. et al. v. U.S. Global, LLCthe
                Notes Guarantee
            Florida
                Progress’ full and unconditional guarantee of the Subordinated NotesNOx
            Nitrogen
                OxideNOx
                SIP Call
            EPA
                rule which requires 22 states including North Carolina, South Carolina
                and
                Georgia (but excluding Florida) to further reduce nitrogen oxide
                emissionsNRC
            United
                States Nuclear Regulatory CommissionNuclear
                Waste Act
            Nuclear
                Waste Policy Act of 1982NYMEX
            New
                York Mercantile ExchangeOCI
            Other
                comprehensive income as defined by GAAPO&M
            Operation
                and maintenance expenseOPEB
            Postretirement
                benefits other than pensionsP11
            Intercession
                City Unit P11the
                Parent
            Progress
                Energy, Inc. holding company on an unconsolidated basisPEC
            Progress
                Energy Carolinas, Inc., formerly referred to as Carolina Power & Light
                CompanyPEF
            Progress
                Energy Florida, Inc., formerly referred to as Florida Power
                CorporationPESC
            Progress
                Energy Service Company, LLCthe
                Phase-out Price
            Price
                per barrel of unregulated domestic crude oil at which Section 29/45K
                tax
                credits are fully eliminatedPower
                Agency
            North
                Carolina Eastern Municipal Power AgencyPreferred
                Securities
            7.10%
                Cumulative Quarterly Income Preferred Securities due 2039, Series
                A issued
                by the TrustPreferred
                Securities Guarantee
            Florida
                Progress’ guarantee of all distributions related to the Preferred
                SecuritiesProgress
                Energy
            Progress
                Energy, Inc. and subsidiaries on a consolidated basisProgress
                Registrants
            The
                reporting registrants within the Progress Energy consolidated group.
                Collectively, Progress Energy, Inc., PEC and PEFProgress
                Fuels
            Progress
                Fuels Corporation, formerly Electric Fuels CorporationProgress
                Rail
            Progress
                Rail Services CorporationProgress
                Ventures
            Business
                segment primarily engaged in nonregulated energy generation, energy
                marketing activities and natural gas drilling and
                productionPRP
            Potentially
                responsible party, as defined in CERCLAPSSP
            Performance
                Share Sub-PlanPTC
            Progress
                Telecommunications CorporationPT
                LLC
            Progress
                Telecom, LLCPUHCA
            Public
                Utility Holding Company Act of 1935, as amendedPURPA
            Public
                Utilities Regulatory Policies Act of 1978PVI
            Progress
                Energy Ventures, Inc., formerly referred to as Progress Ventures,
                Inc.PWC
            Public
                Works Commission of the City of Fayetteville, N.C.PWR
            Pressurized
                water reactorQF
            Qualifying
                facilityRCA
            Revolving
                credit agreementRockport
            Indiana
                Michigan Power Company’s Rockport Unit No. 2Robinson
            Robinson
                Nuclear PlantROE
            Return
                on equityRowan
            Rowan
                County Power, LLCRSA
            Restricted
                stock awards programRTO
            Regional
                transmission organizationSCPSC
            Public
                Service Commission of South CarolinaScrubber
            A
                device that neutralizes sulfur compounds formed during coal
                combustionSEC
            United
                States Securities and Exchange CommissionSection
                29
            Section
                29 of the Internal Revenue Service CodeSection
                29/45K
            General
                business tax credits earned after December 31, 2005 for synthetic
                fuel
                production activities in accordance with Section
                29




6


Section
                45K
            General
                business tax credit(See
                Note/s “#”)
            For
                all sections, this is a cross-reference to the Combined Notes to
                the
                Unaudited Interim Financial Statements contained in PART I, Item
                1S&P
            Standard
                & Poor’s Rating ServicesSFAS
            Statement
                of Financial Accounting StandardsSFAS
                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. 87
            Statement
                of Financial Accounting Standards No. 87, “Employers’ Accounting for
                Pensions”SFAS
                No. 109
            Statement
                of Financial Accounting Standards No. 109, “Accounting for Income
                Taxes”SFAS
                No. 115
            Statement
                of Financial Accounting Standards No. 115, “Accounting for Certain
                Investments in Debt and Equity Securities”SFAS
                No. 123
            Statement
                of Financial Accounting Standards No. 123, “Accounting for Stock-Based
                Compensation”SFAS
                No. 123R
            Statement
                of Financial Accounting Standards No. 123R, “Share-Based
                Payment”SFAS
                No. 131
            Statement
                of Financial Accounting Standards No. 131, “Disclosures about Segments of
                an Enterprise and Related Information”SFAS
                No. 133
            Statement
                of Financial Accounting Standards No. 133, “Accounting for Derivative and
                Hedging Activities”SFAS
                No. 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. 142
            Statement
                of Financial Accounting Standards No. 142, “Goodwill and Other Intangible
                Assets”SFAS
                No. 143
            Statement
                of Financial Accounting Standards No. 143, “Accounting for Asset
                Retirement Obligations”SFAS
                No. 144
            Statement
                of Financial Accounting Standards No. 144, “Accounting for the Impairment
                or Disposal of Long-Lived Assets”SFAS
                No. 148
            Statement
                of Financial Accounting Standards No. 148, “Accounting for Stock-Based
                Compensation - Transition and Disclosure - An Amendment of FASB Statement
                No. 123”SFAS
                No. 149
            Statement
                of Financial Accounting Standards No. 149, “Amendment of Statement 133 on
                Derivative Instruments and Hedging Activities”SFAS
                No. 150
            Statement
                of Financial Accounting Standards No. 150, “Accounting for Certain
                Financial Instruments with Characteristics of Both Liabilities and
                Equity”SNG
            Southern
                Natural Gas CompanySO2
            Sulfur
                dioxideSPC
            Southern
                Power Company, a subsidiary of Southern CompanySRS
            Strategic
                Resource Solutions Corp.Subordinated
                Notes
            7.10%
                Junior Subordinated Deferrable Interest Notes due 2039 issued by
                Funding
                Corp.Tax
                Agreement
            Intercompany
                Income Tax Allocation Agreementthe
                Threshold Price
            Price
                per barrel of unregulated domestic crude oil at which Section 29/45K
                tax
                credits begin to be reducedthe
                Trust
            FPC
                Capital I, a wholly owned subsidiary of Florida
                Progressthe
                Utilities
            Collectively,
                PEC and PEFWinchester
                Production
            Winchester
                Production Company, Ltd., an indirectly owned subsidiary of Progress
                Fuels
                Corporation


7


**SAFE
      HARBOR FOR FORWARD-LOOKING STATEMENTS**





In
      this
      combined report, each of the Progress Registrants makes 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,
      examples of forward-looking statements discussed in this Form 10-Q include,
      but
      are not limited to, statements made in “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations” including, but not limited to,
      statements under the sub-headings RESULTS OF OPERATIONS about trends and
      uncertainties, LIQUIDITY AND CAPITAL RESOURCES about operating cash flows,
      future liquidity requirements and estimated capital expenditures and OTHER
      MATTERS about our synthetic fuel facilities and environmental
      matters.





Any
      forward-looking statement is based on information current as of the date of
      this
      report and speaks only as of the date on which such statement is made, and
      the
      Progress Registrants undertake no obligation to update any forward-looking
      statement or statements to reflect events or circumstances after the date on
      which such statement is made.





Examples
      of factors that you should consider with respect to any forward-looking
      statements made throughout this document include, but are not limited to, the
      following: the impact of fluid and complex laws and regulations, including
      those
      relating to the environment and the Energy Policy Act of 2005; the financial
      resources and capital needed to comply with environmental laws and our ability
      to recover eligible costs under cost recovery clauses; deregulation or
      restructuring in the electric industry that may result in increased competition
      and unrecovered or stranded costs; weather conditions that directly influence
      the production, delivery and demand for electricity; the ability to recover
      through the regulatory process costs associated with future significant weather
      events; recurring seasonal fluctuations in demand for electricity; fluctuations
      in the price of energy commodities and purchased power; economic fluctuations
      and the corresponding impact on our commercial and industrial customers; the
      ability of our subsidiaries to pay upstream dividends or distributions to the
      Parent; the impact on our facilities and businesses from a terrorist attack;
      the
      inherent risks associated with the operation of nuclear facilities, including
      environmental, health, regulatory and financial risks; the anticipated future
      need for additional baseload generation in our regulated service territories
      and
      the accompanying regulatory and financial risks; the ability to successfully
      access capital markets on favorable terms; the Progress Registrants’ ability to
      maintain their current credit ratings and the impact on the Progress
      Registrants’ financial condition and ability to meet their cash and other
      financial obligations in the event their credit ratings are downgraded below
      investment grade; the impact that increases in leverage may have on each of
      the
      Progress Registrants; the impact of derivative contracts used in the normal
      course of business; the investment performance of our pension and benefit plans;
      the Progress Registrants’ ability to control costs, including pension and
      benefit expense, and achieve our cost-management targets for 2007; our ability
      to use Internal Revenue Code Section 29/45K (Section 29/45K) tax credits related
      to our coal-based solid synthetic fuel businesses; the impact that future crude
      oil prices may have on the value of our Section 29/45K tax credits; our ability
      to manage the risks involved with the operation of nonregulated plants,
      including dependence on third parties and related counter-party risks; the
      ability to manage the risks associated with our energy marketing operations,
      including potential impairment charges caused by adverse changes in market
      or
      business conditions; the ability to divest of our gas and other selected assets
      on a timely basis; the outcome of any ongoing or future litigation or similar
      disputes and the impact of any such outcome or related settlements; and
      unanticipated changes in operating expenses and capital expenditures. Many
      of
      these risks similarly impact our nonreporting subsidiaries.





These
      and
      other risk factors are disclosed in the Progress Registrants’ periodic 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 section of the Progress Registrants’ annual report on Form 10-K for the
      fiscal year ended December 31, 2005 (2005 Form 10-K) and are updated, as
      appropriate, in PART II, Item 1A of this Form 10-Q. All such factors are
      difficult to predict, contain uncertainties that may materially affect actual
      results and may be beyond our control. New factors emerge from time to time,
      and
      it is not possible for us to predict all such factors, nor can we assess the
      effect of each such factor on the Progress Registrants.


8


PART
      I.
      FINANCIAL INFORMATION


Item
      1.Financial
      Statements





**PROGRESS
      ENERGY, INC.**


**CONSOLIDATED
      INTERIM FINANCIAL STATEMENTS**


**June
      30, 2006**





**UNAUDITED
                CONSOLIDATED STATEMENTS of INCOME**Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions except per share data)
            
            **2006**
            
            2005
            
            **2006**
            
            2005**Operating
                revenues**Electric
            
            **$**
            **2,082**
            
            $
            1,768
            
            **$**
            **4,067**
            
            $
            3,551Diversified
                business
            
            
            **417**
            
            
            497
            
            
            **858**
            
            
            856Total
                operating revenues
            
            
            **2,499**
            
            
            2,265
            
            
            **4,925**
            
            
            4,407**Operating
                expenses**UtilityFuel
                used in electric generation
            
            
            **709**
            
            
            529
            
            
            **1,399**
            
            
            1,079Purchased
                power
            
            
            **260**
            
            
            217
            
            
            **489**
            
            
            415Operation
                and maintenance
            
            
            **417**
            
            
            543
            
            
            **833**
            
            
            949Depreciation
                and amortization
            
            
            **234**
            
            
            207
            
            
            **462**
            
            
            415Taxes
                other than on income
            
            
            **120**
            
            
            108
            
            
            **239**
            
            
            225Other
            
            
            **−**
            
            
            (25
            )
            
            **(2**
            **)**
            
            (25
            )Diversified
                businessCost
                of sales
            
            
            **398**
            
            
            492
            
            
            **800**
            
            
            853Depreciation
                and amortization
            
            
            **33**
            
            
            32
            
            
            **65**
            
            
            59Impairment
                of assets (Notes 6 and 7)
            
            
            **91**
            
            
            −
            
            
            **155**
            
            
            −Gain
                on the sale of assets
            
            
            **−**
            
            
            −
            
            
            **(7**
            **)**
            
            (4
            )Other
            
            
            **28**
            
            
            26
            
            
            **50**
            
            
            55Total
                operating expenses
            
            
            **2,290**
            
            
            2,129
            
            
            **4,483**
            
            
            4,021**Operating
                income**
            
            
            **209**
            
            
            136
            
            
            **442**
            
            
            386**Other
                income (expense)**Interest
                income
            
            
            **7**
            
            
            4
            
            
            **24**
            
            
            8Other,
                net
            
            
            **11**
            
            
            (6
            )
            
            **9**
            
            
            (5
            )Total
                other income (expense)
            
            
            **18**
            
            
            (2
            )
            
            **33**
            
            
            3**Interest
                charges**Net
                interest charges
            
            
            **173**
            
            
            163
            
            
            **351**
            
            
            325Allowance
                for borrowed funds used during construction
            
            
            **(2**
            **)**
            
            (4
            )
            
            **(4**
            **)**
            
            (7
            )Total
                interest charges, net
            
            
            **171**
            
            
            159
            
            
            **347**
            
            
            318**Income
                (loss) from continuing operations before income tax and minority
                interest**
            
            
            **56**
            
            
            (25
            )
            
            **128**
            
            
            71**Income
                tax expense (benefit)**
            
            
            **35**
            
            
            (23
            )
            
            **48**
            
            
            (25
            )**Income
                (loss) from continuing operations before minority interest**
            
            
            **21**
            
            
            (2
            )
            
            **80**
            
            
            96**Minority
                interest in subsidiaries’ (income) loss, net of
                tax**
            
            
            **(7**
            **)**
            
            8
            
            
            **(14**
            **)**
            
            16**Income
                from continuing operations**
            
            
            **14**
            
            
            6
            
            
            **66**
            
            
            112**Discontinued
                operations, net of tax**
            
            
            **(61**
            **)**
            
            (7
            )
            
            **(68**
            **)**
            
            (20
            )**Net
                (loss) income**
            
            **$**
            **(47**
            **)**
            $
            (1
            )
            **$**
            **(2**
            **)**
            $
            92**Average
                common shares outstanding - basic**
            
            
            **250**
            
            
            246
            
            
            **250**
            
            
            245**Basic
                earnings per common share**Income
                from continuing operations
            
            **$**
            **0.06**
            
            $
            0.02
            
            **$**
            **0.26**
            
            $
            0.46Discontinued
                operations, net of tax
            
            
            **(0.25**
            **)**
            
            (0.03
            )
            
            **(0.27**
            **)**
            
            (0.09
            )Net
                (loss) income
            
            **$**
            **(0.19**
            **)**
            $
            (0.01
            )
            **$**
            **(0.01**
            **)**
            $
            0.37**Diluted
                earnings per common share**Income
                from continuing operations
            
            **$**
            **0.06**
            
            $
            0.02
            
            **$**
            **0.26**
            
            $
            0.46Discontinued
                operations, net of tax
            
            
            **(0.25**
            **)**
            
            (0.03
            )
            
            **(0.27**
            **)**
            
            (0.09
            )Net
                (loss) income
            
            **$**
            **(0.19**
            **)**
            $
            (0.01
            )
            **$**
            **(0.01**
            **)**
            $
            0.37**Dividends
                declared per common share**
            
            **$**
            **0.605**
            
            $
            0.590
            
            **$**
            **1.210**
            
            $
            1.180





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


9


PROGRESS
      ENERGY, INC.


**UNAUDITED
                CONSOLIDATED BALANCE SHEETS**(in
                millions)
            
            **June
                30, 2006**
            
            December
                31, 2005**ASSETS****Utility
                plant**Utility
                plant in service
            
            **$**
            **23,240**
            
            $
            22,940Accumulated
                depreciation
            
            
            **(9,854**
            **)**
            
            (9,602
            )Utility
                plant in service, net
            
            
            **13,386**
            
            
            13,338Held
                for future use
            
            
            **12**
            
            
            12Construction
                work in progress
            
            
            **1,060**
            
            
            813Nuclear
                fuel, net of amortization
            
            
            **249**
            
            
            279**Total
                utility plant, net**
            
            
            **14,707**
            
            
            14,442**Current
                assets**Cash
                and cash equivalents
            
            
            **264**
            
            
            606Short-term
                investments
            
            
            **95**
            
            
            191Receivables,
                net
            
            
            **998**
            
            
            1,099Inventory
            
            
            **948**
            
            
            848Deferred
                fuel cost
            
            
            **449**
            
            
            602Deferred
                income taxes
            
            
            **44**
            
            
            50Assets
                of discontinued operations
            
            
            **384**
            
            
            722Prepayments
                and other current assets
            
            
            **154**
            
            
            209**Total
                current assets**
            
            
            **3,336**
            
            
            4,327**Deferred
                debits and other assets**Regulatory
                assets
            
            
            **825**
            
            
            854Nuclear
                decommissioning trust funds
            
            
            **1,181**
            
            
            1,133Diversified
                business property, net
            
            
            **1,309**
            
            
            1,318Miscellaneous
                other property and investments
            
            
            **478**
            
            
            476Goodwill
            
            
            **3,655**
            
            
            3,719Intangibles,
                net
            
            
            **234**
            
            
            277Other
                assets and deferred debits
            
            
            **429**
            
            
            478**Total
                deferred debits and other assets**
            
            
            **8,111**
            
            
            8,255**Total
                assets**
            
            **$**
            **26,154**
            
            $
            27,024**CAPITALIZATION
                AND LIABILITIES****Common
                stock equity**Common
                stock without par value, 500 million shares authorized, 253 and 252
                million shares issued and outstanding, respectively
            
            **$**
            **5,653**
            
            $
            5,571Unearned
                ESOP shares (2 and 3 million shares, respectively)
            
            
            **(50**
            **)**
            
            (63
            )Accumulated
                other comprehensive loss
            
            
            **(87**
            **)**
            
            (104
            )Retained
                earnings
            
            
            **2,328**
            
            
            2,634**Total
                common stock equity**
            
            
            **7,844**
            
            
            8,038**Preferred
                stock of subsidiaries - not subject to mandatory
                redemption**
            
            
            **93**
            
            
            93**Minority
                interest**
            
            
            **16**
            
            
            43**Long-term
                debt, affiliate**
            
            
            **270**
            
            
            270**Long-term
                debt, net**
            
            
            **9,822**
            
            
            10,176**Total
                capitalization**
            
            
            **18,045**
            
            
            18,620**Current
                liabilities**Current
                portion of long-term debt
            
            
            **460**
            
            
            513Accounts
                payable
            
            
            **654**
            
            
            676Interest
                accrued
            
            
            **199**
            
            
            208Dividends
                declared
            
            
            **153**
            
            
            152Short-term
                obligations
            
            
            **−**
            
            
            175Customer
                deposits
            
            
            **214**
            
            
            200Liabilities
                of discontinued operations
            
            
            **32**
            
            
            91Other
                current liabilities
            
            
            **808**
            
            
            871**Total
                current liabilities**
            
            
            **2,520**
            
            
            2,886**Deferred
                credits and other liabilities**Noncurrent
                income tax liabilities
            
            
            **246**
            
            
            277Accumulated
                deferred investment tax credits
            
            
            **157**
            
            
            163Regulatory
                liabilities
            
            
            **2,500**
            
            
            2,527Asset
                retirement obligations
            
            
            **1,279**
            
            
            1,249Accrued
                pension and other benefits
            
            
            **904**
            
            
            870Other
                liabilities and deferred credits
            
            
            **503**
            
            
            432**Total
                deferred credits and other liabilities**
            
            
            **5,589**
            
            
            5,518**Commitments
                and contingencies (Note 14)****Total
                capitalization and liabilities**
            
            **$**
            **26,154**
            
            $
            27,024





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


10


PROGRESS
      ENERGY, INC.


**UNAUDITED
                CONSOLIDATED STATEMENTS of CASH FLOWS**(in
                millions)Six
                Months Ended June 30
            
            **2006**
            
            2005**Operating
                activities**Net
                (loss) income
            
            **$**
            **(2**
            **)**
            $
            92Adjustments
                to reconcile net (loss) income to net cash provided by operating
                activitiesDiscontinued
                operations, net of tax
            
            
            **68**
            
            
            20Impairment
                of assets (Notes 6 and 7)
            
            
            **155**
            
            
            −Charges
                for voluntary enhanced retirement program
            
            
            **−**
            
            
            158Depreciation
                and amortization
            
            
            **575**
            
            
            534Deferred
                income taxes
            
            
            **(28**
            **)**
            
            (137
            )Investment
                tax credit
            
            
            **(6**
            **)**
            
            (6
            )Tax
                levelization
            
            
            **19**
            
            
            63Deferred
                fuel cost
            
            
            **170**
            
            
            −Other
                adjustments to net income
            
            
            **113**
            
            
            65Cash
                provided (used) by changes in operating assets and
                liabilitiesReceivables
            
            
            **85**
            
            
            (67
            )Inventories
            
            
            **(107**
            **)**
            
            (125
            )Prepayments
                and other current assets
            
            
            **(5**
            **)**
            
            15Accounts
                payable
            
            
            **(6**
            **)**
            
            75Other
                current liabilities
            
            
            **(8**
            **)**
            
            (59
            )Regulatory
                assets and liabilities
            
            
            **4**
            
            
            (52
            )Other
                operating activities
            
            
            **18**
            
            
            (47
            )**Net
                cash provided by operating activities**
            
            
            **1,045**
            
            
            529**Investing
                activities**Gross
                utility property additions
            
            
            **(669**
            **)**
            
            (539
            )Diversified
                business property additions
            
            
            **(92**
            **)**
            
            (120
            )Nuclear
                fuel additions
            
            
            **(62**
            **)**
            
            (67
            )Proceeds
                from sales of discontinued operations and other assets, net of cash
                divested
            
            
            **221**
            
            
            444Purchases
                of available-for-sale securities and other investments
            
            
            **(956**
            **)**
            
            (3,205
            )Proceeds
                from sales of available-for-sale securities and other
                investments
            
            
            **1,126**
            
            
            3,229Other
                investing activities
            
            
            **(14**
            **)**
            
            (23
            )**Net
                cash used in investing activities**
            
            
            **(446**
            **)**
            
            (281
            )**Financing
                activities**Issuance
                of common stock
            
            
            **60**
            
            
            171Proceeds
                from issuance of long-term debt, net
            
            
            **397**
            
            
            792Net
                decrease in short-term indebtedness
            
            
            **(175**
            **)**
            
            (281
            )Retirement
                of long-term debt
            
            
            **(802**
            **)**
            
            (517
            )Dividends
                paid on common stock
            
            
            **(303**
            **)**
            
            (289
            )Cash
                distributions to minority interests of consolidated
                subsidiary
            
            
            **(74**
            **)**
            
            -Other
                financing activities
            
            
            **(41**
            **)**
            
            (24
            )**Net
                cash used in financing activities**
            
            
            **(938**
            **)**
            
            (148
            )**Cash
                provided (used) by discontinued operations**Operating
                activities
            
            
            **4**
            
            
            (1
            )Investing
                activities
            
            
            **(7**
            **)**
            
            (14
            )Financing
                activities
            
            
            **-**
            
            
            -**Net
                (decrease) increase in cash and cash equivalents**
            
            
            **(342**
            **)**
            
            85**Cash
                and cash equivalents at beginning of period**
            
            
            **606**
            
            
            56**Cash
                and cash equivalents at end of period**
            
            **$**
            **264**
            
            $
            141





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


11


**CAROLINA
      POWER & LIGHT COMPANY**


**d/b/a
      PROGRESS ENERGY CAROLINAS, INC.**


**CONSOLIDATED
      INTERIM FINANCIAL STATEMENTS**


**June
      30, 2006**





**UNAUDITED
                CONSOLIDATED STATEMENTS of INCOME**Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005**Operating
                revenues**Electric
            
            **$**
            **935**
            
            $
            860
            
            **$**
            **1,913**
            
            $
            1,795Diversified
                business
            
            
            **1**
            
            
            1
            
            
            **1**
            
            
            1Total
                operating revenues
            
            
            **936**
            
            
            861
            
            
            **1,914**
            
            
            1,796**Operating
                expenses**Fuel
                used in electric generation
            
            
            **262**
            
            
            216
            
            
            **558**
            
            
            464Purchased
                power
            
            
            **80**
            
            
            73
            
            
            **144**
            
            
            140Operation
                and maintenance
            
            
            **248**
            
            
            260
            
            
            **504**
            
            
            484Depreciation
                and amortization
            
            
            **129**
            
            
            130
            
            
            **255**
            
            
            259Taxes
                other than on income
            
            
            **44**
            
            
            42
            
            
            **90**
            
            
            88Other
            
            
            **(1**
            **)**
            
            −
            
            
            −
            
            
            −Total
                operating expenses
            
            
            **762**
            
            
            721
            
            
            **1,551**
            
            
            1,435**Operating
                income**
            
            
            **174**
            
            
            140
            
            
            **363**
            
            
            361**Other
                income (expense)**Interest
                income
            
            
            **4**
            
            
            1
            
            
            **11**
            
            
            3Other,
                net
            
            
            **(1**
            **)**
            
            (2
            )
            
            **(2**
            **)**
            
            (1
            )Total
                other income (expense)
            
            
            **3**
            
            
            (1
            )
            
            **9**
            
            
            2**Interest
                charges**Interest
                charges
            
            
            **57**
            
            
            50
            
            
            **114**
            
            
            102Allowance
                for borrowed funds used during construction
            
            
            **−**
            
            
            (2
            )
            
            **(1**
            **)**
            
            (3
            )Total
                interest charges, net
            
            
            **57**
            
            
            48
            
            
            **113**
            
            
            99**Income
                before income tax**
            
            
            **120**
            
            
            91
            
            
            **259**
            
            
            264**Income
                tax expense**
            
            
            **44**
            
            
            24
            
            
            **97**
            
            
            81**Net
                income**
            
            
            **76**
            
            
            67
            
            
            **162**
            
            
            183**Preferred
                stock dividend requirement**
            
            
            **−**
            
            
            −
            
            
            **1**
            
            
            1**Earnings
                for common stock**
            
            **$**
            **76**
            
            $
            67
            
            **$**
            **161**
            
            $
            182





See
      Notes
      to PEC Consolidated Interim Financial Statements.


12


CAROLINA
      POWER & LIGHT COMPANY


d/b/a PROGRESS
      ENERGY CAROLINAS, INC.


**UNAUDITED
                CONSOLIDATED BALANCE SHEETS**(in
                millions)
            
            **June
                30, 2006**
            
            December
                31, 2005**ASSETS****Utility
                plant**Utility
                plant in service
            
            **$**
            **14,184**
            
            $
            13,994Accumulated
                depreciation
            
            
            **(6,298**
            **)**
            
            (6,120
            )Utility
                plant in service, net
            
            
            **7,886**
            
            
            7,874Held
                for future use
            
            
            **3**
            
            
            3Construction
                work in progress
            
            
            **463**
            
            
            399Nuclear
                fuel, net of amortization
            
            
            **185**
            
            
            203**Total
                utility plant, net**
            
            
            **8,537**
            
            
            8,479**Current
                assets**Cash
                and cash equivalents
            
            
            **156**
            
            
            125Short-term
                investments
            
            
            **50**
            
            
            191Receivables,
                net
            
            
            **441**
            
            
            518Receivables
                from affiliated companies
            
            
            **14**
            
            
            24Inventory
            
            
            **481**
            
            
            451Deferred
                fuel cost
            
            
            **271**
            
            
            261Prepayments
                and other current assets
            
            
            **42**
            
            
            20**Total
                current assets**
            
            
            **1,455**
            
            
            1,590**Deferred
                debits and other assets**Regulatory
                assets
            
            
            **395**
            
            
            421Nuclear
                decommissioning trust funds
            
            
            **669**
            
            
            640Miscellaneous
                other property and investments
            
            
            **194**
            
            
            188Other
                assets and deferred debits
            
            
            **174**
            
            
            184**Total
                deferred debits and other assets**
            
            
            **1,432**
            
            
            1,433**Total
                assets**
            
            **$**
            **11,424**
            
            $
            11,502**CAPITALIZATION
                AND LIABILITIES****Common
                stock equity**Common
                stockwithout
                par value
            
            **$**
            **2,002**
            
            $
            1,981Unearned
                ESOP common stock
            
            
            **(50**
            **)**
            
            (63
            )Accumulated
                other comprehensive loss
            
            
            **(122**
            **)**
            
            (120
            )Retained
                earnings
            
            
            **1,311**
            
            
            1,320**Total
                common stock equity**
            
            
            **3,141**
            
            
            3,118**Preferred
                stock - not subject to mandatory redemption**
            
            
            **59**
            
            
            59**Long-term
                debt, net**
            
            
            **3,668**
            
            
            3,667**Total
                capitalization**
            
            
            **6,868**
            
            
            6,844**Current
                liabilities**Accounts
                payable
            
            
            **221**
            
            
            247Payables
                to affiliated companies
            
            
            **64**
            
            
            73Notes
                payable to affiliated companies
            
            
            **23**
            
            
            11Interest
                accrued
            
            
            **75**
            
            
            73Short-term
                obligations
            
            
            **−**
            
            
            73Customer
                deposits
            
            
            **56**
            
            
            52Taxes
                accrued
            
            
            **10**
            
            
            100Other
                current liabilities
            
            
            **294**
            
            
            255**Total
                current liabilities**
            
            
            **743**
            
            
            884**Deferred
                credits and other liabilities**Noncurrent
                income tax liabilities
            
            
            **803**
            
            
            814Accumulated
                deferred investment tax credits
            
            
            **130**
            
            
            133Regulatory
                liabilities
            
            
            **1,207**
            
            
            1,196Asset
                retirement obligations
            
            
            **978**
            
            
            949Accrued
                pension and other benefits
            
            
            **531**
            
            
            511Other
                liabilities and deferred credits
            
            
            **164**
            
            
            171**Total
                deferred credits and other liabilities**
            
            
            **3,813**
            
            
            3,774**Commitments
                and contingencies (Note 14)****Total
                capitalization and liabilities**
            
            **$**
            **11,424**
            
            $
            11,502





See
      Notes
      to PEC Consolidated Interim Financial Statements.


13


CAROLINA
      POWER & LIGHT COMPANY


d/b/a
      PROGRESS ENERGY CAROLINAS, INC.


**UNAUDITED
                CONSOLIDATED STATEMENTS of CASH FLOWS**(in
                millions)Six
                Months Ended June 30
            
            **2006**
            
            2005**Operating****activities**Net
                income
            
            **$**
            **162**
            
            $
            183Adjustments
                to reconcile net income to net cash provided by operating
                activitiesCharges
                for voluntary enhanced retirement program
            
            
            **−**
            
            
            42Depreciation
                and amortization
            
            
            **295**
            
            
            301Deferred
                income taxes and investment tax credits, net
            
            
            **36**
            
            
            4Deferred
                fuel cost (credit)
            
            
            **7**
            
            
            (36
            )Other
                adjustments to net income
            
            
            **69**
            
            
            42Cash
                provided (used) by changes in operating assets and
                liabilitiesReceivables
            
            
            **76**
            
            
            3Receivables
                from affiliated companies
            
            
            **20**
            
            
            17Inventories
            
            
            **(36**
            **)**
            
            (64
            )Prepayments
                and other current assets
            
            
            **5**
            
            
            1Accounts
                payable
            
            
            **11**
            
            
            (3
            )Payables
                to affiliated companies
            
            
            **(11**
            **)**
            
            (16
            )Other
                current liabilities
            
            
            **(115**
            **)**
            
            35Other
                operating activities
            
            
            **(16**
            **)**
            
            (54
            )**Net
                cash provided by operating activities**
            
            
            **503**
            
            
            455**Investing****activities**Gross
                utility property additions
            
            
            **(307**
            **)**
            
            (303
            )Nuclear
                fuel additions
            
            
            **(56**
            **)**
            
            (33
            )Purchases
                of available-for-sale securities and other investments
            
            
            **(453**
            **)**
            
            (1,344
            )Proceeds
                from sales of available-for-sale securities and other
                investments
            
            
            **578**
            
            
            1,390Other
                investing activities
            
            
            **(3**
            **)**
            
            (6
            )**Net
                cash used in investing activities**
            
            
            **(241**
            **)**
            
            (296
            )**Financing****activities**Proceeds
                from issuance of long-term debt, net
            
            
            **−**
            
            
            495Net
                decrease in short-term indebtedness
            
            
            **(73**
            **)**
            
            (79
            )Changes
                in advances from affiliates
            
            
            **12**
            
            
            (49
            )Retirement
                of long-term debt
            
            
            **−**
            
            
            (300
            )Dividends
                paid to parent
            
            
            **(169**
            **)**
            
            (229
            )Dividends
                paid on preferred stock
            
            
            **(1**
            **)**
            
            (1
            )**Net
                cash used in financing activities**
            
            
            **(231**
            **)**
            
            (163
            )**Net****increase
                (decrease) in cash and cash equivalents**
            
            
            **31**
            
            
            (4
            )**Cash
                and cash equivalents at beginning of period**
            
            
            **125**
            
            
            18**Cash
                and cash equivalents at end of period**
            
            **$**
            **156**
            
            $
            14





See
      Notes
      to PEC Consolidated Interim Financial Statements.


14


**FLORIDA
      POWER CORPORATION**


**d/b/a** **PROGRESS
      ENERGY FLORIDA, INC.**


**INTERIM
      FINANCIAL STATEMENTS**


**June
      30, 2006**





**UNAUDITED
                STATEMENTS of INCOME**Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005**Operating
                revenues**
            
            **$**
            **1,147**
            
            $
            908
            
            **$**
            **2,154**
            
            $
            1,756**Operating
                expenses**Fuel
                used in electric generation
            
            
            **447**
            
            
            313
            
            
            **841**
            
            
            615Purchased
                power
            
            
            **180**
            
            
            144
            
            
            **345**
            
            
            275Operation
                and maintenance
            
            
            **178**
            
            
            288
            
            
            **344**
            
            
            477Depreciation
                and amortization
            
            
            **98**
            
            
            71
            
            
            **193**
            
            
            141Taxes
                other than on income
            
            
            **76**
            
            
            66
            
            
            **149**
            
            
            133Other
            
            
            **1**
            
            
            (25
            )
            
            **(2**
            **)**
            
            (25
            )Total
                operating expenses
            
            
            **980**
            
            
            857
            
            
            **1,870**
            
            
            1,616**Operating
                income**
            
            
            **167**
            
            
            51
            
            
            **284**
            
            
            140**Other
                income (expense)**Interest
                income
            
            
            **3**
            
            
            −
            
            
            **8**
            
            
            −Other,
                net
            
            
            **3**
            
            
            (1
            )
            
            **2**
            
            
            2Total
                other income (expense)
            
            
            **6**
            
            
            (1
            )
            
            **10**
            
            
            2**Interest
                charges**Interest
                charges
            
            
            **40**
            
            
            34
            
            
            **80**
            
            
            68Allowance
                for borrowed funds used during construction
            
            
            **(2**
            **)**
            
            (2
            )
            
            **(3**
            **)**
            
            (4
            )Total
                interest charges, net
            
            
            **38**
            
            
            32
            
            
            **77**
            
            
            64**Income
                before income taxes**
            
            
            **135**
            
            
            18
            
            
            **217**
            
            
            78**Income
                tax expense**
            
            
            **48**
            
            
            8
            
            
            **77**
            
            
            24**Net
                income**
            
            
            **87**
            
            
            10
            
            
            **140**
            
            
            54**Preferred
                stock dividend requirement**
            
            
            **−**
            
            
            −
            
            
            **1**
            
            
            1**Earnings
                for common stock**
            
            **$**
            **87**
            
            $
            10
            
            **$**
            **139**
            
            $
            53





See
      Notes
      to PEF Interim Financial Statements.


15


FLORIDA
      POWER CORPORATION


d/b/a
      PROGRESS ENERGY FLORIDA, INC.


