UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**FORM
      10-Q**





x **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





For
      the
      quarterly period ended September
      30, 2006





OR





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


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





For
      the
      transition period from  to  .








Commission
                File Number
            Exact
                name of registrants as specified in their charters, states of
                incorporation, addresses of principal executive offices,
              and
                telephone numbers
            I.R.S.
                Employer Identification NumberProgress Energy Logo1-15929
            **Progress
                Energy, Inc.**
              410
                South Wilmington Street
              Raleigh,
                North Carolina 27601-1748
              Telephone:
                (919) 546-6111
              State
                of Incorporation: North Carolina
            56-21554811-3382
            **Carolina
                Power & Light Company**
              **d/b/a
                Progress Energy Carolinas, Inc.**
              410
                South Wilmington Street
              Raleigh,
                North Carolina 27601-1748
              Telephone:
                (919) 546-6111
              State
                of Incorporation: North Carolina
            56-01654651-3274
            **Florida
                Power Corporation**
              **d/b/a
                Progress Energy Florida, Inc.**
              100
                Central Avenue
              St.
                Petersburg, Florida 33701
              Telephone
                (727) 820-5151
              State
                of Incorporation: Florida
            59-0247770





NONE


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





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


Yes x No o








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





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





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





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





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





**Registrant**
            **Description**
            **Shares**Progress
                Energy
            Common
                Stock (Without Par Value)
            254,198,987PEC
            Common
                Stock (Without Par Value)
            159,608,055
                (all of which were held
              directly
                by Progress Energy, Inc.)PEF
            Common
                Stock (Without par value)
            100
                (all of which were held
              indirectly
                by Progress Energy, Inc.)





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





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


2


**PROGRESS
      ENERGY, INC.**


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


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


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











Glossary
      of Terms




Safe
      Harbor for Forward-Looking Statements




PART
                I.
            FINANCIAL
                INFORMATION




Item
                1.
            Financial
                Statements




Unaudited
                  Interim Financial Statements:Progress
                  Energy, Inc. (Progress Energy)Unaudited
                  Consolidated Statements of IncomeUnaudited
                  Consolidated Balance SheetsUnaudited
                  Consolidated Statements of Cash FlowsCarolina
                  Power & Light Companyd/b/a
                  Progress Energy Carolinas, Inc. (PEC)Unaudited
                  Consolidated Statements of IncomeUnaudited
                  Consolidated Balance SheetsUnaudited
                  Consolidated Statements of Cash FlowsFlorida
                  Power Corporationd/b/a
                  Progress Energy Florida, Inc. (PEF)Unaudited
                  Statements of IncomeUnaudited
                  Balance SheetsUnaudited
                  Statements of Cash Flows




Combined
      Notes to Unaudited Interim Financial Statements for Progress Energy, Inc.,
      Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. and
      Florida Power Corporation d/b/a Progress Energy Florida, Inc.




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




Item
                3.
            Quantitative
                and Qualitative Disclosures about Market
                Risk




Item
                4.
            Controls
                and
                Procedures




PART
                II.
            OTHER
                INFORMATION




Item
                1.
            Legal
                Proceedings




Item
                1A.
            Risk
                Factors




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




Item
                6.
            Exhibits




Signatures




3


GLOSSARY
      OF TERMS





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




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




**TERM**
            **DEFINITION**2005
                Form 10-K
            Progress
                Registrants’ annual report on Form 10-K for the fiscal year ended December
                31, 2005401(k)
                Plan
            Progress
                Energy 401(k) Savings and Stock Ownership PlanAFUDC
            Allowance
                for funds used during constructionAHI
            Affordable
                housing investmentAPB
            Accounting
                Principles BoardAPB
                No. 25
            Accounting
                Principles Board Opinion No. 25, “Accounting for Stock Issued to
                Employees”APB
                No. 28
            Accounting
                Principles Board Opinion No. 28, “Interim Financial
                Reporting”ARO
            Asset
                retirement obligationAnnual
                Average Price
            Average
                wellhead price per barrel for unregulated domestic crude oil for
                the
                yearAsset
                Purchase Agreement
            Agreement
                by and among Global, Earthco and certain affiliates, and the Progress
                Affiliates as amended on August 23, 2000BART
            Best
                Available Retrofit TechnologyBcf
            Billion
                cubic feetBroad
                River
            Broad
                River LLC’s Broad River FacilityBrunswick
            PEC’s
                Brunswick Nuclear PlantBtu
            British
                thermal unitCAIR
            Clean
                Air Interstate RuleCAMR
            Clean
                Air Mercury RuleCAVR
            Clean
                Air Visibility RuleCCO
            Progress
                Ventures’ nonregulated Competitive Commercial
                OperationsCERCLA
                or Superfund
            Comprehensive
                Environmental Response, Compensation and Liability Act of 1980, as
                amendedClean
                Smokestacks Act
            North
                Carolina Clean Smokestacks Act, enacted in June 2002Coal
            Coal
                terminals and marketing operations that blend and transload coal
                as part
                of the transportation network for coal deliveryCoal
                and Synthetic Fuel
            Business
                segment primarily engaged in synthetic fuel production and sales
                operations, the operation of synthetic fuel facilities for third
                parties
                and coal terminal servicesthe
                Code
            Internal
                Revenue CodeCO2
            Carbon
                dioxideCOL
            Combined
                licenseColona
            Colona
                Synfuel Limited Partnership, LLLPCorporate
            Collectively,
                the Parent, PESC and consolidation entitiesCorporate
                and Other
            Corporate
                and Other segment includes Corporate as well as other nonregulated
                business areasCR3
            PEF’s
                Crystal River Unit No. 3 Nuclear PlantCR4
                and CR5
            PEF’s
                coal-fired steam turbines Crystal River Units No. 4 and
                5CVO
            Contingent
                value obligationDeSoto
            DeSoto
                County Generating Co., LLCDIG
                Issue C20
            FASB
                Derivatives Implementation Group Issue C20, “Interpretation of the Meaning
                of Not Clearly and Closely Related in Paragraph 10(b) regarding Contracts
                with a Price Adjustment Feature”Dixie
                Fuels
            Dixie
                Fuels Limited




4


DOE
            United
                States Department of EnergyEarthco
            Four
                wholly owned coal-based solid synthetic fuel limited liability
                companiesECRC
            Environmental
                Cost Recovery ClauseEIA
            Energy
                Information AgencyEIP
            Progress
                Energy 2002 Equity Incentive PlanEITF
            Emerging
                Issues Task ForceEITF
                03-1
            Emerging
                Issues Task Force No. 03-1, “The Meaning of Other-Than-Temporary
                Impairments and Its Application to Certain Investments”EITF
                03-4
            Emerging
                Issues Task Force No. 03-4, “Determining the Classification and Benefit
                Attribution Method for a ‘Cash Balance’ Pension Plan”EMCs
            Electric
                Membership CooperativesEnergy
                Delivery
            Distribution
                operations of the UtilitiesEPA
            Environmental
                Protection AgencyEPACT
            Energy
                Policy Act of 2005ESOP
            Employee
                Stock Ownership PlanFASB
            Financial
                Accounting Standards BoardFDEP
            Florida
                Department of Environmental ProtectionFERC
            Federal
                Energy Regulatory CommissionFGT
            Florida
                Gas Transmission CompanyFIN
                45
            FASB
                Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements
                for Guarantees, Including Indirect Guarantees of Indebtedness of
                Others”FIN
                46R
            FASB
                Interpretation No. 46R, “Consolidation of Variable Interest Entities - an
                Interpretation of ARB No. 51”FIN
                47
            FASB
                Interpretation No. 47, “Accounting for Conditional Asset Retirement
                Obligations - an Interpretation of FASB Statement No.
                143”FIN
                48
            FASB
                Interpretation No. 48, “Accounting for Uncertainty in Income
                Taxes”Fitch
            Fitch
                RatingsFlorida
                Global Case
            U.S.
                Global LLC v. Progress Energy, Inc. et alFlorida
                Progress or FPC
            Florida
                Progress Corporation, one of our wholly owned
                subsidiariesFPSC
            Florida
                Public Service CommissionFunding
                Corp.
            Florida
                Progress Funding Corporation, a wholly owned subsidiary of Florida
                ProgressGAAP
            Accounting
                principles generally accepted in the United States of
                AmericaGas
            Progress
                Ventures’ natural gas drilling and production businessGeorgia
                Contracts
            Fixed
                price full-requirement contracts serviced by CCOGeorgia
                Power
            Georgia
                Power Company, a subsidiary of Southern CompanyGeorgia
                Region
            Reporting
                unit consisting of our Effingham, Monroe, Walton and Washington
                nonregulated generation plants in serviceGITS
            Georgia
                Integrated Transmission SystemGlobal
            U.S.
                Global LLCGulfstream
            Gulfstream
                Gas System, L.L.C.Harris
            PEC’s
                Shearon Harris Nuclear PlantIBEW
            International
                Brotherhood of Electrical WorkersIRS
            Internal
                Revenue ServiceJackson
            Jackson
                Electric Membership CorporationkV
            KilovoltkVA
            Kilovolt-amperekW
            KilowattkWh/s
            Kilowatt-hour/sLevel
                3
            Level
                3 Communications, Inc.LIBOR
            London
                Inter Bank Offering RateMACT
            Maximum
                Achievable Control TechnologyMDC
            Maximum
                Dependable CapabilityMedicare
                Act
            Medicare
                Prescription Drug, Improvement and Modernization Act of
                2003MGP
            Manufactured
                gas plant




5


MW
            MegawattMWh
            Megawatt-hourMoody’s
            Moody’s
                Investors Service, Inc.NAAQS
            National
                Ambient Air Quality StandardsNCDWQ
            North
                Carolina Division of Water QualityNCNG
            North
                Carolina Natural Gas CorporationNSR
            New
                Source Review requirement by EPANCUC
            North
                Carolina Utilities CommissionNEIL
            Nuclear
                Electric Insurance LimitedNorth
                Carolina Global Case
            Progress
                Synfuel Holdings, Inc. et al. v. U.S. Global, LLCthe
                Notes Guarantee
            Florida
                Progress’ full and unconditional guarantee of the Subordinated NotesNOx
            Nitrogen
                OxideNOx
                SIP Call
            EPA
                rule which requires 22 states including North Carolina, South Carolina
                and
                Georgia (but excluding Florida) to further reduce nitrogen oxide
                emissionsNRC
            United
                States Nuclear Regulatory CommissionNuclear
                Waste Act
            Nuclear
                Waste Policy Act of 1982NYMEX
            New
                York Mercantile ExchangeOCI
            Other
                comprehensive income as defined by GAAPO&M
            Operation
                and maintenance expenseOPC
            Florida’s
                Office of Public CounselOPEB
            Postretirement
                benefits other than pensionsP11
            PEF’s
                combustion turbine Intercession City Unit P11the
                Parent
            Progress
                Energy, Inc. holding company on an unconsolidated basisPEC
            Progress
                Energy Carolinas, Inc., formerly referred to as Carolina Power & Light
                CompanyPEF
            Progress
                Energy Florida, Inc., formerly referred to as Florida Power
                CorporationPESC
            Progress
                Energy Service Company, LLCthe
                Phase-out Price
            Price
                per barrel of unregulated domestic crude oil at which Section 29/45K
                tax
                credits are fully eliminatedPM
                2.5
            EPA
                standard for particulate matter less than 2.5 microns in
                diameterPM
                2.5-10
            EPA
                standard for particulate matter between 2.5 and 10 microns in
                diameterPM
                10
            EPA
                standard for particulate matter less than 10 microns in
                diameterPower
                Agency
            North
                Carolina Eastern Municipal Power AgencyPreferred
                Securities
            7.10%
                Cumulative Quarterly Income Preferred Securities due 2039, Series
                A issued
                by the TrustPreferred
                Securities Guarantee
            Florida
                Progress’ guarantee of all distributions related to the Preferred
                SecuritiesProgress
                Affiliates
            Five
                affiliated synthetic fuel facilitiesProgress
                Energy
            Progress
                Energy, Inc. and subsidiaries on a consolidated basisProgress
                Registrants
            The
                reporting registrants within the Progress Energy consolidated group.
                Collectively, Progress Energy, Inc., PEC and PEFProgress
                Fuels
            Progress
                Fuels Corporation, formerly Electric Fuels CorporationProgress
                Fuels Subsidiaries
            Subsidiaries
                of Progress Fuels that purchased the Earthco synthetic fuel
                facilitiesProgress
                Rail
            Progress
                Rail Services CorporationProgress
                Ventures
            Business
                segment primarily engaged in nonregulated energy generation, energy
                marketing activities and natural gas drilling and
                productionPRP
            Potentially
                responsible party, as defined in CERCLAPSSP
            Performance
                Share Sub-PlanPT
                LLC
            Progress
                Telecom, LLCPUHCA
            Public
                Utility Holding Company Act of 1935, as amendedPURPA
            Public
                Utilities Regulatory Policies Act of 1978PVI
            Progress
                Energy Ventures, Inc., formerly referred to as Progress Ventures,
                Inc.PWC
            Public
                Works Commission of the City of Fayetteville,
                N.C.




6


PWR
            Pressurized
                water reactorQF
            Qualifying
                facilityRCA
            Revolving
                credit agreementRockport
            Indiana
                Michigan Power Company’s Rockport Unit No. 2Robinson
            PEC’s
                Robinson Nuclear PlantROE
            Return
                on equityRowan
            Rowan
                County Power, LLCRSA
            Restricted
                stock awards programRTO
            Regional
                transmission organizationSAB
                108
            SEC
                Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year
                Misstatements when Quantifying Misstatements in Current Year Financial
                Statements”SCPSC
            Public
                Service Commission of South CarolinaScrubber
            A
                device that neutralizes sulfur compounds formed during coal
                combustionSEC
            United
                States Securities and Exchange CommissionSection
                29
            Section
                29 of the Internal Revenue Service CodeSection
                29/45K
            General
                business tax credits earned after December 31, 2005 for synthetic
                fuel
                production activities in accordance with Section 29Section
                45K
            General
                business tax credit(See
                Note/s “#”)
            For
                all sections, this is a cross-reference to the Combined Notes to
                the
                Unaudited Interim Financial Statements contained in PART I, Item
                1S&P
            Standard
                & Poor’s Rating ServicesSFAS
            Statement
                of Financial Accounting StandardsSFAS
                No. 5
            Statement
                of Financial Accounting Standards No. 5, “Accounting for
                Contingencies”SFAS
                No. 71
            Statement
                of Financial Accounting Standards No. 71, “Accounting for the Effects of
                Certain Types of Regulation”SFAS
                No. 87
            Statement
                of Financial Accounting Standards No. 87, “Employers’ Accounting for
                Pensions”SFAS
                No. 109
            Statement
                of Financial Accounting Standards No. 109, “Accounting for Income
                Taxes”SFAS
                No. 115
            Statement
                of Financial Accounting Standards No. 115, “Accounting for Certain
                Investments in Debt and Equity Securities”SFAS
                No. 123
            Statement
                of Financial Accounting Standards No. 123, “Accounting for Stock-Based
                Compensation”SFAS
                No. 123R
            Statement
                of Financial Accounting Standards No. 123R, “Share-Based
                Payment”SFAS
                No. 131
            Statement
                of Financial Accounting Standards No. 131, “Disclosures about Segments of
                an Enterprise and Related Information”SFAS
                No. 133
            Statement
                of Financial Accounting Standards No. 133, “Accounting for Derivative and
                Hedging Activities”SFAS
                No. 138
            Statement
                of Financial Accounting Standards No. 138, “Accounting for Certain
                Derivative Instruments and Certain Hedging Activities - An Amendment
                of
                FASB Statement No. 133”SFAS
                No. 142
            Statement
                of Financial Accounting Standards No. 142, “Goodwill and Other Intangible
                Assets”SFAS
                No. 143
            Statement
                of Financial Accounting Standards No. 143, “Accounting for Asset
                Retirement Obligations”SFAS
                No. 144
            Statement
                of Financial Accounting Standards No. 144, “Accounting for the Impairment
                or Disposal of Long-Lived Assets”SFAS
                No. 148
            Statement
                of Financial Accounting Standards No. 148, “Accounting for Stock-Based
                Compensation - Transition and Disclosure - An Amendment of FASB Statement
                No. 123”SFAS
                No. 149
            Statement
                of Financial Accounting Standards No. 149, “Amendment of Statement 133 on
                Derivative Instruments and Hedging Activities”SFAS
                No. 150
            Statement
                of Financial Accounting Standards No. 150, “Accounting for Certain
                Financial Instruments with Characteristics of Both Liabilities and
                Equity”




7


SFAS
                No. 157
            Statement
                of Financial Accounting Standards No. 157, “Fair
                Value Measurements”SFAS
                No. 158
            Statement
                of Financial Accounting Standards No. 158, “Employers’ Accounting for
                Defined Benefit Pension and Other Postretirement Plans”SNG
            Southern
                Natural Gas CompanySO2
            Sulfur
                dioxideSPC
            Southern
                Power Company, a subsidiary of Southern CompanySRS
            Strategic
                Resource Solutions Corp.Subordinated
                Notes
            7.10%
                Junior Subordinated Deferrable Interest Notes due 2039 issued by
                Funding
                Corp.Tax
                Agreement
            Intercompany
                Income Tax Allocation Agreementthe
                Threshold Price
            Price
                per barrel of unregulated domestic crude oil at which Section 29/45K
                tax
                credits begin to be reducedthe
                Trust
            FPC
                Capital I, a wholly owned subsidiary of Florida
                Progressthe
                Utilities
            Collectively,
                PEC and PEFWinchester
                Production
            Winchester
                Production Company, Ltd.


8


**SAFE
      HARBOR FOR FORWARD-LOOKING STATEMENTS**





In
      this
      combined report, each of the Progress Registrants makes forward-looking
      statements within the meaning of the safe harbor provisions of the Private
      Securities Litigation Reform Act of 1995. The matters discussed throughout
      this
      combined Form 10-Q that are not historical facts are forward-looking and,
      accordingly, involve estimates, projections, goals, forecasts, assumptions,
      risks and uncertainties that could cause actual results or outcomes to differ
      materially from those expressed in the forward-looking statements. In addition,
      examples of forward-looking statements discussed in this Form 10-Q include,
      but
      are not limited to, statements made in “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations” including, but not limited to,
      statements under the sub-headings RESULTS OF OPERATIONS about trends and
      uncertainties, LIQUIDITY AND CAPITAL RESOURCES about operating cash flows,
      future liquidity requirements and estimated capital expenditures and OTHER
      MATTERS about our synthetic fuel facilities and environmental
      matters.





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





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





These
      and
      other risk factors are disclosed in the Progress Registrants’ periodic filings
      with the United States Securities and Exchange Commission (SEC). Many, but
      not
      all, of the factors that may impact actual results are discussed in the Risk
      Factors section of the Progress Registrants’ annual report on Form 10-K for the
      fiscal year ended December 31, 2005 (2005 Form 10-K) and are updated from time
      to time in PART II, Item 1A of our Form 10-Qs. All such factors are difficult
      to
      predict, contain uncertainties that may materially affect actual results and
      may
      be beyond our control. New factors emerge from time to time, and it is not
      possible for us to predict all such factors, nor can we assess the effect of
      each such factor on the Progress Registrants.


9


PART
      I.
      FINANCIAL INFORMATION


Item
      1 .  Financial
      Statements





**PROGRESS
      ENERGY, INC.**


**CONSOLIDATED
      INTERIM FINANCIAL STATEMENTS**


**September
      30, 2006**





**UNAUDITED
                CONSOLIDATED STATEMENTS of INCOME**Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions except per share data)
            
            **2006**
            
            2005
            
            **2006**
            
            2005**Operating
                revenues**Electric
            
            **$**
            **2,599**
            
            $
            2,412
            
            **$**
            **6,666**
            
            $
            5,963Diversified
                business
            
            
            **314**
            
            
            542
            
            
            **1,053**
            
            
            1,314Total
                operating revenues
            
            
            **2,913**
            
            
            2,954
            
            
            **7,719**
            
            
            7,277**Operating
                expenses**UtilityFuel
                used in electric generation
            
            
            **860**
            
            
            633
            
            
            **2,259**
            
            
            1,712Purchased
                power
            
            
            **391**
            
            
            424
            
            
            **880**
            
            
            839Operation
                and maintenance
            
            
            **383**
            
            
            408
            
            
            **1,216**
            
            
            1,357Depreciation
                and amortization
            
            
            **243**
            
            
            232
            
            
            **705**
            
            
            647Taxes
                other than on income
            
            
            **141**
            
            
            131
            
            
            **380**
            
            
            356Other
            
            
            **-**
            
            
            (7
            )
            
            **(2**
            **)**
            
            (32
            )Diversified
                businessCost
                of sales
            
            
            **370**
            
            
            585
            
            
            **1,144**
            
            
            1,418Depreciation
                and amortization
            
            
            **12**
            
            
            21
            
            
            **51**
            
            
            59Impairment
                of assets (Notes 6 and 7)
            
            
            **-**
            
            
            -
            
            
            **155**
            
            
            -Gain
                on the sale of assets
            
            
            **-**
            
            
            -
            
            
            **(4**
            **)**
            
            (4
            )Other
            
            
            **15**
            
            
            17
            
            
            **59**
            
            
            69Total
                operating expenses
            
            
            **2,415**
            
            
            2,444
            
            
            **6,843**
            
            
            6,421**Operating
                income**
            
            
            **498**
            
            
            510
            
            
            **876**
            
            
            856**Other
                income (expense)**Interest
                income
            
            
            **13**
            
            
            3
            
            
            **37**
            
            
            11Other,
                net
            
            
            **(9**
            **)**
            
            4
            
            
            **(1**
            **)**
            
            -Total
                other income
            
            
            **4**
            
            
            7
            
            
            **36**
            
            
            11**Interest
                charges**Net
                interest charges
            
            
            **156**
            
            
            159
            
            
            **498**
            
            
            481Allowance
                for borrowed funds used during construction
            
            
            **-**
            
            
            (3
            )
            
            **(4**
            **)**
            
            (10
            )Total
                interest charges, net
            
            
            **156**
            
            
            156
            
            
            **494**
            
            
            471**Income
                from continuing operations before income tax and minority
                interest**
            
            
            **346**
            
            
            361
            
            
            **418**
            
            
            396**Income
                tax expense (benefit)**
            
            
            **106**
            
            
            (65
            )
            
            **135**
            
            
            (101
            )**Income
                from continuing operations before minority interest**
            
            
            **240**
            
            
            426
            
            
            **283**
            
            
            497**Minority
                interest in subsidiaries’ loss (income), net of
                tax**
            
            
            **3**
            
            
            7
            
            
            **(10**
            **)**
            
            24**Income
                from continuing operations**
            
            
            **243**
            
            
            433
            
            
            **273**
            
            
            521**Discontinued
                operations, net of tax**
            
            
            **76**
            
            
            16
            
            
            **44**
            
            
            20**Cumulative
                effect of changes in accounting principles, net of
                tax**
            
            
            **-**
            
            
            1
            
            
            **-**
            
            
            1**Net
                income**
            
            **$**
            **319**
            
            $
            450
            
            **$**
            **317**
            
            $
            542**Average
                common shares outstanding - basic**
            
            
            **251**
            
            
            248
            
            
            **250**
            
            
            246**Basic
                earnings per common share**Income
                from continuing operations
            
            **$**
            **0.97**
            
            $
            1.75
            
            **$**
            **1.09**
            
            $
            2.12Discontinued
                operations, net of tax
            
            
            **0.30**
            
            
            0.07
            
            
            **0.18**
            
            
            0.08Cumulative
                effect of changes in accounting principles, net of tax
            
            
            **-**
            
            
            -
            
            
            **-**
            
            
            -Net
                income
            
            **$**
            **1.27**
            
            $
            1.82
            
            **$**
            **1.27**
            
            $
            2.20**Diluted
                earnings per common share**Income
                from continuing operations
            
            **$**
            **0.97**
            
            $
            1.74
            
            **$**
            **1.09**
            
            $
            2.12Discontinued
                operations, net of tax
            
            
            **0.30**
            
            
            0.07
            
            
            **0.17**
            
            
            0.08Cumulative
                effect of changes in accounting principles, net of tax
            
            
            **-**
            
            
            -
            
            
            **-**
            
            
            -Net
                income
            
            **$**
            **1.27**
            
            $
            1.81
            
            **$**
            **1.26**
            
            $
            2.20**Dividends
                declared per common share**
            
            **$**
            **0.605**
            
            $
            0.590
            
            **$**
            **1.815**
            
            $
            1.770




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


10


PROGRESS
      ENERGY, INC.


**UNAUDITED
                CONSOLIDATED BALANCE SHEETS**(in
                millions)
            
            **September
                30, 2006**
            
            December
                31, 2005**ASSETS****Utility
                plant**Utility
                plant in service
            
            **$**
            **23,479**
            
            $
            22,940Accumulated
                depreciation
            
            
            **(9,969**
            **)**
            
            (9,602
            )Utility
                plant in service, net
            
            
            **13,510**
            
            
            13,338Held
                for future use
            
            
            **12**
            
            
            12Construction
                work in progress
            
            
            **1,055**
            
            
            813Nuclear
                fuel, net of amortization
            
            
            **231**
            
            
            279**Total
                utility plant, net**
            
            
            **14,808**
            
            
            14,442**Current
                assets**Cash
                and cash equivalents
            
            
            **335**
            
            
            605Short-term
                investments
            
            
            **333**
            
            
            191Receivables,
                net
            
            
            **1,061**
            
            
            1,050Inventory
            
            
            **953**
            
            
            848Deferred
                fuel cost
            
            
            **304**
            
            
            602Deferred
                income taxes
            
            
            **126**
            
            
            41Assets
                of discontinued operations
            
            
            **707**
            
            
            1,272Prepayments
                and other current assets
            
            
            **138**
            
            
            208**Total
                current assets**
            
            
            **3,957**
            
            
            4,817**Deferred
                debits and other assets**Regulatory
                assets
            
            
            **939**
            
            
            854Nuclear
                decommissioning trust funds
            
            
            **1,215**
            
            
            1,133Diversified
                business property, net
            
            
            **759**
            
            
            826Miscellaneous
                other property and investments
            
            
            **466**
            
            
            476Goodwill
            
            
            **3,655**
            
            
            3,719Intangibles,
                net
            
            
            **222**
            
            
            269Other
                assets and deferred debits
            
            
            **359**
            
            
            478**Total
                deferred debits and other assets**
            
            
            **7,615**
            
            
            7,755**Total
                assets**
            
            **$**
            **26,380**
            
            $
            27,014**CAPITALIZATION
                AND LIABILITIES****Common
                stock equity**Common
                stock without par value, 500 million shares authorized, 254 and 252
                million shares issued and outstanding, respectively
            
            **$**
            **5,672**
            
            $
            5,571Unearned
                ESOP shares (2 and 3 million shares, respectively)
            
            
            **(50**
            **)**
            
            (63
            )Accumulated
                other comprehensive loss
            
            
            **(96**
            **)**
            
            (104
            )Retained
                earnings
            
            
            **2,495**
            
            
            2,634**Total
                common stock equity**
            
            
            **8,021**
            
            
            8,038**Preferred
                stock of subsidiaries - not subject to mandatory
                redemption**
            
            
            **93**
            
            
            93**Minority
                interest**
            
            
            **15**
            
            
            36**Long-term
                debt, affiliate**
            
            
            **271**
            
            
            270**Long-term
                debt, net**
            
            
            **9,542**
            
            
            10,176**Total
                capitalization**
            
            
            **17,942**
            
            
            18,613**Current
                liabilities**Current
                portion of long-term debt
            
            
            **700**
            
            
            513Accounts
                payable
            
            
            **613**
            
            
            663Interest
                accrued
            
            
            **151**
            
            
            208Dividends
                declared
            
            
            **154**
            
            
            152Short-term
                obligations
            
            
            **-**
            
            
            175Customer
                deposits
            
            
            **222**
            
            
            200Liabilities
                of discontinued operations
            
            
            **171**
            
            
            198Other
                current liabilities
            
            
            **980**
            
            
            830**Total
                current liabilities**
            
            
            **2,991**
            
            
            2,939**Deferred
                credits and other liabilities**Noncurrent
                income tax liabilities
            
            
            **218**
            
            
            228Accumulated
                deferred investment tax credits
            
            
            **154**
            
            
            163Regulatory
                liabilities
            
            
            **2,432**
            
            
            2,527Asset
                retirement obligations
            
            
            **1,289**
            
            
            1,242Accrued
                pension and other benefits
            
            
            **907**
            
            
            870Other
                liabilities and deferred credits
            
            
            **447**
            
            
            432**Total
                deferred credits and other liabilities**
            
            
            **5,447**
            
            
            5,462**Commitments
                and contingencies (Note 14)****Total
                capitalization and liabilities**
            
            **$**
            **26,380**
            
            $
            27,014





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


11


PROGRESS
      ENERGY, INC.


**UNAUDITED
                CONSOLIDATED STATEMENTS of CASH FLOWS**(in
                millions)Nine
                Months Ended September 30
            
            **2006**
            
            2005**Operating
                activities**Net
                income
            
            **$**
            **317**
            
            $
            542Adjustments
                to reconcile net income to net cash provided by operating
                activitiesDiscontinued
                operations, net of tax
            
            
            **(44**
            **)**
            
            (20
            )Cumulative
                effect of changes in accounting principles
            
            
            **-**
            
            
            (1
            )Impairment
                of assets (Notes 6 and 7)
            
            
            **155**
            
            
            -Charges
                for voluntary enhanced retirement program
            
            
            **-**
            
            
            159Depreciation
                and amortization
            
            
            **827**
            
            
            793Deferred
                income taxes
            
            
            **(79**
            **)**
            
            (156
            )Investment
                tax credit
            
            
            **(9**
            **)**
            
            (10
            )Tax
                levelization
            
            
            **6**
            
            
            (27
            )Deferred
                fuel cost (credit)
            
            
            **197**
            
            
            (276
            )Other
                adjustments to net income
            
            
            **91**
            
            
            91Cash
                (used) provided by changes in operating assets and
                liabilitiesReceivables
            
            
            **(31**
            **)**
            
            (275
            )Inventories
            
            
            **(112**
            **)**
            
            (125
            )Prepayments
                and other current assets
            
            
            **(51**
            **)**
            
            (42
            )Accounts
                payable
            
            
            **6**
            
            
            191Other
                current liabilities
            
            
            **168**
            
            
            14Regulatory
                assets and liabilities
            
            
            **6**
            
            
            (50
            )Other
                operating activities
            
            
            **47**
            
            
            3**Net
                cash provided by operating activities**
            
            
            **1,494**
            
            
            811**Investing
                activities**Gross
                utility property additions
            
            
            **(1,012**
            **)**
            
            (772
            )Diversified
                business property additions
            
            
            **(1**
            **)**
            
            (20
            )Nuclear
                fuel additions
            
            
            **(71**
            **)**
            
            (98
            )Proceeds
                from sales of discontinued operations and other assets, net of cash
                divested
            
            
            **548**
            
            
            458Purchases
                of available-for-sale securities and other investments
            
            
            **(1,687**
            **)**
            
            (3,478
            )Proceeds
                from sales of available-for-sale securities and other
                investments
            
            
            **1,611**
            
            
            3,534Other
                investing activities
            
            
            **(16**
            **)**
            
            (32
            )**Net
                cash used in investing activities**
            
            
            **(628**
            **)**
            
            (408
            )**Financing
                activities**Issuance
                of common stock
            
            
            **73**
            
            
            193Proceeds
                from issuance of long-term debt, net
            
            
            **397**
            
            
            792Net
                decrease in short-term indebtedness
            
            
            **(175**
            **)**
            
            (167
            )Retirement
                of long-term debt
            
            
            **(848**
            **)**
            
            (562
            )Dividends
                paid on common stock
            
            
            **(454**
            **)**
            
            (435
            )Cash
                distributions to minority interests of consolidated
                subsidiary
            
            
            **(74**
            **)**
            
            -Other
                financing activities
            
            
            **(42**
            **)**
            
            (17
            )**Net
                cash used in financing activities**
            
            
            **(1,123**
            **)**
            
            (196
            )**Cash
                provided (used) by discontinued operations**Operating
                activities
            
            
            **130**
            
            
            94Investing
                activities
            
            
            **(143**
            **)**
            
            (155
            )Financing
                activities
            
            
            **-**
            
            
            -**Net
                (decrease) increase in cash and cash equivalents**
            
            
            **(270**
            **)**
            
            146**Cash
                and cash equivalents at beginning of period**
            
            
            **605**
            
            
            55**Cash
                and cash equivalents at end of period**
            
            **$**
            **335**
            
            $
            201





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


12


**CAROLINA
      POWER & LIGHT COMPANY**


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


**CONSOLIDATED
      INTERIM FINANCIAL STATEMENTS**


**September
      30, 2006**





**UNAUDITED
                CONSOLIDATED STATEMENTS of INCOME**Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005**Operating
                revenues**Electric
            
            **$**
            **1,200**
            
            $
            1,185
            
            **$**
            **3,113**
            
            $
            2,980Diversified
                business
            
            
            **-**
            
            
            -
            
            
            **1**
            
            
            1Total
                operating revenues
            
            
            **1,200**
            
            
            1,185
            
            
            **3,114**
            
            
            2,981**Operating
                expenses**Fuel
                used in electric generation
            
            
            **322**
            
            
            282
            
            
            **880**
            
            
            746Purchased
                power
            
            
            **135**
            
            
            154
            
            
            **279**
            
            
            294Operation
                and maintenance
            
            
            **218**
            
            
            235
            
            
            **722**
            
            
            719Depreciation
                and amortization
            
            
            **128**
            
            
            130
            
            
            **383**
            
            
            389Taxes
                other than on income
            
            
            **51**
            
            
            49
            
            
            **141**
            
            
            137Other
            
            
            **-**
            
            
            (8
            )
            
            **-**
            
            
            (8
            )Total
                operating expenses
            
            
            **854**
            
            
            842
            
            
            **2,405**
            
            
            2,277**Operating
                income**
            
            
            **346**
            
            
            343
            
            
            **709**
            
            
            704**Other
                income (expense)**Interest
                income
            
            
            **7**
            
            
            2
            
            
            **18**
            
            
            5Other,
                net
            
            
            **(10**
            **)**
            
            (3
            )
            
            **(12**
            **)**
            
            (4
            )Total
                other (expense) income
            
            
            **(3**
            **)**
            
            (1
            )
            
            **6**
            
            
            1**Interest
                charges**Interest
                charges
            
            
            **44**
            
            
            59
            
            
            **158**
            
            
            161Allowance
                for borrowed funds used during construction
            
            
            **-**
            
            
            (1
            )
            
            **(1**
            **)**
            
            (4
            )Total
                interest charges, net
            
            
            **44**
            
            
            58
            
            
            **157**
            
            
            157**Income
                before income tax**
            
            
            **299**
            
            
            284
            
            
            **558**
            
            
            548**Income
                tax expense**
            
            
            **110**
            
            
            100
            
            
            **207**
            
            
            181**Net
                income**
            
            
            **189**
            
            
            184
            
            
            **351**
            
            
            367**Preferred
                stock dividend requirement**
            
            
            **1**
            
            
            1
            
            
            **2**
            
            
            2**Earnings
                for common stock**
            
            **$**
            **188**
            
            $
            183
            
            **$**
            **349**
            
            $
            365





See
      Notes
      to PEC Consolidated Interim Financial Statements.


