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, 2005


                                       OR

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

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

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

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

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

                                      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 -

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, 2005,  each
registrant had the following shares of common stock outstanding:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

           Registrant                            Description                                Shares
           ----------                            -----------                                ------
Progress Energy                   Common Stock (Without Par Value)                        251,227,350
PEC                               Common Stock (Without Par Value)                 159,608,055 (all of which
                                                                              were held by Progress Energy, Inc.)
</TABLE>

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.




<PAGE>



            PROGRESS ENERGY, INC. AND PROGRESS ENERGY CAROLINAS, INC.
                 FORM 10-Q - For the Quarter Ended June 30, 2005



 Glossary of Terms

 Safe Harbor For Forward-Looking Statements

 PART I.  FINANCIAL INFORMATION

 Item 1.  Financial Statements

           Consolidated Interim Financial Statements:

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

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

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

 Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 Item 4.  Controls and Procedures

 PART II. OTHER INFORMATION

 Item 1.  Legal Proceedings

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

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

 Item 6.  Exhibits

 Signatures



                                       2
<PAGE>




                                GLOSSARY OF TERMS


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

              TERM                           DEFINITION
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

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

                                       3
<PAGE>

 NOx SIP Call                   EPA rule which requires 22
                                states including North Carolina and
                                South Carolina (but excluding Florida)
                                to further reduce nitrogen oxide
                                emissions.
 NRC                            United States Nuclear Regulatory Commission
 Nuclear Waste Act              Nuclear Waste Policy Act of 1982
 NYMEX                          New York Mercantile Exchange
 O&M                            Operation and Maintenance Expense
 OPEB                           Postretirement benefits other than pensions
 PEC                            Progress Energy Carolinas, Inc., formerly referred to as Carolina Power &
                                Light Company
 PEC Electric                   PEC Electric business segment made up of the utility operations and
                                excludes operations of nonregulated subsidiaries
 PEF                            Progress Energy Florida, formerly referred to as Florida Power Corporation
 PESC                           Progress Energy Service Company
 PFA                            IRS Prefiling Agreement
 PLR                            Private Letter Ruling
 Progress Energy                Progress Energy, Inc.
 Progress Fuels                 Progress Fuels Corporation, formerly Electric Fuels Corporation
 Progress Rail                  Progress Rail Services Corporation
 Progress Ventures              Business unit of Progress Energy primarily made up of nonregulated energy
                                generation and marketing activities, as well as gas, coal and synthetic
                                fuel operations
 PRP                            Potentially responsible party, as defined in CERCLA
 PTC                            Progress Telecommunications Corporation
 PT LLC                         Progress Telecom, LLC
 PUHCA                          Public Utility Holding Company Act of 1935, as amended
 PVI                            Progress Energy Ventures, Inc. (formerly referred to as CPL Energy
                                Ventures, Inc.)
 Rail Services                  Rail Services business segment
 RCA                            Revolving credit agreement
 ROE                            Return on Equity
 SCPSC                          Public Service Commission of South Carolina
 SEC                            United States Securities and Exchange Commission
 Section 29                     Section 29 of the Internal Revenue Service Code
 Service Company                Progress Energy Service Company, LLC
 SFAS                           Statement of Financial Accounting Standards
 SFAS No. 5                     Statement of Financial Accounting Standards No. 5, "Accounting for
                                Contingencies"
 SFAS No. 71                    Statement of Financial Accounting Standards No. 71, "Accounting for the
                                Effects of Certain Types of Regulation"
 SFAS No. 109                   Statement of Financial Accounting Standards No. 109, "Accounting for Income
                                Taxes"
 SFAS No. 123R                  Statement of Financial Accounting Standards No. 123R, "Accounting for
                                Stock-Based Compensation"
 SFAS No. 133                   Statement of Financial Accounting Standards No. 133, "Accounting for
                                Derivative and Hedging Activities"
 SFAS No. 138                   Statement of Financial Accounting Standards No. 138, "Accounting for
                                Certain Derivative Instruments and Certain Hedging Activities - An
                                Amendment of FASB Statement No. 133"
 SFAS No. 143                   Statement of Financial Accounting Standards No. 143, "Accounting for Asset
                                Retirement Obligations"
 SFAS No. 148                   Statement of Financial Accounting Standards No. 148, "Accounting for
                                Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
                                Statement No. 123"
 Smokestacks Act                North Carolina Clean Smokestacks Act enacted in June 2002
 SO2                            Sulfur dioxide
 SRS                            Strategic Resource Solutions Corp.
 STB                            Surface Transportation Board
 the Trust                      FPC Capital I
</TABLE>


                                       4
<PAGE>




SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

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

In  addition,   forward-looking   statements  are  discussed  in   "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
including,  but not limited to,  statements  under the  sub-heading  "Results of
Operations" about trends and  uncertainties,  "Liquidity and Capital  Resources"
about future  liquidity  requirements  and "Other  Matters"  about the Company's
synthetic fuel facilities.

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

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

These and other risk factors are detailed from time to time in the Company's and
PEC's filings with the United States  Securities and Exchange  Commission (SEC).
Many,  but not all, of the factors that may impact actual  results are discussed
in the Risk Factors  sections of Progress  Energy's and PEC's annual  reports on
Form 10-K for the year ended December 31, 2004, which were filed with the SEC on
March 16, 2005. All such factors are difficult to predict, contain uncertainties
that may  materially  affect  actual  results  and may be beyond the  control of
Progress  Energy and PEC.  New factors  emerge from time to time,  and it is not
possible  for  management  to predict  all such  factors,  nor can it assess the
effect of each such factor on Progress Energy and PEC.

                                       5


<PAGE>




                         PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

                              PROGRESS ENERGY, INC.
                    CONSOLIDATED INTERIM FINANCIAL STATEMENTS
                                  June 30, 2005

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

                                                                Three Months Ended        Six Months Ended
                                                                     June 30                   June 30
----------------------------------------------------------------------------------------------------------
(in millions except per share data)                              2005        2004         2005       2004
----------------------------------------------------------------------------------------------------------
Operating revenues
   Utility                                                     $1,768     $ 1,721      $ 3,551    $ 3,406
   Diversified business                                           565         402          980        723
----------------------------------------------------------------------------------------------------------
     Total operating revenues                                   2,333       2,123        4,531      4,129
----------------------------------------------------------------------------------------------------------
Operating expenses
Utility
   Fuel used in electric generation                               529         468        1,079        961
   Purchased power                                                217         219          415        402
   Operation and maintenance                                      543         372          949        735
   Depreciation and amortization                                  207         207          415        409
   Taxes other than on income                                     108         109          225        214
Diversified business
   Cost of sales                                                  539         388          934        699
   Depreciation and amortization                                   43          42           82         83
   Other                                                           31          31           63         61
----------------------------------------------------------------------------------------------------------
       Total operating expenses                                 2,217       1,836        4,162      3,564
----------------------------------------------------------------------------------------------------------
Operating income                                                  116         287          369        565
----------------------------------------------------------------------------------------------------------
Other income (expense)
   Interest income                                                  4           4            8          6
   Other, net                                                      19          (3)          21        (25)
----------------------------------------------------------------------------------------------------------
        Total other income (expense)                               23           1           29        (19)
----------------------------------------------------------------------------------------------------------
Interest charges
   Net interest charges                                           168         157          334        318
   Allowance for borrowed funds used during construction           (4)         (2)          (7)        (3)
----------------------------------------------------------------------------------------------------------
        Total interest charges, net                               164         155          327        315
----------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations before income tax
   and minority interest                                          (25)        133           71        231
Income tax benefit                                                 22          12           23         14
----------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations before minority
   interest                                                        (3)        145           94        245
Minority interest in subsidiaries' loss, net of tax                 9           1           17          -
----------------------------------------------------------------------------------------------------------
Income from continuing operations                                   6         146          111        245
Discontinued operations, net of tax                                (7)          8          (19)        17
----------------------------------------------------------------------------------------------------------
Net (loss) income                                              $   (1)    $   154      $    92    $   262
----------------------------------------------------------------------------------------------------------
Average common shares outstanding                                 246         242          245        242
----------------------------------------------------------------------------------------------------------
Basic earnings per common share
    Income from continuing operations                          $ 0.02     $  0.60      $  0.45    $  1.01
    Discontinued operations, net of tax                         (0.03)       0.03        (0.08)      0.07
    Net (loss) income                                          $(0.01)    $  0.63      $  0.37    $  1.08
----------------------------------------------------------------------------------------------------------
Diluted earnings per common share
    Income from continuing operations                          $ 0.02     $  0.60      $  0.45    $  1.01
    Discontinued operations, net of tax                         (0.03)       0.03        (0.08)      0.07
    Net (loss) income                                          $(0.01)       0.63      $  0.37    $  1.08
----------------------------------------------------------------------------------------------------------
Dividends declared per common share                            $0.590     $ 0.575      $ 1.180    $ 1.150
----------------------------------------------------------------------------------------------------------
</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                                                                              2005               2004
------------------------------------------------------------------------------------------------------------
Utility Plant
  Utility plant in service                                                       $22,320           $ 22,103
  Accumulated depreciation                                                        (9,341)            (8,783)
------------------------------------------------------------------------------------------------------------
     Utility plant in service, net                                                12,979             13,320
  Held for future use                                                                  6                 13
  Construction work in progress                                                    1,001                799
  Nuclear fuel, net of amortization                                                  230                231
------------------------------------------------------------------------------------------------------------
     Total utility plant, net                                                     14,216             14,363
------------------------------------------------------------------------------------------------------------
Current assets
  Cash and cash equivalents                                                          141                 56
  Short-term investments                                                              40                 82
  Receivables, net                                                                   995                911
  Inventory                                                                          801                805
  Deferred fuel cost                                                                 231                229
  Deferred income taxes                                                              100                114
  Assets of discontinued operations                                                    -                577
  Prepayments and other current assets                                               235                174
------------------------------------------------------------------------------------------------------------
     Total current assets                                                          2,543              2,948
------------------------------------------------------------------------------------------------------------
Deferred debits and other assets
  Regulatory assets                                                                1,001              1,064
  Nuclear decommissioning trust funds                                              1,081              1,044
  Diversified business property, net                                               1,917              1,838
  Miscellaneous other property and investments                                       502                444
  Goodwill                                                                         3,719              3,719
  Intangibles, net                                                                   321                337
  Other assets and deferred debits                                                   346                262
------------------------------------------------------------------------------------------------------------
     Total deferred debits and other assets                                        8,887              8,708
------------------------------------------------------------------------------------------------------------
           Total assets                                                          $25,646           $ 26,019
------------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
------------------------------------------------------------------------------------------------------------
Common stock equity
  Common stock without par value, 500 million shares authorized,
      251 and 247 million shares issued and outstanding, respectively            $ 5,540           $  5,360
  Unearned restricted shares                                                         (16)               (13)
  Unearned ESOP shares                                                               (63)               (76)
  Accumulated other comprehensive loss                                              (113)              (164)
  Retained earnings                                                                2,327              2,526
------------------------------------------------------------------------------------------------------------
     Total common stock equity                                                     7,675              7,633
------------------------------------------------------------------------------------------------------------
Preferred stock of subsidiaries-not subject to mandatory redemption                   93                 93
Minority interest                                                                     41                 36
Long-term debt, affiliate                                                            270                270
Long-term debt, net                                                                9,041              9,251
------------------------------------------------------------------------------------------------------------
     Total capitalization                                                         17,120             17,283
------------------------------------------------------------------------------------------------------------
Current liabilities
  Current portion of long-term debt                                                  848                349
  Accounts payable                                                                   576                630
  Interest accrued                                                                   221                219
  Dividends declared                                                                 147                145
  Short-term obligations                                                             403                684
  Customer deposits                                                                  189                180
  Liabilities of discontinued operations                                               -                152
  Other current liabilities                                                          666                703
------------------------------------------------------------------------------------------------------------
     Total current liabilities                                                     3,050              3,062
------------------------------------------------------------------------------------------------------------
Deferred credits and other liabilities
  Noncurrent income tax liabilities                                                  532                625
  Accumulated deferred investment tax credits                                        170                176
  Regulatory liabilities                                                           2,451              2,654
  Asset retirement obligations                                                     1,229              1,282
  Other liabilities and deferred credits                                           1,094                937
------------------------------------------------------------------------------------------------------------
     Total deferred credits and other liabilities                                  5,476              5,674
------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 14)
------------------------------------------------------------------------------------------------------------
           Total capitalization and liabilities                                  $25,646           $ 26,019
------------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       7
<PAGE>

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
PROGRESS ENERGY, INC.
UNAUDITED CONSOLIDATED STATEMENTS of CASH FLOWS
----------------------------------------------------------------------------------------------------------
(in millions)
Six Months Ended June 30,                                                           2005           2004
----------------------------------------------------------------------------------------------------------
Operating activities
Net income                                                                      $     92          $ 262
Adjustments to reconcile net income to net cash provided by operating
   activities:
      Discontinued operations, net of tax                                             19            (17)
      Charges for voluntary enhanced retirement program                              158              -
      Depreciation and amortization                                                  556            549
      Deferred income taxes                                                         (132)          (203)
      Investment tax credit                                                           (6)            (6)
      Tax levelization                                                                63             43
      Deferred fuel cost                                                               -             13
      Other adjustments to net income                                                 61             27
      Cash provided (used) by changes in operating assets and liabilities:
         Receivables                                                                 (60)          (138)
         Inventory                                                                   (90)            (2)
         Prepayments and other current assets                                        (27)           (18)
         Accounts payable                                                             76             72
         Other current liabilities                                                   (68)           230
         Regulatory assets and liabilities                                           (59)            10
         Other                                                                        (3)            80
----------------------------------------------------------------------------------------------------------
         Net cash provided by operating activities                                   580            902
----------------------------------------------------------------------------------------------------------
Investing activities
Gross utility property additions                                                    (539)          (473)
Diversified business property additions                                             (130)           (93)
Nuclear fuel additions                                                               (67)           (47)
Proceeds from sales of subsidiaries and other investments, net of cash
   divested                                                                          436             94
Purchases of short-term investments                                               (2,804)          (651)
Proceeds from sales of short-term investments                                      2,846            853
Other                                                                                (41)           (37)
----------------------------------------------------------------------------------------------------------
          Net cash used in investing activities                                     (299)          (354)
----------------------------------------------------------------------------------------------------------
Financing activities
Issuance of common stock                                                             171             59
Issuance of long-term debt                                                           792              1
Net (decrease) increase in short-term indebtedness                                  (281)           624
Retirement of long-term debt                                                        (517)          (865)
Dividends paid on common stock                                                      (289)          (278)
Other                                                                                (42)           (61)
--------------------------------------------------------------------------------------------------------
           Net cash used in financing activities                                    (166)          (520)
----------------------------------------------------------------------------------------------------------
Cash used by discontinued operations:
      Operating activities                                                           (26)            (4)
      Investing activities                                                            (4)            (8)
      Financing activities                                                             -              -
Net increase in cash and cash equivalents                                             85             16
Cash and cash equivalents at beginning of period                                      56             35
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                      $    141          $  51
----------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       8

<PAGE>



PROGRESS ENERGY, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.   BASIS OF PRESENTATION

     A. Basis of Presentation

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

     In accordance  with the provisions of Accounting  Principles  Board Opinion
     (APB) No. 28, "Interim  Financial  Reporting,"  GAAP requires  companies to
     apply a levelized  effective tax rate to interim periods that is consistent
     with  the  estimated  annual  effective  tax  rate.  The  intra-period  tax
     allocation,  which will have no impact on total year net income,  maintains
     an effective tax rate  consistent with the estimated  annual  effective tax
     rate.  Income tax expense was  increased  by $60 million and $5 million for
     the three  months  ended June 30, 2005 and 2004,  respectively.  Income tax
     expense  was  increased  by $63  million and $43 million for the six months
     ended June 30, 2005 and 2004,  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 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, 2005 and 2004,
     gross receipts tax, franchise taxes and other excise taxes of approximately
     $58 million and $61 million, respectively, are included in utility revenues
     and taxes other than on income in the  Consolidated  Statements  of Income.
     For  the six  months  ended  June  30,  2005  and  2004,  excise  taxes  of
     approximately  $114  million  for both  periods  are  included  in  utility
     revenues and taxes other than on income in the  Consolidated  Statements of
     Income.

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

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

     B. Stock-Based Compensation

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

                                       9
<PAGE>

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

     ------------------------------------------------------------------------------  ----------------------
     (in millions except per share data)                       Three Months Ended       Six Months Ended
                                                                    June 30                  June 30
                                                             ----------------------  ----------------------
                                                                  2005      2004          2005       2004
     ------------------------------------------------------------------------------------------------------
     Net (loss) income, as reported                           $    (1)    $  154        $   92     $  262
     Deduct:  Total stock option expense determined under
        fair value method for all awards, net of related tax
        effects                                                     1          3             2          6
     ------------------------------------------------------------------------------------------------------
     Pro forma net (loss) income                              $    (2)    $  151        $   90     $  256
     ------------------------------------------------------------------------------------------------------

     ------------------------------------------------------------------------------------------------------
     Basic earnings per share
       As reported                                            $ (0.01)    $ 0.63        $ 0.37     $ 1.08
       Pro forma                                              $ (0.01)    $ 0.62        $ 0.36     $ 1.06

     Fully diluted earnings per share
       As reported                                            $ (0.01)    $ 0.63        $ 0.37     $ 1.08
       Pro forma                                              $ (0.01)    $ 0.62        $ 0.36     $ 1.05
     ------------------------------------------------------------------------------------------------------
</TABLE>

     The  Company is  planning  to begin  expensing  stock  options in the third
     quarter of 2005 (See Note 2).

     C. Consolidation of Variable Interest Entities

     The Company  consolidates  all voting interest  entities in which it owns a
     majority voting interest and all variable interest entities for which it is
     the primary  beneficiary in accordance  with FASB  Interpretation  No. 46R,
     "Consolidation of Variable Interest Entities - An Interpretation of ARB No.
     51"  (FIN  No.  46R).  The  Company  is  the  primary  beneficiary  of  and
     consolidates two limited  partnerships that qualify for federal  affordable
     housing and historic tax credits under  Section 42 of the Internal  Revenue
     Code (Code). As of June 30, 2005, the total assets of the two entities were
     $38  million,  the  majority  of which  are  collateral  for the  entities'
     obligations   and  are  included  in   miscellaneous   other  property  and
     investments in the Consolidated Balance Sheets.

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

     The Company also has interests in several other variable  interest entities
     for which the Company is not the primary  beneficiary.  These  arrangements
     include  investments  in  approximately  28 limited  partnerships,  limited
     liability  corporations  and venture  capital funds and two building leases
     with special-purpose  entities. The aggregate maximum loss exposure at June
     30,  2005,  that the  Company  could be  required  to record in its  income
     statement  as a  result  of these  arrangements  totals  approximately  $38
     million.  The  creditors of these  variable  interest  entities do not have
     recourse  to the general  credit of the Company in excess of the  aggregate
     maximum loss exposure.

2. IMPACT OF NEW ACCOUNTING STANDARDS

     FASB  EXPOSURE  DRAFT  ON  ACCOUNTING  FOR  UNCERTAIN  TAX  POSITIONS,   AN
     INTERPRETATION OF SFAS NO. 109, "ACCOUNTING FOR INCOME TAXES"

     On July 14, 2005, the Financial Accounting Standards Board (FASB) issued an
     exposure draft of a proposed  interpretation  of SFAS No. 109,  "Accounting
     for Income  Taxes" (SFAS No. 109),  that would address the  accounting  for
     uncertain tax  positions.  The proposed  interpretation  would require that

                                       10
<PAGE>
     uncertain  tax  benefits be probable of being  sustained in order to record
     such  benefits  in  the  consolidated  financial  statements.  The  Company
     currently  accounts for uncertain tax benefits in accordance  with SFAS No.
     5, "Accounting for Contingencies" (SFAS No.5). Under SFAS No. 5, contingent
     losses are recorded  when it is probable  that the tax position will not be
     sustained and the amount of the disallowance  can be reasonably  estimated.
     The exposure draft has a 60-day public comment period ending  September 12,
     2005. As currently drafted, the proposed  interpretation would apply to all
     uncertain  tax  positions  and be effective for the Company on December 31,
     2005.

     As discussed in Note 14, the Internal  Revenue Service (IRS) field auditors
     have recommended that the Section 29 tax credits generated by the Company's
     Earthco  facilities,  totaling  $1.1  billion  through  June 30,  2005,  be
     disallowed.  The Company disagrees with the field audit team's findings and
     has requested  that the National  Office of the IRS review this issue.  The
     Company has not yet determined how the proposed interpretation would impact
     its various income tax  positions,  including the status of the Earthco tax
     credits. Depending on the provisions of the FASB's final interpretation and
     the  Company's  facts  and   circumstances   that  exist  at  the  date  of
     implementation,  including the Company's  assessment of the  probability of
     sustaining  any currently  recorded and future tax  benefits,  the proposed
     interpretation  could  have a  material  adverse  impact  on the  Company's
     financial position and results of operations.

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

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

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

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

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

                                       11
<PAGE>

3.   DIVESTITURES

     Progress Rail Divestiture

     On March 24, 2005,  the Company  completed the sale of Progress Rail to One
     Equity  Partners LLC, a private equity firm unit of J.P. Morgan Chase & Co.
     Gross cash proceeds from the sale are  estimated to be  approximately  $430
     million, consisting of $405 million base proceeds plus an estimated working
     capital adjustment. Proceeds from the sale were used to reduce debt.

     Based on the  estimated  gross  proceeds  associated  with the sale of $430
     million,  the Company  recorded an estimated  after-tax loss on disposal of
     $19  million  during  the six  months  ended  June 30,  2005.  The  Company
     anticipates  adjustments  to the loss on the  divestiture  during the third
     quarter  of  2005  related  to  employee   benefit   settlements   and  the
     finalization  of  the  working  capital   adjustment  and  other  operating
     estimates.

     The  accompanying  consolidated  interim  financial  statements  have  been
     restated for all periods  presented to reflect the  operations  of Progress
     Rail as  discontinued  operations.  Interest  expense has been allocated to
     discontinued  operations based on the net assets of Progress Rail, assuming
     a uniform  debt-to-equity ratio across the Company's  operations.  Interest
     expense  allocated for the three months ended June 30, 2004 was $4 million.
     Interest expense  allocated for the six months ended June 30, 2005 and 2004
     was $4 million and $8 million,  respectively.  The Company ceased recording
     depreciation upon  classification of the assets as discontinued  operations
     in February 2005. After-tax  depreciation expense recorded by Progress Rail
     during the three  months  ended  June 30,  2004 was $3  million.  After-tax
     depreciation expense during the six months ended June 30, 2005 and 2004 was
     $3 million and $5 million, respectively. Results of discontinued operations
     were as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     ------------------------------------------------------------------------------------------------------
                                                                Three Months Ended      Six Months Ended
                                                                     June 30                 June 30
                                                               --------------------   ---------------------
     (in millions)                                                  2005      2004        2005        2004
     ------------------------------------------------------------------------------------------------------
     Revenues                                                      $  -       $285      $  358      $  524
     ------------------------------------------------------------------------------------------------------
     Earnings before income taxes                                  $  -       $ 14      $    8      $   27
     Income tax expense                                               -          7           3          11
     ------------------------------------------------------------------------------------------------------
     Net earnings from discontinued operations                        -          7           5          16
     ------------------------------------------------------------------------------------------------------
     Estimated loss on disposal of discontinued operations,
        including income tax benefit of $0 and  $14 for the
        three and six months ended June 30, 2005, respectively       (7)         -         (24)          -
     ------------------------------------------------------------------------------------------------------
     (Loss) earnings from discontinued operations                  $ (7)      $  7      $  (19)     $   16
     ------------------------------------------------------------------------------------------------------
</TABLE>

     In connection  with the sale,  Progress Fuels and Progress  Energy provided
     guarantees and  indemnifications  of certain legal,  tax and  environmental
     matters  to One Equity  Partners,  LLC.  See  discussion  of the  Company's
     guarantees  at Note 14B. The ultimate  resolution  of these  matters  could
     result in adjustments to the loss on sale in future periods.

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

     --------------------------------------------------------------
     (in millions)
     --------------------------------------------------------------
     Accounts receivable                                      $172
     Inventory                                                 177
     Other current assets                                       15
     Total property, plant and equipment, net                  174
     Total other assets                                         39
     --------------------------------------------------------------
         Assets of discontinued operations                    $577
     --------------------------------------------------------------
     Accounts payable                                         $113
     Accrued expenses                                           39
     --------------------------------------------------------------
         Liabilities of discontinued operations               $152
     --------------------------------------------------------------

                                       12

<PAGE>


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

     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 to  Piedmont
     Natural Gas Company,  Inc. On September 30, 2003, the Company completed the
     sale.  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.

     Winter Park Divestiture

     As discussed in Note 5, PEF sold certain  electric  distribution  assets to
     the City of Winter Park, Florida on June 1, 2005.

4.   ACQUISITIONS

     In May 2005,  Winchester  Production  Company,  Ltd., an indirectly  wholly
     owned  subsidiary of Progress  Fuels  Corporation,  acquired an interest in
     approximately  11  natural  gas  producing  wells and  proven  reserves  of
     approximately  25 billion  cubic  feet  equivalent  from a  privately-owned
     company  headquartered  in Texas.  In addition to the natural gas reserves,
     the transaction  also included a 50% interest in the gas gathering  systems
     related  to  these  reserves.   The  total  cash  purchase  price  for  the
     transaction was $46 million.

