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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

Securities registered pursuant to Section 12(b) of the Act (as of September 30, 2003):

Securities registered pursuant to Section 12(g) of the Act (as of September 30, 2003):

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

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

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

The aggregate market value of the voting common equity held by non-affiliates of the registrant, WGL Holdings, Inc., amounted to $1,282,856,952 as of March 31, 2003.

WGL Holdings, Inc. common stock, no par value outstanding as of October 31, 2003: 48,626,243 shares.

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

DOCUMENTS INCORPORATED BY REFERENCE

Portions of WGL Holdings, Inc.’s definitive Proxy Statement and Washington Gas Light Company’s definitive Information Statement in connection with the 2004 Annual Meeting of Shareholders, to be filed with the Commission pursuant to Regulation 14A and 14C not later than 120 days after September 30, 2003, are incorporated in Part III of this report.

WGL Holdings, Inc.
Washington Gas Light Company

For the Fiscal Year Ended September 30, 2003

Table of Contents

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WGL Holdings, Inc.
Washington Gas Light Company

INTRODUCTION

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

     Certain matters discussed in this report, excluding historical information, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the outlook for earnings, revenues, and other future financial business performance or strategies and expectations. Forward-looking statements are typically identified by words such as, but not limited to, “estimates,” “expects,” “anticipates,” “intends,” “believes,” “plans,” and similar expressions, or future or conditional verbs such as “will,” “should,” “would,” and “could.” Although the registrants, WGL Holdings, Inc. and Washington Gas Light Company, believe such forward-looking statements are based on reasonable assumptions, they cannot give assurance that every objective will be achieved. Forward-looking statements speak only as of today, and the registrants assume no duty to update them. The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

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

     The outcome of negotiations and discussions the registrants hold with other parties from time to time regarding utility and energy-related investments and transactions that are both recurring and non-recurring may also affect future performance. All such factors are difficult to predict accurately and are generally beyond the direct control of the registrants. Accordingly, while they believe that the assumptions are reasonable, the registrants cannot ensure that all expectations and objectives will be realized. Readers are urged to use care and consider the risks, uncertainties and other factors that could affect the registrants’ business as described in this Annual Report on Form 10-K. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.

FILING FORMAT

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

     The Management’s Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 herein, is divided into the following two sections:

     WGL Holdings—This section describes the financial condition and results of operations of WGL Holdings and its subsidiaries on a consolidated basis. It includes discussions of WGL Holdings’ regulated utility and non-utility operations. The majority of WGL Holdings’ results of operations are derived from the regulated utility, Washington Gas, and to a much lesser extent, the results of the non-utility operations. For more information on the Company’s regulated utility operations, please refer to the Management’s Discussion for Washington Gas.

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

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WGL Holdings, Inc.
Washington Gas Light Company

     Included herein under Item 8 are Consolidated Financial Statements of WGL Holdings and the Financial Statements of Washington Gas, and the Notes to Consolidated Financial Statements presented on a combined basis for both WGL Holdings and Washington Gas.

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

     Unless otherwise noted, earnings per share amounts are presented herein on a diluted basis, and are based on weighted average common and common equivalent shares outstanding.

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WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business

ITEM 1. BUSINESS

INTRODUCTION

     WGL Holdings is a holding company that was established on March 3, 2000 under the Public Utility Holding Company Act of 1935. On November 1, 2000, all of the shares of common stock of Washington Gas, a regulated natural gas utility, were converted into an equal number of shares of common stock of WGL Holdings. WGL Holdings also owns all of the shares of common stock of Crab Run Gas Company, Hampshire Gas Company and Washington Gas Resources Corporation (Washington Gas Resources). These companies were previously wholly owned subsidiaries of Washington Gas prior to November 1, 2000. Until October 15, 2002, the Company held a 50-percent equity investment in Primary Investors, LLC (Primary Investors) which investment was also transferred to WGL Holdings as a result of the corporate restructuring. For further discussion of the Company’s restructuring, see Note 2 of the Notes to Consolidated Financial Statements.

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

SUBSIDIARIES

     WGL Holdings is the parent of four direct, wholly owned subsidiaries. The Company previously held a 50-percent equity interest in a limited liability company, Primary Investors. As a result of a September 20, 2002 restructuring agreement and a final closing on October 15, 2002, between WGL Holdings and a 50-percent investor, Thayer Capital Partners (Thayer), the Company no longer has any remaining equity investment in Primary Investors or any financial commitment to this investment. The following paragraphs describe each subsidiary in the WGL Holdings’ corporate structure at September 30, 2003.

     Washington Gas—is a regulated public utility that delivers and sells natural gas to customers in Washington, D.C. and adjoining areas in Maryland, Virginia and several cities and towns in the northern Shenandoah Valley of Virginia. Washington Gas has been engaged in the gas distribution business for 155 years, having been originally incorporated by an Act of Congress in 1848. Washington Gas has been a domestic corporation of the Commonwealth of Virginia since 1953, and a corporation of the District of Columbia since 1957. Washington Gas serves approximately 960,000 customers in an area having a population estimated at five million.

     The following table lists the number of active customer meters served and therms delivered by jurisdiction as of and for the year ended September 30, 2003. A therm of gas contains 100,000 British Thermal Units of heat, the heat content of approximately 100 cubic feet of natural gas. Ten million therms equal one billion cubic feet (bcf) of natural gas.

     Of the 1.7 billion therms delivered in fiscal year 2003, 900.6 million therms, or 52.3 percent, were sold and delivered by Washington Gas and 821.9 million therms, or 47.7 percent, were delivered to various customers that acquired their gas from third-party marketers. Of the total therms delivered by Washington Gas, 80.4 percent was delivered to firm customers and 19.6 percent was delivered to interruptible customers. To be eligible to receive interruptible service, a customer must be capable of using an alternate fuel as a substitute for natural gas in the

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Washington Gas Light Company
Part I
Item 1. Business (continued)

event Washington Gas determines their service must be interrupted to accommodate firm customers’ needs during periods of peak demand.

     Crab Run Gas Company (Crab Run)—is an exploration and production company whose assets are managed by an Oklahoma-based limited partnership. At September 30, 2003, Crab Run’s investment in this partnership was not material. WGL Holdings’ investment in this subsidiary is not material, and the Company expects that future investments in Crab Run will be minimal.

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

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

WGEServices—is engaged in the sale of natural gas and electricity to retail customers in competition with unregulated marketers. At September 30, 2003, WGEServices served 153,400 residential, commercial and industrial natural gas customers and 76,000 electricity customers both inside and outside Washington Gas’ traditional service territory. WGEServices purchases natural gas and electricity commodities for resale and does not own electric generation, transmission or distribution facilities.

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

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

WG Maritime—works with a major developer, Lincoln Property Company, whose purpose is to develop a 12-acre parcel owned by Washington Gas in the District of Columbia. Washington Gas selected the Lincoln Property Company to design, execute and manage the various phases of the development. The development is intended to be a mixed-use commercial project that will be implemented in five phases. The entire project is expected to be completed over a ten to fifteen year period, depending on market demand. To date, Washington Gas has entered into two 99-year ground leases for the first and second phases. WG Maritime holds an interest in both Phase I and Phase II ground lease tenants. None of WGL Holdings’ subsidiaries, including Washington Gas, will make capital investments in this venture or play an active role in any development or management activities.

	Credit Corp.—offered financing to customers to purchase gas appliances and other energy-related equipment. This business no longer offers new loans, but continues to service its existing loan portfolio that is expected to be fully amortized by 2005.

	Brandywood—was a general partner with a major developer in a venture to develop 1,605 acres in Prince George’s County, Maryland. In October 2002, after unsuccessful attempts to rezone, the property was sold. Since the sale, this subsidiary has been inactive and conducts no business.

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

Primary Investors— In August 1999, Washington Gas and Thayer formed a limited liability company, Primary Investors. Effective November 1, 2000, in connection with a corporate restructuring, Washington Gas transferred its ownership interest in Primary Investors to WGL Holdings. WGL Holdings and Thayer each owned 50 percent of Primary Investors. On September 20, 2002, WGL Holdings and Thayer entered into an agreement

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WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)

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 nor was there any effect on the Company’s consolidated net income from this venture.

INDUSTRY SEGMENTS

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

     WGL Holdings has three operating segments: 1) regulated utility; 2) retail energy-marketing and 3) HVAC products and services. These three segments are described below. Transactions not specifically identifiable in one of these three segments are accumulated and reported in the category “Other Activities.”

