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, 2004

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 | Exact name of registrants as specified in their charters, state
of incorporation, address of principal executive offices, and
telephone number                          | I.R.S. Employer
Identification Number
|---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------
|1-8349                 | Florida Progress Corporation
410 South Wilmington Street
Raleigh, North Carolina 27601
Telephone (919) 546-6111
State of Incorporation: Florida                         | 59-2147112                           
|1-3274                 | Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
100 Central Avenue
St. Petersburg, Florida 33701
Telephone (727) 820-5151
State of Incorporation: Florida | 59-0247770                           

NONE

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

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

Indicate by check mark whether the
 registrants  are  accelerated  filers (as defined in Rule 12b-2 of the Exchange Act).
 Yes __  No X

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

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest
practicable date. As of November 3, 2004, each registrant had the following shares of
common stock outstanding:

|Registrant                   | Description                     | Shares                                                      
|---------------------------- | ------------------------------- | ------------------------------------------------------------
|Florida Progress Corporation | Common Stock, without par value | 98,616,658 (all of which were held
by Progress Energy, Inc.)
|PEF                          | Common Stock, without par value | 100 (all of which were held by
Florida Progress Corporation)

Florida Progress Corporation and
Florida Power Corporation meet the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and are therefore filing this form with the reduced disclosure format.



---

# FLORIDA PROGRESS
CORPORATION AND PROGRESS ENERGY FLORIDA, INC. FORM 10-Q  For
the Quarter Ended September 30, 2004

Glossary of Terms

Safe Harbor For
Forward-Looking Statements

PART I. FINANCIAL
INFORMATION

Item 1. Financial
Statements

Florida
Progress Corporation

Unaudited
Consolidated Statements of Income          Unaudited Consolidated Balance Sheets          Unaudited Consolidated
Statements of Cash Flows

Florida
Power Corporation         d/b/a
Progress Energy Florida, Inc.

Unaudited
Statements of Income          Unaudited Balance Sheets          Unaudited Statements of Cash Flows

Notes to Financial
Statements         Florida
Progress Corporation and Florida Power Corporation d/b/a Progress Energy Florida, Inc.

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

Item 3.  Quantitative and
Qualitative Disclosures About Market Risk

Item 4. Controls and
Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 6. Exhibits

Signatures



---

# GLOSSARY OF TERMS

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

|TERM                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | DEFINITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|AFUDC                        
the Agreement                
APB                          
AST                          
BART                         
Bcf                          
CAIR                         
Calgon                       
Caronet                      
Code                         
Colona                       
the Company                  
CR3                          
                             
DOE                          
ECRC                         
EITF                         
EPA                          
EPIK                         
FASB                         
FASB Staff Position 106-2    
                             
FDEP                         
Federal Circuit              
FERC                         
FIN No. 46R                  
                             
Florida Progress or FPC      
FPSC                         
Global                       
MACT                         
Medicare Act                 
MGP                          
NOx                          
NRC                          
NSP                          
OCI                          
Odyssey                      
OPEB                         
PEF or the utility           
                             
PFA                          
the Plan                     
PLRs                         
Progress Capital             
Progress Energy or the Parent
Progress Fuels               
PTC                          
PT LLC                       
PUHCA                        
PVI                          
PWR                          
RAFT                         
Rail Services or Rail        
RTO                          
SEC                          
Section 29                   
Service Company              
SFAS No. 5                   
                             
SFAS No. 71                  
                             
SFAS No. 123                 
                             
SFAS No. 133                 
                             
SFAS No. 142                 
                             
SFAS No. 143                 
                             
SFAS No. 148                 
                             
                             
SMD NOPR                     
                             
SO2                          
the Trust | Allowance for funds used during construction
Stipulation and Settlement Agreement
Accounting Principles Board
Advanced Separation Technology
Best available retrofit technology
Billion cubic feet
Clean Air Interstate Rule
Calgon Carbon Corporation
Caronet, Inc.
Internal Revenue Code
Colona Synfuel Limited Partnership, L.L.L.P.
Florida Progress Corporation
Progress Energy Florida Inc.'s nuclear generating plant, Crystal River
Unit No. 3
United States Department of Energy
Environmental Cost Recovery Clause
Emerging Issues Task Force
United States Environmental Protection Agency
EPIK Communications, Inc.
Financial Accounting Standards Board
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug Improvement and Modernization Act of 2003
Florida Department of Environmental Protection
United States Circuit Court of Appeals
Federal Energy Regulatory Commission
FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities -
An Interpretation of ARB No. 51"
Florida Progress Corporation
Florida Public Service Commission
U.S. Global LLC
Maximum Available Control Technology
Medicare Prescription Drug, Improvement and Modernization Act of 2003
Manufactured Gas Plant
Nitrogen oxide
United States Nuclear Regulatory Commission
Northern States Power
Other comprehensive income
Odyssey Telecorp, Inc.
Other postretirement benefits
Progress Energy Florida, Inc., formerly referred to as Florida Power
Corporation
IRS Prefiling Agreement
Revenue Sharing Incentive Plan
Private Letter Rulings
Progress Capital Holdings, Inc.
Progress Energy, Inc.
Progress Fuels Corporation
Progress Telecommunications Corporation
Progress Telecom LLC
Public Utility Holding Company Act of 1935, as amended
Progress Ventures, Inc.
Pressurized water reactor
Railcar Asset Financing Trust
Rail Services business segment
Regional Transmission Organization
United States Securities and Exchange Commission
Section 29 of the Internal Revenue Code
Progress Energy Service Company, LLC
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies"
Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation"
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation"
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative and Hedging Activities"
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets"
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations"
Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123"
Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue
Discrimination through Open Access Transmission and Standard Market Design
Sulfur dioxide
FPC Capital I
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



---

# SAFE HARBOR FOR
FORWARD-LOOKING STATEMENTS

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

In addition, forward-looking
statements are discussed in Managements Discussion and Analysis of Financial
Condition and Results of Operations including, but not limited to, statements under
the sub-heading Liquidity and Capital Resources concerning operating cash
flows.

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

Examples of factors that you should
consider with respect to any forward-looking statements made throughout this document
include, but are not limited to, the following: the impact of fluid and complex government
laws and regulations, including those relating to the environment; deregulation or
restructuring in the electric industry that may result in increased competition and
stranded costs; the uncertainty regarding the timing, creation and structure of regional
transmission organizations; weather conditions that directly influence the demand for
electricity; our ability to recover through the regulatory process, and the timing of, the
costs associated with the four hurricanes that impacted our service territory in 2004 or
other significant weather events; recurring seasonal fluctuations in demand for
electricity; fluctuations in the price of energy commodities and purchased power;
successful maintenance and operation of PEFs energy commodities and purchased power;
economic fluctuations and the corresponding impact on PEFs commercial and industrial
customers; the inherent risks associated with the operation of nuclear facilities,
including environmental, health, regulatory and financial risks; the impact of any
terrorist acts generally and on our generating facilities and other properties; the
ability to successfully access capital markets on favorable terms; the impact that
increases in leverage may have on the Company and PEF; the ability of the Company and PEF
to maintain their current credit ratings; the impact of derivative contracts used in the
normal course of business; investment performance of pension and benefit plans and the
ability to control costs; the availability and use of Internal Revenue Code Section 29
(Section 29) tax credits by synthetic fuel producers and the Companys continued
ability to use Section 29 tax credits related to its coal and synthetic fuel businesses;
the impact to our financial condition and performance in the event it is determined the
Company is not entitled to previously taken Section 29 tax credits; the outcome of any
ongoing or future litigation or similar disputes and the impact of any such outcome or
related settlements; and unanticipated changes in operating expenses and capital
expenditures. Many of these risks similarly impact the Companys subsidiaries.

These and other risks are detailed
from time to time in Florida Progress and PEFs SEC reports. All such factors
are difficult to predict, contain uncertainties that may materially affect actual results,
and may be beyond the control of the Company and PEF. Many, but not all of the factors
that may impact actual results of the Company and PEF are discussed in the Risk Factors
section of PEFs annual report on Form 10-K for the year ended December 31, 2003
which was filed with the SEC on March 12, 2004. You should carefully read these SEC
reports. New factors emerge from time to time, and it is not possible for management to
predict all such factors, nor can it assess the effect of each such factor on Florida
Progress and PEF.

---

PART I. FINANCIAL
INFORMATION

Item 1. FINANCIAL
STATEMENTS

# FLORIDA PROGRESS
CORPORATION CONSOLIDATED INTERIM
FINANCIAL STATEMENTS September 30, 2004

# UNAUDITED CONSOLIDATED
STATEMENTS of INCOME

|                                                      | Three Months Ended
September 30 | Nine Months Ended
September 30
|----------------------------------------------------- | ------------------------------- | ------------------------------
|                                                     
|
|                                                     
|Operating Revenues                                    |                                 |                               
|Utility                                               |                                 | $ 1,029                       
|Diversified business                                  |                                 | 646                           
|                                                     
|Total Operating Revenues                              |                                 | 1,675                         
|                                                     
|Operating Expenses                                    |                                
|Utility                                               |                                
|Fuel used in electric generation                      |                                 | 335                           
|Purchased power                                       |                                 | 173                           
|Operation and maintenance                             |                                 | 138                           
|Depreciation and amortization                         |                                 | 68                            
|Taxes other than on income                            |                                 | 70                            
|Diversified business                                  |                                
|Cost of sales                                         |                                 | 566                           
|Depreciation and amortization                         |                                 | 31                            
|Other                                                 |                                 | 34                            
|                                                     
|Total Operating Expenses                              |                                 | 1,415                         
|                                                     
|Operating Income                                      |                                 | 260                           
|                                                     
|Other Income (Expense)                                |                                
|Interest income                                       |                                 | 1                             
|Other, net                                            |                                 | 8                             
|                                                     
|Total Other Income                                    |                                 | 9                             
|                                                     
|Interest Charges                                      |                                
|Interest charges                                      |                                 | 42                            
|Allowance for borrowed funds used during construction |                                 | (1)                           
|                                                     
|Total Interest Charges, Net                           |                                 | 41                            
|                                                     
|Income before Income Taxes                            |                                 | 228                           
|Income Tax Expense (Benefit)                          |                                 | 80                            
|                                                     
|Net Income                                            |                                 | $    148                      
|                                                     

See Notes to Interim
Financial Statements.



---

# FLORIDA PROGRESS
CORPORATION UNAUDITED CONSOLIDATED
BALANCE SHEETS

|(in millions)                                                         | September 30 | December 31
|--------------------------------------------------------------------- | ------------ | -----------
|
|                                                                     
|Utility Plant                                                         |              |            
|Utility plant in service                                              |              | $ 8,311    
|Accumulated depreciation                                              |              | (2,921     
|                                                                     
|Utility plant in service, net                                         |              | 5,390      
|Held for future use                                                   |              | 8          
|Construction work in progress                                         |              | 382        
|Nuclear fuel, net of amortization                                     |              | 51         
|                                                                     
|Total Utility Plant, Net                                              |              | 5,831      
|                                                                     
|Current Assets                                                        |             
|Cash and cash equivalents                                             |              | 32         
|Accounts receivable                                                   |              | 508        
|Unbilled accounts receivable                                          |              | 71         
|Receivables from affiliated companies                                 |              | 15         
|Inventory                                                             |              | 485        
|Deferred fuel cost                                                    |              | 212        
|Assets held for sale                                                  |              |           
|Prepayments and other current assets                                  |              | 285        
|                                                                     
|Total Current Assets                                                  |              | 1,608      
|                                                                     
|Deferred Debits and Other Assets                                      |             
|Regulatory assets                                                     |              | 388        
|Nuclear decommissioning trust funds                                   |              | 439        
|Diversified business property, net                                    |              | 927        
|Miscellaneous other property and investments                          |              | 95         
|Prepaid pension cost                                                  |              | 234        
|Deferred tax asset                                                    |              | 89         
|Other assets                                                          |              | 134        
|                                                                     
|Total Deferred Debits and Other Assets                                |              | 2,306      
|                                                                     
|Total Assets                                                          |              | $ 9,745    
|                                                                     
|CAPITALIZATION AND LIABILITIES                                        |             
|                                                                     
|Common Stock Equity                                                   |             
|Common stock without par value                                        |              | $ 1,701    
|Retained earnings                                                     |              | 1,064      
|Accumulated other comprehensive loss                                  |              | (32        
|                                                                     
|Total Common Stock Equity                                             |              | 2,733      
|                                                                     
|Preferred Stock of Subsidiaries - Not Subject to Mandatory Redemption |              | 34         
|Long-Term Debt, Affiliate                                             |              | 809        
|Long-Term Debt, Net                                                   |              | 1,999      
|                                                                     
|Total Capitalization                                                  |              | 5,575      
|                                                                     
|Current Liabilities                                                   |             
|Current portion of long-term debt                                     |              | 48         
|Accounts payable and accrued liabilities                              |              | 648        
|Payables to affiliated companies                                      |              | 97         
|Notes payable to affiliated companies                                 |              | 337        
|Taxes accrued                                                         |              |           
|Short-term obligations                                                |              | 323        
|Customer deposits                                                     |              | 131        
|Other current liabilities                                             |              | 370        
|                                                                     
|Total Current Liabilities                                             |              | 1,954      
|                                                                     
|Deferred Credits and Other Liabilities                                |             
|Accumulated deferred income taxes and investment tax credits          |              | 113        
|Regulatory liabilities                                                |              | 1,340      
|Asset retirement obligations                                          |              | 350        
|Other liabilities                                                     |              | 413        
|                                                                     
|Total Deferred Credits and Other Liabilities                          |              | 2,216      
|                                                                     
|Commitments and Contingencies (Note 15)                               |             
|                                                                     
|Total Capitalization and Liabilities                                  |              | $ 9,745    
|                                                                     

See Notes to Interim
Financial Statements.



