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

Note 8.     Comprehensive Income

For the three months ended March 31, 2003 and 2002, Dominion recognized total comprehensive income (loss) of $287 million and ($15) million, respectively. Other comprehensive income for these periods related primarily to the effective portion of the changes in fair value of derivatives designated as hedging instruments in cash flow hedges (as described in more detail in Note 9).

Dominion recognized pre-tax gains (losses) related to hedge ineffectiveness and changes in time value of options excluded from the measurement of hedge effectiveness in its Consolidated Statements of Income during the three-month periods ended March 31, 2003 and 2002. Dominion also recognized net other comprehensive losses associated with the effective portion of the change in fair value of cash flow hedging derivatives, net of taxes and amounts reclassified to earnings, for the three-month periods ended March 31, 2003 and 2002. Amounts recognized as a result of such hedging activity follow:

PAGE 13

The actual amounts that will be reclassified to earnings during the next 12 months will vary from the expected amounts presented above as a result of changes in market prices, interest rates and foreign exchange rates. The effect of amounts being reclassified from accumulated other comprehensive loss 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.

PAGE 14

During the first quarter of 2003, Dominion Resources, Inc. and its subsidiaries repaid $1 billion of long-term debt securities. Dominion used the entirety of its $500 million escrow deposit, established in December 2002, to repay maturing debt in January 2003.

PAGE 15

Dominion has established external trusts dedicated to funding the future decommissioning of its nuclear plants. At March 31, 2003, the aggregate fair value of these trusts, consisting primarily of debt and equity securities, totaled $1.6 billion.

Had the provisions of SFAS No. 143 been adopted on January 1, 2000, Dominion's net income and earnings per share would have been as follows:

PAGE 16

In accordance with SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, Dominion will continue its practice of accruing for future costs of removal for its cost-of-service rate regulated gas and electric utility assets, even if no legal obligation to perform such activities exists. At March 31, 2003 and December 31, 2002, Dominion's accumulated depreciation, depletion and amortization included $597 million and $596 million, representing the estimated future cost of such removal activities, respectively.

Other than the matters discussed below, there have been no significant developments regarding the commitments and contingencies disclosed in Note 27 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2002, nor have any significant new matters arisen during the first quarter of 2003.

Leases with Special Purpose Entities

As described more fully in Note 27 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2002, Dominion, through certain subsidiaries, has entered into agreements with special purpose entities (lessors) in order to finance and lease several new power generation projects, as well as its corporate headquarters and aircraft. The lessors have financing commitments from equity and debt investors totaling $1.9 billion, of which approximately $1.4 billion has been used for project costs incurred to date. Total project costs at March 31, 2003 included approximately $375 million of costs advanced by Dominion that will be reimbursed by the lessor during the second quarter of 2003. There have been no significant changes to the estimated annual lease payments for these projects disclosed in the Note 27 described above. Under existing accounting guidance, neither the project assets nor related obligations are currently reported on Domi nion's Consolidated Balance Sheets. See also Note 4 for a discussion of FIN 46 as it relates to future accounting requirements for special purpose entities.

In February 2003, pursuant to the terms of its lease agreement, Dominion purchased the electric generation facility under construction in Dresden, Ohio for $266 million. Dominion expects to complete construction in 2005 at an estimated cost of $432 million.