     Regulated Utility

     With approximately 93 percent of the Company’s assets, Washington Gas delivers natural gas to retail customers in accordance with tariffs approved by state or District of Columbia regulatory commissions that have jurisdiction over Washington Gas’ rates. These rates are intended to provide the regulated utility with an opportunity to earn a just and reasonable rate of return on the investment devoted to the delivery of natural gas to customers. Washington Gas also sells natural gas to customers who have not elected to purchase natural gas from unregulated third-party marketers. The regulated utility does not earn a profit or incur a loss when it sells the natural gas commodity as utility customers are charged for the natural gas commodity at the same cost the regulated utility incurs. At September 30, 2003, the regulated utility was selling and delivering the natural gas commodity to 80 percent of its customers. The remaining 20 percent of Washington Gas’ customers utilize the delivery services of Washington Gas for delivery of the natural gas commodity purchased from third-party marketers, one of which is a subsidiary of Washington Gas Resources. During the fiscal years ended September 30, 2003, 2002 and 2001, the regulated utility segment reported total operating revenues of $1.3 billion, $939 million and $1.4 billion, respectively, or 63.6 percent, 59.2 percent and 74.6 percent, respectively, of consolidated total operating revenues. Factors critical to the success of the regulated utility include operating a safe, reliable natural gas distribution system, and recovering the costs and expenses of this business, which include a just and reasonable rate of return on invested capital that is allowed by the regulatory commissions that have jurisdiction over the regulated utility’s rates. Hampshire, a wholly owned subsidiary of WGL Holdings, is a regulated natural gas storage business that operates an underground storage field on behalf of Washington Gas in accordance with a tariff administered by the FERC.

     Retail Energy-Marketing

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

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WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)

     HVAC

     Two wholly owned subsidiaries, ACI and WGESystems, provide turnkey design-build renovation projects to the commercial and government markets. As a result of a restructuring agreement on September 20, 2002 and a final closing on October 15, 2002 between the Company and a 50-percent investor, the Company no longer has any remaining investment in Primary Investors or any financial commitment to the residential HVAC investment.

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

     For further discussion of segment financial results, see Note 17 of the Notes to Consolidated Financial Statements.

RATES AND REGULATORY MATTERS

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

     General Regulatory Matters

     Regulated Service to Firm Customers. In the District of Columbia jurisdiction, the rate schedules are based upon (i) a flat volumetric charge for the delivery of each therm of gas consumed and (ii) a customer charge designed to recover certain fixed costs associated with maintaining facilities located on the customer’s property, as well as certain other costs that do not vary with the amount of natural gas consumed by customers. Non-residential firm customers also pay a peak-usage charge designed to recover the cost to serve customers during peak periods. In the Maryland and Virginia jurisdictions, the rate schedules for firm service are comprised of a fixed charge per customer and a variable volumetric rate structured as a declining rate based on blocks of volumes. Declining block rates have the effect of minimizing fluctuations in net revenue that otherwise would result from deviations from normal weather.

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

     Regulated Service to Interruptible Customers. To qualify for interruptible service, customers must be capable of either substituting an alternate fuel for natural gas or operating without utilizing natural gas should Washington Gas determine that it would interrupt service temporarily to meet firm customers’ needs during periods of peak demand. The effect on net income of changes in delivered volumes and prices to the interruptible class is minimized by margin-sharing arrangements that are included in Washington Gas’ rate designs. Under these arrangements, Washington Gas returns a majority of the margins earned on interruptible gas sales and deliveries to firm customers after a gross margin threshold is reached. This is done because a portion of the fixed costs for servicing interruptible customers has been shifted to the firm customer’s class in rate design.

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

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WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)

     Throughout the Washington Gas service area, all customers are eligible to participate and may choose to purchase natural gas from a variety of unregulated marketers, including WGEServices, an affiliated natural gas and electricity retail marketer. When a customer selects an unregulated marketer as their gas supplier, Washington Gas continues to charge these customers to deliver natural gas through its distribution system. The status of the unbundling programs in the regulated utility’s major jurisdictions as of September 30, 2003 is discussed further in the section entitled Competition.

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

     Jurisdictional Rates and Regulatory Matters

     A description of each commission under which Washington Gas is regulated and a discussion of regulatory matters in each jurisdiction are discussed below. Also see the section entitled “Regulatory Matters” of Management’s Discussion and Analysis of Financial Condition and Results of Operations for a table that summarizes Washington Gas’ major rate applications and results thereof.

     District of Columbia Jurisdiction

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

     Rate Case Activities

     On February 17, 2000, the District of Columbia’s Office of the People’s Counsel (DC OPC) filed a complaint with the PSC of DC requesting an investigation into the reasonableness of the existing rates of Washington Gas. On February 28, 2000, Washington Gas filed an answer urging the PSC of DC to dismiss the DC OPC complaint. On March 21, 2001, the PSC of DC issued an Order granting DC OPC’s request to initiate an investigation into the reasonableness of Washington Gas’ base rates. The PSC of DC’s Order required Washington Gas to file base rate information no later than 90 days from March 21, 2001.

     On June 19, 2001, Washington Gas filed with the 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. Washington Gas’ Application for Reconsideration automatically stayed the PSC of DC’s Order dated October 29, 2002. The DC OPC and another intervener 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 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 certain portions of 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 previously received by Washington Gas. 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, Washington Gas would be required to refund the amounts previously recorded in revenues totaling approximately $9.2 million (on a pre-tax basis). Though Washington Gas cannot predict the final outcome of this matter, it believes that the DC OPC’s appeal is without merit and, accordingly, no liability has been recorded related to this matter.

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WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)

     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 sought 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 reduction from the October 29, 2002 Order 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 further modified to $18.8 million, supporting a total level of annual revenues of $213.2 million.

     On June 26, 2003, the DC OPC, the Apartment and Office Building Association of Metropolitan Washington (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 recommended $9.6 million annual revenue reduction was DC OPC’s recommendation to lower Washington Gas’ annual depreciation expense by $7.7 million due principally to an alternative method to develop depreciation rates that modified the way costs of removal would be reflected in depreciation expense. The DC OPC did not support the Washington Gas proposal to implement an Incentive Rate Plan (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 were held during September 2003 to address the merits of the proposed rate increase.

     On November 10, 2003, the PSC of DC issued an Order authorizing Washington Gas to increase its annual revenues by $5.4 million, reflecting an overall rate of return of 8.42 percent and a return on common equity of 10.60 percent. The Order did not adopt the proposed IRP, rejected DC OPC’s proposal with respect to removal costs, and reduced annual depreciation expense and collections from the currently allowed levels by approximately $300,000. The new rates are effective for services rendered on and after November 24, 2003.

     The $5.4 million annual revenue increase described in the Order included a reduction for the effect of a $6.5 million lower level of pension and other post-retirement benefit costs that had been previously deferred on the balance sheet of Washington Gas as a regulatory liability. This regulatory deferral mechanism, which has been in effect in the District of Columbia for several years, is designed to ensure that the variation in these annual costs, when compared to the levels collected from customers, does not affect net income. Therefore, the Order’s reduction of annual revenues for pension and other post-retirement benefit costs will be reflected as a change to the regulatory liability on the balance sheet since the liability had already been recorded. Additionally, the $5.4 million annual revenue increase in the Order also included an increase in certain expenses that are also subject to the regulatory deferral mechanism treatment that equates to approximately $800,000 per year. Accordingly, the total annual effect of the Order on Washington Gas’s pre-tax income will result in an increase of approximately $11.1 million, which equates to diluted earnings per share of approximately $0.14, based on weighted average common and common equivalent shares outstanding for fiscal year ended September 30, 2003.

     Maryland Jurisdiction

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

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

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WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)

     Rate Case Activities

     On March 28, 2002, Washington Gas filed an application with the PSC of MD requesting an increase in revenues of approximately $31.4 million or 9.3 percent. The original request included a 12.5 percent return on common equity or 9.67 percent overall rate of return on a year-end rate base, coupled with an incentive rate plan.

     On April 26, 2002, the PSC of MD issued a ruling that established two separate phases for the purpose of considering and resolving specific issues that were stated at that time. In Phase I, the PSC of MD would review Washington Gas’ base rate case, its proposal regarding incentive rates and a number of other issues associated with Washington Gas’ proposed tariffs and rates. During Phase II, the PSC of MD would review issues regarding Washington Gas’ proposal for serving as the “supplier/provider of last resort for natural gas services.”

     On July 30, 2002, after discussions among all parties, an uncontested settlement agreement on Phase I of the case was filed with the PSC of MD. On August 1, 2002, hearings were held to take testimony and receive evidentiary exhibits on the narrow question of whether the proposed settlement filed on July 30, 2002 was in the public interest. After evaluating the results of that day’s evidence, the PSC of MD cancelled the scheduled contested case hearing dates. After the August 1, 2002 hearing date, further discussions were held among the parties. An uncontested revised settlement was reached on Phase I of the case and filed with the PSC of MD on August 6, 2002. The revised settlement provided for an increase of $9.25 million in annual non-gas operating revenues. The settlement did not indicate the allowed return on common equity for the purpose of determining the amount of the settlement. An incentive-based rate plan was not included in the settlement. However, the parties agreed to discuss performance standards as they may relate to an incentive rate plan within six months after the settlement is approved by the PSC of MD.