5.   REGULATORY MATTERS

     PEF Retail Rate Matters

     On July 14, 2005, the Florida Public  Service  Commission  (FPSC) issued an
     order authorizing PEF to recover $232 million,  including interest,  of the
     costs it incurred and previously  deferred related to PEF's  restoration of
     power to customers  associated with the four hurricanes in 2004. The ruling
     will allow PEF to include a charge of  approximately  $3.27 on the  average
     residential  monthly  customer bill beginning August 1, 2005. The ruling by
     the  FPSC  approved  the  majority  of  the  Company's   request  with  two
     exceptions:   the   reclassification  of  $8  million  from  operation  and
     maintenance  expense  (O&M) to utility  plant and  reclassification  of $17
     million  as  normal  O&M  expense.   As  a  result  of  these  adjustments,
     approximately  $17  million  was  charged  to O&M  expense  in  June  2005,
     representing the retail portion of these adjustments.

     The amount included in the original  petition  requesting  recovery of $252
     million in November  2004 was an  estimate,  as actual total costs were not
     known at that time. The Company currently estimates that it has incurred an
     additional  $18 million in costs in excess of the amount  requested  in the
     petition.  The difference between the actual costs and the amount requested
     will be trued-up  in  September  2005,  subject to FPSC  approval,  and the
     impact will be included in customer bills beginning January 1, 2006.

     On June 1, 2005,  Florida  Governor  Jeb Bush  signed  into law a bill that
     would allow  utilities  to petition  the FPSC to use  securitized  bonds to
     recover  storm related  costs.  PEF intends to ask the FPSC for approval to
     issue  securitized  debt.  This  arrangement  would  benefit the Company by
     providing  immediate cash recovery of the hurricane costs and would benefit
     the customer by providing a longer recovery period,  which would reduce the
     price impact on monthly  bills.  Assuming  FPSC  approval,  PEF expects the
     process to take six to nine months.

                                       13

<PAGE>

     On June 1, 2005, the City of Winter Park, Florida (the City) acquired PEF's
     electric  distribution  system that serves the City for  approximately  $42
     million.  PEF  transferred the  distribution  system to the City on June 1,
     2005 and  recognized  a pre-tax  gain of  approximately  $25 million on the
     transaction, which is included in other, net on the Consolidated Statements
     of Income. This amount is subject to adjustment pending accumulation of the
     final capital  expenditures  incurred since  arbitration.  The Company also
     recorded a regulatory  liability of $8 million for stranded  cost  revenues
     which will be amortized to revenues  over the next six years in  accordance
     with the provisions of the transfer agreement with the City.

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

     Hearings on the base rate  proceeding are scheduled for September 7 through
     September  16, 2005,  and a final  decision is expected by the end of 2005.
     Although the Company cannot predict the outcome of this matter,  an adverse
     outcome could negatively impact the Company's and PEF's financial condition
     and results of operations.

     The FPSC requires that PEF perform a depreciation  study no less than every
     four years. PEF filed a depreciation study with the FPSC on April 29, 2005,
     as part of the Company's base rate filing, which will increase depreciation
     expense by $14  million  beginning  in 2006 if  approved  by the FPSC.  The
     Company  cannot  predict the outcome or impact of this matter.  PEF reduced
     its estimated  removal costs to take into account the estimates used in the
     depreciation  study.  This  resulted  in a  downward  revision  in the  PEF
     estimated removal costs, a component of regulatory  liabilities,  and equal
     increase in accumulated depreciation of approximately $401 million.

     The FPSC  requires  that PEF update  its cost  estimate  for  fossil  plant
     dismantlement  every four years. PEF filed an updated fossil  dismantlement
     study with the FPSC on April 29, 2005, as part of the  Company's  base rate
     filing.  The new study calls for an  increase in the annual  accrual of $10
     million   beginning  in  2006.   PEF's  retail  reserve  for  fossil  plant
     dismantlement  was  approximately  $133  million at June 30,  2005.  Retail
     accruals on PEF's reserves for fossil plant  dismantlement  were previously
     suspended   through  December  2005  under  the  terms  of  PEF's  existing
     Agreement. The Company cannot predict the outcome or impact of this matter.

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

                                       14

<PAGE>

     PEC Retail Rate Matters

     On April 27,  2005,  PEC filed for an increase in the fuel rate  charged to
     its South Carolina retail  customers with the Public Service  Commission of
     South Carolina (SCPSC).  PEC requested the increase for underrecovered fuel
     costs for the previous 15 months and to meet future expected fuel costs. On
     June 23, 2005, the SCPSC approved a settlement  agreement  filed jointly by
     PEC and all other  parties  to the  proceeding.  The  settlement  agreement
     levelizes  the  collection of  underrecovered  fuel costs over a three-year
     period ending June 30, 2008, and allows PEC to charge and recover  carrying
     costs on the monthly unpaid balance, beginning July 1, 2006, at an interest
     rate of 6% compounded  annually.  An annual increase of $55 million,  or 12
     percent, in PEC's rates was effective July 1, 2005.

     On June 3, 2005,  PEC filed for an increase in the fuel rate charged to its
     North  Carolina  retail   customers  with  the  North  Carolina   Utilities
     Commission  (NCUC).  PEC asked the NCUC to  approve a $276  million,  or 11
     percent,  increase in rates. PEC requested the increase for  underrecovered
     fuel costs for the  previous  12 months and to meet  future  expected  fuel
     costs. If approved, the increase would take effect October 1, 2005.

     On July 25, 2005,  PEC,  the NCUC Public Staff and the Carolina  Industrial
     Group for Fair Utility Rates jointly filed a proposed settlement  agreement
     with the NCUC to resolve issues  concerning  PEC's 2005 North Carolina fuel
     adjustment  proceeding.  Other  intervening  parties to the fuel proceeding
     have not agreed to the proposed  settlement.  The settlement  proposes that
     PEC collect all of its fuel cost  undercollections that occurred during the
     test year ended March 31, 2005 over a one-year period beginning  October 1,
     2005.  Under the  proposed  settlement,  PEC agreed to reduce its  proposed
     billing increment designed to collect future fuel costs in order to address
     customer  concerns  regarding  the magnitude of the proposed  increase.  In
     recognition of the likely  undercollection that will result during the year
     ending  September  30, 2006,  PEC would be allowed to calculate and collect
     interest  at 6% on the  difference  between  its  collection  factor in the
     original  request  to the  NCUC and the  factor  included  in the  proposed
     settlement  agreement until such amounts have been  collected.  Hearings on
     this matter are  scheduled  for August 2005 with an order due in  September
     2005.  If approved,  the increase  would take effect  October 1, 2005.  The
     Company cannot predict the outcome of this matter.

6.   EQUITY AND COMPREHENSIVE INCOME

     A. Earnings Per Common Share

     A  reconciliation   of  the   weighted-average   number  of  common  shares
     outstanding  for basic and  dilutive  earnings  per  share  purposes  is as
     follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     ---------------------------------------------------------------------------------------------------
                                                    Three Months Ended             Six Months Ended
     (in millions)                                        June 30                      June 30
                                                 -------------------------    --------------------------
                                                    2005          2004            2005         2004
     ---------------------------------------------------------------------------------------------------
     Weighted-average common shares - basic          246           242             245          242
     Restricted stock awards                           1             1               1            1
     ---------------------------------------------------------------------------------------------------
     Weighted-average shares - fully dilutive        247           243             246          243
     ---------------------------------------------------------------------------------------------------
</TABLE>

     B. Comprehensive Income
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     ---------------------------------------------------------------------------------------
                                                                       Three Months Ended
                                                                             June 30
                                                                     -----------------------
     (in millions)                                                         2005      2004
     ---------------------------------------------------------------------------------------
     Net (loss) income                                                  $    (1)    $  154
     Other comprehensive income (loss):
       Reclassification adjustments included in net income:
         Change in cash flow hedges (net of tax expense of
           $2 and $3, respectively)                                           3         4
       Changes in net unrealized gains on cash flow hedges
         (net of tax expense of $26 and $0, respectively)                    44         2
       Foreign currency translation adjustment and other                     (1)       (1)
     ---------------------------------------------------------------------------------------
             Other comprehensive income                                 $    46     $   5
     ---------------------------------------------------------------------------------------
       Comprehensive income                                             $    45     $ 159
     ---------------------------------------------------------------------------------------
</TABLE>
                                       15

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

      ---------------------------------------------------------------------------------------
                                                                          Six Months Ended
                                                                              June 30
                                                                      -----------------------
      (in millions)                                                         2005       2004
      ---------------------------------------------------------------------------------------
      Net income                                                         $    92     $  262
      Other comprehensive income (loss):
        Reclassification adjustments included in net income:
          Change in cash flow hedges (net of tax expense of
            $3 and $5, respectively)                                           5          8
          Foreign currency translation adjustments included in
            discontinued operations                                           (6)         -
          Minimum pension liability adjustment included in
            discontinued operations (net of tax expense of $1)                 1          -
        Changes in net unrealized gains (losses) on cash flow hedges
            (net of tax expense (benefit) of $31 and ($8),respectively)       50        (15)
        Foreign currency translation adjustment and other                      1          1
      ---------------------------------------------------------------------------------------
              Other comprehensive income (loss)                          $    51     $   (6)
      ---------------------------------------------------------------------------------------
        Comprehensive income                                             $   143     $  256
      ---------------------------------------------------------------------------------------
</TABLE>

     C. Common Stock

     At December 31, 2004,  the Company had  approximately  63 million shares of
     common stock  authorized by the Board of Directors  that remained  unissued
     and  reserved.  In 2002,  the Board of  Directors  authorized  meeting  the
     requirements of the Progress Energy 401(k) Savings and Stock Ownership Plan
     and the Investor Plus Stock Purchase Plan with original  issue shares.  For
     the  three  and  six  months  ended  June  30,  2005,  the  Company  issued
     approximately  2.6  million  shares and 3.9 million  shares,  respectively,
     under these plans for net proceeds of  approximately  $111 million and $169
     million, respectively.

7.   DEBT AND CREDIT FACILITIES AND FINANCING ACTIVITIES

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

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

     On January 31, 2005,  Progress Energy, Inc. entered into a new $600 million
     RCA,  which was to expire on December 30, 2005.  This facility was added to
     provide additional liquidity,  to the extent necessary,  during 2005 due in
     part to the  uncertainty of the timing of storm  restoration  cost recovery
     from the  hurricanes  in Florida  during  2004.  On February 4, 2005,  $300
     million was drawn under the new facility to reduce commercial paper and pay
     off the remaining amount of loans  outstanding  under other RCA facilities,
     which  consisted of $160 million at Progress Energy and $55 million at PEF.
     As  discussed  below,  the  maximum  size of this RCA was  reduced  to $300
     million on March 22, 2005 and subsequently terminated on May 16, 2005.

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

     In March 2005,  Progress  Energy,  Inc.'s  $1.1  billion  five-year  credit
     facility  was amended to increase the maximum  total debt to total  capital
     ratio  from  65%  to  68%  due  to  the  potential  impacts  of a  proposed
     interpretation of SFAS No. 109 regarding accounting rules for uncertain tax
     positions (See Note 2).

                                       16
<PAGE>

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

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

     In May 2005,  Progress  Energy,  Inc.  used  proceeds  from the issuance of
     commercial paper to pay off $300 million of its $600 million RCA.

     On May 16, 2005,  PEF issued $300 million of First  Mortgage  Bonds,  4.50%
     Series due 2010.  The net proceeds  from the sale of the bonds were used to
     reduce the outstanding  balance of commercial paper.  Pursuant to the terms
     of the  Progress  Energy $600  million  RCA,  commitments  were  completely
     reduced and the RCA was terminated, effective May 16, 2005.

     On July 1, 2005, PEF paid at maturity $45 million of its 6.72%  Medium-Term
     Notes, Series B with short-term debt proceeds.

     On July 28, 2005, PEC filed a shelf registration  statement with the SEC to
     provide an  additional  $1.0  billion of  capacity  in addition to the $400
     million remaining on PEC's current shelf registration statement.  The shelf
     registration   statement  will  allow  PEC  to  issue  various  securities,
     including First Mortgage Bonds, Senior Notes, Debt Securities and Preferred
     Stock.

     On July 28, 2005, PEF filed a shelf registration  statement with the SEC to
     provide an  additional  $1.0  billion of  capacity  in addition to the $450
     million remaining on PEF's current shelf registration statement.  The shelf
     registration   statement  will  allow  PEF  to  issue  various  securities,
     including First Mortgage Bonds, Debt Securities and Preferred Stock.

8.   BENEFIT PLANS

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

                                       17
<PAGE>
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                                                Other Postretirement
                                                      Pension Benefits                Benefits
     Three Months Ended June 30                    -----------------------     -----------------------
     (in millions)                                     2005        2004            2005        2004
                                                   -----------------------     -----------------------
     Service cost                                  $    15       $   13          $    3     $     4
     Interest cost                                      29           28               8           8
     Expected return on plan assets                    (37)         (37)             (1)         (1)
     Amortization of actuarial loss                      6            5               1           1
     Other amortization, net                             1            -               -           1
                                                    ----------------------     -----------------------
     Net periodic cost                             $    14       $    9         $    11     $    13
     Additional cost / (benefit) recognition (a)        (4)          (4)              1           1
                                                    ----------------------     -----------------------
     Net periodic cost recognized                  $    10   $        5         $    12     $    14
                                                    ======================     ======================

                                                                                Other Postretirement
                                                       Pension Benefits                Benefits
     Six Months Ended June 30                      -----------------------     -----------------------
     (in millions)                                       2005        2004            2005        2004
                                                   -----------------------     -----------------------
     Service cost                                  $    30       $   27         $     6     $     8
     Interest cost                                      57           55              16          17
     Expected return on plan assets                    (73)         (75)             (3)         (2)
     Amortization of actuarial loss                     12           11               2           2
     Other amortization, net                             1            -               1           1
                                                   -----------------------     ------------------------
     Net periodic cost                             $    27   $       18         $    22     $    26
     Additional cost / (benefit) recognition (a)        (8)          (8)              1           1
                                                  -----------------------      ------------------------
     Net periodic cost recognized                  $    19   $       10         $    23     $    27
                                                  =======================      ========================
</TABLE>


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

     In addition,  in the second quarter of 2005 the Company  recorded costs for
     special  termination  benefits related to its voluntary enhanced retirement
     program (see Note 10) of  approximately  $122 million for pension  benefits
     and $19 million for other postretirement  benefits.  These charges resulted
     in a $37 million  decrease in prepaid pension assets,  which is included in
     other assets and deferred  debits,  and a $104 million  increase in pension
     and OPEB liabilities,  which are included in other liabilities and deferred
     credits on the Consolidated Balance Sheets.

 9. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS

     Progress Energy and its  subsidiaries  are exposed to various risks related
     to  changes  in  market  conditions.  The  Company  has a  risk  management
     committee that includes senior executives from various business groups. The
     risk management  committee is responsible for administering risk management
     policies and monitoring compliance with those policies by all subsidiaries.
     Under  its risk  policy,  the  Company  may use a variety  of  instruments,
     including  swaps,  options and  forward  contracts,  to manage  exposure to
     fluctuations  in commodity  prices and  interest  rates.  Such  instruments
     contain  credit  risk  if the  counterparty  fails  to  perform  under  the
     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.  See Note 18 to the
     Company's Annual Report on Form 10-K for the year ended December 31, 2004.

     A. Commodity Derivatives

     General

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

                                       18
<PAGE>

     In 2003, PEC recorded a $38 million  pre-tax ($23 million  after-tax)  fair
     value loss  transition  adjustment  pursuant to the provisions of DIG Issue
     C20, "Scope  Exceptions:  Interpretation  of the Meaning of Not Clearly and
     Closely  Related  in  Paragraph  10(b)  regarding  Contracts  with a  Price
     Adjustment  Feature." The related  liability is being amortized to earnings
     over the term of the  related  contract  (See Note 12). As of June 30, 2005
     and December  31, 2004,  the  remaining  liability  was $23 million and $26
     million, respectively.

     Economic Derivatives

     Derivative products,  primarily electricity and natural gas contracts,  may
     be entered  into from time to time for  economic  hedging  purposes.  While
     management  believes the economic hedges mitigate exposures to fluctuations
     in commodity  prices,  these  instruments  are not designated as hedges for
     accounting  purposes and are monitored  consistent with trading  positions.
     The Company  manages open  positions  with strict  policies  that limit its
     exposure  to market risk and  require  daily  reporting  to  management  of
     potential financial exposures.  The Company recorded pre-tax losses of less
     than $1 million and $2 million on such contracts for the three months ended
     June 30, 2005 and 2004,  respectively.  The  Company  recorded a $2 million
     pre-tax gain and a $14 million  pre-tax loss on such  contracts for the six
     months ended June 30, 2005 and 2004, respectively. The Company did not have
     material  outstanding  positions in such  contracts as of June 30, 2005 and
     December  31,  2004,  other  than  those  receiving  regulatory  accounting
     treatment, as discussed below.

     PEF  has   derivative   instruments   related  to  its  exposure  to  price
     fluctuations on fuel oil purchases.  These instruments  receive  regulatory
     accounting   treatment.   Unrealized  gains  and  losses  are  recorded  in
     regulatory liabilities and regulatory assets, respectively.  As of June 30,
     2005, the fair values of these  instruments  were a $60 million  short-term
     derivative  asset  position  included  in other  current  assets  and a $22
     million  long-term  derivative asset position  included in other assets and
     deferred  debits.  As of  December  31,  2004,  the  fair  values  of these
     instruments were a $2 million long-term  derivative asset position included
     in other assets and deferred debits and a $5 million short-term  derivative
     liability position included in other current liabilities.

     Cash Flow Hedges

     Progress  Energy's  nonregulated   subsidiaries   designate  a  portion  of
     commodity  derivative  instruments  as cash flow hedges under SFAS No. 133.
     The objective for holding these  instruments is to hedge exposure to market
     risk  associated  with  fluctuations  in the price of  natural  gas for the
     Company's  forecasted  purchases and sales.  Realized  gains and losses are
     recorded net in operating revenues or operating  expenses,  as appropriate.
     The ineffective portion of commodity cash flow hedges for the three and six
     months  ending June 30, 2005 and 2004,  was not  material to the  Company's
     results of operations.

     The fair  values  of  commodity  cash flow  hedges as of June 30,  2005 and
     December 31, 2004, were as follows:

     --------------------------------------------------------------
     (in millions)                      June 30,      December 31,
                                            2005              2004
     --------------------------------------------------------------
     Fair value of assets                $ 96             $   -
     Fair value of liabilities            (24)              (15)
     --------------------------------------------------------------
     Fair value, net                     $ 72             $ (15)
     --------------------------------------------------------------

     The following table presents selected  information related to the Company's
     commodity cash flow hedges as of June 30, 2005:

                                       19
<PAGE>

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

     Commodity cash flow
        hedges                10            $ 44                  $ (9)
    ---------------------------------------------------------------------------

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

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

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

     The fair  values of interest  rate hedges as of June 30, 2005 and  December
     31, 2004, were as follows:

     --------------------------------------------------------------------
                                                June 30,   December 31,
     (in millions)                                 2005          2004
     --------------------------------------------------------------------
     Interest rate cash flow hedges              $ (3)          $(2)

     Interest rate fair value hedges             $  2           $ 3

     --------------------------------------------------------------------

     Cash Flow Hedges

     Gains and losses  from cash flow  hedges are  recorded  in OCI and  amounts
     reclassified to earnings are included in net interest charges as the hedged
     transactions  occur.  Amounts  in OCI  related  to  terminated  hedges  are
     reclassified  to  earnings  as  the  interest  expense  is  recorded.   The
     ineffective portion of interest rate cash flow hedges for the three and six
     months  ending June 30, 2005 and 2004,  was not  material to the  Company's
     results of operations.

     The following table presents selected  information related to the Company's
     interest rate cash flow hedges included in OCI as of June 30, 2005:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

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

        Interest rate cash  Less than
           flow hedges         one            $ (17)                $ (3)
      -----------------------------------------------------------------------------
</TABLE>

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

     As of June 30, 2005 and  December  31,  2004,  the Company had $300 million
     notional and $331 million  notional,  respectively,  of interest  rate cash
     flow hedges.

                                       20

<PAGE>

     Fair Value Hedges

     For interest  rate fair value  hedges,  the change in the fair value of the
     hedging derivative is recorded in net interest charges and is offset by the
     change  in the  fair  value of the  hedged  item.  As of June 30,  2005 and
     December 31, 2004,  the Company had $150 million  notional of interest rate
     fair value hedges.

10.  SEVERANCE COSTS

     On February 28, 2005,  as part of a previously  announced  cost  management
     initiative,  the  Company  approved  a  workforce  restructuring  which  is
     expected to be  completed  in  September  2005 and result in a reduction of
     approximately 450 positions.  The cost management initiative is designed to
     permanently  reduce by $75 million to $100 million the projected  growth in
     the  Company's  annual O&M expenses by the end of 2007.  In addition to the
     workforce   restructuring,   the  cost  management  initiative  included  a
     voluntary enhanced  retirement program. In connection with this initiative,
     the Company  incurred  approximately  $176  million of pre-tax  charges for
     severance and postretirement  benefits during the six months ended June 30,
     2005, as described below.

     The Company  recorded  $31 million of  severance  expense  during the first
     quarter of 2005 for the workforce  restructuring  and  implementation of an
     automated  meter reading  initiative  at PEF. The  workforce  restructuring
     expense was  computed  based on the  approximate  number of positions to be
     eliminated. During the second quarter of 2005, 1,447 employees eligible for
     participation  in the  voluntary  enhanced  retirement  program  elected to
     participate.  Consequently,  in the  second  quarter of 2005,  the  Company
     decreased its estimated severance costs by $13 million due to the impact of
     the employees electing  participation in the voluntary enhanced  retirement
     program.  The severance  expenses are primarily  included in O&M expense on
     the Consolidated Statements of Income.

     The accrued  severance  expense will be paid over time. The activity in the
     severance liability is as follows:

     ------------------------------------------------------------
     (in millions)
     ------------------------------------------------------------
     Balance as of January 1, 2005                           $ 5
     Severance costs accrued                                  31
     Adjustments                                             (13)
     Payments                                                 (2)
     ------------------------------------------------------------
     Balance as of June 30, 2005                             $21
     ------------------------------------------------------------

     The Company  recorded a $141 million  charge in the second  quarter of 2005
     related to postretirement  benefits that will be paid over time to eligible
     employees who elected to participate in the voluntary  enhanced  retirement
     program  (see Note 8). In  addition,  the  Company  recorded a $17  million
     charge  for early  retirement  incentives  to be paid over time to  certain
     employees.

     The cost  management  initiative  charges are subject to revision in future
     quarters  based  on  completion  of the  workforce  restructuring  and  the
     potential  additional  impacts that the early retirements and outplacements
     may have on the  Company's  postretirement  plans.  Such  revisions  may be
     significant and may adversely impact the Company's results of operations in
     future  periods.  In  addition,   the  Company  expects  to  incur  certain
     incremental  costs for recruiting and staff  augmentation  activities  that
     cannot be quantified at this time.

11.  FINANCIAL INFORMATION BY BUSINESS SEGMENT

     The  Company's  reportable  segments  include:  Progress  Energy  Carolinas
     Electric  (PEC  Electric),   Progress  Energy  Florida  (PEF),  Competitive
     Commercial Operations (CCO), Fuels and Synthetic Fuels.

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

                                       21
<PAGE>
     Fuels is engaged in natural gas  production  in Texas and  Louisiana,  coal
     mining,  coal  terminal  services and fuel  transportation  and delivery in
     Kentucky, West Virginia and Virginia.

     CCO is primarily engaged in nonregulated electric generation operations and
     marketing activities in Georgia, North Carolina and Florida.

     Synthetic  Fuel  operations  include the  production and sale of coal-based
     solid  synthetic fuel (as defined under the Internal  Revenue Code) and the
     operation  of  synthetic  fuel  facilities  for  outside  parties  in  West
     Virginia, Virginia and Kentucky. See Note 14 for more information.

