WASHINGTON GAS LIGHT CO - FORM 10-Q

Attached files

file	filename
EX-32 - EX-32 - WASHINGTON GAS LIGHT CO	w78373exv32.htm
EX-31.3 - EX-31.3 - WASHINGTON GAS LIGHT CO	w78373exv31w3.htm
EX-31.1 - EX-31.1 - WASHINGTON GAS LIGHT CO	w78373exv31w1.htm
EX-10.1 - EX-10.1 - WASHINGTON GAS LIGHT CO	w78373exv10w1.htm
EX-31.2 - EX-31.2 - WASHINGTON GAS LIGHT CO	w78373exv31w2.htm
EX-31.4 - EX-31.4 - WASHINGTON GAS LIGHT CO	w78373exv31w4.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2010


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	Identification No.

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	53-0162882
	101 Constitution Ave., N.W.	Columbia
	Washington, D.C. 20080	and Virginia
	(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 þ No o

Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

WGL Holdings, Inc.:


Large accelerated filer þ		Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

Washington Gas Light Company:


Large accelerated filer o		Accelerated filer o	Non-accelerated filer þ	Smaller reporting company o
	(Do not check if a smaller reporting company)

Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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, 2010: 50,646,386 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, 2010.

WGL Holdings, Inc.
Washington Gas Light Company

For the Quarter Ended March 31, 2010

Table of Contents


PART I. Financial Information


Item 1. Financial Statements (Unaudited)
WGL Holdings, Inc.
Consolidated Balance Sheets			4
Consolidated Statements of Income			5
Consolidated Statements of Cash Flows			6

Washington Gas Light Company
Balance Sheets			7
Statements of Income			8
Statements of Cash Flows			9

Notes to Consolidated Financial Statements
WGL Holdings, Inc. and Washington Gas Light Company — Combined			10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			35
WGL Holdings, Inc.			38
Washington Gas Light Company			63

Item 3. Quantitative and Qualitative Disclosures about Market Risk			72

Item 4. Controls and Procedures			72

Item 4T. Controls and Procedures			72

PART II. Other Information


Item 1. Legal Proceedings			73

Item 6. Exhibits			73

Signature			74

WGL Holdings, Inc.
Washington Gas Light Company

INTRODUCTION

FILING FORMAT

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

Part I — Financial information in this Quarterly Report on Form 10-Q includes separate financial statements (i.e. balance sheets, statements of income and statements of cash flows) for WGL Holdings and Washington Gas. The Notes to Consolidated Financial Statements are also included and are presented on a combined basis for both WGL Holdings and Washington Gas. The Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) included under Item 2 is divided into two major sections for WGL Holdings and Washington Gas.

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 and Washington Gas, 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:

•

the level and rate at which costs and expenses are incurred and the extent to which they are allowed to be recovered from customers through the regulatory process in connection with constructing, operating and maintaining Washington Gas’s natural gas distribution system;

•

the ability to implement successful approaches to modify the current or future composition of gas delivered to customers or to remediate the effects of the current or future composition of gas delivered to customers, as a result of the introduction of gas from the Dominion Cove Point or Elba Island facility to Washington Gas’s natural gas distribution system;

•

the availability of natural gas supply and interstate pipeline transportation and storage capacity;

•

the ability of natural gas producers, pipeline gatherers and natural gas processors to deliver natural gas into interstate pipelines for delivery by those interstate pipelines to the entrance points of Washington Gas’s natural gas distribution system as a result of factors beyond our control;

•

changes and developments in economic, competitive, political and regulatory conditions and developments;

•

changes in capital and energy commodity market conditions;

•

changes in credit ratings of debt securities of WGL Holdings or Washington Gas that may affect access to capital or the cost of debt;

•

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 or decisions affecting business operations or the timing of recovery of costs and expenses;

•

the timing and success of business and product development efforts and technological improvements;

•

the pace of deregulation efforts and the availability of other competitive alternatives to our products and services;

•

changes in accounting principles;

WGL Holdings, Inc.
Washington Gas Light Company

•

new commodity purchase and sales contracts or financial contracts and modifications in the terms of existing contracts that may materially affect fair value calculations under derivative accounting requirements;

•

the ability to manage the outsourcing of several business processes;

•

acts of nature;

•

terrorist activities and

•

other uncertainties.

The outcome of negotiations and discussions that the registrants may hold with other parties from time to time regarding utility and energy-related investments and strategic transactions that are both recurring and non-recurring may also affect future performance. All such factors are difficult to predict accurately and are generally beyond the direct control of the registrants. Accordingly, while they believe that the assumptions are reasonable, the registrants cannot ensure that all expectations and objectives will be realized. Readers are urged to use care and consider the risks, uncertainties and other factors that could affect the registrants’ business as described in this 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.

iii

WGL Holdings, Inc.

Consolidated Balance Sheets (Unaudited)

Part I—Financial Information

Item 1—Financial Statements




	March 31,			September 30,
(In thousands)	2010			2009

ASSETS
Property, Plant and Equipment
At original cost	$	3,296,753		$	3,242,413
Accumulated depreciation and amortization		(1,000,356	)		(973,272	)

Net property, plant and equipment		2,296,397			2,269,141

Current Assets
Cash and cash equivalents		123,454			7,845
Receivables
Accounts receivable		359,311			172,117
Gas costs and other regulatory assets		30,913			77,173
Unbilled revenues		142,498			80,594
Allowance for doubtful accounts		(19,917	)		(20,969	)

Net receivables		512,805			308,915

Materials and supplies—principally at average cost		23,992			23,626
Storage gas—at cost (first-in, first-out)		80,160			237,681
Deferred income taxes		21,178			-
Other prepayments		79,876			82,415
Other		32,744			23,032

Total current assets		874,209			683,514

Deferred Charges and Other Assets
Regulatory assets
Gas costs		-			13,996
Pension and other post-retirement benefits		345,494			308,544
Other		51,872			53,904
Other		51,900			20,791

Total deferred charges and other assets		449,266			397,235

Total Assets	$	3,619,872		$	3,349,890

CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders’ equity	$	1,196,121		$	1,097,698
Washington Gas Light Company preferred stock		28,173			28,173
Long-term debt		591,596			561,830

Total capitalization		1,815,890			1,687,701

Current Liabilities
Current maturities of long-term debt		104,095			82,592
Notes payable		108,454			183,851
Accounts payable and other accrued liabilities		233,205			213,529
Wages payable		15,772			15,294
Accrued interest		4,199			3,598
Dividends declared		19,432			18,758
Customer deposits and advance payments		44,121			52,908
Gas costs and other regulatory liabilities		44,530			14,842
Deferred income taxes		-			5,155
Accrued taxes		69,883			17,119
Other		46,643			26,970

Total current liabilities		690,334			634,616

Deferred Credits
Unamortized investment tax credits		11,034			10,761
Deferred income taxes		366,614			323,505
Accrued pensions and benefits		272,553			273,289
Asset retirement obligations		42,317			32,641
Regulatory liabilities
Accrued asset removal costs		328,814			319,173
Gas costs		15,684			-
Other		15,124			14,310
Other		61,508			53,894

Total deferred credits		1,113,648			1,027,573

Commitments and Contingencies (Note 13)

Total Capitalization and Liabilities	$	3,619,872		$	3,349,890

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				Six Months Ended
	March 31,				March 31,
(In thousands, except per share data)	2010		2009		2010		2009

OPERATING REVENUES
Utility	$	611,625	$	642,397	$	1,002,157	$	1,164,878
Non-utility		445,013		398,491		781,904		702,098

Total Operating Revenues		1,056,638		1,040,888		1,784,061		1,866,976

OPERATING EXPENSES
Utility cost of gas		318,922		375,143		516,199		681,927
Non-utility cost of energy-related sales		451,783		387,074		764,988		679,312
Operation and maintenance		78,272		78,439		151,788		148,773
Depreciation and amortization		24,235		24,245		48,398		48,326
General taxes and other assessments		43,007		41,255		74,427		71,682

Total Operating Expenses		916,219		906,156		1,555,800		1,630,020

OPERATING INCOME		140,419		134,732		228,261		236,956
Other Income—Net		495		760		864		777
Interest Expense
Interest on long-term debt		10,008		10,520		19,903		20,472
AFUDC and other, net		194		955		56		3,182

Total Interest Expense		10,202		11,475		19,959		23,654

INCOME BEFORE INCOME TAXES		130,712		124,017		209,166		214,079
INCOME TAX EXPENSE		51,676		48,617		82,159		83,724

NET INCOME		79,036		75,400		127,007		130,355
Dividends on Washington Gas preferred stock		330		330		660		660

NET INCOME APPLICABLE TO COMMON STOCK	$	78,706	$	75,070	$	126,347	$	129,695

AVERAGE COMMON SHARES OUTSTANDING
Basic		50,366		50,130		50,305		50,071
Diluted		50,572		50,420		50,502		50,309

EARNINGS PER AVERAGE COMMON SHARE
Basic	$	1.56	$	1.50	$	2.51	$	2.59
Diluted	$	1.56	$	1.49	$	2.50	$	2.58

DIVIDENDS DECLARED PER COMMON SHARE	$	0.3775	$	0.3675	$	0.7450	$	0.7225

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)	2010			2009

OPERATING ACTIVITIES
Net income	$	127,007		$	130,355
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization		48,398			48,326
Amortization of:
Other regulatory assets and liabilities—net		1,815			1,593
Debt related costs		346			347
Deferred income taxes—net		(22,408	)		24,971
Accrued/deferred pension cost		3,137			(2,079	)
Compensation expense related to equity awards		1,205			865
Provision for doubtful accounts		10,843			12,366
Other non-cash charges (credits)—net		92			(403	)
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable and unbilled revenues—net		(260,993	)		(350,931	)
Gas costs and other regulatory assets/liabilities—net		75,948			75,667
Storage gas		157,521			321,934
Other prepayments		3,075			(42,021	)
Accounts payable and other accrued liabilities		21,313			41,271
Wages payable		478			405
Customer deposits and advance payments		(8,787	)		(2,182	)
Accrued taxes		52,764			20,875
Accrued interest		601			(276	)
Other current assets		(10,078	)		(1,431	)
Other current liabilities		19,673			(20,456	)
Deferred gas costs—net		29,680			(31,332	)
Deferred assets—other		(29,357	)		(9,583	)
Deferred liabilities—other		4,015			1,545
Other—net		(274	)		2,552

Net Cash Provided by Operating Activities		226,014			222,378

FINANCING ACTIVITIES
Common stock issued		9,689			5,070
Long-term debt issued		51,332			59,201
Long-term debt retired		(20	)		(26,012	)
Debt issuance costs		318			-
Notes payable issued (retired)—net		(75,397	)		(139,510	)
Dividends on common stock and preferred stock		(37,617	)		(36,193	)
Other financing activities—net		(1,042	)		(755	)

Net Cash Used in Financing Activities		(52,737	)		(138,199	)

INVESTING ACTIVITIES
Capital expenditures (excluding Allowance for Funds Used During Construction)		(57,668	)		(65,956	)

Net Cash Used in Investing Activities		(57,668	)		(65,956	)

INCREASE IN CASH AND CASH EQUIVALENTS		115,609			18,223
Cash and Cash Equivalents at Beginning of Year		7,845			6,164

Cash and Cash Equivalents at End of Year	$	123,454		$	24,387

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid	$	49,144		$	40,255
Interest paid	$	19,193		$	23,420
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Extinguishment of project debt financing	$	-			7,375
Capital expenditures included in accounts payable and other accrued liabilities	$	3,309		$	4,095

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)	2010			2009

ASSETS
Property, Plant and Equipment
At original cost	$	3,259,195		$	3,206,576
Accumulated depreciation and amortization		(978,470	)		(950,706	)

Net property, plant and equipment		2,280,725			2,255,870

Current Assets
Cash and cash equivalents		114,726			5,160
Receivables
Accounts receivable		209,687			70,382
Gas costs and other regulatory assets		30,913			77,173
Unbilled revenues		75,915			20,905
Allowance for doubtful accounts		(16,941	)		(18,617	)

Net receivables		299,574			149,843

Materials and supplies—principally at average cost		23,940			23,573
Storage gas—at cost (first-in, first-out)		71,486			168,800
Deferred income taxes		6,300			-
Other prepayments		11,945			39,690
Receivables from associated companies		2,177			10,441
Other		11,986			11,531

Total current assets		542,134			409,038

Deferred Charges and Other Assets
Regulatory assets
Gas costs		-			13,996
Pension and other post-retirement benefits		343,682			306,918
Other		51,872			53,904
Other		29,001			11,846

Total deferred charges and other assets		424,555			386,664

Total Assets	$	3,247,414		$	3,051,572

CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholder’s equity	$	1,061,682		$	966,439
Preferred stock		28,173			28,173
Long-term debt		591,596			561,830

Total capitalization		1,681,451			1,556,442

Current Liabilities
Current maturities of long-term debt		104,095			82,592
Notes payable		20			124,811
Accounts payable and other accrued liabilities		130,272			125,295
Wages payable		15,206			14,622
Accrued interest		4,199			3,598
Dividends declared		18,677			18,008
Customer deposits and advance payments		44,121			52,908
Gas costs and other regulatory liabilities		44,530			14,842
Deferred income taxes		-			9,285
Accrued taxes		72,652			15,434
Payables to associated companies		42,539			11,390
Other		7,773			12,929

Total current liabilities		484,084			485,714

Deferred Credits
Unamortized investment tax credits		10,016			10,462
Deferred income taxes		371,557			326,921
Accrued pensions and benefits		271,119			271,859
Asset retirement obligations		41,065			31,627
Regulatory liabilities
Accrued asset removal costs		328,814			319,173
Gas costs		15,684			-
Other		15,125			14,307
Other		28,499			35,067

Total deferred credits		1,081,879			1,009,416

Commitments and Contingencies (Note 13)

Total Capitalization and Liabilities	$	3,247,414		$	3,051,572

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)	2010			2009		2010			2009

OPERATING REVENUES
Utility	$	619,295		$	651,127	$	1,018,159		$	1,181,767
Non-utility		(5	)		20		2			22

Total Operating Revenues		619,290			651,147		1,018,161			1,181,789

OPERATING EXPENSES
Utility cost of gas		326,592			383,874		532,201			698,817
Operation and maintenance		67,142			68,587		130,995			130,871
Depreciation and amortization		23,766			23,771		47,480			47,392
General taxes and other assessments		41,247			40,101		71,064			69,625

Total Operating Expenses		458,747			516,333		781,740			946,705

OPERATING INCOME		160,543			134,814		236,421			235,084
Other Income—Net		409			582		760			383
Interest Expense
Interest on long-term debt		10,008			10,520		19,903			20,465
AFUDC and other, net		128			722		(66	)		2,553

Total Interest Expense		10,136			11,242		19,837			23,018

INCOME BEFORE INCOME TAXES		150,816			124,154		217,344			212,449
INCOME TAX EXPENSE		59,710			48,643		85,388			83,010

NET INCOME BEFORE PREFERRED STOCK DIVIDENDS	$	91,106		$	75,511	$	131,956		$	129,439
Dividends on preferred stock		330			330		660			660

NET INCOME APPLICABLE TO COMMON STOCK	$	90,776		$	75,181	$	131,296		$	128,779

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)	2010			2009

OPERATING ACTIVITIES
Net income before preferred stock dividends	$	131,956		$	129,439
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization		47,480			47,392
Amortization of:
Other regulatory assets and liabilities—net		1,815			1,593
Debt related costs		346			362
Deferred income taxes—net		(9,645	)		28,790
Accrued/deferred pension cost		3,337			(2,071	)
Compensation expense related to equity awards		1,155			821
Provision for doubtful accounts		8,858			10,038
Other non-cash charges (credits)—net		(627	)		(710	)
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable, unbilled revenues and receivables from associated companies—net		(196,585	)		(237,538	)
Gas costs and other regulatory assets/liabilities—net		75,948			75,667
Storage gas		97,314			245,348
Other prepayments		28,206			20,917
Accounts payable and other accrued liabilities, including payables to associated companies		37,705			43,100
Wages payable		584			420
Customer deposits and advance payments		(8,787	)		(2,182	)
Accrued taxes		57,218			18,687
Accrued interest		601			(276	)
Other current assets		(822	)		(5,482	)
Other current liabilities		(5,156	)		(28,307	)
Deferred gas costs—net		29,680			(31,332	)
Deferred assets—other		(15,422	)		(8,775	)
Deferred liabilities—other		(10,888	)		(8,353	)
Other—net		54			2,149

Net Cash Provided by Operating Activities		274,325			299,697

FINANCING ACTIVITIES
Long-term debt issued		51,332			59,201
Long-term debt retired		(20	)		(25,018	)
Debt issuance costs		318			-
Notes payable issued (retired)—net		(124,791	)		(227,095	)
Dividends on common stock and preferred stock		(36,117	)		(35,443	)
Other financing activities—net		(937	)		(685	)

Net Cash Used in Financing Activities		(110,215	)		(229,040	)

INVESTING ACTIVITIES
Capital expenditures (excluding Allowance for Funds Used During Construction)		(54,544	)		(63,273	)

Net Cash Used in Investing Activities		(54,544	)		(63,273	)

INCREASE IN CASH AND CASH EQUIVALENTS		109,566			7,384
Cash and Cash Equivalents at Beginning of Year		5,160			3,680

Cash and Cash Equivalents at End of Year		114,726			11,064

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid	$	38,600		$	33,605
Interest paid	$	19,106		$	22,784
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Extinguishment of project debt financing	$	-			7,375
Capital expenditures included in accounts payable and other accrued liabilities	$	3,309		$	4,095

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) is a holding company that owns all of the shares of common stock of Washington Gas Light Company (Washington Gas), a regulated natural gas utility, and all of the shares of common stock of Washington Gas Resources Corporation (Washington Gas Resources), Hampshire Gas Company (Hampshire) and Crab Run Gas Company. Washington Gas Resources owns all of the shares of common stock of three unregulated subsidiaries that include Washington Gas Energy Services, Inc. (WGEServices), Washington Gas Energy Systems, Inc. (WGESystems) and Capitol Energy Ventures Corp. (CEV), formerly known as Washington Gas Credit Corporation. Except where the content clearly indicates otherwise, “WGL Holdings,” “we,” “us” or “our” refers to the holding company or the consolidated entity of WGL Holdings and all of its subsidiaries. Unless otherwise noted, these notes apply equally to WGL Holdings and Washington Gas.

The interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Therefore, certain financial information and note 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 accompanying notes 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, 2009. Due to the seasonal nature of Washington Gas’s and WGEServices’ businesses, the results of operations for the periods presented in this report are not necessarily indicative of actual results for the full fiscal years ending September 30, 2010 and 2009 of either WGL Holdings or Washington Gas.

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

For a description of our 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, 2009. See “Accounting Standards Adopted in the Current Period” below for changes to these policies subsequent to September 30, 2009.

Accounting Standards Adopted in the Current Period

Fair Value. In August 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-05, Fair Value Measurements and Disclosures—Measuring Liabilities at Fair Value (ASU 2009-05). This ASU provides amendments to Accounting Standards Codification (ASC) Subtopic 820-10, Fair Value Measurements and Disclosures—Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using; (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset, or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of Topic 820. ASU 2009-05 is effective for us on October 1, 2009. The adoption of this guidance did not have a material effect on our consolidated financial statements.

Noncontrolling Interests. Effective October 1, 2009, we adopted ASC Topic 810, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51. ASC Topic 810 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The adoption of this standard resulted in reclassifying Washington Gas’s preferred stock dividends on the Statement of Income to present consolidated net income attributable to both the shareholders of WGL Holdings Inc. and to the noncontrolling interest of Washington Gas’s preferred shareholders as net income. In addition, the Statements of Cash Flows have been changed to include income from all equity holders as a source of cash in Operating Activities and to reflect the distribution of preferred stock dividends as a use of cash in Financing Activities. The adoption of this standard had no other effect on our consolidated financial statements.

Subsequent Events. In February 2010, the FASB issued ASU 2010-09, Subsequent Events—Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09). This ASU provides amendments to Subtopic 855-10, Subsequent Events—Overall, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.

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

Subtopic 855-10 does not apply to the accounting for and disclosure of subsequent events addressed in other generally accepted accounting principles. ASU 2010-09 eliminates the requirement to disclose the date through which a registered company has evaluated subsequent events. Effective March 31, 2010, we adopted ASU 2010-09 for disclosures of events or transactions not within the scope of other applicable GAAP. Refer to Note 15—Subsequent Events for the required disclosure under this standard.

Other Newly Issued Accounting Standards

Postretirement Benefits. In December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (FSP FAS 132(R)-1), now part of ASC Topic 715-20-65. FSP FAS 132(R)-1 contains amendments to ASC Topic 715 that are intended to improve disclosures of postretirement benefit plan assets. This ASU requires; (i) increased disclosure on how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (ii) the major categories of plan assets; (iii) the inputs and valuation techniques used to measure the fair value of plan assets; (iv) the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and (v) significant concentrations of risk within plan assets. FSP FAS 132(R)-1 is effective for us on September 30, 2010. We are currently evaluating the possible effect of this standard on our consolidated financial statements.

Fair Value. In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC Topic 820 to require the following additional disclosures regarding fair value measurements: (i) the amounts of transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) reasons for any transfers in or out of Level 3 of the fair value hierarchy and (iii) the inclusion of information about purchases, sales, issuances and settlements in the reconciliation of recurring Level 3 measurements. ASU 2010-06 also amends ASC Topic 820 to clarify existing disclosure requirements, requiring fair value disclosures by class of assets and liabilities rather than by major category and the disclosure of valuation techniques and inputs used to determine the fair value of Level 2 and Level 3 assets and liabilities. With the exception of disclosures relating to purchases, sales issuances and settlements of recurring Level 3 measurements, ASU 2010-06 was effective for us on January 1, 2010. Refer to Note 10 – Fair Value Measurements for the required disclosure under this standard. The disclosure requirements related to purchases, sales, issuances and settlements of recurring Level 3 measurements will be effective for us on October 1, 2011. We are currently evaluating the possible effect of this standard on our consolidated financial statements.

NOTE 2. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

The tables below provide details for the amounts included in “Accounts payable and other accrued liabilities” on the balance sheets for both WGL Holdings and Washington Gas.


WGL Holdings, Inc.
(In thousands)	Mar 31, 2010		Sep 30, 2009

Accounts payable - trade	$	191,595	$	174,098
Employee benefits and payroll accruals		20,797		28,813
Other accrued liabilities		20,813		10,618

Total	$	233,205	$	213,529


Washington Gas Light Company
(In thousands)	Mar 31, 2010		Sep 30, 2009

Accounts payable - trade	$	92,556	$	90,630
Employee benefits and payroll accruals		19,524		26,530
Other accrued liabilities		18,192		8,135

Total	$	130,272	$	125,295

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

NOTE 3. SHORT-TERM DEBT

WGL Holdings and Washington Gas satisfy their short-term financing requirements through the sale of commercial paper or through bank borrowings. Due to the seasonal nature of the regulated utility and retail energy-marketing segments, short-term financing requirements can vary significantly during the year. We maintain revolving credit agreements to support our outstanding commercial paper and to permit short-term borrowing flexibility. Our policy is to maintain bank credit facilities in an amount equal to or greater than our expected maximum commercial paper position. The following is a summary of our committed credit available at March 31, 2010.


Committed Credit Available
Committed credit agreements	WGL Holdings		Washington Gas		Total Consolidated

Unsecured revolving credit facility, August 3, 2012 ^(a)		$ 400.0		$ 300.0		$ 700.0
Less: Commercial Paper		(108.4)		-		(108.4)

Net committed credit available		$ 291.6		$ 300.0		$ 591.6

^(a) Both WGL Holdings and Washington Gas have the right to request extensions with the banks’ approval. WGL Holdings’ revolving credit facility permits it to borrow an additional $50 million, with the banks’ approval, for a total of $450 million. Washington Gas’s revolving credit facility permits it to borrow an additional $100 million, with the banks’ approval, for a total of $400 million.

At March 31, 2010 and September 30, 2009 , WGL Holdings and its subsidiaries had outstanding notes payable in the form of commercial paper of $108.4 million and $183.8 million, respectively, at a weighted average interest rate of 0.28% and 0.27%, respectively. Substantially all of the outstanding notes payable balance at March 31, 2010 was commercial paper issued by WGL Holdings. Of the outstanding notes payable balance at September 30, 2009, $59.0 million was issued by WGL Holdings and $124.8 million was issued by Washington Gas.

