Back to GetFilings.com

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

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year ended September 30, 2002

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 registrants were required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes   X       No ______.

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b of the Act): Yes ______    No   X  

The aggregate market value of the voting common equity held by non-affiliates of the registrant, WGL Holdings, Inc., amounted to $1,300,421,904 as of March 31, 2002.

WGL Holdings common stock, no par value outstanding as of October 31, 2002: 48,578,921 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 October 31, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of WGL Holdings, Inc.’s definitive Proxy Statement and Washington Gas Light Company’s definitive Information Statement in connection with the 2003 Annual meeting of Shareholders, to be filed with the Commission pursuant to Regulation 14A and 14C not later than 120 days after September 30, 2002, are incorporated in Part III of this report.

Form 10-K
For the Fiscal Year Ended September 30, 2002

TABLE OF CONTENTS

PART I

1

FORWARD LOOKING STATEMENTS

     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 registrants (WGL Holdings, Inc. and Washington Gas Light Company) believe such forward-looking statements are based on reasonable assumptions, they cannot give assurance that every objective will be reached. Forward-looking statements speak only as of today and the registrants assume no duty to update them. The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

	•		changes in economic, competitive, political and regulatory conditions and developments;
	•		changes in capital and energy commodity market conditions;
	•		changes in credit market conditions and creditworthiness of customers and suppliers;
	•		changes in relevant laws and regulations, including tax, environmental and employment laws and regulations;
	•		weather conditions;
	•		legislative, regulatory and judicial mandates and decisions;
	•		timing and success of business and product development efforts;
	•		technological improvements;
	•		the pace of deregulation efforts and the availability of other competitive alternatives;
	•		terrorist activities; and
	•		other uncertainties.

     Such factors are difficult to predict accurately and are generally beyond the direct control of the registrants. Accordingly, while they believe that the assumptions are reasonable, the registrants 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 registrants’ business as described in this annual report on Form 10-K. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.

FILING FORMAT

     This Annual Report on Form 10-K 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.

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

     WGL Holdings—describes the financial condition and results of operations of WGL Holdings and its subsidiaries on a consolidated basis. It includes brief discussions of WGL Holdings’ regulated utility and non-utility operations. The majority of WGL Holdings’ results of operations are derived from the regulated utility, Washington Gas, and to a much lesser extent, the results of the non-utility operations. Please refer to Washington Gas’ Results of Operations to obtain a complete understanding of the regulated utility’s operations.

     Washington Gas—comprises the 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, the focus of this section includes a detailed description of the financial condition and results of operations of the regulated utility. This section also describes any factors and results, related to the regulated utility, that are significantly different from those operations 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 Consolidated Financial Statements and the Notes to Consolidated Financial Statements.

2

Part I

ITEM 1—BUSINESS

     INTRODUCTION

     Effective November 1, 2000, Washington Gas and its subsidiaries became subsidiaries of WGL Holdings, a holding company 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, hence all of the shares of common stock of Washington Gas’ wholly owned subsidiaries (Crab Run Gas Company, Hampshire Gas Company and Washington Gas Resources Corporation) and a 50-percent equity investment in Primary Investors, LLC (Primary Investors) were also transferred to WGL Holdings as a result of the corporate restructuring. For further discussion of the Company’s restructuring, see Note 2 of the Notes to Consolidated Financial Statements.

     WGL Holdings, through its subsidiaries, sells and delivers natural gas and provides a variety of energy-related products and services to customers in the metropolitan Washington, D.C., Maryland and Virginia areas and beyond. The Company’s core subsidiary, Washington Gas, is involved in the distribution and sale of natural gas that is predominantly regulated by state regulatory commissions. The Company also offers energy-related products and services that are closely related to its core business. The majority of these energy-related activities are performed by wholly owned subsidiaries of Washington Gas Resources Corporation (Washington Gas Resources).

     SUBSIDIARIES

     During fiscal year 2002, WGL Holdings had four wholly owned subsidiaries and a 50-percent equity interest in a limited liability company, Primary Investors. As a result of a September 20, 2002 restructuring agreement and a final closing on October 15, 2002, between WGL Holdings and a 50-percent co-investor, Thayer Capital Partners (Thayer), the Company no longer has any remaining equity investment in Primary Investors or any financial commitment to this investment. For further discussion of the restructuring agreement with Thayer, see Note 3 of the Notes to Consolidated Financial Statements. The following paragraphs describe each subsidiary in the WGL Holdings’ corporate structure at September 30, 2002.

     Washington Gas—is a public utility that delivers and sells natural gas to customers in Washington, D.C. and adjoining areas in Maryland, Virginia and several cities and towns in the northern Shenandoah Valley of Virginia. Washington Gas has been engaged in the gas distribution business for 154 years, having been originally incorporated by an Act of Congress in 1848. It became a domestic corporation of the Commonwealth of Virginia in 1953 and a corporation of the District of Columbia in 1957. On April 1, 2000, Washington Gas merged its former wholly owned gas distribution subsidiary, Shenandoah Gas Company (Shenandoah) into itself. The merged company now serves approximately 939,000 customer meters in an area having a population estimated at 4.8 million. During the fiscal years ended September 30, 2002, 2001 and 2000, Washington Gas’ regulated operations reported operating revenues of $939 million, $1,459 million and $1,031 million, respectively, or 59 percent, 75 percent and 83 percent, respectively, of the Company’s total operating revenues.

     The following table lists the number of meters served and therms delivered by jurisdiction as of and for the year ended September 30, 2002. A therm of gas contains 100,000 British Thermal Units of heat, the heat content of approximately 100 cubic feet of natural gas. Ten million therms equal one billion cubic feet (bcf) of natural gas.

3

     Of the 1,507 million therms delivered in fiscal year 2002, 47.4 percent were sold and delivered by Washington Gas and 52.6 percent were delivered to various customers that acquired their gas from third-party marketers. Of the total therms delivered by Washington Gas, 69.7 percent went to firm customers and 30.3 percent went to interruptible customers. To be eligible to receive interruptible service, a customer must be capable of using an alternate fuel as a substitute for natural gas in the event Washington Gas determines their service must be interrupted to accommodate firm customers’ needs during periods of peak demand.

     Crab Run Gas Company (Crab Run)—is an exploration and production company whose assets are managed by an Oklahoma-based limited partnership. At September 30, 2002, Crab Run’s investment in this partnership was not material. WGL Holdings’ investment in this subsidiary is not material and management expects that future investments in Crab Run will be minimal.

     Hampshire Gas Company (Hampshire)— is a regulated natural gas storage business that operates an underground storage field in the vicinity of Augusta, West Virginia. Hampshire serves Washington Gas under a tariff administered by the Federal Energy Regulatory Commission (FERC).

     Washington Gas Resources—owns the majority of the Company’s non-utility, non-regulated subsidiaries. Washington Gas Resources’ subsidiaries, which are described below, include American Combustion Industries, Inc. (ACI), Brandywood Estates, Inc. (Brandywood), WG Maritime Plaza I, Inc. (WG Maritime), Washington Gas Energy Services, Inc. (WGEServices), Washington Gas Energy Systems, Inc. (WGESystems), Washington Gas Consumer Services, Inc. (Consumer Services) and Washington Gas Credit Corporation (Credit Corp.).

	ACI—is a full-service mechanical contractor that offers turnkey products and services associated with the design, renovation, sale, installation and service of mechanical heating, ventilating and air conditioning (HVAC) systems. ACI serves the industrial, commercial and institutional sectors in Washington, Baltimore, Philadelphia, Richmond and Northern Virginia Areas.

Brandywood—was a general partner with a major developer at September 30, 2002, in a venture to develop 1,605 acres in Prince George’s County, Maryland. In March 1996, the partnership submitted a rezoning application to Prince George’s County for 790 acres of its property. The mixed-use development plan proposed approximately 1,600 homes, 100,000 square feet of retail space and 105,000 square feet of office space. In 1999, the rezoning application was remanded to a zoning hearing examiner for additional review. After not being successful in attempts to rezone the property, in October 2002, the partnership sold 1,605 acres of undeveloped land in Prince George’s County, Maryland.

WG Maritime—is a partner with a major developer whose purpose is to develop a 12-acre parcel owned by Washington Gas in the District of Columbia. Washington Gas selected the Lincoln Property Company to design, execute and manage the various phases of the development. The development is intended to be a mixed-use commercial project that will be implemented in five phases. The entire project is expected to be completed over a five-to-ten year period, depending on market demand. To date, Washington Gas has entered into two ninety-nine year ground leases for the first and second phases. WG Maritime holds an interest in both Phase I and Phase II ground lease tenants. None of WGL Holdings subsidiaries, including Washington Gas, will make capital investments in this venture or play an active role in any development or management activities.