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

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

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

     -------------------------------------------------------------------------- --------------------------
                                             Revenues
                                -----------------------------------

                                                                       Postretirement   Income
                                                                            and          from
                                                                         Severance     Continuing
      (in millions)                Unaffiliated  Intersegment  Total      Charges      Operations   Assets
     -----------------------------------------------------------------------------------------------------
     FOR THE THREE MONTHS
     ENDED JUNE 30, 2005
     --------------------------
     PEC Electric                   $   860         $   -     $  860      $   46        $  68      $ 10,830
     PEF                                908             -        908          93           10         7,742
     Fuels                              178           335        513           4           12           813
     CCO                                158             -        158           1           (3)        1,755
     Synthetic Fuels                    213             -        213           -           23           290
     Corporate and Other                 16           126        142           1         (104)       17,456
     Eliminations                         -          (461)      (461)          -            -       (13,240)
     ------------------------------------------------------------------------------------------------------
     Consolidated totals            $ 2,333         $   -     $2,333      $  145        $   6      $ 25,646
     ------------------------------------------------------------------------------------------------------
     ------------------------------------------------------------------------------------------------------
     FOR THE THREE MONTHS
     ENDED JUNE 30, 2004
     --------------------------
     PEC Electric                   $   861         $   -     $  861      $    5        $  97
     PEF                                860             -        860           -           84
     Fuels                              146           273        419           -           17
     CCO                                 72             -         72           -            5
     Synthetic Fuels                    161             2        163           -           36
     Corporate and Other                 23           104        127           -          (93)
     Eliminations                         -          (379)      (379)          -            -
     -----------------------------------------------------------------------------------------
     Consolidated totals            $ 2,123         $   -     $2,123      $    5        $ 146
     -----------------------------------------------------------------------------------------
</TABLE>

                                       22

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

     -------------------------------------------------------------------------- --------------------------
                                             Revenues
                                -----------------------------------

                                                                       Postretirement   Income
                                                                            and          from
                                                                         Severance     Continuing
      (in millions)                Unaffiliated  Intersegment  Total      Charges      Operations   Assets
     -----------------------------------------------------------------------------------------------------
     FOR THE SIX
     MONTHS ENDED
     JUNE 30, 2005
     --------------------------
     PEC Electric                   $ 1,795         $   -     $1,795      $   60        $ 184      $ 10,830
     PEF                              1,756             -      1,756         107           53         7,742
     Fuels                              314           642        956           6           23           813
     CCO                                222             -        222           2           (9)        1,755
     Synthetic Fuels                    411             -        411           -           22           290
     Corporate and Other                 33           227        260           1         (162)       17,456
     Eliminations                         -          (869)      (869)          -            -       (13,240)
     ------------------------------------------------------------------------------------------------------
     Consolidated totals            $ 4,531         $   -     $4,531      $  176        $ 111      $ 25,646
     ------------------------------------------------------------------------------------------------------

    -------------------------------------------------------------------------------------------------------
     FOR THE SIX
     MONTHS ENDED
     JUNE 30, 2004
     --------------------------
     PEC Electric                   $ 1,762         $   -     $1,762      $    5        $ 213
     PEF                              1,644             -      1,644           1          133
     Fuels                              252           539        791           -           27
     CCO                                105             -        105           -           (3)
     Synthetic Fuels                    326             6        332           -           72
     Corporate and Other                 40           201        241           -         (197)
     Eliminations                         -          (746)      (746)          -            -
     ----------------------------------------------------------------------------------------------
     Consolidated totals            $ 4,129         $   -     $4,129      $    6        $ 245
     ----------------------------------------------------------------------------------------------
</TABLE>

12.  OTHER INCOME AND OTHER EXPENSE

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

     ---------------------------------------------------------------------------------------
                                                       Three Months Ended   Six Months Ended
                                                             June 30             June 30
                                                      -------------------   ----------------
     (in millions)                                        2005    2004         2005     2004
     ---------------------------------------------------------------------------------------
     Other income
     Nonregulated energy and delivery services income     $ 11    $  7         $ 17     $ 12
     DIG Issue C20 Amortization (see Note 9)                 2       2            3        4
     Investment gains                                        -       2            3        4
     Income from equity investments                          3       -            5        -
     Gain on sale of distribution assets (see Note 5)       25       -           25        -
     AFUDC equity                                            5       2            9        4
     Other                                                   3       8            8       14
     ---------------------------------------------------------------------------------------
         Total other income                               $ 49    $ 21         $ 70     $ 38
     ---------------------------------------------------------------------------------------
     Other expense
     Nonregulated energy and delivery services
        expenses                                          $  5    $  5         $ 10     $  9
     Donations                                               5       2           11       10
     Investment losses                                       -       3            -        3
     Contingent value obligations unrealized loss            -       5            -       13
     Loss from equity investments                            4       4           10        7
     Write-off of non-trade receivables                      -       -            -        7
     FERC audit settlement                                   7       -            7        -
     Other                                                   9       5           11       14
     ---------------------------------------------------------------------------------------
         Total other expense                              $ 30    $ 24         $ 49     $ 63
     ---------------------------------------------------------------------------------------
     Other, net                                           $ 19    $ (3)        $  21    $(25)
     ---------------------------------------------------------------------------------------
</TABLE>
                                       23
<PAGE>

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

     FERC audit  settlement  includes  amounts  approved  by the FERC on May 25,
     2005, to settle the FERC Staff's Audit of PEC's and PEF's  compliance  with
     the FERC's Standards of Conduct and Code of Conduct. In the settlement, PEC
     and PEF agreed to make certain  operational and organizational  changes and
     to  provide  their  retail and  wholesale  customers  a one-time  credit of
     approximately  $7 million which was recorded as other expense in the second
     quarter of 2005. PEC recorded $4 million of the settlement and PEF recorded
     the remaining $3 million.

13.  ENVIRONMENTAL MATTERS

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

     HAZARDOUS AND SOLID WASTE MANAGEMENT

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

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

     The Company has filed claims with its general liability  insurance carriers
     to  recover   costs   arising  from  actual  or   potential   environmental
     liabilities.  Almost  all  claims  have  been  settled  and a few are still
     pending. While the Company cannot predict the outcome of these matters, the
     outcome  is not  expected  to have a  material  effect on the  consolidated
     financial position or results of operations.

     PEC

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

     During the fourth  quarter of 2004,  the EPA  advised  PEC that it had been
     identified as a PRP at the Ward Transformer site located in Raleigh,  North
     Carolina. The EPA offered PEC and a number of other PRPs the opportunity to
     negotiate  cleanup of the site and reimbursement of less than $2 million to
     the EPA for EPA's past  expenditures in addressing  conditions at the site.
     PEC and other PRP's are in discussions  with the EPA to reach an agreement.
     However,  as an agreement  among PRPs has not yet been  reached,  it is not
     possible  at this time to  reasonably  estimate  the total  amount of PEC's
     obligation for  remediation of the Ward  Transformer  site. If an agreement
     cannot be reached, the EPA could issue a unilateral order requiring cleanup
     of the site. The Company cannot predict the outcome of this matter.

                                       24
<PAGE>

     As of June 30, 2005 and December 31, 2004,  PEC's accruals for probable and
     estimable costs related to various  environmental sites, which are included
     in other  liabilities and deferred  credits and are expected to be paid out
     over one to five years, were:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     --------------------------------------------------------------------------------
     (in millions)                                  June 30, 2005   December 31, 2004
     --------------------------------------------------------------------------------
     Insurance fund                                           $ 4                 $ 7
     Transferred from North Carolina Natural Gas
        Corporation at time of sale                             2                   2
     --------------------------------------------------------------------------------
     Total accrual for environmental sites                    $ 6                 $ 9
     --------------------------------------------------------------------------------
</TABLE>

     The  insurance  fund in the table above was  established  when PEC received
     insurance   proceeds  to  address  costs   associated  with   environmental
     liabilities  related  to its  involvement  with some  sites.  All  eligible
     expenses  related  to these  sites  are  charged  against a  specific  fund
     containing  these  proceeds.  For the three and six  months  ended June 30,
     2005, PEC made no additional accruals,  received no insurance proceeds, and
     spent  approximately  $1 million and $3 million,  respectively,  related to
     environmental remediation.

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

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

     PEF

     As of June 30, 2005 and December 31, 2004,  PEF's accruals for probable and
     estimable costs related to various  environmental sites, which are included
     in other  liabilities and deferred  credits and are expected to be paid out
     over one to fifteen years, were:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     --------------------------------------------------------------------------------------------
     (in millions)                                               June 30, 2005  December 31, 2004
     --------------------------------------------------------------------------------------------
     Remediation of distribution and substation transformers              $ 22              $ 27
     MGP and other sites                                                    18                18
     --------------------------------------------------------------------------------------------
     Total accrual for environmental sites                                $ 40              $ 45
     --------------------------------------------------------------------------------------------
</TABLE>

     PEF has received  approval  from the FPSC for recovery of costs  associated
     with the remediation of distribution  and substation  transformers  through
     the  Environmental  Cost Recovery Clause (ECRC).  Under agreements with the
     Florida  Department  of  Environmental  Protection  (FDEP),  PEF  is in the
     process of examining  distribution  transformer  sites and substation sites
     for potential  equipment integrity issues that could result in the need for
     mineral  oil  impacted  soil  remediation.  PEF has  reviewed  a number  of
     distribution  transformer  sites and all substation  sites.  PEF expects to
     have completed its review of distribution  transformer  sites by the end of
     2007.  Should further sites be identified,  PEF believes that any estimated
     costs  would  also be  recovered  through  the ECRC.  For the three and six
     months  ended June 30,  2005,  PEF made no  additional  accruals  and spent
     approximately  $3  million  and $5  million,  respectively,  related to the
     remediation of  transformers.  PEF has recorded a regulatory  asset for the
     probable recovery of these costs through the ECRC.

                                       25
<PAGE>
     The  amounts for MGP and other  sites,  in the table  above,  relate to two
     former MGP sites and other sites  associated with PEF that have required or
     are anticipated to require  investigation and/or remediation.  In 2004, PEF
     received  approximately $12 million in insurance claim settlement  proceeds
     and recorded a related accrual for associated  environmental  expenses,  as
     these  insurance  proceeds  are  restricted  for  use in  addressing  costs
     associated  with  environmental  liabilities.  For the three and six months
     ended  June  30,  2005,  PEF  made  no  additional   accruals  or  material
     expenditures and received no insurance proceeds.

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

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

     Florida Progress Corporation

     In 2001, FPC established an accrual to address  indemnities and retained an
     environmental  liability  associated  with  the sale of its  Inland  Marine
     Transportation  business.  In 2003,  the  accrual was reduced to $4 million
     based on a change in  estimate.  As of June 30, 2005 and December 31, 2004,
     the remaining  accrual balance was  approximately $3 million.  Expenditures
     related to this  liability  were not  material to the  Company's  financial
     condition  for the three and six months ended June 30,  2005.  FPC measures
     its  liability  for  these   exposures  based  on  estimable  and  probable
     remediation scenarios.

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

     Progress Rail

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

     AIR QUALITY

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

                                       26
<PAGE>
     The EPA is  conducting  an  enforcement  initiative  related to a number of
     coal-fired  utility power plants in an effort to determine  whether changes
     at those facilities were subject to New Source Review (NSR) requirements or
     New Source  Performance  Standards under the Clean Air Act. The Company was
     asked to  provide  information  to the EPA as part of this  initiative  and
     cooperated in supplying the requested information.  The EPA initiated civil
     enforcement  actions against other  unaffiliated  utilities as part of this
     initiative. Some of these actions resulted in settlement agreements calling
     for expenditures by these unaffiliated utilities in excess of $1.0 billion.
     These  settlement  agreements have generally  called for expenditures to be
     made  over  extended  time  periods,  and  some of the  companies  may seek
     recovery  of  the  related  cost  through  rate   adjustments   or  similar
     mechanisms.

     Total capital expenditures to meet the requirements of the final rule under
     Section 110 of the Clean Air Act (NOx SIP Call) in North and South Carolina
     could reach approximately $370 million.  This amount also includes the cost
     to  install  NOx  controls  under  North  Carolina's  and South  Carolina's
     programs to comply with the federal 8-hour ozone standard. However, further
     technical analysis and rulemaking may result in requirements for additional
     controls at some units. To date, the Company has spent  approximately  $324
     million  related  to  these  projected  amounts.  Increased  operation  and
     maintenance  costs  relating  to the NOx SIP  Call are not  expected  to be
     material to the  Company's  results of  operations.  Further  controls  are
     anticipated  as  electricity  demand  increases.  Parties  unrelated to the
     Company have undertaken  efforts to have Georgia excluded from the rule and
     its requirements. Georgia has not yet submitted a state implementation plan
     to comply with the Section 110 NOx SIP Call. The Company cannot predict the
     outcome of this  matter for the impact to its  nonregulated  operations  in
     Georgia.

     The Company  projects that its capital  costs to meet emission  targets for
     NOx and SO2 from coal-fired  power plants under the  Smokestacks  Act, will
     total  approximately  $895  million  by the end of 2013.  PEC has  expended
     approximately  $190 million of these  capital  costs through June 30, 2005.
     The  Smokestacks  Act requires  PEC to amortize  70% of the  original  cost
     estimate of $813  million,  during a  five-year  rate  freeze  period.  PEC
     recognized amortization of $27 million and $54 million,  respectively,  for
     the three and six  months  ended June 30,  2005,  and has  recognized  $302
     million in  cumulative  amortization  through June 30, 2005.  The remaining
     amortization  requirement  will be recorded  over the future  period ending
     December  31,  2007.  The law  permits  PEC  the  flexibility  to vary  the
     amortization  schedule for recording the  compliance  costs from zero up to
     $174 million of amortization expense per year. The NCUC will hold a hearing
     prior to December 31, 2007, to determine cost recovery amounts for 2008 and
     future  periods.  O&M  expense  will  significantly  increase  due  to  the
     additional materials, personnel and general maintenance associated with the
     equipment.  O&M expenses are recoverable through base rates, rather than as
     part of this  program.  The Company  cannot  predict the future  regulatory
     interpretation, implementation or impact of this law.

     On March 10,  2005,  the EPA issued  the final  Clean Air  Interstate  Rule
     (CAIR). The EPA's rule requires 28 states,  including North Carolina, South
     Carolina,  Georgia and Florida,  and the District of Columbia to reduce NOx
     and SO2  emissions in order to attain state NOx and SO2  emissions  levels.
     Installation  of additional air quality  controls is likely to be needed to
     meet the CAIR  requirements.  The Company is in the process of  determining
     compliance  plans and the cost to comply  with the  rule.  The air  quality
     controls  already  installed  for  compliance  with  the NOx SIP  Call  and
     currently  planned by the Company to comply with the  Smokestacks  Act will
     reduce the costs required to meet the CAIR  requirements  for the Company's
     North Carolina units. The Company preliminarily  estimates compliance costs
     for PEF could be  approximately  $1.0 billion over the next ten years.  PEF
     has joined a coalition of Florida  utilities  that has filed a challenge to
     CAIR as it applies to Florida. A petition for  reconsideration and stay and
     a petition  for judicial  review of CAIR were filed on July 11,  2005.  The
     Company cannot predict the outcome of this matter.

                                       27

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

     On June 24, 2005, the Court of Appeals for the District of Columbia Circuit
     rendered a decision  in a suit  regarding  EPA's NSR rules.  As part of the
     decision,  the court struck down a provision  excluding  pollution  control
     projects from NSR  requirements.  As a result of this decision,  additional
     regulatory review of the Company's  pollution  control equipment  proposals
     will be required adding time and cost to the overall project.

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

     On May 6, 2005, PEF filed a petition with the FPSC through the ECRC program
     for recovery of costs associated with the development and implementation of
     an integrated  strategy to comply with the CAIR and CAMR. PEF is developing
     an integrated  compliance  strategy for the CAIR and CAMR rules because NOx
     and SO2 controls  also are  effective in reducing  mercury  emissions.  PEF
     estimates  the program  costs for 2005 to be  approximately  $2 million for
     preliminary  engineering activities and strategy development work necessary
     to determine the Company's  integrated  compliance  strategy.  PEF projects
     approximately  $62  million  in  program  costs for 2006.  These  costs may
     increase or decrease  depending  upon the  results of the  engineering  and
     strategy   development   work.   Among  other   things;   subsequent   rule
     interpretations,  equipment availability, or the unexpected acceleration of
     the initial NOx or other  compliance  dates could require  acceleration  of
     some  projects and therefore  result in additional  costs in 2005 and 2006.
     PEF  expects  to incur  significant  additional  capital  and O&M  costs to
     achieve  compliance  with the CAIR and CAMR  through  2015 and beyond.  The
     timing and extent of the costs for future  projects  will  depend  upon the
     final compliance strategy.

     In March 2004,  the North Carolina  Attorney  General filed a petition with
     the EPA  under  Section  126 of the  Clean  Air  Act,  asking  the  federal
     government to force coal-fired  power plants in 13 other states,  including
     South Carolina,  to reduce their NOx and SO2 emissions.  The state of North
     Carolina  contends  these  out-of-state   emissions  interfere  with  North
     Carolina's  ability to meet  national air quality  standards  for ozone and
     particulate  matter.  On August 1, 2005, the EPA issued a proposed response
     denying the petition.  The EPA's  rationale  for denial is that  compliance
     with CAIR will reduce the emissions from surrounding states sufficiently to
     address  North  Carolina's  concerns.  The EPA will  hold a  60-day  public
     comment  period from the date that the proposal is published in the Federal
     Register and must take final action by March 15, 2006.  The Company  cannot
     predict the outcome of this matter.

     In a decision  issued  July 15,  2005,  the U.S.  Court of Appeals  for the
     District of Columbia  Circuit denied  petitions for review filed by several
     states,  cities and  organizations  seeking  the  regulation  by the EPA of
     carbon  dioxide  emissions  under  the  Clean  Air Act.  The court in a 2-1
     decision, held that the EPA Administrator properly exercised his discretion
     in denying the request for regulation.

     WATER QUALITY

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

                                       28
<PAGE>
     Based on new cost  information  and changes to the estimated  time frame of
     expenditures since December 31, 2004, the Company has revised the estimated
     amounts  and  time  period  for   expenditures   to  meet  Section   316(b)
     requirements of the Clean Water Act. The Company  currently  estimates that
     from 2005 through 2010 the range of expenditures  will be approximately $80
     million to $110 million.  The range  includes $15 million to $25 million at
     PEC and $65 million to $85 million at PEF.

     OTHER ENVIRONMENTAL MATTERS

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

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

14.  COMMITMENTS AND CONTINGENCIES

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

     A. Purchase Obligations

     As part of Progress  Energy's  ordinary course of business,  it enters into
     various  long  and  short  term  contracts  for  fuel  requirements  at its
     generating  plants.  Through June 30, 2005,  contracts procured through PEC
     have increased the Company's  aggregate  purchase  obligations for fuel and
     purchased  power by  approximately  $709  million as compared to the amount
     stated in the Company's Form 10-K for the year ended December 31, 2004. The
     increase  primarily  covers the period  ranging from 2005  through  2009. A
     majority of the contracts  related to the increase in purchase  obligations
     for fuel and purchased  power are for future coal purchases  primarily with
     fixed prices.

     B. Guarantees

     As a part of normal  business,  Progress  Energy and  certain  wholly-owned
     subsidiaries  enter into various  agreements  providing future financial or
     performance  assurances  to third  parties,  which are outside the scope of
     FASB  Interpretation  No.  45,   "Guarantor's   Accounting  and  Disclosure
     Requirements for Guarantees,  Including Indirect Guarantees of Indebtedness
     of Others"  (FIN No.  45).  Such  agreements  include  guarantees,  standby
     letters of credit and surety bonds.  As of June 30, 2005,  the Company does
     not believe  conditions are likely for significant  performance under these
     guarantees.  To the  extent  liabilities  are  incurred  as a result of the
     activities covered by the guarantees,  such liabilities are included in the
     accompanying Consolidated Balance Sheets.

     As of June 30, 2005, the Company has issued guarantees and indemnifications
     of  certain  legal,  tax and  environmental  matters  to third  parties  in
     connection  with sales of businesses  and for timely payment of obligations
     in support of its non-wholly  owned synthetic fuel  operations.  Related to
     the sales of  businesses,  the  notice  period  extends  until 2012 for the
     majority of matters  provided for in the  indemnification  provisions.  For
     matters for which the Company has received  timely  notice,  the  Company's
     indemnity  obligations  may  extend  beyond  the  notice  period.   Certain
     environmental  indemnifications  related  to the  sale  of  synthetic  fuel
     operations  have no  limitations  as to time or  maximum  potential  future
     payments.  Other guarantees and indemnifications  have an estimated maximum
     exposure of  approximately  $152 million.  As of June 30, 2005, the Company
     has recorded  liabilities  related to guarantees  and  indemnifications  to
     third-parties  of $27 million.  Management does not believe  conditions are
     likely for significant  performance under these agreements in excess of the
     recorded liabilities.

                                       29
<PAGE>
     C. Insurance

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

     D. Other Commitments

     As discussed in Note 23B of the Progress  Energy annual report on Form 10-K
     for the year ended  December  31,  2004,  the Company  has  certain  future
     commitments  related  to four  synthetic  fuel  facilities  purchased  that
     provide for contingent payments (royalties).  The Company has exercised its
     right in the  related  agreements  to  escrow  those  payments  if  certain
     conditions in the agreements were met. The Company  previously  accrued and
     retained 2004 and 2003 royalty  payments of  approximately  $41 million and
     $49 million, respectively. In May 2005, these funds were placed into escrow
     upon establishment of the necessary escrow accounts.

     On May  15,  2005,  the  original  owners  of the  Earthco  synthetic  fuel
     facilities  filed suit in New York state court alleging  breach of contract
     against the Progress  Fuels  Corporation  subsidiaries  that  purchased the
     Earthco facilities (Progress Fuels subsidiaries). The plaintiffs also named
     Progress  Energy,  Inc. as a defendant.  The plaintiffs'  complaint is that
     periodic  payments  otherwise due to them under the sales  arrangement with
     the Progress Fuels subsidiaries are, contrary to the sales agreement, being
     escrowed  pending  the  outcome  of the  ongoing  IRS audit of the  Earthco
     facilities.  The  Progress  Fuels  subsidiaries  believe  that the parties'
     agreements  allow for the  payments  to be  escrowed in such event and also
     allow  for  the use of such  escrowed  amounts  to  satisfy  any  potential
     disallowance  of tax credits  that arises out of such an event.  Currently,
     the escrowed  amount in question is $87 million,  which  reflects  periodic
     payments that would have been paid to the  plaintiffs  beginning  April 30,
     2003 through July 31, 2005.  This amount will  increase as future  periodic
     payments are made to the escrow which would  otherwise have been payable to
     the plaintiffs.  The Company and the Progress Fuels subsidiaries  intend to
     vigorously  defend their  actions,  but cannot  predict the outcome of this
     matter.

     E. Other Contingencies

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

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

     The DOE and the  PEC/PEF  parties  have  agreed  to a stay of the  lawsuit,
     including discovery.  The parties agreed to, and the trial court entered, a
     stay of proceedings, in order to allow for possible efficiencies due to the
     resolution of legal and factual  issues in previously  filed cases in which
     similar  claims are being  pursued by other  plaintiffs.  These  issues may
     include,  among others,  so-called "rate issues," or the minimum  mandatory
     schedule for the  acceptance of SNF and high level waste (HLW) by which the
     Government  was  contractually  obligated to accept  contract  holders' SNF
     and/or HLW, and issues regarding recovery of damages under a partial breach
     of  contract  theory  that will be  alleged to occur in the  future.  These
     issues have been or are  expected to be  presented in the trials or appeals
     that are  currently  scheduled to occur during  2005.  Resolution  of these
     issues in other cases  could  facilitate  agreements  by the parties in the
     PEC/PEF lawsuit, or at a minimum,  inform the Court of decisions reached by
     other courts if they remain contested and require  resolution in this case.
     In July 2005,  the  parties  jointly  requested a  continuance  of the stay
     through December 15, 2005, which the trial court granted.

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

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

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

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

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

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

     On May 4, 2004,  PEC  authorized  its  outside  counsel to file a notice of
     appeal of the April 6, 2004  judgment,  and on May 7,  2004,  the notice of
     appeal  was filed with the United  States  Court of Appeals  for the Fourth
     Circuit. On June 8, 2004, DMT filed a motion to dismiss PEC's appeal on the
     ground that it was untimely.  On July 20, 2005, the appellate  court denied
     DMT's  motion to dismiss  and ruled that the time for PEC to appeal had not
     yet expired.  The appellate  court remanded the case to the trial court for
     further proceedings.

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

     3.  On  February  1,  2002,   PEC  filed  a  complaint   with  the  Surface
     Transportation  Board  (STB)  challenging  the  rates  charged  by  Norfolk
     Southern  Railway Company  (Norfolk  Southern) for coal  transportation  to
     certain generating plants. In a decision served in December,  2003, the STB
     found that the challenged rates exceeded maximum reasonable rate levels and
     prescribed lower rates. In a subsequent decision on reconsideration the STB

                                       31
<PAGE>
     concluded that the rates had not been shown to be  unreasonable,  following
     which PEC requested the STB to consider  requiring that the rates be phased
     in over a period of time. During the course of the complaint  process,  PEC
     accrued a liability  of $42 million.  The  liability  was  comprised of $23
     million  of  reparations  remitted  to PEC by  Norfolk  Southern  that were
     subject to refund and an additional  $19 million,  of which $17 million was
     recorded as deferred  fuel cost on the  Consolidated  Balance  Sheet.  This
     matter has now been settled by mutual agreement,  and the STB has issued an
     order dismissing the case. As a result of the settlement,  PEC reversed the
     previously   recorded   deferred   fuel  cost  and  settled  the  remaining
     obligations for the approximate amount previously  accrued.  The settlement
     had an immaterial impact on the Company's results of operations.

