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 September 30, 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 September 30, 2004, the latest practicable date for determination, 331,439,589 shares of common stock, without par value, of the registrant were outstanding.

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DOMINION RESOURCES, INC.

INDEX

		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	Consolidated Statements of Income - Three and Nine Months Ended September 30, 2004 and 2003	3
	Consolidated Balance Sheets - September 30, 2004 and December 31, 2003	4
	Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2004 and 2003	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	51
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 6.	Exhibits	52

PAGE 3

DOMINION RESOURCES, INC.

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

	Three Months Ended September 30,		Nine Months Ended September 30,
	2004	2003	2004	2003
	(millions, except per share amounts)
Operating Revenue	$3,292	$2,853	$10,211	$9,062

Operating Expenses
Electric fuel and energy purchases, net	612	447	1,705	1,224
Purchased electric capacity	153	152	451	463
Purchased gas, net	414	324	2,036	1,509
Liquids, pipeline capacity and other purchases	287	111	677	318
Other operations and maintenance	647	707	1,781	1,979
Depreciation, depletion and amortization	328	310	964	910
Other taxes	107	104	383	370
Total operating expenses	2,548	2,155	7,997	6,773

Income from operations	744	698	2,214	2,289

Other income (expense)	53	48	152	(36)
Interest and related charges:
Interest expense - junior subordinated notes payable to affiliated trusts	30	--	87	--
Interest expense - other	205	179	610	600
Distributions - mandatorily redeemable trust preferred securities	--	28	--	83
Subsidiary preferred dividends	4	4	12	12
Total interest and related charges	239	211	709	695

Income before income taxes	558	535	1,657	1,558

Income tax expense	221	209	617	577
Income from continuing operations before cumulative effect of changes in accounting principles	337	326	1,040	981
Loss from discontinued operations ⁽¹⁾	--	(582)	(15)	(602)
Cumulative effect of changes in accounting principles (net of income taxes of $71)	--	--	--	113

Net income (loss)	$ 337	$ (256)	$ 1,025	$ 492

Earnings Per Common Share - Basic
Income from continuing operations before cumulative effect of changes in accounting principles	$1.02	$1.01	$3.18	$3.11
Loss from discontinued operations	--	(1.80)	(0.05)	(1.91)
Cumulative effect of changes in accounting principles	--	--	--	0.36
Net income (loss)	$1.02	$(0.79)	$3.13	$1.56

Earnings Per Common Share - Diluted
Income from continuing operations before cumulative effect of changes in accounting principles	$1.02	$1.01	$3.16	$3.10
Loss from discontinued operations	--	(1.80)	(0.04)	(1.90)
Cumulative effect of changes in accounting principles	--	--	--	0.36
Net income (loss)	$1.02	$(0.79)	$3.12	$1.56

Dividends paid per common share	$0.645	$0.645	$1.935	$1.935

____________

^{(1) Net of income tax benefit of $4 million for the nine months ended September 30, 2004 and income tax expense of $42 million and $17 million for the three and nine months ended September 30, 2003, respectively.

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

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DOMINION RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

ASSETS	September 30, 2004	December 31, 2003⁽¹⁾
	(millions)
Current Assets
Cash and cash equivalents	$ 96	$ 126
Customer accounts receivable (net of allowance of $40 in 2004 and $51 in 2003)	2,612	3,091
Other accounts receivable	156	828
Inventories	976	870
Derivative assets	2,531	1,436
Margin deposit assets	153	157
Prepayments	489	202
Other	811	471
Total current assets	7,824	7,181

Investments
Available for sale securities	339	413
Nuclear decommissioning trust funds	1,906	1,872
Investment in affiliates	407	400
Other	393	402
Total investments	3,045	3,087

Property, Plant and Equipment
Property, plant and equipment	38,788	37,107
Accumulated depreciation, depletion and amortization	(12,038)	(11,257)
Net property, plant and equipment	26,750	25,850

Deferred Charges and Other Assets
Goodwill, net	4,298	4,300
Regulatory assets	811	832
Prepaid pension cost	1,944	1,939
Derivative assets	833	402
Other	643	595
Total deferred charges and other assets	8,529	8,068
Total assets	$46,148	$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	September 30, 2004	December 31, 2003⁽¹⁾
	(millions)
Current Liabilities
Securities due within one year	$ 1,761	$ 1,252
Short-term debt	348	1,452
Accounts payable, trade	2,358	2,712
Accrued interest, payroll and taxes	564	619
Derivative liabilities	3,814	2,082
Other	677	750
Total current liabilities	9,522	8,867

