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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

OR

For the transition period from                to

Commission File Number 1-8489

DOMINION RESOURCES, INC.

(Exact name of registrant as specified in its charter)

(804) 819-2000

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is an accelerated filer. Yes x    No ¨

The aggregate market value of the common equity held by non-affiliates of the registrant was approximately $17 billion, based on the closing price of our common stock on June 28, 2002 on the New York Stock Exchange.

As of February 28, 2003, Dominion had 309,274,238 shares of common stock outstanding.

DOCUMENT INCORPORATED BY REFERENCE.

Table of Contents

Dominion Resources, Inc.

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Part I

Item 1.    Business

The Company

Dominion Resources, Inc. is a fully integrated gas and electric holding company headquartered in Richmond, Virginia. Incorporated in Virginia in 1983, Dominion is a registered public utility holding company under the Public Utility Holding Company Act of 1935 (the 1935 Act).

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.

Operating Segments

Dominion manages its operations along three primary business lines that integrate its electric and gas services, streamline operations and position it for long-term growth in the competitive marketplace.

Dominion Energy—Dominion Energy manages Dominion’s generation portfolio, consisting primarily of generating units and power purchase agreements. It also manages Dominion’s energy trading and marketing, hedging and arbitrage activities; and gas pipeline and certain gas production and storage operations. Effective January 1, 2003, Dominion’s electric transmission operations became a part of Dominion Energy.

Dominion Delivery—Dominion Delivery manages Dominion’s electric and gas distribution systems, as well as customer service and, through December 31, 2002, electric transmission functions. Dominion Delivery also includes Dominion’s interest in Dominion Fiber Ventures LLC (DFV), a telecommunications joint venture. See Note 30 to the Consolidated Financial Statements for a discussion of Dominion’s consolidation of DFV beginning in February 2003. Effective January 1, 2003, Dominion’s electric transmission operations became a part of the Dominion Energy segment.

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

While Dominion manages its daily operations as described above, its assets remain wholly-owned by its legal subsidiaries, which are described below. For additional financial information on business segments and geographic areas, see Note 32 to the Consolidated Financial Statements.

Dominion’s principal direct legal subsidiaries are Virginia Electric and Power Company (Virginia Power), Consolidated Natural Gas Company (CNG) and Dominion Energy, Inc. (DEI). Virginia Power is a regulated public utility that generates, transmits and distributes power for sale in Virginia and northeastern North Carolina. CNG is a producer, transporter, distributor and retail marketer of natural gas, serving customers in Pennsylvania, Ohio, West Virginia and other states. DEI is an independent power and natural gas and oil exploration and production company.

As of December 31, 2002, Dominion and its subsidiaries had approximately 17,000 full-time employees. Approximately 6,400 employees are subject to collective bargaining agreements.

Dominion’s principal executive offices are located at 120 Tredegar Street, Richmond, Virginia 23219 and its telephone number is (804) 819-2000.

Dominion’s website address is www.dom.com. Dominion makes available free of charge through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as practicable after filing or furnishing the material with the Securities and Exchange Commission (SEC).

Business Developments

In June 2002, Dominion acquired Mirant State Line Ventures, Inc. (State Line) from a subsidiary of Mirant Corporation for $185 million in cash. State Line’s assets include a 515 Mw coal-fired generation facility located near Hammond, Indiana. In September 2002, Dominion acquired Cove Point LNG Limited Partnership (Cove Point) from a subsidiary of The Williams Companies for $225 million in cash. Cove Point’s assets include a liquefied natural gas import facility located near Baltimore, Maryland that is under reconstruction, a liquefied natural gas storage facility and an approximate 85-mile natural gas pipeline.

Dominion became a registered public utility holding company when it completed the CNG acquisition in January 2000. The 1935 Act prohibits registered companies from owning businesses not directly related to utility or other energy operations. Dominion has substantially completed its strategy to exit the core operating business of Dominion Capital, Inc.

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(DCI), its financial services subsidiary, and continues to seek opportunities to divest of the remaining assets. Currently, Dominion is required to divest of all remaining DCI holdings by January 2006.

Because it is no longer investing in or creating energy business overseas, Dominion continues to explore the sale of CNG’s remaining international operations in Australia.

In February 2003, pursuant to the terms of its lease agreement, Dominion purchased the Dresden, Ohio electric generation facility from the lessor. The Dresden facility remains under construction and includes a 550 Mw combined cycle gas-powered generation plant. The purchase price of approximately $266 million was equal to the sum of all amounts previously advanced by the lenders and equity holders with respect to the facility and certain other additional costs and fees due and payable to the lenders and equity holders by Dominion.

Dominion’s acquisitions and divestitures are described in more detail in Notes 5 and 6 to the Consolidated Financial Statements.

Seasonality

Sales of electricity in the Dominion Delivery segment typically vary seasonally based on increased demand for electricity by residential and commercial customers for cooling and heating use based on changes in temperature. The same is true for gas sales based on heating needs. Dominion Energy’s business is also impacted by seasonal changes in the prices of commodities, primarily electricity and natural gas, that it actively markets and trades. For Dominion Exploration & Production, gas prices can vary seasonally as well.

Competition

Deregulation and restructuring in the electric and gas industries continue to create issues that affect or will likely affect the markets where Dominion Energy and Dominion Delivery do business, and govern the way these business units and their competitors operate. The electric power and natural gas industries continue to evolve into a competitive marketplace where energy companies will compete to provide energy and energy services to a broad range of customers.

Electric Industry

The Virginia Electric Utility Restructuring Act (Virginia Restructuring Act) was enacted in 1999 and established a plan to restructure Virginia’s electric utility industry and provide for the phase-in of choice for retail customers from January 1, 2002 through January 1, 2004. As ordered by the Virginia State Corporation Commission (Virginia Commission), Dominion made retail choice available for all of its Virginia regulated electric customers as of January 1, 2003.

Under the Virginia Restructuring Act, the generation portion of Dominion’s Virginia jurisdictional operations is no longer subject to cost-based rate regulation effective January 1, 2002. Base rates (excluding fuel costs and certain other allowable adjustments) are capped and will remain unchanged until July 2007, unless modified or terminated sooner, as provided by the Virginia Restructuring Act. Under the Virginia Restructuring Act, Dominion may request a termination of the capped rates at any time after January 1, 2004, and the Virginia Commission may grant Dominion’s request to terminate the capped rates, if it finds that a competitive generation services market exists in Dominion’s service area. Recovery of generation-related costs will continue to be provided through capped rates and a wires charge. A wires charge, where applicable, is being assessed to those customers opting for alternative suppliers. The Virginia Restructuring Act also requires Dominion to join or establish a regional transmission organization (RTO), phase-in retail choice beginning January 1, 2002, and functionally separate its electric generation from its electric transmission and distribution operations.

Recently, the Virginia Commission recommended that state policymakers decide promptly whether to proceed with or delay implementation of the Virginia Restructuring Act, in light of recent developments impacting electric industry restructuring in Virginia, including the Federal Energy Regulatory Commission’s (FERC) issuance of a notice of proposed rule making on Standard Market Design. Legislation that would delay entry into a RTO until on or after July 1, 2004 was approved by the Virginia General Assembly in February 2003 and is now awaiting action by the Governor. The proposed legislation also would require Dominion to file an application with the Virginia Commission by July 1, 2003 to join a RTO. Subject to Virginia Commission approval, Dominion would be required to transfer management and control of its transmission assets to a RTO by January 1, 2005.

For additional information on electric deregulation in Virginia, see Regulated Electric Operations in Future Issues and Outlook in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

In North Carolina, regulators and legislators continue to explore the issues related to electric industry restructuring, the

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development of a competitive, wholesale market and retail competition. However, to date, there has been no significant activity.

Dominion plans to continue to participate actively in both the legislative and regulatory processes to ensure an orderly transition from a regulated environment.

Gas Industry

Dominion Delivery

Deregulation is at varying stages in the three states in which Dominion’s gas distribution subsidiaries operate. In Pennsylvania, supplier choice is available for all residential and small commercial customers. In Ohio, legislation has not been enacted to require supplier choice for residential and commercial natural gas consumers. However, Dominion offers an Energy Choice program to customers on its own initiative, in cooperation with the Public Utilities Commission of Ohio (Ohio Commission).

West Virginia legislation currently does not require customer choice in its retail natural gas markets, and Dominion has not voluntarily initiated an Energy Choice program. However, the West Virginia Public Service Commission (West Virginia Commission) recently issued regulations to govern pooling services, one of the tools that natural gas suppliers may utilize to provide retail customer choice in the future. In 2002, the West Virginia Commission proposed rules that require that competitive gas service providers be licensed in West Virginia. In addition, the West Virginia Commission is developing rules for a code of conduct between utilities and their marketing affiliates, as well as consumer protection regulations and marketer licensing rules.

See Regulated Gas Distribution Operations in Future Issues and Outlook in MD&A for additional information.

Dominion Energy

Dominion’s large underground natural gas storage network and the location of its pipeline system are a significant link between the country’s major gas pipelines and large markets in the Northeast and Mid-Atlantic regions and on the East Coast. Dominion’s pipelines are part of an interconnected gas transmission system which continues to provide local distribution companies, marketers, power generators and industrial and commercial customers the accessibility of supplies nationwide.

Dominion competes with domestic and Canadian pipeline companies and gas marketers seeking to provide or arrange transportation, storage and other services for customers. Alternative energy sources, such as oil or coal, provide another level of competition. Although competition is based primarily on price, the array of services that can be provided to customers is also an important factor. The combination of capacity rights held on certain longline pipelines, a large storage capability and the availability of numerous receipt and delivery points along its own pipeline system enables Dominion to tailor its services to meet the needs of individual customers.