     4. The  Company,  through  its  subsidiaries,  is a majority  owner in five
     entities  and a minority  owner in one  entity  that owns  facilities  that
     produce  coal-based  solid  synthetic  fuel as defined  under the  Internal
     Revenue Code (Code).  The  production  and sale of the synthetic  fuel from
     these  facilities  qualify  for tax  credits  under  Section  29 if certain
     requirements are satisfied, including a requirement that the synthetic fuel
     differs significantly in chemical composition from the coal used to produce
     such synthetic fuel and that the fuel was produced from a facility that was
     placed in service before July 1, 1998. The amount of Section 29 tax credits
     that the Company is allowed to claim in any calendar year is limited by the
     amount of the Company's  regular  federal income tax  liability.  Synthetic
     fuel tax credit  amounts  allowed  but not  utilized  are  carried  forward
     indefinitely as deferred alternative minimum tax credits. All entities have
     received PLRs from the IRS with respect to their synthetic fuel operations.
     However,   these   PLRs  do  not   address   the   placed-in-service   date
     determination. The PLRs do not limit the production on which synthetic fuel
     credits  may be  claimed.  Total  Section  29  credits  generated  to  date
     (including  those generated by FPC prior to its acquisition by the Company)
     are  approximately  $1.6  billion,  of which $719 million have been used to
     offset  regular  federal  income tax  liability  and $839 million are being
     carried  forward as deferred  alternative  minimum tax credits.  Also,  $27
     million  has not  been  recognized  due to the  decrease  in tax  liability
     resulting from expenses  incurred for the 2004 hurricane damage and loss on
     sale of Progress Rail. The current Section 29 tax credit program expires at
     the end of 2007.

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

     IRS PROCEEDINGS

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

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

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

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

                                       32
<PAGE>
     Because of the  disagreement  between the Company and the field auditors as
     to the proper  legal  standard to apply,  the Company  believes  that it is
     appropriate  and helpful to have this issue reviewed by the National Office
     of the IRS,  just as the  National  Office  reviewed  the issues  involving
     chemical  change.  Therefore,  the Company is asking the National Office to
     review the issue and  clarify the legal  standard  and has  initiated  this
     process with the National  Office.  The Company  believes  that the appeals
     process, including proceedings before the National Office, could take up to
     two years to  complete;  however,  it cannot  control the actual  timing of
     resolution and cannot predict the outcome of this matter.

     Through June 30, 2005, the Company,  on a consolidated  basis,  has used or
     carried  forward  approximately  $1.1  billion of tax credits  generated by
     Earthco  facilities.  If  these  credits  were  disallowed,  the  Company's
     one-time  exposure for cash tax payments  would be $300 million  (excluding
     interest),  and earnings and equity would be reduced by approximately  $1.1
     billion,  excluding  interest.  These amounts have not been reduced for the
     use of any escrowed  amounts to satisfy a potential  disallowance  of these
     tax credits (see Note 14D).  Progress Energy's amended $1.13 billion credit
     facility includes a covenant that limits the maximum  debt-to-total capital
     ratio to 68%.  This ratio  includes  other  forms of  indebtedness  such as
     guarantees  issued by PGN, letters of credit and capital leases. As of June
     30, 2005, the Company's  debt-to-total capital ratio was 59.1% based on the
     credit  agreement  definition  for this ratio.  The impact on this ratio of
     reversing approximately $1.1 billion of tax credits and paying $300 million
     for taxes would be an increase of the ratio to 63.2%.

     The  Company   believes  that  it  is  complying  with  all  the  necessary
     requirements to be allowed such credits under Section 29, and,  although it
     cannot  provide  certainty,  it  believes  that it will  prevail  in  these
     matters.  The  Company  has no current  plans to alter its  synthetic  fuel
     production  schedule  for 2005 or future years as a result of the IRS field
     auditors'  report.  However,  should the  Company  fail to prevail in these
     matters,  there could be material  liability for previously used or carried
     forward Section 29 tax credits,  with a material adverse impact on earnings
     and cash flows.

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

     PROPOSED ACCOUNTING RULES FOR UNCERTAIN TAX POSITIONS

     On July 14, 2005, the Financial Accounting Standards Board (FASB) issued an
     exposure draft of a proposed  interpretation  of SFAS No. 109,  "Accounting
     for Income  Taxes" (SFAS No. 109),  that would address the  accounting  for
     uncertain tax  positions.  The proposed  interpretation  would require that
     uncertain  tax  benefits be probable of being  sustained in order to record
     such  benefits  in  the  consolidated  financial  statements.  The  Company
     currently  accounts for uncertain tax benefits in accordance  with SFAS No.
     5, "Accounting for Contingencies" (SFAS No. 5). Under SFAS No.5, contingent
     losses are recorded  when it is probable  that the tax position will not be
     sustained and the amount of the disallowance  can be reasonably  estimated.
     The exposure draft has a 60-day public comment period ending  September 12,
     2005. As currently drafted, the proposed  interpretation would apply to all
     uncertain  tax  positions  and be effective for the Company on December 31,
     2005.

     As  discussed  above,  the IRS field  auditors  have  recommended  that the
     Section 29 tax  credits  generated  by the  Company's  Earthco  facilities,
     totaling $1.1 billion through June 30, 2005, be disallowed. The Company has
     not yet determined how the proposed interpretation would impact its various
     income tax  positions,  including  the status of the Earthco  tax  credits.
     Depending  on the  provisions  of the FASB's final  interpretation  and the
     Company's facts and circumstances that exist at the date of implementation,
     including the Company's  assessment of the  probability  of sustaining  any
     currently  recorded and future tax  benefits,  the proposed  interpretation
     could have a material  adverse impact on the Company's  financial  position
     and results of operations.

                                       33
<PAGE>
     PERMANENT SUBCOMMITTEE

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

     IMPACT OF CRUDE OIL PRICES

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

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

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

     The Company  estimates that the 2005 Threshold Price will be  approximately
     $52 per  barrel  and the  Phase  Out price  will be  approximately  $65 per
     barrel,  based on an  estimated  2005  inflation  adjustment.  The  monthly
     Domestic Crude Oil First  Purchases price published by the EIA has recently
     averaged $5 to $6 lower than the corresponding  monthly New York Mercantile
     Exchange  (NYMEX)  settlement price for light sweet crude oil. Through July
     31, 2005, the average NYMEX contract settlement price for light sweet crude
     oil was $51.90 per barrel and the average  futures  price for the remainder
     of 2005 was $61.86 per barrel.  The Company estimates that NYMEX settlement
     price would have to average  approximately $69 per barrel for the remainder
     of 2005 for the Threshold Price to be reached.

     The Company  estimates that the 2006 Threshold Price will be  approximately
     $52 per  barrel  and the  Phase  Out price  will be  approximately  $66 per
     barrel,  based on estimated  inflation  adjustments  for 2005 and 2006. The
     monthly  Domestic Crude Oil First  Purchases price published by the EIA has
     recently  averaged  $5 to $6 lower  than the  corresponding  monthly  NYMEX
     settlement  price for light  sweet  crude  oil.  As of July 31,  2005,  the
     average  NYMEX  futures  price for light sweet crude oil for calendar  year
     2006 was $63.17 per barrel.  Based upon the estimated 2006 Threshold  Price
     and Phase Out prices,  if oil prices for 2006 remained at the July 31, 2005
     average  futures  price  level of $63.17 per barrel for the entire  year in
     2006, the Company currently estimates that the Section 29 tax credit amount
     for 2006 would be reduced by approximately 35% to 40%.

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

                                       34
<PAGE>
     In  response  to the  historically  high oil  prices  to date in 2005,  the
     Company  adjusted its planned  production  schedule for its synthetic  fuel
     plants by shifting some of its production planned for April and May 2005 to
     the second half of 2005.  If oil prices rise and stay at levels high enough
     to  cause a phase  out of tax  credits,  the  Company  may  reduce  planned
     production  or  suspend  production  at some or all of its  synthetic  fuel
     facilities.

     SALE OF PARTNERSHIP INTEREST

     In June 2004, the Company,  through its subsidiary  Progress Fuels, sold in
     two  transactions a combined 49.8%  partnership  interest in Colona Synfuel
     Limited   Partnership,   LLLP,  one  of  its  synthetic  fuel   facilities.
     Substantially all proceeds from the sales will be received over time, which
     is  typical  of such  sales in the  industry.  Gain from the sales  will be
     recognized  on a cost  recovery  basis as the  facility  produces and sells
     synthetic  fuel  and when  there  is  persuasive  evidence  that the  sales
     proceeds have become fixed or determinable and collectability is reasonably
     assured.  Based on projected  production and tax credit levels, the Company
     anticipates  receiving total gross proceeds of approximately $22 million in
     2005,  approximately $32 million in 2006, approximately $34 million in 2007
     and  approximately  $10 million  through the second  quarter of 2008.  Gain
     recognition  is dependent on the synthetic fuel  production  qualifying for
     Section  29 tax  credits  and the value of such tax  credits  as  discussed
     above.  Until the gain  recognition  criteria  are met,  gains from selling
     interests  in Colona will be  deferred.  It is possible  that gains will be
     deferred  in the first,  second  and/or  third  quarters of each year until
     there is  persuasive  evidence  that no tax credit phase out will occur for
     the applicable  calendar year. This could result in shifting  earnings from
     earlier  quarters to later  quarters in a calendar  year. In the event that
     the  synthetic  fuel tax  credits  from the Colona  facility  are  reduced,
     including  an increase  in the price of oil that could  limit or  eliminate
     synthetic fuel tax credits,  the amount of proceeds  realized from the sale
     could be  significantly  impacted.  As of June 30,  2005, a pre-tax gain on
     monetization  of $6 million has been deferred.  Assuming oil prices stay at
     current levels,  the Company  anticipates that this gain will be recognized
     later this year.

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

                                       35
<PAGE>

                         CAROLINA POWER & LIGHT COMPANY
                      d/b/a PROGRESS ENERGY CAROLINAS, INC.
                    CONSOLIDATED INTERIM FINANCIAL STATEMENTS
                                  June 30, 2005

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

                                                      Three Months Ended      Six Months Ended
                                                            June 30               June 30
                                                            -------               -------
(in millions)                                            2005    2004          2005       2004
----------------------------------------------------------------------------------------------
Operating revenues
   Electric                                              $860    $861        $1,795     $1,762
   Diversified business                                     1       1             1          1
----------------------------------------------------------------------------------------------
      Total operating revenues                            861     862         1,796      1,763
----------------------------------------------------------------------------------------------
Operating expenses
   Fuel used in electric generation                       216     193           464        417
   Purchased power                                         73      80           140        142
   Operation and maintenance                              260     226           484        435
   Depreciation and amortization                          130     127           259        254
   Taxes other than on income                              42      45            88         88
----------------------------------------------------------------------------------------------
        Total operating expenses                          721     671         1,435      1,336
----------------------------------------------------------------------------------------------
Operating income                                          140     191           361        427
----------------------------------------------------------------------------------------------
Other income (expense)
   Interest income                                          1       1             3          2
   Other, net                                              (2)      4            (1)        (8)
----------------------------------------------------------------------------------------------
        Total other (expense) income                       (1)      5             2         (6)
----------------------------------------------------------------------------------------------
Interest charges
   Interest charges                                        50      47           102         96
   Allowance for borrowed funds used during construction   (2)      -            (3)        (1)
----------------------------------------------------------------------------------------------
        Total interest charges, net                        48      47            99         95
----------------------------------------------------------------------------------------------
Income before income tax                                   91     149           264        326
Income tax expense                                         24      53            81        115
----------------------------------------------------------------------------------------------
Net income                                               $ 67    $ 96        $  183     $  211
Preferred stock dividend requirement                        -       -             1          1
----------------------------------------------------------------------------------------------
Earnings for common stock                                $ 67    $ 96        $  182     $  210
----------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Interim Financial Statements.

                                       36
<PAGE>

CAROLINA POWER & LIGHT COMPANY
d/b/a PROGRESS ENERGY CAROLINAS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

(in millions)                                                                 June 30            December 31
ASSETS                                                                           2005                   2004
------------------------------------------------------------------------------------------------------------
Utility plant
  Utility plant in service                                                    $13,738               $ 13,521
  Accumulated depreciation                                                     (5,940)                (5,806)
------------------------------------------------------------------------------------------------------------
        Utility plant in service, net                                           7,798                  7,715
  Held for future use                                                               5                      5
  Construction work in progress                                                   440                    379
  Nuclear fuel, net of amortization                                               163                    186
------------------------------------------------------------------------------------------------------------
        Total utility plant, net                                                8,406                  8,285
------------------------------------------------------------------------------------------------------------
Current assets
  Cash and cash equivalents                                                        14                     18
  Short-term investments                                                           18                     82
  Receivables, net                                                                397                    397
  Receivables from affiliated companies                                            12                     20
  Inventory                                                                       399                    390
  Deferred fuel cost                                                              138                    140
  Prepayments and other current assets                                            107                    135
------------------------------------------------------------------------------------------------------------
        Total current assets                                                    1,085                  1,182
------------------------------------------------------------------------------------------------------------
Deferred debits and other assets
  Regulatory assets                                                               496                    473
  Nuclear decommissioning trust funds                                             608                    581
  Miscellaneous other property and investments                                    212                    158
  Other assets and deferred debits                                                157                    108
------------------------------------------------------------------------------------------------------------
        Total deferred debits and other assets                                  1,473                  1,320
------------------------------------------------------------------------------------------------------------
           Total assets                                                       $10,964               $ 10,787
------------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
------------------------------------------------------------------------------------------------------------
Common stock equity
  Common stock without par value, authorized 200 million shares,
     160 million shares issued and outstanding                                 $1,991               $  1,975
  Unearned ESOP common stock                                                      (63)                   (76)
  Accumulated other comprehensive loss                                           (111)                  (114)
  Retained earnings                                                             1,240                  1,287
------------------------------------------------------------------------------------------------------------
        Total common stock equity                                               3,057                  3,072
------------------------------------------------------------------------------------------------------------
  Preferred stock - not subject to mandatory redemption                            59                     59
  Long-term debt, net                                                           3,263                  2,750
------------------------------------------------------------------------------------------------------------
        Total capitalization                                                    6,379                  5,881
------------------------------------------------------------------------------------------------------------
Current liabilities
  Current portion of long-term debt                                                 -                    300
  Accounts payable                                                                202                    254
  Payables to affiliated companies                                                 67                     83
  Notes payable to affiliated companies                                            67                    116
  Short-term obligations                                                          142                    221
  Customer deposits                                                                48                     45
  Other current liabilities                                                       271                    256
------------------------------------------------------------------------------------------------------------
        Total current liabilities                                                 797                  1,275
------------------------------------------------------------------------------------------------------------
Deferred credits and other liabilities
  Noncurrent income tax liabilities                                               993                    991
  Accumulated deferred investment tax credits                                     137                    140
  Regulatory liabilities                                                        1,147                  1,052
  Asset retirement obligations                                                    950                    924
  Other liabilities and deferred credits                                          561                    524
------------------------------------------------------------------------------------------------------------
        Total deferred credits and other liabilities                            3,788                  3,631
------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
------------------------------------------------------------------------------------------------------------
            Total capitalization and liabilities                              $10,964               $ 10,787
------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Interim Financial Statements.

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

CAROLINA POWER & LIGHT COMPANY
d/b/a PROGRESS ENERGY CAROLINAS, INC.
UNAUDITED CONSOLIDATED STATEMENTS of CASH FLOWS
----------------------------------------------------------------------------------------------------------------
(in millions)
Six Months Ended June 30,                                                                   2005         2004
----------------------------------------------------------------------------------------------------------------
Operating activities
Net income                                                                               $   183        $ 211
Adjustments to reconcile net income to net cash provided by operating activities:
   Charges for voluntary enhanced retirement program                                          42            -
   Depreciation and amortization                                                             301          297
   Deferred income taxes                                                                       7            4
   Investment tax credit                                                                      (3)          (4)
   Deferred fuel credit                                                                      (36)         (13)
   Other adjustments to net income                                                            11           12
   Cash provided (used) by changes in operating assets and liabilities:
      Receivables                                                                              3            -
      Receivables from affiliated companies                                                    8           16
      Inventory                                                                              (46)          26
      Prepayments and other current assets                                                   (17)           7
      Accounts payable                                                                        (3)           7
      Payables to affiliated companies                                                       (16)         (59)
      Other current liabilities                                                               27           61
      Other                                                                                   (6)          47
----------------------------------------------------------------------------------------------------------------
         Net cash provided by operating activities                                           455          612
 ---------------------------------------------------------------------------------------------------------------
Investing activities
Gross property additions                                                                    (303)        (243)
Nuclear fuel additions                                                                       (33)         (47)
Net contributions to nuclear decommissioning trust                                           (18)         (18)
Purchases of short-term investments                                                       (1,136)        (651)
Proceeds from sales of short-term investments                                              1,200          853
Other investing activities                                                                    (6)           4
----------------------------------------------------------------------------------------------------------------
         Net cash used in investing activities                                              (296)        (102)
----------------------------------------------------------------------------------------------------------------
Financing activities
Issuance of long-term debt, net                                                              495            -
Net (decrease) increase in short-term obligations                                            (79)          64
Net change in intercompany notes                                                             (49)            1
Retirement of long-term debt                                                                (300)        (339)
Dividends paid to parent                                                                    (229)        (228)
Dividends paid on preferred stock                                                             (1)          (1)
----------------------------------------------------------------------------------------------------------------
         Net cash used in financing activities                                              (163)        (503)
----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents                                          (4)           7
Cash and cash equivalents at beginning of period                                              18           12
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                               $    14        $  19
----------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Interim Financial Statements.

                                       38

<PAGE>

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

1.   BASIS OF PRESENTATION

     A. Basis of Presentation

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

     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.  The  intra-period  tax
     allocation,  which will have no impact on total year net income,  maintains
     an effective tax rate  consistent with the estimated  annual  effective tax
     rate.  Income tax expense was increased by $3 million for the three and six
     months ended June 30, 2005.

     PEC collects  from  customers  certain  excise taxes levied by the state or
     local  government  upon the  customer.  PEC  accounts for excise taxes on a
     gross  basis.  For the three  months  ended June 30,  2005 and 2004,  gross
     receipts tax and other excise  taxes of  approximately  $20 million and $23
     million,  respectively,  are  included in electric  revenue and taxes other
     than on income on the Consolidated Statements of Income. For the six months
     ended June 30, 2005 and 2004,  gross receipts tax and other excise taxes of
     approximately  $41 million and $45 million,  respectively,  are included in
     electric revenue and taxes other than income on the Consolidated Statements
     of Income.

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

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

     B. Stock-Based Compensation

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

                                       39
<PAGE>
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     --------------------------------------------------------------------------------------------------------------
                                                                         Three Months Ended      Six Months Ended
                                                                               June 30               June 30
                                                                        --------------------  ---------------------
     (in millions)                                                         2005        2004       2005        2004
     --------------------------------------------------------------------------------------------------------------
     Net Income, as reported                                              $  67       $  96      $ 183       $ 211
     Deduct:  Total stock option expense determined under
        fair value method for all awards, net of related tax effects          1           2          2           4
     --------------------------------------------------------------------------------------------------------------
     Pro forma net income                                                 $  66       $  94      $ 181       $ 207
     --------------------------------------------------------------------------------------------------------------
</TABLE>

     PEC is planning to begin  expensing  stock  options in the third quarter of
     2005 (See Note 2).

     C. Consolidation of Variable Interest Entities

     PEC consolidates  all voting interest  entities in which it owns a majority
     voting  interest  and all  variable  interest  entities for which it is the
     primary  beneficiary  in  accordance  with  FASB  Interpretation  No.  46R,
     "Consolidation of Variable Interest Entities - An Interpretation of ARB No.
     51" (FIN No. 46R). PEC is the primary  beneficiary of and  consolidates two
     limited  partnerships  that  qualify  for  federal  affordable  housing and
     historic tax credits under Section 42 of the Internal  Revenue Code (Code).
     As of June 30, 2005, the total assets of the two entities were $38 million,
     the majority of which are collateral for the entities'  obligations and are
     included  in   miscellaneous   other   property  and   investments  in  the
     Consolidated Balance Sheets.

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

     PEC also has  interests in several  other  variable  interest  entities for
     which  PEC is not  the  primary  beneficiary.  These  arrangements  include
     investments in approximately  22 limited  partnerships,  limited  liability
     corporations  and  venture  capital  funds  and two  building  leases  with
     special-purpose  entities.  The aggregate maximum loss exposure at June 30,
     2005,  that PEC could be  required to record in its income  statement  as a
     result  of  these  arrangements  totals   approximately  $24  million.  The
     creditors of these variable  interest  entities do not have recourse to the
     general credit of PEC in excess of the aggregate maximum loss exposure.

2.   NEW ACCOUNTING STANDARDS

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

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

                                       40
<PAGE>

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

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

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

3.   REGULATORY MATTERS

     On April 27,  2005,  PEC filed for an increase in the fuel rate  charged to
     its South Carolina retail  customers with the Public Service  Commission of
     South Carolina (SCPSC).  PEC requested the increase for underrecovered fuel
     costs for the previous 15 months and to meet future expected fuel costs. On
     June 23, 2005, the SCPSC approved a settlement  agreement  filed jointly by
     PEC and all other  parties  to the  proceeding.  The  settlement  agreement
     levelizes  the  collection of  underrecovered  fuel costs over a three-year
     period ending June 30, 2008, and allows PEC to charge and recover  carrying
     costs on the monthly unpaid balance, beginning July 1, 2006, at an interest
     rate of 6% compounded  annually.  An annual increase of $55 million,  or 12
     percent, in PEC's rates was effective July 1, 2005.

     On June 3, 2005,  PEC filed for an increase in the fuel rate charged to its
     North  Carolina  retail   customers  with  the  North  Carolina   Utilities
     Commission  (NCUC).  PEC asked the NCUC to  approve a $276  million,  or 11
     percent,  increase in rates. PEC requested the increase for  underrecovered
     fuel costs for the  previous  12 months and to meet  future  expected  fuel
     costs.

     On July 25, 2005,  PEC,  the NCUC Public Staff and the Carolina  Industrial
     Group for Fair Utility Rates jointly filed a proposed settlement  agreement
     with the NCUC to resolve issues  concerning  PEC's 2005 North Carolina fuel
     adjustment  proceeding.  Other  intervening  parties to the fuel proceeding
     have not agreed to the proposed  settlement.  The settlement  proposes that
     PEC collect all of its fuel cost  undercollections that occurred during the
     test year ended March 31, 2005 over a one-year period beginning  October 1,
     2005.  Under the  proposed  settlement,  PEC agreed to reduce its  proposed
     billing increment designed to collect future fuel costs in order to address
     customer  concerns  regarding  the magnitude of the proposed  increase.  In
     recognition of the likely  undercollection that will result during the year
     ending  September  30, 2006,  PEC would be allowed to calculate and collect
     interest  at 6% on the  difference  between  its  collection  factor in the
     original  request  to the  NCUC and the  factor  included  in the  proposed
     settlement  agreement until such amounts have been  collected.  Hearings on
     this matter are  scheduled  for August 2005 with an order due in  September
     2005.  If approved,  the increase  would take effect  October 1, 2005.  PEC
     cannot predict the outcome of this matter.

                                       41
<PAGE>

4.   COMPREHENSIVE INCOME
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     ------------------------------------------------------------------------------
                                                               Three Months Ended
     (in millions)                                                  June 30
                                                             ----------------------
                                                                 2005       2004
    -------------------------------------------------------------------------------
     Net income                                                  $ 67       $ 96
     Other comprehensive income:
       Changes in net unrealized gains on cash flow hedges
         (net of tax expense of $2)                                 -          3
       Other                                                        1         (1)
    -------------------------------------------------------------------------------
                   Other comprehensive income                    $  1       $  2
    -------------------------------------------------------------------------------
          Comprehensive income                                   $ 68       $ 98
    -------------------------------------------------------------------------------

    -------------------------------------------------------------------------------
                                                                Six Months Ended
     (in millions)                                                   June 30
                                                             ----------------------
                                                                 2005       2004
    -------------------------------------------------------------------------------
     Net income                                                  $183       $211
     Other comprehensive income:
       Changes in net unrealized gains on cash flow hedges
         (net of tax expense of $1 and $2, respectively)            2          3
       Other                                                        1          -
    -------------------------------------------------------------------------------
               Other comprehensive income                        $  3       $  3
    -------------------------------------------------------------------------------
       Comprehensive income                                      $186       $214
    -------------------------------------------------------------------------------
</TABLE>

5.   DEBT AND CREDIT FACILITIES AND FINANCING ACTIVITIES

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

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

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

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

     On July 28, 2005, PEC filed a shelf registration  statement with the SEC to
     provide an  additional  $1.0  billion of  capacity  in addition to the $400
     million remaining on PEC's current shelf registration statement.  The shelf
     registration   statement  will  allow  PEC  to  issue  various  securities,
     including First Mortgage Bonds, Senior Notes, Debt Securities and Preferred
     Stock.

