Dominion Energy - 10-Q quarterly report FY

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    X   No         

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes   X   No       

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes       No    X  

At September 30, 2005, the latest practicable date for determination, 347,275,708

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DOMINION RESOURCES, INC.

INDEX

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DOMINION RESOURCES, INC.

PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

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⁽¹⁾ Net of income tax expense of $3 million for the three and nine months ended September 30, 2005 and income tax benefit of $4 million for the nine months ended September 30, 2004.

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

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DOMINION RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS

(Unaudited)

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DOMINION RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS

(Unaudited)

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⁽¹⁾ 

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

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DOMINION RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

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

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 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). In August 2005, the President of the United States signed the Energy Policy Act of 2005, which provides for the repeal of the 1935 Act in February 2006.

Note 2.    Significant Accounting Policies
As permitted by the rules and regulations of the SEC, the accompanying unaudited Consolidated Financial Statements contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes in Dominion's Annual Report on Form 10-K for the year ended December 31, 2004 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2005 and June 30, 2005.

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

In the opinion of Dominion's management, the accompanying unaudited Consolidated Financial Statements contain all adjustments, including normal recurring accruals, necessary to present fairly Dominion's financial position as of September 30, 2005, its results of operations for the three and nine months ended September 30, 2005 and 2004, and its cash flows for the nine months ended September 30, 2005 and 2004.

Dominion makes certain estimates and assumptions in preparing its Consolidated Financial Statements in accordance with GAAP. 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 accompanying unaudited Consolidated Financial Statements include, after eliminating intercompany transactions and balances, the accounts of Dominion and all majority-owned subsidiaries and those variable interest entities (VIEs) where Dominion has been determined to be the primary beneficiary.

Dominion reports certain contracts and instruments at fair value in accordance with GAAP. Market pricing and indicative price information from external sources are used to measure fair value when available. In the absence of this information, Dominion estimates fair value based on near-term and historical price information and statistical methods. For individual contracts, the use of differing assumptions could have a material effect on the contract's estimated fair value. See Note 2 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2004 for a more detailed discussion of Dominion's estimation techniques.

The results of operations for the interim periods are not necessarily indicative of the results expected for the full year. Information for quarterly periods is affected by seasonal variations in sales, rate changes, electric fuel and energy purchases and purchased gas expenses and other factors.

Certain amounts in the 2004 Consolidated Financial Statements have been reclassified to conform to the 2005 presentation. These reclassifications had no effect on net income.

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

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 3.     Recently Issued Accounting Standards
FIN 47
In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47), which clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when the obligation is incurred - generally upon acquisition, construction, or development and/or through the normal operation of the asset, if the fair value of the liability can be reasonably estimated. A conditional asset retirement obligation is a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Uncertainty about the timing and/or method of settlement is required to be factored into the measurement of the liability when sufficient information exists. Dominion will adopt FIN 47 on December 31, 2005 and is currently evaluating its impact, which could be material to Dominion's results of operations and financial condition.

SFAS No. 123R and SAB 107
SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R) requires that compensation cost relating to share-based payment transactions be recognized in the financial statements based on the fair value of the equity or liability instruments issued. SFAS No. 123R covers a wide range of share-based compensation arrangements, including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. In addition, SFAS No. 123R clarifies the timing of expense recognition for share-based awards with terms that accelerate vesting upon retirement.

Dominion's restricted stock awards contain terms that accelerate vesting upon retirement. Under current practice, compensation cost for these awards is recognized over the stated vesting term unless vesting is actually accelerated by retirement. Upon adoption of SFAS No. 123R, Dominion will continue to recognize compensation cost over the stated vesting term for existing restricted stock awards, but will be required to recognize compensation cost over the shorter of the stated vesting term or period from the date of grant to the date of retirement eligibility for newly issued or modified restricted stock awards. At September 30, 2005, unrecognized compensation cost for restricted stock awards held by retirement eligible employees totaled $15 million.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) to express the views of the staff regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and to provide the staff's views regarding the valuation of share-based payment arrangements for public companies, including assumptions such as expected volatility and expected term. In August 2005, the FASB issued Staff Position 123R-1, Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123R, (FSP 123R-1) to defer at this time the requirement of SFAS No. 123R, that a freestanding financial instrument originally subject to SFAS No. 123R becomes subject to the recognition and measurement requirements of other applicable GAAP when the rights conveyed by the instrument to the holder are no longer dependent on the holder being an employee of the entity. Dominion will apply the additional guidanc e provided by SAB 107 and FSP 123R-1 upon implementation of SFAS No. 123R.

Dominion must adopt SFAS No. 123R and related guidance on January 1, 2006 for its outstanding unvested awards as well as for awards granted, modified, repurchased or cancelled on or after that date. Compensation expense expected to be recognized for unvested stock options outstanding at adoption is not expected to be material.

SFAS No. 154
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 applies to all voluntary changes in accounting principle and requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Dominion will apply the provisions of SFAS No. 154 beginning January 1, 2006.

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

EITF 04-5
In June 2005, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) on Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. EITF 04-5 provides guidance in assessing when a general partner should consolidate its investment in a limited partnership or similar entity. The provisions of EITF 04-5 were required to be applied beginning June 30, 2005 by general partners of all newly formed limited partnerships and for existing limited partnerships for which the partnership agreements are modified and is effective for general partners in all other limited partnerships beginning January 1, 2006. Dominion is currently evaluating existing relationships to determine the impact that EITF 04-5 may have on its results of operations and financial condition.

EITF 04-13
Dominion enters into buy/sell and related agreements as a means to reposition its offshore Gulf of Mexico crude oil production to more liquid marketing locations onshore. Dominion typically enters into either a single or a series of buy/sell transactions in which it sells its crude oil production at the offshore field delivery point and buys similar quantities at Cushing, Oklahoma for sale to third parties. Dominion is able to enhance profitability by selling to a wide array of refiners and/or trading companies at Cushing, one of the largest crude oil markets in the world, versus restricting sales to a limited number of refinery purchasers in the Gulf of Mexico.

