UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

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

                  For the quarterly period ended June 30, 2005

                                       OR

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

                For the transition period from          to         .
                                               --------    --------

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

  1-8349                           Florida Progress Corporation                             59-2147112
                                   410 South Wilmington Street
                                  Raleigh, North Carolina 27601
                                    Telephone (919) 546-6111
                                 State of Incorporation: Florida

  1-3274                            Florida Power Corporation                               59-0247770
                               d/b/a Progress Energy Florida, Inc.
                                        100 Central Avenue
                                  St. Petersburg, Florida 33701
                                     Telephone (727) 820-5151
                                 State of Incorporation: Florida

                                      NONE
 (Former name, former address and former fiscal year, if changed since last report)
</TABLE>

Indicate  by check mark  whether  the  registrants  (1) have  filed all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
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 -

Indicate the number of shares  outstanding  of each of the  issuers'  classes of
common  stock,  as of the latest  practicable  date.  As of July 31, 2005,  each
registrant had the following shares of common stock outstanding:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
           Registrant                          Description                              Shares
           ----------                          -----------                              ------
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)
</TABLE>

This combined Form 10-Q is filed separately by two registrants: Florida Progress
Corporation and Florida Power  Corporation  d/b/a Progress Energy Florida,  Inc.
(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.

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.

                                       1
<PAGE>

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

Glossary of Terms


Safe Harbor For Forward-Looking Statements


PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

      Florida Progress Corporation

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

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

      Statements of Income
      Balance Sheets
      Statements of Cash Flows

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

Item 1.  Legal Proceedings

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

                                       2

<PAGE>

                                GLOSSARY OF TERMS


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

       TERM                                                   DEFINITION

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
AFUDC                                     Allowance for funds used during construction
the Agreement                             Stipulation and Settlement Agreement related to retail rate matters
APB                                       Accounting Principles Board
ARO                                       Asset retirement obligation
AST                                       Advanced Separation Technology
Bcf                                       Billion cubic feet
CAIR                                      Clean Air Interstate Rule
CAMR                                      Clean Air Mercury Rule
Calgon                                    Calgon Carbon Corporation
CAMR                                      Clean air mercury rule
the City                                  The City of Winter Park, Florida
the Code                                  Internal Revenue Code
Colona                                    Colona Synfuel Limited Partnership, L.L.L.P.
the Company, Florida Progress or FPC      Florida Progress Corporation
CR3                                       PEF's nuclear generating plant, Crystal River Unit No. 3
DOE                                       United States Department of Energy
ECRC                                      Environmental Cost Recovery Clause
EIA                                       Energy Information Agency
EPA                                       United States Environmental Protection Agency
FASB                                      Financial Accounting Standards Board
FDEP                                      Florida Department of Environmental Protection
FERC                                      Federal Energy Regulatory Commission
FIN No. 45                                Financial Accounting Standards Board (FASB) Interpretation No. 45,
                                          "Guarantor's Accounting and Disclosure Requirements for Guarantees,
                                          Including Indirect Guarantees of Indebtedness of Others"
FIN No. 46R                               FASB Interpretation No. 46, "Consolidation of Variable Interest
                                          Entities - an Interpretation of ARB No. 51"
Financial Statements                      Florida Progress' Financial Statements and Progress Energy Florida's
                                          Financial Statements
Florida Power or the Utility              Florida Power Corporation d/b/a Progress Energy Florida, Inc.
FPSC                                      Florida Public Service Commission
GAAP                                      Accounting principles generally accepted in the United States of America
HLW                                       High Level Waste
IRS                                       Internal Revenue Service
MACT                                      Maximum Achievable Control Technology
MGP                                       Manufactured Gas Plant
MW                                        Megawatts
NOx                                       Nitrogen Oxide
NRC                                       United States Nuclear Regulatory Commission
NYMEX                                     New York Mercantile Exchange
NEIL                                      Nuclear Electric Insurance Limited
OCI                                       Other comprehensive income
OPEB                                      Other postretirement benefits
PEF or the Utility                        Progress Energy Florida, Inc., formerly referred to as Florida Power Corporation
PESC                                      Progress Energy Service Company
PFA                                       IRS Prefiling Agreement
PLRs                                      Private Letter Rulings
PRPs                                      Potentially Responsible Parties
Progress Energy or the Parent             Progress Energy, Inc.
Progress Fuels                            Progress Fuels Corporation, formerly Electric Fuels Corporation
Progress Rail                             Progress Rail Services Corporation
PTC                                       Progress Telecommunications Corporation
PT LLC                                    Progress Telecom LLC

                                       3
<PAGE>

PVI                                       Progress Ventures, Inc., formerly referred to as Energy Ventures, a
                                          business unit of Progress Energy
PUHCA                                     Public Utility Holding Company Act of 1935, as amended
RBCA or Global RBCA                       Risk-based corrective action
Rail                                      Rail Services
RCA                                       Revolving credit agreement
SEC                                       United States Securities and Exchange Commission
Section 29                                Section 29 of the Internal Revenue Service Code
Service Company                           Progress Energy Service Company, LLC
SFAS No. 5                                Statement of Financial Accounting Standards No. 5, "Accounting for
                                          Contingencies"
SFAS No. 71                               Statement of Financial Accounting Standards No. 71, "Accounting for the
                                          Effects of Certain Types of Regulation"
SFAS No. 109                              Statement of Financial Accounting Standards No. 109, "Accounting for
                                          Income Taxes"
SFAS No. 123                              Statement of Financial Accounting Standards No. 123, "Accounting for
                                          Stock-Based Compensation"
SFAS No. 133                              Statement of Financial Accounting Standards No. 133, "Accounting for
                                          Derivative and Hedging Activities"
SFAS No. 143                              Statement of Financial Accounting Standards No. 143, "Accounting for
                                          Asset Retirement Obligations"
SFAS No. 148                              Statement of Financial Accounting Standards No. 148, "Accounting for
                                          Stock-Based Compensation - Transition and Disclosure - An Amendment of
                                          FASB Statement No. 123"
SNF                                       Spent Nuclear Fuel
SO2                                       Sulfur dioxide
the Trust                                 FPC Capital I
</TABLE>

                                       4
<PAGE>


SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

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

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

Any forward-looking  statement is based on information current as of the date of
this report and speaks only as of the date on which such  statement is made, and
neither  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 unrecovered
(stranded) costs; the uncertainty  regarding the timing,  creation and structure
of GridFlorida or other regional transmission organizations;  weather conditions
that directly  influence  the demand for  electricity;  the Company's  timing of
recovery of the costs  associated  with the four  hurricanes  that  impacted our
service  territory  in 2004 or the  ability to recover  through  the  regulatory
process other future significant weather events; recurring seasonal fluctuations
in demand for electricity;  fluctuations in the price of energy  commodities and
purchased  power;  economic  fluctuations  and the  corresponding  impact on the
Company and its subsidiaries'  commercial and industrial customers;  the ability
of the Company's  subsidiaries to pay upstream dividends or distributions to it;
the impact on the  facilities and the businesses of the Company from a terrorist
attack; the inherent risks associated with the operation of nuclear  facilities,
including environmental,  health, regulatory and financial risks; the ability to
successfully  access  capital  markets on  favorable  terms;  the ability of the
Company to maintain its current  credit  ratings and the impact of the Company's
financial condition and ability to meet its cash and other financial obligations
in the event its credit  ratings are  downgraded  below  investment  grade;  the
impact that increases in leverage and the affect it may have on the Company; the
impact of  derivative  contracts  used in the normal  course of  business by the
Company;  investment  performance  of pension and benefit  plans;  the Company's
ability to control costs, including pension and benefit expense, and achieve its
cost management  targets for 2007; the  availability and use of Internal Revenue
Code  Section 29 (Section 29) tax credits by synthetic  fuel  producers  and the
Company's  continued  ability  to use  Section  29 tax  credits  related  to its
coal-based  solid  synthetic  fuel  businesses;  the  impact  to  the  Company's
financial condition and performance in the event it is determined the Company is
not  entitled to  previously  taken  Section 29 tax  credits;  the impact of the
proposed accounting  pronouncement regarding uncertain tax positions; the impact
that future crude oil prices may have on the value of the  Company's  Section 29
tax credits;  the outcome of PEF's rate  proceeding in 2005 regarding its future
base  rates;  the  Company's  ability  to  manage  the risks  involved  with the
operation of its nonregulated plants,  including dependence on third parties and
related  counter-party  risks,  and a lack of operating  history;  the Company's
ability to manage the risks associated with its energy marketing operations; the
outcome of any ongoing or future  litigation or similar  disputes and the impact
of any such  outcome  or  related  settlements;  and  unanticipated  changes  in
operating  expenses  and capital  expenditures.  Many of these  risks  similarly
impact the Company's subsidiaries.

These and other risks are detailed  from time to time in Florida  Progress'  and
PEF's filings with the United States  Securities and Exchange  Commission (SEC).
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, 2004 which was filed with the SEC
on March 16, 2005. You should carefully read this SEC report. 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.


