WGL HOLDINGS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2003


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


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

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

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

Indicate by check mark whether each registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the 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 whether each registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No [X]

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

WGL Holdings, Inc. common stock, no par value, outstanding as of July 31, 2003: 48,600,881 shares.

All of the outstanding shares of common stock ($1 par value) of Washington Gas Light Company were held by WGL Holdings, Inc. as of July 31, 2003.

WGL Holdings, Inc.
Washington Gas Light Company

Table of Contents


PART I. Financial Information

Item 1. Financial Statements:
	WGL Holdings, Inc.:
			Consolidated Balance Sheets	3
			Consolidated Statements of Income	4
			Consolidated Statements of Cash Flows	6

	Washington Gas Light Company:
			Balance Sheets	7
			Statements of Income	8
			Statements of Cash Flows	10

	Notes to Consolidated Financial Statements			11
			WGL Holdings, Inc. and Washington Gas Light Company — Combined

Item 2. Management’s Discussion and Analysis of Financial
	Condition and Results of Operations			27
		WGL Holdings, Inc.		30
		Washington Gas Light Company		41

Item 3. Quantitative and Qualitative Disclosures About Market Risk				51

Item 4. Controls and Procedures				51

PART II. Other Information

Item 6. Exhibits and Reports on Form 8-K				51


Signature				54

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

Part I — Financial Information of this Quarterly Report on Form 10-Q includes separate financial statements (i.e., balance sheets, statements of income and statements of cash flows) for consolidated WGL Holdings and Washington Gas.

WGL Holdings, Inc.
Part 1 — Financial Information
Item 1 — Financial Statements

WGL Holdings, Inc.
Consolidated Balance Sheets (Unaudited)

(Thousands)

June 30,

September 30,

2003

2002

ASSETS

Property, Plant and Equipment

At original cost

2,532,995

2,481,810

Accumulated depreciation and amortization

(903,167

)

(874,967

)

Net Property, Plant and Equipment

1,629,828

1,606,843

Current Assets

Cash and cash equivalents

6,551

2,529

Receivables

Accounts receivable

241,337

175,344

Gas costs due from customers

10,967

6,983

Accrued utility revenues

27,514

11,557

Allowance for doubtful accounts

(21,384

)

(13,740

)

Net Receivables

258,434

180,144

Materials and supplies—principally at average cost

11,471

13,088

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

88,546

99,087

Deferred income taxes

34,305

29,973

Other prepayments — principally taxes

9,423

13,422

Exchange gas imbalance — non-utility operations

201

329

Other

3,126

2,259

Total Current Assets

412,057

340,831

Deferred Charges and Other Assets

Regulatory assets

Gas costs

—

5,272

Other

50,447

64,621

Prepaid qualified pension benefits

64,678

58,453

Other

25,010

37,644

Total Deferred Charges and Other Assets

140,135

165,990

Total Assets

2,182,020

2,113,664

CAPITALIZATION AND LIABILITIES

Capitalization

Common shareholders’ equity (Note 4)

850,902

766,403

Washington Gas Light Company Preferred stock

28,173

28,173

Long-term debt (Note 3)

623,305

667,951

Total Capitalization

1,502,380

1,462,527

Current Liabilities

Notes payable and current maturities of long-term debt (Note 3)

66,619

133,261

Accounts payable

167,951

152,820

Accrued interest

13,456

3,308

Dividends declared

15,876

15,743

Customer deposits and advance payments

10,578

15,482

Gas costs due to customers

16,490

6,190

Accrued taxes

68,940

9,957

Other

2,750

750

Total Current Liabilities

362,660

337,511

Deferred Credits

Unamortized investment tax credits

16,066

16,739

Deferred income taxes

215,726

212,631

Accrued pensions and benefits

36,715

37,970

Other

48,473

46,286

Total Deferred Credits

316,980

313,626

Commitments and Contingencies (Note 12)

Total Capitalization and Liabilities

2,182,020

2,113,664

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

WGL Holdings, Inc.
Part 1 — Financial Information
Item 1 — Financial Statements (continued)

WGL Holdings, Inc.
Consolidated Statements of Income (Unaudited)



					Three Months Ended
					June 30,

(Thousands, Except Per Share Data)					2003			2002

UTILITY OPERATIONS
	Operating Revenues				$	202,401		$	163,696
		Less: Cost of gas				101,539			82,839
				Revenue taxes		7,434			3,240

			Utility Net Revenues			93,428			77,617

	Other Operating Expenses
		Operation				43,601			40,587
		Maintenance				10,274			11,109
		Depreciation and amortization				21,315			18,735
		General taxes				9,333			8,881
		Income tax expense (benefit)				282			(4,681	)

			Utility Other Operating Expenses			84,805			74,631

				Utility Operating Income		8,623			2,986

NON-UTILITY OPERATIONS
	Operating Revenues
		Retail energy-marketing				163,189			135,532
		Heating, ventilating and air conditioning				7,460			14,489
		Other non-utility activities				105			475

			Non-Utility Operating Revenues			170,754			150,496

	Equity Loss in 50%-Owned Residential HVAC Investment (Note 7)					—			(5,051	)
	Impairment of Residential HVAC Investment (Note 7)					—			(2,131	)

	Other Operating Expenses
		Operating expenses				173,084			150,881
		Income tax benefit				(2,990	)		(2,265	)

			Non-Utility Operating Expenses			170,094			148,616

				Non-Utility Operating Income (Loss)		660			(5,302	)

TOTAL OPERATING INCOME (LOSS)						9,283			(2,316	)
		Other Income (Expenses) — Net				(134	)		(327	)

INCOME (LOSS) BEFORE INTEREST EXPENSE						9,149			(2,643	)

INTEREST EXPENSE
		Interest on long-term debt				10,758			10,749
		Other				701			463

		Total Interest Expense				11,459			11,212
DIVIDENDS ON WASHINGTON GAS PREFERRED STOCK						330			330

NET LOSS (APPLICABLE TO COMMON STOCK)					$	(2,640	)	$	(14,185	)

AVERAGE COMMON SHARES OUTSTANDING (Note 6)
		Basic				48,587			48,566
		Diluted				48,587			48,566

LOSS PER AVERAGE COMMON SHARE (Note 6)
		Basic			$	(0.05	)	$	(0.29	)
		Diluted			$	(0.05	)	$	(0.29	)

DIVIDENDS DECLARED PER COMMON SHARE					$	0.3200		$	0.3175

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

WGL Holdings, Inc.
Part 1 — Financial Information
Item 1 — Financial Statements (continued)

WGL Holdings, Inc.
Consolidated Statements of Income (Unaudited)



					Nine Months Ended
					June 30,

(Thousands, Except Per Share Data)					2003			2002

UTILITY OPERATIONS
	Operating Revenues				$	1,197,601		$	809,746
		Less: Cost of gas				660,838			398,572
				Revenue taxes		33,250			22,884

				Utility Net Revenues		503,513			388,290

	Other Operating Expenses
		Operation				135,501			121,671
		Maintenance				29,553			29,343
		Depreciation and amortization				62,119			54,434
		General taxes				30,790			26,952
		Income tax expense				82,625			48,809

				Utility Other Operating Expenses		340,588			281,209

				Utility Operating Income		162,925			107,081

NON-UTILITY OPERATIONS
	Operating Revenues
		Retail energy-marketing				559,822			437,541
		Heating, ventilating and air conditioning				25,600			47,261
		Other non-utility activities				1,225			1,559

				Non-Utility Operating Revenues		586,647			486,361

	Equity Loss in 50%-Owned Residential HVAC Investment (Note 7)					—			(7,873	)
	Impairment of Residential HVAC Investment (Note 7)					—			(9,431	)

	Other Operating Expenses
		Operating expenses				584,782			480,595
		Income tax benefit				(583	)		(59	)

				Non-Utility Operating Expenses		584,199			480,536

				Non-Utility Operating Income (Loss)		2,448			(11,479	)

TOTAL OPERATING INCOME						165,373			95,602
		Other Income (Expenses) — Net				497			1,653

INCOME BEFORE INTEREST EXPENSE						165,870			97,255

INTEREST EXPENSE
		Interest on long-term debt				33,218			32,110
		Other				1,717			2,343

		Total Interest Expense				34,935			34,453
DIVIDENDS ON WASHINGTON GAS PREFERRED STOCK						990			990

NET INCOME (APPLICABLE TO COMMON STOCK)					$	129,945		$	61,812

AVERAGE COMMON SHARES OUTSTANDING (Note 6)
			Basic			48,581			48,562
			Diluted			48,737			48,649

EARNINGS PER AVERAGE COMMON SHARE (Note 6)
			Basic		$	2.67		$	1.27
			Diluted		$	2.67		$	1.27

DIVIDENDS DECLARED PER COMMON SHARE					$	0.9575		$	0.9500

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

WGL Holdings, Inc.
Part 1 — Financial Information
Item 1 — Financial Statements (continued)

WGL Holdings, Inc.
Consolidated Statements of Cash Flows (Unaudited)



			Nine Months Ended
			June 30,

(Thousands)			2003			2002

OPERATING ACTIVITIES
Net income (applicable to common stock)			$	129,945		$	61,812
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
	Depreciation and amortization (a)			66,901			58,546
	Deferred income taxes—net			679			(13,157	)
	Amortization of investment tax credits			(673	)		(677	)
	Accrued/deferred pension cost			(3,711	)		(10,550	)
	Allowance for funds used during construction			49			—
	Equity loss in 50%-owned residential HVAC investment (Note 7)			—			7,873
	Impairment of residential HVAC investment (Note 7)			—			9,431
	Gain from sale of assets (net of taxes) (Note 11)			(3,422	)		—
	Other non-cash charges (credits)—net			(1,019	)		420

CHANGES IN ASSETS AND LIABILITIES
	Accounts receivable and accrued utility revenues			(74,306	)		(40,005	)
	Gas costs due from/to customers — net			6,316			36,061
	Storage gas			10,541			81,413
	Other prepayments—principally taxes			3,998			6,653
	Accounts payable			15,591			(7,178	)
	Wages payable			(459	)		(618	)
	Customer deposits and advance payments			(4,904	)		886
	Accrued taxes			56,734			27,379
	Accrued interest			10,148			10,663
	Pipeline refunds due to customers			1,609			—
	Deferred purchased gas costs—net			8,112			9,324
	Exchange gas imbalance non-utility operations			128			554
	Other—net			(793	)		5,178

		Net Cash Provided by Operating Activities		221,464			244,008

FINANCING ACTIVITIES
	Long-term debt issued			93			83,398
	Long-term debt retired			(59,038	)		(29,623	)
	Debt issuance costs			(359	)		(732	)
	Notes payable			(52,443	)		(118,338	)
	Dividends on common stock			(46,395	)		(46,014	)
	Other financing activities			1,678			386

		Net Cash Used in Financing Activities		(156,464	)		(110,923	)

INVESTING ACTIVITIES
	Capital expenditures			(92,594	)		(115,389	)
	Net proceeds from the sale of assets (Note 11)			21,300			—
	50%-owned residential HVAC investment (Note 7)			—			(4,814	)
	Other investing activities			10,316			(16,537	)

		Net Cash Used in Investing Activities		(60,978	)		(136,740	)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (b)				4,022			(3,655	)
Cash and Cash Equivalents at Beginning of Year (b)				2,529			12,104

Cash and Cash Equivalents at End of Period (b)			$	6,551		$	8,449

(a)		Includes amounts charged to other accounts.
(b)		Cash equivalents are highly liquid investments with a maturity of three months or less when purchased.


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
	Income taxes paid	$	26,997	$	31,182
	Interest paid	$	23,583	$	23,112

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

Washington Gas Light Company
Part 1 — Financial Information
Item 1 — Financial Statements (continued)

Washington Gas Light Company
Balance Sheets (Unaudited)

June 30,

September 30,

(Thousands)

2003

2002

ASSETS

Property, Plant and Equipment

At original cost

2,508,411

2,457,673

Accumulated depreciation and amortization

(886,584

)

(859,505

)

Net Property, Plant and Equipment

1,621,827

1,598,168

Current Assets

Cash and cash equivalents

7,278

2,637

Receivables

Accounts receivable

126,713

63,055

Gas costs due from customers

10,967

6,983

Accrued utility revenues

27,514

11,557

Allowance for doubtful accounts

(16,969

)

(9,395

)

Net Receivables

148,225

72,200

Materials and supplies — principally at average cost

11,313

12,858

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

64,644

69,207

Deferred income taxes

29,510

25,387

Other prepayments — principally taxes

5,852

8,316

Receivables from associated companies (Note 10)

43,537

4,341

Total Current Assets

310,359

194,946

Deferred Charges and Other Assets

Regulatory assets

Gas costs

—

5,272

Other

50,447

64,621

Prepaid qualified pension benefits

64,355

58,162

Other

21,963

30,968

Total Deferred Charges and Other Assets

136,765

159,023

Total Assets

2,068,951

1,952,137

CAPITALIZATION AND LIABILITIES

Capitalization

Common shareholders’ equity (Note 4)

810,398

730,320

Preferred stock

28,173

28,173

Long-term debt (Note 3)

623,256

667,852

Total Capitalization

1,461,827

1,426,345

Current Liabilities

Notes payable and current maturities of long-term debt (Note 3)

28,108

67,943

Accounts payable

128,416

96,150

Accrued interest

13,456

3,308

Dividends declared

15,876

15,764

Customer deposits and advance payments

10,578

15,482

Gas costs due to customers

16,490

6,190

Accrued taxes

66,086

7,220

Payable to associated companies (Note 10)

7,563

692

Other

1,638

Total Current Liabilities

288,211

212,778

Deferred Credits

Unamortized investment tax credits

16,041

16,711

Deferred income taxes

219,202

214,200

Accrued pensions and benefits

36,611

37,848

Other

47,059

44,255

Total Deferred Credits

318,913

313,014

Commitments and Contingencies (Note 12)

Total Capitalization and Liabilities

2,068,951

1,952,137

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

Washington Gas Light Company
Part 1 — Financial Information
Item 1 — Financial Statements (continued)

Washington Gas Light Company
Statements of Income (Unaudited)



					Three Months Ended
					June 30,

(Thousands)					2003			2002

UTILITY OPERATIONS
		Operating Revenues (Note 10)			$	203,095		$	165,793
			Less: Cost of gas (Note 10)			102,233			84,936
				Revenue taxes		7,434			3,240

				Utility Net Revenues		93,428			77,617

		Other Operating Expenses
			Operation (Note 10)			44,062			41,104
			Maintenance			10,188			11,022
			Depreciation and amortization			21,145			18,569
			General taxes			9,269			8,811
			Income tax expense (benefit)			224			(4,765	)

				Utility Other Operating Expenses		84,888			74,741

				Utility Operating Income		8,540			2,876

NON-UTILITY OPERATIONS
		Operating Revenues
			Other non-utility			122			673

				Non-Utility Operating Revenues		122			673

		Other Operating Expenses
			Operating expenses			—			7,304
			Income tax expense (benefit)			47			(2,935	)

				Non-Utility Operating Expenses		47			4,369

				Non-Utility Operating Income (Loss)		75			(3,696	)

TOTAL OPERATING INCOME (LOSS)						8,615			(820	)
	Other Income (Expenses) — Net					(132	)		(1,452	)

