ML021560259

2001 Annual Financial Report

ML021560259
Person / Time
Site:	Millstone
Issue date:	05/13/2002
From:	Price J Dominion Nuclear Connecticut
To:	Document Control Desk, NRC/FSME
References
-nr, B18655
Download: ML021560259 (93)

Text

Dominion Nuclear Connecticut, Inc. SDominion Millstone Power Station Rope Ferry Road Waterford, CT 06385 MAY 13 2002 Docket Nos. 50-245 50-336 50-423 B18655 RE: 10 CFR 50.71(b)

U.S. Nuclear Regulatory Commission Attention: Document Control Desk Washington, DC 20555 Millstone Nuclear Power-Station, Unit Nos. 1, 2 and 3 2001 Annual Financial Report In accordance with 10 CFR 50.71,(b),' eclosedis one copy of the 2001 Annual Financial Report for Dominion Reso'urces, Inc. 'This report is being submitted by Dominion Nuclear Connecticut, 16iC.' DNC), an indirect, wholly owned subsidiary of Dominion Energy, which is itself wholly owned by Dominion Resources, Inc. DNC is the licensed operator of the Millstone Nuclear Power Station:, Unit Nos. 1, 2 and 3.

There are no regulatory commitments contained within this submittal.

If you have any questions concerning this submittal, please contact Mr. Paul R. Willoughby at (860) 447-1791, extension 3655.

Very truly yours, DOMINION NUCLEAR CONNECTICUT, INC.

J. Ala Prýc Site V e Oresident - Millstone Enclosure (1) cc: w/o enclosure H. J. Miller, Region I Administrator J. B. Hickman, NRC Project Manager, Millstone Unit No. 1 T. J. Jackson, NRC Inspector, Region I, Millstone Unit No. 1 R. B. Ennis, NRC Senior Project Manager, Millstone Unit No. 2 NRC Senior Resident Inspector, Millstone Unit No. 2 V. Nerses, NRC Senior Project Manager, Millstone Unit No. 3 1-r-14 NRC Senior Resident Inspector, Millstone Unit No. 3

Docket Nos. 50-245 50-336 50-423 B18655 Enclosure 1 Millstone Nuclear Power Station, Unit Nos. 1, 2 and 3 2001 Annual Financial Report

-I-Dominion Resources is one of the nation's leading natural gas and electric power companies. WAe're traded under the symbol "D" on the New York Stock Exchange and are proud to have the confidence of more than 350,000 shareholders.

We're also privileged to serve nearly 4 million retail energy customers in five states. As one of the nation's largest producers of natural gas and electric power, we're an established, growing wholesale energy trader.

Our $34 billion asset base includes 22,000 megawatts of electric generation, 4.9 trillion cubic feet equivalent of oil and gas reserves, 450 billion cubic feet equivalent of production and 7,600 miles of natural gas pipeline. We also operate a nearly 1 trillion cubic foot natural gas storage system, the nation's largest.

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IF YOU'D BURIED YOUR MONEY IN A MASON JAR IN 2001. I'D OFFER TO BUY YOUR CRYSTAL BALL.

But if you stayed the course and held your Dominion shares, you'd have endured far less pain than most investors. And taking a slightly longer view

-you'd still have a total return in excess of 58 percent since our transforming merger with Consolidated Natural Gas closed in early 2000.

We ended a tough 2001, however, with our shares at

$60.10, down from $67 a year earlier, a total negative return of about 6.5 percent, including the company's $2.58 per share annual dividend. By contrast, the S&P 500 sank at nearly twice that rate with a total negative return just shy of 12 percent. Our industry peer groups did even worse. The Dow Jones and S&P Utilities indexes produced negative total returns of more than 26 and 30 percent, respectively.

Last year, I told you we'd target a 15 percent or better annual total return in 2001.

We missed it. Assuming the economy, like the weather, returns to more normal conditions, we're targeting a 15 percent annual return on average going forward.

In Plain English declined. Others preached the In plain English, that means virtues of shedding assets under weve got more options to an "asset lite" model that helped produce energy, buy it, sell to produce the Enron fiasco. We 10 Percent Average Earnings it and transport it on our passed on that one, too. I even Growth Reaffirmed own systems. In the case of remember a heavy hitter who In the face of heightened gas, we can store it in our suggested that we exit our retail economic and political own systems and sell it when energy distribution businesses.

uncertainty, we surpassed our market conditions are best. As my daughter used to say in 10 percent operating earnings her teen-age years "Not!"

target for 2001 and sustained Fads on Wall Street We've stuck with our our dividend for the 76th Like it or not, attention by original vision to build a fully straight year. Dominion reported Wall Street analysts can help integrated energy company operating earnings of $4.17 solid companies without a lot focused in the Midwest, per share in 2001, a 25 percent of flash and hype to get the Northeast and Mid Atlantic increase over 2000. We expect attention from investors the regions, home to 40 percent of 10 percent average annual companies deserve, our nation's demand for energy.

earnings growth going forward. Candidly, many of these We've hedged our bets, pundits have yet to recognize maintained and grown profit I Call it Hard Work and value our model fully. But margins in our core business, Television talking heads call we're keeping ourselves focused and used our market knowledge it "guidance." Others call it on sound daily operations. We're to jump at new opportunities.

"visibility." In our case, I call it working on delivering depend We've stayed the course. And results from hard work by a lot able financial results. And we're when Wall Street sees that our of good people. hoping they'll catch on and model will continue to yield I credit our employees for share our story with an even good results, I'm hopeful that the very flattering results of a larger number of potential our share price will benefit.

survey published by Fortune Magazine as this letter went to Total Return Comparison E I Year Total Return press in early March. Fortune ranked Dominion as America's second most admired utility in its annual survey of Americais most admired corporations.

Since January 2000, we've increased our targeted earnings four times. We worked hard to deliver sound, safe operating results at our business units, to save money and increase productivity. And we're building Dominion SWp UUiL S&P Elec.

momentum in large part because our merger with CNG created a investors. At times, our industry's A Loss of Faith unique electric and natural gas pundits act like fashion people. The energy sector's bad returns company. In industry speak, we They get caught up in fads. show that many investors lost call it "fully integrated." In the During one memorable period, faith last year. Just when even more tortured jargon of they advised us to spin off our California appeared to begin our industry's top analysts, we're generation, as some companies recovering from an ill-conceived "maximizing our optionality" have done and regretted. We scheme to partially deregulate

this rule somewhere along Transforming the way lost their common business sense.

Ourselves Through their complexity, difficulty of interpretation and cost to shareholders, rules like Successfully these pose as solutions while only compounding the problem.

Even the rule makers have had to issue more than 170 its power sector, Enron went Cash Matters interpretations to help clarify bankrupt and lost virtually all In the end, all that matters is their intention.

of its market value. I suspect cash. All investors benefit when several books about this event accounting helps them more The Game Plan: Run A Sound are in the works. You may clearly understand a company's Trading Business remember that Enron drew fire cash flow. Some industry critics used foi; among other things, the Many legitimate investors Enron's downfall to paint energy aggressive application of an and respected business leaders trading and marketing as accounting technique called question the use of certain unsound businesses. We remind "mark-to-market." This allows generally accepted accounting investors that Enron sold a company to book expected principles in today's business commodities it did not own future income in the current world. An example is a rule and could not produce, and it year. Used properly, this practice issued by the Financial booked earnings before they can accurately and meaningfully Accounting Standards Board were realized. Unlike Enron, our serve investors. Used abusively, it called "SFAS 133," which strategy is to trade around our can be a house of cards waiting establishes the accounting for considerable physical assets. In to fall, as we all witnessed. certain types of contracts called 2001, about five percent of our derivatives. The drafters of company's operating earnings

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0 1996 1997 1998 2001 "I'VE WRITTEN TO YOU BEFORE ABOUT THE IMPORTANCE OF VIRGINIA'S ELECTRIC DEREGULATION PLAN. CUSTOMER CHOICE BEGAN THIS YEAR IN VIRGINIA ON NEW YEAR'S DAY."

V Planning for Flexible Growth before interest and taxes (EBIT) Producing Three Trillion or energy content in both gas were the result of mark-to Btu a Day and electricity.)

market accounting. When we combine our power Much of the energy we Unlike Enron, we have a and gas capabilities, we can produce serves nearly 4 million lot of "iron in the ground," as create more than 3 trillion Btu retail customers in five states, some of our old-timers say. Our a day enough energy to light where traditional "utility trading operations are backed up the entire United States for franchisess contribute stability by assets that we own: modern an hour. ("Btu" stands for to our earnings and cash flow power stations, environmentally British thermal unit, which as we expand into competitive sound natural gas and oil wells, measures the comparable heat markets. As Dominion becomes and large networks of transmis sion pipes and power lines. Type of Unit Mix Whatever the pricing scenario, our Dominion Energy Peaking 15.6% Baseload Clearinghouse specialists shop 51.9%

for the best use of our available molecules or electrons from the Intermediate 27.5%

best source at any given time.

Last year, we traded or sold 1.4 trillion cubic feet of natural gas and 193 million megawatt hours. In 2000, earnings from Electric Generation Growth History Irdudes additions retirements and re atings Clearinghouse operations amounted to $44 million.

In 2001, operations yielded

$56 million. Our Clearinghouse expects more growth by building on our considerable experience in oil and gas trading and blending, coal origination and emissions trading.

Fuel Mix Purchases 15.3%

Nuclear 23.8%

N Our first Midwest merchant generation facilit the Elwood Energy Center is in _Gas/Other its third year of service Construction Coal Oit 28.7% 10.9%

is nearin coripletion at our other merchant facilities in Ohio, Pennsylvania and West Virginia

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a major energy provider to Site Selection magazine, a leading wholesale markets in the publication for site location and Midwest, Northeast and real estate professionals. Last Mid-Atlantic, it's important to year, the company's support to remember that Virginia is home state and local agencies helped to more than 60 percent of create more than 7,400 new jobs our total generating capacity with an estimated investment and represents 41 percent of of $1.5 billion in our Virginia our revenues. service area. We won the award We work to keep that base as Virginia prepared to open strong-an effort that has its doors to retail electricity captured national attention competition.

among developers. For the third consecutive year, Dominion Virginia Power's economic development program earned a spot among the nation's "Top Ten," according to 7

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Virginia: Deregulation place until July 2007-providing That Will Work enough time for healthy retail I've written to you before about markets to develop. if we the importance of Virginia's operate more efficiently, electric deregulation plan. management can reward Customer choice began this year shareholders with the savings in Virginia on New Year's Day. by selling excess power to Thanks to legislators and higher-paying customers in policymakers who share our other regions.

belief in responsible regulation This bears repeating, and free markets, a deregulation especially as certain pundits and plan is in place that works for politicians attempt to crush both investors and consumers. deregulation in the wake of Because of the lawmakers' Californias unique failure to hard work, common sense and keep its lights on. As we see it, foresight, Virginia consumers are California didn't deregulate insulated from price and supply or regulate. Even worse, its uncertainty. Capped rates are in regulators and politicians K-i-

We Hedge Our Bets Some pundits are predicting a power glut, a few see shortages.

We're hedging our bets. Using conservative assumptions, we expect modest capacity growth in the range of 2 percent to "WE DON'T CLAIM TO HAVE A 2.5 percent during most of the SPOTLESS CRYSTAL BALL. THAT'S current decade. The fact is, WHY WE'LL DO WHAT CUSTOMERS siting, permitting and building WANT AND MARKET CONDITIONS a power facility is a complex, REQUIRE, NOT WHAT DOMINION uncertain and politically WANTS. WE DON'T TIE OUR EGOS demanding task. It requires TO OUR BUSINESS PLAN." experience, credibility, financial strength and staying power. A meddled in the management study last year by a well-known and operation of energy Wall Street investment house companies. In contrast, Virginia's predicted that only half of all deregulation plan was cited power stations on the drawing by SmartMoney magazine as a board will be built. The study principal reason for including says the nation could be more Dominion among the magazine's than 50,000 megawatts short of six most promising energy power by 2006. Another energy investments. analyst says about a third of 300,000 megawatts planned will Flexible Growth and never go on line. Our own Market Uncertainty internal studies predict even Virginia rightly focuses on fewer of the planned stations evolving wholesale markets. will materialize.

We've got to make sure our wholesale markets work before We Tie Our Money to it retail competition fully unfolds. We don't claim to have a spotless As competitive electric wholesale crystal ball. That's why we'll do markets open nationwide, plenty what customers want and market of companies-including conditions require, not what Dominion-are building and Dominion wants. We don't tie buying power facilities to meet our egos to our business plan.

expected demand. We tie our money to it.

Right now, we're on track So we haven't spent all of to expand our existing capacity the dollars for the full comple about 18 percent during the ment of electric turbines we next three years, from 22,000 need to expand. For a reasonable megawatts to 26,000 by 2005. amount, we bought the flexibility Sites where construction or to time the build-out according planning is underway are in to market demand. The economic Michigan, North Carolina, slowdown notwithstanding, Tennessee, Ohio, Pennsylvania, power demand in our target Virginia and West Virginia. states is projected to be

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Growth Rate A Growth Rate U112 E In 2001 Richmond City Council voted unanimously in favor of our proposal to build a state of the-art energy trading facility downtown Its part of our commitment to economic growth of the communities we serve

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Physical Fuel Hedging:

Building Our Gas Reserves Natural gas is America's fuel of choice, with an increasingly important role to play in future power generation.

The dominance of natural gas means that the price of power will be largely determined Committing to by the cost of gas. By owning gas, we can better manage our Capital Discipline risks and also take advantage of changes in demand. So when natural gas prices declined, we and Delivering jumped at the chance last fall to acquire Louis Dreyfus Natural Gas, one of the nation's best Strong Financial managed independent natural gas companies. This kind of timing helps us deliver long Results term shareholder value.

We got it for $2.3 billion in cash, stock and assumed debt, substantial. If conditions boosting natural gas reserves at change, we'll slow down. In our Dominion Exploration &

fact, Dominion Energy reduced Production unit by nearly by $600 million its capital 60 percent and increasing our expenditures budget for new production by 40 percent. We power-unit investments in 2002. now own nearly 5 trillion cubic An expansion at our Elwood feet equivalent of natural gas natural gas joint-venture facility reserves and about 450 billion near Chicago is on hold. We've cubic feet equivalent of annual also moved back the start-up production.

date of one phase at a planned generation project in Gas Prices Expected Pennsylvania where we've to Head North already broken ground. On the day we announced the If the market holds or Dreyfus purchase, I spent the strengthens, we'll maintain afternoon on CNN, CNBC or accelerate construction. and other business programs pushing this message: Gas prices should head north.

Last winter and spring, gas prices rose because supply had not kept up with demand.

Customers cut back on their use of gas, which, combined

with milder weather and a too heavily on natural gas lacks slowing economy, brought prices balance and flexibility. Your down. Like other commodities, company has a diverse energy natural gas prices obey the laws fleet, with 24 percent of our of supply and demand. That's capacity from nuclear power, why we expect to see strong 29 percent from coal, and the prices over time. Industry balance from oil, gas, hydroelec experts forecast natural gas tric and other sources. The demand growth at about 3.25 downfall of the farmer with too percent annually, but they many eggs in one basket was expect supply to grow no more not lost on us.

than 2 percent annually.

But as I told a gathering of the nation's economists in Washington last spring, over reliance on any one fuel is risky business. When gas prices go up, as we saw last year, a generation fleet that depends (1. I

Operating with Excellence Keeping the Lights On:

An Operating Hedge A less obvious hedge against uncertainty is the advantage we gain from the highly skilled people who keep our stations running. I'm proud that a major, national coal-users' group recognized our Kincaid Power Station in Illinois as the "2001 Power Station of the Year."

Employees at our fossil-fuel and hydroelectric facilities have a long track record of operating and maintaining Dominion's fleet above industry standards.

Nuclear Operating Excellence For nine consecutive years, Nucleonics Week, a news and information database, has placed our two Virginia nuclear facilities on its list of top per forming nuclear stations in the United States. In fact, our North Anna station was rated the lowest-cost producer of nuclear-generated power in the United States over the three-year period ending in 2000. Surry came in fifth for the same period.

Our stations have consistently received high safety and efficiency marks from the U.S. Nuclear Regulatory Commission and the Institute of Nuclear Power Operations.

Together, these two valuable Operating With Excellence:

company assets comprise about Six Sigma Now In Place 3,300 megawatts of our existing Good people always challenge 22,000-megawatt system. themselves to raise the bar.

They're Dominion's lowest Perhaps you've heard of cost source of power and a "Six Sigma," the business critical competitive strength. improvement methodology.

If we can add to our fleet by With Six Sigma, you raise the purchasing a station at a price bar to unprecedented heights.

that makes sense, run it at top That's exactly where we're going.

standard, and make an added As first in our industry to intro return on the investment, we'll duce Six Sigma companywide, bid for it. Last year, we completed we've selected and trained 125 the purchase of the 2,000 of our most energetic, megawatt Millstone Power motivated employees. We've Station on the Long Island transformed them into "Black Sound in Connecticut, which Belt" process-improvement is selling energy profitably in experts. As I write, they're a region where market prices already generating savings by for power are higher. honing our business processes We've heightened security in and bringing the benefits of the aftermath of September 11 quality to our bottom line.

and are benefiting from the At Dominion Exploration oversight of the Nuclear & Production, for example, Regulatory Commission, as well Black Belt Tim Henry led a as the assistance of state authori team that identified how to ties. These constructive relation reduce idle standby time for ships help in many valuable ways workboats assisting offshore not always evident to the public. drilling operations. We expect to chop 70 percent off the standby time, on average, and generate

$1 million in annual savings.

At Dominion Delivery, Black Belt John Anthony led a team that improved our ground-patrol strategy for electric transmission lines. We've improved our coverage and saved more than

$400,000 in costs.

Six Sigma is expected to play a critical role in helping our company meet its earnings

" A critical advantage in the increasingly competitive energy marketplace is our targets.

ability to generate energy at low cost.

Dominion Energy's North Anna Station has often been rated as the nation's most efficient producer.

" Dominion Virginia Power's lineman, Ray Hooper, connects a new customer to our growing electric distribution system.

Despite the slower economy last year, Virginia and North Carolina continued to grow and we added new customers.

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Ownership Culture In business, character counts. A window on Dominion's character is the number of employees who own shares. Our employees are our biggest single group of owners. At year's end we owned more than $950 million, including more than $132 million by our officers. Under executive Serving with share-ownership guidelines, all company officers have borrowed Excellence from three to 10 times their annual salaries to purchase shares and must hold this stock over a five-year period. In fact, I At our Dominion Virginia am your company's largest indi Power electric distribution unit, vidual shareholder.

service reliability reached another By any standard, in any record level again last year. Our industry, it's a unique level of customers had electricity 99.98 employee ownership, and it's a percent of the time. On average, good thing. I think the sad case Dominion's electricity customers of employees who lost their experienced only 105 minutes in savings at Enron will be the outages during the entire year, exception rather than the rule.

excluding major storms, a Almost always, employee whopping improvement over the ownership improves motivation previous year's 118 minutes. and informs important decisions.

For example, we tried several times last year to purchase

• 4, - generation stations to expand our merchant energy fleet-and were outbid. At Dominion, our ownership culture makes us unwilling to pay more money than an asset is worth, or to assume financial risks that others might.

At year's end, the Financial Times recognized us as having executed the industry's most

• Our customer service centers are committed to the successful change in strategic highest levels of customer satisfaction.

direction. The award really hit home. The judges recognized our ability to adapt, a critical trait for all successful enterprises.

I trace it back to our high level of employee ownership.

Capital Discipline, Stronger Cash Flows Our ability to buy, sell and operate successfully requires commitment to capital discipline.

As an investor, you measure us by the quality of earnings and the strength of our cash flows, bond ratings and balance sheet.

Cash from operations-an important indicator of financial health-grew 80 percent in 2001 to $2.4 billion, over

$1 billion more than 2000. We expect cash flow to grow to more than $3 billion by 2003.

High Bond Ratings Maintained When we choose to borrow money to finance our acquisi tions, our internal investment review committee insists on two unwavering conditions:

first, that we maintain strong investment grade ratings; and second, that we balance our equity and debt in a proportion that serves the joint interests of our shareholders and lenders, and maintains the confidence of both.

Visit your company's Web site at www.dom.com.

We offer a variety of options for customers who want to do business on the Web. Keep up with important developments through the year by visiting our investor information pages or reading our news releases

Committing to Our Communities and the Environment We have continued to We're working to move our debt maintain our "High BBB" ratio to about 55 percent.

bond ratings from both Moody's In 2001, the respected and Standard & Poor's. financial journal Barron' ranked Last year, I told you we'd us among the top 15 percent of continue to work to strengthen the world's 500 largest public the balance sheet. Debt made up companies for overall financial 59 percent of our capitalization performance. It based these at year-end, after adjusting for rankings on a financial "report securities that will eventually card" citing key indicators.

convert to common stock.

That's down from our peak of Community Responsibility more than 67 percent when we We build credibility with our closed our merger with CNG. customers by acting as responsi ble citizens in our communities.

The slowing economy hurts our low-income customers most.

In Ohio, we helped customers who have been disconnected or received a shut-off notice. Under a one-time payment matching program, Dominion East Ohio matched up to $500 per customer on a dollar-for-dollar basis. After making that match, the company worked with

• Rocky Mountain Elk are thriving in Pennsylvania in part because we seeded nourishing grasses on land where customers to begin a payment we laid natural gas pipeline.

plan to pay off past-due balances.

Our EnergyShare heating assistance programs in Virginia and North Carolina collected record contributions to help the disadvantaged pay winter energy bills. Now in its 19th year,

EnergyShare raises donations from employees, customers and other community businesses to provide financial aid to needy individuals and families.

Thanks to the effort of all these groups last year, EnergyShare broke its previous record by raising more than

$1.4 million for the region's most vulnerable citizens.

Also, by year end, we had donated $8 million to charitable causes, including $500,000 Protecting the Environment for victims of the September .11 Protecting the environment attacks, and $100,000 for flood means more than meeting our relief in West Virginia and Texas. legal obligations. It also means Whether it's supporting helping to preserve vital youth programs, such as the ecosystems in and around the Boy Scouts, sponsoring a communities we serve.

golf tournament to benefit a In 2001, we acted on that children's charity, or funding belief. We continued discussions an engineering endowment at with the U.S. Environmental a major university, active Protection Agency about the participation in community landmark air-quality agreement life is an integral part of our we announced in 2000. Under corporate citizenship. an agreement in principle

"* Dominion actively supports civic projects such as the Greater Cleveland Ohio Marathon and the Hampton Jazz Festival.

"* Company volunteer Vicki Hull participating in Dominion's Environmental Volunteer Week in October.

0 Bill Bolin, a Dominion biologist, can now fly-fish on the St. Mary's River.

PROTECTING THE ENVIRONMENT MEANS MORE THAN MEETING OUR LEGAL OBLIGATIONS.

not yet finalized, Dominion would invest $1.2 billion in environmental upgrades at our coal stations in Virginia and West Virginia. The money most of it already budgeted

-would be spent over a 12-year period.

Our people also worked with state agencies and landowners to improve the habitat for quail and other game birds along electric transmission rights-of-way.

If you're a trout fisherman, as I am, you might know or remember the St. Mary's River, which runs through the Blue Ridge Mountains in Virginia.

Some years back, sportsmen recognized the river as a premier wild trout stream in the eastern U.S. But just three years ago, it was declared all but dead. We recognized an opportunity and volunteered to help. Dominion a As part of our environmental commitment to good projects throughout our service areas, Dominion played a critical role in restoring the St. Mary's River in Virginia to its natural state.

Our Thanks Last year tested us as a nation, as individuals and as businesses in ways we had not imagined.

After September 11, I think we all feel more vulnerable. We are reminded how much we take for granted-how much we have to be thankful for.

I thank the many stakeholders who contribute to make this adventure work for us all-our customers, board of directors, worked with government skilled contractors, vendors, biologists to deposit 140,000 regulators and legislators.

tons of limestone into the I say thanks to our St. Mary's watershed. This employees for keeping the faith improved the river's pH balance, and delivering another solid which stimulated a remarkable performance in a tough year and reversal. Water quality has for working hard to build our improved, and fishermen are business and our communities.

once again catching trout. A To you, our investors, similar project is underway near I say thanks for trusting us with our Mt. Storm Power Station your money in both certain and in West Virginia. uncertain times.

Last year, company volunteers from Texas to Sincerely, Connecticut joined forces to refurbish park trails, plant trees at inner city schools and upgrade an environmental Thos. E. Capps education center. These all suc Chairman, President & CEO ceeded through the hard work and dedication of our people.

The Edison Electric Institute recognized their efforts with a 2001 National Land Management Award. I was also gratified when The Virginia Manufacturers Association presented Dominion with its Environmental Excellence Award.

CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, (millions, except per share amounts) 2001 2000 1999 Operating Revenue Regulated sales Electric $ 4,619 $4,492 $4,230 Gas 1,409 1,374 Nonregulated sales Electric 701 318 346 Gas 1,116 671 Gas transportation and storage 702 486 Gas and oil production 1,118 857 251 Other 893 1,048 693 Total 10,558 9,246 5,520 Operating Expenses Electric fuel and energy purchases, net 1,369 1,106 996 Purchased electric capacity 680 741 809 Purchased gas, net 1,822 1,453 Liquids, pipeline capacity and other purchases 219 299 Restructuring and other acquisition-related costs 105 460 Other operations and maintenance 2,938 2,011 1,376 Depreciation, depletion and amortization 1,245 1,176 707 Other taxes 395 485 304 Total 8,773 7,731 4,192 Income from operations 1,785 1,515 1,328 Other income 126 109 75 Interest and related charges Interest expense 899 958 507 Subsidiary preferred dividends and distributions of subsidiary trusts 98 66 67 Total 997 1,024 574 Income before income taxes and minority interests 914 600 829 Income taxes 370 183 259 Minority interests - 2 18 Income before extraordinary item and cumulative effect of a change in accounting principle 544 415 552 Extraordinary item (net of income taxes of $197) - - (255)

Cumulative effect of a change in accounting principle (net of income taxes of $11) - 21 Net Income $ 544 $ 436 $ 297 Earnings Per Common Share-- Basic Income before extraordinary item and cumulative effect of a change in accounting principle $ 2.17 $ 1.76 $ 2.88 Extraordinary item - - (1.33)

Cumulative effect of a change in accounting principle - 0.09 Net income $ 2.17 $ 1.85 $ 1.55 25 Earnings Per Common Share-- Diluted Income before extraordinary item and cumulative effect of a change in accounting principle $ 2.15 $ 1.76 $ 2.81 Extraordinary item - - (1.33)

Cumulative effect of a change in accounting principle - 0.09 Net income $ 2.15 $ 1.85 $ 1.48 Dividends paid per common share $ 2.58 $ 2.58 $ 2.58 The accompanying notes are an integral part of the Consolidated Financial Statements.

CONSOLIDATED BALANCE SHEETS Assets At December 31, (millions) 2001 2000 Current Assets Cash and cash equivalents $ 486 $ 360 Customer accounts receivable 1,846 2,254 Less allowance for doubtful accounts (76) (67)

Other accounts receivable 164 160 Receivable from affiliates 13 122 Inventories:

Materials and supplies (average cost method) 245 150 Fossil fuel (average cost method) 150 102 Gas stored-current portion (LIFO) 182 75 Derivative and energy trading assets 1,311 1,058 Unrecovered gas costs 9 263 Investment securities--trading 244 275 Margin deposit assets 30 287 Prepayments 384 310 Other 366 451 Total 5,354 5,800 Investments Loans receivable, net 106 676 Investments in affiliates 490 471 Available for sale securities 393 292 Nuclear decommissioning trust funds 1,697 851 Other 474 508 Total 3,160 2,798 Property, Plant and Equipment, Net Property, plant and equipment 33,105 28,011 Less accumulated depreciation, depletion and amortization (14,424) (13,162)

Total 18,681 14,849 Deferred Charges and Other Assets 26 Goodwill, net 4,210 3,502 Regulatory assets, net 574 497 Prepaid pension cost 1,511 1,455 Derivative and energy trading assets 545 79 Other 334 317 Total 7,174 5,850 Total assets $34,369 $29,297 The accompanying notes are an integral part of the Consolidated Financial Statements.

Liabilities and Shareholders' Equity At December 31, (millions) 2001 2000 Current Liabilities Securities due within one year $ 1,354 $ 336 Short-term debt 1,859 3,237 Accounts payable, trade 1,776 1,688 Accrued interest 240 195 Accrued payroll 180 178 Accrued taxes 144 316 Derivative and energy trading liabilities 1,086 1,021 Other 839 625 Total 7,478 7,596 Long-Term Debt Long-term debt 11,797 10,101 Notes payable-affiliates 322 Total 12,119 10,101 Deferred Credits and Other Liabilities Deferred income taxes 3,812 2,813 Deferred investment tax credits 128 147 Derivative and energy trading liabilities 322 100 Other 626 646 Total 4,888 3,706 Total liabilities 24,485 21,403 Commitments and Contingencies (see Note 27)

Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts* 1,132 385 Subsidiary Preferred Stock Not Subject to Mandatory Redemption 384 509 Common Shareholders' Equity Common stock-no par, authorized--500.0 shares; outstanding-264.7 shares at 27 2001 and 245.8 shares at 2000 7,129 5,979 Other paid-in capital 28 16 Accumulated other comprehensive income (loss) 289 (23)

Retained earnings 922 1,028 Total common shareholders' equity 8,368 7,000 Total liabilities and shareholders' equity $34,369 $29,297 The accompanying notes are an integral part of the Consolidated Financial Statements.

• As described in Note 22 to the Consolidated Financial Statements, debt securities issued by Dominion Resources, Inc. and certain subsidiaries constitute 100 percent of the trusts' assets.

CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY Accumulated Other Other Common Stock Paid-In Comprehensive Retained (millions) Shares Amount Capital Income (Loss) Earnings Total Balance at January 1, 1999 195 $ 3,933 $16 $ (20) $1,408 $ 5,337 Stock repurchase and retirement (9) (372) (372)

Comprehensive income 5 297 302 Dividends and other adjustments (493) (493)

Balance at December 31, 1999 186 3,561 16 (15) 1,212 4,774 Issuance of stock-CNG acquisition 87 3,527 3,527 Issuance of stock-public offering 6 354 354 Issuance of stock-employee, executive loan and direct stock purchase plans 4 195 195 Stock repurchase and retirement (37) (1,641) (1,641)

Premium income equity securities (21) (21)

Stock awards and stock options exercised (net of change in unearned compensation) 4 4 Comprehensive income (8) 436 428 Dividends and other adjustments (620) (620)

Balance at December 31, 2000 246 5,979 16 (23) 1,028 7,000 Issuance of stock and stock options Louis Dreyfus acquisition 14 894 894 Issuance of stock-employee and direct stock purchase plans 3 185 185 Stock awards and stock options exercised (net of change in unearned compensation) 2 79 79 Tax benefit from stock options exercised 12 12 Comprehensive income 312 544 856 Dividends and other adjustments (8) (650) (658)

Balance at December 31, 2001 265 $7,129 $28 $289 $ 922 $ 8,368 The accompanying notes are an integral part of the Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, Deferred Income Tax Before-Tax (Expense) Net-of-Tax (millions) Amount Benefit Amount 2001 Net income $ 544 Other comprehensive income:

Net deferred gains on derivatives-hedging activities $ 728 $(263) 465 Unrealized gains on investment securities 21 (10) 11 Foreign currency translation adjustments (9) (9)

Minimum pension liability adjustment 7 (3) 4 Cumulative effect of a change in accounting principle (289) 106 (183)

Amounts reclassified to net income:

Realized gains on investment securities (14) 6 (8)

Net losses on derivatives-hedging activities 51 (19) 32 Other comprehensive income $ 495 $(183) 312 Comprehensive income $ 856 2000 Net income $ 436 Other comprehensive income:

Unrealized gains on investment securities $ 15 $ (6) 9 Foreign currency translation adjustments (4) - (4)

Minimum pension liability adjustment (24) 8 (16)

Amounts reclassified to net income:

Realized losses on investment securities 5 (2) 3 Other comprehensive loss $ (8) - (8)

Comprehensive income $ 428 1999 Net income $ 297 Other comprehensive income:

Unrealized losses on investment securities $ (17) $ 3 (14)

Foreign currency translation adjustments 22 - 22 Amounts reclassified to net income:

Realized gains on investment securities (4) 1 (3)

Other comprehensive income $ 1 $ 4 5 Comprehensive income $ 302 The accompanying notes are an integral part of the Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, (millions) 2001 2000 1999 Cash flows from (used in) operating activities Net income $ 544 $ 436 $ 297 Adjustments to reconcile net income to net cash from operating activities:

Cumulative effect of a change in accounting principle, net of income taxes (21)

DCI impairment losses 281 291 Extraordinary item, net of income taxes 255 Gains on sales of businesses (4) (23)

Depreciation, depletion, and amortization 1,322 1,268 798 Deferred income taxes 241 22 64 Deferred fuel expenses, net (24) (33) (35)

Changes in:

Accounts receivable 463 (953) 81 Inventories (170) (62) (6)

Unrecovered gas costs 255 (217)

Purchase and origination of mortgages (1,528) (4,281) (2,575)

Proceeds from sale and principal collections of mortgages 993 4,295 2,597 Accounts payable, trade (25) 626 (24)

Accrued interest and taxes (113) 139 (48)

Broker margin deposits and liabilities 346 (244) 1 Derivative and energy trading assets and liabilities (339) (32)

Other 172 132 (150)

Net cash from operating activities 2,414 1,343 1,255 Cash flows from (used in) investing activities Plant construction and other property additions (1,224) (1,385) (871)

Gas and oil properties and equipment (944) (353) (90)

Loan originations - (2,911) (2,581)

Repayment of loan originations 283 4,255 2,238 Proceeds from sale of businesses 141 836 180 Acquisition of businesses (2,215) (2,779) (167)

Proceeds from sale of securities 30 137 35 Purchase of securities (104) (235) (53)

Other investments (36) (140) (152)

Other (124) (22) (81)

Net cash used in investing activities (4,193) (2,597) (1,542)

Cash flows from (used in) financing activities Issuance of common stock 245 532 Issuance of preferred securities of subsidiary trusts 747 -

Repurchase of common stock - (1,641) (372)

Issuance of long-term debt 7,365 8,108 6,446 Repayment of long-term debt and preferred stock (4,193) (6,813) (5,790)

Issuance (repayment) of short-term debt, net (1,620) 1,820 394 Common dividend payments (649) (615) (493)

Other 10 (57) (44)

Net cash from financing activities 1,905 1,334 141 30 Increase (decrease) in cash and cash equivalents 126 80 (146)

Cash and cash equivalents at beginning of period 360 280 426 Cash and cash equivalents at end of period $ 486 $ 360 $ 280 Supplemental cash flow information:

Cash paid during the year for:

Interest, excluding capitalized amounts $ 854 $ 988 $ 522 Income taxes 284 240 199 Noncash transactions from investing and financing activities:

Noncash stock and stock option issuance-Louis Dreyfus acquisition 894 -

Noncash stock issuance-CNG acquisition - 3,527 Note received in sale of businesses 25 - 260 The accompanying notes are an integral part of the Consolidated Financial Statements.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction causing outages, property damage and requiring Dominion to Management's Discussion and Analysis of Financial Condition incur additional expenses.

and Results of Operations (MD&A) explains the results of Dominion Is Subject to Complex Government Regulation Which operations and general financial condition of Dominion. MD&A Could Adversely Affect Its Operations should be read in conjunction with the Consolidated Financial Dominion's operations are subject to extensive regulation and Statements. "Dominion" is used throughout MD&A and, depending require numerous permits, approvals and certificates from vari on the context of its use, may represent any of the following: the ous federal, state and local governmental agencies. Dominion legal entity, Dominion Resources, Inc., one of Dominion must also comply with environmental protection legislation and Resources, Inc.'s consolidated subsidiaries, or the entirety of other regulations. Management believes the necessary approvals Dominion Resources, Inc. and its consolidated subsidiaries.

have been obtained for Dominion's existing operations and that Risk Factors and Cautionary Statements That May Affect its business is conducted in accordance with applicable laws.

Future Results However, Dominion remains subject to a varied and complex This report contains statements concerning Dominion's expecta body of laws and regulations. New laws or regulations or the tions, plans, objectives, future financial performance and other revision or reinterpretation of existing laws or regulations may statements that are not historical facts. These statements are require Dominion to incur additional expenses.

"forward-looking statements" within the meaning of the Private Costs of Environmental Compliance. Liabilities and Litigation Could Securities Litigation Reform Act of 1995. In most cases, the Exceed Dominion's Estimates reader can identify these forward-looking statements by words Dominion is subject to rising costs that result from a steady such as "anticipate," "estimate," "forecast," "lexpect,""believe,"

increase in the number of federal, state and local laws and regu "should," "could," "plan," "may" or other similar words.

lations designed to protect the environment. These laws and Dominion makes forward-looking statements with full regulations can result in increased capital, operating, and other knowledge that risks and uncertainties exist that may cause costs as a result of compliance, remediation, containment and actual results to be materially different from the results pre monitoring obligations, particularly with laws relating to power dicted. Factors that could cause actual results to differ are often plant emissions. In addition, Dominion may be a responsible presented with the forward-looking statements themselves. In party for environmental clean up at a site identified by a regula addition, other factors could cause actual results to differ materi tory body. Dominion's management cannot predict with cer ally from those indicated in any forward-looking statement.

tainty the amount and timing of all future expenditures related These factors include changes to financial or regulatory account to environmental matters because of the difficulty of estimating ing principles or policies imposed by governing bodies, industry clean up costs and compliance and the possibility that changes conditions in the regulated, unregulated and transition energy will be made to the current environmental laws and regulations.

markets, political and economic conditions (including inflation There is also uncertainty in quantifying liabilities under envi rates) and financial market conditions, including availability and ronmental laws that impose joint and several liability on all cost of capital and credit ratings. Some more specific risks are potentially responsible parties.

discussed below.

Dominion bases its forward-looking statements on manage Capped Electric Rates in Virginia May Be Insufficient to Allow Full ment's beliefs and assumptions using information available at the Recovery of Stranded Costs time the statements are made. Dominion cautions the reader Under the Virginia Utility Restructuring Act, Dominion's elec not to place undue reliance on its forward-looking statements tric base rates (excluding fuel costs and certain other allowable 31 because the assumptions, beliefs, expectations and projections adjustments) remain unchanged until July 2007 unless modified about future events may and often do materially differ from consistent with that Act. The capped rates and wires charges actual results. Dominion undertakes no obligation to update any that, where applicable, will be assessed to customers opting for forward-looking statement to reflect developments occurring alternative suppliers, allow Dominion to recover certain genera after the statement is made. tion-related costs and fuel costs; however, Dominion remains exposed to numerous risks of cost-recovery shortfalls. These Dominion's Operations Are Weather Sensitive include exposure to potentially stranded costs, future environ Dominion's results of operations can be affected by changes in mental compliance requirements, changes in tax laws, inflation the weather. Weather conditions directly influence the demand and increased capital costs. See FutureIssues and Outlook for electricity and natural gas and affect the price of energy Regulated Electric Operationsof MD&A and Note 27 to the commodities. In addition, severe weather can be destructive, Consolidated Financial Statements.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS [CONTINUED]

The Electric Industry is Increasingly Subject to Competition Dominion's Telecommunication Business Strategy's Success Is Effective January 1, 2002, the generation portion of Dominion's Dependent Upon Market Conditions electric utility operations in Virginia is open to competition and The current strategy of Dominion's joint venture in the telecom is no longer subject to cost-based rate regulation. As a result munication's business is based upon its ability to deliver lit capac there will be increased pressure to lower costs, including the cost ity, dark fiber and colocation services to its customers. The of purchased electricity. Because Dominion's electric utility busi market for these services, like the telecommunications industry ness has not previously operated in a competitive environment, in general, is rapidly changing. Dominion cannot assure that the extent and timing of entry by additional competitors into growth in demand for these services will occur as expected.

the electric market in Virginia is yet unknown. Therefore, it is If the market for these services fails to grow as quickly as difficult to predict the extent to which Dominion will be able to anticipated or becomes saturated with competitors, including operate profitably within this new environment. In addition, competitors using alternative technologies such as wireless, the success of Dominion's power merchant plants is dependent Dominion's investment in the telecommunication business may upon Dominion's ability to find buyers willing to enter into be adversely affected.

power purchase agreements at prices sufficient to cover Dominion's Exploration and Production Business Is Dependent on operating costs.

Factors Including Commodity Prices Which Cannot Be Predicted There Are Inherent Risks in the Operation of Nuclear Facilities Or Controlled Dominion operates nuclear facilities that are subject to inherent These factors include: price fluctuations in natural gas and crude risks. These include the ability to dispose of spent nuclear fuel, oil prices; results of future drilling activity; Dominion's ability to the ability to maintain adequate reserves for decommissioning identify and locate prospective geological structures and to drill and potential liabilities arising out of the operation of these and successfully complete wells in those structures; Dominion's facilities. Dominion maintains decommissioning trusts and ability to expand its leased land positions in desirable areas, external insurance coverage to minimize the financial exposure which are often subject to competition; and other risks incident to these risks. However, it is possible that damages could exceed to the operations of natural gas and oil wells. In addition, the amount of Dominion's insurance coverage. In addition, in Dominion follows the full cost method of accounting for gas today's environment there is a heightened risk of a terrorist and oil exploration and production activities prescribed by the attack on the nation's nuclear plants. Dominion expects to incur Securities and Exchange Commission (SEC). Under the full cost increased security costs at its nuclear facilities. method, all direct costs of property acquisition, exploration and development activities are capitalized. The principal limitation The Use of Derivative Contracts Could Result in Financial Losses is that these capitalized amounts may not exceed the present Dominion uses derivatives including futures, forwards, options value of estimated future net revenues from the production of and swaps, to manage its commodity and financial market risks.

proved gas and oil reserves (the ceiling test). If net capitalized In addition, Dominion purchases and sells commodity-based costs exceed the ceiling test at the end of any quarterly period, contracts in the natural gas, electricity and oil markets for then a permanent write-down of the assets must be recognized trading purposes. In the future, Dominion'could recognize in that period.

financial losses on these contracts as a result of volatility in the market values of the underlying commodities or if a counter An Inability to Access Financial Markets Could Affect the Execution party fails to perform under a contract. In the absence of actively of Dominion's Business Plan quoted market prices and pricing information from external Dominion relies on access to both short-term money markets 32 sources, the valuation of these financial instruments can involve and longer-term capital markets as a significant source of liquid management's judgment or use of estimates. As a result, changes ity for capital requirements not satisfied by the cash flow of in the underlying assumptions or use of alternative valuation its operations. Management believes that Dominion and its methods could affect the value of the reported fair value of these subsidiaries will maintain sufficient access to these financial contracts. For additional information concerning Dominion's markets based upon current credit ratings. However, certain derivatives and commodity-based trading contracts, see Market disruptions outside of Dominion's control may increase the cost Rate Sensitive Instruments andRisk Managementof MD&A and of borrowing to Dominion or restrict its ability to access one or Notes 2 and 15 to the Consolidated Financial Statements. more financial markets. Such disruptions could include an economic downturn or the bankruptcy of an unrelated energy company. Restrictions on Dominion's ability to access financial markets may affect Dominion's ability to execute its business plan as scheduled.

Operating Segments certain other charges not allocated to Dominion's other operat In general, management's discussion of Dominion's results ing segments.

of operations focuses on the contributions of its operating For more information on Dominion's operating segments, segments. However, the discussion of Dominion's financial con see Note 30 to the Consolidated Financial Statements.

dition under Liquidity and CapitalResourcesis based on legal Critical Accounting Policies entities. Dominion's three primary operating segments are:

Dominion has identified the following accounting policies that, Dominion Energy manages Dominion's generation portfo as a result of the judgments, uncertainties, uniqueness and com lio, consisting primarily of generating units and power purchase plexities of the underlying accounting standards and operations agreements. It also manages Dominion's generation growth strat involved, could result in material changes to its financial condi egy; energy trading, marketing, hedging and arbitrage activities; tion or results of operations under different conditions or using and gas pipeline and certain gas production and storage opera different assumptions.

tions. Dominion Energy's operating results largely reflect: the Accounting for risk management and energy trading impact of weather on demand for electricity; customer growth contracts at fdir value--Dominion uses derivatives to manage as influenced by overall economic conditions and acquisitions; its commodity and financial market risks. In addition, and changes in prices of commodities, primarily electricity and Dominion purchases and sells commodity-based contracts in natural gas, that the segment actively markets and trades, uses the natural gas, electricity and oil markets for trading purposes.

for hedging purposes, and consumes in generation activities.

The accounting requirements for derivatives and hedging activi Dominion Delivery manages Dominion's electric and gas ties are complex and interpretation of these requirements by distribution systems, as well as customer service and electric standard-setting bodies is ongoing. All derivatives, other than transmission. Dominion Delivery's operating results reflect the specific exceptions, are reported on the Consolidated Balance impact of weather on demand for electricity and natural gas and Sheet at fair value, beginning in 2001. Energy trading contracts customer growth as influenced by overall economic conditions.

are also reported on the Consolidated Balance Sheets at fair The businesses of Dominion Delivery are subject to cost-of value. Changes in fair value, except those related to derivative service rate regulation and changes in prices of commodities instruments designated as cash flow hedges, are generally consumed or delivered are generally recoverable in rates charged included in the determination of Dominion's net income at each to customers. However, these rates may be subject to price caps, financial reporting date until the contracts are ultimately settled.

limiting recovery of higher costs in certain circumstances.

The measurement of fair value is based on actively quoted mar Dominion Exploration & Production manages ket prices, if available. In the absence of actively quoted market Dominion's onshore and offshore gas and oil exploration, devel prices, Dominion seeks indicative price information from exter opment and production operations. Operations are located on nal sources, including broker quotes and industry publications.

the outer continental shelf and deep water areas of the Gulf of If pricing information from external sources is not available, Mexico and in selected regions in the lower 48 states and measurement involves judgment and estimates. These estimates Canada. Dominion E&P's operating results reflect successful are based on valuation methodologies deemed appropriate by discovery of and production from natural gas and oil reserves Dominion management. For individual contracts, the use of and changes in prices of natural gas and oil. Dominion E&P different assumptions could have a material effect on the con manages commodity risk through the use of derivative contracts tract's estimated fair value. In addition, for hedges of forecasted such as forwards, swaps, and options.

transactions, Dominion must estimate the expected future cash In addition, Dominion also reports the financial services flows of forecasted transactions, as well as evaluate the probabil operations of Dominion Capital, Inc. (DCI) and Dominion's ity of occurrence and timing of such transactions. Changes in corporate operations as operating segments. Dominion has sub conditions or the occurrence of unforeseen events could affect stantially completed its exit of the core operating businesses of the timing of recognition of changes in fair value of certain DCI, as required by the SEC under the Public Utility Holding hedging derivatives. See Selected Information - Energy Trading Company Act of 1935 (1935 Act). DCI's primary business was Activities and Market Rate Sensitive Instrumentsand Risk Man financial services, including loan administration, commercial agementin MD&A and Notes 2, 15, and 28 to the Consolidated lending and residential mortgage lending. Corporate and other Financial Statements.

includes those costs of Dominion's corporate operations and

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED]

Accounting for gas and oil operations - Dominion fol 2001 2000 1999 lows the full cost method of accounting for gas and oil explo (millions, except per Net Net Net share amounts) Income EPS Income EPS Income EPS ration and production activities prescribed by the SEC. Under the full cost method, all direct costs of property acquisition, Dominion Energy $ 723 $2.86 $ 489 $ 2.07 $ 271 $ 1.42 Dominion Delivery 366 1.45 339 1.43 175 0.91 exploration and development activities are capitalized. Deprecia Dominion E&P 320 1.27 255 1.08 44 0.23 tion of gas and oil producing properties is computed using the Dominion Capital (14) (0.06) 11 0.05 78 0.41 unit-of-production method. The depreciable base of costs 1,395 5.52 1,094 4.63 568 2.97 includes estimated future costs to be incurred in developing Corporate and Other (851) (3.37) (658) (2.78) (271) (1.42) proved gas and oil reserves, as well as dismantlement and aban Consolidated Total 544 2.15 436 1.85 297 1.48 donment costs, net of projected salvage values. The calculations Consolidated Operating under this accounting method are dependent on engineering Revenue 10,558 9,246 5,520 estimates of proven reserve quantities and estimates of the Consolidated Operating Expense $ 8,773 $7,731 $4,192 amount and timing of future expenditures to develop the proven reserves. Actual reserve quantities and development expendi For additional information about Dominion's operating seg tures may differ from the forecasted amounts. Also, amounts ments, see Note 30 to the Consolidated Financial Statements and capitalized in the depreciable base of costs are subject to a ceiling the following discussion of each segment's results of operations.

test. The test limits capitalized amounts to a ceiling - the pre sent value of estimated future net revenues to be derived from Overview of 2001 Results the production of proved gas and oil reserves. Dominion per Dominion earned $2.15 per diluted share in 2001 reflecting forms the test quarterly, on a country-by-country basis, and net income of $544 million and an increase of $108 million would recognize asset impairments to the extent capitalized and $0.30 per diluted share over 2000. As described below, costs exceed the ceiling. See Notes 2 and 31 to the Consolidated Dominion recognized higher overall operating revenue reflecting Financial Statements. the operations of acquired businesses. This increase was partially Accounting for regulated operations-- Methods of offset by comparatively milder weather and higher operating allocating costs to accounting periods for operations subject to expenses. The increase in operating expenses reflected the recog federal or state cost-of-service rate regulation may differ from nition of charges associated with the impairment of certain accounting methods generally applied by nonregulated compa investments at DCI, restructuring activities, and credit-related nies. When the timing of cost recovery prescribed by regulatory exposures associated with the bankruptcy of Enron Corp. and authorities differs from the timing of expense recognition used certain subsidiaries (Enron).

for accounting purposes, Dominion's consolidated financial Operating Revenue statements may recognize a regulatory asset for expenditures that Operating revenue increased $1.3 billion to $10.6 billion for otherwise would be expensed. Regulatory assets represent proba 2001 as compared to 2000. Dominion acquired Millstone Power ble future revenue associated with certain costs that will be Station (Millstone) on March 31, 2001 and its operations con recovered from customers through the ratemaking process.

tributed largely to the increase in nonregulated electric sales.

Regulatory liabilities represent probable future reductions in Regulated electric sales also increased, reflecting comparatively revenues associated with amounts that are to be credited to higher fuel recovery rates and continued customer growth customers through the raremaking process. See Notes 2, 9, and partially offset by comparatively mild weather. Regulated gas 18 to the Consolidated Financial Statements.

sales, nonregulated gas sales and gas and oil production revenue Results of Operations increased as 2000 results only included 11 months of Consoli Dominion's discussion of its results of operations includes a sum dated Natural Gas Company (CNG) operations. In addition, mary of contributions by the operating segments to net income 2001 reflects the inclusion of Louis Dreyfus Natural Gas Corp.

and diluted earnings per share, an overview of consolidated 2001 (Louis Dreyfus) for two months as well as higher realized prices and 2000 results of operations and more detailed discussion of for gas. The results of Dominion's trading and marketing opera the results of operations of the operating segments. tions, which are recorded as nonregulated gas and nonregulated electric sales, net of cost of sales, also contributed to the overall increase in operating revenue.

Operating Expenses Operating Revenue Operating expenses increased $1 billion to $8.8 billion for 2001 Total operating revenue increased $3.7 billion to $9.2 billion for as compared to 2000. Higher prices for commodities consumed 2000 as compared to 1999. The introduction of regulated gas contributed to increased electric fuel and energy purchases and sales and gas transportation and storage in 2000 as well as purchased gas. In addition, purchased gas increased as 2000 increases in nonregulated gas sales, gas and oil production and amounts only included 11 months of CNG operations. Pur other revenue resulted from the inclusion of CNG operations chased capacity decreased as Dominion terminated certain con beginning in late January 2000. Regulated electric sales also tracts in early 2001. Depreciation increased due to the inclusion increased as a result of customer growth, higher fuel rates, and a of Millstone. However, this increase was partially offset by an charge for rate refunds taken in 1999. Nonregulated electric sales extension of the useful lives of Dominion's nuclear plants in decreased for 2000, reflecting a decrease in available capacity connection with the expected relicensing of those plants. after the expiration of two major long-term power purchase con Dominion incurred restructuring charges in 2001 and 2000 pri tracts late in 1999.

marily associated with its acquisition and integration of CNG.

Operating Expenses In both 2001 and 2000, Dominion recognized impairment and Operating expenses increased $3.5 billion to $7.7 billion for other loan losses on certain DCI loans and other investments.

2000 as compared to 1999. The introduction of purchased gas Impairment losses associated with exit activities were reported as and liquids, pipeline capacity and other purchases in 2000, as restructuring costs and impairment losses associated with the well as increases in other operations and maintenance and normal operations of DCI were reported as other operations and depreciation resulted from the inclusion of CNG operations maintenance. Other operations and maintenance also increased beginning in late January 2000. Electric fuel and energy pur due to the inclusion of Millstone operations, costs associated chases increased in 2000 due to increased generation activity with terminating certain capacity contracts, and provisions for and higher costs for fossil fuels consumed and energy purchases.

credit-related exposures associated with Enron's bankruptcy.

In addition, Dominion recognized restructuring and acquisi Other taxes decreased reflecting the change from gross receipts tion-related charges for the integration and transition of CNG, taxes to state income taxes in Virginia effective January 2001.

and operations and losses associated with DCI investments, Other Factors Affecting Net Income some of which were attributable to the DCI exit strategy.

Interest expense and related charges decreased, reflecting lower Other Factors Affecting Net Income overall interest rates on outstanding debt. Dominion's effective Interest expense and related charges increased, reflecting addi income tax rate increased in 2001 due to its utility operations in tional borrowings in 2000. The proceeds were used primarily to Virginia becoming subject to state income taxes in lieu of gross finance the acquisition of CNG. Also in 2000, the cumulative receipts taxes, higher effective rates associated with foreign earn effect of changing its accounting for certain components of its ings and higher pretax income in relation to nonconventional pension expense increased Dominion's net income by $21 mil fuel tax credits realized.

lion. In 1999, Dominion recorded an extraordinary item of $255 Overview of 2000 Results million, reflecting primarily the write-off of regulatory assets.

Dominion earned $1.85 per diluted share in 2000, reflecting net Dominion Energy income of $436 million and an increase of $139 million and

$0.37 per diluted share over 1999. The inclusion of CNG opera (millions, except per share amounts) 2001 2000 1999 tions for 11 months of 2000 contributed largely to the increases Operating revenue $6,144 $4,894 $3,645 in both operating revenue and expenses and Dominion's overall Operating expense 4,749 3,939 2,970 35 Net income contribution 723 489 271 results for 2000. In addition to the impact of CNG, the increase EPS contribution $ 2.86 $ 2.07 $ 1.42 in net income in 2000 over 1999 also included: an extraordinary Electricity supplied (mmwhr) 72 74 71 item in 1999 for the write-off of certain net regulatory assets; the Gas transmission throughput (bc) 553 567 contributions by Dominion's existing regulated electric utility Gas and oil production (bcfe) 11 12 -

and gas exploration operations; the costs of restructuring and other CNG acquisition-related activities; costs associated with the DCI exit strategy; acquisition-related interest costs; and a change in the method of accounting for pensions.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED]

2001 Results other revenue resulted from the inclusion of CNG operations Dominion Energy contributed $723 million and $2.86 per beginning in late January 2000. Regulated electric sales diluted share for 2001, an increase of $234 million and $0.79 increased as a result of customer growth, higher fuel rates, and per diluted share over 2000 results. The increase in net income a charge in 1999 for rate refunds. Nonregulated electric sales reflects higher revenues due to a full year of CNG operations for decreased for 2000 reflecting a decrease in available capacity 2001, the acquisition of Millstone and reductions in certain after the expiration of two major long-term power purchase operating expenses, including depreciation associated with contracts late in 1999. 2000 results also included sales to other nuclear plant relicensing and capacity expenses. Dominion segments of $163 million.

Operating Revenue Operating Expenses Operating revenue increased $1.3 billion to $6.1 billion for 2001 Operating expenses increased $969 million to $3.9 billion for as compared to 2000 reflecting the acquisition of Millstone and 2000 as compared to 1999. The introduction of purchased gas a full year of CNG operations for 2001. Regulated electric sales and liquids, pipeline capacity and other purchases in 2000, as for 2001 reflected customer growth and comparatively higher well as increases in other operations and maintenance expense fuel rates; however, these increases were largely offset by compar and depreciation resulted from the inclusion of CNG operations atively mild weather. Millstone operations contributed largely beginning in late January 2000. Electric fuel and energy pur to the increase in nonregulated electric sales. Nonregulated chases increased in 2000 due to increased generation activity gas sales and gas transportation and storage revenue increased and higher costs for fossil fuels consumed and energy purchases.

reflecting a full year of CNG operations and increased trans Selected Information - Energy Trading Activities portation rates. The results of Dominion's trading and market ing operations contributed to the overall increase in operating Dominion Energy manages Dominion's energy trading, hedging revenue. The 2001 results also included sales to other Dominion and arbitrage activities through the Dominion Energy Clearing segments of $143 million. house (the Clearinghouse). Dominion believes these operations complement its integrated energy businesses and facilitate its risk Operating Expenses management activities. As part of these operations, the Clear Operating expenses increased $810 million to $4.7 billion for inghouse enters into contracts for purchases and sales of energy 2001 as compared to 2000. Higher commodity prices contributed related commodities, including natural gas, electricity and oil.

to increased electric fuel and energy purchases and purchased Settlement of a contract may require physical delivery of the gas. In addition, purchased gas increased because 2000 expenses underlying commodity or, in some cases, an exchange of cash.

included only 11 months of CNG operations. Depreciation These contracts are classified as energy trading contracts for increased overall due to the inclusion of Millstone. This increase financial accounting purposes, and are included in the Consoli was partially offset by an extension of the useful lives of dated Balance Sheets as components of current and non-current Dominion's nuclear plants in connection with the expected derivative and energy trading assets and liabilities.

relicensing of those plants. This change in estimate resulted in a In accordance with generally accepted accounting princi

$78 million decrease in depreciation expense. Purchased capacity ples, Dominion reports energy trading contracts in its financial decreased as Dominion terminated certain contracts in early statements at fair value. Both realized and unrealized changes in 2001. Other operations and maintenance increased due to the these contracts' fair value are included in net income. For a inclusion of Millstone operations and scheduled outages at both discussion of how Dominion determines fair value for its energy nuclear and fossil plants. trading contracts, see CriticalAccountingPoliciespresented 36 earlier in MD&A. Arbitrage activities constitute a substantial 2000 Results Dominion Energy contributed $489 million and $2.07 per portion of the Clearinghouse's activities. Accordingly, when the diluted share for 2000, an increase of $218 million and $0.65 Clearinghouse enters into a contract to purchase a commodity, per diluted share over 1999 results. The increase in net income it typically enters into a sales contract, or a combination of sales reflects primarily the inclusion of CNG operations. contracts, with quantities and delivery or settlement terms that are identical or very similar to those of the purchase contract.

Operating Revenue When the purchase and sales contracts are settled either by Operating revenue increased $1.2 billion to $4.9 billion for 2000 physical delivery of the underlying commodity or by net cash as compared to 1999 reflecting primarily the inclusion of CNG settlement, the Clearinghouse may receive a net cash margin operations for 2000. The introduction of gas transportation and (a realized gain), or sometimes will pay a net cash margin storage in 2000 and increases in nonregulated gas sales and

(a realized loss). Until the contracts are settled, however, Dominion Delivery Dominion must record the monthly changes in the fair value of (millions, except per share amounts) 2001 2000 1999 both contracts. These changes in fair value represent unrealized Operating revenue $2,963 $2,826 $1,160 gains and losses. To the extent purchase and sales contracts with Operating expense 2,202 2,123 735 identical or similar terms are held by the Clearinghouse, the Net income contribution 366 339 175 changes in their fair values will generally offset one another. EPS contribution $ 1.45 $ 1.43 $ 0.91 Although the Clearinghouse may hold purchase or sales con Electricity delivered (mmwhr) 72 74 71 Gas throughput (mmcf) 357 356 tracts 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 manage 2001 Results ment policy and procedures are designed to ensure that its Dominion Delivery contributed $366 million and $1.45 per exposure to commodity price changes is limited. For additional diluted share for 2001, an increase of $27 million and $0.02 discussion of trading activities, see Market Rate Sensitive Instru per diluted share over 2000 results. The increase in net income ments and Risk Managementand Notes 2, 15, and 28 to the reflects slightly higher gas throughput and slightly lower vol Consolidated Financial Statements. umes of electricity delivered, as well as overall higher gas and A summary of the changes in the unrealized gains and electric rates.

losses in Dominion's portfolio of energy contracts held for trad Operating Revenue ing purposes during 2001 follows: Total operating revenue increased $137 million to $3.0 billion Energy for 2001 as compared to 2000, reflecting a full year of CNG Trading operations for 2001. This is reflected in higher regulated gas sales (millions) Contracts and gas transportation and storage revenue. These revenues also Net unrealized gain at December 31, 2000 $ 25 increased as a result of higher overall throughput and rates. Reg Contracts realized or otherwise settled during the period (1) ulated electric sales for 2001 reflect customer growth and com Net unrealized loss at inception of contracts initiated during the period (4) paratively higher fuel rates partially offset by the comparatively Change in unrealized gains and losses attributable to milder weather.

net arbitrage gains and changes in market prices. 129 Changes in unrealized gains and losses attributable Operating Expenses to changes in valuation techniques 16 Operating expenses increased $79 million to $2.2 billion for Net unrealized gain at December 31, 2001 $165 2001 as compared to 2000. Higher prices of commodities deliv ered or consumed contributed to increased purchased gas Unrealized gains and losses in Dominion's portfolio of energy expense. In addition, purchased gas increased as 2000 amounts trading contracts at December 31, 2001 are summarized in the only included 11 months of CNG operations.

following table based on the approach used to determine fair value and the contract settlement or delivery dates: 2000 Results Dominion Delivery contributed $339 million and $1.43 per (millions) Maturity Based on Contract Settlement or Delivery Date(s) diluted share for 2000, an increase of $164 million and $0.52 Greater per diluted share over 1999 results. The increase in net income Less than 1-2 2-3 3-5 than Source of Fair Value 1 year years years years 5 years Total reflects the inclusion of CNG operations.