13


CAROLINA
      POWER & LIGHT COMPANY


d/b/a PROGRESS
      ENERGY CAROLINAS, INC.


**UNAUDITED
                CONSOLIDATED BALANCE SHEETS**(in
                millions)
            
            **September
                30, 2006**
            
            December
                31, 2005**ASSETS****Utility
                plant**Utility
                plant in service
            
            **$**
            **14,281**
            
            $
            13,994Accumulated
                depreciation
            
            
            **(6,362**
            **)**
            
            (6,120
            )Utility
                plant in service, net
            
            
            **7,919**
            
            
            7,874Held
                for future use
            
            
            **3**
            
            
            3Construction
                work in progress
            
            
            **488**
            
            
            399Nuclear
                fuel, net of amortization
            
            
            **172**
            
            
            203**Total
                utility plant, net**
            
            
            **8,582**
            
            
            8,479**Current
                assets**Cash
                and cash equivalents
            
            
            **130**
            
            
            125Short-term
                investments
            
            
            **132**
            
            
            191Receivables,
                net
            
            
            **489**
            
            
            518Receivables
                from affiliated companies
            
            
            **14**
            
            
            24Inventory
            
            
            **469**
            
            
            451Deferred
                fuel cost
            
            
            **207**
            
            
            261Prepayments
                and other current assets
            
            
            **16**
            
            
            20**Total
                current assets**
            
            
            **1,457**
            
            
            1,590**Deferred
                debits and other assets**Regulatory
                assets
            
            
            **520**
            
            
            421Nuclear
                decommissioning trust funds
            
            
            **692**
            
            
            640Miscellaneous
                other property and investments
            
            
            **193**
            
            
            188Other
                assets and deferred debits
            
            
            **172**
            
            
            184**Total
                deferred debits and other assets**
            
            
            **1,577**
            
            
            1,433**Total
                assets**
            
            **$**
            **11,616**
            
            $
            11,502**CAPITALIZATION
                AND LIABILITIES****Common
                stock equity**Common
                stockwithout
                par value
            
            **$**
            **2,005**
            
            $
            1,981Unearned
                ESOP common stock
            
            
            **(50**
            **)**
            
            (63
            )Accumulated
                other comprehensive loss
            
            
            **(121**
            **)**
            
            (120
            )Retained
                earnings
            
            
            **1,410**
            
            
            1,320**Total
                common stock equity**
            
            
            **3,244**
            
            
            3,118**Preferred
                stock - not subject to mandatory redemption**
            
            
            **59**
            
            
            59**Long-term
                debt, net**
            
            
            **3,469**
            
            
            3,667**Total
                capitalization**
            
            
            **6,772**
            
            
            6,844**Current
                liabilities**Current
                portion of long-term debt
            
            
            **200**
            
            
            -Accounts
                payable
            
            
            **212**
            
            
            247Payables
                to affiliated companies
            
            
            **68**
            
            
            73Notes
                payable to affiliated companies
            
            
            **2**
            
            
            11Interest
                accrued
            
            
            **51**
            
            
            73Short-term
                obligations
            
            
            **-**
            
            
            73Customer
                deposits
            
            
            **57**
            
            
            52Taxes
                accrued
            
            
            **78**
            
            
            100Other
                current liabilities
            
            
            **292**
            
            
            255**Total
                current liabilities**
            
            
            **960**
            
            
            884**Deferred
                credits and other liabilities**Noncurrent
                income tax liabilities
            
            
            **828**
            
            
            814Accumulated
                deferred investment tax credits
            
            
            **129**
            
            
            133Regulatory
                liabilities
            
            
            **1,235**
            
            
            1,196Asset
                retirement obligations
            
            
            **992**
            
            
            949Accrued
                pension and other benefits
            
            
            **538**
            
            
            511Other
                liabilities and deferred credits
            
            
            **162**
            
            
            171**Total
                deferred credits and other liabilities**
            
            
            **3,884**
            
            
            3,774**Commitments
                and contingencies (Note 14)****Total
                capitalization and liabilities**
            
            **$**
            **11,616**
            
            $
            11,502





See
      Notes
      to PEC Consolidated Interim Financial Statements.


14


CAROLINA
      POWER & LIGHT COMPANY


d/b/a
      PROGRESS ENERGY CAROLINAS, INC.


**UNAUDITED
                CONSOLIDATED STATEMENTS of CASH FLOWS**(in
                millions)Nine
                Months Ended September 30
            
            **2006**
            
            2005**Operating****activities**Net
                income
            
            **$**
            **351**
            
            $
            367Adjustments
                to reconcile net income to net cash provided by operating
                activitiesCharges
                for voluntary enhanced retirement program
            
            
            **-**
            
            
            42Depreciation
                and amortization
            
            
            **446**
            
            
            450Deferred
                income taxes and investment tax credits, net
            
            
            **23**
            
            
            (25
            )Deferred
                fuel credit
            
            
            **(47**
            **)**
            
            (146
            )Other
                adjustments to net income
            
            
            **32**
            
            
            71Cash
                provided (used) by changes in operating assets and
                liabilitiesReceivables
            
            
            **24**
            
            
            (88
            )Receivables
                from affiliated companies
            
            
            **22**
            
            
            14Inventories
            
            
            **(23**
            **)**
            
            (70
            )Prepayments
                and other current assets
            
            
            **6**
            
            
            3Accounts
                payable
            
            
            **21**
            
            
            30Payables
                to affiliated companies
            
            
            **(8**
            **)**
            
            (15
            )Other
                current liabilities
            
            
            **(5**
            **)**
            
            96Other
                operating activities
            
            
            **26**
            
            
            (30
            )**Net
                cash provided by operating activities**
            
            
            **868**
            
            
            699**Investing****activities**Gross
                utility property additions
            
            
            **(493**
            **)**
            
            (453
            )Nuclear
                fuel additions
            
            
            **(65**
            **)**
            
            (52
            )Purchases
                of available-for-sale securities and other investments
            
            
            **(736**
            **)**
            
            (1,504
            )Proceeds
                from sales of available-for-sale securities and other
                investments
            
            
            **772**
            
            
            1,560Other
                investing activities
            
            
            **(3**
            **)**
            
            3**Net
                cash used in investing activities**
            
            
            **(525**
            **)**
            
            (446
            )**Financing****activities**Proceeds
                from issuance of long-term debt, net
            
            
            **-**
            
            
            495Net
                decrease in short-term indebtedness
            
            
            **(73**
            **)**
            
            (34
            )Changes
                in advances from affiliates
            
            
            **(9**
            **)**
            
            (36
            )Retirement
                of long-term debt
            
            
            **-**
            
            
            (300
            )Dividends
                paid to parent
            
            
            **(255**
            **)**
            
            (343
            )Dividends
                paid on preferred stock
            
            
            **(2**
            **)**
            
            (2
            )Other
                financing activities
            
            
            **1**
            
            
            1**Net
                cash used in financing activities**
            
            
            **(338**
            **)**
            
            (219
            )**Net****increase
                in cash and cash equivalents**
            
            
            **5**
            
            
            34**Cash
                and cash equivalents at beginning of period**
            
            
            **125**
            
            
            18**Cash
                and cash equivalents at end of period**
            
            **$**
            **130**
            
            $
            52





See
      Notes
      to PEC Consolidated Interim Financial Statements.


15


**FLORIDA
      POWER CORPORATION**


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


**INTERIM
      FINANCIAL STATEMENTS**


**September
      30, 2006**





**UNAUDITED
                STATEMENTS of INCOME**Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005**Operating
                revenues**
            
            **$**
            **1,399**
            
            $
            1,227
            
            **$**
            **3,553**
            
            $
            2,983**Operating
                expenses**Fuel
                used in electric generation
            
            
            **538**
            
            
            351
            
            
            **1,379**
            
            
            966Purchased
                power
            
            
            **256**
            
            
            270
            
            
            **601**
            
            
            545Operation
                and maintenance
            
            
            **171**
            
            
            181
            
            
            **515**
            
            
            658Depreciation
                and amortization
            
            
            **108**
            
            
            95
            
            
            **301**
            
            
            236Taxes
                other than on income
            
            
            **89**
            
            
            82
            
            
            **238**
            
            
            215Other
            
            
            **-**
            
            
            1
            
            
            **(2**
            **)**
            
            (24
            )Total
                operating expenses
            
            
            **1,162**
            
            
            980
            
            
            **3,032**
            
            
            2,596**Operating
                income**
            
            
            **237**
            
            
            247
            
            
            **521**
            
            
            387**Other
                income**Interest
                income
            
            
            **4**
            
            
            -
            
            
            **12**
            
            
            -Other,
                net
            
            
            **6**
            
            
            4
            
            
            **8**
            
            
            6Total
                other income
            
            
            **10**
            
            
            4
            
            
            **20**
            
            
            6**Interest
                charges**Interest
                charges
            
            
            **39**
            
            
            28
            
            
            **119**
            
            
            96Allowance
                for borrowed funds used during construction
            
            
            **-**
            
            
            (2
            )
            
            **(3**
            **)**
            
            (6
            )Total
                interest charges, net
            
            
            **39**
            
            
            26
            
            
            **116**
            
            
            90**Income
                before income tax**
            
            
            **208**
            
            
            225
            
            
            **425**
            
            
            303**Income
                tax expense**
            
            
            **83**
            
            
            74
            
            
            **160**
            
            
            98**Net
                income**
            
            
            **125**
            
            
            151
            
            
            **265**
            
            
            205**Preferred
                stock dividend requirement**
            
            
            **-**
            
            
            -
            
            
            **1**
            
            
            1**Earnings
                for common stock**
            
            **$**
            **125**
            
            $
            151
            
            **$**
            **264**
            
            $
            204





See
      Notes
      to PEF Interim Financial Statements.


16


FLORIDA
      POWER CORPORATION


d/b/a
      PROGRESS ENERGY FLORIDA, INC.


**UNAUDITED
                BALANCE SHEETS**(in
                millions)
            
            **September
                30, 2006**
            
            December
                31, 2005**ASSETS****Utility
                plant**Utility
                plant in service
            
            **$**
            **9,014**
            
            $
            8,756Accumulated
                depreciation
            
            
            **(3,555**
            **)**
            
            (3,434
            )Utility
                plant in service, net
            
            
            **5,459**
            
            
            5,322Held
                for future use
            
            
            **9**
            
            
            9Construction
                work in progress
            
            
            **567**
            
            
            414Nuclear
                fuel, net of amortization
            
            
            **59**
            
            
            76**Total
                utility plant, net**
            
            
            **6,094**
            
            
            5,821**Current
                assets**Cash
                and cash equivalents
            
            
            **16**
            
            
            218Receivables,
                net
            
            
            **422**
            
            
            331Receivables
                from affiliated companies
            
            
            **5**
            
            
            11Deferred
                income taxes
            
            
            **72**
            
            
            12Inventory
            
            
            **427**
            
            
            311Deferred
                fuel cost
            
            
            **97**
            
            
            341Prepayments
                and other current assets
            
            
            **72**
            
            
            100**Total
                current assets**
            
            
            **1,111**
            
            
            1,324**Deferred
                debits and other assets**Regulatory
                assets
            
            
            **329**
            
            
            351Debt
                issuance costs
            
            
            **20**
            
            
            22Nuclear
                decommissioning trust funds
            
            
            **523**
            
            
            493Miscellaneous
                other property and investments
            
            
            **45**
            
            
            47Prepaid
                pension costs
            
            
            **216**
            
            
            200Other
                assets and deferred debits
            
            
            **15**
            
            
            60**Total
                deferred debits and other assets**
            
            
            **1,148**
            
            
            1,173**Total
                assets**
            
            **$**
            **8,353**
            
            $
            8,318**CAPITALIZATION
                AND LIABILITIES****Common
                stock equity**Common
                stockwithout
                par value
            
            **$**
            **1,098**
            
            $
            1,097Accumulated
                other comprehensive loss
            
            
            **(2**
            **)**
            
            -Retained
                earnings
            
            
            **1,585**
            
            
            1,498**Total
                common stock equity**
            
            
            **2,681**
            
            
            2,595**Preferred
                stock - not subject to mandatory redemption**
            
            
            **34**
            
            
            34**Long-term
                debt, net**
            
            
            **2,469**
            
            
            2,554**Total
                capitalization**
            
            
            **5,184**
            
            
            5,183**Current
                liabilities**Current
                portion of long-term debt
            
            
            **88**
            
            
            48Accounts
                payable
            
            
            **276**
            
            
            237Payables
                to affiliated companies
            
            
            **88**
            
            
            101Notes
                payable to affiliated companies
            
            
            **13**
            
            
            13Short-term
                obligations
            
            
            **-**
            
            
            102Customer
                deposits
            
            
            **165**
            
            
            148Interest
                accrued
            
            
            **27**
            
            
            42Other
                current liabilities
            
            
            **255**
            
            
            101**Total
                current liabilities**
            
            
            **912**
            
            
            792**Deferred
                credits and other liabilities**Noncurrent
                income tax liabilities
            
            
            **450**
            
            
            433Accumulated
                deferred investment tax credits
            
            
            **25**
            
            
            30Regulatory
                liabilities
            
            
            **1,065**
            
            
            1,189Asset
                retirement obligations
            
            
            **295**
            
            
            290Accrued
                pension and other benefits
            
            
            **263**
            
            
            257Other
                liabilities and deferred credits
            
            
            **159**
            
            
            144**Total
                deferred credits and other liabilities**
            
            
            **2,257**
            
            
            2,343**Commitments
                and contingencies (Note 14)****Total
                capitalization and liabilities**
            
            **$**
            **8,353**
            
            $
            8,318





See
      Notes
      to PEF Interim Financial Statements.


17


FLORIDA
      POWER CORPORATION


d/b/a
      PROGRESS ENERGY FLORIDA, INC.


**UNAUDITED
                STATEMENTS of CASH FLOWS**(in
                millions)Nine
                Months Ended September 30
            
            **2006**
            
            2005**Operating
                activities**Net
                income
            
            **$**
            **265**
            
            $
            205Adjustments
                to reconcile net income to net cash provided by operating
                activitiesCharges
                for voluntary enhanced retirement program
            
            
            **-**
            
            
            91Depreciation
                and amortization
            
            
            **323**
            
            
            262Deferred
                income taxes and investment tax credits, net
            
            
            **(46**
            **)**
            
            4Deferred
                fuel cost (credit)
            
            
            **244**
            
            
            (130
            )Other
                adjustments to net income
            
            
            **9**
            
            
            13Cash
                (used) provided by changes in operating assets and
                liabilitiesReceivables
            
            
            **(100**
            **)**
            
            (140
            )Receivables
                from affiliated companies
            
            
            **6**
            
            
            10Inventories
            
            
            **(117**
            **)**
            
            (48
            )Prepayments
                and other current assets
            
            
            **(44**
            **)**
            
            (8
            )Accounts
                payable
            
            
            **43**
            
            
            79Payables
                to affiliated companies
            
            
            **(13**
            **)**
            
            5Other
                current liabilities
            
            
            **108**
            
            
            (18
            )Regulatory
                assets and liabilities
            
            
            **5**
            
            
            (52
            )Other
                operating activities
            
            
            **(29**
            **)**
            
            30**Net
                cash provided by operating activities**
            
            
            **654**
            
            
            303**Investing
                activities**Gross
                utility property additions
            
            
            **(528**
            **)**
            
            (336
            )Nuclear
                fuel additions
            
            
            **(6**
            **)**
            
            (46
            )Proceeds
                from sales of assets
            
            
            **3**
            
            
            42Purchases
                of available-for-sale securities and other investments
            
            
            **(547**
            **)**
            
            (241
            )Proceeds
                from sales of available-for-sale securities and other
                investments
            
            
            **547**
            
            
            241Other
                investing activities
            
            
            **1**
            
            
            (5
            )**Net
                cash used in investing activities**
            
            
            **(530**
            **)**
            
            (345
            )**Financing
                activities**Proceeds
                from issuance of long-term debt, net
            
            
            **-**
            
            
            297Net
                decrease in short-term indebtedness
            
            
            **(102**
            **)**
            
            (1
            )Retirement
                of long-term debt
            
            
            **(47**
            **)**
            
            (101
            )Changes
                in advances from affiliates
            
            
            **-**
            
            
            (147
            )Dividends
                paid to parent
            
            
            **(176**
            **)**
            
            -Dividends
                paid on preferred stock
            
            
            **(1**
            **)**
            
            (1
            )Other
                financing activities
            
            
            **-**
            
            
            (2
            )**Net
                cash (used) provided by financing activities**
            
            
            **(326**
            **)**
            
            45**Net****(decrease)
                increase in cash and cash equivalents**
            
            
            **(202**
            **)**
            
            3**Cash
                and cash equivalents at beginning of period**
            
            
            **218**
            
            
            12**Cash
                and cash equivalents at end of period**
            
            **$**
            **16**
            
            $
            15





See
      Notes
      to PEF Interim Financial Statements.


18


PROGRESS
      ENERGY, INC.


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


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


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





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





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




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


19


PROGRESS
      ENERGY, INC.


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


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


**COMBINED
      NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS**





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




1.  ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




A.  Organization




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




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




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




B.  Basis
      of
      Presentation




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




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




20





Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Progress
                Energy
            
            **$**
            **(12**
            **)**
            $
            (91
            )
            **$**
            **7**
            
            $
            (27
            )PEC
            
            **$**
            **1**
            
            $
            3
            
            **$**
            **-**
            
            $
            6PEF
            
            **$**
            **2**
            
            $
            (9
            )
            **$**
            **2**
            
            $
            -





The
      Utilities collect from customers certain excise taxes levied by the state or
      local government upon the customers. The Utilities account for excise taxes
      on a
      gross basis. The amount of gross receipts tax, franchise taxes and other excise
      taxes included in electric revenues and taxes other than on income in the
      Statements of **** Income
      for the three months and nine months ended September 30, 2006 and 2005 were
      as
      follows:


Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Progress
                Energy
            
            **$**
            **89**
            
            $
            80
            
            **$**
            **223**
            
            $
            194PEC
            
            **$**
            **28**
            
            $
            27
            
            **$**
            **71**
            
            $
            68PEF
            
            **$**
            **61**
            
            $
            53
            
            **$**
            **152**
            
            $
            126







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




In
      preparing financial statements that conform with GAAP, management must make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, the reported amounts of revenues and expenses and the disclosure
      of
      contingent assets and liabilities at the date of the financial statements.
      Actual results could differ from those estimates.




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




C.  Consolidation
      of Variable Interest Entities




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




Progress
      Energy




In
      addition to the variable interests listed below for PEC and PEF, we have
      interests through other subsidiaries in several variable interest entities
      for
      which we are not the primary beneficiary. These arrangements include investments
      in five limited liability partnerships and limited liability corporations.
      At
      September 30, 2006, the aggregate additional maximum loss exposure that we
      could
      be required to record in our income statement as a result of these arrangements
      was $7 million, which represents our net remaining investment in the entities.
      The creditors of these variable interest entities do not have recourse to our
      general credit in excess of the aggregate maximum loss exposure.




PEC




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




PEC
      has
      an interest in and consolidates a limited partnership that invests in 17
      low-income housing partnerships that qualify for federal and state tax credits.
      PEC also has an interest in one power plant resulting from long-term power
      purchase contracts. PEC has
      requested the necessary information to determine if the 17 partnerships and
      the
      power




21


plant
      owner are variable interest entities or to identify the primary beneficiaries;
      all entities from which the necessary financial information was requested
      declined to provide the information to PEC and accordingly, PEC has applied
      the information scope exception in FIN No. 46R, paragraph 4(g), to the 17
      partnerships and the power plant. PEC believes that if it is determined to
      be
      the primary beneficiary of these entities, the effect of consolidating the
      entities would result in increases to total assets, long-term debt and other
      liabilities, but would have an insignificant or no impact on PEC’s common stock
      equity, net earnings or cash flows.




PEC
      also
      has interests in several other variable interest entities for which PEC is
      not
      the primary beneficiary. These arrangements include investments in 20 limited
      liability partnerships, limited liability corporations and venture capital
      funds
      and two building leases with special-purpose entities. At September 30, 2006,
      the aggregate maximum loss exposure that PEC could be required to record on
      its
      income statement as a result of these arrangements totals $22 million, which
      primarily represents its net remaining investment in these entities. The
      creditors of these variable interest entities do not have recourse to the
      general credit of PEC in excess of the aggregate maximum loss exposure. See
      Note
      2 of the 2005 Form 10-K for additional information.




PEF




PEF
      has
      interests in three variable interest entities for which PEF is not the primary
      beneficiary. These arrangements include investments in one venture capital
      fund,
      one building lease with a special-purpose entity and one operating lease with
      a
      special-purpose entity. At September 30, 2006, the aggregate maximum loss
      exposure that PEF could be required to record in its income statement as a
      result of these arrangements was $5 million. The creditors of these variable
      interest entities do not have recourse to the general credit of PEF in excess
      of
      the aggregate maximum loss exposure.




2.  NEW
      ACCOUNTING STANDARDS




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




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




*SFAS
      No. 157, “Fair Value Measurements”*




The
      FASB
      issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157) in September 2006.
      SFAS No. 157 redefines fair value as “the price that would be received to sell
      an asset or paid to transfer a liability in an orderly transaction between
      market participants at the measurement date.” SFAS No. 157 establishes a fair
      value hierarchy that categorizes and prioritizes the inputs that should be
      used
      to estimate fair value. We will implement SFAS No. 157 as of January 1, 2008,
      applying the provisions retrospectively for derivative accounting and
      prospectively for all other valuations. We are currently evaluating the impact
      adoption may have on our financial condition, results of operations and cash
      flows.




*SFAS
      No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
      Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
      132(R)”*




In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
      No. 87, 88, 106, and 132(R)” (SFAS No. 158). SFAS No.
      158 requires an entity to recognize in its statement of financial condition
      the
      funded status of its pension and other postretirement benefit plans, measured
      as
      the difference between the fair value of the plan assets and the benefit
      obligation as of the end of the employer’s fiscal year (with limited
      exceptions). SFAS No. 158 also requires an entity to recognize changes in the
      funded status of a pension or other postretirement benefit plan
      within




22


accumulated
      other comprehensive income, net of tax, to the extent such changes are not
      recognized in earnings as components of net periodic cost. SFAS No. 158 does
      not
      permit retrospective application of its provisions. The recognition and
      disclosure provisions of SFAS No. 158 are effective for us as of December 31,
      2006. We are currently in compliance with the year-end measurement date
      provisions, which are not required to be implemented until fiscal years ending
      after December 15, 2008. The implementation of SFAS No. 158 will have no impact
      on reported net income.




The
      effects of SFAS No. 158 for us, PEC and PEF at December 31, 2006 will be
      impacted by factors such as plan asset returns and the December 31, 2006
      discount rate used to measure plan obligations. Based on current projections,
      the implementation of SFAS No. 158 could have the following incremental balance
      sheet effects as compared with continuation of the prior minimum pension
      adjustment requirement: Progress Energy - increase benefit liabilities by $181
      million and decrease accumulated other comprehensive income by $71 million,
      net
      of tax; PEC - increase benefit liabilities by $72 million and decrease
      accumulated other comprehensive income by $58 million, net of tax; PEF -
      decrease benefit assets by $91 million and increase benefit liabilities by
      $98
      million.





The
      estimated effects above for us and PEF reflect the regulatory asset or liability
      treatment of amounts that would otherwise be recorded in accumulated other
      comprehensive income, pursuant to an expected FPSC order consistent with the
      prior FPSC order related to minimum pension adjustments (See Note 16A to the
      2005 Form 10-K). In addition, we and PEC are continuing to evaluate potential
      regulatory asset treatment for PEC amounts that would otherwise be charged
      to
      accumulated other comprehensive income.




*Staff
      Accounting Bulletin No. 108, “Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements”*




The
      SEC
      issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements” **** (SAB
      108), in September 2006. In practice, some companies currently use the
“rollover” method which focuses on the impact of a misstatement on the income
      statement. Other companies use the “iron curtain” method which focuses on the
      impact of a misstatement on the balance sheet. SAB 108 requires companies to
      use
      a “dual approach” in quantifying financial statement misstatements. If an error
      is determined to be material under either approach, the financial statements
      must be adjusted. SAB 108 also provides transition guidance for correcting
      errors existing in prior years.




The
      SEC
      permits two methods for the initial application of SAB 108. A company can elect
      to restate prior financial statements as if the “dual approach” had always been
      used or it can record a cumulative effect, with any correcting adjustments
      recorded to the carrying values of assets and liabilities as of the beginning
      of
      the implementation year with the offsetting adjustment recorded to the opening
      balance of retained earnings. Companies using the “cumulative effect” transition
      method must disclose the nature and amount of each individual error, including
      when and how each error being corrected arose. They must also disclose the
      fact
      that the errors had previously been considered immaterial. Companies do not
      have
      to restate prior period financial statements at initial application so long
      as
      management properly applied its previous approach.




SAB
      108
      is effective for us at December 31, 2006. We do not expect that the
      implementation of SAB 108 will have a material effect on our financial position
      or results of operations.




3.  DIVESTITURES




A.  Natural
      Gas Drilling and Production




On
      July
      12, 2006, our board of directors approved a plan to divest of our natural gas
      drilling and production business (Gas), which includes Winchester Production
      Company, Ltd., Westchester Gas Company, Texas Gas Gathering and Talco Midstream
      Assets Ltd.; all are subsidiaries of Progress Fuels Corporation (Progress
      Fuels). On July 22, 2006, we entered into a definitive agreement to sell Gas
      to
      EXCO Resources, Inc. for $1.2 billion in gross cash proceeds. Proceeds from
      the
      sale are expected to be used primarily to reduce holding company debt and for
      other corporate purposes. The transaction closed on October 2, 2006, and is
      subject to customary post-closing provisions and post-closing adjustments.
      The
      sale will be included in the fourth quarter results. The accompanying
      consolidated financial




23


statements
      have been restated for all periods presented to reflect the operations of Gas
      as
      discontinued operations. Interest expense has been allocated to discontinued
      operations based on their respective net assets, assuming a uniform
      debt-to-equity ratio across our operations. Interest expense allocated for
      the
      three months ended September 30, 2006 and 2005 was $4 million and $3 million,
      respectively. Interest expense allocated for the nine months ended September
      30,
      2006 and 2005 was $13 million and $9 million, respectively. We ceased recording
      depreciation upon classification of the assets as discontinued operations in
      July 2006. After-tax depreciation expense recorded by Gas during the three
      months ended September 30, 2005 totaled $7 million. After-tax depreciation
      expense recorded by Gas during the nine months ended September 30, 2006 and
      2005
      totaled $16 million and $19 million, respectively. Results of discontinued
      operations were as follows:


Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Revenues
            
            **$**
            **100**
            
            $
            43
            
            **$**
            **192**
            
            $
            115Earnings
                before income taxes
            
            
            **88**
            
            
            24
            
            
            **138**
            
            
            57Income
                tax expense
            
            
            **(31**
            **)**
            
            (9
            )
            
            **(54**
            **)**
            
            (21
            )Net
                earnings from discontinued operations
            
            **$**
            **57**
            
            $
            15
            
            **$**
            **84**
            
            $
            36





B.  DeSoto
      and Rowan Generation Facilities




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




The
      sale
      of DeSoto closed in the second quarter of 2006 and the sale of Rowan closed
      during the third quarter of 2006. We recorded an after-tax loss during the
      six
      months ended June 30, 2006 of $62 million on the sale of Rowan and DeSoto and
      an
      additional loss of $3 million during the three months ended September 30, 2006,
      related to post-closing adjustments.




The
      accompanying consolidated financial statements have been restated for all
      periods presented to reflect the operations of DeSoto and Rowan as discontinued
      operations. Interest expense has been allocated to discontinued operations
      based
      on their respective net assets, assuming a uniform debt-to-equity ratio across
      our operations. Interest expense allocated for the three months ended September
      30, 2005 was $3 million. Interest expense allocated for the nine months ended
      September 30, 2006 and 2005 was $6 million and $10 million, respectively. We
      ceased recording depreciation upon classification of the assets as discontinued
      operations in May 2006. After-tax depreciation expense recorded by DeSoto and
      Rowan during the three months ended September 30, 2005 totaled $2 million.
      After-tax depreciation expense recorded by DeSoto and Rowan during the nine
      months ended September 30, 2006 and 2005 totaled $3 million and $7 million,
      respectively. Results of discontinued operations were as
      follows:


24





Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Revenues
            
            **$**
            **50**
            
            $
            37
            
            **$**
            **64**
            
            $
            62Earnings
                before income taxes
            
            
            **22**
            
            
            12
            
            
            **15**
            
            
            12Income
                tax expense
            
            
            **(7**
            **)**
            
            (5
            )
            
            **(6**
            **)**
            
            (5
            )Net
                earnings from discontinued operations
            
            
            **15**
            
            
            7
            
            
            **9**
            
            
            7Loss
                on disposal of discontinued operations, including income tax benefit
                of $2
                and $40, respectively
            
            
            **(3**
            **)**
            
            -
            
            
            **(65**
            **)**
            
            -Earnings
                (loss) from discontinued operations
            
            **$**
            **12**
            
            $
            7
            
            **$**
            **(56**
            **)**
            $
            7





C.  Progress
      Telecom, LLC




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




Based
      on
      the gross proceeds associated with the sale and after consideration of minority
      interest, we recorded an after-tax gain on disposal of $24 million during the
      three months ended March 31, 2006. During the three months ended June 30, 2006,
      we recorded an additional after-tax gain of $5 million in connection with
      certain tax matters. During the three months ended September 30, 2006, we
      recorded a $1 million adjustment related to additional tax expenses resulting
      in
      a total after-tax gain of $28 million for the nine months ended September 30,
      2006.