INCOME (LOSS) BEFORE INTEREST EXPENSE						8,483			(2,272	)

INTEREST EXPENSE
			Interest on long-term debt			10,758			10,749
			Other			795			(432	)

				Total Interest Expense		11,553			10,317

NET LOSS (BEFORE PREFERRED STOCK DIVIDENDS)						(3,070	)		(12,589	)
DIVIDENDS ON PREFERRED STOCK						330			330

NET LOSS (APPLICABLE TO COMMON STOCK)					$	(3,400	)	$	(12,919	)

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

Washington Gas Light Company
Part 1 — Financial Information
Item 1 — Financial Statements (continued)

Washington Gas Light Company
Statements of Income (Unaudited)

Nine Months Ended

June 30,

(Thousands)

2003

2002

UTILITY OPERATIONS

Operating Revenues (Note 10)

1,208,224

821,478

Less: Cost of gas (Note 10)

671,461

410,304

Revenue taxes

33,250

22,884

Utility Net Revenues

503,513

388,290

Other Operating Expenses

Operation (Note 10)

136,759

123,211

Maintenance

29,343

29,172

Depreciation and amortization

61,609

53,937

General taxes

30,653

26,716

Income taxes

82,465

48,497

Utility Other Operating Expenses

340,829

281,533

Utility Operating Income

162,684

106,757

NON-UTILITY OPERATIONS

Operating Revenues

Other non-utility

1,151

1,601

Non-Utility Operating Revenues

1,151

1,601

Other Operating Expenses

Operating expenses

8,042

Income tax expense (benefit)

449

(2,914

)

Non-Utility Operating Expenses

458

5,128

Non-Utility Operating Income (Loss)

693

(3,527

)

TOTAL OPERATING INCOME

163,377

103,230

Other Income (Expenses) — Net

(1,070

)

2,162

INCOME BEFORE INTEREST EXPENSE

162,307

105,392

INTEREST EXPENSE

Interest on long-term debt

33,218

32,110

Other

2,007

1,978

Total Interest Expense

35,225

34,088

NET INCOME (BEFORE PREFERRED STOCK DIVIDENDS)

127,082

71,304

DIVIDENDS ON PREFERRED STOCK

990

990

NET INCOME (APPLICABLE TO COMMON STOCK)

126,092

70,314

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

Washington Gas Light Company
Part 1 — Financial Information
Item 1 — Financial Statements (continued)

Washington Gas Light Company
Statements of Cash Flows (Unaudited)



			Nine Months Ended
			June 30,

(Thousands)			2003			2002

OPERATING ACTIVITIES
Net income (before Preferred Stock Dividends)			$	127,082		$	71,304
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
	Depreciation and amortization (a)			65,940			57,195
	Deferred income taxes—net			1,532			(9,915	)
	Amortization of investment tax credits			(670	)		(672	)
	Accrued/deferred pension cost			(3,680	)		(10,479	)
	Allowance for funds used during construction			49			—
	Gain from sale of assets (net of taxes) (Note 11)			(2,495	)		—
	Other non-cash charges and (credits)—net			(563	)		698

CHANGES IN ASSETS AND LIABILITIES
	Accounts receivable and accrued utility revenues and receivables from associated companies			(111,237	)		(25,680	)
	Gas costs due from/to customers—net			6,316			36,061
	Storage gas			4,563			70,168
	Other prepayments—principally taxes			3,318			6,073
	Accounts payable			39,868			(46,012	)
	Wages payable			(733	)		(510	)
	Customer deposits and advance payments			(4,904	)		886
	Accrued taxes			57,223			28,072
	Accrued Interest			10,148			10,663
	Pipeline refunds due to customers			1,609			—
	Deferred purchased gas costs—net			8,112			9,324
	Other — net			907			6,722

		Net Cash Provided by Operating Activities		202,385			203,898

FINANCING ACTIVITIES
	Long-term debt issued			—			83,326
	Long-term debt retired			(58,838	)		(29,413	)
	Debt issuance costs			(258	)		(1,153	)
	Paid-in capital			—			20,186
	Notes payable			(25,694	)		(98,724	)
	Dividends on common and preferred stock			(47,267	)		(46,992	)
	Other financing activities			182			238

		Net Cash Used in Financing Activities		(131,875	)		(72,532	)

INVESTING ACTIVITIES
	Capital expenditures			(91,933	)		(114,452	)
	Net proceeds from sale of assets (Note 11)			16,000			—
	Other investing activities			10,064			(16,537	)

		Net Cash Used in Investing Activities		(65,869	)		(130,989	)

INCREASE IN CASH AND CASH EQUIVALENTS (b)				4,641			377
Cash and Cash Equivalents at Beginning of Year (b)				2,637			7,537

Cash and Cash Equivalents at End of Period (b)			$	7,278		$	7,914

(a)		Includes amounts charged to other accounts.
(b)		Cash equivalents are highly liquid investments with a maturity of three months or less when purchased.


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
	Income taxes paid	$	25,321	$	24,106
	Interest paid	$	23,070	$	22,646

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

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 – Financial Information
Item 1– Financial Statements (continued)

Notes to Consolidated Financial Statements
(Unaudited)

NOTE 1 — ACCOUNTING POLICIES

General

WGL Holdings, Inc. (WGL Holdings or the Company) has four wholly owned subsidiaries that include Washington Gas Light Company (Washington Gas or the regulated utility), Crab Run Gas Company, Hampshire Gas Company and Washington Gas Resources Corporation (Washington Gas Resources). Washington Gas Resources owns most of the Company’s non-regulated subsidiaries that include, among others, American Combustion Industries, Inc. (ACI), Washington Gas Energy Services, Inc. (WGEServices), WG Maritime Plaza 1, Inc. and Washington Gas Energy Systems, Inc. (WGESystems). Until October 15, 2002, WGL Holdings held a 50 percent equity investment in Primary Investors, LLC (Primary Investors) (refer to Note 7 included herein). Please refer to WGL Holdings fiscal year 2002 Annual Report on Form 10-K for additional information on the corporate structure.

This Quarterly Report on Form 10-Q is a combined report of WGL Holdings and Washington Gas.

These notes are an integral part of the accompanying consolidated financial statements of WGL Holdings and its subsidiaries, including Washington Gas. Except where otherwise noted, these Notes to Consolidated Financial Statements apply equally to WGL Holdings and Washington Gas. Due to the seasonal nature of Washington Gas’ business, the results of operations shown do not necessarily represent the expected results of either WGL Holdings or Washington Gas for the entire fiscal year ending September 30, 2003.

The following policies are certain of the significant accounting policies used by the Company and its subsidiaries in the preparation of their financial statements. The policies shown herein do not reflect all of the Company’s accounting policies that would normally be disclosed in connection with the preparation of the Company’s annual financial statements. Reference is made to the Company’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) for a complete listing and description of all significant accounting policies.

Basis of Presentation of Financial Statements

The interim consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Therefore, certain financial information and footnote disclosures accompanying annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) in the United States are omitted in this interim report pursuant to the SEC rules and regulations. The interim consolidated financial statements and notes thereto should be read in conjunction with the combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2002.

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

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 – Financial Information
Item 1– Financial Statements (continued)

Consolidation of Financial Statements

The consolidated financial statements include the accounts of the Company and its subsidiaries during the periods reported. Intercompany transactions have been eliminated. WGL Holdings accounted for its former 50 percent investment in Primary Investors using the equity method (refer to Note 7 included herein). Certain amounts in the financial statements of prior years have been reclassified to conform to the presentation of the current fiscal year.

Use of Estimates in the Preparation of Financial Statements

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

Utility Revenue and Cost of Gas Recognition

For regulated deliveries of natural gas, Washington Gas reads meters and bills customers on a cycle basis. It accrues revenues for gas that has been delivered but not yet billed at the end of an accounting period. Such revenues are recognized as unbilled revenue which are later adjusted in the subsequent period when actual meter readings are taken.

The regulated utility’s jurisdictional tariffs contain mechanisms that provide for the recovery of the invoice cost of gas applicable to firm customers. Under these mechanisms, the regulated utility periodically adjusts its firm customers’ rates to reflect increases and decreases in the invoice cost of gas. Annually, the regulated utility reconciles the difference between the total gas costs collected from firm customers and the invoice cost of gas. The regulated utility defers any excess or deficiency and either recovers it from, or refunds it to, customers over a subsequent twelve-month period.

Rate Refunds Due to Customers

If the regulated utility were to file a request with a state regulatory commission to modify customers’ rates, the regulated utility could at a point in time after the initial filing, depending on the jurisdiction, begin to charge customers the new rates, until the regulatory commission renders a final decision. During this interim period, the regulated utility would potentially record a provision for a rate refund based on the difference between the amount it collected in rates subject to refund and the amount it expected to recover pending the final regulatory decision. Similarly, Washington Gas periodically records provisions for rate refunds related to other transactions of the regulated utility. Actual results for these regulatory contingencies are difficult to predict and could differ significantly from the estimates reflected in the financial statements. When necessary, in management’s judgement, Washington Gas establishes an estimated refund to customers.

Regulated Operations

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

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)

liabilities upon a company for amounts previously collected from customers and for recovery of costs that are expected to be incurred in the future (regulatory liabilities).

Income Taxes

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

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

Derivative Activities

The Company applies the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS No. 133, as amended, requires derivative instruments, including certain derivative instruments embedded in other contracts, to be recorded at fair value as either an asset or a liability. Changes in the derivative’s fair value are recorded in earnings, unless the derivative meets specific hedge accounting criteria. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged item are recognized in earnings. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative generally are recorded in other comprehensive income and are recognized in income when the hedged item affects earnings. SFAS No. 133 requires that the Company formally document, designate and assess the effectiveness of derivatives that are accounted for as hedging instruments. For those derivatives that are associated with activities of the regulated utility that are likely to be recovered from or passed back to customers in future periods, the corresponding fair value is recorded as regulatory assets or regulatory liabilities, rather than through other comprehensive income.

Recent Accounting Standards

Effective October 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which requires that goodwill no longer be amortized over an estimated useful life, but rather be tested annually for impairment and written down to the extent the test indicates the existence of an impairment. Upon implementation of this Statement, the Company performed a transition impairment test for goodwill as of October 1, 2002, and concluded there was no impairment required to be recorded. Accordingly, the adoption of SFAS No. 142 did not have any effect on the Company’s financial statements for the quarter ended June 30, 2003. Unamortized goodwill was $2.1 million at June 30, 2003. Amortization expense for the three and nine months ended June 30, 2002 was not material. Discontinuing goodwill amortization for fiscal year 2003 does not have a significant impact on the financial statements.

Effective October 1, 2002, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations (ARO). The standard requires that the Company identify legal obligations associated with the retirement of tangible long-lived assets. Liabilities must be recognized and measured at fair value when it is determined that there is a legal obligation associated with the retirement of tangible long-lived assets. The cost associated with the recognition of the liability for

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)

AROs is capitalized as part of the related asset’s book value and is depreciated over the expected life o f the asset. If a legal obligation does not exist, or if it can not be measured due to uncertainty about the estimated amounts, then the accounting for the asset retirement cost is not affected. The adoption of SFAS No. 143 did not have a material effect on the Company’s financial statements for the three and nine months ended June 30, 2003 since the Company did not have a legal obligation to retire any of its tangible long-lived assets or, for certain immaterial assets, the Company could not estimate the ARO. The regulated utility currently accrues interim costs of removal on many regulated, long-lived assets through depreciation expense, with a corresponding credit to accumulated depreciation, as allowed by the regulatory commissions that have jurisdiction over its retail rates. However, because these removal costs meet the requirements of SFAS 71, these accumulated costs are not classified as liabilities. The regulated utility is in the process of determining the amount of the accumulated removal costs included in the accumulated depreciation reserve and will disclose them in the future.

Effective January 1, 2003, the Company adopted FASB Financial Interpretation (FIN) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 clarifies SFAS No. 5, Accounting for Contingencies, by requiring a guarantor to recognize a liability on its balance sheet for the fair value of the obligation it has assumed under certain guarantees issued or modified after December 31, 2002. Additionally, FIN 45 requires expanded disclosures in interim and annual financial statements about a guarantor’s obligations under certain guarantees that it has issued. As of June 30, 2003, the Company did not have any obligations under guarantees that would be required to be recognized as a liability on the balance sheet. However, the Company did have obligations under guarantees subject to the disclosure requirements of FIN 45 (refer to Note 12 included herein).

Effective April 1, 2003, the Company adopted SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, by providing alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 requires prominent disclosure in both annual and interim financial statements. No compensation expense has been recognized in the Company’s Consolidated Statements of Income for stock option grants. If compensation expense associated with the Company’s stock-based compensation plans had been recognized in income based on the fair value at the grant dates for awards under these plans consistent with the method prescribed by SFAS No. 123, as amended by SFAS No. 148, the Company’s net income (loss) and earnings (loss) per share for the three and nine months ended June 30, 2003 and 2002 would have been adjusted to the amounts shown in the following pro forma table.



		Three Months Ended						Nine Months Ended
		June 30,						June 30,

(In thousands, except per share data)		2003			2002			2003		2002

Net Income (Loss)
	As Reported	$	(2,640	)	$	(14,185	)	$	129,945	$	61,812
	Pro Forma	$	(2,723	)	$	(14,253	)	$	129,695	$	61,583

Earnings (Loss) per Common Share - Diluted
	As Reported	$	(0.05	)	$	(0.29	)	$	2.67	$	1.27
	Pro Forma	$	(0.06	)	$	(0.29	)	$	2.66	$	1.27

In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies the accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)

for hedging activities under SFAS No. 133. The amendments set forth in SFAS No. 149 require that contracts with comparable characteristics be accounted for similarly. Specifically, this statement clarifies the circumstances by which a contract with an initial net investment meets the characteristics of a derivative according to SFAS No. 133, and when a derivative contains a financing component that warrants special reporting in the Statement of Cash Flows.

The requirements of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The provisions of the statement that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. Management is currently evaluating the impacts, if any, of SFAS No. 149 on the Company’s financial statements.

NOTE 2 — SHORT-TERM DEBT

On May 2, 2003, WGL Holdings and Washington Gas executed new revolving credit agreements with a banking group in the amounts of $130 million and $175 million respectively. The new credit agreements replaced previously existing credit agreements of $85 million for WGL Holdings and $220 million for Washington Gas. WGL Holdings and Washington Gas pay facility fees of 13 basis points and 11 basis points, respectively, for the new revolving credit agreements, which will expire on April 30, 2004. Other permanent and seasonal bank lines of credit available to WGL Holdings and Washington Gas since the end of fiscal year 2002 have either expired or terminated as of May 2, 2003.

NOTE 3 — LONG-TERM DEBT

Unsecured Medium-Term Notes

The regulated utility issues unsecured Medium-Term Notes (MTNs) with individual terms regarding interest rates, maturities and call or put options that are an integral part of the basic debt instrument. These notes can have maturity dates of one or more years from the date of issuance. During the three months ended June 30, 2003, the regulated utility did not issue any unsecured MTNs. Washington Gas filed a new $250.0 million shelf registration that was declared effective by the SEC on April 24, 2003. The table below reflects notes payable and current maturities of long-term debt outstanding as of June 30, 2003 and September 30, 2002.

