WASHINGTON GAS LIGHT CO - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

(Mark One)


[ X ]		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

		For the Quarter Ended June 30, 2002

OR

[ ]		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


	Exact name of registrant as		I.R.S.
Commission	specified in its charter and principal	States of	Employer
File Number	office address and telephone number	Incorporation	I.D. Number

1-16163	WGL Holdings, Inc.	Virginia	52-2210912
	1100 H Street, N.W.
	Washington, D.C. 20080
	(703) 750-2000

0-49807	Washington Gas Light Company	District of Columbia	53-0162882
	1100 H Street, N.W.	and Virginia
	Washington, D.C. 20080
	(703) 750-4440

Indicate by check mark whether each 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 filing requirements for the past 90 days. Yes X No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

WGL Holdings, Inc. common stock, no par value, outstanding as of July 31, 2002: 48,564,667 shares.

All of the outstanding shares of common stock ($1 par value) of Washington Gas Light Company were held by WGL Holdings, Inc. as of July 31, 2002.

Form 10-Q
Quarter Ended June 30, 2002

TABLE OF CONTENTS
PART I. Financial Information


Item 1. Financial Statements:
	WGL Holdings, Inc.:
		Consolidated Balance Sheets	4
		Consolidated Statements of Income	5
		Consolidated Statements of Cash Flows	7
	Washington Gas Light Company:
		Consolidated Balance Sheets	8
		Consolidated Statements of Income	9
		Consolidated Statements of Cash Flows	11
	Notes to Consolidated Financial Statements		12
		(WGL Holdings, Inc. and Washington Gas Light Company Combined)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
	WGL Holdings, Inc.		22
		Analysis of Results of Operations – Three months ended
		June 30, 2002 vs. June 30, 2001	22
		Analysis of Results of Operations – Nine months ended
		June 30, 2002 vs. June 30, 2001	25
	Washington Gas Light Company		31
		Analysis of Results of Operations – Three months ended
		June 30, 2002 vs. June 30, 2001	32
		Analysis of Results of Operations – Nine months ended
		June 30, 2002 vs. June 30, 2001	35
Item 3. Quantitative and Qualitative Disclosures About Market Risks of the Company			41
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K			41
Signature			42

-2-

FILING FORMAT

This Quarterly Report on Form 10-Q is a combined report being filed by two separate registrants: WGL Holdings, Inc. (WGL Holdings or the Company) and Washington Gas Light Company (Washington Gas or the regulated utility). Except where the content clearly indicates otherwise, any reference in the report to “WGL Holdings” or “the Company” is to the consolidated entity WGL Holdings and all of its subsidiaries, including Washington Gas, a distinct registrant that is a wholly owned subsidiary of WGL Holdings.

Effective November 1, 2000, Washington Gas and its subsidiaries became subsidiaries of WGL Holdings, a newly formed holding company that was established under the Public Utility Holding Company Act of 1935. At that time, all of the shares of common stock of Washington Gas, a regulated natural gas utility, were converted into an equal number of shares of common stock of WGL Holdings. WGL Holdings also owns all of the shares of common stock of Washington Gas’ former wholly owned subsidiaries (Crab Run Gas Company, Hampshire Gas Company and Washington Gas Resources Corporation) and its former 50-percent equity investment in Primary Investors, LLC.

Part I — Financial Information of this Quarterly Report on Form 10-Q includes separate consolidated financial statements (i.e., balance sheets, statements of income and statements of cash flows) for WGL Holdings and Washington Gas. The WGL Holdings financial statements (pages 4 through 7) present the consolidated financial position, results of operations and cash flows of WGL Holdings for the respective periods indicated, which reflect transactions that occurred after the November 1, 2000, corporate restructuring, as well as the consolidated financial position of Washington Gas prior to the corporate restructuring. The consolidated results of operations and financial position of Washington Gas immediately before the restructuring is essentially identical to the financial position and results of operations of WGL Holdings immediately after the corporate restructuring.

The consolidated financial statements for Washington Gas reflect the corporate restructuring which took place on November 1, 2000. This restructuring resulted in a change of ownership in several subsidiaries from Washington Gas to WGL Holdings. The consolidated financial statements of Washington Gas include all pre-restructured transactions of the formerly owned subsidiaries and exclude all post-restructured transactions since such transactions are properly reflected in the financial statements of WGL Holdings. The restructuring did not affect the Consolidated Balance Sheets for Washington Gas, presented herein, because there was no subsidiary ownership on the respective dates of those balance sheets. The Consolidated Statements of Income and Consolidated Statements of Cash Flows of Washington Gas reflect transactions of the wholly owned subsidiaries of Washington Gas for the month of October 2000. Thereafter, such transactions are excluded from the Consolidated Statements of Income and Consolidated Statements of Cash Flows because Washington Gas no longer owned the subsidiaries. Such transactions after October 2000 are reflected in the financial statements of WGL Holdings. The October 2000 transactions do not have a material impact on the financial statements of Washington Gas or on the variations between the two periods with respect to comparisons of the financial statements for the various periods.

-3-

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WGL Holdings, Inc.
CONSOLIDATED BALANCE SHEETS

June 30,

September 30

(Thousands)

2002

2001

ASSETS

(Unaudited)

Property, Plant and Equipment

At original cost

2,441,111

2,340,410

Accumulated depreciation and amortization

(862,074

)

(820,663

)

Net Property, Plant and Equipment

1,579,037

1,519,747

Current Assets

Cash and cash equivalents

8,449

12,104

Accounts receivable

196,725

152,914

Gas costs due from customers

21,793

58,718

Allowance for doubtful accounts

(16,713

)

(19,539

)

Accrued utility revenues

8,548

15,180

Materials and supplies principally at average cost

13,493

14,230

Storage gas at cost (first-in, first-out)

54,349

135,762

Deferred income taxes

15,800

—

Other prepayments principally taxes

12,809

19,462

Exchange gas imbalance unregulated operations

605

Other

1,756

3,063

Total Current Assets

317,060

392,499

Deferred Charges and Other Assets

Regulatory assets

73,470

98,323

Equity in 50%-owned residential HVAC investment, excluding tax benefits (Note 4)

—

10,802

Prepaid qualified pension benefits

53,586

38,844

Other

32,723

20,898

Total Deferred Charges and Other Assets

159,779

168,867

Total Assets

2,055,876

2,081,113

CAPITALIZATION AND LIABILITIES

Capitalization

Common shareholders’ equity

804,432

788,253

Washington Gas Light Company Preferred stock

28,173

28,173

Long-term debt (Note 2)

629,599

584,370

Total Capitalization

1,462,204

1,400,796

Current Liabilities

Current maturities of long-term debt

56,749

48,179

Notes payable

15,714

134,052

Accounts payable

110,244

116,822

Wages payable

14,740

15,358

Accrued interest

13,921

3,258

Dividends declared

15,743

15,621

Customer deposits and advance payments

9,543

8,657

Gas costs due to customers

998

1,862

Deferred income taxes

—

3,539

Accrued taxes

40,508

13,129

Other

929

459

Total Current Liabilities

279,089

360,936

Deferred Credits

Unamortized investment tax credits

16,963

17,640

Deferred income taxes

195,944

209,292

Accrued pensions and benefits

33,718

34,840

Other

67,958

57,609

Total Deferred Credits

314,583

319,381

Total Capitalization and Liabilities

2,055,876

2,081,113

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.

WGL Holdings, Inc.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


					Three Months Ended
					June 30,

(Thousands, Except Per Share Data)					2002			2001

UTILITY OPERATIONS
	Operating Revenues				$	163,696		$	182,377
		Less: Cost of gas				82,839			101,071
				Revenue taxes		3,240			4,468

				Utility Net Revenues		77,617			76,838

	Operating Expenses
		Operation				40,587			38,732
		Maintenance				11,109			9,365
		Depreciation and amortization				18,735			17,419
		General taxes				8,881			10,462
		Income tax (benefit)				(4,681	)		(4,039	)

				Utility Operating Expenses		74,631			71,939

				Utility Operating Income		2,986			4,899

NON-UTILITY OPERATIONS
	Operating Revenues
		Retail energy-marketing				135,532			82,709
		Heating, ventilating and air conditioning				14,489			16,182
		Other non-utility activities				475			432

				Non-Utility Operating Revenues		150,496			99,323

Equity Loss in 50%-Owned Residential HVAC Investment (Note 4)						(5,051	)		(25	)
Impairment of Residential HVAC Investment (Note 4)						(2,131	)		—

	Operating Expenses
			Operation expense			150,881			98,009
			Income tax (benefit) expense			(2,265	)		415

			Non-Utility Operating Expenses			148,616			98,424
				Non-Utility Operating (Loss) Income		(5,302	)		874

TOTAL OPERATING (LOSS) INCOME						(2,316	)		5,773
Other Income (Expenses)—Net						(327	)		(429	)

(LOSS) INCOME BEFORE INTEREST EXPENSE						(2,643	)		5,344

INTEREST EXPENSE
			Interest on long-term debt			10,749			10,356
			Other			463			1,479

				Total Interest Expense		11,212			11,835

DIVIDENDS ON WASHINGTON GAS PREFERRED STOCK						330			330

NET LOSS					$	(14,185	)	$	(6,821	)

AVERAGE COMMON SHARES OUTSTANDING						48,566			47,012

LOSS PER AVERAGE COMMON SHARE- BASIC AND DILUTED (Note 3)					$	(0.29	)	$	(0.15	)

DIVIDENDS DECLARED PER COMMON SHARE					$	0.3175		$	0.3150

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.

WGL Holdings, Inc.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Nine Months Ended

June 30,

(Thousands, Except Per Share Data)

2002

2001

UTILITY OPERATIONS

Operating Revenues

809,746

1,327,889

Less: Cost of gas

398,572

845,612

Revenue taxes

22,884

37,617

Utility Net Revenues

388,290

444,660

Operating Expenses

Operation

121,671

119,644

Maintenance

29,343

26,957

Depreciation and amortization

54,434

51,313

General taxes

26,952

29,534

Income tax expense

48,809

69,589

Utility Operating Expenses

281,209

297,037

Utility Operating Income

107,081

147,623

NON-UTILITY OPERATIONS

Operating Revenues

Retail energy-marketing

437,541

315,435

Heating, ventilating and air conditioning

47,261

58,419

Other non-utility activities

1,559

2,441

Non-Utility Operating Revenues

486,361

376,295

Equity Loss in 50%-Owned Residential HVAC Investment (Note 4)

(7,873)

(943)

Impairment of Residential HVAC Investment (Note 4)

(9,431)

—

Operating Expenses
Operation expense

480,595

371,742

Income tax (benefit) expense

(59

)

1,030

Non-Utility Operating Expenses

480,536

372,772

Non-Utility Operating (Loss) Income

(11,479)

2,580

TOTAL OPERATING INCOME

95,602

150,203

Other Income (Expenses)—Net

1,653

(5,190

)

INCOME BEFORE INTEREST EXPENSE

97,255

145,013

INTEREST EXPENSE

Interest on long-term debt

32,110

30,870

Other

2,343

7,690

Total Interest Expense

34,453

38,560

DIVIDENDS ON WASHINGTON GAS PREFERRED STOCK

990

990

NET INCOME

61,812

105,463

AVERAGE COMMON SHARES OUTSTANDING

48,562

46,693

EARNINGS PER AVERAGE COMMON SHARE BASIC AND DILUTED (Note 3)

1.27

2.26

DIVIDENDS DECLARED PER COMMON SHARE

0.95

0.94

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.

WGL Holdings, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


				Nine Months Ended
				June 30,

(Thousands)				2002			2001

OPERATING ACTIVITIES
Net income				$	61,812		$	105,463
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Depreciation and amortization (a)					58,546			55,039
	Deferred income taxes—net				(13,157	)		33,880
	Amortization of investment tax credits				(677	)		(674	)
	Accrued/deferred pension (income)				(10,550	)		(12,168	)
	Allowance for funds used during construction				—			(376	)
	Equity loss in 50%-owned residential HVAC investment				7,873			943
	Impairment of residential HVAC investment				9,431			--
	Other non-cash expense (credits)—net, including gains and losses on investing activities				420			(320	)

					113,698			181,787
CHANGES IN ASSETS AND LIABILITIES
	Accounts receivable and accrued utility revenues				(40,005	)		(105,491	)
	Gas costs due from/to customers—net				36,061			(6,506	)
	Storage gas				81,413			47,330
	Other prepayments—principally taxes				6,653			(1,836	)
	Accounts payable				(7,178	)		(13,593	)
	Wages payable				(618	)		819
	Customer deposits and advance payments				886			(2,814	)
	Accrued taxes				27,379			33,509
	Accrued interest				10,663			10,625
	Deferred purchased gas cost—net				9,324			(58,402	)
	Exchange gas imbalance—unregulated operations				554			10,230
	Other—net				5,178			2,313

			Net Cash Provided by Operating Activities		244,008			97,971

FINANCING ACTIVITIES
		Common stock issued			—			52,664
	Long-term debt issued				83,398			85,442
	Long-term debt retired				(29,623	)		(1,544	)
	Debt issuance costs				(732	)		(557	)
	Notes payable				(118,338	)		(102,930	)
	Dividends on common stock				(46,014	)		(43,462	)
	Other financing activities				386			1,039

			Net Cash Used in Financing Activities		(110,923	)		(9,348	)

INVESTING ACTIVITIES
	Capital expenditures				(115,389	)		(81,182	)
	50%-owned residential HVAC investment (Note 4)				(4,814	)		(750	)
	Other investing activities				(16,537	)		(16,467	)

			Net Cash Used in Investing Activities		(136,740	)		(98,399	)

DECREASE IN CASH AND CASH EQUIVALENTS (b)					(3,655	)		(9,776	)
Cash and Cash Equivalents at Beginning of Period (b)					12,104			24,336

Cash and Cash Equivalents at End of Period (b)				$	8,449		$	14,560

(a) Includes amounts charged to other accounts.

