8-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to section 13 or 15(d) of

The Securities Exchange Act of 1934

Date of Report: May 9, 2003

(Date of earliest event reported)

Dominion Resources, Inc.

(Exact name of registrant as specified in its charter)

Virginia	1-8489	54-1229715
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

120 Tredegar Street

Richmond, Virginia 23219-3932

(804) 819-2000

(Address including zip code, and telephone number, including area code, of registrant’s principal executive offices)

(Former name or former address, if changed since last report.)

ITEM 5.    OTHER EVENTS

Effective January 1, 2003, Dominion Resources, Inc. (Dominion) realigned its internal and external reporting structure to include its electric transmission operations in the Dominion Energy segment. Prior to January 1, 2003, electric transmission operations had been included in the Dominion Delivery segment.

The following items from Dominion’s Annual Report on Form 10-K for the year ended December 31, 2002 have been reformatted to reflect the current segment structure of Dominion and are presented in Exhibits 99.1 through 99.4:

· Portions of Item 1. Business

· Portions of Item 2. Properties

· Portions of Management’s Discussion and Analysis of Financial Condition and Results of Operations

· Note 32 to the December 31, 2002, 2001 and 2000 Consolidated Financial Statements

ITEM 7(c).    EXHIBITS

Exhibit
23	Independent Auditors’ Consent
99.1	Portions of Item 1. Business
99.2	Portions of Item 2. Properties
99.3	Portions of Management Discussion and Analysis of Financial Condition and Results of Operations
99.4	Consolidated Financial Statements for the Years Ended December 31, 2002, 2001 and 2000, including Schedule I—Condensed Financial Information of Registrant and Schedule II—Valuation and Qualifying Accounts

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DOMINION RESOURCES, INC.

Registrant

/s/ Steven A. Rogers        

Steven A. Rogers

Vice President and Controller

Date: May 9, 2003

EX-23

Exhibit 23

INDEPENDENT AUDITORS’ CONSENT

We consent to the incorporation by reference in Registration Statement Nos. 333-97393, 333-55904 and 333-36082 of Dominion Resources, Inc. on Forms S-3 and Registration Statement Nos. 333-85094, 333-38396, 333-38398, 333-95567, 333-87529, 333-78173, 333-69305, 333-49725, 333-25587, 333-18391 and 333-02733, of Dominion Resources, Inc. on Forms S-8 of our reports dated January 21, 2003, (February 19, 2003, as to the last two paragraphs of the Lease Commitments section of Note 27; February 21, 2003, as to the last three paragraphs of Note 30; and May 7, 2003 as to Note 32, which reports expressed an unqualified opinion and included an explanatory paragraph as to changes in accounting principle for: goodwill and other intangible assets in 2002, derivative instruments and hedging activities in 2001, and method of accounting used to develop the market-related value of pension plan assets in 2000), appearing in this Current Report on Form 8-K of Dominion Resources, Inc.

/s/ DELOITTE & TOUCHE LLP

Richmond, Virginia

May 9, 2003

EX-99.1

Exhibit 99.1

The Company—Operating Segments

Dominion manages its operations along three primary business lines that integrate its electric and gas services, streamline operations and position it for long-term growth in the competitive marketplace.

Dominion Energy—Dominion Energy manages Dominion’s generation portfolio, consisting primarily of generating units and power purchase agreements. It also manages Dominion’s energy trading and marketing, hedging and arbitrage activities; and electric transmission, gas pipeline and certain gas production and storage operations.

Dominion Delivery—Dominion Delivery manages Dominion’s electric and gas distribution systems, as well as customer service function. Dominion Delivery also includes Dominion’s interest in Dominion Fiber Ventures LLC (DFV), a telecommunications joint venture. See Note 30 to the Consolidated Financial Statements for a discussion of Dominion’s consolidation of DFV beginning in February 2003.

Dominion Exploration & Production—Dominion Exploration & Production manages Dominion’s onshore and offshore gas and oil exploration, development and production operations. They are located in several major producing basins in the lower 48 states, including the outer continental shelf and deep-water areas of the Gulf of Mexico, and Western Canada.

EX-99.2

Exhibit 99.2

Reformatted paragraphs—Properties

Dominion Energy has approximately 6,000 miles of electric transmission lines. Portions of Dominion Energy’s transmission lines cross national parks and forests under permits entitling the federal government to use, at specified charges, surplus capacity in the line, if any exists.

Dominion Energy’s and Dominion Delivery’s right-of-way grants from the apparent owners of real estate have been obtained for most electric lines, but underlying titles have not been examined except for transmission lines of 69 Kv or more. Where rights-of-way have not been obtained, they could be acquired from private owners by condemnation, if necessary. Many electric lines are on publicly owned property, where permission to operate can be revoked.

EX-99.3

Exhibit 99.3

Reformatted Portions of Management’s Discussion and Analysis of Financial Condition and Results of Operations

Operating Segments

In general, management’s discussion of Dominion’s results of operations focuses on the contributions of its operating segments. However, the discussion of Dominion’s financial condition under Liquidity and Capital Resources is based on legal entities as Dominion transacts business in the financial markets on that basis. Dominion’s three primary operating segments are:

Dominion Energy manages Dominion’s generation portfolio, consisting primarily of generating units and power purchase agreements. It also manages Dominion’s energy trading and marketing, hedging and arbitrage activities; and electric transmission, gas pipeline and certain gas production and storage operations. Dominion Energy’s operating results largely reflect: the impact of weather on demand for electricity; customer growth as influenced by overall economic conditions and acquisitions; and changes in prices of commodities, primarily electricity and natural gas, that the segment actively markets and trades, uses for hedging purposes, and consumes in generation activities.

Dominion Delivery manages Dominion’s electric and gas distribution systems, as well as customer service. Dominion Delivery’s operating results reflect the impact of weather on demand for electricity and natural gas and customer growth as influenced by overall economic conditions. Dominion Delivery’s electric and gas businesses are subject to cost-of-service rate regulation; changes in prices of commodities consumed or delivered are generally recoverable in rates charged to customers. However, certain rates may be subject to price caps, limiting recovery of higher costs in certain circumstances. Dominion Delivery also includes Dominion’s interest in Dominion Fiber Ventures LLC (DFV), a telecommunications joint venture. See Note 30 for a discussion of Dominion’s consolidation of DFV beginning in February 2003.

Dominion Exploration & Production manages Dominion’s onshore and offshore gas and oil exploration, development and production operations. They are located in several major producing basins in the lower 48 states, including the outer continental shelf and deep-water areas of the Gulf of Mexico, and Western Canada. Dominion Exploration & Production’s operating results reflect successful discovery of and production from natural gas and oil reserves, as well as changes in prices of natural gas and oil. Dominion Exploration & Production’s commodity risk is managed by the Dominion Energy Clearinghouse (the Clearinghouse) by using derivative instruments, such as forwards, swaps, and options.

In addition, Dominion also presents its corporate functions, financial services and other operations as an operating segment.

For more information on Dominion’s segments, see Note 32 to the Consolidated Financial Statements.

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Results of Operations

Dominion’s discussion of its results of operations includes a tabular summary of contributions by its operating segments to net income and diluted earnings per share, an overview of 2002 and 2001 results of operations for consolidated Dominion, as well as a more detailed discussion of operating segment results of operations.

	2002						2001						2000
(millions, except per share amounts)	Net Income			EPS			Net Income			EPS			Net Income			EPS
Dominion Energy	$	836		$	2.95		$	772		$	3.05		$	544		$	2.30
Dominion Delivery		389			1.38			317			1.26			284			1.20
Dominion E&P		380			1.34			320			1.27			255			1.08
Net income contribution—operating segments		1,605			5.67			1,409			5.58			1,083			4.58
Corporate and Other		(243	)		(0.85	)		(865	)		(3.43	)		(647	)		(2.73	)
Total—Consolidated Dominion	$	1,362		$	4.82		$	544		$	2.15		$	436		$	1.85
Consolidated operating revenue	$	10,218					$	10,558					$	9,246
Consolidated operating expense	$	7,333					$	8,773					$	7,731

Overview of Consolidated Operating Results—2002

Dominion earned $4.82 per diluted share on net income of $1.36 billion in 2002, an increase of $818 million and $2.67 per diluted share over 2001. The increase includes higher net income contributions by all operating segments, partially offset by approximately $0.57 of share dilution, reflecting a substantial increase in the number of average common shares outstanding during 2002. In addition, Dominion recognized fewer specific charges in 2002, as described in Corporate and Other segment results below.

Regulated electric sales and non-regulated retail energy sales increased as a result of favorable weather conditions and growth in customer base. Nonregulated electric sales by Dominion’s merchant generation fleet declined primarily due to lower electricity prices, partially offset by sales from recently acquired and constructed assets. Sales of gas and oil production increased as a result of higher production levels, reflecting Dominion’s ongoing drilling programs, the operations of Louis Dreyfus Natural Gas Corp. (Louis Dreyfus), partially offset by natural production declines and by lower average realized prices for gas and oil, including the

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effects of hedging. Overall, net revenue from Dominion’s energy trading operations decreased for 2002. Gas trading activities contributed less for 2002, reflecting the effects of net unfavorable price changes on unsettled contracts and lower trading margins, partially offset by higher overall trading volumes. Electric trading activities increased for 2002, reflecting favorable price changes on unsettled contracts and higher trading margins. Energy trading operations are discussed in more detail as part of the Dominion Energy segment results of operations.

In addition to the contributions by its operating segments, the discontinuance of goodwill amortization resulted in a $95 million increase in net income. During 2002, Dominion did not recognize any significant specific charges, as compared to 2001 when those charges totaled $797 million, as described in the Corporate and Other segment results. Interest and related charges decreased $52 million, reflecting lower overall interest rates on outstanding debt, partially offset by interest on new issues of debt and distributions on trust preferred securities issued in late 2001 and during 2002. Dominion’s effective income tax rate decreased, reflecting the net $33 million effect of including certain subsidiaries in Dominion’s consolidated state income tax returns. In addition, the effective tax rate decreased for foreign earnings, the discontinuance of goodwill amortization for book purposes and other factors.

Overview of Consolidated Operating Results—2001

Dominion earned $2.15 per diluted share on net income of $544 million in 2001, an increase of $108 million and $0.30 per diluted share over 2000. The increase includes higher net income contributions by all operating segments, partially offset by a higher number of specific charges in 2001 as compared to 2000, as discussed in Corporate and Other segment results below.

The increase in results for Dominion’s operating segments for 2001 reflect the operations of businesses acquired during the year. Dominion acquired Millstone Power Station (Millstone) on March 31, 2001. Its operations contributed significantly to the increase in nonregulated electric sales. Regulated gas sales, nonregulated gas sales and gas and oil production revenue increased as Consolidated Natural Gas Company’s (CNG) operations were included for all of 2001. In addition, 2001 gas and oil production results reflected the inclusion of Louis Dreyfus for two months as well as higher realized prices for gas. Dominion’s energy trading operations, recorded as nonregulated gas and electric sales, net of cost of sales, also contributed to the overall operating revenue increase.

The increase in net income contribution by the segments’ operations was partially offset by a higher-level of specific charges in 2001, as compared to 2000, as described in the discussion of the Corporate and Other segment results. Such charges for 2001 and 2000 totaled $797 million and $579 million, respectively. Interest expense and related charges decreased $27 million, reflecting lower overall interest rates on outstanding debt. Dominion’s effective income tax rate increased and its other taxes decreased in 2001 because its utility operations in Virginia became subject to state income taxes in lieu of gross receipts taxes effective January 2001. In addition, Dominion recognized higher effective rates for foreign earnings and higher pretax income in relation to non-conventional fuel tax credits realized.

Dominion Energy

(millions, except per share amounts)	2002		2001		2000
Operating revenue	$	6,168	$	6,363	$	5,113
Operating expenses		4,608		4,848		4,038
Net income contribution		836		772		544
Earnings per share contribution	$	2.95	$	3.05	$	2.30
Electricity supplied* (million mwhrs)		101		95		83
Gas transmission throughput (bcf)		597		553		567

* Amounts presented are for electricity supplied by utility and merchant generation operations.

Operating Results—2002

Dominion Energy contributed $2.95 per diluted share on net income of $836 million for 2002, a net income increase of $64 million and an earnings per share decrease of $0.10 over 2001. Net income for 2002 reflected lower operating revenue ($195 million), operating expenses ($240 million) and other income ($27 million). Interest expense and income taxes, which are discussed on a consolidated basis, decreased $45 million over 2001. The earnings per share decrease reflected share dilution.

Regulated electric sales revenue increased $189 million. Favorable weather conditions, reflecting increased cooling and heating degree-days, as well as customer growth, are estimated to have contributed $142 million and $44 million, respectively. Fuel rate recoveries increased approximately $65 million for 2002. These recoveries are generally offset by increases in electric fuel expense and do not materially affect income. Partially offsetting these increases was a net decrease of $62 million due to other factors not separately measurable, such as the impact of economic conditions on customer usage, as well as variations in seasonal rate premiums and discounts.

Nonregulated electric sales revenue increased $9 million. Sales revenue from Dominion’s merchant generation fleet decreased $21 million, reflecting a $201 million decline due to lower prices partially offset by sales from assets acquired and constructed in 2002 and the inclusion of Millstone operations for all of 2002. Revenue from the wholesale marketing of utility generation decreased $74 million. Due to the higher

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demand of utility service territory customers during 2002, less production from utility plant generation was available for profitable sale in the wholesale market. Revenue from retail energy sales increased $71 million, reflecting primarily customer growth over the prior year. Net revenue from Dominion’s electric trading activities increased $33 million, reflecting the effect of favorable price changes on unsettled contracts and higher trading margins.

Nonregulated gas sales revenue decreased $351 million. The decrease included a $239 million decrease in sales by Dominion’s field services and retail energy marketing operations, reflecting to a large extent declining prices. Revenue associated with gas trading operations, net of related cost of sales, decreased $112 million. The decrease included $70 million of realized and unrealized losses on the economic hedges of natural gas production by the Dominion Exploration & Production segment. As described below under Selected Information—Energy Trading Activities, sales of natural gas by the Dominion Exploration & Production segment at market prices offset these financial losses, resulting in a range of prices contemplated by Dominion’s overall risk management strategy. The remaining $42 million decrease was due to unfavorable price changes on unsettled contracts and lower overall trading margins. Those losses were partially offset by contributions from higher trading volumes in gas and oil markets.

Gas transportation and storage revenue decreased $44 million, primarily reflecting lower rates.

Electric fuel and energy purchases expense increased $94 million which included an increase of $66 million associated with Dominion’s energy marketing operations that are not subject to cost-based rate regulation and an increase of $28 million associated with utility operations. Substantially all of the increase associated with non-regulated energy marketing operations related to higher volumes purchased during the year. For utility operations, energy costs increased $66 million for purchases subject to rate recovery, partially offset by a $38 million decrease in fuel expenses associated with lower wholesale marketing of utility plant generation.

Purchased gas expense decreased $245 million associated with Dominion’s field services and retail energy marketing operations. This decrease reflected approximately $162 million associated with declining prices and $83 million associated with lower purchased volumes.

Liquids, pipeline capacity and other purchases decreased $64 million, primarily reflecting comparably lower levels of rate recoveries of certain costs of transmission operations in the current year period. The difference between actual expenses and amounts recovered in the period are deferred pending future rate adjustments.

Other operations and maintenance expense decreased $18 million, primarily reflecting a decrease in outage costs due to fewer generation unit outages in the current year.

Depreciation expense decreased $24 million, reflecting decreases in depreciation associated with changes in the estimated useful lives of certain electric generation and transmission property, partially offset by increased depreciation associated with State Line and Millstone operations.

Other income decreased $27 million, including a $14 million decrease in net realized investment gains in the Millstone decommissioning trusts. In addition, the decrease included a $12 million decline in equity income from Elwood Energy, an equity method investment, reflecting higher interest expense due to the issuance of additional debt by that company in 2002.

Operating Results—2001

Dominion Energy contributed $3.05 per diluted share on net income of $772 million for 2001, an increase of $228 million and $0.75 per diluted share over 2000 results. The increase in net income reflected a full year of CNG operations in 2001, the acquisition of Millstone and reductions in certain operating expenses.

Operating revenue increased $1.3 billion to $6.4 billion in 2001, as compared to 2000 reflecting the acquisition of Millstone and a full year of CNG operations for 2001. Regulated electric sales for 2001 reflected customer growth and comparatively higher fuel rates; however, these increases were largely offset by comparatively mild weather. Millstone operations largely contributed to the increase in non-regulated electric sales. Non-regulated gas sales and gas transportation and storage revenue increased, reflecting a full year of CNG operations and increased transportation rates. The results of Dominion’s trading and marketing operations contributed to the overall increase in operating revenue.

Operating expenses increased $810 million to $4.8 billion for 2001, as compared to 2000. Higher commodity prices contributed to increased electric fuel and energy purchases and purchased gas. In addition, purchased gas increased, reflecting CNG operations for the entirety of 2001. Depreciation increased overall due to the inclusion of Millstone. This increase was partially offset by an extension of the estimated useful lives of Dominion’s nuclear plants in connection with the expected relicensing of those plants. This change in estimate resulted in a $78 million decrease in depreciation expense. Purchased capacity decreased as Dominion terminated certain contracts in early 2001. Other operations and maintenance increased due to the inclusion of Millstone operations and scheduled outages at both nuclear and fossil plants.

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Selected Information—Energy Trading Activities

As previously described, Dominion Energy manages Dominion’s energy trading, hedging and arbitrage activities through the Clearinghouse. Dominion believes these operations complement its integrated energy businesses and facilitate its risk management activities. As part of these operations, the Clearinghouse enters into contracts for purchases and sales of energy-related commodities, including natural gas, electricity and oil. Settlement of a contract may require physical delivery of the underlying commodity or, in some cases, an exchange of cash. These contracts are classified as energy trading contracts for financial accounting purposes. The contracts are included in the Consolidated Balance Sheets as components of current and non-current derivative and energy trading assets and liabilities. Gains and losses from energy trading contracts, including both realized and unrealized amounts, are reported net in the Consolidated Statements of Income as revenue.

In accordance with generally accepted accounting principles, Dominion reports energy trading contracts in its financial statements at fair value. A discussion of how Dominion determines fair value for its energy trading contracts, can be found in Critical Accounting Policies presented earlier in MD&A.

The Clearinghouse enters into contracts with the objective of benefiting from changes in the prices of energy commodities. Clearinghouse management continually monitors its contract positions, considering location and timing of delivery or settlement for each energy commodity in relation to market price activity, seeking arbitrage opportunities. For example, after entering into a contract to purchase a commodity, the Clearinghouse typically enters into a sales contract, or a combination of sales contracts, with quantities and delivery or settlement terms that are identical or very similar to those of the purchase contract. When the purchase and sales contracts are settled either by physical delivery of the underlying commodity or by net cash settlement, the Clearinghouse may receive a net cash margin (a realized gain), or sometimes will pay a net cash margin (a realized loss).

Until the contracts are settled, however, Dominion must record the changes in the fair value of both contracts. These changes in fair value represent unrealized gains and losses. To the extent purchase and sales contracts with identical or similar terms are held by the Clearinghouse, the changes in their fair values will generally offset one another. Although the Clearinghouse may hold purchase or sales contracts for delivery of commodities at particular locations and times that have not been offset, such exposures are monitored and actively managed on a daily basis. Dominion’s risk management policies and procedures are designed to limit its exposure to commodity price changes.

Additional discussion can be found in Market Rate Sensitive Instruments and Risk Management and Notes 2, 15 and 29 to the Consolidated Financial Statements. Also, see Note 4 to the Consolidated Financial Statements for a discussion of Dominion’s implementation of new accounting requirements effective January 1, 2003 to reflect the decision of the Emerging Issues Task Force (EITF) in Issue No. 02-3, Issues Involved in Accounting for Contracts under Issue No. 98-10. As a result, some energy-related contracts are no longer subject to fair value accounting.

During 2002, the Clearinghouse also held derivative financial contracts to manage the price risk of certain anticipated sales of Dominion Exploration & Production’s 2002 and 2003 natural gas production (economic hedges). Dominion did not designate these derivatives as hedges for accounting purposes and, as a result, any change in the fair value of these derivatives is included in earnings. During 2002, Dominion Energy recognized a loss of $48 million related to the 2002 economic hedges, representing $43 million from contract settlements and $5 million for the reversal of unrealized gains that existed at December 31, 2001. In addition, Dominion Energy recognized $22 million of unrealized losses in 2002 related to the change in the fair value of the 2003 economic hedges. As anticipated, Dominion Exploration & Production sold sufficient volumes of natural gas in 2002 at market prices, which, when combined with the settlement of the 2002 economic hedges, resulted in a range of prices for those sales contemplated by the risk management strategy. Similarly, Dominion expects the combination of anticipated gas sales and the 2003 economic hedges to result in a range of prices for those sales as contemplated by this risk management strategy in 2003.

A summary of the changes in the unrealized gains and losses in Dominion’s energy trading contracts, including the economic hedges described above, during 2002 follows:

(millions)	Energy Trading Contracts
Net unrealized gain at December 31, 2001	$	165
Contracts realized or otherwise settled during the period		(40	)
Net unrealized gain at inception of contracts initiated during the period		39
Changes in valuation techniques		6
Other changes in fair value		—
Net unrealized gain at December 31, 2002	$	170

The balance of net unrealized gains and losses in Dominion’s energy trading contracts, including the economic hedges discussed above, at December 31, 2002 is summarized

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in the following table based on the approach used to determine fair value and the contract settlement or delivery dates:

(millions)	Maturity Based on Contract Settlement or Delivery Date(s)
Source of Fair Value	Less Than 1 Year		1-2 Years		2-3 Years		3-5 Years		In Excess of 5 Years		Total
Actively quoted(1)	$	8	$	15	$	13					$	36
Other external sources(2)				19		13	$	13	$	8		53
Models and other valuation techniques(3)		19		15		14		10		23		81
Total	$	27	$	49	$	40	$	23	$	31	$	170

⁽¹⁾ Exchange-traded and over-the-counter contracts.

⁽²⁾ Values based on prices from over-the-counter broker activity and industry services and, where applicable, conventional option pricing models.

⁽³⁾ Values based on Dominion’s estimate of future commodity prices when information from external sources is not available and use of internally-developed models, reflecting option pricing theory, discounted cash flow concepts, etc.

Dominion Delivery

(millions, except per share amounts)	2002		2001		2000
Operating revenue	$	2,324	$	2,744	$	2,607
Operating expenses		1,565		2,103		2,024
Net income contribution		389		317		284
Earnings per share contribution	$	1.38	$	1.26	$	1.20
Electricity delivered (million mwhrs)		75		72		74
Gas throughput (mmcf)		364		357		356

Operating Results—2002

Dominion Delivery contributed $1.38 per diluted share on net income of $389 million for 2002, an increase of $72 million and $0.12 per diluted share over 2001. Net income for 2002 reflected lower operating revenue ($420 million), operating expenses ($538 million) and other income ($37 million). Changes in interest and income taxes, which are discussed on a consolidated basis, were not significant.

Regulated electric sales revenue increased $48 million. Favorable weather conditions, reflecting increased cooling and heating degree-days, as well as customer growth, are estimated to have contributed $53 million and $16 million, respectively. Partially offsetting these increases was a net decrease of $21 million due to other factors not separately measurable, such as the impact of economic conditions on customer usage, as well as variations in seasonal rate premiums and discounts.

Regulated gas sales revenue decreased $533 million, reflecting $550 million for lower gas cost recoveries attributable to lower prices and customer migration, partially offset by the impact of slightly colder weather and other factors. The decrease was substantially offset by a $489 million decrease in purchased gas expense, reflecting the matching of purchased gas costs and gas cost recoveries in rates, and increased gas transportation service revenue.

Gas transportation and storage revenue increased $36 million, primarily reflecting the shift of customer status from regulated gas sales to gas transportation service in connection with the switch by distribution customers to other natural gas suppliers. The migration of customers does not generally affect net income, as the recognition of the cost of gas delivered for regulated gas sales customers is matched against rate recoveries.

Other operations and maintenance expense decreased $48 million, primarily reflecting lower general and administrative expenses.

Other income decreased $37 million, reflecting to a large extent a $27 million increase in equity losses on Dominion’s telecommunications joint venture. The increased losses reflected lower revenue and increased operating expenses resulting from the expansion into several new markets in 2002. See Notes 30 and 32 to the Consolidated Financial Statements.

Operating Results—2001

Dominion Delivery contributed $1.26 per diluted share on net income of $317 million for 2001, an increase of $33 million and $0.06 per diluted share over 2000 results. The increase in net income reflects slightly higher gas throughput and slightly lower volumes of electricity delivered, as well as overall higher gas and electric rates.

Operating revenue increased $137 million to $2.7 billion for 2001, reflecting a full year of CNG operations for 2001. This is reflected in higher regulated gas sales and gas transportation and storage revenue as a result of higher overall throughput and rates. Regulated electric sales for 2001 reflect customer growth and comparatively higher fuel rates, partially offset by the effect of comparatively milder weather.

Operating expenses increased $79 million to $2.1 billion for 2001. Higher prices for commodities delivered or consumed contributed to increased purchased gas expense. In addition, purchased gas increased, as 2000 amounts only included 11 months of CNG operations.

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EX-99.4

Exhibit 99.4

INDEPENDENT AUDITORS’ REPORT

To the Shareholders and Board of Directors of

Dominion Resources, Inc.

Richmond, Virginia

We have audited the accompanying consolidated balance sheets of Dominion Resources, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, comprehensive income, common shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Dominion Resources, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 18 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. As discussed in Note 15 to the consolidated financial statements, effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Also, as discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting used to develop the market-related value of pension plan assets in 2000.