                                       42
<PAGE>

6.   BENEFIT PLANS

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

                                                                        Other Postretirement
     Three Months Ended June 30                  Pension Benefits             Benefits
                                             -----------------------    ----------------------
     (in millions)                               2005          2004         2005         2004
                                             -----------------------    ----------------------
     Service cost                            $      7      $      6     $      2       $    2
     Interest cost                                 13            13            4            4
     Expected return on plan assets               (16)          (17)          (1)          (1)
     Amortization, net                              2             -            -            1
                                             -----------------------    ----------------------
     Net periodic cost                       $      6      $      2     $      5       $    6
                                             =======================    ======================


                                                                        Other Postretirement
     Six Months Ended June 30                   Pension Benefits              Benefits
                                             -----------------------    ----------------------
     (in millions)                               2005          2004         2005         2004
                                             -----------------------    ----------------------
     Service cost                            $     13      $     12     $      3       $    4
     Interest cost                                 27            26            8            8
     Expected return on plan assets               (31)          (34)          (2)          (2)
     Amortization, net                              4             1            1            2
                                             -----------------------    ----------------------
     Net periodic cost                       $     13      $      5     $     10       $   12
                                             =======================    ======================
</TABLE>

     In  addition,   in  the  second  quarter  of  2005,  PEC  recorded  special
     termination  benefits related to the voluntary enhanced  retirement program
     (see Note 8) of  approximately  $21  million for  pension  benefits  and $8
     million for other postretirement  benefits. These charges resulted in a $29
     million  increase in pension and OPEB  liabilities,  which are  included in
     other liabilities and deferred credits on the Consolidated Balance Sheets.

7.   RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS

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

     A. Commodity Derivatives

     General

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

                                       43
<PAGE>

     In 2003, PEC recorded a $38 million  pre-tax ($23 million  after-tax)  fair
     value loss  transition  adjustment  pursuant to the provisions of DIG Issue
     C20, "Scope  Exceptions:  Interpretation  of the Meaning of Not Clearly and
     Closely  Related  in  Paragraph  10(b)  regarding  Contracts  with a  Price
     Adjustment  Feature." The related  liability is being amortized to earnings
     over the term of the  related  contract  (See Note 10). As of June 30, 2005
     and December  31, 2004,  the  remaining  liability  was $23 million and $26
     million, respectively.

     Economic Derivatives

     Derivative products,  primarily electricity and natural gas contracts,  may
     be entered  into from time to time for  economic  hedging  purposes.  While
     management  believes the economic hedges mitigate exposures to fluctuations
     in commodity  prices,  these  instruments  are not designated as hedges for
     accounting  purposes and are monitored  consistent with trading  positions.
     PEC manages open positions with strict  policies that limit its exposure to
     market  risk  and  require  daily  reporting  to  management  of  potential
     financial exposures. Gains and losses from such contracts were not material
     to results of  operations  during the three and six months  ending June 30,
     2005 and 2004, and PEC did not have material outstanding  positions in such
     contracts at June 30, 2005 and December 31, 2004.

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

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

     Cash Flow Hedges

     Gains and losses from cash flow hedges are  recorded in  accumulated  other
     comprehensive  income  (OCI)  and  amounts  reclassified  to  earnings  are
     included in net interest charges as the hedged transactions occur.  Amounts
     in OCI related to  terminated  hedges are  reclassified  to earnings as the
     interest expense is recorded. The ineffective portion of interest rate cash
     flow hedges for the three and six months ending June 30, 2005 and 2004, was
     not material to PEC's results of  operations.  As of June 30, 2005, PEC had
     $5 million  of  after-tax  deferred  losses in OCI  related  to  terminated
     hedges,  of which an immaterial  amount is expected to be  reclassified  to
     earnings within the next 12 months.

     During  the first  quarter  of 2005,  PEC  terminated  all of its cash flow
     hedges which were open at December 31, 2004,  and had no open interest rate
     cash flow hedges as of June 30, 2005. As of December 31, 2004, PEC had $131
     million notional of open interest rate cash flow hedges.

     Fair Value Hedges

     As of June 30, 2005 and December 31, 2004,  PEC had no open  interest  rate
     fair value hedges.

8.   SEVERANCE COSTS

     On February 28, 2005,  as part of a previously  announced  cost  management
     initiative,  Progress  Energy approved a workforce  restructuring  which is
     expected to be completed in September  2005.  In addition to the  workforce
     restructuring, the cost management initiative included a voluntary enhanced
     retirement  program.  In  connection  with this  initiative,  PEC  incurred
     approximately   $60   million  of  pre-tax   charges  for   severance   and
     postretirement  benefits  during the six months  ended  June 30,  2005,  as
     described below.

     PEC recorded $14 million of severance  expense  during the first quarter of
     2005 for the workforce  restructuring.  The workforce restructuring expense
     was computed based on the approximate number of positions to be eliminated.
     This amount included  approximately $4 million of severance costs allocated
     from Progress Energy Service  Company (PESC).  During the second quarter of
     2005,  553  PEC  employees  eligible  for  participation  in the  voluntary
     enhanced  retirement program elected to participate.  Consequently,  in the
     second quarter of 2005, PEC decreased its estimated  severance  costs by $7
     million due to the impact of the employees  electing  participation  in the
     voluntary enhanced retirement program.  This amount included  approximately
     $2 million of decreased  severance costs allocated from PESC. The severance
     expenses  are  primarily  included  in  O&M  expense  on  the  Consolidated
     Statements of Income.

                                       44
<PAGE>

     The accrued  severance  expense will be paid over time. The activity in the
     severance liability is as follows:

     -------------------------------------------------
     (in millions)
     -------------------------------------------------
     Balance as of January 1, 2005                $ 2
     Severance costs accrued                       10
     Adjustments                                   (5)
     Payments                                       -
     -------------------------------------------------
     Balance as of June 30, 2005                  $ 7
     -------------------------------------------------

     PEC recorded a $29 million  charge in the second quarter of 2005 related to
     postretirement  benefits that will be paid over time to eligible  employees
     who elected to participate  in the voluntary  enhanced  retirement  program
     (see Note 6). PEC also recorded a $13 million  charge for early  retirement
     incentives which will be paid over time to certain employees.  In addition,
     PEC recorded approximately $10 million of postretirement benefits and early
     retirement incentives allocated from PESC.

     The cost  management  initiative  charges are subject to revision in future
     quarters  based  on  completion  of the  workforce  restructuring  and  the
     potential  additional  impacts that the early retirements and outplacements
     may have on the postretirement plans. Such revisions may be significant and
     may adversely  impact PEC's results of  operations  in future  periods.  In
     addition, PEC expects to incur certain incremental costs for recruiting and
     staff augmentation activities that cannot be quantified at this time.

9.   FINANCIAL INFORMATION BY BUSINESS SEGMENT

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

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

     The financial  information for PEC segments for the three months ended June
     30, 2005 and 2004, is as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     -------------------------------------------------------------------------------------------------
     (in millions)                          2005                                   2004
     -------------------------------------------------------------------------------------------------
                                  PEC                                    PEC
                                Electric     Other      Total          Electric     Other      Total
     -------------------------------------------------------------------------------------------------
     Total revenues             $   860     $   1     $   861         $   861      $   1      $  862
     Postretirement and
     severance charges               46         -          46               5          -           5
     Segment profit (loss)           68        (1)         67              97         (1)         96
     -------------------------------------------------------------------------------------------------
</TABLE>

                                       45

<PAGE>

     The  financial  information  for PEC segments for the six months ended June
     30, 2005 and 2004 is as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

      -----------------------------------------------------------------------------------------------
      (in millions)                           2005                                2004
      -----------------------------------------------------------------------------------------------
                                   PEC                                 PEC
                                 Electric     Other      Total       Electric     Other      Total
      -----------------------------------------------------------------------------------------------
      Total revenues             $ 1,795      $   1     $ 1,796      $ 1,762       $   1    $ 1,763
      Postretirement and
      severance charges               60          -          60            5          -          5
      Segment profit (loss)          184         (2)        182          213          (3)      210
      -----------------------------------------------------------------------------------------------
</TABLE>

10.  OTHER INCOME AND OTHER EXPENSE

     Other  income and expense  includes  interest  income and other  income and
     expense items as discussed  below. The components of other, net as shown on
     the  accompanying  Consolidated  Statements of Income for the three and six
     months ended June 30, 2005 and 2004, are as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     ---------------------------------------------------------------------------------------------------
                                                          Three Months Ended           Six Months Ended
                                                                June 30                    June 30
                                                       -------------------------  ----------------------
     (in millions)                                          2005         2004        2005           2004
     ---------------------------------------------------------------------------------------------------
     Other income
     Nonregulated energy and delivery services income      $   7         $  3       $  9           $  5
     DIG Issue C20 Amortization (See Note 7)                   2            2          3              4
     AFUDC equity                                              1            1          2              2
     Other                                                     2            6          5              5
     ---------------------------------------------------------------------------------------------------
         Total other income                                $  12        $  12       $ 19           $ 16
     ---------------------------------------------------------------------------------------------------
     Other expense
     Nonregulated energy and delivery services expenses    $   2         $  2       $  4           $  4
     Donations                                                 2            1          5              5
     Write-off of non-trade receivables                        -            -          -              7
     FERC Audit Settlement                                     4            -          4              -
     Other                                                     6            5          7              8
     ---------------------------------------------------------------------------------------------------
        Total other expense                                $  14          $ 8       $ 20           $ 24
     ---------------------------------------------------------------------------------------------------
     Other, net                                            $  (2)         $ 4       $ (1)          $ (8)
     ---------------------------------------------------------------------------------------------------
</TABLE>

     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.

     FERC audit  settlement  includes  amounts  approved  by the FERC on May 25,
     2005, to settle the FERC Staff's Audit of PEC's  compliance with the FERC's
     Standards of Conduct and Code of Conduct. In the settlement,  PEC agreed to
     make  certain  operational  and  organizational  changes and to provide its
     retail and  wholesale  customers  a  one-time  credit of  approximately  $4
     million which was recorded as other expense in the second quarter of 2005.

11.  ENVIRONMENTAL MATTERS

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

     HAZARDOUS AND SOLID WASTE MANAGEMENT

     The provisions of the Comprehensive  Environmental  Response,  Compensation
     and  Liability  Act of 1980,  as  amended  (CERCLA),  authorize  the EPA to
     require  the  cleanup  of  hazardous  waste  sites.  This  statute  imposes
     retroactive  joint and several  liabilities.  Some states,  including North
     Carolina and South  Carolina,  have similar  types of  legislation.  PEC is

                                       46
<PAGE>

     periodically  notified by  regulators,  including the EPA and various state
     agencies,  of their involvement or potential  involvement in sites that may
     require investigation and/or remediation. There are presently several sites
     with  respect  to which PEC has been  notified  by the EPA and the State of
     North Carolina of its potential  liability,  as described  below in greater
     detail.  PEC is also currently in the process of assessing  potential costs
     and exposures at other sites.  For all sites,  as assessments are developed
     and  analyzed,  PEC will accrue costs for the sites to the extent the costs
     are probable and can be reasonably estimated.

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

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

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

     During the fourth  quarter of 2004,  the EPA  advised  PEC that it had been
     identified as a PRP at the Ward Transformer site located in Raleigh,  North
     Carolina. The EPA offered PEC and a number of other PRPs the opportunity to
     negotiate  cleanup of the site and reimbursement of less than $2 million to
     the EPA for EPA's past  expenditures in addressing  conditions at the site.
     PEC and other PRP's are in discussions  with the EPA to reach an agreement.
     However,  as an agreement  among PRPs has not yet been  reached,  it is not
     possible  at this time to  reasonably  estimate  the total  amount of PEC's
     obligation for  remediation of the Ward  Transformer  site. If an agreement
     cannot be reached, the EPA could issue a unilateral order requiring cleanup
     of the site. PEC cannot predict the outcome of this matter.

     As of June 30, 2005 and December 31, 2004,  PEC's accruals for probable and
     estimable costs related to various  environmental sites, which are included
     in other  liabilities and deferred  credits and are expected to be paid out
     over one to five years, were:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     -----------------------------------------------------------------------------------
     (in millions)                                    June 30, 2005   December 31, 2004
     -----------------------------------------------------------------------------------
     Insurance fund                                             $ 4                 $ 7
     Transferred from North Carolina Natural Gas
         Corporation at time of sale                              2                   2
     -----------------------------------------------------------------------------------
     Total accrual for environmental sites                     $  6                 $ 9
     -----------------------------------------------------------------------------------
</TABLE>

     The  insurance  fund in the table above was  established  when PEC received
     insurance   proceeds  to  address  costs   associated  with   environmental
     liabilities  related  to its  involvement  with some  sites.  All  eligible
     expenses  related to these are charged  against a specific fund  containing
     these proceeds.  For the three and six months ended June 30, 2005, PEC made
     no  additional  accruals,   received  no  insurance  proceeds,   and  spent
     approximately  $1  million  and  $3  million,   respectively,   related  to
     environmental remediation.

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

                                       47

<PAGE>


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

     AIR QUALITY

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

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

     Total capital expenditures to meet the requirements of the final rule under
     Section 110 of the Clean Air Act (NOx SIP Call) in North Carolina and South
     Carolina could reach approximately $370 million.  This amount also includes
     the  cost  to  install  NOx  controls  under  North  Carolina's  and  South
     Carolina's  programs  to comply  with the federal  8-hour  ozone  standard.
     However,   further   technical   analysis  and  rulemaking  may  result  in
     requirements  for  additional   controls  at  some  units.  PEC  has  spent
     approximately  $324  million to date  related to these  projected  amounts.
     Increased  operation and maintenance costs relating to the NOx SIP Call are
     not  expected  to be  material  to PEC's  results  of  operations.  Further
     controls are anticipated as electricity demand increases.

     PEC projects that its capital  costs to meet  emission  targets for NOx and
     SO2 from  coal-fired  power plants under the  Smokestacks  Act,  will total
     approximately   $895  million  by  the  end  of  2013.   PEC  has  expended
     approximately  $190 million of these  capital  costs through June 30, 2005.
     The  Smokestacks  Act requires  PEC to amortize  70% of the  original  cost
     estimate of $813  million,  during a  five-year  rate  freeze  period.  PEC
     recognized amortization of $27 million and $54 million,  respectively,  for
     the three and six  months  ended June 30,  2005,  and has  recognized  $302
     million in  cumulative  amortization  through June 30, 2005.  The remaining
     amortization  requirement  will be recorded  over the future  period ending
     December  31,  2007.  The law  permits  PEC  the  flexibility  to vary  the
     amortization  schedule for recording the  compliance  costs from zero up to
     $174 million of amortization expense per year. The NCUC will hold a hearing
     prior to December 31, 2007, to determine cost recovery amounts for 2008 and
     future periods. O&M expense will increase due to the additional  materials,
     personnel  and  general  maintenance  associated  with the  equipment.  O&M
     expenses are  recoverable  through base rates,  rather than as part of this
     program.   PEC  cannot  predict  the  future   regulatory   interpretation,
     implementation or impact of this law.

                                       48
<PAGE>

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

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

     On June 24, 2005, the Court of Appeals for the District of Columbia Circuit
     rendered a decision  in a suit  regarding  EPA's NSR rules.  As part of the
     decision,  the court struck down a provision  excluding  pollution  control
     projects from NSR  requirements.  As a result of this decision,  additional
     regulatory review of the Company's  pollution  control equipment  proposals
     will be required adding time and cost to the overall project.

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

     In March 2004,  the North Carolina  Attorney  General filed a petition with
     the EPA  under  Section  126 of the  Clean  Air  Act,  asking  the  federal
     government to force coal-fired  power plants in 13 other states,  including
     South Carolina,  to reduce their NOx and SO2 emissions.  The state of North
     Carolina  contends  these  out-of-state   emissions  interfere  with  North
     Carolina's  ability to meet  national air quality  standards  for ozone and
     particulate  matter.  On August 1, 2005, the EPA issued a proposed response
     denying the petition.  The EPA's  rationale  for denial is that  compliance
     with CAIR will reduce the emissions from surrounding states sufficiently to
     address  North  Carolina's  concerns.  The EPA will  hold a  60-day  public
     comment  period from the date that the proposal is published in the Federal
     Register and must take final action by March 15, 2006.  PEC cannot  predict
     the outcome of this matter.

     In a decision  issued  July 15,  2005,  the U.S.  Court of Appeals  for the
     District of Columbia  Circuit denied  petitions for review filed by several
     states,  cities and  organizations  seeking  the  regulation  by the EPA of
     carbon  dioxide  emissions  under  the  Clean  Air Act.  The court in a 2-1
     decision, held that the EPA Administrator properly exercised his discretion
     in denying the request for regulation.

     WATER QUALITY

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

     Based on new cost  information  and changes to the estimated  time frame of
     expenditures since December 31, 2004, PEC has revised the estimated amounts
     and time period for expenditures to meet Section 316(b) requirements of the
     Clean Water Act. PEC  currently  estimates  that from 2005 through 2010 the
     range of expenditures will be approximately $15 million to $25 million.

                                       49
<PAGE>

     OTHER ENVIRONMENTAL MATTERS

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

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

12.  COMMITMENTS AND CONTINGENCIES

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

     A. Purchase Obligations

     As part of PEC's ordinary  course of business,  it enters into various long
     and short term contracts for fuel  requirements  at its generating  plants.
     Through  June 30,  2005,  these  contracts  have  increased  the  Company's
     aggregate   purchase   obligations   for  fuel  and   purchased   power  by
     approximately  $709  million  as  compared  to  the  amount  stated  in the
     Company's  Form 10-K for the year ended  December  31,  2004.  The increase
     primarily  covers the period  ranging from 2005 through 2009. A majority of
     the contracts related to the increase in purchase  obligations for fuel and
     purchased power are for future coal purchases primarily with fixed prices.

     B. Guarantees

     As a part of normal business,  PEC enters into various agreements providing
     future  financial or  performance  assurances to third  parties,  which are
     outside  the  scope  of  Financial   Accounting   Standards   Board  (FASB)
     Interpretation No. 45, "Guarantor's  Accounting and Disclosure Requirements
     for Guarantees,  Including  Indirect  Guarantees of Indebtedness of Others"
     (FIN No. 45). Such agreements include guarantees, standby letters of credit
     and surety bonds. As of June 30, 2005, PEC does not believe  conditions are
     likely for significant  performance under these  guarantees.  To the extent
     liabilities  are  incurred  as a result of the  activities  covered  by the
     guarantees,  such liabilities are included in the accompanying Consolidated
     Balance Sheets. As of June 30, 2005, PEC had no guarantees issued on behalf
     of unconsolidated subsidiaries or other third parties.

     C. Insurance

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

     D. Other Contingencies

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

                                       50
<PAGE>
     DOE failed to begin  taking  spent  nuclear  fuel by January 31,  1998.  In
     January  2004,  PEC filed a complaint in the United States Court of Federal
     Claims  against  the DOE,  claiming  that  the DOE  breached  the  Standard
     Contract for  Disposal of Spent  Nuclear Fuel by failing to accept SNF from
     various PEC  facilities on or before  January 31, 1998.  Damages due to the
     DOE's  breach  will  be  significant,   but  have  yet  to  be  determined.
     Approximately  60 cases  involving the  Government's  actions in connection
     with  spent  nuclear  fuel are  currently  pending  in the Court of Federal
     Claims.

     The DOE and the PEC parties have agreed to a stay of the lawsuit, including
     discovery.  The parties agreed to, and the trial court  entered,  a stay of
     proceedings,  in  order  to  allow  for  possible  efficiencies  due to the
     resolution of legal and factual  issues in previously  filed cases in which
     similar  claims are being  pursued by other  plaintiffs.  These  issues may
     include,  among others,  so-called "rate issues," or the minimum  mandatory
     schedule for the  acceptance of SNF and high level waste (HLW) by which the
     Government  was  contractually  obligated to accept  contract  holders' SNF
     and/or HLW, and issues regarding recovery of damages under a partial breach
     of  contract  theory  that will be  alleged to occur in the  future.  These
     issues have been or are  expected to be  presented in the trials or appeals
     that are  currently  scheduled to occur during  2005.  Resolution  of these
     issues in other cases could facilitate agreements by the parties in the PEC
     lawsuit,  or at a minimum,  inform the Court of decisions  reached by other
     courts if they remain  contested  and require  resolution  in this case. In
     July 2005, the parties jointly  requested a continuance of the stay through
     December 15, 2005, which the trial court granted.

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

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

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

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

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

                                       51
<PAGE>

     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 PEC's appeal on the
     ground that it was untimely.  On July 20, 2005, the appellate  court denied
     DMT's  motion to dismiss  and ruled that the time for PEC to appeal had not
     yet expired.  The appellate  court remanded the case to the trial court for
     further proceedings.

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

     3.  On  February  1,  2002,   PEC  filed  a  complaint   with  the  Surface
     Transportation  Board  (STB)  challenging  the  rates  charged  by  Norfolk
     Southern  Railway Company  (Norfolk  Southern) for coal  transportation  to
     certain generating plants. In a decision served in December,  2003, the STB
     found that the challenged rates exceeded maximum reasonable rate levels and
     prescribed lower rates. In a subsequent decision on reconsideration the STB
     concluded that the rates had not been shown to be  unreasonable,  following
     which PEC requested the STB to consider  requiring that the rates be phased
     in over a period of time. During the course of the complaint  process,  PEC
     accrued a liability  of $42 million.  The  liability  was  comprised of $23
     million  of  reparations  remitted  to PEC by  Norfolk  Southern  that were
     subject to refund and an additional  $19 million,  of which $17 million was
     recorded as deferred  fuel cost on the  Consolidated  Balance  Sheet.  This
     matter has now been settled by mutual agreement,  and the STB has issued an
     order dismissing the case. As a result of the settlement,  PEC reversed the
     previously   recorded   deferred   fuel  cost  and  settled  the  remaining
     obligations for the approximate amount previously  accrued.  The settlement
     had an immaterial impact on PEC's results of operations.

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

                                       52
<PAGE>

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

The following  Management's  Discussion  and Analysis  contains  forward-looking
statements that involve estimates,  projections, goals, forecasts,  assumptions,
risks and  uncertainties  that could cause actual  results or outcomes to differ
materially from those expressed in the forward-looking statements. Please review
"SAFE HARBOR FOR  FORWARD-LOOKING  STATEMENTS"  for a discussion  of the factors
that may impact any such  forward-looking  statements  made  herein and the Risk
Factors  sections of Progress  Energy's and  Progress  Energy  Carolina's  (PEC)
annual report on Form 10-K for the year ended December 31, 2004.

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

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

RESULTS OF OPERATIONS

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

o    Progress Energy  Carolinas  Electric (PEC Electric) - primarily  engaged in
     the  generation,  transmission,  distribution  and sale of  electricity  in
     portions of North Carolina and South  Carolina;

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

o    Competitive  Commercial Operations (CCO) - engaged in nonregulated electric
     generation operations and marketing activities primarily in Georgia,  North
     Carolina and Florida;

o    Fuels - primarily engaged in natural gas production in Texas and Louisiana,
     coal mining, coal terminal services and fuel transportation and delivery in
     Kentucky, West Virginia and Virginia; and

o    Synthetic  Fuels - engaged in the production  and sale of coal-based  solid
     synthetic  fuels and the operation of synthetic fuel facilities for outside
     parties in Kentucky, West Virginia and Virginia.

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

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

In this section,  earnings and the factors affecting  earnings for the three and
six  months  ended June 30,  2005 as  compared  to the same  periods in 2004 are
discussed.  The  discussion  begins with a summarized  overview of the Company's
consolidated  earnings,  which is followed  by a more  detailed  discussion  and
analysis by business segment.

OVERVIEW

For the quarter ended June 30, 2005,  Progress Energy's net loss was $1 million,
or $(0.01)  per share,  compared  to net  income of $154  million,  or $0.63 per
share,  for the same period in 2004.  The  decrease in net income as compared to
prior year was due primarily to:
     o    Postretirement  and severance charges recorded  throughout the Company
          related to the cost management initiative.
     o    Unfavorable weather at both utilities.
     o    Unfavorable retail usage in Florida.
     o    The write-off of unrecoverable storm costs in Florida.

                                       53
<PAGE>
     o    The change in accounting estimates for certain Energy Delivery capital
          costs.
     o    Decreased nonregulated generation earnings.
     o    Decreased synthetic fuel earnings.
     o    The impact of tax levelization.
Partially offsetting these items were:
     o    Utility customer growth in the Carolinas and Florida.
     o    Favorable wholesale sales in both the Carolinas and Florida.
     o    Gain recorded on the sale of distribution system in Florida.
     o    Reduced losses recorded on contingent value obligations.

For the six months  ended June 30,  2005,  Progress  Energy's net income was $92
million,  or $0.37 per share,  compared to $262 million,  or $1.08 per share for
the same  period in 2004.  The  decrease in net income as compared to prior year
was due primarily to:
     o    Postretirement  and severance charges recorded  throughout the Company
          related to the cost management  initiative.
     o    Unfavorable weather at both utilities.
     o    Unfavorable  retail usage in Florida.
     o    The write-off of unrecoverable storm costs in Florida.
     o    The change in accounting estimates for certain Energy Delivery capital
          costs.
     o    Decreased nonregulated generation earnings.
     o    Decreased synthetic fuel earnings.
     o    The impact of tax levelization.
Partially offsetting these items were:
     o    Utility customer growth in the Carolinas and Florida.
     o    Favorable wholesale sales in both the Carolinas and Florida.
     o    Gain recorded on the sale of distribution assets in Florida.
     o    Reduced losses recorded on contingent value obligations.