The
      accompanying consolidated financial statements have been restated for all
      periods presented to reflect the operations of PT LLC as discontinued
      operations. Interest expense has been allocated to discontinued operations
      based
      on the net assets of PT LLC, assuming a uniform debt-to-equity ratio across
      our
      operations. Interest expense allocated for the nine months ended September
      30,
      2005 was $1 million. Interest expense allocated for the three months ended
      September 30, 2005 was less than $1 million. We ceased recording depreciation
      upon classification of the assets as discontinued operations in January 2006.
      After-tax depreciation expense recorded by PT LLC during the nine months ended
      September 30, 2006 and 2005 was $1 million and $6 million, respectively.
      After-tax depreciation expense recorded for the three months ended September
      30,
      2005 was $2 million. Results of discontinued operations were as
      follows:


Three
                Months Ended September 30,
            
            Nine
                Months EndedSeptember
                30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Revenues
            
            **$**
            -
            
            $
            18
            
            **$**
            **18**
            
            $
            49Earnings
                before income taxes and minority interest
            
            
            **2**
            
            
            5
            
            
            **5**
            
            
            7Income
                tax expense
            
            
            -
            
            
            (1
            )
            
            **(4**
            **)**
            
            (1
            )Minority
                interest
            
            
            -
            
            
            (2
            )
            
            **(4**
            **)**
            
            (3
            )Net
                earnings (loss) from discontinued operations
            
            
            **2**
            
            
            2
            
            
            **(3**
            **)**
            
            3(Loss)
                gain on disposal of discontinued operations, including income tax
                benefit
                (expense) of $1 and $(8), respectively, and minority interest of
                $1 and
                $35, respectively
            
            
            **(1**
            **)**
            
            -
            
            
            **28**
            
            
            -Earnings
                from discontinued operations
            
            **$**
            **1**
            
            $
            2
            
            **$**
            **25**
            
            $
            3





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




25


D.  Dixie
      Fuels and Other Fuels Businesses




On
      March
      1, 2006, we sold our 65 percent interest in Dixie Fuels Limited (Dixie Fuels)
      to
      Kirby Corporation for $16 million in cash. Dixie Fuels operates a fleet of
      four
      ocean-going dry-bulk barge and tugboat units operating under long-term contracts
      with PEF. Dixie Fuels primarily transports coal from the lower Mississippi
      River
      to Progress Energy’s Crystal River Facility. We recorded an after-tax gain of $2
      million on the sale of Dixie Fuels. The other fuels businesses are expected
      to
      be sold within the next six months.




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


Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Revenues
            
            **$**
            **7**
            
            $
            9
            
            **$**
            **17**
            
            $
            23Earnings
                before income taxes
            
            
            **6**
            
            
            3
            
            
            **10**
            
            
            5Income
                tax expense
            
            
            **(2**
            **)**
            
            (1
            )
            
            **(4**
            **)**
            
            (2
            )Net
                earnings from discontinued operations
            
            
            **4**
            
            
            2
            
            
            **6**
            
            
            3Gain
                on disposal of discontinued operations, including income tax expense
                of
                $1
            
            
            **-**
            
            
            -
            
            
            **2**
            
            
            -Earnings
                from discontinued operations
            
            **$**
            **4**
            
            $
            2
            
            **$**
            **8**
            
            $
            3





E.  Coal
      Mining Businesses




On
      November 14, 2005, our board of directors approved a plan to divest five
      subsidiaries of Progress Fuels engaged in the coal mining business. On May
      1,
      2006, we sold certain net assets of three of our coal mining businesses to
      Alpha
      Natural Resources, LLC for gross proceeds of $23 million plus a $4 million
      working capital adjustment. As a result, during the nine months ended September
      30, 2006, we recorded an after-tax loss of $13 million on the sale of these
      assets. The remaining coal mining operations are expected to be sold by the
      end
      of 2006.





The
      accompanying consolidated financial statements have been restated for all
      periods presented to reflect the coal mining operations as discontinued
      operations. Interest expense has been allocated to discontinued operations
      based
      on the net assets of the coal mines, assuming a uniform debt-to-equity ratio
      across our operations. Interest expense allocated was $1 million for the three
      months ended September 30, 2005. Interest expense allocated was $1 million
      and
      $2 million for the nine months ended September 30, 2006 and 2005, respectively.
      We ceased recording depreciation expense upon classification of the coal mining
      operations as discontinued operations in November 2005. After-tax depreciation
      expense during the three months and nine months ended September 30, 2005 was
      $4
      million and $10 million, respectively. Results of discontinued operations were
      as follows:


26





Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Revenues
            
            **$**
            **15**
            
            $
            58
            
            **$**
            **87**
            
            $
            168Earnings
                (loss) before income taxes
            
            
            -
            
            
            (14
            )
            
            **(4**
            **)**
            
            (15
            )Income
                tax benefit
            
            
            **2**
            
            
            5
            
            
            **3**
            
            
            6Net
                earnings (loss) from discontinued operations
            
            
            **2**
            
            
            (9
            )
            
            **(1**
            **)**
            
            (9
            )Estimated
                loss on disposal of discontinued operations, including income tax
                benefit
                of $- and $17, respectively
            
            
            -
            
            
            -
            
            
            **(13**
            **)**
            
            -Earnings
                (loss) from discontinued operations
            
            **$**
            **2**
            
            $
            (9
            )
            **$**
            **(14**
            **)**
            $
            (9
            )





F.  Progress
      Rail




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




Based
      on
      the gross proceeds associated with the sale, we recorded an estimated after-tax
      loss on disposal of $25 million during the nine months ended September 30,
      2005.
      During the nine months ended September 30, 2006, we recorded an additional
      after-tax loss on disposal of $3 million in connection with guarantees and
      indemnifications provided by Progress Fuels and Progress Energy for certain
      legal, tax and environmental matters to One Equity Partners, LLC. The ultimate
      resolution of these matters could result in adjustments to the loss on sale
      in
      future periods. See general discussion of guarantees at Note 14A.




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


Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Revenues
            
            **$**
            -
            
            $
            -
            
            **$**
            -
            
            $
            358Earnings
                before income taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            8Income
                tax expense
            
            
            -
            
            
            -
            
            
            -
            
            
            (3
            )Net
                earnings from discontinued operations
            
            
            -
            
            
            -
            
            
            -
            
            
            5Estimated
                loss on disposal of discontinued operations, including income tax
                benefit
                of $- and $2 for 2006, respectively, and $- and $15 for 2005,
                respectively
            
            
            -
            
            
            (1
            )
            
            **(3**
            **)**
            
            (25
            )Loss
                from discontinued operations
            
            **$**
            -
            
            $
            (1
            )
            **$**
            **(3**
            **)**
            $
            (20
            )





G.  Net
      Assets of Discontinued Operations




Included
      in net assets of discontinued operations are the assets and liabilities of
      Gas,
      the remaining coal mining operations and other fuels businesses at September
      30,
      2006 and the assets and liabilities of Gas, DeSoto and Rowan, PT LLC, Dixie
      Fuels, the five coal mining businesses and other fuels businesses at
      December 31, 2005. The major balance sheet classes included in assets and
      liabilities of discontinued operations in the Consolidated Balance Sheets were
      as follows:


27





(in
                millions)
            
            **September
                30, 2006**
            
            December
                31, 2005Accounts
                receivable
            
            **$**
            **40**
            
            $
            61Inventory
            
            
            **5**
            
            
            25Other
                current assets
            
            
            **38**
            
            
            22Total
                property, plant and equipment, net
            
            
            **603**
            
            
            1,152Total
                other assets
            
            
            **21**
            
            
            12Assets
                of discontinued operations
            
            **$**
            **707**
            
            $
            1,272Accounts
                payable
            
            
            **10**
            
            
            25Accrued
                expenses
            
            
            **46**
            
            
            61Long-term
                liabilities
            
            
            **115**
            
            
            112Liabilities
                of discontinued operations
            
            **$**
            **171**
            
            $
            198





4.  REGULATORY
      MATTERS




A.  PEC
      Retail Rate Matters




*FUEL
      COST RECOVERY*




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




On
      June
      2, 2006, PEC filed with the NCUC for an increase in the fuel rate charged to
      its
      North Carolina customers. On
      September 25, 2006, the NCUC approved a settlement agreement filed jointly
      by
      PEC, the NCUC Public Staff and the Carolinas Industrial Group for Fair Utility
      Rates II. The settlement agreement provided for a $177 million, or 6.7 percent
      increase in rates effective October 1, 2006. The settlement agreement further
      provides for rate increases of $50 million in 2007 and $30 million in 2008
      and
      for PEC to collect its existing deferred fuel balance by September 30, 2009. PEC
      initially sought an increase of $292 million, or 11.0 percent, but agreed to
      a
      three-year phase-in of the increase in order to address customer concerns
      regarding the magnitude of the proposed increase. PEC
      will
      be allowed to calculate and collect interest at 6% on the difference between
      its
      fuel factor proposed in its original request to the NCUC and the factor
      effective October 1, 2006 included in the settlement agreement. Effective
      October 1, 2006, residential electric bills increased by $4.87 per 1,000 kWhs
      for fuel cost recovery.




*OTHER
      MATTERS*




PEC
      filed
      petitions on September 14, 2006 and September 22, 2006, with the SCPSC and
      NCUC,
      respectively, seeking authorization to defer and amortize $18 million of
      previously recorded operation and maintenance (O&M) expense relating to
      certain environmental remediation sites (See Note 13A). On October 11, 2006,
      the
      SCPSC granted PEC’s petition to defer its jurisdictional amount, totaling $3
      million, and amortize it over a five-year period beginning January 1, 2007.
      On
      October 19, 2006, the NCUC granted PEC’s petition to defer its jurisdictional
      amount, totaling $15 million, and amortize it over a five-year period. However,
      the NCUC order directed that amortization begin in the fourth quarter of 2006,
      with an amortization expense of $3 million. As a result, during the fourth
      quarter of 2006, PEC will reverse $18 million of O&M expense and establish a
      regulatory asset as well as record $3 million of amortization
      expense.




B.  PEF
      Retail Rate Matters




*FUEL
      COST RECOVERY*




On
      September 1 and September 15, 2006, PEF filed requests with the FPSC seeking
      increases to cover rising fuel, environmental compliance and energy conservation
      costs. PEF asked the FPSC to approve a $171 million, or 3.7 percent, increase
      in
      rates. Subsequently, on October 25 and October 31, 2006, PEF supplemented its
      September




28


filings
      to reflect lower projected fuel costs for PEF. PEF’s revised forecasts show a
      $40 million, or 0.7 percent, increase in rates over 2006. The proposed new
      charges would take effect January 1, 2007 and would increase residential bills
      in total by a net amount of $0.78 for the first 1,000 kWhs. The FPSC is
      scheduled to hold hearings on the proposal in early November. We cannot predict
      the outcome of this matter.




On
      August
      10, 2006, Florida’s Office of Public Counsel (OPC) filed a petition with the
      FPSC asking that the FPSC require PEF to refund to ratepayers $143 million,
      plus
      interest, of alleged excessive past fuel recovery charges and SO 2 allowance costs associated with PEF’s purported failure to utilize the most
      economical sources of coal at Crystal River Unit 4 and Crystal River Unit 5
      (CR4
      and CR5) during the period 1996-2005. The OPC subsequently revised its claim
      to
      $135 million, plus interest. The OPC claims that although CR4 and CR5 were
      designed to burn a blend of coals, PEF failed to act to lower ratepayers’ costs
      by purchasing the most economical blends of coal. During the period specified
      in
      the petition, PEF’s costs recovered through fuel recovery clauses were annually
      reviewed for prudence and approval by the FPSC. On August 30, 2006, PEF filed
      a
      motion with the FPSC to dismiss the petition on the grounds that the OPC
      petition would require the FPSC to engage in retroactive ratemaking for rates
      previously approved under the fuel recovery clause. On September 13, 2006,
      the
      OPC filed a memorandum in opposition to PEF’s motion to dismiss the petition. In
      the event that PEF’s motion to dismiss is not granted, we anticipate a hearing
      to be held during the second quarter of 2007. PEF believes that it has sound
      legal and factual arguments to successfully defend its position but cannot
      predict the outcome of this matter.




*STORM
      COST RECOVERY*




On
      April
      25, 2006, PEF entered into a settlement agreement with certain interveners
      in
      its storm cost recovery docket that would allow PEF to extend its current
      two-year storm surcharge, which equals approximately $3.61 on the average
      residential monthly customer bill of 1,000 kWhs, for an additional 12-month
      period. The extension, which would begin August 2007, would replenish the
      existing storm reserve by an estimated additional $130 million. During the
      third
      quarter, PEF and the interveners modified the settlement agreement such that
      in
      the event future storms cause the reserve to be depleted, PEF would be able
      to
      petition the FPSC for implementation of an interim surcharge of at least 80
      percent and up to 100 percent of the claimed deficiency of its storm reserve.
      The intervenors agreed not to oppose the interim recovery of 80 percent of
      the
      future claimed deficiency but reserved the right to challenge the interim
      surcharge recovery of the remaining 20 percent. The FPSC has the right to review
      PEF’s storm costs for prudence. On August 29, 2006, the FPSC approved the
      settlement agreement as modified.




*OTHER
      MATTERS*




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




On
      September 22, 2006, PEF filed a petition with the FPSC to recover the costs
      to
      uprate Crystal River Unit No. 3 Nuclear Plant (CR3) through its fuel adjustment
      clause. The uprate will increase CR3’s gross output by approximately 180 MWs.
      The uprate will take place in two stages: approximately 40 MWs will be added
      through equipment modifications during the 2009 refueling outage and
      approximately 140 MWs will be added by modifying the design of the plant to
      use
      more highly enriched fuel during the 2011 refueling outage. The design
      modifications will require a license amendment approved by the NRC. The project
      is estimated to cost approximately $382 million, which includes potential
      transmission system improvements and modifications to comply with environmental
      regulations. A hearing date has been tentatively set with the FPSC for January
      18, 2007. If PEF does not receive approval to recover the uprate costs through
      the fuel adjustment clause, these costs will be recoverable through base rates,
      similar to other utility plant additions. We cannot predict the outcome of
      this
      matter.




29


C.  Other
      Matters




*REGIONAL
      TRANSMISSION ORGANIZATION*




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




*NUCLEAR
      LICENSE RENEWAL*




On
      June
      26, 2006, PEC’s Brunswick Nuclear Plant (Brunswick) received 20-year extensions
      from the NRC on the operating licenses for its two nuclear reactors. The
      operating license of Unit 1 extends until 2036 and Unit 2 until
      2034.




5.  EQUITY
      AND COMPREHENSIVE INCOME




A.  Earnings
      Per Common Share




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


Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Weighted-average
                common shares - basic
            
            
            **251**
            
            
            248
            
            
            **250**
            
            
            246Net
                effect of dilutive stock-based compensation plans
            
            
            **-**
            
            
            -
            
            
            **1**
            
            
            -Weighted-average
                shares - fully dilutive
            
            
            **251**
            
            
            248
            
            
            **251**
            
            
            246





B.  Comprehensive
      Income




Progress
      Energy


Three
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005Net
                income
            
            **$**
            **319**
            
            $
            450Other
                comprehensive income (loss)Reclassification
                adjustment included in net incomeChange
                in cash flow hedges (net of tax expense of $20and
                $11, respectively)
            
            
            **32**
            
            
            20Changes
                in net unrealized losses on cash flow hedges (net of tax benefit
                of $33
                and $28, respectively)
            
            
            **(41**
            **)**
            
            (51
            )Minimum
                pension liability adjustment (net of tax benefit of $-and $45, respectively)
            
            
            **-**
            
            
            (70
            )Other
                (net of tax expense of $-and $1, respectively)
            
            
            **-**
            
            
            2Other
                comprehensive loss
            
            
            **(9**
            **)**
            
            (99
            )Comprehensive
                income
            
            **$**
            **310**
            
            $
            351





30





Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005Net
                income
            
            **$**
            **317**
            
            $
            542Other
                comprehensive income (loss)Reclassification
                adjustments included in net incomeChange
                in cash flow hedges (net of tax expense of $19and
                $15, respectively)
            
            
            **31**
            
            
            25Foreign
                currency translation adjustments included in discontinued
                operations
            
            
            **-**
            
            
            (6
            )Minimum
                pension liability adjustment included in discontinued operations
                (net of
                tax expense of $-and $1, respectively)
            
            
            **-**
            
            
            1Changes
                in net unrealized losses on cash flow hedges (net of tax benefit
                of $17
                and $3, respectively)
            
            
            **(23**
            **)**
            
            (1
            )Minimum
                pension liability adjustment (net of tax benefit of $-and $45, respectively)
            
            
            **-**
            
            
            (70
            )Other
                (net of tax expense of $-and $2, respectively)
            
            
            **-**
            
            
            3Other
                comprehensive income (loss)
            
            
            **8**
            
            
            (48
            )Comprehensive
                income
            
            **$**
            **325**
            
            $
            494





PEC


Three
                Months Ended September 30,(in
                millions)
            
            
            **2006**
            
            
            2005Net
                income
            
            **$**
            **189**
            
            $
            184Other
                comprehensive income (loss)Changes
                in net unrealized gains on cash flow hedges (net of taxexpense
                of $-)
            
            
            **1**
            
            
            -Minimum
                pension liability adjustment (net of tax benefit of $-and $35, respectively)
            
            
            **-**
            
            
            (55
            )Other
                (net of tax expense of $-and $1, respectively)
            
            
            **-**
            
            
            2Other
                comprehensive income (loss)
            
            
            **1**
            
            
            (53
            )Comprehensive
                income
            
            **$**
            **190**
            
            $
            131





Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005Net
                income
            
            **$**
            **351**
            
            $
            367Other
                comprehensive (loss) incomeChanges
                in net unrealized (losses) gains on cash flow hedges (net of tax(benefit)
                expense of ($1) and $1, respectively)
            
            
            **(1**
            **)**
            
            2Minimum
                pension liability adjustment (net of tax benefit of $-and $35, respectively)
            
            
            **-**
            
            
            (55
            )Other
                (net of tax expense of $-and $1, respectively)
            
            
            **-**
            
            
            3Other
                comprehensive loss
            
            
            **(1**
            **)**
            
            (50
            )Comprehensive
                income
            
            **$**
            **350**
            
            $
            317





31


PEF


Three
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005Net
                income
            
            **$**
            **125**
            
            $
            151Other
                comprehensive lossChanges
                in net unrealized losses on cash flow hedges (net of taxbenefit
                of $1 and $-,
                respectively)
            
            
            **(2**
            **)**
            
            -Other
                comprehensive loss
            
            
            **(2**
            **)**
            
            -Comprehensive
                income
            
            **$**
            **123**
            
            $
            151





Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005Net
                income
            
            **$**
            **265**
            
            $
            205Other
                comprehensive lossChanges
                in net unrealized losses on cash flow hedges (net of taxbenefit
                of $1 and $-,
                respectively)
            
            
            **(2**
            **)**
            
            -Other
                comprehensive loss
            
            
            **(2**
            **)**
            
            -Comprehensive
                income
            
            **$**
            **263**
            
            $
            205





C.  Common
      Stock




At
      December 31, 2005, we had 500 million shares of common stock authorized under
      our charter, of which approximately 252 million were outstanding. For the three
      months ended September 30, 2006 and 2005, respectively, we issued approximately
      0.3 million shares and 0.4 million shares of common stock resulting in
      approximately $ 13 million
      and $22 million in proceeds, net of purchases of restricted shares, primarily
      to
      meet the requirements of the Progress Energy 401(k) Savings and Stock Ownership
      Plan (401(k) Plan) and the Investor Plus Stock Purchase Plan. For the nine
      months ended September 30, 2006 and 2005, respectively, we issued approximately
      1.7 million shares and 4.4 million shares of common stock resulting in
      approximately $ 73 million
      and $193 million in proceeds, net of purchases of restricted shares. Included
      in
      these amounts were approximately 1.4 million shares and 4.3 million shares
      for
      net proceeds of approximately $58 million and $187 million, respectively, to
      meet the requirements of the 401(k) Plan and the Investor Plus Stock Purchase
      Plan. At December 31, 2005, we had approximately 58 million unissued shares
      of
      common stock reserved, primarily to satisfy the requirements of our stock plans.
      In 2002, the board of directors authorized meeting the requirements of the
      401(k) Plan and the Investor Plus Stock Purchase Plan with original issue
      shares.




D.  Stock-Based
      Compensation




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




Progress
      Energy




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


32





(in
                millions except per share data)Net
                income, as reported
            
            $
            542Deduct:
                Total stock option expense determined under fairvalue
                method for all awards, net of related tax effects
            
            
            2Pro
                forma net income
            
            $
            540Earnings
                per shareBasic
                - as reported
            
            $
            2.20Basic
                - pro forma
            
            $
            2.19Diluted
                - as reported
            
            $
            2.20Diluted
                - pro forma
            
            $
            2.19





PEC




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


(in
                millions)Net
                income, as reported
            
            $
            367Deduct:
                Total stock option expense determined under fairvalue
                method for all awards, net of related tax effects
            
            
            2Pro
                forma net income
            
            $
            365





PEF




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


(in
                millions)Net
                income, as reported
            
            $
            205Deduct:
                Total stock option expense determined under fairvalue
                method for all awards, net of related tax effects
            
            
            1Pro
                forma net income
            
            $
            204





6.  GOODWILL
      AND OTHER INTANGIBLE ASSETS




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




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




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




33


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





(a) Goodwill
      assigned to PEC and PEF is recorded in our Corporate and Other business
      segment.





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


**September
                30, 2006**
            
            December
                31, 2005(in
                millions)
            
            **Gross
                Carrying Amount**
            
            **Accumulated
                Amortization**
            
            Gross
                Carrying Amount
            
            Accumulated
                AmortizationSynthetic
                fuel intangibles
            
            **$**
            **107**
            
            **$**
            **(107**
            **)**
            $
            134
            
            $
            (98
            )Power
                agreements acquired
            
            
            **188**
            
            
            **(31**
            **)**
            
            188
            
            
            (19
            )Other
            
            
            **76**
            
            
            **(11**
            **)**
            
            76
            
            
            (12
            )Total
            
            **$**
            **371**
            
            **$**
            **(149**
            **)**
            $
            398
            
            $
            (129
            )





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




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




7.  IMPAIRMENT
      OF LONG-LIVED ASSETS




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




For
      our
      Progress Ventures segment, long-lived asset impairment tests are performed
      at
      the Georgia Region asset group level. We have engaged a strategic advisor to
      help us pursue alternative business strategies related to our CCO business.
      As a
      result of the decision to pursue these strategies, as of September 30, 2006,
      we
      considered the likelihood of disposal of the CCO assets before the end of their
      useful life to be more likely than not. Under SFAS No. 144, the more likely
      than
      not to dispose determination triggered an impairment test of CCO’s intangible
      and




34


long-lived
      assets in the third quarter of 2006. The first step of the impairment test
      was
      based upon undiscounted cash flows using various hold and sale scenarios over
      the expected period of use of the assets, and the results of the test did not
      indicate impairment. At September 30, 2006, the long-lived assets were recorded
      at a net book value of approximately $926 million, including $727 million of
      property, plant and equipment assets and $199 million of intangible assets. As
      we
      continue to evaluate certain strategic business alternatives, we will monitor
      the carrying value of our long-lived assets associated with our Progress
      Ventures operations.




8.  DEBT
      AND CREDIT FACILITIES AND FINANCING ACTIVITIES




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




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




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




On
      March
      31, 2006, Progress Energy, as a well-known seasoned issuer, filed a shelf
      registration statement with the SEC. The registration statement became effective
      upon filing with the SEC and will allow Progress Energy to issue an
      indeterminate number or amount of various securities, including Senior Debt
      Securities, Junior Subordinated Debentures, Common Stock, Preferred Stock,
      Stock
      Purchase Contracts, Stock Purchase Units, and Trust Preferred Securities and
      Guarantees. The board of directors has authorized the issuance and sale of
      up to
      $1 billion aggregate principal amount of various securities off the new shelf
      registration statement, in addition to $679 million of various securities,
      which
      were not sold from our prior shelf registration statement. Accordingly, as
      of
      September 30, 2006, Progress Energy has the authority to issue and sell up
      to
      $1.679 billion aggregate principal amount of various securities.




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




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




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




On
      July
      3, 2006, PEF paid at maturity $45 million of its 6.77% Medium-Term Notes, Series
      B with available cash on hand.




35


On
      November 1, 2006, Progress Capital Holdings, Inc., one of our wholly owned
      subsidiaries, paid at maturity $60 million of its 7.17% Medium-Term Notes with
      available cash on hand.




9.  BENEFIT
      PLANS




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





Progress
      Energy


Pension
                Benefits
            
            Other
                Postretirement BenefitsThree
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Service
                cost
            
            **$**
            **10**
            
            $
            5
            
            **$**
            **2**
            
            $
            -Interest
                cost
            
            
            **30**
            
            
            31
            
            
            **8**
            
            
            9Expected
                return on plan assets
            
            
            **(39**
            **)**
            
            (34
            )
            
            **(2**
            **)**
            
            (1
            )Amortization
                of actuarial loss
            
            
            **5**
            
            
            14
            
            
            -
            
            
            4Other
                amortization, net
            
            
            -
            
            
            -
            
            
            -
            
            
            1Net
                periodic cost
            
            
            **6**
            
            
            16
            
            
            **8**
            
            
            13Additional
                benefit recognition(a)
            
            
            **(4**
            **)**
            
            (3
            )
            
            -
            
            
            -Net
                periodic cost recognized
            
            **$**
            **2**
            
            $
            13
            
            **$**
            **8**
            
            $
            13





Pension
                Benefits
            
            Other
                Postretirement BenefitsNine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Service
                cost
            
            **$**
            **34**
            
            $
            35
            
            **$**
            **6**
            
            $
            6Interest
                cost
            
            
            **88**
            
            
            88
            
            
            **25**
            
            
            25Expected
                return on plan assets
            
            
            **(111**
            **)**
            
            (107
            )
            
            **(4**
            **)**
            
            (4
            )Amortization
                of actuarial loss
            
            
            **23**
            
            
            26
            
            
            **4**
            
            
            6Other
                amortization, net
            
            
            **1**
            
            
            1
            
            
            **1**
            
            
            2Net
                periodic cost
            
            
            **35**
            
            
            43
            
            
            **32**
            
            
            35Additional
                (benefit) cost recognition(a)
            
            
            **(11**
            **)**
            
            (11
            )
            
            **2**
            
            
            1Net
                periodic cost recognized
            
            **$**
            **24**
            
            $
            32
            
            **$**
            **34**
            
            $
            36





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




In
      addition, in the second quarter of 2005, we recorded costs for special
      termination benefits related to our voluntary enhanced retirement program of
      approximately $122 million for pension benefits and $19 million for other
      postretirement benefits. In the third quarter of 2005, we recorded an additional
      $1 million in special termination charges for pension benefits.




36


PEC


Pension
                Benefits
            
            Other
                Postretirement BenefitsThree
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Service
                cost
            
            **$**
            **5**
            
            $
            3
            
            **$**
            **1**
            
            $
            -Interest
                cost
            
            
            **14**
            
            
            13
            
            
            **4**
            
            
            5Expected
                return on plan assets
            
            
            **(16**
            **)**
            
            (14
            )
            
            **(1**
            **)**
            
            (1
            )Amortization
                of actuarial (gain) loss
            
            
            **2**
            
            
            5
            
            
            **(1**
            **)**
            
            3Other
                amortization, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                periodic cost
            
            **$**
            **5**
            
            $
            7
            
            **$**
            **3**
            
            $
            7





Pension
                Benefits
            
            Other
                Postretirement BenefitsNine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Service
                cost
            
            **$**
            **16**
            
            $
            17
            
            **$**
            **3**
            
            $
            3Interest
                cost
            
            
            **39**
            
            
            40
            
            
            **12**
            
            
            13Expected
                return on plan assets
            
            
            **(44**
            **)**
            
            (46
            )
            
            **(3**
            **)**
            
            (3
            )Amortization
                of actuarial loss
            
            
            **8**
            
            
            7
            
            
            **2**
            
            
            3Other
                amortization, net
            
            
            **1**
            
            
            1
            
            
            **1**
            
            
            1Net
                periodic cost
            
            **$**
            **20**
            
            $
            19
            
            **$**
            **15**
            
            $
            17





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




PEF


Pension
                Benefits
            
            Other
                Postretirement BenefitsThree
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Service
                cost
            
            **$**
            **4**
            
            $
            1
            
            **$**
            **1**
            
            $
            -Interest
                cost
            
            
            **12**
            
            
            13
            
            
            **3**
            
            
            3Expected
                return on plan assets
            
            
            **(21**
            **)**
            
            (17
            )
            
            -
            
            
            -Amortization
                of actuarial (gain) loss
            
            
            **(1**
            **)**
            
            4
            
            
            -
            
            
            1Other
                amortization, net
            
            
            -
            
            
            -
            
            
            **1**
            
            
            1Net
                periodic (benefit) cost
            
            **$**
            **(6**
            **)**
            $
            1
            
            **$**
            **5**
            
            $
            5





Pension
                Benefits
            
            Other
                Postretirement BenefitsNine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Service
                cost
            
            **$**
            **12**
            
            $
            12
            
            **$**
            **2**
            
            $
            3Interest
                cost
            
            
            **37**
            
            
            36
            
            
            **10**
            
            
            10Expected
                return on plan assets
            
            
            **(58**
            **)**
            
            (53
            )
            
            **(1**
            **)**
            
            (1
            )Amortization
                of actuarial loss
            
            
            **2**
            
            
            6
            
            
            **1**
            
            
            1Other
                amortization, net
            
            
            **(1**
            **)**
            
            (1
            )
            
            **3**
            
            
            3Net
                periodic (benefit) cost
            
            **$**
            **(8**
            **)**
            $
            -
            
            **$**
            **15**
            
            $
            16





37


In
      addition, in the second quarter of 2005, PEF recorded costs for special
      termination benefits related to the voluntary enhanced retirement program of
      approximately $83 million for pension benefits and $7 million for other
      postretirement benefits. In the third quarter of 2005, PEF recorded an
      additional $1 million in special termination charges for pension
      benefits.




10.  RISK
      MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS




We
      are
      exposed to various risks related to changes in market conditions. We have a
      Risk
      Management Committee comprised of senior executives from various functional
      areas. The Risk Management Committee is responsible for administering risk
      management policies and monitoring compliance with those policies by all
      subsidiaries. Under our risk policy, we may use a variety of instruments,
      including swaps, options and forward contracts, to manage exposure to
      fluctuations in commodity prices and interest rates. Such instruments contain
      credit risk for nonperformance by the counterparty. We minimize such risk by
      performing credit reviews using, among other things, publicly available credit
      ratings of such counterparties. Potential nonperformance by counterparties
      is
      not expected to have a material effect on our financial position or results
      of
      operations. Additionally, in the normal course of business, some of our
      affiliates may enter into hedge transactions with one another, which are
      eliminated in the consolidated financial statements as appropriate. See Note
      18
      to the 2005 Form 10-K. The following discussion excludes commodity derivative
      instruments held by Gas, which was classified as discontinued
      operations.




A.  Commodity
      Derivatives




*GENERAL*




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




In
      2003,
      PEC recorded a $38 million pre-tax ($23 million after-tax) fair value loss
      transition adjustment pursuant to the provisions of FASB Derivatives
      Implementation Group Issue C20, “Interpretation of the Meaning of Not Clearly
      and Closely Related in Paragraph 10(b) regarding Contracts with a Price
      Adjustment Feature” (DIG Issue C20). The related liability is being amortized to
      earnings over the term of the related contract (See Note 12). At September
      30,
      2006 and December 31, 2005, the remaining liability was $15 million and $19
      million, respectively.




*ECONOMIC
      DERIVATIVES*




Derivative
      products, primarily electricity and natural gas contracts, may be entered into
      from time to time for economic hedging purposes. While management believes
      the
      economic hedges mitigate exposures to fluctuations in commodity prices, these
      instruments are not designated as hedges for accounting purposes and are
      monitored consistent with trading positions. We manage open positions according
      to established policies and guidelines that limit our exposure to market risk
      and require daily reporting to management of financial exposures.




For
      the
      three months and nine months ended September 30, 2006, we recorded pre-tax
      losses of $30 million and $39 million, respectively. For the three months and
      nine months ended September 30, 2005, we recorded pre-tax losses of $8 million.
      Gains and losses from such contracts were not material to the Utilities’ results
      of operations for the three months and nine months ended September 30, 2006
      and
      2005. At September 30, 2006, the fair values of these instruments for our
      nonregulated operations were a $12 million short-term derivative asset position
      included in other current assets, a $124 million long-term derivative asset
      position included in other assets and deferred debits, a $27 million short-term
      derivative liability position included in other current liabilities and a $7
      million long-term derivative liability position included in other liabilities
      and deferred credits on the Balance Sheet. We did not have material outstanding
      positions in such contracts at December 31, 2005, other than those at PEF,
      which
      are discussed below. See Cash Flow Hedge discussion below regarding
      dedesignation of derivative contracts covering approximately 95 bcf of natural
      gas. PEC did not have material outstanding positions in such contracts at
      September 30, 2006 or December 31, 2005. PEF did not have material outstanding
      positions in such contracts at September 30, 2006 or December 31, 2005, other
      than those receiving regulatory accounting treatment, as described below.




38


PEF
      has
      derivative instruments related to its exposure to price fluctuations on fuel
      oil
      and natural gas purchases. These instruments receive regulatory accounting
      treatment. Unrealized gains and losses are recorded in regulatory liabilities
      and regulatory assets, respectively, until the contracts are settled. Once
      settled, any realized gains or losses are
      passed through the fuel adjustment clause. At September 30, 2006, the fair
      values of these instruments were a $3 million short-term derivative asset
      position included in other current assets, a $5 million long-term derivative
      asset position included in other assets and deferred debits, a $45 million
      short-term derivative liability position included in other current liabilities
      and a $49 million long-term derivative liability position included in other
      liabilities and deferred credits on the Balance Sheets. At December 31, 2005,
      the fair values of the instruments were a $77 million short-term derivative
      asset position included in other current assets, a $45 million long-term
      derivative asset position included in other assets and deferred debits and
      a $49
      million long-term derivative liability position included in other liabilities
      and deferred credits on the Balance Sheets.