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As previously reported in Note 27 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2002, Virginia Power received a Notice of Violation in 2000 from the United States Environmental Protection Agency related to some specified construction projects at the Mt. Storm Power Station in West Virginia. Thereafter, New York State filed a suit against Virginia Power alleging similar violations, and the suit was stayed. Virginia Power reached an agreement in principle with the federal government and the state of New York to resolve the matter, and the states of Virginia, West Virginia, Connecticut and New Jersey joined the United States and the state of New York in seeking to reach a final agreement with the Company. A settlement agreement in the form of a proposed Consent Decree was agreed to on April 21, 2003, by the U.S. Department of Justice and the U.S. Environmental Protection Agency for the United States of America, by the states of Virginia, West Virginia, Connecticut, New Jersey and New York and by Virginia Power. In accordance with the settlement, the United States filed an action in the Eastern District of Virginia against Virginia Power and the Consent Decree was lodged with that court to settle that action. Virginia and West Virginia also filed complaints in intervention in the Virginia federal district court. The New York State federal district court action has been transferred to the Virginia federal district court and it is anticipated that, in addition to New York, Connecticut and New Jersey will join as plaintiffs in that proceeding. After an EPA public comment period, the Virginia federal district court will be asked to enter the Consent Decree finalizing the settlement and resolving the underlying actions, but retaining jurisdiction pursuant to the terms of the Consent Decree. The settlement is consistent with the previously reported agreement in principle and includes payment of a $5 million civil penalty, an obligatio n to fund $14 million for environmental projects and a commitment to improve air quality under the Consent Decree estimated to involve expenditures of $1.2 billion. Dominion has already incurred certain capital expenditures for environmental improvements at its coal-fired stations in Virginia and West Virginia and has committed to additional measures in its current financial plans and capital budget to satisfy the requirements of the Consent Decree. As of March 31, 2003, Dominion had accrued $18 million for the civil penalty and the funding of the environmental projects, substantially all of which was recorded in 2000.

FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others-An Interpretation of FASB Statements No. 5, 57 and 107 (FIN No. 45), requires disclosures related to the issuance of certain types of guarantees. It also requires the recognition of liabilities for the fair value of guarantees issued or modified after December 31, 2002.

For purposes of consolidated financial statements, guarantees issued by a parent on behalf of its consolidated subsidiary, guarantees issued by a consolidated subsidiary on behalf of its parent or guarantees issued by a consolidated subsidiary on behalf of a sister consolidated subsidiary are not subject to the FIN No. 45 disclosure and recognition requirements. Nevertheless, Dominion is providing the following information about the guarantees that it and certain of its subsidiaries may issue in the ordinary course of business to provide financial or performance assurance to third parties on behalf of certain subsidiaries. On behalf of consolidated subsidiaries, as of March 31, 2003, Dominion and its subsidiaries had issued $6.1 billion of guarantees; including $3.0 billion of guarantees to support commodity transactions of subsidiaries, $851 million of guarantees for subsidiary debt, $1.4 billion related to leasing obligations for new power generation projects and $822 million for guarantees supporting othe r agreements of subsidiaries. Dominion had also purchased $124 million of surety bonds; and authorized the issuance of standby letters of credit by financial institutions of $642 million. Dominion enters into these arrangements to facilitate commercial transactions by its subsidiaries with third parties. To the extent a liability subject to a guarantee has been incurred by a consolidated subsidiary, that liability is included in Dominion's Consolidated Financial Statements. Dominion believes it is unlikely that it would be required to perform or otherwise incur any losses associated with guarantees of its subsidiaries' obligations.

Beginning in 2003, the issuance of a guarantee requires the recognition of a liability whenever Dominion or certain subsidiaries enter into a guarantee on behalf of a party that is not consolidated in the preparation of Dominion's Consolidated Financial Statements. Furthermore, any performance required by Dominion under such guarantees would result in the recognition of additional liabilities in Dominion's Consolidated Financial Statements. As of March 31, 2003, Dominion has guaranteed $60 million related to officers' borrowings under executive stock loan programs, for which individual officers are personally liable for repayment. Substantially all of this guarantee is scheduled to expire in 2005. Because of new restrictions on company loans or guarantees under the Sarbanes-Oxley Act of 2002, Dominion has ceased

PAGE 18

its program involving the company guaranty of third party loans to executives for the purpose of acquiring company stock. Dominion has also guaranteed $23 million for obligations of certain equity method investments - Morgantown Energy Associates and Elwood Energy. There are no liabilities recorded for these guarantees in accordance with FIN 45 as these guarantees were entered into prior to December 31, 2002.