/s/    DELOITTE & TOUCHE LLP

Richmond, Virginia

January 21, 2003

(February 19, 2003 as to the last two paragraphs of the Lease

Commitments section of Note 27; February 21, 2003 as to

the last three paragraphs of Note 30; and May 7, 2003 as to Note 32)

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Consolidated Statements of Income

	Year Ended December 31,
(millions, except per share amounts)	2002			2001		2000
Operating Revenue	$	10,218		$	10,558	$	9,246
Operating Expenses
Electric fuel and energy purchases, net		1,447			1,369		1,106
Purchased electric capacity		691			680		741
Purchased gas, net		1,159			1,822		1,453
Liquids, pipeline capacity and other purchases		159			219		299
Restructuring and other acquisition-related costs		(8	)		105		460
Other operations and maintenance		2,198			2,938		2,011
Depreciation, depletion and amortization		1,258			1,245		1,176
Other taxes		429			395		485
Total operating expenses		7,333			8,773		7,731
Income from operations		2,885			1,785		1,515
Other income		103			126		109
Interest and related charges:
Interest expense		826			899		958
Subsidiary preferred dividends and distributions of subsidiary trusts		119			98		66
Total interest and related charges		945			997		1,024
Income before income taxes and minority interests		2,043			914		600
Income taxes		681			370		183
Minority interests							2
Income before cumulative effect of a change in accounting principle		1,362			544		415
Cumulative effect of a change in accounting principle (net of income taxes of $11)							21
Net Income	$	1,362		$	544	$	436
Earnings Per Common Share—Basic:
Income before cumulative effect of a change in accounting principle	$	4.85		$	2.17	$	1.76
Cumulative effect of a change in accounting principle							0.09
Net income	$	4.85		$	2.17	$	1.85
Earnings Per Common Share—Diluted:
Income before cumulative effect of a change in accounting principle	$	4.82		$	2.15	$	1.76
Cumulative effect of a change in accounting principle							0.09
Net income	$	4.82		$	2.15	$	1.85
Dividends paid per common share	$	2.58		$	2.58	$	2.58

The accompanying notes are an integral part of the Consolidated Financial Statements.

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Consolidated Balance Sheets

	At December 31,
(millions)	2002			2001
ASSETS
Current Assets
Cash and cash equivalents	$	291		$	486
Customer accounts receivable (net of allowance of $63 and $76)		2,568			1,770
Other accounts receivable		486			226
Inventories:
Materials and supplies		269			245
Fossil fuel		137			150
Gas stored—current portion		231			182
Investment securities—trading					244
Derivative and energy trading assets		1,365			1,311
Margin deposit assets		149			30
Prepayments		347			384
Escrow account for debt refunding		500
Other		482			375
Total current assets		6,825			5,403
Investments
Available for sale securities		564			393
Nuclear decommissioning trust funds		1,599			1,697
Other		1,011			1,070
Total investments		3,174			3,160
Property, Plant and Equipment, Net
Property, plant and equipment		32,631			29,797
Less accumulated depreciation, depletion and amortization		(12,374	)		(11,433	)
Total property, plant and equipment, net		20,257			18,364
Deferred Charges and Other Assets
Goodwill, net		4,301			4,210
Intangible assets, net		313			317
Regulatory assets, net		580			574
Prepaid pension cost		1,710			1,511
Derivative and energy trading assets		482			545
Other		267			285
Total deferred charges and other assets		7,653			7,442
Total assets	$	37,909		$	34,369

The accompanying notes are an integral part of the Consolidated Financial Statements.

3

Consolidated Balance Sheets (Continued)

	At December 31,
(millions)	2002			2001
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Securities due within one year	$	2,125		$	1,354
Short-term debt		1,193			1,859
Accounts payable, trade		2,310			1,776
Accrued interest, payroll and taxes		606			564
Derivative and energy trading liabilities		1,609			1,086
Other		600			839
Total current liabilities		8,443			7,478
Long-Term Debt
Long-term debt		11,968			11,797
Notes payable—affiliates		92			322
Total long-term debt		12,060			12,119
Deferred Credits and Other Liabilities
Deferred income taxes		4,099			3,812
Deferred investment tax credits Derivative and energy trading liabilities		110 690			128 322
Other		640			626
Total deferred credits and other liabilities		5,539			4,888
Total liabilities		26,042			24,485
Commitments and Contingencies (see Note 27)
Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts(1)		1,397			1,132
Subsidiary Preferred Stock Not Subject To Mandatory Redemption		257			384
Common Shareholders’ Equity
Common stock—no par(2)		9,051			7,129
Other paid-in capital		47			28
Accumulated other comprehensive income (loss)		(446	)		289
Retained earnings		1,561			922
Total common shareholders’ equity		10,213			8,368
Total liabilities and shareholders’ equity	$	37,909		$	34,369

⁽¹⁾ As described in Note 22, the debt securities issued by Dominion Resources, Inc. and certain subsidiaries constitute 100 percent of the trusts’ assets.

⁽²⁾ 500 million shares authorized; 308 million shares and 265 million shares outstanding at December 31, 2002 and 2001, respectively.

The accompanying notes are an integral part of the Consolidated Financial Statements.

4

Consolidated Statements of Common Shareholders’ Equity

	Common Stock					Other Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
(millions)	Shares		Amount
Balance at January 1, 2000	186		$	3,561		$	16		$	(15	)	$	1,212		$	4,774
Issuance of stock—CNG acquisition	87			3,527												3,527
Issuance of stock—public offering	6			354												354
Issuance of stock—employee, executive loan and direct stock purchase plans	4			195												195
Stock awards and stock options exercised (net of change in unearned compensation)				4												4
Stock repurchase and retirement	(37	)		(1,641	)											(1,641	)
Accrued contract payments—equity-linked securities				(21	)											(21	)
Comprehensive income										(8	)		436			428
Dividends and other adjustments													(620	)		(620	)
Balance at December 31, 2000	246			5,979			16			(23	)		1,028			7,000
Issuance of stock and stock options—Louis Dreyfus acquisition	14			894												894
Issuance of stock—employee and direct stock purchase plans	3			185												185
Stock awards and stock options exercised (net of change in unearned compensation)	2			79												79
Tax benefit from stock options exercised							12									12
Comprehensive income										312			544			856
Dividends and other adjustments				(8	)								(650	)		(658	)
Balance at December 31, 2001	265			7,129			28			289			922			8,368
Issuance of stock—public offering	38			1,712												1,712
Issuance of stock—employee and direct stock purchase plans	3			199												199
Stock awards and stock options exercised (net of change in unearned compensation)	3			113												113
Stock repurchase and retirement	(1	)		(66	)											(66	)
Accrued contract payments—equity-linked securities				(36	)											(36	)
Tax benefit from stock options exercised							21									21
Comprehensive income										(735	)		1,362			627
Dividends and other adjustments							(2	)					(723	)		(725	)
Balance at December 31, 2002	308		$	9,051		$	47		$	(446	)	$	1,561		$	10,213

The accompanying notes are an integral part of the Consolidated Financial Statements.

5

Consolidated Statements of Comprehensive Income

	Year Ended December 31,
(millions)	2002			2001			2000
Net income	$	1,362		$	544		$	436
Other comprehensive income, net of taxes:
Net deferred gains (losses) on derivatives—hedging activities, net of tax (expense) benefit of $345 and $(263)		(663	)		465
Unrealized gains (losses) on investment securities, net of tax (expense) benefit of $41, $(10) and $(6)		(68	)		11			9
Foreign currency translation adjustments		6			(9	)		(4	)
Minimum pension liability adjustment, net of tax (expense) benefit of $1, $(3) and $8		(2	)		4			(16	)
Cumulative effect of a change in accounting principle, net of tax benefit of $106					(183	)
Amounts reclassified to net income:
Realized (gains) losses on investment securities, net of tax expense (benefit) of $6 and $(2)					(8	)		3
Net (gains) losses on derivatives—hedging activities, net of tax expense (benefit) of $4 and $(19)		(8	)		32
Other comprehensive income (loss)		(735	)		312			(8	)
Comprehensive income	$	627		$	856		$	428

The accompanying notes are an integral part of the Consolidated Financial Statements.

6

Consolidated Statements of Cash Flows

	Year Ended December 31,
(millions)	2002			2001			2000
Operating Activities
Net income	$	1,362		$	544		$	436
Adjustments to reconcile net income to net cash from operating activities:
Cumulative effect of a change in accounting principle, net of income taxes								(21	)
DCI impairment losses		13			281			291
Net unrealized gains on energy trading contracts		(5	)		(140	)		(25	)
Depreciation, depletion and amortization		1,379			1,322			1,268
Deferred income taxes and investment tax credits, net		714			201			(92	)
Changes in:
Accounts receivable		(814	)		414			(953	)
Inventories		(55	)		(170	)		(62	)
Deferred fuel and purchased gas costs, net		(143	)		293			(250	)
Prepaid pension cost		(198	)		(122	)		(68	)
Purchase and origination of mortgages					(1,528	)		(4,281	)
Proceeds from sale and principal collections of mortgages					993			4,295
Accounts payable, trade		527			(25	)		626
Accrued interest, payroll and taxes		58			(111	)		173
Margin deposit assets and liabilities		(186	)		346			(244	)
Other items, net		(204	)		105			239
Net cash provided by operating activities		2,448			2,403			1,332
Investing Activities
Plant construction and other property additions		(1,339	)		(1,224	)		(1,385	)
Purchases of gas and oil properties, prospects and equipment		(1,489	)		(944	)		(353	)
Loan originations								(2,911	)
Repayment of loan originations		19			283			4,255
Proceeds from sale of businesses					141			836
Acquisition of businesses		(410	)		(2,215	)		(2,779	)
Proceeds from sale of securities		54			30			137
Purchase of securities					(104	)		(235	)
Escrow deposit for debt refunding		(500	)
Other		(295	)		(160	)		(162	)
Net cash used in investing activities		(3,960	)		(4,193	)		(2,597	)
Financing Activities
Issuance of common stock		2,020			245			532
Repurchase of common stock		(66	)					(1,641	)
Issuance of preferred securities of subsidiary trusts		400			747
Repayment of preferred securities of subsidiary trusts		(135	)
Issuance of long-term debt and preferred stock		2,434			7,365			8,108
Repayment of long-term debt and preferred stock		(1,904	)		(4,193	)		(6,813	)
Issuance (repayment) of short-term debt, net		(666	)		(1,620	)		1,820
Common dividend payments		(723	)		(649	)		(615	)
Other		(43	)		21			(46	)
Net cash provided by financing activities		1,317			1,916			1,345
(Decrease) increase in cash and cash equivalents		(195	)		126			80
Cash and cash equivalents at beginning of period		486			360			280
Cash and cash equivalents at end of period	$	291		$	486		$	360
Supplemental cash flow information:
Cash paid (received) during the year for:
Interest and related charges, excluding capitalized amounts	$	912		$	952		$	1,054
Income taxes		(8	)		284			240
Noncash transactions from investing and financing activities:
Exchange of debt securities		567
Stock and stock option issuance—Louis Dreyfus acquisition					894
Note received in sale of business					25
Stock issuance—CNG acquisition								3,527

The accompanying notes are an integral part of the Consolidated Financial Statements.

7

Notes to Consolidated Financial Statements

1.    Nature of Operations

Dominion Resources, Inc. (Dominion) is a holding company headquartered in Richmond, Virginia. Its principal subsidiaries are Virginia Electric and Power Company (Virginia Power), Consolidated Natural Gas Company (CNG), and Dominion Energy, Inc. (DEI). Dominion and CNG are registered public utility holding companies under the Public Utility Holding Company Act of 1935 (1935 Act).

Virginia Power is a regulated public utility that generates, transmits and distributes electricity within a 30,000-square-mile area in Virginia and northeastern North Carolina. Virginia Power sells electricity to approximately 2.2 million retail customers, including governmental agencies, and to wholesale customers such as rural electric cooperatives, municipalities, power marketers and other utilities. Virginia Power has trading relationships beyond its retail service territory and buys and sells wholesale electricity and natural gas off-system.

CNG operates in all phases of the natural gas business. Its regulated retail gas distribution subsidiaries serve approximately 1.7 million residential, commercial and industrial gas sales and transportation customers in Ohio, Pennsylvania and West Virginia. Its interstate gas transmission pipeline system serves each of its distribution subsidiaries, non-affiliated utilities and end use customers in the Midwest, Mid-Atlantic and Northeast. CNG’s exploration and production operations are located in several major natural gas and oil producing basins in the United States, both onshore and offshore. CNG also provides a variety of energy marketing services.

DEI is an independent power producer and a natural gas and oil exploration and production company active in the U.S. and Canada.

Dominion has substantially exited the core operating businesses of Dominion Capital, Inc. (DCI), as required by the Securities and Exchange Commission (SEC) under the 1935 Act. Currently, Dominion is required to divest of all remaining DCI holdings by January 2006. DCI’s primary business was financial services, including loan administration, commercial lending and residential mortgage lending. See Note 6.

Dominion manages its daily operations along three primary operating segments: Dominion Energy, Dominion Delivery and Dominion Exploration & Production. In addition, Dominion also reports the operations of DCI and its corporate and other operations as a segment. Assets remain wholly owned by its legal subsidiaries. See Note 32.

The term “Dominion” is used throughout this report and, depending on the context of its use, may represent any of the following: the legal entity, Dominion Resources, Inc., one of Dominion Resources, Inc.’s consolidated subsidiaries or the entirety of Dominion Resources, Inc. and its consolidated subsidiaries.

2.    Significant Accounting Policies

General

Dominion makes certain estimates and assumptions in preparing its Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles). These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from those estimates.

The Consolidated Financial Statements represent Dominion’s accounts after the elimination of intercompany transactions. Dominion follows the equity method of accounting for investments with less than a 50 percent interest in partnerships and corporate joint ventures when Dominion is able to influence the financial and operating policies of the investee. For all other investments, the cost method is applied.

Certain amounts in the 2001 and 2000 Consolidated Financial Statements have been reclassified to conform to the 2002 presentation.

Use of Fair Value Measurements

Dominion reports certain contracts and instruments at fair value in accordance with applicable generally accepted accounting principles. Fair value is based on actively quoted market prices, if available. In the absence of actively quoted market prices, Dominion seeks indicative price information from external sources, including broker quotes and industry publications. If pricing information from external sources is not available, Dominion must estimate prices based on available historical and near-term future price information and certain statistical methods, including regression analysis.

For options and contracts with option-like characteristics where pricing information is not available from external sources, Dominion uses a modified Black-Scholes model and considers time value, the volatility of the underlying commodities and other relevant assumptions when estimating fair value. For contracts with unique characteristics, Dominion estimates fair value using a discounted cash flow approach deemed appropriate in the circumstances and applied consistently from period to period. If pricing information is not available from external sources, judgment is required to develop the estimates of fair value. For individual contracts, the use of different assumptions could have a material effect on the contract’s estimated fair value.

8

Notes to Consolidated Financial Statements—(Continued)

Operating Revenue

Operating revenue is recorded on the basis of services rendered, commodities delivered or contracts settled and includes amounts yet to be billed to customers. Operating revenue from energy trading activities includes realized commodity contract revenue, net of related cost of sales, and unrealized gains and losses resulting from marking to market those commodity contracts not yet settled. See Note 7. Beginning October 25, 2002 and January 1, 2003, in accordance with new accounting requirements discussed further in Note 4, Dominion discontinued marking to market unsettled commodity contracts that are not otherwise accounted for as derivatives under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities.

Electric Fuel, Purchased Energy and Purchased Gas—Deferred Costs

Where permitted by regulatory authorities, the differences between actual electric fuel, purchased energy and purchased gas expenses and levels of recovery for these expenses in current rates are deferred and matched against recoveries in future periods. See Regulatory Assets and Liabilities below and Note 19.

Income Taxes

Dominion and its subsidiaries file a consolidated federal income tax return. Where permitted by regulatory authorities, the treatment of temporary differences can differ from the requirements of SFAS No. 109, Accounting for Income Taxes. Accordingly, a regulatory asset has been recognized if it is probable that future revenues will be provided for the payment of deferred tax liabilities. Deferred investment tax credits are amortized over the service lives of the properties giving rise to the credits.

Stock-based Compensation

Dominion sponsors two stock plans that provide stock-based awards to directors, executives and other key employees. Under the plans, Dominion grants stock options and restricted stock awards that vest over periods ranging from three to five years. Options have contractual terms that range from seven to ten years. Forty million shares of common stock may be issued under the plans and approximately 12 million of those are available for new grants as of December 31, 2002.

Dominion measures compensation cost for stock-based awards issued to its employees in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Compensation expense is measured based on the intrinsic value, the difference between fair market value of Dominion common stock and the exercise price of the underlying award, on the date when both the price and number of shares the recipient is entitled to receive are known, generally the grant date. Compensation expense is recognized on a straight-line basis over the stated vesting period of the award. See Note 24 for more information on stock-based awards.

The following table illustrates the pro forma effect on net income and earnings per share if Dominion had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation:

	Year Ended December 31,
(millions)	2002			2001			2000
Net income—as reported	$	1,362		$	544		$	436
Add: actual stock-based compensation expense, net of tax(1)		5			18			6
Deduct: pro forma stock-based compensation expense, net of tax		(52	)		(49	)		(12	)
Net income—pro forma	$	1,315		$	513		$	430
Basic EPS—as reported	$	4.85		$	2.17		$	1.85
Basic EPS—pro forma		4.68			2.05			1.82
Diluted EPS—as reported		4.82			2.15			1.85
Diluted EPS—pro forma		4.65			2.03			1.82

⁽¹⁾ Actual stock-based compensation expense reflects primarily the issuance of restricted stock. For 2001, stock-based compensation expense also includes an after-tax charge of $11 million for stock options modified in the 2001 restructuring initiative discussed in Note 8.

Cash and Cash Equivalents

Current banking arrangements generally do not require checks to be funded until actually presented for payment. At December 31, 2002 and 2001, accounts payable included the net effect of checks outstanding but not yet presented for payment of $101 million and $214 million, respectively. For purposes of the Consolidated Statements of Cash Flows, Dominion considers cash and cash equivalents to include cash on hand, cash in banks and temporary investments purchased with a remaining maturity of three months or less. In December 2002, Dominion deposited $500 million in escrow to be used solely for repayment of debt maturing in January 2003. Those restricted funds are not included as cash and cash equivalents on the Consolidated Balance Sheets or Consolidated Statements of Cash Flows.

Margin Deposit Assets and Liabilities

Amounts reported as margin deposit assets represent funds held on deposit by various trading counterparties that resulted from Dominion exceeding agreed-upon credit limits established by the counterparties. Amounts reported as margin deposit liabilities represent funds held by Dominion that resulted from various trading counterparties exceeding agreed- upon credit limits established by Dominion. These credit limits and the mechanism for calculating the amounts to be held on deposit are determined in the International Swap

9

Dealers Association master agreements and the Master Power Purchase & Sale Agreement of the Edison Electric Institute in place between Dominion and the counterparties. As of December 31, 2002 and December 31, 2001, Dominion had margin deposit assets of $149 million and $30 million, respectively, and margin deposit liabilities (reported in other current liabilities) of $22 million and $88 million, respectively.

Property, Plant and Equipment

Property, plant and equipment, including additions and replacements, is recorded at original cost, including labor, materials, other direct costs and capitalized interest. The costs of repairs and maintenance, including minor additions and replacements, are charged to expense as incurred. In 2002, 2001 and 2000, Dominion capitalized interest costs of $95 million, $41 million and $30 million, respectively.

For electric and gas distribution and transmission property subject to cost-of-service utility rate regulation, the cost of such property and related cost of removal, less salvage, are charged to accumulated depreciation at retirement. For generation-related property, cost of removal is charged to expense as incurred. Dominion records gains and losses upon retirement of generation-related property based upon the difference between proceeds received, if any, and the property’s undepreciated basis at the retirement date.

Depreciation of property, plant and equipment is computed on the straight-line method based on projected service lives. Dominion’s depreciation rates on property, plant and equipment for 2002, 2001 and 2000 are as follows: generation – 2.34 percent, 2.78 percent, 2.79 percent, respectively; transmission – 2.26 percent, 2.58 percent, 2.59 percent, respectively; distribution – 3.27 percent, 3.43 percent, 3.48 percent, respectively; storage – 2.47 percent, 2.57 percent, 2.61 percent, respectively; gas gathering and processing – 2.31 percent, 2.19 percent, 2.62 percent, respectively; and general and other – 5.74 percent, 4.94 percent, 5.18 percent, respectively. Amortization of nuclear fuel used in electric generation is provided on a unit-of-production basis sufficient to fully amortize, over the estimated service life, the cost of the fuel plus permanent storage and disposal costs. 

In 2002, Dominion extended the estimated useful lives of most of its fossil fuel stations and electric transmission and distribution property based on depreciation studies that indicated longer lives were appropriate. These changes in estimated useful lives reduced depreciation expense by $42 million for the entirety of 2002 and will reduce depreciation expense by approximately $68 million on an annual basis thereafter. In 2001, Dominion increased its estimate of the useful lives of its nuclear facilities by 20 years, which reduced depreciation expense by $78 million for the entirety of 2001 and approximately $94 million on an annual basis thereafter. This change in estimate was made in connection with current and planned filings of applications for re-licensing with the Nuclear Regulatory Commission (NRC).

Dominion follows the full cost method of accounting for gas and oil exploration and production activities prescribed by the SEC. Under the full cost method, all direct costs of property acquisition, exploration and development activities are capitalized. The full cost method limits these capitalized amounts to no more than the present value of estimated future net revenues derived from the production of proved gas and oil reserves as determined under a method established by the SEC (the ceiling test). If net capitalized costs exceed the ceiling test at the end of any quarterly period, then a permanent write-down of the assets must be recognized in that period. The ceiling test is performed separately for each cost center, with cost centers established on a country-by-country basis. As currently permitted by the SEC, Dominion uses hedge-adjusted period-end prices to calculate the present value of estimated future net revenues. Such prices are used for the portion of anticipated production from proved reserves that is hedged by qualifying cash flow hedges. As of December 31, 2002, the use of period-end market prices rather than hedge-adjusted prices, as otherwise required by the full cost method, would not have resulted in an impairment charge. Due to the volatility of gas and oil prices, it is reasonably possible that for some periods, Dominion may satisfy the ceiling test using hedge-adjusted prices, whereas the use of period-end market prices without the effects of hedging could have resulted in an impairment charge.

Depreciation of gas and oil producing properties is computed using the unit-of-production method. Under the full cost method of accounting, amortization is also accrued on estimated future costs to be incurred in developing proved gas and oil reserves and on estimated dismantlement and abandonment costs, net of projected salvage values. The costs of investments in unproved properties are initially excluded from the depreciable base. Until the properties are evaluated, a ratable portion of the capitalized costs is periodically reclassified to the depreciable base, determined on a property by property basis, over terms of underlying leases. Once a property has been evaluated, any remaining capitalized costs are then transferred to the depreciable base. For a discussion of a change in the accounting for future dismantlement and abandonment costs, see Asset Retirement Obligations in Note 4.

Impairment of Long-Lived and Intangible Assets

Dominion performs an evaluation for impairment whenever events or changes in circumstances indicate that the carrying amount of long-lived assets or intangible assets with finite lives may not be recoverable. These assets are written down to fair value if the sum of the expected future undiscounted cash flows is less than the carrying amounts.

10

Notes to Consolidated Financial Statements—(Continued)

Investment Securities

Dominion accounts for and classifies investments in marketable equity and debt securities in two categories. Debt and equity securities purchased and held with the intent of selling them in the near term are classified as trading securities. Trading securities are reported at fair value with net realized and unrealized gains and losses included in earnings. All other debt and equity securities are classified as available-for-sale securities. These are reported at fair value with realized gains and losses included in earnings and unrealized gains and losses reported as a component of accumulated other comprehensive income, net of tax.

Loans Receivable, Net

Loans receivable are stated at their outstanding principal balance, net of the allowance for credit losses and any deferred fees or costs. Origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield of loans receivable. Each loan is evaluated for impairment by discounting estimated future cash flows at the loan’s original contractual rate. In assessing the recoverability of future cash flows, Dominion management considers the debtor’s financial strength and market position, general economic conditions and other factors. If it is determined that a loan has become impaired, an additional allowance for credit losses is established through provisions for credit losses and is charged against income. Loans receivable deemed to be uncollectible are charged against the allowance for credit losses, and subsequent recoveries, if any, are credited to the allowance. At December 31, 2002 and 2001, the carrying amount of loans receivable was $87 million and $106 million, respectively, net of the allowance for credit losses of $69 million and $79 million, respectively.

Securitizations by Financial Services Businesses

Prior to being divested, Dominion’s financial services businesses would periodically securitize mortgages and loans. Securitizations resulted from the process of selling loans to unconsolidated special purpose trusts in exchange for cash and certain retained interests. Retained interests include subordinated bonds or other securities issued by the trusts or interests in the loans sold. Cash proceeds were determined based on the difference between interest rates to be received on the loans sold and the interest rate to be paid to investors participating in the securitizations. The determination of cash proceeds was also affected by estimates of prepayments, credit losses, servicing costs and non-refundable fees and premiums. Gains and losses realized on the sale of loans were recognized based on the difference between 1) the carrying amount of the loans sold and 2) the sum of the cash proceeds received and the fair value of interests retained in the securitization on the settlement date. Fair value was based on the present value of estimated cash flows, adjusted to reflect the effects of credit losses, prepayments and other factors appropriate in each securitization. Dominion securitized commercial loans receivable in collateralized loan obligation (CLO) and collateralized debt obligation (CDO) transactions. Retained interests in CLO and CDO transactions are reported as available-for-sale securities. In addition, before selling its residential mortgage business, Dominion securitized residential mortgage loans.