	WGEServices—is engaged in the sale of natural gas and electricity to retail customers in competition with unregulated marketers. At September 30, 2002, WGEServices served approximately 155,000 residential, commercial and industrial natural gas customers and 66,000 electricity customers both inside and outside

4

	Washington Gas’ traditional service territory. WGEServices purchases natural gas and electricity commodities for resale and does not own electric generation, transmission or distribution facilities.

	WGESystems—provides commercial energy services, including the design and renovation of mechanical HVAC systems in the District of Columbia and parts of Virginia and Maryland. Its business is very similar to that of ACI.

	Consumer Services—was created to evaluate and perform various non-regulated, energy-related functions. This subsidiary is currently inactive and conducts no business at this time.

	Credit Corp.—offered financing to customers to purchase gas appliances and other energy-related equipment. It is no longer offering new loans, but continues to service existing loans.

     Primary Investors— In August 1999, Washington Gas and Thayer formed a limited liability company, Primary Investors. Effective November 1, 2000, in connection with a corporate restructuring, Washington Gas transferred its ownership interest in Primary Investors to WGL Holdings. WGL Holdings and Thayer each owned fifty percent of Primary Investors. As a result of the September 20, 2002 restructuring agreement and a final closing on October 15, 2002, the Company no longer has an investment in this equity venture and has no further financial commitment to this investment.

     During the time that Thayer and WGL Holdings or Washington Gas co-owned Primary Investors, a wholly owned subsidiary of Primary Investors had a loan from a commercial bank for up to $6.75 million. WGL Holdings neither guaranteed nor cosigned this loan, and accordingly, had no obligation to repay this loan. On September 19, 2002, in connection with the restructuring of Primary Investors, the commercial bank that made the loan to the subsidiary of Primary Investors, referenced above, released WGL Holdings and its affiliates from any potential claim that the commercial bank may have made arising from that loan. No payment was required from WGL Holdings for this release. On September 20, 2002, WGL Holdings and Thayer entered into an agreement to restructure Primary Investors such that WGL Holdings has no liability or financial commitment to Thayer, Primary Investors or any subsidiary of Primary Investors. On October 15, 2002, WGL Holdings and Primary Investors executed a final closing and transferred all of its interest in Primary Investors to Thayer. As of September 30, 2002, the Company had no net investment in this equity venture.

     INDUSTRY SEGMENTS

     WGL Holdings, through its subsidiaries, sells and delivers natural gas and provides a variety of energy-related products and services to customers primarily in the metropolitan Washington, D.C., Maryland, and Virginia areas. The Company’s core subsidiary, Washington Gas, is involved in the distribution and sale of natural gas that is primarily regulated by state regulatory commissions. In response to changes in federal and state regulation, the Company has taken the initiative to offer competitively priced natural gas and electricity to customers through its unregulated retail energy-marketing subsidiary. The Company also offers energy-related products and services that are closely related to its core business. The majority of these energy-related activities are performed by wholly owned subsidiaries of Washington Gas Resources Corp. (Washington Gas Resources).

     WGL Holdings has three core operating segments: 1) regulated utility; 2) retail energy-marketing; and 3) heating, ventilating and air conditioning (HVAC) products and services. These three segments are described below:

     Regulated Utility. With over 92 percent of the Company’s assets, Washington Gas delivers natural gas to retail customers in accordance with tariffs set by state or District of Columbia regulatory commissions that have jurisdiction over Washington Gas’ rates. These rates are intended to provide the regulated utility with an opportunity to earn a reasonable rate of return on the investment devoted to the delivery of natural gas to customers. Washington Gas also sells the natural gas commodity to customers who have not elected to purchase natural gas from unregulated third-party marketers. The regulated utility does not incur a profit or a loss when it sells the natural gas commodity as utility customers are charged for the natural gas commodity at the same cost the regulated utility incurs, subject to routine regulatory reviews of the reasonableness of these costs. At September 30, 2002, the regulated utility was selling and delivering the natural gas commodity to approximately 78.8 percent of its customers. The remaining 21.2 percent of Washington Gas’ customers utilize the delivery services of Washington Gas for delivery of the natural gas commodity purchased from third-party marketers, one of which is a subsidiary of WGL Holdings. Factors critical to the success of the regulated utility include operating a safe, reliable natural gas distribution system, and recovering the costs and expenses of this business, which include a fair rate of return on invested capital that is allowed by the regulatory commissions that have jurisdiction over the regulated utility’s rates. Hampshire Gas Company, a wholly owned subsidiary of WGL Holdings, is a regulated natural gas storage business that operates an underground storage field

5

on behalf of Washington Gas in accordance with a tariff administered by the Federal Energy Regulatory Commission (FERC).

     Retail Energy-Marketing. Washington Gas Energy Services, Inc. (WGEServices), a wholly owned subsidiary of Washington Gas Resources, competes with other third-party marketers by selling natural gas and electricity directly to residential, commercial and industrial customers, both inside and outside of the regulated utility’s traditional service territory. WGEServices began selling electricity in fiscal year 2001. WGEServices has the opportunity to make a profit or the potential to incur a loss from these sales. While WGEServices markets the natural gas and electric commodities, regulated utilities such as Washington Gas deliver the natural gas and electric commodities to their customers. No subsidiary or affiliate of the Company owns or operates any electric generation, electric transmission or electric distribution assets. Factors critical to the success of the retail energy-marketing business are managing the market risk of the difference between the sales price and the cost of natural gas and electricity, managing credit risks associated with customers and suppliers to this segment, and controlling the level of selling, general and administrative costs, most notably customer acquisition costs.

     HVAC. Two wholly owned subsidiaries, Washington Gas Energy Systems, Inc. (WGESystems) and American Combustion Industries, Inc. (ACI), provide turnkey design-build renovation projects to the commercial and government markets. For most of fiscal year 2002, through a former 50-percent equity investment in Primary Investors, LLC (Primary Investors), the HVAC segment also installed, repaired and maintained HVAC and plumbing equipment in the residential and small commercial markets. As a result of a restructuring agreement on September 20, 2002 and a final closing on October 15, 2002 between the Company and a 50-percent co-investor, the Company no longer has any remaining equity investment in Primary Investors or any financial commitment to the residential HVAC investment.

     The commercial HVAC operations focus on retrofitting a large number of aging commercial and government structures, primarily in the District of Columbia and parts of Maryland and Virginia. Factors critical to the commercial HVAC business’ success include the ability to maintain and grow the backlog of existing work through diversification of the market segments these subsidiaries serve and estimating and managing fixed price contracts.

     For further discussion of segment results, see Note 15 of the Notes to Consolidated Financial Statements.

     All reported per share amounts discussed in this document are based on average common shares outstanding, basic and diluted.

     RATES AND REGULATORY MATTERS

     Washington Gas is regulated by the Public Service Commission of the District of Columbia (PSC of DC), the Public Service Commission of Maryland (PSC of MD) and the State Corporation Commission of Virginia (SCC of VA). Hampshire is regulated by the FERC. See section, General Regulatory Matters, for a discussion of general regulatory issues and initiatives and Jurisdictional Rates and Regulatory Matters for information regarding the commissions and a discussion of recent regulatory proceedings.

     GENERAL REGULATORY MATTERS

     Regulated Service to Firm Customers

     In the District of Columbia jurisdiction, the firm residential and non-residential rate schedules are based upon 1) a flat commodity charge for each therm of gas consumed; and 2) a customer charge designed to recover certain fixed costs. Non-residential firm customers also pay a peak-usage charge that provides information on gas costs to customers during both peak and non-peak periods. In the Maryland and Virginia jurisdictions, the rate schedules for firm service are comprised of a fixed-charge per customer and a variable commodity rate structured as a declining block rate. Declining block rates have the impact of reducing changes in net revenue for deviations from normal weather.

     The firm tariff provisions in each Washington Gas jurisdiction contain gas cost recovery mechanisms that provide for the recovery of the invoice cost of gas applicable to firm customers. Under these mechanisms, firm customers’ rates are adjusted periodically to reflect increases and decreases in the actual cost of gas. Moreover, regulations in each jurisdiction provide for an annual reconciliation of gas costs collected from firm customers to the applicable invoice cost of gas paid to suppliers.

6

     Regulated Service to Interruptible Customers

     To qualify for interruptible service, a customer must be capable of substituting an alternate fuel for natural gas should Washington Gas determine that it needs to interrupt their service temporarily to meet firm customers’ needs during periods of peak demand. The effect on net income of changes in delivered volumes and prices to the interruptible class is minimized by margin-sharing arrangements that are included in Washington Gas’ rate design. Under these arrangements, Washington Gas returns a majority of the margins earned on interruptible gas sales and deliveries to firm customers after a gross margin threshold is reached in exchange for a portion of the fixed costs of providing service from the interruptible to the firm class. In Maryland, Washington Gas retains 100 percent of the gross margins associated with deliveries to new interruptible customers added after August 1989, until it has recovered its investment and the associated capital costs.