Long-Term Debt
Long-term debt	13,708	14,336
Junior subordinated notes payable to affiliated trusts	1,456	1,440
Total long-term debt	15,164	15,776

Deferred Credits and Other Liabilities
Deferred income taxes and investment tax credits	5,356	4,563
Asset retirement obligations	1,695	1,651
Derivative liabilities	1,894	1,185
Regulatory liabilities	600	587
Other	1,132	762
Total deferred credits and other liabilities	10,677	8,748
Total liabilities	35,363	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⁾	10,358	10,052
Other paid-in capital	84	61
Retained earnings	1,443	1,054
Accumulated other comprehensive loss	(1,357)	(629)
Total common shareholders' equity	10,528	10,538
Total liabilities and shareholders' equity	$46,148	$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; 331 million shares outstanding at September 30, 2004 and 325 million shares outstanding at December 31, 2003.}

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

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DOMINION RESOURCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Nine Months Ended September 30,
	2004	2003
	(millions)
Operating Activities
Net income	$1,025	$492
Adjustments to reconcile net income to net cash provided by operating activities:
Impairment of Telecom assets	--	544
Cumulative effect of changes in accounting principles, net of income taxes	--	(113)
Net unrealized gains on energy-related derivatives held for trading purposes	(69)	(94)
Depreciation, depletion and amortization	1,060	1,025
Deferred income taxes and investment tax credits, net	739	402
Other adjustments for non-cash items	23	26
Changes in:
Accounts receivable	477	54
Inventories	(107)	(278)
Deferred fuel and purchased gas costs, net	75	(257)
Prepayments	(347)	210
Accounts payable, trade	(354)	(11)
Accrued interest, payroll and taxes	(32)	43
Margin deposit assets and liabilities	9	78
Other operating assets and liabilities	(110)	11
Net cash provided by operating activities	2,389	2,132

Investing Activities
Plant construction and other property additions	(922)	(1,526)
Additions to gas and oil properties, including acquisitions	(953)	(941)
Proceeds from sale of oil and gas properties	413	303
Release of escrow deposit for debt refunding	--	500
Purchase of Dominion Fiber Ventures senior notes	--	(633)
Proceeds from sale of loans and securities	363	513
Purchases of securities	(397)	(492)
Advances to lessor for project under construction	(120)	(265)
Reimbursement from lessor for project under construction	793	--
Other	135	66
Net cash used in investing activities	(688)	(2,475)

Financing Activities
Repayment of short-term debt, net	(1,104)	(318)
Issuance of long-term debt	477	2,228
Repayment of long-term debt	(772)	(1,966)
Issuance of common stock	307	936
Common stock dividend payments	(635)	(616)
Other	(4)	(21)
Net cash (used in) provided by financing activities	(1,731)	243

Decrease in cash and cash equivalents	(30)	(100)
Cash and cash equivalents at beginning of period	126	291
Cash and cash equivalents at end of period	$ 96	$191

Supplemental Cash Flow Information
Assumption of debt related to acquisition of non-utility generating facility	$134	--
Non-cash exchange of debt securities	--	$500

____________

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 electricity within a 30,000-square-mile area in Virginia and northeastern North Carolina. Virginia Power serves approximately 2.3 million retail customer accounts, including governmental agencies, and 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 natural gas, electricity and other energy-related 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 approximately 1.3 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 (LNG) 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 a Corporate and Other segment that includes the operations of DCI, Dominion's corporate, service company and other operations (including unallocated debt) and the net impact of Dominion's discontinued telecommunications operations that were sold in May 2004. 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 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004.

In the opinion of Dominion's management, the accompanying unaudited Consolidated Financial Statements contain all adjustments, including normal recurring accruals, necessary to present fairly Dominion's financial position as of September 30, 2004, its results of operations for the three and nine months ended September 30, 2004 and 2003, and its cash flows for the nine months ended September 30, 2004 and 2003.

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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 revenue and expenses for the periods presented. Actual results may differ from those estimates.

The accompanying unaudited Consolidated Financial Statements include, after eliminating intercompany transactions and balances, the accounts of Dominion and all majority-owned subsidiaries, and those variable interest entities (VIEs) where Dominion has been determined to be the primary beneficiary.