Retained interests from the securitization of mortgage loans include interest-only strips, which are recorded, based on the net present value of projected cash flows, using management’s best estimates of key assumptions. These assumptions include credit losses, prepayment speeds, forward yield curves and discount rates commensurate with the risks involved. Interest-only strips are amortized in proportion to the estimated income received. They are analyzed quarterly to determine whether prepayment experience, losses and changes in the interest rate environment have had an impact on the valuation. Expected cash flows of the underlying loans sold are reviewed based on current economic conditions and the types of loans originated and are revised as necessary. See Notes 9 and 13 for more information about Dominion’s investments in retained interests, including the recognition of impairments in 2002, 2001 and 2000.

Derivative Instruments

Dominion uses derivative instruments such as futures, swaps, forwards and options to manage the commodity, currency exchange and financial market risks of its business operations. Dominion also manages a portfolio of commodity contracts held for trading purposes as part of its strategy to market energy and to manage related risks. Derivative instruments are generally recognized on the Consolidated Balance Sheets at fair value. See Note 15 for further discussion of Dominion’s use of derivative instruments and energy trading contracts, including its risk management policy, its accounting policy for derivatives under SFAS No. 133 and the results of its hedging activities for the years ended December 31, 2002 and 2001.

Prior to January 1, 2001, Dominion considered derivative instruments to be effective hedges when the item being hedged and the underlying financial instrument or commodity contract showed strong historical correlation. Dominion used deferral accounting to account for futures, forwards and other derivative instruments that were designated as hedges. Under this method, realized gains and losses (including the payment of any premium) related to effective hedges of existing assets and liabilities were recognized in earnings in conjunction with the designated asset or liability. Gains and losses related to effective hedges of firm commitments and anticipated transactions were included in the measurement of the subsequent transaction.

11

Goodwill, Net

Prior to the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002, goodwill arising from acquisitions completed before July 1, 2001 was amortized on a straight-line basis over periods up to 40 years. In accordance with SFAS No. 142, Dominion did not amortize goodwill arising from acquisitions initiated after June 30, 2001 and ceased amortization of all goodwill upon adoption of the standard. Dominion evaluates goodwill for impairment on at least an annual basis or when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. See Note 18 for further discussion of the adoption of SFAS No. 142 and the goodwill impairment charge recorded in 2002. See Note 5 for discussion of Dominion’s recent significant acquisitions.

Regulatory Assets and Liabilities

Methods of allocating costs to accounting periods for operations subject to federal or state cost-of-service rate regulation may differ from accounting methods generally applied by non-regulated companies. The economic effects of allocations prescribed by regulatory authorities for rate-making purposes must be considered in the application of generally accepted accounting principles. See Notes 19 and 27 for additional information on regulatory assets and liabilities and the impact of legislation on continued application of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation.

Amortization of Debt Issuance Costs

Dominion defers and amortizes debt issuance costs and debt premiums or discounts over the lives of the respective debt issues. As permitted by regulatory authorities, gains or losses resulting from the refinancing of debt allocable to utility operations subject to cost-based rate regulation have also been deferred and amortized over the lives of the new issues.

3.    Accounting Change for Pension Costs

Effective January 1, 2000 and in connection with Dominion’s acquisition of CNG, Dominion adopted a new company-wide method of calculating the market-related value of pension plan assets used to determine the expected return on pension plan assets, a component of net periodic pension cost. Dominion believes the new method enhances the predictability of the expected return on pension plan assets; provides consistent treatment of all investment gains and losses; and results in calculated market-related pension plan asset values that are closer to market value than the values calculated under the pre-acquisition methods used by Dominion or CNG.

The $21 million cumulative effect of the change on prior years (net of income taxes of $11 million) was included in income for the year ended December 31, 2000. The change increased income before cumulative effect of a change in accounting principle for 2000 by $11 million ($0.05 per share-basic and diluted) and net income by $32 million ($0.14 per share-basic and diluted).

4.    Recently Issued Accounting Standards

Asset Retirement Obligations

In 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations, which provides accounting requirements for the recognition and measurement of liabilities associated with the retirement of tangible long-lived assets. Dominion adopted the standard effective January 1, 2003.

Dominion has identified certain asset retirement obligations that are subject to the standard. These obligations are primarily associated with the decommissioning of its nuclear generation facilities, abandoning certain natural gas pipelines and dismantling and removing gas and oil wells and platforms.

Under SFAS No. 143, asset retirement obligations will be recognized at fair value as incurred and capitalized as part of the cost of the related tangible long-lived assets. Under the present value approach used to estimate the fair value of asset retirement obligations, accretion of the liabilities due to the passage of time will be recognized as an operating expense. As a result, the adoption of SFAS No. 143 requires changes in Dominion’s accounting and reporting for certain asset retirement obligations already being recognized under its accounting policies prior to the adoption of SFAS No. 143. For example, Dominion recognizes amounts related to future decommissioning activities at its utility nuclear plants. As discussed in Note 16, the accumulated provision for decommissioning is presented on the balance sheet at December 31, 2002 as a component of accumulated depreciation. Under SFAS No. 143, the asset retirement obligation will be reported as a liability.

In addition, the reporting of realized and unrealized earnings of external trusts available for funding decommissioning activities at Dominion’s utility nuclear plants will be recorded in other income and other comprehensive income, as appropriate. Through 2002, Dominion recorded these trusts’ earnings in other income with an offsetting charge to expense, also recorded in other income, for the accretion of the decommissioning liability.

On January 1, 2003, Dominion implemented SFAS No. 143 and recognized an after-tax gain of $180 million, representing the cumulative effect of a change in accounting principle. Under Dominion’s accounting policy prior to the

12

Notes to Consolidated Financial Statements—(Continued)

adoption of SFAS No. 143, $1.6 billion had previously been accrued for future asset removal costs, primarily related to future nuclear decommissioning. Such amounts are included in the accumulated provision for depreciation, depletion and amortization as of December 31, 2002. With the adoption of SFAS No. 143, Dominion calculated its asset retirement obligations to be $1.5 billion. In recording the cumulative effect of the accounting change, Dominion recognized the reduction attributable to the re-measurement of asset retirement obligations and reclassified such amount from the accumulated provision for depreciation, depletion and amortization to other non-current liabilities. The cumulative effect of the accounting change also reflected a $350 million increase in property, plant and equipment for capitalized asset retirement costs and a $90 million increase in the accumulated provision for depreciation, depletion and amortization, representing the depreciation of such costs through December 31, 2002.

In accordance with SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, Dominion will continue its practice of accruing for future costs of removal for its cost-of-service rate regulated gas and electric utility assets, even if no legal obligation to perform such activities exists. At December 31, 2002, Dominion’s accumulated depreciation, depletion and amortization included $596 million, representing the estimated future cost of such removal activities.

Energy Trading Contracts

In October 2002, the Emerging Issues Task Force (EITF) rescinded EITF Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities (EITF 98-10). As a result, certain energy-related commodity contracts held for trading purposes will no longer be subject to fair value accounting. The affected contracts are those energy-related contracts held for trading purposes that are not considered to be derivatives under SFAS No. 133. Under EITF 98-10 accounting, the fair value of energy contracts was measured at each reporting date, with changes in fair value, including unrealized amounts, reported in earnings. Energy-related contracts affected by the rescission of EITF 98-10 will be subject to accrual accounting and recognized as revenue or expense at the time of contract performance, settlement or termination.

The rescission of EITF 98-10 primarily affects the timing of recognition in earnings from Dominion’s energy-related trading contracts. In addition, affected contracts will no longer be reported at fair value on Dominion’s balance sheet. The EITF 98-10 rescission was effective for all non-derivative energy trading contracts initiated after October 25, 2002. As a result of implementing the change for all non-derivative energy trading contracts initiated prior to October 25, 2002, Dominion recognized a loss of $67 million (net of taxes of $43 million) as the cumulative effect of this change in accounting principle effective January 1, 2003.

Accounting for Guarantees

In November 2002, FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—An Interpretation of FASB Statements No. 5, 57 and 107 (FIN No. 45). Under FIN No. 45, issuers of certain types of guarantees must recognize a liability based on the fair value of the guarantee issued, even when the likelihood of making payments is remote. In addition, FIN No. 45 requires increased disclosures for specific types of guarantees.

FIN No. 45’s initial recognition requirements apply only to guarantees issued or modified after December 31, 2002. Dominion does not anticipate any material impact on its future results of operations or financial condition as a result of recording newly issued or modified guarantees at fair value. FIN No. 45’s disclosure requirements are effective for financial statements ending after December 15, 2002. See Note 27.

Consolidation of Variable Interest Entities

In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, (FIN No. 46) which addresses consolidation by business enterprises of entities that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks and rewards. These entities have been commonly referred to as “special purpose entities.” The underlying principle behind the new Interpretation is that if a business enterprise has the majority financial interest in an entity, defined in the guidance as a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity should be included in consolidated financial statements with those of the business enterprise. FIN No. 46 explains how to identify variable interest entities and how an enterprise should assess its interest in an entity to decide whether to consolidate that entity. Dominion will apply the provisions of FIN No. 46 prospectively for all variable interest entities created after January 31, 2003. For variable interest entities created before January 31, 2003, Dominion will be required to consolidate all entities in which it was deemed to be the primary beneficiary beginning July 1, 2003.

As discussed in Note 27, Dominion, through certain subsidiaries, has entered into agreements with variable interest entities in order to finance and lease several new power generation projects, as well as its corporate headquarters and aircraft. Under existing accounting guidance, neither the project assets nor related obligations are currently reported on

13

Dominion’s Consolidated Balance Sheets. As these variable interest entities are currently structured, Dominion would be determined to be the primary beneficiary under FIN No. 46 and would be required to consolidate these variable interest entities beginning in the third quarter of 2003. Based upon total project costs incurred through December 31, 2002, consolidation of these variable interest entities would result in an additional $1.6 billion in property, plant and equipment and related debt. Dominion’s maximum exposure to loss resulting from these agreements is $1.3 billion as of December 31, 2002. This assessment is based upon total project costs through December 31, 2002 and assumes the property, plant and equipment will have no value at the end of their lease terms, which management believes is highly unlikely. Dominion is considering other financing structures for these projects in the future that may result in continued off-balance sheet treatment.

As discussed in Note 30, Dominion has a 50 percent membership interest in Dominion Fiber Ventures, LLC (DFV), a telecommunications joint venture with approximately $850 million in total assets at December 31, 2002. Under existing accounting guidance, Dominion’s investment in this variable interest entity has been accounted for under the equity method. Under FIN No. 46, Dominion would have been determined to be DFV’s primary beneficiary and thus would have been required to consolidate DFV beginning July 1, 2003. However, as described in Note 30 under Subsequent Event, Dominion began consolidating DFV in February 2003 following its acquisition of substantially all of DFV’s outstanding senior notes, which significantly increased Dominion’s financial interest in DFV. Dominion’s maximum exposure to loss related to its involvement with DFV consists of its $85 million investment in DFV as of December 31, 2002, as well as the $633 million invested in DFV in February 2003 through the acquisition of DFV’s senior notes. In addition, under the joint venture agreements, Dominion must absorb substantially all future DFV operating losses and is exposed to DFV’s obligation for payments to the other DFV investor, representing a return on its investment.

Dominion, through a Dominion Capital subsidiary, has an interest in a developer and manufacturer of engineered polymer products. It is likely that Dominion would be determined to be the primary beneficiary of this variable interest entity under FIN No. 46. Dominion’s maximum exposure to loss as a result of its involvement with this entity is $44 million at December 31, 2002.

Dominion’s management does not anticipate that the changes in accounting requirements will impact planned levels of financing or its credit ratings. Dominion does not anticipate that the adoption of FIN No. 46 will have a material impact on its results of operations for the year ended December 31, 2003.

Other

SFAS No. 133 Guidance—In connection with the January 2003 EITF meeting, FASB was requested to reconsider an interpretation of SFAS No. 133. The interpretation, which is contained in the Derivatives Implementation Group’s C11 guidance, relates to contracts with pricing terms that include broad market indices. In particular, that guidance discusses whether the pricing in a contract that contains broad market indices (e.g., consumer price index) could qualify as a normal purchase or sale and therefore not be subject to fair value accounting. Dominion has certain power purchase and sale contracts that are subject to the guidance addressed in the request for reconsideration. Dominion does not expect the effect of implementing any change, that would ultimately be required as a result of the guidance being clarified, to be material to its results of operations or financial position.

Future Accounting Changes—FASB’s standard-setting process is ongoing. Some of the projects currently on FASB’s agenda include: financial instruments, revenue recognition and procedures related to the purchase method of accounting used for business combinations. In the financial instruments project, FASB is considering whether certain financial instruments should be classified as equity or liabilities on the balance sheet. FASB plans to issue a limited scope statement in 2003. In December 2002, FASB decided to broaden the scope of this project to include development of guidance related to measuring the fair value of financial instruments. The fair value measurement guidance developed in this project would supersede existing guidance. In establishing its revenue recognition project, FASB recognized that no comprehensive standard on revenue recognition exists. FASB plans to issue exposure drafts on a comprehensive accounting standard on revenue recognition and related amendments of its concepts statements in mid-2004 and to finalize the standard and related amendments in 2005. In its project concerned with the purchase method of accounting for business combinations, FASB’s deliberations are expected to consider the following: how to measure the fair value of the exchange; recognition and measurement of acquired assets and assumed liabilities, including pre-acquisition contingencies; and issues related to non-controlling interests. Until new standards have been finalized and issued by FASB, Dominion cannot determine the impact on the reporting of its operations that may result from any such future changes.

14

Notes to Consolidated Financial Statements—(Continued)

5.    Acquisitions

Cove Point LNG Limited Partnership

In September 2002, Dominion acquired 100 percent ownership of Cove Point LNG Limited Partnership (Cove Point), a cost-based rate-regulated entity, from a subsidiary of The Williams Companies for $225 million in cash. Dominion recorded $75 million of goodwill representing the excess of the purchase price over the regulatory basis of Cove Point’s assets acquired and liabilities assumed. Cove Point’s assets include a liquefied natural gas import facility located near Baltimore, Maryland that is under reconstruction, a liquefied natural gas storage facility and an approximately 85-mile natural gas pipeline. Dominion expects Cove Point to become fully operational in 2003. Dominion incurred $33 million of additional development costs during 2002 and expects to incur $84 million of costs in 2003. Cove Point is included in the Dominion Energy operating segment and all of the goodwill arising from the acquisition has been allocated to that segment for purposes of impairment testing under SFAS No. 142.

Mirant State Line Ventures, Inc.

In June 2002, Dominion acquired 100 percent ownership of Mirant State Line Ventures, Inc. (State Line) from a subsidiary of Mirant Corporation for $185 million in cash. State Line’s assets include a 515-megawatt coal-fired generation facility located near Hammond, Indiana. Its operations are included in the Dominion Energy operating segment.

Louis Dreyfus Natural Gas Corp.

In November 2001, Dominion acquired all of the outstanding shares of common stock of Louis Dreyfus Natural Gas Corp. (Louis Dreyfus), a natural gas and oil exploration and production company headquartered in Oklahoma City, Oklahoma. The aggregate purchase price was $1.8 billion, which consisted of approximately 14 million shares of Dominion common stock valued at $881 million, $902 million in cash and employee stock options with a fair value on the date of grant of approximately $13 million. Dominion initially recorded $519 million of goodwill, representing the excess of purchase price over amounts allocated to Louis Dreyfus’ assets acquired and liabilities assumed. The purchase price allocation was completed during the first quarter of 2002 upon receipt of information from outside specialists, increasing liabilities and goodwill each by $24 million.

The operations of Louis Dreyfus are included in the Dominion Exploration & Production operating segment. All of the goodwill arising from the acquisition has been allocated to that segment for purposes of impairment testing under SFAS No. 142. In accordance with SFAS No. 142, no goodwill amortization was recorded related to the acquisition.

Millstone Power Station

In March 2001, Dominion acquired Millstone Power Station (Millstone), a nuclear power station located in Waterford, Connecticut. The aggregate purchase price was $1.3 billion in cash, consisting of approximately $1.2 billion for plant assets and $105 million for nuclear fuel. Dominion recorded $302 million of goodwill representing the excess of the purchase price over amounts allocated to Millstone’s assets acquired and liabilities assumed. The operations of Millstone are included in the Dominion Energy operating segment and all of the goodwill arising from the acquisition has been allocated to that segment for purposes of impairment testing under SFAS No. 142.

CNG

In January 2000, Dominion acquired all of the outstanding shares of CNG and accounted for the acquisition under the purchase method of accounting. The aggregate purchase price was $6.4 billion, consisting of approximately 87 million shares of Dominion common stock valued at $3.5 billion and approximately $2.9 billion in cash. Dominion recorded $3.5 billion of goodwill, representing the excess of the purchase price over the fair value of CNG’s operations not subject to cost-based rate regulation and the historical carrying value of CNG’s operations subject to cost-of-service rate regulation. The operations of CNG are reported in Dominion’s Energy, Delivery and Exploration & Production operating segments and the goodwill arising from the CNG acquisition has been allocated among those segments for purposes of impairment testing under SFAS No. 142.

6.    Divestitures

As of December 31, 2002, Dominion had substantially completed its strategy to exit the core operating businesses of DCI as required by the SEC under the 1935 Act. Currently, Dominion is required to divest of all remaining DCI holdings by January 2006. See Note 9 for charges recognized in connection with the DCI exit strategies in 2001 and 2000. In 2001, Dominion sold Saxon Capital, Inc. and recognized an after-tax loss of $25 million. Under the terms of the sale, Dominion received $116 million in cash, a $25 million note and a non-controlling equity interest that was subsequently sold for $25 million. In addition, Dominion retained approximately $300 million in retained interests related to prior mortgage loan securitizations. Dominion held $185 million and $269 million of retained interests from mortgage loan securitizations at December 31, 2002 and 2001, respectively.

In 2000, Dominion sold $600 million of commercial loans and transferred $223 million of outstanding commercial

15

loan commitments. As of December 31, 2002, Dominion held commercial and other loans receivable of $87 million, net of allowances for loan losses, and $266 million of CLO and CDO-related retained interests. At December 31, 2001, Dominion held commercial and other loans receivable of $106 million, net of allowances for loan losses, and $268 million of CLO and CDO-related retained interests.

In 2000, Dominion completed the sales of Virginia Natural Gas, Inc. and CNG International’s Argentine assets for $678 million. Representing assets held for sale from the CNG acquisition, those transactions did not result in the recognition of any gain or loss. Also in 2000, Dominion completed the sale of its interest in Corby Power Limited for $78 million, resulting in an after-tax gain of $13 million. Dominion completed the sale of its interests in electric generation capacity in Latin America for $405 million in 2000 and 1999, for which Dominion recognized an after-tax impairment loss of $21 million in 1999.

7.    Operating Revenue

	Year Ended December 31,
(millions)	2002		2001		2000
Regulated Sales
Electric	$	4,856	$	4,619	$	4,492
Gas		876		1,409		1,374
Nonregulated Sales
Electric		1,017		1,022		318
Gas		778		1,073		671
Gas transportation and storage		705		702		486
Gas and oil production		1,334		1,057		857
Other		652		676		1,048
Total operating revenue	$	10,218	$	10,558	$	9,246

The primary types of sales and service activities reported as operating revenue include:

Regulated electric sales consist primarily of state-regulated retail electric sales and federally regulated wholesale electric sales and electric transmission services subject to cost-of-service rate regulation.

Regulated gas sales consist primarily of state-regulated retail natural gas sales and related distribution services.

Nonregulated electric sales consist primarily of sales of electricity from utility, independent power production and merchant nuclear plant resources at market-based rates and net operating revenue from electric trading activities.

Nonregulated gas sales consist primarily of sales of natural gas at market-based rates, brokered gas sales and net operating revenue from gas trading activities. Natural gas sold includes gas produced by Dominion as well as purchased gas.

Gas transportation and storage consists primarily of federally-regulated sales of gathering, transmission, distribution and storage services. Also included are gas distribution charges to retail distribution service customers opting for alternate suppliers.

Gas and oil production consists primarily of sales of natural gas, oil and condensate produced by Dominion. Gas and oil production revenue is reported net of royalties.

Other revenue consists primarily of miscellaneous service revenue from electric and gas distribution operations; sales of coal, brokered oil and other extracted products; gas and oil processing; gas transmission capacity release; and interest and other income from financial services operations.

Dominion’s customer accounts receivable at December 31, 2002 and 2001 included $334 million and $307 million, respectively, of accrued unbilled revenue based on estimated electric energy or natural gas delivered but not yet billed to its utility customers. Considering historical usage and applicable customer rates, Dominion estimates unbilled utility revenue based on weather factors and, for electric customers, total daily electric generation supplied after adjusting for estimated losses of energy during transmission.

8.    Restructuring and Acquisition-Related Activities

2001 Restructuring Costs

In the fourth quarter of 2001, after fully integrating CNG’s organization and operations with those of Dominion, management initiated a focused review of Dominion’s combined operations and developed a plan of reorganization. As a result, Dominion recognized $105 million of restructuring costs which included employee severance and termination benefits and the abandonment of leased office space no longer needed. In addition, restructuring charges included approximately $46 million related to departing employees for modifications of stock options, special termination benefits and losses related to the settlement of the related nonqualified pension obligation and plan curtailment attributable to reductions in expected future years of service of plan participants. See Note 26.

Under the 2001 restructuring plan, Dominion identified approximately 340 salaried positions to be eliminated and recorded $42 million in employee severance-related costs. Severance payments were based on the individual’s base salary and years of service at the time of termination. In 2002, Dominion recorded an $8 million adjustment to the liability for severance and related costs and reported it in restructuring and other acquisition-related costs in the Consolidated Statements of Income. With 303 positions actually being eliminated under the plan, the adjustment reflected a reduction in the number of employee positions being

16

Notes to Consolidated Financial Statements—(Continued)

eliminated and a reduction for differences between actual and estimated base salaries and years of service for those employees actually terminated under the plan.

Restructuring and related costs for the year ended December 31, 2001 were as follows:

	(millions)
Severance and related costs	$	42
Nonqualified plan benefits, settlement and other costs		46
Lease termination and restructuring		13
Other		4
Total restructuring costs	$	105

The change in the liabilities for severance and related costs and lease termination costs during 2002 is presented below:

(millions)	Severance Liability			Lease Liability
Balance at December 31, 2001	$	42		$	10
Amounts paid		(24	)		(1	)
Revision of estimate		(8	)
Balance at December 31, 2002	$	10		$	9

2000 Restructuring and Acquisition-Related Activities

During 2000, Dominion incurred charges associated with the divestiture of certain businesses and the implementation of a restructuring plan for the operations of Dominion and its subsidiaries. The divestitures and restructuring plans were driven by certain requirements associated with the CNG acquisition and a focus on operations in the region that begins at the Mid-America Interconnected Network (MAIN) and extends north-eastward through Maine (MAIN-to-Maine). The restructuring plan included an involuntary severance program, a voluntary early retirement program (ERP) and a transition plan to consolidate operations after the CNG acquisition.

For the year ended December 31, 2000, Dominion recorded $460 million of restructuring and acquisition-related costs, including those incurred from exiting certain businesses of DCI, as follows:

	(millions)
Severance and related costs	$	70
Commodity contract losses		55
Information technology related costs		35
Lease termination and restructuring		14
DCI exit strategies (see Note 9)		172
ERP benefit costs (see Note 26)		114
Curtailment gains (see Note 26)		(26	)
Other		26
Total	$	460

Employee Severance Programs—As a result of the 2000 restructuring activities, Dominion eliminated 750 salaried positions. Severance payments were based on the individual’s base salary and years-of-service at the time of termination. In addition, severance payments were provided to employees at DCI who were terminated as part of Dominion’s strategy to exit certain businesses of DCI. At December 31, 2001, $3 million of severance and related benefit costs accrued under the plan had not yet been paid; such amounts were paid during 2002.

Change in Risk Management Strategy—During the first quarter of 2000, Dominion created an enterprise risk management group with responsibility for managing Dominion’s aggregate energy portfolio, including the related commodity price risk, across its consolidated operations. In connection with this change in risk management strategy, management evaluated CNG’s hedging strategy in relation to Dominion’s combined operations and designated CNG’s portfolio of derivative contracts that existed on January 28, 2000, as held for purposes other than hedging for accounting purposes. This action required a change to mark-to-market accounting and resulted in $55 million of losses recognized in the first quarter of 2000 before Dominion had either financially settled the contracts or had entered into offsetting contracts.

Other—Restructuring and other acquisition-related costs included amounts paid to employees to retain their services during the post-acquisition transition period, amounts payable under certain employee contracts and information technology systems and operations integration costs. The information technology costs included excess amortization expense attributable to shortening the useful lives of capitalized software being impacted by systems integration and related conversion costs. Dominion also incurred lease termination and restructuring costs as a result of the consolidation of operations.

9.    Impairment Losses—DCI Operations

In 2002, Dominion recognized impairment losses of $24 million ($16 million after-tax) on its retained interests in mortgage securitizations and goodwill associated with a DCI subsidiary. These impairment losses were reported in other operations and maintenance expenses. See Note 18 for a discussion of the goodwill impairment. In 2001, Dominion recognized impairment losses of $281 million on various investments at DCI and reported the losses in other operations and maintenance expenses. These charges, after-tax, reduced 2001 net income by $183 million. In 2000, Dominion recognized impairment losses of $291 million, of which $172 million was determined to be attributable to Dominion’s DCI exit strategy and were included in restructuring and other acquisition-related costs. The remaining $119 million of impairment charges were related to normal operations of DCI

17

and are included in other operations and maintenance expenses. See Notes 6, 8 and 13. These charges, after-tax, reduced 2000 net income by $186 million. The 2002, 2001 and 2000 impairments are reflected in the Corporate and Other operating segment. See Note 32.