     Natural Gas Unbundling Initiatives

     Currently, for the majority of its business, the price that Washington Gas charges its customers is based on the combination of the cost it incurs for the natural gas commodity and the cost it incurs to deliver natural gas to its customers. Although most of Washington Gas’ revenue continues to be produced from the sale and delivery of natural gas on this combined or “bundled” basis, regulatory initiatives have allowed the separation or unbundling of the sale of the natural gas commodity from the delivery of gas on the regulated utility’s distribution system (delivery service). Margins generated from deliveries of customer-owned gas are equivalent to those earned on bundled gas service. Therefore, Washington Gas does not experience any loss of margins when customers choose to purchase their gas from a third-party marketer.

     Throughout the Washington Gas service area, all customers may choose to purchase their gas from an variety of unregulated marketers, including WGEServices, an affiliated natural gas and electricity retail marketer. When a customer selects an unregulated marketer as their gas supplier, Washington Gas continues to charge these customers to deliver natural gas through its distribution system. The status of the unbundling programs in the regulated utility’s major jurisdictions as of September 30, 2002, is discussed further in the section on Competition.

     WGEServices sells natural gas, as a third-party marketer, to both firm and interruptible customers in each Washington Gas jurisdiction in addition to other areas in Maryland and Virginia that are outside of the regulated utility’s jurisdictional service area. As a non-regulated marketer in a competitive market, WGEServices retains the full amount of margins generated on sales of the natural gas commodity, but also has the potential to incur a loss from the sales of this commodity.

     JURISDICTIONAL RATES AND REGULATORY MATTERS

     Washington Gas implemented a revenue increase in its Maryland jurisdiction effective September 30, 2002. Washington Gas has also requested authority to increase its rates from the applicable regulatory agency in each of the two remaining jurisdictions where the company operates. An order was issued on October 29, 2002 in the District of Columbia ordering Washington Gas to lower revenues in this jurisdiction and on November 6, 2002, Washington Gas filed an application for reconsideration as discussed below. Washington Gas filed for a rate increase in Virginia that is also discussed below. A description of each commission and the key issues in each jurisdiction are also discussed below.

     District of Columbia Jurisdiction

     The PSC of DC consists of three full-time members who are appointed by the Mayor with the advice and consent of the District of Columbia City Council. The term of each commissioner is four years. There are no limitations on the number of terms that can be served.

     Rate Case

     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 reasonableness of the existing rates of Washington Gas. On February 28, 2000, Washington Gas filed an answer urging the PSC of DC to dismiss the OPC complaint. On March 21, 2001, the PSC of DC issued an Order granting 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.

7

     On June 19, 2001, Washington Gas filed an application with the PSC of DC to increase rates in the District of Columbia. The request sought to increase overall annual revenues in the District of Columbia by approximately $16.3 million, or 6.8 percent, based on a proposed return on equity of 12.25 percent.

     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 was premised on a 9.75 percent return on common equity. The OPC also recommended a one-time refund of an estimated $9.0 million associated with the cost of pensions and other postretirement benefits that had been collected by Washington Gas in accordance with a tracking mechanism previously approved by the PSC of DC. Washington Gas filed rebuttal testimony on April 15, 2002. Evidentiary hearings were held the week of May 20, 2002.

     On October 29, 2002 the PSC of DC issued an order for Washington Gas to decrease rates. The order directs a decrease in overall annual revenues in the District of Columbia of approximately $7.5 million. The PSC of DC approved a return on common equity of 10.6 percent and an overall rate of return of 8.83 percent. The PSC of DC rejected Washington Gas’ incentive rate plan. The PSC of DC rejected a proposal by OPC seeking retroactive refunds of asset management revenues collected by Washington Gas in the past and approved the utility’s proposal to share fifty percent of such future revenues with customers. The PSC of DC also ordered Washington Gas to refund the pension and postretirement costs, described above, over three years. Because these benefits had been collected through a tracking mechanism, a liability has already been established and there will be no effect on income.

     On November 6, 2002 Washington Gas filed with the PSC of DC an Application for Reconsideration (Application) of the order issued by the PSC of DC on October 29, 2002. Washington Gas’ Application automatically stayed the PSC of DC’s order. Washington Gas claims that the PSC of DC made calculation errors that overstated the amount of the revenue reduction by $1.4 million. Washington Gas also claims that the PSC of DC failed to take into consideration legitimate costs and operating expenses incurred by Washington Gas and included in the evidentiary record of the case. Washington Gas requested the PSC of DC to modify its ruling to correct calculation errors and apply its articulated principles consistently with the result that Washington Gas would only reduce rates by $1.9 million, which would allow Washington Gas the opportunity to earn the 10.6 percent return on common equity and the 8.83 percent overall rate of return authorized by the PSC of DC (assuming no other changes in post-test period costs or expenses) instead of the $7.5 million reduction noted in the October 29, 2002 order.

     On November 27, 2002, OPC filed an Application for several issues from the October 29, 2002 order, one of which is the retroactive refund of asset management revenues. Another intervenor in this case also filed an Application for Reconsideration. At the present time Washington Gas cannot predict the outcome of the Applications. Unless the PSC of DC decides against Washington Gas on the matter of asset management revenues, the decision by the PSC of DC on the Applications will apply on a prospective basis from the date of the order deciding the Applications for all matters. The PSC of DC has extended the time to issue a decision in this proceeding to January 13, 2003.

     Maryland Jurisdiction

     The PSC of MD consists of five full-time members who are appointed by the Governor with the advice and consent of the Senate of Maryland. Each commissioner is appointed to a five-year term, with no limit on the number of terms that can be served.

     The regulated utility is required to give 30 days’ notice when filing for a rate increase. The PSC of MD may initially suspend the proposed increase for 150 days beyond the 30-day notice period and then has the option to extend the suspension for an additional 30 days. If action has not been taken after 210 days, rates may be placed into effect subject to refund.

     Rate Case

     On March 28, 2002, Washington Gas filed an application with the 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 or 9.67 percent overall rate of return on a year-end rate base, 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.”

8

     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 filed with the PSC of MD on August 6, 2002. The revised settlement provided for an increase of $9.25 million in annual non-gas operating revenues. 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 was 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.

     On September 27, 2002, the PSC of MD issued an Order approving the revised settlement agreement that had been filed with the PSC of MD on August 6, 2002, without modification. The increase in revenues became effective for meter readings of Maryland customers on and after September 30, 2002.

     Virginia Jurisdiction

     The SCC of VA consists of three full-time members who are elected by the General Assembly of Virginia. Each commissioner has a six-year term with no limitation on the number of terms that can be served.

     Either of two methods may be used to request a modification of existing rates. First, Washington Gas may file a general rate application in which it may propose new adjustments to the cost of service which have not previously been approved by the Commission, as well as a revised return on equity. The rates under this process may take effect 150 days after the filing, subject to refund pending the outcome of the SCC of VA’s action on the application. Second, an Expedited Rate Case (ERC) procedure is available which provides that rate increases may take effect 30 days after the filing date, also subject to refund. Under the ERC mechanism, Washington Gas may not propose any new adjustments for issues not previously approved in the last general rate case, or a change in its return on equity from the level authorized in its last general rate case.

     Rate Case

     On June 14, 2002, Washington Gas filed with the SCC of VA an application to increase annual revenues in Virginia. The Shenandoah Gas Division of Washington Gas is included in the filing. The application requested to increase overall annual revenues by approximately $23.8 million. The Company requested an overall rate of return of 9.42 percent and a return on common equity of 12.25 percent versus its current return on common equity of 11.50 percent for Washington Gas and 10.7 percent for Shenandoah Gas. The Company also requested approval of an Incentive Rate Plan, which includes a 50/50 sharing between customers and Washington Gas of weather-normalized Virginia regulated earnings 100 basis points above or below the SCC of VA’s authorized return on equity. The incentive rate plan proposed no change in the method of recovering the cost of natural gas incurred by Washington Gas.

     Under the regulations of the SCC of VA, Washington Gas placed the entire amount of the requested revenue increase into effect on November 12, 2002, subject to refund pending the SCC of VA’s final decision in the proceeding. The collection of increased revenues and the contingent liability for refunds only relate to future financial results. Thus there was no provision for rate refunds as of September 30, 2002.

