Washington Gas Light (WGLCP) 10-Q 2006 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2006

OR

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

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

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

WGL Holdings, Inc.	Large Accelerated Filerþ	Accelerated Filero	Non-Accelerated Filero
Washington Gas Light Company	Large Accelerated Filero	Accelerated Filero	Non-Accelerated Filerþ

Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Act): Yeso Noþ

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

WGL Holdings, Inc. common stock, no par value, outstanding as of April 30, 2006: 48,762,228 shares.

All of the outstanding shares of common stock ($1 par value) of Washington Gas Light Company were held by WGL Holdings, Inc. as of April 30, 2006.

WGL Holdings, Inc.
Washington Gas Light Company

For the Quarter Ended March 31, 2006

Table of Contents

PART I.	Financial Information
Item 1.	Financial Statements
	WGL Holdings, Inc.
	Consolidated Balance Sheets	1
	Consolidated Statements of Income	2
	Consolidated Statements of Cash Flows	3
	Washington Gas Light Company
	Balance Sheets	4
	Statements of Income	5
	Statements of Cash Flows	6
	Notes to Consolidated Financial Statements
	WGL Holdings, Inc. and Washington Gas Light Company — Combined	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
	WGL Holdings, Inc.	33
	Washington Gas Light Company	57
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65
Item 4.	Controls and Procedures	65
PART II.	Other Information
Item 4.	Submission of Matters to a Vote of Security Holders	66
Item 6.	Exhibits	66
Signature		68

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 or the Company) and Washington Gas Light Company (Washington Gas or the regulated utility). Except where the content clearly indicates otherwise, any reference in the report to “WGL Holdings” or “the Company” is to the consolidated entity, WGL Holdings and all of its subsidiaries, including Washington Gas which is a distinct registrant that is a wholly owned subsidiary of WGL Holdings.

     Part I — Financial Information in this Quarterly Report on Form 10-Q includes separate financial statements (i.e., balance sheets, statements of income and statements of cash flows) for consolidated 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 thePrivate Securities Litigation Reform Act of 1995with 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 the Company’s natural gas distribution system;

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

• the ability to recover the costs of implementing steps to accommodate delivery of natural gas to customers as a result of the receipt of liquefied natural gas from Cove Point;

• variations in weather conditions from normal levels;

• 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 the regulated utility’s natural gas distribution system as a result of factors beyond the control of the Company or its subsidiaries;

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

• changes in capital and energy commodity market conditions;

ii

WGL Holdings, Inc.
Washington Gas Light Company

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

• changes in credit market conditions and creditworthiness of customers and suppliers;

• changes in relevant laws and regulations, including tax, environmental and employment laws and regulations;

• legislative, regulatory and judicial mandates or decisions affecting business operations or the timing of recovery of costs and expenses;

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

• the pace of deregulation efforts and the availability of other competitive alternatives;

• changes in accounting principles;

• acts of God and 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 thePrivate Securities Litigation Reform Act of 1995.

iii

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

	March 31,			September 30,
(In thousands)	2006			2005
ASSETS
Property, Plant and Equipment
At original cost	$	2,848,830		$	2,783,976
Accumulated depreciation and amortization		(845,551	)		(814,293	)
Net property, plant and equipment		2,003,279			1,969,683
Current Assets
Cash and cash equivalents		14,112			4,842
Receivables
Accounts receivable		464,732			159,089
Gas costs and other regulatory assets		8,853			9,711
Accrued utility revenues		79,602			16,476
Allowance for doubtful accounts		(17,869	)		(17,548	)
Net receivables		535,318			167,728
Materials and supplies—principally at average cost		19,268			16,987
Storage gas—at cost (first-in, first-out)		144,758			252,925
Deferred income taxes		15,715			14,133
Other prepayments—principally taxes		11,330			11,283
Other		6,526			13,062
Total current assets		747,027			480,960
Deferred Charges and Other Assets
Regulatory assets
Gas costs		15,228			—
Other		62,951			64,236
Prepaid qualified pension benefits		76,105			75,965
Other		7,747			9,756
Total deferred charges and other assets		162,031			149,957
Total Assets	$	2,912,337		$	2,600,600
CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders’ equity	$	963,690		$	893,992
Washington Gas Light Company preferred stock		28,173			28,173
Long-term debt		581,541			584,150
Total capitalization		1,573,404			1,506,315
Current Liabilities
Current maturities of long-term debt		55,062			50,122
Notes payable		161,773			40,876
Accounts payable and other accrued liabilities		255,173			204,916
Wages payable		14,001			13,375
Accrued interest		3,097			2,919
Dividends declared		16,787			16,524
Customer deposits and advance payments		35,103			52,173
Gas costs and other regulatory liabilities		51,228			14,103
Accrued taxes		56,907			13,688
Other		2,616			2,750
Total current liabilities		651,747			411,446
Deferred Credits
Unamortized investment tax credits		13,599			14,047
Deferred income taxes		293,017			292,517
Accrued pensions and benefits		42,922			41,011
Regulatory liabilities
Accrued asset removal costs		282,379			272,124
Gas costs		—			11,600
Other		15,797			15,983
Other		39,472			35,557
Total deferred credits		687,186			682,839
Commitments and Contingencies (Note 12)
Total Capitalization and Liabilities	$	2,912,337		$	2,600,600

The accompanying notes are an integral part of these statements.

1

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

	Three Months Ended						Six Months Ended
	March 31,						March 31,
(In thousands, except per share data)	2006			2005			2006			2005
UTILITY OPERATIONS
Operating Revenues	$	705,656		$	635,226		$	1,306,993		$	1,044,177
Less: Cost of gas		478,363			384,559			884,949			613,170
Revenue taxes		20,760			23,779			37,453			40,874
Utility Net Revenues		206,533			226,888			384,591			390,133
Other Operating Expenses
Operation		56,618			50,379			107,875			97,340
Maintenance		9,556			9,158			18,710			18,195
Depreciation and amortization		23,097			21,418			46,057			43,614
General taxes		13,005			12,197			23,044			21,254
Income taxes		35,155			46,677			63,243			70,714
Utility Other Operating Expenses		137,431			139,829			258,929			251,117
Utility Operating Income		69,102			87,059			125,662			139,016
NON-UTILITY OPERATIONS
Operating Revenues
Retail energy-marketing		356,066			285,918			652,851			491,206
Heating, ventilating and air conditioning (HVAC)		8,411			8,343			19,485			17,202
Other non-utility activities		295			319			425			613
Non-Utility Operating Revenues		364,772			294,580			672,761			509,021
Other Operating Expenses
Operating expenses		364,397			288,210			673,076			498,404
Income tax expense (benefit)		(236	)		2,454			(781	)		4,092
Non-Utility Operating Expenses		364,161			290,664			672,295			502,496
Non-Utility Operating Income		611			3,916			466			6,525
TOTAL OPERATING INCOME		69,713			90,975			126,128			145,541
Other Income (Expenses)—Net
Income (expenses)—net		524			610			723			492
Income tax benefit (expense)		(321	)		(111	)		(237	)		(66	)
Other Income (Expenses)—Net		203			499			486			426
INCOME BEFORE INTEREST EXPENSE		69,916			91,474			126,614			145,967
INTEREST EXPENSE
Interest on long-term debt		10,305			10,492			20,527			20,998
Other—net		2,398			706			4,158			1,231
Total Interest Expense		12,703			11,198			24,685			22,229
DIVIDENDS ON WASHINGTON GAS PREFERRED STOCK		330			330			660			660
NET INCOME (APPLICABLE TO COMMON STOCK)	$	56,883		$	79,946		$	101,269		$	123,078
AVERAGE COMMON SHARES OUTSTANDING
Basic		48,760			48,688			48,750			48,679
Diluted		48,913			48,996			48,903			48,967
EARNINGS PER AVERAGE COMMON SHARE
Basic	$	1.17		$	1.64		$	2.08		$	2.53
Diluted	$	1.16		$	1.63		$	2.07		$	2.51
DIVIDENDS DECLARED PER COMMON SHARE	$	0.3375		$	0.3325		$	0.6700		$	0.6575

The accompanying notes are an integral part of these statements.

2

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

	Six Months Ended
	March 31,
(In thousands)	2006			2005
OPERATING ACTIVITIES
Net income (applicable to common stock)	$	101,269		$	123,078
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES
Depreciation and amortization:
Per Consolidated Statements of Income		46,057			43,614
Charged to other accounts		2,716			2,397
Deferred income taxes—net		178			12,306
Amortization of investment tax credits		(448	)		(448	)
Accrued/deferred pension cost		(754	)		(2,542	)
Other non-cash charges (credits)—net		2,733			1,822
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable and accrued utility revenues		(368,448	)		(300,042	)
Gas costs and other regulatory assets/liabilities—net		37,983			46,885
Storage gas		108,167			165,283
Other prepayments—principally taxes		(47	)		1,129
Accounts payable and other accrued liabilities		53,292			35,013
Wages payable		626			736
Customer deposits and advance payments		(17,070	)		14,146
Accrued taxes		43,219			54,691
Accrued interest		178			52
Deferred purchased gas costs—net		(26,828	)		(19,714	)
Other current assets and liabilities—net		4,121			(1,240	)
Other—net		8,900			3,157
Net Cash Provided by (Used in) Operating Activities		(4,156	)		180,323
FINANCING ACTIVITIES
Common stock issued		—			285
Long-term debt issued		77,404			93
Long-term debt retired		(76,033	)		(20,144	)
Debt issuance costs		(578	)		—
Notes payable issued (retired)—net		120,897			(12,724	)
Dividends on common stock		(32,424	)		(31,643	)
Other financing activities—net		(1,031	)		(428	)
Net Cash Provided by (Used in) Financing Activities		88,235			(64,561	)
INVESTING ACTIVITIES
Capital expenditures (excludes Allowance for Funds Used During Construction)		(72,657	)		(48,060	)
Other investing activities—net		(2,152	)		(2,075	)
Net Cash Used in Investing Activities		(74,809	)		(50,135	)
INCREASE IN CASH AND CASH EQUIVALENTS		9,270			65,627
Cash and Cash Equivalents at Beginning of Year		4,842			6,587
Cash and Cash Equivalents at End of Period	$	14,112		$	72,214
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid	$	29,499		$	21,332
Interest paid	$	24,179		$	21,671
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Extinguishment of project debt financing	$	—		$	16,447
Capital expenditures included in accounts payable and other accrued liabilities	$	(3,035	)	$	(6,029	)

The accompanying notes are an integral part of these statements.

3

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

	March 31,			September 30,
(In thousands)	2006			2005
ASSETS
Property, Plant and Equipment
At original cost	$	2,820,442		$	2,756,638
Accumulated depreciation and amortization		(824,943	)		(794,286	)
Net property, plant and equipment		1,995,499			1,962,352
Current Assets
Cash and cash equivalents		13,470			3,054
Receivables
Accounts receivable		257,371			77,117
Gas costs and other regulatory assets		8,853			9,711
Accrued utility revenues		79,602			16,476
Allowance for doubtful accounts		(15,329	)		(14,981	)
Net receivables		330,497			88,323
Materials and supplies—principally at average cost		19,104			16,823
Storage gas—at cost (first-in, first-out)		112,526			194,104
Deferred income taxes		14,593			12,957
Other prepayments—principally taxes		8,321			11,165
Receivables from associated companies		1,705			8,131
Total current assets		500,216			334,557
Deferred Charges and Other Assets
Regulatory assets
Gas costs		15,228			—
Other		62,960			64,236
Prepaid qualified pension benefits		75,725			75,586
Other		7,444			9,404
Total deferred charges and other assets		161,357			149,226
Total Assets	$	2,657,072		$	2,446,135
CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholder’s equity	$	908,364		$	835,757
Preferred stock		28,173			28,173
Long-term debt		581,541			584,150
Total capitalization		1,518,078			1,448,080
Current Liabilities
Current maturities of long-term debt		55,062			50,122
Notes payable		2,224			10,409
Accounts payable and other accrued liabilities		145,347			149,706
Wages payable		13,941			13,196
Accrued interest		3,097			2,919
Dividends declared		16,787			16,524
Customer deposits and advance payments		35,004			33,880
Gas costs and other regulatory liabilities		51,228			14,103
Accrued taxes		62,386			10,261
Payables to associated companies		68,603			18,598
Other		137			281
Total current liabilities		453,816			319,999
Deferred Credits
Unamortized investment tax credits		13,586			14,033
Deferred income taxes		293,106			290,375
Accrued pensions and benefits		42,829			40,916
Regulatory liabilities
Accrued asset removal costs		282,379			272,124
Gas costs		—			11,600
Other		15,762			15,946
Other		37,516			33,062
Total deferred credits		685,178			678,056
Commitments and Contingencies (Note 12)
Total Capitalization and Liabilities	$	2,657,072		$	2,446,135

The accompanying notes are an integral part of these statements.

4

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

	Three Months Ended						Six Months Ended
	March 31,						March 31,
(In thousands)	2006			2005			2006			2005
UTILITY OPERATIONS
Operating Revenues	$	712,809		$	644,636		$	1,317,794		$	1,056,862
Less: Cost of gas		485,516			393,969			895,750			625,855
Revenue taxes		20,760			23,779			37,453			40,874
Utility Net Revenues		206,533			226,888			384,591			390,133
Other Operating Expenses
Operation		57,091			50,795			108,815			98,263
Maintenance		9,483			9,084			18,545			18,013
Depreciation and amortization		22,909			21,238			45,684			43,257
General taxes		12,977			12,113			22,973			21,110
Income taxes		35,081			46,647			63,110			70,621
Utility Other Operating Expenses		137,541			139,877			259,127			251,264
Utility Operating Income		68,992			87,011			125,464			138,869
NON-UTILITY OPERATIONS
Operating Revenues
Other non-utility		277			256			402			509
Non-Utility Operating Revenues		277			256			402			509
Other Operating Expenses (Income)
Operating expenses (income)		(3,829	)		2,366			(3,538	)		3,893
Income tax (benefit) expense		1,470			(830	)		1,404			(1,333	)
Non-Utility Operating Expenses (Income)		(2,359	)		1,536			(2,134	)		2,560
Non-Utility Operating Income (Loss)		2,636			(1,280	)		2,536			(2,051	)
TOTAL OPERATING INCOME		71,628			85,731			128,000			136,818
Other Income (Expenses)—Net
Income (expense)—net		133			122			49			(157	)
Income tax benefit (expense)		(315	)		(105	)		(222	)		(57	)
Other Income (Expenses)—Net		(182	)		17			(173	)		(214	)
INCOME BEFORE INTEREST EXPENSE		71,446			85,748			127,827			136,604
INTEREST EXPENSE
Interest on long-term debt		10,305			10,492			20,527			20,998
Other—net		1,069			191			2,169			359
Total Interest Expense		11,374			10,683			22,696			21,357
NET INCOME (BEFORE PREFERRED STOCK DIVIDENDS)		60,072			75,065			105,131			115,247
DIVIDENDS ON PREFERRED STOCK		330			330			660			660
NET INCOME (APPLICABLE TO COMMON STOCK)	$	59,742		$	74,735		$	104,471		$	114,587

The accompanying notes are an integral part of these statements.

5

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

	Six Months Ended
	March 31,
(In thousands)	2006			2005
OPERATING ACTIVITIES
Net income (before preferred stock dividends)	$	105,131		$	115,247
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES
Depreciation and amortization:
Per Statements of Income		45,684			43,257
Charged to other accounts		2,510			2,213
Deferred income taxes—net		2,346			12,209
Amortization of investment tax credits		(447	)		(447	)
Accrued/deferred pension cost		(757	)		(2,536	)
Other non-cash charges (credits)—net		2,440			1,556
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable, accrued utility revenues and receivables from associated companies		(236,606	)		(241,898	)
Gas costs and other regulatory assets/liabilities—net		37,983			46,885
Storage gas		81,578			121,649
Other prepayments—principally taxes		2,844			1,311
Accounts payable and other accrued liabilities, including payables to associated companies		48,140			41,624
Wages payable		745			738
Customer deposits and advance payments		1,124			10,394
Accrued taxes		52,125			49,571
Accrued interest		178			52
Deferred purchased gas costs—net		(26,828	)		(19,714	)
Other current assets and liabilities—net		(2,425	)		1,197
Other—net		9,166			3,040
Net Cash Provided by Operating Activities		124,931			186,348
FINANCING ACTIVITIES
Long-term debt issued		77,404			93
Long-term debt retired		(76,033	)		(20,110	)
Debt issuance costs		(578	)		—
Notes payable issued (retired)—net		(8,185	)		(18,686	)
Dividends on common stock and preferred stock		(33,084	)		(32,300	)
Other financing activities—net		(1,031	)		(428	)
Net Cash Used in Financing Activities		(41,507	)		(71,431	)
INVESTING ACTIVITIES
Capital expenditures (excludes Allowance for Funds Used During Construction)		(70,856	)		(47,293	)
Other investing activities—net		(2,152	)		(2,075	)
Net Cash Used in Investing Activities		(73,008	)		(49,368	)
INCREASE IN CASH AND CASH EQUIVALENTS		10,416			65,549
Cash and Cash Equivalents at Beginning of Year		3,054			3,398
Cash and Cash Equivalents at End of Period	$	13,470		$	68,947
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid	$	19,377		$	17,467
Interest paid	$	22,190		$	20,799
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Extinguishment of project debt financing	$	—		$	16,447
Capital expenditures included in accounts payable and other accrued liabilities	$	(2,494	)	$	(5,966	)

The accompanying notes are an integral part of these statements.

6

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

NOTE 1. ACCOUNTING POLICIES

     Basis of Presentation

     WGL Holdings, Inc. (WGL Holdings or the Company) is the parent of four direct, wholly owned subsidiaries that include Washington Gas Light Company (Washington Gas or the regulated utility), Crab Run Gas Company, Hampshire Gas Company (Hampshire) and Washington Gas Resources Corporation (Washington Gas Resources). Washington Gas Resources owns unregulated subsidiaries that include, among others, Washington Gas Energy Services, Inc. (WGEServices), American Combustion Industries, Inc. (ACI) and Washington Gas Energy Systems, Inc. (WGESystems). Reference is made to the combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2005 filed with the Securities and Exchange Commission (SEC) for additional information on the corporate structure.

     The Notes to Consolidated Financial Statements are an integral part of the accompanying consolidated financial statements of WGL Holdings and its subsidiaries, including Washington Gas. Except where otherwise noted, these notes apply equally to WGL Holdings and Washington Gas. Due to the seasonal nature of Washington Gas’ and WGEServices’ businesses, the results of operations presented herein do not necessarily represent the expected results of either WGL Holdings or Washington Gas for the full fiscal years ending September 30, 2006 and 2005.

     The interim consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Therefore, certain financial information and footnote disclosures accompanying annual financial statements prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP) are omitted in this interim report pursuant to the SEC rules and regulations. The interim consolidated financial statements and notes thereto should be read in conjunction with the combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2005.

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

     For a description of the Company’s accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements of the combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2005. There have been no significant changes to these policies subsequent to September 30, 2005, except for the adoption of a new accounting standard, as discussed below. Certain reclassifications have been made to the consolidated financial statements of WGL Holdings and the financial statements of Washington Gas for the prior periods presented to conform to the presentation in the current periods of fiscal year 2006. In fiscal year 2006, WGL Holdings and Washington Gas made reclassifications on their statements of income for the three and six months ended March 31, 2005 of $2.4 million and $3.9 million, respectively, along with related income tax benefits of $930,000 and $1.5 million, respectively, related to weather insurance expense from “Other Income (Expenses) – Net” to “Non-utility operating expenses” to conform with the presentation of similar amounts recorded in the current periods. These reclassifications were considered immaterial to the overall presentation of the respective financial statements.

     Stock-Based Compensation

     Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards

7

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

(SFAS) No. 123 (revised 2004),Share-Based Payment, which revises SFAS No. 123, and supersedes Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees. SFAS No. 123 (revised) requires the Company to measure and recognize stock-based compensation expense in its financial statements based on the fair value at the date of grant for its share-based awards, which include performance shares and stock options. Performance share awards contain market conditions; both performance share and stock option awards contain a service condition. In accordance with SFAS No. 123 (revised), the Company recognizes compensation expense over the requisite service period for:(i)awards granted on or after October 1, 2005 and(ii) unvested awards previously granted and outstanding as of October 1, 2005. In addition, the Company estimates forfeitures over the requisite service period when recognizing compensation expense; these estimates are adjusted to the extent to which actual forfeitures differ, or are expected to materially differ, from such estimates.

     Prior to October 1, 2005, the Company had accounted for its share-based payment transactions in accordance with SFAS No. 123, as amended by SFAS No. 148,Accounting for Stock-Based Compensation-Transition and Disclosure, which permitted the Company to apply APB Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. In accordance with APB Opinion No. 25, the Company did not record compensation expense related to its stock option grants in its financial statements. The Company did record compensation expense over the requisite service period for performance shares awarded to certain key employees based on the market value of the Company’s common stock at the end of each reporting period.