**UNAUDITED
                BALANCE SHEETS**(in
                millions)
            
            **June
                30, 2006**
            
            December
                31, 2005**ASSETS****Utility
                plant**Utility
                plant in service
            
            **$**
            **8,872**
            
            $
            8,756Accumulated
                depreciation
            
            
            **(3,506**
            **)**
            
            (3,434
            )Utility
                plant in service, net
            
            
            **5,366**
            
            
            5,322Held
                for future use
            
            
            **9**
            
            
            9Construction
                work in progress
            
            
            **597**
            
            
            414Nuclear
                fuel, net of amortization
            
            
            **64**
            
            
            76**Total
                utility plant, net**
            
            
            **6,036**
            
            
            5,821**Current
                assets**Cash
                and cash equivalents
            
            
            **77**
            
            
            218Short-term
                investments
            
            
            **45**
            
            
            -Receivables,
                net
            
            
            **368**
            
            
            331Receivables
                from affiliated companies
            
            
            **10**
            
            
            11Deferred
                income taxes
            
            
            **30**
            
            
            12Inventory
            
            
            **397**
            
            
            311Deferred
                fuel cost
            
            
            **178**
            
            
            341Prepayments
                and other current assets
            
            
            **71**
            
            
            100**Total
                current assets**
            
            
            **1,176**
            
            
            1,324**Deferred
                debits and other assets**Regulatory
                assets
            
            
            **343**
            
            
            351Debt
                issuance costs
            
            
            **21**
            
            
            22Nuclear
                decommissioning trust funds
            
            
            **512**
            
            
            493Miscellaneous
                other property and investments
            
            
            **45**
            
            
            47Prepaid
                pension costs
            
            
            **208**
            
            
            200Other
                assets and deferred debits
            
            
            **65**
            
            
            60**Total
                deferred debits and other assets**
            
            
            **1,194**
            
            
            1,173**Total
                assets**
            
            **$**
            **8,406**
            
            $
            8,318**CAPITALIZATION
                AND LIABILITIES****Common
                stock equity**Common
                stockwithout
                par value
            
            **$**
            **1,098**
            
            $
            1,097Retained
                earnings
            
            
            **1,519**
            
            
            1,498**Total
                common stock equity**
            
            
            **2,617**
            
            
            2,595**Preferred
                stock - not subject to mandatory redemption**
            
            
            **34**
            
            
            34**Long-term
                debt, net**
            
            
            **2,554**
            
            
            2,554**Total
                capitalization**
            
            
            **5,205**
            
            
            5,183**Current
                liabilities**Current
                portion of long-term debt
            
            
            **48**
            
            
            48Accounts
                payable
            
            
            **303**
            
            
            237Payables
                to affiliated companies
            
            
            **80**
            
            
            101Notes
                payable to affiliated companies
            
            
            **24**
            
            
            13Short-term
                obligations
            
            
            **−**
            
            
            102Customer
                deposits
            
            
            **158**
            
            
            148Interest
                accrued
            
            
            **38**
            
            
            42Other
                current liabilities
            
            
            **194**
            
            
            101**Total
                current liabilities**
            
            
            **845**
            
            
            792**Deferred
                credits and other liabilities**Noncurrent
                income tax liabilities
            
            
            **432**
            
            
            433Accumulated
                deferred investment tax credits
            
            
            **27**
            
            
            30Regulatory
                liabilities
            
            
            **1,159**
            
            
            1,189Asset
                retirement obligations
            
            
            **291**
            
            
            290Accrued
                pension and other benefits
            
            
            **268**
            
            
            257Other
                liabilities and deferred credits
            
            
            **179**
            
            
            144**Total
                deferred credits and other liabilities**
            
            
            **2,356**
            
            
            2,343**Commitments
                and contingencies (Note 14)****Total
                capitalization and liabilities**
            
            **$**
            **8,406**
            
            $
            8,318





See
      Notes
      to PEF Interim Financial Statements.


16


FLORIDA
      POWER CORPORATION


d/b/a
      PROGRESS ENERGY FLORIDA, INC.


**UNAUDITED
                STATEMENTS of CASH FLOWS**(in
                millions)Six
                Months Ended June 30
            
            **2006**
            
            2005**Operating
                activities**Net
                income
            
            **$**
            **140**
            
            $
            54Adjustments
                to reconcile net income to net cash provided by operating
                activitiesCharges
                for voluntary enhanced retirement program
            
            
            **−**
            
            
            90Depreciation
                and amortization
            
            
            **207**
            
            
            158Deferred
                income taxes and investment tax credits, net
            
            
            **(22**
            **)**
            
            (55
            )Deferred
                fuel cost
            
            
            **163**
            
            
            36Other
                adjustments to net income
            
            
            **10**
            
            
            23Cash
                (used) provided by changes in operating assets and
                liabilitiesReceivables
            
            
            **(43**
            **)**
            
            (42
            )Receivables
                from affiliated companies
            
            
            **2**
            
            
            5Inventories
            
            
            **(87**
            **)**
            
            (35
            )Prepayments
                and other current assets
            
            
            **8**
            
            
            (4
            )Accounts
                payable
            
            
            **51**
            
            
            34Payables
                to affiliated companies
            
            
            **(21**
            **)**
            
            10Other
                current liabilities
            
            
            **81**
            
            
            18Regulatory
                assets and liabilities
            
            
            **2**
            
            
            (54
            )Other
                operating activities
            
            
            **(4**
            **)**
            
            6**Net
                cash provided by operating activities**
            
            
            **487**
            
            
            244**Investing
                activities**Gross
                utility property additions
            
            
            **(371**
            **)**
            
            (253
            )Nuclear
                fuel additions
            
            
            **(6**
            **)**
            
            (34
            )Proceeds
                from sale of assets
            
            
            **3**
            
            
            42Purchases
                of available-for-sale securities and other investments
            
            
            **(329**
            **)**
            
            (177
            )Proceeds
                from sales of available-for-sale securities and other
                investments
            
            
            **284**
            
            
            177Changes
                in advances to affiliates
            
            
            **−**
            
            
            (26
            )Other
                investing activities
            
            
            **1**
            
            
            (4
            )**Net
                cash used in investing activities**
            
            
            **(418**
            **)**
            
            (275
            )**Financing
                activities**Proceeds
                from issuance of long-term debt, net
            
            
            **−**
            
            
            297Net
                decrease in short-term indebtedness
            
            
            **(102**
            **)**
            
            (32
            )Retirement
                of long-term debt
            
            
            **(2**
            **)**
            
            (57
            )Changes
                in advances from affiliates
            
            
            **11**
            
            
            (178
            )Dividends
                paid to parent
            
            
            **(118**
            **)**
            
            **−**Dividends
                paid on preferred stock
            
            
            **(1**
            **)**
            
            (1
            )Other
                financing activities
            
            
            **2**
            
            
            **−****Net
                cash (used) provided by financing activities**
            
            
            **(210**
            **)**
            
            29**Net
                decrease in cash and cash equivalents**
            
            
            **(141**
            **)**
            
            (2
            )**Cash
                and cash equivalents at beginning of period**
            
            
            **218**
            
            
            12**Cash
                and cash equivalents at end of period**
            
            **$**
            **77**
            
            $
            10





See
      Notes
      to PEF Interim Financial Statements.


17


PROGRESS
      ENERGY, INC.


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


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


**COMBINED**  **NOTES
      TO INTERIM FINANCIAL STATEMENTS**





**INDEX
      TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT**





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




**Registrant**
            **Applicable
                Notes**PEC
            1,
                2, 4 through 6, 8 through 10, and 12 through 14PEF
            1,
                2, 4 through 6, 8 through 10, and 12 through
                14


18


PROGRESS
      ENERGY, INC.


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


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


**COMBINED
      NOTES TO INTERIM FINANCIAL STATEMENTS**





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




1.  ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




A.  Organization




The
      Parent is a holding company headquartered in Raleigh, N.C. and is subject to
      the
      regulatory provisions of the Federal Energy Regulatory Commission (FERC).




Our
      reportable segments are: PEC, PEF, Progress Ventures, and Coal and Synthetic
      Fuels. Our PEC and PEF segments are primarily engaged in the generation,
      transmission, distribution and sale of electricity. Our Progress Ventures
      segment is primarily engaged in nonregulated electric generation, energy
      marketing activities and natural gas drilling and production. Our Coal and
      Synthetic Fuels segment is primarily engaged in the production and sale of
      coal-based solid synthetic fuel as defined under the Internal Revenue Code
      (the
      Code), the operation of synthetic fuel facilities for third parties, and coal
      terminal services. On May 22, 2006, we idled our synthetic fuel facilities
      (See
      Note 6). Through our other business units, we engage in other nonregulated
      business areas, which are included in our Corporate and Other segment (Corporate
      and Other).




PEC
      and
      PEF are public service corporations. PEC’s service territory covers portions of
      North Carolina and South Carolina and PEF’s covers portions of Florida. PEC’s
      subsidiaries are involved in insignificant nonregulated business activities.
      PEC
      is subject to the regulatory provisions of the North Carolina Utilities
      Commission (NCUC) and the Public Service Commission of South Carolina (SCPSC);
      PEF is subject to the regulatory provisions of the Florida Public Service
      Commission (FPSC). Both of the Utilities are subject to regulation by the United
      States Nuclear Regulatory Commission (NRC) and the FERC.




B.  Basis
      of
      Presentation




These
      financial statements have been prepared in accordance with accounting principles
      generally accepted in the United States of America (GAAP) for interim financial
      information and with the instructions to Form 10-Q and Regulation S-X.
      Accordingly, they do not include all of the information and footnotes required
      by GAAP for annual financial statements. The December 31, 2005 condensed balance
      sheet data was derived from audited financial statements but does not include
      all disclosures required by GAAP. Because the accompanying interim financial
      statements do not include all of the information and footnotes required by
      GAAP
      for annual financial statements, they should be read in conjunction with the
      audited financial statements and notes thereto included in the Progress
      Registrants’ annual report on Form 10-K for the fiscal year ended December 31,
      2005 (2005 Form 10-K).




In
      accordance with the provisions of Accounting Principles Board (APB) Opinion
      No.
      28, “Interim Financial Reporting” (APB No. 28), GAAP requires companies to apply
      a levelized effective tax rate to interim periods that is consistent with the
      estimated annual effective tax rate. The intra-period tax allocation, which
      will
      have no impact on total year net income, maintains an effective tax rate
      consistent with the estimated annual effective tax rate. The fluctuations in
      the
      effective tax rate for interim periods are primarily due to the recognition
      of
      synthetic fuel tax credits and seasonal fluctuations in energy sales and
      earnings from the Utilities. Income tax expense was increased (decreased) for
      the Progress Registrants for the three and six months ended June 30, 2006 and
      2005, as follows:




19




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Progress
                Energy
            
            **$**
            **3**
            
            $
            60
            
            **$**
            **19**
            
            $
            63PEC
            
            
            **(2**
            **)**
            
            3
            
            
            **(1**
            **)**
            
            3PEF
            
            
            **-**
            
            
            8
            
            
            -
            
            
            8





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




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Progress
                Energy
            
            **$**
            **69**
            
            $
            58
            
            **$**
            **134**
            
            $
            114PEC
            
            
            **21**
            
            
            20
            
            
            **43**
            
            
            41PEF
            
            
            **48**
            
            
            38
            
            
            **91**
            
            
            73





The
      amounts included in these financial statements are unaudited but, in the opinion
      of management, reflect all normal recurring adjustments necessary to fairly
      present the Progress Registrants’ 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 for 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, the reported amounts of revenues and expenses and the disclosure
      of
      contingent assets and liabilities at the date of the financial statements.
      Actual results could differ from those estimates.




Certain
      amounts for 2005 have been reclassified to conform to the 2006
      presentation.




C.  Consolidation
      of Variable Interest Entities




We
      consolidate all voting interest entities in which we own a majority voting
      interest and all variable interest entities for which we are the primary
      beneficiary in accordance with Financial Accounting Standards Board (FASB)
      Interpretation No. 46R, “Consolidation of Variable Interest Entities - An
      Interpretation of ARB No. 51” (FIN 46R).




Progress
      Energy




In
      addition to the variable interests listed below for PEC and PEF, we have
      interests through other subsidiaries in several variable interest entities
      for
      which we are not the primary beneficiary. These arrangements include investments
      in five limited liability partnerships and limited liability corporations.
      At
      June 30, 2006, the aggregate additional maximum loss exposure that we could
      be
      required to record in our income statement as a result of these arrangements
      was
      approximately $8 million, which represents our net remaining investment in
      the
      entities. The creditors of these variable interest entities do not have recourse
      to our general credit in excess of the aggregate maximum loss exposure.




PEC




PEC
      is
      the primary beneficiary of and consolidates two limited partnerships that
      qualify for federal affordable housing and historic tax credits under Section
      42
      of the Code. At June 30, 2006, the total assets of the two entities were $38
      million, the majority of which are collateral for the entities’ obligations and
      are included in miscellaneous other property and investments in the Consolidated
      Balance Sheets.




PEC
      has
      an interest in and consolidates a limited partnership that invests in 17
      low-income housing partnerships that qualify for federal and state tax credits.
      PEC also has an interest in one power plant resulting from long-term power
      purchase contracts. PEC has
      requested the necessary information to determine if the 17 partnerships and
      the
      power plant owner are variable interest entities or to identify the primary
      beneficiaries; all entities from which the necessary financial information




20


was
      requested declined to provide the information to PEC and accordingly, PEC has applied
      the information scope exception in FIN No. 46R, paragraph 4(g), to the 17
      partnerships and the power plant. PEC believes that if it is determined to
      be
      the primary beneficiary 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
      20 limited liability partnerships, limited liability corporations and venture
      capital funds and two building leases with special-purpose entities. At June
      30,
      2006, the aggregate maximum loss exposure that PEC could be required to record
      on its income statement as a result of these arrangements totals approximately
      $23 million, which primarily represents its net remaining investment in these
      entities. 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.
      See Note 2 of the 2005 Form 10-K for additional information.




PEF




PEF
      has
      interests in two variable interest entities for which PEF is not the primary
      beneficiary. These arrangements include investments in one venture capital
      fund
      and one building lease with a special-purpose entity. At June 30, 2006, the
      aggregate maximum loss exposure that PEF could be required to record in its
      income statement as a result of these arrangements was approximately $1 million.
      The creditors of these variable interest entities do not have recourse to the
      general credit of PEF in excess of the aggregate maximum loss exposure.




2.  NEW
      ACCOUNTING STANDARDS




*FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income
      Taxes”*




In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes” (FIN 48). Enterprises must adopt FIN 48 through an adjustment to
      retained earnings at the beginning of their first fiscal year that begins after
      December 15, 2006, which for us would be January 1, 2007. FIN 48 applies to
      all
      tax positions within the scope of SFAS No. 109, “Accounting for Income Taxes.” A
      two-step process is required for the application of FIN 48; recognition of
      the
      tax benefit based on a “more likely than not” threshold and measurement of the
      largest amount of tax benefit that is greater than 50 percent likely of being
      realized upon ultimate settlement with the taxing authority. FIN 48 also
      provides guidance on the related derecognition, classification, interest and
      penalties, accounting for interim periods, disclosure and transition of
      uncertain tax positions. We have not yet evaluated how FIN 48 will impact our
      various income tax positions and results of operations.




3.  DIVESTITURES




A.  DeSoto
      and Rowan Generation Facilities




On
      May 2,
      2006, our board of directors approved a plan to divest of two subsidiaries
      of
      Progress Ventures, Inc., DeSoto
      County Generating Co., LLC (DeSoto) and Rowan County Power, LLC (Rowan). DeSoto
      owns a 320 MW dual-fuel combustion turbine electric generation facility in
      DeSoto County, Florida and Rowan owns a 925 MW dual-fuel combined cycle and
      combustion turbine electric generation facility in Rowan County,
      N.C. On May
      8, 2006, we entered into definitive agreements to sell DeSoto and Rowan,
      including certain existing power supply contracts, to Southern Power Company,
      a
      subsidiary of Southern Company, for gross purchase prices of approximately
      $80
      million and $325 million, respectively. We expect to use the proceeds from
      the
      sales to reduce debt and for other corporate purposes.




The
      sale
      of DeSoto closed in the second quarter of 2006. The sale of Rowan is expected
      to
      close during the third quarter of 2006 and is subject to state and federal
      regulatory approvals and customary closing conditions. We recorded an after-tax
      loss on the sale of DeSoto of $30 million and an estimated after-tax loss on
      the
      sale of Rowan of $32 million.




The
      accompanying consolidated financial statements have been restated for all
      periods presented to reflect the operations of DeSoto and Rowan as discontinued
      operations. Interest expense has been allocated to discontinued operations
      based
      on their respective net assets, assuming a uniform debt-to-equity ratio across
      our operations. Interest expense allocated for the three




21


months
      ended June 30, 2006 and 2005 was $3 million and $4 million, respectively.
      Interest expense allocated for each of the six months ended June 30, 2006 and
      2005 was $7 million. We ceased recording depreciation upon classification of
      the
      assets as discontinued operations in May 2006. After-tax depreciation expense
      recorded by DeSoto and Rowan during the three months ended June 30, 2006 and
      2005 totaled $1 million and $2 million, respectively. After-tax depreciation
      expense recorded by DeSoto and Rowan during the six months ended June 30, 2006
      and 2005 totaled $3 million and $4 million, respectively. Results of
      discontinued operations were as follows:




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Revenues
            
            **$**
            **8**
            
            $
            15
            
            **$**
            **14**
            
            $
            25(Loss)
                Earnings before income taxes
            
            
            **(2**
            **)**
            
            1
            
            
            **(7**
            **)**
            
            (1
            )Income
                tax benefit (expense)
            
            
            **1**
            
            
            (2
            )
            
            **1**
            
            
            (2
            )Net
                loss from discontinued operations
            
            
            **(1**
            **)**
            
            (1
            )
            
            **(6**
            **)**
            
            (3
            )Estimated
                loss on disposal of discontinued operations, including income tax
                benefit
                of $38
            
            
            **(62**
            **)**
            
            -
            
            
            **(62**
            **)**
            
            -Loss
                from discontinued operations
            
            **$**
            **(63**
            **)**
            $
            (1
            )
            **$**
            **(68**
            **)**
            $
            (3
            )





B.  Progress
      Telecom, LLC




On
      March
      20, 2006, we completed the sale of Progress Telecom, LLC (PT LLC) to Level
      3
      Communications, Inc. (Level 3). We received gross proceeds comprised of cash
      of
      $69 million and approximately 20 million shares of Level 3 common stock valued
      at an estimated $66 million on the date of the sale. Our net proceeds from
      the
      sale of approximately $70 million, after consideration of minority interest,
      were used to reduce debt. Prior to the sale, we had a 51 percent interest in
      PT
      LLC. See Note 12 for a discussion of the subsequent sale of the Level 3
      stock.




Based
      on
      the gross proceeds associated with the sale and after consideration of minority
      interest, we recorded an after-tax gain on disposal of $24 million during the
      three months ended March 31, 2006. During the three months ended June 30, 2006,
      we recorded an additional after-tax gain of $5 million in connection with
      certain tax matters resulting in a total after-tax gain of $29 million for
      the
      six months ended June 30, 2006.




The
      accompanying consolidated financial statements have been restated for all
      periods presented to reflect the operations of PT LLC as discontinued
      operations. Interest expense has been allocated to discontinued operations
      based
      on the net assets of PT LLC, assuming a uniform debt-to-equity ratio across
      our
      operations. Interest expense allocated for the six months ended June 30, 2005
      was $1 million. Interest expense allocated for the three months ended June
      30,
      2005 was less than $1 million. We ceased recording depreciation upon
      classification of the assets as discontinued operations in January 2006.
      After-tax depreciation expense recorded by PT LLC during the six months ended
      June 30, 2006 and 2005 was $1 million and $4 million, respectively. After-tax
      depreciation expense recorded for the three months ended June 30, 2005 was
      $2
      million. Results of discontinued operations were as follows:




Three
                Months Ended June 30,
            
            Six
                Months EndedJune
                30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Revenues
            
            **$**
            **-**
            
            $
            16
            
            **$**
            **18**
            
            $
            32Earnings
                before income taxes and minority interest
            
            
            **2**
            
            
            3
            
            
            **3**
            
            
            3Income
                tax expense
            
            
            -
            
            
            -
            
            
            **(4**
            **)**
            
            -Minority
                interest
            
            
            **(1**
            **)**
            
            (1
            )
            
            **(4**
            **)**
            
            (1
            )Net
                earnings (loss) from discontinued operations
            
            
            **1**
            
            
            2
            
            
            **(5**
            **)**
            
            2Estimated
                gain on disposal of discontinued operations, including income tax
                benefit
                (expense) of $4 and $(9), respectively, and minority interest of
                $36
            
            
            **5**
            
            
            -
            
            
            **29**
            
            
            -Earnings
                from discontinued operations
            
            **$**
            **6**
            
            $
            2
            
            **$**
            **24**
            
            $
            2





22


In
      connection with the sale, PEC and PEF provided indemnification against costs
      associated with certain asset performances to Level 3. See general discussion
      of
      guarantees at Note 14A. The ultimate resolution of these matters could result
      in
      adjustments to the gain on sale in future periods.




C.  Progress
      Rail Divestiture




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




Based
      on
      the gross proceeds associated with the sale, we recorded an estimated after-tax
      loss on disposal of $24 million during the six months ended June 30, 2005.
      During the remainder of 2005, we recorded an additional loss of $1 million
      after
      finalizing the working capital adjustment and other operating estimates. During
      the six months ended June 30, 2006, we recorded an additional after-tax loss
      on
      disposal of $3 million in connection with guarantees and indemnifications
      provided by Progress Fuels Corporation (Progress Fuels) and Progress Energy
      for
      certain legal, tax and environmental matters to One Equity Partners, LLC. The
      ultimate resolution of these matters could result in adjustments to the loss
      on
      sale in future periods. See general discussion of guarantees at Note
      14A.




The
      accompanying consolidated financial statements reflect the operations of
      Progress Rail as discontinued operations. Interest expense has been allocated
      to
      discontinued operations based on the net assets of Progress Rail, assuming
      a
      uniform debt-to-equity ratio across our operations. Interest expense allocated
      for the six months ended June 30, 2005 was $4 million. We ceased recording
      depreciation upon classification of the assets as discontinued operations in
      February 2005. After-tax depreciation expense during the six months ended June
      30, 2005 was $3 million. Results of discontinued operations were as
      follows:




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Revenues
            
            **$**
            **-**
            
            $
            -
            
            **$**
            **-**
            
            $
            358Earnings
                before income taxes
            
            
            **-**
            
            
            -
            
            
            **-**
            
            
            8Income
                tax expense
            
            
            **-**
            
            
            -
            
            
            **-**
            
            
            (3
            )Net
                earnings from discontinued operations
            
            
            **-**
            
            
            -
            
            
            **-**
            
            
            5Estimated
                loss on disposal of discontinued operations, including income tax
                benefit
                of $2 and $2 for 2006, respectively, and $- and $14 for 2005,
                respectively
            
            
            **(3**
            **)**
            
            (7
            )
            
            **(3**
            **)**
            
            (24
            )Loss
                from discontinued operations
            
            **$**
            **(3**
            **)**
            $
            (7
            )
            **$**
            **(3**
            **)**
            $
            (19
            )





D.  Coal
      Mines Divestiture




On
      November 14, 2005, our board of directors approved a plan to divest five
      subsidiaries of Progress Fuels engaged in the coal mining business. On May
      1,
      2006, we sold certain net assets of three of our coal mining businesses to
      Alpha
      Natural Resources, LLC for gross proceeds of $23 million plus an estimated
      $4
      million working capital adjustment. As a result, during the six months ended
      June 30, 2006, we recorded an after-tax loss of $17 million on the sale of
      these
      assets. The remaining coal mining operations are expected to be sold by the
      end
      of 2006.





The
      accompanying consolidated financial statements have been restated for all
      periods presented to reflect the coal mining operations as discontinued
      operations. Interest expense has been allocated to discontinued operations
      based
      on the net assets of the coal mines, assuming a uniform debt-to-equity ratio
      across our operations. Interest expense allocated was $1 million for the three
      months ended June 30, 2005. Interest expense allocated was $1 million for each
      of the six months ended June 30, 2006 and 2005. We ceased recording depreciation
      expense upon classification of the coal mining operations as discontinued
      operations in November 2005. After-tax depreciation expense during the three
      months and six months ended June 30, 2005 was $3 million and $5 million,
      respectively. Results of discontinued operations were as
      follows:


23





Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Revenues
            
            **$**
            **24**
            
            $
            44
            
            **$**
            **59**
            
            $
            94Earnings
                (loss) before income taxes
            
            
            **1**
            
            
            (2
            )
            
            **(6**
            **)**
            
            (1
            )Income
                tax benefit
            
            
            **-**
            
            
            1
            
            
            **2**
            
            
            1Net
                earnings (loss) from discontinued operations
            
            
            **1**
            
            
            (1
            )
            
            **(4**
            **)**
            
            -Estimated
                loss on disposal of discontinued operations, including income tax
                benefit
                of $5 and $13
            
            
            **(2**
            **)**
            
            -
            
            
            **(17**
            **)**
            
            -Loss
                from discontinued operations
            
            **$**
            **(1**
            **)**
            $
            (1
            )
            **$**
            **(21**
            **)**
            $
            -





E.
            Net
                Assets of Discontinued Operations




Included
      in net assets of discontinued operations are the assets and liabilities of
      Rowan
      and the remaining coal mining operations at June 30, 2006 and the assets and
      liabilities of DeSoto and Rowan, PT LLC and the five coal mining operations
      at
      December 31, 2005. The major balance sheet classes included in assets and
      liabilities of discontinued operations in the Consolidated Balance Sheet were
      as
      follows:




(in
                millions)
            
            **June
                30, 2006**
            
            December
                31, 2005Accounts
                receivable
            
            **$**
            **14**
            
            $
            18Inventory
            
            
            **16**
            
            
            25Other
                current assets
            
            
            **2**
            
            
            5Total
                property, plant and equipment, net
            
            
            **341**
            
            
            659Total
                other assets
            
            
            **11**
            
            
            15Assets
                of discontinued operations
            
            **$**
            **384**
            
            $
            722Accounts
                payable
            
            **$**
            **2**
            
            $
            12Accrued
                expenses
            
            
            **10**
            
            
            21Long-term
                liabilities
            
            
            **20**
            
            
            58Liabilities
                of discontinued operations
            
            **$**
            **32**
            
            $
            91





4.  REGULATORY
      MATTERS




A.  PEC
      Retail Rate Matters




*FUEL
      COST RECOVERY*




On
      May 3,
      2006, PEC filed with the SCPSC for an increase in the fuel rate charged to
      its
      South Carolina customers for under-recovered fuel costs and to meet future
      expected fuel costs. On June 16, 2006, the SCPSC approved a settlement agreement
      filed jointly by PEC and all other parties to the proceedings. The settlement
      agreement provided for a $23 million, or 4.6 percent, increase in rates. The
      increase was $4 million less than PEC originally requested due to adjustment
      of
      future fuel cost estimates agreed upon during settlement. Effective July 1,
      2006, residential electric bills increased by $3.01 per 1,000 kWhs for fuel
      cost
      recovery.




On
      June
      2, 2006, PEC filed with the NCUC for an increase in the fuel rate charged to
      its
      North Carolina customers. PEC asked the NCUC to approve a $292 million, or
      11.0
      percent, increase in rates. PEC requested the increase for under-recovered
      fuel
      costs and to meet future expected fuel costs. If
      the
      fuel rate increase is approved, residential electric bills would increase by
      $8.04 per 1,000 kWhs for fuel cost recovery beginning October 1, 2006. We cannot
      predict the outcome of this matter.




On
      July
      25, 2006, PEC, the NCUC Public Staff and Carolinas Industrial Group for Fair
      Utility Rates II jointly filed a proposed settlement agreement with the NCUC
      to
      resolve issues concerning PEC’s 2006 North Carolina fuel adjustment proceeding.
      Other intervening parties to the fuel proceeding have not agreed to the proposed
      settlement. The
      settlement proposes that PEC collect its fuel cost undercollection over a
      three-year period beginning October 1,




24


2006.
      Under the proposed settlement, PEC agreed to reduce its proposed billing rate
      during the year ending September 30, 2007. PEC would be allowed to calculate
      and
      collect interest at 6% on the difference between its collection factor in the
      original request to the NCUC and the factor included in the proposed settlement
      agreement. Also included in the settlement are increased billing rates for
      the
      2007 and 2008 proceedings that will recover the undercollected fuel balance
      over
      the three-year period. These rates are subject to change based upon market
      conditions. Hearings on this matter are scheduled for August 9, 2006 with an
      order expected in September 2006. If approved, the increase would take effect
      October 1, 2006. We cannot predict the outcome of this matter.




B.  PEF
      Retail Rate Matters




*STORM
      COST RECOVERY*




On
      June
      1, 2005, the governor of Florida signed into law a bill that allows utilities
      to
      petition the FPSC to use securitized bonds to recover storm-related costs.
      PEF
      has decided not to pursue the issuance of securitized bonds either to recover
      its 2004 storm-related costs or to replenish its storm reserve fund. PEF’s base
      rates provide $6 million annually for storm reserve replenishment. On April
      25,
      2006, PEF entered into a settlement agreement with the interveners in its storm
      cost recovery docket that would allow PEF to extend its current two-year storm
      surcharge, which equals approximately $3.61 on the average residential monthly
      customer bill of 1,000 kWhs, for an additional 12-month period. The extension
      would replenish the existing storm reserve by an estimated additional $130
      million. In the event future storms cause the reserve to be depleted, the
      settlement would further allow PEF to automatically collect from customers
      80
      percent of any future depletion of the storm reserve pending the FPSC’s ultimate
      review and determination of the actual costs incurred and recoverable by PEF.
      The FPSC has the right to review PEF’s storm costs for prudence and has the
      authority to determine the manner and timing of recovery. The parties have
      sought the FPSC’s approval of the settlement and the matter is scheduled for the
      FPSC’s August 29, 2006 meeting. We cannot predict the outcome of this
      matter.




*OTHER
      MATTERS*




On
      November 3, 2004, the FPSC approved PEF’s petition for Determination of Need for
      the construction of a fourth unit at PEF’s Hines Energy Complex and associated
      transmission infrastructure. Hines Unit 4, which has a projected commercial
      operation date of December 2007, is needed to maintain electric system
      reliability and integrity and to continue to provide adequate electricity to
      ratepayers. The estimated total in-service cost of Hines Unit 4 approved as
      part
      of the Determination of Need was $286 million. If the actual cost is less than
      the original estimate, customers will receive the benefit of cost under-runs.
      Any costs that exceed the original estimate will not be recoverable absent
      extraordinary circumstances as found by the FPSC in subsequent proceedings.
      The
      current estimate of in-service cost exceeds the initial project estimate by
      approximately 10 percent due to what we believe to be extraordinary
      circumstances. Therefore, we believe that it is not probable that recovery
      of
      these costs will be disallowed by the FPSC in subsequent proceedings. We cannot
      predict the outcome of this matter.




C.  Other
      Matters




*REGIONAL
      TRANSMISSION ORGANIZATION*




PEF
      was
      one of three major investor-owned Florida utilities that formed a regional
      transmission organization (RTO), GridFlorida, in 2000. A cost-benefit study
      conducted during 2005 concluded that the GridFlorida RTO was not cost effective
      for jurisdictional customers and shifted benefits to nonjurisdictional
      customers. In light of these findings, the GridFlorida applicants filed a motion
      to withdraw the GridFlorida compliance filing and filed a petition to close
      the
      docketed proceeding on January 27, 2006. At a hearing held on April 18, 2006,
      the FPSC approved the request to close the docketed proceeding and the docket
      was closed effective May 9, 2006. The closing of the docketed proceeding did
      not
      impact PEF’s results of operations as PEF has fully recovered its GridFlorida
      startup costs from retail ratepayers. GridFlorida was dissolved on June 12,
      2006. In light of the FPSC’s decision, the FERC also terminated its docket on
      June 19, 2006.




*NUCLEAR
      LICENSE RENEWAL*




On
      June
      26, 2006, PEC’s Brunswick Nuclear Plant (Brunswick) received 20-year extensions
      from the NRC on the operating licenses for its two nuclear reactors. The
      operating license of Unit 1 extends until 2036 and Unit 2 until




25


2034.




5.  EQUITY
      AND COMPREHENSIVE INCOME




A.  Earnings
      Per Common Share




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




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Weighted-average
                common shares - basic
            
            
            **250**
            
            
            246
            
            
            **250**
            
            
            245Net
                effect of dilutive stock-based compensation plans
            
            
            **1**
            
            
            1
            
            
            **-**
            
            
            1Weighted-average
                shares - fully dilutive
            
            
            **251**
            
            
            247
            
            
            **250**
            
            
            246





B.  Comprehensive
      Income




Progress
      Energy




Three
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005Net
                loss
            
            **$**
            **(47**
            **)**
            $
            (1
            )Other
                comprehensive income (loss)Reclassification
                adjustments included in net incomeChange
                in cash flow hedges (net of tax expense of $1
              and
                $2, respectively)
            
            
            **3**
            
            
            3Changes
                in net unrealized gains on cash flow hedges (net of tax expense of
                $9 and
                $26, respectively)
            
            
            **5**
            
            
            44Other
                (net of tax (benefit) expense of ($2) and $1,
                respectively)
            
            
            **(5**
            **)**
            
            (1
            )Other
                comprehensive income
            
            
            **3**
            
            
            46Comprehensive
                (loss) income
            
            **$**
            **(44**
            **)**
            $
            45





Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005Net
                (loss) income
            
            **$**
            **(2**
            **)**
            $
            92Other
                comprehensive (loss) incomeReclassification
                adjustments included in net incomeChange
                in cash flow hedges (net of tax (benefit) expense of ($1)
              and
                $3, respectively)
            
            
            **(1**
            **)**
            
            5Foreign
                currency translation adjustments included in discontinued
                operations
            
            
            **−**
            
            
            (6
            )Minimum
                pension liability adjustment included in discontinued operations
                (net of
                tax expense of $1)
            
            
            **−**
            
            
            1Changes
                in net unrealized gains on cash flow hedges (net of tax expense of
                $16 and
                $31, respectively)
            
            
            **18**
            
            
            50Other
                (net of tax expense of $− and $1, respectively)
            
            
            **−**
            
            
            1Other
                comprehensive income
            
            
            **17**
            
            
            51Comprehensive
                income
            
            **$**
            **15**
            
            $
            143





26


PEC


Three
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005Net
                income
            
            **$**
            **76**
            
            $
            67Other
                comprehensive (loss) incomeChanges
                in net unrealized gains on cash flow hedges (net of tax
              benefit
                of $1)
            
            
            **(2**
            **)**
            
            −Other
                (net of tax benefit of $− and $−, respectively)
            
            
            **(1**
            **)**
            
            1Other
                comprehensive (loss) income
            
            
            **(3**
            **)**
            
            1Comprehensive
                income
            
            **$**
            **73**
            
            $
            68





Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005Net
                income
            
            **$**
            **162**
            
            $
            183Other
                comprehensive (loss) incomeChanges
                in net unrealized gains on cash flow hedges (net of tax
              (benefit)
                expense of ($1) and $1, respectively)
            
            
            **(2**
            **)**
            
            2Other
                (net of tax benefit of $− and $−, respectively)
            
            
            **−**
            
            
            1Other
                comprehensive (loss) income
            
            
            **(2**
            **)**
            
            3Comprehensive
                income
            
            **$**
            **160**
            
            $
            186





PEF




Comprehensive
      income and net income for PEF for the three months ended June 30, 2006 and
      2005
      were $87 million and $10 million, respectively, and for the six months ended
      June 30, 2006 and 2005 were $140 million and $54 million, respectively.




C.  Common
      Stock




At
      December 31, 2005, we had 500 million shares of common stock authorized under
      our charter, of which approximately 252 million were outstanding. For the three
      months ended June 30, 2006 and 2005, respectively, we issued approximately
      0.7
      million shares and 2.6 million shares of common stock resulting in approximately
      $ 32 million
      and $111 million in proceeds, net of purchases of restricted shares, primarily
      to meet the requirements of the Progress Energy 401(k) Savings and Stock
      Ownership Plan (401(k) Plan) and the Investor Plus Stock Purchase Plan. For
      the
      six months ended June 30, 2006 and 2005, respectively, we issued approximately
      1.4 million shares and 4.0 million shares of common stock resulting in
      approximately $ 60 million
      and $171 million in proceeds, net of purchases of restricted shares. Included
      in
      these amounts were approximately 1.0 million shares and 3.9 million shares
      for
      net proceeds of approximately $46 million and $169 million, respectively, to
      meet the requirements of the 401(k) Plan and the Investor Plus Stock Purchase
      Plan. At December 31, 2005, we had approximately 58 million unissued shares
      of
      common stock reserved, primarily to satisfy the requirements of our stock plans.
      In 2002, the board of directors authorized meeting the requirements of the
      401(k) Plan and the Investor Plus Stock Purchase Plan with original issue
      shares.




