UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-K
Annual Report Pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year ended September 30, 2001

Securities registered pursuant to Section 12(g) of the Act: None

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   x   No      

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]

The aggregate market value of the voting common equity held by nonaffiliates of the registrant amounted to $1,310,286,764 as of October 31, 2001.

WGL Holdings common stock, no par value outstanding as of October 31, 2001: 48,562,494 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 October 31, 2001.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of WGL Holding Inc.’s definitive Proxy Statement and Washington Gas Light Company’s definitive Information Statement in connection with the 2002 Annual Meeting of Shareholders, to be filed with the Commission pursuant to Regulation 14A and 14C not later than 120 days after September 30, 2001, are incorporated in Part III of this report.

Form 10-K

For the Fiscal Year Ended September 30, 2001

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FORWARD LOOKING STATEMENTS

     Certain matters discussed in this report, excluding historical information, may 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 company believes such forward-looking statements are based on reasonable assumptions, it cannot give assurance that every objective will be reached. Forward-looking statements speak only as of today, and the company assumes no duty to update them. The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

	1)		changes in economic, competitive, political and regulatory conditions and developments;
	2)		changes in capital and energy commodity market conditions;
	3)		changes in relevant laws and regulations, including tax, environmental and employment laws and regulations;
	4)		weather conditions;
	5)		legislative, regulatory and judicial mandates and decisions;
	6)		timing and success of business and product development efforts;
	7)		technological improvements;
	8)		the pace of deregulation efforts and the availability of other competitive alternatives; and
	9)		other uncertainties.

     Such factors are difficult to predict accurately and are generally beyond the company’s direct control. Accordingly, while it believes that the assumptions are reasonable, the company cannot ensure that all expectations and objectives will be realized. The company urges readers to use care and consider the risks, uncertainties and other factors that could affect the company’s business as described in this Annual Report. All forward-looking statements made in this Annual Report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995 .

FILING FORMAT

     This Annual Report on Form 10-K is a combined report being filed by two different registrants: WGL Holdings, Inc. (WGL Holdings or the company) and Washington Gas Light Company (Washington Gas or the regulated utility). Except where the content clearly indicates otherwise, any references in the report to “WGL Holdings” or “the company” includes all subsidiaries of WGL Holdings, including Washington Gas.

     The Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 separate discussions of WGL Holdings’ utility and non-utility operations.
	•		Washington Gas—Comprises the majority of WGL Holdings’ regulated utility segment. As such, the financial condition and results of operations of both companies are virtually identical. Therefore, the discussion of Washington Gas’s financial condition and results of operations only present those results which are significantly different from those operations which are presented by WGL Holdings.

     The Management’s Discussion and Analysis of Financial Condition and Results of Operations for both WGL Holdings and Washington Gas should be read in conjunction with the respective Consolidated Financial Statements and the combined Notes thereto.

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Part I

ITEM 1—BUSINESS

WGL HOLDINGS, INC.

     Effective November 1, 2000, Washington Gas and its subsidiaries became subsidiaries of WGL Holdings, a newly formed holding company established under the Public Utility Holding Company Act of 1935 . At that time, all of the shares of common stock of Washington Gas were converted into an equal number of shares of common stock of WGL Holdings. WGL Holdings also owns all of the shares of common stock of Washington Gas’s former wholly owned subsidiaries (Crab Run Gas Company, Hampshire Gas Company, and Washington Gas Resources Corporation) and a 50-percent equity investment in Primary Investors, LLC (Primary Investors). For further discussion of the company’s restructuring, see Note 2 to the Consolidated Financial Statements.

     WGL Holdings, through its subsidiaries, sells and delivers natural gas and provides a variety of energy-related products and services to customers in the metropolitan Washington, D.C., Maryland and Virginia areas and beyond. The company’s core subsidiary, Washington Gas, is involved in the distribution and sale of natural gas that is primarily regulated by state regulatory commissions. The company also offers energy-related products and services that are closely related to its core business. The majority of these energy-related activities are performed by wholly-owned subsidiaries of Washington Gas Resources Corporation (Washington Gas Resources).

SUBSIDIARIES

     At September 30, 2001, WGL Holdings has four wholly owned subsidiaries and a 50-percent equity interest in a limited liability company. The following paragraphs describe each subsidiary in WGL Holdings’ corporate structure at September 30, 2001.

      Washington Gas —is a public utility that delivers and sells natural gas to customers in Washington, D.C. and adjoining areas in Maryland and Virginia. Washington Gas has been engaged in the gas distribution business for 153 years, having been originally incorporated by an Act of Congress in 1848. It became a domestic corporation of the Commonwealth of Virginia in 1953 and a corporation of the District of Columbia in 1957. Washington Gas sells and delivers natural gas to customers in metropolitan Washington, D.C., the adjoining areas of Maryland and Virginia and several cities and towns in the northern Shenandoah Valley of Virginia. On April 1, 2000, Washington Gas merged its former wholly-owned gas distribution subsidiary, Shenandoah Gas Company (Shenandoah) into itself. The merged company now serves a total of approximately 903,800 customer meters in an area having a population estimated at 4.6 million. During the fiscal years ended September 30, 2001, 2000 and 1999, Washington Gas’s regulated operations produced revenues of $1,446 million, $1,031 million and $972 million, respectively, or 75 percent, 83 percent and 87 percent, respectively, of the company’s total operating revenues.

     The following table lists the number of meters served and therms delivered by jurisdiction as of September 30, 2001. A therm of gas contains 100,000 British Thermal Units of heat, the heat content of approximately 100 cubic feet of natural gas.

     Of the 1,688 million therms delivered in fiscal year 2001, 53.7 percent were sold and delivered by Washington Gas and 46.3 percent were delivered to various customers that acquired their gas from third-party marketers. Of the total therms delivered by Washington Gas, 74.6 percent went to firm customers and 25.4 percent went to interruptible customers. To be eligible to receive interruptible service, a customer must be capable of using an alternate fuel as a substitute for natural gas in the event Washington Gas

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determines their service must be interrupted to accommodate firm customers’ needs during periods of peak demand.

Crab Run Gas Company (Crab Run) —is an exploration and production company whose assets are managed by an Oklahoma-based limited partnership. At September 30, 2001, Crab Run’s investment in this partnership is not material. Crab Run expects that any future investments it makes in the partnership will be minimal.

Hampshire Gas Company (Hampshire ) — is a regulated natural gas storage business that operates an underground storage field in the vicinity of Augusta, West Virginia. Hampshire serves Washington Gas under a tariff administered by the Federal Energy Regulatory Commission (FERC).

Washington Gas Resources —owns the majority of the company’s unregulated subsidiaries. Washington Gas Resources’ subsidiaries, which are described below, include American Combustion Industries, Inc. (ACI), Brandywood Estates, Inc. (Brandywood), WG Maritime Plaza I, Inc. (WG Maritime), Washington Gas Energy Services, Inc. (WGEServices), Washington Gas Energy Systems, Inc. (WGESystems), Washington Gas Consumer Services, Inc. (Consumer Services) and Washington Gas Credit Corporation (Credit Corp.).