Under the primary guidance of EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, Dominion presents the sales and purchases related to its crude oil buy/sell arrangements on a gross basis in its Consolidated Statements of Income. These transactions require physical delivery of the crude oil and the risks and rewards of ownership are evidenced by title transfer, assumption of environmental risk, transportation scheduling and counterparty nonperformance risk. Amounts currently shown on a gross basis in Dominion's Consolidated Statements of Income are summarized below.

_________________________

In September 2005, the FASB ratified the EITF's consensus on Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty, that will require buy/sell and related agreements to be presented on a net basis in the Consolidated Statements of Income if they are entered into in contemplation of one another. This new guidance is required to be applied to all new arrangements entered into, and modifications or renewals of existing arrangements, for reporting periods beginning after March 16, 2006. Dominion is currently assessing the impact that this new guidance may have on its income statement presentation of these transactions; however, there will be no impact on Dominion's results of operations or cash flows.

Note 4.     Acquisition of Kewaunee Power Station

In July 2005, Dominion completed the acquisition of the 568-megawatt Kewaunee nuclear power station (Kewaunee), located in northeastern Wisconsin, from Wisconsin Public Service Corporation, a subsidiary of WPS Resources Corporation (WPS), and Wisconsin Power and Light Company (WP&L), a subsidiary of Alliant Energy Corporation for approximately $192 million in cash. Dominion sells 100% of the facility's output to WPS (59%) and WP&L (41%) under two power purchase agreements that will expire in 2013. The operations of Kewaunee are included in the Dominion Generation operating segment.

The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the date of the acquisition. Dominion may make adjustments to the initial purchase price allocation to reflect the receipt of additional information.

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 5.     Operating Revenue
Dominion's operating revenue consists of the following:

Dominion's effective tax rate was (31.6%) and 39.6% for the three months ended September 30, 2005 and 2004, respectively. For the three months ended September 30, 2005, the income tax benefit and negative effective tax rate primarily reflect the effects of the substantial decrease in income before income taxes and the items identified above that result from differences in the reported provision for income taxes, as compared to the amount calculated at the U.S. statutory rate.

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 7.     Earnings Per Share

The following table presents the calculation of Dominion's basic and diluted EPS:

_________________
⁽¹⁾

Potentially dilutive securities with the right to purchase approximately 4.3 million and 4.8 million common shares for the three months ended September 30, 2005 and 2004, respectively, and 2.9 million and 4.1 million common shares for the nine months ended September 30, 2005 and 2004, respectively, were not included in the respective period's calculation of diluted EPS because the exercise and purchase prices included in those instruments were greater than the average market price of the common shares.

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 8.     Comprehensive Income
The following table presents total comprehensive income (loss):

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⁽¹⁾

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The following table presents selected information related to cash flow hedges included in accumulated other comprehensive income (loss) (AOCI) in the Consolidated Balance Sheet at September 30, 2005:

The amounts that will be 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 and will vary from the expected amounts presented above as a result of changes in market prices, interest rates and foreign exchange rates.

As a result of a delay in reaching anticipated production levels in the Gulf of Mexico, Dominion discontinued hedge accounting for certain cash flow hedges in March 2005 since it became probable that the forecasted sales of oil would not occur. In connection with the discontinuance of hedge accounting for these contracts, Dominion reclassified $30 million ($19 million after-tax) of losses from AOCI to earnings in March 2005. Through September 30, 2005, Dominion has recognized additional losses of $29 million ($19 million after-tax) due to subsequent changes in the fair value of these contracts.

Additionally, due to interruptions in Gulf of Mexico and South Louisiana gas and oil production caused by Hurricanes Katrina and Rita, Dominion discontinued hedge accounting for certain cash flow hedges in August and September 2005 since it became probable that the forecasted sales of gas and oil would not occur. The discontinuance of hedge accounting for these contracts resulted in the following losses:

• $37 million ($24 million after-tax) reclassified from AOCI to earnings for contracts that settled in the three months ended September 30, 2005 for which delivery did not occur;
• $386 million ($248 million after-tax) reclassified from AOCI to earnings for contracts that will settle in future periods; and
• $133 million ($85 million after-tax) due to subsequent changes in the fair value of these contracts.

Losses related to the discontinuance of hedge accounting were reported in other operations and maintenance expense in the Consolidated Statements of Income.

While Dominion's facilities were not significantly damaged by the hurricanes, certain production capability remains off-line primarily due to damage to downstream infrastructure owned by third parties. At this time, Dominion is not able to predict with certainty when off-line production will resume. If, in the future, it becomes probable that additional forecasted sales of gas and oil will not occur, it may be necessary to discontinue hedge accounting for cash flow hedges related to those forecasted sales.

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 10.     Asset Retirement Obligations
The following table describes the changes to Dominion's asset retirement obligations during the nine months ended September 30, 2005:

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Note 11.     Ceiling Test
Dominion follows the full cost method of accounting for gas and oil exploration and production activities as prescribed by the SEC. Under the full cost method, capitalized costs are subject to a quarterly ceiling test. Under the ceiling test, amounts capitalized are limited to the present value of estimated future net revenues to be derived from the anticipated production of proved gas and oil reserves, assuming period-end hedge-adjusted prices. Approximately 11% of Dominion's anticipated production is hedged by qualifying cash flow hedges, for which hedge-adjusted prices were used to calculate estimated future net revenue. Whether period-end market prices or hedge-adjusted prices were used for the portion of production that is hedged, there was no ceiling test impairment as of September 30, 2005.

Note 12.     Variable Interest Entities
FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, (FIN 46R) addresses consolidation of VIEs. An entity is considered a VIE under FIN 46R if it does not have sufficient equity for it to finance its activities without assistance from variable interest holders or if its equity investors lack any of the following characteristics of a controlling financial interest:

• control through voting rights,
• the obligation to absorb expected losses, or
• the right to receive expected residual returns.