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

     On March 31, 2003, Washington Gas filed an application with the PSC of MD 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 requested increase in overall annual revenue to $27.2 million, with no revision to the return on common equity or overall rate of return requested by Washington Gas in its original filing. The requested level of the revenue increase included $8.7 million related to increased depreciation expense.

     The proposed rate request included an IRP designed to 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 was designed to benefit customers by providing for more stable rates, resulting in less frequent requests for rate increases. The rate request also included 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 other Federal Executive Agencies (DOD) and the AOBA filed testimony in response to Washington Gas’ rate application. According to its originally filed testimony, the MD Staff recommended that the PSC of MD direct Washington Gas to reduce its annual revenues by $6.6 million. The MD Staff subsequently revised its recommendations to reflect a $15.3 million reduction in annual revenues based on an alternative ratemaking proposal for interruptible revenues, a one-time bill credit of $4.8 million in connection with the gain on the sale of the headquarters building and land, 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, 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 elected to adopt an IRP.

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     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 during August 2003 to address the merits of the proposals of the parties.

     On September 11, 2003, a Hearing Examiner of the PSC of MD issued a proposed Order authorizing an increase in annual revenues of $4.1 million, with a return on common equity of 11.00 percent and an overall rate of return of 8.74 percent. The proposed Order denied the MD Staff request for a one-time bill credit in connection with the gain on the sale of the land and headquarters building and, instead, included a reduction to annual revenues of $180,000 for a 15-year period.

     The authorized $4.1 million annual revenue increase excluded the effect of Washington Gas’ request for an $8.7 million increase in annual revenues for depreciation expense which is pending in a separate case. As a result of the Washington Gas proposal for depreciation being considered in a separate docket, the amount of the increase in the proposed Order did not reflect the effect of the increase in depreciation expense proposed by the Company. However, the proposed Order granted Washington Gas’ request to implement new depreciation rates along with the related revenue impact upon conclusion of the hearings in the separate docket, pending the results of an earnings test benchmarked to the authorized rate of return.

     On October 31, 2003, the PSC of MD issued a final Order, granting Washington Gas a $2.9 million increase in annual revenues based on an overall rate of return of 8.61 percent and a return on common equity of 10.75 percent. The PSC of MD did not adopt Washington Gas’ proposed IRP. These rates were effective for service rendered on and after November 6, 2003. The final Order upheld the proposed Order’s treatment of the gain on sale of the land and headquarters building by reducing annual revenues $180,000 for a 15-year period. Additionally, the final Order eliminated the requirement for conducting an earnings test in connection with updating Washington Gas’ depreciation rates, as discussed above, and provides for an update of these rates upon the outcome of the separate docket for determining new depreciation rates.

     Virginia Jurisdiction

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

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

     Rate Case Activities

     On June 14, 2002, Washington Gas filed an application with the SCC of VA to increase annual revenues in Virginia. The Shenandoah Gas Division of Washington Gas (Shenandoah) was included in the application. The application requested an increase in overall annual revenues of 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 the currently authorized return on common equity of 11.50 percent for Washington Gas and 10.70 percent for Shenandoah. Washington Gas also requested to merge the rate structures of Shenandoah with Washington Gas. Additionally, Washington Gas requested approval of an IRP that included 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.

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     On November 15, 2002, the Staff of the SCC of VA (VA Staff) filed testimony in response to Washington Gas’ rate application. The VA Staff took the position that Washington Gas’ revenues were sufficient and did not need to be revised and, instead, recommended that operating revenues for Shenandoah be decreased by $1.4 million. The VA Staff’s estimate of the cost of equity for Washington Gas, including Shenandoah, ranged between 9.50 percent and 10.50 percent. The VA Staff recommended the SCC of VA adopt a 10.0 percent return on common equity for Washington Gas, including Shenandoah. Washington Gas filed rebuttal testimony in this proceeding on December 4, 2002. Hearings were held in December 2002 to review the merits of the proposals of the parties. 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 case-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-retirement benefit expenses proposed by Washington Gas. On January 7, 2003, Washington Gas submitted the actuarial studies to support its rate request.

     On January 30, 2003, the VA Staff filed a motion that requested acceptance of its 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 and other post-retirement benefit costs requested by Washington Gas. After revisions to reflect Washington Gas’ proposed pension and other post-retirement benefit costs, the VA Staff supported an operating revenue increase of $5.0 million for Washington Gas, and an operating revenue reduction of $1.2 million for Shenandoah.

     Under the regulations of the SCC of VA, Washington Gas placed the proposed general revenue increase into effect on November 12, 2002, subject to refund, pending the SCC of VA’s final decision in the proceeding. In its financial statements from November 12, 2002 through September 30, 2003, Washington Gas has recorded a provision for rate refunds, representing the refund required based on management’s judgment of the rate case outcome.

     On September 16, 2003, the Chief Hearing Examiner issued a report recommending that the SCC of VA adopt the Chief Hearing Examiner’s findings for an increase in gross annual revenues of $5.7 million effective November 12, 2002. The Chief Hearing Examiner’s recommendations and conclusions were based on a finding that the current cost of equity is within a range of 10.00 percent to 11.00 percent, and rates should be established based on the 10.50 percent midpoint of the equity range. The overall return recommended was 8.44 percent assuming the midpoint for the equity portion of the return.

     In the September 16, 2003 report, the Chief Hearing Examiner concurred with the Company and recommended that new higher depreciation rates be implemented concurrent with the effective date of new base rates on November 12, 2002. The VA Staff has since requested that the SCC of VA overturn the recommendation of the Chief Hearing Examiner as to the effective date of the new depreciation rates and adopt the VA Staff’s originally recommended implementation date of January 1, 2002. To the extent that the position of the VA Staff is adopted by the SCC of VA, Washington Gas would have to record a charge to income for additional depreciation expense of approximately $3.4 million, before income tax benefits, calculated from January 1, 2002 to November 12, 2002, without a corresponding amount of revenue. The Company believes that it is reasonably possible that the SCC of VA will adopt the position Washington Gas has taken on this matter.

     Additionally in the September 16, 2003 report, the Chief Hearing Examiner recommended approval of a VA Staff-proposed adjustment that reduces the net rate base upon which Washington Gas is allowed to earn a rate of return by $42 million. This amount represents the difference between the accumulated reserve for depreciation recorded on the books of Washington Gas and the theoretical reserve that was derived by VA Staff as part of the review of Washington Gas’ depreciation rates. This recommended rate base adjustment, along with a partial offset for accumulated deferred income taxes, reduced the Chief Hearing Examiner’s determination of Washington Gas’ annual revenue requirement by approximately $3.5 million, based on the Chief Hearing Examiner’s recommended overall rate of return. The Chief Hearing Examiner’s recommendation permits continued recovery of this investment in rate base (i.e. the accumulated depreciation reserve deficiency) over the 32-year remaining life of assets currently in service.

     Although this VA Staff proposal related to the accumulated depreciation reserve and the related accumulated deferred income taxes were included in the Chief Hearing Examiner’s recommendations, Washington Gas disagrees

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with this position. Washington Gas believes that it is reasonably possible that the recommendation of the Chief Hearing Examiner related to the accumulated depreciation reserve deficiency and the related accumulated deferred income taxes will be rejected by the SCC of VA because, among other reasons, the Company believes it is unsupported by case-record evidence and is inaccurate in both theory and in principle. Accordingly, at the present time and based on existing information, Washington Gas has not recorded a refund liability at September 30, 2003 for the effect of this issue on revenues collected subject to refund since November 12, 2002.

     On October 14, 2003, Washington Gas filed the Response of Washington Gas Light Company and the Shenandoah Gas Division to the Report of the Chief Hearing Examiner, objecting to the recommended rate base reduction related to the accumulated depreciation reserve deficiency and the related accumulated deferred income taxes, and commenting on other issues. Similarly, on the same date, the VA Staff filed a response with the SCC of VA expressing its opposition to certain matters in the Report of the Chief Hearing Examiner, most notably the implementation date for new depreciation rates. The VA Staff’s response continued to support its view that the Chief Hearing Examiner should have ruled that higher depreciation rates should be applied retroactively, beginning January 1, 2002. Washington Gas believes that it is reasonably possible that the SCC of VA will uphold the ruling of the Chief Hearing Examiner on this issue regarding the effective date of implementing new depreciation rates.

     Washington Gas reflected increased revenues and higher depreciation expense for the impact of the revised depreciation rates in its customer billings effective November 12, 2002, and in its financial statements for all periods thereafter. If the SCC of VA should support the VA Staff’s position on this issue, Washington Gas would record a charge for additional depreciation expense calculated from January 1, 2002 to November 12, 2002, without a corresponding increase in revenues. The additional expense would be approximately $3.4 million (before income taxes). An Order from the SCC of VA is expected at any time.

