7

                                  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, 2004

                                       OR

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

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

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

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



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

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

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

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

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

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

Indicate the number of shares  outstanding  of each of the  issuers'  classes of
common  stock,  as of the latest  practicable  date.  As of July 31, 2004,  each
registrant had the following shares of common stock outstanding:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

            Registrant                            Description                                Shares
            ----------                            -----------                                ------
 Progress Energy                   Common Stock (Without Par Value)                        246,793,015
 PEC                               Common Stock (Without Par Value)                 159,608,055 (all of which
                                                                               were held by Progress Energy, Inc.)
</TABLE>


<PAGE>



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



Glossary of Terms

Safe Harbor For Forward-Looking Statements

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

           Consolidated Interim Financial Statements:

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

           Carolina Power & Light Company
           d/b/a Progress Energy Carolinas, Inc.
           ---------------------------------------------------------------
           Unaudited Consolidated Statements of Income
           Unaudited Consolidated Balance Sheets
           Unaudited Consolidated Statements of Cash Flows
           Notes to Consolidated Interim Financial Statements

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Item 4.  Controls and Procedures

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

Item 2.  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
         Securities

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

Item 5.  Other Information

Item 6.  Exhibits and Reports on Form 8-K

Signatures



                                       2
<PAGE>

                                GLOSSARY OF TERMS


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

     TERM                             DEFINITION

the Act                          Medicare Prescription Drug, Improvement and Modernization Act of 2003
AFUDC                            Allowance for funds used during construction
the Agreement                    Stipulation and Settlement Agreement
Bcf                              Billion cubic feet
CCO                              Competitive Commercial Operations business segment
Colona                           Colona Synfuel Limited Partnership, LLLP
the Company or Progress          Progress Energy, Inc. and subsidiaries
     Energy
CR3                              Progress Energy Florida Inc.'s nuclear generating plant, Crystal River Unit No. 3
CVO                              Contingent value obligation
DIG                              Derivatives Implementation Group
DOE                              United States Department of Energy
DWM                              North Carolina Department of Environment and Natural Resources, Division of Waste
                                 Management
EITF                             Emerging Issues Task Force
ENCNG                            Eastern North Carolina Natural Gas Company, formerly referred to as Eastern NC
EPA                              United States Environmental Protection Agency
FDEP                             Florida Department of Environment and Protection
Federal Circuit                  United States Circuit Court of Appeals
FERC                             Federal Energy Regulatory Commission
FIN No. 46                       FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - An
                                 Interpretation of ARB No. 51"
Florida Progress or FPC          Florida Progress Corporation
FPSC                             Florida Public Service Commission
Fuels                            Fuels business segment
Genco                            Progress Genco Ventures, LLC
Jackson                          Jackson County EMC
MACT                             Maximum Available Control Technology
Mesa                             Mesa Hydrocarbons, LLC
MGP                              Manufactured gas plant
NCNG                             North Carolina Natural Gas Corporation
NCUC                             North Carolina Utilities Commission
NOx                              Nitrogen oxide
NOx SIP Call                     EPA rule which requires 23 jurisdictions including North and South
                                 Carolina and Georgia to further reduce nitrogen oxide emissions
NRC                              United States Nuclear Regulatory Commission
NSP                              Northern States Power
PCH                              Progress Capital Holdings, Inc.
PEC                              Progress Energy Carolinas, Inc., formerly referred to as Carolina Power & Light
                                 Company
PEF                              Progress Energy Florida, Inc., formerly referred to as Florida Power Corporation
PFA                              IRS Prefiling Agreement
the Plan                         Revenue Sharing Incentive Plan
PLRs                             Private Letter Rulings
Progress Rail                    Progress Rail Services Corporation
PTC LLC                          Progress Telecom LLC
Progress Ventures                Business unit of Progress Energy primarily made up of nonregulated
                                 energy generation, gas, coal and synthetic fuel operations and energy
                                 marketing
PUHCA                            Public Utility Holding Company Act of 1935, as amended
PVI                              Legal entity of Progress Ventures, Inc.
PWR                              Pressurized water reactor
Rail Services or Rail            Rail Services business segment
RTO                              Regional Transmission Organization

                                       3
<PAGE>

SCPSC                            Public Service Commission of South Carolina
Section 29                       Section 29 of the Internal Revenue Code
Service Company                  Progress Energy Service Company, LLC
SFAS No. 71                      Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of
                                 Certain Types of Regulation"
SFAS No. 131                     Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
                                 of an Enterprise and Related Information"
SFAS No. 133                     Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
                                 and Hedging Activities"
SFAS No. 142                     Statement of Financial Accounting Standards No. 142, "Goodwill and Other
                                 Intangible Assets"
SFAS No. 143                     Statement of Financial Accounting Standards No. 143, "Accounting for Asset
                                 Retirement Obligations"
SFAS No. 148                     Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
                                 Compensation - Transition and Disclosure - An Amendment of FASB Statement No.
                                 123"
SFAS No. 149                     Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
                                 on Derivative Instruments and Hedging Activities"
SMD NOPR                         Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue
                                 Discrimination through Open Access Transmission and Standard Market Design
SO2                              Sulfur dioxide
SRS                              Strategic Resource Solutions Corp.
the Trust                        FPC Capital I trust
Westchester                      Westchester Gas Company
</TABLE>


                                       4
<PAGE>

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

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

In  addition,   forward-looking   statements  are  discussed  in   "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
including,  but not limited to, statements under the sub-headings "Liquidity and
Capital  Resources" and "Other  Matters" about the effects of new  environmental
regulations,  nuclear  decommissioning  costs and the effect of electric utility
industry restructuring.

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

Examples of factors that you should consider with respect to any forward-looking
statements made throughout  this document  include,  but are not limited to, the
following:  the impact of fluid and  complex  government  laws and  regulations,
including those relating to the environment;  the impact of recent events in the
energy markets that have  increased the level of public and regulatory  scrutiny
in the energy industry and in the capital markets; deregulation or restructuring
in  the  electric  industry  that  may  result  in  increased   competition  and
unrecovered (stranded) costs; the uncertainty regarding the timing, creation and
structure  of  regional  transmission  organizations;  weather  conditions  that
directly influence the demand for electricity;  recurring seasonal  fluctuations
in demand for electricity;  fluctuations in the price of energy  commodities and
purchased power;  economic fluctuations and the corresponding impact on Progress
Energy,  Inc. and its  subsidiaries'  commercial and industrial  customers;  the
ability of the Company's subsidiaries to pay upstream dividends or distributions
to it; the impact on the  facilities  and the  businesses  of the Company from a
terrorist  attack;  the inherent risks  associated with the operation of nuclear
facilities, including environmental, health, regulatory and financial risks; the
ability to successfully  access capital markets on favorable  terms;  the impact
that  increases in leverage may have on the Company;  the ability of the Company
to maintain its current credit ratings;  the impact of derivative contracts used
in the normal  course of  business by the  Company;  investment  performance  of
pension and benefit plans and the ability to control costs; the availability and
use of Internal  Revenue  Code  Section 29 (Section 29) tax credits by synthetic
fuel producers and the Company's continued ability to use Section 29 tax credits
related to its coal and synthetic fuel  businesses;  the impact to our financial
condition  and  performance  in the event it is  determined  the  Company is not
entitled to previously  taken Section 29 tax credits;  the Company's  ability to
successfully integrate newly acquired assets,  properties or businesses into its
operations  as quickly or as profitably  as expected;  the Company's  ability to
manage  the  risks  involved  with the  operation  of its  nonregulated  plants,
including  dependence on third parties and related  counter-party  risks,  and a
lack of operating history;  the Company's ability to manage the risks associated
with its energy  marketing  operations;  the  outcome  of any  ongoing or future
litigation  or similar  disputes  and the impact of any such  outcome or related
settlements;  and  unanticipated  changes  in  operating  expenses  and  capital
expenditures. Many of these risks similarly impact the Company's subsidiaries.

These and other risk  factors  are  detailed  from time to time in the  Progress
Energy and PEC United States  Securities and Exchange  Commission (SEC) reports.
Many, but not all of the factors that may impact actual results are discussed in
the Risk Factors  sections of Progress  Energy's and PEC's annual report on Form
10-K for the year  ended  December  31,  2003,  which were filed with the SEC on
March 12, 2004.  These reports  should be carefully  read.  All such factors are
difficult to predict,  contain  uncertainties  that may materially affect actual
results and may be beyond the control of  Progress  Energy and PEC.  New factors
emerge from time to time,  and it is not possible for  management to predict all
such  factors,  nor can it assess  the  effect of each such  factor on  Progress
Energy and PEC.



                                       5
<PAGE>

                          PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

                              PROGRESS ENERGY, INC.
                    CONSOLIDATED INTERIM FINANCIAL STATEMENTS
                                  June 30, 2004
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

 UNAUDITED CONSOLIDATED STATEMENTS of INCOME
                                                                Three Months Ended       Six Months Ended
                                                                      June 30                 June 30
----------------------------------------------------------------------------------------------------------
(in millions except per share data)                                2004        2003       2004       2003
----------------------------------------------------------------------------------------------------------
Operating Revenues
   Utility                                                    $   1,721     $ 1,583   $  3,406    $ 3,237
   Diversified business                                             704         467      1,270      1,000
----------------------------------------------------------------------------------------------------------
      Total Operating Revenues                                    2,425       2,050      4,676      4,237
----------------------------------------------------------------------------------------------------------
Operating Expenses
Utility
   Fuel used in electric generation                                 468         394        961        805
   Purchased power                                                  219         210        402        413
   Operation and maintenance                                        372         364        735        699
   Depreciation and amortization                                    207         224        409        444
   Taxes other than on income                                       109          94        214        197
Diversified business
   Cost of sales                                                    656         416      1,177        891
   Depreciation and amortization                                     46          36         91         69
   Other                                                             45          38         88         88
----------------------------------------------------------------------------------------------------------
        Total Operating Expenses                                  2,122       1,776      4,077      3,606
----------------------------------------------------------------------------------------------------------
Operating Income                                                    303         274        599        631
----------------------------------------------------------------------------------------------------------
Other Income (Expense)
   Interest income                                                    4           3          7          6
   Other, net                                                         -          (9)       (25)       (15)
----------------------------------------------------------------------------------------------------------
        Total Other Income (Expense)                                  4          (6)       (18)        (9)
----------------------------------------------------------------------------------------------------------
Interest Charges
   Net interest charges                                             160         159        326        315
   Allowance for borrowed funds used during construction             (2)         (2)        (3)        (5)
----------------------------------------------------------------------------------------------------------
        Total Interest Charges, Net                                 158         157        323        310
----------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Income Tax and             149         111        258        312
   Cumulative Effect of Change in Accounting Principle
Income Tax Benefit                                                   (4)        (43)        (3)       (49)
----------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Cumulative Effect of       153         154        261        361
   Change in Accounting Principle
Discontinued Operations, Net of Tax                                   1           3          1         14
----------------------------------------------------------------------------------------------------------
Income before Cumulative Effect of Change in Accounting             154         157        262        375
Principle
Cumulative Effect of Change in Accounting Principle, Net of
Tax                                                                   -           -          -          1
----------------------------------------------------------------------------------------------------------
Net Income                                                    $     154     $   157   $    262    $   376
----------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding                                   242         236        242        235
----------------------------------------------------------------------------------------------------------
Basic Earnings per Common Share
    Income from Continuing Operations before Cumulative
       Effect of Change in Accounting Principle               $    0.63     $  0.65   $   1.08    $  1.54
    Discontinued Operations, Net of Tax                               -        0.01          -       0.06
        Net Income                                            $    0.63     $  0.66   $   1.08    $  1.60
----------------------------------------------------------------------------------------------------------
Diluted Earnings per Common Share
    Income from Continuing Operations before Cumulative
       Effect of Change in Accounting Principle               $    0.63     $  0.65   $   1.08    $  1.53
    Discontinued Operations, Net of Tax                               -        0.01          -       0.06
        Net Income                                            $    0.63     $  0.66   $   1.08    $  1.59
----------------------------------------------------------------------------------------------------------
Dividends Declared per Common Share                           $   0.575     $ 0.560   $  1.150    $ 1.120
----------------------------------------------------------------------------------------------------------
</TABLE>

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

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

PROGRESS ENERGY, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in millions)                                                               June 30        December 31
ASSETS                                                                         2004               2003
-------------------------------------------------------------------------------------------------------
Utility Plant
  Utility plant in service                                                $  21,991           $ 21,675
  Accumulated depreciation                                                   (8,240)            (8,077)
     Utility plant in service, net                                           13,751             13,598
  Held for future use                                                            13                 13
  Construction work in progress                                                 643                634
  Nuclear fuel, net of amortization                                             218                228
-------------------------------------------------------------------------------------------------------
     Total Utility Plant, Net                                                14,625             14,473
-------------------------------------------------------------------------------------------------------
Current Assets
  Cash and cash equivalents                                                      78                273
  Accounts receivable                                                           854                798
  Unbilled accounts receivable                                                  245                217
  Inventory                                                                     775                795
  Deferred fuel cost                                                            304                317
  Prepayments and other current assets                                          352                375
-------------------------------------------------------------------------------------------------------
     Total Current Assets                                                     2,608              2,775
-------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
  Regulatory assets                                                             645                612
  Nuclear decommissioning trust funds                                           978                938
  Diversified business property, net                                          2,197              2,158
  Miscellaneous other property and investments                                  458                464
  Goodwill                                                                    3,730              3,726
  Prepaid pension costs                                                         449                462
  Intangibles, net                                                              306                327
  Other assets and deferred debits                                              239                253
-------------------------------------------------------------------------------------------------------
     Total Deferred Debits and Other Assets                                   9,002              8,940
-------------------------------------------------------------------------------------------------------
           Total Assets                                                   $  26,235           $ 26,188
-------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
-------------------------------------------------------------------------------------------------------
Common Stock Equity
  Common stock without par value, 500 million shares authorized,
      247 and 246 million shares issued and outstanding, respectively     $   5,339           $  5,270
  Unearned restricted shares                                                    (17)               (17)
  Unearned ESOP shares                                                          (76)               (89)
  Accumulated other comprehensive loss                                          (56)               (50)
  Retained earnings                                                           2,313              2,330
-------------------------------------------------------------------------------------------------------
        Total Common Stock Equity                                             7,503              7,444
-------------------------------------------------------------------------------------------------------
Preferred Stock of Subsidiaries-Not Subject to Mandatory Redemption              93                 93
Long-Term Debt, Affiliate                                                       309                309
Long-Term Debt , Net                                                          9,282              9,625
-------------------------------------------------------------------------------------------------------
        Total Capitalization                                                 17,187             17,471
-------------------------------------------------------------------------------------------------------
Current Liabilities
  Current portion of long-term debt                                             343                868
  Accounts payable                                                              684                643
  Interest accrued                                                              189                209
  Dividends declared                                                            141                140
  Short-term obligations                                                        628                  4
  Customer deposits                                                             172                167
  Other current liabilities                                                     836                580
-------------------------------------------------------------------------------------------------------
        Total Current Liabilities                                             2,993              2,611
-------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
  Accumulated deferred income taxes                                             525                737
  Accumulated deferred investment tax credits                                   184                190
  Regulatory liabilities                                                      3,053              2,977
  Asset retirement obligations                                                1,306              1,271
  Other liabilities and deferred credits                                        987                931
-------------------------------------------------------------------------------------------------------
        Total Deferred Credits and Other Liabilities                          6,055              6,106
-------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 12)
-------------------------------------------------------------------------------------------------------
           Total Capitalization and Liabilities                           $  26,235           $ 26,188
-------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       7
<PAGE>

PROGRESS ENERGY, INC.
UNAUDITED CONSOLIDATED STATEMENTS of CASH FLOWS

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

                                                                               Six Months Ended June 30
(in millions)                                                                       2004           2003
--------------------------------------------------------------------------------------------------------
Operating Activities
Net income                                                                      $    262        $   376
Adjustments to reconcile net income to net cash provided by operating
activities:
      Income from discontinued operations                                             (1)           (14)
      Cumulative effect of change in accounting principle                              -             (1)
      Depreciation and amortization                                                  557            572
      Deferred income taxes                                                         (210)          (118)
      Investment tax credit                                                           (6)            (8)
      Deferred fuel cost (credit)                                                     13            (94)
      Cash provided (used) by changes in operating assets and liabilities:
         Accounts receivable                                                        (101)           (80)
         Inventories                                                                  13             31
         Prepayments and other current assets                                        (53)            15
         Accounts payable                                                             72             (5)
         Income taxes, net                                                           207            105
         Other current liabilities                                                    47             35
         Other                                                                       115             93
--------------------------------------------------------------------------------------------------------
         Net Cash Provided by Operating Activities                                   915            907
--------------------------------------------------------------------------------------------------------
Investing Activities
Gross utility property additions                                                    (483)          (541)
Diversified business property additions                                             (122)          (367)
Nuclear fuel additions                                                               (47)           (84)
Contributions to nuclear decommissioning trust                                       (18)           (18)
Investments in non-utility activities                                                 (7)            (8)
Acquisition of intangibles                                                             -           (191)
Proceeds from sales of investments and assets                                         92              1
Net decrease in restricted cash                                                        5             17
Other                                                                                (11)            (4)
--------------------------------------------------------------------------------------------------------
          Net Cash Used in Investing Activities                                     (591)        (1,195)
--------------------------------------------------------------------------------------------------------
Financing Activities
Issuance of common stock                                                              58            172
Purchase of restricted shares                                                         (7)            (7)
Issuance of long-term debt                                                             1            655
Net increase in short-term indebtedness                                              624            163
Net decrease in cash provided by checks drawn in excess of bank balances             (58)           (44)
Retirement of long-term debt                                                        (865)          (392)
Dividends paid on common stock                                                      (280)          (268)
Other                                                                                  8             (5)
--------------------------------------------------------------------------------------------------------
           Net Cash (Used in) Provided by Financing Activities                      (519)           274
--------------------------------------------------------------------------------------------------------
Cash Used in Discontinued Operations                                                   -             (1)
--------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents                                           (195)           (15)
Cash and Cash Equivalents at Beginning of Period                                     273             61
--------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                                      $     78      $      46
========================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized)                $    341      $     305
                            income taxes (net of refunds)                       $     43      $      22
</TABLE>


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


                                       8
<PAGE>

PROGRESS ENERGY, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.   ORGANIZATION AND BASIS OF PRESENTATION

     A. Organization

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

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

     B. Basis of Presentation

     These financial statements have been prepared in accordance with accounting
     principles  generally  accepted in the United States of America  (GAAP) for
     interim  financial  information and with the  instructions to Form 10-Q and
     Regulation S-X. Accordingly, they do not include all of the information and
     footnotes required by GAAP for annual statements.  Because the accompanying
     consolidated  interim  financial  statements  do  not  include  all  of the
     information  and  footnotes  required  by  GAAP,  they  should  be  read in
     conjunction  with the audited  financial  statements  for the period  ended
     December 31, 2003,  and notes  thereto  included in Progress  Energy's Form
     10-K for the year ended December 31, 2003.

     In accordance  with the provisions of Accounting  Principles  Board Opinion
     (APB) No. 28, "Interim  Financial  Reporting,"  GAAP requires  companies to
     apply a levelized  effective tax rate to interim periods that is consistent
     with the  estimated  annual  effective  tax rate.  Income tax  expense  was
     increased  by $5 million for both the three  months ended June 30, 2004 and
     2003,  in order to  maintain  an  effective  tax rate  consistent  with the
     estimated annual rate.  Income tax expense was increased by $43 million and
     decreased  by $5 million  for the six months  ended June 30, 2004 and 2003,
     respectively. The income tax provisions for the Company differ from amounts
     computed by applying the Federal statutory tax rate to income before income
     taxes, primarily due to the recognition of synthetic fuel tax credits.

     PEC and PEF collect from  customers  certain  excise  taxes,  which include
     gross receipts tax, franchise taxes, and other excise taxes,  levied by the
     state or local  government  upon the  customers.  PEC and PEF  account  for
     excise taxes on a gross basis. For the three months ended June 30, 2004 and
     2003,   excise  taxes  of  approximately   $61  million  and  $51  million,
     respectively,   are   included  in  taxes  other  than  on  income  in  the
     accompanying  Consolidated  Statements of Income.  For the six months ended
     June 30, 2004 and 2003, excise taxes of approximately $114 million and $102
     million,  respectively,  are  included in taxes other than on income in the
     accompanying  Consolidated  Statements of Income. These approximate amounts
     are also included in utility revenues.

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

                                       9
<PAGE>

     In preparing financial  statements that conform with GAAP,  management must
     make estimates and assumptions  that affect the reported  amounts of assets
     and  liabilities,  disclosure of contingent  assets and  liabilities at the
     date of the  financial  statements  and  amounts of revenues  and  expenses
     reflected  during the reporting  period.  Actual  results could differ from
     those estimates. Certain amounts for 2003 have been reclassified to conform
     to the 2004 presentation.

     The results of  operations  of the Rail  Services  segment are reported one
     month in arrears.

