X    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __

At October 31, 2002, the latest practicable date for determination, 307,222,141 shares of common stock, without par value, of the registrant were outstanding.

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

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

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

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

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Dominion Resources, Inc. (Dominion) is a holding company headquartered in Richmond, Virginia. Its principal subsidiaries are Virginia Electric and Power Company (Virginia Power), Consolidated Natural Gas Company (CNG) and Dominion Energy, Inc. (DEI). Dominion and CNG are registered holding companies under the Public Utility Holding Company Act of 1935 (1935 Act).

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

CNG operates in all phases of the natural gas business. Its regulated retail gas distribution subsidiaries serve approximately 1.7 million residential, commercial and industrial gas sales and transportation customers in Ohio, Pennsylvania and West Virginia. Its interstate gas transmission pipeline system serves each of its distribution subsidiaries, non-affiliated utilities and end use customers in the Midwest, Mid-Atlantic and Northeast. CNG's exploration and production operations are located in several major gas and oil producing basins in the United States, both onshore and offshore. CNG also provides a variety of energy marketing services.

DEI is an independent power producer and a natural gas and oil exploration and production company active in the United States and Canada.

Dominion manages its daily operations through three primary operating segments: Dominion Energy, Dominion Delivery and Dominion Exploration & Production. In addition, Dominion also reports its corporate and other operations as an operating segment. Assets remain wholly owned by the legal subsidiaries. See Note 17.

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

Note 2.    Significant Accounting Policies

As permitted by the rules and regulations of the Securities and Exchange Commission (SEC), the accompanying unaudited consolidated financial statements contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles). These unaudited consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001.

In the opinion of Dominion's management, the accompanying unaudited consolidated financial statements contain all adjustments, including normal recurring accruals, necessary to present fairly Dominion's financial position as of September 30, 2002, and its results of operations for the three and nine-month periods and cash flows for the nine-month periods ended September 30, 2002 and 2001.

The accompanying unaudited consolidated financial statements include the accounts of Dominion Resources, Inc. and its subsidiaries, with all significant intercompany transactions and accounts eliminated in consolidation.

The accompanying unaudited consolidated financial statements reflect certain estimates and assumptions made by management in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from those estimates.

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Dominion reports certain contracts and instruments at fair value in accordance with generally accepted accounting principles. Market pricing and indicative price information from external sources are used to measure fair value when available. In the absence of this information, Dominion estimates fair value based on near-term and historical price information and statistical methods. For individual contracts, the use of differing assumptions could have a material effect on the contract's estimated fair value. See Note 2 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001 for a more detailed discussion of Dominion's estimation techniques.

The results of operations for the interim periods are not necessarily indicative of the results expected for the full year. Information for quarterly periods is affected by seasonal variations in sales, rate changes and other factors.

During the second quarter of 2002, Dominion extended the useful lives of most of its fossil fuel stations and electric distribution property based on depreciation studies that indicated longer lives were appropriate after considering the effects of aging and current and planned environmental expenditures. The new estimated useful lives of Dominion's property, plant and equipment are as follows: generation 20-65 years, transmission 30-70 years, distribution 23-53 years, and other 5-25 years. These changes in estimated useful lives reduced depreciation expense by $17 million and $25 million for the three months and nine months ended September 30, 2002. These changes are expected to reduce depreciation by approximately $40 million for the entirety of 2002 and approximately $60 million on an annual basis thereafter.

Certain amounts in the 2001 consolidated financial statements have been reclassified to conform to the 2002 presentation.

In 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, which provides accounting requirements for the recognition and measurement of liabilities associated with the retirement of tangible long-lived assets. Under the standard, these liabilities will be recognized at fair value as incurred and capitalized as part of the cost of the related tangible long-lived assets. Accretion of the liabilities due to the passage of time will be an operating expense. Dominion has identified certain retirement obligations that will be subject to the standard and will adopt the standard effective January 1, 2003. These obligations include the decommissioning of its nuclear generation facilities, removal of certain storage tanks, the abandonment of certain natural gas pipelines and dismantlement and restoration activities for its gas and oil wells and platforms. At this time, management anticipates no adverse effect on Dominion's 2003 net income or its financial position as a result of adopting the standard. Dominion management's expectations are based on its interpretation of the standard and determination of underlying assumptions, such as discount rates and engineering estimates of the future cost and timing of removal activities to be performed, as of the date of this quarterly report. Further refinement of engineering estimates or changes in assumptions underlying the required calculations may be deemed appropriate before the standard is implemented. For more discussion, see Note 4 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001.

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In October, the EITF rescinded EITF Issue No. 98-10, Accounting for Contracts involved in Energy Trading and Risk Management Activities, (EITF 98-10). The effect of this decision is that certain energy-related contracts, held for trading purposes, will no longer be subject to fair value accounting. Generally, the affected contracts are those energy-related contracts, held for trading purposes, that are not considered derivatives under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Under EITF 98-10 accounting, the fair value of energy contracts was measured at each reporting date, with changes in fair value, including unrealized amounts, reported in earnings. Energy-related contracts affected by the rescission of EITF 98-10 will be subject to accrual accounting and thus recognized as revenue or expense at the time of contract settlement or termination. The EITF's decision is effective for all affected contracts initiated after October 25, 2002. However, for all affected contracts initiated earlier, the change is to be implemented as the cumulative effect of a change in accounting principle effective January 1, 2003.

The results of Dominion's trading operations will be impacted by the EITF's decision. However, the impact of the change is generally limited to the timing of recognition in earnings for those contracts affected; also, such contracts will no longer be reported at fair value on Dominion's balance sheet. Although Dominion has identified the types of contracts that are affected, it has not yet completed the assessment of the individual contracts involved.

In 2001, FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 also requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives.