Dominion calculates its gross credit exposure for each counterparty as the unrealized fair value of derivative and energy trading contracts plus any outstanding receivables (net of payables, where netting agreements exist), prior to the application of collateral. In the calculation of net credit exposure, Dominion's gross exposure is reduced by collateral made available by counterparties, including letters of credit and cash received by Dominion and held as margin deposits. Presented below is a summary of Dominion's gross and net credit exposure as of March 31, 2003. The amounts presented exclude accounts receivable for retail electric and gas sales and services, regulated transmission services and Dominion's provision for credit losses. See Note 29 to the Consolidated Financial Statements included in Dominion's Annual Report on Form 10-K for the year ended December 31, 2002 for a discussion of the nature of Dominion's credit risk exposures.

_______________________

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

PAGE 19

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

As a result of this transaction, Dominion consolidated the results of DFV in its Consolidated Financial Statements beginning in February 2003. The DFV senior notes held by Dominion are eliminated in consolidation. After the transaction, $21 million of the DFV senior notes remain outstanding in the hands of third parties. Dominion recognized a pre-tax charge of $57 million on the effective extinguishment of the acquired DFV senior notes. The charge primarily consisted of the premium paid to acquire the notes, the consent fee paid to the note holders and the write-off of unamortized debt costs related to the original issuance of the DFV senior notes and was reported as other expense on the Consolidated Statement of Income. Furthermore, since Dominion holds substantially all of the DFV senior notes, it is unlikely that the remarketing of the Dominion convertible preferred stock held in trust, discussed above, would ever occur.

During the first quarter of 2003, Dominion also recognized a pre-tax charge of $60 million associated with its DFV investment and reported the charge as other expense on the Consolidated Statement of Income. This included a $27 million charge related to a revision to the allocation of equity losses on DFV between the Investor Trust and Dominion. Based on current projections of expected cash allocations of DFV net losses, Dominion and Investor Trust revised the allocation of equity losses, using cash allocations and liquidation provisions of the underlying limited liability company agreement rather than voting interests. The charge also included a $33 million impairment charge in connection with certain DFV assets that will no longer be used under DFV management's current business plan. Dominion's share of the impairment, after allocation of the minority interest share to Investor Trust, was $17 million.

Dominion manages its operations along three primary business lines:

Dominion Energy manages Dominion's generation portfolio, consisting primarily of generating units and power purchase agreements. It also manages Dominion's energy trading, marketing, hedging and arbitrage activities; retail marketing of energy services in non-regulated markets; gas pipeline operations; certain gas production and gas storage operations. Effective January 1, 2003, Dominion Energy also manages Dominion's electric transmission operations formerly managed by Dominion Delivery. Amounts for 2002 have been restated to reflect the management of electric transmission by Dominion Energy effective January 1, 2003.

Dominion Delivery manages Dominion's electric and gas distribution systems as well as Dominion's investment in DFV, described in Note 16. Amounts for 2002 have been restated to reflect the management of electric transmission by Dominion Energy effective January 1, 2003.

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

In addition, Dominion also reports the operations of Dominion Capital, Inc., a financial services subsidiary, and Dominion's corporate and other operations as a segment. Amounts included in the Corporate and Other segment for the three months ended March 31, 2003 and 2002 include corporate expenses of the Dominion and CNG holding companies (including interest and other expenses not allocated to other segments) as well as the following items:

• cumulative effect of changes in accounting principle (see Note 3);
• charges related to Dominion's investment in DFV, including amounts related to the reacquisition of DFV senior notes, reallocation of equity losses and impaired assets (see Note 16) and
• severance costs of $29 million for workforce reductions.

PAGE 20

For more information, see Note 32 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2002.

PAGE 21

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, including hurricanes, winter storms and droughts, can be destructive, causing outages, production delays and property damage that requires Dominion to incur additional expenses.

Dominion is subject to complex government regulation that could adversely affect its operations.    Dominion's operations are subject to extensive regulation and require numerous permits, approvals and certificates from federal, state and local governmental agencies. Dominion must also comply with environmental 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, 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. Compliance with federal, state and local environmental laws and regulations may result in increased capital, operating and other costs, including remediation and containment and monitoring obligations. In addition, Dominion may be a responsible party for environmental clean-up at a site identified by a regulatory body. 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.