     C. Subsidiary Reporting Period Change

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

     Three Months Ended June 30, 2003                              As Previously      Quarter          As
     (in millions, except per share data)                            Reported     Reclassification  Restated
     ---------------------------------------------------------------------------------------------------------
     Income from Continuing Operations before Cumulative Effect        $  150          $    4         $  154
       of Change in Accounting Principle
     Net Income                                                        $  153          $    4         $  157
     Basic earnings per common share
       Income from Continuing Operations before Cumulative
          Effect of Change in Accounting Principle                     $ 0.64          $ 0.01         $ 0.65
       Net Income                                                      $ 0.65          $ 0.01         $ 0.66
     Diluted earnings per common share
       Income from Continuing Operations before Cumulative
          Effect of Change in Accounting Principle                     $ 0.63          $ 0.02         $ 0.65
       Net Income                                                      $ 0.64          $ 0.02         $ 0.66

     Six Months Ended June 30, 2003                                As Previously      Quarter          As
     (in millionas, except per share data)                           Reported     Reclassification  Restated
     ---------------------------------------------------------------------------------------------------------
     Income from Continuing Operations before Cumulative Effect        $  346          $   15         $  361
       of Change in Accounting Principle
     Net Income                                                        $  361          $   15         $  376
     Basic earnings per common share
       Income from Continuing Operations before Cumulative
          Effect of Change in Accounting Principle                     $ 1.48          $ 0.06         $ 1.54
       Net Income                                                      $ 1.54          $ 0.06         $ 1.60
     Diluted earnings per common share
       Income from Continuing Operations before Cumulative
          Effect of Change in Accounting Principle                     $ 1.47          $ 0.06         $ 1.53
       Net Income                                                      $ 1.53          $ 0.06         $ 1.59
</TABLE>

     D. Stock-Based Compensation

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

                                       10
<PAGE>
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                                Three Months Ended       Six Months Ended
                                                                      June 30                 June 30
                                                              -----------------------  ---------------------
     (in millions except per share data)                            2004         2003       2004        2003
                                                              ----------  -----------  ---------  ----------
     Net Income, as reported                                      $  154       $  157     $  262      $  376
     Deduct:  Total stock option expense determined under
     fair value method for all awards, net of related tax
     effects                                                           3            2          6           4
                                                              ----------  -----------  ---------  ----------
     Pro forma net income                                         $  151       $  155     $  256      $  372
                                                              ==========  ===========  =========  ==========

     Basic earnings per share
       As reported                                                $ 0.63       $ 0.66     $ 1.08      $ 1.60
       Pro forma                                                  $ 0.62       $ 0.65     $ 1.06      $ 1.58

     Fully diluted earnings per share
       As reported                                                $ 0.63       $ 0.66     $ 1.08      $ 1.59
       Pro forma                                                  $ 0.62       $ 0.65     $ 1.05      $ 1.57
</TABLE>

     E. Consolidation of Variable Interest Entities

     The Company  consolidates  all voting interest  entities in which it owns a
     majority voting interest and all variable interest entities for which it is
     the primary  beneficiary in accordance  with FASB  Interpretation  No. 46R,
     "Consolidation of Variable Interest Entities - an Interpretation of ARB No.
     51" (FIN No.  46R).  During  the  first six  months  of 2004 and 2003,  the
     Company did not participate in the creation of, or obtain a significant new
     variable interest in, any variable interest entity.

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

     The Company has  variable  interests  in two power  plants  resulting  from
     long-term power purchase contracts. The Company has requested the necessary
     information  to  determine  if the  counterparties  are  variable  interest
     entities or to identify the primary  beneficiaries.  Both entities declined
     to provide the Company with the necessary  financial  information,  and the
     Company  has  applied  the  information  scope  exception  in FIN No.  46R,
     paragraph 4(g). The Company's only significant exposure to variability from
     these contracts  results from fluctuations in the market price of fuel used
     by the two entities'  plants to produce the power purchased by the Company.
     The Company is able to recover  these fuel costs  under PEC's fuel  clause.
     Total purchases from these  counterparties  were  approximately $21 million
     and $19 million in the first six months of 2004 and 2003, respectively. The
     Company will  continue its efforts to obtain the necessary  information  to
     fully  apply  FIN No.  46R to  these  contracts.  The  combined  generation
     capacity of the two  entities'  power plants is  approximately  880 MW. The
     Company believes that if it is determined to be the primary  beneficiary of
     these two entities,  the effect of consolidating  the entities would result
     in increases to total assets,  long-term  debt and other  liabilities,  but
     would have an  insignificant  or no impact on the  Company's  common  stock
     equity,  net  earnings,  or cash  flows.  However,  as the  Company has not
     received  any  financial  information  from these two  counterparties,  the
     impact cannot be determined at this time.

     The Company also has interests in several other variable  interest entities
     for which the Company is not the primary  beneficiary.  These  arrangements
     include  investments  in  approximately  28 limited  partnerships,  limited
     liability  corporations  and venture  capital funds and two building leases
     with special-purpose  entities. The aggregate maximum loss exposure at June
     30,  2004,  that the  Company  could be  required  to record in its  income
     statement  as a  result  of these  arrangements  totals  approximately  $38
     million.  The  creditors of these  variable  interest  entities do not have
     recourse  to the general  credit of the Company in excess of the  aggregate
     maximum loss exposure.

                                       11
<PAGE>

2.   NEW ACCOUNTING STANDARDS

     In  December  2003,  the  Medicare   Prescription  Drug,   Improvement  and
     Modernization Act of 2003 (the Act) was signed into law. In accordance with
     guidance  issued by the FASB in FASB Staff Position FAS 106-1,  the Company
     has  elected  to  defer  accounting  for  the  effects  of the  Act  due to
     uncertainties  regarding the effects of the  implementation  of the Act and
     the  accounting  for  certain  provisions  of  the  Act.  Therefore,   OPEB
     information  presented  in the  financial  statements  does not reflect the
     effects of the Act. The FASB recently issued definitive accounting guidance
     for the Act in FASB  Staff  Position  106-2,  which  is  effective  for the
     Company in the third quarter of 2004. FASB Staff Position 106-2 will result
     in the recognition of lower OPEB costs to reflect prescription drug-related
     federal  subsidies  to be  received  under the Act.  The  Company is in the
     process of quantifying the impact of the Act on OPEB costs.

3.   DIVESTITURES

     A. Divestiture of Synthetic Fuel Partnership Interests

     In June 2004, the Company through its  subsidiary,  Progress Fuels sold, in
     two transactions,  a combined 49.8 percent  partnership  interest in Colona
     Synfuel Limited  Partnership,  LLLP, one of its synthetic fuel  facilities.
     Substantially all proceeds from the sales will be received over time, which
     is  typical  of such  sales in the  industry.  Gain from the sales  will be
     recognized  on a cost  recovery  basis.  The  Company's  book  value of the
     interests  sold  totaled  approximately  $5  million.  Based  on  projected
     production levels, the Company  anticipates  receiving total gross proceeds
     of approximately  $30 million per year, on an annualized  basis.  Under the
     agreements,  the buyers have a right to unwind the  transactions  if an IRS
     reconfirmation  private  letter ruling (PLR) is not received by October 15,
     2004.  Therefore,  no gain would be recognized  prior to the  expiration of
     that right.

     B. Railcar Ltd. Divestiture

     In  December  2002,  the  Progress  Energy  Board of  Directors  adopted  a
     resolution approving the sale of Railcar Ltd., a subsidiary included in the
     Rail Services segment. In March 2003, the Company signed a letter of intent
     to sell the majority of Railcar Ltd. assets to The Andersons, Inc., and the
     transaction   closed  in  February  2004.   Proceeds  from  the  sale  were
     approximately   $82  million   before   transaction   costs  and  taxes  of
     approximately  $13  million.  The assets of Railcar  Ltd.  were  grouped as
     assets  held for sale and are  included  in  other  current  assets  on the
     Consolidated  Balance  Sheets at June 30, 2004 and December  31, 2003.  The
     assets were  recorded at  approximately  $6 million and $75 million at June
     30, 2004 and December 31, 2003, respectively,  which reflects the Company's
     estimates of the fair value  expected to be realized from the sale of these
     assets less costs to sell.  In July 2004,  the Company  sold the  remaining
     assets  classified as held for sale to a third-party for net proceeds of $6
     million.

     C. NCNG Divestiture

     In October 2002, the Company announced the Board of Directors'  approval to
     sell North Carolina Natural Gas Corporation (NCNG) and the Company's equity
     investment  in  Eastern  North  Carolina  Natural  Gas  Company  (ENCNG) to
     Piedmont  Natural Gas  Company,  Inc. On September  30,  2003,  the Company
     completed the sale. The 2003 net income of these  operations is reported as
     discontinued  operations in the Consolidated Statements of Income. Interest
     expense of $3 million  and $7  million  for the three and six months  ended
     June 30, 2003, respectively,  has been allocated to discontinued operations
     based on the net assets of NCNG,  assuming a uniform  debt-to-equity  ratio
     across the Company's operations. Results of discontinued operations were as
     follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     (in millions)                                Three Months Ended     Six Months Ended
                                                    June 30, 2003          June 30, 2003
                                                 -------------------------------------------
     Revenues                                             $ 71                 $ 225
                                                 =====================  ====================

     Earnings before income taxes                         $  4                 $  23
     Income tax expense                                      1                     9
                                                 ---------------------  --------------------
     Net earnings from discontinued operations            $  3                 $  14
                                                 =====================  ====================
</TABLE>

                                       12
<PAGE>

     During the three  months  ended June 30,  2004,  the  Company  recorded  an
     additional gain after taxes of approximately $1 million related to deferred
     taxes on the loss from the NCNG sale.

4.   REGULATORY MATTERS

     A. Retail Rate Matters

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

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

     During the first quarter of 2004, PEC met the requirements of both the NCUC
     and the SCPSC for the  implementation of a depreciation study which allowed
     the utility to reduce the rates used to calculate  depreciation expense. As
     a result,  depreciation  expense decreased $10 million for the three months
     ended June 30, 2004  compared to the prior year quarter and  decreased  $18
     million for the six months  ended June 30, 2004  compared to the prior year
     six month period.

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

     B. Regional Transmission Organizations

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

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

                                       13
<PAGE>

     C. Implementation of SFAS No. 143

     In connection with the  implementation of SFAS No. 143 in 2003, PEC filed a
     request with the NCUC requesting deferral of the difference between expense
     pursuant to SFAS No. 143 and expense as previously  determined by the NCUC.
     The NCUC granted the deferral of the January 1, 2003 cumulative adjustment.
     Because the clean air legislation  discussed in Note 10 under "Air Quality"
     contained a prohibition  against cost deferrals unless certain criteria are
     met,  the NCUC denied the deferral of the ongoing  effects.  Since the NCUC
     order denied  deferral of the ongoing  effects,  PEC ceased deferral of the
     ongoing effects during the second quarter for the six months ended June 30,
     2003 related to its North Carolina retail jurisdiction.  Pre-tax income for
     the three and six months ended June 30, 2003 increased by approximately $14
     million,  which  represents a decrease in non-ARO cost of removal  expense,
     partially  offset by an increase in  decommissioning  expense.  The Company
     provided additional information to the NCUC that demonstrated that deferral
     of the ongoing effects should also be allowed.  In August of 2003, the NCUC
     revised its decision  and  approved the deferral of the ongoing  effects of
     SFAS No. 143 at which time the $14 million was reversed.

     D. FERC Market Power Mitigation

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

5.   GOODWILL AND OTHER INTANGIBLE ASSETS

     The Company  performed the annual  goodwill  impairment  test in accordance
     with FASB Statement No. 142, Goodwill and Other Intangible  Assets, for the
     CCO  segment  in the  first  quarter  of  2004,  and  the  annual  goodwill
     impairment test for the PEC Electric and PEF segments in the second quarter
     of 2004, each of which indicated no impairment. The first annual impairment
     test for the Other  segment will be performed in the fourth  quarter  2004,
     since the goodwill was acquired in 2003.

     The changes in the carrying  amount of goodwill for the periods  ended June
     30, 2004 and December 31, 2003, by reportable segment, are as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     (in millions)                          PEC Electric       PEF         CCO    Other    Total
                                           -----------------------------------------------------------
     Balance as of January 1, 2003             $ 1,922       $ 1,733      $ 64    $  -    $ 3,719
     Acquisitions                                    -             -         -       7          7
                                           -----------------------------------------------------------
     Balance as of December 31, 2003           $ 1,922       $ 1,733      $ 64    $  7    $ 3,726
     Purchase accounting adjustment                  -             -         -       4          4
                                           -----------------------------------------------------------
     Balance as of June 30, 2004               $ 1,922       $ 1,733      $ 64    $ 11    $ 3,730
                                           ===========================================================
</TABLE>


                                       14
<PAGE>

     The gross carrying  amount and  accumulated  amortization  of the Company's
     intangible assets at June 30, 2004 and December 31, 2003, are as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                              June 30, 2004                      December 31, 2003
                                    -----------------------------------    -------------------------------
     (in millions)                         Gross                                Gross
                                         Carrying        Accumulated          Carrying      Accumulated
                                          Amount        Amortization           Amount      Amortization
                                      --------------- -----------------    -------------- ----------------
     Synthetic fuel intangibles            $ 134          $  (71)               $ 140          $ (64)
     Power agreements acquired               221             (29)                 221            (20)
     Other                                    64             (13)                  62            (12)
                                      --------------- -----------------    -------------- ----------------
     Total                                 $ 419          $ (113)               $ 423          $ (96)
                                      =============== =================    ============== ================
</TABLE>

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

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

     Amortization  expense  recorded on  intangible  assets for the three months
     ended June 30, 2004 and 2003 was $12 million and $9 million,  respectively.
     Amortization expense recorded on intangible assets for the six months ended
     June 30, 2004 and 2003 was $21 million and $16 million,  respectively.  The
     estimated  annual  amortization  expense  for  intangible  assets  for 2004
     through 2008,  in millions,  is  approximately  $41, $34, $35, $35 and $17,
     respectively.

6.   EQUITY

     A. Earnings Per Common Share

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

     (in millions)                                  Three Months Ended             Six Months Ended
                                                          June 30                      June 30
                                                 -------------------------    -----------------------
                                                        2004          2003          2004         2003
                                                 -----------    ----------    ----------     --------
     Weighted-average common shares - basic              242           236           242          235
     Restricted stock awards                               1             1             1            1
                                                 -----------    ----------    ----------     --------
     Weighted-average shares - fully dilutive            243           237           243          236
                                                 -----------    ----------    ----------     --------
</TABLE>

     B. Comprehensive Income

     Comprehensive  income for the three months ended June 30, 2004 and 2003 was
     $159 million and $154 million,  respectively.  Comprehensive income for the
     six months ended June 30, 2004 and 2003 was $256 million and $373  million,
     respectively.  Changes  in  other  comprehensive  income  for  the  periods
     consisted  primarily  of changes in the fair value of  derivatives  used to
     hedge cash flows related to interest on long-term debt and gas sales.

7.   FINANCING ACTIVITIES

     Progress Energy took advantage of favorable  market  conditions and entered
     into a new $1.1 billion five year line of credit, effective August 5, 2004,
     and expiring August 4, 2009. This facility  replaces Progress Energy's $250
     million  364 day line of credit  and its three  year $450  million  line of
     credit, which were set to expire in November 2004.

                                       15
<PAGE>

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

     On April 30, 2004,  PEC redeemed  $34.7 million of  Darlington  County 6.6%
     Series  Pollution  Control  Bonds at 102.5% of par,  $1.795  million of New
     Hanover  County 6.3% Series  Pollution  Control Bonds at 101.5% of par, and
     $2.58  million of Chatham  County 6.3% Series  Pollution  Control  Bonds at
     101.5% of par with cash from operations.

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

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

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

     For the three months ended June 30, 2004, the Company issued  approximately
     0.6 million  shares of its common  stock for  approximately  $29 million in
     proceeds  from its  Investor  Plus  Stock  Purchase  Plan and its  employee
     benefit  plans.  For the six months ended June 30, 2004, the Company issued
     approximately  1.3 million shares of its common stock for approximately $58
     million in proceeds  from its  Investor  Plus Stock  Purchase  Plan and its
     employee  benefit  plans.  For the six months ended June 30, 2004 and 2003,
     the dividends paid on common stock were approximately $280 million and $268
     million, respectively.

8.   BENEFIT PLANS

     The Company and some of its subsidiaries  have a  non-contributory  defined
     benefit   retirement   (pension)  plan  for   substantially  all  full-time
     employees. The Company also has supplementary defined benefit pension plans
     that provide  benefits to  higher-level  employees.  In addition to pension
     benefits,  the Company and some of its  subsidiaries  provide  contributory
     other  postretirement  benefits (OPEB),  including  certain health care and
     life insurance benefits, for retired employees who meet specified criteria.
     The  components  of the net  periodic  benefit  cost for the  three and six
     months ended June 30 are:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     Three Months Ended June 30                                              Other Postretirement
                                                      Pension Benefits             Benefits
                                                   ---------------------    ----------------------
     (in millions)                                      2004       2003          2004        2003
                                                   ---------------------    ----------------------
     Service cost                                  $      13  $      13      $      4   $       3
     Interest cost                                        28         27             8           8
     Expected return on plan assets                      (37)       (36)           (1)         (1)
     Amortization of actuarial (gain) loss                 5          5             1           1
     Other amortization, net                               -          -             1           1
                                                   ---------------------    ----------------------
     Net periodic cost                             $       9  $       9      $     13   $      12
     Additional cost / (benefit) recognition (a)          (4)        (4)            1           1
                                                   ---------------------    ----------------------
     Net periodic cost recognized                  $       5  $       5      $     14   $      13
                                                   =====================    ======================
</TABLE>


                                       16
<PAGE>
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     Six Months Ended June 30                                                  Other Postretirement
                                                      Pension Benefits               Benefits
                                                   ----------------------    -----------------------
     (in millions)                                      2004        2003           2004        2003
                                                   ----------------------    -----------------------
     Service cost                                  $      27  $       26      $       8   $       7
     Interest cost                                        55          54             17          15
     Expected return on plan assets                      (75)        (72)            (2)         (2)
     Amortization of actuarial (gain) loss                11           9              2           2
     Other amortization, net                               -           -              1           2
                                                   ----------------------    -----------------------
     Net periodic cost                             $      18  $       17      $      26   $      24
     Additional cost / (benefit) recognition (a)          (8)         (7)             1           1
                                                   ----------------------    -----------------------
     Net periodic cost recognized                  $      10  $       10      $      27   $      25
                                                   ======================    =======================
</TABLE>

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

9.   RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS

     Progress Energy and its  subsidiaries  are exposed to various risks related
     to  changes  in  market  conditions.  The  Company  has a  risk  management
     committee that includes senior executives from various business groups. The
     risk management  committee is responsible for administering risk management
     policies and monitoring compliance with those policies by all subsidiaries.

     Under  its  risk  management  policy,  the  Company  may use a  variety  of
     instruments,  including  swaps,  options and forward  contracts,  to manage
     exposure to  fluctuations  in  commodity  prices and interest  rates.  Such
     instruments  contain credit risk if the counterparty fails to perform under
     the contract.  The Company minimizes such risk by performing credit reviews
     using,  among  other  things,  publicly  available  credit  ratings of such
     counterparties.  Potential nonperformance by counterparties is not expected
     to  have a  material  effect  on the  consolidated  financial  position  or
     consolidated results of operations of the Company.

     Progress  Energy uses interest rate  derivative  instruments  to adjust the
     fixed and variable rate debt  components of its debt portfolio and to hedge
     interest rates with regard to future fixed rate debt issuances.

     As of June 30,  2004,  Progress  Energy  had $1  billion of fixed rate debt
     swapped  to  floating  rate  debt by  executing  interest  rate  derivative
     agreements. Under terms of these swap rate agreements, Progress Energy will
     receive a fixed rate and pay a floating rate based on 3-month LIBOR.  These
     agreements  expire  between  March  2006 and March  2011.  During the year,
     Progress  Energy has entered  into $350 million  notional of open  interest
     rate fair value hedges.  In March 2004,  two interest rate swap  agreements
     totaling $200 million were  terminated.  These swaps were  associated  with
     Progress  Energy 5.85% Notes due in 2008.  The loss on the  agreements  was
     deferred  and is  being  amortized  over  the  life of the  bonds  as these
     agreements  had  been  designated  as  fair  value  hedges  for  accounting
     purposes.

     As of June 30,  2004,  PEC had $70 million  notional  of pay fixed  forward
     starting  swaps,  entered  into in March  2004,  to hedge its  exposure  to
     interest  rates with  regard to a future  issuance  of debt and $26 million
     notional of pay fixed forward  starting swaps,  entered into in April 2004,
     to hedge its exposure to interest rates with regard to an upcoming  railcar
     lease.  In July 2004, PEC entered into an additional  $30 million  notional
     pay fixed forward swap related the future issuance of debt,  increasing the
     total notional of pay fixed forward  starting swaps to $126 million.  These
     agreements have a computational period of ten years.

     In May 2004, the Company terminated  interest rate cash flow hedges, with a
     total  notional  amount of $400 million,  related to projected  outstanding
     balances of commercial paper.  Amounts in accumulated  other  comprehensive
     income related to these terminated  hedges will be reclassified to earnings
     as the hedged interest payments occur.

     The Company  holds  interest  rate collars with a varying  notional  amount
     (currently at the maximum of $195 million) to hedge  floating rate exposure
     associated  with variable rate  long-term  debt at Progress  Ventures.  The
     Company is required to hedge 50% of the amount  outstanding  under its bank
     facility through March 2007.

                                       17
<PAGE>

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

     PEF has entered into derivative  instruments to hedge its exposure to price
     fluctuations  on fuel  oil  purchases.  These  instruments  did not  have a
     material impact on the Company's consolidated financial position or results
     of operations.

     Progress  Fuels  Corporation,   through  Progress  Ventures,   Inc.  (PVI),
     periodically  enters into  derivative  instruments to hedge its exposure to
     price  fluctuations  on natural gas sales.  As of June 30,  2004,  Progress
     Fuels Corporation is hedging exposures to the price variability of portions
     of its natural gas production  through December 2005. These instruments did
     not have a material impact on the Company's consolidated financial position
     or results of operations.