Dominion reports certain contracts and instruments at fair value in accordance with 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, electric fuel and energy purchases 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 (EPS) if Dominion had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2004	2003	2004	2003
	(millions, except EPS)
Net income (loss), as reported	$337	$(256)	$1,025	$492
Add: actual stock-based compensation expense, net of tax	2	2	6	8
Deduct: pro forma stock-based compensation expense, net of tax	(4)	(7)	(14)	(28)
Net income (loss), pro forma	$335	$(261)	$1,017	$472

Basic EPS - as reported	$1.02	$(0.79)	$3.13	$1.56
Basic EPS - pro forma	$1.01	$(0.81)	$3.11	$1.50

Diluted EPS - as reported	$1.02	$(0.79)	$3.12	$1.56
Diluted EPS - pro forma	$1.01	$(0.81)	$3.09	$1.49

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

Note 3. Recently Adopted Accounting Standards

2004
FSP FAS 142-2

Dominion adopted Financial Accounting Standards Board (FASB) Staff Position 142-2, Application of FASB Statement No. 142,Goodwill and Other Intangible Assets, to Oil- and Gas- Producing Entities, (FSP 142-2) in September 2004. FSP 142-2 was issued to clarify that an exception outlined in SFAS No. 142, includes the balance sheet classification of drilling and mineral rights of oil and gas producing entities. In accordance with the guidance in FSP 142-2, Dominion will continue to present its oil and gas drilling rights as tangible assets classified in property, plant and equipment.

FIN 46R

Dominion adopted FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, (FIN 46R) for its interests in 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 related 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 qualifying facilities and independent power producers. Certain variable pricing terms 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 attributabl e to the long-term contract with the VIE would be replaced by the VIE's operations, maintenance and interest expense. The VIE's results of operations would be reported as income attributable to a minority interest, and would not affect Dominion's net income. Long-term debt of these potential VIEs, even if consolidated, would be nonrecourse to Dominion.

At March 31, 2004, Dominion had determined that its contracts with ten of these entities would require further analysis under FIN 46R. Since these entities were established and are legally owned by parties not affiliated with Dominion, Dominion submitted requests to these potential VIEs for the information necessary to perform the required assessments. In response to these requests, one of the potential VIE supplier entities provided some of the requested information. Using this information, Dominion has completed its analysis, the results of which indicate that Dominion is not the primary beneficiary of this supplier entity under FIN 46R. The Emerging Issues Task Force (EITF) has added a project to its agenda to consider what variability should be considered when determining whether an interest is a variable interest. This EITF project or other efforts to further interpret FIN 46R could require a reassessment of this information.

Although limited information has been made available in certain instances, Dominion has not obtained the requested information from the other nine potential VIEs. Dominion will continue its efforts to obtain information and will complete an evaluation of its relationship with each of these potential VIEs, if sufficient information is ultimately obtained.

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

Dominion has remaining purchase commitments under contracts with these ten potential VIEs of $4.5 billion at September 30, 2004. Dominion purchased $167 million and $154 million of electric generation capacity and energy from these entities in the three months ended September 30, 2004 and 2003, respectively, and $498 million and $482 million in the nine months ended September 30, 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 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 No. 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.

EITF 03-11

Dominion adopted EITF Issue No. 03-11, Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not "Held for Trading Purposes" as Defined in Issue No. 02-3, on October 1, 2003. EITF 03-11 addresses classification of income statement related amounts for derivative contracts. Income statement amounts related to periods prior to October 1, 2003 are presented as originally reported.

Note 4. Recently Issued Accounting Standards

EITF 03-1

In accordance with FSP EITF 03-1-1, Dominion delayed its adoption of the recognition and measurement provisions of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which provides guidance for evaluating and recognizing other-than-temporary impairments for certain investments in debt and equity securities. This delay will be in effect until the FASB reaches a final conclusion on issues raised in the proposed FSP 03-1-a, which relates primarily to implementation issues concerning certain types of debt securities.

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

Pending the adoption of any new guidance that may be finalized in the future, Dominion has continued to evaluate its available-for-sale securities for other-than-temporary impairment based upon the accounting policy described in Note 2 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2003. In addition to issues being addressed by the FASB in FSP 03-1-a, Dominion and other entities in the electric industry have sought additional guidance from the FASB concerning the proper application of EITF 03-1 to debt and equity securities held in nuclear decommissioning trusts. Given the delayed effective date and the request for additional guidance described above, Dominion cannot predict what the initial or ongoing impact of applying EITF 03-1 to its nuclear decommissioning trust investments may have on its results of operations and financial condition at this time.

