Progress Energy, Inc. 2006 10-K

10-K 1 form10k2006.htm PROGRESS ENERGY, INC. 2006 10-K Progress Energy, Inc. 2006 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2006

[ ]

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

For the transition period from to

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

1-15929	Progress Energy, Inc. 410 South Wilmington Street Raleigh, North Carolina 27601-1748 Telephone: (919) 546-6111 State of Incorporation: North Carolina	56-2155481

1-3382	Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. 410 South Wilmington Street Raleigh, North Carolina 27601-1748 Telephone: (919) 546-6111 State of Incorporation: North Carolina	56-0165465

1-3274	Florida Power Corporation d/b/a Progress Energy Florida, Inc. 299 First Avenue North St. Petersburg, Florida 33701 Telephone: (727) 820-5151 State of Incorporation: Florida	59-0247770

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class	Name of each exchange on which registered
Progress Energy, Inc.:
Common Stock (Without Par Value)	New York Stock Exchange
Carolina Power & Light Company:	None
Florida Power Corporation:	None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Progress Energy, Inc.:	None
Carolina Power & Light Company:	$5 Preferred Stock, No Par Value
	Serial Preferred Stock, No Par Value
Florida Power Corporation:	None

Indicate by check mark whether each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act.

Progress Energy, Inc. (Progress Energy)	Yes	(X)	No	( )
Carolina Power & Light Company (PEC)	Yes	( )	No	(X)
Florida Power Corporation (PEF)	Yes	( )	No	(X)

Indicate by check mark whether each registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Progress Energy	Yes	( )	No	(X)
PEC	Yes	( )	No	(X)
PEF	Yes	(X)	No	( )

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Progress Energy	Yes	(X)	No	( )
PEC	Yes	(X)	No	( )
PEF	Yes	( )	No	(X)

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each registrant’s knowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form 10-K or any amendment to this Form 10-K.

Progress Energy	( )
PEC	(X)
PEF	(X)

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act:

Progress Energy	Large accelerated filer (X)	Accelerated filer ( )	Non-accelerated filer ( )
PEC	Large accelerated filer ( )	Accelerated filer ( )	Non-accelerated filer (X)
PEF	Large accelerated filer ( )	Accelerated filer ( )	Non-accelerated filer (X)

Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Act).

Progress Energy	Yes	( )	No	(X)
PEC	Yes	( )	No	(X)
PEF	Yes	( )	No	(X)

As of June 30, 2006, the aggregate market value of the voting and nonvoting common equity of Progress Energy held by nonaffiliates was $10,832,028,534. As of June 30, 2006, the aggregate market value of the common equity of PEC held by nonaffiliates was $0. All of the common stock of PEC is owned by Progress Energy. As of June 30, 2006, the aggregate market value of the common equity of PEF held by nonaffiliates was $0. All of the common stock of PEF is indirectly owned by Progress Energy.

As of February 23, 2007, each registrant had the following shares of common stock outstanding:

Registrant	Description	Shares
Progress Energy	Common Stock (Without Par Value)	257,109,374
PEC	Common Stock (Without Par Value)	159,608,055
PEF	Common Stock (Without Par Value)	100

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Progress Energy and PEC definitive proxy statements for the 2007 Annual Meeting of Shareholders are incorporated into PART III, Items 10, 11, 12 , 13 and 14 hereof.

This combined Form 10-K is filed separately by three registrants: Progress Energy, PEC and PEF (collectively, the Progress Registrants). Information contained herein relating to any 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 registrants.

PEF meets the conditions set forth in General Instruction I (1) (a) and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format permitted by General Instruction I (2) to such Form 10-K.

TABLE OF CONTENTS

GLOSSARY OF TERMS

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

PART I

ITEM 1.	BUSINESS

ITEM 1A.	RISK FACTORS

ITEM 1B.	UNRESOLVED STAFF COMMENTS

ITEM 2.	PROPERTIES

ITEM 3.	LEGAL PROCEEDINGS

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

	EXECUTIVE OFFICERS OF THE REGISTRANTS

PART II

ITEM 5.	MARKET FOR THE REGISTRANTS’ COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

ITEM 6.	SELECTED FINANCIAL DATA

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9A.	CONTROLS AND PROCEDURES

ITEM 9B.	OTHER INFORMATION

PART III

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNACE

ITEM 11.	EXECUTIVE COMPENSATION

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES

PART IV

ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

SIGNATURES

GLOSSARY OF TERMS

We use the words “Progress Energy,” “we,” “us” or “our” with respect to certain information to indicate that such information relates to Progress Energy, Inc. and its subsidiaries on a consolidated basis. When appropriate, the parent holding company or the subsidiaries of Progress Energy are specifically identified on an unconsolidated basis as we discuss their various business activities.

The following abbreviations or acronyms are used by the Progress Registrants:

TERM	DEFINITION

401(k)	Progress Energy 401(k) Savings and Stock Ownership Plan
AFUDC	Allowance for funds used during construction
AHI	Affordable housing investment
AOCI	Accumulated other comprehensive income, a component of common stock equity
ARO	Asset retirement obligation
Annual Average Price	Average wellhead price per barrel for unregulated domestic crude oil for the year
Asset Purchase Agreement	Agreement by and among Global, Earthco and certain affiliates, and the Progress Affiliates as amended on August 23, 2000
Audit Committee	Audit and Corporate Performance Committee of Progress Energy’s board of directors
BART	Best Available Retrofit Technology
Bcf	Billion cubic feet
Broad River	Broad River LLC’s Broad River Facility
Brunswick	PEC’s Brunswick Nuclear Plant
Btu	British thermal unit
CAIR	Clean Air Interstate Rule
CAMR	Clean Air Mercury Rule
CAVR	Clean Air Visibility Rule
CCO	Former Progress Ventures segment’s nonregulated Competitive Commercial Operations
CERCLA or Superfund	Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended
Clean Smokestacks Act	North Carolina Clean Smokestacks Act, enacted in June 2002
Coal	Coal terminals and marketing operations that blend and transload coal as part of the transportation network for coal delivery
Coal and Synthetic Fuels	Business segment primarily engaged in synthetic fuels production and sales operations, the operation of synthetic fuels facilities for third parties and coal terminal services
the Code	Internal Revenue Code
CO₂	Carbon dioxide
COL	Combined license
Colona	Colona Synfuel Limited Partnership, LLLP
Corporate	Collectively, the Parent, PESC and consolidation entities
Corporate and Other	Corporate and Other segment includes Corporate as well as other nonregulated businesses
CR3	PEF’s Crystal River Unit No. 3 Nuclear Plant
CR4 and CR5	PEF’s coal-fired steam turbines Crystal River Units No. 4 and 5
CUCA	Carolina Utility Customers Association
CVO	Contingent value obligation
DeSoto	DeSoto County Generating Co., LLC
DIG Issue C20	FASB Derivatives Implementation Group Issue C20, “Interpretation of the Meaning of Not Clearly and Closely Related in Paragraph 10(b) regarding Contracts with a Price Adjustment Feature”
Dixie Fuels	Dixie Fuels Limited
DOE	United States Department of Energy

Earthco	Four wholly owned coal-based solid synthetic fuels limited liability companies
ECRC	Environmental Cost Recovery Clause
EIA	Energy Information Agency
Energy Delivery	Distribution operations of the Utilities
EPA	United States Environmental Protection Agency
EPACT	Energy Policy Act of 2005
ERO	Electric reliability organization
ESOP	Employee Stock Ownership Plan
FASB	Financial Accounting Standards Board
FERC	Federal Energy Regulatory Commission
FGT	Florida Gas Transmission Company
FIN 46R	FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51”
FIN 47	FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations - an Interpretation of FASB Statement No. 143”
FIN 48	FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”
Fitch	Fitch Ratings
Florida Global Case	U.S. Global LLC v. Progress Energy, Inc. et al
Florida Progress	Florida Progress Corporation, one of our wholly owned subsidiaries
FPSC	Florida Public Service Commission
Funding Corp.	Florida Progress Funding Corporation, a wholly owned subsidiary of Florida Progress
GAAP	Accounting principles generally accepted in the United States of America
Gas	Former Progress Ventures segment’s natural gas drilling and production business
the Georgia Contracts	Fixed price full-requirement contracts serviced by CCO
Georgia Power	Georgia Power Company, a subsidiary of Southern Company
Georgia Region	Reporting unit consisting of our Effingham, Monroe, Walton and Washington nonregulated generation plants in service
Global	U.S. Global LLC
Gulfstream	Gulfstream Gas System, L.L.C.
Harris	PEC’s Shearon Harris Nuclear Plant
IBEW	International Brotherhood of Electrical Workers
IRS	Internal Revenue Service
kV	Kilovolt
kVA	Kilovolt-ampere
kWh/s	Kilowatt-hour/s
Level 3	Level 3 Communications, Inc.
LIBOR	London Inter Bank Offering Rate
MD&A	Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of this Form 10-K
Medicare Act	Medicare Prescription Drug, Improvement and Modernization Act of 2003
MGP	Manufactured gas plant
MW	Megawatt
MWh/s	Megawatt-hour/s
Moody’s	Moody’s Investors Service, Inc.
NAAQS	National Ambient Air Quality Standards
NCDWQ	North Carolina Division of Water Quality
NCNG	North Carolina Natural Gas Corporation
NCUC	North Carolina Utilities Commission
NEIL	Nuclear Electric Insurance Limited
NERC	North American Electric Reliability Council
NOPR	Notice of Proposed Rulemaking
the Notes Guarantee	Florida Progress’ full and unconditional guarantee of the Subordinated Notes
NOx	Nitrogen Oxide
NOx SIP Call	EPA rule which requires 22 states including North Carolina, South Carolina and Georgia (but excluding Florida) to further reduce nitrogen oxide emissions