(b) Cash equivalents are highly liquid investments, maturing in three months or less when purchased.


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
	Income taxes paid	$	31,182	$	17,510
	Interest paid	$	23,112	$	28,048

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.

Washington Gas Light Company
CONSOLIDATED BALANCE SHEETS


		June 30,			September 30,
(Thousands)		2002			2001

		(Unaudited)
ASSETS
	Property, Plant and Equipment
	At original cost	$	2,417,121		$	2,317,566
	Accumulated depreciation and amortization		(846,978	)		(806,730	)

	Net Property, Plant and Equipment		1,570,143			1,510,836

	Current Assets
	Cash and cash equivalents		7,914			7,537
	Accounts receivable (Note 7)		91,540			69,481
	Gas costs due from customers		21,793			58,718
	Allowance for doubtful accounts		(13,984	)		(17,279	)
	Accrued utility revenues		8,548			15,180
	Materials and supplies—principally at average cost		13,263			14,000
	Storage gas—at cost (first-in, first-out)		39,506			109,674
	Receivables from associated companies (Note 7)		15,458			8,500
	Deferred income taxes		14,592			--
	Other prepayments—principally taxes		10,568			16,641

	Total Current Assets		209,198			282,452

	Deferred Charges and Other Assets
	Regulatory assets		73,470			98,323
	Prepaid qualified pension benefits		53,319			38,647
	Other		28,891			18,656

	Total Deferred Charges and Other Assets		155,680			155,626

	Total Assets	$	1,935,021		$	1,948,914

CAPITALIZATION AND LIABILITIES
	Capitalization
	Common shareholders’ equity	$	768,605		$	723,886
	Preferred stock		28,173			28,173
	Long-term debt (Note 2)		629,468			584,165

	Total Capitalization		1,426,246			1,336,224

	Current Liabilities
	Current maturities of long-term debt		56,654			47,937
	Notes payable		—			98,724
	Accounts payable (Note 7)		43,885			74,597
	Wages payable		14,418			14,928
	Accrued interest		13,925			3,262
	Dividends declared		15,761			15,627
	Customer deposits and advance payments		9,543			8,657
	Payables to associated companies (Note 7)		—			14,700
	Gas costs due to customers		998			1,862
	Deferred income taxes		—			4,114
	Accrued taxes		36,436			8,364
	Other		29			166

	Total Current Liabilities		191,649			292,938

	Deferred Credits
	Unamortized investment tax credits		16,934			17,606
	Deferred income taxes		200,460			210,469
	Accrued pensions and benefits		33,588			34,730
	Other		66,144			56,947

	Total Deferred Credits		317,126			319,752

	Total Capitalization and Liabilities	$	1,935,021		$	1,948,914

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.

Washington Gas Light Company
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


					Three Months Ended
					June 30,

(Thousands)					2002			2001

UTILITY OPERATIONS
	Operating Revenues (Note 7)				$	165,793		$	186,815
		Less: Cost of gas (Note 7)				84,936			105,509
		Revenue taxes				3,240			4,468

				Utility Net Revenues		77,617			76,838

	Operating Expenses
		Operation (Note 7)				41,104			39,190
		Maintenance				11,022			9,289
		Depreciation and amortization				18,569			17,255
		General taxes				8,811			10,352
		Income tax (benefit)				(4,765	)		(4,249	)

			Utility Operating Expenses			74,741			71,837

				Utility Operating Income		2,876			5,001

NON-UTILITY OPERATIONS
	Operating Revenues
		Other non-utility				673			312

			Non-Utility Operating Revenues			673			312

	Operating Expenses
		Operation expenses				7,304			675
		Income tax (benefit)				(2,935	)		(231	)

			Non-Utility Operating Expenses			4,369			444

				Non-Utility Operating Loss		(3,696	)		(132	)

TOTAL OPERATING (LOSS) INCOME						(820	)		4,869
Other Income (Expenses)—Net						(1,452	)		(404	)

(LOSS) INCOME BEFORE INTEREST EXPENSE						(2,272	)		4,465

INTEREST EXPENSE
		Interest on long-term debt				10,749			10,317
		Other (credits) expenses—Net				(432	)		1,558

			Total Interest Expense			10,317			11,875

NET LOSS						(12,589	)		(7,410	)
DIVIDENDS ON PREFERRED STOCK						330			330

NET LOSS APPLICABLE TO COMMON STOCK					$	(12,919	)	$	(7,740	)

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.

Washington Gas Light Company
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Nine Months Ended

June 30,

(Thousands)

2002

2001

UTILITY OPERATIONS

Operating Revenues (Note 7)

821,478

1,338,468

Less: Cost of gas (Note 7)

410,304

856,191

Revenue taxes

22,884

37,617

Utility Net Revenues

388,290

444,660

Operating Expenses

Operation (Note 7)

123,211

120,921

Maintenance

29,172

26,804

Depreciation and amortization

53,937

50,878

General taxes

26,716

29,250

Income tax expense

48,497

69,270

Utility Operating Expenses

281,533

297,123

Utility Operating Income

106,757

147,537

NON-UTILITY OPERATIONS

Operating Revenues

Retail energy-marketing

—

17,755

Heating, ventilating and air conditioning

—

5,066

Other non-utility activities

1,601

2,321

Non-Utility Operating Revenues

1,601

25,142

Equity Loss in 50%-Owned Residential HVAC Investment

—

(167

)

Operating Expenses

Operation expenses

8,042

24,755

Income tax (benefit)

(2,914

)

(252

)

Non-Utility Operating Expenses

5,128

24,503

Non-Utility Operating (Loss) Income

(3,527

)

472

TOTAL OPERATING INCOME

103,230

148,009

Other Income (Expenses)—Net

2,162

(4,553

)

INCOME BEFORE INTEREST EXPENSE

105,392

143,456

INTEREST EXPENSE

Interest on long-term debt

32,110

30,831

Other

1,978

7,773

Total Interest Expense

34,088

38,604

NET INCOME

71,304

104,852

DIVIDENDS ON PREFERRED STOCK

990

990

NET INCOME APPLICABLE TO COMMON STOCK

70,314

103,862

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.

Washington Gas Light Company
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


			Nine Months Ended
			June 30,

(Thousands)			2002			2001

OPERATING ACTIVITIES
Net income			$	71,304		$	104,852
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
	Depreciation and amortization (a)			57,195			54,244
	Deferred income taxes net			(9,915	)		40,529
	Amortization of investment tax credits			(672	)		(670	)
	Accrued/deferred pension (income)			(10,479	)		(12,095	)
	Allowance for funds used during construction			—			(376	)
	Equity loss in 50%-owned residential HVAC investment			—			167
	Other non-cash charges expense (credits) net, including gains and losses on investing activities			698			(320	)

				108,131			186,331
CHANGES IN ASSETS AND LIABILITIES
	Accounts receivable and accrued utility revenues			(25,680	)		(63,431	)
	Gas costs due from/to customers net			36,061			(6,506	)
	Storage gas			70,168			62,214
	Other prepayments—principally taxes			6,073			(269	)
	Accounts payable			(46,012	)		(25,709	)
	Wages payable			(510	)		438
	Customer deposits and advance payments			886			(2,814	)
	Accrued taxes			28,072			27,764
	Accrued Interest			10,663			10,625
	Deferred purchased gas costs—net			9,324			(58,402	)
	Exchange gas imbalance-unregulated operations			—			(2,405	)
	Other—net			6,722			3,293

		Net Cash Provided by Operating Activities		203,898			131,129

FINANCING ACTIVITIES
	Paid-in capital			20,186			52,664
	Long-term debt issued			83,326			85,157
	Long-term debt retired			(29,413	)		(1,387	)
	Debt issuance costs			(1,153	)		(486	)
	Notes payable—net			(98,724	)		(128,127	)
	Dividends on common and preferred stock			(46,992	)		(44,439	)
	Other financing activities			238			392

		Net Cash Used in Financing Activities		(72,532	)		(36,226	)

INVESTING ACTIVITIES
	Capital expenditures			(114,452	)		(80,678	)
	Cash transfer related to formation of holding company (See Note 7)			—			(11,797	)
	Other investing activities			(16,537	)		(16,467	)

		Net Cash Used in Investing Activities		(130,989	)		(108,942	)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (b)				377			(14,039	)
Cash and Cash Equivalents at Beginning of Period (b)				7,537			24,336

Cash and Cash Equivalents at End of Period(b)			$	7,914		$	10,297

(a)		Includes amounts charged to other accounts.

(b)		Cash equivalents are highly liquid investments, maturing in three months or less when purchased.


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid	$	24,106	$	14,169
Interest paid	$	22,646	$	27,625

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.

WGL Holdings, Inc. and
Washington Gas Light Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1—GENERAL

Effective November 1, 2000, Washington Gas Light Company (Washington Gas or the regulated utility) and its subsidiaries became subsidiaries of WGL Holdings, Inc. (WGL Holdings or the Company), a newly formed holding company that was established under the Public Utility Holding Company Act of 1935. At that time, all of the shares of common stock of Washington Gas, a regulated natural gas utility, were converted into an equal number of shares of common stock of WGL Holdings. WGL Holdings also owns all of the shares of common stock of Washington Gas’ former wholly owned subsidiaries (Crab Run Gas Company, Hampshire Gas Company and Washington Gas Resources Corporation), and its former 50-percent equity investment in Primary Investors, LLC (Primary Investors). Refer to WGL Holdings fiscal year 2001 Annual Report on Form 10-K for additional details about this corporate restructuring.

This Quarterly Report on Form 10-Q is a combined report of WGL Holdings and Washington Gas. Consolidated Financial Statements included in this Quarterly Report on Form 10-Q are presented as follows:

WGL Holdings For all periods reported in this Quarterly Report on Form 10-Q prior to November 1, 2000, the consolidated financial position, results of operations and cash flows reflect Washington Gas and its subsidiaries. The consolidated financial position, results of operations and cash flows of Washington Gas immediately before the November 1, 2000, corporate restructuring are essentially identical to the consolidated financial position, results of operations and cash flows of WGL Holdings immediately after the November 1, 2000, corporate restructuring.

Washington Gas For all periods reported in this Quarterly Report on Form 10-Q, the Washington Gas consolidated financial statements present the financial position, results of operations and cash flows reported for Washington Gas. Washington Gas’ consolidated statements also include the results of operations and cash flows of its former wholly owned subsidiaries and 50-percent equity investment in Primary Investors prior to the November 1, 2000, corporate restructuring.

These notes are an integral part of the accompanying consolidated financial statements of WGL Holdings and its subsidiaries, including Washington Gas. Except where otherwise noted, these Notes to Consolidated Financial Statements apply equally to WGL Holdings and Washington Gas. Due to the seasonal nature of Washington Gas’ business, the results of operations shown do not necessarily represent the expected results of either WGL Holdings or Washington Gas for the entire fiscal year ending September 30, 2002.

BASIS OF PRESENTATION AND USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

The interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Therefore, certain information and footnote disclosures accompanying annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) in the United States are

omitted in this interim report pursuant to the SEC rules and regulations. The interim consolidated financial statements and notes thereto should be read in conjunction with the combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2001.

The accompanying unaudited consolidated financial statements for WGL Holdings and Washington Gas reflect all normal recurring adjustments that are necessary, in the opinion of management, to present fairly the results of operations in accordance with GAAP.

CRITICAL ACCOUNTING POLICIES

The following accounting policies are the significant policies used by the Company and its subsidiaries in the preparation of their financial statements. The policies shown herein do not reflect all of the Company’s accounting policies that would normally be disclosed in connection with the preparation of the Company’s annual financial statements. Reference is made to the Company’s annual report on Form 10-K for a complete listing and description of all significant accounting policies.

Consolidation of Financial Statements

The consolidated financial statements include the accounts of the Company and its subsidiaries during the periods reported. Inter-company transactions have been eliminated. WGL Holdings accounts for a 50 percent investment in a limited liability corporation using the equity method. Certain amounts in financial statements of prior years have been reclassified to conform to the presentation of the current fiscal year.

Use of Estimates in the Preparation of Financial Statements

In accordance with United States GAAP, the Company’s management makes certain estimates and assumptions regarding 1) reported amounts of assets and liabilities, 2) disclosure of contingent assets and liabilities at the date of the financial statements; and 3) reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Utility Revenue and Cost of Gas Recognition

For regulated deliveries of natural gas, Washington Gas reads meters and bills customers on a cycle basis. It accrues revenues for gas that has been delivered but not yet billed at the end of an accounting period.

The regulated utility’s jurisdictional tariffs contain mechanisms that provide for the recovery of the invoice cost of gas applicable to firm customers. Under these mechanisms, the regulated utility periodically adjusts its firm customers’ rates to reflect increases and decreases in the invoice cost of gas. Annually, the regulated utility reconciles the difference between the total gas costs collected from firm customers and the invoice cost of gas. The regulated utility defers any excess or deficiency and subsequently either recovers it from, or refunds it to, customers over the following twelve-month period. The “Gas costs due from Customers” and Gas costs due to customers” captions, reported in the Consolidated Balance Sheets, reflect amounts related to these reconciliations.