Prices actively Operating Revenue quoted $20 41 11 - - $72 Total operating revenue increased $1.7 billion to $2.8 billion for Prices provided by other 2000 as compared to 1999 reflecting primarily the inclusion of external sources - $13 10 20 - $43 CNG operations for 2000. The introduction of regulated gas Prices based on sales and gas transportation and storage in 2000 resulted from models and other valuation methods $14 12 6 6 12 $50 the inclusion of CNG operations beginning in late January

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS [CONTINUED) 2000. Regulated electric sales increased as a result of customer higher operations and maintenance expenses associated with growth, higher fuel rates, and a charge in 1999 for rate refunds. service industry and contractor costs. Operating expenses Weather did not result in material changes in regulated electric associated with purchases of gas and oil for brokered sales sales for the comparable periods. However, colder weather in decreased for 2001.

Dominion's gas distribution service territories resulted in higher 2000 Results than normal throughput and was reflected in regulated gas sales Dominion E&P contributed $255 million and $1.08 per diluted and gas transportation and storage revenue.

share for 2000, an increase of $211 million and $0.85 per Operating Expenses diluted share over 1999 results. The increase in net income Operating expenses increased $1.4 billion to $2.1 billion for reflects the inclusion of CNG operations.

2000 as compared to 1999. The introduction of purchased gas Operating Revenue and liquids, pipeline capacity and other purchases in 2000, as Total operating revenue increased $1.1 billion to $1.3 billion for well as increases in other operations and maintenance expense 2000 as compared to 1999 reflecting primarily the inclusion of and depreciation resulted from the inclusion of CNG operations CNG operations in 2000. Dominion E&P sold $51 million of beginning in late January 2000.

natural gas and oil to other Dominion segments in 2000. In Dominion E&P addition to CNG operations, 2000 results included a full year of operations from property acquisitions in 1999 including a (millions, except per share amounts) 2001 2000 1999 Canadian exploration and production company and other Operating revenue $1,460 $1,330 $256 Operating expense properties in the San Juan Basin of New Mexico.

934 920 212 Net income contribution 320 255 44 Operating Expenses EPS contribution $ 1.27 $ 1.08 $0.23 Operating expenses increased $708 million to $920 million for Natural gas and oil produced (bcfe) 327 304 109 2000 compared to 1999. The introduction of purchased gas and liquids, pipeline capacity and other purchases in 2000 as well as 2001 Results increases in other operations and maintenance expense and depre Dominion E&P contributed $320 million and $1.27 per diluted ciation resulted from the inclusion of CNG operations beginning share for 2001, an increase of $65 million and $0.19 per diluted in late January 2000.

share over 2000 results. The increase in net income reflects a full Dominion Capital year of CNG operations for 2001, two months of Louis Dreyfus operations and higher realized gas and oil prices. (millions, except per share amounts) 2001 2000 1999 Operating Revenue Other revenue $ 234 $433 $ 473 Operating expense (including interest) 268 410 360 Total operating revenue increased $130 million to $1.5 billion Net income (loss) contribution (14) 11 78 for 2001 as compared to 2000 reflecting a full year of CNG EPS contribution $(0.06) $0.05 $0.41 operations for 2001, two months of Louis Dreyfus operations and higher gas and oil prices. Average realized gas and oil prices During 2000, DCI implemented a strategy to exit and windup its increased 16 percent to $3.85/mcfe during 2001. For 2001, over core operating businesses as required by the SEC under the 1935 all gas and oil production increased 8 percent to 327 bcfe. These Act in connection with Dominion's acquisition of CNG. The increases reflect the addition of Louis Dreyfus operations in the results of DCI reflect this strategy.

38 fourth quarter of 2001 offset somewhat by natural declines at 2001 Results certain Dominion gas and oil production properties. Dominion DCI reported losses of $14 million and $0.06 per diluted share E&P sold $106 million of natural gas and oil to other Dominion for 2001, as compared to net income of $11 million and $0.05 segments in 2001.

per diluted share in 2000. Other revenue decreased $199 million Operating Expenses to $234 million for 2001 as compared to 2000. These results Operating expenses increased $14 million to $934 million for reflect lower interest income as a substantial portion of the com 2001 as compared to 2000 and include the addition of Louis mercial loan portfolio was sold in the fourth quarter of 2000. In Dreyfus operations in the fourth quarter of 2001, as well as addition, mortgage loans originated in the second quarter of

2001 were not securitized but sold as part of the Saxon Capital Liquidity and Capital Resources sale. Operating expenses decreased $142 million to $268 million Dominion and its subsidiaries depend on both internal and for 2001 compared to 2000 reflecting reduced interest expense external sources of liquidity to provide working capital and to and lower general and administrative expenses resulting from fund capital requirements. Short-term cash requirements not reduced operations. See Corporateand Otherbelow and Note 6 met by the cash flow from operations are generally satisfied with to Consolidated Financial Statements. proceeds from short-term borrowings. Long-term cash needs are met through sales of securities and additional long-term debt 2000 Results financing.

DCI contributed $11 million and $0.05 per diluted share for 2000, as compared to net income of $78 and $0.41 per diluted Internal Sources of Liquidity share in 1999. Other revenue decreased $40 million to $433 mil Cash flow from operating activities provided $2.4 billion, $1.3 lion for 2000 as compared to 1999. Mortgage volumes were $2.1 billion and $1.3 billion during 2001, 2000 and 1999, respec billion in 2000, down from $2.4 billion in 1999. As a result of tively. The increase in cash flow from operating activities during the sale and restructuring of loans, the commercial finance oper 2001, as compared to 2000, reflects primarily: collections of ations portfolio decreased to $676 million at the end of 2000 receivables outstanding as of December 31, 2000; recovery of compared to $2.0 billion at the end of 1999. previously deferred gas costs; and the inclusion of CNG's opera tions for the entire year. These sources of cash were partially off Corporate and Other set by a reduction in payables, a decrease in cash flow from (millions) 2001 2000 1999 financial services operations due to the exiting of DCI's core Net expense $(851) $(658) $(271) businesses, and an increase in inventory purchases. At December 31, 2000, receivables resulting from gas sales, marketing and trading activities, as well as unrecovered gas costs, were higher 2001 Results than normal due to the sharp increase in gas prices in late 2000.

Net expenses associated with corporate and other operations Dominion's cash flow information for 2000 includes CNG oper were $851 million and $(3.37) per diluted share, an increase in ations beginning January 28, 2000. Cash flow from operating net expenses of $193 million and $0.58 per diluted share as activities during 2000, as compared to 1999, increased primarily compared to 2000. Net expenses for 2001 include the following due to the acquisition of CNG.

unusual charges which were not allocated to Dominion's other Dominion's operations are subject to risks and uncertainties operating segments (amounts are pre-tax): restructuring costs of that may negatively impact cash flows from operations. Such

$105 million; impairment of DCI investments of $281 million; risks and uncertainties include, but are not limited to, the loss of $40 million on the sale of Saxon Capital; provision for following:

credit exposure associated with Enron bankruptcy of $151 mil

• unusual weather and its effect on energy sales to customers lion; and a charge of $220 million related to the purchase of and energy commodity prices; three non-utility generating plants previously serving Dominion

• extreme weather events that could disrupt offshore gas and under long-term contracts. See Notes 7, 8, 15, and 27 to the oil production or cause catastrophic damage to Dominion's Consolidated Financial Statements. electric distribution and transmission systems; 2000 Results

• exposure to unanticipated changes in prices for energy Net expenses associated with corporate and other operations commodities purchased or sold; were $658 million and $(2.79) per diluted share, an increase of

• effectiveness of Dominion's risk management activities and

$387 million and $1.37 per diluted share as compared to 1999. underlying assessment of market conditions and related fac 2000 results included restructuring and acquisition-related tors, including energy commodity prices, basis, counter charges of $460 million, DCI impairments of $119 million and party credit risk, liquidity, volatility, capacity, transmission, the cumulative effect of an accounting change of $21 million. In currency exchange rates, and interest rates; 1999, Dominion recorded an extraordinary item of $255 mil

• the cost of replacement electric energy in the event of lion, net of tax, reflecting primarily the write-off of certain net unscheduled generation outages; regulatory assets. See Notes 7, 8, and 9 to the Consolidated

• contractual or regulatory restrictions on transfers of funds Financial Statements. among Dominion and its subsidiaries; and

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED]

External Sources of Liquidity investments in an effort to maintain the Dominion Companies' Dominion Resources, Inc., Virginia Electric and Power Com current credit ratings.

pany and CNG (the Dominion Companies) rely on access to As part of borrowing funds and issuing debt (both short bank and capital markets as a significant source of liquidity for term and long-term) or preferred securities, the Dominion capital requirements not satisfied by cash provided by the com Companies must enter enabling agreements. These agreements panies' operations. The Dominion Companies' ability to borrow contain covenants that, in the event of default, could trigger the funds or issue securities and the return demanded by investors acceleration of principal and interest payments and, in some are affected by the issuing company's credit ratings. In addition, cases, the termination of credit commitments unless a waiver of the raising of external capital is subject to certain regulatory such requirements is agreed to by the lenders/security holders.

approvals, including the SEC and, in the case of Virginia Elec These provisions are customary, with each agreement specifying tric and Power Company (Virginia Power), the Virginia State which covenants apply. These provisions are not necessarily Corporation Commission (Virginia Commission). Credit ratings unique to the Dominion Companies. Some of the typical are intended to provide banks and capital market participants covenants include:

with a framework for comparing the credit quality of securities. "*the timely payment of principal and interest; Management believes that the current credit ratings of the "*information requirements, including submittal of financial Dominion Companies provide sufficient access to the capital reports filed with the SEC to lenders; markets. However, disruptions in the bank and capital markets "*keeping books and records in accordance with generally not specifically related to Dominion may affect the Dominion accepted accounting principles; Companies' ability to access these funding sources or cause an "* payment of taxes, maintaining insurance; increase in the return required by investors. "* performance obligations, audits/inspections, continuation Both quantitative (financial strength) and qualitative (busi of the basic nature of business, restrictions on certain mat ness or operating characteristics) factors are considered by the ters related to merger or consolidation, restrictions on credit rating agencies in establishing an individual company's disposition of substantial assets; credit rating. The credit ratings for the Dominion Companies "* financial covenants, such as a limit on total funded debt to are most affected by each company's financial profile, mix of reg total capitalization; and ulated and nonregulated businesses and respective cash flows, "*limitations on liens.

changes in methodologies used by the rating agencies and Dominion monitors the covenants on a regular basis in "event risk," if applicable, such as major acquisitions. Credit rat order to provide assurance that events of default will not occur.

ings for the Dominion Companies as of March 1, 2002 follow: As of December 31, 2001, there were no events of default under the Dominion Companies' covenants.

Standard & Poor's Moody's During 2001, the Dominion Companies issued long-term Dominion Resources, Inc.

Senior unsecured debt securities BBB+ Baal debt, preferred securities through affiliated subsidiary trusts, and Preferred securities of subsidiary trusts BBB- Baa2 common stock totaling $8.4 billion. As discussed below, pro Commercial paper A-2 P-2 ceeds were used primarily to repay short-term debt, finance Virginia Power Mortgage bonds major acquisitions and capital expenditures, and support finan A A2 Senior unsecured debt securities (including tax-exempt) A- A3 cial services operations.

Preferred securities of subsidiary trust BBB+ Baal Preferred stock BBB+ Baa2 2001-- Financings Associated with Major Acquisitions Commercial paper A-1 P-1 In 2001, Dominion Resources, Inc., refinanced the remaining 40 CNG bridge financing associated with the CNG acquisition with the Senior unsecured debt securities BBB+ A3 Preferred securities of subsidiary trust BBB- Baal following issuances of securities: $300 million of 8.4 percent trust Commercial paper A-2 P-2 preferred securities due 2041, issued through an affiliated trust, and $1 billion of 2-year fixed rate 6 percent senior notes.

A downgrade in an individual company's credit rating would not Also in 2001, Dominion Resources, Inc., through another generally restrict its ability to raise short-term and long-term affiliated trust, issued $250 million ($247 million after discount) financing so long as its credit rating is still "investment grade," of 8.4 percent capital securities due 2031, in connection with but it would increase the cost of borrowing. Dominion's man the acquisition of Millstone. The balance of the acquisition was agement proactively manages the financial structure of its con funded by proceeds of common stock issued in 2000 and cash solidated businesses, including its business mix and acquisition temporarily available from other internal sources. Dominion

expects to permanently finance the portion temporarily funded 2001-Other Securities Issuances and Repayments by internal sources by issuing Dominion Resources, Inc. debt During 2001, Dominion and its consolidated subsidiaries also securities in the future. In January 2002, Dominion Resources, issued the following other securities and used the net proceeds Inc. issued $250 million 3.875 percent medium-term notes due primarily for general corporate purposes, including the 2004 for this purpose. repayment of commercial paper and other debt and capital Dominion financed the cash consideration for the acquisi expenditures:

tion of Louis Dreyfus and the repayment of certain Louis "*Senior notes: $1.1 billion bearing interest at (5.75 percent Dreyfus debt with the following issuances of CNG securities: 6.85 percent) due 2006-2011;

$200 million of 7.8 percent trust preferred securities due 2041, "*Medium-term notes: $220 million bearing interest at vari issued through an affiliated trust; $500 million of 5.375 percent able rates due 2003; sdnior notes due 2006; and $450 million of 6.25 percent senior "*Medium-term notes denominated in Canadian dollars and notes due 2011. issued through a Canadian subsidiary: $117 million (US dollars) bearing interest at 6.1 percent due 2006; 2001-- Short-Term Borrowings

"*Tax exempt bonds: $50 million bearing interest at variable At December 31, 2001, the Dominion Companies had commer rates due in 2031; and cial paper programs with an aggregate limit of $2.05 billion sup

"*Notes with affiliates: $194 million 6 percent note to an affil ported by a $1.75 billion 364-day revolving credit facility and a iated telecommunications entity due 2005, and a $518 mil

$300 million multi-year facility. These credit facilities mature in lion variable rate demand note due by 2006 to another the second quarter of 2002 and are expected to be replaced.

affiliated telecommunications entity. See Dominion Fiber During 2001, credit facilities totaling $1.05 billion matured and Ventures, LLC below and Note 29 to the Consolidated were not renewed.

Financial Statements.

The Dominion Companies' net borrowings under the com In 2001, Dominion and its consolidated subsidiaries repaid mercial paper program were $1.86 billion at December 31, 2001, approximately $1.0 billion of long-term debt securities, exclud a decrease of $555 million from amounts outstanding at Decem ing debt repayments associated with financial services opera ber 31, 2000. Commercial paper borrowings are used primarily tions. Also in 2001, Dominion purchased and redeemed, at par, to fund working capital requirements and bridge financing of all of the outstanding shares of the Virginia Power January 1987 acquisitions, and therefore may vary significantly during the and June 1987 series of money market preferred stock for course of the year depending upon the timing and amount of

$125 million.

cash requirements not satisfied by cash provided by operations.

In January 2002, Virginia Power called its $200 million, In addition to commercial paper, Virginia Power may also 6.75 percent 1997-A mortgage bonds due February 1, 2007 for issue up to $200 million aggregate outstanding principal of redemption in February 2002. Virginia Power funded the extendible commercial notes (ECNs) to meet working capital redemption by issuing $650 million of 5.375 percent senior requirements. ECNs are unsecured notes that are expected to be notes due 2007. Virginia Power used the remaining proceeds for sold in private placements. Any ECNs issued would have a stated general corporate purposes and to repay other debt.

maturity of 390 days from issuance and may be redeemed, at Virginia Power's option, within 90 days or less from issuance. 2001-- DCI Financing Activities There were no ECNs outstanding at December 31, 2001. In connection with the purchases and originations of loans and the sales and collections of loans during 2001, DCI issued $3.3 2001-Issuance of Common Stock billion and repaid $3.0 billion of long-term debt. With the sale of 41 In 2001, Dominion received proceeds of $245 million from the Saxon Capital in July 2001, DCI no longer engages in the finan issuance of common stock through Dominion Direct (a dividend cial services activities giving rise to these sources and uses of cash.

reinvestment and open enrollment direct stock purchase plan),

For a discussion of Dominion's divestiture of its financial services employee savings plans, and the exercise of employee stock business, see Note 6 to the Consolidated Financial Statements.

options. In addition, Dominion issued 14 million shares of com mon stock and stock options as part of the consideration paid in Amounts Available under Shelf Registrations the acquisition of Louis Dreyfus at a total value of approximately At December 31, 2001, Dominion Resources, Inc. had approxi

$894 million. mately $2.3 billion principal amount remaining under currently effective shelf registrations, which was reduced in January 2002 by the issuance of $250 million of medium term notes due

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED]

2004. Virginia Power had $900 million principal amount these obligations and commitments with cash flow from opera remaining under an effective shelf registration, which was tions and a combination of sales of securities and short-term reduced in January 2002 by the aforementioned issuance of borrowings. Contractual cash obligations and commitments at

$650 million of senior notes. At December 31, 2001, CNG did December 31, 2001 follow: 2002-$2.7 billion; 2003-$3.2 bil not have any amounts remaining under effective shelf registra lion; 2004--$2.4 billion; 2005-$1.9 billion; 2006-$2.3 bil tions. However, CNG expects to file a shelf registration with the lion; and years after 2006-$13.8 billion. The amount for 2002 SEC in March 2002 for an additional $1.5 billion principal includes $1.35 billion associated with the redemption of previ amount in debt and trust preferred securities. ously issued securities that are scheduled to mature. These Investing Activities amounts do not include working capital commitments, includ In 2001, investing activities resulted in a net cash outflow of ing the repayment of short-term debt (see Note 19 to the Con

$4.2 billion, reflecting the following primary investing activities:

solidated Financial Statements) and settlement of derivative and energy trading contracts (see Note 15 to the Consolidated

"*capital expenditures of $1.2 billion that included construc tion and expansion of generation facilities, environmental Financial Statements), or amounts for interest or distributions payable on securities issued by Dominion (see Notes 20 and 22 upgrades, purchase of nuclear fuel, and construction and to the Consolidated Financial Statements). In addition, at improvements of gas and electric transmission and distribu December 31, 2001, Dominion had issued $3.3 billion of guar tion assets;

"* capital expenditures of $944 million that included the antees to various third parties in relation to payment of obliga tions by certain of its subsidiaries and officers. At December 31, purchase of gas and oil producing properties, drilling and equipment costs and undeveloped lease acquisitions; 2001, subsidiary debt subject to such guarantees totaled $1.1 bil

"*proceeds from securitizations and collections of loans lion and officers' borrowings under the executive stock loan pro gram guaranteed by Dominion totaled $84 million.

receivable by DCI of $283 million;

"*acquisition of Millstone for approximately $1.3 billion; As of December 31, 2001, Dominion, through certain

"* cash consideration for acquisition of Louis Dreyfus for subsidiaries, has entered into agreements with special purpose entities (Lessors) in order to finance and lease several new power approximately $902 million; and generation projects, as well as its corporate headquarters and

"* proceeds from the sale of Saxon Capital of $141 million.

For discussion of Dominion's acquisition of Millstone aircraft. The Lessors have an aggregate financing commitment and Louis Dreyfus, see Note 5 to the Consolidated Financial from equity and debt participants (Investors) of $2.2 billion, of which $817 million has been used for total project costs to date.

Statements.

Dominion, in its role as construction agent for the Lessors, is Capital Expenditures responsible for completing construction by a specified date. In Dominion's planned capital expenditures during 2002, 2003 the event a project is terminated before completion, Dominion and 2004 are expected to total approximately $2.5 billion, $3.2 has the option to either purchase the project for 100 percent of billion and $3.3 billion, respectively. These expenditures include project costs or terminate the project and make a payment to construction and expansion of generation facilities, environmen the Lessor of approximately but no more than 89.9 percent of tal upgrades, construction improvements of gas and electric project costs. Upon completion of each individual project, transmission and distribution assets, purchases of nuclear fuel Dominion has use of the project assets subject to an operating and expenditures to develop natural gas and oil properties. lease. Dominion's lease payments to the Lessors are sufficient to Dominion expects to fund its capital expenditures with cash provide a return to the Investors. At the end of each individual 42 from operations; a combination of sales of securities and short project's lease term, Dominion may renew the lease at negotiated term borrowings. amounts based on project costs and current market conditions, subject to Investors' approval; purchase the project at its original Contractual Cash Obligations and Commitments Other than planned capital expenditures, Dominion has con construction cost; or sell the project, on behalf of the Lessor, tractual cash obligations and commitments associated with the to an independent third party. If the project is sold and the proceeds from the sale are insufficient to repay the Investors, following: repayment of long-term debt and mandatorily redeemable preferred securities of subsidiary trusts (see Notes 20 Dominion may be required to make a payment to the Lessor, and 22 to the Consolidated Financial Statements); purchased ranging from 81 percent to 85 percent of the project cost power contracts, fuel purchase contracts, natural gas pipeline depending on the individual project and applicable agreement.

Dominion has guaranteed a portion of the obligations of its and storage capacity contracts and leases (see Note 27 to the Consolidated Financial Statements). Dominion expects to fund subsidiaries to the Lessors during the construction and

post-construction periods. These transactions do not contain there is a downgrade of Dominion Resources, Inc. senior unse any type of credit rating or stock price trigger events. cured debt to BBB- or Baa3 and the closing price of Dominion's As noted above, as of December 31, 2001, amounts subject common stock is below $45.97 for 10 consecutive trading days, to these agreements totaled $817 million, and the total amount, the Preferred Stock is subject to remarketing, with the proceeds upon completion of all projects, is projected to be approximately being used to retire the DFV Senior Notes. If the remarketing of

$2.2 billion. The projects are accounted for as operating leases the Preferred Stock were to occur, the Preferred Stock, as con for financial accounting purposes. Accordingly, neither the vertible securities, would be considered in the calculation of project assets nor related obligations are reported on Dominion's diluted earnings per share of Dominion's common stock or balance sheets. The contractual cash commitments and obliga could result in the issuance of additional shares of Dominion tions discussed above include annual payments of approximately common stock, if converted.

$6 million associated with these projects representing minimum Related Party Transactions payments under leases for which the leased assets are currently For additional information about Dominion's investment in in use. Projects currently under development are scheduled for DFV and other related party transactions, see Note 29 to the completion during the period 2002 through 2004. Annual lease Consolidated Financial Statements.

payments for the projects are estimated to be $33 million in 2002, increasing to $133 million by 2004. Future Issues and Outlook Dominion Fiber Ventures, LLC Regulated Electric Operations In December 2000, Dominion formed Dominion Fiber Ven Electric Deregulation Legislation tures, LLC (DFV) to facilitate the expansion of the telecommu Virginia--In 1999, Virginia enacted comprehensive restructur nications businesses of its subsidiary, Dominion Telecom, Inc.

ing legislation. The Virginia Electric Utility Restructuring Act (DTI). In March 2001, Dominion contributed all outstanding (the Virginia Restructuring Act) established a plan to restructure shares of DTI with an estimated equity value of $110 million to Virginia's electric utility industry and provided for the phase-in DFV, in exchange for 100 percent of Class B managing member of choice for retail customers from January 1, 2002 through ship interests in DFV. A third-party investor trust contributed January 1, 2004. The Virginia Commission has ordered that

$60 million in cash for 100 percent of the Class A membership retail choice be fully implemented in Virginia by January 1, interests in DFV. As a result of the Class A membership interests 2003 for customers of Dominion's regulated electric subsidiary.

having substantive minority veto rights, Dominion's investment Under the Virginia Restructuring Act, the generation por in DFV is accounted for using the equity method and is tion of Dominion's Virginia jurisdictional operations is no longer reported in investments in affiliates on the 2001 Consolidated subject to cost-based rate regulation, effective January 1, 2002.

Balance Sheet.

Dominion's base rates (excluding fuel costs and certain other In March 2001, DFV issued $665 million of 7.05 percent allowable adjustments) will remain capped until July 2007 senior secured notes due March 2005 (DFV Senior Notes) and unless terminated sooner as provided by the Virginia Restructur contributed part of the net proceeds to DTI. Pending the need ing Act. Recovery of generation-related costs will continue for cash to fund capital expenditures in the expansion of its through capped rates and, where applicable, a wires charge telecommunications network, DFV and DTI temporarily assessed on those customers opting for alternative suppliers.

loaned proceeds from the issuance of the DFV Senior Notes Dominion may petition the Virginia Commission to terminate and cash contributed by the Class A member to Dominion.

the capped rates after January 1, 2004. If Dominion were to Dominion used the proceeds to repay commercial paper. At request that the capped rates be terminated, the Virginia Com 4[3 December 31, 2001, Dominion owed $367 million under mission may terminate the capped rates if it finds that a competi these loans and reported it as notes payable -affiliates on the tive generation services market exists within Dominion's service 2001 Consolidated Balance Sheet.

area. Dominion's wires charge is the excess of its capped unbun The DFV Senior Notes are secured by DTI stock and in died rate for generation over the projected market price for gen part by certain rights with respect to 665,000 shares of Series A eration. The wires charge is intended to compensate Dominion Mandatorily Convertible Preferred Stock (Preferred Stock), liq for its investment in and commitments for generation-related uidation preference $1,000 per share, issued by Dominion and utility assets prior to the enactment of the restructuring legisla held by Piedmont Share Trust (Piedmont Trust). Dominion is tion. Dominion's methodology for calculating the wires charge the beneficial owner of Piedmont Trust which is consolidated in and applicable market price has been approved by the Virginia the preparation of Dominion's financial statements. If the DFV Commission. Additionally, the Virginia Restructuring Act pro Senior Notes are not otherwise paid at maturity, or in the event vides that after the end of the capped rate period, any default

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED]

service provided by Dominion will be based upon competitive Because Virginia Power's operations were largely functionally market prices for electric generation services. separated in its existing corporate structure, implementation of Dominion began the phase-in of retail choice on January 1, the plan ordered by the Virginia Commission will require few 2002. The phase-in will be completed on January 1, 2003. changes in Virginia Power's operations. Virginia Power will con Dominion is able to accommodate this schedule as a result of tinue to provide electric service to its customers at capped rates experience gained during its retail access pilot program, as well until July 1, 2007, unless capped rates are terminated after as extensive testing of its processes and systems to support cus January 1, 2004, as provided in the Virginia Restructuring Act.

tomers switching to retail access. Additionally, the pilot demon Virginia Power will continue serving customers who select alter strated Dominion's ability to sell energy displaced by shopping native energy suppliers by delivering the electric energy and will customers in the wholesale market. collect a wires charge, if applicable, as discussed above. Virginia During the capped rate period, Dominion may require a Power will also be permitted to continue its activities in wholesale 12-month minimum stay period for electricity customers with energy markets. However, effective January 1, 2002, Virginia an annual peak demand of 500 kilowatts or greater who request codes of conduct became effective, governing certain transactions electricity supply service after receiving electricity supply service and communications between Virginia Power's electric distribu from a competitive service provider. This measure will mitigate tion and transmission operations and its generation division.

the practice of large commercial and industrial customers These codes of conduct are designed to prevent cross-subsidies returning to Dominion's capped rate service during periods of between the generation and other divisions and to ensure that the higher market prices and leaving during periods of lower market generation and other divisions operate independently.

prices - a practice known as "seasonal gaming."

Alliance RTO As discussed in the Separation ofGenerationandDelivery Both the Virginia Restructuring Act and the Federal Energy Operationsin Virginia and Alliance RTO sections below, the Regulatory Commission (FERC) merger conditions require that Virginia Restructuring Act also calls for the functional separa Dominion join a regional transmission organization (RTO). By tion of generation, transmission and distribution.

joining an RTO, Dominion's regulated electric utility subsidiary, North Carolina-The North Carolina General Assembly is Virginia Power, would transfer operational control of its trans exploring the future of electric service in North Carolina, the mission assets to the RTO, a separate entity. Dominion, together development of a competitive wholesale market and retail com with eight other member companies (Alliance Companies), filed petition. However, there has been little recent activity.

with FERC for approval of the proposed "Alliance RTO."

Separation of Generation and Delivery Operations in Virginia Dominion also filed an application to transfer control of its The Virginia Restructuring Act addressed divestiture, functional transmission facilities to the Alliance RTO with the Virginia separation and other corporate relationships. The Act required Commission and North Carolina Utilities Commission. In Virginia's electric utilities to file with the Virginia Commission December 2001, FERC concluded the Alliance Companies lack their plans to separate generation from transmission and distri sufficient scope as an RTO and also ordered the Alliance Com bution operations. panies to determine how they could fit within the Midwest Dominion's proposed separation plan included transferring Independent System Operator. Dominion will examine the pos the generation assets and operations, including its non-utility sibility of joining RTOs other than those representing Midwest power purchase contracts, from its regulated electric utility, utilities, as directed by FERC. As a result of the FERC decision, Virginia Power, to a separate affiliated company. In December the North Carolina application was dismissed and the Virginia 2001, the Virginia Commission directed Dominion to separate application was stayed. Dominion expects to refile or amend the 44 its generation, distribution, and transmission functions through state applications.

creation of divisions within Virginia Power, rather than through Despite these delays, Dominion remains committed to sup transfer of generation assets to a separate affiliate. The Virginia porting electric deregulation by becoming a member of an RTO.

Commission's December 2001 order did not preclude further The formation of RTOs is important to enhancing wholesale consideration of Dominion's proposed corporate reorganization electric competition through the creation of standardized mar and asset transfer, pending, in the Virginia Commissions view, ket rules, tariffs, and interconnection agreements. RTOs will put further developments in needed market structures and all suppliers on an equal footing and enhance access to non competitive retail electric generation markets. Dominion has discriminatory delivery services. Membership in an RTO and filed a notice of appeal of the Virginia Commission's order. regionalization of electric markets will provide opportunities No assessment can be made at this time concerning future for Dominion to expand its business by providing generation developments.

services to more customers. While a new regional authority will Rate Matters - Electric make major operational decisions and operate the entire grid, Virginia- Dominion's separation plan, as described in Separa Dominion will continue to ensure that the local systems operate tion of Generationand Delivery Operationsin Virginia,proposed reliably. In 2001, Dominion focused on the new systems, busi an index-based fuel cost recovery based on forecasted generation ness processes, regulatory filings and contractual relationships by fuel types and projected fuel price indices, to be effective after necessary to implement electric deregulation and regional trans January 1, 2002. Dominion subsequently withdrew the index mission operations. based fuel cost recovery mechanism and will continue to develop an alternative methodology. Dominion's current Wholesale Competition Virginia jurisdictional fuel factor will remain in effect until Dominion's electric utility subsidiary sells electricity in the December 31, 2002. Proceedings to be initiated during 2002 wholesale market under its market-based sales tariff authorized will determine the fuel factor after that date.

by FERC but has agreed not to make wholesale power sales Dominion filed its Virginia Commission-approved unbun under this tariff to loads located within its service territory. In dled rates reflecting the functional separation of generation, January 2002, Dominion's electric utility subsidiary filed for transmission and distribution in January 2002. As previously FERC approval of a tariff to sell wholesale power at capped rates discussed, Dominion will phase in retail choice for all customers based on its embedded cost of generation. This cost-based sales in its service territory by January 1, 2003. Where applicable, tariff could be used to sell to loads within or outside its service wires charges, effective January 1, 2002 and subject to annual territory. Any such sales would be voluntary. Dominion expects adjustment, will be paid by Dominion's Virginia jurisdictional FERC to approve the tariff during the first quarter of 2002.

retail customers who choose an alternative generation supplier Dominion's sales of natural gas and oil in wholesale markets during the capped rate period.

are not regulated by FERC.