NSR	New Source Review requirements by the EPA
NRC	United States Nuclear Regulatory Commission
Nuclear Waste Act	Nuclear Waste Policy Act of 1982
NYMEX	New York Mercantile Exchange
O&M	Operation and maintenance expense
OCI	Other comprehensive income
OPC	Florida’s Office of Public Counsel
OPEB	Postretirement benefits other than pensions
the Parent	Progress Energy, Inc. holding company on an unconsolidated basis
PEC	Progress Energy Carolinas, Inc., formerly referred to as Carolina Power & Light Company
PEF	Progress Energy Florida, Inc., formerly referred to as Florida Power Corporation
PESC	Progress Energy Service Company, LLC
the Phase-out Price	Price per barrel of unregulated domestic crude oil at which Section 29/45K tax credits are fully eliminated
PM 2.5	EPA standard for particulate matter less than 2.5 microns in diameter
PM 2.5-10	EPA standard for particulate matter between 2.5 and 10 microns in diameter
PM 10	EPA standard for particulate matter less than 10 microns in diameter
Power Agency	North Carolina Eastern Municipal Power Agency
Preferred Securities	7.10% Cumulative Quarterly Income Preferred Securities due 2039, Series A issued by the Trust
Preferred Securities Guarantee	Florida Progress’ guarantee of all distributions related to the Preferred Securities
Progress Affiliates	Five affiliated synthetic fuels facilities
Progress Energy	Progress Energy, Inc. and subsidiaries on a consolidated basis
Progress Registrants	The reporting registrants within the Progress Energy consolidated group. Collectively, Progress Energy, Inc., PEC and PEF
Progress Fuels	Progress Fuels Corporation, formerly Electric Fuels Corporation
Progress Rail	Progress Rail Services Corporation
Progress Ventures	Former business segment that primarily engaged in nonregulated energy generation, energy marketing activities and natural gas drilling and production
PRP	Potentially responsible party, as defined in CERCLA
PSSP	Performance Share Sub-Plan
PTC	Progress Telecommunications Corporation
PT LLC	Progress Telecom, LLC
PUHCA 1935	Public Utility Holding Company Act of 1935, as amended
PUHCA 2005	Public Utility Holding Company Act of 2005
PURPA	Public Utilities Regulatory Policies Act of 1978
PVI	Progress Energy Ventures, Inc., formerly referred to as Progress Ventures, Inc.
PWC	Public Works Commission of the City of Fayetteville, N.C.
QF	Qualifying facility
RCA	Revolving credit agreement
Rockport	Indiana Michigan Power Company’s Rockport Unit No. 2
Robinson	PEC’s Robinson Nuclear Plant
ROE	Return on equity
Rowan	Rowan County Power, LLC
RSA	Restricted stock awards program
RTO	Regional transmission organization
SAB 108	SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”
SCPSC	Public Service Commission of South Carolina
Scrubber	A device that neutralizes sulfur compounds formed during coal combustion
SEC	United States Securities and Exchange Commission
Section 29	Section 29 of the Code

Section 29/45K	General business tax credits earned after December 31, 2005 for synthetic fuels production in accordance with Section 29
Section 316(b)	Section 316(b) of the Clean Water Act
Section 45K	Section 45K of the Code
(See Note/s “#”)	For all sections, this is a cross-reference to the Combined Notes to the Financial Statements contained in PART II, Item 8 of this Form 10-K
SESH	Southeast Supply Header, L.L.C.
S&P	Standard & Poor’s Rating Services
SFAS	Statement of Financial Accounting Standards
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. 87	Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions”
SFAS No. 109	Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”
SFAS No. 115	Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”
SFAS No. 123	Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”
SFAS No. 123R	Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”
SFAS No. 133	Statement of Financial Accounting Standards No. 133, “Accounting for Derivative and Hedging Activities”
SFAS No. 142	Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”
SFAS No. 143	Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations”
SFAS No. 144	Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
SFAS No. 157	Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
SFAS No. 158	Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”
SNG	Southern Natural Gas Company
SO₂	Sulfur dioxide
Subordinated Notes	7.10% Junior Subordinated Deferrable Interest Notes due 2039 issued by Funding Corp.
Tax Agreement	Intercompany Income Tax Allocation Agreement
the Threshold Price	Price per barrel of unregulated domestic crude oil at which Section 29/45K tax credits begin to be reduced
the Trust	FPC Capital I, a wholly owned subsidiary of Florida Progress
the Utilities	Collectively, PEC and PEF
Winchester Production	Winchester Production Company, Ltd.
Winter Park	City of Winter Park, Fla.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

In this combined report, each of the Progress Registrants makes 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-K 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. 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 the Progress Registrants undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made.

In addition, examples of forward-looking statements discussed in this Form 10-K include, but are not limited to, 1) statements made in PART I, Item 1A, “Risk Factors” and 2) PART II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) including, but not limited to, statements under the following headings: a) “Strategy” about our future strategy and goals; b) “Results of Operations” about trends and uncertainties; c) “Liquidity and Capital Resources” about operating cash flows, estimated capital requirements through the year 2009 and future financing plans; and d) “Other Matters” about our synthetic fuels facilities, the effects of new environmental regulations, nuclear decommissioning costs and the effect of electric utility industry restructuring.

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 laws and regulations, including those relating to the environment and the Energy Policy Act of 2005; the financial resources and capital needed to comply with environmental laws and our ability to recover eligible costs under cost-recovery clauses; weather conditions that directly influence the production, delivery and demand for electricity; the ability to recover through the regulatory process costs associated with future significant weather events; recurring seasonal fluctuations in demand for electricity; fluctuations in the price of energy commodities and purchased power and our ability to recover such costs through the regulatory process; economic fluctuations and the corresponding impact on our commercial and industrial customers; the ability of our subsidiaries to pay upstream dividends or distributions to the Parent; the impact on our facilities and businesses from a terrorist attack; the inherent risks associated with the operation of nuclear facilities, including environmental, health, regulatory and financial risks; the anticipated future need for additional baseload generation and associated transmission facilities in our regulated service territories and the accompanying regulatory and financial risks; the ability to successfully access capital markets on favorable terms; the Progress Registrants’ ability to maintain their current credit ratings and the impact on the Progress Registrants’ financial condition and ability to meet their cash and other financial obligations in the event their credit ratings are downgraded; the impact that increases in leverage may have on each of the Progress Registrants; the impact of derivative contracts used in the normal course of business; the investment performance of our pension and benefit plans; the Progress Registrants’ ability to control costs, including pension and benefit expense, and achieve our cost-management targets for 2007; our ability to generate and utilize tax credits from the production and sale of qualifying synthetic fuels under Internal Revenue Code Section 29/45K (Section 29/45K); the impact that future crude oil prices may have on our earnings from our coal-based solid synthetic fuels businesses; the execution of our announced intent to dispose of our Competitive Commercial Operations (CCO) business and additional resulting charges to income, which could exceed $200 million; our ability to manage the risks involved with the CCO business, including dependence on third parties and related counterparty risks, until completion of our disposal strategy; 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 our nonreporting subsidiaries.

These and other risk factors are detailed from time to time in the Progress Registrants’ filings with the United States Securities and Exchange Commission (SEC). Many, but not all, of the factors that may impact actual results are discussed in Item 1A, “Risk Factors,” which you should carefully read. All such factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. 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 the Progress Registrants.