Regulated Operations

The Company accounts for its regulated operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation, as amended and supplemented. SFAS No. 71 sets specific GAAP for companies where independent third-party regulators determine their rates. When setting rates, regulators often make decisions, the economics of which require companies to record costs as expenses, (or defer costs or revenues), in different periods than may be appropriate for unregulated enterprises. When this situation occurs, the regulated utility may recognize a regulatory asset, thus deferring the associated costs on the balance sheet and subsequently records them as expenses on the income statement as it collects revenues through customers’ rates. Further, regulators can also impose regulatory liabilities upon a company for amounts previously collected from customers.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, the Company recognizes deferred income taxes for all temporary differences between the financial statement and tax bases of assets and liabilities at currently enacted income tax rates.

SFAS No. 109 also requires recognition of the additional deferred income tax assets and liabilities for temporary differences where regulators prohibit deferred income tax treatment for ratemaking purposes of the regulated utility. Regulatory assets or liabilities corresponding to such additional deferred tax assets or liabilities may be recorded to the extent the company believes they will be recoverable from or payable to customers through the ratemaking process. Amounts applicable to income taxes due from and due to customers primarily represent differences between the book and tax basis of net utility plant in service.

Derivative Activities

The Company applies the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative instruments and Certain Hedging Activities. SFAS No. 133, as amended, requires derivative instruments, including certain derivative instruments embedded in other contracts, to be recorded at fair value as either an asset or a liability. A change in a derivative’s fair value is recorded in earnings, unless it meets specific hedge accounting criteria. Special accounting for qualifying hedges allows derivative’s gain and loss to offset related results on the hedged item in the income statement or be recorded in other comprehensive income and requires that the company formally document, designate and assess the effectiveness of transactions that receive hedge accounting.

NEW ACCOUNTING STANDARDS

In April of 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” The Statement updates, clarifies, and simplifies existing accounting pronouncements. The provisions of this Statement are effective for fiscal years beginning after May 15, 2002.

In July 2002, FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated December 31, 2002.

Management is reviewing the effects of adopting these standards and does not believe that they will have a material effect, if any, on WGL Holdings’ financial statements.

RECLASSIFICATIONS

Certain amounts in the prior year’s financial statements were reclassified to conform to current year presentation.

NOTE 2—LONG-TERM DEBT

UNSECURED MEDIUM-TERM NOTES

In June 2002, Washington Gas issued a $25 million unsecured Medium-Term Note (MTN) at a fixed interest rate of 5.9 percent, which matures in 2012. Washington Gas has the option to redeem the MTN at any time prior to maturity, at the greater of 100 percent of the principal amount or the present value of the remaining scheduled payments of the MTN to be redeemed, discounted to the redemption date on a semiannual basis at the comparable treasury rate, plus 20 basis points, plus accrued interest to the date of redemption.

NOTE 3 COMMON STOCK AND EARNINGS PER SHARE

EARNINGS PER SHARE

Basic earnings per average common share (EPS) is computed by dividing net income by the weighted-average number of common shares outstanding for each period presented. Diluted EPS assumes the issuance of common shares pursuant to stock-based compensation plans at the beginning of the applicable period. The following tables show the computation of basic and diluted EPS of WGL Holdings for the three months and nine months ended June 30, 2002 and 2001.

Basic and Diluted Earnings Per Average Common Share


				Net					Per Share
				Loss			Shares		Amount
For the Three Months Ended June 30, 2002
	Basic EPS:
		Net Loss		$	(14,185	)		48,566	$	(0.29	)
		Effect of Dilutive Securities:*
			Stock-Based Compensation Plans		—			—		—

	Diluted EPS:
		Net Loss		$	(14,185	)		48,566	$	(0.29	)

For the Three Months Ended June 30, 2001
	Basic EPS:
		Net Loss		$	(6,821	)		47,012	$	(0.15	)
		Effect of Dilutive Securities:*
			Stock-Based Compensation Plans		—			—		—

	Diluted EPS:
		Net Loss		$	(6,821	)		47,012	$	(0.15	)

*Excluded because the effect would be antidilutive

Basic and Diluted Earnings Per Average Common Share


				Net				Per Share
				Income		Shares		Amount
For the Nine Months Ended June 30, 2002
	Basic EPS:
		Net Income		$	61,812		48,562	$	1.27
		Effect of Dilutive Securities:
			Stock-Based Compensation Plans		—		87		—

	Diluted EPS:
		Net Income		$	61,812		48,649	$	1.27

For the Nine Months Ended June 30, 2001
	Basic EPS:
		Net Income		$	105,463		46,693	$	2.26
		Effect of Dilutive Securities:
			Stock-Based Compensation Plans		—		71		—

	Diluted EPS:
		Net Income		$	105,463		46,764	$	2.26

NOTE 4—INVESTMENT IN RESIDENTIAL HVAC BUSINESS—PRIMARY INVESTORS

In August 1999, Washington Gas and Thayer Capital Partners (Thayer) formed Primary Investors, a limited liability company. Effective November 1, 2000, in connection with the corporate restructuring, Washington Gas transferred its ownership interest in Primary Investors to WGL Holdings.

Primary Investors, through its wholly owned subsidiary, Primary Service Group, LLC (PSG), sells, installs, repairs and maintains heating, ventilating and air conditioning (HVAC) equipment in the residential and light commercial markets in the District of Columbia and parts of Maryland and Virginia. WGL Holdings and Thayer each own fifty percent of Primary Investors and each has an equal number of representatives on Primary Investors’ Board of Managers.

Primary Investors has a loan from a commercial bank with an outstanding balance at June 30, 2002 of $6.75 million. WGL Holdings has neither guaranteed nor cosigned this loan and, accordingly, has no obligation to repay this loan. However, WGL Holdings recognizes that, to preserve shareholder value, it could elect to pay this loan or a part thereof.

WGL Holdings is currently negotiating with Thayer to rearrange its business relationship. The Company does not intend to make further commitments to Primary Investors beyond the amounts recorded in its financial statements as of June 30, 2002 for costs incurred as of that date. In the quarter ended June 30, 2002, the Company recorded operating losses and other incurred obligations associated with Primary Investors of $5.1 million.

In the quarter ended June 30, 2002, the Company also recorded an additional impairment provision of $2.1 million to reflect a permanent decline in value. This impairment provision, and previous impairment provisions and operating losses have eliminated the book value of the Company’s investment in Primary Investors. Furthermore, estimated remaining obligations that have been incurred have been recorded. The Company recorded income tax benefits of $2.1 million in the quarter ended June 30, 2002.

NOTE 5—DERIVATIVE ACTIVITY

Effective October 1, 2000, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), as amended by Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS No. 133, as amended, requires derivative instruments, including certain derivative instruments embedded in other contracts, to be recorded at fair value as either an asset or a liability. Changes in the derivative’s fair value would be recorded in earnings, unless the derivative meets specific hedge accounting criteria. Special accounting for qualifying hedges allows derivative gains and losses to offset related results on the hedged item in the income statement or to be recorded in other comprehensive income. Furthermore, this accounting requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company has not designated any contracts as cash flow or fair value hedges under the SFAS’s.

On April 1, 2002, Washington Gas implemented an interpretation issued by the FASB’s Derivatives Implementation Group (DIG), DIG Issue C16, which changed the definition of normal purchases and sales included in SFAS No. 133. Previously, certain derivative commodity contracts for the physical delivery of purchase and sale quantities transacted in the normal course of business were exempt from the requirements of SFAS No. 133 under the normal purchases and sales exception, and thus were not marked to market and reflected on the balance sheet. DIG Issue C16 disallowed normal purchases and sales treatment for commodity contracts (other than power) that contain volumetric variability or optionality. WGL determined that three of its derivative contracts for the purchase of natural gas no longer qualified for normal purchases and sales treatment under these interpretations. Beginning April 1, 2002, these three contracts are presented on the balance sheet at fair value, as a liability of approximately $2.0 million and a corresponding regulatory asset. Because the contracts relate to the acquisition of natural gas under a hedging program providing for recovery of the actual cost, which has been approved by the regulatory bodies in Maryland, Virginia, and the District of Columbia, the offsetting mark to market amounts are recorded as a regulatory asset.

During the nine months ended June 30, 2002, Washington Gas Energy Services, Inc. (WGEServices), the Company’s retail energy-marketing segment, entered into call and put options for the purchase and sale of natural gas in order to mitigate the price risk that could impact the cost of gas, gross margins and earnings. The contracts qualify as

derivative instruments under the definitions included in SFAS No. 133. However, in accordance with the standards outlined in SFAS No. 133 they do not qualify as hedges and must be adjusted periodically to a market price called the fair value. As a result, the options are recognized at their fair value in the Company’s balance sheet under the caption “Exchange gas imbalance-unregulated operations” and the related gains and loses are reflected in the earnings of the retail energy-marketing segment. The Company measures fair value by reference to market quotes. For the third quarter ended June 30, 2002, this segment reflects a $0.2 million loss associated with these options contracts. For the nine months ended June 30, 2002, this segment recorded a $0.3 million loss associated with these option contracts. WGES had no option contracts in the first nine months of fiscal year 2001.

NOTE 6—OPERATING SEGMENT REPORTING

WGL Holdings reports three operating segments, 1) regulated utility; 2) retail energy-marketing; and 3) HVAC activities. In addition, other transactions not directly related to one of these segments are accumulated in a non-utility segment called other activities.

With over 93 percent of WGL Holdings’ assets, the regulated utility segment is its core business. Represented almost entirely by Washington Gas, the regulated utility segment provides regulated gas distribution services (including the purchase and delivery of natural gas, meter reading, customer based services, call center operations, bill preparation and payment processing) to customers in metropolitan Washington, D.C. and parts of Maryland and Virginia. In addition, the regulated utility segment also includes the operation of an underground natural gas storage facility regulated by the Federal Energy Regulatory Commission. The sole customer of this storage facility is Washington Gas.

Through a non-regulated subsidiary, WGEServices, the retail energy-marketing segment, sells natural gas and electricity directly to customers, both inside and outside Washington Gas’ traditional service territory, in competition with other unregulated gas and electricity marketers. Through two other subsidiaries, Washington Gas Energy Systems, Inc. and American Combustion Industries, Inc., and through the Company’s investment in Primary Investors, the HVAC segment sells, designs, renovates and services mechanical heating, ventilating and air conditioning systems for commercial, governmental and residential customers.

The following table presents operating segment information.


			OPERATING SEGMENT FINANCIAL INFORMATION

									Non-Utility Operations

			Regulated			Retail Energy						Other						Eliminations/
(Thousands)			Utility			Marketing			HVAC			Activities			Total			Other			Consolidated

Three Months Ended June 30, 2002
Total Revenues			$	166,482		$	135,532		$	14,489		$	475		$	150,496		$	(2,786	)	$	314,192
Operating Expenses
	Depreciation and Amortization			18,735			132			162			154			448			—			19,183
	Operating Expenses(a)			149,442			131,205			10,610			8,618			150,433			(2,786	)		297,089
	Income Tax (Benefit)Expense			(4,681	)		1,366			(403	)		(3,228	)		(2,265	)		—			(6,946	)
		Total Operating Expenses		163,496			132,703			10,369			5,544			148,616			(2,786	)		309,326
Equity in Net Loss of Affiliate				—			—			(5,051	)		—			(5,051	)		—			(5,051	)
Residential HVAC impairment				—			—			(2,131	)		—			(2,131	)		—			(2,131	)

Operating Income (Loss)				2,986			2,829			(3,062	)		(5,069	)		(5,302	)		—			(2,316	)
Interest Expense – Net				10,902			291			19			—			310			—			11,212
Other Non-Operating Inc. (Exp.)(b)				(110	)		—			282			—			282			(499	)		(327	)
Dividends on Washington Gas
	Preferred Stock			330			—			—			—			—			—			330

Net (Loss) Income			$	(8,356	)	$	2,538		$	(2,799	)	$	(5,069	)	$	(5,330	)	$	(499	)	$	(14,185	)

Total Assets			$	1,926,662		$	106,576		$	25,779		$	908		$	133,263		$	(4,049	)	$	2,055,876

Capital Expenditures/Investments			$	45,915		$	560		$	2,726		$	—		$	3,286		$	—		$	49,201

Three Months Ended June 30, 2001
Total Revenues			$	187,462		$	82,709		$	16,182		$	432		$	99,323		$	(5,085	)	$	281,700
Operating Expenses
Depreciation and Amortization				17,419			104			(2	)		48			150			—			17,569
Operating Expenses(a)				169,183			82,739			14,555			565			97,859			(5,085	)		261,957
Income Tax (Benefit) Expense				(4,039	)		(79	)		575			(81	)		415			—			(3,624	)

		Total Operating Expenses		182,563			82,764			15,128			532			98,424			(5,085	)		275,902
Equity in Net Loss of Affiliate				—			—			(25	)		—			(25	)		—			(25	)

Operating Income (Loss)				4,899			(55	)		1,029			(100	)		874			—			5,773
Interest Expense – Net				11,042			160			295			9			464			329			11,835
Other Non-Operating Inc. (Exp.)(b)				(234	)		—			83			—			83			(278	)		(429	)
Dividends on Washington Gas
	Preferred Stock			330			—			—			—			—			—			330
Net (Loss) Income			$	(6,707	)	$	(215	)	$	817		$	(109	)	$	493		$	(607	)	$	(6,821	)

Total Assets			$	1,957,506		$	78,020		$	45,862		$	17,116		$	140,998		$	143		$	2,098,647

Capital Expenditures/Investments			$	32,308		$	1,176		$	(32	)	$	(123	)	$	1,021		$	—		$	33,329

(a)		Includes cost of gas and revenue taxes during all reported periods. (b) The amounts reported for Other Non-Operating Income (Expense) are net of applicable income taxes.

