The following combined Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is separately filed by Progress Energy, Inc. (Progress Energy), Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. (PEC) and Florida Power Corporation d/b/a Progress Energy Florida, Inc. (PEF). As used in this report, Progress Energy, which includes Progress Energy, Inc. holding company (the Parent) and its regulated and nonregulated subsidiaries on a consolidated basis, is at times referred to as "we," "us" or "our." When discussing Progress Energy's financial information, it necessarily includes the results of PEC and PEF (collectively, the Utilities). The term "Progress Registrants" refers to each of the three separate registrants: Progress Energy, PEC and PEF. Information contained herein relating to PEC and PEF individually is filed by such company on its own behalf. Neither of the Utilities makes any representation as to information related solely to Progress Energy or the subsidiaries of Progress Energy other than itself.

The following MD&A contains forward-looking statements that involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Please review "Safe Harbor for Forward-Looking Statements" and Item 1A, "Risk Factors," for a discussion of the factors that may impact any such forward-looking statements made herein.

MD&A should be read in conjunction with the Progress Energy Consolidated Financial Statements.

PROGRESS ENERGY

INTRODUCTION

Our reportable business segments are PEC and PEF and their primary operations are the generation, transmission, distribution and sale of electricity in portions of North Carolina and South Carolina and in portions of Florida, respectively. The "Corporate and Other" segment primarily includes the operations of the Parent, Progress Energy Service Company, LLC (PESC) and other miscellaneous nonregulated businesses that do not separately meet the quantitative requirements as a separate reportable business segment.

STRATEGY

We are an integrated energy company primarily focused on the end-use electricity markets. Over the last several years we have reduced our business risk by exiting substantially all of our nonregulated businesses. Our two electric utilities operate in regulated retail utility markets in the southeastern United States and have access to attractive wholesale markets in the eastern United States, which we believe positions us well for long-term growth. Please review "Safe Harbor for Forward-Looking Statements" and Item 1A, "Risk Factors," for a discussion of the factors that may impact any such forward-looking statements made herein. We are focused on the following key priorities:

Consistently excelling in the daily fundamentals of our utility business, including safely and reliably generating and delivering power to our customers

The Utilities have more than 21,000 megawatts (MW) of generation capacity, and their service territories cover approximately 54,000 square miles in the southeastern United States, which has historically been one of the fastest-growing regions of the country. We are focused on safely and reliably serving our customer base. However, like other parts of the country, our service territories and business have been impacted by the current economic recession with corresponding downturns in the housing and consumer credit markets. Our customer growth has slowed significantly. We had a net increase of approximately 24,000 retail customers over the past year compared to a net increase of 51,000 retail customers in 2007. However, we were able to mitigate our weaker than expected 2008 retail revenues with strategies of securing additional wholesale revenues and ongoing cost management. We anticipate 2009 will be another challenging year given the recent financial market disruptions and worsening economic conditions.

Successfully implementing our balanced solution for a secure energy future

Our balanced solution is a comprehensive plan to meet the anticipated demand in the Utilities' service territories and provide a solid basis for slowing and reducing carbon dioxide (CO2) emissions by focusing on energy efficiency, alternative energy and state-of-the-art power generation. First, we are expanding and enhancing our demand-side management (DSM), energy-efficiency and energy conservation programs. Second, we are actively engaged in a variety of alternative energy projects and are evaluating the feasibility of producing electricity from these and other sources. North Carolina's minimum renewable energy portfolio standard begins in 2012. On January 12, 2009, the Florida Public Service Commission (FPSC) approved a draft state renewable portfolio standard rule with a goal of 20 percent renewable energy production by 2020; the rule requires legislative ratification before implementation. Third, we are evaluating new generation and fleet upgrades to meet the anticipated demand at both PEC and PEF toward the end of the next decade. We are evaluating the best new generation options, including advanced design nuclear technology, gas-fired combined cycle and combustion turbines, and modernization of existing coal plants to use clean coal technology. The considerations that will factor into this decision include, but are not limited to, construction costs, fuel diversity, transmission and site availability, environmental impact, the rate impact to customers and our ability to obtain cost-effective financing. Expenditures to achieve our balanced solution should be recoverable under base rates or cost-recovery mechanisms that our state jurisdictions have implemented, or are in the process of implementing. See "Other Matters - Regulatory Environment" and Note 7 for additional information.