Dominion Exploration & Production

Dominion conducts exploration and production operations in several major producing basins in the lower 48 states, including the outer continental shelf and deep-water areas of the Gulf of Mexico, and Western Canada. Competitors range from major international oil companies, to smaller, independent producers.

Dominion faces significant competition in the bidding for federal offshore leases and in obtaining leases and drilling rights for onshore properties. Since Dominion is the operator of a number of properties, it also faces competition in securing drilling equipment and supplies for exploration and development.

In terms of its production activities, Dominion sells most of its deliverable natural gas and oil into short and intermediate-term markets. Dominion faces challenges related to the marketing of its natural gas and oil production due to the contraction of participants in the energy marketing industry. In the wake of current industry developments, several energy trading participants have exited the business, reducing the number of active purchasers in the marketplace and reducing Dominion’s delivery flexibility. However, Dominion owns a large and diverse natural gas and oil portfolio and maintains an active gas and oil marketing presence in its primary production regions which strengthens its knowledge of the marketplace and delivery options.

Regulation

General

Dominion is subject to regulation by the SEC, FERC, the Environmental Protection Agency (EPA), Department of Energy (DOE), the Nuclear Regulatory Commission (NRC), the Army Corps of Engineers, and other federal, state and local authorities.

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State Regulation

Electric

In Virginia, Dominion’s retail service is subject to regulation by the Virginia Commission. The Virginia Commission has approved a Virginia fuel factor of 1.613 cents per kWh in effect through December 31, 2003.

In North Carolina, retail service is subject to cost of service regulation by the North Carolina Utilities Commission (North Carolina Commission). In connection with the North Carolina Commission’s approval of the CNG acquisition, Dominion agreed not to request an increase in North Carolina retail electric base rates until 2006, except for certain events that would have a significant financial impact on Dominion’s electric utility operations. Fuel rates are still subject to change under the annual fuel cost adjustment proceedings. The North Carolina Commission has approved a fuel factor of 1.402 cents per kWh, effective January 1, 2003.

Dominion’s electric utility subsidiary holds certificates of public convenience and necessity authorizing it to construct and operate its electric facilities now in operation and to sell electricity to customers. However, it may not construct or incur financial commitments for construction of any substantial generating facilities or large capacity transmission lines without the prior approval of various state and federal government agencies.

In August 2002, the Virginia Commission adopted rules relating to competitive electric metering services and consolidated billing by competitive suppliers. Dominion must provide its Virginia electric customers with access to meter functionality and interval meter data beginning January 1, 2003 and implement consolidated billing by competitive suppliers no later than July 1, 2003.

For additional information on deregulation in the electric industry, the Virginia Restructuring Act and current rate matters, see Electric Industry in Competition and Regulated Electric Operations in Future Issues and Outlook in MD&A.

Gas

Dominion’s gas distribution business subsidiaries are subject to regulation of rates and other aspects of their businesses by the states in which they operate—Pennsylvania, Ohio and West Virginia. When necessary, Dominion’s gas distribution subsidiaries seek general rate increases on a timely basis to recover increased operating costs and to ensure that rates of return are compatible with the cost of raising capital. In addition to general rate increases, certain of Dominion’s gas distribution subsidiaries make routine separate filings with their respective state regulatory commissions to reflect changes in the costs of purchased gas. These purchased gas costs are recovered through a mechanism that ensures dollar for dollar recovery of prudently incurred costs. Costs that are expected to be recovered in future rates are deferred as regulatory assets.

Ohio—In February 2002, Dominion filed a report with the Ohio Commission that addressed the results of a payment matching program approved by the Ohio Commission in 2001 and deferral of certain residential customer receivables in excess of the amount already recovered in rates. The report requires no action by the Ohio Commission. Recovery of the deferred amount will be requested in Dominion’s next rate case. Dominion believes that it will recover those amounts deferred.

In November 2002, Dominion filed comments to the Ohio Commission’s request for information needed to ensure that Ohio public utilities are not impacted by adverse financial consequences of parent or affiliate company unregulated operations. Dominion informed the Ohio Commission that its affiliate and parent company transactions are governed by the rules of the 1935 Act. The Ohio Commission has not acted on the comments filed or given any indication as to how it will proceed at this time.

In December 2002, the Ohio Commission conditionally approved an earlier application by Dominion to implement a four-month gas cost recovery (GCR) rate. The Ohio Commission approved the adjustment components of the GCR and directed Dominion to leave the expected gas cost portion of the GCR at the previous level for one more month before filing for a new three-month rate.

In January 2003, the Ohio Commission approved the settlement of Dominion’s 2001 GCR financial and management performance audit. The settlement contained no disallowances and provided for a review of the corporate gas supply group expense recovery through the GCR and an internal audit of gas procurement processes and affiliate company gas purchase transactions.

Pennsylvania—The Pennsylvania Public Utility Commission (Pennsylvania Commission) accepted a settlement filed by Dominion and other parties to Dominion’s gas cost recovery proceeding in September 2002. As part of the settlement, the parties agreed that Dominion was following a least cost procurement policy and, as a result, no disallowances occurred.

West Virginia— In 2001, the West Virginia Commission approved a settlement between Dominion and certain third parties, regarding the costs of gas supplies and increased operating costs. The settlement stipulated that Dominion would receive a $9.5 million increase in gas and non-gas

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revenues and provides for a two-year rate moratorium. The new rates took effect on January 1, 2002 and will be in place through December 31, 2003.

For additional information on deregulation in the gas industry and current rate matters, see Gas Industry in Competition and Regulated Gas Distribution Operations in Future Issues and Outlook in MD&A.

Public Utility Holding Company Act of 1935  

Dominion is a registered holding company under the 1935 Act. The 1935 Act and related regulations issued by the SEC govern activities of Dominion and its subsidiaries with respect to the issuance and acquisition of securities, acquisition and sale of utility assets, certain transactions among affiliates, engaging in business activities not directly related to the utility or energy business and other matters. Over the past few years, several bills have been introduced in Congress to repeal the 1935 Act, and repeal provisions are currently again pending before Congress.

Federal Energy Regulatory Commission

Electric

Under the Federal Power Act, FERC regulates wholesale sales of electricity and transmission of electricity in interstate commerce by public utilities. Dominion’s electric utility subsidiary sells electricity in the wholesale market under its market-based sales tariff authorized by FERC but has agreed not to make wholesale power sales under this tariff to loads located within its service territory. For additional discussion on this matter, see Regulated Electric Operations—Wholesale Competition in Future Issues and Outlook in MD&A.

The Virginia Restructuring Act requires that Dominion join a RTO, and FERC encourages RTO formation as a means to foster wholesale market formation. FERC Order No. 2000 requires each public utility that owns or operates transmission facilities to make certain filings with respect to RTO formation, but will rely on voluntary formation of RTOs to advance its energy policies. By joining a RTO, Dominion would transfer operational control of its transmission assets to a RTO, a third party.

In September 2002, Dominion and PJM Interconnection, LLC (PJM) entered into the PJM South Implementation Agreement. The agreement provides that, subject to regulatory approval and certain provisions, Dominion will become a member of PJM, transfer functional control of its electric transmission facilities to PJM for inclusion in a new PJM South Region, integrate its control area into the PJM energy markets and otherwise facilitate the establishment and operation of PJM as the RTO with respect to Dominion’s transmission facilities. The agreement also contemplates additional agreements and transmission tariff provisions to be negotiated by the parties and allocates costs of implementation of the agreement among the parties.

Dominion intends to file for FERC approval to join PJM in the future. Dominion will also seek authorization from the Virginia Commission and the North Carolina Commission to become a member of PJM at that time. Dominion will incur integration and operating costs associated with joining a RTO. Dominion has deferred certain of those costs for future recovery and is giving further consideration to seeking regulatory approval to defer the balance of such costs.

Legislation that would delay entry into a RTO until on or after July 1, 2004 was approved by the Virginia General Assembly in February 2003 and is now awaiting action by the Governor. The proposed legislation also would require Dominion to file an application with the Virginia Commission by July 1, 2003 to join a RTO. Subject to Virginia Commission approval, Dominion would be required to transfer management and control of its transmission assets to a RTO by January 1, 2005.

For additional discussion on this matter, see RTO in Future Issues and Outlook in MD&A.

Gas

FERC regulates the transportation and sale for resale of natural gas in interstate commerce under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978, as amended. FERC also has jurisdiction over the construction of pipeline and related facilities used in transportation and storage of natural gas in interstate commerce.

Dominion’s interstate gas transportation and storage activities are conducted in accordance with certificates, tariffs and service agreements on file with FERC. Dominion is also subject to the Natural Gas Pipeline Safety Act of 1968, which authorizes the establishment and enforcement of federal pipeline safety standards and places jurisdiction of these standards with the Department of Transportation.

Competition in the natural gas industry was increased by FERC Order 636, which was issued in 1992. FERC Order 636 requires transmission pipelines to operate as open-access transporters and provide transportation and storage services on an equal basis for all gas supplies, whether purchased from Dominion or from another gas supplier.

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In the spring of 2003, FERC expects to issue new rules governing standards of conduct between interstate electric transmission, gas transporation and storage providers and their energy related affiliates. One goal of FERC is to eliminate the separate standards of conduct regulations for natural gas pipelines and electric transmission utilities and replace these requirements with uniform standards applicable to interstate “Transmission Providers” of both natural gas and electricity. For additional discussion on this matter, see Interstate Gas Transmission Operations in Future Issues and Outlook in MD&A.

Environmental Matters

Each operating segment faces substantial regulation and compliance costs with respect to environmental matters. For discussion of significant aspects of these matters, including current and planned capital expenditures relating to environmental compliance, see Environmental Matters in Future Issues and Outlook in MD&A. Additional information can also be found in Item 3. Legal Proceedings and Note 27 to the Consolidated Financial Statements.

