Dominion Energy - 10-Q quarterly report FY

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

____________

FORM 10-Q

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X    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2002

or

____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number 1-8489

Note 3.     Recently Issued Accounting Standards

Asset Retirement Obligations

In 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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. Under the standard, these liabilities will be recognized at fair value as incurred and capitalized as part of the cost of the related tangible long-lived assets. Accretion of the liabilities due to the passage of time will be an operating expense. Dominion will adopt the standard effective January 1, 2003. Dominion has identified certain retirement obligations that will be subject to the standard. These obligations are associated with the decommissioning of its nuclear generation facilities and certain dismantlement and restoration activities for its gas and oil wells. However, Dominion has not yet performed a complete assessment of possible retirement obligations associated with other electric and gas utility property. Dominion has not yet determined the financial impact of adopting the new standard. For more discussion, see Note 4 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001.

Note 4.     Goodwill and Intangible Assets

In 2001, FASB issued SFAS No. 142, Goodwill and Intangible Assets. SFAS No. 142 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.

Dominion adopted SFAS No. 142 on January 1, 2002. The discontinuance of goodwill amortization under SFAS No. 142 will result in an increase in net income of $95 million in 2002. Dominion is required to test its goodwill for impairment using an annual two-step process described in SFAS No. 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. The standard requires that if impairment were determined to exist under the initial transition test as of January 1, 2002, it would be reflected as the cumulative effect of a change in accounting principle. Dominion is in the process of performing the first step of the transitional goodwill impairment test and will complete this step before the end of the second quarter. Dominion has not yet determined the effect this test may have on its earnings or financial position.

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Had the provisions of SFAS No. 142 requiring the discontinuance of goodwill amortization been applied for the quarter ended March 31, 2001, Dominion's net income and earnings per share would have been as follows:

For the three months ended March 31, 2002 and 2001, Dominion recognized total comprehensive loss of $15 million and total comprehensive income of $91 million, respectively.

Note 9.     Derivatives and Hedge Accounting

Dominion recorded an after-tax charge to accumulated other comprehensive income (AOCI) of $183 million, net of taxes of $106 million in the first quarter of 2001 in connection with the January 1, 2001 adoption of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Other comprehensive income for the quarters ended March 31, 2002 and 2001 included a loss of $335 million and a gain of $132 million, respectively, representing the effective portion of the change in fair value of cash flow hedging derivatives, net of taxes and amounts reclassified to earnings. Dominion expects to reclassify approximately $36 million of net gains in AOCI at March 31, 2002 to earnings during the next twelve-month period. The actual amounts that will be reclassified to earnings over the next twelve months will vary from this amount as a result of changes in market prices. 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. As of March 31, 2002, Dominion is hedging its exposure to the variability in future cash flows for forecasted transactions over periods of one to six years.

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Dominion recognized a pre-tax loss of $9 million for hedge ineffectiveness during the quarter ended March 31, 2002. This amount includes a loss of $6 million related to cash flow hedges and a loss of $3 million related to fair value hedges. Hedge ineffectiveness recognized during the quarter ended March 31, 2001 was insignificant. In addition, Dominion recognized a pre-tax gain of $2 million during the quarter ended March 31, 2001, representing the change in time value excluded from the measurement of effectiveness for options designated as cash flow hedges subsequent to January 1, 2001. The change in time value excluded from the measurement of hedge effectiveness during the quarter ended March 31, 2002 was insignificant.

In June 2001, the FASB cleared guidance that permits certain option-type contracts for the purchase or sale of electricity to qualify for the normal purchases and sales exception, if certain criteria are met. Qualifying contracts, for which Dominion elects and formally documents this exception, are not reported at fair value, as otherwise required by SFAS No. 133. In response to the June 2001 guidance and other guidance issued during that quarter, Dominion reevaluated certain of its long-term power purchase contracts. Dominion determined that such contracts qualified under the guidance and thus designated them as normal purchases and sales. In late December 2001, the FASB issued revised guidance on this matter that became effective April 1, 2002 for Dominion. Dominion reevaluated its long-term power purchase contracts and determined that such contracts continue to qualify for the normal purchases and sales exception based on the guidance issued in December 2001.

Note 10.     Significant Debt and Equity Transactions

Long-term Debt

During the first three months of 2002, Dominion Resources, Inc. issued long-term debt consisting of:

• $250 million of medium-term notes bearing interest at 3.875 percent and maturing in 2004, and
• $330 million of equity-linked debt securities (discussed below).