(b)		The amounts reported for Other Non-Operating Income (Expense) are net of applicable income taxes.


			OPERATING SEGMENT FINANCIAL INFORMATION

							Non-Utility Operations

				Regulated			Retail Energy						Other							Eliminations/
(Thousands)				Utility			Marketing			HVAC			Activities				Total			Other			Consolidated

Nine Months Ended June 30, 2002
Total Revenues				$	823,493		$	437,541		$	47,261		$	1,559		$	486,361		$	(13,747	)	$	1,296,107
Operating Expenses
	Depreciation and Amortization				54,434			356			464			464			1,284			—			55,718
	Operating Expenses(a)				613,169			429,038			40,746			9,527			479,311			(13,747	)		1,078,733
	Income Tax Expense (Benefit)				48,809			2,581			640			(3,280	)		(59	)		—			48,750

		Total Operating Expenses			716,412			431,975			41,850			6,711			480,536			(13,747	)		1,183,201

Equity in Net Loss of Affiliate					—			—			(7,873	)		—			(7,873	)		—			(7,873	)
Residential HVAC Impairment					—			—			(9,431	)		—			(9,431	)		—			(9,431	)
Operating Income (Loss)					107,081			5,566			(11,893	)		(5,152	)		(11,479	)		—			95,602
Interest Expense – Net					33,381			771			288			13			1,072			—			34,453
Other Non-Operating Income (Exp.) (b)					2,163			—			374			—			374			(884	)		1,653
Dividends on Washington Gas
	Preferred Stock				990			—			—			—			—			—			990

Net Income (Loss)				$	74,873		$	4,795		$	(11,807	)	$	(5,165	)	$	(12,177	)	$	(884	)	$	61,812

Total Assets				$	1,926,662		$	106,576		$	25,779		$	908		$	133,263		$	(4,049	)	$	2,055,876

Capital Expenditures/Investments				$	114,626		$	410		$	5,168		$	(1	)	$	5,577		$	—		$	120,203

Nine Months Ended June 30, 2001
Total Revenues				$	1,341,533		$	315,435		$	58,419		$	2,441		$	376,295		$	(13,644	)	$	1,704,184
Operating Expenses
	Depreciation and Amortization				51,313			162			223			49			434			—			51,747
	Operating Expenses(a)				1,073,007			318,680			50,115			2,513			371,308			(13,644	)		1,430,671
	Income Tax Expense (Benefit)				69,589			(1,343	)		2,447			(73	)		1,031			—			70,620

		Total Operating Expenses			1,193,909			317,499			52,785			2,489			372,773			(13,644	)		1,553,038
Equity in Net Loss of Affiliate					—			—			(943	)		—			(943	)		—			(943	)

Operating Income (Loss)					147,624			(2,064	)		4,691			(48	)		2,579			—			150,203
Interest Expense – Net					36,436			498			1,001			53			1,552			572			38,560
Other Non-Operating Inc. (Exp.)(b)					(2,751	)		—			(47	)		—			(47	)		(2,392	)		(5,190	)
Dividends on Washington Gas
	Preferred Stock				990			—			—			—			—			—			990
Net Income (Loss)				$	107,447		$	(2,562	)	$	3,643		$	(101	)	$	980		$	(2,964	)	$	105,463

Total Assets				$	1,957,506		$	78,020		$	45,862		$	17,116		$	140,998		$	143		$	2,098,647

Capital Expenditures/Investments				$	79,835		$	1,182		$	915	(d)	$	—		$	2,097		$	—		$	81,932	(c)

(a)		Includes cost of gas and revenue taxes during all reported periods.

(b)		The amounts reported for Other Non-Operating Income (Expense) are net of applicable income taxes.

(c)		The consolidated capital expenditures and investments include capital expenditures of $81,182 and Primary investments of $750 for the quarter ended June 30, 2001

(d)		The capital expenditures and investments for the HVAC segment include capital expenditures of $165 and Primary investments of $750 for the nine months ended June 30, 2001

NOTE 7 – TRANSACTIONS BETWEEN WASHINGTON GAS AND AFFILIATES

Washington Gas and other subsidiaries of WGL Holdings engage in transactions with each other during the ordinary course of business. All of these inter-company transactions and balances have been eliminated from the consolidated financial statements of WGL Holdings. In addition, all such transactions between Washington Gas and its affiliates that occurred prior to the November 1, 2000 restructuring have similarly been eliminated from the consolidated financial statements of Washington Gas.

In compliance with GAAP, transactions between Washington Gas and its affiliates which occurred after the November 1, 2000 restructuring, as well as inter-company balances remaining on Washington Gas’ balance sheet on June 30, 2002, have not been eliminated from Washington Gas’ financial statements. Because of the relatively small and immaterial size and number of these transactions, these transactions are not disclosed on the face of the Washington Gas consolidated financial statements.

Washington Gas provides administrative and general support to affiliates and has filed consolidated tax returns, which include affiliated taxable transactions. The actual cost of these services are billed to the appropriate affiliates and to the extent such billings are not yet paid, they are reflected in “Receivables from associated companies” on Washington Gas’ Consolidated Balance Sheets. Washington Gas does not recognize revenues or expenses associated with providing these services.

Washington Gas and its affiliates also borrow funds, and lend funds through the operation of a money pool. At June 30, 2002, the Washington Gas Consolidated Balance Sheet reflected a net total of $15.5 million of inter-company receivables and inter-company payables. All affiliated transactions, including these balances, were eliminated from the WGL Holdings Consolidated Balance Sheet in accordance with GAAP.

Additionally, Washington Gas provides gas balancing services related to storage, injections, withdrawals and deliveries to all unregulated energy marketers participating in the sale of natural gas on an unregulated basis through the choice programs that operate in its service territory. Washington Gas records revenues for these balancing services pursuant to tariffs approved by the appropriate regulatory bodies. In conjunction with such services, Washington Gas has charged an affiliate, WGEServices, $2.1 million for the quarter ended June 30, 2002. The related-party amounts have been eliminated in the Consolidated Financial Statements of WGL Holdings.

NOTE 8 – COMMITMENTS AND CONTINGENCIES

The Company has certain legal and administrative proceedings, incidental to the Company’s business that involve WGL Holdings and/or its subsidiaries. In the opinion of management, the company has recorded adequate provisions for probable losses related to these proceedings. The Company utilizes GAAP, including SFAS No. 5, Accounting for Contingencies. In connection with that accounting standard, material contingent liabilities must be disclosed when the final resolution of a contingent event is not known and or can not be quantified. There are two such pending items in connection with ongoing rate issues as follows:

District of Columbia Jurisdiction

An issue in a pending rate case in the District of Columbia is the appropriateness of the rate treatment of money collected from asset managers in connection with various asset management arrangements. Since Washington Gas began these asset management arrangements several years ago, it has recorded all fees applicable to District of Columbia operations as revenues and included such transactions in annual filings providing a statement of operations to the District of Columbia Public Service Commission (PSC of DC). One party in the current District of Columbia rate case, the Office of People’s Counsel (OPC), has asserted that the fees should be concurrently credited to ratepayers. The OPC further contends that the amount of such fees collected by Washington Gas in past periods, applicable to District of Columbia operations, should be refunded to ratepayers.

Washington Gas disagrees with the OPC on the treatment of the fees from the asset management arrangements and has presented evidence in the pending rate case supporting the appropriateness of its historical treatment of these fees. Furthermore, before the pending rate case, the OPC did not object to the treatment used by Washington Gas for asset management fees when the OPC had an opportunity to do so in the forum created by the PSC of DC for all parties to discuss and debate such issues. The amount of the fees related to District of Columbia operations since the inception of asset management arrangements is approximately $8.0 million. If the final order of the PSC of DC were to support the position of the OPC on this matter, Washington Gas may be required to refund the amounts previously

recorded in revenues, thus reducing net income after considering the related income tax effects.

Washington Gas believes its rate treatment has been appropriate. However, Washington Gas can not predict the outcome of this issue in the current rate case and has not provided any liability in its financial statements as of June 30, 2002, based on its view of the issue and the application of GAAP.

Virginia Jurisdiction

On June 14, 2002 Washington Gas filed a request with the State Corporation Commission of Virginia (SCC of VA) to increase rates by approximately $23.8 million. The requested increase will go into effect, subject to refund, on November 11, 2002.

In a separate but related matter, in accordance with an Order of the SCC of VA, Washington Gas has performed a depreciation study as of December 31, 2000, and an update as of December 31, 2001, to determine the adequacy of the current depreciation rates that it uses to record depreciation expense for property located in its Virginia jurisdiction. Washington Gas submitted the study to the Staff of the SCC of VA in the first quarter of fiscal year 2002. Since that time, Washington Gas and the Staff of the SCC of VA have had several informal discussions regarding the depreciation rates included in the originally submitted study and the effective date that should be used for recording depreciation expense utilizing any new rates.

The new depreciation rates that have been informally agreed upon by the Staff and the Company would increase annual depreciation expense by approximately $4.0 million. The Company has included the impact related to using new depreciation rates in its Virginia regulatory filing for increased base rates. If approved in the context of the pending rate proceeding, the impact of the higher depreciation expense would begin to be included in the regulated utility’s revenues in November 2002.

The Staff of the SCC of VA has informally indicated to the Company that they may issue a recommendation that new depreciation rates and the higher depreciation expense that corresponds to these new rates should be recorded earlier than the effective date of the base rate case that has been filed in Virginia. Washington Gas does not agree with the Staff’s informal position. Washington Gas has filed the rate case application discussed above taking the position that the new depreciation rates should be applied at the beginning of the period that base rates are implemented. If new depreciation rates must be applied, before the effect of such rates is included in new base rates, then there would be a mismatch in the level of depreciation expense recorded in the income statement versus the level of revenues being collected. This could result in a one-time charge to depreciation expense without a corresponding revenue adjustment, resulting in a reduction in net income, the timing of which is unclear and dependent upon the actions of the Staff of the SCC of VA and/or the SCC of VA. The Staff could formally recommend that Washington Gas implement new depreciation rates prior to the adjudication of the pending rate case. If that were to occur, the Company will have to determine at that time if any accounting is required for the difference between the current depreciation rates included in base rates and any new depreciation rates that the Staff of the SCC of VA proposes. The implementation date of any new depreciation rates may be an issue in the pending rate case and could ultimately be decided by the courts.

Washington Gas can not predict the outcome of this matter with any degree of certainty. The financial statements as of and for the periods ended June 30, 2002 do not reflect any modification of the depreciation rates that Washington Gas has been utilizing since it last received formal approval of depreciation rates by the SCC of VA.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain matters discussed in this report, excluding historical information, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the outlook for earnings, revenues and other future financial business performance or strategies and expectations. Forward-looking statements are typically identified by words such as, but not limited to, “estimates”, “expects”, “anticipates”, “intends”, “believes”, “plans” and similar expressions or future or conditional verbs such as “will”, “should”, “would” and “could”. Although the Company believes such forward-looking statements are based on reasonable assumptions, it cannot give assurance that every objective will be achieved. Forward-looking statements speak only as of today, and the Company assumes no duty to update them. The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: 1) economic, competitive, political and regulatory conditions and developments; 2) capital and energy commodity market conditions; 3) changes in relevant laws and regulations, including tax, environmental and employment laws and regulations; 4) weather conditions; 5) legislative, regulatory, and judicial mandates and decisions; 6) timing and success of business and product development efforts; 7) technological improvements; 8) the pace of deregulation efforts and the availability of other competitive alternatives; and 9) other uncertainties.

Such factors are difficult to predict accurately and are generally beyond the direct control of WGL Holdings, Inc.’s (WGL Holdings or the Company) or Washington Gas Light Company (Washington Gas or the regulated utility). Accordingly, while it believes that the assumptions are reasonable, WGL Holdings cannot ensure that all expectations and objectives will be realized. Readers are urged to use care and consider the risks, uncertainties and other factors that could affect the Company’s business as described in this Quarterly Report on Form 10-Q. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.

The Management’s Discussion and Analysis of Financial Condition and Results of Operations is divided into the following two sections:

WGL Holdings — This section describes the financial condition and results of operations of WGL Holdings and its subsidiaries on a consolidated basis. This section includes brief discussions of WGL Holdings’ regulated utility operations and non-utility operations. The majority of WGL Holdings’ operations are derived from the results of the regulated utility, Washington Gas. In addition, WGL Holdings is also impacted by the results of the non-utility operations. To obtain a complete understanding and review of all the details of the regulated utility operations, please refer to the Analysis of Operations for Washington Gas.

Washington Gas — This section comprises the vast majority of WGL Holdings’ regulated utility segment. As such, the financial condition and results of operations of Washington Gas’ utility operations and WGL Holdings regulated utility segment are essentially the same. Therefore, this section will focus on a more detailed description of the financial condition and results of operations of the regulated utility’s operations. This section will also describe any factors or results which are significantly different from those operations which are described in WGL Holdings’ Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Management’s Discussion and Analysis of Financial Condition and Results of Operations for both WGL Holdings and Washington Gas should be read in conjunction with the respective Company’s Consolidated Financial Statements and the combined Notes thereto.

WGL HOLDINGS, INC.

