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, 1998

                                       OR

                 [ ] 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 1-3382

                         CAROLINA POWER & LIGHT COMPANY
                         ------------------------------
             (Exact name of registrant as specified in its charter)

                                    North Carolina
                                    --------------
                   (State or other jurisdiction of incorporation or
                                    organization)

                                   56-0165465
                                   ----------
                      (I.R.S. Employer Identification No.)

           411 Fayetteville Street, Raleigh, North Carolina 27601-1748
           -----------------------------------------------------------
               (Address of principal executive offices) (Zip Code)


                                  919-546-6111
                                  ------------
              (Registrant's telephone number, including area code)

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

Indicate by check mark whether the 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
registrant was required to file such reports),  and (2) has been subject to
such filing  requirements  for the past 90 days. Yes  X . No    .
                                                    ----    ----

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares  outstanding of each of the issuer's classes of
common stock, as of the latest  practicable date.   Common Stock (Without Par
Value) shares outstanding at October 31, 1998:  151,330,894.

<PAGE>



         SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
         ------------------------------------------

         The matters discussed throughout this Form 10-Q that are not historical
         facts  are  forward-looking   and,   accordingly,   involve  estimates,
         projections, goals, forecasts, assumptions and uncertainties that could
         cause  actual  results  or  outcomes  to differ  materially  from those
         expressed in the forward-looking statements.

         Examples of  forward-looking  statements  discussed  in this Form 10-Q,
         PART 1, ITEM 2,  "MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS",  include, but are not limited to,
         statements under the heading "Other Matters"  concerning the effects of
         deregulation and the outcome of the Company's Year 2000 Project.

         Any forward-looking  statement speaks only as of the date on which such
         statement is made,  and the Company  undertakes 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  should be  considered  with  respect to any
         forward-looking  statements made throughout this document include,  but
         are not limited to, the following: Governmental policies and regulatory
         actions  (including those of the Federal Energy Regulatory  Commission,
         the Environmental Protection Agency, the Nuclear Regulatory Commission,
         the Department of Energy, the North Carolina  Utilities  Commission and
         the South Carolina Public Service Commission); general industry trends;
         operation of nuclear  power  facilities;  nuclear  storage  facilities;
         nuclear   decommissioning   costs;  general  economic  growth;  weather
         conditions  and  catastrophic   weather-related  damage;  deregulation;
         market  demand  for  energy;  inflation;   capital  market  conditions;
         unanticipated  changes in operating  expenses and capital  expenditures
         and  legal  and  administrative  proceedings.   All  such  factors  are
         difficult to predict,  contain uncertainties that may materially affect
         actual  results,  and may be beyond  the  control of the  Company.  New
         factors  emerge from time to time and it is not possible for management
         to predict  all of such  factors,  nor can it assess the effect of each
         such factor on the Company.


<PAGE>
<TABLE>
                          PART I. FINANCIAL INFORMATION


Item 1.           Financial Statements
        ----------------------------------------------------------------------------------------------------------------------------


                                                       Carolina Power & Light Company
                                                (ORGANIZED UNDER THE LAWS OF NORTH CAROLINA)


                                                  CONSOLIDATED INTERIM FINANCIAL STATEMENTS
                                                                 (UNAUDITED)

                                                             SEPTEMBER 30, 1998

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

         STATEMENTS OF INCOME
<CAPTION>
                                                        Three Months Ended       Nine Months Ended         Twelve Months Ended
                                                           September 30             September 30              September 30

         (In thousands except per share amounts)         1998       1997        1998         1997         1998         1997
         --------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>        <C>         <C>          <C>          <C>          <C>
         Operating Revenues                              $ 946,188  $  906,841  $2,434,635   $2,288,948   $ 3,169,776  $ 2,983,519
         --------------------------------------------------------------------------------------------------------------------------
         Operating Expenses
           Fuel                                            162,925     145,524     442,630      397,774       579,125      521,165
           Purchased power                                 113,323     120,242     301,375      294,406       394,265      386,662
           Other operation and maintenance                 144,033     152,801     466,433      494,610       633,290      685,864
           Depreciation and amortization                   121,377     119,590     366,987      358,590       490,046      465,348
           Taxes other than on income                       39,798      36,761     109,249      105,286       143,441      135,744
           Income tax expense                              128,789     115,213     256,621      198,078       311,591      241,452
           Harris Plant deferred costs, net                  1,644       5,429       5,451       19,173        10,573       25,687
         --------------------------------------------------------------------------------------------------------------------------
               Total Operating Expenses                    711,889     695,560   1,948,746    1,867,917     2,562,331    2,461,922
         --------------------------------------------------------------------------------------------------------------------------
         Operating Income                                  234,299     211,281     485,889      421,031       607,445      521,597
         --------------------------------------------------------------------------------------------------------------------------
         Other Income (Expense)
           Allowance for equity funds used during                4           2          11          118          (108)      (2,097)
         construction
           Income tax benefit                                7,361       4,789      29,574        9,914        38,992        9,443
           Harris Plant carrying costs                         940       1,107       2,860        3,610         3,876        5,021
           Interest income                                   1,536       3,227       6,010       15,412         8,933       16,610
           Other, net                                      (14,737)     (6,695)    (53,649)     (11,173)      (61,751)      11,795
         --------------------------------------------------------------------------------------------------------------------------
               Total Other Income  (Expense)                (4,896)      2,430     (15,194)      17,881       (10,058)      40,772
         --------------------------------------------------------------------------------------------------------------------------
         Income Before Interest Charges                    229,403     213,711     470,695      438,912       597,387      562,369
         --------------------------------------------------------------------------------------------------------------------------
         Interest Charges
           Long-term debt                                   42,437      40,630     129,257      121,778       170,947      163,962
           Other interest charges                            3,050       6,191       8,380       16,508        10,614       19,925
           Allowance for borrowed funds used during         (2,108)       (939)     (5,006)      (3,754)       (6,174)      (7,014)
         construction
         --------------------------------------------------------------------------------------------------------------------------
                  Net Interest Charges                      43,379      45,882     132,631      134,532       175,387      176,873
         --------------------------------------------------------------------------------------------------------------------------
         Net Income                                        186,024     167,829     338,064      304,380       422,000      385,496
         Preferred Stock Dividend Requirements                (742)     (2,167)     (2,225)      (5,310)       (2,966)      (7,713)
         --------------------------------------------------------------------------------------------------------------------------
         Earnings for Common Stock                       $ 185,282  $  165,662  $  335,839   $  299,070   $   419,034  $   377,783
         --------------------------------------------------------------------------------------------------------------------------
         Average Common Shares Outstanding                 144,001     143,800     143,887      143,591       143,866      143,522
         Basic Earnings per Common Share                 $    1.29  $     1.15  $     2.33   $     2.08   $      2.91  $      2.63
         Diluted Earnings per Common Share (Note 5)      $    1.28  $     1.15  $     2.33   $     2.08   $      2.91  $      2.63
         Dividends Declared per Common Share             $   0.485  $    0.470  $    1.455   $    1.410   $     1.940  $     1.880


         --------------------------------------------------------------------------------------------------------------------------
            See Supplemental Data and Notes to Consolidated Interim Financial Statements.