The table below presents a summary of the impairment losses recorded in 2002, 2001 and 2000:

(millions)	2002		2001		2000
Retained interests from mortgage securitizations	$	11	$	21	$	106
Retained interests from CLO/CDO securitizations				81
Loans receivable				94		36
Venture capital and other equity investments		13		64		46
Investment in First Source Financial LLP						49
Real-estate projects and other				21		54
Total	$	24	$	281	$	291

Retained Interests—Mortgage, CLO and CDO Securitizations

As part of routine quarterly reviews of its retained interests in mortgage securitizations during the fourth quarter of 2002, Dominion revised its prepayment speed assumptions for estimating fair values and, as a result, recognized an $11 million write-down of the carrying values of those investments. During its review of its retained interests in mortgage, CLO and CDO securitizations in 2001, Dominion considered the following: historical performance of its securitized pools; recent prepayment and credit loss experience of loans in those pools; other industry data; and economic factors prevailing in the U.S. economy, particularly conditions brought about by the September 11, 2001 events and the mortgage interest rate environment at the time of the assessment. In light of actual credit loss experience and actual prepayment activity of certain mortgage and commercial loans in the securitization trusts, Dominion increased its credit loss and prepayment speed assumptions used to estimate the fair value of its retained interests in mortgage, CLO and CDO securitizations. With these changes in estimates, Dominion recognized a write-down of the carrying values of its retained interests in mortgage and CLO and CDO securitizations of $21 million and $81 million, respectively. During the first half of 2000, in response to changes in market conditions, Dominion increased the discount rate used to value the interest-only strips included in its retained interests in mortgage securitizations from 12 percent to 17 percent and recognized a loss of $106 million. See Note 13 for significant credit loss, prepayment and discount rate assumptions.

Loans and Other Investments

The other impairments and loss provisions in 2001 reflect Dominion’s current estimate of net realizable values considering the dramatically weakened economy and increasing instances of bankruptcies, defaults and major restructurings that significantly diminished investment values. Dominion’s valuation methodologies and assumptions vary by investment and include cash flow analysis, signed contracts, independent third-party appraisals and, in certain cases, liquidation value.

10.    Income Taxes

Income before provision for income taxes, classified by source of income, before minority interests, was as follows:

	Year Ended December 31,
(millions)	2002		2001		2000
U.S.	$	2,018	$	816	$	552
Non-U.S.		25		98		48
Total	$	2,043	$	914	$	600

Details of income tax expense were as follows:

	Year Ended December 31,
(millions)	2002			2001			2000
Current
Federal	$	(46	)	$	104		$	255
State		13			62			20
Non-U.S.					3
Total current		(33	)		169			275
Deferred
Federal		654			151			(111	)
State		65			24			16
Non-U.S.		13			45			22
Total deferred		732			220			(73	)
Amortization of deferred investment tax credits—net		(18	)		(19	)		(19	)
Total income tax expense	$	681		$	370		$	183

18

Notes to Consolidated Financial Statements—(Continued)

The statutory U.S. federal income tax rate reconciles to the effective income tax rates as follows:

	Year Ended December 31,
	2002(1)		2001(2)		2000
U.S. statutory rate	35.0	%	35.0	%	35.0	%
Increases (reductions) resulting from:
Utility plant differences	(0.1	)	0.5		0.8
Preferred dividends	0.3		0.9		2.1
Amortization of investment tax credits	(0.7	)	(1.7	)	(2.3	)
Nonconventional fuel credit	(1.8	)	(4.6	)	(7.1	)
Other benefits and taxes related to foreign operations	0.2		3.0		(2.7	)
State taxes, net of federal benefit	2.5		5.9		4.3
Goodwill amortization			3.3		4.4
Employee pension and other benefits	(0.6	)	(1.4	)	(1.4	)
Employee stock ownership plan deduction	(0.8	)
Other, net	(0.7	)	(0.5	)	(2.6	)
Effective tax rate	33.3	%	40.4	%	30.5	%

⁽¹⁾ Dominion’s effective income tax rate decreased, reflecting the effect of including certain subsidiaries in Dominion’s consolidated state income tax returns. In addition, the effective tax rate decreased for foreign earnings, the impact of discontinuing goodwill amortization for book purposes and other factors.

⁽²⁾ Dominion’s effective income tax rate increased in 2001 due to its utility operations in Virginia becoming subject to state income taxes in lieu of gross receipts taxes, higher effective rates associated with foreign earnings and higher pretax income in relation to nonconventional fuel tax credits realized.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Dominion’s net deferred taxes consist of the following:

	At December 31,
(millions)	2002		2001
Deferred income tax assets:
Other comprehensive income	$	246
Deferred investment tax credits		37	$	43
Other		18		122
Total deferred income tax assets		301		165
Deferred income tax liabilities:
Depreciation method and plant basis differences		2,007		1,911
Income taxes recoverable through future rates		15		19
Partnership basis differences		184		113
Investee earnings reported in different tax periods		149		143
Postretirement and pension benefits		517		464
Intangible drilling costs		723		520
Geological, geophysical and other exploration differences		196		170
Deferred state income taxes		222		221
Other comprehensive income				182
Other		298		113
Total deferred income tax liabilities		4,311		3,856
Total net deferred income tax liabilities(1)	$	4,010	$	3,691

⁽¹⁾ For 2002 and 2001, total net deferred income tax liabilities include $89 million and $121 million, respectively, of current deferred tax assets reported in other current assets.

At December 31, 2002, Dominion had U.S. federal net operating loss carryforwards of $107 million. These carryforwards are expected to be fully utilized between 2003 and 2007. These amounts resulted from the acquisition of subsidiaries.

11.    Earnings Per Share

The following table presents Dominion’s basic and diluted earnings per share (EPS) calculation:

	Year ended December 31,
(millions, except per share amounts)	2002		2001		2000
Basic
Income before cumulative effect of a change in accounting principle	$	1,362	$	544	$	415
Average shares of common stock outstanding—basic		281.0		250.2		235.2
Basic EPS	$	4.85	$	2.17	$	1.76
Diluted
Income before cumulative effect of a change in accounting principle	$	1,362	$	544	$	415
Average shares of common stock outstanding		281.0		250.2		235.2
Net effect of dilutive stock options(1)		1.6		2.3		0.7
Average shares of common stock outstanding—diluted		282.6		252.5		235.9
Diluted EPS	$	4.82	$	2.15	$	1.76
Average anti-dilutive shares excluded from the EPS calculation		11.0		3.0		4.0

⁽¹⁾ Represents the effect of “in-the-money” stock options on the calculation of average outstanding shares of common stock.

12.    Inventories

At December 31, 2002 and 2001, stored gas inventory used in local gas distribution operations was valued at $52 million and $84 million, respectively, under the last-in-first-out (LIFO) method. Based on the average price of gas purchased during 2002, the current cost of replacing the current portion of stored gas inventory exceeded the amount stated on a LIFO basis by approximately $163 million. At December 31, 2002 and 2001, the stored gas inventory of certain of Dominion’s nonregulated gas operations was valued at $179 million and $98 million, respectively, using primarily the weighted average cost method.

A portion of gas in underground storage used as a pressure base and for operational balancing was included in property, plant and equipment in the amount of $124 million at December 31, 2002 and 2001. Property, plant and equipment also reflected a reduction for volumes temporarily withdrawn from storage and valued at replacement costs of $53 million and $25 million as of December 31, 2002 and 2001, respectively.

Materials and supplies and fossil fuel inventories are valued using primarily the weighted average cost method.

13.    Securitization of Financial Assets

In prior years, Dominion sold residential mortgage loans and commercial loans in securitization transactions. In those securitizations, Dominion retained servicing responsibilities

19

and interests which are subordinate to the interests of investors participating in the securitizations. The investors and the securitization trusts have no recourse to Dominion’s other assets for failure of debtors to pay when due. In 2001 and 2000, Dominion recognized pretax gains of $21 million and $85 million, respectively, on the securitization of residential mortgage loans.

Dominion’s retained interests in mortgage securitizations were based on rights to annual servicing fees approximating 50 basis points of the outstanding balance and rights to future cash flows from the performance of the loan portfolios after the investors in the securitization trusts have received their contracted return. In addition, Dominion will continue to receive future cash flows from prepayment penalties on mortgage loans that payoff during the contractual penalty period. The value of the retained interests is subject to credit, prepayment and interest rate risks related to the mortgage loans sold. For CLOs, Dominion receives annual servicing fees of 38 basis points of the outstanding balance and rights to future cash flows after the investors in the securitization trusts have received their contracted return. The estimated fair value of Dominion’s retained interests at the time of the 2001 and 2000 securitizations was based on expected cash flow recoveries from the loan portfolios. The majority of the commercial loans securitized were variable rate loans. As a result, changes in interest rates will not cause a material change in the performance of the loan portfolios. See Notes 2 and 9 for a discussion of Dominion’s accounting policy for securitizations and the outcome of routine quarterly reviews of retained interests in mortgage, CLO and CDO securitizations during 2002, 2001 and 2000 and related impairment charges.

Activity for the retained interests from securitizations of mortgage loans, including interest-only strips and servicing rights, and the CLO and CDO retained interests is summarized as follows:

(millions)	Interest-Only Strips— Mortgage Loans(1)			Servicing Rights Mortgage Loans			Retained Interest— CLO			Retained Interest— CDO
Balance at January 1, 2000	$	347		$	39					$	58
Retained from securitization		99			18		$	76			30
Amortization		(16	)		(7	)
Cash received		(51	)								(4	)
Gain on trading securities		25
Fair value adjustment		(102	)		(5	)					(1	)
Balance at December 31, 2000		302			45			76			83
Retained from securitization		33						196
Amortization		(9	)
Cash received		(55	)								(6	)
Gain on trading securities		19
Servicing rights sold(2)					(45	)
Fair value adjustment		(21	)					(67	)		(14	)
Balance at December 31, 2001		269			—			205			63
Amortization		(5	)
Cash received		(49	)								(2	)
Loss on securities		(19	)
Fair value adjustment		(11	)
Balance at December 31, 2002	$	185			—		$	205		$	61

⁽¹⁾ Includes prepayment penalties.

⁽²⁾ Dominion sold all of its servicing rights as part of its sale of Saxon Mortgage in 2001.

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Notes to Consolidated Financial Statements—(Continued)

Presented below are the fair values of Dominion’s retained interests and related key economic assumptions as of December 31, 2002 and the sensitivity of the retained interests’ fair value to adverse changes of 10 percent and 20 percent in those assumptions:

(millions, except percentages)	Retained Interest— Mortgage Loans			Retained Interest— CLO			Retained Interest— CDO
Carrying amount/fair value	$	182		$	205		$	61
Weighted-average life (in years)		3.54			1.87			3.69
Prepayment speed assumption (annual rate)		(1	)		N/A			N/A
Impact on fair value of 10% adverse change	$	(12	)		N/A			N/A
Impact on fair value of 20% adverse change		(23	)		N/A			N/A
Expected credit losses (annual rate)		3.6	%		4	%(2)		2	%(3)
Impact on fair value of 10% adverse change	$	(7	)	$	(6	)	$	(3	)
Impact on fair value of 20% adverse change		(14	)		(10	)		(7	)
Residual cash flows discount rate (annual)		17	%		10	%		16.9	%
Impact on fair value of 10% adverse change	$	(6	)	$	(10	)	$	(4	)
Impact on fair value of 20% adverse change		(11	)		(15	)		(8	)
Interest rates on variable and adjustable contracts		(4	)		N/A			N/A
Impact on fair value of 10% adverse change	$	(2	)		N/A			N/A
Impact on fair value of 20% adverse change		(4	)		N/A			N/A

⁽¹⁾ Fixed rate loans ramp up to 25 constant prepayment rate (CPR) over 16 months. Adjustable rate loans ramp up to 65 CPR over 16 months, ramping down to 40 CPR over 12 months. Second liens ramp up to 35 CPR over 16 months, ramping down to 22 CPR over 26 months. Two-year hybrid loans ramp up to 32 CPR over 14 months; ramping up to 65 CPR in month 25; ramping to 31 CPR over 7 months. Three-year hybrid loans ramp up to 32 CPR over 14 months; ramping up to 60 CPR in month 37; ramping down to 31 CPR over 7 months.

⁽²⁾ Defaults occur at the beginning of each period. They are applied on constant percentage to the period’s beginning collateral balance.

⁽³⁾ Assets rated Caa1 and lower are defaulted using a cumulative default rate (CDR) vector based upon Moody’s Cumulative Default Rates for Caa1-C securities. A 2 percent per annum CDR is applied to remaining assets with ongoing recoveries of 40 percent and 80 percent on bonds and loans, respectively.

⁽⁴⁾ Based on the full forward 1-month LIBOR, 6-month LIBOR or 1-year constant maturity treasury rate through January 1, 2006 based on the variable component of the variable rate contracts.

These sensitivities are hypothetical. Changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interests was calculated without changing any other assumption. In reality, changes in one factor may result in changes in another factor which might magnify or counteract the sensitivities. For example, increases in market interest rates may result in lower prepayments and increased credit losses.

14.    Investment Securities

Dominion holds marketable debt and equity securities classified as available-for-sale. Those investments are reported as available-for-sale securities on the Consolidated Balance Sheets in Other Investments. In addition, the Millstone nuclear decommissioning trust funds holds marketable debt and equity securities classified as available-for-sale. See Note 16 for additional disclosure of Dominion’s accounting for the Millstone decommissioning trusts. Available-for-sale securities as of December 31, 2002 and 2001 are summarized below:

(millions)	Fair Value		Total Unrealized Gains Included in AOCI		Total Unrealized Losses Included In AOCI
2002
Equity securities	$	489	$	1	$	118
Debt securities		758		14		14
Total	$	1,247	$	15	$	132
2001
Equity securities	$	551	$	11	$	4
Debt securities		684		1		16
Total	$	1,235	$	12	$	20

Debt securities backed by mortgages and loans do not have stated contractual maturities as borrowers have the right to call or repay obligations with or without call or prepayment penalties. At December 31, 2002, these debt securities totaled $448 million. See Note 13 for a discussion of the assumed weighted average life of those investments. The fair value of all other debt securities at December 31, 2002 by contractual maturity are as follows:

	(millions)
Due in one year or less	$	4
Due after one year through five years		56
Due after five years through ten years		96
Due after ten years		146
Total	$	302

Proceeds from sales of available-for-sale securities were $577 million for 2002, $484 million for 2001 and $3 million for 2000. Realized gains associated with sales of available-for-sale securities totaled $58 million for 2002, $18 million for 2001 and $1 million for 2000. Realized losses on those sales totaled $58 million, $4 million and $6 million for 2002, 2001 and 2000, respectively. Beginning in 2001, proceeds and realized gains and losses included activity in the Millstone nuclear decommissioning trusts. The cost of these securities was determined on a specific identification basis. For 2002, Dominion recognized net unrealized losses of $5 million on trading securities, other than those associated with its retained interests from previously securitized mortgages, which are discussed below. For 2001 and 2000, net unrealized holding gains on trading securities increased pre-tax earnings by $21 million and $6 million, respectively. Net unrealized holding gains for 2000 included a $14 million loss relating to the reclassification of certain available-for-sale securities to the trading category.

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During the second quarter of 2002, Dominion evaluated its ability to sell its retained interests from previously securitized mortgages. The evaluation process included discussions with various investment advisors, securitizers of mortgages and others in the mortgage industry. The result of that evaluation was that the retained interests were not readily marketable on terms that would be acceptable to Dominion. Therefore, during the second quarter of 2002, Dominion reclassified its retained interests from trading to available-for-sale. While classifying the retained interests as trading, Dominion recognized $5 million of net realized and unrealized pre-tax losses in earnings through May 1, 2002. Beginning on May 1, 2002, unrealized gains and losses on the retained interests were recorded in other comprehensive income.

15.   Derivative Instruments, Hedge Accounting and Energy Trading Activities

Adoption of SFAS No. 133

Dominion adopted SFAS No. 133 on January 1, 2001 and recorded an after-tax charge to accumulated other comprehensive income (AOCI) of $183 million, net of taxes of $106 million.

Risk Management Policy

Dominion uses derivative instruments to manage the commodity and financial market risks of its business operations. Dominion manages the price risk associated with purchases and sales of electricity, natural gas and oil by using derivative instruments including futures, forwards, swaps and options. Dominion manages the foreign exchange risk associated with anticipated future purchases denominated in foreign currencies through currency forward contracts. Dominion also manages its interest rate risk exposure, in part, by entering into interest rate swap transactions.

As part of its strategy to market energy and to manage related risks, Dominion manages a portfolio of commodity-based derivative instruments held for trading purposes. These contracts are sensitive to changes in the prices of energy commodities, primarily natural gas and electricity. Dominion uses established policies and procedures to manage the risks associated with these price fluctuations and uses various derivative instruments, such as futures, swaps and options, to reduce risk by creating offsetting market positions. Dominion has operating procedures in place that are administered by experienced management to help ensure that proper internal controls are maintained regarding the use of derivative instruments. In addition, Dominion has established an independent function to monitor compliance with the risk management policies of all subsidiaries.

Dominion designates a substantial portion of derivative instruments held for purposes other than trading as fair value or cash flow hedges for accounting purposes. A significant portion of Dominion’s hedge strategies represents cash flow hedges of the variable price risk associated with the purchase and sale of electricity, natural gas, oil and other commodities. Dominion also uses cash flow hedge strategies to hedge the variability in foreign exchange rates and variable interest rates on long-term debt. In its cash flow hedges, Dominion uses the derivative instruments discussed in the preceding paragraphs. Dominion also engages in fair value hedges by using natural gas swaps, futures and options to mitigate the fixed price exposure inherent in its firm commodity commitments. In addition, Dominion has designated interest rate swaps as fair value hedges to manage its exposure to fixed interest rates on certain long-term debt. Certain non-trading derivative instruments are not designated as hedges for accounting purposes. However, management believes these instruments represent economic hedges that mitigate exposure to fluctuations in commodity prices and interest rates.

Accounting Policy

Under SFAS No. 133, derivatives are recognized on the Consolidated Balance Sheets at fair value, unless an exception is available under the standard. Certain qualifying derivative contracts have been designated as normal purchases or normal sales contracts. These contracts are not reported at fair value, as otherwise required by SFAS No. 133.

Commodity contracts representing unrealized gain positions are reported as derivative and energy trading assets; commodity contracts representing unrealized losses are reported as derivative and energy trading liabilities. In addition, purchased options and options sold are reported as derivative and energy trading assets and derivative and energy trading liabilities, respectively, at estimated market value until exercise or expiration.

For all derivatives designated as hedges, Dominion formally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for using the hedging instrument. Dominion assesses whether the hedge relationship between the derivative and the hedged item is highly effective in offsetting changes in fair value or cash flows both at the inception of the hedge and on an ongoing basis. Any change in fair value of the derivative that is not effective in offsetting changes in the fair value of the hedged item is recognized currently in earnings. Dominion discontinues hedge accounting prospectively for derivatives that have ceased to be highly effective hedges.

For fair value hedge transactions in which Dominion is hedging changes in the fair value of an asset, liability or firm

22

Notes to Consolidated Financial Statements—(Continued)

commitment, changes in the fair value of the derivative will generally be offset in the Consolidated Statements of Income by changes in the hedged item’s fair value. For cash flow hedge transactions in which Dominion is hedging the variability of cash flows related to a variable-priced asset, liability, commitment or forecasted transaction, changes in the fair value of the derivative are reported in AOCI. Derivative gains and losses reported in AOCI are reclassified to earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portions of the change in fair value of derivatives and the change in fair value of derivatives not designated as hedges for accounting purposes are recognized in current period earnings. For foreign currency forward contracts designated as cash flow hedges, hedge effectiveness is measured based on changes in the fair value of the contract attributable to changes in the forward exchange rate. For options designated either as fair value or cash flow hedges, changes in time value are excluded from the measurement of hedge effectiveness and are therefore recorded in earnings.

Gains and losses on derivatives designated as hedges, when recognized, are included in operating revenue, expenses or interest and related charges in the Consolidated Statements of Income. Specific line item classification is determined based on the nature of the risk underlying individual hedge strategies. Changes in the fair value of derivatives not designated as hedges and the portion of hedging derivatives excluded from the measurement of effectiveness are included in other operation and maintenance expense in the Consolidated Statements of Income. Cash flows resulting from the settlement of derivatives used as hedging instruments are included in net cash flows from operating activities.

Derivatives and Hedge Accounting Results

In the Consolidated Statements of Income, Dominion recognized pre-tax gains (losses) related to hedge ineffectiveness and changes in time value of options excluded from the measurement of hedge effectiveness, as follows:

(millions)	2002			2001
Ineffectiveness:
Fair value hedges	$	2		$	(1	)
Cash flow hedges		(31	)		3
Total ineffectiveness	$	(29	)	$	2
Change in options’ time value:
Fair value hedges	$	(1	)
Cash flow hedges		(1	)	$	(47	)
Total change in options’ time value	$	(2	)	$	(47	)

The following table presents selected information related to cash flow hedges included in AOCI in the Consolidated Balance Sheet at December 31, 2002:

(millions)	Accumulated Other Comprehensive Income (Loss) After Tax			Portion Expected to be Reclassified to Earnings during the Next 12 Months			Maximum Term
Commodities	$	(356	)	$	(156	)	62 months
Interest Rate		(14	)		(4	)	282 months
Foreign Currency		14			4		59 months
Total	$	(356	)	$	(156	)

The actual amounts that will be reclassified to earnings in 2003 will vary from the expected amounts presented above as a result of changes in market prices, interest rates and foreign exchange rates. The effect of amounts being reclassified from AOCI to earnings will generally be offset by the recognition of the hedged transactions (e.g., anticipated sales) in earnings, thereby achieving the realization of prices contemplated by the underlying risk management strategies.

Energy Trading Activities

Dominion’s non-derivative energy contracts initiated before October 25, 2002 and derivative instruments held for energy trading purposes are reported at fair value, with corresponding changes in value recognized immediately in earnings. See Note 4 for discussion of recent changes impacting the fair value accounting for energy trading contracts. Net gains and losses associated with Dominion’s commodity trading purchases and sales are presented net as nonregulated electric sales and nonregulated gas sales revenue. Cash flows resulting from the settlement of energy trading contracts are included in net cash flows from operating activities. The composition of operating revenue from commodity trading activities for the years 2002, 2001 and 2000 follows:

(millions)	Gains		Losses			Total
2002
Contract settlements	$	10,340	$	(10,310	)	$	30
Unrealized gains and losses		1,447		(1,402	)		45
Operating revenue	$	11,787	$	(11,712	)	$	75
2001
Contract settlements	$	5,208	$	(5,209	)	$	(1	)
Unrealized gains and losses		1,378		(1,238	)		140
Operating revenue	$	6,586	$	(6,447	)	$	139
2000
Contract settlements	$	2,773	$	(2,692	)	$	81
Unrealized gains and losses		1,236		(1,211	)		25
Operating revenue	$	4,009	$	(3,903	)	$	106

Enron Bankruptcy

Based on management’s evaluation of the estimated collectibility of amounts due from Enron Corp. and certain of

23

its subsidiaries (Enron) and the valuation of Enron-related commodity contracts, Dominion recorded a pre-tax charge to earnings of approximately $151 million in the fourth quarter of 2001. This charge was comprised of approximately $9 million for net credit exposure on past energy sales to Enron for which payment has not been received and approximately $142 million related to the impaired fair value of natural gas forward and swap contracts with Enron. Management continues to believe that this charge substantially eliminates any further Enron-related earnings exposure.

During 2002, Dominion terminated all outstanding and open positions with Enron. Dominion has submitted a claim in the Enron bankruptcy case for the value of such contracts, measured at the effective dates of contract termination. Various contingencies, including developments in the Enron bankruptcy proceedings, may affect Dominion’s ultimate exposure to Enron.

Concurrent with the December 2, 2001 Enron bankruptcy filing, Dominion’s Enron derivatives designated as cash flow hedges of anticipated purchases and sales of natural gas no longer qualified for hedge accounting and, accordingly, were de-designated from their hedging relationships for accounting purposes.

16.    Nuclear Operations

Dominion has a total of six licensed, operating nuclear reactors at its Surry and North Anna plants in Virginia and its Millstone plant in Connecticut. Surry and North Anna serve customers of Dominion’s regulated electric utility operations. Millstone is a non-regulated merchant plant with two operating units. A third Millstone unit ceased operations before Dominion acquired the plant. See Notes 5 and 17 regarding the acquisition of Millstone and other information regarding jointly owned utility plants.

Decommissioning represents the decontamination and removal of radioactive contaminants from a nuclear power plant, once operations have ceased, in accordance with standards established by the NRC. Through June 2007, amounts are being collected from Virginia jurisdictional ratepayers and placed in external trusts and invested to fund the expected costs of decommissioning the Surry and North Anna units. As part of its acquisition of Millstone, Dominion acquired the decommissioning trusts for the three units that were fully funded to the regulatory minimum as of the acquisition date. Currently, Dominion believes that the amounts available in the trusts and their expected earnings will be sufficient to cover expected decommissioning costs for the Millstone units, without any additional contributions to the trusts.

Accounting for Decommissioning

Utility Nuclear Plants—In accordance with the accounting policy recognized by regulatory authorities having jurisdiction over its electric utility operations, Dominion recognizes an expense for the future cost of decommissioning in amounts equal to amounts collected from ratepayers and earnings on trust investments dedicated to funding the decommissioning of Dominion’s utility nuclear plants. On the Consolidated Balance Sheets, the external trusts are reported at fair value with the accumulated provision for decommissioning included in accumulated depreciation. Net realized and unrealized earnings on the trust investments, as well as an offsetting expense to increase the accumulated provision for decommissioning, are recorded as a component of other income (loss) as permitted by regulatory authorities.

The balance of investments held in external trusts for Surry and North Anna decommissioning as well as the accumulated provision for decommissioning at December 31, 2002 and 2001, was $838 million and $858 million, respectively.