PART I

ITEM 1.

BUSINESS

GENERAL

ORGANIZATION

Progress Energy, Inc., headquartered in Raleigh, N.C., with its regulated and nonregulated subsidiaries, is an integrated energy company serving the southeast region of the United States. In this report, Progress Energy (which includes Progress Energy, Inc.’s holding company operations (the Parent) and its subsidiaries on a consolidated basis), is at times referred to as “we,” “our” or “us.” 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. However, 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 Parent was incorporated on August 19, 1999 initially as CP&L Energy, Inc. and became the holding company for PEC on June 19, 2000. All shares of common stock of PEC were exchanged for an equal number of shares of CP&L Energy, Inc. common stock. On November 30, 2000, we completed our acquisition of Florida Progress Corporation (Florida Progress), a diversified, exempt electric utility holding company whose primary subsidiaries are PEF and Progress Fuels Corporation (Progress Fuels). In the $5.4 billion purchase transaction, we paid cash consideration of approximately $3.5 billion and issued 46.5 million shares of common stock valued at approximately $1.9 billion. In addition, we issued 98.6 million contingent value obligations (CVOs) valued at approximately $49 million. Prior to February 8, 2006, the Parent was a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA 1935). Effective February 8, 2006, the Federal Energy Regulatory Commission (FERC) was provided with new oversight responsibilities for the electric utility industry by the Public Utility Holding Company Act of 2005 (PUHCA 2005) as discussed below.

Our wholly owned regulated subsidiaries, PEC and PEF, each a business segment, are primarily engaged in the generation, transmission, distribution and sale of electricity in portions of North Carolina, South Carolina and Florida. We have approximately 21,300 megawatts (MW) of regulated electric generation capacity and serve approximately 3.1 million retail electric customers as well as other load-serving entities. The Utilities operate in retail service territories that are anticipated to have population growth higher than the U.S. average. In addition, PEC’s greater proportion of commercial and industrial customers, combined with PEF’s greater proportion of residential customers, creates a balanced customer base. We are dedicated to meeting the growth needs of our service territories and delivering reliable, competitively priced energy from a diverse portfolio of power plants.

Our nonregulated Coal and Synthetic Fuels segment is involved in the production and sale of coal-based solid synthetic fuels as defined under the Internal Revenue Code (the Code), the operation of synthetic fuels facilities for third parties as well as coal terminal services. Our terminal operations support our synthetic fuels operations for the procuring and processing of coal and the transloading and marketing of synthetic fuels. On May 22, 2006, we idled our synthetic fuels facilities due to significant uncertainty surrounding synthetic fuels production. During September and October 2006, we resumed limited synthetic fuels production at our facilities, which continued through the end of 2006. The tax credit program for production of qualifying synthetic fuels is scheduled to expire at the end of 2007.

The Corporate and Other segment is comprised of nonregulated business areas that do not separately meet the disclosure requirements as a business segment. It primarily includes the activities of the Parent and Progress Energy Service Company, LLC (PESC) as well as miscellaneous nonregulated businesses. PESC provides centralized administrative, management and support services to our subsidiaries. See Note 18 for additional information about PESC services provided and costs allocated to subsidiaries.

As discussed in “Significant Developments” below, many of our nonregulated business operations have been divested or are in the process of being divested. Consequently, we no longer report a Progress Ventures segment and

the composition of other continuing segments has been impacted by these divestitures. See Note 19 for information regarding the revenues, income and assets attributable to our business segments.

For the year ended December 31, 2006, our consolidated revenues were $9.6 billion and our consolidated assets at year-end were $25.7 billion.

SIGNIFICANT DEVELOPMENTS

As discussed more fully in Note 3 and under MD&A - “Discontinued Operations,” we divested, or announced divestitures, of multiple nonregulated businesses during 2006 in accordance with our business strategy to reduce our business risk from nonregulated operations and to focus on the core operations of the Utilities. The 2006 divestitures resulted in net cash proceeds of $1.654 billion, which were used primarily to reduce debt, and for other corporate purposes. As discussed in Note 3, certain of our divestiture transactions announced in 2006 are anticipated to close in 2007 and we anticipate recording charges in excess of $200 million after-tax related to these divestitures. Prior to 2006, the divested entities had been included within the following segments:

Former Progress Ventures segment:

· CCO - Georgia Operations

·	KCCO - Operations of DeSoto County Generating Co., LLC (DeSoto) and Rowan County Power, LLC (Rowan) generation facilities

·	KNatural gas drilling and production business (Gas)

Coal and Synthetic Fuels segment:

· Dixie Fuels Limited (Dixie Fuels)

· Progress Materials, Inc.

Corporate and Other segment:

· Progress Telecom, LLC (PT LLC)

In addition to the divestitures and acquisitions discussed in Notes 3 and 4, we also completed the following transactions during the five-year period ended December 31, 2006:

·	During 2003, we sold certain gas-producing properties owned by Mesa Hydrocarbons, LLC, a wholly owned subsidiary of Progress Fuels. Net proceeds were approximately $97 million. During 2006, we sold our remaining Gas operations.

During 2003, two wholly owned subsidiaries of Progress Energy and a wholly owned subsidiary of Odyssey Telecorp, Inc. contributed substantially all of their assets and transferred certain liabilities to PT LLC. Following a series of transactions, Progress Telecommunications Corporation (PTC) held a 51 percent ownership interest in, and was the parent of, PT LLC. PTC sold its interest in PT LLC in 2006.

During 2003, Progress Fuels entered into several unrelated transactions to acquire approximately 200 natural gas-producing wells with proven reserves of approximately 190 billion cubic feet (Bcf) from four companies headquartered in Texas. The total cash purchase price for the transactions was $168 million.

During 2003, we entered into a definitive agreement with Williams Energy Marketing and Trading, a subsidiary of The Williams Companies, Inc., to acquire, for a cash payment of $188 million, a long-term full requirements power supply agreement at fixed prices with Jackson Electric Membership Corporation, located in Jefferson, Ga. We anticipate that a third party will acquire this contract as part of our CCO divestiture strategy.

AVAILABLE INFORMATION

The Progress Registrants’ annual reports on Form 10-K, definitive proxy statements for our annual shareholder meetings, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through the Investors section of our Web site at www.progress-energy.com. These reports are available as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The public may read and copy any material we have filed with the SEC at the SEC’s Public Reference Room

at 100 F Street, N.E., Washington, D.C. 20549. Information regarding the operations of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Alternatively, the SEC maintains a Web site, www.sec.gov, containing reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

The Investors section of our Web site also includes our corporate governance guidelines and code of ethics as well as the charters of the following committees of our board of directors: Executive; Audit and Corporate Performance; Corporate Governance; Finance; Operations and Nuclear Oversight; and Organization and Compensation. This information is available in print to any shareholder who requests it. Requests should be directed to: Shareholder Relations, Progress Energy, Inc., 410 S. Wilmington Street, Raleigh, NC 27601.

Information on our Web site is not incorporated herein and should not be deemed part of this Report.

COMPETITION

REGULATED UTILITIES

RETAIL COMPETITION

To our knowledge, there is currently no enacted or proposed legislation in North Carolina, South Carolina or Florida that would give retail customers the right to choose their electricity provider or otherwise restructure or deregulate the electric industry. However, the Utilities compete with suppliers of other forms of energy in connection with their retail customers.

WHOLESALE COMPETITION

The Utilities compete with other utilities for bulk power sales and for sales to municipalities and cooperatives.

Increased competition in the wholesale electric utility industry and the availability of transmission access could affect the Utilities’ load forecasts, plans for power supply and wholesale energy sales and related revenues. Wholesale energy sales will be impacted by the extent to which additional generation is available to sell to the wholesale market and the ability of the Utilities to retain current wholesale customers who have existing contracts with PEC or PEF.

On August 8, 2005, the Energy Policy Act of 2005 (EPACT) was signed into law. This federal law contained key provisions affecting the electric power industry, including competition among generators of electricity. The FERC has implemented and is considering a number of related regulations to implement EPACT that may impact, among other things, requirements for reliability, Qualified Facilities (QFs), transmission information availability, transmission congestion, security constrained dispatch, energy market transparency, energy market manipulation and behavioral rules.