WGL Holdings, Inc.



(In thousands)	June 30, 2003		September 30, 2002

Current Maturities of Long-Term Debt	$	28,198	$	42,396
Notes Payable		38,421		90,865

Total	$	66,619	$	133,261

Washington Gas Light Company



(In thousands)	June 30, 2003		September 30, 2002

Current Maturities of Long-Term Debt	$	28,097	$	42,238
Notes Payable		11		25,705

Total	$	28,108	$	67,943

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)

NOTE 4 — COMMON SHAREHOLDERS’ EQUITY

The tables below reflect the components of Common shareholders’ equity as of June 30, 2003 and September 30, 2002.

WGL Holdings, Inc.



(In thousands)		June 30, 2003			September 30, 2002

Common stock, no par value, 120,000,000 shares authorized, 48,650,635 shares issued		$	471,497		$	471,497
Paid-in capital			2,372			1,645
Retained earnings			379,093			295,676
Deferred compensation			(40	)		(120	)
Other comprehensive income			(676	)		—
Treasury stock — at cost, 51,154 and 85,968 shares, respectively			(1,344	)		(2,295	)

	Total	$	850,902		$	766,403

Washington Gas Light Company



(In thousands)		June 30, 2003			September 30, 2002

Common stock, $1 par value, 80,000,000 shares authorized, 46,479,536 shares issued		$	46,479		$	46,479
Paid-in capital			450,600			449,518
Retained earnings			314,035			234,443
Deferred compensation			(40	)		(120	)
Other comprehensive income			(676	)		—

	Total	$	810,398		$	730,320

NOTE 5 — COMPREHENSIVE INCOME (LOSS)

The tables below reflect the components of comprehensive income (loss) for the three and nine months ended June 30, 2003 and 2002. Items that are excluded from net income (loss) and charged directly to common shareholders’ equity are accumulated in Other comprehensive income. The amount of accumulated other comprehensive income is included in Common shareholders’ equity.

WGL Holdings, Inc.



			Three Months Ended						Nine Months Ended
			June 30,						June 30,

(In thousands)			2003			2002			2003			2002

Net income (loss) (applicable to common stock)			$	(2,640	)	$	(14,185	)	$	129,945		$	61,812
Other comprehensive income, net of tax:
	Minimum pension liability adjustment			—			—			(676	)		—

		Comprehensive Income (Loss)	$	(2,640	)	$	(14,185	)	$	129,269		$	61,812

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Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)

Washington Gas Light Company



			Three Months Ended						Nine Months Ended
			June 30,						June 30,

(In thousands)			2003			2002			2003			2002

Net income (loss)			$	(3,400	)	$	(12,919	)	$	126,092		$	70,314
Other comprehensive income, net of tax:
	Minimum pension liability adjustment			—			—			(676	)		—

		Comprehensive Income (Loss)	$	(3,400	)	$	(12,919	)	$	125,416		$	70,314

NOTE 6 — EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per average common share (EPS) is computed by dividing net income by the weighted-average number of common shares outstanding during the reported period. Diluted EPS assumes the issuance of common shares pursuant to stock-based compensation plans at the beginning of the applicable period. The following tables show the computation of basic and diluted EPS of WGL Holdings for the three and nine months ended June 30, 2003 and 2002.

Basic and Diluted Earnings Per Average Common Share



			Net					Per Share
(Thousands, Except Per Share Data)			Income			Shares		Amount

Three Months Ended June 30, 2003
	Basic EPS:
		Net Loss	$	(2,640	)		48,587	$	(0.05	)
		Stock-Based Compensation Plans*		—			—		—

	Diluted EPS:
		Net Loss	$	(2,640	)		48,587	$	(0.05	)

Three Months Ended June 30, 2002
	Basic EPS:
		Net Loss	$	(14,185	)		48,566	$	(0.29	)
		Stock-Based Compensation Plans*		—			—		—

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

Nine Months Ended June 30, 2003
	Basic EPS:
		Net Income	$	129,945			48,581	$	2.67
		Stock-Based Compensation Plans		—			156		—

	Diluted EPS:
		Net Income	$	129,945			48,737	$	2.67

Nine Months Ended June 30, 2002
	Basic EPS:
		Net Income	$	61,812			48,562	$	1.27
		Stock-Based Compensation Plans		—			87		—

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

* Excluded because the effect would be anti-dilutive.

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)

NOTE 7 — LIMITED LIABILITY COMPANY INVESTMENT

On September 20, 2002, WGL Holdings and Thayer Capital Partners (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 WGL Holdings transferred all of its interest in Primary Investors to Thayer. Since September 30, 2002, the Company had no net investment in this equity venture and, accordingly, no effect on net income for this venture. Net income (loss) for the three and nine months ended June 30, 2002 included an after-tax loss from these operations totaling $3.0 million and $5.9 million, respectively, as well as an after-tax impairment provision to reflect the permanent decline in value totaling $2.1 million and $9.4 million, respectively.

NOTE 8 — DERIVATIVE ACTIVITY

Washington Gas enters into forward contracts for the purchase of natural gas that qualify as derivatives under SFAS No. 133. Washington Gas has elected to exempt such contracts as normal purchases and sales, as defined by SFAS No. 133. Certain contracts meet the definition of a derivative and are recorded as a liability on the balance sheet at fair value. Because such contracts relate to the acquisition of natural gas under a hedging program that provides for the recovery of the actual cost (which has been approved by the regulatory bodies in the District of Columbia, Maryland and Virginia), offsetting mark-to-market amounts are recorded as a regulatory asset or regulatory liability. The fair value gain of these contracts at September 30, 2002 was $1.3 million; the fair value at June 30, 2003 was negligible.

On June 4, 2003, Washington Gas entered into two forward-starting swaps with an aggregate notional principal of $62 million to mitigate a substantial portion of interest-rate risk associated with debt transactions anticipated to be executed during the first quarter of fiscal year 2004 that will end on December 31, 2003. These swaps have been designated as cash flow hedges which, in accordance with SFAS No. 133, are carried at fair value. At June 30, 2003, the estimated fair value gain related to these swaps totaled $853,000. This gain (along with future changes in the fair value of the swaps) is recorded as a regulatory liability in accordance with regulatory accounting. These swaps are scheduled to terminate concurrently with the execution of the anticipated debt transactions during the first quarter of fiscal year 2004 that will end on December 31, 2003.

The Company’s non-regulated retail energy-marketing subsidiary, WGEServices holds a heating degree day option contract, which is used to manage the risk of increased usage caused by colder-than-normal weather for a limited number of its customers, where such customers have chosen a fixed-price and volume service. This contract pays WGEServices a fixed dollar amount for every heating degree day over a specified level during the calculation period. This contract is accounted for under the guidelines issued by the Emerging Issues Task Force (EITF) of the FASB in issue 99-2 and is excluded from the definition of a hedge contract under SFAS No.133. Except for this heating degree day option contract, WGEServices held no other open option contracts as of June 30, 2003.

NOTE 9 — OPERATING SEGMENT REPORTING

WGL Holdings reports three operating segments: 1) regulated utility; 2) retail energy-marketing; and 3) heating ventilating and air conditioning (HVAC) activities. Transactions excluded from these three segments were accumulated in other activities of the Company’s non-utility operations.

With approximately 95 percent of WGL Holdings’ assets, the regulated utility segment is its core business. Represented almost entirely by Washington Gas, the regulated utility segment provides regulated gas distribution services (including the purchase and delivery of natural gas, meter reading, responding to customer inquiries and bill preparation) to customers in metropolitan

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)

Washington, D.C., and parts of Maryland and Virginia. In addition to the regulated operations of Washington Gas, the regulated utility segment includes the operations of Hampshire Gas Company, an underground natural gas storage facility that is regulated by the Federal Energy Regulatory Commission and operated on behalf of Washington Gas.

Through WGEServices, the retail energy-marketing segment sells natural gas and electricity directly to customers, both inside and outside Washington Gas’ traditional service territory, in competition with unregulated gas and electricity marketers. Through two wholly owned subsidiaries, WGESystems and ACI, the HVAC segment designs, renovates and services mechanical heating, ventilating and air conditioning systems for commercial and governmental customers. In the three and nine months periods ended June 30, 2002, the HVAC segment also included the results of the Company’s 50 percent former equity investment in Primary Investors, an entity that provided HVAC services to residential customers. The Company terminated its interest in Primary Investors in October 2002 (refer to Note 7 included herein).

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)

The following table presents operating segment information.

OPERATING SEGMENT FINANCIAL INFORMATION



						Non-Utility Operations

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

Three Months Ended June 30, 2003

Total Revenues			$	203,097		$	163,189		$	7,460		$	105		$	170,754		$	(696	)	$	373,155
Operating Expenses
	Depreciation and Amortization			21,315			(265	)		34			157			(74	)		—			21,241
	Other Operating Expenses (a)			172,877			164,672			7,976			510			173,158			(696	)		345,339
	Income Tax Expense (Benefit)			282			(547	)		(207	)		(2,236	)		(2,990	)		—			(2,708	)

		Total Operating Expenses		194,474			163,860			7,803			(1,569	)		170,094			(696	)		363,872

Operating Income (Loss)				8,623			(671	)		(343	)		1,674			660			—			9,283
Interest Expense — Net				11,261			132			3			114			249			(51	)		11,459
Other Non-Operating Income (Expense) (b)				(418	)		—			15			320			335			(51	)		(134	)
Dividends on Washington Gas Preferred Stock				330			—			—			—			—			—			330

Net Income (Loss)			$	(3,386	)	$	(803	)	$	(331	)	$	1,880		$	746		$	—		$	(2,640	)

Total Assets			$	2,055,678		$	133,982		$	20,999		$	50,971		$	205,952		$	(79,610	)	$	2,182,020

Capital Expenditures			$	32,114		$	—		$	(16	)	$	(12	)	$	(28	)	$	—		$	32,086

Three Months Ended June 30, 2002 (c)

Total Revenues			$	166,482		$	135,532		$	14,489		$	475		$	150,496		$	(2,786	)	$	314,192
Operating Expenses
	Depreciation and Amortization			18,735			132			162			154			448			—			19,183
	Other Operating Expenses (a)			149,442			131,205			10,610			8,618			150,433			(2,786	)		297,089
	Income Tax Expense (Benefit)			(4,681	)		1,366			(403	)		(3,228	)		(2,265	)		—			(6,946	)

		Total Operating Expenses		163,496			132,703			10,369			5,544			148,616			(2,786	)		309,326
Equity in Net Loss of Affiliate				—			—			(5,051	)		—			(5,051	)		—			(5,051	)

Operating Income (Loss)				2,986			2,829			(931	)		(5,069	)		(3,171	)		—			(185	)
Interest Expense — Net				10,902			291			19			—			310			—			11,212
Other Non-Operating Income (Expense) (b)				(609	)		—			282			—			282			—			(327	)
Residential HVAC impairment				—			—			(2,131	)		—			(2,131	)		—			(2,131	)

Dividends on Washington Gas Preferred Stock				330			—			—			—			—			—			330

Net Income (Loss)			$	(8,855	)	$	2,538		$	(2,799	)	$	(5,069	)	$	(5,330	)	$	—		$	(14,185	)

Total Assets			$	1,926,662		$	106,576		$	25,779		$	37,259		$	169,614		$	(40,400	)	$	2,055,876

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

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

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

c. Certain amounts in the fiscal year 2002 period have been reclassified to conform to the presentation of the current fiscal year period.
Eliminations included in the Other Activities segment in fiscal year 2002 have been reclassified into the Eliminations/Other column to conform to the same presentation in fiscal year 2003.

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)

OPERATING SEGMENT FINANCIAL INFORMATION



						Non-Utility Operations

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

Nine Months Ended June 30, 2003

Total Revenues			$	1,208,226		$	559,822		$	25,600		$	1,225		$	586,647		$	(10,625	)	$	1,784,248
Operating Expenses
	Depreciation and Amortization			62,119			(118	)		100			469			451			—			62,570
	Other Operating Expenses (a)			900,557			554,763			27,118			2,450			584,331			(10,625	)		1,474,263
	Income Tax Expense (Benefit)			82,625			1,876			(655	)		(1,804	)		(583	)		—			82,042

		Total Operating Expenses		1,045,301			556,521			26,563			1,115			584,199			(10,625	)		1,618,875

Operating Income (Loss)				162,925			3,301			(963	)		110			2,448			—			165,373
Interest Expense — Net				34,334			413			11			513			937			(336	)		34,935
Other Non-Operating Income (Expense) (b)				(1,946	)		11			27			2,741			2,779			(336	)		497
Dividends on Washington Gas Preferred Stock				990			—			—			—			—			—			990

Net Income (Loss)			$	125,655		$	2,899		$	(947	)	$	2,338		$	4,290		$	—		$	129,945

Total Assets			$	2,055,678		$	133,982		$	20,999		$	50,971		$	205,952		$	(79,610	)	$	2,182,020

Capital Expenditures			$	92,427		$	8		$	159		$	—		$	167		$	—		$	92,594

Nine Months Ended June 30, 2002 (c)

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

		Total Operating Expenses		716,412			431,975			41,850			6,711			480,536			(13,747	)		1,183,201
Equity in Net Loss of Affiliate				—			—			(7,873	)		—			(7,873	)		—			(7,873	)

Operating Income (Loss)				107,081			5,566			(2,462	)		(5,152	)		(2,048	)		—			105,033
Interest Expense — Net				33,381			771			288			13			1,072			—			34,453
Other Non-Operating Income (Expense) (b)				1,279			—			374			—			374			—			1,653
Residential HVAC impairment				—			—			(9,431	)		—			(9,431	)		—			(9,431	)

Dividends on Washington Gas Preferred Stock				990			—			—			—			—			—			990

Net Income (Loss)			$	73,989		$	4,795		$	(11,807	)	$	(5,165	)	$	(12,177	)	$	—		$	61,812

Total Assets			$	1,926,662		$	106,576		$	25,779		$	37,259		$	169,614		$	(40,400	)	$	2,055,876

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

(a)		Includes cost of gas and revenue taxes during all reported periods.
(b)		The amounts reported for Other Non-Operating Inc. (Expense) are net of applicable income taxes.
(c)		Certain amounts in the fiscal year 2002 period have been reclassified to conform to the presentation of the current fiscal year period. Eliminations included in the Other Activities segment in fiscal year 2002 have been reclassified into the Eliminations/Other column to conform to the same presentation in fiscal year 2003.

NOTE 10 — TRANSACTIONS BETWEEN WASHINGTON GAS AND AFFILIATES

Washington Gas and other subsidiaries of WGL Holdings may engage in transactions with each other during the ordinary course of business. All significant intercompany transactions and balances have been eliminated from the consolidated financial statements of WGL Holdings.