     Nonhedging  derivatives,  primarily  electricity and natural gas contracts,
     are entered into for trading  purposes and for economic  hedging  purposes.
     While  management  believes  the  economic  hedges  mitigate  exposures  to
     fluctuations in commodity  prices,  these instruments are not designated as
     hedges for accounting  purposes and are monitored  consistent  with trading
     positions.

     The Company 's July 2004 forward  mark-to-market losses were $7 million for
     the first  quarter of 2004 and $3 million for the second  quarter of 2004 .
     These mark-to-market  losses are reflected in diversified business revenues
     and were  related to an  agreement  to provide  energy  needed to fulfill a
     contract  obligation  and  economic  hedges used to mitigate  exposures  to
     fluctuations in commodity prices.

10.  FINANCIAL INFORMATION BY BUSINESS SEGMENT

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

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

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

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

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

     The Other segment,  whose operations are in the United States,  is composed
     of other  nonregulated  business  areas  including  telecommunications  and
     energy service operations and other  nonregulated  subsidiaries that do not
     separately meet the disclosure  requirements of SFAS No. 131,  "Disclosures
     about Segments of an Enterprise and Related Information."

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

                                       18
<PAGE>
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                               Revenues
                                ---------------------------------------
                                                                           Income from
                                                                            Continuing
     (in millions)              Unaffiliated   Intersegment    Total        Operations        Assets
                                ------------   ------------  ----------    -------------    -----------
     FOR THE THREE MONTHS
     ENDED
     JUNE 30, 2004
     PEC Electric                  $   861     $        -     $   861          $    97       $ 10,711
     PEF                               860              -         860               84          7,457
     Fuels                             325             68         393               56          1,156
     CCO                                72              -          72                5          1,784
     Rail Services                     285              -         285                4            532
     Other                              22              1          23              (30)           312
     Corporate                           -            (69)        (69)             (63)         4,283
                                ------------   ------------  ----------    -------------    -----------
     Consolidated totals           $ 2,425     $        -     $ 2,425          $   153       $ 26,235
                                ------------   ------------  ----------    -------------    -----------

     FOR THE THREE MONTHS
     ENDED
     JUNE 30, 2003
     PEC Electric                  $   816          $   -     $   816          $    89
     PEF                               767              -         767               61
     Fuels                             206             88         294               58
     CCO                                33              -          33                2
     Rail Services                     214              -         214                2
     Other                              14              3          17                -
     Corporate                           -            (91)        (91)             (58)
                                ------------   ------------  ----------    -------------
     Consolidated totals           $ 2,050          $   -     $ 2,050          $   154
                                ------------   ------------  ----------    -------------

                                               Revenues
                                ---------------------------------------
                                                                           Income from
                                                                            Continuing
     (in millions)              Unaffiliated   Intersegment   Total         Operations
                                ------------   ------------  ----------    -------------
     FOR THE SIX MONTHS
     ENDED JUNE 30, 2004
     PEC Electric                  $ 1,762     $        -     $ 1,762          $   213
     PEF                             1,644              -       1,644              133
     Fuels                             598            151         749              104
     CCO                               105              -         105               (3)
     Rail Services                     523              -         523                9
     Other                              44              1          45              (31)
     Corporate                           -           (152)       (152)            (164)
                                ------------   ------------  ----------    -------------
     Consolidated totals           $ 4,676     $        -     $ 4,676          $   261
                                ------------   ------------  ----------    -------------

     FOR THE SIX MONTHS
     ENDED JUNE 30, 2003
     PEC Electric                  $ 1,742     $        -    $  1,742          $   223
     PEF                             1,495              -       1,495              132
     Fuels                             510            169         679               97
     CCO                                71              -          71               11
     Rail Services                     392              -         392               (1)
     Other                              27              8          35                1
     Corporate                           -           (177)       (177)            (102)
                                ------------   ------------  ----------    -------------
     Consolidated totals           $ 4,237     $        -    $  4,237          $   361
                                ------------   ------------  ----------    -------------
</TABLE>

11.  OTHER INCOME AND OTHER EXPENSE

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

                                       19
<PAGE>
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                           Three Months Ended            Six Months Ended
                                                                 June 30                     June 30
     (in millions)                                            2004           2003          2004          2003
     Other income
     Net financial trading gain  (loss)                     $    4        $    (1)      $     5         $ (1)
     Nonregulated energy and delivery services income            5              5            11            11
     Investment gains                                            3              -             -             -
     AFUDC equity                                                2              4             4             6
     Other                                                       3              9             8             9
                                                        ----------     ----------    ----------    ----------
         Total other income                                 $   17        $    17       $    28         $  25
                                                        ----------     ----------    ----------    ----------

     Other expense
     Nonregulated energy and delivery services expenses     $    5        $     5       $     9         $  10
     Donations                                                   2              3            10             7
     Investment losses                                           -              9             -             8
     Contingent value obligations unrealized loss                5              2            13             -
     Loss from equity investments                                1              -             2             3
     Write-off of non-trade receivable                           -              -             7             -
     Other                                                       4              7            12            12
                                                        ----------     ----------    ----------    ----------
        Total other expense                                 $   17        $    26       $    53         $  40
                                                        ----------     ----------    ----------    ----------

     Other, net                                             $    -        $    (9)      $   (25)        $ (15)
     --------------------------------------------------------------------------------------------------------
</TABLE>

     Net financial trading gains and losses represent non-asset-backed trades of
     electricity  and gas.  Nonregulated  energy and delivery  services  include
     power   protection   services  and  mass-market   programs  such  as  surge
     protection,   appliance  services  and  area  light  sales,  and  delivery,
     transmission and substation work for other utilities.

12.  COMMITMENTS AND CONTINGENCIES

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

     A. Guarantees

     As a part of normal  business,  Progress  Energy and  certain  subsidiaries
     enter into various agreements providing financial or performance assurances
     to third parties.  Such agreements include  guarantees,  standby letters of
     credit and surety bonds.  These  agreements  are entered into  primarily to
     support or enhance the  creditworthiness  otherwise  attributed to Progress
     Energy and subsidiaries on a stand-alone  basis,  thereby  facilitating the
     extension of sufficient  credit to accomplish  the  subsidiaries'  intended
     commercial  purposes.  At  June  30,  2004,  management  does  not  believe
     conditions are likely for significant  performance  under the guarantees of
     performance issued by or on behalf of affiliates discussed herein.

     Guarantees  at June  30,  2004,  are  summarized  in the  table  below  and
     discussed more fully in the subsequent paragraphs.
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     (in millions)
     Guarantees issued on behalf of affiliates
          Guarantees supporting nonregulated portfolio and energy marketing
               activities issued by Progress Energy                                 $      405
          Guarantees supporting nuclear decommissioning                                    181
          Guarantee supporting power supply agreements                                     457
          Standby letters of credit                                                         54
          Surety bonds                                                                     132
          Guarantees supporting nonregulated portfolio and energy marketing
               activities issued by subsidiaries of Progress Energy                         82
     Guarantees issued on behalf of third parties
          Other guarantees                                                                  24
                                                                                   -----------
        Total                                                                          $ 1,335
                                                                                   ===========
</TABLE>


                                       20
<PAGE>

     Guarantees   Supporting   Nonregulated   Portfolio  and  Energy   Marketing
     Activities Issued by Progress Energy

     Progress  Energy has issued  approximately  $404 million of  guarantees  on
     behalf of Progress  Ventures (the business unit) and its  subsidiaries  for
     obligations  under  tolling  agreements,   transmission   agreements,   gas
     agreements,   construction  agreements,  fuel  procurement  agreements  and
     trading  operations.  Approximately  $19  million  and $57 million of these
     guarantees  were issued  during the second  three and six months ended June
     30, 2004, respectively,  to support Fuels and energy-marketing  activities.
     The majority of the marketing contracts supported by the guarantees contain
     provisions that trigger  guarantee  obligations  based on downgrade events,
     ratings  triggers,  monthly  netting of exposure and/or payments and offset
     provisions in the event of a default. Based upon current business levels at
     June 30, 2004,  if the Company's  ratings were to decline below  investment
     grade,  the Company  estimates  that it may have to deposit cash or provide
     letters of credit or other cash  collateral of  approximately  $115 million
     for  the  benefit  of  the  Company's  counterparties  to  support  ongoing
     operations  within a 90-day period.  The remaining $1 million in guarantees
     issued by Progress  Energy on behalf of affiliates is primarily  related to
     performance and payments subject to other contingencies.

     Guarantees Supporting Nuclear Decommissioning

     In 2003, PEC determined that its external funding levels did not fully meet
     the nuclear decommissioning financial assurance levels required by the NRC.
     Therefore,  PEC met  the  financial  assurance  requirements  by  obtaining
     guarantees from Progress  Energy in the amount of $276 million.  On May 12,
     2004,  PEC sent  notice to the NRC  informing  them that due to the Renewed
     Facility  Operating License for Robinson 2, the parent guarantee related to
     Robinson,  would be cancelled as of June 30, 2004.  As a result,  the total
     parent guarantees for  decommissioning  decreased from $276 million to $181
     million during the second quarter.

     Guarantees Supporting Power Supply Agreements

     In March 2003, PVI entered into a definitive agreement with Williams Energy
     Marketing  and Trading,  a subsidiary of The Williams  Companies,  Inc., to
     acquire a  long-term  full-requirements  power  supply  agreement  at fixed
     prices  with  Jackson  County EMC  (Jackson).  The power  supply  agreement
     included a performance guarantee by Progress Energy. The transaction closed
     during  the  second  quarter  of 2003.  The  Company  issued a payment  and
     performance  guarantee to Jackson related to the power supply  agreement of
     $280 million. In the event that Progress Energy's credit ratings fall below
     investment  grade,  Progress  Energy may be required to provide  additional
     security for this guarantee in form and amount (not to exceed $280 million)
     acceptable to Jackson.

     During the third quarter of 2003, PVI entered into an agreement with Morgan
     Stanley  Capital Group Inc.  (Morgan  Stanley) to fulfill Morgan  Stanley's
     obligations  to schedule  resources and supply  energy to Oglethorpe  Power
     Corporation of Georgia through March 31, 2005. The Company issued a payment
     and  performance  guarantee to Morgan  Stanley  related to the power supply
     agreement.  In the event that Progress  Energy's  credit ratings fall below
     investment  grade,  Progress  Energy  estimates that it may have to deposit
     cash or provide letters of credit or other cash collateral of approximately
     $27 million for the benefit of Morgan Stanley as of June 30, 2004.

     In June 2004,  PVI entered into a definitive  agreement  with five electric
     cooperatives in Georgia to provide long term full  requirements  power. The
     transaction  closed during the second quarter of 2004. The Company issued a
     payment and performance  guarantee to the cooperatives related to the power
     supply agreement totaling $150 million. In the event that Progress Energy's
     credit  ratings  fall below  investment  grade,  Progress  Energy  would be
     required to provide  additional  security  for this  guarantee  in form and
     amount  acceptable to the  cooperatives.  The Company would  immediately be
     required  to  deposit  cash or  provide  letters  of credit  or other  cash
     collateral up to 50% of the coverage amount of the guarantees issued (for a
     maximum  of  $75  million)  in  the  event  of  a  downgrade.  Beyond  that
     requirement,  additional  security  requirements  would be determined based
     upon a calculation of mark-to-market exposure, not to exceed $150 million.

                                       21
<PAGE>

     Standby Letters of Credit

     As of June 30,  2004,  financial  institutions  have  issued $54 million of
     standby letters of credit to financial institutions for the Company for the
     benefit of third  parties  that have  extended  credit to the  Company  and
     certain  subsidiaries.  These letters of credit have been issued  primarily
     for  the  purpose  of  supporting  payments  of  trade  payables,  securing
     performance  under contracts and lease obligations and  self-insurance  for
     workers' compensation.  If a subsidiary does not pay amounts when due under
     a covered  contract,  the counterparty may present its claim for payment to
     the  financial  institution,  which will in turn  request  payment from the
     Company.  Any amounts owed by the Company's  subsidiaries  are reflected in
     the accompanying Consolidated Balance Sheets.

     Surety Bonds

     At June 30, 2004,  the Company had $132  million in surety bonds  purchased
     primarily for purposes such as providing  workers'  compensation  coverage,
     obtaining licenses, permits,  rights-of-way and project performance. To the
     extent  liabilities  are incurred as a result of the activities  covered by
     the  surety  bonds,  such  liabilities  are  included  in the  accompanying
     Consolidated Balance Sheets.

     Guarantees   Supporting   Nonregulated   Portfolio  and  Energy   Marketing
     Activities Issued by Subsidiaries of Progress Energy

     Subsidiaries  of Progress Energy have issued  approximately  $82 million of
     guarantees  for   obligations   under  tolling   agreements,   transmission
     agreements,  gas  agreements,  construction  agreements,  fuel  procurement
     agreements and trading operations.

     Other Guarantees

     The Company has other guarantees  outstanding of approximately $24 million.
     Included in the $24 million are $10 million of guarantees  issued on behalf
     of third  parties,  which is in support of synthetic  fuel  operations at a
     third-party  plant.  The remaining  $14 million in affiliate  guarantees is
     related primarily to prompt performance payments and other payments subject
     to contingencies.

     In connection  with the sale of  partnership  interests in Colona (see Note
     3.A),  Progress Fuels  indemnified the buyers against any claims related to
     Colona resulting from violations of any  environmental  laws.  Although the
     terms of the agreement  provide for no limitation to the maximum  potential
     future payments under the  indemnification,  the Company has estimated that
     the maximum total of such payments would be insignificant.

     B. Insurance

     Both  PEC  and PEF are  insured  against  public  liability  for a  nuclear
     incident up to $10.76 billion per occurrence.  Under the current provisions
     of the Price Anderson Act, which limits  liability for accidents at nuclear
     power plants, each company, as an owner of nuclear units, can be assessed a
     portion of any third-party liability claims arising from an accident at any
     commercial  nuclear  power  plant in the United  States.  In the event that
     public  liability  claims  from an insured  nuclear  incident  exceed  $300
     million  (currently  available through commercial  insurers),  each company
     would be subject to  assessments  of up to $101  million  for each  reactor
     owned per occurrence.  Payment of such assessments  would be made over time
     as  necessary  to limit  the  payment  in any one year to no more  than $10
     million per reactor owned.  Congress is considering  revisions to the Price
     Anderson  Act  during  2004  that  could  include   increased   limits  and
     assessments  per reactor owned.  The final outcome of this matter cannot be
     predicted at this time.

     PEC and PEF self-insure their  transmission and distribution  lines against
     loss due to storm  damage  and other  natural  disasters.  PEF  accrues  $6
     million  annually to a storm damage reserve  pursuant to a regulatory order
     and may defer losses in excess of the reserve.

                                       22
<PAGE>

     C. Claims and Uncertainties

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

     Hazardous and Solid Waste Management

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

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

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

     PEC There are nine  former MGP sites and other  sites  associated  with PEC
     that have  required  or are  anticipated  to require  investigation  and/or
     remediation  costs.  PEC  received  insurance  proceeds  to  address  costs
     associated with environmental  liabilities  related to its involvement with
     some sites.  All eligible  expenses  related to these are charged against a
     specific fund containing these proceeds. At June 30, 2004, approximately $8
     million  remains  in this  centralized  fund with a related  accrual  of $8
     million recorded for the associated  expenses of environmental  issues. PEC
     is  unable  to  provide  an  estimate  of  the  reasonably  possible  total
     remediation  costs  beyond what is  currently  accrued due to the fact that
     investigations  have not been completed at all sites. This accrual has been
     recorded on an  undiscounted  basis.  PEC measures its  liability for these
     sites based on available evidence including its experience in investigating
     and remediating  environmentally impaired sites. The process often involves
     assessing and  developing  cost-sharing  arrangements  with other PRPs. PEC
     will accrue costs for the sites to the extent its liability is probable and
     the costs can be reasonably estimated.  Presently, PEC cannot determine the
     total costs that may be incurred in connection  with the remediation of all
     sites.

     In September  2003, the Company sold NCNG to Piedmont  Natural Gas Company,
     Inc. As part of the sales agreement, the Company retained responsibility to
     remediate five former NCNG MGP sites, all of which also are associated with
     PEC, to state  standards  pursuant to an  Administrative  Order on Consent.
     These sites are  anticipated to have  investigation  or  remediation  costs
     associated with them. NCNG had previously accrued  approximately $2 million
     for probable and  reasonably  estimable  remediation  costs at these sites.
     These accruals have been recorded on an undiscounted  basis. At the time of
     the sale,  the  liability  for  these  costs and the  related  accrual  was
     transferred  to PEC. PEC does not believe it can provide an estimate of the
     reasonably  possible  total  remediation  costs beyond the accrual  because
     investigations have not been completed at all sites. Therefore,  PEC cannot
     currently determine the total costs that may be incurred in connection with
     the investigation and/or remediation of all sites.

23
<PAGE>

     PEF At June  30,  2004,  PEF has  accrued  $27  million  for  probable  and
     estimable  costs related to various  environmental  sites. Of this accrual,
     $17 million is for costs  associated  with the  remediation of distribution
     and substation  transformers  for which PEF has received  approval from the
     FPSC for recovery  through the  Environmental  Cost Recovery Clause (ECRC).
     For the six months  ended June 30,  2004,  PEF  accrued  an  additional  $8
     million related to the remediation of transformers  and a regulatory  asset
     for the probable  recovery  through the ECRC.  The remaining $10 million is
     related to two former MGP sites and other  sites  associated  with PEF that
     have  required  or  are   anticipated  to  require   investigation   and/or
     remediation  costs.  PEF is unable to provide an estimate of the reasonably
     possible total remediation costs beyond what is currently accrued.

     These accruals have been recorded on an  undiscounted  basis.  PEF measures
     its  liability  for these sites based on available  evidence  including its
     experience in investigating and remediating environmentally impaired sites.
     This  process  often  includes   assessing  and   developing   cost-sharing
     arrangements  with other PRPs.  Presently,  PEF cannot  determine the total
     costs that may be incurred in connection with the remediation of all sites.
     As more activity occurs at these sites,  PEF will assess the need to adjust
     the accruals.

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

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

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

     Air Quality

     There has been and may be further proposed legislation requiring reductions
     in air emissions for NOx, SO2,  carbon  dioxide and mercury.  Some of these
     proposals  establish  nationwide  caps and emission  rates over an extended
     period of time.  This  national  multi-pollutant  approach to air pollution
     control could involve  significant capital costs which could be material to
     the Company's  consolidated  financial  position or results of  operations.
     Control   equipment  that  will  be  installed  on  North  Carolina  fossil
     generating  facilities as part of the North Carolina legislation  discussed
     below may address some of the issues outlined above.  However,  the Company
     cannot predict the outcome of this matter.

     The EPA is  conducting  an  enforcement  initiative  related to a number of
     coal-fired   utility  power  plants  in  an  effort  to  determine  whether
     modifications  at  those  facilities  were  subject  to New  Source  Review
     requirements or New Source  Performance  Standards under the Clean Air Act.
     Both PEC and PEF were  asked to provide  information  to the EPA as part of
     this initiative and cooperated in providing the requested information.  The
     EPA  initiated  civil  enforcement   actions  against  other   unaffiliated
     utilities as part of this  initiative.  Some of these  actions  resulted in
     settlement  agreements  calling  for  expenditures  by  these  unaffiliated
     utilities,  ranging from $1.0 billion to $1.4  billion.  A utility that was
     not subject to a civil  enforcement  action  settled its New Source  Review
     issues with the EPA for $300  million.  These  settlement  agreements  have
     generally  called for  expenditures  to be made over extended time periods,
     and some of the  companies  may seek  recovery of the related  cost through
     rate  adjustments  or similar  mechanisms.  The Company  cannot predict the
     outcome of this matter.

                                       24
<PAGE>

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

     In 1998, the EPA published a final rule at Section 110 of the Clean Air Act
     addressing the regional  transport of ozone (NOx SIP Call).  The EPA's rule
     requires 23  jurisdictions,  including North  Carolina,  South Carolina and
     Georgia,  but not  Florida,  to further  reduce NOx  emissions  in order to
     attain a preset emission level during each year's "ozone season," beginning
     May 31, 2004.  The EPA rule allows credit to companies  taking early action
     to meet the May 31, 2004  deadline.  PEC is currently  installing  controls
     necessary  to  comply  with the  rule  and,  with  the use of early  action
     credits,  expects to be in compliance as required by the final rule.  Total
     capital  expenditures  to meet these  measures in North and South  Carolina
     could reach  approximately  $370  million,  which has not been adjusted for
     inflation. The Company has spent approximately $265 million to date related
     to these  expenditures.  Increased operation and maintenance costs relating
     to the NOx SIP  Call  are not  expected  to be  material  to the  Company's
     results of  operations.  Further  controls are  anticipated  as electricity
     demand increases.

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

     In June 2002,  legislation  was  enacted in North  Carolina  requiring  the
     state's  electric  utilities  to reduce the  emissions  of NOx and SO2 from
     coal-fired power plants.  Progress Energy expects its capital costs to meet
     these emission targets will be approximately  $813 million by 2013. PEC has
     expended  approximately $45 million of these capital costs through June 30,
     2004.  PEC currently has  approximately  5,100 MW of coal-fired  generation
     capacity in North  Carolina that is affected by this  legislation.  The law
     requires the emissions  reductions  to be completed in phases by 2013,  and
     applies to each utility's total system rather than setting requirements for
     individual power plants. The law also freezes the utilities' base rates for
     five years unless there are extraordinary  events beyond the control of the
     utilities or unless the utilities  persistently earn a return substantially
     in excess of the rate of return  established  and found  reasonable  by the
     NCUC in the utilities' last general rate case. Further,  the law allows the
     utilities to recover  from their retail  customers  the  projected  capital
     costs  during  the first  seven  years of the  ten-year  compliance  period
     beginning on January 1, 2003.  The  utilities  must recover at least 70% of
     their projected capital costs during the five-year rate freeze period.  PEC
     recognized  amortization  of $15 million  and $34  million in the  quarters
     ended June 30, 2004 and 2003, respectively.  PEC recognized amortization of
     $31 million and $54 million in the six months ended June 30, 2004 and 2003,
     respectively.  Pursuant to the law, PEC entered into an agreement  with the
     state of North  Carolina  to  transfer  to the  state  certain  NOx and SO2
     emissions  allowances  that result from  compliance with the collective NOx
     and SO2 emissions limitations set out in the law. The law also requires the
     state to undertake a study of mercury and carbon dioxide emissions in North
     Carolina.  Operation  and  maintenance  costs  will  increase  due  to  the
     additional personnel, materials and general maintenance associated with the
     equipment.  Operation and maintenance expenses are recoverable through base
     rates, rather than as part of this program.  Progress Energy cannot predict
     the future regulatory interpretation, implementation or impact of this law.