D.  Stock-Based
      Compensation




As
      discussed in Note 10 of the 2005 Form 10-K, we adopted SFAS No. 123R,
“Share-Based Payment” (SFAS No. 123R), as of July 1, 2005, using the required
      modified prospective method. Under that method we began recording compensation
      expense as of July 1, 2005. Previously, entities could elect to continue
      accounting for such awards at their grant date intrinsic value under APB Opinion
      No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and we made
      that election. The intrinsic value method resulted in our recording no
      compensation expense for stock options granted to employees. We curtailed our
      stock option program in 2004 and replaced that compensation program with other
      programs.




27


Progress
      Energy




The
      information below should be read in conjunction with the plan descriptions
      and
      other pertinent information disclosed in Note 10 of the 2005 Form 10-K. The
      following table illustrates the effect on our net income and earnings per share
      if the fair value method had been applied to all outstanding and nonvested
      awards during the three and six months ended June 30, 2005:




(in
                millions except per share data)
            Three
                Months Ended June 30, 2005
            
            Six
                Months Ended
              June
                30, 2005Net
                (loss) income, as reported
            $
            (1
            )
            $
            92Deduct:
                Total stock option expense determined under fair
              valuemethod
                for all awards, net of related tax effects
            
            1
            
            
            2Pro
                forma net (loss) income
            $
            (2
            )
            $
            90(Loss)
                Earnings per shareBasic
                - as reported
            $
            (0.01
            )
            $
            0.37Basic
                - pro forma
            $
            (0.01
            )
            $
            0.36Diluted
                - as reported
            $
            (0.01
            )
            $
            0.37Diluted
                - pro forma
            $
            (0.01
            )
            $
            0.36





PEC




PEC
      participates in Progress Energy’s stock option and other stock-based
      compensation plans. The information below should be read in conjunction with
      the
      plan descriptions and other pertinent information disclosed in Note 10 of the 2005 Form
      10-K. The following table illustrates the effect on PEC’s net income if the fair
      value method had been applied to all outstanding and nonvested awards during
      the
      three and six months ended June 30, 2005:




(in
                millions )
            
            Three
                Months Ended June 30, 2005
            
            Six
                Months Ended
              June
                30, 2005Net
                income, as reported
            
            $
            67
            
            $
            183Deduct:
                Total stock option expense determined under fair
              value
                method for all awards, net of related tax effects
            
            
            1
            
            
            2Pro
                forma net income
            
            $
            66
            
            $
            181





PEF




PEF
      participates in Progress Energy’s stock option and other stock-based
      compensation plans. The information below should be read in conjunction with
      the
      plan descriptions and other pertinent information disclosed in Note 10 of the
      2005 Form 10-K. The following table illustrates the effect on PEF’s net income
      if the fair value method had been applied to all outstanding and nonvested
      awards during the three and six months ended June 30, 2005:




(in
                millions)
            
            Three
                Months Ended June 30, 2005
            
            Six
                Months Ended
              June
                30, 2005Net
                income, as reported
            
            $
            10
            
            $
            54Deduct:
                Total stock option expense determined under fair
              value
                method for all awards, net of related tax effects
            
            
            -
            
            
            1Pro
                forma net income
            
            $
            10
            
            $
            53





6.  GOODWILL
      AND OTHER INTANGIBLE ASSETS




As
      discussed in Note 8 of the 2005 Form 10-K, we perform annual goodwill impairment
      tests in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”
(SFAS No. 142).




For
      our
      Progress Ventures segment, the goodwill impairment tests were performed at
      the
      reporting unit level of our




28


Effingham,
      Monroe, Walton and Washington nonregulated generation plants (Georgia
      Region), which is one level below the Progress Ventures segment. As a result
      of
      our evaluation of certain business opportunities that may impact the future
      cash
      flows of our Georgia Region operations, we performed an interim goodwill
      impairment test during the first quarter of 2006. We
      estimated the fair value of that reporting unit using the expected present
      value
      of future cash flows. As
      a
      result of that test, we
      recognized a pre-tax goodwill impairment charge of $64 million ($39 million
      after-tax) during the first quarter of 2006, which is reported within impairment
      of assets on the Consolidated Statements of Income.




Under
      SFAS No. 142, all goodwill is assigned to our reporting units that are expected
      to benefit from the synergies of the business combination. The changes in the
      carrying amount of goodwill, by reportable segment, were as
      follows:




(in
                millions)
            
            PEC
            
            PEF
            
            Progress
                Ventures
            
            TotallBalance
                at January 1, 2005
            
            $
            1,922
            
            $
            1,733
            
            $
            64
            
            $
            3,719Balance
                at December 31, 2005
            
            
            1,922
            
            
            1,733
            
            
            64
            
            
            3,719Impairment
            
            
            -
            
            
            -
            
            
            (64
            )
            
            (64
            )**Balance
                at June 30, 2006**
            
            **$**
            **1,922**
            
            **$**
            **1,733**
            
            **$**
            **-**
            
            **$**
            **3,655**





The
      gross
      carrying amount and accumulated amortization of intangible assets at June 30,
      2006 and December 31, 2005 were as follows:




**June
                30, 2006**
            
            December
                31, 2005(in
                millions)
            
            **Gross
                Carrying Amount**
            
            **Accumulated
                Amortization**
            
            Gross
                Carrying Amount
            
            Accumulated
                AmortizationSynthetic
                fuel intangibles
            
            **$**
            **107**
            
            **$**
            **(107**
            **)**
            $
            134
            
            $
            (98
            )Power
                agreements acquired
            
            
            **188**
            
            
            **(27**
            **)**
            
            188
            
            
            (19
            )Other
            
            
            **86**
            
            
            **(13**
            **)**
            
            84
            
            
            (12
            )Total
            
            **$**
            **381**
            
            **$**
            **(147**
            **)**
            $
            406
            
            $
            (129
            )





We
      apply
      SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
(SFAS No. 144), for the accounting and reporting of impairment or disposal
      of
      long-lived assets. We have monitored our synthetic fuel intangibles for
      impairment and had previously determined that no impairment of these assets
      was
      required. **** On
      May
      22, 2006, we idled our synthetic fuel facilities due to significant uncertainty
      surrounding synthetic fuel production. With the idling of these facilities,
      we
      performed another impairment evaluation of the intangible assets, which were
      comprised primarily of capitalized acquisition costs (See Note 7 for impairment
      of related long-lived assets). The impairment test considered numerous factors
      including, among other things, continued high oil prices, the continued
      uncertainty of whether federal legislation will be enacted that would provide
      assurance that tax credits would exist for 2006 production and the continued
      “idle” state of our synthetic fuel facilities. We
      estimated the fair value using the expected present value of future cash flows. Based
      on
      the results of the impairment test, we recorded a pre-tax impairment charge
      of
      $27 million ($17 million after-tax) during the quarter ended June 30, 2006,
      which is reported within impairment of assets on the Consolidated Statements
      of
      Income. This charge represents the entirety of the synthetic fuels intangible
      assets; these assets had been reported within the Coal and Synthetic Fuels
      segment.




Certain
      intangible assets with net carrying values of $25 million at December 31, 2005,
      related to DeSoto and Rowan, were reclassified to net assets of discontinued
      operations during the second quarter of 2006.




7.  IMPAIRMENT
      OF LONG-LIVED ASSETS




Concurrent
      with the synthetic fuels intangibles impairment evaluation discussed in Note
      6,
      we also performed an impairment evaluation of related long-lived assets during
      the second quarter of 2006. Based on the results of the impairment test, we
      recorded a pre-tax impairment charge of $64 million ($38 million after-tax)
      during the quarter ended June 30, 2006, which is reported within impairment
      of
      assets on the Consolidated Statements of Income. This charge represents the
      entirety of the asset carrying value of our synthetic fuel manufacturing
      facilities, as well as a portion of the asset carrying value associated with
      the
      river terminals at which the synthetic fuel manufacturing facilities are
      located. These assets had been reported within the Coal and Synthetic Fuels
      segment.




29


8.  DEBT
      AND CREDIT FACILITIES AND FINANCING ACTIVITIES




Changes
      to Progress Energy’s, PEC’s and PEF’s debt and credit facilities and financing
      activities since December 31, 2005, are described below.




On
      January 13, 2006, Progress Energy issued $300 million of 5.625% Senior Notes
      due
      2016 and $100 million of Series A Floating Rate Senior Notes due 2010. These
      senior notes are unsecured. Interest on the Floating Rate Senior Notes will
      be
      based on three-month London Inter Bank Offering Rate (LIBOR) plus 45 basis
      points and will be reset quarterly. We used the net proceeds from the sale
      of
      these senior notes and a combination of available cash and commercial paper
      proceeds to retire the $800 million aggregate principal amount of our 6.75%
      Senior Notes on March 1, 2006. Prior to the application of proceeds as described
      above, we invested the net proceeds in short-term, interest-bearing,
      investment-grade securities.




Progress
      Energy entered into a new $800 million 364-day credit agreement on November
      21,
      2005, which was restricted for the retirement of $800 million of 6.75% Senior
      Notes due March 1, 2006. On March 1, 2006, we retired $800 million of our 6.75%
      Senior Notes, thus effectively terminating the 364-day credit
      agreement.




On
      March
      31, 2006, Progress Energy, as a well-known seasoned issuer, filed a shelf
      registration statement with the SEC. The registration statement became effective
      upon filing with the SEC and will allow Progress Energy to issue an
      indeterminate number or amount of various securities, including Senior Debt
      Securities, Junior Subordinated Debentures, Common Stock, Preferred Stock,
      Stock
      Purchase Contracts, Stock Purchase Units, and Trust Preferred Securities and
      Guarantees. The board of directors has authorized the issuance and sale of
      up to
      $1 billion aggregate principal amount of various securities off this new shelf
      registration statement, in addition to the $679 million of various securities
      which were not sold from our prior shelf registration statement. Therefore,
      effective March 31, 2006, Progress Energy has the authority to issue and sell
      up
      to $1.679 billion aggregate principal amount of various securities.




On
      May 3,
      2006, Progress Energy restructured its existing $1.13 billion five-year
      revolving credit agreement (RCA) with a syndication of financial institutions.
      The new RCA is scheduled to expire on May 3, 2011, and is replacing an existing
      $1.13 billion five-year facility, which was terminated effective May 3, 2006.
      The Progress Energy RCA will continue to be used to provide liquidity support
      for Progress Energy’s issuances of commercial paper and other short-term
      obligations. The new RCA still includes a defined maximum total debt to capital
      ratio of 68 percent and contains various cross-default and other acceleration
      provisions. However, the new RCA no longer includes a material adverse change
      representation for borrowings or a financial covenant for interest coverage.
      Fees and interest rates under the RCA will continue to be determined based
      upon
      the credit rating of Progress Energy’s long-term unsecured senior
      noncredit-enhanced debt, currently rated as Baa2 by Moody’s and BBB- by
      S&P.




On
      May 3,
      2006, PEC’s five-year $450 million credit facility was amended to take advantage
      of favorable market conditions and reduce the pricing associated with the
      facility. Fees and interest rates under the RCA will continue to be determined
      based upon the credit rating of PEC’s long-term unsecured senior
      noncredit-enhanced debt, currently rated as Baa1 by Moody’s and BBB- by S&P.
      The amended PEC RCA is still scheduled to expire on June 28, 2010.




On
      May 3,
      2006, PEF’s five-year $450 million credit facility was amended to take advantage
      of favorable market conditions and reduce the pricing associated with the
      facility. Fees and interest rates under the RCA will continue to be determined
      based upon the credit rating of PEF’s long-term unsecured senior
      noncredit-enhanced debt, currently rated as A3 by Moody’s and BBB- by S&P.
      The amended PEF RCA is still scheduled to expire on March 28, 2010.




9.  BENEFIT
      PLANS




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




30


Progress
      Energy


Pension
                Benefits
            
            Other
                Postretirement BenefitsThree
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Service
                cost
            
            **$**
            **12**
            
            $
            15
            
            **$**
            **2**
            
            $
            3Interest
                cost
            
            
            **29**
            
            
            29
            
            
            **9**
            
            
            8Expected
                return on plan assets
            
            
            **(36**
            **)**
            
            (37
            )
            
            **(1**
            **)**
            
            (1
            )Amortization
                of actuarial loss
            
            
            **9**
            
            
            6
            
            
            **2**
            
            
            1Other
                amortization, net
            
            
            **-**
            
            
            1
            
            
            **-**
            
            
            **-**Net
                periodic cost
            
            
            **14**
            
            
            14
            
            
            **12**
            
            
            11Additional
                (benefit) cost recognition(a)
            
            
            **(3**
            **)**
            
            (4
            )
            
            **1**
            
            
            1Net
                periodic cost recognized
            
            **$**
            **11**
            
            $
            10
            
            **$**
            **13**
            
            $
            12





Pension
                Benefits
            
            Other
                Postretirement BenefitsSix
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Service
                cost
            
            **$**
            **23**
            
            $
            30
            
            **$**
            **4**
            
            $
            6Interest
                cost
            
            
            **58**
            
            
            57
            
            
            **17**
            
            
            16Expected
                return on plan assets
            
            
            **(72**
            **)**
            
            (73
            )
            
            **(3**
            **)**
            
            (3
            )Amortization
                of actuarial loss
            
            
            **18**
            
            
            12
            
            
            **5**
            
            
            2Other
                amortization, net
            
            
            **1**
            
            
            1
            
            
            **1**
            
            
            1Net
                periodic cost
            
            
            **28**
            
            
            27
            
            
            **24**
            
            
            22Additional
                (benefit) cost recognition(a)
            
            
            **(7**
            **)**
            
            (8
            )
            
            **1**
            
            
            1Net
                periodic cost recognized
            
            **$**
            **21**
            
            $
            19
            
            **$**
            **25**
            
            $
            23





(a)
            Relates
                to the acquisition of Florida Progress. See Note 16B to the 2005
                Form
                10-K.




In
      addition, in the second quarter of 2005, the Company recorded costs for special
      termination benefits related to its voluntary enhanced retirement program of
      approximately $122 million for pension benefits and $19 million for other
      postretirement benefits.




PEC


Pension
                Benefits
            
            Other
                Postretirement BenefitsThree
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Service
                cost
            
            **$**
            **6**
            
            $
            7
            
            **$**
            **1**
            
            $
            2Interest
                cost
            
            
            **13**
            
            
            13
            
            
            **5**
            
            
            4Expected
                return on plan assets
            
            
            **(15**
            **)**
            
            (16
            )
            
            **(1**
            **)**
            
            (1
            )Amortization
                of actuarial loss
            
            
            **3**
            
            
            1
            
            
            **1**
            
            
            **-**Other
                amortization, net
            
            
            **-**
            
            
            1
            
            
            **-**
            
            
            **-**Net
                periodic cost
            
            **$**
            **7**
            
            $
            6
            
            **$**
            **6**
            
            $
            5





31





Pension
                Benefits
            
            Other
                Postretirement BenefitsSix
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Service
                cost
            
            **$**
            **11**
            
            $
            13
            
            **$**
            **2**
            
            $
            3Interest
                cost
            
            
            **25**
            
            
            27
            
            
            **9**
            
            
            8Expected
                return on plan assets
            
            
            **(29**
            **)**
            
            (31
            )
            
            **(2**
            **)**
            
            (2
            )Amortization
                of actuarial loss
            
            
            **7**
            
            
            2
            
            
            **2**
            
            
            1Other
                amortization, net
            
            
            **1**
            
            
            2
            
            
            **1**
            
            
            **-**Net
                periodic cost
            
            **$**
            **15**
            
            $
            13
            
            **$**
            **12**
            
            $
            10





In
      addition, in the second quarter of 2005, PEC recorded special termination
      benefits related to the voluntary enhanced retirement program of approximately
      $21 million for pension benefits and $8 million for other postretirement
      benefits.




PEF


Pension
                Benefits
            
            Other
                Postretirement BenefitsThree
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Service
                cost
            
            **$**
            **4**
            
            $
            6
            
            **$**
            **1**
            
            $
            1Interest
                cost
            
            
            **12**
            
            
            11
            
            
            **3**
            
            
            3Expected
                return on plan assets
            
            
            **(19**
            **)**
            
            (18
            )
            
            **-**
            
            
            **-**Amortization
                of actuarial loss
            
            
            **2**
            
            
            **-**
            
            
            **-**
            
            
            **-**Other
                amortization, net
            
            
            **-**
            
            
            **-**
            
            
            **1**
            
            
            1Net
                periodic (benefit) cost
            
            **$**
            **(1**
            **)**
            $
            (1
            )
            **$**
            **5**
            
            $
            5





Pension
                Benefits
            
            Other
                Postretirement BenefitsSix
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Service
                cost
            
            **$**
            **8**
            
            $
            11
            
            **$**
            **2**
            
            $
            2Interest
                cost
            
            
            **25**
            
            
            22
            
            
            **7**
            
            
            7Expected
                return on plan assets
            
            
            **(37**
            **)**
            
            (36
            )
            
            **(1**
            **)**
            
            **-**Amortization
                of actuarial loss
            
            
            **3**
            
            
            1
            
            
            **1**
            
            
            **-**Other
                amortization, net
            
            
            **(1**
            **)**
            
            **-**
            
            
            **2**
            
            
            2Net
                periodic (benefit) cost
            
            **$**
            **(2**
            **)**
            $
            (2
            )
            **$**
            **11**
            
            $
            11





In
      addition, in the second quarter of 2005, PEF recorded costs for special
      termination benefits related to the voluntary enhanced retirement program of
      approximately $83 million for pension benefits and $7 million for other
      postretirement benefits.




10.  RISK
      MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS




We
      are
      exposed to various risks related to changes in market conditions. We have a
      Risk
      Management Committee comprised of senior executives from various functional
      areas. The Risk Management Committee is responsible for administering risk
      management policies and monitoring compliance with those policies by all
      subsidiaries. Under our risk
      policy, we may use a variety of instruments, including swaps, options and
      forward contracts, to manage exposure to fluctuations in commodity prices and
      interest rates. Such instruments contain credit risk for nonperformance by
      the
      counterparty. We minimize such risk by performing credit reviews using, among
      other things, publicly available credit




32


ratings
      of such counterparties. Potential nonperformance by counterparties is not
      expected to have a material effect on our financial position or results of
      operations. Additionally, in the normal course of business, some of our
      affiliates may enter into hedge transactions with one another. See Note 18
      to
      the 2005 Form 10-K.




A.  Commodity
      Derivatives




*GENERAL*




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




In
      2003,
      PEC recorded a $38 million pre-tax ($23 million after-tax) fair value loss
      transition adjustment pursuant to the provisions of FASB Derivatives
      Implementation Group Issue C20, “Interpretation of the Meaning of Not Clearly
      and Closely Related in Paragraph 10(b) regarding Contracts with a Price
      Adjustment Feature” (DIG Issue C20). The related liability is being amortized to
      earnings over the term of the related contract (See Note 12). At June 30, 2006
      and December 31, 2005, the remaining liability was $17 million and $19 million,
      respectively.




*ECONOMIC
      DERIVATIVES*




Derivative
      products, primarily electricity and natural gas contracts, may be entered into
      from time to time for economic hedging purposes. While management believes
      the
      economic hedges mitigate exposures to fluctuations in commodity prices, these
      instruments are not designated as hedges for accounting purposes and are
      monitored consistent with trading positions. We manage open positions according
      to established policies and guidelines that limit our exposure to market risk
      and require daily reporting to management of financial exposures. Gains and
      losses from such contracts were not material to our or the Utilities’ results of
      operations for the three and six months ended June 30, 2006 and 2005. PEC did
      not have material outstanding positions in such contracts at June 30, 2006
      or
      December 31, 2005. We and PEF did not have material outstanding positions in
      such contracts at June 30, 2006 or December 31, 2005, other than those receiving
      regulatory accounting treatment at PEF, as described below.




PEF
      has
      derivative instruments related to its exposure to price fluctuations on fuel
      oil
      and natural gas purchases. These instruments receive regulatory accounting
      treatment. Unrealized gains and losses are recorded in regulatory liabilities
      and regulatory assets, respectively, until the contracts are settled. Once
      settled, any realized gains or losses are passed through the fuel clause. At
      June 30, 2006, the fair values of these instruments were a $55 million
      short-term derivative asset position included in other current assets, a $48
      million long-term derivative asset position included in other assets and
      deferred debits, a $15 million short-term derivative liability position included
      in other current liabilities and a $53 million long-term derivative liability
      position included in other liabilities and deferred credits on the Balance
      Sheets. At December 31, 2005, the fair values of the instruments were a $77
      million short-term derivative asset position included in other current assets,
      a
      $45 million long-term derivative asset position included in other assets and
      deferred debits and a $49 million long-term derivative liability position
      included in other liabilities and deferred credits on the Balance
      Sheets.




*CASH
      FLOW HEDGES*




We
      designate a portion of commodity derivative instruments as cash flow hedges
      under SFAS No. 133. The objective for holding these instruments is to hedge
      exposure to market risk associated with fluctuations in the price of natural
      gas
      and power for our forecasted purchases and sales. Realized gains and losses
      are
      recorded net in operating revenues or operating expenses, as appropriate. During
      the three months ending June 30, 2006, $7 million in after-tax deferred losses
      were reclassified to earnings due to discontinuance of the related cash flow
      hedges in anticipation of the sale of our gas business (See Note 16). The
      ineffective portion of commodity cash flow hedges for the three and six months
      ended June 30, 2006 and 2005, was not material to our or the Utilities’ results
      of operations.




33


The
      fair
      values of our commodity cash flow hedges at June 30, 2006 and December 31,
      2005,
      were as follows:




**June
                30, 2006**
            
            December
                31, 2005(in
                millions)
            
            **Progress
                Energy**
            
            **PEC**
            
            **PEF**
            
            Progress
                Energy
            
            PEC
            
            PEFFair
                value of assets
            
            **$**
            **145**
            
            **$**
            **-**
            
            **$**
            **-**
            
            $
            170
            
            $
            7
            
            $
            -Fair
                value of liabilities
            
            
            **(1**
            **)**
            
            **-**
            
            
            **-**
            
            
            (58
            )
            
            (4
            )
            
            -Fair
                value, net
            
            **$**
            **144**
            
            **$**
            **-**
            
            **$**
            **-**
            
            $
            112
            
            $
            3
            
            $
            -





The
      following table presents selected information related to our commodity cash
      flow
      hedges at June 30, 2006:





Maximum
                Term(a)
            
            Accumulated
                Other Comprehensive Income/(Loss), net of tax(b)
            
            Portion
                Expected to be Reclassified to Earnings during the Next 12
                Months(c)(term
                in years/ dollars in millions )
            
            Progress
                Energy
            
            PEC
            
            PEF
            
            Progress
                Energy
            
            PEC
            
            PEF
            
            Progress
                Energy
            
            PEC
            
            PEFCommodity
                cash flow hedges
            
            
            9
            
            
            -
            
            
            -
            
            $
            78
            
            $
            -
            
            $
            -
            
            $
            (6
            )
            $
            -
            
            $
            -





(a)
            The
                majority of hedges in fair value asset positions are currently classified
                as long-term.


(b)
            Includes
                amounts related to de-designated
                hedges.


(c)
            Due
                to the volatility of the commodities markets, the value in accumulated
                other comprehensive income/(loss) is subject to change prior to its
                reclassification into earnings.





At
      December 31, 2005, we had $69 million of after-tax deferred income and PEC
      had
      $2 million in after-tax deferred income recorded in accumulated other
      comprehensive income/(loss) related to commodity cash flow hedges. PEF had
      no
      amount recorded in accumulated other comprehensive income/(loss) related to
      commodity cash flow hedges.




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




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




The
      fair
      values of interest rate hedges at June 30, 2006 and December 31, 2005, were
      as
      follows:




**June
                30, 2006**
            
            December
                31, 2005(in
                millions)
            
            **Progress
                Energy**
            
            **PEC**
            
            **PEF**
            
            Progress
                Energy
            
            PEC
            
            PEFInterest
                rate cash flow hedges
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            $
            1
            
            **$**
            **-**
            
            **$**
            **-**Interest
                rate fair value hedges
            
            
            **(5**
            **)**
            
            **-**
            
            
            **-**
            
            
            (2
            )
            
            **-**
            
            
            **-**





*CASH
      FLOW HEDGES*




Gains
      and
      losses from cash flow hedges are recorded in accumulated other comprehensive
      income/(loss) and amounts reclassified to earnings are included in net interest
      charges as the hedged transactions occur. Amounts in accumulated other
      comprehensive income/(loss) related to terminated hedges are reclassified to
      earnings as the interest expense is recorded. The ineffective portion of
      interest rate cash flow hedges for the three months ended June 30, 2006 and
      2005, was not material to our or the Utilities’ results of
      operations.




34


The
      following table presents selected information related to interest rate cash
      flow
      hedges at June 30, 2006:





Maximum
                Term
            
            Accumulated
                Other Comprehensive Income/ (Loss), net of Tax(a)
            
            Portion
                Expected to be Reclassified to Earnings during the Next 12 Months(term
                in years/ dollars in millions)
            
            Progress
                Energy
            
            PEC
            
            PEF
            
            Progress
                Energy
            
            PEC
            
            PEF
            
            Progress
                Energy
            
            PEC
            
            PEFInterest
                rate cash flow hedges
            
            
            -
            
            
            -
            
            
            -
            
            $
            (12
            )
            $
            (5
            )
            $
            -
            
            $
            (2
            )
            $
            (1
            )
            $
            -





(a)
            Amounts
                relate to terminated hedges.





PEC
      entered into a $50 million forward starting swap on June 2, 2006, and PEF
      entered into a $50 million forward starting swap on June 6, 2006, to mitigate
      exposure to interest rate risk on their respective anticipated fixed rate debt
      issuances in 2007. These swaps were designated as cash flow hedges as of July
      1,
      2006. The fair value of these swaps was not material at June 30,
      2006.




At
      December 31, 2005, we had $13 million of after-tax deferred loss and PEC had
      $5
      million in after-tax deferred loss recorded in accumulated other comprehensive
      income/(loss) related to interest rate cash flow hedges. PEF had no amount
      recorded in accumulated other comprehensive income/(loss) related to interest
      rate cash flow hedges.




At
      December 31, 2005, we had $100 million notional of interest rate cash flow
      hedges, which were settled in the first quarter of 2006. The Utilities had
      no
      open interest rate cash flow hedges at December 31, 2005.




*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. At June 30, 2006, and December 31, 2005,
      we
      had $150 million notional of interest rate fair value hedges and the Utilities
      had no open interest rate fair value hedges.




11.  FINANCIAL
      INFORMATION BY BUSINESS SEGMENT




Our
      reportable segments are: PEC, PEF, Progress Ventures, and Coal and Synthetic
      Fuels.




Our
      PEC
      and PEF business segments are primarily engaged in the generation, transmission,
      distribution and sale of electricity in portions of North Carolina, South
      Carolina and Florida. These electric operations also distribute and sell
      electricity to other utilities, primarily on the east coast of the United
      States.




Our
      Progress Ventures segment is primarily engaged in nonregulated electric
      generation, energy marketing activities and natural gas drilling and production
      (See Note 16).




Our
      Coal
      and Synthetic Fuels segment is primarily engaged in the production and sale
      of
      coal-based solid synthetic fuel (as defined under the Code), the operation
      of
      synthetic fuel facilities for third parties, and coal terminal services. On
      May
      22, 2006, we idled our synthetic fuel facilities due to significant uncertainty
      surrounding synthetic fuel production. See Notes 6 and 7 for additional
      information.




In
      addition to the reportable operating segments, the Corporate and Other segment
      includes the operations of the Parent and Progress Energy Service Company,
      LLC
      (PESC) as well as other nonregulated business areas. These nonregulated business
      areas do not separately meet the disclosure requirements of SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information” (SFAS No.
      131). The profit or loss of the identified segments plus the profit or loss
      of
      Corporate and Other represents our total income from continuing
      operations.




Prior
      to
      2006, DeSoto and Rowan were included within the Progress Ventures segment and
      PT
      LLC was included within the Corporate and Other segment. In connection with
      their divestitures (See Notes 3A and 3B, respectively), the operations of (i)
      DeSoto and Rowan and (ii) PT LLC were reclassified to discontinued operations
      in
      the second and first quarters of 2006, respectively, and therefore are not
      included in the results from continuing operations




35


during
      the periods reported. During the fourth quarter of 2005, we reclassified our
      coal mining operations as discontinued operations (See Note 3D). Income and
      assets of discontinued operations are not included in the table presented below.
      For comparative purposes, the prior year results have been restated to conform
      to the current segment presentation. The cost management initiative charges
      incurred in 2005 resulted from a workforce restructuring and voluntary enhanced
      retirement program that was approved in February 2005 and concluded in December
      2005. The following information is for the three and six months ended June
      30:


Income
                (loss)Revenues
            
            Cost
            
            from
            
            Assets
                of(in
                millions)
            
            Unaffiliated
            
            Intersegment
            
            Total
            
            Management
                Initiative
            
            Continuing
                Operations
            
            Continuing
                Operations**Three
                Months Ended June 30,****2006****PEC**
            
            **$**
            **936**
            
            **$**
            **-**
            
            **$**
            **936**
            
            **$**
            **-**
            
            **$**
            **76**
            
            **$**
            **11,424****PEF**
            
            
            **1,147**
            
            
            **-**
            
            
            **1,147**
            
            
            **-**
            
            
            **87**
            
            
            **8,406****Progress
                Ventures**
            
            
            **189**
            
            
            **-**
            
            
            **189**
            
            
            **-**
            
            
            **(8**
            **)**
            
            **1,738****Coal
                and Synthetic Fuels**
            
            
            **222**
            
            
            **84**
            
            
            **306**
            
            
            **-**
            
            
            **(91**
            **)**
            
            **252****Corporate
                and Other**
            
            
            **5**
            
            
            **103**
            
            
            **108**
            
            
            **-**
            
            
            **(50**
            **)**
            
            **17,244****Eliminations**
            
            
            **-**
            
            
            **(187**
            **)**
            
            **(187**
            **)**
            
            **-**
            
            
            **-**
            
            
            **(13,294**
            **)****Totals**
            
            **$**
            **2,499**
            
            **$**
            **-**
            
            **$**
            **2,499**
            
            **$**
            **-**
            
            **$**
            **14**
            
            **$**
            **25,770**Three
                Months EndedJune 30, 2005PEC
            
            $
            861
            
            $
            -
            
            $
            861
            
            $
            46
            
            $
            67PEF
            
            
            908
            
            
            -
            
            
            908
            
            
            93
            
            
            10Progress
                Ventures
            
            
            178
            
            
            -
            
            
            178
            
            
            1
            
            
            6Coal
                and Synthetic Fuels
            
            
            318
            
            
            100
            
            
            418
            
            
            4
            
            
            23Corporate
                and Other
            
            
            -
            
            
            124
            
            
            124
            
            
            1
            
            
            (100
            )Eliminations
            
            
            -
            
            
            (224
            )
            
            (224
            )
            
            **-**
            
            
            **-**Totals
            
            $
            2,265
            
            $
            -
            
            $
            2,265
            
            $
            145
            
            $
            6





Income
                (loss)Revenues
            
            Cost
            
            from
            
            Assets
                of(in
                millions)
            
            Unaffiliated
            
            Intersegment
            
            Total
            
            Management
                Initiative
            
            Continuing
                Operations
            
            Continuing
                Operations**Six
                Months Ended June 30,****2006****PEC**
            
            **$**
            **1,914**
            
            **$**
            **-**
            
            **$**
            **1,914**
            
            **$**
            **-**
            
            **$**
            **161**
            
            **$**
            **11,424****PEF**
            
            
            **2,154**
            
            
            **-**
            
            
            **2,154**
            
            
            **-**
            
            
            **139**
            
            
            **8,406****Progress
                Ventures**
            
            
            **393**
            
            
            **-**
            
            
            **393**
            
            
            **-**
            
            
            **(43**
            **)**
            
            **1,738****Coal
                and Synthetic Fuels**
            
            
            **456**
            
            
            **162**
            
            
            **618**
            
            
            **-**
            
            
            **(77**
            **)**
            
            **252****Corporate
                and Other**
            
            
            **8**
            
            
            **192**
            
            
            **200**
            
            
            **-**
            
            
            **(114**
            **)**
            
            **17,244****Eliminations**
            
            
            **-**
            
            
            **(354**
            **)**
            
            **(354**
            **)**
            
            **-**
            
            
            **-**
            
            
            **(13,294**
            **)****Totals**
            
            **$**
            **4,925**
            
            **$**
            **-**
            
            **$**
            **4,925**
            
            **$**
            **-**
            
            **$**
            **66**
            
            **$**
            **25,770**SixMonths Ended June 30, 2005PEC
            
            $
            1,796
            
            $
            -
            
            $
            1,796
            
            $
            60
            
            $
            182PEF
            
            
            1,756
            
            
            -
            
            
            1,756
            
            
            107
            
            
            53Progress
                Ventures
            
            
            265
            
            
            -
            
            
            265
            
            
            2
            
            
            12Coal
                and Synthetic Fuels
            
            
            590
            
            
            185
            
            
            775
            
            
            6
            
            
            20Corporate
                and Other
            
            
            -
            
            
            224
            
            
            224
            
            
            1
            
            
            (155
            )Eliminations
            
            
            -
            
            
            (409
            )
            
            (409
            )
            
            **-**
            
            
            **-**Totals
            
            $
            4,407
            
            $
            -
            
            $
            4,407
            
            $
            176
            
            $
            112





36


12.  OTHER
      INCOME AND OTHER EXPENSE




Other
      income and expense includes interest income and other income and expense items
      as discussed below. Nonregulated energy and delivery services include power
      protection services and mass market programs such as surge protection, appliance
      services and area light sales, and delivery, transmission and substation work
      for other utilities. Allowance for funds used during construction (AFUDC) equity
      represents the estimated equity costs of capital funds necessary to finance
      the
      construction of new regulated assets. Contingent value obligations (CVOs)
      unrealized loss and gain is due to changes in the fair market value of the
      liability. See Note 15 to the 2005 Form 10-K for more information on CVOs.
      The
      FERC audit settlement includes amounts approved by the FERC on May 25, 2005,
      to
      settle the FERC Staff’s Audit of compliance with the FERC’s Standard of Conduct
      and Code of Conduct. The components of other, net as shown on the accompanying
      Statements of Income were as follows:




Progress
      Energy


Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Other
                incomeNonregulated
                energy and delivery services income
            
            **$**
            **15**
            
            $
            11
            
            **$**
            **23**
            
            $
            17DIG
                Issue C20 amortization (see Note 10)
            
            
            **1**
            
            
            2
            
            
            **2**
            
            
            3CVOs
                unrealized gain
            
            
            **3**
            
            
            -
            
            
            **3**
            
            
            -Gain
                on sale of Level 3 stock(a)
            
            
            **8**
            
            
            -
            
            
            **32**
            
            
            -Investment
                gains
            
            
            **-**
            
            
            -
            
            
            **3**
            
            
            1AFUDC
                equity
            
            
            **4**
            
            
            5
            
            
            **7**
            
            
            9Other
            
            
            **3**
            
            
            4
            
            
            **7**
            
            
            12Total
                other income
            
            
            **34**
            
            
            22
            
            
            **77**
            
            
            42Other
                expenseNonregulated
                energy and delivery services expenses
            
            
            **7**
            
            
            5
            
            
            **13**
            
            
            10Donations
            
            
            **5**
            
            
            5
            
            
            **12**
            
            
            11CVOs
                unrealized loss
            
            
            -
            
            
            -
            
            
            **25**
            
            
            -Loss
                from equity investments
            
            
            **1**
            
            
            2
            
            
            **1**
            
            
            4FERC
                audit settlement
            
            
            -
            
            
            7
            
            
            -
            
            
            7Other
            
            
            **10**
            
            
            9
            
            
            **17**
            
            
            15Total
                other expense
            
            
            **23**
            
            
            28
            
            
            **68**
            
            
            47Other,
                net - Progress Energy
            
            **$**
            **11**
            
            $
            (6
            )
            **$**
            **9**
            
            $
            (5
            )





(a)
            Other
                income includes gains of $8 million and $32 million for the three-month
                and six-month periods ending June 30, 2006, respectively, from the
                sale of
                approximately 20 million shares of Level 3 stock received as part
                of the
                sale of our interest in PT LLC (See Note 3B). These gains are prior
                to the
                consideration of minority interest.