In addition to EPACT, other policies and orders issued by the FERC have supported increased competition within the electric generation industry. EPACT clarified and expanded the FERC’s authority to assure that markets operate fairly without imposing new, mandatory intrusion on state authorities. On February 15, 2007, the FERC adopted Order 890, which reforms the open-access transmission regulatory framework previously established under Orders 888 and 889. Order 890 is designed to ensure that transmission service is provided on a nondiscriminatory and just and reasonable basis, as well as provide for more effective regulation and transparency in the operation of the transmission grid. We are currently evaluating the expected impact on our operations from compliance with Order 890.

In April 2004, the FERC issued two orders concerning utilities’ ability to sell wholesale electricity at market-based rates. In the first order, the FERC adopted two new interim screens for assessing potential generation market power of applicants for wholesale market-based rates, and described additional analyses and mitigation measures that could be presented if an applicant does not pass one of these interim screens. In July 2004, the FERC issued a second order that re-affirmed its April order and initiated a rulemaking to consider whether the FERC’s current methodology for determining whether a public utility should be allowed to sell wholesale electricity at market-based rates should be modified in any way. The Utilities do not have market-based rate authority for wholesale sales in peninsular Florida.

Given the difficulty PEC believed it would experience in passing one of the interim screens, on September 6, 2005, PEC filed revisions to its market-based rate tariffs restricting PEC to sales outside of PEC’s control area and peninsular Florida, and filed a new cost-based tariff for sales within PEC’s control area. The FERC has accepted these revised tariffs.

On June 6, 2005, the Utilities submitted market power studies to the FERC demonstrating that neither company possessed market power outside of PEC’s control area and peninsular Florida. The FERC accepted the Utilities’ respective market power studies and allowed PEC and PEF to continue selling power at market-based rates in areas outside of PEC’s control area and peninsular Florida.

We do not anticipate that the operations of the Utilities will be materially impacted by these market-based rates decisions.

REGIONAL TRANSMISSION ORGANIZATIONS

The FERC’s Order 2000, issued in late 1999, established national standards for regional transmission organizations (RTOs) and advocated the view that regulated, unbundled transmission would facilitate competition in both wholesale and retail electricity markets. In October 2000, as a result of FERC Order 2000, PEC, along with Duke Energy Corporation and South Carolina Electric & Gas Company, filed an application with the FERC for approval of the GridSouth RTO. In July 2001, the FERC issued an order provisionally approving GridSouth. However, in July 2001, the FERC issued orders recommending that companies in the Southeast engage in mediation to develop a plan for a single RTO for the Southeast. PEC participated in the mediation; no consensus was reached on creating a Southeast RTO. On August 11, 2005, the GridSouth participants notified the FERC that they had terminated the GridSouth project. By order issued October 20, 2005, the FERC terminated the GridSouth proceeding. PEC’s investment in GridSouth totaled $33 million at December 31, 2006. PEC expects to recover this investment.

Also as a result of FERC Order 2000, PEF, Florida Power & Light Company and Tampa Electric Company collectively filed an application with the FERC in October 2000 for approval of the GridFlorida RTO for peninsular Florida. In 2002, the Florida Public Service Commission (FPSC) approved many of the aspects of a modified GridFlorida structure and held workshops in 2004 to address other GridFlorida issues. A cost-benefit study performed by an independent consulting firm concluded in 2005 that the GridFlorida RTO was not cost effective. The study further segregated the costs and benefits between FPSC jurisdictional and nonjurisdictional customers, concluding that the jurisdictional customers would incur even more costs, and benefits would be shifted to nonjurisdictional customers. In light of the findings and conclusions of the cost-benefit study, during 2006 the GridFlorida docketed proceedings were closed by both the FPSC and the FERC, and GridFlorida was dissolved. PEF fully recovered its startup costs in GridFlorida from retail ratepayers through base rates.

FRANCHISE MATTERS

PEC has nonexclusive franchises with varying expiration dates in most of the municipalities in North Carolina and South Carolina in which it distributes electricity. The general effect of these franchises is to provide for the manner in which PEC occupies rights-of-way in incorporated areas of municipalities for the purpose of constructing, operating and maintaining an energy transmission and distribution system. Of these 239 franchises, the majority covers 60-year periods from the date enacted, and 45 have no specific expiration dates. Of the franchise agreements with expiration dates, three expire during the period January 1, 2007 through December 31, 2011, and the remainder expires between January 1, 2012 and 2061. PEC also provides service within a number of municipalities and in all of its unincorporated areas without franchise agreements.

PEF has nonexclusive franchises with varying expiration dates in 110 of the Florida municipalities in which it distributes electricity. PEF also provides service to 12 other municipalities and in all of its unincorporated areas without franchise agreements. The general effect of these franchises is to provide for the manner in which PEF occupies rights-of-way in incorporated areas of municipalities for the purpose of constructing, operating and maintaining an energy transmission and distribution system. The franchise agreements cover periods ranging from 10 to 30 years with the majority covering 30-year periods from the date enacted. Of the 110 franchise agreements, three expire between January 1, 2007 and December 31, 2011, and the remainder expires between January 1, 2012 and December 31, 2036.

STRANDED COSTS

If the retail jurisdictions served by the Utilities become subject to deregulation, the recovery of “stranded costs” could become a significant consideration. Stranded costs primarily include the generation assets of utilities whose value in a competitive marketplace would be less than their current book value, as well as above-market purchased power commitments to QFs. Thus far, all states that have passed restructuring legislation have provided for the opportunity to recover a substantial portion of stranded costs. Assessing the amount of stranded costs for a utility requires various assumptions about future market conditions, including the future price of electricity.

Our largest stranded cost exposure is for PEF’s purchased power commitments with QFs, under which PEF has future minimum expected capacity payments through 2033 of $4.930 billion (See Note 22A). PEF was obligated to enter into these contracts under provisions of the Public Utilities Regulatory Policies Act of 1978 (PURPA). PEF continues to seek ways to address the impact of escalating payments under these contracts. However, the FPSC allows for full recovery of the retail portion of the cost of power purchased from QFs. PEC does not have significant future minimum expected capacity payments under their purchased power commitments with QFs.

EPACT repealed the mandatory purchase and sales requirements of PURPA in competitive markets as determined by the FERC. The law also requires the FERC to revise the criteria for new QFs and removes the ownership limitations on QFs. On October 20, 2006, the FERC issued a final rule to implement a provision from EPACT that provides for termination of an electric utility’s obligation to enter into new power purchase contracts with a QF if the FERC makes specific findings about the QF’s access to competitive markets. The order establishes a rebuttable presumption that any utility located in areas covered by certain RTOs (neither PEC nor PEF are within these specified areas) will be relieved from the must-buy requirement with respect to QFs larger than 20 MW. With respect to other markets, and with respect to all QFs 20 MW or smaller, the utility bears the burden of showing that it qualifies for relief from the must-buy requirement. Any electric utility seeking relief from the must-buy requirements, regardless of location, must apply to the FERC for relief. If the must-buy requirement is terminated in an electric utility’s service territory, QFs, state agencies, or others may later petition for reinstatement of the requirement if circumstances change. The final rule went into effect January 2, 2007. We cannot predict at this time what impact this rule will have on our business.

NONREGULATED BUSINESSES

Coal and Synthetic Fuels operations compete in the steam and industrial coal markets of the eastern United States. Factors contributing to success in these markets include a competitive cost structure and strategic locations. There are, however, numerous competitors in each of these markets, although no one competitor is dominant in any industry. As discussed previously, we idled our synthetic fuels facilities for a portion of 2006 due to uncertainty surrounding synthetic fuels production. The tax credit program for production of qualifying synthetic fuels is scheduled to expire at the end of 2007.

Our CCO business, anticipated to be divested during 2007, operates in the nonregulated wholesale market where competitive pricing is the primary driver.

REGULATORY MATTERS

HOLDING COMPANY REGULATION

As a result of the acquisition of Florida Progress, Progress Energy was a registered public utility holding company subject to regulation by the SEC under PUHCA 1935, including provisions relating to the issuance of securities, sales, acquisitions of securities and utility assets, and services performed by PESC. Effective February 8, 2006, EPACT provisions repealed PUHCA 1935 and enacted PUHCA 2005. Subsequent to that date, the Parent is subject to regulation by the FERC as a public utility holding company rather than by the SEC. EPACT granted the FERC certain new powers, previously addressed under PUHCA 1935, including accounting and record retention authority and cost allocation jurisdiction at the election of the holding company system or the state utility commissions with jurisdiction over its utility subsidiaries.