We are continuing to pursue new nuclear generation based on expectations of new federal climate policy as well as recognition of the need for new baseload generating capacity and better fuel diversity and energy security. Favorable changes in the regulatory and construction processes have evolved in recent years, including standardized design, detailed design before construction, combined license (COL) to build and operate, streamlined regulatory approval process, annual prudence reviews and cost-recovery mechanisms for preconstruction and financing costs. State regulatory processes are specific to each jurisdiction. While we have not made a final determination on nuclear construction, we have taken steps to keep open the option of building a plant or plants. In 2008, the Utilities each filed a COL application with the Nuclear Regulatory Commission (NRC) for two additional reactors each at Shearon Harris Nuclear Plant (Harris) and at a greenfield site in Levy County, Florida (Levy). During 2008, PEF filed and received orders from the FPSC on its Levy Determination of Need and cost-recovery petitions. Also, PEF filed its site certification for Levy, which has an 18-month review period. In late 2008, PEF entered into an engineering, procurement and construction (EPC) agreement for the two proposed Levy units. The next significant step in the Levy project is to negotiate joint ownership agreements. On February 24, 2009, PEF received the NRC's schedule for review and approval of the COL. PEF is assessing the impact of the NRC schedule on the plans and estimated costs for Levy. Current plans would be for the Levy units to be operational in the 2016 to 2018 timeframe. If PEC proceeds with construction at Harris, a new unit would not be online until at least 2019. See "Other Matters - Nuclear Matters" for additional information.

Maintaining constructive regulatory relations while confronting new energy realities

The Utilities successfully resolved key state regulatory issues in 2008, including retail fuel recovery filings in all jurisdictions. PEC successfully sought to terminate its obligation to recognize accelerated amortization of certain environmental compliance costs in North Carolina and accelerated depreciation of nuclear generating assets in South Carolina. Consequently, PEC will not be required to recognize accelerated expenses totaling $229 million in the North Carolina jurisdiction and $38 million in the South Carolina jurisdiction but will record depreciation over the useful life of the respective assets. As discussed previously, PEF's petitions for the Levy Needs Determination and for $420 million of nuclear cost recovery for the Levy and Crystal River Unit No. 3 Nuclear Plant (CR3) projects were granted by the FPSC. See "Other Matters - Regulatory Environment" and Note 7 for further information.

The Utilities have sought, and will continue to seek, recovery of eligible costs in accordance with the energy policies of their respective jurisdictions. In February 2009, PEF began the process for establishing 2010 base rates by filing notification with the FPSC indicating its intent to initiate a base rate proceeding. This procedural step is required because PEF's current base rate agreement will expire at the end of 2009. In addition, on February 18, 2009, PEF filed a request with the FPSC to decrease customers' bills in 2009 due to a revised fuel forecast and a deferral of a portion of previously approved nuclear preconstruction charges. We cannot predict the outcome of these matters (See "Future Liquidity and Capital Resources - Regulatory Matters and Recovery of Costs" and Note 7C.)

We are subject to significant federal and state regulations regarding air quality, water quality, control of toxic substances and hazardous and solid wastes, and other environmental matters. Federal judicial actions during 2008 vacated mercury emissions regulations and remanded clean air regulations to the United States Environmental Protection Agency (EPA) for modification. Subsequent rule issuances and interpretations, increases in the underlying material, labor and equipment costs, equipment availability, or the unexpected acceleration of compliance dates, among other things, could result in significant increases in our estimated costs to comply and acceleration of some projects. We currently estimate that total future capital expenditures for the Utilities to comply with environmental laws and regulations addressing air and water quality, which are eligible for regulatory recovery through either base rates or cost-recovery clauses, could be in excess of $580 million at PEC and $350 million at PEF through 2018, which corresponds to the latest emission reduction deadline.

In addition, growing state, federal and international attention to global climate change may result in the regulation of CO2 and other greenhouse gases. We are preparing for a carbon-constrained future and are actively engaged in helping shape effective policies to address the issue. While state-level study groups are busy in all three of our jurisdictions, we continue to believe that this issue requires a national policy framework - one that provides certainty and consistency. Reductions in CO2 emissions to the levels specified by some proposals could be materially adverse to our financial position or results of operations if associated costs of control or limitation cannot be recovered from ratepayers. The cost impact of legislation or regulation to address global climate change would depend on the specific legislation or regulation enacted and cannot be determined at this time. See "Other Matters - Environmental Matters" for additional information.