During the first three months of 2002, Dominion and its subsidiaries repaid $517 million of long-term debt securities.

In addition to the issuances long-term debt discussed above, during the first three months of 2002, Virginia Power called for redemption its $200 million, 6.75 percent 1997-A mortgage bonds due February 1, 2007. Virginia Power completed the redemption by issuing $650 million of 5.375 percent senior notes (Notes) due 2007. The redemption included a direct exchange of $117 million of Notes for mortgage bonds. Virginia Power used the remaining proceeds of Notes to redeem the remaining $83 million of mortgage bonds and for general corporate purposes including the repayment of other debt.

In March 2002, Dominion issued $330 million of equity-linked debt securities. Dominion used the net proceeds for general corporate purposes, including the repayment of debt. Dominion had previously issued $412.5 million of equity-linked debt securities in the fourth quarter of 2000. Each equity-linked security consists of a stock purchase contract and a senior note issued by Dominion. The stock purchase contracts obligate the holders to purchase from Dominion shares of Dominion common stock at a future settlement 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 obligation 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 under the stock purchase contracts. 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 RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

At March 31, 2002, Dominion Resources, Inc. had issued $3.5 billion of guarantees for subsidiary debt of $1.1 billion, subsidiary leasing arrangements (discussed above) of $840 million, and performance under other subsidiary commodity and financial contracts of $1.6 billion.

At March 31, 2002, CNG had issued $1.2 billion of guarantees for subsidiary debt of $288 million and performance under other subsidiary commodity and financial contracts of $873 million.

Note 13.     Operating Segments

Dominion manages its operations through the following operating segments:

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

Dominion Delivery manages Dominion's electric and gas distribution systems, as well as customer service and electric transmission.

Dominion Exploration & Production manages Dominion's onshore and offshore oil and gas exploration, development and production operations. Operations are located on the outer continental shelf and deep water areas of the Gulf of Mexico and in selected regions in the lower 48 states and Canada.

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Corporate and Other includes:

• corporate expenses of the Dominion and CNG holding companies (including interest not allocated to other segments);
• costs associated with restructuring long-term power purchase contracts in 2001 (see Note 27 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001); and
• the financial services operations of Dominion Capital, Inc. (DCI). Through 2001, Dominion presented DCI as a separate operating segment. As Dominion substantially completed its exit strategy of this business in 2001, it no longer reports DCI as a separate operating segment beginning in 2002.

Introduction

Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) discusses the results of operations and general financial condition of Dominion. MD&A should be read in conjunction with the Consolidated Financial Statements. "Dominion" is used throughout MD&A 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.

Risk Factors and Cautionary Statements That May Affect Future Results

This report contains statements concerning Dominion's expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, the reader can identify these forward-looking statements by words such as "anticipate," "estimate," "forecast," "expect," "believe," "should," "could," "plan," "may" or other similar words.

Dominion makes forward-looking statements with full knowledge that risks and uncertainties exist that may cause actual results to be materially different from the results predicted. Factors that could cause actual results to differ are often presented with the forward-looking statements themselves. In addition, other factors could cause actual results to differ materially from those indicated in any forward-looking statement. These factors include changes to financial or regulatory accounting principles or policies imposed by governing bodies, industry conditions in the regulated, unregulated and transition energy markets, political and economic conditions (including inflation rates) and financial market conditions, including availability and cost of capital and credit ratings. Some more specific risks are discussed below.

Dominion bases its forward-looking statements on management's beliefs and assumptions using information available at the time the statements are made. Dominion cautions the reader not to place undue reliance on its forward-looking statements because the assumptions, beliefs, expectations and projections about future events may and often do materially differ from actual results. Dominion undertakes no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.

Dominion's Operations Are Weather Sensitive

Dominion's results of operations can be affected by changes in the weather. Weather conditions directly influence the demand for electricity and natural gas and affect the price of energy commodities. In addition, severe weather can be destructive, causing outages, property damage and requiring Dominion to incur additional expenses.