As of March 31, 2010 and September 30, 2009, respectively, there were no outstanding bank loans from WGL Holdings’ or Washington Gas’s revolving credit facilities.

NOTE 4. LONG-TERM DEBT

UNSECURED NOTES

Washington Gas issues unsecured Medium-Term Notes (MTNs) and private placement notes with individual terms regarding interest rates, maturities and call or put options. These notes can have maturity dates of one or more years from the date of issuance.

On November 2, 2009, Washington Gas Light Company entered into a note purchase agreement by and among certain purchasers for the issuance and sale of $50.0 million of unsecured 4.76% fixed rate notes with a ten year maturity due November 1, 2019 through a private placement arrangement. The estimated effective cost of the notes, including consideration of issuance fees and hedge proceeds, is 4.79%.

At March 31, 2010, Washington Gas had the capacity, under a shelf registration to issue up to $450.0 million of additional MTNs. At March 31, 2010 and September 30, 2009, outstanding notes were $689.0 million and $639.0 million, respectively. At March 31, 2010 and September 30, 2009, the weighted average interest rate on all outstanding notes was 5.73% and 5.82%, respectively.

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

NOTE 5. COMMON SHAREHOLDERS’ EQUITY

The tables below reflect the changes in “ Common shareholders’ equity” for WGL Holdings and Washington Gas for the six months ended March 31, 2010.


WGL Holdings, Inc.
Components of Common Shareholders’ Equity

									Accumulated Other
	Common Stock		Paid-In			Retained			Comprehensive Loss,
(In thousands)	Amount		Capital			Earnings			Net of Taxes		Total

Balance at September 30, 2009	$	514,501	$	13,516		$	576,122		$	(6,441)	$	1,097,698
Net income applicable to common stock		-		-			126,347			-		126,347
Post-retirement benefits adjustment, net of taxes		-		-			-			(169)		(169	)

Comprehensive income		-		-			-			-		126,178
Stock-based compensation		14,801		(4,925	)		-			-		9,876
Dividends declared:
Common Stock		-		-			(37,631	)		-		(37,631	)

Balance at March 31, 2010	$	529,302	$	8,591		$	664,838		$	(6,610)	$	1,196,121


Washington Gas Light Company
Components of Common Shareholder’s Equity

								Accumulated Other
	Common Stock		Paid-In		Retained			Comprehensive Loss,
(In thousands)	Amount		Capital		Earnings			Net of Taxes		Total


Balance at September 30, 2009	$	46,479	$	469,026	$	457,375		$	(6,441)	$	966,439
Net income before preferred stock dividends		-		-		131,956			-		131,956
Post-retirement benefits adjustment, net of taxes		-		-		-			(169)		(169	)

Comprehensive income		-		-		-			-		131,787
Stock-based compensation		-		242		-			-		242
Dividends declared:
Common Stock		-		-		(36,126	)		-		(36,126	)
Preferred Stock		-		-		(660	)		-		(660	)


Balance at March 31, 2010	$	46,479	$	469,268	$	552,545		$	(6,610)	$	1,061,682

WGL Holdings had 50,569,875 and 50,143,484 shares issued of common stock at March 31, 2010 and September 30, 2009, respectively. Washington Gas had 46,479,536 shares issued of common stock at both March 31, 2010 and September 30, 2009.

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

NOTE 6. COMPREHENSIVE INCOME

The tables below reflect the components of “Comprehensive income” for the three and six months ended March 31, 2010 and 2009 for WGL Holdings and Washington Gas. Items that are excluded from “Net income” and charged directly to “Common shareholders’ equity” are recorded 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 5—Common Shareholders’ Equity).


WGL Holdings, Inc.
Components of Comprehensive Income

	Three Months Ended				Six Months Ended

	March 31,				March 31,
(In thousands)	2010		2009		2010			2009

Net income applicable to common stock	$	78,706	$	75,070	$	126,347		$	129,695
Other comprehensive income (loss), net of taxes ^(a)		201		48		(169	)		97

Comprehensive income	$	78,907	$	75,118	$	126,178		$	129,792


(a)		Amounts relate to postretirement benefits.


Washington Gas Light Company Components of Comprehensive Income

	Three Months Ended				Six Months Ended

	March 31,				March 31,
(In thousands)	2010		2009		2010			2009

Net income before preferred stock dividends	$	91,106	$	75,511	$	131,956		$	129,439
Other comprehensive income (loss), net of taxes ^(a)		201		48		(169	)		97

Comprehensive income	$	91,307	$	75,559	$	131,787		$	129,536


(a)		Amounts relate to postretirement benefits.

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

NOTE 7. EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing net income applicable to common stock 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 unless the effect of such issuance would be anti-dilutive. The following table reflects the computation of our basic and diluted EPS for WGL Holdings for the three and six months ended March 31, 2010 and 2009.


Basic and Diluted EPS

	Net Income
	Applicable to				Per Share
(In thousands, except per share data)	Common Stock		Shares		Amount

Three Months Ended March 31, 2010
Basic EPS	$	78,706		50,366	$	1.56

Stock-based compensation plans		-		206


Diluted EPS	$	78,706		50,572	$	1.56

Three Months Ended March 31, 2009
Basic EPS	$	75,070		50,130	$	1.50

Stock-based compensation plans		-		290

Diluted EPS	$	75,070		50,420	$	1.49

Six Months Ended March 31, 2010
Basic EPS	$	126,347		50,305	$	2.51

Stock-based compensation plans		-		197

Diluted EPS	$	126,347		50,502	$	2.50

Six Months Ended March 31, 2009
Basic EPS	$	129,695		50,071	$	2.59

Stock-based compensation plans		-		238

Diluted EPS	$	129,695		50,309	$	2.58

For the three and six months ended March 31, 2010, we did not exclude any outstanding shares pursuant to stock-based compensation plans in the calculation of diluted EPS. For the three and six months ended March 31, 2009, we had weighted average outstanding stock options totaling approximately 241,000 and 469,000 shares, respectively, which were not included in the calculation of diluted EPS as their effect would be anti-dilutive.

NOTE 8. EFFECTS OF NEW HEALTHCARE LEGISLATION

On March 23 and March 30, 2010 the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, respectively (collectively the “PPACA”) became law resulting in comprehensive healthcare reform legislation that affect the accounting for employer provided benefits.

Washington Gas provides certain healthcare benefits for active and retired employees (the Plan). Washington Gas is self-insured for the majority of healthcare costs. The Plan includes provisions for sharing the cost of covered expenses between Washington Gas and participants. Because Washington Gas’s plan provides prescription drug benefits equal to or greater than Medicare Part D coverage, Washington Gas has been receiving a non-taxable subsidy from the Federal government, which has had the effect of lowering other postretirement employee benefit expense (OPEB) and Washington Gas’s effective tax rate.

Since the year ended September 30, 2004, Washington Gas has reflected the favorable tax benefit (“the Med D tax benefit”) of the non-taxable subsidy in its effective tax rate. Healthcare reform legislation eliminated future Med D tax benefits. During the current fiscal year, the Med D tax benefit has been recognized through the date of the enactment of the PPACA. The subsequent elimination of the Med D tax benefit is expected to increase the effective tax rate for the year ended September 30, 2010 by approximately 0.7%. Washington Gas expects the annual effective tax rate will increase by approximately 1% in subsequent years. Regulatory assets have been increased by $41.2 million to reflect the probable recovery of the higher future tax expense from utility customers. An immaterial amount of tax expense has been recorded related to the effect of the PPACA on our non-utility business.

Washington Gas is continuing to evaluate the remaining provisions of the PPACA and their potential effect on the plan, its benefits, and the assumptions around measuring the related OPEB liability.

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

NOTE 9. DERIVATIVE AND WEATHER-RELATED INSTRUMENTS

DERIVATIVE INSTRUMENTS

To the extent that the information below is being disclosed under certain requirements of ASC Topic 815, no prior information is presented for the six month period ended March 31, 2009. Under this guidance, only information after January 1, 2009 is required to be disclosed. Therefore, only comparison activity for the three months ended March 31, 2010 is being disclosed for the income statement.

Regulated Utility Operations

Washington Gas enters into contracts related to the sale and purchase of natural gas that qualify as derivative instruments and are accounted for under ASC Topic 815. These derivative instruments are recorded at fair value on our balance sheet and Washington Gas does not designate any derivatives as hedges under ASC Topic 815. Washington Gas’s derivative contracts relate to: (i) Washington Gas’s asset optimization program, (ii) managing price risk associated with the purchase of gas to serve utility customers and (iii) managing interest rate risk.

Asset Optimization. Washington Gas optimizes the value of its long-term natural gas transportation and storage capacity resources during periods when these resources are not being used to physically serve utility customers. Specifically, Washington Gas utilizes: (i) its transportation capacity assets to benefit from favorable natural gas prices between different geographic locations and (ii) its storage capacity assets to benefit from favorable natural gas prices between different time periods. As part of this asset optimization program, Washington Gas enters into physical and financial derivative transactions in the form of forwards, swaps and option contracts to lock-in operating margins that Washington Gas will ultimately realize. The derivatives used under this program are subject to mark-to-market accounting treatment.

Regulatory sharing mechanisms in all three jurisdictions allow the profit from these transactions to be shared between Washington Gas’s shareholders and customers; therefore, any changes in fair value are recorded through earnings, or as regulatory assets or liabilities to the extent that gains and losses associated with these derivative instruments will be included in the rates charged to customers when they are realized. Valuation changes for the portion of net profits to be retained for shareholders may cause significant period-to-period volatility in earnings from unrealized gains and losses. This volatility does not change the locked-in operating margins that Washington Gas will ultimately realize from these transactions.

All physically and financially settled contracts under our asset optimization program are reported on a net basis in the statements of income in “Utility cost of gas”. Total net margins recorded to “Utility cost of gas” after sharing and management fees associated with all asset optimization transactions for the three months ended March 31, 2010 and 2009 were gains of $22.3 million and $4.8 million, respectively, including an unrealized gain of $16.1 million and an unrealized loss of $1.8 million, respectively. Total net margins for the six months ended March 31, 2010 and 2009 were gains of $21.8 million and $17.4 million, respectively, including unrealized gains of $12.1 million and $8.5 million, respectively.

Managing Price Risk . To serve utility customers, as authorized by its regulators, Washington Gas enters into forward contracts, option contracts, financial swap contracts and other contracts. These instruments are accounted for as derivative instruments as a part of managing price risk associated with acquiring natural gas supply for utility customers. Any gains and losses associated with these derivatives are recorded as regulatory liabilities or assets, respectively, to reflect the rate treatment for these economic hedging activities.

Managing Interest Rate Risk. Washington Gas utilizes derivative instruments from time to time that are designed to minimize the risk of interest-rate volatility associated with planned issuances of debt securities. Any gains and losses associated with these types of derivatives are recorded as regulatory liabilities or assets, respectively, and amortized in accordance with regulatory requirements, which is typically over the life of the newly issued debt.

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

Non-Utility Operations

Our non-regulated retail energy-marketing subsidiary, WGEServices, also enters into certain derivative contracts as part of managing the price risk associated with the sale and purchase of natural gas and electricity to its retail customers. Derivative instruments are recorded at fair value on our consolidated balance sheets. WGEServices does not designate these derivatives as hedges under ASC Topic 815; therefore, changes in the fair value of these derivative instruments are reflected in the earnings of our retail energy-marketing segment. These derivatives may cause significant period-to-period volatility in earnings; however, this volatility will not change the operating margins that WGEServices will ultimately realize from the sales to its customers.

Consolidated Operations

Reflected in the tables below is information for WGL Holdings as well as Washington Gas. The information for WGL Holdings includes derivative instruments for both Washington Gas and WGEServices.

At March 31, 2010, the absolute notional amounts of our derivatives are as follows:


Absolute Notional Amounts
of Open Positions on Derivative instruments
(In millions)		Notional Amounts
March 31, 2010
Derivative transactions		WGL Holdings			Washington Gas

Natural Gas (in therms)
Asset Optimization			1,325.7			1,325.7
Retail sales			5.0			-
Other risk-management activities			367.0			164.0
Electricity (in kWhs)
Retail sales			1,783.0			-
Other risk-management activities			8,925.0			-
Interest Rate Swap(notional amount in millions)	$		24.0	$		24.0

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

The following tables present the balance sheet classification for all derivative instruments as of March 31, 2010 and September 30, 2009.


WGL Holdings, Inc.
Balance Sheet Classification of Derivative Instruments
As of March 31, 2010

(In millions)
	Derivative		Derivative		Netting of
Balance sheet location	Assets		Liabilities		Collateral		Total

Other current assets^(a)	$	38.7	$	(14.7)	$	-	$	24.0
Deferred charges and other assets - other		84.9		(48.3)		-		36.6
Other current liabilities		3.9		(60.0)		13.2		(42.9)
Deferred credits - other		0.6		(36.6)		4.0		(32.0)

Total	$	128.1	$	(159.6)	$	17.2	$	(14.3)

As of September 30, 2009

Other current assets	$	23.6	$	(7.8)	$	-	$	15.8
Deferred charges and other assets - other		13.2		(5.4)		-		7.8
Other current liabilities^(b)		5.4		(26.0)		1.4		(19.2)
Deferred credits - other		24.4		(48.0)		3.7		(19.9)

Total	$	66.6	$	(87.2)	$	5.1	$	(15.5)


(a) includes interest rate swaps of ($0.5) million

(b) includes interest rate swaps of ($0.7) million


Washington Gas Light Company
Balance Sheet Classification of Derivative Instruments
As of March 31, 2010

(In millions)
	Derivative		Derivative		Netting of
Balance sheet location	Assets		Liabilities		Collateral		Total

Other current assets^(a)	$	26.7	$	(14.8)	$	-	$	11.9
Deferred charges and other assets - other		66.7		(48.3)		-		18.4
Other current liabilities		2.1		(7.2)		-		(5.1)
Deferred credits - other		-		(0.3)		-		(0.3)

Total	$	95.5	$	(70.6)	$	-	$	24.9

As of September 30, 2009

Other current assets	$	19.1	$	(7.6)	$	-	$	11.5
Deferred charges and other assets - other		8.0		(5.4)		-		2.6
Other current liabilities^(b)		2.9		(8.5)		-		(5.6)
Deferred credits - other		23.9		(27.5)		-		(3.6)

Total	$	53.9	$	(49.0)	$	-	$	4.9


(a) includes interest rate swaps of ($0.5) million

(b) includes interest rate swaps of ($0.7) million

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

The following tables present all gains and losses associated with derivative instruments for the three months ended March 31, 2010 and 2009.


Gains and (Losses) on Derivative Instruments
	WGL Holdings, Inc.						Washington Gas Light Company
	March 31,						March 31,

(In millions)	2010			2009			2010			2009

Recorded to income
Operating revenues - non-utility	$	15.7		$	(6.0	)	$	-		$	-
Utility cost of gas		17.6			4.5			17.6			4.5
Non-utility cost of energy-related sales		(46.3	)		(13.1	)		-			-
Recorded to regulatory assets/liabilities
Gas costs		12.8			(6.7	)		12.8			(6.7	)
Other		(0.7	)		-			(0.7	)		-

Total	$	(0.9	)	$	(21.3	)	$	29.7		$	(2.2	)

The following table presents all gains and losses associated with derivative instruments for the six months ended March 2010.


Gains and (Losses) on Derivative Instruments



(In millions)	WGL Holdings, Inc.			Washington Gas Light Company

Recorded to income
Operating revenues - non-utility	$	18.2		$	-
Utility cost of gas		19.1			19.1
Non-utility cost of energy-related sales		(49.5	)		-
Recorded to regulatory assets/liabilities
Gas costs		7.9			7.9
Other		0.2			0.2

Total	$	(4.1	)	$	27.2

Certain of Washington Gas’s derivative instruments contain contract provisions that would require collateral to be posted if the credit rating of Washington Gas’s debt falls below certain levels. Similarly, certain of WGEServices derivative instruments contain contract provisions that require collateral to be posted if the credit rating of WGL Holdings falls below certain levels or if counterparties exposure to WGEServices exceeds a certain level. Due to counterparty exposure levels, at March 31, 2010, WGEServices’ had posted $17.2 million of collateral related to its derivative liabilities that contained credit-related contingent features. Washington Gas was not required to post any collateral at March 31, 2010. The following table shows the aggregate fair value of all derivative instruments with credit-related contingent features that are in a liability position, as well as the maximum amount of collateral that would be required to be posted related to the net fair value of our derivative instruments if the most intrusive credit-risk-related contingent features underlying these agreements were triggered on March 31, 2010.


Potential Collateral Requirements for Derivative Liabilities
with Credit-risk-Contingent Features
(In millions)	WGL Holdings, Inc.		Washington Gas Light Company

Derivative liabilities with credit-risk-contingent features		$ 134.7		$ 64.3
Maximum potential collateral requirements		61.7		0.2

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

Neither Washington Gas nor WGEServices enters into derivative contracts for speculative purposes.

Concentration of Credit Risk

Both Washington Gas and WGEServices are exposed to credit risk associated with agreements with wholesale counterparties that are accounted for as derivative instruments. We have credit policies in place that are designed to mitigate credit risk associated with wholesale counterparties through a requirement for credit enhancements including, but not limited to, letters of credit, parent guarantees and cash collateral when deemed necessary. For certain counterparties or their guarantors that meet this policy’s credit worthiness criteria, both Washington Gas and WGEServices grant unsecured credit which is continuously monitored. Additionally, our agreements with wholesale counterparties contain netting provisions which allow the receivable and payable exposure to/from each counterparty to be offset. At March 31, 2010, one counterparty represented over 10% of Washington Gas’s credit exposure to wholesale derivative counterparties, for a total credit risk of $16.9 million. WGEServices had one counterparty representing over 10% of its credit exposure to wholesale counterparties for a credit risk of $1.2 million at March 31, 2010.

WEATHER-RELATED INSTRUMENTS

Regulated Utility Operations

On September 21, 2009, Washington Gas executed a heating degree day (HDD) derivative contract to manage its financial exposure to variations from normal weather in the District of Columbia during fiscal year 2010. Under this contract, Washington Gas purchased protection against net revenue shortfalls due to warmer-than-normal weather and sold to the counterparty the right to receive the benefit when weather is colder than normal. This derivative contract resulted in a payment to Washington Gas of $2.1 million on the date of execution.

Our weather protection instruments are accounted for under ASC Topic 815. For weather derivative contracts executed by a premium payment, benefits or losses are recognized to the extent actual HDDs are less than or greater than the contracted HDDs. The cost of our weather-related instruments is amortized based on the pattern of normal HDDs over the coverage period. For weather derivative contracts for which we receive a net option premium, we record the receipt as a liability and mark the contract to fair value each period. The expenses or benefits that are derived from our weather-related instruments are not considered in establishing the retail rates of Washington Gas.

During the three months ended March 31, 2010 and 2009, Washington Gas recorded a total pre-tax gain and loss of $2.4 million and $1.3 million, respectively, including premium costs and any fair value adjustments related to its weather derivatives. During the six months ended March 31, 2010 and 2009, Washington Gas recorded a total pre-tax gain and loss of $1.0 million and $3.1 million, respectively, including premium costs and any fair value adjustments related to its weather derivatives. Benefits and expenses associated with Washington Gas’s weather-related instruments are recorded to “Operation and maintenance” expense.

Non-Utility Operations

WGEServices utilizes weather-related derivatives for managing the financial effects of weather risks. These derivatives cover a portion of WGEServices’ estimated revenue or energy-related cost exposure to variations in heating or cooling degree days. These contracts provide for payment to WGEServices of a fixed-dollar amount for every degree day over or under specific levels during the calculation period depending upon the type of contract executed. For the three and six months ended March 31, 2010, WGEServices recorded pre-tax expenses of $867,000 and $1.1 million, respectively. For the three and six months ended March 31, 2009, WGEServices recorded pre-tax expenses of $802,000 and $1.3 million, respectively, related to these derivatives.

NOTE 10. FAIR VALUE MEASUREMENTS

We measure the fair value of our financial assets and liabilities in accordance with ASC Topic 820. These financial assets and liabilities primarily consist of (i) derivatives recorded on our balance sheet under ASC Topic 815, (ii) weather derivatives for which we receive a net option premium payment and (iii) long-term debt outstanding that is required to be disclosed at fair value. Under ASC Topic 820, fair value is defined as the exit price, representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To value our financial instruments, we use market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about credit risk (both our own credit risk and the counterparty’s credit risk) and the risks inherent in the inputs to our valuation technique, the income approach.

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

We enter into derivative contracts in the over-the-counter (OTC) wholesale and retail markets. These markets are the principal markets for the respective wholesale and retail contracts. We have determined that all of our existing counterparties and others who have participated in energy transactions at our delivery points are the relevant market participants. These participants have access to the same market data as WGL Holdings. We value our derivative contracts based on an “in-exchange” premise and valuations are generally based on pricing service data or indicative broker quotes depending on the market location. We measure the net credit exposure at a counterparty level where the right to set-off exists. The net exposure is determined using the mark-to-market exposure adjusted for collateral, letters of credit and parent guarantees. We use published default rates from Standard & Poor’s Ratings Services and Moody’s Investors Service as inputs for the determination of credit adjustments.

ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy under ASC Topic 820 are described below:

Level 1. Level 1 of the fair value hierarchy consists of assets or liabilities that are valued using observable inputs based upon unadjusted quoted prices in active markets for identical assets or liabilities at the reporting date. Level 1 assets and liabilities primarily include exchange traded derivatives and securities. At March 31, 2010, we do not have any financial assets or liabilities in this category.

Level 2. Level 2 of the fair value hierarchy consists of assets or liabilities that are valued using directly or indirectly observable inputs that are corroborated with market data or based on exchange traded market data. Level 2 includes fair values based on industry-standard valuation techniques that consider various assumptions including: (i) quoted forward prices, including the use of mid-market pricing within a bid/ask spread; (ii) discount rates; (iii) implied volatility and (iv) other economic factors. Substantially all of these assumptions are observable throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the relevant market. At March 31, 2010, Level 2 financial assets and liabilities included non-exchange traded energy-related derivatives such as financial swaps and options and physical forward contracts for deliveries at active market locations. Additionally, at March 31, 2010, Level 2 financial instruments included interest rate swaps valued using observable data.

Level 3. Level 3 of the fair value hierarchy consists of assets or liabilities that are valued using significant unobservable inputs at the reporting date. These unobservable assumptions reflect our assumptions about estimates that market participants would use in pricing the asset or liability, including historical volatility and pricing data when delivery is to inactive market locations. These inputs may be used with industry standard valuation methodologies that result in our best estimate of fair value for the assets or liabilities at the reporting date. At March 31, 2010, OTC derivative assets and liabilities in this category included: (i) physical contracts valued with significant basis adjustments to observable market data when delivery is to inactive market locations; (ii) long-dated positions where observable pricing is not available over the life of the contract; (iii) contracts valued using historical volatility assumptions and (iv) valuations using indicative broker quotes for inactive market locations. Additionally, at March 31, 2010, level 3 financial liabilities included Washington Gas’s weather derivative valued using unobservable data.

The following table sets forth financial instruments recorded at fair value as of March 31, 2010. A financial instrument’s classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy.

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

WGL Holdings, Inc.
Fair Value Measurements Under the Fair Value Hierarchy

At March 31, 2010


(In millions)	Level 1		Level 2			Level 3			Total

Assets
Natural gas related derivatives	$	-	$	40.9		$	56.5		$	97.4
Electricity related derivatives		-		-			30.7			30.7

Total Assets	$	-	$	40.9		$	87.2		$	128.1

Liabilities
Natural gas related derivatives	$	-	$	(47.0	)	$	(93.2	)	$	(140.2	)
Electricity related derivatives		-		(8.2	)		(10.7	)		(18.9	)
Interest rate swaps		-		(0.5	)		-			(0.5	)
Weather derivative		-		-			(1.0	)		(1.0	)

Total Liabilities	$	-	$	(55.7	)	$	(104.9	)	$	(160.6	)

At September 30, 2009

Assets
Natural gas related derivatives	$	-	$	31.0		$	25.9		$	56.9
Electricity related derivatives		-		0.4			9.3			9.7

Total Assets	$	-	$	31.4		$	35.2		$	66.6

Liabilities
Natural gas related derivatives	$	-	$	(19.8	)	$	(57.5	)	$	(77.3	)
Electricity related derivatives		-		(3.9	)		(5.3	)		(9.2	)
Interest rate swaps		-		(0.7	)		-			(0.7	)
Weather derivative		-		(2.1	)		-			(2.1	)

Total Liabilities	$	-	$	(26.5	)	$	(62.8	)	$	(89.3	)


Washington Gas Light Company Fair Value Measurements Under the Fair Value Hierarchy

At March 31, 2010

(In millions)	Level 1		Level 2			Level 3			Total

Assets
Natural gas related derivatives	$	-	$	40.6		$	54.9		$	95.5

Total Assets	$	-	$	40.6		$	54.9		$	95.5

Liabilities
Natural gas related derivatives	$	-	$	(27.8	)	$	(42.3	)	$	(70.1	)
Interest rate swaps		-		(0.5	)		-			(0.5	)
Weather derivative		-		-			(1.0	)		(1.0	)

Total Liabilities	$	-	$	(28.3	)	$	(43.3	)	$	(71.6	)

At September 30, 2009

Assets
Natural gas related derivatives	$	-	$	28.9		$	25.0		$	53.9

Total Assets	$	-	$	28.9		$	25.0		$	53.9

Liabilities
Natural gas related derivatives	$	-	$	(17.0	)	$	(31.3	)	$	(48.3	)
Interest rate swaps		-		(0.7	)		-			(0.7	)
Weather derivative		-		(2.1	)		-			(2.1	)

Total Liabilities	$	-	$	(19.8	)	$	(31.3	)	$	(51.1	)

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

Transfers between different levels of the fair value hierarchy may occur based on the level of observable inputs used to value the instruments from period to period. It is our policy to show both transfers into and out of the different levels of the fair value hierarchy at the fair value as of the beginning of the reporting period. For the six months ended March 31, 2010, a $2.1 million fair value liability related to Washington Gas’s weather derivative was transferred from level 2 to level 3 in the fair value hierarchy. This transfer reflected an increase in unobservable inputs used to value the instrument. There were no other transfers during the reported periods.

The following tables are a summary of the changes in the fair value of our derivative instruments that are measured at net fair value on a recurring basis in accordance with ASC Topic 820 using significant Level 3 inputs during the three months ended March 31, 2010 and 2009, respectively.

Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs


(In millions)	WGL Holdings			Washington Gas

Three Months Ended March 31, 2010

Balance at January 1, 2010	$	(38.4	)	$	(11.3	)
Realized and unrealized gains (losses)
Recorded to income		6.5			12.8
Recorded to regulatory assets - gas costs		9.4			9.4
Purchases and settlements, net		4.9			0.7

Balance at March 31, 2010	$	(17.6	)	$	11.6

Three Months Ended March 31, 2009

Balance at January 1, 2009	$	(2.2	)		(6.7	)
Realized and unrealized gains (losses)
Recorded to income		(14.3	)		1.6
Recorded to regulatory assets - gas costs		(2.6	)		(2.6	)
Purchases and settlements, net		8.6			0.6

Balance at March 31, 2009	$	(10.5	)	$	(7.1	)

The following tables are a summary of the changes in the fair value of our derivative instruments that are measured at net fair value on a recurring basis in accordance with ASC Topic 820 using significant Level 3 inputs during the six months ended March 31, 2010 and 2009, respectively.

Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs


(In millions)	WGL Holdings			Washington Gas

Six Months Ended March 31, 2010

Balance at October 1, 2009	$	(27.6	)	$	(6.3	)
Realized and unrealized gains (losses)
Recorded to income		(10.1	)		11.2
Recorded to regulatory assets - gas costs		6.9			6.9
Transfers in and/or out of Level 3^(a)		(2.1	)		(2.1	)
Purchases and settlements, net		15.3			1.9

Balance at March 31, 2010	$	(17.6	)	$	11.6

Six Months Ended March 31, 2009

Balance at October 1, 2008	$	(9.1	)	$	(17.0	)
Realized and unrealized gains (losses)
Recorded to income		(11.7	)		6.3
Recorded to regulatory assets - gas costs		2.0			2.0
Purchases and settlements, net		8.3			1.6

Balance at March 31, 2009	$	(10.5	)	$	(7.1	)

(a) Represents weather derivative.

The tables below sets forth the line items on the Statements of Income of the amounts recorded to income for the three and six months ended March 31, 2010, related to fair value measurements using significant level 3 inputs.

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

WGL Holdings, Inc.
Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements


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

(In millions)	2010		2009		2010		2009

Operating revenues — non-utility	$	15.7	$	(6.0)	$	18.2	$	(1.5)
Utility cost of gas		10.4		1.6		10.2		6.3
Non-utility cost of energy-related sales		(22.0)		(9.9)		(39.5)		(16.5)
Operation and maintenance expense		2.4		-		1.0		-

Total	$	6.5	$	(14.3)	$	(10.1)	$	(11.7)

Washington Gas Light Company
Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements


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

(In millions)	2010		2009		2010		2009

Utility cost of gas	$	10.4	$	1.6	$	10.2	$	6.3
Operation and maintenance expense		2.4		-		1.0		-

Total	$	12.8	$	1.6	$	11.2	$	6.3

Unrealized gains (losses) for the three and six months ended March 31, 2010 attributable to financial instruments measured using significant Level 3 inputs at March 31, 2010 were recorded as follows:

WGL Holdings, Inc.
Unrealized Gains (Losses) Recorded for Level 3 Measurements


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

(In millions)	2010		2009		2010		2009

Recorded to income
Operating revenues - non-utility	$	18.4	$	3.6	$	23.8	$	4.9
Utility cost of gas		10.4		2.3		10.5		7.4
Non-utility cost of energy-related sales		(42.9)		(6.3)		(51.8)		(10.1)
Operation and maintenance expense		2.4		-		1.0		-
Recorded to regulatory assets - gas costs		8.3		(2.0)		6.9		3.1

Total	$	(3.4)	$	(2.4)	$	(9.6)	$	5.3

Washington Gas Light Company
Unrealized Gains (Losses) Recorded for Level 3 Measurements


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

(In millions)	2010		2009		2010		2009

Recorded to income
Utility cost of gas	$	10.4	$	2.3	$	10.5	$	7.4
Operation and maintenance expense		2.4		-		1.0		-
Recorded to regulatory assets - gas costs		8.3		(2.0)		6.9		3.1

Total	$	21.1	$	0.3	$	18.4	$	10.5

The following table presents the carrying amounts and estimated fair values of our financial instruments at March 31, 2010. The carrying amount of any other financial instruments in current assets and current liabilities approximates fair value because of the short-term maturity of these instruments, and therefore are not shown in the table below.

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

Fair Value of Financial Instruments


At March 31,	2010

(In millions)	Carrying Amount		Fair Value

Long-term debt (a)	$	591.6	$	654.4

(a) Excludes current maturities and unamortized discounts.

NOTE 11. OPERATING SEGMENT REPORTING

We identify and report on operating segments under the “management approach.” Our chief operating decision maker is our Chief Operating Officer. Operating segments comprise revenue-generating components of an enterprise for which we produce separate financial information internally that we regularly use to make operating decisions and assess performance. We report three operating segments: (i) regulated utility, (ii) retail energy-marketing and (iii) design-build energy systems.

With approximately 90% of WGL Holdings’ consolidated total assets, the regulated utility segment is our core business and comprises Washington Gas and Hampshire. The regulated utility segment, through Washington Gas, provides regulated gas distribution services (including the sale and delivery of natural gas, meter reading, responding to customer inquiries, bill preparation and the construction and maintenance of its natural gas distribution system) to customers primarily in the District of Columbia and the surrounding metropolitan areas in Maryland and Virginia. Hampshire, an underground natural gas storage company that is regulated under a cost of service tariff by the Federal Energy Regulatory Commission (FERC), provides services exclusively to Washington Gas.

Through WGEServices, the retail energy-marketing segment sells natural gas and electricity directly to retail customers, both inside and outside of Washington Gas’s traditional service territory, in competition with regulated utilities and unregulated gas and electricity marketers.

Through WGESystems, the design-build energy systems segment provides design-build energy efficient and sustainable solutions to government and commercial clients under construction contracts.

Transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our three operating segments, are aggregated as “Other Activities” and included as part of non-utility operations as presented below in the Operating Segment Financial Information. During the first quarter of 2010, Washington Gas Resources changed the name of Washington Gas Credit Corporation to Capitol Energy Ventures, (CEV) Corp. to align better its name with its mission. CEV is an unregulated wholesale energy company that engages in the business of acquiring and optimizing natural gas storage and transportation assets. CEV is in the initial stages of operations and has been aggregated in “Other Activities”.

The same accounting policies applied in preparing our consolidated financial statements, as discussed in Note 1—Accounting Policies, also apply to the reported segments. While net income or loss applicable to common stock is the primary criterion for measuring a segment’s performance, we also evaluate our operating segments based on other relevant factors, such as penetration into their respective markets and return on equity. The following tables present operating segment information for the three and six months ended March 31, 2010 and 2009.

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-			Design-Build			Other
(In thousands)	Utility		Marketing			Energy Systems			Activities			Eliminations			Consolidated

Three Months Ended March 31, 2010

Operating Revenues (a)	$	619,295	$	440,604		$	4,416		$	(7	)	$	(7,670	)	$	1,056,638

Operating Expenses:
Cost of energy-related sales		326,592		447,944			3,839			-			(7,670	)		770,705
Operation		55,166		9,907			689			1,251			-			67,013
Maintenance		11,259		-			-			-			-			11,259
Depreciation and amortization		24,020		206			9			-			-			24,235
General taxes and other assessments:
Revenue taxes		24,330		702			-			-			-			25,032
Other		17,002		924			44			5			-			17,975

Total Operating Expenses		458,369		459,683			4,581			1,256			(7,670	)		916,219

Operating Income (Loss)		160,926		(19,079	)		(165	)		(1,263	)		-			140,419
Other Income (Expenses)-Net		402		18			16			129			(70	)		495
Interest Expense		10,136		70			-			66			(70	)		10,202
Income Tax Expense (Benefit)		59,856		(7,694	)		(58	)		(428	)		-			51,676
Dividends on Washington Gas preferred stock		330		-			-			-			-			330

Net Income (Loss) Applicable to Common Stock	$	91,006	$	(11,437	)	$	(91	)	$	(772	)	$	-		$	78,706

Total Assets	$	3,254,575	$	403,973		$	19,133		$	135,703		$	(193,512	)	$	3,619,872

Capital Expenditures/Investments	$	28,259	$	384		$	77		$	-		$	-		$	28,720

Three Months Ended March 31, 2009

Operating Revenues (a)	$	651,127	$	389,138		$	9,338		$	15		$	(8,730	)	$	1,040,888

Operating Expenses:
Cost of energy-related sales		383,874		380,354			6,719			-			(8,730	)		762,217
Operation		57,474		8,454			643			1,390			-			67,961
Maintenance		10,478		-			-			-			-			10,478
Depreciation and amortization		24,011		220			14			-			-			24,245
General taxes and other assessments:
Revenue taxes		24,877		169			-			-			-			25,046
Other		15,308		859			34			8			-			16,209

Total Operating Expenses		516,022		390,056			7,410			1,398			(8,730	)		906,156

Operating Income (Loss)		135,105		(918	)		1,928			(1,383	)		-			134,732
Other Income (Expenses)-Net		612		28			28			314			(222	)		760
Interest Expense		11,240		221			(1	)		237			(222	)		11,475
Income Tax Expense (Benefit)		48,772		(444	)		756			(467	)		-			48,617
Dividends on Washington Gas preferred stock		330		-			-			-			-			330

Net Income (Loss) Applicable to Common Stock	$	75,375	$	(667	)	$	1,201		$	(839	)	$	-		$	75,070

Total Assets	$	3,036,325	$	353,280		$	26,184		$	153,266		$	(191,752	)	$	3,377,303

Capital Expenditures/Investments	$	34,187	$	188		$	8		$	(1	)	$	-		$	34,382

^(a) Operating revenues are reported gross of revenue taxes. Revenue taxes of both the regulated utility and the retail energy-marketing segments include gross receipt taxes. Revenue taxes of the regulated utility segment also include PSC fees, franchise fees and energy taxes. Operating revenue amounts in the “Eliminations” column represent total intersegment revenues associated with sales from the regulated utility segment to the retail energy-marketing segment.

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-			Design-Build			Other
(In thousands)	Utility		Marketing			Energy Systems			Activities			Eliminations			Consolidated

Six Months Ended March 31, 2010

Operating Revenues (a)	$	1,018,159	$	774,128		$	7,778		$	(2	)	$	(16,002	)	$	1,784,061

Operating Expenses:
Cost of energy-related sales		532,201		758,443			6,545			-			(16,002	)		1,281,187
Operation		107,128		18,688			1,648			1,854			-			129,318
Maintenance		22,470		-			-			-			-			22,470
Depreciation and amortization		47,994		379			25			-			-			48,398
General taxes and other assessments:
Revenue taxes		41,737		1,316			-			-			-			43,053
Other		29,462		1,814			84			14			-			31,374

Total Operating Expenses		780,992		780,640			8,302			1,868			(16,002	)		1,555,800

Operating Income (Loss)		237,167		(6,512	)		(524	)		(1,870	)		-			228,261
Other Income (Expenses)-Net		683		37			26			249			(131	)		864
Interest Expense		19,837		129			-			124			(131	)		19,959
Income Tax Expense (Benefit)		85,651		(2,674	)		(195	)		(623	)		-			82,159
Dividends on Washington Gas preferred stock		660		-			-			-			-			660

Net Income (Loss) Applicable to Common Stock	$	131,702	$	(3,930	)	$	(303	)	$	(1,122	)	$	-		$	126,347

Total Assets	$	3,254,575	$	403,973		$	19,133		$	135,703		$	(193,512	)	$	3,619,872

Capital Expenditures/Investments	$	54,947	$	2,617		$	104		$	-		$	-		$	57,668

Six Months Ended March 31, 2009

Operating Revenues (a)	$	1,181,767	$	682,983		$	19,116		$	(1	)	$	(16,889	)	$	1,866,976

Operating Expenses:
Cost of energy-related sales		698,817		665,293			14,018			-			(16,889	)		1,361,239
Operation		108,567		15,285			1,794			1,998			-			127,644
Maintenance		21,129		-			-			-			-			21,129
Depreciation and amortization		47,871		427			28			-			-			48,326
General taxes and other assessments:
Revenue taxes		42,155		298			-			-			-			42,453
Other		27,613		1,537			63			16			-			29,229

Total Operating Expenses		946,152		682,840			15,903			2,014			(16,889	)		1,630,020

Operating Income (Loss)		235,615		143			3,213			(2,015	)		-			236,956
Other Income (Expenses)-Net		380		38			103			764			(508	)		777
Interest Expense		23,025		511			(1	)		627			(508	)		23,654
Income Tax Expense (Benefit)		83,218		(113	)		1,284			(665	)		-			83,724
Dividends on Washington Gas preferred stock		660		-			-			-			-			660

Net Income (Loss) Applicable to Common Stock	$	129,092	$	(217	)	$	2,033		$	(1,213	)	$	-		$	129,695

Total Assets	$	3,036,325	$	353,280		$	26,184		$	153,266		$	(191,752	)	$	3,377,303

Capital Expenditures/Investments	$	64,579	$	1,355		$	22		$	-		$	-		$	65,956

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

NOTE 12. RELATED PARTY TRANSACTIONS

WGL Holdings and its subsidiaries engage in transactions among each other during the ordinary course of business. Intercompany transactions and balances have been eliminated from the consolidated financial statements of WGL Holdings. Washington Gas provides accounting, treasury, legal and other administrative and general support to affiliates, and files consolidated 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 Washington Gas’s balance sheets. Washington Gas assigns or allocates these costs directly to its affiliates and, therefore, does not recognize revenues or expenses associated with providing these services.

In connection with billing for unregulated third party marketers and with other miscellaneous billing processes, Washington Gas collects cash on behalf of affiliates and transfers the cash as quickly as reasonably possible. Cash collected by Washington Gas on behalf of its affiliates but not yet transferred is recorded in “Payables to associated companies” on Washington Gas’s balance sheets. These transactions recorded by Washington Gas impact the balance sheet only.

At March 31, 2010 and September 30, 2009, the Washington Gas Balance Sheets reflected receivables from associated companies of $2.2 million and $10.4 million, respectively. At March 31, 2010 and September 30, 2009, the Washington Gas Balance Sheets reflected payables to associated companies of $42.5 million and $11.4 million, respectively, related to the activities described above.

Additionally, Washington Gas provides gas balancing services related to storage, injections, withdrawals and deliveries to all energy marketers participating in the sale of natural gas on an unregulated basis through the customer choice programs that operate in its service territory. These balancing services include the sale of natural gas supply commodities related to various peaking arrangements contractually supplied to Washington Gas and then partially allocated and assigned by Washington Gas to the energy marketers, including WGEServices. Washington Gas records revenues for these balancing services pursuant to tariffs approved by the appropriate regulatory bodies. In conjunction with such services and the related sales and purchases of natural gas, Washington Gas charged WGEServices, an affiliated energy marketer, $7.7 million and $8.7 million for the three months ended March 31, 2010 and 2009, respectively. In the six months ended March 31, 2010 and 2009, the charges were $16.0 million and $16.9 million, respectively. These related party amounts have been eliminated in the consolidated financial statements of WGL Holdings.

As a result of these balancing services, an imbalance is created for volumes of natural gas received by Washington Gas that are not equal to the volumes of natural gas delivered to customers of the energy marketers. WGEServices has recognized an accounts receivable from Washington Gas in the amount of $6.2 million and $4.6 million at March 31, 2010 and September 30, 2009, respectively, related to an imbalance in gas volumes. Due to regulatory requirements, these receivables are not eliminated in the consolidated financial statements of WGL Holdings.

NOTE 13. COMMITMENTS AND CONTINGENCIES

REGULATED UTILITY OPERATIONS

Regulatory Contingencies

Certain legal and administrative proceedings incidental to our business, including regulatory contingencies, involve WGL Holdings and/or its subsidiaries. In our opinion, we have recorded an adequate provision for probable losses or refunds to customers for regulatory contingencies related to these proceedings.

District of Columbia Jurisdiction

Recovery of Heavy Hydrocarbon (HHC) Costs. On May 1, 2006, Washington Gas filed two tariff applications with the Public Service Commission of the District of Columbia (PSC of DC) requesting approval of proposed revisions to the balancing charge provisions of its firm and interruptible delivery service tariffs that would permit the utility to recover from its delivery service customers the costs of HHCs that are being injected into Washington Gas’s natural gas distribution system to treat vaporized liquefied natural gas from the Dominion Cove Point Facility. Washington Gas had been recovering the costs of HHCs from sales customers in the District of Columbia through its Purchased Gas Charge (PGC) provision in this jurisdiction.

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

On October 2, 2006, the PSC of DC issued an order rejecting Washington Gas’s proposed tariff revisions until the Public Service Commission of Maryland (PSC of MD) issued a final order related to this matter. On October 12, 2006, Washington Gas filed a motion for clarification requesting that the PSC of DC affirm that Washington Gas can continue collecting HHC costs from sales customers through its PGC provision or to record such HHC costs incurred as a regulatory asset pending a ruling by the PSC of DC on future cost recovery. On May 11, 2007, the PSC of DC directed Washington Gas to cease prospective recovery of the cost of HHCs through the PGC provision, with future HHC costs to be recorded as a “pending” regulatory asset. On November 16, 2007 the PSC of MD issued a final order in the relevant case supporting full recovery of the HHC costs in Maryland. On March 25, 2008, the PSC of DC issued an order stating that the consideration of Washington Gas’s HHC strategy will move forward and directed interested parties to submit filings reflecting a proposed procedural schedule. On June 6, 2008, Washington Gas and the District of Columbia Office of the People’s Counsel (DC OPC) filed a joint response to the order proposing a procedural schedule and a list of issues for consideration in the case. The PSC of DC adopted the proposed issues list and approved a procedural schedule. Washington Gas and other parties subsequently filed comments, conducted discovery and the parties filed reply comments. On April 30, 2009, the PSC of DC ruled that there were unresolved issues and directed that they should be addressed in evidentiary hearings. The PSC of DC issued an order establishing a procedural schedule to address these unresolved issues in the case. Initial testimony was filed May 29, 2009, and rebuttal testimony was filed on July 24, 2009.

On October 2, 2009, Washington Gas and the DC OPC filed a Joint Motion for Approval of Unanimous Agreement of Stipulation and Full Settlement with the PSC of DC (Stipulation). The parties to the Stipulation agreed that hexane (an HHC) commodity costs incurred by Washington Gas to condition liquefied natural gas received in Washington Gas’s natural gas system are recoverable expenses and that Washington Gas is authorized to achieve full cost recovery from sales and delivery service customers of hexane commodity costs incurred prior to September 30, 2009. Additionally, the Stipulation:

	(i)		approves the recovery of hexane commodity costs incurred after September 30, 2009 from sales and delivery service customers, subject to review as a component of Washington Gas’s cost of gas;

	(ii)		establishes a coupling replacement and encapsulation program (program), wherein Washington Gas will replace or encapsulate a portion of its mechanically coupled pipe in the District of Columbia. The program is expected to conclude in approximately seven years with total spending not to exceed $28.0 million;

	(iii)		provides for the cost of the program to be recovered through an annual surcharge based on actual expenditures for coupling replacement and encapsulation that will become effective at the end of the existing base rate freeze (October 1, 2011). The cost will include both a return of and return on the cost of coupling replacement and encapsulation, computed in accordance with the terms of the rates currently in effect and

	(iv)		establishes periodic reporting on the level of hexane injected at each of Washington Gas’s hexane facilities with the associated commodity costs, and continued filing of leak-related information with the PSC of DC.

On October 16, 2009, the PSC of DC published a Notice of Public Interest Hearing, held on October 28, 2009. On December 16, 2009, the PSC of DC issued a final order approving the settlement agreement, including recovery of hexane commodity costs, provided the parties agree to change the September 30, 2009 date to the effective date of the newly approved tariffs. The parties filed the modified language consistent with the final order. Pursuant to the final order, Washington Gas established a regulatory asset by reversing hexane costs previously expensed of $0.7 million into income.

As of March 31, 2010 Washington Gas has incurred cumulative total hexane costs of $2.4 million related to the District of Columbia of which approximately $0.9 million has been recovered and $1.5 million has been deferred as a regulatory asset to be recovered over the next two years.

Revenue Normalization Adjustment (RNA). On December 21, 2009, Washington Gas filed a revised tariff application seeking approval of an RNA, a sales adjustment mechanism that decouples Washington Gas’s non-gas revenues from actual delivered volumes of gas. On December 22, 2009, the DC OPC filed a motion requesting that the PSC of DC establish public hearing procedures to examine the merits of Washington Gas’s RNA application. Washington Gas filed an opposition to the DC OPC’s motion on January 4, 2010. The PSC of DC issued an order on January 19, 2010 granting the DC OPC’s motion for evidentiary hearing and initiated a rate proceeding to consider issues surrounding Washington Gas’s tariff application.

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

On April 2, 2010, the PSC of DC issued an order designating issues to be addressed and establishing a procedural schedule for the case. Washington Gas filed supplemental testimony on April 13, 2010. Direct testimony of other parties is scheduled to be filed on May 17, 2010. Evidentiary hearings are scheduled for July 27 and 28, 2010.

Maryland Jurisdiction

Order on and Review of Purchased Gas Charges. Each year, the PSC of MD reviews the annual gas costs collected from customers in Maryland to determine if Washington Gas’s purchased gas costs are reasonable. On March 14, 2006, in connection with the PSC of MD’s annual review of Washington Gas’s gas costs that were billed to customers in Maryland from September 2003 through August 2004, a Hearing Examiner of the PSC of MD issued a proposed order approving purchased gas charges of Washington Gas for the twelve-month period ended August 2004, except for $4.6 million of such charges that the Hearing Examiner recommended be disallowed because, in the opinion of the Hearing Examiner, they were not reasonably incurred. As a result, during the fiscal year ended September 30, 2006, Washington Gas accrued a liability of $4.6 million related to the proposed disallowance of these purchased gas charges.

Washington Gas filed appeals with the PSC of MD asserting that the Hearing Examiner’s recommendation was without merit. On February 5, 2009, the PSC of MD issued an order that granted the appeal and reversed the findings of the Hearing Examiner. Accordingly, the gas costs at issue were deemed recoverable from rate payers. The PSC of MD’s order concluded that the responsibility for recovery of these costs should be assigned to the specific group of customers associated with unbundled firm delivery service, directing Washington Gas to bill such costs to those customers over a 24-month period and to provide a credit to firm bundled sales customers over the same period. As a result of this order, the liability recorded in fiscal year 2006 for this issue was reversed in the quarter ended December 31, 2008, and Washington Gas recorded income of $4.6 million to “Operating revenues-utility.” On February 25, 2009, Washington Gas filed its compliance plan with the PSC of MD which outlined the plan for returning these funds to its firm sales customers, as well as collecting funds from firm delivery service customers beginning with Washington Gas’s May 2009 billing cycle and ending with its April 2011 billing cycle. On April 29, 2009, the PSC of MD approved Washington Gas’s plan.

A hearing was held March 27, 2009 on Washington Gas’s purchased gas charges for the twelve month period ended August 31, 2008. No party challenged Washington Gas’s gas costs incurred during the period, but the Staff of the PSC of MD (MD Staff) and the Maryland Office of People’s Counsel (MD OPC) requested that the case remain open subject to any changes that may result from the final PSC of MD order regarding Washington Gas’s asset management and gas purchase practices (refer to the section entitled “Investigation of Asset Management and Gas Purchase Practices” for a further discussion of this case). On April 23, 2010, the Hearing Examiner issued a Proposed Order which approved Washington Gas’s gas costs for the period, subject to any changes which may arise from the Commission’s final order in the asset management investigation in Case No. 9158, which is currently pending. The Order becomes a final order of the Commission on May 25, 2010, unless before that date an appeal is filed or the Commission modifies or reverses the proposed order.

A hearing was held on March 25, 2010 on Washington Gas’s purchased gas charges for the twelve month period ended August 31, 2009. The parties filed initial briefs on April 30, 2010. Reply briefs are due May 21, 2010.

Virginia Jurisdiction

Application for Conservation and Ratemaking Efficiency Plan. On September 29, 2009, Washington Gas filed with the Virginia State Corporation Commission (SCC of VA) an application which included a portfolio of conservation and energy efficiency programs, an associated cost recovery provision and a decoupling mechanism which will adjust weather normalized non-gas distribution revenues for the impact of conservation or energy efficiency efforts. An evidentiary hearing in the proceeding was held on February 9, 2010. On March 26, 2010 the SCC of VA issued an Order approving a decoupling rate mechanism for residential customers and six residential energy efficiency programs and the cost recovery mechanism for those programs.

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

Washington Gas filed compliance tariffs with the Staff of the SCC of VA on April 19, 2010 to implement the Conservation and Ratemaking Efficiency Plan on May 1, 2010.

Performance-Based Rate Plans

In rate case proceedings in all jurisdictions, Washington Gas requested permission to implement Performance-Based Rate (PBR) plans that include performance measures for customer service and an Earnings Sharing Mechanism (ESM) that enables Washington Gas to share with shareholders and customers the earnings that exceed a target rate of return on equity.

Effective October 1, 2007, the SCC of VA approved the implementation of a PBR plan through the acceptance of a settlement stipulation, which includes: (i) a four-year base rate freeze; (ii) service quality measures to be determined in conjunction with the Staff of the SCC of VA and reported quarterly for maintaining a safe and reliable natural gas distribution system while striving to control operating costs; (iii) recovery of initial implementation costs associated with achieving Washington Gas’s business process outsourcing (BPO) initiatives over the four-year period of the PBR plan and (iv) an ESM that enables Washington Gas to share with shareholders and Virginia customers the earnings that exceed a target of 10.5% return on equity. The calculation of the ESM excludes $2.4 million of asset management revenues that are being refunded to customers as part of a new margin sharing agreement in Virginia.

On May 4, 2009, the Staff of the SCC of VA issued a report, commenting on the amount of the ESM liability that had been reported for the fiscal year ending September 30, 2008. Washington Gas filed its response to the Staff report on June 18, 2009. On July 17, 2009, Washington Gas and the Staff of the SCC of VA filed a joint motion to approve stipulation and close proceeding with the SCC of VA whereby the Staff of the SCC of VA and Washington Gas agreed upon the appropriate refund to ratepayers under the ESM. The overall difference between the Staff position and Washington Gas’s position was not material to the financial statements of Washington Gas. On July 24, 2009, the SCC of VA granted the joint motion and accepted the stipulation submitted by Washington Gas and the Staff of the SCC of VA in its final order approving the ESM liability for fiscal year 2008. In accordance with the provisions of its VA tariff, Washington Gas began crediting customers’ bills in April 2009 for the fiscal year 2008 ESM liability. The credits continued through March, 2010. At March 31, 2010, Washington Gas had fully refunded the ESM liability to its customers.

On January 28, 2010, Washington Gas filed its annual information filing indicating that there was no ESM liability for fiscal year 2009. The Staff of the SCC of VA’s report to the SCC of VA on Washington Gas’s filing is expected in the summer of 2010. Based on the results reflected in the annual information filing, Washington Gas has recorded revenue of approximately $0.5 million of previously expensed hexane costs.

On an interim basis, Washington Gas records the effects of the ESM based on year-to-date earnings in relation to estimated annual earnings as calculated for regulatory purposes. Based on expected results for 2010, no liability has been recognized for 2010 and Washington Gas has accrued revenue of approximately $1.0 million related to the recovery of hexane costs incurred in Virginia

On November 16, 2007, the PSC of MD issued a final order in a rate case which established a phase-two proceeding to review Washington Gas’s request to implement a PBR plan and issues raised by the parties associated with Washington Gas’s BPO agreement. On September 4, 2008, a proposed order of Hearing Examiner was issued in this phase-two proceeding. Consistent with Washington Gas’s current accounting methodology, the proposed order approved 10-year amortization accounting for initial implementation costs related to Washington Gas’s BPO plan. At March 31, 2010 and September 30, 2009, we had recorded a regulatory asset of $7.0 million and $7.4 million, respectively, net of amortization, related to initial implementation costs allocable to Maryland associated with our BPO plan. Washington Gas’s application seeking approval of a PBR plan was denied. Additionally, the proposed order (i) directs Washington Gas to obtain an independent management audit related to issues raised in the phase-two proceeding and (ii) directs the initiation of a collaboration process in which Washington Gas is directed to engage in discussions with the Staff of the PSC of MD (MD Staff), the MD OPC and interested parties to develop appropriate customer service metrics and a periodic form for reporting results similar to the metrics filed by Washington Gas as part of the approved settlement in Virginia. This proposed order has been appealed by the MD Staff, the MD OPC and other parties. Washington Gas’s reply memorandum on appeal was filed on November 5, 2008. A final decision by the PSC of MD is pending.

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

The final order issued by the PSC of DC on December 28, 2007 approved amortization accounting for initial implementation costs related to the BPO plan in approving the stipulated agreement filed in the proceeding. As part of that approved agreement, Washington Gas withdrew its application seeking approval of a PBR plan. Washington Gas is prohibited from seeking approval of a PBR plan in the District of Columbia until the filing of its next base rate case; however, the settling parties may not seek a change in rates during the rate case filing moratorium period under the terms of the approved rate settlement, with the exception of the implementation of a revenue normalization adjustment.

Depreciation Study

In October 2006, Washington Gas completed a depreciation rate study based on its property, plant and equipment balances as of December 31, 2005. The results of the depreciation study concluded that Washington Gas’s depreciation rates should be reduced due to asset lives being extended beyond previously estimated lives. Under regulatory requirements, these depreciation rates must be approved before they are placed into effect.

On April 13, 2007, Washington Gas filed the portion of the depreciation study related to the Maryland jurisdiction. A separate proceeding was established on May 2, 2007, by the PSC of MD to review Washington Gas’s request to implement new depreciation rates. On October 25, 2007, Washington Gas filed a 2007 technical update of the Maryland depreciation study based on property, plant and equipment balances as of December 31, 2006. Hearings were held May 12 and 13, 2008. Initial briefs were filed on July 16, 2008 and reply briefs were filed on August 6, 2008. On October 15, 2008, a proposed order of Hearing Examiner was issued in Maryland, which would reduce Washington Gas’s annual depreciation expense related to the Maryland jurisdiction by approximately $11.2 million when new depreciation rates are implemented, with a corresponding decrease in annual revenues on a prospective basis to be reflected in future billing rates. Reflected in this reduction in depreciation expense, among other things, are: (i) a change in methodology for calculating accrued asset removal costs and (ii) the designation of certain insurance and relocation reimbursements as salvage value. This reduction in depreciation expense will not impact annual operating income and will not prevent the recovery of our capital investment; however, it will have the effect of deferring full recovery of our capital investment into future years. On November 14, 2008, Washington Gas and the MD OPC noted appeals of the October 15, 2008 proposed order, thus suspending its effective date.

On February 5, 2010, the PSC of MD issued an order on appeal. The order affirmed the proposed order with two exceptions: (i) it directed the parties to confer and report on a prospective allocation method for reimbursements and (ii) it directed Washington Gas to amortize its $13.3 million reserve deficiency imbalance over a 33.5 year time frame. On March 26, 2010, Washington Gas made a compliance filing with the PSC of MD to revise its depreciation rates in accordance with the Commission’s February 5, 2010 Order. Under Washington Gas’s proposed revised depreciation rates, annual depreciation expense applicable to Maryland would be reduced by $11,366,000. As required by the Commission’s Order in Washington Gas’s most recent base rate case in Maryland, as part of its compliance filing, Washington Gas also filed revised base rates to reflect the decrease in annual depreciation expense in Maryland. The MD Staff has challenged Washington Gas’s proposed depreciation rates and supports alternative depreciation rates which would reduce depreciation expense by $11,426,000. The Commission is expected to consider the matter at its weekly Administrative Meeting on May 12, 2010. Washington Gas will request that revised depreciation rates and base rates be implemented effective June 1, 2010.

The PSC of MD’s practice provides that the prospective impact of changes in depreciation rates from such an order will not be reflected on Washington Gas’s accounts and records until a change in Washington Gas’s distribution rates charged to customers takes effect. Implementation of revised depreciation rates and base rates is subject to approval by the PSC of MD.

NON-UTILITY OPERATIONS

Construction Project Financing

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

As the lender funds the construction project, Washington Gas establishes a receivable representing its customers’ obligations to remit principal and interest and a long-term payable to the lender. When these projects are formally “accepted” by the customer as completed, Washington Gas transfers the ownership of the receivable to the lender and removes both the receivable and the long-term financing from its financial statements. As of March 31, 2010, work on these construction projects that was not completed or accepted by customers was valued at $6.4 million, which is recorded on the balance sheet as a receivable in “Deferred Charges and Other Assets—Other” with the corresponding long-term obligation to the lender in “Long-term debt.” At any time before these contracts are accepted by the customer, should there be a contract default, such as, among other things, a delay in completing the project, the lender may call on Washington Gas to fund the unpaid principal in exchange for which Washington Gas would receive the right to the stream of payments from the customer. Once the project is accepted by the customer, the lender will have no recourse against Washington Gas related to this long-term debt.

Financial Guarantees

WGL Holdings has guaranteed payments for certain purchases of natural gas and electricity on behalf of the retail energy-marketing segment. At March 31, 2010, these guarantees totaled $571.5 million. The amount of such guarantees is periodically adjusted to reflect changes in the level of financial exposure related to these purchase commitments. We also receive financial guarantees or other collateral from suppliers when required by our credit policy. WGL Holdings has issued guarantees related to purchase commitments of its Capitol Energy Ventures subsidiary. At March 31, 2010, these guarantees totaled $11.0 million. WGL Holdings also issued guarantees totaling $3.0 million at March 31, 2010 that were made on behalf of certain of our non-utility subsidiaries associated with their banking transactions. Of the total guarantees of $585.5 million, $42.0 million are due to expire on December 31, 2010. The remaining guarantees 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; however, WGL Holdings would continue to be responsible for the obligations that had been created under the guarantees prior to the effective date of the cancellation.

NOTE 14. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

The following tables show the components of net periodic benefit costs (income) recognized in our financial statements during the three and six months ended March 31, 2010 and 2009:

Components of Net Periodic Benefit Costs (Income)


	Three Months Ended March 31,
	2010						2009
	Pension			Health and			Pension			Health and
(In thousands)	Benefits			Life Benefits			Benefits			Life Benefits

Components of net periodic benefit costs (income)
Service cost	$	2,418		$	1,648		$	2,117		$	1,288
Interest cost		10,522			6,331			10,678			6,257
Expected return on plan assets		(11,419	)		(4,605	)		(12,889	)		(4,492	)
Amortization of prior service cost		261			(1,005	)		430			(1,006	)
Amortization of actuarial loss		1,069			2,195			104			1,231
Amortization of transition obligation		-			272			-			272

Net periodic benefit cost		2,851			4,836			440			3,550

Amount allocated to construction projects		(253	)		(758	)		36			(601	)
Amount deferred as regulatory asset/liability - net		(1,309	)		504			(991	)		866
Other		7			-			(25	)		(5	)

Amount charged (credited) to expense	$	1,296		$	4,582		$	(540	)	$	3,810

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)


	Six Months Ended March 31,
	2010						2009
	Pension			Health and			Pension			Health and
(In thousands)	Benefits			Life Benefits			Benefits			Life Benefits

Components of net periodic benefit costs (income)
Service cost	$	4,900		$	3,296		$	4,234		$	2,566
Interest cost		21,336			12,662			21,356			12,514
Expected return on plan assets		(23,174	)		(9,210	)		(25,777	)		(8,984	)
Amortization of prior service cost		531			(2,011	)		859			(2,011	)
Amortization of actuarial loss		2,157			4,390			208			2,462
Amortization of transition obligation		-			543			-			543

Net periodic benefit cost		5,750			9,670			880			7,090

Amount allocated to construction projects		(524	)		(1,527	)		66			(1,100	)
Amount deferred as regulatory asset/liability - net		(2,613	)		1,009			(1,981	)		1,666
Other		15			-			(50	)		-

Amount charged (credited) to expense	$	2,628		$	9,152		$	(1,085	)	$	7,656

Amounts included in the line item “Amount deferred as regulatory asset/liability-net,” as shown in the table above, represent the difference between the cost of the applicable Pension Benefits or the Health and Life Benefits and the amount that Washington Gas is permitted to recover in rates that it charges to customers in the District of Columbia.

Under the new changes to the defined contribution savings plan announced on July 20, 2009, approximately 65 employees elected to cease participating in the non-contributory defined benefit plan in return for receiving an enhanced contribution under the defined contribution savings plan.

NOTE 15. SUBSEQUENT EVENTS

We have evaluated all subsequent events through the date the financial statements were issued. Other than the disclosures below, there were no additional events that require adjustment of, or disclosure in, the consolidated financial statements for the period ended March 31, 2010.

On April 6, 2010, Washington Gas retired $4.0 million of 7.5% MTNs. On April 12, 2010, Washington Gas elected to redeem $50.0 million of 1.05% floating-rate MTNs due August 26, 2010 at 100% of face value. On April 13, 2010, Washington Gas entered into a forward starting swap that expires May 12, 2010 which locks in a 0.34% refinancing cost for the called debt. On May 7, 2010, Washington Gas entered into a forward starting swap that expires November 30, 2010, and locks in a 4.16% cost for the treasury exposure on $75 million of 30-year debt.

WGL Holdings, Inc.
Washington Gas Light Company
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

INTRODUCTION

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) analyzes the financial condition, results of operations and cash flows of WGL Holdings, Inc. (WGL Holdings) and its subsidiaries and should be read in conjunction with our unaudited financial statements and the accompanying notes in this quarterly report, as well as our combined Annual Report on Form 10-K for WGL Holdings and Washington Gas Light Company (Washington Gas) for the fiscal year ended September 30, 2009 (2009 Annual Report). Except where the content clearly indicates otherwise, “WGL Holdings,” “we,” “us” or “our” refers to the holding company or the consolidated entity of WGL Holdings and all of its subsidiaries.

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 discussions of our regulated and unregulated operations. WGL Holdings’ operations are derived from the results of Washington Gas and the results of our non-utility operations.

	•		*Washington Gas*—This section describes the financial condition and results of operations of Washington Gas, a wholly owned subsidiary that comprises the majority of our regulated utility segment.

Unless otherwise noted, earnings per share amounts are presented on a diluted basis and are based on weighted average common and common equivalent shares outstanding. Our operations are seasonal and, accordingly, our operating results for the interim periods presented are not indicative of the results to be expected for the full fiscal year.

EXECUTIVE OVERVIEW

Introduction

WGL Holdings, through its wholly owned subsidiaries, sells and delivers natural gas and provides a variety of energy-related products and services to customers primarily in the District of Columbia and the surrounding metropolitan areas in Maryland and Virginia. WGL Holdings has three operating segments that are described below.

Regulated Utility. With approximately 90% of our consolidated total assets, the regulated utility segment consists of Washington Gas and Hampshire Gas Company (Hampshire). Washington Gas, a wholly owned subsidiary of WGL Holdings, delivers natural gas to retail customers in accordance with tariffs approved by the regulatory commissions that have jurisdiction over Washington Gas’s rates. Washington Gas also sells natural gas to customers who have not elected to purchase natural gas from unregulated third party marketers.

The rates charged to utility customers, are designed to recover Washington Gas’s operating expenses and natural gas commodity costs and to provide a return on its investment in the net assets used in its firm gas sales and delivery service. Washington Gas recovers the cost of the natural gas to serve firm customers through the gas cost recovery mechanisms as approved in jurisdictional tariffs. Any difference between the firm customer gas costs incurred and the gas costs recovered from those firm customers is deferred on the balance sheet as an amount to be collected from or refunded to customers in future periods. Therefore, increases or decreases in the cost of gas associated with sales made to firm customers have no direct effect on Washington Gas’s net revenues and net income.

WGL Holdings, Inc.
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’s asset optimization program utilizes Washington Gas’s storage and transportation capacity resources when not fully being used to physically serve utility customers by entering into commodity-related physical and financial contracts with third parties with the objective of deriving a profit to be shared with its utility customers (refer to the section entitled “Market Risk” for a further discussion of our asset optimization program). Unless otherwise noted, therm deliveries shown related to Washington Gas or the regulated utility segment do not include therm deliveries related to our asset optimization program.

Hampshire, a wholly owned subsidiary of WGL Holdings, is regulated by the Federal Energy Regulatory Commission (FERC). Hampshire operates and owns full and partial interests in underground natural gas storage facilities including pipeline delivery facilities located in and around Hampshire County, West Virginia. Washington Gas purchases all of the storage services of Hampshire and includes the cost of these services in the bills sent to its customers. Hampshire operates under a “pass-through” cost of service-based tariff approved by the FERC, and adjusts its billing rates to Washington Gas on a periodic basis to account for changes in its investment in utility plant and associated expenses.

Retail Energy-Marketing. The retail energy-marketing segment consists of the operations of Washington Gas Energy Services, Inc. (WGEServices), a wholly owned subsidiary of Washington Gas Resources. WGEServices competes with regulated utilities and other unregulated third party marketers to sell natural gas and/or electricity directly to residential, commercial and industrial customers in Maryland, Virginia, Delaware, Pennsylvania and the District of Columbia. WGEServices contracts for its supply needs and buys and resells natural gas and electricity with the objective of earning a profit through competitively priced contracts with end-users. These commodities are delivered to retail customers through the distribution systems owned by regulated utilities such as Washington Gas or other unaffiliated natural gas or electric utilities. WGEServices is also expanding its renewable energy and energy conservation product and service offerings. Other than its Solar PV facilities, WGEServices does not own or operate any natural gas or electric generation, production, transmission or distribution assets. Continued expansion may include the ownership of other renewable energy producing assets.

Design-Build Energy Systems. Our design-build energy systems segment, which consists of the operations of Washington Gas Energy Systems, Inc. (WGESystems), provides design-build energy efficient and sustainable solutions to government and commercial clients. WGESystems focuses on upgrading the mechanical, electrical, water and energy-related systems of large government and commercial facilities by implementing both traditional as well as alternative energy technologies, primarily in the District of Columbia, Maryland and Virginia.

PRIMARY FACTORS AFFECTING WGL HOLDINGS AND WASHINGTON GAS

The principal business, economic and other factors that affect our operations and/or financial performance include:

	•	weather conditions and weather patterns;

	•	regulatory environment and regulatory decisions;

	•	availability of natural gas supply and pipeline transportation and storage capacity;

	•	diversity of natural gas supply;

	•	volatility of natural gas prices;

	•	non-weather related changes in natural gas consumption patterns;

	•	maintaining the safety and reliability of the natural gas distribution system;

	•	competitive environment;

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

	•	environmental matters;

	•	industry consolidation;

	•	economic conditions and interest rates;

	•	inflation/deflation;

	•	use of business process outsourcing;

	•	labor contracts, including labor and benefit costs; and

	•	changes in accounting principles.

For further discussion of the factors listed above, refer to Management’s Discussion within the 2009 Annual Report. Also, refer to the section entitled “Safe Harbor for Forward-Looking Statements” included in this quarterly report for a listing of forward-looking statements related to factors affecting WGL Holdings and Washington Gas.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in compliance with GAAP requires the selection and the application of appropriate technical accounting guidance to the relevant facts and circumstances of our operations, as well as our use of estimates 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-regulated business segments.

We have identified the following critical accounting policies that require our judgment and estimation, where the resulting estimates may have a material effect on the consolidated financial statements:

	•		accounting for unbilled revenue;

	•		accounting for regulatory operations — regulatory assets and liabilities;

	•		accounting for income taxes;

	•		accounting for contingencies;

	•		accounting for derivative instruments;

	•		accounting for pension and other post-retirement benefit plans and

	•		accounting for stock based compensation.

For a description of these critical accounting policies, refer to Management’s Discussion within the 2009 Annual Report. Refer to Note 1 of the Notes to Consolidated Financial Statements in this quarterly report for a discussion of newly implemented accounting policies.

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

WGL HOLDINGS, INC.

RESULTS OF OPERATIONS — Three Months Ended March 31, 2010 vs. March 31, 2009

We analyze the operating results of the regulated utility segment using utility net revenues and the retail energy-marketing segment using gross margins. Both utility net revenues and gross margins are calculated as revenues less the associated cost of energy and applicable revenue taxes. We believe utility net revenues is a better measure to analyze profitability than gross operating revenues for our regulated utility segment because the cost of the natural gas commodity and revenue taxes are generally included in the rates that Washington Gas charges to customers as reflected in operating revenues. Accordingly, changes in the cost of gas and revenue taxes associated with sales made to customers generally have no direct effect on utility net revenues, operating income or net income. We consider gross margins to be a better reflection of profitability than gross revenues or gross energy costs for our retail energy-marketing segment because gross margins are a direct measure of the success of our core strategy for the sale of natural gas and electricity.

Neither utility net revenues nor gross margins should be considered as an alternative to, or a more meaningful indicator of, our operating performance than net income. Our measures of utility net revenues and gross margins may not be comparable to similarly titled measures of other companies. Refer to the sections entitled “Results of Operations — Regulated Utility Operating Results” and “Results of Operations — Non-Utility Operating Results” for the calculation of utility net revenues and gross margins, respectively, as well as a reconciliation to operating income and net income for both segments.

Summary Results

WGL Holdings reported net income applicable to common stock of $78.7 million, or $1.56 per share, for the three months ended March 31, 2010 over $75.1 million, or $1.49 per share, reported for the three months ended March 31, 2009.

The comparison of results for the three month period ended March 31, 2010 compared to the same period of the prior fiscal year primarily reflects an increase in earnings from the regulated utility segment partially offset by decreased earnings from our retail energy-marketing and design-build energy systems segments.

The following table summarizes our net income (loss) applicable to common stock by operating segment for the three months ended March 31, 2010 and 2009.


Net Income (Loss) Applicable to Common Stock by Operating Segment
		Three Months Ended
		March 31,						Increase/
(In millions)	2010			2009				(Decrease)

Regulated Utility	$	91.0		$	75.4		$	15.6
Non-utility operations:
Retail Energy-Marketing		(11.4	)		(0.7	)		(10.7	)
Design-Build Energy Systems		(0.1	)		1.2			(1.3	)
Other, principally non-utility activities		(0.8	)		(0.8	)		-

Total non-utility		(12.3	)		(0.3	)		(12.0	)

Net Income applicable to common stock	$	78.7		$	75.1		$	3.6

EARNINGS PER AVERAGE COMMON SHARE
Basic	$	1.56		$	1.50		$	0.06
Diluted	$	1.56		$	1.49		$	0.07

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

Regulated Utility Operating Results

The following table summarizes the regulated utility segment’s operating results for the three months ended March 31, 2010 and 2009.


Regulated Utility Operating Results
		Three Months Ended
		March 31,					Increase/
(In millions)		2010			2009		(Decrease)

Utility net revenues:
Operating revenues	$	619.3		$	651.1		$	(31.8	)
Less: Cost of gas		326.6			383.9			(57.3	)
Revenue taxes		24.3			24.9			(0.6	)

Total utility net revenues		268.4			242.3			26.1
Operation and maintenance		66.5			67.9			(1.4	)
Depreciation and amortization		24.0			24.0			-
General taxes and other assessments		17.0			15.3			1.7

Operating income		160.9			135.1			25.8
Interest expense		10.1			11.2			(1.1	)
Other (income) expenses-net, including preferred stock dividends		(0.1	)		(0.3	)		0.2
Income tax expense		59.9			48.8			11.1

Net income applicable to common stock	$	91.0		$	75.4		$	15.6

The regulated utility segment’s net income applicable to common stock was $91.0 million for the three months ended March 31, 2010, an increase of $15.6 million over $75.4 million for the same three-month period of the prior fiscal year. The increase in net income primarily reflects: (i) a an increase in over 7,600 average active customer meters; (ii) $5.5 million of favorable effects of changes in natural gas consumption patterns; (iii) $4.2 million due to lower regulatory obligations under the Virginia Earnings Sharing Mechanism (ESM); (iv) a $17.9 million increase in unrealized margins associated with our asset optimization program; (v) $3.7 million lower costs for weather protection products related to the District of Columbia and (vi) a decrease in interest expense of $1.3 million primarily due to lower weighted average interest rates and balances associated with our borrowings. Partially offsetting this increase was: (i) a $3.3 million decrease in the recovery of storage carrying costs on lower average storage gas inventory balances; (ii) an increase of $2.4 million caused by higher employee benefit expenses primarily due to changes in plan asset values and (iii) a $1.7 million increase in property and other general taxes.

Utility Net Revenues. The following table provides the key factors contributing to the changes in the utility net revenues of the regulated utility segment between the three months ended March 31, 2010 and 2009.


Composition of Changes in Utility Net Revenues
		Increase /
(In millions)		(Decrease)

Customer growth	$	1.3
Estimated change in natural gas consumption patterns		5.5
Asset optimization:
Unrealized mark-to-market valuations		17.9
Storage carrying costs		(3.3	)
Earnings Sharing Mechanism		4.2
Other		0.5

Total	$	26.1

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

Customer growth — Average active customer meters increased 7,631 for the three months ended March 31, 2010 compared to the same quarter of the prior fiscal year.

Estimated change in natural gas consumption patterns — The variance in net revenues reflects the changes in natural gas consumption patterns in the Virginia and District of Columbia jurisdictions. These changes may be affected by shifts in weather patterns in which customer heating usage may not correlate highly with average historical levels of usage per HDD that occur. Natural gas consumption patterns may also be affected by non-weather related factors.

Asset optimization — We recorded net unrealized gains associated with our energy-related derivatives of $16.1 million for the six months ended March 31, 2010 compared to net unrealized losses of $1.8 million for the same period of 2009. When these derivatives settle, any unrealized amounts will ultimately be reversed, and Washington Gas will realize margins when combined with the related transactions these derivatives economically hedge. Pre-tax realized margins related to our asset optimization program were $0.4 million lower for the quarter ended March 31, 2010 as compared to the quarter ended March 31, 2009 (Refer to the section entitled “Market Risk—Price Risk Related to the Regulated Utility Segment” for a further discussion of our asset optimization program).

Storage carrying costs — Each jurisdiction provides for the recovery of carrying costs based on the approved cost of capital, multiplied by the 12-month average balance of storage gas inventory. The decrease in the three months ended March 31, 2010 is due to lower average storage gas inventory balances primarily reflecting a lower weighted average cost of gas in inventory during the current period as compared to the same period of the prior year.

Earnings Sharing Mechanism — The Virginia ESM shares with shareholders and customers in Virginia, earnings that exceed a target rate of return on equity with shareholders and customers. A regulatory obligation was recorded related to Virginia earnings during the quarter ended March 31, 2009. An obligation was not incurred under this mechanism during the quarter ended March 31, 2010. Refer to the section entitled “Rates and Regulatory Matters — Performance-Based Rate Plans” included in Management’s Discussion for Washington Gas for a further discussion of the ESM.

Operation and Maintenance Expenses. The following table provides the key factors contributing to the changes in operation and maintenance expenses of the regulated utility for the three months ended March 31, 2010 compared to the same period in 2009.


Composition of Changes in Operation and Maintenance Expenses
		Increase/
(in millions)		(Decrease)

Weather derivatives - premium costs and fair value effects	$	(3.7	)
Employee benefits		2.4
Uncollectible accounts		(0.6	)
Other operating expenses		0.5

Total	$	(1.4	)

Weather derivatives — The decrease in expense associated with weather derivatives reflects a combination of lower transaction costs and the effects of weather. The warmer weather in fiscal year 2010 resulted in lower derivative losses during the quarter ended March 31, 2010.

Employee benefits — The increase in benefit expenses primarily reflects higher pension and other post retirement benefits due to changes in plan asset values and discount rate assumptions used to measure the benefit obligation.

Uncollectible accounts — This reduction in uncollectible accounts expense tracks the lower revenues due to reduced gas costs reflected in the quarter ended March 31, 2010 compared to the same quarter in fiscal year 2009.

Non-Utility Operating Results

Our non-utility operations comprise two business segments: (i) retail energy-marketing and (ii) design-build energy systems. Transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating

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

segment, and that do not fit into one of our three operating segments, are aggregated as “Other Activities” and included as part of non-utility operations. “Other Activities” includes the results of Capitol Energy Ventures. Total net loss from our non-utility operations was $12.3 million for the three months ended March 31, 2010, compared to a net loss of $0.3 million for the same three-month period of the prior fiscal year. This comparison primarily reflects decreased earnings from our retail energy-marketing and design-build energy systems segments.

Retail Energy-Marketing. The following table depicts the retail energy-marketing segment’s operating results along with selected statistical data.


Retail-Energy Marketing Financial and Statistical Data
		Three Months Ended
		March 31,					Increase /
	2010			2009			(Decrease)

Operating Results (In millions)
Gross margins:
Operating revenues	$	440.6		$	389.1		$	51.5
Less: Cost of energy		447.9			380.4			67.5
Revenue taxes		0.7			0.1			0.6

Total gross margins		(8.0	)		8.6			(16.6	)
Operation expenses		9.9			8.5			1.4
Depreciation and amortization		0.2			0.2			-
General taxes and other assessments		0.9			0.8			0.1

Operating loss		(19.0	)		(0.9	)		(18.1	)
Interest expense		0.1			0.2			(0.1	)
Income tax benefit		(7.7	)		(0.4	)		(7.3	)

Net loss	$	(11.4	)	$	(0.7	)	$	(10.7	)

Analysis of gross margins (In millions)
Natural gas
Realized margins	$	5.6		$	6.0		$	(0.4	)
Unrealized mark-to-market losses		(13.2	)		(2.1	)		(11.1	)

Total gross margins — natural gas		(7.6	)		3.9			(11.5	)

Electricity Realized margins
Realized margins		10.9			11.4			(0.5	)
Unrealized mark-to-market losses		(11.3	)		(6.7	)		(4.6	)

Total gross margins — electricity		(0.4	)		4.7			(5.1	)

Total gross margins	$	(8.0	)	$	8.6		$	(16.6	)

Other Retail-Energy Marketing Statistics
Natural gas
Therm sales (millions of therms)		266.0			272.7			(6.7	)
Number of customers (end of period)		159,700			141,500			18,200
Electricity
Electricity sales (millions of kWhs)		2,134.8			1,037.6			1,097.2
Number of accounts (end of period)		130,100			70,600			59,500

WGEServices reported a net loss of $11.4 million for the three months ended March 31, 2010, compared to a net loss of $0.7 million reported for the same three-month period of the prior fiscal year.

The quarter-to-quarter comparison primarily reflects lower gross margins from both natural gas and electric activity. Period-to-period comparisons of quarterly gross margins for this segment can vary significantly and are not representative of expected annualized results.

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

Gross margins from natural gas sales decreased $11.5 million in the second quarter of fiscal year 2010 over the same period in the prior fiscal year primarily due to an $11.1 million increase in unrealized mark-to-market losses associated with energy-related derivatives.

Gross margins from electric sales in the current quarter decreased $5.1 million from the same quarter of the prior period. This decrease primarily reflects a $4.6 million increase in unrealized mark-to-market losses associated with energy-related derivatives. Realized margins were lower by $0.5 million primarily due to an increase in electric sales volumes, partially offset by a compression of unit margins.

Design-Build Energy Systems. The design-build energy systems segment reported a net loss of $0.1 million for the second quarter of fiscal year 2010, compared to net income of $1.2 million reported for the same period of fiscal year 2009. This decrease is primarily due to delays in the initiation of certain planned project work for government agency customers. Operating expenses were also higher due to increased labor expense associated with expansion plans.

Interest Expense

The following table depicts the components of the change in interest expense for the three months ended March 31, 2010 compared to the same period in 2009.


Composition of Interest Expense Changes
		Increase /
(In millions)		(Decrease)

Long-term debt	$	(0.5	)
Short-term debt		(0.9	)
Other (includes AFUDC)^(a)		0.1

Total	$	(1.3	)

^(a)

Represents Allowance for Funds Used During Construction.

WGL Holdings’ interest expense of $10.2 million for the second quarter of fiscal year 2010 decreased $1.3 million from $11.5 million of the same quarter of fiscal year 2009. Lower interest expense for the period primarily reflects lower weighted average interest rates associated with our borrowings, partially offset by higher average balances of long-term debt outstanding.

RESULTS OF OPERATIONS — Six Months Ended March 31, 2010 vs. March 31, 2009

Summary Results

WGL Holdings reported net income applicable to common stock of $126.3 million, or $2.50 per share, for the six months ended March 31, 2010 compared to $129.7 million, or $2.58 per share, reported for the six months ended March 31, 2009.

The comparison of results for the six month period ended March 31, 2010 compared to the same period of the prior fiscal year primarily reflects a decrease in earnings from the retail energy-marketing and design-build energy systems segments partially offset by increased earnings from our regulated utility segment.

The following table summarizes our net income (loss) applicable to common stock by operating segment for the six months ended March 31, 2010 and 2009.

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


Net Income (Loss) Applicable to Common Stock by Operating Segment
		Six Months Ended
		March 31,					Increase/
(In millions)	2010			2009			(Decrease)

Regulated Utility	$	131.7		$	129.1		$	2.6
Non-utility operations:
Retail Energy-Marketing		(3.9	)		(0.2	)		(3.7	)
Design-Build Energy Systems		(0.3	)		2.0			(2.3	)
Other, principally non-utility activities		(1.2	)		(1.2	)		-

Total non-utility		(5.4	)		0.6			(6.0	)

Net income applicable to common stock	$	126.3		$	129.7		$	(3.4	)

EARNINGS PER AVERAGE COMMON SHARE
Basic	$	2.51		$	2.59		$	(0.08	)
Diluted	$	2.50		$	2.58		$	(0.08	)

Regulated Utility Operating Results

The following table summarizes the regulated utility segment’s operating results for the six months ended March 31, 2010 and 2009.


Regulated Utility Operating Results
		Six Months Ended
		March 31,			Increase/
(In millions)	2010		2009		(Decrease)

Utility net revenues:
Operating revenues	$	1,018.2	$	1,181.8	$	(163.6	)
Less: Cost of gas		532.2		698.8		(166.6	)
Revenue taxes		41.7		42.2		(0.5	)

Total utility net revenues		444.3		440.8		3.5
Operation and maintenance		129.6		129.7		(0.1	)
Depreciation and amortization		48.0		47.9		0.1
General taxes and other assessments		29.5		27.6		1.9

Operating income		237.2		235.6		1.6
Interest expense		19.8		23.0		(3.2	)
Other expenses-net, including preferred stock dividends		-		0.3		(0.3	)
Income tax expense		85.7		83.2		2.5

Net income applicable to common stock	$	131.7	$	129.1	$	2.6

The regulated utility segment’s net income applicable to common stock was $131.7 million for the six months ended March 31, 2010 compared to $129.1 million for the same six month period of the prior fiscal year. The increase in net income primarily reflects: (i) an increase in over 8,900 average active customer meters; (ii) $6.6 million of favorable effects of changes in natural gas consumption patterns; (iii) $3.9 million related to the Virginia Earnings Sharing Mechanism (ESM); (iv) a $3.6 million increase in unrealized margins associated with our asset optimization program; (v) $3.2 million lower costs for weather protection products related to the District of Columbia and (vi) a decrease in interest expense of $3.2 million primarily due to lower weighted average interest rates associated with our borrowings. Partially offsetting this increase was: (i) an $8.0 million decrease in the recovery of storage carrying costs on lower average storage gas inventory balances; (ii) a $4.6 million reversal of a reserve in fiscal year 2009 for disallowed natural gas costs in Maryland due to a favorable February 5, 2009 order from the Public Service Commission of Maryland (PSC of MD); (iii) an increase of $4.0 million caused by higher employee benefit expenses primarily due to changes in plan asset values and (iv) a $1.9 million increase in property and other general taxes.

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

Utility Net Revenues. The following table provides the key factors contributing to the changes in the utility net revenues of the regulated utility segment between the six months ended March 31, 2010 and 2009.


Composition of Changes in Utility Net Revenues
		Increase /
(In millions)		(Decrease)
Customer growth	$	2.7
Estimated Weather effects — Offset by weather insurance and derivative products		(0.8	)
Estimated change in natural gas consumption patterns		6.6
Gas administrative charge (GAC)		(1.7	)
Asset optimization:
Realized margins		0.8
Unrealized mark-to-market valuations		3.6
Storage carrying costs		(8.0	)
Earnings Sharing Mechanism (ESM)		3.9
Reversal of reserve for natural gas costs		(4.6	)
Other		1.0

Total	$	3.5

Customer growth — Average active customer meters increased 8,931 for the six months ended March 31, 2010 compared to the same period of the prior fiscal year.

Estimated weather effects — Washington Gas currently has a weather protection strategy that is designed to neutralize the estimated financial effects of variations from normal weather on net income (refer to the section entitled “Weather Risk” for a further discussion of our weather protection strategy). On September 21, 2009, Washington Gas executed a heating degree day (HDD) derivative contract to manage its exposure to variations from normal weather in the District of Columbia during fiscal year 2010. Changes in the fair value of this derivative are reflected in operation and maintenance expense.

Weather, when measured by HDDs, was 4.9% and 11.7% colder than normal during the six months ended March 31, 2010 and 2009, respectively. Including the effects of our weather protection strategy, there were no material effects on net income attributed to colder or warmer weather on the six month periods ended March 31, 2010 and 2009.

GAC — Represents a regulatory mechanism in all jurisdictions that provides for recovery of uncollectible accounts expense related to changes in gas costs. Lower recoveries reflect the lower cost of natural gas for the first six months of fiscal year 2010 as compared to the same period in fiscal year 2009. The related uncollectible accounts expense is included in operation and maintenance expenses.

Asset optimization — We recorded net unrealized gains associated with our energy-related derivatives of $12.1 million for the six months ended March 31, 2010 compared to net unrealized gains of $8.5 million for the same period of 2009. When these derivatives settle, any unrealized amounts will ultimately be reversed, and Washington Gas will realize margins when combined with the related transactions these derivatives economically hedge. Pre-tax realized margins related to our asset optimization program were $0.8 million higher for the six months ended March 31, 2010 compared to the six months ended March 31, 2009. (Refer to the section entitled “Market Risk—Price Risk Related to the Regulated Utility Segment” for a further discussion of our asset optimization program).

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

Storage carrying costs — Each jurisdiction provides for the recovery of carrying costs based on the cost of capital in each jurisdiction, multiplied by the 12-month average balance of storage gas inventory. The decrease in the six months ended March 31, 2010 is due to lower average storage gas inventory investment balances primarily reflecting a lower weighted average cost of gas in inventory during the current period as compared to the same period of the prior year.

Earnings Sharing Mechanism — The Virginia ESM shares with shareholders and customers in Virginia, earnings that exceed a target rate of return on equity. A regulatory obligation was recorded related to Virginia earnings during the first six months of fiscal year 2009. An obligation was not incurred under this mechanism during the six months ended March 31, 2010. Refer to the section entitled “ Rates and Regulatory Matters — Performance-Based Rate Plans ” included in Management’s Discussion for Washington Gas for a further discussion of the ESM.

Reserve for disallowance of natural gas costs — In the first quarter of fiscal year 2009, Washington Gas reversed a $4.6 million reserve for disallowed natural gas costs in Maryland to income due to a favorable February 5, 2009 order from the PSC of MD. This order resolved a contingency related to a proposed order issued by a Hearing Examiner of the PSC of MD in fiscal year 2006. Refer to the section entitled “Rates and Regulatory Matters” in Management’s Discussion for Washington Gas for further discussion of this matter.

Operation and Maintenance Expenses. The following table provides the key factors contributing to the changes in operation and maintenance expenses of the regulated utility for the six months ended March 31, 2010 compared to the same period in 2009.


Composition of Changes in Operation and Maintenance Expenses
	Increase/
(in millions)	(Decrease)

Weather derivatives
Loss	$	(0.9	)
Premium costs and fair values effects		(3.2	)
Employee benefits		4.0
Uncollectible accounts		(1.2	)
Other operating expenses		1.2

Total	$	(0.1	)

Weather derivatives — Washington Gas recorded losses of $1.9 million and $2.8 million related to its weather derivatives as a direct result of the colder-than-normal weather for the six months ended March 31, 2010 and 2009, respectively. These losses are offset by the effect of weather on utility net revenues. The decrease in expenses associated with weather derivatives reflects a combination of lower transaction costs and the effects of weather. Warmer weather in the six months of fiscal year 2010 resulted in lower derivative losses.

Uncollectible accounts — This reduction in uncollectible accounts expense tracks the lower revenues due to reduced gas costs reflected in the six months of fiscal year 2010 compared to the same six month period of the prior fiscal year.

Non-Utility Operating Results

Our non-utility operations comprise of two business segments: (i) retail energy-marketing and (ii) design-build energy systems. Transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our three operating segments, are aggregated as “Other Activities” and included as part of non-utility operations. Total net loss from our non-utility operations was $5.4 million for the six months ended March 31, 2010 compared to $0.6 million for the same six-month period of the prior fiscal year. This comparison primarily reflects decreased earnings from our retail energy-marketing and design-build energy systems segments.

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

Retail Energy-Marketing. The following table depicts the retail energy-marketing segment’s operating results along with selected statistical data.


Retail-Energy Marketing Financial and Statistical Data
	Six Months Ended
		March 31,						Increase /
	2010			2009				(Decrease)

Operating Results (In millions)
Gross margins:
Operating revenues	$	774.1		$	683.0		$		91.1
Less: Cost of energy		758.4			665.3				93.1
Revenue taxes		1.3			0.3				1.0

Total gross margins		14.4			17.4				(3.0	)
Operation expenses		18.7			15.3				3.4
Depreciation and amortization		0.4			0.4				-
General taxes and other assessments—other		1.8			1.5				0.3

Operating income		(6.5	)		0.2				(6.7	)
Interest expense		0.1			0.5				(0.4	)
Income tax benefit		(2.7	)		(0.1	)			(2.6	)

Net loss	$	(3.9	)	$	(0.2	)	$		(3.7	)

Analysis of gross margins (In millions)
Natural gas
Realized margins	$	18.7		$	13.1		$		5.6
Unrealized mark-to-market losses		(16.7	)		(5.4	)			(11.3	)

Total gross margins — natural gas		2.0			7.7				(5.7	)

Electricity
Realized margins		20.2			21.8				(1.6	)
Unrealized mark-to-market losses		(7.8	)		(12.1	)			4.3

Total gross margins — electricity		12.4			9.7				2.7

Total gross margins	$	14.4		$	17.4		$		(3.0	)

Other Retail-Energy Marketing Statistics
Natural gas
Therm sales (millions of therms)		442.9			462.2				(19.3	)
Number of customers (end of period)		159,700			141,500				18,200
Electricity
Electricity sales (millions of kWhs)		4,008.2			1,882.9				2,125.3
Number of accounts (end of period)		130,100			70,600				59,500

WGEServices reported a net loss of $3.9 million for the six months ended March 31, 2010, compared to a net loss of $0.2 million reported for the same six month period of the prior fiscal year.

The year-to-date comparison primarily reflects lower natural gas gross margins partially offset by increased gross margins related to electric sales. Period-to-period comparisons of year-to-date gross margins for this segment can vary significantly and are not representative of expected annualized results.

Gross margins from natural gas sales decreased $5.7 million in the six months ended March 31, 2010 compared to the same period in the prior fiscal year. This decrease reflects an $11.3 million increase in unrealized mark-to-market losses associated with energy-related derivatives offset by higher realized margins primarily due to an increase in the margin per therm sold, reflecting inventory withdrawals that were lower relative to sales prices as compared to the same period of the prior fiscal year.

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

Gross margins from electric sales increased $2.7 million in the six months ended March 31, 2010 compared to the same period of the prior fiscal year. This increase reflects a $4.3 million decrease in unrealized mark-to-market losses associated with energy-related derivatives. Realized margins were lower by $1.6 million primarily due to an increase in electric sales volumes, partially offset by a compression of unit margins.

Design-Build Energy Systems. The design-build energy systems segment reported a net loss of $0.3 million for the six months of fiscal year 2010, compared to net income of $2.0 million reported for the six month period of fiscal year 2009. This decrease is primarily due to delays in the initiation of certain planned project work for government agency customers. Operating expenses were also higher due to increased labor expense associated with expansion plans.

Interest Expense

The following table depicts the components of the change in interest expense from the six months ended March 31, 2010 compared to the same period in 2009.


Composition of Interest Expense Changes
	Increase /
(In millions)	(Decrease)

Long-term debt	$	(0.6	)
Short-term debt		(2.8	)
Other (includes AFUDC) ^(a)		(0.3	)

Total	$	(3.7	)


^(a)		Represents Allowance for Funds Used During Construction.

WGL Holdings’ interest expense of $20.0 million for the six months ended March 31, 2010 decreased $3.7 million from $23.7 million for the same six month period of the prior fiscal year. Lower interest expense for the period primarily reflects lower weighted average interest rates and lower borrowing levels.

LIQUIDITY AND CAPITAL RESOURCES

General Factors Affecting Liquidity

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

Our ability to obtain adequate and cost effective financing depends on our credit ratings as well as the liquidity of financial markets. Our credit ratings depend largely on the financial performance of our subsidiaries, and a downgrade in our current credit ratings could require us to post additional collateral with our wholesale counterparties and adversely affect our borrowing costs, as well as our access to sources of liquidity and capital. Also potentially affecting access to short-term debt capital is the nature of any restrictions that might be placed upon us, such as ratings triggers or a requirement to provide creditors with additional credit support in the event of a determination of insufficient creditworthiness. During the six months ended March 31, 2010, we met our liquidity needs at reasonable cost through the issuance of commercial paper by WGL Holdings and Washington Gas and the issuance of debt securities by Washington Gas to support its operations.

The level of our capital expenditure requirements, our financial performance, our credit ratings, and investor demand for our securities, affect the availability of long-term capital at reasonable costs.

We have a goal to maintain our common equity ratio in the mid-50% range of total consolidated capital. The level of this ratio varies during the fiscal year due to the seasonal nature of our business. This seasonality is also evident in the

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

variability of our short-term debt balances, which are typically higher in the fall and winter months and substantially lower in the spring when a significant portion of our current assets are converted into cash at the end of the winter heating season. Accomplishing this capital structure objective and maintaining sufficient cash flow are necessary to maintain attractive credit ratings for WGL Holdings and Washington Gas, and to allow access to capital at reasonable costs. As of March 31, 2010, total consolidated capitalization, including current maturities of long-term debt and excluding notes payable, comprised 62.3% common equity, 1.5% preferred stock and 36.2% long-term debt. Our cash flow requirements and our ability to provide satisfactory resources to meet those requirements are primarily influenced by the activities of Washington Gas and WGEServices and, to a lesser extent, other non-utility operations.

Our plans provide for sufficient liquidity to satisfy our financial obligations. At March 31, 2010, we did not have any restrictions on our cash balances or retained earnings that would affect the payment of common or preferred stock dividends by WGL Holdings or Washington Gas.

Short-Term Cash Requirements and Related Financing

Washington Gas’s business is weather sensitive and seasonal, causing short-term cash requirements to vary significantly during the year. Approximately 77.0% of the total therms delivered in Washington Gas’s service area (excluding deliveries to two electric generation facilities) occur during the first and second fiscal quarters. Accordingly, Washington Gas typically generates more net income in the first six months of the fiscal year than it does for the entire fiscal year.

During the first six months of our fiscal year, Washington Gas generates large sales volumes and its cash requirements peak when accounts receivable and unbilled revenues are at their highest levels. During the last six months of our fiscal year, after the winter heating season, Washington Gas will typically experience a seasonal net loss due to reduced demand for natural gas. During this period, many of Washington Gas’s assets are converted into cash which Washington Gas generally uses to reduce and sometimes eliminate short-term debt and to acquire storage gas for the next heating season.

Washington Gas and WGEServices have seasonal short-term cash requirements resulting from their need to purchase storage gas inventory in advance of the winter heating periods in which the storage gas is sold. At March 31, 2010 and September 30, 2009, Washington Gas had investment balances in gas storage of $80.2 million and $237.7 million, respectively. Washington Gas collects the cost of gas under cost recovery mechanisms approved by its regulators. WGEServices collects revenues that are designed to reimburse its commodity costs used to supply its retail customer contracts. Variations in the timing of cash receipts from customers under these collection methods can significantly affect short-term cash requirements. In addition, both Washington Gas and WGEServices pay their respective commodity suppliers before collecting the accounts receivable balances resulting from these sales. WGEServices derives its funding to finance these activities from short-term debt issued by WGL Holdings. Additionally, WGEServices may be required to post collateral, either parent guarantees from WGL Holdings or cash, for certain purchases.

Variations in the timing of collections of gas costs under Washington Gas’s gas cost recovery mechanisms can significantly affect short-term cash requirements. At March 31, 2010, Washington Gas had a $8.1 million balance of unrecovered gas costs due from customers related to the most recent twelve month gas cost recovery cycle ended August 31, 2009. Most of this balance will be collected from customers in fiscal year 2010. Amounts under-collected or over-collected that are generated during the current gas cost recovery cycle are deferred as a regulatory asset or liability on the balance sheet until September 1st of each year, at which time the accumulated amount is transferred to gas costs due from/to customers as appropriate. At March 31, 2010, Washington Gas had a net regulatory liability balance related to the current gas recovery cycle of $13.6 million.

WGL Holdings and Washington Gas utilize short-term debt in the form of commercial paper or unsecured short-term bank loans to fund seasonal cash requirements. Our policy is to maintain back-up bank credit facilities in an amount equal to or greater than our expected maximum commercial paper position. The following is a summary of our committed credit agreements at March 31, 2010.

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


Committed Credit Available
Committed credit agreements	WGL Holdings		Washington Gas		Total Consolidated

Unsecured revolving credit facility, August 3, 2012 ^(a)		$400.0		$300.0		$700.0
Less: Commercial Paper		(108.4)		-		(108.4)

Net committed credit available		$291.6		$300.0		$591.6

^(a)Both WGL Holdings and Washington Gas have the right to request extensions with the banks’ approval. WGL Holdings’ revolving credit facility permits it to borrow an additional $50 million, with the banks’ approval, for a total of $450 million. Washington Gas’s revolving credit facility permits it to borrow an additional $100 million, with the banks’ approval, for a total of $400 million.

WGL Holdings typically issues commercial paper to meet its financing requirements including cash collateral requirements posted to counterparties associated with WGEServices’ contracts.

At March 31, 2010 and September 30, 2009, WGL Holdings and its subsidiaries had outstanding notes payable in the form of commercial paper of $108.4 million and $183.8 million, respectively, at a weighted average interest rate of 0.28% and 0.27%, respectively. Substantially all of the outstanding notes payable balance at March 31, 2010 was commercial paper issued by WGL Holdings. Of the outstanding notes payable balance at September 30, 2009, $59.0 million was issued by WGL Holdings and $124.8 million was issued by Washington Gas. As of March 31, 2010 and September 30, 2009, there were no outstanding bank loans under WGL Holdings or Washington Gas’s revolving credit facilities.

To manage credit risk, both Washington Gas and WGEServices may require deposits from certain customers and suppliers, which are reported as current liabilities in “Customer deposits and advance payments.” At March 31, 2010 and September 30, 2009, “Customer deposits and advance payments” totaled $44.1 million and $52.9 million, respectively. For both periods, most of these deposits related to customer deposits for Washington Gas.

For Washington Gas, deposits from customers may be refunded to the depositor-customer at various times throughout the year based on the customer’s payment habits. At the same time, other customers make new deposits that cause the balance of customer deposits to remain relatively steady. There are no restrictions on Washington Gas’s use of these customer deposits. Washington Gas pays interest to its customers on these deposits in accordance with the requirements of its regulatory commissions.

For WGEServices, deposits typically represent collateral for transactions with wholesale counterparties for the purchase and sale of natural gas and electricity. These deposits may be required to be repaid or increased at any time based on the current value of WGEServices’ net position with the counterparty. Currently there are no restrictions on WGEServices’ use of deposit funds and WGEServices pays interest to the counterparty on these deposits in accordance with its contractual obligations. Refer to the section entitled “Credit Risk” for further discussion of our management of credit risk.

Long-Term Cash Requirements and Related Financing

Our long-term cash requirements primarily depend upon the level of capital expenditures, long-term debt maturities and decisions to refinance long-term debt. Our capital expenditures primarily relate to adding new utility customers and system supply as well as maintaining the safety and reliability of Washington Gas’s distribution system. Refer to our 2009 Annual Report for further discussion of our capital expenditures forecast and our long-term debt maturities.

At March 31, 2010, Washington Gas had the capacity under a shelf registration to issue up to $450.0 million of additional MTNs. Washington Gas has authority from its regulators to issue other forms of debt, including private placements.

We are exposed to interest-rate risk associated with our debt financing. Washington Gas utilizes derivative instruments from time to time in order to minimize its exposure to the risk of interest-rate volatility. On July 6, 2009, Washington Gas entered into three interest-rate derivative transactions to mitigate a substantial portion of the risk of rising interest rates associated with future debt issuances: (i) a Treasury lock that expired August 11, 2009 at a gain of $311,000, locking in a 3.59% Treasury yield on $50.0 million of ten-year debt that was issued on November 2, 2009; (ii) a forward starting swap that was terminated on April 5, 2010 at a loss of $30,000 and (iii) a forward starting swap that

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

expires June 21, 2010 and locks in a 4.19% cost for the combined Treasury and LIBOR exposure on $20.0 million of ten-year debt. On April 13, 2010, Washington Gas entered into a forward starting swap that expires May 12, 2010, in conjunction with a call of $50.0 million of floating rate debt due August 26, 2010, and locks in a 0.34% refinancing cost for the called debt. On May 7, 2010, Washington Gas entered into a forward starting swap that expires November 30, 2010, and locks in a 4.16% cost for the treasury exposure on $75 million of 30-year debt. For further discussion of our management of interest-rate risk, refer to Management’s Discussion within our 2009 Annual Report.

Security Ratings

The table below reflects the current credit ratings for the outstanding debt instruments of WGL Holdings and Washington Gas. Changes in credit ratings may affect WGL Holdings’ and Washington Gas’s cost of short-term and long-term debt and their access to the capital markets. A security rating is not a recommendation to buy, sell or hold securities. The rating may be subject to revision or withdrawal at any time by the assigning rating organization and each rating should be evaluated independently of any other rating. On March 5, 2010, Moody’s Investors Service upgraded the commercial paper rating for WGL Holdings to Prime-2 from Not Prime.

Credit Ratings for Outstanding Debt Instruments

WGL Holdings

Washington Gas

Unsecured

Medium-Term Notes

Commercial

Medium-Term

Commercial

Rating Service

(Indicative)^(a)

Paper

Notes

Paper

Fitch Ratings

A+

AA-

F1+

Moody’s Investors Service

Not Rated

P-2

P-1

Standard & Poor’s Ratings Services^(b)

AA-

A-1

AA-

A-1

^(a)		Indicates the ratings that may be applicable if WGL Holdings were to issue unsecured MTNs.

^(b)		The long-term debt rating issued by Standard & Poor’s Ratings Services for WGL Holdings and Washington Gas is stable.

Ratings Triggers and Certain Debt Covenants

WGL Holdings and Washington Gas pay fees on their credit facilities, which in some cases are based on the long-term debt ratings of Washington Gas. In the event the long-term debt of Washington Gas is downgraded below certain levels, WGL Holdings and Washington Gas would be required to pay higher fees. There are five different levels of fees. The credit facility for WGL Holdings defines its applicable fee level as one level below the level applicable to Washington Gas. Under the terms of the credit facilities, the lowest level facility fee is four basis points and the highest is eight basis points.

Under the terms of WGL Holdings’ and Washington Gas’s credit agreements, the ratio of consolidated financial indebtedness to consolidated total capitalization can not exceed 0.65 to 1.0 (65.0%). In addition, WGL Holdings and Washington Gas are required to inform lenders of changes in corporate existence, financial conditions, litigation and environmental warranties that might have a material adverse effect. The failure to inform the lenders’ agent of changes in these areas deemed material in nature might constitute default under the agreements. Additionally, WGL Holdings’ or Washington Gas’s failure to pay principal or interest when due on any of its other indebtedness may be deemed a default under our credit agreements. A default, if not remedied, may lead to a suspension of further loans and/or acceleration in which obligations become immediately due and payable. At March 31, 2010, we were in compliance with all of the covenants under our revolving credit facilities.

For certain of Washington Gas’s natural gas purchase and pipeline capacity agreements, if the long-term debt of Washington Gas is downgraded to or below the lower of a BBB- rating by Standard & Poor’s Ratings Services or a Baa3 rating by Moody’s Investors Service, or if Washington Gas is deemed by a counterparty not to be creditworthy, then the counterparty may withhold service or deliveries, or may require additional credit support. For certain other agreements, if the counterparty’s credit exposure to Washington Gas exceeds a contractually defined threshold amount, or if Washington Gas’s credit rating declines, then the counterparty may require additional credit support. At March 31, 2010, Washington Gas would not be required to supply additional credit support by these arrangements if its long-term debt rating were to be downgraded one rating level.

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

WGL Holdings has guaranteed payments for certain purchases of natural gas and electricity on behalf of its wholly owned subsidiary, WGEServices (refer to our 2009 Annual Report for a further discussion of these guarantees). If the credit rating of WGL Holdings declines, WGEServices may be required to provide additional credit support for these purchase contracts. At March 31, 2010, WGEServices would be required to provide $22.9 million in additional credit support for these arrangements if the long-term debt rating of WGL Holdings were to be downgraded one rating level.

Cash Flows Provided by Operating Activities

The primary drivers for our operating cash flows are cash payments received from natural gas and electricity customers, offset by our payments for natural gas and electricity costs, operation and maintenance expenses, taxes and interest costs.

Net cash provided by operating activities totaled $226.0 million for the six months ended March 31, 2010. Net cash provided by operating activities reflects net income before preferred stock dividends, as adjusted for non-cash earnings and charges and changes in working capital including:

•

Accounts receivable and unbilled revenues—net increased $261.0 million from September 30, 2009, primarily due to increased sales volumes to customers during our winter heating season and increased sales volumes associated with Washington Gas’s asset optimization program.

•

Storage gas inventory cost levels decreased $157.5 million from September 30, 2009 due to seasonal physical withdrawals.

•

Gas costs and other regulatory assets / liabilities decreased $75.9 million from September 30, 2009 primarily due to the recovery of gas cost under collections related to the prior gas cost recovery cycle and increases in the liability for weather related billing adjustment mechanisms.

•

Accounts payable and other accrued liabilities increased $21.3 million, largely attributable to an increase in natural gas purchases for both deliveries to customers for the 2010-2011 winter heating season and Washington Gas’s asset optimization program.

•

Accrued taxes increased $52.8 million from September 30, 2009 primarily due to an increase in taxable income resulting from increased sales during the 2009-2010 winter heating season.

•

Deferred purchased gas costs—net decreased $29.7 million primarily due to recoveries in excess of gas costs incurred.

Cash Flows Used in Financing Activities

Cash flows used in financing activities totaled $52.7 million for the six months ended March 31, 2010 reflecting the retirement of $75.4 million of notes payable and our common and preferred stock dividend payments totaling $37.6 million partially offset by our long-term debt issuance of $51.3 million.

Cash Flows Used in Investing Activities

During the six months ended March 31, 2010, cash flows used in investing activities totaled $57.7 million, which primarily consists of capital expenditures made on behalf of Washington Gas.

Capital Expenditures

We have revised our five-year capital expenditures budget as reported in our 2009 Annual Report to reflect an increase in projected expenditure related to the replacement and betterment of existing capacity. The revised five-year projection reflects a $78.0 million increase in total capital expenditures from $896.3 million as reported in our 2009 Annual Report, to a revised total of $974.3 million. The following table depicts our revised capital expenditures budget for fiscal years 2010 through 2014.

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



Projected Capital Expenditures
		Fiscal Year Ending September 30,
(in millions)		2010			2011			2012			2013			2014			Total


New business	$		48.2	$		61.1	$		62.8	$		65.3	$		64.2	$		301.6

Replacements - Other			46.0			60.1			62.3			61.0			58.9			288.3

LNG storage facility			0.1			0.7			18.0			64.8			38.1			121.7

SOC redevelopment project			6.4			41.6			31.1			-			-			79.1

Other			47.2			47.3			33.5			31.0			24.6			183.6


Total-accrual basis^(a)	$		147.9	$		210.8	$		207.7	$		222.1	$		185.8	$		974.3

^(a)	Excludes Allowance for Funds Used During Construction. Includes capital expenditures accrued and capital expenditure adjustments recorded in the fiscal year.

The 2010 to 2014 projected periods include $301.6 million for continued growth to serve new customers, and $288.3 million primarily related to the replacement and betterment of existing capacity. Additionally, the projected period contains capital expenditures to construct a necessary, new source of peak day capacity within the boundaries of the natural gas distribution system to support customer growth and pressure requirements on the entire natural gas distribution system. Specifically, these estimated expenditures are expected to be used for the construction of a one billion cubic foot LNG storage facility on the land historically used for storage facilities by Washington Gas in Chillum, Maryland (refer to the section entitled “Chillum LNG Facility”). Projected expenditures also reflect $79.1 million for the development of new facilities at the Springfield Operations Center (SOC) and $183.6 million of other expenditures, which include general plant.

CONTRACTUAL OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMERCIAL COMMITMENTS

Contractual Obligations

We have certain contractual obligations incurred in the normal course of business that require us to make fixed and determinable payments in the future. These commitments include long-term debt, lease obligations, unconditional purchase obligations for pipeline capacity, transportation and storage services, certain natural gas and electricity commodity commitments and our commitments related to the business process outsourcing (BPO) program.

Reference is made to the “Contractual Obligations, Off-Balance Sheet Arrangements and Other Commercial Commitments” section of Management’s Discussion in our 2009 Annual Report for a detailed discussion of our contractual obligations. Note 4 of the Notes to Consolidated Financial Statements in our 2009 Annual Report includes a discussion of long-term debt, including debt maturities. Note 13 of the Notes to Consolidated Financial Statements in our 2009 Annual Report reflects information about the various contracts of Washington Gas and WGEServices. Additionally, refer to Note 13 of the Notes to Consolidated Financial Statements in this quarterly report.

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

Construction Project Financing

To fund certain of its construction projects, Washington Gas enters into financing arrangements with third party lenders. As part of these financing arrangements, Washington Gas’s customers agree to make principal and interest payments over a period of time, typically beginning after the projects are completed. Washington Gas assigns these customer payment streams to the lender in exchange for the contract payments paid to Washington Gas during the construction period. As the lender funds the construction project, Washington Gas establishes a receivable representing its customers’ obligations to remit principal and interest and a long-term payable to the lender. When these projects are formally “accepted” by the customer as completed, Washington Gas transfers the ownership of the receivable to the lender and removes both the receivable and the long-term financing from its financial statements. As of March 31, 2010, work on these construction projects that was not completed or accepted by customers was valued at $6.4 million, which is recorded on the balance sheet as a receivable in “Deferred Charges and Other Assets—Other” with the corresponding long-term obligation to the lender in “Long-term debt.” At any time before these contracts are accepted by the customer, should there be a contract default, such as, among other things, a delay in completing the project, the lender may call on Washington Gas to fund the unpaid principal in exchange for which Washington Gas would receive the right to the stream of payments from the customer. Once the project is accepted by the customer, the lender has no recourse against Washington Gas related to this long-term debt.

Financial Guarantees

WGL Holdings has guaranteed payments for certain purchases of natural gas and electricity on behalf of the retail energy-marketing segment. At March 31, 2010, these guarantees totaled $571.5 million. The amount of such guarantees is periodically adjusted to reflect changes in the level of financial exposure related to these purchase commitments. We also receive financial guarantees or other collateral from suppliers when required by our credit policy (refer to the section entitled “Credit Risk” for a further discussion of our credit policy). WGL Holdings has issued guarantees related to purchase commitments of its Capitol Energy Ventures subsidiary. At March 31, 2010, these guarantees totaled $11.0 million. WGL Holdings also issued guarantees totaling $3.0 million at March 31, 2010 that were made on behalf of certain of our 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 that had been created under the guarantees prior to the effective date of the cancellation.

Chillum LNG Facility

Washington Gas continues to reflect an assumption in its plans to construct a one billion cubic foot LNG storage facility on the land owned by Washington Gas in Chillum, Maryland, where natural gas storage facilities previously existed for meeting customers’ forecasted peak demand for natural gas. Subject to the resolution of certain legal and regulatory issues, the new storage facility is currently expected to be completed and in service by the 2015-2016 winter heating season at an estimated cost of $159.0 million.

On October 30, 2006, the District Council of Prince George’s County, Maryland denied Washington Gas’s application for a special exception related to its proposed construction of the LNG peaking plant because of the District Council’s position that current zoning restrictions prohibit such construction. Washington Gas appealed this decision to the Prince George’s County Circuit Court (the Circuit Court) on November 22, 2006; however, the case was subsequently sent back to the administrative process by the Circuit Court. On April 16, 2008, Washington Gas filed a Complaint for Declaratory and Injunctive Relief with the United States District Court for the District of Maryland (the U.S. District Court) seeking a declaratory judgment that all local laws relating to safety and location of the facility are preempted by Federal and State law. On March 26, 2010, the U.S. District Court denied Washington Gas’s motion for summary judgment, however, there are further proceedings for consideration of the preemption issues raised by Washington Gas.

In 2005, Washington Gas requested approval from the Maryland Public Service Commission (PSC of MD) regarding the safety of the proposed facility and compliance with applicable federal regulations. In 2007, the Engineering Division of the PSC of MD confirmed the analyses that had been presented by Washington Gas and found the proposed facility to be

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

safely sited. On March 19, 2009, the PSC of MD docketed a proceeding for the purpose of reviewing Washington Gas’s most recent gas procurement plan including the role the Chillum facility plays in meeting current and future customers’ annual and seasonal natural gas requirements. Refer to the section entitled “Rates and Regulatory Matters—Maryland Jurisdiction—Review of the Company’s 2009-2013 Gas Portfolio Plan” for further discussion of this issue. Washington Gas must begin construction of the storage facility in the spring of 2012 in order for the Chillum Facility to be completed and in service by the 2015-2016 winter heating season. Until the LNG plant is constructed, Washington Gas has planned for alternative sources of supply to meet its customers’ peak day requirements. These plans include capital expenditures related to infrastructure improvements which contribute to providing for adequate system performance based on projected needs.

Operating Issues Related To Cove Point Natural Gas Supply

In late fiscal year 2003, Dominion reactivated its Cove Point LNG terminal. A large portion of the gas delivered from the Cove Point LNG terminal comes to the Washington Gas service territory as a result of the Company’s multiple delivery points on the Cove Point pipeline and from three interstate natural gas transmission pipelines also interconnected with the Cove Point pipeline each of which serve Washington Gas from delivery points downstream of its Cove Point pipeline interconnect. The composition of the vaporized LNG received from the Cove Point LNG terminal resulted in increased leaks in mechanical couplings on the portion of our distribution system in Prince George’s County, Maryland that directly receives the Cove Point gas. The vaporized Cove Point gas contains a lower concentration of heavy hydrocarbons (HHCs) than non-liquefied natural gas, and caused the seals on those mechanical couplings to shrink and to leak. Independent laboratory tests performed on behalf of Washington Gas have shown that, in a laboratory environment, the injection of HHCs into the type of gas coming from the Cove Point LNG terminal can be effective in re-swelling the seals in couplings which increases their sealing force and in turn, reduces the propensity for the affected couplings to leak.

Through a pipeline replacement project and the construction of a HHC injection facility at the largest gate station that exclusively receives gas from the Cove Point terminal, Washington Gas has reduced the occurrence of new coupling leaks in this area of the distribution system. A recent expansion of the physical capacity of the Cove Point terminal could result in a substantial increase in the receipt of Cove Point gas into additional portions of Washington Gas’s distribution system as greater volumes of Cove Point gas are introduced into other downstream pipelines that provide service to Washington Gas. Based upon engineering and flow studies and our experience, this increase in the receipt of Cove Point gas is likely to result in a significantly greater number of leaks in other parts of Washington Gas’s distribution system, unless our efforts to mitigate these additional leaks are successful. Washington Gas is attempting to mitigate this anticipated increase in leaks through: (i) pipeline replacement programs; (ii) the operation of three HHC injection facilities; (iii) isolating its interstate pipeline receipt points and limiting the amount of gas received, where possible, from pipelines that transport Cove Point gas; (iv) blending, where possible, the Cove Point gas with other supplies of natural gas from within the continental United States and (v) continued efforts before the FERC to condition incremental increases in deliveries from the Cove Point terminal on the appropriate resolution of safety concerns consistent with the public interest.

Washington Gas installed and operates HHC injection facilities at three gate stations. Assuming current gas flow patterns with the current pipeline supply configurations, the strategic placement of the three operational HHC injection facilities will inject HHCs into the natural gas supplied to over 95% of the pipelines that contain mechanical couplings within our distribution system. Washington Gas has been granted recovery for a portion of these costs allocable to Virginia and Maryland. Additionally, Washington Gas will seek recovery of the costs of these facilities allocable to the District of Columbia in a future base rate proceeding. Washington Gas expects the cost of these facilities to be recoverable in all jurisdictions.

The cost of these facilities does not include the cost of the HHCs injected into the gas stream at the gate stations. We have been granted cost recovery for the majority of these costs in all three of our jurisdictions. On October 2, 2009, Washington Gas and the District of Columbia Office of the People’s Counsel (DC OPC) filed a Joint Motion for Approval of Unanimous Agreement of Stipulation and Full Settlement with the PSC of DC which was approved on December 16, 2009 and will provide for full recovery of the HHC commodity costs in the District of Columbia (refer to the section entitled “Rates and Regulatory Matters”).

Washington Gas is replacing or remediating selected mechanically coupled pipelines within the areas of the distribution system that may receive high concentrations of Cove Point gas, but that will not receive HHC injections.

WGL Holdings, Inc.
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 has also planned for additional replacement of mechanically coupled pipeline in other areas of its distribution system. In total, the current estimated cost of planned mechanical coupling remediation and replacement work over the next three years is $45.0 million, which includes $9.0 million as part of a planned mechanically coupled pipe replacement program approved by the Virginia State Corporation Commission (SCC of VA) as part of a settlement of a Virginia rate case and the December 16, 2009 settlement in the District of Columbia that includes a targeted mechanically coupled pipe replacement and encapsulation program which will cost no more than $28.0 million and is expected to take approximately seven years to complete. Rate recovery of the expenditures is provided for in the settlement agreements approved respectively by the SCC of VA and the PSC of DC.

Washington Gas continues to gather and evaluate field and laboratory evidence to determine the efficacy of HHC injections of the Cove Point gas in preventing additional leaks or impeding the rate at which additional leaks may occur in the gas distribution system if expanded volumes from the Cove Point terminal are introduced. In a report filed with the PSC of MD on June 30, 2008, Washington Gas reported a notable increase in leaks in mechanical couplings in a portion of its distribution system in Virginia where Cove Point gas injected with HHCs was introduced for a short period of time. Although this increase in leaks was significantly less than the increase experienced in the affected area of Prince George’s County, Maryland, the injection of HHCs into the Cove Point gas did not reduce the occurrence of coupling leaks to an acceptable level that would allow Washington Gas to safely accommodate the increased deliveries of revaporized LNG anticipated with the expansion of the Cove Point terminal. If we are unable to implement a satisfactory solution on a timely basis, additional operating expenses and capital expenditures may be necessary to contend with leaks that may accompany the receipt of increased volumes of vaporized LNG from the Cove Point terminal into Washington Gas’s distribution system. Such additional operating expenses and capital expenditures may not be timely enough to mitigate the challenges posed by increased volumes of Cove Point gas potentially resulting in leakage from mechanical couplings at a rate that could compromise the safety of our distribution system. Additional legal or regulatory remedies may be necessary to protect the Washington Gas distribution system and its customers from the adverse effects of unblended vaporized LNG (refer to the section entitled “Request for FERC Action” below for a further discussion).