Washington Gas provides administrative and general support to affiliates, and prepares consolidated tax returns, which include affiliated company tax obligations. All such costs that are billed to affiliates are settled with a cash transfer or reflected in “Receivables from associated companies” or “Payables to associated companies” on Washington Gas’ Balance Sheets. Washington Gas may also, on occasion, borrow funds from, or lend funds to, affiliated companies through the operation of a money pool. The Washington Gas Balance Sheets reflect a net receivable of $36.0 million and $3.6 million at June 30, 2003 and September 30, 2002, respectively, for money pool balances. Additionally, Washington Gas provides system balancing services to all energy marketers participating in the customer choice programs on its facilities under approved tariffs, including $696,000 and $10.6 million of charges to WGEServices, an affiliated energy

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)

marketer, for balancing services during the three and nine month periods ended June 30, 2003, respectively. For the three and nine month periods ended June 30, 2002, the charges for balancing services were $2.1 million and $11.7 million, respectively.

NOTE 11 — SALE OF ASSETS

In March 2003, the Company’s regulated utility recognized an after-tax gain of $2.5 million, or $0.05 per share, from the sale of the Company’s headquarters building and land located in downtown Washington, D.C. This gain was reported in Other income (expenses) — net for the nine months ended June 30, 2003 in accordance with regulatory accounting. The year-to-date results also include estimates for potential refunds to customers based on the outcome of regulatory decisions related to this gain. In the first quarter of fiscal year 2003, the Company’s non-utility operations recognized an after-tax gain of $926,000, or $0.02 per share, from the sale of its interest in a land development venture.

NOTE 12 — COMMITMENTS AND CONTINGENCIES

Regulated Utility Operations

Certain legal and administrative proceedings, incidental to the Company’s business, including rate case contingencies, involve WGL Holdings and/or its subsidiaries. In the opinion of management, the Company has recorded an adequate provision for probable losses or refunds to customers for rate case contingencies related to these proceedings in accordance with SFAS No. 5, Accounting for Contingencies. Management believes the amount of the refunds that are reasonably possible, in excess of the liability recorded at June 30, 2003, is approximately $8.9 million. Below is a description of certain of Washington Gas’ current regulatory proceedings.

Virginia Jurisdiction — Rate Case Activity

On June 14, 2002, Washington Gas filed an application with the State Corporation Commission of Virginia (SCC of VA) 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. Washington Gas requested an overall rate of return of 9.42 percent and a return on common equity of 12.25 percent versus its currently authorized return on common equity of 11.50 percent for Washington Gas and 10.7 percent for Shenandoah Gas. Washington Gas also requested approval of an Incentive Rate Plan (IRP), 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 IRP proposed no change in the method of recovering the cost of natural gas incurred by Washington Gas.

On November 15, 2002, the Staff of the SCC of VA (VA Staff) filed testimony in response to Washington Gas’ presentation. The VA 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 VA Staff’s estimate of the cost of equity for Washington Gas, including the Shenandoah Division, ranged between 9.50 percent and 10.50 percent. The VA Staff recommended 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. At the hearing, Washington Gas withdrew the IRP from consideration in that proceeding but reserved the right to propose a performance-based rate plan in a future rate case. The other parties agreed to leave the record open to permit Washington Gas to submit by January 10, 2003, the actuarial studies that support the reasonableness of the updated pension and Other Post-Employment Benefits (OPEB) expenses proposed by Washington Gas.

On January 30, 2003, the VA Staff filed a motion that requested acceptance of the VA Staff’s

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)

comments and accompanying schedules that reflected revisions to the VA Staff’s original position. Based on its review of additional financial data and actuarial studies, the VA Staff supported the pension OPEB costs requested by Washington Gas. After appropriate revisions to reflect Washington Gas’ proposed pension and OPEB costs, the VA Staff now supports an operating revenue increase of $5.0 million for Washington Gas and an operating revenue reduction of $1.2 million for the Shenandoah Division.

Washington Gas cannot predict the final outcome of this pending regulatory proceeding. Under the regulations of the SCC of VA, Washington Gas placed the requested general revenue increase into effect on November 12, 2002, subject to refund pending the SCC of VA’s final decision in the proceeding. Washington Gas has recorded a provision for rate refunds as of June 30, 2003, representing management’s judgment of the rate case outcome.

Virginia Jurisdiction — Depreciation Issues

In accordance with an Order of the SCC of VA, Washington Gas performed a depreciation study, using data as of December 31, 2000, 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 2002. Following discussions with the Staff, Washington Gas submitted to the Staff in the third quarter of fiscal year 2002 an updated study based on data as of December 31, 2001.

The VA Staff issued a letter dated October 2, 2002 approving new depreciation rates for Washington Gas and the Shenandoah Gas Division that would increase annual depreciation expense by approximately $4.0 million. Staff stated its position that the approved rates should be implemented as of January 1, 2002, but recognized that the implementation date should be decided by the SCC of VA in the pending rate case discussed above. Washington Gas believes the new depreciation rates should have been implemented concurrent with the effective date of new base rates on November 12, 2002. Washington Gas filed testimony supporting this position with the SCC of VA in the base rate proceeding discussed previously. Washington Gas believes that it is reasonably possible that the position it has taken on this matter will be adopted by the SCC of VA in the pending rate case.

The financial statements as reported in this Quarterly Report on Form 10-Q do not reflect any modification of depreciation rates for periods prior to November 12, 2002. However, Washington Gas did utilize the higher depreciation rates from November 12, 2002 forward. To the extent the position of the VA Staff is adopted by the SCC of VA in the current rate filing, Washington Gas would have to record a charge to income for additional depreciation expense, net of income tax benefits, calculated from January 1, 2002 to November 12, 2002, without a corresponding amount of revenue. This issue is still pending in the previously discussed rate case.

Maryland Jurisdiction

On March 31, 2003, Washington Gas filed with the Public Service Commission of Maryland (PSC of MD) an application to increase rates in Maryland. The application requested an increase to overall annual revenues by approximately $35.1 million, with a return on common equity of 12.25 percent and an overall rate of return of 9.39 percent. On June 16, 2003, as a result of information obtained subsequent to its original filing, Washington Gas revised its overall requested increase in annual revenue to $28.9 million. On August 1, 2003, Washington Gas further revised its requested annual revenue increase to $27.2 million. The most recent update reflects no revision to the original request in regards to Washington Gas’ return on common equity or overall rate of return.

The proposed rate request includes an IRP that would establish incentives to increase efficiencies and would set customer service quality standards that seek to increase the efficiency,

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)

safety, and reliability of service. The IRP benefits customers by providing for more stable rates, which would result in less frequent requests for rate increases. The rate request also includes a proposal that would provide benefits to low-income customers who qualify for participation in a new Washington Gas program that would provide bill credits to participants during the winter heating season.

On June 20, 2003, the Staff of the PSC of MD (MD Staff), the Maryland Office of People’s Counsel (MD OPC), the United States Department of Defense and the other affected Federal Executive Agencies (DOD) and the Apartment and Office Building Association of Metropolitan Washington (AOBA) filed testimony in response to Washington Gas’ rate application. According to its filed testimony, the MD Staff recommended that the PSC of MD order Washington Gas to reduce its annual revenues by $6.6 million (subsequently revised on August 1, 2003 to recommend a $13.6 million reduction in annual revenues based on an alternative rate-making proposal for interruptible revenues) and to allow Washington Gas a return on common equity of 10.80 percent and an overall rate of return of 8.64 percent. The MD OPC recommended an annual reduction in revenues of $11.7 million, with a return on common equity of 9.50 percent and an overall rate of return of 7.92 percent. Neither the MD Staff nor the MD OPC supported the Washington Gas proposal to implement an IRP. The DOD recommended a $5.1 million reduction in Washington Gas’ annual revenues, and a return on common equity of 9.20 percent and an overall rate of return of 7.81 percent. DOD did not support Washington Gas’ proposal to implement an IRP, however, it recommended a reduction in the return on common equity to 8.00 percent if the PSC of MD elects to adopt an IRP.

AOBA did not specify a change in annual revenues, however, it recommended a return on common equity of 10.10 percent and an overall rate of return of 8.08 percent. While not supporting Washington Gas’ proposal to implement an IRP, AOBA alternatively proposed a 9.30 percent return on common equity and an overall rate of return of 7.69 percent if the PSC of MD did adopt an IRP.

On July 14, 2003, Washington Gas filed its rebuttal case. Hearings were held from August 4, 2003 through August 7, 2003 to discuss the merits of the proposed rate increase.

Under Maryland law, the PSC of MD may suspend the implementation of the proposed increase for up to 210 days from the filing date. The PSC of MD typically uses the 210-day period to review the reasonableness of the proposed change in rates. If action has not been taken after 210 days, rates may be placed into effect subject to refund. Due to Maryland’s suspension statute, Washington Gas anticipates a final Order prior to November 2003.

District of Columbia Jurisdiction

On June 19, 2001, Washington Gas filed with the Public Service Commission of the District of Columbia (PSC of DC) an application 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 October 29, 2002, the PSC of DC issued an Order for Washington Gas to decrease rates. The Order directed a decrease in overall annual revenues in the District of Columbia of approximately $7.5 million, and approved a return on common equity of 10.6 percent and an overall rate of return of 8.83 percent.

On November 6, 2002, Washington Gas filed with the PSC of DC an Application for Reconsideration of the Order issued by the PSC of DC on October 29, 2002. The District of Columbia’s Office of the People’s Counsel (DC OPC) and another intervenor also filed Applications for Reconsideration of the October 29, 2002 Order.

After reviewing the Applications for Reconsideration of Washington Gas and other parties in the case, the PSC of DC issued its order on reconsideration on March 28, 2003. New rates resulting

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)

in a $5.4 million annual revenue reduction were put into place in the District of Columbia for service rendered on and after April 9, 2003.

On May 23, 2003, the DC OPC filed an appeal with the District of Columbia Court of Appeals seeking to overturn the March 28, 2003 ruling by the PSC of DC. In its March 28, 2003 ruling, the PSC of DC upheld a previous ruling that rejected a proposal by the DC OPC to refund to customers, asset management revenues collected by the Company, and approved the Company’s proposal to share with customers fifty percent of such future revenues. This ruling became effective on April 9, 2003. If the District of Columbia Court of Appeals were to rule in favor of the DC OPC in this matter, the Company would be required to refund the amounts previously recorded in revenues totaling approximately $8.0 million (on a pre-tax basis). Though management cannot predict the final outcome of this matter, it believes that the DC OPC’s appeal is without merit and, accordingly, the Company has recorded no liability related to this matter.

On February 7, 2003, Washington Gas filed with the PSC of DC an additional application to increase rates. The request sought to increase overall annual revenues in the District of Columbia by approximately $14.1 million, or 7.0 percent, to $214.2 million. The application seeks a return on common equity of 12.25 percent and an overall rate of return of 9.25 percent. The rate request application filed on February 7, 2003 did not reflect the effect of the revenue reduction indicated in the PSC of DC’s October 29, 2002 Order.

After considering the effect of the base rate reductions that became effective on April 9, 2003, Washington Gas filed a revision to its February 7, 2003 application on April 23, 2003. This revision increased the amount of the requested increase from $14.1 million to $19.9 million. On May 2, 2003, in response to a commission request for supplemental testimony, the requested increase was modified to $18.8 million, supporting a total level of annual revenues of $213.2 million. There are no statutory time requirements for a ruling on the rate request in the District of Columbia. However, Washington Gas requested the PSC of DC to take action on the request within a nine-month period from the February filing date. The PSC of DC held a Pre-hearing Conference in this case on April 10, 2003 to consider interventions and appearances of interested parties, the procedural schedule in the case and proposals for issues to be resolved in this case. The PSC of DC has adopted a procedural schedule that requires final briefs to be filed during the first week of October 2003.

On June 26, 2003, the DC OPC, AOBA and other intervenors filed testimony in response to Washington Gas’ District of Columbia rate application. According to its filed testimony, the DC OPC recommended an annual reduction in revenues of $9.6 million with a return on common equity of 9.00 percent and an overall rate of return of 7.39 percent. Included in the $9.6 million annual revenue reduction is DC OPC’s recommendation to lower Washington Gas’ annual depreciation expense by $7.7 million due principally to different depreciation rates that modify the way costs of removal are reflected in depreciation expense. The DC OPC did not support the Washington Gas proposal to implement an IRP.

AOBA did not specify a change in annual revenues, however, it recommended a return on common equity of 10.10 percent and an overall rate of return of 8.08 percent. While not supporting the Washington Gas proposal to implement an IRP, AOBA alternatively proposed a 9.30 percent return on common equity and an overall rate of return of 7.69 percent if the PSC of DC did adopt an IRP.

On July 25, 2003, Washington Gas filed its rebuttal case. Hearings are scheduled from September 16, 2003 through September 18, 2003 to discuss the merits of the proposed rate increase.

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (concluded)

Non-Utility Operations

As discussed below, the Company is party to financial guarantees related to the energy-marketing activities of WGEServices. WGES also is exposed to the risk of non-performance associated with its principal electric supplier.

Financial Guarantees

WGL Holdings and Washington Gas Resources are party to agreements naming them as the guarantor for certain purchases and sales of natural gas and electricity made by WGEServices. Total guarantees outstanding at June 30, 2003 were $261.8 million, of which $258.8 million and $3.0 million of such guarantees named WGL Holdings and Washington Gas Resources as the guarantor, respectively. Of the total guarantees, there were $42.0 million held by WGL Holdings that were due to expire December 31, 2004. The remaining $219.8 million do not have specific maturity dates.

Electric Supplier Contingency

WGEServices owns no electric generation assets and receives all of its electric supply to serve its retail customers from Mirant Americas Energy Marketing L.P. (MAEM), a wholly owned subsidiary of Mirant Americas, Inc., which is a wholly owned subsidiary of Mirant Corporation (Mirant). On July 14, 2003, Mirant and substantially all of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. MAEM was included in these bankruptcy filings. Since the bankruptcy filing, MAEM has continued to perform under its supply contracts with WGEServices. Future performance by MAEM may be subject to further developments in the bankruptcy proceedings.

Should MAEM fail to perform under its supply contracts, WGEServices would be exposed to financial loss equal to the cost of replacement power in excess of the MAEM contracts and the cost of exercising certain damage limitation provisions within its customer sales contracts. WGEServices currently has access to $30 million in collateral from an escrow account established by MAEM as part of the WGEServices supply contracts. In the opinion of counsel to the Company, WGEServices has the contractual right to draw on the escrow funds in the account if MAEM terminates the supply contracts and WGEServices needs to acquire replacement power at a higher cost or otherwise mitigate its damages. As of August 7, 2003, the amount of WGEServices’ exposure in the event of termination of the contracts between WGEServices and MAEM is estimated to be less than the amount of collateral included in the escrow account. This is based upon satisfying the economic terms of existing sales contracts until their expiration, and acquiring supply, priced at forward electricity prices as of August 7, 2003 that will be in effect until WGEServices exercises certain damage limitation provisions of its customers’ sales contracts. The actual exposure for WGEServices may differ from the estimate due to changes for timing of any contract termination, deviations from normal weather, changes in future market conditions, or other factors.