     On November 15, 2002, the Staff of the SCC of VA (Staff) filed testimony in response to Washington Gas’ presentation. The Staff took the position that Washington Gas’ revenues are sufficient and do not need to be revised, but recommended that operating revenues for the Shenandoah Gas Division be decreased by $1.4 million. The Staff’s estimate of the cost of equity for Washington Gas, including the Shenandoah Division, was a range between 9.50 percent and 10.50 percent. The Staff recommends the SCC of VA adopt a 10.0 percent return on equity for Washington Gas including the Shenandoah Division.

     Washington Gas filed rebuttal testimony in this proceeding on December 4, 2002. Hearings were held the week of December 16, 2002. The Company cannot predict the outcome of this pending regulatory proceeding.

     In a separate, but related matter, in accordance with an Order of the SCC of VA, Washington Gas performed a depreciation study, using data 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 in the first quarter of fiscal year

9

2002. Since that time, Washington Gas and the Staff 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.

     Staff issued a letter dated October 2, 2002 approving new depreciation rates for Washington Gas and the related Shenandoah Gas Division, which would increase the annual depreciation expense by approximately $4.0 million. The Staff stated its position that the approved rates should be implemented as of January 1, 2002, but recognized that the implementation date will ultimately be decided by the SCC of VA in the pending rate case discussed above. Washington Gas believes the new depreciation rates should be implemented coincident with the effective date of the new base rates, which is the implementation date, November 12, 2002, of the interim rates that are subject to refund.

     The financial statements as of and for the periods ended September 30, 2002 do not reflect any modification of depreciation rates that Washington Gas has been utilizing since it last received formal approval of depreciation rates by the SCC of VA. To the extent the position of the Staff is upheld by the SCC of VA in the current rate case, without appropriate revenue relief, Washington Gas would have to record a charge to income for additional depreciation expense calculated from January 1, 2002 to November 12, 2002, without a corresponding amount of revenue.

     The Management’s Discussions and Analysis contains a table summarizing Washington Gas’ major rate applications and results thereof.

     COMPETITION

     COMPETITION WITH OTHER ENERGY PRODUCTS

     The core business of the regulated utility faces competition based on customers’ preferences for natural gas compared to other energy products and the comparative prices of those products. Currently, the most significant product competition occurs between natural gas and electricity in the residential market. The residential market generates a significant proportion of the regulated utility’s net income. In its service territory, Washington Gas continues to attract the majority of the new residential construction market. The Company believes that consumers’ continuing preference for natural gas allows Washington Gas to maintain a strong presence.

     The regulated utility has generally maintained a price advantage over electricity in its service area. Increases in the price of the natural gas commodity during the winter of fiscal year 2001 altered this situation somewhat. However, by the end of fiscal year 2001 and during fiscal year 2002, natural gas prices have settled to more traditional levels. Furthermore, as discussed below, restructuring in both the natural gas and electric industries is leading to changes in traditional pricing models. As part of the electric industry restructuring effort, certain business segments are moving toward market-based pricing, with third-party marketers of electricity participating in retail markets. Electric industry restructuring may result in lower comparative pricing for electric service and other alternative energy sources, including natural gas. These changes could result in increased competition for the regulated utility.

     In the interruptible market, the regulated utility’s customers must be capable of using a fuel other than natural gas when demand by the regulated utility’s firm customers peaks. Fuel oil is the most significant competing energy alternative to natural gas. The regulated utility’s success in this market depends largely on the relationship between gas and oil prices. Because the supply of natural gas is primarily derived from domestic sources, the relationship between supply and demand generally has the greatest impact on natural gas prices. As a large portion of oil comes from foreign sources, political events can have significant influences on oil supplies and accordingly, oil prices.

     DEREGULATION

     In each of the jurisdictions (the District of Columbia, Maryland and Virginia) served by the Company’s regulated utility, regulators and utilities have implemented customer choice programs. These programs provide customers with an opportunity to choose to purchase their natural gas and/or electric commodity from third-party marketers, rather than purchasing these commodities as part of a bundled service from the local utility. When customers choose to purchase their natural gas commodity from a third-party marketer, there is no impact on the regulated utility’s net revenues or net income because Washington Gas passes the cost of gas to customers without any mark-up. However, these customer choice programs provide unregulated third-party marketers, such as WGEServices, with opportunities to profit from the sale of the natural gas commodity or electricity in competitive markets. Participating in this rapidly evolving marketplace also poses new risks and challenges discussed below that must be addressed in the Company’s current and future strategies.

10

     THE NATURAL GAS DELIVERY FUNCTION

     The natural gas delivery function, the core business of the Company’s regulated utility, continues to be regulated by local regulatory commissions. In developing this core business, Washington Gas has invested over $2.4 billion to construct a safe, reliable and economical natural gas distribution system. Because of the high fixed costs and significant safety and environmental considerations associated with building and operating a distribution system, it is expected that there will continue to be only one owner and operator of a natural gas distribution system per franchise area for the foreseeable future. The nature of Washington Gas’ customer base and the distance of most customers from interstate pipelines mitigate the threat of bypass of its facilities by other potential delivery service providers.

     Washington Gas expects that local regulatory commissions will continue to set the prices and terms for delivery service that give it an opportunity to earn a fair rate of return on the capital invested in its distribution system and to recover reasonable operating expenses. Washington Gas plans to continue constructing, operating and maintaining its natural gas distribution system.

     The Company does not foresee any significant near-term changes in the regulated utility’s risk profile.

     THE MERCHANT FUNCTION AND NATURAL GAS UNBUNDLING

     The implementation of customer choice programs for natural gas customers is well underway in the District of Columbia, Maryland and Virginia. At September 30, 2002, all of the customers served by Washington Gas were eligible to participate in customer choice programs. Out of approximately 939,000 customers at September 30, 2002, approximately 199,000 customers purchase their natural gas commodity from unregulated third-party marketers. The following table provides the status of natural gas unbundling in the regulated utility’s major jurisdictions at September 30, 2002. The number and percentage of customers reflected in this table include all customers who chose to purchase natural gas from a third-party marketer, including WGEServices.

     Ultimately, the Company expects the regulated utility may play a much smaller role in the merchant function and may eventually exit the merchant function as customers buy natural gas from unregulated marketers. During this transition period, Washington Gas continues to have certain obligations under long-term contracts to purchase natural gas from producers and transportation capacity from interstate pipeline companies. Accordingly, the strategy of Washington Gas focuses on managing efficiently the portfolio of contractual resources, recovering contractual costs and maximizing the value of contractual assets.

     Washington Gas actively manages its supply portfolio to balance its sales and supply obligations. Currently, the regulated utility includes the cost of the natural gas commodity and pipeline services in the purchased gas costs that it includes in firm customers’ rates, subject to regulatory review. The regulated utility’s jurisdictional tariffs contain gas cost mechanisms that allow it to recover the invoice cost of gas applicable to firm customers. Washington Gas believes it prudently entered into its gas contracts and that the costs being incurred should be recoverable from

11

customers. If future unbundling or other initiatives remove the current gas cost recovery provisions, Washington Gas could be adversely impacted to the extent it incurs non-competitive gas costs without other satisfactory regulatory mechanisms available to recover any costs that may exceed market prices. Washington Gas currently has recovery mechanisms for such potentially stranded costs in the District of Columbia, Maryland and Virginia.

     If Washington Gas were to determine that competition or changing regulation would preclude it from recovering these costs in rates, these costs would be charged to expense without any corresponding revenue recovery. If this situation were to occur and depending upon the timing of the occurrence, the impact on Washington Gas’ financial position and results of operations would likely be significant. In the event that a regulatory body disallows the recovery of such costs, these costs would be borne by shareholders.

     To minimize its exposure to contract risks, Washington Gas has mechanisms in its customer choice programs to assign to participating third-party marketers approximately 65 percent of the storage and peak winter capacity resources that were dedicated to serving bundled service customers when those customers elected a third-party marketer. Washington Gas currently has mechanisms filed or approved with each of its local commissions to assign up to 100 percent of the storage, transportation and peak winter capacity resources beginning during the 2003-2004 heating season. Washington Gas continually updates its forecasts of customer growth and the associated requirements for pipeline transportation, storage and peaking resources. While the regulated utility is not renewing expiring long-term gas commodity contracts at the present time, it is generally renewing pipeline transportation and storage contracts to meet its forecasts of increased customer gas requirements and to comply with regulatory mechanisms to provide for or make available such resources to marketers serving customers in the customer choice programs. As the gas commodity contracts expire, Washington Gas enters into flexible short-term purchasing arrangements to meet demand. This strategy mitigates the exposure to long-term commitments beyond minimum FERC-approved contract requirements, while ensuring reliable and competitively priced gas for customers that continue to buy the natural gas commodity from the regulated utility.