                                       25
<PAGE>

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

     In  conjunction  with the proposed  mercury  rule,  the EPA proposed a MACT
     standard to regulate nickel  emissions from residual  oil-fired  units. The
     agency  estimates the proposal  will reduce  national  nickel  emissions to
     approximately  103 tons.  The EPA  expects to  finalize  the nickel rule in
     March 2005. The Company cannot predict the outcome of this matter.

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

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

     Water Quality

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

     After many years of litigation and settlement  negotiations the EPA adopted
     regulations  in February 2004 for the  implementation  of Section 316(b) of
     the Clean Water Act. These regulations become effective  September 7, 2004.
     The  purpose of these  regulations  is to  minimize  adverse  environmental
     impacts caused by cooling water intake structures and intake systems.  Over
     the next several years these  regulations  will impact the larger base load
     generation  facilities  and may require  the  facilities  to  mitigate  the
     effects  to aquatic  organisms  by  constructing  intake  modifications  or
     undertaking  other  restorative  activities.  Substantial  costs  could  be
     incurred by the facilities in order to comply with the new regulation.  The
     Company  cannot  predict the outcome and impacts to the  facilities at this
     time.

     The EPA has published for comment a draft  Environmental  Impact  Statement
     (EIS) for  surface  coal  mining  (sometimes  referred  to as  "mountaintop
     mining") and valley fills in the  Appalachian  coal region,  where Progress
     Fuels  currently  operates  a surface  mine and may  operate  others in the
     future.  The final EIS,  when  published,  may affect  regulations  for the
     permitting  of  mining   operations   and  the  cost  of  compliance   with
     environmental  regulations.  Regulatory  changes for mining may also affect
     the  cost of fuel  for the  coal-fueled  electric  generating  plants.  The
     Company cannot predict the outcome of this matter.

                                       26
<PAGE>

     Other Environmental Matters

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

     Other Contingencies

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

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

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

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

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

     In January 2004,  PEC and PEF filed a complaint  with the DOE claiming that
     the DOE breached the Standard  Contract for Disposal of Spent  Nuclear Fuel
     by  failing to accept  spent  nuclear  fuel from  various  Progress  Energy
     facilities on or before January 31, 1998.  Damages due to DOE's breach will
     likely exceed $100 million.  Similar suits have been  initiated by over two
     dozen other utilities.

     In July 2002,  Congress  passed an override  resolution to Nevada's veto of
     DOE's  proposal to locate a permanent  underground  nuclear  waste  storage
     facility  at  Yucca  Mountain,  Nevada.  DOE  plans  to  submit  a  license
     application for the Yucca Mountain facility by the end of 2004. In November
     2003, Congressional  negotiators approved $580 million for fiscal year 2004
     for the Yucca Mountain  project,  $123 million more than the previous year.
     In January 2003, the State of Nevada, Clark County, Nevada, and the City of
     Las Vegas petitioned the U.S. Court of Appeals for the District of Columbia
     Circuit for review of the  Congressional  override  resolution.  On July 9,
     2004,  the Court  rejected the  challenge to the  constitutionality  of the
     resolution  approving Yucca  Mountain,  but ruled that the EPA was wrong to
     set a 10,000-year compliance period. The DOE continues to state it plans to
     begin  operation of the  repository at Yucca  Mountain in 2010. PEC and PEF
     cannot predict the outcome of this matter.


                                       27
<PAGE>

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

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

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

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

     In June 2004, the Company reached a settlement  agreement with the District
     in this matter. The settlement totaled  approximately  $43.1 million and is
     included  in  diversified  business  cost  of  sales  in  the  accompanying
     Consolidated  Statement of Income for the three-months and six-months ended
     June  30,  2004.   The  accrual  of  the  settlement  was  recorded  on  an
     undiscounted  basis.  The terms of the  settlement  require  SRS to pay the
     District $10.1 million upon approval, and an additional $16 million in 2005
     and $17 million  2006.  In  addition,  during a  transition  period  ending
     September  10,  2004,  SRS will  provide  maintenance  and  training on the
     equipment and software it installed and  maintained  for the District.  The
     agreement,  upon approval,  settles all claims and cross-claims  related to
     SRS, Progress Energy, Progress Energy Solutions and PEC.

     3. In August 2003,  PEC was served as a co-defendant  in a purported  class
     action lawsuit styled as Collins v. Duke Energy Corporation et al, in South
     Carolina's  Circuit Court of Common Pleas for the Fifth  Judicial  Circuit.
     PEC is one of three electric utilities operating in South Carolina named in
     the suit. The plaintiffs are seeking  damages for the alleged  improper use
     of  electric  easements  but have not  asserted  a dollar  amount for their
     damage claims.  The complaint  alleges that the licensing of attachments on
     electric  utility poles,  towers and other  structures to nonutility  third
     parties  or  telecommunication   companies  for  other  than  the  electric
     utilities'  internal  use along the  electric  right-of-way  constitutes  a
     trespass.

     In  September  2003,  PEC  filed a motion  to  dismiss  all  counts  of the
     complaint on  substantive  and  procedural  grounds.  In October 2003,  the
     plaintiffs  filed a motion  to amend  their  complaint.  PEC  believes  the
     amended  complaint  asserts  the  same  factual  allegations  as are in the
     original  complaint and also seeks money damages and injunctive  relief. In
     March 2004, the plaintiffs in this case filed a notice of dismissal without
     prejudice of their claims against PEC and Duke Energy Corporation.

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

                                       28
<PAGE>

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

     On May 4, 2004,  PEC  authorized  its  outside  counsel to file a notice of
     appeal of the April 6, 2004,  judgment  and on May 7,  2004,  the notice of
     appeal  was filed with the United  States  Court of Appeals  for the Fourth
     Circuit.  On June 8, 2004,  DMT filed a motion to dismiss the appeal in the
     appeals  court on the ground that PEC's  notice of appeal  should have been
     filed on or before May 6, 2004.  On June 16, 2004,  PEC filed a motion with
     the trial court  requesting  an extension of the deadline for the filing of
     the notice of appeal.  On July 7, 2004,  the parties agreed to postpone the
     appellate  proceedings to allow the trial court to resolve PEC's motion for
     an extension of the notice of appeal deadline.

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

     5. The  Company,  through  its  subsidiaries,  is a majority  owner in five
     entities  and a minority  owner in one  entity  that owns  facilities  that
     produce  synthetic fuel as defined under the Internal  Revenue Code (Code).
     The  production  and  sale of the  synthetic  fuel  from  these  facilities
     qualifies  for tax credits  under  Section 29 if certain  requirements  are
     satisfied,   including  a  requirement  that  the  synthetic  fuel  differs
     significantly  in chemical  composition  from the coal used to produce such
     synthetic  fuel and that the fuel was  produced  from a  facility  that was
     placed in service  before July 1, 1998.  Synthetic  fuel tax credit amounts
     not utilized are carried forward  indefinitely  as alternative  minimum tax
     credits.  All entities have received private letter rulings (PLRs) from the
     Internal  Revenue  Service  (IRS)  with  respect  to their  synthetic  fuel
     operations.  The PLRs do not limit the  production on which  synthetic fuel
     credits  may be  claimed.  Total  Section  29  credits  generated  to  date
     (including  those generated by FPC prior to its acquisition by the Company)
     are  approximately  $1.4 billion,  of which $584 million have been used and
     $807 million are being carried forward as deferred tax credits. The current
     Section 29 tax credit program expires at the end of 2007.

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

     In July  2004,  Progress  Energy was  notified  that the  Internal  Revenue
     Service  (IRS)  field  auditors   anticipate  taking  an  adverse  position
     regarding  the  placed-in-service   date  of  the  Company's  four  Earthco
     synthetic  fuel  facilities.  Due to the  auditors'  position,  the IRS has
     decided to exercise  its right to withdraw  from the  Pre-Filing  Agreement
     (PFA) program with Progress Energy.  With the IRS's withdrawal from the PFA
     program,  the review of Progress Energy's Earthco facilities is back on the
     normal  procedural  audit path of the  Company's  tax returns.  The IRS has
     indicated that the field audit team will provide its written recommendation
     later this year.  After the field audit team's  written  recommendation  is
     received,  the  Company  will  begin the  Appeals  process  within the IRS.
     Through June 30, 2004 the Company,  on a consolidated basis, has claimed $1
     billion of tax credits  generated by Earthco  facilities.  If these credits
     were  disallowed,  the  Company's  one time  exposure for cash tax payments
     would be $229 million (excluding  interest),  and earnings and equity would
     be reduced by $1 billion, excluding interest. The Company believes that the
     appeals process could take up to two years to complete,  however, it cannot
     control the actual timing of resolution  and cannot  predict the outcome of
     this matter.

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

                                       29
<PAGE>

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

     In  management's  opinion,  the Company is complying with all the necessary
     requirements to be allowed such credits under Section 29, and,  although it
     cannot  provide  certainty,  it  believes  that it will  prevail  in  these
     matters.  Accordingly,  the  Company  has no  current  plans to  alter  its
     synthetic fuel production  schedule as a result of these matters.  However,
     should  the  Company  fail to  prevail  in these  matters,  there  could be
     material liability for previously taken Section 29 credits, with a material
     adverse impact on earnings and cash flows.

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

                                       30
<PAGE>

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

UNAUDITED CONSOLIDATED STATEMENTS of INCOME
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                  Three Months Ended June 30  Six Months Ended June 30
(in millions)                                               2004        2003          2004        2003
-------------------------------------------------------------------------------------------------------
Operating Revenues
   Electric                                               $  861      $  816      $  1,762    $  1,742
   Diversified business                                        1           3             1           6
-------------------------------------------------------------------------------------------------------
      Total Operating Revenues                               862         819         1,763       1,748
-------------------------------------------------------------------------------------------------------
Operating Expenses
   Fuel used in electric generation                          193         177           417         403
   Purchased power                                            80          69           142         142
   Operation and maintenance                                 226         210           435         400
   Depreciation and amortization                             127         142           254         281
   Taxes other than on income                                 45          35            88          79
   Diversified business                                        -           2             -           3
-------------------------------------------------------------------------------------------------------
        Total Operating Expenses                             671         635         1,336       1,308
-------------------------------------------------------------------------------------------------------
Operating Income                                             191         184           427         440
-------------------------------------------------------------------------------------------------------
Other Income (Expense)
   Interest income                                             1           2             2           3
   Other, net                                                  4          (8)           (8)        (10)
-------------------------------------------------------------------------------------------------------
        Total Other Income (Expense)                           5          (6)           (6)         (7)
-------------------------------------------------------------------------------------------------------
Interest Charges
   Interest charges                                           47          49            96          98
   Allowance for borrowed funds used during construction       -          (1)           (1)         (2)
-------------------------------------------------------------------------------------------------------
        Total Interest Charges, Net                           47          48            95          96
-------------------------------------------------------------------------------------------------------
Income before Income Tax                                     149         130           326         337
Income Tax Expense                                            53          41           115         113
-------------------------------------------------------------------------------------------------------
Net Income                                                    96          89           211         224
Preferred Stock Dividend Requirement                           -           -             1           1
-------------------------------------------------------------------------------------------------------
Earnings for Common Stock                                 $   96      $   89      $    210   $     223
-------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Interim Financial Statements.

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

CAROLINA POWER & Light Company
d/b/a PROGRESS ENERGY CAROLINAS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in millions)                                                              June 30         December 31
ASSETS                                                                        2004                2003
-------------------------------------------------------------------------------------------------------
Utility Plant
  Utility plant in service                                                $ 13,516            $ 13,331
  Accumulated depreciation                                                  (5,390)             (5,258)
-------------------------------------------------------------------------------------------------------
        Utility plant in service, net                                        8,126               8,073
  Held for future use                                                            5                   5
  Construction work in progress                                                294                 306
  Nuclear fuel, net of amortization                                            161                 159
-------------------------------------------------------------------------------------------------------
        Total Utility Plant, Net                                             8,586               8,543
-------------------------------------------------------------------------------------------------------
Current Assets
  Cash and cash equivalents                                                     44                 238
  Accounts receivable                                                          253                 265
  Unbilled accounts receivable                                                 146                 145
  Receivables from affiliated companies                                         11                  27
  Inventory                                                                    307                 348
  Deferred fuel cost                                                           126                 113
  Prepayments and other current assets                                          57                  82
-------------------------------------------------------------------------------------------------------
        Total Current Assets                                                   944               1,218
-------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
  Regulatory assets                                                            506                 477
  Nuclear decommissioning trust funds                                          542                 505
  Miscellaneous other property and investments                                 169                 169
  Other assets and deferred debits                                             115                 118
-------------------------------------------------------------------------------------------------------
        Total Deferred Debits and Other Assets                               1,332               1,269
-------------------------------------------------------------------------------------------------------
           Total Assets                                                   $ 10,862            $ 11,030
-------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
-------------------------------------------------------------------------------------------------------
Common Stock Equity
  Common stock without par value, authorized 200 million shares,
     160 million shares issued and outstanding                            $  1,971            $  1,953
  Unearned ESOP common stock                                                   (76)                (89)
  Accumulated other comprehensive loss                                          (4)                 (7)
  Retained earnings                                                          1,361               1,380
-------------------------------------------------------------------------------------------------------
        Total Common Stock Equity                                            3,252               3,237
-------------------------------------------------------------------------------------------------------
  Preferred Stock - Not Subject to Mandatory Redemption                         59                  59
  Long-Term Debt, Net                                                        2,748               3,086
-------------------------------------------------------------------------------------------------------
        Total Capitalization                                                 6,059               6,382
-------------------------------------------------------------------------------------------------------
Current Liabilities
  Current portion of long-term debt                                            300                 300
  Accounts payable                                                             181                 188
  Payables to affiliated companies                                              77                 136
  Notes payable to affiliated companies                                         26                  25
  Interest accrued                                                              57                  64
  Short-term obligations                                                        68                   4
  Other current liabilities                                                    229                 166
-------------------------------------------------------------------------------------------------------
        Total Current Liabilities                                              938                 883
-------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
  Accumulated deferred income taxes                                          1,132               1,125
  Accumulated deferred investment tax credits                                  145                 148
  Regulatory liabilities                                                     1,262               1,197
  Asset retirement obligations                                                 959                 932
  Other liabilities and deferred credits                                       367                 363
-------------------------------------------------------------------------------------------------------
        Total Deferred Credits and Other Liabilities                         3,865               3,765
-------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 10)
-------------------------------------------------------------------------------------------------------
            Total Capitalization and Liabilities                          $ 10,862            $ 11,030
-------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Interim Financial Statements.

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

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

                                                                                     Six Months Ended June 30
(in millions)                                                                               2004         2003
---------------------------------------------------------------------------------------------------------------
     Operating Activities
Net income                                                                              $    211    $     224
Adjustments to reconcile net income to net cash provided by operating activities:
      Depreciation and amortization                                                          297          326
      Deferred income taxes                                                                    4          (38)
      Investment tax credit                                                                   (4)          (5)
      Deferred fuel cost                                                                     (13)           9
   Cash provided (used) by changes in operating assets and liabilities:
      Accounts receivable                                                                     23           35
      Inventories                                                                             32           (1)
      Prepayments and other current assets                                                     8           14
      Accounts payable                                                                       (50)           2
      Other current liabilities                                                               61           58
      Other                                                                                   53           42
---------------------------------------------------------------------------------------------------------------
         Net Cash Provided by Operating Activities                                           622          666
---------------------------------------------------------------------------------------------------------------
     Investing Activities
Gross property additions                                                                    (248)        (259)
Nuclear fuel additions                                                                       (47)         (46)
Contributions to nuclear decommissioning trust                                               (18)         (18)
Other investing activities                                                                     -           (4)
---------------------------------------------------------------------------------------------------------------
         Net Cash Used in Investing Activities                                              (313)        (327)
---------------------------------------------------------------------------------------------------------------
     Financing Activities
Net increase (decrease) in short-term obligations                                             64          (74)
Net change in intercompany notes                                                               1           99
Retirement of long-term debt                                                                (339)        (165)
Dividends paid to parent                                                                    (228)        (203)
Dividends paid on preferred stock                                                             (1)          (1)
---------------------------------------------------------------------------------------------------------------
         Net Cash Used in Financing Activities                                              (503)        (344)
---------------------------------------------------------------------------------------------------------------
     Net Decrease in Cash and Cash Equivalents                                              (194)          (5)
Cash and Cash Equivalents at Beginning of Period                                             238           18
----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                                              $     44    $      13
---------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized)                        $    100    $      95
                            income taxes (net of refunds)                               $     82    $     120
----------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Interim Financial Statements.


                                       33
<PAGE>

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

1.   ORGANIZATION AND BASIS OF PRESENTATION

     A. Organization

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

     B. Basis of Presentation

     These financial statements have been prepared in accordance with accounting
     principles  generally  accepted in the United States of America  (GAAP) for
     interim  financial  information and with the  instructions to Form 10-Q and
     Regulation S-X. Accordingly, they do not include all of the information and
     footnotes required by GAAP for annual statements.  Because the accompanying
     consolidated  interim  financial  statements  do  not  include  all  of the
     information  and  footnotes  required  by  GAAP,  they  should  be  read in
     conjunction  with the audited  financial  statements  for the period  ended
     December  31,  2003 and notes  thereto  included in PEC's Form 10-K for the
     year ended December 31, 2003.

     PEC collects  from  customers  certain  excise  taxes,  which include gross
     receipts tax, franchise taxes, and other excise taxes,  levied by the state
     or local government upon the customers.  PEC accounts for excise taxes on a
     gross  basis.  For the three  months  ended June 30, 2004 and 2003,  excise
     taxes of  approximately  $23 million  and $18  million,  respectively,  are
     included  in taxes  other  than  income  in the  accompanying  Consolidated
     Statements  of  Income.  For the six months  ended June 30,  2004 and 2003,
     excise taxes of  approximately  $45 million and $40 million,  respectively,
     are  included in taxes other than income in the  accompanying  Consolidated
     Statements  of Income.  These  approximate  amounts  are also  included  in
     utility revenues.

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

     In preparing financial  statements that conform with GAAP,  management must
     make estimates and assumptions  that affect the reported  amounts of assets
     and  liabilities,  disclosure of contingent  assets and  liabilities at the
     date of the  financial  statements  and  amounts of revenues  and  expenses
     reflected  during the reporting  period.  Actual  results could differ from
     those estimates. Certain amounts for 2003 have been reclassified to conform
     to the 2004 presentation.

     C. Stock-Based Compensation

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

                                       34
<PAGE>
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                            Three Months Ended      Six Months Ended
                                                                  June 30               June 30
                                                            --------------------  ---------------------
     (in millions)                                               2004      2003       2004        2003
                                                            ---------- ---------  --------- -----------
     Net Income, as reported                                   $   96    $   89     $  211      $  224
     Deduct:  Total stock option expense determined under
       fair value method for all awards, net of related tax         2         1          4           2
     effects
                                                            ---------- ---------  --------- -----------
     Pro forma net income                                      $   94    $   88     $  207      $  222
                                                            ========== =========  ========= ===========
</TABLE>

     D. Consolidation of Variable Interest Entities

     PEC consolidates  all voting interest  entities in which it owns a majority
     voting  interest  and all  variable  interest  entities for which it is the
     primary  beneficiary  in  accordance  with  FASB  Interpretation  No.  46R,
     "Consolidation of Variable Interest Entities - an Interpretation of ARB No.
     51" (FIN No.  46R).  During the first six months of 2004 and 2003,  PEC did
     not  participate  in the creation of, or obtain a significant  new variable
     interest in, any variable interest entity.

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

     PEC has variable  interests in two power plants  resulting  from  long-term
     power purchase  contracts.  PEC has requested the necessary  information to
     determine  if the  counterparties  are  variable  interest  entities  or to
     identify the primary  beneficiaries.  Both entities declined to provide PEC
     with  the  necessary  financial  information,   and  PEC  has  applied  the
     information  scope  exception in FIN No. 46R,  paragraph  4(g).  PEC's only
     significant  exposure to  variability  from these  contracts  results  from
     fluctuations  in the market price of fuel used by the two entities'  plants
     to produce the power  purchased by PEC.  PEC is able to recover  these fuel
     costs under its fuel clause. Total purchases from these counterparties were
     approximately  $21  million and $19 million in the first six months of 2004
     and 2003,  respectively.  PEC will  continue  its  efforts  to  obtain  the
     necessary  information to fully apply FIN No. 46R to these  contracts.  The
     combined   generation  capacity  of  the  two  entities'  power  plants  is
     approximately  880 MW.  PEC  believes  that if it is  determined  to be the
     primary beneficiary of these two entities,  the effect of consolidating the
     entities  would  result in increases to total  assets,  long-term  debt and
     other  liabilities,  but would have an  insignificant or no impact on PEC's
     common stock equity, net earnings,  or cash flows.  However, as PEC has not
     received  any  financial  information  from these two  counterparties,  the
     impact cannot be determined at this time.

