DOMINION RESOURCES INC /VA/ - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

____________

FORM 10-Q
____________

(Mark one)

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004

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
DOMINION RESOURCES, INC.
(Exact name of registrant as specified in its charter)

VIRGINIA (State or other jurisdiction of incorporation or organization)	54-1229715 (I.R.S. Employer Identification No.)

120 Tredegar Street RICHMOND, VIRGINIA (Address of principal executive offices)	23219 (Zip Code)

(804) 819-2000 (Registrant's telephone number)

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

At April 30, 2004, the latest practicable date for determination, 326,530,459 shares of common stock, without par value, of the registrant were outstanding.

PAGE 2

DOMINION RESOURCES, INC.

INDEX

		Page Number
PART I. Financial Information
Item 1.	Consolidated Financial Statements
	Consolidated Statements of Income - Three Months Ended March 31, 2004 and 2003	3
	Consolidated Balance Sheets - March 31, 2004 and December 31, 2003	4
	Consolidated Statements of Cash Flows - Three Months Ended March 31, 2004 and 2003	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	43
	PART II. Other Information
Item 1.	Legal Proceedings	44
Item 4.	Submission of Matters to a Vote of Security Holders	45
Item 6.	Exhibits and Reports on Form 8-K	46

PAGE 3

DOMINION RESOURCES, INC.

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

	Three Months Ended March 31,
	2004	2003
	(millions, except per share amounts)
Operating Revenue	$3,879	$3,579
Operating Expenses
Electric fuel and energy purchases, net	518	414
Purchased electric capacity	152	161
Purchased gas, net	1,097	795
Liquids, pipeline capacity and other purchases	170	81
Other operations and maintenance	581	665
Depreciation, depletion and amortization	317	295
Other taxes	154	154
Total operating expenses	2,989	2,565
Income from operations	890	1,014
Other income (expense)	55	(138)
Interest and related charges:
Interest expense - junior subordinated notes payable to affiliated trusts	29	--
Interest expense - other	207	209
Distributions - mandatorily redeemable trust preferred securities	--	28
Subsidiary preferred dividends	4	3
Total interest and related charges	240	240
Income before income taxes and minority interests	705	636
Income taxes	260	229
Minority interests	--	(2)
Income from continuing operations before cumulative effect of changes in accounting principles	445	409
Loss from discontinued operations (net of tax benefit of $0 and $18)	(8)	(14)
Cumulative effect of changes in accounting principles (net of income taxes of $71)	--	113
Net income	$ 437	$ 508
Earnings Per Common Share - Basic
Income from continuing operations before cumulative effect of changes in accounting principles	$1.37	$1.33
Loss from discontinued operations	(0.02)	(0.05)
Cumulative effect of changes in accounting principles	--	0.37
Net income	$1.35	$1.65
Earnings Per Common Share - Diluted
Income from continuing operations before cumulative effect of changes in accounting principles	$1.36	$1.32
Loss from discontinued operations	(0.02)	(0.04)
Cumulative effect of changes in accounting principles	--	0.36
Net income	$1.34	$1.64
Dividends paid per common share	$0.645	$0.645

____________

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

PAGE 4

DOMINION RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

ASSETS	March 31, 2004	December 31, 2003⁽¹⁾
	(millions)
Current Assets
Cash and cash equivalents	$ 256	$ 126
Customer accounts receivable (net of allowance of $64 and $51)	3,348	3,091
Other accounts receivable	878	828
Inventories	595	870
Derivative assets	1,445	1,436
Margin deposit assets	76	157
Prepayments	183	202
Other	638	471
Total current assets	7,419	7,181
Investments
Available for sale securities	377	413
Nuclear decommissioning trust funds	1,898	1,872
Other	814	802
Total investments	3,089	3,087
Property, Plant and Equipment, Net
Property, plant and equipment	37,531	37,107
Accumulated depreciation, depletion and amortization	(11,516)	(11,257)
Total property, plant and equipment, net	26,015	25,850
Deferred Charges and Other Assets
Goodwill, net	4,298	4,300
Regulatory assets	842	832
Prepaid pension cost	1,939	1,939
Derivative assets	508	402
Other	597	595
Total deferred charges and other assets	8,184	8,068
Total assets	$44,707	$44,186

____________

^{(1) The Consolidated Balance Sheet at December 31, 2003 has been derived from the audited Consolidated Financial Statements at that date.