Dominion adopted SFAS No. 142 on January 1, 2002. The discontinuance of goodwill amortization under SFAS No. 142 will result in an increase in net income of $95 million in 2002. Dominion is required to test its goodwill for impairment using a two-step process described in SFAS No. 142 on an annual basis or whenever events or circumstances indicate that the fair value of Dominion's reporting units may have been affected. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. Dominion completed the transitional goodwill impairment test during the second quarter of 2002 and found no instances of impairment.

Had the provisions of SFAS No. 142 requiring the discontinuance of goodwill amortization been applied for the three and nine months ended September 30, 2001, Dominion's net income and earnings per share would have been as follows:

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Other than a $24 million adjustment made during the first quarter of 2002 to the carrying amount of goodwill recognized as part of the purchase of Louis Dreyfus Natural Gas Corp. (Louis Dreyfus), there were no significant changes in the carrying amount of goodwill during the first nine months of 2002. See Note 5.

All of Dominion's intangible assets other than goodwill are subject to amortization. Amortization expense for intangible assets was $13 million and $9 million for the three months ended September 30, 2002 and 2001, respectively, and $38 million and $27 million for the nine months ended September 30, 2002 and 2001, respectively. There were no material acquisitions of intangible assets during the first nine months of 2002. The components of intangible assets at September 30, 2002 were as follows:

Annual amortization expense for intangible assets is estimated to be $53 million for 2002, $52 million for 2003, $49 million for 2004, $43 million for 2005 and $40 million for 2006.

Note 5.     Acquisitions

Louis Dreyfus

On November 1, 2001, Dominion acquired all of the outstanding shares of common stock of Louis Dreyfus Natural Gas Corp., a natural gas and oil exploration and production company headquartered in Oklahoma City, Oklahoma, for $1.8 billion in common stock and cash. Dominion acquired Louis Dreyfus by merging it into a new subsidiary, Dominion Oklahoma Texas Exploration & Production, Inc. (DOTEPI), and then contributed DOTEPI to CNG. The purchase price allocation was completed during the first quarter of 2002 upon receipt of information from outside specialists, increasing liabilities and goodwill each by $24 million. All of the goodwill arising from the Louis Dreyfus acquisition has been allocated to the Dominion Exploration & Production segment for purposes of impairment testing under SFAS No. 142.

In June 2002, Dominion acquired 100 percent ownership of Mirant State Line Ventures, Inc. (State Line) from Mirant Corporation for approximately $185 million in cash. State Line's assets include a 515-megawatt coal-fired generation facility located near Hammond, Indiana. State Line is included in the Dominion Energy operating segment.

In September 2002, Dominion acquired 100 percent ownership of Cove Point LNG Limited Partnership (Cove Point) from The Williams Companies (Williams) for approximately $217 million in cash. In addition, in November 2002, Dominion paid Williams an additional $8 million representing additional development costs and changes in working capital incurred by Williams prior to closing. Cove Point's assets include a liquefied natural gas import facility located near Baltimore, Maryland that is under reconstruction, a liquefied natural gas storage facility and an approximately 85-mile natural gas pipeline. Dominion expects Cove Point to become fully operational in 2003 and expects to incur approximately $117 million of additional development costs. Cove Point is included in the Dominion Energy operating segment.

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In the fourth quarter of 2001, after fully integrating Dominion's existing organization and operations with those of CNG, management initiated a focused review of Dominion's combined operations. As a result, Dominion recognized restructuring costs which included employee severance and termination benefits and the abandonment of leased office space no longer needed.

Under the 2001 restructuring plan, Dominion identified approximately 340 salaried positions to be eliminated and recorded $42 million in employee severance-related costs. Through September 30, 2002, Dominion had eliminated 254 positions.

The change in the liabilities for severance and related costs and lease termination costs during the first nine months of 2002 is presented below:

For additional information on restructuring activities, see Note 7 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001.

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

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For the three months ended September 30, 2002 and 2001, Dominion recognized total comprehensive income of $310 million and $481 million, respectively. For the nine months ended September 30, 2002 and 2001, Dominion recognized total comprehensive income of $442 million and $880 million, respectively. Other comprehensive income for the three-month and nine-month periods ended September 30, 2002 and 2001 related primarily to unrealized losses on available-for-sale investments held in certain decommissioning trusts and the effective portion of the changes in fair value of derivatives designated as hedging instruments in cash flow hedges (as described in more detail in Note 9).

Dominion adopted SFAS 133 effective January 1, 2001. In connection with this adoption, Dominion recorded an after-tax charge to accumulated other comprehensive income (AOCI) of $183 million, net of taxes of $106 million, in the first quarter of 2001.

As of September 30, 2002, Dominion is hedging its exposure to the variability in future cash flows for certain forecasted transactions over periods of one to six years. Under the provisions of SFAS 133, Dominion records the effective portion of the changes in fair value of derivative contracts designated as cash flow in AOCI in the consolidated balance sheets. Derivative gains and losses reported in AOCI are reclassified as earnings in the periods in which earnings are impacted by the variability of cash flows of the underlying hedged transaction.

The portion of Dominion's other comprehensive income (loss) associated with the effective portion of the change in fair value of cash flow hedging derivatives, net of taxes and amounts reclassified to earnings, is as follows:

Based on balances at September 30, 2002, Dominion expects to reclassify approximately $63 million of net gains from AOCI to earnings during the next twelve-month period. The actual amounts that will be reclassified to earnings over the next twelve months will vary from this amount as a result of changes in market prices. The effect of amounts being reclassified from AOCI to earnings will generally be offset by the recognition of the hedged transactions (e.g., anticipated sales) in earnings, thereby achieving the realization of prices contemplated by the underlying risk management strategies.