*CASH
      FLOW HEDGES*




We
      designate a portion of commodity derivative instruments as cash flow hedges
      under SFAS No. 133. The objective for holding these instruments is to hedge
      exposure to market risk associated with fluctuations in the price of natural
      gas
      for our forecasted purchases and sales. Realized gains and losses are recorded
      net in operating revenues or operating expenses, as appropriate.




For
      the
      nine months ending September 30, 2006, $7 million in after-tax deferred losses
      were reclassified to earnings in the second quarter due to discontinuance of
      the
      related cash flow hedges in anticipation of the sale of Gas (See Note 3A).
      During the three months ending September 30, 2006, no amount was reclassified
      to
      earnings due to discontinuance of cash flow hedges. Based on the alternative
      business strategies being pursued and our assessment of the likelihood of
      divestiture of CCO assets, management determined, as of July 12, 2006, that
      it
      was no longer probable that the forecasted transactions underlying certain
      derivative contracts covering approximately 95 bcf of natural gas would be
      fulfilled. Therefore, these contracts were no longer treated as cash flow
      hedges, and were dedesignated. Beginning July 12, 2006, cash flow hedge
      accounting was discontinued. Unrealized after-tax gains on these contracts
      recorded in accumulated other comprehensive income/(loss) prior to July 12,
      2006
      have not been reclassified to earnings. However, if the disposition status
      of
      the assets increases to probable then we will evaluate whether the unrealized
      gains will be reclassified to earnings. The ineffective portion of commodity
      cash flow hedges for the three months and nine months ended September 30, 2006
      and 2005, was not material to our or the Utilities’ results of
      operations.




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


**September
                30, 2006**
            
            December
                31, 2005(in
                millions)
            
            **Progress
                Energy**
            
            **PEC**
            
            **PEF**
            
            Progress
                Energy
            
            PEC
            
            PEFFair
                value of assets
            
            **$**
            **3**
            
            **$**
            **3**
            
            **$**
            **-**
            
            $
            170
            
            $
            7
            
            $
            -Fair
                value of liabilities
            
            
            **(2**
            **)**
            
            **-**
            
            
            **-**
            
            
            (58
            )
            
            (4
            )
            
            -Fair
                value, net
            
            **$**
            **1**
            
            **$**
            **3**
            
            **$**
            **-**
            
            $
            112
            
            $
            3
            
            $
            -





39


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


Maximum
                Term(a)
            
            Accumulated
                Other Comprehensive Income/(Loss), net of tax(b)
            
            Portion
                Expected to be Reclassified to Earnings during the Next 12
                Months(c)(term
                in years/ dollars in millions )
            
            Progress
                Energy
            
            PEC
            
            PEF
            
            Progress
                Energy
            
            PEC
            
            PEF
            
            Progress
                Energy
            
            PEC
            
            PEFCommodity
                cash flow hedges
            
            
            Less
              than
                1
            
            
            Less
                than 1
            
            
            -
            
            $
            77
            
            $
            2
            
            $
            -
            
            $
            1
            
            $
            2
            
            $
            -





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


(b)
            Includes
                amounts related to dedesignated and terminated
                hedges.


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





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




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




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




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


**September
                30, 2006**
            
            December
                31, 2005(in
                millions)
            
            **Progress
                Energy**
            
            **PEC**
            
            **PEF**
            
            Progress
                Energy
            
            PEC
            
            PEFInterest
                rate cash flow hedges
            
            **$**
            **(4**
            **)**
            **$**
            **(2**
            **)**
            **$**
            **(2**
            **)**
            $
            1
            
            $
            -
            
            $
            -Interest
                rate fair value hedges
            
            **$**
            **(3**
            **)**
            **$**
            **-**
            
            **$**
            **-**
            
            $
            (2
            )
            $
            -
            
            $
            -





*CASH
      FLOW HEDGES*




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




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


Maximum
                Term
            
            Accumulated
                Other Comprehensive Income/ (Loss), net of Tax(a)
            
            Portion
                Expected to be Reclassified to Earnings during the Next 12 Months(term
                in years/ dollars in millions)
            
            Progress
                Energy
            
            PEC
            
            PEF
            
            Progress
                Energy
            
            PEC
            
            PEF
            
            Progress
                Energy
            
            PEC
            
            PEFInterest
                rate cash flow hedges
            
            
            1
            
            
            1
            
            
            1
            
            $
            (15
            )
            $
            (6
            )
            $
            (2
            )
            $
            (2
            )
            $
            (1
            )
            $
            -





(a)
            Includes
                amounts related to terminated
                hedges.





40


PEC
      entered into a $50 million forward starting swap on June 2, 2006, and PEF
      entered into a $50 million forward starting swap on June 6, 2006, to mitigate
      exposure to interest rate risk on their respective anticipated fixed rate debt
      issuances in 2007. These swaps were designated as cash flow hedges as of July
      1,
      2006.




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




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




*FAIR
      VALUE HEDGES*




For
      interest rate fair value hedges, the change in the fair value of the hedging
      derivative is recorded in net interest charges and is offset by the change
      in
      the fair value of the hedged item. At September  30,
      2006,
      and December 31,




2005,
      we
      had $150 million notional of interest rate fair value hedges and the Utilities
      had no open interest rate fair value hedges.




11.  FINANCIAL
      INFORMATION BY BUSINESS SEGMENT




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




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




Our
      Progress Ventures segment is primarily engaged in nonregulated electric
      generation operations and energy marketing activities.




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




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




Prior
      to
      2006, Gas, DeSoto and Rowan were included within the Progress Ventures segment
      and PT LLC was included within the Corporate and Other segment. In connection
      with their divestitures (See Notes 3A, 3B and 3C, respectively), the operations
      of (i) Gas (ii) DeSoto and Rowan and (iii) PT LLC were reclassified to
      discontinued operations in the third, second and first quarters of 2006,
      respectively, and therefore are not included in the results from continuing
      operations during the periods reported. During the fourth quarter of 2005,
      we
      reclassified our coal mining operations as discontinued operations (See Note
      3E). Operational results and assets of discontinued operations are not included
      in the table presented below. For comparative purposes, the prior year results
      have been restated to conform to the current segment presentation. The cost
      management initiative charges incurred in 2005 resulted from a workforce
      restructuring and voluntary enhanced retirement program that was approved in
      February 2005 and concluded in December 2005. The following information is
      for
      the three months and nine months ended September 30:


41





Income
                (loss)Revenues
            
            Cost
            
            from
            
            Assets
                of(in
                millions)
            
            Unaffiliated
            
            Intersegment
            
            Total
            
            Management
                Initiative
            
            Continuing
                Operations
            
            Continuing
                Operations**Three
                Months Ended September 30,****2006****PEC**
            
            **$**
            **1,200**
            
            **$**
            **-**
            
            **$**
            **1,200**
            
            **$**
            **-**
            
            **$**
            **188**
            
            **$**
            **11,616****PEF**
            
            
            **1,399**
            
            
            **-**
            
            
            **1,399**
            
            
            **-**
            
            
            **125**
            
            
            **8,353****Progress
                Ventures**
            
            
            **137**
            
            
            **-**
            
            
            **137**
            
            
            **-**
            
            
            **(40**
            **)**
            
            **1,131****Coal
                and Synthetic Fuels**
            
            
            **177**
            
            
            **88**
            
            
            **265**
            
            
            **-**
            
            
            **9**
            
            
            **248****Corporate
                and Other**
            
            
            **-**
            
            
            **97**
            
            
            **97**
            
            
            **-**
            
            
            **(39**
            **)**
            
            **17,558****Eliminations**
            
            
            **-**
            
            
            **(185**
            **)**
            
            **(185**
            **)**
            
            **-**
            
            
            **-**
            
            
            **(13,233**
            **)****Totals**
            
            **$**
            **2,913**
            
            **$**
            **-**
            
            **$**
            **2,913**
            
            **$**
            **-**
            
            **$**
            **243**
            
            **$**
            **25,673**Three
                Months EndedSeptember 30, 2005PEC
            
            $
            1,185
            
            $
            -
            
            $
            1,185
            
            $
            -
            
            $
            183PEF
            
            
            1,227
            
            
            -
            
            
            1,227
            
            
            1
            
            
            151Progress
                Ventures
            
            
            210
            
            
            -
            
            
            210
            
            
            -
            
            
            (22
            )Coal
                and Synthetic Fuels
            
            
            332
            
            
            110
            
            
            442
            
            
            -
            
            
            81Corporate
                and Other
            
            
            -
            
            
            102
            
            
            102
            
            
            -
            
            
            40Eliminations
            
            
            -
            
            
            (212
            )
            
            (212
            )
            
            -
            
            
            **-**Totals
            
            $
            2,954
            
            $
            -
            
            $
            2,954
            
            $
            1
            
            $
            433





Income
                (loss)Revenues
            
            Cost
            
            from
            
            Assets
                of(in
                millions)
            
            Unaffiliated
            
            Intersegment
            
            Total
            
            Management
                Initiative
            
            Continuing
                Operations
            
            Continuing
                Operations**Nine
                Months Ended September 30,****2006****PEC**
            
            **$**
            **3,113**
            
            **$**
            **-**
            
            **$**
            **3,113**
            
            **$**
            **-**
            
            **$**
            **349**
            
            **$**
            **11,616****PEF**
            
            
            **3,553**
            
            
            **-**
            
            
            **3,553**
            
            
            **-**
            
            
            **264**
            
            
            **8,353****Progress
                Ventures**
            
            
            **422**
            
            
            **-**
            
            
            **422**
            
            
            **-**
            
            
            **(111**
            **)**
            
            **1,131****Coal
                and Synthetic Fuels**
            
            
            **631**
            
            
            **250**
            
            
            **881**
            
            
            **-**
            
            
            **(75**
            **)**
            
            **248****Corporate
                and Other**
            
            
            **-**
            
            
            **289**
            
            
            **289**
            
            
            **-**
            
            
            **(154**
            **)**
            
            **17,558****Eliminations**
            
            
            **-**
            
            
            **(539**
            **)**
            
            **(539**
            **)**
            
            **-**
            
            
            **-**
            
            
            **(13,233**
            **)****Totals**
            
            **$**
            **7,719**
            
            **$**
            **-**
            
            **$**
            **7,719**
            
            **$**
            **-**
            
            **$**
            **273**
            
            **$**
            **25,673**NineMonths Ended September 30, 2005PEC
            
            $
            2,980
            
            $
            -
            
            $
            2,980
            
            $
            60
            
            $
            365PEF
            
            
            2,983
            
            
            -
            
            
            2,983
            
            
            108
            
            
            204Progress
                Ventures
            
            
            404
            
            
            -
            
            
            404
            
            
            2
            
            
            (34
            )Coal
                and Synthetic Fuels
            
            
            910
            
            
            295
            
            
            1,205
            
            
            6
            
            
            103Corporate
                and Other
            
            
            -
            
            
            326
            
            
            326
            
            
            1
            
            
            (117
            )Eliminations
            
            
            -
            
            
            (621
            )
            
            (621
            )
            
            -
            
            
            -Totals
            
            $
            7,277
            
            $
            -
            
            $
            7,277
            
            $
            177
            
            $
            521





12.  OTHER
      INCOME AND OTHER EXPENSE




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




42


Progress
      Energy


Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Other
                incomeNonregulated
                energy and delivery services income
            
            **$**
            **4**
            
            $
            3
            
            **$**
            **27**
            
            $
            20DIG
                Issue C20 amortization (See Note 10)
            
            
            **2**
            
            
            3
            
            
            **4**
            
            
            6CVOs
                unrealized gain
            
            
            -
            
            
            4
            
            
            -
            
            
            4Gain
                on sale of Level 3 stock(a)
            
            
            -
            
            
            -
            
            
            **32**
            
            
            -Investment
                gains
            
            
            **1**
            
            
            1
            
            
            **3**
            
            
            2AFUDC
                equity
            
            
            **6**
            
            
            5
            
            
            **13**
            
            
            14Income
                from equity investments
            
            
            -
            
            
            4
            
            
            -
            
            
            8Other
            
            
            **5**
            
            
            3
            
            
            **16**
            
            
            15Total
                other income
            
            
            **18**
            
            
            23
            
            
            **95**
            
            
            69Other
                expenseNonregulated
                energy and delivery services expenses
            
            
            **7**
            
            
            7
            
            
            **22**
            
            
            17Donations
            
            
            **3**
            
            
            3
            
            
            **15**
            
            
            14CVOs
                unrealized loss
            
            
            **3**
            
            
            -
            
            
            **25**
            
            
            -Loss
                from equity investments
            
            
            **3**
            
            
            5
            
            
            **6**
            
            
            14FERC
                audit settlement
            
            
            -
            
            
            -
            
            
            -
            
            
            7Indemnification
                liability (See Note 13)
            
            
            **8**
            
            
            -
            
            
            **13**
            
            
            -Other
            
            
            **3**
            
            
            4
            
            
            **15**
            
            
            17Total
                other expense
            
            
            **27**
            
            
            19
            
            
            **96**
            
            
            69Other,
                net - Progress Energy
            
            **$**
            **(9**
            **)**
            $
            4
            
            **$**
            **(1**
            **)**
            $
            -





(a)
            Other
                income includes gains of $32 million for the nine months ended September
                30, 2006 from the sale of approximately 20 million shares of Level
                3 stock
                received as part of the sale of our interest in PT LLC (See Note
                3C).
                These gains are prior to the consideration of minority
                interest.




PEC


Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Other
                incomeNonregulated
                energy and delivery services income
            
            **$**
            **(2**
            **)**
            $
            (2
            )
            **$**
            **8**
            
            $
            7DIG
                Issue C20 amortization (See Note 10)
            
            
            **2**
            
            
            3
            
            
            **4**
            
            
            6AFUDC
                equity
            
            
            -
            
            
            1
            
            
            **2**
            
            
            3Income
                from equity investments
            
            
            -
            
            
            1
            
            
            -
            
            
            -Other
            
            
            **2**
            
            
            2
            
            
            **6**
            
            
            6Total
                other income
            
            
            **2**
            
            
            5
            
            
            **20**
            
            
            22Other
                expenseNonregulated
                energy and delivery services expenses
            
            
            **2**
            
            
            3
            
            
            **6**
            
            
            7Donations
            
            
            **1**
            
            
            1
            
            
            **8**
            
            
            6Loss
                from equity investments
            
            
            -
            
            
            -
            
            
            **1**
            
            
            -FERC
                audit settlement
            
            
            -
            
            
            -
            
            
            -
            
            
            4Indemnification
                liability (See Note 13)
            
            
            **8**
            
            
            -
            
            
            **13**
            
            
            -Other
            
            
            **1**
            
            
            4
            
            
            **4**
            
            
            9Total
                other expense
            
            
            **12**
            
            
            8
            
            
            **32**
            
            
            26Other,
                net - PEC
            
            **$**
            **(10**
            **)**
            $
            (
                3
            )
            **$**
            **(12**
            **)**
            $
            (4
            )





43


PEF


Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Other
                incomeNonregulated
                energy and delivery services income
            
            **$**
            **6**
            
            $
            5
            
            **$**
            **19**
            
            $
            14AFUDC
                equity
            
            
            **6**
            
            
            4
            
            
            **11**
            
            
            11Investment
                gains
            
            
            -
            
            
            1
            
            
            **1**
            
            
            2Other
            
            
            -
            
            
            -
            
            
            **1**
            
            
            -Total
                other income
            
            
            **12**
            
            
            10
            
            
            **32**
            
            
            27Other
                expenseNonregulated
                energy and delivery services expenses
            
            
            **5**
            
            
            4
            
            
            **15**
            
            
            9Donations
            
            
            **1**
            
            
            2
            
            
            **7**
            
            
            8Loss
                from equity investments
            
            
            -
            
            
            -
            
            
            **1**
            
            
            -FERC
                audit settlement
            
            
            -
            
            
            -
            
            
            -
            
            
            3Other
            
            
            -
            
            
            -
            
            
            **1**
            
            
            1Total
                other expense
            
            
            **6**
            
            
            6
            
            
            **24**
            
            
            21Other,
                net - PEF
            
            **$**
            **6**
            
            $
            4
            
            **$**
            **8**
            
            $
            6





13.  ENVIRONMENTAL
      MATTERS




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




A.  Hazardous
      and Solid Waste Management




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




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




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




44


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


**Accruals
                for Environmental Remediation Expenses**
              (in
                millions)
            
            **September
                30, 2006**
            
            December
                31, 2005PECMGP
                and other sites(a)
            
            **$**
            **23**
            
            $
            7PEFRemediation
                of distribution and substation transformers
            
            
            **48**
            
            
            20MGP
                and other sites
            
            
            **18**
            
            
            18Total
                PEF environmental remediation accruals(b)
            
            
            **66**
            
            
            38Progress
                Energy nonregulated operations
            
            
            **3**
            
            
            3Total
                Progress Energy environmental remediation accruals
            
            **$**
            **92**
            
            $
            48





(a)
            Expected
                to be paid out over one to five years.


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





Progress
      Energy





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





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




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




PEC




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




Including
      the Ward Transformer site and MGP sites discussed below, for the three months
      ended September 30, 2006, PEC made no additional accruals and spent
      approximately $1 million, and for the nine months ended September 30, 2006,
      PEC
      accrued approximately $21 million and spent approximately $5 million related
      to
      environmental remediation. For the three months and nine months ended September
      30, 2005, PEC accrued approximately $3 million and spent approximately $1
      million and $4 million, respectively, related to environmental remediation.
      PEC
      has received orders from the NCUC and SCPSC to defer and amortize certain
      environmental remediation expenses (See Note 4A).




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




During
      the fourth quarter of 2004, the EPA advised PEC that it had been identified
      as a
      PRP at the Ward Transformer site located in Raleigh, N.C. The EPA offered PEC
      and a number of other PRPs the opportunity to negotiate cleanup of the site
      and
      reimbursement to the EPA for EPA’s past expenditures in addressing conditions at




45


the
      site.
      In September 2005, PEC and other PRPs signed a settlement agreement,
      which requires
      the participating PRPs to remediate the site. In 2005, PEC
      accrued approximately $3 million for its portion of the EPA’s estimated
      remediation costs and the EPA's
      past costs. In
      March
      2006, based upon continuing assessment work performed at the site, PEC recorded
      an additional $9 million accrual for its portion of the estimated remediation
      costs. At September 30, 2006, to date expenditures for the site were
      approximately $3 million. Actual experience may differ from current estimates
      and it is probable that estimates will continue to change in the future. PEC
      plans to file claims with respect to this site. The outcome of this matter
      cannot be predicted.




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




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




PEF




PEF
      has
      received approval from the FPSC for recovery of costs associated with the
      remediation of distribution and substation transformers through the
      Environmental Cost Recovery Clause (ECRC). Under agreements with the Florida
      Department of Environmental Protection (FDEP), PEF is in the process of
      examining distribution transformer sites and substation sites for mineral
      oil-impacted soil remediation caused by equipment integrity issues. PEF has
      reviewed a number of distribution transformer sites and all substation sites.
      Based on changes to the estimated time frame for review of distribution
      transformer sites, PEF currently expects to have completed its review by the
      end
      of 2008. Should further sites be identified, PEF believes that any estimated
      costs would also be recovered through the ECRC. For the three months and nine
      months ended September 30, 2006, PEF accrued approximately $1 million and $40
      million, respectively, due to additional sites expected to require remediation
      and spent approximately $6 million and $12 million, respectively, related to
      the
      remediation of transformers. For the three months and nine months ended
      September 30, 2005, PEF accrued approximately $1 million and spent approximately
      $2 million and $7 million, respectively, related to the remediation of
      transformer sites. PEF records a regulatory asset for the probable recovery
      of
      these costs through the ECRC.




The
      amounts for MGP and other sites, in the table above, relate to two former MGP
      sites and other sites associated with PEF that have required or are anticipated
      to require investigation and/or remediation. The amounts include approximately
      $12 million in insurance claim settlement proceeds received in 2004, which
      are
      restricted for use in addressing costs associated with environmental
      liabilities. For the three months and nine months ended September 30, 2006
      and
      2005, accruals, expenditures and insurance proceeds received were not material
      to PEF’s results of operations, financial position, or cash flows.




B.  Air
      Quality and Water Quality




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




46


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




Progress
      Energy


**Air
                and Water Quality Estimated Required Environmental Expenditures**(in
                millions)
            
            Estimated
                Timetable
            
            Total
                Estimated Expenditures
            
            Cumulative
                Spent through
              September
                30, 2006NOx
                SIP Call
            
            
            2002-2006
            
            $
            355
            
            $
            346Clean
                Smokestacks Act
            
            
            2002-2013
            
            
            1,000
                - 1,400
            
            
            466CAIR/CAMR/CAVR(a)
            
            
            2005-2018
            
            
            970
                - 1,930
            
            
            13Total
                air quality
            
            
            
            
            
            2,325
                - 3,685
            
            
            825Clean
                Water Act Section 316(b)
            
            
            2005-2010
            
            
            60
                - 90
            
            
            1North
                Carolina Groundwater Standard(b)
            
            
            
            
            
            -
            
            
            -Total
                water quality
            
            
            
            
            
            60
                - 90
            
            
            1Total
                air and water quality
            
            
            
            
            $
            2,385
                - $3,775
            
            $
            826





PEC


**Air
                and Water Quality Estimated Required Environmental Expenditures**(in
                millions)
            
            Estimated
                Timetable
            
            Total
                Estimated Expenditures
            
            Cumulative
                Spent through
              September
                30, 2006NOx
                SIP Call
            
            
            2002-2006
            
            $
            355
            
            $
            346Clean
                Smokestacks Act
            
            
            2002-2013
            
            
            1,000
                - 1,400
            
            
            466CAIR/CAMR/CAVR
            
            
            2005-2018
            
            
            170
                - 330
            
            
            1Total
                air quality
            
            
            
            
            
            1,525
                - 2,085
            
            
            813Clean
                Water Act Section 316(b)
            
            
            2005-2010
            
            
            5
                - 10
            
            
            -North
                Carolina Groundwater Standard(b)
            
            
            
            
            
            -
            
            
            -Total
                water quality
            
            
            
            
            
            5
                - 10
            
            
            -Total
                air and water quality
            
            
            
            
            $
            1,530
                - $2,095
            
            $
            813





PEF


**Air
                and Water Quality Estimated Required Environmental Expenditures**(in
                millions)
            
            Estimated
                Timetable
            
            Total
                Estimated Expenditures
            
            Cumulative
                Spent through
              September
                30, 2006CAIR/CAMR/CAVR(a)
            
            
            2005-2018
            
            $
            800
                - $1,600
            
            $
            12Clean
                Water Act Section 316(b)
            
            
            2005-2010
            
            
            55
                - 80
            
            
            1Total
                air and water quality
            
            
            
            
            $
            855
                - $1,680
            
            $
            13





(a)
            Includes
                current estimates for the series of compliance alternatives filed
                by PEF
                with the FPSC as discussed below.


(b)
            Compliance
                plans will be determined upon finalization of the changes expected
                to be
                proposed to the North Carolina ground water quality standard for
                arsenic.





*NEW
      SOURCE REVIEW*




The
      EPA
      is conducting an enforcement initiative related to a number of coal-fired
      utility power plants in an effort to determine whether changes at those
      facilities were subject to New Source Review (NSR) requirements or New Source
      Performance Standards under the Clean Air Act. We were asked to provide
      information to the EPA as part of this initiative and cooperated in supplying
      the requested information. The outcome of this matter cannot be




47


predicted.
      However, the EPA has initiated civil enforcement actions against unaffiliated
      utilities as part of this initiative. Some of these actions resulted in
      settlement agreements requiring expenditures by these unaffiliated utilities
      in
      excess of $1.0 billion. These settlement agreements have generally called for
      expenditures to be made over extended time periods, and some of the companies
      may seek recovery of the related costs through rate adjustments or similar
      mechanisms. The U.S. Supreme Court has heard arguments, but not yet issued
      a
      ruling, related to an appeal of a decision issued by the U.S. Court of Appeals
      for the Fourth Circuit, in a case involving an unaffiliated utility, holding
      that NSR applies to projects that result in an increase in maximum hourly
      emissions.




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




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




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




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




*CLEAN
      SMOKESTACKS ACT*




In
      June
      2002, the Clean Smokestacks Act was enacted in North Carolina requiring the
      state's electric utilities to reduce the emissions of NOx and SO 2 from
      their North Carolina coal-fired power plants in phases by 2013. PEC currently
      has approximately 5,100 MW of coal-fired generation capacity in North Carolina
      that is affected by the Clean Smokestacks Act. To meet SO 2 emission
      targets, PEC plans to install devices that neutralize sulfur compounds formed
      during coal combustion (scrubbers) on some of its coal-fired units. These
      devices combine the sulfur in gaseous emissions with other chemicals to form
      inert compounds, such as gypsum, that are then removed. In March 2006, PEC
      filed
      its annual estimate with the NCUC of the total capital expenditures to meet
      emission targets under the Clean Smokestacks Act of approximately $1.1 billion
      to $1.4 billion by the end of 2013. Currently, the estimate is $1.0 billion
      to
      $1.4 billion. The increase in estimated total capital expenditures from the
      original 2002 estimate of $813 million is primarily due to the higher cost
      and
      revised quantities of construction materials, such as concrete and steel,
      refinement of cost and scope estimates for the current projects, and increases
      in the estimated inflation factor applied to future project costs. We are
      continuing to evaluate various design, technology, and new generation options
      that could further change expenditures required by the Clean Smokestacks
      Act.




The
      Clean
      Smokestacks Act also freezes the state’s utilities' base rates for five years,
      which ends in 2007, unless there are extraordinary events beyond the control
      of
      the utilities or unless the utilities persistently earn a return substantially
      in excess of the rate of return established and found reasonable by the NCUC
      in
      the utilities' last general rate case. The Clean Smokestacks Act requires PEC
      to
      amortize $569 million, representing 70 percent of the original cost estimate
      of
      $813 million, during the five-year rate freeze period. PEC recognized
      amortization of $21 million and $65 million, respectively, for the three months
      and nine months ended September 30, 2006, and has recognized $460 million in
      cumulative amortization through September 30, 2006. PEC recognized amortization
      of $26 million and $80 million, respectively, for the three months and nine
      months ended September 30, 2005. The remaining amortization requirement of
      $109
      million will be recorded over the 15-month period ending December 31, 2007.
      The
      Clean Smokestacks Act permits PEC the flexibility to vary the amortization
      schedule for recording of the compliance costs from none up to $174 million
      per
      year. The NCUC will hold a hearing prior to December 31, 2007, to determine
      cost
      recovery amounts for 2008 and future periods.




Two
      of
      PEC’s largest coal-fired generation plants (the Roxboro No. 4 and Mayo Units)
      impacted by the Clean Smokestacks Act are jointly owned. Pursuant to joint
      ownership agreements, the joint owners are required to pay a




48


portion
      of the costs of owning and operating these plants. PEC has determined that
      the
      most cost effective Clean Smokestacks Act compliance strategy is to maximize
      the
      SO 2 removal
      from its larger coal-fired units, including Roxboro No. 4 and Mayo, so as to
      avoid the installation of expensive emission controls on its smaller coal-fired
      units. In order to address the joint owner's concerns that such a compliance
      strategy would result in a disproportionate share of the cost of compliance
      on
      the jointly owned units, PEC entered into an agreement with the joint owner
      to
      limit their aggregate costs associated with capital expenditures to comply
      with
      the Clean Smokestacks Act to approximately $38 million. PEC records a related
      liability for the joint owner's share of estimated costs in excess of the
      contract amount. At December 31, 2005, the amount of the liability was $16
      million and increased to $29 million at September 30, 2006, based upon the
      respective current estimates for Clean Smokestacks Act compliance. Because
      PEC
      has taken a system-wide compliance approach, its North Carolina retail customers
      have significantly benefited from the strategy of focusing emission reduction
      efforts on the jointly owned units, and therefore, PEC believes that any costs
      in excess of the joint owner’s share should be recovered from North Carolina
      retail customers, consistent with other capital expenditures associated with
      PEC’s compliance with the Clean Smokestacks Act. PEC has notified the NCUC of
      its intent to record these estimated excess costs as part of the $569 million
      amortization required to be recorded by December 31, 2007. The outcome of this
      matter cannot be predicted .




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




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




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




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




On
      March
      15, 2005, the EPA finalized two separate but related rules: the CAMR that sets
      emissions limits to be met in two phases beginning in 2010 and 2018,
      respectively, and encourages a cap and trade approach to achieving those caps,
      and a de-listing rule that eliminated any requirement to pursue a maximum
      achievable control technology (MACT) approach for limiting mercury emissions
      from coal-fired power plants. NOx and SO 2 controls
      also are effective in reducing mercury emissions. However, according to the
      EPA
      the second phase cap reflects a level of mercury emissions reduction that
      exceeds the level that would be achieved solely as a co-benefit of controlling
      NOx and SO 2 under
      CAIR. States are required to adopt mercury rules implementing the CAMR by
      November 17, 2006, which must be reviewed and approved by the EPA. At September
      30, 2006, of the three states in which the Utilities operate, Florida and North
      Carolina had formally proposed mercury regulations. **** North
      Carolina's proposed rule would adopt the EPA’s cap-and-trade approach and would
      require the addition of mercury controls on certain of PEC's North Carolina
      units that do not have scrubbers by 2023. On June 29, 2006, the Florida
      Environmental Regulation Commission adopted the Florida CAMR. The Florida rule
      adopts the EPA’s cap-and-trade approach with changes to the EPA’s mercury
      allowance allocations in the rule’s first phase. **** Formal
      rulemaking in South Carolina is expected to occur in the fall of 2006. The
      outcome of this matter cannot be




49


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




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




PEC
      and
      PEF are each developing an integrated compliance strategy to meet all the
      requirements of the CAIR, CAMR and CAVR. We are evaluating various design,
      technology, and new generation options that could change PEC’s and PEF’s costs
      required by the CAIR, CAMR and CAVR.




On
      October 14, 2005, the FPSC approved PEF’s petition for the recovery of costs
      associated with the development and implementation of an integrated strategy
      to
      comply with the CAIR, CAMR and CAVR through the ECRC. On March 31, 2006, PEF
      filed a series of compliance alternatives with the FPSC to meet these federal
      environmental rules. At the time, PEF’s recommended proposed compliance plan
      included approximately $740 million of estimated capital costs expected to
      be
      spent through 2016, to plan, design, build and install pollution control
      equipment at our Anclote and Crystal River plants. On October 27, 2006, PEF
      filed supplemental testimony to inform the FPSC that estimated capital costs
      for
      the series of compliance alternatives are likely to increase by approximately
      25
      percent to 30 percent from the estimates filed in March 2006, primarily due
      to
      the higher cost of labor and construction materials, such as concrete and steel,
      and refinement of cost and scope estimates for the current projects. We expect
      this matter to be addressed during the FPSC hearings in November 2006, but
      cannot predict whether this proposed compliance plan, or another compliance
      plan, will be approved by the FPSC. These costs may continue to change depending
      upon the results of the engineering and strategy development work, increases
      in
      the underlying material, labor and equipment costs, and FPSC approval of the
      final compliance plan. Subsequent rule interpretations, equipment availability,
      or the unexpected acceleration of the initial NOx or other compliance dates,
      among other things, could require acceleration of some projects.




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




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




*NATIONAL
      AMBIENT AIR QUALITY STANDARDS*




On
      December 21, 2005, the EPA announced proposed changes to the National Ambient
      Air Quality Standards (NAAQS) for particulate matter. The EPA proposed to lower
      the 24-hour standard for particulate matter less than 2.5 microns in diameter
      (PM 2.5) from 65 micrograms per cubic meter to 35 micrograms per cubic meter.
      In
      addition, the EPA proposed to establish a new 24-hour standard of 70 micrograms
      per cubic meter for particulate matter that is between 2.5 and 10 microns in
      diameter (PM 2.5-10). The EPA also proposed to eliminate the current standards
      for particulate matter less than 10 microns in diameter (PM 10). On September
      20, 2006, the EPA




50


announced
      that it is finalizing the PM 2.5 NAAQS as proposed. In addition, EPA decided
      not
      to establish a PM 2.5-10 NAAQS, and it is eliminating the annual PM 10 NAAQS,
      but the EPA is retaining the 24-hour PM 10 NAAQS. These changes are not expected
      to result in any additional nonattainment areas in PEC’s or PEF’s service
      territories.




*WATER
      QUALITY*




1.
      General





As
      a
      result of the operation of certain control equipment needed to address the
      air
      quality issues outlined above, new wastewater streams may be generated at the
      affected facilities. Integration of these new wastewater streams into the
      existing wastewater treatment processes may result in permitting, construction
      and treatment requirements imposed on the Utilities in the immediate and
      extended future. The outcome of this matter cannot be predicted.





2.
      Section 316(b) of the Clean Water Act





Section
      316(b) of the Clean Water Act requires cooling water intake structures to
      reflect the best technology available for minimizing adverse environmental
      impacts. The rule requires us to assess the environmental effect of withdrawal
      of water at our facilities and may require us to install additional intake
      screens or other protective measures. The timing and extent of estimated costs
      may change depending upon the final compliance strategy.