North Carolina--Dominion's regulated electric utility cannot Exposure to Potentially Stranded Costs request an increase in its North Carolina jurisdictional base rates Stranded costs are those costs incurred or commitments made until 2006, except for certain events that would have a signifi by utilities under cost-based regulation that may not be reason cant financial impact. Fuel rates, however, are still subject to ably expected to be recovered in a competitive market. At change under annual proceedings.

December 31, 2001, Dominion's exposure to potentially Regulated Gas Distribution Operations stranded costs consisted of long-term purchased power contracts that could ultimately be determined to be above market; gener Gas Deregulation Legislation ating plants that could possibly become uneconomic in a dereg Each of the three states in which Dominion has gas distribution ulated environment; and unfunded obligations for nuclear plant operations has enacted or considered legislation regarding dereg decommissioning and postretirement benefits not yet recognized ulation of natural gas sales at the retail level.

in the financial statements. Ohio -Ohio has not enacted legislation requiring supplier Dominion believes capped electric retail rates and, where choice for residential and commercial natural gas consumers.

applicable, wires charges provided under the Virginia Restructur However, in cooperation with the Public Utilities Commission ing Act provide a reasonable opportunity to recover a substantial of Ohio (Ohio Commission), Dominion on its own initiative portion of its potentially stranded costs. Based on estimates at offers retail choice to customers. Dominion's Energy Choice March 31, 1999, Dominion would have otherwise been exposed, program is available to all 1.2 million customers in Dominion's on a pre-tax basis, to an estimated $3.2 billion of potential losses Ohio service area. At December 31, 2001, approximately related to long-term power purchase commitments without the 586,000 of Dominion's Ohio customers were participating in 45 recoveries provided by the capped rates. Recovery of Dominion's this open-access program. Large industrial customers in Ohio potentially stranded costs remains subject to numerous risks even also source their own natural gas supplies.

in the capped-rate environment including, among others, expo Pennsylvania-At December 31, 2001, approximately 125,000 sure to long-term power purchase commitment losses, future residential and small commercial customers had opted for environmental compliance requirements, changes in tax laws, Energy Choice in Dominion's Pennsylvania service area. Nearly nuclear decommissioning costs, inflation, increased capital costs, all Pennsylvania industrial and large commercial customers buy and recovery of certain other items. See Notes 16, 26 and 27 to natural gas from unregulated suppliers.

the Consolidated Financial Statements.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

West Virginia-At this time, West Virginia has not enacted legis parties, regarding the costs of gas supplies and increased oper lation to require customer choice in its retail natural gas markets. ating costs, that stipulated that Dominion would receive a $9.5 The West Virginia Public Service Commission (West Virginia million increase in gas and non-gas revenues. The settlement Commission) recently issued regulations to govern pooling ser also provides for a two-year rate moratorium. The new rates vices; these services are one of the tools that natural gas suppliers took effect on January 1, 2002 and will be in place through may utilize to provide retail customer choice in the future. December 31, 2003.

Rate Matters-- Gas Distribution Interstate Gas Transmission Operations Ohio--In October 2001, the Ohio Commission approved a FERC Policy Developments program developed by Dominion to address the inability of cer FERC's most significant near-term policy initiative regarding tain customers to pay delinquent account balances. In many interstate gas pipelines may also impact Dominion's interstate cases, these customers were impacted by last winter's unusually electric transmission operations. FERC proposes to eliminate its high gas prices and cold weather. Under this one-time matching existing, separate code of conduct regulations for natural gas program, Dominion matched dollar-for-dollar, up to $500 per pipelines and electric transmission utilities, and to replace these customer, the first payment received by December 31, 2001 for requirements with uniform standards applicable to interstate qualifying customers who had received a disconnection notice or "Transmission Providers" both of natural gas and of electricity.

who had been disconnected as of October 31, 2001. Matching The proposed standards would redefine the scope of affiliates amounts totaling $10 million were credited to customers' covered by standards of conduct for most FERC-regulated com accounts at December 31, 2001.

panies. If the proposed policy is adopted, it will supersede the The Ohio Commission and Dominion also agreed that existing broad standards, imposed as a result of the CNG acqui adjustments of approximately $100 million to depreciation were sition, that are now applicable to Dominion, and will improve its appropriate in order to reflect the effect of certain fixed assets competitive standing among other integrated energy companies.

exceeding their original estimated useful lives. The Ohio Com mission initially held that payments made under the matching Dominion supports FERC's policy goal to ensure a compet program and subsequent write-offs of bad debts in excess of the itive interstate energy market. However, Dominion advocates certain adjustments to recognize the significant operational amount already recovered in rates could be offset by reductions differences between gas pipelines and electric transmission in the excess depreciation reserve through a bad debt rider. The companies. Dominion anticipates further action by FERC by Ohio Commission revised its decision on the bad debt rider but mid-2002. While Dominion expects the outcome of a final rule allowed the payment-matching program to continue. Under the to improve its ability to compete with similarly-situated trans revised final order, the Ohio Commission authorized the deferral mission providers, Dominion does not expect the final rule to of certain amounts incurred by Dominion in excess of the have a short-term material impact on its results of operations, amount of bad debt expense already recovered in rates, pending financial position or cash flows.

recovery in the next rate case. Dominion recognized a regulatory asset of $80 million, representing the excess customer bad debt Rate Matters- Gas Transmission costs as of December 31, 2001. Dominion believes that it will Dominion implemented various rate filings, tariff changes, and recover those amounts deferred. See Note 18 to the Consoli negotiated rate service agreements during 2001. In all material dated Financial Statements. respects, the filings were approved by FERC in the form Pennsylvania-The Audit Bureau of the Pennsylvania Public requested by Dominion and were subject to only minor modifi Utility Commission (Pennsylvania Commission) has conducted cations. Dominion has no significant rate matters pending 46 a compliance audit of Dominion's purchased gas cost rates for before FERC at this time.

the years 1997 through 1999. In the fourth quarter of 2001, Environmental Matters Dominion received an audit report in which the Audit Bureau noted certain exceptions and proposed adjustments that, if Dominion is subject to rising costs resulting from a steadily determined to be appropriate, would result in refunds to cus increasing number of federal, state and local laws and regula tomers. Dominion is discussing the matter with the Pennsylva tions designed to protect human health and the environment.

nia Commission and believes that the ultimate resolution of this These laws and regulations affect future planning and existing issue will not have a material impact on its financial position, operations. They can result in increased capital, operating and results of operations or cash flows. other costs as a result of compliance, remediation, containment West Virginia- In 2001, the West Virginia Commission and monitoring obligations.

approved a settlement between Dominion and certain third

Historically, Dominion recovered such costs arising from upon flexible cap and trade programs for compliance and would regulated electric operations through utility rates. However, to exempt covered facilities from other Clean Air Act requirements.

the extent that environmental costs are incurred in connection All of the proposals would phase-in the emission reduction with operations regulated by the Virginia Commission, during requirements under a variety of timeframes, up to 16 years.

the period ending June 30, 2007, in excess of the level currently Dominion's management cannot predict whether any of these included in the Virginia jurisdictional electric retail rates, proposals will pass this year or in the future. However, if more Dominion's results of operations will decrease. After that date, stringent emissions standards are ultimately imposed on recovery through regulated rates may be sought for only those Dominion's generating units, new, perhaps significant, expendi environmental costs related to regulated electric transmission tures could be required.

and distribution operations. Dominion also may seek recovery During 2000, Virginia Power received a Notice of Violation through regulated rates for environmental expenditures related from the EPA alleging that it failed to obtain New Source to regulated gas transmission and distribution operations. Review permits under the Clean Air Act prior to undertaking specified construction projects at the Mt. Storm Power Station in Environmental Protection and Monitoring Expenditures West Virginia. The Attorney General of New York filed a suit Dominion incurred approximately $116 million, $94 million, against Virginia Power alleging similar violations of the Clean and $78 million of expenses (including depreciation) during Air Act at the Mt. Storm Power Station. Virginia Power also 2001, 2000, and 1999, respectively, in connection with environ received notices from the Attorneys General of Connecticut and mental protection and monitoring activities, and expects these New Jersey of their intentions to file suit for similar violations.

expenses to be approximately $126 million in 2002. In addition, Management believes that Virginia Power has obtained the nec capital expenditures related to environmental controls were $221 essary permits for its generating facilities. Virginia Power has million, $214 million, and $84 million for 2001, 2000, and reached an agreement in principle with the federal government 1999, respectively. The amount estimated for 2002 for these and the state of New York to resolve this situation. The agree expenditures is $321 million.

ment in principle includes payment of a $5 million civil penalty, Clean Air Act Compliance a commitment of $14 million for environmental projects in The Clean Air Act requires Dominion to reduce its emissions Virginia, West Virginia, Connecticut, New Jersey and New York, of sulfur dioxide (SO 2) and nitrogen oxide (NOx), which are and a 12-year, $1.2 billion capital investment program for envi gaseous by-products of fossil fuel combustion, and to obtain ronmental improvements at Virginia Power's coal-fired generat operating permits for all major emissions-emitting facilities. ing stations in Virginia and West Virginia. Dominion had Permit applications have been submitted for Dominion's affected already committed to a substantial portion of the $1.2 billion facilities. The Clean Air Act's SO 2 reduction program is based expenditures for SO 2 and NOx emissions controls. The negotia on the issuance of a limited number of SO 2 emission allowances, tions over the terms of a binding settlement have expanded each of which may be used as a permit to emit one ton of SO 2 beyond the basic agreement in principle and are ongoing.

into the atmosphere or may be sold to a third party. Evaluation Global Climate Change and planning of future projects to comply with SO 2 and NOx In 1997, the United States signed an international Protocol to limitations are ongoing and will be influenced by changes in the limit man-made greenhouse emissions. However, the Protocol regulatory environment, availability of SO 2 allowances, various will not become binding unless approved by the United States state and federal SO 2 and NOx control programs, and emission Senate. Currently, the Bush Administration has indicated that it control technology.

will not pursue ratification of the Protocol but will work to In response to NOx reduction requirements mandated by establish new "voluntary" approaches to achieve reductions of 47 the Environmental Protection Agency (EPA) for states in which it greenhouse gas emissions. However, the United States Congress operates, Dominion plans to install NOx reduction equipment at may consider legislation that would implement mandatory its affected coal-fired generating facilities at an estimated capital reductions of greenhouse gas emissions. The cost of compliance cost of approximately $650 million over the next several years.

with the Protocol or similar mandatory greenhouse gas reduc In the near future, the Bush Administration and the United tion obligations could be significant. Given the uncertainties States Congress may consider various "multi-pollutant" legisla of future action by the federal government on this issue, tive proposals that would require fossil-fuel fired generating Dominion cannot predict the likely future impact on its units to comply with more stringent pollution control standards operations at this time.

for NOx, SO 2 and mercury. Many of the proposals would rely

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Accounting Matters Exploration and Production Operations Dominion continues to focus on increasing earnings from gas Recently Issued Accounting Standards and oil properties primarily through acquisition and develop In 2001, the Financial Accounting Standards Board (FASB) ment activities, exploration, and operating efficiencies. The issued SFAS Nos. 141, Business Combinations,142, Goodwill acquisition of Louis Dreyfus represents the addition of signifi and Other IntangibleAssets, 143, Accountingfor Asset Retirement cant, long-lived natural gas reserves located in several onshore Obligations,and 144, Accountingfor the Impairment or Disposal United States regions serving northeast markets. This addition ofLong-LivedAssets. See Note 4 to the Consolidated Financial also provides significant new development drilling opportuni Statements for a discussion of the impact of adopting these ties, complementing Dominion's existing development and new standards.

exploration activities.

Restructuring Charges Additionally, Dominion will seek opportunities to enhance After completing the transition period for fully integrating the value of its reserves through the convergence of its gas and CNG into Dominion's existing organization and operations, electric products and optimization of its gas storage facilities.

management initiated a focused review of Dominion's combined Continued use of new and emerging production, prospecting operations in the fourth quarter of 2001. The objective of this and drilling technologies, when applied to sound business prac review was to identify any activities or resources that were no tices developed over time in gas and oil operations, should help longer necessary since the end of the transition period. As a improve operational efficiencies, as well as minimize finding, result, restructuring charges of $105 million were recognized in developing and lifting costs.

the fourth quarter of 2001 for items such as employee severance Effect of Changes in Commodity Prices and other termination benefits and cancellation or modification Dominion's operations are impacted by changes in energy com of leases to eliminate office space no longer needed. See Note 7 modity prices. To the extent that energy commodities are sold to the Consolidated Financial Statements. Dominion's 2001 and by one of Dominion's utilities with cost-of-service rate regula 2000 restructuring plans should reduce future annualized oper tion, such commodity costs are generally recovered through ating costs by approximately $33 million and $102 million, rates. Market price changes impact Dominion's revenue from respectively, that would otherwise have been incurred.

natural gas and oil production and from commodity sales Business Opportunities and Other Operations through unregulated subsidiaries. Dominion has established an enterprise risk management function to reduce such price Independent Power Production Operations risk exposures.

Dominion's focus in its power generation business is to acquire and develop additional power generation in the MAIN-to Nuclear Relicensing Maine region. The region begins at the Mid-America Intercon Dominion filed applications for 20-year life-extensions for the nected Network (MAIN) that includes electric service territories North Anna and Surry units in May 2001 with the Nuclear of the upper Midwest and is home to Dominion's Kincaid and Regulatory Commission (NRC). The NRC has accepted and is Elwood generating facilities. The target region extends east to reviewing the applications. Over the next two years, the NRC Virginia Power's service territory and north to New England, will perform site visits and review the applications in detail.

where Dominion operates Millstone. Dominion is benefiting Dominion has also performed an internal assessment on the from the CNG acquisition, as it is developing natural gas-fired probability of a successful license renewal application for both of power generation facilities along its natural gas pipeline system. its operating Millstone units. Based on this assessment and other Dominion is in various stages of development for new natural factors, Dominion has initiated preparations to apply for a gas-fired power generation facilities throughout the MAIN-to 20-year extension of the licenses for both its operating Millstone Maine region with estimated completion dates from 2002 to units. Dominion expects to file a completed application based 2004. Dominion is striving to grow a balanced portfolio of gen on NRC guidelines in 2004.

eration assets, while maintaining fuel and regional diversity Nuclear Insurance throughout the MAIN-to-Maine region.

The Price Anderson Act (Act) expires in August 2002, but oper ating nuclear reactors would continue to be covered by the law, which would channel and cap claims if a nuclear accident should occur. The Act has been renewed three times since 1957, and Congress is currently holding hearings on reauthorizing the legislation.

Pipeline Operations Dominion's sensitivity analysis estimates the potential Dominion plans to expand its natural gas transmission system loss of future earnings or fair value from market risk sensitive with a $497 million, 263-mile interstate pipeline. The Green instruments over a selected time period due to a 10 percent unfa brier Pipeline will originate in Kanawha County, West Virginia, vorable change in interest rates and commodity prices.

and extend through southwest Virginia into Granville County, Commodity Price Risk-- Trading Activities North Carolina. Piedmont Natural Gas is a 33 percent owner in As part of its strategy to market energy and to manage related the pipeline project.

risks, Dominion manages a portfolio of derivative commodity Telecommunications Operations contracts held for trading purposes. These contracts are sensitive Dominion continues the expansion of its telecommunications to changes in the prices of natural gas, electricity and certain operations as a competitive provider of services through its other commodities. Dominion uses established policies and pro jointly-owned affiliate, Dominion Fiber Ventures, LLC. These cedures to manage the risks associated with these price fluctua services include providing facilities-based, high-bandwidth tions and uses various commodity instruments, such as futures, capacity throughout the eastern United States with particular forwards, swaps and options, to reduce risk by creating offset concentration on under-served markets. Dominion continues ting market positions. In addition, Dominion seeks to use its building its network through the acquisition of dark fiber capac generation capacity, when not needed to serve customers in its ity on existing third-party networks. The future growth of its service territory, to satisfy commitments to sell energy.

network will occur through joint development projects on A hypothetical 10 percent unfavorable change in commod third-party rights of way. ity prices would have resulted in a decrease of approximately $12 million and $3 million in the fair value of its commodity con Future Acquisitions tracts held for trading purposes as of December 31, 2001 and Because Dominion's industry is rapidly changing, there are 2000, respectively.

many opportunities for acquisitions of assets, as well as for busi ness combinations. Dominion investigates any opportunity that Commodity Price Risk - Non-Trading Activities may increase shareholder value and build on existing businesses. Dominion manages the price risk associated with purchases Dominion has participated in the past-and its security holders and sales of natural gas, oil and electricity by using derivative may assume that at any time Dominion may be participating commodity instruments including futures, forwards, options in bidding or other negotiations for such transactions. Such par and swaps.

ticipation may or may not result in a transaction for Dominion. For sensitivity analysis purposes, the fair value of However, any such transaction that does take place may involve Dominion's non-trading derivative commodity instruments consideration in the form of cash, debt or equity securities. It is determined based on models that consider the market may also involve payment of a premium over book or market prices of commodities in future periods, the volatility of the values. Such transactions or payments could affect the market market prices in each period, as well as the time value factors prices and rates for Dominion's securities. of the derivative instruments. Market prices and volatility are principally determined based on quoted prices on the Market Rate Sensitive Instruments and Risk Management futures exchange.

Dominion's financial instruments, derivative financial instru A hypothetical 10 percent unfavorable change in market ments and derivative commodity contracts are exposed to poten prices of Dominion's non-trading derivative commodity instru tial losses due to adverse changes in interest rates, commodity ments would have resulted in a decrease in fair value of approxi prices and equity security prices as described below. Interest rate mately $155 million and $56 million as of December 31, 2001 49 risk generally is related to Dominions outstanding debt and and December 31, 2000, respectively.

financial services activities. Commodity price risk is present in The impact of a change in energy commodity prices on Dominion's electric operations, gas production and procurement Dominion's non-trading derivative commodity instruments at a operations, and energy marketing and trading operations due to point in time is not necessarily representative of the results that the exposure to market shifts for prices received and paid for nat will be realized when such contracts are ultimately settled. Net ural gas, electricity and other commodities. Dominion uses losses from derivative commodity instruments used for hedging derivative commodity contracts to manage price risk exposures purposes, to the extent realized, are generally offset by recogni for these operations. Dominion is exposed to equity price risk tion of the hedged transaction, such as revenue from sales.

through various portfolios of equity securities.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED]

Interest Rate Risk Equity Price Risk Dominion manages its interest rate risk exposure predominantly Dominion is subject to equity price risk due to marketable by maintaining a balance of fixed and variable rate debt. equity securities held as investments and in trust funds. These Dominion also enters into interest rate sensitive derivatives, marketable securities are reported on the balance sheet at fair including interest rate swaps and interest rate lock agreements. value. The following table presents marketable equity securities In addition, Dominion, through subsidiaries, retains ownership held by Dominion by category at December 31, 2001 and 2000.

of mortgage investments, including subordinated bonds and 2001 2000 interest-only residual assets retained at securitization of mort gage loans originated and purchased. For financial instruments Fair Fair (millions) Cost Value Cost Value outstanding at December 31, 2001, a hypothetical 10 percent Marketable securities $127 $121 $134 $118 increase in market interest rates would decrease annual earnings Nuclear decommissioning by approximately $10 million. A hypothetical 10 percent trust investments 734 952 279 549 increase in market interest rates, as determined at December 31, 2000, would have resulted in a decrease in annual earnings of Risk Management Policies approximately $40 million.

Dominion has operating procedures in place that are adminis Foreign Exchange Risk tered by experienced management to help ensure that proper Dominion's Canadian natural gas and oil exploration and pro internal controls are maintained. In addition, Dominion has duction activities are relatively self-contained within Canada. As established an independent function at the corporate level to a result, Dominion's exposure to foreign currency exchange risk monitor compliance with the price risk management policies of for these activities is limited primarily to the effects of transla all subsidiaries. Dominion maintains credit policies that include tion adjustments that arise from including that operation in its the evaluation of a prospective counterparty's financial condi consolidated financial statements. Since these translation adjust tion, collateral requirements where deemed necessary, and the ments do not impact cash flows, Dominion's management moni use of standardized agreements which facilitate the netting of tors this exposure but believes it is not material. Although cash flows associated with a single counterparty. In addition, Dominion may purchase products and services denominated in Dominion also monitors the financial condition of existing foreign currencies for use in its non-Canadian operations and counterparties on an ongoing basis. Management believes, based may use currency forward contracts to manage related risks, on Dominion's credit policies and the December 31, 2001 provi such commitments were not material at December 31, 2001 sion for credit losses, that it is unlikely that a material adverse and 2000. effect on its financial position, results of operations or cash flows would occur as a result of counterparty nonperformance. See Note 15 to the Consolidated Financial Statements for discussion of the effects of Enron's bankruptcy on Dominion's December 31, 2001 consolidated financial statements.

SELECTED CONSOLIDATED FINANCIAL DATA (millions, except per share amounts) 2001 2000 1999 1998 1997 Operating revenue $10,558 $ 9,246 $ 5,520 $ 6,081 $ 7,263 Income before extraordinary item and cumulative effect of a change in accounting principle 544 415 552 548 412 Extraordinary item (net of income taxes of $197) - - (255) -

Cumulative effect of a change in accounting principle (net of income taxes of $11) - 21 - -

Net income 544 436 297 548 412 Earnings per common share-basic 2.17 1.85 1.55 2.81 2.22 Earnings per common share-diluted 2.15 1.85 1.48 2.81 2.22 Total assets 34,369 29,297 17,782 17,549 20,184 Long-term debt, subsidiary preferred stock subject to mandatory redemption and preferred securities ofsubsidiary trusts 13,251 10,486 7,321 6,817 7,761 Dividends paid per share 2.58 2.58 2.58 2.58 2.58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nature of Operations The term "Dominion" is used throughout this report and, depending on the context of its use, may represent any of Dominion Resources, Inc. (Dominion) is a holding company the following: the legal entity, Dominion Resources, Inc., one headquartered in Richmond, Virginia. Its principal subsidiaries of Dominion Resources, Inc.'s consolidated subsidiaries or the are Virginia Electric and Power Company (Virginia Power),

entirety of Dominion Resources, Inc. and its consolidated Consolidated Natural Gas Company (CNG), and Dominion subsidiaries.

Energy, Inc. (DEI). Dominion and CNG are registered public utility holding companies under the Public Utility Holding Significant Accounting Policies Company Act of 1935 (1935 Act).

Virginia Power is a regulated public utility that generates, General transmits, and distributes electricity within a 30,000-square Dominion includes certain estimates and assumptions in mile area in Virginia and northeastern North Carolina. Virginia preparing consolidated financial statements in accordance with Power sells electricity to approximately 2.1 million retail cus generally accepted accounting principles. These estimates and tomers, including governmental agencies, and to wholesale cus assumptions affect the reported amounts of assets and liabilities, tomers such as rural electric cooperatives, municipalities, power the disclosure of contingent assets and liabilities at the date of marketers and other utilities. Virginia Power has trading rela the financial statements, and the reported amounts of revenues tionships beyond its retail service territory and buys and sells and expenses for the periods presented. Actual results may differ wholesale electricity and natural gas off-system. from those estimates.

CNG operates in all phases of the natural gas business. Its The consolidated financial statements represent Dominion's regulated retail gas distribution subsidiaries serve approximately accounts after the elimination of intercompany transactions.

1.7 million residential, commercial and industrial gas sales and Dominion follows the equity method of accounting for invest transportation customers in Ohio, Pennsylvania, and West ments in partnerships and corporate joint ventures when Virginia. Its interstate gas transmission pipeline system serves Dominion is able to influence the financial and operating each of its distribution subsidiaries, non-affiliated utilities and policies of the investee. For all other investments, the cost end use customers in the Midwest, mid-Atlantic and Northeast. method is applied.

CNG's exploration and production operations are located in Certain amounts in the 2000 and 1999 consolidated several major gas and oil producing basins in the United States, financial statements have been reclassified to conform to the both onshore and offshore. CNG also provides a variety of 2001 presentation.

energy marketing services and holds an equity investment in Use of Fair Value Measurements energy activities in Australia that is classified as held for sale. Dominion reports certain contracts and instruments at fair value DEI is an independent power producer and a natural gas in accordance with applicable generally accepted accounting and oil exploration and production company active in the U.S. principles. Fair value is based on actively quoted market prices, and Canada. if available. In the absence of actively quoted market prices, Dominion has substantially exited the core operating busi Dominion seeks indicative price information from external nesses of Dominion Capital, Inc. (DCI) as required by the Secu sources, including broker quotes and industry publications. If rities and Exchange Commission (SEC) under the 1935 Act. pricing information from external sources is not available, DCI's primary business was financial services including loan Dominion must estimate prices based on available historical and administration, commercial lending and residential mortgage near-term future price information and certain statistical meth lending. See Note 6.

ods, including regression analysis. For options and contracts In 2000, Dominion created a subsidiary service with option-like characteristics where pricing information is not 51 company under the 1935 Act that serves Dominion's various available from external sources, Dominion uses a modified subsidiaries. CNG also operated a service company during Black-Scholes model and considers time value, the volatility of 2000. Effective January 1, 2001, Dominion combined the the underlying commodities and other relevant assumptions two service companies. when estimating fair value. For contracts with unique character Dominion manages its daily operations along three primary istics, Dominion estimates fair value using a discounted cash operating segments: Dominion Energy, Dominion Delivery and flow approach deemed appropriate in the circumstances and Dominion Exploration & Production. In addition, Dominion applied consistently from period to period. If pricing informa also reports the operations of DCI and its corporate and other tion is not available from external sources, judgment is required operations as operating segments. Assets remain wholly owned by its legal subsidiaries. See Note 30.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [CONTINUED]

to develop the estimates of fair value. For individual contracts, Nonregulated electric sales consist primarily of sales of the use of different assumptions could have a material effect on electricity from utility, independent power production and mer the contract's estimated fair value. chant nuclear plant resources at market-based rates, and net operating revenue from electric trading activities.

Concentration of Credit Risk Nonregulated gas sales consist primarily of sales of natural Dominion engages in transactions for the purchase and sale of gas at market-based rates, brokered gas sales, and net operating products and services with various companies in the energy revenue from gas trading activities. Natural gas sold includes gas industry and with commercial and residential energy con produced by Dominion as well as gas purchased from others.

sumers. These transactions principally occur in the Northeast, Gas transportation and storage consists primarily of Midwest and Mid-Atlantic regions of the United States.

federally-regulated sales of gathering, transmission, distribution Although this concentration could affect Dominion's overall and storage services. Also included are gas distribution charges exposure to credit risk, management believes that Dominion is to retail customers opting for alternate suppliers.

exposed to minimal risk. A significant portion of Dominion's Gas and oil production consists primarily of sales of nat business is conducted with major companies in the energy ural gas, oil and condensate produced by Dominion. Gas and oil industry. Credit risk associated with trade accounts receivable production revenue is reported net of royalties.

from energy consumers is limited due to the large number of Other revenue consists primarily of service fees associated customers. Dominion maintains credit policies with respect to with rate-regulated electric and gas distribution; sales of coal, its counterparties that management believes minimize overall brokered oil and other extracted products; gas and oil process credit risk. Such policies include the evaluation of a prospective ing; capacity release; and interest and other income from counterparty's financial condition, collateral requirements where financial services operations.

deemed necessary and the use of standardized agreements that facilitate the netting of cash flows associated with a single coun Electric Fuel, Purchased Energy and Purchased terparty. Dominion also monitors the financial condition of Gas - Deferred Costs existing counterparties on an ongoing basis. Dominion main Where permitted by regulatory authorities, the differences tains a provision for credit losses based upon factors surrounding between actual electric fuel, purchased energy and purchased gas the credit risk of its customers, historical trends and other infor expenses and the levels of recovery of such expenses in current mation. Management believes, based on Dominion's credit poli rates are deferred and matched against recoveries in future rates.

cies and the December 31, 2001 provision for credit losses, that See Regulatory Assets and Liabilitiesbelow and Note 18.

it is unlikely that a material adverse effect on its financial posi Income Taxes tion, results of operations or cash flows would occur as a result of Dominion and its subsidiaries file a consolidated federal income counterparty nonperformance. See Note 15 for discussion of the tax return. Where permitted by regulatory authorities, the treat effects of Enron's bankruptcy on Dominion's December 31, 2001 ment of temporary differences can differ from the requirements consolidated financial statements.

of Statement of Financial Accounting Standards (SFAS) No.

Operating Revenue 109, Accountingfor Income Taxes. Accordingly, a regulatory asset Operating revenue is recorded on the basis of services rendered, has been recognized if it is probable that future revenues will be commodities delivered or contracts settled and includes provided for the payment of deferred tax liabilities. Deferred amounts yet to be billed to customers. Operating revenue from investment tax credits are amortized over the service lives of the energy trading activities includes realized commodity contract properties giving rise to the credits.

52 revenue, net of related cost of sales, and unrealized gains and Stock-based Compensation losses resulting from marking to market those commodity con Dominion measures compensation cost for stock-based awards tracts not yet settled. The primary types of sales and service issued to its employees in accordance with Accounting Princi activities reported as operating revenue include:

ples Board Opinion No. 25, Accountingfor Stock Issued to Regulated electric sales consist primarily of state-regulated Employees, and related interpretations. Compensation expense retail electric sales and federally-regulated wholesale electric is measured as the difference between fair market value of sales and electric transmission services.

Dominion common stock and the exercise price of the underly Regulated gas sales consist primarily of state-regulated ing award on the date when both the price and number of shares retail natural gas sales.

the recipient is entitled to receive are known. This date is gener ally the date of grant. See Note 25.

Cash and Cash Equivalents and oil reserves (the ceiling test). If net capitalized costs exceed Current banking arrangements generally do not require checks the ceiling test at the end of any quarterly period, then a perma to be funded until actually presented for payment. At December nent write-down of the assets must be recognized in that period.

31, 2001 and 2000, accounts payable included the net effect of The ceiling test is performed separately for each cost center, with checks outstanding but not yet presented for payment of $214 cost centers established on a country-by-country basis.

million and $171 million, respectively. For purposes of the con Depreciation of gas and oil producing properties is com solidated statements of cash flows, Dominion considers cash and puted using the unit-of-production method. Under the full cost cash equivalents to include cash on hand, cash in banks and method of accountingi amortization is also accrued on esti temporary investments purchased with a maturity of three mated future costs to be incurred in developing proved gas and months or less. oil reserves, and on estimated dismantlement and abandonment costs net of projected salvage values. However, the costs of Property, Plant and Equipment investments in unproved properties are excluded from amortiza Property, plant and equipment, including additions and replace tion until it is determined whether proved reserves exist.

ments, is recorded at original cost including labor, materials, other direct costs and capitalized interest. The costs of repairs Impairment of Long-Lived Assets and maintenance, including minor additions and replacements, Dominion performs an evaluation for impairment whenever are charged to expense as incurred. In 2001, 2000, and 1999, events or changes in circumstances indicate that the carrying Dominion capitalized interest costs of $41 million, $30 million, amount of long-lived assets or intangible assets, including good and $30 million, respectively. will, may not be recoverable. Long-lived assets are written down The cost of depreciable gas utility and transmission and to fair value if the sum of the expected future undiscounted cash electric transmission and distribution property retired and flows is less than the carrying amounts.

related cost of removal, less salvage, are charged to accumulated Investment Securities depreciation. For generation-related property, cost of removal is Dominion accounts for and classifies investments in marketable charged to expense as incurred. Dominion records gains and equity and debt securities in two categories. Debt and equity losses upon retirement of generation-related property based securities purchased and held with the intent of selling them in upon the difference between proceeds received, if any, and the the current period are classified as trading securities and are property's undepreciated basis at the retirement date.

reported at fair value with unrealized gains and losses included Depreciation of property, plant, and equipment is com in earnings. All other debt and equity securities are classified as puted on the straight-line method based on projected useful available-for-sale securities. These are reported at fair value with service lives or, in the case of gas and oil producing properties, unrealized gains and losses reported as a component of accumu the unit-of-production method. Estimated useful lives of lated other comprehensive income, net of tax.