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations

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

Certain matters discussed in this report, excluding historical information, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the outlook for earnings, revenues and other future financial business performance or strategies and expectations. Forward-looking statements are typically identified by words such as, but not limited to, “estimates”, “expects”, “anticipates”, “intends”, “believes”, “plans” and similar expressions or future or conditional verbs such as “will”, “should”, “would” and “could”. Although the Company believes such forward-looking statements are based on reasonable assumptions, it cannot give assurance that every objective will be achieved. Forward-looking statements speak only as of today, and the Company assumes no duty to update them. The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: 1) economic, competitive, political and regulatory conditions and developments; 2) capital and energy commodity market conditions; 3) changes in credit market conditions and creditworthiness of customers and suppliers; 4) changes in relevant laws and regulations, including tax, environmental and employment laws and regulations; 5) weather conditions; 6) legislative, regulatory, and judicial mandates and decisions; 7) timing and success of business and product development efforts; 8) technological improvements; 9) the pace of deregulation efforts and the availability of other competitive alternatives; 10) terrorist activities; and 11) other uncertainties.

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

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

WGL Holdings — This section 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 operations and non-utility operations. The majority of WGL Holdings’ operations are derived from the results of the regulated utility, Washington Gas Light Company (Washington Gas). In addition, WGL Holdings is also impacted by the results of its non-utility operations. To obtain a complete understanding and review of all the details of the regulated utility operations, please refer to the Management’s Discussion and Analysis of Financial Condition and Results of Operations for Washington Gas.

Washington Gas — This section comprises the vast majority of WGL Holdings’ regulated utility segment. As such, the financial condition and results of operations of Washington Gas’ utility operations and WGL Holdings’ regulated utility segment are essentially the same.

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

Washington Gas provides accounting, legal and other services to its affiliates at cost, the total amounts of which are not material. Additionally, Washington Gas provides system balancing

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

services to all energy-marketers participating in the customer choice programs on its system under approved tariffs which includes $696,000 and $2.1 million of charges to Washington Gas Energy Services, Inc. (WGEServices) for balancing in the quarters ended June 30, 2003 and 2002, respectively. For the nine months ended June 30, 2003 and 2002, the charges for balancing services were $10.6 million and $11.7 million, respectively. All of these related-party amounts have been eliminated in the consolidated financial statements of WGL Holdings.

CRITICAL ACCOUNTING POLICIES

Preparation of financial statements and related disclosures in compliance with generally accepted accounting principles requires the selection and the application of appropriate technical accounting rules to the relevant facts and circumstances of the Company’s operations, as well as the use of estimates by management to compile the consolidated financial statements. The application of these accounting policies necessarily involves judgments regarding estimates and projected outcomes of future events, including the likelihood of success of particular regulatory initiatives, the likelihood of actualizing environmental estimates and the probability of recovering costs and investments in both the regulated utility and non-utility operations. These judgments, in and of themselves, materially impact the financial statements and the related disclosures.

The Company has identified four critical accounting policies discussed below that require judgment and estimation, where such estimates have a material impact on the consolidated financial statements.

Accounting for Utility Revenue and Cost of Gas Recognition

Accounting for Regulated Operations — Regulatory Assets and Liabilities

A significant portion of the Company’s business is subject to regulation. As the regulated utility industry continues to address competitive market issues, the cost-of-service regulation used to compensate the Company’s regulated utility for the cost of its regulated operations will continue to evolve. Non-traditional ratemaking initiatives and market-based pricing of products and services could have additional long-term financial implications for the Company. Management has relied on its projection of continued regulatory oversight of its operations in order to validate the carrying cost of the regulated utility investment in fixed assets.

The Company’s regulated utility accounts for its regulated activities in accordance with Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards

WGL Holdings, Inc.
Washington Gas Light Company
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

(SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation, which results in differences in the application of generally accepted accounting principles between regulated and non-regulated businesses. SFAS No. 71 requires the recognition of regulatory assets and liabilities for certain transactions that would have been treated as revenue and expense in non-regulated businesses. In certain circumstances, SFAS No. 71 allows entities whose rates are determined by third-party regulators to defer costs as “regulatory” assets on the balance sheet to the extent that the entity expects to recover these costs in future rates. Future regulatory changes or changes in the competitive environment could result in the Company discontinuing the application of SFAS No. 71 for some of its businesses and require the write-off of the portion of any regulatory asset or liability that was no longer probable of recovery or refund. In effect, the Company’s regulated utility could be required to write off certain regulatory assets that had been previously deferred on the Consolidated Balance Sheets in prior periods, and charge these costs to expense at the time it determines that the provisions of SFAS No. 71 no longer apply. If WGL Holdings were required to discontinue the application of SFAS No. 71 for any of its operations, it would have an extraordinary non-cash charge to income for the net book value of its regulatory assets and liabilities. Other adjustments might also be required.

Management believes that currently available facts support the continued application of SFAS No. 71 for the Company’s regulated activities, and that all regulatory assets and liabilities are recoverable or refundable through the regulatory environment.

Accounting for Income Taxes

Accounting for Contingencies

The Company recognizes contingent liabilities utilizing SFAS No. 5, Accounting for Contingencies. By their nature, the amount of the contingency and the timing of a contingent event are subject to management’s judgment of such events and management’s estimates of the amounts. Some of these contingent events and amounts are discussed in Note 12 of the Notes to Consolidated Financial Statements.

WGL Holdings, Inc.
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

WGL HOLDINGS

RESULTS OF OPERATIONS — Three Months Ended June 30, 2003 vs. June 30, 2002

Summary Results

WGL Holdings, Inc. reported a net loss for the three months ended June 30, 2003 of $2.6 million, or $0.05 per share, an improvement of $11.5 million, or $0.24 per share, over the net loss of $14.2 million, or $0.29 per share, reported for the same period last year. Unless otherwise noted, earnings (or loss) per share amounts are presented herein on a diluted basis, and are based on weighted average common and common equivalent shares outstanding. There was no difference between basic and diluted earnings (or loss) per share for the current or prior year’s quarter.

Regulated Utility Operating Results

The Company’s utility operations are weather sensitive with a significant portion of its revenue coming from deliveries of natural gas to residential and small commercial heating customers. The utility segment reported a seasonal net loss of $3.4 million for the third quarter of fiscal year 2003, an improvement of $5.5 million, or 61.8 percent, over the same quarter in fiscal year 2002. This improvement reflects a 24.7 percent increase in firm deliveries due to colder weather during the current quarter. Weather, as measured by heating degree days, was 32.2 percent colder in the current quarter than the same period of the prior fiscal year. The current quarter was 41.8 percent colder than normal, as compared to 6.5 percent colder than normal for the same period last year. The colder-than-normal weather contributed an estimated $0.08 per share to current quarter results. Also contributing to current period results were new rates that went into effect in Maryland on September 30, 2002, and in Virginia on November 12, 2002. The Virginia rate increase is subject to refund pending a final rate order. Tempering these year-over-year improvements were higher labor and benefit costs and depreciation expense. Further discussion of the operating results of the regulated utility for the three months ended June 30, 2003, is included herein in the Management’s Discussion and Analysis of Financial Condition and Results of Operations for Washington Gas.

Non-Utility Operating Results

The Company’s non-utility operations reported net income of $746,000 for the third quarter of fiscal year 2003, an improvement of $6.1 million over the same quarter in fiscal year 2002. This improvement is primarily attributable to after-tax charges recorded in the third quarter fiscal year 2002 totaling $10.2 million. These charges related to after-tax operating losses of $3.0 million and an impairment provision of $2.1 million associated with the Company’s former 50 percent equity investment in Primary Investors LLC (Primary Investors). On October 15, 2002, the Company and Primary Investors executed a final closing and transferred all of its interest in Primary Investors to Thayer Capital Partners, the Company’s co-investor. Since September 30, 2002, the Company had no net investment in this equity venture and, accordingly, there was no effect on net income for this venture for the current quarter. The third quarter of the prior year also included an after-tax charge of $5.1 million reflecting a loan loss provision associated with a consumer finance business that has stopped accepting new loans and is expected to fully amortize its loan portfolio by 2005.

Partially offsetting the favorable year-over-year comparisons were net losses totaling $1.1 million from the Company’s retail energy-marketing and commercial heating ventilating and air conditioning (HVAC) businesses, as compared to net income totaling $4.8 million for the same period in fiscal year 2002.

WGL Holdings, Inc.
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

The following table compares the financial results from non-utility activities for the quarters ended June 30, 2003 and 2002.

Net Income (Loss) Applicable to Non-Utility Activities
(In thousands of dollars)



		Three Months Ended
		June 30,

		2003			2002			Variance

Retail energy-marketing		$	(803	)	$	2,538		$	(3,341	)
Commercial HVAC			(331	)		2,300			(2,631	)

	Subtotal		(1,134	)		4,838			(5,972	)
Other non-utility activities			1,880			(5,069	)		6,949
Residential HVAC *			—			(5,099	)		5,099

	Total	$	746		$	(5,330	)	$	6,076

Not an operating unit in the 2003 period.

Retail Energy-Marketing

WGL Holdings’ retail energy-marketing subsidiary, WGEServices, sells natural gas and electricity in competition with other unregulated marketers. For the third quarter of fiscal year 2003, WGEServices reported a net loss of $803,000 for the current quarter, as compared to net income of $2.5 million for the same quarter in fiscal year 2002. The $3.3 million decrease in income reflects reduced gross margins from natural gas sales due to a higher weighted average gas cost in the current quarter, partially offset by slightly higher gross margins from the sale of electricity.

At June 30, 2003, the retail energy-marketing segment supplied natural gas to 157,200 customers, a two percent increase over the same period last year. Electricity accounts totaled 79,000 at the end of the current quarter, an increase of 33 percent over the third quarter of fiscal year 2002.

HVAC — Commercial Operations

Two subsidiaries, American Combustion Industries, Inc. and Washington Gas Energy Systems, Inc., offer large-scale HVAC installations and related services to commercial and government customers. The Company’s commercial HVAC segment reported a net loss of $331,000 for the three months ended June 30, 2003, down from net income of $2.3 million for the comparable 2002 period, principally reflecting reduced business activity and lower gross margins.

Other Non-Utility Activities

Results for the other non-utility activities of the Company for the 2003 quarter improved $6.9 million over the prior year’s quarter. This improvement reflects reduced income taxes in the current quarter of $2.1 million resulting from adjustments reflecting the realization of tax benefits of capital loss carryforwards. Additionally, the prior year’s quarter included an after-tax charge of $5.1 million reflecting a loan loss provision associated with a consumer finance business that has stopped accepting new loans.

WGL Holdings, Inc.
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

Other Income (Expenses) — Net

For the quarter ended June 30, 2003, Other Income (Expenses) — Net reflected a net expense of $134,000, which was relatively unchanged from the same period in fiscal year 2002.

Interest Expense

WGL Holdings’ total interest expense of $11.5 million for the third quarter of fiscal year 2003 was essentially unchanged from the same quarter last year. The components of interest expense are reflected below.

Composition of Interest Expense Changes
(In thousands of dollars)



		Three Months Ended
		June 30,

		2003		2002		Variance

Long-Term Debt		$	10,758	$	10,749	$	9
Short-Term Debt			106		143		(37	)
Other (Includes AFUDC)			595		320		275

	Total	$	11,459	$	11,212	$	247

RESULTS OF OPERATIONS — Nine Months Ended June 30, 2003 vs. June 30, 2002

Summary Results

For the first nine months of fiscal year 2003, the Company’s net income was $129.9 million, or $2.67 per share, more than double the net income of $61.8 million, or $1.27 per share, for the same period in fiscal year 2002, principally due to colder weather. Earnings for the current nine-month period reflect an after-tax gain of $2.5 million from the sale in the second quarter of the Company’s Washington, D.C. headquarters property. Results for the current nine-month period also reflect management’s estimates for potential refunds to customers based on the outcome of regulatory decisions related to this gain, as well as other pending regulatory matters in Virginia. Actual results related to these regulatory contingencies are difficult to predict and could differ significantly from the estimates included in the reported earnings. These and other factors affecting the Company’s operating results for the nine-month periods presented are discussed below.

Regulated Utility Operating Results

Net income for the utility segment was $125.7 million for the first nine months of fiscal year 2003, an increase of $51.7 million over the corresponding nine-month period in 2002, due primarily to 37.4 percent colder weather than the prior year. Weather was 20 percent colder than normal for the current nine-month period, as compared to 13.0 percent warmer than normal for the same period last year. Firm gas deliveries of 1.298 billion therms for the nine months ended June 30, 2003 represented an increase of 337 million therms, or 35 percent, over the corresponding period in 2002. The colder-than-normal weather for the nine months ended June 30, 2003 enhanced earnings per share by $0.54. New retail rates put into effect on September 30, 2002 in Maryland and on November 12, 2002 in Virginia also improved results. Additionally, the utility segment reflects an adjustment to income taxes in the current nine-month period that added $2.7 million to income. Tempering these earnings improvements were higher labor and benefit costs, depreciation levels and increased expenses associated with uncollectible accounts. The 2002 nine-month period included an after-tax loss of $1.7 million incurred on a transaction with a bankrupt energy trader. Further discussion of the operating results of the regulated utility for the nine months ended June 30, 2003, is included in the

WGL Holdings, Inc.
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

Management’s Discussion and Analysis of Financial Condition and Results of Operations for Washington Gas.

Non-Utility Operating Results

Net income for the non-utility operations was $4.3 million for the first nine months of fiscal year 2003, as compared to a net loss of $12.2 million for the corresponding period in 2002. The inclusion of charges in the first nine months of fiscal year 2002, for which there were not similar charges in the first nine months of fiscal year 2003, favorably impacted year-over-year comparisons. These charges included a $5.1 million after-tax loan loss provision associated with a consumer finance business that is no longer making new loans, and a $5.9 million after-tax operating loss and a $9.4 million after-tax impairment provision associated with the Company’s former 50 percent equity investment in Primary Investors. There was no impact on financial results for the current nine-month period from the former residential HVAC business as the Company no longer has an investment in this entity.

Partially offsetting the favorable year-over-year comparisons was a $6.4 million decline in earnings from the Company’s retail energy-marketing and commercial HVAC businesses. The following table compares the financial results from non-utility activities for the nine months ended June 30, 2003 and 2002.

Net Income (Loss) Applicable to Non-Utility Activities
(In thousands of dollars)



		Nine Months Ended
		June 30,

		2003			2002			Variance

Retail energy-marketing		$	2,899		$	4,795		$	(1,896	)
Commercial HVAC			(947	)		3,537			(4,484	)

	Subtotal		1,952			8,332			(6,380	)
Other non-utility operations			2,338			(5,165	)		7,503
Residential HVAC *			—			(15,344	)		15,344

	Total	$	4,290		$	(12,177	)	$	16,467

Not an operating unit in the 2003 period.

Retail Energy-Marketing

Net income for the retail energy-marketing business was $2.9 million for the first nine months of fiscal year 2003, down $1.9 million from the same period in fiscal year 2002. Despite the seasonal storage flexibility and other risk mitigation strategies that this business utilizes to provide significant protection from the effects of warmer- and colder-than-normal weather, high gas prices that occurred in late February and early March of the current fiscal year were more extreme than the planning parameters prescribed in the Company’s risk management policy. Consequently, the colder-than-normal weather experienced in the 2003 second quarter resulted in the need to make additional purchases of natural gas in the spot market at a cost above its retail selling price to meet its commitments to customers, thereby significantly reducing net margins. Net margins from electricity sales increased due to increased volumes sold and a higher gross margin per kilowatt-hour. Gas sales were 625.9 million therms in the current period, an increase of 100.9 million therms over last year. Electric sales for the nine months ended June 30, 2003 of 5.5 billion kilowatt-hours rose 1.2 billion kilowatt-hours over the same period last year.