37


PEC


Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Other
                incomeNonregulated
                energy and delivery services income
            
            **$**
            **8**
            
            $
            7
            
            **$**
            **10**
            
            $
            9DIG
                Issue C20 amortization (see Note 10)
            
            
            **1**
            
            
            2
            
            
            **2**
            
            
            3AFUDC
                equity
            
            
            **1**
            
            
            1
            
            
            **2**
            
            
            2Other
            
            
            -
            
            
            2
            
            
            **3**
            
            
            5Total
                other income
            
            
            **10**
            
            
            12
            
            
            **17**
            
            
            19Other
                expenseNonregulated
                energy and delivery services expenses
            
            
            **2**
            
            
            2
            
            
            **3**
            
            
            4Donations
            
            
            **3**
            
            
            2
            
            
            **6**
            
            
            5FERC
                audit settlement
            
            
            -
            
            
            4
            
            
            -
            
            
            4Other
            
            
            **6**
            
            
            6
            
            
            **10**
            
            
            7Total
                other expense
            
            
            **11**
            
            
            14
            
            
            **19**
            
            
            20Other,
                net - PEC
            
            **$**
            **(1**
            **)**
            $
            (2
            )
            **$**
            **(2**
            **)**
            $
            (1
            )





PEF


Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Other
                incomeNonregulated
                energy and delivery services income
            
            **$**
            **7**
            
            $
            4
            
            **$**
            **13**
            
            $
            8AFUDC
                equity
            
            
            **3**
            
            
            4
            
            
            **5**
            
            
            7Other
            
            
            -
            
            
            -
            
            
            **1**
            
            
            1Total
                other income
            
            
            **10**
            
            
            8
            
            
            **19**
            
            
            16Other
                expenseNonregulated
                energy and delivery services expenses
            
            
            **5**
            
            
            3
            
            
            **10**
            
            
            6Donations
            
            
            **2**
            
            
            3
            
            
            **6**
            
            
            5FERC
                audit settlement
            
            
            -
            
            
            3
            
            
            -
            
            
            3Other
            
            
            -
            
            
            -
            
            
            **1**
            
            
            -Total
                other expense
            
            
            **7**
            
            
            9
            
            
            **17**
            
            
            14Other,
                net - PEF
            
            **$**
            **3**
            
            $
            (1
            )
            **$**
            **2**
            
            $
            2





13.  ENVIRONMENTAL
      MATTERS




We
      are
      subject to federal, state and local regulations addressing hazardous and solid
      waste management, air and water quality and other environmental matters. See
      Note 22 to the 2005 Form 10-K.




A.  Hazardous
      and Solid Waste Management




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




38


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




PEC
      and
      PEF filed claims with general liability insurance carriers to recover costs
      arising from actual or potential environmental liabilities for remediation
      of
      certain sites. No material claims are currently pending. We plan to file further
      claims with respect to sites for which claims were not previously presented.




The
      following table contains information about accruals for environmental
      remediation expenses described below. At June 30, 2006 and December 31, 2005,
      accruals for probable and estimable costs related to various environmental
      sites, which were included in other liabilities and deferred credits
      were:




**Accruals
                for Environmental Remediation Expenses**
              **(in
                millions)**
            
            **June
                30, 2006**
            
            December
                31, 2005PECMGP
                and other sites(a)
            
            **$**
            **24**
            
            $
            7PEFRemediation
                of distribution and substation transformers
            
            
            **53**
            
            
            20MGP
                and other sites
            
            
            **18**
            
            
            18Total
                PEF environmental remediation accruals(b)
            
            
            **71**
            
            
            38Progress
                Energy nonregulated operations
            
            
            **3**
            
            
            3Total
                Progress Energy environmental remediation accruals
            
            **$**
            **98**
            
            $
            48





(a)
            Expected
                to be paid out over one to five years. PEC is planning to request
                orders
                from both the NCUC and SCPSC to defer and amortize the retail portion
                of
                certain of these costs, net of insurance proceeds, over a period
                of years.
                We cannot predict the outcome of this
                matter.


(b)
            Expected
                to be paid out over one to fifteen
                years.





Progress
      Energy





In
      addition to the Utilities’ sites, discussed under “PEC” and “PEF” below, our
      environmental sites include the following related to our nonregulated
      operations.





In
      2001,
      we, through our Progress Fuels subsidiary, established an accrual to address
      indemnities and retained an environmental liability associated with the sale
      of
      our Inland Marine Transportation business. At June 30, 2006 and December 31,
      2005, the remaining accrual balance was approximately $3 million. Expenditures
      related to this liability were not material during the three and six months
      ended June 30, 2006 and 2005.




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




PEC




There
      are
      currently eight former MGP sites and a number of other sites associated with
      PEC
      that have required or are anticipated to require investigation and/or
      remediation. Three of these sites are in the long-term monitoring
      phase.




For
      the
      three months ended June 30, 2006, PEC made no additional accruals and spent
      approximately $1 million, and for the six months ended June 30, 2006, PEC
      accrued approximately $21 million and spent approximately $4




39


million
      related to environmental remediation. For the three and six months ended June
      30, 2005, PEC made no additional accruals and spent approximately $1 million
      and
      $3 million, respectively, related to environmental remediation.




In
      September 2005, the EPA advised PEC that it had been identified as a PRP at
      the
      Carolina Transformer site located in Fayetteville, N.C. The EPA offered PEC
      and
      a number of other PRPs the opportunity to share in the reimbursement to the
      EPA
      of past expenditures in addressing conditions at the site, which are currently
      approximately $32 million. In May 2006, a meeting was called by the EPA to
      discuss a settlement proposal among the PRPs. An agreement among PRPs has not
      been reached; consequently, it is not possible at this time to reasonably
      estimate the amount of PEC’s share of the reimbursement for remediation of the
      Carolina Transformer site. PEC may file claims with respect to this site. The
      outcome of this matter cannot be predicted.




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, N.C. The EPA offered PEC
      and a number of other PRPs the opportunity to negotiate cleanup of the site
      and
      reimbursement to the EPA for EPA’s past expenditures in addressing conditions at
      the site. In September 2005, PEC and other PRPs signed a settlement agreement,
      which requires
      the participating PRPs to remediate the site. In 2005, PEC
      accrued approximately $3 million for its portion of the EPA’s estimated
      remediation costs and the EPA's
      past costs. In
      March
      2006, based upon continuing assessment work performed at the site, PEC recorded
      an additional $9 million accrual for its portion of the estimated remediation
      costs. Actual experience may differ from current estimates and it is probable
      that estimates will continue to change in the future. PEC plans to file claims
      with respect to this site. The outcome of this matter cannot be
      predicted.




In
      March
      2006, based upon newly available data for several of PEC’s MGP sites, which had
      individual site remediation costs ranging from approximately $2 million to
      $4
      million, a remediation liability of approximately $12 million was recorded
      for
      the minimum estimated total remediation cost for all of PEC’s remaining MGP
      sites. However, the maximum amount of the range for all the sites cannot be
      determined at this time as one of the remaining sites is significantly larger
      than the sites for which we have historical experience.




On
      March
      30, 2005, the North Carolina Division of Water Quality renewed a PEC permit
      for
      the continued use of coal combustion products generated at any of its coal-fired
      plants located in the state. PEC appealed the permit conditions, which could
      have significantly restricted the reuse of coal ash, resulting in higher ash
      management costs. Subsequently, based on comments from PEC, the permit was
      revised, and the appeal was withdrawn on July 11, 2006.




PEF




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 mineral
      oil-impacted soil remediation caused by equipment integrity issues. PEF has
      reviewed a number of distribution transformer sites and all substation sites.
      Based on changes to the estimated time frame for review of distribution
      transformer sites, PEF currently expects to have completed its review by the
      end
      of 2008. Should further sites be identified, PEF believes that any estimated
      costs would also be recovered through the ECRC. For the three and six months
      ended June 30, 2006, PEF accrued approximately $1 million and $39 million,
      respectively, due to additional sites expected to require remediation and spent
      approximately $5 million and $6 million, respectively, related to the
      remediation of transformers. For the three and six months ended June 30, 2005,
      PEF made no additional accruals and spent approximately $3 million and $5
      million, respectively, related to the remediation of transformers. PEF records
      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. The amounts include approximately
      $12 million in insurance claim settlement proceeds received in 2004, which
      are
      restricted for use in addressing costs associated with environmental
      liabilities. For the three and six months ended June 30, 2006 and 2005, PEF
      made
      no additional accruals or material expenditures and received no insurance
      proceeds.




40





B.  Air
      Quality and Water Quality




We
      are or
      may ultimately be subject to various current and proposed federal, state and
      local environmental compliance laws and regulations, which would likely result
      in increased planned capital expenditures and O&M expenses. Significant
      updates to these laws and regulations and related impacts to us since December
      31, 2005, are discussed below. Additionally, Congress is considering legislation
      that would require additional reductions in air emissions of nitrogen oxide
      (NOx), sulfur dioxide (SO 2 ),
      carbon
      dioxide (CO 2 )
      and
      mercury. Some of these proposals establish nationwide caps and emission rates
      over an extended period of time. This national multi-pollutant approach to
      air
      pollution control could involve significant capital costs that could be material
      to our financial position or results of operations. Control equipment that
      will
      be installed pursuant to the provisions of the Clean Smokestacks Act, the Clean
      Air Interstate Rule (CAIR), and the Clean Air Mercury Rule (CAMR), which are
      discussed below, may address some of the issues outlined above. However, the
      outcome of the matter cannot be predicted.




The
      following tables contain information about estimates of capital expenditures
      to
      comply with environmental laws and regulations described below. These costs
      are
      eligible for regulatory recovery through either base rates or pass-through
      clauses. The outcome of future petitions for recovery cannot be predicted.
      Estimated expenditures for the NOx SIP Call Rule under Section 110 of the Clean
      Air Act (NOx SIP Call) include the cost to install NOx controls under North
      Carolina’s and South Carolina’s programs to comply with the federal eight-hour
      ozone standard. The air quality controls needed to meet compliance with the
      NOx
      SIP Call and Clean Smokestacks Act will reduce the costs to meet the CAIR
      requirements for our North Carolina units at PEC. We review our estimates on
      an
      ongoing basis. The timing and extent of the costs for future projects will
      depend upon final compliance strategies.





Progress
      Energy


**Air
                and Water Quality Estimated Required Environmental Expenditures**(in
                millions)
            Estimated
                Timetable
            Total
                Estimated Expenditures
            Spent
                through June 30, 2006NOx
                SIP Call
            2002-2006
            $355
            $344Clean
                Smokestacks Act
            2002-2013
            $1,100
                - $1,400
            404CAIR/CAMR
            2005-2018
            $700
                - $1,600
            7Incremental
                CAVR BART(a)
            
            $-
            -Incremental
                NAAQS(b)
            
            $-
            -Total
                air quality
            
            $2,155
                - $3,355
            755Clean
                Water Act Section 316(b)
            2005-2010
            $70
                - $95
            1Total
                air and water quality
            
            $2,225
                - $3,450
            $756





PEC


**Air
                and Water Quality Estimated Required Environmental Expenditures**(in
                millions)
            Estimated
                Timetable
            Total
                Estimated Expenditures
            Spent
                through June 30, 2006NOx
                SIP Call
            2002-2006
            $355
            $344Clean
                Smokestacks Act
            2002-2013
            $1,100
                - $1,400
            404CAIR/CAMR
            2005-2018
            $100
                - $200
            1Incremental
                CAVR BART(a)
            
            $-
            -Incremental
                NAAQS(b)
            
            $-
            -Total
                air quality
            
            $1,555
                - $1,955
            749Clean
                Water Act Section 316(b)
            2005-2010
            $5
                - $10
            -Total
                air and water quality
            
            $1,560
                - $1,965
            $749





41


PEF


**Air
                and Water Quality Estimated Required Environmental Expenditures**(in
                millions)
            Estimated
                Timetable
            Total
                Estimated Expenditures
            Spent
                through June 30, 2006CAIR/CAMR
            2005-2018
            $600
                - $1,400
            $6Incremental
                CAVR BART(a)
            
            $-
            -Incremental
                NAAQS(b)
            
            $-
            -Total
                air quality
            
            $600
                - $1,400
            6Clean
                Water Act Section 316(b)
            2005-2010
            $65
                - $85
            1Total
                air and water quality
            
            $665
                - $1,485
            $7





(a)
            Plans
                for compliance with the CAIR and CAMR are expected to fulfill the
                Best
                Available Retrofit Technology (BART) obligations of the Clean Air
                Visibility Rule (CAVR).


(b)
            Compliance
                plans will be determined upon finalization of the proposed changes
                to the
                National Ambient Air Quality Standards (NAAQS) for particulate
                matter.





*NEW
      SOURCE REVIEW*




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 (NSR) requirements or New Source
      Performance Standards under the Clean Air Act. We were asked to provide
      information to the EPA as part of this initiative and cooperated in supplying
      the requested information. The EPA initiated civil enforcement actions against
      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 costs through rate adjustments or
      similar mechanisms. On May 15, 2006, the U.S. Supreme Court agreed to hear
      an
      appeal of a decision issued by the U.S. Court of Appeals for the Fourth Circuit,
      in a case involving an unaffiliated utility, holding that NSR applies to
      projects that result in an increase in maximum hourly emissions.




On
      March
      17, 2006, the Court of Appeals for the District of Columbia Circuit set aside
      the EPA’s 2003 New Source Review equipment replacement rule. The rule would have
      provided a more uniform definition of routine equipment replacement. The court
      had earlier set aside a provision in the NSR rule, which had exempted the
      installation of pollution control projects from review. The Court denied a
      request by the EPA for a re-hearing regarding this matter on June 30, 2006.
      These projects are now subject to NSR requirements, adding time and cost to
      the
      installation process.




*NO* *x* *SIP
      CALL RULE UNDER SECTION 110 OF THE CLEAN AIR ACT*




The
      NOx
      SIP Call is an EPA rule that requires 22 states, including North Carolina,
      South
      Carolina and Georgia, to further reduce nitrogen oxide emissions. The NOx SIP
      Call is not applicable to Florida. Further technical analysis and rulemaking
      may
      result in requirements for additional controls at some units. Increased O&M
      expenses relating to the NOx SIP Call are not expected to be material to our
      or
      PEC’s results of operations.




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




*CLEAN
      SMOKESTACKS ACT*




In
      June
      2002, the Clean Smokestacks Act was enacted in North Carolina requiring the
      state's electric utilities to reduce the emissions of NOx and SO 2 from
      their North Carolina coal-fired power plants in phases by 2013. PEC currently
      has approximately 5,100 MW of coal-fired generation capacity in North Carolina
      that is affected by the Clean Smokestacks Act. To meet SO 2 emission
      targets, PEC plans to install devices that neutralize sulfur compounds formed
      during coal combustion (scrubbers) on some of its coal-fired units. These
      devices combine the sulfur in gaseous emissions with other chemicals to form
      inert compounds, such as gypsum, that are then removed. In March 2006, PEC
      filed
      its annual estimate with the NCUC of the total capital expenditures to meet
      emission targets under the Clean Smokestacks Act of approximately $1.1 billion
      to $1.4 billion by the end of 2013, as shown in the above tables. The increase
      in estimated total capital expenditures from the original estimate of $813
      million is primarily due




42


to
      the
      higher cost and revised quantities of construction materials, such as concrete
      and steel, refinement of cost and scope estimates for the current projects,
      and
      increases in the estimated inflation factor applied to future project costs.
      We
      are evaluating various design, technology, and new generation options that
      could
      reduce expenditures required by the Clean Smokestacks Act.




Two
      of
      the coal-fired generation plants impacted by the Clean Smokestacks Act are
      jointly owned. The joint owners pay their ownership share of construction costs.
      In 2005, PEC entered into a contract with the joint owner of certain facilities
      at the Mayo and Roxboro plants to limit their aggregate costs associated with
      capital expenditures to comply with the Clean Smokestacks Act to approximately
      $38 million and recognized a related liability. At June 30, 2006 and December
      31, 2005, the amount of the liability was $21 million and $16 million,
      respectively, based upon the current estimates for Clean Smokestacks Act
      compliance. As capital cost projections change, it is reasonably possible that
      additional losses, which could be material, may be incurred in the
      future.




The
      Clean
      Smokestacks Act also freezes the state’s utilities' base rates for five years,
      which ends in 2007, unless there are extraordinary events beyond the control
      of
      the utilities or unless the utilities persistently earn a return substantially
      in excess of the rate of return established and found reasonable by the NCUC
      in
      the utilities' last general rate case. The Clean Smokestacks Act requires PEC
      to
      amortize $569 million, representing 70 percent of the original cost estimate
      of
      $813 million, during the five-year rate freeze period. PEC recognized
      amortization of $22 million and $44 million, respectively, for the three and
      six
      months ended June 30 2006, and has recognized $439 million in cumulative
      amortization through June 30, 2006. PEC recognized amortization of $27 million
      and $54 million, respectively, for the three and six months ended June 30 2005.
      The remaining amortization requirement of $130 million will be recorded over
      the
      18-month period ending December 31, 2007. The Clean Smokestacks Act permits
      PEC
      the flexibility to vary the amortization schedule for recording of the
      compliance costs from none 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.




Pursuant
      to the Clean Smokestacks Act, PEC entered into an agreement with the state
      of
      North Carolina to transfer to the state certain NOx and SO 2 emissions allowances that result from compliance with the collective NOx and
      SO 2 emissions limitations set out in the Clean Smokestacks Act. The Clean
      Smokestacks Act also required the state to undertake a study of mercury and
      CO 2 emissions in North Carolina. O&M expenses will significantly increase due to
      the additional personnel, materials and general maintenance associated with
      the
      equipment. O&M expenses are recoverable through base rates, rather than as
      part of this program. The future regulatory interpretation, implementation
      or
      impact of the Clean Smokestacks Act cannot be predicted.




*CLEAN
      AIR INTERSTATE RULE, MERCURY RULE AND CLEAN AIR VISIBILITY
      RULE*




On
      March
      10, 2005, the EPA issued the final CAIR. The EPA’s rule requires 28 states,
      including North Carolina, South Carolina, Georgia and Florida, and the District
      of Columbia to reduce NOx and SO 2 emissions in order to reduce levels of fine particulate matter and impacts
      to
      visibility. The CAIR sets emission limits to be met in two phases beginning
      in
      2009 and 2015, respectively, for NOx and beginning in 2010 and 2015,
      respectively, for SO 2 .




PEF
      has
      joined a coalition of Florida utilities that has filed a challenge to the CAIR
      as it applies to Florida. A petition for reconsideration and stay and a petition
      for judicial review of the CAIR were filed on July 11, 2005. On October 27,
      2005, the DC Circuit Court issued an order granting the motion for stay of
      the
      proceedings. On December 2, 2005, the EPA announced a reconsideration of four
      aspects of the CAIR, including its applicability to Florida. On March 16, 2006,
      the EPA denied all pending reconsiderations, allowing the challenge to proceed.
      While we consider it unlikely that this challenge would eliminate the compliance
      requirements of the CAIR, it could potentially reduce or delay our costs to
      comply with the CAIR. On June 29, 2006, the Florida Environmental Regulation
      Commission adopted the Florida CAIR, which is very similar to the EPA’s model
      rule. The outcome of this matter cannot be predicted.




On
      March
      15, 2005, the EPA finalized two separate but related rules: the CAMR that sets
      emissions limits to be met in two phases beginning in 2010 and 2018,
      respectively, 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 SO 2 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




43


and
      SO 2 under
      CAIR. States are required to adopt mercury rules implementing the CAMR by
      November 11, 2006, which must be reviewed and approved by the EPA. At June
      30,
      2006, of the three states in which the Utilities operate, Florida and North
      Carolina had formally proposed mercury regulations. **** North
      Carolina's proposed rule would adopt the EPA’s cap-and-trade approach and would
      require the addition of mercury controls on certain of PEC's North Carolina
      units that do not have scrubbers by 2023. On June 29, 2006, the Florida
      Environmental Regulation Commission adopted the Florida CAMR. The Florida rule
      adopts the EPA’s cap-and-trade approach with changes to the EPA’s mercury
      allowance allocations in the rule’s first phase. **** Formal
      rulemaking in South Carolina is expected to occur in the summer and fall of
      2006. The outcome of this matter cannot be predicted.




The
      de-listing rule has been challenged by a number of parties; the resolution
      of
      the challenges could impact our final compliance plans and costs. On October
      21,
      2005, the EPA announced a reconsideration of the CAMR. On May 31, 2006, the
      EPA
      issued a determination confirming the de-listing. Sixteen states have
      subsequently petitioned for a review of this determination. The outcome of
      this
      matter cannot be predicted.




On
      June
      15, 2005, the EPA issued the final CAVR. The EPA’s rule requires states to
      identify facilities, including power plants, built between August 1962 and
      August 1977 with the potential to produce emissions that affect visibility
      in
      156 specially protected areas. To help restore visibility in those areas, states
      must require the identified facilities to install BART to control their
      emissions. Depending on the approach taken by the states, the reductions
      associated with BART would begin to take effect in 2014. CAVR included the
      EPA’s
      determination that compliance with the NOx and SO 2 requirements of CAIR may be used by states as a BART substitute. We expect
      that
      our plans for compliance with the CAIR and CAMR will fulfill BART obligations,
      but the states could require the installation of additional air quality controls
      if they do not achieve reasonable progress on improving visibility. PEC’s
      BART-eligible units are Asheville Units No. 1 and No. 2, Roxboro Units No.
      1,
      No. 2 and No. 3, and Sutton Unit No. 3. PEF’s BART-eligible units are Anclote
      Unit No. 1, Bartow Unit No. 3, and Crystal River Units No. 1 and No. 2. The
      outcome of this matter cannot be predicted.




PEC
      and
      PEF are each developing an integrated compliance strategy for the CAIR and
      CAMR
      rules because NOx and SO 2 controls
      are effective in reducing mercury emissions. We are evaluating various design,
      technology, and new generation options that could reduce PEC’s and PEF’s costs
      required by the CAIR and CAMR.




On
      October 14, 2005, the FPSC approved PEF’s petition for the recovery of costs
      associated with the development and implementation of an integrated strategy
      to
      comply with the CAIR and CAMR through the ECRC. On March 31, 2006, PEF filed
      a
      series of compliance alternatives with the FPSC to meet these federal
      environmental rules. PEF’s recommended proposed compliance plan includes
      approximately $740 million of estimated capital costs expected to be spent
      through 2016, to plan, design, build and install pollution control equipment
      at
      our Anclote and Crystal River plants. We expect this matter to be addressed
      during the FPSC hearings in November 2006, but cannot predict whether this
      proposed compliance plan, or another compliance plan, will be approved by the
      FPSC. These costs may increase or decrease depending upon the results of the
      engineering and strategy development work and FPSC approval of the final
      compliance plan. Subsequent rule interpretations, equipment availability, or
      the
      unexpected acceleration of the initial NOx or other compliance dates, among
      other things, could require acceleration of some projects and therefore result
      in additional costs in 2006.




*NORTH
      CAROLINA ATTORNEY GENERAL PETITION UNDER SECTION 126 OF THE CLEAN AIR
      ACT*




In
      March
      2004, the North Carolina Attorney General filed a petition with the EPA, under
      Section 126 of the Clean Air Act, asking the federal government to force
      coal-fired power plants in 13 other states, including South Carolina, to reduce
      their NOx and SO 2 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. On March 16, 2006, the EPA issued a final
      response denying the petition. The EPA's rationale for denial is that compliance
      with CAIR will reduce the emissions from surrounding states sufficiently to
      address North Carolina's concerns. On June 26, 2006, the North Carolina Attorney
      General filed a petition in the U.S. Court of Appeals for the District of
      Columbia Circuit seeking a review of the agency’s final action on the
      petition. **** The
      outcome of this matter cannot be predicted.




44


*NATIONAL
      AMBIENT AIR QUALITY STANDARDS*




On
      December 21, 2005, the EPA announced proposed changes to the National Ambient
      Air Quality Standards (NAAQS) for particulate matter. The EPA proposed to lower
      the 24-hour standard for particulate matter less than 2.5 microns in diameter
      from 65 micrograms per cubic meter to 35 micrograms per cubic meter. In
      addition, the EPA proposed to establish a new 24-hour standard of 70 micrograms
      per cubic meter for particulate matter that is between 2.5 and 10 microns in
      diameter. The EPA also proposed to eliminate the current standards for
      particulate matter less than 10 microns in diameter. The EPA is scheduled to
      finalize the NAAQS standards by September 27, 2006. The changes could ultimately
      result in increased costs for installation of additional pollution controls
      at
      facilities operated by PEC and PEF. The outcome of this matter cannot be
      predicted.




*WATER
      QUALITY*




As
      a
      result of the operation of certain control equipment needed to address the
      air
      quality issues outlined above, new wastewater streams may be generated at the
      affected facilities. Integration of these new wastewater streams into the
      existing wastewater treatment processes may result in permitting, construction
      and treatment requirements imposed on the Utilities in the immediate and
      extended future. Section 316(b) of the Clean Water Act requires assessment
      of
      the environmental effect of withdrawal of water at our facilities. The outcome
      of this matter cannot be predicted.





C.  Other
      Environmental Matters




*GLOBAL
      CLIMATE CHANGE*




The
      Kyoto
      Protocol was adopted in 1997 by the United Nations to address global climate
      change by reducing emissions of CO 2 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. There are proposals to address global
      climate change that would regulate CO 2 and
      other greenhouse gases. Reductions in CO 2 emissions to the levels specified by the Kyoto Protocol and some additional
      proposals could be materially adverse to our financial position or results
      of
      operations if associated costs of control or limitation cannot be recovered
      from
      customers. We have articulated principles that we believe should be incorporated
      into any global climate change policy. While the outcome of this matter cannot
      be predicted, we are taking voluntary action on this important issue as part
      of
      our commitment to environmental stewardship and responsible corporate
      citizenship.




In
      a
      decision issued July 15, 2005, a three-judge panel of the U.S. Court of Appeals
      for the District of Columbia Circuit denied petitions for review filed by
      several states, cities and organizations seeking the regulation by the EPA
      of
      CO 2 emissions under the Clean Air Act. In a 2-1 decision, the court held that the
      EPA administrator properly exercised his discretion in denying the request
      for
      regulation. Officials from five states and the District of Columbia asked the
      full U.S. Court of Appeals for the D.C. Circuit to review the decision made
      by
      the three-judge panel. On December 2, 2005, the U.S. Court of Appeals denied
      the
      request for rehearing. On March 2, 2006, the petitioners filed a petition for
      writ of certiorari with the U.S. Supreme Court, seeking a review of the U.S.
      Court of Appeals decision. On June 26, 2006, the U.S. Supreme Court agreed
      to
      review the decision. The outcome of this matter cannot be
      predicted.




In
      2005,
      we initiated a study to assess the impact of constraints on CO 2 and
      other air emissions and on March 27, 2006, we issued our report to shareholders
      for an assessment of global climate change and air quality risks and actions.
      While we participate in the development of a national climate change policy
      framework, we will continue to actively engage others in our region to develop
      consensus-based solutions, as we did with the Clean Smokestacks
      Act.




14.  COMMITMENTS
      AND CONTINGENCIES




Contingencies
      and significant changes to the commitments discussed in Note 23 to the 2005
      Form
      10-K are described below.




A.  Guarantees




As
      a part
      of normal business, we enter into various agreements providing future financial
      or performance assurances to third parties, which are outside the scope of
      FASB
      Interpretation No. 45, “Guarantor’s Accounting and Disclosure




45


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 June 30, 2006, we do not believe conditions are likely for
      significant performance under these guarantees. To the extent liabilities are
      incurred as a result of the activities covered by the guarantees, such
      liabilities are included in the accompanying Balance Sheets.




At
      June
      30, 2006, we have issued guarantees and indemnifications of certain asset
      performance, legal, tax and environmental matters to third parties, including
      indemnifications made in connection with sales of businesses, and for timely
      payment of obligations in support of our nonwholly owned synthetic fuel
      operations. Related to the sales of businesses, the latest notice period extends
      until 2012 for the majority of legal, tax and environmental matters provided
      for
      in the indemnification provisions. Indemnifications for the performance of
      assets extend to 2016. For matters for which we receive timely notice, our
      indemnity obligations may extend beyond the notice period. Certain
      indemnifications have no limitations as to time or maximum potential future
      payments. In 2005, PEC entered into a contract with the joint owner of certain
      facilities at the Mayo and Roxboro plants to limit their aggregate costs
      associated with capital expenditures to comply with the Clean Smokestacks Act
      and recognized a liability related to this indemnification (See Note 13B).
      PEC’s
      maximum exposure cannot be determined. At June 30, 2006, the maximum exposure
      for guarantees and indemnifications for which a maximum exposure is determinable
      was $208 million, including $32 million at PEF. At June 30, 2006 and December
      31, 2005, we have recorded liabilities related to guarantees and
      indemnifications to third parties of approximately $59 million and $41 million,
      respectively. These amounts include $21 million and $16 million, respectively,
      for PEC at June 30, 2006 and December 31, 2005, and $8 million for PEF at June
      30, 2006. PEF had no liabilities related to guarantees and indemnifications
      to
      third parties at December 31, 2005. As current estimates change, it is possible
      that additional losses related to guarantees and indemnifications to third
      parties, which could be material, may be recorded in the future.




In
      addition, the Parent has issued $300 million of guarantees of certain payments
      of two wholly owned indirect subsidiaries. See Note 15 for additional
      information.




B.  Other
      Commitments and Contingencies




1.  Spent
      Nuclear Fuel Matters




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




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




The
      DOE
      and the Utilities agreed to, and the trial court entered, a stay of proceedings,
      in order to allow for possible efficiencies due to the resolution of legal
      and
      factual issues in previously filed cases in which similar claims are being
      pursued by other plaintiffs. These issues may include, among others, so-called “ rate
      issues,” or the minimum mandatory schedule for the acceptance of spent nuclear
      fuel and high-level waste by which the government was contractually obligated
      to
      accept contract holders’ spent nuclear fuel and/or high-level waste, and issues
      regarding recovery of damages under a partial breach of contract theory that
      will be alleged to occur in the future. These issues have been or are expected
      to be presented in the trials or appeals that are currently scheduled to occur
      during 2006 and 2007. Resolution of these issues in other cases could facilitate
      agreements by the parties in the Utilities’ lawsuit, or at a minimum, inform the
      court of decisions reached by other courts if they remain contested and require
      resolution in this case. In July 2005, the parties jointly requested a
      continuance of the stay through December 15, 2005, which the trial court
      granted. Subsequently, the trial court continued the stay until March 17, 2006.
      The trial court lifted the stay on March 22, 2006 and discovery has commenced.
      The trial court’s scheduling order, issued on March 23, 2006, included an
      anticipated trial date in late 2007.




In
      July
      2002, Congress passed an override resolution to Nevada’s veto of the DOE’s
      proposal to locate a permanent underground nuclear waste storage facility at
      Yucca Mountain, Nev. In January 2003, the state of Nevada; Clark




46


County,
      Nev.; and Las Vegas petitioned the U.S. Court of Appeals for the District of
      Columbia Circuit for review of the Congressional override resolution. These
      same
      parties also challenged the EPA’s radiation standards for Yucca Mountain. On
      July 9, 2004, the Court rejected the challenge to the constitutionality of
      the
      resolution approving Yucca Mountain, but ruled that the EPA was wrong to set
      a
      10,000-year compliance period in the radiation protection standard. In August
      2005, the EPA issued new proposed standards. The proposed standards include
      a
      1,000,000-year compliance period in the radiation protection standard. Comments
      were due November 21, 2005, and are being reviewed by the EPA. The EPA plans
      to
      issue a new safety standard for the repository by 2007. The DOE originally
      planned to submit a license application to the NRC to construct the Yucca
      Mountain facility by the end of 2004. However, in November 2004, the DOE
      announced it would not submit the license application until mid-2005 or later.
      The DOE did not submit the license application in 2005 and recently reported
      that the license application will not be submitted until after September 2007.
      Congress approved $450 million for fiscal year 2006 for the Yucca Mountain
      project, approximately $201 million less than requested by the DOE. The DOE
      has
      acknowledged that a working repository will not be operational until sometime
      after 2010. The DOE has not identified a new target date for placing the
      repository in service, but they have stated that they expect it to be open
      by
      2020. The Utilities cannot predict the outcome of this matter.




With
      certain modifications and additional approval by the NRC, including the
      installation of onsite dry storage facilities at Robinson Nuclear Plant
      (Robinson), Brunswick and Crystal
      River Unit No. 3 (CR3) ,
      the
      Utilities’ spent nuclear fuel storage facilities will be sufficient to provide
      storage space for spent fuel generated on their respective systems through
      the
      expiration of the operating licenses, including any license extensions, for
      all
      of their nuclear generating units.




2.  Synthetic
      Fuel Matters




On
      May
      15, 2005, the original owners of the Earthco synthetic fuel facilities filed
      suit in New York state court alleging breach of contract against the Progress
      Fuels subsidiaries that purchased the Earthco facilities (Progress Fuels
      Subsidiaries). The plaintiffs also named us as a defendant. The case is now
      resolved and dismissed.




The
      plaintiffs’ position in the lawsuit was that periodic payments otherwise due to
      them under the sales arrangement with the Progress Fuels Subsidiaries were,
      contrary to the sales agreement, being escrowed pending the outcome of the
      Internal Revenue Service (IRS) audit of the Earthco facilities. The Progress
      Fuels Subsidiaries believed that the parties’ agreements allowed for the
      payments to be escrowed in such event and also allowed for the use of such
      escrowed amounts to satisfy any potential disallowance of tax credits that
      could
      have arisen out of such an event. The escrowed amount in question was $103
      million, which reflected periodic payments that would have been paid to the
      plaintiffs beginning April 30, 2003 through May 18, 2006. In light of the
      successful outcome of the IRS audit of the Earthco facilities, the parties
      agreed to resolve the case. The Progress Fuels Subsidiaries paid the plaintiffs
      the funds held in escrow in exchange for a release of claims and dismissal
      of
      the lawsuit, which occurred on May 18, 2006.




A
      number
      of our subsidiaries and affiliates are parties to two lawsuits arising out
      of an
      Asset Purchase Agreement dated as of October 19, 1999, by and among U.S. Global,
      LLC (Global), Earthco, certain affiliates of Earthco (collectively the Earthco
      Sellers), EFC Synfuel LLC (which is owned indirectly by Progress Energy, Inc.)
      and certain of its affiliates, including Solid Energy LLC, Solid Fuel LLC,
      Ceredo Synfuel LLC, Gulf Coast Synfuel LLC (currently named Sandy River Synfuel
      LLC) (collectively the Progress Affiliates), as amended by an amendment to
      Purchase Agreement as of August 23, 2000 (the Asset Purchase Agreement). Global
      has asserted that (1) pursuant to the Asset Purchase Agreement it is entitled
      to
      an interest in two synthetic fuel facilities currently owned by the Progress
      Affiliates and an option to purchase additional interests in the two synthetic
      fuel facilities, (2) that it is entitled to damages because Progress
      Affiliates prohibited it from procuring purchasers for the synthetic fuel
      facilities, and (3) that it is entitled to immediate payment of tonnage fees
      held in escrow (this claim is identical to the position taken by Earthco as
      described above).