</TABLE>

<PAGE>
<TABLE>
     Carolina Power & Light Company
     BALANCE SHEETS
<CAPTION>
                                                                                           September 30           December 31
     (In thousands)                                                                   1998              1997             1997
     -----------------------------------------------------------------------------------------------------------------------------

                                       ASSETS
     Electric Utility Plant
<S>                                                                              <C>               <C>              <C>
       Electric utility plant in service                                         $  10,238,675     $  10,039,131    $  10,113,334
       Accumulated depreciation                                                     (4,436,187)       (4,057,913)      (4,181,417)
     -----------------------------------------------------------------------------------------------------------------------------
              Electric utility plant in service, net                                 5,802,488         5,981,218        5,931,917
       Held for future use                                                              11,886            12,734           12,255
       Construction work in progress                                                   255,005           155,098          158,347
       Nuclear fuel, net of amortization                                               205,881           184,643          190,991
     -----------------------------------------------------------------------------------------------------------------------------
              Total Electric Utility Plant, Net                                      6,275,260         6,333,693        6,293,510
     -----------------------------------------------------------------------------------------------------------------------------
     Current Assets
       Cash and cash equivalents                                                        24,571            14,736           14,426
       Accounts receivable                                                             498,632           396,167          406,872
       Fuel                                                                             61,311            46,715           47,551
       Materials and supplies                                                          140,254           130,604          136,253
       Deferred fuel cost                                                               42,240            11,260           20,630
       Prepayments                                                                      58,269            59,273           62,040
       Other current assets                                                             17,691            43,271           47,034
     -----------------------------------------------------------------------------------------------------------------------------
              Total Current Assets                                                     842,968           702,026          734,806
     -----------------------------------------------------------------------------------------------------------------------------
     Deferred Debits and Other Assets
       Income taxes recoverable through future rates                                   290,278           342,976          328,818
       Abandonment costs                                                                19,531            45,461           38,557
       Harris Plant deferred costs                                                      61,134            67,834           63,727
       Unamortized debt expense                                                         32,348            53,767           48,407
       Nuclear decommissioning trust funds                                             298,280           179,682          245,523
       Miscellaneous other property and investments                                    269,636           213,638          256,291
       Other assets and deferred debits                                                272,497           215,030          211,089
     -----------------------------------------------------------------------------------------------------------------------------
              Total Deferred Debits and Other Assets                                 1,243,704         1,118,388        1,192,412
     -----------------------------------------------------------------------------------------------------------------------------
                 Total Assets                                                    $   8,361,932     $   8,154,107    $   8,220,728
     -----------------------------------------------------------------------------------------------------------------------------

                           CAPITALIZATION AND LIABILITIES
     Capitalization
       Common stock equity                                                       $   2,957,164     $   2,805,515    $   2,818,807
       Preferred stock - redemption not required                                        59,376            59,376           59,376
       Long-term debt, net                                                           2,535,409         2,389,251        2,415,656
     -----------------------------------------------------------------------------------------------------------------------------
              Total Capitalization                                                   5,551,949         5,254,142        5,293,839
     -----------------------------------------------------------------------------------------------------------------------------
     Current Liabilities
       Current portion of long-term debt                                                73,172           188,529          207,979
       Accounts payable                                                                224,491           160,344          290,352
       Taxes accrued                                                                   124,659           134,257           13,666
       Interest accrued                                                                 29,360            33,810           43,620
       Dividends declared                                                               72,206            69,901           72,266
       Other current liabilities                                                       106,237            96,950          102,943
     -----------------------------------------------------------------------------------------------------------------------------
              Total Current Liabilities                                                630,125           683,791          730,826
     -----------------------------------------------------------------------------------------------------------------------------
     Deferred Credits and Other Liabilities
       Accumulated deferred income taxes                                             1,671,677         1,743,092        1,722,908
       Accumulated deferred investment tax credits                                     214,374           224,587          222,028
       Other liabilities and deferred credits                                          293,807           248,495          251,127
     -----------------------------------------------------------------------------------------------------------------------------
              Total Deferred Credits and Other Liabilities                           2,179,858         2,216,174        2,196,063
     -----------------------------------------------------------------------------------------------------------------------------
     Commitments and Contingencies (Notes 2, 3 and 4)
                 Total Capitalization and Liabilities                            $   8,361,932     $   8,154,107    $   8,220,728
     -----------------------------------------------------------------------------------------------------------------------------
     SCHEDULES OF COMMON STOCK EQUITY
     (In thousands)
       Common stock                                                              $   1,372,267     $   1,371,520    $   1,371,520
       Unearned ESOP common stock                                                     (154,356)         (165,805)        (165,804)
       Capital stock issuance expense                                                     (790)             (790)            (790)
       Retained earnings                                                             1,740,043         1,600,590        1,613,881
     -----------------------------------------------------------------------------------------------------------------------------
              Total Common Stock Equity                                          $   2,957,164     $   2,805,515    $   2,818,807
     -----------------------------------------------------------------------------------------------------------------------------
     See Supplemental Data and Notes to Consolidated Interim Financial Statements.

</TABLE>

<PAGE>
<TABLE>
Carolina Power & Light Company
STATEMENTS OF CASH FLOWS
<CAPTION>
                                                           Three Months Ended         Nine Months Ended      Twelve Months Ended
                                                             September 30              September 30               September 30
(In thousands)                                             1998        1997         1998         1997          1998       1997
------------------------------------------------------------------------------------------------------------------------------------
Operating Activities
<S>                                                        <C>        <C>         <C>          <C>         <C>          <C>
  Net income                                               $ 186,024  $  167,829  $   338,064  $  304,380  $    422,000 $  385,496
  Adjustments to reconcile net income to net cash
  provided by operating activities
      Depreciation and amortization                          145,655     141,085      435,702     420,038       580,876    524,187
      Harris Plant deferred costs                                704       4,322        2,591      15,563         6,697     20,666
      Deferred income taxes                                   (8,193)    (16,507)     (44,795)    (57,788)      (53,551)    54,788
      Investment tax credit                                   (2,551)     (2,558)      (7,654)     (7,675)      (10,213)   (10,286)
      Deferred fuel cost (credit)                            (16,326)    (16,362)     (21,610)    (15,599)      (30,980)   (20,014)
      Net(increase)decrease in receivables,
          inventories and prepaid expenses                    11,216     (50,849)    (129,176)    (86,366)     (154,026)  (133,007)
      Net increase (decrease)in payables and accrued
          expenses                                            29,217     104,574      123,228      37,510        79,304    (72,003)
      Miscellaneous                                           40,631      30,128       37,584      49,914        46,863     37,272
------------------------------------------------------------------------------------------------------------------------------------
         Net Cash Provided by Operating Activities           386,377     361,662      733,934     659,977       886,970    787,099
------------------------------------------------------------------------------------------------------------------------------------
Investing Activities
  Gross property additions                                  (124,512)    (87,332)    (296,310)   (227,458)     (391,057)  (346,786)
  Nuclear fuel additions                                     (24,796)    (16,474)     (96,079)    (50,278)     (107,310)   (72,940)
  Contributions to external decommissioning trust             (7,720)     (7,556)     (25,659)    (25,577)      (30,808)   (30,725)
  Contributions to retiree benefit trusts                          -           -            -     (21,096)             -   (21,096)
  Net cash flow of company-owned life insurance program          119         179       (2,405)    137,708        (1,605)   137,688
  Miscellaneous                                              (32,899)    (14,174)     (72,954)    (35,026)      (92,661)   (41,802)
------------------------------------------------------------------------------------------------------------------------------------
        Net Cash Used in Investing Activities               (189,808)   (125,357)    (493,407)   (221,727)     (623,441)  (375,661)
------------------------------------------------------------------------------------------------------------------------------------
Financing Activities
  Proceeds from issuance of long-term debt                     2,789     199,075        3,790     199,075         3,790    199,075
  Net increase (decrease) in short-term debt
    (maturity less than 90 days)                                   -     (93,900)           -     (62,224)            -    (74,722)
  Net increase  (decrease) in commercial paper classified
     as long-term debt                                         2,000    (189,600)     166,400    (189,600)      251,900   (115,857)
  Retirement of long-term debt                              (146,513)     (1,420)    (187,989)    (62,847)     (228,552)   (32,569)
  Redemption of preferred stock                                    -     (85,850)           -     (85,850)            -    (85,850)
  Purchase of Company common stock                                 -           -            -     (23,418)            -    (27,558)
  Dividends paid on common and preferred stock               (70,620)    (70,260)    (211,960)   (209,591)     (280,209)  (277,241)
  Miscellaneous                                                   10           -         (623)          -          (623)         -
------------------------------------------------------------------------------------------------------------------------------------
        Net Cash Used in Financing Activities               (212,334)   (241,955)    (230,382)   (434,455)     (253,694)  (414,722)
------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents         (15,765)     (5,650)      10,145       3,795         9,835     (3,284)

Cash and Cash Equivalents at Beginning of the Period          40,336      20,386       14,426      10,941        14,736     18,020
------------------------------------------------------------------------------------------------------------------------------------

Cash and Cash Equivalents at End of the Period             $  24,571  $   14,736  $    24,571  $   14,736  $     24,571 $   14,736
------------------------------------------------------------------------------------------------------------------------------------

Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest                    $   57,868  $   48,616  $   148,995  $  138,653  $    181,853 $  178,344
                              income taxes                $   67,232  $   36,599  $   194,026  $  133,893  $    349,826 $  226,493



Noncash Activities
In June 1997,  Strategic  Resource  Solutions Corp., a wholly-owned  subsidiary,
purchased all remaining shares of Knowledge Builders,  Inc. (KBI). In connection
with the purchase of KBI, the Company  issued $20.5  million in common stock and
paid $1.9 million in cash.