WGL Holdings, Inc.
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

HVAC — Commercial Operations

The commercial HVAC business reported a net loss of $947,000 for the first nine months of fiscal year 2003, as compared to net income of $3.5 million for the same period last year, due primarily to reduced business activity and lower gross margins.

Other Non-Utility Activities

Results for the other non-utility activities of the Company for the fiscal year 2003 nine-month period improved $7.5 million over the corresponding period in 2002. This improvement reflects reduced income taxes in the current quarter of $2.1 million resulting from adjustments reflecting the realization of tax benefits of capital loss carryforwards. Additionally, the prior year’s quarter included an after-tax charge of $5.1 million reflecting a loan loss provision associated with a consumer finance business that has stopped accepting new loans.

Other Income (Expenses) — Net

Other Income (Expenses) — Net reflects a $1.2 million decrease in net income for the first nine months of fiscal year 2003 as compared to the same period last year. This decrease is due primarily to $8.3 million of after-tax benefits recorded during the nine-month period of fiscal year 2002 for the proceeds from a weather insurance policy. There were no weather insurance proceeds recorded in the current nine-month period. Partially offsetting the effect of the absence of any weather insurance proceeds in fiscal year 2003 were after-tax gains of $926,000 and $2.5 million related to sales of the Company’s interest in a land development venture and its headquarters property during the first and second quarters of fiscal year 2003, respectively. Lastly, the first quarter of fiscal year 2002 included a $1.7 million after-tax charge related to business activities with a bankrupt energy trader.

Interest Expense

WGL Holdings’ interest expense of $34.9 million for the nine months ended June 30, 2003 increased $482,000 over the same period last year due primarily to an increase in the average balance of long-term debt outstanding, partially offset by a decrease in the weighted average cost of these borrowings. Reduced interest costs related to WGL Holdings’ short-term borrowings reflect lower average balances, as well as a decrease in the weighted average cost of such borrowings. The components of interest expense are reflected below.

Composition of Interest Expense Changes
(In thousands of dollars)


		Nine Months Ended
		June 30,

		2003		2002		Variance

Long-Term Debt		$	33,218	$	32,110	$	1,108
Short-Term Debt			758		1,472		(714	)
Other (Includes AFUDC)			959		871		88

	Total	$	34,935	$	34,453	$	482

WGL Holdings, Inc.
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

LIQUIDITY AND CAPITAL RESOURCES

General Factors Affecting Liquidity

It is important for the Company to have access to short-term debt markets to maintain satisfactory liquidity to operate its businesses on a near-term basis. Acquisition of natural gas, electricity, pipeline capacity and the need to finance accounts receivable are the most significant short-term financing requirements of the Company. The need for long-term capital is primarily driven by capital expenditures and maturities of long-term debt.

Significant swings can take place in the level of short-term debt needed by the Company due primarily to changes in the price of natural gas and the impact of weather on the volumes of natural gas and electricity that need to be purchased to satisfy customer demand. Satisfactory backup financing to the Company’s commercial paper program in the form of revolving credit agreements and bank lines of credit enables the Company to maintain access to short-term debt markets. The ability of the Company to obtain such financing depends on its credit ratings, which are greatly affected by financial performance and the liquidity of financial markets. Also potentially affecting access to short-term debt capital is the nature of any restrictions that might be placed upon the Company such as ratings triggers or a requirement to provide creditors with additional credit support in the event of a determination of unreasonable creditworthiness.

The ability to procure sufficient levels of long-term capital at reasonable costs is determined by the level of the Company’s capital expenditure requirements, its financial performance, and the impact of these factors on its credit ratings and investment alternatives available to investors. The Company’s access to short- and long-term capital may be affected by contract provisions related to a change in the Company’s creditworthiness.

The Company has a goal to maintain its common equity ratio in the mid-50 percent range of total consolidated capital. Accomplishing this capital structure objective and maintaining sufficient cash flow are necessary to maintain attractive credit ratings for the Company and Washington Gas and to allow access to capital at relatively low costs. As of June 30, 2003, total consolidated capitalization, including current maturities of long-term debt, comprised 55.6 percent common equity, 1.8 percent preferred stock and 42.6 percent long-term debt. The cash flow requirements of the Company and the ability to provide satisfactory resources to satisfy those requirements are primarily influenced by the activities of Washington Gas and to a lesser extent the non-utility operations.

Short-Term Cash Requirements and Related Financing

The regulated utility’s business is weather-sensitive and seasonal, causing short-term cash requirements to vary significantly during the year. Over 75 percent of the total therms delivered in the regulated utility’s service area (excluding deliveries to two electric generation facilities) occur in the first and second fiscal quarters. Cash requirements peak in the fall and winter months when accounts receivable, accrued utility revenues and storage gas inventories are at their highest levels. After the winter heating season, many of these assets are converted into cash, which the Company generally uses to reduce and sometimes eliminate short-term debt and acquire storage gas for the next heating season.

The retail energy-marketing subsidiary, WGEServices, has seasonal short-term cash requirements resulting from purchasing gas in periods that are not matched with the sale of this commodity. In addition, WGEServices must finance its accounts receivable for the gas and electricity that it sells, and the accounts receivable balances are seasonal.

WGL Holdings, Inc.
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

Both the regulated utility and the retail energy-marketing segment maintain storage gas inventory. Storage gas inventories represent gas purchased from producers and are stored in facilities primarily owned by interstate pipelines. The regulated utility and retail energy-marketing subsidiary generally pay for storage gas between heating seasons and withdraw it during the heating season. Significant variations in storage balances are usually caused by the price paid to producers and marketers, which is a function of short-term market fluctuations in gas costs. For the regulated utility, such costs become a component of the cost of gas recovered from customers when volumes are withdrawn from storage. In addition, the regulated utility is able to specifically recover a carrying cost related to the varying level of storage gas inventory balances in two of the three jurisdictions in which it operates and it recovers this carrying cost from its customers as a component of gas costs.

Variations in the timing of collections of gas costs under the regulated utility’s gas cost recovery mechanisms and the level of refunds from pipeline companies that will be returned to customers can significantly affect short-term cash requirements.

The Company and Washington Gas utilize short-term debt in the form of commercial paper or unsecured short-term bank loans to fund seasonal requirements. The Company’s policy is to maintain bank credit facilities in an amount equal to or greater than its expected maximum short-term debt position.

The regulated utility has regulatory authority to issue up to $300 million of short-term debt. As of June 30, 2003, the regulated utility had bank facilities totaling $175 million in support of its short-term debt requirements. WGL Holdings had bank credit facilities of $130 million. These facilities were provided pursuant to new revolving credit agreements that became effective on May 2, 2003. The new credit agreements replaced previously existing credit agreements of $85 million for WGL Holdings and $220 million for Washington Gas. The Company’s policy is to maintain bank credit facilities in an amount equal to or greater than its expected maximum short-term debt position.

WGL Holdings and Washington Gas pay facility fees of 13 basis points and 11 basis points, respectively, for the new revolving credit agreements, which will expire on April 30, 2004. Other permanent and seasonal bank lines of credit previously available to WGL Holdings and Washington Gas had expired or were terminated as of May 2, 2003.

At June 30, 2003, the Company had outstanding notes payable of $38.4 million as compared to $90.9 million outstanding at September 30, 2002. Most of this decline occurred during the third quarter of fiscal year 2003, after the winter-heating season when accounts receivable and other assets have been converted into cash and have been utilized, in part, to reduce short-term debt. At June 30, 2003, current maturities of long-term debt were $28.2 million as compared to $42.4 million at September 30, 2002.

Long-Term Cash Requirements and Related Financing

The Company’s long-term cash requirements primarily depend upon the level of capital expenditures, long-term debt maturity requirements and decisions to refinance long-term debt. The Company devotes the majority of its capital expenditures to adding new regulated utility customers in its existing service area. At June 30, 2003, Washington Gas was authorized to issue up to $250 million of long-term debt under a shelf registration that was declared effective by the Securities and Exchange Commission (SEC) on April 24, 2003. On May 20, 2003, Washington Gas executed a Distribution Agreement with certain financial institutions for the issuance and sale of debt securities included in the shelf registration statement.

The Company utilizes derivative financial instruments from time to time in order to minimize its exposure to interest-rate risk associated with its debt financing costs. On June 4, 2003, Washington Gas entered into two forward-starting swaps with an aggregate notional principal of $62 million to mitigate a substantial portion of interest-rate risk associated with debt transactions anticipated to be

WGL Holdings, Inc.
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

executed during the first quarter of fiscal year 2004 that will end on December 31, 2003. These swaps have been designated as cash flow hedges and, in accordance with SFAS No. 133, are carried at fair value. At June 30, 2003, the estimated fair value gain related to these swaps totaled $853,000. These swaps are scheduled to terminate concurrently with the execution of the anticipated debt transactions during the first quarter of fiscal year 2004 that will end on December 31, 2003.

Securities Ratings

The table below shows the ratings on both WGL Holdings’ and Washington Gas’ debt instruments.

If the Company and/or the regulated utility were to experience a change in its debt ratings, the cost of its future short-term and long-term debt issues would likely change. Furthermore, a ratings change could result in a change in facility fees paid to banks.

WGL Holdings, Inc.

Washington Gas

Unsecured

Medium-Term

Commercial

Medium-Term

Commercial

Rating Service

Notes (Indicative)*

Paper

Notes

Paper

Fitch, Inc.

A+

AA-

F1+

Moody’s Investors Service

P-2

P-1

Standard & Poor’s Corporation

AA-

A-1+

AA-

A-1+

*		Indicates the ratings that would be applicable if WGL Holdings were to issue unsecured medium-term notes.
**		Unpublished.

Contractual Obligations, Off-Balance Sheet Arrangements and Other Commercial Commitments

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

Reference is made to the section entitled “Contractual Commitments and Obligations” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2002, for a detailed discussion of these contractual obligations. Note 5 of the Notes to Consolidated Financial Statements in the Company’s 2002 Annual Report on Form 10-K includes a discussion of long-term debt, including debt maturities. Note 13 of the Notes to Consolidated Financial Statements in the Company’s 2002 Annual Report on Form 10-K reflects information about natural gas purchase contracts and pipeline capacity contracts of Washington Gas and similar contracts of WGEServices. The comparable information as of June 30, 2003 is not materially different from that disclosed in the Company’s fiscal year 2002 Annual Report on Form 10-K.

The Company’s non-regulated consumer financing operation has, in the past, extended credit to certain residential and small commercial customers to purchase gas appliances and other energy-related products. The operation transferred, with recourse, certain of these accounts receivable to commercial banks. As of June 30, 2003, the recourse obligation to banks, net of related reserves, was $7.7 million. The Company also finances certain construction projects managed by its commercial HVAC segment. Under the terms of certain agreements with a lender related to certain contracts, all payments received from the project owners are used to satisfy principal and interest

WGL Holdings, Inc.
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

obligations. The Company accounts for these transfers as sales in accordance with Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Please refer to Note 13 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2002, for a detailed discussion of these transactions.

In addition to the contractual obligations shown above, WGL Holdings and a non-regulated subsidiary have guaranteed certain purchases and sales of natural gas and electricity for its retail energy-marketing subsidiary, WGEServices. At June 30, 2003, these guarantees totaled $261.8 million, of which $258.8 million were guaranteed by WGL Holdings and $3.0 million were guaranteed by the non-regulated subsidiary. Termination of these guarantees is coincident with the satisfaction of all obligations of WGEServices covered by the guarantees. WGL Holdings may also cancel any or all future obligations imposed by the guarantees upon written notice to the counterparty, but WGL Holdings would continue to honor the obligations which had been created under the guarantee prior to the date of the notice of cancellation.

Cash Flows From Operating Activities

Net cash provided from operating activities totaled $221.5 million for the first nine months of fiscal year 2003, a decrease of $22.5 million from the same period in fiscal year 2002. Although net income and non-cash charges and credits included in net income increased by $75.1 million in the first nine months of fiscal year 2003 when compared to the same period of fiscal year 2002, primarily as a result of the changes in net income previously described, this improvement in cash flow was more than offset by other factors. Accounts receivable and accrued utility revenues rose and therefore used $34.3 million more in cash in the first nine months of fiscal year 2003 as compared to the same period of fiscal year 2002 due to significantly higher volumes of gas sold in the current nine months. Gas costs due from customers, which represent the difference between gas costs paid to suppliers and the amount of such costs collected from customers, provided $29.7 million less cash in the current year. At the end of fiscal year 2001, a significant undercollection of gas costs existed that was recovered in the first nine months of fiscal year 2002. A similar undercollection did not exist at the end of fiscal year 2002, and gas costs paid to suppliers and collected from customers have stayed relatively close during the first nine months of fiscal year 2003. Storage gas inventory normally declines dramatically from September to June as the volumetric balance declines. Although volumes also fell in the nine months ended June 30, 2003, the price of storage gas increased dramatically in the most recent nine months and, accordingly, the source of cash derived from storage gas between September and June fell $70.9 million less in fiscal year 2003 than the corresponding change in fiscal year 2002. Partially offsetting these cash declines was the favorable impact of a $22.8 million increase in accounts payable compared to the prior fiscal year period to fund increased natural gas and electricity purchases.

Cash Flows Used in Financing Activities

Financing activities in the current period reflect an increased use of cash of $45.5 million compared to the same period last year, primarily due to an $83.3 million decline in new long-term debt issued and $29.4 million higher debt retirements. This was largely offset by a $65.9 million net increase in notes payable financing to fund unregulated activities.

Cash Flows Used in Investing Activities

During the nine months ended June 30, 2003, net cash used in investing activities totaled $61.0 million, a decrease of $75.8 million from such cash levels used for the same period in fiscal year 2002. WGL Holdings’ consolidated capital expenditures were $92.6 million for the first nine months of fiscal year 2003, down $22.8 million from the $115.4 million expended for the corresponding 2002 period. Furthermore, the reduction in cash usage includes the effects of cash proceeds from sales of

WGL Holdings, Inc.
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

the Company’s headquarters property and its interest in a land development venture during the second quarter of fiscal year 2003 which generated cash proceeds to the Company of $16.0 million and $5.3 million, respectively.

PRICE RISK RELATED TO RETAIL ENERGY MARKETING OPERATIONS

The Company’s retail energy-marketing subsidiary, WGEServices, sells natural gas and electricity to retail customers at both fixed prices and index-based prices. The Company must manage daily and seasonal demand fluctuations for these products. The volume and price risk for natural gas and electicity are evaluated and measured separately.

WGEServices can have exposure to changes in natural gas prices if the volumes it acquires on behalf of its customers do not match the volumes consumed by these customers. Purchases of natural gas to fulfill sales commitments are made under fixed volume contracts that assume normal weather. Approximately 60 percent of WGEServices’ annual natural gas sales volumes are subject to variations in demand caused by fluctuations in weather. This could result in WGEServices having contracted for more or less natural gas than its customers require. WGEServices attempts to manage much of the risk associated with volume fluctuations by closely matching purchases from suppliers with sales commitments to customers. Additionally, WGEServices utilizes storage gas inventory, peaking services of the regulated utility and purchases call and put options. The option values are marked-to-market in accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Except for a small heating degree day option contract, discussed in Note 8 of the Notes to Consolidated Financial Statements, at the end of the third quarter of fiscal year 2003, WGEServices had no open option contracts related to its supply management and its risk management practices.

