Edgar Filing: WGL HOLDINGS INC

WGL HOLDINGS, INC.

and

WASHINGTON GAS LIGHT COMPANY

(Co-registrants)

Date: May 7, 2014

/s/ William R. Ford

William R. Ford

Vice President and Chief Accounting Officer (Principal Accounting Officer)

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2014

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


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

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

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

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

WGL Holdings, Inc.:


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

Washington Gas Light Company:


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

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

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

WGL Holdings, Inc. common stock, no par value, outstanding as of April 30, 2014: 51,902,839 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, 2014.

WGL Holdings, Inc.

Washington Gas Light Company

For the Quarter Ended March 31, 2014

Table of Contents


PART I. Financial Information

Item 1. Financial Statements (Unaudited)
WGL Holdings, Inc.
Consolidated Balance Sheets			4
Consolidated Statements of Income			5
Consolidated Statements of Comprehensive Income			6
Consolidated Statements of Cash Flows			7

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

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			47
WGL Holdings, Inc.			51
Washington Gas Light Company			73

Item 3. Quantitative and Qualitative Disclosures about Market Risk			78

Item 4. Controls and Procedures			78

PART II. Other Information

Item 1. Legal Proceedings			79

Item 4. Mine Safety Disclosures			79

Item 6. Exhibits			79

Signature			80

(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) and Washington Gas Light Company (Washington Gas). Except where the content clearly indicates otherwise, any reference in the report to “WGL,” “we,” “us” or “our” is to the holding company or the consolidated entity of WGL Holdings, Inc. and all of its subsidiaries, including Washington Gas.

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

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

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

•

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

•

the ability to implement successful approaches to modify the current or future composition of gas delivered to customers or to remediate the effects of the current or future composition of gas delivered to customers, as a result of the introduction of gas from the Dominion Cove Point or Elba Island facilities to Washington Gas’ distribution system or changes in the composition of domestic natural gas as a result of liquids processing and new domestic sources of natural gas;

•

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

•

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

•

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

•

changes in capital and energy commodity market conditions;

•

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

•

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

•

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

•

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

•

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

•

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

•

changes in accounting principles;

•

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

(ii)

WGL Holdings, Inc.

Washington Gas Light Company

•

the ability to manage the outsourcing of several business processes;

•

acts of nature;

•

terrorist activities and

•

other uncertainties.

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

(iii)

WGL Holdings, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

Part I—Financial Information

Item 1—Financial Statements


(In thousands)	March 31, 2014			September 30, 2013
ASSETS
Property, Plant and Equipment
At original cost	$	4,241,016		$	4,118,149
Accumulated depreciation and amortization		(1,244,752	)		(1,210,686	)
Net property, plant and equipment		2,996,264			2,907,463
Current Assets
Cash and cash equivalents		11,977			3,478
Receivables
Accounts receivable		582,825			229,544
Gas costs and other regulatory assets		5,735			10,825
Unbilled revenues		210,827			98,598
Allowance for doubtful accounts		(23,371	)		(20,433	)
Net receivables		776,016			318,534
Materials and supplies—principally at average cost		22,414			24,904
Storage gas		74,153			347,291
Deferred income taxes		21,998			24,522
Prepaid taxes		62,432			24,450
Other prepayments		18,824			29,922
Derivatives		27,368			35,315
Other		15,556			11,595
Total current assets		1,030,738			820,011
Deferred Charges and Other Assets
Regulatory assets
Gas costs		292,792			93,963
Pension and other post-retirement benefits		246,690			240,634
Other		66,081			66,010
Derivatives		3,091			26,306
Investment in direct financing leases, capital leases		23,955			23,390
Investment in unconsolidated affiliates		88,247			67,522
Other		14,359			14,761
Total deferred charges and other assets		735,215			532,586
Total Assets	$	4,762,217		$	4,260,060

CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders’ equity	$	1,314,338		$	1,274,545
Washington Gas Light Company preferred stock		28,173			28,173
Long-term debt		599,225			524,067
Total capitalization		1,941,736			1,826,785
Current Liabilities
Current maturities of long-term debt		30,000			67,000
Notes payable		314,500			373,100
Accounts payable and other accrued liabilities		362,097			270,658
Wages payable		19,636			18,645
Accrued interest		3,375			3,399
Dividends declared		23,167			22,075
Customer deposits and advance payments		52,441			67,154
Gas costs and other regulatory liabilities		100,175			27,013
Accrued taxes		31,715			16,056
Derivatives		61,810			48,413
Other		13,393			36,564
Total current liabilities		1,012,309			950,077
Deferred Credits
Unamortized investment tax credits		83,742			46,378
Deferred income taxes		616,967			629,807
Accrued pensions and benefits		163,326			148,890
Asset retirement obligations		103,504			101,321
Regulatory liabilities
Accrued asset removal costs		319,604			321,266
Other		28,188			13,459
Derivatives		400,024			141,334
Other		92,817			80,743
Total deferred credits		1,808,172			1,483,198
Commitments and Contingencies (Note 13)
Total Capitalization and Liabilities	$	4,762,217		$	4,260,060

The accompanying notes are an integral part of these statements.

WGL Holdings, Inc.

Condensed Consolidated Statements of Income (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


	Three Months Ended March 31,				Six Months Ended March 31,
(In thousands, except per share data)	2014		2013		2014		2013
OPERATING REVENUES
Utility	$	702,255	$	527,174	$	1,088,796	$	875,107
Non-utility		471,995		364,209		765,751		703,012
Total Operating Revenues		1,174,250		891,383		1,854,547		1,578,119
OPERATING EXPENSES
Utility cost of gas		459,107		244,201		645,988		387,171
Non-utility cost of energy-related sales		426,286		323,740		731,637		622,889
Operation and maintenance		99,699		88,133		187,841		171,763
Depreciation and amortization		27,304		25,544		53,894		52,848
General taxes and other assessments		57,121		54,181		97,742		93,248
Total Operating Expenses		1,069,517		735,799		1,717,102		1,327,919
OPERATING INCOME		104,733		155,584		137,445		250,200
Equity in earnings of unconsolidated affiliates		543		301		1,033		546
Other income—net		342		781		561		1,210
Interest expense		9,525		8,951		18,517		18,144
INCOME BEFORE INCOME TAXES		96,093		147,715		120,522		233,812
INCOME TAX EXPENSE		34,550		57,880		40,020		91,259
NET INCOME	$	61,543	$	89,835	$	80,502	$	142,553
Dividends on Washington Gas Light Company preferred stock		330		330		660		660
NET INCOME APPLICABLE TO COMMON STOCK	$	61,213	$	89,505	$	79,842	$	141,893

AVERAGE COMMON SHARES OUTSTANDING
Basic		51,875		51,681		51,846		51,657
Diluted		51,899		51,828		51,864		51,759

EARNINGS PER AVERAGE COMMON SHARE
Basic	$	1.18	$	1.73	$	1.54	$	2.75
Diluted	$	1.18	$	1.73	$	1.54	$	2.74
DIVIDENDS DECLARED PER COMMON SHARE	$	0.4400	$	0.4200	$	0.8600	$	0.8200

The accompanying notes are an integral part of these statements.

WGL Holdings, Inc.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


	Three Months Ended March 31,						Six Months Ended March 31,
(In thousands)	2014			2013			2014			2013
NET INCOME	$	61,543		$	89,835		$	80,502		$	142,553
OTHER COMPREHENSIVE INCOME, BEFORE INCOME TAXES:
Pension and other postretirement benefit plans
Change in prior service credit		(35	)		(12	)		(69	)		(24	)
Change in actuarial net loss (gain)		(164	)		462			200			925
Change in transition obligation		—			62			—			71
Total pension and other postretirement benefit plans	$	(199	)	$	512		$	131		$	972
INCOME TAX EXPENSE (BENEFIT) RELATED TO OTHER COMPREHENSIVE INCOME		(79	)		209			52			392
OTHER COMPREHENSIVE INCOME (LOSS)	$	(120	)	$	303		$	79		$	580
COMPREHENSIVE INCOME	$	61,423		$	90,138		$	80,581		$	143,133

The accompanying notes are an integral part of these statements.

WGL Holdings, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


	Six Months Ended March 31,
(In thousands)	2014			2013
OPERATING ACTIVITIES
Net income	$	80,502		$	142,553
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization		53,894			52,848
Amortization of:
Other regulatory assets and liabilities—net		(5,896	)		(6,617	)
Debt related costs		288			431
Deferred income taxes—net		(16,248	)		9,087
Accrued/deferred pension cost		18,380			15,965
Compensation expense related to equity awards		3,923			3,266
Provision for doubtful accounts		8,850			7,413
Impairment loss on Springfield Operations Center		770			—
Other non-cash charges—net		822			764
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable and unbilled revenues—net		(471,422	)		(279,705	)
Gas costs and other regulatory assets/liabilities—net		78,252			65,263
Storage gas		273,138			118,137
Prepaid taxes		6,645			52,110
Other prepayments		(33,529	)		(13,434	)
Accounts payable and other accrued liabilities		108,629			51,551
Wages payable		991			689
Customer deposits and advance payments		(14,713	)		(29,745	)
Unamortized investment tax credits		37,364			7,706
Accrued taxes		15,659			43,812
Accrued interest		(24	)		(64	)
Other current assets		6,476			23,212
Other current liabilities		(9,774	)		(18,247	)
Deferred gas costs—net		(198,829	)		(21,794	)
Deferred assets—other		(597	)		489
Deferred liabilities—other		22,703			(1,335	)
Derivatives—deferred		281,905			32,531
Other—net		(6,018	)		4,724
Net Cash Provided By Operating Activities		242,141			261,610
FINANCING ACTIVITIES
Common stock issued		(732	)		(98	)
Long-term debt issued		75,253			2,536
Long-term debt retired		(37,000	)		—
Notes payable issued (retired)—net		(58,600	)		(65,600	)
Dividends on common stock and preferred stock		(44,199	)		(39,406	)
Other financing activities—net		(515	)		701
Net Cash Used In Financing Activities		(65,793	)		(101,867	)
INVESTING ACTIVITIES
Capital expenditures (excluding AFUDC)		(147,472	)		(143,739	)
Investments in unconsolidated affiliates		(21,194	)		(18,650	)
Distributions from unconsolidated affiliates		817			2,047
Net Cash Used in Investing Activities		(167,849	)		(160,342	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		8,499			(599	)
Cash and Cash Equivalents at Beginning of Year		3,478			10,263
Cash and Cash Equivalents at End of Period	$	11,977		$	9,664

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid (refunded)—net	$	10,020		$	(11,979	)
Interest paid	$	18,240		$	17,853
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Project debt financing activities—net	$	253		$	2,536
Capital expenditure accruals included in accounts payable and other accrued liabilities	$	14,483		$	9,678
Dividends paid in common stock	$	2,617		$	2,564

The accompanying notes are an integral part of these statements.

Washington Gas Light Company

Condensed Balance Sheets (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


(In thousands)	March 31, 2014			September 30, 2013
ASSETS
Property, Plant and Equipment
At original cost	$	3,984,411		$	3,903,482
Accumulated depreciation and amortization		(1,209,097	)		(1,178,600	)
Net property, plant and equipment		2,775,314			2,724,882
Current Assets
Cash and cash equivalents		7,919			—
Receivables
Accounts receivable		360,717			91,405
Gas costs and other regulatory assets		5,735			10,825
Unbilled revenues		123,244			19,418
Allowance for doubtful accounts		(19,816	)		(17,498	)
Net receivables		469,880			104,150
Materials and supplies—principally at average cost		22,368			24,857
Storage gas		45,885			132,226
Deferred income taxes		26,849			27,000
Other prepayments		28,441			22,794
Receivables from associated companies		7,101			7,173
Derivatives		1,779			4,278
Total current assets		610,222			322,478
Deferred Charges and Other Assets
Regulatory assets
Gas costs		292,792			93,963
Pension and other post-retirement benefits		245,544			239,434
Other		66,040			65,984
Derivatives		193			16,051
Other		12,722			11,597
Total deferred charges and other assets		617,291			427,029
Total Assets	$	4,002,827		$	3,474,389
CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholder’s equity	$	1,073,761		$	1,024,583
Preferred stock		28,173			28,173
Long-term debt		599,225			524,067
Total capitalization		1,701,159			1,576,823
Current Liabilities
Current maturities of long-term debt		30,000			67,000
Notes payable		61,000			124,500
Accounts payable and other accrued liabilities		210,718			132,814
Wages payable		18,281			17,057
Accrued interest		3,375			3,399
Dividends declared		20,444			19,359
Customer deposits and advance payments		52,441			67,154
Gas costs and other regulatory liabilities		100,175			27,013
Accrued taxes		101,553			25,380
Payables to associated companies		41,358			20,557
Derivatives		44,437			24,749
Other		3,070			9,047
Total current liabilities		686,852			538,029
Deferred Credits
Unamortized investment tax credits		6,915			7,354
Deferred income taxes		598,150			611,453
Accrued pensions and benefits		161,897			147,479
Asset retirement obligations		102,116			99,972
Regulatory liabilities
Accrued asset removal costs		319,604			321,266
Other		28,188			13,459
Derivatives		347,437			106,144
Other		50,509			52,410
Total deferred credits		1,614,816			1,359,537
Commitments and Contingencies (Note 13)
Total Capitalization and Liabilities	$	4,002,827		$	3,474,389

The accompanying notes are an integral part of these statements.

Washington Gas Light Company

Condensed Statements of Income (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


	Three Months Ended March 31,				Six Months Ended March 31,
(In thousands)	2014		2013		2014			2013
OPERATING REVENUES	$	716,808	$	535,950	$	1,107,223		$	891,767
OPERATING EXPENSES
Utility cost of gas		473,508		252,837		664,203			403,285
Operation and maintenance		76,440		72,941		148,512			143,334
Depreciation and amortization		25,401		24,653		50,442			51,141
General taxes and other assessments		53,421		51,161		90,799			87,612
Total Operating Expenses		628,770		401,592		953,956			685,372
OPERATING INCOME		88,038		134,358		153,267			206,395
Other income (expense)—net		90		435		(90	)		574
Interest expense		9,393		8,857		18,272			17,952
INCOME BEFORE INCOME TAXES		78,735		125,936		134,905			189,017
INCOME TAX EXPENSE		29,229		48,671		46,592			73,035
NET INCOME	$	49,506	$	77,265	$	88,313		$	115,982
Dividends on Washington Gas preferred stock		330		330		660			660
NET INCOME APPLICABLE TO COMMON STOCK	$	49,176	$	76,935	$	87,653		$	115,322

The accompanying notes are an integral part of these statements.

Washington Gas Light Company

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


	Three Months Ended March 31,						Six Months Ended March 31,
(In thousands)	2014			2013			2014			2013
NET INCOME	$	49,506		$	77,265		$	88,313		$	115,982
OTHER COMPREHENSIVE INCOME, BEFORE INCOME TAXES:
Pension and other postretirement benefit plans
Change in prior service credit		(35	)		(12	)		(69	)		(24	)
Change in actuarial net loss (gain)		(164	)		462			200			925
Change in transition obligation		—			62			—			71
Total pension and other postretirement benefit plans	$	(199	)	$	512		$	131		$	972
INCOME TAX EXPENSE (BENEFIT) RELATED TO OTHER COMPREHENSIVE INCOME		(79	)		209			52			392
OTHER COMPREHENSIVE INCOME (LOSS)	$	(120	)	$	303		$	79		$	580
COMPREHENSIVE INCOME	$	49,386		$	77,568		$	88,392		$	116,562

The accompanying notes are an integral part of these statements.

Washington Gas Light Company

Condensed Statements of Cash Flows (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


	Six Months Ended March 31,
(In thousands)	2014			2013
OPERATING ACTIVITIES
Net income	$	88,313		$	115,982
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization		50,442			51,141
Amortization of:
Other regulatory assets and liabilities—net		(6,141	)		(6,616	)
Debt related costs		565			430
Deferred income taxes—net		(17,185	)		6,002
Accrued/deferred pension cost		18,208			15,834
Compensation expense related to equity awards		1,812			2,522
Provision for doubtful accounts		7,895			5,983
Impairment loss on Springfield Operations Center		770			—
Other non-cash charges—net		1,283			899
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable, unbilled revenues and receivables from associated companies—net		(378,643	)		(216,171	)
Gas costs and other regulatory assets/liabilities—net		78,252			65,263
Storage gas		86,341			75,632
Other prepayments		(5,647	)		42,280
Accounts payable and other accrued liabilities, including payables to associated companies		106,067			34,865
Wages payable		1,224			918
Customer deposits and advance payments		(14,713	)		(32,896	)
Accrued taxes		76,173			47,354
Accrued interest		(24	)		(64	)
Other current assets		4,988			5,665
Other current liabilities		13,711			1,198
Deferred gas costs—net		(198,829	)		(21,794	)
Deferred assets—other		(8,729	)		(217	)
Deferred liabilities—other		13,527			(6,784	)
Derivatives—deferred		257,151			35,681
Other—net		(305	)		37
Net Cash Provided By Operating Activities		176,506			223,144
FINANCING ACTIVITIES
Long-term debt issued		75,253			2,536
Long-term debt retired		(37,000	)		—
Notes payable issued (retired)—net		(63,500	)		(71,800	)
Dividends on common stock and preferred stock		(38,764	)		(37,844	)
Other financing activities—net		—			(223	)
Net Cash Used In Financing Activities		(64,011	)		(107,331	)
INVESTING ACTIVITIES
Capital expenditures (excluding AFUDC)		(104,576	)		(115,813	)
Net Cash Used In Investing Activities		(104,576	)		(115,813	)
INCREASE IN CASH AND CASH EQUIVALENTS		7,919			—
Cash and Cash Equivalents at Beginning of Year		—			1
Cash and Cash Equivalents at End of Period	$	7,919		$	1

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid (refunded)—net	$	1,240		$	(15,000	)
Interest paid	$	17,995		$	8,804
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Project debt financing activities—net	$	253		$	2,536
Capital expenditure accruals included in accounts payable and other accrued liabilities	$	8,474		$	9,678

The accompanying notes are an integral part of these statements.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. ACCOUNTING POLICIES

Basis of Presentation

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

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Therefore, certain financial information and note disclosures accompanying annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) are omitted in this interim report. The interim consolidated financial statements and accompanying notes should be read in conjunction with the combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2013. Due to the seasonal nature of our businesses, the results of operations for the periods presented in this report are not necessarily indicative of actual results for the full fiscal years ending September 30, 2014 and 2013 of either WGL or Washington Gas.

The accompanying unaudited financial statements for WGL and Washington Gas reflect all normal recurring adjustments that are necessary, in our opinion, to present fairly the results of operations in accordance with GAAP. Certain reclassifications have been recast to conform to current year presentation.

For a complete description of our accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements of the combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2013.

Storage Gas Valuations

For Washington Gas and WGEServices, storage gas inventory is stated at the lower-of-cost or market as determined using the first-in, first-out method. For the three and six months ended March 31, 2014, Washington Gas recorded a decrease to net income due to a lower-of-cost of market adjustment of $0.4 million. For the three and six months ended March 31, 2013, Washington Gas did not record any lower-of-cost of market adjustments. For the three and six months ended March 31, 2014 and 2013, WGEServices did not record any lower-of-cost or market adjustments.

For WGL Midstream, storage gas inventory is stated at the lower-of-cost or market using the weighted average cost method. For the three and six months ended March 31, 2014, WGL Midstream did not record any lower of-cost-or market adjustments. For the three months ended March 31, 2013, WGL Midstream recorded an increase to net income due to a reversal of a prior period lower-of-cost or market adjustment of $6.6 million. For the six months ended March 31, 2013, WGL Midstream recorded a reduction to net income of $1.8 million for lower-of-cost or market adjustments.

Accounting Standards Adopted in the Current Fiscal Year

Balance Sheet Offsetting. In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. This standard amends the disclosure requirements on offsetting in ASC Topic 210 by requiring enhanced disclosures about financial instruments and derivative instruments that are either: (i) offset in accordance with existing guidance or (ii) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the balance sheet. In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of the Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 limits the scope of the required disclosures to derivatives, repurchase agreements and securities borrowing and securities lending transactions. The disclosures are required irrespective of whether the transactions are offset in the statement of financial position. ASU 2011-11 and ASU 2013-01 were effective for us on October 1, 2013. As a result of the standard, additional disclosures regarding master netting arrangements were added to Note 8 - Derivatives and Weather-Related Instruments. The adoption of these standards did not otherwise affect our financial statements.

Comprehensive Income. In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This standard requires entities to (i)

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

present information about reclassification adjustments from accumulated other comprehensive income (AOCI) to net income in their entirety – the effect on the reclassification on each affected net income line item and (ii) for AOCI reclassification items that are not reclassified in their entirety into net income – a cross-reference to other required US GAAP disclosures. The reclassification information may be presented in a single note or on the face of the financial statements. ASU 2013-02 was effective for us on October 1, 2013. As a result of this standard, we have presented information about reclassification adjustments out of accumulated other comprehensive income in a new footnote to the financial statements. Refer to Note 15 – Changes in Accumulated Other Comprehensive Income for the details of this disclosure. The adoption of this standard did not otherwise affect our financial statements.

Other Newly Issued Accounting Standards

Income Taxes. In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This standard amends the disclosure requirement of ASC Topic 740 by requiring an unrecognized tax benefit, or a portion of an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset in most circumstances. ASU 2013-11 will be effective for us on October 1, 2014. We do not expect the adoption of this standard to have a material effect on our financial statements.

NOTE 2. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

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


WGL Holdings, Inc.
(In millions)	March 31, 2014		September 30, 2013
Accounts payable—trade	$	312.2	$	216.3
Employee benefits and payroll accruals		18.0		23.4
Embedded derivatives and other accrued liabilities		31.9		30.9
Total	$	362.1	$	270.6


Washington Gas Light Company
(In millions)		March 31, 2014		September 30, 2013
Accounts payable—trade	$	172.6	$	99.7
Employee benefits and payroll accruals		16.9		21.4
Embedded derivatives and other accrued liabilities		21.2		11.7
Total	$	210.7	$	132.8

NOTE 3. SHORT-TERM DEBT

WGL and Washington Gas satisfy their short-term financing requirements through the sale of commercial paper or through bank borrowings. Due to the seasonal nature of the regulated utility and retail energy-marketing segments, short-term financing requirements can vary significantly during the year. Revolving credit agreements are maintained to support outstanding commercial paper and to permit short-term borrowing flexibility. WGL’s policy is to maintain bank credit facilities in amounts equal to or greater than the expected maximum commercial paper position. The following is a summary of committed credit available at March 31, 2014 and September 30, 2013.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


Committed Credit Available (In millions)
As of March 31, 2014	WGL Holdings, Inc. ⁽*^b)*			Washington Gas			Total Consolidated
Committed credit agreements
Unsecured revolving credit facility, expires April 3, 2017^(a)	$	450.0		$	350.0		$	800.0
Less: Commercial Paper		(253.5	)		(61.0	)		(314.5	)
Net committed credit available	$	196.5		$	289.0		$	485.5



As of September 30, 2013	WGL Holdings, Inc.^(b)			Washington Gas			Total Consolidated
Committed credit agreements
Unsecured revolving credit facility, expires April 3, 2017^(a)	$	450.0		$	350.0		$	800.0
Less: Commercial Paper		(248.6	)		(124.5	)		(373.1	)
Net committed credit available	$	201.4		$	225.5		$	426.9

^(a)Both WGL and Washington Gas have the right to request extensions with the banks’ approval. WGL’s revolving credit facility permits it to borrow an additional $100 million, with the banks’ approval, for a total of $550 million. Washington Gas’ revolving credit facility permits it to borrow an additional $100 million, with the banks’ approval, for a total of $450 million.