FIN 46R requires the primary beneficiary of a VIE to consolidate the VIE and to disclose certain information about its significant variable interests. The primary beneficiary of a VIE is the entity that receives the majority of a VIE's expected losses, expected residual returns, or both.

Certain variable pricing terms in some long-term power and capacity contracts cause them to be considered potential variable interests in the counterparties.

Dominion has since determined that its interest in two of the potential VIEs is not significant. In addition, in May 2005, Dominion paid $215 million to divest its interest in a long-term power tolling contract with a 551-megawatt combined cycle facility located in Batesville, Mississippi, which was considered to be a potential VIE. Dominion decided to divest its interest in the long-term power tolling contract in connection with its reconsideration of the scope of certain activities of the Dominion Clearinghouse (Clearinghouse), including those conducted on behalf of Dominion's business segments, and its ongoing strategy to focus on business activities within the Mid-America Interconnected Network (MAIN) to Maine region.

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

As of September 30, 2005, no further information has been received from the three remaining potential VIEs. Dominion will continue its efforts to obtain information and will complete an evaluation of its relationship with each of these potential VIEs, if sufficient information is ultimately obtained. Dominion has remaining purchase commitments with these three potential VIE supplier entities of $2.1 billion at September 30, 2005. Dominion paid $45 million and $47 million for electric generation capacity and $107 million and $43 million for electric energy to these entities in the three months ended September 30, 2005 and 2004, respectively. Dominion paid $146 million for electric generation capacity in the nine months ended September 30, 2005 and 2004 and $188 million and $124 million for electric energy to these entities in the same periods of 2005 and 2004, respectively.

During the first and second quarters of 2005, Dominion entered into three long-term contracts with unrelated limited liability corporations (LLCs) to purchase synthetic fuel produced from coal. Certain variable pricing terms in the contracts protect the equity holders from variability in the cost of their coal purchases, and therefore, the LLCs were determined to be VIEs. Dominion's only obligation under the contractual arrangement is to purchase the synthetic fuel that the LLCs produce. After completing its FIN 46R analysis, Dominion concluded that although its interests in the contracts, as a result of their pricing terms, represent variable interests in the LLCs, Dominion is not the primary beneficiary. Dominion paid $67 million and $130 million to the LLCs for coal and synthetic fuel produced from coal in the three months and nine months ended September 30, 2005, respectively.

In accordance with FIN 46R, Dominion consolidates certain variable interest lessor entities through which Dominion has financed and leased several power generation projects, as well as its corporate headquarters and aircraft. Dominion's Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004 reflect net property, plant and equipment of $950 million and $963 million, respectively, and $1.1 billion of debt related to these entities. The debt is nonrecourse to Dominion and is secured by the entities' property, plant and equipment.

Note 13.     Significant Financing Transactions
Credit Facilities and Short-Term Debt
Dominion, Virginia Power and CNG (collectively the Dominion Companies) use short-term debt, primarily commercial paper, to fund working capital requirements, as a bridge to long-term debt financing and as bridge financing for acquisitions, if applicable. The levels of borrowing may vary significantly during the course of the year, depending upon the timing and amount of cash requirements not satisfied by cash from operations. In addition, the Dominion Companies utilize cash and letters of credit to fund collateral requirements under their commodities hedging program. Collateral requirements are impacted by commodity prices, hedging levels and the credit quality of the Dominion Companies and their counterparties. In May 2005, the Dominion Companies entered into a $2.5 billion five-year joint revolving credit facility that replaced their $1.5 billion three-year facility dated May 2004 and their $750 million three-year facility dated May 2002. In August 2005, CNG entered into a $1.75 billion five-year f acility that replaced its $1.5 billion three-year facility dated August 2004. At September 30, 2005, the Dominion Companies had committed lines of credit totaling $4.25 billion. Although there were no loans outstanding, these lines of credit support commercial paper borrowings and letter of credit issuances. At September 30, 2005, the Dominion Companies had the following commercial paper and letters of credit outstanding and capacity available under credit facilities:

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Dominion and CNG have entered into several bilateral credit facilities in addition to the facilities above in order to provide collateral required on derivative contracts used in their risk management strategies for merchant generation and gas and oil production operations, respectively. Collateral requirements have increased significantly in 2005 as a result of escalating commodity prices. At September 30, 2005, Dominion and CNG had the following letter of credit facilities:

In October 2005, Dominion entered into an additional $290 million letter of credit agreement that terminates in April 2006. The agreement will be used to provide collateral required on derivative contracts used in its risk management strategies for merchant generation and gas and oil production operations.

In connection with its commodity hedging activities, Dominion is required to provide collateral to counterparties under some circumstances. Under certain collateral arrangements, Dominion may satisfy these requirements by electing to either deposit cash, post letters of credit or, in some cases, utilize other forms of security. From time to time, Dominion varies the form of collateral provided to counterparties after weighing the costs and benefits of various factors associated with the different forms of collateral. These factors include short-term borrowing and short-term investment rates, the spread over these short-term rates at which Dominion can issue commercial paper, balance sheet impacts, the costs and fees of alternative collateral postings with these and other counterparties and overall liquidity management objectives.

Long-Term Debt
During the nine months ended September 30, 2005, Dominion Resources, Inc. issued the following long-term debt:

In February 2005, in connection with the acquisition of a non-utility generating facility from Panda-Rosemary LP (Rosemary), Virginia Power assumed $62 million of Rosemary's 8.625% senior notes that mature in 2016. In addition, in February and April of 2005, Virginia Power issued $2 million and $6 million, respectively, of 7.25% promissory notes, which mature in 2025 and 2032, respectively, in exchange for electric distribution facilities at certain military bases in connection with their privatization.

Dominion Resources, Inc. and its subsidiaries repaid $1.6 billion of long-term debt during the nine months ended September 30, 2005.