UTILITY REGULATION

FEDERAL REGULATION

Other EPACT provisions included tax changes for the utility industry; incentives for emissions reductions; federal insurance and incentives to build new nuclear power plants; and certain protection for native retail load customers of load-serving entities. EPACT gave the FERC "backstop" transmission siting authority which provides for federal intervention, subject to limitations, when states are unable or unwilling to resolve transmission issues. EPACT also provided incentives and funding for clean coal technologies, provided initiatives to voluntarily reduce greenhouse gases and redesignated the Code’s Section 29 (Section 29) tax credit as a general business credit under the Code’s Section 45K (Section 45K). In addition, the law requires both the FERC and the U.S. Department of Energy (DOE) to study how utilities dispatch their resources to meet the needs of their customers. The results of these studies or any related actions taken by the DOE could impact the Utilities’ system operations.

The FERC has adopted final rules implementing much of its new authority under EPACT. These new rules require the FERC’s approval prior to any merger involving a public utility; require the FERC’s approval prior to the disposition of any utility asset with a market value in excess of $10 million; prohibit market participants from intentionally or recklessly making any fraudulent or misleading statements with regard to transactions subject to the FERC’s jurisdiction; and provides the procedures and rules for the establishment of an electric reliability organization (ERO) that will propose and enforce mandatory reliability standards for the bulk power electric system.

On July 20, 2006, the FERC certified the North American Electric Reliability Council (NERC) as the ERO. In addition, on October 20, 2006, the FERC issued a Notice of Proposed Rulemaking (NOPR) on reliability standards originally proposed by the NERC, which would transition compliance with these standards from voluntary to mandatory. The proposed reliability standards were based on the current NERC reliability standards. The FERC proposes to approve 83 reliability standards, as currently written, and make compliance mandatory. After these standards are approved, the FERC has directed the NERC to make technical improvements to 62 of the 83 standards. An additional 24 standards proposed by the NERC that were not adopted remain pending at the FERC awaiting further clarification and filings by the NERC and regional entities. Mandatory reliability standards are expected to be in place by the summer of 2007. All users, owners and operators of the bulk power system, including PEC and PEF, will be subject to these standards upon their approval by the FERC.

Recent reliability audits of PEC operations have not resulted in any standards violations. PEF is in the process of executing a mitigation plan associated with findings from a 2004 reliability audit. Based on the direction the FERC has given to the NERC to make revisions to 62 of the standards proposed for adoption, we expect standards to migrate to stricter requirements over time. We are committed to meeting those standards. The financial impact of mandatory compliance cannot currently be determined. If we are unable to meet the reliability standards for the bulk power system in the future, it could have a material adverse effect on our financial condition, results of operations and cash flows. In addition, failure to comply with the reliability standards approved by the FERC could result in the imposition of fines and civil penalties.

On January 18, 2007, the FERC issued a NOPR regarding Standards of Conduct in response to a 2006 court case, which invalidated certain portions of the Standards of Conduct as they relate to natural gas companies. The NOPR requests comment with respect to whether the electric Standards of Conduct should be limited to marketing affiliates and proposes to create two new categories of shared employees: one for employees involved in resource competitive solicitations and the other for employees involved in integrated resource planning. We cannot predict the outcome of this matter.

PEC and PEF are subject to regulation by the FERC with respect to wholesale rates for transmission and sale of electric energy and the interconnection of facilities in interstate commerce (other than interconnections for use in the event of certain emergency situations). PEC and its wholesale customers last agreed to a general increase in wholesale rates in 1988. PEF and its wholesale customers last agreed to a general increase in wholesale rates in 1995. However, wholesale rates for both of the Utilities have been adjusted since that time through contractual negotiations.

The Utilities are also subject to regulation by other federal regulatory agencies, including the United States Nuclear Regulatory Commission (NRC) and the Environmental Protection Agency (EPA). The Utilities’ nuclear generating units are regulated by the NRC under the Atomic Energy Act of 1954 and the Energy Reorganization Act of 1974. The NRC is responsible for granting licenses for the construction, operation and retirement of nuclear power plants and subjects these plants to continuing review and regulation. In the event of noncompliance, the NRC has the authority to impose fines, set license conditions, shut down a nuclear unit, or take some combination of these actions, depending upon its assessment of the severity of the situation, until compliance is achieved.

STATE REGULATION

PEC is subject to regulation in North Carolina by the North Carolina Utilities Commission (NCUC), and in South Carolina by the Public Service Commission of South Carolina (SCPSC). PEF is subject to regulation in Florida by the FPSC. The Utilities are regulated by their respective regulatory bodies with respect to, among other things, rates and service for electricity sold at retail; retail cost recovery of unusual or unexpected expenses, such as severe storm costs; and issuances of securities. The underlying concept of utility ratemaking is to set rates at a level that allows the utility to collect revenues equal to its cost of providing service plus earn a reasonable rate of return on its invested capital, including equity.

Retail Rate Matters

Each of the Utilities’ state utility commissions authorize retail “base rates” that are designed to provide the respective utility with the opportunity to earn a specific rate of return on its “rate base,” or investment in utility plant. These rates are intended to cover all reasonable and prudent expenses of constructing, operating and maintaining the utility system, except those covered by specific cost-recovery clauses.

In PEC’s most recent rate cases in 1988, the NCUC and the SCPSC each authorized a return on equity of 12.75 percent for PEC. The Clean Smokestacks Act enacted in North Carolina in 2002 (Clean Smokestacks Act) froze PEC’s retail base rates in North Carolina through December 31, 2007, unless PEC experiences extraordinary events beyond the control of PEC, in which case PEC can petition for a rate increase. Subsequent to 2007, PEC’s current North Carolina base rates will continue subject to traditional cost-based rate regulation.

During 2005, the FPSC approved a four-year base rate agreement with PEF. The new base rates took effect the first billing cycle of January 2006 and will remain in effect through the last billing cycle of December 2009 with PEF having the sole option to extend the agreement through the last billing cycle of June 2010. Base rates will be adjusted in late 2007 depending on the in-service date of specified generation facilities. PEF’s base rate settlement also provides for revenue sharing between PEF and its ratepayers. For 2006, PEF agreed to refund two-thirds of retail base revenues between the $1.499 billion threshold and the $1.549 billion cap and 100 percent of revenues above the $1.549 billion cap. However, PEF’s 2006 retail base rates did not exceed the threshold and no revenues were subject to the revenue sharing provisions. Both the threshold and cap will be adjusted annually for rolling average 10-year retail kilowatt-hour (kWh) sales growth.

Retail Cost-recovery Clauses

Each of the Utilities’ state utility commissions allows recovery of certain costs through various cost-recovery clauses, to the extent the respective commission determines in an annual hearing that such costs are prudent. Each state utility commission’s determination results in the addition of a rider to a utility’s base rates to reflect the approval of these costs and to reflect any past over- or under-recovery of costs. The Utilities do not earn a return on the recovery of eligible operating expenses under such clauses; however, the FPSC has authorized PEF to earn a return for specified capital investments for environmental compliance and utility plant. Fuel and certain purchased power costs are eligible for recovery by the Utilities. The Utilities use coal, oil, hydroelectric (PEC only), natural gas and nuclear power to generate electricity thereby maintaining a diverse fuel mix that helps mitigate the impact of cost increases in any one fuel. Due to the regulatory treatment of these costs and the method allowed for recovery, changes in fuel costs from year to year have no material impact on operating results of the Utilities, unless a commission finds a portion of such costs to have been imprudently incurred. However, delays between the expenditure for fuel costs and recovery from ratepayers can adversely impact the cash flow of the Utilities. See MD&A - “Regulatory Matters and Recovery of Costs” for additional discussion regarding cost-recovery clauses.

Costs recovered by the Utilities through cost-recovery clauses, by retail jurisdiction, are as follows:

·	North Carolina Retail - fuel costs and the fuel portion of purchased power;

·	South Carolina Retail - fuel costs, certain purchased power costs, and sulfur dioxide (SO₂) emission allowance expense; and

·	Florida Retail - fuel costs, purchased power costs, capacity costs, energy conservation expense and specified environmental costs, including SO₂ emission allowance expense and nitrogen oxide (NOx) compliance.

Storm Recovery

In accordance with its base rate agreement, PEF accrues $6 million annually in base rates to a storm damage reserve and is allowed to defer losses in excess of the accumulated reserve for major storms. Under the order, the storm reserve is charged with operation and maintenance (O&M) expenses related to storm restoration and with capital expenditures related to storm restoration that are in excess of expenditures assuming normal operating conditions.