^(b)WGL Holdings, Inc. includes all subsidiaries other than Washington Gas Light Company.

At March 31, 2014 and September 30, 2013, WGL and its subsidiaries had outstanding notes payable in the form of commercial paper supported by revolving credit facilities of $314.5 million and $373.1 million, respectively, at a weighted average interest rate of 0.17% and 0.19%, respectively. At March 31, 2014 and September 30, 2013, Washington Gas had outstanding notes payable in the form of commercial paper of $61.0 million and $124.5 million, respectively, at a weighted average interest rate of 0.12% and 0.13%, respectively. At March 31, 2014 and September 30, 2013, there were no outstanding bank loans from WGL’s or Washington Gas’ revolving credit facilities.

NOTE 4. LONG-TERM DEBT

UNSECURED NOTES

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

At March 31, 2014 and September 30, 2013, Washington Gas had the capacity under a shelf registration to issue up to $375.0 million and $450.0 million, respectively, of additional MTNs. At March 31, 2014 and September 30, 2013, outstanding MTNs and private placement notes were $621.0 million and $583.0 million at a weighted average interest rate of 5.86% and 5.91%, respectively.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

The following table shows MTN and private placement issuances and retirements for the six months ended March 31, 2014.

MTN and Private Placement Issuances and Retirements

($ In millions)

Principal

Interest

Rate

Nominal

Maturity Date

Six Months Ended March 31, 2014

Issuances:

12/5/2013

75.0

5.00

% ^(a)

12/15/2043

Total

75.0

Retirements:

11/7/2013

37.0

4.88

11/7/2013

Total

37.0

^(a)The estimated effective cost of the issued notes, including consideration of issuance fees and hedge costs, is 4.95%.

There were no MTN or private placement issuances or retirements for the year ended September 30, 2013.

NOTE 5. COMMON SHAREHOLDERS’ EQUITY

The tables below reflect the components of “Common shareholders’ equity” for WGL and “Common shareholder’s equity” for Washington Gas for the six months ended March 31, 2014.


WGL Holdings, Inc.
Components of Common Shareholders’ Equity
(In thousands)	Common Stock Amount		Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss, Net of Taxes			Total
Balance at September 30, 2013	$	574,461	$	10,710		$	700,422		$	(11,048	)	$	1,274,545
Net income		—		—			80,502			—			80,502
Other comprehensive income		—		—			—			79			79
Dividends reinvestment		3,083		—			—			—			3,083
Stock-based compensation		2,197		(777	)		—			—			1,420
Dividends declared:
Common stock		—		—			(44,631	)		—			(44,631	)
Preferred stock		—		—			(660	)		—			(660	)
Balance at March 31, 2014	$	579,741	$	9,933		$	735,633		$	(10,969	)	$	1,314,338


Washington Gas Light Company
Components of Common Shareholder’s Equity
(In thousands)	Common Stock Amount		Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss, Net of Taxes			Total
Balance at September 30, 2013	$	46,479	$	477,968		$	511,184		$	(11,048	)	$	1,024,583
Net income		—		—			88,313			—			88,313
Other comprehensive income		—		—			—			79			79
Stock-based compensation		—		635			—			—			635
Dividends declared:
Common stock		—		—			(39,189	)		—			(39,189	)
Preferred stock		—		—			(660	)		—			(660	)
Balance at March 31, 2014	$	46,479	$	478,603		$	559,648		$	(10,969	)	$	1,073,761

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

WGL had 51,901,152 and 51,774,204 shares issued of common stock at March 31, 2014 and September 30, 2013, respectively. Washington Gas had 46,479,536 shares issued of common stock at both March 31, 2014 and September 30, 2013.

NOTE 6. EARNINGS PER SHARE

Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Diluted EPS assumes the issuance of common shares pursuant to stock-based compensation plans at the beginning of the applicable period unless the effect of such issuance would be anti-dilutive. The following table reflects the computation of our basic and diluted EPS for the three and six months ended March 31, 2014 and 2013.

Basic and Diluted EPS


(In thousands, except per share data)	Net Income Applicable to Common Stock		Shares		Per Share Amount
Three Months Ended March 31, 2014
Basic EPS	$	61,213		51,875	$	1.18

Stock-based compensation plans		—		24
Diluted EPS	$	61,213		51,899	$	1.18

Three Months Ended March 31, 2013
Basic EPS	$	89,505		51,681	$	1.73

Stock-based compensation plans		—		147
Diluted EPS	$	89,505		51,828	$	1.73

Six Months Ended March 31, 2014
Basic EPS	$	79,842		51,846	$	1.54

Stock-based compensation plans		—		18
Diluted EPS	$	79,842		51,864	$	1.54

Six Months Ended March 31, 2013
Basic EPS	$	141,893		51,657	$	2.75

Stock-based compensation plans		—		102
Diluted EPS	$	141,893		51,759	$	2.74

There were no anti-dilutive shares for the three and six months ended March 31, 2014 or 2013.

NOTE 7. INCOME TAXES

As of March 31, 2014 and September 30, 2013, our uncertain tax positions were approximately $26.2 million and $25.1 million, respectively, primarily due to the change in tax accounting for repairs. If the amounts of unrecognized tax benefits are eventually realized, it would not materially impact the effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefit with respect to some of WGL’s and Washington Gas’ uncertain tax positions will significantly increase or decrease in the next 12 months, however at this time an estimate of the range of reasonably possible outcomes cannot be determined.

Under the provision of FIN 48 (now part of ASC Topic 740, Income Taxes), Washington Gas recognizes any accrued interest associated with uncertain tax positions in interest expense and recognizes any accrued penalties associated with uncertain tax positions in other expenses in the statements of income. During the three months ended March 31, 2014 and 2013, we accrued no expense for interest on uncertain tax positions. At both March 31, 2014 and September 30, 2013, we had a total accrual of $0.1 million of interest expense related to uncertain tax positions included in other deferred credits in the accompanying balance sheets.

Washington Gas charged the Maryland portion of the Medicare Part D (Med D) regulatory asset to tax expense during the fiscal year ended September 30, 2012 based on positions taken by the Maryland Public Service Commission (PSC of MD) in Washington Gas’ rate case during that fiscal year that did not permit recovery. Washington Gas received an order during the three months ended December 31, 2013 in its recent rate case from the PSC of MD that will allow recovery of the Med D Regulatory Asset. Therefore, the tax benefit has been recognized to reinstate the regulatory asset which results in a

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

decrease in the effective rate for the fiscal year ended September 30, 2014. The Med D adjustment results in an effective tax rate for WGL of 33.3% at March 31, 2014 and is expected to be approximately 33.2% for the entire fiscal year ended September 30, 2014. The Med D adjustment results in an effective tax rate for Washington Gas of 34.6% at March 31, 2014, and is expected to be approximately 33.5% for the entire fiscal year ended September 30, 2014.

NOTE 8. DERIVATIVE AND WEATHER-RELATED INSTRUMENTS

DERIVATIVE INSTRUMENTS

Regulated Utility Operations

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

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

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

All physically and financially settled contracts under our asset optimization program are reported on a net basis in the statements of income in “Utility cost of gas.” Total net margins recorded to “Utility cost of gas” after sharing and management fees associated with all asset optimization transactions for the three months ended March 31, 2014 was a loss of $60.4 million including an unrealized loss of $77.9 million. During the three months ended March 31, 2013 we recorded a loss of $2.2 million including an unrealized loss of $6.1 million. Total net margins recorded for the six months ended March 31, 2014 was a loss of $80.2 million including an unrealized loss of $104.1 million. During the six months ended March 31, 2013, we recorded a loss of $7.2 million including an unrealized loss of $14.8 million.

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

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

Non-Utility Operations

WGEServices enters into certain derivative contracts as part of managing the price risk associated with the sale and purchase of natural gas and electricity. WGL Midstream enters into derivative contracts for the purpose of optimizing its storage and transportation capacity as well as managing the transportation and storage assets on behalf of third parties. As the storage and transportation capacity utilized by WGL Midstream are not considered to be derivative instruments, they are not recorded at fair value on our consolidated balance sheets. Washington Gas Resources has warrants to purchase stock from certain of its solar investments that are accounted for as derivative instruments. Derivative instruments are recorded at fair value on our consolidated balance sheets.WGEServices, WGL Midstream and Washington Gas Resources do not designate these derivatives as hedges under ASC Topic 815; therefore, changes in the fair value of these derivative instruments are reflected in the earnings of our non-utility operations and may cause significant period-to-period volatility in earnings.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

Consolidated Operations

Reflected in the tables below is information for WGL as well as Washington Gas. The information for WGL includes derivative instruments for both utility and non-utility operations.

At March 31, 2014 and September 30, 2013, respectively, the absolute notional amounts of our derivatives are as follows:


Absolute Notional Amounts
of Open Positions on Derivative Instruments
As of March 31, 2014	Notional Amounts
Derivative transactions	WGL Holdings, Inc.	Washington Gas Light Company
Natural Gas (In millions of therms)
Asset optimization	15,109.7	11,294.1
Retail sales	62.8	—
Other risk-management activities	1,681.0	1,402.3
Electricity (In millions of kWhs)
Retail sales	3,942.0	—
Other risk-management activities	15,685.0	—
Warrants (In millions of shares)	4.6	—



Absolute Notional Amounts of Open Positions on Derivative Instruments
As of September 30, 2013	Notional Amounts
Derivative transactions	WGL Holdings, Inc.	Washington Gas Light Company
Natural Gas (In millions of therms)
Asset optimization	13,289.6	11,115.8
Retail sales	98.9	—
Other risk-management activities	1,803.6	1,455.7
Electricity (In millions of kWhs)
Retail sales	4,790.2	—
Other risk-management activities	17,647.9	—
Warrants (In millions of shares)	4.6	—
Interest Rate Swaps (In millions of dollars)^(a)	75.0	75.0

^(a) The fair value of our interest rate swaps was minimal at 9/30/13.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

The following tables present the balance sheet classification for all derivative instruments as of March 31, 2014 and September 30, 2013.


WGL Holdings, Inc.
Balance Sheet Classification of Derivative Instruments
(In millions)
As of March 31, 2014	Gross Derivative Assets		Gross Derivative Liabilities			Netting of Collateral			Total^(a)
Current Assets—Derivatives	$	39.5		(7.7	)		(4.4	)	$	27.4
Deferred Charges and Other Assets—Derivatives		5.0		(1.9	)		—			3.1
Accounts Payable and Other Accrued Liabilities		3.3		—			—			3.3
Current Liabilities—Derivatives		5.5		(71.0	)		3.7			(61.8	)
Deferred Credits—Derivatives		3.0		(404.5	)		1.5			(400.0	)
Total	$	56.3	$	(485.1	)	$	0.8		$	(428.0	)

As of September 30, 2013
Current Assets—Derivatives	$	57.3	$	(19.3	)	$	(2.7	)	$	35.3
Deferred Charges and Other Assets—Derivatives		57.4		(31.1	)		—			26.3
Accounts Payable and Other Accrued Liabilities		1.5		—			—			1.5
Current Liabilities—Derivatives		4.1		(53.4	)		0.9			(48.4	)
Deferred Credits—Derivatives		—		(144.0	)		2.7			(141.3	)
Total	$	120.3	$	(247.8	)	$	0.9		$	(126.6	)


Washington Gas Light Company
Balance Sheet Classification of Derivative Instruments
(In millions)
As of March 31, 2014	Gross Derivative Assets		Gross Derivative Liabilities			Netting of Collateral			Total^(a)
Current Assets—Derivatives	$	6.1		(4.3	)		—			1.8
Deferred Charges and Other Assets—Derivatives		2.1		(1.9	)		—			0.2
Current Liabilities—Derivatives		0.7		(45.1	)		—			(44.4	)
Deferred Credits—Derivatives		1.5		(348.9	)		—			(347.4	)
Total	$	10.4	$	(400.2	)	$	—		$	(389.8	)

As of September 30, 2013
Current Assets—Derivatives	$	19.3	$	(12.3	)	$	(2.7	)	$	4.3
Deferred Charges and Other Assets—Derivatives		47.2		(31.1	)		—			16.1
Current Liabilities—Derivatives		1.5		(26.2	)		—			(24.7	)
Deferred Credits—Derivatives		—		(106.1	)		—			(106.1	)
Total	$	68.0	$	(175.7	)	$	(2.7	)	$	(110.4	)

^(a)WGL has elected to offset the fair value of recognized derivative instruments against the right to reclaim or the obligation to return collateral for derivative instruments executed under the same master netting arrangement in accordance with ASC 815. All recognized derivative contracts and associated financial collateral subject to a master netting arrangement or similar that is eligible for offset under ASC 815 have been presented net in the balance sheet.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

The following table presents all gains and losses associated with derivative instruments for the three and six months ended March 31, 2014 and 2013.


Gains and Losses on Derivative Instruments
(In millions)	WGL Holdings, Inc.						Washington Gas Light Company
Three Months Ended March 31,		2014			2013			2014			2013
Recorded to income
Operating revenues—non-utility	$	(35.8	)	$	(50.9	)	$	—		$	—
Utility cost of gas		(96.4	)		(8.0	)		(96.4	)		(8.0	)
Non-utility cost of energy-related sales		27.6			33.9			—			—
Other income-net		—			—			—			—
Recorded to regulatory assets
Gas costs		(133.7	)		(15.0	)		(133.7	)		(15.0	)
Other		1.2			—			1.2			—
Total	$	(237.1	)	$	(40.0	)	$	(228.9	)	$	(23.0	)


Gains and Losses on Derivative Instruments
(In millions)	WGL Holdings, Inc.						Washington Gas Light Company
Six Months Ended March 31,		2014			2013			2014			2013
Recorded to income
Operating revenues—non-utility	$	(84.3	)	$	(38.7	)	$	—		$	—
Utility cost of gas		(123.7	)		(15.2	)		(123.7	)		(15.2	)
Non-utility cost of energy-related sales		43.9			26.4			—			—
Other income-net		0.1			0.1			—			—
Recorded to regulatory assets
Gas costs		(212.0	)		(26.9	)		(212.0	)		(26.9	)
Other		1.2			—			1.2			—
Total	$	(374.8	)	$	(54.3	)	$	(334.5	)	$	(42.1	)

Collateral

WGL utilizes standardized master netting agreements, which facilitate the netting of cash flows into a single net exposure for a given counterparty. As part of these master netting agreements, cash, letters of credit, and parental guarantees may be required to be posted to or obtained from counterparties in order to mitigate credit risk related to both derivatives and non-derivative positions. Under WGL’s offsetting policy, collateral balances are offset against the related counterparties’ derivative positions to the extent the application would not result in the over-collateralization of those derivative positions on the balance sheet. At March 31, 2014, Washington Gas, WGEServices and WGL Midstream posted $14.7 million, $33.6 million and $2.5 million, respectively, of collateral deposits with counterparties that were not offset against open and settled derivative contracts. At September 30, 2013, Washington Gas, WGEServices and WGL Midstream posted $3.0 million, $12.1 million and $8.1 million, respectively, of collateral deposits with counterparties that were not offset against open and settled derivative contracts. In addition, at March 31, 2014 and September 30, 2013, Washington Gas held $0.3 million and $4.6 million, respectively of cash collateral representing an obligation to counterparties that was not offset against open and settled derivative contracts. Any collateral posted that is not offset against open and settled derivative contracts is included in “Other prepayments” in the accompanying balance sheet. Collateral received and not offset against open and settled derivative contracts is included in “Customer deposits and advance payments” in the accompanying balance sheet.

Certain derivative instruments of Washington Gas, WGEServices and WGL Midstream contain contract provisions that require collateral to be posted if the credit rating of WGL falls below certain levels or if counterparty exposure to WGEServices or WGL Midstream exceeds a certain level. Due to counterparty exposure levels, at March 31, 2014, WGEServices posted $5.2 million of collateral related to its derivative liabilities that contained credit-related contingent features. At September 30, 2013, WGEServices posted $3.6 million of collateral related to these aforementioned derivative liabilities. Washington Gas and WGL Midstream were not required to post any collateral related to its derivative liabilities that contained credit-related contingent features at March 31, 2014 or September 30, 2013. The following table shows the aggregate fair value of all derivative instruments with credit-related contingent features that are in a liability position, as well as the maximum amount of collateral that would be required if the most intrusive credit-risk-related contingent features underlying these agreements were triggered on March 31, 2014 and September 30, 2013, respectively.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


Potential Collateral Requirements for Derivative Liabilities with Credit-risk-Contingent Features
(In millions)		WGL Holdings, Inc.		Washington Gas Light Company
March 31, 2014
Derivative liabilities with credit-risk-contingent features	$	31.9	$	18.6
Maximum potential collateral requirements		20.0		13.6
September 30, 2013
Derivative liabilities with credit-risk-contingent features	$	77.0	$	44.7
Maximum potential collateral requirements		33.6		1.7

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

Concentration of Credit Risk

We are exposed to credit risk from derivative instruments with wholesale counterparties. Our credit policies are designed to mitigate this credit risk by requiring credit enhancements including, but not limited to, letters of credit, parent guarantees and cash collateral when deemed necessary. For certain counterparties or their guarantors that meet our specified creditworthiness criteria, Washington Gas, WGEServices and WGL Midstream grant unsecured credit, which we continuously monitor. Additionally, Washington Gas, WGEServices and WGL Midstream have separate agreements with wholesale counterparties that contain netting provisions to allow offsetting of the receivable and payable exposure related to each counterparty. At March 31, 2014, two counterparties represented over 10% of Washington Gas’ credit exposure to wholesale derivative counterparties for a total credit risk of $5.7 million; three counterparties represented over 10% of WGEServices’ credit exposure to wholesale counterparties for a total credit risk of $5.6 million; and three counterparties represented over 10% of WGL Midstream’s credit exposure to wholesale counterparties for a total credit risk of $15.5 million.

WEATHER-RELATED INSTRUMENTS

Washington Gas did not use any weather-related instruments during the three and six months ended March 31, 2014. During the three and six months ended March 31, 2013, Washington Gas used Heating Degree Day (HDD) weather-related instruments to manage its financial exposure to variations from normal weather in the District of Columbia. Under these contracts, Washington Gas purchased protection against net revenue shortfalls due to warmer-than-normal weather and sold to its counterparty the right to receive the benefit when weather is colder than normal. Washington Gas elected to value all weather-related instruments at fair value.

Gains and losses associated with Washington Gas’ weather-related instruments are recorded to “Operation and maintenance” expense. During the three months ended March 31, 2013, Washington Gas recorded a pre-tax net gain of $ 0.6 million related to weather instruments. During the six months ended March 31, 2013, Washington Gas recorded a pre-tax net gain of $1.3 million related to weather instruments.

WGEServices utilizes weather-related instruments for managing the financial effects of weather risks. These instruments cover a portion of WGEServices’ estimated revenue or energy-related cost exposure to variations in heating or cooling degree days. These contracts provide for payment to WGEServices of a fixed-dollar amount for every degree day over or under specific levels during the calculation period depending upon the type of contract executed. For the three months ended March 31, 2014 and March 31, 2013, WGEServices recorded a pre-tax gain of $6.4 million and a pre-tax loss of $1.2 million, respectively, related to these contracts. For the six months ended March 31, 2014 and March 31, 2013, WGEServices recorded a pre-tax gain of $5.4 million and a pre-tax loss of $0.8 million, respectively, related to these contracts.

NOTE 9. FAIR VALUE MEASUREMENTS

Recurring Basis

We measure the fair value of our financial assets and liabilities using a combination of the income and market approach in accordance with ASC Topic 820. These financial assets and liabilities primarily consist of (i) derivatives recorded on our balance sheet under ASC Topic 815, (ii) weather-related instruments and (iii) short-term investments, commercial paper and long-term debt outstanding required to be disclosed at fair value. Under ASC Topic 820, fair value is defined as the exit price, representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

transaction between market participants at the measurement date. To value our financial instruments, we use market data or assumptions that market participants would use, including assumptions about credit risk (both our own credit risk and the counterparty’s credit risk) and the risks inherent in the inputs to valuation.

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

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

Level 1. Level 1 of the fair value hierarchy consists of assets or liabilities that are valued using observable inputs based upon unadjusted quoted prices in active markets for identical assets or liabilities at the reporting date. Level 1 assets and liabilities primarily include exchange traded derivatives and securities.

Level 2. Level 2 of the fair value hierarchy consists of assets or liabilities that are valued using directly or indirectly observable inputs either corroborated with market data or based on exchange traded market data. Level 2 includes fair values based on industry-standard valuation techniques that consider various assumptions: (i) quoted forward prices, including the use of mid-market pricing within a bid/ask spread; (ii) discount rates; (iii) implied volatility and (iv) other economic factors. Substantially all of these assumptions are observable throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the relevant market. At March 31, 2014 and September 30, 2013, Level 2 financial assets and liabilities included energy-related derivatives such as financial contracts, options and physical forward contracts for deliveries at active market locations.

Level 3. Level 3 of the fair value hierarchy consists of assets or liabilities that are valued using significant unobservable inputs at the reporting date. These unobservable assumptions reflect our assumptions about estimates that market participants would use in pricing the asset or liability, including natural gas basis prices, annualized volatilities of natural gas prices, and electricity congestion prices. A significant change to any one of these inputs in isolation could result in a significant upward or downward fluctuation in the fair value measurement. These inputs may be used with industry standard valuation methodologies that result in our best estimate of fair value for the assets or liabilities at the reporting date.

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

At March 31, 2014 and September 30, 2013, Level 3 derivative assets and liabilities included: (i) physical contracts valued at illiquid market locations with no observable market data; (ii) long-dated positions where observable pricing is not available over the life of the contract; (iii) contracts valued using historical spot price volatility assumptions; (iv) valuations using indicative broker quotes for inactive market locations and (v) non-publicly traded stock warrants.