     PEC also has  interests in several  other  variable  interest  entities for
     which  PEC is not  the  primary  beneficiary.  These  arrangements  include
     investments in approximately  22 limited  partnerships,  limited  liability
     corporations  and  venture  capital  funds  and two  building  leases  with
     special-purpose  entities.  The aggregate maximum loss exposure at June 30,
     2004,  that PEC could be  required to record in its income  statement  as a
     result  of  these  arrangements  totals   approximately  $23  million.  The
     creditors of these variable  interest  entities do not have recourse to the
     general credit of PEC in excess of the aggregate maximum loss exposure.

                                       35
<PAGE>

2.   NEW ACCOUNTING STANDARDS

     In  December  2003,  the  Medicare   Prescription  Drug,   Improvement  and
     Modernization Act of 2003 (the Act) was signed into law. In accordance with
     guidance  issued by the FASB in FASB Staff Position FAS 106-1,  PEC elected
     to  defer  accounting  for the  effects  of the  Act  due to  uncertainties
     regarding the effects of the  implementation  of the Act and the accounting
     for certain provisions of the Act. Therefore, OPEB information presented in
     the financial  statements does not reflect the effects of the Act. The FASB
     recently issued  definitive  accounting  guidance for the Act in FASB Staff
     Position  106-2,  which is effective  for PEC in the third quarter of 2004.
     FASB Staff  Position  106-2 will  result in the  recognition  of lower OPEB
     costs to reflect prescription drug-related federal subsidies to be received
     under the Act. PEC is in the process of  quantifying  the impact of the Act
     on OPEB costs.

3.   REGULATORY MATTERS

     A. Retail Rate Matters

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

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

     During the first quarter of 2004, PEC met the requirements of both the NCUC
     and the SCPSC for the  implementation of a depreciation study which allowed
     the utility to reduce the rates used to calculate  depreciation expense. As
     a result,  depreciation  expense decreased $10 million for the three months
     ended June 30, 2004  compared to the prior year quarter and  decreased  $18
     million for the six months  ended June 30, 2004  compared to the prior year
     six month period.

     B. Regional Transmission Organizations

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

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

     C. Implementation of SFAS No. 143

     In connection with the  implementation of SFAS No. 143 in 2003, PEC filed a
     request with the NCUC requesting deferral of the difference between expense
     pursuant to SFAS No. 143 and expense as previously  determined by the NCUC.
     The NCUC granted the deferral of the January 1, 2003 cumulative adjustment.
     Because the clean air legislation  discussed in Note 12 under "Air Quality"
     contained a prohibition  against cost deferrals unless certain criteria are
     met,  the NCUC denied the deferral of the ongoing  effects.  Since the NCUC

                                       36
<PAGE>

     order denied  deferral of the ongoing  effects,  PEC ceased deferral of the
     ongoing effects during the second quarter for the six months ended June 30,
     2003 related to its North Carolina retail jurisdiction.  Pre-tax income for
     the three and six months ended June 30, 2003 increased by approximately $14
     million,  which  represents a decrease in non-ARO cost of removal  expense,
     partially  offset by an increase in  decommissioning  expense.  The Company
     provided additional information to the NCUC that demonstrated that deferral
     of the ongoing effects should also be allowed.  In August of 2003, the NCUC
     revised its decision  and  approved the deferral of the ongoing  effects of
     SFAS No. 143 at which time the $14 million was reversed.

     D. FERC Market Power Mitigation

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

4.   COMPREHENSIVE INCOME

     Comprehensive  income for the three months ended June 30, 2004 and 2003 was
     $98 million and $88 million, respectively. Comprehensive income for the six
     months  ended June 30,  2004 and 2003 was $214  million  and $223  million,
     respectively.  Changes  in  other  comprehensive  income  for  the  periods
     consisted  primarily of changes in fair value of derivatives  used to hedge
     cash flows related to interest on long-term debt.

5.   FINANCING ACTIVITIES

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

     On April 30, 2004,  PEC redeemed  $34.7 million of  Darlington  County 6.6%
     Series  Pollution  Control  Bonds at 102.5% of par,  $1.795  million of New
     Hanover  County 6.3% Series  Pollution  Control Bonds at 101.5% of par, and
     $2.58  million of Chatham  County 6.3% Series  Pollution  Control  Bonds at
     101.5% of par with cash from operations.

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

6.   BENEFIT PLANS

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

                                       37
<PAGE>
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     Three Months Ended June 30                                             Other Postretirement
                                                   Pension Benefits               Benefits
                                                -----------------------    ---------------------
     (in millions)                                   2004         2003         2004        2003
                                                -----------------------    ---------------------
     Service cost                               $       6   $        5     $      2  $        2
     Interest cost                                     13           12            4           3
     Expected return on plan assets                   (17)         (16)          (1)         (1)
     Amortization, net                                  -            -            1           1
                                                -----------------------    ---------------------
     Net periodic cost                          $       2   $        1     $      6  $        5
                                                =======================    =====================

     Six Months Ended June 30                                              Other Postretirement
                                                  Pension Benefits               Benefits
                                                -----------------------    ---------------------
     (in millions)                                   2004         2003         2004        2003
                                                -----------------------    ---------------------
     Service cost                               $      12   $       11     $      4  $        3
     Interest cost                                     26           24            8           7
     Expected return on plan assets                   (34)         (33)          (2)         (1)
     Amortization, net                                  1            -            2           2
                                                -----------------------    ---------------------
     Net periodic cost                          $       5   $        2     $     12  $       11
                                                =======================    =====================
</TABLE>

7.   RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS

     PEC uses  interest  rate  derivative  instruments  to adjust  the fixed and
     variable rate debt  components of its debt  portfolio and to hedge interest
     rates with regard to future fixed rate debt issuances.

     As of June 30,  2004,  PEC had $70 million  notional  of pay fixed  forward
     starting  swaps,  entered  into in March  2004,  to hedge its  exposure  to
     interest  rates with  regard to a future  issuance  of debt and $26 million
     notional of pay fixed forward  starting swaps,  entered into in April 2004,
     to hedge its exposure to interest rates with regard to an upcoming  railcar
     lease.  In July 2004, PEC entered into an additional  $30 million  notional
     pay fixed forward swap,  increasing the total notional of pay fixed forward
     starting  swaps to $126  million.  These  agreements  have a  computational
     period of ten years.

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

8.   FINANCIAL INFORMATION BY BUSINESS SEGMENT

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

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

     The  financial  information  for PEC  segments for the three and six months
     ended June 30, 2004 and 2003 is as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     Three Months Ended June 30                    2004                                  2003
                                     ----------------------------------    ---------------------------------
                                         PEC                                   PEC
     (in millions)                    Electric     Other      Total         Electric     Other      Total
                                     ----------------------------------    ---------------------------------
     Total revenues                    $  861      $  1      $  862          $ 816        $ 3      $ 819
     Earnings available
          for common                       97        (1)         96             89          -         89
</TABLE>


                                       38
<PAGE>
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     Six Months Ended June 30                      2004                                  2003
                                     ----------------------------------    ---------------------------------
                                        PEC                                   PEC
     (in millions)                    Electric     Other      Total         Electric     Other      Total
                                     ----------- ---------- -----------    ----------- ---------- ----------
     Total revenues                   $  1,762     $  1      $ 1,763        $ 1,742      $  6      $ 1,748
     Earnings available
          for common                       213       (3)         210            223         -          223
</TABLE>

9.   OTHER INCOME AND OTHER EXPENSE

     Other  income and expense  includes  interest  income and other  income and
     expense items as discussed  below. The components of other, net as shown on
     the  accompanying  Consolidated  Statements of Income for the three and six
     months ended June 30 are as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                           Three Months Ended             Six Months Ended
                                                                 June 30                      June 30
                                                        --------------------------    -------------------------
     (in millions)                                           2004            2003          2004           2003
                                                        ----------     -----------    ----------    -----------
     Other income
     Net financial trading gain (loss)                  $       4         $     -        $    5          $  (1)
     Nonregulated energy and delivery services income           2               2             4              4
     Investment gains                                           2               -             -              -
     AFUDC equity                                               1               1             2              2
     Other                                                      -               4             3              4
                                                        ----------     -----------    ----------    -----------
         Total other income                             $       9         $     7        $   14          $   9
                                                        ----------     -----------    ----------    -----------

     Other expense
     Nonregulated energy and delivery services expenses $       2         $     2        $    4          $   4
     Donations                                                  1               1             5              3
     Investment losses                                          -               9             -              8
     Write-off of non-trade receivable                          -               -             7              -
     Other                                                      2               3             6              4
                                                        ----------     -----------    ----------    -----------
        Total other expense                             $       5         $    15        $   22          $  19
                                                        ----------     -----------    ----------    -----------

     Other, net                                         $       4         $    (8)       $   (8)         $ (10)
                                                        ==========     ===========    ==========    ===========
</TABLE>

     Net financial trading gains and losses represent non-asset-backed trades of
     electricity  and gas.  Nonregulated  energy and delivery  services  include
     power   protection   services  and  mass  market  programs  such  as  surge
     protection,   appliance  services  and  area  light  sales,  and  delivery,
     transmission and substation work for other utilities.

10.  COMMITMENTS AND CONTINGENCIES

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

     A. Guarantees

     As a part of normal business,  PEC enters into various agreements providing
     financial or  performance  assurances  to third  parties.  Such  agreements
     include  guarantees,  standby  letters of credit and  surety  bonds.  These
     agreements   are  entered   into   primarily  to  support  or  enhance  the
     creditworthiness   otherwise  attributed  to  PEC  and  subsidiaries  on  a
     stand-alone basis,  thereby facilitating the extension of sufficient credit
     to  accomplish  PEC and the  subsidiaries'  intended  commercial  purposes.
     Guarantees at June 30, 2004,  are  summarized in the table and discussed in
     the subsequent paragraphs.

     At June 30, 2004, outstanding guarantees consisted of the following:

     (in millions)
     Standby letters of credit                       $   3
     Surety bonds                                       18
                                                  ------------
        Total                                        $  21
                                                  ============


                                       39
<PAGE>

     Standby Letters of Credit

     Financial  institutions  have issued standby letters of credit to financial
     institutions  for PEC and  certain  subsidiaries  for the  benefit of third
     parties that have extended  credit to PEC and certain  subsidiaries.  As of
     June 30, 2004, PEC and certain  subsidiaries  have  outstanding  letters of
     credit  totaling  $3  million.  These  letters of credit  have been  issued
     primarily  for the  purpose of securing  performance  under  contracts  and
     supporting  payments on interest  payments on outstanding  debt obligations
     and self insurance for workers  compensation.  If PEC or a subsidiary  does
     not pay amounts when due under a covered  contract,  the  counterparty  may
     present its claim for payment to the financial  institution,  which will in
     turn request  payment from PEC.  Any amounts owed by its  subsidiaries  are
     reflected in the PEC Consolidated Balance Sheets.

     Surety Bonds

     At June 30, 2004, PEC had $18 million in surety bonds  purchased  primarily
     for purposes such as providing workers' compensation coverage and obtaining
     licenses, permits and rights-of-way. To the extent liabilities are incurred
     as a result of the activities covered by the surety bonds, such liabilities
     are included in the Consolidated Balance Sheets.

     Guarantees Issued by the Parent

     In 2003, PEC determined that its external funding levels did not fully meet
     the nuclear decommissioning financial assurance levels required by the NRC.
     Therefore,  PEC obtained parent company  guarantees of $276 million to meet
     the required levels. On May 12, 2004 PEC sent notice to the NRC that due to
     the Renewed Facility Operating License for Robinson 2, the parent guarantee
     related to Robinson,  would be cancelled as of June 30, 2004.  As a result,
     the total parent guarantees for decommissioning decreased from $276 million
     to $181 million during the second quarter.

     B. Insurance

     PEC is insured against public liability for a nuclear incident up to $10.76
     billion per occurrence.  Under the current provisions of the Price Anderson
     Act,  which limits  liability for accidents at nuclear  plants,  PEC, as an
     owner of  nuclear  units,  can be  assessed  a portion  of any  third-party
     liability  claims arising from an accident at any commercial  nuclear power
     plant in the United States.  In the event that public liability claims from
     an insured  nuclear  incident  exceed  $300  million  (currently  available
     through commercial insurers),  PEC would be subject to assessments of up to
     $101  million  for each  reactor  owned  per  occurrence.  Payment  of such
     assessments  would be made over time as  necessary  to limit the payment in
     any one year to no more than $10  million per  reactor  owned.  Congress is
     considering  revisions  to the Price  Anderson  Act during  2004 that could
     include  increased  limits and  assessments  per reactor  owned.  The final
     outcome of this matter cannot be predicted at this time.

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

     C. Claims and Uncertainties

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


                                       40
<PAGE>

     Hazardous and Solid Waste Management

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

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

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

     There are nine  former MGP sites and other sites  associated  with PEC that
     have  required  or  are   anticipated  to  require   investigation   and/or
     remediation  costs.  PEC  received  insurance  proceeds  to  address  costs
     associated with PEC  environmental  liabilities  related to its involvement
     with some sites. All eligible expenses related to these are charged against
     a specific fund containing these proceeds. At June 30, 2004,  approximately
     $8 million  remains in this  centralized  fund with a related accrual of $8
     million recorded for the associated  expenses of environmental  issues. PEC
     is  unable  to  provide  an  estimate  of  the  reasonably  possible  total
     remediation  costs  beyond what is  currently  accrued due to the fact that
     investigations  have not been completed at all sites. This accrual has been
     recorded on an  undiscounted  basis.  PEC measures its  liability for these
     sites based on available evidence including its experience in investigating
     and remediating  environmentally impaired sites. The process often involves
     assessing and  developing  cost-sharing  arrangements  with other PRPs. PEC
     will accrue costs for the sites to the extent its liability is probable and
     the costs can be reasonably estimated.  Presently, PEC cannot determine the
     total costs that may be incurred in connection  with the remediation of all
     sites.

     In September  2003, the Company sold NCNG to Piedmont  Natural Gas Company,
     Inc. As part of the sales agreement, the Company retained responsibility to
     remediate five former NCNG MGP sites, all of which also are associated with
     PEC, to state  standards  pursuant to an  Administrative  Order on Consent.
     These sites are  anticipated to have  investigation  or  remediation  costs
     associated with them. NCNG had previously accrued  approximately $2 million
     for probable and  reasonably  estimable  remediation  costs at these sites.
     These accruals have been recorded on an undiscounted  basis. At the time of
     the sale,  the  liability  for  these  costs and the  related  accrual  was
     transferred  to PEC. PEC does not believe it can provide an estimate of the
     reasonably  possible  total  remediation  costs beyond the accrual  because
     investigations have not been completed at all sites. Therefore,  PEC cannot
     currently determine the total costs that may be incurred in connection with
     the investigation and/or remediation of all sites.

     Air Quality

     There has been and may be further proposed legislation requiring reductions
     in air emissions for NOx, SO2,  carbon  dioxide and mercury.  Some of these
     proposals  establish  nationwide  caps and emission  rates over an extended
     period of time.  This  national  multi-pollutant  approach to air pollution
     control could involve  significant capital costs which could be material to
     PEC's  consolidated  financial  position or results of operations.  Control
     equipment  that  will be  installed  on North  Carolina  fossil  generating
     facilities as part of the North Carolina  legislation  discussed  below may
     address some of the issues outlined above.  However, PEC cannot predict the
     outcome of this matter.

     The EPA is  conducting  an  enforcement  initiative  related to a number of
     coal-fired   utility  power  plants  in  an  effort  to  determine  whether
     modifications  at  those  facilities  were  subject  to New  Source  Review
     requirements or New Source  Performance  Standards under the Clean Air Act.
     PEC was asked to provide  information to the EPA as part of this initiative
     and  cooperated in providing the requested  information.  The EPA initiated
     civil enforcement  actions against other unaffiliated  utilities as part of

                                       41
<PAGE>

     this initiative.  Some of these actions  resulted in settlement  agreements
     calling for expenditures by these unaffiliated utilities, ranging from $1.0
     billion  to  $1.4  billion.  A  utility  that  was not  subject  to a civil
     enforcement  action  settled its New Source  Review issues with the EPA for
     $300  million.  These  settlement  agreements  have  generally  called  for
     expenditures  to be  made  over  extended  time  periods,  and  some of the
     companies may seek recovery of the related cost through rate adjustments or
     similar mechanisms. PEC cannot predict the outcome of this matter.

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

     In 1998, the EPA published a final rule at Section 110 of the Clean Air Act
     addressing the regional  transport of ozone (NOx SIP Call).  The EPA's rule
     requires 23 jurisdictions,  including North Carolina and South Carolina, to
     further  reduce NOx  emissions in order to attain a preset  emission  level
     during each year's "ozone season," beginning May 31, 2004. PEC is currently
     installing  controls necessary to comply with the rule and, with the use of
     early action credits,  expects to be in compliance as required by the final
     rule. Total capital  expenditures to meet these measures in North and South
     Carolina  could  reach  approximately  $370  million,  which  has not  been
     adjusted for inflation.  PEC has spent  approximately  $265 million to date
     related to these  expenditures.  Increased  operation and maintenance costs
     relating  to the NOx SIP  Call are not  expected  to be  material  to PEC's
     results of  operations.  Further  controls are  anticipated  as electricity
     demand increases.

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

     In June 2002,  legislation  was  enacted in North  Carolina  requiring  the
     state's  electric  utilities  to reduce the  emissions  of NOx and SO2 from
     coal-fired  power  plants.  PEC  expects  its  capital  costs to meet these
     emission  targets  will be  approximately  $813  million  by 2013.  PEC has
     expended  approximately $45 million of these capital costs through June 30,
     2004.  PEC currently has  approximately  5,100 MW of coal-fired  generation
     capacity in North  Carolina that is affected by this  legislation.  The law
     requires the emissions  reductions  to be completed in phases by 2013,  and
     applies to each utility's total system rather than setting requirements for
     individual power plants. The law also freezes the utilities' base rates for
     five years unless there are extraordinary  events beyond the control of the
     utilities or unless the utilities  persistently earn a return substantially
     in excess of the rate of return  established  and found  reasonable  by the
     NCUC in the utilities' last general rate case. Further,  the law allows the
     utilities to recover  from their retail  customers  the  projected  capital
     costs  during  the first  seven  years of the  ten-year  compliance  period
     beginning on January 1, 2003.  The  utilities  must recover at least 70% of
     their projected capital costs during the five-year rate freeze period.  PEC
     recognized  amortization  of $15 million  and $34  million in the  quarters
     ended June 30, 2004 and 2003, respectively.  PEC recognized amortization of
     $31 million and $54 million in the six months ended June 30, 2004 and 2003,
     respectively.  Pursuant to the law, PEC entered into an agreement  with the
     state of North  Carolina  to  transfer  to the  state  certain  NOx and SO2
     emissions  allowances  that result from  compliance with the collective NOx
     and SO2 emissions limitations set out in the law. The law also requires the
     state to undertake a study of mercury and carbon dioxide emissions in North
     Carolina.  Operation  and  maintenance  costs  will  increase  due  to  the
     additional personnel, materials and general maintenance associated with the
     equipment.  Operation and maintenance expenses are recoverable through base
     rates,  rather than as part of this program.  PEC cannot predict the future
     regulatory interpretation, implementation or impact of this law.

                                       42
<PAGE>

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

     In  conjunction  with the proposed  mercury  rule,  the EPA proposed a MACT
     standard to regulate nickel  emissions from residual  oil-fired  units. The
     agency  estimates the proposal  will reduce  national  nickel  emissions to
     approximately  103 tons.  The EPA  expects to  finalize  the nickel rule in
     March 2005. PEC cannot predict the outcome of this matter.

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

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

     Water Quality

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

     After many years of litigation and settlement  negotiations the EPA adopted
     regulations  in February 2004 for the  implementation  of Section 316(b) of
     the Clean Water Act. These  regulations will become effective  September 7,
     2004. The purpose of these regulations is to minimize adverse environmental
     impacts caused by cooling water intake structures and intake systems.  Over
     the next several years these  regulations  will impact the larger base load
     generation  facilities  and may require  the  facilities  to  mitigate  the
     effects  to aquatic  organisms  by  constructing  intake  modifications  or
     undertaking  other  restorative  activities.  Substantial  costs  could  be
     incurred by the facilities in order to comply with the new regulation.  PEC
     cannot predict the outcome and impacts to the facilities at this time.

     Other Environmental Matters

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

                                       43
<PAGE>

     Other Contingencies

     1. As required under the Nuclear Waste Policy Act of 1982, PEC entered into
     a contract  with the DOE under which the DOE agreed to begin  taking  spent
     nuclear  fuel by no later than  January 31, 1998.  All  similarly  situated
     utilities were required to sign the same standard contract.

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

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

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

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

     In January 2004,  PEC filed a complaint  with the DOE claiming that the DOE
     breached  the  Standard  Contract  for  Disposal of Spent  Nuclear  Fuel by
     failing  to  accept  spent  nuclear  fuel  from  various   Progress  Energy
     facilities on or before January 31, 1998.  Damages due to DOE's breach will
     likely exceed $100 million.  Similar suits have been  initiated by over two
     dozen other utilities.