     To maximize the value of its contractual assets, the regulated utility has entered into contracts with unregulated marketers that make use of the regulated utility’s firm storage and transportation rights to meet the regulated utility’s city gate delivery needs and to make off-system sales when such storage and transportation rights are underutilized. The regulated utility continues to pay the fixed charges associated with the firm storage and transportation contracts used to make sales.

     UNREGULATED RETAIL ENERGY-MARKETING AND NATURAL GAS AND ELECTRIC UNBUNDLING

     As the regulated utility’s role in the merchant function decreases over time, opportunities emerge for unregulated natural gas providers. In the deregulated marketplace, third-party marketers have profit-making opportunities, but also assume the risk of loss.

     Recognizing the opportunities presented by competition, the Company established WGEServices, an unregulated retail energy-marketing subsidiary in fiscal year 1997. WGEServices now markets both natural gas and electricity to residential, commercial and industrial customers both inside and outside of the Washington Gas service area. To date, WGEServices has grown to nearly 155,000 natural gas customers and 66,000 electric customers compared to 125,000 natural gas customers and 44,000 electric customers in fiscal year 2001 (the initial year of electric sales), and 123,900 natural gas customers in fiscal year 2000. WGEServices gross revenues in fiscal years 2002 and 2001, which include both sales of natural gas and electricity, were $595.9 million and $419.2 million, respectively. WGEServices had net income of $5.0 million in fiscal year 2002 and incurred a net loss of $1.6 million in fiscal year 2001, due mainly to acquisition costs associated with obtaining new electricity customers. During fiscal year 2000, WGEServices had revenues of $166.7 million from natural gas customers and net income of $0.5 million.

     The regulatory process tends to stabilize rates and revenues of the regulated utility. However, there can be significant volatility for unregulated third-party marketers, such as WGEServices. Thus, while WGEServices has a significant potential for continued growth, it must carefully manage risks in a volatile commodity market.

     WGEServices competes with other third-party marketers to sell the unregulated natural gas commodity to customers. Marketers of the natural gas commodity compete largely on price, and gross margins are relatively small. Consequently, operating margins for the sale of unregulated natural gas are typically lower than those earned by the regulated utility.

     In addition, WGEServices faces supply-side risks. To minimize these risks, WGEServices’ strategy is to manage its natural gas contract portfolio in a manner that closely aligns the volumes of gas it purchases with firm commitments from customers to purchase this gas and enter into transactions to moderate gas supply cost volatility. WGEServices

12

purchases its gas from a number of wholesale suppliers in order to avoid relying on any single provider for its natural gas supply. Additionally, WGEServices maintains gas storage inventory to meet daily and monthly fluctuations in demand caused by variations in normal weather. Similarly, WGEServices’ dependency on any one customer or group of customers is limited. Beginning in fiscal year 2002, WGEServices entered into derivative contracts in order to balance its sales commitments with the amount of gas it must purchase to satisfy those commitments. WGEServices has a risk management policy in place and periodically reassesses its policy to determine its adequacy to mitigate risks in changing markets.

     Customer choice programs are not unique to the natural gas industry. Choice for electric customers has been implemented in each jurisdiction in which the regulated utility operates. Similar to the natural gas industry, participants in these programs can choose either to continue purchasing bundled electricity service from their local electric distribution utility or to purchase electricity from a third-party marketer.

     WGEServices competes with other third-party marketers to sell electric supply services to customers. Marketers of electric supply service compete largely on price and gross margins are relatively small.

     In anticipation of the opportunities to sell electricity in jurisdictions that have implemented customer choice programs, WGEServices entered into a master purchase and sale agreement in April 2000 with a wholesale energy marketer. Under the agreement, as WGEServices identifies profitable opportunities, it purchases electric energy, capacity and certain ancillary services from the wholesaler for resale to retail electricity customers. In each jurisdiction that has introduced customer choice programs, WGEServices evaluates the associated profit potential and other strategic factors. WGEServices does not own or operate any electric generation, electric transmission or electric distribution assets.

     Some of the supplier companies that sell gas to WGEServices and the sole provider of electricity under the full-requirements contract mentioned above, have relatively low or below investment grade credit ratings as determined by major credit rating agencies. Depending on the future ability of these suppliers to deliver natural gas or electricity under existing contracts, WGEServices could be financially exposed for the difference between the price at which WGEServices has contracted to buy natural gas and electricity, and the cost of any replacement natural gas or electricity that may need to be purchased.

     POTENTIAL FOR FURTHER UNBUNDLING

     Currently, the Company’s regulated utility provides customer services, such as preparing bills, reading meters and responding to customer inquiries, as part of its core utility function. Unregulated third-party marketers have the option to assume responsibility for bill preparation and customer collections. In addition to billing and collecting from customers for the natural gas commodity, third-party marketers’ bills may include natural gas delivery charges due the regulated utility, which they subsequently remit to Washington Gas. Although Washington Gas still provides most customer services on a bundled basis, the potential exists for future deregulation initiatives to separate these services from the core utility function. In that case, customers could choose to have unregulated competitors provide these services.

     To remain competitive, the Company strives to improve quality and efficiency and to reduce costs with the goal of achieving market-level performance. Accordingly, the Company will continue to look for opportunities to profit from further unbundling.

     GAS SUPPLY AND CAPACITY

     Washington Gas arranges to have natural gas delivered to the entry points of its distribution systems (city gates) using the delivery capacity of interstate pipeline companies and some on-system peaking facilities to meet requirements. Washington Gas acquires natural gas delivery and storage capacity on a system-wide basis on the different interstate pipelines to provide the greatest amount of flexibility to meet the diverse demand characteristics of its customer base. Washington Gas’ supply and capacity plan is based on forecasted system requirements and takes into account estimated load growth by type of customer, attrition, conservation, demand by gate station, pipeline capacity and contractual limitations and the forecasted movement of customers between delivery service and sales service.

     Pursuant to FERC Order No. 636, the pipeline companies are required to provide transportation and storage services to gas shippers, such as Washington Gas, that are comparable to the services it received prior to the implementation of the order. At September 30, 2002, Washington Gas has service agreements with four pipeline

13

companies that provide direct service for firm transportation and storage services. These contracts have expiration dates ranging from fiscal years 2003 to 2016.

     Washington Gas is responsible for acquiring both sufficient gas supplies and capacity to meet customer requirements. Washington Gas must also contract for reliable and adequate delivery to its distribution system. Washington Gas’ contracting activities take into account the current tendencies of customers into or out of delivery service. By entering into flexible short-term agreements for supply and capacity levels Washington Gas remains competitive. Washington Gas has adopted a diversified portfolio approach designed to satisfy the supply and deliverability requirements of its customers, using multiple supply points, dependable transportation and storage arrangements and its own substantial storage and peaking capabilities to meet its customers’ demands.

     Washington Gas has three long-term natural gas purchase contracts with producers and marketers to purchase natural gas at market-sensitive prices. These contracts provide for commodity charges based upon an ascertainable index and either fixed-reservation charges based on contracted minimum volumes or premiums built into volumetric charges. The contracts also provide for Washington Gas to pay monthly and/or annual deficiency charges if actual volumes fall below minimum levels. Washington Gas recovers all of these contract costs from its customers as part of the overall supply pricing in its rates. These gas purchase contracts expire during fiscal year 2003. Washington Gas acquires the balance of its supplies at market prices under short-term contracts.

     As reflected in the table below, there were six sources of delivery through which the regulated utility received natural gas to satisfy the sendout requirements in pipeline year 2002 (November 1, 2001 through October 31, 2002) and from which supplies can be received in pipeline year 2003 (November 1, 2002 through October 31, 2003). Firm transportation denotes gas transported directly to the entry point of Washington Gas’ distribution system in contractual viable volumes. Transportation storage denotes volumes stored by a pipeline during the summer injection season for withdrawal during the heating season to meet load requirements. Peak load requirements are met by: 1) underground natural gas storage at the Hampshire storage field in Hampshire County, West Virginia; 2) the local production of propane air plants located at Company-owned facilities in Rockville, Maryland (Rockville Station) and in Springfield, Virginia (Ravensworth Station); and 3) other storage and peak-shaving arrangements. Unregulated third-party marketers acquire interstate pipeline capacity and the natural gas commodity on behalf of Washington Gas’ regulated utility customers. These marketers have natural gas delivered to the entry point of Washington Gas’ delivery system on behalf of those utility customers that have decided to acquire their natural gas commodity on an unbundled basis, as previously discussed.

     During pipeline year 2002, total sendout on the system was 1,339 million therms, excluding the sendout of sales and deliveries of natural gas used for electric generation. The sendout for pipeline year 2003 is estimated at 1,645 million therms (based on normal weather), excluding the sendout for the sales and deliveries of natural gas used for electric generation. The significant variation was the result of weather in pipeline year 2002 that was significantly warmer than normal which resulted in lower sendout. The sources of delivery and related volumes that were used to satisfy the requirements of pipeline year 2002 and those projected for pipeline year 2003 are shown in the following table.