     The following table depicts the effect of adopting SFAS No. 123 (revised) on net income and earnings per share for the three and six months ended March 31, 2006. Specifically shown is the Company’s reported net income and earnings per share for the three and six months ended March 31, 2006, which reflect compensation expense related to the Company’s share-based awards recorded in accordance with SFAS No. 123 (revised), as compared to net income and earnings per share for the same period that would have been reported had such compensation expense been recorded under APB Opinion No. 25.

WGL Holdings, Inc.
Effect of Adopting SFAS No. 123 (Revised)

	Three Months Ended				Six Months Ended
	March 31, 2006				March 31, 2006
	As		Per		As		Per
(In thousands, except per share data)	Reported		APB No. 25		Reported		APB No. 25
Total stock-based compensation expense (before income taxes)	$	1,251	$	885	$	2,746	$	1,557
Net income	$	56,883	$	57,104	$	101,269	$	101,989
Earnings per share:
Basic	$	1.17	$	1.17	$	2.08	$	2.09
Diluted	$	1.16	$	1.17	$	2.07	$	2.09

     As permitted by SFAS No. 123 (revised), the Company used the modified prospective method of adopting the new accounting standard; accordingly, financial results for the prior periods presented were not retroactively adjusted to reflect the effects of SFAS No. 123 (revised). If stock-based compensation expense for the three and six months ended March 31, 2005 had been determined and recorded based on the fair value at the grant dates of the awards consistent with the method prescribed by SFAS No. 123, which was superseded by SFAS No. 123 (revised), the Company’s net income and earnings per share for the three and six months ended March 31, 2005 would have been reduced to the amounts shown in the following table.

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, Inc.
Pro Forma Effect of Stock-Based Compensation

	Three Months Ended			Six Months Ended
(In thousands, except per share data)	March 31, 2005			March 31, 2005
Net income as reported	$	79,946		$	123,078
Add:      Stock-based employee compensation expense included in reported net income,          net of tax(a)		535			1,213
Deduct: Total stock-based employee compensation expense determined under the fair          value-based method, net of tax(b)		(667	)		(1,477	)
Pro forma net income	$	79,814		$	122,814
Earnings per average common share—basic
As reported	$	1.64		$	2.53
Pro forma	$	1.64		$	2.52
Earnings per average common share—diluted
As reported	$	1.63		$	2.51
Pro forma	$	1.63		$	2.51

^(a)Reflects compensation expense related to performance shares.

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

     Refer to Note 8 –Stock-Based Compensationof the Notes to Consolidated Financial Statements for a further discussion of compensation expense related to the Company’s share-based awards.

     Recent Accounting Standards

     In March 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 156,Accounting for Servicing of Financial Assets,which amends SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilitieswith respect to accounting for separately-recognized servicing assets and servicing liabilities. SFAS No. 156 requires all separately-recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. Subsequent to initial recognition, an entity may use either the amortization method or the fair value measurement method to account for servicing assets and servicing liabilities within the scope of this statement. SFAS No. 156 is effective for the Company on October 1, 2006. Management is currently evaluating the effect of this standard but, based on the Company’s current operations, it does not believe it will materially affect the Company’s consolidated financial statements.

     In February 2006, the FASB issued SFAS No. 155,Accounting for Certain Hybrid Financial Instruments, which amends SFAS No. 133,Accounting for Derivative Instruments and Hedging Activitiesand SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.SFAS No. 155 gives entities the option of applying fair value accounting to certain hybrid financial instruments in their entirety if they contain embedded derivatives that would require bifurcation under SFAS No. 133. SFAS No. 155 is effective for the Company on October 1, 2006. Management is currently evaluating the effect of this standard but, based on the Company’s current operations, it does not believe it will materially affect the Company’s consolidated financial statements.

     In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections,which supersedes APB Opinion No. 20,Accounting Changesand SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements.SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable. SFAS No. 154 is effective for the Company on October 1, 2006.

9

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

     In March 2005, the FASB issued FASB Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations(FIN 47). FIN 47 clarifies the manner of accounting for asset retirement obligations (ARO) containing uncertainties as to the timing and/or method of settlement of the obligation. FIN 47 also clarifies the circumstances under which the fair value of the ARO is considered subject to reasonable estimation. FIN 47 is effective for the Company no later than September 30, 2006. Management is currently evaluating the effect of this new standard on the Company’s consolidated financial statements.

     In November 2004, the FASB issued SFAS No. 151,Inventory Costs. SFAS No. 151 requires that abnormal amounts of idle facility expense, freight, handling costs and spoilage be charged to income as a current period expense rather than capitalized as inventory costs. SFAS No. 151 became effective for the Company for inventory costs incurred on and after October 1, 2005. The adoption of this standard had no effect on the Company’s consolidated financial statements for the three and six months ended March 31, 2006.

NOTE 2. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

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

WGL Holdings, Inc.

(In thousands)	Mar. 31, 2006		Sept. 30, 2005
Accounts payable — trade	$	225,163	$	183,030
Employee benefits and payroll accruals		10,632		13,806
Other accrued liabilities		19,378		8,080
Total	$	255,173	$	204,916

Washington Gas Light Company

(In thousands)	Mar. 31, 2006		Sept. 30, 2005
Accounts payable — trade	$	117,285	$	130,211
Employee benefits and payroll accruals		10,012		12,446
Other accrued liabilities		18,050		7,049
Total	$	145,347	$	149,706

NOTE 3. SHORT-TERM DEBT

     At March 31, 2006 and September 30, 2005, WGL Holdings and its subsidiaries had $161.8 million and $40.9 million, respectively, of commercial paper outstanding at a weighted average cost of 4.88 percent and 3.87 percent, respectively. Included in these consolidated balances were $2.2 million and $10.4 million in commercial paper that Washington Gas had outstanding at March 31, 2006 and September 30, 2005, respectively.

     To support their commercial paper borrowings, WGL Holdings and Washington Gas each have revolving credit agreements with a group of commercial banks that expire on September 30, 2010. The credit facility for WGL Holdings permits it to borrow up to $275 million, and further permits the Company to request prior to September 30, 2009, and the banks to approve, an additional line of credit of $50 million above the original credit limit, for a maximum potential total of $325 million. The

10

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

credit facility for Washington Gas permits it to borrow up to $225 million, and further permits Washington Gas to request prior to September 30, 2009, and the banks to approve, an additional line of credit of $100 million above the original credit limit, for a maximum potential total of $325 million. There were no outstanding borrowings under these credit facilities at March 31, 2006 or September 30, 2005.

NOTE 4. LONG-TERM DEBT

     Washington Gas issues unsecured Medium-Term Notes (MTNs) 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 March 31, 2006, Washington Gas had capacity under a shelf registration that was declared effective by the SEC on April 24, 2003, to issue up to $77.5 million of long-term debt.

     On January 18, 2006, Washington Gas issued $25.0 million of 5.17 percent MTNs due January 18, 2016, and $25.0 million of 5.70 percent MTNs due January 18, 2036. On February 15, 2006, Washington Gas used the combined cash proceeds from these debt issuances to retire $50.0 million of 6.15 percent MTNs through its exercise of call options.

     On March 22, 2006, Washington Gas issued $25.0 million of 5.78 percent MTNs due March 15, 2036. Concurrent with this issuance, Washington Gas paid $26.0 million, plus accrued interest, to retire $25.0 million of 7.31 percent MTNs with a stated maturity date of October 30, 2007, by exercising a make-whole call. The make-whole call premium of $958,000 was recorded as a regulatory asset, and is being amortized in accordance with regulatory accounting requirements.

     Refer to Note 9—Derivative and Weather-Related Instrumentsfor a discussion of derivative transactions that were settled concurrent with these debt issuances.

NOTE 5. COMMON SHAREHOLDERS’ EQUITY

     The tables below reflect the components of “Common shareholders’ equity” for WGL Holdings, Inc. and Washington Gas Light Company as of March 31, 2006 and September 30, 2005.

WGL Holdings, Inc.
Components of Common Shareholders’ Equity

(In thousands, except shares)	Mar. 31, 2006			Sept. 30, 2005
Common stock, no par value, 120,000,000 shares authorized, 48,762,228 and 48,704,340 shares issued, respectively	$	474,821		$	472,974
Paid-in capital		6,267			6,142
Retained earnings		487,231			418,649
Accumulated other comprehensive loss, net of taxes		(4,629	)		(3,773	)
Total	$	963,690		$	893,992

11

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

Washington Gas Light Company
Components of Common Shareholder’s Equity

(In thousands, except shares)	Mar. 31, 2006			Sept. 30, 2005
Common stock, $1 par value, 80,000,000 shares authorized, 46,479,536 shares issued	$	46,479		$	46,479
Paid-in capital		457,015			455,336
Retained earnings		409,499			337,715
Accumulated other comprehensive loss, net of taxes		(4,629	)		(3,773	)
Total	$	908,364		$	835,757

NOTE 6. COMPREHENSIVE INCOME

     The tables below reflect the components of “Comprehensive income” for the three and six months ended March 31, 2006 and 2005 for WGL Holdings, Inc. and Washington Gas Light Company. Items that are excluded from “Net income” and charged directly to “Common shareholders’ equity” are accumulated in “Other comprehensive loss, net of taxes.” The amount of “Accumulated other comprehensive loss, net of taxes” is included in “Common shareholders’ equity” (refer to Note 5—Common Shareholders’ Equity).

WGL Holdings, Inc.
Components of Comprehensive Income

	Three Months Ended					Six Months Ended
	March 31,					March 31,
(In thousands)	2006		2005			2006			2005
Net income (applicable to common stock)	$	56,883	$	79,946		$	101,269		$	123,078
Other comprehensive loss, net of taxes—minimum pension liability adjustment		—		(971	)		(856	)		(971	)
Comprehensive income	$	56,883	$	78,975		$	100,413		$	122,107

Washington Gas Light Company
Components of Comprehensive Income

	Three Months Ended					Six Months Ended
	March 31,					March 31,
(In thousands)	2006		2005			2006			2005
Net income (before preferred stock dividends)	$	60,072	$	75,065		$	105,131		$	115,247
Other comprehensive loss, net of taxes—minimum pension liability adjustment		—		(971	)		(856	)		(971	)
Comprehensive income	$	60,072	$	74,094		$	104,275		$	114,276

NOTE 7. EARNINGS PER SHARE

     Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Diluted EPS assumes the issuance of common shares pursuant to stock-based compensation plans at the beginning of the applicable period (see Note 8—Stock-Based Compensation). The following table reflects the computation of the Company’s basic and diluted EPS for WGL Holdings for the three and six months ended March 31, 2006 and 2005.

12

`

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

Basic and Diluted EPS

	Net				Per Share
(In thousands, except per share data)	Income		Shares		Amount
Three Months Ended March 31, 2006
Basic EPS:
Net income	$	56,883		48,760	$	1.17
Stock-based compensation plans		—		153		—
Diluted EPS:
Net income	$	56,883		48,913	$	1.16
Three Months Ended March 31, 2005
Basic EPS:
Net income	$	79,946		48,688	$	1.64
Stock-based compensation plans		—		308		—
Diluted EPS:
Net income	$	79,946		48,996	$	1.63
Six Months Ended March 31, 2006
Basic EPS:
Net income	$	101,269		48,750	$	2.08
Stock-based compensation plans		—		153		—
Diluted EPS:
Net income	$	101,269		48,903	$	2.07
Six Months Ended March 31, 2005
Basic EPS:
Net income	$	123,078		48,679	$	2.53
Stock-based compensation plans		—		288		—
Diluted EPS:
Net income	$	123,078		48,967	$	2.51

     For both the three- and six-month periods ended March 31, 2006, the Company had weighted average stock options outstanding totaling 364,000 shares that were not included in the calculation of diluted EPS as their effect would be anti-dilutive.

NOTE 8. STOCK-BASED COMPENSATION

     The Company has granted share-based awards in the form of stock options and performance shares under its shareholder-approved 1999 Incentive Compensation Plan, as amended and restated (1999 Plan). The 1999 Plan allows the Company to issue up to 2,000,000 shares of common stock to persons designated by the Human Resources Committee of the Board of Directors, including officers and key employees. For performance shares, the Company imposes performance goals based on certain market conditions, which if unattained, may result in no performance shares being earned for the applicable performance period. Performance shares granted under the 1999 Plan generally vest over three years from the date of grant. At the end of the associated vesting period, the number of common shares issued related to performance shares depends upon the Company’s achievement of performance goals for total shareholder return relative to a selected peer group of companies. The Company also has granted stock options under the 1999 Plan at the market value of the Company’s common stock on the date of grant. The Company’s stock options generally have a vesting period of three years, and expire ten years from the date of grant.

     Both stock option and performance share awards provide for accelerated vesting upon change in control. Additionally, the stock options provide for accelerated vesting upon retirement, death or

13

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

disability. The Company generally issues new shares of common stock in order to satisfy stock issuances related to both stock options and performance shares; however, the Company may, from time to time, repurchase shares of its common stock on the open market in order to satisfy these issuances.

     For the three and six months ended March 31, 2006, the Company recognized total stock-based compensation expense of $1.3 million and $2.7 million, respectively, along with related income tax benefits of $493,000 and $1.1 million respectively, in accordance with SFAS No. 123 (revised) which was adopted by the Company effective October 1, 2005 (refer to Note 1—Accounting Policies). For the three and six months ended March 31, 2005, the Company recognized total stock-based compensation expense of $823,000 and $1.9 million, respectively, along with related income tax benefits of $288,000 and $653,000, respectively, in accordance with APB Opinion No. 25.

     As of March 31, 2006, there was $6.9 million of total unrecognized compensation expense related to share-based awards granted under the 1999 Plan. Performance shares and stock options comprised $5.1 million and $1.8 million of total unrecognized compensation expense, respectively. The total unrecognized compensation expense is expected to be recognized over a weighted average period of 1.9 years, which comprises 2.0 years and 1.8 years for performance shares and stock options, respectively. During the six months ended March 31, 2006 and 2005, the Company paid $1.0 million and $415,000, respectively, related to taxes withheld for the issuance of share-based awards. No such payments were made during the three months ended March 31, 2006 and 2005.

     Performance Shares

     The following table summarizes information regarding performance share activity under the 1999 Plan during the three and six months ended March 31, 2006:

Performance Share Activity

	Three Months Ended				Six Months Ended
	March 31, 2006				March 31, 2006
			Weighted					Weighted
			Average					Average
	Number of		Grant-Date		Number of			Grant-Date
	Shares(1)		Fair Value		Shares(1)			Fair Value
Non-vested and outstanding, beginning of period		328,083	$	30.50		308,012		$	27.87
Granted		—		—		108,251		$	32.62
Vested		—		—		(88,180	)	$	23.91
Cancelled/forfeited		—		—		—			—
Non-vested and outstanding, end of period		328,083	$	30.50		328,083		$	30.50

⁽¹⁾ The number of common shares issued related to performance shares may range from zero to 200 percent of the number of shares shown in the table above based on the Company’s achievement of performance goals for total shareholder return relative to a selected peer group of companies.

     The total intrinsic value of performance shares vested during the six months ended March 31, 2006 and 2005 was $2.6 million and $1.0 million, respectively. No performance shares vested during the three months ended March 31, 2006 and 2005. Performance shares non-vested and outstanding at the end of the period had a weighted average remaining contractual term of 1.5 years.

     The Company measures compensation expense related to performance shares based on the fair value of these awards at their date of grant. Compensation expense for performance shares is recognized for awards that ultimately vest, and is not adjusted based on the actual achievement of

14

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

performance goals. The Company estimated the fair value of performance shares on the date of grant using a Monte Carlo simulation model based on the following assumptions:

Fair Value Assumptions

	Six Months Ended
	March 31,
	2006			2005
Expected stock-price volatility		17.63	%		21.64	%
Dividend yield		4.10	%		4.60	%
Risk-free interest rate		4.23	%		1.71	%
Weighted average fair value of performance shares granted during the period	$	32.62		$	29.62

     Expected stock-price volatility is based on the daily historical volatility of the Company’s common shares for the past three fiscal years as of the valuation date. The dividend yield represents the Company’s annualized dividend yield on its market price at September 30, 2005 and 2004. The risk-free interest rate is based on the zero-coupon U.S. Treasury bond, with a term equal to the three-year contractual term of the performance shares.

     Stock Options

     The following table summarizes information regarding stock option activity under the 1999 Plan during the six months ended March 31, 2006. There was no stock option activity during the three months ended March 31, 2006.

Stock Option Activity
	Six Months Ended March 31, 2006
					Weighted
			Weighted		Average
	Number		Average		Remaining		Aggregate
	Of		Exercise		Contractual		Intrinsic Value
	Options		Price		Term (in years)		(in thousands)
Outstanding, beginning of period		1,293,831	$	26.76
Granted		357,742	$	32.13
Exercised		—		—
Cancelled/forfeited		—		—
Outstanding, end of period		1,651,573	$	27.93		7.32	$	4,119
Exercisable, end of period		584,677	$	25.32		5.12	$	2,984

     There were no exercises of stock options during the three and six months ended March 31, 2006. The Company received $285,000 related to the exercise of stock options during the three and six months ended March 31, 2005.

     The Company measures compensation expense related to stock options based on the fair value of these awards at their date of grant. Compensation expense for stock options is recognized for awards that ultimately vest. The Company estimated the fair value of stock options on the date of grant using the Black-Scholes option-pricing model based on the following assumptions:

15

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

Fair Value Assumptions

	Six Months Ended
	March 31,
	2006			2005
Expected stock-price volatility		22.07	%		21.64	%
Dividend yield		4.1	%		4.6	%
Risk-free interest rate		4.26	%		1.71	%
Expected option term	6.5 years			3 years
Weighted average fair value of stock options granted during the period	$	5.51		$	3.07

     Expected stock-price volatility is based on the daily historical volatility of the Company’s common shares over a period that approximates the expected term of the stock options. The dividend yield represents the Company’s annualized dividend yield on its market price at September 30, 2005 and 2004. The risk-free interest rate is based on the zero-coupon U.S. Treasury bond, with a term equal to the expected term of the stock options. The expected option term is based on the Company’s historical experience with respect to stock option exercises and expectations about future exercises.

NOTE 9. DERIVATIVE AND WEATHER-RELATED INSTRUMENTS

     DERIVATIVE INSTRUMENTS

     Regulated Utility Operations

     Washington Gas enters into forward contracts and other related transactions for the purchase of natural gas that qualify as derivative instruments under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138,Accounting for Certain Derivative Instruments and Certain Hedging Activitiesand SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities(collectively referred to as “SFAS No. 133”). As of March 31, 2006 and September 30, 2005, such contracts had a net fair value loss of $4.7 million and a net fair value gain of $18.2 million, respectively. Of the March 31, 2006 amount, $5.0 million represented a fair value loss that was recorded on the balance sheet as a payable, with a corresponding amount recorded as a regulatory asset. This was partially offset by a $317,000 fair value gain that was recorded as a receivable, with a corresponding amount recorded as a regulatory liability. Of the September 30, 2005 amount, $19.9 million represented a fair value gain that was recorded on the balance sheet as a receivable, with a corresponding amount recorded as a regulatory liability. This was partially offset by a $1.7 million fair value loss that was recorded on the balance sheet as a payable, with a corresponding amount recorded as a regulatory asset. This accounting is in accordance with regulatory accounting requirements for recoverable or refundable costs.

     Washington Gas utilizes derivative instruments that are designed to minimize the risk of interest-rate volatility associated with planned issuances of MTNs. In July 2005, Washington Gas entered into two forward-starting swaps with an aggregate notional principal amount of $50.0 million. At September 30, 2005, these swaps had a fair value gain totaling $106,000 that was recorded as a receivable with a corresponding amount recorded as a regulatory liability. In conjunction with the issuance of $25.0 million of 5.17 percent MTNs on January 18, 2006 (refer to Note 4—Long-Term Debt), Washington Gas terminated $25.0 million of the total $50.0 million aggregate notional principal amount of the forward-starting swaps. Washington Gas received $182,000 associated with the settlement of this hedge agreement. Similarly, in conjunction with the issuance of $25.0 million of 5.70 percent MTNs on January 18, 2006 (refer to Note 4—Long-Term Debt), Washington Gas agreed to terminate the remaining $25.0 million notional principal amount of the forward-starting swaps.

16

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

Washington Gas received $104,000 associated with the settlement of this hedge agreement.

     In February 2006, Washington Gas entered into a forward-starting swap with a notional principal amount of $25.0 million. In conjunction with the issuance of $25.0 million of 5.78 percent MTNs on March 22, 2006 (refer to Note 4—Long-Term Debt), Washington Gas terminated this swap and received $303,000 associated with the settlement of this hedge agreement. The amounts received upon settlement of these three swaps were recorded as regulatory liabilities, and are being amortized in accordance with regulatory requirements.

     Non-Utility Operations

     The Company’s non-regulated retail energy-marketing subsidiary, WGEServices, enters into contracts for the sale and purchase of natural gas that qualify as derivative instruments under SFAS No. 133. WGEServices also enters into other derivative instruments (primarily in the form of call options, put options and swap contracts) related to the sale and purchase of natural gas. WGEServices’ derivative instruments are recorded at fair value on the Company’s consolidated balance sheets. Changes in the fair value of these various derivative instruments are reflected in the earnings of the retail energy-marketing segment. At September 30, 2005, these derivative instruments were recorded on the Company’s consolidated balance sheets as fair value gains of $5.4 million. No amounts related to these derivative instruments were recorded as of March 31, 2006. In connection with these derivative instruments, WGEServices recorded pre-tax losses of $807,000 and $4.9 million for the three and six months ended March 31, 2006, respectively. WGEServices recorded a pre-tax gain of $1.5 million and a pre-tax loss of $643,000 for the three and six months ended March 31, 2005, respectively.