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Washington Gas Light Company
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Item 1. Business (continued)

COMPETITION

     Competition with Other Energy Products

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

     The regulated utility has generally maintained a price advantage over electricity in its service area for traditional uses of energy such as heating, water heating and cooking. However, price volatility in the wholesale natural gas commodity market has resulted in significant increases in the cost of natural gas billed to customers. Such increases have resulted in significant reductions to or the elimination of the traditional price advantage of natural gas. Any price advantage that electricity may currently have is partially caused by artificial price caps, established to help stimulate the unbundled retail market for electricity. These price caps expire in June 2004 in the District of Columbia, June 2006 in Maryland, and July 2007 in Virginia. Once these price caps expire, comparisons may change. Furthermore, as discussed below, restructuring in both the natural gas and electric industries is leading to changes in traditional pricing models. As part of the electric industry restructuring effort, certain business segments are moving toward market-based pricing, with third-party marketers of electricity participating in retail markets. Electric industry restructuring may result in lower comparative pricing for electric service and other alternative energy sources, including natural gas. These changes could result in increased competition for the regulated utility.

     In the interruptible market, the regulated utility’s customers must be capable of using a fuel other than natural gas when demand peaks for the regulated utility’s firm customers. In the interruptible market, fuel oil is the most prevalent energy alternative to natural gas. The regulated utility’s success in this market depends largely on the relationship between gas and oil prices. Since the supply of natural gas is primarily derived from domestic sources, the relationship between supply and demand generally has the greatest impact on natural gas prices. Since a large portion of oil comes from foreign sources, political events can have significant influences on oil supplies and, accordingly, oil prices. The anticipated introduction of non-domestic supplies of liquefied natural gas into the United States natural gas market may impact supply levels and have an impact on natural gas prices.

     Deregulation

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

     The Natural Gas Delivery Function

     The natural gas delivery function, the core business of the Company’s regulated utility, continues to be regulated by local regulatory commissions. In developing this core business, Washington Gas invested $2.5 billion as of September 30, 2003 to construct and operate a safe, reliable and economical natural gas distribution system. Because of the high fixed costs and significant safety and environmental considerations associated with building and operating a distribution system, it is expected that there will continue to be only one owner and operator of a natural gas distribution system per franchise area for the foreseeable future. The nature of Washington Gas’ customer base and the distance of most customers from interstate pipelines mitigate the threat of bypass of its facilities by other potential delivery service providers.

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     Washington Gas expects that local regulatory commissions will continue to set the prices and terms for delivery service that give it an opportunity to earn a just and reasonable rate of return on the capital invested in its distribution system and to recover reasonable operating expenses. Washington Gas plans to continue constructing, operating and maintaining its natural gas distribution system. The Company does not foresee any significant near-term changes in the regulated utility’s risk profile.

     The Merchant Function and Natural Gas Unbundling

     At September 30, 2003, customer choice programs for natural gas customers were available to all of Washington Gas’ regulated utility customers in the District of Columbia, Maryland and Virginia. Of approximately 960,000 customers at September 30, 2003, approximately 197,000 customers purchased their natural gas commodity from unregulated third-party marketers. The following table provides the status of natural gas unbundling in the regulated utility’s major jurisdictions at September 30, 2003. The number and percentage of customers reflected in this table include all customers who chose to purchase natural gas from a third-party marketer, including WGEServices.

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

     Washington Gas actively manages its supply portfolio to balance its sales, delivery and supply obligations. Currently, the regulated utility includes the cost of the natural gas commodity and interstate pipeline services in the purchased gas costs that it includes in firm customers’ rates, subject to regulatory review. The regulated utility’s jurisdictional tariffs contain gas cost mechanisms that allow it to recover the invoice cost of gas applicable to firm customers. Additionally as described below, these same tariffs provide for the assignment and recovery of certain capacity and peaking services from retail suppliers or third-party marketers serving delivery service customers. Washington Gas believes it prudently entered into its gas contracts and that the costs being incurred should be recoverable from customers. If future unbundling or other initiatives remove the current gas cost recovery provisions, Washington Gas could be adversely impacted to the extent it incurs non-competitive gas costs without other satisfactory regulatory mechanisms available to recover any costs that may exceed market prices. Washington Gas currently has recovery mechanisms for such potentially stranded costs in the District of Columbia, Maryland and Virginia.

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

     To minimize its exposure to contract risks, Washington Gas has mechanisms in its customer choice programs that enable it to assign to participating third-party marketers 100 percent of the storage and peak winter capacity resources that were dedicated to serving bundled service customers when those customers elected a third-party marketer. Additionally, Washington Gas currently has mechanisms filed or approved with each of its local commissions to assign up to 100 percent of transportation capacity resources contracted for use beginning with the 2003-2004 heating season. Washington Gas continually updates its forecasts of customer growth and the associated requirements for pipeline transportation, storage and peaking resources. Washington Gas is generally renewing pipeline transportation and storage contracts to meet its forecasts of increased customer gas requirements and to comply with regulatory mechanisms to provide for or make available such resources to marketers serving customers in the customer choice programs.

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

UNREGULATED RETAIL ENERGY-MARKETING AND NATURAL GAS AND ELECTRIC UNBUNDLING

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

     Recognizing the opportunities presented by competition, the Company established WGEServices, an unregulated retail energy-marketing subsidiary, in fiscal year 1997. WGEServices markets both natural gas and electricity to residential, commercial and industrial customers inside and outside of the Washington Gas service area. At September 30, 2003, WGEServices had 153,400 natural gas customers and 76,000 electric customers, compared to 155,000 natural gas customers and 66,000 electric customers at September 30, 2002, and 125,000 natural gas customers and 44,000 electric customers at September 30, 2001. WGEServices’ gross revenues for fiscal years 2003, 2002 and 2001 were $726.2 million, $595.9 million and $419.2 million, respectively. WGEServices’ net income was $3.7 million for fiscal year 2003, a decline from net income of $5.0 million in fiscal year 2002. During fiscal year 2001, WGEServices incurred a net loss of $1.6 million.

     Assuming normal weather, the regulatory process results in relatively stable earnings for the regulated utility. However, there can be significant volatility for unregulated third-party marketers, such as the volatility experienced by WGEServices during fiscal year 2003. High gas prices that occurred in late February and early March of the 2003 fiscal year were more extreme than the planning parameters prescribed in the Company’s risk management policy. Consequently, the colder-than-normal weather experienced during that 2003 period 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 commitment to customers, thereby reducing WGEServices’ net margin. Thus, while WGEServices has a significant potential for continued growth, it must carefully manage the risks associated with a volatile commodity market.

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

     In addition, WGEServices faces risks associated with its gas supply. At any point in time, WGEServices may experience a difference between contracted gas purchase quantities and contractual gas sales commitments. To minimize this risk, WGEServices manages its natural gas contract portfolio by closely matching the timing of gas purchases from suppliers with sales commitments to customers. WGEServices also purchases its gas from a number of wholesale suppliers in order to avoid relying on any single provider for its natural gas supply. Additionally, WGEServices maintains gas storage inventory to meet daily and monthly fluctuations in demand caused by

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Item 1. Business (continued)

variations in weather from normal. From time to time, WGEServices enters into derivative contracts in order to balance its sales commitments with the amount of gas it must purchase to satisfy those commitments, or for purposes of fixing the price at which WGEServices may have to purchase or sell gas. WGEServices has a risk management policy in place and periodically reassesses its policy to determine its adequacy to mitigate risks in changing markets. For a further discussion about WGEServices’ exposure to and management of market risks, refer to the section entitled “Market Risk” included under Item 7 of this report.

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

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

     In anticipation of the opportunities to sell electricity in jurisdictions that have implemented customer choice programs, WGEServices entered into a master purchase and sale agreement in April 2000 with a wholesale energy marketer, Mirant Americas Energy Marketing L.P. (MAEM), which is an indirect wholly owned subsidiary of Mirant Corporation (Mirant). The master purchase and sale agreement is a full requirements agreement under which WGEServices identifies profitable opportunities, and purchases electric energy, capacity and certain ancillary services from Mirant for resale to retail electricity customers. Although the full requirements contract eliminates the electric supply risk that is associated with changes in demand, the benefits of this contractual provision are only realized to the extent MAEM performs its delivery function. WGEServices does not own or operate any electric generation, electric transmission or electric distribution assets.

     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, the sole provider of electricity under the full requirements contract mentioned above, was included in these bankruptcy filings. Since the bankruptcy filing, MAEM has continued to honor its supply obligations to WGEServices. Future performance by MAEM may be subject to further developments in the bankruptcy proceedings (refer to the section entitled “Market Risk” included under Item 7 of this report).

POTENTIAL FOR FURTHER UNBUNDLING

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

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

GAS SUPPLY AND CAPACITY

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

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     Pursuant to FERC Order No. 636, interstate pipeline companies are required to provide transportation and storage services to natural gas shippers, such as Washington Gas, that are comparable to the services it received prior to the implementation of the order. At September 30, 2003, Washington Gas had service agreements with four pipeline companies that provided direct service for firm transportation and storage services. These contracts have expiration dates ranging from fiscal years 2004 to 2017.