---

# FLORIDA PROGRESS
CORPORATION UNAUDITED CONSOLIDATED
STATEMENTS OF CASH FLOWS

|                                                                                 | Nine Months Ended September 30
|-------------------------------------------------------------------------------- | ------------------------------
|
|                                                                                
|Operating Activities                                                             |                               
|Net income                                                                       |                               
|Adjustments to reconcile net income to net cash provided by operating activities |                               
|Depreciation and amortization                                                    |                               
|Deferred income taxes and investment tax credits, net                            |                               
|Deferred fuel credit                                                             |                               
|Cash provided (used) by changes in operating assets and liabilities:             |                               
|Accounts receivable                                                              |                               
|Affiliate accounts receivable                                                    |                               
|Inventories                                                                      |                               
|Prepayments and other current assets                                             |                               
|Accounts payable                                                                 |                               
|Affiliate accounts payable                                                       |                               
|Income taxes, net                                                                |                               
|Other current liabilities                                                        |                               
|Other                                                                            |                               
|                                                                                
|Net Cash Provided by Operating Activities                                        |                               
|                                                                                
|Investing Activities                                                             |                               
|Utility property additions                                                       |                               
|Diversified business property additions                                          |                               
|Nuclear fuel additions                                                           |                               
|Proceeds from sale of assets                                                     |                               
|Other                                                                            |                               
|                                                                                
|Net Cash Used in Investing Activities                                            |                               
|                                                                                
|Financing Activities                                                             |                               
|Proceeds from issuance of long-term debt                                         |                               
|Net increase (decrease) in short-term obligations                                |                               
|Retirement of long-term debt                                                     |                               
|Net change in intercompany notes                                                 |                               
|Equity contributions from parent                                                 |                               
|Dividends paid to parent                                                         |                               
|Other                                                                            |                               
|                                                                                
|Net Cash (Used in) Provided by Financing Activities                              |                               
|                                                                                
|Net Increase (Decrease) in Cash and Cash Equivalents                             |                               
|Cash and Cash Equivalents at Beginning of Period                                 |                               
|                                                                                
|Cash and Cash Equivalents at End of Period                                       |                               
|                                                                                
|Supplemental Disclosures of Cash Flow Information                                |                               
|Cash paid during the year - interest (net of amount capitalized)                 |                               
|income taxes (net of refunds)                                                    |                               
|                                                                                

See Notes to Interim
Financial Statements.



---

# FLORIDA POWER
CORPORATION d/b/a PROGRESS ENERGY
FLORIDA, INC.INTERIM FINANCIAL
STATEMENTSSeptember 30, 2004

UNAUDITED
STATEMENTS of INCOME

|                                                      | Three Months Ended
September 30 | Nine Months Ended
September 30
|----------------------------------------------------- | ------------------------------- | ------------------------------
|                                                     
|
|                                                     
|Operating Revenues                                    |                                 | $ 1,029                       
|Operating Expenses                                    |                                
|Fuel used in electric generation                      |                                 | 335                           
|Purchased power                                       |                                 | 173                           
|Operation and maintenance                             |                                 | 138                           
|Depreciation and amortization                         |                                 | 68                            
|Taxes other than on income                            |                                 | 70                            
|                                                     
|Total Operating Expenses                              |                                 | 784                           
|                                                     
|Operating Income                                      |                                 | 245                           
|                                                     
|Other Income                                          |                                
|Other, net                                            |                                 | 1                             
|                                                     
|Total Other Income                                    |                                 | 1                             
|                                                     
|Interest Charges                                      |                                
|Interest charges                                      |                                 | 27                            
|Allowance for borrowed funds used during construction |                                 | (1                            
|                                                     
|Total Interest Charges, Net                           |                                 | 26                            
|                                                     
|Income before Income Taxes                            |                                 | 220                           
|Income Tax Expense                                    |                                 | 80                            
|                                                     
|Net Income                                            |                                 | $    140                      
|Preferred Stock Dividend Requirement                  |                                 |                              
|                                                     
|Earnings for Common Stock                             |                                 | $    140                      
|                                                     

See
Notes to Interim Financial Statements.



---

# FLORIDA POWER CORPORATION d/b/a PROGRESS ENERGY
FLORIDA, INC. UNAUDITED BALANCE SHEETS

|(in millions)                                         | September 30 | December 31
|----------------------------------------------------- | ------------ | -----------
|
|                                                     
|Utility Plant                                         |              |            
|Utility plant in service                              |              | $ 8,311    
|Accumulated depreciation                              |              | (2,921     
|                                                     
|Utility plant in service, net                         |              | 5,390      
|Held for future use                                   |              | 8          
|Construction work in progress                         |              | 382        
|Nuclear fuel, net of amortization                     |              | 51         
|                                                     
|Total Utility Plant, Net                              |              | 5,831      
|                                                     
|Current Assets                                        |             
|Cash and cash equivalents                             |              | 13         
|Accounts receivable                                   |              | 238        
|Unbilled accounts receivable                          |              | 71         
|Receivables from affiliated companies                 |              | 7          
|Deferred income taxes                                 |              |           
|Inventory                                             |              | 260        
|Deferred fuel cost                                    |              | 212        
|Income taxes receivable                               |              | 189        
|Prepayments and other current assets                  |              | 27         
|                                                     
|Total Current Assets                                  |              | 1,017      
|                                                     
|Deferred Debits and Other Assets                      |             
|Regulatory assets                                     |              | 388        
|Debt issuance costs                                   |              | 22         
|Nuclear decommissioning trust funds                   |              | 439        
|Miscellaneous other property and investments          |              | 45         
|Prepaid pension cost                                  |              | 229        
|Other assets                                          |              | 34         
|                                                     
|Total Deferred Debits and Other Assets                |              | 1,157      
|                                                     
|Total Assets                                          |              | $ 8,005    
|                                                     
|CAPITALIZATION AND LIABILITIES                        |             
|                                                     
|Common Stock Equity                                   |             
|Common stock without par value                        |              | $ 1,081    
|Retained earnings                                     |              | 1,218      
|Accumulated other comprehensive loss                  |              | (4         
|                                                     
|Total Common Stock Equity                             |              | 2,295      
|                                                     
|Preferred Stock - Not Subject to Mandatory Redemption |              | 34         
|Long-Term Debt, Net                                   |              | 1,858      
|                                                     
|Total Capitalization                                  |              | 4,187      
|                                                     
|Current Liabilities                                   |             
|Current portion of long-term debt                     |              | 48         
|Accounts payable and accrued liabilities              |              | 469        
|Payables to affiliated companies                      |              | 91         
|Notes payable to affiliated companies                 |              | 18         
|Taxes accrued                                         |              |           
|Interest accrued                                      |              | 27         
|Short-term obligations                                |              | 323        
|Customer deposits                                     |              | 131        
|Accrued taxes other than income                       |              | 85         
|Other current liabilities                             |              | 66         
|                                                     
|Total Current Liabilities                             |              | 1,258      
|                                                     
|Deferred Credits and Other Liabilities                |             
|Accumulated deferred income taxes                     |              | 591        
|Accumulated deferred investment tax credits           |              | 37         
|Regulatory liabilities                                |              | 1,340      
|Asset retirement obligations                          |              | 332        
|Other liabilities                                     |              | 260        
|                                                     
|Total Deferred Credits and Other Liabilities          |              | 2,560      
|                                                     
|Commitments and Contingencies (Note 15)               |             
|                                                     
|Total Capitalization and Liabilities                  |              | $ 8,005    
|                                                     

See Notes to Interim
Financial Statements.



---

# FLORIDA POWER CORPORATIONd/b/a PROGRESS ENERGY
FLORIDA, INC. UNAUDITED STATEMENTS of
CASH FLOWS

|                                                                                  | Nine Months Ended September 30
|--------------------------------------------------------------------------------- | ------------------------------
|
|                                                                                 
|Operating Activities                                                              |                               
|Net income                                                                        |                               
|Adjustments to reconcile net income to net cash provided by operating activities: |                               
|Depreciation and amortization                                                     |                               
|Deferred income taxes and investment tax credits, net                             |                               
|Deferred fuel credit                                                              |                               
|Cash provided (used) by changes in operating assets and liabilities:              |                               
|Accounts receivable                                                               |                               
|Inventories                                                                       |                               
|Prepayments and other current assets                                              |                               
|Accounts payable                                                                  |                               
|Income taxes, net                                                                 |                               
|Other current liabilities                                                         |                               
|Other                                                                             |                               
|                                                                                 
|Net Cash Provided by Operating Activities                                         |                               
|                                                                                 
|Investing Activities                                                              |                               
|Property additions                                                                |                               
|Nuclear fuel additions                                                            |                               
|Other                                                                             |                               
|                                                                                 
|Net Cash Used in Investing Activities                                             |                               
|                                                                                 
|Financing Activities                                                              |                               
|Proceeds from issuance of long-term debt                                          |                               
|Net increase (decrease) in short-term obligations                                 |                               
|Retirement of long-term debt                                                      |                               
|Net change in intercompany notes                                                  |                               
|Dividends paid to parent                                                          |                               
|Dividends paid on preferred stock                                                 |                               
|Other                                                                             |                               
|                                                                                 
|Net Cash (Used in) Provided by Financing Activities                               |                               
|                                                                                 
|Net Increase (Decrease) in Cash and Cash Equivalents                              |                               
|                                                                                 
|Cash and Cash Equivalents at Beginning of Period                                  |                               
|                                                                                 
|Cash and Cash Equivalents at End of Period                                        |                               
|                                                                                 
|Supplemental Disclosures of Cash Flow Information                                 |                               
|Cash paid during the year - interest (net of amount capitalized)                  |                               
|income taxes (net of refunds)                                                     |                               
|                                                                                 

See Notes to Interim
Financial Statements.



---

# FLORIDA PROGRESS
CORPORATION AND FLORIDA POWER CORPORATIONd/b/a PROGRESS ENERGY FLORIDA, INC.NOTES TO INTERIM FINANCIAL
STATEMENTS

# 

1.       
          ORGANIZATION AND BASIS OF PRESENTATION

| | A. | Organization
| | -- | ------------

| | Florida
Progress Corporation (the Company or Florida Progress) is a holding company under the
Public Utility Holding Company Act of 1935 (PUHCA). The Company became subject to the
regulations of PUHCA when it was acquired by Progress Energy, Inc. (Progress Energy or
the Parent). Florida Progress two primary subsidiaries are Florida Power
Corporation d/b/a Progress Energy Florida, Inc. (PEF) and Progress Fuels Corporation
(Progress Fuels).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEF
is a regulated public utility engaged in the generation, purchase, transmission,
distribution and sale of electricity primarily in portions of Florida. PEF is regulated
by the Florida Public Service Commission (FPSC), the Federal Energy Regulatory Commission
(FERC) and the Nuclear Regulatory Commission (NRC). Progress Fuels is a diversified
non-utility energy company, whose principal business segments are Energy and Related
Services and Rail Services. Throughout the report, the terms utility and regulated will
be used to discuss items pertaining to PEF. Diversified business and nonregulated will be
used to discuss the subsidiaries of Florida Progress excluding PEF.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Basis
of Presentation
| | -- | ---------------------