From time to time Dominion may be identified as a potentially responsible party to a Superfund site. The EPA (or a state) can either (a) allow such a party to conduct and pay for a remedial investigation, feasibility study and remedial action or (b) conduct the remedial investigation and action and then seek reimbursement from the parties. Each party can be held jointly, severally and strictly liable for all costs. These parties can also bring contribution actions against each other and seek reimbursement from their insurance companies. As a result, Dominion may be responsible for the costs of remedial investigation and actions under the Superfund Act or other laws or regulations regarding the remediation of waste. Dominion does not believe that any currently identified sites will result in significant liabilities.

Dominion has determined that it is associated with 20 former manufactured gas plant sites. Studies conducted by other utilities at their former manufactured gas plants have indicated that their sites contain coal tar and other potentially harmful materials. None of the 20 former sites with which Dominion is associated is under investigation by any state or federal environmental agency, and no investigation or action is currently anticipated. At this time, it is not known to what degree these sites may contain environmental contamination. Dominion is not able to estimate the cost, if any, that may be required for the possible remediation of these sites.

The EPA amended its oil pollution prevention regulations in July 2002. The total projected cost of compliance with the new regulations is estimated to range from $21 to $40 million, representing primarily capital expenditures.

The EPA is also considering issuing new regulations that govern existing utilities that employ a cooling water intake structure, and whose flow levels exceed a minimum threshold. As currently written, EPA’s proposed rule presents several control options under consideration for the final rule. Dominion is evaluating facility information from certain of its power stations. Given the uncertainties of future action by EPA on this issue, the Dominion cannot predict the future impact on its operations at this time.

Dominion has applied for or obtained the necessary environmental permits material to the operation of its electric generating stations. Many of these permits are subject to re-issuance and continuing review.

As part of its reissuance of a pollution discharge permit for the Millstone Power Station, the Connecticut Department of Environmental Protection will evaluate the ecological impacts of the cooling water intake system. Until the permit is reissued, it is not possible to predict the financial impact, if any, that may result.

Nuclear Regulatory Commission

All aspects of the operation and maintenance of Dominion’s nuclear power stations, which are part of the Dominion Energy segment, are regulated by the NRC. Operating licenses issued by the NRC are subject to revocation, suspension or modification, and operation of a nuclear unit may be suspended if the NRC determines that the public interest, health or safety so requires.

Dominion filed applications for 20 year life-extension for the North Anna and Surry units in May 2001. The NRC has completed its review of the applications and Dominion expects to receive a renewed license for these units in 2003. Dominion also expects to file a similar request for the Millstone units in 2004. For more information on this matter, see Note 16 to the Consolidated Financial Statements.

From time to time, the NRC adopts new requirements for the operation and maintenance of nuclear facilities. In many cases, these new regulations require changes in the design, operation and maintenance of existing nuclear facilities. If the NRC adopts such requirements in the future, it could result in substantial increases in the cost of operating and maintaining Dominion’s nuclear generating units.

The NRC also requires Dominion to decontaminate nuclear facilities once operations cease. This process is referred to as decommissioning, and Dominion is required by the NRC to prepare for it financially. For information on compliance with the NRC financial assurance requirements, see Note 16 to Consolidated Financial Statements.

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Disposal of spent nuclear fuel is a significant issue associated with the operation and decommissioning of nuclear facilities. The Nuclear Waste Policy Act (NWPA) of 1982 required a permanent, federal repository for high-level radioactive waste and spent nuclear fuel to be made available by January 31, 1998. In February 2002, the Secretary of Energy recommended that Yucca Mountain located in the state of Nevada be developed as the permanent repository. Final congressional approval was received in July 2002. The DOE is currently in the process of seeking approval of a NRC license to begin construction of the repository.

Dominion and other utilities have petitioned the U.S. Court of Appeals for the 11th Circuit to review a matter involving DOE and PECO Energy Company (PECO). The petitioners challenged the DOE’s action that allowed PECO to take credits against payments PECO would have been making into the Nuclear Waste Fund (NWF). The credits are part of the DOE’s settlement of PECO’s claim regarding the DOE’s failure to provide a permanent repository for spent nuclear fuel as required by the NWPA. The petition stated that the credits violated the NWPA by depleting the NWF and releasing PECO from a portion of its NWF obligation. The petition also sought an injunction of the DOE’s settlement agreement with PECO and an injunction against DOE entering into similar agreements. In September 2002, the court issued its decision on the matter declaring the fee adjustment aspect of the settlement between PECO and DOE “null and void.” The decision does not prevent DOE from settling claims related to its breach of its contractual obligation to begin disposing of spent nuclear fuel, but precludes DOE from using the NWF to compensate utilities for damages incurred by utilities owing to DOE’s breach of its NWF obligation to dispose of spent nuclear fuel.

Interconnections

Dominion maintains major interconnections with Progress Energy, American Electric Power Company, Inc., PJM-West and PJM. Through this major transmission network, Dominion has arrangements with these entities for coordinated planning, operation, emergency assistance and exchanges of capacity and energy. See also RTO in Future Issues and Outlook in MD&A.

Sources of Energy

Sources of Energy—Electricity

Dominion Energy provides electricity for use on a wholesale and a retail level. Dominion Energy can supply electricity demand either from its generation facilities in Connecticut, Indiana, Illinois, North Carolina, Ohio, Pennsylvania, Virginia and West Virginia or through purchased power contracts when needed. The following table lists Dominion’s generating units and capability.

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Dominion’s Power Generation

Note: (CT) denotes combustion turbine and (CC) denotes combined cycle

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Power Purchase Contracts

Dominion Energy purchases electricity under contracts with other suppliers to meet a portion of its system capacity requirements. As of December 31, 2002, Dominion has 42 power purchase contracts with a combined dependable summer capacity of 3,758 Mw. For information on the financial obligations under these agreements, see Note 27 to the Consolidated Financial Statements.

Fuel for Electric Generation

Dominion uses a variety of fuels to power its electric generation. These include a mix of both nuclear fuel and fossil fuel as described further below.

Nuclear Fuel Supply

Dominion utilizes both long-term contracts and short-term purchases to support its nuclear fuel requirements. Worldwide market conditions are continuously evaluated to ensure a range of supply options at reasonable prices. Current agreements, inventories and spot market availability are expected to support current and planned fuel supply needs. Additional fuel is purchased as required to ensure optimum cost and inventory levels.

Fossil Fuel Supply

Dominion utilizes coal, oil and natural gas in its fossil fuel operations. Dominion Energy’s coal supply is obtained through long-term contracts and spot purchases. Oil and oil-fired generation are used primarily to support heavier system generation loads during very cold or very hot weather periods. System requirements are purchased mainly under short-term spot agreements.

Dominion uses natural gas as needed throughout the year for Dominion’s jurisdictional and non-jurisdictional generation facilities. Dominion’s gas supply is obtained from various sources including: purchases from major and independent producers in the Southwest and Midwest regions; purchases from local producers in the Appalachian area; purchases from gas marketers; and withdrawals from Dominion’s and third party underground storage fields.

Firm natural gas transportation contracts (capacity) exist that allow delivery of gas to our facilities. Dominion’s capacity portfolio allows flexible natural gas deliveries to its gas turbine fleet, while minimizing costs.

Gas Supply

Dominion is engaged in the sale and storage of natural gas through its operating subsidiaries. Sources of gas supplies for sale to customers are the same as those described in Fossil Fuel Supply above.

Dominion continues to purchase volumes from the array of accessible producing basins using its firm capacity resources. These purchased supplies include Appalachian resources in Ohio, Pennsylvania and West Virginia and production from the Gulf Coast, Mid-Continent and offshore areas. Upon FERC’s restructuring of the interstate pipeline business in 1992 and 1993, pipelines no longer sell the delivered natural gas commodity; rather, customers provide their own gas supply for wholesale storage and/or delivery by the pipelines. Much of the supply is purchased by local distributors, energy marketing companies or end-users under seasonal or spot purchase agreements.

Gas Storage—Transmission

Dominion’s underground storage facilities play an important part in balancing gas supply with sales demand and are essential to servicing the Mid-Atlantic and Northeast’s large volume of space-heating business. In addition, storage capacity is an important element in the effective management of both gas supply and pipeline transport capacity. Dominion operates 26 underground gas storage fields located in Ohio, Pennsylvania, West Virginia and New York. Dominion owns 20 of these storage fields and has joint-ownership with other companies in six of the fields. The total designed capacity of the storage fields is approximately 960 billion cubic feet (bcf). Dominion’s share of the total capacity is about 717 bcf. About one-half of the total capacity is base gas which remains in the reservoirs at all times to provide the primary pressure which enables the balance of the gas to be withdrawn as needed.

Gas Production

Dominion Exploration & Production owns 6.1 trillion cubic feet of proved equivalent natural gas reserves and produced almost 1.1 billion cubic feet of natural gas per day and 27 thousand barrels of oil per day in 2002.

Dominion Exploration & Production utilizes production handling and firm transportation contracts to support delivery of its gas and oil in certain market areas. Additional information about these commitments can also be found in Note 27 to the Consolidated Financial Statements.

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Item 2.    Properties

Dominion leases its principal executive office in Richmond, Virginia as well as corporate offices in other cities in which its subsidiaries operate. It also owns another corporate office in Richmond.

Dominion’s assets consist primarily of its investments in its subsidiaries, the principal properties of which are described below.

Substantially all of Dominion’s electric subsidiary’s property is subject to the lien of the mortgage securing its First and Refunding Mortgage Bonds and certain of its nonutility generation facilities are subject to liens.