Notwithstanding Washington Gas’s recovery of costs related to the construction of the injection facilities and HHC commodity costs through local regulatory commission action, Washington Gas is pursuing remedies to keep its customers from having to pay more than their appropriate share of the costs of the remediation to maintain the safety of the Washington Gas distribution system.

Request for FERC Action Regarding Cove Point

In November 2005, Washington Gas requested the FERC to invoke its authority to require Dominion to demonstrate that the increased volumes of the Cove Point gas resulting from the expansion would flow safely through the Washington Gas distribution system and would be consistent with the public interest. Washington Gas specifically requested that the proposed expansion of the Cove Point LNG terminal be denied until Dominion has shown that the Cove Point gas: (i) is of such quality that it is fully interchangeable with the domestically produced natural gas historically received by Washington Gas and (ii) will not cause harm to its customers or to the infrastructure of Washington Gas’s distribution system.

On June 16, 2006, the FERC issued an order authorizing Dominion’s request to expand the capacity and output of its Cove Point LNG terminal and, thereby, denying Washington Gas’s request to require Dominion to demonstrate the safety of the Cove Point gas flowing through the Washington Gas distribution system. Washington Gas, the PSC of MD, Keyspan Corporation, the Maryland Office of People’s Counsel (MD OPC) and other organizations all filed Requests for Rehearing with the FERC to seek modification of the FERC’s June 16, 2006 order. These requests were all rejected by the FERC. On January 26, 2007, Washington Gas filed a notice of appeal with the United States Court of Appeals for the District of Columbia Circuit (the Court of Appeals). Washington Gas requested the Court of Appeals to reverse the June 16, 2006 FERC order that authorized the Cove Point expansion, as well as a January 4, 2007 FERC order that denied Washington Gas’s rehearing request.

On July 18, 2008, the Court of Appeals issued an opinion vacating the FERC orders to the extent they approve the expansion. The opinion remanded the case to the FERC to address whether the expansion can go forward without causing unsafe leakage on Washington Gas Light Company’s distribution system.

Although Washington Gas agrees with the portion of the Court of Appeals decision that states the FERC failed to address adequately the future safety concerns associated with increased deliveries of LNG into its system, Washington Gas does not agree with all of the findings of the Court of Appeals, including conclusions related to the cause of the leaks, and on September 2, 2008 filed a request for rehearing with the Court of Appeals.

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

This request has been denied. The FERC held a technical conference on August 14, 2008 “to discuss the nature and progress of remedial measures taken to date, as well as the need and benefit of any other remedial measures that might be taken by WGL and Dominion Cove Point LNG, LP so that WGL’s system can safely accommodate the increased amounts of regasified LNG from Cove Point’s LNG terminal.” Washington Gas filed initial Post Technical Conference Comments on August 19, 2008 and reply Post Technical Conference Comments on August 22, 2008. On October 7, 2008, the FERC issued its reauthorization of the expansion of the Cove Point terminal, allowing construction to continue; however, the FERC limited the amount of vaporized LNG that may flow from the Cove Point terminal into the Columbia Gas Transmission pipeline and ultimately into the distribution system of Washington Gas. On November 6, 2008, Washington Gas filed a Request for Rehearing with the FERC, citing numerous factual and legal errors in the October 7, 2008 reauthorization. The reauthorization fails to adequately address future safety concerns as directed by the Court of Appeals. Although this reauthorization limited the amount of vaporized LNG that may flow from the Cove Point terminal into Washington Gas’s distribution system through the Columbia Gas Transmission pipeline, this limited amount far exceeds any amount of Cove Point gas that has been received by Columbia Gas Transmission to date. On January 15, 2009, the FERC issued an order denying Washington Gas’s request for rehearing and affirmed its reauthorization of the expansion of the Cove Point terminal. On February 13, 2009, Washington Gas filed a request with the FERC for an emergency stay of the effectiveness of the orders the FERC issued on October 7, 2008 and January 15, 2009. On March 19, 2009, the FERC denied Washington Gas’s request for a stay. On March 13, 2009, Washington Gas filed a Petition for Review in the Court of Appeals of the FERC’s order on remand issued on October 7, 2008, and its order on rehearing of the October 7, 2008 order, issued January 15, 2009, that established a cap on the volume of LNG that could be delivered to the Columbia Gas interconnection with the Cove Point pipeline. The October 2008 decision did not fully address the concerns raised earlier by the Court of Appeals — that the Cove Point expansion should not proceed until FERC addressed the safety concerns raised by Washington Gas. On July 20, 2009 the Court of Appeals issued an order setting a briefing schedule with final briefs due on January 27, 2010. Oral argument was held on March 11, 2010. The Court of Appeals issued a decision on April 27, 2010 finding that the FERC had “satisfactorily ensured that the Expansion will not result in an increased risk of unsafe natural gas leakage” and therefore upheld the FERC decision and denied the Company’s petition for review. Washington Gas is assessing what, if any, action it will take as a result of this order.

Washington Gas is committed to maintaining the safety of its distribution system for its customers and will use all feasible options to create long-term solutions that can address the safety issues associated with the expanded flows of vaporized LNG from the Cove Point terminal that flow into the interstate pipeline system that also serves Washington Gas.

Additional LNG Supply from the Elba Island Expansion

On September 20, 2007, the FERC approved the expansion of the existing Elba Island LNG receiving terminal near Savannah, Georgia owned by Southern LNG, Inc. (Southern LNG). Concurrent with this approval, the FERC granted Southern LNG certificate authority to construct and operate a new interstate natural gas pipeline to transport regasified LNG from the Elba Island facility to Georgia and South Carolina. On March 31, 2009, Transcontinental Gas Pipe Line Corporation (Transco) filed with FERC for authority to construct and operate interconnections in Georgia and South Carolina between the Elba Island pipeline and the Transco pipeline. This expansion and the requested interconnections, expected to be completed in 2010, may result in the receipt of gas from the Elba Island facility into portions of Washington Gas’s distribution system. The vaporized LNG from the Elba Island facility is expected to contain a lower concentration of HHCs than domestically produced natural gas. This low HHC gas will blend with the domestic natural gas typically flowing on Transco, thus reducing the overall HHC level in the gas being delivered to the Washington Gas service territory by Transco, and may result in increased leaks in Washington Gas’s distribution system. Washington Gas is currently evaluating the potential effect of the introduction of Elba Island gas into our distribution system, and is evaluating potential preventative and remedial measures to mitigate any possible increase in leaks in the effected portions of Washington Gas’s distribution system that may receive Elba Island gas. Washington Gas has filed with FERC to challenge Transco’s interconnection request and has conditioned our support of such interconnection on Transco maintaining minimum HHC levels in the blended gas that would be delivered into the Washington Gas system. On September 17, 2009, the FERC issued an order granting Transco’s request for authorization to construct the interconnections between the Elba Island facility and the Transco pipeline. The FERC stated that Washington Gas had not raised any new evidence to support claims of damage to the distribution system and that the Cove Point orders had addressed the same issues. The FERC also found it was unreasonable to impose restrictions on a long distance pipeline to accommodate the Washington Gas system.

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

On October 19, 2009, Washington Gas filed a rehearing request of the FERC order with the FERC. On February 18, 2010, the FERC issued an order denying the rehearing request of Washington Gas.

Washington Gas welcomes the opportunity to work with Dominion as well as the shippers who bring LNG into the Cove Point terminal and the interstate pipelines that deliver gas to Washington Gas in order to achieve and implement an appropriate solution to the issue of gas quality affecting its distribution system.

CREDIT RISK

Wholesale Credit Risk

Certain wholesale suppliers that sell natural gas to both Washington Gas and WGEServices either have relatively low credit ratings or are not rated by major credit rating agencies.

Washington Gas enters into transactions with wholesale counterparties for the purpose of meeting firm ratepayer commitments, to optimize the value of its long-term capacity assets, and for hedging natural gas costs. In the event of a counterparty’s failure to deliver contracted volumes of gas or fulfill its payment obligations, Washington Gas may incur losses that would typically be passed through to its sales customers under the purchased gas cost adjustment mechanisms. Washington Gas may be at risk for financial loss to the extent these losses are not passed through to its customers. To manage these various credit risks, Washington Gas has a credit policy in place that is designed to mitigate these credit risks through a requirement for credit enhancements including, but not limited to, letters of credit, parent guarantees and cash collateral when deemed necessary. In accordance with this policy, Washington Gas has obtained credit enhancements from certain of its counterparties. Additionally, for certain counterparties or their guarantors that meet this policy’s credit worthiness criteria, Washington Gas grants unsecured credit which is continuously monitored.

For WGEServices, depending on the ability of wholesale counterparties to deliver natural gas or electricity under existing contracts, WGEServices could be financially exposed for the difference between the price at which WGEServices has contracted to buy these commodities and their replacement cost from another supplier. To the extent that WGEServices sells natural gas to these wholesale counterparties, WGEServices may be exposed to payment risk if WGEServices is in a net receivable position. Additionally, WGEServices enters into contracts with third parties to hedge the costs of natural gas and electricity. Depending on the ability of the third parties to fulfill their commitments, WGEServices could be at risk for financial loss. WGEServices has an existing credit policy that is designed to mitigate credit risks through a requirement for credit enhancements including, but not limited to, letters of credit, parent guarantees and cash collateral when deemed necessary. In accordance with this policy, WGEServices has obtained credit enhancements from certain of its counterparties. If certain counterparties or their guarantors meet the policy’s credit worthiness criteria, WGEServices grants unsecured credit to those counterparties or their guarantors. The credit worthiness of all counterparties is continuously monitored.

WGEServices is also subject to the credit policy requirements of their counterparties which under certain circumstances require similar credit enhancements from WGEServices under these contracts. WGEServices credit risks may extend beyond the price or payment risk outlined above to the extent that cash collateral has been provided to the counterparty. At March 31, 2010, WGEServices had provided $83.3 million in cash collateral to supplier counterparties.

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

The following table provides information on our credit exposure, net of collateral, to wholesale counterparties as of March 31, 2010 for both Washington Gas and WGEServices, separately.


Credit Exposure to Wholesale Counterparties (In millions)
			Offsetting				Number of		Net Exposure of
	Exposure		Credit				Counterparties		Counterparties
	Before Credit		Collateral		Net		Greater		Greater Than
Rating ^(a)	Collateral^(b)		Held^(c)		Exposure		Than 10%^(d)		10%

Washington Gas
Investment Grade	$	52.5	$	5.0	$	47.5		1	$	16.9
Non-Investment Grade		-		-		-		-		-
No External Ratings		7.4		0.4		7.0		-		-

WGEServices
Investment Grade	$	1.2	$	-	$	1.2		1	$	1.2
Non-Investment Grade		-		-		-		-		-
No External Ratings		-		-		-		-		-


^(a) Included in “Investment Grade” are counterparties with a minimum Standard & Poor’s or Moody’s Investor Service rating of BBB- or Baa3, respectively. If a counterparty has provided a guarantee by a higher-rated entity (e.g., its parent), the guarantor’s rating is used in this table.

^(b) Includes the net of all open positions on energy-related derivatives subject to mark-to-market accounting requirements, the net receivable/payable for realized transactions and net open positions sheet. Amounts due from counterparties are offset by liabilities payable to those counterparties to the extent that legally enforceable netting arrangements are in place.

^(c) Represents cash deposits and letters of credit received from counterparties, not adjusted for probability of default.

^(d) Using a percentage of the net exposure.

Retail Credit Risk

Washington Gas is exposed to the risk of non-payment of utility bills by certain of its customers. To manage this customer credit risk, Washington Gas may require cash deposits from its high risk customers to cover payment of their bills until the requirements for the deposit refunds are met.

WGEServices is also exposed to the risk of non-payment of invoiced sales by its retail customers. WGEServices manages this risk by evaluating the credit quality of new customers as well as by monitoring collections from existing customers. To the extent necessary, WGEServices can obtain collateral from, or terminate service to its existing customers based on credit quality criteria. The PSC of MD is currently reviewing and evaluating proposals by electric and gas utilities to purchase the receivables of competitive suppliers who render their charges through the utilities billing process. WGEServices bills the majority of its customers through utilities, and the shift to this new purchase of receivables may affect WGEServices billing practices and bad debt expense.

MARKET RISK

We are exposed to various forms of market risk including commodity price risk, weather risk and interest-rate risk. The following discussion describes these risks and our management of them.

Price Risk Related to the Regulated Utility Segment

Washington Gas faces price risk associated with the purchase of natural gas. Washington Gas generally recovers the cost of the natural gas to serve customers through gas cost recovery mechanisms as approved in jurisdictional tariffs; therefore a change in the price of natural gas generally has no direct effect on Washington Gas’s net income. However, Washington Gas is responsible for following competitive and reasonable practices in purchasing natural gas for its customers.

To manage price risk associated with its natural gas supply to its firm customers, Washington Gas: (i) actively manages its gas supply portfolio to balance sales and delivery obligations; (ii) injects natural gas into storage during the summer months when prices are historically lower, and withdraws that gas during the winter heating season when prices are historically higher and (iii) enters into hedging contracts and other contracts that qualify as derivative instruments related to the sale and purchase of natural gas.

WGL Holdings, Inc.
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 has specific regulatory approval in the District of Columbia and Virginia to use forward contracts and option contracts to hedge against potential price volatility for a limited portion of its natural gas purchases for firm customers. Specifically, Washington Gas has approval to: (i) buy gas in advance using forward contracts; (ii) purchase call options that lock in a maximum price when Washington Gas is ready to buy gas and (iii) use a combination of put and call options to limit price exposure within an acceptable range. Regulatory approval for Virginia is permanent. The regulatory approval in the District of Columbia is pursuant to a pilot program, and Washington Gas will be seeking to continue this program. Washington Gas currently has no regulatory approval for hedging in Maryland but has requested this approval. The request is currently being reviewed by the Maryland Commission. The PSC of MD issued an order on April 28, 2010 requesting further information before approving Washington Gas’s proposed plans for summer hedging. The Order required Washington Gas to file its proposed interim hedging program for the Summer Storage Injection Season 2010 and Winter 2010-2011 heating season by May 7, 2010. Comments are due on Washington Gas’s proposed hedging plans by May 14 and hearings are set for May 18, 2010.

Washington Gas also executes commodity-related physical and financial contracts in the form of forwards, swaps and option contracts as part of an asset optimization program that is managed by its internal staff. These transactions are accounted for as derivatives. Under this program, Washington Gas realizes value from its long-term natural gas transportation and storage capacity resources when not fully being used to serve utility customers. Regulatory sharing mechanisms in all three jurisdictions allow the profit from these transactions to be shared between Washington Gas’s customers and shareholders.

The following two tables summarize the changes in the fair value of our net assets (liabilities) associated with the regulated utility segment’s energy-related derivatives during the six months ended March 31, 2010:


Regulated Utility Segment
Changes in Fair Value of Energy-Related Derivatives
(In millions)

Net assets (liabilities) at September 30, 2009	$	5.6
Net fair value of contracts entered into during the period		4.8
Other changes in net fair value		22.2
Realized net settlement of derivatives		(7.2	)

Net assets (liabilities) at March 31, 2010	$	25.4


Regulated Utility Segment
Roll Forward of Energy-Related Derivatives
(In millions)

Net assets (liabilities) at September 30, 2009	$	5.6
Recorded to income		19.1
Recorded to regulatory assets/liabilities		7.9
Realized net settlement of derivatives		(7.2	)

Net assets (liabilities) at March 31, 2010	$	25.4

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

The maturity dates of our net assets (liabilities) associated with the regulated utility segment’s energy-related derivatives recorded at fair value at March 31, 2010, is summarized in the following table based on the level of the fair value calculation under ASC Topic 820:


Regulated Utility Segment
Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives
Years Ended September 30,
			Remainder
(In millions)	Total		2010			2011			2012			2013		2014		Thereafter

Level 1 — Quoted prices in active markets	$	-	$	-		$	-		$	-		$	-	$	-	$	-
Level 2 — Significant other observable inputs		12.8		3.8			6.0			(0.1	)		1.3		0.3		1.5
Level 3 — Significant unobservable inputs		12.6		(2.1	)		(2.5	)		3.7			3.3		3.1		7.1

Total net assets (liabilities) associated with our energy-related derivatives	$	25.4	$	1.7		$	3.5		$	3.6		$	4.6	$	3.4	$	8.6

Refer to Notes 8 and 9 of the Notes to Consolidated Financial Statements in this quarterly report for a further discussion of our derivative activities and fair value measurements.

Price Risk Related to the Retail Energy-Marketing Segment

Our retail energy-marketing subsidiary, WGEServices, sells natural gas and electricity to retail customers at both fixed and indexed prices. WGEServices must manage daily and seasonal demand fluctuations for these products with its suppliers. Price risk exists to the extent WGEServices does not closely match the timing and volume of natural gas and electricity it purchases with the related fixed price or indexed sales commitments. WGEServices’ risk management policies and procedures are designed to minimize this risk.

Natural Gas. A portion of WGEServices’ annual natural gas sales volumes is subject to variations in customer demand associated with fluctuations in weather and other factors. Purchases of natural gas to fulfill retail sales commitments are generally made under fixed-volume contracts based on certain weather assumptions. If there is significant deviation from normal weather or other factors which affect customer usage, this may cause our purchase commitments to differ significantly from actual customer usage. To the extent that WGEServices cannot match its customer requirements and supply commitments, it may be exposed to commodity price and volume variances, which could negatively impact expected gross margins. WGEServices may manage these risks through the use of derivative instruments including financial products and wholesale supply contracts that provide for volumetric variability.

Electricity. WGEServices procures electricity supply under contract structures in which WGEServices assumes the responsibility of matching its customer requirements with its supply purchases. WGEServices assembles the various components of supply, including electric energy from various suppliers, and capacity, ancillary services and transmission service from the PJM Interconnection, a regional transmission organization, to match its customer requirements in accordance with its risk management policy.

To the extent WGEServices has not sufficiently matched its customer requirements with its supply commitments, it could be exposed to electricity commodity price risk. WGEServices may manage this risk through the use of derivative instruments, including financial products.

WGEServices’ electric business is also exposed to fluctuations in weather and varying customer usage. Purchases generally are made under fixed-price, fixed-volume contracts that are based on certain weather assumptions. If there are significant deviations in weather or usage from these assumptions, WGEServices may incur price and volume variances that could negatively impact expected gross margins (refer to the section entitled “Weather Risk” for a further discussion of our management of weather risk).

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

The following two tables summarize the changes in the fair value of our net assets (liabilities) associated with the retail energy-marketing segment’s energy-related derivatives for both natural gas and electricity during the six months ended March 31, 2010:


Retail Energy-Marketing Segment
Changes in Fair Value of Energy-Related Derivatives
(In millions)

Net assets (liabilities) at September 30, 2009	$	(25.5	)
Net fair value of contracts entered into during the period		(15.2	)
Other changes in net fair value		(22.4	)
Realized net settlement of derivatives		6.7

Net assets (liabilities) at March 31, 2010	$	(56.4	)


Retail Energy-Marketing Segment
Roll Forward of Energy-Related Derivatives
(In millions)

Net assets (liabilities) at September 30, 2009	$	(25.5	)
Recorded to income		(31.2	)
Recorded to accounts payable		(6.4	)
Recorded to retained earnings		-
Net option premium payments		-
Realized net settlement of derivatives		6.7

Net assets (liabilities) at March 31, 2009	$	(56.4	)

The maturity dates of our net assets (liabilities) associated with the retail energy-marketing segment’s energy-related derivatives recorded at fair value at March 31, 2010, is summarized in the following table based on the level of the fair value calculation under ASC Topic 820:


Retail Energy Marketing Segment
Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives
Years Ended September 30,
				Remainder
(In millions)	Total			2010			2011			2012			2013			2014			Thereafter

Level 1 — Quoted prices in active markets	$	-		$	-		$	-		$	-		$	-		$	-		$	-
Level 2 — Significant other observable inputs		(27.1	)		(13.5	)		(9.5	)		(2.6	)		(1.3	)		(0.2	)		-
Level 3 — Significant unobservable inputs		(29.3	)		(8.6	)		(13.9	)		(7.9	)		1.1			-			-

Total net assets (liabilities) associated with our energy-related derivatives	$	(56.4	)	$	(22.1	)	$	(23.4	)	$	(10.5	)	$	(0.2	)	$	(0.2	)	$	-

Refer to Note 8 and 9 of the Notes to Consolidated Financial Statements in this quarterly report for a further discussion of our derivative activities and fair value measurements.

Value-at-Risk. WGEServices measures the market risk of its energy commodity portfolio by determining its 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. The value-at-risk calculation for natural gas and electric portfolios include assumptions for normal weather, new customers and renewing customers for which supply commitments have been secured. Based on a 95% confidence interval for a one-day holding period, WGEServices’ value-at-risk at March 31, 2010 was approximately $34,000 and $207,000, related to its natural gas and electric portfolios, respectively.

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

Weather Risk

We are exposed to various forms of weather risk in both our regulated utility and unregulated business segments. For Washington Gas, a large portion of its revenues is volume driven and its current rates are based upon an assumption of normal weather, however, billing adjustment mechanisms described below address variations from this assumption. Without weather protection strategies, variations from normal weather will cause our earnings to increase or decrease depending on the weather pattern. Washington Gas currently has a weather protection strategy that is designed to neutralize the estimated financial effects of weather on its net income, as discussed below.

The financial results of our non-regulated energy-marketing business, WGEServices, are also affected by variations from normal weather primarily in the winter relating to its natural gas sales, and throughout the fiscal year relating to its electricity sales. WGEServices manages these weather risks with, among other things, weather derivatives.

Billing Adjustment Mechanisms. In Maryland, Washington Gas has a revenue normalization agreement (RNA) billing mechanism that is designed to stabilize the level of net revenues collected from Maryland customers by eliminating the effect of deviations in customer usage caused by variations in weather from normal levels and other factors such as conservation. In Virginia, Washington Gas has a Weather Normalization Adjustment (WNA) mechanism which is a billing adjustment mechanism that is designed to eliminate the effect of variations in weather from normal levels on utility net revenues. The SCC of VA, in its order on March 26, 2010, rejected the adoption of a commercial energy efficiency program and an associated decoupling rate mechanism for commercial customers. Washington Gas is preparing a filing to address concerns raised by the SCC of VA associated with the commercial energy efficiency program. Should the SCC of VA approve a revision to the commercial energy efficiency program, a decoupling rate mechanism for commercial customers would be approved for implementation. The SCC of VA approval of this filing is expected prior to the winter of 2010-2011.

For both the RNA and the WNA mechanisms, periods of colder-than-normal weather generally would cause Washington Gas to record a reduction to its revenues and establish a refund liability to customers, while the opposite would generally result during periods of warmer-than-normal weather. However, factors such as volatile weather patterns and customer conservation may cause the RNA to function conversely because it adjusts billed revenues to provide a designed level of net revenue per meter.

Weather Derivatives. On September 21, 2009, Washington Gas executed an HDD derivative contract to manage its exposure to variations from normal weather in the District of Columbia during fiscal year 2010. Under this contract, Washington Gas purchased protection against net revenue shortfalls due to warmer-than-normal weather and sold cold weather benefits. This derivative contract resulted in a payment to Washington Gas of $2.1 million.

WGEServices utilizes HDD derivatives from time to time to manage weather risks related to its natural gas and electricity sales. WGEServices also utilizes cooling degree day (CDD) derivatives to manage weather risks related to its electricity sales during the summer cooling season. These derivatives cover a portion of WGEServices’ estimated revenue or energy-related cost exposure to variations in HDDs or CDDs. Refer to Note 8 of the Notes to Consolidated Financial Statements for a further discussion of the accounting for these weather-related instruments.

