Edgar Filing: WASHINGTON GAS LIGHT CO

Form 10-Q

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 December 31, 2012

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


Commission File Number	Exact name of registrant as specified in its charter and principal office address and telephone number	State of Incorporation	I.R.S. Employer Identification No.
1-16163	WGL Holdings, Inc. 101 Constitution Ave., N.W. Washington, D.C. 20080 (703) 750-2000	Virginia	52-2210912
0-49807	Washington Gas Light Company 101 Constitution Ave., N.W. Washington, D.C. 20080 (703) 750-4440	District of Columbia and Virginia	53-0162882

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 ¨

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 þ No ¨

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 ¨	Non-accelerated filer ¨	Smaller reporting company ¨
	(Do not check if a smaller reporting company)

Washington Gas Light Company:


Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer þ	Smaller reporting company ¨
	(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 ¨ 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 January 31, 2013: 51,668,012 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 January 31, 2013.

WGL Holdings, Inc.

Washington Gas Light Company

For the Quarter Ended December 31, 2012

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 Comprehensive Income			6
Consolidated Statements of Cash Flows			7

Washington Gas Light Company
Balance Sheets			8
Statements of Income			9
Statements of Comprehensive Income			10
Statements of Cash Flows			11

Notes to Consolidated Financial Statements
WGL Holdings, Inc. and Washington Gas Light Company — Combined			12

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			37
WGL Holdings, Inc.			41
Washington Gas Light Company			59

Item 3. Quantitative and Qualitative Disclosures about Market Risk			63

Item 4. Controls and Procedures			63

PART II. Other Information

Item 1. Legal Proceedings			64

Item 4. Mine Safety Disclosures			64

Item 6. Exhibits			64

Signature			66

(i)

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 comprehensive 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’ 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 the Southern LNG, Inc. Elba Island facility to Washington Gas’ natural gas distribution system or changes in the composition of domestic natural gas as a result of liquids processing and new domestic sources of natural gas;

•

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’ natural gas distribution system as a result of factors beyond our control;

•

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

•

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, pipeline integrity 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;

•

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;

(ii)

WGL Holdings, Inc.

Washington Gas Light Company

•

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


(In thousands)	December 31, 2012			September 30, 2012
ASSETS
Property, Plant and Equipment
At original cost	$	3,854,531		$	3,807,036
Accumulated depreciation and amortization		(1,153,438	)		(1,139,623	)
Net property, plant and equipment		2,701,093			2,667,413
Current Assets
Cash and cash equivalents		4,584			10,263
Receivables
Accounts receivable		339,829			238,945
Gas costs and other regulatory assets		20,991			40,835
Unbilled revenues		203,187			109,919
Allowance for doubtful accounts		(20,086	)		(19,792	)
Net receivables		543,921			369,907
Materials and supplies—principally at average cost		23,693			23,843
Storage gas		280,362			283,008
Deferred income taxes		9,301			12,404
Other prepayments		100,925			80,240
Derivatives		34,024			43,196
Other		14,164			9,900
Total current assets		1,010,974			832,761
Deferred Charges and Other Assets
Regulatory assets
Gas costs		30,648			—
Pension and other post-retirement benefits		429,771			435,118
Other		67,958			68,431
Derivatives		45,179			61,751
Other		55,314			45,473
Total deferred charges and other assets		628,870			610,773
Total Assets	$	4,340,937		$	4,110,947

CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders’ equity	$	1,302,914		$	1,269,556
Washington Gas Light Company preferred stock		28,173			28,173
Long-term debt		553,694			589,202
Total capitalization		1,884,781			1,886,931
Current Liabilities
Current maturities of long-term debt		37,000			18
Notes payable		361,400			247,700
Accounts payable and other accrued liabilities		297,199			270,387
Wages payable		14,874			16,886
Accrued interest		10,898			3,524
Dividends declared		20,991			20,975
Customer deposits and advance payments		79,555			89,320
Gas costs and other regulatory liabilities		55,117			20,664
Accrued taxes		32,939			23,036
Derivatives		35,648			36,459
Other		24,591			28,046
Total current liabilities		970,212			757,015
Deferred Credits
Unamortized investment tax credits		31,779			25,260
Deferred income taxes		646,385			621,451
Accrued pensions and benefits		312,486			313,504
Asset retirement obligations		72,206			71,415
Regulatory liabilities
Gas costs		—			19,511
Accrued asset removal costs		324,289			325,618
Other		16,212			15,047
Derivatives		17,227			13,208
Other		65,360			61,987
Total deferred credits		1,485,944			1,467,001
Commitments and Contingencies (Note 12)
Total Capitalization and Liabilities	$	4,340,937		$	4,110,947

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 December 31,
(In thousands, except per share data)	2012		2011
OPERATING REVENUES
Utility	$	347,933	$	364,147
Non-utility		338,803		363,610
Total Operating Revenues		686,736		727,757
OPERATING EXPENSES
Utility cost of gas		142,970		155,309
Non-utility cost of energy-related sales		299,149		335,862
Operation and maintenance		83,502		81,624
Depreciation and amortization		27,304		24,240
General taxes and other assessments		39,066		36,797
Total Operating Expenses		591,991		633,832
OPERATING INCOME		94,745		93,925
Other Income—Net		545		1,041
Interest Expense		9,193		9,822
INCOME BEFORE INCOME TAXES		86,097		85,144
INCOME TAX EXPENSE		33,379		34,376
NET INCOME	$	52,718	$	50,768
Dividends on Washington Gas Light Company preferred stock		330		330
NET INCOME APPLICABLE TO COMMON STOCK	$	52,388	$	50,438

AVERAGE COMMON SHARES OUTSTANDING
Basic		51,631		51,438
Diluted		51,688		51,533

EARNINGS PER AVERAGE COMMON SHARE
Basic	$	1.01	$	0.98
Diluted	$	1.01	$	0.98
DIVIDENDS DECLARED PER COMMON SHARE	$	0.4000	$	0.3875

The accompanying notes are an integral part of these statements.

WGL Holdings, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


	Three Months Ended December 31,
(In thousands)	2012			2011
NET INCOME	$	52,718		$	50,768
OTHER COMPREHENSIVE INCOME
Pension and other postretirement benefit plans
Change in prior service cost (credit)		(12	)		(39	)
Change in actuarial net loss		462			374
Change in transition obligation		9			(366	)
Total pension and other postretirement benefit plans		459			(31	)
OTHER COMPREHENSIVE INCOME BEFORE INCOME TAXES	$	53,177		$	50,737
INCOME TAX EXPENSE (BENEFIT) RELATED TO OTHER COMPREHENSIVE INCOME		182			(22	)
COMPREHENSIVE INCOME	$	52,995		$	50,759

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)


	Three Months Ended December 31,
(In thousands)	2012			2011
OPERATING ACTIVITIES
Net income	$	52,718		$	50,768
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES
Depreciation and amortization		27,304			24,240
Amortization of:
Other regulatory assets and liabilities—net		238			61
Debt related costs		216			226
Deferred income taxes—net		26,486			23,082
Accrued/deferred pension cost		7,965			4,856
Compensation expense related to equity awards		1,214			1,954
Provision for doubtful accounts		4,010			4,603
Other non-cash charges (credits)—net		8,087			5,511
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable and unbilled revenues—net		(197,868	)		(235,828	)
Gas costs and other regulatory assets/liabilities—net		54,297			46,420
Storage gas		2,646			(30,680	)
Other prepayments		(11,513	)		12,089
Accounts payable and other accrued liabilities		42,496			25,783
Wages payable		(2,012	)		(2,447	)
Customer deposits and advance payments		(9,765	)		2,690
Accrued taxes		9,092			12,791
Accrued interest		7,374			8,051
Other current assets		(4,114	)		(37,553	)
Other current liabilities		(3,455	)		23,551
Deferred gas costs—net		(50,159	)		(18,875	)
Deferred assets—other		14,939			(3,198	)
Deferred liabilities—other		2,182			3,479
Other—net		655			17
Net Cash Used in Operating Activities		(16,967	)		(78,409	)
FINANCING ACTIVITIES
Common stock issued		281			1,063
Long-term debt issued		1,491			—
Long-term debt retired		—			(27,000	)
Notes payable issued (retired)—net		113,700			188,563
Dividends on common stock and preferred stock		(19,688	)		(18,921	)
Other financing activities—net		(1,129	)		(695	)
Net Cash Provided by Financing Activities		94,655			143,010
INVESTING ACTIVITIES
Capital expenditures (excluding AFUDC)		(75,917	)		(59,390	)
Investments in non-utility interests		(8,116	)		(4,761	)
Distributions from non-utility interests		666			734
Net Cash Used in Investing Activities		(83,367	)		(63,417	)
INCREASE IN CASH AND CASH EQUIVALENTS		(5,679	)		1,184
Cash and Cash Equivalents at Beginning of Year		10,263			4,332
Cash and Cash Equivalents at End of Period	$	4,584		$	5,516

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid—net	$	200		$	4,096
Interest paid	$	1,559		$	1,898
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Project debt financing activities—net	$	1,491		$	(3,154	)
Capital expenditure accruals included in accounts payable and other accrued liabilities	$	18,781		$	21,057

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)


(In thousands)	December 31, 2012			September 30, 2012
ASSETS
Property, Plant and Equipment
At original cost	$	3,729,602		$	3,686,192
Accumulated depreciation and amortization		(1,124,653	)		(1,111,796	)
Net property, plant and equipment		2,604,949			2,574,396
Current Assets
Cash and cash equivalents		1			1
Receivables
Accounts receivable		164,808			99,514
Gas costs and other regulatory assets		20,991			40,835
Unbilled revenues		100,289			19,300
Allowance for doubtful accounts		(16,889	)		(17,129	)
Net receivables		269,199			142,520
Materials and supplies—principally at average cost		23,647			23,797
Storage gas		105,326			114,826
Deferred income taxes		8,440			14,416
Other prepayments		62,179			55,255
Receivables from associated companies		8,035			5,532
Derivatives		7,443			9,206
Other		1,566			1,451
Total current assets		485,836			367,004
Deferred Charges and Other Assets
Regulatory assets
Gas costs		30,648			—
Pension and other post-retirement benefits		426,886			432,168
Other		67,951			68,429
Derivatives		34,434			50,973
Other		11,527			10,295
Total deferred charges and other assets		571,446			561,865
Total Assets	$	3,662,231		$	3,503,265
CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholder’s equity	$	1,045,542		$	1,025,743
Preferred stock		28,173			28,173
Long-term debt		553,694			589,202
Total capitalization		1,627,409			1,643,118
Current Liabilities
Current maturities of long-term debt		37,000			18
Notes payable		195,000			98,800
Accounts payable and other accrued liabilities		147,706			142,193
Wages payable		14,364			15,827
Accrued interest		10,898			3,524
Dividends declared		18,926			18,912
Customer deposits and advance payments		76,405			89,320
Gas costs and other regulatory liabilities		55,117			20,664
Accrued taxes		27,195			19,108
Payables to associated companies		25,520			28,540
Derivatives		8,641			10,512
Other		4,279			5,136
Total current liabilities		621,051			452,554
Deferred Credits
Unamortized investment tax credits		8,023			8,249
Deferred income taxes		627,671			605,938
Accrued pensions and benefits		309,594			310,605
Asset retirement obligations		70,913			70,141
Regulatory liabilities
Gas costs		—			19,511
Accrued asset removal costs		324,289			325,618
Other		16,212			15,047
Derivatives		8,326			3,507
Other		48,743			48,977
Total deferred credits		1,413,771			1,407,593
Commitments and Contingencies (Note 12)
Total Capitalization and Liabilities	$	3,662,231		$	3,503,265

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 December 31,
(In thousands)	2012		2011
OPERATING REVENUES	$	355,817	$	370,893
OPERATING EXPENSES
Utility cost of gas		150,448		161,817
Operation and maintenance		70,264		67,142
Depreciation and amortization		26,488		23,451
General taxes and other assessments		36,450		34,264
Total Operating Expenses		283,650		286,674
OPERATING INCOME		72,167		84,219
Other Income—Net		9		690
Interest Expense		9,095		9,761
INCOME BEFORE INCOME TAXES		63,081		75,148
INCOME TAX EXPENSE		24,364		30,642
NET INCOME	$	38,717	$	44,506
Dividends on preferred stock		330		330
NET INCOME APPLICABLE TO COMMON STOCK	$	38,387	$	44,176

The accompanying notes are an integral part of these statements.

Washington Gas Light Company

Consolidated Statements of Comprehensive Income (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


	Three Months Ended December 31,
(In thousands)	2012			2011
NET INCOME	$	38,717		$	44,506
OTHER COMPREHENSIVE INCOME
Pension and other postretirement benefit plans
Change in prior service cost (credit)		(12	)		(39	)
Change in actuarial net loss		462			374
Change in transition obligation		9			(366	)
Total pension and other postretirement benefit plans		459			(31	)
OTHER COMPREHENSIVE INCOME BEFORE INCOME TAXES	$	39,176		$	44,475
INCOME TAX EXPENSE (BENEFIT) RELATED TO OTHER COMPREHENSIVE INCOME		182			(22	)
COMPREHENSIVE INCOME	$	38,994		$	44,497

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)


	Three Months Ended December 31,
(In thousands)	2012			2011
OPERATING ACTIVITIES
Net income	$	38,717		$	44,506
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation and amortization		26,488			23,451
Amortization of:
Other regulatory assets and liabilities—net		710			61
Debt related costs		487			226
Deferred income taxes—net		25,954			24,201
Accrued/deferred pension cost		7,899			4,817
Compensation expense related to equity awards		1,152			1,859
Provision for doubtful accounts		3,208			3,597
Other non-cash charges (credits)—net		1,610			208
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable, unbilled revenues and receivables from associated companies—net		(152,234	)		(150,092	)
Gas costs and other regulatory assets/liabilities—net		54,297			46,420
Storage gas		9,500			6,288
Other prepayments		(6,924	)		6,867
Accounts payable and other accrued liabilities, including payables to associated companies		6,982			30,673
Wages payable		(1,463	)		(2,007	)
Customer deposits and advance payments		(12,915	)		2,690
Accrued taxes		8,087			12,004
Accrued interest		7,374			8,051
Other current assets		1,798			(7,414	)
Other current liabilities		(2,728	)		(2,016	)
Deferred gas costs—net		(50,159	)		(18,875	)
Deferred assets—other		15,096			2,929
Deferred liabilities—other		(945	)		(11,933	)
Other—net		(30	)		84
Net Cash Provided by (Used in) Operating Activities		(18,039	)		26,595
FINANCING ACTIVITIES
Long-term debt issued		1,491			—
Long-term debt retired		—			(27,000	)
Notes payable issued (retired)—net		96,200			64,977
Dividends on common stock and preferred stock		(18,912	)		(18,717	)
Other financing activities—net		(677	)		93
Net Cash Provided by Financing Activities		78,102			19,353
INVESTING ACTIVITIES
Capital expenditures (excluding AFUDC)		(60,063	)		(47,301	)
Net Cash Used in Investing Activities		(60,063	)		(47,301	)
INCREASE IN CASH AND CASH EQUIVALENTS		—			(1,353	)
Cash and Cash Equivalents at Beginning of Year		1			1,353
Cash and Cash Equivalents at End of Period	$	1		$	—

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid—net	$	—		$	3,599
Interest paid	$	1,461		$	1,837
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Project debt financing activities—net	$	1,491		$	(3,154	)
Capital expenditure accruals included in accounts payable and other accrued liabilities	$	17,935		$	20,247

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 four non-utility subsidiaries that include Washington Gas Energy Services, Inc. (WGEServices), Washington Gas Energy Systems, Inc. (WGESystems), Capitol Energy Ventures Corp. (CEV) and WGSW, Inc. (WGSW). 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. 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, 2012. Due to the seasonal nature of our 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, 2013 and 2012 of either WGL Holdings or Washington Gas.

The accompanying unaudited 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. Certain prior period amounts in the accompanying balance sheets have been reclassified to conform to the current period presentation.

For a complete 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, 2012.

Storage Gas Valuations

For Washington Gas and WGEServices, storage gas inventory is stated at the lower-of-cost or market as determined using the first-in, first-out method. For CEV, storage gas inventory is stated at the lower-of-cost or market using the weighted average cost method. For the three months ended December 31, 2012, WGL Holdings recorded a reduction to net income of $8.4 million for lower-of-cost or market adjustments, which was recorded to “Operating revenues, non-utility”. For the three months ended December 31, 2011, WGL Holdings recorded a reduction to net income of $9.9 million for lower-of-cost or market adjustments, of which $9.5 million was recorded to “Operating revenues, non-utility” and $0.4 million was recorded to “Utility cost of gas”.

In conjunction with optimizing Washington Gas’ storage capacity, storage gas inventory may be subject to lower-of-cost or market adjustments. Washington Gas did not record any lower–of-cost or market adjustments for the three months ended December 31, 2012. For the three months ended December 31, 2011, Washington Gas recorded a lower-of-cost or market adjustment related to its storage gas inventory, after the effects of regulatory sharing, of $0.4 million, which was recorded to “Utility cost of gas.”

Accounting Standards Adopted in the Current Fiscal Year

Comprehensive Income. In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 is intended to improve financial reporting by requiring companies to present items of net income in either one continuous statement, or in two separate but consecutive statements of net income and other comprehensive income. The new guidance removes the current presentation options in ASC Topic 220. The requirements of ASU 2011-05 do not change which components of comprehensive income are recognized in net income or other comprehensive income, nor does the update change the computation of earnings per share (EPS). In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 indefinitely defers the provisions requiring reclassification adjustments out of OCI to be presented on the face of the financial statements. ASU 2011-05, as amended by ASU 2011-12, was effective for us on October 1, 2012. As a result of the standard, we have presented comprehensive income in two separate but consecutive statements of net income and other comprehensive income. The adoption of this standard did not have an effect on our financial statements.

Other Newly Issued Accounting Standards

Balance Sheet Offsetting. In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. This standard amends the disclosure requirements on offsetting in ASC Topic 210 by requiring enhanced disclosures about financial instruments and derivative instruments that are either: (i) offset in accordance with existing guidance or (ii) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the balance sheet. ASU 2011-11 will be effective for us on October 1, 2013. We do not expect the adoption of this standard to have a material effect on our financial statements.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

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 millions)	December 31, 2012		September 30, 2012
Accounts payable—trade	$	249.8	$	217.0
Employee benefits and payroll accruals		13.4		20.3
Embedded derivatives and other accrued liabilities		34.0		33.1
Total	$	297.2	$	270.4


Washington Gas Light Company
(In millions)		December 31, 2012		September 30, 2012
Accounts payable—trade	$	123.0	$	112.7
Employee benefits and payroll accruals		12.5		18.2
Embedded derivatives and other accrued liabilities		12.2		11.3
Total	$	147.7	$	142.2

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. Revolving credit agreements are maintained to support outstanding commercial paper and to permit short-term borrowing flexibility. WGL Holding’s policy is to maintain bank credit facilities in amounts equal to or greater than the expected maximum commercial paper position. The following is a summary of committed credit available at December 31, 2012 and September 30, 2012.


Committed Credit Available (In millions)
As of December 31, 2012	WGL Holdings			Washington Gas			Total Consolidated
Committed credit agreements
Unsecured revolving credit facility, expires April 3, 2017^(a)	$	450.0		$	350.0		$	800.0
Less: Commercial Paper		(166.4	)		(195.0	)		(361.4	)
Net committed credit available	$	283.6		$	155.0		$	438.6



As of September 30, 2012	WGL Holdings			Washington Gas			Total Consolidated
Committed credit agreements
Unsecured revolving credit facility, expires April 3, 2017^(a)	$	450.0		$	350.0		$	800.0
Less: Commercial Paper		(148.9	)		(98.8	)		(247.7	)
Net committed credit available	$	301.1		$	251.2		$	552.3

^(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 $100 million, with the banks’ approval, for a total of $550 million. Washington Gas’ revolving credit facility permits it to borrow an additional $100 million, with the banks’ approval, for a total of $450 million.

At December 31, 2012 and September 30, 2012, WGL Holdings and its subsidiaries had outstanding notes payable in the form of commercial paper from revolving credit facilities of $361.4 million and $247.7 million, respectively, both at a weighted average interest rate of 0.26%. At December 31, 2012 and September 30, 2012, there were no outstanding bank loans from WGL Holdings’ or Washington Gas’ 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.

At December 31, 2012, Washington Gas had the capacity under a shelf registration to issue up to $450.0 million of additional MTNs. At both December 31, 2012 and September 30, 2012, outstanding MTNs and private placement notes were $583.0 million. At both December 31, 2012 and September 30, 2012, the weighted average interest rate on all MTNs and private placement notes was 5.91%.

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 “Common shareholder’s equity” for Washington Gas for the three months ended December 31, 2012.


WGL Holdings, Inc.
Components of Common Shareholders’ Equity
(In thousands)	Common Stock Amount		Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss, Net of Taxes			Total
Balance at September 30, 2012	$	567,598	$	8,132		$	706,027		$	(12,201	)	$	1,269,556
Net income		—		—			52,718			—			52,718
Post-retirement benefits adjustment, net of taxes		—		—			—			277			277
Comprehensive income													52,995
Dividends reinvestment		1,568		—			—			—			1,568
Stock-based compensation		—		(214	)		—			—			(214	)
Dividends declared:
Common stock		—		—			(20,661	)		—			(20,661	)
Preferred stock		—		—			(330	)		—			(330	)
Balance at December 31, 2012	$	569,166	$	7,918		$	737,754		$	(11,924	)	$	1,302,914


Washington Gas Light Company
Components of Common Shareholder’s Equity
(In thousands)	Common Stock Amount		Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss, Net of Taxes			Total
Balance at September 30, 2012	$	46,479	$	475,634		$	515,831		$	(12,201	)	$	1,025,743
Net income		—		—			38,717			—			38,717
Post-retirement benefits adjustment, net of taxes		—		—			—			277			277
Comprehensive income													38,994
Stock-based compensation		—		(269	)		—			—			(269	)
Dividends declared:
Common stock		—		—			(18,596	)		—			(18,596	)
Preferred stock		—		—			(330	)		—			(330	)
Balance at December 31, 2012	$	46,479	$	475,365		$	535,622		$	(11,924	)	$	1,045,542

WGL Holdings had 51,651,417 and 51,611,647 shares issued of common stock at December 31, 2012 and September 30, 2012, respectively. Washington Gas had 46,479,536 shares issued of common stock at both December 31, 2012 and September 30, 2012.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NOTE 6. EARNINGS PER SHARE

Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Diluted EPS assumes the issuance of common shares pursuant to stock-based compensation plans at the beginning of the applicable period unless the effect of such issuance would be anti-dilutive. The following table reflects the computation of our basic and diluted EPS for the three months ended December 31, 2012 and 2011.

Basic and Diluted EPS


(in thousands, except per share data)	Net Income Applicable to Common Stock		Shares		Per Share Amount
Three Months Ended December 31, 2012
Basic EPS	$	52,388		51,631	$	1.01

Stock-based compensation plans		—		57
Diluted EPS	$	52,388		51,688	$	1.01

Three Months Ended December 31, 2011
Basic EPS	$	50,438		51,438	$	0.98

Stock-based compensation plans		—		95
Diluted EPS	$	50,438		51,533	$	0.98

There were no anti-dilutive shares for the three months ended December 31, 2012 or 2011.

NOTE 7. INCOME TAXES

As of December 31, 2012 and September 30, 2012, our uncertain tax positions were approximately $22.7 million and $22.1 million, respectively, primarily due to the change in tax accounting for repairs. If the amounts of unrecognized tax benefits are eventually realized, it would not materially impact the effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefit with respect to some of WGL Holdings’ and Washington Gas’ uncertain tax positions will increase or decrease in the next 12 months. The IRS completed its audit of the tax years related to the change in accounting method for repairs without proposing any changes, however, the IRS could re-examine this issue in the future.

WGL Holdings and Washington Gas recognize any accrued interest associated with uncertain tax positions in interest expense and recognizes any accrued penalties associated with uncertain tax positions in other expenses in the statements of income. During the quarter ended December 31, 2012, we accrued no expense for interest on uncertain tax positions. During the year ended September 30, 2012, we reversed $1.6 million of interest previously accrued based on the completion of the IRS audit relating to the repairs project. At both December 31, 2012 and September 30, 2012, we had a total accrual of $0.1 million of interest expense related to uncertain tax positions included in other deferred credits in the accompanying balance sheets.

NOTE 8. DERIVATIVE AND WEATHER-RELATED INSTRUMENTS

DERIVATIVE INSTRUMENTS

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’ derivative instruments relate to: (i) Washington Gas’ 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 its transportation capacity assets to benefit from favorable natural gas prices between different geographic locations and 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 forward, futures 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 allow the profit from these transactions to be shared between Washington Gas’ 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.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

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 December 31, 2012 was a loss of $5.0 million including an unrealized loss of $8.7 million. During the three months ended December 31, 2011 we recorded a gain of $3.7 million including an unrealized derivative gain of $0.3 million.

Managing Price Risk. To manage price risk associated with acquiring natural gas supply for utility customers, Washington Gas enters into forward contracts, option contracts, financial contracts and other contracts, as authorized by its regulators. These instruments are accounted for as derivative instruments. 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 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.

Non-Utility Operations

WGEServices enters into certain derivative contracts as part of managing the price risk associated with the sale and purchase of natural gas and electricity. CEV enters into derivative contracts for the purpose of optimizing its storage and transportation capacity as well as managing the transportation and storage assets on behalf of third parties. WGSW has warrants to purchase stock from ASD Holdings, Inc., which are accounted for as derivative instruments. Derivative instruments are recorded at fair value on our consolidated balance sheets. Neither WGEServices, CEV, nor WGSW 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 non-utility operations and may cause significant period-to-period volatility in earnings.

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 utility and non-utility operations.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

At December 31, 2012 and September 30, 2012, respectively, the absolute notional amounts of our derivatives are as follows:


Absolute Notional Amounts
of Open Positions on Derivative Instruments
As of December 31, 2012	Notional Amounts
Derivative transactions	WGL Holdings	Washington Gas
Natural Gas (In millions of therms)
Asset optimization	10,828.6	9,373.7
Retail sales	113.0	—
Other risk-management activities	617.1	207.2
Electricity (In millions of kWhs)
Retail sales	5,875.7	—
Other risk-management activities	19,220.6	—
Warrants (In millions of shares)	4.4	—

Absolute Notional Amounts of Open Positions on Derivative Instruments
As of September 30, 2012	Notional Amounts
Derivative transactions	WGL Holdings	Washington Gas
Natural Gas (In millions of therms)
Asset optimization	4,798.5	3,039.1
Retail sales	126.1	—
Other risk-management activities	537.1	206.5
Electricity (In millions of kWhs)
Retail sales	5,080.5	—
Other risk-management activities	16,898.0	—
Warrants (In millions of shares)	4.4	—

The increase in volume of asset optimization related derivatives from September 30, 2012 to December 31, 2012 is the result of new contracts for Washington Gas.

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 December 31, 2012 and September 30, 2012.


WGL Holdings, Inc.
Balance Sheet Classification of Derivative Instruments
(In millions)
As of December 31, 2012	Derivative Assets			Derivative Liabilities			Netting of Collateral			Total
Current Assets — Derivatives	$	57.6		$	(22.8	)	$	(0.8	)	$	34.0
Deferred Charges and Other Assets — Derivatives		84.5			(39.3	)		—			45.2
Accounts payable and other accrued liabilities		1.3			(0.2	)		—			1.1
Current Liabilities — Derivatives		2.2			(40.1	)		2.3			(35.6	)
Deferred Credits — Derivatives		3.0			(23.6	)		3.4			(17.2	)
Total	$	148.6		$	(126.0	)	$	4.9		$	27.5

As of September 30, 2012
Current Assets — Derivatives	$	80.4		$	(36.1	)	$	(1.1	)	$	43.2
Deferred Charges and Other Assets — Derivatives		103.9			(42.1	)		—			61.8
Accounts payable and other accrued liabilities		(0.2	)		—			—			(0.2	)
Current Liabilities — Derivatives		4.3			(40.8	)		—			(36.5	)
Deferred Credits — Derivatives		2.8			(18.6	)		2.6			(13.2	)
Total	$	191.2		$	(137.6	)	$	1.5		$	55.1


Washington Gas Light Company
Balance Sheet Classification of Derivative Instruments
(In millions)
As of December 31, 2012	Derivative Assets			Derivative Liabilities			Netting of Collateral			Total
Current Assets — Derivatives	$	23.5		$	(15.3	)	$	(0.8	)	$	7.4
Deferred Charges and Other Assets — Derivatives		72.9			(38.5	)		—			34.4
Current Liabilities — Derivatives		(0.1	)		(8.5	)		—			(8.6	)
Deferred Credits — Derivatives		2.5			(10.8	)		—			(8.3	)
Total	$	98.8		$	(73.1	)	$	(0.8	)	$	24.9

As of September 30, 2012
Current Assets — Derivatives	$	20.7		$	(10.4	)	$	(1.1	)	$	9.2
Deferred Charges and Other Assets — Derivatives		92.8			(41.8	)		—			51.0
Current Liabilities — Derivatives		1.6			(12.1	)		—			(10.5	)
Deferred Credits — Derivatives		1.6			(5.1	)		—			(3.5	)
Total	$	116.7		$	(69.4	)	$	(1.1	)	$	46.2

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

The following table presents all gains and losses associated with derivative instruments for the three months ended December 31, 2012 and 2011.


Gains and Losses on Derivative Instruments
(In millions)	WGL Holdings, Inc.						Washington Gas Light Company
Three Months Ended December 31,		2012			2011			2012			2011
Recorded to income
Operating revenues—non-utility	$	12.2		$	33.2		$	—		$	—
Utility cost of gas		(7.2	)		2.6			(7.2	)		2.6
Non-utility cost of energy-related sales		(7.5	)		(42.3	)		—			—
Other income-net		0.1			—			—			—
Recorded to regulatory assets
Gas costs		(11.9	)		11.4			(11.9	)		11.4
Total	$	(14.3	)	$	4.9		$	(19.1	)	$	14.0

Collateral

In accordance with ASC 815, WGL Holdings offsets the fair value of derivative instruments against the right to reclaim or the obligation to return collateral for derivative instruments executed under the same master netting arrangement. At December 31, 2012, Washington Gas, WGEServices and CEV posted $4.0 million, $14.3 million and $14.2 million, respectively, of collateral deposits with counterparties that were not offset against open and settled derivative contracts. At September 30, 2012, Washington Gas, WGEServices and CEV posted $4.0 million, $8.2 million and $3.7 million, respectively, of collateral deposits with counterparties that were not offset against open and settled derivative contracts. In addition, at December 31, 2012 and September 30, 2012, Washington Gas held $3.2 million and $9.3 million, respectively of cash collateral representing an obligation to counterparties that was not offset against open and settled derivative contracts. Any collateral posted that is not offset against open and settled derivative contracts is included in “Other prepayments” in the accompanying balance sheet. Collateral received and not offset against open and settled derivative contracts is included in “Customer deposits and advance payments” in the accompanying balance sheet.

Certain derivative instruments of Washington Gas, WGEServices and CEV contain contract provisions that require collateral to be posted if the credit rating of WGL Holdings falls below certain levels or if counterparty exposure to WGEServices or CEV exceeds a certain level. Due to counterparty exposure levels, at December 31, 2012, WGEServices posted $5.8 million of collateral related to its derivative liabilities that contained credit-related contingent features. At September 30, 2012, WGEServices posted $2.6 million of collateral related to these aforementioned derivative liabilities. Washington Gas and CEV were not required to post any collateral related to its derivative liabilities that contained credit-related contingent features at December 31, 2012 and September 30, 2012. 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 if the most intrusive credit-risk-related contingent features underlying these agreements were triggered on December 31, 2012 and September 30, 2012, respectively.


Potential Collateral Requirements for Derivative Liabilities
with Credit-risk-Contingent Features
(In millions)		WGL Holdings		Washington Gas
December 31, 2012
Derivative liabilities with credit-risk-contingent features	$	92.3	$	55.5
Maximum potential collateral requirements		35.1		2.1
September 30, 2012
Derivative liabilities with credit-risk-contingent features	$	101.2	$	60.8
Maximum potential collateral requirements		35.7		3.4

Washington Gas, WGEServices and CEV do not enter into derivative contracts for speculative purposes.

Concentration of Credit Risk

We are exposed to credit risk from derivative instruments that reflect certain agreements with wholesale counterparties. Our credit policies are designed to mitigate this credit risk by requiring 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 our specified creditworthiness criteria, Washington Gas, WGEServices and CEV grant unsecured credit, which we continuously monitor. Additionally, Washington Gas, WGEServices and CEV have separate agreements with wholesale counterparties that contain netting

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

provisions to allow offsetting of the receivable and payable exposure related to each counterparty. At December 31, 2012, each of three counterparties represented over 10% of Washington Gas’ credit exposure to wholesale derivative counterparties for a total credit risk of $26.6 million; one counterparty represented over 10% of WGEServices’ credit exposure to wholesale counterparties for a total credit risk of $0.6 million; and each of three counterparties represented over 10% of CEV’s credit exposure to wholesale counterparties for a total credit risk of $15.5 million.

WEATHER-RELATED INSTRUMENTS

During the three months ended December 31, 2012 and 2011, Washington Gas used Heating Degree Day (HDD) weather-related instruments to manage its financial exposure to variations from normal weather in the District of Columbia. Under these contracts, Washington Gas purchased protection against net revenue shortfalls due to warmer-than-normal weather and sold to its counterparty the right to receive the benefit when weather is colder than normal. Washington Gas elected to value all weather-related instruments at fair value.

Gains and losses associated with Washington Gas’ weather-related instruments are recorded to “Operation and maintenance” expense. During the three months ended December 31, 2012 and 2011, Washington Gas recorded a pre-tax net gain of $0.6 and $2.8 million, respectively, related to weather derivatives.

WGEServices utilizes weather-related instruments for managing the financial effects of weather risks. These instruments 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 months ended December 31, 2012 and 2011, WGEServices recorded pre-tax gains of $0.4 million and $6.3 million, respectively, related to these instruments.

NOTE 9. FAIR VALUE MEASUREMENTS

We measure the fair value of our financial assets and liabilities using a combination of the income and market approach 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-related instruments and (iii) short-term investments, commercial paper and long-term debt outstanding 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, including assumptions about credit risk (both our own credit risk and the counterparty’s credit risk) and the risks inherent in the inputs to valuation.

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. Our relevant market participants are our existing counterparties and others who have participated in energy transactions at our delivery points. 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 the 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 determining 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.

Level 2. Level 2 of the fair value hierarchy consists of assets or liabilities that are valued using directly or indirectly observable inputs either 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: (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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

data or are supported by observable levels at which transactions are executed in the relevant market. At December 31, 2012 and September 30, 2012, Level 2 financial assets and liabilities included non-exchange traded energy-related derivatives such as financial contracts, options and physical forward contracts for deliveries at active market locations.

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 natural gas basis prices, annualized volatilities of natural gas prices, and electricity congestion prices. A significant change to any one of these inputs in isolation could result in a significant upward or downward fluctuation in the fair value measurement. 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.

Our Risk Analysis and Mitigation (RA&M) Group determines the valuation policies and procedures. The RA&M Group reports to the WGL Holdings Chief Financial Officer. In accordance with WGL Holdings’ valuation policy, we may utilize a variety of valuation methodologies to fair value Level 3 derivative contracts including internally developed valuation inputs and pricing models. The prices used in our valuations are corroborated using multiple pricing sources, and we periodically conduct assessments to determine whether each valuation model is appropriate for its intended purpose. The RA&M Group also evaluates changes in fair value measurements on a daily basis.

At December 31, 2012 and September 30, 2012, Level 3 derivative assets and liabilities 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; (iv) valuations using indicative broker quotes for inactive market locations and (v) non-publicly traded stock warrants. Additionally, Washington Gas’ weather-related instruments are valued using unobservable data, so these are classified as Level 3 assets and liabilities.

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 set forth financial instruments recorded at fair value as of December 31, 2012 and September 30, 2012, respectively. 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.

Fair Value Measurements Under the Fair Value Hierarchy


(In millions)	Level 1		Level 2			Level 3			Total
At December 31, 2012
Assets
Natural gas related derivatives	$	—	$	54.1		$	69.3		$	123.4
Electricity related derivatives		—		—			24.2			24.2
Warrants		—		—			1.0			1.0
Weather related instruments		—		—			1.6			1.6
Total Assets	$	—	$	54.1		$	96.1		$	150.2

Liabilities
Natural gas related derivatives	$	—	$	(46.0	)	$	(47.8	)	$	(93.8	)
Electricity related derivatives		—		(12.6	)		(19.6	)		(32.2	)
Weather related instruments		—		—			(1.5	)		(1.5	)
Total Liabilities	$	—	$	(58.6	)	$	(68.9	)	$	(127.5	)

At September 30, 2012
Assets
Natural gas related derivatives	$	—	$	85.9		$	80.7		$	166.6
Electricity related derivatives		—		0.3			23.4			23.7
Warrants		—		—			0.9			0.9
Weather related instruments		—		—			1.5			1.5
Total Assets	$	—	$	86.2		$	106.5		$	192.7

Liabilities
Natural gas related derivatives	$	—	$	(62.5	)	$	(41.1	)	$	(103.6	)
Electricity related derivatives		—		(13.3	)		(20.6	)		(33.9	)
Weather related instruments		—		—			(2.0	)		(2.0	)
Total Liabilities	$	—	$	(75.8	)	$	(63.7	)	$	(139.5	)

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


Washington Gas Light Company
Fair Value Measurements Under the Fair Value Hierarchy
(In millions)	Level 1		Level 2			Level 3			Total
At December 31, 2012
Assets
Natural gas related derivatives	$	—	$	35.0		$	63.8		$	98.8
Weather related instruments		—		—			1.6			1.6
Total Assets	$	—	$	35.0		$	65.4		$	100.4

Liabilities
Natural gas related derivatives	$	—	$	(27.1	)	$	(46.0	)	$	(73.1	)
Weather related instruments		—		—			(1.5	)		(1.5	)
Total Liabilities	$	—	$	(27.1	)	$	(47.5	)	$	(74.6	)

At September 30, 2012
Assets
Natural gas related derivatives	$	—	$	41.4		$	75.3		$	116.7
Weather related instruments		—		—			1.5			1.5
Total Assets	$	—	$	41.4		$	76.8		$	118.2

Liabilities
Natural gas related derivatives	$	—	$	(29.7	)	$	(39.7	)	$	(69.4	)
Weather related instruments		—		—			(2.0	)		(2.0	)
Total Liabilities	$	—	$	(29.7	)	$	(41.7	)	$	(71.4	)

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

The following table includes quantitative information about the significant unobservable inputs used in the fair value measurement of our Level 3 financial instruments and the respective fair values of the net derivative asset and liability positions, by contract type, as of December 31, 2012 and September 30, 2012.

Quantitative Information about Level 3 Fair Value Measurements


(In millions)	Net Fair Value December 31, 2012	Valuation Techniques	Unobservable Inputs	Range

WGL Holdings
Natural gas related derivatives	$21.5	Discounted Cash Flow	Natural Gas Basis Price (per dekatherm)	($0.315) - $1.135
		Option Model	Natural Gas Basis Price (per dekatherm)	$0.053 - $0.739
			Annualized Volatility of Spot Market Natural Gas	35.3% - 236.00%
Electricity related derivatives	$4.6	Discounted Cash Flow	Electricity Congestion Price (per megawatt hour)	($2.749) - $63.200
		Load-Shaping Option Model	Electricity Congestion Price (per megawatt hour)	$33.559 - $64.260

Washington Gas
Natural gas related derivatives	$17.8	Discounted Cash Flow	Natural Gas Basis Price (per dekatherm)	($0.315) - $1.135
		Option Model	Natural Gas Basis Price (per dekatherm)	$0.079 - $0.739
			Annualized Volatility of Spot Market Natural Gas	35.3% - 236.00%

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

Quantitative Information about Level 3 Fair Value Measurements


(In millions)	Net Fair Value September 30, 2012	Valuation Techniques	Unobservable Inputs	Range

WGL Holdings
Natural gas related derivatives	$39.6	Discounted Cash Flow	Natural Gas Basis Price (per dekatherm)	($0.25) - $1.183
		Option Model	Natural Gas Basis Price (per dekatherm)	$0.05 - $1.175
			Annualized Volatility of Spot Market Natural Gas	37.8% - 236.03%
Electricity related derivatives	$2.8	Discounted Cash Flow	Electricity Congestion Price (per megawatt hour)	($2.204) - $64.700

Washington Gas
Natural gas related derivatives	$35.6	Discounted Cash Flow	Natural Gas Basis Price (per dekatherm)	($0.25) - $1.183
		Option Model	Natural Gas Basis Price (per dekatherm)	$0.09 - $0.861
			Annualized Volatility of Spot Market Natural Gas	37.8% - 236.03%

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 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 December 31, 2012 and 2011, respectively.


WGL Holdings Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives			Weather Related Instruments			Warrants		Total
Three Months Ended December 31, 2012
Balance at October 1, 2012	$	39.6		$	2.8		$	(0.5	)	$	0.9	$	42.8
Realized and unrealized gains (losses)
Recorded to income		(8.6	)		(10.9	)		0.6			0.1		(18.8	)
Recorded to regulatory assets — gas costs		(12.1	)		—			—			—		(12.1	)
Purchases		—			2.5			—			—		2.5
Settlements		2.6			10.2			—			—		12.8
Balance at December 31, 2012	$	21.5		$	4.6		$	0.1		$	1.0	$	27.2

WGL Holdings Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives			Weather Related Instruments			Warrants		Total
Three Months Ended December 31, 2011
Balance at October 1, 2011	$	(3.9	)	$	(6.8	)	$	(1.4	)	$	—	$	(12.1	)
Realized and unrealized gains (losses)
Recorded to income		(0.6	)		(11.1	)		2.8			—		(8.9	)
Recorded to regulatory assets — gas costs		2.8			—			—			—		2.8
Transfers out of Level 3		(2.1	)		—			—			—		(2.1	)
Purchases		—			0.9			—			—		0.9
Settlements		0.4			10.0			—			—		10.4
Balance at December 31, 2011	$	(3.4	)	$	(7.0	)	$	1.4		$	—	$	(9.0	)


Washington Gas Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives			Weather Related Instruments			Warrants		Total
Three Months Ended December 31, 2012
Balance at October 1, 2012	$	35.6		$	—		$	(0.5	)	$	—	$	35.1
Realized and unrealized gains (losses)
Recorded to income		(7.7	)		—			0.6			—		(7.1	)
Recorded to regulatory assets — gas costs		(12.1	)		—			—			—		(12.1	)
Transfers out of Level 3		—			—			—			—		—
Settlements		2.0			—			—			—		2.0
Balance at December 31, 2012	$	17.8		$	—		$	0.1		$	—	$	17.9

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


Washington Gas Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives		Weather Related Derivatives			Warrants		Total
Three Months Ended December 31, 2011
Balance at October 1, 2011	$	(4.9	)	$	—	$	(1.4	)	$	—	$	(6.3	)
Realized and unrealized gains (losses)
Recorded to income		0.1			—		2.8			—		2.9
Recorded to regulatory assets — gas costs		2.8			—		—			—		2.8
Transfers out of Level 3		(0.8	)		—		—			—		(0.8	)
Settlements		1.2			—		—			—		1.2
Balance at December 31, 2011	$	(1.6	)	$	—	$	1.4		$	—	$	(0.2	)

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. There were no transfers in or out of Level 3 for three months ended December 31, 2012. For WGL Holdings and Washington Gas net derivative assets transferred out of Level 3 during the three months ended December 31, 2011, reflected an increase in observable market inputs used to value those instruments.

The table below sets forth the line items on the Statements of Income to which amounts are recorded for the three months ended December 31, 2012 and 2011 related to fair value measurements using significant Level 3 inputs.

WGL Holdings

Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements

Three Months Ended

December 31, 2012

(In millions)

Natural Gas
Related
Derivatives

Electricity
Related
Derivatives

Weather

Related
Instruments

Warrants

Total

Operating revenues — non-utility

(0.5

)

(1.1

)

—

(1.6

)

Utility cost of gas

(7.7

)

—

(7.7

)

Other income-net

—

0.1

Non-utility cost of energy-related sales

(0.4

)

(9.8

)

—

(10.2

)

Operation and maintenance expense

—

0.6

—

0.6

Total

(8.6

)

(10.9

)

0.6

0.1

(18.8

)

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


WGL Holdings Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
Three Months Ended							December 31, 2011
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives			Weather Related Derivatives		Warrants		Total
Operating revenues — non-utility	$	3.2		$	6.5		$	—	$	—	$	9.7
Utility cost of gas		0.1			—			—		—		0.1
Other income-net		—			—			—		—		—
Non-utility cost of energy-related sales		(3.9	)		(17.6	)		—		—		(21.5	)
Operation and maintenance expense		—			—			2.8		—		2.8
Total	$	(0.6	)	$	(11.1	)	$	2.8	$	—	$	(8.9	)

Washington Gas

Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements

Three Months Ended

December 31, 2012

(In millions)

Natural Gas
Related
Derivatives

Electricity
Related
Derivatives

Weather

Related
Instruments

Warrants

Total

Utility cost of gas

(7.7

)

—

(7.7

)

Operation and maintenance expense

—

0.6

—

0.6

Total

(7.7

)

—

0.6

—

(7.1

)


Washington Gas Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
Three Months Ended					December 31, 2011
(In millions)	Natural Gas Related Derivatives		Electricity Related Derivatives		Weather Related Instruments		Warrants		Total
Utility cost of gas	$	0.1	$	—	$	—	$	—	$	0.1
Operation and maintenance expense		—		—		2.8		—		2.8
Total	$	0.1	$	—	$	2.8	$	—	$	2.9

Unrealized gains (losses) attributable to derivative assets and liabilities measured using significant Level 3 inputs were recorded as follows, for the three months ended December 31, 2012 and 2011, respectively.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

WGL Holdings

Unrealized Gains (Losses) Recorded for Level 3 Measurements

Three Months Ended

December 31, 2012

(In millions)

Natural Gas
Related
Derivatives

Electricity
Related
Derivatives

Weather

Related
Instruments

Warrants

Total

Recorded to income

Operating revenues — non-utility

0.3

4.3

—

4.6

Utility cost of gas

(7.5

)

—

(7.5

)

Non-utility cost of energy-related sales

0.6

9.2

—

9.8

Other income-net

—

0.1

Operation and maintenance expense

—

0.6

—

0.6

Recorded to regulatory assets — gas costs

(11.9

)

—

(11.9

)

Total

(18.5

)

13.5

0.6

0.1

(4.3

)


WGL Holdings Unrealized Gains (Losses) Recorded for Level 3 Measurements
Three Months Ended	December 31, 2011
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives			Weather Related Instruments		Warrants		Total
Recorded to income
Operating revenues — non-utility	$	3.4		$	9.9		$	—	$	—	$	13.3
Utility cost of gas		(0.3	)		—			—		—		(0.3	)
Non-utility cost of energy-related sales		(4.9	)		(10.2	)		—		—		(15.1	)
Other income-net		—			—			—		—		—
Operation and maintenance expense		—			—			2.8		—		2.8
Recorded to regulatory assets—gas costs		1.9			—			—		—		1.9
Total	$	0.1		$	(0.3	)	$	2.8	$	—	$	2.6

Washington Gas

Unrealized Gains (Losses) Recorded for Level 3 Measurements

Three Months Ended

December 31, 2012

(In millions)

Natural Gas
Related
Derivatives

Electricity
Related
Derivatives

Weather
Related
Instruments

Warrants

Total

Recorded to income

Utility cost of gas

(7.5

)

—

(7.5

)

Operation and maintenance expense

—

0.6

—

0.6

Recorded to regulatory assets — gas costs

(11.9

)

—

(11.9

)

Total

(19.4

)

—

0.6

—

(18.8

)

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


Washington Gas Unrealized Gains (Losses) Recorded for Level 3 Measurements
Three Months Ended	December 31, 2011
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives		Weather Related Instruments		Warrants		Total
Recorded to income
Utility cost of gas	$	(0.3	)	$	—	$	—	$	—	$	(0.3	)
Operation and maintenance expense		—			—		2.8		—		2.8
Recorded to regulatory assets — gas costs		1.9			—		—		—		1.9
Total	$	1.6		$	—	$	2.8	$	—	$	4.4

The following table presents the carrying amounts and estimated fair values of our financial instruments at December 31, 2012 and September 30, 2012.


WGL Holdings Fair Value of Financial Instruments
	December 31, 2012				September 30, 2012
(In millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Money market funds^(a)	$	5.7	$	5.7	$	7.2	$	7.2
Other short- term investments^(a)	$	0.8	$	0.8	$	0.8	$	0.8
Commercial Paper ^(b)	$	361.4	$	361.4	$	247.7	$	247.7
Long-term debt^(c)	$	553.7	$	716.2	$	589.2	$	758.9


Washington Gas Fair Value of Financial Instruments
	December 31, 2012				September 30, 2012
(In millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Money market funds^(a)	$	2.8	$	2.8	$	4.1	$	4.1
Other short- term investments^(a)	$	0.8	$	0.8	$	0.8	$	0.8
Commercial Paper ^(b)	$	195.0	$	195.0	$	98.8	$	98.8
Long-term debt^(c)	$	553.7	$	716.2	$	589.2	$	758.9

^(a) Balance located in cash and cash equivalents in the accompanying balance sheets.
^(b) Balance is located in notes payable in the accompanying balance sheets.
^(c) Excludes current maturities and unamortized discounts.

Our money market funds are level 1 valuations and their carrying amount approximates fair value. Other short-term investments are primarily overnight investment accounts; therefore, their carrying amount approximates fair value based on level 2 inputs. The maturity of our commercial paper outstanding at both December 31, 2012 and September 30, 2012 is under 30 days. Due to the short term nature of these notes, the carrying cost of our commercial paper approximates fair value using Level 2 inputs. Washington Gas’ long-term debt is not actively traded. The fair value of long-term debt was estimated based on the quoted market prices of the U.S. Treasury issues having a similar term to maturity, adjusted for Washington Gas’ credit quality. Our long-term debt fair value measurement is classified as Level 3.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NOTE 10. OPERATING SEGMENT REPORTING

We have four reportable operating segments: regulated utility, retail energy-marketing, commercial energy systems and wholesale energy solutions. The division of these segments into separate revenue generating components is based upon regulation, products and services. Our chief operating decision maker is our Chief Executive Officer. Our four segments are summarized below.

This quarter, we have made certain changes to our operating segments to reflect the recent growth of our non-utility business activities and the impact of those activities on our financial performance. All activities of WGSW are now reported within the Commercial Energy Systems segment. WGSW had previously been reported within “Other Activities”. WGSW, a holding company formed to invest in alternative energy assets through sale leaseback arrangements. In addition, WGSW holds a limited partnership interest in ASD Solar, LP, which it accounts for under the equity method of accounting. As these operations align with those of the Commercial Energy Systems segment, and our chief operating decision maker reviews the operations of these units together, their combination for reporting purpose was deemed appropriate. Prior period operating segment information has been recast to conform to current quarter presentation.

•

Regulated Utility – The regulated utility segment is our core business. It consists of Washington Gas and Hampshire. Washington Gas provides regulated gas distribution services (including the sale and delivery of natural gas) to customers and natural gas transportation services to an unaffiliated natural gas distribution company in West Virginia under a Federal Energy Regulatory Commission (FERC) approved interstate transportation service operating agreement. Hampshire provides regulated interstate natural gas storage services to Washington Gas under a FERC approved interstate storage service tariff.

•

Retail Energy-Marketing – The retail energy-marketing segment consists of WGEServices, which sells natural gas and electricity directly to retail customers and in competition with regulated utilities and unregulated gas and electricity marketers.

•

Commercial Energy Systems – The commercial energy systems segment consists of WGESystems and provides design-build energy efficient and sustainable solutions including commercial solar, energy efficiency and combined heat and power projects to government and commercial clients. In addition, this segment comprises the operations of WGSW, a holding company formed to invest in alternative energy assets.

•

Wholesale Energy Solutions – The wholesale energy solutions segment consists of CEV, which engages in acquiring, managing and optimizing natural gas storage and transportation assets.

Activities and 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 four operating segments, are aggregated as “Other Activities” and included as part of non-utility operations in the Operating Segment Financial Information presented below. Administrative costs associated with WGL Holdings and Washington Gas Resources are included in this segment.

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.

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 operating segment information for the three months ended December 31, 2012 and 2011.

Operating Segment Financial Information


			Non-Utility Operations
(In thousands)	Regulated Utility		Retail Energy-Marketing		Commercial Energy Systems		Wholesale Energy Solutions		Other Activities		Eliminations		Consolidated
Three Months Ended December 31, 2012
Operating revenues ^(a)	$	355,817	$	324,059	$	11,985		$ 2,854	$	—	$	(7,979)	$	686,736
Operating expenses:
Cost of energy-related sales		150,448		290,133		9,111		—		—		(7,573)		442,119
Operation		58,080		11,359		1,232		844		791		(254)		72,052
Maintenance		11,450		—		—		—		—		—		11,450
Depreciation and amortization		26,792		175		459		31		—		(153)		27,304
General taxes and other assessments:
Revenue taxes		24,221		1,431		1		—		—		—		25,653
Other		12,286		871		79		166		10		1		13,413
Total operating expenses	$	283,277	$	303,969	$	10,882	$	1,041	$	801	$	(7,979)	$	591,991
Operating income (loss)		72,540		20,090		1,103		1,813		(801)		—		94,745
Other income (expense)-net		4		50		325		—		218		(52)		545
Interest expense		9,095		3		43		—		104		(52)		9,193
Dividends on Washington Gas preferred stock		330		—		—		—		—		—		330
Income tax expense		24,453		7,116		347		537		926		—		33,379
Net income (loss) applicable to common stock	$	38,666	$	13,021	$	1,038	$	1,276	$	(1,613)	$	—	$	52,388
Total assets at December 31, 2012	$	3,673,308	$	400,951	$	168,761	$	201,111	$	226,221	$	(329,415)	$	4,340,937
Capital expenditures	$	60,615	$	201	$	15,101	$	—	$	—	$	—	$	75,917
Equity Method Investments	$	—	$	—	$	29,005	$	—	$	—	$	—	$	29,005

Three Months Ended December 31, 2011
Operating revenues ^(a)	$	370,893	$	336,459	$	18,380	$	8,771	$	—	$	(6,746)	$	727,757
Operating expenses:
Cost of energy—related sales		161,817		319,460		16,402		—		—		(6,508)		491,171
Operation		53,655		13,203		1,027		350		793		(148)		68,880
Maintenance		12,744		—		—		—		—		—		12,744
Depreciation and amortization		23,744		202		358		26		—		(90)		24,240
General taxes and other assessments:
Revenue taxes		22,593		1,328		—		—		—		—		23,921
Other		11,723		1,041		56		52		4		—		12,876
Total operating expenses		286,276		335,234		17,843		428		797		(6,746)		633,832
Operating income (loss)		84,617		1,225		537		8,343		(797)		—		93,925
Other income (expenses)-net		678		5		42		—		333		(17)		1,041
Interest expense		9,761		9		—		—		69		(17)		9,822
Dividends on Washington Gas preferred stock		330		—		—		—		—		—		330
Income tax expense (benefit)		30,798		375		281		3,106		(184)		—		34,376
Net income (loss) applicable to common stock	$	44,406	$	846	$	298	$	5,237	$	(349)	$	—	$	50,438

Total assets at December 31, 2011	$	3,571,446	$	393,777	$	47,103	$	169,773	$	206,733	$	(234,298)	$	4,154,534

Capital expenditures	$	47,679	$	143	$	11,568	$	—	$	—	$	—	$	59,390
Equity Method Investments	$	—	$	—	$	11,628	$	—	$	—	$	—	$	11,628

^(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. Wholesale Energy Solutions’ cost of energy related sales is netted with its gross revenues.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NOTE 11. RELATED PARTY TRANSACTIONS

WGL Holdings and its subsidiaries engage in transactions during the ordinary course of business. Inter-company transactions and balances have been eliminated from the consolidated financial statements of WGL Holdings, except as described below. Washington Gas provides accounting, treasury, legal and other administrative and general support to affiliates, and files consolidated tax returns that include affiliated taxable transactions. Washington Gas bills its affiliates in accordance with regulatory practices for the actual cost of providing these services, which approximates their market value. The actual costs of these services are billed to the appropriate affiliates and to the extent such billings for these services are not yet paid, they are reflected in “Receivables from associated companies” on Washington Gas’ 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 in a reasonable time period. Cash collected by Washington Gas on behalf of its affiliates but not yet transferred is recorded in “Payables to associated companies” on Washington Gas’ balance sheets.

At December 31, 2012 and September 30, 2012, Washington Gas recorded receivables from associated companies of $8.0 million and $5.5 million, respectively. At December 31, 2012 and September 30, 2012, Washington Gas recorded payables to associated companies of $25.5 million and $28.5 million, respectively.

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 $7.6 million and $6.5 million for the three months ended December 31, 2012 and 2011, 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 recognized an accounts payable to Washington Gas in the amount of $0.8 million at December 31, 2012 and an accounts payable from Washington Gas in the amount of $2.8 million at September 30, 2012 related to an imbalance in gas volumes. Due to regulatory treatment, these receivables are not eliminated in the consolidated financial statements of WGL Holdings. Refer to Note 1—Accounting Policies of the Notes to Consolidated Financial Statements of the combined Annual Report on Form 10-K for the fiscal year ended September 30, 2012 for further discussion of these imbalance transactions.

In 2011, Washington Gas implemented a Purchase of Receivables (POR) program as approved by the Maryland Public Service Commission (PSC of MD), whereby it purchases receivables from participating energy marketers at approved discount rates. In addition, WGEServices participates in POR programs with certain Maryland and Pennsylvania utilities, whereby it sells its receivables to various utilities, including Washington Gas, at approved discount rates. The receivables purchased by Washington Gas are included in “Accounts receivable” in the accompanying balance sheet. Any activity between Washington Gas and WGEServices related to the POR program has been eliminated in the accompanying financial statements for WGL Holdings. During the three months ended December 31, 2012, Washington Gas purchased $20.5 million of receivables from WGEServices. For the year ended September 30, 2012, Washington Gas purchased $95.7 million of receivables from WGEServices.

In 2011, WGL Holdings began charging fees for guarantees to its subsidiaries in an amount equal to the daily guarantee exposure multiplied by a monthly weighted average interest rate. During both the three months ended December 31, 2012 and 2011 the total fees charged by WGL Holdings to its subsidiaries were $0.1 million. The majority of these fees were charged to WGEServices. These fees have been eliminated in the accompanying consolidated financial statements of WGL Holdings. Refer to Note 12—Commitments and Contingencies for further discussion of our guarantees.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NOTE 12. COMMITMENTS AND CONTINGENCIES

RATES AND REGULATORY MATTERS

Washington Gas makes its requests to modify existing rates based on its determination of the level of net investment in plant and equipment, operating expenses, and a level of return on invested capital that is just and reasonable. The following is an update of significant current regulatory matters in each of Washington Gas’ jurisdictions. For a more detailed discussion of the matters below, refer to our combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2012.

District of Columbia Jurisdiction

District of Columbia Base Rate Case. On November 2, 2011, the PSC of DC docketed a proceeding to investigate the reasonableness of Washington Gas’ base rates and charges and required Washington Gas to file a base rate case no later than 90 days from the date of the order. On February 29, 2012, Washington Gas filed a request with the PSC of DC for a $29.0 million annual increase in revenues. The $29.0 million revenue increase requested in this application included a proposed overall rate of return of 8.91% and a return on common equity of 10.90%. Washington Gas is also proposing to expand its existing program to replace or encapsulate certain vintage mechanical couplings, which was previously approved by the PSC of DC, to include the accelerated replacement of certain pipe in its system. Washington Gas plans to invest approximately $119.0 million to replace aging distribution pipe in the District of Columbia over the next five years and included in this proposal, a request for approval of these expenditures over the next five years as well as a surcharge updated annually to recover the investment as it is made. Washington Gas also provided a proposed procedural schedule and proposed issues list for consideration in the case. On April 26, 2012, the PSC of DC adopted a procedural schedule and designated issues for the proceeding. Intervenor testimony was filed in July 2012. Rebuttal testimony was filed in August 2012 and evidentiary hearings were held in October 2012. Initial and reply briefs were filed in November 2012. A Commission decision is pending.

Maryland Jurisdiction

Order on and Reviews 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’ purchased gas costs are reasonable.

On August 16, 2012, Washington Gas, the Staff of the PSC of MD and the Maryland Office of People’s Counsel (MD OPC) filed a stipulation which, pending approval by the public utility law judge, would resolve all issues remanded by the PSC of MD in its September 9, 2011 order. The parties to the stipulation agreed that the total amount credited or to be credited by Washington Gas to the actual cost adjustment account provision is $4.8 million, and that no civil penalties should be imposed. Given its plans to recover these costs from the CSPs, Washington Gas recorded accounts receivable from the CSPs for the $4.8 million, of which approximately $3.3 million relates to its affiliate, WGEServices. On November 29, 2012, the public utility law judge issued a Proposed Order approving the Stipulation. The Proposed Order became final on January 3, 2013.

Investigation of Asset Management and Gas Purchase Practices. In 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’ asset management program and cost recovery of its gas purchases.

On November 15, 2012, Washington Gas filed a proposed stipulation among Washington Gas, and the Office of the People’s Counsel with the PSC of MD. Based on the terms of the stipulation, Washington Gas recorded the favorable effect of a change in sharing in fiscal year 2012, increasing Washington Gas’ share of realized margins by $2.9 million. On December 5, 2012, the public utility law judge issued a Proposed Order approving the Stipulation. The Proposed order became final on January 7, 2013.

Maryland Base Rate Case. On March 29, 2012, the PSC of MD issued an order in response to the December 14, 2011 petition for rehearing and clarification filed by Washington Gas regarding the disallowance of certain costs included in the rate case originally filed in April 2011. The PSC of MD (i) granted an additional revenue increase of $0.7 million related to interest synchronization, increasing the overall revenue increase granted to Washington Gas in the case to $9.1 million; (ii) denied Washington Gas’ request for

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

an adjustment related to other tax adjustments, which would have increased the revenue requirement by an additional $2.4 million; (iii) denied recovery of the costs to initiate the outsourcing agreement with Accenture, LLC in 2007; and (iv) directed Washington Gas to provide written notice when it implements the accelerated pipeline replacement project and adopted the reporting structure suggested by a PSC of MD Staff witness as guidance for reporting Washington Gas’ progress. As a result of this order, Washington Gas recorded a $2.8 million charge to income tax expense to write-off a regulatory asset that had been established in 2010 for the change in the tax treatment of Medicare Part D, the amortization of which comprised the majority of the other tax adjustments that were disallowed by the Commission.

On April 30, 2012, Washington Gas filed a petition for rehearing with the PSC of MD which requested the Commission reverse its decisions in the March 29, 2012 order denying Washington Gas’ request for an adjustment related to other tax adjustments and the costs to initiate the outsourcing agreement with Accenture, LLC. Washington Gas also filed a petition for judicial review of the PSC of MD’s March 29, 2012 order with the Circuit Court for Baltimore City to preserve its right to appeal in this case. Washington Gas has requested the Circuit Court to hold further proceedings on the appeal in abeyance pending the PSC of MD’s action on the petition for rehearing. In its reply to the Circuit Court, the PSC of MD agreed with Washington Gas’ request to hold further proceedings on the appeal in abeyance pending further PSC of MD action.

Virginia Jurisdiction

Conservation and Ratemaking Efficiency Plan (CARE). On December 4, 2012, Washington Gas filed an application to amend its CARE Plan to allow it to (i) continue to implement its CARE Plan for residential customer classes with a revised portfolio of programs for residential customers; (ii) extend its CARE plan to small commercial and industrial customer classes and (iii) implement its amended CARE Plan for a three-year period beginning on May 1, 2013. On December 19, 2012, the Commission issued its Order for notice and comment establishing the procedural schedule of the proceeding. Interested parties are required to file notices of participation or request for a hearing by January 25, 2013; the Staff Report is due by February 28, 2013, and Washington Gas’ rebuttal or comments by March 7, 2013.

Affiliate Transactions. On October 2, 2012, Washington Gas filed an application with the SCC of VA for approval of revised service agreements between Washington Gas and two affiliates—WGEServices and WGESystems. The revised service agreements incorporate recommendations from the Staff of the SCC of VA that Washington Gas agreed to include as part of the stipulation approved in Washington Gas’ Virginia base rate case, revisions to the descriptions of services provided to the affiliates, and revisions to permit the two affiliates to participate in some health and welfare plans sponsored by Washington Gas. On December 21, 2012, the SCC of VA approved the revised services agreements with only minor modifications. On January 18, 2013, Washington Gas filed a separate application requesting approval of revised service agreements between Washington Gas and each of the remaining five affiliates receiving services.

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’ 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. 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 December 31, 2012 and September 30, 2012, work on these construction projects that was not completed or accepted by customers was valued at $7.7 million and $6.2 million, respectively, which are 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. Construction projects are financed primarily for government agencies, which Washington Gas considers to have minimal credit risk. Based on this assessment and previous collection experience, Washington Gas did not record a corresponding reserve for bad debts related to these receivables at December 31, 2012 or September 30, 2012.

FINANCIAL GUARANTEES

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (concluded)

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2012, these guarantees totaled $472.7 million, $152.0 million and $2.1 million for WGEServices, CEV and other non-affiliated parties, respectively. 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 counterparties when required by our credit policy (refer to the section entitled “Credit Risk” for a further discussion of our credit policy). WGL Holdings also issued guarantees totaling $4.5 million at December 31, 2012 on behalf of certain of our non-utility subsidiaries associated with their banking transactions. Of the $631.3 million total, $5.0 million of guarantees expired on January 3, 2013, and $3.2 million is due to expire on April 15, 2013. The remaining guarantees do not have specific maturity dates. For all of its financial guarantees, WGL Holdings may cancel any or all future obligations upon written notice to the counterparty, but WGL Holdings would continue to be responsible for the obligations created under the guarantees prior to the effective date of the cancellation.

NOTE 13. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

The following table shows the components of net periodic benefit costs (income) recognized in our financial statements during the three months ended December 31, 2012 and 2011:


Components of Net Periodic Benefit Costs (Income)
	Three Months Ended December 31,
	2012						2011
(In millions)	Pension Benefits			Health and Life Benefits			Pension Benefits			Health and Life Benefits
Components of net periodic benefit costs (income)
Service cost	$	4.2		$	2.4		$	3.2		$	2.0
Interest cost		9.1			4.7			10.1			6.3
Expected return on plan assets		(10.5	)		(4.6	)		(10.9	)		(4.7	)
Amortization of prior service cost		0.3			(1.0	)		0.3			(1.0	)
Amortization of actuarial loss		7.2			2.3			4.0			3.3
Amortization of transition obligation		—			0.3			—			0.3
Net periodic benefit cost		10.3			4.1			6.7			6.2
Amount allocated to construction projects		(1.4	)		(0.7	)		(0.8	)		(1.0	)
Amount deferred as regulatory asset (liability) — net		(2.4	)		0.8			(1.8	)		0.5
Amount charged to expense	$	6.5		$	4.2		$	4.1		$	5.7

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.

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 and its subsidiaries. It also includes management’s analysis of past financial results and potential factors that may affect future results, potential future risks and approaches that may be used to manage them. 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 operations, including Washington Gas and Hampshire Gas Company (Hampshire), and our non-utility operations.

—

Washington Gas Light Company (Washington Gas)—This section describes the financial condition and results of operations of Washington Gas, a wholly owned subsidiary of WGL Holdings, which comprises the majority of the regulated utility segment.

Both sections of Management’s Discussion—WGL Holdings and Washington Gas—are designed to provide an understanding of our operations and financial performance and should be read in conjunction with the respective company’s financial statements and the combined Notes to Consolidated Financial Statements in this quarterly report as well as our combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2012 (2012 Annual Report).

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 four operating segments:

—

regulated utility;

—

retail energy-marketing;

—

commercial energy systems and

—

wholesale energy solutions.

Our core subsidiary, Washington Gas, engages in the delivery and sale of natural gas that is regulated by regulatory commissions in the District of Columbia, Maryland and Virginia. Through the wholly owned unregulated subsidiaries of Washington Gas Resources, we offer energy-related products and services. We offer competitively priced natural gas, electricity and energy from renewable sources to customers through WGEServices, our non-utility retail energy-marketing subsidiary. We offer efficient and sustainable commercial energy solutions focused on upgrading energy related systems of large government and commercial facilities through WGESystems. Capitol Energy Ventures performs natural gas and asset optimization activities.

Activities and 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 four operating segments, are aggregated as “Other Activities” and are included as part of non-utility operations. Administrative costs associated with WGL Holdings and Washington Gas Resources are also included in “Other activities.”

This quarter, we made certain changes to our operating segment reporting to reflect the recent growth of our non-utility business activities and the impact of those activities on our financial performance. Projects that we own and manage directly, including

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)

commercial solar projects, energy efficiency projects, combined heat and power projects, along with activities of WGSW, are reported within the Commercial Energy Systems segment. This change improves visibility into our operations and better aligns our reporting with current management accountability and evaluation. Our four segments are described below. Prior period operating segment information has been recast to conform to current quarter presentation.

Regulated Utility. The regulated utility segment consists of Washington Gas and Hampshire and represents approximately 85% of WGL Holdings’ consolidated total assets. Washington Gas, the core of the regulated utility segment, delivers natural gas to retail customers in accordance with tariffs approved by the regulatory commissions that have jurisdiction over Washington Gas’ rates and terms of service. These regulatory commissions set the rates in their respective jurisdictions that Washington Gas can charge customers for its rate-regulated services. Washington Gas also sells natural gas to customers who have not elected to purchase natural gas from unregulated third party marketers (refer to the section entitled “Natural Gas Unbundling”). Washington Gas recovers the cost of the natural gas purchased to serve firm customers through gas cost recovery mechanisms as approved in jurisdictional tariffs. Any difference between gas costs incurred on behalf of firm customers and the gas costs recovered from those 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’ net revenues and net income.

Washington Gas’ asset optimization program utilizes Washington Gas’ storage and transportation capacity resources when those assets are not fully utilized to serve utility customers. The objective of this program is to derive a profit to be shared with its utility customers (refer to the section entitled “Market Risk” for further discussion of our asset optimization program) by entering into commodity-related physical and financial contracts with third parties. 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 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 WGEServices. 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. Washington Gas delivers the majority of natural gas sold by WGEServices, and unaffiliated electric utilities deliver all of the electricity sold. Additionally, WGEServices bills its customers through the billing services of the regulated utilities that deliver its commodities as well as directly through its own billing capabilities.

WGEServices also sells renewable energy credits from wind power and other sources as well as carbon offset products to its customers. WGEServices does not own or operate any other natural gas or electric generation, production, transmission or distribution assets.

Commercial Energy Systems. The commercial energy systems segment consists of the operations of WGESystems and WGSW. WGESystems provides commercial energy efficiency and sustainability solutions to governmental and commercial clients. These solutions include energy efficiency projects and distributed generation assets such as Solar PV systems, combined heat and power plants and fuel cells which we own and operate. WGESystems also focuses on upgrading the mechanical, electrical, water and energy-related infrastructure of large governmental and commercial facilities by implementing both traditional as well as alternative energy technologies, primarily in the District of Columbia, Maryland and Virginia. In addition to these three regions, WGESystems is also expanding its portfolio of Solar PV power generating systems into Delaware, New Jersey, New Mexico and Massachusetts. WGESystems is also evaluating opportunities in other geographical locations within the United States.

WGSW is a holding company formed to invest in alternative energy assets. WGSW holds a limited partnership in ASD Solar, LP in addition to investments in solar assets through sale leaseback arrangements.

Wholesale Energy Solutions. The Wholesale Energy Solutions segment, which consists of the operations of CEV, engages in acquiring, managing and optimizing natural gas storage and transportation assets. CEV enters into both physical and financial transactions in a manner intended to utilize the most effective energy risk management products available to mitigate risks while maximizing potential profits from the optimization of these assets under its management.

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)

Other Activities. Activities and 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 other operating segments, are aggregated as “Other activities” and included as part of non-utility operations as presented below in the operating segment financial information. Administrative costs associated with WGL Holdings and Washington Gas Resources comprise the majority of transactions included in “Other activities.”

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)

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, regulatory decisions and changes in legislation;

•

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

•

diversity of natural gas supply;

•

volatility of natural gas and electricity prices;

•

non-weather related changes in natural gas consumption patterns;

•

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

•

competitive environment;

•

environmental matters;

•

industry consolidation;

•

economic conditions and interest rates;

•

inflation;

•

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 2012 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-utility 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 2012 Annual Report. There were no new critical accounting policies or changes to our critical accounting policies during the three month period ended December 31, 2012.

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

We analyze the operating results using utility net revenues for the regulated utility segment and gross margins for the retail energy-marketing segment. 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 retail energy-marketing 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—Retail Energy-Marketing” 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 of $52.4 million for the three months ended December 31, 2012, compared to $50.4 million reported for the same period of the prior fiscal year. We earned a return on average common equity of 11.2% and 8.4%, respectively.

The following table summarizes our net income (loss) by operating segment for the three months ended December 31, 2012 and 2011.

Net Income (Loss) by Operating Segment


	Three Months Ended December 31,						Increase/
(In millions)	2012			2011			(Decrease)
Regulated Utility	$	38.7		$	44.4		$	(5.7	)
Non-utility operations:
Retail Energy-Marketing		13.0			0.8			12.2
Commercial Energy Systems		1.0			0.3			0.7
Wholesale Energy Solutions		1.3			5.2			(3.9	)
Other Activities		(1.6	)		(0.3	)		(1.3	)
Total non-utility		13.7			6.0			7.7
Net income applicable to common stock	$	52.4		$	50.4		$	2.0

EARNINGS PER AVERAGE COMMON SHARE
Basic	$	1.01		$	0.98		$	0.03
Diluted	$	1.01		$	0.98		$	0.03

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 December 31, 2012 and 2011.

Regulated Utility Operating Results


	Three Months Ended December 31,					Increase/
(In millions)	2012			2011		Decrease
Utility net revenues:
Operating revenues	$	355.8		$	370.9	$	(15.1	)
Less: Cost of gas		150.4			161.8		(11.4	)
Revenue taxes		24.2			22.6		1.6
Total utility net revenues		181.2			186.5		(5.3	)
Operation and maintenance		69.5			66.4		3.1
Depreciation and amortization		26.8			23.7		3.1
General taxes and other assessments		12.3			11.7		0.6
Operating income		72.6			84.7		(12.1	)
Other income-net, including preferred stock dividends		(0.3	)		0.3		(0.6	)
Interest expense		9.1			9.8		(0.7	)
Income tax expense		24.5			30.8		(6.3	)
Net income applicable to common stock	$	38.7		$	44.4	$	(5.7	)

The Regulated Utility segment’s net income applicable to common stock was $38.7 million for the three months ended December 31, 2012, compared to net income of $44.4 million reported for the same period of the prior fiscal year. This comparison primarily reflects: (i) $9.0 million in lower unrealized margins associated with our asset optimization program; (ii) $3.1 million in higher operation and maintenance expenses; (iii) an increase of $3.1 million in depreciation expense due to the growth in, and changes in the asset mix of, our investment in utility plant and (iv) a $1.5 million decrease in the recovery of storage carrying costs on lower average storage gas inventory balances. Partially offsetting these variances were: (i) $1.9 million in higher revenues due to the timing of rate relief in Maryland; (ii) $1.5 million in lower income taxes due to a decrease in the effective tax rate and (iii) a $1.3 million increase in revenues related to growth of more than 10,600 average active customer meters.

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 December 31, 2012 and 2011.

Composition of Changes in Utility Net Revenues


(In millions)	Increase/ (Decrease)
Customer growth	$	1.3
Impact of new base rates in Maryland		1.9
Asset optimization:
Realized margins		(0.2	)
Unrealized mark-to-market valuations		(9.0	)
Lower-of-cost or market adjustment		0.4
Estimated weather effects		1.6
Storage carrying costs		(1.5	)
Other		0.2
Total	$	(5.3	)

Customer growth — Average active customer meters increased by more than 10,600 for the three months ended December 31, 2012 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)

Impact of new base rates in Maryland — New base rates were approved in Maryland effective November 14, 2011.

Asset optimization — We recorded net unrealized losses associated with our energy-related derivatives of $8.7 million for the three months ended December 31, 2012, compared to unrealized gains of $0.3 million reported for the same period of the prior fiscal year. When these derivatives settle, any unrealized amounts will ultimately reverse and Washington Gas will realize margins in combination with related transactions that these derivatives economically hedge. Washington Gas recorded no lower-of-cost or market adjustments related to its storage gas inventory during the three months ended December 31, 2012. Washington Gas recorded lower-of-cost or market adjustments related to its storage gas inventory, after the effects of regulatory sharing, of $0.4 million during the three months ended December 31, 2011. Refer to the section entitled “Market Risk—Price Risk Related to the Regulated Utility Segment” for further discussion of our asset optimization program.

Estimated weather effects — Weather, when measured by HDDs, was 2.9% warmer and 11.6% warmer than normal for the three months ended December 31, 2012 and 2011, respectively. Washington Gas 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 further discussion of our weather protection strategy). Washington Gas executed heating degree day derivative contracts to manage its exposure to variations from normal weather in the District of Columbia. Changes in the fair value of these derivatives are reflected in operation and maintenance expenses and offset the benefits reflected above. There were no material effects on net income attributed to colder or warmer weather for the three months ended December 31, 2012 or 2011.

Storage carrying costs — Each jurisdiction provides for the recovery of carrying costs based on the pre-tax cost of capital in each jurisdiction, multiplied by the monthly average balance of storage gas inventory. The three month comparison reflects lower average storage gas inventory investment balances primarily due to lower weighted average cost of gas in inventory.

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 December 31, 2012 and 2011.

Composition of Changes in Operation and Maintenance Expenses


(In millions)	Increase/ (Decrease)
Employee benefits	$	2.8
Operation, engineering, compliance and safety		(0.6	)
Weather derivative benefits:
Loss		1.6
Premium costs and fair value effects		0.6
Other operating expenses		(1.3	)
Total	$	3.1

Employee benefits — The increase in employee benefits expense reflects higher pension and workers’ compensation expenses, partially offset by lower other post-retirement benefits primarily due to changes in the discount rate and other plan assumptions used to measure the benefit obligation.

Operation, engineering, compliance and safety — Washington Gas incurred lower repair costs for the three months ended December 31, 2012 than for the same period in the previous year.

Weather derivative benefits — The effects of hedging variations from normal weather in the District of Columbia for the three months ended December 31, 2012 and 2011 are recorded to operation and maintenance expense. The increase in O&M for the weather derivative reflects the level of heating degree days this year compared to the same period last year. This year, while HDD’s were lower than normal, they were greater than last year, resulting in a lower benefit being derived from the weather derivative. During three months ended December 31, 2012, Washington Gas recorded gains of $0.6 million (pre-tax) related to its weather-related instruments as a result of warmer-than-normal weather and received a benefit of $0.2 million for premiums on its weather-related instruments. During three months ended December 31, 2011, Washington Gas recorded a gain of $2.2 million related to its weather-related instruments as a result of warmer-than-normal weather. The benefits or losses of the weather-related instruments are offset by the effect of weather on utility net revenues.

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)

Depreciation and Amortization. The increase of $3.1 million in depreciation and amortization is primarily attributed to growth in, and changes in the asset mix of, our investment in utility plant partially offset by a reduction in Virginia depreciation rates.

Interest Expense. The following table depicts the components of the change in interest expense for the three months ended December 31, 2012.

Composition of Interest Expense Changes


(In millions)	Increase/ (Decrease)
Long-term debt	$	(0.8	)
Short-term debt		0.1
Other (includes Allowance for Funds Used During Construction)		0.1
Total	$	(0.6	)

WGL Holdings reported interest expense of $9.2 million and $9.8 million for the three months ended December 31, 2012 and 2011, respectively. The decrease in interest expense is primarily due to lower long-term debt balances.

Income Taxes. The effective tax rate for the three months ended December 31, 2012 was lower than for the same period of the previous year due to interim period tax sharing among the business segments.

Retail Energy-Marketing

Our Retail Energy-Marketing subsidiary, WGEServices, sells natural gas and electricity on an unregulated, competitive basis directly to residential, commercial and industrial customers. The following table depicts the Retail Energy-Marketing segment’s operating results along with selected statistical data.

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 Financial and Statistical Data


	Three Months Ended December 31,						Increase /
	2012			2011			(Decrease)
Operating Results (In millions)
Gross margins:
Operating revenues	$	324.1		$	336.5		$	(12.4	)
Less: Cost of energy		290.1			319.5			(29.4	)
Revenue taxes		1.4			1.3			0.1
Total gross margins		32.6			15.7			16.9
Operation expenses		11.4			13.2			(1.8	)
Depreciation and amortization		0.2			0.2			—
General taxes and other assessments		0.9			1.0			(0.1	)
Operating income		20.1			1.3			18.8
Interest expense		—			0.1			(0.1	)
Income tax expense		7.1			0.4			6.7
Net income	$	13.0		$	0.8		$	12.2

Analysis of gross margins (In millions)
Natural gas
Realized margins	$	12.6		$	12.9		$	(0.3	)
Unrealized mark-to-market losses		(2.9	)		(10.2	)		7.3
Total gross margins — natural gas		9.7			2.7			7.0
Electricity
Realized margins		18.3			23.3			(5.0	)
Unrealized mark-to-market gains (losses)		4.6			(10.3	)		14.9
Total gross margins — electricity		22.9			13.0			9.9
Total gross margins	$	32.6		$	15.7		$	16.9

Other Retail Energy-Marketing Statistics
Natural gas
Therm sales (millions of therms)		210.9			182.7			28.2
Number of customers (end of period)		174,000			177,100			(3,100	)
Electricity
Electricity sales (millions of kWhs)		2,803.7			2,513.9			289.8
Number of accounts (end of period)		186,800			194,400			(7,600	)

The Retail Energy-Marketing segment reported net income of $13.0 million for the three months ended December 31, 2012, compared to net income of $0.8 million reported for the same period of the prior fiscal year.

The increase in net income primarily reflects higher gross margins from natural gas and electric sales. Period-to-period comparisons of quarterly gross margins for this segment can vary significantly and are not necessarily representative of expected annualized results.

Gross margins from natural gas sales increased by $7.0 million for the three months ended December 31, 2012, compared to the same period in the prior fiscal year. This increase is primarily due to the favorable change in unrealized mark-to-market margins on energy-related derivatives of $7.3 million resulting from fluctuating market prices, partially offset by lower realized margins of $0.3 million.

Gross margins from electric sales increased by $9.9 million for the three months ended December 31, 2012, compared to the same period of the prior fiscal year. This increase reflects lower realized electric retail margins of $5.0 million due to quarterly fluctuations in the pattern of margin recognition, partially offset by increased sales volumes resulting from customer growth versus the same quarter in the prior year and an increase of $14.9 million in unrealized margins due to fluctuating market prices.

The pattern of margin recognition that the retail energy-marketing segment realizes in a given quarter varies from year to year. Operating expenses declined due to lower customer acquisition expenses in the current quarter compared to the same quarter 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)

Commercial Energy Systems

The Commercial Energy Systems segment reported net income of $1.0 million for the three months ended December 31, 2012, compared to net income of $0.3 million reported for the same period of the prior fiscal year. This increase is primarily due to higher revenue from new commercial solar projects in the current period and higher margins on project work for government agency customers.

Wholesale Energy Solutions

The Wholesale Energy Solutions segment reported a net income of $1.3 million for the three months ended December 31, 2012, compared to net income of $5.2 million reported for the same period of the prior fiscal year. This decrease is primarily due to lower net unrealized margins of $13.6 million due to changes in the fair value of derivatives and differences in lower-of-cost-or-market valuations partially offset by approximately $9.7 million of higher realized margins due to favorable summer/winter storage spreads. Operation and maintenance expenses were higher as a result of investments in new storage and optimization arrangements.

Other Non-Utility

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 four operating segments, are aggregated as “Other Activities” and included as part of non-utility operations. Results from our other non-utility activities reflect net losses of $1.6 million three months ended December 31, 2012, compared to net losses of $0.3 million reported for the same period of the prior fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

General Factors Affecting Liquidity

Access to short-term debt markets is necessary in order to maintain satisfactory liquidity to operate our businesses on a near-term basis. Our most significant short-term financing requirements include the acquisition of natural gas, electricity and pipeline capacity, and the need to finance accounts receivable and storage gas inventory. 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, the liquidity of financial markets, and investor demand for our securities. 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 could adversely affect both our borrowing costs and 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 requirements to provide creditors with additional support in the event of a determination of insufficient creditworthiness. During the three months ended December 31, 2012, WGL Holdings met its liquidity and capital needs through the retention of earnings and the issuance of commercial paper and common stock. Washington Gas met its liquidity and capital needs through the retention of earnings and the issuance of commercial paper. Both WGL Holdings and Washington Gas believe that they will be able to meet their liquidity and capital needs through fiscal year 2013 through a mixture of operating earnings, issuances of commercial paper, and in the case of Washington Gas, issuance of MTNs.

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 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 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 December 31, 2012, total consolidated capitalization, including current maturities of long-term debt and excluding notes payable, comprised 67.8% common equity, 1.5% preferred stock and 30.7% 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 December 31, 2012, we had no restrictions on our cash balances or retained earnings that would affect the payment of common or preferred stock dividends by either WGL Holdings or Washington Gas.

Short-Term Cash Requirements and Related Financing

Washington Gas’ business is weather sensitive and seasonal, causing short-term cash requirements to vary significantly during the year. Approximately 72% of the total therms delivered in Washington Gas’ service area (excluding deliveries to two electric generation facilities) occur during the first and second fiscal quarters. Accordingly, Washington Gas typically earns more net income in the first six months of the fiscal year than it does for the entire 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)

During the first six months of our fiscal year, Washington Gas’ large sales volumes cause its cash requirements to peak when combined storage inventory, accounts receivable, and unbilled revenues are at their highest levels. During the last six months of our fiscal year, after the 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’ 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, WGEServices and CEV have seasonal short-term cash requirements to fund the purchase of storage gas inventory in advance of the winter heating periods when a large portion of the storage gas is sold. At December 31, 2012 and September 30, 2012, Washington Gas had balances in gas storage of $105.3 million and $114.5 million, respectively; WGEServices had balances in gas storage of $38.7 million and $46.8 million, respectively, and CEV had balances in gas storage of $136.4 million and $122.9 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 commodity costs used to supply their retail customer and wholesale counterparty contracts. Variations in the timing of cash receipts from customers under these collection methods can significantly affect short-term cash requirements. In addition, Washington Gas and WGEServices pay their respective commodity suppliers before collecting the accounts receivable balances resulting from these sales. WGEServices and CEV derive their funding to finance these activities from short-term debt issued by WGL Holdings. Additionally, Washington Gas, WGEServices and CEV may be required to post cash collateral for certain purchases. WGEServices and CEV may be required to provide parent guarantees from WGL Holdings for certain transactions.

Variations in the timing of collections of gas costs under Washington Gas’ gas cost recovery mechanisms can significantly affect short-term cash requirements. At December 31, 2012 and September 30, 2012, Washington Gas had a net $12.4 million and $11.7 million in under-collection of unrecovered gas costs, respectively, reflected in current assets/liabilities as gas costs due from/to customers related to the most recent twelve month gas cost recovery cycle ended August 31 of each year. Most of this balance will be collected from customers in fiscal year 2013. 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 1^st of each year, at which time the accumulated amount is transferred to gas costs due from/to customers as appropriate. At December 31, 2012 and September 30, 2012, Washington Gas had a net regulatory liability of $34.1 million and a net regulatory asset of $20.2 million, respectively, related to the current gas recovery cycle.

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. Bank credit balances available to WGL Holdings and Washington Gas net of commercial paper balances were $283.6 million and $155.0 million at December 31, 2012 and $301.1 million and $251.2 million at September 30, 2012, respectively. The credit facility for WGL Holdings permits it to borrow up to $450.0 million, and further permits, with the banks’ approval, additional borrowings of $100.0 million for a maximum potential total of $550.0 million. The credit facility for Washington Gas permits it to borrow up to $350.0 million, and further permits, with the banks’ approval, additional borrowings of $100.0 million for a maximum potential total of $450.0 million. The interest rate on loans made under each of the credit facilities will be a fluctuating rate per annum that will be set using certain parameters at the time each loan is made. These credit agreements provide for a term of five years and expire on April 3, 2017. The credit agreements each have two one-year extension options. Refer to Note 3—Short-Term Debt of the Notes to the Consolidated Financial Statements for further information.

To manage credit risk, Washington Gas, WGEServices and CEV may require deposits from certain customers and suppliers, which are reported as current liabilities in “Customer deposits and advance payments,” in the accompanying balance sheets. At December 31, 2012 and September 30, 2012, “Customer deposits and advance payments” totaled $79.6 million and $89.3 million, respectively. For both periods, almost all 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’ 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 and CEV, deposits typically represent collateral for transactions with wholesale counterparties. These deposits may be required to be repaid or increased at any time based on the current value of WGEServices’ or CEV’s net position with the counterparty. Currently there are no restrictions on the use of deposited funds and interest is paid 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.

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)

Long-Term Cash Requirements and Related Financing

The primary drivers of our long-term cash requirements include 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’ distribution system. Refer to our 2012 Annual Report for a discussion of our long-term debt maturities and capital expenditures.

At December 31, 2012, Washington Gas had the capacity under a shelf registration to issue up to $450.0 million of 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. Prior to issuing long-term debt, Washington Gas may utilize derivative instruments to minimize its exposure to the risk of interest-rate volatility. Refer to the section entitled “Interest-Rate Risk” included in Management’s Discussion for further discussion of our interest-rate risk management activity.

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’ 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.

Credit Ratings for Outstanding Debt Instruments


	WGL Holdings		Washington Gas
Rating Service	Unsecured Medium-Term Notes (Indicative)^(a)	Commercial Paper	Unsecured Medium- Term Notes	Commercial Paper
Fitch Ratings^(b)	A+	F1	AA–	F1
Moody’s Investors Service^(c)	Not Rated	P-2	A2	P-1
Standard & Poor’s Ratings Services^(d)	A+	A-1	A+	A-1

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

^(b)	The long-term debt ratings outlook issued by Fitch Ratings for WGL Holdings and Washington Gas is stable.

^(c)	The long-term debt ratings outlook issued by Moody’s Investors Service for Washington Gas is stable.

^(d)	On October 5, 2012, Fitch lowered the commercial paper rating of Washington Gas from F1+ to F1 in adherence to changes in short-term rating criteria for non-financial corporate issuers.

Ratings Triggers and Certain Debt Covenants

WGL Holdings and Washington Gas incur credit facility fees 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 6.0 basis points and the highest is 17.5 basis points.

Under the terms of WGL Holdings’ and Washington Gas’ credit agreements, the ratio of consolidated financial indebtedness to consolidated total capitalization cannot 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 effect on debt ratings. The failure to inform the lenders’ agent of material changes in these areas might constitute default under the agreements. Additionally, failure to pay principal or interest on any 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 December 31, 2012, we were in compliance with all of the covenants under our revolving credit facilities.

For certain of Washington Gas’ 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 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’ credit rating declines by a certain rating level, then the counterparty may require additional credit support. At December 31, 2012, Washington Gas would not be required to provide additional credit support by these arrangements if its long-term credit rating was to be downgraded by 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 guarantees payments for certain purchases of natural gas and electricity on behalf of WGEServices and CEV (refer to our 2012 Annual Report for a further discussion of these guarantees). If the credit rating of WGL Holdings declines, WGEServices and CEV may be required to provide additional credit support for these purchase contracts. At December 31, 2012, WGEServices would be required to provide $0.1 million in additional credit support for these arrangements if the long-term credit rating of WGL Holdings was to be downgraded by a one rating level. CEV would not be required to provide any additional credit support.

Cash Flows Used in 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 used in operating activities totaled $17.0 million for the three months ended December 31, 2012. Net cash used in 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 $197.9 million from September 30, 2012, primarily due to increased sales volumes to customers during our winter heating season and increased sales volumes associated with Washington Gas’ asset optimization program.

•

Accounts payable and other accrued liabilities increased $42.5 million, due to a seasonal increase in the volumes of natural gas purchases and increased trading activity in CEV. Volumes increased both for deliveries to customers for the winter heating season and for Washington Gas’ asset optimization program.

•

Deferred assets—other decreased $14.9 million primarily related to a decrease in market value and settlement of derivative assets.

•

Accrued taxes increased $9.1 million from September 30, 2012 primarily due to an increase in fuel taxes in Maryland and the District of Columbia.

Cash Flows Provided by Financing Activities

Cash flows provided by financing activities totaled $94.7 million for the three months ended December 31, 2012, reflecting the issuance of $113.7 million of notes payable, partially offset by dividends on common and preferred stock of $19.7 million.

Cash Flows Used in Investing Activities

During the three months ended December 31, 2012, cash flows used in investing activities totaled $83.4 million, which primarily consists of capital expenditures made on behalf of Washington Gas. In addition, investing activities also reflects additional investments in commercial Solar Photovoltaic (Solar PV) facilities and investments in a partnership to directly fund residential Solar PV facilities.

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 program.

Reference is made to the “Contractual Obligations, Off-Balance Sheet Arrangements and Other Commercial Commitments” section of Management’s Discussion in our 2012 Annual Report. Note 4 of the Notes to Consolidated Financial Statements in our 2012 Annual Report includes a discussion of long-term debt, including debt maturities. Note 13 of the Notes to Consolidated Financial Statements in our 2012 Annual Report reflects information about the various contracts of Washington Gas, WGEServices and CEV. Additionally, refer to Note 12 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)

There have been no significant changes to contractual obligations in the three month period ended December 31, 2012.