The accompanying notes are an integral part of the Consolidated Financial Statements.
PAGE 5
DOMINION RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)

LIABILITIES AND SHAREHOLDERS' EQUITY

March 31,

2004

December 31,

2003⁽¹⁾

(millions)

Current Liabilities

Securities due within one year

$   1,047

$   1,252

Short-term debt

1,555

1,452

Accounts payable, trade

2,558

2,712

Accrued interest, payroll and taxes

731

619

Derivative liabilities

2,359

2,082

Other

      788

       750

     Total current liabilities

   9,038

    8,867

Long-Term Debt

Long-term debt

14,375

14,336

Junior subordinated notes payable to affiliated trusts

    1,441

    1,440

     Total long-term debt

  15,816

  15,776

Deferred Credits and Other Liabilities

Deferred income taxes and investment tax credits

4,641

4,563

Asset retirement obligations

1,665

1,651

Derivative liabilities

1,419

1,185

Regulatory liabilities

592

587

Other

       769

       762

     Total deferred credits and other liabilities

    9,086

    8,748

     Total liabilities

  33,940

  33,391

Commitments and Contingencies (see Note 11)

Subsidiary Preferred Stock Not Subject to Mandatory Redemption

       257

      257

Common Shareholders' Equity

Common stock - no par⁽²⁾

10,111

10,052

Other paid-in capital

63

61

Retained earnings

1,281

1,054

Accumulated other comprehensive loss

      (945)

      (629)

     Total common shareholders' equity

   10,510

  10,538

     Total liabilities and shareholders' equity

$44,707

$44,186

____________
^{(1) The Consolidated Balance Sheet at December 31, 2003 has been derived from the audited Consolidated Financial Statements at that date.
^{(2) 500 million shares authorized; 326 million shares outstanding at March 31, 2004 and 325 million shares outstanding at December 31, 2003.

The accompanying notes are an integral part of the Consolidated Financial Statements.
PAGE 6
DOMINION RESOURCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)}}

Three Months Ended

March 31,

2004

2003

(millions)

Operating Activities

Net income

$  437

$   508

Adjustments to reconcile net income to cash from operating activities:

Cumulative effect of changes in accounting principles, net of income taxes

--

(113)

DCI impairment losses

38

--

Net unrealized gains on energy-related derivatives held for trading purposes

(1)

(143)

Depreciation, depletion and amortization

352

328

Deferred income taxes and investment tax credits, net

86

132

Other adjustments for non-cash items

(9)

113

Changes in:

Accounts receivable

(269)

(1,275)

Inventories

274

190

Deferred fuel and purchased gas costs, net

23

(195)

Prepayments

20

124

Accounts payable, trade

(154)

1,095

Accrued interest, payroll and taxes

114

20

Margin deposit assets and liabilities

83

(154)

Other operating assets and liabilities

    (25)

     252

Net cash provided by operating activities

    969

     882

Investing Activities

Plant construction and other property additions

(255)

(617)

Additions to gas and oil properties, including acquisitions

(284)

(224)

Release of escrow deposit for debt refunding

--

500

Purchase of Dominion Fiber Ventures senior notes

--

(633)

Proceeds from sale of loans and securities

46

159

Purchases of securities

(63)

(127)

Advances to lessor for project under construction, net

(38)

(86)

Other

     25

      (42)

Net cash used in investing activities

(569)

(1,070)

Financing Activities

Issuance of common stock

68

77

Issuance of long-term debt

300

2,200

Repayment of long-term debt

(528)

(1,025)

Issuance (repayment) of short-term debt, net

104

(649)

Common dividend payments

(210)

(199)

Other

      (4)

       (9)

Net cash (used in) provided by financing activities

  (270)

     395

Increase in cash and cash equivalents

130

207

Cash and cash equivalents at beginning of period

   126

    291

Cash and cash equivalents at end of period

$  256

$   498

____________
The accompanying notes are an integral part of the Consolidated Financial Statements.
PAGE 7
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).

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

CNG operates in all phases of the natural gas business, explores for and produces gas and oil and provides a variety of energy marketing services. Its regulated gas distribution subsidiaries serve approximately 1.7 million residential, commercial and industrial gas sales and transportation customer accounts in Ohio, Pennsylvania and West Virginia and its nonregulated retail energy marketing businesses serve 1.4 million residential and commercial customer accounts in the Northeast and Midwest. CNG operates an interstate gas transmission pipeline system in the Midwest, Mid-Atlantic states and the Northeast and a liquefied natural gas import and storage facility in Maryland. Its producer services operations involve the aggregation of natural gas supply and related wholesale activities. CNG's exploration and production operations are located in several major gas and oil producing basins in the United States, both onshore and offshore.

DEI is involved in merchant generation, energy trading and marketing and natural gas and oil exploration and production.

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

Dominion manages its daily operations through four primary operating segments: Dominion Generation, Dominion Energy, Dominion Delivery and Dominion Exploration & Production. In addition, Dominion reports the operations of DCI, its telecommunications business and its corporate and other operations as a segment. Assets remain wholly owned by its legal subsidiaries.

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

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 (generally accepted accounting principles). 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, 2003.

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 March 31, 2004, and its results of operations and cash flows for the three months ended March 31, 2004 and 2003.

PAGE 8
DOMINION RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The accompanying unaudited Consolidated Financial Statements represent Dominion's accounts after the elimination of intercompany transactions. Dominion follows the equity method of accounting for investments with a 50% or less interest in partnerships and corporate joint ventures when Dominion is able to significantly influence the financial and operating policies of the investee. Dominion reports its equity earnings from these investments in other income. For all other investments, the cost method is applied.