Dominion collected $36 million from ratepayers in each of the years ended 2002, 2001 and 2000 and expensed like amounts as a component of depreciation. Dominion recognized net realized gains and interest income of $11 million, $32 million and $20 million for 2002, 2001 and 2000, respectively. Dominion recognized net unrealized losses of $67 million, $61 million and $23 million, for 2002, 2001 and 2000, respectively. Dominion recognized offsetting increases or decreases to its provision for decommissioning in amounts equal to net realized and unrealized gains or losses for each period.

Merchant Nuclear Plant—The external trusts that hold investments dedicated to funding the decommissioning of Dominion’s merchant nuclear plant are classified as available for sale and reported in the Consolidated Balance Sheets at fair value. See Note 14. The balance of investments held in external trusts for Millstone decommissioning at December 31, 2002 and 2001 was $761 million and $839 million, respectively.

The accumulated provision for decommissioning, which is included in accumulated depreciation in the Consolidated Balance Sheets, was recorded upon the acquisition of Millstone at its estimated fair value using discounted cash flows of expected costs to perform the decommissioning activities. The balance of the accumulated provision for Millstone decommissioning was $700 million and $660 million at December 31, 2002 and 2001, respectively.

The accretion of the provision for decommissioning is expensed as a component of depreciation and was $40 million and $30 million for the years ended December 31, 2002 and 2001, respectively. Dominion realized net gains and interest income on trust investments of $21 million and $37 million in

24

Notes to Consolidated Financial Statements—(Continued)

2002 and 2001, respectively, and recorded such gains in other income. Dominion recorded unrealized losses on the decommissioning trusts of $99 million in 2002 in other comprehensive income. Unrealized losses on the decommissioning trust in 2001 were less than $1 million.

See Note 4 for a discussion of the adoption of SFAS No. 143 which will affect Dominion’s accounting for nuclear decommissioning costs.

Expected Costs for Decommissioning

The total estimated current cost to decommission Dominion’s seven nuclear units is $3.1 billion based on site-specific studies completed in 2002. Dominion expects to perform new cost studies in 2006. For all units except Millstone Unit 1, the current cost estimates assume decommissioning activities will begin shortly after cessation of operations, which will occur when operating licenses expire. Millstone Unit 1 is not in service and will be monitored until decommissioning activities begin for the remaining Millstone units. The current operating licenses expire in the years detailed in the following table. However, Dominion filed a request with the NRC in 2001 for a 20-year life extension for the Surry and North Anna units and expects to file a similar request for the Millstone units in 2004. Dominion expects to decommission the Surry and North Anna units during the period 2032 to 2045 and the Millstone units during the period 2050 to 2055.

	Surry				North Anna				Millstone
(millions)	Unit 1		Unit 2		Unit 1		Unit 2		Unit 1			Unit 2		Unit 3		Total
NRC license expiration year		2012		2013		2018		2020		(1	)		2015		2025
Current cost estimate (2002 dollars)	$	375	$	368	$	391	$	363	$	552		$	522	$	554	$	3,125
Funds in external trusts at December 31, 2002		235		230		192		181		262			252		247		1,599
2002 contribu- tions to external trusts		11		11		7		7									36

⁽¹⁾ Unit 1 ceased operations in 1998 before Dominion’s acquisition of Millstone.

The NRC requires nuclear power plant owners to annually update minimum financial assurance amounts for the future decommissioning of the nuclear facilities. Dominion’s 2002 NRC minimum financial assurance amount, aggregated for the nuclear units, was $2.1 billion and has been satisfied by a combination of surety bonds and the funds being collected and deposited in the external trusts. Beginning in March 2003, Dominion expects to substitute a guarantee to replace the surety bonds currently being utilized.

Insurance

The Price-Anderson Act limits the public liability of a nuclear plant owner to $9.5 billion for a single nuclear incident. The Price-Anderson Act Amendment of 1988 allows for an inflationary provision adjustment every five years. Dominion has purchased $200 million of coverage from commercial insurance pools with the remainder provided through a mandatory industry risk-sharing program. In the event of a nuclear incident at any licensed nuclear reactor in the United States, Dominion could be assessed up to $88 million for each of its seven licensed reactors, not to exceed $10 million per year per reactor. There is no limit to the number of incidents for which this retrospective premium can be assessed.

The Price-Anderson Act was first enacted in 1957 and has been renewed three times—in 1967, 1975 and 1988. Price-Anderson expired August 1, 2002, but operating nuclear reactors continue to be covered by the law. Congress is currently holding hearings to reauthorize the legislation. The expiration of the Price-Anderson Act has no impact on existing nuclear license holders.

Dominion’s current level of property insurance coverage ($2.55 billion for North Anna, $2.55 billion for Surry and $2.75 billion for Millstone) exceeds the NRC’s minimum requirement for nuclear power plant licensees of $1.06 billion per reactor site and includes coverage for premature decommissioning and functional total loss. The NRC requires that the proceeds from this insurance be used first to return the reactor to and maintain it in a safe and stable condition and second to decontaminate the reactor and station site in accordance with a plan approved by the NRC. Dominion’s nuclear property insurance is provided by Nuclear Electric Insurance Limited (NEIL), a mutual insurance company, and is subject to retrospective premium assessments in any policy year in which losses exceed the funds available to the insurance company. The maximum assessment for the current policy period is $70 million. Based on the severity of the incident, the board of directors of Dominion’s nuclear insurer has the discretion to lower or eliminate the maximum retrospective premium assessment. Dominion has the financial responsibility for any losses that exceed the limits or for which insurance proceeds are not available because they must first be used for stabilization and decontamination.

Dominion also purchases insurance from NEIL to cover the cost of replacement power during the prolonged outage of a nuclear unit due to direct physical damage of the unit. Under this program, Dominion is subject to a retrospective premium assessment for any policy year in which losses exceed funds available to NEIL. The current policy period’s maximum assessment is $29 million.

Old Dominion Electric Cooperative, a part owner of the North Anna Power Station, and Massachusetts Municipal Wholesale Electric Company and Central Vermont Public Service Corporation, part owners of Millstone’s Unit 3, are responsible for their share of the nuclear decommissioning

25

obligations and insurance premiums on applicable units, including any retrospective premium assessments and any losses not covered by insurance.

17.    Property, Plant and Equipment

Major classes of property, plant and equipment and their respective balances are:

	At December 31,
(millions)	2002		2001
Utility
Generation	$	8,497	$	8,415
Transmission		3,283		3,165
Distribution		7,347		7,024
Storage		781		755
Plant under construction		972		585
Nuclear fuel		740		757
Gas gathering and processing		341		285
General		830		876
Total utility	$	22,791	$	21,862
Nonutility
Exploration and production properties:
Proved	$	6,265	$	4,707
Unproved		1,440		1,508
Merchant generation properties—nuclear		921		968
Nuclear fuel		146		107
Merchant generation properties—other		629		361
Other—including plant under construction		439		284
Total nonutility		9,840		7,935
Total property, plant and equipment	$	32,631	$	29,797

Costs of unproved properties capitalized under the full cost method of accounting that are excluded from amortization at December 31, 2002, and the years in which such excluded costs were incurred, follow:

(millions)	Total		2002		2001		Years Prior
Property acquisition costs	$	903	$	103	$	740	$	60
Exploration costs		138		59		42		37
Capitalized interest		82		63		17		2
Total	$	1,123	$	225	$	799	$	99

Amortization rates for capitalized costs under the full cost method of accounting for Dominion’s United States and Canadian cost centers were as follows:

	Year Ended December 31,
(Per mcf equivalent)	2002		2001		2000
United States cost center	$	1.13	$	1.13	$	1.13
Canadian cost center		0.85		0.78		0.92

Dominion’s proportionate share of jointly-owned utility plants at December 31, 2002 follows:

(millions, except percentages)	Bath County Pumped Storage Station		North Anna Power Station		Clover Power Station
Ownership interest		60.0%		88.4%		50.0%
Plant in service	$	1,028	$	1,861	$	534
Accumulated depreciation		342		1,176		93
Nuclear fuel				341
Accumulated amortization of nuclear fuel				309
Construction work in progress		4		82		12

The co-owners are obligated to pay their share of all future construction expenditures and operating costs of the jointly-owned facilities in the same proportions as their respective ownership interest. Dominion reports its share of operating costs in the appropriate expense category in the Consolidated Statements of Income.

18.    Goodwill and Intangible Assets

In 2001, FASB issued SFAS No. 142, which prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 also requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives and will be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.

Dominion adopted SFAS No. 142 on January 1, 2002 and completed its transitional and annual goodwill impairment tests during the second quarter of 2002, finding no instances of impairment. The discontinuance of goodwill amortization under SFAS No. 142 resulted in an increase in net income of $95 million in 2002.

26

Notes to Consolidated Financial Statements—(Continued)

Had the provisions of SFAS No. 142 requiring the discontinuance of goodwill amortization been applied for 2001 and 2000, Dominion’s net income and earnings per share would have been as follows:

Year Ended	Amount		Basic Earnings Per Share		Diluted Earnings Per Share
	(millions, except per share amounts)
2001
Reported net income	$	544	$	2.17	$	2.15
Add: Goodwill amortization		95		0.38		0.38
Adjusted net income	$	639	$	2.55	$	2.53
2000
As Reported:
Income before cumulative effect of a change in accounting principle	$	415	$	1.76	$	1.76
Net income	$	436	$	1.85	$	1.85
Add: Goodwill amortization		83		0.35		0.35
As Adjusted:
Income before cumulative effect of a change in accounting principle	$	498	$	2.11	$	2.11
Net income	$	519	$	2.20	$	2.20

In November 2002, a DCI subsidiary received an unfavorable arbitration ruling that affected its ability to recover disputed amounts for past and future performance under a contract with a major customer. Accordingly, Dominion performed a goodwill impairment test, using discounted cash flow analysis and recorded a goodwill impairment charge of $13 million in the fourth quarter of 2002 related to the DCI reporting unit.

The changes in the carrying amount of goodwill for the year ended December 31, 2002, are as follows:

(millions)	Dominion Energy		Dominion Delivery		Dominion E&P			Corporate and Other			Total
Balance at December 31, 2001	$	1,975	$	1,344	$	858		$	33		$	4,210
Acquisition of Cove Point		75										75
DCI impairment loss									(13	)		(13	)
Louis Dreyfus purchase accounting adjustment						24						24
Other		7				(3	)		1			5
Balance at December 31, 2002	$	2,057	$	1,344	$	879		$	21		$	4,301

All of Dominion’s intangible assets, other than goodwill, are subject to amortization. Amortization expense for intangible assets was $53 million, $44 million and $34 million for 2002, 2001 and 2000, respectively. There were no material acquisitions of intangible assets during 2002. The components of intangible assets at December 31, 2002 were as follows:

(millions)	Gross Carrying Amount		Accumulated Amortization
Software and software licenses	$	464	$	200
Other		68		19
Total	$	532	$	219

Amortization expense for intangible assets is estimated to be $56 million for 2003, $52 million for 2004, $46 million for 2005, $43 million for 2006 and $36 million for 2007.

19.    Regulatory Assets and Liabilities

Regulatory assets represent probable future revenue associated with certain costs that will be recovered from customers through the ratemaking process. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are to be credited to customers through the ratemaking process.

In 1999, Virginia enacted the Virginia Electric Utility Restructuring Act (the Virginia Restructuring Act) that established a detailed plan to restructure Virginia’s electric utility industry. Under the Virginia Restructuring Act, the generation portion of Dominion’s Virginia jurisdictional operations is no longer subject to cost-based regulation, effective January 1, 2002. The legislation’s deregulation of generation was an event that required the discontinuance of SFAS No. 71 for Dominion’s generation operations in 1999.

27

Dominion’s regulatory assets and liabilities included the following at December 31, 2002 and 2001:

	At December 31,
(millions)	2002		2001
Unrecovered gas costs	$	32	$	9
Regulatory assets, net:
Other postretirement benefit costs(1)		106		115
Income taxes recoverable through future rates(2)		203		179
Deferred cost of fuel used in electric generation		133		119
Cost of decommissioning DOE uranium enrichment facilities(3)		34		42
Customer bad debts(4)		56		80
Other		48		39
Regulatory assets, net		580		574
Total regulatory assets	$	612	$	583
Regulatory liabilities
Amounts payable to customers		13		91
Estimated rate contingencies and refunds(5)		21		43
Total regulatory liabilities	$	34	$	134

⁽¹⁾ Costs recognized in excess of amounts included in regulated rates charged by Dominion’s regulated gas operations before rates were updated to reflect the new method of accounting and the cost related to the accrued benefit obligation recognized as part of Dominion’s accounting for its acquisition of CNG.

⁽²⁾ Income taxes recoverable through future rates resulting from the recognition of additional deferred income taxes, not previously recorded because of past ratemaking practices.

⁽³⁾ Cost of decommissioning the Department of Energy’s uranium enrichment facilities, representing the unamortized portion of Dominion’s required contributions. Beginning in 1992, Dominion began making contributions over a 15-year period and collecting these costs in electric customers’ fuel rates.

⁽⁴⁾ In 2001 the Public Utilities Commission of Ohio authorized the deferral of costs associated with certain uncollectible customer accounts not contemplated by current rates. Dominion expects recovery of such costs, which will be included in Dominion’s next base rate case.

⁽⁵⁾ Estimated rate contingencies and refunds are associated with certain increases in prices by Dominion’s rate regulated utilities and other rate-making issues that are subject to final modification in regulatory proceedings.

The incurred costs underlying regulatory assets may represent past expenditures by Dominion’s rate regulated electric and gas operations or may represent the recognition of liabilities that ultimately will be settled at some future time. At December 31, 2002, approximately $118 million of Dominion’s regulatory assets represented past expenditures on which it does not earn a return. These expenditures consist primarily of unrecovered gas costs, customer bad debts and a portion of deferred fuel costs. Unrecovered gas and deferred fuel costs are recovered within two years; recovery of customer bad debts is expected to be addressed in the next base rate case.

20.    Short-Term Debt and Credit Agreements

Joint Credit Facilities

In May 2002, Dominion, Virginia Power and CNG entered into two joint credit facilities that allow aggregate borrowings of up to $2 billion. The facilities include a $1.25 billion 364-day revolving credit facility that terminates in May 2003 and a $750 million three-year revolving credit facility that terminates in May 2005. The 364-day facility includes an option to extend any borrowings for an additional period of one year to May 2004. These joint credit facilities are being used for working capital, as support for the combined commercial paper programs of Dominion, Virginia Power and CNG and other general corporate purposes. The three-year facility can also be used to support up to $200 million of letters of credit. Dominion expects to renew the 364-day revolving credit facility prior to its maturity in May 2003.

At December 31, 2002, total outstanding commercial paper supported by the joint credit facilities was $1.2 billion, with a weighted average interest rate of 1.71 percent. At December 31, 2001, total outstanding commercial paper supported by previous credit agreements was $1.9 billion, with a weighted average interest rate of 2.72 percent.

At December 31, 2002, total outstanding letters of credit supported by the three-year facility were $106 million. There were no outstanding letters of credit at December 31, 2001.

CNG Credit Facility

In August 2002, CNG entered into a $500 million 364-day revolving credit facility that terminates in August 2003. This credit facility is being used to support CNG’s issuance of commercial paper and letters of credit to provide collateral required by counterparties to derivative financial contracts used by CNG in its risk management strategies for its gas and oil production. At December 31, 2002, outstanding letters of credit under this facility totaled $500 million.

Cove Point Bridge Facility

In September 2002, Dominion financed its acquisition of Cove Point with commercial paper supported by a $250 million 364-day revolving credit facility. This bridge facility will expire in March 2003 and will not be renewed. See Note 5 for a discussion of the Cove Point acquisition.

28

Notes to Consolidated Financial Statements—(Continued)

21.    Long-Term Debt

Long-term debt consists of the following:

At December 31,	2002 Weighted Average Coupon(8)		2002			2001
Dominion Resources, Inc.:			(millions)
Senior and medium-term notes
Variable rates, due 2002 to 2003	2.49	%	$	100		$	350
3.875% to 8.125%, due 2003 to 2032(1)	6.63	%		4,920			3,250
Equity-linked senior notes, 5.75% to 8.05%, due 2006 to 2008	7.03	%		743			413
Consolidated Natural Gas Company:
Senior notes
5.375% to 7.375%, due 2003 to 2027	6.48	%		3,150			3,150
6.875%, due 2026(2)				150			150
Senior subordinated debt, 9.25% due 2004				88			94
Virginia Electric and Power Company:
First and refunding mortgage bonds, 6.0% to 8.625%, due 2002 to 2025(3)	7.56	%		1,666			2,121
Senior and medium-term notes
Variable rates, due 2002 to 2003	2.37	%		120			340
5.375% to 9.60%, due 2002 to 2038	5.95	%		1,785			1,195
Tax-exempt financings(4):
Variable rates, due 2008 to 2027	1.60	%		197			489
3.15% to 5.875%, due 2007 to 2031(5)	4.99	%		402			110
Other Subsidiaries:
Medium-term notes, 5.72% to 6.1%, due 2005 to 2006(6)	5.94	%		199			117
Revolving lines of credit, variable rates, due 2002 to 2004(6)	3.16	%		163			241
Bank term note, variable rate, due 2002							675
Nonrecourse debt:
Variable rates, due 2004 to 2006	2.11	%		40			40
7.0% to 12.5%, due 2002 to 2020	8.08	%		342			353
				14,065			13,088
Fair value hedge valuation (see Note 15)				75			43
Amounts due within one year				(2,077	)		(1,309	)
Unamortized discount and premium, net(7)				(95	)		(25	)
				11,968			11,797
Notes payable—affiliates (see Note 30):
6.0%, due 2005				126			175
Variable rates, due 2006				14			192
				140			367
Amounts due within one year				(48	)		(45	)
				92			322
Total long-term debt			$	12,060		$	12,119

⁽¹⁾ $250 million of the 7.82% remarketable notes due September 15, 2014 will be either mandatorily purchased and remarketed by the remarketing agent or mandatorily redeemed by Dominion on September 15, 2004.

⁽²⁾ At the exercised option of holders, CNG will be required to purchase its $150 million, 6.875% senior notes due October 15, 2026 at 100% of the principal amount plus accrued interest on October 15, 2006.

⁽³⁾ Substantially all of Virginia Power’s property is subject to the lien of the mortgage, securing its mortgage bonds. In 2002, Virginia Power redeemed its $200 million, 6.75% mortgage bonds due February 1, 2007. Virginia Power completed the redemption with part of the proceeds from the issuance of $650 million, 5.375% senior notes due February 1, 2007. The redemption included a direct exchange of senior notes for $117 million of mortgage bonds. Virginia Power used the remaining proceeds of senior notes to redeem the remaining $83 million of mortgage bonds and for general corporate purposes including the repayment of other debt.

⁽⁴⁾ Certain pollution control equipment at Virginia Power’s generating facilities has been pledged to support these financings.

⁽⁵⁾ In 2002, Virginia Power converted $292 million of its variable rate tax exempt financings to fixed rates, ranging from 4.95% to 5.875%. Other terms of the bonds remain the same.

⁽⁶⁾ Includes an aggregate principal amount of CAD$335 million of securities denominated in Canadian dollars and presented in US dollars, based on exchange rates as of year-end.

⁽⁷⁾ In 2002, Dominion redeemed $200 million of 7.40% remarketable senior notes and $250 million of variable rate remarketable senior notes, both due September 16, 2012. In a direct exchange, Dominion completed the redemption by issuing $520 million, 5.70% senior notes due September 17, 2012. The principal amount of the senior notes was determined by an exchange ratio that was based on the fair value of the remarketable senior notes. The $63 million difference between the principal amounts of senior notes issued and remarketable senior notes redeemed was recorded as a debt discount.

⁽⁸⁾ Represents weighted-average coupon rates for debt outstanding as of December 31, 2002.

The scheduled principal payments of long-term debt at December 31, 2002 were as follows (in millions):

2003	2004	2005	2006	2007	Thereafter	Total
$2,125	$1,290	$969	$1,675	$1,091	$7,055	$14,205

In December 2002, Dominion issued $600 million of senior notes, of which $500 million of proceeds was deposited into an escrow account solely for the purpose of being used to repay approximately one half of the aggregate principal amount of Dominion’s 2001 Series A 6.0 percent senior notes maturing in January 2003.

Dominion’s short-term credit facilities and long-term debt agreements contain customary covenants and default provisions. As of December 2002, there were no events of default under these covenants.

Equity—Linked Securities

In 2002 and 2000, Dominion issued equity-linked debt securities, consisting of stock purchase contracts and senior notes. The stock purchase contracts obligate the holders to purchase shares of Dominion common stock from Dominion by a settlement date, two years prior to the senior notes’ maturity date. The purchase price is $50 and the number of shares to be purchased will be determined under a formula based upon the average closing price of Dominion common stock near the settlement date. The senior notes, or treasury securities in some instances, are pledged as collateral to secure the purchase of common stock under the related stock purchase contracts. The holders may satisfy their obligations under the stock purchase contracts by allowing the senior notes to be remarketed with the proceeds being paid to Dominion as consideration for the purchase of stock. Alternatively, holders may choose to continue holding the senior notes and use other resources as consideration for the purchase of stock under the stock purchase contracts.

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Dominion makes quarterly interest payments on the senior notes and quarterly payments on the stock purchase contracts at the rates described below. Dominion has recorded the present value of the stock purchase contract payments as a liability, offset by a charge to common stock in shareholders’ equity. Interest payments on the senior notes are recorded as interest expense and stock purchase contract payments are charged against the liability. Accretion of the stock purchase contract liability is recorded as interest expense. In calculating diluted earnings per share, Dominion applies the treasury stock method to the equity-linked debt securities. These securities did not have a significant effect on diluted earnings per share for 2002.

Under the terms of the stock purchase contracts, Dominion will issue between 6.7 million and 8.1 million shares of its common stock in November 2004 and between 4.1 million and 5.5 million shares of its common stock in May 2006. A total of 13.6 million shares of Dominion common stock has been reserved for issuance in connection with the stock purchase contracts.

Selected information about Dominion’s equity-linked debt securities is presented below:

Date of Issuance	Units Issued	Total Net Proceeds		Total Long-term Debt		Senior Notes Annual Interest Rate		Stock Purchase Contract Annual Rate		Total Equity Charge		Stock Purchase Settlement Date	Maturity of Senior Notes
(millions, except percentages)
2000	8.3	$	400.1	$	412.5	8.05	%	1.45	%	$	20.7	11/04	11/06
2002	6.6	$	320.1	$	330.0	5.75	%	3.00	%	$	36.3	5/06	5/08

22.   Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts

From 1997 through 2002, Dominion established five subsidiary capital trusts that sold trust preferred securities that represented preferred beneficial interests and 97 percent beneficial ownership in the assets held by the capital trusts. In exchange for the funds realized from the sale of the trust preferred securities and common securities that represent the remaining 3 percent beneficial ownership interest in the assets held by the capital trust, Dominion issued various junior subordinated debt instruments. The junior subordinated debt instruments constitute 100 percent of each capital trust’s assets. The trust must redeem the trust preferred securities when the junior subordinated notes are repaid at maturity or if redeemed prior to maturity. The following table provides

summary information about the capital trusts and junior subordinated debt instruments outstanding as of December 31, 2002:

Date Established	Capital Trusts	Units	Rate		Trust Preferred Securities Amount			Common Securities Amount
		(thousands)			(millions)
December 1997	Dominion Resources Capital Trust I(1)	250	7.83	%	$	250		$	8
January 2001	Dominion Resources Capital Trust II(2)	12,000	8.4	%		300			9
January 2001	Dominion Resources Capital Trust III(3)	250	8.4	%		250			8
October 2001	Dominion CNG Capital Trust I(4)	8,000	7.8	%		200			6
August 2002	Virginia Power Capital Trust II(5)	16,000	7.375	%		400			12
						1,400
	Unamortized discount					(3	)
	Total at December 31, 2002				$	1,397

Junior subordinated notes/debentures held as assets by each capital trust were as follows:

⁽¹⁾ $258 million—Dominion Resources, Inc. 7.83% Debentures due 12/1/2027.

⁽²⁾ $309 million—Dominion Resources, Inc. 8.4% Debentures due 1/30/2041.

⁽³⁾ $258 million—Dominion Resources, Inc. 8.4% Debentures due 1/15/2031.

⁽⁴⁾ $206 million—CNG 7.8% Debentures due 10/31/2041.

⁽⁵⁾ $412 million—Virginia Power 7.375% Debentures due 7/30/2042.

In 2002, Virginia Power redeemed $139 million of junior subordinated debt instruments held by Virginia Power Capital Trust I. The trust redeemed all outstanding trust preferred securities for $135 million and redeemed $4 million of its common securities held by Virginia Power.

Distribution payments on the trust preferred securities are guaranteed by the respective company that issued the debt instruments held by each trust, but only to the extent that the trusts have funds legally and immediately available to make distributions. The trust’s ability to pay amounts when they are due on the trust preferred securities is solely dependent upon the payment of amounts by Dominion, Virginia Power or CNG when they are due on the junior subordinated debt instruments. If the payment on the junior subordinated notes is deferred, the company that issued them may not make distributions related to its capital stock, including dividends, redemptions, repurchases, liquidation payments or guarantee payments. Also, during the deferral period, it may not make any payments or redeem or repurchase any debt securities that are equal in right of payment with, or subordinated to, the junior subordinated debt instruments.

23.    Preferred Stock

Dominion is authorized to issue up to 20 million shares of preferred stock. Dominion issued 665,000 shares of Series A mandatorily convertible preferred stock, liquidation preference

30

Notes to Consolidated Financial Statements—(Continued)

$1,000 per share, to Piedmont Share Trust (Piedmont Trust) in connection with the formation of DFV and the issuance of senior notes by DFV. Dominion is the beneficial owner of the Piedmont Trust which is consolidated in the preparation of Dominion’s Consolidated Financial Statements, thus eliminating these outstanding shares of preferred stock. See Note 30.