ANALYSIS OF RESULTS OF OPERATIONS-THREE MONTHS ENDED JUNE 30, 2002 VS. JUNE 30, 2001

CONSOLIDATED EARNINGS

For the three months ended June 30, 2002, the third quarter of its fiscal year, WGL Holdings reported a net loss of $14.2 million, or $0.29 per average common share. This compares to a net loss of $6.8 million, or $0.15 per average common share for the same quarter last fiscal year. A 3.3 percent increase in the average number of common shares outstanding reduced the loss per average common share in the current quarter by $0.01 compared to the same quarter last year.

REGULATED UTILITY OPERATING RESULTS

On a segment basis, for the three months ended June 30, 2002, WGL Holdings’ regulated utility segment incurred a net loss of $8.4 million, or $0.17 per average common share. This compares to a net loss of $6.7 million, or $0.14 per average common share, during the same period last year. A seasonal decline in demand for natural gas historically results in a net loss for the regulated utility segment in the quarter ending June 30. During the current quarter operating income has declined approximately $1.9 million reflecting slightly higher net revenue, offset by higher depreciation and increases in certain operating expenses. Operating expenses that increased include labor and labor related costs, benefit costs and outside professional services.

NON-UTILITY OPERATING RESULTS

WGL Holdings has two core non-utility operating segments: 1) retail energy-marketing; and 2) heating, ventilating and air conditioning (HVAC), comprised of residential operations and commercial operations. An additional component, other activities, is utilized to accumulate transactions that are not reflected as a stand alone segment and are included in the total non-utility operating results. The results of non-utility operations decreased from $0.5 million of net income during the quarter ended June 30, 2001, to a $5.3 million net loss in the current quarter. Results from non-utility operations reflect a loss per average common share of $0.11 during the quarter ended June 30, 2002, comparable to earnings per average common share of $0.01 during the same quarter last year. The following table compares the financial results from non-utility operations for the quarters ended June 30, 2002 and 2001.


Net (Loss) Income Applicable to Non-Utility Operations

			Three Months Ended
			June 30

(In thousands of dollars)			2002			2001			Variance

Retail energy-marketing			$	2,538		$	(215	)	$	2,753
HVAC:
	Commercial Operations			2,300			992			1,308
	Residential Operations			(2,968	)		(175	)		(2,793	)

	Subtotal			(668	)		817			(1,485	)
	Residential HVAC Impairment			(2,131	)		—			(2,131	)

		Total HVAC		(2,799	)		817			(3,616	)

Other non-utility activities				(5,069	)		(109	)		(4,960	)

Net (Loss) Income			$	(5,330	)	$	493		$	(5,823	)

Retail Energy-Marketing Segment

WGL Holdings’ retail energy-marketing subsidiary, Washington Gas Energy Services, Inc. (WGEServices), sells natural gas and electricity in competition with other unregulated marketers. On a segment basis, the Company’s retail energy-marketing segment yielded net income of $2.5 million in the third quarter of fiscal year 2002, compared to a $0.2 million net loss for the same period last year. The increase reflects improvements in both the sales and margins of natural gas and electricity in addition to a 32.9 percent increase in total gas customers. Further, electricity sales increased as a result of adding approximately 35,000 new electricity accounts since last year. Earnings per average common share from this segment improved by $0.06, over the quarter ended June 30, 2001, to $0.05 in the current quarter.

The subsidiary sold 11.5 billion cubic feet (bcf) of gas in the current quarter, an increase of 23.2 percent from 9.4 bcf sold in the comparable quarter last year. During the quarters ended June 30, 2002 and 2001, respectively, 27.4 percent and 31.2 percent of these sales were made to customers outside of the service territory of the regulated utility. During the quarter ended June 30, 2002, WGEServices sold 1,710.8 gigawatt-hours of electricity to approximately 60,000 accounts, in Maryland, Virginia, and the District of Columbia, compared to 563.7 gigawatt-hours to 25,000 accounts within the same quarter in the prior year. In total, WGEServices’ revenues increased from $82.7 million in the quarter ended June 30, 2001, to $135.5 million in the quarter ended June 30, 2002.

HVAC Segment

The Company’s HVAC segment is comprised of residential HVAC operations and commercial HVAC operations. Two subsidiaries, American Combustion Industries, Inc. and Washington Gas Energy Systems, Inc., offer large-scale HVAC installations and related services to commercial and government customers. In addition, the Company has a 50-percent equity investment in Primary Investors, LLC, (Primary Investors) a limited liability company that, through its investment in Primary Service Group, LLC, (PSG), has invested in nine companies that offer HVAC products and services to residential and light commercial customers.

These two operations, residential and commercial, had different results, the combination of which is a net loss of $2.8 million or $0.06 per average common share in the current period. The HVAC segment earnings declined versus the same period last year by $3.6 million. Revenues from the Company’s HVAC activities decreased from $16.2 million in the quarter ended June 30, 2001 to $14.5 million in the quarter ended June 30, 2002, primarily due to the reduction of work performed in the current year on behalf of a local government customer.

The earnings from the commercial HVAC operations improved by $1.3 million reflecting additional margin resulting from the receipt of an approved change order to a contract with a government customer.

The residential HVAC operations for the three months ended June 30, 2002 and 2001 incurred operating losses, net of income taxes, of $3.0 million and $0.2 million, respectively, from the Company’s 50-percent equity investment in Primary Investors. In addition to the operating losses, the continued low sales levels and low gross profit margins coupled with higher than expected expenses, are the factors that prompted the Company to record a $2.1 million impairment provision to appropriately reflect the value of this business. The impairment provision resulted in a $0.05 charge to earnings per average common share for the quarter ended June 30, 2002. This impairment provision, together with the current period operating losses and other related expenses, eliminates the Company’s equity investment in the residential HVAC operations except for the carrying value of tax benefits. Please see note 4 of the Notes to Consolidated Financial Statements.

Other Non-Utility Activities

For the three months ended June 30, 2002, other non-utility activities reflect a net loss of $5.1 million, or $0.10 per average common share. This compares to a net loss of $0.1 million, or less than $0.01 per average common share, during the same period last year. The loss this quarter largely reflects a provision for loan losses in connection with the inactive consumer finance business. Most of this portfolio of loans has been sold to third party banks with full recourse to the Company for uncollectible loans. The current value of this business’ existing loan portfolio is approximately $26.0 million associated with approximately 14,600 accounts, which are principally not reflected on the Company’s balance sheet. Although the Company stopped making new loans in 2001, the existing loans will continue to be serviced until 2005, the final payment year for outstanding loans.

INTEREST EXPENSE

Interest expenses are assigned and allocated to the appropriate business segment and included in segment earnings reflected above. As indicated in the chart below, total interest expense decreased from $11.8 million during the three months ended June 30, 2001, to $11.2 million during the current fiscal quarter.

Composition of Interest Expense Changes
(In thousands of dollars)


	WGL Holdings

	Three Months Ended
	June 30,

	2002		2001		Variance

Long-Term Debt	$	10,749	$	10,356	$	393
Short-Term Debt		143		1,275		(1,132	)
Other (Includes AFUDC)		320		204		116

Total	$	11,212	$	11,835	$	(623	)

Interest on long-term debt increased $0.4 million primarily due to a $27.1 million increase in the average balance of debt outstanding. The weighted-average cost of long-term debt increased by 0.17 percentage points during the same period. Interest on short-term debt decreased $1.1 million reflecting a $79.7 million decline in the average short-term debt balance and a 2.74 percentage point decrease in the weighted-average cost of such debt.

ANALYSIS OF RESULTS OF OPERATIONS—NINE MONTHS ENDED JUNE 30, 2002 VS. JUNE 30, 2001

CONSOLIDATED EARNINGS

For the nine months ended June 30, 2002, WGL Holdings reported net income of $61.8 million, or $43.7 million lower than the results reported for the same period last year. Basic and diluted earnings per average common share in the current nine-month period were $1.27, compared to $2.26 for the nine months ended June 30, 2001.

REGULATED UTILITY OPERATING RESULTS

On a segment basis, for the nine months ended June 30, 2002, the utility operations reported net income of $74.9 million, or $1.54 per average common share. This compares to $107.4 million or $2.30 per average common share during the same period last year. This change is principally due to a 17.8 percent drop in the regulated utility’s firm therm deliveries from the nine months ended June 30, 2001. This decrease reflected a 22.6 percent decline in the number of heating degree days from the same nine-month period last year tempered by a 3.9 percent increase in Washington Gas’ customer base during the same period. Weather during the first nine months of fiscal year 2002 was approximately 13.0 percent warmer than normal, while weather during the first nine months of the fiscal year 2001 was 12.4 percent colder than normal. Operation and maintenance expenses increased 3.0 percent to $151.0 million in the first nine months of fiscal year 2002 compared to $146.6 million during this same period in fiscal year 2001. This variation is caused by increased labor and labor related expenses, increased professional fees, partially offset by lower uncollectible accounts expense.

NON-UTILITY OPERATING RESULTS

During the nine months ended June 30, 2002, net income from non-utility operations generated a net loss of $12.2 million compared to net income of $1.0 million for the nine months ended June 30, 2001. The loss per average common share from non-utility operations during the quarter ended June 30, 2002, was $0.25 per average common share compared to earnings of $0.02 per average common share for the same period last year. Included within these results is a $9.4 million, or $0.19 per average common share, impairment provision from the Company’s investment in Primary Investors. The following table compares the financial results from non-utility operations for the nine months ended June 30, 2002 and 2001.


Net (Loss) Income Applicable to Non-Utility Operations

		Nine Months Ended
		June 30

(In thousands)		2002			2001			Variance

Retail energy-marketing		$	4,795		$	(2,562	)	$	7,357
HVAC:
	Commercial Operations		3,537			4,749			(1,212	)
	Residential Operations		(5,913	)		(1,106	)		(4,807	)

Subtotal			(2,376	)		3,643			(6,019	)
Residential HVAC impairment			(9,431	)		—			(9,431	)

Total HVAC			(11,807	)		3,643			(15,450	)

Other non-utility activities			(5,165	)		(101	)		(5,064	)

Total		$	(12,177	)	$	980		$	(13,157	)

Retail Energy-Marketing Segment

The Company’s retail energy-marketing segment yielded net income of $4.8 million or $0.10 per average common share in the first nine months of fiscal year 2002, compared to a net loss of $2.6 million or $0.05 per average common share in the same period of the prior year. The increase reflects improvements in both the sales and margins of natural gas and electricity and in the customer growth through an expansion of the residential customer base.

WGEServices sold 52.5 bcf of gas in the current nine-month period, an increase of 15.6 percent over the first nine months of fiscal year 2001. During the nine month period ended June 30, 2002 and 2001, 20.5 percent and 23.9 percent, respectively, of these sales were made to customers outside of the service territory of the regulated utility. During the nine months ended June 30, 2002, WGEServices sold 4,228.9 gigawatt-hours of electricity to approximately 60,000 accounts as compared to 814.7 gigawatt-hours to 25,000 accounts during the nine months ended June 30, 2001. In total, WGEServices’ revenues increased to $437.5 million compared to $315.4 million in the nine months ended June 30, 2002 and 2001 respectively.

HVAC Segment

These two HVAC operations, residential and commercial, had different results, the combination of which is a net loss of $11.8 million or $0.24 per average common share in the nine months ended June 30,2002. The HVAC segment earnings declined versus the same period last year by $15.5 million or $0.32 per average common share.

The earnings from the commercial HVAC operations decreased by $1.2 million primarily reflecting a decline in the level of business with a local government customer during the current nine month period. This decline was partially offset by the improvement for a favorable transaction described in the quarterly analysis.

The residential HVAC operations for the nine months ended June 30, 2002 and 2001 incurred operating losses, net of income taxes, of $5.9 million and $1.1 million, respectively, from the Company’s 50-percent equity investment in Primary Investors. The operating losses, the continued low sales levels and low gross profit margins, coupled with higher than expected expenses, are the factors that prompted the Company to record $9.4 million of impairment provisions in the nine months ended June 30, 2002, to appropriately reflect the value of this business. The impairment provisions resulted in a $0.19 charge to earnings per average common share for the nine months ended June 30, 2002. These impairment provisions, together with the operating losses and other related expenses, eliminate the Company’s equity investment in the residential HVAC operations except for the carrying value of tax benefits.

Other Non-Utility Activities

For the nine months ended June 30, 2002, other non-utility activities reflect a net loss of $5.2 million, or $0.11 per average common share. This compares to a net loss of $0.1 million, or less than $0.01 per average common share, during the same period last year. The current period loss largely reflects a provision for loan losses in connection with the inactive consumer finance business. Most of this portfolio of loans has been sold to third party banks with full recourse to the Company for uncollectible loans. The current value of this business’ existing loan portfolio is approximately $26.0 million associated with approximately 14,600 accounts, which are principally not included in the Company’s balance sheet. Although the Company stopped making new loans in 2001, the existing loans will continue to be serviced until 2005, the final payment year for outstanding loans.

INTEREST EXPENSE

Interest expenses are assigned and allocated to the appropriate business segment and included in segment earnings reflected above. Total interest expense decreased from $38.6 million during the nine months ended June 30, 2001, to $34.5 million during the current nine-month period.

This change in interest expense, a decrease of $4.1 million, or 10.7 percent, from the same period last year, reflected the following changes in interest expense:

Composition of Interest Expense Changes
(In thousands of dollars)


		WGL Holdings

		Nine Months Ended
		June 30,

		2002		2001		Variance

Long-Term Debt		$	32,110	$	30,870	$	1,240
Short-Term Debt			1,472		7,260		(5,788	)
Other (Includes AFUDC)			871		430		441

	Total	$	34,453	$	38,560	$	(4,107	)

Interest on long-term debt increased $1.2 million primarily due to a $35.2 million increase in the average balance of long-term debt outstanding, which reflects the issuance of $77.0 million of Medium-Term Notes (MTNs) during fiscal year 2002.