Dominion reports certain contracts and instruments at fair value in accordance with generally accepted accounting principles. 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, 2003 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, timing of recovery of electric fuel, purchased energy and purchased gas expenses and other factors.

Certain amounts in the 2003 Consolidated Financial Statements have been reclassified to conform to the 2004 presentation.

Stock Compensation

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

Three Months Ended March 31,

2004

2003

(millions)

Net income, as reported

$437

$508

Add: actual stock-based compensation expense, net of tax

2

3

Deduct: pro forma stock-based compensation expense, net of tax

   (5)

(11)

Net income, pro forma

$434

$500

Basic EPS - as reported

$1.35

$1.65

Basic EPS - pro forma

$1.34

$1.62

Diluted EPS - as reported

$1.34

$1.64

Diluted EPS - pro forma

$1.33

$1.61

PAGE 9
DOMINION RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Note 3.     Recently Adopted Accounting Standards

2004

FIN 46R

Dominion adopted FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, (FIN 46R) for its interests in variable interest entities (VIEs) that are not considered special purpose entities on March 31, 2004. FIN 46R addresses the identification and consolidation of VIEs, which are entities that are not controllable through voting interests or in which the VIEs' equity investors do not bear the residual economic risks and rewards. There was no impact on Dominion's results of operations or financial position relating to this adoption.
As described in Note 23 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2003, Dominion is a party to long-term contracts for purchases of electric generation capacity and energy from other utilities, qualifying facilities and independent power producers. Certain variable pricing mechanisms in some of these contracts cause them to be considered potential variable interests that require evaluation under the provisions of FIN 46R. If a power generator that holds one of these specific types of contracts is determined to be a VIE and Dominion is determined to be the primary beneficiary, Dominion would be required to consolidate the entity in its financial statements. Consolidation of one of these potential VIEs would primarily result in the addition of property, plant and equipment, long-term debt and minority interest to Dominion's balance sheet. The impact on Dominion's consolidated results of operations would be that purchased
energy and capacity expenses attributable to the long-term contract with the VIE would be replaced by the VIE's operations, maintenance and interest expense, with the VIE's results of operations being reported as income attributable to a minority interest. Long-term debt of these potential VIEs, even if consolidated, would be nonrecourse to Dominion.
As a result of these contracts, Dominion has identified significant variable interests in ten potential VIEs. Since these entities were established and are legally owned by parties not affiliated with Dominion, Dominion has submitted requests to these potential VIEs for the information necessary to perform the required assessments. Dominion has recently received some, but not all, of the requested information from one of the potential VIE supplier entities, which owns and manages a 180 Mw cogeneration facility in North Carolina. Furthermore, the potential VIE supplier entity has indicated that it does not intend to provide quarterly financial information. Dominion is in the process of evaluating, but has not yet concluded whether this supplier entity is a VIE or, if it is a VIE, whether Dominion would be the primary beneficiary under FIN 46R. If Dominion were to determine that it is required to consolidate this entity, Dominion's balance sheet would increase by the amounts presented below,
which are based on the unaudited financial statements provided by the supplier entity for the year ended December 31, 2003:
(millions)

Current assets

$ 9

Current liabilities

$ 6

Property, plant and equipment, net

51

Long-term debt

62

Other long-term assets

9

Other long-term liabilities

3

Minority interest

(2)

Total assets

$69

Total liabilities and shareholders' equity

$69

Because the requested information has not been provided by the other nine potential VIEs, Dominion is unable to apply FIN 46R to its interests in those entities. Dominion will continue efforts to obtain the information and, if it is received in the future, will evaluate these contracts under the provisions of FIN 46R at that time.
PAGE 10
DOMINION RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)
Dominion has remaining purchase commitments under contracts with these ten potential VIEs of $4.7 billion at March 31, 2004. Dominion purchased $174 million and $184 million of electric generation capacity and energy from these entities in the quarters ended March 31, 2004 and 2003, respectively. Dominion's exposure to losses from its involvement with these entities cannot be determined since losses, if any, would be represented by either: 1) the difference between (a) the amount payable by Dominion for energy and capacity under the long-term contract and (b) amounts recoverable through regulated electric sales or wholesale market transactions; or 2) if the potential VIE supplier fails to perform, any amount paid by Dominion to obtain replacement energy and capacity in excess of the amounts otherwise payable under the long-term contract with the potential VIE supplier entity.
As described more fully in Note 3 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2003, Dominion adopted FIN 46R for its interests in special purpose entities on December 31, 2003.
2003

SFAS No. 143

Effective January 1, 2003, Dominion adopted SFAS No. 143, Accounting for Asset Retirement Obligations, which provides accounting requirements for the recognition and measurement of liabilities associated with the retirement of tangible long-lived assets. Upon adoption, Dominion recognized a $180 million after-tax gain as the cumulative effect of this change in accounting principle.