The ineffective portion of the change in fair value of both cash flow and fair value hedging derivatives is recognized in current period earnings. In addition, for options designated either as fair value or cash flow hedges, changes in time value are excluded from the measurement of hedge effectiveness and therefore recorded in earnings. Dominion recognized pre-tax increases (decreases) in earnings, representing hedge ineffectiveness and the change in time value, as follows:

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Amounts reported as margin deposit assets represent funds held on deposit by various trading counterparties that resulted from credit exposures for Dominion exceeding agreed-upon credit limits. Amounts reported as margin deposit liabilities represent funds held by Dominion that resulted from credit exposures for various trading counterparties exceeding agreed-upon credit limits. These credit limits and the mechanism for calculating the amounts to be held on deposit are determined in the International Swap Dealers Association master agreements in place between Dominion and the counterparties. As of September 30, 2002 and December 31, 2001, Dominion had margin deposit assets of $147 million and $30 million, respectively, and margin deposit liabilities of $8 million and $88 million, respectively.

As more fully described in Note 2 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001, Dominion follows the full cost method of accounting for gas and oil exploration and production activities, as prescribed by the SEC. Under this method, capitalized costs are subject to a quarterly "ceiling test". Under the ceiling test, amounts capitalized are limited to the present value of estimated future net revenues to be derived from the production of proved gas and oil reserves. As currently permitted by the SEC, Dominion uses hedge-adjusted period-end prices to calculate the present value of estimated future net revenues. Such prices are used for the portion of anticipated production from proved reserves that is hedged by qualifying cash flow hedges. As of September 30, 2002, the use of period-end market prices rather than hedge-adjusted prices, as otherwise required by the full cost method, would not have resulted in an impai rment charge. Due to the volatility of gas and oil prices, it is reasonably possible that for some quarters, Dominion may satisfy the ceiling test using hedge-adjusted prices, whereas the use of period-end market prices without the effects of hedging could have resulted in an impairment charge.

During the second quarter of 2002, Dominion evaluated its ability to sell its retained interests from previously securitized mortgages. The evaluation process included discussions with various investment advisors, securitizers of mortgages and others in the mortgage industry. The result of that evaluation was that the retained interests were not readily saleable on terms that would be acceptable to Dominion. Therefore, during the second quarter of 2002, Dominion reclassified $236 million of retained interests from "trading" to "available-for-sale". While classifying the retained interests as trading, Dominion recognized $5 million of net realized and unrealized pre-tax losses in earnings through May 1, 2002. Beginning on May 1, 2002, unrealized gains and losses on the retained interests were recorded in other comprehensive income. As of September 30, 2002, $19 million of net unrealized pre-tax losses had been recorded in other comprehensive income. For additional discussion of retained interests and prior securitizations of loans, see Notes 2 and 13 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001.

Note 13.     Significant Financing Transactions

In May 2002, Dominion, Virginia Power and CNG entered into two joint credit facilities that allow aggregate borrowings of up to $2 billion. The facilities include a $1.25 billion 364-day revolving credit facility that terminates in May 2003 and a $750 million three-year revolving credit facility that terminates in May 2005. These credit facilities replaced the $1.75 billion 364-day credit facility and Dominion's $300 million multi-year credit facility that matured during the second quarter of 2002. The new joint credit facilities will be used for working capital, as support for the combined commercial paper programs of Dominion, Virginia Power and CNG, and for other general corporate purposes. The three-year facility can also be used to support up to $200 million of letters of credit. At September 30, 2002, total outstanding commercial paper was $1.7 billion. At September 30, 2002, total outstanding letters of credit supported by the three-year facility were $65 million related pri marily to DEI.

In August 2002, CNG entered into a $500 million credit facility that terminates in August 2003. This credit facility will be used to support the issuance of letters of credit and commercial paper by CNG. At September 30, 2002, outstanding letters of credit under this facility totaled $325 million.

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In September 2002, Dominion financed its acquisition of Cove Point with commercial paper supported by a $250 million revolving credit facility. The $250 million bridge facility expires in March 2003. See Note 5 to the Consolidated Financial Statements for a discussion of the Cove Point acquisition.

Extendible Commercial Notes

In addition to commercial paper, Virginia Power has, from time to time, sold extendible commercial notes (ECNs) to meet working capital requirements. ECNs are unsecured notes that Virginia Power sells in private placements. Any ECNs would have a stated maturity of 390 days from issuance and may be redeemed earlier at Virginia Power's option. At September 30, 2002, $50 million of ECNs were outstanding.

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

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During the first nine months of 2002, Dominion Resources, Inc. and its subsidiaries repaid $1.6 billion of long-term debt securities.

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In March 2002, Dominion issued $330 million of equity-linked debt securities. Dominion used the net proceeds for general corporate purposes, including the repayment of debt. Dominion had also issued $412.5 million of equity-linked debt securities in the fourth quarter of 2000. Each equity-linked debt security consists of a stock purchase contract and a senior note issued by Dominion. The stock purchase contracts obligate the holders to purchase from Dominion shares of Dominion common stock by a future settlement date. The purchase price is $50 and the number of shares to be purchased will be determined under a formula based upon the average closing price of Dominion common stock near the settlement date. The senior notes, or treasury securities in some instances, are pledged as collateral to secure the purchase of common stock under the related stock purchase contracts. The holders may satisfy their obligation under the stock purchase contracts by allowing the senior notes to be re marketed with the proceeds being paid to Dominion as consideration for the purchase of stock under the stock purchase contracts. Alternatively, holders may choose to continue holding the senior notes and use other resources as consideration for the purchase of stock under the stock purchase contracts.

Dominion makes quarterly interest payments on the senior notes and quarterly payments on the stock purchase contracts at the rates described below. Dominion has recorded the present value of the stock purchase contract payments as a liability, offset by a charge to common stock in shareholders' equity. Interest payments on the senior notes are recorded as interest expense and stock purchase contract payments are charged against the liability. Accretion of the stock purchase contract liability is recorded as interest expense. In calculating diluted earnings per share, Dominion applies the treasury stock method to the equity-linked debt securities. These securities did not have a significant effect on diluted earnings per share for the three and nine months ended September 30, 2002.