The
      first
      suit, U.S. Global, LLC v. Progress Energy, Inc. et al., asserts the above claims
      in a case filed in the Circuit Court for Broward County, Florida, in March
      2003
      (the Florida Global Case), and requests an unspecified amount of compensatory
      damages, as well as declaratory relief. The Progress Affiliates have answered
      the Complaint by generally denying all of Global’s substantive allegations and
      asserting numerous substantial affirmative defenses. The case is at issue,
      but
      neither party has requested a trial. The parties are currently engaged in
      discovery in the Florida Global Case.




47


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




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




We
      have
      escrowed $41 million that otherwise would have been paid to Global through
      June
      30, 2006. **** These
      funds are being escrowed on the same basis as the funds that were escrowed
      for
      the original owners of the Earthco facilities as discussed above. We have sent
      communication to Global regarding the negotiation of terms under which the
      funds
      might be released given the successful resolution of the IRS audit of the
      Earthco facilities.




We
      cannot
      predict the outcome of this matter.




3.  Other
      Litigation Matters




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




15.  CONDENSED
      CONSOLIDATING STATEMENTS




As
      discussed in Note 24 to the 2005 Form 10-K, we have guaranteed certain payments
      of two wholly owned indirect subsidiaries, FPC Capital I (the Trust) and Florida
      Progress Funding Corporation (Funding Corp.) since September 2005. Our
      guarantees are joint and several, full and unconditional and are in addition
      to
      the joint and several, full and unconditional guarantees previously issued
      to
      the Trust and Funding Corp. by Florida Progress Corporation (Florida Progress).
      Our subsidiaries have provisions restricting the payment of dividends to the
      Parent in certain limited circumstances and as disclosed in Note 12B to the
      2005
      Form 10-K, there were no restrictions on PEC’s or PEF’s retained
      earnings.




The
      Trust
      is a special-purpose entity and was deconsolidated in 2003 in accordance with
      the provisions of FIN No. 46. The deconsolidation was not material to our
      financial statements. Separate financial statements and other disclosures
      concerning the Trust have not been presented because we believe that such
      information is not material to investors.




Presented
      below are the condensed consolidating Statements of Income, Balance Sheets
      and
      Cash Flows as required by Rule 3-10 of Regulation S-X. In these condensed
      consolidating statements, the Parent column includes the financial results
      of
      the parent holding company only. The Subsidiary Guarantor column includes the
      financial results of Florida Progress. The Other column includes the
      consolidated financial results of all other non-guarantor subsidiaries and
      elimination entries for all intercompany transactions. All applicable corporate
      expenses have been allocated appropriately among the guarantor and non-guarantor
      subsidiaries. The
      financial information may not necessarily be indicative of results of operations
      or financial position had the Subsidiary Guarantor or other non-guarantor
      subsidiaries operated as independent entities. The
      accompanying condensed consolidating financial statements have been restated
      for
      all periods presented to reflect the operations of the coal mines, PT LLC,
      DeSoto and Rowan as discontinued operations as described in Note
      3.


48





Condensed
                Consolidating Statement of Income
              Three
                Months Ended June 30, 2006(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Operating
                revenues**Electric
            
            $
            **−**
            
            $
            1,147
            
            $
            935
            
            $
            2,082Diversified
                business
            
            
            **−**
            
            
            274
            
            
            143
            
            
            417**Total
                operating revenues**
            
            
            **−**
            
            
            1,421
            
            
            1,078
            
            
            2,499**Operating
                expenses**UtilityFuel
                used in electric generation
            
            
            **−**
            
            
            447
            
            
            262
            
            
            709Purchased
                power
            
            
            **−**
            
            
            180
            
            
            80
            
            
            260Operation
                and maintenance
            
            
            3
            
            
            178
            
            
            236
            
            
            417Depreciation
                and amortization
            
            
            **−**
            
            
            98
            
            
            136
            
            
            234Taxes
                other than on income
            
            
            **−**
            
            
            76
            
            
            44
            
            
            120Other
            
            
            **−**
            
            
            1
            
            
            (1
            )
            
            **−**Diversified
                businessCost
                of sales
            
            
            **−**
            
            
            226
            
            
            172
            
            
            398Depreciation
                and amortization
            
            
            **−**
            
            
            17
            
            
            16
            
            
            33Impairment
                of assets
            
            
            **−**
            
            
            44
            
            
            47
            
            
            91Other
            
            
            **−**
            
            
            17
            
            
            11
            
            
            28**Total
                operating expenses**
            
            
            3
            
            
            1,284
            
            
            1,003
            
            
            2,290**Operating
                (loss) income**
            
            
            (3
            )
            
            137
            
            
            75
            
            
            209Other
                income (expense), net
            
            
            12
            
            
            9
            
            
            (3
            )
            
            18Interest
                charges, net
            
            
            69
            
            
            49
            
            
            53
            
            
            171**(Loss)
                income from continuing operations before income tax, equity in earnings
                of
                consolidated subsidiaries and minority interest**
            
            
            (60
            )
            
            97
            
            
            19
            
            
            56**Income
                tax (benefit) expense**
            
            
            (26
            )
            
            36
            
            
            25
            
            
            35**Equity
                in earnings of consolidated subsidiaries**
            
            
            (13
            )
            
            **−**
            
            
            13
            
            
            **−****Minority
                interest in subsidiaries’ income, net of tax**
            
            
            **−**
            
            
            7
            
            
            **−**
            
            
            7**(Loss)
                income from continuing operations**
            
            
            (47
            )
            
            54
            
            
            7
            
            
            14**Discontinued
                operations, net of tax**
            
            
            **−**
            
            
            2
            
            
            (63
            )
            
            (61
            )**Net
                (loss) income**
            
            $
            (47
            )
            $
            56
            
            $
            (56
            )
            $
            (47
            )





49





Condensed
                Consolidating Statement of Income
              Three
                Months Ended June 30, 2005(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Operating
                revenues**Electric
            
            $
            **−**
            
            $
            908
            
            $
            860
            
            $
            1,768Diversified
                business
            
            
            **−**
            
            
            364
            
            
            133
            
            
            497**Total
                operating revenues**
            
            
            **−**
            
            
            1,272
            
            
            993
            
            
            2,265**Operating
                expenses**UtilityFuel
                used in electric generation
            
            
            **−**
            
            
            313
            
            
            216
            
            
            529Purchased
                power
            
            
            **−**
            
            
            144
            
            
            73
            
            
            217Operation
                and maintenance
            
            
            5
            
            
            288
            
            
            250
            
            
            543Depreciation
                and amortization
            
            
            **−**
            
            
            71
            
            
            136
            
            
            207Taxes
                other than on income
            
            
            **−**
            
            
            66
            
            
            42
            
            
            108Other
            
            
            **−**
            
            
            (25
            )
            
            **−**
            
            
            (25
            )Diversified
                businessCost
                of sales
            
            
            **−**
            
            
            344
            
            
            148
            
            
            492Depreciation
                and amortization
            
            
            **−**
            
            
            16
            
            
            16
            
            
            32Other
            
            
            **−**
            
            
            17
            
            
            9
            
            
            26**Total
                operating expenses**
            
            
            5
            
            
            1,234
            
            
            890
            
            
            2,129**Operating
                (loss) income**
            
            
            (5
            )
            
            38
            
            
            103
            
            
            136Other
                income (expense), net
            
            
            14
            
            
            (4
            )
            
            (12
            )
            
            (2
            )Interest
                charges, net
            
            
            75
            
            
            46
            
            
            38
            
            
            159**(Loss)
                income from continuing operations before income tax, equity in earnings
                of
                consolidated subsidiaries and minority interest**
            
            
            (66
            )
            
            (12
            )
            
            53
            
            
            (25
            )**Income
                tax benefit**
            
            
            19
            
            
            4
            
            
            **−**
            
            
            23**Equity
                in earnings of consolidated subsidiaries**
            
            
            46
            
            
            **−**
            
            
            (46
            )
            
            **−****Minority
                interest in subsidiaries’ loss, net of tax**
            
            
            **−**
            
            
            8
            
            
            **−**
            
            
            8**(Loss)
                income from continuing operations**
            
            
            (1
            )
            
            −
            
            
            7
            
            
            6**Discontinued
                operations, net of tax**
            
            
            **−**
            
            
            (8
            )
            
            1
            
            
            (7
            )**Net
                (loss) income**
            
            $
            (1
            )
            $
            (8
            )
            $
            8
            
            $
            (1
            )





50





Condensed
                Consolidating Statement of Income
              Six
                Months Ended June 30, 2006(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Operating
                revenues**Electric
            
            $
            **−**
            
            $
            2,154
            
            $
            1,913
            
            $
            4,067Diversified
                business
            
            
            **−**
            
            
            556
            
            
            302
            
            
            858**Total
                operating revenues**
            
            
            **−**
            
            
            2,710
            
            
            2,215
            
            
            4,925**Operating
                expenses**UtilityFuel
                used in electric generation
            
            
            **−**
            
            
            841
            
            
            558
            
            
            1,399Purchased
                power
            
            
            **−**
            
            
            345
            
            
            144
            
            
            489Operation
                and maintenance
            
            
            7
            
            
            344
            
            
            482
            
            
            833Depreciation
                and amortization
            
            
            **−**
            
            
            193
            
            
            269
            
            
            462Taxes
                other than on income
            
            
            **−**
            
            
            149
            
            
            90
            
            
            239Other
            
            
            **−**
            
            
            (2
            )
            
            **−**
            
            
            (2
            )Diversified
                businessCost
                of sales
            
            
            **−**
            
            
            482
            
            
            318
            
            
            800Depreciation
                and amortization
            
            
            **−**
            
            
            35
            
            
            30
            
            
            65Impairment
                of assets
            
            
            **−**
            
            
            44
            
            
            111
            
            
            155Other
            
            
            **−**
            
            
            24
            
            
            19
            
            
            43**Total
                operating expenses**
            
            
            7
            
            
            2,455
            
            
            2,021
            
            
            4,483**Operating
                (loss) income**
            
            
            (7
            )
            
            255
            
            
            194
            
            
            442Other
                income (expense), net
            
            
            2
            
            
            38
            
            
            (7
            )
            
            33Interest
                charges, net
            
            
            146
            
            
            101
            
            
            100
            
            
            347**(Loss)
                income from continuing operations before income tax, equity in earnings
                of
                consolidated subsidiaries and minority interest**
            
            
            (151
            )
            
            192
            
            
            87
            
            
            128**Income
                tax (benefit) expense**
            
            
            (59
            )
            
            63
            
            
            44
            
            
            48**Equity
                in earnings of consolidated subsidiaries**
            
            
            90
            
            
            **−**
            
            
            (90
            )
            
            **−****Minority
                interest in subsidiaries’ income, net of tax**
            
            
            **−**
            
            
            14
            
            
            **−**
            
            
            14**(Loss)
                income from continuing operations**
            
            
            (2
            )
            
            115
            
            
            (47
            )
            
            66**Discontinued
                operations, net of tax**
            
            
            **−**
            
            
            1
            
            
            (69
            )
            
            (68
            )**Net
                (loss) income**
            
            $
            (2
            )
            $
            116
            
            $
            (116
            )
            $
            (2
            )





51





Condensed
                Consolidating Statement of Income
              Six
                Months Ended June 30, 2005(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Operating
                revenues**Electric
            
            **$**
            **−**
            
            $
            1,756
            
            $
            1,795
            
            $
            3,551Diversified
                business
            
            
            **−**
            
            
            663
            
            
            193
            
            
            856**Total
                operating revenues**
            
            
            **−**
            
            
            2,419
            
            
            1,988
            
            
            4,407**Operating
                expenses**UtilityFuel
                used in electric generation
            
            
            **−**
            
            
            615
            
            
            464
            
            
            1,079Purchased
                power
            
            
            **−**
            
            
            275
            
            
            140
            
            
            415Operation
                and maintenance
            
            
            9
            
            
            477
            
            
            463
            
            
            949Depreciation
                and amortization
            
            
            **−**
            
            
            141
            
            
            274
            
            
            415Taxes
                other than on income
            
            
            4
            
            
            133
            
            
            88
            
            
            225Other
            
            
            **−**
            
            
            (25
            )
            
            **−**
            
            
            (25
            )Diversified
                businessCost
                of sales
            
            
            **−**
            
            
            625
            
            
            228
            
            
            853Depreciation
                and amortization
            
            
            **−**
            
            
            32
            
            
            27
            
            
            59Other
            
            
            **−**
            
            
            33
            
            
            18
            
            
            51**Total
                operating expenses**
            
            
            13
            
            
            2,306
            
            
            1,702
            
            
            4,021**Operating
                (loss) income**
            
            
            (13
            )
            
            113
            
            
            286
            
            
            386Other
                income (expense), net
            
            
            32
            
            
            (5
            )
            
            (24
            )
            
            3Interest
                charges, net
            
            
            154
            
            
            90
            
            
            74
            
            
            318**(Loss)
                income from continuing operations before income tax, equity in earnings
                of
                consolidated subsidiaries and minority interest**
            
            
            (135
            )
            
            18
            
            
            188
            
            
            71**Income
                tax (benefit) expense**
            
            
            (38
            )
            
            (10
            )
            
            23
            
            
            (25
            )**Equity
                in earnings of consolidated subsidiaries**
            
            
            189
            
            
            **−**
            
            
            (189
            )
            
            **−****Minority
                interest in subsidiaries’ loss, net of tax**
            
            
            **−**
            
            
            16
            
            
            **−**
            
            
            16**Income
                (loss) from continuing operations**
            
            
            92
            
            
            44
            
            
            (24
            )
            
            112**Discontinued
                operations, net of tax**
            
            
            **−**
            
            
            (34
            )
            
            14
            
            
            (20
            )**Net
                income (loss)**
            
            $
            92
            
            $
            10
            
            $
            (10
            )
            $
            92





52





Condensed
                Consolidating Balance Sheet
              June
                30, 2006(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Utility
                plant, net**
            
            $
            −
            
            $
            6,036
            
            $
            8,671
            
            $
            14,707**Current
                assets**Cash
                and cash equivalents
            
            
            −
            
            
            107
            
            
            157
            
            
            264Short-term
                investments
            
            
            −
            
            
            45
            
            
            50
            
            
            95Notes
                receivables from affiliated companies
            
            
            310
            
            
            15
            
            
            (325
            )
            
            −Deferred
                fuel cost
            
            
            −
            
            
            178
            
            
            271
            
            
            449Assets
                of discontinued operations
            
            
            −
            
            
            42
            
            
            342
            
            
            384Other
                current assets
            
            
            13
            
            
            1,105
            
            
            1,026
            
            
            2,144**Total
                current assets**
            
            
            323
            
            
            1,492
            
            
            1,521
            
            
            3,336**Deferred
                debits and other assets**Investment
                in consolidated subsidiaries
            
            
            11,415
            
            
            −
            
            
            (11,415
            )
            
            −Goodwill
            
            
            −
            
            
            2
            
            
            3,653
            
            
            3,655Other
                assets and deferred debits
            
            
            256
            
            
            2,027
            
            
            2,173
            
            
            4,456**Total
                deferred debits and other assets**
            
            
            11,671
            
            
            2,029
            
            
            (5,589
            )
            
            8,111**Total
                assets**
            
            $
            11,994
            
            $
            9,557
            
            $
            4,603
            
            $
            26,154**Capitalization**Common
                stock equity
            
            $
            7,844
            
            $
            3,028
            
            $
            (3,028
            )
            $
            7,844Preferred
                stock of subsidiaries - not subject to mandatory
                redemption
            
            
            −
            
            
            34
            
            
            59
            
            
            93Minority
                interest
            
            
            −
            
            
            11
            
            
            5
            
            
            16Long-term
                debt, affiliate
            
            
            −
            
            
            440
            
            
            (170
            )
            
            270Long-term
                debt, net
            
            
            3,520
            
            
            2,634
            
            
            3,668
            
            
            9,822**Total
                capitalization**
            
            
            11,364
            
            
            6,147
            
            
            534
            
            
            18,045**Current
                liabilities**Current
                portion of long-term debt
            
            
            351
            
            
            109
            
            
            −
            
            
            460Notes
                payable to affiliated companies
            
            
            −
            
            
            205
            
            
            (205
            )
            
            −Liabilities
                of discontinued operations
            
            
            −
            
            
            22
            
            
            10
            
            
            32Other
                current liabilities
            
            
            233
            
            
            969
            
            
            826
            
            
            2,028**Total
                current liabilities**
            
            
            584
            
            
            1,305
            
            
            631
            
            
            2,520**Deferred
                credits and other liabilities**Noncurrent
                income tax liabilities
            
            
            −
            
            
            12
            
            
            234
            
            
            246Regulatory
                liabilities
            
            
            −
            
            
            1,159
            
            
            1,341
            
            
            2,500Accrued
                pension and other benefits
            
            
            12
            
            
            318
            
            
            574
            
            
            904Other
                liabilities and deferred credits
            
            
            34
            
            
            616
            
            
            1,289
            
            
            1,939**Total
                deferred credits and other liabilities**
            
            
            46
            
            
            2,105
            
            
            3,438
            
            
            5,589**Total
                capitalization and liabilities**
            
            $
            11,994
            
            $
            9,557
            
            $
            4,603
            
            $
            26,154





53





Condensed
                Consolidating Balance Sheet
              December
                31, 2005(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Utility
                plant, net**
            
            $
            −
            
            $
            5,821
            
            $
            8,621
            
            $
            14,442**Current
                assets**Cash
                and cash equivalents
            
            
            239
            
            
            241
            
            
            126
            
            
            606Short-term
                investments
            
            
            **−**
            
            
            **−**
            
            
            191
            
            
            191Notes
                receivables from affiliated companies
            
            
            467
            
            
            **−**
            
            
            (467
            )
            
            **−**Deferred
                fuel cost
            
            
            **−**
            
            
            341
            
            
            261
            
            
            602Assets
                of discontinued operations
            
            
            **−**
            
            
            223
            
            
            499
            
            
            722Other
                current assets
            
            
            22
            
            
            1,057
            
            
            1,127
            
            
            2,206**Total
                current assets**
            
            
            728
            
            
            1,862
            
            
            1,737
            
            
            4,327**Deferred
                debits and other assets**Investment
                in consolidated subsidiaries
            
            
            11,594
            
            
            **−**
            
            
            (11,594
            )
            
            **−**Goodwill
            
            
            **−**
            
            
            2
            
            
            3,717
            
            
            3,719Other
                assets and deferred debits
            
            
            259
            
            
            2,072
            
            
            2,205
            
            
            4,536**Total
                deferred debits and other assets**
            
            
            11,853
            
            
            2,074
            
            
            (5,672
            )
            
            8,255**Total
                assets**
            
            $
            12,581
            
            $
            9,757
            
            $
            4,686
            
            $
            27,024**Capitalization**Common
                stock equity
            
            $
            8,038
            
            $
            3,039
            
            $
            (3,039
            )
            $
            8,038Preferred
                stock of subsidiaries - not subject to mandatory
                redemption
            
            
            **−**
            
            
            34
            
            
            59
            
            
            93Minority
                interest
            
            
            **−**
            
            
            38
            
            
            5
            
            
            43Long-term
                debt, affiliate
            
            
            **−**
            
            
            440
            
            
            (170
            )
            
            270Long-term
                debt, net
            
            
            3,873
            
            
            2,636
            
            
            3,667
            
            
            10,176**Total
                capitalization**
            
            
            11,911
            
            
            6,187
            
            
            522
            
            
            18,620**Current
                liabilities**Current
                portion of long-term debt
            
            
            404
            
            
            109
            
            
            **−**
            
            
            513Notes
                payable to affiliated companies
            
            
            **−**
            
            
            315
            
            
            (315
            )
            
            **−**Short-term
                obligations
            
            
            **−**
            
            
            102
            
            
            73
            
            
            175Liabilities
                of discontinued operations
            
            
            **−**
            
            
            87
            
            
            4
            
            
            91Other
                current liabilities
            
            
            245
            
            
            843
            
            
            1,019
            
            
            2,107**Total
                current liabilities**
            
            
            649
            
            
            1,456
            
            
            781
            
            
            2,886**Deferred
                credits and other liabilities**Noncurrent
                income tax liabilities
            
            
            **−**
            
            
            62
            
            
            215
            
            
            277Regulatory
                liabilities
            
            
            **−**
            
            
            1,189
            
            
            1,338
            
            
            2,527Accrued
                pension and other benefits
            
            
            12
            
            
            307
            
            
            551
            
            
            870Other
                liabilities and deferred credits
            
            
            9
            
            
            556
            
            
            1,279
            
            
            1,844**Total
                deferred credits and other liabilities**
            
            
            21
            
            
            2,114
            
            
            3,383
            
            
            5,518**Total
                capitalization and liabilities**
            
            $
            12,581
            
            $
            9,757
            
            $
            4,686
            
            $
            27,024





54





Condensed
                Consolidating Statement of Cash Flows
              Six
                Months Ended June 30, 2006(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Net
                cash provided by operating activities**
            
            $
            254
            
            $
            598
            
            $
            193
            
            $
            1,045**Investing
                activities**Gross
                utility property additions
            
            
            -
            
            
            (362
            )
            
            (307
            )
            
            (669
            )Diversified
                business property additions
            
            
            -
            
            
            (92
            )
            
            -
            
            
            (92
            )Nuclear
                fuel additions
            
            
            -
            
            
            (6
            )
            
            (56
            )
            
            (62
            )Proceeds
                from sales of discontinued operations and other assets, net of cash
                divested
            
            
            -
            
            
            137
            
            
            84
            
            
            221Purchases
                of available-for-sale securities and other investments
            
            
            (163
            )
            
            (329
            )
            
            (464
            )
            
            (956
            )Proceeds
                from sales of available-for-sale securities and other
                investments
            
            
            163
            
            
            383
            
            
            580
            
            
            1,126Changes
                in advances to affiliates
            
            
            164
            
            
            (2
            )
            
            (162
            )
            
            -Other
                investing activities
            
            
            (4
            )
            
            (2
            )
            
            (8
            )
            
            (14
            )**Net
                cash provided (used) by investing activities**
            
            
            160
            
            
            (273
            )
            
            (333
            )
            
            (446
            )**Financing
                activities**Issuance
                of common stock
            
            
            60
            
            
            -
            
            
            -
            
            
            60Proceeds
                from issuance of long-term debt
            
            
            397
            
            
            -
            
            
            -
            
            
            397Net
                decrease in short-term indebtedness
            
            
            -
            
            
            (102
            )
            
            (73
            )
            
            (175
            )Retirement
                of long-term debt
            
            
            (800
            )
            
            (2
            )
            
            -
            
            
            (802
            )Dividends
                paid on common stock
            
            
            (303
            )
            
            -
            
            
            -
            
            
            (303
            )Dividends
                paid to parent
            
            
            -
            
            
            (163
            )
            
            163
            
            
            -Cash
                distributions to minority interests of consolidated
                subsidiary
            
            
            -
            
            
            (74
            )
            
            -
            
            
            (74
            )Changes
                in advances from affiliates
            
            
            -
            
            
            (114
            )
            
            114
            
            
            -Other
                financing activities
            
            
            (7
            )
            
            8
            
            
            (42
            )
            
            (41
            )**Net
                cash (used ) provided by financing activities**
            
            
            (653
            )
            
            (447
            )
            
            162
            
            
            (938
            )**Cash
                (used) provided by discontinued operations**Operating
                activities
            
            
            -
            
            
            (6
            )
            
            10
            
            
            4Investing
                activities
            
            
            -
            
            
            (6
            )
            
            (1
            )
            
            (7
            )Financing
                activities
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                (decrease) increase in cash and cash equivalents
            
            
            (239
            )
            
            (134
            )
            
            31
            
            
            (342
            )**Cash
                and cash equivalents at beginning of period**
            
            
            239
            
            
            241
            
            
            126
            
            
            606**Cash
                and cash equivalents at end of period**
            
            $
            -
            
            $
            107
            
            $
            157
            
            $
            264





55





Condensed
                Consolidating Statement of Cash Flows
              Six
                Months Ended June 30, 2005(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Net
                cash provided by operating activities**
            
            $
            125
            
            $
            170
            
            $
            234
            
            $
            529**Investing
                activities**Gross
                utility property additions
            
            
            -
            
            
            (253
            )
            
            (286
            )
            
            (539
            )Diversified
                business property additions
            
            
            -
            
            
            (103
            )
            
            (17
            )
            
            (120
            )Nuclear
                fuel additions
            
            
            -
            
            
            (34
            )
            
            (33
            )
            
            (67
            )Proceeds
                from sales of discontinued operations and other assets, net of cash
                divested
            
            
            -
            
            
            443
            
            
            1
            
            
            444Purchases
                of available-for-sale securities and other investments
            
            
            (1,665
            )
            
            (177
            )
            
            (1,363
            )
            
            (3,205
            )Proceeds
                from sales of available-for-sale securities and other
                investments
            
            
            1,643
            
            
            177
            
            
            1,409
            
            
            3,229Changes
                in advances to affiliates
            
            
            90
            
            
            (31
            )
            
            (59
            )
            
            -Proceeds
                from repayment of long-term affiliate debt
            
            
            369
            
            
            -
            
            
            (369
            )
            
            -Other
                investing activities
            
            
            (11
            )
            
            (10
            )
            
            (2
            )
            
            (23
            )**Net
                cash provided (used) by investing activities**
            
            
            426
            
            
            12
            
            
            (719
            )
            
            (281
            )**Financing
                activities**Issuance
                of common stock
            
            
            171
            
            
            -
            
            
            -
            
            
            171Proceeds
                from issuance of long-term debt
            
            
            -
            
            
            297
            
            
            495
            
            
            792Net
                decrease in short-term indebtedness
            
            
            (170
            )
            
            (32
            )
            
            (79
            )
            
            (281
            )Retirement
                of long-term debt
            
            
            (160
            )
            
            (57
            )
            
            (300
            )
            
            (517
            )Retirement
                of long-term affiliate debt
            
            
            -
            
            
            (369
            )
            
            369
            
            
            -Dividends
                paid on common stock
            
            
            (289
            )
            
            -
            
            
            -
            
            
            (289
            )Changes
                in advances from affiliates
            
            
            -
            
            
            (26
            )
            
            26
            
            
            -Other
                financing activities
            
            
            (8
            )
            
            32
            
            
            (48
            )
            
            (24
            )**Net
                cash (used) provided by financing activities**
            
            
            (456
            )
            
            (155
            )
            
            463
            
            
            (148
            )**Cash
                (used) provided by discontinued operations**Operating
                activities
            
            
            -
            
            
            (15
            )
            
            14
            
            
            (1
            )Investing
                activities
            
            
            -
            
            
            (13
            )
            
            (1
            )
            
            (14
            )Financing
                activities
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                increase (decrease) in cash and cash equivalents
            
            
            95
            
            
            (1
            )
            
            (9
            )
            
            85**Cash
                and cash equivalents at beginning of period**
            
            
            5
            
            
            24
            
            
            27
            
            
            56**Cash
                and cash equivalents at end of period**
            
            $
            100
            
            $
            23
            
            $
            18
            
            $
            141





16.  SUBSEQUENT
      EVENT





On
      July
      12, 2006, our board of directors approved a plan to divest of our natural gas
      drilling and production business (Gas), which includes Winchester Production
      Company, Westchester Gas Company, Texas Gas Gathering and Talco Midstream
      Assets. On July 22, 2006, we entered into a definitive agreement to sell Gas
      to
      Dallas, Texas-based EXCO Resources, Inc. for $1.2 billion in gross cash
      proceeds. Proceeds from the sale will be used to reduce holding company debt
      and
      for other corporate purposes.





The
      transaction is expected to close in October 2006 and is subject to customary
      closing provisions and adjustments. We expect to report Gas, which is included
      within our Progress Ventures segment, as discontinued operations in the third
      quarter of 2006. The carrying amounts for the assets and liabilities of Gas
      included in the Consolidated Balance Sheet were as follows:





(in
                millions)
            
            **June
                30, 2006**
            
            December
                31, 2005Total
                current assets
            
            **$**
            **38**
            
            $
            52Total
                property, plant and equipment, net
            
            
            **528**
            
            
            469Total
                other assets
            
            
            **8**
            
            
            8Total
                current liabilities
            
            
            **44**
            
            
            68Total
                long-term liabilities
            
            
            **93**
            
            
            66Total
                capitalization
            
            
            **437**
            
            
            395


56


Item
      2.  Management’s
      Discussionand Analysis of Financial Condition and
      Results of Operations




The
      following combined Management’s Discussion and Analysis is separately filed by
      Progress Energy, Inc. (Progress Energy), Carolina Power & Light Company
      d/b/a Progress Energy Carolinas, Inc. (PEC) and Florida Power Corporation d/b/a
      Progress Energy Florida, Inc. (PEF). Information contained herein relating
      to
      PEC and PEF individually is filed by such company on its own behalf. As used
      in
      this report, Progress Energy, which includes Progress Energy, Inc. holding
      company (the Parent) and its regulated and nonregulated subsidiaries on a
      consolidated basis, is at times referred to as “we”, “us” or “our.” When
      discussing Progress Energy’s financial information, it necessarily includes the
      results of PEC and PEF (collectively, the Utilities). The term “Progress
      Registrants” refers to each of the three separate registrants: Progress Energy,
      PEC and PEF.




The
      following Management’s Discussion and Analysis contains forward-looking
      statements that involve estimates, projections, goals, forecasts, assumptions,
      risks and uncertainties that could cause actual results or outcomes to differ
      materially from those expressed in the forward-looking statements. Please review
      “SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS” and Item 1A, “Risk Factors” of Part
      II herein and in the 2005 Form 10-K for a discussion of the factors that may
      impact any such forward-looking statements made herein.




Amounts
      reported in the interim 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 2005
      Form
      10-K.




**RESULTS
      OF OPERATIONS**





Our
      reportable business segments and their primary operations include:





·
            PEC
                - primarily engaged in the generation, transmission, distribution
                and sale
                of electricity in portions of North Carolina and South Carolina;


·
            PEF
                - primarily engaged in the generation, transmission, distribution
                and sale
                of electricity in portions of Florida;


·
            Progress
                Ventures - primarily engaged in nonregulated electric generation
                operations and energy marketing activities in Georgia, as well as
                natural
                gas drilling and production in Texas and Louisiana. We have subsequently
                entered into a definitive agreement to sell our natural gas drilling
                and
                production business (See Note 16);
                and


·
            Coal
                and Synthetic Fuels - primarily engaged in the production and sale
                of
                coal-based solid synthetic fuels in Kentucky and West Virginia, the
                operation of synthetic fuel facilities for third parties in West
                Virginia,
                and coal terminal services in Kentucky and West Virginia. On May
                22, 2006,
                we idled production at our synthetic fuel plants due to significant
                uncertainty surrounding synthetic fuel production (See Notes 6 and
                7 for
                additional information).





The
      Corporate and Other segment includes businesses which do not meet the
      requirements for separate segment reporting disclosure. These businesses are
      engaged in other nonregulated business areas including holding company
      operations and Progress Energy Service Company, LLC (PESC)
      operations.




In
      2005,
      we changed our reportable segments due to changes in the operations of certain
      businesses and the reclassification of our coal mining business as discontinued
      operations. In addition, with the sale of our share of Progress Telecom, LLC
      (PT
      LLC) in the first quarter of 2006, we reclassified PT LLC’s operations as
      discontinued operations and in the second quarter of 2006, we reclassified
      two
      generating facilities’ operations previously included in Progress Ventures as
      discontinued operations. These reportable segment changes reflect the current
      reporting structure. For comparative purposes, prior year results have been
      restated to conform to the current presentation. On July 22, 2006, we entered
      into a definitive agreement to sell our natural gas drilling and production
      business. As a result we expect to reclassify this portion of Progress Ventures
      as discontinued operations in the third quarter (See Note 16).




57


In
      this
      section, earnings and the factors affecting earnings for the three and six
      months ended June 30, 2006 are compared to the same periods in 2005. The
      discussion begins with a summarized overview of our consolidated earnings,
      which
      is followed by a more detailed discussion and analysis by business segment.




**OVERVIEW**




For
      the
      quarter ended June 30, 2006, our net loss was $47 million, or $(0.19) per share,
      compared to net loss of $1 million, or $(0.01) per share, for the same period
      in
      2005. The increase in net loss as compared to prior year was due primarily
      to:




·
            The
                estimated loss on sale of two of our nonregulated plants and the
                associated valuation allowance recorded against the deferred tax
                assets
                for net operating loss carry
                forwards.


·
            Lower
                tax credits due to lower synthetic fuel production and higher oil
                prices.


·
            Impairment
                of our synthetic fuel assets and a portion of our coal terminal assets
                primarily due to continued high oil
                prices.


·
            Additional
                outage expenses at PEC.


·
            Prior
                year gain on the sale of our Winter Park distribution
                assets.





Partially
      offsetting these items were:





·
            Prior
                year postretirement and severance expenses related to the 2005
                cost-management initiative.


·
            The
                impact of tax levelization.


·
            Favorable
                retail margin at the Utilities.


·
            Prior
                year write-off of unrecoverable storm costs at
                PEF.





For
      the
      six months ended June 30, 2006, our net loss was $2 million, or $(0.01) per
      share, compared to net income of $92 million, or $0.37 per share, for the same
      period in 2005. The decrease in net income as compared to prior year was due
      primarily to:




·
            Lower
                tax credits due to lower synthetic fuel production and higher oil
                prices.


·
            The
                estimated loss on sale of two of our nonregulated plants and the
                associated valuation allowance recorded against the deferred tax
                assets
                for net operating loss carry
                forwards.


·
            Impairment
                of our synthetic fuel assets and a portion of our coal terminal assets
                primarily due to continued high oil
                prices.


·
            Impairment
                of goodwill related to our nonregulated plants in
                Georgia.


·
            Additional
                outage expenses at PEC.


·
            Unrealized
                losses recorded on contingent value
                obligations.


·
            Prior
                year gain on the sale of our Winter Park distribution
                assets.


·
            Additional
                estimated environmental remediation expenses at
                PEC.





Partially
      offsetting these items were:





·
            Prior
                year postretirement and severance expenses related to the 2005
                cost-management initiative.


·
            The
                impact of tax levelization.


·
            Gain
                on sale of PT LLC.


·
            Increased
                wholesale margin at PEC.


·
            Gain
                on sale of Level 3 stock acquired as part of the divestiture of PT
                LLC.


·
            Favorable
                retail margin at PEF.


·
            Prior
                year write-off of unrecoverable storm costs at
                PEF.


·
            The
                impact of restructuring a long-term coal supply contract at Coal
                and
                Synthetic Fuels.





58


Our
      segments contributed the following profits or losses for the three and six
      months ended June 30, 2006 and 2005:


Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Business
                SegmentPEC
            
            **$**
            **76**
            
            $
            67
            
            **$**
            **161**
            
            $
            182PEF
            
            
            **87**
            
            
            10
            
            
            **139**
            
            
            53Progress
                Ventures
            
            
            **(8**
            **)**
            
            6
            
            
            **(43**
            **)**
            
            12Coal
                and synthetic fuels
            
            
            **(91**
            **)**
            
            23
            
            
            **(77**
            **)**
            
            20Total
                segment profit
            
            
            **64**
            
            
            106
            
            
            **180**
            
            
            267Corporate
                and Other
            
            
            **(50**
            **)**
            
            (100
            )
            
            **(114**
            **)**
            
            (155
            )Income
                from continuing operations
            
            
            **14**
            
            
            6
            
            
            **66**
            
            
            112Discontinued
                operations, net of tax
            
            
            **(61**
            **)**
            
            (7
            )
            
            **(68**
            **)**
            
            (20
            )Net
                (loss) income
            
            **$**
            **(47**
            **)**
            $
            (1
            )
            **$**
            **(2**
            **)**
            $
            92





**PROGRESS
      ENERGY CAROLINAS**




PEC
      contributed segment profits of $76 million and $67 million for the three months
      ended June 30, 2006 and 2005, respectively. The increase in profits for the
      three months ended June 30, 2006, when compared to the same period in 2005,
      was
      primarily due to postretirement and severance expenses incurred in 2005 and
      favorable retail and wholesale margins. These were partially offset by higher
      O&M expenses related to outages at nuclear facilities.




PEC
      contributed segment profits of $161 million and $182 million for the six months
      ended June 30, 2006 and 2005, respectively. The decrease in profits for the
      six
      months ended June 30, 2006, when compared to the same period in 2005, was
      primarily due to higher O&M expenses related to outages at nuclear
      facilities, additional estimated environmental remediation expenses and
      unfavorable weather. These were partially offset by postretirement and severance
      expenses incurred in 2005, favorable wholesale sales and favorable retail
      customer growth and usage.