     Washington Gas is responsible for acquiring both sufficient natural gas supplies and pipeline capacity to meet customer requirements. As such, Washington Gas must contract for reliable and adequate delivery capacity to its distribution system, while considering the dynamics of the interstate pipeline capacity market, on-system peaking facilities, as well as the characteristics of its customer base. Washington Gas’ contracting activities take into account customers’ tendencies to switch between sales and delivery service; however, such short-term arrangements may not be available in future periods under conditions of capacity constraints. By entering into flexible short-term agreements for supply and capacity levels, Washington Gas remains competitive. Washington Gas has adopted a diversified portfolio approach designed to satisfy the supply and deliverability requirements of its customers, using multiple supply points, dependable interstate pipeline transportation and storage arrangements, and its own substantial storage and peaking capabilities to meet its customers’ demands.

     Local distribution companies, such as Washington Gas, along with other participants in the energy industry have raised concerns regarding the gradual depletion in the availability of interstate pipeline capacity. Depleting pipeline capacity is a business issue that must be managed by Washington Gas, whose customer base has grown at an annual rate of two to three percent, which growth is expected to continue. The increased number of electric co-generation facilities that exist and that are planned for in the near future for the mid-Atlantic region and upstream of the mid-Atlantic region exacerbates the availability of pipeline capacity. These facilities, which significantly utilize pipeline capacity, will ultimately affect deliverability and flexibility of natural gas delivery into the region. Due to the reluctance on the part of both marketers and some local distribution companies in committing to long-term pipeline contracts, infrastructure improvements have been limited despite the fact that the major pipelines serving the Washington Gas system are fully subscribed. In response to growing concerns, interstate pipelines have begun the process of offering infrastructure improvements that will expand pipeline capacity in the mid-Atlantic region. These improvement projects, paid for through incremental demand charges by the participating entities, require a minimum of two to three years to complete for the planning, solicitation of interest, regulatory approval and construction of new pipelines. To date, Washington Gas has entered into an agreement with an interstate pipeline company, Dominion Transmission, Inc. (DTI), under which DTI will construct additional capacity for firm transportation and storage services to Washington Gas. DTI has received FERC approval for the pipeline construction project that is expected to be completed and in service by the 2004-2005 winter season. Washington Gas will continue to monitor other opportunities to acquire or participate in obtaining additional pipeline capacity that will improve or maintain the high level of service expected by its customer base.

     As reflected in the table below, there were six sources of delivery through which the regulated utility received natural gas to satisfy the sendout requirements in pipeline year 2003 (November 1, 2002 through October 31, 2003), and from which supplies can be received in pipeline year 2004 (November 1, 2003 through October 31, 2004). Firm transportation denotes gas transported directly to the entry point of Washington Gas’ distribution system in contractually viable volumes. Transportation storage denotes volumes stored by a pipeline during the summer injection season for withdrawal during the heating season to meet load requirements. Peak load requirements are met by (i) underground natural gas storage at the Hampshire storage field in Hampshire County, West Virginia; (ii) the local production of propane air plants located at Washington Gas-owned facilities in Rockville, Maryland (Rockville Station) and in Springfield, Virginia (Ravensworth Station) and (iii) other peak-shaving sources. Unregulated third-party marketers acquire interstate pipeline capacity and the natural gas commodity on behalf of Washington Gas’ delivery service customers, some of which may be provided through transportation, storage and peaking resources provided by Washington Gas to unregulated third-party marketers under tariffs approved by the three public service commissions. These marketers have natural gas delivered to the entry point of Washington Gas’ delivery system on behalf of those utility customers that have decided to acquire their natural gas commodity on an unbundled basis, as previously discussed.

     During pipeline year 2003 (November 1, 2002 through October 31, 2003), total sendout on the system was 1.8 billion therms as compared to total sendout of 1.3 billion therms during pipeline year 2002. This excludes the sendout of sales and deliveries of natural gas used for electric generation. The sendout for pipeline year 2004 is estimated at 1.7 billion therms (based on normal weather), excluding the sendout for the sales and deliveries of natural gas used for electric generation. The significant increase in 2003 was the result of weather in pipeline year 2003 that was significantly colder than pipeline year 2002. The sources of delivery and related volumes that were

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used to satisfy the requirements of pipeline year 2003 and those projected for pipeline year 2004 are shown in the following table.

     The effectiveness of Washington Gas’ gas supply program is largely dependent on the sources from which the design day requirement is satisfied. A design day is the maximum anticipated demand on the natural gas distribution system during a 24-hour period assuming a five-degree Fahrenheit average temperature. Washington Gas assumes that all interruptible customers will be curtailed on the design day. Washington Gas’ current design day demand forecast for the 2003-2004 winter season is 16.9 million therms, and Washington Gas’ projected sources of delivery for design day sendout is 18.1 million therms. This provides a reserve margin of approximately 7.1 percent. Washington Gas is currently capable of meeting 73 percent of its design day requirements with storage and peaking capabilities. Optimal utilization of storage and peaking facilities on Washington Gas’ design day reduces the dependency on firm transportation. The following table reflects the sources of delivery that are projected to be used to satisfy the design day sendout estimate for pipeline year 2004.

     Washington Gas believes the combination of the natural gas supply it can purchase under short-term contracts, its peaking supplies, and the capacity held under contract on the interstate pipelines is sufficient to satisfy the needs of existing customers and allow for growth in future years.

     ENVIRONMENTAL MATTERS

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

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

18

WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (concluded)

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

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

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

     Washington Gas does not expect that the ultimate impact of these matters will have a material adverse effect on its capital expenditures, earnings or competitive position. Washington Gas believes, at this time, that the appropriate remediation has been or is being undertaken or that no remediation is necessary at the remaining eight sites. See Note 14 of the Notes to Consolidated Financial Statements for a further discussion of environmental response costs.

OTHER INFORMATION ABOUT THE BUSINESS

     The regulated utility is not dependent upon a single customer or group of customers such that the loss of any one or more of such customers would have a significant adverse effect on the regulated utility. Large customers are generally on interruptible rate schedules, and margin-sharing arrangements limit the effects of variations in interruptible customer usage on net income. As previously discussed, Washington Gas served approximately 960,000 customers at September 30, 2003. The Company’s energy-marketing segment is not heavily dependent on any one customer or group of customers. The commercial HVAC segment derived 44.6 percent of revenues from one customer in fiscal year 2003 and 78.9 percent of revenues from one customer in fiscal year 2002.

     The Company’s utility business is weather-sensitive and seasonal since the majority of its business is derived from residential and small commercial customers who use natural gas for space heating purposes. In fiscal year 2003, approximately 78 percent of the total therms delivered in the regulated utility’s franchise area, excluding deliveries for electric generation, occurred in the regulated utility’s first and second fiscal quarters. The Company’s utility earnings are typically generated during these two quarters and the regulated utility historically incurs net losses in the third and fourth fiscal quarters. The timing and level of approved rate increases can affect the results of operations. The seasonal nature of the regulated utility’s business creates large variations in short-term cash requirements, primarily due to the fluctuations in the level of customer accounts receivable, accrued utility revenues and storage gas inventories. Washington Gas finances these seasonal requirements primarily through the sale of commercial paper and unsecured short-term bank loans.

     The Company’s research and development costs during fiscal years 2003, 2002 and 2001 were not material.

     At September 30, 2003, the Company and its wholly owned subsidiaries had 2,078 employees comprised of 1,842 and 236 utility and non-utility employees, respectively.

     The Company’s Code of Conduct and Corporate Governance Guidelines will be available on the corporate Web site www.wglholdings.com on or before December 31, 2003. Copies also may be obtained by request to the Corporate Secretary at WGL Holdings, Inc., 101 Constitution Ave., N.W., Washington, DC 20080. Additional information about WGL Holdings is also available on its web site.

19

WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 2. Properties

ITEM 2—PROPERTIES

     At September 30, 2003, WGL Holdings and its subsidiaries provided services in various areas of Virginia, the District of Columbia and Maryland, and held certificates of convenience and necessity, licenses and permits necessary to maintain and operate their respective properties and businesses. The regulated utility segment is the only segment where property, plant and equipment is a significant asset.

     Property, plant and equipment are stated at original cost, including labor, materials, taxes and overhead. Washington Gas calculates depreciation applicable to its utility gas plant in service primarily using a straight-line method over the estimated remaining life of the plant. The composite depreciation and amortization rate of the regulated utility during fiscal years 2003, 2002 and 2001 was 3.20 percent, 2.93 percent and 2.94 percent, respectively, which included an allowance for non-legal asset retirement costs (see Note 1 of the Notes to Consolidated Financial Statements).