Dominion's property, plant and equipment are as follows: gener ation 20-60 years, transmission 20-78 years, distribution Loans Receivable, Net 10-50 years, storage 20-78 years, and other 5-31 years. Amor Loans receivable are stated at their outstanding principal bal tization of nuclear fuel used in electric generation is provided on ance, net of the allowance for credit losses and any deferred fees a unit-of-production basis sufficient to fully amortize, over the or costs. Origination fees, net of certain direct origination costs, estimated service life, the cost of the fuel plus permanent storage are deferred and recognized as an adjustment of the yield of the and disposal costs. In 2001, Dominion increased its estimate of loan receivable. The allowance for credit losses is established the useful lives of its nuclear facilities by 20 years. This change through provisions for credit losses charged against income. 53 in estimate was made in connection with the current and future Loans receivable deemed to be uncollectible are charged against filing of applications for relicensing with the Nuclear Regulatory the allowance for credit losses, and subsequent recoveries, if any, Commission (NRC). are credited to the allowance. At December 31, 2001 and 2000, Dominion follows the full cost method of accounting for the allowance for credit losses for loans receivable was $79 and gas and oil exploration and production activities prescribed $61 million, respectively.

by the SEC. Under the full cost method, all direct costs of prop Sale of Loans by Financial Services Businesses erty acquisition, exploration, and development activities are Securitizations involve selling loans to an unconsolidated capitalized. The principal limitation is that these capitalized special purpose trust in exchange for cash and certain retained amounts may not exceed the present value of estimated future interests. Retained interests may include subordinated bonds net revenues to be derived from the production of proved gas

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED]

or other securities issued by the trust or interests in the loans sold. policy for derivatives under SPAS No. 133 and the results of its Cash proceeds are determined based on the difference between hedging activities for the year ended December 31, 2001.

interest rates to be received on the loans sold and the interest rate Prior to January 1, 2001, Dominion considered derivative to be paid to investors participating in the securitizations. The instruments to be effective hedges when the item being hedged determination of cash proceeds is also affected by estimates of pre and the underlying financial or commodity instrument showed payments, credit losses, servicing costs, and non-refundable fees strong historical correlation. Dominion used deferral accounting and premiums. Gains and losses realized on the sale of loans are to account for futures, forwards and other derivative instru recognized based on the difference betweenthe carrying amount ments that were designated as hedges. Under this method, real of the loans sold and the sum of the cash proceeds received and ized gains and losses (including the payment of any premium) the fair value of interests retained in the securitization on the set related to effective hedges of existing assets and liabilities were tlement date. Fair value is based on the present value of estimated recognized in earnings in conjunction with earnings of the des cash flows, adjusted to reflect the effects of credit losses, prepay ignated asset or liability. Gains and losses related to effective ments and other factors appropriate in each securitization. hedges of firm commitments and anticipated transactions were Dominion securitized commercial loans receivable in collateral included in the measurement of the subsequent transaction.

ized loan obligation (CLO) and collateralized debt obligation Goodwill, Net (CDO) transactions. Retained interests in CLO and CDO trans Goodwill arising from acquisitions completed before July 1, actions are reported as available for sale securities. In addition, 2001 was amortized on a straight-line basis over periods up to Dominion securitized residential mortgage loans. Dominion clas 40 years. As of December 31, 2001 and 2000, Dominion had sifies its retained interests from securitizations of mortgage loans as amortized $173 million and $83 million of goodwill, respec investment securities-trading.

tively. In accordance with SFAS No. 142, Goodwill and Other Retained interests from the securitization of mortgage loans include interest-only strips which are recorded~based on the net IntangibleAssets, Dominion has not amortized goodwill arising from acquisitions initiated after June 30, 2001 and will cease present value of projected cash flows, using management's best amortization of all goodwill effective January 1, 2002. See Note estimates of key assumptions. These assumptions include credit 4 for further discussion of the adoption of SFAS 142 effective losses, prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. Interest-only strips January 1, 2002. See Note 5 for discussion of Dominion's acqui sitions during 2001.

are amortized in proportion to the estimated income received.

They are analyzed quarterly to determine whether prepayment Regulatory Assets and Liabilities experience, losses and changes in the interest rate environment Methods of allocating costs to accounting periods for operations have had an impact on the valuation. Expected cash flows of the subject to federal or state cost-of-service rate regulation may dif underlying loans sold are reviewed based upon current economic fer from accounting methods generally applied by nonregulated conditions and the type of loans originated and are revised as companies. The economic effects of allocations prescribed necessary. See Notes 8 and 13 for more information about by regulatory authorities for rate-making purposes must be Dominion's investments in retained interests, including the considered in the application of generally accepted accounting recognition of impairments in 2001 and 2000. principles. See Notes 9 and 18 for the impact of legislation on continued application of SFAS No. 71, Accountingfor the Effects Derivatives Dominion uses derivatives such as futures, swaps, forwards and of Certain Types ofRegulation, and additional information on regulatory assets and liabilities.

options to manage the commodity, currency exchange and 54 financial market risks of its business operations. Dominion also Amortization of Debt Issuance Costs manages a portfolio of commodity contracts held for trading Dominion defers and amortizes debt issuance costs and debt purposes as part of its strategy to market energy and to manage premiums or discounts over the lives of the respective debt related risks. Effective January 1, 2001, upon adoption of SIAS issues. As permitted by regulatory commissions, gains or losses No. 133, Accountingfor DerivativeInstruments andHedging resulting from the refinancing of debt allocable to utility opera Activities, derivatives are generally recognized on the consoli tions subject to cost-based regulation have also been deferred dated balance sheets at fair value. See Note 15 for further discus and amortized over the lives of the new issues.

sion of Dominion's use of derivatives and energy trading contracts, including its risk management policy, its accounting

Accounting Change for Pension Costs were determined to exist under that test, it would be reflected as the cumulative effect of a change in accounting principle.

Effective January 1, 2000 and in connection with Dominion's Dominion has not yet determined the effect these tests may acquisition of CNG, Dominion adopted a new company-wide have on its earnings or financial position.

method of calculating the market-related value of pension plan assets used to determine the expected return on pension plan Asset Retirement Obligations assets, a component of net periodic pension cost. Dominion In 2001, FASB issued SFAS No. 143, Accountingfor Asset believes the new method enhances the predictability of the Retirement Obligations,which provides accounting requirements expected return on pension plan assets; provides consistent treat for the recognition and measurement of liabilities associated ment of all investment gains and losses; and results in calculated with the retirement of tangible long-lived assets. Under the stan market-related pension plan asset values that are closer to mar dard, these liabilities will be recognized at fair value as incurred ket value than the values calculated under the pre-acquisition and capitalized as part of the cost of the related tangible long methods used by Dominion and CNG. lived assets. Accretion of the liabilities due to the passage of time The $21 million cumulative effect of the change on prior will be an operating expense. Dominion will adopt the standard years (net of income taxes of $11 million) is included in income effective January 1, 2003.

for the year ended December 31, 2000. The effect of the change Dominion has identified retirement obligations associated on 2000 was to increase income before extraordinary item and with the decommissioning of its nuclear generation facilities and cumulative effect of a change in accounting principle by $11 certain dismantlement and restoration activities for its gas and million ($0.05 per share-basic and diluted) and net income by oil wells. However, Dominion has not yet performed a complete

$32 million ($0.14 per share-basic and diluted). assessment of possible retirement obligations associated with Retroactive application of the new method, on a pro forma other electric and gas utility property. Dominion has not yet basis, would not have materially changed Dominion's net determined the financial impact of adopting the new standard.

income for 1999. Also, under the new standard, the realized and unrealized earnings of external trusts available for funding decommission Recently Issued Accounting Standards ing activities at Dominion's utility nuclear plants will be Business Combinations and Goodwill recorded in other income and other comprehensive income, as In 2001, the Financial Accounting Standards Board (FASB) appropriate. Currently, Dominion records these trusts' earnings issued SFAS Nos. 141, Business Combinations,and 142, Goodwill in other income with an offsetting charge to expense, also and Other IntangibleAssets. SFAS No. 141 requires that the recorded in other income, associated with the accretion of the purchase method of accounting be used for all business decommissioning liability. See Note 16. Upon adoption of the combinations initiated after June 30, 2001. SFAS No. 141 also new standard, Dominion will discontinue its practice of accru includes guidance on the initial recognition and measurement ing, as part of depreciation expense, amounts associated with the of goodwill and other intangible assets arising from business future costs of removal for its gas and electric utility and gas and combinations initiated after June 30, 2001. SFAS No. 142 pro oil exploration and production assets. However, Dominion may hibits the amortization of goodwill and intangible assets with continue its practice of accruing for such costs subject to cost-of indefinite useful lives. SFAS No. 142 also requires that these service utility rate regulation even when an asset removal obliga assets be reviewed for impairment at least annually. Intangible tion does not exist but would do so through the recognition of assets with finite lives will continue to be amortized over their regulatory assets and liabilities, as appropriate.

estimated useful lives. Impairment or Disposal of Long-Lived Assets 55 Dominion will adopt SFAS No. 142 effective January 1, In 2001, FASB issued SFAS No. 144, Accountingfor the Impair 2002. The discontinuance of goodwill amortization under SFAS ment or DisposalofLong-LivedAssets, which provides guidance No. 142 is expected to result in an increase in net income of $95 that will eliminate inconsistencies in accounting for the impair million in 2002. Dominion will test goodwill for impairment ment or disposal of long-lived assets under existing accounting using an annual two-step process described in SFAS No. 142. pronouncements. Dominion will apply the provisions of this The first step is a screen for potential impairment, while the standard prospectively beginning January 1, 2002 and does not second step measures the amount of the impairment, if any. expect the adoption to have a material impact on its results of Dominion will perform the first step of the required impairment operations or financial condition.

tests of goodwill as of January 1, 2002 before the end of the sec ond quarter of 2002. The standard requires that if impairment

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [CONTINUED]

Acquisitions The following table summarizes the estimated fair values Louis Dreyfus Natural Gas Corp. (Louis Dreyfus] of the assets acquired and liabilities assumed at the date of On November 1, 2001, Dominion acquired all of the outstand acquisition.

ing shares of common stock of Louis Dreyfus, a natural gas and (millions) At November 1, 2001 oil exploration and production company headquartered in Current assets $ 89 Current liabilities $ 167 Oklahoma City, Oklahoma. The results of Louis Dreyfus have Property, plant and been included in the consolidated financial statements since that equipment 2,387 Long-term debt 1,426" Deferred charges and Deferred credits and date. Dominion's proven gas and oil reserves increased approxi other assets 43 other liabilities 551 mately 60 percent as a result of the acquisition of Louis Dreyfus.

Goodwill 519 Total liabilities assumed 2,144 Dominion recognized goodwill in the acquisition to reflect the value attributable to: the complementary nature of the Louis Total Assets $3,038 Net assets acquired $ 894 Dreyfus assets in relation to Dominion's growth strategy for its *Long-term debt includes approximately $1.1 billion of debt issued by CNG and preferred securities issued through an affiliated trust to finance the cash portion of the acquisition integrated energy businesses; Louis Dreyfus' experienced explo and refinance certain Louis Dreyfus debt.

ration and production technical personnel; and potential opera tional efficiencies from the consolidation of Louis Dreyfus' Dominion is in the process of evaluating and measuring operations with Dominion's existing exploration and production certain liabilities assumed in the acquisition; thus, the allocation operations. By providing Dominion with a presence in addi of the purchase price is subject to refinement. Potential adjust tional large natural gas basins and increasing its holdings in cer ments are not expected to be material. In accordance with SFAS tain basins in which it already operates, management believes No. 142, no goodwill amortization was recorded during 2001.

that the acquisition results in a more balanced portfolio of pro See Note 4.

ducing properties, a more stable production profile and a larger Millstone Power Station platform for future growth. Dominion has not yet completed the On March 31, 2001, Dominion acquired Millstone Power Sta assignment of goodwill associated with the Louis Dreyfus acqui tion (Millstone), a nuclear power station located in Waterford, sition to its operating segments. In addition, the goodwill is not Connecticut and accounted for the acquisition under the pur deductible for income tax purposes. chase method of accounting. The results of Millstone have been The aggregate purchase price was $1.8 billion, which con included in the consolidated financial statements since that date.

sisted of approximately 14 million shares of Dominion common The acquisition includes a 100% ownership interest in Unit 1 stock valued at $881 million and $902 million in cash. The and Unit 2 and a 93.47% ownership interest in Unit 3 for a total value of the common stock issued was determined based on the of 1,954 megawatts of generating capacity. Unit 1 is being average market price of common shares over the two-day period decommissioned and is no longer in service. Dominion acquired before and after the terms of the acquisition were agreed to and the decommissioning trusts for the three units that were fully announced. In addition, Dominion issued approximately funded to the regulatory minimum at closing. See Note 16.

675,000 stock options to employees of Louis Dreyfus in The aggregate purchase price was $1.3 billion in cash; repre exchange for outstanding Louis Dreyfus options with a fair value senting approximately $1.2 billion for plant assets and $105 mil on the date of grant of approximately $13 million. lion for nuclear fuel. Dominion recorded $302 million of goodwill representing the excess of the purchase price over amounts allocated to Millstone's assets acquired and liabilities 56 assumed. Through December 31, 2001, Dominion amortized

$6 million of goodwill based on the straight-line method and 40 years. See Note 4.

CNG were classified as net assets held for sale. Dominion sold VNG On January 28, 2000, Dominion acquired all of the outstanding and CNG International's Argentine investments in 2000. See shares of CNG and accounted for the acquisition under the pur Note 6. At December 31, 2001 the unsold portion of CNG chase method of accounting. The results of CNG have been International included primarily its equity investment in included in the consolidated financial statements since that date. Australian energy activities.

The aggregate purchase price was $6.4 billion, consisting of Unaudited Pro Forma Results approximately 87 million shares of Dominion common stock The following unaudited pro forma combined results of opera valued at $3.5 billion and approximately $2.9 billion in cash.

tions for the years ended December 31, 2001 and 2000 have Dominion recorded $3.5 billion of goodwill representing the been prepared assuming the acquisition of Millstone and Louis excess of the purchase price over the fair value of CNG's opera Dreyfus had occurred at the beginning of each period. The pro tions not subject to cost-based rate regulation and the historical forma adjustment for Millstone in 2001 reflects the effect of carrying value of CNG's operations subject to cost-of-service scheduled outages during the first quarter of 2001. The pro rate regulation. Through December 31, 2001, Dominion amor forma results are provided for information only. The results are tized $165 million of goodwill based on the straight-line method not necessarily indicative of the actual results that would have and 40 years. See Note 4.

been realized had the acquisition occurred on the indicated date, The initial purchase price allocation included estimated nor are they necessarily indicative of future results of operations values for amounts expected to be realized from the sale of of the combined businesses.

Virginia Natural Gas (VNG) and CNG International, which Unaudited Pro Forma As Millstone Louis Dreyfus Combined (Millions, except per share amounts) Year ended December 31, Reported Acquisition Acquisition Results 2001 Operating revenue $10,558 $ 85 $554 $11,197 Income before cumulative effect of a change in accounting principle 544 (62) 155 637 Net income 544 (62) 155 637 Earnings Per Share-- Basic Income before cumulative effeci of a change in accounting principle $ 2.17 $ 2.41 Net income $ 2.17 $ 2.41 Average shares of common stock 250.2 14.3 264.5 Earnings Per Share-Diluted Income before cumulative effect of a change in accounting principle $ 2.15 $ 2.39 Net income $ 2.15 $ 2.39 Average shares of common stock 252.5 14.5 267.0 2000 Operating revenue $ 9,246 $499 $474 $10,219 Income before cumulative effect of a change in accounting principle 415 10 71 496 Net income 436 10 71 517 Earnings Per Share-Basic Income before cumulative effect of a change in accounting principle $ 1.76 $ 1.99 Net income $ 1.85 $ 2.07 57 Average shares of common stock 235.2 14.3 249.5 Earnings Per Share--Diluted Income before cumulative effect of a change in accounting principle $ 1.76 $ 1.98 Net income $ 1.85 $ 2.07 Average shares of common stock 235.9 14.4 250.3

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED]

Divestitures necessary when the post-CNG acquisition transition period As of December 31, 2001, Dominion had substantially com had ended. As a result, Dominion recognized $105 million pleted its strategy to exit the core operating businesses of DCI as of restructuring costs which included employee severance and required by the SEC under the 1935 Act. See Note 8 for charges termination benefits and the abandonment of leased office space recognized in connection with the DCI exit strategies. In 2000, no longer needed. In addition, restructuring charges included Dominion sold $600 million of commercial loans and trans approximately $46 million related to departing employees for ferred $223 million of outstanding commercial loan commit modifications of stock options, special termination benefits ments. As discussed in Note 13, Dominion securitized a and losses related to the settlement of the related nonqualified substantial portion of the remainder of its financial subsidiaries' pension obligation and plan curtailment attributable to reduc commercial loans in CLO and CDO transactions in 2000 and tions in expected future years of service of plan participants.

2001. As of December 31, 2001, Dominion held commercial See Notes 25 and 26.

and other loans receivable of $106 million, net of allowances for Under the restructuring plan, Dominion identified approx loan losses, and $268 million of CLO and CDO-related imately 340 salaried positions to be eliminated and recorded retained interests. At December 31, 2000, Dominion held CLO $42 million in employee severance-related costs. As of Decem and CDO-related retained interests of $159 million. ber 31, 2001, 12 positions had been eliminated. Severance In 2001, Dominion sold Saxon Capital and recognized an payments were based on the individual's base salary and years after-tax loss of $25 million. Under the terms of the sale, of service at the time of termination.

Dominion received $116 million in cash, a $25 million note and Restructuring and related costs for the year ended a non-controlling equity interest that was subsequently sold for December 31, 2001 were as follows:

$25 million. In addition, Dominion retained approximately (millions)

$300 million in retained interests related to prior mortgage loan Severance and related costs $ 42 securitizations. Dominion held $269 million and $347 million Nonqualified plan benefits, settlement and other costs 46 of retained interests from mortgage loan securitizations at Lease termination and restructuring 13 December 31, 2001 and 2000, respectively. Other, net 4 In 2000, Dominion completed the sales of VNG and CNG Total restructuring costs 105 International's Argentine assets for $678 million. As these enti Severance liability at December 31, 2001") 42 ties were classified as net assets held for sale, the sales did not Lease termination liability at December 31, 2001 $ 10 result in any gain or loss. Also in 2000, Dominion completed (1) Amount paid during the fourth quarter of2001 was not material.

the sale of its interest in Corby Power Limited for $78 million, resulting in an after-tax gain of $13 million. 2000 Restructuring and Acquisition-Related Activities During 1999 and 2000, Dominion sold its interests in gen During 2000, Dominion incurred charges associated with the eration capacity located in Latin America for $405 million. divestiture of certain businesses and the implementation of a Dominion recognized an impairment loss of $21 million, after restructuring plan for the operations of Dominion and its sub taxes, associated with these investments in 1999. sidiaries. The divestitures and restructuring plans were driven by certain requirements associated with the CNG acquisition

.. Restructuring and Acquisition-Related Activities and a focus on operations in the region that begins at the Mid America Interconnected Network (MAIN) and extends north 2001 Restructuring Costs eastward through Maine (MAIN-to-Maine). The restructuring

.In the fourth quarter of 2001, after completing the transition plan included an involuntary severance program, a voluntary period for fully integrating Dominion's existing organization early retirement program (ERP) and a transition plan to consoli and operations, management initiated a focused review of date operations after the CNG acquisition.

Dominion's combined operations. The objective of this review was to identify any activities or resources which were no longer

For the year ended December 31, 2000, Dominion systems and operations integration costs. The information tech recorded $460 million of restructuring and acquisition-related nology costs included excess amortization expense attributable costs, including exiting certain businesses of DCI, as follows: to shortening the useful lives of capitalized software being impacted by systems integration and related conversion costs.

(millions)

Dominion also incurred lease termination and restructuring Severance and related costs $ 70 costs as a result of the consolidation of operations.

Commodity contract losses 55 Information technology related costs 35 Lease termination and restructuring 14 SImpairment Losses - DCI Operations DCI exit strategies (see Note 8) 172 ERP benefit costs (see Note 26) 114 In 2001, Dominion recognized impairment losses of $281 mil Curtailment gains (see Note 26) (26) lion on various investments at DCI and reported the losses in Other, net 26 other operations and maintenance expenses. These charges, Total $460 after-tax, reduced 2001 net income by $183 million. In 2000, Dominion recognized impairment losses of $291 million, of At December 31, 2001, the remaining severance liability of which $172 million was determined to be attributable to

$3 million represented amounts payable to employees terminated Dominion's DCI exit strategy and were included in restructur under Dominion's 2000 restructuring plan. The change in the ing and other acquisition-related costs. The remaining $119 mil liability for severance and related benefit costs is presented below: lion of impairment charges were related to normal operations of DCI and are included in other operations and maintenance (millions) expenses. See Notes 6, 7, and 13. These charges, after-tax, Balance at December 31, 2000 $ 29 reduced 2000 net income by $186 million for 2000. The 2001 Amounts paid (24)

Revision of estimates (2) and 2000 impairments are reflected in the Corporate and Other Balance at December 31, 2001 $ 3 operating segment. See Note 30.

The table below presents a summary of the impairments Employee Severance Programs--Through December 31, losses recorded in 2001 and 2000:

2001, 750 salaried positions had been eliminated and $65 mil (millions) 2001 2000 lion of severance benefits had been paid. Severance payments Investment in:

were based on the individual's base salary and years-of-service at Retained interests-mortgage securitizations $ 21 $106 the time of termination. In addition, severance payments were Retained interests-CLO/CDO securitizations 81 Loans receivable 94 36 provided to employees at DCI who were terminated as part of Venture capital and other equity investments 64 46 Dominion's strategy to exit certain businesses of DCI. Investment in First Source - 49 Change in Risk Management Strategy- During the first Real-estate projects and other 21 54 quarter of 2000, Dominion created an enterprise risk manage Total $281 $291 ment group with responsibility for managing Dominion's aggre gate energy portfolio, including the related commodity price Retained Interests-Mortgage, CLO and CDO Securitizations risk, across its consolidated operations. In connection with this change in risk management strategy, management evaluated As part of routine quarterly reviews of its retained interests in CNG's hedging strategy in relation to Dominion's combined mortgage, CLO and CDO securitizations during the fourth quar ter of 2001, Dominion considered the following: historical perfor operations and designated CNG's portfolio of derivative con 59 mance of its securitized pools; recent prepayment and credit loss tracts that existed on January 28, 2000, as held for purposes experience of loans in those pools; other industry data; and eco other than hedging for accounting purposes. This action nomic factors prevailing in the U.S. economy, particularly condi required a change to mark-to-market accounting and resulted in tions brought about by the September 11, 2001 events and the

$55 million of losses recognized in the first quarter of 2000 mortgage interest rate environment at that time. In light of recent before Dominion had either financially settled the contracts or had entered into offsetting contracts. actual credit loss experience and actual prepayment activity of cer Other- Restructuring and other acquisition-related costs tain mortgage and commercial loans in the securitization trusts, Dominion increased its credit loss and prepayment speed assump included amounts paid to employees to retain their services tions used to estimate the fair value of its retained interests in during the post-acquisition transition period, amounts payable mortgage, CLO and CDO securitizations. With these changes in under certain employee contracts and information technology

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED]

estimates, Dominion recognized a write-down of the carrying of nuclear decommissioning and other currently identified envi values of its retained interests in mortgage and CLO/CDO securi ronmental expenditures. Based on those analyses, no plant tizations of $21 million and $81 million, respectively, during the write-downs were appropriate at that time.

fourth quarter of 2001. See Note 13 for significant credit loss, Dominion also reviewed its long-term power purchase prepayment and discount rate assumptions. contracts for potential loss in accordance with SEAS No. 5, Accountingfor Contingencies,and Accounting Research Bulletin Loans and Other Investments No. 43, Chapter 4, Inventory Pricing.Based on projections of The other impairments and loss provisions reflect Dominion's possible future market prices for wholesale electricity as of current estimate of net realizable values considering the dramati March 31, 1999, the results of the analysis indicated no loss cally weakened economy and increasing instances of bankrupt recognition was appropriate at that time. Other projections of cies, defaults, and major restructurings that significantly possible future market prices indicated a possible loss of $500 diminished investment values in the fourth quarter of 2001.

million. In the absence of the transition period rates provided by Dominion's valuation methodologies and assumptions vary by the legislation, the potential loss exposure would have been investment and include cash flow analysis, signed contracts, approximately $3.2 billion at March 31, 1999.

independent third-party appraisals, and, in certain cases, Significant estimates were required in recording the effect liquidation value.

of the deregulation legislation, including the resulting impact on the fair value determination of generating facilities and esti Extraordinary Item mated purchases under long-term power purchase contracts.

In 1999, legislation was passed that established a detailed plan to Such projections were highly dependent on future customer load restructure the electric utility industry in Virginia. The legisla projections, generating unit availability, the timing and type of tion's deregulation of generation was an event that required dis future capacity additions in Dominion's market area and future continuation of SEAS No. 71 for Dominion's generation market prices for fuel and electricity.

operations in 1999. Dominion's transmission and distribution operations continue to meet the criteria for recognition of regu SM Income Taxes latory assets and liabilities as defined by SFAS No. 71. In addi Income before provision for income taxes, classified by source of tion, the cost of fuel used in electric generation continues to be income, before minority interests, was as follows:

subject to deferral accounting.

In order to measure the amount of regulatory assets to be (millions) Year ended December 31, 2001 2000 1999 written off upon discontinuance of SEAS No. 71, Dominion U.S. $816 $552 $797 evaluated the estimated recovery of regulatory assets through its Non-U.S. 98 48 32 Virginia jurisdictional rates during the transition period ending Total $914 $600 $829 July 2007. Generation-related assets and liabilities that will not be recovered through the transition period rates were written off Details of income tax expense were as follows:

in 1999, resulting in an after-tax charge to earnings of $255 mil (millions) Year ended December 31, 2001 2000 1999 lion. See Note 18 for discussion of net regulatory assets at December 31, 2001. The $255 million charge also included the Current Federal $104 $ 255 $187 write-off of approximately $38 million, after-tax, of deferred State 62 20 18 investment tax credits and approximately $18 million, after-tax, Non-U.S. 3 - 4 of other generation-related assets. A corresponding regulatory Total current 169 275 209 asset of $23 million was established representing the amount Deferred expected to be recovered during the transition period related to Federal 151 (111) 66 these assets. State 24 16 Non-U.S. 45 22 (1)

The events that caused the discontinuance of SFAS No. 71 for generation-related operations, also required a review of Total deferred 220 (73) 65 generation assets for impairment. This review was based on Amortization of deferred investment tax credits-net (19) (19) (15) estimates of possible future market prices, load growth, competition and other assumptions. It also included the effects Total income tax expense $370 $ 183 $259

The statutory U.S. federal income tax rate reconciles to the Earnings Per Share effective income tax rates as follows: The following table presents Dominion's basic and diluted earn Year ended December 31, 200111 2000 1999 ings per share (EPS) calculation:

U.S. statutory rate 35.0% 35.0% 35.0% Year Ended December 31, 2001 2000 1999 Increases (reductions) resulting from:

(millions, except per share amounts)

Utility plant differences 0.5 0.8 0.3 Basic Preferred dividends 0.9 2.1 1.6 Income before extraordinary item and Amortization of investment cumulative effect of a change in tax credits (1.7) (2.3) (1.8) accounting principle $544 $415 $552 Nonconventional fuel credit (4.6) (7.1) (4.4)

Average shares of common Other benefits and taxes related stock outstanding-basic 250.2 235.2 191.4 to foreign operations 3.0 (2.7) (0.2)

Basic EPS $2.17 $1.76 $2.88 State taxes, net of federal benefit 5.9 4.3 1.5 Goodwill amortization 3.3 4.4 Diluted Employee pension and other benefits (1.4) (1.4) Income before extraordinary Other, net (0.5) (2.6) (0.8) item and cumulative effect of a change in accounting principle $ 544 $ 415 $ 552 Effective tax rate 40.4% 30.5% 31.2' %4 Income effect of total return equity swap, (1)Dominion's effective income tax rate increased in 2001 due to its utility operations in net of taxes - - (12)

Virginia becoming subject to state income taxes in lieu of gross receipts taxes, higher Income before extraordinary item effective rates associated with foreign earnings and higher pretax income in relation to and cumulative effect of a change nonconventional fuel tax credits realized. in accounting principle-diluted $544 $ 415 $ 540 Average shares of common stock outstanding 250.2 235.2 191.4 Deferred income taxes reflect the net tax effects of tempo Net effect of dilutive stock options 2.3 0.7 rary differences between the carrying amount of assets and lia Average shares of common stock bilities for financial reporting purposes and the amounts used outstanding-diluted 252.5 235.9 191.4 Diluted EPS $2.15 $1.76 $2.81 for income tax purposes. Dominion's net deferred taxes consist Average anti-dilutive shares excluded of the following:

from the EPS calculation 6 5 (millions) At December 31, 2001 2000 Deferred income tax assets:

Deferred investment tax credits $ 43 $ 55 Gas Stored Other 122 231 At December 31, 2001 and 2000, stored gas inventory used in Total deferred income tax assets 165 286 local gas distribution operations was valued at $84 million and Deferred income tax liabilities:

$41 million, respectively, under the LIFO method. Based on the Depreciation method and plant basis differences 1,911 1,994 Income taxes recoverable through future rates 19 20 average price of gas purchased during 2001, the current cost of Partnership basis differences 113 141 replacing the inventory of gas stored- current portion exceeded Investee earnings reported in different tax periods 143 the amount stated on a LIFO basis by approximately $308 mil Postretirement and pension benefits 464 481 Intangible drilling costs 520 269 lion. At December 31, 2001 and 2000, the stored gas inventory Geological, geophysical and other of certain of Dominion's nonregulated gas operations was valued exploration differences 170 157 at $98 million and $34 million, respectively, using primarily the Deferred state income taxes 221 37 weighted average cost method.