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

| | PEF
collects from customers certain excise taxes, which include gross receipts tax, franchise
taxes, and other excise taxes, levied by the state or local government upon the
customers. PEF accounts for excise taxes on a gross basis. For the three month periods
ended September 30, 2004 and 2003, excise taxes of approximately $45 million and $40
million, respectively, are included in taxes other than on income in the accompanying
Statements of Income. For the nine month periods ended September 30, 2004 and 2003,
excise taxes of approximately $114 million and $104 million, respectively, are included
in taxes other than on income in the accompanying Statements of Income. These approximate
amounts are also included in utility revenues.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | C. | Subsidiary
Reporting Period Change
| | -- | ----------------------------------

| | In
the fourth quarter of 2003, the Company ceased recording portions of Energy and Related
Services segment operations, primarily synthetic fuel operations, one month in
arrears. As a result, earnings for the year ended December 31, 2003 as reported in the
Companys Form 10-K, included 13 months of results for these operations. The 2003
quarterly results for periods ended March 31, June 30 and September 30 have been restated
for the above-mentioned reporting period change. This resulted in ten months of earnings
in the nine months ended September 30, 2003. The reclassification of earnings between
quarters resulted in a $1 million decrease and a $14 million increase in net income for
the quarter and year to date periods, respectively, from $175 million to $174 million for
the third quarter of 2003, and from $366 million to $380 million for the nine months
ended September 30, 2003.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Stock-Based
Compensation
| | -- | ------------------------

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

|(in millions)                                             | Three Months Ended
September 30 | Nine Months Ended
September 30
|--------------------------------------------------------- | ------------------------------- | ------------------------------
|                                                         
|
|                                                         
|Net Income, as reported                                   |                                 | $148                          
|Deduct:  Total stock option expense determined under fair |                                
|value method for all awards, net of related tax effects   |                                 | 1                             
|                                                         
|Pro forma net income                                      |                                 | $147                          
|                                                         

|(in millions)                                             | Three Months Ended
September 30 | Nine Months Ended
September 30
|--------------------------------------------------------- | ------------------------------- | ------------------------------
|                                                         
|
|                                                         
|Earnings for Common Stock, as reported                    |                                 | $140                          
|Deduct:  Total stock option expense determined under fair |                                
|value method for all awards, net of related tax effects   |                                 | 1                             
|                                                         
|Pro forma earnings for common stock                       |                                 | $139                          
|                                                         

| | The
Company expects to begin expensing stock options in 2005, either by adopting SFAS No.
123, as amended by SFAS No. 148, or by adopting new FASB guidance on accounting for
stock-based compensation that is expected to be issued in late 2004 and effective July 1,
2005. In 2004, however, Progress Energy made the decision to cease granting stock options
and intends to replace that compensation program with other programs. Therefore, the
amount of stock option expense expected to be recorded in 2005 is below the amount that
would have been recorded if the stock option program had continued. If stock option
expense is recorded for the full year 2005, approximately $1 million of pre-tax expense
would be recorded by the Company and PEF.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Consolidation
of Variable Interest Entities
| | -- | -------------------------------------------

| | Florida
Progress and PEF consolidate all voting interest entities in which they own a majority
voting interest and all variable interest entities for which they are the primary
beneficiary in accordance with FASB Interpretation No. 46R, Consolidation of
Variable Interest Entities  an Interpretation of ARB No. 51" (FIN No. 46R). A
subsidiary of Florida Progress is the primary beneficiary of and consolidates Colona
Synfuel Limited Partnership LLLP (Colona), a synthetic fuel production facility that
qualifies for federal tax credits under Section 29 of the Internal Revenue Code. As of
September 30, 2004, Colonas total assets were $24 million. None of Florida Progress consolidated
assets are collateral for Colonas obligations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Florida
Progress and PEF have interests in several variable interest entities for which they are
not the primary beneficiary. These arrangements include investments in approximately five
limited partnerships, limited liability corporations and venture capital funds. The
aggregate maximum loss exposure at September 30, 2004, that Florida Progress could be
required to record in its consolidated income statement as a result of these arrangements
totals approximately $13 million. The aggregate maximum loss exposure at September 30,
2004, that PEF could be required to record in its income statement as a result of these
arrangements totals approximately $5 million. The creditors of these variable interest
entities do not have recourse to the general credit of Florida Progress or PEF in excess
of the aggregate maximum loss exposure.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2.       
          NEW ACCOUNTING STANDARDS

| | In
December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(Medicare Act) was signed into law. In accordance with guidance issued by the FASB in
FASB Staff Position 106-2, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug Improvement and Modernization Act of 2003 (FASB Staff
Position 106-2), the Company elected to defer accounting for the effects of the Medicare
Act due to uncertainties regarding the effects of the implementation of the Medicare Act
and the accounting for certain provisions of the Medicare Act. In May 2004, the FASB
issued definitive accounting guidance for the Medicare Act in FASB Staff Position 106-2,
which was effective for the Company in the third quarter of 2004. FASB Staff Position
106-2 results in the recognition of lower other post retirement benefits (OPEB) costs to
reflect prescription drug-related federal subsidies to be received under the Medicare
Act. The Companys and PEFs accumulated postretirement benefit obligations as
of January 1, 2004 were reduced by approximately $36 million and $35 million,
respectively, by the impact of the Medicare Act, and the Companys and PEFs
2004 net periodic cost will be lower by approximately $5 million due to the Medicare Act.
The Company and PEF recorded approximately $4 million and $3 million, respectively, of
that net periodic cost reduction in the quarter ended September 30, 2004. Prior quarters
were not restated due to the immateriality of the adjustments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3.       
          HURRICANE-RELATED COSTS

| | Hurricanes
Charley, Frances, Ivan and Jeanne struck significant portions of PEFs service
territory during the third quarter of 2004. PEF has estimated total hurricane costs of
$366 million, of which $55 million was charged to capital expenditures, and $311 million
was charged to the storm damage reserve pursuant to a regulatory order.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with a regulatory order, PEF accrues $6 million annually to a storm damage
reserve and is allowed to defer losses in excess of the accumulated reserve. Under the
order, the storm reserve is charged with operation and maintenance expenses related to
storm restoration and with capital expenditures related to storm restoration that are in
excess of expenditures assuming normal operating conditions. As of September 30, 2004,
$266 million of hurricane restoration costs in excess of the previously recorded storm
reserve have been classified as a regulatory asset in order to recognize the probable
recoverability of these costs. On November 2, 2004, PEF filed a petition with FPSC to
recover $252 million of storm costs plus interest from retail ratepayers over a two-year period. The
remaining storm reserve costs of $14 million are attributable to wholesale customers. PEF
believes such costs are recoverable.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total
capital expenditures of approximately $55 million have been included in construction work
in progress as reported on the Consolidated Balance Sheets at September 30, 2004. Due to
the frequency and timing of these storms, the replaced equipment has not been fully
identified or quantified at this time. As such, current expenditures are still recorded
as in construction work in progress and replaced equipment is still recorded as gross in
the utility plant in service and accumulated depreciation balances reported on the
Consolidated Balance Sheets as of September 30, 2004 instead of being retired. Due to the
accounting treatment for regulated utility assets and related depreciation, these
retirements, when recorded, will reduce utility plant in service and accumulated
depreciation by offsetting amounts, therefore having no impact on total utility plant,
net or the Consolidated Statements of Income.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the substantial hurricane restoration costs, the Companys regular
federal income tax liability has been significantly reduced, resulting in a charge of $47
million related to the write-off of Section 29 tax credits. See Note 14 and 15 for
additional discussion.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4.        DIVESTITURES

| | A. | Divestiture
of Synfuel Partnership Interests
| | -- | --------------------------------------------

| | In
June 2004, the Company through its subsidiary, Progress Fuels sold, in two transactions,
a combined 49.8 percent partnership interest in Colona Synfuel Limited Partnership, LLLP,
one of its synthetic fuel facilities. Substantially all proceeds from the sales will be
received over time, which is typical of such sales in the industry. Gain from the sales
will be recognized on a cost recovery basis. The Companys book value of the
interests sold totaled approximately $3 million. Based on projected production and tax credit levels,
the Company anticipates receiving total gross proceeds of $10 million in 2004,
approximately $30 million per year from 2005 through 2007 and approximately $9 million
through the second quarter of 2008, on an annualized basis. In the event that the
synthetic fuel tax credits at the Colona facility are reduced, including an
increase in the price of oil which could limit or eliminate synthetic fuel tax credits,
the amount of proceeds realized could be significantly impacted (see Note 15 for
additional discussion regarding the limitation or elimination of synthetic fuel tax
credits). Under the agreements, the buyers had a right to unwind the transactions if an
IRS reconfirmation private letter ruling (PLR) was not received by October 15, 2004. The
reconfirmation PLR was received in September 2004. An immaterial gain was recorded for
the three months ended September 30, 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Railcar
Ltd. Divestiture
| | -- | ------------------------

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

5.       
          ACQUISITIONS AND BUSINESS COMBINATIONS

| | Progress Telecommunications Corporation
| | ---------------------------------------

| | In
December 2003, Progress Telecommunications Corporation (PTC) and Caronet, Inc. (Caronet),
both wholly-owned subsidiaries of Progress Energy, and EPIK Communications, Inc. (EPIK),
a wholly-owned subsidiary of Odyssey Telecorp, Inc. (Odyssey), contributed substantially
all of their assets and transferred certain liabilities to Progress Telecom, LLC (PT
LLC), a subsidiary of PTC. Subsequently, in December 2003 the stock of Caronet was sold
to an affiliate of Odyssey for $2 million in cash and Caronet became a wholly-owned
subsidiary of Odyssey. Following consummation of all the transactions described above,
PTC holds a 55% ownership interest in, and is the parent of PT LLC. Odyssey holds a
combined 45% ownership interest in PT LLC through EPIK and Caronet. The accounts of PT
LLC are included in the Companys Consolidated Financial Statements since the
transaction date. The minority interest is included in other liabilities and deferred
credits in the Consolidated Balance Sheets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
transaction was accounted for as a partial acquisition of EPIK through the issuance of
the stock of a consolidated subsidiary.The contributions of PTCs and Caronets
net assets were recorded at their carrying values of approximately $31 million. EPIKs
contribution was recorded at its estimated fair value of $22 million using the purchase
method. No gain or loss was recognized on the transaction. The EPIK purchase price was
initially allocated as follows: property and equipment  $27 million; other current
assets  $9 million; current liabilities  $21 million, and goodwill  $7
million. During 2004, PT LLC obtained certain external appraisals of acquired assets and
developed a restructuring plan to exit certain leasing arrangements of EPIK. Based on the
results of these activities, the preliminary purchase price allocation for EPIK was
revised as follows at September 30, 2004: property and equipment  $39 million;
other current assets  $7 million; intangible assets  $1 million; current
liabilities  $19 million, and exit costs  $6 million. The exit costs consist
primarily of lease termination penalties and noncancellable lease payments made after
certain leased properties are vacated. The purchase price allocation is subject to
adjustment in the fourth quarter of 2004 pending the completion of certain external
appraisals and the finalization of the restructuring plan, which is expected to be
substantially completed by December 31, 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6.       
          REGULATORY MATTERS

| | A. | Retail
Rate Matters
| | -- | -------------------

| | In
a filing dated September 9, 2004, as amended in November 2004, PEF is requesting the FPSC
to approve recovery through PEFs pass-through clauses in 2005 an increase of $278
million. This includes recovery for various pass-through items, primarily projected fuel cost increases in 2005 and $77
million related to under-recovered fuel costs in 2004 along with projected environmental costs. PEF expects a total of $156
million of under-recovered fuel costs for 2004 as of year end, of which PEF has requested
deferral of $79 million until 2006 to mitigate the impact on customers resulting from the
need to also recover hurricane-related costs. A decision on PEFs request is
expected from the FPSC at the conclusion of its annual fuel hearing, which began
on November 8, 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | PEF
has determined that additional generating capacity will be required in late 2007 and has
requested approval by the FPSC to build an additional unit at PEFs Hines Complex.
On October 28, 2004, the Prehearing Order in the Hines 4 Determination of Need proceeding
was issued. The order reflects a stipulation between the FPSC Staff and the Company
resolving all issues and agreement that the Commission should grant an affirmative
Determination of Need for the construction of a Hines Unit 4. The stipulation finds that
Hines Unit 4 is needed to maintain electric system reliability and integrity and to
continue to provide adequate electricity to its ratepayers at a reasonable cost. Hines
Unit 4 will be a combined cycle unit with a generating capacity of 461 megawatts (summer
rating). The estimated total in-service cost of Hines Unit 4 is $286 million and the unit
is planned for commercial operation in December 2007. If the actual cost is less than the
estimate, customers will receive the benefit of such cost under runs. Any costs that
exceed this estimate will be not recoverable absent extraordinary circumstances as found
by the FPSC in subsequent proceedings. The FPSC approved the final order on November 3,
2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Regional
Transmission Organizations
| | -- | -----------------------------------