Dominion Energy utilizes the electric generation facilities listed under the heading Sources of Energy—Dominion’s Power Generation in Item 1. Business.

Dominion’s storage operation consists of 26 storage fields, approximately 373,000 acres of operated leaseholds and 2,000 storage wells. Dominion Energy has approximately 7,900 miles of gas transmission, gathering and storage piplines.

The map below illustrates Dominion’s gas transmission pipelines, storage facilities and electric transmission lines.

Dominion Energy also has more than 100 compressor stations with approximately 577,000 installed compressor horsepower located in Ohio, West Virginia, Pennsylvania and New York. Some of the stations are used interchangeably for several functions.

Dominion Delivery has approximately 6,000 miles of electric transmission lines. Portions of Dominion Delivery’s transmission lines cross national parks and forests under permits entitling the federal government to use, at specified charges, surplus capacity in the line, if any exists.

Dominion Delivery’s right-of-way grants from the apparent owners of real estate have been obtained for most electric lines, but underlying titles have not been examined except for transmission lines of 69 Kv or more. Where rights-of-way have not been obtained, they could be acquired from private owners by condemnation, if necessary. Many electric lines are on publicly owned property, where permission to operate can be revoked.

Dominion Delivery’s investment in its gas distribution network is located in the states of Ohio, Pennsylvania and West Virginia. The gas distribution network includes approximately 27,000 miles of pipe, exclusive of service pipe.

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Dominion Exploration & Production owns 6.1 trillion cubic feet of proved equivalent natural gas reserves and produces approximately 1.2 billion cubic feet of equivalent natural gas per day from its leasehold acreage and facility investments. Dominion, either alone or with partners, holds interests in natural gas and oil lease acreage, wellbores, well facilities, production platforms and gathering systems. Dominion also owns or holds rights to seismic data and other tools used in exploration and development drilling activities. Dominion’s share of developed leasehold totals 3.1 million acres, with another 2.4 million acres held for future exploration and development drilling opportunities.

Information detailing Dominion’s gas and oil operations presented on the following pages includes the activities of the Dominion Exploration & Production segment and the production activity of Dominion Transmission, Inc., which is included in the Dominion Energy segment:

Company-Owned Proved Gas and Oil Reserves

Estimated net quantities of proved gas and oil reserves at December 31 of each of the last three years were as follows:

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Certain subsidiaries of Dominion file Form EIA-23 with the DOE, which reports gross proved reserves, including the working interests share of other owners, for properties operated by such Dominion subsidiaries. The proved reserves reported in the table above represent Dominion’s share of proved reserves for all properties, based on Dominion’s ownership interest in each property. For properties operated by Dominion, the difference between the proved reserves reported on Form EIA-23 and the Company-owned proved reserves, reported in the table above, does not exceed five percent. Estimated proved reserves as of December 31, 2002 are based upon studies for each Dominion property prepared by Dominion’s staff engineers and reviewed by either Ralph E. Davis Associates, Inc. or Ryder Scott Company, L.P. Calculations were prepared using standard geological and engineering methods generally accepted by the petroleum industry and in accordance with SEC guidelines.

Quantities of Gas and Oil Produced

Quantities of gas and oil produced* during each of the last three years ending December 31 follow:

The average sales price per thousand cubic feet (mcf) of gas with hedging results (including transfers to other Dominion operations at market prices) realized during the years 2002, 2001 and 2000 was $3.41, $3.83 and $3.12, respectively. The respective average prices without hedging results per mcf of gas produced were $3.04, $3.92 and $3.72. The respective average sales prices realized for oil with hedging results were $23.29, $23.42 and $26.63 per barrel and the respective average price without hedging results were $24.45, $23.53 and $28.35 per barrel. The average production (lifting) cost per mcf equivalent of gas and oil produced (as calculated per SEC guidelines) during the years 2002, 2001 and 2000 was $0.60, $0.65 and $0.49 respectively.

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Net Wells Drilled in the Calendar Year

The number of net wells completed during each of the last three years ending December 31 follows:

As of December 31, 2002, 68 gross (52 net) wells were in process of drilling, including wells temporarily suspended.

Acreage

Gross and net developed and undeveloped acreage at December 31, 2002 was:

Productive Wells

The number of productive gas and oil wells in which Dominion’s subsidiaries had an interest at December 31, 2002, follow:

The number of productive wells includes 197 gross (73 net) multiple completion gas wells and 10 gross (4 net) multiple completion oil wells.

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From time to time, Dominion and its subsidiaries are alleged to be in violation or in default under orders, statutes, rules or regulations relating to the environment, compliance plans or permits issued by various local, state and federal agencies for the construction or operation of facilities. From time to time, there may be administrative proceedings on these matters pending. In addition, in the ordinary course of business, Dominion and its subsidiaries are involved in various legal proceedings. Management believes that the ultimate resolution of these proceedings will not have a material adverse effect on Dominion’s financial position, liquidity or results of operations.

See Regulation in Item 1. Business, Rate Matters in Future Issues and Outlook in MD&A and Note 27 to the Consolidated Financial Statements for additional information on rate matters and various regulatory proceedings to which Dominion is a party.

Before being acquired by Dominion, Louis Dreyfus and two predecessor companies were named as defendants in several lawsuits originally filed in 1995 that were subsequently consolidated. The consolidated lawsuit is now pending in the Texas 93rd Judicial District Court in Hildago County, Texas.  The lawsuit alleges that gas wells and related pipeline facilities operated by Louis Dreyfus, and other facilities operated by other defendants, caused an underground hydrocarbon plume in McAllen, Texas. The plaintiffs claim that they have suffered damages, including property damage and lost profits, as a result of the plume and seek compensation for these items.

In July 1997, Jack Grynberg, an oil and gas entrepreneur, brought suit against CNG and several of its subsidiaries. The suit seeks damages for alleged fraudulent mismeasurement of gas volumes and underreporting of gas royalties from gas production taken from federal leases. In 2002, the valuation portion of the claim was dismissed. The plaintiff has filed an appeal.

In April 1998, Harrold E. (Gene) Wright, an oil and gas entrepreneur, brought suit against CNG Producing Company, a subsidiary of CNG, alleging various fraudulent valuation practices in the payment of royalties on federal leases. Shortly after filing, this case was consolidated under the Federal Multidistrict Litigation rules with the Grynberg case noted above. A substantial portion of the claim against CNG Producing Company was resolved by settlement in late 2002; however, the suit remains consolidated with the Grynberg case.

In 1999, a class action was filed by Quinque Operating Co. and other parties against approximately 300 defendants, including CNG and several of its subsidiaries, in Stevens County, Kansas. The complaint seeks damages for alleged fraud, misrepresentation, conversion and assorted other claims, in the measurement and payment of gas royalties from privately held gas leases. The plaintiffs will seek class certification and expedited discovery in Kansas. The defendants have filed motions to dismiss the case. A motion in opposition to class certification was argued in January 2003.

During 2000, Virginia Power received a Notice of Violation from the EPA, alleging that Virginia Power failed to obtain New Source Review permits under the Clean Air Act prior to undertaking specified construction projects at the Mt. Storm Power Station in West Virginia. The Attorney General of New York filed a suit against Virginia Power alleging similar violations of the Clean Air Act at the Mt. Storm Power Station. Virginia Power also received notices from the Attorneys General of Connecticut and New Jersey of their intentions to file suit for similar violations. In December 2002, the Attorney General of Connecticut filed a motion to intervene as a plaintiff in the action filed by the New York State Attorney General. This action has been stayed. Management believes that Virginia Power has obtained the necessary permits for its generating facilities. Virginia Power has reached an agreement in principle with the federal government and the state of New York to resolve this situation. The agreement in principle includes payment of a $5 million civil penalty, a commitment of $14 million for environmental projects in Virginia, West Virginia, Connecticut, New Jersey and New York, and a 12-year, $1.2 billion capital investment program for environmental improvements at Virginia Power’s coal- fired generating stations in Virginia and West Virginia. Virginia Power had already committed to a substantial portion of the $1.2 billion expenditures for sulfur dioxide and nitrogen oxide emissions controls. The negotiations over the terms of a binding settlement have expanded beyond the basic agreement in principle and are ongoing. As of December 31, 2002, Virginia Power has recorded, on a discounted basis, $18 million for the civil penalty and environmental projects.

In June 2002, Wiley Fisher, Jr. and John Fisher filed a purported class action lawsuit against Virginia Power and Dominion Telecom, Inc. (Dominion Telecom) in the U.S. District Court in Richmond, Virginia. The plaintiffs claim that Virginia Power and Dominion Telecom 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.

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The named plaintiffs purport to “represent a class . . . consisting of all owners of land in North Carolina and Virginia, other than public streets or highways, that underlies Virginia Power’s electric transmission lines and on or in which fiber optic cable has been installed.” The named plaintiffs have asked that the court allow the lawsuit to proceed as a class action. Discovery has begun and the court has granted a motion to add additional plaintiffs, Harmon T. Tomlinson, Jr. and Linda D. Tomlinson. The outcome of the proceeding, including an estimate as to any potential loss, cannot be predicted at this time.

None.

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Executive Officers of the Registrant

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Any service listed for Virginia Electric and Power Company, Consolidated Natural Gas Company, Dominion Energy, Inc. and Optacor Financial Services Company reflects service at a subsidiary of Dominion.

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Part II

Dominion’s common stock is listed on the New York Stock Exchange. At December 31, 2002, there were approximately 188,000 registered shareholders, including approximately 88,000 certificate holders. The quarterly information concerning stock prices and dividends is incorporated by reference from Note 34 to the Consolidated Financial Statements.

