Summary of WGL HOLDINGS INC

Item 2-Management's Discussion and Analysis of
Financial Condition and Results of Operations
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION
This Management's Discussion and Analysis of Financial Condition and Results of Operations(Management's Discussion) analyzes the financial condition, results of operations and cash flows of WGL Holdings, Inc. (WGL Holdings) and its subsidiaries and should be read in conjunction with our unaudited financial statements and the accompanying notes in this quarterly report, as well as our combined Annual Report on Form 10-K for WGL Holdings and Washington Gas Light Company (Washington Gas) for the fiscal year ended September 30, 2008 (2008 Annual Report). Except where the content clearly indicates otherwise, "WGL Holdings," "we," "us" or "our" refers to the holding company or the consolidated entity of WGL Holdings and all of its subsidiaries.
Management's Discussion is divided into the following two major sections:
• WGL Holdings-This section describes the financial condition and results of operations of WGL Holdings and its subsidiaries on a consolidated basis. It includes discussions of our regulated and unregulated operations. WGL Holdings' operations are derived from the results of Washington Gas and the results of our non-utility operations.

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

Both of the major sections of Management's Discussion-WGL Holdings and Washington Gas-are designed to provide an understanding of our operations and financial performance. Management's Discussion also should be read in conjunction with the respective company's financial statements and the combined Notes to Consolidated Financial Statements.
Unless otherwise noted, earnings per share amounts are presented on a diluted basis and are based on weighted average common and common equivalent shares outstanding. Our operations are seasonal and, accordingly, our operating results for the interim periods presented are not indicative of the results to be expected for the full fiscal year.
EXECUTIVE OVERVIEW
Introduction
WGL Holdings, through its wholly owned subsidiaries, sells and delivers natural gas and provides a variety of energy-related products and services to customers primarily in the District of Columbia and the surrounding metropolitan areas in Maryland and Virginia. WGL Holdings has three operating segments that are described below.
Regulated Utility. With approximately 90% of our consolidated total assets, the regulated utility segment consists of Washington Gas and Hampshire Gas Company (Hampshire). Washington Gas, a wholly owned subsidiary of WGL Holdings, delivers natural gas to retail customers in accordance with tariffs approved by the regulatory commissions that have jurisdiction over Washington Gas's rates. Washington Gas also sells natural gas to customers who have not elected to purchase natural gas from unregulated third-party marketers.
In its rates charged to utility customers, Washington Gas generally does not earn a profit or incur a loss associated with the sale of the natural gas commodity because regulation requires Washington Gas to bill these customers for the natural gas commodity at the same cost that Washington Gas incurs. However, Washington Gas has an asset optimization program which utilizes Washington Gas's storage and transportation capacity resources when not fully being used to physically serve utility customers by entering into commodity-related physical and financial contracts with third parties with the objective of deriving a profit to be shared with its utility customers (refer to the section entitled "Market Risk" for a further discussion of our asset optimization program). Unless otherwise noted, therm deliveries shown related to Washington Gas or the regulated utility segment do not include therms delivered related to our asset optimization program.