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Convertible Securities
As discussed in Note 17 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2004, $220 million of outstanding contingent convertible senior notes are convertible by holders into a combination of cash and shares of Dominion's common stock under certain circumstances. At September 30, 2005, since none of the conditions had been met, these senior notes are not yet subject to conversion.

The new notes have been included in the diluted EPS calculation using the method described in EITF 04-8. Under this method, the number of shares included in the denominator of the diluted EPS calculation is calculated as the net shares issuable for the reporting period based upon the average market price for the period. This resulted in an increase to the average shares outstanding used in the calculation of Dominion's diluted EPS since the conversion price of $73.60 included in the notes was lower than the average market price of Dominion's common stock over the period.

Issuance of Common Stock
In the nine months ended September 30, 2005, Dominion received proceeds of $336 million for 5.6 million shares issued through Dominion Direct® (a dividend reinvestment and open enrollment direct stock purchase plan), employee savings plans and the exercise of employee stock options. In February 2005, Dominion Direct® and the Dominion employee savings plans began purchasing Dominion common stock on the open market with the proceeds received through these two programs, rather than having additional new common shares issued.

Repurchases of Common Stock
In February 2005, Dominion was authorized by its Board of Directors to repurchase up to the lesser of 25 million shares or $2.0 billion of Dominion's outstanding common stock. In the nine months ended September 30, 2005, Dominion repurchased 3.7 million shares for approximately $276 million.

Forward Equity Transaction
As described in Note 19 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2004, Dominion entered into a forward equity sale agreement (forward agreement) with Merrill Lynch International (MLI), as forward purchaser, relating to 10 million shares of Dominion's common stock. The forward agreement provided for the sale of two tranches consisting of 2 million and 8 million shares of Dominion common stock, respectively, each with stated maturity dates and settlement prices.

Dominion elected to cash settle the first tranche in December 2004 and paid MLI $5.8 million, representing the difference between Dominion's share price and the applicable forward sale price, multiplied by the 2 million shares. Additionally, Dominion elected to cash settle 3 million shares of the second tranche in February 2005 and paid MLI $17.4 million. Dominion recorded these settlement payments as reductions to common stock in its Consolidated Balance Sheets.

In April 2005, Dominion entered into an agreement with MLI that extended the settlement date for the remaining 5 million shares of the second tranche to August 2005. In August 2005, Dominion delivered 5 million newly issued shares of its common stock to MLI, and received proceeds of $319.7 million as final settlement of the forward agreement.

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 14.     Commitments and Contingencies
Other than the matters discussed below, there have been no significant developments regarding the commitments and contingencies disclosed in Note 22 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2004, Note 16 to the Consolidated Financial Statements in Dominion's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 or Note 12 to the Consolidated Financial Statements in Dominion's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 nor have any significant new matters arisen during the three months ended September 30, 2005.

Income Taxes
As a matter of course, Dominion is regularly audited by federal and state tax authorities. Dominion establishes liabilities for probable tax-related contingencies in accordance with SFAS No. 5, Accounting for Contingent Liabilities, and reviews them in light of changing facts and circumstances. Although the results of these audits are uncertain, Dominion believes that the ultimate outcome will not have a material adverse effect on Dominion's financial position. At September 30, 2005 and December 31, 2004, Dominion's Consolidated Balance Sheets reflect $163 million and $54 million, respectively, of tax-related contingent liabilities, including accrued interest.

Environmental Matters
In March 2005, the Environmental Protection Agency (EPA) Administrator signed both the Clean Air Interstate Rule and the Clean Air Mercury Rule. These rules, when implemented, will require significant reductions in future sulfur dioxide (SO₂), nitrogen oxide (NO_X) and mercury emissions from electric generating facilities. The SO₂ and NO_X emission reduction requirements are in two phases with initial reduction levels targeted for 2009 (NO_X) and 2010 (SO₂), and a second phase of reductions targeted for 2015 (SO₂ and NO_X). The mercury emission reduction requirements are also in two phases with initial reduction levels targeted for 2010 and a second phase of reductions targeted for 2018. The new rules allow for the use of cap-and-trade programs. States will be required to develop detailed implementation plans, which will ultimately determine the levels and timing of required emission reductions. These regulatory actio ns will require additional reductions in emissions from Dominion's fossil fuel-fired generating facilities. Dominion is in the process of evaluating these rules and developing compliance plans, the details of which will be based on how the rules are ultimately implemented by each state.

Guarantees
As of September 30, 2005, Dominion and its subsidiaries had issued $7.3 billion of guarantees, including: $4.0 billion to support commodity transactions of subsidiaries; $1.3 billion for subsidiary debt; $898 million related to a subsidiary leasing obligation for the Fairless Energy power station (Fairless); $588 million related to subsidiaries' nuclear obligations; $474 million for guarantees supporting other agreements of subsidiaries and $39 million for guarantees supporting third parties and equity method investees. Dominion enters into these arrangements to facilitate commercial transactions by its subsidiaries with third parties. 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 that a liability subject to a guarantee has been incurred by a consolidated subsidiary, that liability is included in Dominion's Consolidated Financial Statements. Dominion is not requ ired to recognize liabilities for guarantees on behalf of its subsidiaries in the Consolidated Financial Statements, unless it becomes probable that Dominion will have to perform under the guarantees. No such liabilities have been recognized as of September 30, 2005. Dominion believes it is unlikely that it would be required to perform or otherwise incur any losses associated with guarantees of its subsidiaries' obligations.

Surety Bonds and Letters of Credit
As of September 30, 2005 Dominion had also purchased $69 million of surety bonds and authorized the issuance of standby letters of credit by financial institutions of $5.5 billion. Dominion enters into these arrangements to facilitate commercial transactions by its subsidiaries with third parties.

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Lease Commitment
In September 2005, Dominion and two other gas and oil exploration and production companies signed a four-year drilling contract related to a new ultra-deepwater drilling rig, to be named ENSCO 8500, that is expected to be delivered in mid-2008. The contract has a four-year primary term, plus four one-year extension options. Dominion's minimum commitment under the agreement is for approximately $96 million over the four-year term.