EITF 02-3
On January 1, 2003, Dominion adopted Emerging Issues Task Force (EITF) Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities, that rescinded EITF Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. The implementation of EITF 02-3 resulted in the discontinuance of fair value accounting for non-derivative energy-related contracts held for trading purposes. Upon adoption, Dominion recognized an after-tax loss of $67 million as the cumulative effect of this change in accounting principle.

PAGE 11
DOMINION RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)
Note 4.     Classification of Oil and Gas Drilling Rights

The EITF has added Issue No. 03-S, Application of FASB Statement No. 142, Goodwill and Other Intangible Assets, to Oil and Gas Companies, to its agenda to address a question about whether oil and gas drilling rights should be classified as intangible assets rather than tangible assets on the balance sheet. If, as a result of the resolution of this issue, reclassification of the costs associated with its oil and gas drilling rights is required, Dominion's net intangible assets would increase and its net property, plant and equipment would decrease. As of March 31, 2004, the amount subject to reclassification was approximately $4.3 billion. While resolution of this issue may affect the balance sheet classification of these assets, there would be no impact on Dominion's results of operations or cash flows.

Note 5.     Operating Revenue

Dominion's operating revenue consists of the following:

Three Months Ended March 31,

2004

2003

Operating Revenue

(millions)

Regulated electric sales

$1,289

$1,248

Regulated gas sales

660

551

Nonregulated electric sales

339

332

Nonregulated gas sales

664

631

Gas transportation and storage

266

258

Gas and oil production

382

383

Other

     279

     176

        Total operating revenue

$3,879

$3,579

PAGE 12
DOMINION RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Note 6.     Earnings Per Share

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

Three Months Ended March 31,

2004

2003

(millions, except per share amounts)

Income from continuing operations before cumulative effect of changes in accounting principles

$445

$409

Loss from discontinued operations

(8)

(14)

Cumulative effect of changes in accounting principles

      --

113

Net income

$437

$508

Basic EPS

Average shares of common stock outstanding - basic

325.0

308.5

Income from continuing operations before cumulative effect of changes in accounting principles

$1.37

$1.33

Loss from discontinued operations

(0.02)

(0.05)

Cumulative effect of changes in accounting principles

     --

  0.37

Net income

$1.35

$1.65

Diluted EPS

Average shares of common stock outstanding

325.0

308.5

Net effect of dilutive stock options ⁽¹⁾

    1.7

   1.2

Average shares of common stock outstanding - diluted

326.7

309.7

Income from continuing operations before cumulative effect of changes in accounting principles

$1.36

$1.32

Loss from discontinued operations

(0.02)

(0.04)

Cumulative effect of changes in accounting principles

      --

  0.36

Net income

$1.34

$1.64

Average antidilutive shares excluded from the EPS calculation ⁽²⁾

3.6

19.6

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

⁽²⁾ Represents the average number of stock options excluded from the calculation of average outstanding shares of common stock because they are "out-of-the-money".

See Note 10 for information regarding senior notes that are convertible into Dominion common stock under certain conditions. Since none of the conditions have been met, the shares that would be issued upon conversion have not been included in the calculation of diluted EPS.

PAGE 13
DOMINION RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Note 7.     Comprehensive Income

The following table presents total comprehensive income:

Three Months Ended

March 31,

2004

2003

       (millions)

Net income

$437

$508

Other comprehensive income (loss):

Net other comprehensive loss associated with effective portion of the changes in fair value of derivatives designated as cash flows hedges net of taxes and amounts reclassified to earnings

(336)

(270)

Other⁽¹⁾

   20

   49

Other comprehensive loss

(316)

(221)

Total comprehensive income

$121

$287

________________
(1) Represents primarily unrealized gains and losses on investments held in decommissioning trusts and the impact of foreign currency    translation adjustments.

Note 8.     Hedge Accounting Activities

Dominion is exposed to the impact of market fluctuations in the price of natural gas, electricity and other energy-related products marketed and purchased as well as currency exchange and financial market risks of its business operations. Dominion uses derivative instruments to mitigate its exposure to these risks and designates derivative instruments as fair value or cash flow hedges for accounting purposes. Selected information about Dominion's hedge accounting activities follows:

Three Months Ended

March 31,

2004

2003

Portion of pre-tax gains (losses) on hedging instruments determined to be ineffective and included in net income:

(millions)

Fair value hedges

$3

$3

Cash flow hedges

(2)

4

Net ineffectiveness

$1

$7

For options used as hedging instruments, change in options' time value excluded from measurement of effectiveness and included in net income:

Fair value hedges

--

--

Cash flow hedges

$36

   $5

Total change in options' time value

$36

   $5

PAGE 14
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 loss in the Consolidated Balance Sheet at March 31, 2004:

Accumulated Other

Comprehensive

(Loss) Income

After-Tax

Portion Expected to be

Reclassified to

Earnings during the

Next 12 Months

Maximum Term

(millions)

Commodities:

Gas

$(721)

$(351)

47 months

Oil

(151)

(71)

33 months

Electricity

(211)

(110)

45 months

Interest rate

(60)

(6)

267 months

Foreign currency

       35

        6

44 months

Total

$(1,108)

$(532)

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.
Note 9.     Ceiling Test

Dominion follows the full cost method of accounting for gas and oil exploration and production activities prescribed by the SEC. Under the full cost method, 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 13% 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 March 31, 2004.