     The effectiveness of Washington Gas’ gas supply program is largely dependent on the sources from which the design day requirement is satisfied. A design day is the maximum anticipated demand on the gas supply system during a 24-hour period assuming a 5 degree Fahrenheit average temperature. Washington Gas assumes that all interruptible customers will be curtailed on the design day. Washington Gas ‘s current design day is 15.7 million therms and Washington Gas’ projected sources of delivery for design day sendout is 17.2 million therms. This provides a

14

reserve margin of 9.5 percent. Washington Gas is currently capable of meeting 64 percent of its design day requirements with storage and peaking capabilities. Emphasizing storage and peaking facilities on Washington Gas’ design day reduces the necessity to purchase firm transportation, the most expensive form of capacity from a design day perspective. The following table reflects the sources of delivery that are projected to be used to satisfy the design day sendout estimate for pipeline year 2003.

     Washington Gas believes the combination of the gas supply it can purchase under short-term and long-term contracts, its peaking supplies and the capacity on the pipelines required to deliver the purchased supplies is sufficient to satisfy the needs of existing customers and allow for growth in future years. In the event that unregulated third-party marketers are unable to deliver the quantities indicated above, Washington Gas believes it has the ability to enter the interstate market to secure sufficient capacity to make up any such third-party marketer shortfalls. Washington Gas continues to seek opportunities to restructure existing contracts to maximize the competitiveness of its gas supply portfolio.

     ENVIRONMENTAL MATTERS

     The Company and its subsidiaries are subject to federal, state and local laws and regulations related to environmental matters. These evolving laws and regulations may require expenditures over a long timeframe to control environmental impacts. Estimates of liabilities for environmental response costs are difficult to determine with precision because of the various factors that can affect their ultimate level. These factors include, but are not limited to:

•		the complexity of the site;
•		changes in environmental laws and regulations at the federal, state and local levels;
•		the number of regulatory agencies or other parties involved;
•		new technology that renders previous technology obsolete or experience with existing technology that proves ineffective;
•		the ultimate selection of technology;
•		the level of remediation required; and
•		variations between the estimated and actual period of time that must be dedicated to respond to an environmentally-contaminated site.

     The Company has identified up to ten sites where Washington Gas or its predecessors may have operated manufactured gas plants (MGP). Washington Gas last used any such plant in 1984. In connection with these operations, Washington Gas management is aware that coal tar and certain other by-products of the gas manufacturing process are present at or near some former sites and may be present at others. Washington Gas management does not believe that any of the sites present any unacceptable risk to human health or the environment.

     At one of the former MGP sites, studies show the presence of coal tar under the site and an adjoining property. Washington Gas has taken steps to control the movement of contaminants into an adjacent river by installing a water treatment system that removes and treats contaminated groundwater at the site. Washington Gas received approval from governmental authorities for a comprehensive remedial plan for the majority of the site that will allow commercial development of Washington Gas’ property. Washington Gas has entered into an agreement with a national developer for the development of this site in phases. Washington Gas has also entered into a ground lease and obtained a carried interest for the first two phases of development. Construction has been completed on the first phase of this

15

development and is substantially completed on phase two. Washington Gas continues to seek approval of a remedial plan for the remainder of the site, including an adjoining property owned by a separate entity.

     At a second former MGP site and on an adjacent parcel of land, Washington Gas made application under a state voluntary closure program. Washington Gas has developed a remediation plan for the site and is currently seeking approval of that plan from the state.

     The Company believes, at this time, that the appropriate remediation is being undertaken or that no remediation is necessary at the remaining eight sites.

     At September 30, 2002, the Company has a liability of $7.1 million on an undiscounted basis related to future environmental response costs. This estimate principally includes the minimum liabilities associated with a range of environmental response costs expected to be incurred at the sites identified. The Company estimates the maximum liability associated with all of its sites to be approximately $15.4 million at September 30, 2002. The estimates were determined by the Company’s environmental experts, based on experience in remediating MGP sites and advice from legal counsel and environmental consultants. Variations within the range of estimated liability result primarily from differences in the number of years that will be required to perform environmental response processes at each site and the extent of remediation that may be required.

     Regulatory orders issued by the PSC of MD allow Washington Gas to recover the costs associated with the sites applicable to Maryland over periods ranging from five to thirty years. Rate orders issued by the PSC of DC allow Washington Gas a three-year recovery of prudently incurred environmental response costs and allow Washington Gas to defer additional costs incurred between rate cases. The SCC of VA allows the recovery of prudent environmental remediation costs.

     At September 30, 2002, Washington Gas reported a regulatory asset of $5.2 million for the portion of environmental response costs it believes are recoverable in rates. Based on existing knowledge, Washington Gas does not expect that the ultimate impact of these matters will have a material adverse effect on its capital expenditures, its earnings or its competitive position.

     OTHER INFORMATION ABOUT THE BUSINESS

     The regulated utility is not dependent upon a single customer or group of customers such that the loss of any one or more of such customers would have a significant adverse effect on the regulated utility. Large customers are generally on interruptible rate schedules, and margin-sharing arrangements limit the effects of variations in interruptible customer usage on net income. As shown on page 4, Washington Gas served 939,291 customer meters at September 30, 2002. The Company’s commercial HVAC segment derived 78.9 percent of revenues from one customer in fiscal year 2002 and 84.5 percent of revenues from two customers in fiscal year 2001.

     The Company’s utility business is weather-sensitive and seasonal since the majority of its business is derived from residential and small commercial customers who use natural gas for space heating purposes. In fiscal year 2002, approximately 74 percent of the total therms delivered in the regulated utility’s franchise area, excluding deliveries for electric generation, occurred in the regulated utility’s first and second fiscal quarters. All of the Company’s utility earnings are generated during these two quarters and the regulated utility historically incurs losses in the third and fourth fiscal quarters. The timing and level of approved rate increases can affect the results of operations. The seasonal nature of the regulated utility’s business creates large variations in short-term cash requirements, primarily due to the fluctuations in the level of customer accounts receivable, accrued utility revenues and storage gas inventories. Washington Gas finances these seasonal requirements primarily through the sale of commercial paper and unsecured short-term bank loans.

     The Company’s research and development costs during fiscal years 2002, 2001 and 2000 were not material.

     At September 30, 2002, the Company and its wholly owned subsidiaries had 2,205 employees, an increase of 15 employees from the level at September 30, 2001. At September 30, 2002, there were 1,932 utility employees, a decrease of 47 employees from the level at September 30, 2001.

16

ITEM 2—PROPERTIES

     At September 30, 2002, WGL Holdings and its subsidiaries provided services in various areas of Virginia, the District of Columbia and Maryland, and held certificates of convenience and necessity, licenses and permits necessary to maintain and operate their respective properties and businesses.

     Property, plant and equipment are stated at original cost, including labor, materials, taxes and overhead. The Company calculates depreciation applicable to its gas plant in service primarily on a straight-line remaining life basis. The composite depreciation rate during fiscal year 2002 was 2.93 percent, which includes the effect of recovering any estimated net salvage associated with retiring the cost of plant in service. The following table discloses the depreciable life of natural gas plant, by category, at September 30, 2002.

     At September 30, 2002, the regulated utility segment had approximately 624 miles of transmission mains, 10,841 miles of distribution mains, and 12,655 miles of distribution services. The regulated utility has the storage capacity for approximately 15 million gallons of propane for peak shaving.

     The Company owns the building and the land and completely occupies the 12-story office building (built in 1942) at 1100 H Street, NW, Washington, D.C. 20080, where its corporate offices are currently located. The Company is in the process of attempting to sell its corporate headquarters and expects to execute a long-term lease for a new headquarters. The Company owns approximately 40 acres of land and a building which the company completely occupies (built in 1970) at 6801 Industrial Road in Springfield, Virginia 22151. The Springfield office consists of operating offices and certain administrative functions. The Company has title to land and buildings used as substations for its utility operations. The Company uses these facilities for operations primarily within its utility segment. Facilities utilized by the retail energy marketing segment and by the HVAC segment are located in the Washington, D.C. metropolitan area and are leased or rented.

     In early October 2002, Brandywood (a subsidiary of Washington Gas Resources) executed two transactions in which it effectively sold its partnership interest in 1,605 acres in Prince George’s County, Maryland.

     Washington Gas owns a 12-acre parcel of land located in Southeast Washington, D.C. Washington Gas entered into an agreement with a national developer in February 2000, with the intention of developing this site in five phases. Phase I of the project, a 200,000 square foot office building was completed in December 2001. Phase II, a 145,000 square foot office building, is currently under construction and scheduled for completion in December 2002. The remaining three phases may be built, depending on market demand. See the discussion regarding WG Maritime and the Environmental Matters section for additional information regarding this development.