The following tables set forth financial instruments recorded at fair value as of March 31, 2014 and September 30, 2013, respectively. A financial instrument’s classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


WGL Holdings, Inc.
Fair Value Measurements Under the Fair Value Hierarchy
(In millions)	Level 1		Level 2			Level 3			Total
At March 31, 2014
Assets
Natural gas related derivatives	$	—	$	28.5		$	2.7		$	31.2
Electricity related derivatives		—		0.8			23.1			23.9
Warrants		—		—			1.2			1.2
Total Assets	$	—	$	29.3		$	27.0		$	56.3

Liabilities
Natural gas related derivatives	$	—	$	(23.1	)	$	(435.0	)	$	(458.1	)
Electricity related derivatives		—		(1.7	)		(25.3	)		(27.0	)
Total Liabilities	$	—	$	(24.8	)	$	(460.3	)	$	(485.1	)

At September 30, 2013
Assets
Natural gas related derivatives	$	—	$	72.3		$	21.5		$	93.8
Electricity related derivatives		—		—			25.4			25.4
Warrants		—		—			1.1			1.1
Total Assets	$	—	$	72.3		$	48.0		$	120.3

Liabilities
Natural gas related derivatives	$	—	$	(41.1	)	$	(176.7	)	$	(217.8	)
Electricity related derivatives		—		(7.0	)		(23.0	)		(30.0	)
Total Liabilities	$	—	$	(48.1	)	$	(199.7	)	$	(247.8	)

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


Washington Gas Light Company Fair Value Measurements Under the Fair Value Hierarchy
(In millions)	Level 1		Level 2			Level 3			Total
At March 31, 2014
Assets
Natural gas related derivatives	$	—	$	8.6		$	1.8		$	10.4
Total Assets	$	—	$	8.6		$	1.8		$	10.4

Liabilities
Natural gas related derivatives	$	—	$	(15.8	)	$	(384.4	)	$	(400.2	)
Total Liabilities	$	—	$	(15.8	)	$	(384.4	)	$	(400.2	)

At September 30, 2013
Assets
Natural gas related derivatives	$	—	$	51.0		$	17.0		$	68.0
Total Assets	$	—	$	51.0		$	17.0		$	68.0

Liabilities
Natural gas related derivatives	$	—	$	(25.1	)	$	(150.6	)	$	(175.7	)
Total Liabilities	$	—	$	(25.1	)	$	(150.6	)	$	(175.7	)

The following table includes quantitative information about the significant unobservable inputs used in the fair value measurement of our Level 3 financial instruments and the respective fair values of the net derivative asset and liability positions, by contract type, as of March 31, 2014 and September 30, 2013.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


Quantitative Information about Level 3 Fair Value Measurements
	Net Fair Value March 31, 2014	Valuation Techniques	Unobservable Inputs	Range

WGL Holdings, Inc.	(In millions)
Natural gas related derivatives	($432.3)	Discounted Cash Flow	Natural Gas Basis Price (per dekatherm)	($2.150) - $6.315
		Option Model	Natural Gas Basis Price (per dekatherm)	($0.860) - $4.430
			Annualized Volatility of Spot Market Natural Gas	34.6% - 589.6%
Electricity related derivatives	($2.2)	Discounted Cash Flow	Electricity Congestion Price (per megawatt hour)	($1.888) - $83.350
		Load-Shaping Option Model	Electricity Congestion Price (per megawatt hour)	$37.108 - $89.627

Washington Gas Light Company
Natural gas related derivatives	($382.6)	Discounted Cash Flow	Natural Gas Basis Price (per dekatherm)	($2.150) - $6.315

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


Quantitative Information about Level 3 Fair Value Measurements
	Net Fair Value September 30, 2013	Valuation Techniques	Unobservable Inputs	Range

WGL Holdings, Inc.	(In millions)
Natural gas related derivatives	($155.2)	Discounted Cash Flow	Natural Gas Basis Price (per dekatherm)	($1.780) - $2.205
		Option Model	Natural Gas Basis Price (per dekatherm)	($0.181) - $0.628
			Annualized Volatility of Spot Market Natural Gas	34.6% - 276.6%
Electricity related derivatives	$2.4	Discounted Cash Flow	Electricity Congestion Price (per megawatt hour)	($1.995) - $64.15

Washington Gas Light Company
Natural gas related derivatives	($133.6)	Discounted Cash Flow	Natural Gas Basis Price (per dekatherm)	($1.780) - $2.205
		Option Model	Natural Gas Basis Price (per dekatherm)	$0.024 - $0.628
			Annualized Volatility of Spot Market Natural Gas	46.8% - 276.6%

The following tables are a summary of the changes in the fair value of our derivative instruments that are measured at net fair value on a recurring basis in accordance with ASC Topic 820 using significant Level 3 inputs during the three and six months ended March 31, 2014 and 2013, respectively.

WGL Holdings, Inc.

Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs

(In millions)

Natural Gas
Related
Derivatives

Electricity
Related
Derivatives

Weather
Related
Instruments

Warrants

Total

Three Months Ended March 31, 2014

Balance at January 1, 2014

(264.5

)

(1.7

)

—

1.2

(265.0

)

Realized and unrealized gains (losses)

Recorded to income

(85.9

)

11.2

—

(74.7

)

Recorded to regulatory assets—gas costs

(110.8

)

—

(110.8

)

Transfers out of Level 3

—

Purchases

—

Settlements

28.9

(11.7

)

—

17.2

Balance at March 31, 2014

(432.3

)

(2.2

)

—

1.2

(433.3

)

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. Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives			Weather Related Instruments		Warrants		Total
Three Months Ended March 31, 2013
Balance at January 1, 2013	$	21.5			4.6			0.1		1.0	$	27.2
Realized and unrealized gains (losses)
Recorded to income		(6.3	)		(3.2	)		0.6		—		(8.9	)
Recorded to regulatory assets—gas costs		(10.5	)		—			—		—		(10.5	)
Transfers out of Level 3		(3.0	)		—			—		—		(3.0	)
Purchases		—			—			—		—		—
Settlements		2.9			2.6			—		—		5.5
Balance at March 31, 2013	$	4.6		$	4.0		$	0.7	$	1.0	$	10.3


WGL Holdings, Inc. Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives			Weather Related Instruments		Warrants		Total
Six Months Ended March 31, 2014
Balance at October 1, 2013	$	(155.2	)	$	2.4		$	—	$	1.1	$	(151.7	)
Realized and unrealized gains (losses)
Recorded to income		(132.6	)		3.3			—		0.1		(129.2	)
Recorded to regulatory assets—gas costs		(182.8	)		—			—		—		(182.8	)
Transfers out of Level 3		—			—			—		—		—
Purchases		—			1.4			—		—		1.4
Settlements		38.3			(9.3	)		—		—		29.0
Balance at March 31, 2014	$	(432.3	)	$	(2.2	)	$	—	$	1.2	$	(433.3	)

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. Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives			Weather Related Instruments			Warrants		Total
Six Months Ended March 31, 2013
Balance at October 1, 2012	$	39.6		$	2.8			(0.5	)		0.9	$	42.8
Realized and unrealized gains (losses)
Recorded to income		(14.9	)		(14.1	)		1.2			0.1		(27.7	)
Recorded to regulatory assets—gas costs		(22.6	)		—			—			—		(22.6	)
Transfers out of Level 3		(3.0	)		—			—			—		(3.0	)
Purchases		—			2.5			—			—		2.5
Settlements		5.5			12.8			—			—		18.3
Balance at March 31, 2013	$	4.6		$	4.0		$	0.7		$	1.0	$	10.3

Washington Gas Light Company

Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs

(In millions)

Natural Gas
Related
Derivatives

Electricity
Related
Derivatives

Weather
Related
Instruments

Warrants

Total

Three Months Ended March 31, 2014

Balance at January 1, 2014

(220.0

)

—

(220.0

)

Realized and unrealized gains (losses)

Recorded to income

(81.8

)

—

(81.8

)

Recorded to regulatory assets—gas costs

(110.8

)

—

(110.8

)

Transfers out of Level 3

—

Purchases

—

Settlements

30.0

—

30.0

Balance at March 31, 2014

(382.6

)

—

(382.6

)


Washington Gas Light Company Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives		Weather Related Instruments		Warrants		Total
Three Months Ended March 31, 2013
Balance at January 1, 2013	$	17.8			—		0.1		—	$	17.9
Realized and unrealized gains (losses)
Recorded to income		(5.1	)		—		0.6		—		(4.5	)
Recorded to regulatory assets—gas costs		(10.5	)		—		—		—		(10.5	)
Transfers out of Level 3		—			—		—		—		—
Purchases		(3.0	)		—		—		—		(3.0	)
Settlements		2.2			—		—		—		2.2
Balance at March 31, 2013	$	1.4		$	—	$	0.7	$	—	$	2.1

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

Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs

(In millions)

Natural Gas
Related
Derivatives

Electricity
Related
Derivatives

Weather
Related
Instruments

Warrants

Total

Six Months Ended March 31, 2014

Balance at October 1, 2013

(133.6

)

—

(133.6

)

Realized and unrealized gains (losses)

Recorded to income

(105.2

)

—

(105.2

)

Recorded to regulatory assets—gas costs

(182.8

)

—

(182.8

)

Transfers out of Level 3

—

Purchases

—

Settlements

39.0

—

39.0

Balance at March 31, 2014

(382.6

)

—

(382.6

)


Washington Gas Light Company Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives		Weather Related Instruments			Warrants		Total
Six Months Ended March 31, 2013
Balance at October 1, 2012	$	35.6		$	—	$	(0.5	)	$	—	$	35.1
Realized and unrealized gains (losses)
Recorded to income		(12.8	)		—		1.2			—		(11.6	)
Recorded to regulatory assets—gas costs		(22.6	)		—		—			—		(22.6	)
Transfers out of Level 3		(3.0	)		—		—			—		(3.0	)
Purchases		—			—		—			—		—
Settlements		4.2			—		—			—		4.2
Balance at March 31, 2013	$	1.4		$	—	$	0.7		$	—	$	2.1

Transfers between different levels of the fair value hierarchy may occur based on the level of observable inputs used to value the instruments from period to period. It is our policy to show both transfers into and out of the different levels of the fair value hierarchy at the fair value as of the beginning of the reporting period. There were no transfers in or out of Level 3 for the three and six months ended March 31, 2014 for WGL or Washington Gas. There were no transfers in or out of Level 3 for the three months ended March 31, 2013 for Washington Gas. During the six months ended March 31, 2013 there was a $3.0 million transfer out of Level 3 for Washington Gas. During the three and six months ended March 31, 2013, there was a $3.0 million transfer out of Level 3 for WGL. This transfer reflected an increase for prior year in the observable market inputs used to value those instruments.

The table below sets forth the line items on the statements of income to which amounts are recorded for the three and six months ended March 31, 2014 and 2013, respectively, related to fair value measurements using significant Level 3 inputs.

WGL Holdings, Inc.

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

Three Months Ended March 31, 2014

(In millions)

Natural Gas

Related
Derivatives

Electricity
Related
Derivatives

Weather
Related
Instruments

Warrants

Total

Operating revenues—non-utility

(0.5

)

(14.5

)

—

(15.0

)

Utility cost of gas

(81.8

)

—

(81.8

)

Other income-net

—

Non-utility cost of energy-related sales

(3.6

)

25.7

—

22.1

Operation and maintenance expense

—

Total

(85.9

)

11.2

—

(74.7

)

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)



WGL Holdings, Inc. Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
Three Months Ended March 31, 2013
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives			Weather Related Instruments		Warrants		Total
Operating revenues—non-utility	$	(3.2	)	$	(17.6	)	$	—	$	—	$	(20.8	)
Utility cost of gas		(5.1	)		—			—		—		(5.1	)
Other income-net		—			—			—		—		—
Non-utility cost of energy-related sales		2.0			14.4			—		—		16.4
Operation and maintenance expense		—			—			0.6		—		0.6
Total	$	(6.3	)	$	(3.2	)	$	0.6	$	—	$	(8.9	)


WGL Holdings, Inc. Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
Six Months Ended March 31, 2014
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives			Weather Related Instruments		Warrants		Total
Operating revenues—non-utility	$	(26.3	)	$	(24.5	)	$	—	$	—	$	(50.8	)
Utility cost of gas		(105.2	)		—			—		—		(105.2	)
Other income-net		—			—			—		0.1		0.1
Non-utility cost of energy-related sales		(1.1	)		27.8			—		—		26.7
Operation and maintenance expense		—			—			—		—		—
Total	$	(132.6	)	$	3.3		$	—	$	0.1	$	(129.2	)


WGL Holdings, Inc. Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
Six Months Ended March 31, 2013
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives			Weather Related Instruments		Warrants		Total
Operating revenues—non-utility	$	(3.7	)	$	(18.7	)	$	—	$	—	$	(22.4	)
Utility cost of gas		(12.8	)		—			—		—		(12.8	)
Other income-net		—			—			—		0.1		0.1
Non-utility cost of energy-related sales		1.6			4.6			—		—		6.2
Operation and maintenance expense		—			—			1.2		—		1.2
Total	$	(14.9	)	$	(14.1	)	$	1.2	$	0.1	$	(27.7	)


Washington Gas Light Company Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
Three Months Ended March 31, 2014
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives			Weather Related Instruments		Warrants		Total
Utility cost of gas		(81.8	)		—			—		—		(81.8	)
Operation and maintenance expense		—			—			—		—		—
Total	$	(81.8	)	$	—		$	—	$	—	$	(81.8	)

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)



Washington Gas Light Company Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
Three Months Ended March 31, 2013
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives		Weather Related Instruments		Warrants		Total
Utility cost of gas		(5.1	)		—		—		—		(5.1	)
Operation and maintenance expense		—			—		0.6		—		0.6
Total	$	(5.1	)	$	—	$	0.6	$	—	$	(4.5	)


Washington Gas Light Company Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
Six Months Ended March 31, 2014
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives		Weather Related Instruments		Warrants		Total
Utility cost of gas	$	(105.2	)	$	—	$	—	$	—	$	(105.2	)
Operation and maintenance expense		—			—		—		—		—
Total	$	(105.2	)	$	—	$	—	$	—	$	(105.2	)


Washington Gas Light Company Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
Six Months Ended March 31, 2013
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives		Weather Related Instruments		Warrants		Total
Utility cost of gas	$	(12.8	)	$	—	$	—	$	—	$	(12.8	)
Operation and maintenance expense		—			—		1.2		—		1.2
Total	$	(12.8	)	$	—	$	1.2	$	—	$	(11.6	)

Unrealized gains (losses) attributable to derivative assets and liabilities measured using significant Level 3 inputs were recorded as follows, for the three and six months ended March 31, 2014 and 2013, respectively.

WGL Holdings, Inc.

Unrealized Gains (Losses) Recorded for Level 3 Measurements

Three Months Ended March 31, 2014

(In millions)

Natural Gas
Related
Derivatives

Electricity
Related
Derivatives

Weather
Related
Instruments

Warrants

Total

Recorded to income

Operating revenues—non-utility

(5.0

)

(28.4

)

—

(33.4

)

Utility cost of gas

(68.1

)

—

(68.1

)

Non-utility cost of energy-related sales

(0.8

)

27.1

—

26.3

Other income—net

—

Operation and maintenance expense

—

Recorded to regulatory assets—gas costs

(101.1

)

—

(101.1

)

Total

(175.0

)

(1.3

)

—

(176.3

)

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. Unrealized Gains (Losses) Recorded for Level 3 Measurements
Three Months Ended March 31, 2013
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives			Weather Related Instruments		Warrants		Total
Recorded to income
Operating revenues—non-utility	$	(2.1	)	$	(14.7	)	$	—	$	—	$	(16.8	)
Utility cost of gas		(5.0	)		—			—		—		(5.0	)
Non-utility cost of energy-related sales		2.4			13.6			—		—		16.0
Other income-net		—			—			—		—		—
Operation and maintenance expense		—			—			0.6		—		0.6
Recorded to regulatory assets—gas costs		(8.3	)		—			—		—		(8.3	)
Total	$	(13.0	)	$	(1.1	)	$	0.6	$	—	$	(13.5	)


WGL Holdings, Inc. Unrealized Gains (Losses) Recorded for Level 3 Measurements
Six Months Ended March 31, 2014
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives			Weather Related Instruments		Warrants		Total
Recorded to income
Operating revenues—non-utility	$	(30.3	)	$	(33.4	)	$	—	$	—	$	(63.7	)
Utility cost of gas		(92.1	)		—			—		—		(92.1	)
Non-utility cost of energy-related sales		3.3			28.3			—		—		31.6
Other income-net		—			—			—		0.1		0.1
Operation and maintenance expense		—			—			—		—		—
Recorded to regulatory assets—gas costs		(169.9	)		—			—		—		(169.9	)
Total	$	(289.0	)	$	(5.1	)	$	—	$	0.1	$	(294.0	)


WGL Holdings, Inc. Unrealized Gains (Losses) Recorded for Level 3 Measurements
Six Months Ended March 31, 2013
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives			Weather Related Instruments		Warrants		Total
Recorded to income
Operating revenues—non-utility	$	(1.8	)	$	(10.5	)	$	—	$	—	$	(12.3	)
Utility cost of gas		(12.3	)		—			—		—		(12.3	)
Non-utility cost of energy-related sales		1.5			16.6			—		—		18.1
Other income-net		—			—			—		0.1		0.1
Operation and maintenance expense		—			—			1.2		—		1.2
Recorded to regulatory assets—gas costs		(20.4	)		—			—		—		(20.4	)
Total	$	(33.0	)	$	6.1		$	1.2	$	0.1	$	(25.6	)

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 Unrealized Gains (Losses) Recorded for Level 3 Measurements
Three Months Ended March 31, 2014
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives		Weather Related Instruments		Warrants		Total
Recorded to income
Utility cost of gas	$	(68.1	)	$	—	$	—	$	—	$	(68.1	)
Operation and maintenance expense		—			—		—		—		—
Recorded to regulatory assets—gas costs		(101.1	)		—		—		—		(101.1	)
Total	$	(169.2	)	$	—	$	—	$	—	$	(169.2	)


Washington Gas Light Company Unrealized Gains (Losses) Recorded for Level 3 Measurements
Three Months Ended March 31, 2013
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives		Weather Related Instruments		Warrants		Total
Recorded to income
Utility cost of gas	$	(5.0	)	$	—	$	—	$	—	$	(5.0	)
Operation and maintenance expense		—			—		0.6		—		0.6
Recorded to regulatory assets—gas costs		(8.3	)		—		—		—		(8.3	)
Total	$	(13.3	)	$	—	$	0.6	$	—	$	(12.7	)


Washington Gas Light Company Unrealized Gains (Losses) Recorded for Level 3 Measurements
Six Months Ended March 31, 2014
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives		Weather Related Instruments		Warrants		Total
Recorded to income
Utility cost of gas	$	(92.1	)	$	—	$	—	$	—	$	(92.1	)
Operation and maintenance expense		—			—		—		—		—
Recorded to regulatory assets—gas costs		(169.9	)		—		—		—		(169.9	)
Total	$	(262.0	)	$	—	$	—	$	—	$	(262.0	)


Washington Gas Light Company Unrealized Gains (Losses) Recorded for Level 3 Measurements
Six Months Ended March 31, 2013
(In millions)	Natural Gas Related Derivatives			Electricity Related Derivatives		Weather Related Instruments		Warrants		Total
Recorded to income
Utility cost of gas	$	(12.3	)	$	—	$	—	$	—	$	(12.3	)
Operation and maintenance expense		—			—		1.2		—		1.2
Recorded to regulatory assets—gas costs		(20.4	)		—		—		—		(20.4	)
Total	$	(32.7	)	$	—	$	1.2	$	—	$	(31.5	)

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

The following table presents the carrying amounts and estimated fair values of our financial instruments at March 31, 2014 and September 30, 2013.


WGL Holdings, Inc. Fair Value of Financial Instruments
	March 31, 2014				September 30, 2013
(In millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Money market funds^(a)	$	7.9	$	7.9	$	6.5	$	6.5
Other short-term investments^(a)	$	0.2	$	0.2	$	0.1	$	0.1
Commercial paper ^(b)	$	314.5	$	314.5	$	373.1	$	373.1
Long-term debt^(c)	$	599.2	$	717.1	$	524.1	$	630.2


Washington Gas Light Company Fair Value of Financial Instruments
	March 31, 2014				September 30, 2013
(In millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Money market funds^(a)	$	3.8	$	3.8	$	3.1	$	3.1
Other short-term investments^(a)	$	0.2	$	0.2	$	0.1	$	0.1
Commercial paper ^(b)	$	61.0	$	61.0	$	124.5	$	124.5
Long-term debt^(c)	$	599.2	$	717.1	$	524.1	$	630.2

^(a) Balance is located in cash and cash equivalents in the accompanying balance sheets. These amounts may be offset by outstanding checks.
^(b) Balance is located in notes payable in the accompanying balance sheets.
^(c) Excludes current maturities and unamortized discounts.

Our money market funds are Level 1 valuations and their carrying amount approximates fair value. Other short-term investments are primarily overnight investment accounts; therefore, their carrying amount approximates fair value based on Level 2 inputs. The maturity of our commercial paper outstanding at both March 31, 2014 and September 30, 2013 is under 30 days. Due to the short term nature of these notes, the carrying cost of our commercial paper approximates fair value using Level 2 inputs. Washington Gas’ long-term debt is not actively traded. The fair value of long-term debt was estimated based on the quoted market prices of the U.S. Treasury issues having a similar term to maturity, adjusted for Washington Gas’ credit quality. Our long-term debt fair value measurement is classified as Level 3.

Non Recurring Basis

During the six months ended March 31, 2014, Washington Gas impaired its previous operations facility by reducing the carrying amount of $22.3 million down to its fair value of $21.5 million, resulting in an impairment charge of $0.8 million based on the progress made towards selling the facility. During the fiscal year ended September 30, 2013, Washington Gas impaired this facility by reducing the carrying amount of $24.9 million down to its fair value of $22.3 million, resulting in an impairment charge of $2.6 million. The fair value of this facility is a Level 3 measurement. At September 30, 2013, the facility was valued using the discounted cash value model that incorporated the anticipated sale proceeds indicated through a comparable analysis, incorporating expected market trends, prepared by an independent consultant and the estimated costs to carry the asset until a sale is completed. The current fiscal year valuation is based on the progress in the efforts to sell the property.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NOTE 10. OPERATING SEGMENT REPORTING

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

•

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

•

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

•

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

•

Midstream Energy Services – The midstream energy services segment consists of WGL Midstream, which engages in acquiring, investing in, managing and optimizing natural gas storage and transportation assets.

Activities and transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our four operating segments, are aggregated as “Other Activities” and included as part of non-utility operations in the Operating Segment Financial Information presented below. Administrative and business development activity costs associated with WGL and Washington Gas Resources are included in this segment.

While net income or loss applicable to common stock is the primary criterion for measuring a segment’s performance, we also evaluate our operating segments based on other relevant factors, such as penetration into their respective markets and return on equity.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

The following tables present operating segment information for the three and six months ended March 31, 2014 and 2013.