     In July 2002,  Congress  passed an override  resolution to Nevada's veto of
     DOE's  proposal to locate a permanent  underground  nuclear  waste  storage
     facility  at  Yucca  Mountain,  Nevada.  DOE  plans  to  submit  a  license
     application for the Yucca Mountain facility by the end of 2004. In November
     2003, Congressional  negotiators approved $580 million for fiscal year 2004
     for the Yucca Mountain  project,  $123 million more than the previous year.
     In January 2003, the State of Nevada, Clark County, Nevada, and the City of
     Las Vegas petitioned the U.S. Court of Appeals for the District of Columbia
     Circuit for review of the  Congressional  override  resolution.  On July 9,
     2004,  the Court  rejected the  challenge to the  constitutionality  of the
     resolution  approving Yucca  Mountain,  but ruled that the EPA was wrong to
     set a 10,000-year compliance period. The DOE continues to state it plans to
     begin  operation of the  repository at Yucca  Mountain in 2010.  PEC cannot
     predict the outcome of this matter.

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

     2. In August 2003,  PEC was served as a co-defendant  in a purported  class
     action lawsuit styled as Collins v. Duke Energy Corporation et al, in South
     Carolina's  Circuit Court of Common Pleas for the Fifth  Judicial  Circuit.
     PEC is one of three electric utilities operating in South Carolina named in
     the suit. The plaintiffs are seeking  damages for the alleged  improper use
     of  electric  easements  but have not  asserted  a dollar  amount for their
     damage claims.  The complaint  alleges that the licensing of attachments on
     electric utility poles,  towers and other  structures to non-utility  third
     parties  or  telecommunication   companies  for  other  than  the  electric
     utilities'  internal  use along the  electric  right-of-way  constitutes  a
     trespass.

                                       44
<PAGE>

     In  September  2003,  PEC  filed a motion  to  dismiss  all  counts  of the
     complaint on  substantive  and  procedural  grounds.  In October 2003,  the
     plaintiffs  filed a motion  to amend  their  complaint.  PEC  believes  the
     amended  complaint  asserts  the  same  factual  allegations  as are in the
     original  complaint and also seeks money damages and injunctive  relief. In
     November 2003, PEC filed a motion to dismiss the plaintiffs'  first amended
     complaint.  In March 2004,  the  plaintiffs  in this case filed a notice of
     dismissal  without  prejudice of their  claims  against PEC and Duke Energy
     Corporation.

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

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

     On May 4, 2004,  PEC  authorized  its  outside  counsel to file a notice of
     appeal of the April 6, 2004  judgment  and on May 7,  2004,  the  notice of
     appeal  was filed with the United  States  Court of Appeals  for the Fourth
     Circuit.  On June 8, 2004 DMT filed a motion to  dismiss  the appeal in the
     appeals  court on the ground that PEC's  notice of appeal  should have been
     filed on or before May 6, 2004.  On June 16, 2004,  PEC filed a motion with
     the trial court  requesting  an extension of the deadline for the filing of
     the notice of appeal.  On July 7, 2004,  the parties agreed to postpone the
     appellate  proceedings to allow the trial court to resolve PEC's motion for
     an extension of the notice of appeal deadline.

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

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

                                       45
<PAGE>

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

The following  Management's  Discussion  and Analysis  contains  forward-looking
statements that involve estimates,  projections, goals, forecasts,  assumptions,
risks and  uncertainties  that could cause actual  results or outcomes to differ
materially from those expressed in the forward-looking statements. Many, but not
all of the factors  that may impact  actual  results are  discussed  in the Risk
Factors  sections of Progress  Energy's and PEC's annual report on Form 10-K for
the year ended  December  31,  2003,  which were filed with the SEC on March 12,
2004.  Please  review  "SAFE  HARBOR  FOR  FORWARD-LOOKING   STATEMENTS"  for  a
discussion  of the factors that may impact any such  forward-looking  statements
made herein.

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

This discussion  should be read in conjunction with the  accompanying  financial
statements  found elsewhere in this report and in conjunction with the 2003 Form
10-K.

RESULTS OF OPERATIONS

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

o    Progress Energy  Carolinas  Electric (PEC Electric) - primarily  engaged in
     the  generation,  transmission,  distribution  and sale of  electricity  in
     portions of North Carolina and South Carolina;
o    Progress  Energy  Florida  (PEF) -  primarily  engaged  in the  generation,
     transmission, distribution and sale of electricity in portions of Florida;
o    Competitive  Commercial Operations (CCO) - engaged in nonregulated electric
     generation   operations   and   marketing   activities   primarily  in  the
     southeastern United States;
o    Fuels - primarily  engaged in natural gas drilling and  production in Texas
     and  Louisiana,  coal terminal  services,  coal mining,  the  production of
     synthetic fuels and related services, and fuel transportation and delivery,
     all of which are located in Kentucky, West Virginia, and Virginia;
o    Rail Services (Rail) - engaged in various rail and railcar related services
     in 23 states, Mexico and Canada; and
o    Other Businesses  (Other) - engaged in other  nonregulated  business areas,
     including  telecommunications  primarily in the eastern  United  States and
     energy service operations,  which do not meet the requirements for separate
     segment reporting disclosure.

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

OVERVIEW

For the  quarter  ended June 30,  2004,  Progress  Energy's  net income was $154
million or $0.63 per share  compared to $157  million or $0.66 per share for the
same period in 2003. For the six months ended June 30, 2004,  Progress  Energy's
net income was $262 million or $1.08 per share compared to $376 million or $1.60
per share for the same period in 2003. The decrease in net income as compared to
prior year was due primarily to:

o    Lower off-system wholesale sales, primarily by PEC Electric.
o    Higher  operations  and  maintenance  (O&M) costs at the  utilities  due to
     increased  spending for plant outages in both the Carolinas and Florida and
     planned reliability improvements in Florida.
o    Recording of litigation settlement reached in the civil suit by SRS.
o    Decreased  nonregulated  generation  earnings  due to receipt of a contract
     termination  payment on a tolling  agreement in 2003 and higher fixed costs
     and interest charges in 2004.
o    Unrealized losses recorded on contingent value obligations.
o    The impact of tax levelization.

                                       46
<PAGE>

Partially offsetting these items were:

o    Favorable weather in the Carolinas.
o    Reduction in revenue sharing provisions in Florida
o    Utility customer growth in both the Carolinas and Florida.
o    Lower depreciation and amortization costs at the utilities.
o    Increased natural gas earnings.

Basic earnings per share  decreased in 2004 due in part to the factors  outlined
above. Dilution related to the issuances under the Company's Investor Plus Stock
Purchase Plan and employee  benefit programs in 2003 and 2004 also reduced basic
earnings per share by $0.02 for the second quarter of 2004 and $0.04 for the six
months ended June 30, 2004.

Beginning in the fourth quarter of 2003, the Company ceased  recording  portions
of Fuels segment's operations, primarily synthetic fuel facilities, one month in
arrears. As a result,  earnings for the year ended December 31, 2003 included 13
months of operations,  resulting in a net income  increase of $2 million for the
year. The Company restated previously reported  consolidated  quarterly earnings
to reflect the new reporting  periods which resulted in four months  earnings in
the first  quarter  of 2003 and  changed  reported  net  income  for  subsequent
quarters. Earnings increased $4 million and $15 million,  respectively,  for the
three and six  months  ended June 30,  2003 as  compared  to amounts  originally
reported.

The Company's segments contributed the following profits or losses for the three
and six months ended June 30, 2004 and 2003:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

--------------------------------------------------------------------------------------
(in millions)                                 Three Months Ended     Six Months Ended
                                                   June 30               June 30
--------------------------------------------------------------------------------------

Business Segment                                  2004      2003      2004      2003
-------------------------------------------------------------------------------------
PEC Electric                                  $     97     $  89    $  213    $  223
PEF                                                 84        61       133       132
Fuels                                               56        58       104        97
CCO                                                  5         2        (3)       11
Rail                                                 4         2         9        (1)
Other                                              (30)        -       (31)        1
                                            -----------------------------------------
    Total Segment Profit                           216       212       425       463
Corporate                                          (63)      (58)     (164)     (102)
                                            -----------------------------------------
Income from continuing operations                  153       154       261       361
NCNG discontinued operations                         1         3         1        14
Cumulative effect of change in accounting
      principle, net of tax                          -         -         -         1
                                            -----------------------------------------
    Net income                                $    154     $ 157    $  262    $  376
-------------------------------------------------------------------------------------
</TABLE>

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


                                       47
<PAGE>

PROGRESS ENERGY CAROLINAS ELECTRIC

PEC Electric  contributed segment profits of $97 million and $89 million for the
three months ended March 31, 2004 and 2003,  respectively,  and $213 million and
$223 million for the six months ended June 30, 2004 and 2003, respectively.  The
increase in profits for the three  months ended June 30, 2004 as compared to the
same period in 2003 is due  primarily to favorable  weather,  increased  revenue
from customer growth, lower depreciation and amortization charges and the impact
of losses  booked on  investments  in limited  partnerships  in 2003,  partially
offset by higher  operations and maintenance  charges and lower wholesale sales.
The  decrease in profits  for the six months  ended June 30, 2004 as compared to
the same period in 2003 is primarily due to lower off-system wholesale sales and
higher  O&M  charges,  partially  offset by the  favorable  impact  of  weather,
increased  revenues from customer growth and lower depreciation and amortization
charges.

PEC  Electric's  revenues  for the three and six months  ended June 30, 2004 and
2003, and the percentage change by customer class are as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

-----------------------------------------------------------------------------------------------------
(in millions of $)                 Three Months Ended June 30           Six Months Ended June 30
-----------------------------------------------------------------------------------------------------
Customer Class                 2004    Change    % Change   2003      2004  Change   % Change    2003
-----------------------------------------------------------------------------------------------------
Residential                 $   284    $   36      14.5    $ 248   $   655   $   50     8.3   $   605
Commercial                      213        14       7.0      199       420       20     5.0       400
Industrial                      161         5       3.2      156       308        6     2.0       302
Governmental                     19         1       5.6       18        38        2     5.6        36
                            ------------------           --------------------------         ---------
    Total retail revenues       677        56       9.0      621     1,421       78     5.8     1,343
Wholesale                       139       (15)     (9.7)     154       295      (69)  (19.0)      364
Unbilled                         24         1                 23         1        8                (7)
Miscellaneous                    21         3      16.7       18        45        3     7.1        42
                            ------------------           --------------------------         ---------
  Total electric revenues    $  861    $   45       5.5    $ 816   $ 1,762   $   20     1.1   $ 1,742
-----------------------------------------------------------------------------------------------------
</TABLE>

PEC Electric's energy sales for the three and six months ended June 30, 2004 and
2003, and the amount and percentage change by customer class are as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

-------------------------------------------------------------------------------------------------------
(in thousands of mWh)              Three Months Ended June 30             Six Months Ended June 30
-------------------------------------------------------------------------------------------------------
Customer Class                 2004    Change   % Change    2003     2004   Change   % Change     2003
-------------------------------------------------------------------------------------------------------
Residential                   3,525       473      15.5    3,052    8,266      627       8.2     7,639
Commercial                    3,172       226       7.7    2,946    6,230      300       5.1     5,930
Industrial                    3,280        83       2.6    3,197    6,273       71       1.1     6,202
Governmental                    337        20       6.3      317      682       22       3.3       660
                            ------------------           --------------------------           ---------
    Total retail revenues    10,314       802       8.4    9,512   21,451    1,020       5.0    20,431
Wholesale                     3,114      (187)     (5.7)   3,301    6,904   (1,016)    (12.8)    7,920
Unbilled                        404         8                396       20      104                 (84)
                            ------------------           --------------------------           ---------
  Total mWh sales            13,832       623       4.7   13,209   28,375      108       0.4    28,267
-------------------------------------------------------------------------------------------------------
</TABLE>

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

PEC Electric's revenues, excluding recoverable fuel revenues of $156 million and
$137 million for the three  months  ended June 30, 2004 and 2003,  respectively,
increased  $26 million.  The increase in revenues was due primarily to favorable
weather,  with cooling  degree days 59% above prior year. In addition,  customer
growth was  favorable  compared to prior year.  PEC Electric  has  approximately
26,000  additional  customers as of June 30, 2004 compared to June 30, 2003. The
increase in retail  revenues  was offset  partially  by a reduction in wholesale
revenues.  Revenues  for  the  quarter  ended  June  30,  2003  included  strong
off-system  wholesale  sales to the  Northeastern  United States in the month of
April as a result of favorable market conditions.

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

                                       48
<PAGE>

Fuel and purchased  power  expenses  increased $27 million from $246 million for
the three  months ended June 30, 2003 to $273 million for the three months ended
June 30, 2004.  Fuel used in electric  generation  increased $16 million to $193
compared to the same period in the prior year. This increase is primarily due to
higher  system  requirements  caused by favorable  weather and customer  growth.
Purchased power expenses  increased $11 million to $80 million compared to prior
year due primarily to an increase in price.

O&M costs were $226  million for the three  months  ended June 30,  2004,  which
represents a $16 million increase compared to the same period in 2003. O&M costs
increased $13 million  primarily due to an increase in outage scope and duration
at the nuclear plants.

Depreciation  and amortization  expense  decreased $15 million from $142 million
for the quarter  ended June 30, 2003 to $127 million for the quarter  ended June
30,  2004.  During the first  half of 2004,  PEC  Electric  filed with the North
Carolina  Utilities  Commission  (NCUC)  and  obtained  approval  from the South
Carolina  Public  Service  Commission  (SCPSC)  for a  depreciation  study which
allowed the utility to reduce the rates used to calculate  depreciation expense.
The new depreciation study provides support for reducing depreciation expense on
an annual  basis by  approximately  $40  million  for  2004.  The  reduction  in
depreciation  expense is  primarily  attributable  to extended  lives of nuclear
generation,   offset  by  increases  for  distribution   assets.   As  a  result
depreciation  expense  decreased $10 million compared to the prior year quarter.
In addition,  clean air amortization decreased $18 million compared to the prior
year.  These items were partially offset by higher  depreciation  expense due to
assets  placed  in  service  of $4  million  and  the  impact  of a $14  million
adjustment booked in 2003 related to the  implementation of SFAS No. 143. In the
prior  year,  PEC  filed a  request  with the NCUC  requesting  deferral  of the
difference  between  expense  pursuant to SFAS No. 143 and expense as previously
determined by the NCUC. The NCUC granted  deferral of the cumulative  adjustment
but denied deferral of the ongoing effects.  As a result, PEC ceased deferral of
the  ongoing  effects  during  the second  quarter of 2003  related to its North
Carolina retail rate jurisdictions. This resulted in a reduction of depreciation
and  amortization  expense  for the  quarter  ended June 30, 2003 of $14 million
which represented a decrease in non-ARO cost of removal expense partially offset
by an increase in decommissioning  expense.  In August of 2003, the NCUC revised
its  decision and  approved  deferral of the ongoing  effects of SFAS No. 143 at
which time the $14 million reduction was reversed.

Other  expenses  have  decreased $12 million for the three months ended June 30,
2004 as  compared  to the same  period  in the  prior  year.  This  decrease  is
primarily due to losses on limited investment partnerships recorded in 2003.

Taxes other than on income have  increased  $10 million from $35 million for the
three  months ended June 30, 2003 to $45 million for the three months ended June
30,  2004.  This  increase is due to an increase in gross  receipts  taxes of $5
million related to an increase in revenues and a 2004 adjustment  related to the
prior year, and an increase in payroll taxes of $3 million.

Six months ended June 30, 2004 compared to the six months ended June 30, 2003

PEC Electric's revenues, excluding recoverable fuel revenues of $322 million and
$293  million  for the six months  ended June 30,  2004 and 2003,  respectively,
decreased  $9  million.  The  decrease in revenues  was due  primarily  to lower
wholesale sales. Revenues for the six months ended June 30, 2003 included strong
sales  to the  Northeastern  United  States  as a  result  of  favorable  market
conditions.  The decline in wholesale revenues was partially offset by increased
retail revenues as a result of favorable  weather,  with cooling degree days 58%
above prior year. In addition,  favorable  customer growth  partially offset the
decrease in wholesale sales.

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

Fuel and  purchased  power  expenses  were $559 million for the six months ended
June 30,  2004,  which  represents a $14 million  increase  compared to the same
period in the prior  year.  This  increase  is  primarily  due to higher  system
requirements caused by favorable weather and customer growth.

                                       49
<PAGE>

O&M costs were $435  million  for the six  months  ended  June 30,  2004,  which
represents  a $35 million  increase  compared  to the same  period in 2003.  O&M
charges  were  favorably  impacted  by $16  million  related to the  retroactive
reallocation of Service Company costs in the prior year. In addition,  O&M costs
increased $18 million  primarily due to an increase in outage scope and duration
at the nuclear plants.

Depreciation  and amortization  expense  decreased $27 million from $281 million
for the six months  ended June 30, 2003 to $254 million for the six months ended
June 30, 2004. As previously  discussed,  PEC filed a  depreciation  study which
allowed the utility to reduce the rates used to calculate  depreciation expense.
The impact of the study for the six months  ended June 30,  2004 was a reduction
of  depreciation  of $18  million  compared  to the same prior year  period.  In
addition,  clean  air  amortization  for the six  months  ended  June  30,  2004
decreased $23 million  compared to the same prior year period.  These items were
partially offset by higher depreciation  expense due to assets placed in service
of $8  million  and the $14  million  impact  of the  adjustment  booked in 2003
related to the implementation of SFAS No. 143 as previously discussed.

Taxes other than on income have  increased  $9 million  from $79 million for the
six months  ended June 30, 2003 to $88 million for the six months ended June 30,
2004.  This increase is due to an increase in gross receipts taxes of $5 million
related to an increase in revenues  and a 2004  adjustment  related to the prior
year, and an increase in property taxes of $2 million.

PROGRESS ENERGY FLORIDA

PEF  contributed  segment  profits of $84  million and $61 million for the three
months  ended June 30, 2004 and 2003,  respectively,  and $133  million and $132
million  for the six months  ended  June 30,  2004 and 2003,  respectively.  The
increase in profits for the three  months  ended June 30, 2004 when  compared to
2003 is primarily due to a reduction in the provision for revenue  sharing,  the
additional  return on investment  for the Hines 2 plant and  favorable  customer
growth. Profits for the six months ended June 30, 2004 increased slightly due to
a reduction in the provision for revenue sharing, favorable customer growth, and
the additional  return on investment on the Hines 2 plant,  partially  offset by
higher O&M charges and  increased  depreciation  expense  from assets  placed in
service.

PEF's  electric  revenues  for the three and six months  ended June 30, 2004 and
2003, and the amount and percentage change by customer class are as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

--------------------------------------------------------------------------------------------------------
(in millions of $)                Three Months Ended June 30             Six Months Ended June 30
--------------------------------------------------------------------------------------------------------
Customer Class                 2004   Change   % Change     2003     2004   Change   % Change      2003
--------------------------------------------------------------------------------------------------------
Residential                  $  422   $    8       1.9    $  414  $   824   $   26       3.3    $   798
Commercial                      214       22      11.5       192      395       53      15.5        342
Industrial                       66       10      17.9        56      128       24      23.1        104
Governmental                     52        6      13.0        46       99       15      17.9         84
Retail revenue sharing           (3)      25                 (28)      (7)      21                  (28)
                            -----------------           ---------------------------           ----------
    Total retail revenues       751       71      10.4       680    1,439      139      10.7      1,300
Wholesale                        53        3       6.0        50      120       (1)     (0.8)        121
Unbilled                         24       17                   7       18       11                    7
Miscellaneous                    32        2       6.7        30       67        -         -         67
                            -----------------           ---------------------------           ----------
  Total electric revenues    $  860   $   93      12.1    $  767  $ 1,644   $  149      10.0    $ 1,495
--------------------------------------------------------------------------------------------------------
</TABLE>

PEF's electric energy sales for the three and six months ended June 30, 2004 and
2003, and the amount and percentage change by customer class are as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

--------------------------------------------------------------------------------------------------------
(in thousands of mWh)             Three Months Ended June 30             Six Months Ended June 30
--------------------------------------------------------------------------------------------------------
Customer Class                 2004   Change   % Change     2003      2004    Change   % Change     2003
--------------------------------------------------------------------------------------------------------
Residential                   4,505     (198)     (4.2)     4,703    8,797     (459)     (5.0)     9,256
Commercial                    2,941      (10)     (0.3)     2,951    5,431       38       0.7      5,393
Industrial                    1,051       43       4.3      1,008    2,074      150       7.8      1,924
Governmental                    751        9       1.2        742    1,423       25       1.8      1,398
                            -----------------           ---------------------------           ----------
  Total retail energy sales   9,248     (156)     (1.7)     9,404   17,725     (246)     (1.4)    17,971
Wholesale                     1,093      203      22.8        890    2,415      249      11.5      2,166
Unbilled                        790      292                  498      655      101                  554
                            -----------------           ---------------------------           ----------
  Total mWh sales            11,131      339       3.1     10,792   20,795      104       0.5     20,691
--------------------------------------------------------------------------------------------------------
</TABLE>


                                       50
<PAGE>

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

PEF's revenues,  excluding  recoverable fuel and other pass-through  revenues of
$479 million and $422 million for the three months ended June 30, 2004 and 2003,
respectively,  increased  $36  million.  This  increase  was due  primarily to a
reduction in the provision for revenue sharing of $25 million. The provision for
revenue  sharing in the prior year included an additional $18 million related to
2002 as ordered by the FPSC and the year to date  accrual  for 2003 which was $7
million  higher than the  provisions  recorded  during 2004.  Revenues were also
increased $11 million and $10 million,  respectively,  due to favorable customer
growth and the return on  investment on Hines Unit 2 which was placed in service
December 2003. PEF has approximately  37,000 additional customers as of June 30,
2004  compared  to June  30,  2003.  Based  on the  Stipulation  and  Settlement
Agreement  reached with the FPSC in April 2002,  beginning  with the  in-service
date of PEF's Hines Unit 2 and  continuing  through  December  2005, PEF will be
allowed to recover  through  the fuel cost  recovery  clause a return on average
investment and  depreciation  expense for Hines Unit 2, to the extent such costs
do not exceed the Unit's cumulative fuel savings over the recovery period. These
increases were  partially  offset by the impact of milder weather in the current
year of approximately $5 million.