3.
      North
      Carolina Groundwater Standard





On
      September 14, 2006, NCDWQ appeared before the North Carolina Environmental
      Management Commission and recommended the state’s groundwater quality standard
      for arsenic be revised to 0.00002 milligrams/liter. The existing groundwater
      quality standard for arsenic is 0.05 milligrams/liter. The North Carolina
      Environmental Management Commission granted approval for NCDWQ staff to publish
      a notice in the North Carolina Register and schedule public hearings. The
      rulemaking process will require at least six months before the standard may
      be
      changed. Trace amounts of arsenic are commonly present in coal fly ash sluice
      water, coal pile runoff, flue gas desulphurization by-products, and other coal
      combustion by-products. The specific requirements of the rule as finally adopted
      and associated costs, if any, cannot be predicted.





C.  Other
      Environmental Matters




*GLOBAL
      CLIMATE CHANGE*




The
      Kyoto
      Protocol was adopted in 1997 by the United Nations to address global climate
      change by reducing emissions of CO 2 and
      other greenhouse gases. The treaty went into effect on February 16, 2005. The
      United States has not adopted the Kyoto Protocol, and the Bush administration
      has stated it favors voluntary programs. There are proposals to address global
      climate change that would regulate CO 2 and
      other greenhouse gases. Reductions in CO 2 emissions to the levels specified by the Kyoto Protocol and some additional
      proposals could be materially adverse to our financial position or results
      of
      operations if associated costs of control or limitation cannot be recovered
      from
      customers. We have articulated principles that we believe should be incorporated
      into any global climate change policy. While the outcome of this matter cannot
      be predicted, we are taking voluntary action on this important issue as part
      of
      our commitment to environmental stewardship and responsible corporate
      citizenship.




In
      a
      decision issued July 15, 2005, a three-judge panel of the U.S. Court of Appeals
      for the District of Columbia Circuit denied petitions for review filed by
      several states, cities and organizations seeking the regulation by the EPA
      of
      CO 2 emissions from new automobiles under the Clean Air Act. In a 2-1 decision,
      the
      court held that the EPA administrator properly exercised his discretion in
      denying the request for regulation. Officials from five states and the District
      of Columbia asked the full U.S. Court of Appeals for the D.C. Circuit to review
      the decision made by the three-judge panel. The U.S. Court of Appeals denied
      the
      request for rehearing and the petitioners filed a petition for writ of
      certiorari with the U.S. Supreme Court, seeking a review of the decision. On
      June 26, 2006, the U.S. Supreme Court agreed to review the decision. Oral
      argument has been scheduled for November 29, 2006. The outcome of this matter
      cannot be predicted.




In
      2005,
      we initiated a study to assess the impact of constraints on CO 2 and
      other air emissions and on March 27, 2006, we issued our report to shareholders
      for an assessment of global climate change and air quality risks and




51


actions.
      While we participate in the development of a national climate change policy
      framework, we will continue to actively engage others in our region to develop
      consensus-based solutions, as we did with the Clean Smokestacks
      Act.




14.  COMMITMENTS
      AND CONTINGENCIES




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




A.  Guarantees




As
      a part
      of normal business, we enter into various agreements providing future financial
      or performance assurances to third parties, which are outside the scope of
      FASB
      Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for
      Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN No.
      45). Such agreements include guarantees, standby letters of credit and surety
      bonds. At September 30, 2006, we do not believe conditions are likely for
      significant performance under these guarantees. To the extent liabilities are
      incurred as a result of the activities covered by the guarantees, such
      liabilities are included in the accompanying Balance Sheets.




At
      September 30, 2006, we have issued guarantees and indemnifications of certain
      asset performance, legal, tax and environmental matters to third parties,
      including indemnifications made in connection with sales of businesses, and
      for
      timely payment of obligations in support of our nonwholly owned synthetic fuel
      operations. Related to the sales of businesses, the latest notice period extends
      until 2012 for the majority of legal, tax and environmental matters provided
      for
      in the indemnification provisions. Indemnifications for the performance of
      assets extend to 2016. For matters for which we receive timely notice, our
      indemnity obligations may extend beyond the notice period. Certain
      indemnifications have no limitations as to time or maximum potential future
      payments. In 2005, PEC entered into an agreement with the joint owner of certain
      facilities at the Mayo and Roxboro plants to limit their aggregate costs
      associated with capital expenditures to comply with the Clean Smokestacks Act
      and recognized a liability related to this indemnification (See Note 13B).
      PEC’s
      maximum exposure cannot be determined. At September 30, 2006, the maximum
      exposure for guarantees and indemnifications for which a maximum exposure is
      determinable was $208 million, including $32 million at PEF. At September 30,
      2006 and December 31, 2005, we have recorded liabilities related to guarantees
      and indemnifications to third parties of approximately $66 million and $41
      million, respectively. These amounts include $29 million and $16 million,
      respectively, for PEC at September 30, 2006 and December 31, 2005, and $8
      million for PEF at September 30, 2006. PEF had no liabilities related to
      guarantees and indemnifications to third parties at December 31, 2005. As
      current estimates change, it is possible that additional losses related to
      guarantees and indemnifications to third parties, which could be material,
      may
      be recorded in the future.




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




B.  Other
      Commitments and Contingencies




1.  Spent
      Nuclear Fuel Matters




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




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




The
      DOE
      and the Utilities agreed to, and the trial court entered, a stay of proceedings,
      in order to allow for possible efficiencies due to the resolution of legal
      and
      factual issues in previously filed cases in which similar claims are




52


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




In
      July
      2002, Congress passed an override resolution to Nevada’s veto of the DOE’s
      proposal to locate a permanent underground nuclear waste storage facility at
      Yucca Mountain, Nev. In January 2003, the state of Nevada; Clark County, Nev.;
      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. In August
      2005, the EPA issued new proposed standards. The proposed standards include
      a
      1,000,000-year compliance period in the radiation protection standard. Comments
      were due November 21, 2005, and are being reviewed by the EPA. The EPA plans
      to
      issue a new safety standard for the repository by 2007. The DOE originally
      planned to submit a license application to the NRC to construct the Yucca
      Mountain facility by the end of 2004. However, in November 2004, the DOE
      announced it would not submit the license application until mid-2005 or later.
      The DOE did not submit the license application in 2005 and has since reported
      that the license application will not be submitted until after September 2007.
      Congress approved $450 million for fiscal year 2006 for the Yucca Mountain
      project, approximately $201 million less than requested by the DOE. The DOE
      has
      stated that if legislative changes requested by the Bush administration are
      enacted, the repository will be able to accept spent nuclear fuel starting
      in
      2017. The Utilities cannot predict the outcome of this matter.




With
      certain modifications and additional approval by the NRC, including the
      installation of onsite dry storage facilities at Robinson Nuclear Plant
      (Robinson), Brunswick and CR3 ,
      the
      Utilities’ spent nuclear fuel storage facilities will be sufficient to provide
      storage space for spent fuel generated on their respective systems through
      the
      expiration of the operating licenses, including any license extensions, for
      all
      of their nuclear generating units.




2.  Synthetic
      Fuel Matters




On
      May
      15, 2005, the original owners of the Earthco synthetic fuel facilities filed
      suit in New York state court alleging breach of contract against the Progress
      Fuels subsidiaries that purchased the Earthco facilities (Progress Fuels
      Subsidiaries). The plaintiffs also named us as a defendant. The plaintiffs’
position in the lawsuit was that periodic payments otherwise due to them under
      the sales arrangement with the Progress Fuels Subsidiaries were, contrary to
      the
      sales agreement, being escrowed pending the outcome of the Internal Revenue
      Service (IRS) audit of the Earthco facilities. The Progress Fuels Subsidiaries
      believed that the parties’ agreements allowed for the payments to be escrowed in
      such event and also allowed for the use of such escrowed amounts to satisfy
      any
      potential disallowance of tax credits that could have arisen out of such an
      event. The escrowed amount in question was $103 million, which reflected
      periodic payments that would have been paid to the plaintiffs beginning April
      30, 2003 through May 18, 2006. In light of the successful outcome of the IRS
      audit of the Earthco facilities, the parties agreed to resolve the case. The
      Progress Fuels Subsidiaries paid the plaintiffs the funds held in escrow in
      exchange for a release of claims and dismissal of the lawsuit, which occurred
      on
      May 18, 2006. The case is now resolved and dismissed.




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




53


owned
      by
      the Progress Affiliates and an option to purchase additional interests in the
      two synthetic fuel facilities, (2) it is entitled to damages because the
      Progress Affiliates prohibited it from procuring purchasers for the synthetic
      fuel facilities, and (3) it is entitled to immediate payment of tonnage fees
      held in escrow (this claim is identical to the position taken by Earthco as
      described above).




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




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




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




We
      have
      escrowed $42 million that otherwise would have been paid to Global through
      September 30, 2006. These funds are being escrowed on the same basis as the
      funds that were escrowed for the original owners of the Earthco facilities,
      as
      discussed above. We are in discussion with Global regarding the terms under
      which the funds might be released, given the successful resolution of the IRS
      audit of the Earthco facilities.




We
      cannot
      predict the outcome of this matter.




3.  Other
      Litigation Matters




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




15.  CONDENSED
      CONSOLIDATING STATEMENTS




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




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




Presented
      below are the condensed consolidating Statements of Income, Balance Sheets
      and
      Cash Flows as required by Rule 3-10 of Regulation S-X. In these condensed
      consolidating statements, the Parent column includes the financial results
      of
      the parent holding company only. The Subsidiary Guarantor column includes the
      financial results of Florida Progress. The Other column includes the
      consolidated financial results of all other non-guarantor




54


subsidiaries
      and elimination entries for all intercompany transactions. All applicable
      corporate expenses have been allocated appropriately among the guarantor and
      non-guarantor subsidiaries. The
      financial information may not necessarily be indicative of results of operations
      or financial position had the Subsidiary Guarantor or other non-guarantor
      subsidiaries operated as independent entities. The accompanying condensed
      consolidating financial statements have been restated for all periods presented
      to reflect the operations of Gas, the coal mines, PT LLC, DeSoto, Rowan, Dixie
      Fuels and other fuels businesses as discontinued operations as described in
      Note
      3.





Condensed
                Consolidating Statement of Income
              Three
                Months Ended September 30, 2006(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Operating
                revenues**Electric
            
            $
            **−**
            
            $
            1,399
            
            $
            1,200
            
            $
            2,599Diversified
                business
            
            
            **−**
            
            
            175
            
            
            139
            
            
            314**Total
                operating revenues**
            
            
            **−**
            
            
            1,574
            
            
            1,339
            
            
            2,913**Operating
                expenses**UtilityFuel
                used in electric generation
            
            
            **−**
            
            
            538
            
            
            322
            
            
            860Purchased
                power
            
            
            **−**
            
            
            256
            
            
            135
            
            
            391Operation
                and maintenance
            
            
            3
            
            
            171
            
            
            209
            
            
            383Depreciation
                and amortization
            
            
            **−**
            
            
            108
            
            
            135
            
            
            243Taxes
                other than on income
            
            
            **−**
            
            
            89
            
            
            52
            
            
            141Diversified
                businessCost
                of sales
            
            
            **−**
            
            
            187
            
            
            183
            
            
            370Depreciation
                and amortization
            
            
            **−**
            
            
            2
            
            
            10
            
            
            12Other
            
            
            **−**
            
            
            7
            
            
            8
            
            
            15**Total
                operating expenses**
            
            
            3
            
            
            1,358
            
            
            1,054
            
            
            2,415**Operating
                (loss) income**
            
            
            (3
            )
            
            216
            
            
            285
            
            
            498Other
                income (expense), net
            
            
            7
            
            
            9
            
            
            (12
            )
            
            4Interest
                charges, net
            
            
            70
            
            
            47
            
            
            39
            
            
            156**(Loss)
                income from continuing operations before income tax, equity in earnings
                of
                consolidated subsidiaries and minority interest**
            
            
            (66
            )
            
            178
            
            
            234
            
            
            346**Income
                tax (benefit) expense**
            
            
            (14
            )
            
            60
            
            
            60
            
            
            106**Equity
                in earnings of consolidated subsidiaries**
            
            
            371
            
            
            **−**
            
            
            (371
            )
            
            **−****Minority
                interest in subsidiaries’ loss, net of tax**
            
            
            **−**
            
            
            3
            
            
            **−**
            
            
            3**Income
                (loss) from continuing operations**
            
            
            319
            
            
            121
            
            
            (197
            )
            
            243**Discontinued
                operations, net of tax**
            
            
            **−**
            
            
            59
            
            
            17
            
            
            76**Net
                income (loss)**
            
            $
            319
            
            $
            180
            
            $
            (180
            )
            $
            319





55





Condensed
                Consolidating Statement of Income
              Three
                Months Ended September 30, 2005(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Operating
                revenues**Electric
            
            $
            **−**
            
            $
            1,227
            
            $
            1,185
            
            $
            2,412Diversified
                business
            
            
            **−**
            
            
            340
            
            
            202
            
            
            542**Total
                operating revenues**
            
            
            **−**
            
            
            1,567
            
            
            1,387
            
            
            2,954**Operating
                expenses**UtilityFuel
                used in electric generation
            
            
            **−**
            
            
            351
            
            
            282
            
            
            633Purchased
                power
            
            
            **−**
            
            
            270
            
            
            154
            
            
            424Operation
                and maintenance
            
            
            2
            
            
            181
            
            
            225
            
            
            408Depreciation
                and amortization
            
            
            **−**
            
            
            95
            
            
            137
            
            
            232Taxes
                other than on income
            
            
            **−**
            
            
            82
            
            
            49
            
            
            131Other
            
            
            **−**
            
            
            1
            
            
            (8
            )
            
            (7
            )Diversified
                businessCost
                of sales
            
            
            **−**
            
            
            335
            
            
            250
            
            
            585Depreciation
                and amortization
            
            
            **−**
            
            
            5
            
            
            16
            
            
            21Other
            
            
            **−**
            
            
            13
            
            
            4
            
            
            17**Total
                operating expenses**
            
            
            2
            
            
            1,333
            
            
            1,109
            
            
            2,444**Operating
                (loss) income**
            
            
            (2
            )
            
            234
            
            
            278
            
            
            510Other
                income (expense), net
            
            
            15
            
            
            (1
            )
            
            (7
            )
            
            7Interest
                charges, net
            
            
            70
            
            
            36
            
            
            50
            
            
            156**(Loss)
                income from continuing operations before income tax, equity in earnings
                of
                consolidated subsidiaries and minority interest**
            
            
            (57
            )
            
            197
            
            
            221
            
            
            361**Income
                tax benefit**
            
            
            13
            
            
            44
            
            
            8
            
            
            65**Equity
                in earnings of consolidated subsidiaries**
            
            
            494
            
            
            **−**
            
            
            (494
            )
            
            **−****Minority
                interest in subsidiaries’ loss, net of tax**
            
            
            **−**
            
            
            7
            
            
            **−**
            
            
            7**Income
                (loss) from continuing operations**
            
            
            450
            
            
            248
            
            
            (265
            )
            
            433**Discontinued
                operations, net of tax**
            
            
            −
            
            
            9
            
            
            7
            
            
            16**Cumulative
                effect of changes in accounting principles, net of
                tax**
            
            
            −
            
            
            −
            
            
            1
            
            
            1**Net
                income (loss)**
            
            $
            450
            
            $
            257
            
            $
            (257
            )
            $
            450





56





Condensed
                Consolidating Statement of Income
              Nine
                Months Ended September 30, 2006(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Operating
                revenues**Electric
            
            $
            **−**
            
            $
            3,553
            
            $
            3,113
            
            $
            6,666Diversified
                business
            
            
            **−**
            
            
            628
            
            
            425
            
            
            1,053**Total
                operating revenues**
            
            
            **−**
            
            
            4,181
            
            
            3,538
            
            
            7,719**Operating
                expenses**UtilityFuel
                used in electric generation
            
            
            **−**
            
            
            1,379
            
            
            880
            
            
            2,259Purchased
                power
            
            
            **−**
            
            
            601
            
            
            279
            
            
            880Operation
                and maintenance
            
            
            10
            
            
            515
            
            
            691
            
            
            1,216Depreciation
                and amortization
            
            
            **−**
            
            
            301
            
            
            404
            
            
            705Taxes
                other than on income
            
            
            **−**
            
            
            238
            
            
            142
            
            
            380Other
            
            
            **−**
            
            
            (2
            )
            
            **−**
            
            
            (2
            )Diversified
                businessCost
                of sales
            
            
            **−**
            
            
            645
            
            
            499
            
            
            1,144Depreciation
                and amortization
            
            
            **−**
            
            
            11
            
            
            40
            
            
            51Impairment
                of assets
            
            
            **−**
            
            
            44
            
            
            111
            
            
            155Other
            
            
            **−**
            
            
            27
            
            
            28
            
            
            55**Total
                operating expenses**
            
            
            10
            
            
            3,759
            
            
            3,074
            
            
            6,843**Operating
                (loss) income**
            
            
            (10
            )
            
            422
            
            
            464
            
            
            876Other
                income (expense), net
            
            
            9
            
            
            47
            
            
            (20
            )
            
            36Interest
                charges, net
            
            
            216
            
            
            142
            
            
            136
            
            
            494**(Loss)
                income from continuing operations before income tax, equity in earnings
                of
                consolidated subsidiaries and minority interest**
            
            
            (217
            )
            
            327
            
            
            308
            
            
            418**Income
                tax (benefit) expense**
            
            
            (73
            )
            
            107
            
            
            101
            
            
            135**Equity
                in earnings of consolidated subsidiaries**
            
            
            461
            
            
            **−**
            
            
            (461
            )
            
            **−****Minority
                interest in subsidiaries’ income, net of tax**
            
            
            **−**
            
            
            10
            
            
            **−**
            
            
            10**Income
                (loss) from continuing operations**
            
            
            317
            
            
            210
            
            
            (254
            )
            
            273**Discontinued
                operations, net of tax**
            
            
            **−**
            
            
            86
            
            
            (42
            )
            
            44**Net
                income (loss)**
            
            $
            317
            
            $
            296
            
            $
            (296
            )
            $
            317





57





Condensed
                Consolidating Statement of Income
              Nine
                Months Ended September 30, 2005(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Operating
                revenues**Electric
            
            **$**
            **−**
            
            $
            2,983
            
            $
            2,980
            
            $
            5,963Diversified
                business
            
            
            **−**
            
            
            924
            
            
            390
            
            
            1,314**Total
                operating revenues**
            
            
            **−**
            
            
            3,907
            
            
            3,370
            
            
            7,277**Operating
                expenses**UtilityFuel
                used in electric generation
            
            
            **−**
            
            
            966
            
            
            746
            
            
            1,712Purchased
                power
            
            
            **−**
            
            
            545
            
            
            294
            
            
            839Operation
                and maintenance
            
            
            11
            
            
            658
            
            
            688
            
            
            1,357Depreciation
                and amortization
            
            
            **−**
            
            
            236
            
            
            411
            
            
            647Taxes
                other than on income
            
            
            4
            
            
            215
            
            
            137
            
            
            356Other
            
            
            **−**
            
            
            (24
            )
            
            (8
            )
            
            (32
            )Diversified
                businessCost
                of sales
            
            
            **−**
            
            
            947
            
            
            471
            
            
            1,418Depreciation
                and amortization
            
            
            **−**
            
            
            16
            
            
            43
            
            
            59Other
            
            
            **−**
            
            
            42
            
            
            23
            
            
            65**Total
                operating expenses**
            
            
            15
            
            
            3,601
            
            
            2,805
            
            
            6,421**Operating
                (loss) income**
            
            
            (15
            )
            
            306
            
            
            565
            
            
            856Other
                income (expense), net
            
            
            49
            
            
            (6
            )
            
            (32
            )
            
            11Interest
                charges, net
            
            
            225
            
            
            121
            
            
            125
            
            
            471**(Loss)
                income from continuing operations before income tax, equity in earnings
                of
                consolidated subsidiaries and minority interest**
            
            
            (191
            )
            
            179
            
            
            408
            
            
            396**Income
                tax (benefit) expense**
            
            
            (51
            )
            
            (68
            )
            
            18
            
            
            (101
            )**Equity
                in earnings of consolidated subsidiaries**
            
            
            682
            
            
            **−**
            
            
            (682
            )
            
            **−****Minority
                interest in subsidiaries’ loss, net of tax**
            
            
            **−**
            
            
            24
            
            
            **−**
            
            
            24**Income
                (loss) from continuing operations**
            
            
            542
            
            
            271
            
            
            (292
            )
            
            521**Discontinued
                operations, net of tax**
            
            
            −
            
            
            (3
            )
            
            23
            
            
            20**Cumulative
                effect of changes in accounting principles, net of
                tax**
            
            
            **−**
            
            
            **−**
            
            
            1
            
            
            1**Net
                income (loss)**
            
            $
            542
            
            $
            268
            
            $
            (268
            )
            $
            542





58





Condensed
                Consolidating Balance Sheet
              September
                30, 2006(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Utility
                plant, net**
            
            $
            **−**
            
            $
            6,094
            
            $
            8,714
            
            $
            14,808**Current
                assets**Cash
                and cash equivalents
            
            
            152
            
            
            47
            
            
            136
            
            
            335Short-term
                investments
            
            
            201
            
            
            **−**
            
            
            132
            
            
            333Notes
                receivables from affiliated companies
            
            
            219
            
            
            5
            
            
            (224
            )
            
            **−**Deferred
                fuel cost
            
            
            **−**
            
            
            97
            
            
            207
            
            
            304Assets
                of discontinued operations
            
            
            **−**
            
            
            724
            
            
            (17
            )
            
            707Other
                current assets
            
            
            21
            
            
            1,190
            
            
            1,067
            
            
            2,278**Total
                current assets**
            
            
            593
            
            
            2,063
            
            
            1,301
            
            
            3,957**Deferred
                debits and other assets**Investment
                in consolidated subsidiaries
            
            
            11,308
            
            
            **−**
            
            
            (11,308
            )
            
            **−**Goodwill
            
            
            **−**
            
            
            2
            
            
            3,653
            
            
            3,655Other
                assets and deferred debits
            
            
            259
            
            
            1,458
            
            
            2,243
            
            
            3,960**Total
                deferred debits and other assets**
            
            
            11,567
            
            
            1,460
            
            
            (5,412
            )
            
            7,615**Total
                assets**
            
            $
            12,160
            
            $
            9,617
            
            $
            4,603
            
            $
            26,380**Capitalization**Common
                stock equity
            
            $
            8,021
            
            $
            3,146
            
            $
            (3,146
            )
            $
            8,021Preferred
                stock of subsidiaries - not subject to mandatory
                redemption
            
            
            **−**
            
            
            34
            
            
            59
            
            
            93Minority
                interest
            
            
            **−**
            
            
            12
            
            
            3
            
            
            15Long-term
                debt, affiliate
            
            
            **−**
            
            
            440
            
            
            (169
            )
            
            271Long-term
                debt, net
            
            
            3,523
            
            
            2,550
            
            
            3,469
            
            
            9,542**Total
                capitalization**
            
            
            11,544
            
            
            6,182
            
            
            216
            
            
            17,942**Current
                liabilities**Current
                portion of long-term debt
            
            
            351
            
            
            149
            
            
            200
            
            
            700Notes
                payable to affiliated companies
            
            
            **−**
            
            
            186
            
            
            (186
            )
            
            **−**Liabilities
                of discontinued operations
            
            
            **−**
            
            
            173
            
            
            (2
            )
            
            171Other
                current liabilities
            
            
            218
            
            
            997
            
            
            905
            
            
            2,120**Total
                current liabilities**
            
            
            569
            
            
            1,505
            
            
            917
            
            
            2,991**Deferred
                credits and other liabilities**Noncurrent
                income tax liabilities
            
            
            **−**
            
            
            **−**
            
            
            218
            
            
            218Regulatory
                liabilities
            
            
            **−**
            
            
            1,065
            
            
            1,367
            
            
            2,432Accrued
                pension and other benefits
            
            
            13
            
            
            313
            
            
            581
            
            
            907Other
                liabilities and deferred credits
            
            
            34
            
            
            552
            
            
            1,304
            
            
            1,890**Total
                deferred credits and other liabilities**
            
            
            47
            
            
            1,930
            
            
            3,470
            
            
            5,447**Total
                capitalization and liabilities**
            
            $
            12,160
            
            $
            9,617
            
            $
            4,603
            
            $
            26,380





59





Condensed
                Consolidating Balance Sheet
              December
                31, 2005(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Utility
                plant, net**
            
            $
            **−**
            
            $
            5,821
            
            $
            8,621
            
            $
            14,442**Current
                assets**Cash
                and cash equivalents
            
            
            239
            
            
            239
            
            
            127
            
            
            605Short-term
                investments
            
            
            **−**
            
            
            **−**
            
            
            191
            
            
            191Notes
                receivables from affiliated companies
            
            
            467
            
            
            **−**
            
            
            (467
            )
            
            **−**Deferred
                fuel cost
            
            
            **−**
            
            
            341
            
            
            261
            
            
            602Assets
                of discontinued operations
            
            
            **−**
            
            
            757
            
            
            515
            
            
            1,272Other
                current assets
            
            
            22
            
            
            992
            
            
            1,133
            
            
            2,147**Total
                current assets**
            
            
            728
            
            
            2,329
            
            
            1,760
            
            
            4,817**Deferred
                debits and other assets**Investment
                in consolidated subsidiaries
            
            
            11,594
            
            
            **−**
            
            
            (11,594
            )
            
            **−**Goodwill
            
            
            **−**
            
            
            2
            
            
            3,717
            
            
            3,719Other
                assets and deferred debits
            
            
            259
            
            
            1,561
            
            
            2,216
            
            
            4,036**Total
                deferred debits and other assets**
            
            
            11,853
            
            
            1,563
            
            
            (5,661
            )
            
            7,755**Total
                assets**
            
            $
            12,581
            
            $
            9,713
            
            $
            4,720
            
            $
            27,014**Capitalization**Common
                stock equity
            
            $
            8,038
            
            $
            3,039
            
            $
            (3,039
            )
            $
            8,038Preferred
                stock of subsidiaries - not subject to mandatory
                redemption
            
            
            **−**
            
            
            34
            
            
            59
            
            
            93Minority
                interest
            
            
            **−**
            
            
            31
            
            
            5
            
            
            36Long-term
                debt, affiliate
            
            
            **−**
            
            
            440
            
            
            (170
            )
            
            270Long-term
                debt, net
            
            
            3,873
            
            
            2,636
            
            
            3,667
            
            
            10,176**Total
                capitalization**
            
            
            11,911
            
            
            6,180
            
            
            522
            
            
            18,613**Current
                liabilities**Current
                portion of long-term debt
            
            
            404
            
            
            109
            
            
            **−**
            
            
            513Notes
                payable to affiliated companies
            
            
            **−**
            
            
            315
            
            
            (315
            )
            
            **−**Short-term
                obligations
            
            
            **−**
            
            
            102
            
            
            73
            
            
            175Liabilities
                of discontinued operations
            
            
            **−**
            
            
            226
            
            
            (28
            )
            
            198Other
                current liabilities
            
            
            245
            
            
            762
            
            
            1,046
            
            
            2,053**Total
                current liabilities**
            
            
            649
            
            
            1,514
            
            
            776
            
            
            2,939**Deferred
                credits and other liabilities**Noncurrent
                income tax liabilities
            
            
            **−**
            
            
            **−**
            
            
            228
            
            
            228Regulatory
                liabilities
            
            
            **−**
            
            
            1,189
            
            
            1,338
            
            
            2,527Accrued
                pension and other benefits
            
            
            12
            
            
            307
            
            
            551
            
            
            870Other
                liabilities and deferred credits
            
            
            9
            
            
            523
            
            
            1,305
            
            
            1,837**Total
                deferred credits and other liabilities**
            
            
            21
            
            
            2,019
            
            
            3,422
            
            
            5,462**Total
                capitalization and liabilities**
            
            $
            12,581
            
            $
            9,713
            
            $
            4,720
            
            $
            27,014





60





Condensed
                Consolidating Statement of Cash Flows
              Nine
                Months Ended September 30, 2006(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Net
                cash provided by operating activities**
            
            $
            376
            
            $
            728
            
            $
            390
            
            $
            1,494**Investing
                activities**Gross
                utility property additions
            
            
            −
            
            
            (519
            )
            
            (493
            )
            
            (1,012
            )Diversified
                business property additions
            
            
            −
            
            
            (1
            )
            
            −
            
            
            (1
            )Nuclear
                fuel additions
            
            
            −
            
            
            (6
            )
            
            (65
            )
            
            (71
            )Proceeds
                from sales of discontinued operations and other assets, net of cash
                divested
            
            
            −
            
            
            134
            
            
            414
            
            
            548Purchases
                of available-for-sale securities and other investments
            
            
            (392
            )
            
            (547
            )
            
            (748
            )
            
            (1,687
            )Proceeds
                from sales of available-for-sale securities and other
                investments
            
            
            191
            
            
            646
            
            
            774
            
            
            1,611Changes
                in advances to affiliates
            
            
            248
            
            
            (7
            )
            
            (241
            )
            
            −Return
                of investment in consolidated subsidiary
            
            
            287
            
            
            −
            
            
            (287
            )
            
            −Other
                investing activities
            
            
            (5
            )
            
            (3
            )
            
            (8
            )
            
            (16
            )**Net
                cash provided (used) by investing activities**
            
            
            329
            
            
            (303
            )
            
            (654
            )
            
            (628
            )**Financing
                activities**Issuance
                of common stock
            
            
            73
            
            
            −
            
            
            −
            
            
            73Proceeds
                from issuance of long-term debt, net
            
            
            397
            
            
            −
            
            
            −
            
            
            397Net
                decrease in short-term indebtedness
            
            
            −
            
            
            (102
            )
            
            (73
            )
            
            (175
            )Retirement
                of long-term debt
            
            
            (801
            )
            
            (47
            )
            
            −
            
            
            (848
            )Dividends
                paid on common stock
            
            
            (454
            )
            
            −
            
            
            −
            
            
            (454
            )Dividends
                paid to parent
            
            
            −
            
            
            (222
            )
            
            222
            
            
            −Cash
                distributions to minority interests of consolidated
                subsidiary
            
            
            −
            
            
            (74
            )
            
            −
            
            
            (74
            )Changes
                in advances from affiliates
            
            
            −
            
            
            (132
            )
            
            132
            
            
            −Other
                financing activities
            
            
            (7
            )
            
            9
            
            
            (44
            )
            
            (42
            )**Net
                cash (used ) provided by financing activities**
            
            
            (792
            )
            
            (568
            )
            
            237
            
            
            (1,123
            )**Cash
                provided (used) by discontinued operations**Operating
                activities
            
            
            −
            
            
            94
            
            
            36
            
            
            130Investing
                activities
            
            
            −
            
            
            (143
            )
            
            −
            
            
            (143
            )Financing
                activities
            
            
            −
            
            
            −
            
            
            −
            
            
            −Net
                (decrease) increase in cash and cash equivalents
            
            
            (87
            )
            
            (192
            )
            
            9
            
            
            (270
            )**Cash
                and cash equivalents at beginning of period**
            
            
            239
            
            
            239
            
            
            127
            
            
            605**Cash
                and cash equivalents at end of period**
            
            $
            152
            
            $
            47
            
            $
            136
            
            $
            335





61





Condensed
                Consolidating Statement of Cash Flows
              Nine
                Months Ended September 30, 2005(in
                millions)
            
            **Parent**
            
            **Subsidiary
                Guarantor**
            
            **Other**
            
            **Progress
                Energy, Inc.****Net
                cash provided by operating activities**
            
            $
            168
            
            $
            251
            
            $
            392
            
            $
            811**Investing
                activities**Gross
                utility property additions
            
            
            −
            
            
            (336
            )
            
            (436
            )
            
            (772
            )Diversified
                business property additions
            
            
            −
            
            
            (2
            )
            
            (18
            )
            
            (20
            )Nuclear
                fuel additions
            
            
            −
            
            
            (46
            )
            
            (52
            )
            
            (98
            )Proceeds
                from sales of discontinued operations and other assets, net of cash
                divested
            
            
            −
            
            
            449
            
            
            9
            
            
            458Purchases
                of available-for-sale securities and other investments
            
            
            (1,702
            )
            
            (241
            )
            
            (1,535
            )
            
            (3,478
            )Proceeds
                from sales of available-for-sale securities and other
                investments
            
            
            1,702
            
            
            241
            
            
            1,591
            
            
            3,534Changes
                in advances to affiliates
            
            
            127
            
            
            1
            
            
            (128
            )
            
            −Proceeds
                from repayment of long-term affiliate debt
            
            
            369
            
            
            −
            
            
            (369
            )
            
            −Other
                investing activities
            
            
            (11
            )
            
            (20
            )
            
            (1
            )
            
            (32
            )**Net
                cash provided (used) by investing activities**
            
            
            485
            
            
            46
            
            
            (939
            )
            
            (408
            )**Financing
                activities**Issuance
                of common stock
            
            
            193
            
            
            −
            
            
            −
            
            
            193Proceeds
                from issuance of long-term debt, net
            
            
            −
            
            
            297
            
            
            495
            
            
            792Net
                decrease in short-term indebtedness
            
            
            (132
            )
            
            (1
            )
            
            (34
            )
            
            (167
            )Retirement
                of long-term debt
            
            
            (160
            )
            
            (101
            )
            
            (301
            )
            
            (562
            )Retirement
                of long-term affiliate debt
            
            
            −
            
            
            (369
            )
            
            369
            
            
            −Dividends
                paid on common stock
            
            
            (435
            )
            
            −
            
            
            −
            
            
            (435
            )Changes
                in advances from affiliates
            
            
            −
            
            
            (45
            )
            
            45
            
            
            −Other
                financing activities
            
            
            (9
            )
            
            28
            
            
            (36
            )
            
            (17
            )**Net
                cash (used) provided by financing activities**
            
            
            (543
            )
            
            (191
            )
            
            538
            
            
            (196
            )**Cash
                provided (used) by discontinued operations**Operating
                activities
            
            
            −
            
            
            57
            
            
            37
            
            
            94Investing
                activities
            
            
            −
            
            
            (154
            )
            
            (1
            )
            
            (155
            )Financing
                activities
            
            
            −
            
            
            −
            
            
            −
            
            
            −Net
                increase in cash and cash equivalents
            
            
            110
            
            
            9
            
            
            27
            
            
            146**Cash
                and cash equivalents at beginning of period**
            
            
            5
            
            
            23
            
            
            27
            
            
            55**Cash
                and cash equivalents at end of period**
            
            $
            115
            
            $
            32
            
            $
            54
            
            $
            201





62


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




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




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




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




This
      discussion should be read in conjunction with the accompanying financial
      statements found elsewhere in this report and in conjunction with the 2005
      Form
      10-K.