Basic earnings per share  decreased in 2005 due in part to the factors  outlined
above.  Dilution  related to the  issuances of an aggregate of  approximately  4
million and 1 million  shares of common stock under the Company's  Investor Plus
Stock Purchase Plan and employee  benefit  programs for the year to date in 2005
and the year ended December 31, 2004, respectively,  also reduced basic earnings
per share by $0.01 and $0.02 for the three and six months  ended June 30,  2005,
respectively.

The Company's segments contributed the following profits or losses for the three
and six months ended June 30, 2005 and 2004:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

-------------------------------------------------------------------------------------------------
(in millions)                            Three Months Ended June 30,   Six Months Ended June 30,
Business Segment                                  2005          2004         2005           2004
-------------------------------------------------------------------------------------------------
PEC Electric                                      $ 68          $ 97         $184           $213
PEF                                                 10            84           53            133
Fuels                                               12            17           23             27
CCO                                                 (3)            5           (9)            (3)
Synthetic Fuel                                      23            36           22             72
-------------------------------------------------------------------------------------------------
    Total Segment Profit                           110           239          273            442
-------------------------------------------------------------------------------------------------
Corporate & Other                                 (104)          (93)        (162)          (197)
-------------------------------------------------------------------------------------------------
Income from continuing operations                    6           146          111            245
Discontinued operations, net of tax                 (7)            8          (19)            17
-------------------------------------------------------------------------------------------------
    Net income                                    $ (1)         $154         $ 92           $262
-------------------------------------------------------------------------------------------------
</TABLE>

COST MANAGEMENT INITIATIVE

On  February  28,  2005,  as  part of a  previously  announced  cost  management
initiative,  the Company approved a workforce restructuring which is expected to
be completed in September  2005 and result in a reduction of  approximately  450
positions.  The cost management  initiative is designed to permanently reduce by
$75  million  to $100  million  the  projected  growth in the  Company's  annual
operation and maintenance  (O&M) expenses by the end of 2007. In addition to the
workforce  restructuring,  the cost management  initiative  included a voluntary
enhanced  retirement  program.  In connection with this initiative,  the Company
incurred  approximately  $176  million  of pre-tax  charges  for  severance  and
postretirement  benefits during the six months ended June 30, 2005, as described
below.

                                       54
<PAGE>

The Company  recorded $31 million of severance  expense during the first quarter
of 2005 for the workforce restructuring and implementation of an automated meter
reading  initiative  at PEF. The  workforce  restructuring  expense was computed
based on the approximate number of positions to be eliminated. During the second
quarter of 2005,  1,447 employees  eligible for  participation  in the voluntary
enhanced retirement program elected to participate.  Consequently, in the second
quarter of 2005,  the Company  decreased  its estimated  severance  costs by $13
million  due to  the  impact  of the  employees  electing  participation  in the
voluntary  enhanced  retirement  program.  The severance  expenses are primarily
included in O&M  expense on the  Consolidated  Statements  of Income and will be
paid over time.

The Company recorded a $141 million charge in the second quarter of 2005 related
to postretirement benefits that will be paid over time to eligible employees who
elected to participate in the voluntary enhanced retirement program.  See Note 8
to the Progress Energy Consolidated  Interim Financial Statements for additional
information on postretirement  benefits. In addition, the Company recorded a $17
million charge for early  retirement  incentives to be paid over time to certain
employees.

The cost  management  initiative  charges  are  subject  to  revision  in future
quarters  based on completion of the workforce  restructuring  and the potential
additional  impacts that the early retirements and outplacements may have on the
Company's  postretirement  plans.  Such  revisions  may be  significant  and may
adversely  impact the  Company's  results of operations  in future  periods.  In
addition,  the Company expects to incur certain incremental costs for recruiting
and staff augmentation activities that cannot be quantified at this time.

PROGRESS ENERGY CAROLINAS ELECTRIC

PEC Electric  contributed segment profits of $68 million and $97 million for the
three months ended June 30, 2005 and 2004,  respectively.  Results for 2005 were
unfavorably  impacted by higher O&M costs  primarily due to  postretirement  and
severance costs  associated with the cost management  initiative and unfavorable
weather.  These  unfavorable  items were partially offset by favorable  customer
growth and usage and increased wholesale revenues.

PEC Electric  contributed  segment  profits of $184 million and $213 million for
the six months ended June 30, 2005 and 2004, respectively. Results for 2005 were
unfavorably  impacted by higher O&M costs  primarily due to  postretirement  and
severance costs associated with the cost management initiative and the change in
accounting  estimates for certain Energy Delivery  capital costs and unfavorable
weather.  These  unfavorable  items were partially offset by favorable  customer
growth and usage and increased wholesale revenues.

Three  months  ended June 30, 2005  compared to the three  months ended June 30,
2004

Revenues

PEC  Electric's  revenues for the three months ended June 30, 2005 and 2004, and
the percentage change by customer class are as follows:

-----------------------------------------------------------------------
(in millions of $)                    Three Months Ended June 30,
Customer Class                   2005    Change     % Change    2004
-----------------------------------------------------------------------
Residential                      $272     $ (12)       (4.2)     $ 284
Commercial                        214         1         0.5        213
Industrial                        164         3         1.9        161
Governmental                       18        (1)       (5.3)        19
------------------------------------------------              --------
    Total retail revenues         668        (9)       (1.3)       677
Wholesale                         154        15        10.8        139
Unbilled                           15        (9)          -         24
Miscellaneous                      23         2         9.5         21
------------------------------------------------             ---------
  Total electric revenues        $860     $  (1)       (0.1)     $ 861
------------------------------------------------             ---------
Less:
Pass-through fuel revenues       (238)      (16)       (7.2)      (222)
------------------------------------------------             ---------
Revenues excluding fuel          $622     $ (17)       (2.7)     $ 639
-----------------------------------------------------------------------

                                       55

<PAGE>

PEC  Electric's  energy sales for the three months ended June 30, 2005 and 2004,
and the amount and percentage change by customer class are as follows:

-----------------------------------------------------------------------
(in millions of kWh)                  Three Months Ended June 30,
Customer Class                   2005    Change     % Change    2004
 ----------------------------------------------------------------------
Residential                     3,285     (240)        (6.8)      3,525
Commercial                      3,087      (85)        (2.7)      3,172
Industrial                      3,230      (50)        (1.5)      3,280
Governmental                      314      (23)        (6.8)        337
 -----------------------------------------------              ---------
  Total retail energy sales     9,916     (398)        (3.9)     10,314
Wholesale                       3,341      227          7.3       3,114
Unbilled                          235     (169)           -         404
------------------------------------------------              ---------
  Total kWh sales              13,492     (340)        (2.5)     13,832
-----------------------------------------------------------------------

PEC Electric's revenues, excluding recoverable fuel revenues of $238 million and
$222 million for the three  months  ended June 30, 2005 and 2004,  respectively,
decreased  $17 million.  The decrease in revenues is  attributable  primarily to
unfavorable  weather offset  partially by favorable  retail growth and usage and
increased wholesale  revenues.  The impact of weather is $28 million unfavorable
with cooling degree days 36% below prior year.  Favorable growth and usage of $6
million was driven by an increase in the number of customers as of June 30, 2005
compared to June 30, 2004 of 28,000.  The  increase in wholesale  revenues  less
fuel of $3 million  was driven  primarily  by the impact of  increased  capacity
under contract.

Expenses

Fuel and Purchased Power

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

Fuel and purchased  power  expenses were $289 million for the three months ended
June 30,  2005,  which  represents a $16 million  increase  compared to the same
period in the prior year. Fuel used in electric generation increased $23 million
to $216 million  compared to the prior year. This increase is due to an increase
in fuel used in  generation  of $17 million due  primarily  to higher fuel costs
which are being driven primarily by rising coal, oil and natural gas prices.  In
addition,  deferred fuel expense increased $6 million due to the write-off of $5
million in  deferred  fuel costs as a result of the South  Carolina  annual fuel
hearing. Purchased power expense decreased $7 million to $73 million compared to
the prior  year.  Prior year  purchased  power  costs  were  higher due to plant
outages during periods of favorable weather during the second quarter of 2004.

Operations and Maintenance (O&M)

O&M expenses  were $260 million for the three months ended June 30, 2005,  which
represents  a $34  million  increase  compared  to  the  same  period  in  2004.
Postretirement and severance expenses related to the cost management  initiative
increased  O&M expenses by $46 million  during 2005.  This is an increase of $41
million  compared to the same period in 2004 as prior year  expenses  include $5
million related to a separate initiative. In addition, O&M expenses increased $6
million  related  to the  change in  accounting  estimates  for  certain  Energy
Delivery   capital  costs.   See   discussion  of  change  in  Energy   Delivery
capitalization  practice in Note 8F of the Progress Energy annual report on Form
10-K  for the year  ended  December  31,  2004.  These  unfavorable  items  were
partially  offset by decreased plant outage costs of $12 million compared to the
same period of 2004, which included a nuclear plant outage.

                                       56
<PAGE>

Depreciation and Amortization

Depreciation  and  amortization  expense was $130  million for the three  months
ended June 30, 2005, which represents a $3 million increase compared to the same
period in 2004. The increase is attributable to higher NC Clean Air amortization
of $12  million  and  higher  depreciation  for  assets  placed in service of $1
million.  These  increases were partially  offset by a reduction in depreciation
expense  of $10  million  related  to the  depreciation  studies  filed in 2004.
Depreciation  rates  are the same for 2005 and 2004;  however,  the 2004 year to
date  retroactive  adjustment for the new rates adopted  related to the expanded
lives of the nuclear units was made in November 2004.

Other income, net

Other income,  net has decreased $4 million for the three months ending June 30,
2005, as compared to the same period in the prior year. This  fluctuation is due
primarily  to the FERC Code of  Conduct  audit  settlement  reached in 2005 that
required $4 million to be refunded to customers  (see  discussion  in Note 12 to
the Progress Energy Consolidated Interim Financial Statements).

Income tax expense

GAAP  requires  companies  to apply a  levelized  effective  tax rate to interim
periods that is consistent with the estimated annual effective tax rate.  Income
tax expense was  increased  by $3 million  for the three  months  ended June 30,
2005, in order to maintain an effective tax rate  consistent  with the estimated
annual rate. Fluctuations in estimated annual earnings and the timing of various
permanent  and temporary  deductions  can also cause 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.  The  remaining  fluctuation  in
income tax expense is attributable to reduced earnings compared to prior year.

Six months ended June 30, 2005 compared to the six months ended June 30, 2004

Revenues

PEC Electric's revenues for the six months ended June 30, 2005 and 2004, and the
percentage change by customer class are as follows:

-----------------------------------------------------------------------
(in millions of $)                   Six Months Ended June 30,
Customer Class                     2005    Change    % Change      2004
-----------------------------------------------------------------------
Residential                      $  646     $ (9)       (1.4)    $  655
Commercial                          428        8         1.9        420
Industrial                          313        5         1.6        308
Governmental                         38        -           -         38
-------------------------------------------------             ---------
  Total retail revenues           1,425        4         0.3      1,421
Wholesale                           328       33        11.2        295
Unbilled                            (3)       (4)          -          1
Miscellaneous                        45        -           -         45
-------------------------------------------------             ---------
  Total electric revenues        $1,795     $ 33         1.9     $1,762
-------------------------------------------------             ---------
Less:
Pass-through fuel revenues         (509)     (49)      (10.7)      (460)
-------------------------------------------------             ---------
Revenues excluding fuel          $1,286     $(16)       (1.2)    $1,302
------------------------------------------------------------------------

                                       57

<PAGE>

PEC Electric's energy sales for the six months ended June 30, 2005 and 2004, and
the amount and percentage change by customer class are as follows:

-------------------------------------------------------------------------
(in millions of kWh)                 Six Months Ended June 30,
Customer Class                     2005      Change     % Change     2004
-------------------------------------------------------------------------
Residential                       7,957     (309)        (3.7)      8,266
Commercial                        6,167      (63)        (1.0)      6,230
Industrial                        6,161     (112)        (1.8)      6,273
Governmental                        642      (40)        (5.9)        682
-------------------------------------------------                --------
  Total retail energy sales      20,927     (524)        (2.4)     21,451
Wholesale                         7,278      374          5.4       6,904
Unbilled                           (67)      (87)           -          20
-------------------------------------------------               ---------
  Total kWh sales                28,138     (237)        (0.8)     28,375
-------------------------------------------------------------------------

PEC Electric's revenues, excluding recoverable fuel revenues of $509 million and
$460  million  for the six months  ended June 30,  2005 and 2004,  respectively,
decreased  $16 million.  The decrease in revenues is  attributable  primarily to
unfavorable  weather offset  partially by favorable  retail growth and usage and
increased wholesale  revenues.  The impact of weather is $47 million unfavorable
with cooling degree days 37% below prior year. Favorable growth and usage of $26
million was driven by an increase in the number of customers as of June 30, 2005
compared to June 30, 2004 of 28,000.  The  increase in wholesale  revenues  less
fuel of $5 million  was driven  primarily  by the impact of  increased  capacity
under contract.

Expenses

Fuel and Purchased Power

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

Fuel and  purchased  power  expenses  were $604 million for the six months ended
June 30, 2005, which  represents a $45 million increase  compared to same period
in the prior year.  Fuel used in electric  generation  increased  $47 million to
$464 million  compared to June 30, 2004.  This increase is due to an increase in
fuel used in  generation  of $70 million due  primarily to higher coal,  oil and
natural  gas costs.  The  increase  in fuel used in  generation  was offset by a
reduction  in  deferred  fuel  expense  of  $24  million  as  a  result  of  the
under-recovery of current period fuel costs offset partially by the write-off of
$5 million in deferred fuel costs as a result of the South Carolina  annual fuel
hearing.  Purchased power expense  decreased $2 million to $140 million compared
to prior year.

Operations and Maintenance (O&M)

O&M expenses  were $484  million for the six months  ended June 30, 2005,  which
represents  a $49  million  increase  compared  to  the  same  period  in  2004.
Postretirement and severance expenses related to the cost management  initiative
increased  O&M expenses by $60 million  during 2005.  This is an increase of $55
million  compared to the same period in 2004 as prior year expenses  included $5
million related to a separate  initiative.  In addition,  O&M expenses increased
$12 million  related to the change in accounting  estimates  for certain  Energy
Delivery   capital  costs.   See   discussion  of  change  in  Energy   Delivery
capitalization  practice in Note 8F of the Progress Energy annual report on Form
10-K  for the year  ended  December  31,  2004.  These  unfavorable  items  were
partially offset by decreased plant outage costs of $8 million compared to 2004,
which included an additional planned nuclear plant outage. In addition,  results
for 2004 included $6 million of costs  associated with an ice storm that hit the
Carolinas service territory in the first quarter of 2004.

                                       58
<PAGE>

Depreciation and Amortization

Depreciation and amortization  expense was $259 million for the six months ended
June 30,  2005,  which  represents  a $5 million  increase  compared to the same
period in 2004. The increase is attributable to higher NC Clean Air amortization
of $23  million  and higher  depreciation  for assets  placed in  services of $3
million.  These  increases were partially  offset by a reduction in depreciation
expense  of $21  million  related  to the  depreciation  studies  filed in 2004.
Depreciation  rates  are the same for 2005 and 2004;  however,  the 2004 year to
date  retroactive  adjustment for the new rates adopted  related to the expanded
lives of the nuclear units was made in November 2004.

Other income, net

Other  income,  net has  increased $8 million for the six months ending June 30,
2005 as  compared to the same  period in the prior  year.  This  increase is due
primarily  to a write-off of $7 million of  non-trade  receivables  in the prior
year.

Income tax expense

GAAP  requires  companies  to apply a  levelized  effective  tax rate to interim
periods that is consistent with the estimated annual effective tax rate.  Income
tax expense was  increased by $3 million for the six months ended June 30, 2005,
in order to maintain an effective tax rate consistent with the estimated  annual
rate.  Fluctuations  in  estimated  annual  earnings  and the  timing of various
permanent  and temporary  deductions  can also cause 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.  The  remaining  fluctuation  in
income tax expense is  attributable  primarily to reduced  earnings  compared to
prior year.

PROGRESS ENERGY FLORIDA

PEF  contributed  segment  profits of $10  million and $84 million for the three
months ended June 30, 2005 and 2004,  respectively.  The decrease in profits for
the three months ended June 30, 2005 when  compared to 2004 is primarily  due to
higher O&M expenses (as a result of  postretirement  and  severance  costs,  the
write-off of unrecovered storm costs and the change in accounting  estimates for
certain Energy Delivery  capital costs),  the impact of milder weather and lower
average retail usage per customer,  partially  offset by higher wholesale sales,
favorable  provision for rate refund,  favorable  retail customer growth and the
gain on the sale of the Winter Park distribution system.

PEF  contributed  segment  profits of $53 million  and $133  million for the six
months ended June 30, 2005 and 2004,  respectively.  The decrease in profits for
the six months  ended June 30, 2005 when  compared to 2004 is  primarily  due to
higher O&M expenses (as a result of  postretirement  and  severance  costs,  the
write-off of unrecovered storm costs and the change in accounting  estimates for
certain Energy Delivery capital costs),  lower average usage per retail customer
and the impact of milder weather  partially  offset by higher  wholesale  sales,
favorable  provision for rate refund,  favorable  retail customer growth and the
gain on the sale of the Winter Park distribution system.

Three  months ended June 30, 2005 as compared to the three months ended June 30,
2004

Revenues

PEF's  electric  revenues for the three months ended June 30, 2005 and 2004, and
the amount and percentage change by customer class are as follows:

                                       59
<PAGE>

-----------------------------------------------------------------------
(in millions of $)                  Three Months Ended June 30,
Customer Class                  2005       Change  % Change       2004
-----------------------------------------------------------------------
Residential                     $ 431       $   9      2.1       $ 422
Commercial                        227          13      6.1         214
Industrial                         71           5      7.6          66
Governmental                       57           5      9.6          52
Retail revenue sharing              2           5       -           (3)
--------------------------------------------------            --------
    Total retail revenues         788          37      4.9         751
Wholesale                          68          15     28.3          53
Unbilled                           18          (6)       -          24
Miscellaneous                      34           2      6.3          32
--------------------------------------------------            --------
    Total electric revenues     $ 908       $  48      5.6       $ 860
--------------------------------------------------            --------
Less:
--------------------------------------------------            --------
Pass-through revenues            (527)        (49)   (10.3)       (478)
--------------------------------------------------            --------
Revenues excluding pass-
   through revenues             $ 381       $  (1)    (0.3)      $ 382
-----------------------------------------------------------------------

PEF's  electric  energy sales for the three months ended June 30, 2005 and 2004,
and the amount and percentage change by customer class are as follows:

----------------------------------------------------------------------------
(in millions of kWh)                  Three Months Ended June 30,
Customer Class                  2005       Change    Change       2004
----------------------------------------------------------------------------
Residential                     4,341        (164)    (3.6)      4,505
Commercial                      2,888         (53)    (1.8)      2,941
Industrial                      1,040         (11)    (1.0)      1,051
Governmental                      762          11      1.5         751
-------------------------------------------------             --------
    Total retail energy sales   9,031        (217)    (2.3)      9,248
Wholesale                       1,318         225     20.6       1,093
Unbilled                          428        (362)       -         790
-------------------------------------------------             --------
    Total kWh sales            10,777        (354)    (3.2)     11,131
----------------------------------------------------------------------------

PEF's revenues,  excluding  recoverable fuel and other pass-through  revenues of
$527 million and $478 million for the three months ended June 30, 2005 and 2004,
respectively,  decreased  $1  million.  The  decrease  in  revenues  is  due  to
unfavorable  average usage per retail  customer of $13 million and the impact of
milder  weather of $5 million with heating  degree days and cooling  degree days
43% and 7% below prior year, respectively. These decreases were partially offset
by favorable provision for rate refund of $5 million (due to lower base revenues
as discussed  above and a higher revenue sharing  threshold in 2005),  favorable
retail  customer  growth of $6 million and  favorable  wholesale  revenues of $4
million.  Wholesale  revenue  favorability  is  attributable  primarily  to  new
contracts entered into subsequent to June 2004.

Expenses

Fuel and Purchased Power

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

Fuel and purchased  power  expenses were $457 million for the three months ended
June 30, 2005, which  represents a $42 million increase  compared to prior year.
This  increase  is due to  increases  in fuel used in  electric  generation  and
purchased power expenses of $37 million and $5 million, respectively.  Increased
fuel costs in the current  year  account for $12 million of the increase in fuel
used in electric  generation.  The remaining  increase was due to an increase in
deferred  fuel  expense as  recovery of fuel  expenses  in the current  year was
greater  than in the prior  year.  In December  2004,  the FPSC  approved  PEF's
request for a cost  recovery  adjustment  in its annual filing due to the rising
cost of fuel.  Fuel recovery  rates  increased  effective  January 1, 2005.  The
increase in  purchased  power  expense  was  primarily  due to higher  prices of
purchases in the current year as a result of increased fuel costs.

                                       60
<PAGE>

Operations and Maintenance (O&M)

O&M expenses  were $288 million for the three months ended June 30, 2005,  which
represents  an  increase of $136  million,  when  compared  to the $152  million
incurred  during  the three  months  ended  June 30,  2004.  Postretirement  and
severance expense related to the cost management  initiative increased O&M costs
by  $93  million  during  2005.  In  addition,  PEF  wrote-off  $17  million  of
unrecoverable storm costs associated with the 2004 hurricanes (see Note 5 to the
Progress Energy  Consolidated  Interim Financial  Statements).  O&M expense also
increased $9 million  related to the change in accounting  estimates for certain
Energy  Delivery  capital  costs.  See  discussion of change in Energy  Delivery
capitalization  practice in Note 8F of the Progress Energy annual report on Form
10-K for the year ended December 31, 2004. The remaining increase in O&M expense
is  attributable  to higher  environmental  cost  recovery  expenses  (primarily
emission  allowances)  of $6 million and a $3 million bad debt reserve  recorded
during the period.  The  environmental  cost recovery  expenses are pass-through
expenses and have no impact on earnings.

Other income, net

Other income,  net has increased $24 million for the three months ended June 30,
2005 as compared to the prior  year.  This  increase  was due  primarily  to the
pre-tax gain  recognized on the sale of the Winter Park  distribution  system of
$25 million (see Note 5 to the Progress Energy  Consolidated  Interim  Financial
Statements).  In addition,  the equity component of the allowance for funds used
during construction  increased $3 million as a result of the Hines Unit 3 & Unit
4 construction projects. These favorable items were offset partially by the FERC
Code of Conduct  audit  settlement  that  required  $3 million to be refunded to
customers (see discussion in Note 12 to the Progress Energy Consolidated Interim
Financial Statements).

Interest charges, net

Total  interest  charges,  net increased $4 million to $32 million for the three
months ended June 30, 2005 as compared to $28 million for the three months ended
June 30, 2004. This increase is due primarily to additional commercial paper and
internal money pool borrowings related to unrecovered storm costs.

Income tax expense

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 $8 million  for the three  months  ended June 30,
2005, in order to maintain an effective tax rate  consistent  with the estimated
annual rate. Fluctuations in estimated annual earnings and the timing of various
permanent  and temporary  deductions  can also cause 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.  The  remaining  fluctuation  in
income tax expense is attributable to reduced earnings compared to prior period.


Six months ended June 30, 2005 as compared to six months ended June 30, 2004

Revenues

PEF's electric revenues for the six months ended June 30, 2005 and 2004, and the
amount and percentage change by customer class are as follows:

                                       61
<PAGE>

----------------------------------------------------------------------------
(in millions of $)                     Six Months Ended June 30,
Customer Class                     2005      Change     % Change       2004
----------------------------------------------------------------------------
Residential                      $  861        $ 37          4.5     $  824
Commercial                          428          33          8.4        395
Industrial                          134           6          4.7        128
Governmental                        110          11         11.1         99
Retail revenue sharing                -           7            -         (7)
----------------------------------------------------              ----------
    Total retail revenues         1,533          94          6.5      1,439
Wholesale                           142          22         18.3        120
Unbilled                             13          (5)           -         18
Miscellaneous                        68           1          1.5         67
----------------------------------------------------              ----------
    Total electric revenues      $1,756        $112          6.8     $1,644
----------------------------------------------------              ----------
Less:
----------------------------------------------------              ----------
Pass-through revenues            (1,028)       (103)       (11.1)      (925)
----------------------------------------------------              ----------
Revenues excluding pass-
   through revenues               $ 728        $  9          1.3     $  719
----------------------------------------------------------------------------

PEF's electric energy sales for the six months ended June 30, 2005 and
2004, and the amount and percentage change by customer class are as
follows:

----------------------------------------------------------------------------
(in millions of kWh)                   Six Months Ended June 30,
Customer Class                     2005      Change     % Change       2004
----------------------------------------------------------------------------
Residential                       8,688        (109)        (1.2)     8,797
Commercial                        5,459          28          0.5      5,431
Industrial                        1,981         (93)        (4.5)     2,074
Governmental                      1,471          48          3.4      1,423
----------------------------------------------------              ---------
    Total retail energy sales    17,599        (126)        (0.7)    17,725
Wholesale                         2,655         240          9.9      2,415
Unbilled                            325        (330)           -        655
----------------------------------------------------              ---------
    Total kWh sales              20,579        (216)        (1.0)    20,795
----------------------------------------------------------------------------

PEF's revenues,  excluding  recoverable fuel and other pass-through  revenues of
$1.028 billion and $925 million for the six months ended June 30, 2005 and 2004,
respectively, increased $9 million. The increase in revenues is due to favorable
retail customer growth, increased wholesale revenues and the favorable provision
for rate  refund of $12  million,  $11  million  and $7  million,  respectively.
Wholesale revenue improvement is attributable primarily to new contracts entered
into  subsequent to May 2004.  These  increases were  partially  offset by lower
average  usage per  retail  customer  of $12  million  and the  impact of milder
weather in the current year of $7 million with heating degree days 18% below the
prior year. In addition, weaker industrial sales reduced revenues $2 million.