     Consolidated Operations

     The following table summarizes the balance sheet classification for all derivative instruments with open positions for both WGL Holdings and Washington Gas.

Balance Sheet Classification of Open Positions on Derivative Instruments

	WGL Holdings				Washington Gas
	Mar. 31,		Sep. 30,		Mar. 31,		Sep. 30,
(in millions)	2006		2005		2006		2005
Assets
Current assets—Accounts receivable	$	0.3	$	15.8	$	0.3	$	15.8
Other current assets		—		5.5		—		0.1
Deferred charges and other assets—Other		—		4.1		—		4.1
Total assets	$	0.3	$	25.4	$	0.3	$	20.0
Liabilities
Accounts payable and other accrued liabilities	$	1.0	$	1.7	$	1.0	$	1.7
Deferred credits — Other		4.0		—		4.0		—
Total liabilities	$	5.0	$	1.7	$	5.0	$	1.7

17

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

     WEATHER-RELATED INSTRUMENTS

     Regulated Utility Operations

     Washington Gas has both a weather insurance policy and heating degree day (HDD) derivative that are used to mitigate the negative financial effects of warmer-than-normal weather. These weather-related instruments are accounted for under the guidelines issued by the Emerging Issues Task Force (EITF) of the FASB in Issue No. 99-2. Benefits are recognized to the extent actual HDDs fall below the contracted HDDs for each instrument. Premium expense is being amortized based on the pattern of normal HDDs over the period of the terms of the respective weather-related instruments.

     Prior to October 1, 2005, Washington Gas maintained a weather insurance policy covering all of its jurisdictions designed to cover 50 percent of the impact of warmer-than-normal weather on its financial results. This policy expired on September 30, 2005.

     During the three and six months ended March 31, 2006, Washington Gas recorded accrued benefits, net of premium costs, of $3.5 million (or $2.1 million after income taxes) and $3.2 million (or $2.0 million after income taxes), respectively, related to both its weather insurance policy and weather derivative. Washington Gas recorded premium expense of $2.4 million (or $1.5 million after income taxes) and $3.9 million (or $2.4 million after income taxes) during the three and six months ended March 31, 2005, respectively, related to the expired weather insurance policy. The premium expense and any benefits that are derived from the weather insurance policy and HDD derivative are not considered in establishing the retail rates of the regulated utility. Accordingly, Washington Gas records all expenses and benefits related to these weather-related instruments as “Non-utility operating expenses (income)” in the Statements of Income.

     Non-Utility Operations

     WGEServices also holds HDD derivatives that are used to manage its risk for natural gas customers who participate in a program that allows them to pay a fixed amount for their gas requirements regardless of the amount of gas consumed, and to manage other weather-related risks. These hedges cover a portion of WGEServices’ estimated net revenue exposure to variations in HDDs. These contracts pay WGEServices a fixed dollar amount for every HDD over a specified level during the calculation period. Similar to Washington Gas’ weather-related instruments, these contracts are accounted for under the guidelines issued by EITF Issue No. 99-2. For the three and six months ended March 31, 2006, the Company recorded, net of premium costs, a pre-tax loss of $2.2 million (or $1.4 million after income taxes) and $2.0 million (or $1.2 million after income taxes), related to these hedges, respectively. For the three and six months ended March 31, 2005, the Company recorded, including premium costs, a pre-tax loss of $96,000 (or $59,000 after income taxes) and $249,000 (or $154,000 after income taxes) related to these hedges, respectively.

NOTE 10. OPERATING SEGMENT REPORTING

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

     With approximately 91 percent of WGL Holdings’ consolidated total assets, the regulated utility segment is the Company’s core business and comprises Washington Gas and Hampshire. The regulated utility segment, through Washington Gas, provides regulated gas distribution services (including the sale and delivery of natural gas, meter reading, responding to customer inquiries, bill preparation and the construction and maintenance of its natural gas distribution system) to customers primarily in Washington, D.C. and the surrounding metropolitan areas in Maryland and Virginia. In addition to the regulated operations of Washington Gas, the regulated utility segment includes the operations of Hampshire, an underground natural gas storage company that is regulated under a cost of service tariff by the Federal Energy Regulatory Commission (FERC), and provides services exclusively to Washington Gas.

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

     Certain activities of the Company are not significant enough on a stand-alone basis to warrant

18

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

treatment as an operating segment and the activities do not fit into one of the segments contained in the Company’s financial statements. For purposes of segment reporting, these activities are aggregated in the category “Other Activities” of the Company’s non-utility operations as presented below in the Operating Segment Financial Information. These activities are included in the Consolidated Statements of Income in the appropriate lines, revenues and expenses in “Non-Utility Operations.”

     The same accounting policies applied in preparing the Company’s consolidated financial statements also apply to the reported segments. While net income or loss is the primary criterion for measuring a segment’s performance, the Company also evaluates its operating segments based on other relevant factors, such as return on invested capital.

     The Statements of Income of Washington Gas, the regulated utility, report all transactions that are part of that legal entity, Washington Gas Light Company. Some of these transactions are not subject to a jurisdictional rate case and these types of transactions are reported as part of the “Non-Utility Operations” section in the Statements of Income to distinguish them from transactions included in the rate regulated model. In segment reporting, however, such transactions may be included in the “Regulated Utility” section of the Operating Segment Financial Information if the transactions relate to that segment. For example, the financial effects of weather insurance or a weather derivative that are not considered in connection with the determination of base rates of the regulated utility in a regulatory proceeding is not included in the caption “Utility Operating Income” in the Statements of Income, but the financial impact is included below in the operating results of the “Regulated Utility” section of the Operating Segment Financial Information. The following tables present operating segment information for the three and six months ended March 31, 2006 and 2005.

19

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

Operating Segment Financial Information

				Non-Utility Operations
	Regulated			Retail Energy-						Other
(In thousands)	Utility			Marketing			HVAC			Activities			Total			Eliminations			Consolidated
Three Months Ended March 31, 2006
Total Revenues	$	712,809		$	356,066		$	8,411		$	295		$	364,772		$	(7,153	)	$	1,070,428
Operating Expenses:
Depreciation and Amortization		23,097			82			21			—			103			—			23,200
Other Operating Expenses(a)		581,625			357,575			9,525			1,024			368,124			(7,153	)		942,596
Income Tax Expense (Benefit)		36,560			(1,050	)		(445	)		(146	)		(1,641	)		—			34,919
Total Operating Expenses		641,282			356,607			9,101			878			366,586			(7,153	)		1,000,715
Operating Income (Loss)		71,527			(541	)		(690	)		(583	)		(1,814	)		—			69,713
Interest Expense — Net		11,374			1,055			—			1,268			2,323			(994	)		12,703
Other Non-Operating Income (Expense)(b)		(169	)		—			3			1,363			1,366			(994	)		203
Dividends on Washington Gas Preferred Stock		330			—			—			—			—			—			330
Net Income (Loss) (Applicable to Common Stock)	$	59,654		$	(1,596	)	$	(687	)	$	(488	)	$	(2,771	)	$	—		$	56,883
Total Assets	$	2,661,344		$	303,475		$	24,682		$	169,425		$	497,582		$	(246,589	)	$	2,912,337
Capital Expenditures/Investments	$	36,205		$	125		$	26		$	—		$	151		$	—		$	36,356
Three Months Ended March 31, 2005
Total Revenues	$	644,636		$	285,918		$	8,343		$	319		$	294,580		$	(9,410	)	$	929,806
Operating Expenses:
Depreciation and Amortization		21,418			61			34			—			95			—			21,513
Other Operating Expenses(a)		491,847			275,889			8,750			1,111			285,750			(9,410	)		768,187
Income Tax Expense (Benefit)		45,747			3,807			(168	)		(255	)		3,384			—			49,131
Total Operating Expenses		559,012			279,757			8,616			856			289,229			(9,410	)		838,831
Operating Income (Loss)		85,624			6,161			(273	)		(537	)		5,351			—			90,975
Interest Expense — Net		10,683			385			—			491			876			(361	)		11,198
Other Non-Operating Income (Expense)(b)		29			9			17			805			831			(361	)		499
Dividends on Washington Gas Preferred Stock		330			—			—			—			—			—			330
Net Income (Loss) (Applicable to Common Stock)	$	74,640		$	5,785		$	(256	)	$	(223	)	$	5,306		$	—		$	79,946
Total Assets	$	2,543,800		$	199,208		$	26,243		$	92,205		$	317,656		$	(145,602	)	$	2,715,854
Capital Expenditures/Investments	$	21,724		$	337		$	20		$	—		$	357		$	—		$	22,081

(a)	Includes cost of gas and electricity, and revenue taxes.
(b)	Amounts reported are net of applicable income taxes.

20

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

Operating Segment Financial Information

				Non-Utility Operations
	Regulated			Retail Energy-						Other
(In thousands)	Utility			Marketing			HVAC			Activities			Total			Eliminations			Consolidated
Six Months Ended March 31, 2006
Total Revenues	$	1,317,794		$	652,851		$	19,485		$	425		$	672,761		$	(10,801	)	$	1,979,754
Operating Expenses:
Depreciation and Amortization		46,057			162			44			—			206			—			46,263
Other Operating Expenses(a)		1,079,272			653,153			21,688			1,589			676,430			(10,801	)		1,744,901
Income Tax Expense (Benefit)		64,541			(771	)		(1,161	)		(147	)		(2,079	)		—			62,462
Total Operating Expenses		1,189,870			652,544			20,571			1,442			674,557			(10,801	)		1,853,626
Operating Income (Loss)		127,924			307			(1,086	)		(1,017	)		(1,796	)		—			126,128
Interest Expense — Net		22,696			1,480			—			1,732			3,212			(1,223	)		24,685
Other Non-Operating Income (Expense)(b)		(144	)		—			(32	)		1,885			1,853			(1,223	)		486
Dividends on Washington Gas Preferred Stock		660			—			—			—			—			—			660
Net Income (Loss) (Applicable to Common Stock)	$	104,424		$	(1,173	)	$	(1,118	)	$	(864	)	$	(3,155	)	$	—		$	101,269
Total Assets	$	2,661,344		$	303,475		$	24,682		$	169,425		$	497,582		$	(246,589	)	$	2,912,337
Capital Expenditures/Investments	$	71,911		$	633		$	113		$	—		$	746		$	—		$	72,657
Six Months Ended March 31, 2005
Total Revenues	$	1,056,862		$	491,206		$	17,202		$	613		$	509,021		$	(12,685	)	$	1,553,198
Operating Expenses:
Depreciation and Amortization		43,614			116			68			—			184			—			43,798
Other Operating Expenses(a)		807,410			474,065			18,350			1,917			494,332			(12,689	)		1,289,053
Income Tax Expense (Benefit)		69,183			6,510			(452	)		(435	)		5,623			—			74,806
Total Operating Expenses		920,207			480,691			17,966			1,482			500,139			(12,689	)		1,407,657
Operating Income (Loss)		136,655			10,515			(764	)		(869	)		8,882			4			145,541
Interest Expense — Net		21,357			634			1			828			1,463			(591	)		22,229
Other Non-Operating Income (Expense)(b)		(195	)		12			77			1,127			1,216			(595	)		426
Dividends on Washington Gas Preferred Stock		660			—			—			—			—			—			660
Net Income (Loss) (Applicable to Common Stock)	$	114,443		$	9,893		$	(688	)	$	(570	)	$	8,635		$	—		$	123,078
Total Assets	$	2,543,800		$	199,208		$	26,243		$	92,205		$	317,656		$	(145,602	)	$	2,715,854
Capital Expenditures/Investments	$	47,573		$	397		$	90		$	—		$	487		$	—		$	48,060

(a)	Includes cost of gas and electricity, and revenue taxes.
(b)	Amounts reported are net of applicable income taxes.

NOTE 11. RELATED PARTY TRANSACTIONS

     WGL Holdings and its subsidiaries engage in transactions among each other during the ordinary course of business. Intercompany transactions and balances have been eliminated from the consolidated financial statements of WGL Holdings.

     Washington Gas provides accounting, treasury, legal and other administrative and general support to affiliates, and has filed consolidated tax returns that include affiliated taxable transactions. The actual costs of these services are billed to the appropriate affiliates and to the extent such billings are not yet paid, they are reflected in “Receivables from associated companies” on the Washington Gas Balance Sheets. Washington Gas 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

21

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

processes, Washington Gas collects cash on behalf of affiliates and transfers the cash as quickly as reasonably possible. Cash collected by Washington Gas on behalf of its affiliates but not yet transferred is recorded in “Payables to associated companies” on the Washington Gas Balance Sheets. These transactions recorded by Washington Gas impact the balance sheet only.

     At March 31, 2006 and September 30, 2005, the Washington Gas Balance Sheets reflected a receivable from associated companies of $1.7 million and $8.1 million, respectively. At March 31, 2006 and September 30, 2005, the Washington Gas Balance Sheets reflected a payable to associated companies of $68.6 million and $18.6 million, respectively.

     Additionally, Washington Gas provides gas balancing services related to storage, injections, withdrawals and deliveries to all energy marketers participating in the sale of natural gas on an unregulated basis through the customer choice programs that operate in its service territory. These balancing services include the sale of natural gas supply commodities related to various peaking arrangements contractually supplied to Washington Gas and then partially allocated and assigned by Washington Gas to the energy marketers, including WGEServices. Washington Gas records revenues for these balancing services pursuant to tariffs approved by the appropriate regulatory bodies. In conjunction with such services and the related sales and purchases of natural gas, Washington Gas charged WGEServices, an affiliated energy marketer, $7.2 million and $9.4 million for the three months ended March 31, 2006 and 2005, respectively. In the six months ended March 31, 2006 and 2005, the charges were $10.8 million and $12.7 million, respectively. These related party amounts have been eliminated in the consolidated financial statements of WGL Holdings.

NOTE 12. COMMITMENTS AND CONTINGENCIES

     REGULATED UTILITY OPERATIONS

     Operating Issues in Prince George’s County, Maryland

     On April 1, 2005, Washington Gas announced that it would address a significant increase in the number of natural gas leaks on its distribution system in a portion of Prince George’s County, Maryland. Washington Gas retained an international engineering consulting firm to determine the cause for the increase in leaks in the affected area of Prince George’s County. Based on the work of the consultant, there is a combination of three contributing factors to the higher leak rates of seals on couplings. However, the factor that is unique to the affected area is the change in the gas composition resulting from a change in the gas supply arising from the reactivation of the Dominion Cove Point (Dominion or Cove Point) liquefied natural gas (LNG) terminal owned by Dominion Resources, Inc. The gas from the Cove Point terminal has a lower concentration of heavy hydrocarbons (HHCs) than domestic natural gas. The Company learned from the consultant’s work that a characteristic of the rubber material comprising the seals in the couplings is the ability of the seals to both adsorb and desorb HHCs. When seals are exposed to higher levels of HHCs, they swell in size and cause a tighter seal. However, when gas, such as the gas from the Cove Point terminal is introduced and it has a lower level of HHCs, the seals shrink in size and there is a greater propensity for those seals to cause the couplings to leak.

     Also considered as potentially contributing factors to a higher failure rate for seals of this nature are the age of the couplings and the colder ground temperature during the winter. However, both the age of the couplings and the ground temperature are common to couplings in other areas of Washington Gas’ service territory where leak patterns have not been observed like those in the affected area of Prince George’s County. Thus, in management’s opinion, the relevant change that explains the higher incidence of leaks in the affected area of Prince George’s County is the composition of the gas resulting from the introduction of gas from the Cove Point terminal.

22

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

     Given the increase in the number of natural gas leaks, Washington Gas announced that it would replace gas service lines and rehabilitate gas mains that contain the applicable mechanical couplings in the affected area of the distribution system in Prince George’s County (the rehabilitation project) by the end of December 2007. The rehabilitation project is currently expected to cost $144 million. This cost estimate could differ materially from the actual costs incurred for the work associated with the project. As a result of the receipt of an Accounting Order dated June 1, 2005 from the Public Service Commission of Maryland (PSC of MD), the Company is capitalizing all costs of encapsulating certain couplings on mains with respect to this rehabilitation project. This phase represents less than 10% of the total estimated cost of the rehabilitation project. However, the receipt of the order from the PSC of MD is not determinative of the ratemaking treatment, and the PSC of MD retains jurisdiction to adopt any ratemaking treatment it deems appropriate.

     Management of Washington Gas considers the cost of the rehabilitation project described above necessary to provide safe and reliable utility service. Management anticipates that costs such as these eventually will be recognized in the ratemaking process as reasonable. Washington Gas has not yet requested recovery of the costs. However, Washington Gas is considering the effect of these capital expenditures on its ability to earn its allowed rate of return in Maryland, and is evaluating the most appropriate options to enable full and timely recovery of, and return on, the amounts to be expended. There can be no assurance at this time that recovery in rates will be allowed or at what point in time such recovery may begin to be reflected in rates. If Washington Gas is unable to recover from customers through the regulatory process all or some of these costs and its authorized rate of return on these costs, this could have a significant adverse effect on the Company’s financial condition, results of operations and cash flows.

     Washington Gas has examined potential approaches that will enable it to protect against the effect of the introduction of gas from the Cove Point LNG terminal on its distribution system in both the affected area of Prince George’s County and on other areas of its distribution system where additional volumes of gas from the Cove Point terminal may flow in the future if the Cove Point terminal is allowed to expand its capacity and output. The current cost estimate of the $144 million rehabilitation project discussed above does not consider any costs that have been incurred to date or that will potentially be incurred associated with implementing any of these actions. Based upon the scientific evidence available to date Washington Gas constructed the facilities necessary to inject HHCs into the gas stream at the gate station that exclusively receives gas from the Cove Point terminal and serves the affected area of Prince George’s County, Maryland where the increase in gas leaks has been observed. This facility became operational in January 2006 at a cost of approximately $3.2 million. Washington Gas is planning the construction of up to as many as eight additional HHC injection facilities at other points on its gas distribution system in contemplation of the expansion in the amount of gas that will be received from the Cove Point terminal in the future.

23

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

     Currently, Washington Gas is collecting the cost of HHCs in its purchased gas charge in Maryland and the District of Columbia from its sales customers, and will file in those jurisdictions to include the cost of HHCs in bills of marketers who serve delivery service customers in those jurisdictions. Washington Gas is not collecting the cost allocable to Virginia customers associated with the injection of HHCs at the gate station where this process became operational in January 2006, and will need to request recovery of these costs through a formal filing with the State Corporation Commission of Virginia (SCC of VA).

     Rate Case Contingencies

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

     District of Columbia Jurisdiction

     In a March 28, 2003 Final Order, the Public Service Commission of the District of Columbia (PSC of DC) upheld a previous ruling that approved, among other things, a methodology for sharing with customers 50 percent of annual ground lease and development fee revenues that Washington Gas received from Maritime Plaza, a commercial development project constructed on land owned by Washington Gas. On May 23, 2003, the District of Columbia Office of the People’s Counsel (DC OPC) filed an appeal with the District of Columbia Court of Appeals (DC Court of Appeals) seeking to overturn this portion of the March 28, 2003 ruling by the PSC of DC. On March 18, 2004, the DC Court of Appeals ordered, among other things, the PSC of DC to provide an explanation of its decision to approve the allocation methodology for sharing with customers the ground lease and development fee revenues attributable to the Maritime Plaza development project. The PSC of DC issued a subsequent order requiring both the DC OPC and Washington Gas to file testimony addressing the allocation issue. On October 12, 2004, Washington Gas filed testimony before the PSC of DC that it believes supports the allocation methodology that was approved in the PSC of DC’s initial order. The DC OPC filed opposing testimony on the same date. Rebuttal testimony was filed on November 19, 2004 by the DC OPC and Washington Gas. The PSC of DC issued a Final Order on April 4, 2005 that required Washington Gas and the DC OPC to file supplemental testimony on April 25, 2005. The PSC of DC held a one-day evidentiary hearing on October 25, 2005. Washington Gas and the DC OPC filed initial briefs on December 2, 2005 and reply briefs on December 23, 2005. Management cannot predict the final outcome of this matter; however, it believes that the likely outcome will not have a material impact on Washington Gas’ financial statements.

     Maryland Jurisdiction

     On August 8, 2005, the PSC of MD approved an unopposed Stipulation and Agreement (Stipulation), filed by Washington Gas and three other participants and accepted by the PSC of MD. The Stipulation resolved outstanding issues from a Final Order previously issued by the PSC of MD regarding the manner in which interruptible transportation service is charged to Maryland customers. The Stipulation also requested approval by the PSC of MD of a revenue normalization adjustment (RNA) mechanism, a 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. The Stipulation also allows for the impact of the RNA on Washington Gas’ risk and rate of return to be evaluated in the next rate case. The RNA became effective on October 1, 2005. Washington Gas’ net income for the three and six months ended March 31, 2006 includes the effect of the RNA.