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There are inherent risks in the operation of nuclear facilities.    Dominion operates nuclear facilities that are subject to inherent risks. These include the threat of terrorist attack and ability to dispose of spent nuclear fuel, the disposal of which is subject to complex federal and state regulatory constraints. These risks also include the cost of and Dominion's ability to maintain adequate reserves for decommissioning, costs of plant maintenance and exposure to 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 costs arising from claims could exceed the amount of any insurance coverage.

The use of derivative instruments could result in financial losses.    Dominion uses derivative instruments, 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 involves 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 derivatives and commodity-based trading contract s, see Management's Discussion and Analysis of Financial Condition and Results of Operations-Market Rate Sensitive Instruments and Risk Management 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, 2002.

Dominion is exposed to market risks beyond its control in its energy clearinghouse operations.    Dominion's energy clearinghouse and risk management operations are subject to multiple market risks including market liquidity, counterparty credit strength and price volatility. Many industry participants have experienced severe business downturns during the past year resulting in some being forced to exit or curtail their participation in the energy trading markets. This has led to a reduction in the number of trading partners and lower industry trading revenues. Declining credit worthiness of some of Dominion's trading counterparties may limit the level of its trading activities with these parties and increase the risk that these parties may not perform under a contract.

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Dominion's exploration and production business is dependent on factors including commodity prices that cannot be predicted or controlled.    Dominion's exploration and production business is subject to risks beyond its control. These factors include fluctuations in natural gas and crude oil prices, results of future drilling and well completion activities, Dominion's ability to acquire additional land positions in competitive lease areas, and operational risks that are inherent in the exploration and production business and could result in disruption of production. In addition, in connection with the use of financial derivatives to hedge future sales of gas and oil production, Dominion's liquidity may sometimes be affected by margin requirements. Under these requirements, Dominion must deposit funds with counterparties to cover the fair value of covered contracts in excess of agreed-upon credit limits. Some of these factors could have compounding effects that could a lso affect Dominion's financial results. Also, because Dominion follows the full cost method of accounting for gas and oil exploration and production activities prescribed by the Securities and Exchange Commission (SEC), short-term market declines in the prices of natural gas and oil could adversely affect its financial results. 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 based on hedge-adjusted period-end prices from the production of proved gas and oil reserves (the ceiling test). If net capitalized costs exceed the ceiling test, in a given country, at the 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 flows from 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 its cost of borrowing or restrict its ability to access one or more financial markets. Such disruptions could include an economic downturn, the bankruptcy of an unrelated energy company or changes to Dominion's credit ratings. Restrictions on Dominion's ability to access financial markets may affect its ability to execute its business plan as scheduled.

Changing rating agency requirements could negatively affect Dominion's growth and business strategy.    As of May 1, 2003, Dominion's senior unsecured debt is rated BBB+, stable outlook, by Standard & Poor's Rating Group, a division of the McGraw-Hill Companies, Inc. (Standard & Poor's) and Baa1, negative outlook, by Moody's Investor Service (Moody's). Both agencies have recently implemented more stringent applications of the financial requirements for various ratings levels. In order to maintain its current credit ratings in light of these or future new requirements, Dominion may find it necessary to take steps or change its business plans in ways that may adversely affect its growth and earnings per share. A reduction in Dominion's credit ratings by either Standard & Poor's or Moody's could increase its borrowing costs and adversely affect operating results.

Potential changes in accounting practices may adversely affect Dominion's financial results.    Dominion cannot predict the impact of future changes in accounting standards or practices in general with respect to public companies, the energy industry or its operations specifically. New accounting standards could be issued by the Financial Accounting Standards Board (FASB) or the SEC that could change the way Dominion records revenues, expenses, assets and liabilities. These changes in accounting standards could adversely affect Dominion's reported earnings or could increase reported liabilities.

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As of March 31, 2003, other than the adoption of Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, there have been no significant changes with regard to the critical accounting policies disclosed in MD&A in Dominion's Annual Report on Form 10-K for the year ended December 31, 2002. The policies disclosed included the accounting for: risk management and energy trading contracts at fair value; gas and oil operations; impairment testing; retained interests from securitizations; and regulated operations.

Effective January 1, 2003, Dominion adopted SFAS No. 143, which provides accounting requirements for the recognition and measurement of liabilities associated with the retirement of tangible long-lived assets. At March 31, 2003, Dominion's asset retirement obligations totaled $1.6 billion, the majority of which relates to the decommissioning of its nuclear units.