			ACI —is a full-service mechanical contractor that offers turnkey products and services associated with the design, renovation, sale, installation and service of mechanical heating, ventilating and air conditioning (HVAC) systems. ACI serves the industrial, commercial and institutional sectors in Washington, Baltimore, Philadelphia, Richmond and Northern Virginia Areas.
			Brandywood —is a general partner with a major developer, in a venture to develop 1,600 acres in Prince George’s County, Maryland. In March 1996, the partnership submitted a rezoning application to Prince George’s County for 790 acres of its property. The mixed-use development plan proposed approximately 1,600 homes, 100,000 square feet of retail space and 105,000 square feet of office space. In 1999, the rezoning application was remanded to a zoning hearing examiner for additional review. No date has been set for a final decision on this application and any action on it is not imminent.
			WG Maritime —Washington Gas has entered into an agreement with Lincoln Property Company, a national developer, to develop a 12-acre parcel owned by Washington Gas in the District of Columbia. The development will be a mixed-use commercial project that will be implemented in five phases. The entire project is expected to be completed over a five-to-ten year period. To date, Washington Gas has entered into two ninety-nine year ground leases for the first and second phases. WG Maritime holds an interest in both Phase I and Phase II ground lease tenants. None of WGL Holdings subsidiaries, including Washington Gas, will make capital investments in this venture or play an active role in any development or management activities.
			WGEServices —is engaged in the sale of natural gas in competition with unregulated third-party marketers. At September 30, 2001, WGEServices served approximately 125,000 residential, commercial and industrial customers both inside and outside Washington Gas’s traditional service territory. During fiscal year 2001, WGEServices started to sell electricity in competition with electricity marketers. At September 30, 2001, WGEServices had 44,000 electricity customers.
			WGESystems —provides commercial energy services, including the design and renovation of mechanical HVAC systems in the District of Columbia and parts of Virginia and Maryland. Its business is very similar to that of ACI.
			Consumer Services —evaluates and performs unregulated functions. No such functions are being performed at this time.
			Credit Corp. —offered financing to customers to purchase gas appliances and other energy-related equipment. It is no longer making new loans, but it continues to service existing loans.

Primary Investors —In August 1999, Washington Gas and Thayer Capital Partners (Thayer) formed Primary Investors, a limited liability company. Primary Investors, through its wholly-owned subsidiary, Primary Service Group, LLC(PSG), focuses on investment opportunities in after-market products and services in the HVAC industry. PSG primarily sells, installs, repairs and maintains HVAC equipment in the residential and light commercial markets of the District of Columbia and parts of Maryland and Virginia. PSG has acquired nine companies.

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     As mentioned above, in November 2000, all of Washington Gas’s shares of Primary Investors were transferred to WGL Holdings. At September 30, 2001, WGL Holdings and Thayer each owned 50 percent of Primary Investors and each had an equal number of representatives on Primary Investors’ Board of Managers. As a co-investor, WGL Holdings has committed to invest up to $25 million of equity capital in Primary Investors. WGL Holdings has invested $19.3 million in Primary Investors through September 30, 2001. The company uses the equity method of accounting to reflect the results of Primary Investors in the Consolidated Financial Statements.

INDUSTRY SEGMENTS

     For fiscal year 2001, WGL Holdings reports four operating segments: 1) regulated utility; 2) retail energy marketing; 3) HVAC; and 4) consumer financing. The overwhelming majority of WGL Holdings’ consolidated assets were devoted to, and revenues were derived from, the regulated utility segment. Going forward, WGL Holdings expects this to continue. Each segment is described below.

Regulated Utility —Washington Gas delivers natural gas to all retail customers in its service territory in accordance with tariffs established by the state regulatory commissions that have jurisdiction over its rates. These tariffs allow the regulated utility segment the opportunity to earn a fair rate of return on its invested capital and to recover the costs of providing service. On September 30, 2001, over 93 percent of WGL Holdings’ consolidated assets were committed to the regulated utility segment. This comprises the company’s core business. Hampshire operates its storage facilities on behalf of Washington Gas under a FERC-regulated tariff.

Retail Energy Marketing —WGEServices competes with unregulated marketers by selling natural gas and electricity directly to residential, commercial and industrial customers, both inside and outside of the regulated utility’s traditional service territory. During the fiscal years ended September 30, 2001, 2000 and 1999, the energy-marketing segment produced operating revenues from the sales of natural gas of $321 million, $167 million and $104 million, respectively, or 17 percent, 13 percent and 9 percent, respectively, of the company’s total operating revenues. Electricity sales began in October 2000, and produced operating revenues of $98 million in fiscal year 2001.

HVAC —Through its wholly-owned subsidiaries, WGESystems and ACI, and its investment in Primary Investors, WGL Holdings has offered residential and commercial customers a variety of products and services primarily associated with the design, renovation, sale, installation and service of mechanical HVAC systems. During the fiscal years ended September 30, 2001, 2000 and 1999, the company’s commercial HVAC segment produced operating revenues of $70 million, $47 million and $31 million, respectively, or 4 percent for the current and prior year and 3 percent for 1999, of the company’s total operating revenue. At September 30, 2001 and 2000, the HVAC segment had a backlog of firm orders of $53.8 million and $12.8 million, respectively. Of the backlog outstanding at September 30, 2001, the company believes that $1 million will not be filled within fiscal year 2002. There are no significant seasonal or other material aspects associated with this backlog.

Consumer Financing —During fiscal year 2001, WGL Holdings offered financing for customers to purchase natural gas appliances and other energy-related equipment. In August 2001, the company determined that the consumer financing segment could not meet the strategic objective of the company’s business plan and ceased making any new loans. The segment continues to service existing loans.

RATES AND REGULATORY MATTERS

     Washington Gas is regulated by the Public Service Commission of the District of Columbia (PSC of DC), the Public Service Commission of Maryland (PSC of MD) and the State Corporation Commission of Virginia (SCC of VA). The FERC regulates Hampshire. See the following section, General Regulatory Matters , for a discussion of general regulatory issues and initiatives. See Jurisdictional Rates and Regulatory Matters , which begins on page 6, for detail regarding the individual commissions and a discussion of recent regulatory proceedings.

      General Regulatory Matters

          Regulated Service to Firm Customers

     In the District of Columbia jurisdiction, the firm residential and non-residential rate schedules are based upon 1) a flat commodity charge for each therm of gas consumed; and 2) a customer charge designed to

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recover certain fixed costs. Non-residential firm customers also pay a peak-usage charge that sends accurate price signals regarding gas costs to customers during both peak and non-peak periods. In the Maryland and Virginia jurisdictions, the rate schedules for firm service are comprised of a fixed-charge per customer and declining block commodity rates. Declining block rates reduce the impact of deviations from normal weather on net revenues.

     The firm tariff provisions in each Washington Gas jurisdiction contain gas cost recovery mechanisms that provide for the recovery of the invoice cost of gas applicable to firm customers. Under these mechanisms, firm customers’ rates are adjusted periodically to reflect increases and decreases in the invoice cost of gas. Moreover, the regulators in each jurisdiction provide for an annual reconciliation of gas costs collected from firm customers to the applicable invoice cost of gas paid to suppliers.

      Regulated Service to Interruptible Customers

     To qualify for interruptible service, a customer must be capable of substituting an alternate fuel for natural gas should Washington Gas determine that it needs to interrupt their service temporarily to satisfy firm customers’ needs during periods of peak demand. The effect on net income of changes in delivered volumes and prices to the interruptible class is minimized by margin-sharing arrangements that are part of the design of Washington Gas’s rates. Under these arrangements, Washington Gas returns a majority of the margins earned on interruptible gas sales and deliveries to firm customers after a gross margin threshold is reached in exchange for the shift of a portion of the fixed costs of providing service from the interruptible to the firm class. In Maryland, Washington Gas retains 100 percent of the gross margins associated with sales and deliveries to new interruptible customers added after August 1989, until it has recovered its investment and the associated capital costs.

      Natural Gas Unbundling Initiatives

     Currently, for the majority of its business, the price that Washington Gas charges its customers is based on the combination of the cost it incurs for the natural gas commodity and the cost it incurs to deliver natural gas to its customers. Although most of Washington Gas’s revenue continues to be produced from the sale and delivery of natural gas on this combined or “bundled” basis, a number of regulatory initiatives are underway to separate or unbundle the sale of the natural gas commodity from the delivery of gas on the regulated utility’s distribution system (delivery service). Margins generated from deliveries of customer-owned gas are equivalent to those earned on bundled gas service. Therefore, Washington Gas does not experience any loss of margins when customers choose to purchase their gas from a third-party marketer.