                                       5
<PAGE>

                          PART I. FINANCIAL INFORMATION


Item 1.  FINANCIAL STATEMENTS

                          FLORIDA PROGRESS CORPORATION
                    CONSOLIDATED INTERIM FINANCIAL STATEMENTS
                                  June 30, 2005

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
UNAUDITED CONSOLIDATED STATEMENTS of INCOME
                                                              Three Months Ended           Six Months Ended
                                                                   June 30                      June 30
                                                           ------------------------------------------------
(in millions)                                                   2005         2004          2005       2004
-----------------------------------------------------------------------------------------------------------
Operating revenues
   Utility                                                   $   908      $   860       $ 1,756    $ 1,644
   Diversified business                                          425          350           792        635
-----------------------------------------------------------------------------------------------------------
      Total operating revenues                                 1,333        1,210         2,548      2,279
-----------------------------------------------------------------------------------------------------------
Operating expenses
Utility
   Fuel used in electric generation                              313          276           615        545
   Purchased power                                               144          139           275        260
   Operation and maintenance                                     288          152           477        312
   Depreciation and amortization                                  71           72           141        141
   Taxes other than on income                                     66           64           133        126
Diversified business
    Cost of sales                                                394          301           727        564
    Depreciation and amortization                                 24           21            47         41
    Gain on the sale of assets                                     -            -            (5)        (1)
    Other                                                         20           21            48         41
-----------------------------------------------------------------------------------------------------------
        Total operating expenses                               1,320        1,046         2,458      2,029
-----------------------------------------------------------------------------------------------------------
Operating income                                                  13          164            90        250
-----------------------------------------------------------------------------------------------------------
Other income (expense)
   Interest income                                                 1            1             2          2
   Other, net                                                     18           (3)           17         (7)
-----------------------------------------------------------------------------------------------------------
        Total other income (expense)                              19           (2)           19         (5)
-----------------------------------------------------------------------------------------------------------
Interest charges
   Interest charges                                               48           43            95         84
   Allowance for borrowed funds used during construction          (2)          (1)           (4)        (2)
-----------------------------------------------------------------------------------------------------------
        Total interest charges, net                               46           42            91         82
-----------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations before income
      taxes and minority interest                                (14)         120            18        163
Income tax benefit                                                 6            8            11         13
-----------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations before minority
      interest, net of tax                                        (8)         128            29        176
Minority interest in subsidiaries' loss, net of tax                9            1            17          -
-----------------------------------------------------------------------------------------------------------
Income from continuing operations                                  1          129            46        176
Discontinued operations, net of tax                               (9)           6           (36)        14
-----------------------------------------------------------------------------------------------------------
Net (loss) income                                            $    (8)     $   135       $    10    $   190
-----------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Interim Financial Statements.

                                       6
<PAGE>

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
FLORIDA PROGRESS CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in millions)                                                                 June 30          December 31
ASSETS                                                                           2005                 2004
-------------------------------------------------------------------------------------------------------------
Utility plant
  Utility plant in service                                                    $ 8,399              $ 8,387
  Accumulated depreciation                                                     (3,357)              (2,978)
-------------------------------------------------------------------------------------------------------------
        Utility plant in service, net                                           5,042                5,409
  Held for future use                                                               1                    8
  Construction work in progress                                                   561                  420
  Nuclear fuel, net of amortization                                                67                   45
-------------------------------------------------------------------------------------------------------------
        Total utility plant, net                                                5,671                5,882
-------------------------------------------------------------------------------------------------------------
Current assets
  Cash and cash equivalents                                                        23                   24
  Receivables, net                                                                537                  476
  Receivables from affiliated companies                                            72                   40
  Deferred income taxes                                                            65                   60
  Inventory                                                                       367                  341
  Deferred fuel cost                                                               93                   89
  Assets of discontinued operations                                                 -                  590
  Prepayments and other current assets                                            122                   33
-------------------------------------------------------------------------------------------------------------
        Total current assets                                                    1,279                1,653
-------------------------------------------------------------------------------------------------------------
Deferred debits and other assets
  Regulatory assets                                                               439                  524
  Nuclear decommissioning trust funds                                             473                  463
  Diversified business property, net                                              653                  576
  Miscellaneous other property and investments                                    103                   95
  Other assets and deferred debits                                                514                  492
-------------------------------------------------------------------------------------------------------------
        Total deferred debits and other assets                                  2,182                2,150
-------------------------------------------------------------------------------------------------------------
         Total assets                                                         $ 9,132              $ 9,685
-------------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
-------------------------------------------------------------------------------------------------------------
Common stock equity
  Common stock without par value                                              $ 1,726              $ 1,712
  Retained earnings                                                               986                  976
  Accumulated other comprehensive loss                                            (19)                  (7)
-------------------------------------------------------------------------------------------------------------
     Total common stock equity                                                  2,693                2,681
-------------------------------------------------------------------------------------------------------------
Preferred stock of subsidiaries - not subject to mandatory redemption              34                   34
Minority interest                                                                  36                   32
Long-term debt, affiliate                                                         440                  809
Long-term debt, net                                                             2,294                2,052
-------------------------------------------------------------------------------------------------------------
        Total capitalization                                                    5,497                5,608
-------------------------------------------------------------------------------------------------------------
Current liabilities
  Current portion of long-term debt                                                48                   49
  Accounts payable                                                                327                  333
  Payables to affiliated companies                                                 73                   71
  Notes payable to affiliated companies                                           391                  431
  Short-term obligations                                                          261                  293
  Customer deposits                                                               141                  135
  Liabilities of discontinued operations                                            -                  152
  Other current liabilities                                                       394                  406
-------------------------------------------------------------------------------------------------------------
        Total current liabilities                                               1,635                1,870
-------------------------------------------------------------------------------------------------------------
Deferred credits and other liabilities
  Noncurrent income tax liabilities                                                59                   64
  Accumulated deferred investment tax credits                                      33                   36
  Regulatory liabilities                                                        1,128                1,362
  Asset retirement obligations                                                    278                  358
  Other liabilities and deferred credits                                          502                  387
-------------------------------------------------------------------------------------------------------------
        Total deferred credits and other liabilities                            2,000                2,207
-------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 14)
-------------------------------------------------------------------------------------------------------------
         Total capitalization and liabilities                                 $ 9,132              $ 9,685
-------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Interim Financial Statements.

                                       7
<PAGE>

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
FLORIDA PROGRESS CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------------------------
(in millions)
-------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,                                                               2005          2004
-------------------------------------------------------------------------------------------------------------
Operating activities
Net income                                                                             $  10         $ 190
Adjustments to reconcile net income to net cash provided by operating
activities:
      Discontinued operations, net of tax                                                 36           (14)
      Charges for voluntary enhanced retirement program                                   93             -
      Depreciation and amortization                                                      205           196
      Deferred income taxes and investment tax credits, net                              (99)          (151)
      Tax levelization                                                                    45            23
      Deferred fuel cost                                                                  36            26
      Other adjustments to net income                                                     51             6
Cash provided/(used) by changes in operating assets and liabilities:
      Receivables                                                                        (43)         (113)
      Receivables from affiliated companies                                              (16)           (2)
      Inventory                                                                          (43)          (27)
      Prepayments and other current assets                                               (26)           (2)
      Accounts payable                                                                    79            49
      Payables to affiliated companies                                                     2            51
      Other current liabilities                                                          (60)          193
      Regulatory assets and liabilities                                                  (54)            6
      Other                                                                              (13)           11
-------------------------------------------------------------------------------------------------------------
         Net cash provided by operating activities                                       203           442
-------------------------------------------------------------------------------------------------------------
Investing activities
Utility property additions                                                              (253)         (230)
Diversified business property additions                                                 (112)          (85)
Nuclear fuel additions                                                                   (34)            -
Proceeds from sales of subsidiaries and other investments, net of cash
divested                                                                                 435            84
Other                                                                                    (11)          (13)
-------------------------------------------------------------------------------------------------------------
          Net cash provided by (used in) investing activities                             25          (244)
-------------------------------------------------------------------------------------------------------------
Financing activities
Issuance of long-term debt, net                                                          297             1
Net (decrease) increase in short-term obligations                                        (32)           231
Retirement of long-term debt                                                            (426)          (26)
Net change in intercompany notes                                                         (57)         (309)
Dividends paid to parent                                                                   -           (78)
Other                                                                                     19             7
-------------------------------------------------------------------------------------------------------------
           Net cash used in financing activities                                        (199)         (174)
-------------------------------------------------------------------------------------------------------------
Cash used by discontinued operations:
       Operating activities                                                              (26)           (4)
       Investing activities                                                               (4)           (8)
       Financing activities                                                                -             -
Net (decrease) increase in cash and cash equivalents                                      (1)           12
Cash and cash equivalents at beginning of period                                          24            15
-------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                             $  23         $  27
-------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Interim Financial Statements.

                                       8
<PAGE>

                            FLORIDA POWER CORPORATION
                       d/b/a PROGRESS ENERGY FLORIDA, INC.
                          INTERIM FINANCIAL STATEMENTS
                                  June 30, 2005



<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
UNAUDITED STATEMENTS of INCOME
                                                            Three Months Ended          Six Months Ended
                                                                 June 30                     June 30
                                                         ------------------------------------------------------
(in millions)                                                 2005          2004         2005          2004
---------------------------------------------------------------------------------------------------------------

Operating revenues                                            $ 908        $ 860      $ 1,756       $ 1,644

Operating expenses
   Fuel used in electric generation                             313          276          615           545
   Purchased power                                              144          139          275           260
   Operation and maintenance                                    288          152          477           312
   Depreciation and amortization                                 71           72          141           141
   Taxes other than on income                                    66           64          133           126
---------------------------------------------------------------------------------------------------------------
        Total operating expenses                                882          703        1,641         1,384
---------------------------------------------------------------------------------------------------------------
Operating income                                                 26          157          115           260
---------------------------------------------------------------------------------------------------------------
Other income (expense)
   Other, net                                                    24            -           27            (1)
---------------------------------------------------------------------------------------------------------------
        Total other income (expense)                             24            -           27            (1)
---------------------------------------------------------------------------------------------------------------
Interest charges
   Interest charges                                              34           29           68            60
   Allowance for borrowed funds used during construction         (2)          (1)          (4)           (2)
---------------------------------------------------------------------------------------------------------------
        Total interest charges, net                              32           28           64            58
---------------------------------------------------------------------------------------------------------------

Income before income taxes                                       18          129           78           201
Income tax expense                                                8           45           24            67
---------------------------------------------------------------------------------------------------------------

Net income                                                    $  10        $  84      $    54       $   134
Preferred stock dividend requirement                              -            -            1             1
---------------------------------------------------------------------------------------------------------------
Earnings for common stock                                     $  10        $  84      $    53       $   133
---------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Interim Financial Statements.