Construction Project Financing

Financial Guarantees

WGL Holdings guarantees payments primarily for certain purchases of natural gas and electricity on behalf of WGEServices and for certain purchase commitments of CEV and on behalf of other non affiliated parties for its banking. At December 31, 2012, these guarantees totaled $472.7 million, $152.0 million and $2.1 million for WGEServices, CEV and other non affiliated parties, respectively. 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 counterparties when required by our credit policy (refer to the section entitled “Credit Risk” for a further discussion of our credit policy). WGL Holdings also issued guarantees totaling $4.5 million at December 31, 2012 on behalf of certain of our non-utility subsidiaries associated with their banking transactions. Of the $631.3 million total, $5.0 million of guarantees expired on January 3, 2013, and $3.2 million is due to expire on April 15, 2013. The remaining guarantees do not have specific maturity dates. For all of its financial guarantees, WGL Holdings may cancel any or all future obligations upon written notice to the counterparty, but WGL Holdings would continue to be responsible for the obligations created under the guarantees prior to the effective date of the cancellation.

Effective October 1, 2011, WGL Holdings began charging fees for guarantees to its subsidiaries in an amount equal to the daily guarantee exposure multiplied by a monthly weighted average interest rate. During both the three months ended December 31, 2012 and 2011 the total fees charged by WGL Holdings to its subsidiaries was $0.1 million. Most of these fees were charged to WGEServices and have been eliminated in the accompanying consolidated financial statements of WGL Holdings.

Chillum LNG Facility

Washington Gas has incorporated in its plans construction of a proposed 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 expected to be completed and in service by the 2019-2020 winter heating season at a total estimated cost of $185.3 million.

On March 9, 2012, the U.S. District Court issued an order and memorandum opinion that denied Washington Gas’ motion for summary judgment. Washington Gas filed a notice of appeal with the U.S. Circuit Court of Appeals for the Fourth Circuit on April 3, 2012. Oral Argument occurred on December 5, 2012. The case now awaits a decision by the assigned U.S. Circuit Court Judge.

Washington Gas must begin construction of the storage facility in the spring of 2016 in order for the Chillum Facility to be completed and in service by the 2019-2020 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.

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)

Operating Issues Related To Changes In Natural Gas Supply

In fiscal year 2005, Washington Gas began addressing a significant increase in the number of natural gas leaks on its distribution system in a portion of Prince George’s County, Maryland. Natural gas containing a low concentration of heavy hydrocarbons (HHCs) can cause the seals in certain mechanical couplings on the Washington Gas distribution system to shrink increasing the propensity for the coupling to leak. Independent laboratory tests performed on behalf of Washington Gas have shown that, in a laboratory environment, the injection of HHCs into gas with low concentrations of HHC can be effective in offsetting the affect of the low HHC gas on the seals in couplings which increases their sealing force and in turn, reduces the propensity for the affected couplings to leak.

To resolve the significant increase in leaks, Washington Gas replaced gas service lines and replaced or rehabilitated gas mains that contained the affected mechanical couplings in Prince George’s County. Additionally, Washington Gas constructed three facilities to inject HHCs into the gas stream entering the Washington Gas distribution system. Washington Gas has been evaluating the effectiveness of this HHC injection process on the affected couplings under field conditions. Our evaluation of the role of these HHC injections as a preventative and remedial measure was filed in a report to the PSC of MD on June 29, 2007. Washington Gas continues to mitigate the impact of low HHC gas from whatever source through accelerating the replacement of mechanically coupled pipeline and the operation of three HHC injection facilities.

The current forecast for mechanical coupling remediation and replacement work includes a planned $62.0 million, five-year, mechanically coupled pipe replacement program approved by the SCC of VA on April 21, 2011 as part of Washington Gas’ Steps to Advance Virginia’s Energy Plan (SAVE) filing (the approved five-year SAVE plan is the first part of a fifteen-year timeline for pipe replacements in Virginia) and the continuation of the December 16, 2009 settlement in the District of Columbia that includes a targeted mechanically coupled pipe replacement and encapsulation program which is now estimated to cost $35.0 million and is expected to take approximately seven years to complete. Rate recovery of the expenditures has been approved by the SCC of VA and the PSC of DC. On August 6, 2012, Washington Gas filed an application with the SCC of VA to amend its approved SAVE plan to include three additional categories of high risk pipe and to increase its SAVE expenditures to $191.4 million over a five year period beginning on January 1, 2013. On November 15, 2012, the SCC of VA approved these amendments. In Washington Gas’ current base rate proceeding in the District of Columbia, Washington Gas is requesting a continuation of the rate recovery mechanism. Additionally, Washington Gas has budgeted approximately $48.0 million related to a planned five-year mechanically coupled pipe replacement program in Maryland. The accelerated pipe replacement plan in Maryland was proposed as a thirty-year program with $115.0 million to be spent during the first five years.

Additional operating expenses and capital expenditures may be necessary to contend with leaks caused by increased volumes of low HHC gas flowing into Washington Gas’ distribution system. Such additional operating expenses and capital expenditures may not be timely enough to mitigate the challenges posed by increased volumes of low HHC gas, potentially resulting in leakage from mechanical couplings at a rate that could compromise the safety of our distribution system.

Notwithstanding Washington Gas’ recovery of costs related to the construction of the injection facilities and hexane costs through local regulatory commission action, Washington Gas has pursued and will pursue all remedies available 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.

Commonwealth Pipeline

In February 2012, CEV entered into a joint development agreement with UGI Energy Services, Inc. (UGI) and Inergy Midstream, L.P. (Inergy), to jointly market and develop an interstate pipeline named the Commonwealth Pipeline. The proposed pipeline will consist initially of approximately 120 miles of thirty-inch pipeline extending south from the terminus of Inergy’s Marc I line in Lycoming County, Pennsylvania. The proposed interstate pipeline project is expected to have an initial capacity of 800,000 dekatherms of natural gas per day and is expected to cost approximately $800 million and be funded equally by the three parties. The pipeline is expected to cross and link with a number of interstate pipelines along its route, providing even greater supply diversity to the mid-Atlantic region while simultaneously providing Marcellus and Utica natural gas producers with direct access to expanding markets currently served by legacy interstate pipelines. The new pipeline will provide the central Pennsylvania and Philadelphia metropolitan region markets with direct access to abundant supplies of Marcellus and Utica natural gas through a safe, reliable and cost-effective transportation system. CEV, Inergy and UGI expect to be equal equity holders of the project.

Although the initial response to the non-binding open season was positive, subsequent efforts to convert this response into binding commitments have not initially been successful. We believe the project still has merit as a means to move gas from a constrained production area to the market area and we will continue to promote the project. When sufficient interest in the project is evidenced, the project sponsors will commence field work and make the required filing with the FERC.

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)

CREDIT RISK

Wholesale Credit Risk

Certain wholesale suppliers that sell natural gas to any or all of Washington Gas, WGEServices and CEV may have relatively low credit ratings or may not be 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.

For WGEServices, any failure of wholesale counterparties to deliver natural gas or electricity under existing contracts could cause financial exposure 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 counterparties to hedge the costs of natural gas and electricity. Depending on the ability of the counterparties to fulfill their commitments, WGEServices could be at risk for financial loss.

CEV enters into transactions with wholesale counterparties to optimize its portfolio of owned and managed natural gas assets. Any failure of wholesale counterparties to deliver natural gas under existing contracts could cause financial exposure for the difference between the price at which CEV has contracted to buy these commodities and their replacement cost. To the extent that CEV sells natural gas to these wholesale counterparties, CEV may be exposed to payment risk if it is in a net receivable position. In addition, CEV enters into contracts with counterparties to hedge the costs of natural gas. Depending on the ability of the counterparties to fulfill their commitments, CEV could be at risk for financial loss.

Washington Gas, WGEServices and CEV operate under an existing credit policy that is designed to mitigate credit risks through requirements 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, WGEServices and CEV have each obtained credit enhancements from certain of their counterparties. If certain counterparties or their guarantors meet the policy’s creditworthiness criteria, Washington Gas, WGEServices and CEV may grant unsecured credit to those counterparties or their guarantors. The creditworthiness of all counterparties is continuously monitored.

Washington Gas, WGEServices and CEV are also subject to the collateral requirements of their counterparties. At December 31, 2012, Washington Gas, WGEServices and CEV provided $4.0 million, $20.0 million and $14.2 million in cash collateral to counterparties, 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)

The following table provides information on our credit exposure, net of collateral, to wholesale counterparties as of December 31, 2012 for Washington Gas, WGEServices and CEV, separately.

Credit Exposure to Wholesale Counterparties (In millions)


Rating^(a)	Exposure Before Credit Collateral^(b)		Offsetting Credit Collateral Held^(c)		Net Exposure		Number of Counterparties Greater Than 10%^(d)		Net Exposure of Counterparties Greater Than 10%
Washington Gas
Investment Grade	$	37.6	$	0.1	$	37.5		2	$	24.9
Non-Investment Grade		4.8		3.1		1.7		1		1.7
No External Ratings		2.0		—		2.0		—		—
WGEServices
Investment Grade	$	—	$	—	$	—		—	$	—
Non-Investment Grade		—		—		—		—		—
No External Ratings		0.6		—		0.6		1		0.6
CEV
Investment Grade	$	18.1	$	—	$	18.1		3	$	15.5
Non-Investment Grade		—		—		—		—		—
No External Ratings		2.2		—		2.2		—		—

^(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 for contracts designated as normal purchases and normal sales and not recorded on our balance 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. In addition, Washington Gas implemented a POR program as approved by the PSC of MD, whereby it purchases receivables from participating energy marketers at approved discount rates. Under the program, Washington Gas is exposed to the risk of non-payment by the retail customers for these receivables. This risk is factored into the approved discount rate at which Washington Gas purchases the receivables.

WGEServices is also exposed to the risk of non-payment by its retail customers. WGEServices manages this risk by evaluating the credit quality of certain 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. In addition, WGEServices participates in POR programs with certain Maryland and Pennsylvania utilities, whereby it sells its receivables to various utilities at approved discount rates. Under the POR programs, WGEServices is exposed to the risk of non-payment by its retail customers for delivered commodities that have not yet been billed. Once the invoices are billed, however, the associated credit risk is assumed by the purchasing utilities. While participation in POR programs reduce the risk of collection and fixes a discount rate on the receivables, there is a risk that the discount rate paid to participate in the POR program will exceed the actual bad debt expense and billing fees associated with these receivables.

WGESystems is exposed to minimal amounts of retail credit risk associated with solar energy sales under long term agreements. WGSW is exposed to secondary credit risk based on its partnership investment where the partnership has retail credit risk from long term lease agreements and is exposed to credit risk on receivables from its leased assets. CEV is not subject to retail credit risk.

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 and sale 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’ net income. However, Washington Gas is responsible for following competitive and reasonable practices in purchasing natural gas for its customers.

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)

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.

Washington Gas executes commodity-related physical and financial contracts in the form of forwards, futures 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 being fully used to serve utility customers. Regulatory sharing mechanisms in all three jurisdictions allow the profit from these transactions to be shared between Washington Gas’ 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 three months ended December 31, 2012:

Regulated Utility Segment

Changes in Fair Value of Energy-Related Derivatives


(In millions)
Net assets (liabilities) at September 30, 2012	$	47.3
Net fair value of contracts entered into during the period		(8.2	)
Other changes in net fair value		(10.9	)
Realized net settlement of derivatives		(2.5	)
Net assets (liabilities) at December 31, 2012	$	25.7

Regulated Utility Segment

Roll Forward of Energy-Related Derivatives


(In millions)
Net assets (liabilities) at September 30, 2012	$	47.3
Recorded to income		(7.2	)
Recorded to regulatory assets/liabilities		(11.9	)
Realized net settlement of derivatives		(2.5	)
Net assets (liabilities) at December 31, 2012	$	25.7

The maturity dates of our net assets (liabilities) associated with the Regulated Utility segment’s energy-related derivatives recorded at fair value at December 31, 2012, 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,
(In millions)	Total		Remainder 2013			2014			2015		2016		2017		Thereafter
Level 1 — Quoted prices in active markets	$	—	$	—		$	—		$	—	$	—	$	—	$	—
Level 2 — Significant other observable inputs		7.9		—			5.7			2.2		—		—		—
Level 3 — Significant unobservable inputs		17.8		(4.2	)		(2.9	)		4.8		7.6		7.3		5.2
Total net assets (liabilities) associated with our energy-related derivatives	$	25.7	$	(4.2	)	$	2.8		$	7.0	$	7.6	$	7.3	$	5.2

Refer to Note 8, Derivative and Weather-Related Instruments and Note 9, Fair Value Measurements of the Notes to Consolidated Financial Statements for a further discussion of our derivative activities and fair value measurements.

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)

Price Risk Related to the Non-Utility Segments

Retail Energy-Marketing. 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.

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, purchase commitments may 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 (refer to the section entitled “Weather Risk” for a further discussion of our management of weather risk). WGEServices manages these risks through the use of derivative instruments including financial products.

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).

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 during the three months ended December 31, 2012:

Retail Energy-Marketing Segment

Changes in Fair Value of Energy-Related Derivatives


(In millions)
Net liabilities at September 30, 2012	$	(14.2	)
Net fair value of contracts entered into during the period		1.4
Other changes in net fair value		(12.8	)
Realized net settlement of derivatives		10.8
Net liabilities at December 31, 2012	$	(14.8	)

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 Segment

Roll Forward of Energy-Related Derivatives


(In millions)
Net liabilities at September 30, 2012	$	(14.2	)
Recorded to income		(9.1	)
Recorded to accounts payable		(2.3	)
Realized net settlement of derivatives		10.8
Net liabilities at December 31, 2012	$	(14.8	)

The maturity dates of our net assets (liabilities) associated with the Retail Energy-Marketing segments’ energy-related derivatives recorded at fair value at December 31, 2012 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,
(In millions)	Total			Remainder 2013			2014			2015			2016		2017		Thereafter
Level 1 — Quoted prices in active markets	$	—		$	—		$	—		$	—		$	—	$	—	$	—
Level 2 — Significant other observable inputs		(23.1	)		(15.4	)		(7.4	)		(0.3	)		—		—		—
Level 3 — Significant unobservable inputs		8.3			6.0			2.2			0.1			—		—		—
Total net assets (liabilities) associated with our energy-related derivatives	$	(14.8	)	$	(9.4	)	$	(5.2	)	$	(0.2	)	$	—	$	—	$	—

Wholesale Energy Solutions. CEV engages in wholesale commodity transactions to optimize its owned and managed natural gas assets. Price risk exists to the extent CEV does not closely match the volume of physical natural gas it purchases with the related forward sales entered into as hedges. CEV’s risk management policies and procedures are designed to minimize this risk. Depending upon the nature of its forward hedges, CEV may also be exposed to fluctuations in mark-to-market valuations based on changes in forward price curves. CEV pays fixed fair market prices for its owned storage assets and is subject to variations in annual summer-winter spreads associated with weather and other market factors. To the extent there are significant variations in weather, CEV may incur price variances that negatively impact expected gross margins (refer to the section entitled “Weather Risk” for a further discussion of our management of weather risk). CEV manages this risk through the use of derivative instruments, including financial products.