Asset retirement obligations are recognized at fair value as incurred and capitalized as part of the cost of the related tangible long-lived assets. In the absence of quoted market prices, Dominion estimates the fair value of asset retirement obligations using present value techniques, involving discounted cash flow analysis. Measurement using such techniques is dependent upon many subjective factors, including the selection of discount and cost escalation rates, identification of planned retirement activities and related cost estimates and assertions of probability regarding the timing, nature and costs of such activities. Inputs and assumptions are based on the best information available at the time the estimates are made. However, estimates of future cash flows are highly uncertain by nature and may vary significantly from actual results.

Results Of Operations

Dominion's discussion of its results of operations includes a tabular summary of contributions by its operating segments to net income and diluted earnings per share (EPS), an overview of consolidated 2003 results of operations, as well as a more detailed discussion of the operating segment results of operations. All variances are stated as first quarter 2003 actual results, as compared to the first quarter of 2002.

PAGE 25

Contributions by regulated electric and gas sales, gas transportation and storage, and nonregulated retail energy sales increased, reflecting the impact of colder weather and customer growth during the first quarter of 2003. Higher gas prices also increased regulated gas sales but were generally offset by increased purchased gas costs. Nonregulated electric sales by Dominion's merchant generation fleet increased, reflecting comparably higher prices as well as higher sales volumes from existing assets that began operations after the first quarter of 2002. Nonregulated gas sales by field services and retail gas marketing operations increased, reflecting primarily higher gas prices. Revenue for gas and oil production also increased, reflecting comparably higher realized prices for both gas and oil on slight increases in production. Overall, the net income contribution by Dominion Energy Clearinghouse (Clearinghouse) energy trading and marketing activities increased for the first quarter of 2003, reflecting prim arily favorable price changes on unsettled gas contracts and higher trading margins for its gas-related activities. Contributions associated with Clearinghouse electric-related activities declined for the first quarter of 2003. In addition to the contributions by its primary operating segments, Dominion recognized a net after-tax gain of $37 million for certain specific items that are discussed in the Corporate and Other segment results below. There was no significant change in interest expenses or Dominion's effective tax rate for the first quarter of 2003 as compared to 2002.

Effective January 1, 2003, Dominion adopted Emerging Issues Task Force (EITF) Issue 02-03, Issues Involved in Accounting for Contracts under Issue No. 98-10. EITF 02-03 rescinds EITF Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities (EITF 98-10). The implementation of EITF 02-03 primarily affects the timing of recognition in earnings for certain Clearinghouse energy-related contracts, as well as the presentation of gains and losses associated with energy-related contracts on the Consolidated Statement of Income. The adoption of EITF 02-03 did not require restatement of prior periods. See Note 3 to the Consolidated Financial Statements.

The adoption of EITF 02-03 had the following initial and ongoing impact on the accounting for and presentation of Clearinghouse energy-related contracts in the Consolidated Financial Statements, effective January 1, 2003:

• Cumulative effect of adopting EITF 02-03: For all non-derivative energy trading contracts initiated prior to October 25, 2002 and previously designated as trading under EITF 98-10, Dominion recognized a loss of $67 million (net of taxes of $43 million) as the cumulative effect of a change in accounting principle effective January 1, 2003, which is reflected in the Corporate and Other segment.
• Derivative Contracts: Energy-related derivative contracts continue to be subject to fair value accounting. Under fair value accounting, unrealized changes in fair value are recorded in earnings each reporting period, as well as amounts realized as settlements occur. For those derivatives determined to be held for trading purposes, all changes in fair value, including amounts realized upon settlement, are presented in revenue on a net basis. For non-trading derivatives not designated as hedges, all unrealized changes in fair value are presented in other operations and maintenance expense on a net basis. For non-trading derivative contracts that involve physical delivery of commodities, gross sales contract settlements are presented in revenue, while gross purchase contract settlements are reported in expenses.
• Non-Derivative Contracts: Non-derivative energy-related contracts, previously subject to fair value accounting under EITF 98-10, are now subject to accrual accounting. Under accrual accounting, Dominion recognizes revenue or expense on a gross basis at the time of contract performance, settlement or termination. These contracts will no longer be reported at fair value in Dominion's Consolidated Financial Statements.