     At September 30, 2003, the regulated utility segment had approximately 622 miles of transmission mains, 11,065 miles of distribution mains, and 12,872 miles of distribution services. The regulated utility has the storage capacity for approximately 15 million gallons of propane for peak shaving.

     Until March 2003, Washington Gas owned and occupied a 12-story office building, along with land, located at 1100 H Street, NW, Washington, D.C. 20080. In March 2003, Washington Gas sold this property and relocated its corporate headquarters to 101 Constitution Avenue, NW, Washington, D.C. 20080, pursuant to a new long-term lease arrangement for office space.

     Washington Gas owns approximately 40 acres of land and a building (built in 1970) at 6801 Industrial Road in Springfield, Virginia 22151. The Springfield office engages in both operating and certain administrative functions of the regulated utility. Washington Gas also holds title to land and buildings used as substations for its utility operations.

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

     Washington Gas owns a 12-acre parcel of land located in Southeast Washington, D.C. Washington Gas entered into an agreement with a national developer in February 2000 to lease this land. See the section entitled “Subsidiaries” for a discussion regarding WG Maritime and the Environmental Matters section for additional information regarding this development.

     Facilities utilized by the retail energy-marketing and HVAC segments are located in the Washington, D.C. metropolitan area and are leased. In early October 2002, Brandywood (a subsidiary of Washington Gas Resources) executed transactions in which it effectively sold its partnership interest in 1,605 acres in Prince George’s County, Maryland.

     The Mortgage of Washington Gas dated January 1, 1933 (Mortgage), as supplemented and amended, securing any First Mortgage Bonds (FMBs) it issues, constitutes a direct lien on substantially all property and franchises owned by the regulated utility other than a small amount of property that is expressly excluded. At September 30, 2003 and 2002, no debt was outstanding under the Mortgage.

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

20

WGL Holdings, Inc.
Washington Gas Light Company
Part I

ITEM 3—LEGAL PROCEEDINGS

     None.

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

     None.

21

WGL Holdings, Inc.
Washington Gas Light Company
Part I

     EXECUTIVE OFFICERS OF THE REGISTRANTS

     The names, ages and positions of the executive officers of the registrants at September 30, 2003, are listed below along with their business experience during the past five years. The age of each officer listed is as of the date of filing of this report. There is no family relationship among the officers.

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

Executive Officers

22

WGL Holdings, Inc.
Washington Gas Light Company
Part I

Executive Officers

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

23

WGL Holdings, Inc.
Part II
Item 5- Market for Registrants’ Common Equity and Related
Stockholder Matters

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

     At September 30, 2003, WGL Holdings had 17,277 common shareholders of record. During fiscal years 2003 and 2002, WGL Holdings’ common stock was listed for trading on the New York Stock Exchange and was shown as “WGL Hold” or “WGL Hldgs” in newspapers. The table below shows quarterly price ranges and quarterly dividends paid for fiscal years ended September 30, 2003 and 2002.

The table below reflects securities authorized for issuance under equity compensation plans pursuant to Item 201 (d) of Regulation S-K for the fiscal year ended September 30, 2003.

Equity Compensation Plan Information

24

WGL Holdings, Inc.
Washington Gas Light Company
Part II
Item 6. Selected Financial Data

ITEM 6. SELECTED FINANCIAL DATA

SELECTED FINANCIAL AND OPERATIONS DATA^(a)

(a)		Results presented for periods prior to fiscal year 2001 reflect the consolidated operation of Washington Gas Light Company and its subsidiaries.

25

WGL Holdings, Inc.
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations

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

     This Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) analyzes the financial condition, results of operations and cash flows of WGL Holdings, Inc. (WGL Holdings or the Company) and its subsidiaries. It also includes management’s analysis of the Company’s past financial results and potential factors that may affect future results, potential future risks and approaches that may be used to manage them.

     Management’s discussion 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 its regulated utility, Washington Gas Light Company (Washington Gas). In addition, WGL Holdings is also affected by the results of its non-utility operations. For more information on the Company’s regulated utility operations, please refer to the Management’s Discussion 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.

     Both of the major sections of Management’s Discussion – WGL Holdings and Washington Gas – should be read to obtain an understanding of the Company’s operations and financial performance. Management’s Discussion also should be read in conjunction with the respective company’s Consolidated Financial Statements and the combined Notes thereto.

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

     Unless otherwise noted, earnings per share amounts are presented herein on a diluted basis, and are based on weighted average common and common equivalent shares outstanding.

Management’s Discussion Table of Contents

26

WGL Holdings, Inc.
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

BUSINESS OVERVIEW

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

     WGL Holdings has three operating segments that are described below:

	•		regulated utility;
	•		retail energy-marketing, and
	•		heating, ventilating and air conditioning (HVAC) products and services.

     Transactions not specifically identifiable in one of the above three segments are accumulated and reported in the category “Other Activities.”

     Regulated Utility

     With over 93 percent of the Company’s assets, Washington Gas delivers natural gas to retail customers in accordance with tariffs set by state or District of Columbia regulatory commissions that have jurisdiction over Washington Gas’ rates. These rates are intended to provide the regulated utility with an opportunity to earn a just and reasonable rate of return on the investment devoted to the delivery of natural gas to customers. Washington Gas also sells natural gas to customers who have not elected to purchase natural gas from unregulated third-party marketers. The regulated utility does not earn a profit or incur a loss when it sells the natural gas commodity as utility customers are charged for the natural gas commodity at the same cost the regulated utility incurs. At September 30, 2003, the regulated utility was selling and delivering the natural gas commodity to 80 percent of its customers. The remaining 20 percent of Washington Gas’ customers utilized the delivery services of Washington Gas for delivery of the natural gas commodity purchased from third-party marketers, one of which is a subsidiary of Washington Gas Resources. Factors critical to the success of the regulated utility include operating a safe, reliable natural gas distribution system, and recovering the costs and expenses of this business, which include a just and reasonable rate of return on invested capital that is allowed by the regulatory commissions that have jurisdiction over the regulated utility’s rates. Hampshire Gas Company (Hampshire), a wholly owned subsidiary of WGL Holdings, is a regulated natural gas storage business that operates an underground storage field on behalf of Washington Gas in accordance with a tariff administered by the Federal Energy Regulatory Commission (FERC).

     Retail Energy-Marketing

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

     HVAC

     Two wholly owned subsidiaries, Washington Gas Energy Systems, Inc. (WGESystems) and American Combustion Industries, Inc. (ACI), provide turn-key, design-build, renovation projects to the commercial and government markets. As a result of a restructuring agreement on September 20, 2002 and a final closing on October

27

WGL Holdings, Inc.
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

15, 2002 between the Company and a 50-percent investor, the Company no longer has any investment in Primary Investors or any financial commitment to the residential HVAC investment.

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

     Refer to the “Business” section under Item 1 of this report for further discussion of the Company’s regulated utility and unregulated businesses. For further discussion of the Company’s financial performance by operating segment, refer to Note 17 of the Notes to Consolidated Financial Statements.

WGL HOLDINGS, INC.

PRIMARY FACTORS AFFECTING WGL HOLDINGS

     The following is a summary discussion of the primary factors that affect the operations and/or financial performance of the regulated and unregulated businesses of WGL Holdings. Refer to the “Business” section under Item 1 of this report on Form 10-K for a more detailed discussion of these and other related factors that affect WGL Holdings’ operations and/or financial performance.

     Weather Conditions

     The Company’s regulated utility operations are weather sensitive, with a significant portion of its revenues derived from the delivery of natural gas to residential and commercial heating customers during the winter season. Weather conditions directly influence the volume of natural gas delivered by the regulated utility. The regulated utility’s rates are determined on the basis of expected normal weather conditions. As such, deviations in weather from normal levels can affect the Company’s financial performance. Washington Gas does not have a ratemaking provision that allows for revenues to be adjusted for the difference between actual weather conditions in a particular year and the expected normal weather conditions that are used to establish rates. However, the regulated utility does have a weather insurance policy designed to protect against a portion of warmer-than-normal weather (refer to “Market Risk” included herein for a further discussion of this weather insurance policy).

     The financial results of the Company’s energy-marketing subsidiary, WGEServices, also are affected by deviations in weather from normal levels. Since WGEServices sells both natural gas and electricity, WGEServices’ financial results may fluctuate due to deviations from normal weather during the winter heating and summer cooling seasons.

     Regulatory Environment

     Washington Gas is regulated by the Public Service Commission of the District of Columbia (PSC of DC), the Public Service Commission of Maryland (PSC of MD) and the State Corporation Commission of Virginia (SCC of VA). Hampshire is regulated by the FERC. These regulatory commissions set the rates in their respective jurisdictions that Washington Gas can charge customers for its rate-regulated services. Changes in these rates as ordered by regulatory commissions affect the Company’s financial performance.