     Washington Gas underwent a routine review of its gas costs that were billed to customers in Maryland from September 2003 through August 2004. Each year, the PSC of MD reviews the annual gas costs collected from customers to determine if Washington Gas’ purchased gas costs are not justified because: (1) Washington Gas failed to show that the charges were based solely on increased

24

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

costs of purchased gas; (2) Washington Gas failed to follow competitive practices in purchasing natural gas; or (3) Washington Gas failed to show that its practices in procuring and purchasing natural gas were reasonable. On March 14, 2006, a Hearing Examiner of the PSC of MD issued a proposed order approving purchased gas charges of Washington Gas for the twelve-month period ending August 2004, except for $4.6 million of such charges that the Hearing Examiner recommended be disallowed because, in the opinion of the Hearing Examiner, they were not reasonably and prudently incurred. Washington Gas filed a Notice of Appeal on April 12, 2006 and a Memorandum on Appeal on April 21, 2006 with the PSC of MD, asserting that the Hearing Examiner’s recommendation is without merit. Reply memorandums must be filed by May 11, 2006 and the PSC of MD is expected to issue a final order after that date. During the second quarter of fiscal year 2006, Washington Gas accrued a liability of $4.6 million (pre-tax) related to the proposed disallowance of these purchased gas charges.

     Virginia Jurisdiction

     On December 18, 2003, the SCC of VA issued a Final Order in response to an application filed by Washington Gas on June 14, 2002 to increase annual revenues in Virginia. In connection with this Final Order, the SCC of VA ordered Washington Gas to reduce its rate base related to net utility plant by $28 million, which is net of accumulated deferred income taxes of $14 million, and to establish an equivalent regulatory asset that the Company has done for regulatory accounting purposes only. This regulatory asset represents the difference between the accumulated reserve for depreciation recorded on the books of Washington Gas and a theoretical reserve that was derived by the Staff of the SCC of VA (VA Staff) as part of its review of Washington Gas’ depreciation rates, less accumulated deferred income taxes. This regulatory asset is being amortized, for regulatory accounting purposes only, as a component of depreciation expense over 32 years pursuant to the Final Order. The SCC of VA provided for both a return on, and a return of, this regulatory asset established for regulatory accounting purposes.

     In approving the treatment described in the preceding paragraph, the SCC of VA further ordered that an annual “earnings test” be performed to determine if Washington Gas has earned in excess of its allowed rate of return on common equity for its Virginia operations. The current procedure for performing this earnings test does not normalize the actual return on equity for the effect of weather over the applicable twelve-month period. To the extent that Washington Gas earns in excess of its allowed return on equity in any annual earnings test period, Washington Gas is required to increase depreciation expense (after considering the impact of income tax benefits) and increase the accumulated reserve for depreciation for the amount of the actual earnings in excess of the earnings produced by the 10.50 percent allowed return on equity. Under the SCC of VA’s requirements for performing earnings tests, if weather is warmer than normal in a particular annual earnings test period, Washington Gas is not allowed to restore any amount of earnings previously eliminated as a result of this earnings test. These annual earnings tests will continue to be performed until the $28 million difference between the accumulated reserve for depreciation recorded on Washington Gas’ books and the theoretical reserve derived by the VA Staff, net of accumulated deferred income taxes, is eliminated or the level of the regulatory asset established for regulatory accounting purposes is adjusted as a result of a future depreciation study.

     In accordance with a September 27, 2004 SCC of VA approved Stipulation involving Washington Gas and other participants, Washington Gas is required to file with the SCC of VA annual earnings test calculations based on a twelve-month period ended December 31; such calculations are being estimated by Washington Gas quarterly, and when appropriate, accounting adjustments are being recorded.

     On October 19, 2005, the VA Staff filed a report with the SCC of VA in connection with Washington Gas’ earnings test for the twelve-month period ended December 31, 2004. The VA

25

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

Staff’s report concluded that Washington Gas did not earn in excess of its allowed return on equity during this period, and recommended that Washington Gas not be required to record any additional depreciation expense related to its earnings for the twelve-month period ended December 31, 2004. On November 28, 2005, the SCC of VA issued a Final Order that concurred with the VA Staff’s recommendation. On April 28, 2006, Washington Gas filed an earnings test for the twelve months ended December 31, 2005. The regulated utility’s filing, which is subject to review by the applicable parties within the SCC of VA, did not indicate that Washington Gas earned in excess of its allowed return on equity during the period of the earnings test.

     NON-UTILITY OPERATIONS

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

     Financial Guarantees

     WGL Holdings has guaranteed payments primarily for certain purchases of natural gas and electricity made by WGEServices. At March 31, 2006, these guarantees totaled $313.3 million. Termination of these guarantees is coincident with the satisfaction of all obligations of WGEServices covered by the guarantees. WGL Holdings also issued guarantees totaling $5.0 million at March 31, 2006 that were made on behalf of certain of its non-utility subsidiaries associated with their banking transactions. Of the total guarantees of $318.3 million, $3.0 million, $10.0 million and $600,000 are due to expire on December 31, 2006, June 30, 2007 and February 29, 2008, respectively. The remaining guarantees of $304.7 million do not have specific maturity dates. For all of its financial guarantees, WGL Holdings may cancel any or all future obligations imposed by the guarantees upon written notice to the counterparty, but WGL Holdings would continue to be responsible for the obligations that had been created under the guarantees prior to the effective date of the cancellation.

     Electric Supplier Contingency

     WGEServices owns no electric generation assets and, through March 31, 2006, received a portion of its electric supply to serve its retail customers under full requirements supply contracts. WGEServices’ principal supplier of electricity under full requirements supply contracts is Mirant Energy Trading LLC (MET) (formerly known as Mirant Americas Energy Marketing, L.P.), which is a wholly owned subsidiary of Mirant Corporation (Mirant). On July 14, 2003, Mirant and substantially all of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. MET, through its predecessor, was included in these bankruptcy filings. On January 3, 2006, Mirant and its subsidiaries emerged from bankruptcy. WGEServices and MET have a contract including provisions that allow WGEServices to net payables to MET against any damages that may result from default on the part of MET, and allow WGEServices to request collateral under certain situations. At September 30, 2005, WGEServices held cash deposits as collateral totaling $18.3 million related to supplier risks for electric purchase transactions under this contract. This cash collateral was refunded in the second quarter of fiscal year 2006 when market conditions reduced the collateral requirement. As of March 31, 2006, WGEServices held a small letter of credit as collateral.

     ACI Contingency

     As previously reported, ACI was engaged in an arbitration proceeding with a general contractor. In the proceeding, ACI claimed that it was wrongfully terminated in January 2003 from completing work on behalf of the general contractor, and sought recovery of its accounts receivable. In the same

26

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

matter, the general contractor made a counterclaim against ACI for costs that it incurred to complete the project and legal fees. On January 30, 2006, the arbitration panel found that the termination of ACI was wrongful and that the general contractor should pay ACI $960,000. Consolidated net income for the six months ended March 31, 2006, reflect the effect of the decision of the arbitration panel. Amounts recorded for the six months ended March 31, 2006 related to this matter were not material to the Company’s consolidated results of operations.

NOTE 13. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

     The following tables show the components of net periodic benefit costs (income) recognized in the Company’s financial statements during the three and six months ended March 31, 2006 and 2005:

Components of Net Periodic Benefit Costs (Income)

	Three Months Ended						Three Months Ended
	March 31, 2006						March 31, 2005
										Health and
	Pension			Health and			Pension			Life
(In thousands)	Benefits			Life Benefits			Benefits			Benefits
Components of net periodic benefit costs (income)
Service cost	$	2,627		$	2,558		$	2,538		$	2,590
Interest cost		9,292			5,456			9,197			5,758
Expected return on plan assets		(12,659	)		(3,570	)		(12,942	)		(3,311	)
Recognized prior service cost		576			—			560			—
Recognized actuarial loss		839			2,580			290			2,223
Amortization of transition obligation-net		—			363			—			1,436
Net periodic benefit cost (income)		675			7,387			(357	)		8,696
Amount capitalized as construction costs		(101	)		(707	)		126			(1,074	)
Amount deferred as regulatory asset/liability-net		(1,012	)		(177	)		(881	)		(420	)
Other		(27	)		—			(48	)		(24	)
Amount charged (credited) to expense	$	(465	)	$	6,503		$	(1,160	)	$	7,178

27

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

Components of Net Periodic Benefit Costs (Income)

	Six Months Ended						Six Months Ended
	March 31, 2006						March 31, 2005
	Pension			Health and			Pension			Health and
(In thousands)	Benefits			Life Benefits			Benefits			Life Benefits
Components of net periodic benefit costs (income)
Service cost	$	5,253		$	5,116		$	5,077		$	5,180
Interest cost		18,585			10,912			18,394			11,517
Expected return on plan assets		(25,318	)		(7,140	)		(25,883	)		(6,622	)
Recognized prior service cost		1,152			—			1,120			—
Recognized actuarial loss		1,679			5,159			579			4,445
Amortization of transition obligation-net		—			726			—			2,872
Net periodic benefit cost (income)		1,351			14,773			(713	)		17,392
Amount capitalized as construction costs		19			(1,737	)		257			(2,189	)
Amount deferred as regulatory asset/liability-net		(2,024	)		(354	)		(1,733	)		(883	)
Other		(67	)		—			(83	)		11
Amount charged (credited) to expense	$	(721	)	$	12,682		$	(2,272	)	$	14,331

     During fiscal year 2006, the Company has not made, and does not expect to make any contributions related to its qualified, trusteed, non-contributory defined benefit pension plan covering all active and vested former employees of Washington Gas.

     During the six months ended March 31, 2006, the Company paid $612,000 on behalf of participants in its non-funded supplemental executive retirement plan, and expects to pay an additional $764,000 for the remainder of fiscal year 2006.

     For the six months ended March 31, 2006, the Company contributed $15.1 million to its healthcare and life insurance benefit plans, and expects to contribute an additional $14.8 million for the remainder of fiscal year 2006.

     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 Washington Gas charges in the District of Columbia. These differences are recorded as regulatory assets or liabilities and will be reflected as adjustments to customer bills in future rate proceedings.

28

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

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

• WGL Holdings-This section describes the financial condition and results of operations of WGL Holdings, Inc. (WGL Holdings or the Company) and its subsidiaries on a consolidated basis. It includes discussions of WGL Holdings’ regulated utility and non-utility operations. The majority of WGL Holdings’ operations are derived from the results of its regulated utility, Washington Gas Light Company (Washington Gas or the regulated utility) and, to a much lesser extent, the results of its non-utility operations. These unregulated, non-utility operations are wholly owned by Washington Gas Resources Corporation, a wholly owned subsidiary of WGL Holdings. For more information on the Company’s regulated utility operations, please refer to the Management’s Discussion for Washington Gas.

• Washington Gas-This section describes the financial condition and results of operations of Washington Gas, a wholly owned subsidiary that comprises the majority of WGL Holdings’ regulated utility segment. The financial condition and results of operations of Washington Gas’ utility operations and WGL Holdings’ regulated utility segment are essentially the same.

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

     Unless otherwise noted, earnings per share amounts are presented herein on a diluted basis, and are based on weighted average common and common equivalent shares outstanding. The Company’s operations are seasonal and, accordingly, the Company’s operating results for the interim periods presented herein are not indicative of the results to be expected for the full fiscal year. The earnings per share of any segment does not represent a direct legal interest in the assets and liabilities allocated to any one segment, but rather represents a direct equity interest in WGL Holdings’ assets and liabilities as a whole.

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 Washington, D.C. and the surrounding metropolitan areas in Maryland and Virginia. WGL Holdings has three primary operating segments that are described below.

     Regulated Utility.The Company’s core subsidiary, Washington Gas, delivers natural gas to retail customers in accordance with tariffs approved by the District of Columbia, Maryland and Virginia regulatory commissions that have jurisdiction over Washington Gas’ rates. These rates are intended to provide the regulated utility with an opportunity to earn a just and reasonable rate of return on the

29

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)

investment devoted to the delivery of natural gas to customers. Washington Gas also sells natural gas to customers who have not elected to purchase natural gas from unregulated third-party marketers. The regulated utility does not earn a profit or incur a loss when it sells the natural gas commodity because utility customers are charged for the natural gas commodity at the same cost the regulated utility incurs.

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

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

     Key Indicators of Financial Condition and Operating Performance

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

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

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

PRIMARY FACTORS AFFECTING WGL HOLDINGS AND WASHINGTON GAS

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

• weather conditions and weather patterns;

• regulatory environment and regulatory decisions;

• availability of natural gas supplies and interstate pipeline transportation and storage capacity;

• natural gas prices and the prices of competing fuels such as oil, propane and electricity;

30

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)

• changes in natural gas usage resulting from improved appliance efficiencies and the effect of changing natural gas prices;

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

• the level of capital expenditures for adding new customers and replacing facilities worn beyond economic repair;

• the ability of the Company to manage and control the effects of receiving gas from the Cove Point LNG terminal into its natural gas distribution system;

• new or changed laws and regulations;

• competitive environment;

• environmental matters;

• industry consolidation;

• economic conditions and interest rates;

• inflation/deflation;

• labor contracts, including labor and benefit costs; and

• changes in accounting principles.

     For a further discussion of the Company’s business, operating segments and the factors listed above, refer to Management’s Discussion within the combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2005. 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 these factors affecting WGL Holdings and Washington Gas.

CRITICAL ACCOUNTING POLICIES

     Preparation of financial statements and related disclosures in compliance with Generally Accepted Accounting Principles in the United States of America (GAAP) requires the selection and the application of appropriate technical accounting rules to the relevant facts and circumstances of the Company’s operations, as well as the use of estimates by management to compile the consolidated financial statements. The application of these accounting policies involves judgment regarding estimates and projected outcomes of future events, including the likelihood of success of particular regulatory initiatives or challenges, the likelihood of realizing estimates for legal and environmental contingencies, and the probability of recovering costs and investments in both the regulated utility and non-utility operations.

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

• accounting for unbilled revenue and cost of gas recognition;

• accounting for regulatory operations – regulatory assets and liabilities;

• accounting for income taxes;

• accounting for contingencies;

• accounting for derivative instruments; and

31

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)

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

     For a description of these critical accounting policies, refer to Management’s Discussion within the combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2005, and Management’s Discussion contained herein.

     Adoption of SFAS No. 123 (revised).Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),Share-Based Payment, which replaces SFAS No. 123, and supersedes Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employeesand SFAS No. 148,Accounting for Stock-Based Compensation-Transition and Disclosure. Under SFAS No. 123 (revised), the Company measures and records compensation expense for both its stock options and performance share awards based on their fair value at the date of grant. Prior to October 1, 2005, the Company had accounted for its share-based awards in accordance with SFAS No. 123, as amended, which permitted the Company to apply APB Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. In accordance with APB Opinion No. 25, the Company did not record in its financial statements compensation expense related to its stock option grants. The Company did record compensation expense over the requisite service period related to its performance shares awarded based on the market value of the Company’s common stock at the end of each reporting period.

     As permitted by SFAS No. 123 (revised), the Company used the modified prospective method of adopting the new accounting standard; accordingly, financial results for the prior period presented have not been retroactively adjusted to reflect the effects of SFAS No. 123 (revised). In accordance with SFAS No. 123 (revised), the Company recognized total stock-based compensation expense of $1.3 million and $2.7 million for the three and six months ended March 31, 2006, respectively, along with related income tax benefits of $493,000 and $1.1 million respectively. For the three and six months ended March 31, 2005, the Company recognized total stock-based compensation expense of $823,000 and $1.9 million, respectively, along with related income tax benefits of $288,000 and $653,000, respectively, in accordance with APB Opinion No. 25.

     To value its stock options under SFAS No. 123 (revised), the Company continues to use the Black-Scholes model that was previously used for disclosure purposes under SFAS No. 123, as amended. The Company uses a Monte Carlo simulation model to value its performance shares under SFAS No. 123 (revised), as they contain market conditions based on total shareholder return compared to a peer group.

     As of March 31, 2006, there was $6.9 million of total unrecognized compensation expense related to share-based awards granted under the 1999 Plan. This cost is expected to be recognized over a weighted average period of 1.9 years. Refer to Notes 1 and 8 of the Notes to Consolidated Financial Statements for a further discussion of the Company’s share-based awards.

32

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

WGL HOLDINGS, INC.

     RESULTS OF OPERATIONS – Three Months Ended March 31, 2006 vs. March 31, 2005

     Summary Results

     WGL Holdings, Inc. reported net income of $56.9 million, or $1.16 per share, for the three months ended March 31, 2006, the second quarter of the Company’s fiscal year 2006. This compares to net income reported of $79.9 million, or $1.63 per share, reported for the three months ended March 31, 2005. For the twelve-month periods ended March 31, 2006 and 2005, the Company earned a return on average common equity of 8.6 percent and 10.9 percent, respectively.

     Net income for the second quarter of fiscal year 2006, when compared to the same quarter of the prior fiscal year, reflects:(i)lower earnings from the Company’s retail energy-marketing business and other non-utility operations;(ii)warmer weather;(iii)lower consumption of natural gas by utility customers due to factors other than weather, such as customer conservation;(iv)a charge of $4.6 million (pre-tax) recorded by the regulated utility segment in the second quarter of fiscal year 2006 related to a proposed regulatory order recommending the disallowance of certain purchased natural gas costs incurred by the regulated utility and billed to customers in a prior fiscal year; and(v)higher utility operation and maintenance, depreciation and amortization, general taxes and interest expenses. The following items favorably affected earnings for the current period:(i)continued utility customer growth;(ii)the application of a new regulatory mechanism known as a Revenue Normalization Adjustment (RNA) that was implemented in Maryland on October 1, 2005, and other weather protection strategies used by the regulated utility to manage the effect of warmer-than-normal weather and(iv)increased earnings from greater carrying costs on higher balances of storage gas inventory at the regulated utility.

     Regulated Utility Operating Results

     The operating results of the Company’s core regulated utility segment are the primary influence on consolidated operating results. The regulated utility segment reported net income of $59.7 million, or $1.22 per share, for the three months ended March 31, 2006, as compared to net income of $74.6 million, or $1.52 per share, reported for the same quarter of the prior fiscal year. This comparison primarily reflects a 98.7 million therm, or 15.7 percent, decrease in natural gas deliveries to firm customers that fell to 528.2 million therms delivered during the second quarter of fiscal year 2006 due to warmer weather. Weather, as measured by heating degree days (HDDs), was 14.6 percent warmer in the second quarter of fiscal year 2006 than in the same quarter of the prior fiscal year. Weather was 8.9 percent warmer than normal during the current quarter, as compared to 6.9 percent colder than normal during the comparable quarter of the prior fiscal year. Natural gas deliveries to firm customers for the second quarter of fiscal year 2006, when compared to the same quarter of the prior fiscal year, also reflect lower consumption of natural gas by customers due to factors other than weather, such as customer conservation. Mitigating the negative financial effects of warmer-than-normal weather and lower non-weather related consumption of natural gas during the current quarter were:(i)the regulated utility’s application of the Maryland RNA and other weather protection strategies, as discussed below;(ii) the addition of 20,691 active customer meters since the end of the same quarter of the prior fiscal year; and(iii)$2.7 million (pre-tax) of increased earnings from greater carrying costs on a higher balance of storage gas inventory that was primarily the result of higher natural gas prices.

     The effects of warmer-than-normal weather in the current quarter were substantially eliminated by the Company’s various weather protection strategies. Prior to October 1, 2005, the Company

33

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

managed weather risk for all jurisdictions of the regulated utility with a weather insurance policy designed to protect against 50 percent of the effects of warmer-than-normal weather. That policy expired on September 30, 2005. Commencing in fiscal year 2006, the Company began utilizing the following new mechanisms to manage weather risk:(i)the RNA billing mechanism implemented in Maryland on October 1, 2005 after prior approval by the Public Service Commission of Maryland (PSC of MD) (refer to the section entitled“Regulatory Matters”included herein);(ii)a weather insurance policy for the District of Columbia effective October 1, 2005; and(iii)a weather derivative in Virginia effective December 18, 2005 (refer to the section entitled“Market Risk – Weather Risk”included herein).

     The RNA is a 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 certain other factors such as customer conservation. Deliveries to Maryland customers represent approximately 40 percent of therms delivered by the regulated utility segment. Periods of colder-than-normal weather generally would cause the Company to reduce “Utility net revenues” and establish a refund liability to customers, while the opposite would generally result during periods of warmer-than-normal weather. Accordingly, the warmer-than-normal weather during the second quarter of fiscal year 2006 resulted in an increase in “Utility net revenues,” and the recording of a receivable from customers to reflect the regulated utility’s protection from warmer-than-normal weather and factors other than weather, such as customer conservation, that are covered under the RNA mechanism.

     The weather insurance policy and the weather derivative utilized in the District of Columbia and Virginia, respectively, are also designed to provide full protection from the negative financial effects of warmer-than-normal weather. The regulated utility segment benefited $3.6 million (after-tax) in the current quarter, when compared to the same quarter of the prior fiscal year, from the net benefits derived from both the regulated utility’s weather insurance and the weather derivative. These benefits, which are net of related premium costs, are reported on the Consolidated Statements of Income within the line item entitled “Non-Utility Operations—Operating Expenses” for the quarters ended March 31, 2006 and 2005.