Interest on short-term debt decreased $5.8 million reflecting a $70.9 million decrease in the average short-term debt balance outstanding and a 3.8 percentage point decrease in the weighted-average cost of such debt reflecting the current period’s significantly lower interest rates. The reduction in short-term borrowings was due to

reduced financing needs from lower levels and storage gas inventory balances.

OTHER INCOME (EXPENSES)-NET

Other income (expenses) net are assigned and allocated to the appropriate business segment and included in segment earnings reflected above, at amounts net of taxes. The $6.8 million after tax improvement in Other Income (Expenses)-Net was primarily attributable to a $14.2 million pre-tax benefit ($8.3 million, after tax, or $0.17 per average common share) related to the recovery on a weather insurance policy of Washington Gas. Additionally, it includes a $1.7 million after tax charge, or $0.04 per average common share associated with a bad debt expense related to a bankrupt energy company.

LIQUIDITY AND CAPITAL RESOURCES

The primary uses of cash by WGL Holdings are to fund capital expenditures for its regulated utility to retire maturing debt securities and to fund the growth of working capital for all of its businesses. The current budget for capital expenditures for fiscal year 2002 is $162.2 million, an increase of $17.2 million from the original budget of $145.0 million. The reason for the increase results largely from the increase in the number of customers being added by the regulated utility, Washington Gas.

The Company has a goal to maintain its common equity ratio in the mid-50 percent range of total consolidated capital. In addition, the Company has a general policy to reduce short-term debt balances in the spring because a significant portion of the Company’s current assets are converted to cash at the end of the heating season. Accomplishing these objectives and maintaining sufficient cash flow are necessary to preserve the Company’s and Washington Gas’ credit ratings and to allow access to capital at relatively low costs.

SHORT-TERM CASH REQUIREMENTS AND RELATED FINANCING

The regulated utility’s business is highly weather sensitive and seasonal. Approximately 75 percent of Washington Gas’ therm deliveries (excluding deliveries for electric generation) occur in the first and second fiscal quarters. This weather sensitivity causes short-term cash requirements to vary significantly during the year. Cash requirements peak in the fall and winter months when accounts receivable, accrued utility revenues and storage gas are at, or near, their highest levels. After the winter heating season, these assets are converted into cash and are generally used to repay short-term debt and acquire storage gas for the subsequent heating season.

The Company uses short-term debt in the form of commercial paper and unsecured short-term bank loans to fund seasonal requirements. Washington Gas has regulatory authority to issue up to $300 million of short-term debt. In support of its commercial paper program, the Washington Gas had back-up bank credit facilities totaling $225 million as of June 30, 2002. WGL Holdings had credit facilities of $95 million supporting its commercial paper program as of June 30, 2002.

On May 10, 2002, WGL Holdings and Washington Gas executed new revolving credit agreements with its bank group, in the amounts of $85 million and $220 million respectively. The regulated utility pays a facility fee of 8 basis points, and WGL Holdings pays a facility fee of 9 basis points. The credit agreements expire on May 9, 2003. In addition to the revolving credit agreements, WGL Holdings has a $10 million

bank line of credit and the regulated utility has a $5 million bank line of credit. At June 30, 2002, the Company had notes payable outstanding, which consist of commercial paper of $15.7 million compared to $134.1 million at September 30, 2001.

LONG-TERM CASH REQUIREMENTS AND RELATED FINANCING

To fund construction expenditures and other capital requirements, the Company draws upon both internal and external sources of cash. The Company’s ability to generate adequate cash internally depends upon a number of factors, including the timing and amount of rate increases received and the level of therm deliveries. The regulated utility’s last significant base rate increase became effective in December 1994. Because of the annual growth in facilities to serve new customers, the regulated utility is a net borrower of cash on an annual basis. The Company uses a combination of short-term debt as described above, long-term debt and common equity to meet any cash needs not met through operations.

On June 14, 2002, Washington Gas issued $25 million of long-term debt in the form of MTN with a coupon of 5.9 percent, maturing June 2012.

At June 30, 2002, Washington Gas was authorized to issue up to $173 million of long-term debt under an existing shelf registration. Washington Gas’ authority from the State Corporation Commission of Virginia (SCC of VA) and the Public Service Commission of the District of Columbia (PSC of DC) to issue long-term debt expires on December 31, 2002. Washington Gas will file applications with the commissions to renew its authority.

Security Ratings

The table below shows the ratings on both WGL Holdings’ and Washington Gas’ debt instruments at June 30, 2002.

WGL Holdings, Inc.

Washington Gas

Unsecured

Medium-Term

Unsecured

Commercial

Notes (Indicative)

Commercial Paper

Medium-Term Notes

Paper

RATING SERVICE

Fitch, Inc.

A+

AA-

F1+

Moody’s Investors Service

P-1

Aa2

P-1

Standard & Poor’s Corporation

AA-

A-1+

AA-

A-1+

* Unpublished

On April 30, 2002, Moody’s Investors Service (Moody’s) placed Washington Gas’ debt ratings on review for possible downgrade and confirmed ratings on commercial paper. The ratings under review are Washington Gas’ senior unsecured debt, currently rated Aa2, and Washington Gas preferred stock, currently rated A1. Moody’s indicated that any possible downgrade action would be limited to one notch. Moody’s confirmed the rating of Washington Gas commercial paper, currently rated Prime-1, and WGL Holdings commercial paper, currently rated Prime-1.

If the Company or Washington Gas were to experience changes in their debt ratings, the cost of their future short-term and long-term debt would be affected. Furthermore, a change would impact the facility fees paid to banks.

Contractual Obligations and Other Commercial Commitments

Washington Gas has entered into contracts in the normal course of business that require it to make fixed and determinable payments for many years in the future. These obligations consist of long-term debt issued to finance the Company’s capital expenditure, contracts to purchase natural gas commodity and obligations for pipeline transportation capacity for its regulated utility operations.

At the current time, all of the costs incurred under the natural gas commodity and pipeline transportation capacity contracts have ongoing market value and are fully recoverable through purchased gas cost recovery mechanisms in each of the regulated utility’s jurisdictions.

WGL Holdings and its affiliates have guaranteed certain purchases of natural gas and electricity for its retail energy-marketing segment, WGEServices. At June 30, 2002, these guarantees totaled $225.3 million. Termination of the guarantees is coincident with the satisfaction of all obligations of WGEServices covered by the guarantees. Thereafter, WGL Holdings may cancel any or all of the guarantees on written notice to the counterparty.

Please refer to WGL Holdings fiscal year 2001 Annual Report on Form 10-K for additional details about each of these contractual obligations.

Cash Flow from Operating Activities

Net cash provided by operating activities totaled $244.0 million during the first nine months of fiscal year 2002. This compares to $98.0 million of net cash provided by operating activities for the same period last year. The $146.0 million increase in cash provided by operating activities was primarily the result of lower levels of funds required to support accounts receivable and accrued utility revenues, reflecting lower revenues in the current period due to lower sales volumes and lower costs of gas in the current year. Additional cash was also provided from the collection of gas costs owed by customers after the winter of 2000/2001 and lower storage gas balances. Offsetting these cash issues was lower net income.

Cash Flow from Financing Activities

During the nine months ended June 30, 2002, the Company used net cash of $110.9 million in financing activities. This compares with a net cash use of $9 million in the same period of the prior year. The primary reasons for the difference are a $53 million equity issuance in the nine months ended June 30, 2001 and $28 million more in long-term debt retirements in the nine months ended June 30, 2002.

The dividends paid by the Company in May 2002, increased by $2.6 million due to a $0.0025 increase per common share paid during the current quarter compared to the quarter ended June 30, 2001 and an additional 2,038,500 shares of common stock issued in a June 2001, offering.

Cash Flow from Investing Activities

During the nine months ended June 30, 2002, WGL Holdings had consolidated capital expenditures of $115.4 million, on a revised budget of $162.2 million for fiscal year 2002. This compared to capital expenditures of $81.2 million for the nine months ended June 30, 2001.

Price Risk Related to Retail Energy Marketing Operations

The Company’s subsidiary, WGEServices, markets both natural gas and electricity. In the course of its business, WGEServices makes fixed-price sales commitments to customers and purchases the corresponding physical supplies at fixed prices to lock in margins. WGEServices has exposure to changes in gas prices related to the volumetric differences between the purchase commitments and sales commitments. WGEServices has managed the risk associated with gas price fluctuations by closely matching purchases from suppliers with sales commitments to customers. Additionally, WGEServices utilizes its storage services discussed below to manage its volume risk and it utilizes put options and call options to manage its price and volume risk.

Historically, the responsibility for managing daily demand fluctuations from WGEServices’ customers resulting from variability in weather was assumed by WGL Holdings’ regulated utility subsidiary through the use of its storage and peaking capacity. The regulated utility charged WGEServices a fee for this service.

Effective April 1, 2001, WGEServices assumed a large portion of the responsibility to deliver the appropriate level of gas to its customers on a daily basis. WGEServices will continue to be able to avail itself of certain peak shaving capacity that the regulated utility provides for a fee and has acquired a pro-rata portion of the regulated utility’s storage gas capacity to manage its load. Therefore, variations in demand caused by fluctuations in weather applicable to approximately 50-percent of WGEServices’ annual sales volumes could result in WGEServices having contracted for more or less gas than its customers require on any given day. As a result, WGEServices has modified its risk management and procurement policies to reflect the need to obtain storage capacity and other contractual arrangements to meet the weather-related variability in its demand and to ensure the financial exposure caused by this variability in demand is adequately controlled.

Since October 2001, WGEServices has purchased call and put options in accordance with its Risk Management Policy. As of June 30, 2002, WGEServices has natural gas call and put options outstanding with a current notional balance of 1,040,00 dekatherms. The value of options held at the end of each period are marked-to-market in accordance with the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.

WASHINGTON GAS LIGHT COMPANY

As discussed on page 3, this Quarterly Report on Form 10-Q includes separate consolidated financial statements for WGL Holdings (pages 4 through 7), as well as for Washington Gas (pages 8 through 11). This section of the Quarterly Report on Form 10-Q discusses the consolidated financial position and results of operations of Washington Gas throughout the reported periods. As previously noted, all results for Washington Gas prior to the November 1, 2000 corporate restructuring are reported on a consolidated basis, in accordance with generally accepted accounting principles. This consolidation reflects the results of Washington Gas’ operations, as well as those of its subsidiaries prior to the restructuring. All results of operations reported after the restructuring reflect the financial position and results of Washington Gas alone.

In many cases, the reasons for the changes in the financial position and results of operations for both WGL Holdings and Washington Gas are essentially the same. In those instances, the reader is referred to the WGL Holdings Management’s Discussion and Analysis of Financial Condition and Results of Operations, which begins on page 21. The following management’s discussion of Washington Gas’ financial position and results of operations only describes those instances in which the reasons for changes in the financial results or results of operations vary from those of WGL Holdings.

ANALYSIS OF RESULTS OF OPERATIONS-THREE MONTHS ENDED JUNE 30, 2002 VS. JUNE 30, 2001

EARNINGS

For the three months ended June 30, 2002, Washington Gas reported a net loss applicable to common stock of $12.9 million compared to a net loss of $7.7 million for the prior year period. Comparable results for the non-utility operations are reflected in WGL Holdings’ consolidated financial statements and notes thereto which begin on page 4, and the WGL Holdings Management’s Discussion and Analysis of Financial Condition and Results of Operations which begins on page 21.

UTILITY NET REVENUES

Utility net revenues for the quarter ended June 30, 2002, increased $0.8 million (1.0 percent) from the same period last year to $77.6 million. Key gas delivery, weather and meter statistics are shown in the table below for the three months ended June 30, 2002 and 2001.


Gas Delivery, Weather and Meter Statistics

					Three Months Ended
					June 30,
														Percent
					2002			2001			Variance			Inc. (Dec.)

Gas Sales and Deliveries (thousands of therms)
	Firm
		Gas Sold and Delivered				101,114			86,438			14,676			17.0
		Gas Delivered for Others				45,111			56,611			(11,500	)		(20.3	)

			Total Firm			146,225			143,049			3,176			2.2

	Interruptible
		Gas Sold and Delivered				2,034			2,489			(455	)		(18.3	)
		Gas Delivered for Others				58,360			51,379			6,981			13.6

			Total Interruptible			60,394			53,868			6,526			12.1

		Electric Generation—Delivered for Others				28,821			28,997			(176	)		(0.6	)

				Total Deliveries		235,440			225,914			9,526			4.2

Degree Days
	Actual					326			300			26			8.7
	Normal					306			307			(1	)		(0.3	)
		Percent Colder (Warmer) than Normal				6.5	%		(2.3	)%		—			—

Customer Meters (end of period)						933,636			898,694			34,942			3.9

Gas Delivered to Firm Customers

The level of gas delivered to firm customers is highly sensitive to weather variability because a large portion of the natural gas delivered by Washington Gas is used for space heating. The regulated utility’s rates are based on normal weather and none of the tariffs for the jurisdictions in which it operates currently have a weather normalization provision. Nonetheless, declining block rates in the regulated utility’s Maryland and Virginia jurisdictions reduce the impact that deviations from normal weather have on net revenues.