PAGE 15
DOMINION RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Note 10.     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 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. At March 31, 2004, the Dominion Companies had committed lines of credit totaling $3.0 billion. Although there were no loans outstanding, these lines of credit support commercial paper borrowings and letter of credit issuances. At March 31, 2004, the Dominion Companies had the following commercial paper and letters of credit outstanding and capacity available under credit facilities:

Facility Limit

Outstanding Commercial Paper

Outstanding Letters of Credit

Facility Capacity Remaining

(millions)

364-day revolving credit facility

$1,250

Three-year revolving credit facility

     750

Total joint credit facilities⁽¹⁾

2,000

$1,530

$148

$322

364-day CNG credit facility⁽²⁾

  1,000

        --

  825

175

     Totals

$3,000

$1,530

$973

$497

__________________________
^{(1) The joint credit facilities support borrowings by the Dominion Companies. The 364-day revolving credit facility was executed in May 2003 and terminates in May 2004. The three-year revolving credit facility was executed in May 2002 and terminates in May 2005. Dominion expects to renew the 364-day revolving credit facility prior to its maturity in May 2004.
^{(2) The credit facility is used to support the issuance of letters of credit and commercial paper by CNG to fund collateral requirements under its gas and oil hedging program. The facility was executed in August 2003 and terminates in August 2004. CNG expects to renew the $1 billion 364-day revolving credit facility prior to its maturity in August 2004.}

In January 2004, CNG entered into a $200 million letter of credit agreement to support the issuance of a letter of credit to provide collateral required by a counterparty on derivative financial contracts used by CNG in its risk management strategies for its gas and oil production. The agreement terminates in May 2004 and is not expected to be renewed. At March 31, 2004, outstanding letters of credit under this agreement totaled $200 million.

Long-Term Debt
During the first quarter of 2004, Dominion Resources, Inc. issued the following long-term debt:

Type

Principal

Rate

Maturity

Issuing Company

(millions)

Senior notes

$200

5.20 %

2016

Dominion Resources, Inc.

Senior notes

  100

Variable

2006

Dominion Resources, Inc.

  Total

$300

Dominion Resources, Inc. and its subsidiaries repaid $528 million of long-term debt during the first quarter of 2004.
PAGE 16
DOMINION RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)
Convertible Securities
In 2003, Dominion issued $220 million of convertible senior notes due 2023. The senior notes are convertible during certain periods subsequent to March 31, 2004 by holders into shares of Dominion's common stock initially at a conversion rate of 13.5865 shares of common stock per $1,000 principal amount of senior notes under the following circumstances:

the price of Dominion common stock reaches $88.32 per share for a specified period;

the senior notes are called for redemption by Dominion (senior notes become redeemable at any time on or after December 20, 2006 with appropriate notice provisions);

the occurrence of specified corporate transactions such as Dominion being a party to a consolidation or a merger or distributing to all of its common stock holders the right to purchase shares of common stock under specified conditions or;

the credit ratings of the senior notes are lowered by both Moody's and Standard & Poor's below Baa3 and BBB-, respectively, or the ratings are discontinued for any reason.

The initial conversion rate is subject to adjustment upon certain events such as subdivisions, splits, combinations of common stock or the issuance to all common stock holders of certain common stock rights, warrants or options and certain dividend increases.

Since none of the conditions have been met, the senior notes are not yet subject to conversion.

Beginning with the six-month interest payment period ending on June 15, 2007, Dominion will pay contingent interest equal to 0.25% of the average trading price for the then-current interest payment period if the average trading price of the senior notes during the five trading days immediately preceding the first day of the interest period equals or exceeds 120% of the principal amount of the senior notes.

Holders have the right to require Dominion to purchase their senior notes in cash at 100% of the principal plus accrued interest on December 15, 2006, December 15, 2008, December 15, 2013, or December 15, 2018, or if Dominion undergoes certain fundamental changes, such as a person becoming the beneficial owner of common equity representing more than 50% of the voting power of Dominion's common equity.