**RESULTS
      OF OPERATIONS**





Our
      reportable business segments and their primary operations include:





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


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


·
            Progress
                Ventures - primarily engaged in nonregulated electric generation
                operations and energy marketing activities in Georgia;
                and


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





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




In
      2005,
      we changed our reportable segments due to changes in the operations of certain
      businesses and the reclassification of our coal mining business as discontinued
      operations. In addition, due to our divestitures in 2006, we reclassified
      Progress Telecom, LLC’s (PT LLC) operations as discontinued operations in the
      first quarter of 2006, we reclassified DeSoto and Rowan generating facilities’
operations previously included in Progress Ventures, as discontinued operations
      in the second quarter of 2006 and we reclassified our natural gas drilling
      and
      production operations (Gas) and our Dixie Fuels Limited (Dixie Fuels) and other
      fuels businesses as discontinued operations in the third quarter of 2006. These
      reportable segment changes reflect the current reporting structure. For
      comparative purposes, prior year results have been restated to conform to the
      current presentation. In this section, earnings and the factors affecting
      earnings for the three months and nine months ended September 30, 2006 are
      compared to the same periods in 2005. The discussion begins with a summarized
      overview of our consolidated earnings, which is followed by a more detailed
      discussion and analysis by business segment.




63


**OVERVIEW**




For
      the
      quarter ended September 30, 2006, our net income was $319 million, or $1.27
      per
      share, compared to net income of $450 million, or $1.82 per share, for the
      same
      period in 2005. The decrease in net income as compared to prior year was due
      primarily to:




·
            The
                impact of tax levelization. Accounting principles generally accepted
                in
                the United States (GAAP) require companies to apply a levelized effective
                tax rate to interim periods that is consistent with the estimated
                annual
                effective tax rate.


·
            Lower
                tax credits due to lower synthetic fuel production and higher oil
                prices
                in 2006 and tax credit adjustments in
                2005.


·
            Unfavorable
                weather at the Utilities.


·
            The
                impact of mark-to-market losses resulting from the discontinuance
                of cash
                flow hedge accounting for certain natural gas
                contracts.





Partially
      offsetting these items were:





·
            Favorable
                results in Gas operations which are classified as discontinued
                operations.


·
            Favorable
                operation and maintenance (O&M) expense at the
                Utilities.


·
            Favorable
                retail growth and usage at the
                Utilities.





For
      the
      nine months ended September 30, 2006, our net income was $317 million, or $1.27
      per share, compared to net income of $542 million, or $2.20 per share, for
      the
      same period in 2005. The decrease in net income as compared to prior year was
      due primarily to:




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


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


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


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


·
            The
                impact of tax levelization.


·
            Unrealized
                losses recorded on contingent value
                obligations.


·
            Unfavorable
                weather at the Utilities.


·
            Increased
                nuclear outage expenses at PEC.


·
            The
                impact of mark-to-market losses resulting from the discontinuance
                of cash
                flow hedge accounting for certain natural gas
                contracts.


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


·
            Increased
                estimated environmental remediation expenses at
                PEC.





Partially
      offsetting these items were:




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


·
            Favorable
                results in Gas operations which are classified as discontinued
                operations.


·
            Gain
                on sale of PT LLC.


·
            Increased
                wholesale margin at PEC.


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


·
            Favorable
                retail growth and usage at the
                Utilities.


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


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





64


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


Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Business
                SegmentPEC
            
            **$**
            **188**
            
            $
            183
            
            **$**
            **349**
            
            $
            365PEF
            
            
            **125**
            
            
            151
            
            
            **264**
            
            
            204Progress
                Ventures
            
            
            **(40**
            **)**
            
            (22
            )
            
            **(111**
            **)**
            
            (34
            )Coal
                and synthetic fuels
            
            
            **9**
            
            
            81
            
            
            **(75**
            **)**
            
            103Total
                segment profit
            
            
            **282**
            
            
            393
            
            
            **427**
            
            
            638Corporate
                and Other
            
            
            **(39**
            **)**
            
            40
            
            
            **(154**
            **)**
            
            (117
            )Income
                from continuing operations
            
            
            **243**
            
            
            433
            
            
            **273**
            
            
            521Discontinued
                operations, net of tax
            
            
            **76**
            
            
            16
            
            
            **44**
            
            
            20Cumulative
                effect of changes in accounting principles
            
            
            **-**
            
            
            1
            
            
            **-**
            
            
            1Net
                income
            
            **$**
            **319**
            
            $
            450
            
            **$**
            **317**
            
            $
            542





**PROGRESS
      ENERGY CAROLINAS**




PEC
      contributed segment profits of $188 million and $183 million for the three
      months ended September 30, 2006 and 2005, respectively. The increase in profits
      for the three months ended September 30, 2006, when compared to the same period
      in 2005, was primarily due to favorable retail growth and usage, lower interest
      expense and lower O&M expenses partially offset by unfavorable
      weather.




PEC
      contributed segment profits of $349 million and $365 million for the nine months
      ended September 30, 2006 and 2005, respectively. The decrease in profits for
      the
      nine months ended September 30, 2006, when compared to the same period in 2005,
      was primarily due to unfavorable weather, higher O&M expenses related to
      outages at nuclear facilities, increased estimated environmental remediation
      expenses and the impact of suspending allocation of the Parent’s income tax
      benefit. See Corporate and Other below for additional information on the change
      in the tax benefit allocation in 2006. These were partially offset by
      postretirement and severance expenses incurred in 2005 related to the 2005
      cost-management initiative, favorable wholesale margin and favorable retail
      customer growth and usage.




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




*REVENUES*




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


(in
                millions)
            
            Three
                Months Ended September 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            **$**
            **458**
            
            $
            5
            
            
            1.1
            
            $
            453Commercial
            
            
            **297**
            
            
            16
            
            
            5.7
            
            
            281Industrial
            
            
            **198**
            
            
            (1
            )
            
            (0.5
            )
            
            199Governmental
            
            
            **28**
            
            
            2
            
            
            7.7
            
            
            26Total
                retail revenues
            
            
            **981**
            
            
            22
            
            
            2.3
            
            
            959Wholesale
            
            
            **205**
            
            
            (13
            )
            
            (6.0
            )
            
            218Unbilled
            
            
            **(9**
            **)**
            
            8
            
            
            -
            
            
            (17
            )Miscellaneous
            
            
            **23**
            
            
            (2
            )
            
            (8.0
            )
            
            25Total
                electric revenues
            
            
            **1,200**
            
            
            15
            
            
            1.3
            
            
            1,185Less:
                Fuel revenues
            
            
            **(392**
            **)**
            
            (25
            )
            
            -
            
            
            (367
            )Revenues
                excluding fuel
            
            **$**
            **808**
            
            $
            (10
            )
            
            (1.2
            )
            $
            818





65


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


(in
                millions of kWh)
            
            Three
                Months Ended September 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            
            **4,886**
            
            
            (172
            )
            
            (3.4
            )
            
            5,058Commercial
            
            
            **3,975**
            
            
            (33
            )
            
            (0.8
            )
            
            4,008Industrial
            
            
            **3,317**
            
            
            (164
            )
            
            (4.7
            )
            
            3,481Governmental
            
            
            **427**
            
            
            6
            
            
            1.4
            
            
            421Total
                retail energy sales
            
            
            **12,605**
            
            
            (363
            )
            
            (2.8
            )
            
            12,968Wholesale
            
            
            **3,974**
            
            
            (382
            )
            
            (8.8
            )
            
            4,356Unbilled
            
            
            **(248**
            **)**
            
            268
            
            
            -
            
            
            (516
            )Total
                kWh sales
            
            
            **16,331**
            
            
            (477
            )
            
            (2.8
            )
            
            16,808





PEC’s
      electric revenues, excluding fuel revenues of $392 million and $367 million
      for
      the three months ended September 30, 2006 and 2005, respectively, decreased
      $10
      million. The decrease in revenues is attributable primarily to unfavorable
      retail weather of $31 million, with cooling degree days 16 percent less than
      the
      prior year. This was partially offset by increased retail growth and usage
      and
      wholesale revenues less fuel. The increase in retail growth and usage of $13
      million was driven by an approximate increase in the average number of customers
      of 28,000 as of September 30, 2006, compared to September 30, 2005. The increase
      in wholesale revenues less fuel of $6 million was driven primarily by decreased
      fuel costs related to Hurricanes Katrina and Rita impacting prior year.




*EXPENSES*




*Fuel
      and Purchased Power*




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




Fuel
      and
      purchased power expenses were $457 million for the three months ended September
      30, 2006, which represents a $21 million increase compared to the same period
      in
      the prior year. Fuel used in electric generation increased $40 million to $322
      million compared to the prior year. This increase is due to an increase in
      deferred fuel expense of $59 million driven by an increase in the fuel recovery
      rates for North Carolina and South Carolina. This was partially offset by a
      $20
      million decrease in fuel. Fuel used in generation also decreased due to lower
      system requirements and a change in generation mix, as a greater percentage
      of
      generation during the three months ended September 30, 2006 was provided by
      nuclear relative to coal and gas, partially offset by higher fuel costs
      resulting from higher delivered coal costs. Current year purchased power costs
      were $19 million lower than the three months ended September 30, 2005, primarily
      due to lower system requirements and lower market prices in the third quarter
      of
      2006.




*Operation
      and Maintenance*




O&M
      expenses were $218 million for the three months ended September 30, 2006, which
      represents a $17 million decrease compared to the same period in 2005. O&M
      expenses decreased $6 million due to lower outage costs at nuclear facilities,
      $4 million related to lower pension expenses due to revised actuarial estimates
      during 2006, $3 million of lower estimated environmental costs, $2 million
      of
      lower storm related costs and $2 million of postretirement and severance expense
      recorded in the prior year related to the 2005 cost-management initiative.
      These
      were partially offset by certain capital project write-offs of $6
      million.




*Other*




Other
      had
      no material transactions for the three months ended September 30, 2006. The
      $8
      million gain for the three months ended September 30, 2005 was primarily due
      to
      land sales.




66


*Total
      Other (Expense) Income*




Total
      other expense of $3 million increased $2 million compared to the three months
      ended September 30, 2005 primarily due to a $8 million increase in the
      indemnification liability recorded for estimated capital costs associated with
      the North Carolina Clean Smokestacks Act, enacted in June 2002 (Clean
      Smokestacks Act) expected to be incurred in excess of the maximum billable
      costs
      to the joint owner (See Note 13B) partially offset by a $6 million increase
      in
      interest income related to temporary investments and under-recovered fuel
      costs.




*Total
      Interest Charges, net*




Total
      interest charges, net decreased $14 million for the three months ended September
      30, 2006, as compared to the same period in the prior year. This fluctuation
      is
      due primarily to a $22 million variance in the impact of tax matters, partially
      offset by the impact of a net increase in long-term debt and higher interest
      rates on variable rate pollution control bonds.




*Income
      Tax Expense*




Income
      tax expense increased $10 million for the three months ended September 30,
      2006,
      as compared to the same period in the prior year, primarily due to the impact
      of
      higher earnings compared to prior year. Income tax expense also increased due
      to
      the allocation of $5 million of the Parent’s tax benefit not related to
      acquisition interest expense in 2005 that is no longer allocated in 2006. See
      Corporate and Other below for additional information on the change in the tax
      benefit allocation in 2006. GAAP requires companies to apply a levelized
      effective tax rate to interim periods that is consistent with the estimated
      annual effective tax rate. PEC’s income tax expense was increased by $1 million
      for the three months ended September 30, 2006 compared to an increase of $3
      million for the three months ended September 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 items of income
      or
      deduction can also cause fluctuations in the effective tax rate for interim
      periods. Therefore, this adjustment will vary each quarter, but will have no
      effect on net income for the year.




Nine
      Months Ended September 30, 2006 Compared to Nine Months Ended September 30,
      2005




*REVENUES*




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


(in
                millions)
            
            Nine
                Months Ended September 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            **$**
            **1,133**
            
            $
            34
            
            
            3.1
            
            $
            1,099Commercial
            
            
            **759**
            
            
            50
            
            
            7.1
            
            
            709Industrial
            
            
            **534**
            
            
            22
            
            
            4.3
            
            
            512Governmental
            
            
            **69**
            
            
            5
            
            
            7.8
            
            
            64Total
                retail revenues
            
            
            **2,495**
            
            
            111
            
            
            4.7
            
            
            2,384Wholesale
            
            
            **564**
            
            
            18
            
            
            3.3
            
            
            546Unbilled
            
            
            **(21**
            **)**
            
            (1
            )
            
            -
            
            
            (20
            )Miscellaneous
            
            
            **75**
            
            
            5
            
            
            7.1
            
            
            70Total
                electric revenues
            
            
            **3,113**
            
            
            133
            
            
            4.5
            
            
            2,980Less:
                Fuel revenues
            
            
            **(1,004**
            **)**
            
            (125
            )
            
            -
            
            
            (879
            )Revenues
                excluding fuel
            
            **$**
            **2,109**
            
            $
            8
            
            
            0.4
            
            $
            2,101





67


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


(in
                millions of kWh)
            
            Nine
                Months Ended September 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            
            **12,741**
            
            
            (274
            )
            
            (2.1
            )
            
            13,015Commercial
            
            
            **10,245**
            
            
            70
            
            
            0.7
            
            
            10,175Industrial
            
            
            **9,389**
            
            
            (252
            )
            
            (2.6
            )
            
            9,641Governmental
            
            
            **1,080**
            
            
            17
            
            
            1.6
            
            
            1,063Total
                retail energy sales
            
            
            **33,455**
            
            
            (439
            )
            
            (1.3
            )
            
            33,894Wholesale
            
            
            **11,260**
            
            
            (375
            )
            
            (3.2
            )
            
            11,635Unbilled
            
            
            **(395**
            **)**
            
            188
            
            
            -
            
            
            (583
            )Total
                kWh sales
            
            
            **44,320**
            
            
            (626
            )
            
            (1.4
            )
            
            44,946





PEC’s
      electric revenues, excluding fuel revenues of $1.004 billion and $879 million
      for the nine months ended September 30, 2006 and 2005, respectively, increased
      $8 million. The increase in revenues is attributable primarily to increased
      wholesale revenues less fuel and increased retail growth and usage, partially
      offset by unfavorable weather. The increase in wholesale revenues less fuel
      of
      $34 million was driven primarily by the impact of increased capacity under
      contract, higher excess generation sales due to favorable market conditions
      and
      gains on forward sales of excess generation. The increase in retail growth
      and
      usage of $19 million was driven by an approximate increase in the average number
      of customers of 29,000 as of September 30, 2006, compared to September 30,
      2005.
      The impact of unfavorable weather was $43 million with cooling degree days
      7
      percent below the prior year and heating degree days 11 percent below the prior
      year.





*EXPENSES*





*Fuel
      and Purchased Power*





Fuel
      and
      purchased power expenses were $1.159 billion for the nine months ended September
      30, 2006, which represents a $119 million increase compared to the same period
      in the prior year. Fuel used in electric generation increased $134 million
      to
      $880 million compared to the prior year. This increase is due to a $105 million
      increase in deferred fuel expense due to an increase in the fuel recovery rates
      for North Carolina and South Carolina. In addition, fuel used in generation
      increased $28 million due primarily to higher fuel costs which are being driven
      by higher delivered coal costs partially offset by lower system requirements
      and
      a change in generation mix, as generation shifted from higher priced gas to
      coal. Current year purchased power costs were $15 million lower than the nine
      months ended September 30, 2005, primarily due to lower system requirements
      partially offset by an increase in price.





*Operation
      and Maintenance*





O&M
      expenses were $722 million for the nine months ended September 30, 2006, which
      represents a $3 million increase compared to the same period in 2005. O&M
      expenses increased $40 million due to outages at nuclear facilities and $18
      million due to increased estimated environmental remediation expenses (See
      Note
      13A), and capital project write-offs of $15 million. These were partially offset
      by $61 million of postretirement and severance expense recorded in the prior
      year related to the 2005 cost-management initiative and $6 million due to lower
      outage costs at fossil facilities.





*Depreciation
      and Amortization*





Depreciation
      and amortization expense was $383 million for the nine months ended September
      30, 2006, which represents a $6 million decrease compared to the same period
      in
      2005. Depreciation expense decreased $15 million due to lower Clean Smokestacks
      Act amortization, partially offset by the impact of an increase in the
      depreciable base.





68


*Other*




Other
      had
      no material transactions for the nine months ended September 30, 2006. The
      $8
      million gain for the nine months ended September 30, 2005 was primarily due
      to
      land sales.





*Total
      Other (Expense) Income*





Total
      other income of $6 million increased $5 million compared to the nine months
      ended September 30, 2005 primarily due to a $13 million increase in interest
      income related to temporary investments and under-recovered fuel costs and
      a $4
      million expense related to a FERC Code of Conduct audit settlement recorded
      in
      the prior year partially offset by a $13 million increase in the indemnification
      liability recorded for estimated capital costs associated with the Clean
      Smokestacks Act expected to be incurred in excess of the maximum billable costs
      to the joint owner (See Note 13B).





*Total
      Interest Charges, net*





Total
      interest charges, net of $157 million for the nine months ended September 30,
      2006 were flat compared to the same period in the prior year. This is due
      primarily to a $22 million variance in the impact of tax matters, offset by
      the
      $16 million impact of a net increase in long-term debt and $5 million due to
      higher interest rates on variable rate pollution control bonds.





*Income
      Tax Expense*





Income
      tax expense increased $26 million for the nine months ended September 30, 2006,
      as compared to the same period in the prior year, primarily due to the
      allocation of $16 million of the Parent’s tax benefit not related to acquisition
      interest expense in 2005 that is no longer allocated in 2006, $7 million benefit
      related to an income tax matter recorded in 2005 and the $3 million impact
      of a
      2005 tax benefit related to state audit settlements. See Corporate and Other
      below for additional information on the change in the tax benefit allocation
      in
      2006. GAAP requires companies to apply a levelized effective tax rate to interim
      periods that is consistent with the estimated annual effective tax rate. PEC’s
      income tax expense was not materially increased for the nine months ended
      September 30, 2006 compared to an increase of $6 million for the nine months
      ended September 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 items of income or deduction can also cause
      fluctuations in the effective tax rate for interim periods. Therefore, this
      adjustment will vary each quarter, but will have no effect on net income for
      the
      year.





**PROGRESS
      ENERGY FLORIDA**





PEF
      contributed segment profits of $125 million and $151 million for the three
      months ended September 30, 2006 and 2005, respectively. The decrease in profits
      for the three months ended September 30, 2006, when compared to the same period
      in 2005, was primarily due to unfavorable weather, unfavorable tax adjustments
      and higher interest expense.





PEF
      contributed segment profits of $264 million and $204 million for the nine months
      ended September 30, 2006 and 2005, respectively. The increase in profits for
      the
      nine months ended September 30, 2006, when compared to the same period in 2005,
      was primarily due to lower O&M expenses, which included postretirement and
      severance expenses and the write-off of unrecoverable storm costs in 2005 and
      favorable retail margin partially offset by the gain on sale of utility
      distribution assets in the prior year and higher interest expense.





69


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





*REVENUES*





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


(in
                millions)
            
            Three
                Months Ended September 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            **$**
            **754**
            
            $
            94
            
            
            14.2
            
            $
            660Commercial
            
            
            **334**
            
            
            51
            
            
            18.0
            
            
            283Industrial
            
            
            **90**
            
            
            13
            
            
            16.9
            
            
            77Governmental
            
            
            **83**
            
            
            15
            
            
            22.1
            
            
            68Retail
                revenue sharing
            
            
            **-**
            
            
            2
            
            
            -
            
            
            (2
            )Total
                retail revenues
            
            
            **1,261**
            
            
            175
            
            
            16.1
            
            
            1,086Wholesale
            
            
            **98**
            
            
            2
            
            
            2.1
            
            
            96Unbilled
            
            
            **(3**
            **)**
            
            (11
            )
            
            -
            
            
            8Miscellaneous
            
            
            **43**
            
            
            6
            
            
            16.2
            
            
            37Total
                electric revenues
            
            
            **1,399**
            
            
            172
            
            
            14.0
            
            
            1,227Less:
                Fuel and other pass-through revenues
            
            
            **(925**
            **)**
            
            (183
            )
            
            -
            
            
            (742
            )Revenues
                excluding fuel and pass-through revenues
            
            **$**
            **474**
            
            $
            (11
            )
            
            (2.3
            )
            $
            485





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


(in
                millions of kWh)
            
            Three
                Months Ended September 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            
            **6,369**
            
            
            (185
            )
            
            (2.8
            )
            
            6,554Commercial
            
            
            **3,481**
            
            
            (70
            )
            
            (2.0
            )
            
            3,551Industrial
            
            
            **1,067**
            
            
            (45
            )
            
            (4.0
            )
            
            1,112Governmental
            
            
            **905**
            
            
            8
            
            
            0.9
            
            
            897Total
                retail energy sales
            
            
            **11,822**
            
            
            (292
            )
            
            (2.4
            )
            
            12,114Wholesale
            
            
            **1,372**
            
            
            (36
            )
            
            (2.6
            )
            
            1,408Unbilled
            
            
            **(97**
            **)**
            
            (292
            )
            
            -
            
            
            195Total
                kWh sales
            
            
            **13,097**
            
            
            (620
            )
            
            (4.5
            )
            
            13,717





PEF’s
      revenues, excluding recoverable fuel and other pass-through revenues of $925
      million and $742 million for the three months ended September 30, 2006 and
      2005,
      respectively, decreased $11 million. The decrease in revenues is primarily
      due
      to unfavorable weather of $20 million, with cooling degree days 10 percent
      below
      the prior year, partially offset by favorable miscellaneous service revenues
      of
      $6 million and increased retail growth and usage of $2 million driven by an
      approximate increase in the average number of customers of 40,000 as of
 September 30, 2006, compared to September 30, 2005.




*EXPENSES*




*Fuel
      and Purchased Power*




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




Fuel
      and
      purchased power expenses were $794 million for the three months ended September
      30, 2006, which represents a $173 million increase compared to the same period
      in the prior year. Fuel used in electric generation




70


increased
      $187 million to $538 million compared to the prior year. This increase is due
      to
      an increase in deferred fuel expense of $235 million due to an increase in
      the
      fuel recovery rates on January 1, 2006 partially offset by a $48 million
      decrease in fuel used in generation due primarily to lower oil and natural
      gas
      prices and a decrease in the volume of fuel purchases due to lower system
      requirements. Current year purchased power costs were $14 million lower than
      the
      three months ended September 30, 2005, primarily due to lower market prices
      in
      the third quarter of 2006 partially offset by an increase in capacity recovery
      rates under the capacity cost recovery clause. The FPSC allows capacity payments
      to be recovered through a capacity cost recovery clause, which is similar to,
      and works in conjunction with, energy payments recovered through the fuel cost
      recovery clause.




*Operation
      and Maintenance*




O&M
      expenses were $171 million for the three months ended September 30, 2006, which
      represents a decrease of $10 million, when compared to the $181 million incurred
      during the three months ended September 30, 2005. O&M expenses decreased $8
      million related to lower ECRC costs and $7 million related to lower pension
      expenses due to revised actuarial estimates. ECRC costs are pass-through
      expenses and have no material impact on earnings. These decreases were partially
      offset by increased nuclear outage accruals.




*Depreciation
      and Amortization*




Depreciation
      and amortization expense increased $13 million to $108 million for the three
      months ended September 30, 2006. The increase is primarily due to the
      amortization of $13 million in storm costs which began in August 2005. Storm
      cost amortization is a pass-through expense and has no material impact on
      earnings. In addition, depreciation increased $6 million due to increases in
      the
      depreciable base. These increases were partially offset by the $6 million impact
      of rate changes effective January 1, 2006 related to the 2005 depreciation
      study
      (See Note 7C of the 2005 Form 10-K).




*Taxes
      other than on Income*




Taxes
      other than on income increased $7 million to $89 million compared to the three
      months ended September 30, 2005. The increase is primarily due to higher gross
      receipts taxes and franchise taxes due to higher revenues. Gross receipts taxes
      and franchise taxes are pass-through expenses and have no material impact on
      earnings.




*Total
      Other Income*





Total
      other income increased $6 million to $10 million compared to the three months
      ended September 30, 2005 primarily due to a $4 million increase in interest
      income related to temporary investments and unrecovered storm
      costs.




*Total
      Interest Charges, net*




Total
      interest charges, net increased $13 million for the three months ended September
      30, 2006, as compared to the same period in the prior year. This fluctuation
      is
      due primarily to a $6 million interest benefit recognized in 2005 related to
      tax
      matters and the $4 million impact of long-term debt balances on interest
      expense.




*Income
      Tax Expense*




Income
      tax expense increased $9 million for the three months ended September 30, 2006,
      as compared to the same period in the prior year, primarily due to the impact
      of
      tax levelization, discussed below, partially offset by the impact of lower
      pre-tax income for the three months ended September 30, 2006 compared to the
      same period in 2005. In addition, income tax expense increased due to the
      allocation of $3 million of the Parent’s tax benefit not related to acquisition
      interest expense in 2005 that is no longer allocated in 2006. See Corporate
      and
      Other below for additional information on the change in the tax benefit
      allocation in 2006. GAAP requires companies to apply a levelized effective
      tax
      rate to interim periods that is consistent with the estimated annual effective
      tax rate. PEF’s income tax expense was increased by $2 million for the three
      months ended September 30, 2006 compared to a decrease of $9 million for the
      three months ended September 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 items of income or deduction can
      also cause fluctuations in the effective tax rate for interim periods.
      Therefore, this adjustment will vary each quarter, but will have no effect
      on
      net income for the year.




71


Nine
      Months Ended September 30, 2006 Compared to Nine Months Ended September 30,
      2005




*REVENUES*




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


(in
                millions)
            
            Nine
                Months Ended September 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            **$**
            **1,820**
            
            $
            298
            
            
            19.6
            
            $
            1,522Commercial
            
            
            **869**
            
            
            158
            
            
            22.2
            
            
            711Industrial
            
            
            **264**
            
            
            53
            
            
            25.1
            
            
            211Governmental
            
            
            **223**
            
            
            45
            
            
            25.3
            
            
            178Retail
                revenue sharing
            
            
            **1**
            
            
            4
            
            
            -
            
            
            (3
            )Total
                retail revenues
            
            
            **3,177**
            
            
            558
            
            
            21.3
            
            
            2,619Wholesale
            
            
            **236**
            
            
            (1
            )
            
            (0.4
            )
            
            237Unbilled
            
            
            **21**
            
            
            (1
            )
            
            -
            
            
            22Miscellaneous
            
            
            **119**
            
            
            14
            
            
            13.3
            
            
            105Total
                electric revenues
            
            
            **3,553**
            
            
            570
            
            
            19.1
            
            
            2,983Less:
                Fuel and other pass-through revenues
            
            
            **(2,315**
            **)**
            
            (545
            )
            
            -
            
            
            (1,770
            )Revenues
                excluding fuel and pass-through revenues
            
            **$**
            **1,238**
            
            $
            25
            
            
            2.1
            
            $
            1,213





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


(in
                millions of kWh)
            
            Nine
                Months Ended September 30,Customer
                Class
            
            **2006**
            
            Change
            
            %
                Change
            
            2005Residential
            
            
            **15,425**
            
            
            183
            
            
            1.2
            
            
            15,242Commercial
            
            
            **9,040**
            
            
            30
            
            
            0.3
            
            
            9,010Industrial
            
            
            **3,173**
            
            
            80
            
            
            2.6
            
            
            3,093Governmental
            
            
            **2,432**
            
            
            64
            
            
            2.7
            
            
            2,368Total
                retail energy sales
            
            
            **30,070**
            
            
            357
            
            
            1.2
            
            
            29,713Wholesale
            
            
            **3,342**
            
            
            (721
            )
            
            (17.7
            )
            
            4,063Unbilled
            
            
            **532**
            
            
            12
            
            
            -
            
            
            520Total
                kWh sales
            
            
            **33,944**
            
            
            (352
            )
            
            (1.0
            )
            
            34,296





PEF’s
      revenues, excluding recoverable fuel and other pass-through revenues of $2.315
      billion and $1.770 billion for the nine months ended September 30, 2006 and
      2005, respectively, increased $25 million. The increase in revenues is primarily
      due to miscellaneous service revenues of $14 million and increased retail growth
      and usage of $13 million driven by an approximate increase in the average number
      of customers of 36,000 as of September 30, 2006, compared to September 30,
      2005,
      even though approximately 14,000 Winter Park customers were transferred from
      the
      retail customer class to the wholesale customer class in June of 2005. This
      increase was partially offset by unfavorable weather of $2 million.




*EXPENSES*




*Fuel
      and Purchased Power*




Fuel
      and
      purchased power expenses were $1.98 billion for the nine months ended September
      30, 2006, which represents a $469 million increase compared to the same period
      in the prior year. Fuel used in electric generation increased $413 million
      to
      $1.379 billion compared to the prior year. This increase is due to a $351
      million increase in deferred fuel expense due to an increase in the fuel
      recovery rates on January 1, 2006. In addition, fuel used in generation
      increased $63 million due primarily to higher fuel costs which are being driven
      by increased delivered coal costs, higher oil prices and a change in generation
      mix, as generation shifted from coal to gas, partially offset by a decrease
      in
      the volume of fuel purchases due to lower system requirements. Current year
      purchased power




72


costs
      were $56 million higher than the nine months ended September 30, 2005, primarily
      due to $35 million related to increased purchases and higher market prices
      in
      the current year and $21 million due to an increase in capacity recovery rates
      under the capacity cost recovery clause. The FPSC allows capacity payments
      to be
      recovered through a capacity cost recovery clause, which is similar to, and
      works in conjunction with, energy payments recovered through the fuel cost
      recovery clause.




*Operation
      and Maintenance*




O&M
      expenses were $515 million for the nine months ended September 30, 2006, which
      represents a decrease of $143 million, when compared to the $658 million
      incurred during the nine months ended September 30, 2005. O&M expenses
      decreased $108 million due to postretirement and severance expense recorded
      in
      the prior year related to the 2005 cost-management initiative, $18 million
      related to the prior year write-off of storm restoration costs, $18 million
      related to lower ECRC costs in the current year and $8 million related to lower
      pension expenses due to revised actuarial estimates. ECRC costs are pass-through
      expenses and have no material impact on earnings. These were partially offset
      by
      $7 million of additional spending on system reliability programs.




*Depreciation
      and Amortization*




Depreciation
      and amortization expense increased $65 million to $301 million for the nine
      months ended September 30, 2006. The increase is primarily due to an increase
      in
      storm cost amortization of $70 million. Storm cost amortization is a
      pass-through expense and has no material impact on earnings. In addition,
      depreciation increased $12 million due to increases in the depreciable base.
      These increases were partially offset by the $15 million impact of rate changes
      effective January 1, 2006 related to the 2005 depreciation study (See Note
      7C of
      the 2005 Form 10-K).




*Taxes
      other than on Income*




Taxes
      other than on income increased $23 million to $238 million compared to the
      nine
      months ended September 30, 2005. The increase is primarily due to higher gross
      receipts taxes and franchise taxes due to higher revenues. Gross receipts taxes
      and franchise taxes are pass-through expenses and have no material impact on
      earnings.




*Other*





Other
      decreased $22 million from a gain of $24 million for the nine months ended
      September 30, 2005 to a gain of $2 million for the nine months ended September
      30, 2006. The decrease is primarily due to the $24 million prior year gain
      on
      the sale of Winter Park distribution assets.





*Total
      Other Income*





Total
      other income increased $14 million to $20 million compared to the nine months
      ended September 30, 2005 primarily due to a $12 million increase in interest
      income related to temporary investments and unrecovered storm costs and a $3
      million expense related to a FERC Code of Conduct audit settlement recorded
      in
      the prior year.