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

| | The
FPSC ruled in December 2001 that the formation of GridFlorida by the three major
investor-owned utilities in Florida, including PEF, was prudent but ordered changes in
the structure and market design of the proposed organization. In September 2002, the FPSC
set a hearing for market design issues; this order was appealed to the Florida Supreme
Court by the consumer advocate of the state of Florida. In June 2003, the Florida Supreme
Court dismissed the appeal without prejudice. In September 2003, the FERC held a Joint
Technical Conference with the FPSC to consider issues related to formation of an RTO for
peninsular Florida. In December 2003, the FPSC ordered further state proceedings and
established a collaborative workshop process to be conducted during 2004. In June 2004,
the workshop process was abated pending completion of a cost-benefit study currently
anticipated to be completed in December 2004 with subsequent action by the state
commission to be determined at that time.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company cannot predict the outcome of these matters or the effect that they may have on
the GridFlorida proceedings currently ongoing before the FERC or FPSC. It is unknown what
impact the future proceedings will have on the Companys earnings, revenues or
prices.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEF
has $4 million invested in GridFlorida related to startup costs at September 30, 2004.
PEF expects to recover these startup costs in conjunction with the GridFlorida original
structure or in conjunction with any alternate combined transmission structure that
emerges.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7.       
          GOODWILL AND OTHER INTANGIBLE ASSETS

| | The
changes in the carrying amount of goodwill, by reportable segment, are as follows:
| | --------------------------------------------------------------------------------------

|(in millions)                    | Energy and
Related
Services | Other | Total
|-------------------------------- | --------------------------- | ----- | -----
|                                
|Balance as of January 1, 2003    |                             | $ 11  |      
|Divestitures                     |                             | (1    | )    
|Acquisition                      |                             | --    |      
|                                
|Balance as of December 31, 2003  |                             | $ 10  |      
|Purchase accounting adjustment   |                             | --    |      
|                                
|Balance as of September 30, 2004 |                             | $ 10  |      
|                                

| | In
December 2003, $7 million in goodwill was acquired based on a preliminary purchase price
allocation as part of the Progress Telecommunications Corporation partial acquisition of
EPIK and was reported in the Other segment. As discussed in Note 5, the Company revised
the preliminary EPIK purchase price allocation as of September 2004, and the $7 million
of goodwill was reallocated to certain tangible assets acquired based on the preliminary
results of external appraisals.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has $9 million of net intangible assets at September 30, 2004 and December 31,
2003. All of the Companys intangibles are subject to amortization. The Companys
intangibles are primarily acquired customer contracts that are amortized over their
respective lives. Amortization expense recorded on intangible assets for the three and
nine months ended September 30, 2004 and 2003, and estimated annual amortization expense
for intangible assets for 2004 through 2008 are not material to the results of
operations. PEF has no goodwill or significant intangible assets at September 30, 2004 or
December 31, 2003.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8.       
          COMPREHENSIVE INCOME

| | Comprehensive
income for Florida Progress for the three months ended September 30, 2004 and 2003 was
$146 million and $182 million, respectively, and $323 million and $370 million for the
nine months ended September 30, 2004 and 2003, respectively. Comprehensive income for PEF
for the three months ended September 30, 2004 and 2003 was $140 million and $115 million,
respectively, and $274 million and $248 million for the nine months ended September 30,
2004 and 2003, respectively. Changes in other comprehensive income consisted primarily of
changes in fair value of derivatives used to hedge cash flows related to interest on
long-term debt and gas sales, and of foreign currency translation adjustments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9.       
          FINANCING ACTIVITIES

| | Between
October 19, 2004 and November 1, 2004, PEF borrowed a net total of $55 million under its
long-term revolving credit facility. In addition, PEF borrowed $170 million under its
short-term credit facility. PEFs long-term credit facility was arranged through a
syndication of financial institutions and supports its commercial paper program. The
credit facilities contain various cross default and other acceleration provisions. The
borrowed funds will be used to pay off maturing commercial paper and for other cash
needs. This action was taken due to the uncertain impact on PEFs ability to access
the commercial paper markets resulting from recent ratings actions taken by Standard and
Poors (S&P) credit rating agency and Moodys Investor Services
(Moodys).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 19, 2004, S&P changed Progress Energys outlook from stable to negative.
S&P cited the uncertainties regarding the timing of the recovery of hurricane costs,
the Companys debt reduction plans, and the IRS audit of the Companys Earthco
synthetic fuels facilities as the reasons for the change in outlook. On October 25, 2004,
S&P reduced the short-term debt rating of PEF to A-3 from A-2, as a result of their
change in outlook discussed above.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 20, 2004, Moodys changed its outlook for Progress Energy from stable to
negative and placed the ratings of PEF under review for possible downgrade.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Moodys
cited the following reasons for its change in the outlook for Progress Energy: financial
ratios that are weak for its current rating category; rising O&M, pension, benefit,
and insurance costs; and delays in executing its deleveraging plan. With respect to PEF,
Moodys cited declining cash flow coverages and rising leverage over the last
several years; expected funding needs for a large capital expenditure program; risks with
regard to its upcoming 2005 rate case and the timing of hurricane cost recovery as
reasons for putting its ratings under review.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
changes by S&P and Moodys do not trigger any debt or guarantee collateral
requirements, nor do they have any material impact on the overall liquidity of PEF. To
date, PEFs access to the commercial paper markets had not been materially impacted
by the rating agencies actions. However, the changes are expected to increase the
interest rate incurred on its short-term borrowings by 0.25% to 0.875%.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 1, 2004, PEF paid at maturity $40 million 6.69% Medium-Term Notes Series B with
commercial paper proceeds and cash from operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 30, 2004, PEF extended its $200 million 364-day line of credit. The line of credit
will expire on March 29, 2005.
| | --------------------------------------------------------------------------------------------------------------------------

| | On
February 9, 2004, Progress Capital Holdings, Inc. paid at maturity $25 million 6.48%
medium term notes with available cash from operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------

10.       
          BENEFIT PLANS

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

|Three Months Ended September 30,        | Pension Benefits | Other Postretirement
Benefits
|--------------------------------------- | ---------------- | -----------------------------
|                                       
|
|                                       
|Service cost                            |                  | $   6                        
|Interest cost                           |                  | 12                           
|Expected return on plan assets          |                  | (22                          
|Net amortization                        |                  |                             
|                                       
|Net cost recognized by Florida Progress |                  | $(4                          
|                                       
|Net cost/(benefit) recognized by PEF    |                  | $(4                          
|                                       

|Nine Months Ended September 30,                   | Pension Benefits | Other Postretirement
Benefits
|------------------------------------------------- | ---------------- | -----------------------------
|                                                 
|
|                                                 
|Service cost                                      |                  | $ 16                         
|Interest cost                                     |                  | 36                           
|Expected return on plan assets                    |                  | (57                          
|Net amortization                                  |                  | 1                            
|                                                 
|Net cost/(benefit) recognized by Florida Progress |                  | $(4                          
|                                                 
|Net cost/(benefit) recognized by PEF              |                  | $(6                          
|                                                 

| | Net
periodic costs for other postretirement benefits decreased during the three and nine
months ended September 30, 2004 due to the implementation of FASB Staff Position 106-2.
See discussion in Note 2 to the Consolidated Interim Financial Statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11.       
          RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS

| | The
Company, under its risk management policy, may use a variety of instruments to manage
exposure to fluctuations in commodity prices and interest rates. See Note 15 to the
financial statements in Item 8 of the Form 10-K.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A. | Commodity
Derivatives
| | -- | ---------------------

| | Nonhedging
Derivatives
| | ----------------------

| | Since
December 31, 2003, PEF has entered into derivative instruments related to its exposure to
price fluctuations on fuel oil purchases. At September 30, 2004, the fair value of these
instruments was an $11 million asset position. These instruments receive regulatory
accounting treatment. Gains are recorded in regulatory liabilities and losses are recorded in regulatory
assets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
Flow Hedges
| | ----------------

| | The
Companys subsidiaries designate a portion of commodity derivative instruments as
cash flow hedges under Statement of Financial Accounting Standards (SFAS) No. 133.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Progress
Fuels periodically enters into derivative instruments to hedge its exposure to price
fluctuations on natural gas sales. As of September 30, 2004, Progress Fuels was hedging
exposures to the price variability of portions of its natural gas production through
December 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair values of cash flow hedges at September 30, 2004 and December 31, 2003 were as
follows:
| | ------------------------------------------------------------------------------------------------

|                          | Progress Fuels
|------------------------- | --------------
|                         
|
|                         
|Fair value of assets      |               
|Fair value of liabilities |               
|                         
|Fair value, net           |               
|                         

| | The
ineffective portion of commodity cash flow hedges for the three and nine month periods
ending September 30, 2004 was not material to the Companys results of operations.
At September 30, 2004, there were $25 million of after-tax deferred losses in accumulated other comprehensive income (OCI), of
which $21 million are expected to be reclassified to earnings during the next 12 months
as the hedged transactions occur. Due to the volatility of the commodities markets, the
value in OCI is subject to change prior to its reclassification into earnings.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company uses cash flow hedging strategies to hedge variable interest rates on long-term
and short-term debt and to hedge interest rates with regard to future fixed-rate debt
issuances. As of September 30, 2004, there were no outstanding interest rate derivatives
at Florida Progress or PEF.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12.        
          FINANCIAL INFORMATION BY BUSINESS SEGMENT

| | The
Companys principal business segment is PEF, a utility engaged in the generation,
purchase, transmission, distribution and sale of electricity primarily in Florida. The
other reportable business segments are Progress Fuels Energy & Related Services
and Rail Services. The Energy & Related Services segment includes coal and synthetic
fuel operations, natural gas production and sales, river terminal services and off-shore
marine transportation. Rail Services operations include railcar repair, rail parts
reconditioning and sales, providing rail and track material, and scrap metal recycling.
The Other category consists primarily of PT LLC, the Companys telecommunications
subsidiary, and the holding company, Florida Progress Corporation. PT LLC markets
wholesale fiber-optic based capacity service in the Eastern United States and also
markets wireless structure attachments to wireless communication companies and
governmental entities. The Company allocates a portion of its operating expenses to
business segments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys significant operations are geographically located in the United States
with limited operations in Mexico and Canada. The Companys segments are based on
differences in products and services, and therefore no additional disclosures are
presented. Intersegment sales and transfers consist primarily of coal sales from the
Energy and Related Services segment of Progress Fuels to PEF. The price Progress Fuels
charges PEF is based on market rates for coal procurement. Prices for water-borne
transportation in 2003 were based on a methodology approved by the FPSC. In April 2004,
PEF executed a Stipulation and Settlement agreement with the Office of Public Counsel and
the Florida Industrial Power Users Group which amends the transportation rate. On June
29, 2004, the FPSC approved the Stipulation and Settlement. See discussion at Note 6A.
Rail transportation is also based on market rates plus a return allowed by the FPSC on
equity in transportation equipment utilized in transporting coal to PEF. The allowed rate
of return is currently 12%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following summarizes the revenues and segment profits or losses for the reportable
business segments. The combined segment profits and losses represents Florida Progress total
income.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(in millions)                         | PEF | Energy and
Related
Services | Rail | Other | Consolidated
|------------------------------------- | --- | --------------------------- | ---- | ----- | ------------
|                                     
|Three Months Ended September 30, 2004 |     |                             |      |       |             
|Revenues                              |     | $1,029                      |      | $ 336 |             
|Intersegment  revenues                |     |                            |      | 75    |             
|Total revenues                        |     | 1,029                       |      | 411   |             
|Segment profit                        |     | 140                         |      | (13   | )           
|Total segment assets                  |     | $8,005                      |      | $ 988 |             
|Three Months Ended September 30, 2003 |    
|Revenues                              |     | $   904                     |      | $ 271 |             
|Intersegment  revenues                |     |                            |      | 88    |             
|Total revenues                        |     | 904                         |      | 359   |             
|Segment profit (loss)                 |     | 115                         |      | 59    |             

|                                     | PEF | Energy and
Related
Services | Rail | Other   | Consolidated
|------------------------------------ | --- | --------------------------- | ---- | ------- | ------------
|                                    
|Nine Months Ended September 30, 2004 |     |                             |      |         |             
|Revenues                             |     | $2,673                      |      | $   950 |             
|Intersegment  revenues               |     |                            |      | 226     |             
|Total revenues                       |     | 2,673                       |      | 1,176   |             
|Segment profit                       |     | 273                         |      | 67      |             
|                                    
|Nine Months Ended September 30, 2003 |    
|Revenues                             |     | $2,399                      |      | $   793 |             
|Intersegment  revenues               |     |                            |      | 257     |             
|Total revenues                       |     | 2,399                       |      | 1,050   |             
|Segment profit (loss)                |     | 247                         |      | 126     |             

| | No
single customer accounted for 10% or more of unaffiliated revenues.
| | ----------------------------------------------------------------------