                                       9
<PAGE>

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA, INC.
UNAUDITED BALANCE SHEETS
--------------------------------------------------------------------------------------------------
(in millions)                                                      June 30        December  31
ASSETS                                                                2005                 2004
--------------------------------------------------------------------------------------------------
Utility plant
  Utility plant in service                                         $ 8,399              $ 8,387
  Accumulated depreciation                                          (3,357)              (2,978)
--------------------------------------------------------------------------------------------------
        Utility plant in service, net                                5,042                5,409
  Held for future use                                                    1                    8
  Construction work in progress                                        561                  420
  Nuclear fuel, net of amortization                                     67                   45
--------------------------------------------------------------------------------------------------
        Total utility plant, net                                     5,671                5,882
--------------------------------------------------------------------------------------------------
Current Assets
  Cash and cash equivalents                                             10                   12
  Receivables, net                                                     306                  266
  Receivables from affiliated companies                                 37                   16
  Deferred income taxes                                                 48                   42
  Inventory                                                            281                  279
  Deferred fuel cost                                                    93                   89
  Prepayments and other current assets                                  96                   12
--------------------------------------------------------------------------------------------------
        Total current assets                                           871                  716
--------------------------------------------------------------------------------------------------
Deferred debits and other assets
  Regulatory assets                                                    439                  524
  Nuclear decommissioning trust funds                                  473                  463
  Miscellaneous other property and investments                          46                   46
  Prepaid pension costs                                                194                  234
  Other assets and deferred debits                                      48                   59
--------------------------------------------------------------------------------------------------
        Total deferred debits and other assets                       1,200                1,326
--------------------------------------------------------------------------------------------------
         Total assets                                              $ 7,742              $ 7,924
--------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
--------------------------------------------------------------------------------------------------
Common stock equity
  Common stock without par value                                   $ 1,096              $ 1,081
  Retained earnings                                                  1,293                1,240
--------------------------------------------------------------------------------------------------
     Total common stock equity                                       2,389                2,321
--------------------------------------------------------------------------------------------------
  Preferred stock - not subject to mandatory redemption                 34                   34
  Long-term debt, net                                                2,152                1,912
--------------------------------------------------------------------------------------------------
        Total capitalization                                         4,575                4,267
--------------------------------------------------------------------------------------------------
Current liabilities
  Current portion of long-term debt                                     48                   48
  Accounts payable                                                     212                  262
  Payables to affiliated companies                                      90                   80
  Notes payable to affiliated companies                                  -                  178
  Short-term obligations                                               261                  293
  Customer deposits                                                    141                  135
  Other current liabilities                                            193                  161
--------------------------------------------------------------------------------------------------
        Total current liabilities                                      945                1,157
--------------------------------------------------------------------------------------------------
Deferred credits and other liabilities
  Noncurrent income tax liabilities                                    458                  489
  Accumulated deferred investment tax credits                           33                   35
  Regulatory liabilities                                             1,128                1,362
  Asset retirement obligations                                         256                  337
  Other liabilities and deferred credits                               347                  277
--------------------------------------------------------------------------------------------------
        Total deferred credits and other liabilities                 2,222                2,500
--------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 14)
--------------------------------------------------------------------------------------------------
         Total capitalization and liabilities                      $ 7,742              $ 7,924
--------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Interim Financial Statements.

10
<PAGE>

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA, INC.
UNAUDITED STATEMENTS of CASH FLOWS
-----------------------------------------------------------------------------------------------------------------
(in millions)
Six Months Ended June 30,                                                                   2005         2004
----------------------------------------------------------------------------------------------------------------
Operating activities
Net income                                                                                 $  54        $ 134
Adjustments to reconcile net income to net cash provided by operating activities:
     Charges for voluntary enhanced retirement program                                        90            -
     Depreciation and amortization                                                           158          155
     Deferred income taxes and investment tax credits, net                                   (55)           1
     Deferred fuel cost                                                                       36           26
     Other adjustments to net income                                                          39            -
Cash provided/(used) by changes in operating assets and liabilities:
     Receivables                                                                             (42)         (48)
     Receivables from affiliated companies                                                     5            1
     Inventory                                                                               (15)         (11)
     Prepayments and other current assets                                                    (24)           2
     Accounts payable                                                                         32           33
     Payables to affiliated companies                                                         10           54
     Other current liabilities                                                                 5           82
     Regulatory assets and liabilities                                                       (54)           6
     Other                                                                                     5            7
----------------------------------------------------------------------------------------------------------------
         Net cash provided by operating activities                                           244          442
----------------------------------------------------------------------------------------------------------------
Investing activities
Property additions                                                                          (253)        (230)
Nuclear fuel additions                                                                       (34)           -
Proceeds from sales of assets                                                                 42            -
Other                                                                                         (4)           -
----------------------------------------------------------------------------------------------------------------
          Net cash used in investing activities                                             (249)        (230)
----------------------------------------------------------------------------------------------------------------
Financing activities
Issuance of long-term debt, net                                                              297            1
Net (decrease) increase in short-term obligations                                            (32)         231
Retirement of long-term debt                                                                 (57)          (1)
Net change in intercompany notes                                                            (204)        (363)
Dividends paid to parent                                                                       -          (78)
Dividends paid on preferred stock                                                             (1)          (1)
----------------------------------------------------------------------------------------------------------------
           Net cash provided by (used in) financing activities                                 3         (211)
----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents                                          (2)           1
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period                                              12           10
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                                $   10        $  11
--------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Interim Financial Statements.

                                       11
<PAGE>

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

1.   BASIS OF PRESENTATION

     A. Basis of Presentation

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

     In accordance  with the  provisions of  Accounting  Principles  Board (APB)
     Opinion 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.  For the three  months  ended June 30, 2005 and 2004,  the  Company's
     income tax  expense was  increased  by $39  million  and  decreased  by $11
     million, respectively. For the six months ended June 30, 2005 and 2004, the
     Company's  income tax expense  increased  by $45  million and $23  million,
     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.

     PEF's income tax expense was  increased by $8 million for the three and six
     months  ended June 30,  2005 in order to  maintain  an  effective  tax rate
     consistent with the estimated annual rate.

     PEF collects  from  customers  certain  excise taxes levied by the state or
     local  government  upon the  customer.  PEF  accounts for excise taxes on a
     gross  basis.  For the three  months  ended June 30,  2005 and 2004,  gross
     receipts  tax and  franchise  taxes of  approximately  $38  million and $37
     million,  respectively,  are  included in electric  operating  revenues and
     taxes other than on income on the Statements of Income.  For the six months
     ended June 30, 2005 and 2004,  gross  receipts tax and  franchise  taxes of
     approximately  $73 million and $69 million,  respectively,  are included in
     electric  operating  revenues  and  taxes  other  than  as  income  on  the
     Statements of Income.

     The amounts included in the consolidated  interim financial  statements are
     unaudited but, in the opinion of management,  reflect all normal  recurring
     adjustments  necessary  to  fairly  present  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 is 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 2004  have  been made to
     conform to the 2005 presentation.

     B. Stock-Based Compensation

     The Company and PEF measure  compensation  expense for stock options as the
     difference  between the market price of Progress  Energy's common stock and
     the exercise  price of the option at the grant date.  The exercise price at
     which options are granted by Progress Energy equals the market price at the
     grant date, and  accordingly,  no compensation  expense has been recognized
     for stock option grants. For purposes of the pro forma disclosures required
     by SFAS No. 148, "Accounting for Stock-Based  Compensation - Transition and
     Disclosure - an Amendment of FASB  Statement  No. 123" (SFAS No. 148),  the
     estimated  fair value of the Company's and PEF'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:

                                       12
<PAGE>

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                                   Three Months Ended          Six Months Ended
         (in millions)                                                  June 30                     June 30
                                                               --------------------------- -------------------------
     FLORIDA PROGRESS CORPORATION                                       2005         2004          2005        2004
                                                               --------------  ----------- ------------- -----------
     Net (loss) income, as reported                                     $ (8)       $ 135          $ 10       $ 190
     Deduct:  Total stock option expense determined under fair
       value method for all awards, net of related tax effects             -            1             1           2
                                                               --------------  ----------- ------------- -----------
     Pro forma net (loss) income                                        $ (8)       $ 134           $ 9       $ 188
                                                               ==============  =========== ============= ===========

                                                                   Three Months Ended          Six Months Ended
         (in millions)                                                  June 30                     June 30
                                                               --------------------------- -------------------------
     PROGRESS ENERGY FLORIDA, INC.                                      2005         2004          2005        2004
                                                               --------------  ----------- ------------- -----------
     Net income, as reported                                            $ 10        $  84          $ 54       $ 134
     Deduct:  Total stock option expense determined under fair
       value method for all awards, net of related tax effects             -            1             1           2
                                                               --------------  ----------- ------------- -----------
     Pro forma net income                                               $ 10        $  83          $ 53       $ 132
                                                               ==============  =========== ============= ===========
</TABLE>

     The  Company and PEF expect to begin  expensing  stock  options  during the
     third quarter of 2005 (See Note 2).

     C. 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 June 30, 2005,  Colona's total assets were $30 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 June 30, 2005, 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 June 30,  2005,  that PEF could be  required  to record in its
     income statement as a result of these arrangements totals  approximately $6
     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.   IMPACT OF NEW ACCOUNTING STANDARDS

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

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

     As discussed in Note 14, the Internal  Revenue Service (IRS) field auditors
     have recommended that the Section 29 tax credits generated by the Company's
     Earthco  facilities,  totaling  $595  million  through  June 30,  2005,  be
     disallowed.  The Company disagrees with the field audit team's findings and
     has requested  that the National  Office of the IRS review this issue.  The
     Company has not yet determined how the proposed interpretation would impact
     its various income tax  positions,  including the status of the Earthco tax
     credits. Depending on the provisions of the FASB's final interpretation and
     the  Company's  facts  and   circumstances   that  exist  at  the  date  of

                                       13
<PAGE>

     implementation,  including the Company's  assessment of the  probability of
     sustaining  any currently  recorded and future tax  benefits,  the proposed
     interpretation  could  have a  material  adverse  impact  on the  Company's
     financial position and results of operations.

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

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

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

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

     On March 30, 2005, the FASB issued  Interpretation  No. 47, "Accounting for
     Conditional  Asset Retirement  Obligations," an  interpretation of SFAS No.
     143,  "Accounting for Asset  Retirement  Obligations."  The  interpretation
     clarifies that a legal obligation to perform an asset  retirement  activity
     that is  conditional on a future event is within the scope of SFAS No. 143.
     Accordingly,  an entity is required to  recognize a liability  for the fair
     value of an asset  retirement  obligation  that is  conditional on a future
     event if the  liability's  fair  value  can be  reasonably  estimated.  The
     interpretation  also provides  additional  guidance for evaluating  whether
     sufficient  information  is available to make a reasonable  estimate of the
     fair value. The interpretation is effective for Florida Progress and PEF no
     later than  December 31,  2005.  Neither  Florida  Progress nor PEF has yet
     determined  the impact of the  interpretation  on its  financial  position,
     results of operations or liquidity.