     As discussed above, the regulated utility’s weather protection strategies are designed to provide full protection from the negative financial effects of warmer-than-normal weather. Unlike the Maryland RNA, these weather protection products do not address colder-than-normal consequences of weather and thus the Company is able to retain the benefits of colder-than-normal weather in any fiscal year. The financial effect of this strategy is calculated based on cumulative weather experienced from the beginning of the fiscal year. Accordingly, the financial effects of weather on a quarterly basis may not correlate with the HDDs experienced in a particular quarter. Results for the second quarter of fiscal year 2006 illustrate these effects in that net income for the current quarter included an estimated $1 million (after-tax), or $0.02 per share, reduction in earnings in relation to normal weather, reflecting a partial adjustment to the colder-than-normal weather benefit recorded during the first quarter of fiscal year 2006. Colder-than-normal weather for the three months ended March 31, 2005 enhanced net income for that period in relation to normal weather by an estimated $5 million (after-tax), or $0.10 per share.

     Utility net revenues of the regulated utility segment were unfavorably affected by a charge of $4.6 million (pre-tax) recorded in the second quarter of fiscal year 2006 to reflect a proposed order for the disallowance of certain purchased natural gas costs incurred by the regulated utility and billed to Maryland customers from September 2003 through August 2004. Disallowance of these costs was recommended by a Hearing Examiner of the PSC of MD on March 14, 2006, in connection with its annual review of the regulated utility’s purchased natural gas costs. The Company currently is appealing the proposed order before the PSC of MD asserting that the recommendation is without

34

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

merit (refer to the section entitled“Regulatory Matters”included herein).

     The second quarter of fiscal year 2006 for the regulated utility segment reflects a $6.6 million (pre-tax) increase in operation and maintenance expenses. Principally contributing to the increase in these expenses were $1.4 million of increased labor and incentive costs which primarily reflect higher labor rates, as well as higher accruals for equity-based compensation pursuant to a new accounting standard that became effective on October 1, 2005 (refer to the section entitled“Critical Accounting Policies”included herein). The current quarter also reflects $1.2 million of higher employee benefits costs primarily related to increased group insurance, $1.3 million of increased costs associated with information technology projects, $534,000 of higher expenses for uncollectible accounts partially due to the effects of higher revenues related to higher natural gas costs, and other miscellaneous items. Results from the regulated utility segment also reflect higher depreciation and amortization expense, higher general taxes and increased interest expense that, together, reduced pre-tax income by $3.2 million.

     Non-Utility Operating Results

     The Company’s non-utility operations, principally comprised of the results of the Company’s unregulated, energy-marketing and the HVAC segments, reported a net loss of $2.8 million, or $0.06 per share, for the three months ended March 31, 2006, as compared to net income of $5.3 million, or $0.11 per share, for the same quarter of the prior fiscal year. The following table compares the financial results from non-utility activities for the three months ended March 31, 2006 and 2005.

Net Income (Loss) Applicable to Non-Utility Activities

	Three Months Ended
	March 31,
(In thousands)	2006			2005			Variance
Retail energy-marketing	$	(1,596	)	$	5,785		$	(7,381	)
Commercial HVAC		(687	)		(256	)		(431	)
Subtotal		(2,283	)		5,529			(7,812	)
Other non-utility activities		(488	)		(223	)		(265	)
Total	$	(2,771	)	$	5,306		$	(8,077	)

     Retail Energy-Marketing.WGL Holdings’ retail energy-marketing subsidiary, WGEServices, sells natural gas and electricity in competition with other unregulated marketers to residential, commercial and industrial customers. WGEServices reported a net loss of $1.6 million, or $0.03 per share, for the second quarter of fiscal year 2006, as compared to net income of $5.8 million, or $0.12 per share, reported for the same quarter in fiscal year 2005. The year-over-year decline in earnings for this business primarily reflects lower gross margins from the sale of natural gas, which was partially offset by the reversal of expenses in the current quarter of $3.1 million (pre-tax), or $0.04 per share, related to certain fees assessed by a regulatory body that were accrued in prior fiscal years and higher gross margins from the sale of electricity.

     Lower gross margins from the sale of natural gas reflect lower gross margins per therm, coupled with a 6.7 percent decrease in natural gas sales volumes primarily due to warmer weather in the current quarter relative to the same quarter of the prior fiscal year. The lower gross margins per therm resulted, in part, from a larger number of commercial customers entering into long-term, fixed-price contracts during the first quarter of fiscal year 2006 compared to the same period in the prior year. Natural gas costs incurred for these contracts in the second quarter of the current fiscal year

35

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

were high in relation to the sales prices associated with the contracts, causing a compression in gross margins in the current quarter in relation to the prior year. Gross margins recognized on fixed-price sales contracts vary over their term as such margins are based on the spread between the fixed sales price billed each month and the monthly fluctuating commodity cost. Over the life of these contracts, positive margins are expected to be realized. Lower gross margins from natural gas sales for the current quarter also reflect increased mark-to-market losses and the cost of weather hedges that are associated with certain contracts used to hedge risks associated with the volatility in the price of natural gas and the volumes being sold. The increase in these mark-to-market losses and hedges in the current quarter decreased net income by $2.7 million (after-tax).

     Favorably affecting the operating results of the energy-marketing segment for the three months ended March 31, 2006 was the reversal of certain administrative fees that were previously assessed by the Public Service Commission of the District of Columbia (PSC of DC). The energy-marketing segment, which recorded these assessments as an expense in prior fiscal years, protested its payment of these fees. On March 9, 2006, the energy-marketing segment received a favorable court decision from its appeal regarding the payment of these fees in which the court decided that the energy-marketing business is entitled to a refund. Accordingly, the energy-marketing segment benefited $3.1 million (pre-tax) from its reversal in the current quarter of fees accrued as an expense in prior fiscal years.

     The operating results of the energy-marketing segment for the current three-month period also benefited slightly from higher gross margins from electric sales. The higher gross margins reflect an increase in the margin per kilowatt hour sold, partially offset by a decline in electric sales volumes due, in part, to a 16 percent decline in customers.

     Commercial HVAC.Two subsidiaries, American Combustion Industries, Inc. and Washington Gas Energy Systems, Inc., comprise the Company’s commercial HVAC operations. This operating segment reported a net loss of $687,000, or $0.01 per share, for the second quarter of fiscal year 2006, as compared to a net loss of $256,000, or $0.01 per share, reported for the same quarter in fiscal year 2005. The increased net loss is primarily attributable to $753,000 (pre-tax) of additional costs in the current quarter in connection with completing a large construction project.

     Other Non-Utility Activities. Transactions not significant enough to be reported as a separate business segment are aggregated as “Other Activities” and included as part of the Company’s non-utility operations. The operating results of other non-utility activities for the 2006 second quarter were relatively consistent with results for the comparable quarter of the prior fiscal year.

     Interest Expense

     The following table depicts the components of interest expense for the quarters ended March 31, 2006 and 2005.

36

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

Composition of Interest Expense

	Three Months Ended
	March 31,
(In thousands)	2006		2005		Variance
Long-term debt	$	10,305	$	10,492	$	(187	)
Short-term debt		2,071		634		1,437
Other (includes AFUDC*)		327		72		255
Total	$	12,703	$	11,198	$	1,505

* Represents the debt component of the Allowance for Funds Used During Construction.

     WGL Holdings’ interest expense of $12.7 million for the second quarter of fiscal year 2006 increased $1.5 million over the same quarter last year. This increase primarily reflects higher interest costs associated with short-term debt, reflecting an increase of almost 200 basis points in the weighted average cost of short-term debt, coupled with a higher average balance of short-term debt outstanding. Approximately 54 percent of the increase in interest expense resulted from the higher short-term debt requirements of the non-utility operations. The decline in interest expense on long-term debt is all attributable to the regulated utility segment, and reflects a lower embedded cost of debt resulting from refinancing a portion of previously outstanding amounts.

     RESULTS OF OPERATIONS – Six Months Ended March 31, 2006 vs. March 31, 2005

     Summary Results

     For the first six months of fiscal year 2006, the Company reported net income of $101.3 million, or $2.07 per share, as compared to net income of $123.1 million, or $2.51 per share, for the corresponding six-month period in fiscal year 2005. Year-over-year earnings comparisons reflect:(i)lower earnings from the Company’s retail energy-marketing business and other non-utility operations;(ii)warmer weather;(iii)lower consumption of natural gas by utility customers due to factors other than weather, such as customer conservation;(iv)a charge of $4.6 million (pre-tax) related to a proposed regulatory order recommending the disallowance of certain purchased natural gas costs by the regulated utility segment and(v)higher utility operation and maintenance, depreciation and amortization, general taxes and interest expenses. The following items favorably affected earnings for the current period:(i)continued utility customer growth;(ii)the favorable effects of the Maryland RNA and other weather protection strategies used by the regulated utility to manage the effect of warmer-than-normal weather and(iii)increased earnings from greater carrying costs on higher balances of storage gas inventory at the regulated utility.

     Regulated Utility Operating Results

     The regulated utility segment reported net income of $104.4 million, or $2.14 per share, for the six months ended March 31, 2006, as compared to net income of $114.4 million, or $2.34 per share, for the corresponding six-month period in fiscal year 2005. Natural gas deliveries to firm customers of 957.8 million therms for the six months ended March 31, 2006 were 6.2 percent lower than firm deliveries for the corresponding period in fiscal year 2005. The decline in these deliveries reflects 6.0 percent warmer weather in the current six-month period than in the comparable period of the prior fiscal year, as well as lower consumption of natural gas by customers due to factors other than weather, such as customer conservation. Weather was 1.5 percent warmer than normal during the current year-to-date period, as compared to 5.1 percent colder than normal during the corresponding period in the prior fiscal year. Mitigating the negative financial effects of warmer-than-normal weather and lower non-weather related consumption of natural gas during the current six-month period were:(i)the regulated utility’s application of the Maryland RNA and other weather protection strategies;(ii)the addition of 20,691 active customer meters since the end of the same quarter of the prior fiscal year;(iii)and $5.0 million (pre-tax) of increased earnings from greater carrying costs on a higher balance of storage gas inventory that was primarily the result of higher natural gas prices. Utility net

37

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

revenues for the first six months of the current fiscal year also reflect a charge of $4.6 million (pre-tax) recorded in the second quarter of fiscal year 2006 related to a proposed order of a Hearing Examiner in Maryland that recommends the disallowance of certain purchased natural gas costs incurred by the segment in a prior fiscal year (refer to the section entitled“Regulatory Matters”included herein).

     For the six months ended March 31, 2006, the negative financial effects of warmer weather and lower non-weather related natural gas consumption in Maryland were substantially eliminated by the regulated utility’s application of the RNA. Additionally, the application of the regulated utility’s weather insurance policy in the District of Columbia and weather derivative in Virginia eliminated substantially all of the effects of warmer-than-normal weather in those jurisdictions for the current year-to-date period. Net income for the six months ended March 31, 2006 increased by $4.4 million (after-tax) from the net benefits of both the weather insurance and weather derivative. These benefits, which are net of related premium costs, are reported on the Consolidated Statements of Income within the line item entitled “Non-Utility Operations—Operating Expenses” for the six months ended March 31, 2006 and 2005.

     As previously discussed, the application of the weather insurance and weather derivative can enhance net income when weather is colder than normal. The financial effects of the weather insurance and the weather derivative are calculated based on cumulative weather experienced from the beginning of the fiscal year. For the six months ended March 31, 2006, net income in relation to normal weather increased by an estimated $2.5 million (after-tax), or $0.05 per share, derived from the colder-than-normal weather experienced prior to the December 18, 2005 effective date of the Virginia weather derivative. Weather was colder than normal for the comparable six-month period in fiscal year 2005, contributing an estimated $5 million (after-tax), or $0.10 per share, to net income for that period.

     Earnings of the regulated utility segment for the first six months of fiscal year 2006 reflect an $11.1 million (pre-tax) increase in operation and maintenance expenses. Principally contributing to this increase was $3.3 million of higher expenses for uncollectible accounts, $1.8 million of increased labor and incentive costs and $1.6 million of increased expenses associated with information technology projects. Other drivers of the increase in operation and maintenance expenses were increased employee benefits and other miscellaneous items. Results from the regulated utility segment also reflect higher depreciation and amortization expense, higher general taxes and increased interest expense that, together, reduced pre-tax income by $5.6 million.

     Non-Utility Operating Results

     The Company’s non-utility operations reported a net loss of $3.2 million, or $0.07 per share, for the six months ended March 31, 2006, as compared to net income of $8.6 million, or $0.17 per share, reported for the corresponding period of the prior fiscal year. The following table compares the financial results from non-utility activities for the six months ended March 31, 2006 and 2005.

Net Income (Loss) Applicable to Non-Utility Activities

	Six Months Ended
	March 31,
(In thousands)	2006			2005			Variance
Retail energy-marketing	$	(1,173	)	$	9,893		$	(11,066	)
Commercial HVAC		(1,118	)		(688	)		(430	)
Subtotal		(2,291	)		9,205			(11,496	)
Other non-utility activities		(864	)		(570	)		(294	)
Total	$	(3,155	)	$	8,635		$	(11,790	)

38

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

          Retail Energy-Marketing.WGEServices reported a net loss of $1.2 million, or $0.02 per share, for the six months ended March 31, 2006, as compared to net income of $9.9 million, or $0.20 per share, reported for the same period in fiscal year 2005. The $11.1 million, or $0.22 per share, year-over-year decline in earnings primarily reflects a lower gross margin per therm of natural gas sold, that was partially offset by the reversal of expenses in the current period of $3.1 million (pre-tax), or $0.04 per share, related to certain administrative fees that were assessed by the PSC of DC and accrued in prior fiscal years.

     Lower gross margins from natural gas sales primarily reflect lower gross margins per therm that resulted, in part, from a larger number of commercial customers entering into long-term, fixed-price contracts during the first quarter of fiscal year 2006 when natural gas costs were relatively high compared to the same period in the prior fiscal year, causing a compression in gross margins. Lower gross margins from natural gas sales for the current six-month period also reflect increased mark-to-market losses and weather hedge costs associated with certain of its contracts used to hedge the volatility of natural gas prices and the volumes being sold, which decreased net income by $3.7 million (after-tax) for the six months ended March 31, 2006.

     Gross margins from electric sales declined during the current six-month period, reflecting a 33 percent decline in sales volumes that was partially offset by an increase in the margin per kilowatt hour sold. Due to the recent resetting of standard offer service electricity rates to market-based electric pricing in Maryland, Delaware and the District of Columbia, a significant rise in electric rates offered by regulated electric utilities will begin for both residential and commercial customers. WGEServices is positioned to offer attractive, competitive electric pricing to these customers, offering the energy-marketing business an opportunity to expand its customer base, volumes and profits while providing a cost savings to customers.

     Commercial HVAC.The commercial HVAC segment reported a net loss of $1.1 million, or $0.02 per share, for the six months ended March 31, 2006, as compared to a net loss of $688,000, or $0.02 per share, reported for the corresponding period in fiscal year 2005. The increased net loss is primarily attributable to $753,000 (pre-tax) of additional costs in the current quarter in connection with completing a large construction project.

     Interest Expense

     The following table depicts the components of interest expense for the six months ended March 31, 2006 and 2005.

Composition of Interest Expense

	Six Months Ended
	March 31,
(In thousands)	2006		2005		Variance
Long-term debt	$	20,527	$	20,998	$	(471	)
Short-term debt		3,468		1,227		2,241
Other (includes AFUDC*)		690		4		686
Total	$	24,685	$	22,229	$	2,456

* Represents the debt component of the Allowance for Funds Used During Construction.

     WGL Holdings’ interest expense of $24.7 million for the first six months of fiscal year 2006 increased $2.5 million from the same period last year. This increase primarily reflects higher interest costs associated with short-term borrowings due to an increase of over 200 basis points in the weighted average cost of these borrowings, coupled with a higher average balance of short-term debt

39

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

outstanding. Partially offsetting the increased short-term interest expense were reduced interest costs on long-term debt primarily due to a decrease in the embedded cost of these borrowings as a result of refinancing previously outstanding amounts.

     LIQUIDITY AND CAPITAL RESOURCES

     General Factors Affecting Liquidity

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

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

     The ability to procure sufficient levels of long-term capital at reasonable costs is determined by the level of the Company’s capital expenditure requirements, its financial performance, and the effect of these factors on its credit ratings and investment alternatives available to investors.

     The Company has a capital structure goal to maintain its common equity ratio in the mid-50 percent range of total consolidated capital. The level of this ratio varies during the fiscal year due to the seasonal nature of the Company’s business. This seasonality is also evident in the variability of the Company’s 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 the Company’s current assets is converted into cash at the end of the winter heating season. Accomplishing this capital structure objective and maintaining sufficient cash flow are necessary to maintain attractive credit ratings for the Company and Washington Gas, and to allow access to capital at reasonable costs. As of March 31, 2006, total consolidated capitalization, including current maturities of long-term debt and excluding notes payable, comprised 59.2 percent common equity, 1.7 percent preferred stock and 39.1 percent long-term debt. The cash flow requirements of the Company and the ability to provide satisfactory resources to satisfy those requirements are primarily influenced by the activities of Washington Gas and, to a lesser extent, the non-utility operations.

     The Company believes it has sufficient liquidity to satisfy its financial obligations. At March 31, 2006, the Company did not have any restrictions on its cash balances that would affect the payment of common or preferred stock dividends by WGL Holdings or Washington Gas.

     Gulf Coast Natural Gas Supply Issues

     During the late summer of 2005, the Gulf Coast region experienced a major disruption of natural gas production and processing due to hurricanes Katrina, Rita and Wilma. These natural gas production and processing disruptions resulted in a significant reduction of the normal 10 billion cubic

40

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

feet of natural gas per day available to be delivered from the Gulf Coast region. Historically, this region had supplied the majority of the natural gas that Washington Gas purchased and delivered through its contracted interstate pipeline services. As of May 3, 2006, the United States Department of the Interior, Minerals Management Service, reported that approximately 87 percent of the pre-hurricane natural gas production and processing from the Gulf region had become available to the wholesale market. Due to warmer-than-normal weather during the 2005-2006 winter heating season, and the availability of natural gas supply from alternative production areas, Washington Gas was able to meet its customers’ daily natural gas requirements. Storage gas inventory balances were maintained at adequate operational levels throughout the heating season. Washington Gas believes that through the combination of traditional summer replenishment of its storage resources, the various locations and diversity of natural gas supply sources that are available to Washington Gas, and the continued progress toward restoring supply from Gulf Coast producers and processors, the regulated utility should have sufficient sources of supply to meet its firm service obligations for the 2006-2007 winter heating season.

     WGEServices also purchases a portion of its natural gas supply from the Gulf Coast region. Purchase commitments from certain of WGEServices’ Gulf Coast-based natural gas suppliers were interrupted by the supply shortage in the Gulf Coast region in the immediate aftermath of the hurricanes. During the 2005-2006 winter heating season, all of WGEServices’ contracted natural gas supplies from the Gulf Coast region flowed as contracted, and WGEServices met its customers’ daily natural gas requirements and achieved its required storage inventory balances.

     As a result of market concerns about the sufficiency of the supply of natural gas and other factors during the winter of 2005-2006, the price of the natural gas commodity paid by the Company’s customers has risen sharply from levels experienced during the prior year’s winter heating season. During the first six months of fiscal year 2006, higher gas costs have increased customers’ bills dramatically. The increased bills are likely to cause increased difficulty for customers to pay their bills in a timely manner or, in certain situations, to be able to pay their bills. Higher gas costs were a major cause of the need for the Company and Washington Gas to finance a higher level of accounts receivable than in prior years. During the six months ended March 31, 2006, the Company incurred higher short-term debt levels and greater short-term debt costs to finance these receivables than would have been incurred absent these circumstances. It also has incurred a higher level of uncollectible accounts expenses. These trends are likely to continue in the future if gas costs remain relatively high.

     Short-Term Cash Requirements and Related Financing

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

     The Company’s retail energy-marketing subsidiary, WGEServices, has seasonal short-term cash requirements resulting from its need to purchase storage gas inventory in advance of the winter period during which the storage gas is sold. In addition, WGEServices must continually pay its suppliers of natural

41

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

gas and electricity before it collects its customer accounts receivable balances resulting from these sales. WGEServices derives its funding to finance these activities from short-term debt issued by WGL Holdings.

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

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

     The Company and Washington Gas utilize short-term debt in the form of commercial paper or unsecured short-term bank loans to fund seasonal requirements. The Company’s policy is to maintain back-up bank credit facilities in an amount equal to or greater than its expected maximum commercial paper position. As of March 31, 2006, WGL Holdings and Washington Gas each had revolving credit agreements with a group of commercial banks that expire on September 30, 2010. The credit facility for WGL Holdings permits it to borrow up to $275 million, and further permits the Company to request prior to September 30, 2009, and the banks to approve, an additional line of credit of $50 million above the original credit limit, for a maximum potential total of $325 million. The credit facility for Washington Gas permits it to borrow up to $225 million, and further permits Washington Gas to request prior to September 30, 2009, and the banks to approve, an additional line of credit of $100 million above the original credit limit, for a maximum potential total of $325 million. As of March 31, 2006, there were no outstanding borrowings under either the WGL Holdings or Washington Gas credit facilities.