13.        OTHER
INCOME AND OTHER EXPENSE

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

|                                                   | Three Months Ended
September 30 | Nine Months Ended
September 30
|-------------------------------------------------- | ------------------------------- | ------------------------------
|                                                  
|
|                                                  
|Other income                                       |                                 |                               
|Nonregulated energy and delivery services income   |                                 | $  4                          
|AFUDC equity                                       |                                 | 2                             
|Other                                              |                                 |                              
|                                                  
|Total other income - PEF                           |                                 | $  6                          
|Other income - Florida Progress                    |                                 | 11                            
|                                                  
|Total other income - PEF and Florida Progress      |                                 | $17                           
|                                                  
|Other expense                                      |                                
|Nonregulated energy and delivery services expenses |                                 | $  3                          
|Donations                                          |                                 | 1                             
|Other                                              |                                 | 1                             
|                                                  
|Total other expense - PEF                          |                                 | $  5                          
|Loss from equity investments                       |                                 | 3                             
|Other expense - Florida Progress                   |                                 | 1                             
|                                                  
|Total other expense - PEF and Florida Progress     |                                 | $  9                          
|                                                  
|Other, net                                         |                                 | $  8                          
|                                                  

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

14.        
          INCOME TAXES

| | In
accordance with the provisions of Accounting Principles Board Opinion (APB) No. 28, Interim
Financial Reporting, GAAP requires companies to apply a levelized effective tax
rate to interim periods that is consistent with the estimated annual effective tax rate.
The intra-period tax allocation, which will have no impact on total year net income,
maintains an effective tax rate consistent with the estimated annual effective tax rate.
Income tax expense was decreased by $12 million and $3 million for the three months ended
September 30, 2004 and 2003, respectively, in order to maintain an effective tax rate
consistent with the estimated annual rate. Income tax expense was increased by $11
million and decreased by $18 million for the nine months ended September 30, 2004 and
2003, respectively. The income tax provisions for the Company differ from amounts
computed by applying the Federal statutory tax rate to income before income taxes,
primarily due to the recognition of synthetic fuel tax credits.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Florida
Progress, through its subsidiaries, is currently a majority owner in two synthetic fuel
entities and a minority owner in four synthetic fuel entities, including Colona. The
production and sale of the synthetic fuel from these facilities qualifies for tax credits
under Section 29 of the Code (Section 29) if certain requirements are satisfied,
including a requirement that the synthetic fuel differs significantly in chemical
composition from the coal used to produce such synthetic fuel and that the fuel was
produced from a facility that was placed in service before July 1, 1998. Synthetic fuel
tax credit amounts claimed but not utilized are carried forward indefinitely as alternative minimum
tax credits. The amount of Section 29 credits that the Company is allowed to claim in any
calendar year is limited by the amount of the Companys regular federal income tax
liability. Because of the substantial costs the Company incurred from damage attributable
to hurricanes in August through September 2004, the Companys regular federal income
tax liability for 2004 will be significantly reduced. Based on the revised projections of
2004 taxable income, the Company has generated more Section 29 credits through September
30, 2004 than it estimates is allowable for calendar year 2004. As a result, the Company
recorded a charge of $47 million in September 2004 related to previously recognized Section
29 credits that it anticipates cannot be used.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15.       
          COMMITMENTS AND CONTINGENCIES

| | Contingencies
and significant changes to the commitments discussed in Note 19 of the Companys
2003 Annual Report on Form 10-K are described below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | A. | Guarantees
| | -- | ----------

| | As
a part of normal business, Florida Progress and certain subsidiaries including PEF enter
into various agreements providing financial or performance assurances to third parties.
Such agreements include guarantees, standby letters of credit and surety bonds. These
agreements are entered into primarily to support or enhance the creditworthiness
otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the
extension of sufficient credit to accomplish the subsidiaries intended commercial
purposes. At September 30, 2004, management does not believe conditions are likely for
significant performance under these agreements. To the extent liabilities are incurred as
a result of the activities covered by the guarantees, such liabilities are included in
the accompanying Consolidated Balance Sheets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
September 30, 2004, Progress Fuels had issued guarantees on behalf of third parties with
a maximum exposure of approximately $10 million. These guarantees support synthetic fuel
operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with the sale of partnership interests in Colona (see Note 4A), Progress Fuels
indemnified the buyers against any claims related to Colona resulting from violations of
any environmental laws. Although the terms of the agreement provide for no limitation to
the maximum potential future payments under the indemnification, the Company has
estimated that the maximum total of such payments would not be material.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Securities
of Affiliated Trust
| | ------------------------------

| | The
Company has guaranteed certain payments of an affiliated company, FPC Capital I (the
Trust). Due to the nature of the relationship between the Trust and Florida Progress
Funding Corporation, the Company has guaranteed the payment of all distributions related
to the Trusts outstanding mandatorily redeemable preferred securities. At September
30, 2004, the Trust had outstanding 12 million shares of the securities with a
liquidation value of $300 million.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Insurance
| | -- | ---------

| | PEF
is insured against public liability for a nuclear incident up to $10.8 billion per
occurrence. Under the current provisions of the Price Anderson Act, which limits
liability for accidents at nuclear power plants, PEF, as owner of a nuclear unit, can be
assessed a portion of any third-party liability claims arising from an accident at any
commercial nuclear power plant in the United States. In the event that public liability
claims from an insured nuclear incident exceed $300 million (currently available through
commercial insurers), PEF would be subject to assessments of up to $101 million for each
reactor owned per occurrence. Payment of such assessments would be made over time as
necessary to limit the payment in any one year to no more than $10 million per reactor
owned. Congress is considering revisions to the Price Anderson Act that could include
increased limits and assessments per reactor owned. The final outcome of this matter
cannot be predicted at this time.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEF
self-insures their transmission and distribution lines against loss due to storm damage
and other natural disasters. PEF accrues $6 million annually to a storm damage reserve
pursuant to a regulatory order and may defer losses in excess of the reserve. See Note 3
to the Consolidated Interim Financial Statements for discussion of major storms and
related impact.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Claims
and Uncertainties
| | -- | ------------------------

| | The
Company is subject to federal, state and local regulations addressing hazardous and solid
waste management, air and water quality and other environmental matters. Reference is
made to Note 19E to the financial statements in Item 8 of the Form 10-K for the year
ended December 31, 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Hazardous
and Solid Waste Management
| | ------------------------------------

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

| | PEF
has filed claims with the Companys general liability insurance carriers to recover
costs arising out of actual or potential environmental liabilities. Some claims have been
settled and others are still pending. The Company cannot predict the outcome of this
matter.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | PEF. At
September 30, 2004, PEF has accrued $27 million for probable and estimable costs related
to various environmental sites. Of this accrual, $17 million is for costs associated with
the remediation of distribution and substation transformers for which PEF has received
approval from the FPSC for recovery through the Environmental Cost Recovery Clause
(ECRC). The remaining $10 million is related to two former MGP sites and other sites
associated with PEF that have required or are anticipated to require investigation and/or
remediation costs. At December 31, 2003, the accrual balance for costs associated with
the remediation of distribution transformers was $12 million. For the nine months ended
September 30, 2004, PEF accrued an additional $8 million and spent approximately $3
million related to the remediation of transformers and recorded a regulatory asset for
the probable recovery through the ECRC.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Florida Legislature passed the risk-based corrective action (RBCA, known as Global RBCA)
legislation in the 2003 regular session. Risk-based corrective action generally means
that the corrective action prescribed for contaminated sites can correlate to the level
of human health risk imposed by the contamination at the property. The Global RBCA law
expands the use of the risk-based corrective action to all contaminated sites in the
state that are not currently in one of the states waste cleanup programs. Over the
past 18 months, the Florida Department of Environmental Protection (FDEP) has been in the
process of developing the rules required by the RBCA statute, holding meetings with
interested stakeholders and hosting public workshops. The rules have the potential for
making future clean-ups in Florida more costly to complete. The FDEP has not yet
announced its schedule to submit its rule for adoption. The Company cannot predict the
outcome of this matter.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

| | Air
Quality
| | -----------

| | There
has been and may be further proposed legislation requiring reductions in air emissions
for NOx, SO2, carbon dioxide and mercury. Some of these proposals establish nationwide
caps and emission rates over an extended period of time. This national multi-pollutant
approach to air pollution control could involve significant capital costs which could be
material to the Company and PEFs consolidated financial position or results of
operations. However, the Company and PEF cannot predict the outcome of this matter.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | In
conjunction with the proposed mercury rule, the EPA proposed a MACT standard to regulate
nickel emissions from residual oil-fired units. The agency estimates the proposal will
reduce national nickel emissions to approximately 103 tons. As proposed, the rule may
require the company to install additional pollution controls on its residual oil-fired
units, resulting in significant capital expenditures. The EPA expects to finalize the
nickel rule in March 2005. Compliance costs will be determined once the rule is
finalized.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2003, the EPA released its proposed Interstate Air Quality Rule, currently
referred to as the Clean Air Interstate Rule (CAIR). The rule is expected to become final
by the end of 2004. Compliance costs will be determined once the rule is finalized.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Water
Quality
| | -------------

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

| | After
many years of litigation and settlement negotiations the EPA adopted regulations in
February 2004 to implement Section 316(b) of the Clean Water Act. These regulations
became effective September 7, 2004. The purpose of these regulations is to minimize
adverse environmental impacts caused by cooling water intake structures and intake
systems. Over the next several years these regulations will impact the larger base load
generation facilities and may require the facilities to mitigate the effects to aquatic
organisms by constructing intake modifications or undertaking other restorative
activities. PEF currently estimates that from 2005 through 2009 the range of its
expenditures to meet the Section 316(b) requirements of the Clean Water Act will be $65
million to $85 million.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
Environmental Matters
| | ---------------------------

| | The
Kyoto Protocol was adopted in 1997 by the United Nations to address global climate change
by reducing emissions of carbon dioxide and other greenhouse gases. Russia recently
announced its intent to ratify the Protocol, which would allow the treaty to enter into
force. The United States has not adopted the Kyoto Protocol, and the Bush administration
has stated it favors voluntary programs. A number of carbon dioxide emissions control
proposals have been advanced in Congress and by the Bush administration. Reductions in
carbon dioxide emissions to the levels specified by the Kyoto Protocol and some
legislative proposals could be materially adverse to the Companys consolidated
financial position or results of operations if associated costs of control or limitation
cannot be recovered from customers. The Company favors the voluntary program approach
recommended by the administration and is evaluating options for the reduction, avoidance
and sequestration of greenhouse gases. However, the Company cannot predict the outcome of
this matter.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
Contingencies
| | -------------------

| | 1. | Franchise
Litigation
| | -- | --------------------

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

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

| | Arbitration
with the 2,500-customer Town of Belleair was completed in June 2003. In September 2003,
the arbitration panel issued an award in that case setting the value of the electric
distribution system within the Town at approximately $6 million. The panel further
required the Town to pay to PEF its requested $1 million in separation and reintegration
costs and $2 million in stranded costs. The Town has not yet decided whether it will
attempt to acquire the system; however, it has indicated its intent to seek bids for
wholesale power supply and to operate and maintain the distribution system. The Town also
has indicated that it may place the issue of whether to municipalize on a referendum
ballot in March 2005. At this time, whether and when there will be further proceedings
regarding the Town of Belleair cannot be determined.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | A
fourth city (the 7,000-customer City of Maitland) is contemplating municipalization and
has indicated its intent to proceed with arbitration to determine the value of PEFs
electric distribution system within the City. Maitlands franchise expires in August
2005. At this time, whether and when there will be further proceedings regarding the City
of Maitland cannot be determined.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
part of the above litigation, two appellate courts have also reached opposite conclusions
regarding whether PEF must continue to collect from its customers and remit to the cities
franchise fees under the expired franchise ordinances. PEF has filed an
appeal with the Florida Supreme Court to resolve the conflict between the two appellate
courts. The Florida Supreme Court held oral argument in one of the appeals in August
2003. Subsequently, the Court requested briefing from the parties in the other appeal,
which was completed in November 2003. On October 28, 2004, the Court issued a decision
holding that PEF must collect from its customers and remit to the cities franchise fees
during the interim period when the city exercises its purchase option or executes a new
franchise. The Courts decision should not have a material impact on the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | DOE
Litigation
| | -- | --------------