3.   DIVESTITURE

     Progress Rail Divestiture

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

     Based on the  estimated  gross  proceeds  associated  with the sale of $430
     million,  the Company  recorded an estimated  after-tax loss on disposal of
     $41  million  during  the six  months  ended  June 30,  2005.  The  Company
     anticipates  adjustments  to the loss on the  divestiture  during the third
     quarter  of  2005  related  to  employee   benefit   settlements   and  the
     finalization  of  the  working  capital   adjustment  and  other  operating
     estimates.

     The  accompanying  consolidated  interim  financial  statements  of Florida
     Progress  have been  restated  for all  periods  presented  to reflect  the
     operations of Progress Rail as discontinued  operations.  Interest  expense
     has been allocated to  discontinued  operations  based on the net assets of
     Progress Rail, assuming a uniform debt-to-equity ratio across the Company's
     operations.  Interest expense allocated for the three months ended June 30,
     2004 was $4 million.  Interest  expense  allocated for the six months ended

                                       14
<PAGE>

     June 30,  2005 and 2004 was $4 million and $8  million,  respectively.  The
     Company ceased recording  depreciation upon classification of the assets as
     discontinued  operations in February 2005.  After-tax  depreciation expense
     recorded by Progress  Rail during the three  months ended June 30, 2004 was
     $3 million.  After-tax  depreciation  during the six months  ended June 30,
     2005 and 2004 was $3  million  and $6  million,  respectively.  Results  of
     discontinued operations were as follows:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
    ----------------------------------------------------------------------------------------------------
    (in millions)                                                Three Months Ended     Six Months Ended
                                                                       June 30               June 30
                                                                    2005     2004         2005      2004
    ----------------------------------------------------------------------------------------------------
    Revenues                                                       $   -    $ 285        $ 358     $ 525
    ----------------------------------------------------------------------------------------------------
    Earnings before income taxes                                   $   -    $  13        $   7        24
    Income tax expense                                                 -        7            2        10
    ----------------------------------------------------------------------------------------------------
    Net earnings from discontinued operations                          -        6            5        14
    ----------------------------------------------------------------------------------------------------
    Estimated loss on disposal of discontinued operations,
       including income tax benefit of $0 and $21 for the
       three and six month ended June 30, 2005, respectively          (9)       -          (41)        -
    ----------------------------------------------------------------------------------------------------
    (Loss) earnings from discontinued operations                   $  (9)   $   6        $ (36)    $  14
    ----------------------------------------------------------------------------------------------------
</TABLE>

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

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

       ----------------------------------------------------------
       (in millions)
       ----------------------------------------------------------
       Accounts receivable                                 $ 172
       Inventory                                             177
       Other current assets                                   15
       Total property, plant and equipment, net              199
       Total other assets                                     27
       ----------------------------------------------------------
           Assets of discontinued operations               $ 590
       ----------------------------------------------------------
       Accounts payable                                    $ 113
       Accrued expenses                                       37
       Total long-term liabilities                             2
       ----------------------------------------------------------
           Liabilities of discontinued operations          $ 152
       ----------------------------------------------------------

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

     Winter Park Divestiture

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

4.   ACQUISITIONS

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

5.   REGULATORY MATTERS

     PEF Retail Rate Matters

     On July 14, 2005, the Florida Public  Service  Commission  (FPSC) issued an
     order authorizing PEF to recover $232 million,  including interest,  of the
     costs it incurred and previously  deferred related to PEF's  restoration of
     power to customers  associated with the four hurricanes in 2004. The ruling
     will allow PEF to include a charge of  approximately  $3.27 on the  average

                                       15
<PAGE>

     residential  monthly  customer bill beginning August 1, 2005. The ruling by
     the  FPSC  approved  the  majority  of  the  Company's   request  with  two
     exceptions:   the   reclassification  of  $8  million  from  operation  and
     maintenance  expense  (O&M) to utility  plant and  reclassification  of $17
     million  as  normal  O&M  expense.   As  a  result  of  these  adjustments,
     approximately  $17  million  was  charged  to O&M  expense  in  June  2005,
     representing the retail portion of these adjustments.

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

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

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

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

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

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

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

                                       16
<PAGE>

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

6. COMPREHENSIVE INCOME

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
    -----------------------------------------------------------------------------------
                                                                     Three Months Ended
    Florida Progress Corporation                                          June 30,
                                                                 ----------------------
    (in millions)                                                       2005       2004
    -----------------------------------------------------------------------------------
    Net (loss) income                                                  $  (8)     $ 135
    Other comprehensive loss:
      Reclassification adjustments included in net income:
         Change in cash flow hedges (net of tax expense of $2
             and $1, respectively)                                         2          2
      Changes in net unrealized losses on cash flow hedges
          (net of tax benefit of $0 and $3, respectively)                  -         (6)
      Foreign currency translation adjustment and other                    1          -
    -----------------------------------------------------------------------------------
            Other comprehensive loss                                   $   3      $  (4)
    -----------------------------------------------------------------------------------
       Comprehensive (loss) income                                     $  (5)     $ 131
    -----------------------------------------------------------------------------------

    -----------------------------------------------------------------------------------
                                                                      Six Months Ended
    Florida Progress Corporation                                           June 30,
                                                                 ----------------------
    (in millions)                                                       2005       2004
    -----------------------------------------------------------------------------------
    Net income                                                         $  10      $ 190
    Other comprehensive loss:
      Reclassification adjustments included in net income:
         Change in cash flow hedges (net of tax expense of $2
             and $2, respectively)                                         3          4
         Foreign currency translation adjustment included in
             discontinued operations                                      (5)         -
         Minimum pension liability adjustment included in
             discontinued operations (net of tax expense of $1)            1          -
         Changes in net unrealized losses on cash flow hedges
             (net of tax benefit of $7 and $10, respectively)            (12)       (18)
      Foreign currency translation adjustment and other                    1          1
    -----------------------------------------------------------------------------------
            Other comprehensive loss                                   $ (12)     $ (13)
    -----------------------------------------------------------------------------------
       Comprehensive (loss) income                                     $  (2)     $ 177
    -----------------------------------------------------------------------------------
</TABLE>

     Comprehensive income and net income for PEF for the three months ended June
     30,  2005  and  2004  were  $10  million  and  $84  million,  respectively.
     Comprehensive  income and net income for PEF for the six months  ended June
     30, 2005 and 2004 were $54 million and $134 million, respectively.

7.   DEBT AND CREDIT FACILITIES AND FINANCING ACTIVITIES

     Changes  to the  Company's  and  PEF's  debt and  credit  facilities  since
     December 31, 2004, discussed in Note 12 to the Financial Statements in Item
     8 of the Company's and PEF's 2004 Form 10-K, are described below.

     In January 2005, PEF used proceeds from the issuance of commercial paper to
     pay off $170  million  of  revolving  credit  agreement  (RCA)  loans.  PEF
     subsequently  used money pool  borrowings to reduce  commercial  paper.  In
     February 2005, PEF used proceeds from money pool  borrowings to pay off $55
     million of RCA loans.

                                       17
<PAGE>

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

     On May 16, 2005,  PEF issued $300 million of First  Mortgage  Bonds,  4.50%
     Series due 2010.  The net proceeds  from the sale of the bonds were used to
     reduce the outstanding balance of commercial paper.

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

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

8.   BENEFIT PLANS

     The  Company  and  some  of  its   subsidiaries   (including  PEF)  have  a
     noncontributory defined benefit retirement (pension) plan for substantially
     all full-time employees. The Company also has supplementary defined benefit
     pension plans that provide benefits to higher-level  employees. In addition
     to pension  benefits,  the Company and some of its subsidiaries  (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 six months ended June 30 are:

<TABLE>
<S>                          <C>
     Three Months Ended June 30,                                                  Other Postretirement
                                                         Pension Benefits                Benefits
                                                      ---------------------    ------------------------
     (in millions)                                         2005       2004           2005         2004
                                                      ---------------------    ------------------------
     Service cost                                         $   6      $   5          $   1        $   1
     Interest cost                                           13         12              4            4
     Expected return on plan assets                         (19)       (18)             -            -
     Net amortization                                         -          1              1            1
                                                      ---------------------    ------------------------
     Net cost recognized by Florida Progress              $   -      $   -          $   6        $   6
                                                      ---------------------    ------------------------
     Net cost/(benefit) recognized by PEF                 $  (1)     $  (1)         $   5        $   6
                                                      =====================    ========================

     Six Months Ended June 30,                                                   Other Postretirement
                                                        Pension Benefits               Benefits
                                                      ---------------------    -----------------------
     (in millions)                                         2005       2004           2005         2004
                                                      ---------------------    -----------------------
     Service cost                                         $  12      $  11          $   2        $   3
     Interest cost                                           25         23              7            8
     Expected return on plan assets                         (38)       (36)             -            -
     Net amortization                                         -          1              2            2
                                                      ---------------------    -----------------------
     Net cost/(benefit) recognized by Florida
        Progress                                          $  (1)     $  (1)         $  11        $  13
                                                      ---------------------    -----------------------
     Net cost/(benefit) recognized by PEF                 $  (2)     $  (2)         $  11        $  12
                                                      =====================    =======================
</TABLE>

     In  addition,  in the second  quarter of 2005 the Company and PEF  recorded
     costs for special  termination  benefits related to the voluntary  enhanced
     retirement  program  (see Note 10) of  approximately  $86  million  and $83
     million,  respectively,  for  pension  benefits  and $7  million  for other
     postretirement  benefits.  For the Company, these charges resulted in a $49
     million decrease in prepaid pension cost, which is included in other assets
     and  deferred  debits,  and a $44  million  increase  in  pension  and OPEB
     liabilities,  which are included in other  liabilities and deferred credits

                                       18
<PAGE>

     on the  Consolidated  Balance Sheets.  For PEF, these charges resulted in a
     $47 million  decrease in prepaid pension cost and a $43 million increase in
     pension and OPEB  liabilities,  which are included in other liabilities and
     deferred credits on the Balance Sheets.