Dominion Is Subject to Complex Government Regulation Which Could Adversely Affect Its Operations

Dominion's operations are subject to extensive regulation and require numerous permits, approvals and certificates from various federal, state and local governmental agencies. Dominion must also comply with environmental protection legislation and other regulations. Management believes the necessary approvals have been obtained for Dominion's existing operations and that its business is conducted in accordance with applicable laws. However, Dominion remains subject to a varied and complex body of laws and regulations. New laws or regulations or the revision or reinterpretation of existing laws or regulations may require Dominion to incur additional expenses.

Costs of Environmental Compliance, Liabilities and Litigation Could Exceed Dominion's Estimates

Dominion is subject to rising costs that result from a steady increase in the number of federal, state and local laws and regulations designed to protect 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, particularly with laws relating to power plant emissions. In addition, Dominion may be a responsible party for environmental clean up at a site identified

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DOMINION RESOURCES, INC.

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

by a regulatory body. Dominion's management cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean up costs and compliance and the possibility that changes will be made to the current environmental laws and regulations. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties.

Capped Electric Rates in Virginia May Be Insufficient to Allow Full Recovery of Stranded Costs

Under the Virginia Utility Restructuring Act, Dominion's electric base rates (excluding fuel costs and certain other allowable adjustments) remain unchanged until July 2007 unless modified consistent with that Act. The capped rates and wires charges that, where applicable, will be assessed to customers opting for alternative suppliers, allow Dominion to recover certain generation-related costs and fuel costs; however, Dominion remains exposed to numerous risks of cost-recovery shortfalls. These include exposure to potentially stranded costs, future environmental compliance requirements, changes in tax laws, inflation and increased capital costs. See Future Issues and Outlook-Regulated Electric Operations of MD&A and Note 27 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001.

The Electric Industry is Increasingly Subject to Competition

Effective January 1, 2002, the generation portion of Dominion's electric utility operations in Virginia is open to competition and is no longer subject to cost-based rate regulation. As a result there will be increased pressure to lower costs, including the cost of purchased electricity. Because Dominion's electric utility business has not previously operated in a competitive environment, the extent and timing of entry by additional competitors into the electric market in Virginia is yet unknown. Therefore, it is difficult to predict the extent to which Dominion will be able to operate profitably within this new environment. In addition, the success of Dominion's power merchant plants is dependent upon Dominion's ability to find buyers willing to enter into power purchase agreements at prices sufficient to cover operating costs.

There Are Inherent Risks in the Operation of Nuclear Facilities

Dominion operates nuclear facilities that are subject to inherent risks. These include the ability to dispose of spent nuclear fuel, the ability to maintain adequate reserves for decommissioning and potential liabilities arising out of the operation of these facilities. Dominion maintains decommissioning trusts and external insurance coverage to minimize the financial exposure to these risks. However, it is possible that damages could exceed the amount of Dominion's insurance coverage. In addition, in today's environment there is a heightened risk of a terrorist attack on the nation's nuclear plants. Dominion expects to incur increased security costs at its nuclear facilities.

The Use of Derivative Contracts Could Result in Financial Losses

Dominion uses derivatives including futures, forwards, options and swaps, to manage its commodity and financial market risks. In addition, Dominion purchases and sells commodity-based contracts in the natural gas, electricity and oil markets for trading purposes. In the future, Dominion could recognize financial losses on these contracts as a result of volatility in the market values of the underlying commodities or if a counterparty fails to perform under a contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these financial instruments can involve management's judgment or use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the value of the reported fair value of these contracts. For additional information concerning Dominion's derivatives and commodity-based trading contracts, see Market Rate Sensitive Instruments and Risk Management of MD& amp;A and Notes 2 and 15 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001.

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DOMINION RESOURCES, INC.

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

Dominion's Telecommunication Business Strategy's Success Is Dependent Upon Market Conditions

The current strategy of Dominion's joint venture in the telecommunication's business is based upon its ability to deliver lit capacity, dark fiber and colocation services to its customers. The market for these services, like the telecommunications industry in general, is rapidly changing. Dominion cannot assure that growth in demand for these services will occur as expected. If the market for these services fails to grow as quickly as anticipated or becomes saturated with competitors, including competitors using alternative technologies such as wireless, Dominion's investment in the telecommunication business may be adversely affected.