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

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

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

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

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

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

| | In
July 2002, Congress passed an override resolution to Nevadas veto of DOEs
proposal to locate a permanent underground nuclear waste storage facility at Yucca
Mountain, Nevada. DOE plans to submit a license application for the Yucca Mountain
facility by the end of 2004. On November 5, 2003, Congressional negotiators approved $580
million for fiscal year 2004 for the Yucca Mountain project, $123 million more than the
previous year. In January 2003, the State of Nevada, Clark County, Nevada, and the City
of Las Vegas petitioned the U.S. Court of Appeals for the District of Columbia Circuit
for review of the Congressional override resolution. On July 9, 2004, the Court rejected
the challenge to the constitutionality of the resolution approving Yucca Mountain, but
ruled that the EPA was wrong to set a 10,000-year compliance period. The DOE continues to
state it plans to begin operation of the repository at Yucca Mountain in 2010. PEF cannot
predict the outcome of this matter.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEF
is currently storing spent nuclear fuel onsite in spent fuel pools. PEFs nuclear
unit, Crystal River Unit No. 3, (CR3) has sufficient storage capacity in place for fuel
consumed through the end of the expiration of the current license in 2016. PEF will seek
renewal of the CR3 operating license and if approved, additional dry storage will be
necessary in 2014.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Advanced
Separation Technologies (AST)
| | -- | --------------------------------------

| | In
1996, Florida Progress sold its 80% interest in AST to Calgon Carbon Corporation (Calgon)
for net proceeds of $56 million in cash.  In 1998, Calgon filed a lawsuit against
Florida Progress and the other selling shareholder and amended it in April 1998, alleging
misstatement of ASTs 1996 revenues, assets and liabilities, seeking damages and
granting Calgon the right to rescind the sale.  The lawsuit also accused the sellers
of failing to disclose flaws in ASTs manufacturing process and a lack of quality
control.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
parties filed motions for summary judgment in July 2001.  The summary judgment
motions of Calgon and the other selling shareholder were denied in April 2002.  The
summary judgment motion of Florida Progress was withdrawn pending a legal challenge to
portions of the report of Calgons expert, Arthur Andersen, which had been used to
oppose summary judgment.  In September 2003, the United States District Court for
the Western District of Pennsylvania issued final orders excluding from evidence in the
case that portion of Arthur Andersens damage analysis based on the discounted cash
flow methodology of valuation.  The Court did not exclude Arthur Andersens use
of the guideline publicly traded company methodology in its damage analysis.  Florida
Progress filed a renewed motion for summary judgment in October 2003, which is pending.  Because
the motion has now been outstanding for almost a year, a ruling on the motion is expected
at any time.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Florida
Progress believes that the aggregate total of all legitimate warranty claims by customers
of AST for which it is probable that Florida Progress will be responsible for under the
Stock Purchase Agreement with Calgon is approximately $3 million, and accordingly,
accrued $3 million in the third quarter of 1999 as an estimate of probable loss.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 4. | Synthetic
Fuel Tax Credits
| | -- | --------------------------

| | At
December 31, 2003, Florida Progress, through its subsidiaries, was a majority-owner in
three entities and a minority owner in three entities that own facilities that produce
synthetic fuel as defined under the Internal Revenue Code (Code). In June 2004, Progress
Fuels sold, in two transactions, a combined 49.8 percent partnership interest in Colona
Synfuel Limited Partnership, LLLP (Colona), one of its majority owned synthetic fuel
operations. The Company is now a minority owner in Colona, but continues to consolidate
Colona in accordance with FASB Interpretation No. 46R. Florida Progress, through its
subsidiaries, is currently a majority owner in two synthetic fuel entities and a minority
owner in four synthetic fuel entities, including Colona. The production and sale of the
synthetic fuel from these facilities qualifies for tax credits under Section 29 of the
Code (Section 29) if certain requirements are satisfied, including a requirement that the
synthetic fuel differs significantly in chemical composition from the coal used to
produce such synthetic fuel and that the fuel was produced from a facility that was
placed in service before July 1, 1998. The amount of Section 29 credits that the Company
is allowed to claim in any calendar year is limited by the amount of the Company's regular
federal income tax liability.  Synthetic fuel tax credit amounts allowed but not
utilized are carried forward indefinitely as deferred alternative minimum tax credits.
All majority-owned and minority-owned entities received private letter rulings (PLRs)
from the Internal Revenue Service (IRS) with respect to their synthetic fuel operations.
The PLRs do not limit the production on which synthetic fuel credits may be claimed.
Total Section 29 credits generated to date are approximately $907 million, of which $431
million has been used and $429 million are being carried forward as deferred alternative
minimum tax credits. Also $47 million has not been recognized due to the decrease in tax
liability from the 2004 hurricane damage.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Impact
of Hurricanes
| | --------------------

| | For
the nine-month period ended September 30, 2004, the Companys synthetic fuel
facilities have sold 4.6 million tons of synthetic fuel which generated an estimated $119
million of Section 29 tax credits. Due to the anticipated decrease in the Companys
tax liability as a result of the 2004 hurricanes, the Company estimates that it will be
able to use in 2004 or carry forward to future years only $72 million of these Section 29
tax credits. As a result, the Company has recorded a charge of $47 million due to Section
29 tax credits. The Company is currently evaluating its options for mitigating some or
all of this loss of tax credits.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pre-Filing
Agreement Program
| | ----------------------------

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

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

| | In
July 2004, Progress Energy was notified that the Internal Revenue Service (IRS) field
auditors anticipate taking an adverse position regarding the placed-in-service date of
the Companys four Earthco synthetic fuel facilities. Due to the auditors position,
the IRS has decided to exercise its right to withdraw from the Pre-Filing Agreement (PFA)
program with Progress Energy. With the IRSs withdrawal from the PFA program, the
review of Progress Energys Earthco facilities is back on the normal procedural
audit path of the Companys tax returns. Through September 30, 2004, based on its
ownership percentage, the Company has used or carried forward $518 million of tax credits
generated by Earthco facilities. If these credits were disallowed, the Companys one
time exposure for cash tax payments would be $89 million (excluding interest), and
earnings and equity would be reduced by $518 million, excluding interest. The parent company, Progress Energys
$1.13 billion credit facility includes a covenant which limits the maximum debt-to-total
capital ratio to 65%. This ratio includes other forms of indebtedness such as guarantees
issued by PGN, letters of credit and capital leases. As of September 30, 2004, Progress Energy's
debt-to-total capital ratio was 60.6% based on the credit agreement definition for this ratio.
The impact on this ratio of reversing $1 billion of tax credits and paying $286 million
for taxes would be to increase the ratio to 64.4%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Because
of the stark disagreement between the Company and the field auditors as to the proper
legal standard to apply, the Company believes that it is appropriate to have this issue
reviewed by the National Office of the IRS, just as the National Office reviewed the
issues involving chemical change. The Company could go directly to the Appeals section of
the IRS, but it believes that clarification on the critical legal disagreements would
help to resolve this matter. At this point, however, the Company does not know if the
field auditors will agree to present this matter to the National Office. The Company
believes that the appeals process, including proceedings before the National Office,
could take up to two years to complete, however, it cannot control the actual timing of
resolution and cannot predict the outcome of this matter.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
managements opinion, the Company is complying with all the necessary requirements
to be allowed such credits under Section 29, and, although it cannot provide certainty,
it believes that it will prevail in these matters. Accordingly, while the Company has
adjusted its synthetic fuel production for 2004 in response to the effects of the
hurricane damage on its 2004 tax liability, it has no current plans to alter its
synthetic fuel production schedule for future years as a result of the IRS field auditorsreport.
However, should the Company fail to prevail in these matters, there could be a material
liability for previously taken Section 29 tax credits, with a material adverse impact on
earnings and cash flows.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 2004, the FASB stated that it plans to issue an exposure draft of a proposed
interpretation of SFAS No. 109, Accounting for Income Taxes, that would
address the accounting for uncertain tax positions. The FASB has indicated that the
interpretation would require that uncertain tax benefits be probable of being sustained
in order to record such benefits in the financial statements. The exposure draft is
expected to be issued in the fourth quarter of 2004. The Company cannot predict what
actions the FASB will take or how any such actions might ultimately affect the Companys
financial position or results of operations, but such changes could have a material
impact on the Companys evaluation and recognition of Section 29 tax credits.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Permanent
Subcommittee
| | ----------------------

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

| | Sale
of Partnership Interest
| | ----------------------------

| | In
June 2004, the Company through its subsidiary, Progress Fuels sold, in two transactions,
a combined 49.8 percent partnership interest in Colona Synfuel Limited Partnership, LLLP,
one of its synthetic fuel facilities. Substantially all proceeds from the sales will be
received over time, which is typical of such sales in the industry. Gain from the sales
will be recognized on a cost recovery basis. The Companys book value of the
interests sold totaled approximately $3 million. Based on projected production levels,
the Company anticipates receiving total gross proceeds of $10 million in 2004,
approximately $30 million per year from 2005 through 2007 and approximately $9 million
through the second quarter 2008. In the event that the Company alters synthetic fuel
production at the Colona facility for any reason, including an increase in the price of
oil which could limit or eliminate synthetic fuel tax credits, the amount of proceeds
realized from the sale could be significantly impacted. Under the agreements, the buyers
had a right to unwind the transactions if an IRS reconfirmation private letter ruling
(PLR) was not received by October 15, 2004. The reconfirmation PLR was received in
September 2004. An immaterial gain was recorded for the three months ended September 30,
2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Impact
of Crude Oil Prices
| | --------------------------

| | Although
the Internal Revenue Code Section 29 tax credit program is expected to continue through
2007, recent unprecedented and unanticipated increases in the price of oil could limit
the amount of those credits or eliminate them altogether for one or more of the years
following 2004. This possibility is due to a provision of Section 29 that provides that
if the average wellhead price per barrel for unregulated domestic crude oil for the year
(the Annual Average Price) exceeds a certain threshold value (the Threshold
Price), the amount of Section 29 tax credits are reduced for that year. Also, if
the Annual Average Price increases high enough (the Phase Out Price), the
Section 29 tax credits are eliminated for that year. For 2003, the Threshold Price was
$50.14 per barrel and the Phase Out Price was $62.94 per barrel. The Threshold Price and
the Phase Out Price are adjusted annually for inflation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
the Annual Average Price falls between the Threshold Price and the Phase Out Price for a
year, the amount by which Section 29 tax credits are reduced will depend on where the
Average Annual Price falls in that continuum. For example, for 2003, if the Annual
Average Price had been $56.54 per barrel, there would have been a 50% reduction in the
amount of Section 29 tax credits for that year.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Secretary of the Treasury calculates the Annual Average Price based on the Domestic Crude
Oil First Purchases Prices published by the Energy Information Agency (EIA). Because the
EIA publishes its information on a three month lag, the Secretary of the Treasury
finalizes its calculations three months after the year in question ends. Thus, the Annual
Average Price for calendar year 2003 was published in April 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Although
the official notice for 2004 is not expected to be published until April of 2005, the
Company does not believe that the Annual Average Price for 2004 will reach the Threshold
Price for 2004. Even with oil prices at historic highs, oil prices would have to
experience a significant and sustained increase for the remainder of the year for the
Annual Average Price to approach the anticipated Threshold Price. Consequently, the
Company does not expect the amount of its 2004 Section 29 tax credits to be adversely
affected by oil prices.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 5. | Other
Legal Matters
| | -- | -------------------

| | Florida
Progress and PEF are involved in various other claims and legal actions arising in the
ordinary course of business, some of which involve claims for substantial amounts. Where
appropriate, accruals have been made in accordance with SFAS No. 5, Accounting for
Contingencies, to provide for such matters. Florida Progress and PEF believe the
ultimate disposition of these matters will not have a material adverse effect upon either
Companys consolidated and PEFs financial position or results of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

Item 2.  MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Amounts reported in the interim
Consolidated Statements of Income for Florida Progress Corporation (Florida Progress) and
the interim Statements of Income for Progress Energy Florida, Inc. (PEF) are not
necessarily indicative of amounts expected for the respective annual or future periods due
to the effects of seasonal temperature variations on energy consumption, significant
weather events, and the timing of maintenance on electric generating units, among other
factors.

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

OPERATING RESULTS

Beginning in the fourth quarter of
2003, the Company ceased recording portions of Energy and Related Services segments
operations, primarily synthetic fuel facilities, one month in arrears. As a result,
earnings for the year ended December 31, 2003 included 13 months of operations, resulting
in a net income increase of $2 million for the year. The Company restated previously
reported consolidated quarterly earnings to reflect the new reporting periods which
resulted in four months of earnings in the first quarter of 2003 and changed reported net
income for subsequent quarters. Earnings decreased $1 million for the quarter ended
September 30, 2003 and increased $14 million for the nine months ended September 30, 2003
as compared to amounts originally reported.

The Companys segments
contributed segment profits or losses for the three and nine months ended September 30,
2004 and 2003 as follows:

|                           
|---------------------------
|
|                           
|
|                           
|PEF                        
|Energy and Related Services
|Rail                       
|Other                      
|                           
|Segment profit/(loss)      
|                           

Cost Management Initiative

On October 12, 2004, Progress Energy
announced to its employees a cost-management initiative to analyze the size and structure
of the entire organization and reduce projected operating expenses over the next three
years. This initiative is focused on reducing the rate of cost increases throughout Progress
Energy. These cost initiatives will likely require some workforce reductions. Among the
options being considered is a voluntary early-retirement program. By 2007, Progress Energy is
estimating total annual savings of at least $75 million from this cost management
initiative.