9.   RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS

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

     A. Commodity Derivatives

     GENERAL

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

     ECONOMIC DERIVATIVES

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

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

     CASH FLOW HEDGES

     The Company's  nonregulated  subsidiaries  designate a portion of commodity
     derivative  instruments  as cash  flow  hedges  under  SFAS  No.  133.  The
     objective for holding these instruments is to hedge exposure to market risk
     associated with  fluctuations in the price of natural gas for the Company's
     forecasted sales. In the normal course of business,  Progress Fuels through
     an affiliate,  Progress Ventures,  Inc. (PVI), enters natural gas cash flow
     hedging  instruments,  which PVI  offsets  with third  party  transactions.
     Progress Fuels accounts for such contracts as if it were  transacted with a
     third party and records the contract using mark-to-market accounting. As of
     June 30, 2005, Progress Fuels is hedging exposures to the price variability
     of natural gas through December 2006.

     The total fair value of these  instruments  as of June 30,  2005,  was a $2
     million asset position and a $24 million liability position. The total fair
     value of these  instruments  as of  December  31,  2004,  was a $9  million
     liability  position.  The ineffective portion of commodity cash flow hedges
     was not  material  for the three and six months  ending  June 30,  2005 and
     2004.  As of June 30, 2005,  there were $14 million of  after-tax  deferred
     losses in accumulated other comprehensive  income (OCI) of which $9 million
     is 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.

                                       19
<PAGE>

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

     The  Company  and PEF  manage  their  interest  rate  exposures  in part by
     maintaining  variable-rate and fixed rate-exposures  within defined limits.
     In  addition,  the  Company  and PEF also enter into  financial  derivative
     instruments,  including,  but not limited to,  interest rate swaps and lock
     agreements to manage and mitigate interest rate risk exposure.

     The Company and PEF use cash flow hedging  strategies to reduce exposure to
     changes in cash flow due to fluctuating interest rates. The Company and PEF
     held no interest rate cash flow hedges as of June 30, 2005 and December 31,
     2004.

     The Company and PEF use fair value hedging strategies to reduce exposure to
     changes in fair value due to interest rate changes. As of June 30, 2005 and
     December 31, 2004, the Company and PEF had no open interest rate fair value
     hedges.

10.  SEVERANCE COSTS

     On February 28, 2005,  as part of a previously  announced  cost  management
     initiative,  Progress  Energy approved a workforce  restructuring  which is
     expected to be completed in September  2005.  In addition to the  workforce
     restructuring, the cost management initiative included a voluntary enhanced
     retirement  program.  In  connection  with  this  initiative,  the  Company
     incurred  approximately  $113 million of pre-tax  charges for severance and
     postretirement  benefits  during the six months  ended  June 30,  2005,  as
     described below. Of this amount, $107 million was recorded by PEF.

     The Company  recorded  $15 million of  severance  expense  during the first
     quarter of 2005 for the workforce  restructuring  and  implementation of an
     automated  meter reading  initiative  at PEF. The  workforce  restructuring
     expense was  computed  based on the  approximate  number of positions to be
     eliminated.  This amount  included  approximately  $4 million of  severance
     costs allocated from Progress  Energy Service  Company  (PESC).  During the
     second  quarter  of  2005,  692 of the  Company's  employees  eligible  for
     participation  in the  voluntary  enhanced  retirement  program  elected to
     participate,  including  680 PEF  employees.  Consequently,  in the  second
     quarter of 2005, the Company decreased its estimated  severance costs by $6
     million due to the impact of the employees  electing  participation  in the
     voluntary enhanced retirement program.  This amount included  approximately
     $2 million of decreased  severance costs allocated from PESC. The severance
     expenses  are  primarily  included  in  O&M  expense  on  the  Consolidated
     Statements of Income.

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

     -------------------------------------------------------
       (in millions)                          FPC       PEF
     -------------------------------------------------------
       Balance as of January 1, 2005          $ 1       $ -
       Severance costs accrued                 11        10
       Adjustments                             (4)       (4)
       Payments                                (1)        -
     -------------------------------------------------------
       Balance as of June 30, 2005            $ 7       $ 6
     -------------------------------------------------------

     The  Company  recorded a $93 million  charge in the second  quarter of 2005
     related to postretirement  benefits that will be paid over time to eligible
     employees who elected to participate in the voluntary  enhanced  retirement
     program (see Note 8). In addition,  the Company recorded  approximately $10
     million  of  charges  for  postretirement  benefits  and  early  retirement
     incentives allocated from PESC.

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

                                       20
<PAGE>

11.  FINANCIAL INFORMATION BY BUSINESS SEGMENT

     The Company's  principal  business segment is PEF, a utility engaged in the
     generation, transmission, distribution and sale of electricity primarily in
     Florida.  The other reportable business segments are Progress Fuels' Energy
     & Related  Services  and  Synthetic  Fuels.  The Energy & Related  Services
     segment includes coal operations,  natural gas production and sales,  river
     terminal  services and off-shore  marine  transportation.  Synthetic Fuels'
     operations  include the production and sale of coal-based  solid  synthetic
     fuel as  defined  under the  Internal  Revenue  Code and the  operation  of
     synthetic  fuel  facilities  for  outside  parties.  See  Note 14 for  more
     information.   The  Other   category   consists   primarily   of   Progress
     Telecommunications Corp (PTC), the Company's telecommunications subsidiary,
     and  the  holding  company,  Florida  Progress  Corporation.   PTC  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.

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

     The Company's  segments are based on  differences in products and services,
     and therefore no additional  disclosures  are presented.  All  intersegment
     transactions  are at cost except for coal sales from the Energy and Related
     Services  segment to PEF. The price  Progress Fuels charges PEF is based on
     market rates for coal  procurement.  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%. In accordance  with SFAS No. 71, profits on  intercompany
     sales between Energy and Related Services and PEF are not eliminated if the
     sales price is  reasonable  and the future  recovery of sales price through
     the ratemaking  process is probable.  The profits for the periods presented
     were not  significant.  No  single  customer  accounted  for 10% or more of
     unaffiliated revenues.

     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 from continuing operations.

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
     -----------------------------------------------------------------------------------------------------------
     (in millions)                                      Energy and
                                               PEF        Related       Synthetic       Other     Consolidated
                                                         Services         Fuels
     -----------------------------------------------------------------------------------------------------------
     Three Months Ended June 30, 2005:
       Revenues                              $   908       $ 226          $ 182         $  17       $ 1,333
       Intersegment  revenues                      -         287              -          (287)            -
       Total revenues                            908         513            182          (270)        1,333
       Postretirement and Severance Charges       93           4              -             -            97
       Segment profit (loss)                 $    10       $  12          $  13         $ (34)      $     1
     -----------------------------------------------------------------------------------------------------------
                                                        Energy and
     (in millions)                             PEF        Related       Synthetic       Other     Consolidated
                                                         Services         Fuels
     -----------------------------------------------------------------------------------------------------------
     Three Months Ended June 30, 2004:
       Revenues                              $   860       $ 212          $ 121         $  17       $ 1,210
       Intersegment  revenues                      -         207              2          (209)            -
       Total revenues                            860         419            123          (192)        1,210
       Postretirement and Severance Charges        -           -              -             -             -
       Segment profit (loss)                 $    84       $  17          $  21         $   7       $   129
     -----------------------------------------------------------------------------------------------------------


                                       21
<PAGE>

     -----------------------------------------------------------------------------------------------------------
     (in millions)                                      Energy and
                                               PEF        Related       Synthetic       Other     Consolidated
                                                         Services         Fuels
     -----------------------------------------------------------------------------------------------------------
     Six Months Ended June 30, 2005:
       Revenues                              $ 1,756       $ 409          $ 348         $  35       $ 2,548
       Intersegment  revenues                      -         547              -          (547)            -
       Total revenues                          1,756         956            348          (512)        2,548
       Postretirement and Severance Charges      107           6              -             -           113
       Segment profit (loss)                 $    53       $  23          $  13         $ (43)      $    46
     -----------------------------------------------------------------------------------------------------------
                                                        Energy and
     (in millions)                             PEF        Related       Synthetic       Other     Consolidated
                                                         Services         Fuels
     -----------------------------------------------------------------------------------------------------------
     Six Months Ended June 30, 2004:
       Revenues                              $ 1,644       $ 347          $ 257         $  31       $ 2,279
       Intersegment  revenues                      -         444              6          (450)            -
       Total revenues                          1,644         791            263          (419)        2,279
       Postretirement and Severance Charges        1           -              -            -              1
       Segment profit (loss)                 $   133       $  27          $  47         $ (31)      $   176
     -----------------------------------------------------------------------------------------------------------
</TABLE>

12.  OTHER INCOME AND OTHER EXPENSE

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

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                          Three Months Ended        Six Months Ended
    (in millions)                                               June 30                 June 30
                                                          --------------------     -------------------
                                                             2005        2004        2005        2004
                                                          --------    --------     -------     -------
    Other income
    Nonregulated energy and delivery services income            4           4           8           7
    Gain on sale of distribution assets (see Note 5)           25           -          25           -
    AFUDC equity                                                4           1           7           2
    Other                                                       -           -           2           2
                                                          --------    --------     -------     -------
        Total other income - PEF                           $   33       $   5       $  42       $  11
    Other income - Florida Progress                             -           1           3           2
                                                          --------    --------     -------     -------
        Total other income - PEF and Florida Progress      $   33       $   6       $  45       $  13
                                                          --------    --------     -------     -------

    Other expense
    Nonregulated energy and delivery services expenses     $    3       $   3       $   6       $   5
    Donations                                                   3           1           6           5
    FERC Audit Settlement                                       3           -           3           -
    Other                                                       -           1           -           2
                                                          --------    --------     -------     -------
       Total other expense - PEF                           $    9       $   5       $  15       $  12
    Loss from equity investments                                4           4          10           7
    Other expense - Florida Progress                            2           -           3           1
                                                          --------    --------     -------     -------
       Total other expense - PEF and Florida Progress      $   15       $   9       $  28       $  20
                                                          --------    --------     -------     -------
    Other, net                                             $   18       $  (3)      $  17       $  (7)
                                                          ========    ========     =======     =======
</TABLE>

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

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

                                       22
<PAGE>




13.  ENVIRONMENTAL MATTERS

     The Company and PEF are  subject to  federal,  state and local  regulations
     addressing hazardous and solid waste management,  air and water quality and
     other  environmental  matters.  See Note 20 of the Company's and PEF's 2004
     Annual Report on Form 10-K for a more  detailed,  historical  discussion of
     these federal, state, and local regulations.