For its electric business, WGEServices has a full-requirements supply contract with a major generator, Mirant Americas Energy Marketing L.P. (MAEM) which is an indirect wholly owned subsidiary of Mirant Corporation (Mirant). On July 14, 2003, Mirant and substantially all of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. MAEM was included in these bankruptcy filings. Since the bankruptcy filing, MAEM has continued to perform under its supply contracts with WGEServices. Future performance by MAEM may be subject to further developments in the bankruptcy proceedings.

WGEServices currently has access to $30 million in collateral from an escrow account established by MAEM as part of the WGEServices supply contracts. In the opinion of counsel to the Company, WGEServices has the contractual right to draw on the escrow funds in the account if the contracts between WGEServices and MAEM terminate and WGEServices needs to find replacement power at a higher cost or otherwise mitigate its damages. As of August 7, 2003, the amount of WGEServices’ exposure in the event of termination of the contracts between WGEServices and MAEM is estimated to be less than the amount of collateral included in the escrow account. This is based upon satisfying the economic terms of existing sales contracts until their expiration, and acquiring supply, priced at forward electricity prices as of August 7, 2003 that will be in effect until WGEServices exercises certain damage limitation provisions of its customers’ sales contracts. The actual exposure for WGEServices may differ from the estimate due to changes for timing of any contract termination, deviations from normal weather, changes in future market conditions, or other factors.

WGL Holdings, Inc.
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

Similar to WGEServices’ electric supplier, some of the other supplier companies that sell gas to WGEServices 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 under existing contracts, WGEServices could be financially exposed for the difference between the price at which WGEServices has contracted to buy natural gas, and the cost of any replacement natural gas that may need to be purchased. WGEServices also has a wholesale supplier credit policy that is designed to mitigate wholesale credit risks in the current energy environment. Per the terms of this policy, WGEServices has obtained credit enhancements from various gas suppliers.

WGEServices also measures the market risk of its energy commodity portfolio and employs risk control mechanisms to measure and determine mitigating steps related to market risk including the determination and review of value-at-risk. Value-at-risk is an estimate of the maximum loss that can be expected at some level of probablity if a portfolio is held for a given time period. WGEServices’ value-at-risk as of June 30, 2003 was approximately $100,000, while the value of the open position was approximately $1.6 million.

Washington Gas Light Company
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

WASHINGTON GAS LIGHT COMPANY

This section of the Quarterly Report on Form 10-Q discusses the financial position and results of operations of Washington Gas for the reported periods. In many cases, the reasons for the changes in financial position and results of operations for both WGL Holdings and Washington Gas are essentially the same.

RESULTS OF OPERATIONS — Three Months Ended June 30, 2003 vs. June 30, 2002

Summary Results

Washington Gas reported a seasonal net loss applicable to common stock of $3.4 million for the three months ended June 30, 2003, an improvement of $9.5 million over the net loss of $12.9 million reported for the same period last year.

Utility Net Revenues

Net revenues for Washington Gas were $93.4 million for the current quarter, an increase of $15.8 million over the same quarter in fiscal year 2002. The higher net revenues were primarily due to additional volumes sold as a result of additional customers being served, and 32.2 percent colder weather than the same period last year. Also improving current period results were new rates that went into effect in Maryland on September 30, 2002, and in Virginia on November 12, 2002. The Virginia rate increase is subject to refund pending a final rate order. Key gas delivery, weather and meter statistics are shown in the table below for the three months ended June 30, 2003 and 2002.

Gas Deliveries, Weather and Meter Statistics


					Three Months Ended
					June 30,									Percent
														Increase
					2003			2002			Variance			(Decrease)

Gas Sales and Deliveries (thousands of therms)

	Firm
		Gas Sold and Delivered				111,221			101,116			10,105			10.0	%
		Gas Delivered for Others				71,168			45,111			26,057			57.8	%

			Total Firm			182,389			146,227			36,162			24.7	%

	Interruptible
		Gas Sold and Delivered				2,890			2,034			856			42.1	%
		Gas Delivered for Others				52,632			58,360			(5,728	)		(9.8)	%

			Total Interruptible			55,522			60,394			(4,872	)		(8.1)	%

	Electric Generation — Delivered for Others					14,942			28,821			(13,879	)		(48.2)	%

				Total Deliveries		252,853			235,442			17,411			7.4	%

Degree Days
	Actual					431			326			105			32.2	%
	Normal					304			306			(2	)		(0.7)	%
		Percent Colder (Warmer) than Normal				41.8	%		6.5	%		n/a			n/a
Customer Meters (end of period)						958,088			933,636			24,452			2.6	%

Gas Service to Firm Customers

The level of gas delivered to firm customers is highly sensitive to weather variability as a large portion of the natural gas delivered by Washington Gas is used for space heating. The regulated utility’s rates are based on normal weather, and none of the tariffs for the jurisdictions in

Washington Gas Light Company
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

which it operates has a weather normalization provision. Nonetheless, declining block rates in the regulated utility’s Maryland and Virginia jurisdictions, and the existence of a fixed demand charge in all jurisdictions to collect a portion of revenues, reduces the impact that variations from normal weather may have on net revenues.

During the quarter ended June 30, 2003, firm therm deliveries increased 24.7 percent to 182.4 million therms over the same quarter last year. This increase primarily reflects significantly colder weather during the third quarter of the current fiscal year, and additional customers being served. Weather for the quarter ended June 30, 2003, was 41.8 percent colder than normal, as compared to 6.5 percent colder than normal for the same period last year.

An increasing number of customers are choosing to buy the natural gas commodity from third-party marketers, rather than purchasing the natural gas commodity and delivery service from Washington Gas on a “bundled” basis. Gas sold and delivered to firm customers increased to 111.2 million therms during the quarter ended June 30, 2003, a 10.0 percent rise over the quarter ended June 30, 2002. Volumes of firm gas delivered for others increased to 71.2 million therms for the quarter ended June 30, 2003, up 57.8 percent over the same period in the prior year. On a per unit basis, Washington Gas earns the same net revenues from delivering gas for others as it earns from bundled gas sales in which customers purchase both the natural gas commodity and the associated delivery service from Washington Gas. Therefore, the regulated utility does not experience any loss in net revenues when customers choose to purchase the natural gas commodity from a third-party marketer.

Gas Service to Interruptible Customers

Therm deliveries to interruptible customers were 8.1% lower than quarter ended June 30, 2002 primarily due to the customer use of alternative fuels or conversion to firm deliveries because of higher natural gas prices.

The effect on net income of any changes in delivered volumes and prices to the interruptible class is minimized by margin-sharing arrangements embedded in the Washington Gas rate designs. Under these arrangements, Washington Gas credits a majority of the gross margins earned on interruptible gas sales and deliveries to firm customers’ bills. This margin sharing occurs in exchange for shifting many of the fixed costs of providing service to the interruptible class to the firm class of customers.

Gas Delivered for Electric Generation

Washington Gas sells and/or delivers natural gas for use at two electric generation facilities in Maryland which are each owned by separate companies that are independent of WGL Holdings. During the current quarter, deliveries to these customers decreased 48.2 percent to 14.9 million therms, reflecting the use of alternative fuels primarily due to higher natural gas prices.

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

Utility Operating Expenses

Operation and maintenance expenses for the three months ended June 30, 2003 were $54.2 million, up $2.1 million over the same period last year. This increase was due primarily to higher

Washington Gas Light Company
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

labor, benefit and uncollectible accounts expenses, partially offset by lower costs for consulting services.

Depreciation and amortization expense for the third quarter of fiscal year 2003 rose to $21.1 million, an increase of $2.6 million, or 13.9 percent, over the same period last year reflecting additional plant investment and higher depreciation rates in effect for the Virginia jurisdiction beginning in November 2002.

General taxes for the current quarter were $9.3 million, a slight increase of $0.5 million largely due to higher rights-of-way fees as a result of increased sales volumes in the current period. Also contributing to the increase were higher property taxes as a result of increased investment in plant and equipment.

Other Income (Expenses) — Net

Other Income (Expenses) — Net reflected net expenses of $132,000, as compared to net expenses of $1.5 million for the same period in fiscal year 2002. This reduction in expense was largely due to charges recorded in the prior year’s quarter associated with the writeoff of certain miscellaneous receivables.

Interest Expense

Washington Gas’ total interest expense of $11.6 million for the quarter ended June 30, 2003 increased $1.2 million over the same quarter last year, due to carrying charges associated with miscellaneous regulatory liabilities. The components of interest expense are presented in the table below.

Composition of Interest Expense
(In thousands of dollars)


		Three Months Ended
		June 30,

		2003		2002			Variance

Long-Term Debt		$	10,758	$	10,749		$	9
Short-Term Debt			1		2			(1	)
Other (Includes AFUDC)			794		(434	)		1,228

	Total	$	11,553	$	10,317		$	1,236

RESULTS OF OPERATIONS — Nine Months Ended June 30, 2003 vs. June 30, 2002

Summary Results

For the first nine months of fiscal year 2003, Washington Gas reported net income applicable to common stock of $126.1 million, an increase of $55.8 million, or 79.3 percent over net income of $70.3 million reported for the same period of the prior year.

Washington Gas Light Company
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

Utility Net Revenues

Net revenues were $503.5 million for the current nine-month period, an increase of $115.2 million, or 29.7 percent, over the first nine months of fiscal year 2002. Higher net revenues primarily resulted from 37.4 percent colder weather than the same period last year. Also improving current period results were new rates that went into effect in Maryland on September 30, 2002 and in Virginia on November 12, 2002, subject to refund. Key gas delivery, weather and meter statistics are shown in the table below for the nine months ended June 30, 2003 and 2002.

Gas Deliveries, Weather and Meter Statistics


					Nine Months Ended
					June 30,									Percent
														Increase
					2003			2002			Variance			(Decrease)

Gas Sales and Deliveries (thousands of therms)

	Firm
		Gas Sold and Delivered				842,865			645,227			197,638			30.6	%
		Gas Delivered for Others				454,646			315,650			138,996			44.0	%

			Total Firm			1,297,511			960,877			336,634			35.0	%

	Interruptible
		Gas Sold and Delivered				10,226			8,799			1,427			16.2	%
		Gas Delivered for Others				215,728			230,075			(14,347	)		(6.2)	%

			Total Interruptible			225,954			238,874			(12,920	)		(5.4)	%

	Electric Generation — Delivered for Others					52,159			65,189			(13,030	)		(20.0)	%

				Total Deliveries		1,575,624			1,264,940			310,684			24.6	%

Degree Days
	Actual					4,537			3,303			1,234			37.4	%
	Normal					3,782			3,797			(15	)		(0.4)	%
		Percent Colder (Warmer) than Normal				20.0	%		(13.0	)%		n/a			n/a
Customer Meters (end of period)						958,088			933,636			24,452			2.6	%

Gas Service to Firm Customers

Total gas deliveries of 1.3 billion therms to firm customers for the current nine-month period increased 336.6 million therms, or 35.0 percent, over the same period in the prior year. This increase is due to significantly colder weather during the first nine months of the current fiscal year, coupled with a 2.6 percent increase in the number of customer meters. Weather for the nine months ended June 30, 2003 was 20.0 percent colder than normal, while weather for the same period last year was 13.0 percent warmer than normal.

Gas Service to Interruptible Customers

Therm deliveries to interruptible customers were 5.4 percent lower during the nine month period ended June 30, 2003 than the same period last year, primarily reflecting the curtailment of interruptible service by Washington Gas due to the severe cold weather, and higher natural gas prices which caused some interruptible customers to switch to alternative fuels. Washington Gas must curtail or interrupt service to this class of customers when demand by firm customers exceeds specified levels. This curtailment was mitigated by colder weather during the first three quarters of the current year.

Washington Gas Light Company
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

Gas Service for Electric Generation

During the current nine-month period, deliveries to the two electric generation facilities in Maryland decreased 20.0 percent to 52.2 million therms, reflecting conversion to alternative fuels due to higher natural gas prices.

Utility Operating Expenses

Operation and maintenance expense was $166.1 million for the fiscal nine-month period ended June 30, 2003, an increase of $13.7 million, or 9.0 percent, over the same period last year. The higher operating expenses were largely due to increased labor costs and benefits, and increased expenses associated with uncollectible accounts that were primarily driven by the significantly colder weather during the current period.

Depreciation and amortization expense for the first nine months of fiscal year 2003 was $61.6 million, an increase of $7.7 million, or 14.2 percent, over the same period last year reflecting additional plant investment and higher depreciation rates in effect for the Virginia jurisdiction beginning in November 2002.

General taxes for the current nine-month period were $30.7 million, an increase of $3.9 million, or 14.7 percent. This increase was largely due to higher rights-of-way fees assessed and collected as a result of increased throughput volumes during the current period. Also contributing to the increase were higher property taxes as a result of increased investment in plant and equipment.

Other Income (Expenses) — Net

Other Income (Expenses) — Net reflects net expense of $1.1 million for the first nine months of fiscal year 2003, as compared to income of $2.2 million for the first nine months of fiscal year 2002. The reduction in income is primarily attributable to benefits from the Company’s weather insurance policy that were realized during the first nine months of fiscal year 2002. There were no proceeds realized from this weather insurance policy during the current nine-month period due to the colder than normal weather. For a further discussion of weather insurance please refer to the Company’s most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2002. Partially offsetting the reduced income were after-tax gains of $926,000 and $2.5 million related to sales of the Company’s interest in a land development venture and its headquarters property during the first and second quarters of fiscal year 2003, respectively. Additionally, the inclusion in fiscal year 2002 of a $1.7 million after-tax charge related to business activities with a bankrupt energy trader further impacted the year-over-year comparison.

Interest Expense

Washington Gas’ total interest expense of $35.2 million for the nine months ended June 30, 2003 increased $1.1 million over the corresponding period in 2002, due primarily to an increase in the average balance of long-term debt outstanding, partially offset by a decrease in the weighted average cost of these borrowings. The components of interest expense are presented in the table below.

Washington Gas Light Company
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

Composition of Interest Expense
(In thousands of dollars)


		Nine Months Ended
		June 30,

		2003		2002		Variance

Long-Term Debt		$	33,218	$	32,110	$	1,108
Short-Term Debt			270		1,075		(805	)
Other (Includes AFUDC)			1,737		903		834

	Total	$	35,225	$	34,088	$	1,137

LIQUIDITY AND CAPITAL RESOURCES

General

Liquidity and capital resources for Washington Gas are generally identical to the liquidity and capital resources of WGL Holdings, except for certain items and the transactions between WGL Holdings and the other non-regulated subsidiaries. For purposes of discussing the liquidity and capital resources of Washington Gas, this section incorporates by reference, the disclosures provided in this document under the similar section for WGL Holdings, titled “Liquidity and Capital Resources”.

Other

Washington Gas has five labor contracts with three labor unions. The contract with the International Brotherhood of Teamsters Local 96 is a four-year contract that was ratified in June 2000 and applies to approximately 700 members. The contract with the Office and Professional Employees International Union (OPEIU) Local 2, is a three-year contract that applies to approximately 340 members. During fiscal year 2003, Washington Gas ratified new labor contracts with OPEIU Local 2, and another smaller union that covers approximately 20 employees.