Other comprehensive income 182 113 A portion of gas in underground storage used as a pressure Other 61 Total deferred income tax liabilities 3,856 3,099 base and for operational balancing was included in property, 0 plant and equipment in the amount of $124 million and $126 Total net deferred income tax liabilities( $3,691 $2,813 million at December 31, 2001 and 2000, respectively. Property, (1) For 2001, includes $121 million of current deferred tax assets reported in other plant and equipment also reflects a reduction for volumes tem current assets.

porarily withdrawn from storage and valued at replacement costs At December 31, 2001, Dominion had U.S. federal net of $25 million and $211 million as of December 31, 2001 and operating loss carryforwards of $139 million that will expire 2000, respectively.

beginning in 2003. These amounts resulted from the acquisition of subsidiaries. Dominion also has net operating loss carryfor wards for state income tax purposes which have been reserved.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED]

Securitization of Financial Assets from the performance of the loan portfolios after the investors in Securitization of Commercial Loans the securitization trust have received their contracted return. In During 2001 and 2000, Dominion sold commercial loans in addition, Dominion continues to receive future cash flows from CLO and CDO-related securitization transactions. In those prepayment penalties on mortgage loans that prepay during the transactions, Dominion retained servicing responsibilities and contractual penalty period. The value of the retained interests is interests which are subordinate to those of investors participat subject to credit, prepayment and interest rate risks related to ing in the securitizations. The investors and the securitization the mortgage loans sold. In 2001, 2000 and 1999, Dominion trusts have no recourse to Dominion's other assets for failure of recognized pretax gains of $21 million, $85 million and $107 debtors to pay when due. The majority of the loans sold are vari million, respectively, on the securitization of residential able rate loans. As a result, changes in interest rates will not mortgage loans.

cause a material change in the performance of the loan portfo The following table presents weighted-average rates lios. Dominion receives annual servicing fees and rights to (per annum) for key economic assumptions used in measuring future cash flows after the investors in the securitization trusts the retained interests from securitizations completed have received their contracted return. The estimated fair value of during 2001:

Dominion's retained interests at the time of the 2001 securitiza Retained tion was based on expected cash flow recoveries from the loan Interests Retained Mortgage Interests portfolios, assuming a credit loss rate of 2 percent, and a dis Loans(' CLO count rate of 10 percent. The following table summarizes key Prepayment speed (2) N/A information about the securitizations of commercial loans Weighted-average life (in years) 3.28 2.2 during 2001 and 2000: Expected credit losses 3.22% 2%

Residual cash flows discounted at 17% 10%

Loans Cash Retained (1) Dominion sold all of its servicing rights as part of its sale of Saxon Mortgage in 2001.

(2) Fixed rate loans ramp up to 26.25 Constant Prepayment Rate (CPR) over 16 months.

(millions) Securitized Proceeds Interests Annual Servicing Fees Adjustable rate loans ramp up to 67.275 CPR over 16 months, ramping down to 41.4 2001 $423 $227 $196 38 basis points of the CPR over 12 months. Second liens ramp up to 36.75 CPR over 16 months, ramping outstanding balance down to 23.1 CPR over 26 months. Two-year hybrid loans ramp up to 33.12 CPR over 2000 $646 $570 $ 76 38 basis points of the 14 months; ramping up to 67275 CPR in month 25; ramping up to 32.085 CPR over 7 months. Three-year hybrid loans ramp up to 33.12 CPR over 14 months; ramping up to outstanding balance 62.1 CPR in month 37; ramping down to 32.085 CPR over 7 months.

As a result of an acceleration of prepayments and loan Securitization of Residential Mortgages defaults, Dominion recognized a loss of $21 million in the During 2001, 2000 and 1999, Dominion sold residential mort fourth quarter of 2001 on its retained interests from securitiza gage loans in securitization transactions. In each of those securi tions of mortgage loans. During the first half of 2000, in tizations, Dominion retained servicing responsibilities and response to changes in market conditions, Dominion increased interests in the mortgage loans sold which are subordinate to the the discount rate used to value the interest-only strips included interests of investors participating in the securitizations. The in its retained interests from 12 percent to 17 percent, and recog investors and the securitization trusts have no recourse to nized a loss of $106 million. In connection with the DCI exit Dominion's other assets for failure of debtors to pay when due.

strategy, Dominion reclassified its retained interests from securi Dominion's retained interests in mortgage securitizations were tizations of mortgage loans from available-for-sale to trading.

based on rights to annual servicing fees approximating 50 basis 62 points of the outstanding balance and rights to future cash flows

Activity for the retained interests from securitizations of Presented below are the fair values of Dominion's retained mortgage loans, including interest-only strips and servicing interests and related key economic assumptions as of December rights, and the CLO and CDO retained interests is summarized 31, 2001 and the sensitivity of the retained interests' fair value as follows: to adverse changes of 10 percent and 20 percent in those assumptions:

Interest-Only Servicing Strips-- Rights Retained Retained Retained Mortgage Mortgage Interest- Interest-Interest Retained Retained (millions) Loanstl Loans CLO CDO Mortgage Interest Interest Balance at January 1, 1999 $ 282 $ 35 - $ 24 (millions, except percentages) Loans CLO CDO Retained from securitization 169 16 - 34 Carrying amount/fair value $261 $205 $63 Amortization (7) (12) - 2.69 2.2 3.8 Weighted-average life (in years)

Cash received (79) -

Fair value adjustment (18) - - Prepayment speed assumption (annual rate) (1) N/A N/A Balance at December 31, 1999 347 39 - 58 Impact on fair value of 10%

Retained from securitization 99 18 $ 76 30 adverse change $(15) N/A N/A Amortization (16) (7) - Impact on fair value of 20%

Cash received (51) - - (4) adverse change $ (30) N/A N/A Gain on trading securities 25 . -

Expected credit losses (annual rate) 3.32% 4%(2) 2%(3)

Fair value adjustment (102) (5) - (1)

Impact on fair value of 10%

Balance at December 31, 2000 302 45 76 83 adverse change $ (8) $ (7) $(1)

Retained from securitization 33 - 196 Impact on fair value of 20%

Amortization (9) - - $(15) $(11) $(3) adverse change Cash received (55) - - (6)

Gain on trading securities 19 - - Residual cash flows discount 2 rate [annual] 17% 10% 16.9%

Servicing rights sold( ) - (45) -

Fair value adjustment (21) - (67) (14) Impact on fair value of 10%

adverse change $ (6) $(12) $ (2)

Balance at December 31, 2001 $ 269 $ - $205 $ 63 Impact on fair value of 20%

(1) Includes prepayment penalties.

adverse change $(15) $(17) $(4) )

(2) Dominion sold all of its servicing rights as part of its sale of Saxon Mortgage in 2001. Interest rates on variable and adjustable contracts (4) N/A N/A Impact on fair value of 10%

adverse change - N/A N/A Impact on fair value of 20%

adverse change $ (3) N/A N/A (1) Fixed rate loans ramp up to 25 CPR over 16 months. Adjustable rate loans ramp up to 65 CPR over 16 months, ramping down to 40 CPR over 12 months. Second liens ramp up to 35 CPR over 16 months, ramping down to 22 CPR over 26 months. Two-year hybrid loans ramp up to 32 CPR over 14 months; ramping up to 65 CPR in month 25; ramping to 31 CPR over 7 months. Three-year hybrid loans ramp up to 32 CPR over 14 months; ramping up to 60 CPR in month 37; ramping down to 31 CPR over 7 months.

(2) Defaults occur at the beginning of each period. They are applied on constant percentage to the period's beginning collateral balance.

(3) Assets rated Caal and lower are defaulted using a CDR vector based upon Moody's Cumulative Default Rates for Caal-C securities. A 2 percent per annum CDR is applied to remaining assets with ongoing recoveries of 40 percent and 80 percent on bonds and loans, respectively.

(4) Based on the full forward 1-month LIBOR, 6-month LIBOR or 1-year CMT through January 1, 2005 based on the variable component of the variable rate contracts.

These sensitivities are hypothetical. Changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interests was calculated without changing any other assumption. In reality, changes in one factor may result in changes in another factor which might magnify or

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED]

counteract the sensitivities. For example, increases in market determined on a specific identification basis. For 2001, 2000 interest rates may result in lower prepayments and increased and 1999, net unrealized holding gains on trading securities credit losses. increased earnings by $21 million, $6 million and $1 million, respectively. Net unrealized holding gains for 2000 included r Investment Securities a $14 million loss relating to the reclassification of certain Dominion holds marketable debt and equity securities classified as available-for-sale securities to the trading category.

available-for-sale. Those investments are reported as available-for sale securities on the consolidated balance sheets. In addition, the SDerivatives, Hedge Accounting and Energy Millstone nuclear decommissioning trust funds holds marketable Trading Activities debt and equity securities classified as available-for-sale. See Note Adoption of SFAS No. 133 16 for additional disclosure of Dominion's accounting for the Dominion adopted SFAS No. 133 on January 1, 2001 and Millstone decommissioning trusts. Available-for-sale securities as recorded an after-tax charge to accumulated other comprehensive of December 31, 2001 and 2000 are summarized below: income (AOCI) of $183 million, net of taxes of $106 million.

Dominion reclassified approximately $183 million, net of taxes, of Total Total Unrealized Unrealized AOCI associated with the January 1, 2001 transition adjustment Gains Losses to earnings during 2001. The effect of the amounts reclassified Included in Included in (millions) Fair Value AOCI AGO from AOCI to earnings was generally offset by the recognition 2001 of the hedged transactions (e.g., anticipated sales) in earnings, Equity securities $ 551 $11 $ 4 thereby achieving the realization of prices contemplated by the Debt securities 684 1 16 underlying risk management strategies.

Total $1,235 $12 $20 Risk Management Policy 2000 Dominion uses derivatives to manage the commodity and Equity securities $ 118 $ 1 $15 Debt securities 174 - 1 financial market risks of its business operations. Dominion manages the price risk associated with purchases and sales of Total $ 292 $ 1 $16 electricity, natural gas and oil by using derivative commodity instruments including futures, forwards, swaps and options.

Debt securities backed by mortgages and loans do not have Dominion manages the foreign exchange risk associated with stated contractual maturities as borrowers have the right to call anticipated future purchases denominated in foreign currencies or repay obligations with or without call or prepayment penal through currency forward contracts. Dominion also manages ties. At December 31, 2001, these debt securities totaled $277 its interest rate risk exposure, in part, by entering into interest million. The fair value of all other debt securities at December rate swap transactions.

31, 2001 by contractual maturity are as follows:

As part of its strategy to market energy and to manage (millions) related risks, Dominion manages a portfolio of derivative com Due in one year or less $ 52 modity contracts held for trading purposes. These contracts Due after one year through five years 81 are sensitive to changes in the prices of natural gas and electric Due after five years through ten years 119 ity. Dominion uses established policies and procedures to man Due after ten years 155 age the risks associated with these price fluctuations and uses Total $407 various commodity instruments, such as futures, swaps and options, to reduce risk by creating offsetting market positions.

Proceeds from sales of available-for-sale securities were Dominion has operating procedures in place that are adminis

$484 million, $3 million and $35 million for 2001, 2000, and tered by experienced management to help ensure that proper 1999 respectively. Realized gains associated with sales of avail internal controls are maintained regarding the use of derivatives.

able-for-sale securities totaled $18 million, $1 million and $5 In addition, Dominion has established an independent function million for 2001, 2000 and 1999, respectively. Realized losses on to monitor compliance with the price risk management policies those sales totaled $4 million, $6 million, and $1 million for of all subsidiaries.

2001, 2000 and 1999, respectively. The increase in proceeds and realized gains relates primarily to activity in the Millstone nuclear decommissioning trusts. The cost of these securities was

Dominion designates a substantial portion of derivatives variability of cash flows related to a variable-priced asset, liability, held for purposes other than trading as fair value or cash flow commitment, or forecasted transaction, changes in the fair hedges. A significant portion of Dominion's hedge strategies rep value of the derivative are reported in AOCI. Derivative gains resents cash flow hedges of the variable price risk associated with and losses reported in AOCI are reclassified as earnings in the the purchase and sale of electricity, natural gas, oil and other periods in which earnings are impacted by the variability of the commodities. Dominion also uses cash flow hedge strategies to cash flows of the hedged item. The ineffective portion of the hedge the variability in foreign exchange rates and variable inter change in fair value of derivatives and the change in fair value est rates on long-term debt. In its cash flow hedges, Dominion of derivatives not designated as hedges for accounting purposes uses the derivative instruments discussed in the preceding para are recognized in current period earnings. For foreign currency graphs. Dominion also engages in fair value hedges by using nat forward contracts designated as cash flow hedges, hedge effec ural gas swaps, futures and options to mitigate the fixed price tiveness is measured based on changes in the fair value of the exposure inherent in its firm commodity commitments. In addi contract attributable to changes in the forward exchange rate.

tion, Dominion has designated interest rate swaps as fair value For options designated either as fair value or cash flow hedges, hedges to manage its exposure to fixed interest rates on certain changes in time value are excluded from the measurement of long-term debt. Certain non-trading derivative instruments are hedge effectiveness and are therefore recorded in earnings.

not designated as hedges for accounting purposes. However, Gains and losses on derivatives designated as hedges, management believes these instruments represent economic when recognized, are included in operating revenue, expenses hedges that mitigate exposure to fluctuations in commodity or interest and related charges in the consolidated statements of prices and interest rates. income. Specific line item classification is determined based on the nature of the risk underlying individual hedge strategies.

Accounting Policy Changes in the fair value of derivatives not designated as Under SFAS No. 133, derivatives are recognized on the consoli hedges and the portion of hedging derivatives excluded from dated balance sheets at fair value, unless an exception is available the measurement of effectiveness are included in other operation under the standard. Commodity contracts representing unreal and maintenance expense in the consolidated statements of ized gain positions are reported as derivative and energy trading income. Cash flows resulting from the settlement of derivatives assets; commodity contracts representing unrealized losses used as hedging instruments are included in net cash flows from are reported as derivative and energy trading liabilities. In addi operating activities.

tion, purchased options and options sold are reported as deriva tive and energy trading assets and derivative and energy trading 2001 Derivatives and Hedge Accounting Results liabilities, respectively, at estimated market value until exercise Dominion recognized a pre-tax net gain of $2 million for hedge or expiration. ineffectiveness during 2001. This amount includes a pre-tax For all derivatives designated as hedges, Dominion formally gain of $3 million related to cash flow hedges and a loss of $1 mil documents the relationship between the hedging instrument lion related to fair value hedges. In addition, Dominion recog and the hedged item, as well as the risk management objective nized a net pre-tax loss of $45 million during 2001, representing and strategy for using the hedging instrument. Dominion the change in time value excluded from the measurement of effec assesses whether the hedge relationship between the derivative tiveness for options designated as cash flow hedges subsequent to and the hedged item is highly effective in offsetting changes in January 1, 2001.

fair value or cash flows both at the inception of the hedge and on Approximately $209 million of net gains in AOCI at an ongoing basis. Any change in fair value of the derivative that December 31, 2001 is expected to be reclassified to earnings is not effective in offsetting changes in the fair value of the during 2002. The actiLal amounts that will be reclassified to hedged item is recognized currently in earnings. Further, for earnings in 2002 will vary from this amount as a result of derivatives that have ceased to be highly effective hedges, changes in market prices. The effect of amounts being reclassi Dominion discontinues hedge accounting prospectively. fied from AOCI to earnings will generally be offset by the recog For fair value hedge transactions in which Dominion is nition of the hedged transactions (e.g., anticipated sales) in hedging changes in the fair value of an asset, liability, or firm earnings, thereby achieving the realization of prices contem commitment, changes in the fair value of the derivative will plated by the underlying risk management strategies. As of generally be offset in the consolidated statements of income December 31, 2001, Dominion is hedging its exposure to the by changes in the hedged item's fair value. For cash flow variability in future cash flows for forecasted transactions over hedge transactions in which Dominion is hedging the periods of one to seven years.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Energy Trading Activities its estimated Enron exposure. This charge is comprised of Dominion's energy trading contracts are reported at fair value, approximately $9 million for net credit exposure on past energy with corresponding changes in value recognized immediately in sales to Enron for which payment has not yet been received and earnings. Net gains and losses associated with Dominion's com approximately $142 million related to the impaired fair value of modity trading activities are accounted for net of related cost of natural gas forward and swap contracts with Enron. Manage sales in nonregulated electric sales and nonregulated gas sales. ment believes that this charge substantially eliminates any Cash flows resulting from the settlement of energy trading con further Enron-related earnings exposure. However, various con tracts are included in net cash flows from operating activities. tingencies, including developments in the Enron bankruptcy The composition of operating revenue from commodity trading proceedings, may affect Dominion's ultimate exposure to Enron.

activities for the years 2001, 2000 and 1999 follows: Concurrent with the December 2, 2001 Enron bank (millions) ruptcy filing, Dominion's Enron derivatives designated as Gains Losses Total cash flow hedges of anticipated purchases and sales of natural 2001 Contract settlements $5,208 $(5,209) $ (1) gas no longer qualified for hedge accounting and, accordingly, Unrealized gains and losses 1,378 (1,238) 140 were de-designated from their hedging relationships for Operating revenue 6,586 (6,447) 139 accounting purposes.

2000 Other Contract settlements 2,773 (2,692) 81 In June 2001, the FASB cleared guidance that permits certain Unrealized gains and losses 1,236 (1,211) 25 option-type contracts for the purchase or sale of electricity to Operating revenue 4,009 (3,903) 106 qualify for the normal purchases and sales exception, if certain 1999 criteria are met. Qualifying contracts, for which Dominion Contract settlements 2,577 (2,481) 96 Unrealized gains and losses elects and formally documents this exception, are not reported 114 (101) 13 at fair value, as otherwise required by SFAS No. 133. In response Operating revenue $2,691 $(2,582) $109 to the June 2001 guidance and other guidance issued during the second quarter, Dominion reevaluated certain of its long Enron Bankruptcy term power purchase contracts. Dominion determined that On December 2, 2001, Enron Corp. and certain of its sub such contracts qualified under the guidance and thus designated sidiaries (collectively referred to as Enron) voluntarily filed for them as normal purchases and sales. In late December 2001, reorganization under Chapter 11 of the United States Bank the FASB issued revised guidance on this matter to be effective ruptcy Code. Dominion is a party to various contracts with April 1, 2002. Dominion believes that its long-term power Enron that were initiated primarily for purposes of hedging purchase contracts that are currently designated as normal anticipated purchases and sales of natural gas and for use in its purchases and normal sales will continue to qualify for energy trading operations. As a result of Enron's bankruptcy fil the exception.

ing, Dominion reexamined the estimated collectibility of its net Future interpretations of SPAS No. 133 by the FASB or accounts receivable balance from Enron and the valuation of its other standard-setting bodies could result in fair value account Enron commodity contracts carried at fair value on Dominion's ing being required for certain contracts that are not currently consolidated balance sheet at December 2, 2001. In reexamining being subjected to such requirements. Accordingly, future inter the valuation of these assets, Dominion considered, among other pretations may impact Dominion's ultimate application of the factors, its contractual ability to exercise the right of setoff, the standard. However, if future SPAS No. 133 interpretive guidance 66 likelihood of continued performance by Enron under its con results in additional contracts becoming subject to fair value tracts and its expectation regarding amounts to be realized upon accounting, Dominion would pursue hedging strategies to miti potential future termination of its contracts by Dominion. gate any potential future volatility in reported earnings.

Based on management's evaluation of these factors, Dominion recorded a pre-tax charge to earnings of approxi mately $151 million in the fourth quarter of 2001 related to

Nuclear Operations Dominion collected $36 million from ratepayers in each of the years 2001, 2000 and 1999 and expensed like amounts as a Dominion has a total of seven licensed nuclear reactors at its component of depreciation. Dominion recognized net realized Surry and North Anna plants in Virginia and its Millstone plant gains of $32 million, $20 million and $17 million for 2001, in Connecticut. Surry and North Anna serve native load in 2000, and 1999. Dominion recognized net unrealized losses of Dominion's regulated electric utility operations. Millstone is

$61 million and $23 million, for 2001 and 2000, respectively; a nonregulated merchant plant. See Notes 5 and 17 regarding and net unrealized gains in 1999 of $60 million. Dominion rec the acquisition of Millstone and other information regarding jointly-owned utility plants. ognized offsetting increases or decreases to its provision for decommissioning in amounts equal to net realized and unreal Decommissioning represents the decontamination and ized gains or losses for each period.

removal of radioactive contaminants from a nuclear power Merchant Nuclear Plant-The external trusts that hold plant, once operations have ceased, in accordance with investments dedicated to funding the decommissioning of standards established by the NRC. Through July 2007, amounts Dominion's merchant nuclear plant are classified as "available are being collected from ratepayers and placed in external for sale" and reported in the consolidated balance sheets at fair trusts and invested to fund the expected costs of decommission value. See Note 14. The balance of investments held in external ing the Surry and North Anna units. As part of its acquisition of trusts for Millstone decommissioning at December 31, 2001 was Millstone, Dominion acquired the decommissioning trusts for

$839 million.

the three units that were fully funded to the regulatory mini The accumulated provision for decommissioning, which is mum as of the acquisition date. Currently, Dominion believes included in accumulated depreciation in the consolidated bal that the amounts available in the trusts and their expected earn ance sheets, was recorded upon the acquisition of Millstone at ings will be sufficient to cover expected decommissioning costs its estimated fair value using discounted cash flows of expected for the Millstone units, without any additional contributions to costs to perform the decommissioning activities. The balance of the trusts.

the accumulated provision for Millstone decommissioning was Accounting for Decommissioning $660 million at December 31, 2001.

Utility Nuclear Plants-- In accordance with the accounting The accretion of the provision for decommissioning is policy recognized by regulatory authorities having jurisdiction expensed as a component of depreciation and was $30 million over its electric utility operations, Dominion recognizes an for the year ended December 31, 2001. Dominion realized expense for the future cost of decommissioning in amounts net gains on trust investments of $15 million in 2001 and equal to amounts collected from ratepayers and earnings on recorded such gains in other income.

trust investments dedicated to funding the decommissioning of Expected Costs for Decommissioning Dominion's utility nuclear plants. On the consolidated balance The total estimated cost to decommission Dominion's seven sheets, the external trusts are reported at fair value with the nuclear units is $3.4 billion based upon site-specific studies com accumulated provision for decommissioning included in accu pleted in 1998 and 1999. Dominion expects to perform new mulated depreciation. Net realized and unrealized earnings on cost studies in 2002. For all units except Millstone Unit 1, the the trust investments, as well as the offsetting expense for current cost estimates assume decommissioning activities will decommissioning, are recorded as a component of other income begin shortly after cessation of operations, which will occur (loss) as permitted by regulatory authorities.

when operating licenses expire. Millstone Unit 1 is not in service The balance of investments held in external trusts for Surry and will be monitored until decommissioning activities begin for and North Anna decommissioning as well as the accumulated 67 the remaining Millstone units. The current operating licenses provision for decommissioning at December 31, 2001 and 2000, expire in the years detailed in the table below. However, was $858 million and $851 million, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED]

Dominion filed a request with the NRC in 2001 for a 20-year life extension for the Surry and North Anna units and expects to file a similar request for the Millstone units in 2004. Dominion expects to decommission the Surry and North Anna units dur ing the period 2032 to 2045 and the Millstone units during the period 2050 to 2055.

Surry North Anna Millstone (millions) Unit 1 Unit 2 Unit I Unit 2 Unit 1 Unit 2 Unit 3 Total NRC license expiration year 2012 2013 2018 2020 () 2015 2025 Current cost estimate (1998 dollars) $411 $413 $401 $387 - - - $1,612 Current cost estimate (1999 dollars) - - - $631 $ 500 $ 618 1,749 Funds in external trusts at December 31, 2001 239 234 198 187 288 278 273 1,697 2001 contributions to external trusts 11 11 7 7 - - - 36 (1) Unit I isbeing decommissioned and was not in service.

The NRC requires nuclear power plant owners to annually this insurance be used first to return the reactor to and maintain update minimum financial assurance amounts for the future it in a safe and stable condition and second to decontaminate decommissioning of the nuclear facilities. Dominion's 2001 the reactor and station site in accordance with a plan approved NRC minimum financial assurance amount, aggregated for the by the NRC. Dominion's nuclear property insurance is provided nuclear units, was $1.9 billion and will be satisfied by a combi by Nuclear Electric Insurance Limited (NEIL), a mutual insur nation of surety bonds and the funds being collected in the ance company, and is subject to retrospective premium assess external trusts. ments in any policy year in which losses exceed the funds available to the insurance company. The maximum assessment Insurance for the current policy period is $70 million. Based on the severity The Price-Anderson Act limits the public liability of an owner of a nuclear power plant to $9.5 billion for a single nuclear inci of the incident, the board of directors of Dominion's nuclear insurer has the discretion to lower or eliminate the maximum dent. The Price-Anderson Act Amendment of 1988 allows for an retrospective premium assessment. Dominion has the financial inflationary provision adjustment every five years. Dominion has responsibility for any losses that exceed the limits or for which purchased $200 million of coverage from commercial insurance insurance proceeds are not available because they must first be pools with the remainder provided through a mandatory indus used for stabilization and decontamination.

try risk-sharing program. In the event of a nuclear incident at Dominion purchases insurance from NEIL to cover the any licensed nuclear reactor in the United States, Dominion cost of replacement power during the prolonged outage of a could be assessed up to $88 million for each of its seven licensed nuclear unit due to direct physical damage of the unit. Under reactors not to exceed $10 million per year per reactor. There is this program, Dominion is subject to a retrospective premium no limit to the number of incidents for which this retrospective assessment for any policy year in which losses exceed funds avail premium can be assessed.

able to NEIL. The current policy period's maximum assessment The Price-Anderson Act was first enacted in 1957 and has is $29 million.

been renewed three times-in 1967, 1975 and 1988. Price Anderson expires August 1, 2002, but operating nuclear reactors Old Dominion Electric Cooperative, a part owner of the 68 North Anna Power Station, and Massachusetts Municipal would continue to be covered by the law. Congress is currently Wholesale Electric Company and Central Vermont Public Ser holding hearings to reauthorize the legislation.

vice Corporation, part owners of Millstone's Unit 3, are responsi Dominion's current level of property insurance coverage ble for their share of the nuclear decommissioning obligations

($2.55 billion for North Anna, $2.55 billion for Surry and $2.75 and insurance premiums on applicable units, including any ret billion for Millstone) exceeds the NRC's minimum requirement for nuclear power plant licensees of $1.06 billion per reactor site rospective premium assessments and any losses not covered by insurance.

and includes coverage for premature decommissioning and functional total loss. The NRC requires that the proceeds from

Property. Plant and Equipment Amortization rates for capitalized costs under the full cost method of accounting for Dominion's United States and Major classes of property, plant and equipment and their Canadian cost centers were as follows:

respective balances are:

(Per Mcf Equivalent)

(millions) At December 31, 2001 2000 Year ended December 31, 2001 2000 1999 Utility United States cost center $1.13 $1.13 $0.75 Production $ 8,414 $ 8,103 Canadian cost center 0.78 0.92 0.80 Transmission 3,165 3,085 Distribution 7,024 6,764 Storage 755 573 Dominion's proportionate share of jointly-owned utility Plant under construction 587 562 plants at December 31, 2001 follows:

Nuclear fuel 757 755 Other electric and gas 1,528 1,574 Bath Total utility 22,230 21,416 County North Pumped Anna Clover Nonutility Storage Power Power Exploration and production properties: (millions, except percentages) Station Station Station Proved 7,303 5,210 Ownership interest 60.0% 88.4% 50.0%

Unproved 1,689 550 Plant in service $1,028 $1,859 $533 Independent power properties-nuclear 1,170 Accumulated depreciation 321 1,162 83 Independent power properties-other 381 358 Nuclear fuel - 314 Other 332 477 - 303 Accumulated amortization of nuclear fuel Total nonutility 10,875 6,595 Construction work in progress 3 28 4 Total property, plant and equipment $33,105 $28,011 The co-owners are obligated to pay their share of all future Costs of unproved properties capitalized under the full cost construction expenditures and operating costs of the jointly method of accounting that are excluded from amortization at owned facilities in the same proportions as their respective December 31, 2001, and the years in which such excluded costs ownership interest. Such operating costs are classified in the were incurred, follow: appropriate expense category in the consolidated statements of income.

(millions) Incurred In Year Ended December 31, Prior Total 2001 2000 Years Property acquisition costs $ 947 $861 $41 $45 Exploration costs 120 80 40 Capitalized interest 27 13 14 Total $1,094 $954 $95 $45 69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED]

Regulatory Assets and Liabilities Short-Term Debt and Credit Agreements Regulatory assets represent probable future revenue associated Dominion and its subsidiaries have credit agreements with vari with certain costs that will be recovered from customers through ous expiration dates and pay fees in lieu of compensating bal the ratemaking process. Regulatory liabilities represent probable ances in connection with these agreements. These agreements future reductions in revenues associated with amounts that are provided for maximum borrowing capacity of $2.5 billion and to be credited to customers through the ratemaking process. $4.4 billion at December 31, 2001 and December 31, 2000, Dominion's regulatory assets and liabilities included the follow respectively. In 2000, $295 million was borrowed under these ing at December 31, 2001 and 2000: agreements. There were no borrowings as of December 31, 2001.

These credit agreements also supported $1.9 billion and (millions) 2001 2000

$2.7 billion of commercial paper at December 31, 2001 and Regulatory assets Unrecovered gas costs 2000, respectively. These borrowings were used primarily to

$ 9 $263 Other postretirement benefit costs (1) 115 126 fund working capital requirements, bridge financing of acquisi Income taxes recoverable through future rates (2) 179 164 tions and operational needs at Dominion and its subsidiaries. At Deferred cost of fuel used in electric generation 119 98 December 31, 2000, a total of $250 million of the commercial Cost of decommissioning DOE uranium enrichment facilities (3) 42 49 paper was classified as long-term debt since a portion of the Customer bad debts (4) 80 commercial paper was supported by credit agreements that had Other 39 60 expiration dates extending beyond one year.

Regulatory assets, net 574 497 At December 31, 2001, Dominion had commercial paper Total regulatory assets 583 760 programs with an aggregate amount of $2.05 billion supported by Regulatory liabilities a $1.75 billion 364-day revolving credit facility and a $300 mil Amounts payable to customers 91 lion multi-year facility. Dominion expects to renew these credit Estimated rate contingencies and refunds (5) 43 41 facilities after their maturities in the second quarter of 2002.

Total regulatory liabilities $134 $ 41 A summary of the amounts that are classified as short-term (1)Costs recognized in excess of amounts included in regulated rates charged by Dominion's debt at December 31 follows:

regulated gas operations before rates were updated to reflect the new method of accounting and the cost related to the accrued benefit obligation recognized as part of 2001 2000 Dominion's accounting for its acquisition of CNG.

(2) Income taxes recoverable or refundable through future rates resulted from the Weighted Weighted recognition ofadditional deferred income taxes, not previously recorded because of past Average Average ratemaking practices. Amount Interest Amount Interest (3) Cost of decommissioning the Department of Energy's uranium enrichment facilities, (millions, except percentages) Outstanding Rate Outstanding Rate representing the unamortized portion of Dominion's required contributions. Beginning Commercial paper $1,859 4.23% $2,414 6.50%

in 1992, Dominion began making contributions over a 15-year period and collecting Term notes - - 823 7.02%

these costs in electric customers' fuel rates.

(4) In 2001 the Public Utilities Commission ofOhio authorized the deferral of costs Total $1,859 $3,237 associated with certain uncollectible customer accounts not contemplated by current rates. Dominion expects recovery of such costs, which will be included in Dominion's next base rate case.

(5) Estimated rate contingencies and refunds are associated with certain increases in prices by Dominions rate regulated utilities and other rate-making issues that are subject to final modification in regulatory proceedings.