     HAZARDOUS AND SOLID WASTE MANAGEMENT

     The provisions of the Comprehensive  Environmental  Response,  Compensation
     and  Liability  Act of 1980,  as amended,  authorize the EPA to require the
     cleanup of hazardous waste sites.  This statute imposes  retroactive  joint
     and several liabilities. Some states, including Florida, have similar types
     of legislation. The Company and PEF are periodically notified by regulators
     such as the  EPA  and  various  state  agencies  of  their  involvement  or
     potential  involvement  in sites  that  may  require  investigation  and/or
     remediation.  The  Company  and PEF are also  currently  in the  process of
     assessing potential costs and exposures at other  environmentally  impaired
     sites.  For all 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.

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

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

     PEF

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

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

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

                                       23
<PAGE>

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

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

     Florida Progress Corporation

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

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

     Progress Rail

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

     AIR QUALITY

     The Company and PEF are subject to various  current and  proposed  federal,
     state, and local environmental  compliance laws and regulations,  which may
     result  in  increased  planned  capital   expenditures  and  operating  and
     maintenance  costs.  Significant  updates to these laws and regulations and
     related  impacts  to the  Company  and PEF since  December  31,  2004,  are
     discussed  below.  Additionally,  Congress is considering  legislation that
     would require  reductions in air emissions of NOx, SO2,  carbon dioxide and
     mercury.  Some of these  proposals  establish  nationwide caps and emission
     rates  over an  extended  period  of time.  This  national  multi-pollutant
     approach to air pollution control could involve  significant  capital costs
     that could be material to the  Company's and PEF's  consolidated  financial
     position  or results of  operations.  However,  the  Company and PEF cannot
     predict the outcome of the matter.

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

                                       24
<PAGE>

     On March 10,  2005,  the EPA issued  the final  Clean Air  Interstate  Rule
     (CAIR).  The EPA's rule  requires  28 states,  including  Florida,  and the
     District of  Columbia,  to reduce NOx and SO2  emissions in order to attain
     state NOx and SO2 emissions levels.  Installation of additional air quality
     controls is likely to be needed to meet the CAIR requirements.  The Company
     and  PEF  preliminarily   estimate   compliance  costs  for  PEF  could  be
     approximately  $1.0 billion  over ten years.  PEF has joined a coalition of
     Florida  utilities  that has filed a  challenge  to CAIR as it  applies  to
     Florida.  A  petition  for  reconsideration  and  stay and a  petition  for
     judicial  review of CAIR were filed on July 11,  2005.  The Company and PEF
     cannot predict the outcome of this matter.

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

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

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

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

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

     WATER QUALITY

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

     Based on changes to the estimated time frame of expenditures since December
     31,  2004,   the  Company  has  revised  the  estimated   time  period  for
     expenditures  to meet Section 316(b)  requirements  of the Clean Water Act.
     PEF  currently   estimates  that  from  2005  through  2010  the  range  of
     expenditures will be approximately $65 million to $85 million.

                                       25
<PAGE>

     OTHER ENVIRONMENTAL MATTERS

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

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

14.  COMMITMENTS AND CONTINGENCIES

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

     A. Guarantees

     As a part of normal business,  Florida  Progress and certain  subsidiaries,
     including PEF and Progress Fuels, enter into various  agreements  providing
     financial or performance assurances to third parties, which are outside the
     scope of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
     Requirements for Guarantees,  Including Indirect Guarantees of Indebtedness
     of Others"  (FIN No.  45).  Such  agreements  include  guarantees,  standby
     letters of credit and surety  bonds.  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.  As of June 30, 2005,  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.

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

     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. As of June 30, 2005, the Trust
     had  outstanding  12 million  shares of the  securities  with a liquidation
     value of $300 million.

                                       26
<PAGE>

     B. Insurance

     PEF is a  member  of  Nuclear  Electric  Insurance  Limited  (NEIL),  which
     provides primary and excess  insurance  coverage against property damage to
     members' nuclear generating  facilities.  Under the primary program, PEF is
     insured for $500 million at its nuclear plant,  CR3. In addition to primary
     coverage, NEIL also provides decontamination, premature decommissioning and
     excess property insurance with a limit of $1.75 billion.

     C. Other Commitments

     As discussed in Note 21B of the  Company's  annual  report on Form 10-K for
     the  year  ended   December  31,  2004,  the  Company  has  certain  future
     commitments  related  to four  synthetic  fuel  facilities  purchased  that
     provide for contingent payments (royalties).  The Company has exercised its
     right in the  related  agreements  to  escrow  those  payments  if  certain
     conditions in the agreements were met. The Company  previously  accrued and
     retained 2004 and 2003 royalty  payments of  approximately  $20 million and
     $22 million, respectively. In May 2005, these funds were placed into escrow
     upon establishment of the necessary escrow accounts.

     On May  15,  2005,  the  original  owners  of the  Earthco  synthetic  fuel
     facilities  filed suit in New York state court alleging  breach of contract
     against the Progress  Fuels  Corporation  subsidiaries  that  purchased the
     Earthco facilities (Progress Fuels subsidiaries). The plaintiffs also named
     Progress  Energy,  Inc. as a defendant.  The plaintiffs'  complaint is that
     periodic  payments  otherwise due to them under the sales  arrangement with
     the Progress Fuels subsidiaries are, contrary to the sales agreement, being
     escrowed  pending  the  outcome  of the  ongoing  IRS audit of the  Earthco
     facilities.  The  Progress  Fuels  subsidiaries  believe  that the parties'
     agreements  allow for the  payments  to be  escrowed in such event and also
     allow  for  the use of such  escrowed  amounts  to  satisfy  any  potential
     disallowance  of tax credits  that arises out of such an event.  Currently,
     the  escrowed  amount in question  attributable  to the Earthco  facilities
     currently  owned by Florida  Progress  subsidiaries  is $40 million,  which
     reflects  periodic  payments  that would  have been paid to the  plaintiffs
     beginning  April 30, 2003 through July 31, 2005.  This amount will increase
     as future  periodic  payments are made to the escrow which would  otherwise
     have been payable to the  plaintiffs.  The Company and the  Progress  Fuels
     subsidiaries intend to vigorously defend their actions,  but cannot predict
     the outcome of this matter.

     D. Other Contingencies

     1. Franchise Litigation

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

     Arbitration  in the  case by the  City of  Winter  Park  was  completed  in
     February 2003. That  arbitration  panel issued an award in May 2003 setting
     the value of PEF's  distribution  system within the City (13,000 customers)
     at approximately  $32 million,  not including  separation and reintegration
     and construction work in progress,  which could add several million dollars
     to the award.  The panel also  awarded  PEF  approximately  $11  million in
     stranded  costs,  which,  according to the award,  decrease  over time.  In
     September 2003, Winter Park voters passed a referendum that would authorize
     the City to issue bonds of up to approximately $50 million to acquire PEF's
     electric  distribution system. On April 26, 2004, the City Commission voted
     to proceed with the  acquisition.  The City sought and  received  wholesale
     power supply bids and on June 24, 2004,  executed a wholesale  power supply
     contract with PEF with a five-year  term from the date service begins and a
     renewal  option.  On May 12, 2004,  the City  solicited bids to operate and
     maintain the distribution system and awarded a contract in January 2005. On
     February 10, 2005,  PEF filed a petition  with the Florida  Public  Service
     Commission  (FPSC) to relieve the Company of its  statutory  obligation  to

                                       27
<PAGE>

     serve  customers  in Winter Park on June 1, 2005,  or at such time when the
     City is able to provide retail  service.  On April 19, 2005, the FPSC voted
     to  approve  PEF's  petition.  On June 1,  2005,  the City  acquired  PEF's
     electric  distribution  system that serves the City for  approximately  $42
     million.  PEF  transferred the  distribution  system to the City on June 1,
     2005 and recognized a pre-tax gain of $25 million on the transaction, which
     is included in other,  net on the Consolidated  Statements of Income.  This
     amount is subject  to true-up  pending  accumulation  of the final  capital
     expenditures since arbitration. PEF also recorded a regulatory liability of
     $8 million for stranded cost  revenues  which will be amortized to revenues
     over the next six years in accordance  with the  provisions of the transfer
     agreement with the City.

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

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

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

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

     2. DOE Litigation

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

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

     The DOE and the PEF parties have agreed to a stay of the lawsuit, including
     discovery.  The parties agreed to, and the trial court  entered,  a stay of
     proceedings,  in  order  to  allow  for  possible  efficiencies  due to the
     resolution of legal and factual issues in  previously-filed  cases in which
     similar  claims are being  pursued by other  plaintiffs.  These  issues may
     include,  among others,  so-called "rate issues," or the minimum  mandatory
     schedule for the  acceptance of SNF and high level waste (HLW) by which the
     Government  was  contractually  obligated to accept  contract  holders' SNF
     and/or HLW, and issues regarding recovery of damages under a partial breach
     of  contract  theory  that will be  alleged to occur in the  future.  These
     issues are  expected  to be  presented  in the  trials or appeals  that are

                                       28
<PAGE>

     scheduled to occur during 2005.  Resolution  of these issues in other cases
     could  facilitate  agreements  by the parties in the PEF  lawsuit,  or at a
     minimum,  inform the Court of  decisions  reached  by other  courts if they
     remain  contested and require  resolution  in this case. In July 2005,  the
     parties  jointly  requested a continuance of the stay through  December 15,
     2005, which the trial court generated.