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

Fuel and purchased  power  expenses  increased $57 million from $358 million for
the three  months ended June 30, 2003 to $415 million for the three months ended
June 30, 2004.  This increase is  attributable  primarily to an increase in fuel
used  in  electric  generation  which  increased  $59  million.   Higher  system
requirements  and  increased  fuel costs in the  current  year  account  for $32
million of the  increase  in fuel used in  electric  generation.  The  remaining
increase is due to the recovery of fuel expenses that were deferred in the prior
year, as well as the deferral of current year expenses.

O&M costs  decreased  $2 million,  when  compared to the $154  million  incurred
during the three months ended June 30, 2003. This decrease is primarily  related
to the timing of outages and maintenance at generation  facilities of $3 million
and a  reduction  in costs  allocated  from the  Service  Company  of $1 million
partially   offset  by  higher  costs   associated   with  planned   reliability
improvements of approximately $2 million.

Depreciation  and  amortization  decreased $8 million  when  compared to the $80
million  incurred during the three months ended June 30, 2003,  primarily due to
the  amortization of the Tiger Bay regulatory asset in the prior year. The Tiger
Bay regulatory asset, for contract  termination costs, was recovered pursuant to
an  agreement  between  PEF which was  approved  by the FPSC in 1997 and as such
fluctuations  in this  expense  did not have an impact on  earnings.  During the
second quarter of 2003, Tiger Bay  amortization  was $15 million.  The Tiger Bay
asset  was  fully  amortized  in  September  2003.  The  decrease  in Tiger  Bay
amortization was partially  offset by additional  depreciation for assets placed
in service.

Six months ended June 30, 2004 compared to the six months ended June 30, 2003

PEF's revenues,  excluding  recoverable fuel and other pass-through  revenues of
$926  million and $794  million for the six months ended June 30, 2004 and 2003,
respectively,  increased  $17  million.  This  increase  was due  primarily to a
reduction in the provision for revenue sharing of $21 million.  Results for 2003
included the accrual of an  additional  $18 million  related to the 2002 revenue
sharing  provision  as ordered  by the FPSC in June of 2003.  In  addition,  the
return on investment on Hines 2 and favorable customer growth increased revenues
by $19 million and $9 million,  respectively.  These  increases  were  partially
offset by the impact of milder weather in the current year of approximately  $17
million.

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

                                       51
<PAGE>

Fuel and  purchased  power  expenses  were $805 million for the six months ended
June 30, 2004,  which  represents a $132 million  increase  compared to the same
period in the prior  year.  This  increase is due to an increase in fuel used in
electric  generation  of $143 million  offset by a reduction in purchased  power
costs. This increase in fuel used in electric  generation is due to the recovery
of fuel  expenses  that were deferred in the prior year, as well as the deferral
of current year fuel expenses. In November 2003, the FPSC approved PEF's request
for a cost adjustment in its annual fuel filing due to the rising costs of fuel.
The new rates became  effective  January 2004.  The decrease in purchased  power
expense of $11  million is  attributable  primarily  to the Hines 2 Plant  being
placed in service in December of 2003,  thereby  reducing the need for purchased
power.

O&M costs  increased  $17 million,  when  compared to the $295 million  incurred
during the six months ended June 30, 2003. This increase is primarily related to
higher costs  associated  with scheduled  plant outages and planned  reliability
improvements of approximately $9 million each.

Depreciation  and  amortization  decreased $18 million when compared to the $159
million incurred during the six months ended June 30, 2003, primarily due to the
amortization of the Tiger Bay regulatory  asset in the prior year. The Tiger Bay
regulatory asset, for contract  termination  costs, was recovered pursuant to an
agreement  between  PEF  which  was  approved  by the FPSC in 1997,  and as such
fluctuations in this expense did not have an impact on earnings.  During the six
months ended June 30, 2003, Tiger Bay  amortization  was $30 million.  The Tiger
Bay asset was fully  amortized  in  September  2003.  The  decrease in Tiger Bay
amortization was partially  offset by additional  depreciation for assets placed
in service.

DIVERSIFIED BUSINESSES

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

FUELS

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

The following  summarizes  Fuels'  segment  profits for the three and six months
ended June 30, 2004 and 2003:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

-----------------------------------------------------------------------------------------
                                   Three Months Ended June 30    Six Months Ended June 30
-----------------------------------------------------------------------------------------
(in millions)                               2004      2003          2004       2003
-----------------------------------------------------------------------------------------
  Synthetic fuel operations                 $ 36       $49         $  72        $83
  Gas production                              12         9            25         16
  Coal fuel and other operations               8         -             7        (2)
                                      ---------------------------------------------------
     Segments Profits                       $ 56       $58         $ 104        $97
-----------------------------------------------------------------------------------------
</TABLE>

Synthetic Fuel Operations

The  synthetic  fuel  operations  generated  net  profits of $36 million and $49
million for the three months ended June 30, 2004 and 2003, respectively, and $72
million  and $83  million  for the six  months  ended  June 30,  2004 and  2003,
respectively.  The  production  and sale of synthetic  fuel  generate  operating
losses,  but qualify for tax credits  under  Section 29 of the Code,  which more
than offset the effect of such losses.  See Note 12 to the Progress Energy Notes
to the  Consolidated  Interim  Financial  Statements  for further  discussion of
synthetic fuel tax credit matters.

The operations resulted in the following for the three and six months ended June
30, 2004 and 2003:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

--------------------------------------------------------------------------------------------------
                                            Three Months Ended June 30    Six Months Ended June 30
--------------------------------------------------------------------------------------------------
(in millions)                                       2004         2003         2004         2003
--------------------------------------------------------------------------------------------------
Tons sold                                            2.7          3.0          5.7          5.5
                                           -------------------------------------------------------

Operating losses, excluding tax credits           $  (35)     $   (33)      $  (77)     $   (65)
Tax credits generated                                 71           82          149          148
                                           -------------------------------------------------------
    Net profits                                   $   36      $    49       $   72      $    83
--------------------------------------------------------------------------------------------------
</TABLE>


                                       52
<PAGE>

Synthetic  fuels' net profits  decreased in the three months ended June 30, 2004
as compared to the same period in 2003 due  primarily  to a reduction in credits
earned of $4 million as a result of a decrease  in tons sold and an  increase in
operating cost of $4 million after-tax.  Synthetic fuel profits decreased in the
six months ended June 30, 2004 due  primarily to increases in operating  cost of
$10  million.  The  Company  anticipates  total  synthetic  fuel  production  of
approximately  11 to 12  million  tons for  2004  which  is  comparable  to 2003
production levels.

Natural Gas Operations

Natural gas operations  generated  profits of $12 million and $9 million for the
three months ended June 30, 2004 and 2003, respectively, and $25 million and $16
million  for the six  months  ended  June 30,  2004 and 2003.  The  increase  in
production  resulting  from the  acquisition of North Texas Gas in late February
2003 and  increased  drilling  and  higher  gas  prices in 2004  contributed  to
increased  earnings in 2004 as compared to 2003.  In October  2003,  the Company
completed  the  sale  of  certain  gas  producing   properties   owned  by  Mesa
Hydrocarbons,  LLC. The following  summarizes the gas  production,  revenues and
gross  margins  for the three and six  months  ended  June 30,  2004 and 2003 by
production facility:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

-----------------------------------------------------------------------------------------------------
                                               Three Months Ended June 30    Six Months Ended June 30
-----------------------------------------------------------------------------------------------------
                                                       2004         2003         2004         2003
-----------------------------------------------------------------------------------------------------
         Production in Bcf equivalent
Mesa                                                      -          1.5            -          3.2
Westchester                                             4.9          3.1          9.0          6.3
North Texas Gas                                         2.7          1.8          5.3          2.4
                                             --------------------------------------------------------
    Total Production                                    7.6          6.4         14.3         11.9
                                             --------------------------------------------------------

             Revenues in millions
Mesa                                                   $  -         $  3         $  -         $  8
Westchester                                              26           16           48           31
North Texas Gas                                          14           10           27           14
                                             --------------------------------------------------------
    Total Revenues                                     $ 40         $ 29         $ 75         $ 53
                                             --------------------------------------------------------

                 Gross Margin
in millions of $                                       $ 33         $ 24         $ 60         $ 43
As a % of revenues                                       83%          83%          80%          81%
-----------------------------------------------------------------------------------------------------
</TABLE>

Coal Fuel and Other Operations

Coal fuel and other operations  generated  segment profits of $8 million for the
three  months  ended June 30,  2004  compared  to zero  segment  profits for the
comparable  period in the prior year.  For the six months  ended June 30,  2004,
coal fuel and other operations  generated segment profits of $7 million compared
to a segment  loss of $2 million  for the  comparable  period in the prior year.
This  increase  in  profits  for the  quarter  and year to date is due to higher
volumes and margins for coal fuel operations of $9 million after-tax offset by a
reduction in profits of $4 million after-tax for fuel transportation  operations
related to the waterborne  transportation ruling by the FPSC. See Note 4A of the
Progress  Energy  Consolidated  Interim  Financial  Statements.  The increase in
profits is also due to the impact of the retroactive  Service Company allocation
in the prior year. Results in the same period for the prior year were negatively
impacted by the retroactive  reallocation of Service Company costs of $4 million
after-tax.

COMPETiTIVE COMMERCIAL OPERATIONS

CCO's  operations  generated  segment profits of $5 million for the three months
ended June 30, 2004 compared to $2 million of segment profits for the comparable
period in the prior year.  Results for the three months ended June 30, 2004 were
favorably  impacted by margins on new  contracts and market sales of $15 million
partially offset by an increase in fixed costs. Fixed costs increased $6 million
from additional  depreciation  and  amortization on plants placed in service and
from an increase in interest  expense of $4 million due primarily to interest no
longer being  capitalized  due to the  completion of  construction  in the prior
year.

CCO's operations generated segment losses of $3 million for the six months ended
June 30,  2004  compared to $11  million of segment  profits for the  comparable
period in the prior year.  Results  for the six months  ended June 30, 2004 were
favorably  impacted by  increased  gross margin which was offset by higher fixed
costs.  Revenues increased a net of $34 million in the six months ended June 30,
2004 due to increased  revenues from marketing and tolling contracts offset by a
termination  payment received on a marketing contract in 2003 and mark to market
losses of $10  million.  Expenses  for the cost of fuel and  purchased  power to


                                       53
<PAGE>

supply our marketing  contracts offset the increased revenues of $34M netting to
an increase in gross margin of $4 million for the six months ended June 30, 2004
as compared to the same prior year  period.  Fixed costs  increased  $14 million
from additional  depreciation  and amortization on plants placed into service in
2003 and from an increase in interest  expense of $10 million due  primarily  to
interest no longer being  capitalized  due to the completion of  construction in
the prior year.  Expenses  were  favorably  impacted  by a reduction  in Service
Company   allocations.   Results  for  2003  were  negatively  impacted  by  the
retroactive  reallocation  of Service  Company  costs of $3 million  ($2 million
after-tax).

--------------------------------------------------------------------------------
                           Three Months Ended June 30   Six Months Ended June 30
--------------------------------------------------------------------------------
(in millions)                    2004         2003          2004        2003
--------------------------------------------------------------------------------
Total revenues                   $ 72         $ 33         $ 105        $ 71
                           -----------------------------------------------------
Gross margin
   In millions of $              $ 42         $ 27         $  65        $ 61
   As a % of revenues              58%          82%           62%         86%
                           -----------------------------------------------------
Segment profits (losses)         $  5         $  2         $  (3)       $ 11
--------------------------------------------------------------------------------

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

RAIL

Rail's operations include railcar and locomotive repair,  trackwork,  rail parts
reconditioning and sales, scrap metal recycling and other rail related services.
The  Company  sold the  majority  of the  assets  of  Railcar  Ltd.,  a  leasing
subsidiary,  in  2004.  See  Note  3B  of  the  Progress  Energy  Notes  to  the
Consolidated Interim Financial Statements.

Rail  contributed  segment  profits of $4 million  and $2 million  for the three
months ended June 30, 2004 and 2003,  respectively.  Revenues have increased $71
million to $285 million for the three months ended June 30, 2004 compared to the
same  period in the prior year.  This  increase is due  primarily  to  increased
volumes  and higher  prices in  recycling  operations  and in part to  increased
production  and sales in locomotive  and railcar  services and  engineering  and
track  services.  Cost of goods sold  increased  $62  million  compared  to $188
million  in the  prior  year.  The  increase  in  costs  of good  sold is due to
increased costs for inventory, labor and operations as a result of the increased
volume  in  the  recycling  operations,  locomotive  and  railcar  services  and
engineering  and track  services.  The  increase  in margins  of $9 million  was
partially  offset by an  increase in general and  administrative  costs  related
primarily to higher professional fees.

Rail contributed  segment profit of $9 million for the six months ended June 30,
2004 compared with a segment loss of $1 million for the same period in the prior
year.  Revenues have  increased  $130 million to $523 million for the six months
ended June 30, 2004 compared to the same period in the prior year. This increase
is due primarily to increased volumes and higher prices in recycling  operations
and in part to increased production and sales in locomotive and railcar services
and engineering  and track  services.  Cost of goods sold increased $112 million
compared to $455  million in the prior year.  The increase in costs of good sold
is due to increased costs for inventory, labor and operations as a result of the
increased  volume in the recycling  operations,  locomotive and railcar services
and engineering  and track  services.  Results in the prior year were negatively
impacted by the retroactive  reallocation of Service Company costs of $3 million
after-tax.  The  favorability  related  to the  reallocation  was  offset  by an
increase  in  general  and  administrative  costs in the  current  year  related
primarily to higher professional fees.

OTHER BUSINESSES SEGMENT

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

SRS  recorded a net loss of $29 million for the three months ended June 30, 2004
compared  with  profits of less than $1 million for the same period in the prior
year.  SRS  recorded a net loss of $29 million for the six months ended June 30,
2004  compared  to a net loss of less than $1 million  for the six months  ended
June 30, 2004.  The  increased  segment  loss  compared to the prior year is due
primarily  to the  recording  of the  litigation  settlement  reached  with  San
Francisco United School District related to civil proceedings.  In June of 2004,
SRS reached a settlement with the District which settled all outstanding  claims
for approximately $43 million pre-tax ($29 million after-tax).

                                       54
<PAGE>

CORPORATE SERVICES

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

------------------------------------------------------------------------------------------
                                   Three Months Ended June 30     Six Months Ended June 30
------------------------------------------------------------------------------------------
(in millions)                           2004          2003            2004          2003
------------------------------------------------------------------------------------------
  Other interest expense              $ (66)        $ (70)         $ (139)       $ (141)
  Contingent value obligations           (5)           (2)            (13)            -
  Tax levelization                       (5)           (5)            (43)            5
  Tax reallocation                       (9)           (9)            (18)          (18)
  Other income taxes                     28            31              65            62
  Other                                  (6)           (3)            (16)          (10)
                                   -------------------------------------------------------
    Segment profit (loss)             $ (63)        $ (58)         $ (164)       $ (102)
------------------------------------------------------------------------------------------
</TABLE>

Other  interest  expense  decreased  $4 million  compared to $70 million for the
three months  ended June 30, 2003 and it  decreased $2 million  compared to $141
million  for the six months  ended June 30,  2003.  Interest  expense  decreased
during the current periods due to the repayment of a $500 million unsecured note
by the Holding  company on March 1, 2004 which  reduced  interest  expense by $8
million  pre-tax for the quarter and year to date.  This reduction was offset by
interest no longer being  capitalized  due to the completion of  construction at
the CCO  segment  in the  prior  year.  Approximately  $4  million  ($2  million
after-tax) and $10 million ($6  after-tax) was  capitalized in the three and six
months ended June 30, 2003, respectively.

Progress  Energy  issued 98.6 million  contingent  value  obligations  (CVOs) in
connection  with the 2000 FPC  acquisition.  Each CVO  represents  the  right to
receive  contingent  payments  based on the  performance  of four synthetic fuel
facilities owned by Progress Energy. The payments,  if any, are based on the net
after-tax  cash flows the  facilities  generate.  At June 30, 2004 and 2003, the
CVOs had fair  market  values of  approximately  $36  million  and $14  million,
respectively.  Progress  Energy recorded an unrealized loss of $5 million and $2
million  for the three  months  ended June 30, 2004 and 2003,  respectively,  to
record the changes in fair value of the CVOs,  which had average  unit prices of
$0.36  and  $0.14  at June 30,  2004 and  2003,  respectively.  Progress  Energy
recorded an  unrealized  loss of $13 million for six months ended June 30, 2004.
The CVO values at June 30, 2003 were  unchanged from the January 1, 2003 values,
thus  requiring no  recognition  of  unrealized  gain or loss for the six months
ended June 30, 2003.

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 for the three months ended June 30, 2004
and 2003,  respectively,  in order to maintain an effective tax rate  consistent
with the estimated annual rate.  Income tax expense was increased by $43 million
and  decreased  by $5 million  for the six months  ended June 30, 2004 and 2003,
respectively.  The tax credits  associated  with the  Company's  synthetic  fuel
operations  primarily drive the required  levelization  amount.  Fluctuations in
estimated  annual  earnings  and tax credits can also cause large  swings in the
effective tax rate for interim  periods.  Therefore,  this  adjustment will vary
each quarter, but will have no effect on net income for the year.

Other expenses  increased $3 million and $6 million for the three and six months
ended June 30, 2004 and 2003,  respectively,  as compared to the same prior year
periods.  This increase is due primarily to an increase in depreciation  expense
at the Service Company due to assets being placed in service.

DISCONTINUED OPERATIONS

In 2002, the Company  approved the sale of NCNG to Piedmont Natural Gas Company,
Inc. The sale closed on September 30, 2003. Net proceeds of  approximately  $443
million from the sale of NCNG were used to reduce  outstanding  short-term debt.
NCNG  contributed  $1 million of net income for the three  months ended June 30,
2004  compared  with $3 million  of net  income for the same prior year  period.
During the three months ended June 30, 2004, the Company  recorded an additional
gain after taxes of  approximately  $1 million  related to deferred taxes on the
loss from the NCNG sale.  NCNG  contributed $1 million of net income for the six
months ended June 30, 2004 compared to $14 million for the comparable prior year
period.

                                       55
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

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

Net cash provided by operating  activities of $915 million  increased $8 million
for the six months  ended June 30,  2004,  when  compared to $907 million in the
corresponding  period in the prior  year.  The slight  improvement  in cash from
operating  activities for the 2004 period is primarily due to approximately $100
million  of lower  operating  cash  flow at PEF for the  period  in 2003,  which
resulted from an under recovery of fuel costs, and reduced working capital needs
of nearly $50  million in the  current  year.  These  improvements  in cash from
operating  activities  were partially  offset by a $114 million  decrease in net
income for the period.

Net cash used in investing activities of $591 million decreased $604 million for
the six  months  ended  June 30,  2004,  when  compared  to $1.2  billion in the
corresponding period in the prior year. The decrease is primarily due to reduced
nonregulated  capital  expenditures,  primarily  the purchase of North Texas Gas
assets and a long-term  power supply  contract during the first half of 2003. In
addition,  proceeds from the sale of Railcar Ltd.  assets  reduced net investing
cash requirements during the first half of 2004.

For the first six months of 2004,  Progress  Energy's cash from  operations less
cash used in investing  activities  increased  approximately  $600 million.  The
improvement was due to the reduction in capital  expenditures  discussed  above.
The positive cash flow combined with the equity issuance of $58 million,  helped
reduce the  Company's  consolidated  leverage to 58.2% from 58.9% as of December
31, 2003.

Progress Energy took advantage of favorable market conditions and entered into a
new $1.1  billion  five year line of  credit,  effective  August  5,  2004,  and
expiring August 4, 2009. This facility  replaces  Progress Energy's $250 million
364 day line of credit and its  three-year  $450 million  line of credit,  which
were set to expire in November 2004.

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

On April 30, 2004, PEC redeemed  $34.7 million of Darlington  County 6.6% Series
Pollution  Control Bonds at 102.5% of par,  $1.795 million of New Hanover County
6.3%  Series  Pollution  Control  Bonds at 101.5% of par,  and $2.58  million of
Chatham  County 6.3% Series  Pollution  Control Bonds at 101.5% of par with cash
from operations.

On March 1, 2004,  Progress  Energy used  available  cash and proceeds  from the
issuance of  commercial  paper to retire $500  million  6.55%  senior  unsecured
notes.  Cash and commercial paper capacity were created  primarily from the sale
of assets and early long term debt financings in 2003.

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

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

For the six months ended June 30, 2004,  the Company  issued  approximately  1.3
million  shares  representing  approximately  $58 million in  proceeds  from its
Investor Plus Stock Purchase Plan and its employee  benefit  plans.  For the six
months  ended June 30, 2004 and 2003,  the  dividends  paid on common stock were
approximately $280 million and $268 million, respectively.

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

                                       56
<PAGE>

The amount  and timing of future  sales of  company  securities  will  depend on
market  conditions,  operating cash flow,  asset sales and the specific needs of
the Company. The Company may from time to time sell securities beyond the amount
needed to meet capital  requirements in order to allow for the early  redemption
of  long-term  debt,  the  redemption  of  preferred  stock,  the  reduction  of
short-term debt or for other general corporate purposes.

Future Commitments

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

The total amount of liquidity  requirements  associated  with guarantees for the
company's nonregulated portfolio and power supply agreements is $497 million.

As of June 30, 2004, the current portion of long-term debt is $343 million.

As of June 30,  2004,  Progress  Energy's  guarantees  issued on behalf of third
parties were approximately $24 million.