The following two tables summarize the changes in the fair value of our net assets (liabilities) associated with the Wholesale Energy Solutions segments’ energy-related derivatives during the three months ended December 31, 2012:

Wholesale Energy Solutions Segment

Changes in Fair Value of Energy-Related Derivatives


(In millions)
Net assets at September 30, 2012	$	19.7
Net fair value of contracts entered into during the period		11.3
Other changes in net fair value		2.5
Realized net settlement of derivatives		(22.8	)
Net assets at December 31, 2012	$	10.7

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)

Wholesale Energy Solutions Segment

Roll Forward of Energy-Related Derivatives


(In millions)
Net assets at September 30, 2012	$	19.7
Recorded to income		13.8
Realized net settlement of derivatives		(22.8	)
Net assets at December 31, 2012	$	10.7

The maturity dates of our net assets (liabilities) associated with the Wholesale Energy Solutions segments’ energy-related derivatives recorded at fair value at December 31, 2012 is summarized in the following table based on the level of the fair value calculation under ASC Topic 820:

Wholesale Energy Solutions Segment

Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives


	Years Ended September 30,
(In millions)	Total		Remainder 2013		2014		2015		2016		2017		Thereafter
Level 1 — Quoted prices in active markets	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Level 2 — Significant other observable inputs		10.7		4.9		5.8		—		—		—		—
Level 3 — Significant unobservable inputs		—		—		—		—		—		—		—
Total net assets associated with our energy-related derivatives	$	10.7	$	4.9	$	5.8	$	—	$	—	$	—	$	—

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 December 31, 2012 was approximately $2,400 and $10,500, related to its natural gas and electric portfolios, respectively. At December 31, 2012, the high, low and average value-at-risk for natural gas was $8,900, $200 and $2,800, respectively. At December 31, 2012, the high, low and average value-at-risk for electric was $11,800, $7,700 and $9,500, respectively. At September 30, 2012, WGEServices’ value-at-risk was approximately $900 and $13,900, related to its natural gas and electric portfolios, respectively.

Weather Risk

We are exposed to various forms of weather risk in both our regulated utility and non-utility business segments. To the extent Washington Gas does not have weather related instruments or billing adjustment mechanisms in place, its revenues are volume driven and its current rates are based upon an assumption of normal weather. 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 within a reasonable range of weather expectations, as discussed below.

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 financial results of our retail energy-marketing business, WGEServices, are 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 related instruments.

Variations from normal weather may also affect the financial results of our wholesale energy business, CEV, primarily with regards to summer - winter storage spreads and in transportation spreads throughout the fiscal year. CEV manages these weather risks with, among other things, locational, physical and financial basis hedging.

Billing Adjustment Mechanisms. In Maryland, Washington Gas has a Revenue Normalization Adjustment (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) billing adjustment mechanism that is designed to eliminate the effect of variations in weather from normal levels on utility net revenues. Additionally, as part of the Conservation and Ratemaking Efficiency (CARE) plan, Washington Gas has a Care Ratemaking Adjustment (CRA) mechanism, which, coupled with the WNA, eliminates the effect of both weather and other factors such as conservation for residential customers in Virginia. For a discussion of current rates and regulatory matters, refer to the section entitled “Rates and Regulatory Matters” in Management’s Discussion for Washington Gas.

For the RNA, WNA, and CRA 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 and the CRA mechanisms to function conversely because they adjust billed revenues to provide a designed level of net revenue per meter.

Weather Derivatives. On August 15, 2012, Washington Gas executed Heating Degree Day (HDD) weather related derivative contracts to manage its financial exposure to variations from normal weather in the District of Columbia for fiscal year 2013 resulting in net premium payment to Washington Gas of $0.7 million. Under these contracts, Washington Gas purchased protections against net revenue shortfalls due to warmer-than-normal weather and sold colder-than-normal weather benefits.

WGEServices utilizes HDD instruments from time to time to manage weather risks related to its natural gas and electricity sales. WGEServices also utilizes cooling degree day (CDD) instruments and other instruments to manage weather and price risks related to its electricity sales during the summer cooling season. These instruments cover a portion of WGEServices’ estimated revenue or energy-related cost exposure to variations in HDDs or CDDs. Refer to Note 8—Derivatives of the Notes to Consolidated Financial Statements for 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. 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 Washington Gas for the reported periods. In many cases, explanations and disclosures for both WGL Holdings and Washington Gas are substantially the same.

RESULTS OF OPERATIONS

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’ net income applicable to its common stock was $38.4 million and $44.2 million for the three months ended December 31, 2012 and 2011, respectively. Changes in the composition of earnings from the prior period are primarily due to: (i) lower unrealized margins associated with our asset optimization program; (ii) higher operation and maintenance expenses; (iii) an increase in depreciation expense due to the growth in, and changes in the asset mix of, our investment in utility plant and (iv) a decrease in the recovery of storage carrying costs on lower average storage gas inventory balances. Partially offsetting these variances were: (i) lower income taxes due to a decrease in the effective tax; (ii) higher revenues due to the timing of rate relief in Maryland and (iii) an increase in revenues related to growth of more than 10,600 average active customer meters.

Key gas delivery, weather and meter statistics are shown in the table below for the three months ended December 31, 2012 and 2011.

Gas Deliveries, Weather and Meter Statistics


	Three Months Ended
	December 31,						Increase/
	2012			2011			(Decrease)
Gas Sales and Deliveries (millions of therms)
Firm
Gas sold and delivered		264.9			232.7			32.2
Gas delivered for others		150.5			140.7			9.8
Total firm		415.4			373.4			42.0
Interruptible
Gas sold and delivered		0.7			0.7			—
Gas delivered for others		76.0			71.9			4.1
Total interruptible		76.7			72.6			4.1
Electric generation—delivered for others		51.2			7.8			43.4
Total deliveries		543.3			453.8			89.5

Degree Days
Actual		1,309			1,194			115
Normal		1,348			1,350			(2	)
Percent colder (warmer) than normal		(2.9	)%		(11.6	)%		n/a
Average active customer meters		1,099,176			1,088,528			10,648
New customer meters added		3,428			3,456			(28	)

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’ 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, WNA and CRA 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 a further discussion of these mechanisms and other weather-related instruments included in our weather protection strategy).

During the three months ended December 31, 2012, total gas deliveries to firm customers were 415.4 million therms, an increase of 42.0 million therms from 373.4 million therms delivered in the period of the prior fiscal year. This comparison in natural gas deliveries to firm customers primarily reflects colder weather in the current quarter than in the same quarter of the prior year and an increase in average active customer meters of 10,648.

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 2.9% warmer than normal for the three months ended December 31, 2012, compared to 11.6% warmer than normal for the same period of the prior fiscal year. Including the effects of our weather protection strategy, there were no material effects on net income attributed to colder or warmer than normal weather on either the quarter ended December 31, 2012 or 2011.

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 increased by 4.1 million therms during the three months ended December 31, 2012, compared to the same period of the prior fiscal 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’ 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 a majority of the margins earned on interruptible gas and delivery sales. The company shares actual non-gas margins from interruptible sales service customers that are in excess of delivery service rates. 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 three months ended December 31, 2012, deliveries to these customers increased by 43.4 million therms when compared to the same period 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

District of Columbia Jurisdiction

Investigation of Depreciation Practices. On September 9, 2011, the PSC of DC docketed a proceeding to review the proper and adequate rates of depreciation of the several classes of Washington Gas’ property. In accordance with the procedural schedule, interested parties’ comments were filed by October 24, 2011. Washington Gas’ reply comments were filed on November 14, 2011, wherein Washington Gas requested that the PSC of DC consider depreciation issues in the context of the newly-initiated rate case, referenced below. On April 26, 2012, the PSC of DC granted Washington Gas’ request to consolidate its investigation of depreciation issues into its base rate proceeding and closed the proceeding.

District of Columbia Base Rate Case. On November 2, 2011, the PSC of DC docketed a proceeding to investigate the reasonableness of Washington Gas’ base rates and charges and required Washington Gas to file a base rate case no later than 90 days from the date of the order. On February 29, 2012, Washington Gas filed a request with the PSC of DC for a $29.0 million annual increase in revenues. The $29.0 million revenue increase requested in this application included a proposed overall rate of return of 8.91% and a return on common equity of 10.90%. Washington Gas is also proposing to expand the existing program to replace or encapsulate certain vintage mechanical couplings, which was previously approved by the PSC of DC, to include the accelerated replacement of certain pipe in its system. Washington Gas plans to invest approximately $119.0 million to replace aging distribution pipe in the District of Columbia over the next five years and included, in this proposal, a request for approval of these expenditures over the next five years as well as a surcharge updated annually to recover the investment as it is made. Washington Gas also provided a proposed procedural schedule and proposed issues list for consideration in the case. On April 26, 2012, the PSC of DC adopted a procedural schedule and designated issues for the proceeding. Intervenor testimony was filed in July 2012, rebuttal testimony was filed in August 2012 and evidentiary hearings were held in October 2012. Initial and reply briefs were filed in November 2012.

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)

A Commission decision is pending.

Maryland Jurisdiction

On September 9, 2011, the PSC of MD issued an order approving purchased gas charges of Washington Gas for the twelve-month period ending August 2009, except for an undetermined amount related to excess gas deliveries by Competitive Service Providers (CSPs) which were cashed-out by Washington Gas. The PSC of MD found that the cash-out of excess deliveries was in violation of Washington Gas’ tariff and that Washington Gas should not have cashed-out the excess deliveries by CSPs, but rather should have eliminated the imbalances through volumetric adjustments in the future. On August 16, 2012, Washington Gas, the Staff of the PSC of MD and the Maryland Office of People’s Counsel (MD OPC) filed a stipulation which, pending approval by the public utility law judge, would resolve all issues remanded by the PSC of MD in its September 9, 2011 order. The parties to the stipulation agreed that the total amount credited or to be credited by Washington Gas to the actual cost adjustment account provision is $4.8 million, and that no civil penalties should be imposed. Given its plans to recover these costs from the CSPs, Washington Gas has recorded accounts receivable from the CSPs for the $4.8 million, of which approximately $3.3 million relates to its affiliate, WGEServices. On November 29, 2012, the Public Utility Law Judge issued a Proposed Order of Public Utility Law Judge approving the Stipulation. The Proposed Order became final on January 3, 2013.

In November 2009, the Chief Hearing Examiner of the PSC of MD issued a Proposed Order of Hearing Examiner (POHE), which approved Washington Gas’ proposal to change the formula for sharing asset optimization margins between Washington Gas and customers and its current methodology for pricing storage injections. Subsequently, both the Staff of the PSC of MD and the Maryland OPC filed notices of appeal of the POHE followed by a memorandum on appeal in support of their positions. In January 2010, Washington Gas filed a reply memorandum in response to the Staff of the PSC of MD and the Maryland OPC’s memoranda on appeal.

On August 16, 2012, the PSC of MD issued an order affirming the POHE. The order left open the question of Washington Gas’ use of the ratable fill method to price storage injections for review and directed Washington Gas to consult with other parties to develop greater transparency and separate accounting of asset optimization transactions.

On November 15, 2012, Washington Gas filed a proposed stipulation among Washington Gas, and the Office of the People’s Counsel with the PSC of MD which resolves the open items. Based on the terms of the stipulation, Washington Gas has recorded the favorable effect of a change in sharing in fiscal year 2012, increasing Washington Gas’ share of realized margins by $2.9 million. On December 5, 2012, the Public Utility Law Judge issued a Proposed Order approving the Stipulation. The Proposed order became final on January 7, 2013.

Maryland Base Rate Case. On April 30, 2012, Washington Gas filed a petition for rehearing with the PSC of MD which requested the Commission reverse its decisions in the March 29, 2012 order denying Washington Gas’ request for an adjustment related to other tax adjustments and the costs to initiate the outsourcing agreement with Accenture, LLC. Washington Gas also filed a petition for judicial review of the PSC of MD’s March 29, 2012 order with the Circuit Court for Baltimore City to preserve its right to appeal in this case. Washington Gas has requested the Circuit Court to hold further proceedings on the appeal in abeyance pending the PSC of MD’s action on the petition for rehearing. In its reply to the Circuit Court, the PSC of MD agreed with Washington Gas’ request to hold further proceedings on the appeal in abeyance pending further PSC of MD action.

Virginia Jurisdiction

Conservation and Ratemaking Efficiency Plan (CARE). On December 4, 2012, Washington Gas filed an application to amend its CARE Plan to allow it to (i) continue to implement its CARE Plan for residential customer classes with a revised portfolio of programs for residential customers and (ii) extend its CARE plan to small commercial and industrial customer classes; and (iii) implement its amended CARE Plan for a three-year period beginning on May 1, 2013. On December 19, 2012, the Commission issued its Order for Notice and comment establishing the procedural schedule of the proceeding. Interested parties are required to file notices of participation or request for a hearing by January 25, 2013; the Staff Report is due by February 28, 2013 and Washington Gas’ rebuttal or comments by March 7, 2013.

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)

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 Non-Utility Segments

•

Value-At-Risk

•

Weather Risk

•

Interest-Rate Risk

ITEM 4. CONTROLS AND PROCEDURES – WGL Holdings

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 December 31, 2012. Based on this evaluation process, the Chairman and Chief Executive Officer, and the Vice President and Chief Financial Officer have concluded that disclosure controls and procedures of WGL Holdings are effective. There have been no changes in the internal control over financial reporting of WGL Holdings during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of WGL Holdings.

ITEM 4. CONTROLS AND PROCEDURES—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 December 31, 2012. 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 December 31, 2012 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. For information regarding pending federal and state regulatory matters, see Note 12 — Commitments and Contingencies, contained in Part I under the Notes to Consolidated Financial Statements.

On December 30, 2011, a complaint was filed against Washington Gas in the Superior Court of the District of Columbia. The complaint was filed on behalf of six plaintiffs who are collectively seeking damages in the amount of $110 million. The plaintiffs in the case are: Stephen D. Vermillion III, Jennifer Vermillion, Anna Cederberg Heard, C.J.C. (a minor), and Adrienne Connolly and James Connolly. Pursuant to the complaint, the plaintiffs have sued Washington Gas for various personal injuries and damages allegedly related to, and negligently caused by, pollutants located at Washington Gas’ East Station site at which a manufactured gas plant was formerly operated. The East Station site is adjacent to the Anacostia River in Washington, DC.

On August 14, 2012, a third-party complaint was filed against Washington Gas and WGL Holdings, Inc. in the Arlington County Circuit Court in Virginia (“the Court”) by The Carlin Limited Partnership and Foundation Property Management, Inc. (“defendants”). The case involves a complaint filed by plaintiff Marianne Karklins, against defendants, seeking $50 million in damages for injuries sustained as a result of an explosion and fire in an apartment on May 21, 2011. Pursuant to the complaint, the plaintiff asserts claims of negligence and negligence per se against the defendants for her injuries. The third-party complaint was filed on behalf of defendants and seeks contribution for any sums awarded to the plaintiff. Washington Gas and WGL Holdings, Inc. filed a demurrer which was sustained by the Court in a letter opinion dated November 28, 2012, effectively dismissing the third-party complaint. The Court allowed the defendants the opportunity to file an amended third-party complaint following the entry of the order sustaining the demurrer. Proceedings related to the amended third-party complaint are currently pending.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 6. EXHIBITS

Exhibits:


Schedule/ Exhibit		Description
(a)(3)		Exhibits

		Exhibits Filed Herewith:

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.

101.INS		XBRL Instance Document:

101.SCH		XBRL Schema Document:

101.CAL		XBRL Calculation Linkbase Document:

101.LAB		XBRL Labels Linkbase Document:

101.PRE		XBRL Presentation Linkbase Document:

101.DEF		XBRL Definition Linkbase Document.

		Exhibits Incorporated by Reference

3		Articles of Incorporation & Bylaws:

		Washington Gas Light Company Charter, filed on Form S-3 dated July 21, 1995.

WGL Holdings, Inc.

Washington Gas Light Company

Part II—Other Information


Schedule/ Exhibit		Description

		WGL Holdings, Inc. Charter, filed on Form S-4 dated February 2, 2000.

		Bylaws of WGL Holdings, Inc. as amended on March 5, 2009, filed as Exhibit 3(ii) to Form 8-K on March 6, 2009.

		Bylaws of Washington Gas Light Company as amended on December 16, 2011, filed as Exhibit 3(ii) to Form 8-K on December 21, 2011.

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: February 6, 2013				/s/ William R. Ford
				William R. Ford
				Controller (Principal Accounting Officer)