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

     Gas Supply and Storage Capacity

     Washington Gas is responsible for acquiring both sufficient natural gas supplies and resource capacity to meet customer requirements. As such, Washington Gas must contract for reliable and adequate delivery capacity to its distribution system, while considering the dynamics of the interstate pipeline capacity market, on-system peaking facilities, as well as the characteristics of its customer base.

     Local distribution companies, such as Washington Gas, along with other participants in the energy industry have raised concerns regarding the gradual depletion in the availability of interstate pipeline capacity. Depleting pipeline capacity is a business issue that must be managed by Washington Gas, whose customer base has grown at an annual

28

WGL Holdings, Inc.
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

rate of two to three percent. This rate of growth is expected to continue. To date, Washington Gas has entered into an agreement with an interstate pipeline company that will construct additional capacity for firm transportation and storage services to Washington Gas. This pipeline construction project is expected to be completed and in service by the 2004-2005 winter season. Washington Gas will continue to monitor other opportunities to acquire or participate in obtaining additional pipeline capacity that will improve or maintain the high level of service expected by its customer base.

     Washington Gas believes the combination of the natural gas supply it can purchase under short-term contracts, its peaking supplies and the capacity held under contract on the interstate pipelines is sufficient to satisfy the needs of existing customers and allow for growth in future years.

     Competitive Environment

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

     In the interruptible market, the regulated utility’s customers must be capable of using a fuel other than natural gas when demand peaks for the regulated utility’s firm customers. In the interruptible market, fuel oil is the most prevalent energy alternative to natural gas. The regulated utility’s success in this market depends largely on the relationship between gas and oil prices. Since the supply of natural gas primarily is derived from domestic sources, the relationship between supply and demand generally has the greatest impact on natural gas prices. Since a large portion of oil comes from foreign sources, political events can have significant influences on oil supplies and, accordingly, oil prices. The anticipated introduction of non-domestic supplies of liquefied natural gas into the United States natural gas market may impact the supply levels and have an impact on natural gas prices.

     Deregulation and Unbundling. In each of the jurisdictions served by the Company’s regulated utility, regulators and utilities have implemented customer choice programs. These programs provide customers with an opportunity to choose to purchase their natural gas and/or electric commodity from third-party marketers, rather than purchasing these commodities as part of a bundled service from the local utility. When customers choose to purchase their natural gas commodity from third-party marketers on an unbundled basis, there is no impact on the regulated utility’s net revenues or net income since Washington Gas passes the cost of gas to customers without any mark-up. However, these customer choice programs provide unregulated third-party marketers, such as the Company’s unregulated subsidiary, WGEServices, with opportunities to profit from the sale of the natural gas commodity or electricity in competitive markets. It also enables customers to have competitive choices from which to buy natural gas and electricity. Successfully participating in this evolving marketplace also poses new risks and challenges that must continue to be addressed in the Company’s current and future strategies.

     Currently, the regulated utility includes the cost of the natural gas commodity and interstate pipeline services in the purchased gas costs that it includes in firm customers’ rates, subject to regulatory review. The regulated utility’s jurisdictional tariffs contain gas cost mechanisms that allow it to recover the invoice cost of gas, including both the commodity cost of gas and the interstate pipeline services, applicable to firm customers. If Washington Gas were to determine that competition or changing regulation stemming from future unbundling or other initiatives would preclude it from recovering these costs in rates, these costs would be charged to expense without any corresponding revenue recovery. If this situation were to occur, and depending upon the timing of the occurrence, the effect on Washington Gas’ financial position and results of operations would likely be significant. In the event that a regulatory body disallows the recovery of such costs, these costs would be borne by shareholders.

     To minimize this risk, Washington Gas has mechanisms in its customer choice programs that enable it to assign to participating third-party marketers 100 percent of the storage and peak winter capacity resources that were dedicated to serving bundled service customers when those customers elected a third-party marketer. Additionally, Washington Gas currently has mechanisms filed or approved with each of its local commissions to assign up to 100 percent of transportation capacity resources contracted for use during the 2003-2004 heating season. Washington Gas generally is renewing pipeline transportation and storage capacity contracts to meet its forecasts of increased customer gas requirements and to comply with regulatory mechanisms to provide for or make available such resources to marketers serving customers in the customer choice programs.

29

WGL Holdings, Inc.
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

     Unregulated Retail Energy-Marketing

     The Company’s unregulated subsidiary, WGEServices, competes with other third-party marketers to sell the unregulated natural gas commodity to customers. Marketers of the natural gas commodity compete largely on price, and gross margins are relatively small. WGEServices also competes with other third-party marketers to sell electric supply services to customers. As with natural gas, marketers of electric supply service compete largely on price, and gross margins are relatively small. WGEServices is exposed to market risks associated with its gas supply, as well as credit risks associated with both its gas and electric suppliers. See “Market Risk” included herein for a further discussion of this risk exposure and WGEServices’ management of them.

     Environmental Matters

     The Company and its subsidiaries are subject to federal, state and local laws and regulations related to environmental matters. These evolving laws and regulations may require expenditures over a long timeframe to control environmental impacts. Washington Gas believes, at this time, that appropriate remediation is being undertaken at all the relevant sites. Based on existing knowledge, Washington Gas does not expect that the ultimate effect of these matters will have a material adverse effect on its capital expenditures, its earnings or its competitive position. Refer to Note 14 of the Notes to Consolidated Financial Statements for a further discussion of these matters.

     Industry Consolidation

     In recent years, the energy industry has seen a number of consolidations, combinations, disaggregations and other strategic alliances. Consolidation will present combining entities with the challenges of remaining focused on the customer and integrating different organizations. Others in the energy industry are discontinuing operations in certain portions of the energy industry or divesting portions of their business and facilities.

     From time to time, the Company performs studies and, in some cases, holds discussions regarding utility and energy-related investments and transactions with other companies. The ultimate effect on the Company of any such investments and transactions that may occur cannot be determined at this time.

     Economic Conditions and Interest Rates

     The Company and its subsidiaries operate in one of the fastest growing regions in the nation. The continued prosperity of this region, supported by a relatively low interest-rate environment for new housing, has allowed the Company’s regulated utility to expand its regulated delivery service customer base at a rate of growth well over twice the national industry average during the past five years. In addition, this economy has provided a robust market for the Company’s subsidiaries to market natural gas, electricity and other energy-related products and services. A downturn in the economy of the region in which the Company operates, or a significant increase in interest rates, which cannot be predicted with accuracy, might adversely affect the Company’s ability to grow its regulated utility customer base and other businesses at the same rate they have grown in the past.

     The Company has been operating in a relatively low interest-rate environment in the recent past as it relates to short- and long-term debt financings. A rise in interest rates without the recognition of the higher cost of debt in the rates charged by the regulated utility to its customers would adversely affect future earnings.

     Inflation/Deflation

     From time to time, the Company’s regulated utility seeks approval for rate increases from regulatory commissions to help it manage the effects of inflation on its capital investment and returns. The most significant impact of inflation is on the regulated utility’s replacement cost of plant and equipment. While the regulatory commissions, having jurisdiction over the regulated utility’s retail rates, allow depreciation only on the basis of historical cost to be recovered in rates, the Company anticipates that its regulated utility should be allowed to recover the increased costs of its investment and earn a return thereon, after replacement of the facilities occurs.

     To the extent the Company’s regulated utility experiences a sustained deflationary economic environment, actual returns on invested capital could rise and exceed returns allowed by regulators in previous regulatory proceedings. If this were to occur, it could prompt the initiation of a regulatory review to reduce the revenue of the regulated utility.

30

WGL Holdings, Inc.
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

     Labor Contracts

     The Company 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. This contract expires on May 31, 2004. The contract with the Office and Professional Employees International Union (OPEIU), Local 2, is a three-year contract that began on April 1, 2003, and it applies to approximately 340 members. During fiscal year 2003, Washington Gas ratified new labor contracts with OPEIU, Local 2, and another smaller union, International Brotherhood of Teamsters, Local 96-Shenandoah Gas that covers approximately 20 employees.

     Potential Changes in Accounting Practices

     The Company cannot predict the effect of potential future changes in accounting regulations or practices in general on its operating results and financial condition. New accounting standards could be issued by the Financial Accounting Standards Board (FASB) or the Securities and Exchange Commission (SEC) that could change the way the Company records and recognizes revenues, expenses, assets and liabilities. These changes in accounting standards could adversely affect the Company’s reported earnings or increase its liabilities.

     Critical Accounting Policies

     Preparation of financial statements and related disclosures in compliance with generally accepted accounting principles (GAAP) 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 involves judgment 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.

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

     Accounting for 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 revenues that are adjusted in subsequent periods 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.

     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.