     Throughout the Washington Gas franchise area, all interruptible customers and most of the their firm customers may choose to purchase their gas from an array of third-party marketers, such as WGEServices. Washington Gas continues to charge these customers to deliver natural gas through its distribution system. The status of the unbundling programs in the company’s major jurisdictions as of September 30, 2001, is discussed further in Competition , which begins on page 9 of this report.

     WGEServices sells natural gas, as a third-party marketer, to both firm and interruptible customers in each Washington Gas jurisdiction in addition to regions in Maryland and Virginia that are outside of the regulated utility’s jurisdictional service area. WGEServices retains the full amount of margins generated on sales of the natural gas commodity, but also has the potential to incur a loss from the sales of this commodity.

      Jurisdictional Rates and Regulatory Matters

     Since 1994, Washington Gas has had no increases in the base rates charged to customers in any of its three current jurisdictions. However, effective December 28, 1997, the SCC of VA granted a $1.4 million revenue increase to Shenandoah, a subsidiary whose operations have since been merged into Washington Gas.

     The following sections describe each regulatory commission and the procedures they use to set Washington Gas’s rates. These sections also discuss the most recent rate increases and other ongoing regulatory activity that could potentially affect Washington Gas’s rates and/or operations.

      District of Columbia

     The PSC of DC consists of three full-time members who are appointed by the Mayor with the advice and consent of the District of Columbia City Council. The term of each commissioner is four years. There are no limitations on the number of terms that can be served.

     There is no statutory suspension period related to rate requests.

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      Rate Increases

     In October 1993, the PSC of DC approved a $4.7 million increase in base rates (2.5 percent in annual revenues), effective October 19, 1993. The order, which included a 9.86 percent overall rate of return and an 11.50 percent return on common equity, provided for a phase-in, rather than immediate recognition, of the additional costs associated with the implementation of Statement of Financial Accounting Standards No. 106—Employers’ Accounting for Postretirement Benefits Other Than Pensions (SFAS No. 106). The incremental costs related to SFAS No. 106 were phased-in over a five-year period that ended September 30, 1998. In each year of the phase-in, the Company filed for an increase in rates, through streamlined procedures, to reflect an additional increment of SFAS No. 106 costs in excess of a stipulated “pay-as-you-go” level. The difference between the incremental annual amount reflected in rates during the phase-in period and the full SFAS No. 106 cost was deferred as a regulatory asset. On September 30, 1998, the PSC of DC granted the Company recovery of the regulatory asset established during the phase-in period over a fifteen-year amortization period, effective October 1, 1998.

     Effective August 1, 1994, the PSC of DC approved a Stipulation and Agreement signed by a majority of the parties to a rate case filed in January 1994, providing for a $6.4 million annual revenue increase (or 3.4 percent). The agreement did not specify a rate of return. The agreement provided for an increase in the curtailment charge to interruptible customers during periods of interruption and established the previously discussed peak-usage charge for non-residential firm customers.

      Rate Case Filing

     On February 17, 2000, the District of Columbia’s Office of the People’s Counsel (OPC) filed a complaint with the PSC of DC requesting an investigation into the rates and charges of Washington Gas. On February 28, 2000, Washington Gas filed an answer urging the PSC of DC to dismiss the OPC complaint because the OPC’s analysis of the company’s rates was substantively flawed.

     On March 21, 2001, the PSC of DC issued an Order granting the OPC’s request to initiate an investigation into the reasonableness of Washington Gas’s base rates. The PSC of DC’s Order required Washington Gas to file base rate information no later than ninety days from March 21, 2001. The PSC of DC’s Order did not set a schedule to issue a final order on Washington Gas’s rates.

     On June 19, 2001, Washington Gas filed an application with the PSC of DC to increase rates in the District of Columbia. The request seeks to increase overall annual revenues in the District of Columbia by approximately $16.3 million, or 6.8 percent, based on a proposed return on equity of 12.25 percent. Revenues from the District of Columbia operations represent approximately 20 percent of total utility revenues for Washington Gas. Additionally, Washington Gas is proposing an incentive rate plan. The proposed incentive rate plan includes a 50/50 sharing between customers and Washington Gas of weather-normalized District of Columbia regulated earnings above or below a 200 basis point earnings band around the PSC of DC’s authorized return on equity. The incentive rate plan proposes continuing the existing mechanisms for recovery of the actual cost of natural gas incurred by Washington Gas.

     On August 10, 2001, the PSC of DC held the pre-hearing conference for the base rate proceeding. All matters presented at the pre-hearing conference are under review by the PSC of DC. No specific timeline has been established for the proceeding.

     WGL Holdings, Inc. and Washington Gas cannot predict the ultimate outcome of its application and the related investigation that the PSC of DC has ordered. WGL Holdings, Inc. and Washington Gas expect a decision on the base rate case sometime during fiscal year 2002.

      Maryland

     The PSC of MD consists of five full-time members who are appointed by the Governor with the advice and consent of the Senate of Maryland. Each commissioner is appointed to a five-year term, with no limit on the number of terms that can be served.

     The regulated utility is required to give 30 days’ notice when filing for a rate increase. The PSC of MD may initially suspend the proposed increase for 150 days beyond the 30-day notice period and then has the option to extend the suspension for an additional 30 days. If action has not been taken after 210 days, rates may be placed into effect subject to refund.

      Rate Increases

     Effective August 1, 1993, the PSC of MD ordered a base rate increase designed to collect an additional $10.6 million (3.7 percent), in annual revenues. The order resulted from a settlement agreement entered into

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by most parties to a March 1993 rate case. Recovery of SFAS No. 106 costs, which had been included in the regulated utility’s request, was not specifically addressed in the order. However, the amount authorized by the PSC of MD was sufficient to cover Washington Gas’s cost to implement this standard in Maryland. The order also revised Washington Gas’s purchased gas cost recovery mechanism to provide for recovery of carrying costs on actual storage gas balances and provided for a $1.0 million annual revenue increase resulting from the modification to, or the addition of, certain service-related charges. The 11.5 percent return on equity indicated in the order was not utilized to establish rates.

     In October 1994, the PSC of MD approved an unopposed Stipulation and Agreement, signed by a majority of the parties to a June 1994 rate case. The Stipulation and Agreement, designed to collect an additional $7.4 million (2.4 percent) annually, went into effect on December 1, 1994.

      Incentive-Based Rate Request

     On January 6, 2000, the Company announced that it filed with the PSC of MD a non-unanimous settlement agreement that would, if approved by the PSC of MD, have frozen basic delivery rates at the present levels and insulated Maryland customers from potential rate increases for five years.

     On October 19, 2000, the PSC of MD issued an Order that declined to approve the agreement. The PSC of MD Order noted a number of positive aspects of the Settlement Agreement. The Order stated that the record was not sufficient to demonstrate that rates would be just and reasonable throughout the five-year term. On November 6, 2000, Washington Gas filed a Request for a Rehearing of the PSC of MD’s Order. The Rehearing Request cited the numerous features of the Settlement that enhanced, rather than diminished, the PSC of MD oversight responsibilities, as well as the extensive record evidence and past PSC of MD precedence on the subject.

     Washington Gas announced on March 14, 2001 that it filed a notice of withdrawal with the PSC of MD withdrawing its May 17, 1999 Application for authority to implement an incentive rate plan.

      Virginia

     The SCC of VA consists of three full-time members who are elected by the General Assembly of Virginia. Each commissioner has a six-year term with no limitation on the number of terms that can be served.