The incurred costs underlying regulatory assets may repre sent past expenditures by Dominion's rate regulated electric and 70 gas operations or may represent the recognition of liabilities that ultimately will be settled at some future time. At December 31, 2001, approximately $130 million of Dominion's regulatory assets represented past expenditures on which it does not earn a return. These expenditures consist primarily of unrecovered gas costs, customer bad debts and a portion of deferred fuel costs.

Unrecovered gas and deferred fuel costs are recovered within two years; recovery of these customer bad debts is expected to be addressed in the next base rate case.

SLong-Term Debt The scheduled principal payments of long-term debt at December 31, 2001 were as follows (in millions):

(millions) At December 31 2001 2000 2002 2003 2004 2005 2006 Thereafter Total First and Refunding Mortgage Bonds:

6.0% to 8.75%, due 2001 to 2025 (1) $ 2,121 $ 2,321 $1,354 $2,112 $1,459 $889 $1,445 $6,196 $13,455 Senior Subordinated Debt, 9.25%, due 2004 94 Senior and Medium-Term Notes:

Dominion's short-term credit facilities and long-term debt Variable rates, due 2002 to 2012 690 470 5.375% to 9.85%, due 2001 to 2038(2) 8,275 5,133 agreements contain customary covenants and default provisions.

Commercial Paper (see Note 19) - 250 Tax-Exempt Financings (3):

Variable rates, due 2007 to 2027 489 489

• Subsidiary Dividend Restrictions 4.0% to 5.45%, due 2022 to 2031 110 60 The 1935 Act prohibits registered holding companies and their Secured Revolving Lines of Credit: subsidiaries from paying dividends out of capital or unearned Variable rates, due 2002 to 2004 Revolving Lines of Credit:

surplus except when they have received specific SEC authori Variable rates, due 2001 to 2004 (4) 241 145 zation. In January 2002, Dominion filed an application with Term Note: the SEC for relief from the restriction on paying dividends out Variable rate, due 2002 675 900 of unearned surplus of the subsidiary into which Louis Dreyfus Nonrecourse Debt:

Variable rates, due 2004 to 2009 40 59 was merged. The request was for relief up to an amount equal 4.49% to 12.5%, due 2001 to 2020 (4) 353 367 to Louis Dreyfus' retained earnings before the merger.

13,088 10,491 The Virginia Commission may prohibit any public service 5

Fair value hedge valuation ( ) 43 - company, including Virginia Power, from declaring or paying a (1

Amount due within one year ,309) (336) dividend to an affiliate, if found not to be in the public interest.

Unamortized discount and premium, net (25) (54) 11 At December 31, 2001, the Virginia Commission had not restricted the payment of dividends by Virginia Power.

Notes Payable-Affiliates (see Note 29):

6.0%, due 2005 175 - Certain agreements associated with Dominion's credit facil Variable rates, due 2006 192 - ities contain restrictions on the ratio of debt to total capitaliza 367 _ tion. These limitations did not restrict Dominion's ability (45) - to pay dividends or receive dividends from its subsidiaries at Amount due within one year December 31, 2001.

322 Total long-term debt $12 ,119 $10,101

• Obligated Mandatorily Redeemable Preferred (1) Substantially all of Virginia Power's property is subject to the lien of the mortgage, Securities of Subsidiary Trusts securing its First and Refunding Mortgage Bonds (Mortgage Bonds) . In 2001, Virginia Power retired $100 million of its 1993-E, 6% Mortgage Bonds and edeemed $100 From 1995 through 2001, Dominion established five subsidiary million of its 1991-A, 8.75% Mortgage Bonds due April 1, 2021. In Jan dua2002, ry capital trusts that sold trust preferred securities that represented Virginia Power called its $200 million, 6.75% 1997-A Mortgage Bonds due February 1, 2007 for redemption in February 2002 at a price of 102.74 plus accirued interest. In preferred beneficial interests and 97 percent beneficial owner January 2002, Virginia Power issued $650 million of 5.375% Senio r Notes (2002 Senior ship in the assets held by the capital trusts. In exchange for the Notes) maturing in February 200Z (2) In 2001, CNG redeemed the remaining $84 million of 8.75% Senioir Notes due October funds realized from the sale of the trust preferred securities and 1, 2019. At the exercised option of holders, CNG will be required on October 15, 2006 common securities that represent the remaining 3 percent to purchase the $150 million, 6.875% Senior Notes due October 15 2026 at 100% of the principal amount plus accrued interest. In January 2002, Domi nion Resources, Inc. beneficial ownership interest in the assets held by the capital issued $250 million of 3.875 percent medium-term notes due 2004 71 trust, Dominion issued various junior subordinated debt instru (3) Certain pollution control equipment at Virginia Power's generating facilities has been ments. The junior subordinated debt instruments constitute pledged or conveyed to secure these financings.

(4) $76 million of variable rate debt under revolving lines of credit and $12 million of 6.34%

to 6.5% nonrecourse debt were retired in 2001.

(5) Represents changes in fair value ofcertain fixed rate long-term debt associated with fair value hedging relationships, as described in Note 15.

Note: Coupon rate for variable rate debt is a weighted average of the int erest rates for 2001, ranging from 2.52% to 5.17%.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED]

100 percent of each capital trust's assets. The following table pro As of December 31, 2001 and 2000, there were no out vides summary information about the capital trusts and junior standing issues of Virginia Power preferred stock subject to subordinated debt instruments: mandatory redemption. Shown below are the series of Virginia Power preferred stock not subject to mandatory redemption that Trust Date Capital Preferred Common were outstanding as of December 31, 2001.

Established Trusts Securities Securities Issued and (Millions) Outstanding Entitled Per August, 1995 Virginia Power Capital Trust F') $135 $4 Dividend Share Upon December, 1997 Dominion Resources Capital Shares(' Liquidation Trust 1(2) 250 8 $5.00 107 $112.50 January, 2001 Dominion Resources Capital 4.04 13 102.27 Trust II(3) 300 9 4.20 15 102.50 January, 2001 Dominion Resources Capital 4.12 32 103.73 4

Trust IIIM) 250 8 4.80 73 101.00 October, 2001 Dominion CNG Capital Trust 1(5) 200 6 7.05 500 105.00)21 1,135 6.98 600 105.00(31 MMP 10/88 (4) 750 100.00 Unamortized discount (3)

Total at December 31, 2001 $1,132 MMP 6/89(4) 750 100.00 4

MMP 9/92, Series A( ) 500 100.00 4

Junior subordinated notes/debentures assets for each capital trust were as follows: MMP 9/92, Series B( ) 500 100.00

() $139 million-Virginia Power 8.05% Series A Notes due 9/30/2025-The maturity date, subject to certain conditions, may be extended for up to an additional 10 years from date Total 3,840 of original maturity (2) $258 million-Dominion Resources, Inc. 7.83% Debentures due 12/1/2027 (1) Shares are presented in thousands.

(3)$309 million- Dominion Resources, Inc. 8.4% Debentures due 1/30/2041.

(2) Through 7/31/03; amounts decline in steps thereafter to $100.00 after 7/31/13.

(3) Through 8/31/03; amounts decline in steps thereafter to $100.00 after 8131/13.

(4)$258 million- Dominion Resources, Inc. 8.4% Debentures due 1/15/2031.

(5)$206 million-CNG 78% Debentures due 10/31/2041.

(4) Money Market Preferred (MMP) dividend rates are variable and are set every 49 days via an auction process. The combined weighted average rates for all series outstanding during 2001, 2000, and 1999, including fees for broker/dealer agreements, were 4.32

.- Preferred Stock percent, 5.71 percent and 4.82 percent, respectively.

Dominion is authorized to issue up to 20 million shares of

.r ' Common Stock preferred stock. See Note 29 for a discussion of Dominion's issuance of 665,000 shares of Series A Mandatorily Convertible Dominion is authorized by its Board of Directors to repurchase Preferred Stock, liquidation preference $1,000 per share (Pre up to $650 million of Dominion common stock outstanding. As ferred Stock), to Piedmont Share Trust (Piedmont Trust). of December 31, 2001, Dominion had repurchased approxi Dominion is the beneficial owner of the Piedmont Trust which mately 11 million shares for $471 million. Dominion has not is consolidated in the preparation of Dominions consolidated repurchased any shares since January 2000.

financial statements, thus eliminating the Preferred Stock. Immediately before the CNG merger in January 2000, Virginia Power is authorized to issue up to 10 million shares Dominion concluded a first step transaction in which 33 million of preferred stock, $100 liquidation preference. Upon involun shares of Dominion common stock were exchanged for approxi tary liquidation, dissolution or winding-up of Virginia Power, mately $1.4 billion. Dominion also repurchased approximately each share is entitled to receive $100 per share plus accrued 3.2 million shares of stock in 2000 through a total return dividends. Dividends are cumulative. swap facility at a cost of approximately $145 million. The trans During the fourth quarter of 2001, Virginia Power actions were independent of the general repurchase authority 72 described above.

purchased and redeemed, at par, all shares of its January 1987 and June 1987 series of money market preferred stock for

$125 million. .- Stock Compensation Plans Dominion sponsors two stock plans that provide stock-based awards to directors, executives and other key employees. Under the plans, Dominion grants stock options and restricted stock awards that vest from three to five years, and in the case of options, have contractual terms that range from seven to 10 years. Forty million shares of common stock may be issued

under the plans and 15 million of those are available for new stock options equals the market price of Dominion common grants as of December 31, 2001. stock on the date of grant.

Dominion recognized compensation expense of $13 mil lion, $8 million, and $2 million in 2001, 2000, and 1999, Weighted respectively, for the issuance of stock-based awards, primarily average Weighted restricted stock. If compensation cost associated with the stock Stock Exercise average Options Price Fair Value based awards had been measured based on the fair market value (thousands) of the options at the date of grant, 2001 net income, basic EPS, Outstanding at December 31, 1998 2 $29.49 and diluted EPS would have been $520 million, $2.08 and Granted-1999 7,146 $41.38 $4.35(2)

$2.06, respectively; 2000 net income, basic EPS, and diluted Exercised, cancelled and forfeited (1) $29.37 EPS would have been $430 million, $1.82 and $1.82, respec Outstanding at December 31, 1999 7,147 $41.37 tively; and 1999 net income, basic EPS, and diluted EPS would Exercisable at December 31, 1999 7,147 $41.37 have been $277 million, $1.45 and $1.38.

Granted-2000 5,389 $43.87 $6.86(2)

The adjacent table provides a summary of changes in Exercised, cancelled and forfeited (2,205) $40.07 amounts of Dominion stock options outstanding as of and for Outstanding at December 31, 2000 10,331 $41.77 the years ended December 31, 2001, 2000, and 1999. In con Exercisable at December 31, 2000 6,967 $41.51 nection with the acquisition of Louis Dreyfus, employee stock Granted-2001 480(l $33.21(l) $23.69(11 options of Louis Dreyfus were converted into employee stock 11,471(*) $61.20[2) $11.24(2) options of Dominion. Based on the conversion formula, certain 194(3) $62.2733) $ 9.43(3) converted stock options had exercise prices that either exceeded Exercised, cancelled and forfeited (1,484) $41.23 or were less than the market price of Dominion common stock Outstanding at December 31, 2001 20,992 $52.90 on the date of grant. The fair value of all converted stock options Exercisable at December 31, 2001 7,955 $42.68 were included in the purchase price of Louis Dreyfus, see (1), (2), (3) The exercise price for these stock options (1)was less than, (2) equaled, or Note 5. Generally, the exercise price of Dominion employee (3) exceeded the market price on the date of grant.

The following table provides certain information about stock options outstanding as of December 31, 2001:

Options Outstanding Options Exercisable Weighted-average Shares Remaining Weighted-average Shares Weighted-average Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price (thousands) (thousands)

$ 0-$19.99 13 7.0 $19.15 13 $19.15

$20-$30.99 186 5.8 $25.76 186 $25.76

$31-$40.99 266 7.5 $38.42 165 $38.16

$41-$50.99 8,537 7.5 $42.40 7,070 $41.87

$51-$60.99 9,546 7.1 $59.91 216 $58.83

$61-$69 2,444 9.3 $66.00 305 $63.90 Total 20,992 7.5 $52.90 7,955 $42.68 73 The fair value of the options was estimated on the dates of modified to extend the period, after separation from employ grant using the Black-Scholes option pricing model with the fol ment, that the executives may exercise their options but not lowing weighed-average assumptions for 2001, 2000, and 1999, beyond the options' original contractual lives. Dominion re respectively: expected dividend yield of 4.22 percent, 5.22 per measured compensation expense associated with these options cent, 6.25 percent; expected volatility of 22.19 percent, 21.54 on the modification date and recognized a pre-tax charge of percent, 15.14 percent; contractual life of 10 years (all periods); $18 million included in restructuring charges in 2001.

risk free interest rate of 5.15 percent, 5.18 percent, 6.52 percent; During 2001, 2000, and 1999, respectively, Dominion and expected lives of six years (all periods). awarded 332,884 shares, 169,886 shares and 24,758 shares of In the fourth quarter of 2001, Dominion modified the restricted stock with weighted-average fair values of $63.49, stock options of certain executives in connection with the $41.88 and $43.51.

restructuring activities discussed in Note 7. The options were

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Employee Benefit Plans formula purposes, subject to age and service maximums under Dominion and its subsidiaries provide certain benefits to eligible Dominion and its subsidiaries' postretirement medical and active employees, retirees and qualifying dependents. Under the pension plans. Certain employees who satisfied certain mini terms of its benefit plans, Dominion and its subsidiaries reserve mum age and years of service requirements were eligible under the right to change, modify or terminate the plans. From time to the ERP. The effect of the ERP on Dominion's pension plan and time in the past, benefits have changed, and some of these post retirement benefit expenses was $81 million and $33 mil changes have reduced benefits. lion, respectively. These expenses were offset, in part, by curtail Dominion and its subsidiaries maintain qualified noncon ment gains of approximately $20 million and $6 million from tributory defined benefit retirement plans covering virtually all pension plans and other postretirement benefit plans, respec employees. Retirement benefits are based primarily on years of tively, attributable to reductions in expected future years of ser service, age, and compensation. Dominion's funding policy is to vice as a result of ERP participation and involuntary employee contribute annually an amount that is in accordance with the terminations.

provisions of the Employment Retirement Income Security Act In November 2001, Dominion eliminated certain senior of 1974. The pension program also provides benefits to certain management positions. Dominion paid these individuals special retired executives under company-sponsored nonqualified termination benefits and accelerated the payment of benefits employee benefit plans. Certain of these nonqualified plans are under Dominion's nonqualified pension plans. Dominion recog funded through contributions to a grantor trust. nized special termination benefits expense of $15 million, a loss of Dominion and its subsidiaries provide retiree health care $7 million related to the settlement of the related non-qualified and life insurance benefits with annual premiums based on sev pension obligation and a curtailment loss of $2 million.

eral factors such as age, retirement date, and years of service. In addition, effective January 1, 2000, Dominion adopted In 2000, Dominion offered an early retirement program a change in the method of calculating the market-related value (ERP). The ERP provided up to three additional years of age of pension plan assets. The change was reported as a change and three additional years of employee service for benefit in accounting principle. See Note 3.

The following tables summarize the changes in Dominion's pension and other postretirement benefit plan obligations and plan assets for each of the years ended December 31, 2001 and 2000, and a statement of the plans' funded status as of December 31, 2001 and 2000:

(millions) Pension Benefits Other Postretirement Benefits Year ended December 31, 2001 2000 2001 2000 Expected benefit obligation at beginning of year $2,304 $1,097 $799 $401 Acquisition of CNG 1,002 -- 297 Acquisition of Millstone 66 21 Actual benefit obligation at beginning of year 2,370 2,099 820 698 Additional benefit obligation due to change in control 10 Service cost 71 65 39 30 Interest cost 173 161 63 52 Benefits paid (153) (141) (51) (43)

Actuarial loss during the year 114 112 107 82 ERP benefit costs 81 33 Change in benefit obligation (5)

Special termination benefits 15 Sale of VNG (45) (20)

Change in APBO due to curtailment (20) (6)

Plan amendments 8 (18) 18 (27)

Expected benefit obligation at end of year 2,593 2,304 996 799 Fair value of plan assets at beginning of year 3,557 1,305 417 272 Acquisition of CNG 2,332 128 Actual return on plan assets (91 64 (11) 3 Contributions 39 34 65 45 Benefits paid from plan assets (153: (141) (25) (20)

Sale of VNG (37) (11)

Fair value of plan assets at end of year 3,352 3,557 446 417 Funded status 759 1,253 (550) (382)

Unrecognized net actuarial loss 698 177 164 13 Unrecognized prior service cost 3 (1) 11 (7)

Unrecognized net transition (asset) obligation (5) (9) 115 125 Prepaid (accrued) benefit cost 1,455 1,420 (260) (251)

Amounts recognized in the consolidated balance sheets at December 31:

Prepaid benefit cost 1,511 1,455 -

Accrued benefit liability (89) (77) (260) (251)

Intangible asset 12 14 -

Accumulated other comprehensive income 21 28 Net amount recognized $1,455 $1,420 $(260) $(251)

Dominion has nonqualified pension and supplemental pen those dates amounted to $12 million and $14 million, respec sion plans which do not have "plan assets" as defined by generally tively. Adjustments of the additional minimum liability and 75 accepted accounting principles. The total projected benefit oblig intangible asset due to changes in assumptions or the financial ation for these plans was $103 million and $93 million at Decem status of these plans resulted in a pre-tax credit to other compre ber 31, 2001 and 2000, respectively, and is included in the table hensive income of $7 million for 2001 and a pre-tax charge to above. The additional minimum liability recognized relating to other comprehensive income of $24 million for 2000.

these plans was $33 million and $42 million at December 31, 2001 and 2000. The related intangible asset recognized as of

NOTES TO CONSOLIDATED FINANCIAL STATIEMENTS (CONTINUED)

The components of the provision *fornet periodic benefit In addition, Dominion sponsors defined contribution cost were as follows: thrift-type savings plans. During 2001, 2000 and 1999, Dominion recognized $27 million, $30 million and $29 mil (millions) Year ended December 31, 2001 2000 1999 lion, respectively, as contributions to these plans.

Pension Benefits The funds collected for other postretirement benefits in Service cost $ 71 $ 65 $ 40 regulated utility rates, in excess of other postretirement bene Interest cost 173 161 76 Expected return on plan assets (331) (298) (93) fits actually paid during the year, are contributed to external Recognized loss 3 6 benefit trusts.

Amortization of prior service cost 2 3 Amortization of transition obligation (4) (4)

Curtailment gains - (20) Commitments and Contingencies ERP benefit costs - 81 As the result of issues generated in the course of daily business, Settlement loss 7 -

Special termination benefits 15 Dominion and its subsidiaries are involved in legal, tax and regu Curtailment loss 2 - latory proceedings before various courts, regulatory commissions Net periodic benefit cost $ (62) $ (6) $ 23 and governmental agencies, some of which involve substantial amounts of money. Management believes that the final disposi Other Postretirement Benefits tion of these proceedings will not have an adverse material effect Service cost $ 40 $ 30 $ 17 Interest cost 63 on its operations or the financial position, liquidity or results 52 28 Expected return on plan assets (32) (31) (20) of operations.

Amortization of prior service cost (1) -

Amortization of transition obligation 10 13 12 Utility Rate Regulation Curtailment gains - (6) Dominion's retail gas distribution companies are subject to price ERP benefit costs 33 regulation in the states of Ohio, Pennsylvania and West Virginia.

Net amortization and deferral - (2)

Dominion's gas transmission business is subject to federal Net periodic benefit cost $ 80 $ 89 $ 37 rate regulation.

Dominion currently faces competition as a result of utility Significant assumptions used in determining net periodic industry deregulation. Under Virginia's electric utility industry pension cost, the projected benefit obligation, and postretire deregulation legislation, Dominion's base rates will remain ment benefit obligations were:

capped until July 2007 unless Dominion petitions for, and the Pension Benefits Other Benefits Virginia Commission approves, an earlier termination any time 2001 2000 2001 2000 after January 1, 2004. The capped rates will provide recovery of Discount rates 7.25% 7.50% 7. 2 5% 7.50%

certain generation-related costs. Dominion remains exposed to Expected return on numerous risks, including, among others, exposure to poten plan assets 9.50% 9.50% 7.88% 6.50% tially stranded costs, future environmental compliance require Rate of increase for compensation 4.60% 5.00% 4.60%

ments, changes in tax laws, inflation and increased capital costs.

5.00%

Medical cost trend rate 9.00% 9.00% At December 31, 2001, Dominion's exposure to potentially Decreasing to stranded costs was comprised of the following: long-term pur 4.75% in 2006 chased power contracts that could ultimately be determined and years thereafter to be above market (see Power Purchase Contracts below);

generating plants that could possibly become uneconomic in a Assumed health care cost trend rates have a significant deregulated environment; and unfunded obligations for nuclear effect on the amounts reported for the health care plans. A one plant decommissioning and postretirement benefits not yet percentage-point change in assumed health care cost trend rates recognized in the financial statements (see Notes 16 and 26).

would have the following effects:

Capital Expenditures Other Postretirement Benefits Dominion has made substantial commitments in connection One percentage One percentage with its capital expenditures program. Those expenditures are (millions) point increase point decrease estimated to total approximately $2.4 billion, $3.1 billion and Effect on total service and interest costs $3.2 for 2002, 2003 and 2004 respectively. Purchases of components for 2001 $15 $(12) nuclear fuel are included in FuelPurchaseCommitments below.

Effect on postretirement benefit obligation at December 31,2001 $118 Dominion expects that these expenditures will be met through

$(97)

cash flow from operations and through a combination of sales 2006-$143 million and years beyond 2006-$288 million.

of securities and short-term borrowings. These purchase commitments include those required for regu lated operations. Dominion recovers the costs of those purchases Power Purchase Contracts through regulated rates. The natural gas purchase commitments Dominion has entered into contracts for the long-term pur of Dominion's field services operations are also included, net of chases of capacity and energy from other utilities, qualifying related sales commitments. In addition, Dominion has facilities and independent power producers. As of December 31, committed to purchase certain volumes of natural gas at market 2001, Dominion had 43 non-utility purchase contracts with a index prices determined in the period the natural gas is delivered.

combined dependable summer capacity of 3,770 megawatts. These transactions have been designated as normal purchases and The table below reflects Dominion's minimum commitments as sales under SFAS No. 133.

of December 31, 2001 under these contracts.

Natural Gas Pipeline and Storage Capacity Commitments Commitment Dominion enters into long-term commitments for the purchase (millions) Capacity Other of natural gas pipeline and storage for purposes other than trad 2002 $ 688 $ 33 ing. Estimated payments under these commitments for the next 2003 635 20 634 17 five years are as follows: 2002-$43 million; 2003-$38 million; 2004 2005 627 12 2004-$23 million; 2005-$6 million; and 2006-$1 million.

2006 613 12 There were no commitments beyond 2006.

Later years 5,856 128 Total $9,053 $222 Leases

$5,094 $116 Dominion leases various facilities, vehicles, aircraft, and equip Present value of the total ment under both operating and capital leases. Future minimum lease payments under operating and capital leases that have ini In addition to the minimum commitments in the table tial or remaining lease terms in excess of one year as of Decem above, under some of these contracts Dominion may purchase, ber 31, 2001 are: 2002-$70 million; 2003-$95 million; at its option, energy as needed. Purchased power expenditures, 2004-$100 million; 2005-$91 million; 2006-$72 million; subject to cost of service rate regulation, (including economy, and years after 2006-$166 million. Rental expense included in emergency, limited term, short-term and long-term purchases) other operations and maintenance expense was $63 million, for the years 2001, 2000 and 1999 were $1.1 billion, $1.1 billion,

$107 million, and $31 million for 2001, 2000, and 1999, and $1.2 billion, respectively.

respectively.

In 2001, Dominion completed the purchase of three gener As of December 31, 2001, Dominion, through certain sub ating facilities and the termination of seven long-term power pur sidiaries, has entered into agreements with special purpose enti chase contracts with non-utility generators (NUG). Dominion ties (Lessors) in order to finance and lease several new power recorded an after-tax charge of $136 million in connection with generation projects, as well as its corporate headquarters and the purchase and termination of long-term power purchase con aircraft. The Lessors have an aggregate financing commitment tracts. Cash payments related to the purchase of three generating from equity and debt participants (Investors) of $2.2 billion, of facilities totaled $207 million. The allocation of the purchase which $817 million has been used for total project costs to date.

price was assigned to the assets and liabilities acquired based Dominion, in its role as construction agent for the Lessors, is upon estimated fair values as of the date of acquisition. Substan responsible for completing construction by a specified date. In tially all of the value was attributed to the power purchase contracts which were terminated and resulted in a charge included in operation and maintenance expense.

the event a project is terminated before completion, Dominion has the option to either purchase the project for 100 percent of 77 project costs or terminate the project and make a payment to See Note 9 for additional disclosure regarding the evalua the Lessor of approximately but no more than 89.9 percent of tion of Dominion's potential exposure under its long-term power project costs. Upon completion of each individual project, purchase commitments.

Dominion has use of the project assets subject to an operating Fuel Purchase Commitments lease. Dominion's lease payments to the Lessors are sufficient to Dominion enters into long-term purchase commitments for fuel provide a return to the Investors. At the end of each individual used in electric generation and natural gas for purposes other project's lease term, Dominion may renew the lease at negotiated than trading. Estimated payments under these commitments amounts based on project costs and current market conditions, for the next five years are as follows: 2002-$549 million; subject to Investors' approval; purchase the project at its original 2003-$321 million; 2004-$212 million; 2005-$241 million; construction cost; or sell the project, on behalf of the Lessor, to

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED]

an independent third party. If the project is sold and the pro Superfund Sites-- In 1987, the Environmental Protection ceeds from the sale are insufficient to repay the Investors, Agency (EPA) identified Dominion and a number of other enti Dominion may be required to make a payment to the Lessor, ties as Potentially Responsible Parties (PRPs) at two Superfund ranging from 81 percent to 85 percent of the project cost sites located in Kentucky and Pennsylvania. Current cost studies depending on the individual project and applicable agreement. estimate total remediation costs for the sites to range from Dominion has guaranteed a portion of the obligations of its $98 million to $153 million. Dominion's proportionate share subsidiaries to the Lessors during the construction and post of the total cost is expected to be in the range of $2 million to construction periods. These transactions do not contain any $3 million, based upon allocation formulas and the volume of type of credit rating or stock price trigger events. waste shipped to the sites. The majority of remediation activities As noted above, as of December 31, 2001, amounts subject at the Kentucky site are complete and remediation design is to these agreements totaled $817 million, and the total amount, ongoing for the Pennsylvania site. Dominion has accrued a upon completion of all projects, is projected to be approximately reserve of $2 million to meet its obligations at these two sites.

$2.2 billion. The projects are accounted for as operating leases Based on a financial assessment of the PRPs involved at these for financial accounting purposes. Accordingly, neither the proj sites, Dominion has determined that it is probable that the PRPs ect assets nor related obligations are reported on Dominion's will fully pay their share of the costs. Dominion generally seeks balance sheets. The future minimum lease payments described to recover its costs associated with environmental remediation above include annual payments of approximately $6 million from third party insurers. At December 31, 2001, any pending associated with these projects representing minimum payments or possible claims were not recognized as an asset or offset under leases for which the leased assets are currently in use. against such obligations.

Projects currently under development are scheduled for comple Other EPA Matters- In 1999, the Department of Justice tion during the period 2002 through 2004. Annual lease pay (DOJ) notified Dominion of an alleged noncompliance with the ments for the projects are estimated to be $33 million in 2002, EPA's oil spill prevention, control and countermeasures (SPCC) increasing to $133 million by 2004. plans and facility response plan (FRP) requirements at one of Dominion's power stations. In December 2001, Dominion Energy Trading Subsidiaries of Dominion enter into purchases and sales of reached a settlement agreement with the DOJ and EPA covering commodity-based contracts in the energy-related markets, all alleged noncompliance issues. The settlement will not have including natural gas, electricity, coal and oil. These agreements a material impact on Dominion's financial condition or results may cover current and future periods. The volume of these trans of operations. Dominion also identified matters at other power actions varies from day to day, based on market conditions. See stations that the EPA might view as not in compliance with Note 15 for a discussion of Dominion's energy trading activities the SPCC and FRP requirements and reported these matters to and risk management policies. the EPA. Dominion also reported its plans for correcting the issues. Dominion does not believe that the settlement of these Environmental Matters self-reported matters, if any, will be material to its results of Dominion is subject to rising costs resulting from a steadily operations or financial conditions.

increasing number of federal, state and local laws and regula During 2000, Virginia Power received a Notice of Violation tions designed to protect human health and the environment. from the EPA alleging that the company failed to obtain New These laws and regulations can result in increased capital, Source Review permits under the Clean Air Act prior to under operating and other costs as a result of compliance, remedia taking specified construction projects at the Mt. Storm Power 78 tion, containment and monitoring obligations.

Historically, Dominion recovered such costs arising from Station in West Virginia. The Attorney General of New York filed a suit against Virginia Power alleging similar violations of regulated electric operations through utility rates. However, to the Clean Air Act at the Mt. Storm Power Station. Virginia the extent environmental costs are incurred in connection with Power also received notices from the Attorneys General of operations regulated by the Virginia State Corporation Commis Connecticut and New Jersey of their intentions to file suit for sion, during the period ending June 30, 2007, in excess of the similar violations. Management believes that Virginia Power has level currently included in Virginia jurisdictional rates, obtained the necessary permits for its generating facilities.

Dominion's results of operations will decrease. After that date, Virginia Power has reached an agreement in principle with the Dominion may seek recovery from customers through utility federal government and the state of New York to resolve this sit rates of only those environmental costs related to transmission uation. The agreement in principle includes payment of a $5 and distribution operations. million civil penalty, a commitment of $14 million for environ mental projects in Virginia, West Virginia, Connecticut, New

Jersey and New York, and a 12-year, $1.2 billion capital invest fair value. The financial instruments' carrying amounts and fair ment program for environmental improvements at Virginia values as of December 31 were as follows:

Power's coal-fired generating stations in Virginia and West 2001 2000 Virginia. Dominion had already committed to a substantial por Carrying Estimated Carrying Estimated tion of the $1.2 billion expenditures for sulfur dioxide and nitro (millions) Amount Fair Value Amount Fair Value gen oxide emissions controls. The negotiations over the terms of Long-term debt(') $13,455 $13,725 $10,491 $10,555 a binding settlement have expanded beyond the basic agreement Preferred securities of in principle and are ongoing. As of December 31, 2001, subsidiary trusts(2)(3) $ 1,132 $ 1,154 385 $ 383 Loan commitments (4) - - - $ 230 Dominion has recorded, on a discounted basis, $18 million for Unrecognized financial the civil penalty and environmental projects. instruments(5):

Other- Before being acquired by Dominion, Louis Drey Interest rate swaps (6) -- $ 17 Swaps, collars and fus was one of numerous defendants in several lawsuits pending 7

$ (277) options-hedging( ) - -

in the Texas 93rd Judicial District Court in Hildago County, (1) Fair value is estimated using market prices, where available, and interest rates currently Texas. The lawsuit alleges that gas wells and related pipeline available for issuance of debt with similar terms and remaining maturities are used facilities operated by Louis Dreyfus and facilities operated by to estimate fair value. The carrying amount of debt issues with short-term maturities other defendants caused an underground hydrocarbon plume and variable rates refinanced at current market rates is a reasonable estimate of their fair value.

in McAllen, Texas. The plaintiffs claim that they have suffered (2) Fair value is based on market quotations.

damages, including property damage and lost profits as a result (3) The 2001 carrying value of $1,132 million represents principal outstanding of $1,135 million less an unamortized discount of $3 million.

of the plume. Although the results of litigation are inherently (4) The fair value of commitments was estimated using the fees currently charged to enter unpredictable, Dominion does not expect the ultimate outcome into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.

of the case to have a material adverse impact on its financial (5) Upon adoption of SFAS No. 133 on January 1, 2001, all derivatives are reported at fair position or results of operations. value. The fair value of unrecognized financial instruments at December 31, 2000 was recognized as a component of the January 1, 2001 SFAS No. 133 transition adjustment.