Under the terms of the stock purchase contracts, Dominion will issue between 6.7 million and 8.1 million shares of its common stock in November 2004 and between 4.1 million and 5.5 million shares of its common stock in May 2006. A total of 13.6 million shares of Dominion's common stock is reserved for issuance in connection with the stock purchase contracts.

Selected information about Dominion's equity-linked debt securities is presented below (amounts other than percentages are in millions):

In October 2002, Dominion issued approximately 28 million shares through a public equity offering and received proceeds of approximately $1.1 billion. Net proceeds will be used for general corporate purposes, principally repayment of debt.

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In August 2002, Virginia Power Capital Trust II (Trust), a capital trust subsidiary of Virginia Power, issued $400 million of 7.375 percent trust preferred securities, representing preferred beneficial interests and 97 percent beneficial ownership in the assets held by the Trust. In exchange for the $400 million realized from the sale of the trust preferred securities and $12 million of common securities that represent the remaining three percent beneficial ownership interest in the assets held by the Trust, Virginia Power issued $412 million of its 2002 7.375 percent Junior Subordinated Notes (the Junior Subordinated Notes) due July 30, 2042. The Junior Subordinated Notes constitute 100 percent of the Trust's assets. The Trust must redeem the trust preferred securities when the Junior Subordinated Notes are repaid at maturity or if redeemed prior to maturity. The proceeds were used to redeem all shares of Virginia Power variable rate preferred stock as discussed below.

In September, 2002, Virginia Power Capital Trust I redeemed all outstanding trust preferred securities for $135 million and Virginia Power redeemed $139 million of Junior Subordinated Deferrable Interest Notes Series A held by the trust.

In September 2002, Virginia Power purchased and redeemed all shares of its variable rate preferred stock September 1992A Series, September 1992B Series, and October 1988 Series for $175 million, representing a price of $100 per share. In October 2002, Virginia Power redeemed its outstanding June 1989 Series variable rate preferred stock for $75 million, representing a price of $100 per share.

The 1935 Act prohibits registered holding companies and their subsidiaries from paying dividends out of capital or unearned surplus except when they have received specific SEC authorization. In January 2002, Dominion filed an application with the SEC for relief from the restriction on paying dividends out of unearned surplus of the subsidiary into which Louis Dreyfus was merged. The request was for relief up to an amount equal to Louis Dreyfus' retained earnings before the merger. As of September 30, 2002, the application was still pending with the SEC.

There have been no changes to other subsidiary dividend restrictions disclosed in Note 21 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001.

Other than the environmental matter discussed below, there have been no significant developments regarding the commitments and contingencies disclosed in Note 27 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001, nor have any significant new matters arisen during the nine months ended September 30, 2002.

FASB expects to issue a new accounting standard regarding the accounting treatment for special purpose entities. The final provisions of this new standard may affect the accounting of these lease arrangements. If the special purpose entities were to be consolidated into Dominion's financial statements, Dominion would record both the project assets and related debt and minority interests on its balance sheet. Dominion is monitoring this FASB project and may consider other financing structures for these projects in the future. Dominion's management does not anticipate any changes in accounting requirements to impact planned levels of financing or its credit ratings.

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During 2000, Virginia Power received a Notice of Violation from the Environmental Protection Agency (EPA) alleging that Virginia Power failed to obtain New Source Review permits under the Clean Air Act prior to undertaking specified construction projects at the Mt. Storm Power Station in West Virginia. The Attorney General of New York filed a suit against Virginia Power alleging similar violations of the Clean Air Act at the Mt. Storm Power Station. Virginia Power also received notices from the Attorneys General of Connecticut and New Jersey of their intentions to file suit for similar violations. Management believes that Virginia Power has obtained the necessary permits for its generating facilities. Virginia Power has reached an agreement in principle with the federal government and the state of New York to resolve this situation. The agreement in principle includes payment of a $5 million civil penalty, a commitment of $14 million for environmental projects in Virginia, West Virgini a, Connecticut, New Jersey and New York, and a 12-year, $1.2 billion capital investment program for environmental improvements at Virginia Power's coal-fired generating stations in Virginia and West Virginia. Dominion had already committed to a substantial portion of the $1.2 billion expenditures for sulfur dioxide and nitrogen oxide emissions controls. The negotiations over the terms of a binding settlement have expanded beyond the basic agreement in principle and are ongoing. As of September 30, 2002, Dominion has recorded, on a discounted basis, $18 million for the civil penalty and environmental projects. In May 2002, the EPA issued a Section 114 request for information about whether projects undertaken at Virginia Power's Chesterfield, Chesapeake, Yorktown, Possum Point and Bremo Bluff power stations were properly permitted under the Clean Air Act's New Source Review requirements, to which Virginia Power responded in a timely manner.

In July 2002, the EPA issued a Section 114 request for information about whether Morgantown Energy Associates' facility in Morgantown, West Virginia is in compliance with environmental requirements. EPA made a site visit and at that time received the requested information. Morgantown Energy Associates is a 50 percent-owned investment accounted for by Dominion under the equity method.