# PROGRESS ENERGY FLORIDA

PEF contributed segment profits of
$140 million and $115 million for the three months ended September 30, 2004 and 2003,
respectively, and $273 million and $247 million for the nine months ended September 30,
2004 and 2003, respectively. The increase in profits for the three months ended September
30, 2004 when compared to 2003 is primarily due to favorable weather and customer growth,
increased wholesale sales, the additional return on investment for the Hines 2 plant and
reduced O&M expenditures. These items were partially offset by the reduction in
revenues related to major storms and increased interest expense. Profits for the nine
months ended September 30, 2004 increased due to a reduction in the provision for revenue
sharing, favorable customer growth, the additional return on investment on the Hines 2
plant and reduced O&M expenses. These items were partially offset by unfavorable
weather; reduction in revenues related to the hurricanes, increased interest expense and
increased depreciation expense from assets placed in service.

PEFs electric revenues for the
three and nine months ended September 30, 2004 and 2003, and the amount and percentage
change by customer class are as follows:

|                       
|-----------------------
|
|                       
|
|                       
|Residential            
|Commercial             
|Industrial             
|Governmental           
|Retail revenue sharing 
|                       
|Total retail revenues  
|Wholesale              
|Unbilled               
|Miscellaneous          
|                       
|Total electric revenues
|                       

PEFs electric energy sales for
the three and nine months ended September 30, 2004 and 2003, and the amount and percentage
change by customer class are as follows:

|                         
|-------------------------
|
|                         
|
|                         
|Residential              
|Commercial               
|Industrial               
|Governmental             
|                         
|Total retail energy sales
|Wholesale                
|Unbilled                 
|                         
|Total mWh sales          
|                         

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

PEFs
revenues, excluding recoverable fuel and other pass-through revenues of $588 million and
$485 million for the three months ended September 30, 2004 and 2003, respectively,
increased $22 million. This increase was due to favorable customer growth and weather
(excluding the hurricane impacts) and increased wholesale sales. Favorable customer growth
contributed an additional $13 million compared to the prior quarter. PEF has approximately
31,000 additional customers as of September 30, 2004 compared to September 30, 2003. The
impact of favorable weather resulted in an $8 million increase in revenues. Wholesale
revenues are $7 million higher compared to prior quarter as a result of signing new
contracts and extending pre-existing contracts. Included in fuel revenues, is the return
on Hines Unit 2 which contributed $9 million in additional revenues. Based on the
Stipulation and Settlement Agreement reached with the FPSC in April 2002, beginning with
the service date of PEFs Hines Unit 2 and continuing through December 2005, PEF will
be allowed to recover through the fuel cost recovery clause a return on average investment
and depreciation expense for Hines Unit 2, to the extent such costs do not exceed the
Units cumulative fuel cost savings over the recovery period. These increases were
offset partially by the reduction in revenues of approximately $12 million related to
customer outages caused by Hurricanes Charley, Frances and Jeanne of approximately $12
million.

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

Fuel and purchased power expenses
increased $97 million from $411 million for the three months ended September 30, 2003 to
$508 million for the three months ended September 30, 2004. This increase is attributable
primarily to an increase in fuel used in electric generation which increased $80 million.
Higher system requirements and increased fuel costs in the current year account for $66
million of the increase in fuel used in electric generation. The remaining increase is due
to the recovery of fuel expenses that were deferred in the prior year, as well as the
deferral of current year expenses. Purchased power expenses increased $17 million compared
to the prior quarter due to higher system requirements and an increase in prices.

O&M costs decreased $25 million,
when compared to the $163 million incurred during the three months ended September 30,
2003. This decrease is primarily related to lower business unit spending of $17 million
due the timing of outages and maintenance activities at generation facilities (including
the nuclear outage costs in the prior year) and the delay of several major projects due to
storm restoration work (storm costs are recorded in the storm reserve). In addition,
benefit-related costs decreased $11 million due primarily to pension and OPEB adjustments
which were recorded during the current quarter based on the latest actuarial valuations
which reflected the implementation of FASB Staff Position 106-2 for OPEB obligations. See
discussion in Note 2 to the Financial Statements.

Hurricanes Charley, Frances, Ivan and
Jeanne struck significant portions of PEFs service territories during the third
quarter of 2004. PEF incurred total costs of $366 million, of which $55 million has been
charged to capital expenditures, and $311 million has been charged to the storm damage
reserve.

In accordance with a regulatory order,
PEF accrues $6 million annually to a storm damage reserve and is allowed to defer losses
in excess of the accumulated reserve. Under the order, the storm reserve is charged with
O&M expenses related to storm restoration and with capital expenditures related to
storm restoration that are in excess of expenditures assuming normal operating conditions.
As of September 30, 2004, $266 million of hurricane restoration costs in excess of the
previously recorded storm reserve have been classified as a regulatory asset in order to
recognize the probable recoverability of these costs. On November 2, 2004, PEF filed a
petition with FPSC to recover $252 million of storm costs plus interest from retail ratepayers over a
two-year period. See discussion in Note 3 to the Financial Statements.

Depreciation and amortization
decreased $14 million when compared to the $82 million incurred during the three months
ended September 30, 2003, primarily due to the amortization of the Tiger Bay regulatory
asset in the prior year. The Tiger Bay regulatory asset, for contract termination costs,
was recovered pursuant to an agreement between PEF and the FPSC which was approved in
1997. The amortization of the regulatory asset was calculated using revenues collected
under the fuel adjustment clause, as such fluctuations in this expense did not have an
impact on earnings. During the third quarter of 2003, Tiger Bay amortization was $17
million. The Tiger Bay asset was fully amortized in September 2003. The decrease in Tiger
Bay amortization was partially offset by additional depreciation for assets placed in
service.

Interest charges increased $17 million
from $10 million for the quarter ended September 30, 2003 to $27 million for the quarter
ended September 30, 2004. Interest costs in 2003 were favorably impacted by the reversal
of interest expense due to the resolution of certain tax matters.

Nine months ended September 30,
2004 compared to the nine months ended September 30, 2003

PEFs
revenues, excluding recoverable fuel and other pass-through revenues of $1,513 million and
$1,279 million for the nine months ended September 30, 2004 and 2003, respectively,
increased $40 million. This increase was due primarily to a reduction in the provision for
revenue sharing of $22 million. Results for 2003 included the accrual of an additional $18
million related to the 2002 revenue sharing provision as ordered by the FPSC in June of
2003. In addition, favorable customer growth and increased wholesale sales increased
revenues by $22 million and $9 million, respectively. Included in fuel revenues is the
return on Hines Unit 2, which contributed $27 million of additional revenues in 2004.
These increases were partially offset by the reduction in revenues related to customer
outages for Hurricanes Charley, Frances and Jeanne of approximately $12 million and the
impact of milder weather in the current year of approximately $9 million.

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

Fuel and purchased power expenses were
$1,313 million for the nine months ended September 30, 2004, which represents a $229
million increase compared to the same period in the prior year. This increase is due to
increases in fuel used in electric generation and purchased power expenses of $223 million
and $6 million, respectively. Higher system requirements and increased fuel costs in the
current year account for $75 million of the increase in fuel used in electric generation.
The remaining increase is due to the recovery of fuel expenses that were deferred in the
prior year, partially offset by the deferral of current year under-recovered fuel
expenses. In November 2003, the FPSC approved PEFs request for a cost adjustment in
its annual fuel filing due to the rising costs of fuel. The new rates became effective
January 2004.

O&M costs decreased $8 million,
when compared to the $458 million incurred during the nine months ended September 30,
2003. This decrease is primarily related to favorable benefit related costs of $9 million
primarily pension and OPEB adjustments which were recorded based on the latest actuarial
valuations which reflected the implementation of FASB Staff Position 106-2 for OPEB
obligations. See discussion in Note 2 to the Financial Statements.

Depreciation and amortization
decreased $32 million when compared to the $241 million incurred during the nine months
ended September 30, 2003, primarily due to the amortization of the Tiger Bay regulatory
asset in the prior year. The Tiger Bay regulatory asset, for contract termination costs,
was recovered pursuant to an agreement between PEF and the FPSC which was approved in
1997. The amortization of the regulatory asset was calculated using revenues collected
under the fuel adjustment clause, as such fluctuations in this expense did not have an
impact on earnings. During the nine months ended September 30, 2003, Tiger Bay
amortization was $47 million. The Tiger Bay asset was fully amortized in September 2003.
The decrease in Tiger Bay amortization was partially offset by additional depreciation for
assets placed in service, including expenses for Hines Unit 2 of approximately $7 million.
This depreciation expense is being recovered through the fuel cost recovery clause as
allowed by the FPSC. See discussion of the return in the revenues analysis above.

Taxes other than on income have
increased $16 million from $180 million for the nine months ended September 30, 2003 to
$196 million for the nine months ended September 30, 2004. This increase is due to
increases in gross receipts and franchise taxes of $6 million and $5 million,
respectively, related to an increase in revenues and an increase in property taxes of $7
million due to increases in property placed in service and tax rate increases.

Interest charges increased $19 million
from $68 million for the nine months ended September 30, 2003 to $87 million for the nine
months ended September 30, 2004. Interest costs in 2003 were favorably impacted by the
reversal of interest expense due to the resolution of certain tax matters

# ENERGY AND RELATED
SERVICES

The Energy and Related Services
segment operations include synthetic fuels production, natural gas production, coal
extraction and terminal operations. Energy and Related Services results for the nine
months ended September 30, 2003 were restated to reflect ten months of earnings for
certain operations, primarily synthetic fuel facilities as discussed previously.

The following summarizes Energy and
Related Services segment profits for the three and nine months ended September 30,
2004 and 2003:

|                              
|------------------------------
|
|                              
|
|                              
|Synthetic fuel operations     
|Gas production                
|Coal fuel and other operations
|                              
|Segments Profits              
|                              

Synthetic Fuel Operations

The synthetic fuel operations
generated net losses of $35 million for the three months ended September 30, 2004 compared
to net profits of $40 million for the three months ended September 30, 2003. Synthetic
fuel operations generated segment profits of $12 million and $94 million for the nine
months ended September 30, 2004 and 2003, respectively. The production and sale of
synthetic fuel generate operating losses, but qualify for tax credits under Section 29 of
the Code, which more than offset the effect of such losses. See Note 15 of the Notes to
the Interim Financial Statements for further discussion of synthetic fuel tax credit
matters.

The operations resulted in the
following for the three and nine months ended September 30, 2004 and 2003:

|                                       
|---------------------------------------
|
|                                       
|
|                                       
|Tons sold                              
|                                       
|Operating losses, excluding tax credits
|Tax credits generated                  
|Tax credits reversed                   
|                                       
|Net profits                            
|                                       

Synthetic fuel operations net profits
decreased in the three months ended September 30, 2004 as compared to the same period in
2003 due primarily to a decrease in synthetic fuel production and the recording of a
charge due to tax credits as a result of hurricane costs (as described above) which
reduced the Companys projected 2004 regular tax liability. These factors also
explain the decrease in synthetic fuel net profits for the nine months ended September 30,
2004. The Company has ceased production at its Earthco facilities for the remainder of
2004 due to the decrease in tax appetite.

Natural Gas Operations

Natural gas operations generated
profits of $15 million and $10 million for the three months ended September 30, 2004 and
2003, respectively, and $40 million and $26 million for the nine months ended September
30, 2004 and 2003, respectively. There is an increase in production resulting from the
acquisition of North Texas Gas in late February 2003, along with increased drilling. The
increase in production, coupled with higher gas prices in 2004, contributed to increased
earnings in 2004 as compared to 2003. Volume and prices have increased 17% and 22%,
respectively, compared to the three months ended September 30, 2003. Volume and prices
have increased 20% and 17%, respectively, for the nine months ended September 30, 2004
compared to the nine months ended September 30, 2003. In October 2003, the Company
completed the sale of certain gas producing properties owned by Mesa Hydrocarbons, LLC.
The following summarizes the gas production, revenues and gross margins for the three and
nine months ended September 30, 2004 and 2003 by production facility:

|                            
|----------------------------
|
|                            
|
|                            
|Production in Bcf equivalent
|Mesa                        
|Westchester                 
|North Texas Gas             
|                            
|Total Production            
|                            
|Revenues in millions        
|Mesa                        
|Westchester                 
|North Texas Gas             
|                            
|Total Revenues              
|                            
|Gross Margin                
|in millions of $            
|As a % of revenues          
|                            

Coal Fuel and Other
Operations

Coal fuel and other operations
generated segment profits of $7 million for the three months ended September 30, 2004
compared to $9 million segment profits for the comparable period in the prior year. The
decrease in profits of $2 million is due primarily to reduced earnings from fuel
transportation operations related to the waterborne transportation ruling by the FPSC.
This ruling reduced the price charged to PEF for waterborne coal deliveries by the fuel
transportation operations of the Fuels segment. See Note 6A of the Consolidated
Interim Financial Statements. For the nine months ended September 30, 2004, coal fuel and
other operations generated segment profits of $15 million compared to segment profits of
$6 million for the comparable period in the prior year. This increase in profits for the
year to date is due primarily to higher volumes and margins for coal fuel operations of
$15 million after-tax offset by a reduction in profits of $7 million after-tax for fuel
transportation operations related to the waterborne transportation ruling by the FPSC as
discussed above. See Note 6A of the Consolidated Interim Financial Statements. The
increase in profits is also due to the impact of the retroactive Service Company
allocation in the prior year. Results in the same period for the prior year were
negatively impacted by the retroactive reallocation of Service Company costs of $4 million
after-tax.