Dominion's Exploration and Production Business Is Dependent on Factors Including Commodity Prices Which Cannot Be Predicted Or Controlled

These factors include: price fluctuations in natural gas and crude oil prices; results of future drilling activity; Dominion's ability to identify and locate prospective geological structures and to drill and successfully complete wells in those structures; Dominion's ability to expand its leased land positions in desirable areas, which are often subject to competition; and other risks incident to the operations of natural gas and oil wells. In addition, Dominion follows the full cost method of accounting for gas and oil exploration and production activities prescribed by the Securities and Exchange Commission (SEC). Under the full cost method, all direct costs of property acquisition, exploration and development activities are capitalized. The principal limitation is that these capitalized amounts may not exceed the present value of estimated future net revenues from the production of proved gas and oil reserves (the ceiling test). If net capitalized costs exceed the ceiling test at t he end of any quarterly period, then a permanent write-down of the assets must be recognized in that period.

An Inability to Access Financial Markets Could Affect the Execution of Dominion's Business Plan

Dominion relies on access to both short-term money markets and longer-term capital markets as a significant source of liquidity for capital requirements not satisfied by the cash flow of its operations. Management believes that Dominion and its subsidiaries will maintain sufficient access to these financial markets based upon current credit ratings. However, certain disruptions outside of Dominion's control may increase the cost of borrowing to Dominion or restrict its ability to access one or more financial markets. Such disruptions could include an economic downturn or the bankruptcy of an unrelated energy company. Restrictions on Dominion's ability to access financial markets may affect Dominion's ability to execute its business plan as scheduled.

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 interacts with financing parties on these bases. Dominion's three primary operating segments are Dominion Energy, Dominion Delivery, and Dominion Exploration & Production. In addition, Dominion also presents its corporate, financial services and other operations as an operating segment. For more information on Dominion's business segments, see Note 13 to the Consolidated Financial Statements.

Critical Accounting Policies

See MD&A in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001 for a detailed discussion of Dominion's critical accounting policies. These policies include the accounting for risk management and energy trading contracts at fair value, accounting for gas and oil operations, and accounting for regulated operations.

Results Of Operations

Dominion's discussion of its results of operations includes a summary of contributions by the operating segments to net income and diluted earnings per share, an overview of consolidated 2002 and 2001 results of operations and more detailed discussion of the results of operations of the operating segments.

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DOMINION RESOURCES, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Dominion earned $1.20 per diluted share in the first quarter of 2002, reflecting net income of $322 million and an increase of $160 million and $0.55 per diluted share over 2001. The increase relates primarily to an after-tax charge of $136 million taken in the first quarter of 2001 in connection with purchase of three non-utility generating plants previously serving Dominion under long-term purchase power agreements. Also, the discontinuance of goodwill amortization, effective January 1, 2002, resulted in a $22 million increase net income. The operations results of Dominion's primary operating segments reduced net income by $12 million ($0.16 per diluted share), reflecting primarily the impact of comparably milder weather on Dominion's regulated electric and gas distribution operations. Interest and related charges decreased $12 million to $242 million for the first quarter of 2002 as compared to 2001, reflecting lower overall interest rates on debt securities offset somewhat by n ew issues of trust preferred securities in the fourth quarter of 2001.

Dominion Energy

Dominion Energy contributed $141 million and $0.52 per diluted share for the first quarter of 2002, a decrease of $19 million and $0.12 per diluted share over 2001 results. The decrease in net income reflects lower revenues, reflecting the impact of comparably milder weather on regulated electric sales revenues and lower gas prices on nonregulated gas sales revenue. These factors were partially offset by the inclusion of Millstone sales revenue in 2002. Operating expenses also decreased, reflecting primarily purchased gas as a result of lower gas prices and volumes associated with field services activities. This decrease was partially offset by increases in electric fuel and energy purchases, purchased capacity, and operations and maintenance expenses resulting primarily from the Millstone operations.

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DOMINION RESOURCES, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Operating Revenue

Operating revenue decreased $124 million to $1.5 billion for the first quarter of 2002 as compared to 2001, reflecting primarily a decrease in nonregulated gas sales resulting from lower prices and volumes at Dominion's field services business. Regulated electric sales revenue decreased as a result of comparatively milder weather partially offset by customer growth. Nonregulated electric sales increased, reflecting the operations of Millstone power plant, acquired March 31, 2001, and contributions by Dominion's electric trading activities. The first quarter of 2002 results included sales to other Dominion segments of $33 million.