Nuclear Operations
The Price-Anderson Act provides the public up to $10.8 billion of protection per nuclear incident via obligations required of owners of nuclear power plants. Dominion has purchased $300 million of coverage from the commercial insurance pools with the remainder provided through a mandatory industry risk-sharing program. With the acquisition of Kewaunee in July 2005, Dominion has seven licensed reactors. In the event of a nuclear incident at any licensed nuclear reactor in the United States, Dominion could be assessed up to $100.6 million for each of its seven licensed reactors not to exceed $15 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 was renewed again in 2005.

Dominion's current level of property insurance coverage ($2.55 billion for North Anna, $2.55 billion for Surry, $2.75 billion for Millstone, and $1.8 billion for Kewaunee) exceeds the Nuclear Regulatory Commission's (NRC) 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 are 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 the 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 $87 million. Based on the severity of the inc ident, 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 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 $31 million.

Old Dominion Electric Cooperative, a part owner of 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 obligation and insurance premiums on applicable units, including any retrospective premium assessments and any losses not covered by insurance.

In May 2004, Dominion completed the sale of its discontinued telecommunications operations to Elantic Telecom, Inc. (ETI) resulting in a loss of $11 million ($7 million after-tax). In July 2004, ETI filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code, which was subsequently approved by the U.S. Bankruptcy Court. ETI's plan of reorganization became effective in May 2005, and ETI emerged from bankruptcy. In September 2005, ETI, its parent and various Dominion entities reached a comprehensive settlement of various issues that was subsequently approved by the U.S. Bankruptcy Court. Dominion recognized a benefit of $8 million ($5 million after-tax) in the three months ended September 30, 2005, from the revaluation of an outstanding guarantee associated with the sale transaction. In addition to this $8 million outstanding guarantee, Dominion has several potential indemnification obligations related to its discontinued telecommunications operati ons.

Note 17.     Employee Benefit Plans
The following table illustrates the components of the provision for net periodic benefit cost for Dominion's pension and other postretirement benefit plans:

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DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Employer Contributions
Dominion made no contributions to its defined benefit pension plans or other postretirement benefit plans during the first nine months of 2005. Dominion expects to contribute at least $40 million to its other postretirement benefit plans during the remainder of 2005. Under its funding policies, Dominion evaluates pension and other postretirement benefit plan funding requirements annually, usually in the second half of the year after receiving updated plan information from its actuary. Based on the funded status of each plan and other factors, the amount of additional contributions to be made in 2005 will be determined at that time.

Note 18.     Operating Segments
During the fourth quarter of 2004, Dominion performed an evaluation of its Clearinghouse trading and marketing operations, which resulted in a decision to exit certain energy trading activities and instead focus on the optimization of company assets. The financial impact of the Clearinghouse's optimization of company assets is now reported as part of the results of the business segments operating the related assets, in order to better reflect the performance of the underlying assets. As such, activities such as fuel management, hedging, selling the output of, contracting and optimizing the Dominion Generation assets are reported in the Dominion Generation segment. Activities related to corporate-wide enterprise commodity risk management and optimization services that are not focused on any particular business segment are reported in the Corporate and Other segment. Aggregation of gas supply and associated gas trading and marketing activities, as well as the prior year results of certain energy trading ac tivities exited in connection with the reorganization continue to be reported in the Dominion Energy segment.

Additionally, in January 2005 in connection with the reorganization, commodity derivative contracts held by the Clearinghouse were assessed to determine if they contribute to the optimization of Dominion's assets. As a result of this review, certain commodity derivative contracts previously designated as held for trading purposes are now held for non-trading purposes. Under Dominion's derivative income statement classification policy described in Note 2 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2004, all changes in fair value, including amounts realized upon settlement, related to the reclassified contracts were previously presented in operating revenue on a net basis. Upon reclassification as non-trading, all unrealized changes in fair value and settlements related to those derivative contracts that are financially settled are now reported in other operations and maintenance expense. The statement of income related am ounts for those reclassified derivative sales contracts that are physically settled are now presented in operating revenue, while the statement of income related amounts for physically settled purchase contracts are reported in operating expenses.

Dominion is organized primarily on the basis of products and services sold in the United States. Dominion manages its operations through the following operating segments:

Dominion Delivery includes Dominion's regulated electric and gas distribution and customer service business, as well as nonregulated retail energy marketing operations.

Dominion Energy includes Dominion's tariff-based electric transmission, natural gas transmission pipeline and storage businesses and an LNG facility. It also includes certain natural gas production and producer services, which consist of aggregation of gas supply, market-based services related to gas transportation and storage and associated gas trading and the prior year's results of certain energy trading activities exited in December 2004.

Dominion Generation includes the generation operations of Dominion's electric utility and merchant fleet as well as energy trading, marketing and hedging activities associated with the optimization of generation assets.

PAGE 23

DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Dominion E&P includes Dominion's 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 deepwater areas of the Gulf of Mexico, and Western Canada.

Corporate and Other includes the operations of Dominion's corporate, service company and other operations (including unallocated debt), corporate-wide enterprise commodity risk management and optimization services, DCI and the net impact of Dominion's discontinued telecommunications operations that were sold in May 2004. In addition, the contribution to net income by Dominion's primary operating segments is determined based upon a measure of profit that executive management believes represents the segments' core earnings. As a result, certain specific items attributable to those segments are not included in profit measures evaluated by executive management in assessing the segment's performance or allocating resources among the segments. These specific items are instead reported in the Corporate and Other segment and include:

Nine Months Ended September 30, 2005

• A loss related to the discontinuance of hedge accounting in August and September 2005 for certain gas and oil hedges resulting from an interruption of gas and oil production in the Gulf of Mexico caused by Hurricanes Katrina and Rita, and subsequent changes in the fair value of those hedges; and
• A charge related to the termination of a long-term power purchase agreement.