     Washington Gas also has peaking facilities consisting of propane air plants in Springfield, Virginia (Ravensworth Station), and Rockville, Maryland (Rockville Station). Hampshire operates an underground natural gas storage field in Hampshire County, West Virginia. Hampshire accesses the storage field through 12 storage wells that are connected to an 18-mile pipeline gathering system. Hampshire also operates a compressor station for injection of gas into storage. For pipeline year 2003, the company projects that the Hampshire storage facility can supply approximately 2.0 billion cubic feet of natural gas to the regulated utility’s system for meeting seasonal demands.

     The Mortgage of Washington Gas dated January 1, 1933 (Mortgage), as supplemented and amended, securing any First Mortgage Bonds (FMBs) it issues, constitutes a direct lien on substantially all property and franchises owned by the regulated utility other than expressly excepted property. At September 30, 2002, no FMBs were outstanding under the Mortgage.

17

     The regulated utility executed a supplemental indenture to its unsecured Medium-Term Note (MTN) Indenture on September 1, 1993, providing that the regulated utility will not issue any FMBs under its Mortgage without securing all MTNs with all other debt secured by the Mortgage.

18

ITEM 3—LEGAL PROCEEDINGS

     None.

ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

19

     EXECUTIVE OFFICERS OF THE REGISTRANTS

     The names, ages and positions of the executive officers of the registrants at September 30, 2002, are listed below along with their business experience during the past five years. The age of each officer listed is as of the date of filing of this report. There is no family relationship among the officers.

     Unless otherwise indicated, all officers have served continuously since the dates indicated, and all positions are executive officers listed with Washington Gas Light Company.

20

(1)		Executive Officers of both WGL Holdings, Inc. and Washington Gas Light Company
(2)		Mr. Bonner has previously served in executive positions in gas supply, customer services, operations and engineering at South Jersey Gas Company and Philadelphia Gas Works.
(3)		Mr. McCallister was previously employed by Southern Natural Gas Company, a subsidiary of Sonat, Inc., where he served as Vice President and Director of Operations. Prior to working for Southern Natural Gas Company, a gas utility, Mr. McCallister held various leadership positions with Atlantic Richfield Company, a fully-integrated international oil and gas exploration, production, refining and marketing company.
(4)		Mr. O’Flynn has more than 30 years of experience in various finance positions with natural gas and electric utilities. He has previous experience as a CFO, controller and treasurer of utility companies that were SEC registrants.

21

PART II

ITEM 5—MARKET FOR REGISTRANTS’ COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

At September 30, 2002, WGL Holdings had 17,960 common shareholders of record. During fiscal years 2002 and 2001, WGL Holdings’ common stock was listed for trading on the New York Stock Exchange and was shown as ‘‘WGL Hold’’ or ‘‘WGL Hldgs’’ in newspapers. The table below shows quarterly price ranges and quarterly dividends paid for fiscal years ended September 30, 2002 and 2001.

The table below reflects securities authorized for issuance under equity compensation plans pursuant to Item 201(d) of Regulation S-K for the fiscal year ended September 30, 2002.

*Excluding securities reflected in Column A

22

ITEM 6—SELECTED FINANCIAL DATA

SELECTED FINANCIAL AND OPERATIONS DATA^(a)

^(a) The results represented for periods prior to fiscal year 2001 reflect the consolidated operations of Washington Gas Light Company and its subsidiaries.

23

ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This management’s discussion analyzes the financial condition and results of operations of WGL Holdings, Inc. (WGL Holdings or the Company) and its subsidiaries under the corporate structure that was in place during the fiscal year ended September 30, 2002. Effective November 1, 2000, Washington Gas Light Company (Washington Gas) reorganized, such that Washington Gas and its subsidiaries became separate subsidiaries of WGL Holdings, a newly formed holding company established under the Public Utility Holding Company Act of 1935. Note 2 of the Notes to Consolidated Financial Statements discusses the new holding Company structure.

     This Management’s Discussion and Analysis of Financial Condition and Results of Operations describes the Company’s financial condition, results of operations and cash flows with specific information on liquidity and capital resources. It also includes management’s interpretation of the Company’s past financial results and potential factors that may affect future results, potential future risks and approaches that will be used to manage them.

     The Glossary of Key Terms included herein defines certain terms used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Bold Italics indicate the first reference to a term defined in the Glossary of Key Terms.

     SAFE HARBOR FOR FORWARD LOOKING STATEMENTS

     Certain matters discussed in this report, excluding historical information, may 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 WGL Holdings believes such forward-looking statements are based on reasonable assumptions, it cannot give assurance that every objective will be reached. Forward-looking statements speak only as of today, and WGL Holdings 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:

•		changes in economic, competitive, political and regulatory conditions and developments;
•		changes in capital and energy commodity market conditions;
•		changes in credit market conditions and creditworthiness of customers and suppliers;
•		changes in relevant laws and regulations, including tax, environmental and employment laws and regulations;
•		weather conditions;
•		legislative, regulatory and judicial mandates and decisions;
•		timing and success of business and product development efforts;
•		technological improvements;
•		the pace of deregulation efforts and the availability of other competitive alternatives;
•		terrorist activities; and
•		other uncertainties.

     Such factors are difficult to predict accurately and are generally beyond the Company’s direct control. Accordingly, while it believes that the assumptions are reasonable, the Company cannot ensure that all expectations and objectives will be realized. The Company urges readers to use care and consider the risks, uncertainties and other factors that could affect the Company’s business as described in this Annual Report. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.

     OVERVIEW

     WGL Holdings, through its subsidiaries, sells and delivers natural gas and provides a variety of energy-related products and services to customers primarily in the metropolitan Washington, D.C., Maryland, and Virginia areas. The Company’s core subsidiary, Washington Gas, is involved in the distribution and sale of natural gas that is primarily regulated by state regulatory commissions. In response to changes in federal and state regulation, the Company has taken the initiative to offer competitively priced natural gas and electricity to customers through its unregulated retail energy-marketing subsidiary. The Company also offers energy-related products and services that are closely related to its core business. The majority of these energy-related activities are performed by wholly owned subsidiaries of Washington Gas Resources Corp. (Washington Gas Resources).

24

     WGL Holdings has three core operating segments: 1) regulated utility; 2) retail energy-marketing; and 3) heating, ventilating and air conditioning (HVAC) products and services. These three segments are described below:

     Regulated Utility. With over 92 percent of the Company’s assets, Washington Gas delivers natural gas to retail customers in accordance with tariffs set by state or District of Columbia regulatory commissions that have jurisdiction over Washington Gas’ rates. These rates are intended to provide the regulated utility with an opportunity to earn a reasonable rate of return on the investment devoted to the delivery of natural gas to customers. Washington Gas also sells the natural gas commodity to customers who have not elected to purchase natural gas from unregulated third-party marketers. The regulated utility does not incur a profit or a loss when it sells the natural gas commodity as utility customers are charged for the natural gas commodity at the same cost the regulated utility incurs, subject to routine regulatory reviews of the reasonableness of these costs. At September 30, 2002, the regulated utility was selling and delivering the natural gas commodity to approximately 78.8 percent of its customers. The remaining 21.2 percent of Washington Gas’ customers utilize the delivery services of Washington Gas for delivery of the natural gas commodity purchased from third-party marketers, one of which is a subsidiary of WGL Holdings. Factors critical to the success of the regulated utility include operating a safe, reliable natural gas distribution system, and recovering the costs and expenses of this business, which include a fair rate of return on invested capital that is allowed by the regulatory commissions that have jurisdiction over the regulated utility’s rates. Hampshire Gas Company, a wholly owned subsidiary of WGL Holdings, is a regulated natural gas storage business that operates an underground storage field on behalf of Washington Gas in accordance with a tariff administered by the Federal Energy Regulatory Commission (FERC).

     Retail Energy-Marketing. Washington Gas Energy Services, Inc. (WGEServices), a wholly owned subsidiary of Washington Gas Resources, competes with other third-party marketers by selling natural gas and electricity directly to residential, commercial and industrial customers, both inside and outside of the regulated utility’s traditional service territory. WGEServices began selling electricity in fiscal year 2001. WGEServices has the opportunity to make a profit or the potential to incur a loss from these sales. While WGEServices markets the natural gas and electricity commodities, regulated utilities such as Washington Gas deliver the natural gas and electric commodities to their customers. No subsidiary or affiliate of the Company owns or operates any electric generation, electric transmission or electric distribution assets. Factors critical to the success of the retail energy-marketing business are managing the market risk of the difference between the sales price and the cost of natural gas and electricity, managing credit risks associated with customers and suppliers to this segment, and controlling the level of selling, general and administrative costs, most notably customer acquisition costs.