As noted above, the recognition and presentation requirements of EITF 02-03 described above were applied prospectively in 2003, and the Consolidated Statement of Income for the first quarter of 2002 was not restated.

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The overall increase in operating revenue includes increased revenue for regulated and non-regulated electric sales, non-regulated gas sales, gas transportation and storage, as well as other revenue.

• Regulated electric sales revenue increased $92 million. Colder temperatures and customer growth are estimated to have contributed $75 million and $10 million, respectively. Fuel rate recoveries increased approximately $44 million, however, such recoveries were offset by a comparable increase in fuel expense and did not materially affect net income. A reallocation of base rate revenue between the Dominion Energy and Dominion Delivery segments, effective January 1, 2003, decreased regulated electric sales revenue by $19 million. Other factors decreased regulated electric sales revenue by $18 million.
• Nonregulated electric sales revenue increased $90 million. Revenue for sales by Dominion's merchant generation fleet increased $92 million due to the impact of higher prices of $52 million and higher volumes of $40 million. Volumes increased for sales by assets purchased and constructed after the first quarter of 2002, as well as increased production by the Millstone Power Station, reflecting lower outage days during the first quarter of 2003. Revenue from wholesale marketing of utility generation increased $7 million. Revenue from retail energy sales increased $28 million primarily as a result of customer growth. Clearinghouse electric revenue, net of applicable trading purchases, decreased $37 million. The decrease included the effects of unfavorable price changes on the fair value of unsettled derivative contracts held for trading purposes, lower margins and the impact of discontinuing fair value accounting for non-derivative contracts and the reclassification of purchases under der ivative contracts no longer considered to be held for trading purposes after the adoption of EITF 02-03.
• Nonregulated gas sales revenue increased $415 million. The increase included a $201 million increase in revenue from field services and retail energy marketing operations, reflecting primarily higher prices. Clearinghouse gas revenue, net of applicable trading purchases, increased $214 million. The increase was net of $30 million of realized and unrealized losses on certain financial derivative instruments held as economic hedges of natural gas production by the Dominion Exploration & Production segment. As described below under Selected Information - Energy Trading Activities, the combination of sales of natural gas by the Dominion Exploration & Production segment at market prices and these financial derivatives is expected to result in a range of prices contemplated by Dominion's overall risk strategy. The remaining $244 million increase was due to favorable price changes on the fair value of unsettled derivative contracts held for trading purposes, higher margins and the impact of and the impact of discontinuing fair value accounting for non-derivative contracts and the reclassification of purchases under derivative contracts no longer considered to be held for trading purposes after the adoption of EITF 02-03.

PAGE 27

• Gas transportation and storage revenue increased $13 million, primarily reflecting higher gas transportation revenue resulting from higher throughput volumes and the liquefied natural gas operations of Cove Point, acquired in September 2002, partially offset by the effect of lower rates.
• Other revenue increased $24 million and included $16 million associated with Clearinghouse oil revenue, net of applicable trading purchases, and revenue from sales of coal. The increase largely reflected the impact of adopting of EITF 02-03 related to these activities, primarily the reclassification of purchases to expense.