Nine Months Ended September 30, 2004

• A loss related to the discontinuance of hedge accounting in September 2004 for certain oil hedges resulting from an interruption of oil production in the Gulf of Mexico caused by Hurricane Ivan and subsequent changes in the fair value of those hedges during the third quarter; partially offset by
• A benefit related to the termination of a long-term power purchase agreement.

PAGE 24

DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Intersegment sales and transfers are based on underlying contractual arrangements and agreements and may result in intersegment profit or loss.

PAGE 25

DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. The term "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.

An analysis of Dominion's results of operations for the third quarter and year-to-date periods of 2005 compared to the third quarter and year-to-date periods of 2004 follows:

Third Quarter 2005 vs. 2004
Operating Revenue increased 39% to $4.6 billion, primarily reflecting:

• A $725 million increase in nonregulated electric sales revenue primarily reflecting a $314 million increase from the Dominion New England power plants acquired in January 2005 and the Kewaunee power plant acquired in July 2005, a $100 million increase attributable to other merchant generation stations primarily due to higher output and a $304 million increase from energy trading and marketing activities primarily related to the designation of certain commodity derivative contracts as held for non-trading purposes effective January 1, 2005. These contracts were previously held for trading purposes as discussed in Note 18 to the Consolidated Financial Statements. The net impact of this change in classification was largely offset by similar changes in Other operations and maintenance expense and Electric fuel and energy purchases, net expense;
• A $274 million increase in regulated electric sales revenue primarily reflecting a $144 million increase due to the impact of a comparatively higher fuel rate for non-Virginia jurisdictional customers and a $110 million increase associated with the impact of favorable weather on customer usage. The increase resulting from a comparatively higher fuel rate was more than offset by an increase in Electric fuel and energy purchases, net expense;

PAGE 30

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

• A $230 million increase in nonregulated gas sales revenue largely reflecting a $192 million increase from gas aggregation activities primarily due to higher prices. The increase in revenue from gas aggregation activities was largely offset by corresponding increases in Purchased gas, net expense;
• A $73 million increase in other revenue primarily reflecting a $49 million increase in sales of emissions allowances held for resale due to higher prices and increased volumes, a $23 million increase in non-utility coal sales resulting from higher prices and a $21 million increase in sales of purchased oil by exploration and production operations. These increases were largely offset by a corresponding increase in Liquids, pipeline capacity and other purchases expense; partially offset by
• A $71 million decrease in gas and oil production revenue primarily due to a decrease in production volumes resulting from interruptions caused by Hurricanes Katrina and Rita and the sale of the majority of Dominion's natural gas and oil properties in British Columbia, Canada in December 2004.

Operating Expenses and Other Items
Electric fuel and energy purchases, net expense increased 186% to $1.8 billion, primarily reflecting the combined effects of:

• A $478 million increase related to the designation of certain commodity derivative contracts as held for non-trading purposes effective January 1, 2005, which were previously held for trading purposes as discussed in Operating Revenue;
• A $471 million increase related to utility operations primarily resulting from increased output and higher commodity prices including purchased power;
• A $137 million increase due to the Dominion New England power plants acquired in January 2005; and
• A $47 million increase due to an increase in fuel usage by other merchant generation facilities associated with higher output.

Purchased electric capacity expense decreased 21% to $121 million, as a result of the termination of several long-term power purchase agreements in connection with the purchase of the related generating facilities in 2004 and 2005.

Purchased gas, net expense increased 52% to $629 million, principally resulting from a $188 million increase related to gas aggregation activities discussed in Operating Revenue.

Liquids, pipeline capacity and other purchases expense increased 37% to $392 million, reflecting the combined impact of a $49 million increase in the cost of emissions allowances purchased for resale, a $27 million increase in the cost of coal purchased for resale and a $23 million increase related to purchases of oil by exploration and production operations, all of which are discussed in Operating Revenue.

Other operations and maintenance expense increased 59% to $1.0 billion, resulting from:

• A $556 million loss related to the discontinuance of hedge accounting for certain gas and oil hedges resulting from an interruption of gas and oil production in the Gulf of Mexico caused by Hurricanes Katrina and Rita, and subsequent changes in the fair value of those hedges;
• A $99 million increase due to the Dominion New England power plants acquired in January 2005 and the Kewaunee power station acquired in July 2005;
• A $51 million increase resulting from higher incentive-based compensation, wages and pension and medical benefits;
• A $31 million increase in hedge ineffectiveness expense associated with exploration and production operations, primarily due to an increase in the fair value

PAGE 31

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

• An $81 million benefit related to financial transmission rights granted by PJM to Dominion as a load-serving entity to offset the congestion costs associated with PJM spot market activity, which is included in Electric fuel and energy purchases, net expense; and
• The net impact in 2004 of the following:

• A $96 million loss related to the discontinuance of hedge accounting for certain oil hedges resulting from an interruption of oil production in the Gulf of Mexico caused by Hurricane Ivan, and subsequent changes in the fair value of those hedges; and
• $26 million in impairments related to various equity investments and several operating companies held by DCI; partially offset by
• A $45 million benefit due to favorable changes in the fair value of certain oil options related to exploration and production operations; and
• A $34 million benefit resulting from the termination of a long-term power purchase contract.

Depreciation, depletion and amortization expense (DD&A) increased 8% to $355 million, largely due to incremental depreciation and amortization expense resulting from the acquisition of the Dominion New England power plants and other property additions.

Other taxes

Other income increased 55% to $65 million, largely reflecting a $15 million increase in net realized gains (including investment income) associated with nuclear decommissioning trust fund investments.