     Either of two methods may be used to request a modification of existing rates. First, Washington Gas may file a general rate application in which it may propose new adjustment to the cost of service which have not previously been approved by the Commission, as well as a revised return on equity. The rates under this process may take effect 150 days after the filing. Second, an Expedited Rate Case (ERC) procedure is available which provides that rate increases may take effect 30 days after the filing date. Under the ERC mechanism, Washington Gas may not propose any new adjustments not previously approved in the last general rate case, or a change in its return on equity from the level authorized in its last general rate case. Before new rates become final, both types of rate increases are subject to refund.

     The company filed an application with the SCC of VA on July 28, 2000 for approval of special Area Development Rates (“ADR”) applicable to future gas customers within a defined area in its service territory in Loudoun County, Virginia, where gas service was not currently available. The purpose of the ADR charges was to provide an alternative mechanism for the company to collect, and customers to pay, deposits necessary to offset the excess costs of providing gas service over the expected revenues from such service over the life of the facilities. The Company generally collects such amounts through deposits paid by customers who want gas service. After a formal hearing, on March 14, 2001, a Hearing Examiner with the SCC of VA recommended approval of the ADR charges with certain conditions. The company subsequently determined that it could collect the necessary amounts directly from developers in the area and on October 1, 2001, withdrew its application for approval of ADR charges prior to receiving a final decision from the SCC of VA.

      Rate Increases

     On September 27, 1994, the regulated utility implemented rates designed to recover an additional $15.7 million annually, based on a rate case filed in April 1994. These rates were collected subject to refund. On September 28, 1995, the SCC of VA approved a $6.8 million (2.7 percent) annual revenue increase, effective September 27, 1994. The SCC of VA’s order included a 9.72 percent overall rate of return and an 11.50 percent return on equity. The order also allowed Washington Gas to collect SFAS No. 106 costs in accordance with a generic order of the SCC of VA. The Company refunded amounts associated with the difference between the interim rates that were collected subject to refund and the amount approved by the SCC of VA, with interest, by January 1, 1996.

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     In December 1997, Shenandoah implemented new rates in Virginia designed to recover an additional $2.3 million annually, based on a rate case filed in August 1997. On July 16, 1998, the SCC of VA issued an order approving an increase in annual revenues of $1.4 million, or 6.78 percent, effective December 28, 1997. The order included a 9.062 percent overall rate of return and a 10.70 percent return on equity. Shenandoah refunded amounts associated with the difference between the interim rates that were collected subject to refund and the amount approved by the SCC of VA, with interest, by October 31, 1998. As previously discussed, Shenandoah was merged into Washington Gas, on April 1, 2000. In compliance with the order issued by the SCC of VA, Shenandoah is continuing to operate as a separate division under the same rates that were in place at the time of the merger.

     Page 35 of the Management’s Discussions and Analysis provides a table summarizing Washington Gas’s major rate applications and results thereof.

COMPETITION

      Competition with Other Energy Products

     In its core business, the company’s regulated utility subsidiary, Washington Gas, faces competition based on customers’ preferences for natural gas compared to other energy products and the comparative prices of those products. Currently, the most significant product competition occurs between natural gas and electricity in the residential market. The residential market generates a substantial proportion of the regulated utility’s net income. In its service territory, Washington Gas continues to attract the majority of the new residential construction market. The company believes that consumers’ continuing preference for natural gas allows Washington Gas to maintain a strong presence.

     The regulated utility has generally maintained a price advantage over electricity in its service area. Increases in the price of the natural gas commodity during the winter of fiscal year 2001 altered this situation somewhat. However, by the end of fiscal year 2001 natural gas prices have settled to more traditional levels. Furthermore, as discussed below, restructuring in both the natural gas and electric industries is leading to changes in traditional pricing models. As part of the electric industry restructuring effort, certain business segments are moving toward market-based pricing, with third-party marketers of electricity participating in retail markets. Electric industry restructuring may result in lower comparative pricing for electric service and other alternative energy sources, including natural gas. These changes will result in increased competition for the regulated utility.

     In the interruptible market, the regulated utility’s customers must be capable of using a fuel other than natural gas when demand by the regulated utility’s firm customers peaks. Fuel oil is the most significant competing energy alternative to natural gas. The regulated utility’s success in this market depends largely on the relationship between gas and oil prices. Because the supply of natural gas is primarily derived from domestic sources, the relationship between supply and demand generally has the greatest impact on natural gas prices. As a large portion of oil comes from foreign sources, political events can have significant influences on oil supplies and accordingly, oil prices.

      Deregulation

     In each of the jurisdictions (Maryland, Virginia and the District of Columbia) served by the company’s regulated utility, regulators and utilities have implemented customer choice programs. These programs provide customers with an opportunity to choose to purchase their natural gas and/or electric commodity from third-party marketers, rather than purchasing these commodities as part of a bundled service from the local utility. When customers choose to purchase their natural gas commodity from a third-party marketer, there is no impact on the regulated utility’s net revenues or net income because Washington Gas passes the cost of gas to customers without any mark-up. However, these customer choice programs provide unregulated third-party marketers, such as WGEServices, with opportunities to profit from the sale of the natural gas commodity or electricity in competitive markets through energy sales to an expanding customer base. Participating in this rapidly evolving marketplace also poses new risks and challenges discussed below that must be addressed in the company’s current and future strategies.

      The Natural Gas Delivery Function

     The natural gas delivery function, the company’s regulated utility’s core business, continues to be regulated by local regulatory commissions. In developing this core business, Washington Gas has invested over $2.3 billion to construct a safe, reliable and economical natural gas distribution system. Because of the high costs and important safety and environmental considerations associated with building and operating a duplicate distribution system, societal interests will continue to prefer allowing only one owner and operator

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of a natural gas distribution system per franchise area for the foreseeable future. The nature of Washington Gas’s customer base and the distance of most customers from interstate pipelines mitigate the threat of bypass of its facilities by other potential delivery service providers.

     Washington Gas expects that local regulatory commissions will continue to set the prices and terms for delivery service that give it an opportunity to earn a fair rate of return on the capital invested in its distribution system and to recover reasonable operating expenses. Washington Gas plans to continue constructing, operating and maintaining its natural gas distribution system. The company does not foresee any near-term changes in the regulated utility’s risk profile.

      The Merchant Function and Natural Gas Unbundling

     The implementation of customer choice programs for natural gas customers is well underway in Maryland, Virginia and the District of Columbia. At September 30, most of the customers served by Washington Gas are eligible to participate in customer choice programs and the company expects that these programs will gradually encompass all customers in its service territory. Out of approximately 704,000 customers eligible to participate in these programs at September 30, 2001, approximately 154,000 customers purchase their natural gas commodity from unregulated third-party marketers. The following table provides the status of natural gas unbundling in the regulated utility’s major jurisdictions at September 30, 2001. The number and percentage of customers reflected in this table include all customers who chose to purchase natural gas from a third-party marketer, including WGEServices.

     Ultimately, the company expects the regulated utility may play a much smaller role in the merchant function and may eventually exit the merchant function as customers buy natural gas from unregulated marketers. During this transition period, Washington Gas continues to have certain obligations under long-term contracts to purchase natural gas from producers and transportation capacity from interstate pipeline companies Accordingly, the strategy of Washington Gas focuses on recovering contractual costs and maximizing the value of contractual assets.

     Currently, the regulated utility includes the cost of the natural gas commodity and pipeline services in the purchased gas costs that it includes in firm customers’ rates, subject to regulatory review. The regulated utility’s jurisdictional tariffs contain gas cost mechanisms that allow it to recover the invoice cost of gas applicable to firm customers. Washington Gas believes it prudently entered into its gas contracts and that the costs being incurred should be recoverable from customers. If future unbundling or other initiatives remove the current gas cost recovery provisions, Washington Gas could be adversely impacted to the extent it incurs non-competitive gas costs without other satisfactory regulatory mechanisms available to recover any costs that may exceed market prices.

     Washington Gas currently has recovery mechanisms for such potentially stranded costs in Maryland, the District of Columbia and Virginia.

     Washington Gas actively manages its supply portfolio to ensure that its sales and supply obligations remain balanced. If Washington Gas were to determine that competition or changing regulation would preclude it from recovering these costs in rates, these costs would be charged to expense without any corresponding revenue recovery. If this situation were to occur and depending upon the timing of the occurrence, the impact on Washington Gas’s financial position and results of operations would likely be

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significant. In the event that a regulatory body disallows the recovery of such costs, these costs would be borne by shareholders.

     To minimize its exposure to contracting risks, Washington Gas has mechanisms in its customer choice programs to assign to participating marketers approximately 65 percent of the storage and peak winter capacity resources that were dedicated to serving bundled service customers when those customers elected a third-party marketer. Washington Gas is also updating its forecasts of customer growth and the associated requirements for pipeline transportation, storage and peaking resources. While it is not renewing expiring long-term gas commodity contracts at the present time, it is generally renewing pipeline transportation and storage contracts to meet its forecasts of increased customer gas requirements, and consistent with regulatory mechanisms to provide for or make available such resources to marketers serving customers in the customer choice programs. As the gas commodity contracts expire, Washington Gas enters into flexible short-term purchasing arrangements to meet demand. This strategy mitigates the exposure to long-term commitments beyond minimum Federal Energy Regulatory Commission-approved contracting requirements, while ensuring reliable and competitively priced gas for customers that continue to buy the natural gas commodity from the regulated utility.

     To maximize the value of its contractual assets, the regulated utility has entered into contracts with unregulated marketers that make use of the regulated utility’s firm storage and transportation rights to meet the regulated utility’s city gate delivery needs and to make off-system sales when such storage and transportation rights are underutilized. The regulated utility continues to pay the fixed charges associated with the firm storage and transportation contracts used to make sales.

      Unregulated Natural Gas Energy Marketing

     As the local distribution regulated utility’s role in the merchant function decreases over time, opportunities emerge for unregulated natural gas providers. In the deregulated marketplace, third-party marketers have profit-making opportunities, but also assume the risk of loss.

     Recognizing the opportunities presented by competition, the company established WGEServices, an unregulated retail energy marketing subsidiary in 1997. WGEServices now markets both natural gas and electricity to residential, commercial and industrial customers both inside and outside of the Washington Gas service area. To date, WGEServices has grown to nearly 125,000 natural gas customers and 44,000 electric customers. WGEServices gross revenues in fiscal years 2001 and 2000, which include both sales of natural gas and electricity, were $419.2 million and $166.7 million, respectively. WGEServices had net income of $0.5 million in fiscal year 2000 but incurred a net loss of $1.5 million in fiscal year 2001 due mainly to the acquisition costs associated with deriving new electricity customers. The company believes that customer choice programs may continue to expand customers’ selection of WGEServices as a service provider.

     The regulatory process tends to stabilize rates and revenues of the regulated utility. However, there can be significant volatility for unregulated third-party marketers, such as WGEServices. Thus, while WGEServices has a significant potential for continued growth, it must carefully manage risks in a volatile commodity market.

     WGEServices competes with other third-party marketers to sell the unregulated natural gas commodity to customers. Marketers of the natural gas commodity compete largely on price and gross margins are relatively small. Furthermore, as with any startup operation, customer acquisition costs are high. Consequently, operating margins for WGEServices are lower than those earned by the regulated utility.

     In addition, WGEServices faces supply-side risks. To minimize its supply-side risks, WGEServices’ strategy is to manage its natural gas contract portfolio in a manner that closely aligns the volumes of gas it purchases with firm commitments from customers to purchase this gas and enter into transactions to moderate gas supply cost volatility. WGEServices purchases its gas from a number of wholesale suppliers in order to avoid relying on any single provider for its natural gas supply. Additionally, WGEServices maintains gas storage inventory to meet daily and monthly fluctuations in demand caused by variations in normal weather. Similarly, WGEServices’ dependency on any one customer or group of customers is limited. Beginning in fiscal year 2002, WGEServices has entered into derivative contracts in order to balance its sales commitments with the amount of gas it must purchase to satisfy those commitments. WGEServices has a risk management policy in place and periodically reassesses its policy to determine its adequacy to mitigate risks in changing markets.

      Electric Unbundling

     Customer choice programs are not unique to the natural gas industry. Choice for electric customers has been implemented or will be implemented in each jurisdiction in which the regulated utility operates. Similar to the natural gas industry, participants in these programs can choose either to continue purchasing bundled

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electricity service from their local electric distribution utility or to purchase electricity from a third-party marketer.

     In anticipation of the opportunities to sell electricity in jurisdictions that have implemented customer choice programs, WGEServices entered into a master purchase and sale agreement in April 2000 with a wholesale energy marketer. Under the agreement, as WGEServices identifies profitable opportunities, it purchases electric energy, capacity and certain ancillary services from the wholesaler for resale to retail electricity customers. In each jurisdiction that has introduced customer choice programs, WGEServices evaluates the associated profit potential and other strategic factors.

     In 2001, WGEServices significantly expanded its efforts to market electricity and enroll customers. During fiscal year 2001, the company enrolled 44,000 retail electricity customers in Maryland and the District of Columbia. In addition, during fiscal year 2001, WGEServices began supplying electricity to Montgomery County, Maryland government agencies under a $33.5 million, 18-month contract and to the Washington Metropolitan Area Transit Authority (Metro) under a $16.0 million, two year contract to supply electricity to all Metro facilities in the District of Columbia and Maryland. WGEServices was also awarded a $125 million contract to supply electricity to 47 large federal facilities in the District of Columbia and suburban Maryland for up to three and one-half years. Total electric revenues in fiscal year 2001 were $98.4 million on deliveries of 1.9 billion kilowatt hours of electricity.

      Potential for Further Unbundling

     Currently, the company’s regulated utility provides customer services, such as preparing bills, reading meters and responding to customer inquiries, as part of its core utility function. Unregulated third-party marketers have the option to assume responsibility for bill preparation and customer collections. In addition to billing and collecting from customers for the natural gas commodity, third-party marketers’ bills may include natural gas delivery charges due the regulated utility, which they subsequently remit to Washington Gas. Although Washington Gas still provides most customer services on a bundled basis, the potential exists for future deregulation initiatives to separate these services from the core utility function. In that case, customers could choose to have unregulated competitors provide these services.

     To remain competitive, the company strives to improve quality and efficiency and to reduce costs with the goal of achieving market-level performance. Accordingly, the company will continue to look for opportunities to profit from further unbundling.

GAS SUPPLY AND CAPACITY

     Washington Gas arranges to have natural gas delivered to the entry points of its distribution systems (city gates) using the delivery capacity of interstate pipelines companies. Washington Gas acquires natural gas delivery and storage capacity on a system-wide basis because of the integrated nature of the service agreements between the pipelines and its distribution operations. Washington Gas’s supply and capacity plan is based on the system requirements and takes into account estimated load growth by type of customer, as well as customer attrition, conservation and movement of customers from bundled to unbundled service.

     Pursuant to FERC Order No. 636, the pipeline companies are required to provide transportation and storage services to gas shippers, such as Washington Gas, that are comparable to the services it received prior to the implementation of the order. At September 30, 2001, Washington Gas has service agreements with four pipeline companies that provide direct service and two upstream pipelines companies that provide for firm transportation and storage services. These contracts have expiration dates ranging from fiscal years 2002 to 2015.