OTHER MATTERS

PEF Rate Case Settlement

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

Synthetic Fuels Tax Credits

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

Progress Energy, through its subsidiaries, produces a coal-based solid synthetic
fuel.  The  production  and sale of the  synthetic  fuel from  these  facilities
qualifies  for tax credits  under Section 29 of the Code (Section 29) if certain
requirements  are  satisfied,  including a requirement  that the synthetic  fuel
differs significantly in chemical composition from the coal used to produce such
synthetic fuel and that the fuel was produced from a facility that was placed in
service before July 1, 1998.  Synthetic fuel tax credit amounts not utilized are
carried forward indefinitely as alternative minimum tax credits. All of Progress
Energy's  synthetic fuel facilities have received  private letter rulings (PLRs)
from the Internal  Revenue  Service (IRS) with respect to their  synthetic  fuel
operations.  These tax credits are subject to review by the IRS, and if Progress
Energy fails to prevail through the administrative or legal process, there could
be a significant  tax liability  owed for  previously  taken Section 29 credits,
with a significant impact on earnings and cash flows. Additionally,  the ability
to use tax  credits  currently  being  carried  forward  could be denied.  Total
Section 29 credits  generated to date (including those generated by FPC prior to
its acquisition by the Company) are  approximately  $1.4 billion,  of which $584
million  have been used and $807 million are being  carried  forward as deferred
tax credits.  The current  Section 29 tax credit  program  expires at the end of
2007.

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

In July 2004,  Progress  Energy was notified that the Internal  Revenue  Service
(IRS)  field  auditors  anticipate  taking an  adverse  position  regarding  the
placed-in-service  date of the Company's four Earthco synthetic fuel facilities.
Due to the  auditors'  position,  the IRS has decided to  exercise  its right to
withdraw from the Pre-Filing  Agreement (PFA) program with Progress Energy. With
the IRS's  withdrawal  from the PFA  program,  the review of  Progress  Energy's
Earthco  facilities is back on the normal procedural audit path of the Company's
tax returns.  The IRS has  indicated  that the field audit team will provide its
written  recommendation  later this year.  After the field audit team's  written
recommendation  is received,  the Company will begin the Appeals  process within
the IRS. Through June 30, 2004 the Company, on a consolidated basis, has claimed
$1 billion of tax credits generated by Earthco facilities. If these credits were

                                       57
<PAGE>

disallowed,  the Company's one time exposure for cash tax payments would be $229
million  (excluding  interest),  and  earnings and equity would be reduced by $1
billion, excluding interest. The Company believes that the appeals process could
take up to two years to complete,  however,  it cannot control the actual timing
of resolution and cannot predict the outcome of this matter.

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

In June 2004, the Company  through its  subsidiary,  Progress Fuels sold, in two
transactions,  a combined 49.8 percent  partnership  interest in Colona  Synfuel
Limited Partnership,  LLLP, one of its synthetic fuel facilities.  Substantially
all proceeds from the sales will be received over time, which is typical of such
sales in the industry. Gain from the sales will be recognized on a cost recovery
basis.  The Company's book value of the interests sold totaled  approximately $5
million. Based on projected production levels, the Company anticipates receiving
total gross  proceeds of  approximately  $30 million per year,  on an annualized
basis. Under the agreements,  the buyers have a right to unwind the transactions
if an IRS reconfirmation  private letter ruling (PLR) is not received by October
15, 2004. Therefore, no gain would be recognized prior to the expiration of that
right.

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

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

Nuclear Matters

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

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

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

During the first quarter of 2004, PEC met the  requirements of both the NCUC and
the SCPSC for the  implementation  of a  depreciation  study  which  allowed the
utility  to  reduce  the  rates  used to  calculate  depreciation  expense.  The
reduction  in  depreciation  expense is  primarily  attributable  to  assumption
changes for nuclear generation.

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

                                       58
<PAGE>

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

Franchise Litigation

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

Arbitration  in one of the cases  (the City of  Casselberry)  was held in August
2002. Following arbitration,  the parties entered settlement discussions, and in
July 2003 the City approved a settlement  agreement and a new, 30-year franchise
agreement with PEF. The  settlement  resolves all pending  litigation  with that
city. A second  arbitration (with the  13,000-customer  City of Winter Park) was
completed in February 2003. That  arbitration  panel issued an award in May 2003
setting the value of PEF's distribution system within the City of Winter Park at
approximately $32 million,  not including separation and reintegration costs and
construction  work in progress,  which could add several  million dollars to the
award. The panel also awarded PEF  approximately  $11 million in stranded costs,
which according to the award decreases over time. In September 2003, Winter Park
voters passed a referendum that would authorize the City to issue bonds of up to
approximately $50 million to acquire PEF's electric  distribution  system. While
the City has not yet definitively decided whether it will acquire the system, on
April 26, 2004,  the City  Commission  voted to enter into a hedge  agreement to
lock into interest  rates for the  acquisition of the system and to proceed with
the acquisition. The City sought and received wholesale power supply bids and on
June 23, 2004,  executed a wholesale  power supply contract with PEF. On May 12,
2004, the City solicited bids to operate and maintain the  distribution  system.
The City  received  bids on July 1, 2004,  and expects to make its  selection in
August  2004.  The  City  has  indicated  that  its  goal is to  begin  electric
operations  in June 2005.  At this time,  whether and when there will be further
proceedings regarding the City of Winter Park cannot be determined.

A third arbitration (with the 2,500-customer  Town of Belleair) was completed in
June 2003. In September 2003, the arbitration panel issued an award in that case
setting  the  value  of the  electric  distribution  system  within  the Town at
approximately $6 million.  The panel further required the Town to pay to PEF its
requested $1 million in separation and reintegration  costs and approximately $2
million in stranded costs.  The Town has not yet decided whether it will attempt
to acquire  the  system.  At this time,  whether  and when there will be further
proceedings regarding the Town of Belleair cannot be determined.

A  fourth  arbitration  (with  the  13,000-customer  City of  Apopka)  had  been
scheduled for January 2004. In December 2003, the Apopka City  Commission  voted
on first reading to approve a settlement  agreement and a 30-year franchise with
PEF.  The  settlement  and  franchise  became  effective  upon  approval  by the
Commission at a second  reading of the franchise in January 2004. The settlement
resolves all outstanding litigation between the parties.

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

As part of the above litigation, two appellate courts have also reached opposite
conclusions  regarding  whether PEF must  continue to collect from its customers
and remit to the cities "franchise fees" under the expired franchise ordinances.
PEF has filed an appeal with the Florida  Supreme  Court to resolve the conflict
between the two appellate  courts.  The Florida Supreme Court held oral argument
in one of the appeals in August 2003. Subsequently, the Court requested briefing
from the parties in the other appeal,  which was completed in November 2003. The
Company cannot predict the outcome of these matters at this time.

                                       59
<PAGE>

Progress Energy Carolinas, Inc.

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

RESULTS OF OPERATIONS

The results of operations for the PEC Electric segment are identical between PEC
and  Progress   Energy.   The  results  of  operations  for  PEC's   non-utility
subsidiaries  for the three and six months  ended June 30, 2004 and 2003 are not
material to PEC's consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

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

Cash provided by operating  activities  decreased $45 million for the six months
ended June 30,  2004,  when  compared to the  corresponding  period in the prior
year.  The  decrease was caused  primarily by a $34 million  increase in working
capital requirements.

Cash used in investing activities decreased $13 million for the six months ended
June 30,  2004,  when  compared  to the  corresponding  period in the prior year
primarily due to lower construction spending.

$150  million of First  Mortgage  Bonds  matured on  January  15,  2004 and $150
million of First  Mortgage  Bonds matured on April 15, 2004.  The remaining $300
million  current portion of long-term debt will be refinanced or retired through
commercial paper, capital market transactions and internally generated funds.

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

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



                                       60
<PAGE>

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Progress Energy, Inc.

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

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

The   Company's   exposure   to  return  on   marketable   securities   for  the
decommissioning  trust funds has not changed materially since December 31, 2003.
The  Company's  exposure to market  value risk with respect to the CVOs has also
not changed  materially  since  December  31,  2003.  The exposure to changes in
interest rate from the Company's  commercial paper was not materially  different
than at December 31, 2003.

The  exposure to changes in  interest  rates from the  Company's  fixed rate and
variable  rate  long-term  debt at June 30, 2004 has changed  from  December 31,
2003.  The total fixed rate  long-term  debt at June 30, 2004 was $8.6  billion,
with an average  interest  rate of 6.53% and fair market value of $9.3  billion.
The total variable rate long-term debt at June 30, 2004, was $1.1 billion,  with
an average interest rate of 1.70% and fair market value of $1.1 billion.

The company  maintains a portion of its outstanding debt with floating  interest
rates.  As of June  30,  2004  approximately  22% of  consolidated  debt  was in
floating rate mode compared to 18% at the end of 2003.

Progress  Energy uses interest rate  derivative  instruments to adjust the fixed
and variable rate debt  components of its debt  portfolio and to hedge  interest
rates with regard to future fixed rate debt issuances.

As of June 30, 2004,  Progress  Energy had $1 billion of fixed rate debt swapped
to floating rate debt by executing  interest rate derivative  agreements.  Under
terms of these swap rate  agreements,  Progress Energy will receive a fixed rate
and pay a floating rate based on 3-month LIBOR.  These agreements expire between
March 2006 and March 2011.  During the year,  Progress  Energy has entered  into
$350 million  notional of open interest  rate fair value hedges.  In March 2004,
two interest rate swap agreements  totaling $200 million were terminated.  These
swaps were  associated with Progress Energy 5.85% Notes due in 2008. The loss on
the agreements was deferred and is being amortized over the life of the bonds as
these  agreements  had been  designated  as fair  value  hedges  for  accounting
purposes.

As of June 30, 2004, PEC had $70 million  notional of pay fixed forward starting
swaps,  entered into in March 2004, to hedge its exposure to interest rates with
regard  to a future  issuance  of debt and $26  million  notional  of pay  fixed
forward  starting  swaps, in April 2004, to hedge its exposure to interest rates
with regard to an upcoming  railcar  lease.  In July 2004,  PEC entered  into an
additional $30 million notional pay fixed forward swap,  increasing the total to
$126 million. These agreements have a computational period of ten years.

In May 2004, the Company terminated interest rate cash flow hedges, with a total
notional amount of $400 million,  related to projected  outstanding  balances of
commercial paper.  Amounts in accumulated other comprehensive  income related to
these terminated  hedges will be reclassified to earnings as the hedged interest
payments occur.

The  Company  holds  interest  rate  collars  with  a  varying  notional  amount
(currently  at the maximum of $195  million)  to hedge  floating  rate  exposure
associated with variable rate long-term debt at Progress  Ventures.  The Company
is  required  to hedge 50% of the  amount  outstanding  under its bank  facility
through March 2007.

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

                                       61
<PAGE>

PEF has  entered  into  derivative  instruments  to hedge its  exposure to price
fluctuations  on fuel oil purchases.  These  instruments did not have a material
impact  on  the  Company's   consolidated   financial  position  or  results  of
operations.

Progress Fuels Corporation,  through Progress Ventures, Inc. (PVI), periodically
enters into derivative  instruments to hedge its exposure to price  fluctuations
on natural gas sales. As of June 30, 2004, Progress Fuels Corporation is hedging
exposures  to the price  variability  of portions of its natural gas  production
through December 2005.  These  instruments did not have a material impact on the
Company's consolidated financial position or results of operations.

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

Progress Energy Carolinas, Inc.

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

PEC has certain market risks inherent in its financial instruments,  which arise
from transactions  entered into in the normal course of business.  PEC's primary
exposures  are  changes in interest  rates with  respect to  long-term  debt and
commercial  paper, and fluctuations in the return on marketable  securities with
respect to its nuclear  decommissioning trust funds. PEC's exposure to return on
marketable   securities  for  the  decommission  trust  funds  has  not  changed
materially since December 31, 2003.

The exposure to changes in interest rates from PEC's fixed rate long-term  debt,
variable  rate  long-term  debt and  commercial  paper at June 30,  2004 was not
materially different than at December 31, 2003.

As of June 30, 2004, PEC had $70 million  notional of pay fixed forward starting
swaps,  entered into in March 2004, to hedge its exposure to interest rates with
regard  to a future  issuance  of debt and $26  million  notional  of pay  fixed
forward  starting  swaps, in April 2004, to hedge its exposure to interest rates
with regard to an upcoming  railcar  lease.  In July 2004,  PEC entered  into an
additional $30 million notional pay fixed forward swap,  increasing the total to
$126 million. These agreements have a computational period of ten years.

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


                                       62
<PAGE>

Item 4: Controls and Procedures

Progress Energy, Inc.

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

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

Progress Energy Carolinas, Inc.

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

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



                                       63
<PAGE>

                           PART II. OTHER INFORMATION


Item 1. Legal Proceedings

Legal aspects of certain matters are set forth in Part I, Item 1. See Note 12 to
the Progress Energy, Inc.  Consolidated Interim Financial Statements and Note 10
to the PEC's Consolidated Interim Financial Statements.

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

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

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

In June 2004,  the Company  reached a settlement  agreement with the District in
this matter. The settlement totaled approximately $43.1 million and was recorded
as a charge to diversified business cost of sales in the Company's  Consolidated
Statement of Income for the three-months ended June 30, 2004. The accrual of the
settlement was recorded on an  undiscounted  basis.  The terms of the settlement
require SRS to pay the District $10.1 million upon  approval,  and an additional
$16 million in 2005 and $17  million  2006.  In  addition,  during a  transition
period ending  September 10, 2004, SRS will provide  maintenance and training on
the  equipment and software it installed and  maintained  for the District.  The
agreement,  upon approval,  settles all claims and cross-claims  related to SRS,
Progress Energy, Progress Energy Solutions and PEC.

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

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

The first suit, U.S. Global,  LLC v. Progress  Energy,  Inc. et al, was filed in
the Circuit Court for Broward County,  Florida in March 2003 (the Florida Global
Case).  The Florida  Global Case asserts claims for breach of the Asset Purchase
Agreement and other contract and tort claims related to the Progress Affiliates'
alleged  interference  with Global's rights under the Asset Purchase  Agreement.
The Florida Global Case requests an unspecified amount of compensatory  damages,
as well as declaratory  relief.  On December 15, 2003,  the Progress  Affiliates
filed a motion to dismiss the Third  Amended  Complaint  in the  Florida  Global
Case.  The  motion  to  dismiss  filed on behalf of the  Progress  Energy,  Inc.
subsidiaries  and  affiliates  that are  parties  to the  case was  heard by the
Circuit Court of Broward County, Florida on June 7, 2004. The case was dismissed
on procedural  issues, but allowed the plaintiff to refile. The case was refiled
on June 23, 2004.

                                       64
<PAGE>

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

On May 15, 2003, Global moved to dismiss the North Carolina Global Case for lack
of personal jurisdiction over Global. In the alternative,  Global requested that
the court decline to exercise its  discretion  to hear the Progress  Affiliates'
declaratory  judgment action.  On August 7, 2003, the Wake County Superior court
denied  Global's  motion to  dismiss  and  entered  an order  staying  the North
Carolina  Global  Case,  pending  the outcome of the Florida  Global  Case.  The
Progress  Affiliates have appealed the Superior  court's order staying the case;
Global  has cross  appealed  the  denial of its  motion to  dismiss  for lack of
personal jurisdiction. The North Carolina Court of Appeals heard argument on the
Progress Affiliates' Appeal and the Global's cross appeal on May 26, 2004. There
has been no ruling on the appeal or the cross appeal. The Company cannot predict
the  outcome  of  these  matters,   but  will  vigorously   defend  against  the
allegations.

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

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

On March 31, 2004, a second class action  complaint was filed by Stanley  Fried,
Raymond X. Talamantes and Jacquelin Talamantes against William Cavanaugh III and
Progress  Energy,  Inc. in the United  States  District  Court for the  Southern
District of New York alleging  violations of federal securities laws arising out
of the  Company's  issuance of CVOs  nearly  identical  to those  alleged in the
February 3, 2004 Gerber  Asset  Management  complaint.  On April 29,  2004,  the
Honorable  John E.  Sprizzo  ordered  among other  things that (1) the two class
action cases be  consolidated,  (2) Peak6 Capital  Management LLC shall serve as
the lead plaintiff in the consolidated  action, and (3) the lead plaintiff shall
file a consolidated amended complaint on or before June 14, 2004.

The lead plaintiffs filed a consolidated  amended complaint on June 15, 2004. In
addition to the  allegations  asserted in the Gerber Asset  Management and Fried
complaints,  the consolidated  amended complaint alleges that the Company failed
to disclose that excess fuel credits could not be carried over from one tax year
into later years.  On July 30, 2004,  the Company  filed a motion to dismiss the
complaint.

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

                                       65
<PAGE>

Item 2. Changes in  Securities,  Use of Proceeds and Issuer  Purchases of Equity
Securities

RESTRICTED STOCK AWARDS:

(a)  Securities  Delivered.  On April 28, 2004,  23,300 restricted shares of the
     Company's  Common Shares were granted to certain key employees  pursuant to
     the terms of the Company's  2002 Equity  Incentive  Plan (Plan),  which was
     approved by the  Company's  shareholders  on May 8, 2002.  Section 9 of the
     Plan provides for the granting of Restricted  Stock by the Organization and
     Compensation Committee of the Company's Board of Directors, (the Committee)
     to key employees of the Company, including its Affiliates or any successor,
     and to  outside  directors  of the  Company.  The Common  Shares  delivered
     pursuant to the Plan were acquired in market transactions  directly for the
     accounts of the recipients and do not represent  newly issued shares of the
     Company.

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

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

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


                                       66
<PAGE>

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

Progress Energy Inc.

(a)  The Annual Meeting of the Shareholders of Progress Energy, Inc. was held on
     May 12, 2004.

(b)  The meeting  involved the election of five Class III directors to serve for
     three-year  terms.  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 total votes for the election of directors were as follows:

Class III                   Votes For                       Votes Withheld
(Term Expiring in 2007)

Charles W. Coker           208,883,229                        4,775,358
Robert B. McGehee          209,390,084                        4,268,503
E. Marie McKee             209,566,761                        4,091,826
Peter S. Rummell           209,456,069                        4,202,518
Jean Giles Wittner         207,028,428                        6,630,159

(d)  The  shareholder  proposal  relating  to stock  options for  Directors  and
     certain  Executive  Officers  was  presented,  but was not  approved by the
     shareholders.

     The number of shares voted for the proposal was 23,184,068
     The number of shares voted against the proposal was 148,433,662
     The number of abstaining votes was 4,850,014
     The delivered not voted total was 37,190,843

Carolina Power & Light  Company,  doing business as Progress  Energy  Carolinas,
Inc.

(a)  The Annual  Meeting of the  Shareholders  of Carolina Power & Light Company
     was held on May 12, 2004.

(b)  The meeting  involved  the  election of five Class III  directors  to serve
     three-year  terms.  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 total votes for the election of directors were as follows:

Class III                   Votes For                     Votes Withheld
(Term Expiring in 2007)

Charles W. Coker  1         59,964,384                        6,387
Robert B. McGehee          159,964,895                        5,876
E. Marie McKee             159,965,517                        5,254
Peter S. Rummell           159,964,707                        6,064
Jean Giles Wittner         159,964,687                        6,064

                                       67
<PAGE>

Item 5. Other Information

Appointment of Presiding Director

John H. Mullin, III was appointed Chairman of the Corporate Governance Committee
of the  Company's  Board of  Directors  at the Board  meeting  that  immediately
followed the Company's Annual Meeting of Shareholders on May 12, 2004. By virtue
of that position,  Mr. Mullin is also the Presiding  Director of the Board. (Mr.
Mullin succeeds J. Tylee Wilson, who retired from the Board on May 12, 2004.) As
Presiding Director, Mr. Mullin chairs the executive sessions of the non-employee
Directors.  Mr.  Mullin can be  contacted  by writing  to John H.  Mullin,  III,
Presiding Director, Progress Energy Board of Directors, c/o Corporate Secretary,
P.O. Box 1551, Raleigh, NC 27602.  Progress Energy screens mail addressed to Mr.
Mullin for security  purposes and to ensure that it relates to discrete business
matters that are relevant to Progress Energy. Mail addressed to Mr. Mullin which
satisfies these screening criteria will be forwarded to him.



                                       68
<PAGE>

Item 6.     Exhibits and Reports on Form 8-K

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

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

        10(i)       Progress Energy, Inc. $1,130,000,00 5-Year                  X
                    Revolving Credit Agreement dated as of
                    August 5, 2004

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

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

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

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


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

         Progress Energy, Inc.
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                           Financial
             Item          Statements
           Reported         Included             Date of Event          Date Filed or Furnished

            9, 12             Yes                July 21, 2004               July 21, 2004
             5, 9              No                 July 7, 2004                July 7, 2004
             7, 9             Yes                June 15, 2004               June 16, 2004
             7, 9              No                 May 28, 2004                May 28, 2004
             7, 9              No                 May 13, 2004                May 18, 2004
             7, 9              No               April 28, 2004              April 28, 2004
            7, 11              No                April 5, 2004              April 23, 2004
            9, 12             Yes               April 21, 2004              April 21, 2004

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

                           Financial
             Item          Statements
           Reported         Included             Date of Event          Date Filed or Furnished

            9, 12             Yes                July 21, 2004              July 21, 2004
            9, 12             Yes               April 21, 2004             April 21, 2004
</TABLE>


                                       69
<PAGE>

                                   SIGNATURES


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

                                       PROGRESS ENERGY, INC.
                                       CAROLINA POWER & LIGHT COMPANY
Date: August 6, 2004                   (Registrants)

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

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