Operating Expenses

Operating expenses decreased $111 million to $1.2 billion for 2002 as compared to the first quarter of 2001, reflecting lower purchased gas costs associated with lower gas prices and volumes at Dominion's field services operations partially offset by operating expenses associated with Millstone. Electric fuel and energy purchases, net increased primarily due to Millstone nuclear fuel amortization partially offset by lower fuel costs at Dominion's regulated electric utility. These costs were lower due to changes in generation mix and comparatively milder weather. Depreciation increased primarily as a result of the addition of Millstone's depreciable assets.

Selected Information-Energy Trading Activities

See Selected Information-Energy Trading Activities in the MD&A of Dominion's Annual Report on Form 10-K for the year ended December 31, 2001 for a detailed discussion of the energy trading, hedging and arbitrage activities of the Dominion Energy Clearinghouse (the Clearinghouse) and related accounting policies. For additional discussion of trading activities, see Market Rate Sensitive Instruments and Risk Management.

The Clearinghouse holds a portfolio of derivative financial contracts used by Dominion to manage the price risk of certain anticipated sales of Dominion E&P's 2002 natural gas production (economic hedges). Dominion has not designated these derivatives as hedges for accounting purposes and, as a result, its quarterly earnings will reflect the changes in their fair values until settled. For the first quarter of 2002, Dominion Energy recognized a net loss comprised of $61 million of unrealized losses offset by $7 million of gains related to contract settlements. The effects of these economic hedges, together with Dominion's portfolio of energy contracts held for trading purposes, are included in the tables presented below.

During the remainder of 2002, individual quarterly earnings will reflect changes in fair value and financial settlement of the economic hedges as well as the anticipated gas sales at then current market prices. Differences in the timing of amounts recognized related to the economic hedges and the anticipated gas sales may result in net losses in certain quarters. However, for the entirety of fiscal year 2002, Dominion expects the combination of the anticipated gas sales and the economic hedges to result in a range of prices for those sales as contemplated by its risk management strategy.

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DOMINION RESOURCES, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

A summary of the changes in the unrealized gains and losses in Dominion's energy trading contracts, including the economic hedges, during the first quarter of 2002 follows:

Dominion Delivery contributed $147 million and $0.55 per diluted share for the first quarter of 2002, a decrease of $10 million and $0.08 per diluted share over 2001 results. Comparably milder weather resulted in the decrease in net income as regulated electric and gas sales revenue and purchased gas expense were each down due to lower volumes.

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DOMINION RESOURCES, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Operating Revenue

Operating revenue decreased $477 million to $768 million for the first quarter of 2002 as compared to 2001, reflecting primarily a decrease in nonregulated electric and gas sales offset somewhat by an increase in gas transportation and storage revenue. Regulated electric sales revenue decreased as a result of comparatively milder weather partially offset by customer growth. Regulated gas sales revenue decreased primarily due to comparably milder weather. Gas transportation and storage revenue increased reflecting the switch of customers in Dominion's regulated gas distribution operations in certain service territories to alternate suppliers. These customers became transport customers as opposed to sales customers.

Operating Expenses

Operating expenses decreased $447 million to $501 million for 2002 as compared to the first quarter of 2001 reflecting lower purchased gas costs resulting from comparably milder weather, lower natural gas prices as reflected in rates and customers switching to alternative gas suppliers. The milder weather has also resulted in a decrease in maintenance costs.

Dominion Exploration & Production

Corporate and Other

Net expenses associated with corporate and other operations for the first quarter of 2002 were $54 million and $(0.20) per diluted share, a decrease in net expenses of $172 million and $0.71 per diluted share as compared to 2001. The decrease in net expense reflects primarily a decrease in operating expenses for the comparative quarters. This decrease includes the impact of a charge of $220 million ($136 million after-tax), reported in operations and maintenance expense, related to the purchase of three non-utility generating plants previously serving Dominion under long-term contracts. In addition, the decrease also reflects a $22 million reduction in amortization expense, reflecting the discontinuance of goodwill amortization effective January 1, 2002.

Liquidity and Capital Resources

Dominion and its subsidiaries depend on both internal and external sources of liquidity to provide working capital and to fund capital requirements. Short-term cash requirements not met by the cash flow from operations are generally satisfied with proceeds from short-term borrowings. Long-term cash needs are met through sales of securities and additional long-term debt financing.