     Washington Gas accounts for its regulated activities in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation, which results in differences in the application of GAAP between regulated and non-regulated businesses. SFAS No. 71 requires the recording of regulatory assets and liabilities for certain transactions that would have been treated as revenue and expense in unregulated 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 and Washington Gas discontinuing the application of SFAS No. 71 for some of its businesses and

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WGL Holdings, Inc.
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

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 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 or Washington Gas were required to discontinue the application of SFAS No. 71 for any of its operations, it would record 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 regulatory activities, and that all regulatory assets and liabilities are recoverable or refundable through the regulatory environment.

     Accounting for 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. Any significant differences between management’s estimates and actual tax amounts could have a material impact on the Company’s operating results and financial condition.

     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. The Company currently is involved in a regulatory contingency with respect to a pending rate case. Under the regulations of the SCC of VA, Washington Gas placed a proposed general revenue increase into effect on November 12, 2002, subject to refund pending the SCC of VA’s final decision on a rate case proceeding. Revenues recorded in fiscal year 2003 related to the Virginia rate increase are subject to refund pending a final rate order by the SCC of VA. Washington Gas’ financial results for fiscal year 2003 reflect the proposed revenue increase, along with a provision for a rate refund to customers based on the difference between the amount Washington Gas has collected in rates subject to refund and the estimated amount Washington Gas expects to recover based on a final rate order of the SCC of VA. To the extent a final order by the SCC of VA differs from Washington Gas’ estimate, Washington Gas will adjust its provision for rate refund to customers to reflect the impact of the final order. Actual results related to this regulatory contingency are difficult to predict and could differ significantly from the estimates included in reported earnings.

RESULTS OF OPERATIONS

     Summary Results

     WGL Holdings reported net income of $112.3 million, or $2.30 per share, for the fiscal year ended September 30, 2003, as compared to net income of $39.1 million, or $0.80 per share, and $82.4 million, or $1.75 per share, for fiscal years ended September 30, 2002 and 2001, respectively. The Company earned a return of 14.2 percent, 5.0 percent and 11.0 percent, respectively, on average common equity during these three fiscal years.

     Net income for fiscal year 2003 more than doubled the Company’s net income for the prior year. The Company’s core regulated utility operations drove most of the Company’s significant earnings improvement for fiscal year 2003, reflecting 38 percent colder weather as compared to fiscal year 2002, as well as customer growth and the favorable impact of new retail rates and a new rate design in the District of Columbia. The Company’s non-utility operations also contributed to the favorable earnings comparison for fiscal year 2003, primarily due to after-tax charges included in the prior fiscal year totaling $18.0 million, or $0.37 per share, associated with the Company’s former co-investment in a residential HVAC business and a consumer finance business that is no longer making new loans. Additionally, fiscal year 2003 included after-tax gains of $2.5 million, or $0.05 per share, from the sale of the Company’s Washington D.C. headquarters property, and $0.9 million, or $0.02 per share, from the sale of its interest in a land development venture. Fiscal year 2003 also included an adjustment to income taxes that added $2.7 million to income, or $0.06 per share, coupled with a reduction to income taxes of $2.1 million, or $0.04 per share, due to the realization of tax benefits of capital loss carryforwards.

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WGL Holdings, Inc.
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

     Net income for fiscal year 2002 fell $43.3 million, or $0.95 per share, from fiscal year 2001. The decrease in net income primarily reflects 23 percent warmer weather in fiscal year 2002 compared to 2001, as well as after-tax charges related to the Company’s former investment in a residential HVAC business and a consumer finance business that is no longer making new loans. Fiscal year 2002 also included a loss of $1.7 million, or $0.04 per share, associated with a transaction with a bankrupt energy trader.

     The following table summarizes the Company’s net income (loss) by operating segment for fiscal years ended September 30, 2003, 2002 and 2001.

     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. For the fiscal year ended September 30, 2003, the regulated utility segment reported net income of $109.0 million, or $2.24 per share, representing an increase of $57.3 million, or $1.18 per share over fiscal year 2002. This significant increase primarily reflects a 32 percent increase in total gas deliveries to firm customers that grew to nearly 1.4 billion therms during fiscal year 2003 due to colder weather, as well as an increase of over 20,600 active customer meters during the current fiscal year. Weather, when measured by an industry standard called heating degree days, was 38 percent colder than fiscal year 2002. Weather was 19.8 percent colder than normal for the current fiscal year, as compared to 13.4 percent warmer than normal for the prior fiscal year. The colder-than-normal weather for fiscal year 2003 contributed an estimated $0.51 per share to current year earnings.

     The improvement in current year earnings was also attributable to new retail rates put into effect in Maryland on September 30, 2002, and in Virginia on November 12, 2002, as well as the impact of a new rate design in the District of Columbia that enables a greater recovery of fixed charges in the summer months of the year. As discussed earlier, revenues recorded in fiscal year 2003 related to the Virginia rate increase are subject to refund pending a final rate order by the SCC of VA.

     Increased earnings for the utility segment also reflect an adjustment to income taxes during fiscal year 2003 that improved net income by $2.7 million, or $0.06 per share, coupled with the sale in the second quarter of fiscal year 2003 of the headquarters property that resulted in an after-tax gain of $2.5 million, or $0.05 per share. This gain reflects management’s estimate for potential refunds to customers based on the outcome of regulatory decisions related to this gain. Tempering these earnings improvements were higher labor and benefit costs, higher depreciation expense levels and increased expenses associated with uncollectible accounts. Additionally, the 2002 fiscal year included an after-tax loss of $1.7 million, or $0.04 per share, associated with a transaction with a bankrupt energy trader.

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WGL Holdings, Inc.
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

     In fiscal year 2002, weather was 23.4 percent warmer than fiscal year 2001, and 13.4 percent warmer than normal as compared to 13.1 percent colder than normal for fiscal year 2001. The warmer-than-normal weather reduced earnings by an estimated $27.7 million, or $0.57 per share, before considering an $8.7 million, or $0.18 per share, improvement derived from a weather insurance policy. Accordingly, the net impact of weather on earnings per share was a reduction of $0.39 per share. There were no weather insurance proceeds recorded in fiscal year 2003. Since 2001, the Company has been managing its weather-related business risk through an insurance policy that reimburses the Company for a portion of the effect of deviations of weather from normal levels when the effect of weather is warmer than normal. Refer to the “Market Risk” section of Management’s Discussion for a further description of this insurance policy, and Note 1 of the Notes to Consolidated Financial Statements for a discussion of the related accounting treatment.

     Further discussion of the operating results of the regulated utility is included herein in the Management’s Discussion for Washington Gas.

     Non-Utility Operating Results

     The Company’s non-utility operations are comprised of two business segments: 1) retail energy-marketing and 2) commercial HVAC. Certain of the Company’s transactions are not significant enough to report as stand-alone business segments, and therefore are aggregated as “Other Non-Utility Activities” which are included as part of non-utility operations for purposes of segment reporting (refer to Note 17 of the Notes to Consolidated Financial Statements).

     Total net income for the Company’s non-utility operations for fiscal year 2003 was $3.3 million, or $0.06 per share, as compared to a net loss of $12.6 million, or $0.26 per share, for fiscal year 2002. This significant improvement of $15.9 million, or $0.32 per share, is primarily attributable to after-tax charges totaling $18.0 million, or $0.37 per share, that were recorded in fiscal year 2002 for which there were not similar charges recorded in fiscal year 2003. These charges included a $3.5 million, or $0.07 per share, after-tax operating loss and a $9.4 million, or $0.19 per share, after-tax impairment provision associated with the Company’s former 50-percent equity investment in Primary Investors, a residential HVAC business. There was no effect on fiscal year 2003 net income from this venture. Additional charges included in fiscal year 2002 included a $5.1 million, or $0.11 per share, after-tax loan loss provision associated with a consumer finance business. This business has stopped issuing new loans, and is expected to fully amortize its loan portfolio in 2005.

     Also contributing to the improved non-utility operating results were reduced income taxes in the third quarter of fiscal year 2003 of $2.1 million, or $0.04 per share, resulting from the realization of tax benefits of capital loss carryforwards, as well as an after-tax gain of $926,000, or $0.02 per share, resulting from the Company’s sale in the first quarter of fiscal year 2003 of its interest in a land development venture. Partially offsetting the favorable year-over-year comparisons were lower operating results of the Company’s retail energy-marketing and commercial HVAC businesses that together declined $6.4 million, or $0.13 per share, from fiscal year 2002.

     Non-utility operations reported a net loss of $12.6 million for fiscal year ended September 30, 2002, as compared to a loss of $3.4 million for fiscal year 2001. The increased net loss was attributable to after-tax charges recorded in fiscal year 2002 totaling $18.0 million for losses associated with the residential HVAC and consumer finance businesses, as compared to similar losses recorded in fiscal year 2001 totaling $6.1 million related to the residential HVAC business. Partially offsetting the increased loss in fiscal year 2002 compared to fiscal year 2001 were improved operating results of the Company’s retail energy-marketing and commercial HVAC businesses that together improved $5.5 million over fiscal year 2001.

     The following table depicts the composition of the changes in revenues for the non-utility business segments.