Year-To-Date 2005 vs. 2004

Operating Revenue increased 27% to $12.9 billion, primarily reflecting:

• A $1.4 billion increase in nonregulated electric sales revenue due to a $743 million increase attributable to the Dominion New England power plants acquired in January 2005, the Kewaunee power plant acquired in July 2005 and the commencement of commercial operations at Fairless in June 2004, a $103 million increase from other merchant generation stations primarily due to higher output and a $557 million increase from energy trading and marketing activities primarily related to the designation of certain commodity derivative contracts as held for non-trading purposes effective January 1, 2005. These contracts were previously held for trading purposes as discussed in Note 18 to the Consolidated Financial Statements. The net impact of this change in classification was largely offset by similar changes in Other operations and maintenance expense and Electric fuel and energy purchases, net expense;
• A $525 million increase in other revenue reflecting a $259 million increase in non-utility coal sales resulting from higher coal prices and increased sales volumes, a $179 million increase due to the recognition of business interruption insurance revenue associated with Hurricane Ivan and a $90 million increase in sales of purchased oil by exploration and production operations. The increase in other revenue related to coal and sales of purchased oil was largely offset by a corresponding increase in Liquids, pipeline capacity and other purchases expense;
• A $347 million increase in nonregulated gas sales revenue largely reflecting a $177 million increase from gas aggregation activities primarily due to higher prices ($257 million), partially offset by lower volumes ($80 million), a $98 million increase from gas marketing activities resulting from the impact of higher prices on settled contracts, partially offset by the effect of unfavorable price changes on unsettled contracts and a $73 million increase in sales of gas purchased by exploration and production operations to facilitate gas transportation and satisfy other agreements. The increases in revenue from gas aggregation activities and exploration and production operations were largely offset by corresponding increases in Purchased gas, net expense;

PAGE 32

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

• A $285 million increase in regulated electric sales revenue reflecting a $184 million increase due to the impact of a comparatively higher fuel rate for non-Virginia jurisdictional customers, a $54 million increase associated with the impact of favorable weather on customer usage and a $45 million increase from customer growth associated with new customer connections. The increase resulting from a comparatively higher fuel rate was more than offset by an increase in Electric fuel and energy purchases, net expense; and
• A $164 million increase in regulated gas sales revenue primarily related to the recovery of higher gas prices. The effect of this increase was offset by a comparable increase in Purchased gas, net expense; partially offset by
• A $33 million decrease in gas and oil production revenue reflecting an $85 million decrease in revenue from gas production, due to lower volumes ($197 million) largely resulting from interruptions in Gulf of Mexico production caused by Hurricanes Katrina and Rita and the sale of the majority of Dominion's natural gas and oil properties in British Columbia, Canada in December 2004, partially offset by higher average realized prices ($112 million). The decrease in revenue from gas production was partially offset by an increase in revenue from oil production ($56 million) primarily reflecting higher volumes.

Operating Expenses and Other Items
Electric fuel and energy purchases, net expense increased 107% to $3.5 billion, primarily reflecting the combined effects of:

• An $864 million increase related to the designation of certain commodity derivative contracts as held for non-trading purposes effective January 1, 2005, which were previously held for trading purposes as discussed in Operating Revenue;
• A $569 million increase related to utility operations primarily resulting from increased output and higher commodity prices including purchased power; and
• A $376 million increase due to the Dominion New England power plants acquired in January 2005, the Kewaunee power plant acquired in July 2005 and the commencement of commercial operations at Fairless in June 2004.

Purchased electric capacity expense decreased 17% to $376 million, as a result of the termination of several long-term power purchase agreements in connection with the purchase of the related generating facilities in 2004 and 2005.

Purchased gas, net expense increased 18% to $2.4 billion, principally resulting from:

• A $165 million increase associated with regulated gas distribution operations discussed in Operating Revenue; and
• A $160 million increase associated with gas aggregation activities reflecting higher prices ($241 million), partially offset by lower volumes ($81 million); and
• A $75 million increase related to exploration and production operations discussed in Operating Revenue.

Liquids, pipeline capacity and other purchases expense increased 56% to $1.1 billion, primarily reflecting a $243 million increase in the cost of coal purchased for resale and a $94 million increase related to purchases of oil by exploration and production operations, both of which are discussed in Operating Revenue.

Other operations and maintenance expense increased 32% to $2.3 billion, resulting from:

• A $556 million loss related to the discontinuance of hedge accounting for certain gas and oil hedges resulting from an interruption of gas and oil production in the Gulf of Mexico caused by Hurricanes Katrina and Rita, and subsequent changes in the fair value of those hedges;
• A $236 million increase due to the Dominion New England power plants acquired in January 2005, the Kewaunee power station acquired in July 2005 and the commencement of commercial operations at Fairless in June 2004;
• A $118 million increase related to higher incentive-based compensation, wages and pension and medical benefits;
• A $77 million charge resulting from the termination of a long-term power purchase agreement;
• A $59 million loss related to the discontinuance of hedge accounting in March 2005 for certain oil hedges primarily resulting from a delay in reaching anticipated production levels in the Gulf of Mexico, and subsequent changes in the fair value of those hedges;

PAGE 33

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

• A $50 million increase in hedge ineffectiveness expense associated with exploration and production operations, primarily due to an increase in the fair value differential between the delivery location and commodity specifications of derivative contracts held by Dominion and the delivery location and commodity specifications of Dominion's forecasted gas and oil sales; and
• The net impact of the following items recognized in 2004:

• A $120 million benefit due to favorable changes in the fair value of certain oil options related to exploration and production operations;
• A $34 million benefit resulting from the termination of a long-term power purchase contract; and
• An $18 million benefit from the reduction of accrued expenses associated with Hurricane Isabel restoration activities; partially offset by
• A $96 million loss related to the discontinuance of hedge accounting for certain oil hedges resulting from an interruption of oil production in the Gulf of Mexico caused by Hurricane Ivan, and subsequent changes in the fair value of those hedges;
• A $38 million impairment of retained interests from mortgage securitizations held by DCI, reflecting increased defaults and accelerated prepayments as a result of low interest rates; and
• $26 million in charges from the impairment of various equity investments and several operating companies held by DCI.
• These increases were partially offset by the following benefits:
• A $244 million decrease related to the designation of certain commodity derivative contracts as held for non-trading purposes effective January 1, 2005, which were previously held for trading purposes as discussed in Operating Revenue;
• A $138 million gain resulting from the sale of excess emissions allowances. Future gains, if any, are dependent on market liquidity and other factors;
• A $113 million benefit related to financial transmission rights granted by PJM to Dominion as a load-serving entity to offset the congestion costs associated with PJM spot market activity, which is included in Electric fuel and energy purchases, net expense; and
• A $24 million net benefit resulting from the establishment of certain regulatory assets and liabilities in connection with settlement of a North Carolina rate case in the first quarter of 2005.