Internal Sources of Liquidity

Cash flow from operating activities provided $412 million during the three months of 2002 as compared to $922 million in 2001. The decrease in cash flow from operating activities for the first quarter of 2002 resulted primarily from the following:

• a shift in net margin requirements from the net receipt of cash under margin arrangements during the first quarter of 2001 to the net payments of cash into margin deposits during the first quarter of 2002, and
• collections of comparatively higher levels of receivables during the first quarter of 2001 as compared to the first quarter of 2002 reflective of higher gas prices as of year-end 2000;

Dominion's operations are subject to risks and uncertainties that may negatively impact cash flows from operations. See the discussion of such factors in Internal Sources of Liquidity in the MD&A of Dominion's Annual Report on Form 10-K for the year ended December 31, 2001.

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DOMINION RESOURCES, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

External Sources of Liquidity

In the External Sources of Liquidity section of MD&A in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001, Dominion discussed the use of capital markets by Dominion Resources, Inc., Virginia Power, and CNG (the Dominion Companies) as well as the impact of credit ratings on the accessibility and costs of using these markets. In addition, that section of MD&A discussed various covenants present in the enabling agreements underlying the Dominion Companies' debt. As of March 31, 2002, there have been no downgrades of the Dominion Companies' credit ratings, as disclosed in the 2001 Annual Report. In addition, there have been no changes to or events of default under Dominion's debt covenants.

During the first three months of 2002, Dominion and its subsidiaries issued long-term debt and common stock totaling $1.8 billion. The proceeds were used primarily to repay other debt and finance capital expenditures.

Short-term Debt

At March 31, 2002, the Dominion Companies had commercial paper programs with an aggregate limit of $2.05 billion, supported by a $1.75 billion 364-day revolving credit facility and a $300 million multi-year facility. These credit facilities mature in the second quarter of 2002 and are expected to be replaced. During 2001, credit facilities totaling $1.05 billion matured and were not renewed.

The Dominion Companies' net borrowings under the commercial paper program were $1.08 billion at March 31, 2002, a decrease of $780 million from amounts outstanding at December 31, 2001. Commercial paper borrowings are used primarily to fund working capital requirements and as bridge financing of acquisitions, and therefore may vary significantly during the course of the year depending upon the timing and amount of cash requirements not satisfied by cash provided by operations.

In addition to commercial paper, Virginia Power may also issue up to $200 million aggregate outstanding principal of extendible commercial notes (ECNs) to meet working capital requirements. ECNs are unsecured notes that are expected to be sold in private placements. Any ECNs issued would have a stated maturity of 390 days from issuance and may be redeemed, at Virginia Power's option, within 90 days or less from issuance. There were no ECNs outstanding at March 31, 2002.

Long-Term Debt

During the first three months of 2002, Dominion Resources, Inc. issued the following debt securities:

• $250 million of medium-term notes bearing interest at 3.875 percent and maturing in 2004, and
• $330 million of equity-linked debt securities bearing interest at 5.75 percent and maturing in 2008.

During the first three months of 2002, the Dominion Companies, and certain other subsidiaries, repaid $517 million of long-term debt securities.

In addition, during the first three months of 2002, Virginia Power called for redemption of its $200 million, 6.75 percent 1997-A mortgage bonds due February 1, 2007. Virginia Power completed the redemption by issuing $650 million of 5.375 percent senior notes (Notes) due 2007. The redemption included a direct exchange of $117 million of Notes for mortgage bonds. Virginia Power used the remaining proceeds of Notes to redeem the remaining $83 million of mortgage bonds and for general corporate purposes including the repayment of other debt.

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DOMINION RESOURCES, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Issuance of Common Stock

During the first quarter of 2002, Dominion received proceeds of $689 million from the issuance of common stock. In March 2002, Dominion issued approximately 10 million shares through an equity offering and received proceeds of $618 million. The remainder of the shares issued and proceeds received occurred through Dominion Direct (a dividend reinvestment and open enrollment direct stock purchase plan), employee savings plans, and the exercise of employee stock options.

Amounts Available under Shelf Registrations

At March 31, 2002, Dominion Resources, Inc. and Virginia Power had approximately $1.06 billion and $250 million of principal amount remaining under currently effective shelf registrations, respectively. CNG filed a shelf registration statement with the SEC for $1.5 billion which went effective during April 2002.