EITF 04-8

In October 2004, the FASB ratified the consensus reached by the EITF on Issue No. 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share. EITF 04-8 would require the shares issuable under Dominion's $220 million of outstanding contingent convertible senior notes to be included in its diluted EPS calculation retroactive to the date of issuance by applying the "if converted" method under SFAS No. 128, Earnings Per Share. Dominion has followed the existing interpretation of SFAS No. 128, which includes contingently issuable shares in diluted EPS only when and if certain contingencies are met. EITF 04-8 is effective for periods ending after December 15, 2004. Under the new guidance, Dominion's diluted EPS would be lower than previously reported. Dominion estimates that the average shares outstanding used in the calculation of its diluted EPS would increase by approximately 3 million shares. The dilutive effect of higher average shares outst anding would be partially offset as the numerator used in the calculation of diluted EPS would increase by an amount equal to the interest cost, net of related tax benefits, on the outstanding contingent convertible senior notes.

SAB 106

In September 2004, the SEC issued Staff Accounting Bulletin No. 106 (SAB 106) that provides guidance to oil and gas companies following the full cost accounting method regarding the application of SFAS 143. SAB 106 requires companies calculating the full cost ceiling test to exclude future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet as required by SFAS 143. However, estimated dismantlement and abandonment costs related to future development activities, which are not required to be accrued under SFAS 143, should continue to be included in the full cost ceiling test. The SEC staff has also recommended that companies discuss how the adoption of SFAS 143 has affected their accounting for oil and gas operations. The accounting and disclosure requirements of SAB 106 are to be applied prospectively beginning with the first quarter of 2005. Dominion is currently evaluating the impact, if any, that SAB 106 may have o n its calculations under the full cost ceiling test.

Note 5. Operating Revenue

Dominion's operating revenue consists of the following:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2004	2003	2004	2003
Operating Revenue	(millions)
Regulated electric sales	$1,455	$1,383	$4,011	$3,742
Regulated gas sales	110	121	953	851
Nonregulated electric sales	356	316	958	915
Nonregulated gas sales	363	311	1,466	1,268
Gas transportation and storage	151	138	579	539
Gas and oil production	429	376	1,210	1,135
Other	428	208	1,034	612
Total operating revenue	$3,292	$2,853	$10,211	$9,062

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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 EPS:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2004	2003	2004	2003
	(millions, except EPS)
Income from continuing operations before cumulative effect of changes in accounting principles	$337	$326	$1,040	$981
Loss from discontinued operations	--	(582)	(15)	(602)
Cumulative effect of changes in accounting principles	--	--	--	113
Net income (loss)	$337	$(256)	$1,025	$492

Basic EPS
Average shares of common stock outstanding - basic	329.7	322.8	327.3	315.3
Income from continuing operations before cumulative effect of changes in accounting principles	$1.02	$1.01	$3.18	$3.11
Loss from discontinued operations	--	(1.80)	(0.05)	(1.91)
Cumulative effect of changes in accounting principles	--	--	--	0.36
Net income (loss)	$1.02	$(0.79)	$3.13	$1.56

Diluted EPS
Average shares of common stock outstanding	329.7	322.8	327.3	315.3
Net effect of potentially dilutive securities⁽¹⁾	1.3	1.4	1.4	1.3
Average shares of common stock outstanding - diluted	331.0	324.2	328.7	316.6

Income from continuing operations before cumulative effect of changes in accounting principles	$1.02	$1.01	$ 3.16	$3.10
Loss from discontinued operations	--	(1.80)	(0.04)	(1.90)
Cumulative effect of changes in accounting principles	--	--	--	0.36
Net income (loss)	$1.02	$(0.79)	$ 3.12	$1.56

_____________

^{(1) Potentially dilutive securities consist of options, restricted stock, equity-linked debt securities and an equity forward.}

Stock options and equity-linked debt securities with the right to purchase 4.8 million and 4.6 million common shares for the three months ended September 30, 2004 and 2003, respectively, and 4.1 million and 11.1 million common shares for the nine months ended September 30, 2004 and 2003, respectively, were not included in the respective period's calculation of diluted EPS because the exercise prices included in those instruments were greater than the average market price of the common shares.

See Note 10 for information regarding senior notes that are convertible into Dominion common shares 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.