Spent Nuclear Fuel See Note 15 for discussion of Dominion's derivatives and hedge accounting activities.

(6) Fair value was based upon the present value of all estimated net future cash flows, taking Under provisions of the Nuclear Waste Policy Act of 1982, into account current interest rates and the creditworthiness of the swap counterparties.

Dominion has entered into contracts with the DOE for the dis (7) Fair value reflected Dominion's best estimates considering over-the-counter quotations, time value and volatility factors of the underlying commitments.

posal of spent nuclear fuel. The DOE failed to begin accepting the spent nuclear fuel on January 31, 1998, the date provided by S* Related Party Transactions the Nuclear Waste Policy Act and by Dominion's contract with the DOE. Dominion will continue to safely manage its spent Dominion Fibers Ventures, LLC fuel until accepted by the DOE. In December 2000, Dominion formed Dominion Fiber Ven tures, LLC (DFV). In 2001, Dominion contributed all of the Retrospective Premium Assessments outstanding shares of its telecommunications subsidiary, Under several of Dominion's nuclear insurance policies, Dominion Telecom, Inc. (DTI), with an equity value of $110 Dominion is subject to retrospective premium assessments in million, in exchange for 100 percent of Class B managing mem any policy year in which losses exceed the funds available to bership interests in DFV. A third-party investor trust con these insurance companies. For additional information, see tributed $60 million for 100 percent of the Class A membership Note 16.

interests in DFV. DFV is the sole owner of DTI. As a result of Related Party Transactions the Class A membership interests having substantive minority 79 For a discussion of Dominion's commitments to related parties, veto rights, DTI is no longer consolidated, and Dominion's see Note 29. investment in DFV is accounted for using the equity method and is reported in investment in affiliates on the 2001 consoli

• Fair Value of Financial Instruments dated balance sheet.

In 2001, DFV issued $665 million of 7.05 percent Senior Substantially all of Dominion's financial instruments are Secured Notes due March 2005 (DFV Senior Notes). The DFV recorded at fair value, with the exception of the instruments Senior Notes are redeemable at any time at the option of DFV described below. Fair value amounts have been determined using or upon occurrence of certain events. DFV contributed $712 available market information and valuation methodologies con million net cash proceeds from the issuance of DFV Senior sidered appropriate by management. Dominion reports the fol Notes and the sale of the Class A membership interests to DTI lowing financial instruments based on historical cost rather than and Monument Overfund Trust (Overfund Trust), approximat ing $518 million and $194 million, respectively. Overfund Trust

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED]

is owned by DFV. The DFV Senior Notes are secured by the Energy of $121 million which was repaid in 2001. The remainder stock of DTI, the Overfund Trust, and certain rights with of these receivables generally relates to services provided to respect to the Dominion Preferred Stock held by Piedmont Elwood Energy, Morgantown Energy Associates and DTI. Rev Share Trust (Piedmont Trust) as described below. Pending the enues recognized for these services for 2001, 2000, and 1999 need for cash to fund capital expenditures in the expansion of its were not material. In addition, Dominion leases fiber optic telecommunications network, the unused cash was loaned to capacity to DTI. During 2001, Dominion received approxi Dominion and was used by it to repay commercial paper. The mately $4 million under the lease and related support and main amount in Overfund Trust will be invested in Dominion debt tenance services. Balances due to or from affiliates are settled securities or other financial investments. The interest and prin based on contractual terms or on a monthly basis, depending on cipal payments on such investments are expected to generate the nature of the underlying transactions.

amounts sufficient to make interest payments on the DFV Senior Notes through maturity and make return requirements Related Party Guarantees Dominion has issued guarantees to various third parties in rela payments on Investor Trust's membership interests in DFV.At the end of 2001, Dominion owed $367 million under these affil tion to payment obligations by certain of its subsidiaries and iated loans. This amount is reported as notes payable- affiliates officers. At December 31, 2001, Dominion had issued $3.3 bil lion of guarantees, subsidiary debt subject to such guarantees and securities due within one year on the consolidated balance sheet. In 2001, Dominion paid $22 million of interest on the totaled $1.1 billion and officers' borrowings under the executive loans and approximately $1 million for rental charges for use of stock loan program totaled $84 million.

fiber lines owned by DTI.

As a result of the formation of DFV and the issuance of Operating Segments the DFV Senior Notes, Dominion issued 665,000 shares of its Dominion manages its operations along three primary Series A Mandatorily Convertible Preferred Stock, liquidation business lines:

preference $1,000 per share, (Preferred Stock) to Piedmont Trust Dominion Energy manages Dominion's generation at closing. Dominion is the beneficial owner of the Piedmont portfolio, consisting primarily of generating units and power Trust which is consolidated in the preparation of the consoli purchase agreements. It also manages Dominion's generation dated financial statements of Dominion. The right to cause growth strategy; energy trading, marketing, hedging and arbi remarketing of the Preferred Stock is part of the security for the trage activities; and gas pipeline and certain gas production DFV Senior Notes. Piedmont Trust is established with the and storage operations.

intention of allowing for the remarketing of the Preferred Stock Dominion Delivery manages Dominion's electric and gas in an amount sufficient to retire the DFV Senior Notes if those distribution systems, as well as customer service and electric notes are not otherwise paid at maturity, or in the event there is transmission.

a downgrade of Dominion Resources, Inc. senior unsecured debt Dominion Exploration & Production manages to BBB- or Baa3 and the closing price of Dominion's common Dominion's onshore and offshore gas and oil exploration, devel stock is below $45.97 for ten consecutive trading days. If the opment and production operations. Operations are located on remarketing of the Preferred Stock were to occur, the Preferred the outer continental shelf and deep water areas of the Gulf of Stock, as convertible securities, would be considered in the cal Mexico and in selected regions in the lower 48 states and culation of diluted earnings per share of Dominion's common Canada.

stock or could result in the issuance of additional shares of In addition, Dominion also reports the operations of DCI Dominion common stock, if converted. At March 1, 2001, and Dominion's corporate and other operations as operating Dominion Resources, Inc. senior unsecured debt was rated segments. Amounts included in the Corporate and Other BBB+/- by Standard & Poor's Corporation and Baal by Moody's category include:

Investors Service. 1. corporate expenses of the Dominion and CNG holding com panies (including interest not allocated to other segments);

Amounts Due from Affiliates

2. the operations of Corby (UK), prior to its sale on September Dominion's equity method investments include its 50 percent 29, 2000 (see Note 6); and interest in both Elwood Energy and Morgantown Energy Associ

3. the following unusual or extraordinary items:

ates, each of which operates independent power generating

• 2001 restructuring costs and 2000 restructuring and facilities. As of December 31, 2001 and 2000, amounts due from acquisition-related costs (see Note 7);

affiliates totaled $13 million and $122 million, respectively. The

• 2001 costs associated with restructuring long-term NUG balance at December 31, 2000, included an advance to Elwood contracts (see Note 27);

• 2001 provision for credit exposure in connection with - 2000 cumulative effect of a change in accounting principle Enron bankruptcy (see Note 15); (see Note 3); and

• 2001 and 2000 impairment and re-valuation of DCI's 1999 extraordinary item-discontinuance of SFAS No. 71 assets (see Note 8); (see Note 9).

The following table presents segment information pertaining to Dominion's operations:

Dominion Dominion Dominion Dominion Corporate Consolidated (millions, except total assets) Energy Delivery E&P Capital and Other Eliminations Total 2001 Revenue from external customers:

Regulated electric sales $3,475 $1,144 ... $ 4,619 Regulated gas sales - 1,409 - - 1,409 Nonregulared electric sales 680 -- - $ 21 - 701 Nonregulated gas sales 1,047 4 $ 65 - - 1,116 Gas transportation and storage 404 298 .... 702 Gas and oil production - - 1,118 - - - 1,118 Other revenue 395 93 171 $234 - - 893 Total revenue from external customers 6,001 2,948 1,354 234 21 - 10,558 143 15 106 - 626 $ (890)

Intersegment revenue Total operating revenue 6,144 2,963 1,460 234 647 (890) 10,558 Interest expense 275 208 64 83 474 (205) 899 Depreciation, depletion, and amortization 379 339 364 28 135 - 1,245 Equity in earnings of equity method investees 39 (3) 5 - 2 - 43 Income tax expense (benefit) 477 200 145 (19) (433) - 370 Net Income 723 366 320 (14) (851) - 544 Investment in equity method investees 135 103 71 105 76 - 490 Capital expenditures 793 435 898 - 42 - 2,168 Total assets (billions) 13.2 8.5 7.4 1.3 18.4 (14.4) 34.4 2000 Revenue from external customers:

Regulated electric sales 3,341 1,151 - - 4,492 Regulated gas sales - 1,374 .- 1,374 Nonregulated electric sales 317 - - - 1 - 318 Nonregulated gas sales 614 (9) 66 -- - 671 290 197 - - (1) - 486 Gas transportation and storage Gas and oil production (13) - 870 - - - 857 182 85 343 433 5 - 1,048 Other revenue Total revenue from external customers 4,731 2,798 1,279 433 5 - 9,246 163 28 51 - 398 (640)

Intersegment revenue Total operating revenue 4,894 2,826 1,330 433 403 (640) 9,246 Interest expense 225 204 83 192 379 (125) 958 Depreciation, depletion, and amortization 340 318 352 34 132 - 1,176 Equity in earnings of equity method investees 23 - 12 6 6 - 47 Income tax expense (benefit) 262 187 97 12 (375) - 183 Net Income 489 339 255 11 (658) - 436 Investment in equity method investees 223 - 71 111 66 - 471 22 - 1,565 Capital expenditures 330 457 751 5 14.2 (9.1) 29.3 81 Total assets (billions) 10.5 8.5 3.2 2.0 1999 Revenue from external customers:

Regulated electric sales 3,121 1,109 . 4,230 Nonregulated electric sales 346 - - - 346 Gas and oil production - - 251 - - - 251 Other revenue 178 28 5 473 9 - 693 Total revenue from external customers 3,645 1,137 256 473 9 - 5,520

- 23 - - - (23)

Intersegment revenue 3,645 1,160 256 473 9 (23) 5,520 Total operating revenue Interest expense 173 141 39 152 28 (26) 507 Depreciation, depletion, and amortization 313 246 84 32 32 - 707 Equity in earnings of equity method investees 14 - 5 4 10 - 33 Income tax expense (benefit) 161 109 (29) 35 (17) - 259 Net Income 271 175 44 78 (271) - 297 461 317 86 9 21 - 894 Capital expenditures

I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED]

As of December 31, 2001 and 2000, and for the years ended Gas and Oil Producing Activities (unaudited]

December 31, 2001, 2000, and 1999, approximately 2 percent Capitalized Costs of Dominion's total long-lived assets and revenue, respectively, The aggregate amounts of costs capitalized for gas and oil pro were associated with international operations. As of December ducing activities, and related aggregate amounts of accumulated 31, 1999, approximately 8 percent of Dominion's total long-lived depreciation and amortization, follow:

assets were associated with international operations. Long-lived assets at December 31, 1999 included Dominion's investments (millions) At December 31 2001 2000 in Latin America and in the U.K., which were divested in 2000. Capitalized costs of:

Proved properties $7,303 $5,210 Unproved properties 1,689 550 8,992 5,760 Accumulated depreciation of:

Proved properties 3,043 2,959 Unproved properties 301 233 3,344 3,192 Net capitalized costs $5,648 $2,568 Total Costs Incurred The following costs were incurred in gas and oil producing activities during the years 1999 through 2001:

(millions) Year Ended December 31, 2001 2000 1999 United United United Total States Canada Total States Canada Total States Canada Property acquisition costs:

Proved properties $1,586 $1,586 - $1,475 $1,459 $16 $280 $121 $159 Unproved properties 908 897 $ 11 125 125 - 33 3 30 2,494 2,483 11 1,600 1,584 16 313 124 189 Exploration costs 305 305 - 159 115 44 4 2 2 Development costs0) 512 395 117 261 236 25 85 34 51 Total $3,311 $3,183 $128 $2,020 $1,935 $85 $402 $160 $242 (1) Development costs incurred for proved undeveloped reserves were $133 million and $82 million for 2001 and 2000, respectively. Dominion did not incur development costs for proved undeveloped reserves in 1999.

Results of Operations Dominion cautions that the following standardized disclosures required by the FASB do not represent the results of operations based on its historical financial statements. In addition to requiring different determinations of revenue and costs, the disclosures exclude the impact of interest expense and corporate overhead.

(millions) Year Ended December 31, 2001 2000 1999 United United United Total States Canada Total States Canada Total States Canada 82 Revenue (net of royalties) from:

Sales to nonaffiliated companies $1,144 $ 920 $224 $861 $691 $170 $229 $142 $87 Transfers to other operations 114 114 - 93 93 ....

Total 1,258 1,034 224 954 784 170 229 142 87 Less:

Production (lifting) costs 220 162 58 158 133 25 77 47 30 Depreciation, depletion and amortization 358 307 51 345 294 51 84 47 37 Income tax expense (benefit) 208 162 46 134 93 41 (10) (19) 9 Results of operations $ 472 $ 403 $ 69 $317 $264 $ 53 $ 78 $ 67 $11

Company-Owned Reserves Estimated net quantities of proved gas and oil (including condensate) reserves in the United States and Canada at December 31, 1999 through 2001, and changes in the reserves during those years, are shown in the two schedules which follow.

2001 2000 1999 United United United (billion cubic feet) Total States Canada Total States Canada Total States Canada Proved developed and undeveloped reserves- Gas At January 1 2,337 1,858 479 1,114 600 514 591 473 118 Changes in reserves:

Extensions, discoveries and other additions 480 393 87 274 232 42 156 94 62 Revisions of previous estimates (210) (134) (76) (89) (59) (30) (18) 25 (43)

Production (273) (230) (43) (269) (222) (47) (97) (60) (37)

Purchases of gas in place 1,577 1,575 2 1,322 1,322 - 512 98 414 Sales of gas in place (9) (9) - (15) (15) - (30) (30)

At December 31 3,902 3,453 449 2,337 1,858 479 1,114 600 514 Proved developed reserves-Gas At January 1 1,954 1,593 361 1,005 600 405 591 473 118 At December 31 3,294 2,962 332 1,954 1,593 361 1,005 600 405 2001 2000 1999 United United United (thousands of barrels) Total States Canada Total States Canada Total States Canada Proved developed and undeveloped reserves-- Oil AtJanuaryl 75,342 51,072 24,270 20,808 659 20,149 4,204 2,661 1,543 Changes in reserves:

Extensions, discoveries and other additions 44,489 37,402 7,087 14,213 12,813 1,400 2,051 118 1,933 Revisions of previous estimates 29,349 11,647 17,702 (5,082) (2,443) (2,639) 8,339 (552) 8,891 Production (11,220) (7,267) (3,953) (7,694) (6,436) (1,258) (2,057) (595) (1,462)

Purchases of oil in place 34,702 34,603 99 54,977 48,359 6,618 9,244 - 9,244 Sales of oil in place (789) (789) - (1,880) (1,880) - (973) (973)

At December 31 171,873 126,668 45,205 75,342 51,072 24,270 20,808 659 20,149 Proved developed reserves-Oil At January 1 36,236 21,709 14,527 6,102 659 5,443 4,204 2,661 1,543 At December 31 92,615 57,152 35,463 36,236 21,709 14,527 6,102 659 5,443 83

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED]

Standardized Measure of Discounted Future Net Cash Flows and Changes Therein The following tabulation has been prepared in accordance with the FASB's rules for disclosure of a standardized measure of discounted future net cash flows relating to proved gas and oil reserve quantities owned by Dominion.

(millions) Year Ended December 31, 2001 2000 1999 United United United Total States Canada Total States Canada Total States Canada Future cash inflows $12,350 $11,161 $1,189 $23,602 $19,117 $4,485 $2,401 $1,282 $1,119 Less:

Future development cost11 ) 845 770 75 503 405 98 110 - 110 Future production cost 3,571 3,091 480 2,055 1,540 515 987 497 490 Future income tax expense 1,917 2,026 (109) 7,145 5,591 1,554 209 125 84 Future cash flows 6,017 5,274 743 13,899 11,581 2,318 1,095 660 435 Less annual discount (10% a year) 2,804 2,513 291 5,723 4,622 1,101 546 310 236 Standardized measure of discounted future net cash flows(2) $ 3,213 $ 2,761 $ 452 $ 8,176 $ 6,959 $1,217 $ 549 $ 350 $ 199 (1) Estimated future development costs, excluding abandonment, for proven undeveloped reserves are estimated to be $241 million, $272 million and $85 million for 2002, 2003, and 2004, respectively.

(2) Amounts exclude the effect of contracts designated as hedges of future sales of production at year end.

In the foregoing determination of future cash inflows, sales The following tabulation is a summary of changes between prices for gas and oil were based on contractual arrangements or the total standardized measure of discounted future net cash market prices at year-end. Future costs of developing and pro flows at the beginning and end of each year.

ducing the proved gas and oil reserves reported at the end of each year shown were based on costs determined at each such year (millions) Year Ended December 31, 2001 2000 1999 end, assuming the continuation of existing economic conditions. Standardized measure of discounted future net cash flows at January 1 $8,176 $ 549 $ 382 Future income taxes were computed by applying the appropriate Changes in the year resulting from:

year-end or future statutory tax rate to future pretax net cash Sales and transfers of gas and oil produced flows, less the tax basis of the properties involved, and giving during the year, less production costs (1,038) (796) (152) effect to tax deductions, or permanent differences and tax credits. Prices and production and development costs related to future production (9,793) 9,544 (110)

It is not intended that the FASB's standardized measure of Extensions, discoveries and other additions, discounted future net cash flows represent the fair market value less production and development costs 767 1,602 103 of Dominion's proved reserves. Dominion cautions that the dis Previously estimated development costs incurred during the year 134 82 57 closures shown are based on estimates of proved reserve quanti Revisions of previous quantity estimates 62 (778) 34 ties and future production schedules which are inherently Accretion of discount 1,117 259 44 imprecise and subject to revision, and the 10% discount rate is Income taxes 2,949 (3,309) (44)

Acquisition of Louis Dreyfus and CNG 1,347 1,322 arbitrary. In addition, present costs and prices are used in the Other purchases and sales of proved determinations and no value may be assigned to probable or reserves in place 102 994 245 possible reserves. Other (principally timing of production) (610) (1,293) (10)

Standardized measure of discounted future net cash flows at December 31 $3,213 $ 8,176 84 $ 549

T Quarterly Financial and Common Stock Data (unaudited]

A summary of the quarterly results of operations for the years 2001 and 2000 follows. Amounts reflect all adjustments, consisting of only normal recurring accruals (except as discussed below), necessary in the opinion of management for a fair statement of the results for the interim periods. Results for interim periods may fluctuate as a result of weather conditions, changes in rates and other factors.

Amounts for 2000 reflect certain reclassifications to conform to the 2001 presentation.

(millions, except per share amounts) First Qtr. Second Qtr. Third Qtr. Fourth Qtr. Total 2001 Operating revenue $3,198 $2,309 $2,544 $2,507 $10,558 Income from operations 496 518 780 (9) 1,785 Net income (loss) 162 155 344 (117) 544 Earnings per share - basic Net income (loss) 0.66 0.63 1.38 (0.45) 2.17 Earnings per share - diluted Net income (loss) 0.65 0.62 1.37 (0.45) 2.15 Dividends paid per share 0.645 0.645 0.645 0.645 2.58 Common stock price range (high-low) 68-55.31 69.99-59.47 64.15-55.13 62.97-55.30 2000 Operating revenue 2,069 2,051 2,344 2,782 9,246 Income from operations 418 71 660 366 1,515 Income (loss) before cumulative effect of a change in accounting principle 147 (98) 260 106 415 Cumulative effect of a change in accounting principle 21 - - - 21 Net income (loss) 168 (98) 260 106 436 Earnings per share-- basic Income (loss) before cumulative effect of a change in accounting principle 0.66 (0.41) 1.09 0.44 1.76 Net income (loss) 0.75 (0.41) 1.09 0.44 1.85 Earnings per share - diluted Income (loss) before cumulative effect of a change in accounting principle 0.66 (0.41) 1.09 0.44 1.76 Net income (loss) 0.75 (0.41) 1.09 0.44 1.85 Dividends paid per share 0.645 0.645 0.645 0.645 2.58 Common stock price range (high-low) 43.13-34.81 47.50-38.06 59.81-42.81 67.94-50.75 85

REPORT OF MANAGEMENT'S RESPONSIBILITIES INDEPENDENT AUDITORS' REPORT The management of Dominion Resources, Inc. is responsible To the Shareholders and Board of Directors of for all information and representations contained in the Dominion Resources, Inc.

Consolidated Financial Statements and other sections of the Richmond, Virginia annual report. The Consolidated Financial Statements, which include amounts based on estimates and judgments of man We have audited the accompanying consolidated balance sheets agement, have been prepared in conformity with generally of Dominion Resources, Inc. and subsidiaries as of December accepted accounting principles. Other financial information 31, 2001 and 2000, and the related consolidated statements of in the annual report is consistent with that in the Consolidated income, comprehensive income, common shareholders' equity, Financial Statements. and cash flows for each of the three years in the period ended Management maintains a system of internal accounting con December 31, 2001. These financial statements are the respon trols designed to provide reasonable assurance, at a reasonable cost, sibility of the Company's management. Our responsibility is that Dominion's and its subsidiaries' assets are safeguarded against to express an opinion on these financial statements based on loss from unauthorized use or disposition and that transactions are our audits.

executed and recorded in accordance with established procedures. We conducted our audits in accordance with auditing stan Management recognizes the inherent limitations of any system of dards generally accepted in the United States of America. Those internal accounting control, and therefore cannot provide absolute standards require that we plan and perform the audit to obtain assurance that the objectives of the established internal accounting reasonable assurance about whether the financial statements are controls will be met. free of material misstatement. An audit includes examining, on This system includes written policies, an organizational struc a test basis, evidence supporting the amounts and disclosures in ture designed to ensure appropriate segregation of responsibilities, the financial statements. An audit also includes assessing the careful selection and training of qualified personnel, and internal accounting principles used and significant estimates made by audits. Management believes that during 2001 the system of inter management, as well as evaluating the overall financial statement nal control was adequate to accomplish the intended objectives. presentation. We believe that our audits provide a reasonable basis The Consolidated Financial Statements have been audited for our opinion.

by Deloitte & Touche LLP, independent auditors, who were In our opinion, such consolidated financial statements designated by the Board. Their audits were conducted in accor present fairly, in all material respects, the financial position of dance with auditing standards generally accepted in the United Dominion Resources, Inc. and subsidiaries as of December 31, States of America and include a review of Dominion's and its sub 2001 and 2000, and the results of their operations and their cash sidiaries' accounting systems, procedures and internal controls, and flows for each of the three years in the period ended December the performance of tests and other auditing procedures sufficient 31, 2001, in conformity with accounting principles generally to provide reasonable assurance that the Consolidated Financial accepted in the United States of America.

Statements are not materially misleading and do not contain As discussed in Note 15 to the consolidated financial state material errors. ments, effective January 1, 2001, the Company adopted State The Audit Committee of the Board of Directors of Dominion ment of Financial Accounting Standards No. 133, Accountingfor Resources, Inc., composed entirely of directors who are not officers DerivativeInstrumentsand HedgingActivities, as amended. Also, or employees of Dominion Resources, Inc. or its subsidiaries, meets as discussed in Note 3 to the consolidated financial statements, periodically with the independent auditors, the internal auditors the Company changed its method of accounting used to develop and management to discuss auditing, internal accounting control the market-related value of pension plan assets in 2000.

and financial reporting matters of Dominion and to ensure that each is properly discharging its responsibilities. Both independent TA&k /°)

auditors and the internal auditors periodically meet alone with the Audit Committee and have free access to the Committee at any time. Richmond, Virginia Management recognizes its responsibility for fostering a strong January 22, 2002 ethical climate so that Dominion's affairs are conducted according to the highest standards of personal corporate conduct. This responsibility is characterized and reflected in Dominion's Code of Ethics, which addresses potential conflicts of interest, compliance with all domestic and foreign laws, the confidentiality of propri etary information, and full disclosure of public information.

Dominion Resources, Inc.

Thos. E. Capps Steven A. Rogers Chairman, President and Vice President, Controller and Chief Executive Officer Principal Accounting Officer

DIRECTORS AND OFFICERS Directors Officers Thos. E. Capps, 66 Thomas F. Farrell, II, 47 Chairman, President and Chief Executive Officer Executive Vice President (Chief Executive Officer of Dominion Energy)

William S. Barrack, Jr., 72 Former Senior Vice President, Texaco, Inc., Duane C. Radtke, 53 New Canaan, Connecticut Executive Vice President (President and Chief Executive Officer of Ronald J. Calise, 53 Dominion Exploration & Production)

Former Managing Director of the Global Power Industry Group, Investment Banking Division, Lehman Brothers, Edgar M. Roach, Jr., 53 New York, New York Executive Vice President (President and Chief Executive Officer of Dominion Delivery)

George A. Davidson, Jr., 63 Retired Chairman, Dominion Resources, Inc., Thomas N. Chewning, 56 Pittsburgh, Pennsylvania Executive Vice President and Chief Financial Officer John W. Harris, 54 James P. O'Hanlon, 58 President, Lincoln Harris, LLC (real estate consulting firm), Executive Vice President Charlotte, North Carolina (President and Chief Operating Officer of Dominion Energy)

Benjamin J. Lambert, III, 65 G. Scott Hetzer, 45 Optometrist, Richmond, Virginia Senior Vice President and Treasurer Richard L. Leatherwood, 62 Mark E McGettrick, 44 Retired President and Chief Executive Officer, Senior Vice President and Chief Administrative Officer CSX Equipment, Baltimore, Maryland James L. Sanderlin, 60 Margaret A. McKenna, 56 Senior Vice President - Law President, Lesley University, Cambridge, Massachusetts Eva Teig Hardy, 57 Steven A. Minter, 63 Senior Vice President - External Affairs President and Executive Director, & Corporate Communications The Cleveland Foundation (community foundation),

Cleveland, Ohio William C. Hall, Jr., 48 Vice President - External Affairs Kenneth A. Randall, 74 & Corporate Communications Corporate director of various companies, Williamsburg, Virginia Simon C. Hodges, 40 Vice President - Financial Planning Frank S. Royal, M.D., 62 Physician, Richmond, Virginia S. Dallas Simmons, 62 Karen E. Hunter, 47 Vice President - Tax 8 Chairman, President and Chief Executive Officer, Steven A. Rogers, 40 Dallas Simmons & Associates (consulting firm), Vice President, Controller, and Principal Accounting Officer Richmond, Virginia James E Stutts, 57 Robert H. Spilman, 74 Vice President and General Counsel President, Spilman Properties, Inc. (private investments),

Bassett, Virginia Patricia A.Wilkerson, 46 Vice President and Corporate Secretary David A. Wollard, 64 Founding Chairman of the Board, Emeritus, Exempla Healthcare, Denver, Colorado

SHAREHOLDER INFORMATION Dominion Resources Services, Inc. is the transfer agent and Corporate Street Address registrar for Dominion's common stock. Our Shareholder Services Dominion Resources, Inc.

staff provides personal assistance for any inquiries Monday 120 Tredegar Street through Friday from 9 a.m. to noon and from 1 p.m. to 4 p.m. Richmond, Virginia 23219 (ET). In addition, automated information is available 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> a day with our voice response system. Mailing Address Dominion Resources, Inc.

1-800-552-4034 (toll free] P.O. Box 26532 1-804-775-2500 Richmond, Virginia 23261-6532 Major press releases and other company information may be Web site obtained by visiting our Web site at www.dom.com. Shareholders www.dom.com may also obtain account-specific information by visiting this site. Dominion's Annual Report is on the Web site.

To sign up for this service, type "shareholders" in the Keyword/Search: Annual Report www.dom.com Keyword/Search box and follow the links to "First Time Visitor." Once you have signed up, you will be Independent Auditors able to monitor your account, make changes and review your Deloitte & Touche LLP Dominion DirectsM statements at your convenience. Richmond, Virginia Direct Stock Purchase Plan Shareholder Inquiries You may buy Dominion common stock directly from the ShareholderServices@dom.com company through Dominion Direct with no brokerage fees.

Dominion Resources Services, Inc.

Please contact Shareholder Services for information on how to Shareholder Services obtain a prospectus and enrollment form or visit our Web site PO. Box 26532 at www.dom.com. Richmond, Virginia 23261-6532 Common Stock Listing Additional Information New York Stock Exchange Dominion will provide, without charge, a copy of Trading symbol: D the following items:

• 2001 SEC Form 10-K (excluding exhibits)

Common Stock Price Range - 2001 Statistical Summary and Financial Forecast 2001 2000 High Low High Low First Quarter 68.00 Requests for these items should be made by writing to:

55.31 43.13 34.81 Second Quarter 69.99 59.47 47.50 38.06 Investor Relations Department Third Quarter 64.15 55.13 59.81 42.81 Dominion Resources, Inc.

Fourth Quarter 62.97 55.30 67.94 50.75 P.O. Box 26532 Year 69.99 55.13 67.94 34.81 Richmond, Virginia 23261-6532 Dividends on Dominion common stock are paid as declared by Or by e-mail to:

88 the board. Dividends are typically paid on the 20th of March, DominionResources@dom.com June, September and December. Dividends can be paid by check or electronic deposit, or they may be reinvested.

Electronic Reports Our proxy statement and annual report are available At December 31, 2001, there were approximately 184,000 registered electronically. Please refer to the proxy card that was mailed to shareholders, including approximately 94,000 certificate holders. shareholders with this annual report for more information.

Annual Meeting The 2002 Annual Meeting of Shareholders of Dominion Resources, Inc. will be held Friday, April 26 at 9:30 a.m. at The Library of Virginia, 800 East Broad Street, Richmond, Virginia.

@2002 Dominion Resources, Inc., Richmond, Virginia, USA - Design: Taylor & Ives, Inc., New York, New York, USA

• Printing: The Hennegan Company, Florence, Kentucky, USA ° Photo credits: Page 4 at bottom, far-left photo: courtesy of the Rock and Roll Hall of Fame and Museum, Cleveland, Ohio, photography by Design Photography, Inc., Cleveland, Ohio; Page 5 at top: ©DSpaceshots, Inc./Living Earth; Page 14: @Richmond Times-Dispatch.

Dominion Resources, Inc.

PO. Box 26532 Richmond, Virginia 23261-6532 www.dom com