Three
      Months Ended June 30, 2006 Compared to Three Months Ended June 30,
      2005




**Revenues**




PEC’s
      electric revenues for the three months ended June 30, 2006 and 2005, and the
      percentage change by customer class were as follows:




(in
                millions)
            
            Three
                Months Ended June 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            **$**
            **299**
            
            $
            27
            
            
            9.9
            
            $
            272Commercial
            
            
            **236**
            
            
            22
            
            
            10.3
            
            
            214Industrial
            
            
            **173**
            
            
            9
            
            
            5.5
            
            
            164Governmental
            
            
            **21**
            
            
            3
            
            
            16.7
            
            
            18Total
                retail revenues
            
            
            **729**
            
            
            61
            
            
            9.1
            
            
            668Wholesale
            
            
            **167**
            
            
            13
            
            
            8.4
            
            
            154Unbilled
            
            
            **14**
            
            
            (1
            )
            
            -
            
            
            15Miscellaneous
            
            
            **25**
            
            
            2
            
            
            8.7
            
            
            23Total
                electric revenues
            
            
            **935**
            
            
            75
            
            
            8.7
            
            
            860Less:
                Fuel revenues
            
            
            **(294**
            **)**
            
            (56
            )
            
            -
            
            
            (238
            )Revenues
                excluding fuel
            
            **$**
            **641**
            
            $
            19
            
            
            3.1
            
            $
            622





59


PEC’s
      energy sales for the three months ended June 30, 2006 and 2005, and the amount
      and percentage change by customer class were as follows:


(in
                millions of kWh)
            
            Three
                Months Ended June 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            
            **3,438**
            
            
            153
            
            
            4.7
            
            
            3,285Commercial
            
            
            **3,218**
            
            
            131
            
            
            4.2
            
            
            3,087Industrial
            
            
            **3,139**
            
            
            (91
            )
            
            (2.8
            )
            
            3,230Governmental
            
            
            **333**
            
            
            19
            
            
            6.1
            
            
            314Total
                retail energy sales
            
            
            **10,128**
            
            
            212
            
            
            2.1
            
            
            9,916Wholesale
            
            
            **3,328**
            
            
            (13
            )
            
            (0.4
            )
            
            3,341Unbilled
            
            
            **232**
            
            
            (3
            )
            
            -
            
            
            235Total
                kWh sales
            
            
            **13,688**
            
            
            196
            
            
            1.5
            
            
            13,492





PEC’s
      electric revenues, excluding fuel revenues of $294 million and $238 million
      for
      the three months ended June 30, 2006 and 2005, respectively, increased $19
      million. The increase in revenues is attributable primarily to favorable retail
      growth and usage, increased wholesale revenues less fuel and favorable weather.
      Favorable retail growth and usage of $10 million was driven by an approximate
      increase in the average number of customers of 30,000 as of June 30, 2006,
      compared to June 30, 2005. The increase in wholesale revenues less fuel of
      $9
      million was driven primarily by the impact of increased capacity under contract,
      higher excess generation margin due to favorable market conditions and gains
      on
      forward sales of excess generation. The impact of weather was $2 million
      favorable with cooling degree days 17 percent greater than prior year partially
      offset by heating degree days 25 percent 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 a portion of 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.




Fuel
      and
      purchased power expenses were $342 million for the three months ended June
      30,
      2006, which represents a $53 million increase compared to the same period in
      the
      prior year. Fuel used in electric generation increased $46 million to $262
      million compared to the prior year. This increase is due to a $41 million
      increase in fuel used in generation due primarily to higher fuel costs which
      are
      being driven by higher coal, oil and natural gas prices and a change in
      generation mix primarily due to lower nuclear generation related to nuclear
      outages. In addition, deferred fuel expense increased $5 million due to an
      increase in the fuel recovery rates for North Carolina and South Carolina.
      Current year purchased power costs were $7 million higher than the three months
      ended June 30, 2005, primarily due to higher system requirements and market
      prices in the second quarter of 2006.




*Operation
      and Maintenance*




O&M
      expenses were $248 million for the three months ended June 30, 2006, which
      represents a $12 million decrease compared to the same period in 2005. O&M
      expenses decreased $46 million due to postretirement and severance expense
      recorded in the prior year related to the 2005 cost-management initiative
      partially offset by $26 million related to outages at nuclear facilities and
      $2
      million due to higher United States Nuclear Regulatory Commission (NRC) fees
      in
      2006.




*Total
      Other Income*




Total
      other income of $3 million increased $4 million compared to the three months
      ended June 30, 2005 primarily due to $4 million related to the Federal Energy
      Regulatory Commission (FERC) Code of Conduct audit settlement recorded in the
      prior year and a $3 million increase in interest income related to temporary
      investments partially offset by a $5 million increase in the indemnification
      liability recorded for estimated capital costs associated with the




60


Clean
      Smokestacks Act expected to be incurred in excess of the maximum billable costs
      to the joint owner (See Note 13B).




*Total
      Interest Charges, net*




Total
      interest charges, net increased $9 million for the three months ended June
      30,
      2006, as compared to the same period in the prior year. This fluctuation is
      due
      primarily to the impact of a net increase in long-term debt and higher interest
      rates on variable rate pollution control bonds.




*Income
      Tax Expense*




Income
      tax expense increased $20 million for the three months ended June 30, 2006,
      as
      compared to the same period in the prior year, primarily due to the impact
      of
      higher earnings compared to prior year. Income tax expense also increased due
      to
      the allocation of $5 million of the Parent’s tax benefit not related to
      acquisition interest expense in 2005 that is no longer allocated in 2006. See
      Corporate and Other below for additional information on the change in the tax
      benefit allocation in 2006. Accounting principles generally accepted in the
      United States (GAAP) requires companies to apply a levelized effective tax
      rate
      to interim periods that is consistent with the estimated annual effective tax
      rate. PEC’s income tax expense was decreased by $2 million for the three months
      ended June 30, 2006 compared to an increase of $3 million for the three months
      ended June 30, 2005, in order to maintain an effective tax rate consistent
      with
      the estimated annual rate. Fluctuations in estimated annual earnings and the
      timing of various permanent and temporary deductions can also cause fluctuations
      in the effective tax rate for interim periods. Therefore, this adjustment will
      vary each quarter, but will have no effect on net income for the year.




Six
      Months Ended June 30, 2006 Compared to Six Months Ended June 30,
      2005




**Revenues**




PEC’s
      electric revenues for the six months ended June 30, 2006 and 2005, and the
      percentage change by customer class were as follows:


(in
                millions)
            
            Six
                Months Ended June 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            **$**
            **675**
            
            $
            29
            
            
            4.5
            
            $
            646Commercial
            
            
            **462**
            
            
            34
            
            
            7.9
            
            
            428Industrial
            
            
            **336**
            
            
            23
            
            
            7.3
            
            
            313Governmental
            
            
            **41**
            
            
            3
            
            
            7.9
            
            
            38Total
                retail revenues
            
            
            **1,514**
            
            
            89
            
            
            6.2
            
            
            1,425Wholesale
            
            
            **360**
            
            
            32
            
            
            9.8
            
            
            328Unbilled
            
            
            **(13**
            **)**
            
            (10
            )
            
            -
            
            
            (3
            )Miscellaneous
            
            
            **52**
            
            
            7
            
            
            15.6
            
            
            45Total
                electric revenues
            
            
            **1,913**
            
            
            118
            
            
            6.6
            
            
            1,795Less:
                Fuel revenues
            
            
            **(612**
            **)**
            
            (103
            )
            
            -
            
            
            (509
            )Revenues
                excluding fuel
            
            **$**
            **1,301**
            
            $
            15
            
            
            1.2
            
            $
            1,286





61


PEC’s
      energy sales for the six months ended June 30, 2006 and 2005, and the amount
      and
      percentage change by customer class were as follows:


(in
                millions of kWh)
            
            Six
                Months Ended June 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            
            **7,856**
            
            
            (101
            )
            
            (1.3
            )
            
            7,957Commercial
            
            
            **6,270**
            
            
            103
            
            
            1.7
            
            
            6,167Industrial
            
            
            **6,071**
            
            
            (90
            )
            
            (1.5
            )
            
            6,161Governmental
            
            
            **653**
            
            
            11
            
            
            1.7
            
            
            642Total
                retail energy sales
            
            
            **20,850**
            
            
            (77
            )
            
            (0.4
            )
            
            20,927Wholesale
            
            
            **7,286**
            
            
            8
            
            
            0.1
            
            
            7,278Unbilled
            
            
            **(146**
            **)**
            
            (79
            )
            
            -
            
            
            (67
            )Total
                kWh sales
            
            
            **27,990**
            
            
            (148
            )
            
            (0.5
            )
            
            28,138





PEC’s
      electric revenues, excluding fuel revenues of $612 million and $509 million
      for
      the six months ended June 30, 2006 and 2005, respectively, increased $15
      million. The increase in revenues is attributable primarily to increased
      wholesale revenues less fuel and favorable retail growth and usage, partially
      offset by unfavorable weather. The increase in wholesale revenues less fuel
      of
      $30 million was driven primarily by the impact of increased capacity under
      contract, higher excess generation sales due to favorable market conditions
      and
      gains on forward sales of excess generation. Favorable retail growth and usage
      of $6 million was driven by an approximate increase in the average number of
      customers of 30,000 as of June 30, 2006, compared to June 30, 2005. The impact
      of weather was $13 million unfavorable with heating degree days 12 percent
      below
      prior year partially offset by cooling degree days 20 percent greater than
      last
      year.





**Expenses**





*Fuel
      and Purchased Power*





Fuel
      and
      purchased power expenses were $702 million for the six months ended June 30,
      2006, which represents a $98 million increase compared to the same period in
      the
      prior year. Fuel used in electric generation increased $94 million to $558
      million compared to the prior year. This increase is due to a $46 million
      increase in deferred fuel expense due to an increase in the fuel recovery rates
      for North Carolina and South Carolina. In addition, fuel used in generation
      increased $48 million due primarily to higher fuel costs which are being driven
      by higher coal, oil and natural gas prices and a change in generation mix
      primarily due to lower nuclear generation related to nuclear outages. Current
      year purchased power costs were $4 million higher than the six months ended
      June
      30, 2005, primarily due to higher prices during the first half of 2006 partially
      offset by lower system requirements.





*Operation
      and Maintenance*





O&M
      expenses were $504 million for the six months ended June 30, 2006, which
      represents a $20 million increase compared to the same period in 2005. O&M
      expenses increased $46 million due to outages at nuclear facilities and $21
      million due to additional estimated environmental remediation expenses (See
      Note
      13A) and $4 million due to higher NRC fees in 2006. These were partially offset
      by $60 million of postretirement and severance expense recorded in the prior
      year related to the 2005 cost-management initiative.





*Depreciation
      and Amortization*





Depreciation
      and amortization expense was $255 million for the six months ended June 30,
      2006, which represents a $4 million decrease compared to the same period in
      2005. Depreciation expense decreased $10 million due to lower Clean Smokestacks
      Act amortization, partially offset by the impact of an increase in the
      depreciable base.





62


*Total
      Other Income*





Total
      other income of $9 million increased $7 million compared to the six months
      ended
      June 30, 2005 primarily due to a $8 million increase in interest income related
      to temporary investments and $4 million related to FERC Code of Conduct audit
      settlement recorded in the prior year partially offset by a $5 million increase
      in the indemnification liability recorded for estimated capital costs associated
      with the Clean Smokestacks Act expected to be incurred in excess of the maximum
      billable costs to the joint owner (See Note 13B).





*Total
      Interest Charges, net*





Total
      interest charges, net increased $14 million for the six months ended June 30,
      2006, as compared to the same period in the prior year. This fluctuation is
      due
      primarily to the impact of a net increase in long-term debt and higher interest
      rates on variable rate pollution control bonds.





*Income
      Tax Expense*





Income
      tax expense increased $16 million for the six months ended June 30, 2006, as
      compared to the same period in the prior year, primarily due to the allocation
      of $11 million of the Parent’s tax benefit not related to acquisition interest
      expense in 2005 that is no longer allocated in 2006 and the $3 million impact
      of
      a 2005 tax credit related to state audit settlements. See Corporate and Other
      below for additional information on the change in the tax benefit allocation
      in
      2006. GAAP requires companies to apply a levelized effective tax rate to interim
      periods that is consistent with the estimated annual effective tax rate. PEC’s
      income tax expense was decreased by $1 million for the six months ended June
      30,
      2006 compared to an increase of $3 million for the six months ended June 30,
      2005, in order to maintain an effective tax rate consistent with the estimated
      annual rate. Fluctuations in estimated annual earnings and the timing of various
      permanent and temporary deductions can also cause fluctuations in the effective
      tax rate for interim periods. Therefore, this adjustment will vary each quarter,
      but will have no effect on net income for the year.





**PROGRESS
      ENERGY FLORIDA**





PEF
      contributed segment profits of $87 million and $10 million for the three months
      ended June 30, 2006 and 2005, respectively. The increase in profits for the
      three months ended June 30, 2006, when compared to the same period in 2005,
      was
      primarily due to lower O&M expenses, which included postretirement and
      severance expenses and the write-off of unrecoverable storm costs in 2005,
      favorable weather and customer growth and usage partially offset by the gain
      on
      sale of utility distribution assets in the prior year and higher interest
      expense.





PEF
      contributed segment profits of $139 million and $53 million for the six months
      ended June 30, 2006 and 2005, respectively. The increase in profits for the
      six
      months ended June 30, 2006, when compared to the same period in 2005, was
      primarily due to lower O&M expenses, which included postretirement and
      severance expenses and the write-off of unrecoverable storm costs in 2005,
      favorable weather and customer growth and usage partially offset by the gain
      on
      sale of utility distribution assets in the prior year and higher interest
      expense.





63


Three
      Months Ended June 30, 2006 Compared to Three Months Ended June 30,
      2005





**Revenues**





PEF’s
      revenues for the three months ended June 30, 2006 and 2005, and the amount
      and
      percentage change by customer class were as follows:


(in
                millions)
            
            Three
                Months Ended June 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            **$**
            **559**
            
            $
            128
            
            
            29.7
            
            $
            431Commercial
            
            
            **291**
            
            
            64
            
            
            28.2
            
            
            227Industrial
            
            
            **91**
            
            
            20
            
            
            28.2
            
            
            71Governmental
            
            
            **74**
            
            
            17
            
            
            29.8
            
            
            57Retail
                revenue sharing
            
            
            **-**
            
            
            (2
            )
            
            -
            
            
            2Total
                retail revenues
            
            
            **1,015**
            
            
            227
            
            
            28.8
            
            
            788Wholesale
            
            
            **69**
            
            
            1
            
            
            1.5
            
            
            68Unbilled
            
            
            **23**
            
            
            5
            
            
            -
            
            
            18Miscellaneous
            
            
            **40**
            
            
            6
            
            
            17.6
            
            
            34Total
                electric revenues
            
            
            **1,147**
            
            
            239
            
            
            26.3
            
            
            908Less:
                Fuel and other pass-through revenues
            
            
            **(736**
            **)**
            
            (209
            )
            
            -
            
            
            (527
            )Revenues
                excluding fuel and pass-through revenues
            
            **$**
            **411**
            
            $
            30
            
            
            7.9
            
            $
            381





PEF’s
      electric energy sales for the three months ended June 30, 2006 and 2005, and
      the
      amount and percentage change by customer class are as follows:


(in
                millions of kWh)
            
            Three
                Months Ended June 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            
            **4,745**
            
            
            404
            
            
            9.3
            
            
            4,341Commercial
            
            
            **3,010**
            
            
            122
            
            
            4.2
            
            
            2,888Industrial
            
            
            **1,100**
            
            
            60
            
            
            5.8
            
            
            1,040Governmental
            
            
            **806**
            
            
            44
            
            
            5.8
            
            
            762Total
                retail energy sales
            
            
            **9,661**
            
            
            630
            
            
            7.0
            
            
            9,031Wholesale
            
            
            **962**
            
            
            (356
            )
            
            (27.0
            )
            
            1,318Unbilled
            
            
            **779**
            
            
            351
            
            
            -
            
            
            428Total
                kWh sales
            
            
            **11,402**
            
            
            625
            
            
            5.8
            
            
            10,777





PEF’s
      revenues, excluding recoverable fuel and other pass-through revenues of $736
      million and $527 million for the three months ended June 30, 2006 and 2005,
      respectively, increased $30 million. The increase in revenues is primarily
      due
      to favorable weather of $17 million and favorable growth and usage of $8 million
      driven by an approximate average net increase in the number of customers of
      35,000 for the three months ended June 30, 2006, compared to the three months
      ended June 30, 2005, even though approximately 14,000 Winter Park customers
      were
      transferred from the retail customer class to the wholesale customer class
      in
      June of 2005. In addition, wholesale revenues excluding fuel increased by $2
      million due to new contracts in 2005 and 2006, including the addition of Winter
      Park, and higher demand charges partially offset by the expiration of certain
      contracts in 2005.




**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.




64


Fuel
      and
      purchased power expenses were $627 million for the three months ended June
      30,
      2006, which represents a $170 million increase compared to the same period
      in
      the prior year. Fuel used in electric generation increased $134 million to
      $447
      million compared to the prior year. This increase is due to an $87 million
      increase in fuel used in generation due primarily to higher fuel costs which
      are
      being driven by higher coal, oil and natural gas prices and an increase in
      the
      volume of fuel purchases. In addition, deferred fuel expense increased $47
      million due to an increase in the fuel recovery rates on January 1, 2006.
      Current year purchased power costs were $36 million higher than the three months
      ended June 30, 2005, primarily due to higher system requirements and market
      prices in the second quarter of 2006 and an increase in capacity recovery rates
      under the capacity cost recovery clause. The FPSC allows capacity payments
      to be
      recovered through a capacity cost recovery clause, which is similar to, and
      works in conjunction with, energy payments recovered through the fuel cost
      recovery clause.




*Operation
      and Maintenance*




O&M
      expenses were $178 million for the three months ended June 30, 2006, which
      represents a decrease of $110 million, when compared to the $288 million
      incurred during the three months ended June 30, 2005. O&M expenses decreased
      $93 million due to postretirement and severance expense recorded in the prior
      year related to the 2005 cost-management initiative, $17 million related to
      the
      prior year write-off of unrecoverable storm restoration costs and $5 million
      related to lower ECRC costs. ECRC costs are pass-through expenses and have
      no
      material impact on earnings. These decreases were partially offset by additional
      expenses related to reliability programs.




*Depreciation
      and Amortization*




Depreciation
      and amortization expense increased $27 million to $98 million for the three
      months ended June 30, 2006. The increase is primarily due to the amortization
      of
      $30 million in storm costs which began in August 2005. Storm cost amortization
      is a pass-through expense and has no material impact on earnings. In addition,
      depreciation increased $2 million to due increases in the depreciable base.
      These increases were partially offset by the $4 million impact of rate changes
      effective January 1, 2006 related to the 2005 depreciation study (See Note
      7C of
      the 2005 Form 10-K).




*Taxes
      other than on Income*




Taxes
      other than on income increased $10 million to $76 million compared to the three
      months ended June 30, 2005. The increase is primarily due to higher gross
      receipts taxes and franchise taxes due to higher revenues. Gross receipts taxes
      and franchise taxes are pass-through expenses and have no material impact on
      earnings.




*Other*





Other
      decreased $26 million from a gain of $25 million for the three months ended
      June
      30, 2005 to an expense of $1 million for the three months ended June 30, 2006.
      The increase is primarily due to the $25 million prior year gain on the sale
      of
      Winter Park distribution assets.





*Total
      Other Income*





Total
      other income increased $7 million to $6 million compared to the three months
      ended June 30, 2005 primarily due to a $3 million increase in interest income
      driven by temporary investments and interest on unrecovered storm costs and
      $3
      million related to FERC Code of Conduct audit settlement recorded in the prior
      year.




*Total
      Interest Charges, net*




Total
      interest charges, net increased $6 million for the three months ended June
      30,
      2006, as compared to the same period in the prior year. This fluctuation is
      due
      primarily to the impact of long-term debt balances on interest expense.




*Income
      Tax Expense*




Income
      tax expense increased $40 million for the three months ended June 30, 2006,
      as
      compared to the same period in the prior year, primarily due to higher earnings
      compared to prior year. In addition, income tax expense increased due to the
      allocation of $3 million of the Parent’s tax benefit not related to acquisition
      interest expense in 2005 that




65


is
      no
      longer allocated in 2006. See Corporate and Other below for additional
      information on the change in the tax benefit allocation in 2006. GAAP requires
      companies to apply a levelized effective tax rate to interim periods that is
      consistent with the estimated annual effective tax rate. PEF’s income tax
      expense was not materially impacted for the three months ended June 30, 2006
      compared to an increase of $8 million for the three months ended June 30, 2005,
      in order to maintain an effective tax rate consistent with the estimated annual
      rate. Fluctuations in estimated annual earnings and the timing of various
      permanent and temporary deductions can also cause fluctuations in the effective
      tax rate for interim periods. Therefore, this adjustment will vary each quarter,
      but will have no effect on net income for the year.




Six
      Months Ended June 30, 2006 Compared to Six Months Ended June 30,
      2005




**Revenues**




PEF’s
      revenues for the six months ended June 30, 2006 and 2005, and the amount and
      percentage change by customer class were as follows:


(in
                millions)
            
            Six
                Months Ended June 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            **$**
            **1,066**
            
            $
            205
            
            
            23.8
            
            $
            861Commercial
            
            
            **536**
            
            
            108
            
            
            25.2
            
            
            428Industrial
            
            
            **174**
            
            
            40
            
            
            29.9
            
            
            134Governmental
            
            
            **140**
            
            
            30
            
            
            27.3
            
            
            110Retail
                revenue sharing
            
            
            **1**
            
            
            1
            
            
            -
            
            
            -Total
                retail revenues
            
            
            **1,917**
            
            
            384
            
            
            25.0
            
            
            1,533Wholesale
            
            
            **137**
            
            
            (5
            )
            
            (3.5
            )
            
            142Unbilled
            
            
            **24**
            
            
            11
            
            
            -
            
            
            13Miscellaneous
            
            
            **76**
            
            
            8
            
            
            11.8
            
            
            68Total
                electric revenues
            
            
            **2,154**
            
            
            398
            
            
            22.7
            
            
            1,756Less:
                Fuel and other pass-through revenues
            
            
            **(1,390**
            **)**
            
            (362
            )
            
            -
            
            
            (1,028
            )Revenues
                excluding fuel and pass-through revenues
            
            **$**
            **764**
            
            $
            36
            
            
            4.9
            
            $
            728





PEF’s
      electric energy sales for the six months ended June 30, 2006 and 2005, and
      the
      amount and percentage change by customer class are as follows:


(in
                millions of kWh)
            
            Six
                Months Ended June 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            
            **9,056**
            
            
            368
            
            
            4.2
            
            
            8,688Commercial
            
            
            **5,560**
            
            
            101
            
            
            1.9
            
            
            5,459Industrial
            
            
            **2,105**
            
            
            124
            
            
            6.3
            
            
            1,981Governmental
            
            
            **1,527**
            
            
            56
            
            
            3.8
            
            
            1,471Total
                retail energy sales
            
            
            **18,248**
            
            
            649
            
            
            3.7
            
            
            17,599Wholesale
            
            
            **1,970**
            
            
            (685
            )
            
            (25.8
            )
            
            2,655Unbilled
            
            
            **629**
            
            
            304
            
            
            -
            
            
            325Total
                kWh sales
            
            
            **20,847**
            
            
            268
            
            
            1.3
            
            
            20,579





PEF’s
      revenues, excluding recoverable fuel and other pass-through revenues of $1.390
      billion and $1.028 billion for the six months ended June 30, 2006 and 2005,
      respectively, increased $36 million. The increase in revenues is primarily
      due
      to favorable weather of $18 million, favorable retail growth and usage of $11
      million driven by an approximate average net increase in the number of customers
      of 33,000 for the six months ended June 30, 2006, compared to the six months
      ended June 30, 2005, even though approximately 14,000 Winter Park customers
      were
      transferred from the retail customer class to the wholesale customer class
      in
      June of 2005. These increases were partially offset by a $2 million decrease
      in
      wholesale revenues excluding fuel due to the expiration of certain contracts
      in
      2005 partially offset by new contracts in 2005 and 2006, including the addition
      of Winter Park, and higher demand charges.




66


**Expenses**




*Fuel
      and Purchased Power*




Fuel
      and
      purchased power expenses were $1.186 billion for the six months ended June
      30,
      2006, which represents a $296 million increase compared to the same period
      in
      the prior year. Fuel used in electric generation increased $226 million to
      $841
      million compared to the prior year. This increase is due to a $115 million
      increase in deferred fuel expense due to an increase in the fuel recovery rates
      on January 1, 2006. In addition, fuel used in generation increased $111 million
      due primarily to higher fuel costs which are being driven by higher coal, oil
      and natural gas prices and an increase in the volume of fuel purchases. Current
      year purchased power costs were $70 million higher than the six months ended
      June 30, 2005, primarily due to higher system requirements and market prices
      in
      the current year as a result of increased fuel costs and an increase in capacity
      recovery rates under the capacity cost recovery clause. The FPSC allows capacity
      payments to be recovered through a capacity costs recovery clause, which is
      similar to, and works in conjunction with, energy payments recovered through
      the
      fuel cost recovery clause.




*Operation
      and Maintenance*




O&M
      expenses were $344 million for the six months ended June 30, 2006, which
      represents a decrease of $133 million, when compared to the $477 million
      incurred during the six months ended June 30, 2005. O&M expenses decreased
      $107 million due to postretirement and severance expense recorded in the prior
      year related to the 2005 cost-management initiative, $17 million related to
      the
      prior year write-off of unrecovered storm restoration costs and $10 million
      related to lower ECRC costs in the current year. ECRC costs are pass-through
      expenses and have no material impact on earnings.




*Depreciation
      and Amortization*




Depreciation
      and amortization expense increased $52 million to $193 million for the six
      months ended June 30, 2006. The increase is primarily due to the amortization
      of
      $57 million in storm costs which began in August 2005. Storm cost amortization
      is a pass-through expense and has no material impact on earnings. In addition,
      depreciation increased $6 million due to increases in the depreciable base.
      These increases were partially offset by the $10 million impact of rate changes
      effective January 1, 2006 related to the 2005 depreciation study (See Note
      7C of
      the 2005 Form 10-K).




*Taxes
      other than on Income*




Taxes
      other than on income increased $16 million to $149 million compared to the
      six
      months ended June 30, 2005. The increase is primarily due to higher gross
      receipts taxes and franchise taxes due to higher revenues. Gross receipts taxes
      and franchise taxes are pass-through expenses and have no material impact on
      earnings.




*Other*





Other
      decreased $23 million from a gain of $25 million for the six months ended June
      30, 2005 to a gain of $2 million for the six months ended June 30, 2006. The
      decrease is primarily due to the $25 million prior year gain on the sale of
      Winter Park distribution assets.





*Total
      Other Income*





Total
      other income increased $8 million to $10 million compared to the six months
      ended June 30, 2005 primarily due to an $8 million increase in interest income
      driven by temporary investments and interest on unrecovered storm costs and
      $3
      million related to FERC Code of Conduct audit settlement recorded in the prior
      year. These were partially offset by a $2 million reduction in AFUDC equity
      primarily due to the completion of Hines Unit 3 during 2005.




*Total
      Interest Charges, net*




Total
      interest charges, net increased $13 million for the six months ended June 30,
      2006, as compared to the same period in the prior year. This fluctuation is
      due
      primarily to the impact of higher long-term debt balances on interest expense.




67


*Income
      Tax Expense*




Income
      tax expense increased $53 million for the six months ended June 30, 2006, as
      compared to the same period in the prior year, primarily due to higher earnings
      compared to prior year. In addition, income tax expense increased due to the
      allocation of $7 million of the Parent’s tax benefit not related to acquisition
      interest expense in 2005 that is no longer allocated in 2006. See Corporate
      and
      Other below for additional information on the change in the tax benefit
      allocation in 2006. GAAP requires companies to apply a levelized effective
      tax
      rate to interim periods that is consistent with the estimated annual effective
      tax rate. PEF’s income tax expense was not materially impacted for the six
      months ended June 30, 2006 compared to an increase of $8 million for the six
      months ended June 30, 2005, in order to maintain an effective tax rate
      consistent with the estimated annual rate. Fluctuations in estimated annual
      earnings and the timing of various permanent and temporary deductions can also
      cause fluctuations in the effective tax rate for interim periods. Therefore,
      this adjustment will vary each quarter, but will have no effect on net income
      for the year.




**DIVERSIFIED
      BUSINESSES**




Our
      diversified businesses consist of the Progress Ventures segment and the Coal
      and
      Synthetic Fuels segment. These businesses are explained in more detail
      below.




**PROGRESS
      VENTURES**




The
      Progress Ventures segment is primarily engaged in nonregulated electric
      generation operations, energy marketing activities and natural gas drilling
      and
      production (Gas). The nonregulated electric generation operations are primarily
      located in Georgia and service multiple fixed price full-requirements contracts,
      one of which has a term of 2003 through 2015 with the remaining running from
      2005 through 2010. These contracts are primarily served by callable resources
      from a number of external and Progress Ventures’ internal sources. Progress
      Ventures has also entered into an agreement to provide capacity and associated
      energy to Georgia Power from 2009 through 2024. In addition, Progress Ventures
      has entered into an agreement to purchase combined-cycle capacity from Southern
      Power Company, a subsidiary of Southern Company, from 2009 through 2015. The
      Gas
      operations are primarily located in Texas and Louisiana. As described under
      Recent Developments, we have entered into a definitive agreement to sell Gas.




The
      following summarizes the quarterly and year-to-date gas production in Bcf
      equivalent, revenues, gross margin and segment (losses) profits for Progress
      Ventures:


Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,($
                in millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Gas
                production in Bcf equivalent
            
            
            **7**
            
            
            6
            
            
            **14**
            
            
            11Electric
                revenues
            
            **$**
            **151**
            
            $
            139
            
            **$**
            **286**
            
            $
            193Gas
                revenues
            
            
            **38**
            
            
            39
            
            
            **107**
            
            
            72Total
                revenues
            
            **$**
            **189**
            
            $
            178
            
            **$**
            **393**
            
            $
            265Gross
                marginIn
                millions of $
            
            **$**
            **36**
            
            $
            47
            
            **$**
            **94**
            
            $
            87As
                a % of revenues
            
            
            **19**
            **%**
            
            26
            %
            
            **24**
            **%**
            
            33
            %Segment
                (losses) profits
            
            **$**
            **(8**
            **)**
            $
            6
            
            **$**
            **(43**
            **)**
            $
            12





Progress
      Ventures revenues increased $11 million to $189 million for the three months
      ended June 30, 2006 compared to same period in 2005. Electric revenues increased
      $12 million primarily due to serving an increased load at higher rates on our
      Georgia contracts. Although electric revenues increased for the three months
      ended June 30, 2006 due to fixed price full-requirements contracts, margins
      from
      these contracts decreased primarily due to higher fuel and power prices. Gas
      revenues decreased $1 million primarily due to mark-to-market losses on gas
      hedges partially offset by increased gas production and higher market prices.
      The increased mark-to-market losses on the gas hedges are primarily due to
      the
      reclassification of deferred losses caused by the discontinuance of the related
      cash flow hedge accounting due to the anticipated sale of Gas as discussed
      below
      in Recent Developments (See Note 10A). The decreased margins on the Georgia
      contracts and the mark-to-market losses at Gas were the main drivers of




68


the
      $14
      million decrease in Progress Venture’s segment earnings for the three months
      ended June 30, 2006 compared to the three months ended June 30, 2005.




Progress
      Ventures revenues increased $128 million to $393 million for the six months
      ended June 30, 2006 compared to same period in 2005. Electric revenues increased
      $93 million primarily due to fixed price full-requirements contracts that began
      in April 2005 and serving an increased load on a pre-existing contract in
      Georgia. Although electric revenues increased for the six months ended June
      30,
      2006 due to fixed price full-requirements contracts, margins from these
      contracts decreased primarily due to higher fuel and power prices. Gas revenues
      increased $35 million primarily due to increased gas production and higher
      market prices partially offset by mark-to-market losses on gas hedges. The
      increased mark-to-market losses on the gas hedges are primarily due to the
      reclassification of deferred losses caused by the discontinuance of the related
      cash flow hedge accounting due to the anticipated sale of Gas as discussed
      below
      in Recent Developments (See Note 10A). In addition to the decreased margins
      on
      the Georgia contracts and the mark-to-market losses at Gas, the $55 million
      decrease in Progress Venture’s segment earnings for the six months ended June
      30, 2006 compared to the six months ended June 30, 2006 was unfavorably impacted
      by the $64 million pre-tax impairment loss ($39 million after-tax) on goodwill
      described below.




In
      accordance with accounting standards for goodwill, we have monitored the
      carrying value of our goodwill associated with our Progress Ventures operations.
      The Progress Ventures electric generation operations were divided into three
      regions where it had generation plants: South Florida, North Carolina and
      Georgia. As part of our evaluation of certain business opportunities that may
      impact the future cash flows of our Georgia Region operations we performed
      an
      interim goodwill impairment test during the first quarter of 2006. As a result
      of this test, we recognized a pre-tax goodwill impairment loss of $64 million
      ($39 million after-tax), the entire amount of goodwill assigned to Progress
      Ventures (See Note 6). We also entered into a definitive agreement to sell
      our
      operations in South Florida and North Carolina and these operations were
      classified as discontinued operations during the second quarter of 2006 (See
      Note 3A).




In
      accordance with accounting standards for long-lived assets, we monitor the
      carrying value of our long-lived assets associated with our Progress Ventures
      operations. Future adverse changes in market conditions or changes in business
      conditions, including the manner in which the remaining long-lived assets are
      deployed under various strategic alternatives that management is pursuing,
      could
      require future impairment evaluations of the $920 million of remaining
      long-lived and intangible assets, which could result in a material non-cash
      impairment charge against earnings.




*RECENT
      DEVELOPMENTS*





As
      part
      of our strategy to reduce our risk profile and continue our efforts to reduce
      holding company debt through selected asset sales, we entered into a definitive
      agreement to sell Gas to Dallas, Texas-based EXCO Resources, Inc. for $1.2
      billion in gross cash proceeds. Proceeds from the sale will be used to reduce
      holding company debt and for other corporate purposes.





The
      transaction is expected to close in October 2006 and is subject to customary
      closing provisions and adjustments. We expect to report Gas as discontinued
      operations in the third quarter of 2006. As part of this transaction, we will
      divest of our holdings in Winchester Production Company, Westchester Gas
      Company, Texas Gas Gathering and Talco Midstream Assets. Specific assets include
      over 325 Bcf equivalent of proved natural gas reserves, over 350 miles of
      pipelines, over 500 producing wells and other related assets, all of which
      are
      located in Texas and Louisiana.




The
      following summarizes Progress Ventures’ segment (losses) profits by operation
      and the goodwill impairment discussed above for the three months and six months
      ended June 30, 2006 and 2005:




69


Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Competitive
                Commercial Operations excluding goodwill impairment
            
            **$**
            **(15**
            **)**
            $
            (6
            )
            **$**
            **(31**
            **)**
            $
            (12
            )Goodwill
                impairment
            
            
            **-**
            
            
            **-**
            
            
            **(39**
            **)**
            
            **-**Gas
                operations
            
            
            **7**
            
            
            12
            
            
            **27**
            
            
            24Segment
                (losses) profits
            
            **$**
            **(8**
            **)**
            $
            6
            
            **$**
            **(43**
            **)**
            $
            12





**COAL
      AND SYNTHETIC FUELS**




The
      Coal
      and Synthetic Fuels’ segment includes synthetic fuels operations and coal
      terminal operations. The following summarizes Coal and Synthetic Fuels’ segment
      profits:


Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Synthetic
                fuel operations
            
            **$**
            **(82**
            **)**
            $
            23
            
            **$**
            **(79**
            **)**
            $
            22Coal
                terminals and marketing
            
            
            **(1**
            **)**
            
            9
            
            
            **16**
            
            
            17Corporate
                overhead and other operations
            
            
            **(8**
            **)**
            
            (9
            )
            
            **(14**
            **)**
            
            (19
            )Segment
                (losses) profits
            
            **$**
            **(91**
            **)**
            $
            23
            
            **$**
            **(77**
            **)**
            $
            20





*SYNTHETIC
      FUEL OPERATIONS*





The
      production and sale of synthetic fuels generate operating losses, but qualify
      for tax credits under Section 29/45K, which typically offset the effect of
      such
      losses. Our synthetic fuel operations resulted in the following:


Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Tons
                sold
            
            
            **0.5**
            
            
            2.3
            
            
            **1.7**
            
            
            4.3After-tax
                losses, excluding tax credits
            
            **$**
            **(25**
            **)**
            $
            (39
            )
            **$**
            **(50**
            **)**
            $
            (77
            )After-tax
                impairment charge
            
            
            **(45**
            **)**
            
            -
            
            
            **(45**
            **)**
            
            -Valuation
                allowance
            
            
            **(7**
            **)**
            
            -
            
            
            **(7**
            **)**
            
            -Tax
                credits generated
            
            
            **13**
            
            
            62
            
            
            **48**
            
            
            116Tax
                credit inflation adjustment
            
            
            -
            
            
            -
            
            
            **10**
            
            
            -Tax
                credits reserved due to potential phase-out
            
            
            **(18**
            **)**
            
            -
            
            
            **(35**
            **)**
            
            -Tax
                credits reversed
            
            
            -
            
            
            -
            
            
            -
            
            
            (17
            )Net
                (loss) profit
            
            **$**
            **(82**
            **)**
            $
            23
            
            **$**
            **(79**
            **)**
            $
            22





Prior
      to
      2006, our synthetic fuel production levels and the amount of tax credits we
      could claim each year were a function of our projected consolidated regular
      federal income tax liability. With the redesignation of Section 29 tax credits
      as Section 45K general business credits, that limitation was removed effective
      January 1, 2006.




Synthetic
      fuels’ earnings for the three months ended June 30, 2006, as compared to the
      same period in the prior year, were negatively impacted by the impairment of
      our
      synthetic fuel assets, the recording of fewer tax credits in 2006 due to lower
      production and recording an additional $18 million tax credit reserve at June
      30, 2006 due to high oil prices which increased the potential for a phase-out
      of
      tax credits in 2006.  In
      addition, results were unfavorably impacted by the recognition of a valuation
      allowance recorded against the deferred tax assets for state net operating
      loss
      carry forwards. These
      were partially offset by lower 2006
      production which resulted in lower pre-tax losses.




Synthetic
      fuels’ earnings for the six months ended June 30, 2006, as compared to the same
      period in the prior year, were negatively impacted by the impairment of our
      synthetic fuel assets, the recording of fewer tax credits in 2006 due to lower
      production and recording a $35 million tax credit reserve at June 30, 2006
      due
      to high oil prices which increased the potential for a phase-out of tax credits
      in 2006. In addition, results were unfavorably impacted by the recognition
      of a
      valuation allowance recorded against the deferred tax assets for state net
      operating loss carry forwards. These were partially offset by the reversal
      of
      $17 million of tax credits in the first quarter of 2005 due to




70


the
      loss
      on sale of Progress Rail, the recording of a $10 million inflation adjustment
      to
      2005 tax credits and lower 2006 production which resulted in lower pre-tax
      losses. As
      a
      result of the impairment of
      our
      synthetic fuel assets ,
      approximately $12 million of depreciation and amortization expense associated
      with the impaired assets will not be recorded during the remainder of
      2006.




See
      OTHER
      MATTERS below for additional information on the impact of oil prices on Section
      29/45K tax credits, the results of our interim impairment review and a
      discussion of uncertainties surrounding our synthetic fuel production in 2006
      and 2007.




*COAL
      TERMINALS AND MARKETING*




Coal
      terminals and marketing (Coal) operations blend and transload coal as part
      of
      the trucking, rail and barge network for coal delivery. This business also
      has
      an operating fee agreement with our synthetic fuel operations for procuring
      and
      processing of coal and the transloading and marketing of synthetic fuels. As
      a
      result of the relationship with the synthetic fuels operations, fluctuations
      in
      Coal’s annual earnings are typically related to production volumes at our
      synthetic fuel plants. Coal operations resulted in a loss of $1 million for
      the
      three months ended June 30, 2006 compared to earnings of $9 million for the
      three months ended June 30, 2005. The 2006 loss is driven by the impairment
      of a
      portion of Coal’s terminal assets which resulted in a pre-tax charge of $17
      million ($10 million after-tax) for the three months ended June 30, 2006. As
      a
      result of this impairment, approximately $6 million of depreciation expense
      associated with the impaired assets will not be recorded during the remainder
      of
      2006.




Coal
      operations contributed earnings of $16 million and $17 million for the six
      months ended June 30, 2006 and 2005, respectively. Coal’s results were
      negatively impacted by the impairment of a portion of Coal’s terminal assets
      which resulted in a pre-tax charge of $17 million ($10 million after-tax) and
      lower revenues related to lower production at our synthetic fuels plants and
      higher cost of sales due to higher coal prices. These were partially offset
      by
      an $11 million pre-tax reduction in expense related to a restructured coal
      supply contract and a $3 million pre-tax gain on the sale of Dixie Fuels Limited
      (Dixie Fuels). During the first quarter of 2006, one of Coal’s supply contracts
      was restructured resulting in a payment of $103 million to Coal. These proceeds
      covered long-term coal supply commitments from 2005 through 2007 and will be
      recognized over the life of the contract as coal is received and the related
      inventory is utilized. For the six months ended June 30, 2006, Coal recognized
      an $11 million pre-tax reduction in expense related to the restructured coal
      supply contract for 2005 coal commitments that were not delivered. Future
      amortization of these proceeds will be wholly offset by the increased contract
      price and is therefore not expected to materially impact earnings.




See
      OTHER
      MATTERS below for additional information on the results of our interim
      impairment review and its impact on our Coal terminals.




On
      March
      1, 2006, we sold our 65 percent interest in Dixie Fuels for $16 million to
      Kirby
      Corporation which owned the remaining 35 percent interest. Dixie Fuels operated
      four barge and tugboat units under long-term contracts with PEF and an outside
      party. Proceeds from the sale were used for debt reduction and other corporate
      purposes.




*CORPORATE
      OVERHEAD AND OTHER OPERATIONS*




Corporate
      overhead and other operations resulted in after-tax expenses of $8 million
      and
      $9 million for the three months ended March 31, 2006 and 2005, respectively. The
      decrease in after-tax expenses for 2006 is primarily due to postretirement
      and severance
      expense recorded in the prior year related to the 2005 cost-management
      initiative . Corporate
      overhead and other operations recorded after-tax expenses of $14 million and
      $19
      million for the six months ended June 30, 2006 and 2005, respectively. The
      decrease in after-tax expenses for 2006 is primarily due to postretirement
      and severance expense recorded in the prior year related to the 2005 cost-management
      initiative .




71


**CORPORATE
      AND OTHER**




The
      Corporate and Other segment consists of the operations of the Parent, PESC
      and
      other consolidating and non-operating entities. Corporate and Other also
      includes other nonregulated business areas. Corporate and Other income (expense)
      is summarized below:


Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Other
                interest expense
            
            **$**
            **(70**
            **)**
            $
            (69
            )
            **$**
            **(142**
            **)**
            $
            (137
            )Contingent
                value obligations
            
            
            **3**
            
            
            -
            
            
            **(22**
            **)**
            
            -Tax
                levelization
            
            
            **(5**
            **)**
            
            (49
            )
            
            **(19**
            **)**
            
            (52
            )Tax
                reallocation
            
            
            **-**
            
            
            (9
            )
            
            **-**
            
            
            (19
            )Other
                income tax benefit
            
            
            **21**
            
            
            32
            
            
            **51**
            
            
            62Other
            
            
            **1**
            
            
            (5
            )
            
            **18**
            
            
            (9
            )Corporate
                and Other after-tax expense
            
            **$**
            **(50**
            **)**
            $
            (100
            )
            **$**
            **(114**
            **)**
            $
            (155
            )





Other
      interest expense, which includes intercompany elimination entries, increased
      $ 1 million
      to $ 70 million
      for the three months ended June 30, 2006 compared to $ 69 million
      for the three months ended June 30, 2005. Other interest expense, which includes
      elimination entries, increased $ 5 million
      to $ 142 million
      for the six months ended June 30, 2006 compared to $ 137 million
      for the six months ended June 30, 2005. Interest expense increased primarily
      due
      to a decrease in the elimination of intercompany interest expense resulting
      from
      lower intercompany debt balances. This was partially offset by having no
      revolving credit agreement (RCA) balances outstanding or related interest during
      the six months ended June 30, 2006 compared to $3 million of interest expense
      related to outstanding RCA balances during the six months ended June 30,
      2005.




Progress
      Energy issued 98.6 million contingent value obligations (CVOs) in connection
      with the 2000 acquisition of Florida Progress. Each CVO represents the right
      of
      the holder to receive contingent payments based on the performance of four
      synthetic fuel facilities owned by Progress Energy. The payments, if any, will
      be based on the net after-tax cash flows the facilities generate. At June 30,
      2006 and 2005, the CVOs had fair market values of approximately $ 30 million
      and $13 million, respectively. We recorded unrealized gains of $ 3 million
      for the three months ended June 30, 2006 and an immaterial unrealized loss
      for
      the three months ended June 30, 2005, to record the changes in fair value of
      the
      CVOs, which had average unit prices of $ 0.30 and
      $ 0.14 at June
      30, 2006 and 2005, respectively. We recorded an unrealized loss of $ 22 million
      for the six months ended June 30, 2006. The CVO values at June 30, 2005 were
      unchanged from the December 31, 2004 values, thus requiring no recognition
      of
      unrealized gain or loss for the six months ended June 30, 2005.




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 $5 million and $49 million for the three months ended
      June 30, 2006 and 2005, respectively, and $19 million and $52 million for the
      six months ended June 30, 2006 and 2005, respectively, in order to maintain
      an
      effective rate consistent with the estimated annual rate. The tax credits
      associated with our synthetic fuel operations and seasonal fluctuations in
      our
      annual earnings primarily drive the fluctuations in the effective tax rate
      for
      interim periods. The tax levelization adjustment will vary each quarter, but
      it
      will have no effect on net income for the year.




For
      the
      three and six months ended June 30, 2006, income tax expense was not increased
      by the allocation of the Parent’s income tax benefits not related to acquisition
      interest expense to profitable subsidiaries. Due to the repeal of the Public
      Utility Holding Company Act of 1935, as amended (PUHCA) we will no longer
      allocate the Parent income tax benefits not related to acquisition interest
      expense to profitable subsidiaries beginning in 2006. Since 2002, Parent income
      tax benefits not related to acquisition interest expense were allocated to
      profitable subsidiaries, in accordance with a PUHCA order. For the three months
      ended June 30, 2005, income tax expense was increased by $9 million and for
      the
      six months ended June 30, 2005, income tax expense was increased by $19 million
      due to the allocation of the Parent’s income tax benefit.




For
      the
      three months end June 30, 2006, other contributed $1 million to earnings
      compared to $5 million of expense for the same period in 2005. The $6 million
      change is primarily due to the pre-tax gain, net of minority interest, on the
      sale of our remaining interest in Level 3 stock subsequent to the sale of PT
      LLC
      (See Notes 3B and 12). For the




72


six
      months ended June 30, 2006, other contributed $18 million to earnings compared
      to $9 million of expense in 2005. The $27 million change is primarily due to
      the
      $17 million pre-tax gain, net of minority interest, on the sale of Level 3
      stock. In addition, other changed due to a $2 million increase in interest
      income on temporary investments and expenses in 2005 included $4 million for
      South Carolina corporate license related to the South Carolina audit
      settlement.




**DISCONTINUED
      OPERATIONS**




*DESOTO
      AND ROWAN GENERATION FACILITIES*




On
      May 2,
      2006, our board of directors approved a plan to divest of our DeSoto
      County Generating Co., LLC (DeSoto) and Rowan County Power, LLC (Rowan)
      subsidiaries. DeSoto
      was and Rowan is a subsidiary of Progress Energy Ventures, Inc. DeSoto
      owns a 320 MW dual-fuel combustion turbine electric generation facility in
      DeSoto County, Florida and Rowan owns a 925 MW dual-fuel combined cycle and
      combustion turbine electric generation facility in Rowan County,
      N.C.. On May
      8, 2006, we entered into definitive agreements to sell DeSoto and Rowan,
      including certain existing power supply contracts, to Southern Power Company,
      a
      subsidiary of Southern Company, for a gross purchase price of approximately
      $80
      million and $325 million, respectively. We expect to use the proceeds from
      the
      sales to reduce debt and for other corporate purposes (See Note 3A).





The
      sale
      of DeSoto closed in the second quarter of 2006. The sale of Rowan is expected
      to
      close during the third quarter of 2006 and is subject to state and federal
      regulatory approvals and customary closing conditions. We recorded an after-tax
      loss on the sale of DeSoto of $30 million and an estimated after-tax loss on
      the
      sale of Rowan of $32 million. Discontinued DeSoto and Rowan operations had
      combined losses of $63 million for the three months ended June 30, 2006 compared
      to losses of $1 million for the same period in 2005 and combined losses of
      $68
      million for the six months ended June 30, 2006 compared to combined losses
      of $3
      million for the same period in 2005.




*PROGRESS
      TELECOM LLC*




On
      March
      20, 2006, we completed the sale of Progress Telecom, LLC (PT LLC) to Level
      3. We
      received gross proceeds comprised of cash of $69 million and approximately
      20
      million shares of Level 3 common stock valued at an estimated $66 million on
      the
      date of the sale. Our net proceeds from the sale of $70 million, after
      consideration of minority interest, were used to reduce debt. Prior to the
      sale,
      we had a 51 percent interest in PT LLC (See Note 3B).




Based
      on
      the gross proceeds associated with the sale and after consideration of minority
      interest, we recorded an estimated after-tax gain on disposal of $29 million
      during the six months ended June 30, 2006. Discontinued PT LLC operations had
      earnings of $6 million for the three months ended June 30, 2006 compared to
      $2
      million for the same period in 2005 and earnings of $24 million for the six
      months ended June 30, 2006 compared to $2 million for the same period in
      2005.




*COAL
      MINING OPERATIONS*




On
      November 14, 2005, our board of directors approved a plan to divest of five
      subsidiaries of Progress Fuels engaged in the coal mining business. On May
      1,
      2006, we sold certain net assets of three of our coal mining businesses to
      Alpha
      Natural Resources, LLC for gross proceeds of $23 million plus an estimated
      $4
      million working capital adjustment. As a result, during the six months ended
      June 30, 2006 we recorded an estimated after-tax loss of $17 million for the
      sale of these assets. The remaining coal mining operations are expected to
      be
      sold by the end of 2006 (See Note 3D).




Discontinued
      coal mining operations incurred a net loss of $1 million for both the three
      months ended June 30, 2006 and 2005 and a net loss of $21 million for the six
      months ended June 30, 2006 compared to earnings of less than a million for
      the
      same period in 2005. The net loss for the six months ended June 30, 2006 is
      primarily due to recording a $17 million after-tax loss on the
      sale.




73


*PROGRESS
      RAIL*




On
      March
      24, 2005, we completed the sale of Progress Rail Services Corporation (Progress
      Rail) to One Equity Partners LLC, a private equity firm unit of J.P. Morgan
      Chase & Co. Gross cash proceeds from the sale were approximately $429
      million, consisting of $405 million base proceeds plus a working capital
      adjustment. Proceeds from the sale were used to reduce debt (See Note
      3C).




Rail
      discontinued operations resulted in losses of $3 million for the three months
      ended June 30, 2006 compared to $7 million for the same period in 2005 and
      losses of $3 million for the six months ended June 30, 2006 compared to $19
      million for the same period in 2005.




**LIQUIDITY
      AND CAPITAL RESOURCES**




**OVERVIEW**




Progress
      Energy, Inc. is a holding company and, as such, has no operations of its own.
      Our primary cash needs at the Parent level are our common stock dividend and
      interest and principal payments on our $3.9 billion of senior unsecured debt.
      Our ability to meet these needs is dependent on the earnings and cash flows
      of
      the Utilities and our nonregulated subsidiaries, and the ability of our
      subsidiaries to pay dividends or repay funds to us.




Our
      other
      significant cash requirements arise primarily from the capital-intensive nature
      of the Utilities’ operations, including expenditures for environmental
      compliance, and expenditures for our diversified businesses, primarily those
      of
      the Progress Ventures segment.




We
      rely
      upon our operating cash flow, primarily generated by the Utilities, commercial
      paper and bank facilities, and our ability to access the long-term debt and
      equity capital markets for sources of liquidity.




The
      majority of our operating costs are related to the Utilities. Such costs are
      recovered from customers in accordance with various rate plans. We are allowed
      to recover certain fuel, purchased power and other costs incurred by PEC and
      PEF
      through their respective recovery clauses. The types of costs recovered through
      clauses vary by jurisdiction. Fuel price volatility can lead to over- or
      under-recovery of fuel costs, as changes in fuel prices are not immediately
      reflected in fuel surcharges due to regulatory lag in setting the surcharges.
      As
      a result, fuel price volatility can be both a source of and a use of liquidity
      resources, depending on what phase of the cycle of price volatility we are
      experiencing. Changes in the Utilities’ fuel and purchased power costs may
      affect the timing of cash flows, but not materially affect net
      income.




Cash
      from
      operations, asset sales and limited ongoing equity sales from our Investor
      Plus
      Stock Purchase Plan and employee benefit and stock option plans are expected
      to
      fund capital expenditures and common stock dividends for 2006. We expect to
      use
      excess cash proceeds, if any, to reduce debt. To the extent necessary,
      short-term and long-term debt may also be used as a source of liquidity.




We
      believe our internal and external liquidity resources will be sufficient to
      fund
      our current business plans. Risk factors associated with credit facilities
      and
      credit ratings are discussed in the “Risk Factors” section of our 2005 Form
      10-K.




The
      following discussion of our liquidity and capital resources is on a consolidated
      basis.




*CASH
      FLOWS FROM OPERATIONS*




Net
      cash
      provided by operating activities increased by $516 million for the six months
      ended June 30, 2006, when compared to the corresponding period in the prior
      year. The increase in operating cash flow was primarily due to a $170 million
      increase in the recovery of fuel costs at the Utilities, $185 million net
      decrease in working capital and other operating activity needs, and $64 million
      of storm restoration costs incurred in the prior year at PEF. In 2005, the
      Utilities requested and received approval from their respective state
      commissions for rate increases for fuel cost recovery, including amounts for
      previous under-recoveries. PEF also received approval from the FPSC authorizing
      PEF to recover $245 million over a two-year period, including interest, of
      the
      costs it incurred and previously deferred related to PEF’s restoration of power
      to customers associated with the four hurricanes in 2004. See Note 4 for
      additional information. The decrease in working capital and other operating
      activity needs was primarily due to




74


decreases
      from the change in accounts receivable of $73 million at PEC and approximately
      $80 million at our nonregulated operations primarily due to cessation of our
      synthetic fuel operations, approximately $103 million of proceeds received
      from
      the restructuring of a long-term coal supply contract, and $52 million due
      to
      fluctuations in emission allowance inventory at PEC. These impacts were
      partially offset by an $81 million decrease from the change in accounts payable,
      primarily driven by reduced purchases at our nonregulated operations.




*INVESTING
      ACTIVITIES*




Net
      cash
      used in investing activities increased by $165 million for the six months ended
      June 30, 2006, when compared to the corresponding period in the prior year.
      This
      is due primarily to a $223 million decrease in proceeds from sales of
      discontinued operations and other assets for 2006 when compared to the
      corresponding period in the prior year.




Excluding
      proceeds from sales of discontinued operations and other assets, cash used
      in
      investing activities decreased approximately $58 million in 2006 when compared
      with 2005. The decrease is due primarily to a $146 million increase in net
      proceeds from available-for-sale securities and other investments, including
      approximately $98 million in net proceeds from the sale of Level 3 stock (See
      Notes 3B and 12), partially offset by $97 million in additional capital
      expenditures for property and nuclear fuel additions. Available-for-sale
      securities and other investments include marketable debt and equity securities
      and investments held in nuclear decommissioning and benefit investment trusts.
      The increase in property additions is primarily due to higher spending at the
      Hines 4 facility and distribution projects at PEF, partially offset by lower
      spending at the Hines 3 facility.




During
      the six months ended June 30, 2006, proceeds from sales of discontinued
      operations and other assets, net of cash divested primarily included
      approximately $80 million from the sale of DeSoto (See Note 3A), approximately
      $70 million from the sale of PT LLC (See Note 3B), approximately $27 million
      from the sale of certain net assets of the coal mining business (See Note 3D),
      and approximately $15 million from the sale of Dixie Fuels. During the same
      period in 2005, proceeds from sales of discontinued operations and other assets
      primarily included $393 million in proceeds from the sale of Progress Rail
      in
      March 2005, net of cash divested (See Note 3C).




*FINANCING
      ACTIVITIES*




Net
      cash
      used in financing activities increased by $790 million for the six months ended
      June 30, 2006, when compared to the corresponding period in the prior year.
      The
      increase in cash used in financing activities was due primarily to a decrease
      in
      the proceeds from issuances of long-term debt and common stock and payment
      of
      the March 1, 2006 maturity of $800 million 6.75% senior unsecured notes. These
      notes were paid with net proceeds from the sale of $400 million in senior notes,
      as discussed below, and a combination of cash and commercial paper
      proceeds.




On
      January 13, 2006, Progress Energy issued $300 million of 5.625% Senior Notes
      due
      2016 and $100 million of Series A Floating Rate Senior Notes due 2010. These
      senior notes are unsecured. Interest on the Floating Rate Senior Notes will
      be
      based on three-month London Inter Bank Offering Rate (LIBOR) plus 45 basis
      points and will be reset quarterly. We used the net proceeds from the sale
      of
      these senior notes and a combination of available cash and commercial paper
      proceeds to retire the $800 million aggregate principal amount of our 6.75%
      Senior Notes on March 1, 2006. Pending the application of proceeds as described
      above, we invested the net proceeds in short-term, interest-bearing,
      investment-grade securities.




Progress
      Energy entered into a new $800 million 364-day credit agreement on November
      21,
      2005, which was restricted for the retirement of $800 million of 6.75% Senior
      Notes due March 1, 2006. On March 1, 2006, we retired $800 million of our 6.75%
      Senior Notes, thus effectively terminating the 364-day credit
      agreement.




On
      March
      31, 2006, Progress Energy, as a well-known seasoned issuer, filed a shelf
      registration statement with the SEC. The registration statement became effective
      upon filing with the SEC and will allow Progress Energy to issue an
      indeterminate number or amount of various securities, including Senior Debt
      Securities, Junior Subordinated Debentures, Common Stock, Preferred Stock,
      Stock
      Purchase Contracts, Stock Purchase Units, and Trust Preferred Securities and
      Guarantees. The Board of Directors has authorized the issuance and sale of
      up to
      $1 billion aggregate principal amount of various securities off the new shelf
      registration statement, in addition to $679 million of various securities,
      which
      were not sold from our prior shelf registration statement. Therefore, effective
      March 31, 2006,




75


Progress
      Energy has the authority to issue and sell up to $1.679 billion aggregate
      principal amount of various securities.




On
      May 3,
      2006, Progress Energy restructured its existing $1.13 billion five-year
      revolving credit agreement (RCA) with a syndication of financial institutions.
      The new RCA is scheduled to expire on May 3, 2011, and is replacing an existing
      $1.13 billion five-year facility, which was terminated effective May 3, 2006.
      The Progress Energy RCA will continue to be used to provide liquidity support
      for Progress Energy’s issuances of commercial paper and other short-term
      obligations. The new RCA still includes a defined maximum total debt to capital
      ratio of 68 percent and contains various cross-default and other acceleration
      provisions. However, the new RCA no longer includes a material adverse change
      representation for borrowings or a financial covenant for interest coverage.
      Fees and interest rates under the RCA will continue to be determined based
      upon
      the credit rating of Progress Energy’s long-term unsecured senior
      noncredit-enhanced debt, currently rated as Baa2 by Moody’s and BBB- by
      S&P.




On
      May 3,
      2006, PEC’s five-year $450 million RCA was amended to take advantage of
      favorable market conditions and reduce the pricing associated with the facility.
      Fees and interest rates under the RCA will continue to be determined based
      upon
      the credit rating of PEC’s long-term unsecured senior noncredit-enhanced debt,
      currently rated as Baa1 by Moody’s and BBB- by S&P. The amended PEC RCA is
      still scheduled to expire on June 28, 2010.




On
      May 3,
      2006, PEF’s five-year $450 million RCA was amended to take advantage of
      favorable market conditions and reduce the pricing associated with the facility.
      Fees and interest rates under the RCA will continue to be determined based
      upon
      the credit rating of PEF’s long-term unsecured senior noncredit-enhanced debt,
      currently rated as A3 by Moody’s and BBB- by S&P. The amended PEF RCA is
      still scheduled to expire on March 28, 2010.




For
      the
      three months ended June 30, 2006 and 2005, respectively, we issued approximately
      0.7 million shares and 2.6 million shares of common stock resulting in
      approximately $ 32 million
      and $111 million in proceeds, net of purchases of restricted shares, primarily
      to meet the requirements of the Progress Energy 401(k) Savings and Stock
      Ownership Plan (401(k) Plan) and the Investor Plus Stock Purchase Plan. For
      the
      six months ended June 30, 2006 and 2005, respectively, we issued approximately
      1.4 million shares and 4.0 million shares of common stock resulting in
      approximately $ 60 million
      and $171 million in proceeds, net of purchases of restricted shares. Included
      in
      these amounts were approximately 1.0 million shares and 3.9 million shares
      for
      net proceeds of approximately $46 million and $169 million, respectively, to
      meet the requirements of the 401(k) Plan and the Investor Plus Stock Purchase
      Plan. For the fiscal year 2006, we expect to realize approximately $100 million
      aggregate amount from the sale of stock through these plans.




**FUTURE
      LIQUIDITY AND CAPITAL RESOURCES**




At
      June
      30, 2006, there were no material changes in our “Capital Expenditures,” “Other
      Cash Needs,” “Credit Facilities,” or “Credit Rating Matters” as compared to
      those discussed under LIQUIDITY AND CAPITAL RESOURCES in Item 7 of the 2005
      Form
      10-K, other than as described below and above under “Financing
      Activities.”




The
      amount and timing of future sales of our debt and equity securities will depend
      on market conditions, operating cash flow, asset sales and our specific needs.
      We may from time to time sell securities beyond the amount needed to meet our
      immediate 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.




At
      June
      30, 2006, the current portion of our long-term debt was $460 million, which
      we
      expect to fund with cash from operations, proceeds from sales of assets and/or
      commercial paper borrowings. See Notes 3 and 16 for additional information
      on
      asset sales.




On
      June
      13, 2006, Fitch Ratings (Fitch) placed the senior unsecured credit ratings
      of
      Progress Energy (BBB-), PEC (BBB+) and PEF (BBB+) on Rating Watch Positive.
      The
      short-term ratings of PEC and PEF are unaffected. The placement of PGN's ratings
      on Rating Watch Positive is based on Fitch's expectation that significant
      holding company reductions of debt and business risk will result from pending
      and planned asset sales, as well as the successful resolution of the IRS audit
      of the Earthco synthetic fuel facilities. Should Fitch take a rating action,
      a
      one notch upgrade of the holding company's ratings is likely following
      completion of a rating review, closing of the sales of the DeSoto and Rowan
      plants and the application of the associated $405 million of proceeds to parent
      debt




76


reduction.
      The rating review is expected to occur during the third quarter of 2006. On
      July
      25, 2006, S&P affirmed the corporate credit ratings of BBB at Progress
      Energy, Inc., PEC and PEF and revised each company's outlook to positive from
      stable. The outlook revision reflects the progress towards our holding company
      debt reduction plan and expectations of future financial performance at the
      BBB+
      benchmark levels. S&P also improved the Progress Energy's business risk
      profile to 5 from 6 due to the recently announced sales of the DeSoto and Rowan
      plants and Gas, as well as, anticipated cash flow benefits related to the idling
      of our synthetic fuel facilities. We do not expect these changes to have a
      material impact on our borrowing costs or overall liquidity.




The
      following regulatory matters may impact our future liquidity and financing
      activities: PEC’s fuel cost recovery as discussed in Note 4, PEF’s recovery of
      storm costs as discussed in Note 4, and filings for recovery of environmental
      costs as discussed in Note 13.




**OFF-BALANCE
      SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS**




Our
      off-balance sheet arrangements and contractual obligations are described below.




**GUARANTEES**




As
      a part
      of normal business, we enter into various agreements providing future financial
      or performance assurances to third parties that are outside the scope of FASB
      Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for
      Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN No.
      45). These agreements are entered into primarily to support or enhance the
      creditworthiness otherwise attributed to Progress Energy or our subsidiaries
      on
      a stand-alone basis, thereby facilitating the extension of sufficient credit
      to
      accomplish the subsidiaries’ intended commercial purposes. Our guarantees
      include performance obligations under power supply agreements, tolling
      agreements, transmission agreements, gas agreements, fuel procurement agreements
      and trading operations. Our guarantees also include standby letters of credit,
      surety bonds and guarantees in support of nuclear decommissioning. At June
      30,
      2006, we have issued $1.83 billion of guarantees for future financial or
      performance assurance. Included in this amount is $300 million of Parent-issued
      guarantees of certain payments of two wholly owned indirect subsidiaries (See
      Note 15). We do not believe conditions are likely for significant performance
      under the guarantees of performance issued by or on behalf of affiliates.




The
      majority of contracts supported by the guarantees contain provisions that
      trigger guarantee obligations based on downgrade events to below investment
      grade (below BBB- or Baa3) by S&P or Moody’s, ratings triggers, monthly
      netting of exposure and/or payments and offset provisions in the event of a
      default. At June 30, 2006, no guarantee obligations had been triggered. If
      the
      guarantee obligations were triggered, the approximate amount of liquidity
      requirements to support ongoing operations within a 90-day period, associated
      with guarantees for Progress Energy’s nonregulated portfolio and power supply
      agreements, was $639 million. While we believe that we would be able to meet
      this obligation with cash or letters of credit, if we cannot, our financial
      condition, liquidity and results of operations will be materially and adversely
      impacted.




At
      June
      30, 2006, we have issued guarantees and indemnifications of certain asset
      performance, legal, tax and environmental matters to third parties, including
      indemnifications made in connection with sales of businesses, and for timely
      payment of obligations in support of our nonwholly owned synthetic fuel
      operations as discussed in Note 14A.




**MARKET
      RISK AND DERIVATIVES**




Under
      our
      risk management policy, we may use a variety of instruments, including swaps,
      options and forward contracts, to manage exposure to fluctuations in commodity
      prices and interest rates. See Note 10 and Item 3, “Quantitative and Qualitative
      Disclosures about Market Risk” of this Form 10-Q, for a discussion of market
      risk and derivatives.




**CONTRACTUAL
      OBLIGATIONS**




As
      of
      June 30, 2006, our contractual cash obligations and other commercial commitments
      have not changed materially from what was reported in the 2005 Form
      10-K.




77


**OTHER
      MATTERS**




**SYNTHETIC
      FUELS TAX CREDITS**




Historically,
      we have had substantial operations associated with the production of coal-based
      solid synthetic fuels as
      defined under Section 29 of the Code (Section 29) .
      The
      production and sale of these products qualifies for federal income tax credits
      so long as certain requirements are satisfied, including
      a requirement that the synthetic fuel differs significantly in chemical
      composition from the coal used to produce such synthetic fuel and that the
      fuel
      was produced from a facility that was placed in service before July 1,
      1998 . Qualifying
      synthetic fuel facilities entitle their owners to federal income tax credits
      based on the barrel of oil equivalent of the synthetic fuel produced and sold
      by
      these plants. The
      tax
      credits associated with synthetic fuels in a particular year may be phased
      out
      if Annual Average market prices for crude oil exceed certain prices. Synthetic
      fuel is generally not economical to produce and sell absent the credits. On
      May
      22, 2006, we idled production of synthetic fuel at our synthetic fuel
      facilities. As discussed below in *IMPACT
      OF CRUDE OIL PRICES* ,
      the
      decision to idle production was based on the high level of oil prices and the
      continued uncertainty of any proposed federal legislation regarding the value
      of
      the tax credits received as a result of synthetic fuel production. Resumption
      of
      synthetic fuel production would be dependent upon a number of factors, including
      a reduction in oil prices, the enactment of future federal tax legislation
      and/or the duration of the current idling.




*TAX
      CREDITS*




Legislation
      enacted in 2005 redesignated the Section 29 tax credit as a general business
      credit under Section 45K of the Code (Section 45K) effective January 1, 2006.
      The previous amount of Section 29 tax credits that we were allowed to claim
      in
      any calendar year through December 31, 2005, was limited by the amount of our
      regular federal income tax liability. Section 29 tax credit amounts allowed
      but
      not utilized are currently carried forward indefinitely as deferred alternative
      minimum tax credits. The redesignation of Section 29 tax credits as a Section
      45K general business credit removes the regular federal income tax liability
      limit on synthetic fuel production and subjects the credits to a 20-year carry
      forward period. This provision would allow us to produce synthetic fuel to
      a
      higher level than we have historically produced, should we choose to do so.




Total
      Section 29/45K credits generated through June 30, 2006 (including those
      generated by Florida Progress prior to our acquisition), were approximately
      $1.8
      billion, of which $869 million has been used to offset regular federal income
      tax liability, $896 million is being carried forward as deferred tax credits
      and
      $35 million has been reserved due to the potential phase-out of tax credits
      due
      to high oil prices, as described below.




*IMPACT
      OF CRUDE OIL PRICES*




Although
      the Section 29/45K tax credit program is expected to continue through 2007,
      recent market conditions, world events and catastrophic weather events have
      increased the volatility and level of oil prices that could limit the amount
      of
      those credits or eliminate them entirely for 2006 and 2007. 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 29/45K tax credits is reduced for that year. Also, if the
      Annual Average Price increases high enough (the Phase-out Price), the Section
      29/45K tax credits are eliminated for that year. 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 29/45K tax credits are reduced will
      depend on where the Annual Average Price falls in that continuum. For example,
      for 2005, the Threshold Price was $53.20 per barrel and the Phase-out Price
      was
      $66.78 per barrel. If the Annual Average Price had been $59.99 per barrel,
      there
      would have been a 50 percent reduction in the amount of Section 29 tax credits
      for that year.




The
      Department 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 the calculations three months after
      the
      year in question ends. The Annual Average Price for calendar year 2005 was
      published on April 11, 2006. Based on the Annual Average Price of $50.26, there
      was no phase-out of our synthetic fuel tax credits in 2005.




78


We
      estimate that the 2006 Threshold Price will be approximately $55 per barrel
      and
      the Phase-out Price will be approximately $69 per barrel, based on an estimated
      inflation adjustment for 2006. The monthly Domestic Crude Oil First Purchases
      Price published by the EIA has recently averaged approximately $6 lower than
      the
      corresponding monthly New York Mercantile Exchange (NYMEX) settlement price
      for
      light sweet crude oil. Through June 30, 2006, the average NYMEX settlement
      price
      for light sweet crude oil was $67.13 per barrel, and as of June 30, 2006, the
      average NYMEX futures price for light sweet crude oil for the remainder of
      calendar year 2006 was $75.12 per barrel. This results in a weighted-average
      annual price for light sweet crude oil of approximately $71.16 per barrel for
      calendar year 2006. Based upon the estimated 2006 Threshold Price and Phase-out
      Price, if oil prices for 2006 averaged this weighted price of approximately
      $71.16 per barrel for the entire year in 2006, we currently estimate that the
      synthetic fuel tax credit amount for 2006 would be reduced by approximately
      72
      percent. Therefore, we reserved 72 percent or approximately $35 million of
      the
      $48 million in tax credits generated during the first six months of 2006. The
      NYMEX price of oil for the remainder of 2006 would have to be $55.16 to have
      no
      reduction in value of tax credits generated during 2006 and would have to be
      $83.04 to have a full reduction in value. The final calculations of any
      reductions in the value of the tax credits will not be determined until the
      end
      of 2006 when final oil prices are known. Additional fluctuations in oil prices
      may cause quarterly adjustments to our results of operations and the amount
      of
      tax credits we record or reserve, either positive or negative, depending on
      current and futures oil prices at the end of the quarter, which impact the
      estimated weighted average annual price of oil for 2006.