Depreciation, depletion and amortization expense increased 9% to $1.1 billion, largely due to incremental depreciation and amortization expense resulting from the acquisition of the Dominion New England power plants and other property additions.

Other income

Other taxes

PAGE 34

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

__________________

Presented below, on an after-tax basis, are the key factors impacting Dominion Delivery's net income contribution:

Dominion Delivery's third quarter and year-to-date net income contribution decreased $6 million and $12 million, respectively, primarily reflecting:

• A change in the seasonal allocation of electric utility base rate revenue among Dominion Delivery, Dominion Energy and Dominion Generation effective January 1, 2005. The revised allocation method is not expected to impact full year results;
• A lower contribution from nonregulated retail energy marketing operations in the third quarter, largely resulting from a decrease in average customer accounts. In the year-to-date period the contribution from nonregulated retail energy marketing operations increased, largely resulting from higher gas margins;
• Higher depreciation and amortization expense largely due to incremental expense resulting from property additions;
• An increase in interest expense due to the combined impact of additional long-term affiliate borrowings and higher interest rates on affiliate borrowings;

PAGE 35

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

• An increase in salaries, wages and benefits expense in the year-to-date period resulting from higher incentive-based compensation, wages and pension and medical benefits; and
• Higher bad debt expense, primarily reflecting the favorable impact in 2004 of a reduction in reserves; partially offset by
• Favorable weather in the regulated electric service territory;
• Favorable weather in the regulated gas service territories in the year-to-date period;
• Customer growth in the electric franchise service area, primarily reflecting new residential customers; and
• A benefit recognized by electric utility operations in the year-to-date period resulting from the establishment of certain regulatory assets in connection with settlement of a North Carolina rate case.

Dominion Energy
Dominion Energy includes Dominion's tariff-based electric transmission, natural gas transmission pipeline and storage businesses and an LNG facility. It also includes certain natural gas production and producer services, which consist of aggregation of gas supply, market-based services related to gas transportation and storage and associated gas trading and the prior year's results of certain energy trading activities exited in December 2004.

Presented below, on an after-tax basis, are the key factors impacting Dominion Energy's net income contribution:

Dominion Energy's third quarter and year-to-date net income contribution increased $58 million and $131 million, respectively, primarily reflecting:

• A higher contribution from producer services primarily reflecting the impact of losses in the prior year related to certain energy trading activities that were exited in December 2004; and
• A higher contribution from the Cove Point LNG facility resulting from the addition of a fifth storage tank in December 2004 and increased pipeline capacity; partially offset by
• An increase in salaries, wages and benefits expense resulting from higher incentive-based compensation, wages and pension and medical benefits;

PAGE 36

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

• The impact of price movements in 2004 associated with a portfolio of financial derivative instruments used to manage Dominion's price risk associated with a portion of its anticipated sales of 2004 natural gas production that had not been considered in the hedging activities of the Dominion E&P segment (economic hedges). In 2005, Dominion did not enter into similar economic hedging transactions; and
• Other factors including a charge incurred by electric utility operations in the year-to-date period for the write-off of certain previously deferred start-up and integration costs associated with joining an RTO that are allocable to non-Virginia jurisdictional and wholesale customers.

Dominion Generation

Dominion Generation includes the generation operations of Dominion's electric utility and merchant fleet as well as energy trading, marketing and hedging activities associated with the optimization of generation assets.

Presented below, on an after-tax basis, are the key factors impacting Dominion Generation's net income contribution:

PAGE 37

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

Dominion Generation's third quarter and year-to-date net income contribution decreased $7 million and $6 million, respectively, primarily reflecting:

• Higher fuel and purchased power expenses incurred by electric utility operations due to increased output and higher commodity prices;
• An increase in salaries, wages and benefits expense resulting from higher incentive-based compensation, wages and pension and medical benefits;
• An increase in interest and other financing expense due to higher interest rates on affiliate borrowings and variable rate debt. The increase for the year-to-date period also reflects the lease financing of Fairless; partially offset by
• Higher regulated electric sales due to favorable weather and customer growth in the electric franchise service area, primarily reflecting an increase in new residential customers;
• Gains resulting from the sale of excess emissions allowances. Future gains, if any, are dependent on market liquidity and other factors;
• A contribution from the Dominion New England power plants acquired in January 2005;
• A change in the seasonal allocation of electric utility base rate revenue among Dominion Delivery, Dominion Energy and Dominion Generation effective January 1, 2005. The revised allocation method is not expected to impact full year results;
• Reduced purchased power capacity expenses due to the termination of several long-term power purchase agreements in connection with the purchase of the related non-utility generating facilities;
• An increase in energy supply margin primarily reflecting financial transmission rights granted by PJM to Dominion as a load-serving entity, which more than offset the congestion costs associated with PJM spot market activity;
• A contribution from the Kewaunee power station acquired in July 2005; and
• A net benefit recognized by electric utility operations in the year-to-date period resulting from the establishment of certain regulatory assets and liabilities in connection with settlement of a North Carolina rate case in the first quarter of 2005.

PAGE 38

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

Dominion E&P

Dominion E&P includes Dominion's gas and oil exploration, development and production business. Operations are located in several major producing basins in the lower 48 states, including the outer continental shelf and deepwater areas of the Gulf of Mexico, and Western Canada.

_____________________

PAGE 39

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

Presented below, on an after-tax basis, are the key factors impacting Dominion E&P's net income contribution: