WGL HOLDINGS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2004


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


	Exact name of registrant as		I.R.S.
Commission	specified in its charter and principal	State of	Employer
File Number	office address and telephone number	Incorporation	I.D. Number
1-16163	WGL Holdings, Inc.	Virginia	52-2210912
	101 Constitution Ave., N.W.
	Washington, D.C. 20080
	(703) 750-2000

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

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

Indicate by check mark whether each registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

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

WGL Holdings, Inc. common stock, no par value, outstanding as of April 30, 2004: 48,647,665 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 April 30, 2004.

WGL Holdings, Inc.
Washington Gas Light Company
For the Quarter Ended March 31, 2004

Table of Contents


PART I.	Financial Information

Item 1.	Financial Statements:
	WGL Holdings, Inc.:
	Consolidated Balance Sheets	1
	Consolidated Statements of Income	2
	Consolidated Statements of Cash Flows	3

	Washington Gas Light Company:
	Balance Sheets	4
	Statements of Income	5
	Statements of Cash Flows	6

	Notes to Consolidated Financial Statements	7
	WGL Holdings, Inc. and Washington Gas Light Company — Combined

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	WGL Holdings, Inc.	23
	Washington Gas Light Company	37

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45

Item 4.	Controls and Procedures	45

PART II.	Other Information

Item 4.	Submission of Matters to a Vote of Security Holders	46

Item 6.	Exhibits and Reports on Form 8-K	46

Signature		48

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

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

WGL Holdings, Inc.
Consolidated Balance Sheets (Unaudited)
Part I — Financial Information
Item 1 — Financial Statements



	March 31,			September 30,
(In thousands)	2004			2003

ASSETS
Property, Plant and Equipment
At original cost	$	2,609,621		$	2,563,923
Accumulated depreciation and amortization		(722,881	)		(689,000	)

Net property, plant and equipment		1,886,740			1,874,923

Current Assets
Cash and cash equivalents		77,369			4,470
Receivables
Accounts receivable		354,868			171,772
Gas costs due from customers		10,842			11,368
Accrued utility revenues		65,792			15,580
Allowance for doubtful accounts		(17,087	)		(17,543	)

Net receivables		414,415			181,177

Materials and supplies — principally at average cost		13,099			12,989
Storage gas — at cost (first-in, first-out)		36,980			164,597
Deferred income taxes		15,560			11,980
Other prepayments — principally taxes		9,221			26,919
Other		2,162			6,753

Total current assets		568,806			408,885

Deferred Charges and Other Assets
Regulatory assets
Gas costs		17,384			10,490
Other		47,245			52,333
Prepaid qualified pension benefits		69,303			66,753
Other		22,838			22,668

Total deferred charges and other assets		156,770			152,244

Total Assets	$	2,612,316		$	2,436,052

CAPITALIZATION AND LIABILITIES
Capitalization
Washington Gas Light Company preferred stock	$	28,173		$	28,173
Common shareholders’ equity		906,267			818,218
Long-term debt		617,903			636,650

Total capitalization		1,552,343			1,483,041

Current Liabilities
Current maturities of long-term debt		32,171			12,180
Notes payable		114,570			166,662
Accounts payable		163,189			142,708
Wages payable		15,942			15,701
Accrued interest		2,853			3,027
Dividends declared		16,149			15,886
Customer deposits and advance payments		13,671			11,046
Gas costs due to customers		44,967			7,553
Accrued taxes		62,549			8,699
Other		641			2,612

Total current liabilities		466,702			386,074

Deferred Credits
Unamortized investment tax credits		15,393			15,841
Deferred income taxes		251,944			236,888
Accrued pensions and benefits		37,456			37,356
Regulatory liabilities
Accrued asset removal costs		241,905			230,672
Other		20,978			22,444
Other		25,595			23,736

Total deferred credits		593,271			566,937

Commitments and Contingencies (Note 11)

Total Capitalization and Liabilities	$	2,612,316		$	2,436,052

The accompanying notes are an integral part of these statements.

WGL Holdings, Inc.
Consolidated Statements of Income (Unaudited)
Part I — Financial Information
Item 1 — Financial Statements (continued)



	Three Months Ended March 31,						Six Months Ended March 31,

(In thousands, except per share data)	2004			2003			2004		2003

UTILITY OPERATIONS
Operating Revenues	$	588,648		$	620,208		$	963,962	$	995,200
Less: Cost of gas		336,986			366,763			535,764		559,299
Revenue taxes		20,510			16,029			34,279		25,816

Utility Net Revenues		231,152			237,416			393,919		410,085

Other Operating Expenses
Operation		51,868			46,115			96,840		91,901
Maintenance		10,527			9,931			20,763		19,278
Depreciation and amortization		22,961			21,189			48,166		40,804
General taxes		10,782			11,849			20,653		21,457
Income taxes		49,629			54,443			74,387		82,343

Utility Other Operating Expenses		145,767			143,527			260,809		255,783

Utility Operating Income		85,385			93,889			133,110		154,302

NON-UTILITY OPERATIONS
Operating Revenues
Retail energy-marketing		265,680			222,692			467,938		396,633
Heating, ventilating and air conditioning		7,246			7,551			14,780		18,140
Other non-utility activities		678			622			861		1,120

Non-Utility Operating Revenues		273,604			230,865			483,579		415,893

Other Operating Expenses
Operating expenses		275,821			232,584			478,613		411,698
Income taxes (benefit)		(410	)		(785	)		2,114		2,407

Non-Utility Operating Expenses		275,411			231,799			480,727		414,105

Non-Utility Operating Income (Loss)		(1,807	)		(934	)		2,852		1,788

TOTAL OPERATING INCOME		83,578			92,955			135,962		156,090
Other Income (Expenses)—Net		5,553			(85	)		4,633		631

INCOME BEFORE INTEREST EXPENSE		89,131			92,870			140,595		156,721
INTEREST EXPENSE
Interest on long-term debt		10,465			10,671			20,935		21,623
Other		281			906			1,402		1,853

Total Interest Expense		10,746			11,577			22,337		23,476
DIVIDENDS ON WASHINGTON GAS PREFERRED STOCK		330			330			660		660

NET INCOME (APPLICABLE TO COMMON STOCK)	$	78,055		$	80,963		$	117,598	$	132,585

AVERAGE COMMON SHARES OUTSTANDING
Basic		48,643			48,582			48,634		48,578
Diluted		48,859			48,738			48,836		48,725

EARNINGS PER AVERAGE COMMON SHARE
Basic	$	1.60		$	1.67		$	2.42	$	2.73
Diluted	$	1.60		$	1.66		$	2.41	$	2.72

DIVIDENDS DECLARED PER COMMON SHARE	$	0.3250		$	0.3200		$	0.6450	$	0.6375

The accompanying notes are an integral part of these statements.

WGL Holdings, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Part I — Financial Information
Item 1 — Financial Statements (continued)



	Six Months Ended
	March 31,

(In thousands)	2004			2003

OPERATING ACTIVITIES
Net income (applicable to common stock)	$	117,598		$	132,585
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization:
Utility property, plant and equipment		48,166			40,804
Other accounts		3,078			3,821
Deferred income taxes—net		12,577			2,276
Amortization of investment tax credits		(448	)		(449	)
Accrued/deferred pension cost		(2,361	)		(2,470	)
Earnings from sale of carried interest in real estate		(6,414	)		—
Gain from sale of assets		—			(5,671	)
Other non-cash charges (credits)—net		366			(830	)

CHANGES IN ASSETS AND LIABILITIES
Accounts receivable and accrued utility revenues		(233,764	)		(316,045	)
Gas costs due from/to customers—net		37,940			25,462
Storage gas		127,617			73,701
Other prepayments—principally taxes		17,698			1,940
Accounts payable		20,481			97,241
Wages payable		241			903
Customer deposits and advance payments		2,625			(5,124	)
Accrued taxes		53,850			69,078
Accrued interest		(174	)		(214	)
Pipeline refunds due to customers		(1,415	)		2,020
Deferred purchased gas costs—net		(6,894	)		(5,860	)
Other—net		7,247			886

Net Cash Provided by Operating Activities		198,014			114,054

FINANCING ACTIVITIES
Long-term debt issued		37,000			93
Long-term debt retired		(36,114	)		(41,260	)
Debt issuance costs		(752	)		(217	)
Notes payable issued (retired)—net		(52,092	)		19,868
Dividends on common stock		(31,125	)		(30,849	)
Other financing activities		1,764			818

Net Cash Used in Financing Activities		(81,319	)		(51,547	)

INVESTING ACTIVITIES
Capital expenditures		(49,619	)		(60,508	)
Net proceeds from sale of carried interest in real estate		6,414			—
Net proceeds from sale of assets		—			21,300
Other investing activities		(591	)		(7,396	)

Net Cash Used in Investing Activities		(43,796	)		(46,604	)

INCREASE IN CASH AND CASH EQUIVALENTS		72,899			15,903
Cash and Cash Equivalents at Beginning of Year		4,470			2,529
Cash and Cash Equivalents at End of Period	$	77,369		$	18,432

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid	$	13,454		$	20,027
Interest paid	$	21,971		$	22,777
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Extinguishment of project debt financing	$	—		$	17,800

The accompanying notes are an integral part of these statements.

Washington Gas Light Company
Balance Sheets (Unaudited)
Part I — Financial Information
Item 1 — Financial Statements (continued)



	March 31,			September 30,
(In thousands)	2004			2003

ASSETS
Property, Plant and Equipment
At original cost	$	2,584,892		$	2,539,397
Accumulated depreciation and amortization		(705,143	)		(671,990	)

Net property, plant and equipment		1,879,749			1,867,407

Current Assets
Cash and cash equivalents		74,969			4,119
Receivables
Accounts receivable		216,389			69,455
Gas costs due from customers		10,842			11,368
Accrued utility revenues		65,792			15,580
Allowance for doubtful accounts		(14,547	)		(15,826	)

Net receivables		278,476			80,577

Materials and supplies—principally at average cost		12,936			12,825
Storage gas—at cost (first-in, first-out)		25,607			124,416
Deferred income taxes		14,196			10,957
Other prepayments—principally taxes		5,443			19,089

Total current assets		411,627			251,983

Deferred Charges and Other Assets
Regulatory assets
Gas costs		17,384			10,490
Other		47,245			52,333
Prepaid qualified pension benefits		68,958			66,420
Other		20,822			19,784

Total deferred charges and other assets		154,409			149,027

Total Assets	$	2,445,785		$	2,268,417

CAPITALIZATION AND LIABILITIES
Capitalization
Preferred stock	$	28,173		$	28,173
Common shareholder’s equity		858,182			778,502
Long-term debt		617,906			636,614

Total capitalization		1,504,261			1,443,289

Current Liabilities
Current maturities of long-term debt		32,105			12,100
Notes payable		12			65,226
Accounts payable		107,200			111,001
Wages payable		15,896			15,623
Accrued interest		2,853			3,027
Dividends declared		16,140			15,886
Customer deposits and advance payments		13,671			11,046
Gas costs due to customers		44,967			7,553
Accrued taxes		63,409			6,426
Payables to associated companies		50,901			10,026
Other		81			1,496

Total current liabilities		347,235			259,410

Deferred Credits
Unamortized investment tax credits		15,372			15,818
Deferred income taxes		254,663			237,483
Accrued pensions and benefits		37,364			37,264
Regulatory liabilities
Accrued asset removal costs		241,905			230,672
Other		20,967			22,431
Other		24,018			22,050

Total deferred credits		594,289			565,718

Commitments and Contingencies (Note 11)

Total Capitalization and Liabilities	$	2,445,785		$	2,268,417

The accompanying notes are an integral part of these statements.

Washington Gas Light Company
Statements of Income (Unaudited)
Part I — Financial Information
Item 1 — Financial Statements (continued)



	Three Months Ended						Six Months Ended
	March 31,						March 31,

(In thousands)	2004			2003			2004			2003

UTILITY OPERATIONS
Operating Revenues	$	603,281		$	626,424		$	986,411		$	1,005,129
Less: Cost of gas		351,619			372,979			558,213			569,228
Revenue taxes		20,510			16,029			34,279			25,816

Utility Net Revenues		231,152			237,416			393,919			410,085

Other Operating Expenses
Operation		52,329			46,518			97,798			92,697
Maintenance		10,449			9,883			20,612			19,155
Depreciation and amortization		22,785			21,019			47,816			40,464
General taxes		10,694			11,840			20,392			21,384
Income taxes		49,571			54,374			74,285			82,241

Utility Other Operating Expenses		145,828			143,634			260,903			255,941

Utility Operating Income		85,324			93,782			133,016			154,144

NON-UTILITY OPERATIONS
Operating Revenues
Other non-utility		651			598			818			1,029

Non-Utility Operating Revenues		651			598			818			1,029

Other Operating Expenses
Operating expenses (income)		42			—			(958	)		9
Income taxes		635			111			700			402

Non-Utility Operating Expenses (Income)		677			111			(258	)		411

Non-Utility Operating Income (Loss)		(26	)		487			1,076			618

TOTAL OPERATING INCOME		85,298			94,269			134,092			154,762
Other Income (Expenses)—Net		(83	)		(81	)		(1,194	)		(938	)

INCOME BEFORE INTEREST EXPENSE		85,215			94,188			132,898			153,824
INTEREST EXPENSE
Interest on long-term debt		10,465			10,671			20,935			21,623
Other		347			996			1,517			2,049

Total Interest Expense		10,812			11,667			22,452			23,672

NET INCOME (BEFORE PREFERRED STOCK DIVIDENDS)		74,403			82,521			110,446			130,152
DIVIDENDS ON PREFERRED STOCK		330			330			660			660

NET INCOME (APPLICABLE TO COMMON STOCK)	$	74,073		$	82,191		$	109,786		$	129,492

The accompanying notes are an integral part of these statements.

Washington Gas Light Company
Statements of Cash Flows (Unaudited)
Part I — Financial Information
Item 1 — Financial Statements (continued)



	Six Months Ended
	March 31,

(In thousands)	2004			2003

OPERATING ACTIVITIES
Net income (Before Preferred Stock Dividends)	$	110,446		$	130,152
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization
Utility property, plant and equipment		47,816			40,464
Other accounts		2,859			3,295
Deferred income taxes—net		14,953			2,742
Amortization of investment tax credits		(446	)		(446	)
Accrued/deferred pension cost		(2,348	)		(2,449	)
Gain from sale of assets		—			(4,138	)
Other non-cash charges (credits)—net		280			(923	)
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable, accrued utility revenues and receivables from associated companies		(198,425	)		(265,063	)
Gas costs due from/to customers—net		37,940			25,462
Storage gas		98,809			50,745
Other prepayments—principally taxes		13,646			1,472
Accounts payable		37,074			87,746
Wages payable		273			717
Customer deposits and advance payments		2,625			(5,124	)
Accrued taxes		56,983			67,389
Accrued interest		(174	)		(214	)
Pipeline refunds due to customers		(1,415	)		2,020
Deferred purchased gas costs—net		(6,894	)		(5,860	)
Other—net		2,440			820

Net Cash Provided by Operating Activities		216,442			128,807

FINANCING ACTIVITIES
Long-term debt issued		37,000			—
Long-term debt retired		(36,060	)		(41,096	)
Debt issuance costs		(752	)		(124	)
Notes payable issued (retired)—net		(65,214	)		8,906
Dividends on common and preferred stock		(31,784	)		(31,379	)
Other financing activities		1,198			557

Net Cash Used in Financing Activities		(95,612	)		(63,136	)

INVESTING ACTIVITIES
Capital expenditures		(49,389	)		(60,002	)
Net proceeds from sale of assets		—			16,000
Other investing activities		(591	)		(5,967	)

Net Cash Used in Investing Activities		(49,980	)		(49,969	)

INCREASE IN CASH AND CASH EQUIVALENTS		70,850			15,702
Cash and Cash Equivalents at Beginning of Year		4,119			2,637

Cash and Cash Equivalents at End of Period	$	74,969		$	18,339

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid	$	10,591		$	18,912
Interest paid	$	21,468		$	22,376

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Extinguishment of project debt financing	$	—		$	17,800

The accompanying notes are an integral part of these statements.

WGL Holdings, Inc.
Washington Gas Light Company
Part I — Financial Information
Item 1 — Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. ACCOUNTING POLICIES

Basis of Presentation

WGL Holdings, Inc. (WGL Holdings or the Company) is the parent of four direct, wholly owned subsidiaries that include Washington Gas Light Company (Washington Gas or the regulated utility), Crab Run Gas Company, Hampshire Gas Company and Washington Gas Resources Corporation (Washington Gas Resources). Washington Gas Resources owns unregulated subsidiaries that include, among others, Washington Gas Energy Services, Inc. (WGEServices), American Combustion Industries, Inc. (ACI) and Washington Gas Energy Systems, Inc. (WGESystems). Reference is made to the combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2003 filed with the Securities and Exchange Commission (SEC) for additional information on the corporate structure.

The Notes to Consolidated Financial Statements are an integral part of the accompanying consolidated financial statements of WGL Holdings and its subsidiaries, including Washington Gas. Except where otherwise noted, these notes apply equally to WGL Holdings and Washington Gas. Due to the seasonal nature of Washington Gas’ and WGEServices’ businesses, the results of operations presented herein do not necessarily represent the expected results of either WGL Holdings or Washington Gas for the entire fiscal year ending September 30, 2004.

The interim consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Therefore, certain financial information and footnote disclosures accompanying annual financial statements prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP) are omitted in this interim report pursuant to the SEC rules and regulations. The interim consolidated financial statements and notes thereto should be read in conjunction with the combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2003.

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

For a description of the Company’s accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements of the combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2003. There have been no significant changes to these policies subsequent to September 30, 2003.

Stock-Based Compensation

The Company applies Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock-based compensation plans. In accordance with APB No. 25, the Company records no compensation expense related to stock option grants. The Company records compensation expense for performance shares awarded to certain key employees. If compensation expense for stock options had been determined and recorded based on the fair value at their grant dates consistent with the method prescribed by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, the Company’s net income and earnings per share would have been reduced to the amounts shown in the following table.

WGL Holdings, Inc.
Washington Gas Light Company
Part I — Financial Information
Item 1 — Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)

Pro Forma Effect of Stock-Based Compensation



	Three Months Ended						Six Months Ended
	March 31,						March 31,

(In thousands, except per share data)	2004			2003			2004			2003

Net Income As Reported	$	78,055		$	80,963		$	117,598		$	132,585
Add: Stock-based employee compensation expense included in reported net income, net of tax (a)		561			381			960			646
Deduct: Total stock-based employee compensation expense determined under the fair value-based method, net of tax (b)		(669	)		(468	)		(1,176	)		(820	)

Pro Forma Net Income	$	77,947		$	80,876		$	117,382		$	132,411

Earnings per average common share—basic
As reported	$	1.60		$	1.67		$	2.42		$	2.73
Pro forma	$	1.60		$	1.66		$	2.41		$	2.73
Earnings per average common share—diluted
As reported	$	1.60		$	1.66		$	2.41		$	2.72
Pro forma	$	1.60		$	1.66		$	2.40		$	2.72

(a) Reflects compensation expense related to performance shares.

(b) Reflects compensation expense related to performance shares and stock options.

Recent Accounting Standards

In December 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 132 (revised 2003), Employers’ Disclosure about Pensions and Other Postretirement Benefits, which amends SFAS No. 87, Employers’ Accounting for Pensions, SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, and replaces SFAS No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits (collectively referred to as “SFAS No. 132 (revised)”). SFAS No. 132 (revised) expands employers’ disclosures about pension and other post-retirement benefit plans to present more information regarding the economic resources and obligations of such plans in terms of the plans’ assets, obligations, cash flows and net periodic benefit costs. Additionally, SFAS No. 132 (revised) requires interim-period disclosures regarding plan benefit costs and plan contributions. The Company will be required to adopt the new annual disclosure requirements of SFAS No. 132 (revised) effective as of September 30, 2004. The interim-period disclosure requirements became effective for the Company as of March 31, 2004 (refer to Note 12—Pensions and Other Post-Retirement Benefit Plans). As SFAS No. 132 (revised) does not change the measurement or recognition of pension and other post-retirement benefit costs as required by SFAS No. 87, SFAS No. 88 and SFAS No. 106, adoption of this new standard had no effect on the Company’s consolidated financial statements.

In January 2004, the FASB issued FASB Staff Position (FSP) No. 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP No. 106-1 permits the sponsor of a post-retirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act), and requires certain disclosures pending further consideration of the underlying accounting issue. The Act, signed into law in December 2003, introduces a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare (part D).

WGL Holdings, Inc.
Washington Gas Light Company
Part I — Financial Information
Item 1 — Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)

As of March 31, 2004, the Company has elected to follow the deferral provisions of FSP No. 106-1. In accordance with this FSP, any measures of the accumulated post-retirement benefit obligation or net periodic post-retirement benefit cost in the Company’s consolidated financial statements or accompanying notes do not reflect the effects of the Act on its plans. Specific authoritative guidance on the accounting for the federal subsidy under the Act is pending; such guidance, when finalized, may require the Company to change previously reported information.

NOTE 2. SHORT-TERM DEBT

As of March 31, 2004, Washington Gas and WGL Holdings had revolving credit agreements with a group of banks of $175 million and $130 million, respectively, in support of their short-term debt requirements. Effective April 28, 2004, these credit facilities were replaced by new credit agreements with a group of banks in the amount of $175 million each for Washington Gas and WGL Holdings. The new credit facility for Washington Gas expires on April 28, 2009, and permits the regulated utility to request an additional line of credit of $100 million above the original credit limit, for a maximum total of $275 million. The new WGL Holdings’ credit facility expires on April 27, 2007, and permits the Company to request an additional line of credit of $50 million above the original credit limit, for a maximum total of $225 million.

NOTE 3. LONG-TERM DEBT

Washington Gas issues unsecured Medium-Term Notes (MTNs) with individual terms regarding interest rates, maturities and call or put options that are an integral part of the basic debt instrument. These notes can have maturity dates of one or more years from the date of issuance. At March 31, 2004, Washington Gas was authorized to issue up to $213.0 million of long-term debt under a shelf registration that was declared effective by the SEC on April 24, 2003.

On November 17, 2003, Washington Gas paid $37.2 million plus accrued interest to redeem $36.0 million of 6.95 percent MTNs that were due in 2024, and replaced this debt with $37.0 million of 4.88 percent MTNs due in 2013 that were issued in November 2003. The $1.2 million loss incurred in connection with the debt retirement was deferred and is being amortized over the life of the newly issued debt in accordance with regulatory accounting. Refer to Note 7—Derivative Instruments for a discussion of a derivative transaction that was settled concurrent with the new debt issuance.

NOTE 4. COMMON SHAREHOLDERS’ EQUITY

The tables below reflect the components of “Common shareholders’ equity” for WGL Holdings, Inc. and Washington Gas as of March 31, 2004 and September 30, 2003.

WGL Holdings, Inc.
Components of Common Shareholders’ Equity



(In thousands)	Mar. 31, 2004			Sept. 30, 2003

Common stock, no par value, 120,000,000 shares authorized, 48,650,635 shares issued	$	471,497		$	471,497
Paid-in capital		3,411			2,582
Retained earnings		432,137			345,927
Deferred compensation		(19	)		(32	)
Accumulated other comprehensive loss, net of taxes		(655	)		(716	)
Treasury stock—at cost, 2,887 and 39,072 shares, respectively		(104	)		(1,040	)

Total	$	906,267		$	818,218

WGL Holdings, Inc.
Washington Gas Light Company
Part I — Financial Information
Item 1 — Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)

Washington Gas Light Company
Components of Common Shareholder’s Equity



(In thousands)	Mar. 31, 2004			Sept. 30, 2003

Common stock, $1 par value, 80,000,000 shares authorized, 46,479,536 shares issued	$	46,479		$	46,479
Paid-in capital		452,012			450,813
Retained earnings		360,365			281,958
Deferred compensation		(19	)		(32	)
Accumulated other comprehensive loss, net of taxes		(655	)		(716	)

Total	$	858,182		$	778,502

NOTE 5. COMPREHENSIVE INCOME

The tables below reflect the components of “Comprehensive income” for the three and six months ended March 31, 2004 and 2003 for WGL Holdings, Inc. and Washington Gas Light Company. Items that are excluded from “Net income” and charged directly to “Common shareholders’ equity” are accumulated in “Other comprehensive income (loss), net of taxes.” The amount of “Accumulated other comprehensive loss, net of taxes” is included in “Common shareholders’ equity” (refer to Note 4—Common shareholders’ equity).

WGL Holdings, Inc.
Components of Comprehensive Income



	Three Months Ended				Six Months Ended

(In thousands)	March 31, 2004		March 31, 2003		March 31, 2004		March 31, 2003

Net income (applicable to common stock)	$	78,055	$	80,963	$	117,598	$	132,585
Other comprehensive income (loss), net of taxes—minimum pension liability adjustment		61		112		61		(676	)

Comprehensive income	$	78,116	$	81,075	$	117,659	$	131,909

Washington Gas Light Company
Components of Comprehensive Income



	Three Months Ended				Six Months Ended

(In thousands)	March 31, 2004		March 31, 2003		March 31, 2004		March 31, 2003

Net income (before preferred stock dividends)	$	74,403	$	82,521	$	110,446	$	130,152
Other comprehensive income (loss), net of taxes—minimum pension liability adjustment		61		112		61		(676	)

Comprehensive income	$	74,464	$	82,633	$	110,507	$	129,476

NOTE 6. EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Diluted EPS assumes the issuance of common shares pursuant to stock-based compensation plans at the beginning of the applicable period. The following table reflects the computation of the Company’s basic and diluted EPS for WGL Holdings for the three and six months ended March 31, 2004 and 2003.

WGL Holdings, Inc.
Washington Gas Light Company
Part I — Financial Information
Item 1 — Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)

Basic and Diluted EPS



	Net				Per Share
*(In thousands, except per share data)*	Income		Shares		Amount

Three Months Ended March 31, 2004
Basic EPS:
Net income	$	78,055		48,643	$	1.60
Stock-based compensation plans		—		216		—

Diluted EPS:
Net income	$	78,055		48,859	$	1.60

Three Months Ended March 31, 2003
Basic EPS:
Net income	$	80,963		48,582	$	1.67
Stock-based compensation plans		—		156		—

Diluted EPS:
Net income	$	80,963		48,738	$	1.66

Six Months Ended March 31, 2004
Basic EPS:
Net income	$	117,598		48,634	$	2.42
Stock-based compensation plans		—		202		—

Diluted EPS:
Net income	$	117,598		48,836	$	2.41

Six Months Ended March 31, 2003
Basic EPS:
Net income	$	132,585		48,578	$	2.73
Stock-based compensation plans		—		147		—

Diluted EPS:
Net income	$	132,585		48,725	$	2.72

NOTE 7. DERIVATIVE INSTRUMENTS

Washington Gas enters into forward contracts and other related transactions for the purchase of natural gas that qualify as derivative instruments under SFAS No. 133. Certain forward contracts are recorded on the balance sheet at fair value as they contain volumetric variability or optionality, or contain provisions that allow for a net settlement. The net fair value loss of these forward contracts and other related derivative transactions at March 31, 2004 and September 30, 2003 totaled $3.8 million and $3.3 million, respectively. These amounts were recorded as a payable, with a corresponding amount recorded as a regulatory asset in accordance with regulatory accounting.

Washington Gas enters into derivative instruments that are designed to minimize interest-rate risk associated with planned issuances of MTNs. In June 2003, Washington Gas entered into two forward-starting swaps with an aggregate notional principal amount of $62.0 million to mitigate a substantial portion of interest-rate risk associated with certain future debt transactions. These swaps were designated as cash flow hedges and carried at fair value. Concurrent with the issuance of MTNs in November 2003 (see Note 3—Long-Term Debt), Washington Gas terminated $37.0 million of the total $62.0 million aggregate notional principal of the forward-starting swaps. Washington Gas received $2.6 million associated with the settlement of this hedge agreement, which was recorded as a regulatory liability and is being amortized over the life of the newly issued MTNs in accordance with regulatory accounting. In December 2003, Washington Gas terminated the remaining $25.0 million aggregate notional principal of the forward-starting swaps, and received $1.2 million associated with the settlement of this hedge agreement which was recorded as a regulatory liability. On April 15, 2004, Washington Gas initiated an interest-rate swap against

WGL Holdings, Inc.
Washington Gas Light Company
Part I — Financial Information
Item 1 — Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)

a $50 million MTN due July 9, 2009. The swap exchanges the fixed interest rate on the MTN of 6.92% for an interest rate based on 6-month LIBOR plus 2.65 percent. Washington Gas can terminate this swap at any time.

The Company’s non-regulated retail energy-marketing subsidiary, WGEServices, holds certain contracts for the sale and purchase of natural gas, as well as derivative instruments (primarily in the form of call options, put options and futures contracts) related to the sale and purchase of natural gas. The derivative instruments were recorded at their fair value on the Company’s Consolidated Balance Sheets. Incremental changes in the fair value of these various derivative instruments are reflected in the earnings of the retail energy-marketing segment. At September 30, 2003, these derivatives were valued at $188,000, and at March 31, 2004, WGEServices had no outstanding positions associated with their natural gas derivatives. WGEServices recorded net gains of $485,000 and $278,000 for the six months ended March 31, 2004 and 2003, respectively, related to their natural gas derivatives. For the three months ended March 31, 2004 and 2003, WGEServices recorded a net loss of $(369,000) and a net gain of $160,000, respectively.

NOTE 8. OPERATING SEGMENT REPORTING

WGL Holdings reports three operating segments: (i) regulated utility; (ii) retail energy-marketing; and (iii) heating ventilating and air conditioning (HVAC) activities.

With approximately 93 percent of WGL Holdings’ consolidated total assets, the regulated utility segment is the Company’s core business. Represented almost entirely by Washington Gas, the regulated utility segment provides regulated gas distribution services (including the sale and delivery of natural gas, meter reading, responding to customer inquiries and bill preparation) to customers in the metropolitan areas of Washington, D.C., Maryland and Virginia. In addition to the regulated operations of Washington Gas, the regulated utility segment includes the operations of Hampshire Gas Company, an underground natural gas storage facility that is regulated by the Federal Energy Regulatory Commission and operated on behalf of Washington Gas.

Through WGEServices, the retail energy-marketing segment sells natural gas and electricity directly to retail customers, both inside and outside Washington Gas’ traditional service territory, in competition with unregulated gas and electricity marketers. Through two wholly owned subsidiaries, WGESystems and ACI, the HVAC segment designs, renovates and services mechanical heating, ventilating and air conditioning systems for commercial and governmental customers.

Certain activities of the Company are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and the activities do not fit into one of the segments contained in the Company’s financial statements. With respect to segment reporting, these activities are aggregated in the category “Other Activities” of the Company’s non-utility operations as presented below in the Operating Segment Financial Information. These activities are included in the Consolidated Statements of Income in the appropriate lines, revenues and expenses, in “Non-Utility Operations.”

The same accounting policies applied in preparing the Company’s consolidated financial statements also apply to the reported segments. While net income or loss is the primary criterion for measuring a segment’s performance, the Company also evaluates its operating segments based on other relevant factors, such as penetration into their respective markets and return on invested capital. The following tables present operating segment information for the three and six months ended March 31, 2004 and 2003.

WGL Holdings, Inc.
Washington Gas Light Company
Part I — Financial Information
Item 1 — Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)

Operating Segment Financial Information



				Non-Utility Operations
	Regulated			Retail Energy—						Other						Eliminations/
(In thousands)	Utility			Marketing			HVAC			Activities			Total			Other			Consolidated

Three Months Ended March 31, 2004

Total Revenues	$	603,281		$	265,680		$	7,246		$	678		$	273,604		$	(14,633	)	$	862,252
Operating Expenses:
Depreciation and Amortization		22,961			54			34			—			88			—			23,049
Other Operating Expenses *(a)*		445,281			265,710			8,567			1,481			275,758			(14,633	)		706,406
Income Tax Expense (Benefit)		49,629			(116	)		(533	)		239			(410	)		—			49,219

Total Operating Expenses		517,871			265,648			8,068			1,720			275,436			(14,633	)		778,674

Operating Income (Loss)		85,410			32			(822	)		(1,042	)		(1,832	)		—			83,578
Interest Expense — Net		10,500			214			—			251			465			(219	)		10,746
*Other Non-Operating Income (Expense)(b)***		(390	)		(1	)		48			6,115			6,162			(219	)		5,553
Dividends on Washington Gas Preferred Stock		330			—			—			—			—			—			330

Net Income (Loss)	$	74,190		$	(183	)	$	(774	)	$	4,822		$	3,865		$	—		$	78,055

Total Assets	$	2,434,387		$	194,656		$	21,690		$	128,921		$	345,267		$	(167,338	)	$	2,612,316

Capital Expenditures/Investments	$	28,286		$	17		$	46		$	—		$	63		$	—		$	28,349


Three Months Ended March 31, 2003 (c)

Total Revenues	$	626,424		$	222,692		$	7,551		$	622		$	230,865		$	(6,216	)	$	851,073
Operating Expenses
Depreciation and Amortization		21,189			74			33			156			263			—			21,452
Other Operating Expenses (a)		456,903			223,500			7,941			880			232,321			(6,216	)		683,008
Income Tax Expense (Benefit)		54,443			(428	)		(205	)		(152	)		(785	)		—			53,658

Total Operating Expenses		532,535			223,146			7,769			884			231,799			(6,216	)		758,118

Operating Income (Loss)		93,889			(454	)		(218	)		(262	)		(934	)		—			92,955
Interest Expense — Net		11,361			144			5			454			603			(387	)		11,577
Other Non-Operating Income (Expense)(b)		(68	)		—			(8	)		378			370			(387	)		(85	)
Dividends on Washington Gas Preferred Stock		330			—			—			—			—			—			330

Net Income (Loss)	$	82,130		$	(598	)	$	(231	)	$	(338	)	$	(1,167	)	$	—		$	80,963

Total Assets	$	2,409,570		$	156,700		$	24,857		$	85,717		$	267,274		$	(71,020	)	$	2,605,824

Capital Expenditures/Investments	$	32,204		$	6		$	16		$	12		$	34		$	—		$	32,238

(a) Includes cost of gas and revenue taxes.

(b) Amounts reported are net of applicable income taxes.

(c) Certain amounts for the three months ended March 31, 2003 period have been reclassified to conform to the presentation of the current fiscal year period. Eliminations included in the Other Activities segment for fiscal year 2003 have been reclassified into the Eliminations/Other column to conform to the same presentation in fiscal year 2004.

WGL Holdings, Inc.
Washington Gas Light Company

Part 1 — Financial Information
Item 1— Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)

Operating Segment Financial Information



				Non-Utility Operations
	Regulated			Retail Energy-					Other					Eliminations/
(In thousands)	Utility			Marketing		HVAC			Activities			Total		Other			Consolidated

Six Months Ended March 31, 2004

Total Revenues	$	986,411		$	467,938	$	14,780		$	861		$	483,579	$	(22,449	)	$	1,447,541
Operating Expenses:
Depreciation and Amortization		48,166			108		67			43			218		—			48,384
Other Operating Expenses *(a)*		730,692			459,931		16,950			1,570			478,451		(22,449	)		1,186,694
Income Tax Expense (Benefit)		74,387			2,969		(867	)		12			2,114		—			76,501

Total Operating Expenses		853,245			463,008		16,150			1,625			480,783		(22,449	)		1,311,579

Operating Income (Loss)		133,166			4,930		(1,370	)		(764	)		2,796		—			135,962
Interest Expense — Net		21,834			412		9			501			922		(419	)		22,337
*Other Non-Operating Income (Expense)(b)***		(1,803	)		109		107			6,639			6,855		(419	)		4,633
Dividends on Washington Gas Preferred Stock		660			—		—			—			—		—			660

Net Income (Loss)	$	108,869		$	4,627	$	(1,272	)	$	5,374		$	8,729	$	—		$	117,598

Total Assets	$	2,434,387		$	194,656	$	21,690		$	128,921		$	345,267	$	(167,338	)	$	2,612,316

Capital Expenditures/Investments	$	49,450		$	40	$	129		$	—		$	169	$	—		$	49,619


Six Months Ended March 31, 2003(c)

Total Revenues	$	1,005,129		$	396,633	$	18,140		$	1,120		$	415,893	$	(9,929	)	$	1,411,093
Operating Expenses
Depreciation and Amortization		40,804			148		66			312			526		—			41,330
Other Operating Expenses (a)		727,680			390,090		19,143			1,939			411,172		(9,929	)		1,128,923
Income Tax Expense (Benefit)		82,343			2,423		(448	)		432			2,407		—			84,750

Total Operating Expenses		850,827			392,661		18,761			2,683			414,105		(9,929	)		1,255,003

Operating Income (Loss)		154,302			3,972		(621	)		(1,563	)		1,788		—			156,090
Interest Expense — Net		23,073			280		9			399			688		(285	)		23,476
Other Non-Operating Income (Expense)(b)		(1,528	)		10		14			2,420			2,444		(285	)		631
Dividends on Washington Gas Preferred Stock		660			—		—			—			—		—			660

Net Income (Loss)	$	129,041		$	3,702	$	(616	)	$	458		$	3,544	$	—		$	132,585

Total Assets	$	2,409,570		$	156,700	$	24,857		$	85,717		$	267,274	$	(71,020	)	$	2,605,824

Capital Expenditures/Investments	$	60,313		$	8	$	175		$	12		$	195	$	—		$	60,508

(a) Includes cost of gas and revenue taxes.

(b) Amounts reported are net of applicable income taxes.

(c) Certain amounts for the six months ended March 31, 2003 period have been reclassified to conform to the presentation of the current fiscal year period. Eliminations included in the Other Activities segment for fiscal year 2003 have been reclassified into the Eliminations/Other column to conform to the same presentation in fiscal year 2004.

NOTE 9. TRANSACTIONS BETWEEN WASHINGTON GAS AND AFFILIATES

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

Washington Gas provides administrative and general support to affiliates, such as cash collections and other services, and has filed tax returns that include affiliated taxable transactions. The actual costs of these services are billed to the appropriate affiliates and to the extent such billings are not yet paid, they are reflected in “Receivables from associated companies” on the Washington Gas Balance Sheets. Cash collected by Washington Gas on behalf of its affiliates but not yet transferred is recorded in “Payables to associated companies” on the Washington Gas Balance Sheets. Washington Gas does not recognize revenues or expenses associated with providing these services.

Washington Gas and its affiliates borrow and lend funds through the operation of a money pool. At March 31, 2004 and September 30, 2003, the Washington Gas Balance Sheets reflected a total of $50.9 million and $10.0 million, respectively, of net payables to associated companies. All affiliated transactions, including these balances, were eliminated from the WGL Holdings Consolidated Balance Sheets in accordance with GAAP.

WGL Holdings, Inc.
Washington Gas Light Company
Part I — Financial Information
Item 1 — Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)

Additionally, Washington Gas provides gas balancing services related to storage, injections, withdrawals and deliveries to all unregulated energy marketers participating in the sale of natural gas on an unregulated basis through the customer choice programs that operate in its service territory. Washington Gas records revenues for these balancing services pursuant to tariffs approved by the appropriate regulatory bodies. In conjunction with such services, Washington Gas charged WGEServices, an affiliated energy marketer, $14.6 million and $6.2 million for the three months ended March 31, 2004 and 2003, respectively. In the six months ended March 31, 2004 and 2003 the charges were $22.4 million and $9.9 million, respectively. The related party amounts have been eliminated in the consolidated financial statements of WGL Holdings.

NOTE 10. SALE OF CARRIED INTEREST AND ASSETS

During the second quarter of fiscal year 2004, the Company’s non-utility operations recognized pre-tax earnings of $6.4 million from the sale, by an unrelated third party, of two buildings at Maritime Plaza, a commercial development project in which the Company held a carried interest. This carried interest had no cost basis, and was accounted for under the equity method of accounting. WGL Holdings utilized a capital loss carryforward to offset the federal income taxes associated with this transaction and, after considering other local income tax provisions, WGL Holdings recognized after-tax earnings of $5.8 million.

In the second quarter ended March 31, 2003, the regulated utility recognized a pre-tax gain of $4.1 million (or $2.5 million after-tax) from the sale of the Company’s former headquarters building and land located in downtown Washington, D.C. This gain was reported in “Other income (expenses)-net” in accordance with regulatory accounting. Results for the quarter ended March 31, 2003 also reflect Company estimates for potential refunds to customers based on the outcome of regulatory decisions related to this gain.

In the first quarter of fiscal year 2003, the Company’s non-utility operations recognized a pre-tax gain of $1.5 million ($926,000 after-tax) from the sale of its interest in a land development venture.

NOTE 11. COMMITMENTS AND CONTINGENCIES

Regulated Utility Operations

Certain legal and administrative proceedings associated with the Company’s business, including rate case contingencies, involve WGL Holdings and/or its subsidiaries. In the opinion of management, the Company has recorded an adequate provision for probable losses or refunds to customers for rate case contingencies related to these proceedings in accordance with SFAS No. 5, Accounting for Contingencies.

District of Columbia Jurisdiction

In response to an Order issued by the Public Service Commission of the District of Columbia (PSC of DC) on March 28, 2003, the District of Columbia Office of the People’s Counsel (DC OPC-a participant in the regulatory proceeding) filed an appeal with the District of Columbia Court of Appeals. The filing sought 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 had upheld a previous ruling that rejected a proposal by the DC OPC to refund to customers, asset management revenues previously received by Washington Gas. On March 18, 2004, the District of Columbia Court of Appeals affirmed the PSC of DC’s March 28, 2003 ruling with respect to the treatment of Washington Gas’ asset management revenues.

WGL Holdings, Inc.
Washington Gas Light Company
Part I — Financial Information
Item 1 — Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)

Virginia Jurisdiction

On June 14, 2002, Washington Gas filed an application with the State Corporation Commission of Virginia (SCC of VA) to increase annual revenues in Virginia. The Shenandoah Gas Division of Washington Gas 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. 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. From that time until a refund was made, as discussed below, Washington Gas recorded a provision for rate refunds in each period representing the estimated refund required based on management’s judgment of the rate case outcome.

On December 18, 2003, the SCC of VA issued a final Order in this proceeding which granted Washington Gas an annual revenue increase of $10.8 million, and reduced the annual revenue of the Shenandoah Gas Division of Washington Gas by $867,000. The combination of this increase in the rates of Washington Gas and the reduction in the rates of the Shenandoah Division of Washington Gas yields a net increase in annual revenues of $9.9 million. The final Order allowed a rate of return on common equity of 10.50 percent and an overall rate of return of 8.44 percent.

Refunds to customers, with interest, were made pursuant to the final Order during the second quarter ended March 31, 2004. The difference between the amount refunded to customers and the amount of the provision for rate refunds previously recorded by Washington Gas was not material. Accordingly, this refund had no material effect on earnings for the three and six months ended March 31, 2004.

In the final Order, the SCC of VA ordered that the implementation date of new depreciation rates should be January 1, 2002, as opposed to November 12, 2002 as originally requested and implemented by Washington Gas. This required Washington Gas to record additional depreciation expense for the quarter ended December 31, 2003 of approximately $3.5 million on a pre-tax basis.

The SCC of VA also ordered Washington Gas to reduce its rate base by $28 million, which is net of accumulated deferred income taxes of $14 million, and to establish an equivalent regulatory asset for regulatory accounting purposes. This represents the difference between the accumulated reserve for depreciation recorded on the books of Washington Gas and a theoretical reserve that was derived by the Staff of the SCC of VA (VA Staff) as part of its review of Washington Gas’ depreciation rates, less accumulated deferred income taxes. This difference is being amortized as a component of depreciation expense over 32 years. The SCC of VA provided for both a return on, and a return of, this investment.

However, in approving this treatment described in the preceding paragraph, the SCC of VA further ordered that an annual “earnings test” be performed to determine if Washington Gas has earned in excess of its allowed rate of return on common equity for its Virginia operations. The current procedure for performing this earnings test does not normalize the actual return on equity for the effect of weather over the applicable twelve-month period. To the extent that Washington Gas earns in excess of its allowed return on equity in any annual earnings test period, Washington Gas would be required to increase depreciation expense (after considering the impact of income tax benefits) and increase the accumulated reserve for depreciation for the amount of the actual earnings in excess of the earnings produced by the 10.50 percent allowed return on equity. Under the SCC of VA’s requirements for performing earnings tests, if weather is warmer than normal in a particular annual earnings test period, Washington Gas would not be allowed to restore any amount of earnings previously eliminated as a result of this earnings test. This annual earnings

WGL Holdings, Inc.
Washington Gas Light Company
Part I — Financial Information
Item 1 — Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)

test shall continue to be performed until the $28 million difference between the accumulated reserve for depreciation recorded on Washington Gas’ books and the theoretical reserve derived by the VA Staff, net of accumulated deferred income taxes, is eliminated or the level of the regulatory asset established for regulatory accounting purposes is adjusted as a result of a future depreciation study. In connection with the required earnings test, Washington Gas performed a preliminary analysis forecasting 12-month results for the period ended June 30, 2004 based on information as of March 31, 2004, and concluded that Washington Gas may exceed its allowed return on equity for this period. As a result, Washington Gas recorded a $554,000 additional charge to depreciation during the three months ended March 31, 2004. This assessment could change if the VA Staff differs with management’s calculations or methodology, or if actual results for the twelve months ended June 30, 2004 differ from the results forecasted for the remaining three months of this period due to the effects of pending rate relief, deviations of weather from normal levels, or other factors.

On January 27, 2004, Washington Gas filed an expedited rate case with the SCC of VA that seeks to increase annual revenues in Virginia by $19.6 million, with an overall rate of return of 8.70 percent and a 10.50 percent return on equity. On February 26, 2004, based upon expedited rate case filing procedures, Washington Gas placed the proposed revenue increase into effect, subject to refund, pending the SCC of VA’s final decision in the proceeding. Accordingly, Washington Gas’ financial statements reflect a provision for rate refunds, representing the refund required based on management’s judgment of the rate case outcome.

Non-Utility Operations

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

Financial Guarantees

WGL Holdings and Washington Gas Resources have guaranteed payments for certain purchases of natural gas and electricity made by WGEServices. At March 31, 2004, these guarantees totaled $326.3 million, of which $323.3 million were guaranteed by WGL Holdings and $3.0 million were guaranteed by Washington Gas Resources. Termination of these guarantees is coincident with the satisfaction of all obligations of WGEServices covered by the guarantees. WGL Holdings also had guarantees totaling $6.0 million at March 31, 2004 that were made on behalf of certain of its non-utility subsidiaries associated with their banking transactions. Of the total guarantees of $332.3 million, $42.0 million and $600,000 held by WGL Holdings are due to expire on December 31, 2004 and February 29, 2008, respectively. The remaining guarantees of $289.7 million do not have specific maturity dates. For all of its financial guarantees, WGL Holdings may cancel any or all future obligations imposed by the guarantees upon written notice to the counterparty, but WGL Holdings would continue to be responsible for the obligations which had been created under the guarantees prior to the effective date of the cancellation.

Construction Project Financing

In October 2000, Washington Gas contracted with the U.S. General Services Administration (the GSA) to construct certain facilities at the GSA central plant in Washington, DC. Payments to Washington Gas for this construction were to be made by the GSA over a 15-year period. In November 2000, Washington Gas and General Electric Capital Assurance Company (GEFA) entered into a long-term financing arrangement, whereby GEFA funded this construction project. As part of this financing arrangement, Washington Gas assigned to GEFA the 15-year stream of payments due from the GSA. The amount of this long-term financing arrangement, including change orders, origination fees and capitalized finance charges was $69.4 million. As the long-

WGL Holdings, Inc.
Washington Gas Light Company
Part I — Financial Information
Item 1 — Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)

term financing from GEFA was funded, Washington Gas established a note receivable representing the GSA’s obligation to remit principal and interest. Upon completion and acceptance of phases of the construction project, Washington Gas accounts for the transfer of the financed asset as an extinguishment of long-term debt and removes both the note receivable and long-term financing from its financial statements. Work on the construction project that has not been completed or accepted by the GSA was valued at $15.6 million, which represents an obligation on Washington Gas’ Balance Sheet at March 31, 2004. At any time before the contract with GSA is fully accepted, should there be a contract default, such as, among other things, non-payment by the GSA, GEFA may call on Washington Gas to fund the entire unpaid principal in exchange for which Washington Gas would receive the right to the stream of repayments from the GSA. As of March 31, 2004, the GSA had made all required payments under this long-term financing arrangement, and the remaining unpaid principal balance was $65.3 million. The Company expects full acceptance of this remaining balance on or before December 31, 2004. Once final acceptance by the GSA is made, GEFA will have no recourse against the Company related to this long-term debt.

Electric Supplier Contingency

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

The performance risk of the MAEM contract is mitigated through a Security and Escrow agreement entered into between WGEServices and MAEM prior to the bankruptcy filing. Under the Security and Escrow agreement, WGEServices has access to collateral that is intended to cover the difference between the current market price of electricity and the price at which WGEServices has contracted to buy electricity. In the opinion of counsel to the Company, WGEServices has the contractual right to draw on the escrow funds in the account (which totaled $15 million as of March 31, 2004) if the contracts between WGEServices and MAEM are terminated. The amount of WGEServices’ exposure in the event of termination of the contracts between WGEServices and MAEM is estimated to be less than the amount of collateral included in the escrow account. This estimate of WGEServices’ exposure to contract termination is based upon acquiring supply, priced at forward electricity prices through the expiration of the existing sales contracts or until WGEServices exercises certain damage limitation provisions of its customers’ sales contracts. The actual exposure for WGEServices may differ from the estimate due to changes in timing of any contract termination, deviations from normal weather, changes in future market conditions, or other factors.

Since the bankruptcy filing, MAEM has continued to honor its supply obligations to WGEServices. In October 2003, WGEServices and MAEM signed a post-bankruptcy petition contract that enables WGEServices to renew expiring contracts with its current electric retail customers. This post-bankruptcy petition contract is also a full requirements contract with no fixed commitment to purchase electricity.

NOTE 12. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

The following tables show the components of net periodic benefit costs (income) recognized in the Company’s financial statements during the three and six months ended March 31, 2004 and 2003:

WGL Holdings, Inc.
Washington Gas Light Company
Part I — Financial Information
Item 1 — Financial Statements (concluded)
Notes to Consolidated Financial Statements (Unaudited)


Components of Net Periodic Benefit Costs (Income)
	Three Months Ended						Three Months Ended
	March 31, 2004						March 31, 2003

	Pension			Health and			Pension			Health and
(In thousands)	Benefits			Life Benefits			Benefits			Life Benefits

Components of net periodic benefit costs (income)
Service cost	$	2,588		$	2,295		$	2,315		$	2,010
Interest cost		9,029			5,316			8,971			5,137
Expected return on plan assets		(13,079	)		(3,079	)		(13,507	)		(2,853	)
Recognized prior service cost		569			—			569			—
Recognized actuarial loss (gain)		240			1,527			130			276
Amortization of transition obligation (asset)-net		44			1,436			54			2,383

Net periodic benefit cost (income)		(609	)		7,495			(1,468	)		6,953

Amount capitalized as construction costs		182			(1,176	)		420			(1,423	)
Amount deferred as regulatory asset/liability-Net		(704	)		(297	)		394			198
Other		55			543			(266	)		—

Amount charged (credited) to expense	$	(1,076	)	$	6,565		$	(920	)	$	5,728


Components of Net Periodic Benefit Costs (Income)
	Six Months Ended						Six Months Ended
	March 31, 2004						March 31, 2003

	Pension			Health and			Pension			Health and
(In thousands)	Benefits			Life Benefits			Benefits			Life Benefits

Components of net periodic benefit costs (income)
Service cost	$	5,177		$	4,589		$	4,629		$	4,021
Interest cost		18,057			10,632			17,942			10,274
Expected return on plan assets		(26,158	)		(6,157	)		(27,014	)		(5,707	)
Recognized prior service cost		1,138			—			1,139			—
Recognized actuarial loss (gain)		479			3,053			261			551
Amortization of transition obligation (asset)-net		88			2,872			107			4,767

Net periodic benefit cost (income)		(1,219	)		14,989			(2,936	)		13,906

Amount capitalized as construction costs		400			(2,622	)		861			(2,894	)
Amount deferred as regulatory asset/liability-Net		(1,150	)		(216	)		785			394
Other		8			2			(319	)		—

Amount charged (credited) to expense	$	(1,961	)	$	12,153		$	(1,609	)	$	11,406

During fiscal year 2004, the Company has not made, and does not expect to make any contributions related to its qualified, trusteed, non-contributory defined benefit pension plan covering all active and vested former employees of Washington Gas.

The Company expects its fiscal year 2004 payments on behalf of participants in its non-funded supplemental executive retirement plan (SERP) to be $1.2 million. During the six months ended March 31, 2004, the Company paid $597,000 to SERP participants, and expects to pay an additional $613,000 for the remaining six months of the current fiscal year.

Contributions to the Company’s healthcare and life insurance benefit plans are expected to be $30.2 million for fiscal year 2004. For the six months ended March 31, 2004, the Company has contributed $15.1 million, and expects to contribute an additional $15.1 million for the remainder of fiscal year 2004.

WGL Holdings, Inc.
Part I — Financial Information
Item 2 — Management’s Discussion and Analysis of
Financial Condition and Results of Operations

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

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. (WGL Holdings or the Company) and Washington Gas Light Company (Washington Gas or the regulated utility), 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 Company’s business as described in this Quarterly Report on Form 10-Q. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (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. In addition, WGL Holdings is 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 describes the financial condition and results of operations of Washington Gas, a wholly owned subsidiary that 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 financial statements and the combined notes thereto.

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.

EXECUTIVE OVERVIEW

Introduction

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. WGL Holdings has three primary operating segments that are described below:

Regulated Utility. The Company’s core subsidiary, 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. Additionally, Washington Gas sells natural gas to customers who have not elected to purchase natural gas from unregulated third-party marketers. Washington Gas 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.

Retail Energy-Marketing. Washington Gas Energy Services (WGEServices) sells natural gas and electricity directly to residential, commercial and industrial customers, both inside and outside of the regulated utility’s traditional service territory. WGEServices does not own any natural gas or electric generation, transmission or distribution assets. Rather, it sells natural gas and electricity with the objective of earning a profit, and those commodities are delivered to retail customers through the assets owned by regulated utilities.

Heating, Ventilating and Air Conditioning (HVAC). The Company’s commercial HVAC operations provide turn-key, design-build, and renovation projects to the commercial and government markets.

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

Key Indicators of Financial Condition and Operating Performance

Management believes that the following are key indicators for monitoring the Company’s financial condition and operating performance:

Return on Average Common Equity. This ratio is calculated by dividing net income (applicable to common stock) by average common shareholders’ equity. For the regulated utility, management compares the actual return on equity with the return on equity allowed by regulators and the return on equity that is necessary for the Company to compensate investors sufficiently and be able to continue to attract capital.

Common equity ratio. This ratio is calculated by dividing total common shareholders’ equity by the sum of common shareholders’ equity, preferred stock and long-term debt (including current maturities). Maintaining this ratio in the mid-50 percent range affords the Company financial flexibility and access to long-term capital at relatively low costs. Refer to the “Liquidity and Capital Resources- General Factors Affecting Liquidity” section of Management’s Discussion for a discussion of the Company’s capital structure.

Primary Factors Affecting WGL Holdings and Washington Gas

The principal business, economic and other factors that affect the operations and/or financial performance of WGL Holdings and Washington Gas include:

• weather conditions;

• regulatory environment;

• gas supply and storage capacity;

• natural gas prices;

• competitive environment;

• environmental matters;

• industry consolidation;

• economic conditions and interest rates;

• inflation/deflation;

• labor contracts; and

• potential changes in accounting practices.

For a further discussion of the Company’s business, operating segments and the factors listed above, refer to Management’s Discussion within the Company’s fiscal year 2003 Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES

Preparation of financial statements and related disclosures in accordance with Generally Accepted Accounting Principles in the United States of America (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 realizing estimates for legal and environmental contingencies, and the probability of recovering costs and investments in both the regulated utility and non-utility operations.

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

The following critical accounting policies require management’s judgment and estimation, where such estimates may have a material effect on the consolidated financial statements.

• accounting for utility revenue and cost of gas recognition;

• accounting for regulatory operations — regulatory assets and liabilities;

• accounting for income taxes; and

• accounting for contingencies.

For a description of these critical accounting policies, refer to Management’s Discussion within the combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2003.

WGL HOLDINGS, INC.

RESULTS OF OPERATIONS — Three Months Ended March 31, 2004 vs. March 31, 2003

Summary Results

WGL Holdings, Inc. reported net income of $78.1 million, or $1.60 per share, for the three months ended March 31, 2004, the second quarter of the Company’s fiscal year 2004. This compares to net income of $81.0 million, or $1.66 per share, for the same quarter of the prior fiscal year. For the twelve-month period ended March 31, 2004, the Company earned a return on average common equity of 11.0 percent as compared to 11.2 percent for the corresponding prior twelve-month period.

Weather, as measured by heating degree days, for the second quarter of fiscal year 2004 was 10.3 percent colder than normal, and was estimated to have enhanced earnings per share by $0.20. Weather was 16.2 percent colder than normal for the same quarter last fiscal year, and was estimated to have contributed an additional $0.29 per share to earnings for that quarter. Earnings for the current three-month period also reflects a 2.6 percent increase in active customer meters. The impact of rate decisions in all jurisdictions contributed an additional $0.02 per share to earnings for the current quarter in relation to the same quarter of the prior fiscal year. Higher operation and maintenance expenses tempered current quarter earnings.

During the second quarter of the current fiscal year, the Company also realized after-tax earnings of $5.8 million, or $0.12 per share, from the sale, by an unrelated third party, of two buildings at Maritime Plaza, a commercial development project in which the Company held a carried interest under the equity method of accounting (the Maritime sale). In the same period last year, the Company realized an after-tax gain of $2.5 million, or $0.05 per share, from the sale of its former Washington, D.C. headquarters property.

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 commercial heating customers. The regulated utility segment reported net income of $74.2 million, or $1.52 per share, for the second quarter of fiscal year 2004, compared to net income of $82.1 million, or $1.68 per share, for the same quarter of the prior fiscal year. The change in net income primarily reflects a decrease in total gas deliveries to firm customers that fell 19.1 million therms, or 2.9 percent, to 649.5 million therms for the current quarter, due to warmer weather. Weather was 5.5 percent warmer in the current quarter than in the same period of the prior fiscal year.

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

Active customer meters increased by 24,794 from the end of the same quarter of the prior fiscal year. Further contributing to earnings for the current quarter was the impact of new rates that went into effect in Maryland on November 6, 2003, the District of Columbia on November 24, 2003 and Virginia on February 26, 2004. The Virginia rate increase went into effect pursuant to the regulations of the State Corporation Commission of Virginia (SCC of VA), and is subject to refund pending the SCC of VA’s final decision on an expedited rate case that Washington Gas filed on January 27, 2004 (refer to the “Regulatory Matters — Virginia Jurisdiction” section of Management’s Discussion for Washington Gas). The Company’s financial results reflect a provision for rate refunds to customers, representing management’s judgment of the rate case outcome.

The regulated utility’s operation and maintenance expenses increased during the current quarter when compared to the corresponding quarter of the prior fiscal year, primarily reflecting higher labor and benefit costs due primarily to employee severance costs in the current period and increased group insurance costs. The current period also reflects increased outside service costs associated with implementing the provisions of the Sarbanes-Oxley Act, as well as higher uncollectible accounts expense. Depreciation and amortization expense also increased during the current three-month period due to new plant investment, as well as additional depreciation expense of $554,000 recorded in the second quarter of fiscal year 2004 related to the performance of an earnings test required by the December 18, 2003 Virginia rate order (refer to the Regulatory Matters — Virginia Jurisdiction section of the Management’s Discussion for Washington Gas). In addition to higher operation and maintenance expenses and depreciation and amortization expense for the second quarter of fiscal year 2004, earnings comparisons for the regulated utility’s results were affected by the inclusion in the second quarter of fiscal year 2003 of an after-tax gain of $2.5 million, or $0.05 per share, from the sale of the Company’s former headquarters property.

Non-Utility Operating Results

Total net income for the Company’s non-utility operations was $3.9 million, or $0.08 per share, for the three months ended March 31, 2004, as compared to a net loss of $1.2 million, or $0.02 per share, reported for the same three-month period of the prior fiscal year. The following table compares the financial results from non-utility activities for the quarters ended March 31, 2004 and 2003.


Net Income (Loss) Applicable to Non-Utility Activities
	Three Months Ended
	March 31,
(In thousands)	2004			2003			Variance

Retail energy-marketing	$	(183	)	$	(598	)	$	415
Commercial HVAC		(774	)		(231	)		(543	)

Subtotal		(957	)		(829	)		(128	)
Other non-utility activities		4,822			(338	)		5,160

Total	$	3,865		$	(1,167	)	$	5,032

Retail Energy-Marketing. WGL Holdings’ retail energy-marketing subsidiary, WGEServices, sells natural gas and electricity in competition with other unregulated marketers. WGEServices reported a net loss of $183,000 for the second quarter of fiscal year 2004, a $415,000 improvement over the same quarter in fiscal year 2003. This improvement reflects higher gross margins from the sale of natural gas, partially offset by lower gross margins from the sale of electricity. Higher gross margins from gas sales reflect a 20.1 percent increase in the revenue per therm of natural gas sold, coupled with an 8.5 percent increase in natural gas sales volumes. Lower gross margins from electric sales resulted primarily from a 6.4 percent decline in electricity volumes sold due to a reduction in the number of lower-margin residential customers served.

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

Commercial HVAC. Two subsidiaries, American Combustion Industries, Inc. and Washington Gas Energy Systems, Inc., comprise the Company’s commercial HVAC operations. This operating segment reported a net loss of $774,000 for the second quarter of fiscal year 2004, as compared to a net loss of $231,000 for the same quarter last year, principally reflecting lower sales and gross margins.

Other Non-Utility Activities. Transactions not significant enough to be reported as a separate business segment are aggregated as other non-utility activities of the Company and included as part of non-utility operations. Results for other non-utility activities for the current quarter reflect a $5.2 million increase in income from the prior year’s quarter primarily due to after-tax earnings of $5.8 million, or $0.12 per share, realized from the Maritime sale.

Other Income (Expenses) — Net

For the quarter ended March 31, 2004, other income (expenses)-net reflected net income of $5.6 million as compared to a net loss of $85,000 for the quarter ended March 31, 2003. The current period included the after-tax earnings of $5.8 million realized from the Maritime sale, along with miscellaneous income amounts recorded during this period. This compares to an after-tax gain of $2.5 million realized in the comparable quarter of the prior year from the sale of the Company’s former headquarters property.

Interest Expense

The following table depicts the components of interest expense for the quarters ended March 31, 2004 and 2003.


Composition of Interest Expense Changes
	Three Months Ended
	March 31,
(In thousands)	2004			2003		Variance

Long-Term Debt	$	10,465		$	10,671	$	(206	)
Short-Term Debt		317			299		18
Other (Includes AFUDC*)		(36	)		607		(643	)

Total	$	10,746		$	11,577	$	(831	)

* Represents Allowance for Funds Used During Construction.

WGL Holdings’ interest expense of $10.7 million for the three months ended March 31, 2004 decreased $831,000 from the same period last year in part due to a decrease in the average balance of long-term debt outstanding coupled with a decrease in the weighted average cost of these borrowings. Additionally, the decline in other interest expense reflects reduced interest charges associated with the Company’s provision for rate refunds and other miscellaneous items.

RESULTS OF OPERATIONS — Six Months Ended March 31, 2004 vs. March 31, 2003

Summary Results

For the first six months of fiscal year 2004, the Company reported net income of $117.6 million, or $2.41 per share, as compared to net income of $132.6 million, or $2.72 per share, for the same period in fiscal year 2003. Weather for the first six months of fiscal year 2004 was 7.0 percent colder than normal, and was estimated to have improved net income by $0.20 per share. The 18.1 percent colder-than-normal weather for the same period last fiscal year was estimated to have contributed an

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

additional $0.46 per share to net income for that period. Earnings for the current six-month period also reflect customer growth and the impact of favorable rate decisions, partially offset by higher operation and maintenance expenses and increased depreciation and amortization expense. The impact of rate decisions in all jurisdictions contributed an additional $0.03 per share to earnings for the current six-month period in relation to the same period of the prior fiscal year.

The effect of the after-tax earnings of $5.8 million, or $0.12 per share, realized during the current year-to-date period from the Maritime sale was more than offset by amounts recorded in the corresponding period of the prior year, including: (i) an after-tax gain of $2.5 million, or $0.05 per share, realized from the sale of the Company’s former headquarters property, (ii) an after-tax gain of $926,000, or $0.02 per share, realized from the sale of the Company’s interest in a land development venture, and (iii) a $2.7 million, or $0.06 per share, favorable adjustment to income taxes.

Regulated Utility Operating Results

Net income for the regulated utility segment was $108.9 million, or $2.23 per share, for the first six months of fiscal year 2004, compared to net income of $129.0 million, or $2.65 per share, for the comparable period in fiscal year 2003. Firm gas deliveries of 1.05 billion therms were 5.7 percent lower than deliveries for the same six-month period of the prior fiscal year, primarily due to warmer weather. Weather was 9.5 percent warmer in the current six-month period than in the same period of the prior fiscal year. Favorably contributing to earnings for the current six-month period was an increase in active customer meters, and the impact of rate decisions put into effect in all three jurisdictions. Additionally, the inclusion in the first six months of fiscal year 2003 of an after-tax gain of $2.5 million, or $0.05 per share, from the sale of the Company’s former headquarters property, as well as a favorable adjustment to income taxes of $2.7 million, or $0.06 per share, contributed to the earnings comparison for the first six months of fiscal year 2004.

Current year-to-date earnings for the regulated utility segment also reflect higher operation and maintenance expenses due primarily to higher labor and benefit costs that were partially offset by lower expenses associated with uncollectible accounts. The regulated utility segment also incurred higher depreciation and amortization expense attributable to plant investment, as well as the effect of a December 18, 2003 final Order issued by the SCC of VA. In connection with this Order, the Company recorded, in the quarter ended December 31, 2003, additional depreciation expense of $3.5 million (pre-tax), or $0.04 per share, to implement higher depreciation rates applicable to the period from January 1, 2002 through November 11, 2002. The Company also recorded additional depreciation expense of $554,000 in the second quarter of fiscal year 2004 related to the performance of an earnings test required by the December 18, 2003 Virginia rate order (refer to the Regulatory Matters—Virginia Jurisdiction section of the Management’s Discussion for Washington Gas).

Non-Utility Operating Results

Total net income for the Company’s non-utility operations was $8.7 million, or $0.18 per share, for the six months ended March 31, 2004, an improvement of $5.2 million, or $0.11 per share, over the corresponding period of the prior year. The following table compares the financial results from non-utility activities for the six months ended March 31, 2004 and 2003.

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


Net Income (Loss) Applicable to Non-Utility Activities
	Six Months Ended
	March 31,
(In thousands)	2004			2003			Variance

Retail energy-marketing	$	4,627		$	3,702		$	925
Commercial HVAC		(1,272	)		(616	)		(656	)

Subtotal		3,355			3,086			269
Other non-utility activities		5,374			458			4,916

Total	$	8,729		$	3,544		$	5,185

Retail Energy-Marketing. WGEServices reported net income of $4.6 million, or $0.10 per share, for the first six months of fiscal year 2004, a $925,000, or $0.02 per share, improvement over the corresponding period in fiscal year 2003. This improvement reflects higher gross margins from the sale of natural gas, partially offset by lower gross margins from the sale of electricity. Higher gross margins from gas sales reflect a 22.6 percent increase in the revenue per therm of natural gas sold, coupled with a 4.8 percent increase in natural gas sales volumes. Lower electricity margins reflect an 8.7 percent decline in electricity sales volumes, as well as a decline in the gross margin per kilowatt-hour sold.

Commercial HVAC. The commercial HVAC segment reported a net loss of $1.3 million, or $0.03 per share, as compared to a net loss of $616,000, or $0.01 per share, for the corresponding period of the prior fiscal year, due to reduced revenues and lower gross margins.

Other Non-Utility Activities. Results for other non-utility activities for the current six month period reflect a $4.9 million improvement in net income over the same period of the prior fiscal year, primarily due to the inclusion in the current period of the after-tax earnings of $5.8 million, or $0.12 per share, realized from the Maritime sale. In the same period last year, the Company realized an after-tax gain of $926,000, or $0.02 per share, from the sale of its interest in a land development venture.

Other Income (Expenses) — Net

For the six months ended March 31, 2004, other income (expenses)-net reflected income of $4.6 million compared to income of $631,000 for the six months ended March 31, 2003. The significant improvement in income was attributable primarily to the after-tax earnings of $5.8 million realized in the current six-month period from the Maritime sale, along with miscellaneous income amounts recorded during this period. In the same period of the prior fiscal year, the Company realized an after-tax gain of $2.5 million from the sale of its headquarters property, as well as an after-tax gain of $926,000 from the sale of its interest in a real estate venture.

Interest Expense

The following table depicts the components of interest expense for the six months ended March 31, 2004 and 2003.

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


Composition of Interest Expense Changes
	Six Months Ended
	March 31,
(In thousands)	2004		2003		Variance

Long-Term Debt	$	20,935	$	21,623	$	(688	)
Short-Term Debt		774		653		121
Other (Includes AFUDC*)		628		1,200		(572	)

Total	$	22,337	$	23,476	$	(1,139	)

*Represents Allowance for Funds Used During Construction.

WGL Holdings’ interest expense of $22.3 million for the first six months of fiscal year 2004 decreased $1.1 million from the same period last year due in part to a decrease in the average balance of long-term debt outstanding, coupled with a decrease in the weighted average cost of these borrowings. Increased interest costs related to short-term borrowings reflect higher average balances, partially offset by a decrease in the weighted average cost of such borrowings. The decline in other interest expense reflects reduced interest charges associated with the Company’s provision for rate refunds and other miscellaneous items.

LIQUIDITY AND CAPITAL RESOURCES

General Factors Affecting Liquidity

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

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

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

The Company has a goal to maintain its common equity ratio in the mid-50 percent range of total consolidated capital. In addition, the Company typically reduces short-term debt balances in the spring because a significant portion of the Company’s current assets is converted into cash at the end of the winter heating season. Accomplishing these capital structure objectives and maintaining sufficient cash flow are necessary to maintain attractive credit ratings for the Company and Washington Gas, and to allow access to capital at reasonable costs. As of March 31, 2004, total consolidated capitalization, including current maturities of long-term debt, comprised 57.2 percent

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

common equity, 1.8 percent preferred stock and 41.0 percent long-term debt. The cash flow requirements of the Company and the ability to provide satisfactory resources to satisfy those requirements are primarily influenced by the activities of Washington Gas and to a lesser extent the non-utility operations.

The Company believes it has sufficient liquidity to satisfy its financial obligations. At March 31, 2004, the Company did not have any restrictions on its cash balances that would affect the payment of common or preferred stock dividends by WGL Holdings or Washington Gas.

Short-Term Cash Requirements and Related Financing

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

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

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

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

The Company and Washington Gas utilize short-term debt in the form of commercial paper or unsecured short-term bank loans to fund seasonal requirements. The Company’s policy is to maintain bank credit facilities in an amount equal to or greater than its expected maximum short-term debt position. As of March 31, 2004, Washington Gas and WGL Holdings had revolving credit agreements with a group of banks of $175 million and $130 million, respectively, in support of their short-term debt requirements and other corporate needs. Effective April 28, 2004, these credit facilities were replaced by new credit agreements with a group of banks in the amount of $175 million each for Washington Gas and WGL Holdings. The new credit facility for Washington Gas expires on April 28, 2009, and permits the regulated utility to request an additional line of credit of $100 million above the original credit limit, for a maximum total of $275 million. The new WGL Holdings’ credit facility expires on April 27, 2007, and permits the Company to request an additional line of credit of $50 million above the original credit limit, for a maximum total of $225 million.

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

At March 31, 2004, the Company had outstanding notes payable of $114.6 million as compared to $166.7 million outstanding at September 30, 2003. The decrease in notes payable was primarily attributable to improved operating cash flows generated by the Company’s regulated utility during the six months ended March 31, 2004, which reduced the Company’s need for short-term borrowings to fund its working capital requirements.

Long-Term Cash Requirements and Related Financing

The Company’s long-term cash requirements primarily depend upon the level of capital expenditures, long-term debt maturity requirements and decisions to refinance long-term debt. The Company devotes the majority of its capital expenditures to adding new regulated utility customers in its existing service area. At March 31, 2004, Washington Gas was authorized to issue up to $213.0 million of long-term debt under a shelf registration that was declared effective by the Securities and Exchange Commission (SEC) on April 24, 2003. On May 20, 2003, Washington Gas executed a Distribution Agreement with certain financial institutions for the issuance and sale of debt securities included in the shelf registration statement.

In November 2003, Washington Gas paid $37.2 million plus accrued interest to redeem $36.0 million of 6.95 percent Medium-Term Notes (MTNs) that were due in 2024, and replaced this debt with $37.0 million of newly issued, 4.88 percent MTNs due in 2013. The effective cost of the new debt, after considering a gain associated with a derivative instrument entered into in connection with this debt, was 4.11 percent (refer to the “Market Risk—Interest-Rate Risk” section of Management’s Discussion).

Security Ratings

The table below reflects credit ratings for outstanding debt instruments of WGL Holdings and Washington Gas at March 31, 2004. If the Company and/or the regulated utility were to experience a change in its debt ratings, the cost of its future short-term and long-term debt issues would likely change. Furthermore, a ratings change could result in a change in facility fees paid to banks.

Credit Ratings for Outstanding Debt Instruments

WGL Holdings, Inc.

Washington Gas

Unsecured

Medium-Term Notes

Unsecured

Rating Service

(Indicative)*

Commercial Paper

Medium-Term Notes

Commercial Paper

Fitch, Inc.

A+

AA-

F1+

Moody’s Investors Service

P-2

P-1

Standard & Poor’s Corporation

AA-

A-1+

AA-

A-1+

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

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

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

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

Reference is made to the “Contractual Commitments and Commercial Obligations” section in Management’s Discussion in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003, for a detailed discussion of these contractual obligations. Note 6 of the Notes to Consolidated Financial Statements in the Company’s 2003 Annual Report on Form 10-K includes a discussion of long-term debt, including debt maturities. Reference is made to Note 15 of the Notes to Consolidated Financial Statements in the Company’s 2003 Annual Report on Form 10-K that reflects information about the various contracts of Washington Gas and WGEServices.

Financial Guarantees. WGL Holdings and Washington Gas Resources Corporation (Washington Gas Resources) have guaranteed payments for certain purchases of natural gas and electricity on behalf of the retail energy-marketing segment. At March 31, 2004, these guarantees totaled $326.3 million, of which $323.3 million were guaranteed by WGL Holdings and $3.0 million were guaranteed by Washington Gas Resources. Termination of these guarantees is coincident with the satisfaction of all obligations of WGEServices covered by the guarantees. WGL Holdings also had guarantees totaling $6.0 million at March 31, 2004 that were made on behalf of certain of its non-utility subsidiaries associated with their banking transactions. For all of its financial guarantees, WGL Holdings may cancel any or all future obligations imposed by the guarantees upon written notice to the counterparty, but WGL Holdings would continue to be responsible for the obligations which had been created under the guarantees prior to the effective date of the cancellation.

Construction Project Financing. In October 2000, Washington Gas contracted with the U.S. General Services Administration (the GSA) to construct certain facilities at the GSA central plant in Washington, DC. Payments to Washington Gas for this construction were to be made by the GSA over a 15-year period. In November 2000, Washington Gas and General Electric Capital Assurance Company (GEFA) entered into a long-term financing arrangement, whereby GEFA funded this construction project. As part of this financing arrangement, Washington Gas assigned to GEFA the 15-year stream of payments due from the GSA. The amount of this long-term financing arrangement, including change orders, origination fees and capitalized finance charges was $69.4 million. As the long-term financing from GEFA was funded, Washington Gas established a note receivable representing the GSA’s obligation to remit principal and interest. Upon completion and acceptance of phases of the construction project, Washington Gas accounts for the transfer of the financed asset as an extinguishment of long-term debt and removes both the note receivable and long-term financing from its financial statements. Work on the construction project that has not been completed or accepted by the GSA was valued at $15.6 million, which represents an obligation on Washington Gas’ Balance Sheet at March 31, 2004. At any time before the contract with GSA is fully accepted, should there be a contract default, such as, among other things, non-payment by the GSA, GEFA may call on Washington Gas to fund the entire unpaid principal in exchange for which Washington Gas would receive the right to the stream of repayments from the GSA. As of March 31, 2004, the GSA had made all required payments under this long-term financing arrangement, and the remaining unpaid principal balance was $65.3 million. The Company expects full acceptance of this remaining balance on or before December 31, 2004. Once final acceptance by the GSA is made, GEFA will have no recourse against the Company related to this long-term debt.

Cash Flows Provided By Operating Activities

The primary drivers for the Company’s operating cash flows are cash payments received from gas customers, offset by payments made by the Company for gas costs, and for operation and maintenance, taxes and interest costs. Current interest expense reflects the favorable effect of relatively low interest rates, especially short-term interest rates, a condition that could change rapidly.

During the first six months of the Company’s fiscal year, the Company generates a large portion of its annual net income due to the significant volumes of natural gas that are delivered by the regulated utility during the winter heating season. Variations in the level of net income reported for the six-month

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

period ended March 31 may be significant because of the variability of weather from one period in a year to the same period in the subsequent year. Generating large sales volumes during the six-month period ended March 31 increases accounts receivable from the level at September 30; likewise, accounts payable increases to pay providers of the natural gas commodity and pipeline capacity. Accounts payable for the natural gas commodity can also vary significantly from one period to the next because of the volatility in the price of natural gas. Since payments for natural gas and pipeline capacity need to be made to suppliers before accounts receivable are collected from customers, this generally causes the Company to increase its short-term debt financing between September 30 and March 31. Storage gas inventories, which usually peak on November 1, are largely drawn down in the six months ended March 31, and provide a source of cash as this asset is used to satisfy winter sales demand. Gas costs due from or to customers, as well as deferred purchased gas costs which represent the difference between gas costs that have been paid to suppliers in the past and what has been collected from customers for these gas costs, can also cause significant variations in cash flows from period to period.

Net cash provided by operating activities totaled $198.0 million for the first six months of fiscal year 2004. A description of certain material changes in working capital from September 30, 2003 to March 31, 2004 is listed below:

• Accounts receivable and accrued utility revenues increased $233.8 million, primarily due to the onset of the Company’s heating season and the increased sales that resulted during this period. Rising gas costs also increased uses of working capital.

• Storage gas inventory levels decreased $127.6 million from September 30, 2003 as volumes were withdrawn to satisfy the sales demand during the winter heating season.

• Accounts payable increased $20.5 million, largely attributable to increased gas purchases to match the increased sales demand.

Cash Flows Used In Financing Activities

Cash flows used in financing activities were $81.3 million for the six months ended March 31, 2004. A decrease in notes payable of $52.1 million was the primary driver of this decrease. This decrease was primarily attributable to improved operating cash flows generated by the Company’s regulated utility during the six months ended March 31, 2004, which reduced the Company’s need for short-term borrowings to fund its working capital requirements. The decrease in notes payable was coupled with a normal recurring common stock dividend payment of $31.1 million. Additionally, during the current six-month period, the Company retired $36.1 million of long-term debt and issued $37.0 million of lower-cost long-term debt (refer to the “Liquidity and Capital Resources—Long-Term Cash Requirements and Related Financing” section in Management’s Discussion).

Cash Flows Used In Investing Activities

During the six months ended March 31, 2004, cash flows used in investing activities totaled $43.8 million primarily for capital expenditures of $49.6 million made on behalf of the regulated utility, partially offset by cash proceeds of $6.4 million (pre-tax) from the Maritime sale.

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

Capital Expenditures

The Company recently revised its five-year capital expenditures budget from $628.0 million to a total of $662.1 million to be expended during fiscal years 2004 through 2008. The increase in this budget reflects the construction of a liquefied natural gas peaking facility which, estimated to cost approximately $60-$65 million, will enhance the operational efficiency of the system. This increase in future capital expenditures for a peaking facility is expected to be partially offset by a $26 million future reduction in other capital expenditures. The following table depicts the Company’s revised capital expenditures budget for fiscal years 2004 through 2008.


Projected Capital Expenditures
	Fiscal Year Ended September 30,
(In millions)	2004		2005		2006		2007		2008		Total

New business	$	76.3	$	68.2	$	62.1	$	63.1	$	61.1	$	330.8
Replacements		34.4		32.4		33.2		34.0		34.9		168.9
Other		16.8		35.3		37.7		38.9		33.7		162.4

Total	$	127.5	$	135.9	$	133.0	$	136.0	$	129.7	$	662.1

CREDIT RISK

Regulated Utility Operations

Certain suppliers that sell gas to Washington Gas have relatively low credit ratings as determined by major credit rating agencies. In the event of a supplier’s failure to deliver contracted volumes of gas, the regulated utility would need to replace those volumes at prevailing market prices, and pass these costs through to its sales customers under the purchased gas cost adjustment mechanisms (refer to Market Risk—Price Risk Related to Regulated Utility Operations section of this Management’s Discussion). To manage this supplier credit risk, Washington Gas screens suppliers’ creditworthiness and may ask suppliers for financial assurances, including letters of credit, parental guarantees, and surety bonds to mitigate adverse price exposures that could occur if a supplier defaults.

Retail Energy-Marketing Operations

Natural Gas. Similar to the regulated utility, certain suppliers that sell gas to WGEServices have relatively low credit ratings as determined by major credit rating agencies. Depending on the future ability of these suppliers to deliver natural gas under existing contracts, WGEServices could be financially exposed for the difference between the price at which WGEServices has contracted to buy natural gas, and the cost of any replacement natural gas that may need to be purchased. WGEServices has a wholesale supplier credit policy that is designed to mitigate wholesale credit risks through a requirement for credit enhancements. Per the terms of this policy, WGEServices has obtained credit enhancements from certain of its gas suppliers.

Electricity. For a discussion of credit risk associated with WGEServices’ electricity suppliers, refer to Market Risk—Price Risk Related to Retail Energy-Marketing Operations section of this Management’s Discussion.

MARKET RISK

The Company is exposed to various forms of market risk. The following discussion describes the Company’s exposure to commodity price risk and interest-rate risk.

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

Price Risk Related to Regulated Utility Operations

Washington Gas actively manages its gas supply portfolio to balance its sales and delivery obligations. The regulated utility includes the cost of the natural gas commodity and pipeline services in the purchased gas costs that it includes in firm customers’ rates, subject to regulatory review. The regulated utility’s jurisdictional tariffs contain gas cost mechanisms that allow it to recover the invoice cost of gas applicable to firm customers. However, higher wholesale gas costs could increase customer account write-offs and result in a reduction of customer consumption patterns that would negatively impact the Company’s gross margins and net income.

In order to mitigate commodity price risk for its firm customers, Washington Gas obtained regulatory approval in the District of Columbia, Maryland and Virginia to hedge transactions for a limited portion of its natural gas purchases. At March 31, 2004, the Company had no open positions associated with the hedging program. The regulated utility also mitigates price risk through storage, transportation, and fuel-switching agreements that significantly insulate customers’ gas costs from commodity price fluctuations.

Additionally, the Company purchases gas under contracts that provide for volumetric variability. Certain of these contracts are required to be recorded at fair value (refer to Note 7— Derivative Instruments for a discussion of the accounting for these derivative instruments). At March 31, 2004, these contracts had a total fair value loss of $3.8 million.

Price Risk Related to Retail Energy-Marketing Operations

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

Natural Gas. WGEServices is exposed to market risk to the extent it does not closely match the timing and amount of natural gas it purchases with the related fixed price sales commitments. WGEServices manages much of this risk by attempting to closely match the timing of its purchases with its sales commitments to customers. WGEServices also faces risk in that approximately 60 percent of its annual natural gas sales volumes are subject to variations in customer demand caused by fluctuations in weather. Purchases of natural gas to fulfill sales commitments are made under fixed-volume contracts that assume normal weather. If there is a significant deviation from normal weather that causes purchase commitments to differ significantly from sales levels, WGEServices may be required to buy incremental gas or sell excess natural gas at prices that negatively impact gross margins. WGEServices balances its volumetric requirements by using storage gas inventory and peaking services offered to marketers by the regulated utility that provide delivery service for WGEServices customers. WGEServices also manages this risk through the purchase of derivative instruments. At March 31, 2004, WGEServices had no positions associated with its natural gas derivatives. For derivatives previously held, WGEServices recorded net gains of $485,000 and $278,000 for the six-months ended March 31, 2004 and 2003, respectively.

Electricity. For its electric business, WGEServices has significantly limited its volumetric and price risks through full requirements supply contracts. During fiscal year 2004, WGEServices entered into separate full requirements supply contracts with two new electricity suppliers. A significant amount of its electricity purchases continues to be supplied by Mirant Americas Energy Marketing L.P. (MAEM), which is an indirect wholly owned subsidiary of Mirant Corporation (Mirant). Under the terms of this contract, MAEM assumes the risk for any volume and price risks associated with sales made by WGEServices. On July 14, 2003, Mirant and substantially all of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. MAEM was included in these

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

bankruptcy filings. Future performance by MAEM under its full requirements contract with WGEServices may be subject to further developments in the bankruptcy proceedings.

Value-At-Risk. WGEServices also measures the market risk of its energy commodity portfolio and employs risk control mechanisms to measure and determine mitigating steps related to market risk including the determination and review of value-at-risk. Value-at-risk is an estimate of the maximum loss that can be expected at some level of probability if a portfolio is held for a given time period. For the natural gas portfolio, based on a 95 percent confidence interval, WGEServices’ value-at-risk at March 31, 2004 was approximately $106,000 for a one-day holding period. WGEServices also calculates the value of its open position related to natural gas, which measures the amount of net cash outflow or inflow that would be required to close the volumetric differential between its purchase and sales commitments. As of March 31, 2004, WGEServices would have had a net cash outflow of approximately $1.8 million to close its open position.

Interest-Rate Risk

The Company is exposed to interest-rate risk associated with its debt financing costs. The Company utilizes derivative financial instruments from time to time in order to minimize its exposure to interest-rate risk. In June 2003, Washington Gas entered into two forward-starting swaps with an aggregate notional principal of $62.0 million to mitigate a substantial portion of interest-rate risk associated with certain future debt transactions. These swaps were designated as cash flow hedges and carried at fair value.

In November 2003, Washington Gas terminated $37.0 million of the total $62.0 million aggregate notional principal of the forward-starting swaps concurrent with the November issuance of $37.0 million of MTNs as discussed previously in the “Liquidity and Capital Resources” section of Management’s Discussion. Washington Gas received $2.6 million associated with the settlement of this hedge agreement. In December 2003, Washington Gas terminated the remaining $25.0 million aggregate notional principal of the forward-starting swaps, and received $1.2 million associated with the settlement of this hedge agreement. On April 15, 2004, Washington Gas initiated an interest-rate swap against a $50 million MTN due July 9, 2009. The swap exchanges the fixed interest rate on the MTN of 6.92% for an interest rate based on 6-month LIBOR plus 2.65 percent. Washington Gas can terminate this swap at any time.

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

WASHINGTON GAS LIGHT COMPANY

This section of Management’s Discussion focuses on the financial position and results of operations of Washington Gas for the reported periods. In many cases, explanations for the changes in financial position and results of operations for both WGL Holdings and Washington Gas are substantially the same.

RESULTS OF OPERATIONS — Three Months Ended March 31, 2004 vs. March 31, 2003

Summary Results

Washington Gas reported net income applicable to common stock of $74.1 million for the three months ended March 31, 2004, as compared to net income of $82.2 million reported for the same period last year.

Utility Net Revenues

Net revenues for Washington Gas were $231.2 million for the current quarter, as compared to net revenues of $237.4 million for the same quarter in fiscal year 2003. Revenues were primarily affected by weather, which was 5.5 percent warmer in the current quarter than the same quarter of the prior fiscal year. Favorably contributing to net revenues was a 24,794 increase in active customer meters from the end of the same quarter of the prior fiscal year, as well as the favorable impact of rate changes that went into effect in Maryland on November 6, 2003, the District of Columbia on November 24, 2003 and Virginia on February 26, 2004. Key gas delivery, weather and meter statistics are shown in the table below for the three months ended March 31, 2004 and 2003.

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


Gas Deliveries, Weather and Meter Statistics
	Three Months Ended
	March 31,									Percent
										Increase
	2004			2003			Variance			(Decrease)

Gas Sales and Deliveries (thousands of therms)
Firm
Gas Sold and Delivered		432,143			440,970			(8,827	)		(2.0	)
Gas Delivered for Others		217,387			227,663			(10,276	)		(4.5	)

Total Firm		649,530			668,633			(19,103	)		(2.9	)

Interruptible
Gas Sold and Delivered		1,952			2,849			(897	)		(31.5	)
Gas Delivered for Others		85,390			80,072			5,318			6.6

Total Interruptible		87,342			82,921			4,421			5.3

Electric Generation—Delivered for Others		11,149			14,794			(3,645	)		(24.6	)

Total Deliveries		748,021			766,348			(18,327	)		(2.4	)

Degree Days
Actual		2,328			2,463			(135	)		(5.5	)
Normal		2,110			2,120			(10	)		(0.5	)
Percent Colder than Normal		10.3	%		16.2	%		n/a			n/a
Active Customer Meters (end of period)		987,748			962,954			24,794			2.6
New Customer Meters Added		6,936			5,868			1,068			18.2

Gas Service to Firm Customers. The level of gas delivered to firm customers is highly sensitive to weather variability as a large portion of the natural gas delivered by Washington Gas is used for space heating. The regulated utility’s rates are based on normal weather, and none of the tariffs for the jurisdictions in which it operates has a weather normalization provision. Nonetheless, declining block rates in the regulated utility’s Maryland and Virginia jurisdictions, and the existence of a fixed demand charge in all jurisdictions to collect a portion of revenues, reduce the effect that variations from normal weather have on net revenues.

During the quarter ended March 31, 2004, firm therm deliveries were 649.5 million therms compared to 668.6 million therms for the same quarter last year. This comparison primarily reflects 5.5 percent warmer weather as compared to prior year’s second quarter. Weather for the quarter ended March 31, 2004 was 10.3 percent colder than normal, as compared to 16.2 percent colder than normal for the same period last year.

Many customers are choosing to buy the natural gas commodity from third-party marketers, rather than purchasing the natural gas commodity and delivery service from Washington Gas on a “bundled” basis. Gas delivered to firm customers but purchased from third-party marketers represented 33.5 percent of total firm therms delivered for the quarter ended March 31, 2004, compared to 34.0 percent for the quarter ended March 31, 2003. On a per unit basis, Washington Gas earns the same net revenues from delivering gas for others as it earns from bundled gas sales in which customers purchase both the natural gas commodity and the associated delivery service from Washington Gas. Therefore, the regulated utility does not experience any loss in net revenues when customers choose to purchase the natural gas commodity from a third-party marketer.

Gas Service to Interruptible Customers. Therm deliveries to interruptible customers were 5.3 percent higher than deliveries for the same quarter of the prior year, primarily reflecting a reduction in the curtailment of interruptible service due to warmer weather in the current quarter than the same quarter of the prior year. Washington Gas must curtail or interrupt service to this class of customers when the demand by firm customers exceeds specified levels.

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

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

Gas Service for Electric Generation. Washington Gas sells and/or delivers natural gas for use at two electric generation facilities in Maryland that are each owned by companies independent of WGL Holdings. During the current quarter, deliveries to these customers decreased 24.6 percent to 11.1 million therms, reflecting the use of alternative fuels primarily due to higher natural gas prices. Washington Gas shares a significant majority of the margins earned from gas deliveries to these customers with firm customers. Therefore, changes in the volume of interruptible gas deliveries to these customers do not materially affect either net revenues or net income.

Utility Operating Expenses

Operation and Maintenance Expenses. Operation and maintenance expenses of $62.8 million for the three months ended March 31, 2004 increased $6.4 million, or 11.3 percent, from same period in the prior fiscal year, reflecting higher labor and benefit costs due primarily to employee severance costs incurred in the current period, and increased group insurance costs. The current period also reflects increased outside service costs associated with implementing the provisions of the Sarbanes-Oxley Act, as well as higher uncollectible accounts expense.

Depreciation and Amortization. Depreciation and amortization expense for the second quarter of fiscal year 2004 rose to $22.8 million, an increase of $1.8 million, or 8.4 percent, over the same period in the prior fiscal year. This increase reflects new plant investment, as well as additional depreciation expense of $554,000 related to the performance of an earnings test required by a December 18, 2003 Virginia rate order (refer to the “Regulatory Matters—Virginia Jurisdiction” section of this Management’s Discussion).

Interest Expense

The explanations for changes in Washington Gas’ interest expense are substantially the same as the explanations included in the Management’s Discussion of WGL Holdings which, therefore, are incorporated herein by reference into this discussion.

RESULTS OF OPERATIONS — Six Months Ended March 31, 2004 vs. March 31, 2003

Summary Results

For the first six months of fiscal year 2004, Washington Gas reported net income applicable to common stock of $109.8 million for the six months ended March 31, 2004, as compared to net income of $129.5 million reported for the same period last year.

Utility Net Revenues

Net revenues for Washington Gas were $393.9 million for the current six-month period, as compared to net revenues of $410.1 million for the corresponding period in fiscal year 2003.

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

Revenues were primarily affected by weather, which was 9.5 percent warmer in the first six months of fiscal year 2004 than the corresponding period of the prior year. Favorably contributing to net revenues was an increase in active customer meters from the end of the same quarter of the prior fiscal year, and the favorable impact of rate changes that went into effect. Key gas delivery, weather and meter statistics are shown in the table below for the six months ended March 31, 2004 and 2003.


Gas Deliveries, Weather and Meter Statistics
	Six Months Ended
	March 31,									Percent
										Increase
	2004			2003			Variance			(Decrease)

Gas Sales and Deliveries (thousands of therms)
Firm
Gas Sold and Delivered		698,786			731,644			(32,858	)		(4.5	)
Gas Delivered for Others		352,811			383,478			(30,667	)		(8.0	)

Total Firm		1,051,597			1,115,122			(63,525	)		(5.7	)

Interruptible
Gas Sold and Delivered		4,974			7,336			(2,362	)		(32.2	)
Gas Delivered for Others		167,284			163,096			4,188			2.6

Total Interruptible		172,258			170,432			1,826			1.1

Electric Generation—Delivered for Others		21,717			37,217			(15,500	)		(41.6	)

Total Deliveries		1,245,572			1,322,771			(77,199	)		(5.8	)

Degree Days
Actual		3,716			4,106			(390	)		(9.5	)
Normal		3,472			3,478			(6	)		(0.2	)
Percent Colder than Normal		7.0	%		18.1	%		n/a			n/a
Active Customer Meters (end of period)		987,748			962,954			24,794			2.6
New Customer Meters Added		15,886			14,174			1,712			12.1

Gas Service to Firm Customers. During the six months ended March 31, 2004, total gas deliveries to firm customers were 1.05 billion therms, a 5.7 percent decrease in deliveries from the same period last year. This comparison primarily reflects 9.5 percent warmer weather in the current period than the comparable period of the prior year. Weather for the six months ended March 31, 2004 was 7.0 percent colder than normal, as compared to 18.1 percent colder than normal for the same period last year.

Gas Service to Interruptible Customers. Therm deliveries to interruptible customers were 1.1 percent higher during the current six-month period, primarily reflecting a reduction in the curtailment of interruptible service due to warmer weather in the current period than the same period last year.

Gas Service for Electric Generation. During the current six-month period, deliveries to the two electric generation facilities in Maryland decreased 41.6 percent to 21.7 million therms, primarily due to higher natural gas prices.

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

Utility Operating Expenses

Operation and Maintenance Expenses. Operation and maintenance expenses of $118.4 million for the first six months of fiscal year 2004 increased 6.6 million, or 5.9 percent, over the same period last year. The increased operating expenses were largely due to higher labor and benefit costs that were partially offset by lower expenses associated with uncollectible accounts.

Depreciation and Amortization. Depreciation and amortization expense for the first six months of fiscal year 2004 rose to $47.8 million, an increase of $7.4 million, or 18.2 percent, over the same period in the prior fiscal year. This increase reflects $3.5 million of additional depreciation expense recorded in the first quarter of the current fiscal year to implement higher depreciation rates applicable to the period from January 1, 2002 through November 11, 2002 in connection with a December 18, 2003 Virginia rate order. The remaining increase in this expense is attributable to new plant investment, as well as additional depreciation expense of $554,000 related to the performance of an earnings test required by the December 18, 2003 Virginia rate order (refer to the “Regulatory Matters—Virginia Jurisdiction” section of this Management’s Discussion).

Interest Expense

LIQUIDITY AND CAPITAL RESOURCES

General

Liquidity and capital resources for Washington Gas are substantially the same as the liquidity and capital resources discussion included in the Management’s Discussion of WGL Holdings (except for certain items and transactions that pertain to WGL Holdings and its unregulated subsidiaries) which, therefore, are incorporated herein by reference into this discussion.

Other

Washington Gas has a four-year labor contract with the Teamsters Local Union No. 96, AFL-CIO, a local union affiliated with the International Brotherhood of Teamsters, that expires on May 31, 2004. The contract covers approximately 700 employees. Negotiations are being held between Washington Gas and the union regarding a possible new agreement.

REGULATORY MATTERS

During fiscal year 2004, the Company anticipates that the effect of regulatory decisions issued in fiscal years 2003 and 2004 will add $0.12 per share to earnings when compared to fiscal year 2003. For the first half of fiscal year 2004, these rates contributed $0.03 to earnings per share. The relatively higher contribution the Company expects over the balance of the year reflects changes in rate design that are contributing proportionately more from higher fixed system charges that include certain of the fixed costs the Company incurs to serve customers. The earnings effect of regulatory decisions also reflect certain accounting adjustments necessitated by the decisions. The status of recent regulatory activity in all jurisdictions is shown below. For a further discussion of these activities, refer to the Company’s fiscal year 2003 Annual Report on Form 10-K.

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

District of Columbia Jurisdiction

On February 7, 2003, Washington Gas filed with the Public Service Commission of the District of Columbia (PSC of DC) an application to increase rates. The request sought to increase overall annual revenues in the District of Columbia by approximately $14.1 million, later revised to $18.8 million on May 2, 2003. The application sought a return on common equity of 12.25 percent and an overall rate of return of 9.25 percent.

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, among other things, reduced annual depreciation expense and collections from the currently allowed levels by approximately $300,000. The new rates went into effect for service 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 effect of the Order’s reduction of annual revenues for lower pension and other post-retirement benefit costs requires an accounting adjustment that reduces the regulatory liability on the balance sheet and operation and maintenance expenses. 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’ 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

On March 31, 2003, Washington Gas filed an application with the Public Service Commission of Maryland (PSC of MD) to increase rates in Maryland. The application requested an increase to overall annual revenues by approximately $35.1 million, later revised to $27.2 million on June 16, 2003, with a return on common equity of 12.25 percent and an overall rate of return of 9.39 percent. The requested level of the revenue increase included $8.7 million related to increased depreciation expense.

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. These rates went into effect for services rendered on and after November 6, 2003. The final Order excluded the effect of Washington Gas’ request for an $8.7 million increase in annual revenues for depreciation expense, which was decided in a separate docket. The final Order did provide for adjusted revenues that correspond to an update of Washington Gas’ depreciation rates upon the outcome of the separate docket.

On March 25, 2004, a Hearing Examiner of the PSC of MD issued a proposed Order granting an increase of $1.1 million in annual revenues and depreciation expense to be implemented by July 1, 2004. This proposed order is being appealed by various parties, including Washington Gas.

Virginia Jurisdiction

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 was included in the application. The application requested an increase in overall annual revenues of approximately

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

$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 then currently authorized return on common equity of 11.50 percent for Washington Gas and 10.70 percent for the Shenandoah Gas Division.

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. From that time until a refund was made, as discussed below, Washington Gas recorded a provision for rate refunds in each period representing the estimated refund required based on management’s judgment of the rate case outcome.

On December 18, 2003, the SCC of VA issued a final Order in this proceeding which granted Washington Gas an annual revenue increase of $10.8 million, and reduced the annual revenue of the Shenandoah Division of Washington Gas by $867,000. The combination of this increase in the rates of Washington Gas and the reduction in the rates of the Shenandoah Gas Division of Washington Gas yields a net increase in annual revenues of $9.9 million. The final Order allowed a rate of return on common equity of 10.50 percent and an overall rate of return of 8.44 percent.

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

On January 7, 2004, Washington Gas filed a Petition for Reconsideration of Commission Final Order (the Petition) with the SCC of VA. The Petition requested that the SCC of VA reconsider the establishment of a regulatory asset for $28 million related to the accumulated depreciation reserve, net of accumulated deferred income taxes, and for making such regulatory asset be subject to an earnings test. The Petition further requested, among other things, that the SCC of VA reconsider its requirement for Washington Gas to implement new depreciation rates effective January 1, 2002, rather than coincident with the effective date of interim rates on November 12, 2002. On January 23, 2004, the SCC of VA rejected the Petition. On January 15, 2004 and on February 9, 2004, Washington Gas filed a Notice of Appeal with the SCC of VA notifying it of Washington Gas’ intent to appeal to the Supreme Court of Virginia, the SCC of VA’s December 18, 2003 final Order and the January 23, 2004 rejection of the Petition. On April 15, 2004, Washington Gas filed a Petition for Appeal with the Supreme Court of Virginia, seeking its review of the SCC of VA’s Order. On April 29, 2004, the Supreme Court of Virginia agreed to review the Order.

Included in the January 27, 2004 expedited rate case were two earnings tests performed by Washington Gas related to the twelve-month periods ended December 31, 2002 and June 30, 2002. These earnings tests indicated that Washington Gas had not exceeded its allowed return on equity in the Virginia jurisdiction. Additionally, Washington Gas performed a preliminary analysis forecasting twelve-month results for the period ended June 30, 2004 based on information as of March 31, 2004, and concluded that Washington Gas may exceed its allowed return on equity for this period. As a result, Washington Gas recorded $554,000 of additional depreciation expense for the three months ended March 31, 2004. This assessment could change if the VA Staff differs with management’s calculations or methodology, or if actual results for the twelve months ended June 30, 2004 differ from the results forecasted for the remaining three months of this period due to the effects of pending rate relief, deviations of weather from normal levels, or other factors.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following issues related to the Company’s market risk are included under Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and are incorporated herein by reference into this discussion. Also refer to Item 7A in the Company’s 2003 Annual Report on Form 10-K.

• Price Risk Related to Regulated Utility Operations

• Price Risk Related to Retail Energy-Marketing Operations

• Interest-Rate Risk

ITEM 4. CONTROLS AND PROCEDURES

Senior management, including the Chairman and Chief Executive Officer and the Vice President and Chief Financial Officer, evaluated the effectiveness of WGL Holdings’ and Washington Gas’ disclosure controls and procedures as of March 31, 2004. Based on this evaluation process, the Chairman and Chief Executive Officer and the Vice President and Chief Financial Officer have concluded that WGL Holdings’ and Washington Gas’ disclosure controls and procedures are effective. There have been no changes in the Registrants’ internal control over financial reporting during the quarter ended March 31, 2004 that have materially affected, or are reasonably likely to materially affect, the registrants’ internal control over financial reporting.

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

PART II. OTHER INFORMATION

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

The Annual Meetings of Shareholders of WGL Holdings, Inc. and Washington Gas Light Company were held on March 2, 2004. Below are the matters voted upon at this meeting.

WGL Holdings, Inc.

The following individuals were elected to the Board of Directors of WGL Holdings, Inc.:


Director	Votes in Favor		Votes Withheld

Michael D. Barnes		41,331,477		764,094
Daniel J. Callahan, III		41,505,299		590,272
George P. Clancy, Jr.		41,533,589		561,982
James H. DeGraffenreidt, Jr.		41,145,321		950,250
James W. Dyke, Jr.		41,048,825		1,046,746
Melvyn J. Estrin		41,518,243		577,328
James F. Lafond		41,522,595		572,976
Debra L. Lee		41,454,558		641,013
Karen Hastie Williams		40,921,436		1,174,135

The shareholders ratified the appointment of Deloitte & Touche LLP, independent public accountants, to audit the accounts of WGL Holdings, Inc. for fiscal year 2004 by a vote of 41,624,943 in favor of the proposal and 243,537 against. There were 227,091 abstentions.

A shareholder proposal to establish cumulative voting was defeated by a vote of 18,620,779 against the proposal and 12,469,668 in favor. There were 1,070,171 abstentions and 9,934,953 broker non-votes.

Washington Gas Light Company

The individuals listed above were elected to the Board of Directors of Washington Gas Light Company by a vote of 46,479,536 in favor of the proposal. There were no votes withheld.

The shareholders ratified the appointment of Deloitte & Touche LLP, independent public accountants, to audit the accounts of Washington Gas Light Company for fiscal year 2004 by a vote of 46,479,536 in favor of the proposal. There were no votes opposed to this proposal.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:


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

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

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

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


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

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

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

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

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

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

(b) Reports on Form 8-K:

The following reports were jointly filed, unless otherwise specified, on Forms 8-K during the quarter ended March 31, 2004:


Date Filed		Description of Event Occurred

January 30, 2004		First Quarter Fiscal Year 2004 Results WGL Holdings, Inc. issued an earnings news release on January 30, 2004 covering the results of operations for the three months ended December 31, 2003.

March 3, 2004		Raised Earnings Guidance WGL Holdings, Inc. raised its earnings guidance for the quarter ended March 31, 2004, and for the full fiscal year ended September 30, 2004.


		WGL HOLDINGS, INC.

		and

		WASHINGTON GAS LIGHT COMPANY (Co-Registrants)



Date: May 17, 2004		/s/ Mark P. O’Flynn Mark P. O’Flynn Controller (Principal Accounting Officer)

(a)		Reflects compensation expense related to performance shares.
(b)		Reflects compensation expense related to performance shares and stock options.

(a)		Includes cost of gas and revenue taxes.
(b)		Amounts reported are net of applicable income taxes.
(c)		Certain amounts for the three months ended March 31, 2003 period have been reclassified to conform to the presentation of the current fiscal year period. Eliminations included in the Other Activities segment for fiscal year 2003 have been reclassified into the Eliminations/Other column to conform to the same presentation in fiscal year 2004.

	•		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.

	•		*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. In addition, WGL Holdings is 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 describes the financial condition and results of operations of Washington Gas, a wholly owned subsidiary that 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.

	•		weather conditions;
	•		regulatory environment;
	•		gas supply and storage capacity;
	•		natural gas prices;
	•		competitive environment;
	•		environmental matters;
	•		industry consolidation;
	•		economic conditions and interest rates;
	•		inflation/deflation;
	•		labor contracts; and
	•		potential changes in accounting practices.

•		accounting for utility revenue and cost of gas recognition;
•		accounting for regulatory operations — regulatory assets and liabilities;
•		accounting for income taxes; and
•		accounting for contingencies.

	•		Accounts receivable and accrued utility revenues increased $233.8 million, primarily due to the onset of the Company’s heating season and the increased sales that resulted during this period. Rising gas costs also increased uses of working capital.

	•		Storage gas inventory levels decreased $127.6 million from September 30, 2003 as volumes were withdrawn to satisfy the sales demand during the winter heating season.

	•		Accounts payable increased $20.5 million, largely attributable to increased gas purchases to match the increased sales demand.

	•		Price Risk Related to Regulated Utility Operations

	•		Price Risk Related to Retail Energy-Marketing Operations

	•		Interest-Rate Risk