Operating Segment Financial Information


			Non-Utility Operations
(In thousands)	Regulated Utility		Retail Energy-Marketing		Commercial Energy Systems		Midstream Energy Services		Other Activities		Eliminations^(b)		Consolidated
Three Months Ended March 31, 2014
Operating revenues ^(a)	$	716,808	$	437,434	$	8,036		$27,104	$	—	$	(15,132)	$	1,174,250
Operating expenses:
Cost of energy-related sales		473,508		423,587		3,941		—		—		(15,643)		885,393
Operation		61,411		11,655		1,620		5,451		5,330		42		85,509
Maintenance		14,190		—		—		—		—		—		14,190
Depreciation and amortization		25,736		180		1,551		31		—		(194)		27,304
General taxes and other assessments:
Revenue taxes		36,353		2,323		1		—		—		—		38,677
Other		17,168		1,102		63		82		28		1		18,444
Total operating expenses	$	628,366	$	438,847	$	7,176	$	5,564	$	5,358	$	(15,794)	$	1,069,517
Operating income (loss)		88,442		(1,413)		860		21,540		(5,358)		662		104,733
Equity in earnings of unconsolidated affiliates		—		—		479		64		—		—		543
Other income (expense)—net		93		21		107		(56)		177		—		342
Interest expense		9,393		7		—		—		125		—		9,525
Dividends on Washington Gas preferred stock		330		—		—		—		—		—		330
Income tax expense (benefit)		29,356		(1,469)		(143)		7,737		(1,197)		266		34,550
Net income (loss) applicable to common stock	$	49,456	$	70	$	1,589	$	13,811	$	(4,109)	$	396	$	61,213
Total assets at March 31, 2014	$	4,013,934	$	402,675	$	423,803	$	102,148	$	232,407	$	(412,750)	$	4,762,217
Capital expenditures	$	50,656	$	13	$	38,497	$	—	$	—	$	—	$	89,166
Equity method investments at March 31, 2014	$	—	$	—	$	68,517	$	13,692	$	413	$	—	$	82,622

Three Months Ended March 31, 2013
Operating revenues ^(a)	$	535,950	$	368,814	$	8,735	$	(13,340)	$	—	$	(8,776)	$	891,383
Operating expenses:
Cost of energy-related sales		252,837		317,348		6,391		—		—		(8,635)		567,941
Operation		60,849		11,712		1,561		970		1,665		40		76,797
Maintenance		11,336		—		—		—		—		—		11,336
Depreciation and amortization		24,960		174		558		31		—		(179)		25,544
General taxes and other assessments:
Revenue taxes		34,238		1,805		2		—		—		—		36,045
Other		17,009		922		80		117		10		(2)		18,136
Total operating expenses	$	401,229	$	331,961	$	8,592	$	1,118	$	1,675	$	(8,776)	$	735,799
Operating income (loss)		134,721		36,853		143		(14,458)		(1,675)		—		155,584
Equity in earnings of unconsolidated affiliates		—		—		301		—		—		—		301
Other income (expenses)—net		437		57		445		(1)		109		(266)		781
Interest expense		8,857		4		50		206		100		(266)		8,951
Dividends on Washington Gas preferred stock		330		—		—		—		—		—		330
Income tax expense		48,831		15,226		190		(5,264)		(1,103)		—		57,880
Net income (loss) applicable to common stock	$	77,140	$	21,680	$	649	$	(9,401)	$	(563)	$	—	$	89,505

Total assets at March 31, 2013	$	3,604,169	$	396,545	$	184,136	$	196,646	$	205,509	$	(355,188)	$	4,231,817

Capital expenditures	$	55,293	$	265	$	12,264	$	—	$	—	$	—	$	67,822
Equity method investments at March 31, 2013	$	—	$	—	$	34,615	$	—	$	285	$	—	$	34,900

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

^(b) Intersegment eliminations net income represents a timing difference between Commercial Energy Systems’ recognition of revenue for the sale of Solar Renewable Energy Credits (SRECs) to Retail Energy-Marketing and Retail Energy-Marketing’s recognition of the associated expense. Retail Energy-Marketing has recorded a portion of the SREC’s purchased as inventory to be used in future periods and will expense them at that time.

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
(In thousands)	Regulated Utility		Retail Energy-Marketing		Commercial Energy Systems		Midstream Energy Services		Other Activities		Eliminations^(b)		Consolidated
Six Months Ended March 31, 2014
Operating revenues ^(a)	$	1,107,223	$	760,372	$	12,753	$	(6,069)	$	—	$	(19,732)	$	1,854,547
Operating expenses:
Cost of energy-related sales		664,203		726,855		7,086		—		—		(20,519)		1,377,625
Operation		118,841		22,906		3,094		6,575		8,334		59		159,809
Maintenance		28,032		—		—		—		—		—		28,032
Depreciation and amortization		51,105		354		2,644		62		—		(271)		53,894
General taxes and other assessments:
Revenue taxes		61,024		4,270		2		—		—		—		65,296
Other		29,943		2,170		115		169		49		—		32,446
Total Operating Expenses	$	953,148	$	756,555	$	12,941	$	6,806	$	8,383	$	(20,731)	$	1,717,102
Operating income (loss)		154,075		3,817		(188)		(12,875)		(8,383)		999		137,445
Equity in earnings of unconsolidated affiliates		—		—		763		270		—		—		1,033
Other income (expense)—net		(87)		82		172		(139)		533		—		561
Interest expense		18,272		7		—		—		238		—		18,517
Dividends on Washington Gas Preferred Stock		660		—		—		—		—		—		660
Income tax expense (benefit)		46,879		507		(705)		(4,767)		(2,296)		402		40,020
Net income (loss) applicable to common stock	$	88,177	$	3,385	$	1,452	$	(7,977)	$	(5,792)	$	597	$	79,842
Total Assets at March 31, 2014	$	4,013,934	$	402,675	$	423,803	$	102,148	$	232,407	$	(412,750)	$	4,762,217
Capital Expenditures	$	105,749	$	88	$	41,635	$	—	$	—	$	—	$	147,472
Equity Method Investments at March 31, 2014	$	—	$	—	$	68,517	$	13,692	$	413	$	—	$	82,622

Six Months Ended March 31, 2013
Operating revenues ^(a)	$	891,767	$	692,873	$	20,720	$	(10,486)	$	—	$	(16,755)	$	1,578,119
Operating expenses:
Cost of energy-related sales		403,285		607,481		15,502		—		—		(16,208)		1,010,060
Operation		119,057		23,071		2,793		1,814		2,456		(214)		148,977
Maintenance		22,786		—		—		—		—		—		22,786
Depreciation and amortization		51,752		349		1,017		62		—		(332)		52,848
General taxes and other assessments:
Revenue taxes		58,459		3,236		3		—		—		—		61,698
Other		29,296		1,793		159		283		20		(1)		31,550
Total Operating Expenses		684,635		635,930		19,474		2,159		2,476		(16,755)		1,327,919
Operating income (loss)		207,132		56,943		1,246		(12,645)		(2,476)		—		250,200
Equity in Earnings of Unconsolidated Affiliates		—		—		546		—		—		—		546
Other income (expenses)—net		570		107		525		(1)		327		(318)		1,210
Interest expense		17,952		7		93		206		204		(318)		18,144
Dividends on Washington Gas Preferred Stock		660		—		—		—		—		—		660
Income tax expense (benefit)		73,284		22,342		537		(4,727)		(177)		—		91,259
Net income (loss) applicable to common stock	$	115,806	$	34,701	$	1,687	$	(8,125)	$	(2,176)	$	—	$	141,893

Total Assets at March 31, 2013	$	3,604,169	$	396,545	$	184,136	$	196,646	$	205,509	$	(355,188)	$	4,231,817

Capital Expenditures	$	115,908	$	466	$	27,365	$	—	$	—	$	—	$	143,739

Equity Method Investments at March 31, 2013	$	—	$	—	$	34,615	$	—	$	285	$	—	$	34,900

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

^(b) Intersegment eliminations net income represents a timing difference between Commercial Energy Systems’ recognition of revenue for sale of Solar Renewable Energy Credits (SRECs) to Retail Energy-Marketing and Retail Energy-Marketing’s recognition of the associated expense. Retail Energy-Marketing has recorded a portion of the SREC’s purchased as inventory to be used in future periods and will expense them at that time.

NOTE 11. OTHER INVESTMENTS

Variable Interest Entities (VIE)

WGL has a variable interest in five investments that qualify as VIEs. These entities do not have sufficient equity at risk to finance their activities without additional subordinated financial support from other parties. The five investments are:

•

Meade,

•

SunEdison,

•

Skyline,

•

ASD Solar LP and

•

Crab Run.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

WGL and its subsidiaries are not the primary beneficiary for any of the above VIEs, therefore we have not consolidated any of the VIE entities. At March 31, 2014, the nature of WGL’s involvement with these investments lacks the characteristics of a controlling financial interest. WGL does not have control over any of the VIEs’ significant economic activities, such as the design of the companies, operation activities and construction. For the sale/leaseback arrangements, WGL lacks control over vendor selection, customer selection, and re-marketing activities after the termination of customer leases. In addition, WGL does not have the obligation to absorb expected losses or the right to receive expected gains that could be significant to the VIE.

Meade

On February 14, 2014, WGL Holdings, Inc., through its subsidiary, WGL Midstream, entered into a limited liability company agreement and formed Meade Pipeline Co LLC (Meade), a Delaware limited liability company with COG Holdings LLC, Vega Midstream MPC LLC and River Road Interests LLC. Meade was formed to partner with Transcontinental Gas Pipeline Company, LLC (Williams) to invest in a regulated pipeline project called Central Penn Pipeline (Central Penn). The Central Penn will be an approximately 177-mile pipeline originating in Susquehanna County, Pennsylvania and extending to Lancaster County, Pennsylvania that will have the capacity to transport and deliver up to approximately 1.7 million dekatherms per day of natural gas.

WGL Midstream plans to invest an estimated $410.0 million for a 55% interest in Meade. WGL Midstream joins COG Holdings LLC (20% share), Vega Midstream MPC LLC (15% share), River Road Interests LLC (10% share), and VED NPI I, LLC (0% share) in Meade. Meade is accounted for under the equity method of accounting referred to as the hypothetical liquidation at book value method (HLBV) for allocating profits and losses; any profits and losses are included in “Earnings from Equity Method Investments” in the accompanying Consolidated Statement of Income and are added to or subtracted from the carrying amount of WGL’s investment balance. WGL Midstream held a $0.5 million equity method investment in Meade at March 31, 2014. No identified events or changes in circumstances that may have a significant effect on the carrying value of this investment have occurred.

Our maximum financial exposure includes contributions and guarantees on behalf of WGL Midstream. In addition, we have guaranteed the future commitments of one of the other partners in the venture. Our maximum exposure to loss at March 31, 2014 was $75.5 million, which represents the minimum funding requirements should Meade terminate its agreement with Williams early and the guarantee on behalf of one of the other partners.

SunEdison/Skyline

WGSW is party to three agreements to fund residential and commercial retail solar energy installations with three separate, privately held companies. WGSW has a master purchase agreement and master lease agreement with SunEdison, Inc. (SunEdison), formerly known as EchoFirst Finance Company LLC (EchoFirst) and Skyline Innovations, Inc (Skyline) for sale/leaseback arrangements for residential and commercial solar systems.

Our agreements with SunEdison and Skyline are accounted for as direct financing leases. WGSW records lease receipts and associated interest in the “Other Income” line in the accompanying Consolidated Statement of Income. WGSW held a $26.5 million and $29.2 million combined investment in direct financing leases at March 31, 2014 and September 30, 2013, respectively, of which $1.7 million and $5.8 million are current receivables recorded in “Other Current Assets” in the accompanying Consolidated Balance Sheets at March 31, 2014 and September 30, 2013, respectively.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

Minimum future lease payments receivable under direct financing leases over the next five fiscal years and thereafter are as follows:

Minimum Payments Receivable for Direct Financing Leases


(In millions)
2014	$	1.7
2015		1.6
2016		1.5
2017		1.4
2018		1.4
Thereafter		12.3
Total	$	19.9

Minimum payments receivable exclude $4.4 million of residual values and $2.1 million in tax credits. Associated with these investments, WGSW has recorded $8.3 million of unearned income. The initial direct costs (incurred in FY 2012) associated with these investments was $0.7 million.

Our maximum financial exposure from solar agreements is limited to its lease payment receivables and investment contributions made to these companies. All additional future committed contributions are contingent on the projects meeting required criteria. Our exposure is offset by the owned physical assets received as part of the transaction and the quick economic return for the investment through the investment tax credit/treasury grant proceeds and accelerated depreciation.

ASD Solar, LP

In addition to SunEdison/Skyline, WGSW is also a limited partner in ASD Solar LP, a partnership formed to own and operate a portfolio of residential solar projects, primarily rooftop photovoltaic power generation systems. As a limited partner, WGSW provides funding to the partnership but is excluded from involvement in the partnership’s operations.

Our investment in ASD Solar, LP is accounted for under the HLBV equity method of accounting; any profits and losses are included in “Earnings from Equity Method Investments” in the accompanying Consolidated Statement of Income and are added to or subtracted from the carrying amount of WGSW’s investment balance. WGSW held a $68.5 million equity method investment in ASD Solar LP at March 31, 2014.

ASD Solar, LP is consolidated by the general partner, Solar Direct LLC. Solar Direct LLC is a wholly owned subsidiary of American Solar Direct Inc. (ASDI). At March 31, 2014, the carrying amount of WGSW’s investment in ASD Solar, LP exceeded the amount of the underlying equity in net assets by $35.9 million due to WGSW recording additions to its investment in ASD Solar, LP’s net assets at fair value of contributions in accordance with GAAP. This basis difference is being amortized over the life of the assets.

Crab Run

Washington Gas Resources owns all of the shares of common stock of Crab Run Gas Company. Crab Run Gas Company is an exploration and production company who is the limited partner in the Western/Crab Run Limited Partnership (Crab Run). The partnership was formed to manage oil and gas properties and perform oil and gas leasing, marketing and production activities.

Crab Run is accounted for under the equity method of accounting; any profits and losses are included in “Earnings from Equity Method Investments” in the accompanying Consolidated Statement of Income and are added to or subtracted from the carrying amount of WGL’s investment balance.

Non-VIE Investments

ASDHI

Washington Gas Resources held a $5.6 million investment in American Solar Direct Holdings Inc. (ASDHI), at both March 31, 2014 and September 30, 2013. This investment is recorded at cost. The profits and losses are included in “Other Income” in the accompanying Consolidated Statement of Income. No identified events or changes in circumstances that may have a significant effect on the carrying value of this investment have occurred. At March 31, 2014 and September 30, 2013, Washington Gas Resources also held $1.2 million and $1.1 million, respectively, in warrants of ASDHI accounted for as derivatives and recorded at fair value.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

Constitution

In May of 2013, WGL Midstream invested in Constitution Pipeline Company, LLC (Constitution). WGL Midstream will invest an estimated $68.0 million in the project for a 10% share in the pipeline venture. WGL Midstream joins Williams Partners L.P. (41% share), Cabot Oil and Gas Corporation (25% share) and Piedmont Natural Gas (24% share) in the project. This natural gas pipeline venture will transport natural gas from the Marcellus region in northern Pennsylvania to major northeastern markets. At March 31, 2014, WGL Midstream had invested $13.2 million. Constitution is accounted for under the equity method of accounting; any profits and losses are included in “Earnings from Equity Method Investments” in the accompanying Consolidated Statement of Income and are added to or subtracted from the carrying amount of WGL’s investment balance. The equity method is considered appropriate because Constitution is an LLC with specific ownership accounts and ownership between five and fifty percent resulting in WGL Midstream maintaining a more than minor influence over the partnership operating and financing policies.

The balance sheet location of the investments discussed in this footnote at March 31, 2014 and September 30, 2013 are as follows:

WGL Holdings, Inc.

Balance Sheet Location of Other Investments


As of March 31, 2014 (in millions)	VIEs		Non-VIEs		Total
Assets
Investment in unconsolidated affiliates	$	69.4	$	18.8	$	88.2
Investment in direct financing leases, capital leases		24.0		—		24.0
Deferred charges and other assets—derivatives		—		1.2		1.2
Other non-current assets		2.5		—		2.5
Total assets	$	95.9	$	20.0	$	115.9

Liabilities
Other	$	8.3	$	—	$	8.3
Total liabilities	$	8.3	$	—	$	8.3


WGL Holdings, Inc.
Balance Sheet Location of Other Investments
As of September 30, 2013 (in millions)	VIEs		Non-VIEs		Total
Assets
Investment in unconsolidated affiliates	$	55.4	$	12.1	$	67.5
Investment in direct financing leases, capital leases		23.4		—		23.4
Deferred charges and other assets—derivatives		—		1.1		1.1
Other non-current assets		5.8		—		5.8
Total assets	$	84.6	$	13.2	$	97.8

Liabilities
Other	$	8.5	$	—	$	8.5
Total liabilities	$	8.5	$	—	$	8.5

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

The income statement location of the investments discussed in this footnote for the three and six months ended March 31, 2014 and 2013 are as follows:


WGL Holdings, Inc.
Income Statement Location of Other Investments
	Three Months Ended						Six Months Ended
	March 31, 2014						March 31, 2014
*(in millions)*	VIEs		Non-VIEs		Total		VIEs		Non-VIEs		Total
Equity in earnings of unconsolidated affiliates	$	0.5	$	—	$	0.5	$	0.8	$	0.2	$	1.0
Depreciation and amortization	$	—	$	—	$	—	$	0.1	$	—	$	0.1
Other income—net	$	0.8	$	—	$	0.8	$	1.3	$	—	$	1.3


WGL Holdings, Inc.
Income Statement Location of Other Investments
	Three Months Ended						Six Months Ended
	March 31, 2013						March 31, 2013
(in millions)	VIEs		Non-VIEs		Total		VIEs		Non-VIEs		Total
Equity in earnings of unconsolidated affiliates	$	0.2	$	0.1	$	0.3	$	0.5	$	0.1	$	0.6
Other income—net	$	0.2	$	—	$	0.2	$	0.4	$	—	$	0.4

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NOTE 12. RELATED PARTY TRANSACTIONS

WGL and its subsidiaries engage in transactions during the ordinary course of business. Inter-company transactions and balances have been eliminated from the consolidated financial statements of WGL, except as described below. Washington Gas provides accounting, treasury, legal and other administrative and general support to affiliates, and files consolidated tax returns with WGL that include affiliated taxable transactions. Washington Gas bills its affiliates in accordance with regulatory requirements for the actual cost of providing these services, which approximates their market value. To the extent such billings are not yet paid, they are reflected in “Receivables from associated companies” on Washington Gas’ balance sheets. Washington Gas assigns or allocates these costs directly to its affiliates and, therefore, does not recognize revenues or expenses associated with providing these services.

In connection with billing for unregulated third party marketers and with other miscellaneous billing processes, Washington Gas collects cash on behalf of affiliates and transfers the cash in a reasonable time period. Cash collected by Washington Gas on behalf of its affiliates but not yet transferred is recorded in “Payables to associated companies” on Washington Gas’ balance sheets. The following table presents the receivables and payables from associated companies on Washington Gas’ balance sheets as of March 31, 2014 and September 30, 2013.


Washington Gas Receivables / Payables from Associated Companies
(In millions)	March 31, 2014		September 30, 2013
Receivables from Associated Companies	$	7.1	$	7.2
Payables to Associated Companies	$	41.4	$	20.6

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. These related party amounts have been eliminated in the consolidated financial statements of WGL. The following table shows the amounts Washington Gas charged WGEServices for balancing services.


Washington Gas-Gas Balancing Service Charges
	Three Months Ended March 31,				Six Months Ended March 31,
(In millions)	2014		2013		2014		2013
Gas balancing service charge	$	14.4	$	8.6	$	18.2	$	16.2

As a result of these balancing services, an imbalance is created for volumes of natural gas received by Washington Gas that are not equal to the volumes of natural gas delivered to customers of the energy marketers. WGEServices recognized an accounts payable to Washington Gas in the amount of $3.1 million and an accounts receivable from Washington Gas in the amount of $1.0 million at March 31, 2014 and September 30, 2013, respectively, related to an imbalance in gas volumes. Due to regulatory treatment, these payables and receivables are not eliminated in the consolidated financial statements of WGL. Refer to Note 1—Accounting Policies of the Notes to Consolidated Financial Statements of the combined Annual Report on Form 10-K for the fiscal year ended September 30, 2013 for further discussion of these imbalance transactions.

Washington Gas participates in a Purchase of Receivables (POR) program as approved by the PSC of MD, whereby it purchases receivables from participating energy marketers at approved discount rates. In addition, WGEServices participates in POR programs with certain Maryland and Pennsylvania utilities, whereby it sells its receivables to various utilities, including Washington Gas, at approved discount rates. The receivables purchased by Washington Gas are included in “Accounts receivable” in the accompanying balance sheet. Any activity between Washington Gas and WGEServices related to the POR program has been eliminated in the accompanying financial statements for WGL. At March 31, 2014 and September 30, 2013, Washington Gas had balances of $43.8 million and $106.6 million, respectively, of purchased receivables from WGEServices.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NOTE 13. COMMITMENTS AND CONTINGENCIES

RATES AND REGULATORY MATTERS

Washington Gas makes its requests to modify existing rates based on its determination of the level of net investment in plant and equipment, operating expenses, and a level of return on invested capital that is just and reasonable. The following is an update of significant current regulatory matters in each of Washington Gas’ jurisdictions. For a more detailed discussion of the matters below, refer to our combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2013.

District of Columbia Jurisdiction

Revised Accelerated Pipe Replacement Plan (Plan). On August 15, 2013, Washington Gas filed a request for approval with the Public Service Commission of the District of Columbia (PSC of DC) of a plan and surcharge mechanism to recover the associated costs for the first five years of the plan. Washington Gas proposes to replace bare and/or unprotected steel services, bare and targeted unprotected steel main, and cast iron main in its distribution system in the District of Columbia at an estimated five-year cost of $110.0 million. Comments and replies were filed by interested parties. On March 31, 2014, the PSC of DC issued an order conditionally approving the plan, contingent on Washington Gas submitting an implementation plan and other information directed in the Order, by April 30, 2014. Washington Gas filed responsive information, as directed, and sought reconsideration/clarification on several issues in the Order. An evidentiary hearing will be scheduled in the near future to address the proposed cost recovery mechanism.

Weather Normalization Adjustment (WNA). On November 8, 2013, Washington Gas filed an application for approval of a WNA, which is a rate design mechanism that eliminates the variability of weather from the calculation of actual billed revenues and offers customers more stability in their bills during colder-than-normal winter heating seasons. Comments and replies have been filed regarding Washington Gas’ application. A PSC of DC order in this matter is pending.

Maryland Jurisdiction

Maryland Base Rate Case. On November 22, 2013, the Public Service Commission of Maryland (PSC of MD) issued an order granting an overall increase of $8.9 million, based on the capital structure recommended by the Staff of the PSC. The order approved a return on equity of 9.50% resulting in an overall rate of return of 7.70%. The order also clarified that Washington Gas was authorized to establish a regulatory asset and amortize the costs related to the change in tax treatment of Med D. Finally, the PSC of MD denied Washington Gas’ appeal on recovery of the costs to initiate the outsourcing agreement with Accenture, LLP. As a result of this order, Washington Gas established a Med D regulatory asset in the first quarter of fiscal year 2014 and has begun amortizing the balance. On December 20, 2013, Washington Gas filed a request for rehearing and an appeal with the Baltimore City Circuit Court appealing the PSC of MD’s rulings on capital structure, return on equity, and recovery of the costs to initiate the outsourcing agreement. The case is pending action by the court on the appeal.