Investing Activities

During the first quarter of 2002, investing activities resulted in a net cash outflow of $576 million, reflecting the following primary investing activities:

• capital expenditures of $333 million that included construction and expansion of generation facilities, environmental upgrades, purchase of nuclear fuel, and construction and improvements of gas and electric transmission and distribution assets; and
• capital expenditures of $274 million that included the purchase and development of gas and oil producing properties, drilling and equipment costs and undeveloped lease acquisitions.

Contractual Cash Obligations and Commitments

As of March 31, 2002, other than scheduled maturities of debt issued during the first three months of 2002, there have been no significant changes to the contractual obligations and commitments previously disclosed in the Contractual Cash Obligations and Commitments section of MD&A in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001.

Future Issues

The following discussion of future issues and other information includes current developments of previously disclosed matters and new issues arising during the period covered by and subsequent to these financial statements. We recommend that this section be read in conjunction with Future Issues and Outlook in MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2001.

Regulated Electric Operations

Separation of Electric Generation and Delivery Operations

The Virginia Electric Utility Restructuring Act was enacted in 1999 and, among other things, addressed divestiture, functional separation and other corporate relationships. The Act required Virginia's electric utilities to file with the Virginia Commission their plans to separate generation from transmission and distribution operations.

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DOMINION RESOURCES, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

On April 25, 2002 the Federal Energy Regulatory Commission (FERC) issued an order addressing a request by the Alliance Companies and National Grid USA that FERC find that certain proposed policy resolutions provide an appropriate basis for the participation of the Alliance Companies in the Midwest Independent System Operator (ISO). While a member of the Alliance Companies, Dominion did not join the request. The FERC order provided direction and guidance to the Alliance Companies on the basis for participation in the Midwest ISO, and stated that certain of the guidance is intended to be applicable regardless of which RTO the Alliance Companies join. FERC also directed the Alliance Companies to file within 30 days detail on which RTO they plan to join and whether such participation will be collective or individual. Should the individual or collective Alliance Companies decide to join the Midwest ISO, FERC directed such companies to detail their plans for the timing of such event taki ng into consideration FERC's guidance.

Regulated Gas Operations

Rate Matters-Pennsylvania

The Pennsylvania Public Utility Commission (Pennsylvania Commission) issued an audit report in March 2002 regarding a compliance audit of Dominion's purchased gas cost rates for the years 1997 through 1999. Dominion was directed to refund $5 million to sales customers over a two-year period beginning April 1, 2002.

Pending Acquisition

Dominion's financial instruments, derivative financial instruments and derivative commodity contracts are exposed to potential losses due to adverse changes in interest rates, commodity prices and equity security prices as described below. Interest rate risk generally is related to Dominion's outstanding debt and financial services activities. Commodity price risk is present in Dominion's electric operations, gas production and procurement operations, and energy marketing and trading operations due to the exposure to market shifts for prices received and paid for natural gas, electricity and other commodities. Dominion uses derivative commodity contracts to manage price risk exposures for these operations. Dominion is exposed to equity price risk through various portfolios of equity securities.

Dominion's sensitivity analysis estimates the potential loss of future earnings or fair value from market risk sensitive instruments over a selected time period due to a 10 percent unfavorable change in interest rates and commodity prices.

Commodity Price Risk-Trading Activities

As part of its strategy to market energy and to manage related risks, Dominion manages a portfolio of derivative commodity contracts held for trading purposes. These contracts are sensitive to changes in the prices of natural gas, electricity and certain other commodities. Dominion uses established policies and procedures to manage the risks associated with these price fluctuations and uses various commodity instruments, such as futures, forwards, swaps and options, to reduce risk by creating offsetting market positions. In addition, Dominion seeks to use its generation capacity, when not needed to serve customers in its service territory, to satisfy commitments to sell energy.

A hypothetical 10 percent unfavorable change in commodity prices would have resulted in a decrease of approximately $36 million and $12 million in the fair value of its commodity contracts held for trading purposes as of March 31, 2002 and December 31, 2001, respectively.

Commodity Price Risk-Non-Trading Activities

Dominion manages the price risk associated with purchases and sales of natural gas, oil and electricity by using derivative commodity instruments including futures, forwards, options and swaps. For sensitivity analysis purposes, the fair value of Dominion's non-trading derivative commodity instruments is determined based on models that consider the market prices of commodities in future periods, the volatility of the market prices in each period, as well as the time value factors of the derivative instruments. Market prices and volatility are principally determined based on quoted prices on the futures exchange.