------------------------------------------------------------------------------------------------------------------------------------
See Supplemental Data and Notes to Consolidated Interim Financial Statements.

</TABLE>
<PAGE>
<TABLE>
Carolina Power & Light Company
SUPPLEMENTAL  DATA
<CAPTION>
                                                        Three Months Ended         Nine Months Ended            Twelve Months Ended
                                                            September 30               September 30                  September 30
                                                         1998         1997         1998           1997          1998            1997
------------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in thousands)
<S>                                                   <C>         <C>           <C>           <C>            <C>           <C>
  Residential                                         $ 341,459   $ 310,251    $  821,272  $   750,113    $1,057,995    $   974,134
  Commercial                                            205,188     193,713       526,417      493,684       681,173        643,087
  Industrial                                            202,709     206,230       555,126      561,735       731,476        740,723
  Government and municipal                               22,673      21,766        60,546       58,667        79,028         76,382
  Power Agency contract requirements                     34,933      28,672        77,748       57,418        91,648         75,238
  NCEMC                                                  69,931      68,666       174,895      169,365       231,480        214,447
  Other wholesale                                        25,964      23,041        70,938       67,301        95,722         91,672
  Other utilities                                        27,364      40,314       104,153       89,158       144,080        111,629
  Miscellaneous revenue                                  15,967      14,188        43,540       41,507        57,174         56,207
------------------------------------------------------------------------------------------------------------------------------------
        Total Operating Revenues                      $ 946,188   $ 906,841    $2,434,635  $ 2,288,948    $3,169,776    $ 2,983,519
------------------------------------------------------------------------------------------------------------------------------------
Energy Sales (millions of kWh)
  Residential                                             4,074       3,697        10,380        9,416        13,451         12,290
  Commercial                                              3,189       2,984         8,187        7,612        10,585          9,889
  Industrial                                              3,843       3,953        11,226       11,345        14,954         15,027
  Government and municipal                                  405         379         1,037          989         1,343          1,274
  Power Agency contract requirements                        791         779         1,792        1,619         2,245          2,064
  NCEMC                                                   1,504       1,359         3,489        3,131         4,532          4,004
  Other wholesale                                           538         484         1,594        1,531         2,184          2,097
  Other utilities                                         1,106       1,339         4,381        3,524         6,390          4,632
------------------------------------------------------------------------------------------------------------------------------------
        Total Energy Sales                               15,450      14,974        42,086       39,167        55,684         51,277
------------------------------------------------------------------------------------------------------------------------------------
Energy Supply (millions of kWh)
  Generated - coal                                        7,889       7,424        21,454       18,683        28,317         24,517
              nuclear                                     5,865       5,491        16,523       16,106        22,107         21,100
              hydro                                          73         105           714          677           836            886
              combustion turbines                           212          95           371          145           416            156
  Purchased                                               1,907       2,251         4,478        4,832         5,965          6,418
------------------------------------------------------------------------------------------------------------------------------------
        Total Energy Supply (Company Share)              15,946      15,366        43,540       40,443        57,641         53,077
------------------------------------------------------------------------------------------------------------------------------------
Detail of Income Taxes (in thousands)
  Included in Operating Expenses
    Income tax expense (credit) - current             $ 139,849   $ 134,217    $  308,763    $ 264,040    $  376,603    $   206,756
                                  deferred               (8,509)    (16,446)      (44,488)     (58,287)      (54,799)        44,982
                                  investment tax
                                  credit adjustments     (2,551)     (2,558)       (7,654)      (7,675)      (10,213)       (10,286)
------------------------------------------------------------------------------------------------------------------------------------
        Subtotal                                        128,789     115,213       256,621      198,078       311,591        241,452
------------------------------------------------------------------------------------------------------------------------------------
    Harris Plant deferred costs - investment tax
       credit adjustments                                     -         (30)            -         (130)          (21)          (193)
------------------------------------------------------------------------------------------------------------------------------------
          Total Included in Operating Expenses          128,789     115,183       256,621      197,948       311,570        241,259
------------------------------------------------------------------------------------------------------------------------------------
  Included in Other Income
    Income tax expense (credit) - current                (7,677)     (4,728)      (29,267)     (10,413)      (40,240)       (19,249)
                                  deferred                  316         (61)         (307)         499         1,248          9,806
------------------------------------------------------------------------------------------------------------------------------------
            Total Included in Other Income               (7,361)     (4,789)      (29,574)      (9,914)      (38,992)        (9,443)
------------------------------------------------------------------------------------------------------------------------------------
               Total Income Tax Expense               $ 121,428   $ 110,394    $  227,047    $ 188,034    $  272,578    $   231,816
------------------------------------------------------------------------------------------------------------------------------------

FINANCIAL STATISTICS

Ratio of earnings to fixed charges                                                                                 4.57       4.11
Return on average common stock equity                                                                             14.63 %    13.79 %
Book value per common share                                                                                  $    20.55    $ 19.51
Capitalization ratios
    Common stock equity                                                                                           53.26 %    53.40 %
    Preferred stock - redemption not required                                                                      1.07       1.13
    Long-term debt, net                                                                                           45.67      45.47
------------------------------------------------------------------------------------------------------------------------------------
            Total                                                                                                100.00 %   100.00 %
------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Interim Financial Statements.
</TABLE>
<PAGE>
Carolina Power & Light Company
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.       ORGANIZATION AND BASIS OF PRESENTATION

         A.       Organization.  Carolina Power & Light Company (the Company) is
                  a  public  service   corporation   primarily  engaged  in  the
                  generation, transmission, distribution and sale of electricity
                  in  portions of North and South  Carolina.  The Company has no
                  other material segments of business.

         B.       Basis of Presentation.  These  consolidated  interim financial
                  statements  should be read in  conjunction  with the Company's
                  consolidated  financial  statements  included in the Company's
                  1997 Annual  Report on Form 10-K.  The  amounts are  unaudited
                  but, in the  opinion of  management,  reflect all  adjustments
                  necessary to fairly present the Company's  financial  position
                  and  results of  operations  for the interim  periods.  Due to
                  temperature  variations  between  seasons  of the year 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.   Certain   amounts  for  1997  have  been
                  reclassified  to  conform  to the 1998  presentation,  with no
                  effect on  previously  reported  net  income  or common  stock
                  equity.

                  In preparing financial  statements that conform with generally
                  accepted accounting principles, management must make estimates
                  and assumptions that affect the reported amounts of assets and
                  liabilities,  disclosure of contingent  assets and liabilities
                  at the  date  of  the  financial  statements  and  amounts  of
                  revenues and expenses  reflected during the reporting  period.
                  Actual results could differ from those estimates.

2.       NUCLEAR DECOMMISSIONING

         In  the  Company's   retail   jurisdictions,   provisions  for  nuclear
         decommissioning  costs are  approved  by the North  Carolina  Utilities
         Commission (NCUC) and the South Carolina Public Service  Commission and
         are based on site-specific estimates that include the costs for removal
         of all radioactive  and other  structures at the site. In the wholesale
         jurisdiction,  the  provisions  for nuclear  decommissioning  costs are
         based on amounts agreed upon in applicable  rate  agreements.  Based on
         the  site-specific  estimates  discussed  below,  and using an  assumed
         after-tax  earnings rate of 8.5% and an assumed cost escalation rate of
         4%, current levels of rate recovery for nuclear  decommissioning  costs
         are adequate to provide for  decommissioning  of the Company's  nuclear
         facilities.

         The Company's most recent  site-specific  estimates of  decommissioning
         costs were developed in 1993, using 1993 cost factors, and are based on
         prompt  dismantlement  decommissioning,  which  reflects  the  cost  of
         removal of all radioactive and other structures  currently at the site,
         with such removal occurring shortly after operating license expiration.
         These  estimates,  in 1993 dollars,  are $258 million for Robinson Unit
         No.  2, $235  million  for  Brunswick  Unit No.  1,  $221  million  for
         Brunswick  Unit  No. 2 and  $284  million  for the  Harris  Plant.  The
         estimates  are  subject  to  change  based  on  a  variety  of  factors
         including,  but not limited to, cost escalation,  changes in technology
         applicable to nuclear  decommissioning and changes in federal, state or
         local regulations.  The cost estimates exclude the portion attributable
         to North  Carolina  Eastern  Municipal  Power  Agency,  which  holds an
         undivided  ownership  interest  in the  Brunswick  and  Harris  nuclear
         generating  facilities.  Operating  licenses for the Company's  nuclear
         units  expire  in the year  2010 for  Robinson  Unit  No.  2,  2016 for
         Brunswick  Unit No. 1, 2014 for  Brunswick  Unit No. 2 and 2026 for the
         Harris Plant.

         The Financial  Accounting Standards Board has reached several tentative
         conclusions with respect to its project regarding  accounting practices
         related to  obligations  associated  with the  retirement of long-lived
         assets (formerly  referred to as liabilities for closure and removal of
         long-lived  assets).  It is uncertain when the final  statement will be
         issued  and  what  effects  it may  ultimately  have  on the  Company's
         accounting for nuclear decommissioning and other retirement costs.

3.       RETAIL RATE MATTERS

         A petition was filed in July 1996 by the Carolina  Industrial Group for
         Fair Utility  Rates  (CIGFUR) with the NCUC,  requesting  that the NCUC
         conduct  an  investigation  of the  Company's  base  rates or treat its
         petition as a complaint against the Company.  The petition alleged that
         the Company's return on equity (which was authorized by the NCUC in the
         Company's  last general rate  proceeding  in 1988) and earnings are too
         high.  In  December  1996,  the NCUC issued an order  denying  CIGFUR's
         petition and stating that it tentatively found no reasonable grounds to
         proceed with CIGFUR's petition as a complaint.  In January 1997, CIGFUR
         filed its Comments and Motion for Reconsideration, to which the Company
         responded.  In February 1997, the NCUC issued an order denying CIGFUR's
         Motion for Reconsideration. CIGFUR filed a Notice of Appeal of the NCUC
         Order with the North Carolina  Court of Appeals.  The Company filed its
         brief in this matter in July 1997,  and oral  argument  was held before
         the North  Carolina  Court of Appeals  (Court of  Appeals)  in November
         1997.  On  September  1, 1998 the Court of Appeals  filed its  decision
         affirming the NCUC Orders dismissing CIGFUR's petition. On September 6,
         1998 CIGFUR  filed a petition for  Discretionary  Review with the North
         Carolina  Supreme  Court  (Supreme  Court)  asking the Supreme Court to
         review the Court of Appeals  decision.  The Company  cannot predict the
         outcome of this matter.

4.       COMMITMENTS AND CONTINGENCIES

         Contingencies existing as of the date of these statements are described
         below.  No  significant  changes have occurred since December 31, 1997,
         with respect to the  commitments  discussed in Note 11 of the financial
         statements included in the Company's 1997 Annual Report on Form 10-K.

         A.       Applicability of SFAS-71.  As a regulated entity,  the Company
                  is  subject  to  the  provisions  of  Statement  of  Financial
                  Accounting  Standards No. 71,  "Accounting  for the Effects of
                  Certain  Types  of  Regulation"  (SFAS-71).  Accordingly,  the
                  Company records certain assets and liabilities  resulting from
                  the  effects of the  ratemaking  process,  which  would not be
                  recorded under generally  accepted  accounting  principles for
                  unregulated  entities.  The  Company's  ability to continue to
                  meet the criteria for  application  of SFAS-71 may be affected
                  in  the  future  by  competitive   forces,   deregulation  and
                  restructuring in the electric utility  industry.  In the event
                  that SFAS-71 no longer  applied to a separable  portion of the
                  Company's   operations,    related   regulatory   assets   and
                  liabilities   would  be  eliminated   unless  an   appropriate
                  regulatory recovery mechanism is provided. Additionally, these
                  factors  could  result in an  impairment  of electric  utility
                  plant assets as determined  pursuant to Statement of Financial
                  Accounting  Standards No. 121,  "Accounting for the Impairment
                  of Long-Lived  Assets and for Long-Lived Assets to Be Disposed
                  Of." At September 30, 1998,  the Company's  regulatory  assets
                  totaled $464 million.

         B.       Claims  and  Uncertainties.  1)  The  Company  is  subject  to
                  federal,  state and local regulations addressing air and water
                  quality,  hazardous  and  solid  waste  management  and  other
                  environmental matters.

                  Various  organic  materials  associated with the production of
                  manufactured  gas,  generally  referred  to as coal  tar,  are
                  regulated  under  various  federal and state  laws.  There are
                  several  manufactured  gas  plant  (MGP)  sites to  which  the
                  Company and certain  entities  that were later merged into the
                  Company had some  connection.  In this  regard,  the  Company,
                  along with others,  is participating  in a cooperative  effort
                  with the North Carolina  Department of Environment and Natural
                  Resources,  Division  of Waste  Management  (DWM),  which  has
                  established  a uniform  framework  to address  MGP sites.  The
                  investigation  and  remediation  of specific MGP sites will be
                  addressed  pursuant  to one or more  Administrative  Orders on
                  Consent (AOC) between the DWM and the potentially  responsible
                  party or parties.  The Company has signed AOC's to investigate
                  certain  sites.  The  Company  continues  to  investigate  the
                  identities of parties  connected to individual MGP sites,  the
                  relative  relationships  of the Company  and other  parties to
                  those sites and the degree to which the Company will undertake
                  efforts with others at individual  sites. The Company does not
                  expect  these costs to be material to the  financial  position
                  and results of operations of the Company.

                  The Company has been notified by regulators of its involvement
                  or  potential  involvement  in several  sites,  other than MGP
                  sites,  that may require remedial  action.  The Company cannot
                  predict the outcome of these matters.

                  The Company carries a liability,  in accordance with Statement
                  of  Financial  Accounting  Standards  No. 5,  "Accounting  for
                  Contingencies",   for  the  estimated  costs  associated  with
                  certain remedial activities. This liability is not material to
                  the financial position of the Company.

                  2) As required under the Nuclear Waste Policy Act of 1982, the
                  Company  entered into a contract  with the U.S.  Department of
                  Energy  (DOE)  under  which the DOE  agreed to  dispose of the
                  Company's  spent  nuclear  fuel by January 31,  1998.  The DOE
                  defaulted on its January 31, 1998,  obligation to begin taking
                  spent  nuclear fuel,  and a group of utilities,  including the
                  Company,  has  undertaken  measures  to force  the DOE to take
                  spent nuclear fuel and/or to pay damages.  To date, the courts
                  have  rejected  attempts  to force DOE to take  spent  nuclear
                  fuel. The Company cannot predict the outcome of this matter.

                  With certain  modifications,  the Company's spent fuel storage
                  facilities  will be  sufficient  to provide  storage space for
                  spent fuel  generated  on the  Company's  system  through  the
                  expiration  of the current  operating  licenses for all of the
                  Company's  nuclear   generating   units.   Subsequent  to  the
                  expiration of these licenses, dry storage may be necessary.

                  3) On October 27, 1998, the  Environmental  Protection  Agency
                  (EPA)  published a final rule addressing the issue of regional
                  transport of ozone. This rule is commonly known as the NOx SIP
                  call.  The  rule  requires  utilities  to make  reductions  in
                  nitrogen oxides (NOx) in 22 states,  including North and South
                  Carolina,  by May 2003.  The Company is  evaluating  necessary
                  measures  to  comply  with  the  rule.  The  Company  is  also
                  participating in litigation  challenging the NOx SIP call. The
                  Company cannot predict the outcome of this matter.

                  4) In the opinion of management,  liabilities, if any, arising
                  under other pending claims would not have a material effect on
                  the  financial  position  and  results  of  operations  of the
                  Company.

5.       EARNINGS PER COMMON SHARE

         Restricted stock awards and contingently issuable shares had a dilutive
         effect on earnings per share and increased the weighted-average  number
         of common shares outstanding for dilutive purposes by 274,825,  248,026
         and 189,819 for the three,  nine and twelve months ended  September 30,
         1998, respectively, and by 20,672 for the three, nine and twelve months
         ended September 30, 1997. The weighted-average  number of common shares
         outstanding for dilutive purposes was 144.3 million, 144.1 million, and
         144.1 million,  for the three,  nine and twelve months ended  September
         30, 1998,  respectively,  and 143.8  million,  143.6  million and 143.5
         million,  for the three,  nine and twelve  months ended  September  30,
         1997, respectively.


<PAGE>




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

                              RESULTS OF OPERATIONS
         For the Three, Nine and Twelve Months Ended September 30, 1998,
          As Compared With the Corresponding Periods One Year Earlier

<TABLE>

         Operating Revenues

         For the  three,  nine and  twelve  months  ended  September  30,  1998,
         operating   revenues  were  affected  by  the  following   factors  (in
         millions):

<CAPTION>
                                                           Three Months  Nine Months  Twelve Months
<S>                                                        <C>           <C>          <C>
           Weather                                         $    29       $     81     $     110
           Customer growth/changes in usage patterns            23             54            60
           Sales to other utilities                            (13)            15            33
           Price                                                (8)           (26)          (34)
           Sales to Power Agency                                 6             20            16
           Other                                                 2              2             1
                                                               ---            ---           ---
              Total                                        $    39       $    146     $     186
                                                               ===            ===           ===
</TABLE>

         The increase in the weather component of revenue for all periods is the
         result  of  more  favorable  temperatures  in the  current  periods  as
         compared to prior periods. The increase in the customer  growth/changes
         in usage  patterns  component  of revenue  for all  comparison  periods
         reflects  continued  growth in the  number of  customers  served by the
         Company,  partially  offset by the  effect of lost  revenues  caused by
         Hurricane  Bonnie  in  the  current  periods.   While  residential  and
         commercial  sales  increased  for all  periods,  industrial  sales have
         decreased slightly primarily  reflecting  downturns in the chemical and
         textile  industries.  Sales to other utilities  increased for the nine-
         and twelve-month periods as a result of the Company's active pursuit of
         opportunities  in the wholesale  power market.  During the  three-month
         period,  however,  sales to other  utilities  have  declined due to the
         recent  volatility of the wholesale market in comparison to that of the
         prior period. The price-related  decrease for the three months and nine
         months  ended  September  30,  1998,  is  primarily  attributable  to a
         decrease  in the fuel cost  component  of  revenue.  The  price-related
         decrease for the twelve  months ended  September  30, 1998, is due to a
         combination  of a decrease  in the fuel cost  component  of revenue and
         changes  to the Power  Coordination  Agreement,  which  were  effective
         January  1, 1997,  between  the  Company  and North  Carolina  Electric
         Membership  Corporation  (NCEMC).  The  increase in revenue  related to
         sales to the North  Carolina  Eastern  Municipal  Power  Agency  (Power
         Agency) for all periods is primarily due to more favorable temperatures
         in the  current  periods,  in  addition  to the timing of  supplemental
         capacity adjustments.

         Operating Expenses

         Fuel expense  increased for all periods primarily due to an increase in
         generation of  approximately  7.1%, 9.7% and 10.8% for the three,  nine
         and twelve months ended September 30, 1998, respectively.  The increase
         in fuel expense for the nine- and twelve-month  periods is also related
         to a change in the  generation  mix.  These  increases  were  partially
         offset by a decrease in fuel prices  during the nine- and  twelve-month
         periods.

         Other operation and maintenance  expense decreased during the three and
         nine  months  ended  September  30,  1998,  due to the  timing of plant
         outages and continued  cost reduction  efforts,  which more than offset
         expenses of approximately $10.4 million incurred in the current periods
         related to Hurricane Bonnie. In the prior  twelve-month  period,  other
         operation  and  maintenance  expense  was  reduced by the  reversal  of
         approximately  $30 million of Hurricane Fran  expenses.  These expenses
         were incurred during the third quarter of 1996 and were reversed during
         the  fourth  quarter  of 1996  when  the  Company  received  regulatory
         approval to defer and  amortize  expenses  related to  Hurricane  Fran.
         Excluding  this  reversal,  other  operation  and  maintenance  expense
         decreased  approximately $82 million for the twelve-month  period. This
         decrease primarily reflects lower expenses resulting from the Company's
         cost  reduction  efforts and a reduction  in expenses  related to plant
         outages.

         Depreciation and amortization  increased  approximately $25 million for
         the twelve months ended September 30, 1998, of which  approximately $17
         million  was a  result  of  the  accelerated  amortization  of  certain
         regulatory assets in accordance with orders from the commissions in the
         Company's retail jurisdictions.

         Income tax expense  increased for all comparison  periods primarily due
         to an increase in pretax operating  income.  In addition,  the increase
         for  the  nine-  and   twelve-month   periods  reflects  tax  provision
         adjustments recorded for potential audit issues in open tax years which
         decreased income tax expense in the prior periods.

         Harris Plant deferred costs,  net decreased for all comparison  periods
         primarily due to the completion,  in late 1997, of the  amortization of
         the Harris Plant phase-in  costs related to the North  Carolina  retail
         jurisdiction.

         Other Income

         The  income  tax  benefit  related to other  income  increased  for all
         comparison periods primarily as a result of a decrease in other income.

         Interest  income  decreased for all comparison  periods  primarily as a
         result of a decrease in tax  refund-related  interest income recognized
         in the current periods.

         Approximately $6 million,  $30 million, and $37 million of the decrease
         in  other,  net  for  the  three-,  nine-  and  twelve-month   periods,
         respectively,  is due to the combined pre-tax start-up losses of two of
         the Company's  subsidiaries,  Strategic  Resource Solutions Corp. (SRS)
         and  Interpath   Communications,   Inc.  (Interpath).   Management  has
         projected losses for these subsidiaries as they evolve through start-up
         phases; however, 1998 losses for SRS have been higher than management's
         expectations.  Accordingly,  the Company has initiated cost-cutting and
         revenue  enhancing  efforts  at SRS to  mitigate  the  effects of these
         losses.   Although   not   significantly   affecting   period-to-period
         comparisons,  Interpath's  results  for all  reported  periods  include
         losses recorded from its 10% limited partnership  interest in BellSouth
         Carolinas PCS, LP (a wireless  communications  technology company). The
         decrease in the  twelve-month  period was also due to an  adjustment of
         $23 million to the unamortized  balance of abandonment costs related to
         the Harris Plant,  which  positively  affected other,  net in the prior
         period.

         Interest Charges

         Interest   charges   relating  to  long-term  debt  increased  for  all
         comparison  periods due to an increase in commercial  paper  borrowings
         classified as long-term debt in the current  periods.  For the nine and
         twelve months ended  September  30, 1998,  the increase was also due to
         the issuance of $200 million  principal  amount of first mortgage bonds
         in August,  1997.  Other  interest  charges  decreased for all reported
         periods  primarily  as a  result  of a  decrease  in  commercial  paper
         borrowings classified as short-term debt.

         Preferred Stock Dividend Requirements

         The  decrease in the  preferred  stock  dividend  requirements  for all
         comparison  periods is the result of the  redemption  of two  preferred
         stock series in July 1997.


               MATERIAL CHANGES IN LIQUIDITY AND CAPITAL RESOURCES
            For the Nine and Twelve months ended September 30, 1998


         Cash Flow and Financing

         The  proceeds  from  commercial  paper  borrowings   and/or  internally
         generated funds financed the redemption or retirement of long-term debt
         totaling  $188  million  and $229  million  during  the nine and twelve
         months ended September 30, 1998, respectively.

         As of September 30, 1998,  the  Company's  long-term  revolving  credit
         facilities, which support its commercial paper borrowings, totaled $750
         million.  The Company is required to pay minimal annual commitment fees
         to maintain its credit facilities.  Consistent with management's intent
         to  maintain  all or a portion of its  commercial  paper on a long-term
         basis, and as supported by its long-term  revolving credit  facilities,
         the Company included in long-term debt $412 million and $160 million of
         commercial  paper  outstanding  as of  September  30,  1998  and  1997,
         respectively.

         The Company's capital structure as of September 30 was as follows:


                                            1998        1997
                                            ----        ----
                Common Stock Equity         53.26%      53.40%
                Long-term Debt, net         45.67%      45.47%
                Preferred Stock              1.07%       1.13%


         The Company's  First Mortgage Bonds are currently rated "A2" by Moody's
         Investors  Service,  "A" by  Standard  and  Poor's and "A+" by Duff and
         Phelps.  Moody's  Investors  Service,  Standard and Poor's and Duff and
         Phelps  have rated the  Company's  commercial  paper  "P-1",  "A-1" and
         "D-1", respectively.


                                  OTHER MATTERS

         Competition

         Wholesale Competition

         During  the  last  week of June  1998,  some  wholesale  power  markets
         experienced sharp increases in prices.  That upsurge in power costs was
         due,  in  part,  to  the  unavailability  of  generating  capacity  and
         unusually  hot weather in the  Midwestern  portion of the country.  The
         relatively  sudden movement in wholesale power prices disrupted certain
         power  transactions,  including  some to which the Company was a party.
         The  monetary  damages  the  Company  incurred  as a  result  of  those
         disrupted  transactions  did not have a material  adverse effect on the
         Company's  results  of  operations.  The  Company  is  taking  steps to
         mitigate  those monetary  damages.  The Company  anticipates  increased
         volatility  in the wholesale  power market during peak demand  periods;
         however, due to the risk management processes the Company has in place,
         the Company does not expect this volatility to have a material  adverse
         effect on its financial position and results of operations.

         North Carolina Activities

         The 23-member  study  commission  established to evaluate the future of
         electric  service  in  North  Carolina  met on  November  10,  1998.  A
         consultant's report on the stranded costs that would be associated with
         the deregulation of North Carolina's  utilities is currently due to the
         study  commission  in December of 1998.  The  commission  will make its
         final  report  to the  1999  Session  of  the  North  Carolina  General
         Assembly. The Company cannot predict the outcome of this matter.

         South Carolina Activities

         A report issued by the South Carolina Public Service Commission (SCPSC)
         on  September  30, 1998,  estimates  that in a  deregulated  generation
         market, South Carolina's three investor-owned  electric utilities would
         face  approximately  $1.4 billion in stranded costs in connection  with
         their South  Carolina  operations.  The report  estimates the Company's
         potential stranded costs, for its South Carolina  operations,  would be
         approximately  $410 million in 2003 dollars.  On October 29, 1998,  the
         South Carolina Senate  Judiciary  Committee  appointed a 13-member task
         force to study  the  deregulation  issue and make a report to the South
         Carolina  General  Assembly during the 1999  legislative  session.  The
         Company cannot predict the outcome of these matters.

         Federal Activities

         At the federal level,  additional  bills  regarding  deregulation  were
         introduced this year, but Congress  adjourned in October without taking
         any  action  on the  issue.  The  deregulation  debate is  expected  to
         continue in Congress next year.  The Company cannot predict the outcome
         of this matter.

         Company Activities

         In 1996,  Power Agency  notified the Company that it would  discontinue
         certain  contractual  purchases  of power  from the  Company  effective
         September  1, 2001;  however,  the  Company  won the right to  continue
         supplying  this power by being  selected  from a number of bidders.  On
         September 11, 1998, the Company and Power Agency entered into a revised
         agreement  that  extends  the period  during  which  Power  Agency will
         continue to  purchase  all of its  supplemental  power from the Company
         through at least  December 31, 2002.  The new  agreement  also includes
         options  for  Power  Agency to  purchase  supplemental  power  from the
         Company for the year 2003 and beyond.  (The load served by supplemental
         power under that  agreement  will include all of Power  Agency's  power
         needs  in  excess  of the  load  served  by Power  Agency  through  its
         ownership  interest in  generation  units that it jointly owns with the
         Company and other smaller  resources  that are currently in place.) The
         revised   agreement  was  filed  with  the  Federal  Energy  Regulatory
         Commission  (FERC) for approval or acceptance on October 30, 1998.  The
         Company cannot predict the outcome of this matter.

         On October 9, 1998, the Company and its largest customer, NCEMC entered
         into an  agreement  under  which  NCEMC  will  purchase  a total of 800
         megawatts of peaking  capacity and  associated  energy from the Company
         during the period from January 1, 2001 through  December 31, 2003.  The
         agreement, which provides NCEMC with an option to extend all or part of
         the purchase  through 2005,  provides  capacity to meet NCEMC's growing
         peaking  power needs.  A portion of this  purchase is intended to serve
         load located in the Company's  service area that is currently served by
         purchases  from the  Company  under a  contract  that  will  expire  on
         December 31, 2000.  During the period 2001 through 2003, this agreement
         also will serve up to 450 MWs of NCEMC load that is located in the Duke
         Power service area that has not previously  been served by the Company.
         The agreement will be filed with FERC for approval or  acceptance.  The
         Company cannot predict the outcome of this matter.

         On October 30, 1998, the Company and NCEMC also entered into agreements
         that  supersede  the 1993  Power  Coordination  Agreement  between  the
         Company and NCEMC,  as amended (the PCA). The primary effect of the new
         agreements is to unbundle the generation and  transmission  service for
         the load  previously  served  under the PCA.  To that end,  the parties
         executed a Network  Integration  Transmission  Service  Agreement and a
         Network Operating Agreement under which NCEMC will receive transmission
         services  from  the  Company  pursuant  to the  Company's  Open  Access
         Transmission  Tariff.  The parties also entered into a new Power Supply
         Agreement,  which  provides for the Company to sell capacity and energy
         to  NCEMC  under  terms  and   conditions   and  in  amounts  that  are
         substantially  the same as those  that were set  forth in the PCA.  The
         parties agreed to a modification of the calculation of certain capacity
         charges;  however,  the net  effect of the  changes is  intended  to be
         essentially revenue neutral under expected load conditions. The Network
         Transmission  Agreement,  the Network Operating Agreement,  and the new
         Power Supply  Agreement were filed with FERC for approval or acceptance
         on November  3, 1998.  The Company  also  expects the new Power  Supply
         Agreement to be submitted by NCEMC to the Rural  Utilities  Service for
         approval. The Company cannot predict the outcome of these matters.

         On  September  28,  1998,  the  Company and the South  Carolina  Public
         Service Authority (Santee Cooper) entered into an agreement under which
         the Company will provide  peaking  capacity  and  associated  energy to
         Santee Cooper for the period January 1, 1999 through December 31, 2003.
         Under the terms of the  agreement,  the Company  will provide 100 MW of
         generation  capacity  in 1999,  150 MW in 2000 and 200 MW from  2001 to
         2003.  Santee Cooper needs the additional  capacity to accommodate  its
         expected  load growth over the next several  years.  The  agreement was
         filed with FERC for approval or  acceptance  on October 23,  1998.  The
         Company cannot predict the outcome of this matter.

         Year 2000

         Background

         The Company's overall goal is to be Year 2000 ready.  "Year 2000 ready"
         means  that  critical  systems,   devices,   applications  or  business
         relationships  have been  evaluated and are expected to be suitable for
         continued use into and beyond the Year 2000, or  contingency  plans are
         in place.

         The Company began  addressing  the Year 2000 issue in 1994 by beginning
         to assess  its  business  computer  systems,  such as  general  ledger,
         payroll,  customer billing and inventory control. The majority of these
         systems have been  corrected  and running in the  Company's  day-to-day
         computing  environment  since 1996.  Also, by the mid-1990s,  two major
         accounting  systems were replaced with systems that were designed to be
         Year 2000 ready.  The  Company  plans to  complete  corrections  to the
         remaining business systems by the end of 1998.

         During  mid-1997 a  Corporate  Year 2000  Project  was  established  to
         provide  leadership  and direction to the Year 2000 efforts  throughout
         the Company and its subsidiaries.  Also, the project scope was expanded
         to include "embedded' systems (such as process control computers, chart
         recorders,  data loggers,  calibration  equipment and chemical analysis
         equipment),   end-user  computing  hardware  and  software   (including
         personal  computers,  spreadsheets,  word processing and other personal
         and workgroup  applications),  plant and corporate  facilities (such as
         security  systems,  elevators  and  heating and  cooling  systems)  and
         business relationships with key suppliers and customers.

         The Company is using a multi-step  approach in conducting its Year 2000
         Project.  These  steps  are:  inventory,  assessment,  remediation  and
         testing, and contingency planning.  The first step, an inventory of all
         systems and devices with potential Year 2000 problems, was completed in
         January 1998.  The next step,  completed in the first half of 1998, was
         to conduct an initial  assessment  of the  inventory to  determine  the
         state of its Year  2000  readiness.  As part of the  assessment  phase,
         remediation  strategies were identified and remediation  cost estimates
         were  developed.  The Company is utilizing  both  internal and external
         resources to remediate and test for Year 2000 readiness. The Company is
         actively conducting formal communications with the suppliers with which
         it has active contracts to determine the extent to which the Company is
         vulnerable to those third parties'  failure to remediate their own Year
         2000 issue.  The Company cannot predict the outcome of other companies'
         remediation efforts.

         Costs

         The Company currently plans to complete the Year 2000 Project by August
         1999. The total remaining cost of the Year 2000 Project is estimated at
         $13  million.   (This   estimate   excludes  Year  2000  Project  costs
         attributable to recent subsidiary acquisitions,  which the Company does
         not expect to be  material  to its  financial  position  and results of
         operations.)  Approximately $6 million is for new software and hardware
         purchases  and will be  capitalized.  The  remaining $7 million will be
         expensed as incurred over the next two years.  To date, the Company has
         incurred  and  expensed   approximately   $4  million  related  to  the
         inventory,   assessment  and  remediation  of  non-compliant   systems,
         equipment  and  applications.  The costs of the project and the date on
         which the Company  plans to complete  the Year 2000  modifications  are
         based  on  management's  best  estimates,   which  were  derived  using
         assumptions of future events  including the continued  availability  of
         certain  resources,  third  parties'  Year  2000  readiness  and  other
         factors.

         Risk Assessment

         At this time,  the Company  believes its most  reasonably  likely worst
         case  scenario  is that  key  customers  could  experience  significant
         reductions  in their  power  needs due to their  own Year 2000  issues.
         Although the Company does not believe that this scenario will occur, it
         has assessed the effect of such a scenario by using  current  financial
         data. In the event that this scenario does occur,  the Company does not
         expect that it would have a material  adverse  effect on the  Company's
         financial position and results of operations.

         The Company  believes a more likely scenario is a temporary  disruption
         of service to its electric customers, including the effect of cascading
         disruptions  caused by other  entities  whose  electrical  systems  are
         connected to the  Company's.  The Company has assessed the risk of this
         scenario,  and believes that its  contingency  plans would mitigate the
         long-term  effect of such a  scenario.  In the event  that a  temporary
         disruption does occur, the Company does not expect that it would have a
         material  adverse  effect on its  financial  position  and  results  of
         operations.

         Contingency Plans

         Contingency  plans  will be  prepared  so that the  Company's  critical
         business  processes  can be expected to continue to function on January
         1, 2000 and beyond. The Company's  contingency plans will be structured
         to address both remediation of systems and their components and overall
         business  operating  risk.  These plans are  intended to mitigate  both
         internal  risks as well as  potential  risks in the supply chain of the
         Company's suppliers and customers.

         One of the Company's emergency contingency plans specifically addresses
         emergency  scenarios  that  may  arise  due to the fact  that  electric
         utility  systems  throughout the southeast  region of the United States
         are  interconnected.  The Company has been  working  actively  with the
         North  American  Electric  Reliability  Council  and  the  Southeastern
         Electric  Reliability  Council  to address  the issue of  overall  grid
         reliability and protection.  In order to mitigate the risk of cascading
         regional electric failures,  the Company can, as a last resort, isolate
         its transmission system either automatically or manually. The Company's
         emergency  readiness  contingency  plan  includes  the  performance  of
         regular training  exercises that include  simulated  disaster  recovery
         scenarios.  As part of its Year 2000 contingency planning,  the Company
         will review its disaster recovery  scenarios to identify those that can
         be used specifically for Year 2000 readiness training.

         New Accounting Standards

         In June 1998, the Financial Accounting Standards Board issued Statement
         of  Financial  Accounting  Standards  (SFAS) No. 133,  "Accounting  for
         Derivative  Instruments and Hedging  Activities",  effective for fiscal
         years   beginning  after  June  15,  1999.  SFAS  No.  133  establishes
         accounting  and  reporting   standards  for   derivative   instruments,
         including certain derivative  instruments  embedded in other contracts,
         and  for  hedging  activities.  It  requires  the  recognition  of  all
         derivative  instruments  as assets or  liabilities  in the statement of
         financial  position and measurement of those instruments at fair value.
         The  accounting  treatment of changes in fair value is  dependent  upon
         whether or not an  instrument  is designated as a hedge and, if so, the
         type of hedge.  The Company has not fully  analyzed the  provisions  of
         SFAS No. 133.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

         The Company's market risk exposure has not changed  materially from the
         exposure as disclosed in the Company's 1997 Annual Report on Form 10-K.
<PAGE>

                           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

         Legal aspects of certain matters are set forth in Part I, Item 1, Notes
         3 and 4 of the Company's financial statements.

Item 2.  Changes in Securities and Use of Proceeds

         ACQUISITION OF JACK WALTERS, INC. AND JACK WALTERS SERVICE, INC.:

         (a)      Securities Delivered.  Pursuant to a merger agreement and plan
                  of reorganization  effective  September 1, 1998, 62,304 shares
                  of the Company's  common stock  (Common  Shares) that had been
                  recently  purchased  in  the  open  market  by  the  Company's
                  wholly-owned subsidiary, Strategic Resource Solutions Corp., a
                  North Carolina Enterprise Corporation (SRS), were delivered by
                  SRS  as  part  of  the   merger   consideration   due  to  the
                  shareholders of Jack Walters,  Inc. and Jack Walters  Service,
                  Inc., both North Carolina  corporations,  (collectively  JWI).
                  JWI merged into SRS  effective  September 1, 1998.  All Common
                  Shares  delivered by SRS pursuant to the JWI merger  agreement
                  and  plan  of   reorganization   were   acquired   in   market
                  transactions,  and do not represent newly-issued shares of the
                  Company.

         (b)      Underwriters and Other  Purchasers.  No underwriters were used
                  in connection  with the  transactions  identified  above.  The
                  shareholders  of JWI were the only  recipients  of the  Common
                  Shares.