The Company has begun exploring strategic alternatives
regarding the Fuels coal mining business.  As of September 30, 2004 the carrying value of long-lived assets of the
coal mining business were $64 million.  As a result of this initiative, the Company may trigger an
impairment review in the fourth quarter of 2004; however, the Company cannot currently predict the
outcome of this matter.

# RAIL

Rails operations include railcar
and locomotive repair, trackwork, rail parts reconditioning and sales, scrap metal
recycling and other rail related services. The Company sold the majority of the assets of
Railcar Ltd., a leasing subsidiary, in 2004. See Note 4B of the Notes to the Consolidated
Interim Financial Statements.

Rail contributed segment profits of $8
million and $1 million for the three months ended September 30, 2004 and 2003,
respectively. Revenues have increased $81 million to $291 million for the three months
ended September 30, 2004 compared to the same period in the prior year. This increase is
due primarily to increased volumes and higher prices in recycling operations and in part
to increased production and sales in locomotive and railcar services and engineering and
track services. Cost of goods sold increased $71 million from $182 million in the prior
year. The increase in costs of good sold is due to increased costs for inventory, labor
and operations as a result of the increased volume in the recycling operations, locomotive
and railcar services and engineering and track services.

Rail contributed segment profit of $17
million for the nine months ended September 30, 2004 compared with a segment loss of less
than $1 million for the same period in the prior year. Revenues increased $215 million to
$816 million for the nine months ended September 30, 2004 compared to the same period in
the prior year. This increase is due primarily to increased volumes and higher prices in
recycling operations and in part to increased production and sales in locomotive and
railcar services and engineering and track services. Tonnage for recycling operations is
up 10 to 15% on an annualized basis compared to 2003. The increase in tonnage coupled with
an increase in the average index price of approximately 90% accounts for the significant
increase in revenues year over year. The American Metal Market index price for #1 rail
road heavy melt (which is used as the index for buying and selling of railcars) has
increased to 198 as of September 30, 2004 from 104 as of September 30, 2003. Cost of goods
sold increased $183 million from $525 million in the prior year. The increase in costs of
good sold is due to increased costs for inventory, labor and operations as a result of the
increased volume in the recycling operations, locomotive and railcar services and
engineering and track services. Results in the prior year were negatively impacted by the
retroactive reallocation of Service Company costs of $3 million after-tax. The
favorability related to the reallocation was offset by an increase in general and
administrative costs in the current year related primarily to higher professional fees.

# OTHER

The Other segment includes
telecommunications, holding company and financing expenses.

Other segment profits increased $14
million for the three months ended September 30, 2004 compared to the same period in the
prior year. Other segment profits decreased $26 million for the nine months ended
September 30, 2004 compared to the same period in the prior year. These changes were due
primarily to the impact of tax levelization adjustments booked each quarter. GAAP requires
companies to apply a levelized effective tax rate to interim periods that is consistent
with the estimated annual effective tax rate. Income tax expense was decreased by $12
million and $3 million for the three months ended September 30, 2004 and 2003,
respectively, in order to maintain an effective tax rate consistent with the estimated
annual rate. Income tax expense was increased by $11 million and decreased by $18 million
for the nine months ended September 30, 2004 and 2003, respectively, in order to maintain
an effective tax rate consistent with the estimated annual rate. The tax credits
associated with the Companys synthetic fuel operations primarily drive the required
levelization amount. Fluctuations in estimated annual earnings and tax credits can also
cause large swings in the effective tax rate for interim periods. Therefore, this
adjustment will vary each quarter, but will have no effect on net income for the year.

# LIQUIDITY AND CAPITAL
RESOURCES

Statements of Cash Flows
and Financing Activities

Florida Progress

Cash provided by operating activities
increased $46 million for the nine months ended September 30, 2004, when compared to the
nine months ended September 30, 2003. The increase in operating cash flow was due
primarily to the recovery of previously deferred fuel costs, partially offset by increased
working capital requirements.

Net cash used in investing activities
decreased $347 million for the nine months ended September 30, 2004, when compared to the
nine months ended September 30, 2003. The decrease is primarily due to reduced
nonregulated capital expenditures, primarily the purchase of North Texas Gas assets in the
first quarter of 2003, and proceeds from the sale of Railcar Ltd. in 2004.

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

PEF

Cash provided by operating activities
increased $110 million for the nine months ended September 30, 2004, when compared to the
nine months ended September 30, 2003. The increase in operating cash flow was due
primarily to the recovery of $147 million of previously deferred fuel costs, partially
offset by storm damage costs.

Net cash used in investing activities
decreased $119 million for the nine months ended September 30, 2004, when compared to the
nine months ended September 30, 2003. The decrease is due to lower capital spending for
generation projects and the absence of nuclear fuel purchases.

Between October 19, 2004 and November
1, 2004, PEF borrowed a net total of $55 million under its long-term revolving credit
facility. In addition, PEF borrowed $170 million under its short-term credit facilities.
PEFs long-term credit facility was arranged through a syndication of financial
institutions and supports its commercial paper program. The credit facilities contain
various cross default and other acceleration provisions. The borrowed funds will be used
to pay off maturing commercial paper and for other cash needs. This action was taken due
to the uncertain impact on PEFs ability to access the commercial paper markets
resulting from recent ratings actions taken by Standard and Poors
(S&P) credit rating agency and Moodys Investor Services
(Moodys).

On October 19, 2004, S&P changed
Progress Energys outlook from stable to negative. S&P cited the uncertainties
regarding the timing of the recovery of hurricane costs, the Companys debt reduction
plans, and the IRS audit of the Companys Earthco synthetic fuels facilities as the
reasons for the change in outlook. On October 25, 2004, S&P reduced the short-term
debt rating of PEF to A-3 from A-2, as a result of their change in outlook discussed
above.

On October 20, 2004, Moodys
changed its outlook for Progress Energy from stable to negative and placed the ratings of
PEF under review for possible downgrade.

Moodys cited the following
reasons for its change in the outlook for Progress Energy: financial ratios that are weak
for its current rating category; rising O&M, including pension, benefit, and insurance
costs; and delays in executing its deleveraging plan. With respect to PEF, Moodys
cited declining cash flow coverages and rising leverage over the last several years;
expected funding needs for a large capital expenditure program; risks with regard to its
upcoming 2005 rate case and the timing of hurricane cost recovery as reasons for putting
its ratings under review.

The changes by S&P and
Moodys do not trigger any debt or guarantee collateral requirements, nor do they
have any material impact on the overall liquidity of PEF. To date, PEFs access to
the commercial paper markets had not been materially impacted by the rating agencies
actions. However, the changes are expected to increase the interest rate incurred on its
short-term borrowings by 0.25% to 0.875%.

Due to the lower short-term rating
issued by S&P, PEF may continue to borrow under its revolving credit facilities instead of
issuing commercial paper due to the difference in investor demand for lower-rated
commercial paper. While the cost of borrowing under its revolving credit facilities is
higher than commercial paper, it provides the same amount of liquidity.

On July 1, 2004, PEF paid at maturity
$40 million 6.69% Medium-Term Notes Series B with commercial paper proceeds and cash from
operations.

On March 30, 2004, PEF extended its
$200 million 364-day line of credit. The line of credit will expire on March 29, 2005.

PEFs filings with the Securities
and Exchange Commission provide additional discussion of the risks associated with a
credit ratings downgrade. See the Risk Factors section of PEFs Form 10-K
for the year ended December 31, 2003. Also, see Form 8-K filed November 3, 2004, for a
discussion of PEFs borrowings under its revolving credit facilities.

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

Contractual Obligations
and Off-Balance Arrangements

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

Guarantees

As of September 30, 2004, Progress
Fuels has other guarantees outstanding of approximately $10 million issued on behalf of
third parties in support of synthetic fuel operations. See Note 15A of the Notes to
Consolidated Interim Financial Statements in Item 1. Financial
Statements, for a discussion of guarantees in accordance with FIN 45.



---

Item 3.       QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by ITEM 3
is omitted pursuant to Instruction H(2)(c) to Form 10-Q (Omission of Information by
Certain Wholly Owned Subsidiaries).

Item 4.  CONTROLS AND
PROCEDURES

Florida Progress
Corporation

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

There has been no change in Florida
Progress internal control over financial reporting during the quarter ended
September 30, 2004 that has materially affected, or is reasonably likely to materially
affect, Florida Progress internal control over financial reporting.

Progress Energy Florida,
Inc.

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

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

---

PART II. OTHER
INFORMATION

Item 1. LEGAL PROCEEDINGS

Legal aspects of certain matters are
set forth in Part I, Item 1. See Note 15 to the Florida Progress Corporation and PEF
Interim Financial Statements.

|1. | U.S.
Global, LLC v. Progress Energy, Inc. et al, Case No. 03004028-03 and
                    Progress Synfuel Holdings,Inc. et al, v. U.S. Global, LLC,
Case No.                     03004028-03
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

The first suit, U.S. Global, LLC v.
Progress Energy, Inc. et al, was filed in the Circuit Court for Broward County, Florida in
March 2003 (the Florida Global Case). The Florida Global Case asserts claims for breach of
the Asset Purchase Agreement and other contract and tort claims related to the Progress
Affiliates alleged interference with Globals rights under the Asset Purchase
Agreement. The Florida Global Case requests an unspecified amount of compensatory damages,
as well as declaratory relief. Following briefing and argument on a number of dispositive
motions on successive versions of Globals complaint, on August 16, 2004, the
Progress Affiliates answered the Fourth Amended Complaint by generally denying all of
Globals substantive allegations and asserting numerous affirmative defenses. The
parties are currently engaged in discovery in the Florida Global Case.

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

On May 15, 2003, Global moved to
dismiss the North Carolina Global Case for lack of personal jurisdiction over Global. In
the alternative, Global requested that the court decline to exercise its discretion to
hear the Progress Affiliates declaratory judgment action. On August 7, 2003, the
Wake County Superior court denied Globals motion to dismiss and entered an order
staying the North Carolina Global Case, pending the outcome of the Florida Global Case.
The Progress Affiliates appealed the Superior courts order staying the case. By
order dated September 7, 2004, the North Carolina Court of Appeals dismissed the Progress
Affiliates appeal.

The
Company cannot predict the outcome of these matters, but will vigorously defend against
the allegations.

---

Item 6. EXHIBITS

(a)    
          Exhibits:

|Exhibit
Number | Description                                                                                                                        | Florida Progress
Corporation | Progress Energy
Florida, Inc.
|-------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | -----------------------------
|31(a)          | Certifications pursuant to Section 302 of the
Sarbanes-Oxley Action of 2002 - Chairman,
President and Chief Executive Officer      | X                            | X                            
|31(b)          | Certifications pursuant to Section 302 of the
Sarbanes-Oxley Action of 2002 - Executive Vice
President and Chief Financial Officer | X                            | X                            
|32(a)          | Certifications pursuant to Section 906 of the
Sarbanes-Oxley Action of 2002 - Chairman,
President and Chief Executive Officer      | X                            | X                            
|32(b)          | Certifications pursuant to Section 906 of the
Sarbanes-Oxley Action of 2002 - Executive Vice
President and Chief Financial Officer | X                            | X                            

---

# SIGNATURES

Pursuant
to the 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.

|                       | FLORIDA PROGRESS CORPORATION
FLORIDA POWER CORPORATION
(Registrants)                                                                          
|---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------
|Date: November 9, 2004 | By: /s/ Geoffrey S. Chatas______________________________
Geoffrey Chatas
Executive Vice President and
Chief Financial Officer                 
|                       |                                                                                                                                               
|                       | By: /s/Robert H. Bazemore, Jr._________________________________
Robert H. Bazemore, Jr.
Vice President and Controller
Chief Accounting Officer