During the three months ended June 30, 2002, firm therm deliveries increased by 3.2 million therms or 2.2 percent over the same quarter last year. This increase reflects 8.7 percent more heating degree days in the current quarter versus the prior year in addition to a 3.9 percent rise in the number of firm customer meters. Weather for the three months ended June 30, 2002, was 6.5 percent colder than normal, while weather for the same period last year was 2.3 percent warmer than normal. However, variation in heating degree days during the third quarter of the fiscal year generally have little impact on net revenues because space heating requirements are low.

On a per unit basis, the net revenues that Washington Gas earns from delivering only natural gas for others is the same as what it earns from delivering and also selling the natural gas commodity on a bundled basis. This is because the regulated utility does not profit from the sale of the natural gas commodity since the cost of natural gas is a pass-through item in the tariffs that Washington Gas maintains in all jurisdictions in which it operates. Therefore, the regulated utility does not experience any gain or loss of margins when customers choose to purchase the natural gas commodity from a third-party marketer or to switch back to Washington Gas as their bundled supplier.

Gas Delivered to Interruptible Customers

Therm deliveries to Washington Gas’ interruptible customers were 12.1 percent higher during the three months ended June 30, 2002 over the same period last year. This increase was due to higher demand from interruptible customers that burned oil in the prior fiscal year because of relatively high gas costs. These customers switched back to natural gas in the current year as gas prices fell. The effect on net income of any changes in delivered volumes and prices to the interruptible class is minimized by margin-sharing arrangements embedded in Washington Gas’ interruptible rate design. Under these arrangements, once Washington Gas reaches a pre-established gross margin threshold, it applies a majority of the gross margins earned on interruptible gas sales to reduce the rates of firm customers. In exchange for this provision, many of the fixed costs of providing service to the interruptible class of customers is borne by the firm class of customers.

Gas Delivered for Electric Generation

Washington Gas delivers natural gas for use at two electric generation facilities in Maryland, which are each owned by separate companies that are independent of WGL Holdings. During the current quarter, deliveries to these customers declined by 0.2 million therms to 28.8 million therms.

Washington Gas shares a significant portion of the margins earned from gas deliveries to these customers with firm customers. Therefore, changes in the volume of interruptible gas deliveries to these customers do not have a material impact on either net revenues or net income.

UTILITY OPERATING EXPENSES

Operation and maintenance expenses for the three months ended June 30, 2002, increased by $3.6 million over the same period last year to $52.1 million. The increase reflects additional expenses incurred for professional fees to promote operational efficiencies, and increased labor and labor related items. Partially offsetting these increases is a reduction in the provision for uncollectible accounts, which declined by $1.8 million from the same period last year. The decline in uncollectible expense reflects the impact of warmer weather and lower gas costs in the most recent heating season on customer accounts receivable.

Depreciation and amortization expense increased by $1.3 million (7.6 percent) in the current quarter primarily because of Washington Gas’ increased investment in property, plant and equipment.

The general taxes incurred by the utility operations during the quarter ended June 30, 2002, decreased by approximately $1.5 million reflecting a $1.4 million favorable disposition of a dispute with Prince George’s County, Maryland regarding rights of way maintenance fees.

A greater pre-tax loss from utility operations increased this quarter’s income tax benefit to $4.8 million, a $0.5 million increase from last year at this time. For utility operations, the effective income tax rates were 41.1 percent for the third fiscal quarter of 2002 and 38.50 percent for the comparable period in fiscal year 2001.

NON-UTILITY OPERATIONS OF WASHINGTON GAS

Washington Gas recorded a $3.7 million non-utility operating loss in the quarter ended June 30, 2002 as contrasted with a loss of $0.1 million in the same quarter of the prior year. This resulted primarily from recording a provision for loan losses in connection with a consumer finance business for which loans are no longer being made. After writing off certain receivables associated with this loan portfolio and recording the provision mentioned above, the loan portfolio of approximately 14,600 accounts is valued at $26 million. It is expected that this balance will steadily decline through 2005, which is the final payment year for the outstanding loans.

OTHER INCOME (EXPENSES)- NET

Other Income (Expenses)-Net declined by $1.0 million from the same quarter of the prior year to a net level of expenses of $1.5 million. The largest component of the change is a $0.3 million reduction in the receivable for weather insurance due to the colder than normal weather in the current quarter.

INTEREST EXPENSE

Washington Gas’ total interest expense decreased by $1.6 million from the same period last year to $10.3 million.

Composition of Interest Expense Changes
(In thousands of dollars)


				Washington Gas

	Three Months Ended
	June 30,

	2002			2001		Variance

Long-Term Debt	$	10,749		$	10,317	$	432
Short-Term Debt		2			1,133		(1,131	)
Other (Includes AFUDC)		(434	)		425		(859	)

Total	$	10,317		$	11,875	$	(1,558	)

Interest on long-term debt increased $0.4 million primarily due to a $27.7 million increase in the average balance of debt outstanding at Washington Gas. The weighted-average cost of such long-term debt increased by 0.17 percentage points during the same period. Interest on short-term debt decreased $1.1 million reflecting a $79.7 million decline in the average short-term debt balance at Washington Gas and a 2.74 percentage point decrease in the weighted-average cost of such debt.

ANALYSIS OF RESULTS OF OPERATIONS NINE MONTHS ENDED JUNE 30, 2002 VS. JUNE 30, 2001

EARNINGS

For the nine months ended June 30, 2002, Washington Gas reported net income applicable to common stock of $70.3 million compared to net income of $103.9 million for the prior year period. The primary reason for the decline in Washington Gas’ results was due to 22.6 percent warmer weather for the nine months ended June 30, 2002 as compared to the same period of the prior year. Weather in the most recent nine months was 13.0 percent warmer than normal and it is estimated that this reduced earnings per common share by $0.57. This impact is before the favorable effect of weather insurance, which contributed $0.17 per average common share in the nine months ended June 30, 2002.

UTILITY NET REVENUES

Utility net revenues for the nine months ended June 30, 2002, decreased $56.4 million, or 12.7 percent from the same period last year to $388.3 million. Key gas delivery, weather and meter statistics are shown in the table below for the nine months ended June 30, 2002 and 2001.

Gas Delivery, Weather and Meter Statistics


					Nine Months Ended
					June 30,									Percent
					2002			2001			Variance			Inc. (Dec.)

Gas Sales and Deliveries (thousands of therms)
	Firm
		Gas Sold and Delivered				645,227			835,686			(190,459	)		(22.8	)
		Gas Delivered for Others				315,650			333,335			(17,685	)		(5.3	)

			Total Firm			960,877			1,169,021			(208,144	)		(17.8	)

	Interruptible
		Gas Sold and Delivered				8,799			9,085			(286	)		(3.1	)
		Gas Delivered for Others				230,075			205,904			24,171			11.7

			Total Interruptible			238,874			214,989			23,885			11.1

	Electric Generation—Delivered for Others					65,189			101,757			(36,568	)		(35.9	)

				Total Deliveries		1,264,940			1,485,767			(220,827	)		(14.9	)

Degree Days
	Actual					3,303			4,270			(967	)		(22.6	)
	Normal					3,797			3,799			(2	)		(0.1	)

		Percent (Warmer) Colder than Normal				(13.0	)%		12.4	%		—			—

Customer Meters (end of period)						933,636			898,694			34,942			3.9

Gas Delivered to Firm Customers

During the nine months ended June 30, 2002, firm therm deliveries decreased by 208.1 million therms or 17.8 percent from the same period last year. This decrease primarily reflects 22.6 percent fewer heating degree days in the current nine-month period compared to last year tempered by a 3.9 percent rise in the number of customer meters. Weather for the nine months ended June 30, 2002, was 13.0 percent warmer than normal, while weather for the same period last year was 12.4 percent colder than normal.

The volume of firm therms sold and delivered to customers by Washington Gas decreased 22.8 percent during the current nine-month period from 835.7 million therms in the nine months ended June 30, 2001, to 645.2 million therms during the nine months ended June 30, 2002. The volume of firm gas delivered for others decreased from 333.3 million therms to 315.7 million therms, a 5.3 percent decrease.

Gas Delivered to Interruptible Customers

Interruptible therm deliveries to Washington Gas’ interruptible customers were 11.1 percent higher during the nine months ended June 30, 2002, compared to the same period last year. This increase reflects a reduction in interruptible curtailment during the most recent nine months reflecting warmer weather in the current year and higher demand due to lower gas costs. As previously described in this report, the effect on net income of changes in gas deliveries to interruptible customers is minimal due to margin-sharing arrangements in each of the regulated utility’s jurisdictions.

Gas Delivered for Electric Generation

Volumes delivered for electric generation were 35.9 percent lower than the same period last year. Margins earned on such deliveries are being shared with firm customers as described previously in this report.

UTILITY OPERATING EXPENSES

Operation and maintenance expenses for the nine months ended June 30, 2002, increased by $4.7 million (3.2 percent) from the prior year’s levels. Some of the key factors that contributed to the variance in operation and maintenance expenses for the current nine-month period compared with last year include:

a $4.8 million decrease in uncollectible accounts expense, which directly relates to lower natural gas costs and warmer weather, causing a decrease in the regulated utility’s customer accounts receivable balance;

a $5.0 million increase for professional fees incurred to achieve management objectives in obtaining greater operational efficiency;

a $3.9 million increase in labor and labor-related costs, primarily reflecting increases in pensions and other post-retirement benefit expenses.

Depreciation and amortization expense increased by $3.1 million (6.0 percent) in the current nine-month period primarily because of Washington Gas’ increased investment in property, plant and equipment.

The general taxes incurred by the regulated utility during the nine months ended June 30, 2002 decreased $2.5 million largely due to: the reduction in the right-of-way fees imposed by the District of Columbia, a tax expense which is recorded on a volumetric basis and is therefore impacted by the warmer than normal weather; and higher than normal general taxes

for the first quarter of fiscal year 2001, which reflected a $2.2 million one-time adjustment for a Virginia business license tax payment made as a result of a tax law restructuring.

Utility income taxes decreased by $20.8 million primarily due to a decrease in pre-tax income for the current nine-month period. For utility operations, the effective income tax rates were 41.1 percent for the first nine months of fiscal year 2002 and 38.5 percent for the same period in fiscal year 2001, reflecting the imposition of changes in certain state income taxes.

NON-UTILITY RESULTS FOR WASHINGTON GAS

The non-utility results of operations reported by Washington Gas for the nine months ended June 30, 2002 include the provision for loan losses recorded in connection with a consumer finance business for which loans are no longer being made. In the nine months ended June 30, 2001, the results are composed almost entirely of the results from retail energy-marketing and the HVAC segment before the implementation of the operation of WGL Holdings, Inc. on November 1, 2000.

OTHER INCOME (EXPENSES)— NET

Other Income (Expenses)-Net improved by $6.7 million from the nine months ended June 30, 2001 to the nine months ended June 30, 2002. The primary reason for the improvement is $8.3 million of net income for proceeds from the regulated utility’s weather insurance policy, partially offset by a $1.7 million charge, net of income tax, associated with a bad debt expense related to a bankrupt energy company.

INTEREST EXPENSE

Interest expense decreased by $4.5 million (11.7 percent) from the same period last year, reflecting the following changes:

Composition of Interest Expense Changes
(In thousands of dollars)


		Washington Gas

		Nine Months Ended
		June 30,

		2002		2001		Variance

Long-Term Debt		$	32,110	$	30,831	$	1,279
Short-Term Debt			1,075		6,887		(5,812	)
Other (Includes AFUDC)			903		886		17

	Total	$	34,088	$	38,604	$	(4,516	)

Interest on long-term debt increased $1.3 million primarily due to a $35.2 million increase in the average balance of long-term debt outstanding. Interest on short-term debt declined by $5.8 million primarily due to a decrease in the average balance of short-term debt of approximately $71.0 million and a reduction in the average interest rate on short-term debt of 3.80 percentage points.

REGULATORY MATTERS

Washington Gas has requested authority to increase its rates from the applicable regulatory agency in each of the three jurisdictions where the company operates. A discussion of the key financial issues in each case is shown below. The Company cannot predict the outcome of any of these rate filings. It believes that these cases will each be resolved near the beginning of the fiscal year 2003. Therefore, it is unlikely that the changes to the base rates in these cases, individually or in total, will have a significant impact on the regulated utility’s financial position or results of operations during fiscal year 2002, except for issues related to depreciation and asset management arrangements as described below and in Note 8 - Commitments and Contingencies of the Notes to the Consolidated Financial Statements.

District of Columbia Jurisdiction

On February 17, 2000, the District of Columbia’s Office of the People’s Counsel (OPC) filed a complaint with the PSC of DC requesting an investigation into the rates and charges of Washington Gas. On February 28, 2000, Washington Gas filed an answer urging the PSC of DC to dismiss the OPC complaint because the OPC’s analysis of the regulated utility’s rates was substantively flawed. On March 21, 2001, the PSC of DC issued an Order granting the OPC’s request to initiate an investigation into the reasonableness of Washington Gas’ base rates. The PSC of DC’s Order required Washington Gas to file base rate information no later than ninety days from March 21, 2001. On June 19, 2001, the regulated utility filed an application requesting a rate increase of $16.3 million, or 6.8 percent of overall annual revenues in the District of Columbia. The request includes a 12.25 percent return on equity, coupled with an incentive rate plan.

In December 2001, the PSC of DC issued an Order that identified the issues in the case. In addition, the PSC of DC established a procedural schedule.