During 2002, Dominion issued 483 shares of common stock to two former employees as a deferred payment under a 1985 performance achievement plan. These shares were not registered under the Securities Act of 1933 (Securities Act). The issuance of this stock did not involve a public offering, and is therefore exempt from registration under the Securities Act.

Introduction

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

Risk Factors and Cautionary Statements That May Affect Future Results

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

Dominion makes forward-looking statements with full knowledge that risks and uncertainties exist that may cause actual results to be materially different from predicted results. Factors that could cause actual results to differ are often presented with the forward-looking statements themselves. In addition, other factors could cause actual results to differ materially from those indicated in any forward-looking statement. These factors include weather conditions; fluctuations in energy-related commodities prices and the effect these could have on Dominion’s earnings, liquidity position and the underlying value of its assets; trading counterparty credit risk; capital market conditions, including price risk due to marketable securities held as investments in trusts and benefit plans; fluctuations in interest rates; changes in rating agency requirements or ratings; changes in accounting standards; the risks of operating businesses in regulated industries that are becoming deregulated; the transfer of control over electric transmission facilities to a regional transmission organization; completing the divestiture of Dominion Capital, Inc. (DCI) and CNG International Corporation; collective bargaining agreements and labor negotiations; and political and economic conditions (including inflation rates). Some more specific risks are discussed below.

Dominion bases its forward-looking statements on management’s beliefs and assumptions using information available at the time the statements are made. Dominion

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

Dominion’s operations are weather sensitive. Dominion’s results of operations can be affected by changes in the weather. Weather conditions directly influence the demand for electricity and natural gas and affect the price of energy commodities. In addition, severe weather, including hurricanes, winter storms and droughts, can be destructive, causing outages, production delays and property damage that requires Dominion to incur additional expenses.

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

Costs of environmental compliance, liabilities and litigation could exceed Dominion’s estimates. Compliance with federal, state and local environmental laws and regulations may result in increased capital, operating and other costs, including remediation and containment and monitoring obligations. In addition, Dominion may be a responsible party for environmental clean up at a site identified by a regulatory body. Management cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean-up costs and compliance, and the possibility that changes will be made to the current environmental laws and regulations. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties.

Capped electric rates in Virginia may be insufficient to allow full recovery of stranded and other costs.    Under the Virginia Electric Utility Restructuring Act, Dominion’s electric base rates (excluding fuel costs and certain other allowable adjustments) remain unchanged until July 2007 unless modified or terminated consistent with that Act. The capped rates and wires charges that, where applicable, are being assessed to customers opting for alternative suppliers allow Dominion to recover certain generation-related costs; however, Dominion remains exposed to numerous risks of cost-recovery shortfalls.

These include exposure to potentially stranded costs, future environmental compliance requirements, changes in tax laws, inflation and increased capital costs. See Future Issues and Outlook-Regulated Electric Operations and Note 27 to the Consolidated Financial Statements.

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

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

The use of derivative instruments could result in financial losses.    Dominion uses derivative instruments including futures, forwards, options and swaps, to manage its commodity and financial market risks. In addition, Dominion purchases and sells commodity-based contracts in the natural gas, electricity and oil markets for trading purposes. In the future, Dominion could recognize financial losses on these contracts as a result of volatility in the market values of the underlying commodities or if a counterparty fails to perform under a contract. In the absence of actively quoted market prices and pricing information from external sources, the

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Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

valuation of these financial instruments involves management’s judgment or use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the value of the reported fair value of these contracts. For additional information concerning derivatives and commodity-based trading contracts, see Market Rate Sensitive Instruments and Risk Management and Notes 2 and 15 to the Consolidated Financial Statements.

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

The success of Dominion’s telecommunications business strategy is dependent upon market conditions.    The current strategy of Dominion’s joint venture in the telecommunications business is based upon its ability to deliver lit capacity, dark fiber and colocation services to its customers. The market for these services, like the telecommunications industry in general, is rapidly changing, and Dominion cannot be certain that anticipated growth in demand for these services will occur. If the market for these services continues to fail to grow as quickly as anticipated or becomes saturated with competitors, including competitors using alternative technologies such as wireless, Dominion’s equity and debt investments in the telecommunications business, as well as the results from such investments, may continue to be adversely affected. Additionally, the current market values of assets in the telecommunications industry have been subject to depressed market conditions. If these conditions continue, Dominion may have to contribute cash to satisfy operating requirements and the underlying value of Dominion’s telecommunications investments could be affected adversely which, under certain circumstances, could require a write-down of the value of such investments.

Dominion’s exploration and production business is dependent on factors including commodity prices that cannot be predicted or controlled.    Dominion’s exploration and production business is subject to numerous risks beyond its control. These factors include fluctuations in natural gas and crude oil prices, results of future drilling and well completion activities, Dominion’s ability to acquire additional land positions in competitive lease areas, and operational risks that are inherent in the exploration and production business and could result in disruption of production. In addition, in connection with the use of financial derivatives to hedge future sales of gas and oil production, Dominion’s liquidity may sometimes be affected by margin requirements. Under these requirements, Dominion must deposit funds with counterparties to cover the fair value of covered contracts in excess of agreed-upon credit limits. Some of these factors could have compounding effects that could also affect Dominion’s financial results. Also, because Dominion follows the full cost method of accounting for gas and oil exploration and production activities prescribed by the Securities and Exchange Commission (SEC), short-term market declines in the prices of natural gas and oil could adversely affect its financial results. Under the full cost method, all direct costs of property acquisition, exploration and development activities are capitalized. The principal limitation is that these capitalized amounts may not exceed the present value of estimated future net revenues based on hedge-adjusted period-end prices from the production of proved gas and oil reserves (the ceiling test). If net capitalized costs exceed the ceiling test, in a given country, at the end of any quarterly period, then a permanent write-down of the assets must be recognized in that period.

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

Changing rating agency requirements could negatively affect Dominion’s growth and business strategy.    As of March 1, 2003, Dominion’s senior unsecured debt is rated BBB+, stable outlook, by Standard & Poor’s Rating Group, a division of the McGraw-Hill Companies, Inc. (Standard & Poor’s) and Baa1, negative outlook, by Moody’s Investor Service (Moody’s). Both agencies have recently implemented more stringent applications of the financial requirements for various ratings levels. In order to maintain its current credit

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ratings in light of these or future new requirements, Dominion may find it necessary to take steps or change its business plans in ways that may adversely affect its growth and earnings per share. A reduction in Dominion’s credit ratings by either Standard & Poor’s or Moody’s could increase its borrowing costs and adversely affect operating results.

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

Operating Segments

In general, management’s discussion of Dominion’s results of operations focuses on the contributions of its operating segments. However, the discussion of Dominion’s financial condition under Liquidity and Capital Resources is based on legal entities as Dominion transacts business in the financial markets on that basis. Dominion’s three primary operating segments are:

Dominion Energy manages Dominion’s generation portfolio, consisting primarily of generating units and power purchase agreements. It also manages Dominion’s energy trading and marketing, hedging and arbitrage activities; and gas pipeline and certain gas production and storage operations. Dominion Energy’s operating results largely reflect: the impact of weather on demand for electricity; customer growth as influenced by overall economic conditions and acquisitions; and changes in prices of commodities, primarily electricity and natural gas, that the segment actively markets and trades, uses for hedging purposes, and consumes in generation activities. Effective January 1, 2003, Dominion’s electric transmission operations became a part of Dominion Energy.

Dominion Delivery manages Dominion’s electric and gas distribution systems, as well as customer service and electric transmission functions. Dominion Delivery’s operating results reflect the impact of weather on demand for electricity and natural gas and customer growth as influenced by overall economic conditions. Dominion Delivery’s electric and gas businesses are subject to cost-of-service rate regulation; changes in prices of commodities consumed or delivered are generally recoverable in rates charged to customers. However, certain rates may be subject to price caps, limiting recovery of higher costs in certain circumstances. Dominion Delivery also includes Dominion’s interest in Dominion Fiber Ventures LLC (DFV), a telecommunications joint venture. See Note 30 for a discussion of Dominion’s consolidation of DFV beginning in February 2003. Effective January 1, 2003, Dominion’s electric transmission operations became a part of the Dominion Energy operating segment.

Dominion Exploration & Production manages Dominion’s onshore and offshore gas and oil exploration, development and production operations. They are located in several major producing basins in the lower 48 states, including the outer continental shelf and deep-water areas of the Gulf of Mexico, and Western Canada. Dominion Exploration & Production’s operating results reflect successful discovery of and production from natural gas and oil reserves, as well as changes in prices of natural gas and oil. Dominion Exploration & Production’s commodity risk is managed by the Dominion Energy Clearinghouse (the Clearinghouse) by using derivative instruments, such as forwards, swaps, and options.

In addition, Dominion also presents its corporate functions, financial services and other operations as an operating segment.

For more information on Dominion’s segments, see Note 32 to the Consolidated Financial Statements.

Critical Accounting Policies

Dominion has identified the following accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved, could result in material changes to its financial condition or results of operations under different conditions or using different assumptions.

Accounting for risk management and energy trading contracts at fair value—Dominion uses derivative instruments to manage its commodity and financial market risks. In addition, Dominion purchases and sells commodity-based contracts in the natural gas, electricity and oil markets for trading purposes. Accounting requirements for derivatives and hedging activities are complex; interpretation of these requirements by standard-setting bodies is ongoing. All derivatives, other than specific exceptions, are reported on the Consolidated Balance Sheets at fair value, beginning in 2001. Energy trading contracts are also reported on the Consolidated Balance Sheets at fair value. Changes in fair value, except those related to derivative instruments designated as cash flow hedges, are generally included in the determination of Dominion’s net income at each financial reporting date until the contracts are ultimately settled. The measurement of fair value is based on actively quoted market prices, if available. In their absence, Dominion seeks indicative price information from external sources, including broker quotes and industry publications. If pricing information from external sources is

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Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

not available, measurement involves judgment and estimates. These estimates are based on valuation methodologies deemed appropriate by Dominion management. For individual contracts, the use of different assumptions could have a material effect on the contract’s estimated fair value. In addition, for hedges of forecasted transactions, Dominion must estimate the expected future cash flows of the forecasted transactions, as well as evaluate the probability of occurrence and timing of such transactions. Changes in conditions or the occurrence of unforeseen events could affect the timing of recognition of changes in fair value of certain hedging derivatives. See Selected Information—Energy Trading Activities and Market Rate Sensitive Instruments and Risk Management in MD&A and Notes 2, 4 and 15 to the Consolidated Financial Statements.