     Washington Gas is responsible for acquiring sufficient gas supplies to meet customer requirements, as well as the appropriate pipeline capacity to ensure delivery to its distribution system. Washington Gas’s contracting activities take into account the continuing trend toward unbundling the sale of the gas commodity from the delivery of the commodity to the customer, by entering into flexible short-term agreements for supply and capacity levels that will allow it to remain competitive. Washington Gas has adopted a diversified portfolio approach designed to satisfy the supply and deliverability requirements of its customers, using multiple supply points, dependable transportation and storage arrangements and its own substantial storage and peaking capabilities to meet its customers’ demands.

     Washington Gas has four long-term natural gas purchase contracts with producers and marketers to purchase natural gas at market-sensitive prices. These contracts provide for commodity charges based upon an ascertainable index and either fixed-reservation charges based on contracted minimum volumes or premiums built into volumetric charges. The contracts also provide for Washington Gas to pay monthly and/or annual deficiency charges if actual volumes fall below minimum levels. These gas purchase contracts expire during fiscal years 2002 and 2003. Washington Gas acquires the balance of its supplies at market prices under short-term contracts.

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     As reflected in the first table below, there were six sources of delivery through which the company received natural gas at its city gates to satisfy the sendout requirements in pipeline year 2001 (November 1, 2000 through October 31, 2001) and from which supplies can be received in pipeline year 2002 (November 1, 2001 through October 31, 2002). Firm transportation denotes gas transported directly to the entry point of Washington Gas’s distribution system in volumes agreed upon by them and the applicable pipeline. Transportation storage denotes volumes stored by a pipeline for withdrawal during the heating season. Peak load requirements are met by: 1) underground natural gas storage at the Hampshire storage field in Hampshire County, West Virginia; 2) the local production of propane air plants located at company-owned facilities in Rockville, Maryland (Rockville Station) and in Springfield, Virginia (Ravensworth Station); and 3) other storage and peak-shaving arrangements. Unregulated third-party marketers acquire interstate pipeline capacity and the natural gas commodity on behalf of Washington Gas’s regulated utility customers. These marketers have natural gas delivered to the entry point of Washington Gas’s delivery system on behalf of those utility customers that have decided to acquire their natural gas commodity on an unbundled basis, as previously discussed.

     During pipeline year 2001, total sendout on the system was 1,772 million therms, excluding the sendout of sales and deliveries of natural gas used for electric generation. The sendout for pipeline year 2002 is estimated at 1,559 million therms (based on normal weather), excluding the sendout for the sales and deliveries of natural gas used for electric generation. The significant variation was the result of weather in pipeline year 2001 that was significantly colder than normal generating larger sendout. The sources of delivery and related volumes that were used to satisfy the requirements of pipeline year 2001 and those projected for pipeline year 2002 are shown in the following table.

     The effectiveness of Washington Gas ‘s gas supply program is largely dependent on the sources from which the design day requirement is satisfied. A design day is the maximum anticipated demand on the gas supply system during a 24-hour period assuming a 5 degree Fahrenheit average temperature. Washington Gas assumes that all interruptible customers will be curtailed on the design day. Washington Gas ‘s current design day is 15.3 million therms and Washington Gas’s projected sources of delivery for design day sendout is 16.9 million therms. This provides a reserve margin of 10.5 percent. Washington Gas is currently capable of meeting 66 percent of its design day requirements with storage and peaking capabilities. Emphasizing storage and peaking facilities on Washington Gas’s design day reduces the necessity to purchase firm transportation, the most expensive form of capacity from a design day perspective. The following table reflects the sources of delivery that are projected to be used to satisfy the design day sendout estimate for pipeline year 2002.

PROJECTED SOURCES OF DELIVERY FOR
DESIGN DAY SENDOUT
(Millions of Therms)

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     Washington Gas believes the combination of the gas supply it can purchase under short-term and long-term contracts, its peaking supplies and the capacity on the pipelines required to deliver the purchased supplies is sufficient to satisfy the needs of existing customers and allow for growth in future years. In the event that unregulated third-party marketers are unable to deliver the quantities indicated above, Washington Gas believes it has the ability to enter the interstate market to secure sufficient capacity to make up any such third-party marketer shortfalls. Washington Gas continues to seek opportunities to restructure existing contracts to maximize the competitiveness of its gas supply portfolio.

ENVIRONMENTAL MATTERS

     The company and its subsidiaries are subject to federal, state and local laws and regulations related to environmental matters. These evolving laws and regulations may require expenditures over a long timeframe to control environmental impacts.

     Estimates of liabilities for environmental response costs are difficult to determine with precision because of the factors that can affect their ultimate level. These factors include, but are not limited to: 1) the complexity of the site; 2) changes in environmental laws and regulations at the federal, state and local levels; 3) the number of regulatory agencies or other parties involved; 4) new technology that renders previous technology obsolete or experience with existing technology that proves ineffective; 5) the ultimate selection of technology; 6) the level of remediation required and 7) variations between the estimated and actual number of years that must be devoted to respond to an environmentally contaminated site.

     The company has identified up to ten sites where WGL Holdings’ regulated utility subsidiaries or their predecessors may have operated manufactured gas plants (MGPs). The regulated utility last used any such plant in 1984. In connection with these operations, the regulated utility is aware that coal tar and certain other by-products of the gas manufacturing process are present at or near some former sites and may be present at others. The regulated utility does not believe that any of the sites present any unacceptable risk to human health or the environment.

     At one of the former MGP sites, studies show the presence of coal tar under the site and an adjoining property. The regulated utility has taken steps to control the movement of contaminants into an adjacent river by installing a water treatment system that removes and treats contaminated groundwater at the site. The regulated utility received approval from governmental authorities for a comprehensive remedial plan for the majority of the site that will allow commercial development of the regulated utility’s property. The regulated utility has entered into an agreement with a national developer for the development of this site in phases. The regulated utility has also entered into a ground lease and obtained a carried interest for the first two phases. Construction has been substantially completed on the first phase of this development and the planning for phase two is presently underway. The regulated utility continues to seek approval of a remedial plan for the remainder of the site, including an adjoining property owned by a separate entity.

     At a second former MGP site, a local government notified the regulated utility about the detection of a substance in an adjacent river that may be related to this site. This same local government owned and operated the MGP for the majority of the life of the plant. The local government sold the MGP to a company that was subsequently merged into Washington Gas. Washington Gas retired the MGP many years ago. Washington Gas has entered into a settlement agreement with the local government and has no further obligation with respect to any costs that may be incurred by the local government to remediate the site.

     At a third former MGP site and on an adjacent parcel of land, the regulated utility made application under a state voluntary closure program. The regulated utility has developed a remediation plan for the site and is currently seeking approval of that plan from the state.

     The company believes, at this time, that appropriate remediation is being undertaken or that no remediation is necessary at the remaining seven sites.

     Through September 30, 2001, the company had paid $11.8 million for environmental response costs. The company has recorded a liability of $7.6 million on an undiscounted basis at September 30, 2001, related to future environmental response costs. This estimate principally includes the minimum liabilities associated with a range of environmental response costs expected to be incurred at five of the sites, including the first site described above. The company estimates the maximum liability associated with all of its sites to be approximately $22.2 million at September 30, 2001. The estimates were determined by the company’s environmental experts, based on experience in remediating MGP sites and advice from legal counsel and environmental consultants. Variations within the range of estimated liability result primarily from differences in the number of years that will be required to perform environmental response processes at each site (2 to 25 years) and the extent of remediation that may be required.

     Regulatory orders issued by the PSC of MD allow the regulated utility to recover the costs associated with the sites applicable to Maryland over periods ranging from five to thirty years. Rate orders issued by the PSC of DC allow the regulated utility a three-year recovery of prudently incurred environmental response costs and

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allow the regulated utility to defer additional costs incurred between rate cases. At September 30, 2001, there was no environmental regulatory asset subject to recovery in Virginia. At September 30, 2001, the regulated utility reported a regulatory asset of $5.8 million for the portion of environmental response costs it believes recoverable in rates. Based on existing knowledge, the regulated utility does not expect that the ultimate impact of these matters will have a material adverse effect on its capital expenditures, its earnings or its competitive position.

OTHER

     The regulated utility is not dependent upon a single customer or group of customers such that the loss of any one or more of such customers would have a significant adverse effect on the regulated utility. Large customers are generally on interruptible rate schedules, and margin-sharing arrangements limit the effects of variations in interruptible customer usage on net income. As shown on page 3, Washington Gas served 903,789 customer meters at September 30, 2001.

     The company’s utility business is weather-sensitive and seasonal since the majority of its business is derived from residential and small commercial customers who use natural gas for space heating purposes. In fiscal year 2001, approximately 78 percent of the total therms delivered in the regulated utility’s franchise area, excluding deliveries for electric generation, occurred in the regulated utility’s first and second fiscal quarters. All of the company’s utility earnings are generated during these two quarters and the company historically incurs losses in the third and fourth fiscal quarters. The timing and level of approved rate increases can affect the results of operations. The seasonal nature of the regulated utility’s business creates large variations in short-term cash requirements, primarily due to the fluctuations in the level of customer accounts receivable, accrued utility revenues and storage gas inventories. Washington Gas finances these seasonal requirements primarily through the sale of commercial paper and unsecured short-term bank loans.

     Washington Gas belongs to the Natural Gas Vehicle Coalition, which develops new applications and technologies for using natural gas. In addition, during fiscal year 2001, the company contributed to the Gas Technology Institute (GTI), which also develops new applications and technologies for using natural gas, focuses on developing more efficient gas equipment and increases the long-term supply of gas. The cost of these memberships and the company’s own research and development costs during fiscal years 2001, 2000 and 1999 were not material.

     At September 30, 2001, the company and its wholly-owned subsidiaries had 2,190 employees, an increase of 142 employees from the level at September 30, 2000. At September 30, 2001, there were 1,979 utility employees, an increase of 145 employees from the level at September 30, 2000.

ITEM 2—PROPERTIES

     At September 30, 2001, WGL Holdings and its subsidiaries held such valid franchises, certificates of convenience and necessity, licenses and permits necessary to maintain and operate their respective properties and businesses, as currently conducted. The company has no reason to believe that it will be unable to renew any of such franchises as they expire.

     Property, plant and equipment are stated at original cost, including labor, materials, taxes and overhead. The company calculates depreciation applicable to its gas plant in service primarily on a straight-line remaining life basis. The composite depreciation rate during fiscal year 2001 was 2.94%, which includes the effect of recovering any estimated net salvage associated with retiring the cost of plant in service. The following table discloses the depreciable life of natural gas plant, by category, at September 30, 2001.

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     At September 30, 2001, the regulated utility segment had approximately 611 miles of transmission mains, 10,531 miles of distribution mains, and 12,375 miles of distribution services. The regulated utility has the capacity for storage of approximately 15 million gallons of propane for peak shaving.

     The company owns the land and a 12-story office building (built in 1942) at 1100 H Street, NW, Washington, D.C. 20080, where its corporate offices are located. The company owns approximately 40 acres of land and a building (built in 1970) at 6801 Industrial Road in Springfield, Virginia 22151, which houses the company’s operating offices and certain administrative functions. The company has title to land and buildings used as substations for its utility operations.

     Washington Gas owns a 12-acre parcel of land located in Southeast Washington, D.C. Washington Gas has entered into an agreement with a national developer for the development of this site in phases. See the discussion regarding WG Maritime, which begins on page 4, and Environmental Matters, which begins on page 14 for additional information regarding this development.

     Washington Gas also has peaking facilities consisting of propane air plants in Springfield, Virginia (Ravensworth Station), and Rockville, Maryland (Rockville Station). Hampshire operates an underground natural gas storage field in Hampshire County, West Virginia. Hampshire accesses the storage field through 12 storage wells that are connected to an 18-mile pipeline gathering system. Hampshire also operates a compressor station for injection of gas into storage. For pipeline year 2002, the company projects that the Hampshire storage facility can supply approximately 2.0 billion cubic feet of natural gas to the regulated utility’s system for meeting seasonal demands.

     The Mortgage of Washington Gas dated January 1, 1933 (Mortgage), as supplemented and amended, securing any First Mortgage Bonds (FMBs) it issues, constitutes a direct lien on substantially all property and franchises owned by the regulated utility other than expressly excepted property. At September 30, 2001, no FMBs were outstanding under the Mortgage.

     The regulated utility executed a supplemental indenture to its unsecured MTN Indenture on September 1, 1993, providing that the regulated utility will not issue any FMBs under its Mortgage without making effective provision whereby any outstanding MTNs shall be secured equally and ratably with any and all other obligations and indebtedness secured by the Mortgage.

ITEM 3—LEGAL PROCEEDINGS
    None.

ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    None.

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EXECUTIVE OFFICERS OF THE REGISTRANTS

     The names, ages and positions of the executive officers of the registrants at September 30, 2001, are listed below along with their business experience during the past five years. The age of each officer listed is as of the date of filing of this report. There is no family relationship among the officers.

     Unless otherwise indicated all positions are executive officers listed with Washington Gas Light Company.

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PART II
ITEM 5—MARKET FOR REGISTRANTS’ COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

* Pertains to WGL Holdings, Inc.
** Pertains to Washington Gas Light Company

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ITEM 6—SELECTED FINANCIAL DATA

Selected Financial and Operations Data ^(a) (b)

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ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This management’s discussion analyzes the financial condition and results of operations of WGL Holdings, Inc. ( WGL Holdings or the company ) and its subsidiaries under the corporate structure that was in place during the fiscal year ended September 30, 2001. Effective November 1, 2000, Washington Gas Light Company (Washington Gas) reorganized, such that Washington Gas and its subsidiaries became separate subsidiaries of WGL Holdings, a newly formed holding company established under the Public Utility Holding Company Act of 1935 . Note 2 to the Consolidated Financial Statements discusses the new holding company structure. Since the former subsidiaries of Washington Gas are now subsidiaries of WGL Holdings, the consolidated results for Washington Gas for fiscal years 1999 and 2000, which are also presented in this Annual Report are comparable to the consolidated results for WGL Holdings for fiscal year 2001.

     The Glossary of Key Terms on page 71 defines certain terms used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Bold Italics indicate the first reference to a defined term.

SAFE HARBOR FOR FORWARD LOOKING STATEMENTS

     Certain matters discussed in this report, excluding historical information, may 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 company believes such forward-looking statements are based on reasonable assumptions, it cannot give assurance that every objective will be reached. Forward-looking statements speak only as of today, and the company assumes no duty to update them. The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

	1)		changes in economic, competitive, political and regulatory conditions and developments;
	2)		changes in capital and energy commodity market conditions;
	3)		changes in relevant laws and regulations, including tax, environmental and employment laws and regulations;
	4)		weather conditions;
	5)		legislative, regulatory and judicial mandates and decisions;
	6)		timing and success of business and product development efforts;
	7)		technological improvements;
	8)		the pace of deregulation efforts and the availability of other competitive alternatives; and
	9)		other uncertainties.

     Such factors are difficult to predict accurately and are generally beyond the company’s direct control. Accordingly, while it believes that the assumptions are reasonable, the company cannot ensure that all expectations and objectives will be realized. The company urges readers to use care and consider the risks, uncertainties and other factors that could affect the company’s business as described in this Annual Report. All forward-looking statements made in this Annual Report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995 .

OVERVIEW

     WGL Holdings, through its subsidiaries, sells and delivers natural gas and provides a variety of energy-related products and services to customers in the metropolitan Washington, D.C., Maryland, Virginia areas and beyond. The company’s core subsidiary, Washington Gas, is involved in the distribution and sale of natural gas that is primarily regulated by state regulatory commissions. In response to changes in federal and state regulation, the company has taken the initiative to offer competitively priced natural gas and electricity to customers through its unregulated retail energy marketing subsidiary. The company also offers energy-related products and services that are closely related to its core business. The majority of these energy-related activities are performed by wholly owned subsidiaries of Washington Gas Resources Corp. (Washington Gas Resources).

     During the fiscal years ended September 30, 2001, 2000 and 1999, WGL Holdings reported on four major business segments: 1) regulated utility ; 2) retail energy marketing ; 3) heating, ventilating and air conditioning ( HVAC ); and 4) consumer financing . These four segments are described below:

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Regulated Utility. With over 93 percent of the company’s assets, Washington Gas delivers natural gas to retail customers in accordance with tariffs set by regulatory commissions that have regional jurisdiction over Washington Gas’s rates. These rates provide the regulated utility an opportunity to earn a reasonable rate of return for the service on the investment devoted to the delivery of natural gas to customers. Washington Gas also sells the natural gas commodity to customers who either have not yet elected to purchase gas from unregulated third-party marketers or are not yet eligible to make this choice. The regulated utility does not incur a profit or a loss when it sells the natural gas commodity as utility customers are charged for the natural gas commodity at the same cost it incurs, subject to routine regulatory reviews of the reasonableness of these costs.

Retail Energy Marketing. Washington Gas Energy Services, Inc. ( WGEServices ), a wholly owned subsidiary of Washington Gas Resources, competes with other third-party marketers by selling natural gas and electricity directly to residential, commercial and industrial customers, both inside and outside of the regulated utility’s traditional service territory. WGEServices has the opportunity to make a profit or the potential to incur a loss from these sales. While WGEServices markets the natural gas and electricity commodities, regulated utilities are required to deliver the commodities to their customers. In the near-term, WGEServices will focus on expanding its customer base while seeking to generate positive earnings by controlling customer acquisition costs. On a long-term basis WGEServices believes the current strategy will enable the development of a significant customer base with the related volumes. As the customer base and volumes grow, WGEServices expects customer acquisition costs as a percentage of revenues to decline. WGEServices anticipates that this should enable it to generate higher levels of net income as the business evolves from its current stage.

HVAC. Two wholly owned subsidiaries, Washington Gas Energy Systems, Inc. ( WGESystems ) and American Combustion Industries, Inc. ( ACI ), provide turnkey design-build renovation projects to the commercial and government markets. Through a 50 percent equity investment in Primary Investors, LLC (Primary Investors), the HVAC segment also installs, repairs and maintains HVAC and plumbing equipment in the residential and light commercial markets.

     The commercial HVAC business has grown dramatically as a result of strong repeat and add-on business from successful completion of many projects. The segment focuses on retrofitting the area’s large number of aging commercial and government structures. Factors critical to the commercial HVAC success include the ability to maintain and grow the backlog of existing work through diversification of the market segments these subsidiaries serve. Balance between governmental and private sector work should allow these subsidiaries to succeed despite changes that might occur in general economic conditions.

     WGL Holdings owns a 50 percent investment in Primary Investors that owns a residential HVAC business. Primary Investors has acquired nine companies and is striving to grow its level of sales while continuing to work on improving the integration of the important activities of the entities acquired.

Consumer Financing. Washington Gas historically offered financing for customers to purchase natural gas appliances and other energy-related equipment. In August 2001, the company determined that the consumer financing segment could not meet the strategic objectives of the company’s business plan and thus ceased making any new loans. It continues servicing of existing loans. This segment has maintained a minimal staff to carry out this function.

     This Management’s Discussion and Analysis of Financial Condition and Results of Operations describes the company’s financial condition, results of operations and cash flows with specific information on liquidity and capital resources. It also includes management’s interpretation of the company’s past financial results, potential factors that may affect future results and potential risks in the years ahead and approaches used to manage them.

RESULTS OF OPERATIONS

     Net income was $82.4 million, $83.3 million and $67.4 million for the fiscal years ended September 30, 2001, 2000 and 1999, respectively. The company earned 11.0 percent, 11.9 percent and 10.4 percent, respectively, on average common equity during these three fiscal years.

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     The following table summarizes the net income for each segment at September 30, 2001, 2000 and 1999.

(a)Regulated utility results include $4.0 million, $1.4 million and $2.1 million of expenses shown in Note 15 to the Consolidated Financial Statements under the caption “Eliminations/Other” for fiscal years 2001, 2000, and 1999, respectively.

     Basic and diluted earnings per average common share were $1.75, $1.79 and $1.47 for fiscal years 2001, 2000 and 1999, respectively. A June 2001 public sale of common stock increased the number of shares outstanding by 2,038,500, which reduced the earnings per average common share by $0.02 in fiscal year 2001 from the prior year results.

Significant factors that affected the company’s earnings included:

Winter Weather. During the 2001 fiscal year, winter weather was approximately 13 percent colder than normal, which increased utility earnings by $0.28 per share.

Utility Customer Base. Washington Gas continues to expand its customer base. During fiscal year 2001, customer meters increased by 3.2 percent over the prior fiscal year.

Operation and Maintenance Expenses. Utility operation and maintenance expenses for fiscal year 2001 increased $17.0 million over the same period last year principally reflecting a $10.3 million increase in the utility segment’s uncollectible accounts expense due to the impact higher natural gas prices and colder weather had on outstanding accounts receivable balances. In addition, labor related expenses increased by $1.4 million due primarily to a 7.9 percent rise in the regulated utility’s workforce over the preceding year’s level. Tempering these increases was a $2.2 million decrease in pension and post-retirement benefits expense.

     Operation and maintenance expenses in fiscal year 2000 decreased $23.7 million from 1999. The decrease was primarily the result of reduced pension and postretirement benefit expenses and the reduction in fiscal year 2000 in the level of Year 2000 and other technology-related costs incurred in fiscal year 1999.

Depreciation and Amortization Expense. In fiscal years 2001 and 2000, depreciation and amortization expense increased over the prior year by $3.2 million and $5.6 million, respectively. These increases primarily reflect depreciation associated with the company’s increased investment in property, plant and equipment . The larger increase in fiscal year 2000 reflects additional amortization of a new enterprise-wide software system completed in fiscal year 1999.

Non-Utility Operations. The net income contributed by the company’s recurring non-utility operations decreased $1.1 million during fiscal year 2001, approximately $0.02 per average common share from fiscal year 2000 results. In fiscal year 2000, recurring net income from the company’s non-utility activities decreased $1.8 million, approximately $0.04 per average common share from fiscal year 1999 results.

Nonrecurring Transactions. The company’s earnings for the three reported years include a number of nonrecurring items. Fiscal year 2001 results include a $3.9 million after tax ($0.08 per average common share) permanent impairment provision on its 50 percent-owned residential HVAC investment, a $1.7 million pre-tax ($1.0 million after-tax or $0.02 per average common share) reserve for potential refunds on regulated utility customer bills recorded in operation and maintenance expenses and a $2.2 million pre-tax ($1.3 million after-tax or $0.03 per average common share) adjustment for a Virginia business license tax recorded by the regulated utility in General Taxes. Fiscal year 2000 results include a $1.2 million after-tax gain from the sale

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of two minor non-utility assets. Fiscal year 1999 results include a $1.8 million after-tax gain from a subsidiary’s sale of undeveloped land, offset by a $1.9 million after-tax loss from the sale of natural gas utility assets located in West Virginia. The following table summarizes the net income and earnings per average common share that were produced by the company’s recurring operations during fiscal years 2001, 2000 and 1999.

NET INCOME FROM RECURRING OPERATIONS