Transactions with Affiliated Trusts
Upon adoption of FIN 46R for its interests in special purpose entities on December 31, 2003, Dominion ceased consolidating its five subsidiary capital trusts (Dominion Resource Capital Trust I, Dominion Resources Capital Trust II, Dominion Resources Capital Trust III, Dominion CNG Capital Trust I and Virginia Power Capital Trust II). Each trust is a finance subsidiary of the respective parent company, which holds 100% of the voting interests. The junior subordinated notes issued by Dominion Resources, Inc. and certain subsidiaries and held by the trusts are reported as long-term debt. Dominion reported $29 million of interest expense on the junior subordinated notes in the first quarter of 2004 and $28 million of distributions of subsidiary trusts in the first quarter of 2003.

Issuance of Common Stock
During the first quarter of 2004, Dominion received proceeds of $68 million through Dominion Direct (a dividend reinvestment and open enrollment direct stock purchase plan), employee savings plans and the exercise of employee stock options.
PAGE 17
DOMINION RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Note 11.     Commitments and Contingencies

Other than the matters discussed below, there have been no significant developments regarding the commitments and contingencies disclosed in Note 23 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2003, nor have any significant new matters arisen during the first quarter of 2004.

Enron Bankruptcy

As described more fully in Note 23 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2003, Dominion submitted a claim in the Enron bankruptcy case for the value of certain terminated commodity contracts. During the first quarter of 2004, the bankruptcy court approved a settlement of Dominion's claim in the proceeding, resulting in a $2 million after-tax benefit.

Litigation
Virginia Power and Dominion Telecom, Inc. (DTI) are defendants in a class action lawsuit pending in the U.S. District Court in Richmond, Virginia. The plaintiffs claim that Virginia Power and DTI strung fiber-optic cable across their land, along a Virginia Power electric transmission corridor without paying compensation. The plaintiffs are seeking damages for trespass and "unjust enrichment," as well as punitive damages from the defendants. In April 2004, the parties entered into a settlement agreement that is subject to approval by the court in formal proceedings. Under the terms of the settlement, a fund of $20 million will be established by defendants to pay claims of current and former landowners as well as fees of lawyers for the class. Costs of notice to the class and administration of claims will be borne separately by defendants. The settlement agreement resulted in an after-tax charge of $7 million in the first quarter of 2004.

Environmental Matters

In March 2004, the State of North Carolina filed a petition under Section 126 of the Clean Air Act seeking the Environmental Protection Agency (EPA) to impose additional nitrogen oxide (NO_X) and sulfur dioxide (SO₂) reductions from electrical generating units in thirteen states, claiming emissions from the electrical generating units in those states are contributing to air quality problems in North Carolina. Dominion has electrical generating units in six of the states. The issues raised by North Carolina are already being addressed by the EPA in current regulatory initiatives. The EPA has 60 days to respond to the petition. Provisions of the Clean Air Act also allow up to a 6-month extension. Given the highly uncertain outcome and timing of future action, if any, by the EPA on this issue, Dominion cannot predict the financial impact on its operations at this time.

Nuclear Insurance
During March 2004, the Nuclear Regulatory Commission (NRC) exempted Dominion's Millstone Unit 1, which is currently being decommissioned, from the Secondary Financial Protection provisions of the Price-Anderson Act. As a result, Dominion now has six licensed reactors instead of seven for which it could be assessed up to $100.6 million not to exceed $10 million per year per reactor in the event of a nuclear incident at any licensed nuclear reactor in the United States. There is no limit to the number of incidents for which this retrospective premium can be assessed.
PAGE 18
DOMINION RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Guarantees, Letters of Credit and Surety Bonds
As of March 31, 2004, Dominion had guaranteed $57 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 corporate loans or guarantees under the Sarbanes-Oxley Act of 2002, Dominion has ceased its program of new third party loans to executives for the purpose of acquiring company stock.

As of March 31, 2004, Dominion and its subsidiaries had issued $7.3 billion of guarantees, including: $3.2 billion to support commodity transactions of subsidiaries; $2.0 billion for subsidiary debt, $792 million related to a subsidiary leasing obligation for a new power generation project and $1.3 billion for guarantees supporting other agreements of subsidiaries. Dominion had also purchased $77 million of surety bonds and authorized the issuance of standby letters of credit by financial institutions of $1.2 billion. 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 a liability, subject to a guarantee, has been incurred by a consolidated subsidiary, that liability is included in Dominion's Consolidated Fi
nancial Statements. Dominion is not required 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 March 31, 2004. Dominion believes it is unlikely that it would be required to perform or otherwise incur any losses associated with guarantees of its subsidiaries' obligations.

Note 12.      Credit Risk

Dominion's exposure to credit risk is concentrated primarily within its sales of gas and oil production and energy trading, marketing and commodity hedging activities. Dominion transacts with a smaller, less diverse group of counterparties and transactions may involve large notional volumes and potentially volatile commodity prices. Energy trading, marketing and hedging activities include proprietary trading activities, marketing of merchant generation output, structured transactions and the use of financial contracts for enterprise-wide hedging purposes. At March 31, 2004, gross credit exposure related to these transactions totaled $1.0 billion, reflecting the unrealized gains for contracts carried at fair value plus any outstanding receivables (net of payables, where netting agreements exist), prior to the application of collateral. After the application of collateral, Dominion's credit exposure is reduced to $990 million. Of this amount, investment grad
e counterparties represent 77% and no single counterparty exceeded 3%. As of March 31, 2004 and December 31, 2003, Dominion had margin deposit assets of $76 million and $157 million, respectively, and margin deposit liabilities (reported in other current liabilities) of $14 million and $12 million, respectively.