The American Recovery and Reinvestment Act signed into law in February 2009 contains provisions promoting energy efficiency and renewable energy, including $11 billion for Smart Grid-related technologies, $6.3 billion for energy-efficiency and conservation grants and $2 billion in tax credits for the purchase of plug-in electric vehicles. Also, the Obama administration has announced a goal of sparking a new energy revolution by stimulating transmission and promoting renewable resources while also pricing greenhouse gas emissions and setting a federal requirement for renewable energy. We are currently reviewing the impact the new legislation might have on our operations. The impact of the new legislation and regulation resulting from other federal initiatives cannot be determined at this time.

Achieving our long-term financial objectives and sustaining financial strength and flexibility during anticipated nuclear construction

We have several key financial objectives, the first of which is to achieve sustainable earnings growth. In addition, we seek to continue our track record of dividend growth, as we have increased our dividend for 21 consecutive years, and 33 of the last 34 years. We will strive to preserve our investment grade credit ratings so that we are positioned to accommodate the significant future demand expected at the Utilities.

Our ability to meet these financial objectives is largely dependent on the earnings and cash flows of the Utilities. The Utilities' earnings and operating cash flows are heavily influenced by weather, the economy, demand for electricity related to customer growth, actions of regulatory agencies, cost control, and the timing of recovery of fuel costs and storm damage. The Utilities contributed $914 million of our segment profit and generated substantially all of our consolidated cash flow from operations in 2008. Partially offsetting the Utilities' segment profit contribution were losses of $141 million recorded at Corporate and Other, primarily related to interest expense on holding company debt.

Ongoing cost management initiatives have enabled us to offset some of the impact of the slowing economy and high cost pressures. The Utilities are allowed to recover prudently incurred fuel costs through the fuel portion of our rates, which are adjusted annually in each state. We attempt to mitigate rising fuel prices through our diverse generation mix, staggered fuel contracts and hedging, and supplier and transportation diversity. Mitigating the impact of rising fuel prices benefits our cash flows, interest expense and leverage. Additionally, recovery of higher fuel costs negatively impacts customer satisfaction.

In addition to the significant capital investment required for complying with environmental regulations and meeting anticipated load growth, the Utilities' operations are inherently capital intensive. We have addressed the challenges presented by current financial market conditions and will continue to monitor the credit markets to maintain an

appropriate level of liquidity. Despite the tightened credit market that began with the extreme market turmoil in the third quarter of 2008, we have been able to issue additional equity and short- and long-term debt. See "Liquidity and Capital Resources."

We expect total capital expenditures before potential nuclear construction to be approximately $2.2 billion, $2.1 billion and $2.0 billion for 2009, 2010 and 2011, respectively. If we determine to proceed with the construction of a new nuclear facility, we expect that our potential nuclear construction expenditures will range from $260 million to $560 million in 2009, $460 million to $660 million in 2010 and $750 million to $950 million in 2011. Forecasted potential nuclear construction expenditures are dependent upon, and may vary significantly based upon, the decision to build, regulatory approval schedules, timing and escalation of project costs, and the percentage of joint ownership. PEF has utilized, and anticipates continuing to utilize, nuclear cost-recovery mechanisms for nuclear preconstruction and construction cost financing available under Florida law. Subject to regulatory approval, capital investments that support load growth and comply with environmental regulations increase the Utilities' "rate base" or investment in utility plant, upon which additional return can be realized, and create the basis for long-term earnings growth in the Utilities.

Our now discontinued synthetic fuels operations historically produced significant net earnings driven by tax credits for synthetic fuels production in accordance with the Section 29/45K tax credit program (Section 29/45K), which expired at the end of 2007. However, the associated cash flow benefits are realized over time when deferred Section 29/45K tax credits generated, but not yet utilized, are ultimately utilized. At December 31, 2008, the amount of these deferred tax credits carried forward was $799 million. See "Other Matters - Synthetic Fuels Tax Credits" below and Note 22D for additional information on our synthetic fuels tax credits and other matters.