On July 14, 2005, the FPSC issued an order authorizing PEF to recover $232 million over a two-year period, including interest, of its incurred storm restoration costs associated with the four hurricanes in 2004. The initial amount approved for recovery was based on PEF’s estimate of costs and its impact was included in customer bills beginning August 1, 2005, as a storm surcharge. On September 12, 2005, PEF filed a true-up of an additional $19 million in costs. The increase was partially offset by $6 million of adjustments. The FPSC administratively approved the true-up amount, subject to audit by the FPSC staff. The net true-up effect was included in customer bills beginning January 1, 2006.

During 2006, PEF entered into, and the FPSC approved, a settlement agreement with certain intervenors in its storm cost-recovery docket. The settlement agreement, as amended, allows PEF to extend its current two-year storm surcharge for an additional 12-month period. The extension, which begins August 2007, will replenish the existing storm reserve by an estimated additional $130 million. The amended settlement agreement provides that in the event future storms cause the reserve to be depleted, PEF would be able to petition the FPSC for implementation of an interim surcharge of at least 80 percent and up to 100 percent of the claimed deficiency of its storm reserve. The intervenors agreed not to oppose the interim recovery of 80 percent of the future claimed deficiency but reserved the right to challenge the interim surcharge recovery of the remaining 20 percent. The FPSC has the right to review PEF’s storm costs for prudence.

PEC does not maintain a storm damage reserve account and does not have an ongoing regulatory mechanism, such as a surcharge, to recover storm costs. In the past, PEC has sought and received permission from the SCPSC and NCUC to defer and amortize certain storm recovery costs.

See Note 7 for further discussion of regulatory matters.

NUCLEAR MATTERS

GENERAL

The nuclear power industry faces uncertainties with respect to the cost and long-term availability of disposal sites for spent nuclear fuel and other radioactive waste, compliance with changing regulatory requirements, nuclear plant operations, capital outlays for modifications, the technological and financial aspects of decommissioning plants at the end of their licensed lives and requirements relating to nuclear insurance.

PEC owns and operates four nuclear generating units, Brunswick Nuclear Plant (Brunswick) Unit No. 1 and Unit No. 2, Shearon Harris Nuclear Plant (Harris), and Robinson Nuclear Plant (Robinson). NRC operating licenses, including license extensions granted through 2006, for Brunswick No. 1 and No. 2, Harris and Robinson currently expire in September 2036, December 2034, October 2026 and July 2030, respectively. On June 26, 2006, Brunswick received 20-year extensions from the NRC on the operating licenses for its two nuclear reactors. On November 14, 2006, we submitted an application to the NRC requesting a 20-year extension of the Harris operating license.

PEF owns and operates one nuclear generating unit, Crystal River Unit No. 3 (CR3). The NRC operating license for CR3 currently expires in December 2016. We expect to submit an application to extend this license 20 years in the first quarter of 2009.

Nuclear units are periodically removed from service to accommodate normal refueling and maintenance outages, repairs and certain other modifications.

The NRC periodically issues bulletins and orders addressing industry issues of interest or concern that necessitate a response from the industry. It is our intent to comply with and to complete required responses in a timely and accurate manner. Any potential impact to company operations will vary and will be dependent upon the nature of the requirement(s).

Since 2002, the NRC has issued various bulletins and orders addressing inspection activities associated with pressurized water reactor vessels. We have complied with all requests. Additionally, we replaced the reactor vessel head at CR3 in 2003 and at Robinson in 2005.

POTENTIAL NEW CONSTRUCTION

We have announced that we are pursuing development of combined license (COL) applications. Our announcement is not a commitment to build a nuclear plant. It is a necessary step to keep open the option of building a plant or plants. On January 23, 2006, we announced that PEC selected the Harris site to evaluate for possible future nuclear expansion. We currently expect to file the application for the COL for PEC’s Harris site in 2007. We have selected the Westinghouse Electric AP-1000 reactor design as the technology upon which to base PEC’s potential application submission. On December 12, 2006, we announced that PEF selected a site in Levy County, Fla. to evaluate for possible future nuclear expansion and PEF expects to file the application for the COL in 2008. We have not selected the reactor design technology upon which to base PEF’s potential application submission. If we receive approval from the NRC and applicable state agencies, and if the decisions to build are made, construction activities could begin as early as 2010, and new plants could be online in late 2016. The NRC estimates that it will take approximately three to four years to review and process the COL applications.

SECURITY

The NRC has issued various orders since September 2001 with regard to security at nuclear plants. These orders include additional restrictions on access, increased security measures at nuclear facilities and closer coordination with our partners in intelligence, military, law enforcement and emergency response at the federal, state and local levels. We completed the requirements as outlined in the orders by the committed dates. As the NRC, other governmental entities and the industry continue to consider security issues, it is possible that more extensive security plans could be required.

SPENT FUEL AND OTHER HIGH-LEVEL RADIOACTIVE WASTE

The Nuclear Waste Policy Act of 1982 (Nuclear Waste Act) provides the framework for development by the federal government of interim storage and permanent disposal facilities for high-level radioactive waste materials. The Nuclear Waste Act promotes increased usage of interim storage of spent nuclear fuel at existing nuclear plants. We will continue to maximize the use of spent fuel storage capability within our own facilities for as long as feasible.

With certain modifications and additional approvals by the NRC, including the installation of onsite dry cask storage facilities at Robinson, Brunswick and CR3, the Utilities’ spent nuclear fuel storage facilities will be sufficient to provide storage space for spent fuel generated on their respective systems through the expiration of the operating licenses, including any license extensions, for their nuclear generating units. Harris has sufficient storage capacity in its spent fuel pool through the expiration of its operating license, including any license extension.

On January 16, 2007, the U.S. Supreme Court declined to hear an appeal of a Ninth Circuit U.S. Court of Appeals’ decision in which the Ninth Circuit held that the NRC is required to consider the environmental impacts of terrorist attacks under the National Environmental Policy Act in authorizing an independent spent fuel storage installation. Similar cases, including cases involving operating license renewals, are pending in seven other jurisdictions. The NRC is considering the scope and import of the Ninth Circuit’s decision in reviewing its operating license renewal

program. The extent and timing of the NRC’s application of the case is unclear at this time, and the impact, if any, on PEC’s pending Harris operating license renewal application or any future PEC or PEF operating licensing proceedings cannot be predicted at this time.

Since 2001, PEC and PEF have made various modifications to increase the output of their nuclear facilities. To date, the cumulative increase is approximately 315 MW, of which 311 MW is at PEC and 4 MW is at PEF. In January 2007, the FPSC approved PEF’s petition to uprate CR3’s gross output by approximately 180 MW (See Note 7C).

See Note 22D for a discussion of the Utilities’ contracts with the DOE for spent nuclear fuel.

DECOMMISSIONING

In the Utilities’ retail jurisdictions, provisions for nuclear decommissioning costs are approved by the NCUC, the SCPSC and the FPSC and are based on site-specific estimates that include the costs for removal of all radioactive and other structures at the site. In the wholesale jurisdiction, the provisions for nuclear decommissioning costs are approved by the FERC. A condition of the operating license for each unit requires an approved plan for decontamination and decommissioning. See Note 5D for a discussion of the Utilities’ nuclear decommissioning costs.

ENVIRONMENTAL

We are subject to regulation by various federal, state and local authorities in the areas of air quality, water quality, control of toxic substances and hazardous and solid wastes, and other environmental matters. We believe that we are in substantial compliance with those environmental regulations currently applicable to our business and operations and believe we have all necessary permits to conduct such operations. Environmental laws and regulations frequently change and the ultimate costs of compliance cannot always be precisely estimated. The current estimated capital costs associated with compliance with pollution control laws and regulations that we expect to incur are included within MD&A - “Liquidity and Capital Resources - Capital Expenditures” and within MD&A - “Other Matters - Environmental Matters.”

The provisions of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA), authorize the EPA to require the cleanup of hazardous waste sites. This statute imposes retroactive joint and several liabilities. Some states, including North Carolina, South Carolina and Florida, have similar types of legislation. We are periodically notified by regulators, including the EPA and various state agencies, of our involvement or potential involvement in sites that may require investigation and/or remediation.