REGULATORY MATTERS

The status of recent regulatory activity in all jurisdictions is shown below.

Virginia Jurisdiction — Rate Case Activity

On June 14, 2002, Washington Gas filed an application with the State Corporation Commission of Virginia (SCC of VA) 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. Washington Gas 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. Washington Gas also requested approval of an Incentive Rate Plan (IRP), 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 IRP proposed no change in the method of recovering the cost of natural gas incurred by Washington Gas.

Washington Gas Light Company
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

On January 30, 2003, the VA Staff filed a motion that requested acceptance of the VA Staff’s comments and accompanying schedules that reflected revisions to the VA Staff’s original position. Based on its review of additional financial data and actuarial studies, the VA Staff supported the pension OPEB costs requested by Washington Gas. After appropriate revisions to reflect Washington Gas’ proposed pension and OPEB costs, the VA Staff now supports an operating revenue increase of $5.0 million for Washington Gas and an operating revenue reduction of $1.2 million for the Shenandoah Division.

Virginia Jurisdiction — Depreciation Issues

Washington Gas Light Company
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

record a charge to income for additional depreciation expense, net of income tax benefits, calculated from January 1, 2002 to November 12, 2002, without a corresponding amount of revenue. This issue is still pending in the previously discussed rate case.

Maryland Jurisdiction

The proposed rate request includes an IRP that would establish incentives to increase efficiencies and would set customer service quality standards that seek to increase the efficiency, safety, and reliability of service. The IRP benefits customers by providing for more stable rates, which would result in less frequent requests for rate increases. The rate request also includes a proposal that would provide benefits to low-income customers who qualify for participation in a new Washington Gas program that would provide bill credits to participants during the winter heating season.

On June 20, 2003, the Staff of the PSC of MD (MD Staff), the Maryland Office of People’s Counsel (MD OPC), the United States Department of Defense and the other affected Federal Executive Agencies (DOD) and the Apartment and Office Building Association of Metropolitan Washington (AOBA) filed testimony in response to Washington Gas’ rate application. According to its filed testimony, the MD Staff recommended that the PSC of MD order Washington Gas to reduce its annual revenues by $6.6 million (subsequently revised on August 1, 2003 to recommend a $13.6 million reduction in annual revenues based on an alternative rate-making proposal for interruptible revenues), and to allow Washington Gas a return on common equity of 10.80 percent and an overall rate of return of 8.64 percent. The MD OPC recommended an annual reduction in revenues of $11.7 million, with a return on common equity of 9.50 percent and an overall rate of return of 7.92 percent. Neither the MD Staff nor the MD OPC supported the Washington Gas proposal to implement an IRP. The DOD recommended a $5.1 million reduction in Washington Gas’ annual revenues, and a return on common equity of 9.20 percent and an overall rate of return of 7.81 percent. DOD did not support Washington Gas’ proposal to implement an IRP, however, it recommended a reduction in the return on common equity to 8.00 percent if the PSC of MD elects to adopt an IRP.

On July 14, 2003, Washington Gas filed its rebuttal case. Hearings were held from August 4, 2003 through August 7, 2003 to discuss the merits of the proposed rate increase.

Washington Gas Light Company
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

District of Columbia Jurisdiction

After reviewing the Applications for Reconsideration of Washington Gas and other parties in the case, the PSC of DC issued its order on reconsideration on March 28, 2003. New rates resulting in a $5.4 million annual revenue reduction were put into place in the District of Columbia for service rendered on and after April 9, 2003.

Washington Gas Light Company
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (concluded)

AOBA did not specify a change in annual revenues, however, it recommended a return on common equity of 10.10 percent and an overall rate of return of 8.08 percent. While not supporting the Washington Gas’ proposal to implement an IRP, AOBA alternatively proposed a 9.30 percent return on common equity and an overall rate of return of 7.69 percent if the PSC of DC did adopt an IRP.

On July 25, 2003, Washington Gas filed its rebuttal case. Hearings are scheduled from September 16, 2003 through September 18, 2003 to discuss the merits of the proposed rate increase.

WGL Holdings, Inc.
Washington Gas Light Company
Part I — Financial Information
Part II — Other Information

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

WGL Holdings and its subsidiary, Washington Gas, have interest-rate risk exposure related to long-term debt. Additionally, WGL Holdings’ subsidiary, WGEServices has price risk exposure related to gas marketing activities. For information regarding the exposure related to these risks, see the caption Price Risk Related to Retail Energy Marketing Operations in the Management’s Discussion and Analysis section of this document and in the caption Price Risk Related to Retail- Energy Marketing Operations and Item 7A in WGL Holdings’ and Washington Gas’ most recently filed Annual Report on Form 10-K. Neither WGL Holdings nor Washington Gas’ risk associated with interest rates have materially changed from September 30, 2002. At June 30, 2003, WGEServices’ open position was not material to WGL Holdings’ financial position or results of operations.

ITEM 4. CONTROLS AND PROCEDURES

Senior management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of WGL Holdings’ and Washington Gas’ disclosure controls and procedures as of June 30, 2003. Based on this evaluation process, the Chief Executive Officer and the Chief Financial Officer have concluded that WGL Holdings’ and Washington Gas’ disclosure controls and procedures are effective. There have been no changes in the Registrants’ internal control over financial reporting during the quarter ended June 30, 2003 that have materially affected, or is reasonably likely to materially affect, the registrants’ internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:


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

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

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

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

31.1		Certification of James H. DeGraffenreidt, Jr., the Chairman and Chief Executive Officer of WGL Holdings, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Frederic M. Kline, the Chief Financial Officer of WGL Holdings, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.3		Certification of James H. DeGraffenreidt, Jr., the Chairman and Chief Executive Officer of Washington Gas Light Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.4		Certification of Frederic M. Kline, the Chief Financial Officer of Washington Gas Light Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

WGL Holdings, Inc.
Washington Gas Light Company
Part II — Other Information (continued)


32.1		Certification of James H. DeGraffenreidt, Jr., the Chairman and Chief Executive Officer, and Frederic M. Kline, the Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

• Form 8-K filed on April 14, 2003

Maryland Regulatory Matters

On March 31, 2003, Washington Gas filed an application with the PSC of MD to increase rates in Maryland. The request seeks to increase overall annual revenues by approximately $35.1 million. The application seeks a return on common equity of 12.25 percent and an overall rate of return of 9.39 percent. The proposed rate request includes an Incentive Rate Plan (IRP) that would establish incentives to increase efficiencies and would set customer service quality standards that seek to increase the efficiency, safety, and reliability of service.

District of Columbia Regulatory Matters

After reviewing the applications for reconsideration of the October 2002 order submitted by Washington Gas and other parties in the case, the PSC of DC issued its order on reconsideration on March 28, 2003. In this order, the PSC of DC directed Washington Gas to compute a new revenue requirement and to file supporting information with the PSC of DC. Pursuant to that order, Washington Gas filed new rates that reflect a $5.4 million annual revenue reduction. These lower rates went into effect for service rendered on and after April 9, 2003. In this order, the PSC of DC also reaffirmed its previous ruling that rejected retroactive refunds of asset management revenues collected by Washington Gas in the past and approved the regulated utility’s proposal to share with customers, fifty percent of such future revenues.

On February 7, 2003, Washington Gas filed a new rate case requesting approval by the PSC of DC for an annual revenue requirement of $214.2 million. Based on the level of rates that were in effect at the time of this February 2003 filing, Washington Gas would need to increase its annual revenues by $14.1 million. The application seeks a return on common equity of 12.25 percent and an overall rate of return of 9.25 percent.

• Form 8-K filed on May 2, 2003

WGL Holdings, Inc. issued an earnings news release on April 30, 2003 covering the results of operations for the three and six months ended March 31, 2003, as well as earnings guidance for the third quarter and annual results for fiscal year 2003.

• Form 8-K filed on May 22, 2003

On May 20, 2003, Washington Gas executed a Distribution Agreement with Citigroup Capital Markets Inc., Banc One Capital Markets, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Williams Capital Group, L.P. and Wachovia Securities, Inc. for the issuance and sale of up to $250,000,000 of Medium-Term Notes, Series G, under an Indenture dated as of September 1, 1991.

• Form 8-K filed on June 27, 2003

Maryland Regulatory Matters

On June 16, 2003, as a result of information obtained subsequent to its original filing to the PSC of MD in March 2003 of an application to increase rates, Washington Gas revised its overall requested increase in annual revenue from $35.1 million to $28.9 million. Washington Gas made no revision to its requested return on common equity or overall rate of return.

On June 20, 2003, the MD Staff, the MD OPC, the DOD, the AOBA and other intervenors filed testimony in response to Washington Gas’ rate application. The Form 8-K also disclosed that

WGL Holdings, Inc.
Washington Gas Light Company
Part II — Other Information (concluded)

Washington Gas would file its rebuttal case on July 14, 2003.

District of Columbia Regulatory Matters On June 26, 2003, the DC OPC, AOBA and other intervenors filed testimony in response to Washington Gas’ District of Columbia rate application filed on February 7, 2003. The Form 8-K also disclosed that Washington Gas would file its rebuttal case on July 25, 2003.

• Form 8-K filed on July 15, 2003

On July 14, 2003, Mirant Corporation (Mirant) issued a press release announcing that Mirant and substantially all of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. WGEServices, the energy-marketing segment of WGL Holdings, owns no electric generation assets and receives all of its electricity supply from Mirant Americas Energy Marketing L.P. (MAEM), a wholly owned subsidiary of Mirant Americas, Inc., which is a wholly owned subsidiary of Mirant Corporation (Mirant). MAEM was included in Mirant’s bankruptcy filings. Since the bankruptcy filing, MAEM has continued to perform under its supply contracts with WGEServices. Future performance by MAEM may be subject to further developments in the bankruptcy proceedings. The Form 8-K also disclosed that as of July 14, 2003, the amount of WGEServices’ exposure in the event of termination of the contracts between WGEServices and MAEM is estimated to be less than the amount of collateral included in an escrow account established in connection with certain supply contracts between WGES and MAEM. The actual exposure for WGEServices may differ from the estimate due to changes for timing of any contract termination, deviations from normal weather, changes in future market conditions, or other factors.

• Form 8-K filed on July 31, 2003

WGL Holdings, Inc. issued an earnings news release on July 30, 2003 covering the results of operations for the three and nine months ended June 30, 2003. WGL Holdings also provided earnings guidance for the fourth quarter and annual results for fiscal year 2003.

WGL Holdings, Inc.
Washington Gas Light Company

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		WGL HOLDINGS, INC.

		and

		WASHINGTON GAS LIGHT COMPANY (Co-Registrants)

Date:	August 14, 2003	/s/ Mark P. O’Flynn

		Mark P. O’Flynn
		Controller
		(Principal Accounting Officer)

	•		Form 8-K filed on April 14, 2003

			Maryland Regulatory Matters

			On March 31, 2003, Washington Gas filed an application with the PSC of MD to increase rates in Maryland. The request seeks to increase overall annual revenues by approximately $35.1 million. The application seeks a return on common equity of 12.25 percent and an overall rate of return of 9.39 percent. The proposed rate request includes an Incentive Rate Plan (IRP) that would establish incentives to increase efficiencies and would set customer service quality standards that seek to increase the efficiency, safety, and reliability of service.

			District of Columbia Regulatory Matters

			After reviewing the applications for reconsideration of the October 2002 order submitted by Washington Gas and other parties in the case, the PSC of DC issued its order on reconsideration on March 28, 2003. In this order, the PSC of DC directed Washington Gas to compute a new revenue requirement and to file supporting information with the PSC of DC. Pursuant to that order, Washington Gas filed new rates that reflect a $5.4 million annual revenue reduction. These lower rates went into effect for service rendered on and after April 9, 2003. In this order, the PSC of DC also reaffirmed its previous ruling that rejected retroactive refunds of asset management revenues collected by Washington Gas in the past and approved the regulated utility’s proposal to share with customers, fifty percent of such future revenues.

			On February 7, 2003, Washington Gas filed a new rate case requesting approval by the PSC of DC for an annual revenue requirement of $214.2 million. Based on the level of rates that were in effect at the time of this February 2003 filing, Washington Gas would need to increase its annual revenues by $14.1 million. The application seeks a return on common equity of 12.25 percent and an overall rate of return of 9.25 percent.

	•		Form 8-K filed on May 2, 2003

			WGL Holdings, Inc. issued an earnings news release on April 30, 2003 covering the results of operations for the three and six months ended March 31, 2003, as well as earnings guidance for the third quarter and annual results for fiscal year 2003.

	•		Form 8-K filed on May 22, 2003

			On May 20, 2003, Washington Gas executed a Distribution Agreement with Citigroup Capital Markets Inc., Banc One Capital Markets, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Williams Capital Group, L.P. and Wachovia Securities, Inc. for the issuance and sale of up to $250,000,000 of Medium-Term Notes, Series G, under an Indenture dated as of September 1, 1991.

	•		Form 8-K filed on June 27, 2003

			Maryland Regulatory Matters

			On June 16, 2003, as a result of information obtained subsequent to its original filing to the PSC of MD in March 2003 of an application to increase rates, Washington Gas revised its overall requested increase in annual revenue from $35.1 million to $28.9 million. Washington Gas made no revision to its requested return on common equity or overall rate of return.

			On June 20, 2003, the MD Staff, the MD OPC, the DOD, the AOBA and other intervenors filed testimony in response to Washington Gas’ rate application. The Form 8-K also disclosed that

			Washington Gas would file its rebuttal case on July 14, 2003.

			District of Columbia Regulatory Matters On June 26, 2003, the DC OPC, AOBA and other intervenors filed testimony in response to Washington Gas’ District of Columbia rate application filed on February 7, 2003. The Form 8-K also disclosed that Washington Gas would file its rebuttal case on July 25, 2003.

	•		Form 8-K filed on July 15, 2003

			On July 14, 2003, Mirant Corporation (Mirant) issued a press release announcing that Mirant and substantially all of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. WGEServices, the energy-marketing segment of WGL Holdings, owns no electric generation assets and receives all of its electricity supply from Mirant Americas Energy Marketing L.P. (MAEM), a wholly owned subsidiary of Mirant Americas, Inc., which is a wholly owned subsidiary of Mirant Corporation (Mirant). MAEM was included in Mirant’s bankruptcy filings. Since the bankruptcy filing, MAEM has continued to perform under its supply contracts with WGEServices. Future performance by MAEM may be subject to further developments in the bankruptcy proceedings. The Form 8-K also disclosed that as of July 14, 2003, the amount of WGEServices’ exposure in the event of termination of the contracts between WGEServices and MAEM is estimated to be less than the amount of collateral included in an escrow account established in connection with certain supply contracts between WGES and MAEM. The actual exposure for WGEServices may differ from the estimate due to changes for timing of any contract termination, deviations from normal weather, changes in future market conditions, or other factors.

	•		Form 8-K filed on July 31, 2003

			WGL Holdings, Inc. issued an earnings news release on July 30, 2003 covering the results of operations for the three and nine months ended June 30, 2003. WGL Holdings also provided earnings guidance for the fourth quarter and annual results for fiscal year 2003.