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

Note 7. Comprehensive Income

The following table presents total comprehensive income:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2004	2003	2004	2003
	(millions)
Net income	$337	$(256)	$1,025	$492
Other comprehensive income (loss):
Net other comprehensive income (loss) associated with effective portion of changes in fair value of derivatives designated as cash flow hedges, net of taxes and amounts reclassified to earnings	(261)	237	(695)	(208)
Other⁽¹⁾	10	(28)	(33)	112
Other comprehensive income (loss)	(251)	209	(728)	(96)
Total comprehensive income (loss)	$ 86	$ (47)	$297	$396

________________

(1) Primarily represents the impact of both unrealized gains and losses on investments held in decommissioning trusts and 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 commodities marketed and purchased as well as currency exchange and interest rate 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 September 30,		Nine Months Ended September 30,
	2004	2003	2004	2003
Portion of gains (losses) on hedging instruments determined to be ineffective and included in net income:	(millions)
Fair value hedges	$ 3	$(4)	$ 7	$(1)
Cash flow hedges	3	2	5	(1)
Net ineffectiveness	$ 6	$(2)	$12	$(2)

Portion of gains (losses) on hedging instruments excluded from measurement of effectiveness and included in net income:
Fair value hedges ⁽¹⁾	$(9)	$1	$(12)	$1
Cash flow hedges ⁽²⁾	26	(3)	102	5
Total	$17	$(2)	$90	$6

^{(1) Amounts relate to changes in the difference between spot prices and forward prices for 2004 and to changes in options' time value for 2003.

⁽²⁾ Amounts relate to changes in options' time value.
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 September 30, 2004:

Accumulated Other

Comprehensive

(Loss) Income,

After-Tax

Portion Expected to be

Reclassified to

Earnings during the

Next 12 Months,

After-Tax

Maximum Term

(millions)

Commodities:

  Gas

$  (883)

$(557)

41 months

  Oil

(344)

(153)

39 months

  Electricity

(238)

(147)

39 months

Interest rate

(35)

(3)

261 months

Foreign currency

       33

      8

38 months

Total

$(1,467)

$(852)

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.

As a result of damage to certain offshore production facilities in the Gulf of Mexico caused by Hurricane Ivan, and the related loss of forecasted oil production for the period from mid-September 2004 to May 2005, Dominion discontinued certain cash flow hedges effective September 14, 2004. In connection with the discontinuance of these cash flow hedges, Dominion reclassified losses of $71 million from accumulated other comprehensive loss to earnings during the three months ended September 30, 2004.

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 September 30, 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 September 30, 2004, the Dominion Companies had committed credit facilities totaling $3.75 billion. Although there were no loans outstanding, these credit facilities support commercial paper borrowings and letter of credit issuances. At September 30, 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)

Three-year revolving credit facility⁽¹⁾

$1,500

Three-year revolving credit facility⁽²⁾

   750

  Total joint credit facilities

2,250

$348

$  148

$1,754

Three-year CNG credit facility⁽³⁾

  1,500

     --

1,459

       41

     Totals

$3,750

$348

$1,607

$1,795

__________________________

^{(1) The $1.5 billion three-year revolving credit facility was entered into in May 2004 and terminates in May 2007. This credit facility can also be used to support up to $500 million of letters of credit.

⁽²⁾ The $750 million three-year revolving credit facility was entered into in May 2002 and terminates in May 2005. This credit facility can also be used to support up to $200 million of letters of credit.

⁽³⁾ The $1.5 billion three-year 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 entered into in August 2004 and terminates in August 2007.}

In June 2004, CNG entered into a $100 million letter of credit agreement that terminates in June 2007. In August 2004, CNG entered into a $100 million letter of credit agreement that terminates in August 2009. These agreements support letter of credit issuances, providing collateral required on derivative financial contracts used by CNG in its risk management strategies for gas and oil production. At September 30, 2004, outstanding letters of credit under these agreements totaled $200 million.

In October 2004, CNG entered into three letter of credit agreements totaling $700 million that terminate in April 2005. These agreements support letter of credit issuances, providing collateral required on derivative financial contracts used by CNG in its risk management strategies for gas and oil production.

Long-Term Debt
During the nine months ended September 30, 2004, Dominion Resources, Inc. and its subsidiaries issued the following long-term debt:

Type<}

	Accumulated Other Comprehensive (Loss) Income, After-Tax	Portion Expected to be Reclassified to Earnings during the Next 12 Months, After-Tax	Maximum Term
	(millions)
Commodities:
Gas	$ (883)	$(557)	41 months
Oil	(344)	(153)	39 months
Electricity	(238)	(147)	39 months
Interest rate	(35)	(3)	261 months
Foreign currency	33	8	38 months
Total	$(1,467)	$(852)

	Facility Limit	Outstanding Commercial Paper	Outstanding Letters of Credit	Facility Capacity Remaining
	(millions)
Three-year revolving credit facility⁽¹⁾	$1,500
Three-year revolving credit facility⁽²⁾	750
Total joint credit facilities	2,250	$348	$ 148	$1,754
Three-year CNG credit facility⁽³⁾	1,500	--	1,459	41
Totals	$3,750	$348	$1,607	$1,795