There are presently several sites, including 10 manufactured gas plant (MGP) sites, with respect to which we have been notified by the EPA, the State of North Carolina or the State of Florida of our potential liability, as a potentially responsible party (PRP). We have accrued costs for the sites to the extent our liability is probable and the costs can be reasonably estimated. These costs are eligible for regulatory recovery through either base rates or cost-recovery clauses (See Notes 7 and 21). Both PEC and PEF evaluate potential claims against other potential PRPs and insurance carriers and plan to submit claims for cost recovery where appropriate. The outcome of these potential claims cannot be predicted. No material claims are currently pending. While we accrue for probable costs that can be reasonably estimated, based upon the current status of some sites, not all costs can be reasonably estimated or accrued and actual costs may materially exceed our accruals. Material costs in excess of our accruals could have an adverse impact on our financial condition and results of operations.

See Note 21 and MD&A - “Other Matters - Environmental Matters” for additional discussion of our environmental matters, which identifies specific environmental issues, the status of the issues, accruals associated with issue resolutions and our associated exposures.

EMPLOYEES

As of February 15, 2007, we employed approximately 11,000 full-time employees. Of this total, approximately 2,000 employees at PEF are represented by the International Brotherhood of Electrical Workers (IBEW). The three-year labor contract with the IBEW expires in November 2008. We consider our relationship with employees,

including those covered by collective bargaining agreements, to be good.

We have a noncontributory defined benefit retirement (pension) plan for substantially all full-time employees and an employee stock purchase plan among other employee benefits. We also provide contributory postretirement benefits, including certain health care and life insurance benefits, for substantially all retired employees.

As of February 15, 2007, PEC and PEF employed approximately 5,000 and 4,000 full-time employees, respectively.

ELECTRIC - PEC

GENERAL

PEC is a regulated public utility formed under the laws of North Carolina in 1926 and is primarily engaged in the generation, transmission, distribution and sale of electricity in portions of North and South Carolina. At December 31, 2006, PEC had a total summer generating capacity (including jointly owned capacity) of 12,409 MW. For additional information about PEC’s generating plants, see “Electric - PEC” in Item 2, “Properties.” PEC’s system normally experiences its highest peak demands during the summer, and the all-time system peak of 12,577 megawatt-hour (MWh) was set on July 27, 2005.

PEC distributes and sells electricity in North Carolina and northeastern South Carolina. The service territory covers approximately 34,000 square miles, including a substantial portion of the coastal plain of North Carolina extending from the Piedmont to the Atlantic coast between the Pamlico River and the South Carolina border, the lower Piedmont section of North Carolina, an area in western North Carolina in and around the city of Asheville and an area in the northeastern portion of South Carolina. At December 31, 2006, PEC was providing electric services, retail and wholesale, to approximately 1.4 million customers. Major wholesale power sales customers include North Carolina Eastern Municipal Power Agency (Power Agency), North Carolina Electric Membership Corporation and Public Works Commission of the City of Fayetteville, North Carolina (PWC). PEC is subject to the rules and regulations of the FERC, the NCUC, the SCPSC and the NRC. No single customer accounts for more than 10 percent of PEC’s revenues.

BILLED ELECTRIC REVENUES

PEC’s electric revenues billed by customer class, for the last three years, are shown as a percentage of total PEC electric revenues in the table below:

BILLED ELECTRIC REVENUE PERCENTAGES
	2006	2005	2004
Residential	37%	37%	38%
Commercial	25%	24%	25%
Industrial	18%	18%	19%
Wholesale	18%	19%	16%
Other retail	2%	2%	2%

Major industries in PEC’s service area include textiles, chemicals, metals, paper, food, rubber and plastics, wood products and electronic machinery and equipment.

FUEL AND PURCHASED POWER

SOURCES OF GENERATION

PEC’s consumption of various types of fuel depends on several factors, the most important of which are the demand for electricity by PEC’s customers, the availability of various generating units, the availability and cost of fuel and the requirements of federal and state regulatory agencies. PEC’s total system generation (including jointly owned capacity) by primary energy source, along with purchased power for the last three years is presented in the following table:

ENERGY MIX PERCENTAGES
	2006	2005	2004
Coal	47%	47%	47%
Nuclear	43%	42%	43%
Purchased power	6%	6%	6%
Oil/Gas	3%	4%	3%
Hydro	1%	1%	1%

PEC is generally permitted to pass the cost of fuel and certain purchased power costs to its customers through fuel adjustment clauses. The future prices for and availability of various fuels discussed in this report cannot be predicted with complete certainty. See “Commodity Price Risk” under Item 7A, “Quantitative And Qualitative Disclosures About Market Risk” and Item 1A, “Risk Factors.” However, PEC believes that its fuel supply contracts, as described below and in Note 22A, will be adequate to meet its fuel supply needs.

PEC’s average fuel costs per million British thermal units (Btu) for the last three years were as follows:

AVERAGE FUEL COST
(per million Btu)	2006		2005		2004
Coal	$	2.90	$	2.72	$	2.17
Nuclear		0.43		0.42		0.42
Oil		11.04		8.60		6.78
Gas		9.87		10.90		8.29
Weighted-average		2.06		2.03		1.57

Changes in the unit price for coal, oil and gas are due to market conditions. Because these costs are primarily recovered through recovery clauses established by regulators, fluctuations do not materially affect net income.

Coal

PEC anticipates a requirement of approximately 13 million tons of coal in 2007. Almost all of the coal will be supplied from Appalachian coal sources in the United States and will be primarily delivered by rail.

For 2007, PEC has short-term, intermediate and long-term agreements from various sources for approximately 99 percent of its estimated burn requirements of its coal units. The contracts have expiration dates ranging from one to five years. PEC will continue to sign contracts of various lengths, terms and quality to meet its expected burn requirements.

Nuclear

Nuclear fuel is processed through four distinct stages. Stages I and II involve the mining and milling of the natural uranium ore to produce a uranium oxide concentrate and the conversion of this concentrate into uranium hexafluoride. Stages III and IV entail the enrichment of the uranium hexafluoride and the fabrication of the enriched uranium hexafluoride into usable fuel assemblies.

PEC has sufficient uranium, conversion, enrichment and fabrication contracts to meet its near-term nuclear fuel requirement needs. PEC’s nuclear fuel contracts typically have terms ranging from three to ten years. For a discussion of PEC’s plans with respect to spent fuel storage, see “Nuclear Matters.”

Oil and Gas

Oil and natural gas supply for PEC’s generation fleet is purchased under term and spot contracts from several suppliers. PEC has dual-fuel generating facilities that can operate with both oil and gas. The cost of PEC’s oil and gas is hedged at a fixed price or determined by market prices as reported in certain industry publications. PEC believes that it has access to an adequate supply of oil and gas for the reasonably foreseeable future. PEC’s natural

gas transportation for its baseload gas generation is purchased under term firm transportation contracts with interstate pipelines. PEC also purchases capacity under other contracts and utilizes interruptible transportation for its peaking load requirements.

Hydroelectric

PEC has three hydroelectric generating plants licensed by the FERC: Walters, Tillery and Blewett. PEC also owns the Marshall Plant, which has a license exemption. The total maximum dependable capacity for all four units is 225 MW. PEC submitted an application to relicense for 50 years its Tillery and Blewett Plants. The remaining phase of the application process is expected to take up to one year. The license for these plants currently expires in April 2008. The Walters Plant license will expire in 2034.

Purchased Power

PEC purchased approximately 4.2 million MWh, 4.7 million MWh and 4.0 million MWh of its system energy requirements during 2006, 2005 and 2004 and had 1,461 MW of firm purchased capacity under contract during 2006. PEC may acquire additional purchased power capacity in the future to accommodate a portion of its system load needs, and PEC believes that it can obtain enough purchased power to meet these needs. However, during periods of high demand, the price and availability of purchased power may be significantly affected.

ELECTRIC - PEF

GENERAL

PEF, incorporated in Florida in 1899, is an operating public utility engaged in the generation, transmission, distribution and sale of electricity. At December 31, 2006, PEF had a total summer generating capacity (including jointly owned capacity) of 8,913 MW. For additional information about PEF’s generating plants, see “Electric - PEF” in Item 2, “Properties.” PEF’s system normally experiences its highest peak demands during the winter, and the all-time system peak of 10,131 MWh was set on January 24, 2003.

PEF distributes and sells electricity in Florida. The service territory covers approximately 20,000 square miles and includes the densely populated areas around Orlando, as well as the cities of St. Petersburg and Clearwater. PEF is interconnected with 22 municipal and 9 rural electric cooperative systems. At December 31, 2006, PEF was providing electric services, retail and wholesale, to approximately 1.6 million customers. Major wholesale power sales customers include Seminole Electric Cooperative, Inc., Reedy Creek Improvement District, Tampa Electric Company, and the cities of Bartow and Winter Park. PEF is subject to the rules and regulations of the FERC, the FPSC and the NRC. No single customer accounts for more than 10 percent of PEF’s revenues.