Note 13.     Discontinued Operations - Telecommunications Operations

In March 2004, Dominion signed a definitive agreement to sell 100% of DTI to a subsidiary of Elantic Networks, Inc. The sale is expected to close in the second quarter of 2004 and is subject to review and approval by the Federal Communications Commission and regulators in eleven states. Dominion may realize a pre-tax loss of up to $30 million related to the sale.

Note 14.     Asset Valuation Adjustments

During the first quarter of 2004, Dominion recognized a $38 million ($23 million after-tax) impairment of retained interests from mortgage securitizations held by DCI, Dominion's financial services subsidiary, reflecting increased defaults and accelerated prepayments as a result of low interest rates.

Also during the first quarter of 2004, Dominion recognized an $18 million after-tax benefit resulting from a favorable valuation adjustment related to an agreement to sell a portion of its CNG International (CNGI) pipeline assets in Australia that are held for sale. The adjustment to the assets' carrying amount reflects Dominion's current evaluation of the assets' fair market value, less estimated costs to sell. The sale is expected to close in the second quarter of 2004.
PAGE 19
DOMINION RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Note 15.     Employee Benefit Plans

The following table illustrates the components of the provision for net periodic benefit cost (credit) for Dominion's pension and other postretirement benefit plans:

Pension Benefits

Other Postretirement Benefits

Three Months Ended March 31,

2004

2003

2004

2003

(millions)

  Service cost

$24

$22

$16

$15

  Interest cost

47

45

21

22

  Expected return on plan assets

(84)

(80)

(11)

(9)

  Amortization of prior service cost

1

--

--

--

  Amortization of transition obligation

--

--

2

2

  Amortization of net loss

14

  5

   5

   5

  Net periodic benefit cost (credit)

$ 2

$(8)

$33

$35

Employer Contributions

Dominion made no contributions to its defined benefit pension plans or other postretirement benefit plans during the first quarter of 2004. Dominion expects to contribute at least $51 million to its other postretirement benefit plans during the remainder of 2004. Under its funding policies, Dominion evaluates plan funding requirements annually, usually in the third quarter 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 2004 will be determined at that time.

PAGE 20
DOMINION RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)
Note 16.     Operating Segments

Dominion manages its operations through the following operating segments:

Dominion Generation includes the generation operations of Dominion's electric utility and merchant fleet.

Dominion Energy includes Dominion's electric transmission, natural gas transmission pipeline and storage businesses, certain natural gas production, as well as energy trading and marketing activities (Clearinghouse) and producer services operations that include aggregation of gas supply and related wholesale activities.

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

Dominion Exploration & Production 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 DCI, Dominion Fiber Ventures LLC (DFV) and related telecommunications operations and Dominion's corporate, service company and other operations (including unallocated debt). In addition, the contribution to net income by Dominion's primary operating segments is determined based on 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.
Intersegment sales and transfers are based on underlying contractual arrangements and agreements and may result in intersegment profit or loss.

Dominion Generation

Dominion Energy

Dominion Delivery

Dominion

E&P

Corporate and Other

Adjustments/ Eliminations

Consolidated Total

Three Months Ended

March 31, 2004

(millions)

Operating revenue - external

customers

$1,062

$752

$1,407

$466

$19

$173

$3,879

Operating revenue -

intersegment

146

77

22

40

132

(417)

- --

Net income (loss) 2003

144

69

166

129

(71)

--

437

Operating revenue - external

customers

$1,144

$629

$1,185

$480

$36

$105

$3,579

Operating revenue -

intersegment

34

142

17

44

162

(399)

- --

Net income (loss)

111

173

159

106

(41)

--

508

PAGE 21
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.
Contents of MD&A

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LIABILITIES AND SHAREHOLDERS' EQUITY	March 31, 2004	December 31, 2003⁽¹⁾
	(millions)
Current Liabilities
Securities due within one year	$ 1,047	$ 1,252
Short-term debt	1,555	1,452
Accounts payable, trade	2,558	2,712
Accrued interest, payroll and taxes	731	619
Derivative liabilities	2,359	2,082
Other	788	750
Total current liabilities	9,038	8,867
Long-Term Debt
Long-term debt	14,375	14,336
Junior subordinated notes payable to affiliated trusts	1,441	1,440
Total long-term debt	15,816	15,776
Deferred Credits and Other Liabilities
Deferred income taxes and investment tax credits	4,641	4,563
Asset retirement obligations	1,665	1,651
Derivative liabilities	1,419	1,185
Regulatory liabilities	592	587
Other	769	762
Total deferred credits and other liabilities	9,086	8,748
Total liabilities	33,940	33,391
Commitments and Contingencies (see Note 11)
Subsidiary Preferred Stock Not Subject to Mandatory Redemption	257	257
Common Shareholders' Equity
Common stock - no par⁽²⁾	10,111	10,052
Other paid-in capital	63	61
Retained earnings	1,281	1,054
Accumulated other comprehensive loss	(945)	(629)
Total common shareholders' equity	10,510	10,538
Total liabilities and shareholders' equity	$44,707	$44,186