Accounting for gas and oil operations—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, all direct costs of property acquisition, exploration and development activities are capitalized and subsequently depreciated using a unit-of-production method. The depreciable base of costs includes estimated future costs to be incurred in developing proved gas and oil reserves, as well as dismantlement and abandonment costs, net of projected salvage values. The calculations under this accounting method are dependent on engineering estimates of proved reserve quantities and estimates of the amount and timing of future expenditures to develop the proved reserves. Proved reserves, and the cash flows related to these reserves, are estimated based on a combination of historical data and estimates of future activity. Actual reserve quantities and development expenditures may differ from the forecasted amounts. In addition, Dominion has significant investments in unproved properties, which are initially excluded from the depreciable base. Until the properties are evaluated, a ratable portion of the capitalized costs is periodically reclassified to the depreciable base, determined on a property-by-property basis, over terms of underlying leases. Once a property has been evaluated, any remaining capitalized costs are then transferred to the depreciable base. Capitalized costs in the depreciable base are subject to a ceiling test prescribed by the SEC. The test limits capitalized amounts to a ceiling—the present value of estimated future net revenues to be derived from the production of proved gas and oil reserves. Dominion performs the test quarterly, on a country-by-country basis, and would recognize asset impairments to the extent that total capitalized costs exceed the ceiling. Any impairment of excess gas and oil property costs over the ceiling is charged to operations. Given the volatility of natural gas and oil prices, it is possible that Dominion’s estimate of discounted future net cash flows from proved natural gas and oil reserves could change in the near term. If natural gas or oil prices decline, even if for only a short period, or if Dominion revises its estimated proved reserves downward, recognition of natural gas and oil property impairments could occur in the future. See Notes 2 and 33 to the Consolidated Financial Statements.

Use of estimates in impairment testing—Dominion is required to test at least annually its goodwill for potential impairment. As part of that test, Dominion is required to determine the fair value of its reporting units. Dominion produces this estimate by using discounted cash flow analyses and other valuation techniques based on multiples of earnings for peer group companies, as well as analyses of recent business combinations involving peer group companies. These calculations are dependent on many subjective factors, including the selection of appropriate discount and growth rates, the selection of peer group companies and recent transactions and management’s estimate of future cash flows. The cash flow estimates used by Dominion are based on the best information available at the time the estimates are made. However, estimates of future cash flows are highly uncertain by nature and may vary significantly from actual results.

Dominion performed the transitional impairment test upon adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002 and its annual test later in the year. The fair value of each of Dominion’s reporting units exceeded the related carrying amounts, resulting in no impairment. The underlying assumptions and estimates involved in preparing these fair value calculations could change significantly from period to period. If Dominion’s estimates of the fair value of its reporting units are substantially reduced, impairment may be indicated and Dominion would be required to perform the second step of the goodwill impairment test. That step measures the amount of impairment, if any, and requires the further use of fair value estimates. A goodwill impairment charge would result in a charge to earnings, with a corresponding reduction of the carrying amount of goodwill on the balance sheet. Dominion had $4.3 billion and $4.2 billion of goodwill at December 31, 2002 and 2001, respectively. See Notes 2 and 18 to the Consolidated Financial Statements for further discussion of goodwill impairment tests.

Impairment testing for long-lived assets and intangible assets with definite lives is required when circumstances indicate that such assets may be impaired. In performing the impairment test, Dominion would estimate the future cash flows associated with individual assets or groups of assets. Impairment results when the undiscounted estimated future cash flows are less than the related asset’s carrying amount. If

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impaired, the asset must be written down to its fair value, which is generally calculated using the present value of its expected future net cash flows, using an appropriate discount rate. Although cash flow estimates used by Dominion are based on the best information available at the time the estimates are made, estimates of future cash flows are by nature highly uncertain and may vary significantly from actual results.

Accounting for retained interests from securitizations—Securitizations involve selling loans to qualifying unconsolidated trusts in exchange for cash and retained interests. Retained interests may include unsecured debt of the trust or retained interests in the transferred loans. Dominion holds retained interests from mortgage and commercial loans securitized in prior years and classifies them as available-for-sale investments, carried on the Consolidated Balance Sheets at fair value. Quarterly, Dominion evaluates the key assumptions relating to valuing the retained interests. Those key assumptions include loan prepayment speeds, credit losses, forward yield curves and discount rates. Using a published forward yield curve, cash flows, net of adjustments for expected credit losses and loan prepayments, are discounted to determine the estimated fair value of the retained interests. Loan prepayments speeds and credit loss assumptions are based on actual historical results and future estimates. The discount rate is risk adjusted and is periodically compared to industry averages and recent or similar transactions for reasonableness. Changes in interest rates will result in a change in the forward yield curve and can result in a change in the assumed amount of loan prepayments. Changes in general economic conditions may impact actual credit losses, thus impacting the credit loss assumption used in Dominion’s quarterly evaluation. Income from the residual interests is reported as other revenue. As discussed in Note 9 to the Consolidated Financial Statements, during 2002, 2001 and 2000, Dominion made changes to these key assumptions, resulting in impairment charges for those years. See also Notes 2 and 13 to the Consolidated Financial Statements for additional discussion of securitizations and retained interests and a sensitivity analysis of key assumptions.

Accounting for regulated operations—Methods of allocating costs to accounting periods for operations subject to federal or state cost-of-service rate regulation may differ from accounting methods generally applied by nonregulated companies. When the timing of cost recovery prescribed by regulatory authorities differs from the timing of expense recognition used for accounting purposes, Dominion’s Consolidated Financial Statements may recognize a regulatory asset for expenditures that otherwise would be expensed. Regulatory assets represent probable future revenue associated with certain costs that will be recovered from customers through rates. Regulatory liabilities represent probable future reductions in revenue associated with expected customer credits through rates. Management makes assumptions regarding the probability of regulatory asset recovery through future rates approved by applicable regulatory authorities. The expectations of future recovery are generally based upon historical experience, as well as discussions with applicable regulatory authorities. If recovery of regulatory assets is determined to be less than probable, they would be expensed in the period such assessment is made. See Notes 2 and 19 to the Consolidated Financial Statements.

Results of Operations

Dominion’s discussion of its results of operations includes a tabular summary of contributions by its operating segments to net income and diluted earnings per share, an overview of 2002 and 2001 results of operations for consolidated Dominion, as well as a more detailed discussion of operating segment results of operations.

Overview of Consolidated Operating Results—2002

Dominion earned $4.82 per diluted share on net income of $1.36 billion in 2002, an increase of $818 million and $2.67 per diluted share over 2001. The increase includes higher net income contributions by all operating segments, partially offset by approximately $0.57 of share dilution, reflecting a substantial increase in the number of average common shares outstanding during 2002. In addition, Dominion recognized fewer specific charges in 2002, as described in Corporate and Other segment results below.

Regulated electric sales and non-regulated retail energy sales increased as a result of favorable weather conditions and growth in customer base. Nonregulated electric sales by Dominion’s merchant generation fleet declined primarily due to lower electricity prices, partially offset by sales from recently acquired and constructed assets. Sales of gas and oil production increased as a result of higher production levels, reflecting Dominion’s ongoing drilling programs, the operations of Louis Dreyfus Natural Gas Corp. (Louis Dreyfus), partially offset by natural production declines and by lower average realized prices for gas and oil, including the

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Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

effects of hedging. Overall, net revenue from Dominion’s energy trading operations decreased for 2002. Gas trading activities contributed less for 2002, reflecting the effects of net unfavorable price changes on unsettled contracts and lower trading margins, partially offset by higher overall trading volumes. Electric trading activities increased for 2002, reflecting favorable price changes on unsettled contracts and higher trading margins. Energy trading operations are discussed in more detail as part of the Dominion Energy segment results of operations.

In addition to the contributions by its operating segments, the discontinuance of goodwill amortization resulted in a $95 million increase in net income. During 2002, Dominion did not recognize any significant specific charges, as compared to 2001 when those charges totaled $797 million, as described in the Corporate and Other segment results. Interest and related charges decreased $52 million, reflecting lower overall interest rates on outstanding debt, partially offset by interest on new issues of debt and distributions on trust preferred securities issued in late 2001 and during 2002. Dominion’s effective income tax rate decreased, reflecting the net $33 million effect of including certain subsidiaries in Dominion’s consolidated state income tax returns. In addition, the effective tax rate decreased for foreign earnings, the discontinuance of goodwill amortization for book purposes and other factors.

Overview of Consolidated Operating Results—2001

Dominion earned $2.15 per diluted share on net income of $544 million in 2001, an increase of $108 million and $0.30 per diluted share over 2000. The increase includes higher net income contributions by all operating segments, partially offset by a higher number of specific charges in 2001 as compared to 2000, as discussed in Corporate and Other segment results below.