Interest-Rate Risk

We are exposed to interest-rate risk associated with our short-term and long-term financing. Washington Gas utilizes derivative instruments from time to time in order to minimize its exposure to the risk of interest-rate volatility. On July 6, 2009, Washington Gas entered into three interest-rate derivative transactions to mitigate a substantial portion of the risk of rising interest rates associated with future debt issuances, two of which have settled and one due to settle in June 2010. In addition, on April 13, 2010, Washington Gas executed a forward starting swap expiring in May related to the call of $50 million of floating rate debt (refer to the section entitled “ Long-Term Cash Requirements and Related Financing ” for further discussion of our interest-rate risk management activity).

WGL Holdings, Inc.
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, 2010 vs. March 31, 2009

The results of operations for the regulated utility segment and Washington Gas are substantially the same; therefore, this section primarily focuses on statistical information and other information that is not discussed in the results of operations for the regulated utility segment. Refer to the section entitled “Results of Operations-Regulated Utility” in Management’s Discussion for WGL Holdings for a detailed discussion of the results of operations for the regulated utility segment.

Washington Gas reported net income applicable to common stock of $90.8 million for the three months ended March 31, 2010, an increase of $15.6 million over net income applicable to common stock of $75.2 million reported for the same three months of the prior fiscal year. The increase in net income primarily reflects: (i) an increase in over 7,600 average active customer meters; (ii) favorable effects of changes in natural gas consumption patterns; (iii) lower regulatory obligation for the Virginia Earnings Sharing Mechanism; (iv) an increase in unrealized margins associated with our asset optimization program; (v) lower costs for weather protection products related to the District of Columbia and (vi) a decrease in interest expense primarily due to both lower borrowings and lower weighted average interest rates. Partially offsetting this increase was: (i) a decrease in the recovery of storage carrying costs on lower average storage gas inventory balances; (ii) an increase in employee benefit expenses due to changes in plan asset values and (iii) an increase in property and other general taxes.

Key gas delivery, weather and meter statistics are shown in the table below for the three months ended March 31, 2010 and 2009.


Gas Deliveries, Weather and Meter Statistics
	Three Months Ended
	March 31,				Increase/
	2010		2009		(Decrease)

Gas Sales and Deliveries (millions of therms)
Firm
Gas sold and delivered		436.7		444.3		(7.6	)
Gas delivered for others		211.6		200.0		11.6

Total firm		648.3		644.3		4.0

Interruptible
Gas sold and delivered		1.4		1.0		0.4
Gas delivered for others		97.9		95.0		2.9

Total interruptible		99.3		96.0		3.3

Electric generation—delivered for others		12.4		22.8		(10.4	)

Total deliveries		760.0		763.1		(3.1	)

Degree Days
Actual		2,177		2,333		(156	)
Normal		2,104		2,111		(7	)
Percent colder (warmer) than normal		4.1%		10.5%		n/a
Average active customer meters		1,078,358		1,070,724		7,634
New customer meters added		1,989		2,173		(184	)

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

The tariffs in the Maryland and Virginia jurisdictions include provisions that consider the effects of the RNA and WNA mechanisms, respectively, which are designed to, among other things, eliminate the effect on net revenues of variations in weather from normal levels (refer to the section entitled “Weather Risk” for further discussion of these mechanisms and other weather-related instruments included in our weather protection strategy). In addition to these mechanisms, the combination of declining block rates in the Maryland and Virginia jurisdictions and the existence of fixed demand charges 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, 2010, total gas deliveries to firm customers were 648.3 million therms compared to 644.3 million therms delivered in the same quarter of the prior fiscal year. This comparison in natural gas deliveries to firm customers reflects colder weather in the current three-month period than in the same period of the prior fiscal year.

Weather, when measured by HDDs, was 4.1% colder than normal in the second quarter of fiscal year 2010, compared to 10.5% colder than normal for the same quarter of fiscal year 2009. Including the effects of our weather protection strategy, there were no material effects on net income attributed to colder or warmer weather on either the quarter ended March 31, 2010 or March 31, 2009.

Gas Service to Interruptible Customers. Washington Gas must curtail or interrupt service to this class of customer when the demand by firm customers exceeds specified levels. Therm deliveries to interruptible customers were 99.3 million therms during the second quarter of fiscal year 2010, compared to 96.0 million therms for the same quarter last year, reflecting increased demand due to weather.

In the District of Columbia, the effect on net income of any changes in delivered volumes and prices to interruptible customers is limited by margin-sharing arrangements that are included in Washington Gas’s rate designs in the District of Columbia. In the District of Columbia, Washington Gas shares a majority of the margins earned on interruptible gas sales and deliveries with firm customers. A portion of the fixed costs for servicing interruptible customers is collected through the firm customers’ rate design. Rates for interruptible customers in Maryland and Virginia are based on a traditional cost of service approach. In Virginia, Washington Gas retains all revenues above a pre-approved margin threshold level. In Maryland, Washington Gas retains a defined amount of revenues based on a set threshold.

Gas Service for Electric Generation. Washington Gas delivers natural gas for use at two electric generation facilities in Maryland that are each owned by companies independent of WGL Holdings. During the six months ended March 31, 2010, deliveries to these customers decreased by 10.4 million therms, when compared to the same quarter of the prior fiscal year. Washington Gas shares with firm customers a significant majority of the margins earned from natural gas deliveries to these customers. Therefore, changes in the volume of interruptible gas deliveries to these customers do not materially affect either net revenues or net income.

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

RESULTS OF OPERATIONS — Six Months Ended March 31, 2010 vs. March 31, 2009

Washington Gas reported net income applicable to common stock of $131.3 million for the six months ended March 31, 2010, an increase of $2.5 million over net income applicable to common stock of $128.8 million reported for the same six months of the prior fiscal year. The increase in net income primarily reflects: (i) an increase in over 8,900 average active customer meters; (ii) favorable effects of changes in natural gas consumption patterns; (iii) lower regulatory obligation under the Virginia Earnings Sharing Mechanism; (iv) an increase in unrealized margins associated with our asset optimization program; (v) lower costs for weather protection products related to the District of Columbia and (vi) a decrease in interest expense primarily due to both lower borrowings and lower weighted average interest rates. Partially offsetting this increase was: (i) a decrease in the recovery of storage carrying costs on lower average storage gas inventory balances; (ii) a $4.6 million reversal of a reserve in fiscal year 2009 for disallowed natural gas costs in Maryland due to a favorable February 5, 2009 order from the Public Service Commission of Maryland (PSC of MD); (iii) an increase in employee benefit expenses due to changes in plan asset values and (iv) an increase in property and other general taxes.

Key gas delivery, weather and meter statistics are shown in the table below for the six months ended March 31, 2010 and 2009.


Gas Deliveries, Weather and Meter Statistics
	Six Months Ended
	March 31,				Increase/
	2010		2009		(Decrease)

Gas Sales and Deliveries (millions of therms)
Firm
Gas sold and delivered		706.7		739.7		(33.0	)
Gas delivered for others		370.5		347.7		22.8

Total firm		1,077.2		1,087.4		(10.2	)

Interruptible
Gas sold and delivered		2.9		2.2		0.7
Gas delivered for others		175.4		173.5		1.9

Total interruptible		178.3		175.7		2.6

Electric generation—delivered for others		23.5		46.3		(22.8	)

Total deliveries		1,279.0		1,309.4		(30.4	)

Degree Days
Actual		3,608		3,860		(252	)
Normal		3,451		3,457		(6	)
Percent colder (warmer) than normal		4.9%		11.7%	n/a
Average active customer meters		1,073,732		1,064,801		8,931
New customer meters added		5,073		6,029		(956	)

Gas Service to Firm Customers. The volume 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. Washington Gas’s rates are based on an assumption of normal weather. The tariffs in the Maryland and Virginia jurisdictions include provisions that consider the effects of the RNA and WNA mechanisms, respectively, which are designed to, among other things, eliminate the effect on net revenues of variations in weather from normal levels (refer to the section entitled “Weather Risk” for further discussion of these mechanisms and other weather-related instruments included in our weather protection strategy). In addition to these mechanisms, the combination of declining block rates in the Maryland and Virginia jurisdictions and the existence of fixed demand charges in all jurisdictions to collect a portion of revenues reduce the effect that variations from normal weather have on net revenues.

During the six months ended March 31, 2010, total gas deliveries to firm customers were 1,077.2 million therms compared to 1,087.4 million therms delivered in the same period of the prior year. This comparison in natural gas deliveries to firm customers reflects warmer weather in the current six-month period than in the same period of the prior fiscal year.

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

Weather, when measured by HDDs, was 4.9% colder than normal in the six months ended March 31, 2010, compared to 11.7% colder than normal for the same period of the prior year. Including the effects of our weather protection strategy, there were no material effects on net income attributed to colder or warmer weather on either the six months ended March 31, 2010 or March 31, 2009.

Gas Service to Interruptible Customers. Washington Gas must curtail or interrupt service to this class of customer when the demand by firm customers exceeds specified levels. Therm deliveries to interruptible customers were 178.3 million therms during the six months ended March 31, 2010, compared to 175.7 million therms for the same six month period of the prior year, reflecting increased demand due to weather.

Gas Service for Electric Generation. Washington Gas delivers natural gas for use at two electric generation facilities in Maryland that are each owned by companies independent of WGL Holdings. During the six months ended March 31, 2010, deliveries to these customers decreased by 22.8 million therms, when compared to the same quarter of the prior fiscal year. Washington Gas shares with firm customers a significant majority of the margins earned from natural gas deliveries to these customers. Therefore, changes in the volume of interruptible gas deliveries to these customers do not materially affect either net revenues or net income.

LIQUIDITY AND CAPITAL RESOURCES

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). Those explanations are incorporated by reference into this discussion.

RATES AND REGULATORY MATTERS

Washington Gas determines its request to modify existing rates based on the level of net investment in plant and equipment, operating expenses and the need to earn a just and reasonable return on invested capital. The following is a discussion of significant current regulatory matters in each of Washington Gas’s jurisdictions.

District of Columbia Jurisdiction

Recovery of HHC Costs. On May 1, 2006, Washington Gas filed two tariff applications with the PSC of DC requesting approval of proposed revisions to the balancing charge provisions of its firm and interruptible delivery service tariffs that would permit the utility to recover from its delivery service customers the costs of HHCs that are being injected into Washington Gas’s natural gas distribution system to treat vaporized liquefied natural gas from the Dominion Cove Point Facility (refer to the section entitled “Operating Issues Related to Cove Point Natural Gas Supply” in Management’s Discussion). Washington Gas had been recovering the costs of HHCs from sales customers in the District of Columbia through its Purchased Gas Charge (PGC) provision in this jurisdiction. On October 2, 2006, the PSC of DC issued an order rejecting Washington Gas’s proposed tariff revisions until the PSC of MD issued a final order related to this matter. On October 12, 2006, Washington Gas filed a motion for clarification requesting that the PSC of DC affirm that Washington Gas can continue collecting HHC costs from sales customers through its PGC provision or to record such HHC costs incurred as a regulatory asset pending a ruling by the PSC of DC on future cost recovery.

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

On May 11, 2007, the PSC of DC directed Washington Gas to cease prospective recovery of the cost of HHCs through the PGC provision, with future HHC costs to be recorded as a “pending” regulatory asset. On November 16, 2007 the PSC of MD issued a final order in the relevant case supporting full recovery of the HHC costs in Maryland. On March 25, 2008, the PSC of DC issued an order stating that the consideration of Washington Gas’s HHC strategy will move forward and directed interested parties to submit filings reflecting a proposed procedural schedule. On June 6, 2008, Washington Gas and the District of Columbia Office of the People’s Counsel filed a joint response to the order proposing a procedural schedule and a list of issues for consideration in the case. The PSC of DC adopted the proposed issues list and approved a procedural schedule. Washington Gas and other parties subsequently filed comments, conducted discovery and the parties filed reply comments. On April 30, 2009, the PSC of DC ruled that there were unresolved issues and directed that they should be addressed in evidentiary hearings. The PSC of DC issued an order establishing a procedural schedule to address these unresolved issues in the case. Initial testimony was filed May 29, 2009, and rebuttal testimony was filed on July 24, 2009.

	(i)		approves the recovery of hexane commodity costs incurred after September 30, 2009 from sales and delivery service customers, subject to review as a component of Washington Gas’s cost of gas;

	(ii)		establishes a coupling replacement and encapsulation program (program), wherein Washington Gas will replace or encapsulate a portion of its mechanically coupled pipe in the District of Columbia. The program is expected to conclude in approximately seven years with total spending not to exceed $28.0 million;

	(iii)		provides for the cost of the program to be recovered through an annual surcharge based on actual expenditures for coupling replacement and encapsulation that will become effective at the end of the existing base rate freeze (October 1, 2011). The cost will include both a return of and return on the cost of coupling replacement and encapsulation, computed in accordance with the terms of the rates currently in effect and

	(iv)		establishes periodic reporting on the level of hexane injected at each of Washington Gas’s hexane facilities with the associated commodity costs, and continued filing of leak-related information with the PSC of DC.

Revenue Normalization Adjustment. On December 21, 2009, Washington Gas filed a revised tariff application seeking approval of an RNA, a sales adjustment mechanism that decouples Washington Gas’s non-gas revenues from actual delivered volumes of gas. On December 22, 2009, the DC OPC filed a motion requesting that the PSC of DC establish public hearing procedures to examine the merits of Washington Gas’s RNA application. Washington Gas filed an opposition to the DC OPC’s motion on January 4, 2010. The PSC of DC issued an order on January 19, 2010 granting the DC OPC’s motion for evidentiary hearing and initiated a rate proceeding to consider issues surrounding Washington Gas’s tariff application. On April 2, 2010, the PSC of DC issued an order designating issues to be addressed and establishing a procedural schedule for the case. Washington Gas filed supplemental testimony on April 13, 2010. Direct testimony of other parties is scheduled to be filed on May 17, 2010. Evidentiary hearings are scheduled for July 27 and 28, 2010.

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

Maryland Jurisdiction

A hearing was held March 27, 2009 on Washington Gas’s purchased gas charges for the twelve month period ended August 31, 2008. No party challenged Washington Gas’s gas costs incurred during the period, but the Staff of the PSC of MD (MD Staff) and the PSC of MD Office of the People’s Counsel (MD OPC) requested that the case remain open subject to any changes that may result from the final PSC of MD order regarding Washington Gas’s asset management and gas purchase practices (refer to the section entitled “Investigation of Asset Management and Gas Purchase Practices” for a further discussion of this case). On April 23, 2010, the Hearing Examiner issued a Proposed Order which approved Washington Gas’s gas costs for the period, subject to any changes which may arise from the Commission’s final order in the asset management investigation in Case No. 9158. The Order becomes a final order of the Commission on May 25, 2010, unless before that date an appeal is filed or the Commission modifies or reverses the proposed order.

A hearing was held on March 25, 2010 on Washington Gas’s purchased gas charges for the twelve month period ended August 31, 2009. The parties files initial briefs on April 30, 2010. Reply briefs are due May 21, 2010.

Investigation of Asset Management and Gas Purchase Practices. On July 24, 2008, the Office of Staff Counsel of the PSC of MD submitted a petition to the PSC of MD to establish an investigation into Washington Gas’s asset management program and cost recovery of its gas purchases. On September 4, 2008, the PSC of MD docketed a new proceeding to consider the issues raised in the petition filed by the Staff. In accordance with the procedural schedule, Washington Gas filed direct testimony on November 21, 2008; direct testimony by intervening parties was filed on February 4, 2009, and Washington Gas’s rebuttal testimony was filed March 11, 2009. A public hearing was held on March 19, 2009. Initial briefs were filed by Washington Gas and other parties on June 25, 2009. Reply briefs were filed on August 3, 2009.

On November 2, 2009, the Chief Hearing Examiner of the PSC of MD issued a Proposed Order of Hearing Examiner (POHE) which supports Washington Gas’s move to self-optimization of its gas assets, concluding that “the evidence on the record in this case is overwhelming that Washington Gas’s decision to transition to self-management has in fact been prudent and resulted in substantial rate benefits...”

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

The POHE also approves Washington Gas’s proposal for the sharing of margins from asset optimization between Washington Gas and customers based on a graduated, tiered approach. The POHE directs Washington Gas to pass credits to customers through the PGC provision.

The POHE approves Washington Gas’s current methodology for pricing storage injections. However, the POHE states that the parties will have 60 days from the date of a final order in the case to suggest any alternative pricing methods. The POHE also directs Washington Gas to consult with the other parties to develop greater transparency and separate accounting or tracking of asset optimization activities and to provide a proposal or report within 60 days after a final order is issued.

The POHE directs the Washington Gas to include language in its tariff that would prevent losses from asset optimization activity over a full year from being passed on to ratepayers, but recognizes that timing differences or accounting adjustments, which may appear as a loss in a particular month, may occur.

On December 2, 2009, both the MD Staff and the Office of People’s Counsel filed Notices of Appeal of the POHE and on December 14, 2009, both filed a Memorandum on Appeal in support of their positions. On January 4, 2010, Washington Gas filed a Reply Memorandum in response to the Staff of the PSC of MD and the MD OPC’s Memoranda on Appeal. A Commission decision is pending.

Investigation Into Operating Issues Related to Cove Point Natural Gas Supply. On February 2, 2009, the PSC of MD issued an order reopening the evidentiary proceedings in a previously established case for the purpose of investigating and considering revised solutions to the gas distribution system leak problems (refer to the section entitled “Operating Issues Related to Cove Point Natural Gas Supply”). A technical conference was held on May 22, 2009, interested parties are currently engaged in discovery and status reports by the parties were filed with the Hearing Examiner on July 23, 2009, September 18, 2009 and November 5, 2009. On December 4, 2009, the parties filed a letter with the Hearing Examiner stating that all parties are in agreement that no further evidentiary hearings are necessary at the present time. Washington Gas agreed to provide additional information to the Staff of the PSC of MD and the MD OPC in on-going quarterly reports filed with the Commission and to discuss the quarterly reports after they are filed.

Review of the Company’s 2009 — 2013 Gas Portfolio Plan. On March 19, 2009, the PSC of MD docketed a proceeding to review the Washington Gas’s 2009 — 2013 Gas Portfolio Plan, specifically noting Washington Gas’s plans to build an on-system peaking facility on the grounds of the decommissioned Chillum gas storage holders in Chillum, Maryland. Refer to the section entitled “Chillum LNG Facility” for further discussion of this matter. A pre-hearing conference was held on April 15, 2009, at which time interventions were granted and a procedural schedule was established. Upon consideration of a motion to combine review of Washington Gas’s Gas Portfolio Plans, on January 6, 2010, the PSC of MD consolidated this proceeding with Washington Gas’s 2010 — 2014 Gas Portfolio Plan, which was filed on November 17, 2009. Washington Gas filed supplemental testimony on February 18, 2010. Testimony by the Staff of the PSC of MD, the MD OPC and other interveners was filed on April 14, 2010 and Rebuttal Testimony is due May 28, 2010. A hearing is scheduled for the week of June 14-18, 2010.

Virginia Jurisdiction

Application for Conservation and Ratemaking Efficiency Plan. On September 29, 2009, Washington Gas filed with the SCC of VA an application which included a portfolio of conservation and energy efficiency programs, an associated cost recovery provision and a decoupling mechanism which will adjust weather normalized non-gas distribution revenues for the impact of conservation or energy efficiency efforts. An evidentiary hearing in the proceeding was held on February 9, 2010. On March 26, 2010 the SCC of VA issued an Order approving a decoupling rate mechanism for residential customers and six residential energy efficiency programs and the cost recovery mechanism for those programs. Washington Gas filed compliance tariffs with the Staff of the SCC of VA on April 19, 2010 to implement the Conservation and Ratemaking Efficiency Plan on May 1, 2010.

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

Performance-Based Rate Plans

In rate case proceedings in all jurisdictions, Washington Gas requested permission to implement Performance-Based Rate (PBR) plans that include performance measures for customer service and an ESM that enables Washington Gas to share with shareholders and customers the earnings that exceed a target rate of return on equity.

Effective October 1, 2007, the SCC of VA approved the implementation of a PBR plan through the acceptance of a settlement stipulation, which includes: (i) a four-year base rate freeze; (ii) service quality measures to be determined in conjunction with the Staff of the SCC of VA and reported quarterly for maintaining a safe and reliable natural gas distribution system while striving to control operating costs; (iii) recovery of initial implementation costs associated with achieving Washington Gas’s BPO initiatives over the four-year period of the PBR plan and (iv) an ESM that enables Washington Gas to share with shareholders and Virginia customers the earnings that exceed a target of 10.5% return on equity. The calculation of the ESM excludes $2.4 million of asset management revenues that are being refunded to customers as part of a new margin sharing agreement in Virginia.

On January 28, 2010, Washington Gas filed its annual information filing indicating that there was no ESM liability for fiscal year 2009. Staff’s report to the SCC of VA on Washington Gas’s filing is expected in the summer of 2010. Based on the results reflected in the annual information filing, Washington Gas has recorded revenue of approximately $0.5 million of previously expensed hexane costs.

On November 16, 2007, the PSC of MD issued a final order in a rate case, which established a phase-two proceeding to review Washington Gas’s request to implement a PBR plan and issues raised by the parties associated with Washington Gas’s BPO agreement. On September 4, 2008, a proposed order of Hearing Examiner was issued in this phase-two proceeding. Consistent with Washington Gas’s current accounting methodology, the proposed order approved 10-year amortization accounting for initial implementation costs related to Washington Gas’s BPO plan. At March 31, 2010 and September 30, 2009, we had recorded a regulatory asset of $7.0 million and $7.4 million, respectively, net of amortization, related to initial implementation costs allocable to Maryland associated with our BPO plan. Washington Gas’s application seeking approval of a PBR plan was denied. Additionally, the proposed order (i) directs Washington Gas to obtain an independent management audit related to issues raised in the phase-two proceeding and (ii) directs the initiation of a collaboration process in which Washington Gas is directed to engage in discussions with the Staff of the PSC of MD (MD Staff), the MD OPC and interested parties to develop appropriate customer service metrics and a periodic form for reporting results similar to the metrics filed by Washington Gas as part of the approved settlement in Virginia. This proposed order has been appealed by the MD Staff, the MD OPC and other parties. Washington Gas’s reply memorandum on appeal was filed on November 5, 2008. A final decision by the PSC of MD is pending.

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

Depreciation Study

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 our market risks are included under Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and are incorporated by reference into this discussion.

	•		Price Risk Related to the Regulated Utility Segment

	•		Price Risk Related to the Retail Energy-Marketing Segment

	•		Weather Risk

	•		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’ disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2010. Based on this evaluation process, the Chairman and Chief Executive Officer, and the Vice President and Chief Financial Officer have concluded that WGL Holdings’ disclosure controls and procedures are effective. There have been no changes in the internal control over financial reporting of WGL Holdings during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of WGL Holdings.

ITEM 4T. CONTROLS AND PROCEDURES

Washington Gas is a non-accelerated filer; therefore, management has included this Item 4T as part of this combined report being filed by the two separate registrants: WGL Holdings and Washington Gas.

Senior management, including the Chairman and Chief Executive Officer, and the Vice President and Chief Financial Officer, evaluated the effectiveness of the disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) of Washington Gas as of March 31, 2010. Based on this evaluation process, the Chairman and Chief Executive Officer, and the Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures of Washington Gas are effective. There have been no changes in the internal control over financial reporting of Washington Gas during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of Washington Gas.

WGL Holdings, Inc.
Washington Gas Light Company

Part II—Other Information

ITEM 1. LEGAL PROCEEDINGS

The nature of our business ordinarily results in periodic regulatory proceedings before various state and federal authorities and litigation incidental to the business. For information regarding pending federal and state regulatory matters, see Note 13 — Commitments and Contingencies, contained in Part 1 under the Notes to Consolidated Financial Statements.

ITEM 6. EXHIBITS

Exhibits:


10.1		Directors’ Stock Compensation Plan, as amended and restated on March 4, 2010.

31.1		Certification of Terry D. McCallister, 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 Vincent L. Ammann, Jr., 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 Terry D. McCallister, the Chairman and Chief Executive Officer of Washington Gas Light Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.4		Certification of Vincent L. Ammann, Jr., the Vice President and Chief Financial Officer of Washington Gas Light Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Terry D. McCallister, the Chairman and Chief Executive Officer, and Vincent L. Ammann, Jr., the Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

WGL Holdings, Inc.
Washington Gas Light Company

Signature

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


		WGL HOLDINGS, INC.

		and

		WASHINGTON GAS LIGHT COMPANY
		(Co-Registrants)

Date: May 7, 2010		/s/ Mark P. O’Flynn
		Mark P. O’Flynn
		Controller
		(Principal Accounting Officer)

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WASHINGTON GAS LIGHT CO Reports

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