WGL Holdings, Inc. Washington Gas Light Company

Part I-Financial Information Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Hampshire, a wholly-owned subsidiary of WGL Holdings, is regulated by the Federal Energy Regulatory Commission (FERC). Hampshire owns full and partial interests in, and operates underground natural gas storage facilities including pipeline delivery facilities located in and around Hampshire County, West Virginia. Washington Gas purchases all of the storage services of Hampshire and includes the cost of these services in the bills sent to its customers. Hampshire operates under a "pass-through" cost of service-based tariff approved by the FERC, and adjusts its billing rates to Washington Gas on a periodic basis to account for changes in its investment in utility plant and associated expenses.
Retail Energy-Marketing. The retail energy-marketing segment consists of the operations of Washington Gas Energy Services, Inc. (WGEServices), a wholly owned subsidiary of Washington Gas Resources. WGEServices competes with regulated utilities and other unregulated third-party marketers to sell natural gas and/or electricity directly to residential, commercial and industrial customers in Maryland, Virginia, Delaware and the District of Columbia. WGEServices contracts for its supply needs and buys and resells natural gas and electricity with the objective of earning a profit through competitively priced contracts with end-users. These commodities are delivered to retail customers through the distribution systems owned by regulated utilities such as Washington Gas or other unaffiliated natural gas or electric utilities. WGEServices is also expanding its renewable energy and energy conservation product and service offerings. During the quarter ended December 31, 2008, WGEServices contracted for and completed the construction of a renewable-energy generating facility which includes ownership of the operational asset. Other than this facility, WGEServices does not own or operate any natural gas or electric generation, production, transmission or distribution assets. Continued expansion may include the ownership of other renewable energy producing assets.
Design-Build Energy Systems. Our design-build energy systems segment, which consists of the operations of Washington Gas Energy Systems, Inc. (WGESystems), provides design-build energy efficient and sustainable solutions to government and commercial clients. WGESystems focuses on upgrading the mechanical, electrical, water and energy-related systems of large government and commercial facilities by implementing both traditional as well as alternative energy technologies, primarily in the District of Columbia, Maryland and Virginia.
Key Indicators of Financial Condition and Operating Performance We have determined that the following are key indicators for monitoring our financial condition and operating performance:
Net Income and Diluted Earnings Per Share. In our review of overall operating results for both WGL Holdings on a consolidated basis and for each segment, we analyze net income and diluted earnings per share as calculated under Generally Accepted Accounting Principles in the United States of America (GAAP).
Return on Average Common Equity. This measure is calculated by dividing twelve months ended net income by average common shareholders' equity. For Washington Gas, we compare the actual return on common equity with the return on common equity that is allowed to be earned by regulators and the return on equity that is necessary for us to compensate investors sufficiently and to continue to attract capital.
Common Equity Ratio. This ratio is calculated by dividing total common shareholders' equity by the sum of common shareholders' equity, preferred stock and long-term debt (including current maturities). Maintaining this ratio in the mid-50% range affords us financial flexibility and access to long-term capital at relatively low costs. Refer to the section entitled "Liquidity and Capital Resources-General Factors Affecting Liquidity" for additional comments about our capital structure.

WGL Holdings, Inc. Washington Gas Light Company

Part I-Financial Information Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Utility Net Revenues and Gross Margins. We analyze the operating results of the regulated utility segment using utility net revenues and the retail energy-marketing segment using gross margins. Both utility net revenues and gross margins are calculated as revenues less the associated cost of energy and applicable revenue taxes. We believe utility net revenues is a better measure to analyze profitability than gross operating revenues for our regulated utility segment because the cost of the natural gas commodity and revenue taxes are generally included in the rates that Washington Gas charges to customers as reflected in operating revenues. Accordingly, changes in the cost of gas and revenue taxes associated with sales made to customers generally have no direct effect on utility net revenues, operating income or net income. We consider gross margins to be a better reflection of profitability than gross revenues or gross energy costs for our retail energy-marketing segment because gross margins are a direct measure of the success of our core strategy for the sale of natural gas and electricity.
Neither utility net revenues nor gross margins should be considered as an alternative to, or a more meaningful indicator of, our operating performance than net income. Our measures of utility net revenues and gross margins may not be comparable to similarly titled measures of other companies. Refer to the sections entitled "Results of Operations-Regulated Utility Operating Results" and "Results of Operations-Non-Utility Operating Results" for the calculation of utility net revenues and gross margins, respectively, as well as a reconciliation to operating income and net income for both segments.
PRIMARY FACTORS AFFECTING WGL HOLDINGS AND WASHINGTON GAS The principal business, economic and other factors that affect our operations and/or financial performance include:
• weather conditions and weather patterns;

• regulatory environment and regulatory decisions;

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

• diversity of natural gas supply;

• volatility of natural gas prices;

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

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

• competitive environment;

• environmental matters;

• industry consolidation;

• economic conditions and interest rates;

• inflation/deflation;

• use of business process outsourcing;

• labor contracts, including labor and benefit costs; and

• changes in accounting principles.

For a further discussion of the factors listed above, refer to Management's Discussion within the 2008 Annual Report. Also, refer to the section entitled "Safe Harbor for Forward-Looking Statements" included in this quarterly report for a listing of forward-looking statements related to factors affecting WGL Holdings and Washington Gas.

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)
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in compliance with GAAP requires the selection and the application of appropriate technical accounting rules 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 and cost of gas recognition;

• accounting for regulatory operations - regulatory assets and liabilities;

• accounting for income taxes;

• accounting for contingencies;

• accounting for derivative instruments and

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

For a description of these critical accounting policies, refer to Management's Discussion within the 2008 Annual Report. Refer to Note 1 of the Notes to Consolidated Financial Statements in this quarterly report for a discussion of newly implemented accounting policies.

WGL Holdings, Inc. Washington Gas Light Company

Part I-Financial Information Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
WGL HOLDINGS, INC.
RESULTS OF OPERATIONS - Three Months Ended March 31, 2009 vs. March 31, 2008 Summary Results
WGL Holdings reported net income of $75.1 million, or $1.49 per share, for the three months ended March 31, 2009, compared to net income of $81.0 million, or $1.63 per share, reported for the three months ended March 31, 2008. For the twelve-month periods ended March 31, 2009 and 2008, we earned a return on average common equity of 10.6% and 12.2%, respectively.
The comparison of results for the three month period ended March 31, 2009 compared to the same period of the prior fiscal year primarily reflects decreased earnings from our retail energy-marketing segment.
The following table summarizes our net income (loss) by operating segment for the three months ended March 31, 2009 and 2008.

                          Net Income (Loss) by Operating Segment

                                                   Three Months Ended

                                                       March 31,            Increase/
    (In millions)                                   2009          2008      (Decrease)

    Regulated Utility                            $   75.4       $ 78.0       $   (2.6 )
    Non-utility operations:
    Retail energy-marketing                          (0.7 )        3.6           (4.3 )
    Design-Build Energy Systems                       1.2          0.3            0.9
    Other, principally non-utility activities        (0.8 )       (0.9 )          0.1

    Total non-utility                                (0.3 )        3.0           (3.3 )

    Net Income                                   $   75.1       $ 81.0       $   (5.9 )

Regulated Utility Operating Results
The following table summarizes the regulated utility segment's operating results for the three months ended March 31, 2009 and 2008.

                                   Regulated Utility Operating Results

                                                              Three Months Ended

                                                                   March 31,                  Increase/
(In millions)                                                2009             2008           (Decrease)

Utility net revenues:
Operating revenues                                        $  651.1          $ 677.7          $   (26.6 )
Less: Cost of gas                                            383.9            417.1              (33.2 )
Revenue taxes                                                 24.9             21.6                3.3

Total utility net revenues                                   242.3            239.0                3.3
Operation and maintenance                                     67.9             63.0                4.9
Depreciation and amortization                                 24.0             23.1                0.9
General taxes and other assessments                           15.3             13.5                1.8

Operating income                                             135.1            139.4               (4.3 )
Interest expense                                              11.2             11.4               (0.2 )
Other (income) expenses-net, including preferred
stock dividends                                               (0.3 )           (0.1 )             (0.2 )
Income tax expense                                            48.8             50.1               (1.3 )

Net income                                                $   75.4          $  78.0          $    (2.6 )

The regulated utility segment's net income was $75.4 million for the three months ended March 31, 2009, compared to net income of $78.0 million for the same three-month period of the prior fiscal year. Net income decreased $2.6 million primarily reflecting: (i) negative effects of higher natural gas consumption patterns that benefited the prior comparative period; (ii) higher recurring service costs related to the BPO and (iii) higher uncollectible accounts expense. Partially offsetting these unfavorable items were: (i) the effect of an increase in average active customer meters from the prior period;
(ii) an increase in the recovery of carrying costs on higher average storage gas inventory balances; (iii) an increase in net margins associated with our asset optimization program and (iv) lower costs for weather protection products related to the District of Columbia.

                               WGL Holdings, Inc.
                          Washington Gas Light Company
                          Part I-Financial Information
                 Item 2-Management's Discussion and Analysis of
           Financial Condition and Results of Operations (continued)
   Utility Net Revenues. The following table provides the key factors
contributing to the changes in the utility net revenues of the regulated utility
segment between the three months ended March 31, 2009 and 2008.

                       Composition of Changes in Utility Net Revenues

                                                                               Increase /
(In millions)                                                                  (Decrease)

Customer growth                                                               $       1.8
Estimated Weather effects - Offset by weather insurance and derivative
products                                                                              3.3
Estimated change in natural gas consumption patterns                                 (7.3 )
Gas administrative charge (GAC)                                                      (0.3 )
Asset optimization:
Realized margins                                                                      8.8
Unrealized mark-to market valuations                                                  0.5
Current period lower of cost or market adjustment                                    (6.8 )
Storage carrying costs                                                                3.4
Earnings Sharing Mechanism (ESM)                                                     (0.1 )

Total                                                                         $       3.3