• Electric fuel and energy purchases increased $75 million which included an increase of $13 million associated with Dominion's nonregulated energy marketing operations and an increase of $62 million associated with regulated utility operations. Substantially all of the increase associated with nonregulated energy marketing operations related to higher volumes purchased during the first quarter of 2003 and reclassification of purchases under derivative contracts and related transportation no longer considered held for trading after implementation of EITF 02-03. For utility operations, energy costs increased $44 million for energy purchases subject to rate recovery, $12 million for purchases not subject to rate recovery and $6 million for expenses associated with increased wholesale marketing of utility generation.
• Purchased electric capacity decreased $23 million primarily due to scheduled rate reductions on certain supply contracts.
• Purchased gas expense increased $256 million. The increase included a $205 million increase associated with field services, retail energy marketing and gas transmission operations. The increase reflected primarily higher prices, partially offset by $44 million, due to lower purchases as part of retail gas marketing activities resulting from customer attrition. The remaining $51 million increase in purchased gas reflects reclassification of purchases under derivative contracts no longer considered to be held for trading purposes after the adoption of EITF 02-03.
• Liquids, pipeline capacity and other purchases expense increased $30 million, reflecting primarily the reclassification of purchase contracts primarily for transportation, storage and coal no longer considered held for trading purposes after the adoption of EITF 02-03.
• Other operations and maintenance expense increased $51 million and largely reflected a $55 million increase in general, administrative expenses, such as wages, benefits and bad debt reserves, and other expenses, such as routine maintenance. In addition, the overall increase included $18 million of expense recorded under a new accounting policy for asset retirement obligations, as described in Notes 3 and 13 to the Consolidated Financial Statements. See also the discussion of asset retirement obligations in depreciation below. The net impact of changes in fair value of non-trading derivatives not held for hedging purposes and hedge ineffectiveness was not material. These increases were partially offset by a $26 million decrease, primarily reflecting higher costs in 2002 associated with a planned nuclear outage at Millstone.
• Depreciation expense decreased $21 million, primarily reflecting a $16 million decrease related to a change in the presentation of expenses associated with asset retirement obligations pursuant to a change in accounting policy. A significant component of such expenses is now recognized under the new policy in other operations and maintenance beginning in 2003. The remaining decrease reflects the extension of estimated useful lives of most fossil fuel stations and electric transmission property during the second quarter of 2002, partially offset by the impact of new property additions.
• Other taxes increased $16 million, primarily due to the impact in 2000 of a favorable resolution of sales and use and property tax issues and the recognition of business and occupation tax credits. Similar benefits were not recognized in the first quarter of 2003.

Other income decreased $55 million, primarily reflecting net realized losses on investments held in Dominion's decommissioning trusts.

PAGE 28

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, 2002 for a detailed discussion of the energy trading, hedging and arbitrage activities of the Clearinghouse and related accounting policies. For additional discussion of trading activities, see Market Rate Sensitive Instruments and Risk Management.

During the remainder of 2003, individual quarterly earnings will reflect unrealized changes in the fair value of those instruments that continue to be held as economic hedges, including financial settlements of such instruments, 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 2003, Dominion expects the combination of the anticipated gas sales by Dominion Exploration & Production and the economic hedges to result in a range of prices for those sales as contemplated by its risk management strategy.

PAGE 29

The balance of net unrealized gains and losses recognized for Dominion's energy-related derivative instruments held for trading purposes, including the economic hedges discussed above, at March 31, 2003 is summarized in the following table based on the approach used to determine fair value and the contract settlement or delivery dates:

The increase in operating revenue includes increased revenue for regulated and nonregulated electric and gas sales and gas transportation and storage.

• Regulated electric sales revenue increased $46 million. Colder temperatures and customer growth are estimated to have contributed $32 million and $4 million, respectively. A reallocation of base rate revenue between the Dominion Energy and Dominion Delivery segments, effective January 1, 2003, increased regulated electric sales revenue by $19 million. Other factors decreased regulated electric sales revenue by $9 million.
• Regulated gas sales revenue increased $211 million, including $117 million for higher gas prices reflected in higher rate recoveries and $94 million for increased sales related primarily to the impact of colder weather. The increase in regulated gas sales revenue was substantially offset by a $181 million increase in purchased gas expense, reflecting the matching of purchased gas costs and gas costs recoveries in rates.
• Gas transportation and storage revenue increased $20 million, primarily reflecting the impact of comparably colder weather on customer demand.

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The increase in operating expenses reflects primarily higher purchased gas expense (discussed with regulated gas sales revenue above), other operations and maintenance expenses and other taxes. There were no material fluctuations in depreciation expense for the first quarter of 2003.

• Other operations and maintenance expense increased $27 million, reflecting primarily a net increase in general and administrative expenses as well as higher service restoration costs associated with storm damage.
• Other taxes increased $14 million primarily due to higher gross receipts taxes.