         (c)      Consideration. The consideration for the Common Shares was the
                  acquisition of all assets and assumption of all liabilities of
                  JWI by SRS as  successor  by  merger  pursuant  to the  merger
                  agreement and plan of reorganization.

         (d)      Exemption  from  Registration   Claimed.   The  Common  Shares
                  described  in this  Item  were  delivered  on the  basis of an
                  exemption  from   registration   under  Section  4(2)  of  the
                  Securities  Act of 1933.  The Common  Shares were  received by
                  four  individuals  and are subject to  restrictions  on resale
                  typical for private  placements.  Appropriate  disclosure  was
                  made to the recipients of the Common Shares.

Item 5.  Other Information

         Recent Developments

         On  November  10,  1998,  the  Company,   North  Carolina  Natural  Gas
         Corporation,  a Delaware  corporation  (NCNG) and Carolina  Acquisition
         Corporation,  a newly formed Delaware corporation,  wholly owned by the
         Company  (Carolina),  entered  into an  Agreement  and  Plan of  Merger
         (Merger Agreement)  providing for the strategic business combination of
         the Company and NCNG.  Pursuant to the Merger Agreement,  Carolina will
         be  merged  with and into NCNG (the  "Merger")  and NCNG will  become a
         wholly  owned  subsidiary  of the  Company.  The Merger is  intended to
         constitute a tax-free  reorganization  for federal  income tax purposes
         and to be  accounted  for as a  pooling-of-interests.  The joint  press
         release  issued by the Company  and NCNG with  respect to the Merger is
         filed herewith as Exhibit 2(a).

         In  accordance  with the Merger  Agreement,  each share of NCNG  Common
         Stock, par value $2.50, issued and outstanding immediately prior to the
         effective  time of the Merger,  including the rights  attached  thereto
         issued pursuant to the Rights Agreement dated October 7, 1997,  between
         NCNG and  Wachovia  Bank,  N.A.,  will be  converted  into the right to
         receive shares of the Company's Common Stock,  without par value, equal
         to the  Exchange  Ratio.  The  Exchange  Ratio  will be  determined  by
         dividing $35 by the average  closing  price of a share of the Company's
         Common Stock for each of the twenty  consecutive  trading days prior to
         and including the fifth trading day prior to the closing of the Merger.
         The Exchange Ratio will not exceed 0.8594 nor be less than 0.7032.  The
         Merger Agreement  provides that if the Merger closes after November 10,
         1999,  the Exchange  Ratio will be subject to further  adjustment.  The
         Company  will  issue  approximately  $354  million  in  stock  to  NCNG
         shareholders to complete the Merger.

         The Merger  Agreement  has been  approved by the Boards of Directors of
         the Company and NCNG.  Consummation of the Merger is subject to certain
         closing  conditions,  including  approval by the  shareholders of NCNG.
         NCNG presently  intends that the shareholders  meeting to consider such
         approval  will be held as early  as  practicable.  Consummation  of the
         Merger is also  subject  to (i)  receipt by the  Company  and NCNG of a
         favorable opinion of counsel that the Merger will constitute a tax-free
         reorganization  under  Section  368(a) of the Internal  Revenue Code of
         1986, as amended, (ii) the receipt by the Company and NCNG of favorable
         letters from their  independent  auditors  that the Merger will qualify
         for pooling-of-interests  accounting treatment, (iii) the effectiveness
         of a Registration  Statement to be filed with the  Securities  Exchange
         Commission by the Company with respect to its Common Stock to be issued
         in the Merger, (iv) certain regulatory approvals or filings,  including
         approvals by or filings with the NCUC and the SCPSC,  and the filing of
         the requisite  notifications  with the Federal Trade Commission and the
         Department   of   Justice   under   the   Hart-Scott-Rodino   Antitrust
         Improvements Act of 1976, as amended,  and the expiration of applicable
         waiting  periods  thereunder,  and (v) other  customary  conditions  to
         closing.

         The Merger Agreement  provides for termination by either the Company or
         NCNG if the Merger has not been  consummated by December 31, 1999 or if
         the  necessary  shareholder  approval  is not  obtained  by NCNG at its
         special  shareholders'  meeting. The Merger Agreement may be terminated
         by NCNG if prior to the  effective  time a third  party has made a bona
                                                                            ----
         fide  proposal  which the Board of  Directors of NCNG  determines  is a
         ----
         Superior  Proposal (as defined in the Merger Agreement) and the Company
         does not make,  within five  business  days of receiving  notice of the
         Superior  Proposal,  an offer  that  the  Board  of  Directors  of NCNG
         believes is at least as favorable,  from a financial  point of view, to
         NCNG's shareholders as the Superior Proposal.  The Merger Agreement may
         also be  terminated  by the Company if the Board of  Directors  of NCNG
         fails  to  recommend  to  the  NCNG   shareholders  (or  withdraws  its
         recommendation  of) approval of the  transactions  contemplated  by the
         Merger Agreement.

         If  the  Company  terminates  the  Merger  Agreement  because  (i)  the
         effective  time does not occur by December 31, 1999 as a consequence of
         NCNG's  failure  to  fulfill  certain   obligations  under  the  Merger
         Agreement,  or  because  NCNG  or  its  shareholders  has  received  an
         Alternative  Proposal (as defined in the Merger  Agreement) or (ii) the
         Board of Directors  of NCNG fails to  recommend to NCNG's  shareholders
         (or  withdraws  its  recommendation  of)  approval of the  transactions
         contemplated by the Merger Agreement;  or if NCNG terminates due to its
         acceptance of a Superior Proposal; or if either party terminates due to
         the failure of NCNG's  shareholders  to approve the Merger and prior to
         or during the special meeting of  shareholders an Alternative  Proposal
         has been  made and not  revoked,  then  NCNG  must  pay the  Company  a
         termination fee of $10 million; provided, however, that no payment will
         be due where the Company  terminates in connection  with NCNG's receipt
         of an Alternative Proposal unless within 12 months of termination NCNG,
         or any of its subsidiaries, enters into a definitive agreement relating
         to such Alternative Proposal, or a similar proposal.

         The  description  of the Merger  Agreement  set forth  herein  does not
         purport  to be  complete  and  is  qualified  in  its  entirety  by the
         provisions of the Merger Agreement, which is attached hereto as Exhibit
         2(b) and incorporated herein by reference.

         Deadline for Shareholder Proposals

         The deadline by which the Company must  receive  notice of  shareholder
         proposals  which are to be  presented  at its 1999  Annual  Meeting  of
         Shareholders,  but not included in its 1999 proxy materials is February
         12, 1999. The Company's management proxies will be allowed to use their
         discretionary  voting  authority in connection with proposals for which
         this deadline is not met.


Item 6.  Exhibits and Reports on Form 8-K

         (a)      See EXHIBIT INDEX

         (b)      Reports  on Form  8-K  filed  during  or with  respect  to the
                  quarter:

                  NONE


<PAGE>


                                   SIGNATURES


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


                         CAROLINA POWER & LIGHT COMPANY
                                  (Registrant)


                             By /s/ Glenn E. Harder
                                -------------------
                                 Glenn E. Harder
                          Executive Vice President and
                             Chief Financial Officer
                          (Principal Financial Officer)


                            By /s/ Bonnie V. Hancock
                              ----------------------
                                Bonnie V. Hancock
                          Vice President and Controller
                           (Chief Accounting Officer)





Date:     November 13, 1998


<PAGE>

                                  EXHIBIT INDEX

           Exhibit Number                         Description

                 2(a)           Press Release of Carolina Power & Light Company,
                                dated November 11, 1998.

                 2(b)           Agreement  and  Plan  of  Merger  By  and  Among
                                Carolina Power & Light  Company,  North Carolina
                                Natural Gas Corporation and Carolina Acquisition
                                Corporation, dated as of November 10, 1998.


                 4              Form of  Carolina  Power & Light  Company  First
                                Mortgage Bond, 6.80% Series Due August 15, 2007.

                27              Financial Data Schedule