On March 8, 2002, the OPC filed testimony in which it recommended that the PSC of DC order Washington Gas to reduce its rates by $12.0 million, or 5.0 percent. The OPC’s recommendation is premised on a 9.75 percent return on common equity. The OPC also recommended a one-time refund of an estimated $9 million associated with Pensions and Other Postretirement Benefits. Washington Gas filed testimony on April 15, 2002, which supported its request for a $16.3 million increase and which rebutted the testimony of OPC and other intervenors in the case. Evidentiary hearings were held the week of May 20, 2002.

An issue in the pending rate case in the District of Columbia is the appropriateness of the rate treatment of money collected from asset managers in connection with various asset management arrangements. Asset management arrangements provide Washington Gas with assistance in managing and coordinating its various upstream natural gas capacity contracts, supply contracts and storage contracts. These periodic asset management arrangements provide for integration of these contracts and services to insure efficient and timely delivery of natural gas to meet 100 percent of firm customer demand. A third party Asset Manager has been selected on a periodic basis, ranging from 12 to 18 months, to provide Washington Gas with these asset management services. These arrangements allow Washington Gas to maintain the reliability and flexibility of the current natural gas supply portfolio. They also provide for the payment of fees to Washington Gas by the Asset Manager for the right to utilize assets of Washington Gas when not required on a day to day basis to serve Washington Gas’ customers.

Since Washington Gas began these asset management arrangements several years ago, it has recorded all fees applicable to District of Columbia operations as revenues and included such transactions in annual filings providing a statement of operations to the PSC of DC. One party in the current District of Columbia rate case, OPC, has asserted that the fees should be concurrently credited to ratepayers. OPC further contends that the amount of such fees collected by Washington Gas in past periods, applicable to District of Columbia operations, should be refunded to ratepayers. Before the referenced rate proceeding, OPC did not raise this argument when Washington Gas presented its treatment in the forum created by the PSC of DC for the parties to discuss and debate such issues.

Washington Gas disagrees with OPC on the treatment of the fees from the asset management arrangements and has presented evidence in the current case supporting the appropriateness of its historical treatment of these fees. The amount of the fees related to District of Columbia operations since the inception of asset management arrangements is approximately $8 million. If the final order of the PSC of DC were to support the position of OPC on this matter, Washington Gas may be required to refund the amounts previously recorded in revenues, thus reducing net income after considering the related income tax effects.

Maryland Jurisdiction

On March 28, 2002, Washington Gas filed an application with the Maryland Public Service Commission (PSC of MD) requesting an increase in revenues of approximately $31.4 million or 9.3 percent. The original request included a 12.5 percent return on common equity, coupled with an incentive rate plan.

On April 26, 2002, the PSC of MD issued a ruling that established two separate phases for the purpose of considering and resolving specific issues that were stated at that time. In Phase I, the PSC of MD would review Washington Gas’ base rate case, its proposal regarding incentive rates and a number of other issues associated with Washington Gas’ proposed tariffs and rates. During Phase II the PSC of MD would review issues regarding Washington Gas’ proposal for serving as the “supplier/provider of last resort for natural gas services”. The order also set a procedural schedule for filing pre-filed direct and rebuttal testimony in the case and indicated that evidentiary hearings would be conducted the week of July 29, 2002.

The originally scheduled evidentiary hearings that were to have begun on July 29, 2002 were suspended on July 26, 2002. On July 30, 2002, after discussions among all parties, an uncontested settlement agreement on Phase I of the case was filed with the PSC of MD. On August 1, 2002, hearings were held to take testimony and receive evidentiary exhibits on the narrow question of whether the proposed settlement filed on July 30, 2002 was in the public interest. After evaluating the results of that day’s evidence, the PSC of MD cancelled the scheduled contested case hearing dates. After the August 1, 2002 hearing date, further discussions were held among the parties. An uncontested revised settlement was reached on Phase I of the case and was filed with the PSC of MD on August 6, 2002. The revised settlement agreement is subject to the approval of the PSC of MD. The settlement agreement provides for an increase of $9.25 million in annual non-gas operating revenues. The increased rates are scheduled to become effective for meter readings on and after a September 2002 date immediately following the issuance of an Order by the PSC of MD in the proceeding. The settlement did not indicate the allowed return on common equity for the purpose of determining the amount of the settlement. An incentive based rate plan is not included in the settlement. However, the parties have agreed to discuss performance standards as they may relate to an incentive rate plan within six months after the settlement is approved by the PSC of MD. The settlement, if approved by the PSC of MD, will not have a material effect on the results of operations of Washington Gas for the quarter or the fiscal year ended September 30, 2002.

Virginia Jurisdiction

On June 14, 2002, Washington Gas filed a request with the SCC of VA to increase rates by approximately $23.8 million. The requested increase will go into effect, subject to refund, on November 11, 2002. The rate application was predicated primarily upon an increase in property, plant and equipment that has served the significant customer growth in the regulated utility’s Virginia jurisdiction and increases in operation costs. The regulated utility’s customers in the Commonwealth of Virginia represent approximately 42 percent of its total utility customers.

In a separate but related matter, in accordance with an Order of the SCC of VA, Washington Gas has performed a depreciation study, as of December 31, 2000 and an update as of December 31, 2001, to determine the adequacy of the current depreciation rates that Washington Gas uses to record depreciation expense for property located in its Virginia jurisdiction. Washington Gas submitted the study to the Staff of the SCC of VA in the first quarter of fiscal year 2002. Since that time, Washington Gas and the Staff of the SCC of VA have had several informal discussions regarding the depreciation rates included in the originally submitted study and the effective date that should be used for recording depreciation expense utilizing any new rates.

The Staff of the SCC of VA has informally indicated to the Company that they may issue a recommendation that new depreciation rates and the higher depreciation expense that corresponds to these new rates should be recorded earlier than the effective date of the base rate case that has been filed in Virginia. Washington Gas does not agree with the Staff’s informal position. Washington Gas has filed the rate case application discussed above taking the position that the new depreciation rates should be applied at the beginning of the period that base rates are implemented. If new depreciation rates must be applied before the effect of such rates is included in new base rates, then there would be a mismatch in the level of depreciation expense recorded in the income statement versus the level of revenues being collected. This could result in a one-time charge to depreciation expense without a corresponding revenue adjustment, resulting in a reduction in net income, the timing of which is unclear and dependent upon the actions of the Staff of the SCC of VA and/or the SCC of VA. The Staff could formally recommend that Washington Gas implement new depreciation rates prior to the adjudication of the pending rate case. If that were to occur, the Company will have to determine at that time if any accounting is required for the difference between the current depreciation rates included in base rates and any new depreciation rates that the Staff of the SCC of VA proposes. The implementation date of any new depreciation rates may be an issue in the pending rate case and could ultimately be decided by the courts.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and capital resources for Washington Gas are generally identical to the liquidity and capital resources of WGL Holdings, except for certain items and the transactions between WGL Holdings and the other non-regulated subsidiaries. For purposes of discussing the liquidity and capital resources of Washington Gas, this section incorporates by reference, the disclosures provided in this document under the similar section for WGL Holdings, titled “Liquidity and Capital Resources”. WGL Holdings provides financing and capital resources to all of its subsidiaries. During June of 2002, WGL Holdings made a $ 20.2 million capital contribution to Washington Gas. The contribution is reflected in financing activities for the nine months ended June 30, 2002. Effective November 1, 2000, Washington Gas no longer has subsidiaries of its own. At that time, a corporate restructuring moved all subsidiaries previously under Washington Gas, to WGL Holdings, a holding company. Accordingly, as a result of the restructuring , Washington Gas no longer provides financing or capital resources to any of these subsidiaries . However, for the nine months ended June 2001, Washington Gas’ investing activities reflect certain pre-restructuring transactions including an $ 11.8 million cash transfer to WGL Holdings related to the formation of the holding company and dividends of the former subsidiaries that were made prior to the formation of the holding company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS OF THE COMPANY

WGL Holdings and its subsidiary, Washington Gas, have interest rate risk exposure related to its debt. Additionally, WGL Holdings’ subsidiary, WGEServices has price and volumetric risk related to gas marketing activities. For additional information regarding the exposure related to these risks, see page 31 of this Form 10-Q, under the caption Price Risk Related to Retail Energy Marketing, Note 14 to the Financial Statements included in Item 8 and Item 7A in the combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2001. Neither WGL Holdings’ nor Washington Gas’ risk associated with interest rates have materially changed from September 30, 2001. At June 30, 2002, WGEServices’ open position was not material to WGL Holdings’ financial position or results of operations. The subsidiaries of WGL Holdings also have credit risk, including the credit risk of WGEServices and the regulated utility accounts receivable. Washington Gas mitigates this risk with an intense credit and collection process and the potential for rate recovery of uncollectible expenses in each regulatory jurisdiction. The regulated utility and WGEServices are also exposed to counter party credit/deliverability risk that the company mitigates by purchasing gas from multiple suppliers and by maintaining a continual review over the creditworthiness of its suppliers. The regulated utility also mitigates its risk by its ability to recover gas costs from its customers. The regulated utility also has weather risk, which is mitigated by a weather insurance policy held by Washington Gas.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits required by Item 601 of Regulation S-K:


99.0		Computation of Ratio of Earnings to Fixed Charges—WGL Holdings, Inc.

99.1		Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends—WGL Holdings, Inc.

99.2		Computation of Ratio of Earnings to Fixed Charges—Washington Gas Light Company

99.3		Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends—Washington Gas Light Company

99.4		Section 906 Certification from James H. DeGraffenreidt, Jr. and Frederic M. Kline

(b) Reports on Form 8-K

• As co-registrants, WGL Holdings, Inc. and Washington Gas Light Company filed a Current Report on Form 8-K on May 16, 2002, reporting that the firm Arthur Andersen, LLP had been dismissed as the independent auditor. On the same date, co-registrants reported Deloitte & Touche LLP will serve as the independent auditor.

• As co-registrants, WGL Holdings, Inc. and Washington Gas Light Company filed a Current Report on Form 8-K on June 27, 2002, to report the filing of an application with the State Corporation Commission of Virginia to increase base rates within Virginia.

• As co-registrants, WGL Holdings, Inc. and Washington Gas Light Company filed a Current Report on Form 8-K dated July 16, 2002, to report the positions taken by intervenors in the regulatory filing made by Washington Gas before the PSC of MD on March 28, 2002.

• WGL Holdings, Inc. filed a Current Report on Form 8-K dated on August 2, 2002, to report that Chairman and Chief Executive Officer James H. DeGraffenreidt, Jr. and Vice President and Chief Financial Officer Frederic M. Kline filed statements required by an order issued by the Securities and Exchange Commission (SEC) on June 27, 2002 in SEC File No. 4-460 pursuant to section 21(a)(1) of the Securities Exchange Act of 1934.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.


		WGL HOLDINGS, INC.

		and

		WASHINGTON GAS LIGHT COMPANY (Co-Registrants)

Date: August 14, 2002		/s/ Mark P. O’Flynn Mark P. O’Flynn Controller (Principal Accounting Officer)


	WGL Holdings — This section describes the financial condition and results of operations of WGL Holdings and its subsidiaries on a consolidated basis. This section includes brief discussions of WGL Holdings’ regulated utility operations and non-utility operations. The majority of WGL Holdings’ operations are derived from the results of the regulated utility, Washington Gas. In addition, WGL Holdings is also impacted by the results of the non-utility operations. To obtain a complete understanding and review of all the details of the regulated utility operations, please refer to the Analysis of Operations for Washington Gas.

	Washington Gas — This section comprises the vast majority of WGL Holdings’ regulated utility segment. As such, the financial condition and results of operations of Washington Gas’ utility operations and WGL Holdings regulated utility segment are essentially the same. Therefore, this section will focus on a more detailed description of the financial condition and results of operations of the regulated utility’s operations. This section will also describe any factors or results which are significantly different from those operations which are described in WGL Holdings’ Management’s Discussion and Analysis of Financial Condition and Results of Operations.


	a $4.8 million decrease in uncollectible accounts expense, which directly relates to lower natural gas costs and warmer weather, causing a decrease in the regulated utility’s customer accounts receivable balance;

	a $5.0 million increase for professional fees incurred to achieve management objectives in obtaining greater operational efficiency;

	a $3.9 million increase in labor and labor-related costs, primarily reflecting increases in pensions and other post-retirement benefit expenses.

•		As co-registrants, WGL Holdings, Inc. and Washington Gas Light Company filed a Current Report on Form 8-K on May 16, 2002, reporting that the firm Arthur Andersen, LLP had been dismissed as the independent auditor. On the same date, co-registrants reported Deloitte & Touche LLP will serve as the independent auditor.

•		As co-registrants, WGL Holdings, Inc. and Washington Gas Light Company filed a Current Report on Form 8-K on June 27, 2002, to report the filing of an application with the State Corporation Commission of Virginia to increase base rates within Virginia.

•		As co-registrants, WGL Holdings, Inc. and Washington Gas Light Company filed a Current Report on Form 8-K dated July 16, 2002, to report the positions taken by intervenors in the regulatory filing made by Washington Gas before the PSC of MD on March 28, 2002.

•		WGL Holdings, Inc. filed a Current Report on Form 8-K dated on August 2, 2002, to report that Chairman and Chief Executive Officer James H. DeGraffenreidt, Jr. and Vice President and Chief Financial Officer Frederic M. Kline filed statements required by an order issued by the Securities and Exchange Commission (SEC) on June 27, 2002 in SEC File No. 4-460 pursuant to section 21(a)(1) of the Securities Exchange Act of 1934.