Legislation
      that would have provided synthetic fuel producers with additional certainty
      around future synthetic fuel production decisions was not included in the Tax
      Increase Prevention and Reconciliation Act passed in May 2006. However, similar
      provisions modifying the Section 29/45K synthetic fuel tax credit program may
      be
      included in future legislation. We cannot predict the outcome of this
      matter.




If
      our
      synthetic fuel operations remain idle for the balance of 2006 and the 2006
      credits earned to date were completely phased out due to high oil prices, then
      the estimated current year losses through June 30, 2006 from our synthetic
      fuel
      operations would be approximately $92 million, which includes after-tax
      impairment losses of $55 million and a reversal of $13 million of income related
      to tax credits recorded during the first six months of 2006.




*IMPAIRMENT
      OF SYNTHETIC FUEL AND OTHER RELATED LONG-LIVED ASSETS*




We
      have
      monitored our synthetic fuel and other related operating long-lived assets
      for
      impairment and previously determined that no impairment of these assets was
      required. **** With
      the
      idling of these facilities during the second quarter of 2006, we performed
      another impairment evaluation. The impairment test considered numerous factors,
      including, among other things, continued high oil prices, the continued
      uncertainty of whether federal legislation will be enacted that would provide
      assurance that tax credits would exist for 2006 production and the continued
      “idle” state of our synthetic fuel facilities. Based on the results of the
      impairment test, we recorded pre-tax impairment charges of $91 million ($55
      million after-tax) during the quarter ended June 30, 2006 (See Notes 6 and
      7).
      These charges represent the entirety of the asset carrying value of our
      synthetic fuel intangible assets and manufacturing facilities, as well as a
      portion of the asset carrying value associated with the river terminals at
      which
      the synthetic fuel manufacturing facilities are located.




*PERMANENT
      SUBCOMMITTEE*




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




*SALE
      OF PARTNERSHIP INTEREST*




In
      June
      2004, through our subsidiary Progress Fuels, we sold in two transactions a
      combined 49.8 percent partnership interest in Colona, one of our synthetic
      fuel
      facilities. Substantially all proceeds from the sales will be received over
      time, which is typical of such sales in the industry. Gains 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.
      Gain
      recognition is dependent on the synthetic fuel production qualifying for Section
      29/45K tax credits and the value of such tax credits as




79


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. With an extended idling of our production, the
      amount of proceeds realized from the sale could be significantly impacted.
      As of
      June 30, 2006, a pre-tax gain on monetization of $11 million has been deferred.
      Based on the current level of oil prices, we cannot predict how much, if any,
      of
      this gain will be recognized this year. Beginning with the payment for the
      second quarter of 2006, the minority interest parties have elected to defer
      their cash payments in consideration of the idling of the synthetic fuel
      facilities.




See
      Note
      14B for additional discussion related to our synthetic fuel
      operations.




**REGULATORY
      ENVIRONMENT**




The
      Utilities’ operations in North Carolina, South Carolina and Florida are
      regulated by the North Carolina Utilities Commission (NCUC), Public Service
      Commission of South Carolina (SCPSC) and the Florida Public Service Commission
      (FPSC), respectively. The electric businesses are also subject to regulation
      by
      the FERC, the NRC and other federal and state agencies common to the utility
      industry. In addition, until February 8, 2006, we were subject to SEC regulation
      as a registered holding company under the Public Utility Holding Company Act
      of
      1935, as amended (PUHCA). Subsequent to the repeal of PUHCA, we became subject
      to additional regulation by the FERC. As a result of regulation, many of our
      fundamental business decisions, as well as the rate of return the Utilities
      are
      permitted to earn, are subject to the approval of these governmental
      agencies.




On
      May 5,
      2006, the Florida state legislature passed a comprehensive energy bill which
      has
      been signed by the governor. The legislation creates a new energy council tasked
      with developing a statewide energy policy, provides incentives to renewable
      energy sources and fosters the construction of new nuclear power plants,
      including streamlining the siting of nuclear power plants and related
      transmission facilities, exempting new nuclear plants from the FPSC bid rule
      and
      requiring the FPSC to issue rules authorizing alternative cost-recovery
      mechanisms for pre-construction costs and construction cost
      financing.




Due
      to
      the damage electric utility facilities suffered during recent hurricanes, the
      FPSC and the Florida state legislature have reviewed proposals that sought
      to
      minimize future storm damage and resulting customer outages. While the proposed
      legislation did not pass, the FPSC has initiated rulemaking proceedings and
      workshops regarding changes in construction and maintenance standards.
      Regulations involving wooden pole inspection schedules have been adopted and
      the
      FPSC is currently considering vegetation maintenance and long-term initiatives.
      PEF has actively participated in the rulemaking process and will continue to
      address the FPSC’s concerns until remaining storm-hardening rulemaking issues
      are resolved. If all current and proposed rulemakings are adopted, PEF
      anticipates that these rules will not materially increase PEF’s costs. We cannot
      predict the outcome of this matter.




On
      April
      26, 2006, PEC submitted a license renewal application with the FERC seeking
      a
      50-year license for its Tillery and Blewett hydroelectric generating plants.
      The
      license for these plants currently expires in April 2008 and the requested
      renewal will allow the plants to continue operations until 2058. The remaining
      phase of the application process will take approximately two years and includes
      review by the FERC and solicitation of public comment. We cannot predict the
      outcome of this matter.




**APPLICATIONS
      FOR NUCLEAR POWER PLANT LICENSES**




We
      have
      announced that we are pursuing development of Combined License (COL)
      applications, which are not commitments to build nuclear plants but are a
      necessary step to keep open the option of building a potential plant or plants. On
      January 23, 2006, we announced that PEC had selected the Shearon Harris Nuclear
      Plant (Harris) site to evaluate for possible future nuclear expansion and we
      announced the selection of the Westinghouse Electric AP1000 reactor design
      as
      the technology upon which to base any potential application submission. We
      currently expect to file the application for the COL for PEC’s Harris site in
      2007. We expect to file the application for the COL for an as-yet unspecified
      site in Florida in 2008. We plan to announce the selection of the Florida site
      in the third quarter of 2006. If we receive approval from the NRC, and if the
      decision to build is made, construction could begin as early as 2010, and a
      new
      plant could be in service around 2016.  We
      estimate that it will take approximately 36 months for the NRC to review the
      COL
      applications and grant approval.




80


A
      new
      nuclear plant may be eligible for the federal production tax credits and risk
      insurance provided by the Energy Policy Act of 2005 (EPACT). EPACT provides
      an
      annual tax credit of 1.8 cents per kWh for nuclear facilities for the first
      eight years of operation. The credit is limited to the first 6,000 MW of new
      nuclear generation in the United States and has an annual cap of $125 million
      per 1,000 MW of national MW capacity limitation allocated to the unit. In April
      2006, the IRS provided interim guidance that the 6,000 MW of production tax
      credits generally will be allocated to new nuclear facilities which filed
      license applications with the NRC by December 31, 2008 and which were placed
      in
      service before January 1, 2021. There is no guarantee that
      the interim guidance will be incorporated into the final regulations governing
      the allocation of production tax credits.




Multiple
        utilities have announced plans to pursue new nuclear plants. There is no
        guarantee that any nuclear plant constructed by us would qualify for these
        or
        other incentives. We cannot predict the outcome of this
        matter.




**ENVIRONMENTAL
      MATTERS**




We
      are
      subject to federal, state and local regulations addressing air and water
      quality, hazardous and solid waste management and other environmental matters.
      We currently estimate total remaining compliance costs for the Utilities,
      related to environmental laws and regulations addressing air and water quality,
      which will primarily be for capital expenditures, could be in excess of $1.0
      billion each at PEC and PEF, respectively, through 2018, which is the latest
      compliance target date for current air and water quality regulations. These
      costs are eligible for regulatory recovery through either base rates or
      pass-through clauses. These environmental matters are discussed in further
      detail in Note 13, including identification of specific environmental issues,
      the status of the issues, accruals associated with issue resolutions and our
      associated exposures. We accrue costs to the extent they are probable and can
      be
      reasonably estimated. It is probable that current estimates will change and
      additional losses, which could be material, may be incurred in the future.




**NEW
      ACCOUNTING STANDARDS**




See
      Note
      2 for a discussion of the impact of new accounting standards.


81


***PEC***




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.




The
      following Management’s Discussion and Analysis and the information incorporated
      herein by reference contain 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 and Item 1A, “Risk Factors” of Part II for a discussion of the
      factors that may impact any such forward-looking statements made
      herein.




Cash
      provided by operating activities increased $48 million for the six months ended
      June 30, 2006, when compared to the corresponding period in the prior year.
      The
      increase in operating cash flow was primarily due to a $43 million increase
      in
      the recovery of fuel costs and a $38 million increase from other operating
      activities, primarily related to fluctuations in long-term emission allowance
      inventory. In 2005, PEC requested and received approval from the NCUC and SCPSC
      for rate increases for fuel cost recovery, including amounts for previous
      under-recoveries. These impacts were partially offset by lower net income and
      a
      $23 million net increase in working capital needs. The increase in working
      capital needs was primarily driven by a $122 million increase resulting from
      tax
      payments, largely offset by decreases of $73 million related to accounts
      receivable and $28 million related to fluctuations in inventory, primarily
      emission allowances.




Cash
      used
      in investing activities decreased $55 million for the six months ended June
      30,
      2006, when compared to the corresponding period in the prior year primarily
      due
      to an increase in net proceeds from available-for-sale securities and other
      investments for the period in 2006, partially offset by an increase in nuclear
      fuel additions related to nuclear facility outages. Available-for-sale
      securities and other investments include marketable debt securities and
      investments held in nuclear decommissioning trusts.




See
      Progress Energy’s Management’s Discussion and Analysis of Financial Condition
      and Results of Operations, LIQUIDITY AND CAPITAL RESOURCES, for a discussion
      of
      PEC’s financing activities.




**OFF-BALANCE
      SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS**




At
      June
      30, 2006, PEC’s off-balance sheet arrangements and contractual obligations have
      not changed materially from what was reported in PEC’s 2005 Form
      10-K.




**MARKET
      RISK AND DERIVATIVES**




Under
      its
      risk management policy, PEC may use a variety of instruments, including swaps,
      options and forward contracts, to manage exposure to fluctuations in commodity
      prices and interest rates. See Note 10 and Item 3, “Quantitative and Qualitative
      Disclosures about Market Risk” of this Form 10-Q, for a discussion of market
      risk and derivatives.




**CONTRACTUAL
      OBLIGATIONS**




At
      June
      30, 2006, PEC’s contractual cash obligations and other commercial commitments
      have not changed materially from what was reported in PEC’s 2005 annual report
      on Form 10-K.




82


***PEF***




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




The
      following Management’s Discussion and Analysis and the information incorporated
      herein by reference contain 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 and Item 1A, “Risk Factors” of Part II for a discussion of the
      factors that may impact any such forward-looking statements made
      herein.




**LIQUIDITY
      AND CAPITAL RESOURCES**




PEF’s
      net
      cash provided by operating activities increased by $243 million for the six
      months ended June 30, 2006, when compared to the corresponding period in the
      prior year. The increase was due primarily to higher net income, a $127 million
      increase in the recovery of fuel costs, $64 million of storm restoration costs
      incurred in the prior year, and $56 million related to lower tax payments and
      higher income tax provision. In 2005, PEF requested and received approval from
      the FPSC for rate increases for fuel cost recovery, including amounts for
      previous under-recoveries. PEF also received approval from the FPSC authorizing
      PEF to recover $245 million over a two-year period, including interest, of
      the
      costs it incurred and previously deferred related to PEF’s restoration of power
      to customers associated with the four hurricanes in 2004. See Note 4 for
      additional information. These impacts were partially offset by decreases of
      $52
      million from fluctuations in inventory, primarily coal, and $31 million from
      the
      timing of purchases and payments to affiliates.




Cash
      used
      in investing activities increased $143 million for the six months ended June
      30,
      2006, when compared to the corresponding period in the prior year. The increase
      in cash used in investing activities is primarily due to $118 million of
      property additions, primarily related to higher spending to construct the Hines
      4 facility and distribution projects partially offset by lower spending to
      construct the Hines 3 facility and a $45 million increase in net purchases
      of
      short-term investments included in available-for-sale securities and other
      investments. These impacts were partially offset by a $28 million decrease
      in
      nuclear fuel additions. Available-for-sale securities and other investments
      include marketable debt securities and investments held in nuclear
      decommissioning trusts.




See
      Progress Energy’s Management’s Discussion and Analysis of Financial Condition
      and Results of Operations, LIQUIDITY AND CAPITAL RESOURCES, for a discussion
      of
      PEF’s financing activities.




83


Item
      3 .  Quantitative
      and Qualitative Disclosures about Market Risk





We
      are
      exposed to various risks related to changes in market conditions. We have a
      Risk
      Management Committee comprised of senior executives from various functional
      areas. The Risk Management Committee is responsible for administering risk
      management policies and monitoring compliance with those policies by all
      subsidiaries. Under our risk policy, we may use a variety of instruments,
      including swaps, options and forward contracts, to manage exposure to
      fluctuations in commodity prices and interest rates. Such instruments contain
      credit risk for nonperformance by the counterparty. We minimize such risk by
      performing credit reviews using, among other things, publicly available credit
      ratings of such counterparties. Potential nonperformance by counterparties
      is
      not expected to have a material effect on our financial position or results
      of
      operations. Additionally, in the normal course of business, some of our
      affiliates may enter into hedge transactions with one another (See Note
      10).




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




***PROGRESS
      ENERGY, INC.***




Other
      than described below, the various risks that we are exposed to have not
      materially changed since December 31, 2005.




**INTEREST
      RATE RISK**




Our
      exposure to changes in interest rates from fixed rate and variable rate
      long-term debt at June 30, 2006, has changed from December 31, 2005. The total
      notional amount of fixed rate long-term debt at June 30, 2006, was $ 9.240 billion,
      with an average interest rate of 6.29 %
      and
      fair market value of $ 9.269 billion.
      The total notional amount of variable rate long-term debt at June 30, 2006,
      was
      $ 1.411 billion,
      with an average interest rate of 4.38 %
      and
      fair market value of $ 1.411 billion.




In
      addition to our variable rate long-term debt, we typically have commercial
      paper
      and/or loans outstanding under our RCA facilities, which are also exposed to
      floating interest rates. At June 30, 2006, approximately 14.7 percent of
      consolidated debt, including interest rate swaps, was in floating rate mode
      compared to 12.8 percent at the end of 2005.




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




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




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




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




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




84


**CASH
      FLOW HEDGES**




During
      the six months ended June 30, 2006, we settled the previous $100 million of
      forward starting swaps in conjunction with our issuance of $300 million of
      5.625% Senior Notes due 2016. Under terms of these swap agreements, we paid
      a
      fixed rate and received a floating rate based on 3-month London Inter Bank
      Offering Rate (LIBOR). The Utilities had no open interest rate cash flow hedges
      at June 30, 2006 and December 31, 2005.





Cash
                Flow Hedges (dollars in millions)
            
            Notional
                Amount
            
            Pay
            
            Receive(a)
            
            Fair
                Value
            
            Sensitivity(b)Progress
                Energy, Inc.**Risk
                hedged at June 30, 2006:**
            
            
            **None**Risk
                hedged at December 31, 2005:Anticipated
                10-year debt issue(c)
            
            $
            100
            
            
            4.87
            %
            
            3-month
                LIBOR
            
            $
            1
            
            $
            (2
            )




(a)
              3-month
                    LIBOR rate was 4.54% at December 31,
                    2005.
 (b)
              Sensitivity
                    indicates change in value due to 25 basis point unfavorable shift
                    in
                    interest rates.
 (c)
              Progress
                    Energy, Inc. anticipated 10-year debt issue hedges terminated
                    on March 1,
                    2006 with required mandatory cash
                    settlement.


PEC
      entered into a $50 million forward starting swap on June 2, 2006, and PEF
      entered into a $50 million forward starting swap on June 6, 2006, to mitigate
      exposure to interest rate risk on their respective anticipated fixed rate debt
      issuances in 2007. These swaps were designated as cash flow hedges as of July
      1,
      2006. The fair value of these swaps was not material at June 30,
      2006.




**FAIR
      VALUE HEDGES**




At
      June
      30, 2006 and December 31, 2005, we had $150 million notional of fixed rate
      debt
      swapped to floating rate debt. Under terms of these swap agreements, we will
      receive a fixed rate and pay a floating rate based on 3-month LIBOR. At June
      30,
      2006 and December 31, 2005, the Utilities had no open interest rate fair value
      hedges.





Fair
                Value Hedges (dollars in millions)
            
            Notional
                Amount
            
            Receive
            
            Pay(b)
            
            Fair
                Value
            
            Sensitivity(c)Progress
                Energy, Inc.**Risk
                hedged at June 30, 2006:**5.85%
                Notes due 10/30/2008
            
            **$**
            **100**
            
            
            **4.10**
            **%**
            
            **3-month
                LIBOR**
            
            **$**
            **(3**
            **)**
            **$**
            **(1**
            **)**7.10%
                Notes due 3/1/2011
            
            
            **50**
            
            
            **4.65**
            **%**
            
            **3-month
                LIBOR**
            
            
            **(2**
            **)**
            
            **-**Total
            
            **$**
            **150**
            
            
            **4.28**
            **%**
            **(a)**
            
            
            **$**
            **(5**
            **)**
            **$**
            **(1**
            **)**Risk
                hedged at December 31, 2005:5.85%
                Notes due 10/30/2008
            
            $
            100
            
            
            4.10
            %
            
            3-month
                LIBOR
            
            $
            (2
            )
            $
            (1
            )7.10%
                Notes due 3/1/2011
            
            
            50
            
            
            4.65
            %
            
            3-month
                LIBOR
            
            
            -
            
            
            -Total
            
            $
            150
            
            
            4.28
            %
            (a)
            
            
            $
            (2
            )
            $
            (1
            )





(a)
            Weighted
                average interest rate.


(b)
            3-month
                LIBOR rate was 5.48% at June 30, 2006 and 4.54% at December 31,
                2005.


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





85


**MARKETABLE
      SECURITIES PRICE RISK**





At
      June
      30, 2006 and December 31, 2005, the fair value of our nuclear decommissioning
      trust funds was $1.181 billion and $1.133 billion, respectively, including
      $669
      million and $640 million, respectively, for PEC and $512 million and $493
      million, respectively, for PEF. The accounting for nuclear decommissioning
      recognizes that the Utilities’ regulated electric rates provide for recovery of
      these costs net of any trust fund earnings, and, therefore, fluctuations in
      trust fund marketable security returns do not affect earnings.




**CONTINGENT
      VALUE OBLIGATIONS MARKET VALUE RISK**




CVOs
      are
      recorded at fair value, and unrealized gains and losses from changes in fair
      value are recognized in earnings. At June 30, 2006 and December 31, 2005, the
      fair value of CVOs was $30 million and $7 million, respectively. At June 30,
      2006, a hypothetical 10 percent change in the market price would not have a
      material effect on our financial position, results of operations or cash
      flows.




**COMMODITY
      PRICE RISK**




We
      are
      exposed to the effects of market fluctuations in the price of natural gas,
      coal,
      fuel oil, electricity and other energy-related products marketed and purchased
      as a result of our ownership of energy-related assets. Our exposure to these
      fluctuations is significantly limited by the cost-based regulation of the
      Utilities. Each state commission allows electric utilities to recover certain
      of
      these costs through various cost recovery clauses to the extent the respective
      commission determines that such costs are prudent. Therefore, while there may
      be
      a delay in the timing between when these costs are incurred and when these
      costs
      are recovered from the ratepayers, changes from year to year have no material
      impact on operating results. In addition, many of our long-term power sales
      contracts shift substantially all fuel responsibility to the purchaser. We
      also
      have oil price risk exposure related to synthetic fuel tax credits as discussed
      in the OTHER MATTERS section of Item 2.




We
      perform sensitivity analyses to estimate our exposure to the market risk of
      our
      commodity positions. Our exposure to commodity price risk has not changed
      materially since December 31, 2005. A hypothetical 10 percent increase or
      decrease in quoted market prices in the near term on our derivative commodity
      instruments would not have a material effect on our financial position, results
      of operations or cash flows at June 30, 2006.




See
      Note
      10 for additional information with regard to our commodity contracts and use
      of
      derivative financial instruments.




**GENERAL**




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




**ECONOMIC
      DERIVATIVES**




Derivative
      products, primarily electricity and natural gas contracts, may be entered into
      from time to time for economic hedging purposes. While management believes
      the
      economic hedges mitigate exposures to fluctuations in commodity prices, these
      instruments are not designated as hedges for accounting purposes and are
      monitored consistent with trading positions. We manage open positions according
      to established policies and guidelines that limit our exposure to market risk
      and require daily reporting to management of financial exposures. Gains and
      losses from such contracts were not material to our or the Utilities’ results of
      operations for the three and six months ended June 30, 2006 and 2005. PEC did
      not have material outstanding positions in such contracts at June 30, 2006
      and
      December 31, 2005. We and PEF did not have material outstanding positions in
      such contracts at June 30, 2006 and December 31, 2005, other than those
      receiving regulatory accounting treatment at PEF, as described below.




PEF
      has
      derivative instruments related to its exposure to price fluctuations on fuel
      oil
      and natural gas purchases. These instruments receive regulatory accounting
      treatment. Unrealized gains and losses are recorded in regulatory liabilities
      and regulatory assets, respectively, until the contracts are settled. Once
      settled, any realized gains or losses are passed through the fuel clause. At
      June 30, 2006, the fair values of these instruments were a $55 million
      short-term derivative asset position included in other current assets, a $48
      million long-term derivative asset position




86


included
      in other assets and deferred debits, a $15 million short-term derivative
      liability position included in other current liabilities and a $53 million
      long-term derivative liability position included in other liabilities and
      deferred credits on the Balance Sheets. At December 31, 2005, the fair values
      of
      the instruments were a $77 million short-term derivative asset position included
      in other current assets, a $45 million long-term derivative asset position
      included in other assets and deferred debits and a $49 million long-term
      derivative liability position included in other liabilities and deferred credits
      on the Balance Sheets.




**CASH
      FLOW HEDGES**




We
      designate a portion of commodity derivative instruments as cash flow hedges
      under SFAS No. 133. The objective for holding these instruments is to hedge
      exposure to market risk associated with fluctuations in the price of natural
      gas
      and power for our forecasted purchases and sales.




The
      fair
      values of our commodity cash flow hedges at June 30, 2006 and December 31,
      2005,
      were as follows:




**June
                30, 2006**
            
            December
                31, 2005(in
                millions)
            
            **Progress
                Energy**
            
            **PEC**
            
            Progress
                Energy
            
            PECFair
                value of assets
            
            **$**
            **145**
            
            **$**
            **-**
            
            $
            170
            
            $
            7Fair
                value of liabilities
            
            
            **(1**
            **)**
            
            **-**
            
            
            (58
            )
            
            (4
            )Fair
                value, net
            
            **$**
            **144**
            
            **$**
            **-**
            
            $
            112
            
            $
            3





***PEC***





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





PEC
      has
      certain market risks inherent in its financial instruments, which arise from
      transactions entered into in the normal course of business. PEC’s primary
      exposures are changes in interest rates with respect to long-term debt and
      commercial paper, fluctuations in the return on marketable securities with
      respect to its nuclear decommissioning trust funds, and changes in energy
      related commodity prices. Other than as discussed above, PEC’s exposure to these
      risks has not materially changed since December 31, 2005.





***PEF***





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





87


Item
      4 :  Controls
      and Procedures





Progress
      Energy, Inc.





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





There
      has
      been no change in our internal control over financial reporting during the
      quarter ended June 30, 2006, that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial reporting.





PEC





Pursuant
      to the Securities Exchange Act of 1934, PEC carried out an evaluation, with
      the
      participation of its management, including PEC’s 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 June 30, 2006, that has materially affected, or is reasonably
      likely to materially affect, its internal control over financial reporting.





PEF





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





On
      March
      21, 2006, Progress Energy announced that Jeffrey J. Lyash was appointed to
      the
      position of President and Chief Executive Officer of PEF, effective June 1,
      2006. This position was previously held by H. William Habermeyer, Jr. who
      retired on May 31, 2006.





Other
      than the above-referenced item, there has been no change in PEF’s internal
      control over financial reporting during the quarter ended June 30, 2006, that
      has materially affected, or is reasonably likely to materially affect, PEF’s
      internal control over financial reporting.





88


PART
                  II.OTHER INFORMATION





Item
      1.  Legal
      Proceedings




Legal
      aspects of certain matters are set forth in PART I, Item 1 (See Note
      14B).









Item
      1A.  Risk
      Factors




In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part I, Item 1A. Risk Factors of the 2005
      Form
      10-K, which could materially affect our business, financial condition or future
      results. The risks described in this report and in our 2005 Form 10-K are not
      the only risks facing us. Additional risks and uncertainties not currently
      known
      to us or that we currently deem to be immaterial also may materially adversely
      affect our business, financial condition and/or operating results. Other than
      as
      discussed below, there have been no material changes to our risk factors from
      those disclosed in the 2005 Form 10-K.





***Our
      results of operations may be materially and adversely affected by the high
      price
      of oil and its impact on our synthetic fuels business. This risk is not
      applicable to PEC and PEF.***





Section
      29 provides that if the average wellhead price per barrel for unregulated
      domestic crude oil for the year (the Annual Average Price) exceeds a certain
      threshold value (the Threshold Price), the amount of Section 29/45K tax credits
      are reduced for that year. Also, if the Annual Average Price increases high
      enough (the Phase-out Price), the Section 29/45K tax credits are eliminated
      for
      that year. The Threshold Price and the Phase-out Price are adjusted annually
      for
      inflation. See IMPACT OF CRUDE OIL PRICES in OTHER MATTERS of Item 2,
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations, for additional information on the impact of crude oil prices on
      our
      synthetic fuel operations and the value of our Section 29/45K tax
      credits.





Recent
      increases in the price of oil have limited the amount of Section 29/45K tax
      credits we recognized through June 30, 2006 and could eliminate them altogether.
      On May 22, 2006, we idled production of synthetic fuel at our synthetic fuel
      facilities. The decision to idle production was based on the high level of
      oil
      prices and the continued uncertainty of any proposed federal legislation
      regarding the value of the tax credits received as a result of synthetic fuel
      production. Resumption of synthetic fuel production would be dependent upon
      a
      number of factors, including a reduction in oil prices, the enactment of future
      federal tax legislation and/or the duration of the current idling.




The
      idling of our synthetic fuel facilities triggered an impairment test of our
      synthetic fuel and other related long-lived assets during the quarter ended
      June
      30, 2006. Based on the results of the impairment test, during the second quarter
      of 2006, we recorded an after-tax impairment charge of $91 million ($55 million
      after-tax) that represents the entirety of the asset carrying value of our
      synthetic fuel intangible assets and manufacturing facilities, as well as a
      portion of the asset carrying value associated with the river terminals at
      which
      the synthetic fuel manufacturing facilities are located (See Notes 6 and
      7).





If
      our
      synthetic fuel operations remain idle for the remainder of 2006 and the Section
      29/45 tax credits earned to date during 2006 were completely phased out due
      to
      high oil prices, then the current year losses from our synthetic fuel operations
      would equal its operating losses ($79 million through June 30, 2006) plus the
      reversal of income related to Section 29/45 tax credits recorded during the
      year
      ($13 million through June 30, 2006).







89


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





(a)  RESTRICTED
      STOCK AWARDS





(a)
            Securities
                Delivered.On
                April 1, 2006, 62,200 restricted shares of our common stock were
                granted
                to certain key employees pursuant to the terms of the Progress Energy
                2002
                Equity Incentive Plan (EIP), which was approved by the Progress Energy’s
                shareholders on May 8, 2002. Section 9 of the EIP provides for the
                granting of Restricted Stock by the Organization and Compensation
                Committee of the Board of Directors, (the Committee) to key employees,
                including our Affiliates or any successor, and to our outside directors.
                The shares of common stock delivered pursuant to the EIP were acquired
                in
                market transactions directly for the accounts of the recipients and
                do not
                represent newly issued shares of Progress Energy.





(b)
            Underwriters
                and Other Purchasers.No
                underwriters were used in connection with the delivery of our common
                stock
                described above. The shares were delivered to certain key employees.
                The
                EIP defines "key employee" as an officer or other employee of Progress
                Energy who is selected for participation in the EIP.





(c)
            Consideration.The shares of our common stock were delivered to provide an incentive
                to
                the employee recipients to exert their utmost efforts on Progress
                Energy’s
                behalf and thus enhance our performance while aligning the employee's
                interest with those of our 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 shares of our common stock required no investment
                decision on the part of the
                recipients.





(c)  ISSUER
      PURCHASES OF EQUITY SECURITIES FOR SECOND QUARTER OF 2006





**Period**
            **(a)**
              **Total
                Number of Shares**
              **(or
                Units) Purchased (1)(2)**
            **(b)**
              **Average
                Price Paid Per Share (or Unit)**
            **(c)**
              **Total
                Number of Shares (or Units) Purchased as Part of Publicly Announced
                Plans
                or Programs (1)**
            **(d)**
              **Maximum
                Number (or Approximate Dollar Value) of Shares (or Units) that May
                Yet Be
                Purchased Under the Plans or Programs (1)**April
                1 - April 30
            62,200
            $44.63
            N/A
            N/AMay
                1- May 31
            -
            N/A
            N/A
            N/AJune
                1 - June 30
            -
            N/A
            N/A
            N/ATotal
            62,200
            $44.63
            N/A
            N/A





(1)
            As
                of June 30, 2006, Progress Energy does not have any publicly announced
                plans or programs to purchase shares of its common
                stock.





(2)
            Open-market
                transactions were executed to purchase 62,200 shares of our common
                stock
                at an average price of $44.63 in connection with restricted stock
                awards
                that were granted to certain key employees pursuant to the terms
                of the
                EIP.








90


Item
      4 .  Submission
      of Mattersto a Vote of Security
      Holders





Progress
      Energy




(a)
            The
              Annual Meeting of the Shareholders of Progress Energy, Inc. was held
              on
              May 10, 2006.





(b)
            The
                meeting involved the election of three Class I directors to serve
                for
                two-year terms; four Class II directors to serve for three-year terms
                and
                one Class III director to serve for a one-year term. Proxies for
                the
                meeting were solicited pursuant to Regulation 14, there was no
                solicitation in opposition to management’s nominees as listed below, and
                all nominees were elected.





(c)
            The
                matters voted upon at the meeting and the votes cast for, against
                or
                withheld were as follows:





The
      total
      votes for the election of directors were as follows:





Term
                Expiration
            Votes
                For
            Votes
                WithheldClass
                IW.
                D. Frederick, Jr.
            2008
            215,490,208
            4,585,104W.
                Steven Jones
            2008
            215,798,985
            4,276,327Theresa
                M. Stone
            2008
            215,265,406
            4,809,906Class
                IIEdwin
                B. Borden
            2009
            214,832,442
            5,242,870James
                E. Bostic, Jr.
            2009
            214,914,154
            5,161,157David
                L. Burner
            2009
            212,469,262
            7,606,050Richard
                L. Daugherty
            2009
            214,700,956
            5,374,356Class
                IIIHarris
                E. DeLoach, Jr.
            2007
            215,543,794
            4,531,517








The
      Board
      of Directors’ proposal to ratify the selection of Deloitte & Touche LLP as
      Progress Energy’s independent registered public accounting firm was approved by
      the shareholders.





The
      number of shares voted for the proposal was 215,064,154


The
      number of shares voted against the proposal was 2,807,547


The
      number of abstaining votes was 2,203,610





The
      Board
      of Directors’ proposal to require the annual election of all members of the
      Board of Directors was approved by the shareholders.





The
      number of shares voted for the proposal was 212,102,971


The
      number of shares voted against the proposal was 4,770,946


The
      number of abstaining votes was 3,201,394





The
      Board
      of Directors’ proposal to require director election by majority vote was
      approved by the shareholders.





The
      number of shares voted for the proposal was 213,274,850


The
      number of shares voted against the proposal was 3,289,843


The
      number of abstaining votes was 3,510,618





The
      shareholder proposal relating to Progress Energy’s policies on the hiring of
      contractors was not approved by the shareholders.





The
      number of shares voted for the proposal was 14,544,287


The
      number of shares voted against the proposal was 135,213,222


The
      number of abstaining votes was 18,601,530


The
      number of broker non-votes was 51,716,272








91


PEC




(a)
              The
                  Annual Meeting of the Shareholders of Progress Energy, Inc. was
                  held on
                  May 10, 2006.





(b)
            The
                meeting involved the election of three Class I directors to serve
                for
                two-year terms; four Class II directors to serve for three-year terms
                and
                one Class III director to serve for a one-year term. Proxies for
                the
                meeting were solicited pursuant to Regulation 14, there was no
                solicitation in opposition to management’s nominees as listed below, and
                all nominees were elected.





(c)
            The
                matters voted upon at the meeting and the votes cast for, against
                or
                withheld were as follows:


The
        total
        votes for the election of directors were as follows:





Term
                Expiration
            Votes
                For
            Votes
                WithheldClass
                IW.
                D. Frederick, Jr.
            2008
            159,934,661
            3,228W.
                Steven Jones
            2008
            159,935,316
            2,573Theresa
                M. Stone
            2008
            159,935,278
            2,611Class
                IIEdwin
                B. Borden
            2009
            159,934,847
            3,042James
                E. Bostic, Jr.
            2009
            159,935,400
            2,489David
                L. Burner
            2009
            159,935,134
            2,755Richard
                L. Daugherty
            2009
            159,934,814
            3,075Class
                IIIHarris
                E. DeLoach, Jr.
            2007
            159,934,780
            3,109





The
      Board
      of Directors’ proposal to ratify the selection of Deloitte & Touche LLP as
      PEC’s independent registered public accounting firm was approved by the
      shareholders.





The
      number of shares voted for the proposal was 159,936,932


The
      number of shares voted against the proposal was 591


The
      number of abstaining votes was 366


92


Item
      6.  Exhibits





(a)
            Exhibits





Exhibit
              Number
            Description
            Progress
              Energy
            PEC
            PEF3(a)
            Articles
                of Amendment effective May 12, 2006 to the Progress Energy, Inc.
                Articles
                of Incorporation
            X3(b)
            By-Laws
                of Progress Energy, Inc. as amended on May 10, 2006
            X31(a)
            302
                Certifications of Chief Executive Officer
            X31(b)
            302
                Certifications of Chief Financial Officer
            X31(c)
            302
                Certifications of Chief Executive Officer
            
            X31(d)
            302
                Certifications of Chief Financial Officer
            
            X31(e)
            302
                Certifications of Chief Executive Officer
            
            
            X31(f)
            302
                Certifications of Chief Financial Officer
            
            
            X32(a)
            906
                Certifications of Chief Executive Officer
            X32(b)
            906
                Certifications of Chief Financial Officer
            X32(c)
            906
                Certifications of Chief Executive Officer
            
            X32(d)
            906
                Certifications of Chief Financial Officer
            
            X32(e)
            906
                Certifications of Chief Executive Officer
            
            
            X32(f)
            906
                Certifications of Chief Financial Officer
            
            
            X





93





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 COMPANYFLORIDA
                POWER CORPORATIONDate:
                August 9, 2006
            (Registrants)By:/s/
                Peter M. Scott IIIPeter
                M. Scott IIIExecutive
                Vice President and Chief Financial OfficerBy:/s/
                Jeffrey M. StoneJeffrey
                M. StoneChief
                Accounting Officer and ControllerProgress
                Energy, Inc.Chief
                Accounting OfficerCarolina
                Power & Light CompanyFlorida
                Power Corporation





94