     HVAC. Two wholly owned subsidiaries, Washington Gas Energy Systems, Inc. (WGESystems) and American Combustion Industries, Inc. (ACI), provide turnkey design-build renovation projects to the commercial and government markets. For most of fiscal year 2002, through a former 50-percent equity investment in Primary Investors, LLC (Primary Investors), the HVAC segment also installed, repaired and maintained HVAC and plumbing equipment in the residential and small commercial markets. As a result of a restructuring agreement on September 20, 2002 and a final closing on October 15, 2002 between the Company and a 50-percent co-investor, the Company no longer has any remaining equity investment in Primary Investors or any financial commitment to the residential HVAC investment.

     The commercial HVAC operations focus on retrofitting a large number of aging commercial and government structures, primarily in the District of Columbia and parts of Maryland and Virginia. Factors critical to the commercial HVAC business’ success include the ability to maintain and grow the backlog of existing work through diversification of the market segments these subsidiaries serve and estimating and managing fixed price contracts.

     All reported per share amounts discussed in this document are based on average common shares outstanding, basic and diluted.

     RESULTS OF OPERATIONS

     CONSOLIDATED

     Net income was $39.1 million, $82.4 million and $83.3 million for the fiscal years ended September 30, 2002, 2001 and 2000, respectively. The Company earned 5.0 percent, 11.0 percent and 11.9 percent, respectively, on average common equity during these three fiscal years.

     The following table summarizes the net income by operating segment for the fiscal years ended September 30, 2002, 2001 and 2000.

25

(a)  Regulated utility results include $4.0 million and $1.4 million of expenses shown in Note 15 of the Notes to Consolidated Financial Statements under the caption “Eliminations/Other” for fiscal years 2001 and 2000, respectively, in order to conform to the current year presentation.

     Basic earnings per share were $0.81, $1.75 and $1.79 for fiscal years 2002, 2001 and 2000, respectively. Diluted earnings per share were $0.80, $1.75, and $1.79 for fiscal years 2002, 2001, and 2000, respectively. A June 2001 public sale of common stock increased the number of shares outstanding by 2,038,500, which reduced earnings per share by $0.02 in fiscal years 2002 and 2001.

     Unusual, Infrequent Transactions. The Company’s earnings for the three reported years include several items which are unusual, infrequent and not expected to recur.

     Fiscal year 2002 results include unusual, infrequent items as follows: a $2.8 million pre-tax charge ($1.7 million after-tax) to write-off accounts receivable with a bankrupt energy company; a $9.4 million before- and after-tax permanent impairment provision on its former 50-percent-owned residential HVAC investment; a $5.4 million pre-tax charge ($3.5 million after-tax) for operating losses of the former 50-percent equity investment in residential HVAC; and a $9.4 million pre-tax provision for loan losses ($5.6 million after-tax) from a consumer financing business which has ceased making new loans but continues to service existing loans and is recorded in non-utility operations.

     Fiscal year 2001 results include a $3.9 million before- and after-tax permanent impairment provision on its former 50-percent equity investment in residential HVAC, a $2.2 million net loss from operations of the 50-percent-owned residential HVAC investment, a $1.7 million pre-tax ($1.0 million after-tax) reserve for potential refunds on regulated utility customer bills recorded in operation and maintenance expenses, and a $2.2 million pre-tax ($1.3 million after-tax) adjustment for a Virginia business license tax recorded by the regulated utility in General Taxes.

     Fiscal year 2000 results include a $1.7 million loss from operations of the 50-percent equity investment in residential HVAC and a $1.2 million after-tax gain from the sale of two minor non-utility assets.

     Summary of significant factors that affected the Company’s earnings:

Winter Weather. The results of operations of the regulated utility are significantly affected by variations of winter weather from normal levels. The regulated utility’s rates are determined on the basis of expected normal weather conditions. Washington Gas does not have a ratemaking provision that allows for revenues to be adjusted for the difference between actual weather conditions in a particular year and the expected normal weather conditions that are used to establish rates. During fiscal year 2002, winter weather, when measured by an industry standard called heating degree days, was approximately 13.4 percent warmer than normal and 23.4 percent warmer than fiscal year 2001. Fiscal year 2001 was 13.1 percent colder than normal and 18.6 percent colder than fiscal year 2000. Fiscal year 2000 was 5.0 percent warmer than normal. The Company estimates that the effect of warmer than normal weather reduced earnings by $27.7 million in fiscal year 2002, before considering an $8.7 million improvement for weather insurance. In fiscal year 2001, the colder than normal weather increased earnings by approximately $13.2 million. In fiscal year 2000, warmer than normal weather reduced earnings by approximately $9.3 million. Since fiscal year 2001, the Company has been managing its weather-related business risk through an insurance policy that reimburses the Company for a portion of the effect of deviations of weather from normal levels when the effect of weather is warmer than normal. The weather insurance policy is described in the Market Risk-Weather Risk section of this Management’s Discussion and

26

	Analysis and the accounting for the related transactions is described in Note 1 of the Notes to Consolidated Financial Statements.

	Utility Customer Base and Retail Rates for Natural Gas Delivery Service. During fiscal years 2002, 2001 and 2000, customer meters of Washington Gas increased by 3.9 percent, 3.2 percent and 3.5 percent, respectively over the prior fiscal year. Washington Gas had no change in the base rates charged for natural gas delivery service during fiscal years 2000 through 2002.

Utility Operation and Maintenance Expenses. Utility operation and maintenance expenses for fiscal year 2002 increased $10.6 million over the same period last year. This was due principally to a $4.6 million increase in labor and benefits-related expenses, primarily pensions and post-retirement medical and life insurance expenses, and a $5.2 million increase in consulting expenses incurred in connection with Washington Gas’ initiatives to improve operational efficiencies and productivity. Other issues that contributed to the rise include a $2.5 million increase related to professional services for audits, financial consulting and information technology services and $1.0 million required to outsource mail services as a result of security concerns. Mitigating these increases was a $3.3 million net decrease in the regulated utility segment’s uncollectible accounts expense principally due to lower natural gas costs and warmer weather in the current year which in turn lowered customer bills. This decrease in utility uncollectible accounts expense in fiscal year 2002 was net of a $2.4 million provision for uncollectible accounts for ancillary services and reimbursements for damages to utility property and not related to the sale or delivery of natural gas.

	Operation and maintenance expenses in fiscal year 2001 increased $17.0 million from 2000. The increase was primarily the result of a $10.3 million increase in utility uncollectible accounts expense and a $1.4 million increase in labor-related expenses.

Utility Depreciation and Amortization Expense. In fiscal years 2002 and 2001, depreciation and amortization expense increased over the prior year by $4.2 million and $3.2 million, respectively. These increases primarily reflect higher depreciation associated with increased investments in property, plant and equipment that result from customer growth and the increased cost of replacing capacity to serve existing customers, primarily due to inflation.

	Interest Expense. During fiscal year 2002, interest expense decreased by $4.1 million due to lower short-term borrowings stemming from lower accounts receivable, unrecovered gas costs and storage gas inventory balances, coupled with significantly lower short-term interest rates. This reduction was partially offset by higher long-term debt outstanding.

	During fiscal year 2001, additional debt was issued to fund a higher volume and cost of storage gas balances, increased customer accounts receivable and higher levels of unrecovered gas costs as compared with fiscal year 2000.

Non-utility Operations. The results for non-utility operations are presented in the Consolidated Statements of Income, before other income (expenses)—net, interest expense and dividends on preferred stock. Net Income for the non-utility operations is also presented in the Operating Segment Reporting (see Note 15 of the Notes to Consolidated Financial Statements). The non-utility operating results reflect an operating loss for fiscal years 2002 and 2001 of $11.5 million and $1.3 million, respectively. These results are discussed in detail in the non-utility operating results section.

     REGULATED UTILITY OPERATING RESULTS

     The Company’s regulated utility operations include results of the Company’s combined operations to render utility service in the District of Columbia, Maryland, and Virginia. The regulated utility operations reflect operating income, which is before other income (expenses)—net, interest expense and dividends on preferred stock, for fiscal years 2002, 2001 and 2000 of $97.4 million, $141.3 million, and $124.9 million, respectively. For purposes of the discussion below, the appropriate assignment and allocations of other income (expenses)—net, interest expense and dividends on preferred stock were made to report net income for these operations on a segment basis. During fiscal years 2002, 2001 and 2000, utility operations contributed $51.7 million, $89.9 million and $81.9 million, respectively, toward net income.

     The following table provides the factors contributing to the changes in utility net revenues between years.

27

COMPOSITION OF CHANGES IN UTILITY NET REVENUES