BILLED ELECTRIC REVENUES

PEF’s electric revenues, billed by customer class for the last three years, are shown as a percentage of total PEF electric revenues in the table below:

BILLED ELECTRIC REVENUE PERCENTAGES
	2006	2005	2004
Residential	53%	52%	53%
Commercial	26%	25%	25%
Industrial	8%	8%	8%
Wholesale	7%	9%	8%
Other retail	6%	6%	6%

Important industries in PEF’s territory include phosphate rock mining and processing, electronics design and manufacturing, and citrus and other food processing. Other important commercial activities are tourism, health care, construction and agriculture.

FUEL AND PURCHASED POWER

SOURCES OF GENERATION

PEF’s consumption of various types of fuel depends on several factors, the most important of which are the demand for electricity by PEF’s customers, the availability of various generating units, the availability and cost of fuel and the requirements of federal and state regulatory agencies. PEF’s total system generation (including jointly owned capacity) by primary energy source, along with purchased power for the last three years is presented in the following table:

ENERGY MIX PERCENTAGES
	2006	2005	2004
Coal ^(a)	32%	33%	32%
Oil/Gas	31%	33%	32%
Nuclear	15%	13%	16%
Purchased Power	22%	21%	20%

^(a)	Amounts include synthetic fuels from unrelated third parties.

PEF is generally permitted to pass the cost of fuel and purchased power to its customers through fuel adjustment clauses. The future prices for and availability of various fuels discussed in this report cannot be predicted with complete certainty. See “Commodity Price Risk” under Item 7A, “Quantitative And Qualitative Disclosures About Market Risk” and Item 1A, “Risk Factors.” However, PEF believes that its fuel supply contracts, as described below and in Note 22A, will be adequate to meet its fuel supply needs.

PEF’s average fuel costs per million Btu for the last three years were as follows:

AVERAGE FUEL COST
(per million Btu)	2006	2005	2004
Coal ^(a)	$3.16	$2.70	$2.30
Oil	7.03	5.90	4.67
Nuclear	0.50	0.51	0.49
Gas	7.41	8.53	6.41
Weighted-average	4.21	4.15	3.21

^(a)	Amounts include synthetic fuels from unrelated third parties.

Coal

PEF anticipates a combined requirement of approximately 6 million tons of coal in 2007. Approximately 60 percent of the coal is expected to be supplied from Appalachian coal sources in the United States and 40 percent supplied from coal sources in South America. Approximately 55 percent of the coal is expected to be delivered by rail and the remainder by water. Prior to 2006, coal for PEF was supplied by Progress Fuels, a subsidiary of Progress Energy, pursuant to contracts between PEF and Progress Fuels. Beginning in 2006, PEF began entering into coal contracts on its own behalf.

For 2007, PEF has medium-term and long-term contracts with various sources for approximately 99 percent of the estimated burn requirements of its coal units. These contracts have price adjustment provisions and have expiration dates ranging from one to four years. All the coal to be purchased for PEF is considered to be low-sulfur coal by industry standards.

Oil and Gas

Oil and natural gas supply for PEF’s generation fleet is purchased under term and spot contracts from several suppliers. PEF has dual-fuel generating facilities that can operate with both oil and gas. PEF’s oil and gas is either hedged at a fixed price or determined by market prices as reported in certain industry publications. PEF believes that it has access to an adequate supply of oil and gas for the reasonably foreseeable future. PEF’s natural gas transportation for its gas generation is purchased under term firm transportation contracts with interstate pipelines. PEF purchases capacity on a seasonal basis from numerous shippers and interstate pipelines and utilizes interruptible transportation to serve its peaking load requirements.

Nuclear

PEF has sufficient uranium, conversion, enrichment and fabrication contracts to meet its near-term nuclear fuel requirement needs. PEF’s nuclear fuel contracts typically have terms ranging from three to ten years. For a discussion of PEF’s plans with respect to spent fuel storage, see “Nuclear Matters.”

Purchased Power

PEF purchased approximately 10.4 million MWh, 9.9 million MWh and 9.4 million MWh of its system energy requirements during 2006, 2005 and 2004 respectively, and had 2,073 MW of firm purchased capacity under contract during 2006. These agreements include approximately 943 MW of capacity under contract with certain QFs. PEF may acquire additional purchased power capacity in the future to accommodate a portion of its system load needs, and PEF believes that it can obtain enough purchased power to meet these needs. However, during periods of high demand, the price and availability of purchased power may be significantly affected.

COAL AND SYNTHETIC FUELS

Historically, we have had substantial operations associated with the production of coal-based solid synthetic fuels. Our synthetic fuels facilities include five majority-owned synthetic fuels entities and one minority interest in a synthetic fuels entity and have the capability to produce 19 million tons per year. The production and sale of these products qualifies for federal income tax credits within the meaning of Section 29/45K so long as certain requirements are satisfied. Qualifying synthetic fuels facilities entitle their owners to federal income tax credits based on the barrel of oil equivalent of the synthetic fuels produced and sold by these plants. The tax credits associated with synthetic fuels in a particular year may be phased out if annual average market prices for crude oil exceed certain prices. Synthetic fuels are generally not economical to produce and sell absent the credits. Through tax year 2005, our ability to utilize tax credits was dependent on having a sufficient tax liability. In 2005, the tax law was changed and this constraint no longer applies beginning in tax year 2006. The tax credit program for the production of qualifying synthetic fuels is scheduled to expire at the end of 2007.

In May 2006, we idled production of synthetic fuels at our synthetic fuels facilities due to the high level of oil prices. Based on significantly reduced oil prices combined with favorable oil price projections, we resumed limited production at our synthetic fuels facilities in September and October 2006, which continued through the end of 2006. For the year ended December 31, 2006, we produced approximately 3.7 million tons of synthetic fuels.

We also have five terminals on the Ohio River and its tributaries which blend and transload coal and are part of the trucking, rail and barge network for coal delivery; these terminals also support our synthetic fuel facilities.

Our coal and synthetic fuels operations and related risks are described in more detail in Item 1A, “Risk Factors” and MD&A - “Other Matters - Synthetic Fuels Tax Credits.”

CORPORATE AND OTHER

GENERAL

The Corporate and Other segment is comprised of nonregulated business areas that do not separately meet the disclosure requirements as a business segment. It primarily includes the activities of the Parent and PESC as well as miscellaneous nonregulated businesses. PESC provides centralized administrative, management and support services to our subsidiaries. See Note 18 for additional information about PESC services provided and costs allocated to subsidiaries.

ELECTRIC UTILITY REGULATED OPERATING STATISTICS - PROGRESS ENERGY
	Years Ended December 31
	2006			2005			2004		2003		2002
Energy supply (millions of kWhs)
Generated
Steam		48,770			52,306			50,782		51,501		49,734
Nuclear		30,602			30,120			30,445		30,576		30,126
Combustion Turbines/Combined Cycle		11,857			11,349			9,695		7,819		8,522
Hydro		594			749			802		955		491
Purchased		14,664			14,566			13,466		13,848		14,305
Total energy supply (Company share)		106,487			109,090			105,190		104,699		103,178
Jointly owned share^(a)		5,224			5,388			5,395		5,213		5,258
Total system energy supply		111,711			114,478			110,585		109,912		108,436
Average fuel cost (per million Btu)
Fossil	$	4.17		$	4.05		$	3.17	$	2.94	$	2.62
Nuclear fuel	$	0.44		$	0.44		$	0.44	$	0.44	$	0.44
All fuels	$	2.86		$	2.83		$	2.21	$	2.05	$	1.84
Energy sales (millions of kWhs)
Retail
Residential		36,280			36,558			35,350		34,712		33,993
Commercial		25,333			25,258			24,753		24,110		23,888
Industrial		16,553			16,856			17,105		16,749		16,924
Other Retail		4,695			4,608			4,475		4,382		4,287
Wholesale		19,117			21,137			18,323		19,841		19,204
Unbilled		(371	)		(440	)		449		189		275
Total energy sales		101,607			103,977			100,455		99,983		98,571
Company uses and losses		4,880			5,113			4,735		4,716		4,607
Total energy requirements		106,487			109,090			105,190		104,699		103,178
Electric revenues (in millions)
Retail	$	7,429		$	6,607		$	6,066	$	5,620	$	5,515
Wholesale		1,039			1,103			843		914		881
Miscellaneous revenue		254			235			244		207		205