The Progress Registrants are subject to various risks. For a discussion of their current material risks, see Item 1A, "Risk Factors."

RESULTS OF OPERATIONS

In this section, earnings and the factors affecting earnings are discussed. The discussion begins with a summarized overview of our consolidated earnings, which is followed by a more detailed discussion and analysis by business segment.

OVERVIEW

FOR 2008 AS COMPARED TO 2007 AND 2007 AS COMPARED TO 2006

For the year ended December 31, 2008, our net income was $830 million, or $3.19 per share, compared to $504 million, or $1.97 per share, for the same period in 2007. For the year ended December 31, 2008, our income from continuing operations was $773 million compared to $693 million for the same period in 2007. The increase in income from continuing operations as compared to prior year was due primarily to:

· favorable allowance for funds used during construction (AFUDC) at the Utilities;

· increased retail base rates at PEF;

· higher wholesale revenues at PEF;

· lower purchased power capacity costs at PEC due to the expiration of a power buyback agreement; and

· favorable net retail customer growth and usage at PEC.

Partially offsetting these items were:

· higher interest expense at PEF;

· higher income tax expense due to the benefit from the closure of certain federal tax years and positions in 2007;

· unfavorable net retail customer growth and usage at PEF;

· unfavorable weather at PEC;

· higher investment losses of certain employee benefit trusts at PEF and Corporate and Other resulting from the decline in market conditions; and

· higher depreciation and amortization expense at PEF excluding prior year recoverable storm amortization at PEF.

For the year ended December 31, 2007, our net income was $504 million, or $1.97 per share, compared to $571 million, or $2.28 per share, for the same period in 2006. For the year ended December 31, 2007, our income from continuing operations was $693 million compared to $551 million for the same period in 2006. The increase in income from continuing operations as compared to prior year was due primarily to:

· lower North Carolina Clean Smokestacks Act (Clean Smokestacks Act) amortization expense at PEC;

· lower interest expense at the Parent due to reducing debt in late 2006;

· the cost incurred to redeem debt at the Parent in 2006;

· favorable weather at PEC;

· lower allocations of corporate overhead to continuing operations as a result of the 2006 divestitures;

· unrealized losses recorded on contingent value obligations (CVOs) during 2006;

· favorable AFUDC equity at the Utilities;

· favorable net retail customer growth and usage at the Utilities; and

· higher wholesale revenues at PEF.

Partially offsetting these items were:

· higher operation and maintenance (O&M) expenses at the Utilities primarily due to higher plant outage and maintenance costs and higher employee benefits;

· additional depreciation expense associated with PEC's accelerated cost-recovery program for nuclear generation assets (See Note 7B);

· higher interest expense at PEF;

· the impact of the 2006 gain on sale of Level 3 Communications, Inc. stock acquired as part of the divestiture of Progress Telecom, LLC (PT LLC); and

· higher other operating expenses due to disallowed fuel costs at PEF.

Our segments contributed the following profit or loss from continuing operations:

(in millions)                               2008       Change       2007      Change       2006
PEC                                       $  531     $     33     $  498     $    44     $  454
PEF                                          383           68        315         (11 )      326
Total segment profit                         914          101        813          33        780
Corporate and Other                         (141 )        (21 )     (120 )       109       (229 )
Total income from continuing operations      773           80        693         142        551
Discontinued operations, net of tax           57          246       (189 )      (209 )       20
Net income                                $  830     $    326     $  504     $   (67 )   $  571

PROGRESS ENERGY CAROLINAS

PEC contributed segment profits of $531 million, $498 million and $454 million in 2008, 2007 and 2006, respectively. The increase in profits for 2008 as compared to 2007 is primarily due to lower purchased power capacity costs due to the expiration of a power buyback agreement, favorable AFUDC and favorable net retail customer growth and usage, partially offset by the unfavorable impact of weather and lower excess generation revenues.

The increase in profits for 2007 as compared to 2006 is primarily due to lower Clean Smokestacks Act amortization, the favorable impact of weather and favorable net retail customer growth and usage, partially offset by higher O&M expense related to plant outage and maintenance costs and employee benefit costs and additional depreciation expense associated with PEC's accelerated cost-recovery program for nuclear generating assets.