Expenses

Fuel and Purchased Power

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

Fuel and  purchased  power  expenses  were $890 million for the six months ended
June 30, 2005, which represents an $85 million increase  compared to prior year.
This  increase  is due to  increases  in fuel used in  electric  generation  and
purchased  power expenses of $70 million and $15 million,  respectively.  Higher
system requirements and increased fuel costs in the current year account for $52
million of the  increase  in fuel used in  electric  generation.  The  remaining
increase  was due to an increase in  deferred  fuel  expense as recovery of fuel
expenses in the current  year was  greater  than in the prior year.  In December
2004,  the FPSC approved  PEF's  request for a cost  recovery  adjustment in its
annual  filing due to the rising cost of fuel.  Fuel  recovery  rates  increased
effective January 1, 2005. The increase in purchased power expense was primarily
due to higher  prices of  purchases in the current year as a result of increased
fuel costs.

                                       62
<PAGE>

Operations and Maintenance (O&M)

O&M expenses  were $477  million for the six months  ended June 30, 2005,  which
represents  an  increase of $165  million,  when  compared  to the $312  million
incurred during the six months ended June 30, 2004. Postretirement and severance
costs associated with the cost management initiative increased O&M costs by $107
million  during 2005. In addition,  PEF  wrote-off $17 million of  unrecoverable
storm costs  associated  with the 2004  hurricanes  (see Note 5 to the  Progress
Energy Consolidated  Interim Financial  Statements).  O&M expense also increased
$17 million  related to the change in accounting  estimates  for certain  Energy
Delivery   capital  costs.   See   discussion  of  change  in  Energy   Delivery
capitalization  practice in Note 8F of the Progress Energy annual report on Form
10-K for the year ended December 31, 2004. O&M expense increased $11 million due
to higher environmental cost recovery expenses (primarily emission  allowances).
The environmental  cost recovery  expenses are pass-through  expense and have no
impact on earnings.  The remaining increase in O&M expense is attributable to an
$8 million workers  compensation benefit adjustment recorded in 2005 as a result
of an actuarial study.

Other income, net

Other  income,  net has  increased $28 million for the six months ended June 30,
2005 as compared to the prior  year.  This  increase  was due  primarily  to the
pre-tax gain  recognized on the sale of the Winter Park  distribution  system of
$25 million (see Note 5 to the Progress Energy  Consolidated  Interim  Financial
Statements).  In addition,  the equity component of the allowance for funds used
during construction  increased $5 million as a result of the Hines Unit 3 & Unit
4 construction projects. These favorable items were offset partially by the FERC
Code of Conduct  audit  settlement  that  required  $3 million to be refunded to
customers (see discussion in Note 12 to the Progress Energy Consolidated Interim
Financial Statements).

Interest charges, net

Total  interest  charges,  net  increased  $6 million to $64 million for the six
months  ended June 30, 2005 as compared to $58 million for the six months  ended
June 30, 2004. This increase is due primarily to additional commercial paper and
internal money pool borrowings related to unrecovered storm costs.

Income tax expense

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 $8 million for the six months ended June 30, 2005,
in order to maintain an effective tax rate consistent with the estimated  annual
rate.  Fluctuations  in  estimated  annual  earnings  and the  timing of various
permanent  and temporary  deductions  can also cause 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.  The  remaining  fluctuation  in
income tax expense is attributable to reduced earnings compared to prior year.

DIVERSIFIED BUSINESSES

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

FUELS

The Fuels' segment  operations  include natural gas production,  coal extraction
and terminal operations. The following summarizes Fuels' segment profits for the
three and six months ended June 30, 2005 and 2004:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

-----------------------------------------------------------------------------------------------
                                      Three Months Ended June 30,    Six Months Ended June 30,
-----------------------------------------------------------------------------------------------
(in millions)                             2005              2004          2005          2004
-----------------------------------------------------------------------------------------------
  Gas production                           $12               $12           $24           $25
  Coal fuel and other operations             -                 5           (1)             2
-----------------------------------------------------------------------------------------------
     Segment Profits                       $12               $17           $23           $27
-----------------------------------------------------------------------------------------------
</TABLE>

                                       63

<PAGE>

Natural Gas Operations

Natural gas  operations  generated  profits of $12 million for both of the three
months ended June 30, 2005 and 2004, and $24 million and $25 million for the six
months ended June 30, 2005 and 2004, respectively.  The decrease in gas earnings
compared to prior year is attributable to reduced  production as a result of the
sale of gas assets in 2004 offset  partially  by higher  natural gas prices.  In
addition,  results  for the six  months  ended  June 30,  2005  were  negatively
impacted by a  reduction  in  capitalized  interest  of $3 million  pre-tax.  In
December  2004,  the Company sold certain  gas-producing  properties and related
assets owned by Winchester  Production  Company,  Ltd., a subsidiary of Progress
Fuels (North Texas gas operations). The following summarizes the gas production,
revenues and gross  margins for the three and six months ended June 30, 2005 and
2004 by production facility:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

------------------------------------------------------------------------------------------
                                    Three Months Ended June 30,  Six Months Ended June 30,
------------------------------------------------------------------------------------------
                                            2005          2004          2005         2004
------------------------------------------------------------------------------------------
     Production in Bcf equivalent
East Texas/LA gas operations                 6.0           4.9          11.4          9.0
North Texas gas operations                     -           2.7             -          5.3
------------------------------------------------------------------------------------------
    Total Production                         6.0           7.6          11.4         14.3
------------------------------------------------------------------------------------------

         Revenues in millions
East Texas/LA gas operations               $  39           $27           $72         $ 48
North Texas gas operations                     -            13             -           27
------------------------------------------------------------------------------------------
    Total Revenues                         $  39           $40           $72         $ 75
------------------------------------------------------------------------------------------

             Gross Margin
in millions of $                           $  30           $33           $58         $ 60
As a % of revenues                           77%           83%           81%          80%
------------------------------------------------------------------------------------------
</TABLE>

Coal Fuel and Other Operations

Coal fuel and other  operations  earnings  were  essentially  break even for the
three months ended June 30, 2005  compared to segment  profits of $5 million for
the three months ended June 30, 2004.  The decrease in earnings  compared to the
prior  period is due to higher coal mining  costs (due to rising  prices of fuel
and steel) and reduced sales volumes due to the expiration of several  contracts
in  the  current  year.  In  addition,  results  were  unfavorably  impacted  by
postretirement  and severance costs of $4 million  pre-tax  recorded during 2005
related to the cost management initiative.

Coal fuel and other  operations  generated  segment losses of $1 million for the
six months ended June 30, 2005 compared to segment  profit of $2 million for the
six months  ended June 30,  2004.  The decrease in earnings of $3 million is due
primarily  to higher coal mining  costs of $11  million  pre-tax  (due to rising
prices of fuel and steel) , a workers  compensation  accrual  adjustment  booked
during the first quarter of 2005 of $5 million  pre-tax and  postretirement  and
severance  costs  of $6  million  pre-tax  as a  part  of  the  cost  management
initiative.  This unfavorability was partially offset by increased revenues as a
result of higher coal prices.

The Company is exploring strategic alternatives regarding the Fuels' coal mining
business,  which could include  divesting these assets. As of June 30, 2005, the
carrying value of long-lived assets of the coal mining business was $69 million.
The Company cannot currently predict the outcome of this matter.

COMPETITIVE COMMERCIAL OPERATIONS

CCO's  operations  generated  segment  losses of $3 million for the three months
ended June 30, 2005 compared to segment  profit of $5 million in the prior year.
The decrease in earnings  compared to prior year is due primarily to a reduction
in gross margin of $13 million pre-tax ($8 million  after-tax)  offset partially
by favorable  interest  expense.  Contract  margins are unfavorable  compared to
prior  year due to the  expiration  of  certain  tolling  agreements  and  lower
at-market sales.  This margin  unfavorability  was partially offset by increased
earnings from new full-requirements  contracts and increased load on an existing
contract. In addition, interest expense decreased $3 million pre-tax ($2 million
after-tax)  compared to the prior period due to the  termination  of CCO's Genco
financing arrangement in December 2004.

                                       64
<PAGE>

CCO's operations generated segment losses of $9 million for the six months ended
June 30, 2005 compared to segment losses of $3 million in the prior period.  The
increase in losses  compared to prior year is due  primarily  to a reduction  in
gross margin of $15 million pre-tax ($9 million  after-tax)  offset partially by
favorable  depreciation and amortization expense and interest expense.  Contract
margins are unfavorable  compared to prior year due to the expiration of certain
tolling agreements and lower at-market sales. This  unfavorability was partially
offset by increased earnings from new full-requirements  contracts and increased
load on an existing contract. In addition,  results in the current year included
$2 million pre-tax ($1 million  after-tax) in postretirement and severance costs
associated with the cost management  initiative.  Depreciation  and amortization
expenses  decreased $4 million pre-tax ($2 million after-tax) as a result of the
expiration  of certain  acquired  contracts  that were subject to  amortization.
Interest expense decreased $5 million pre-tax ($2 million  after-tax) due to the
termination of the Genco financing arrangement in December 2004.
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

-----------------------------------------------------------------------------------------
                                Three months ended June 30,    Six months ended June 30,
-----------------------------------------------------------------------------------------
(in millions)                         2005             2004          2005           2004
-----------------------------------------------------------------------------------------
Total revenues                      $  158             $ 72          $222          $ 105
Gross margin
   In millions of $                 $   29             $ 42          $ 50          $  65
   As a % of revenues                  18%              58%           23%            62%
Segment losses                      $   (3)            $  5          $ (9)         $   (3)
-----------------------------------------------------------------------------------------
</TABLE>

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

SYNTHETIC FUEL

The synthetic fuel operations  generated  segment profits of $23 million and $36
million for the three months  ended June 30, 2005 and 2004,  and $22 million and
$72 million for the six months ended June 30, 2005 and 2004,  respectively.  The
production  and sale of  coal-based  solid  synthetic  fuel  generate  operating
losses,  but  qualify  for tax  credits  under  Section  29 of the  Code,  which
typically  more  than  offset  the  effect  of such  losses.  See Note 14 to the
Progress Energy Consolidated Interim Financial Statements.

The operations resulted in the following for the three and six months ended June
30, 2005 and 2004:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

------------------------------------------------------------------------------------------------
                                         Three Months Ended June 30,   Six Months Ended June 30,
------------------------------------------------------------------------------------------------
(in millions)                                   2005           2004         2005          2004
-----------------------------------------------------------------------------------------------
Tons sold                                        2.3            2.7          4.3           5.7
-----------------------------------------------------------------------------------------------

Operating losses, excluding tax credits       $  (39)          $(35)       $ (77)         $(77)
Tax credits generated, net                        62             71           99           149
-----------------------------------------------------------------------------------------------
    Segment profits                           $   23           $ 36         $ 22          $ 72
-----------------------------------------------------------------------------------------------
</TABLE>

Synthetic  fuels'  earnings for the three months ended June 30, 2005 as compared
to the  prior  period  were  negatively  impacted  by  lower  sales  and  higher
production  costs.  The decrease in sales is due primarily to an internal change
in the quarterly production schedule in 2005 compared to 2004.

Synthetic  fuels' earnings for the six months ended June 30, 2005 as compared to
the prior period were  negatively  impacted by lower sales and the forfeiture of
tax credits as a result of the sale of Progress Rail. The decrease in sales year
over year is  primarily  attributable  to an  internal  change in the  quarterly
production schedule in 2005 compared to 2004. The sale of Progress Rail resulted
in a capital loss for tax purposes, therefore $17 million of previously recorded
tax credits were forfeited  during the current year. See Note 14 to the Progress
Energy Consolidated Interim Financial Statements for further discussion.

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

                                       65
<PAGE>

CORPORATE & OTHER

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

Other nonregulated business areas

Other nonregulated  businesses  contributed segment losses of $2 million for the
three months ended June 30, 2005  compared to segment  losses of $31 million for
the three months ended June 30, 2004.  This  favorability  is due primarily to a
reduction in losses at SRS.  During the second  quarter of 2004 SRS recorded the
litigation  settlement  reached with the San Francisco  United  School  District
related to civil  proceedings.  In June 2004, SRS reached a settlement  with the
District  which settled all  outstanding  claims for  approximately  $43 million
pre-tax ($29 million after-tax).

Other nonregulated  businesses  contributed segment losses of $2 million for the
six months ended June 30, 2005 compared to segment losses of $35 million for the
six months  ended June 30,  2004.  This  favorability  is due  primarily  to the
reduction of losses at SRS as discussed above.

Corporate Services

Corporate Services  (Corporate)  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,
---------------------------------------------------------------------------------------------
Income (expense) in millions                  2005          2004        2005          2004
---------------------------------------------------------------------------------------------
  Other interest expense                   $  (72)         $ (67)     $ (143)       $ (140)
  Contingent value obligations                  -             (5)          -           (13)
  Tax levelization                            (49)            (5)        (52)          (43)
  Tax reallocation                             (9)            (9)        (19)          (18)
  Other income taxes                           32             28          62            59
  Other                                        (4)            (4)         (8)           (7)
---------------------------------------------------------------------------------------------
    Segment profit (loss)                  $ (102)         $ (62)     $ (160)       $ (162)
---------------------------------------------------------------------------------------------
</TABLE>

Other  interest  expense  increased  $5 million  compared to $67 million for the
three  months  ended June 30,  2004 and  increased  $3 million  compared to $140
million  for the six months  ended June 30,  2004.  Interest  expense  increased
during  the  current  periods  due  to  increased  rates  on  commercial   paper
borrowings, interest rate swaps and additional expenses incurred related to draw
downs on revolving credit agreements.

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, 2005 and 2004, the
CVOs had fair  market  values of  approximately  $13  million  and $36  million,
respectively.  Progress Energy recorded unrealized losses of $0.5 million and $5
million  for the three  months  ended June 30, 2005 and 2004,  respectively,  to
record the changes in fair value of the CVOs,  which had average  unit prices of
$0.14  and  $0.36  at June 30,  2005 and  2004,  respectively.  Progress  Energy
recorded an  unrealized  loss of $13  million for the six months  ended June 30,
2004.  The CVO values at June 30, 2005 were unchanged from the December 31, 2004
values,  thus requiring no  recognition  of unrealized  gain or loss for the six
months ended June 30, 2005.

                                       66
<PAGE>

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 $49 million and $5 million for the three  months
ended June 30, 2005 and 2004, and $52 million and $43 million for the six months
ended June 30, 2005 and 2004,  respectively,  in order to maintain an  effective
tax rate consistent with the estimated  annual rate. The tax credits  associated
with the  Company's  synthetic  fuel  operations  primarily  drive the  required
levelization  amount.  Fluctuations in estimated annual earnings and tax credits
can also cause  large  swings in the  effective  tax rate for  interim  periods.
Therefore,  this adjustment  will vary each quarter,  but will have no effect on
net income for the year.

DISCONTINUED OPERATIONS

On March 24, 2005, the Company completed the sale of Progress Rail to One Equity
Partners LLC, a private  equity firm unit of J.P.  Morgan Chase & Co. Gross cash
proceeds  from  the  sale  are  estimated  to  be  approximately  $430  million,
consisting  of $405 million base  proceeds  plus an  estimated  working  capital
adjustment.  Proceeds from the sale were used to reduce debt.  The  accompanying
consolidated  interim  financial  statements  have been restated for all periods
presented for the discontinued  operations of Progress Rail. See Notes 3 and 14B
to the Progress Energy Consolidated  Interim Financial Statements for additional
discussion.

Rail  discontinued  operations  resulted  in losses of $7 million  for the three
months  ended June 30,  2005  compared  to  profits of $7 million  for the three
months ended June,  2004.  Earnings for 2005 include an adjustment of $7 million
to the  estimated  after-tax  loss  on  the  sale  related  to  working  capital
adjustments and other revisions of operating estimates. Results for 2004 include
three months of operations.  Results for the three months ended June 30, 2005 do
not include any income or loss from  operations  as the sale closed in the first
quarter.  See  discontinued  earnings summary included at Note 3 to the Progress
Energy Consolidated Interim Financial Statements.

Rail  discontinued  operations  resulted  in losses of $19  million  for the six
months ended June 30, 2005 compared to profits of $16 million for the six months
ended June 30, 2004.  Earnings for 2005 include an estimated  after-tax  loss on
the sale of $24  million.  Results  for 2004  included  six  months of  earnings
activity compared to only three months in 2005.

NCNG discontinued  operations contributed $1 million of net income for the three
and six months  ended June 30,  2004.  The sale of NCNG to Piedmont  Natural Gas
Company closed in 2003; however,  during the three and six months ended June 30,
2004, the Company recorded an additional gain of $1 million after tax related to
deferred taxes on the loss from the sale.


LIQUIDITY AND CAPITAL RESOURCES

Progress Energy, Inc.

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

Cash Flows from Operations

Net cash  provided by operating  activities  decreased  $322 million for the six
months ended June 30, 2005,  when  compared to the  corresponding  period in the
prior year.  The  decrease in  operating  cash flow was due  primarily to a $313
million  increase  in working  capital  requirements.  The  increase  in working
capital  requirements  was  primarily  driven by $90 million in  synthetic  fuel
royalty  payments  (see  Note  14D),  a $71  million  difference  in PEC's  coal
inventory fluctuations,  $73 million due to timing of tax payments at PEF, and a
$32  million  reduction  in tax  liabilities  related to the loss on disposal of
Rail.  See  Note  3  to  the  Progress  Energy  Consolidated  Interim  Financial
Statements.

                                       67
<PAGE>

Investing Activities

Net cash used in  investing  activities  decreased  by $55  million  for the six
months ended June 30, 2005,  when  compared to the  corresponding  period in the
prior year.  The decrease is due  primarily to $405 million in proceeds from the
sale of Progress  Rail in March 2005,  compared to $94 million in proceeds  from
the sale of assets during the six months ended June 30, 2004.  See Note 3 to the
Progress Energy Consolidated  Interim Financial  Statements.  This was partially
offset by $160 million of lower net proceeds from  short-term  investments,  $86
million in additional capital expenditures for utility property and nuclear fuel
additions,  and the  purchase  of natural gas assets for $46 million at Progress
Fuels  in May  2005.  See Note 4 to the  Progress  Energy  Consolidated  Interim
Financial Statements.

Financing Activities

Net cash used in financing  activities was $166 million for the six months ended
June 30, 2005,  compared to $520 million for the six months ended June 30, 2004,
or a net  decrease  of  $354  million.  The  change  in cash  used in  financing
activities was due primarily to the March 1, 2004 maturity of $500 million 6.55%
senior  unsecured  notes.  These notes were paid with cash and commercial  paper
capacity which was created from the sale of assets during 2003.

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

On January 31, 2005,  Progress Energy, Inc. entered into a new $600 million RCA,
which was to expire on December  30,  2005.  This  facility was added to provide
additional  liquidity,  to the extent necessary,  during 2005 due in part to the
uncertainty of the timing of storm restoration cost recovery from the hurricanes
in Florida  during 2004.  On February 4, 2005,  $300 million was drawn under the
new  facility to reduce  commercial  paper and pay off the  remaining  amount of
loans outstanding under other RCA facilities, which consisted of $160 million at
Progress Energy and $55 million at PEF. As discussed  below, the maximum size of
this RCA was  reduced  to $300  million  on  March  22,  2005  and  subsequently
terminated on May 16, 2005.

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

In March 2005,  Progress Energy,  Inc.'s $1.1 billion  five-year credit facility
was amended to increase the maximum  total debt to total  capital ratio from 65%
to 68% due to the potential impacts of a proposed interpretation of SFAS No. 109
regarding accounting rules for uncertain tax positions (See Note 2).

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

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

                                       68
<PAGE>

In May 2005, Progress Energy, Inc. used proceeds from the issuance of commercial
paper to pay off $300 million of its $600 million RCA.

On May 16, 2005, PEF issued $300 million of First Mortgage  Bonds,  4.50% Series
due 2010.  The net  proceeds  from the sale of the bonds were used to reduce the
outstanding  balance of commercial paper.  Pursuant to the terms of the Progress
Energy $600 million RCA,  commitments  were  completely  reduced and the RCA was
terminated, effective May 16, 2005.

On July 1, 2005,  PEF paid at  maturity  $45  million  of its 6.72%  Medium-Term
Notes, Series B with short-term debt proceeds.

On July 28,  2005,  PEC  filed a shelf  registration  statement  with the SEC to
provide an  additional  $1.0 billion of capacity in addition to the $400 million
remaining on PEC's current shelf registration statement.  The shelf registration
statement will allow PEC to issue various  securities,  including First Mortgage
Bonds, Senior Notes, Debt Securities and Preferred Stock.

On July 28,  2005,  PEF  filed a shelf  registration  statement  with the SEC to
provide an  additional  $1.0 billion of capacity in addition to the $450 million
remaining on PEF's current shelf registration statement.  The shelf registration
statement will allow PEF to issue various  securities,  including First Mortgage
Bonds, Debt Securities and Preferred Stock.

For the six months ended June 30, 2005,  the Company  issued  approximately  4.0
million  shares  representing  approximately  $171 million in proceeds  from its
Investor  Plus Stock  Purchase  Plan and its  employee  benefit and stock option
plans,  net of purchases of restricted  shares.  For the year 2005,  the Company
expects to realize  approximately $200 million aggregate amount from the sale of
stock through these plans.

Future Liquidity and Capital Resources

As of June 30, 2005,  there were no material  changes in the Company's  "Capital
Expenditures,"  "Other  Cash  Needs,"  "Credit  Facilities,"  or "Credit  Rating
Matters" as compared to those discussed under in Item 7 of the Form 10-K,  other
than  "Environmental  Matters"  and as  described  below  and  under  "Financing
Activities."

As of June 30, 2005,  the current  portion of long-term  debt was $848  million,
which the Company  expects to fund from proceeds from the sale of Progress Rail,
issuances of new long-term debt,  commercial paper borrowings and/or issuance of
new equity securities.

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

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

On June 21,  2005,  the FPSC ruled that PEF will  recover  $232 million of storm
costs over a two-year period.  PEF's initial petition was for $252 million.  The
final order was received on July 14, 2005.

On June 1, 2005,  Florida  Governor  Jeb Bush  signed into law a bill that would
allow utilities to petition the FPSC to use  securitized  bonds to recover storm
related  costs.  PEF intends to ask the FPSC for  approval to issue  securitized
debt.  This  arrangement  would benefit the Company by providing  immediate cash
recovery of the  hurricane  costs and would  benefit the customer by providing a
longer  recovery  period,  which will reduce the price impact on monthly  bills.
Assuming  FPSC  approval,  PEF expects the process to take six to nine months to
complete.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

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

                                       69
<PAGE>

Guarantees

As a  part  of  normal  business,  Progress  Energy  and  certain  wholly  owned
subsidiaries  enter  into  various  agreements  providing  future  financial  or
performance  assurances to third parties that are outside the scope of Financial
Accounting Standards Board (FASB) Interpretation No. 45, "Guarantor's Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness  of  Others"  (FIN No.  45).  These  agreements  are  entered  into
primarily to support or enhance the  creditworthiness  otherwise  attributed  to
Progress Energy and subsidiaries on a stand-alone  basis,  thereby  facilitating
the extension of  sufficient  credit to accomplish  the  subsidiaries'  intended
commercial purposes.  The Company's  guarantees include performance  obligations
under power supply agreements, tolling agreements,  transmission agreements, gas
agreements,  fuel procurement  agreements and trading operations.  The Company's
guarantees also include  standby letters of credit,  surety bonds and guarantees
in support of nuclear  decommissioning.  As of June 30,  2005,  the  Company had
issued $1.3 billion of guarantees for future financial or performance assurance.
The Company does not believe  conditions are likely for significant  performance
under the guarantees of performance issued by or on behalf of affiliates.

The majority of contracts  supported by the guarantees  contain  provisions that
trigger  guarantee  obligations  based on downgrade  events to below  investment
grade (below BBB- or Baa3), ratings triggers, monthly netting of exposure and/or
payments and offset  provisions in the event of a default.  As of June 30, 2005,
no guarantee  obligations had been triggered.  If the guarantee obligations were
triggered,  the maximum  amount of  liquidity  requirements  to support  ongoing
operations within a 90-day period,  associated with guarantees for the Company's
nonregulated portfolio and power supply agreements was $437 million. The Company
believes that it would be able to meet this  obligation  with cash or letters of
credit.