A hypothetical 10 percent unfavorable change in market prices of Dominion's non-trading derivative commodity instruments would have resulted in a decrease in fair value of approximately $282 million and $155 million as of March 31, 2002 and December 31, 2001, respectively. These results reflect comparably higher commodity prices and volumes as of March 31, 2002.

The impact of a change in energy commodity prices on Dominion's non-trading derivative commodity instruments at a point in time is not necessarily representative of the results that will be realized when such contracts are ultimately settled. Net losses from derivative commodity instruments used for hedging purposes, to the extent realized, are generally offset by recognition of the hedged transaction, such as revenue from sales.

Interest Rate Risk

Dominion manages its interest rate risk exposure predominantly by maintaining a balance of fixed and variable rate debt. Dominion also enters into interest rate sensitive derivatives, including interest rate swaps and interest rate lock agreements. In addition, Dominion, through subsidiaries, retains ownership of mortgage investments, including subordinated bonds and interest-only residual assets retained at securitization of mortgage loans originated and purchased. For financial instruments outstanding at March 31, 2002 and December 31, 2001, a hypothetical 10 percent increase in market interest rates would decrease annual earnings by approximately $5 million and $10 million, respectively.

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DOMINION RESOURCES, INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

(Continued)

Foreign Exchange Risk

Dominion's Canadian natural gas and oil exploration and production activities are relatively self-contained within Canada. As a result, Dominion's exposure to foreign currency exchange risk for these activities is limited primarily to the effects of translation adjustments that arise from including that operation in its consolidated financial statements. Since these translation adjustments do not impact cash flows, Dominion's management monitors this exposure but believes it is not material. Although Dominion may purchase products and services denominated in foreign currencies for use in its non-Canadian operations and may use currency forward contracts to manage related risks, such commitments were not material at March 31, 2002 and December 31, 2001.

Equity Price Risk

Dominion is subject to equity price risk due to marketable securities held as investments and in trust funds. In accordance with current accounting standards, the marketable securities are reported on the balance sheet at fair value. There have been no significant changes in the trust fund balances since December 31, 2001.

Forward-Looking Statements

The matters discussed in this Item may contain "forward-looking statements" as described in the introductory paragraphs under Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q. The reader's attention is directed to those paragraphs for discussion of various risks and uncertainties that may affect the future of Dominion.

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DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, Dominion and its subsidiaries are alleged to be in violation or in default under orders, statutes, rules or regulations relating to the environment, compliance plans imposed upon or agreed to by us, or permits issued by various local, state and federal agencies for the construction or operation of facilities. From time to time, there also may be administrative proceedings on these matters pending. In addition, in the normal course of business, Dominion and its subsidiaries are involved in various legal proceedings. Management believes that the ultimate resolution of these proceedings will not have a material adverse effect on Dominion's financial position, liquidity or results of operations. See Future Issues in Management's Discussion and Analysis (MD&A) and Item 5 - Other Information for discussion on various regulatory proceedings to which we are a party.

In April 2002, the U.S. Court of Appeals for the District of Columbia vacated and remanded a Federal Energy Regulatory Commission (FERC) order that Dominion had contested. The FERC order, issued in May 2000, originally required Dominion to adopt codes of conduct among its regulated and unregulated energy affiliates as a condition of FERC's approval of the merger of Dominion and CNG.

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

Dominion's Annual Shareholders Meeting was held on April 26, 2002 and the following matters were voted on by shareholders.

Election of Directors

The following Directors were elected to the Board of Directors for a one-year term or until next year's annual meeting.

Labor Relations

On April 25, 2002, members of Service Employees International Union (SEIU) Local 69-II approved a new labor contract with Dominion Transmission, Inc. and Hope Gas, Inc.. The agreement is retroactive to April 1, 2002 and will extend until April 1, 2006.

Executive Stock Options

On April 17, 2002, Dominion announced that it would waive certain forfeiture provisions so that its executives could exercise up to 20 percent of their vested options. The options had been granted in 1999 and thereafter under a shareholder-approved plan and coincided with the elimination of the company's cash-based long-term incentive program. A total of 1.1 million stock options were eligible to be exercised and at April 30, approximately 1 million options were exercised and the resulting shares sold. Dominion bought back 1 million shares, effectively eliminating any dilution.

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DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION

(Continued)

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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.