Virginia Power is authorized to issue up to 10 million shares of preferred stock, $100 liquidation preference. Upon involuntary liquidation, dissolution or winding-up of Virginia Power, each share is entitled to receive $100 per share plus accrued dividends. Dividends are cumulative.

Holders of the outstanding preferred stock of Virginia Power are not entitled to voting rights except under certain provisions of the amended and restated articles of incorporation and related provisions of Virginia law restricting corporate action, or upon default in dividends, or in special statutory proceedings and as required by Virginia law (such as mergers, consolidations, sales of assets, dissolution and changes in voting rights or priorities of preferred stock).

In 2002, Virginia Power purchased and redeemed, at par, all shares of its variable rate preferred stock October 1988 Series, June 1989 Series, September 1992A Series and September 1992B Series for $250 million, at the redemption price of $100 per share. The dividend rates for these series were variable and set every 49 days via an auction process. The combined weighted average rates for all series outstanding during 2002, 2001 and 2000, including fees for broker/dealer agreements, were 4.00 percent, 4.32 percent and 5.71 percent, respectively.

In 2002, Virginia Power issued 1,250 units consisting of 1,000 shares per unit of cumulative preferred stock for $125 million. The preferred stock has a dividend rate of 5.50 percent until the end of the initial dividend period on December 20, 2007. The dividend rate for subsequent periods will be determined according to periodic auctions. The preferred stock has a liquidation preference of $100 per share plus accumulated and unpaid dividends. Except during the initial dividend period, and any non-call period, the preferred stock will be redeemable, in whole or in part, on any dividend payment date at the option of Virginia Power. Virginia Power may also redeem the preferred stock, in whole but not in part, if certain changes are made to federal tax law which reduce the dividends received percentage.

Presented below are the series of Virginia Power preferred stock not subject to mandatory redemption that were outstanding as of December 31, 2002.

Dividend	Issued and Outstanding Shares	Entitled Per Share Upon Liquidation
	(thousands)
$5.00	107	$	112.50
4.04	13	$	102.27
4.20	15	$	102.50
4.12	32	$	103.73
4.80	73	$	101.00
7.05	500	$	105.00	(1)
6.98	600	$	105.00	(2)
Flex MMP 12/02,     Series A	1,250	$	100.00
Total	2,590

⁽¹⁾ Through 7/31/03; $103.53 commencing 8/1/03; amounts decline in steps thereafter to $100.00.

⁽²⁾ Through 8/31/03; $103.49 commencing 9/1/03; amounts decline in steps thereafter to $100.00.

24.    Shareholders’ Equity

Issuance of Common Stock

During 2002, Dominion issued 44 million shares of common stock and received proceeds of $2.0 billion. This included the issuance of approximately 38 million shares and receipt of proceeds of approximately $1.7 billion through two public equity offerings. Net proceeds were used for general corporate purposes, principally repayment of debt. The remainder of the shares issued and proceeds received in 2002 occurred through Dominion Direct^® (a dividend reinvestment and open enrollment direct stock purchase plan), employee savings plans and the exercise of employee stock options.

Repurchases of Common Stock

Dominion is authorized by its Board of Directors to repurchase up to $650 million of Dominion common stock outstanding. As of December 31, 2002, Dominion had repurchased approximately 12 million shares for $537 million. During 2002, Dominion repurchased 1 million shares for approximately $66 million, primarily using proceeds received from the exercise of employee stock options.

Immediately before the CNG merger in January 2000, Dominion concluded a first step transaction in which 33 million shares of Dominion common stock were exchanged for approximately $1.4 billion. Dominion also repurchased approximately 3.2 million shares of stock in 2000 through a total return swap facility at a cost of approximately $145 million. These transactions were independent of the general repurchase authority described above.

Shares Reserved for Issuance

At December 31, 2002, a total of 59 million shares was reserved and available for issuance pursuant to Dominion Direct^®, various employee and director stock award and

31

savings plans, stock purchase contracts associated with equity-linked debt securities and Dominion’s Series A Mandatorily Convertible Preferred Stock. See Notes 23 and 30 for a discussion of Dominion’s issuance of 665,000 shares of Series A Mandatorily Convertible Preferred Stock, liquidation preference $1,000 per share to Piedmont Share Trust.

Accumulated Other Comprehensive Income

Presented in the table below is a summary of accumulated other comprehensive income by component:

	At December 31,
(millions)	2002			2001
Net unrealized gains (losses) on derivatives	$	(356	)	$	315
Net unrealized losses on investment securities		(72	)		(4	)
Minimum pension liability adjustment		(14	)		(12	)
Foreign currency translation adjustments		(4	)		(10	)
Total accumulated other comprehensive income (loss)	$	(446	)	$	289

Stock-Based Awards

The following table provides a summary of changes in amounts of Dominion stock options outstanding as of and for the years ended December 31, 2002, 2001 and 2000. Generally, the exercise price of Dominion employee stock options equals the market price of Dominion common stock on the date of grant.

	Stock Options		Weighted- average Exercise Price		Weighted- average Fair Value
	(thousands)
Outstanding at January 1, 2000	7,147		$	41.37
Granted—2000	5,389		$	43.87	$	6.86
Exercised, cancelled and forfeited	(2,205	)	$	40.07
Outstanding at December 31, 2000	10,331		$	41.77
Exercisable at December 31, 2000	6,967		$	41.51
Granted—2001(1)
Exercise price < market price on grant date	480		$	33.21	$	23.69
Exercise price = market price on grant date	11,471		$	61.20	$	11.24
Exercise price > market price on grant date	194		$	62.27	$	9.43
Exercised, cancelled and forfeited	(1,484	)	$	41.23
Outstanding at December 31, 2001	20,992		$	52.90
Exercisable at December 31, 2001	7,955		$	42.68
Granted—2002	3,122			62.28	$	10.91
Exercised, cancelled and forfeited	(3,057	)	$	44.54
Outstanding at December 31, 2002	21,057		$	55.49
Exercisable at December 31, 2002	8,586		$	47.95

⁽¹⁾ In connection with the acquisition of Louis Dreyfus, employee stock options of Louis Dreyfus were converted into employee stock options of Dominion. Based on the conversion formula, certain converted stock options had exercise prices that either exceeded or were less than the market price of Dominion common stock on the date of grant. The fair value of all converted stock options was included in the purchase price of Louis Dreyfus. See Note 5.

The fair value of the options was estimated on the dates of grant using the Black-Scholes option pricing model with the following weighed-average assumptions for 2002, 2001 and 2000, respectively: expected dividend yield of 4.17 percent, 4.22 percent and 5.22 percent; expected volatility of 22.67 percent, 22.19 percent and 21.54 percent; contractual life of 10 years (all periods); risk free interest rate of 4.38 percent, 5.15 percent and 5.18 percent; and expected lives of six years (all periods).

The following table provides certain information about stock options outstanding as of December 31, 2002:

Options Outstanding					Options Exercisable
Exercise Price	Shares Outstanding	Weighted- average Remaining Contractual Life	Weighted- average Exercise Price		Shares Exercisable	Weighted- average Exercise Price
	(thousands)	(years)			(thousands)
$ 0-$19.99	2	6.0	$	19.10	2	$	19.10
$20-$30.99	53	5.8	$	25.00	53	$	25.00
$31-$40.99	75	7.0	$	39.25	75	$	39.25
$41-$50.99	6,782	6.6	$	43.02	5,905	$	42.26
$51-$60.99	9,411	6.1	$	59.88	1,673	$	59.76
$61-$69	4,734	8.4	$	65.24	878	$	65.94
Total	21,057	6.8	$	55.49	8,586	$	47.95

During 2002, 2001 and 2000, respectively, Dominion granted approximately 14,000 shares, 341,000 shares and 171,000 shares of restricted stock with weighted-average fair values of $60.62, $63.49 and $41.88.

25.    Dividend Restrictions

The 1935 Act and related regulations issued by the SEC impose restrictions on the transfer and receipt of funds by a registered holding company from its subsidiaries, including a general prohibition against loans or advances being made by the subsidiaries to benefit the registered holding company. Under the 1935 Act, registered holding companies and their subsidiaries may pay dividends only from retained earnings, unless the SEC specifically authorizes payments from other capital accounts. Dominion received dividends from its subsidiaries of $945 million, $806 million and $1.3 billion in 2002, 2001 and 2000, respectively. At December 31, 2002, Dominion’s consolidated subsidiaries had approximately $8.4 billion in capital accounts other than retained earnings, representing capital stock, additional paid in capital and accumulated other comprehensive income. Dominion Resources, Inc. had approximately $8.7 billion in capital accounts other than retained earnings at December 31, 2002. Generally, such amounts are not available for the payment of dividends by affected subsidiaries, or by Dominion itself, without specific authorization by the SEC. In response to a

32

Notes to Consolidated Financial Statements—(Continued)

Dominion request, the SEC granted relief in 2000, authorizing payment of dividends by CNG from other capital accounts to Dominion in amounts up to $1.6 billion, representing CNG’s retained earnings prior to Dominion’s acquisition of CNG. Furthermore, Dominion has submitted a similar request to the SEC in 2002, seeking relief from this restriction in regard to its subsidiary, into which Louis Dreyfus was merged. The application requests relief up to approximately $303 million, representing Louis Dreyfus’ retained earnings prior to Dominion’s acquisition of Louis Dreyfus. Dominion’s ability to pay dividends on its common stock at declared rates was not impacted by the restrictions discussed above during 2002, 2001 and 2000.

The Virginia Commission may prohibit any public service company, including Virginia Power, from declaring or paying a dividend to an affiliate, if found not to be in the public interest. At December 31, 2002, the Virginia Commission had not restricted the payment of dividends by Virginia Power.

Certain agreements associated with Dominion’s credit facilities contain restrictions on the ratio of debt to total capitalization. These limitations did not restrict Dominion’s ability to pay dividends or receive dividends from its subsidiaries at December 31, 2002.

See Note 22 for a description of potential restrictions on dividend payments by Dominion and certain subsidiaries in connection with the deferral of distribution payments on trust preferred securities.

26.    Employee Benefit Plans

Dominion and its subsidiaries provide certain benefits to eligible active employees, retirees and qualifying dependents. Under the terms of its benefit plans, Dominion and its subsidiaries reserve the right to change, modify or terminate the plans. From time to time in the past, benefits have changed, and some of these changes have reduced benefits.

Dominion maintains qualified noncontributory defined benefit retirement plans covering virtually all employees. Retirement benefits are based primarily on years of service, age and compensation. Dominion’s funding policy is to generally contribute annually an amount that is in accordance with the provisions of the Employment Retirement Income Security Act of 1974. The pension program also provides benefits to certain retired executives under company-sponsored nonqualified employee benefit plans. Certain of these nonqualified plans are funded through contributions to a grantor trust.

Dominion provides retiree health care and life insurance benefits with annual premiums based on several factors such as age, retirement date and years of service.

In 2001, Dominion eliminated certain senior management positions. Dominion paid these individuals special termination benefits and accelerated the payment of benefits under Dominion’s nonqualified pension plans. Dominion recognized special termination benefits expense of $15 million, a loss of $7 million related to the settlement of the related non-qualified pension obligation and a curtailment loss of $2 million.

In 2000, Dominion offered an early retirement program (ERP). The ERP provided up to three additional years of age and three additional years of employee service for benefit formula purposes, subject to age and service maximums under Dominion and its subsidiaries’ postretirement medical and pension plans. Certain employees who satisfied certain minimum age and years of service requirements were eligible under the ERP. The effect of the ERP on Dominion’s pension and postretirement benefit expenses was $81 million and $33 million, respectively. These expenses were offset, in part, by curtailment gains of approximately $20 million and $6 million from pension plans and other postretirement benefit plans, respectively, attributable to reductions in expected future years of service as a result of ERP participation and involuntary employee terminations.

In addition, effective January 1, 2000, Dominion adopted a change in the method of calculating the market-related value of pension plan assets. The change was reported as a change in accounting principle. See Note 3.

33

The following tables summarize the changes in Dominion’s pension and other postretirement benefit plan obligations and plan assets and a statement of the plans’ funded status:

	Pension Benefits						Other Postretirement Benefits
Year ended December 31,	2002			2001			2002			2001
(millions)
Expected benefit obligation at beginning of year	$	2,593		$	2,304		$	996		$	799
Acquired businesses		1			66			3			21
Actual benefit obligation at beginning of year		2,594			2,370			999			820
Service cost		77			71			44			39
Interest cost		177			173			68			63
Benefits paid		(148	)		(153	)		(58	)		(51	)
Actuarial loss during the year		89			114			84			107
Change in benefit obligation					(5	)
Special termination benefits					15
Plan amendments		12			8			(18	)		18
Expected benefit obligation at end of year		2,801			2,593			1,119			996
Fair value of plan assets at beginning of year		3,352			3,557			446			417
Actual return on plan assets		(241	)		(91	)		(31	)		(11	)
Contributions		111			39			60			65
Benefits paid from plan assets		(148	)		(153	)		(32	)		(25	)
Fair value of plan assets at end of year		3,074			3,352			443			446
Funded status		273			759			(676	)		(550	)
Unrecognized net actuarial loss		1,374			698			308			164
Unrecognized prior service cost		14			3			4			11
Unrecognized net transition (asset) obligation		(1	)		(5	)		93			115
Prepaid (accrued) benefit cost	$	1,660		$	1,455		$	(271	)	$	(260	)
Amounts recognized in the consolidated balance sheets at December 31:
Prepaid pension cost	$	1,710		$	1,511
Accrued benefit liability		(84	)		(89	)	$	(271	)	$	(260	)
Intangible asset		10			12
Accumulated other comprehensive loss		24			21
Net amount recognized	$	1,660		$	1,455		$	(271	)	$	(260	)

Dominion has nonqualified pension and supplemental pension plans which do not have “plan assets” as defined by generally accepted accounting principles. The total projected benefit obligation for these plans was $97 million and $103 million at December 31, 2002 and 2001, respectively, and is included in the table above. The total accumulated benefit obligation for these plans was $88 million and $94 million at December 31, 2002 and 2001, respectively. The additional minimum liability recognized relating to these plans was $34 million and $33 million at December 31, 2002 and 2001, respectively.

The components of the provision for net periodic benefit cost were as follows:

	Year ended December 31,
(millions)	2002			2001			2000
Pension Benefits
Service cost	$	77		$	71		$	65
Interest cost		177			173			161
Expected return on plan assets		(349	)		(331	)		(298	)
Recognized loss		2			3			6
Amortization of prior service cost		1			2			3
Amortization of transition obligation		(4	)		(4	)		(4	)
Curtailment gains								(20	)
ERP benefit costs								81
Settlement loss					7
Special termination benefits					15
Curtailment loss					2
Net periodic benefit credit	$	(96	)	$	(62	)	$	(6	)
Other Postretirement Benefits
Service cost	$	44		$	40		$	30
Interest cost		68			63			52
Expected return on plan assets		(34	)		(32	)		(31	)
Amortization of prior service cost		1			(1	)
Amortization of transition obligation		11			10			13
Amortization of unrecognized net loss		5
Curtailment gains								(6	)
ERP benefit costs								33
Net amortization and deferral								(2	)
Net periodic benefit cost	$	95		$	80		$	89

Significant assumptions used in determining net periodic cost, the projected benefit obligation and postretirement benefit obligations were:

	Pension Benefits		Other Postretirement Benefits
	2002	2001	2002	2001
Discount rates	6.75%	7.25%	6.75%	7.25%
Expected return on plan assets(1)	9.50%	9.50%	7.82%	7.88%
Rate of increase for compensation	4.70%	4.60%	4.70%	4.60%
Medical cost trend rate			9.00%	9.00%
			Decreasing to 4.75% in 2007 and years thereafter

⁽¹⁾ Dominion has adopted 8.75 percent for pension benefits in 2003.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

Other Postretirement Benefits

(millions)	One percentage point increase		One percentage point decrease
Effect on total service and interest cost components for 2002	$	18	$	(14	)
Effect on postretirement benefit obligation at December 31, 2002	$	147	$	(119	)

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Notes to Consolidated Financial Statements—(Continued)

In addition, Dominion sponsors defined contribution  thrift-type savings plans. During 2002, 2001 and 2000, Dominion recognized $26 million, $27 million and $30 million, respectively, as contributions to these plans.

Certain regulatory authorities have held that amounts recovered in utility customers’ rates for other postretirement benefits, in excess of benefits actually paid during the year, must be deposited in trust funds dedicated for the sole purpose of paying such benefits. Accordingly, certain subsidiaries fund postretirement benefit costs through Voluntary Employees’ Beneficiary Associations. The remaining subsidiaries do not prefund postretirement benefit costs but instead pay claims as presented.

27.    Commitments and Contingencies

As the result of issues generated in the ordinary course of business, Dominion and its subsidiaries are involved in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies, some of which involve substantial amounts of money. Management believes that the final disposition of these proceedings will not have a material adverse effect on its financial position, liquidity or results of operations.

Cash Requirements for Planned Capital Expenditures

Dominion has made substantial commitments in connection with its capital expenditures program. Cash requirements for those expenditures are estimated to total approximately $2.4 billion, $2.2 billion and $2.1 for 2003, 2004 and 2005 respectively. Purchases of nuclear fuel are included in Fuel Purchase Commitments below. Dominion expects that these expenditures will be met through a combination of sales of securities and short-term borrowings to the extent not funded by cash flows from operations.

Power Purchase Contracts

Dominion has entered into contracts for long-term purchases of capacity and energy from other utilities, qualifying facilities and independent power producers. As of December 31, 2002, Dominion had 42 non-utility purchase contracts with a combined dependable summer capacity of 3,758 megawatts. The table below reflects Dominion’s minimum commitments as of December 31, 2002 under these contracts.

	Commitment
(millions)	Capacity		Other
2003	$	643	$	44
2004		635		29
2005		629		22
2006		614		18
2007		589		11
Later years		5,259		113
Total		8,369		237
Present value of the total	$	4,836	$	140

Capacity and other purchases under these contracts totaled $691 million, $680 million and $740 million for 2002, 2001 and 2000, respectively.

In 2001, Dominion completed the purchase of three generating facilities and the termination of seven long-term power purchase contracts with non-utility generators. Dominion recorded an after-tax charge of $136 million in connection with the purchase and termination of long-term power purchase contracts. Cash payments related to the purchase of three generating facilities totaled $207 million. The allocation of the purchase price was assigned to the assets and liabilities acquired based upon estimated fair values as of the date of acquisition. Substantially all of the value was attributed to the power purchase contracts which were terminated and resulted in a charge included in operation and maintenance expense.

Fuel Purchase Commitments

Dominion enters into long-term purchase commitments for fuel used in electric generation and natural gas for purposes other than trading. Estimated payments under these commitments for the next five years are as follows: 2003—$599 million; 2004—$311 million; 2005—$253 million; 2006—$205 million; 2007—$89 million; and years beyond 2007—$215 million. These purchase commitments include those required for regulated operations. Dominion recovers the costs of those purchases through regulated rates. The natural gas purchase commitments of Dominion’s field services operations are also included, net of related sales commitments. In addition, Dominion has committed to purchase certain volumes of natural gas at market index prices determined in the period the natural gas is delivered. These transactions have been designated as normal purchases and sales under SFAS No. 133.

Natural Gas Pipeline and Storage Capacity Commitments

Dominion enters into long-term commitments for the purchase of natural gas pipeline and storage capacity for purposes other than trading. Estimated payments under these commitments for the next five years are as follows: 2003—$34 million; 2004—$23 million; 2005—$13 million. There were no significant commitments beyond 2005.

Production Handling and Firm Transportation Commitments

In connection with its gas and oil production operations, Dominion has entered into certain transportation and production handling agreements with minimum commitments expected to be paid in the following years: 2003—$23 million; 2004—$57 million; 2005—$56 million; 2006—$53 million; 2007—$44 million; and years after 2007—$68 million.

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Lease Commitments

Dominion leases various facilities, vehicles, aircraft and equipment under both operating and capital leases. Future minimum lease payments under operating and capital leases that have initial or remaining lease terms in excess of one year as of December 31, 2002 are as follows: 2003—$94 million; 2004—$94 million; 2005—$82 million; 2006—$67 million; 2007—$62 million; and years beyond 2007—$79 million. Rental expense included in other operations and maintenance expense was $84 million, $75 million and $107 million for 2002, 2001, and 2000, respectively.

As of December 31, 2002, Dominion, through certain subsidiaries, has entered into agreements with special purpose entities (lessors) in order to finance and lease several new power generation projects, as well as its corporate headquarters and aircraft. The lessors have an aggregate financing commitment from equity and debt investors of $2.2 billion, of which $1.6 billion has been used for total project costs to date. Dominion, in its role as construction agent for the lessors, is responsible for completing construction by a specified date. In the event a project is terminated before completion, Dominion has the option to either purchase the project for 100 percent of project costs or terminate the project and make a payment to the lessor of approximately but no more than 89.9 percent of project costs. Upon completion of each individual project, Dominion has use of the project assets subject to an operating lease. Dominion’s lease payments to the lessors are sufficient to provide a return to the investors. At the end of each individual project’s lease term, Dominion may renew the lease at negotiated amounts based on project costs and current market conditions, subject to investors’ approval; purchase the project at its original construction cost; or sell the project, on behalf of the lessor, to an independent third party. If the project is sold and the proceeds from the sale are insufficient to repay the investors, Dominion may be required to make a payment to the lessor up to an amount ranging from 81 percent to 85 percent of the project cost depending on the individual project and applicable agreement. Dominion has guaranteed a portion of the obligations of its subsidiaries to the lessors during the construction and post-construction periods. Neither the guarantees nor the underlying transaction documents contain any type of credit rating or stock price trigger events. Total project costs at December 31, 2002 included approximately $288 million of costs advanced by Dominion that will be reimbursed by the lessor during the second quarter of 2003.

The projects are accounted for as operating leases for financial accounting purposes. Accordingly, neither the project assets nor related obligations are reported on Dominion’s Consolidated Balance Sheets.

In February 2003, pursuant to the terms of its lease agreement, Dominion purchased the electric generation facility under construction in Dresden, Ohio for $266 million. This amount was included in total project costs of $1.6 billion as of December 31, 2002. Dominion expects to complete construction in 2005 at an estimated cost of $350 million.

The future minimum lease payments described above include annual minimum lease payments under these leases for assets currently in use total approximately $38 million. Projects being developed under leasing arrangements are scheduled for completion in 2003 and 2004. Annual lease payments for these projects are estimated to be $7 million for 2003 and $79 million by 2005. See Note 4.

Energy Trading

Subsidiaries of Dominion enter into purchases and sales of commodity-based contracts in the energy-related markets, including natural gas, electricity and oil. These agreements may cover current and future periods. The volume of these transactions varies from day to day, based on market conditions. See Note 15 for a discussion of Dominion’s energy trading activities and risk management policies.

Environmental Matters

Dominion is subject to costs resulting from a steadily increasing number of federal, state and local laws and regulations designed to protect human health and the environment. These laws and regulations can result in increased capital, operating and other costs as a result of compliance, remediation, containment and monitoring obligations.

Historically, Dominion recovered such costs arising from regulated electric operations through utility rates. However, to the extent environmental costs are incurred in connection with operations regulated by the Virginia State Corporation Commission during the period ending June 30, 2007, in excess of the level currently included in Virginia jurisdictional rates, Dominion’s results of operations will decrease. After that date, Dominion may seek recovery through rates of only those environmental costs related to transmission and distribution operations.

Superfund Sites—In 1987, the Environmental Protection Agency (EPA) identified Dominion and a number of other entities as Potentially Responsible Parties (PRPs) at two Superfund sites located in Kentucky and Pennsylvania. Current cost studies estimate total remediation costs for the sites to range from $98 million to $152 million. Dominion’s proportionate share of the total cost is expected to be in the range of $2 million to $3 million, based on allocation formulas and the volume of waste shipped to the sites. The majority of remediation activities at the Kentucky site are complete and remediation design is ongoing for the Pennsylvania site. Dominion has accrued a reserve of $2 million to meet its obligations at these two sites. Although each PRP can be held

36

Notes to Consolidated Financial Statements—(Continued)

jointly, severally and strictly liable for all costs, Dominion has determined that it is probable that the PRPs will fully pay their share of the costs based on a financial assessment of the PRPs involved at these sites. Dominion generally seeks to recover its costs associated with environmental remediation from third party insurers. At December 31, 2002, any pending or possible claims were not recognized as an asset or offset against such obligations.

Other EPA Matters—During 2000, Virginia Power received a Notice of Violation from the EPA, alleging that Virginia Power failed to obtain New Source Review permits under the Clean Air Act prior to undertaking specified construction projects at the Mt. Storm Power Station in West Virginia. The Attorney General of New York filed a suit against Virginia Power alleging similar violations of the Clean Air Act at the Mt. Storm Power Station. Virginia Power also received notices from the Attorneys General of Connecticut and New Jersey of their intentions to file suit for similar violations. In December 2002, the Attorney General of Connecticut filed a motion to intervene as a plaintiff in the action filed by the New York State Attorney General. This action has been stayed. Management believes that Virginia Power has obtained the necessary permits for its generating facilities. Virginia Power has reached an agreement in principle with the federal government and the state of New York to resolve this situation. The agreement in principle includes payment of a $5 million civil penalty, a commitment of $14 million for environmental projects in Virginia, West Virginia, Connecticut, New Jersey and New York and a 12-year, $1.2 billion capital investment program for environmental improvements at the Company’s coal-fired generating stations in Virginia and West Virginia. Virginia Power had already committed to a substantial portion of the $1.2 billion expenditures for sulfur dioxide and nitrogen oxide emissions controls. The negotiations over the terms of a binding settlement have expanded beyond the basic agreement in principle and are ongoing. As of December 31, 2002, Virginia Power has recorded, on a discounted basis, $18 million for the civil penalty and environmental projects.