Guarantees, Letters of Credit and Surety Bonds

In the ordinary course of business, Dominion Resources, Inc. and certain subsidiaries are party to various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries. Such agreements include guarantees, stand-by letters of credit and surety bonds. The amounts subject to certain of these agreements vary depending on the covered contracts actually outstanding at any particular point in time. Guarantees and stand-by letters of credit are used, when necessary, to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis. Accordingly, Dominion and certain subsidiaries entered into guarantees and stand-by letters of credit so the third parties would be willing to enter into contracts with the subsidiaries and to extend sufficient credit to facilitate the subsidiaries' accomplishment of intended commercial purposes. In such instances, guarantees may be used to limit exposures resulting from subsidiary bu siness activities to pre-defined amounts. To the extent a liability, subject to a guarantee, has been incurred by a consolidated subsidiary, such liability is included in Dominion's consolidated financial statements. Only in those limited instances where Dominion or certain subsidiaries enter into a guarantee on behalf of a party that is not consolidated in the preparation of Dominion's consolidated financial statements would performance under the agreement result in the recognition of additional liabilities in Dominion's consolidated financial statements.

Guarantees

At September 30, 2002 and December 31, 2001, outstanding guarantees totaled $4.7 billion and $4.4 billion, respectively. Dominion believes it unlikely that it would be required to perform or otherwise incur any losses associated with guarantees of its subsidiaries' obligations. Outstanding guarantees as of December 31, 2001 included $3.3 billion issued by Dominion Resources, Inc. and $1.1 billion issued by CNG. As of September 30, 2002, outstanding guarantees include $3.6 billion issued by Dominion Resources, Inc. and $1.1 billion issued by CNG and represented the following types of guarantees:

Guarantee of Consolidated Subsidiary Debt -- Dominion Resources, Inc. has guaranteed the payment of interest and principal of $538 million of subsidiary debt, primarily for certain subsidiaries of DEI. CNG has guaranteed the payment of interest and principal on $288 million of debt of DOTEPI. These debts are included in Dominion's consolidated balance sheet at September 30, 2002. In the event of default by the subsidiaries, Dominion Resources, Inc. or CNG, as applicable, would be obligated to repay such amounts.

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Guarantees Supporting Other Agreements -- Dominion Resources, Inc. has also guaranteed the following transactions:

• $26 million related to the future nuclear decommissioning obligations of certain DEI subsidiaries for the Millstone Power Station and $264 million related to potential retrospective premiums that could be assessed under Dominion's nuclear insurance programs for the Millstone Power Station, if there is a nuclear incident. The liability for future nuclear decommissioning is included in Dominion's consolidated balance sheet at September 30, 2002. See Note 16 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001 for more information on nuclear operations. Also, as part of satisfying certain NRC requirements concerned with ensuring adequate funding for Millstone's operations, Dominion has also agreed to provide up to $150 million to a DEI subsidiary, if requested by such subsidiary, to pay Millstone operating expenses.
• $91 million related to certain leases (fleet vehicles and computer hardware and software), primarily for Dominion Resources Services, Inc. (DRS) and CNG. To the extent such leases qualify as capital leases, the assets and related lease obligations are included in Dominion's consolidated balance sheet at September 30, 2002. For information on commitments for Dominion's leases, see Leases under Note 27 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001.
• $1.4 billion related to the leasing obligations of certain subsidiaries of DEI for several new power generation projects, as well as those of DRS for corporate headquarters and aircraft. See Leases with Special Purpose Entities above and Leases under Note 27 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001.
• $35 million if certain environmental events related to oil and gas producing activities conducted by certain CNG subsidiaries should occur in the future. If a liability should result from a future environmental event associated with such subsidiaries' operations, the liability would be reported in CNG's consolidated balance sheet.
• $35 million related to the obligations of a DEI subsidiary under a cross-currency swap agreement. If the subsidiary were to default on any amounts payable under the swap agreement, Dominion Resources, Inc. would be obligated to pay such amounts.
• $27 million related to guarantees for letters of credit issued primarily on behalf of certain subsidiaries of Dominion Capital, Inc. (DCI) and DEI.

Guarantees Supporting Related Parties -- Dominion Resources, Inc. has guaranteed $69 million related to officers' borrowings under the executive stock loan program. In the event of default by an officer, Dominion Resources, Inc. would be obligated to repay such loans and would recognize a charge to earnings and the related liability in its consolidated financial statements. Dominion's maximum exposure is $69 million if all officers defaulted on their loans and Dominion could not recover these amounts from the officers who are personally liable for repayment of the loans.

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Standby Letters of Credit

At September 30, 2002, CNG and DEI had authorized the issuance of standby letters of credit by a financial institution in the amounts of $325 million and $65 million, respectively, for the benefit of certain counterparties that had extended credit to these subsidiaries. In the unlikely event that CNG or DEI do not pay amounts when due under the covered contracts, any covered counterparty may present its claim for payment to the financial institution, which would then request payment from CNG or DEI, as applicable. The letters of credit of DEI are backed by the 3-year revolving credit facility that matures in May 2005. The letters of credit of CNG are backed by the CNG credit facility that matures in August 2003. See Note 13. As of September 30, 2002, no amounts had been presented for payment under these letters of credit.

At September 30, 2002, Dominion Resources, Inc. and Virginia Power had purchased $120 million of surety bonds, of which $57 million was associated with the financial assurance requirements imposed by the Nuclear Regulatory Commission with respect to the decommissioning of Virginia Power's nuclear units. Under the terms of the surety bonds related to nuclear decommissioning, Virginia Power is obligated to indemnify the respective surety bond company for any amounts paid. The liability for future nuclear decommissioning is included in Dominion's consolidated balance sheets at September 30, 2002. The remaining $63 million relates to surety bonds purchased by various Dominion subsidiaries for purposes, such as providing worker compensation coverage and obtaining licenses, permits and rights-of-way. To the extent liabilities are incurred as a result of the activities covered by the surety bonds, such liabilities would be included in Dominion's consolidated balance sheets until paid. Und er the terms of the surety bonds, Dominion Resources, Inc. is obligated to indemnify the respective surety bond company for any amounts paid on behalf of its subsidiaries.

CNG International Corporation, a subsidiary of CNG, is contractually obligated to make equity contributions of up to $100 million to an unconsolidated subsidiary in the event that the unconsolidated subsidiary is unable to service certain debt. CNG is contractually obligated to cause CNG International to make such equity contributions. As part of the final purchase price allocation for the CNG acquisition, Dominion established a liability for $100 million, reflecting amounts expected to be made pursuant to the equity contribution agreement.

Credit risk is the risk of financial loss to Dominion if counterparties fail to perform their contractual obligations. Dominion engages in transactions for the purchase and sale of products and services with major companies in the energy industry and with commercial and residential energy consumers. These transactions principally occur in the Northeast, Midwest and Mid-Atlantic regions of the United States. Management does not believe that this geographic concentration contributes significantly to Dominion's overall exposure to credit risk. Credit risk associated with trade accounts receivable from energy consumers is limited due to the large number of customers.

Dominion maintains credit policies with respect to its counterparties that management believes minimize overall credit risk. Where appropriate, such policies include the evaluation of a prospective counterparty's financial condition, collateral requirements and the use of standardized agreements that facilitate the netting of cash flows associated with a single counterparty. Dominion also monitors the financial condition of existing counterparties on an ongoing basis. Dominion maintains a provision for credit losses based upon factors surrounding the credit risk of its customers, historical trends and other information. Management believes, based on Dominion's credit policies and the September 30, 2002 provision for credit losses, that it is unlikely that a material adverse effect on its financial position, results of operations or cash flows would occur as a result of counterparty nonperformance.

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_______________________

Dominion Energy manages Dominion's generation portfolio, consisting of generating units and power purchase agreements. It also manages Dominion's energy trading, marketing, hedging and arbitrage activities; and gas pipeline and certain gas production and storage operations.

Dominion Delivery manages Dominion's electric and gas distribution systems, as well as customer service and electric transmission operations.

Dominion Exploration & Production manages Dominion's onshore and offshore gas and oil exploration, development and production operations. Operations are located on the outer continental shelf and deep water areas of the Gulf of Mexico and in selected regions in the lower 48 states and Canada.

Corporate and Other includes:

• corporate expenses of the Dominion and CNG holding companies (including interest not allocated to other segments);
• termination of certain long-term power purchase contracts in 2001 (see Note 27 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001); and
• the financial services operations of DCI. Through 2001, Dominion presented DCI as a separate operating segment. As Dominion substantially completed its exit strategy of this business in 2001, it no longer reports DCI as a separate operating segment beginning in 2002.

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

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

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

Dominion's Operations Are Weather Sensitive-Dominion's results of operations can be affected by changes in the weather. Weather conditions directly influence the demand for electricity and natural gas and affect the price of energy commodities. In addition, severe weather, including hurricanes, winter storms and droughts, can be destructive, causing outages, property damage and requiring Dominion to incur additional expenses.

Dominion Is Subject to Complex Government Regulation Which Could Adversely Affect Its Operations-Dominion's operations are subject to extensive regulation and require numerous permits, approvals and certificates from various federal, state and local governmental agencies. Dominion must also comply with environmental legislation and other regulations. Management believes the necessary approvals have been obtained for Dominion's existing operations and that its business is conducted in accordance with applicable laws. However, Dominion remains subject to a varied and complex body of laws and regulations. New laws or regulations or the revision or reinterpretation of existing laws or regulations may require Dominion to incur additional expenses.

Costs of Environmental Compliance, Liabilities and Litigation Could Exceed Dominion's Estimates-Dominion is subject to rising costs that result from a steady increase in the number of federal, state and local laws and regulations designed to protect the environment. These laws and regulations can result in increased capital, operating and other costs as a result of compliance, remediation, containment and monitoring obligations, particularly with laws relating to power plant emissions. In addition, Dominion may be a responsible party for environmental clean up at a site identified by a regulatory body. Management cannot predict with certainty the amount and timing of all future expenditures related to environmental

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matters because of the difficulty of estimating clean up costs and compliance, and the possibility that changes will be made to the current environmental laws and regulations. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties.

Capped Electric Rates in Virginia May Be Insufficient to Allow Full Recovery of Stranded and Other Costs-Under the Virginia Utility Restructuring Act, Dominion's electric base rates (excluding fuel costs and certain other allowable adjustments) remain unchanged until July 2007 unless modified consistent with that Act. The capped rates and wires charges that, where applicable, will be assessed to customers opting for alternative suppliers allow Dominion to recover certain generation-related costs and fuel costs; however, Dominion remains exposed to numerous risks of cost-recovery shortfalls. These include exposure to potentially stranded costs, future environmental compliance requirements, changes in tax laws, inflation and increased capital costs. See Management's Discussion and Analysis of Financial Condition and Results of Operations-Future Issues and Outlook-Regulated Electric Operations and Note 27 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001.

The Electric Generation Business is Increasingly Subject to Competition-Effective January 1, 2002, the generation portion of Dominion's electric utility operations in Virginia is open to competition and is no longer subject to cost-based rate regulation. As a result there will be increased pressure to lower costs, including the cost of purchased electricity. Because Dominion's electric utility generation business has not previously operated in a competitive environment, the extent and timing of entry by additional competitors into the electric market in Virginia is unknown. Therefore, it is difficult to predict the extent to which Dominion will be able to operate profitably within this new environment. In addition, the success of Dominion's merchant power plants is dependent upon its ability to find buyers willing to enter into power purchase agreements at prices sufficient to cover its operating costs. Recent short term, depressed spot and forward wholesale power prices during the past summer months have resulted in lower than expected revenues in Dominion's merchant power business and, if this continues into the future, will negatively affect Dominion's earnings.

There Are Inherent Risks in the Operation of Nuclear Facilities-Dominion operates nuclear facilities that are subject to inherent risks. These include the ability to dispose of spent nuclear fuel, the disposal of which is subject to complex federal and state regulatory constraints, the cost of and Dominion's ability to maintain adequate reserves for decommissioning, costs of plant maintenance and exposure to potential liabilities arising out of the operation of these facilities. Dominion maintains decommissioning trusts and external insurance coverage to minimize the financial exposure to these risks. However, it is possible that costs arising from claims could exceed the amount of any insurance coverage. In addition, in today's environment there is a heightened risk of a terrorist attack on the nation's nuclear plants. Dominion expects to incur increased security costs at its nuclear facilities.

The Use of Derivative Contracts Could Result in Financial Losses-Dominion uses derivatives including futures, forwards, options and swaps, to manage its commodity and financial market risks. In addition, Dominion purchases and sells commodity-based contracts in the natural gas, electricity and oil markets for trading purposes. In the future, Dominion could recognize financial losses on these contracts as a result of volatility in the market values of the underlying commodities or if a counterparty fails to perform under a contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these financial instruments involves management's judgment or use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the value of the reported fair value of these contracts. For additional information concerning derivatives and commodity-based trading contracts, see Management's Discussion and Analysis of Financial Condition and Results of Operations-Market Rate Sensitive Instruments and Risk Management and Notes 2 and 15 to the Consolidated Financial Statements in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001.

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

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The Success of Dominion's Telecommunications Business Strategy is Dependent Upon Market Conditions-The current strategy of Dominion's joint venture in the telecommunications business is based upon its ability to deliver lit capacity, dark fiber and colocation services to its customers. The market for these services, like the telecommunications industry in general, is rapidly changing. Dominion cannot be certain that growth in demand for these services will occur as expected. If the market for these services fails to grow as quickly as anticipated or becomes saturated with competitors, including competitors using alternative technologies such as wireless, Dominion's investment in the telecommunications business , as well as the earnings from such investment, may be adversely affected. Additionally, the current market values of assets in the telecommunications industry have been subject to depressed market conditions; if these conditions continue, it could adversely affect the underlying value of Domini on's telecommunications investment.

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

Changing Rating Agency Requirements Could Negatively Affect Dominion's Growth and Business Strategy-As of October 2002, Dominion's senior unsecured debt is rated BBB+, stable outlook, by Standard & Poor's and Baa1, negative outlook, by Moody's. Both agencies have recently implemented more stringent applications of the financial requirements for various ratings levels. In order to maintain its current credit ratings in light of these or future new requirements, Dominion may find it necessary to take steps or change its business plans in ways that may adversely affect its growth and earnings per share. A reduction in Dominion's credit ratings by either Standard & Poor's or Moody's could increase its borrowing costs and adversely impact its results of operations

Potential Changes in Accounting Practices May Adversely Affect Dominion's Financial Results-Recently discovered accounting irregularities in various industries have caused regulators and legislators to take a renewed look at accounting practices, financial disclosures and companies' relationships with their independent auditors. While it is still unclear what laws or regulations will develop, Dominion cannot predict the ultimate impact of any future changes in accounting regulations or practices in general with respect to public companies, the energy industry or in its operations specifically.

In addition, new accounting standards could be enacted by the FASB or the SEC which could impact the way Dominion is required to record revenues, expenses, assets and liabilities. These changes in accounting standards could lead to negative impacts on reported earnings or increases in liabilities, which in turn could affect Dominion's reported results of operations.

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Operating Segments

In general, management's discussion of Dominion's results of operations focuses on the contributions of its operating segments. However, the discussion of Dominion's financial condition under Liquidity and Capital Resources is based on legal entities as Dominion transacts business in the financial markets on that basis. Dominion's three primary operating segments are Dominion Energy, Dominion Delivery and Dominion Exploration & Production. In addition, Dominion also presents its corporate, financial services and other operations as an operating segment. For more information on Dominion's business segments, see Note 17 to the Consolidated Financial Statements.

See MD&A in Dominion's Annual Report on Form 10-K for the year ended December 31, 2001 for a detailed discussion of Dominion's critical accounting policies. These policies include the accounting for risk management and energy trading contracts at fair value, accounting for gas and oil operations and accounting for regulated operations.

Results Of Operations

Dominion's discussion of its results of operations includes a summary of contributions by the operating segments to net income and diluted earnings per share, an overview of consolidated 2002 and 2001 results of operations and more detailed discussion of the results of operations of the operating segments.

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• Third quarter 2002 results for Dominion's operating segments reflect primarily increases in regulated electric sales, resulting from comparably warmer weather during the current year quarter, and gas and oil production, reflecting the impact of the Louis Dreyfus acquisition, offset somewhat by lower average realized prices from gas and oil production. Partially offsetting these results were decreases in electric sales by Dominion's merchant generation fleet, reflecting primarily comparably lower prices for electricity. In addition, the contribution by Dominion's energy trading and wholesale electric marketing operations decreased, reflecting the effects of unfavorable price changes on energy contracts held but not yet settled, lower electric marketing sales and lower trading margins for both gas and electricity.
• The increase in net income also includes a $26 million benefit associated with the discontinuance of goodwill amortization in 2002 and a $10 million increase in operating income for DCI. Interest and related charges decreased $16 million, reflecting lower overall interest rates on outstanding debt, partially offset by interest on new issues of debt and trust preferred securities in late 2001 and the first nine months of 2002. Dominion's effective income tax rate decreased, reflecting a net $31 million effect of including certain subsidiaries in Dominion's consolidated state income tax returns. In addition, the effective tax rate decreased for foreign earnings, the impact of discontinuing amortization of goodwill for book purposes and other factors.

• The results for Dominion's operating segments for the first nine months of 2002 reflect primarily increases in regulated electric sales, resulting from comparably warmer weather during the current year quarter, and gas and oil production, reflecting the impact of the Louis Dreyfus acquisition, offset somewhat by lower average realized prices from gas and oil production. Partially offsetting these results were decreases in electric sales by Dominion's merchant generation fleet, reflecting primarily comparably lower prices for electricity. In addition, the contribution by Dominion's energy trading and wholesale electric marketing operations decreased, reflecting the effects of unfavorable price changes on energy contracts held but not yet settled, lower electric marketing sales and lower trading margins for both gas and electricity.
• The increase in net income also includes the impacts of: a $136 million after-tax charge recognized in 2001 in connection with the termination of certain long-term power purchase agreements; a $25 million after-tax loss recognized on the sale of Saxon Capital in 2001; a $72 million benefit associated with the discontinuance of goodwill amortization; and a $27 million increase in operating income for DCI. Interest and related charges decreased $47 million, reflecting lower overall interest rates on outstanding debt, partially offset by interest on new issues of debt and trust preferred securities in late 2001 and the first nine months of 2002. Dominion's effective income tax rate decreased, reflecting a net $31 million effect of including certain subsidiaries in Dominion's consolidated state income tax returns. In addition, the effective tax rate decreased for foreign earnings, the impact of discontinuing amortization of goodwill for book purposes and other factors.

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The decrease in operating revenue includes decreased revenues for non-regulated electric sales, non-regulated gas sales, and gas transportation and storage, partially offset by increased regulated electric sales revenue.

• Purchased gas expense decreased $51 million. The decrease reflects lower gas prices of $30 million and lower volumes in the energy marketing operations of $21 million.

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• Liquids, pipeline capacity and other purchases expense decreased $15 million, reflecting primarily comparably lower levels of rate recovery for certain transmission costs in the current year quarter. The difference between actual expenses and amounts recovered in the period are deferred pending future rate adjustments.
• Depreciation decreased $14 million reflecting primarily changes in the estimated useful lives of electric generation property. See Note 2 to the Consolidated Financial Statements for additional discussion.
• Electric fuel and energy purchases increased $28 million primarily in connection with comparably higher non-regulated retail electric sales volumes for the third quarter of 2002.
• Other taxes increased, reflecting primarily higher franchise taxes at Millstone.

The decrease in operating revenue reflects decreased revenues for non-regulated gas sales, non-regulated electric sales and gas transportation and storage, partially offset by increased regulated electric sales revenue.

The decrease in operating expenses reflects decreases in purchased gas expense and liquids, pipeline capacity and other purchases, partially offset by an increase in electric fuel and energy purchases expenses and other operations and maintenance expense.

• Purchased gas expense decreased $276 million associated with Dominion's gas aggregation and retail energy marketing operations, reflecting approximately $155 million associated with declining prices and $120 million associated with lower purchased volumes.
• Liquids, pipeline capacity and other purchases decreased $43 million, reflecting primarily comparably lower levels of rate recoveries of certain transmission costs in the current year period. The difference between actual expenses and amounts recovered in the period are deferred pending future rate adjustments.

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• Electric fuel and energy purchases expense increased $36 million, reflecting an increase of $56 million associated with Dominion's non-regulated energy marketing operations. This increase includes a $64 million increase associated with higher volumes of electricity purchases partially offset by an estimated $8 million impact of comparably lower prices for electricity. Offsetting these increases were decreases of $20 million primarily due to a change in generation mix and comparably milder weather in the first quarter of 2002.
• Other operations and maintenance expense increased $95 million, including $122 million associated with the operations of Millstone, acquired in the second quarter of 2001, and new generation facilities that began operations in 2002. This increase was partially offset by decreases in general and administrative expenses.
• Depreciation expense did not change materially compared to the prior year as increases in depreciation associated with nine months of operations at Millstone in 2002, as compared to six months of operations in 2001, were offset by decreases in depreciation associated with changes in the estimated useful lives of other electric generation property.

See Selected Information-Energy Trading Activities in the MD&A of Dominion's Annual Report on Form 10-K for the year ended December 31, 2001 for a detailed discussion of the energy trading, hedging and arbitrage activities of the Dominion Energy Clearinghouse (Clearinghouse) and related accounting policies. For additional discussion of trading activities, see Market Rate Sensitive Instruments and Risk Management.

The Clearinghouse holds a portfolio of derivative financial contracts used by Dominion to manage the price risk of certain anticipated sales of Dominion Exploration & Production's 2002 natural gas production (economic hedges). Dominion has not designated these derivatives as hedges for accounting purposes and, as a result, its quarterly earnings will reflect the changes in their fair values until settled. For the third quarter of 2002, Dominion Energy recognized a net loss of $8 million related to the economic hedges, comprised of $9 million of losses related to contract settlements, offset by $1 million of unrealized gains. For the first nine months of 2002, Dominion Energy recognized a net loss of $52 million comprised of $37 million of unrealized losses and $15 million of losses related to contract settlements.

Fourth quarter 2002 earnings will reflect financial settlement of the economic hedges as well as the anticipated gas sales at then current market prices. For the entirety of 2002, Dominion expects the combination of the anticipated gas sales by Dominion Exploration & Production and the economic hedges to result in a range of prices for those sales as contemplated by its risk management strategy.

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In the third quarter of 2002, Dominion entered into a group of derivative contracts to economically hedge certain anticipated sales of 2003 natural gas production. Similar to the economic hedges of 2002 natural gas production discussed above, Dominion has not designated these derivatives as hedges for accounting purposes. While Dominion expects the combination of anticipated gas sales by Dominion Exploration & Production and the settlement of the derivative contracts to result in a range of prices for those sales as contemplated by its risk management strategy, quarterly earnings will reflect any unrealized gains or losses resulting from the change in the fair value of the derivative contracts until the derivative contracts are settled and the related natural gas production is sold. The impact of the 2003 economic hedges on the third quarter of 2002 was not material.

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

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Dominion Delivery