The revenue tables below present the total amount and percentage change of revenues excluding fuel. Revenues excluding fuel and other pass-through revenues is defined as total electric revenues less fuel and other pass-through revenues. We and PEC consider revenues excluding fuel and other pass-through revenues a useful measure to evaluate PEC's electric operations because fuel and other pass-through revenues primarily represent the recovery of fuel, a portion of purchased power expenses and other pass-through expenses through cost-recovery clauses and, therefore, do not have a material impact on earnings. We and PEC have included the analysis below as a complement to the financial information we provide in accordance with accounting principles generally accepted in the United States of America (GAAP). However, revenues excluding fuel and other pass-through revenues is not defined under GAAP, and the presentation may not be comparable to other companies' presentation or more useful than the GAAP information provided elsewhere in this report.

REVENUES

PEC's electric revenues and the percentage change by year and by customer class
were as follows:



(in millions)
Customer Class                         2008       % Change          2007       % Change          2006
Residential                       $   1,626            0.8     $   1,613           10.3     $   1,462
Commercial                            1,127            1.8         1,107           10.3         1,004
Industrial                              725            1.3           716            0.7           711
Governmental                            104            6.1            98            7.7            91
Total retail revenues                 3,582            1.4         3,534            8.1         3,268
Wholesale                               737           (2.3 )         754            4.7           720
Unbilled                                  8              -             -              -            (1 )
Miscellaneous                           101            5.2            96           (2.0 )          98
Total electric revenues               4,428            1.0         4,384            7.3         4,085
Less: Fuel and other
pass-through revenues                (1,625 )            -        (1,547 )            -        (1,336 )
Revenues excluding fuel and
other pass-
    through revenues              $   2,803           (1.2 )   $   2,837            3.2     $   2,749

PEC's revenues, excluding fuel and other pass-through revenues of $1.625 billion and $1.547 billion for 2008 and 2007, respectively, decreased $34 million. The decrease in revenues was due primarily to lower wholesale revenues, excluding fuel and other pass-through revenues, of $45 million and the $28 million unfavorable impact of weather, partially offset by the $34 million favorable impact of net retail customer growth and usage. The lower wholesale revenues were driven by $24 million lower excess generation sales due to unfavorable market dynamics due to higher relative fuel costs and $22 million lower revenues related to capacity contracts with two major customers. Weather had an unfavorable impact as cooling degree days were 12 percent lower than 2007, even though cooling degree days were comparable to normal. The favorable net retail customer growth and usage was driven by a net 24,000 increase in the average number of customers for 2008 compared to 2007, partially offset by lower average usage per retail customer.

The current recession in the United States has contributed to a slowdown in customer growth and usage in PEF's service territory (See "Progress Energy Florida - Revenues"). PEC has not been impacted by the recession as significantly as PEF. However, PEC has experienced some decline in the rate of residential and commercial sales growth. We cannot predict the severity of the recession, how long it may last or the extent to which it may impact PEC's revenues. In the future, PEC's customer usage could be impacted by customer response to energy-efficiency programs and to increased rates resulting from higher fuel and other recoverable costs.

PEC's revenues, excluding fuel and other pass-through revenues of $1.547 billion and $1.336 billion for 2007 and 2006, respectively, increased $88 million. The increase in revenues was due primarily to the $57 million favorable impact of weather and a $22 million favorable impact of net retail customer growth and usage. Weather had a favorable impact as cooling degree days were 20 percent higher than 2006 and 16 percent higher than normal. The favorable retail customer growth and usage was driven by a net 28,000 increase in the average number of customers for 2007 compared to 2006, partially offset by lower average usage per retail customer.

PEC's electric energy sales in kilowatt -hours (kWh) and the percentage change by year and by customer class were as follows:

(in millions of kWh)
Customer Class              2008 % Change   2007 % Change   2006
Residential               17,000    (1.2) 17,200      5.8 16,259
Commercial                13,941    (0.6) 14,032      5.0 13,358
Industrial                11,388    (4.3) 11,901    (4.0) 12,393
Governmental               1,466      1.9  1,438      1.3  1,419
Total retail energy sales 43,795    (1.7) 44,571      2.6 43,429
Wholesale                 14,329    (6.4) 15,309      5.0 14,584
Unbilled                     (8)        -   (55)        -  (137)
Total kWh sales           58,116    (2.9) 59,825      3.4 57,876

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