Virginia Jurisdiction

Affiliate Transactions. On June 16, 2011, Washington Gas submitted an application to the State Corporation Commission of Virginia (SCC of VA) requesting approval of three affiliate transactions with WGL Midstream: (i) the transfer to WGL Midstream of the remainder of the term of two agreements for natural gas storage service at the Washington Gas Storage (WSS) and Eminence Storage Service (ESS) storage fields; (ii) the sale to WGL Midstream of any storage gas balances associated with the WSS and ESS agreements; and (iii) the assignment to WGL Midstream of Washington Gas’ rights to buy base gas in the WSS storage field. The SCC of VA did not approve the transfer of the agreements on the grounds that ratepayers funded a portion of the costs associated with the assets. Washington Gas filed comments related to the denial on December 5, 2013. The case is pending review by the SCC of VA.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NON-UTILITY OPERATIONS

WGEServices enters into contracts to purchase natural gas and electricity designed to match the duration of its sales commitments, and to effectively lock in a margin on estimated sales over the terms of existing sales contracts. As listed below, natural gas purchase commitments are based on existing fixed-price purchase contracts using city gate equivalent deliveries, the majority of which are for fixed volumes. Also listed below are electricity purchase commitments that are based on existing fixed-price purchase commitments, all of which are for fixed volumes.

WGL Midstream enters into contracts to acquire, invest in, manage and optimize natural gas storage and transportation assets. On February 14, 2014, WGL Midstream contracted to purchase a significant amount of natural gas, as well as capacity on the Central Penn Line pipeline that begins after the pipeline has gone into operation.

The following table summarizes the minimum commitments and contractual obligations of WGEServices and WGL Midstream for the next five fiscal years and thereafter:


Contract Minimums
WGEServices							WGL Midstream
(In millions)	Gas Purchase Commitments^(a)		Pipeline Contracts		Electric Purchase Commitments^(b)		Gas Purchase Commitments		Pipeline Contracts		Total
2014	$	104.7	$	1.7	$	292.6	$	30.7	$	7.7	$	437.4
2015		114.8		1.0		257.1		2.4		14.8		390.1
2016		26.8		0.6		75.4		28.0		19.4		150.2
2017		5.5		0.6		15.9		303.1		17.7		342.8
2018		—		0.6		0.3		943.9		27.2		972.0
Thereafter		—		1.9		—		14,912.0		286.2		15,200.1
Total	$	251.8	$	6.4	$	641.3	$	16,220.1	$	373.0	$	17,492.6

^(a)	Represents fixed price commitments with city gate equivalent deliveries.

^(b)	Includes $18.7 million of commitments related to renewable energy credits.

There were no other material changes to contractual obligations and minimum commitments for Washington Gas. Refer to the footnote entitled “Note 13—Commitments and Contingencies” in our combined Annual Report on Form 10-K for WGL and Washington Gas for the year ended September 30, 2013 for details.

FINANCIAL GUARANTEES

WGL has guaranteed payments primarily for certain purchases of natural gas and electricity on behalf of WGEServices and for certain purchase commitments and construction investments on behalf of WGL Midstream. At March 31, 2014, these guarantees totaled $265.5 million and $259.1 million for WGEServices and WGL Midstream, respectively. The amount of such guarantees is periodically adjusted to reflect changes in the level of financial exposure related to these purchase commitments. We also receive financial guarantees or other collateral from counterparties when required by our credit policy. WGL also issued guarantees totaling $23.9 million at March 31, 2014 on behalf of certain of our non-utility subsidiaries, partners and unconsolidated investments associated with their banking transactions. For all of its financial guarantees, WGL may cancel any or all future obligations upon written notice to the counterparty, but WGL would continue to be responsible for the obligations created under the guarantees prior to the effective date of the cancellation.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NOTE 14. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

The following table shows the components of net periodic benefit costs (income) recognized in our financial statements during the three and six months ended March 31, 2014 and 2013.


Components of Net Periodic Benefit Costs (Income)
	Three Months Ended March 31,
	2014						2013
(In millions)	Pension Benefits			Health and Life Benefits			Pension Benefits			Health and Life Benefits
Components of net periodic benefit costs
Service cost	$	3.5		$	2.2		$	4.3		$	2.4
Interest cost		10.1			5.6			9.2			4.7
Expected return on plan assets		(10.2	)		(4.8	)		(10.5	)		(4.5	)
Amortization of prior service cost (credit)		—			(1.0	)		0.2			(1.0	)
Amortization of actuarial loss		4.2			1.2			7.2			2.3
Amortization of transition obligation		—			—			—			0.2
Net periodic benefit cost		7.6			3.2			10.4			4.1
Amount allocated to construction projects		(1.0	)		(0.4	)		(1.5	)		(0.7	)
Amount amortized/deferred as regulatory asset (liability)		1.8			0.1			(2.4	)		0.7
Amount charged to expense	$	8.4		$	2.9		$	6.5		$	4.1


Components of Net Periodic Benefit Costs (Income)
	Six Months Ended March 31,
	2014						2013
(In millions)	Pension Benefits			Health and Life Benefits			Pension Benefits			Health and Life Benefits
Components of net periodic benefit costs
Service cost	$	7.0		$	4.3		$	8.5		$	4.8
Interest cost		20.2			11.0			18.3			9.4
Expected return on plan assets		(20.5	)		(9.5	)		(21.0	)		(9.1	)
Amortization of prior service cost (credit)		0.1			(2.0	)		0.5			(2.0	)
Amortization of actuarial loss		8.4			1.9			14.4			4.6
Amortization of transition obligation		—			—			—			0.5
Net periodic benefit cost		15.2			5.7			20.7			8.2
Amount allocated to construction projects		(2.0	)		(0.8	)		(2.9	)		(1.4	)
Amount amortized/deferred as regulatory asset (liability)		3.6			0.2			(4.8	)		1.5
Amount charged to expense	$	16.8		$	5.1		$	13.0		$	8.3

Amounts included in the line item “Amount amortized/deferred as regulatory asset (liability),” as shown in the table above, represent the amortization of a regulatory asset (liability) for the District of Columbia as of March 31, 2014. Amounts included in the line item “Amount amortized/deferred as regulatory asset (liability)” as of March 31, 2013 represent the difference between the cost of the applicable Pension Benefits or the Health and Life Benefits and the amount that Washington Gas is permitted to recover in rates that it charges to customers in the District of Columbia.

NOTE 15. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME

All components of other comprehensive income are related to the amortization of pension and other post-retirement benefit costs. The following table shows the changes in accumulated other comprehensive income for both WGL and Washington Gas by component for the three and six months ended March 31, 2014 and 2013.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (concluded)

Notes to Consolidated Financial Statements (Unaudited)


Changes in Accumulated Other Comprehensive Income by Component
	Three Months Ended March 31,
	2014			2013
(In thousands)
Beginning Balance	$	(10,849	)	$	(11,924	)
Amortization of prior service credit ^(a)		(35	)		(12	)
Amortization of actuarial loss (gain) ^(a)		(164	)		462
Amortization of transition obligation ^(a)		—			62
Current-period other comprehensive income (loss)		(199	)		512
Income tax expense (benefit) related to other comprehensive income		(79	)		209
Ending Balance	$	(10,969	)	$	(11,621	)


Changes in Accumulated Other Comprehensive Income by Component
	Six Months Ended March 31,
	2014			2013
(In thousands)
Beginning Balance	$	(11,048	)	$	(12,201	)
Amortization of prior service credit ^(a)		(69	)		(24	)
Amortization of actuarial loss ^(a)		200			925
Amortization of transition obligation ^(a)		—			71
Current-period other comprehensive income		131			972
Income tax expense related to other comprehensive income		52			392
Ending Balance	$	(10,969	)	$	(11,621	)

^(a)

These accumulated other comprehensive income components are included in the computation of net periodic benefit cost. Refer to Note #14-Pension and other post-retirement benefit plans for additional details.

NOTE 16. SUBSEQUENT EVENTS

Changes to Medical Coverage for Medicare-eligible Retirees. On April 24, 2014, Washington Gas announced that the existing retiree medical benefit plan and dental plan options for Medicare-eligible retirees age 65 and older will be replaced with a special tax-free Health Reimbursement Account (HRA) plan. With the introduction of the new plan, effective January 1, 2015, participating retirees and dependents will receive a subsidy each year through the HRA account to help purchase supplemental medical and dental coverage in the marketplace. As part of the new HRA plan, participants who enroll in a Medicare Part D prescription drug plan and meet the threshold for Medicare catastrophic prescription drug coverage will be eligible for an additional reimbursement of their out-of-pocket prescription drug costs in excess of the threshold. Retirees and dependents under age 65 will still be covered under the existing Washington Gas Retiree Medical Plan until they become eligible for Medicare at age 65 and can obtain coverage through the new HRA plan. To assist in the transition process, Washington Gas will partner with a leader in the Medicare supplemental marketplace to educate and assist participants in selecting supplemental coverage. We expect the amendment to reduce our annual other post-retirement benefit expense.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

INTRODUCTION

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) analyzes the financial condition, results of operations and cash flows of WGL and its subsidiaries. It also includes management’s analysis of past financial results and potential factors that may affect future results, potential future risks and approaches that may be used to manage them. Except where the content clearly indicates otherwise, “WGL,” “we,” “us” or “our” refers to the holding company or the consolidated entity of WGL Holdings, Inc. and all of its subsidiaries.

Management’s Discussion is divided into the following two major sections:

—

WGL—This section describes the financial condition and results of operations of WGL Holdings, Inc. and its subsidiaries on a consolidated basis. It includes discussions of our regulated operations, including Washington Gas and Hampshire Gas Company (Hampshire), and our non-utility operations.

—

Washington Gas—This section describes the financial condition and results of operations of Washington Gas, a subsidiary of WGL, which comprises the majority of the regulated utility segment.

Both sections of Management’s Discussion—WGL and Washington Gas—are designed to provide an understanding of our operations and financial performance and should be read in conjunction with the respective company’s financial statements and the combined Notes to Consolidated Financial Statements in this quarterly report as well as our combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2013 (2013 Annual Report).

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

EXECUTIVE OVERVIEW

Introduction

WGL, through its subsidiaries, sells and delivers natural gas and provides a variety of energy-related products and services to customers primarily in the District of Columbia and the surrounding metropolitan areas in Maryland and Virginia. In addition to our primary markets, WGL’s non-utility subsidiaries own energy assets in 29 states.

WGL has four operating segments:

—

regulated utility;

—

retail energy-marketing;

—

commercial energy systems and

—

midstream energy services.

Our core subsidiary, Washington Gas, engages in the delivery and sale of natural gas that is regulated by regulatory commissions in the District of Columbia, Maryland and Virginia. Through the wholly owned unregulated subsidiaries of Washington Gas Resources, we offer energy-related products and services. We offer competitively priced natural gas, electricity and energy from renewable sources to customers through WGEServices, our non-utility retail energy-marketing subsidiary. We offer efficient and sustainable commercial energy solutions focused on upgrading energy related systems of large government and commercial facilities as well as own and operate distributed generation assets such as Solar Photovoltaic (Solar PV) systems through WGESystems and WGSW. WGL Midstream engages in acquiring, owning and optimizing natural gas storage and transportation assets.

Regulated Utility. The regulated utility segment consists of Washington Gas and Hampshire and represents approximately 84% of WGL’s consolidated total assets. Washington Gas is a regulated public utility that sells and delivers natural gas to retail customers in the District of Columbia and adjoining areas in Maryland, Virginia and several cities and towns in the northern Shenandoah Valley of Virginia in accordance with tariffs approved by the regulatory commissions of the District of Columbia, Maryland, and Virginia. These regulatory commissions set the rates in their respective jurisdictions

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)

that Washington Gas can charge customers for its rate-regulated services. Washington Gas also sells natural gas to customers who have not elected to purchase natural gas from unregulated third party marketers. Washington Gas recovers the cost of the natural gas purchased to serve firm customers through gas cost recovery mechanisms as approved in jurisdictional tariffs. Any difference between gas costs incurred on behalf of firm customers and the gas costs recovered from those customers is deferred on the balance sheet as an amount to be collected from or refunded to customers in future periods. Therefore, increases or decreases in the cost of gas associated with sales made to firm customers have no direct effect on Washington Gas’ net revenues and net income.

Washington Gas, under its asset optimization program, makes use of storage and transportation capacity resources when those assets are not required to serve utility customers. The objective of this program is to derive a profit to be shared with its utility customers by entering into commodity-related physical and financial contracts with third parties (refer to the section entitled “Market Risk” for further discussion of the asset optimization program). Unless otherwise noted, therm deliveries reported for the regulated utility segment do not include those related to the asset optimization program.

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

Retail Energy-Marketing. The retail energy-marketing segment consists of the operations of WGEServices. WGEServices competes with regulated utilities and other unregulated third party marketers to sell natural gas and/or electricity directly to residential, commercial and industrial customers in Delaware, the District of Columbia, Maryland, Pennsylvania and Virginia. WGEServices buys natural gas and electricity with the objective of earning a profit through competitively priced sales contracts with end-users. These commodities are delivered to retail customers through the distribution systems owned by regulated utilities. Washington Gas delivers the majority of natural gas sold by WGEServices, and unaffiliated electric utilities deliver all of the electricity sold. Additionally, WGEServices bills its customers either independently or through the billing services of the regulated utilities that deliver its commodities.

WGEServices also sells wind and other renewable energy credits and carbon offsets to retail customers. WGEServices does not own or operate any other natural gas or electric generation, production, transmission or distribution assets.

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

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

Midstream Energy Services. The Midstream Energy Services segment, which consists of the operations of WGL Midstream, engages in developing, acquiring, investing in, managing and optimizing natural gas storage and transportation assets. Specifically, WGL Midstream enters into both physical and financial transactions to mitigate risks while maximizing potential profits from the optimization of these assets under its management. Additionally, through its pipeline infrastructure investments, WGL Midstream seeks to earn a return while potentially increasing its gas transportation and delivery capacity. WGL Midstream’s customers and counterparties include producers, utilities, local distribution companies, power generators, wholesale energy suppliers, pipelines and storage facilities. WGL Midstream’s risk management policy requires it to closely match its forward physical and financial positions with its asset base, thereby minimizing its price risk exposure. For a discussion of WGL Midstream’s exposure to and management of price risk, refer to the section entitled “Market Risk—Price Risk Related to the Other Non-Utility Segment” in Management’s Discussion and Analysis.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Other Activities. Activities and transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our other operating segments, are aggregated as “Other activities” and are included as part of non-utility operations in the operating segment financial information. Administrative and business development activity costs associated with WGL and Washington Gas Resources are included in this segment.

PRIMARY FACTORS AFFECTING WGL AND WASHINGTON GAS

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

•

weather conditions and weather patterns;

•

regulatory environment, regulatory decisions and changes in legislation;

•

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

•

diversity of natural gas supply;

•

volatility of natural gas and electricity prices;

•

non-weather related changes in natural gas consumption patterns;

•

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

•

competitive environment;

•

environmental matters;

•

industry consolidation;

•

economic conditions and interest rates;

•

inflation;

•

use of business process outsourcing;

•

labor contracts, including labor and benefit costs and

•

changes in accounting principles.

For further discussion of the factors listed above, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2013 Annual Report on Form 10-K which was filed with the Securities and Exchange Commission on November 20, 2013. Also, refer to the section entitled “Safe Harbor for Forward-Looking Statements” included in this quarterly report for a listing of forward-looking statements related to factors affecting WGL and Washington Gas.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in compliance with Generally Accepted Accounting Principles requires the selection and the application of appropriate technical accounting guidance to the relevant facts and circumstances of our operations, as well as our use of estimates to compile the consolidated financial statements. The application of these accounting policies involves judgment regarding estimates and projected outcomes of future events, including the likelihood of success of particular regulatory initiatives, the likelihood of realizing estimates for legal and environmental contingencies and the probability of recovering costs and investments in both the regulated utility and non-utility business segments.

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

•

accounting for unbilled revenue;

•

accounting for regulatory operations — regulatory assets and liabilities;

•

accounting for income taxes;

•

accounting for contingencies;

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 derivative and fair value instruments;

•

accounting for pension and other post-retirement benefit plans and

•

accounting for stock-based compensation.

For a description of these critical accounting policies, refer to Management’s Discussion within the 2013 Annual Report. There were no new critical accounting policies or changes to our critical accounting policies during the six month period ended March 31, 2014.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

WGL HOLDINGS, INC.

RESULTS OF OPERATIONS—Three Months Ended March 31, 2014 vs. March 31, 2013

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

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

Summary Results

WGL reported net income of $61.2 million for the three months ended March 31, 2014, compared to net income of $89.5 million reported for the same period of the prior fiscal year. We earned a return on average common equity of 1.4% and 11.8%, respectively.

The following table summarizes our net income (loss) by operating segment for the three months ended March 31, 2014 and 2013.

Net Income (Loss) by Operating Segment


	Three Months Ended March 31,						Increase/
(In millions)	2014			2013			(Decrease)
Regulated Utility	$	49.5		$	77.1		$	(27.6	)
Non-utility operations:
Retail Energy-Marketing		0.1			21.7			(21.6	)
Commercial Energy Systems		1.6			0.6			1.0
Midstream Energy Services		13.8			(9.4	)		23.2
Other Activities		(4.2	)		(0.5	)		(3.7	)
Total non-utility		11.3			12.4			(1.1	)
Intersegment Eliminations	$	0.4		$	—		$	0.4
Net income applicable to common stock	$	61.2		$	89.5		$	(28.3	)

EARNINGS PER AVERAGE COMMON SHARE
Basic	$	1.18		$	1.73		$	(0.55	)
Diluted	$	1.18		$	1.73		$	(0.55	)

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Regulated Utility Operating Results

The following table summarizes the Regulated Utility segment’s operating results for the three months ended March 31, 2014 and 2013.

Regulated Utility Operating Results


	Three Months Ended March 31,					Increase/
(In millions)	2014			2013		Decrease
Utility net revenues:
Operating revenues	$	716.8		$	536.0	$	180.8
Less: Cost of gas		473.5			252.8		220.7
Revenue taxes		36.4			34.2		2.2
Total utility net revenues		206.9			249.0		(42.1	)
Operation and maintenance		75.6			72.2		3.4
Depreciation and amortization		25.6			25.0		0.6
General taxes and other assessments		17.2			17.0		0.2
Operating income		88.5			134.8		(46.3	)
Other expense—net, including preferred stock dividends		(0.2	)		—		(0.2	)
Interest expense		9.4			8.9		0.5
Income tax expense		29.4			48.8		(19.4	)
Net income applicable to common stock	$	49.5		$	77.1	$	(27.6	)

The Regulated Utility segment’s net income applicable to common stock was $49.5 million for the three months ended March 31, 2014, compared to net income of $77.1 million reported for the same period of the prior fiscal year. The comparison primarily reflects the following:

•

lower unrealized margins associated with our asset optimization program; and

•

higher operation and maintenance expenses.

Partially offsetting these unfavorable variances were:

•

higher revenues related to growth of more than 12,900 average active customer meters;

•

higher revenues due to new base rates in the District of Columbia and Maryland;

•

higher net revenues attributed to the colder weather impact in 2014 that was not offset by weather protection; and

•

higher realized margins associated with our asset optimization program;

Utility Net Revenues. The following table provides the key factors contributing to the changes in the utility net revenues of the Regulated Utility segment between the three months ended March 31, 2014 and 2013.

Composition of Changes in Utility Net Revenues


(In millions)	Increase/ (Decrease)
Customer growth	$	4.0
Estimated weather effects		4.1
Impact of rate cases		6.3
Asset optimization:
Realized margins		14.1
Unrealized mark-to-market valuations		(71.9	)
Other		1.3
Total	$	(42.1	)

Customer growth—Average active customer meters increased by more than 12,900 for the three months ended March 31, 2014 compared to the same period of the prior fiscal year.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Estimated weather effects — Weather, when measured by HDDs, was 16.2% and 1.7% colder than normal for the three months ended March 31, 2014 and 2013, respectively (refer to the section entitled “Weather Risk” for further discussion of our weather protection strategy).

Impact of rate cases — New base rates were approved in the District of Columbia and Maryland effective June 4, 2013 and November 23, 2013, respectively.

Asset optimization — We recorded net unrealized losses associated with our energy-related derivatives of $77.9 million for the three months ended March 31, 2014, compared to unrealized losses of $6.0 million reported for the same period of the prior fiscal year. When these derivatives settle, any unrealized amounts will ultimately reverse and Washington Gas will realize margins in combination with related transactions that these derivatives economically hedge. The losses recorded in 2014 relate primarily to fair value changes due to unfavorable movements in the unobservable inputs used in the valuation of long-dated forward contracts. We believe that this value is not reflective of our ultimate cash flows as these purchases are utilized in the optimization of our long-term natural gas transportation and storage capacity resources, the value of which is not reflected at fair value. Unfavorably affecting asset optimization results were $0.4 million in lower-of-cost or market adjustments related to storage gas inventory during the three months ended March 31, 2014. Washington Gas recorded no lower-of-cost of market adjustments related to its storage gas during the three months ended March 31, 2013. Refer to the section entitled “Market Risk—Price Risk Related to the Regulated Utility Segment” for further discussion of our asset optimization program.

Operation and Maintenance Expenses. The following table provides the key factors contributing to the changes in operation and maintenance expenses of the Regulated Utility for the three months ended March 31, 2014 and 2013.

Composition of Changes in Operation and Maintenance Expenses


(In millions)	Increase/ (Decrease)
Uncollectible accounts	$	3.3
Operation, engineering, compliance and safety		1.9
Weather-related instruments:
Loss		(0.4	)
Premium costs and fair value effects		1.1
Net insurance proceeds		(1.9	)
Other		(0.6	)
Total	$	3.4

Uncollectible accounts—The increase in uncollectible accounts is due to increased volumes of gas deliveries. In addition, Washington Gas has provided an increased number of structured and deferred payment plans to customers in Maryland due to the extremely cold winter.

Operation, engineering, compliance and safety—Washington Gas incurred increased maintenance costs for the three months ended March 31, 2014 than for the same period of the previous fiscal year due primarily to the cold weather and higher throughput.

Weather-related instruments—Washington Gas did not use any weather-related instruments during the three months ended March 31, 2014. During the three months ended March 31, 2013, Washington Gas used HDD weather related instruments to manage its financial exposure to variation from normal weather in the District of Columbia. Washington Gas recorded a net gain of $0.7 million as a result of colder than normal weather in the three months ended March 31, 2013.

Net insurance proceeds—Washington Gas received proceeds from its insurance policies for incurred legal costs and past and future environmental expenses, partially offset by costs associated with environmental claims and regulatory sharing during the period ended March 31, 2014.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Retail Energy-Marketing

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

Retail Energy-Marketing Financial and Statistical Data


	Three Months Ended March 31,					Increase /
	2014			2013		(Decrease)
Operating Results (In millions)
Gross margins:
Operating revenues	$	437.4		$	368.8	$	68.6
Less: Cost of energy		423.6			317.3		106.3
Revenue taxes		2.3			1.8		0.5
Total gross margins		11.5			49.7		(38.2	)
Operation expenses		11.6			11.7		(0.1	)
Depreciation and amortization		0.2			0.2		—
General taxes and other assessments		1.1			0.9		0.2
Operating income (loss)		(1.4	)		36.9		(38.3	)
Income tax expense (benefit)		(1.5	)		15.2		(16.7	)
Net income	$	0.1		$	21.7	$	(21.6	)

Analysis of gross margins (In millions)
Natural gas
Realized margins	$	36.4		$	10.3	$	26.1
Unrealized mark-to-market gains (losses)		(4.4	)		12.7		(17.1	)
Total gross margins—natural gas		32.0			23.0		9.0
Electricity
Realized margins		(18.5	)		21.9		(40.4	)
Unrealized mark-to-market gains (losses)		(2.0	)		4.8		(6.8	)
Total gross margins—electricity		(20.5	)		26.7		(47.2	)
Total gross margins	$	11.5		$	49.7	$	(38.2	)

Other Retail Energy-Marketing Statistics
Natural gas
Therm sales (millions of therms)		309.0			320.1		(11.1	)
Number of customers (end of period)		165,000			171,000		(6,000	)
Electricity
Electricity sales (millions of kWhs)		3,052.2			3,044.9		7.3
Number of accounts (end of period)		181,000			183,000		(2,000	)

The Retail Energy-Marketing segment reported net income of $0.1 million for the three months ended March 31, 2014, compared to net income of $21.7 million reported for the same period of the prior fiscal year.

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

Gross margins from natural gas sales increased by $9.0 million for the three months ended March 31, 2014, compared to the same period in the prior fiscal year. This comparison reflects an increase of $26.1 million in realized mark-to-market gains resulting from higher margins on portfolio optimization activity, increased spot sales to interruptible customers and hedge settlements in the current quarter versus the same quarter of the prior year, partially offset by lower unrealized margins of $17.1 million due to fluctuating market prices.

Gross margins from electric sales decreased by $47.2 million for the three months ended March 31, 2014, compared to the same period of the prior fiscal year. This comparison reflects lower realized electric retail margins of $40.4 million compared to the same quarter in the prior year due to higher capacity and ancillary service charges from the regional power grid operator associated with fixed price retail contracts and a decrease of $6.8 million in unrealized mark-to-market valuations due to fluctuating market prices.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Commercial Energy Systems

The Commercial Energy Systems segment reported net income of $1.6 million for the three months ended March 31, 2014, compared to net income of $0.6 million for the same period of the prior fiscal year. This increase is primarily due to higher solar renewable energy credits (SREC’s) and solar generation revenue.

Midstream Energy Services

The Midstream Energy Services segment reported net income of $13.8 million for the three months ended March 31, 2014, compared to a net loss of $9.4 million reported for the same period of the prior fiscal year. This increase is primarily due to favorable transportation spreads as a result of colder weather.

Other Non-Utility Activities

Transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our four operating segments, are aggregated as “Other Activities” and included as part of non-utility operations. Results from our other non-utility activities reflect net losses of $4.2 million and $0.5 million for the three months ended March 31, 2014 and 2013, respectively. The comparison reflects higher branding initiative costs and business development activities.

Intersegment Eliminations

Intersegment eliminations represents a timing difference between Commercial Energy Systems’ recognition of revenue for the sale of SREC’s to Retail Energy-Marketing’s recognition of the associated expense. Retail Energy-Marketing has accrued expenses related to SREC’s that are generated by Commercial Energy Systems but have not been transferred.

RESULTS OF OPERATIONS—Six months ended March 31, 2014 vs. March 31, 2013

Summary Results

WGL reported net income applicable to common stock of $79.8 million, or $1.54 per share, for the six months ended March 31, 2014 compared to net income of $141.9 million, or $2.74 per share, reported for the same period of the prior fiscal year.

The following table summarizes our net income (loss) applicable to common stock by operating segment for the six months ended March 31, 2014 and 2013.

Net Income (Loss) by Operating Segment


	Six Months Ended March 31,						Increase/
(In millions)	2014			2013			(Decrease)
Regulated Utility	$	88.2		$	115.8		$	(27.6	)
Non-utility operations:
Retail Energy-Marketing		3.4			34.7			(31.3	)
Commercial Energy Systems		1.5			1.7			(0.2	)
Midstream Energy Services		(8.0	)		(8.1	)		0.1
Other Activities		(5.9	)		(2.2	)		(3.7	)
Total non-utility		(9.0	)		26.1			(35.1	)
Intersegment Eliminations	$	0.6		$	—		$	0.6
Net income applicable to common stock	$	79.8		$	141.9		$	(62.1	)

EARNINGS PER AVERAGE COMMON SHARE
Basic	$	1.54		$	2.75		$	(1.21	)
Diluted	$	1.54		$	2.74		$	(1.20	)

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Regulated Utility Operating Results

The following table summarizes the Regulated Utility segment’s operating results for the six months ended March 31, 2014 and 2013.

Regulated Utility Operating Results


	Six Months Ended March 31,						Increase/
(In millions)	2014			2013			(Decrease)
Utility net revenues:
Operating revenues	$	1,107.2		$	891.8		$	215.4
Less: Cost of gas		664.2			403.2			261.0
Revenue taxes		61.0			58.5			2.5
Total utility net revenues		382.0			430.1			(48.1	)
Operation and maintenance		146.9			141.8			5.1
Depreciation and amortization		51.1			51.8			(0.7	)
General taxes and other assessments		29.9			29.3			0.6
Operating income		154.1			207.2			(53.1	)
Other expenses—net, including preferred stock dividends		(0.7	)		(0.1	)		(0.6	)
Interest expense		18.3			18.0			0.3
Income tax expense		46.9			73.3			(26.4	)
Net income	$	88.2		$	115.8		$	(27.6	)

The Regulated Utility segment’s net income applicable to common stock was $88.2 million for the six months ended March 31, 2014 compared to net income of $115.8 million for the same period of the prior fiscal year. The decrease in net income primarily reflects the following:

•

lower unrealized margins associated with our asset optimization program; and

•

higher expenses related to operations and maintenance activities.

Partially offsetting these unfavorable variances were:

•

higher revenues related to growth of more than 12,400 average active customer meters;

•

higher revenues due to new base rates in the District of Columbia and Maryland;

•

higher revenues attributed to the colder weather impact in 2014 that was not offset by weather protection;

•

higher revenues due to favorable effects of natural gas consumption patterns;

•

higher realized margins associated with our asset optimization program;

•

decrease in the effective tax rate including reinstatement of regulatory assets related to the tax effect of Med D.

Utility Net Revenues. The following table provides the key factors contributing to the changes in the utility net revenues of the Regulated Utility segment between the six months ended March 31, 2014 and 2013.

Composition of Changes in Utility Net Revenues


(In millions)	Increase / (Decrease)
Estimated weather effects	$	5.4
Customer growth		5.9
Natural gas consumption patterns		1.9
Impact of rate cases		9.2
Asset optimization:
Realized margins		17.1
Unrealized mark-to-market valuations		(89.3	)
Lower-of-cost or market adjustment		(0.7	)
Other		2.4
Total	$	(48.1	)

Estimated weather effects—Weather, when measured by HDDs, was 11.4% colder and 0.1% warmer than normal for the six months ended March 31, 2014 and 2013, respectively (refer to the section entitled “Weather Risk” for further discussion of our weather protection strategy).

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Customer growth—Average active customer meters increased by more than 12,400 for the six months ended March 31, 2014 compared to the same period of the prior fiscal year.

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

Impact of rate cases—New base rates were approved in the District of Columbia and Maryland effective June 4, 2013 and November 23, 2013, respectively.

Asset optimization—We recorded unrealized losses associated with our energy-related derivatives of $104.1 million for the six months ended March 31, 2014 compared to net unrealized losses of $14.8 million for the same period of the prior fiscal year. When these derivatives settle, any unrealized amounts will ultimately be reversed, and Washington Gas will realize margins in combination with the related transactions that these derivatives economically hedge. The losses recorded in 2014 relate primarily to fair value changes due to unfavorable movements in the unobservable inputs used in the valuation of long-dated forward contracts. We believe that this value is not reflective of our ultimate cash flows as these purchases are utilized in the optimization of our long-term natural gas transportation and storage capacity resources, the value of which is not reflected at fair value. Unfavorably affecting asset optimization results were $0.4 million and $0.3 million of lower-of-cost or market adjustments related to storage gas inventory during the six months ended March 31, 2014 and 2013, respectively. (Refer to the section entitled “Market Risk—Price Risk Related to the Regulated Utility Segment” for a further discussion of our asset optimization program).

Operation and Maintenance Expenses. The following table provides the key factors contributing to the changes in operation and maintenance expenses of the Regulated Utility for the six months ended March 31, 2014 and 2013.

Composition of Changes in Operation and Maintenance Expenses


(In millions)	Increase/ (Decrease)
Direct labor	$	2.9
Employee incentives and benefits		(4.7	)
Uncollectible accounts		1.9
Operations, engineering, compliance and safety		3.9
Net insurance proceeds		(2.2	)
Weather derivative benefits:
Loss		0.1
Premium costs and fair value effects		1.1
Other		2.1
Total	$	5.1

Direct Labor—The increase is driven by an increase in the number of employees and in overtime work driven primarily by cold weather.

Employee incentives and benefits—The decrease reflects lower pension, other post-retirement, employee benefits and workers’ compensation expenses due to changes in plan assumptions used to measure the benefit obligation partially offset by the amortization of the regulatory asset authorized in rated by the District of Columbia.

Uncollectible accounts—The increase in uncollectible accounts is due to increased volumes of gas deliveries. In addition, Washington Gas has provided an increased number of structured and deferred payment plans to customers in Maryland due to the extremely cold winter.

Operation, engineering, compliance and safety—Washington Gas incurred increased maintenance costs for the six months ended March 31, 2014 than for the same period of the previous fiscal year, driven primarily by cold weather.

Weather-related instruments—Washington Gas did not use any weather-related instruments during the six months ended March 31, 2014. During the six months ended March 31, 2013, Washington Gas used HDD weather related instruments to manage its financial exposure to variations from normal weather in the District of Columbia. Washington Gas recorded a net gain of $0.1 million as a result of slightly colder than normal weather in the six months ended March 31, 2013.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Retail Energy-Marketing

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

Retail-Energy Marketing Financial and Statistical Data


	Six Months Ended March 31,					Increase /
	2014			2013		(Decrease)
Operating Results (In millions)
Gross margins:
Operating revenues	$	760.4		$	692.9	$	67.5
Less: Cost of energy		726.9			607.5		119.4
Revenue taxes		4.3			3.2		1.1
Total gross margins		29.2			82.2		(53.0	)
Operation expenses		22.9			23.1		(0.2	)
Depreciation and amortization		0.4			0.3		0.1
General taxes and other assessments		2.2			1.8		0.4
Operating income		3.7			57.0		(53.3	)
Other income—net		0.2			—		0.2
Income tax expense		0.5			22.3		(21.8	)
Net income	$	3.4		$	34.7	$	(31.3	)

Analysis of gross margins (In millions)
Natural gas
Realized margins	$	54.0		$	22.9	$	31.1
Unrealized mark-to-market gains (losses)		(8.6	)		9.8		(18.4	)
Total gross margins—natural gas		45.4			32.7		12.7
Electricity
Realized margins		(14.5	)		40.1		(54.6	)
Unrealized mark-to-market gains (losses)		(1.7	)		9.4		(11.1	)
Total gross margins—electricity		(16.2	)		49.5		(65.7	)
Total gross margins	$	29.2		$	82.2	$	(53.0	)

Other Retail-Energy Marketing Statistics
Natural gas
Therm sales (millions of therms)		519.6			531.0		(11.4	)
Number of customers (end of period)		165,000			171,000		(6,000	)
Electricity
Electricity sales (millions of kWhs)		5,880.6			5,848.6		32.0
Number of accounts (end of period)		181,000			183,000		(2,000	)

The Retail Energy-Marketing segment reported net income of $3.4 million for the six months ended March 31, 2014, compared to net income of $34.7 million reported for the same period of the prior fiscal year.

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

Gross margins from natural gas sales increased 12.7 million in the six months ended March 31, 2014 compared to the same period of the prior fiscal year. This comparison is primarily due to increased spot sales to interruptible customers, hedge settlements and favorable portfolio optimization activity. Partially offsetting this increase were lower unrealized mark-to-market valuations due to fluctuating market prices.

Gross margins from electric sales decreased $65.7 million in the six months ended March 31, 2014 compared to the same period of the prior year due to higher capacity and ancillary service charges from the regional power grid operator (PJM) associated with fixed price retail contracts, lower realized unit margins from large commercial customers due to extreme price movements on commodity prices and a decrease in unrealized mark-to-market valuations due to fluctuating market prices.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Commercial Energy Systems

The Commercial Energy Systems segment reported net income of $1.5 million for the six months ended March 31, 2014, compared to net income of $1.7 million reported for the same period of the prior fiscal year. This decrease relates to reduced Federal design build projects partially offset by an increase in SREC and solar generation revenues.

Midstream Energy Services

The Midstream Energy Services segment reported a net loss of $8.0 million for the six months ended March 31, 2014, compared to a net loss of $8.1 million reported for the same period of the prior fiscal year. For both years, the losses primarily relate to unrealized losses on derivative instruments that are not expected to be actualized.

Other Non-Utility

Transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our four operating segments, are aggregated as “Other Activities” and included as part of non-utility operations. Results from our other non-utility activities reflect net losses of $5.9 million and $2.2 million for the six months ended March 31, 2014 and 2013, respectively. The comparison reflects higher branding initiative costs and business development activities.

Intersegment Eliminations

LIQUIDITY AND CAPITAL RESOURCES

General Factors Affecting Liquidity

Access to short-term debt markets is necessary for funding our short-term liquidity requirements, the most significant of which include buying natural gas, electricity, and pipeline capacity, and financing accounts receivable and storage gas inventory. Our need for access to long-term capital markets is driven primarily by capital expenditures, maturities of long-term debt, and the availability of government funding through deferred taxes.

During the six months ended March 31, 2014, WGL met its liquidity and capital needs through retained earnings and the issuance of commercial paper, long-term debt and common stock, and expects to do so for the remainder of fiscal year 2014. Washington Gas met its liquidity and capital needs through retained earnings, the sale of medium-term notes, and the issuance of commercial paper, and expects to do so during the remainder of fiscal year 2014.

Our ability to access capital markets depends on our credit ratings, general market liquidity, and investor demand for our securities. Our credit ratings depend largely on the financial performance of our subsidiaries, and a ratings downgrade could both increase our borrowing costs and trigger the need for posting additional collateral with our wholesale counterparties or other creditors. In support of our credit ratings, we have a goal to maintain our common equity ratio in the mid-50% range of total consolidated capital. As of March 31, 2014, total consolidated capitalization, including current maturities of long-term debt and excluding notes payable, comprised 66.7% common equity, 1.4% preferred stock and 31.9% long-term debt. The level of this ratio varies during the fiscal year due to the seasonal nature of our business. This seasonality also affects our short-term debt balances, which are typically higher in the fall and winter months and substantially lower in the spring when a significant portion of our current assets are converted into cash at the end of the heating season. Our cash flow requirements and our ability to provide satisfactory resources to meet those requirements are primarily influenced by the activities of Washington Gas, WGEServices, WGL Midstream, and, to a lesser extent, other non-utility operations.

Our plans provide for sufficient liquidity to satisfy our financial obligations. At March 31, 2014, we had no restrictions on our cash balances or retained earnings that would affect the payment of common or preferred stock dividends by either WGL or Washington Gas.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Short-Term Cash Requirements and Related Financing

Washington Gas has seasonal short-term cash requirements to fund the purchase of storage gas inventory in advance of the winter heating season. At March 31, 2014 and September 30, 2013, Washington Gas had balances in gas storage of $45.9 million and $132.2 million, respectively. Washington Gas collects the cost of gas under cost recovery mechanisms approved by its regulators. Additionally, Washington Gas may be required to post cash collateral for certain purchases.

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

Variations in the timing of collections under its gas cost recovery mechanisms can significantly affect Washington Gas’ short-term cash requirements. At March 31, 2014 and September 30, 2013, Washington Gas had $3.1 million and $0.6 million, respectively, in net over-collections of gas costs reflected in current assets/liabilities as gas costs due from/to customers. Most of the March 31, 2014 balance will be returned to customers in fiscal year 2014. Amounts under-collected or over-collected that are generated during the current gas cost recovery cycle are deferred as a regulatory asset or liability on the balance sheet until September 1 of each year, at which time the accumulated amount is transferred to gas costs due from/to customers as appropriate. At March 31, 2014 and September 30, 2013, Washington Gas had a net regulatory liability of $94.4 million and a net regulatory asset of $13.8 million, respectively, related to the current gas recovery cycle.

WGL and Washington Gas use short-term debt in the form of commercial paper or unsecured short-term bank loans to fund seasonal cash requirements. Our policy is to maintain back-up bank credit facilities in an amount equal to or greater than our expected maximum commercial paper position. Bank credit balances available to WGL and Washington Gas net of commercial paper balances were $196.5 million and $289.0 million at March 31, 2014 and $201.4 million and $225.5 million at September 30, 2013, respectively. The credit facility for WGL permits it to borrow up to $450.0 million, and further permits, with the banks’ approval, additional borrowings of $100.0 million for a maximum potential total of $550.0 million. The credit facility for Washington Gas permits it to borrow up to $350.0 million, and further permits, with the banks’ approval, additional borrowings of $100.0 million for a maximum potential total of $450.0 million. The interest rate on loans made under each of the credit facilities will be a fluctuating rate per annum that will be set using certain parameters at the time each loan is made. WGL and Washington Gas incur credit facility fees, which in some cases are based on the long-term debt ratings of Washington Gas. In the event that the long-term debt of Washington Gas is downgraded below certain levels, WGL and Washington Gas would be required to pay higher fees. There are five different levels of fees. The credit facility for WGL defines its applicable fee level as one level below the level applicable to Washington Gas. Under the terms of the credit facilities, the lowest level facility fee is 0.06% and the highest is 0.175%. These credit agreements provide for a term of five years and expire on April 3, 2017. The credit agreements each have two one-year extension options. Refer to Note 3—Short-Term Debt of the Notes to the Consolidated Financial Statements for further information.

To manage credit risk, Washington Gas, WGEServices and WGL Midstream may require certain customers and suppliers to provide deposits, which are reported as current liabilities in “Customer deposits and advance payments,” in the accompanying balance sheets. At March 31, 2014 and September 30, 2013, “Customer deposits and advance payments” totaled $52.4 million and $67.2 million, respectively. For both periods, almost all of these deposits were from Washington Gas customers.

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

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

WGEServices and WGL Midstream have seasonal short-term cash requirements to fund the purchase of storage gas inventory in advance of the winter heating season. At March 31, 2014 and September 30, 2013, WGEServices had balances in gas storage of $4.6 million and $49.1 million, respectively. WGEServices collects revenues that are designed to reimburse commodity costs used to supply their retail customer and wholesale counterparty contracts. At March 31, 2014 and

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)

September 30, 2013, WGL Midstream had balances in gas storage of $23.6 million and $166.0 million, respectively. As market opportunities arise, WGL Midstream collects revenues in excess of its commodity costs through its wholesale counterparty contracts. WGEServices and WGL Midstream derive funding to finance these activities from short-term debt issued by WGL. Additionally, WGEServices and WGL Midstream may be required to post cash collateral for certain purchases. WGEServices and WGL Midstream may be required to provide parent guarantees from WGL for certain transactions.

In addition to storage gas, WGL Midstream also has short-term cash requirements to fund the construction of the Central Penn Line pipeline. At March 31, 2014, WGL Midstream had short-term cash obligations of $2.4 million related to the Central Penn Line pipeline. At September 30, 2013, WGL Midstream did not have any obligations related to the Central Penn Line pipeline. WGL Midstream derives funding to finance these activities from short-term debt issued by WGL.

WGESystems has short-term cash requirements to fund the construction and purchase of residential and commercial Solar PT generating systems. WGESystems derives funding to finance these activities from short-term debt issued by WGL.

Long-Term Cash Requirements and Related Financing

For Washington Gas, our long-term cash requirements primarily depend upon the level of capital expenditures and long-term debt maturities. Our capital expenditures primarily relate to adding new utility customers and system supply as well as maintaining the safety and reliability of Washington Gas’ distribution system. Refer to the section entitled “Capital Expenditures” for discussion of our capital expenditures forecast and our 2013 Annual Report for a discussion of our long-term debt maturities.

On December 5, 2013, Washington Gas issued $75.0 million of 5.00% fixed MTNs with a thirty year maturity due December 15, 2043. On July 18, 2013, in anticipation of the issuance, we entered into a forward starting swap to mitigate a substantial portion of the risk of rising interest rates. The swap was terminated on December 2, 2013 at a gain to Washington Gas of $1.2 million. The estimated effective cost of the notes, after consideration of issuance discount, underwriter fees and hedge gain, is 4.95%. For further discussion of our management of interest-rate risk, refer to Management’s Discussion in our 2013 Annual Report.

For our non-utility segments, our long-term cash requirements primarily depend upon the level of investments and capital expenditures. For WGL Midstream, our investments primarily relate to providing capital for construction of the Penn Line pipeline. For WGESystems, our investments primarily relate to providing capital for construction of new residential and commercial solar projects.

Security Ratings

The table below reflects the current credit ratings for the outstanding debt instruments of WGL and Washington Gas. Changes in credit ratings may affect WGL’s and Washington Gas’ cost of short-term and long-term debt and our access to the capital markets. A security rating is not a recommendation to buy, sell or hold securities. The rating may be subject to revision or withdrawal at any time by the assigning rating organization and each rating should be evaluated independently of any other rating.

Credit Ratings for Outstanding Debt Instruments


	WGL		Washington Gas
Rating Service	Unsecured Medium-Term Notes (Indicative)^(a)	Commercial Paper	Unsecured Medium-Term Notes	Commercial Paper
Fitch Ratings^(b)	A+	F1	AA-	F1
Moody’s Investors Service^(c)	Not Rated	P-2	A1	P-1
Standard & Poor’s Ratings Services^(d)	A+	A-1	A+	A-1

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

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

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

^(d)	The long-term debt ratings outlook issued by Standard & Poor’s Rating Services for WGL and Washington Gas is stable.

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)

Ratings Triggers and Certain Debt Covenants

Under the terms of WGL’s and Washington Gas’ credit agreements, the ratio of consolidated financial indebtedness to consolidated total capitalization cannot exceed 0.65 to 1.0 (65.0%). In addition, WGL and Washington Gas are required to inform lenders of changes in corporate existence, financial conditions, litigation, and environmental warranties that might have a material effect on debt ratings. The failure to inform the lenders’ agent of material changes in these areas might constitute default under the agreements. Additionally, failure to pay principal or interest on any other indebtedness may be deemed a default under our credit agreements. A default, if not remedied, may lead to a suspension of further loans and/or acceleration in which obligations become immediately due and payable. At March 31, 2014, we were in compliance with all of the covenants under our revolving credit facilities.

For certain of its natural gas purchase and pipeline capacity agreements, if the long-term debt of Washington Gas is downgraded to or below the lower of a BBB- rating by Standard & Poor’s or a Baa3 rating by Moody’s Investors Service, or if Washington Gas is deemed by a counterparty not to be creditworthy, then the counterparty may withhold service or deliveries, or may require additional credit support. For certain other agreements, if the counterparty’s credit exposure to Washington Gas exceeds a contractually defined threshold amount, or if Washington Gas’ credit rating declines by a certain rating level, then the counterparty may require additional credit support. At March 31, 2014, Washington Gas would not be required to provide additional credit support by these arrangements if its long-term credit rating was to be downgraded by one rating level.

WGL guarantees payments for certain purchases of natural gas and electricity on behalf of WGEServices and WGL Midstream (refer to our 2013 Annual Report for a further discussion of these guarantees). If the credit rating of WGL declines, WGEServices and WGL Midstream may be required to provide additional credit support for these purchase contracts. At March 31, 2014, WGEServices and WGL Midstream would not be required to provide any additional credit support if the long-term credit rating of WGL was to be downgraded by one rating level.

Historical Cash Flows

The following table summarizes WGL’s net cash provided by (used in) operating, investing and financing activities for the six months ended March 31, 2014 and 2013:


	Six Months Ended March 31,
(In millions)	2014			2013			Increase / (Decrease)
Cash provided by (used in):
Operating activities	$	242.1		$	261.6		$	(19.5	)
Investing activities		(167.8	)		(160.3	)		(7.5	)
Financing activities		(65.8	)		(101.9	)		36.1

Cash Flows Provided by Operating Activities

The regulated utility’s cash flows from operating activities principally reflect gas sales and deliveries and cost of operations. The volume of gas sales and deliveries is dependent primarily on factors external to the utility, such as growth of customer demand, weather, market prices for energy, economic conditions and measures that promote energy efficiency. Under revenue and weather normalization and ratemaking adjustments and decoupling mechanisms in place, changes in delivery volumes from levels assumed when rates were approved may affect the timing of cash flows but not net income. The price at which the utility provides energy to customers is determined in accordance with rate agreements. In general, changes in the utility’s cost of purchased power, fuel and gas may affect the timing of cash flows but not net income because the costs are recovered in accordance with rate agreements. In addition, the regulated utility’s cash flow is impacted by the timing of derivative settlements.

The non-utility cash flows from operating activities primarily reflect the timing of receipts related to solar and federal projects at commercial energy systems and the timing of receipts related to electric and gas bills for retail-energy marketing. The timing of gas purchases resulting from asset optimization arrangements affect midstream energy services.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Net income is the result of cash and non-cash (or accrual) transactions. Only cash transactions affect WGL’s cash flows from operating activities. Principal non-cash charges include depreciation and deferred income tax expense. Principal non-cash credits include the amortization of certain net regulatory liabilities. Non-cash charges or credits may also be accrued under the revenue decoupling and cost reconciliation mechanisms in the utilities’ rate plans.

Net cash flows provided by operating activities for the six months ended March 31, 2014 was $242.1 million compared to $261.6 million for the six months ended March 31, 2013. The change in net cash flows reflects seasonal trends of increased sales volumes to customers due to our colder than normal weather winter heating season, timing of payments for and recovery of energy costs. Seasonal trends and timing are reflected within changes to accounts receivable, recoverable energy costs and accounts payable.

The change in regulatory assets principally reflects changes in deferred pension costs in accordance with the accounting rules for retirement benefits.

Cash Flows Used in Investing Activities

During the six months ended March 31, 2014, cash flows used in investing activities totaled $167.8 million, which primarily consists of capital expenditures made on behalf of Washington Gas. In addition, investing activities also reflects additional investments in commercial Solar PV facilities, a partnership and other financing vehicles to directly fund residential Solar PV projects. During the six months ended March 31, 2013, cash flows used in investing activities totaled $160.3 million, which primarily consists of capital expenditures made on behalf of Washington Gas. In addition, investing activities also reflects additional investments in commercial Solar PV facilities and investments in a partnership to directly fund residential Solar PV projects.

Cash Flows Used in Financing Activities

Cash flows used in financing activities totaled $65.8 million for the six months ended March 31, 2014, reflecting the net retirement of $20.3 million of notes payable and long-term debt and dividends on common and preferred stock of $44.2 million. Cash flows used in financing activities totaled $101.9 million for the six months ended March 31, 2013, reflecting the repayment of $65.6 million of notes payable and dividends on common and preferred stock of $39.4 million.

Capital Investments

The following table depicts our updated projected capital investments for the fiscal years 2014 through 2018. In addition to expenditures to extend service to new areas, ensuring safe, reliable and improved service for our utility and to grow our non-utility investments, our capital investments include an investment in a new pipeline construction projected entered into during the three months ended March 31, 2014. Refer to Note 11—Other Investments in the notes to the consolidated financial statements for further discussion about this project.


Capital Investments
(In millions)	2014		2015		2016		2017		2018		Total
New business	$	80.8	$	91.5	$	107.7	$	133.3	$	122.5	$	535.8
Replacements		122.2		132.8		132.2		129.1		129.1		645.4
Customer information system		14.2		30.3		26.7		10.3		—		81.5
Other utility		77.2		31.2		23.4		34.6		36.0		202.4
Total Utility^(a)	$	294.4	$	285.8	$	290.0	$	307.3	$	287.6	$	1,465.1
Pipeline Investments	$	16.9		73.3		82.3		263.2		30.3		466.0
Solar		120.0		100.1		100.1		100.1		100.1		520.4
Other Non Utility		16.8		40.4		0.6		0.6		0.7		59.1
Total investments	$	448.1	$	499.6	$	473.0	$	671.2	$	418.7	$	2,510.6

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

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

Contractual Obligations

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

WGL Midstream enters into contracts to acquire, invest in, manage and optimize natural gas storage and transportation assets. On February 14, 2014, WGL Midstream contracted to purchase a significant amount of natural gas. These gas purchases are related to the Central Penn Line pipeline and begin after the pipeline has gone into operation. See the sub-section below entitled “Central Penn Line Pipeline” for details of this project.

The estimated obligations as of March 31, 2014 for future fiscal years are shown below.


Estimated Contractual Obligations and Commercial Commitments
	Years Ended September 30,
(In millions)	Total		2014		2015		2016		2017		2018		Thereafter
Pipeline and storage contracts^(a)	$	379.4	$	9.4	$	15.8	$	20.0	$	18.3	$	27.8	$	288.1
Medium-term notes^(b)		621.0		30.0		45.0		—		—		50.0		496.0
Interest expense^(c)		515.8		17.8		34.7		32.9		32.6		32.6		365.2
Gas purchase commitments
—Washington Gas^(d)		4,762.0		207.6		236.5		303.4		337.6		320.6		3,356.3
—WGEServices^(e)		251.8		104.7		114.8		26.8		5.5		—		—
—WGL Midstream^(b)		16,220.1		30.7		2.4		28.0		303.1		943.9		14,912.0
Electric purchase commitments^(f)		641.3		292.6		257.1		75.4		15.9		0.3		—
Operating leases		30.8		6.1		6.4		5.5		4.5		3.9		4.4
Business process outsourcing^(g)		105.1		16.9		32.1		32.8		23.3		—		—
Other long-term commitments^(h)		25.2		8.4		6.1		4.9		3.8		1.7		0.3
Total	$	23,552.5	$	724.2	$	750.9	$	529.7	$	744.6	$	1,380.8	$	19,422.3

^(a) Represents minimum payments under natural gas transportation, storage and peaking contracts that have expiration dates through fiscal year 2029. Additionally, includes minimum payments for WGEServices and WGL Midstream pipeline contracts.

^(b) Represents scheduled repayment of principal. Excludes $8.3 million in debt that is anticipated to be a non-cash extinguishment of project debt financing (refer to the section entitled “Construction Project Financing”).

^(c) Represents the scheduled interest payments associated with MTNs and other long-term debt.

^(b) Includes short-term commitments to purchase fixed volumes of natural gas, as well as long-term gas purchase commitments that contain fixed volume purchase requirements. Cost estimates are based on both forward market prices and option premiums for fixed volume purchases under these purchase commitments.

^(e) Represents commitments based on a combination of market prices at March 31, 2014 and fixed price as well as index priced contract commitments for natural gas delivered to various city gate stations, including the cost of transportation to that point, which is bundled in the purchase price.

^(f) Represents electric purchase commitments that are based on existing fixed price and fixed volume contracts. Also includes $18.7 million related to renewable energy credits.

^(g) Represents fixed costs to the service provider related to the 10-year contract for business process outsourcing. These payments do not reflect potential inflationary adjustments included in the contract. Including these inflationary adjustments, required payments to the service provider could total $125.5 million over the remaining contract term.

^(h) Includes Shell agreement minimum program fees, certain information technology service contracts and committed payments related to certain environmental response costs and excludes uncertain tax positions.

Note 5 to the Consolidated Financial Statements in our 2013 Annual Report includes a discussion of long-term debt, including debt maturities. Note 13 to the Consolidated Financial Statements in our 2013 Annual Report reflects information about the various contracts of Washington Gas, WGEServices and WGL Midstream. Additionally, refer to Note 13 of the Notes to Consolidated Financial Statements in this quarterly report.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Financial Guarantees

WGL has guaranteed payments primarily for certain purchase commitments on behalf of WGEServices and WGL Midstream. At March 31, 2014, these guarantees totaled $265.5 million and $259.1 million for WGEServices and WGL Midstream, respectively. The amount of such guarantees is periodically adjusted to reflect changes in the level of financial exposure related to these purchase commitments. We also receive financial guarantees or other collateral from counterparties when required by our credit policy (refer to the section entitled “Credit Risk” for a further discussion of our credit policy). WGL also issued guarantees totaling $23.9 million at March 31, 2014 on behalf of certain of our non-utility subsidiaries, partners and unconsolidated investments associated with their banking transactions. For all of its financial guarantees, WGL may cancel any or all future obligations upon written notice to the counterparty, but WGL would continue to be responsible for the obligations created under the guarantees prior to the effective date of the cancellation.

Central Penn Line Pipeline

In February, 2014, WGL Midstream entered into a limited liability company agreement and formed Meade, with COG Holdings LLC , Vega Midstream MPC LLC, and River Road Interests LLC.

Meade was formed to jointly develop and own, together with Transcontinental Gas Pipe Line Company, LLC (Transco), an approximately 177-mile pipeline originating in Susquehanna County, Pennsylvania and extending to Lancaster County, Pennsylvania (Central Penn Line) that will have the capacity to transport and deliver up to approximately 1.7 million dekatherms per day of natural gas. This pipeline will be an integral part of Transco’s recently announced “Atlantic Sunrise” project.

The Central Penn Line, as part of Atlantic Sunrise, is a natural gas pipeline designed to provide new firm transportation capacity from various supply points in northeast Pennsylvania to a delivery point into Transco’s mainline in southeast Pennsylvania. The Central Penn Line currently has a projected in-service date in the second half of 2017. WGL Midstream will invest an estimated $410 million for a 55% interest in Meade, and Meade will invest an estimated $746 million in the Central Penn Line for an approximate 39% interest in the Central Penn Line. Transco will have the remaining ownership interests.

Additionally, in February, 2014, WGL Midstream entered into an agreement with Cabot Oil & Gas Corporation (Cabot) whereby WGL Midstream will purchase 500,000 dekatherms per day of natural gas from Cabot over a 15 year term. As part of this agreement, Cabot will acquire 500,000 dekatherms per day of firm gas transportation capacity on Transco’s Atlantic Sunrise project of which the Central Penn Line is a part. This capacity will be released to WGL Midstream.

CREDIT RISK

Wholesale Credit Risk

Certain wholesale suppliers that sell natural gas to any or all of Washington Gas, WGEServices and WGL Midstream may have relatively low credit ratings or may not be rated by major credit rating agencies.

Washington Gas enters into transactions with wholesale counterparties for the purpose of meeting firm ratepayer commitments, to optimize the value of its long-term capacity assets, and for hedging natural gas costs. In the event of a counterparty’s failure to deliver contracted volumes of gas or fulfill its payment obligations, Washington Gas may incur losses that would typically be passed through to its sales customers under the purchased gas cost adjustment mechanisms. Washington Gas may be at risk for financial loss to the extent these losses are not passed through to its customers.

For WGEServices, any failure of wholesale counterparties to deliver natural gas or electricity under existing contracts could cause financial exposure for the difference between the price at which WGEServices has contracted to buy these commodities and their replacement cost from another supplier. To the extent that WGEServices sells natural gas to these wholesale counterparties, WGEServices may be exposed to payment risk if WGEServices is in a net receivable position. Additionally, WGEServices enters into contracts with counterparties to hedge the costs of natural gas and electricity. Depending on the ability of the counterparties to fulfill their commitments, WGEServices could be at risk for financial loss.

WGL Midstream enters into transactions with wholesale counterparties to hedge and optimize its portfolio of owned and managed natural gas assets. Any failure of wholesale counterparties to deliver natural gas under existing contracts could cause financial exposure for the difference between the price at which WGL Midstream has contracted to buy these commodities and their replacement cost. To the extent that WGL Midstream sells natural gas to these wholesale

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)

counterparties, WGL Midstream may be exposed to payment risk if it is in a net receivable position. In addition, WGL Midstream enters into contracts with counterparties to hedge the costs of natural gas. Depending on the ability of the counterparties to fulfill their commitments, WGL Midstream could be at risk for financial loss.

Washington Gas, WGEServices and WGL Midstream operate under an existing credit policy that is designed to mitigate credit risks through requirements for credit enhancements including, but not limited to, letters of credit, parent guarantees and cash collateral when deemed necessary. In accordance with this policy, Washington Gas, WGEServices and WGL Midstream have each obtained credit enhancements from certain of their counterparties. If certain counterparties or their guarantors meet the policy’s creditworthiness criteria, Washington Gas, WGEServices and WGL Midstream may grant unsecured credit to those counterparties or their guarantors. The creditworthiness of all counterparties is continuously monitored.

Washington Gas, WGEServices and WGL Midstream are also subject to the collateral requirements of their counterparties. At March 31, 2014, Washington Gas, WGEServices and WGL Midstream provided $14.7 million, $38.8 million and $2.5 million in cash collateral to counterparties, respectively.

The following table provides information on our credit exposure, net of collateral, to wholesale counterparties as of March 31, 2014 for Washington Gas, WGEServices and WGL Midstream, separately.


Credit Exposure to Wholesale Counterparties (In millions)
Rating^(a)	Exposure Before Credit Collateral^(b)		Offsetting Credit Collateral Held^(c)		Net Exposure		Number of Counterparties Greater Than 10%^(d)		Net Exposure of Counterparties Greater Than 10%
Washington Gas
Investment Grade	$	6.9	$	—	$	6.9		1	$	3.7
Non-Investment Grade		1.1		0.1		1.0		—		—
No External Ratings		9.5		—		9.5		1		2.0
WGEServices
Investment Grade	$	5.8	$	—	$	5.8		2	$	3.9
Non-Investment Grade		6.1		4.4		1.7		1		1.7
No External Ratings		—		—		—		—		—
WGL Midstream
Investment Grade	$	22.4	$	—	$	22.4		3	$	15.5
Non-Investment Grade		—		—		—		—		—
No External Ratings		0.9		—		0.9		—		—

^(a)Investment Grade is primarily determined using publicly available credit ratings of the counterparty. If the counter party has provided a guarantee by a higher-rated entity (e.g., its parent), it is determined based upon the rating of it guarantor. Included in “Investment Grade” are counterparties with a minimum Standard & Poor’s or Moody’s Investor Service rating of BBB- or Baa3, respectively.

^(b)Includes the net of all open positions on energy-related derivatives subject to mark-to-market accounting requirements, the net receivable/payable for realized transactions and net open positions for contracts designated as normal purchases and normal sales and not recorded on our balance sheet. Amounts due from counterparties are offset by liabilities payable to those counterparties to the extent that legally enforceable netting arrangements are in place.

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

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

Retail Credit Risk

Washington Gas is exposed to the risk of non-payment of utility bills by certain of its customers. To manage this customer credit risk, Washington Gas may require cash deposits from its high-risk customers to cover payment of their bills until the requirements for the deposit refunds are met. In addition, Washington Gas implemented a POR program as approved by the PSC of MD, whereby it purchases receivables from participating energy marketers at approved discount rates. Under the program, Washington Gas is exposed to the risk of non-payment by the retail customers for these receivables. This risk is factored into the approved discount rate at which Washington Gas purchases the receivables.

WGEServices is also exposed to the risk of non-payment by its retail customers. WGEServices manages this risk by evaluating the credit quality of certain new customers as well as by monitoring collections from existing customers. To the extent necessary, WGEServices can obtain collateral from, or terminate service to, its existing customers based on credit quality criteria. In addition, WGEServices participates in POR programs with certain Maryland and Pennsylvania utilities, whereby it sells its receivables to various utilities at approved discount rates. Under the POR programs, WGEServices is

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)

exposed to the risk of non-payment by its retail customers for delivered commodities that have not yet been billed. Once the invoices are billed, however, the associated credit risk is assumed by the purchasing utilities. While participation in POR programs reduce the risk of collection and fixes a discount rate on the receivables, there is a risk that the discount rate paid to participate in the POR program will exceed the actual bad debt expense and billing fees associated with these receivables.

WGSW is indirectly subject to retail credit risk associated with non-payment by customers who lease solar equipment or maintain energy service agreements through ASD Solar LP, Skyline Innovations, Inc. and SunEdison. This credit risk is mitigated with minimum credit quality criteria established in each of WGSW’s agreements. These criteria must be satisfied for WGSW to participate in the project financing arrangement or partnership interest.

WGL Midstream is not subject to retail credit risk.

MARKET RISK

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

Price Risk Related to the Regulated Utility Segment

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

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

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

The following two tables summarize the changes in the fair value of our net assets (liabilities) associated with the Regulated Utility segment’s energy-related derivatives during the six months ended March 31, 2014:

Regulated Utility Segment

Changes in Fair Value of Energy-Related Derivatives


(In millions)
Net assets (liabilities) at September 30, 2013	$	(107.7	)
Net fair value of contracts entered into during the period		(26.9	)
Other changes in net fair value		(308.8	)
Realized net settlement of derivatives		53.6
Net assets (liabilities) at March 31, 2014	$	(389.8	)

Regulated Utility Segment

Roll Forward of Energy-Related Derivatives


(In millions)
Net assets (liabilities) at September 30, 2013	$	(107.7	)
Recorded to income		(123.7	)
Recorded to regulatory assets/liabilities		(212.0	)
Realized net settlement of derivatives		53.6
Net assets (liabilities) at March 31, 2014	$	(389.8	)

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

The maturity dates of our net assets (liabilities) associated with the Regulated Utility segment’s energy-related derivatives recorded at fair value at March 31, 2014, is summarized in the following table based on the level of the fair value calculation under ASC Topic 820:

Regulated Utility Segment

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


	Years Ended September 30,
(In millions)	Total			Remainder 2014			2015			2016			2017			2018			Thereafter
Level 1 — Quoted prices in active markets	$	—		$	—		$	—		$	—		$	—		$	—		$	—
Level 2 — Significant other observable inputs		(7.2	)		(1.1	)		(6.2	)		—			0.1			—			—
Level 3 — Significant unobservable inputs		(382.6	)		(13.6	)		(25.2	)		(35.4	)		(47.8	)		(38.6	)		(222.0	)
Total net assets (liabilities) associated with our energy-related derivatives	$	(389.8	)	$	(14.7	)	$	(31.4	)	$	(35.4	)	$	(47.7	)	$	(38.6	)	$	(222.0	)

Fair value changed due primarily to unfavorable movements in the unobservable inputs used in the valuation of long-dated forwards. We believe that this value is not reflective of our ultimate cash flows as these purchases are utilized in the optimization of our long-term natural gas transportation and storage capacity resources, which are not reflected at fair value. Refer to Note 8, Derivative and Weather-Related Instruments and Note 9, Fair Value Measurements of the Notes to Consolidated Financial Statements for a further discussion of our derivative activities and fair value measurements.

Price Risk Related to the Non-Utility Segments

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

A portion of WGEServices’ annual natural gas sales volumes is subject to variations in customer demand associated with fluctuations in weather and other factors. Purchases of natural gas to fulfill retail sales commitments are generally made under fixed-volume contracts based on certain weather assumptions. If there is significant deviation from normal weather or from other factors that affect customer usage, purchase commitments may differ significantly from actual customer usage. To the extent that WGEServices cannot match its customer requirements and supply commitments, it may be exposed to commodity price and volume variances, which could negatively impact expected gross margins (refer to the section entitled “Weather Risk” for a further discussion of our management of weather risk). WGEServices manages these risks through the use of derivative instruments, including financial products.

WGEServices procures electricity supply under contract structures in which WGEServices assumes the responsibility of matching its customer requirements with its supply purchases. WGEServices assembles the various components of supply, including electric energy from various suppliers and capacity, ancillary services and transmission service from the PJM Interconnection, a regional transmission organization, in matching its customer requirements obligations. While the capacity and transmission costs within PJM are generally stable and identifiable several years into the future, the cost of ancillary services which support the reliable operation of the transmission system, fluctuate more frequently as changes occur in the balance between generation and the consumption mix within the electric system. WGEServices could be exposed to price risk associated with changes in ancillary costs due to lack of available forward market products to sufficiently hedge those risks.