As of June 30, 2005, the Company has issued guarantees and  indemnifications  of
certain legal, tax and environmental matters to third parties in connection with
sales of  businesses  and for timely  payment of  obligations  in support of its
non-wholly owned synthetic fuel operations.  Related to the sales of businesses,
the notice period extends until 2012 for the majority of matters provided for in
the indemnification  provisions.  For matters for which the Company has received
timely notice, the Company's indemnity  obligations may extend beyond the notice
period. Certain environmental  indemnifications related to the sale of synthetic
fuel  operations  have no  limitations  as to time or maximum  potential  future
payments.  Other  guarantees  and  indemnifications  have an  estimated  maximum
exposure of  approximately  $152 million.  As of June 30, 2005,  the Company has
recorded liabilities related to guarantees and indemnifications to third-parties
of  $27  million.   Management  does  not  believe  conditions  are  likely  for
significant  performance  under  these  agreements  in  excess  of the  recorded
liabilities.

Market Risk and Derivatives

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

Contractual Obligations

As part of Progress Energy's ordinary course of business, it enters into various
long and short term contracts for fuel  requirements  at its generating  plants.
Through  June 30,  2005,  contracts  procured  through  PEC have  increased  the
Company's  aggregate  purchase  obligations  for  fuel  and  purchased  power by
approximately  $709  million as compared to the amount  stated in the  Company's
Form 10-K for the year ended  December 31, 2004. The increase  primarily  covers
the period  ranging from 2005 through 2009. A majority of the contracts  related
to the increase in purchase  obligations  for fuel and  purchased  power are for
future coal purchases primarily with fixed prices.

OTHER MATTERS

Synthetic Fuels Tax Credits

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

                                       70
<PAGE>

Although the Company  believes that it operates its synthetic fuel facilities in
compliance with applicable legal requirements for claiming the credits, its four
Earthco  facilities are under audit by the IRS. IRS field auditors have taken an
adverse  position  with respect to the  Company's  compliance  with one of these
legal  requirements,  and if the Company  fails to prevail  with respect to this
position,  it could incur significant liability and/or lose the ability to claim
the  benefit  of tax  credits  carried  forward  or  generated  in  the  future.
Similarly, in July 2005 the Financial Accounting Standards Board issued proposed
new  accounting  rules that would require that  uncertain tax benefits  (such as
those  associated  with the Earthco  plants) be probable of being  sustained  in
order to be  recorded  on the  financial  statements;  if adopted  as  currently
drafted,  this provision could have an adverse  financial impact on the Company.
See Note 2 to the Progress Energy Consolidated Interim Financial Statements.

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

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

PEF Rate Case Filing

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

Hearings on the base rate  proceeding  are  scheduled  from  September 7 through
September  16,  2005,  and a final  decision  is  expected  by the end of  2005.
Although  the Company  cannot  predict the  outcome of this  matter,  an adverse
outcome could negatively impact the Company's and PEF's financial  condition and
results of operations.

PEF Storm Cost Filing

On July 14, 2005, the Florida Public Service  Commission  (FPSC) issued an order
authorizing  PEF to recover $232 million,  including  interest,  of the costs it
incurred  and  previously   deferred  related  to  PEF's  restoration  of  power
associated  with the four  hurricanes  in 2004.  The  ruling  will  allow PEF to
include a charge  of  approximately  $3.27 on the  average  residential  monthly
customer  bill  beginning  August 1, 2005.  The ruling by the FPSC  approved the
majority of the Company's request with two exceptions:  the  reclassification of
$8 million  from O&M to utility  plant and  reclassification  of $17  million as
normal O&M expense. As a result of these adjustments,  approximately $17 million
was  charged to O&M  expense in June 2005,  representing  the retail  portion of
these adjustments.

The amount included in the original petition requesting recovery of $252 million
in November  2004 was an estimate,  as actual total costs were not known at that
time.  The Company  currently  estimates  that it has incurred an additional $18
million  in costs  over and above the  amount  requested  in the  petition.  The
difference between the actual costs and the amount requested will be trued-up in
September  2005,  subject to FPSC  approval,  and the impact will be included in
customer bills beginning January 1, 2006.

                                       71

<PAGE>

On June 1, 2005,  Florida  Governor  Jeb Bush  signed into law a bill that would
allow utilities to petition the FPSC to use  securitized  bonds to recover storm
related  costs.  PEF intends to ask the FPSC for  approval to issue  securitized
debt.  This  arrangement  would benefit the Company by providing  immediate cash
recovery of the  hurricane  costs and would  benefit the customer by providing a
longer  recovery  period,  which will reduce the price impact on monthly  bills.
Assuming  FPSC  approval,  PEF expects the process to take six to nine months to
complete.

Energy Bill

On July 29, 2005,  the U.S.  Senate gave the final  approval  for  comprehensive
energy  policy  legislation.  This bill  provides  tax  changes  for the utility
industry,  incentives  for  emissions  reductions,  and  federal  insurance  and
incentives to build new nuclear power plants.  The U.S. House passed the measure
on July 28, 2005,  and President Bush is expected to sign the  legislation  into
law on or about August 8, 2005.

The  bill  contains  key  provisions  affecting  the  electric  power  industry,
including  provisions on nuclear security and nuclear regulatory risk insurance,
repeal of the Public  Utility  Holding  Company Act (PUHCA),  and protection for
native retail load customers of utilities that are not in regional  transmission
organizations.   It  gives  the  Federal  Energy  Regulatory  Commission  (FERC)
"backstop"  transmission  siting  authority as well as increased  utility merger
oversight.  The bill  also  provides  incentives  and  funding  for  clean  coal
technologies  and  initiatives  to  voluntarily   reduce  greenhouse  gases  and
redesignates the Section 29 tax credit as a general business credit.

The Company is reviewing the new energy bill  legislation  and cannot  currently
predict what impact the proposed law would have on its  financial  condition and
results of operations.

Franchise Litigation

Two  cities,  Edgewood  and  Belleair,  with  a  total  of  approximately  4,000
customers, have litigation pending against PEF in two circuit courts in Florida.
As discussed below,  proceedings against PEF by a third city, the City of Winter
Park,  Florida,  were  concluded in the second  quarter of 2005.  As  previously
reported,  the lawsuits  principally  seek (1) a  declaratory  judgment that the
cities have the right to purchase  PEF's  electric  distribution  system located
within the municipal  boundaries of the cities, (2) a declaratory  judgment that
the value of the distribution system must be determined through arbitration, and
(3) injunctive relief requiring PEF to continue to collect from PEF's customers,
and remit to the cities,  franchise fees during the pending litigation,  as long
as PEF  continues  to occupy  the  cities'  rights-of-way  to  provide  electric
service,  notwithstanding the expiration of the franchise ordinances under which
PEF had agreed to collect  such fees.  The  circuit  courts in those  cases have
entered  orders  requiring  arbitration to establish the purchase price of PEF's
electric  distribution  system  within five cities.  Two  appellate  courts have
upheld those circuit court  decisions and authorized the cities to determine the
value of PEF's electric  distribution  system within those cities,  which orders
have been upheld by the appellate courts.

Arbitration  in the case by the City of Winter Park (the City) 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  (13,000  customers)  at
approximately  $32 million,  not  including  separation  and  reintegration  and
construction  work in progress,  which could add several  million dollars to the
award. The panel also awarded PEF  approximately  $11 million in stranded costs,
which,  according to the award,  decrease over time. In September  2003,  Winter
Park voters passed a referendum  that would authorize the City to issue bonds of
up to approximately $50 million to acquire PEF's electric  distribution  system.
On April 26, 2004, the City  Commission  voted to proceed with the  acquisition.
The City sought and received  wholesale  power supply bids and on June 24, 2004,
executed a wholesale  power supply  contract with PEF with a five-year term from
the  date  service  begins  and a  renewal  option.  On May 12,  2004,  the City
solicited  bids to operate and  maintain the  distribution  system and awarded a
contract in January  2005.  On February 10, 2005,  PEF filed a petition with the
Florida Public Service Commission (FPSC) to relieve the Company of its statutory
obligation  to serve  customers in Winter Park on June 1, 2005,  or at such time
when the City is able to provide  retail  service.  On April 19, 2005,  the FPSC
voted to approve  PEF's  petition.  On June 1,  2005,  the City  acquired  PEF's
electric  distribution assets that serve the City for approximately $42 million.
PEF  transferred  the  distribution  assets  to the  City on June  1,  2005  and
recognized a pre-tax gain of $25 million on the  transaction,  which is included
in other, net on the Consolidated  Statements of Income.  This amount is subject
to  true-up  pending  accumulation  of  the  final  capital  expenditures  since
arbitration. PEF also recorded a regulatory liability of $8 million for stranded
cost  revenues  which will be amortized  to revenues  over the next six years in
accordance with the provisions of the transfer agreement with the City.

                                       72
<PAGE>

Arbitration with the 2,500-customer Town of Belleair (the Town) was completed in
June 2003. In September 2003, the arbitration panel issued an award in that case
setting  the  value  of the  electric  distribution  system  within  the Town at
approximately $6 million.  The panel further required the Town to pay to PEF its
requested $1 million in  separation  and  reintegration  costs and $2 million in
stranded costs.  The Town has not yet decided whether it will attempt to acquire
the system;  however, on January 18, 2005, it issued a request for proposals for
wholesale power supply and to operate and maintain the distribution  system.  In
March 2005, PEF submitted a bid to supply  wholesale power to the Town. The Town
received several other proposals for wholesale power and distribution  services.
In February 2005, the Town  Commission also voted to put the issue of whether to
acquire the distribution system to a voter referendum. A referendum is scheduled
to occur on  November  8,  2005.  At this time,  whether  and when there will be
further proceedings regarding the Town of Belleair cannot be determined.

Arbitration  in the remaining  city's  litigation  (the  1,500-customer  City of
Edgewood) has not yet been scheduled.  On February 17, 2005, the parties filed a
joint motion to stay the litigation for a 90-day period during which the parties
will discuss potential  settlement.  In April, the City Council voted to proceed
with  arbitration  and on July 6, 2005, the circuit court referred the matter to
arbitration,  but did not set an  arbitration  date.  The parties are engaged in
settlement  discussions  and have  reached a tentative  agreement to resolve the
case under which the City of Edgewood would sign a 30-year franchise  agreement.
At this time, whether and when there will be further  proceedings  regarding the
City of Edgewood cannot be determined.

A  fourth  city  (the   7,000-customer   City  of  Maitland)  is   contemplating
municipalization  but has  indicated  its intent to enter  into a new  franchise
agreement with PEF.  Maitland's  franchise expires in August 2005. At this time,
whether  and  when  there  will be  further  proceedings  regarding  the City of
Maitland cannot be determined.

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

Environmental Matters

The Company is subject to federal,  state and local  regulations  addressing air
and water quality,  hazardous and solid waste management and other environmental
matters. The Company currently estimates total compliance costs, for PEC and PEF
combined, related to environmental laws and regulations addressing air and water
quality,  which will primarily be for capital expenditures,  may be in excess of
$2.0 billion over ten years. These environmental matters are discussed in detail
in Note 13. This discussion identifies specific environmental issues, the status
of the issues,  accruals  associated  with issue  resolutions and the associated
exposures  to the  Company.  The  Company  accrues  costs to the extent they are
probable  and  can be  reasonably  estimated.  It is  reasonably  possible  that
additional losses, which could be material, may be incurred in the future.

Progress Energy Carolinas, Inc.

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

RESULTS OF OPERATIONS

The results of operations for the PEC Electric segment are identical between PEC
and Progress Energy. The results of operations for PEC's nonutility subsidiaries
for the three and six months  ended June 30,  2005 and 2004 are not  material to
PEC's consolidated financial statements.

                                       73
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating  activities decreased $157 million for the six months
ended June 30,  2005,  when  compared to the  corresponding  period in the prior
year.  The  decrease  was caused  primarily  by a change in  emission  allowance
inventory  fluctuations  of $46 million and a $102  million  increase in working
capital  requirements,  primarily  driven by a $71  million  difference  in coal
inventory fluctuations.

Cash used in  investing  activities  increased  $194  million for the six months
ended June 30, 2005, when compared to the corresponding period in the prior year
primarily due to lower net proceeds from short-term investments in 2005 compared
to 2004.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

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

Market Risk and Derivatives

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

Contractual Obligations

As part of PEC's  ordinary  course of business,  it enters into various long and
short term contracts for fuel  requirements  at its generating  plants.  Through
June 30, 2005, these contracts have increased the Company's  aggregate  purchase
obligations  for fuel and  purchased  power by  approximately  $709  million  as
compared  to the  amount  stated in the  Company's  Form 10-K for the year ended
December 31, 2004.  The increase  primarily  covers the period ranging from 2005
through  2009. A majority of the  contracts  related to the increase in purchase
obligations for fuel and purchased power are for future coal purchases primarily
with fixed prices.

                                       74

<PAGE>

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Progress Energy, Inc.

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

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

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

Interest Rate Risk

The Company's exposure to changes in interest rates from fixed rate and variable
rate  long-term  debt at June 30, 2005 has changed from  December 31, 2004.  The
total fixed rate long-term debt as of June 30, 2005, was $9.35 billion,  with an
average  interest  rate of 6.40% and fair market  value of $10.16  billion.  The
total variable rate long-term debt as of June 30, 2005, was $0.86 billion,  with
an average interest rate of 2.41% and fair market value of $0.86 billion.

In addition to the Company's variable rate long-term debt, the Company typically
has commercial paper and/or loans  outstanding  under its RCA facilities,  which
are also exposed to floating interest rates. As of June 30, 2005,  approximately
11.4% of consolidated debt,  including interest rate swaps, was in floating rate
mode compared to 16.1% at the end of 2004.

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

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

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

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

                                       75
<PAGE>

The following  tables  summarize the terms,  fair market values and exposures of
the Company's interest rate derivative instruments:

Cash Flow Hedges:

As of June 30, 2005,  Progress  Energy had $200  million of  pay-fixed  swaps to
hedge cash flow for  commercial  paper  interest  and $100  million of pay-fixed
forward  starting swaps to hedge cash flow risk with regard to future  financing
transactions.  Under terms of these swap agreements,  Progress Energy will pay a
fixed rate and receive a floating rate based on either 1-month or 3-month LIBOR,
respectively.
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

-------------------------------------------------------------------------------------------------------------
Cash Flow Hedges (dollars in millions)
                                             Notional                                Fair
Progress Energy, Inc.                         Amount        Pay        Receive(b)    Value        Exposure(c)
-------------------------------------------------------------------------------------------------------------
Risk hedged as of June 30, 2005:

Commercial Paper interest rate risk through
2005                                           $ 200       3.07%      1-month LIBOR $    1       $         -
Anticipated 10-year debt issue(d)              $ 100       4.87%      3-month LIBOR $   (4)      $        (2)
-------------------------------------------------------------------------------------------------------------
Total                                          $ 300       3.67%(a)                 $   (3)      $        (2)
-------------------------------------------------------------------------------------------------------------

Risk hedged as of December 31, 2004:

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

Progress Energy Carolinas
-------------------------------------------------------------------------------------------------------------
Risk hedged as of June 30, 2005:               None

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

(a)  Weighted average interest rate.

(b)  1-month LIBOR rate was 3.34% as of June 30, 2005,  and 2.40% as of December
     31, 2004.
     3-month LIBOR rate was 3.52% as of June 30, 2005, and 2.56% as of December
     31, 2004.

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

(d)  Anticipated  10-year debt issue hedges mature on March 1, 2016, and require
     mandatory cash settlement on March 1, 2006.

Fair Value Hedges:

As of June 30, 2005, Progress Energy had $150 million of fixed rate debt swapped
to floating rate debt.  Under terms of these swap  agreements,  Progress  Energy
will receive a fixed rate and pay a floating rate based on 3-month LIBOR.

                                       76
<PAGE>

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

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

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

(a)  Weighted average interest rate.

(b)  3-month LIBOR rate was 3.52% as of June 30, 2005,  and 2.56% as of December
     31, 2004.

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

Marketable Securities Price Risk

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

CVO Market Value Risk

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

Commodity Price Risk

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

Derivative  products,  primarily  electricity and natural gas contracts,  may be
entered into from time to time for economic hedging  purposes.  While management
believes the economic  hedges  mitigate  exposures to  fluctuations in commodity
prices,  these instruments are not designated as hedges for accounting  purposes
and are monitored  consistent with trading  positions.  The Company manages open
positions  with  strict  policies  that limit its  exposure  to market  risk and
require  daily  reporting to management of potential  financial  exposures.  The
Company  recorded  pre-tax losses of less than $1 million and $2 million on such
contracts for the three months ended June 30, 2005 and 2004,  respectively.  The
Company  recorded a $2 million  pre-tax  gain and a $14 million  pre-tax loss on
such  contracts  for the six months ended June 30, 2005 and 2004,  respectively.
The Company did not have material outstanding  positions in such contracts as of
June 30, 2005 and  December  31,  2004,  other than those  receiving  regulatory
accounting treatment, as discussed below.

PEF has derivative  instruments related to its exposure to price fluctuations on
fuel oil purchases.  These instruments receive regulatory  accounting treatment.
Unrealized  gains  and  losses  are  recorded  in  regulatory   liabilities  and
regulatory assets,  respectively.  As of June 30, 2005, the fair values of these
instruments were a $60 million short-term  derivative asset position included in
other  current  assets and a $22 million  long-term  derivative  asset  position
included in other assets and deferred debits.  As of December 31, 2004, the fair
values  of  these  instruments  were a $2  million  long-term  derivative  asset
position  included  in  other  assets  and  deferred  debits  and  a $5  million
short-term derivative liability position included in other current liabilities.

                                       77
<PAGE>

The Company  uses  natural gas  hedging  instruments  to manage a portion of the
market risk associated with fluctuations in the future purchase and sales prices
of the  Company's  natural  gas.  Progress  Energy's  nonregulated  subsidiaries
designate  a portion of  commodity  derivative  instruments  as cash flow hedges
under SFAS No. 133. The fair values of commodity cash flow hedges as of June 30,
2005 and December 31, 2004 were as follows:

---------------------------------------------------------
 (in millions)                  June 30,   December 31,
                                    2005           2004
---------------------------------------------------------
 Fair value of assets               $ 96        $    -
 Fair value of liabilities           (24)          (15)
---------------------------------------------------------
 Fair value, net                    $ 72        $  (15)
---------------------------------------------------------

The Company performs sensitivity analyses to estimate its exposure to the market
risk of its commodity positions.  The Company's exposure to commodity price risk
has not changed  materially since December 31, 2004. A hypothetical 10% increase
or decrease in quoted market prices in the near term on the Company's derivative
commodity  instruments  would not have had a  material  effect on the  Company's
consolidated financial position,  results of operations or cash flows as of June
30, 2005.

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

Progress Energy Carolinas, Inc.

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

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

Item 4: Controls and Procedures

Progress Energy, Inc.

Pursuant to Rule 13a-15(b) under the Securities  Exchange Act of 1934,  Progress
Energy  carried out an evaluation,  with the  participation  of its  management,
including  Progress  Energy's  Chairman  and Chief  Executive  Officer and Chief
Financial Officer, of the effectiveness of Progress Energy's disclosure controls
and procedures (as defined under Rule  13a-15(e)  under the Securities  Exchange
Act of 1934) as of the end of the period covered by this report. Based upon that
evaluation,  Progress  Energy's  Chief  Executive  Officer  and Chief  Financial
Officer  concluded that its disclosure  controls and procedures are effective to
ensure that  information  required  to be  disclosed  by Progress  Energy in the
reports that it files or submits under the Exchange Act, is recorded, processed,
summarized  and reported,  within the time periods  specified in the SEC's rules
and forms, and that such information is accumulated and communicated to Progress
Energy's  management,  including the Chief Executive Officer and Chief Financial
Officer,   as  appropriate,   to  allow  timely  decisions   regarding  required
disclosure.

On May 24, 2005,  Progress Energy  announced that Jeffrey M. Stone was appointed
to the position of Controller (Chief Accounting  Officer) of the Company and its
subsidiaries,  Carolina Power & Light Company d/b/a Progress  Energy  Carolinas,
Inc. and Florida  Progress  Corporation,  effective June 1, 2005. Mr. Stone will
also serve as Controller  of Florida Power  Corporation  d/b/a  Progress  Energy
Florida,  Inc. and Progress  Energy Service  Company,  LLC. These positions were
previously  held by Robert H. Bazemore,  Jr. since 2000.  Mr.  Bazemore has been
reassigned to the position of Vice President, Capital Planning and Control.

Other  than the  above-referenced  item,  there has been no  change in  Progress
Energy's internal control over financial reporting during the quarter ended June
30, 2005, that has materially  affected,  or is reasonably  likely to materially
affect, Progress Energy's internal control over financial reporting.

                                       78
<PAGE>

Progress Energy Carolinas, Inc.

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

On May 24, 2005,  Progress Energy  announced that Jeffrey M. Stone was appointed
to the position of Controller (Chief Accounting  Officer) of the Company and its
subsidiary, Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc.
These positions were previously held by Robert H. Bazemore,  Jr. since 2000. Mr.
Bazemore has been reassigned to the position of Vice President, Capital Planning
and Control for Progress Energy.

Other than the above-referenced item, there has been no change in PEC's internal
control over financial  reporting  during the quarter ended June 30, 2005,  that
has  materially  affected,  or is reasonably  likely to materially  affect,  its
internal control over financial reporting.

                                       79

<PAGE>



                           PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Legal  aspects  of  certain  matters  are set  forth  in Part I,  Item 1.  For a
discussion of certain other legal matters,  see Note 14 to the Progress  Energy,
Inc.   Consolidated  Interim  Financial  Statements  and  Note  12  to  the  PEC
Consolidated Interim Financial Statements.

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

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

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

The lead plaintiff filed a consolidated  amended  complaint on June 15, 2004. In
addition to the  allegations  asserted in the Gerber Asset  Management and Fried
complaints,  the consolidated  amended complaint alleges that the Company failed
to disclose that excess fuel credits could not be carried over from one tax year
into later years.  On July 30, 2004,  the Company  filed a motion to dismiss the
complaint;  plaintiff  submitted its opposition brief on September 14, 2004. The
Court heard oral  argument on the  Company's  motion to dismiss on November  15,
2004. On May 24, 2005, the Court dismissed the litigation with prejudice.

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

a. RESTRICTED STOCK AWARDS:

(a)  Securities  Delivered.  On April 1, 2005,  72,600  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.

                                       80
<PAGE>

c.   ISSUER PURCHASES OF EQUITY SECURITIES FOR SECOND QUARTER OF 2005
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

--------------------------------------------------------------------------------------------------------------------------
         Period                    (a)                 (b)                  (c)                          (d)
                                                                  Total Number of Shares         Maximum Number (or
                             Total Number of         Average      (or Units) Purchased as   Approximate Dollar Value) of
                                  Shares           Price Paid        Part of Publicly        Shares (or Units) that May
                                (or Units)          Per Share       Announced Plans or       Yet Be Purchased Under the
                             Purchased(1)(2)        (or Unit)           Programs(1)             Plans or Programs(1)
--------------------------------------------------------------------------------------------------------------------------
April 1 - April 30                72,600             $42.53                 N/A                          N/A
--------------------------------------------------------------------------------------------------------------------------
May 1- May 31                      N/A                 N/A                  N/A                          N/A
--------------------------------------------------------------------------------------------------------------------------
June 1 - June 30                   N/A                 N/A                  N/A                          N/A
--------------------------------------------------------------------------------------------------------------------------
Total:                            72,600             $42.53                 N/A                          N/A
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  As of June 30, 2005,  Progress Energy does not have any publicly  announced
     plans or programs to purchase shares of its common stock.

(2)  72,600   shares  of  our  common  stock  were   purchased  in   open-market
     transactions in connection  with restricted  stock awards that were granted
     to certain key employees  pursuant to the terms of the Progress Energy 2002
     Equity Incentive Plan, which was approved by Progress Energy's Shareholders
     on May 8, 2002.

                                       81

<PAGE>

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

(a)  The Annual Meeting of the Shareholders of Progress Energy, Inc. was held on
     May 11, 2005.

(b)  The meeting  involved  the election of three Class I 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 I  (Term Expiring in 2008)      Votes For               Votes Withheld
----------------------------------------------------------------------------
William O. McCoy                   205,913,326                   4,398,058
John H. Mullin, III                206,101,396                   4,209,988
Carlos A. Saladrigas               206,112,664                   4,198,720


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

The number of shares voted for the proposal was 205,625,939
The number of shares voted against the proposal was 2,651,127
The number of abstaining votes was 2,034,318

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 11, 2005.

(b)  The meeting  involved  the election of three Class I 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 I  (Term Expiring in 2008)     Votes For              Votes Withheld
--------------------------------------------------------------------------
William O. McCoy                   160,129,938                4,171
John H. Mullin, III                160,129,664                4,445
Carlos A. Saladrigas               160,129,764                4,345

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

The number of shares voted for the proposal was 160,129,689
The number of shares voted against the proposal was 2,288
The number of abstaining votes was 2,132

                                       82
<PAGE>




Item 6. Exhibits

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

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

  10         Amendment to Employment  Agreement  Between Progress        X                    X
             Energy   Service Company, LLC and Peter M. Scott III,
             dated August 5, 2005

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

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

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

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

</TABLE>
                                       83


<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 5, 2005                   (Registrants)

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

                                        By:/s/Jeffrey M.Stone
                                        -------------------------
                                        Jeffrey M. Stone
                                        Controller and Chief Accounting Officer



                                       84