     At March 31, 2006 and September 30, 2005, the Company had outstanding notes payable in the form of commercial paper totaling $161.8 million and $40.9 million, respectively. Included in these consolidated outstanding balances were $2.2 million and $10.4 million of commercial paper that was issued by Washington Gas at March 31, 2006 and September 30, 2005, respectively.

     Long-Term Cash Requirements and Related Financing

     The Company’s long-term cash requirements primarily depend upon the level of capital expenditures, long-term debt maturities and decisions to refinance long-term debt. Historically, the Company has devoted the majority of its capital expenditures to adding new regulated utility customers in its existing service area. However, as a result of recent operating issues in Prince George’s County, Maryland described later in Management’s Discussion, the Company forecasts a greater level of replacement capital expenditures over the next two years.

     On January 18, 2006, Washington Gas issued $25.0 million of 5.17 percent Medium-Term Notes (MTNs) due January 18, 2016, and $25.0 million of 5.70 percent MTNs due January 18, 2036. In conjunction with the

42

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

issuance of the 5.17 percent MTNs, Washington Gas received $182,000 associated with the settlement of a forward-starting swap that had a notional principal amount of $25.0 million. Similarly, in conjunction with the issuance of the 5.70 percent MTNs, Washington Gas received $104,000 associated with the settlement of a forward-starting swap that had a notional principal amount of $25.0 million (refer to the section entitled“Market Risk—Interest Rate Risk”included herein). The effective cost of the newly-issued debt, after considering the amount received related to the two forward-starting swaps and amortization of discounts related to the debt issuances, is 5.16 percent for the MTNs due 2016 and 5.72 percent for the MTNs due 2036. On February 15, 2006, Washington Gas used the combined cash proceeds from these debt issuances to retire $50.0 million of 6.15 percent MTNs through its exercise of call options.

     On March 22, 2006, Washington Gas issued $25.0 million of 5.78 percent MTNs due March 15, 2036. In conjunction with this issuance, Washington Gas received $303,000 associated with the settlement of a forward-starting swap that had a notional principal amount of $25.0 million (refer to the section entitled“Market Risk—Interest Rate Risk”included herein). Additionally, on March 22, 2006, Washington Gas paid $26.0 million, plus accrued interest, to retire $25.0 million of 7.31 percent MTNs that were due on October 30, 2007, by exercising a make-whole call feature that required Washington Gas to pay to the debt holder a call premium of $958,000 for redeeming the debt prior to its stated maturity date. This premium was recorded as a regulatory asset, and is being amortized in accordance with regulatory accounting requirements. The effective cost of the newly-issued debt, after considering the amount received related to the forward-starting swap, the amount paid related to the make-whole call premium and discounts related to the debt issuance, is 6.03 percent.

     At March 31, 2006, Washington Gas had capacity under a shelf registration that was declared effective by the Securities and Exchange Commission on April 24, 2003, to issue up to $77.5 million of long-term debt. On May 20, 2003, Washington Gas executed a Distribution Agreement with certain financial institutions for the issuance and sale of debt securities included in the shelf registration statement.

     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 occur at any time and affect WGL Holdings’ and Washington Gas’ cost of short-term and long-term debt and their access to the credit markets.

Credit Ratings for Outstanding Debt Instruments

	WGL Holdings, Inc.				Washington Gas
	Unsecured				Unsecured
	Medium-Term Notes		Commercial		Medium-Term		Commercial
Rating Service	(Indicative)*		Paper		Notes		Paper
Fitch Ratings		A+		F1	AA-			F1+
Moody’s Investors Service	Not Rated		Not Prime			A2		P-1
Standard & Poor’s Ratings Services**	AA-			A-1	AA-			A-1

*	Indicates the ratings that may be applicable if WGL Holdings were to issue unsecured medium-term notes.
**	This agency has held a negative outlook on the long-term debt ratings of WGL Holdings and Washington Gas since July 2, 2004.

     Cash Flows Used in Operating Activities

     The primary drivers for the Company’s operating cash flows are cash payments received from gas customers, offset by payments made by the Company for gas costs, operation and maintenance expenses, taxes and interest costs. Although long-term interest rates remain relatively low and the

43

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

Company has been able to take advantage of refinancing some long-term debt at lower interest rates, current interest expense reflects a steep rise in short-term debt interest rates.

     During the first six months of the Company’s fiscal year, the Company typically generates more net income than its annual net income (net losses are normally generated in the last six months of the fiscal year) due to the significant volumes of natural gas that are delivered by the regulated utility during the winter heating season. Variations in the level of net income reported for the fiscal six-month period ended March 31 may be significant because of the variability of weather and other related factors from one period in a year to the same period in the subsequent year. In the first six months of fiscal year 2006, increased conservation by customers reduced cash flows from operating activities. This condition could continue in the future. Generating large sales volumes during the six-month period ended March 31 increases accounts receivable from the level at September 30; likewise, accounts payable increases to pay providers of the natural gas commodity. Accounts payable for the natural gas commodity can also vary significantly from one period to the next because of the volatility in the price of natural gas. Storage gas inventories, which usually peak by November 1, are largely drawn down in the six months ended March 31, and provide a source of cash as this asset is used to satisfy winter sales demand. Gas costs due from or to customers and deferred purchased gas costs, which represent the difference between gas costs that have been paid to suppliers and what has been collected from customers, can also cause significant variations in operating cash flows from period to period.

     Net cash used in operating activities totaled $4.2 million for the first six months of fiscal year 2006. Net cash used in operating activities reflects, in part, a $21.8 million decline in net income applicable to common stock for the six months ended March 31, 2006, when compared to the same period of the prior fiscal year, as well as material changes in working capital from September 30, 2005 to March 31, 2006, as described below:

• Accounts receivable and accrued utility revenues increased $368.4 million, primarily due to the onset of the Company’s winter heating season and the increased sales that resulted during this period. These balances rose more than usual for the retail energy-marketing business which experienced relatively stable natural gas sales volumes, but a significant increase in natural gas commodity costs that resulted in increased prices billed to customers.

• Storage gas inventory levels decreased $108.2 million from September 30, 2005 as volumes were withdrawn to satisfy sales demand during the winter heating season. These balances declined less than expected from September 30, 2005 due to warmer-than-normal weather during this period that resulted in lower withdrawals to satisfy customer requirements.

• Accounts payable and accrued liabilities increased $53.3 million, largely attributable to an increase in the cost of the natural gas commodity, coupled with increased gas purchase volumes to match the increased sales demand.

• A decline in customer deposits and advance payments used $17.1 million of cash in the first six months of fiscal year 2006, primarily due to an $18.3 million refund of cash collateral held on behalf of an electricity supplier of WGEServices that emerged from bankruptcy and provided a different form of collateral (refer to the section entitled“Market Risk—Price Risk Related to Retail Energy-Marketing Operations” included herein). As of March 31, 2006, the Company held customer deposits, principally at the regulated utility, and reflected these deposits as current liabilities in the amount of $35.1 million. These deposits may be refunded to the depositor-customer at various times throughout the year contingent upon the customer’s payment habits. Other customers make new deposits that, from the Company’s perspective, tend to keep the overall balance of customer deposits relatively steady.

     Cash Flows Provided by Financing Activities

     Cash flows provided by financing activities totaled $88.2 million for the six months ended March 31, 2006. Notes payable increased $120.9 million due to increased working capital requirements. This increase in notes payable was slightly offset by common stock dividend payments totaling $32.4 million. Additionally during the first six-months of the current fiscal year, the Company refinanced $75.0 million of long-term debt with cash proceeds from the issuance of $75.0 million of lower-cost, long-term debt (refer to the section entitled “Liquidity and Capital Resources—Long-Term Cash Requirements and Related Financing” included herein).

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Item 2 — Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

     Cash Flows Used in Investing Activities

     During the six months ended March 31, 2006, cash flows used in investing activities totaled $74.8 million, $70.9 million of which were for capital expenditures made on behalf of the regulated utility.

     Capital Expenditures

     The Company has revised its five-year capital expenditures budget from $815.2 million, as reported in its Annual Report on Form 10-K for the fiscal year ended September 30, 2005, to a revised total of $826.9 million to be expended during fiscal years 2006 through 2010. While the revised five-year total capital expenditures projection primarily represents only a slight change from the originally reported estimate, the revised projection reflects a shift in the expected timing of certain expenditures from fiscal year 2006 to later fiscal years related to the Prince George’s County rehabilitation project and the construction of a new liquefied natural gas (LNG) storage facility, as discussed below.

     The following table depicts the Company’s revised capital expenditures budget for fiscal years 2006 through 2010.

Projected Capital Expenditures

	Fiscal Year Ending September 30,
(In millions)	2006		2007		2008		2009		2010		Total
New business	$	53.8	$	54.9	$	55.3	$	55.2	$	55.2	$	274.4
Replacements
Rehabilitation project		51.8		62.0		22.0		—		—		135.8
Other		19.2		31.8		30.5		35.9		37.2		154.6
LNG storage facility		20.6		48.6		22.6		0.7		—		92.5
Other		38.9		25.3		33.4		32.8		39.2		169.6
Total-accrual basis(a)	$	184.3	$	222.6	$	163.8	$	124.6	$	131.6	$	826.9

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

     The 2006 to 2010 projected period includes $274.4 million for continued growth to serve new customers, and $290.4 million primarily related to the replacement and betterment of existing capacity. Projected expenditures in fiscal years 2006 through 2008 related to replacements reflect $135.8 million of costs to be incurred which, along with $8.2 million of costs previously incurred in fiscal year 2005, represent an aggregate total of $144.0 million that are currently estimated to be expended in connection with a rehabilitation project in Prince George’s County, Maryland (refer to the section entitled“Contractual Obligations, Off-Balance Sheet Arrangements and Other Commercial Commitments – Operating Issues in Prince George’s County, Maryland”included herein).

     Projected expenditures also reflect $169.6 million of other expenditures, which includes general plant. Additionally, the projected period contains $92.5 million of capital expenditures to construct a necessary, new source of peak day capacity within the boundaries of the natural gas distribution system to support customer growth and pressure requirements on the entire natural gas distribution system that is needed at the beginning of the 2008-2009 winter heating season. Specifically, these estimated expenditures for the peaking facility are expected to be used to construct a one billion cubic foot LNG storage facility on the land used for former storage facilities by Washington Gas in Chillum, Maryland. Washington Gas’ proposed location for this peaking facility is being opposed by certain external parties. The Company cannot predict that this facility will be built as planned. However, Washington Gas has an

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Item 2 — Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

alternate plan to satisfy its customer requirements, that although significantly more expensive for customers, could be utilized to meet peak day demand requirements.

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

     Contractual Obligations

     WGL Holdings and Washington Gas have certain contractual obligations incurred in the normal course of business that require it 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, and certain natural gas and electricity commodity commitments.

     Reference is made to the“Contractual Obligations, Off-Balance Sheet Arrangements and Other Commercial Commitments”section of Management’s Discussion in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005, for a detailed discussion of these contractual obligations. Note 5 of the Notes to Consolidated Financial Statements in the Company’s 2005 Annual Report on Form 10-K includes a discussion of long-term debt, including debt maturities. Reference is made to Note 14 of the Notes to Consolidated Financial Statements in the Company’s 2005 Annual Report on Form 10-K that reflects information about the various contracts of Washington Gas and WGEServices. Additionally, refer to Note 12 of the Notes to Consolidated Financial Statements in this Form 10-Q.

     Financial Guarantees

     WGL Holdings has guaranteed payments primarily for certain purchases of natural gas and electricity on behalf of the retail energy-marketing segment. At March 31, 2006, these guarantees totaled $313.3 million. Termination of these guarantees is coincident with the satisfaction of all obligations of WGEServices covered by the guarantees. WGL Holdings also issued guarantees totaling $5.0 million outstanding as of March 31, 2006 that were made on behalf of certain of its non-utility subsidiaries associated with their banking transactions. For all of its financial guarantees, WGL Holdings may cancel any or all future obligations imposed by the guarantees upon written notice to the counterparty, but WGL Holdings would continue to be responsible for the obligations that had been created under the guarantees prior to the effective date of the cancellation.

Operating Issues in Prince George’s County, Maryland

     Description of Operating Issues and Related Causes.On April 1, 2005, Washington Gas announced that it would address a significant increase in the number of natural gas leaks on its distribution system in a portion of Prince George’s County, Maryland. Washington Gas retained a consultant, ENVIRON International Corporation (Environ), to determine the reason for the increase in leaks in the affected area of Prince George’s County. Based on the work conducted to date by Environ, there is a combination of three contributing factors to the higher leak rates of seals on couplings. However, the factor that is unique to the affected area is the change in the gas composition resulting from a change in the gas supply arising from the reactivation of the Dominion Cove Point (Dominion or Cove Point) LNG terminal owned by Dominion Resources, Inc. The Cove Point gas has a lower concentration of heavy hydrocarbons (HHCs) than domestic natural gas. The Company learned from the consultant’s work that a characteristic of the rubber material comprising the seals in the couplings is the ability of the seals to both adsorb and desorb HHCs. When seals are exposed to higher levels of HHCs, they swell in size and cause a tighter seal. However, when gas, such as the gas from the Cove Point terminal is introduced and it has a lower level of HHCs, the seals shrink in size and there is a greater propensity for those seals to cause the couplings to leak.

     Also considered as potential contributing factors to the higher leak rate by Environ for the seals is the age of the couplings and the colder ground temperature during the winter. However, both the age of the couplings and the colder ground temperatures are common to couplings in other areas of Washington Gas’ service territory where leak patterns have not been observed like those in the affected area of Prince George’s County. Thus, in management’s opinion, the relevant change that explains the higher incidence of leaks in the affected area of Prince George’s County is the composition of the gas resulting from the introduction of gas from the Cove Point LNG terminal.

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Item 2 – Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

     Washington Gas has continued to evaluate the causes and possible solutions related to the higher leak rate in the seals discussed above. Data and analyses continue to confirm that changes in gas composition explain the higher leak rates. A report by another independent consultant, Polymer Solutions, Inc., dated September 27, 2005, discussed and confirmed that changing gas composition has a significant effect on coupling seal materials. A new report from Environ, dated April 10, 2006, concluded in its testing of full component mechanical couplings removed from Washington Gas’ distribution system within the affected area of Prince George’s County that the seals on the couplings will shrink and swell with the exposure to the change in levels of HHCs between domestic natural gas and vaporized LNG. Testing will continue on full component couplings and coupling seal materials to observe and confirm leakage rate changes due to varying gas quality, and to attempt to determine optimum HHC injection rates necessary to maintain the integrity of the seals and return leak rates for the couplings to normal maintenance levels experienced before the introduction of gas coming from the Cove Point terminal.

     Given the increase in the number of natural gas leaks, Washington Gas announced that it would replace gas service lines and rehabilitate gas mains that contain the applicable mechanical couplings in the affected area of the distribution system in Prince George’s County (the rehabilitation project) by the end of December 2007. The rehabilitation project is currently expected to cost $144 million. Washington Gas’ planned capital expenditures for fiscal years 2006 through 2008 reflect the current cost estimate of the rehabilitation project. This cost estimate could differ materially from the actual costs incurred for the work associated with this project. However, Washington Gas believes it has the financial resources necessary to fund this project due to its current cash position, and the financing options it has available. As of April 30, 2006, Washington Gas had completed approximately 30 percent of the work related to the rehabilitation project, and is on schedule for completion some time late in calendar year 2007 or early in 2008.

     Management of Washington Gas considers the cost of the rehabilitation project described above necessary to provide safe and reliable utility service. Management anticipates that costs such as these eventually will be recognized in the ratemaking process as reasonable. Washington Gas has not yet requested recovery of the costs. However, Washington Gas is considering the effect of these capital expenditures on its ability to earn its allowed rate of return in Maryland, and is evaluating the most appropriate options to enable full and timely recovery of, and return on, the amounts to be expended. There can be no assurance at this time that recovery in rates will be allowed or at what point in time such recovery may begin to be reflected in rates. If Washington Gas is unable to recover from customers through the regulatory process all or some of these costs and its authorized rate of return on these costs, this could have a significant adverse effect on the Company’s financial condition, results of operations, and cash flows.

     Washington Gas has examined potential approaches that will enable it to protect against the effect of the introduction of gas from the Cove Point LNG terminal on its distribution system in both the affected area of Prince George’s County and on other areas of its distribution system where additional volumes of gas from the Cove Point terminal may flow in the future if the Cove Point terminal is allowed to expand its capacity and output. The current cost estimate of the $144 million rehabilitation project discussed above does not consider any costs that have been incurred to date or that will potentially be incurred associated with implementing any of these actions. Based upon the scientific evidence available to date, Washington Gas constructed the facilities necessary to inject HHCs into the gas stream at the gate station that exclusively receives gas from the Cove Point terminal and serves the affected area of Prince George’s County, Maryland where the increase in gas leaks has been observed. This facility became operational in January 2006 at a cost of approximately $3.2 million.

     Laboratory tests have been performed to determine if the injection of HHCs into the type of gas coming from the Cove Point terminal can be effective in preventing seals in couplings from leaking. Furthermore, since the injection facility became operational in January 2006, Washington Gas has been evaluating the effectiveness of this HHC injection process on the couplings under field conditions. As of April 30, 2006, testing had concluded that the HHCs being injected at this gate station remain in the gas stream and are carried throughout that portion of the distribution system where Washington Gas intends for them to flow. Leak data in the affected area of Prince George’s County continues to be collected and analyzed. While Washington Gas has observed a reduction in leak rates since HHC injection commenced at this facility in January 2006, there is not yet sufficient empirical evidence available at this time to draw definitive conclusions regarding the effectiveness of this injection process. Accordingly, Washington Gas plans to continue its rehabilitation efforts within the affected area in Prince George’s County, and to continue performing special leak surveys until there is appropriate evidence that the desired reduction in the leak rate of couplings has occurred. The Company will concurrently continue its gas conditioning initiative.

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

     Proposed Cove Point Expansion.In fiscal year 2005, Dominion (the applicant) requested authorization from the Federal Energy Regulatory Commission (FERC) to expand the capacity and output of its Cove Point LNG terminal. This proposed expansion, if approved, will result in a substantial increase of Cove Point gas introduced into the Washington Gas distribution system. This could increase the exposure of other areas within the Washington Gas distribution system to Cove Point gas that may be either minimally blended with domestic natural gas pipeline supply or completely unblended with any other gas, thereby potentially causing an increase in leaks on couplings in additional parts of the Washington Gas distribution system. To address this potential risk, Washington Gas has begun the planning necessary to construct facilities to inject HHCs at up to as many as eight additional gate stations in anticipation that more gas from the Cove Point terminal may begin flowing into the interconnected pipelines prior to or after 2008. Washington Gas anticipates that the next gate station injection facility will be operational by the spring of 2007.

     The estimated cost of each of the eight additional HHC injection facilities will range from an estimated $2 million to $3 million. Washington Gas expects that the cost of these facilities should be includible in the rate base upon which Washington Gas is allowed to earn an allowed rate of return. The estimated cost of these facilities does not include the cost of the purchase of HHCs which Washington Gas anticipates should be includible in its purchased gas charge or in operating expenses used to determine base rates. Currently, Washington Gas is collecting the cost of HHCs in its purchased gas charge in Maryland and the District of Columbia from its sales customers, and will file in those jurisdictions to include the cost of HHCs in bills of marketers who serve delivery service customers in those jurisdictions. Washington Gas is not collecting the cost allocable to Virginia customers associated with the injection of HHCs at the gate station where this process became operational in January 2006, and will need to request recovery of these costs through a formal filing with the State Corporation Commission of Virginia (SCC of VA).

     Washington Gas has not gathered enough evidence yet to conclude that the injection of HHCs into the gas distribution system will be effective in preventing additional leaks that may occur in the gas distribution system if additional volumes from the Cove Point terminal are introduced. The Company continues to gather and evaluate field and laboratory evidence about this gas conditioning initiative. Construction of these additional facilities may not be timely, permitted or feasible. If the facilities are constructed, the injection of additional HHCs may not be effective in preventing additional leaks on couplings in the gas distribution system. If the injection of HHCs into the gas distribution system is not effective in preventing additional leaks on couplings, Washington Gas will seek an acceptable and viable alternative to address this issue. If the planned actions of injecting HHCs are not successful in preventing additional leaks on couplings, and if the Company is not able to determine a satisfactory alternative solution on a timely basis, additional operating expenses and capital expenditures may be necessary to contend with the receipt of increased volumes of gas from the Cove Point LNG terminal into Washington Gas’ distribution system. These additional expenditures may not be recoverable or may not be recoverable on a timely enough basis from customers, or other parties. Therefore, these conditions could have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

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

     Notwithstanding Washington Gas’ current and potential future actions before its local regulatory commissions with respect to the recovery of costs related to the construction of the injection facilities and the purchase of HHCs, Washington Gas believes that any costs associated with the remediation related to the gas from the Cove Point LNG terminal should be the responsibility of the parties that are responsible for introducing gas from the Cove Point terminal into the interstate pipeline transmission system that is then introduced into the distribution system of Washington Gas. Therefore, as further discussed below, Washington Gas is pursuing certain remedies, and will pursue all remedies, it has before the FERC and other entities to assure that its customers are only paying their appropriate share of the costs of the remediation to maintain the safety of the Washington Gas distribution system. To the extent that Washington Gas receives approval and recovers costs from its retail customers for actions it has taken to maintain the safety and integrity of its distribution system, Washington Gas will apply any compensation received as a result of current or future actions before the FERC or against others, as an offset to future costs collected from retail customers.