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

The following two tables summarize the changes in the fair value of our net assets (liabilities) associated with the Retail Energy-Marketing segment’s energy-related derivatives during the six months ended March 31, 2014:

Retail Energy-Marketing Segment

Changes in Fair Value of Energy-Related Derivatives


(In millions)
Net liabilities at September 30, 2013	$	(10.4	)
Net fair value of contracts entered into during the period		0.6
Other changes in net fair value		16.7
Realized net settlement of derivatives		(7.2	)
Net assets (liabilities) at March 31, 2014	$	(0.3	)

Retail Energy-Marketing Segment

Roll Forward of Energy-Related Derivatives


(In millions)
Net liabilities at September 30, 2013	$	(10.4	)
Recorded to income		17.5
Recorded to accounts payable		(0.2	)
Realized net settlement of derivatives		(7.2	)
Net assets (liabilities) at March 31, 2014	$	(0.3	)

The maturity dates of our net assets (liabilities) associated with the Retail Energy-Marketing segments’ energy-related derivatives recorded at fair value at March 31, 2014 is summarized in the following table based on the level of the fair value calculation under ASC Topic 820:

Retail Energy-Marketing Segment

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


	Years Ended September 30,
(In millions)	Total			Remainder 2014			2015			2016			2017		2018		Thereafter
Level 1 — Quoted prices in active markets	$	—		$	—		$	—		$	—		$	—	$	—	$	—
Level 2 — Significant other observable inputs		2.6			(0.2	)		3.8			(1.0	)		—		—		—
Level 3 — Significant unobservable inputs		(2.9	)		2.4			(4.8	)		(0.5	)		—		—		—
Total net assets (liabilities) associated with our energy-related derivatives	$	(0.3	)	$	2.2		$	(1.0	)	$	(1.5	)	$	—	$	—	$	—

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

The following two tables summarize the changes in the fair value of our net assets (liabilities) associated with the Midstream Energy Services segments’ energy-related derivatives during the six months ended March 31, 2014:

Midstream Energy Services Segment

Changes in Fair Value of Energy-Related Derivatives


(In millions)
Net assets at September 30, 2013	$	(10.5	)
Net fair value of contracts entered into during the period		(34.2	)
Other changes in net fair value		(23.7	)
Realized net settlement of derivatives		28.5
Net assets (liabilities) at March 31, 2014	$	(39.9	)

Midstream Energy Services Segment

Roll Forward of Energy-Related Derivatives


(In millions)
Net assets at September 30, 2013	$	(10.5	)
Recorded to income		(57.9	)
Realized net settlement of derivatives		28.5
Net assets (liabilities) at March 31, 2014	$	(39.9	)

The maturity dates of our net assets (liabilities) associated with the Midstream Energy Services segments’ energy-related derivatives recorded at fair value at March 31, 2014 is summarized in the following table based on the level of the fair value calculation under ASC Topic 820:

Midstream Energy Services Segment

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


	Years Ended September 30,
(In millions)	Total			Remainder 2014		2015			2016			2017			2018			Thereafter
Level 1—Quoted prices in active markets	$	—		$	—	$	—		$	—		$	—		$	—		$	—
Level 2—Significant other observable inputs		9.1			9.2		(0.1	)		—			—			—			—
Level 3—Significant unobservable inputs		(49.0	)		—		—			(6.4	)		(6.7	)		(8.4	)		(27.5	)
Total net assets associated with our energy-related derivatives	$	(39.9	)	$	9.2	$	(0.1	)	$	(6.4	)	$	(6.7	)	$	(8.4	)	$	(27.5	)

Fair value changed primarily due to movements in unobservable inputs used in the valuation of long-dated forward contracts. We believe that this value is not reflective of our ultimate cash flows as these purchases are utilized in the optimization of our long-term natural gas transportation and storage capacity resources, which are not reflected at fair value.

Value-at-Risk

WGEServices measures the market risk of its energy commodity portfolio by determining its value-at-risk. Value-at-risk is an estimate of the maximum loss that can be expected at some level of probability if a portfolio is held for a given time period. The value-at-risk calculation for natural gas and electric portfolios include assumptions for normal weather, new customers and renewing customers for which supply commitments have been secured. Based on a 95% confidence interval for a one-day holding period, WGEServices’ value-at-risk at March 31, 2014 was approximately $227,000 and $61,000, related to its natural gas and electric portfolios, respectively. At September 30, 2013, WGEServices’ value-at-risk was approximately $14,900 and $36,100, related to its natural gas and electric portfolios, respectively. The increases to WGEServices’ value-at-risk natural gas and electric portfolios were driven by increased market prices as a result of colder than normal weather. At March 31, 2014, the high, low and average value-at-risk for natural gas are noted in the table below.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

WGEServices

Value-at-Risk at March 31, 2014


(In thousands)	High		Low		Average
Natural Gas	$	227.0	$	13.9	$	52.3
Electric Portfolio		131.6		10.1		38.9
Total	$	358.6	$	24.0	$	91.2

Interest-Rate Risk

We are exposed to interest-rate risk associated with our short-term and long-term financing. WGL utilizes derivative instruments from time to time in order to minimize its exposure to the risk of interest-rate volatility.

Short-Term Debt. At March 31, 2014 and September 30, 2013, WGL and its subsidiaries had outstanding notes payable of $314.5 million and $373.1 million, respectively. The carrying amount of our short-term debt approximates fair value. In the current quarter, a change of 100 basis points in the underlying average interest rate for our short-term debt would have caused a change in interest expense of approximately $2.8 million.

Long-Term Debt. At March 31, 2014, we had outstanding fixed-rate MTNs and other long-term debt of $599.2 million, excluding current maturities and unamortized discounts. While fixed-rate debt does not expose us to earnings risk when market interest rates change, such debt is subject to changes in fair value. Fair value is defined as the present value of the debt securities’ future cash flows discounted at interest rates that reflect market conditions as of the measurement date. As of March 31, 2014, the fair value of our fixed-rate debt was $717.1 million. Our sensitivity analysis indicates that fair value would increase by approximately $27.6 million or decrease by approximately $25.8 million if interest rates were to decline or increase by 10%, respectively, from current market levels. In general, such an increase or decrease in fair value would impact earnings and cash flows only if Washington Gas were to reacquire some or all of these instruments in the open market prior to their maturity.

A total of $447.5 million, or approximately 75.7%, of Washington Gas’ outstanding MTNs, excluding current maturities, have make-whole call options which, if exercised, would require us to pay a premium over the face amount.

Derivative Instruments. Washington Gas utilizes derivative instruments from time to time in order to minimize its exposure to the risk of interest-rate volatility. On July 18, 2013, Washington Gas entered into a forward starting swap in anticipation of its December 2013 MTN issuance. The swap was terminated on December 2, 2013 at a gain to Washington Gas of $1.2 million. Refer to the section entitled “Long-Term Cash Requirements and Related Financing” for further discussion of our interest-rate risk management activity.

Weather Risk

We are exposed to various forms of weather risk in both our regulated utility and non-utility business segments. To the extent Washington Gas does not have weather related instruments or billing adjustment mechanisms in place, its revenues are volume driven and its current rates are based upon an assumption of normal weather. Without weather protection strategies, variations from normal weather will cause our earnings to increase or decrease depending on the weather pattern. Washington Gas currently has a weather protection strategy that is designed to neutralize the estimated financial effects of weather on its net income for Virginia and Maryland. In the District of Columbia, we have an open Weather Normalization Adjustment (WNA) filing, and due to recent rate case decisions and the pricing environment, we did not hedge against exposure to weather in the District of Columbia during the six months ended March 31, 2014.

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

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

Billing Adjustment Mechanisms. In Maryland, Washington Gas has a Revenue Normalization Adjustment (RNA) billing mechanism that is designed to stabilize the level of net revenues collected from Maryland customers by eliminating the effect of deviations in customer usage caused by variations in weather from normal levels and other factors such as conservation. In Virginia, Washington Gas has a WNA billing adjustment mechanism that is designed to eliminate the effect of variations in weather from normal levels on utility net revenues. Additionally, as part of the Conservation and Ratemaking Efficiency

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)

(CARE) plan, Washington Gas has a Care Ratemaking Adjustment (CRA) mechanism, which, coupled with the WNA, eliminates the effect of both weather and other factors such as conservation for residential, small commercial and industrial and group metered apartment customers in Virginia. For a discussion of current rates and regulatory matters, refer to the section entitled “Rates and Regulatory Matters” in Management’s Discussion for Washington Gas.

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

WASHINGTON GAS LIGHT COMPANY

This section of Management’s Discussion focuses on Washington Gas for the reported periods. In many cases, explanations and disclosures for both WGL and Washington Gas are substantially the same.

RESULTS OF OPERATIONS—Three Months Ended March 31, 2014 vs. March 31, 2013

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

Washington Gas’ net income applicable to common stock was $49.5 million for the three months ended March 31, 2014, compared to net income of $76.9 million reported for the same period of the prior fiscal year. The comparison primarily reflects the following:

•

lower unrealized margins associated with our asset optimization program; and

•

higher operation and maintenance expenses.

Partially offsetting these unfavorable variances were:

•

higher revenues related to growth of more than 12,900 average active customer meters;

•

higher revenues due to new base rates in the District of Columbia and Maryland;

•

higher net revenues attributed to the colder weather impact in 2014 that was not offset by weather protection; and

•

higher realized margins associated with our asset optimization program.

Key gas delivery, weather and meter statistics are shown in the table below for the three months ended March 31, 2014 and 2013.

Gas Deliveries, Weather and Meter Statistics


	Three Months Ended
	March 31,						Increase/
	2014			2013			(Decrease)
Gas Sales and Deliveries (millions of therms)
Firm
Gas sold and delivered		503.0			429.0			74.0
Gas delivered for others		250.3			212.6			37.7
Total firm		753.3			641.6			111.7
Interruptible
Gas sold and delivered		0.9			1.4			(0.5	)
Gas delivered for others		92.1			101.0			(8.9	)
Total interruptible		93.0			102.4			(9.4	)
Electric generation—delivered for others		22.0			14.4			7.6
Total deliveries		868.3			758.4			109.9

Degree Days
Actual		2,440			2,151			289
Normal		2,099			2,115			(16	)
Percent colder (warmer) than normal		16.2	%		1.7	%		n/a
Average active customer meters		1,119,993			1,107,004			12,989
New customer meters added		2,856			2,344			512

Gas Service to Firm Customers. The volume of gas delivered to firm customers is highly sensitive to weather variability as a large portion of the natural gas delivered by Washington Gas is used for space heating. Washington Gas’ rates are based on an assumption of normal weather. The Revenue Normalization Adjustment (RNA) in Maryland and the Weather Normalization Adjustment (WNA) and CARE Ratemaking Adjustment (CRA) in Virginia are mechanisms designed to, among other things, eliminate the effect on net revenues of variations in weather from normal levels (refer to the section entitled “Weather Risk” for a further discussion of these mechanisms and other weather-related instruments included in our weather protection strategy).

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

During the three months ended March 31, 2014, total gas deliveries to firm customers were 753.3 million therms, an increase of 111.7 million therms from 641.6 million therms delivered in the same period of the prior fiscal year. This comparison in natural gas deliveries to firm customers primarily reflects colder weather in the current quarter than in the same quarter of the prior year and an increase in average active customer meters of 12,989.

Weather, when measured by HDDs was 16.2% colder than normal for the three months ended March 31, 2014, compared to 1.7% colder than normal for the same period of the prior fiscal year. For the three months ended March 31, 2014 and 2013, there was a $3.7 million and $3.0 million favorable impact to net income, respectively, attributed to colder weather.

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 9.4 million therms during the three months ended March 31, 2014, compared to the same period of the prior fiscal year, reflecting increased interruptions to serve firm customers’ increased demand due to cold weather.

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

Gas Service for Electric Generation. Washington Gas delivers natural gas for use at two electric generation facilities in Maryland that are each owned by companies independent of WGL. During the three months ended March 31, 2014, deliveries to these customers increased by 7.6 million therms when compared to the same period of the prior fiscal year. Washington Gas shares with firm customers a significant majority of the margins earned from natural gas deliveries to these customers. Therefore, changes in the volume of interruptible gas deliveries to these customers do not materially affect either net revenues or net income.

RESULTS OF OPERATIONS—Six Months Ended March 31, 2014 vs. March 31, 2013

Washington Gas’ net income applicable to common stock was $87.7 million for the six months ended March 31, 2014, compared to net income of $115.3 million reported for the same period of the prior fiscal year. The comparison primarily reflects the following:

•

lower unrealized margins associated with our asset optimization program; and

•

higher expenses related to operations and maintenance activities.

Partially offsetting these unfavorable variances were:

•

higher revenues related to growth of more than 12,400 average active customer meters;

•

higher revenues due to new base rates in the District of Columbia and Maryland;

•

higher revenues attributed to the colder weather impact in 2014 that was not offset by weather protection;

•

higher revenues due to favorable effects of natural gas consumption patterns;

•

higher realized margins associated with our asset optimization program;

•

decrease in the effective tax rate including reinstatement of regulatory assets related to the tax effect of Med D.

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)

Gas Deliveries, Weather and Meter Statistics


	Six Months Ended
	March 31,						Increase/
	2014			2013			(Decrease)
Gas Sales and Deliveries (millions of therms)
Firm
Gas sold and delivered		792.2			693.8			98.4
Gas delivered for others		409.0			363.1			45.9
Total firm		1,201.2			1,056.9			144.3
Interruptible
Gas sold and delivered		1.5			2.1			(0.6	)
Gas delivered for others		169.8			177.1			(7.3	)
Total interruptible		171.3			179.2			(7.9	)
Electric generation—delivered for others		59.1			65.6			(6.5	)
Total deliveries		1,431.6			1,301.7			129.9

Degree Days
Actual		3,834			3,460			374
Normal		3,443			3,463			(20	)
Percent colder (warmer) than normal		11.4	%		(0.1	)%		n/a
Average active customer meters		1,115,361			1,102,917			12,444
New customer meters added		7,050			5,772			1,278

Gas Service to Firm Customers. During the six months ended March 31, 2014 total gas deliveries to firm customers were 1,201.2 million therms, an increase of 144.3 million therms, compared to 1,056.9 million therms delivered in the same period of the prior fiscal year. This comparison in natural gas deliveries to firm customers primarily reflects colder weather in the current period than in the same period of the prior year and an increase in average active customer meters.

Weather, when measured by HDDs was 11.4% colder than normal for the six months ended March 31, 2014, compared to 0.1% warmer than normal for the same period of the prior fiscal year. For the six months ended March 2014 and 2013, there was a $5.5 million and $2.6 million favorable impact to net income, respectively, attributed to colder weather.

Gas Service to Interruptible Customers. Therm deliveries to interruptible customers decreased by 7.9 million therms during the six months ended March 31, 2014 compared to the same period of the prior fiscal year, reflecting increased interruptions to serve firm customers’ increased demand due to cold weather.

Gas Service for Electric Generation. Washington Gas delivers natural gas for use at two electric generation facilities in Maryland that are each owned by companies independent of WGL. During the six months ended March 31, 2014, deliveries to these customers decreased by 6.5 million therms when compared to the same period of the prior fiscal year. Washington Gas shares with firm customers a significant majority of the margins earned from natural gas deliveries to these customers. Therefore, changes in the volume of interruptible gas deliveries to these customers do not materially affect either net revenues or net income.

LIQUIDITY AND CAPITAL RESOURCES

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

RATES AND REGULATORY MATTERS

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)

District of Columbia Jurisdiction

District of Columbia Base Rate Case. On August 15, 2013, Washington Gas filed a request for approval with the PSC of DC of a plan and surcharge mechanism to recover the associated costs for the first five years of the plan. Washington Gas proposes to replace bare and/or unprotected steel services, bare and targeted unprotected steel main, and cast iron main in its distribution system in the District of Columbia at an estimated five-year cost of $110 million. Comments and replies were filed by interested parties. On March 31, 2014, the PSC of DC issued an order conditionally approving the plan, contingent on Washington Gas submitting an implementation plan and other information directed in the Order, by April 30, 2014. Washington Gas filed responsive information, as directed, and sought reconsideration/clarification on several issues in the Order. An evidentiary hearing will be scheduled in the near future to address the proposed cost recovery mechanism.

Weather Normalization Adjustment. On November 8, 2013, Washington Gas filed an Application for Approval of a WNA, which is a rate design mechanism that eliminates the variability of weather from the calculation of actual billed revenues and offers customers more stability in their bills during colder-than-normal winter heating seasons. Comments and replies have been filed regarding Washington Gas’ application. A PSC of DC order in this matter is pending.

Maryland Jurisdiction

Maryland Base Rate Case. On October 10, 2013, Public Utility Law Judge issued a Proposed Order recommending an $8.8 million increase in annual revenues based on an overall rate of return of 7.54% and a return on common equity of 9.25%. In addition, the Proposed Order recommended that Washington Gas be allowed to amortize the costs related to the change in tax treatment of Medicare Part D, but recommended disallowance of the costs to initiate the outsourcing agreement with Accenture LLP. The proposed order recommended that Washington Gas be allowed to recover the costs incurred related to the proposed Chillum liquefied natural gas facility, but recommend that the unamortized balance not be included in rate base. On October 24, 2013, Washington Gas and other parties to the case filed appeal memoranda on the proposed order. Washington Gas requested the PSC of MD to accept Washington Gas’ proposed capital structure and approve a rate of return on equity of no less than 9.60%. Washington Gas also requested the PSC of MD to approve the amortization of the costs to achieve related to the outsourcing, to correct a mathematical error and clarify other issues in the case. On November 22, 2013, the PSC of Maryland issued an order granting an overall increase of $8.9 million, based on the capital structure recommended by the Staff of the PSC. The order approved a return on equity of 9.50% resulting in an overall rate of return of 7.70%. The order also clarified that Washington Gas was authorized to establish a regulatory asset and amortize the costs related to the change in tax treatment of Medicare Part D. Finally, the PSC denied Washington Gas’ appeal on recovery of the costs to initiate the outsourcing agreement with Accenture, LLP. As a result of this order, Washington Gas has established a Medicare Part D regulatory asset in the first quarter of fiscal year 2014 and has begun amortizing the balance. On December 20, 2013, Washington Gas filed a request for rehearing and an appeal with the Baltimore City Circuit Court appealing the PSC’s rulings on capital structure, return on equity, and recovery of the costs to initiate the outsourcing agreement. The case is pending action by the court on the appeal.

Maryland Strategic Infrastructure Development and Enhancement Plan. On November 7, 2013, pursuant to a new law in Maryland, Washington Gas filed an application with the PSC of MD for authority to implement a STRIDE Plan and to recover the reasonable and prudent costs associated with the infrastructure replacements through monthly surcharges to system charges. The surcharge may not exceed $2.00 per month for residential customers. Under the new law, “eligible infrastructure” means replacement or improvement of existing infrastructure of a gas company that (i) is made on or after June 1, 2013; (ii) is designed to improve public safety or infrastructure reliability; (iii) does not increase revenue of a gas company by connecting directly to new customers; (iv) reduces or has the potential to reduce greenhouse gas emissions through a reduction in leaks; and (v) is not included in the current rate base of the gas company. In the application, Washington Gas proposes to invest approximately $200 million in the initial five years of a 22-year overall plan. The STRIDE Plan will enable Washington Gas to expedite replacement of aging infrastructure in its distribution system in Maryland. The new law provides that the Commission must approve the cost-recovery schedule associated with the STRIDE Plan at the same time that it approves the Plan and has 180 days to issue a final decision on Washington Gas’ request. On March 21, 2014, the Chief Public Utility Law Judge issued a Proposed Order conditionally approving Washington Gas’ proposed STRIDE Plan effective March 1, 2014. The conditions for approval are that (i) Washington Gas file a list of proposed eligible infrastructure replacement projects to be undertaken during the 12 months March 2014 through March 2015 for approval by the Commission and each year thereafter for the next four years, and (ii) that Washington Gas agree to undergo an audit by an independent auditor each year to evaluate program performance and to ensure that expenditures under the STRIDE Plan are reasonable and prudent. Under the Proposed Order, Washington Gas would not have flexibility to substitute one eligible infrastructure replacement project for another if circumstances change after the annual project list has been approved by the Commission. On April 4, 2014, Washington Gas noted an appeal of the Proposed Order, challenging the start date for STRIDE Plan approved in the Proposed Order, as well as the denial of flexibility to substitute eligible infrastructure replacement projects on the project list after it has been approved by the Commission. Other parties also noted appeals of the Proposed Order, opposing the decision to conditionally approve the Company’s Plan. Reply Memorandum on Appeals were filed by Washington Gas and other parties on April 11, 2014.

On May 6, 2014, the PSC of MD issued an order approving Washington Gas’ proposed STRIDE Plan with a January 1, 2014 start date. Washington Gas has 30 days from the date of the order to accept the conditions of the order and file a list of STRIDE Plan projects to be undertaken in calendar year 2014. The PSC of MD authorized Washington Gas to substitute eligible infrastructure replacement projects contingent on review and approval by the PSC of MD. On May 7, 2014, Washington Gas filed a letter accepting all the conditions of the order and indicating that the list of projects will be filed as directed.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (concluded)

Virginia Jurisdiction

Affiliate Transactions. On June 16, 2011, Washington Gas submitted an application to the SCC of VA requesting approval of three affiliate transactions with WGL Midstream: (i) the transfer to WGL Midstream of the remainder of the term of two agreements for natural gas storage service at the Washington Gas Storage (WSS) and Eminence Storage Service (ESS) storage fields; (ii) the sale to WGL Midstream of any storage gas balances associated with the WSS and ESS agreements; and (iii) the assignment to WGL Midstream of Washington Gas’ rights to buy base gas in the WSS storage field. The SCC of VA did not approve the transfer of the agreements on the grounds that ratepayers funded a portion of the costs associated with the assets. On June 5, 2013, Washington Gas filed requesting the SCC of VA to issue a declaratory judgment that the proposed capacity releases are governed by the FERC and the SCC of VA does not have jurisdiction over the transaction.

On October 31, 2013, the Senior Hearing Examiner issued a Report finding that the SCC of VA has jurisdiction over the proposed transfers. Washington Gas filed comments on the Report on December 5, 2013. The case is pending review by the SCC of VA.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

•

Price Risk Related to the Regulated Utility Segment

•

Price Risk Related to the Non-Utility Segments

•

Value-At-Risk

•

Weather Risk

•

Interest-Rate Risk

ITEM 4. CONTROLS AND PROCEDURES—WGL Holdings, Inc.

Senior management, including the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer of WGL, evaluated the effectiveness of WGL’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2014. Based on this evaluation process, the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that disclosure controls and procedures of WGL are effective. There have been no changes in the internal control over financial reporting of WGL during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of WGL.

ITEM 4. CONTROLS AND PROCEDURES—Washington Gas Light Company

Senior management, including the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer of Washington Gas, evaluated the effectiveness of the disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) of Washington Gas as of March 31, 2014. Based on this evaluation process, the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures of Washington Gas are effective. There have been no changes in the internal control over financial reporting of Washington Gas during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of Washington Gas.

WGL Holdings, Inc.

Washington Gas Light Company

Part II—Other Information

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 6. EXHIBITS

Exhibits:


Schedule/ Exhibit		Description
(a)(3)		Exhibits

		Exhibits Filed Herewith:

		Confidential information has been redacted from certain exhibits and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

10.1		Limited Liability Company Agreement of Meade Pipeline Co. LLC entered into on February 14, 2014, by and between WGL Midstream, Inc., COG Holdings LLC, Vega Midstream MPC LLC, River Road Interests LLC, and VED NPI I, LLC (confidential treatment has been requested for portions of this exhibit).

10.2		Construction and Ownership Agreement entered into on February 14, 2014, by and between Transcontinental Gas Pipe Line Company, LLC and Meade Pipeline Co. LLC (confidential treatment has been requested for portions of this exhibit).

10.3		Lease Agreement between Transcontinental Gas Pipe Line Company, LLC and Meade Pipeline Co. LLC (confidential treatment has been requested for portions of this exhibit).

31.1		Certification of Terry D. McCallister, the Chairman and Chief Executive Officer of WGL Holdings, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Vincent L. Ammann, Jr., the Senior Vice President and Chief Financial Officer of WGL Holdings, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

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

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

101.INS		XBRL Instance Document:

101.SCH		XBRL Schema Document:

101.CAL		XBRL Calculation Linkbase Document:

101.LAB		XBRL Labels Linkbase Document:

101.PRE		XBRL Presentation Linkbase Document:

101.DEF		XBRL Definition Linkbase Document. Exhibits Incorporated by Reference:

3		Articles of Incorporation & Bylaws:

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

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

		Bylaws of WGL Holdings, Inc. as amended on March 7, 2013, filed as Exhibit 3.1 to Form 8-K on March 13, 2013. Bylaws of Washington Gas Light Company as amended on March 7, 2013, filed as Exhibit 3.2 to Form 8-K on March 13, 2013.

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.