In 2002, EPA issued a Section 114 request for information about whether projects undertaken at Virginia Power’s Chesterfield, Chesapeake, Yorktown, Possum Point and Bremo Bluff power stations were properly permitted under the Clean Air Act’s New Source Review requirements, to which Virginia Power responded in a timely manner.

In 2002, the EPA issued a Section 114 request for information about whether Morgantown Energy Associates’ (MEA) facility in Morgantown, West Virginia is in compliance with environmental requirements. EPA made a site visit and at that time received the requested information. In September 2002, MEA received a copy of EPA’s inspection report summarizing the facts surrounding the visit. MEA is prepared to resolve follow-up questions from EPA. MEA is a 50 percent-owned investment accounted for by Dominion under the equity method.

Other—Before being acquired by Dominion, Louis Dreyfus was one of numerous defendants in several lawsuits pending in the Texas 93rd Judicial District Court in Hildago County, Texas. The lawsuit alleges that gas wells and related pipeline facilities operated by Louis Dreyfus and facilities operated by other defendants caused an underground hydrocarbon plume in McAllen, Texas. The plaintiffs claim that they have suffered damages, including property damage and lost profits, as a result of the plume. Although the results of litigation are inherently unpredictable, Dominion does not expect the ultimate outcome of the case to have a material adverse impact on its results of operations, cash flows or financial position.

Spent Nuclear Fuel

Under provisions of the Nuclear Waste Policy Act of 1982, Dominion has entered into contracts with the DOE for the disposal of spent nuclear fuel. The DOE failed to begin accepting the spent nuclear fuel on January 31, 1998, the date provided by the Nuclear Waste Policy Act and by Dominion’s contract with the DOE. Dominion will continue to safely manage its spent fuel until accepted by the DOE.

Retrospective Premium Assessments

Under several of Dominion’s nuclear insurance policies, Dominion is subject to retrospective premium assessments in any policy year in which losses exceed the funds available to these insurance companies. For additional information, see Note 16.

Guarantees, Letters of Credit and Surety Bonds

As discussed in Note 4, FIN No. 45 requires disclosures related to the issuance of certain types of guarantees, beginning with financial statements for the year ended December 31, 2002. For purposes of consolidated financial statements, guarantees issued by a parent on behalf of its consolidated subsidiary, guarantees issued by a consolidated subsidiary on behalf of its parent or guarantees issued by a consolidated subsidiary on behalf of a sister consolidated subsidiary are not subject to the FIN No. 45’s disclosure requirements.

Nevertheless, Dominion is providing the following information about the guarantees that it and certain of its subsidiaries may issue in the ordinary course of business to provide financial or performance assurance to third parties on behalf of certain subsidiaries. These agreements include guarantees, stand-by letters of credit and surety bonds. The amounts subject to certain of these agreements vary depending on the covered contracts actually outstanding at any particular

37

point in time. Guarantees and stand-by letters of credit are used, when necessary, to support or enhance a subsidiary’s stand-alone creditworthiness. Accordingly, Dominion and certain subsidiaries have entered into guarantees and stand-by letters of credit so that third parties would be willing to enter into contracts with the subsidiaries and to extend sufficient credit to facilitate the subsidiaries’ accomplishment of intended commercial purposes. In such instances, guarantees may be used to limit exposures resulting from subsidiary business activities to pre-defined amounts. While the majority of these guarantees do not have a termination date, Dominion may choose at any time to limit the applicability of such guarantees to future transactions.

To the extent a liability subject to a guarantee has been incurred by a consolidated subsidiary, that liability is included in Dominion’s Consolidated Financial Statements. Dominion believes it unlikely that it would be required to perform or otherwise incur any losses associated with guarantees of its subsidiaries’ obligations. On behalf of consolidated subsidiaries, as of December 31, 2002, Dominion and its subsidiaries had issued $5.2 billion of guarantees; purchased $117 million of surety bonds; and authorized the issuance of standby letters of credit by financial institutions of $606 million.

Only in those limited instances where Dominion or certain subsidiaries enter into a guarantee on behalf of a party that is not consolidated in the preparation of Dominion’s Consolidated Financial Statements would performance under the agreement result in the recognition of additional liabilities in Dominion’s Consolidated Financial Statements. As of December 31, 2002, Dominion has guaranteed $70 million related to officers’ borrowings under executive stock loan programs, for which individual officers are personally liable for repayment. Substantially all of this guarantee is scheduled to expire in 2005.

Dominion has also guaranteed $32 million for obligations of certain equity method investments - Dominion Telecom, Inc., MEA and Elwood Energy.

Indemnifications

In addition, as part of commercial contract negotiations in the normal course of business, Dominion may sometimes agree to make payments to compensate or indemnify other parties for possible future unfavorable financial consequences resulting from specified events. The specified events may involve an adverse judgment in a lawsuit or the imposition of additional taxes due to a change in tax law or interpretation of the tax law. Dominion is unable to develop an estimate of the maximum potential amount of future payments under these contracts because events that would obligate Dominion have not yet occurred or, if any such event has occurred, Dominion has not been notified of its occurrence. However, at December 31, 2002, management believes future payments, if any, that could ultimately become payable under these contract provisions, would not have a material impact on its results of operations, cash flows or financial position.

Stranded Costs

Under the Virginia Restructuring Act, the generation portion of Dominion’s Virginia jurisdictional operations is no longer subject to cost-based regulation, effective January 1, 2002. Dominion’s base rates (excluding fuel costs and certain other allowable adjustments) will remain capped until July 2007, unless terminated sooner or otherwise modified consistent with the Virginia Restructuring Act. Under the Act, Dominion may request a termination of the capped rates at any time after January 1, 2004, and the Virginia State Corporation Commission may grant Dominion’s request to terminate the capped rates, if it finds that a competitive generation services market exists in Dominion’s service area. Dominion believes capped electric retail rates and, where applicable, wires charges provided under the Virginia Restructuring Act provide an opportunity to recover a portion of its potentially stranded costs, depending on market prices of electricity and other factors. Stranded costs are those costs incurred or commitments made by utilities under cost-based regulation that may not be reasonably expected to be recovered in a competitive market.

Even in the capped rate environment, Dominion remains exposed to numerous risks, including, among others, exposure to potentially stranded costs, future environmental compliance requirements, changes in tax laws, inflation and increased capital costs. At December 31, 2002, Dominion’s exposure to potentially stranded costs included: long-term power purchase contracts that could ultimately be determined to be above market (see Power Purchase Contracts above); generating plants that could possibly become uneconomic in a deregulated environment; and unfunded obligations for nuclear plant decommissioning and postretirement benefits not yet recognized in the financial statements. See Notes 16 and 26.

28.    Fair Value of Financial Instruments

Substantially all of Dominion’s financial instruments are recorded at fair value, with the exception of the instruments described below. Fair value amounts have been determined using available market information and valuation methodologies considered appropriate by management. Dominion reports the following financial instruments based on historical cost rather than fair value.

38

Notes to Consolidated Financial Statements—(Continued)

The financial instruments’ carrying amounts and fair values as of December 31, 2002 and 2001 were as follows:

	2002				2001
(millions)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Long-term debt(1)	$	14,185	$	14,990	$	13,473	$	13,725
Preferred securities of subsidiary trusts(2)(3)		1,397		1,441		1,132		1,154

⁽¹⁾ Fair value is estimated using market prices, where available; otherwise, interest rates, currently available for issuance of debt with similar terms and remaining maturities, are used. The carrying amount of debt issues with short-term maturities and variable rates repriced at current market rates is a reasonable estimate of fair value.

⁽²⁾ Fair value is based on market quotations.

⁽³⁾ The 2002 carrying value of $1,397 million represents principal outstanding of $1,400 million, less an unamortized discount of $3 million, and the 2001 carrying value of $1,132 million represents principal outstanding of $1,135 million, less an unamortized discount of $3 million.

29.    Concentration of Credit Risk

Credit risk is the risk of financial loss to Dominion if counterparties fail to perform their contractual obligations. Dominion engages in transactions for the purchase and sale of products and services with major companies in the energy industry and with commercial and residential energy consumers. These transactions principally occur in the Northeast, Midwest and Mid-Atlantic regions of the United States. Management does not believe that this geographic concentration contributes significantly to Dominion’s overall exposure to credit risk. Credit risk associated with trade accounts receivable from energy consumers is limited due to the large number of customers.

Dominion maintains credit policies with respect to its counterparties that management believes minimize overall credit risk. Where appropriate, such policies include the evaluation of a prospective counterparty’s financial condition, collateral requirements and the use of standardized agreements that facilitate the netting of cash flows associated with a single counterparty. Dominion also monitors the financial condition of existing counterparties on an ongoing basis. Dominion maintains a provision for credit losses based upon factors surrounding the credit risk of its customers, historical trends and other information. Management believes, based on Dominion’s credit policies and its December 31, 2002 provision for credit losses, that it is unlikely that a material adverse effect on its financial position, results of operations or cash flows would occur as a result of counterparty nonperformance.

Dominion calculates its gross credit exposure for each counterparty as the unrealized fair value of derivative and energy trading contracts plus any outstanding receivables (net of payables, where netting agreements exist), prior to the application of collateral. In the calculation of net credit exposure, Dominion’s gross exposure is reduced by collateral made available by counterparties, including letters of credit and cash received by Dominion and held as margin deposits. Presented below is a summary of Dominion’s gross and net credit exposure as of December 31, 2002. The amounts presented exclude accounts receivable for retail electric and gas sales and services, regulated transmission services and Dominion’s provision for credit losses.

	At December 31, 2002
(millions)	Credit Exposure before Credit Collateral		Credit Collateral		Net Credit Exposure
Investment grade(1)	$	486	$	31	$	455
Non-investment grade(2)		100		24		76
No external ratings:
Internal rated—investment grade(3)		206				206
Internal rated—non-investment grade(4)		143				143
Total	$	935	$	55	$	880

⁽¹⁾ This category includes counterparties with minimum credit ratings of Baa3 assigned by Moody’s Investor Service (Moody’s) and BBB- assigned by Standard & Poor’s Rating Group, a division of the McGraw-Hill Companies, Inc. (Standard & Poor’s). The five largest counterparty exposures, combined, for this category represented approximately 13 percent of the total gross credit exposure.

⁽²⁾ This category includes counterparties with credit ratings that are below investment grade. The five largest counterparty exposures, combined, for this category represented approximately 6 percent of the total gross credit exposure.

⁽³⁾ This category includes counterparties that have not been rated by Moody’s or Standard & Poor’s, but are considered investment grade based on Dominion’s evaluation of the counterparty’s creditworthiness. The five largest counterparty exposures, combined, for this category represented approximately 18 percent of the total gross credit exposure.

⁽⁴⁾ This category includes counterparties that have not been rated by Moody’s or Standard & Poor’s, and are considered non-investment grade based on Dominion’s evaluation of the counterparty’s creditworthiness. The five largest counterparty exposures, combined, for this category represented approximately 3 percent of the total gross credit exposure.

30.    Dominion Fiber Ventures, LLC

Dominion has a 50 percent voting interest in DFV, a joint venture with a third-party investor trust (Investor Trust). DFV was established to fund the development of its principal investment, Dominion Telecom, Inc. (DTI), a telecommunications business. DTI is a facilities-based interchange and emerging local carrier that provides broadband solutions to wholesale customers throughout the eastern United States. Due to the veto rights and substantive equity at risk from the Investor Trust, Dominion’s investment in DFV is accounted for using the equity method. See Note 31.

39

In connection with its formation, DFV issued $665 million of 7.05 percent senior secured notes due March 2005 (DFV Senior Notes).

The DFV Senior Notes were secured in part by Dominion convertible preferred stock held in trust. Dominion was the beneficial owner of the trust and included it in the preparation of its Consolidated Financial Statements. Prior to Dominion’s repurchase of substantially all of the outstanding DFV Senior Notes in February 2003, as described below, the preferred stock would have been subject to being remarketed in an amount sufficient to retire the DFV Senior Notes at maturity or earlier if the credit ratings for Dominion Resources, Inc. senior unsecured debt were BBB– or Baa3 during a period when the closing price of Dominion’s common stock was below $45.97 for ten consecutive trading days. If the remarketing of the preferred stock occurred, the convertible preferred stock would have been considered in the calculation of diluted earnings per share of Dominion’s common stock or could have resulted in the issuance of additional shares of Dominion common stock, if converted.

At the end of 2002 and 2001, DTI and DFV had loaned Dominion a total of $140 million and $367 million, respectively, which are reported as notes payable—affiliates and securities due within one year on the Consolidated Balance Sheets. In 2002 and 2001, Dominion incurred $13 million and $23 million of interest expense on the loans, respectively. For management and other support services, Dominion billed DTI $35 million and $20 million in 2002 and 2001, respectively.

Subsequent Event

On January 23, 2003, Dominion and DFV made a tender and consent offering for the DFV Senior Notes. Under the terms of the offering, DFV sought the consent of the note holders to remove the stock price and credit downgrade trigger described above as well as certain other related modifications to the indenture. Dominion offered to purchase for cash all of the outstanding notes. The consent and tender offer was successful, resulting in the removal of the stock price and credit downgrade trigger and the purchase of $633 million of the outstanding notes by Dominion in February 2003. Dominion paid a total of $664 million for the notes acquired, using proceeds from the sale of $700 million of senior notes.

In connection with this transaction, Dominion and Investor Trust agreed to certain amendments to the DFV limited liability company agreement. Pursuant to one of these amendments, Dominion agreed that upon the earlier of the scheduled maturity date of the DFV Senior Notes or upon certain default events, Dominion will contribute the $644 million of DFV Senior Notes it holds to DFV in exchange for an additional equity interest in DFV.

As a result of this transaction, Dominion will consolidate the results of DFV in its financial statements beginning in February 2003. The DFV Senior Notes held by Dominion will be eliminated in consolidation. After the transaction, $21 million of the DFV Senior Notes remain outstanding in the hands of third parties. Dominion will recognize a pre-tax charge of approximately $60 million on the effective extinguishment of the acquired notes in the first quarter of 2003. The charge will primarily consist of the premium paid to acquire the notes, the consent fee paid to the note holders and the write-off of unamortized debt costs related to the original issuance of the DFV Senior Notes. Furthermore, since Dominion holds substantially all of the DFV Senior Notes, it is unlikely that the remarketing of the Dominion convertible preferred stock held in trust, discussed above, would ever occur.

31.   Equity Method Investments and Affiliated Transactions

At December 31, 2002 and 2001, Dominion’s equity method investments totaled $503 million and $523 million, respectively, and equity earnings on these investments totaled $11 million in 2002, $36 million in 2001 and $47 million in 2000. Dominion’s equity method investments are reported on the Consolidated Balance Sheets in other investments. In addition, Dominion has equity method investments that are held for sale, representing primarily its interest in certain Australian natural gas pipelines. As of December 31, 2002 and 2001, equity method investments that are held for sale totaled $83 million and $68 million, respectively, and are included in other current assets in the Consolidated Balance Sheets. Other than transactions involving its telecommunications joint venture described in Note 30, transactions between Dominion and its affiliates, as well as amounts due from those affiliates, were not significant.

32.    Operating Segments

Dominion manages its operations along three primary business lines:

        Dominion Energy manages Dominion’s generation portfolio, consisting primarily of generating units and power purchase agreements. It also manages Dominion’s energy trading and marketing, hedging and arbitrage activities; and electric transmission, gas pipeline and certain gas production and storage operations.

Dominion Delivery manages Dominion’s electric and gas distribution systems, as well as customer service. Dominion Delivery also includes Dominion’s investment in DFV, see Note 30.

40

Notes to Consolidated Financial Statements—(Continued)

Dominion Exploration & Production manages Dominion’s onshore and offshore gas and oil exploration, development and production operations. Operations are located in several major producing basins in the lower 48 states, including the outer continental shelf and deep-water areas of the Gulf of Mexico, and Western Canada.

In addition, Dominion also reports the operations of DCI and Dominion’s corporate and other operations as a segment. Amounts included in the Corporate and Other category include:

n      corporate expenses of the Dominion and CNG holding companies (including interest not allocated to other segments);

n      the operations of Corby (UK), prior to its sale on September 29, 2000 (see Note 6);

n      2002 and 2001 restructuring costs and 2000 restructuring and acquisition-related costs (see Note 8);

n      2001 costs associated with termination of long-term power purchase contracts (see Note 27);

n      2001 provision for credit exposure in connection with Enron bankruptcy (see Note 15);

n      2002, 2001 and 2000 impairment and re-valuation of certain DCI investments (see Note 9);

n      2000 cumulative effect of a change in accounting principle (see Note 3).

Dominion’s management evaluates performance based on a measure of profit and loss that represents each segment’s contribution to Dominion’s net income. Intersegment sales and transfers are based on underlying contractual arrangements and agreements and may result in intersegment profit or loss.

41

The following table presents segment information pertaining to Dominion’s operations:

(millions)	Dominion Energy		Dominion Delivery			Dominion E&P		Corporate and Other			Adjustments & Eliminations			Consolidated Total
2002
Total revenue from external customers	$	6,000	$	2,307		$	1,629	$	215		$	67		$	10,218
Intersegment revenue		168		17			90		568			(843	)
Total operating revenue		6,168		2,324			1,719		783			(776	)		10,218
Interest and related charges		290		170			88		653			(256	)		945
Depreciation, depletion and amortization		397		299			502		60						1,258
Equity in earnings of equity method investees		29		(32	)		5		9						11
Income tax expense (benefit)		504		194			165		(182	)					681
Net income		836		389			380		(243	)					1,362
Investment in equity method investees		216		74			53		160						503
Capital expenditures		882		409			1,492		45						2,828
Total assets (billions)	$	16.5	$	7.2		$	7.8	$	15.1		$	(8.7	)	$	37.9
2001
Total revenue from external customers	$	6,205	$	2,744		$	1,354	$	255					$	10,558
Intersegment revenue		158					106		626		$	(890	)
Total operating revenue		6,363		2,744			1,460		881			(890	)		10,558
Interest and related charges		327		190			64		621			(205	)		997
Depreciation, depletion and amortization		421		297			364		163						1,245
Equity in earnings of equity method investees		39		(3	)		5		(5	)					36
Income tax expense (benefit)		511		166			145		(452	)					370
Net income		772		317			320		(865	)					544
Investment in equity method investees		208		102			71		142						523
Capital expenditures		840		388			898		42						2,168
Total assets (billions)	$	14.7	$	7.0		$	7.4	$	10.8		$	(5.5	)	$	34.4
2000
Total revenue from external customers	$	4,925	$	2,604		$	1,279	$	438					$	9,246
Intersegment revenue		188		3			51		398		$	(640	)
Total operating revenue		5,113		2,607			1,330		836			(640	)		9,246
Interest and related charges		259		192			83		519			(29	)		1,024
Depreciation, depletion and amortization		381		277			352		166						1,176
Equity in earnings of equity method investees		23					12		12						47
Income tax expense (benefit)		294		155			97		(363	)					183
Net income		544		284			255		(647	)					436
Capital expenditures	$	370	$	417		$	751	$	27					$	1,565

As of December 31, 2002 and 2001, approximately 3 and 2 percent of Dominion’s total long-lived assets, respectively, were associated with international operations. For the years ended December 31, 2002 and 2001, approximately 1 and 2 percent of operating revenues were associated with international operations.

42

Notes to Consolidated Financial Statements—(Continued)

33.    Gas and Oil Producing Activities  (unaudited)

Capitalized Costs

The aggregate amounts of costs capitalized for gas and oil producing activities, and related aggregate amounts of accumulated depreciation, depletion and amortization, at December 31, 2002 and 2001 follow:

(millions)	2002		2001
Capitalized costs of:
Proved properties	$	6,265	$	4,707
Unproved properties		1,440		1,508
		7,705		6,215
Accumulated depreciation of:
Proved properties		1,212		447
Unproved properties		151		120
		1,363		567
Net capitalized costs	$	6,342	$	5,648

Total Costs Incurred

The following costs were incurred in gas and oil producing activities during the years ended December 31, 2002, 2001 and 2000:

	2002						2001						2000
(millions)	Total		United States		Canada		Total		United States		Canada		Total		United States		Canada
Property acquisition costs:
Proved properties	$	243	$	243			$	1,586	$	1,586			$	1,475	$	1,459	$	16
Unproved properties		177		170	$	7		908		897	$	11		125		125
		420		413		7		2,494		2,483		11		1,600		1,584		16
Exploration costs		267		260		7		305		305				159		115		44
Development costs(1)		760		679		81		512		395		117		261		236		25
Total	$	1,447	$	1,352	$	95	$	3,311	$	3,183	$	128	$	2,020	$	1,935	$	85

⁽¹⁾ Development costs incurred for proved undeveloped reserves were $223 million and $133 million for 2002 and 2001, respectively.

Results of Operations

Dominion cautions that the following standardized disclosures required by the FASB do not represent the results of operations based on its historical financial statements. In addition to requiring different determinations of revenue and costs, the disclosures exclude the impact of interest expense and corporate overhead.

	2002						2001						2000
(millions)	Total		United States		Canada		Total		United States		Canada		Total		United States		Canada
Revenue (net of royalties) from:
Sales to nonaffiliated companies	$	1,396	$	1,257	$	139	$	1,144	$	920	$	224	$	861	$	691	$	170
Transfers to other operations		97		97				114		114				93		93
Total		1,493		1,354		139		1,258		1,034		224		954		784		170
Less:
Production (lifting) costs		272		220		52		220		162		58		158		133		25
Depreciation, depletion and amortization		502		452		50		358		307		51		345		294		51
Income tax expense		222		209		13		208		162		46		134		93		41
Results of operations	$	497	$	473	$	24	$	472	$	403	$	69	$	317	$	264	$	53

43

Company-Owned Reserves

Estimated net quantities of proved gas and oil (including condensate) reserves in the United States and Canada at December 31, 2002, 2001 and 2000, and changes in the reserves during those years, are shown in the two schedules which follow.

	2002						2001						2000
(billion cubic feet)	Total		United States		Canada		Total		United States		Canada		Total		United States		Canada
Proved developed and undeveloped reserves—Gas
At January 1	4,090		3,517		573		2,337		1,858		479		1,114		600		514
Changes in reserves:
Extensions, discoveries and other additions	874		769		105		503		394		109		274		232		42
Revisions of previous estimates	158		145		13		(24	)	(64	)	40		(89	)	(59	)	(30	)
Production	(399	)	(346	)	(53	)	(295	)	(238	)	(57	)	(269	)	(222	)	(47	)
Purchases of gas in place	381		379		2		1,578		1,576		2		1,322		1,322
Sales of gas in place	(6	)	(6	)			(9	)	(9	)			(15	)	(15	)
At December 31	5,098		4,458		640		4,090		3,517		573		2,337		1,858		479
Proved developed reserves—Gas
At January 1	3,466		3,026		440		1,954		1,593		361		1,005		600		405
At December 31	4,035		3,549		486		3,466		3,026		440		1,954		1,593		361
(thousands of barrels)
Proved developed and undeveloped reserves—Oil
At January 1	140,567		115,988		24,579		75,342		51,072		24,270		20,808		659		20,149
Changes in reserves:
Extensions, discoveries and other additions	24,326		24,273		53		40,676		37,401		3,275		14,213		12,813		1,400
Revisions of previous estimates	11,165		4,293		6,872		(1,617	)	(165	)	(1,452	)	(5,082	)	(2,443	)	(2,639	)
Production	(9,725	)	(8,653	)	(1,072	)	(7,663	)	(6,134	)	(1,529	)	(7,694	)	(6,436	)	(1,258	)
Purchases of oil in place	2,928		2,928				34,619		34,604		15		54,977		48,359		6,618
Sales of oil in place	(31	)	(31	)			(790	)	(790	)			(1,880	)	(1,880	)
At December 31	169,230		138,798		30,432		140,567		115,988		24,579		75,342		51,072		24,270
Proved developed reserves—Oil
At January 1	63,777		46,473		17,304		36,236		21,709		14,527		6,102		659		5,443
At December 31	65,823		47,759		18,064		63,777		46,473		17,304		36,236		21,709		14,527

44

Notes to Consolidated Financial Statements—(Continued)

Standardized Measure of Discounted Future Net Cash Flows and Changes Therein

The following tabulation has been prepared in accordance with the FASB’s rules for disclosure of a standardized measure of discounted future net cash flows relating to proved gas and oil reserve quantities owned by Dominion.

	2002						2001							2000
(millions)	Total		United States		Canada		Total		United States		Canada			Total		United States		Canada
Future cash inflows	$	28,337	$	25,344	$	2,993	$	12,350	$	11,161	$	1,189		$	23,602	$	19,117	$	4,485
Less:
Future development costs(1)		1,092		1,005		87		845		770		75			503		405		98
Future production costs		3,603		2,979		624		3,571		3,091		480			2,055		1,540		515
Future income tax expense (benefit)		7,582		6,904		678		1,917		2,026		(109	)		7,145		5,591		1,554
Future cash flows		16,060		14,456		1,604		6,017		5,274		743			13,899		11,581		2,318
Less annual discount (10% a year)		8,255		7,436		819		2,804		2,513		291			5,723		4,622		1,101
Standardized measure of discounted future net cash flows(2)	$	7,805	$	7,020	$	785	$	3,213	$	2,761	$	452		$	8,176	$	6,959	$	1,217

⁽¹⁾ Estimated future development costs, excluding abandonment, for proven undeveloped reserves are estimated to be $236 million, $239 million and $203 million for 2003, 2004 and 2005, respectively.

⁽²⁾ Amounts exclude the effect of derivative instruments designated as hedges of future sales of production at year end.

