Carolina Power & Light Company

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS   

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
         are prepared in conformity with the accounting  principles reflected in
         the financial  statements  included in the Company's 1996 Annual Report
         to  Shareholders  and the  1996  Annual  Report  on Form  10-K.  Due to
         temperature  variations  between  seasons of the year and the timing of
         outages of electric generating units, especially  nuclear-fueled units,
         the amounts  reported in the  Statements  of Income for periods of less
         than twelve months are not necessarily  indicative of amounts  expected
         for the  year.  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.  Certain amounts for 1996 have been reclassified to conform to
         the 1997 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
         (SCPSC) 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 $257.7 million for Robinson Unit
         No. 2, $235.4  million  for  Brunswick  Unit No. 1, $221.4  million for
         Brunswick  Unit No. 2 and  $284.3  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 (the  Board)  has  reached
         several  tentative  conclusions  with respect to its project  regarding
         accounting  practices  related to  closure  and  removal of  long-lived
         assets.   The   primary   conclusions   as  they   relate  to   nuclear
         decommissioning are: 1) the cost of decommissioning should be accounted
         for as a  liability  and  accrued as the  obligation  is  incurred;  2)
         recognition of a liability for  decommissioning  results in recognition
         of an  increase  to the  cost  of  the  plant;  3) the  decommissioning
         liability  should be measured  based on  discounted  cash flows using a
         risk-free rate; and 4) decommissioning trust funds should not be offset
         against the decommissioning liability. It is uncertain what impacts the
         final  statement may  ultimately  have on the Company's  accounting for
         nuclear  decommissioning and other closure and removal costs. The Board
         has announced that the effective date would be no earlier than 1998.

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.  On  February  6,  1997,  the NCUC  issued an order  denying
         CIGFUR's Motion for Reconsideration. On February 25, 1997, CIGFUR filed
         a Notice of Appeal of the NCUC's decision with the North Carolina Court
         of  Appeals.  The  Company  filed its brief in this  matter on July 18,
         1997. The Company cannot predict the outcome of this matter.

         In  December  1996,  the  Company  filed a  proposal  with the SCPSC to
         accelerate  amortization of certain regulatory assets,  including plant
         abandonment costs related to the Harris Plant, over a three-year period
         beginning  January 1, 1997. This accelerated  amortization  will reduce
         income by  approximately  $13 million,  after tax, in each of the three
         years.  In  anticipation  of  approval  of the  proposal  in 1997,  the
         unamortized  balance of plant  abandonment  costs related to the Harris
         Plant was  adjusted in 1996 to reflect the present  value impact of the
         shorter  recovery  period.  This adjustment  resulted in an increase in
         income of approximately  $14 million,  after tax, in the fourth quarter
         of  1996.  On  March  20,  1997,   the  SCPSC  approved  the  Company's
         accelerated amortization proposal.

4.       PURCHASE OF KNOWLEDGE BUILDERS, INC. (KBI)
         ------------------------------------------
         On May  6,  1997,  CaroCapital,  Inc.  (CaroCapital),  a  wholly  owned
         subsidiary of the Company,  entered into a merger agreement pursuant to
         which KBI was  merged  into  CaroCapital.  KBI is an  energy-management
         software and control systems company in which  CaroCapital  purchased a
         40%  equity  interest  in 1996.  In  connection  with the  merger,  the
         remaining  KBI stock was  exchanged  for  common  stock of the  Company
         according  to a  market  value  formula.  The  merger  resulted  in the
         issuance of approximately  604,000 shares of the Company's common stock
         (valued  at $20.5  million)  and a cash  payment of $1.9  million.  The
         merger  agreement  also  provided  for  incentive   payments  based  on
         CaroCapital's future results of operations. If earned, these additional
         payments  will be made  primarily  in  shares of the  Company's  common
         stock.  The  merger  was  completed  on June  5,  1997.  Following  the
         completion of the merger,  CaroCapital was renamed  Strategic  Resource
         Solutions Corp., a North Carolina Enterprise Corporation.

5.       PREFERRED STOCK REDEMPTION
         --------------------------
         On July 1, 1997,  the  Company  redeemed  all  500,000  shares of $7.72
         Serial Preferred Stock and all 350,000 shares of $7.95 Serial Preferred
         Stock,  both at a redemption price of $101 per share. On June 30, 1997,
         $84.4 million was reclassified to current liabilities.  The redemptions
         were  funded  with  additional   commercial  paper  borrowings   and/or
         internally generated funds.

6.       COMMITMENTS AND CONTINGENCIES
         -----------------------------
         Contingencies existing as of the date of these statements are described
         below.  No  significant  changes have occurred since December 31, 1996,
         with respect to the  commitments  discussed in Note 11 of the financial
         statements   included  in  the   Company's   1996   Annual   Report  to
         Shareholders.
       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 non-regulated  entities. The continued  applicability of
         SFAS-71  will  require  further   evaluation  as  competitive   forces,
         deregulation  and  restructuring  take effect in the  electric  utility
         industry.  In the event the Company  discontinued  the  application  of
         SFAS-71,  amounts  recorded  under  SFAS-71  as  regulatory  assets and
         liabilities  would be  eliminated.  At June  30,  1997,  the  Company's
         regulatory  assets totaled $627.1  million.  Additionally,  the factors
         discussed above 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."

       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 other entities alleged to be former owners and
         operators  of MGP  sites  in  North  Carolina,  is  participating  in a
         cooperative  effort with the North Carolina  Department of Environment,
         Health and Natural  Resources,  Division of Waste  Management  (DWM) to
         establish  a uniform  framework  for  addressing  these MGP sites.  The
         investigation  and  remediation of specific MGP sites will be addressed
         pursuant to one or more  Administrative  Orders on Consent  between the
         DWM and  individual  potentially  responsible  party  or  parties.  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 shared voluntary efforts with others at individual sites.

         The  Company has been  notified by  regulators  of its  involvement  or
         potential  involvement  in several  sites,  other than MGP sites,  that
         require  remedial  action.  Although  the  Company  cannot  predict the
         outcome of these  matters,  it does not expect  costs  associated  with
         these sites to be material to the results of operations of the Company.

         The Company carries a liability for the estimated costs associated with
         certain  remedial  activities  at  certain  MGP and other  sites.  This
         liability is not material to the financial position of the Company. Due
         to  uncertainty  regarding  the extent of remedial  action that will be
         required and questions of liability, the cost of remedial activities at
         certain MGP sites is not  currently  determinable.  The Company  cannot
         predict the outcome of these matters.

         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.
         The Company cannot predict  whether the DOE will be able to perform its
         contractual  obligations  and  provide  interim  storage  or  permanent
         disposal   repositories  for  spent  nuclear  fuel  and/or   high-level
         radioactive waste materials on a timely basis.

         With certain modifications, the Company's spent fuel storage facilities
         are 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) In the opinion of  management,  liabilities,  if any,  arising under
         other pending claims would not have a material  effect on the financial
         position, results of operations or cash flows of the Company.

7.       IMPACT OF NEW ACCOUNTING STANDARD
         ---------------------------------
         In February  1997,  the  Financial  Accounting  Standards  Board issued
         Statement of Financial  Accounting  Standards  No. 128,  "Earnings  Per
         Share,"  (SFAS-128),  which changed the previous standards on computing
         and  presenting  earnings per share.  SFAS-128 is effective  for fiscal
         years  beginning  after December 15, 1997;  earlier  application is not
         permitted. The Company does not expect the adoption of SFAS-128 to have
         a material impact on its financial statements.