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

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

     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.  A  magistrate  judge  has
     recommended  that the summary  judgment motion be denied.  Florida Progress
     has  objected  to this  recommendation.  A final  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.

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 coal-based solid 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,

                                       29
<PAGE>

     including a requirement  that the synthetic fuel differs  significantly  in
     chemical  composition from the coal used to produce such synthetic fuel and
     that the fuel  was  produced  from a  facility  that was  placed-in-service
     before July 1, 1998.  The amount of Section 29 tax credits that the Company
     is  allowed to claim in any  calendar  year is limited by the amount of the
     Company's  regular federal income tax liability.  Synthetic fuel tax credit
     amounts  allowed but not  utilized  are  carried  forward  indefinitely  as
     deferred   alternative   minimum  tax  credits.   All   majority-owned  and
     minority-owned entities received private letter rulings (PLRs) from the IRS
     with respect to their synthetic fuel  operations.  However,  these PLR's do
     not  address the  placed-in-service  date  determinations.  The PLRs do not
     limit the production on which synthetic fuel credits may be claimed.  Total
     Section 29 credits  generated to date are  approximately  $983 million,  of
     which $436  million  have been used to offset  regular  federal  income tax
     liability  and  $529  million  are  being   carried   forward  as  deferred
     alternative  minimum tax credits.  Also $18 million has not been recognized
     due to the decrease in tax  liability  from the 2004  hurricane  damage and
     loss on sale of Progress  Rail.  The current  Section 29 tax credit program
     expires at the end of 2007.

     The  sale of  Progress  Rail in 2005  resulted  in a  capital  loss for tax
     purposes.  Capital losses that are not offset with capital gains  generated
     in 2005 will be  carried  back to reduce  the  regular  federal  income tax
     liability  in  2004.   The  estimated   impact  of  the  sale  resulted  in
     approximately  $11  million in tax  credits no longer  being  realized  and
     reflected as a deferred tax asset.

     IRS PROCEEDINGS

     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 in lieu of the ordinary IRS audit process.  The PFA
     program allows taxpayers to voluntarily  accelerate the IRS exam process in
     order to seek resolution of specific issues.

     In February 2004,  subsidiaries of the Company  finalized  execution of the
     Colona Closing  Agreement with the IRS  concerning  their Colona  synthetic
     fuel facilities.  The 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 PFA program with respect to Colona.

     In July 2004,  Progress  Energy was  notified  that the 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 IRS
     auditors'  position,  the IRS has decided to exercise its right to withdraw
     from the PFA program with Progress  Energy.  With the IRS's withdrawal from
     the PFA program,  the review of the Company's Earthco facilities is back on
     the normal procedural audit path of the Company's tax returns.

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

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

     Through June 30, 2005, based on its ownership  percentage,  the Company has
     used or carried  forward  $595  million  of tax  credits  generated  by its
     Earthco facilities. If these credits were disallowed, Florida Progress' one
     time  exposure  for  cash tax  payments  would  be $67  million  (excluding
     interest),  and  earnings  and equity  would be  reduced  by $595  million,
     excluding interest.  These amounts have not been reduced for the use of any
     escrowed  amounts to satisfy a potential  disallowance of these tax credits
     (see Note 14C).

                                       30
<PAGE>

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

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

     PROPOSED ACCOUNTING RULES FOR UNCERTAIN TAX POSITIONS

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

     As  discussed  above,  the IRS field  auditors  have  recommended  that the
     Section 29 tax  credits  generated  by the  Company's  Earthco  facilities,
     totaling $595 million through June 30, 2005, be disallowed. The Company has
     not yet determined how the proposed interpretation would impact its various
     income tax  positions,  including  the status of the Earthco  tax  credits.
     Depending  on the  provisions  of the FASB's final  interpretation  and the
     Company's facts and circumstances that exist at the date of implementation,
     including the Company's  assessment of the  probability  of sustaining  any
     currently  recorded and future tax  benefits,  the proposed  interpretation
     could have a material  adverse impact on the Company's  financial  position
     and results of operations.

     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 provided information in connection with this investigation.
     The Company cannot predict the outcome of this matter.

     IMPACT OF CRUDE OIL PRICES

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

                                       31
<PAGE>

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

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

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

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

     The Company  cannot predict with any certainty the Annual Average Price for
     2005 or beyond.  Therefore, it cannot predict whether the price of oil will
     have a material  effect on 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  results of operations  and synthetic
     fuel production plans.

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

     SALE OF PARTNERSHIP INTEREST

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

                                       32
<PAGE>

     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 and disclosures
     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  financial  position or
     results of operation.

                                       33
<PAGE>

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

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

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  and  the  timing  of
maintenance on electric generating units, among other factors.

This discussion  should be read in conjunction with the  accompanying  financial
statements  found elsewhere in this report and in conjunction with the 2004 Form
10-K. See Note 13 for a discussion of environmental matters.

OPERATING RESULTS

The Company's  segments  contributed  segment  profits or losses from continuing
operations for the three and six months ended June 30, 2005 and 2004 as follows:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
--------------------------------------------------------------------------------------------
(in millions)                        Three Months Ended June 30    Six Months Ended June 30
--------------------------------------------------------------------------------------------
Business Segment                           2005       2004          2005        2004
--------------------------------------------------------------------------------------------
PEF                                        $ 10      $  84          $ 53       $ 133
Energy and Related Services                  12         17            23          27
Synthetic Fuels                              13         21            13          47
Other                                       (34)         7           (43)        (31)
                                  ----------------------------------------------------------
    Segment profit/(loss)                  $  1      $ 129          $ 46       $ 176
--------------------------------------------------------------------------------------------
</TABLE>

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

COST MANAGEMENT INITIATIVE

On  February  28,  2005,  as  part of a  previously  announced  cost  management
initiative, Progress Energy approved a workforce restructuring which is expected
to be completed in September  2005. In addition to the workforce  restructuring,
the cost management initiative included a voluntary enhanced retirement program.
In connection with this  initiative,  the Company  incurred  approximately  $113
million of pre-tax charges for severance and postretirement  benefits during the
six months ended June 30, 2005, as described below. Of this amount, $107 million
was recorded by PEF.

The Company  recorded $15 million of severance  expense during the first quarter
of 2005 for the workforce restructuring and implementation of an automated meter
reading  initiative  at PEF. The  workforce  restructuring  expense was computed
based on the  approximate  number of  positions  to be  eliminated.  This amount
included  approximately  $4 million of severance  costs  allocated from Progress
Energy  Service  Company  (PESC).  During the second quarter of 2005, 692 of the
Company's  employees  eligible  for  participation  in  the  voluntary  enhanced
retirement   plan  elected  to   participate,   including  680  PEF   employees.
Consequently, in the second quarter of 2005, the Company decreased its estimated
severance  costs by $6  million  due to the  impact  of the  employees  electing
participation  in the voluntary  enhanced  retirement plan. This amount included
approximately  $2 million of decreased  severance costs allocated from PESC. The
severance  expenses are  primarily  included in O&M expense on the  Consolidated
Statements of Income and will be paid over time.

The Company  recorded a $93 million charge in the second quarter of 2005 related
to postretirement benefits that will be paid over time to eligible employees who
elected to participate in the voluntary  enhanced  retirement  program (see Note
8).  In   addition,   the  Company   recorded   approximately   $10  million  of
postretirement benefits and early retirement incentives allocated from PESC.

                                       34
<PAGE>

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

PROGRESS ENERGY FLORIDA

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

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

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

Revenues

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

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


                                       35
<PAGE>

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

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

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

Expenses

Fuel and Purchased Power

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

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

Operations and Maintenance (O&M)

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

                                       36
<PAGE>

Other income, net

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

Interest charges, net

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

Income tax expense

GAAP  requires  companies  to apply a  levelized  effective  tax rate to interim
periods that is consistent with the estimated annual effective tax rate.  Income
tax expense was  increased  by $8 million  for the three  months  ended June 30,
2005, in order to maintain an effective tax rate  consistent  with the estimated
annual rate. Fluctuations in estimated annual earnings and the timing of various
permanent  and temporary  deductions  can also cause swings in the effective tax
rate for interim periods. Therefore, this adjustment will vary each quarter, but
will have no effect on net income for the year.  The  remaining  fluctuation  in
income tax expense is attributable to reduced earnings compared to prior period.

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

Revenues

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

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


                                       37
<PAGE>

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

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

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

Expenses

Fuel and Purchased Power

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

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

Operations and Maintenance (O&M)

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

                                       38
<PAGE>

Other income, net

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

Interest charges, net

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

Income tax expense

GAAP  requires  companies  to apply a  levelized  effective  tax rate to interim
periods that is consistent with the estimated annual effective tax rate.  Income
tax expense was  increased by $8 million for the six months ended June 30, 2005,
in order to maintain an effective tax rate consistent with the estimated  annual
rate.  Fluctuations  in  estimated  annual  earnings  and the  timing of various
permanent  and temporary  deductions  can also cause swings in the effective tax
rate for interim periods. Therefore, this adjustment will vary each quarter, but
will have no effect on net income for the year.  The  remaining  fluctuation  in
income tax expense is attributable to reduced earnings compared to prior year.

DIVERSIFIED BUSINESSES

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

ENERGY AND RELATED SERVICES

The  Energy  and  Related  Services'  segment  operations  include  natural  gas
production,  coal extraction and terminal  operations.  The following summarizes
Energy and Related  Services' segment profits for the three and six months ended
June 30, 2005 and 2004:

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

Natural Gas Operations

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

                                       39
<PAGE>

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

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

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

Coal Fuel and Other Operations

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

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

The Company is exploring strategic alternatives regarding the Energy and Related
Services' coal mining business,  which could include  divesting these assets. As
of June 30, 2005,  the carrying  value of  long-lived  assets of the coal mining
business was $65 million.  The Company cannot  currently  predict the outcome of
this matter.

SYNTHETIC FUEL

The synthetic fuel operations  generated  segment profits of $13 million and $21
million for the three months  ended June 30, 2005 and 2004,  and $13 million and
$47 million for the six months ended June 30, 2005 and 2004,  respectively.  The
production  and sale of  coal-based  solid  synthetic  fuel  generate  operating
losses,  but  qualify  for tax  credits  under  Section  29 of the  Code,  which
typically  more  than  offset  the  effect  of such  losses.  See Note 14 to the
Consolidated Interim Financial Statements.