	Three Months Ended March 31,
	2004	2003
	(millions)
Operating Activities
Net income	$ 437	$ 508
Adjustments to reconcile net income to cash from operating activities:
Cumulative effect of changes in accounting principles, net of income taxes	--	(113)
DCI impairment losses	38	--
Net unrealized gains on energy-related derivatives held for trading purposes	(1)	(143)
Depreciation, depletion and amortization	352	328
Deferred income taxes and investment tax credits, net	86	132
Other adjustments for non-cash items	(9)	113
Changes in:
Accounts receivable	(269)	(1,275)
Inventories	274	190
Deferred fuel and purchased gas costs, net	23	(195)
Prepayments	20	124
Accounts payable, trade	(154)	1,095
Accrued interest, payroll and taxes	114	20
Margin deposit assets and liabilities	83	(154)
Other operating assets and liabilities	(25)	252
Net cash provided by operating activities	969	882
Investing Activities
Plant construction and other property additions	(255)	(617)
Additions to gas and oil properties, including acquisitions	(284)	(224)
Release of escrow deposit for debt refunding	--	500
Purchase of Dominion Fiber Ventures senior notes	--	(633)
Proceeds from sale of loans and securities	46	159
Purchases of securities	(63)	(127)
Advances to lessor for project under construction, net	(38)	(86)
Other	25	(42)
Net cash used in investing activities	(569)	(1,070)
Financing Activities
Issuance of common stock	68	77
Issuance of long-term debt	300	2,200
Repayment of long-term debt	(528)	(1,025)
Issuance (repayment) of short-term debt, net	104	(649)
Common dividend payments	(210)	(199)
Other	(4)	(9)
Net cash (used in) provided by financing activities	(270)	395
Increase in cash and cash equivalents	130	207
Cash and cash equivalents at beginning of period	126	291
Cash and cash equivalents at end of period	$ 256	$ 498

Current assets	$ 9	Current liabilities	$ 6
Property, plant and equipment, net	51	Long-term debt	62
Other long-term assets	9	Other long-term liabilities	3
		Minority interest	(2)
Total assets	$69	Total liabilities and shareholders' equity	$69

	Accumulated Other Comprehensive (Loss) Income After-Tax	Portion Expected to be Reclassified to Earnings during the Next 12 Months	Maximum Term
	(millions)
Commodities:
Gas	$(721)	$(351)	47 months
Oil	(151)	(71)	33 months
Electricity	(211)	(110)	45 months
Interest rate	(60)	(6)	267 months
Foreign currency	35	6	44 months
Total	$(1,108)	$(532)

	Facility Limit	Outstanding Commercial Paper	Outstanding Letters of Credit	Facility Capacity Remaining
	(millions)
364-day revolving credit facility	$1,250
Three-year revolving credit facility	750
Total joint credit facilities⁽¹⁾	2,000	$1,530	$148	$322
364-day CNG credit facility⁽²⁾	1,000	--	825	175
Totals	$3,000	$1,530	$973	$497

Type	Principal	Rate	Maturity	Issuing Company
	(millions)
Senior notes	$200	5.20 %	2016	Dominion Resources, Inc.
Senior notes	100	Variable	2006	Dominion Resources, Inc.
Total	$300

	Pension Benefits		Other Postretirement Benefits
Three Months Ended March 31,	2004	2003	2004	2003
	(millions)
Service cost	$24	$22	$16	$15
Interest cost	47	45	21	22
Expected return on plan assets	(84)	(80)	(11)	(9)
Amortization of prior service cost	1	--	--	--
Amortization of transition obligation	--	--	2	2
Amortization of net loss	14	5	5	5
Net periodic benefit cost (credit)	$ 2	$(8)	$33	$35

	Dominion Generation	Dominion Energy	Dominion Delivery	Dominion E&P	Corporate and Other	Adjustments/ Eliminations	Consolidated Total
Three Months Ended March 31, 2004	(millions)
Operating revenue - external customers	$1,062	$752	$1,407	$466	$19	$173	$3,879
Operating revenue - intersegment	146	77	22	40	132	(417)	- --
Net income (loss) 2003	144	69	166	129	(71)	--	437
Operating revenue - external customers	$1,144	$629	$1,185	$480	$36	$105	$3,579
Operating revenue - intersegment	34	142	17	44	162	(399)	- --
Net income (loss)	111	173	159	106	(41)	--	508