*Total
      Interest Charges, net*




Total
      interest charges, net increased $26 million for the nine months ended September
      30, 2006, as compared to the same period in the prior year. This fluctuation
      is
      due primarily to the $18 million impact of long-term debt balances on interest
      expense and a $6 million interest benefit recognized in 2005 related to tax
      matters.




*Income
      Tax Expense*




Income
      tax expense increased $62 million for the nine months ended September 30, 2006,
      as compared to the same period in the prior year, primarily due to higher
      earnings compared to prior year. In addition, income tax expense increased
      due
      to the allocation of $10 million of the Parent’s tax benefit not related to
      acquisition interest expense in 2005 that is no longer allocated in 2006. See
      Corporate and Other below for additional information on the change in the tax
      benefit allocation in 2006. GAAP requires companies to apply a levelized
      effective tax rate to interim periods that is consistent with the estimated
      annual effective tax rate. PEF’s income tax expense was increased $2 million for
      the nine months ended September 30, 2006 compared to an immaterial decrease
      for
      the nine months




73


ended
      September 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 items of income or deduction can also cause
      fluctuations in the effective tax rate for interim periods. Therefore, this
      adjustment will vary each quarter, but will have no effect on net income for
      the
      year.




**DIVERSIFIED
      BUSINESSES**




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




**PROGRESS
      VENTURES**




The
      Progress Ventures segment is primarily engaged in nonregulated electric
      generation operations and energy marketing activities in our Competitive
      Commercial Operations business (CCO). The approximate 1,800 megawatts of
      gas-fired generation plants are located in Georgia and are utilized to help
      serve full requirements contracts with sixteen Georgia Electric Membership
      Cooperatives (the Georgia Contracts). There are six different contracts that
      expire in either 2010 or 2015. These contracts are served by resources owned
      by
      the customer, generation owned by Progress Ventures and market purchases.
      Progress Ventures has also entered into an agreement to provide capacity and
      associated energy to Georgia Power, a subsidiary of Southern Company, from
      2009
      through 2024. In addition, Progress Ventures has entered into an agreement
      to
      purchase combined-cycle capacity from Southern Power Company, a subsidiary
      of
      Southern Company, from 2009 through 2015. The Georgia Region business is an
      integrated generation and contract portfolio managed in CCO.




*ALTERNATIVE
      BUSINESS STRATEGIES*




As
      discussed in Note 3A, we entered into a definitive agreement to sell Gas, which
      was previously part of the Progress Ventures segment, and the transaction closed
      on October 2, 2006. Our Gas business acted as a natural long-term economic
      hedge
      for our nonregulated electric generation fuel needs. The Gas and CCO businesses
      were managed together in Progress Ventures, and the sale of Gas has resulted
      in
      an acceleration of the strategic review process at Progress Ventures. We have
      engaged a strategic advisor to help us pursue alternative business strategies
      related to our CCO business. As a result of the decision to pursue these
      strategies, as of September 30, 2006, we considered the likelihood of disposal
      of the CCO assets before the end of their useful life to be more likely than
      not. Under SFAS No. 144, the more likely than not to dispose determination
      triggered an impairment test of CCO’s intangible and long-lived assets in the
      third quarter of 2006. The first step of the impairment test was based upon
      undiscounted cash flows using various hold and sale scenarios over the expected
      period of use of the assets, and the results of the test did not indicate
      impairment. At September 30, 2006, the long-lived assets were recorded at a
      net
      book value of approximately $926 million, including $727 million of property,
      plant and equipment assets and $199 million of intangible assets. However,
      in a
      sale scenario, we would not expect to recover the recorded value of these
      assets.




As
      we
      continue to evaluate alternatives, we will monitor the carrying value of
      Progress Ventures’ long-lived assets. Future adverse changes in market
      conditions or changes in business conditions, including the manner in which
      the
      remaining long-lived assets are deployed under various alternatives that
      management is pursuing, could require future impairment evaluations of the
      $926
      million of remaining long-lived and intangible assets, which could result in
      a
      material non-cash impairment charge against earnings.




The
      Georgia Contracts described above are sensitive to changes in power and natural
      gas market prices. As described in Note 10A, we have entered into certain power
      and natural gas hedge contracts to mitigate the impact of fluctuations in the
      price of power and natural gas. For the nine months ended September 30, 2006,
      the gross margin losses on the Georgia Contracts, including realized losses
      on
      the related hedges, were $10 million before taxes. The future earnings impacts
      of the Georgia Contracts are dependent on a number of factors including customer
      load growth, generation availability, weather and commodity prices (primarily
      natural gas and power). Based on changes in these factors, the earnings impacts
      from the Georgia Contracts could change materially in the
      future.


74





In
      evaluating a potential sale of the CCO business, we would expect three main
      components of value:





1.
            Market
                value of the approximate 1,800 megawatts of Progress Ventures-owned
                generation in Georgia (including the associated tolling contracts
                with
                Georgia Power). The book value related to these assets at September
                30,
                2006 is $769 million including plant-related
                intangibles.


2.
            Market
                value of power and natural gas hedges associated with the Georgia
                Contracts. Only the natural gas hedges are considered derivatives
                and are
                reflected on the Consolidated Balance Sheet. The book value of the
                net
                derivative asset at September 30, 2006 is $91
                million.


3.
            Market
                value of the future obligations to serve the Georgia Contracts. As
                these
                are executory contracts, no liabilities are recorded on the Consolidated
                Balance Sheet for these obligations in accordance with GAAP. There
                is $157
                million of intangible assets related to these contracts on the
                Consolidated Balance Sheet at September 30,
                2006.





The
      combination of the three items above results in a book value of approximately
      $1
      billion related to CCO assets, hedges and Georgia Contracts at September 30,
      2006. In a sale scenario, the potential market values for the generation assets
      and the hedges could be partially offset by the potential negative market value
      ascribed to the Georgia Contracts. If a sale of CCO were to occur, the charges
      to earnings related to these assets and contracts could exceed $500 million
      before taxes. Charges to earnings, should they occur, would likely occur in
      multiple future quarters depending upon the progress of our strategic review
      process.





If
      a sale
      of CCO were to be completed in 2007, we would expect to (1) eliminate the
      potential negative earnings related to the remaining CCO businesses, (2) receive
      an undetermined level of cash proceeds and (3) recognize a significant tax
      benefit related to the sale of the assets and/or contracts. These results are
      consistent with management’s intention to reduce holding company debt and
      business risk which was announced earlier this year.




*IMPACT
      OF DISCONTINUED HEDGE ACCOUNTING*




Based
      on
      the strategies being pursued and our assessment of the likelihood of divestiture
      of CCO assets, management determined, as of July 12, 2006, that it was no longer
      probable that the forecasted transactions underlying certain derivative
      contracts covering approximately 95 bcf of natural gas would be fulfilled.
      Therefore, these contracts were no longer treated as hedges, and were
      dedesignated. Beginning July 12, 2006 cash flow hedge accounting was
      discontinued. Subsequent changes in market prices resulted in the recognition
      of
      mark-to-market losses of $28
      million pre-tax ($18 million after-tax) for the
      three months ended September 30, 2006. Unrealized after-tax gains of $75 million
      recorded in accumulated other comprehensive loss on the Consolidated Balance
      Sheet prior to July 12, 2006 have not been reclassified to earnings. However,
      if
      the disposition status of CCO’s assets increases to probable then we will
      evaluate whether the unrealized gains will be reclassified to earnings. Future
      price volatility in the natural gas market will cause us to record
      mark-to-market changes through earnings and increase the volatility of future
      Progress Ventures’ operating results.




*OPERATING
      RESULTS*





The
      following summarizes the quarterly and year-to-date revenues, gross margin,
      goodwill impairment and segment losses for Progress Ventures:


Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,($
                in millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Total
                revenues
            
            **$**
            **137**
            
            $
            210
            
            **$**
            **422**
            
            $
            404Gross
                marginIn
                millions of $
            
            
            **(35**
            **)**
            
            (6
            )
            
            **(26**
            **)**
            
            24As
                a % of revenues
            
            
            **(26**
            **)%**
            
            (3
            )%
            
            **(6**
            **)%**
            
            6
            %Goodwill
                impairment (after-tax)
            
            
            **-**
            
            
            -
            
            
            **(39**
            **)**
            
            -Segment
                losses
            
            **$**
            **(40**
            **)**
            $
            (22
            )
            **$**
            **(111**
            **)**
            $
            (34
            )





75


Although
      the Georgia Contracts operated at a loss, as a result of increased revenues
      and
      lower cost of sales, the margins for these contracts improved for the three
      months ended September 30, 2006 compared to the same period in 2005. The
      mark-to-market losses related to the dedesignated natural gas hedges were the
      main driver of the $18 million decrease in Progress Ventures’ segment earnings
      for the three months ended September 30,
      2006
      compared to the three months ended September 30,
      2005.
      Progress Ventures’ revenues decreased $73 million to $137 million for the three
      months ended September 30, 2006 compared to the same period in 2005. The
      decrease in revenues is primarily due to a $41 million decrease in market sales
      due to lower 2006 market prices and $28 million of mark-to-market losses related
      to the dedesignated natural gas hedges described above. These decreases were
      partially offset by slightly higher revenues from the Georgia contracts due
      to
      serving a larger load. Progress Ventures’ cost of sales decreased $45 million
      for the three months ended September 30,
      2006
      primarily due to lower volumes of market purchases and lower power
      prices.




Progress
      Ventures’ revenues increased $18 million to $422 million for the nine months
      ended September 30, 2006 compared to the same period in 2005. Revenues increased
      $65 million primarily due to fixed price full-requirements contracts that began
      in April 2005 and serving an increased load on a pre-existing contract in
      Georgia. This increase was partially offset by $28 million of mark-to-market
      losses related to the dedesignated natural gas hedges and $16 million of
      realized losses on other hedges. Progress Ventures cost of sales increased
      $68
      million for the nine months ended September 30, 2006 primarily due to higher
      market purchases and serving an increased load. Although the Georgia Contract
      revenues increased, the contracts operated at a loss for the nine months ended
      September 30, 2006 compared to the same period in 2005 due to the increase
      in
      the cost of sales. In addition to the realized losses and the mark-to-market
      losses, the $77 million decrease in Progress Venture’s segment earnings for the
      nine months ended September 30, 2006 compared to the nine months ended September
      30, 2005 resulted in part from the $64 million pre-tax impairment loss ($39
      million after-tax) on goodwill recognized in the first quarter of 2006 (See
      Note
      6).





**COAL
      AND SYNTHETIC FUELS**




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


Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Synthetic
                fuel operations
            
            **$**
            **20**
            
            $
            71
            
            **$**
            **(59**
            **)**
            $
            93Coal
                terminals and marketing
            
            
            **(6**
            **)**
            
            16
            
            
            **6**
            
            
            32Corporate
                overhead and other operations
            
            
            **(5**
            **)**
            
            (6
            )
            
            **(22**
            **)**
            
            (22
            )Segment
                profits (losses)
            
            **$**
            **9**
            
            $
            81
            
            **$**
            **(75**
            **)**
            $
            103





76


*SYNTHETIC
      FUEL OPERATIONS*





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


Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Tons
                sold
            
            
            **0.2**
            
            
            3.0
            
            
            **1.9**
            
            
            7.3After-tax
                losses, excluding tax credits
            
            **$**
            **(2**
            **)**
            $
            (38
            )
            **$**
            **(52**
            **)**
            $
            (116
            )After-tax
                impairment charge
            
            
            **-**
            
            
            -
            
            
            **(45**
            **)**
            
            -Valuation
                allowance
            
            
            **-**
            
            
            -
            
            
            **(7**
            **)**
            
            -Tax
                credits generated
            
            
            **6**
            
            
            82
            
            
            **54**
            
            
            199Tax
                credit inflation adjustment
            
            
            **-**
            
            
            -
            
            
            **10**
            
            
            -Tax
                credit reserve (increase)/decrease due to potential
                phase-out
            
            
            **16**
            
            
            -
            
            
            **(19**
            **)**
            
            -Tax
                credits previously unrecorded
            
            
            **-**
            
            
            27
            
            
            **-**
            
            
            10Net
                profit (loss)
            
            **$**
            **20**
            
            $
            71
            
            **$**
            **(59**
            **)**
            $
            93





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




Synthetic
      fuels’ earnings for the three months ended September 30, 2006, as compared to
      the same period in the prior year, decreased by $51 million. The decrease was
      impacted by the recording of fewer tax credits in 2006 due to lower production
      and the recording of $27 million of tax credits that had previously not been
      recognized in 2005. During the third quarter of 2005 while finalizing our 2004
      regular federal income tax liability, we recorded $27 million of tax credits
      that had previously not been recognized. These credits were not previously
      recognized due to the decrease in tax liability resulting from expenses incurred
      for the 2004 hurricanes and loss on sale of Progress Rail. These
      were partially offset by lower 2006
      production which resulted in lower pre-tax losses and reducing the tax credit
      reserve at September 30, 2006 by $16 million due to decreasing oil prices which
      decreased the estimated phase-out percentage of tax credits generated in
      2006.




Synthetic
      fuels’ earnings for the nine months ended September 30, 2006, as compared to the
      same period in the prior year, were negatively impacted by the impairment of
      our
      synthetic fuel assets, the recording of fewer tax credits in 2006 due to lower
      production and recording a $19 million tax credit reserve at September 30,
      2006
      due to high oil prices which increased the anticipated phase-out of tax credits
      in 2006. In addition, results were unfavorably impacted by the recognition
      of a
      valuation allowance recorded against the deferred tax assets for state net
      operating loss carry forwards and recognition of $10 million of tax credits
      in
      the third quarter of 2005 related to the finalization of the 2004 tax return.
      These were partially offset by the recording of a $10 million inflation
      adjustment to 2005 tax credits and lower 2006 production which resulted in
      lower
      pre-tax losses. As
      a
      result of the impairment of
      our
      synthetic fuel assets ,
      approximately $6 million of depreciation and amortization expense associated
      with the impaired assets will not be recorded during the remainder of
      2006.




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




*COAL
      TERMINALS AND MARKETING*




Coal
      terminals and marketing (Coal) operations blend and transload coal as part
      of
      the trucking, rail and barge network for coal delivery. This business also
      has
      an operating fee agreement with our synthetic fuel operations for procuring
      and
      processing of coal and the transloading and marketing of synthetic fuels. As
      a
      result of the relationship with the synthetic fuels operations, fluctuations
      in
      Coal’s annual earnings are typically related to production volumes at our
      synthetic fuel plants. Coal operations resulted in a loss of $6 million for
      the
      three months ended September 30,
      2006
      compared to earnings of $16 million for the three months ended September 30,
      2005.




77


Coal’s
      results were negatively impacted by lower revenues related to lower production
      at our synthetic fuels plants and higher cost of sales due to higher coal
      prices.




Coal
      operations contributed earnings of $6 million and $32 million for the nine
      months ended September 30, 2006 and 2005, respectively. Coal’s results were
      negatively impacted by the impairment of a portion of Coal’s terminal assets
      which resulted in a pre-tax charge of $17 million ($10 million after-tax) and
      lower revenues related to lower production at our synthetic fuels plants and
      higher cost of sales due to higher coal prices. These were partially offset
      by
      an $11 million pre-tax reduction in expense related to a restructured coal
      supply contract. During the first quarter of 2006, one of Coal’s supply
      contracts was restructured resulting in a payment of $103 million to Coal.
      These
      proceeds covered long-term coal supply commitments from 2005 through 2007 and
      will be recognized over the life of the contract as coal is received and the
      related inventory is utilized. For the nine months ended September 30, 2006,
      Coal recognized an $11 million pre-tax reduction in expense related to the
      restructured coal supply contract for 2005 coal commitments that were not
      delivered. Future amortization of these proceeds will be wholly offset by the
      increased contract price and is therefore not expected to materially impact
      earnings. As a result of the impairment of Coal’s terminal assets discussed
      above, approximately $3 million of depreciation expense associated with the
      impaired assets will not be recorded during the remainder of 2006.




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




**CORPORATE
      AND OTHER**




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


Three
                Months EndedSeptember30,
            
            Nine
                Months EndedSeptember30,(in
                millions)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Other
                interest expense
            
            **$**
            **(69**
            **)**
            $
            (65
            )
            **$**
            **(209**
            **)**
            $
            (203
            )Contingent
                value obligations
            
            
            **(3**
            **)**
            
            4
            
            
            **(25**
            **)**
            
            4Tax
                levelization
            
            
            **15**
            
            
            85
            
            
            **(5**
            **)**
            
            33Tax
                reallocation
            
            
            **-**
            
            
            (10
            )
            
            **-**
            
            
            (29
            )Other
                income tax benefit
            
            
            **18**
            
            
            23
            
            
            **67**
            
            
            82Other
            
            
            **-**
            
            
            3
            
            
            **18**
            
            
            (4
            )Corporate
                and Other after-tax (expense)/income
            
            **$**
            **(39**
            **)**
            $
            40
            
            **$**
            **(154**
            **)**
            $
            (117
            )





Other
      interest expense, which includes intercompany elimination entries, increased
      $ 4 million
      to $ 69 million
      for the three months ended September 30,
      2006
      compared to $ 65 million
      for the three months ended September 30,
      2005.
      Other interest expense, which includes elimination entries, increased
      $ 6 million
      to $ 209 million
      for the nine months ended September 30,
      2006
      compared to $ 203 million
      for the nine months ended September 30,
      2005.
      Interest expense increased primarily due to reversing $4 million of interest
      related to a tax matter in the prior year.




Progress
      Energy issued 98.6 million contingent value obligations (CVOs) in connection
      with the 2000 acquisition of Florida Progress. Each CVO represents the right
      of
      the holder to receive contingent payments based on the performance of four
      synthetic fuel facilities owned by Progress Energy. The payments, if any, will
      be based on the net after-tax cash flows the facilities generate. At September 30,
      2006
      and 2005, the CVOs had fair market values of approximately $ 33 million
      and $9 million, respectively. We recorded unrealized losses of $ 3 million
      for the three months ended September 30,
      2006
      and unrealized gains of $4 million for the three months ended September 30,
      2005,
      to record the changes in fair value of the CVOs, which had average unit prices
      of $ 0.33 and
      $ 0.09 at September 30,
      2006
      and 2005, respectively. We recorded an unrealized loss of $ 25 million
      for the nine months ended September 30,
      2006
      and an unrealized gain of $4 million for the nine months ended September 30,
      2005.




GAAP
      requires companies to apply a levelized effective tax rate to interim periods
      that is consistent with the estimated annual effective tax rate. Income tax
      expense was decreased by $15 million and $85 million for the three months ended September 30,
      2006
      and 2005, respectively, and increased by $5 million for the nine months ended




78


September
      30, 2006 and decreased by $33 million for the nine months ended September 30,
      2005, in order to maintain an effective rate consistent with the estimated
      annual rate. The tax credits associated with our synthetic fuel operations
      and
      seasonal fluctuations in our annual earnings primarily drive the fluctuations
      in
      the effective tax rate for interim periods. The tax levelization adjustment
      will
      vary each quarter, but it will have no effect on net income for the year.




For
      the
      three months and nine months ended September 30, 2006, income tax expense was
      not increased by the allocation of the Parent’s income tax benefits not related
      to acquisition interest expense to profitable subsidiaries. Due to the repeal
      of
      the Public Utility Holding Company Act of 1935, as amended (PUHCA) we will
      no
      longer allocate the Parent income tax benefits not related to acquisition
      interest expense to profitable subsidiaries beginning in 2006. Since 2002,
      Parent income tax benefits not related to acquisition interest expense were
      allocated to profitable subsidiaries, in accordance with a PUHCA order. For
      the
      three months ended September 30, 2005, income tax expense was increased by
      $10
      million and for the nine months ended September 30, 2005, income tax expense
      was
      increased by $29 million due to the allocation of the Parent’s income tax
      benefit.




For
      the
      three months end September 30, 2006, other did not contribute any material
      earnings compared to $3 million for the same period in 2005. For the nine months
      ended September 30, 2006, other contributed $18 million to earnings compared
      to
      $4 million of expense in 2005. The $22 million change is primarily due to the
      $17 million pre-tax gain, net of minority interest, on the sale of Level 3
      stock
      subsequent to the sale of PT LLC (See Notes 3C and 12). In addition, other
      changed due to a $2 million increase in interest income on temporary investments
      and recording $4 million for South Carolina corporate license related to the
      South Carolina audit settlement in 2005.




**DISCONTINUED
      OPERATIONS**




*GAS
      OPERATIONS*




On
      July
      12, 2006, our board of directors approved a plan to divest of our natural gas
      drilling and production business (Gas), which includes Winchester Production
      Company, Ltd., Westchester Gas Company, Texas Gas Gathering and Talco Midstream
      Assets Ltd.; all are subsidiaries of Progress Fuels Corporation (Progress
      Fuels). On July 22, 2006, we entered into a definitive agreement to sell Gas
      to
      EXCO Resources, Inc. for $1.2 billion in gross cash proceeds. Proceeds from
      the
      sale are expected to be used primarily to reduce holding company debt and for
      other corporate purposes (See Note 3A).




The
      transaction closed on October 2, 2006 and is subject to customary post-closing
      provisions and post-closing adjustments. Specific assets included over 325
      Bcf
      equivalent of proved natural gas reserves, over 350 miles of pipelines, over
      500
      producing wells and other related assets, all of which were located in Texas
      and
      Louisiana. Discontinued Gas operations had net earnings of $57 million for
      the
      three months ended September 30, 2006 compared to net earnings of $15 million
      for the same period in 2005 and net earnings of $84 million for the nine months
      ended September 30, 2006 compared to net earnings of $36 million for the same
      period in 2005. During the fourth quarter of 2006, we expect to record a gain
      on
      the sale of Gas. We anticipate the gain will be approximately $100 million
      less
      than the $400 million previously estimated in July of 2006, due to the increase
      in value related to hedge contracts executed on behalf of the purchaser and
      other closing adjustments. Although these hedge contracts will reduce the gain
      on the sale, they have increased earnings for the three months and nine months
      ended September 30, 2006, and should therefore not result in a materially
      different net impact on retained earnings.




*DESOTO
      AND ROWAN GENERATION FACILITIES*




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





79


The
      sale
      of DeSoto closed in the second quarter of 2006 and the sale of Rowan closed
      during the third quarter of 2006. We recorded an after-tax loss during the
      nine
      months ended September 30, 2006 on the sale of DeSoto and Rowan of $65 million.
      Discontinued DeSoto and Rowan operations had combined earnings of $15 million
      for the three months ended September 30, 2006 compared to earnings of $7 million
      for the same period in 2005 and combined earnings of $9 million for the nine
      months ended September 30, 2006 compared to combined earnings of $7 million
      for
      the same period in 2005.




*PROGRESS
      TELECOM LLC*




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




Based
      on
      the gross proceeds associated with the sale and after consideration of minority
      interest, we recorded an estimated after-tax gain on disposal of $28 million
      during the nine months ended September 30, 2006. Discontinued PT LLC operations
      had earnings of $2 million for both the three months ended September 30, 2006
      and 2005 and a net loss of $3 million for the nine months ended September 30,
      2006 compared to earnings of $3 million for the same period in
      2005.




*DIXIE
      FUELS AND OTHER FUELS BUSINESSES*




On
      March
      1, 2006, we sold our 65 percent interest in Dixie Fuels Limited (Dixie Fuels)
      to
      Kirby Corporation for $16 million in cash. Dixie Fuels operates a fleet of
      four
      ocean-going dry-bulk barge and tugboat units operating under long-term contracts
      with PEF. Dixie Fuels primarily transports coal from the lower Mississippi
      River
      to Progress Energy’s Crystal River Facility. We recorded an after-tax gain of $2
      million on the sale of Dixie Fuels. The other fuels businesses are expected
      to
      be sold within the next six months (See Note 3D).




Discontinued
      Dixie Fuels and other fuels businesses had earnings of $4 million for the
      three months ended September 30, 2006 compared to $2 million for the same period
      in 2005 and earnings of $6 million for the nine months ended September 30,
      2006
      compared to $3 million for the same period in 2005.




*COAL
      MINING BUSINESSES*




On
      November 14, 2005, our board of directors approved a plan to divest of five
      subsidiaries of Progress Fuels engaged in the coal mining business. On May
      1,
      2006, we sold certain net assets of three of our coal mining businesses to
      Alpha
      Natural Resources, LLC for gross proceeds of $23 million plus an estimated
      $4
      million working capital adjustment. As a result, during the nine months ended
      September 30, 2006 we recorded an estimated after-tax loss of $13 million for
      the sale of these assets. The remaining coal mining businesses are expected
      to
      be sold by the end of 2006 (See Note 3E).




Discontinued
      coal mining businesses had earnings of $2 million for the three months
      ended September 30, 2006 compared to a net loss of $9 million for the same
      period in 2005 and a net loss of $1 million for the nine months ended September
      30, 2006 compared to $9 million for the same period in 2005.




*PROGRESS
      RAIL*




On
      March
      24, 2005, we completed the sale of Progress Rail Services Corporation (Progress
      Rail) to One Equity Partners LLC, a private equity firm unit of J.P. Morgan
      Chase & Co. Gross cash proceeds from the sale were approximately $429
      million, consisting of $405 million base proceeds plus a working capital
      adjustment. During the nine months ended September 30, 2006 and 2005 we recorded
      an estimated after-tax loss for the sale of these assets of $3 million and
      $25
      million, respectively. Proceeds from the sale were used to reduce debt (See
      Note
      3F).




Rail
      discontinued operations had no earnings impact for the three months ended
      September 30, 2006 and 2005 and no earnings impact for the nine months ended
      September 30, 2006 compared to earnings of $5 million for the same period in
      2005.




80


**LIQUIDITY
      AND CAPITAL RESOURCES**




**OVERVIEW**




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




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




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




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




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




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




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




*CASH
      FLOWS FROM OPERATIONS*




Net
      cash
      provided by operating activities increased by $683 million for the nine months
      ended September 30, 2006, when compared to the corresponding period in the
      prior
      year. The increase in operating cash flow was primarily due to a $473 million
      increase in the recovery of fuel costs at the Utilities, a $261 million net
      decrease in working capital and other operating activity needs, and $66 million
      of storm restoration costs paid in the prior year at PEF, partially offset
      by
      lower net income. In 2005, the Utilities requested and received approval from
      their respective state commissions for rate increases for fuel cost recovery,
      including amounts for previous under-recoveries. PEF also received approval
      from
      the FPSC authorizing PEF to recover $245 million over a two-year period,
      including interest, of the costs it incurred and previously deferred related
      to
      PEF’s restoration of power to customers associated with the four hurricanes in
      2004. See Note 4 for additional information. The decrease in working capital
      and
      other operating activity needs was primarily due to a $244 million decrease
      from
      the change in accounts receivable, approximately $103 million of proceeds
      received from the restructuring of a long-term coal supply contract, and $32
      million due to fluctuations in emission allowance inventory at PEC. The change
      in accounts receivable included $112 million at PEC, principally driven by
      the
      timing of wholesale sales, and approximately $108 million at our nonregulated
      operations, primarily related to fixed
      price full-requirements contracts that began in April 2005
      at
      Progress Ventures and lower synthetic fuel sales. These impacts were partially
      offset by a $185 million increase in working capital needs from the change
      in
      accounts payable, primarily driven by reduced purchases at our nonregulated
      operations.




81


*INVESTING
      ACTIVITIES*




Net
      cash
      used in investing activities increased by $220 million for the nine months
      ended
      September 30, 2006, when compared to the corresponding period in the prior
      year.
      This was due primarily to $240 million in additional capital expenditures for
      utility property additions and a $132 million decrease in net proceeds from
      available-for-sale securities and other investments. Available-for-sale
      securities and other investments include marketable debt and equity securities
      and investments held in nuclear decommissioning and benefit investment trusts.
      These impacts were partially offset by a $27 million decrease in nuclear fuel
      additions and $90 million in additional proceeds from sales of discontinued
      operations and other assets for 2006 when compared to the corresponding period
      in the prior year.




Excluding
      proceeds from sales of discontinued operations and other assets, cash used
      in
      investing activities increased approximately $310 million in 2006 when compared
      with 2005. The increase in property additions was primarily due to environmental
      compliance and mobile meter reading project expenditures at PEC and to various
      distribution, transmission and steam production projects, as well as, a project
      to change the Bartow plant to more efficient natural gas-burning technology
      at
      PEF. The decrease in nuclear fuel additions was primarily related to nuclear
      facility outage expenditures at PEF in 2005.




During
      the nine months ended September 30, 2006, proceeds from sales of discontinued
      operations and other assets, net of cash divested primarily included
      approximately $405 million from the sale of DeSoto and Rowan (See Note 3B),
      approximately $70 million from the sale of PT LLC (See Note 3C), approximately
      $27 million from the sale of certain net assets of the coal mining business
      (See
      Note 3E), and approximately $16 million from the sale of Dixie Fuels (See Note
      3D). During the same period in 2005, proceeds from sales of discontinued
      operations and other assets primarily included $393 million in proceeds from
      the
      sale of Progress Rail in March 2005, net of cash divested (See Note
      3F).




*FINANCING
      ACTIVITIES*




Net
      cash
      used in financing activities increased by $927 million for the nine months
      ended
      September 30, 2006, when compared to the corresponding period in the prior
      year.
      The increase in cash used in financing activities was due primarily to a
      decrease in the proceeds from issuances of long-term debt and common stock
      and
      payment of the March 1, 2006 maturity of $800 million 6.75% senior unsecured
      notes. These notes were paid with net proceeds from the sale of $400 million
      in
      senior notes, as discussed below, and a combination of cash and commercial
      paper
      proceeds.




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




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




On
      March
      31, 2006, Progress Energy, as a well-known seasoned issuer, filed a shelf
      registration statement with the SEC. The registration statement became effective
      upon filing with the SEC and will allow Progress Energy to issue an
      indeterminate number or amount of various securities, including Senior Debt
      Securities, Junior Subordinated Debentures, Common Stock, Preferred Stock,
      Stock
      Purchase Contracts, Stock Purchase Units, and Trust Preferred Securities and
      Guarantees. The board of directors has authorized the issuance and sale of
      up to
      $1 billion aggregate principal amount of various securities off the new shelf
      registration statement, in addition to $679 million of various securities,
      which
      were not sold from our prior shelf registration statement. Accordingly, as
      of
      September 30, 2006, Progress Energy has the authority to issue and sell up
      to
      $1.679 billion aggregate principal amount of various securities.




82


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




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




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




On
      July
      3, 2006, PEF paid at maturity $45 million of its 6.77% Medium-Term Notes, Series
      B with available cash on hand.




On
      November 1, 2006, Progress Capital Holdings, Inc., one of our wholly owned
      subsidiaries, paid at maturity $60 million of its 7.17% Medium-Term Notes with
      available cash on hand.




At
      December 31, 2005, we had 500 million shares of common stock authorized under
      our charter, of which approximately 252 million were outstanding. For the three
      months ended September 30, 2006 and 2005, respectively, we issued approximately
      0.3 million shares and 0.4 million shares of common stock resulting in
      approximately $ 13 million
      and $22 million in proceeds, net of purchases of restricted shares, primarily
      to
      meet the requirements of the Progress Energy 401(k) Savings and Stock Ownership
      Plan (401(k) Plan) and the Investor Plus Stock Purchase Plan. For the nine
      months ended September 30, 2006 and 2005, respectively, we issued approximately
      1.7 million shares and 4.4 million shares of common stock resulting in
      approximately $ 73 million
      and $193 million in proceeds, net of purchases of restricted shares. Included
      in
      these amounts were approximately 1.4 million shares and 4.3 million shares
      for
      net proceeds of approximately $58 million and $187 million, respectively, to
      meet the requirements of the 401(k) Plan and the Investor Plus Stock Purchase
      Plan. For the fiscal year 2006, we expect to realize an aggregate amount of
      approximately $100 million from the sale of stock through these
      plans.




**FUTURE
      LIQUIDITY AND CAPITAL RESOURCES**




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




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




At
      September 30, 2006, the current portion of our long-term debt was $700 million,
      which we expect to fund with cash from operations, proceeds from sales of assets
      and/or commercial paper borrowings. See Note 3 for additional information on
      asset sales.




On
      October 27, 2006, Progress Energy announced that on November 27, 2006, it
      intends to redeem the entire outstanding $350 million principal amount of its
      6.05% Senior Notes due April 15, 2007 and the entire outstanding




83


$400
      million principal amount of its 5.85% Senior Notes due October 30, 2008. The
      redemptions will be funded with existing cash and no additional debt will be
      incurred in connection with the redemptions.