In the foregoing determination of future cash inflows, sales prices for gas and oil were based on contractual arrangements or market prices at year-end. Future costs of developing and producing the proved gas and oil reserves reported at the end of each year shown were based on costs determined at each such year end, assuming the continuation of existing economic conditions. Future income taxes were computed by applying the appropriate year-end or future statutory tax rate to future pretax net cash flows, less the tax basis of the properties involved, and giving effect to tax deductions, permanent differences and tax credits.

It is not intended that the FASB’s standardized measure of discounted future net cash flows represent the fair market value of Dominion’s proved reserves. Dominion cautions that the disclosures shown are based on estimates of proved reserve quantities and future production schedules which are inherently imprecise and subject to revision, and the 10 percent discount rate is arbitrary. In addition, costs and prices as of the measurement date are used in the determinations, and no value may be assigned to probable or possible reserves.

The following tabulation is a summary of changes between the total standardized measure of discounted future net cash flows at the beginning and end of each year.

(millions)	2002			2001			2000
Standardized measure of discounted future net cash flows at January 1	$	3,213		$	8,176		$	549
Changes in the year resulting from:
Sales and transfers of gas and oil produced during the year, less production costs		(1,221	)		(1,038	)		(796	)
Prices and production and development costs related to future production		3,975			(9,793	)		9,544
Extensions, discoveries and other additions, less production and development costs		2,039			767			1,602
Previously estimated development costs incurred during the year		223			134			82
Revisions of previous quantity estimates		(152	)		62			(778	)
Accretion of discount		426			1,117			259
Income taxes		(2,639	)		2,949			(3,309	)
Acquisition of Louis Dreyfus and CNG					1,347			1,322
Other purchases and sales of proved reserves in place		799			102			994
Other (principally timing of production)		1,142			(610	)		(1,293	)
Standardized measure of discounted future net cash flows at December 31	$	7,805		$	3,213		$	8,176

45

34.    Quarterly Financial and Common Stock Data (unaudited)

A summary of the quarterly results of operations for the years ended December 31, 2002 and 2001 follows. Amounts reflect all adjustments, consisting of only normal recurring accruals, necessary in the opinion of management for a fair statement of the results for the interim periods. Results for interim periods may fluctuate as a result of weather conditions, changes in rates and other factors. Amounts for 2001 reflect certain reclassifications to conform to the 2002 presentation.

(millions, except per share amounts)	First Quarter		Second Quarter		Third Quarter		Fourth Quarter			Full Year
2002
Operating revenue		$2,634		$2,332		$2,545		$2,707			$10,218
Income from operations		711		625		836		713			2,885
Net income		322		272		430		338			1,362
Earnings per share—basic		1.21		0.98		1.55		1.12			4.85
Earnings per share—diluted		1.20		0.97		1.54		1.12			4.82
Dividends paid per share		0.645		0.645		0.645		0.645		$	2.58
Common stock prices (high-low)		$65.97-$56.39		$67.06-$60.59		$66.15-$47.97		$55.74-$35.40
2001
Operating revenue		$3,198		$2,309		$2,544		$2,507		$	10,558
Income from operations		496		518		780		(9	)		1,785
Net income (loss)		162		155		344		(117	)		544
Earnings (loss) per share—basic		0.66		0.63		1.38		(0.45	)		2.17
Earnings (loss) per share—diluted		0.65		0.62		1.37		(0.45	)		2.15
Dividends paid per share		0.645		0.645		0.645		0.645			2.58
Common stock prices (high-low)	$	68-$55.31	$	69.99-$59.47	$	64.15-$55.13	$	62.97-$55.30

93

Independent Auditors’ Report

To the Shareholders and Board of Directors of

Dominion Resources, Inc.

Richmond, Virginia

We have audited the consolidated financial statements of Dominion Resources, Inc. and subsidiaries as of December 31, 2002 and 2001, and for each of the three years in the period ended December 31, 2002, and have issued our report thereon dated January 21, 2003 (February 19, 2003 as to the last two paragraphs of the Lease Commitments section of Note 27; February 21, 2003 as to the date of the last three paragraphs of Note 30; and May 7, 2003 as to Note 32), which report expresses an unqualified opinion and includes an explanatory paragraph as to changes in accounting principle: for goodwill and other intangible assets in 2002, derivative instruments and hedging activities in 2001, and the method of accounting used to develop the market-related value of pension plan assets in 2000; such consolidated financial statements and report are included elsewhere in this Form 8-K. Our audits also included the consolidated financial statement schedules of the Company, listed in Item 7(c). Exhibit 99.4. These consolidated financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/    DELOITTE & TOUCHE LLP

Richmond, Virginia

January 21, 2003

(February 19, 2003 as to the last two paragraphs of the Lease

Commitments section of Note 27; February 21, 2003 as to

the last three paragraphs of Note 30; and May 7, 2003 as to Note 32)

47

Dominion Resources, Inc. (Parent Company)

Schedule I—Condensed Financial Information of Registrant

Condensed Statements of Income

	Year Ended December 31,
(millions)	2002			2001			2000
Operating Revenue	$	—		$	—		$	3
Operating Expenses		33			22			31
Loss from operations		(33	)		(22	)		(28	)
Other income:
Affiliated interest income		85			87			37
Other		7			7			10
Total other income		92			94			47
Interest and related charges		421			405			350
Loss before income taxes		(362	)		(333	)		(331	)
Income tax benefit		121			117			129
Equity in undistributed earnings of subsidiaries		1,603			760			638
Net Income	$	1,362		$	544		$	436

The accompanying notes are an integral part of the Condensed Financial Statements.

48

Dominion Resources, Inc. (Parent Company)

Schedule I—Condensed Financial Information of Registrant

Condensed Balance Sheets

	At December 31,
(millions)	2002			2001
ASSETS
Current Assets
Cash and cash equivalents	$	74		$	181
Receivables and advances due from affiliates		2,201			840
Prepayments		68			41
Escrow account for debt refunding		500
Other		1			1
Total current assets		2,844			1,063
Investments
Investment in affiliates		13,966			12,821
Loans to affiliates		1,300			1,300
Other		26			24
Total investments		15,292			14,145
Property, Plant and Equipment, Net
Property, plant and equipment		6			6
Less: accumulated depreciation, depletion and amortization		(3	)		(3	)
Total property, plant and equipment, net		3			3
Deferred Charges and Other Assets		32			15
Total assets	$	18,171		$	15,226
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Securities due within one year	$	1,548		$	45
Short-term debt		354			648
Payables and short-term borrowings due to affiliates		43			78
Accrued interest and taxes		97			161
Other		4			51
Total current liabilities		2,048			983
Long-Term Debt
Long-term debt		4,219			4,028
Notes payable to affiliates		914			1,144
Total long-term debt		5,133			5,172
Deferred Credits and Other Liabilities
Deferred income taxes		54			19
Other		58			19
Total deferred credits and other liabilities		112			38
Total liabilities		7,293			6,193
Preferred Stock		665			665
Common Shareholders’ Equity
Common stock, no par(1)		9,051			7,129
Other paid-in capital		47			28
Accumulated other comprehensive income (loss)		(446	)		289
Retained earnings		1,561			922
Total common shareholders’ equity		10,213			8,368
Total liabilities and shareholders’ equity	$	18,171		$	15,226

⁽¹⁾ 500 million shares authorized; 308 million shares and 265 million shares outstanding at December 31, 2002 and 2001, respectively.

The accompanying notes are an integral part of the Condensed Financial Statements.

49

Dominion Resources, Inc. (Parent Company)

Schedule I—Condensed Financial Information of Registrant

Condensed Statements of Cash Flows

	Year Ended December 31,
(millions)	2002			2001			2000
Net Cash Provided By Operating Activities	$	547		$	408		$	1,310
Investing Activities
Investment in affiliates		(95	)		(17	)		(71	)
Advances to affiliates, net of repayments		(2,435	)		327			(611	)
Loans to affiliates					(1,300	)
Acquisition of Consolidated Natural Gas Company								(2,869	)
Escrow deposit for debt refunding		(500	)
Other		(3	)		(4	)		17
Net cash used in investing activities		(3,033	)		(994	)		(3,534	)
Financing Activities
Issuance of common stock		2,020			245			532
Repurchase of common stock		(66	)					(1,641	)
Issuance of long-term debt		1,680			1,097			2,913
Repayment of long-term debt								(50	)
Issuance (repayment) of short-term debt, net		(294	)		(908	)		1,108
Issuance of notes payable to affiliates					1,276
Repayment of notes payable to affiliates		(227	)		(345	)
Common dividends paid		(723	)		(649	)		(615	)
Other		(11	)
Net cash provided by financing activities		2,379			716			2,247
Increase (decrease) in cash and cash equivalents		(107	)		130			23
Cash and cash equivalents at beginning of the year		181			51			28
Cash and cash equivalents at end of the year	$	74		$	181		$	51
Supplemental cash flow information:
Noncash transactions from investing and financing activities:
Common stock issuance —acquisition of Consolidated Natural Gas Company							$	3,527
Stock and stock option issuance —Louis Dreyfus acquisition				$	894
Conversion of short-term advances and other amounts receivable from subsidiaries to paid-in capital	$	959			86
Issuance of preferred stock to beneficially owned trust					665
Common stock received in exchange for reduction in amounts receivable from subsidiary		150
Exchange of debt securities		450

The accompanying notes are an integral part of the Condensed Financial Statements.

50

Dominion Resources, Inc. (Parent Company)

Schedule I—Condensed Financial Information of Registrant

Notes to Condensed Financial Statements

Note 1.    Basis of Presentation

Pursuant to rules and regulations of the Securities and Exchange Commission (SEC), the unconsolidated condensed financial statements of Dominion Resources, Inc. (the Company) do not reflect all of the information and notes normally included with financial statements prepared in accordance with generally accepted accounting principles. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in the 2002 Form 10-K, Part II, Item 8.

Accounting for subsidiaries—The Company has accounted for the earnings of its subsidiaries under the equity method in the unconsolidated condensed financial statements.

Income Taxes—The unconsolidated income tax benefit computed for the Company in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, reflects the tax assets and liabilities of the Company on a stand alone basis and the effect of filing a consolidated U.S. tax return with its subsidiaries.

Note 2.    Long-Term Debt

	2002 Weighted-average Coupon(1)		At December 31,
(millions)			2002			2001
Senior and medium-term notes:
Variable rates, due 2002 to 2003	2.49	%	$	100		$	350
3.875% to 8.125%, due 2003 to 2032(2)	6.63	%		4,920			3,250
Equity-linked senior notes, 5.75% to 8.05%, due 2006 to 2008(3)	7.03	%		743			413
Nonrecourse debt:
Variable rates, due 2004	2.21	%		18			18
				5,781			4,031
Fair value hedge valuation(4)				5
Amount due within one year				(1,500	)
Unamortized discount(5)				(67	)		(3	)
				4,219			4,028
Notes payable—affiliates:
6.0%, due 2005				126			175
7.83% to 8.4%, due 2027 to 2041	8.22	%		822			822
Variable rates, due 2006	2.05	%		14			192
				962			1,189
Amount due within one year				(48	)		(45	)
				914			1,144
Total long-term debt			$	5,133		$	5,172

⁽¹⁾ Represents weighted-average coupon rates for debt outstanding as of December 31, 2002.

⁽²⁾ Includes $250 million of the 7.82 percent Series E Remarketable Notes due September 15, 2014, which will be either mandatorily purchased and remarketed by the remarketing agent or mandatorily redeemed by the Company on September 15, 2004.

⁽³⁾ See Note 3.

⁽⁴⁾ Represents changes in fair value of certain fixed rate long-term debt associated with fair value hedging relationships.

⁽⁵⁾ In 2002, the Company redeemed two series of its remarketable senior notes due September 16, 2012: $200 million, 7.40 percent Series D and $250 million, Variable Rate Series F (Remarketable Senior Notes). In a direct exchange, the Company completed the redemption by issuing $520 million, 5.70 percent Series C Senior Notes due September 17, 2012 (Senior Notes). The principal amount of the Senior Notes was determined by an exchange ratio that was based upon the fair value of the Remarketable Senior Notes. The $63 million difference between the principal amounts of Senior Notes issued and Remarketable Senior Notes redeemed was recorded as an increase in debt discount. In addition, through September 2004, the interest rate for the Senior Notes may increase if the credit ratings established by Moody’s or Standard & Poor’s for Dominion Resources, Inc. senior unsecured debt securities decline. The total increase is limited to 1 percent and would continue for any period in which the downgrade is in effect.

The scheduled principal payments of long-term debt at December 31, 2002 were as follows (in millions):

2003	2004	2005	2006	2007	Thereafter	Total
$1,549	$319	$727	$427	—	$3,722	$6,743

In December 2002, the Company issued $600 million of senior notes, of which $500 million of proceeds was deposited into an escrow account solely for the purpose of being used to repay approximately one half of the aggregate principal amount of the Company’s 2001 Series A 6.0 percent senior notes maturing in January 2003.

The Company’s long-term debt agreements contain customary covenants and default provisions. As of December 31, 2002, there were no events of default under those covenants.

Note 3.    Equity-Linked Securities

In 2002 and 2000, the Company issued equity-linked debt securities, consisting of stock purchase contracts and senior notes. The stock purchase contracts obligate the holders to purchase shares of the Company’s common stock from the Company by a settlement date, two years prior to the senior notes’ maturity date. The purchase price is $50 and the number of shares to be purchased will be determined under a formula based on the average closing price of the Company’s common stock near the settlement date. The senior notes, or treasury securities in some instances, are pledged as collateral to secure the purchase of common stock under the related stock purchase contracts. The holders may satisfy their obligations under the stock purchase contracts by allowing the senior notes to be remarketed with the proceeds being paid to

51

Dominion Resources, Inc. (Parent Company)

Schedule I—Condensed Financial Information of Registrant

Notes to Condensed Financial Statements

the Company as consideration for the purchase of stock. Alternatively, holders may choose to continue holding the senior notes and use other resources as consideration for the purchase of stock under the stock purchase contracts.

The Company makes quarterly interest payments on the senior notes and quarterly payments on the stock purchase contracts at the rates described below. The Company has recorded the present value of the stock purchase contract payments as a liability, offset by a charge to common stock in shareholders’ equity. Interest payments on the senior notes are recorded as interest expense and stock purchase contract payments are charged against the liability. Accretion of the stock purchase contract liability is recorded as interest expense.

Under the terms of the stock purchase contracts, the Company will issue between 6.7 million and 8.1 million shares of its common stock in November 2004 and between 4.1 million and 5.5 million shares of its common stock in May 2006. A total of 13.6 million shares of the Company’s common stock has been reserved for issuance in connection with the stock purchase contracts.

Selected information about the Company’s equity-linked debt securities is presented below (amounts other than percentages are in millions):

Date of Issuance	Units Issued	Total Net Proceeds		Total Long-Term Debt		Senior Notes Annual Interest Rate		Stock Purchase Contract Annual Rate		Total Equity Charge		Stock Purchase Settlement Date	Maturity of Senior Notes
2000	8.3	$	400.1	$	412.5	8.05	%	1.45	%	$	20.7	11/04	11/06
2002	6.6	$	320.1	$	330.0	5.75	%	3.00	%	$	36.3	5/06	5/08

Note  4.    Guarantees, Letters of Credit and Surety Bonds

In the ordinary course of business, the Company is party to various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries. These agreements include guarantees, standby letters of credit and surety bonds. The amounts subject to certain of these agreements vary depending on the covered contracts actually outstanding at any particular point in time. Guarantees and stand-by letters of credit are used, when necessary, to support or enhance a subsidiary’s stand-alone creditworthiness. Accordingly, the Company entered into guarantees and stand-by letters of credit so that third parties would be willing to enter into contracts with the subsidiaries and to extend sufficient credit to facilitate the subsidiaries’ accomplishment of intended commercial purposes. In such instances, guarantees may be used to limit exposures resulting from subsidiary business activities to pre-defined amounts. While the majority of these guarantees do not have a termination date, the Company may choose at any time to limit the applicability of such guarantees to future transactions.

Guarantees

The Company believes it unlikely that it would be required to perform or otherwise incur any losses associated with guarantees of its subsidiaries’ obligations. As of December 31, 2002, outstanding guarantees include $4.0 billion issued by the Company and represented the following types of guarantees:

Guarantee of Subsidiary Debt—The Company has guaranteed the payment of interest and principal of $541 million of subsidiary debt, primarily for certain subsidiaries of Dominion Energy (DEI) and Dominion Capital, Inc. (DCI). In the event of default by the subsidiaries, the Company would be obligated to repay such amounts.

Guarantees Supporting Commodity Transactions of Subsidiaries—The Company has also guaranteed contract payments up to approximately $1.1 billion, primarily for certain subsidiaries of Virginia Electric and Power Company (Virginia Power), Consolidated Natural Gas (CNG) and DEI involved in energy marketing activities and $88 million related to other commodity commitments. These guarantees were provided to counterparties in order to facilitate physical and financial transactions in gas, pipeline capacity, transportation, oil, electricity and related commodities and services. If any one of these subsidiaries fails to perform or pay under the contracts and the counterparties seek performance or payment, the Company would be obligated to satisfy such obligation. The Company and its subsidiaries receive similar guarantees as collateral for credit extended to others.

Guarantees Supporting Other Agreements—The Company has also guaranteed the following transactions:

n $26 million related to the future nuclear decommissioning obligations of certain DEI subsidiaries for the Millstone Power Station (Millstone) and $264 million related to potential retrospective premiums that could be assessed, if there is a nuclear incident under the Company’s nuclear insurance programs for the Millstone Power Station. See Note 16 to the Consolidated Financial Statements included in the 2002 Form 10-K, Part II, Item 8 for more information on nuclear operations. Also, as part of satisfying certain Nuclear Regulatory Commission requirements concerned with ensuring adequate funding for

52

Dominion Resources, Inc. (Parent Company)

Schedule I—Condensed Financial Information of Registrant

Notes to Condensed Financial Statements—(continued)

Millstone’s operations, the Company has also agreed to provide up to $150 million to a DEI subsidiary, if requested by such subsidiary, to pay Millstone operating expenses.

n $91 million related to certain leases (fleet vehicles and computer hardware and software), primarily for Dominion Resources Services, Inc. (DRS) and CNG. For information on commitments for the Company’s leases, see Lease Commitments in Note 27 to the Consolidated Financial Statements included in the 2002 Form 10-K, Part II, Item 8.

n $1.6 billion related to the leasing obligations of certain subsidiaries of DEI for several new power generation projects, as well as those of DRS for corporate headquarters and aircraft. See Lease Commitments in Note 27 to the Consolidated Financial Statements included in the 2002 Form 10-K, Part II, Item 8.

n $35 million related to the obligations of a DEI subsidiary under a cross-currency swap agreement. If the subsidiary were to default on any amounts payable under the swap agreement, the Company would be obligated to pay such amounts.

n $22 million related to guarantees for letters of credit issued primarily on behalf of certain subsidiaries of DCI, CNG and DEI.

n Guarantees Supporting Related Parties—As of December 31, 2002, the Company has guaranteed $70 million related to officers’ borrowings under executive stock loan programs, for which individual officers are personally liable for repayment. Substantially all of this guarantee is scheduled to expire in 2005. The Company has also guaranteed $32 million for certain obligations of certain equity method investments—Dominion Telecom, Inc., Morgantown Energy Associates and Elwood Energy.

Standby Letters of Credit

At December 31, 2002, the Company had authorized the issuance of standby letters of credit by financial institutions in the amounts of $71 million for the benefit of certain counterparties that had extended credit to DEI. In the unlikely event that DEI does not pay amounts when due under the covered contracts, any covered counterparty may present its claim for payment to the financial institution, which would then request payment from DEI and the Company, as applicable. See Note 20 to the Consolidated Financial Statements included in the 2002 Form 10-K, Part II, Item 8. As of December 31, 2002, no amounts had been presented for payment under these letters of credit.

Surety Bonds

At December 31, 2002, the Company and its subsidiaries had purchased $63 million of surety bonds, $60 million of which was purchased for subsidiaries. CNG, Virginia Power and various other Company subsidiaries have purchased $40 million, $9 million and $11 million, respectively, of surety bonds primarily in relation to providing worker compensation benefits and obtaining licenses, permits and rights-of-way. Under the terms of the surety bonds, Virginia Power, DEI, or CNG and then the Company, are obligated to indemnify the respective surety bond company for any amounts paid on behalf of subsidiaries. The Company has also indemnified $3 million of surety bonds issued for Dominion Telecom, Inc. For additional related party information, see Note 31 to the Consolidated Financial Statements included in the 2002 Form 10-K, Part II, Item 8.

Indemnifications

In addition, as part of commercial contract negotiations in the normal course of business, the Company may sometimes agree to make payments to compensate or indemnify other parties for possible future unfavorable financial consequences resulting from specified events. The specified events may involve an adverse judgment in a lawsuit or the imposition of additional taxes due to a change in tax law or interpretation of the tax law. The Company is unable to develop an estimate of the maximum potential amount of future payments under these contracts because events that would obligate the Company have not yet occurred or, if any such event has occurred, the Company has not been notified of its occurrence. However, at December 31, 2002, management believes future payments, if any, that could ultimately become payable under these contract provisions, would not have a material impact on its results of operations, cash flows or financial position.

Note 5.    Preferred Stock

The Company is authorized to issue up to 20 million shares of preferred stock. The Company issued 665,000 shares of Series A mandatorily convertible preferred stock, liquidation preference $1,000 per share, to Piedmont Share Trust (Piedmont Trust) in connection with the formation of Dominion Fiber Ventures LLC (DFV) and the issuance of senior notes by DFV. The Company is the beneficial owner of the Piedmont Trust. For more information about the Company’s investment in DFV, see Note 30 to the Consolidated Financial Statements included in the 2002 Form 10-K, Part II, Item 8.

53

Dominion Resources, Inc. (Parent Company)

Schedule I—Condensed Financial Information of Registrant

Notes to Condensed Financial Statements—(continued)

Note 6.    Dividend Restrictions

The Company received dividends from its consolidated subsidiaries in the amounts of $945 million, $806 million and $1.3 billion for the years 2002, 2001 and 2000, respectively.

The 1935 Act and related regulations issued by the SEC impose restrictions on the transfer and receipt of funds by a registered holding company from its subsidiaries, including a general prohibition against loans or advances being made by the subsidiaries to benefit the registered holding company. Under the 1935 Act, registered holding companies and their subsidiaries may pay dividends only from retained earnings, unless the SEC specifically authorizes payments from other capital accounts. In response to the Company’s request, the SEC granted relief in 2000, authorizing payment of dividends by CNG from other capital accounts to the Company in amounts up to $1.6 billion, representing CNG’s retained earnings prior to the Company’s acquisition of CNG. Furthermore, the Company has submitted a similar request to the SEC in 2002, seeking relief from this restriction in regard to its subsidiary, into which Louis Dreyfus was merged. The application requests relief up to $303 million, representing Louis Dreyfus’ retained earnings prior to the Company’s acquisition of Louis Dreyfus. The Company’s ability to pay dividends on its common stock at declared rates was not impacted by the restriction discussed above during 2002, 2001 and 2000.

The Virginia State Corporation Commission may prohibit any public service company, including Virginia Power, from declaring or paying a dividend to an affiliate, if found not to be in the public interest. At December 31, 2002, the Virginia Commission had not restricted the payment of dividends by Virginia Power.

Certain agreements associated with the Company’s credit facilities contain restrictions on the ratio of debt to total capitalization. These limitations did not restrict the Company’s ability to pay dividends or receive dividends from its subsidiaries at December 31, 2002.

See Note 22 to the Consolidated Financial Statements included in the 2002 Form 10-K, Part II, Item 8., for a description of potential restrictions on dividend payments by the Company in connection with the deferral of payments on the affiliated notes that are held as assets by certain subsidiary capital trusts of the Company.

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Schedule II—Valuation and Qualifying Accounts

Column A		Column B			Column C						Column D			Column E
					Additions
Description		Balance at Beginning of Period			Charged to Expense			Charged to Other Accounts			Deductions			Balance at End of Period
		(Millions)
Valuation and qualifying accounts which are deducted in the balance sheet from the assets to which they apply:
Allowance for doubtful accounts	2000	$	36	(a)	$	71		$	(1	)	$	39	(b)	$	67
	2001		67			54			—			45	(b)		76
	2002		76			48			—			61	(b)		63
Allowance for loan losses	2000		47			16			—			7	(b)		56
	2001		56			178			—			158	(b)		76
	2002		76			—			—			10	(b)		66
Valuation allowance for commodity contracts	2000		22			(3	)(c)		—			—			19
	2001		19			(8	)(c)		—			—			11
	2002		11			(7	)(c)		—			—			4
Reserves:
Liability for pre-2001 workforce reductions	2000		12	(a)		—			—			9	(d)		3
	2001		3			—			—			3	(d)		—
	2002		—			—			—			—			—
Liabilities for restructuring costs:
2000 Plan
DCI exit strategies—Allowance for loan losses	2000		—			19			—			14	(b)		5
	2001		5			—			—			2	(b)		3
	2002		3			—			—			—			3
Severance and related costs	2000		—			70			—			41	(d)		29
	2001		29			(2	)(c)		—			24	(d)		3
	2002		3			—			—			3	(d)		—
Lease termination and restructuring	2000		—			14			—			6	(d)		8
	2001		8			—			—			7	(d)		1
	2002		1			—			—			1	(d)		—
Other, net	2000		—			8			—			8	(d)		—
	2001		—			—			—			—			—
	2002		—			—			—			—			—
2001 Plan
Severance and related costs	2001		—			42			—			—			42
	2002		42			(8	)(c)		—			24	(d)		10
Lease termination and restructuring	2001		—			13			—			3	(d)		10
	2002		10			—			—			1	(d)		9

^(a) Includes balance of acquired company at date of acquisition.

^(b) Represents net amounts charged-off as uncollectible.

^(c) Represents adjustments reflecting changes in estimates.

^(d) Represents payments of liabilities.

55