Customer growth - Average active customer meters increased 10,500 for the three months ended March 31, 2009 compared to the same quarter of the prior fiscal year.
Estimated weather effects - Washington Gas currently has a weather protection strategy that is designed to neutralize the estimated financial effects of variations from normal weather on net income (refer to the section entitled "Weather Risk" for a further discussion of our weather protection strategy). As part of this strategy, on October 1, 2008, Washington Gas purchased weather derivatives to protect against variations from normal weather in the District of Columbia. Washington Gas had weather insurance in fiscal year 2008 related to the District of Columbia, which allowed us to retain the benefits of colder-than-normal weather. Both the effects of weather insurance and weather derivatives are recorded to "Operation and maintenance expenses".
Weather, when measured by heating degree days (HDDs), was 10.5% colder than normal in the second quarter of fiscal year 2009, as compared to 8.1% warmer than normal for the same quarter of fiscal year 2008. Including the effects of our weather protection strategy, there were no estimated effects on net income attributed to colder or warmer weather during the quarters ended March 31, 2009 or March 31, 2008.
Estimated change in natural gas consumption patterns - Changes in natural gas consumption patterns may be affected by shifts in weather patterns in which customer heating usage may not correlate highly with average historical levels of usage per HDD that occur. Natural gas consumption patterns may also be affected by non-weather related factors.
GAC - Represents a regulatory mechanism in all jurisdictions that provides for recovery of uncollectible accounts expense related to changes in gas costs. The related uncollectible accounts expense is included in operation and maintenance expenses.
Asset optimization - We recorded pre-tax unrealized losses of $1.8 million and $2.3 million for the three months ended March 31, 2009 and 2008, respectively, associated with our energy-related derivatives. When these derivatives settle, any unrealized amounts will ultimately be reversed, and Washington Gas will realize margins when combined with the related transactions these derivatives economically hedge. Pre-tax realized margins related to our asset optimization program were $13.5 million and $4.7 million for the quarter ended March 31, 2009 and 2008, respectively. Partially offsetting these realized margins for the current period were $6.8 million of lower-of-cost or market adjustments associated with storage capacity assets utilized for asset optimization. (Refer to the section entitled "Market Risk-Price Risk Related to the Regulated Utility Segment"for a further discussion of our asset optimization program).

WGL Holdings, Inc. Washington Gas Light Company

Part I-Financial Information Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Storage carrying costs - Represents recoverable carrying costs based on the cost of capital approved in each jurisdiction, multiplied by the 12-month average balance of storage gas inventory. The comparison of fiscal year 2009 to 2008 reflects higher average storage gas inventory balances in fiscal year 2009 due to a significant increase in gas prices during the storage fill season in the spring and summer of 2008.
Earnings Sharing Mechanism - Washington Gas has an ESM in Virginia which enables the sharing of earnings that exceed a target rate of return on equity with shareholders and customers. For the three months ended March 31, 2009, we recorded $4.2 million of expense related to the ESM. For the three months ended March 31, 2008, Washington Gas recorded $4.1 million (pre-tax) of expense related to the ESM. Refer to the section entitled "Rates and Regulatory Matters
- Performance-Based Rate Plans" included in Management's Discussion for Washington Gas for a further discussion of the ESM. Operation and Maintenance Expenses. The following table provides the key factors contributing to the changes in operation and maintenance expenses of the regulated utility for the three months ended March 31, 2009 compared to 2008.

Composition of Changes in Operation and Maintenance Expenses

                                                                 Increase/
        (in millions)                                            (Decrease)

        Weather insurance and derivative products
        Loss                                                      $    3.3
        Decrease in premium costs                                     (1.4 )
        Business Process Outsourcing (BPO)                             2.3
        Labor and incentive plans                                      0.7
        Employee benefits                                              0.3
        Uncollectible accounts                                         1.0
        Paving and leak repair                                        (0.7 )
        Other operating expenses                                      (0.6 )

        Total                                                     $    4.9

Weather insurance and derivative products - During the quarter ended March 31, 2009, Washington Gas recorded a loss of $1.1 million (pre-tax) related to its weather derivatives as a result of colder-than-normal weather during the period. For the same quarter of the prior year, Washington Gas recorded a $2.2 million benefit (pre-tax) related to its weather derivatives as a result of warmer-than-normal weather during the period. The effect of these weather-related instruments are offset in utility net revenues. Additionally, Washington Gas incurred costs of $164,000 and $1.6 million during the quarters ended March 31, 2009 and 2008, respectively, for premium expense.
Business Process Outsourcing (BPO) - The increase from the prior year reflects a scheduled increase in the recurring service costs paid to the service provider and amortization expense related to the regulatory asset established for initial BPO implementation costs, partially offset by reduced labor and benefits as well as improved cost efficiencies from implementing the outsourcing initiative.
Uncollectible accounts - The increase from prior year is due to a higher accrual rate for uncollectible expense in fiscal year 2009 due to an anticipated increase in delinquencies of customer payments stemming largely from the weakened economy.
Non-Utility Operating Results
Our non-utility operations comprise two business segments: (i) retail energy-marketing and (ii) design-build energy systems. Transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our three operating segments, are aggregated as "Other Activities" and included as part of non-utility operations. Total net loss from our non-utility operations was $305,000 for the three months ended March 31, 2009, compared to net income of $3.0 million for the same three-month period of the prior fiscal year. This comparison primarily reflects decreased earnings from our retail energy-marketing segment.

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

. . .