     Request for FERC Action.Washington Gas is requesting the FERC to invoke its authority to require the applicant to demonstrate the safety and reliability of the Cove Point gas flowing through the Washington Gas distribution system. Washington Gas has specifically requested that the proposed expansion of the Cove Point LNG terminal be denied until the applicant has shown that the Cove Point gas is of such quality that it is fully interchangeable with the natural gas historically received by Washington Gas, and that gas coming from the Cove Point terminal will not cause harm to its customers or to the infrastructure of Washington Gas’ distribution system.

     The FERC convened a procedural conference to receive information related to the issues raised by Washington Gas concerning the compatibility of gas from the Cove Point terminal and the safety of its distribution system should significantly larger volumes of gas from the Cove Point terminal flow into the interconnected interstate pipelines that serve Washington Gas. Washington Gas presented scientific evidence supporting Washington Gas’ assertions that the unblended re-vaporized LNG is the unique cause of the leaks. Washington Gas also provided the FERC with all data that Washington Gas had made available for Environ’s review. A decision by the FERC regarding the certificate applications to expand the Cove Point LNG terminal is pending.

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

     Washington Gas is committed to the use of natural gas from the Cove Point terminal to satisfy the needs of its customers. Washington Gas is willing to work with Dominion Cove Point LNG, the shippers who bring LNG into the Cove Point terminal and the interstate pipelines that deliver gas to Washington Gas in order to achieve and implement an appropriate solution to the issue of gas interchangeability affecting its system.

     CREDIT RISK

     Regulated Utility Operations

     Certain suppliers that sell gas to Washington Gas have either relatively low credit ratings or are not rated by major credit rating agencies. In the event of a supplier’s failure to deliver contracted volumes of gas, Washington Gas may need to replace those volumes at prevailing market prices, which may be higher than the original transaction prices, and pass these costs through to its sales customers under the purchased gas cost adjustment mechanisms (refer to the section entitled “Market Risk—Price Risk Related to Regulated Utility Operations”included herein). To manage this supplier credit risk, Washington Gas screens suppliers’ creditworthiness and asks suppliers as necessary for financial assurances including, but not limited to, letters of credit and parental guarantees. In response to the continued rise in natural gas prices, Washington Gas has requested and received increased levels of financial assurance from its suppliers.

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

     Washington Gas is also 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. The deposits are held for varying periods of time, typically a minimum of one year and, as defined by regulatory tariffs, may be refunded if the customer makes timely payments to Washington Gas during the holding period of the customer deposit. There are no restrictions on the regulated utility’s use of these customer deposits. Washington Gas pays interest to its customers on these deposits in accordance with the requirements of its regulatory commissions.

     Retail Energy-Marketing Operations

     Certain suppliers that sell natural gas or electricity to WGEServices have either relatively low credit ratings or are not rated by major credit rating agencies. Depending on the ability of these suppliers to deliver natural gas or electricity under existing contracts, WGEServices could be financially exposed for the difference between the price at which WGEServices has contracted to buy these commodities, and the replacement cost of these commodities that may need to be purchased. WGEServices has a wholesale supplier credit policy that is designed to mitigate wholesale credit risks through a requirement for credit enhancements. In accordance with this policy, WGEServices has obtained credit enhancements from certain of its suppliers.

     In response to the significant rise in natural gas prices, WGEServices continuously monitors the unsecured credit limits it will accept from certain suppliers or their guarantors. This allows WGEServices to have greater flexibility in obtaining alternative sources of natural gas supplies in the event of non-performance by one or more of its suppliers.

     MARKET RISK

     The Company is exposed to various forms of market risk including commodity price risk, weather risk and interest-rate risk. The following discussion describes these risks and the Company’s management of them.

     Price Risk Related to Regulated Utility Operations

     Washington Gas actively manages its gas supply portfolio to balance its sales and delivery obligations. The regulated utility includes the cost of the natural gas commodity and pipeline services in the purchased gas costs that it includes in firm customers’ rates, as permitted by its jurisdictional tariffs and subject to regulatory review.

     In order to mitigate commodity price risk for its firm customers, Washington Gas has specific regulatory approval in the District of Columbia, Maryland and Virginia to hedge transactions for a limited portion of its natural gas purchases. While the regulatory approval for Virginia is permanent, the regulatory approvals in the District of Columbia and Maryland are pursuant to pilot programs, and the Company is seeking to continue these programs. Additionally, to provide for additional supply reliability, the regulated utility purchases natural gas under contracts that provide for volumetric variability. Certain of these contracts are required to be recorded at fair value (refer to Note 9 of the Notes to Consolidated Financial Statements—Derivative and Weather-Related Instrumentsfor a discussion of the accounting for these derivative instruments). As of March 31, 2006 and September 30, 2005, the Company’s variable gas purchase contracts had a net fair value loss of $4.7 million and a net fair value gain of $18.2 million, respectively. Of the March 31, 2006 net loss, $5.0 million represented a fair value loss that was recorded on the balance sheet as a payable, with a corresponding amount recorded as a regulatory asset. This was partially offset by a $317,000 fair value gain that was recorded as a receivable, with a corresponding amount recorded as a regulatory liability. Of the September 30, 2005 net gain, $19.9 million represented a fair value gain that was

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Item 2 — Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

recorded on the balance sheet as a receivable, with a corresponding amount recorded as a regulatory liability. This was partially offset by a $1.7 million fair value loss that was recorded on the balance sheet as a payable, with a corresponding amount recorded as a regulatory asset.

     The regulated utility also mitigates price risk by injecting natural gas into storage during the summer months when prices are generally lower and less volatile, and withdraws that gas during the winter heating season when prices are generally higher and more volatile.

     Price Risk Related to Retail Energy-Marketing Operations

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

     WGEServices is exposed to market risk to the extent it 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 these risks.

     Natural Gas

     WGEServices faces risk in that approximately 60 percent of its annual natural gas sales volumes are subject to variations in customer demand caused by fluctuations in weather. Purchases of natural gas to fulfill retail sales commitments are made generally under fixed-volume contracts that are based on normal weather assumptions. If there is a significant deviation from normal weather that causes purchase commitments to differ significantly from sales levels, WGEServices may be required to buy incremental natural gas or sell excess natural gas at prices that negatively impact gross margins. WGEServices manages this volumetric risk by using storage gas inventory and peaking services offered to marketers by the regulated utilities that provide delivery service for WGEServices’ customers. WGEServices may also manage price risk through the use of derivative instruments or weather hedges. At September 30, 2005, these derivative instruments were recorded on the Company’s consolidated balance sheets as fair value gains of $5.4 million. No amounts related to these derivative instruments were recorded on the consolidated balance sheets at March 31, 2006. In connection with these derivative instruments, WGEServices recorded losses of $807,000 (pre-tax) and $4.9 million (pre-tax) for the three and six months ended March 31, 2006, respectively. WGEServices recorded a gain of $1.5 million (pre-tax) and a loss of $643,000 (pre-tax) for the three and six months ended March 31, 2005, respectively.

     Electricity

     Non-Full Requirements Supply.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, capacity, ancillary services and transmission service from multiple suppliers to match its customer requirements. This procurement strategy reduces the potential credit exposure that WGEServices otherwise faces when dealing almost exclusively with a single supplier under a full requirements supply arrangement.

     To the extent WGEServices is not able to match its customer requirements relatively closely with its supply purchases, it is exposed to electricity commodity price risk on the unmatched portion of its

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Item 2 — Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)

portfolio. WGEServices’ electric business also is exposed to fluctuations in weather. These purchases generally are made under fixed-volume contracts that are based on certain weather assumptions. If there are significant deviations in weather from these assumptions, WGEServices could be exposed to hourly price and volume risk that can negatively impact gross margins. At March 31, 2006 and September 30, 2005, 91 percent and 44 percent, respectively, of the WGEServices electric supply portfolio was provided under non-full requirements contracts.

     Full Requirements Supply.For a portion of its electricity supply, WGEServices limits its volumetric and price risks by purchasing full requirements services from its wholesale electricity suppliers under master purchase and sale agreements, including electric energy, capacity and certain ancillary services, for resale to retail electric customers. WGEServices’ full requirements wholesale suppliers assume the risk for any volume and price risks associated with sales made by WGEServices. WGEServices’ principal supplier of full requirements electricity is Mirant Energy Trading LLC (MET), a wholly owned subsidiary of Mirant Corporation (Mirant).

     On July 14, 2003, Mirant and substantially all of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. MET (formerly known as Mirant Americas Energy Trading L.P.) was included in these bankruptcy filings through its predecessor. On January 3, 2006, Mirant and its subsidiaries emerged from bankruptcy. WGEServices and MET have a contract including provisions that allow WGEServices to net payables to MET against any damages that may result from default on the part of MET, and allow WGEServices to request collateral under certain situations. At September 30, 2005, WGEServices held cash deposits as collateral totaling $18.3 million related to electric purchase transactions under this contract. This cash collateral was refunded in the second quarter of fiscal year 2006 when market conditions reduced the collateral requirement. As of March 31, 2006, WGEServices held a small letter of credit as collateral.

     In addition to MET, WGEServices has separate master purchase and sale agreements under which it purchases full requirements services from other wholesale electricity suppliers. These electric suppliers either have investment grade credit ratings or provide guarantees from companies with investment grade credit ratings.

     Value-At-Risk

     WGEServices measures the market risk of its energy commodity portfolio and employs risk control mechanisms to measure and determine mitigating steps related to market risk, including the determination and review of value-at-risk. Value-at-risk is an estimate of the maximum loss that can be expected at some level of probability if a portfolio is held for a given time period. Based on a 95 percent confidence interval for a one-day holding period, WGEServices’ value-at-risk at March 31, 2006 was approximately $370,000 and $176,000 related to its natural gas and electric portfolios, respectively.

     Weather Risk

     The Company is exposed to various forms of weather risk in both its regulated utility and unregulated businesses. For the regulated utility, a large portion of the Company’s revenues is volume driven and its current rates are based upon an assumption of normal weather. Variations from normal weather will cause the Company’s earnings to increase or decrease, depending on the weather pattern. Prior to October 1, 2005, the Company managed weather risk for all jurisdictions of the regulated utility with a weather insurance policy. As discussed below, Washington Gas obtained ratemaking provisions in Maryland that are designed to moderate the volatility of its revenues and

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

customers’ monthly bills due to variations in usage from factors such as weather and conservation. Washington Gas does not have similar ratemaking provisions in the District of Columbia or Virginia and, therefore, relies on a weather insurance policy and a weather derivative, respectively, that are designed to provide full protection from the negative financial effects of warmer-than-normal weather in these jurisdictions, as discussed below. During the three and six months ended March 31, 2006, Washington Gas recorded after-tax accrued benefits, net of premium costs, of $2.1 million and $2.0 million, respectively, related to both its weather insurance in the District of Columbia and weather derivative in Virginia. This compares to $1.5 million and $2.4 million of after-tax premium expense recorded during the three and six months ended March 31, 2005, respectively, related to an expired weather insurance policy that was designed to provide 50 percent protection from the effects of warmer-than-normal weather in the District of Columbia, Maryland and Virginia.

     The financial results of the Company’s non-regulated energy-marketing business, WGEServices, are also affected by variations from normal weather in the winter relating to its gas sales, and in the summer relating to its electricity sales. WGEServices manages its weather risk with, among other things, weather hedges, which are also discussed below.

     Billing Adjustment Mechanism.In August 2005, Washington Gas received approval from the PSC of MD to implement the 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. The RNA became effective on October 1, 2005 (refer to the section entitled“Regulatory Matters” included herein).

     Weather Insurance.Prior to October 1, 2005, Washington Gas maintained a weather insurance policy covering all of its jurisdictions designed to cover 50 percent of the impact of warmer-than-normal weather on its financial results. The policy had a five-year term that expired on September 30, 2005. In October 2005, Washington Gas purchased a new weather insurance policy designed to provide full protection from its exposure to warmer-than-normal weather in the District of Columbia. The new policy has a three-year term that expires on September 30, 2008.

     The new policy covers Washington Gas’ estimated net revenue exposure in the District of Columbia to variations in HDDs, subject to a maximum annual payment of $6.55 million (pre-tax) and cumulative maximum payments of $13.10 million (pre-tax) over the three-year policy period. Pre-tax income is provided in the amount of $12,600 for each HDD warmer-than-normal during each fiscal year subject to the limitations previously described. Other than the cost of the insurance, Washington Gas pays nothing if weather is colder than normal. The policy’s pre-tax annual expense will be $1.87 million for fiscal year 2006 and for each of the next two years of the policy period. This pre-tax expense is being amortized based on the pattern of normal HDDs over the three-year policy period. No portion of the cost or benefit of this policy is considered in the regulatory process. Washington Gas’ derived an accrued benefit, net of amortization expense of the related insurance premium, totaling $86,000 (after-tax) for the three months ended March 31, 2006, and net amortization expense totaling $57,000 (after-tax) for the six months ended March 31, 2006, related to the new insurance policy in the District of Columbia. This compares to $1.5 million and $2.4 million of after-tax premium amortization expense recorded during the three and six months ended March 31, 2005, respectively, related to the expired insurance policy.

     HDD Derivatives.On December 8, 2005, Washington Gas purchased an HDD derivative designed to provide full protection from warmer-than-normal weather in Virginia. Washington Gas will receive $24,600 for every HDD below 2,833 during the period of December 18, 2005 through May 31, 2006. The maximum amount that Washington Gas can receive under this arrangement is $9.4 million. The pre-tax expense of this derivative is $1.7 million, which is being amortized over the pattern of

54

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

normal HDDs over the 5 1/2-month term of the weather derivative. Washington Gas derived an accrued benefit, net of amortization expense of the related premium, totaling $2.1 million (after-tax) and $2.0 million (after-tax) related to the weather derivative for the three and six months ended March 31, 2006, respectively.

     WGEServices utilizes HDD derivatives to manage its risk for natural gas customers who participate in a program that allows them to pay a fixed amount for their gas requirements regardless of the amount of gas consumed, and to manage other weather-related risks. These hedges cover a portion of WGEServices’ estimated net revenue exposure to variations in HDDs. For the three and six months ended March 31, 2006, the Company recorded, net of premium costs, a pre-tax loss of $2.2 million and $2.0 million, related to these hedges, respectively. For the three and six months ended March 31, 2005, the Company recorded, including premium costs, a pre-tax loss of $96,000 and $249,000 related to these hedges, respectively.

     Interest-Rate Risk

     The Company is exposed to interest-rate risk associated with its debt financing costs. Washington Gas utilizes derivative instruments from time to time in order to minimize its exposure to the risk of interest-rate volatility associated with anticipated future debt issuances.

     In July 2005, Washington Gas entered into two forward-starting swaps with an aggregate notional principal amount of $50.0 million. At September 30, 2005, these swaps had a fair value gain totaling $106,000. Washington Gas terminated the two forward-starting swaps in conjunction with the issuance of $50.0 million of MTNs on January 18, 2006, and received a total of $286,000 associated with the settlement of these hedge agreements.

     In February 2006, Washington Gas entered into a forward-starting swap with a notional principal amount of $25.0 million. Washington Gas terminated this forward-starting swap in conjunction with the issuance of $25.0 million of MTNs on March 22, 2006, and received $303,000 associated with the settlement of this hedge agreement.

     Refer to the section entitled“Liquidity and Capital Resources – Long-Term Cash Requirements and Related Financing”included herein for a further discussion of the debt transactions related to these derivatives. Also refer to Note 9 of the Notes to Consolidated Financial Statements—Derivative and Weather-Related Instrumentsfor a further discussion of the accounting for these derivatives transactions.

     As discussed in this report, the Company and Washington Gas utilize commercial paper to satisfy short-term borrowing requirements. Actions and communications by the Federal Reserve in the past year have resulted in increases in short-term interest rates. Increases in short-term interest rates may reduce the profitability of the Company and Washington Gas to the extent that those higher interest rates are not timely reflected in utility rates or can not be reflected in the prices charged by WGEServices.

     OTHER MATTERS

     WGL Holdings was a registered holding company as defined by the Public Utility Holding Company Act of 1935 (PUHCA) before its repeal. On August 8, 2005, the President of the United States of America signed the Energy Policy Act of 2005 (EPA 2005), which authorizes many broad energy policy provisions including significant funding for consumers and business for energy-related activities, energy-related tax credits, accelerated depreciation for certain natural gas utility infrastructure investments and which

55

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

contains the repeal of the PUHCA. The effective date of the repeal was February 8, 2006. The Company primarily benefits from provisions embedded in the legislation that support the Company’s efforts to promote energy efficiency in a manner that benefits customers and shareholders.

56

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

WASHINGTON GAS LIGHT COMPANY

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

     RESULTS OF OPERATIONS–Three Months Ended March 31, 2006 vs. March 31, 2005

     Summary Results

     Washington Gas reported net income applicable to common stock of $59.7 million for the three months ended March 31, 2006, as compared to $74.7 million reported for the same three months of the prior fiscal year.

     Utility Net Revenues

     Utility net revenues for Washington Gas were $206.5 million for the current quarter, as compared to net revenues of $226.9 million for the same quarter in fiscal year 2005. Net revenues were primarily affected by lower natural gas deliveries to firm customers due to warmer weather in the current period compared to the same quarter of the prior fiscal year, as well as lower consumption of natural gas by customers due to factors other than weather, such as customer conservation. Mitigating the negative financial effects of warmer-than-normal weather and lower non-weather related consumption of natural gas during the current quarter were:(i)the regulated utility’s application of the Maryland RNA and other weather protection strategies;(ii)the addition of 20,691 active customer meters since the end of the same quarter of the prior fiscal year; and(iii)$2.7 million (pre-tax) of increased earnings from greater carrying costs on a higher balance of storage gas inventory that was primarily the result of higher natural gas prices. Utility net revenues for the three months ended March 31, 2006 also reflect a charge of $4.6 million (pre-tax) recorded in the second quarter of fiscal year 2006 related to a proposed Maryland regulatory order that recommends the disallowance of certain purchased natural gas costs incurred by the regulated utility in a prior fiscal year (refer to the section entitled“Regulatory Matters” included herein).

     Key gas delivery, weather and meter statistics are shown in the table below for the three months ended March 31, 2006 and 2005.

57

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

Gas Deliveries, Weather and Meter Statistics

	Three Months Ended									Percent
	March 31,									Increase
	2006			2005			Variance			(Decrease)
Gas Sales and Deliveries(thousands of therms)
Firm
Gas Sold and Delivered		364,415			432,258			(67,843	)		(15.7	)
Gas Delivered for Others		163,771			194,666			(30,895	)		(15.9	)
Total Firm		528,186			626,924			(98,738	)		(15.7	)
Interruptible
Gas Sold and Delivered		1,594			2,413			(819	)		(33.9	)
Gas Delivered for Others		85,358			99,942			(14,584	)		(14.6	)
Total Interruptible		86,952			102,355			(15,403	)		(15.0	)
Electric Generation—Delivered for Others		9,939			9,202			737			8.0
Total Deliveries		625,077			738,481			(113,404	)		(15.4	)
Degree Days
Actual		1,934			2,264			(330	)		(14.6	)
Normal		2,123			2,117			6			0.3
Percent Colder (Warmer) Than Normal		(8.9	)%		6.9	%		n/a			n/a
Active Customer Meters(end of period)		1,035,918			1,015,227			20,691			2.0
New Customer Meters Added		5,882			5,827			55			0.9

     Gas Service to Firm Customers.The level of gas delivered to firm customers is highly sensitive to weather variability as a large portion of the natural gas delivered by Washington Gas is used for space heating. The regulated utility’s rates are based on normal weather. The tariffs in the Maryland jurisdiction also include the effects of the RNA mechanism that was implemented in Maryland on October 1, 2005 upon approval by the PSC of MD (refer to the section entitled“Regulatory Matters”included herein). The tariffs for the remaining two jurisdictions in which the regulated utility operates do not have a weather normalization mechanism (refer to the section entitled“Weather Risk”included herein). Nonetheless, declining block rates in the regulated utility’s Virginia and Maryland jurisdictions, and the existence of a fixed demand charge in all jurisdictions to collect a portion of revenues, reduce the effect that variations from normal weather have on net revenues.