On
      June
      13, 2006, Fitch Ratings (Fitch) placed the senior unsecured credit ratings
      of
      Progress Energy (BBB-),
      PEC (BBB+) and PEF (BBB+) on Rating Watch Positive. The short-term ratings
      of
      PEC and PEF were unaffected. The placement of PGN's ratings on Rating Watch
      Positive was based on Fitch's expectation that significant holding company
      reductions of debt and business risk will result from pending and planned asset
      sales, as well as the successful resolution of the IRS audit of the Earthco
      synthetic fuel facilities. On July 25, 2006, S&P affirmed the corporate
      credit ratings of BBB at Progress Energy, Inc., PEC and PEF and revised each
      company's outlook to positive from stable. The outlook revision reflects the
      progress towards our holding company debt reduction plan and expectations of
      future financial performance at the BBB+ benchmark levels. S&P also improved
      Progress Energy's business risk profile to 5 from 6 due to the sales of the
      DeSoto and Rowan plants and Gas, as well as, anticipated cash flow benefits
      related to the idling of our synthetic fuel facilities. On August 31, 2006,
      Moody’s upgraded Progress Energy’s outlook to stable from negative, citing
      expected holding company debt reduction from asset sale proceeds, successful
      resolution of the IRS audit of the Earthco synthetic fuel facilities, and lower
      business risk after divestitures of non-core assets. Moody’s also upgraded PEC’s
      outlook to positive from stable, citing PEC’s manageable leverage, strong cash
      flow coverage ratios for its current ratings category, and constructive
      regulatory environments in North Carolina and South Carolina. PEF’s outlook
      remains stable. We do not expect these changes to have a material impact on
      our
      borrowing costs or overall liquidity.




Regulatory
      matters as discussed in Note 4 and filings for recovery of environmental costs
      as discussed in Note 13 may impact our future liquidity and financing
      activities.




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




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




**GUARANTEES**




As
      a part
      of normal business, we enter into various agreements providing future financial
      or performance assurances to third parties that are outside the scope of FASB
      Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for
      Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN No.
      45). These agreements are entered into primarily to support or enhance the
      creditworthiness otherwise attributed to Progress Energy or our subsidiaries
      on
      a stand-alone basis, thereby facilitating the extension of sufficient credit
      to
      accomplish the subsidiaries’ intended commercial purposes. Our guarantees
      include performance obligations under power supply agreements, tolling
      agreements, transmission agreements, gas agreements, fuel procurement agreements
      and trading operations. Our guarantees also include standby letters of credit,
      surety bonds and guarantees in support of nuclear decommissioning. At September
      30, 2006, we have issued $1.578 billion of guarantees for future financial
      or
      performance assurance. Included in this amount is $300 million of Parent-issued
      guarantees of certain payments of two wholly owned indirect subsidiaries (See
      Note 15). We do not believe conditions are likely for significant performance
      under the guarantees of performance issued by or on behalf of affiliates.




The
      majority of contracts supported by the guarantees contain provisions that
      trigger guarantee obligations based on downgrade events to below investment
      grade (below BBB- or Baa3) by S&P or Moody’s, ratings triggers, monthly
      netting of exposure and/or payments and offset provisions in the event of a
      default. At September 30, 2006, no guarantee obligations had been triggered.
      If
      the guarantee obligations were triggered, the approximate amount of liquidity
      requirements to support ongoing operations within a 90-day period, associated
      with guarantees for Progress Energy’s nonregulated portfolio and power supply
      agreements, was $585 million. While we believe that we would be able to meet
      this obligation with cash or letters of credit, if we cannot, our financial
      condition, liquidity and results of operations will be materially and adversely
      impacted.




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




84


**MARKET
      RISK AND DERIVATIVES**




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




**CONTRACTUAL
      OBLIGATIONS**




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




**OTHER
      MATTERS**




**SYNTHETIC
      FUELS TAX CREDITS**




Historically,
      we have had substantial operations associated with the production of coal-based
      solid synthetic fuels as
      defined under Section 29 of the Code (Section 29) .
      The
      production and sale of these products qualifies for federal income tax credits
      so long as certain requirements are satisfied, including
      a requirement that the synthetic fuel differs significantly in chemical
      composition from the coal used to produce such synthetic fuel and that the
      fuel
      was produced from a facility that was placed in service before July 1,
      1998 . Qualifying
      synthetic fuel facilities entitle their owners to federal income tax credits
      based on the barrel of oil equivalent of the synthetic fuel produced and sold
      by
      these plants. The
      tax
      credits associated with synthetic fuels in a particular year may be phased
      out
      if Annual Average market prices for crude oil exceed certain prices. Synthetic
      fuel is generally not economical to produce and sell absent the credits. On
      May
      22, 2006, we idled production of synthetic fuel at our synthetic fuel
      facilities. As discussed below in *IMPACT
      OF CRUDE OIL PRICES* ,
      the
      decision to idle production was based on the high level of oil prices and the
      continued uncertainty of any proposed federal legislation regarding the value
      of
      the tax credits received as a result of synthetic fuel production. Based on
      significantly reduced oil prices combined with current favorable fuel price
      projections, we resumed limited production at our synthetic fuel facilities
      in
      September and October 2006. We currently expect to produce up to 1.5 million
      tons during the remainder of 2006. We will continue to monitor the economic
      environment surrounding synthetic fuel production and will adjust our production
      as warranted by changing market conditions.




*TAX
      CREDITS*




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




Total
      Section 29/45K credits generated through September 30, 2006 (including those
      generated by Florida Progress prior to our acquisition), were approximately
      $1.8
      billion, of which $899 million has been used to offset regular federal income
      tax liability, $888 million is being carried forward as deferred tax credits
      and
      $19 million has been reserved due to the potential phase-out of tax credits
      due
      to high oil prices, as described below.




*IMPACT
      OF CRUDE OIL PRICES*




Although
      the Section 29/45K tax credit program is expected to continue through 2007,
      recent market conditions, world events and catastrophic weather events have
      increased the volatility and level of oil prices that could limit the amount
      of
      those credits or eliminate them entirely for 2006 and 2007. This possibility
      is
      due to a provision of Section 29 that provides that if the average wellhead
      price per barrel for unregulated domestic crude oil for the year (the Annual
      Average Price) exceeds a certain threshold price (the Threshold Price), the
      amount of Section 29/45K tax credits is reduced for that year. Also, if the
      Annual Average Price increases high enough (the Phase-out Price), the Section
      29/45K tax credits are eliminated for that year. The Threshold Price and the
      Phase-out Price are adjusted




85


annually
      for inflation.




If
      the
      Annual Average Price falls between the Threshold Price and the Phase-out Price
      for a year, the amount by which Section 29/45K tax credits are reduced will
      depend on where the Annual Average Price falls in that continuum. For example,
      for 2005, the Threshold Price was $53.20 per barrel and the Phase-out Price
      was
      $66.78 per barrel. If the Annual Average Price had been $59.99 per barrel,
      there
      would have been a 50 percent reduction in the amount of Section 29 tax credits
      for that year.




The
      Department of the Treasury calculates the Annual Average Price based on the
      Domestic Crude Oil First Purchases Prices published by the Energy Information
      Agency (EIA). Because the EIA publishes its information on a three-month lag,
      the secretary of the Treasury finalizes the calculations three months after
      the
      year in question ends. The Annual Average Price for calendar year 2005 was
      published on April 11, 2006. Based on the Annual Average Price of $50.26, there
      was no phase-out of our synthetic fuel tax credits in 2005.




We
      estimate that the 2006 Threshold Price will be approximately $55 per barrel
      and
      the Phase-out Price will be approximately $69 per barrel, based on an estimated
      inflation adjustment for 2006. The monthly Domestic Crude Oil First Purchases
      Price published by the EIA has recently averaged approximately $7 lower than
      the
      corresponding monthly New York Mercantile Exchange (NYMEX) settlement price
      for
      light sweet crude oil. Through September 30, 2006, the average NYMEX settlement
      price for light sweet crude oil was $68.26 per barrel, and as of September
      30,
      2006, the average NYMEX futures price for light sweet crude oil for the
      remainder of calendar year 2006 was $63.53 per barrel. This results in a
      weighted-average annual price for light sweet crude oil of approximately $67.08
      per barrel for calendar year 2006. Based upon the estimated 2006 Threshold
      Price
      and Phase-out Price, if oil prices for 2006 averaged this weighted price of
      approximately $67.08 per barrel for the entire year in 2006, we currently
      estimate that the synthetic fuel tax credit amount for 2006 would be reduced
      by
      approximately 35 percent. Therefore, we reserved 35 percent or approximately
      $19
      million of the $54 million in tax credits generated during the first nine months
      of 2006. The NYMEX price of oil for the remainder of 2006 would have to be
      $43.66 to have no reduction in value of tax credits generated during 2006 and
      would have to be $99.90 to have a full reduction in value. The final
      calculations of any reductions in the value of the tax credits will not be
      determined until early 2007 when final 2006 oil prices are known. Additional
      fluctuations in oil prices may cause quarterly adjustments to our results of
      operations and the amount of tax credits we record or reserve, either positive
      or negative, depending on current and futures oil prices at the end of the
      quarter, which impact the estimated weighted average annual price of oil for
      2006.




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




No
      decisions have been made about synthetic fuel production levels, if any, in
      2007. Such decisions will be based on then-current and projected fuel prices.
      Assuming an inflation adjustment of 2.7 percent, we estimate that the 2007
      Threshold Price and Phase-Out Price would be approximately $57 and $71,
      respectively.




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




We
      monitor our long-lived assets for impairment as warranted. **** With
      the
      idling of our synthetic fuel facilities during the second quarter of 2006,
      we
      performed an impairment evaluation of our synthetic fuel and other related
      operating long-lived assets. The impairment test considered numerous factors,
      including, among other things, continued high oil prices, the continued
      uncertainty of whether federal legislation will be enacted that would provide
      assurance that tax credits would exist for 2006 production and the then-current
      “idle” state of our synthetic fuel facilities. Based on the results of the
      impairment test, we recorded pre-tax impairment charges of $91 million ($55
      million after-tax) during the quarter ended June 30, 2006 (See Notes 6 and
      7).
      These charges represent the entirety of the asset carrying value of our
      synthetic fuel intangible assets and manufacturing facilities, as well as a
      portion of the asset carrying value associated with the river terminals at
      which
      the synthetic fuel manufacturing facilities are located.




*PERMANENT
      SUBCOMMITTEE*




In
      October 2003, the United States Senate Permanent Subcommittee on Investigations
      began a general investigation




86


concerning
      synthetic fuel tax credits claimed under Section 29. The investigation is
      examining the utilization of the credits, the nature of the technologies and
      fuels created, the use of the synthetic fuel, and other aspects of Section
      29
      and is not specific to our synthetic fuel operations. Progress Energy provided
      information in connection with this investigation. We cannot predict the outcome
      of this matter and are not aware of any current investigation activity.




*SALE
      OF PARTNERSHIP INTEREST*




In
      June
      2004, through our subsidiary Progress Fuels, we sold in two transactions a
      combined 49.8 percent partnership interest in Colona Synfuel Limited
      Partnership, LLLP (Colona), one of our synthetic fuel facilities. Substantially
      all proceeds from the sales will be received over time, which is typical of
      such
      sales in the industry. Gains from the sales will be recognized on a cost
      recovery basis as the facility produces and sells synthetic fuel and when there
      is persuasive evidence that the sales proceeds have become fixed or determinable
      and collectability is reasonably assured. Gain recognition is dependent on
      the
      synthetic fuel production qualifying for Section 29/45K tax credits and the
      value of such tax credits as 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 to subsequent quarters, or to a subsequent
      calendar 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 or to a
      subsequent calendar year. With an extended idling of our production, the amount
      of proceeds realized from the sale could be significantly impacted. As of
      September 30, 2006, a pre-tax gain on monetization of $11 million has been
      deferred. Based on the current level of oil prices, we cannot predict how much,
      if any, of this gain will be recognized this year. Beginning with the payment
      for the second quarter of 2006, the minority interest parties have elected
      to
      defer their cash payments in consideration of the idling of the synthetic fuel
      facilities.




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




**REGULATORY
      ENVIRONMENT**




The
      Utilities’ operations in North Carolina, South Carolina and Florida are
      regulated by the North Carolina Utilities Commission (NCUC), Public Service
      Commission of South Carolina (SCPSC) and the Florida Public Service Commission
      (FPSC), respectively. The electric businesses are also subject to regulation
      by
      the FERC, the NRC and other federal and state agencies common to the utility
      industry. As a result of regulation, many of our fundamental business decisions,
      as well as the rate of return the Utilities are permitted to earn, are subject
      to the approval of these governmental agencies.




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




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




On
      April
      26, 2006, PEC submitted a license renewal application with the FERC seeking
      a
      50-year license for its Tillery and Blewett hydroelectric generating plants.
      The
      license for these plants currently expires in April 2008 and the requested
      renewal will allow the plants to continue operations until 2058. PEC and a
      key
      group of stakeholders have reached an agreement in principle that supports
      PEC’s
      relicensing application. The agreement in principle, which has been filed with
      the FERC, will establish increased water flows from both plants and will protect
      water supplies for local government as well as provide enhancements for
      recreation, water quality and aquatic habits. The




87


remaining
      phase of the application process will take approximately two years and includes
      review by the FERC and solicitation of public comment. We cannot predict the
      outcome of this matter.




**APPLICATIONS
      FOR NUCLEAR POWER PLANT LICENSES**




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




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




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




**ENVIRONMENTAL
      MATTERS**




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




**NEW
      ACCOUNTING STANDARDS**




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


88


***PEC***




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




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




**LIQUIDITY
      AND CAPITAL RESOURCES**




Cash
      provided by operating activities increased $169 million for the nine months
      ended September 30, 2006, when compared to the corresponding period in the
      prior
      year. The increase in operating cash flow was primarily due to a $99 million
      increase in the recovery of fuel costs, a $67 million net decrease in working
      capital needs and a $56 million net decrease in other operating activity needs,
      partially offset by lower net income. In 2005, PEC requested and received
      approval from the NCUC and SCPSC for rate increases for fuel cost recovery,
      including amounts for previous under-recoveries. The decrease in working capital
      needs was primarily due to decreases from the change in accounts receivable
      of
      $112 million, principally driven by the timing of wholesale sales, and $47
      million related to fluctuations in inventory, primarily coal, partially offset
      by a $122 million net increase in tax payments for the period in 2006 compared
      to 2005. The decrease in other operating activity needs was largely due to
      $32
      million of emission allowance inventory fluctuations.




Cash
      used
      in investing activities decreased $79 million for the nine months ended
      September 30, 2006, when compared to the corresponding period in the prior
      year
      primarily due to a $53 million increase in property and nuclear fuel additions
      and a $20 million decrease in net proceeds from available-for-sale securities
      and other investments for the period in 2006. The increase in property additions
      was primarily related to environmental compliance and mobile meter reading
      project expenditures. The increase in nuclear fuel additions was related to
      nuclear facility refueling outages. Available-for-sale securities and other
      investments include marketable debt securities and investments held in nuclear
      decommissioning trusts.




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




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




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




**MARKET
      RISK AND DERIVATIVES**




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




**CONTRACTUAL
      OBLIGATIONS**




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




89


***PEF***




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




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




**LIQUIDITY
      AND CAPITAL RESOURCES**




PEF’s
      net
      cash provided by operating activities increased by $351 million for the nine
      months ended September 30, 2006, when compared to the corresponding period
      in
      the prior year. The increase was due primarily to a $374 million increase in
      the
      recovery of fuel costs, $90 million due to the timing of income tax payments,
      $66 million of storm restoration costs paid in the prior year. In 2005, PEF
      requested and received approval from the FPSC for rate increases for fuel cost
      recovery, including amounts for previous under-recoveries. PEF also received
      approval from the FPSC authorizing PEF to recover $245 million over a two-year
      period, including interest, of the costs it incurred and previously deferred
      related to PEF’s restoration of power to customers associated with the four
      hurricanes in 2004. See Note 4 for additional information. These impacts were
      partially offset by a $69 million decrease from fluctuations in inventory,
      primarily related to coal.




Cash
      used
      in investing activities increased $185 million for the nine months ended
      September 30, 2006, when compared to the corresponding period in the prior
      year.
      The increase in cash used in investing activities was primarily due to $192
      million of property additions, primarily related to various distribution,
      transmission and steam production projects, as well as, a project to change
      the
      Bartow plant to more efficient natural gas-burning technology and lower proceeds
      from sales of assets in 2006 as compared to 2005 due to the sale of assets
      to
      Winter Park in 2005. These impacts were partially offset by a $40 million
      decrease in nuclear fuel additions related to nuclear facility refueling outages
      in 2005.




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




90


Item
      3 .  Quantitative
      and Qualitative Disclosures about Market Risk





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




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




***PROGRESS
      ENERGY***




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




**INTEREST
      RATE RISK**




Our
      exposure to changes in interest rates from fixed rate and variable rate
      long-term debt at September 30, 2006, has changed from December 31, 2005. The
      total notional amount of fixed rate long-term debt at September 30, 2006, was
      $ 9.192 billion,
      with an average interest rate of 6.29 %
      and
      fair market value of $ 9.559 billion.
      The total notional amount of variable rate long-term debt at September 30,
      2006,
      was $ 1.411 billion,
      with an average interest rate of 4.38 %
      and
      fair market value of $ 1.411 billion.




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




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




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




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




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




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




91


**CASH
      FLOW HEDGES**




At
      September 30, 2006, the Utilities had a combined $100 million notional of
      pay-fixed forward starting swaps to hedge cash flow risk with regard to future
      financing transactions. Under terms of these swap agreements, we will pay a
      fixed rate and received a floating rate based on 3-month LIBOR. The Parent
      had
      no open interest rate cash flow hedges at September 30, 2006, while the
      Utilities had no open interest rate cash flow hedges at December 31,
      2005.


Cash
                Flow Hedges (dollars in millions)
            Notional
                Amount
            Pay
            Receive(a)
            Fair
                Value
            Exposure(b)Progress
                Energy, Inc.**Risk
                hedged at September 30, 2006:**
            **None**Risk
                hedged at December 31, 2005:Anticipated
                10-year debt issue(c)
            $100
            4.87%
            3-month
                LIBOR
            $1
            $(2)PEC**Risk
                hedged at September 30, 2006:****Anticipated
                10-year debt issue**
            **$50**
            **5.61%**
            **3-month
                LIBOR**
            **$(2)**
            **$(1)**Risk
                hedged at December 31, 2005:
            NonePEF**Risk
                hedged at September 30, 2006:****Anticipated
                10-year debt issue**
            **$50**
            **5.61%**
            **3-month
                LIBOR**
            **$(2)**
            **$(1)**Risk
                hedged at December 31, 2005:
            None








(a)
            
            3-month
              LIBOR rate was 5.37% at September 30, 2006 and 4.54% at December 31,
              2005. (b)
            
            Sensitivity
              indicates change in value due to 25 basis points unfavorable shift
              in
              interest rates. (c)
            
            Progress
                Energy, Inc. anticipated 10-year debt issue hedges terminated on
                March 1,
                2006 with required mandatory cash
                settlement.





PEC
      entered into a $50 million forward starting swap on June 2, 2006, and PEF
      entered into a $50 million forward starting swap on June 6, 2006, to mitigate
      exposure to interest rate risk on their respective anticipated fixed rate debt
      issuances in 2007. These swaps were designated as cash flow hedges as of July
      1,
      2006.





**FAIR
      VALUE HEDGES**




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


92





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





(a)
            Weighted
                average interest rate.


(b)
            3-month
                LIBOR rate was 5.37% at September 30, 2006 and 4.54% at December
                31,
                2005.


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





**MARKETABLE
      SECURITIES PRICE RISK**





At
      September 30, 2006 and December 31, 2005, the fair value of our nuclear
      decommissioning trust funds was $1.215 billion and $1.133 billion, respectively,
      including $692 million and $640 million, respectively, for PEC and $523 million
      and $493 million, respectively, for PEF. The accounting for nuclear
      decommissioning recognizes that the Utilities’ regulated electric rates provide
      for recovery of these costs net of any trust fund earnings, and, therefore,
      fluctuations in trust fund marketable security returns do not affect
      earnings.




**CONTINGENT
      VALUE OBLIGATIONS MARKET VALUE RISK**




CVOs
      are
      recorded at fair value, and unrealized gains and losses from changes in fair
      value are recognized in earnings. At September 30, 2006 and December 31, 2005,
      the fair value of CVOs was $33 million and $7 million, respectively. At
      September 30, 2006, a hypothetical 10 percent change in the market price would
      not have a material effect on our financial position, results of operations
      or
      cash flows.




**COMMODITY
      PRICE RISK**




See
      Note
      10 for additional information with regard to our commodity contracts and use
      of
      derivative financial instruments. The following discussion excludes commodity
      derivative instruments held by Gas, which was classified as discontinued
      operations.




**GENERAL**




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




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




93


We
      perform sensitivity analyses to estimate our exposure to the market risk of
      our
      derivative commodity instruments. Derivative commodity instruments held by
      the
      Gas business sold on October 2, 2006, (see Note 3A) were excluded from the
      analysis. The following discussion addresses the stand-alone commodity risk
      created by our derivative commodity instruments, without regard to the
      offsetting effect of the underlying exposure these instruments are intended
      to
      hedge. The sensitivity analysis performed on these derivative commodity
      instruments uses quoted prices obtained from brokers to measure the potential
      loss in earnings from a hypothetical 10 percent adverse change in market prices
      over the next 12 months. A decrease of 10 percent in the market prices of energy
      commodities from their September 30, 2006 levels would decrease our after-tax
      earnings by approximately $53 million.




The
      above
      analysis of our derivative commodity instruments used for hedging purposes
      does
      not include the potential favorable impact of the same hypothetical price
      movement on our physical purchases of natural gas and power to which the hedges
      relate. Additionally, our derivative commodity portfolio is managed to
      complement the physical transaction portfolio, reducing overall risk within
      set
      limits. Therefore, the potential impact to our earnings from a hypothetical
      10
      percent adverse change in commodity market prices would be offset by a favorable
      impact on the underlying hedged physical transactions, assuming the derivative
      commodity positions are not closed out in advance of their expected term,
      continue to function effectively as hedges of the underlying risk, and the
      anticipated underlying transactions settle, as applicable. If any of these
      assumptions ceases to be true, a loss on the derivative instruments may occur.




**ECONOMIC
      DERIVATIVES**




Derivative
      products, primarily electricity and natural gas contracts, may be entered into
      from time to time for economic hedging purposes. While management believes
      the
      economic hedges mitigate exposures to fluctuations in commodity prices, these
      instruments are not designated as hedges for accounting purposes and are
      monitored consistent with trading positions. We manage open positions according
      to established policies and guidelines that limit our exposure to market risk
      and require daily reporting to management of financial exposures.




For
      the
      three months and nine months ended September 30, 2006, we recorded pre-tax
      losses of $30 million and $39 million, respectively. For the three months and
      nine months ended September 30, 2005, we recorded pre-tax losses of $8 million.
      Gains and losses from such contracts were not material to the Utilities’ results
      of operations for the three months and nine months ended September 30, 2006
      and
      2005. At September 30, 2006, the fair values of these instruments for our
      nonregulated operations were a $12 million short-term derivative asset position
      included in other current assets, a $124 million long-term derivative asset
      position included in other assets and deferred debits, a $27 million short-term
      derivative liability position included in other current liabilities and a $7
      million long-term derivative liability position included in other liabilities
      and deferred credits on the Balance Sheet. We did not have material outstanding
      positions in such contracts at December 31, 2005, other than those at PEF,
      which
      are discussed below. See Cash Flow Hedge discussion below regarding
      dedesignation of derivative contracts covering approximately 95 bcf of natural
      gas. PEC did not have material outstanding positions in such contracts at
      September 30, 2006 or December 31, 2005. PEF did not have material outstanding
      positions in such contracts at September 30, 2006 or December 31, 2005, other
      than those receiving regulatory accounting treatment, as described below.




PEF
      has
      derivative instruments related to its exposure to price fluctuations on fuel
      oil
      and natural gas purchases. These instruments receive regulatory accounting
      treatment. Unrealized gains and losses are recorded in regulatory liabilities
      and regulatory assets, respectively, until the contracts are settled. Once
      settled, any realized gains or losses are passed through the fuel adjustment
      clause. At September 30, 2006, the fair values of these instruments were a
      $3
      million short-term derivative asset position included in other current assets,
      a
      $5 million long-term derivative asset position included in other assets and
      deferred debits, a $45 million short-term derivative liability position included
      in other current liabilities and a $49 million long-term derivative liability
      position included in other liabilities and deferred credits on the Balance
      Sheets. At December 31, 2005, the fair values of the instruments were a $77
      million short-term derivative asset position included in other current assets,
      a
      $45 million long-term derivative asset position included in other assets and
      deferred debits and a $49 million long-term derivative liability position
      included in other liabilities and deferred credits on the Balance Sheets.




94


**CASH
      FLOW HEDGES**




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




Based
      on
      the alternative strategies being pursued and our assessment of the likelihood
      of
      divestiture of CCO assets, management determined, as of July 12, 2006, that
      it
      was no longer probable that the forecasted transactions underlying certain
      derivative contracts covering approximately 95 bcf of natural gas would be
      fulfilled. Therefore, these contracts were no longer treated as cash flow
      hedges, and were dedesignated. Beginning July 12, 2006, cash flow hedge
      accounting was discontinued. Unrealized after-tax gains on these contracts
      recorded in accumulated other comprehensive income/(loss) prior to July 12,
      2006
      have not been reclassified to earnings. However, if the disposition status
      of
      the assets increases to probable then we will evaluate whether the unrealized
      gains will be reclassified to earnings.




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


**September
                30, 2006**
            
            December
                31, 2005(in
                millions)
            
            **Progress
                Energy**
            
            **PEC**
            
            Progress
                Energy
            
            PECFair
                value of assets
            
            **$**
            **3**
            
            **$**
            **3**
            
            $
            170
            
            $
            7Fair
                value of liabilities
            
            
            **(2**
            **)**
            
            **-**
            
            
            (58
            )
            
            (4
            )Fair
                value, net
            
            **$**
            **1**
            
            **$**
            **3**
            
            $
            112
            
            $
            3





***PEC***





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





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





***PEF***





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




95


Item
      4 :  Controls
      and Procedures





Progress
      Energy, Inc.





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





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





PEC





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





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





PEF





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





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





96




PART
        II. OTHER
        INFORMATION


Item
      1.  Legal
      Proceedings




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









Item
      1A.  Risk
      Factors




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





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





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





Recent
      increases in the price of oil have limited the amount of Section 29/45K tax
      credits we recognized through September 30, 2006 and could eliminate them
      altogether. On May 22, 2006, we idled production of synthetic fuel at our
      synthetic fuel facilities. The decision to idle production was based on the
      high
      level of oil prices and the continued uncertainty of any proposed federal
      legislation regarding the value of the tax credits received as a result of
      synthetic fuel production. We resumed limited production in September and
      October as a result of significantly reduced oil prices combined with current
      favorable fuel price projections. We currently expect to produce up to 1.5
      million tons during the remainder of 2006. No decisions have been made about
      synthetic fuel production levels, if any, for 2007. We will continue to monitor
      the economic environment surrounding synthetic fuel production and will adjust
      our production as warranted by changing market conditions.




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





If
      the
      Section 29/45 tax credits earned to date during 2006 were completely phased
      out
      due to high oil prices, then the current year losses from our synthetic fuel
      operations would equal its operating losses ($59 million through September
      30,
      2006) plus the reversal of income related to Section 29/45 tax credits recorded
      during the year ($35 million through September 30, 2006).




***Our
      ability to recover significant costs resulting from severe weather events is
      subject to regulatory oversight and the timing and amount of any such recovery
      is uncertain and may impact our financial conditions.***





We
      are
      subject to incurring significant costs resulting from severe weather. While
      the
      Utilities have historically been granted regulatory approval to recover the
      majority of significant storm costs incurred, the Utilities’ storm cost recovery
      petitions may not always be granted or may not be granted in a timely
      manner.





97


Under
      a
      regulatory order, PEF maintains a storm damage reserve account for major storms.
      Due to the significant costs incurred to recover from the damage sustained
      during the 2004 hurricane season, PEF’s storm damage reserve accounts were
      largely depleted at December 31, 2005. On August 29, 2006, the FPSC approved
      a
      modified settlement agreement that extends PEF’s current two-year storm
      surcharge for retail customers, equaling approximately $3.61 on the average
      residential monthly customer bill of 1,000 kWhs, for an additional 12-month
      period. The extension is expected to replenish the existing storm reserve by
      an
      estimated additional $130 million. In the event future storms cause the reserve
      to be depleted, the modified settlement agreement provides that PEF would be
      able to petition the FPSC for implementation of an interim retail surcharge
      of
      at least 80 percent and up to 100 percent of the claimed deficiency of its
      storm
      reserve. The intervenors to the settlement agreement agreed not to oppose
      recovery of 80 percent of the future claimed deficiency but reserved the right
      to challenge the recovery of the remaining 20 percent. The FPSC has the right
      to
      review PEF’s storm costs for prudence. Storm reserve costs attributable to
      wholesale customers may be amortized consistent with recovery of such amounts
      in
      wholesale rates, albeit at a specified amount per year resulting in an extended
      recovery period.





PEC
      does
      not maintain a storm damage reserve account and does not have an on-going
      regulatory mechanism to recover storm costs. PEC has previously sought and
      received permission from the NCUC and the SCPSC to defer storm expenses and
      amortize them over five-year periods. PEC did not seek deferral of storm costs
      from the NCUC or SCPSC during 2005 or through September 30, 2006.





If
      we
      cannot recover costs associated with future significant weather events in a
      timely manner, or in an amount sufficient to cover our actual costs, or if
      our
      storm reserve is inadequate, our financial conditions and results of operations
      could be materially and adversely impacted.









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




(a)  PERFORMANCE
      SHARE SUB-PLAN AWARD PAYOUT




(a)
            Securities
                Delivered.On
                September 21, 2006, 54 shares of our common stock were delivered
                to the
                estate of an employee pursuant to the terms of the Progress Energy
                2002
                Equity Incentive Plan (EIP), which was approved by the Progress Energy’s
                shareholders on May 8, 2002. The shares of common stock delivered
                pursuant
                to the EIP were newly issued shares of Progress
                Energy.




(b)
            Underwriters
                and Other Purchasers.No
                underwriters were used in connection with the delivery of our common
                stock
                described above.




(c)
            Consideration.The performance share awards were initially granted during the employee’s
                term of employment to provide an incentive to the former employee
                to exert
                his utmost efforts on Progress Energy’s behalf and thus enhance our
                performance while aligning the employee's interest with those of
                our
                shareholders.  (d)
            Exemption from Registration Claimed.The common shares described in this Item were delivered pursuant to a
              broad-based, involuntary, non-contributory employee benefit plan, and
              thus
              did not involve an offer to sell or sale of securities within the meaning
              of Section 2(3) of the Securities Act of 1933. Receipt of the shares
              of
              our common stock required no investment decision on the part of the
              recipients.





98


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


**Period**
            **(a)**
              **Total
                Number of Shares**
              **(or
                Units) Purchased (1)(2)**
            **(b)**
              **Average
                Price Paid Per Share (or Unit)**
            **(c)**
              **Total
                Number of Shares (or Units) Purchased as Part of Publicly Announced
                Plans
                or Programs (1)**
            **(d)**
              **Maximum
                Number (or Approximate Dollar Value) of Shares (or Units) that May
                Yet Be
                Purchased Under the Plans or Programs (1)**July
                1 - July 31
            127,161
            $43.9172
            N/A
            N/AAugust
                1- August 31
            -
            -
            N/A
            N/ASeptember
                1 - September 30
            173,500
            $43.5255
            N/A
            N/ATotal
            300,661
            $43.6912
            N/A
            N/A





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





(2)
            Open-market
                transactions were executed by the plan administrator to purchase
                300,661
                shares of our common stock at an average price of $43.6912 to meet
                share
                delivery obligations under the Progress Energy 401(k) Savings and
                Stock
                Ownership Plan.







Item
      6.  Exhibits




(a)
            Exhibits




ExhibitNumber
            Description
            ProgressEnergy
            PEC
            PEF31(a)
            302
                Certifications of Chief Executive Officer
            X31(b)
            302
                Certifications of Chief Financial Officer
            X31(c)
            302
                Certifications of Chief Executive Officer
            
            X31(d)
            302
                Certifications of Chief Financial Officer
            
            X31(e)
            302
                Certifications of Chief Executive Officer
            
            
            X31(f)
            302
                Certifications of Chief Financial Officer
            
            
            X32(a)
            906
                Certifications of Chief Executive Officer
            X32(b)
            906
                Certifications of Chief Financial Officer
            X32(c)
            906
                Certifications of Chief Executive Officer
            
            X32(d)
            906
                Certifications of Chief Financial Officer
            
            X32(e)
            906
                Certifications of Chief Executive Officer
            
            
            X32(f)
            906
                Certifications of Chief Financial Officer
            
            
            X





99


SIGNATURES








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





PROGRESS
                ENERGY, INC.CAROLINA
                POWER & LIGHT COMPANYFLORIDA
                POWER CORPORATIONDate:
                November 3, 2006
            (Registrants)By:/s/
                Peter M. Scott IIIPeter
                M. Scott IIIExecutive
                Vice President and Chief Financial OfficerBy:/s/
                Jeffrey M. StoneJeffrey
                M. StoneChief
                Accounting Officer and ControllerProgress
                Energy, Inc.Chief
                Accounting OfficerCarolina
                Power & Light CompanyFlorida
                Power Corporation





100