The increase in results for Dominion’s operating segments for 2001 reflect the operations of businesses acquired during the year. Dominion acquired Millstone Power Station (Millstone) on March 31, 2001. Its operations contributed significantly to the increase in nonregulated electric sales. Regulated gas sales, nonregulated gas sales and gas and oil production revenue increased as Consolidated Natural Gas Company’s (CNG) operations were included for all of 2001. In addition, 2001 gas and oil production results reflected the inclusion of Louis Dreyfus for two months as well as higher realized prices for gas. Dominion’s energy trading operations, recorded as nonregulated gas and electric sales, net of cost of sales, also contributed to the overall operating revenue increase.

The increase in net income contribution by the segments’ operations was partially offset by a higher-level of specific charges in 2001, as compared to 2000, as described in the discussion of the Corporate and Other segment results. Such charges for 2001 and 2000 totaled $797 million and $579 million, respectively. Interest expense and related charges decreased $27 million, reflecting lower overall interest rates on outstanding debt. Dominion’s effective income tax rate increased and its other taxes decreased in 2001 because its utility operations in Virginia became subject to state income taxes in lieu of gross receipts taxes effective January 2001. In addition, Dominion recognized higher effective rates for foreign earnings and higher pretax income in relation to non-conventional fuel tax credits realized.

Dominion Energy

Operating Results—2002

Dominion Energy contributed $2.72 per diluted share on net income of $770 million for 2002, a net income increase of $47 million and an earnings per share decrease of $0.14 over 2001. Net income for 2002 reflected lower operating revenue ($204 million), operating expenses ($229 million) and other income ($27 million). Interest expense and income taxes, which are discussed on a consolidated basis, decreased $50 million over 2001. The earnings per share decrease reflected share dilution.

Regulated electric sales revenue increased $179 million. Favorable weather conditions, reflecting increased cooling and heating degree-days, as well as customer growth, are estimated to have contributed $133 million and $41 million, respectively. Fuel rate recoveries increased approximately $65 million for 2002. These recoveries are generally offset by increases in electric fuel expense and do not materially affect income. Partially offsetting these increases was a net decrease of $60 million due to other factors not separately measurable, such as the impact of economic conditions on customer usage, as well as variations in seasonal rate premiums and discounts.

Nonregulated electric sales revenue increased $9 million. Sales revenue from Dominion’s merchant generation fleet decreased $21 million, reflecting a $201 million decline due to lower prices partially offset by sales from assets acquired and constructed in 2002 and the inclusion of Millstone operations for all of 2002. Revenue from the wholesale marketing of utility generation decreased $74 million. Due to the higher

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demand of utility service territory customers during 2002, less production from utility plant generation was available for profitable sale in the wholesale market. Revenue from retail energy sales increased $71 million, reflecting primarily customer growth over the prior year. Net revenue from Dominion’s electric trading activities increased $33 million, reflecting the effect of favorable price changes on unsettled contracts and higher trading margins.

Nonregulated gas sales revenue decreased $351 million. The decrease included a $239 million decrease in sales by Dominion’s field services and retail energy marketing operations, reflecting to a large extent declining prices. Revenue associated with gas trading operations, net of related cost of sales, decreased $112 million. The decrease included $70 million of realized and unrealized losses on the economic hedges of natural gas production by the Dominion Exploration & Production segment. As described below under Selected Information—Energy Trading Activities, sales of natural gas by the Dominion Exploration & Production segment at market prices offset these financial losses, resulting in a range of prices contemplated by Dominion’s overall risk management strategy. The remaining $42 million decrease was due to unfavorable price changes on unsettled contracts and lower overall trading margins. Those losses were partially offset by contributions from higher trading volumes in gas and oil markets.

Gas transportation and storage revenue decreased $44 million, primarily reflecting lower rates.

Electric fuel and energy purchases expense increased $94 million which included an increase of $66 million associated with Dominion’s energy marketing operations that are not subject to cost-based rate regulation and an increase of $28 million associated with utility operations. Substantially all of the increase associated with non-regulated energy marketing operations related to higher volumes purchased during the year. For utility operations, energy costs increased $66 million for purchases subject to rate recovery, partially offset by a $38 million decrease in fuel expenses associated with lower wholesale marketing of utility plant generation.

Purchased gas expense decreased $245 million associated with Dominion’s field services and retail energy marketing operations. This decrease reflected approximately $162 million associated with declining prices and $83 million associated with lower purchased volumes.

Liquids, pipeline capacity and other purchases decreased $64 million, primarily reflecting comparably lower levels of rate recoveries of certain costs of transmission operations in the current year period. The difference between actual expenses and amounts recovered in the period are deferred pending future rate adjustments.

Other operations and maintenance expense decreased $14 million, primarily reflecting an $18 million decrease in outage costs due to fewer generation unit outages in the current year.

Depreciation expense decreased $11 million, reflecting decreases in depreciation associated with changes in the estimated useful lives of certain electric generation property, partially offset by increased depreciation associated with State Line and Millstone operations.

Other income decreased $27 million, including a $14 million decrease in net realized investment gains in the Millstone decommissioning trusts. In addition, the decrease included a $12 million decline in equity income from Elwood Energy, an equity method investment, reflecting higher interest expense due to the issuance of additional debt by that company in 2002.

Operating Results—2001

Dominion Energy contributed $2.86 per diluted share on net income of $723 million for 2001, an increase of $234 million and $0.79 per diluted share over 2000 results. The increase in net income reflected a full year of CNG operations in 2001, the acquisition of Millstone and reductions in certain operating expenses.

Operating revenue increased $1.3 billion to $6.1 billion in 2001, as compared to 2000 reflecting the acquisition of Millstone and a full year of CNG operations for 2001. Regulated electric sales for 2001 reflected customer growth and comparatively higher fuel rates; however, these increases were largely offset by comparatively mild weather. Millstone operations largely contributed to the increase in non-regulated electric sales. Non-regulated gas sales and gas transportation and storage revenue increased, reflecting a full year of CNG operations and increased transportation rates. The results of Dominion’s trading and marketing operations contributed to the overall increase in operating revenue.

Operating expenses increased $810 million to $4.7 billion for 2001, as compared to 2000. Higher commodity prices contributed to increased electric fuel and energy purchases and purchased gas. In addition, purchased gas increased, reflecting CNG operations for the entirety of 2001. Depreciation increased overall due to the inclusion of Millstone. This increase was partially offset by an extension of the estimated useful lives of Dominion’s nuclear plants in connection with the expected relicensing of those plants. This change in estimate resulted in a $78 million decrease in depreciation expense. Purchased capacity decreased as Dominion terminated certain contracts in early 2001. Other operations and maintenance increased due to the inclusion of Millstone operations and scheduled outages at both nuclear and fossil plants.

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Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

Selected Information—Energy Trading Activities

As previously described, Dominion Energy manages Dominion’s energy trading, hedging and arbitrage activities through the Clearinghouse. Dominion believes these operations complement its integrated energy businesses and facilitate its risk management activities. As part of these operations, the Clearinghouse enters into contracts for purchases and sales of energy-related commodities, including natural gas, electricity and oil. Settlement of a contract may require physical delivery of the underlying commodity or, in some cases, an exchange of cash. These contracts are classified as energy trading contracts for financial accounting purposes. The contracts are included in the Consolidated Balance Sheets as components of current and non-current derivative and energy trading assets and liabilities. Gains and losses from energy trading contracts, including both realized and unrealized amounts, are reported net in the Consolidated Statements of Income as revenue.

In accordance with generally accepted accounting principles, Dominion reports energy trading contracts in its financial statements at fair value. A discussion of how Dominion determines fair value for its energy trading contracts, can be found in Critical Accounting Policies presented earlier in MD&A.

The Clearinghouse enters into contracts with the objective of benefiting from changes in the prices of energy commodities. Clearinghouse management continually monitors its contract positions, considering location and timing of delivery or settlement for each energy commodity in relation to market price activity, seeking arbitrage opportunities. For example, after entering into a contract to purchase a commodity, the Clearinghouse typically enters into a sales contract, or a combination of sales contracts, with quantities and delivery or settlement terms that are identical or very similar to those of the purchase contract. When the purchase and sales contracts are settled either by physical delivery of the underlying commodity or by net cash settlement, the Clearinghouse may receive a net cash margin (a realized gain), or sometimes will pay a net cash margin (a realized loss).

Until the contracts are settled, however, Dominion must record the changes in the fair value of both contracts. These changes in fair value represent unrealized gains and losses. To the extent purchase and sales contracts with identical or similar terms are held by the Clearinghouse, the changes in their fair values will generally offset one another. Although the Clearinghouse may hold purchase or sales contracts for delivery of commodities at particular locations and times that have not been offset, such exposures are monitored and actively managed on a daily basis. Dominion’s risk management policies and procedures are designed to limit its exposure to commodity price changes.

Additional discussion can be found in Market Rate Sensitive Instruments and Risk Management and Notes 2, 15 and 29 to the Consolidated Financial Statements. Also, see Note 4 to the Consolidated Financial Statements for a discussion of Dominion’s implementation of new accounting requirements effective January 1, 2003 to reflect the decision of the Emerging Issues Task Force (EITF) in Issue No. 02-3, Issues Involved in Accounting for Contracts under Issue No. 98-10. As a result, some energy-related contracts are no longer subject to fair value accounting.

During 2002, the Clearinghouse also held derivative financial contracts to manage the price risk of certain anticipated sales of Dominion Exploration & Production’s 2002 and 2003 natural gas production (economic hedges). Dominion did not designate these derivatives as hedges for accounting purposes and, as a result, any change in the fair value of these derivatives is included in earnings. During 2002, Dominion Energy recognized a loss of $48 million related to the 2002 economic hedges, representing $43 million from contract settlements and $5 million for the reversal of unrealized gains that existed at December 31, 2001. In addition, Dominion Energy recognized $22 million of unrealized losses in 2002 related to the change in the fair value of the 2003 economic hedges. As anticipated, Dominion Exploration & Production sold sufficient volumes of natural gas in 2002 at market prices, which, when combined with the settlement of the 2002 economic hedges, resulted in a range of prices for those sales contemplated by the risk management strategy. Similarly, Dominion expects the combination of anticipated gas sales and the 2003 economic hedges to result in a range of prices for those sales as contemplated by this risk management strategy in 2003.