     During the quarter ended March 31, 2006, total gas deliveries to firm customers declined 98.7 million therms, or 15.7 percent, to 528.2 million therms delivered during the second quarter of fiscal year 2006. This comparison primarily reflects 14.6 percent warmer weather as compared to the prior year’s second quarter, as well as lower natural gas consumption by customers due to factors other than weather, such as customer conservation. Weather was 8.9 percent warmer than normal in the second quarter of fiscal year 2006, as compared to 6.9 percent colder than normal for the same quarter of the prior fiscal year. The application, in the current fiscal year, of the regulated utility’s new RNA in Maryland, weather insurance in the District of Columbia and a weather derivative in Virginia eliminated substantially all of the negative financial effects of the warmer-than-normal weather during the second quarter of fiscal year 2006. Additionally, the Maryland RNA mitigated the effects of lower non-weather related natural gas consumption that occurred in Maryland during the current quarter. Deliveries to Maryland customers represent approximately 40 percent of all therms delivered by the regulated utility.

     Many customers choose to buy the natural gas commodity from unregulated third-party marketers, rather than purchase the natural gas commodity and delivery service from Washington Gas on a “bundled” basis. Gas delivered to firm customers but purchased from unregulated third-party

58

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

marketers represented 31.0 percent of total firm therms delivered during the quarter ended March 31, 2006, compared to 31.1 percent delivered during the quarter ended March 31, 2005. On a per unit basis, Washington Gas earns the same net revenues from delivering gas for others as it earns from bundled gas sales in which customers purchase both the natural gas commodity and the associated delivery service from Washington Gas. Therefore, the regulated utility does not experience any loss in net revenues when customers choose to purchase the natural gas commodity from a third-party marketer.

     Gas Service to Interruptible Customers.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 decreased by 15.4 million therms, or 15.0 percent, during the second quarter of fiscal year 2006 when compared to the same quarter last year, primarily due to customers’ use of alternative fuels because of higher natural gas prices and warmer weather.

     The effect on net income of any changes in delivered volumes and prices to the interruptible class is limited by margin-sharing arrangements that are included in Washington Gas’ rate designs in the District of Columbia and, to a much smaller extent, in Virginia. In the District of Columbia, Washington Gas shares a majority of the margins earned on interruptible gas sales and deliveries with firm customers after a gross margin threshold is reached. A portion of the fixed costs for servicing interruptible customers is collected through the firm customers’ rate design. In the Virginia jurisdiction, rates for customers using interruptible delivery service are based on a traditional cost of service approach, and Washington Gas retains all revenues from interruptible delivery service. However, a few customers have been grandfathered into a bundled sales and delivery service with a previously approved bundled interruptible rate design. There is some sharing of those revenues with firm customers, but the volumes are small and the amounts of revenues are not material to the financial statements or results of operations. Prior to October 1, 2005, interruptible customers in the Maryland jurisdiction had similar margin-sharing arrangements, as described above, for interruptible customers in the District of Columbia. Effective October 1, 2005, pursuant to Washington Gas’ implementation of the RNA mechanism, rates for interruptible customers in Maryland are based on a traditional cost of service approach, and Washington Gas retains a defined amount above a pre-approved margin threshold level.

     Gas Service for Electric Generation.Washington Gas sells and/or delivers natural gas for use at two electric generation facilities in Maryland that are each owned by companies independent of WGL Holdings. During the current quarter, deliveries to these customers increased 8.0 percent to 9.9 million therms, as compared to the same quarter of fiscal year 2005, reflecting the increased use by these customers of natural gas rather than alternative fuels. Washington Gas shares a significant majority of the margins earned from gas deliveries to these customers with firm customers. Therefore, changes in the volume of interruptible gas deliveries to these customers do not materially affect either net revenues or net income.

     Utility Operating Expenses

     Operation and Maintenance Expenses.Operations and maintenance expenses of $66.6 million (pre-tax) for the three months ended March 31, 2006 were $6.7 million higher than the same period in the prior fiscal year. Principally contributing to the increase in these expenses were $1.4 million of increased labor and incentive costs which primarily reflect higher labor rates, as well as higher accruals for equity-based compensation pursuant to a new accounting standard that became effective on October 1, 2005 (refer to the section entitled“Critical Accounting Policies” included herein). The current quarter also reflects $1.2 million of higher employee benefits costs primarily related to increased group insurance, $1.3 million of increased costs associated with information technology

59

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

projects, $534,000 of higher expenses for uncollectible accounts partially due to the effects of higher revenues related to higher natural gas costs, and other miscellaneous items.

     Depreciation and Amortization.Depreciation and amortization expense was $22.9 million (pre-tax) for the second quarter of fiscal year 2006, an increase of $1.7 million, or 7.9 percent, over the same quarter of the prior fiscal year. This increase is primarily attributable to a reversal in the second quarter of fiscal year 2005 of $1.0 million of depreciation expense that was previously recorded in fiscal year 2004 related to the performance of an earnings test required by a December 18, 2003 Final Order of the SCC of VA. The remainder of the year-over-year increase reflects increased investment in property, plant and equipment.

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

     RESULTS OF OPERATIONS–Six Months Ended March 31, 2006 vs. March 31, 2005

     Summary Results

     For the first six months of fiscal year 2006, Washington Gas reported net income applicable to common stock of $104.5 million, as compared to net income of $114.6 million for the same period of the prior fiscal year.

     Utility Net Revenues

     Utility net revenues for Washington Gas were $384.6 million for the current six-month period, as compared to net revenues of $390.1 million for the corresponding period in the prior fiscal year. Net revenues primarily reflect lower natural gas deliveries to firm customers due to warmer weather in the current six-month period than the same period of the prior fiscal year, as well as lower consumption of natural gas by customers due to factors other than weather, such as customer conservation. Mitigating the negative financial effects of warmer-than-normal weather and lower non-weather related consumption of natural gas during the current quarter were:(i)the regulated utility’s application of the Maryland RNA and other weather protection strategies;(ii)the addition of 20,691 active customer meters since the end of the same quarter of the prior fiscal year; and(iii)$5.0 million (pre-tax) of increased earnings from greater carrying costs on a higher balance of storage gas inventory that was primarily the result of higher natural gas prices. Utility net revenues for the first six months of the current fiscal year also reflect a charge of $4.6 million (pre-tax) recorded in the second quarter of fiscal year 2006 related to a proposed Maryland regulatory order recommending the disallowance of certain purchased natural gas costs incurred by the regulated utility in a prior fiscal year (refer to the section entitled“Regulatory Matters”included herein).

     Key gas delivery, weather and meter statistics are shown in the table below for the six months ended March 31, 2006 and 2005.

60

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

Gas Deliveries, Weather and Meter Statistics

	Six Months Ended									Percent
	March 31,									Increase
	2006			2005			Variance			(Decrease)
Gas Sales and Deliveries(thousands of therms)
Firm
Gas Sold and Delivered		658,799			689,072			(30,273	)		(4.4	)
Gas Delivered for Others		299,034			332,385			(33,351	)		(10.0	)
Total Firm		957,833			1,021,457			(63,624	)		(6.2	)
Interruptible
Gas Sold and Delivered		3,270			4,569			(1,299	)		(28.4	)
Gas Delivered for Others		158,152			177,440			(19,288	)		(10.9	)
Total Interruptible		161,422			182,009			(20,587	)		(11.3	)
Electric Generation—Delivered for Others		25,859			18,509			7,350			39.7
Total Deliveries		1,145,114			1,221,975			(76,861	)		(6.3	)
Degree Days
Actual		3,433			3,653			(220	)		(6.0	)
Normal		3,485			3,476			9			0.3
Percent Colder (Warmer) Than Normal		(1.5	)%		5.1	%		n/a			n/a
Active Customer Meters(end of period)		1,035,918			1,015,227			20,691			2.0
New Customer Meters Added		14,051			14,299			(248	)		(1.7	)

     Gas Service to Firm Customers.During the six months ended March 31, 2006, natural gas deliveries to firm customers were 957.8 million therms, a decrease of 63.6 million therms, or 6.2 percent, in deliveries from the same period last year. This comparison primarily reflects 6.0 percent warmer weather in the current period than the comparable period of the prior year, as well as lower natural gas consumption by customers due to factors other than weather, such as customer conservation. Weather for the six months ended March 31, 2006 was 1.5 percent warmer than normal, as compared to 5.1 percent colder than normal for the same period last year. The regulated utility’s application, in the current fiscal year, of its new RNA in Maryland, weather insurance in the District of Columbia and the weather derivative in Virginia eliminated substantially all of the negative financial effects of warmer-than-normal weather during the current six-months ended March 31, 2006. Additionally, the Maryland RNA mitigated the effects of lower non-weather related natural gas consumption that occurred in Maryland during the current year-to-date period.

     Gas Service to Interruptible Customers.Therm deliveries to interruptible customers decreased 11.3 percent during the first six months of fiscal year 2006 compared to the same period last fiscal year, primarily due to customers’ use of alternative fuels because of higher natural gas prices and warmer weather.

     Gas Service for Electric Generation.During the current six-month period, deliveries to the two electric generation facilities in Maryland increased 39.7 percent to 25.9 million therms, primarily reflecting the increased use by these customers of natural gas rather than alternative fuels.

     Utility Operating Expenses

     Operation and Maintenance Expenses.Operations and maintenance expenses increased $11.1 million (pre-tax) for the first six months of fiscal year 2006 when compared to the same period in the prior fiscal year. Principally contributing to this increase was $3.3 million of higher expenses for uncollectible accounts, $1.8 million of increased labor and incentive costs and $1.6 million of increased expenses associated with information technology projects. Other drivers of the increase in operation and maintenance expenses were increased employee benefits and other miscellaneous

61

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

items. Results from the regulated utility segment also reflect higher depreciation and amortization expense, higher general taxes and increased interest expense that, together, reduced net income by $5.6 million (pre-tax).

     Depreciation and Amortization.Depreciation and amortization expense was $45.7 million (pre-tax) for the first six months of fiscal year 2006, an increase of $2.4 million over the corresponding period of the prior fiscal year. This increase is primarily attributable, in part, to a reversal in the six months ended March 31, 2005 of $1.0 million of depreciation expense that was previously recorded in fiscal year 2004 related to the performance of an earnings test required by a December 18, 2003 Final Order by the SCC of VA. The remainder of the year-over-year increase reflects increased investment in property, plant and equipment.

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

     REGULATORY MATTERS

     District of Columbia Jurisdiction

     In a March 28, 2003 Final Order, the PSC of DC upheld a previous ruling that approved, among other things, a methodology for sharing with customers 50 percent of annual ground lease and development fee revenues that Washington Gas received from Maritime Plaza, a commercial development project constructed on land owned by Washington Gas. On May 23, 2003, the District of Columbia Office of the People’s Counsel (DC OPC) filed an appeal with the District of Columbia Court of Appeals (DC Court of Appeals) seeking to overturn this portion of the March 28, 2003 ruling by the PSC of DC. On March 18, 2004, the DC Court of Appeals ordered, among other things, the PSC of DC to provide an explanation of its decision to approve the allocation methodology for sharing with customers the ground lease and development fee revenues attributable to the Maritime Plaza development project. The PSC of DC issued a subsequent order requiring both the DC OPC and Washington Gas to file testimony addressing the allocation issue. On October 12, 2004, Washington Gas filed testimony before the PSC of DC that it believes supports the allocation methodology that was approved in the PSC of DC’s initial order. The DC OPC filed opposing testimony on the same date. Rebuttal testimony was filed on November 19, 2004 by the DC OPC and Washington Gas. The PSC of DC issued a Final Order on April 4, 2005 that required Washington Gas and the DC OPC to file supplemental testimony on April 25, 2005. The PSC of DC held a one-day evidentiary hearing on October 25, 2005. Washington Gas and the DC OPC filed initial briefs on December 2, 2005 and reply briefs on December 23, 2005. Management cannot predict the final outcome of this matter; however, it believes that the likely outcome will not have a material impact on Washington Gas’ financial statements.

     Maryland Jurisdiction

     On August 8, 2005, the PSC of MD approved an unopposed Stipulation and Agreement (Stipulation), filed by Washington Gas and three other participants and accepted by the PSC of MD. The Stipulation resolved outstanding issues from a Final Order previously issued by the PSC of MD regarding the manner in which interruptible transportation service is charged to Maryland customers. The Stipulation also requested approval by the PSC of MD of an RNA 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. The Stipulation also allows for the impact of the RNA on Washington Gas’ risk

62

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

and rate of return to be evaluated in the next rate case. The RNA became effective on October 1, 2005. Washington Gas’ net income for the three and six months ended March 31, 2006 reflects the effect of the RNA.

     Washington Gas underwent a routine review of its gas costs that were billed to customers in Maryland from September 2003 through August 2004. Each year, the PSC of MD reviews the annual gas costs collected from customers to determine if Washington Gas’ purchased gas costs are not justified because: (1) Washington Gas failed to show that the charges were based solely on increased costs of purchased gas; (2) Washington Gas failed to follow competitive practices in purchasing natural gas; or (3) Washington Gas failed to show that its practices in procuring and purchasing natural gas were reasonable. On March 14, 2006, a Hearing Examiner of the PSC of MD issued a proposed order approving purchased gas charges of Washington Gas for the twelve-month period ending August 2004, except for $4.6 million of such charges that the Hearing Examiner recommended be disallowed because, in the opinion of the Hearing Examiner, they were not reasonably and prudently incurred. Washington Gas filed a Notice of Appeal on April 12, 2006 and a Memorandum on Appeal on April 21, 2006 with the PSC of MD, asserting that the Hearing Examiner’s recommendation is without merit. Reply memorandums must be filed by May 11, 2006 and the PSC of MD is expected to issue a final order after that date. During the second quarter of fiscal year 2006, Washington Gas accrued a liability of $4.6 million (pre-tax) related to the proposed disallowance of these purchased gas charges. If the PSC of MD rules in Washington Gas’ favor, the liability recorded in the current quarter for this issue will be reversed.

     Virginia Jurisdiction

     On December 18, 2003, the SCC of VA issued a Final Order in response to an application filed by Washington Gas on June 14, 2002 to increase annual revenues in Virginia. In connection with this Final Order, the SCC of VA ordered Washington Gas to reduce its rate base related to net utility plant by $28 million, which is net of accumulated deferred income taxes of $14 million, and to establish an equivalent regulatory asset that the Company has done for regulatory accounting purposes only. This regulatory asset represents the difference between the accumulated reserve for depreciation recorded on the books of Washington Gas and a theoretical reserve that was derived by the Staff of the SCC of VA (VA Staff) as part of its review of Washington Gas’ depreciation rates, less accumulated deferred income taxes. This regulatory asset is being amortized, for regulatory accounting purposes only, as a component of depreciation expense over 32 years pursuant to the Final Order. The SCC of VA provided for both a return on, and a return of, this regulatory asset established for regulatory accounting purposes.

     In approving the treatment described in the preceding paragraph, the SCC of VA further ordered that an annual “earnings test” be performed to determine if Washington Gas has earned in excess of its allowed rate of return on common equity for its Virginia operations. The current procedure for performing this earnings test does not normalize the actual return on equity for the effect of weather over the applicable twelve-month period. To the extent that Washington Gas earns in excess of its allowed return on equity in any annual earnings test period, Washington Gas is required to increase depreciation expense (after considering the impact of income tax benefits) and increase the accumulated reserve for depreciation for the amount of the actual earnings in excess of the earnings produced by the 10.50 percent allowed return on equity. Under the SCC of VA’s requirements for performing earnings tests, if weather is warmer than normal in a particular annual earnings test period, Washington Gas is not allowed to restore any amount of earnings previously eliminated as a result of this earnings test. These annual earnings tests will continue to be performed until the $28 million difference between the accumulated reserve for depreciation recorded on Washington Gas’ books and the theoretical reserve derived by the VA Staff, net of accumulated deferred income taxes, is eliminated or the level of the regulatory asset established for regulatory accounting purposes is adjusted as a result of a future depreciation study.

63

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

     In accordance with a September 27, 2004 SCC of VA approved Stipulation involving Washington Gas and other participants, Washington Gas is required to file with the SCC of VA annual earnings test calculations based on a twelve-month period ended December 31; such calculations are being estimated by Washington Gas quarterly, and when appropriate, accounting adjustments are being recorded.

     On October 19, 2005, the VA Staff filed a report with the SCC of VA in connection with Washington Gas’ earnings test for the twelve-month period ended December 31, 2004. The VA Staff’s report concluded that Washington Gas did not earn in excess of its allowed return on equity during this period, and recommended that Washington Gas not be required to record any additional depreciation expense related to its earnings for the twelve-month period ended December 31, 2004. On November 28, 2005, the SCC of VA issued a Final Order that concurred with the VA Staff’s recommendation. On April 28, 2006, Washington Gas filed an earnings test for the twelve months ended December 31, 2005. The regulated utility’s filing, which is subject to review by the applicable parties within the SCC of VA, did not indicate that Washington Gas earned in excess of its allowed return on equity during the period of the earnings test.

     OTHER MATTERS

     On January 4, 2006, the Office and Professional Employees International Union, Local No. 2 (A.F.L.-C.I.O.) (Local 2), ratified a thirty-nine month labor contract with Washington Gas effective on January 1, 2006. This contract covers approximately 290 employees, and replaced a previous collective bargaining agreement that was scheduled to expire on March 31, 2006. The provisions of the new labor contract include, among other things:(i)general wage increases of 2.75 percent, 3.0 percent and 3.5 percent effective on January 1, 2006, April 1, 2007 and April 1, 2008, respectively;(ii)increases in employee medical benefit contributions by employees;(iii)enhanced pension benefit-funding formulas for Local 2 employees who retire from service beginning January 1, 2007; and(iv)employment security for Local 2 employees hired on or before April 1, 1995.

64

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The following issues related to the Company’s market risk are included under Item 2,Management’s Discussion and Analysis of Financial Condition and Results of Operations, and are incorporated herein by reference into this discussion. Also refer to Item 7A in the Company’s 2005 Annual Report on Form 10-K.

• Price Risk Related to Regulated Utility Operations

• Price Risk Related to Retail Energy-Marketing Operations

• Weather Risk

• Interest-Rate Risk

ITEM 4. CONTROLS AND PROCEDURES

     Senior management, including the Chairman and Chief Executive Officer and the Vice President and Chief Financial Officer, evaluated the effectiveness of WGL Holdings’ and Washington Gas’ disclosure controls and procedures as of March 31, 2006. Based on this evaluation process, the Chairman and Chief Executive Officer and the Vice President and Chief Financial Officer have concluded that WGL Holdings’ and Washington Gas’ disclosure controls and procedures are effective. There have been no changes in the Registrants’ internal control over financial reporting during the quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, the registrants’ internal control over financial reporting.

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

PART II. OTHER INFORMATION

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

     The Annual Meetings of Shareholders of WGL Holdings, Inc. and Washington Gas Light Company were held on March 1, 2006. Below are the matters voted upon at these meetings.

     WGL Holdings, Inc.

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

Director	Votes in Favor		Votes Withheld
Michael D. Barnes		42,515,047		633,160
George P. Clancy, Jr.		42,685,407		462,800
James H. DeGraffenreidt, Jr.		42,424,473		723,734
James W. Dyke, Jr.		42,660,354		487,853
Melvyn J. Estrin		42,664,729		483,478
James F. Lafond		42,680,631		467,576
Debra L. Lee		42,562,479		585,728
Karen Hastie Williams		42,602,996		545,211

     The shareholders ratified the appointment of Deloitte & Touche LLP, independent public accountants, to audit the accounts of WGL Holdings, Inc. for fiscal year 2006 by a vote of 42,624,822 in favor of the proposal and 332,162 against. There were 191,223 abstentions.

     A shareholder proposal to establish cumulative voting was defeated by a vote of 20,145,780 against the proposal and 11,535,228 in favor. There were 780,736 abstentions and 10,686,463 broker non-votes.

     A shareholder proposal to elect an independent director as Chairman of the Board was defeated by a vote of 27,403,902 against the proposal and 3,932,578 in favor. There were 1,125,264 abstentions and 10,686,463 broker non-votes.

     Washington Gas Light Company

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

     The shareholders ratified the appointment of Deloitte & Touche LLP, independent public accountants, to audit the accounts of Washington Gas Light Company for fiscal year 2006 by a vote of 46,479,536 in favor of the proposal. There were no votes opposed to this proposal.

ITEM 6. EXHIBITS

Exhibits:

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

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

31.2	Certification of Frederic M. Kline, the Vice President and Chief Financial Officer of WGL Holdings, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.3	Certification of James H. DeGraffenreidt, Jr., the Chairman and Chief Executive Officer of Washington Gas Light Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.4	Certification of Frederic M. Kline, the Vice President and Chief Financial Officer of Washington Gas Light Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of James H. DeGraffenreidt, Jr., the Chairman and Chief Executive Officer, and Frederic M. Kline, the Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1	Computation of Ratio of Earnings to Fixed Charges—WGL Holdings, Inc.
99.2	Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends—WGL Holdings, Inc.
99.3	Computation of Ratio of Earnings to Fixed Charges—Washington Gas Light Company.
99.4	Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends—Washington Gas Light Company.

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WGL Holdings, Inc.
Washington Gas Light Company

Signature

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

	WGL HOLDINGS, INC. and WASHINGTON GAS LIGHT COMPANY (Co-Registrants)
Date: May 10, 2006	/s/ Mark P. O’Flynn
	Mark P. O’Flynn
	Controller (Principal Accounting Officer)

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