The operations resulted in the following for the three and six months ended June
30, 2005 and 2004:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
---------------------------------------------------------------------------------------------------
                                           Three Months Ended June 30,   Six Months Ended June 30,
---------------------------------------------------------------------------------------------------
(in millions)                                     2005           2004         2005          2004
---------------------------------------------------------------------------------------------------
Tons sold                                          1.4            1.5          2.5           3.4
---------------------------------------------------------------------------------------------------

Operating losses, excluding tax credits          $ (23)         $ (16)       $ (43)        $ (40)
Tax credits generated, net                          36             37           56            87
---------------------------------------------------------------------------------------------------
    Segment profits                              $  13          $  21        $  13         $  47
---------------------------------------------------------------------------------------------------
</TABLE>

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

                                       40
<PAGE>

Synthetic fuels' earnings for the six months ended June 30, 2005, as compared to
the prior period were  negatively  impacted by lower sales and the forfeiture of
tax credits as a result of the sale of Progress Rail. The decrease in sales year
over year is  primarily  attributable  to an  internal  change in the  quarterly
production schedule in 2005 compared to 2004. The sale of Progress Rail resulted
in a capital loss for tax purposes, therefore $11 million of previously recorded
tax  credits  were  forfeited  during  the  current  year.  See  Note  14 to the
Consolidated Interim Financial Statements for further discussion.

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

OTHER

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

Other segment profits decreased $41 million and $12 million,  respectively,  for
the three and six months ended June 30, 2005 compared to the same periods in the
prior year.  This decrease was due  primarily to the impact of tax  levelization
adjustments  booked  during the  periods.  GAAP  requires  companies  to apply a
levelized  effective  tax rate to interim  periods that is  consistent  with the
estimated  annual  effective  tax rate.  Income tax expense was increased by $31
million for the three months ended June 30, 2005  compared to a reduction in tax
expense of $11 million for the three  months  ended June 30,  2004,  in order to
maintain an effective tax rate  consistent  with the estimated  annual rate. For
the six months ended June 30, 2005 income tax expense was  increased $36 million
compared to an increase of $23 million for the six months  ended June 30,  2004.
The  tax  credits  associated  with  the  Company's  synthetic  fuel  operations
primarily  drive the required  levelization  amount.  Fluctuations  in estimated
annual earnings and tax credits can also cause large swings in the effective tax
rate for interim periods. Therefore, this adjustment will vary each quarter, but
will have no effect on net income for the year.

DISCONTINUED OPERATIONS

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

Rail  discontinued  operations  resulted  in losses of $9 million  for the three
months  ended June 30,  2005  compared  to  profits of $6 million  for the three
months ended June,  2004.  Earnings for 2005 include an adjustment of $9 million
to the  estimated  after-tax  loss  on  the  sale  related  to  working  capital
adjustments and revisions of other operating estimates. Results for 2004 include
three months of operations.  Results for the three months ended June 30,2 005 do
not include any income or loss from  operations  as the sale closed in the first
quarter.   See  discontinued   earnings  summary  included  at  Note  3  to  the
Consolidated Interim Financial Statements.

Rail  discontinued  operations  resulted  in losses of $36  million  for the six
months ended June 30, 2005 compared to profits of $14 million for the six months
ended June 30, 2004.  Earnings for 2005 include an estimated  after-tax  loss on
the sale of $41  million.  Results  for 2004  included  six  months of  earnings
activity compared to only three months in 2005.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows from Operations

The Company's net cash provided by operating activities was $203 million for the
six months  ended June 30,  2005,  compared  to $442  million for the six months
ended June 30, 2004.  The decrease in operating cash flow was due primarily to a
$256 million increase in working capital  requirements at Progress Fuels and PEF
and storm  restoration  expenditures at PEF, as explained below. The increase in
working capital requirements at Progress Fuels is primarily due to a $32 million
reduction in tax liabilities related to the loss on disposal of Rail (see Note 3
of the Notes to Interim Financial  Statements) and $42 million in synthetic fuel
royalty payments (see Note 14C of the Notes to Interim Financial Statements).

                                       41
<PAGE>

PEF's net cash  provided by  operating  activities  was $244 million for the six
months  ended June 30,  2005,  compared to $442 million for the six months ended
June 30, 2004.  The decrease in operating cash flow was due primarily to payment
of  approximately  $63  million  in storm  restoration  expenditures  and a $142
million  increase in working capital  requirements,  largely driven by timing of
settlement of payables to affiliates and differences in estimated tax payments.

Investing Activities

The Company's net cash provided by investing  activities was $25 million for the
six months ended June 30, 2005, compared to cash used in investing activities of
$244 million for the six months  ended June 30, 2004.  The increase is primarily
due to proceeds of  approximately  $405 million  from the sale of Progress  Rail
(See Note 3), partially offset by the purchase of natural gas assets at Progress
Fuels in May 2005 (see Note 4 of the Notes to Interim Financial  Statements) and
nuclear fuel and property additions at PEF, as explained below.

PEF's net cash used in investing  activities was $249 million for the six months
ended June 30, 2005,  compared to $230 million for the six months ended June 30,
2004. The increase in cash used in investing  activities is primarily due to $23
million in additional  capital  expenditures in 2005,  primarily  related to the
Hines 4 plant,  and $34 million in nuclear fuel  additions  related to a planned
outage later in 2005.  These  increases were partially  offset by $42 million in
proceeds  from the sale of  Winter  Park  assets  (see  Note 14D of the Notes to
Interim Financial Statements).

Financing Activities

In January 2005, PEF used proceeds from the issuance of commercial  paper to pay
off $170 million of revolving  credit  agreement (RCA) loans.  PEF  subsequently
used money pool  borrowings to reduce  commercial  paper.  In February 2005, PEF
used proceeds from money pool borrowings to pay off $55 million of RCA loans.

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

On May 16, 2005, PEF issued $300 million of First Mortgage  Bonds,  4.50% Series
due 2010.  The net  proceeds  from the sale of the bonds were used to reduce the
outstanding balance of commercial paper.

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

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

Future Liquidity and Capital Resources

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

On April 29, 2005, PEF made its initial filing with the FPSC seeking annual base
revenue  increase of $206 million (See Note 5). Hearings for this proceeding are
expected to occur during the third quarter of 2005. A final ruling from the FPSC
is expected in December 2005 with new rates in effect January 2006.

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

                                       42
<PAGE>

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


OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

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

Guarantees

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

Market Risk and Derivatives

The Company and PEF, are exposed to various  risks  related to changes in market
conditions.  The  Company's  and  PEF's  parent,  Progress  Energy,  has a  risk
management  committee  that includes  senior  executives  from various  business
groups.  The risk  management  committee is responsible for  administering  risk
management  policies  and  monitoring  compliance  with  those  policies  by all
subsidiaries.

The Company and PEF manage market risk in accordance with its  established  risk
management  policies,   which  may  include  entering  into  various  derivative
transactions.  The Company and PEF may use a variety of  instruments,  including
swaps,  options and forward  contracts,  to manage  exposure to  fluctuations in
commodity  prices and interest rates. See Note 9 for a discussion of market risk
and derivatives.

Contractual Obligations

As of June 30, 2005, the Company's and PEF's  contractual  cash  obligations and
other commercial  commitments have not changed materially from what was reported
in the 2004 Annual Report on Form 10-K.

NEW ACCOUNTING STANDARDS

See Note 2 to the  Financial  Statements  for a  discussion  of the  anticipated
impact of new accounting standards.


                                       43
<PAGE>

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,  and with the  participation  of its management,  including  Florida
Progress'  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'  Chief
Executive  Officer and Chief  Financial  Officer  concluded  that its disclosure
controls and procedures are effective to ensure that information  required to be
disclosed by Florida Progress  (including its consolidated  subsidiaries) in the
reports that it files or submits under the Exchange Act, is recorded, processed,
summarized  and reported,  within the time periods  specified in the SEC's rules
and forms,  and that such information is accumulated and communicated to Florida
Progress' management,  including the Chief Executive Officer and Chief Financial
Officer,   as  appropriate,   to  allow  timely  decisions   regarding  required
disclosure.

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

Other  than the  above-referenced  item,  there has been no  change  in  Florida
Progress'  internal  control over financial  reporting  during the quarter ended
June  30,  2005,  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,
and with the  participation  of its management,  including PEF's Chief Executive
Officer and Chief Financial  Officer,  of the  effectiveness of PEF's disclosure
controls and procedures  (as defined under the Securities  Exchange Act of 1934)
as of the end of the period covered by this report.  Based upon that evaluation,
PEF's Chief  Executive  Officer and Chief Financial  Officer  concluded that its
disclosure  controls and  procedures  are  effective to ensure that  information
required to be disclosed  by PEF in the reports  that it files or submits  under
the Exchange Act, is recorded,  processed,  summarized and reported,  within the
time periods  specified in the SEC's rules and forms,  and that such information
is  accumulated  and  communicated  to PEF's  management,  including  the  Chief
Executive Officer and Chief Financial Officer,  as appropriate,  to allow timely
decisions regarding required disclosure.

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

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


                                       44
<PAGE>



                           PART II. OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

Legal aspects of certain matters are set forth in Part I, Item 1. See Note 14 to
the Company's Consolidated Interim Financial Statements.

Item 6.  EXHIBITS

(a) Exhibits:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
    Exhibit                                                              Florida Progress        Progress Energy
     Number                          Description                           Corporation            Florida, Inc.
     ------                          -----------                           -----------            -------------

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

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

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

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

     32(b)        Certifications pursuant to Section 906 of the                 X                       X
                  Sarbanes-Oxley Action of 2002 - Chief Financial
                  Officer
</TABLE>



                                       45
<PAGE>

                                   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:  August 5, 2005                   By:  /s/ Geoffrey Chatas
                                             -------------------
                                        Geoffrey Chatas
                                        Executive Vice President and
                                        Chief Financial Officer



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

                                        Controller - Florida Power Corporation




                                       46