A summary of the changes in the unrealized gains and losses in Dominion’s energy trading contracts, including the economic hedges described above, during 2002 follows:

The balance of net unrealized gains and losses in Dominion’s energy trading contracts, including the economic hedges discussed above, at December 31, 2002 is summarized

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in the following table based on the approach used to determine fair value and the contract settlement or delivery dates:

Dominion Delivery

Operating Results—2002

Dominion Delivery contributed $1.61 per diluted share on net income of $455 million for 2002, an increase of $89 million and $0.16 per diluted share over 2001. Net income for 2002 reflected lower operating revenue ($411 million), operating expenses ($549 million) and other income ($37 million). Changes in interest and income taxes, which are discussed on a consolidated basis, were not significant.

Regulated electric sales revenue increased $58 million. Favorable weather conditions, reflecting increased cooling and heating degree-days, as well as customer growth, are estimated to have contributed $62 million and $19 million, respectively. Partially offsetting these increases was a net decrease of $23 million due to other factors not separately measurable, such as the impact of economic conditions on customer usage, as well as variations in seasonal rate premiums and discounts.

Regulated gas sales revenue decreased $533 million, reflecting $550 million for lower gas cost recoveries attributable to lower prices and customer migration, partially offset by the impact of slightly colder weather and other factors. The decrease was substantially offset by a $489 million decrease in purchased gas expense, reflecting the matching of purchased gas costs and gas cost recoveries in rates, and increased gas transportation service revenue.

Gas transportation and storage revenue increased $36 million, primarily reflecting the shift of customer status from regulated gas sales to gas transportation service in connection with the switch by distribution customers to other natural gas suppliers. The migration of customers does not generally affect net income, as the recognition of the cost of gas delivered for regulated gas sales customers is matched against rate recoveries.

Other operations and maintenance expense decreased $50 million, primarily reflecting lower general and administrative expenses.

Depreciation decreased $11 million as a result of changes in the estimated useful lives of electric distribution assets.

Other income decreased $37 million, reflecting to a large extent a $27 million increase in equity losses on Dominion’s telecommunications joint venture. The increased losses reflected lower revenue and increased operating expenses resulting from the expansion into several new markets in 2002. See Notes 30 and 32 to the Consolidated Financial Statements.

Operating Results—2001

Dominion Delivery contributed $1.45 per diluted share on net income of $366 million for 2001, an increase of $27 million and $0.02 per diluted share over 2000 results. The increase in net income reflects slightly higher gas throughput and slightly lower volumes of electricity delivered, as well as overall higher gas and electric rates.

Operating revenue increased $137 million to $3.0 billion for 2001, reflecting a full year of CNG operations for 2001. This is reflected in higher regulated gas sales and gas transportation and storage revenue as a result of higher overall throughput and rates. Regulated electric sales for 2001 reflect customer growth and comparatively higher fuel rates, partially offset by the effect of comparatively milder weather.

Operating expenses increased $79 million to $2.2 billion for 2001. Higher prices for commodities delivered or consumed contributed to increased purchased gas expense. In addition, purchased gas increased, as 2000 amounts only included 11 months of CNG operations.

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Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

Dominion Exploration & Production

Operating Results—2002

Dominion Exploration & Production contributed $1.34 per diluted share on net income of $380 million, an increase of $60 million and $0.07 per diluted share over 2001.

Operating revenue increased $259 million to $1.7 billion for 2002, reflecting higher overall production as a result of the full year operations of Louis Dreyfus and Dominion’s ongoing drilling programs, partially offset by natural production declines. Average realized gas and oil prices, including the effects of hedging, decreased for the comparative years.

Operating expenses increased $177 million to $1.1 billion for 2002, and reflect primarily the impact of including Louis Dreyfus operations in 2002. The increase includes an increase in depreciation, depletion and amortization expense of $138 million in connection with the higher levels of production noted above, partially offset by lower depletion rates due primarily to the inclusion of properties from the Louis Dreyfus acquisition.

Operating Results—2001

Dominion Exploration & Production contributed $1.27 per diluted share on net income of $320 million, an increase of $65 million and $0.19 per diluted share, as compared to 2000 results. Operating revenue increased $130 million to $1.5 billion for 2001, reflecting a full year of CNG operations for 2001, two months of Louis Dreyfus operations and higher average realized gas and oil prices. The production increases reflect the addition of Louis Dreyfus operations in the fourth quarter of 2001, offset somewhat by natural declines at certain Dominion gas and oil production properties.

Operating expenses increased $14 million to $934 million for 2001, as compared to 2000, and include the acquisition of Louis Dreyfus in the fourth quarter of 2001, as well as higher operations and maintenance expenses associated with service industry and contractor costs. Purchases of gas and oil for brokered sales decreased in 2001.

Corporate and Other

Operating Results—2002

The net loss associated with corporate and other operations for 2002 was $243 million and $(0.85) per diluted share, a decrease of $622 million and $2.58 per diluted share over 2001. The decrease in net loss reflected higher operating expenses for 2001 as a result of specific charges described in Operating Results—2001 below. In addition, the decreased net loss for 2002 included an $88 million decrease in operating expenses, due to the discontinuance of goodwill amortization.

Operating Results—2001

The net loss associated with corporate and other operations for 2001 was $865 million and $(3.43) per diluted share, an increase of $218 million and $0.70 per diluted share over 2000. These results reflect comparatively higher operating expenses for 2001 that included the following specific items, which are discussed in Notes 6, 8, 9, 15 and 27 to the Consolidated Financial Statements:

n a $105 million charge for restructuring activities, including employee severance and termination benefits and costs associated with the termination of leases;

n a $281 million charge, reported in other operations and maintenance expense, for the impairment of various DCI investments;

n a $151 million charge for credit exposure associated with the bankruptcy of Enron;

n a $220 million charge, reported in operations and maintenance expense, related to the termination of certain long-term power purchase contracts; and

n a $40 million loss on the sale of Saxon Capital, reported in other operations and maintenance expense.

Charges in 2000 included restructuring and acquisition-related charges of $460 million and DCI impairments of $119 million. These charges were partially offset by the cumulative effect of an accounting change of $21 million. These items are discussed in Notes 3, 8 and 9 to the Consolidated Financial Statements.

Liquidity and Capital Resources

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

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Internal Sources of Liquidity

As presented on Dominion’s Consolidated Statements of Cash Flows, net cash flows from operating activities were $2.4 billion, $2.4 billion and $1.3 billion for the years ended December 31, 2002, 2001 and 2000, respectively. Dominion’s management believes that its operations provide a stable source of cash flow sufficient to contribute to planned levels of capital expenditures and maintain current shareholder dividend levels. As noted above, Dominion uses a combination of debt and equity securities to fund capital requirements not covered by the timing or amounts of operating cash flows. As discussed under Credit Ratings and Cash Requirements for Planned Capital Expenditures below, Dominion is taking steps to improve its financial position in response to current credit rating requirements. As a result of these measures, Dominion may choose to postpone or cancel certain planned capital expenditures, to the extent they are not fully covered by operating cash flows. Dominion would do this in order to mitigate the need for future debt financings, beyond those needed to cover normal maturities and redemptions.

Dominion’s operations are subject to risks and uncertainties that may negatively impact cash flows from operations. Such risks and uncertainties include, but are not limited to, the following:

n unusual weather and its effect on energy sales to customers and energy commodity prices;

n extreme weather events that could disrupt offshore gas and oil production or cause catastrophic damage to Dominion’s electric distribution and transmission systems;

n exposure to unanticipated changes in prices for energy commodities purchased or sold, including the effect on derivative instruments that may require the use of funds to post margin deposits with counterparties;

n effectiveness of Dominion’s risk management activities and underlying assessment of market conditions and related factors, including energy commodity prices, basis, liquidity, volatility, counterparty credit risk, availability of generation and transmission capacity, currency exchange rates and interest rates;

n the cost of replacement electric energy in the event of longer-than-expected or unscheduled generation outages;

n contractual or regulatory restrictions on transfers of funds among Dominion and its subsidiaries; and

n timeliness of recovery for costs subject to cost-of-service utility rate regulation.

External Sources of Liquidity

Dominion Resources, Inc., Virginia Electric and Power Company (Virginia Power) and CNG (collectively the Dominion Companies) rely on bank and capital markets as a significant source of funding for capital requirements not satisfied by cash provided by the companies’ operations. As discussed further in the Credit Ratings section below, the Dominion Companies’ ability to borrow funds or issue securities and the return demanded by investors are affected by the issuing company’s credit ratings. In addition, the raising of external capital is subject to certain regulatory approvals, including the SEC and, in the case of Virginia Power, the Virginia State Corporation Commission (Virginia Commission).

During 2002, the Dominion Companies issued long-term debt (net of exchanged debt), trust preferred securities, preferred stock and common stock totaling approximately $4.85 billion. The proceeds were used primarily to repay other debt and to finance capital expenditures.

Credit Facilities and Short-Term Debt

The Dominion Companies use short-term debt, primarily commercial paper, to fund working capital requirements and as bridge financing for acquisitions. 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. The commercial paper programs are supported by the credit facilities discussed below.

At December 31, 2002, the Dominion Companies had the following short-term debt outstanding and capacity available under credit facilities:

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Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

Long-Term Debt

During 2002, Dominion Resources, Inc. and its subsidiaries issued the following long-term debt: