D

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2007, for Dominion Resources, Inc. (Dominion), a major producer and transporter of energy headquartered in Richmond, Virginia. The company operates primarily in the eastern United States, providing electricity, natural gas, and related services. Key operational segments include Dominion Virginia Power (DVP), Dominion Generation, and Dominion Energy. In 2007, the company completed a significant strategic refocusing by selling its non-Appalachian natural gas and oil exploration and production (E&P) operations for approximately $13.9 billion and merging its subsidiary Consolidated Natural Gas Company (CNG) into the holding company.

Key Financial Metrics

Note: 2007 Net Income includes a $2.1 billion after-tax gain from the sale of non-Appalachian E&P operations. Operating cash flow decreased significantly due to income taxes paid on this gain and other transaction costs.

Material Changes Versus Prior Period

• Revenue: Operating revenue decreased 4% to $15.7 billion, primarily due to lower volumes from the sale of non-Appalachian E&P assets ($1.4 billion impact), partially offset by higher realized commodity prices and increased electric utility revenue driven by weather and customer growth.
• Profitability: Net income increased 84% to $2.5 billion. This surge was driven by the $2.1 billion after-tax gain on the E&P sale, higher merchant generation margins, and the reinstatement of annual fuel rate adjustments in Virginia. These gains were partially offset by a $252 million after-tax impairment charge on the Dresden merchant generation facility and a $158 million after-tax extraordinary charge related to regulatory accounting changes.
• Balance Sheet: Total assets decreased by approximately $10 billion, reflecting the divestiture of E&P assets. Long-term debt decreased by $1.6 billion as proceeds from the asset sale were used to repurchase $5.8 billion of common stock and repay $5.5 billion of debt.
• Segment Realignment: The company realigned its operating segments in Q4 2007 to DVP, Dominion Generation, and Dominion Energy, moving away from the previous four-segment structure.

Guidance, Outlook, and Risks

Outlook: Management expects earnings per share growth in 2008, driven by a full year of deferred fuel accounting in Virginia, higher merchant generation margins, increased Appalachian E&P production, and lower interest expense following the debt tender offer. These benefits are expected to be partially offset by a potential decrease in regulated electric sales if weather returns to normal and increased depreciation expenses.

Capital Expenditures: Planned capital expenditures are approximately $3.7 billion for 2008, focusing on generation expansion (including the "Powering Virginia" program), environmental upgrades, and transmission improvements.

Key Risks and Contingencies:

• Regulatory Risk: Virginia's 2007 Restructuring Act ends capped rates in 2008, transitioning to a modified cost-of-service model. Future rate cases in 2009 could result in rate reductions if earnings exceed established returns on equity.
• Environmental Compliance: Significant capital expenditures are required for compliance with the Clean Air Act (CAIR/CAMR) and potential future greenhouse gas regulations. The company estimates $900 million in capital expenditures between 2008 and 2012 for emission controls.
• Asset Sales: The planned sale of two regulated gas distribution subsidiaries (Peoples and Hope) was terminated in January 2008 due to regulatory delays; the company is seeking other offers.
• Market Risk: Exposure to commodity price volatility and interest rate fluctuations, managed through hedging strategies that may require significant collateral.

Investor Verification Checklist

• Gain on Sale Sustainability: Verify the extent to which 2007 earnings were driven by the one-time $2.1 billion gain from the E&P divestiture versus core operational performance.
• Regulatory Rate Cases: Monitor the outcome of the 2009 Virginia base rate case and the status of the Ohio pipeline replacement program rate case, as these could materially impact future revenue.
• Environmental Capital Costs: Track actual capital expenditures related to the Clean Air Act and potential carbon regulations against the estimated $900 million projection.
• Divestiture Status: Confirm the status of the sale of Peoples and Hope gas distribution subsidiaries, which remain held for sale.
• Debt and Liquidity: Review the impact of the $5.8 billion stock repurchase and $5.5 billion debt repayment on the company's leverage ratios and credit ratings (currently A-/Baa2/BBB+).