WGL HOLDINGS INC (Form: 10-Q, Received: 05/08/2014 06:03:20)

WGL HOLDINGS, INC.

and

WASHINGTON GAS LIGHT COMPANY

(Co-registrants)

Date: May 7, 2014

/s/ William R. Ford

William R. Ford

Vice President and Chief Accounting Officer (Principal Accounting Officer)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2014

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


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

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

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

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

WGL Holdings, Inc.:


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

Washington Gas Light Company:


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

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

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

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

All of the outstanding shares of common stock ($1 par value) of Washington Gas Light Company were held by WGL Holdings, Inc. as of April 30, 2014.

WGL Holdings, Inc.

Washington Gas Light Company

For the Quarter Ended March 31, 2014

Table of Contents


PART I. Financial Information

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

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

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk			78

Item 4. Controls and Procedures			78

PART II. Other Information

Item 1. Legal Proceedings			79

Item 4. Mine Safety Disclosures			79

Item 6 . Exhibits			79

Signature			80

(i)

WGL Holdings, Inc.

Washington Gas Light Company

INTRODUCTION

FILING FORMAT

This Quarterly Report on Form 10-Q is a combined report being filed by two separate registrants: WGL Holdings, Inc. (WGL) and Washington Gas Light Company (Washington Gas). Except where the content clearly indicates otherwise, any reference in the report to “WGL,” “we,” “us” or “our” is to the holding company or the consolidated entity of WGL Holdings, Inc. and all of its subsidiaries, including Washington Gas.

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

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

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

•

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

•

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

•

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

•

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

•

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

•

changes in capital and energy commodity market conditions;

•

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

•

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

•

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

•

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

•

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

•

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

•

changes in accounting principles;

•

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

(ii)

WGL Holdings, Inc.

Washington Gas Light Company

•

the ability to manage the outsourcing of several business processes;

•

acts of nature;

•

terrorist activities and

•

other uncertainties.

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

(iii)

WGL Holdings, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

Part I—Financial Information

Item 1—Financial Statements


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

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

The accompanying notes are an integral part of these statements.

WGL Holdings, Inc.

Condensed Consolidated Statements of Income (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


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

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

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

The accompanying notes are an integral part of these statements.

WGL Holdings, Inc.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


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

The accompanying notes are an integral part of these statements.

WGL Holdings, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


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

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

The accompanying notes are an integral part of these statements.

Washington Gas Light Company

Condensed Balance Sheets (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


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

The accompanying notes are an integral part of these statements.

Washington Gas Light Company

Condensed Statements of Income (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


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

The accompanying notes are an integral part of these statements.

Washington Gas Light Company

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


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

The accompanying notes are an integral part of these statements.

Washington Gas Light Company

Condensed Statements of Cash Flows (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)


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

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

The accompanying notes are an integral part of these statements.

W GL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. ACCOUNTING POLICIES

Basis of Presentation

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

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

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

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

Storage Gas Valuations

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

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

Accounting Standards Adopted in the Current Fiscal Year

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

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

Other Newly Issued Accounting Standards

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

NOTE 2. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

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


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


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

NOTE 3. SHORT-TERM DEBT

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


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



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

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

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

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

NOTE 4. LONG-TERM DEBT

UNSECURED NOTES

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

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

MTN and Private Placement Issuances and Retirements

($ In millions)

Principal

Interest

Rate

Nominal

Maturity Date

Six Months Ended March 31, 2014

Issuances:

12/5/2013

75.0

5.00

% ^(a)

12/15/2043

Total

75.0

Retirements:

11/7/2013

37.0

4.88

11/7/2013

Total

37.0

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

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

NOTE 5. COMMON SHAREHOLDERS’ EQUITY

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


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


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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

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

NOTE 6. EARNINGS PER SHARE

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

Basic and Diluted EPS


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

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

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

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

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

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

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

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

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

NOTE 7. INCOME TAXES

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

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

NOTE 8. DERIVATIVE AND WEATHER-RELATED INSTRUMENTS

DERIVATIVE INSTRUMENTS

Regulated Utility Operations

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

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

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

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

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

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

Non-Utility Operations

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

Consolidated Operations

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

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


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



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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

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


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

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


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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

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


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


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

Collateral

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


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

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

Concentration of Credit Risk

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

WEATHER-RELATED INSTRUMENTS

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

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

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

NOTE 9. FAIR VALUE MEASUREMENTS

Recurring Basis

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

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

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

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

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

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

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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


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

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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


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

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

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

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

WGL Holdings, Inc.

Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs

(In millions)

Natural Gas
Related
Derivatives

Electricity
Related
Derivatives

Weather
Related
Instruments

Warrants

Total

Three Months Ended March 31, 2014

Balance at January 1, 2014

(264.5

)

(1.7

)

—

1.2

(265.0

)

Realized and unrealized gains (losses)

Recorded to income

(85.9

)

11.2

—

(74.7

)

Recorded to regulatory assets—gas costs

(110.8

)

—

(110.8

)

Transfers out of Level 3

—

Purchases

—

Settlements

28.9

(11.7

)

—

17.2

Balance at March 31, 2014

(432.3

)

(2.2

)

—

1.2

(433.3

)

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


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


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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


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

Washington Gas Light Company

Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs

(In millions)

Natural Gas
Related
Derivatives

Electricity
Related
Derivatives

Weather
Related
Instruments

Warrants

Total

Three Months Ended March 31, 2014

Balance at January 1, 2014

(220.0

)

—

(220.0

)

Realized and unrealized gains (losses)

Recorded to income

(81.8

)

—

(81.8

)

Recorded to regulatory assets—gas costs

(110.8

)

—

(110.8

)

Transfers out of Level 3

—

Purchases

—

Settlements

30.0

—

30.0

Balance at March 31, 2014

(382.6

)

—

(382.6

)


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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

Washington Gas Light Company

Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs

(In millions)

Natural Gas
Related
Derivatives

Electricity
Related
Derivatives

Weather
Related
Instruments

Warrants

Total

Six Months Ended March 31, 2014

Balance at October 1, 2013

(133.6

)

—

(133.6

)

Realized and unrealized gains (losses)

Recorded to income

(105.2

)

—

(105.2

)

Recorded to regulatory assets—gas costs

(182.8

)

—

(182.8

)

Transfers out of Level 3

—

Purchases

—

Settlements

39.0

—

39.0

Balance at March 31, 2014

(382.6

)

—

(382.6

)


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

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

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

WGL Holdings, Inc.

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

Three Months Ended March 31, 2014

(In millions)

Natural Gas

Related
Derivatives

Electricity
Related
Derivatives

Weather
Related
Instruments

Warrants

Total

Operating revenues—non-utility

(0.5

)

(14.5

)

—

(15.0

)

Utility cost of gas

(81.8

)

—

(81.8

)

Other income-net

—

Non-utility cost of energy-related sales

(3.6

)

25.7

—

22.1

Operation and maintenance expense

—

Total

(85.9

)

11.2

—

(74.7

)

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)



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


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


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


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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)



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


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


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

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

WGL Holdings, Inc.

Unrealized Gains (Losses) Recorded for Level 3 Measurements

Three Months Ended March 31, 2014

(In millions)

Natural Gas
Related
Derivatives

Electricity
Related
Derivatives

Weather
Related
Instruments

Warrants

Total

Recorded to income

Operating revenues—non-utility

(5.0

)

(28.4

)

—

(33.4

)

Utility cost of gas

(68.1

)

—

(68.1

)

Non-utility cost of energy-related sales

(0.8

)

27.1

—

26.3

Other income—net

—

Operation and maintenance expense

—

Recorded to regulatory assets—gas costs

(101.1

)

—

(101.1

)

Total

(175.0

)

(1.3

)

—

(176.3

)

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)


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


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


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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)



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


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


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


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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

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


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


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

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

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

Non Recurring Basis

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NOTE 10. OPERATING SEGMENT REPORTING

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

•

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

•

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

•

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

•

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

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

Operating Segment Financial Information


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

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

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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

Operating Segment Financial Information


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

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

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

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

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

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

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

NOTE 11. OTHER INVESTMENTS

Variable Interest Entities (VIE)

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

•

Meade,

•

SunEdison,

•

Skyline,

•

ASD Solar LP and

•

Crab Run.

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

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

Meade

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

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

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

SunEdison/Skyline

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

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

Minimum Payments Receivable for Direct Financing Leases


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

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

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

ASD Solar, LP

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

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

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

Crab Run

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

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

Non-VIE Investments

ASDHI

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

Constitution

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

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

WGL Holdings, Inc.

Balance Sheet Location of Other Investments


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

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


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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

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


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


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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NOTE 12. RELATED PARTY TRANSACTIONS

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

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


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

Washington Gas provides gas balancing services related to storage, injections, withdrawals and deliveries to all energy marketers participating in the sale of natural gas on an unregulated basis through the customer choice programs that operate in its service territory. These balancing services include the sale of natural gas supply commodities related to various peaking arrangements contractually supplied to Washington Gas and then partially allocated and assigned by Washington Gas to the energy marketers, including WGEServices. Washington Gas records revenues for these balancing services pursuant to tariffs approved by the appropriate regulatory bodies. These related party amounts have been eliminated in the consolidated financial statements of WGL. The following table shows the amounts Washington Gas charged WGEServices for balancing services.


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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NOTE 13. COMMITMENTS AND CONTINGENCIES

RATES AND REGULATORY MATTERS

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

District of Columbia Jurisdiction

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

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

Maryland Jurisdiction

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

Virginia Jurisdiction

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NON-UTILITY OPERATIONS

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

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

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


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

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

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

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

FINANCIAL GUARANTEES

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NOTE 14. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

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


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


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

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

NOTE 15. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (concluded)

Notes to Consolidated Financial Statements (Unaudited)


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


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

^(a)

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

NOTE 16. SUBSEQUENT EVENTS

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

INTRODUCTION

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

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

—

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

—

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

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

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

EXECUTIVE OVERVIEW

Introduction

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

WGL has four operating segments:

—

regulated utility;

—

retail energy-marketing;

—

commercial energy systems and

—

midstream energy services.

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

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

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

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

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

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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

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

PRIMARY FACTORS AFFECTING WGL AND WASHINGTON GAS

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

•

weather conditions and weather patterns;

•

regulatory environment, regulatory decisions and changes in legislation;

•

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

•

diversity of natural gas supply;

•

volatility of natural gas and electricity prices;

•

non-weather related changes in natural gas consumption patterns;

•

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

•

competitive environment;

•

environmental matters;

•

industry consolidation;

•

economic conditions and interest rates;

•

inflation;

•

use of business process outsourcing;

•

labor contracts, including labor and benefit costs and

•

changes in accounting principles.

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

CRITICAL ACCOUNTING POLICIES

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

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

•

accounting for unbilled revenue;

•

accounting for regulatory operations — regulatory assets and liabilities;

•

accounting for income taxes;

•

accounting for contingencies;

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

•

accounting for derivative and fair value instruments;

•

accounting for pension and other post-retirement benefit plans and

•

accounting for stock-based compensation.

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

WGL HOLDINGS, INC.

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

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

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

Summary Results

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

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

Net Income (Loss) by Operating Segment


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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Regulated Utility Operating Results

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

Regulated Utility Operating Results


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

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

•

lower unrealized margins associated with our asset optimization program; and

•

higher operation and maintenance expenses.

Partially offsetting these unfavorable variances were:

•

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

•

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

•

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

•

higher realized margins associated with our asset optimization program;

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

Composition of Changes in Utility Net Revenues


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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

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

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

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

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

Composition of Changes in Operation and Maintenance Expenses


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

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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Retail Energy-Marketing

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

Retail Energy-Marketing Financial and Statistical Data


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

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

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

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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Commercial Energy Systems

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

Midstream Energy Services

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

Other Non-Utility Activities

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

Intersegment Eliminations

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

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

Summary Results

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

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

Net Income (Loss) by Operating Segment


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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Regulated Utility Operating Results

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

Regulated Utility Operating Results


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

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

•

lower unrealized margins associated with our asset optimization program; and

•

higher expenses related to operations and maintenance activities.

Partially offsetting these unfavorable variances were:

•

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

•

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

•

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

•

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

•

higher realized margins associated with our asset optimization program;

•

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

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

Composition of Changes in Utility Net Revenues


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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

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

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

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

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

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

Composition of Changes in Operation and Maintenance Expenses


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

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

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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Retail Energy-Marketing

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

Retail-Energy Marketing Financial and Statistical Data


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

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

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

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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Commercial Energy Systems

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

Midstream Energy Services

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

Other Non-Utility

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

Intersegment Eliminations

LIQUIDITY AND CAPITAL RESOURCES

General Factors Affecting Liquidity

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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Short-Term Cash Requirements and Related Financing

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

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

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

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

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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

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

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

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

Long-Term Cash Requirements and Related Financing

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

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

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

Security Ratings

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

Credit Ratings for Outstanding Debt Instruments


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

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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Ratings Triggers and Certain Debt Covenants

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

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

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

Historical Cash Flows

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


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

Cash Flows Provided by Operating Activities

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

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

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

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

Cash Flows Used in Investing Activities

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

Cash Flows Used in Financing Activities

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

Capital Investments

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


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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

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

Contractual Obligations

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

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

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


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

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

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

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

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

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

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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Financial Guarantees

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

Central Penn Line Pipeline

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

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

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

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

CREDIT RISK

Wholesale Credit Risk

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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

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

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

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

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


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

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

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

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

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

Retail Credit Risk

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

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

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

WGL Midstream is not subject to retail credit risk.

MARKET RISK

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

Price Risk Related to the Regulated Utility Segment

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

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

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

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

Regulated Utility Segment

Changes in Fair Value of Energy-Related Derivatives


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

Regulated Utility Segment

Roll Forward of Energy-Related Derivatives


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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

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

Regulated Utility Segment

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


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

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

Price Risk Related to the Non-Utility Segments

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

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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

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

Retail Energy-Marketing Segment

Changes in Fair Value of Energy-Related Derivatives


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

Retail Energy-Marketing Segment

Roll Forward of Energy-Related Derivatives


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

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

Retail Energy-Marketing Segment

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


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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

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

Midstream Energy Services Segment

Changes in Fair Value of Energy-Related Derivatives


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

Midstream Energy Services Segment

Roll Forward of Energy-Related Derivatives


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

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

Midstream Energy Services Segment

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


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

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

Value-at-Risk

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

WGEServices

Value-at-Risk at March 31, 2014


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

Interest-Rate Risk

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

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

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

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

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

Weather Risk

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

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

WASHINGTON GAS LIGHT COMPANY

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

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

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

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

•

lower unrealized margins associated with our asset optimization program; and

•

higher operation and maintenance expenses.

Partially offsetting these unfavorable variances were:

•

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

•

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

•

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

•

higher realized margins associated with our asset optimization program.

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

Gas Deliveries, Weather and Meter Statistics


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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

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

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

Gas Service to Interruptible Customers. Washington Gas must curtail or interrupt service to this class of customer when the demand by firm customers exceeds specified levels. Therm deliveries to interruptible customers decreased by 9.4 million therms during the three months ended March 31, 2014, compared to the same period of the prior fiscal year, reflecting increased interruptions to serve firm customers’ increased demand due to cold weather.

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

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

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

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

•

lower unrealized margins associated with our asset optimization program; and

•

higher expenses related to operations and maintenance activities.

Partially offsetting these unfavorable variances were:

•

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

•

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

•

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

•

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

•

higher realized margins associated with our asset optimization program;

•

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Gas Deliveries, Weather and Meter Statistics


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

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

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

RATES AND REGULATORY MATTERS

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

District of Columbia Jurisdiction

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

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

Maryland Jurisdiction

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (concluded)

Virginia Jurisdiction

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

I TEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

•

Price Risk Related to the Regulated Utility Segment

•

Price Risk Related to the Non-Utility Segments

•

Value-At-Risk

•

Weather Risk

•

Interest-Rate Risk

I TEM 4. CONTROLS AND PROCEDURES—WGL Holdings, Inc.

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

ITEM 4. CONTROLS AND PROCEDURES—Washington Gas Light Company

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

WGL Holdings, Inc.

Washington Gas Light Company

Part II—Other Information

ITE M 1. LEGAL PROCEEDINGS

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

ITE M 4. MINE SAFETY DISCLOSURES

Not applicable.

IT EM 6. EXHIBITS

Exhibits:


Schedule/ Exhibit		Description
(a)(3)		Exhibits

		Exhibits Filed Herewith:

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

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

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

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

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

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

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

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

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

101.INS		XBRL Instance Document:

101.SCH		XBRL Schema Document:

101.CAL		XBRL Calculation Linkbase Document:

101.LAB		XBRL Labels Linkbase Document:

101.PRE		XBRL Presentation Linkbase Document:

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

3		Articles of Incorporation & Bylaws:

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

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

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

WGL Holdings, Inc.

Washington Gas Light Company

Si gnature

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

Exhibit 10.1

LIMITED LIABILITY COMPANY AGREEMENT OF

MEADE PIPELINE CO LLC

by and between

WGL Midstream, Inc.,

COG Holdings LLC ,

Vega Midstream MPC LLC,

River Road Interests LLC,

and

VED NPI I, LLC

Dated as of February 14, 2014

In this document, “[*****]” indicates that confidential portions of this document have been redacted and filed separately with the Securities and Exchange Commission.

TABLE OF CONTENTS


	Page

ARTICLE I CERTAIN DEFINITIONS		1
Section 1.1 Definitions		1
Section 1.2 Construction		12

ARTICLE II ORGANIZATION		13
Section 2.1 Formation		13
Section 2.2 Name		13
Section 2.3 Registered Office; Registered Agent; Place of Business		13
Section 2.4 Purpose; Powers		13
Section 2.5 Foreign Qualification		13
Section 2.6 Term		14
Section 2.7 No State-Law Partnership		14
Section 2.8 Title to Company Assets		14
Section 2.9 No Power to Bind Company or Other Members		14
Section 2.10 Liability to Third Parties		14
Section 2.11 Member Obligations		14
Section 2.12 Vega Carryco		16

ARTICLE III MANAGEMENT		16
Section 3.1 Generally		16
Section 3.2 Company Board		17
Section 3.3 Meetings		17
Section 3.4 Written Consent		18
Section 3.5 Minutes		18
Section 3.6 Board of Managers Composition; Initial Managers		18
Section 3.7 Manager Qualifications		18
Section 3.8 Removal and Replacement of Managers		18
Section 3.9 Compensation		19
Section 3.10 Actions by the Board of Managers		19
Section 3.11 Super Majority Consent Decisions and Unanimous Consent Decisions		20
Section 3.12 Project Agreements		22
Section 3.13 Budgets		23
Section 3.14 Deadlocks		25
Section 3.15 Limitation of Liability; Indemnification		26

TABLE OF CONTENTS

(continued)


	Page

Section 3.16 Insurance		27
Section 3.17 Affiliate Contracts; Matters Involving Affiliates		27
Section 3.18 Voting Rights During Default		27

ARTICLE IV BOOKS AND RECORDS; REPORTS AND INFORMATION AND ACCOUNTS		27
Section 4.1 Maintenance of Books and Records		27
Section 4.2 Auditors; Company Reports; Annual Financial Statements		27
Section 4.3 Confidentiality		28
Section 4.4 Publicity		29

ARTICLE V TRANSFERS OF A COMPANY INTEREST		30
Section 5.1 General Provisions		30
Section 5.2 Additional Provisions		30
Section 5.3 Right of First Offer		31

ARTICLE VI PROJECT OPPORTUNITIES; MAJOR COST OVERRUN CAPITAL CALLS		32
Section 6.1 C&O Opportunities		32
Section 6.2 Major Cost Overrun Capital Calls		33
Section 6.3 Members in Default		34

ARTICLE VII CAPITAL CONTRIBUTIONS AND CAPITAL ACCOUNTS		34
Section 7.1 Capital Contributions; Failure to Contribute		34
Section 7.2 Capital Accounts		36
Section 7.3 Return of Contributions		36

ARTICLE VIII PROFITS AND LOSSES; DISTRIBUTIONS		36
Section 8.1 Allocation of Profits and Losses		36
Section 8.2 Allocations		36
Section 8.3 Income Tax Allocations		38
Section 8.4 Other Allocation Rules		39
Section 8.5 Distributions		39

ARTICLE IX TAX STATUS, TAX ELECTIONS AND TAX MATTERS MEMBER		40
Section 9.1 Tax Status		40
Section 9.2 Tax Elections		40
Section 9.3 Tax Matters Member		40
Section 9.4 Tax Returns		41
Section 9.5 Withholding		42

TABLE OF CONTENTS

(continued)


	Page

Section 9.6 Tax Consolidation		42

ARTICLE X DISSOLUTION, WINDING-UP AND TERMINATION		42
Section 10.1 Dissolution		42
Section 10.2 Winding-Up and Termination		43
Section 10.3 Deficit Capital Accounts		43

ARTICLE XI MISCELLANEOUS		43
Section 11.1 Counterparts		43
Section 11.2 Governing Law; Jurisdiction and Forum; Waiver of Jury Trial		44
Section 11.3 No Third Party Beneficiaries		44
Section 11.4 Entire Agreement; Interpretation		44
Section 11.5 Notices		45
Section 11.6 Successors and Assigns		46
Section 11.7 Headings		46
Section 11.8 Amendments		46
Section 11.9 Waivers		47
Section 11.10 Severability		47
Section 11.11 Interpretation		47
Section 11.12 Further Assurances		47

Annex A

Project Description

Annex B

Pre-Effective Date Expenditures, Equalization Expenses and Distributions

Annex C

C&O Agreement

iii

This LIMITED LIABILITY COMPANY AGREEMENT of Meade Pipeline Co LLC, dated as of February 14, 2014 (the “ Effective Date ”), is adopted, executed and agreed to by and between WGL Midstream, Inc., a Delaware corporation (“ WGL ”), COG Holdings LLC, a Delaware limited liability company (“ COG ”), Vega Midstream MPC LLC, a Delaware limited liability company (“ Vega ”), River Road Interests LLC, a Delaware Limited Liability Company (“ RRI ”) and VED NPI I, LLC, a Delaware limited liability company (“ Vega Carryco ”).

RECITALS:

WHEREAS , Meade Pipeline Co LLC (the “ Company ”) was formed on January 28, 2014 as a Delaware limited liability company by the filing of a Certificate of Formation (the “ Certificate ”) under and pursuant to the Act.

WHEREAS , WGL, COG, Vega, RRI and Vega Carryco intend for the Company to own an undivided ownership interest in assets of the Project (as defined herein), and lease such ownership interests to Transcontinental Gas Pipe Line Company, LLC (“ Owner Operator ”), with the terms of such lease, and the construction and the joint ownership and development of the Project to be determined by several ancillary agreements between the Company and Owner Operator, as further described in Section 3.12 hereof.

WHEREAS , WGL, COG, Vega, RRI and Vega Carryco are entering into this Agreement to set forth, among other things, (a) the governance and operating procedures of the Company, (b) their respective rights and obligations with respect to the Company, and (c) the Company’s role in the joint ownership and development of the Project.

NOW, THEREFORE , in consideration of the premises and the covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, intending to be legally bound hereby, WGL, COG, Vega, RRI and Vega Carryco hereby agree as follows:

ARTICLE I

CERTAIN DEFINITIONS

Section 1.1 Definitions . Each capitalized term used herein shall have the meaning given such term set forth below:

“ Act ” shall mean the Delaware Limited Liability Company Act and any successor statute, as amended from time to time.

“ Action ” shall mean any action, suit, case, arbitration, inquiry, proceeding, investigation, condemnation or audit by or before any court or other Governmental Entity or any arbitrator or panel of arbitrators.

“ Adjusted Capital Account ” shall mean the Capital Account maintained for any Member, (a) increased by any amounts that such Member is treated as obligated to restore under Treasury Regulation Sections 1.704-1(b)(2)(ii)(c), 1.704-2(g)(1) and 1.704-2(i)(5) and (b) decreased by any amounts described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) with respect to such Member. The foregoing definition of “Adjusted Capital Account” is intended to comply with the provisions of Treasury Regulation Sections 1.704-1(b)(2)(ii)(d) and 1.704-2 and shall be interpreted consistently therewith.

“ Affiliate ” shall mean a Person that Controls, is Controlled by or is under common Control with the Person in question; provided , however , that, notwithstanding the foregoing (a) no Member (or any of its Affiliates) shall be considered an Affiliate of the Company, (b) the Company shall not be considered an Affiliate of any Member (or any of its Affiliates) and (c) Owner Operator shall not be considered an Affiliate of the Company or any Member.

“ Affiliate Contract ” shall mean any contract and/or other agreement, the parties to which include a Member and/or one or more of its Affiliates (on the one hand) and the Company and/or one or more of its Subsidiaries, if any (on the other hand).

“ Agreement ” shall mean this Limited Liability Company Agreement, as the same may be amended from time to time.

“ Allocation Period ” shall mean any period (a) commencing on the Effective Date or the day following the end of a prior Allocation Period and (b) ending on the last day of each Fiscal Year or the day preceding any day in which an adjustment to the Book Value of the Company’s properties pursuant to clause (b) of the definition of Book Value occurs.

“ Annual Budget ” shall have the meaning set forth in Section 3.13(a)(ii) and, when used in this Agreement (other than in the definition of “Permitted Variance Amount”), shall be deemed to include the Permitted Variance Amount.

“ Anticipated In-Service Date ” shall have the meaning set forth in Section 3.13(a)(i) .

“ Anticipated Lease Termination Date ” shall have the meaning set forth in Section 3.13(b)(i) .

“ Approved Overage ” shall have the meaning set forth in Section 6.2(b) .

“ Applicable Tax ” shall have the meaning set forth in Section 9.6 .

“ Approved Project ” shall have the meaning set forth in Section 6.1(b) .

“ Available Cash ” shall mean, with respect to any month ending prior to the dissolution or liquidation of the Company, without duplication:

(a) the sum of all cash and cash equivalents of the Company on hand at the end of such month following the date on which all of the capital contributions the Company is required to make in connection with funding Project Costs (as defined in the C&O Agreement) for the Central Penn Line, pursuant to Capital Calls issued pursuant to Section 2.6(e) of the C&O Agreement and Major Cost Overrun Capital Calls approved by the Board of Managers pursuant to Section 6.2 of this Agreement, have been made under the C&O Agreement (without taking into account any additional capital contributions required with respect to Project Opportunities), less

(b) the amount of any cash reserves that is necessary or appropriate in the reasonable discretion of the Managing Member, not to exceed an amount equal to total operating expenses for the next two fiscal quarters, to (i) provide for the proper conduct of the business of the Company subsequent to such month or (ii) comply with applicable Law or any agreement or obligation to which the Company is a party or by which it is bound; provided, however , that distributions made by the Company or cash reserves established, increased or reduced after the end of such month but on or before the date of determination of Available Cash with respect to such month shall be deemed to have been made, established, increased or reduced, for purposes of determining Available Cash, within such month if the Managing Member so determines.

“ Bankrupt Member ” shall mean any Member:

(a) that (i) makes a general assignment for the benefit of creditors; (ii) files a voluntary bankruptcy petition; (iii) becomes the subject of an order for relief or is declared insolvent in any federal or state bankruptcy or insolvency Action; (iv) files a petition or answer for or seeking a reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief with respect to such Member under any Law; (v) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against such Member in an Action of the type described in subclauses (i) through (iv) of this clause (a) or (vi) seeks, consents or acquiesces to the appointment of a trustee, receiver or liquidator of such Member or of all or any substantial part of such Member’s properties; or

(b) against which an Action seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any Law has been commenced and 90 days have expired without dismissal thereof or with respect to which, without such Member’s consent or acquiescence, a trustee, receiver or liquidator of such Member, or of all or any substantial part of such Member’s properties, has been appointed and 60 days have expired without such appointments having been vacated or stayed or 60 days have expired after the date of expiration of a stay, if the appointment has not previously been vacated.

“ Board ” or “ Board of Managers ” shall have the meaning set forth in Section 3.2 .

“ Board of Managers Designee ” shall have the meaning set forth in Section 3.8(a) .

“ Book Value ” shall mean, with respect to any property of the Company, such property’s adjusted basis for U.S. federal income tax purposes, except as follows:

(a) The initial Book Value of any property contributed by a Member to the Company shall be the Fair Market Value of such property as determined in good faith by the Board of Managers as of the date of such contribution.

(b) The Book Values of all properties shall be adjusted to equal their respective Fair Market Values as determined by the Board of Managers in connection with (i) the acquisition of an interest (or additional interest) in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution to the Company or in exchange for the performance of more than a de minimis amount of services to or for the benefit of the Company, (ii) the distribution by the Company to a Member of more than a de minimis amount of property as consideration for an interest in the Company, (iii) the liquidation of the Company within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(g)(1) (other than pursuant to Code Section 708(b)(1)(B)), (iv) the acquisition of an interest in the Company by any new or existing Member upon the exercise of a non-compensatory option in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(s) or (v) any other event to the extent determined by the Board of Managers to be permitted and necessary to properly reflect Book Values in accordance with the standards set forth in Treasury Regulation Section 1.704-1(b)(2)(iv)(q).

(c) The Book Value of property distributed to a Member shall be adjusted to equal the Fair Market Value of such property as determined in good faith by the Board of Managers as of the date of such distribution.

(d) The Book Value of all property shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such property pursuant to Code Section 734(b) or 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m) and clause (f) of the definition of Profits or Losses; provided, however , that the Book Value of the property shall not be adjusted pursuant to this clause (d) to the extent that the Board of Managers reasonably determines an adjustment pursuant to clause (b) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this clause (d) .

(e) If the Book Value of property has been determined or adjusted pursuant to clauses (a) , (b) or (d) hereof, such Book Value shall thereafter be adjusted by the Depreciation taken into account with respect to such property for the purposes of computing Profits and Losses and other items allocated pursuant to Article VIII .

“ Business ” shall mean (a) the joint ownership and operation of the Project with Owner Operator as set forth in the Project Agreements, including the development, design, construction, operation and maintenance of, the marketing of capacity on, and the provision of transportation, compression and dehydration services for natural gas related to the Project, (b) ownership and operation of the Project after the term of the Lease Agreement, (c) any other activities related or incidental to, or in anticipation of, the actions described in clauses (a) and (b) above and (d) any other activities approved by Unanimous Consent.

“ Business Day ” shall mean any day on which banks are generally open to conduct business in the State of Texas.

“ Business Dispute ” shall have the meaning set forth in Section 3.14(a) .

“ C&O Agreement ” shall have the meaning set forth in Section 3.12(b) .

“ C&O Credit Support ” shall have the meaning set forth in Section 7.1(a)(ii) .

“ C&O Opportunity ” shall have the meaning set forth in Section 6.1 .

“ Capital Account ” shall mean the account to be maintained by the Company for each Member pursuant to Section 7.2 .

“ Capital Budget ” shall mean the budget with respect to all capital costs and expenses associated with the Project, which (i) shall be not less than the Company Original Capital Estimate and (ii) shall include all Company mandatory capital funding obligations under the C&O Agreement.

“ Capital Call ” shall have the meaning given in the C&O Agreement.

“ Capital Contribution ” shall mean, with respect to any Member, the amount of any money and the initial Book Value of any property (other than money) contributed (or deemed contributed for federal income tax purposes) to the Company with respect to the Company Interest held or purchased by such Member and credited to any such Member’s Capital Accounts pursuant to Article VII ; provided , however , that a Member may not contribute any property (other than money, other than in connection with an Equalization Expense under Section 7.1(a)(iii) ) unless such contribution has received Unanimous Consent. Any reference to the Capital Contributions of a Member will include the Capital Contributions made by a predecessor holder of such Member’s Company Interest to the extent such Capital Contributions were made in respect of the Company Interest Transferred to such Member.

“ Central Penn Line ” has the meaning set forth in the C&O Agreement.

“ Certificate ” shall have the meaning set forth in the Recitals.

“ Chairman of the Board ” shall have the meaning set forth in Section 3.6 .

“ Claim ” shall mean any and all debts, losses, liabilities, duties, claims, damages, obligations, payments (including those arising out of any demand, assessment, settlement, judgment or compromise relating to any actual or threatened Action), costs and reasonable expenses, including any reasonable attorneys’ fees and any and all reasonable expenses whatsoever and howsoever incurred in investigating, preparing or defending any Action, whether matured or unmatured, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, known or unknown.

“ Code ” shall mean the United States Internal Revenue Code of 1986, as amended.

“ COG ” shall have the meaning set forth in the Preamble and shall also mean any Transferee of any of COG’s Company Interest pursuant to Article V .

“ Company ” shall have the meaning set forth in the Recitals.

“ Company Insurance ” shall have the meaning set forth in Section 3.16 .

“ Company Interest ” shall mean, with respect to any Member, such Member’s respective membership interest in the Company. For the avoidance of doubt, Company Interests shall be uncertificated.

“ Company Original Capital Estimate ” means $746,136,000 (the amount that is equal to the Company’s Ownership Share of the CPL Original Capital Estimate, as such amount may be reduced from time to time under the terms of the C&O Agreement or any side letter or memorandum of understanding with respect to the C&O Agreement executed by Owner Operator and the Company).

“ Control ” (including the terms “Controlled by” and “under common Control with”) shall mean the possession, directly or indirectly, and whether acting alone or in conjunction with others of the authority to direct or cause the direction of the management or policies of a Person (a voting interest of 50 percent or more creates a rebuttable presumption of Control).

“ Covered Person ” shall have the meaning set forth in Section 3.15(b) .

“ CPL Original Capital Estimate ” shall have the meaning given in the C&O Agreement.

“ Default ” shall mean the occurrence and continuation of any of the following events with respect to any Member: (a) such Member’s failure to remedy, within 10 days of such Member’s receipt of written notice thereof from the Board of Managers or any other Member, such Member’s delinquency in making any Required Contribution, (b) the occurrence of any event that causes such Member to become a Bankrupt Member, (c) such Member’s failure to remedy, within 30 days of receipt of written notice thereof from the Board of Managers or any other Member, a material breach of any representation or warranty of such Member or the non-performance of or non-compliance with any other material agreement, obligation or undertaking of such Member contained in this Agreement (other than as contemplated in clause (a) above) and (d) the occurrence of any event that constitutes a material breach by such Member (or any of its Affiliates, if applicable) of, or a default by such Member (or any of its Affiliates, if applicable), of or an event of default applicable or attributable to such Member (or any of its Affiliates, if applicable) under any Affiliate Contract to which such Member (or any of such Member’s Affiliates) is a party.

“ Default Percentage Interest ” shall mean, with respect to any non-Delinquent Member (a) the Percentage Interest of such non-Delinquent Member divided by (b) the total of the Percentage Interests of all non-Delinquent Members.

“ Delinquent Interest Purchase Price ” shall have the meaning set forth in Section 7.1(b)(ii) .

“ Delinquent Member ” shall have the meaning set forth in Section 7.1(b) .

“ Depreciation ” shall mean, for each Allocation Period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable for U.S. federal income tax purposes with respect to any property for such Allocation Period, except that (a) with respect to any such property the Book Value of which differs from its adjusted tax basis for U.S. federal income tax purposes and which difference is being eliminated by use of the “remedial method” pursuant to Treasury Regulation Section 1.704-3(d), Depreciation for such Allocation Period shall be the amount of Book Value recovered for such Allocation Period under the rules prescribed by Treasury Regulation Section 1.704-3(d)(2) and (b) with respect to any other such property the Book Value of which differs from its adjusted tax basis at the beginning of such Allocation Period, Depreciation shall be an amount which bears the same ratio to such beginning Book Value as the U.S. federal income tax depreciation, amortization or other cost recovery deduction for such Allocation Period bears to such beginning adjusted tax basis; provided that if the adjusted tax basis of any property at the beginning of such Allocation Period is zero dollars ($0), depreciation with respect to such property shall be determined with reference to such beginning Book Value using any reasonable method selected by the Tax Matters Member in good faith.

“ Designating Party ” shall have the meaning set forth in Section 3.8(a) .

“ Dilution Ratio ” shall have the meaning set forth in Section 6.1(c) .

“ Disposition ” shall have the meaning given in the C&O Agreement.

“ Dispute Notice ” shall have the meaning set forth in Section 3.14(a) .

“ Dissolution Event ” shall have the meaning set forth in Section 10.1 .

“ Economic Risk of Loss ” shall have the meaning assigned to that term in Treasury Regulation Section 1.752-2(a).

“ Effective Date ” shall have the meaning set forth in the Preamble.

“ Emergency ” shall mean (a) any event that causes or could (in the reasonable discretion of the Board of Managers) risk causing (i) substantial damage to any of the assets or properties of the Company (including the Project or any expansion thereof constituting a Project Opportunity) or the property of any other Person, (ii) death of or injury to any Person, (iii) damage or substantial risk of damage to natural resources (including wildlife) or the environment, (iv) safety concerns associated with continued operations or the Company’s assets and properties (including the Project or any expansion thereof) or (v) noncompliance by the Company with any of its then existing obligations (under any contract or agreement to which it is a party, under Law or otherwise) or (b) an “Emergency” as defined in the O&M Agreement.

“ Emergency Expenditures ” shall mean any costs and expenses incurred in connection with any Emergency.

“ Equalization Expense ” means the amount each Member shall be required to reimburse any other Member for the reimbursing Member’s proportionate share (according to its respective Percentage Interests) of any Pre-Effective Date Expenditures; provided that the aggregate amount of all Equalization Expenses shall not exceed $1,000,000.

“ Fair Market Value ” shall mean, as of the time of determination, the value of any specified interest or property that would be obtained in an arm’s-length transaction for cash between an informed and willing buyer and an informed and willing seller, neither of whom is under any compulsion to purchase or sell, respectively.

“ FERC ” means the Federal Energy Regulatory Commission or its successor.

“ FERC Authorization ” shall mean the necessary authorizations from FERC under the NGA for the Company to own and operate its undivided interest in the Central Penn Line.

“ Fiscal Year ” means the taxable year of the Company, which shall end on September 30 of each calendar year unless, for U.S. federal income tax purposes, another taxable year is required under Section 706 of the Code. The Company shall have the same fiscal year for U.S. federal income tax purposes and for accounting purposes.

“ Funding Member ” shall have the meaning set forth in Section 6.1(b) .

“ GAAP ” shall mean generally accepted accounting principles in the United States, consistently applied.

“ Governmental Entity ” shall mean any (a) national, state, county, municipal or local government (whether domestic or foreign) and any political subdivision thereof, (b) court or administrative tribunal, (c) other governmental, quasi-governmental, judicial, public or statutory instrumentality, authority, body, agency, bureau or entity of competent jurisdiction (including any zoning authority, or state public utility commission or any comparable authority), (d) non-governmental agency, tribunal or entity that is properly vested by a governmental authority with applicable jurisdiction, and (e) arbitrator.

“ In-Service Budget ” shall have the meaning given such term in Section 3.13(a)(i) .

“ In-Service Date ” shall have the meaning given in the C&O Agreement.

“ Law ” shall mean any applicable constitutional provision, statute, act, code (including the Code), law, regulation, rule, ordinance, order, decree, ruling, proclamation, resolution, judgment, decision or declaration of a Governmental Entity.

“ Lease Agreement ” shall have the meaning set forth in Section 3.12(d) .

“ Lien ” shall mean any mortgage, pledge, hypothecation, security interest, encumbrance, lien, charge or deposit arrangement or other arrangement having the practical effect of any of the foregoing.

“ Major Cost Overrun Capital Call ” shall have the meaning given in the C&O Agreement.

“ Manager ” shall mean a member of the Board of Managers as designated by the applicable Member.

“ Managing Member ” shall mean WGL, subject to replacement under Section 3.1(a) and Section 3.11(a)(xiii) ; provided however, that any Transferee of all of WGL’s Percentage Interest shall only become Managing Member upon Super Majority Consent.

“ Managing Member Indemnified Parties ” shall mean the Company, the Managing Member and its Affiliates and any of the Managing Member’s and its Affiliates’ respective directors, officers, employees, agents, managers, members and representatives.

“ Member ” shall mean (i) WGL, COG, Vega and RRI, (ii) Vega Carryco, subject to the limitations provided in Section 2.12 and (iii) any Person hereafter admitted to the Company as a Member as provided in this Agreement, but such term does not include any Person who has ceased to be a Member in the Company.

“ Member Consolidated Group ” shall have the meaning set forth in Section 9.6 .

“ Member Nonrecourse Debt ” shall have the meaning assigned to the term “partner nonrecourse debt” in Treasury Regulation Section 1.704-2(b)(4).

“ Member Nonrecourse Debt Minimum Gain ” shall have the meaning assigned to the term “partner nonrecourse debt minimum gain” in Treasury Regulation Section 1.704-2(i)(2).

“ Member Nonrecourse Deductions ” shall have the meaning assigned to the term “partner nonrecourse deductions” in Treasury Regulation Section 1.704-2(i)(2).

“ Minimum Gain ” shall have the meaning assigned to the term “partnership minimum gain” in Treasury Regulation Section 1.704-2(d).

“ MOU Agreement ” shall have the meaning set forth in Section 3.12(e) .

“ NGA ” shall mean the Natural Gas Act, 15 U.S.C. § 717, et seq. as amended.

“ Nonrecourse Deductions ” shall have the meaning assigned to that term in Treasury Regulation Section 1.704-2(b).

“ Non-Funding Member ” shall have the meaning set forth in Section 6.1(c) .

“ Non-Managing Member Indemnified Parties ” shall mean the Company, each Non-Managing Member and its Affiliates and each of such Non-Managing Member’s and its Affiliates’ respective directors, officers, employees, agents, managers, members and representatives.

“ Non-Managing Member Parties ” shall mean all Members other than the Managing Member.

“ Non-Selling Members ” shall have the meaning set forth in Section 5.3 .

“ O&M Agreement ” shall have the meaning set forth in Section 3.12(c) .

“ Offered Interest ” shall have the meaning set forth in Section 5.3 .

“ Overage Dilution Ratio ” shall have the meaning set forth in Section 6.2(c) .

“ Overage Funding Member ” shall have the meaning set forth in Section 6.2(b) .

“ Overage Non-Funding Member ” shall have the meaning set forth in Section 6.2(c) .

“ Owner Operator ” shall have the meaning set forth in the Recitals and to the extent a successor or assign of Owner Operator’s interest in the Project assumes Owner Operator’s obligations under a Project Agreement, shall also include any permitted successor or assign of Owner Operator’s interest in the Project, pursuant to the terms of the Project Agreements.

“ Ownership Share ” shall have the meaning given in the C&O Agreement.

“ Parent ” shall mean (a) in the case of WGL, WGL Midstream, Inc., (b) in the case of COG, Cabot Oil & Gas Corporation, (c) in the case of Vega, Vega Energy Partners, Ltd., (d) in the case of RRI, EIF Meade Pipeline, LLC, and (e) in the case of any other Member, the Person that at the time of such Member’s admittance as a member in accordance with the terms and provisions of this Agreement, Controls such Member.

“ Parent Executive ” shall have the meaning set forth in Section 3.14(b) .

“ Percentage Interest ” shall mean (a) with respect to the Company Interest owned by WGL as of the Effective Date, 55%, (b) with respect to the Company Interest owned by COG as of the Effective Date, [*****]%, (c) with respect to the Company Interest owned by Vega as of the Effective Date, [*****]% (d) with respect to the Company Interest owned by RRI as of the Effective Date [*****]% (e) with respect to the Company Interest owned by Vega Carryco as of the Effective Date, [*****]% and (f) with respect to the Company Interest owned by any other Person admitted as a Member in accordance with the terms and provisions of this Agreement, such Person’s Company Interest in the Company as of the effective date of such Person’s admission as a Member, in each case, as the relevant percentages may change from time to time as such Member(s)’ Company Interests may change as a result of the admission of a new Member or permitted Transfers, pursuant to the provisions of Section 6.1(c) , Section 6.2(c) , Section 7.1(b) or otherwise; provided, however that the “Percentage Interest” of each Member may be reduced in accordance with Section 6.1(c) , Section 6.2(c) , and Section 7.1(b) ; provided further, that, with respect to the Company Interests owned by WGL and Vega, as more particularly described in the WGL Side Letter, as of the Vega Funding Date (y) WGL’s Percentage Interest (as it may change from time to time) shall be increased by an amount equal to the [*****] and (z) Vega’s Percentage Interest (as it may change from time to time) shall be decreased by an amount equal to [*****]. For the sake of clarity, Vega Carryco shall only be a Member for all purposes hereunder as set forth in Section 2.12 .

“ Permitted Variance Amount ” means any variance to the then applicable Annual Budget, Post-Lease In-Service Budget, or Post-Lease Annual Budget by an amount equal to [*****]% of such Annual Budget, Post-Lease In-Service Budget, or Post-Lease Annual Budget, on an aggregate basis.

“ Person ” shall mean any individual or entity, including any corporation, limited liability company, partnership (general or limited), joint venture, association, joint stock company, trust, incorporated organization or Governmental Entity.

“Pre-Effective Date Expenditures” shall mean any third party costs and expenses that were (i) incurred by any Member on behalf of the other Members prior to the Effective Date, (ii) directly related to the (y) origination or evaluation of the Project and/or (z) negotiation or documentation of this Agreement, the Project Agreements and other definitive agreements related thereto, and (iii) approved by the Members pursuant to Section 7.1(a)(iii) if required to be so approved.

“ Post-Lease Project Agreement ” shall mean any material agreement related to the Project following the termination of the Lease Agreement.

“ Post-Lease Annual Budget ” shall have the meaning set forth in Section 3.13(b)(ii) and, when used in this Agreement (other than in the definition of “Permitted Variance Amount”), shall be deemed to include the Permitted Variance Amount.

“ Post-Lease In-Service Budget ” shall have the meaning set forth in Section 3.13(b)(i) and, when used in this Agreement (other than in the definition of “Permitted Variance Amount”), shall be deemed to include the Permitted Variance Amount.

“ Press Release ” shall have the meaning set forth in Section 4.4 .

“ Profits ” or “ Losses ” shall mean, for each Allocation Period, an amount equal to the Company’s taxable income or loss for such period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments (without duplication):

(a) any income of the Company that is exempt from U.S. federal income tax and not otherwise taken into account in computing Profits and Losses pursuant to this definition of “Profits” or “Losses” shall be added to such taxable income or loss;

(b) any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits and Losses pursuant to this definition of “Profits” or “Losses,” shall be subtracted from such taxable income or loss;

(c) in the event the Book Value of any asset is adjusted pursuant to clause (b) or (c) of the definition of Book Value, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the Book Value of the asset) or an item of loss (if the adjustment decreases the Book Value of the asset) from the disposition of such asset and shall, except to the extent allocated pursuant to Section 8.2(b) , be taken into account for purposes of computing Profits and Losses for the Allocation Period ending on the day preceding such adjustment;

(d) gain or loss resulting from any disposition of property with respect to which gain or loss is recognized for U.S. federal income tax purposes shall be computed by reference to the Book Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Book Value;

(e) in lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation;

(f) to the extent an adjustment to the adjusted tax basis of any asset pursuant to Code Section 734(b) is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Account balances as a result of a distribution other than in liquidation of a Member’s interest in the Company, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or an item of loss (if the adjustment decreases such basis) from the disposition of such asset and shall be taken into account for purposes of computing Profits and Losses; and

(g) any items that are allocated pursuant to Section 8.2 shall not be taken into account in computing Profits and Losses, but such items available to be specially allocated pursuant to Section 8.2 will be determined by applying rules analogous to those set forth in clauses (a) through (f) above.

“ Project ” shall mean the capital project described in Annex A .

“ Project Agreements ” shall have the meaning set forth in Section 3.12(a) .

“ Project Opportunity ” shall mean any Project expansion opportunity that arises under the C&O Agreement and applies to the Company.

“ Recoverable Amounts ” shall have the meaning set forth in Section 3.15(b) .

“ Reporting Member ” shall have the meaning set forth in Section 9.6 .

“ Required Consent ” shall mean the consent of Managers appointed by one or more Members collectively holding at least sixty five percent (65%) of all the Percentage Interests entitled to vote on such action at the time such action is taken at a meeting where a quorum is present (or through a written consent in accordance with the provisions of Section 3.4 ).

“ Required Consent Decision ” shall have the meaning given such term in Section 3.10(a) .

“ Required Contribution ” shall have the meaning set forth in Section 7.1(a)(ii) .

“ ROFO Acceptance Notice ” shall have the meaning set forth in Section 5.3 .

“ ROFO Deadline ” shall have the meaning set forth in Section 5.3 .

“ ROFO Offer ” shall have the meaning set forth in Section 5.3 .

“ RRI ” shall have the meaning set forth in the Preamble and shall also mean any Transferee of any of RRI’s Company Interest pursuant to Article V .

“ Securities Act ” shall mean the Securities Act of 1933, as amended.

“ Selling Member ” shall have the meaning set forth in Section 5.3 .

“ Subsidiary ” shall mean, when used with respect to any Person, any Person that is Controlled by such Person.

“ Super Majority Consent ” shall mean the consent of Managers appointed by one or more Members collectively holding 81% of all of the Company Interests entitled to vote on such action at the time such action is taken.

“ Super Majority Consent Decision ” shall have the meaning given such term in Section 3.11(a) .

“ Tax ” shall mean any tax or similar governmental charge, impost, levy, fee and/or assessment, however denominated (including any income tax, business asset tax, franchise tax, net worth tax, capital tax, estimated tax, withholding tax, use tax, gross receipts tax, sales tax, transfer tax or fee, excise tax, real and personal property tax, ad valorem tax, value added tax, payroll related tax, employment tax, unemployment insurance tax, social security tax, minimum tax and any import duty and/or other obligation of the same or a similar nature), together with any related liability, penalty, fine, addition to tax and/or interest, whether imposed at the national, state and/or local level.

“ Tax Matters Member ” shall have the meaning assigned to the term “tax matters partner” in Code Section 6231(a)(7) and the meaning set forth in Section 9.3(a) .

“ Transfer ” shall mean any voluntary or involuntary sale, assignment, transfer, conveyance, exchange, bequest, devise, gift, hypothecation, pledge, security interest or any other alienation, disposition or encumbrance, in each case, to any Person with or without consideration of any rights, interests or obligations with respect to the Company Interest of a Member, excluding, however, the granting by any Member of a Lien on the Company Interest of such Member but including any foreclosure and other enforcement remedies relating to such Lien. “ Transferred ” and “ Transferring ” shall have correlative meanings.

“ Transferee ” shall mean a Person who receives a Member’s Company Interest through a Transfer.

“ Treasury Regulation ” shall mean the regulations promulgated under the Code by the U.S. Department of the Treasury (whether final or temporary).

“ Unanimous Consent ” shall mean the consent of Managers appointed by one or more Members collectively holding 100% of all of the Percentage Interests entitled to vote on such action at the time such action is taken.

“ Unanimous Consent Decision ” shall have the meaning set forth in Section 3.11(b) .

“ Vega ” shall have the meaning set forth in the Preamble and shall also mean any Transferee of any of Vega’s Company Interest pursuant to Article V .

“ Vega Carryco ” shall have the meaning set forth in the Preamble and shall also mean any Transferee of any of Vega Carryco’s Company Interest pursuant to Article V .

“ Vega Funding Date ” shall have the meaning set forth in Section 7.1(a)(ii) .

“ WGL ” shall have the meaning set forth in the Preamble and, except as set forth in the definition of Managing Member, shall also mean any Transferee of any of WGL’s Company Interest pursuant to Article V .

“ WGL Distributions ” shall have the meaning set forth in Section 8.5(a) .

“ WGL Preference Amount ” shall mean an amount, but not less than $0, equal to (a) the sum of all Capital Contributions made by WGL, less (b) the sum of all amounts distributed to WGL pursuant to Section 8.5(b)(ii) .

“ WGL Side Letter ” shall mean that certain side letter between Vega and WGL dated on or about the date hereof relating to the Vega Company Interests and certain obligations described in Section 7.1(a)(ii) .

Section 1.2 Construction . Unless the context requires otherwise: (a) the gender (or lack of gender) of all words used in this Agreement includes the masculine, feminine and neuter; (b) references to Articles, Sections and Annexes refer to Articles, Sections and Annexes of this Agreement; (c) references

to Laws refer to such Laws as they may be amended from time to time, and references to particular provisions of a Law include any corresponding provisions of any succeeding Law; (d) references to money refer to legal currency of the United States of America; (e) the word “including” shall mean “including, without limitation” and (f) all capitalized terms defined herein are equally applicable to both the singular and plural forms of such terms.

ARTICLE II

ORGANIZATION

Section 2.1 Formation . The Company was formed on the Effective Date as a Delaware limited liability company by the filing of the Certificate under and pursuant to the Act.

Section 2.2 Name . The name of the Company is “Meade Pipeline Co LLC” and all Company business must be conducted in that name or such other names that comply with Law as the Board of Managers may approve by Super Majority Consent.

Section 2.3 Registered Office; Registered Agent; Place of Business .

(a) The registered office of the Company required by the Act to be maintained in the State of Delaware shall be the office of the initial registered agent for service of process named in the Certificate or such other office (which need not be a place of business of the Company) as the Board of Managers may designate in the manner provided by Law.

(b) The registered agent for service of process of the Company in the State of Delaware shall be the initial registered agent for service of process named in the Certificate or such other Person or Persons as the Managing Member may designate in the manner provided by Law.

(c) The principal office of the Company in the United States shall be at such place as the Board of Managers may designate which need not be in the State of Delaware, and the Company shall maintain records there or such other place as the Board of Managers shall designate. The initial principal office shall be the office of the Managing Member.

Section 2.4 Purpose; Powers .

(a) The purpose of the Company is solely to engage in the Business.

(b) The Company (i) shall possess and may exercise all the powers and privileges granted by the Act or by any Law or by this Agreement together with any powers incidental thereto, insofar as such powers and privileges are necessary, appropriate, proper, advisable, incidental or convenient to, or in furtherance of, the Business and (ii) has, without limitation, any and all powers that may be exercised on behalf of the Company by the Board of Managers and the Managing Member pursuant to Article III .

Section 2.5 Foreign Qualification . The Company shall execute and cause to be filed original or amended articles and/or certificates and shall take any and all other actions as may be reasonably necessary to perfect and maintain the status of the Company as a limited liability company or similar type of entity under the laws of any other jurisdictions in which the Company engages in business. At the request of the Board of Managers, each Member shall execute, acknowledge, swear to, and deliver all certificates and other instruments conforming with this Agreement that are necessary or appropriate to qualify, continue, and terminate the Company as a foreign limited liability company or similar type of entity in all such jurisdictions in which the Company may conduct business.

Section 2.6 Term . The Company commenced on January 28, 2014 by the filing of the Certificate with the Secretary of State of the State of Delaware, and its existence shall be perpetual, unless and until a Certificate of Cancellation is filed with the State of Delaware in accordance with Section 10.2(d) .

Section 2.7 No State-Law Partnership . The Members intend that the Company shall be a limited liability company and, without limiting the provisions of Section 9.1 with respect to U.S. federal income tax treatment (and other tax treatment consistent therewith), the Company shall not be a state Law partnership (including a limited partnership) or joint venture, and no Member shall be a state Law partner or joint venturer of any other Member, for any purposes, and this Agreement may not be construed to suggest otherwise.

Section 2.8 Title to Company Assets . Title to Company assets, whether tangible, intangible, real, personal or mixed, shall be deemed to be owned by the Company as an entity, and no Member shall individually have any direct ownership in Company property. Title to any or all of the Company assets shall be held in the name of the Company and all contracts, permits, applications and other intangible assets and rights of the Company shall be entered into by, or held in the name of, the Company. All Company assets shall be recorded as the property of the Company in its books and records. The Company’s credit and assets shall be used solely for the benefit of the Company, and no asset of the Company shall be transferred or encumbered for, or in payment of, any individual obligation of any Member or Manager.

Section 2.9 No Power to Bind Company or Other Members . A Member, or an Affiliate of a Member, may not take any action purporting to bind the Company, any other Member or their respective Affiliates, except as provided in this Agreement with respect to the Company. All actions undertaken by the Members and their Affiliates, or any of them, are at their sole risk and expense except (a) for actions undertaken by the Managing Member or the Board of Managers on behalf of the Company within the scope of its authority under this Agreement or (b) for actions (and/or obligations) to the extent, if any, that the Company (or the Managing Member acting on behalf of the Company), with the approval of the Board of Managers if required in accordance with this Agreement, ratifies or assumes, as applicable, such actions and/or obligations in accordance with this Agreement. Subject to the foregoing and the proviso set forth at the end of this sentence, no Member (nor any of its Affiliates) is an agent, employee, contractor, vendor, representative or (except for tax purposes) partner of any other Member or its Affiliates by virtue of its execution of this Agreement, and no Member (nor any of its Affiliates) may hold itself out as such; provided, however , that (a) the Managing Member may act on behalf of the Company as provided in this Agreement and (b) the Members and their Affiliates may, subject to any applicable terms hereof, be parties to Affiliate Contracts.

Section 2.10 Liability to Third Parties . No Member (including the Managing Member in its capacity as a Member or in its capacity as the Managing Member) shall be liable for the debts, obligations or liabilities of the Company solely by reason of being a Member.

Section 2.11 Member Obligations .

(a) Any Member and its Affiliates may engage, directly or indirectly, without the consent or approval of any other Member or the Company, in the businesses conducted by such Member and its Affiliates as of the Effective Date and in any other business opportunities (including any transactions, ventures or other arrangements of any nature or description, independently or with others, including business of a nature that may be competitive with or the same as or similar to the Business, regardless of the geographic location of such business), all without any duty or obligation to account to any other Member or the Company in connection therewith. Nothing herein is intended to create a partnership, joint

venture, agency or other relationship creating fiduciary or quasi-fiduciary duties or similar duties and obligations or subject any Member to joint and several or vicarious liability or to impose any duty, obligation or liability that would arise therefrom with respect to any or all of the Members or the Company. To the extent that, at law or in equity, a Member has any fiduciary or other duty to the Company or to any other Member pursuant to this Agreement (other than as expressly set forth in this Agreement), such duty is hereby eliminated to the maximum extent permitted pursuant to Section 18-1101(c) of the Act. Notwithstanding anything to the contrary in this Agreement, (i) each Member (and its designated Managers) shall be permitted to vote its Company Interest in its own self-interest and (ii) (A) the doctrine of corporate opportunity, or any analogous doctrine, shall not apply to any Member; (B) no Member that (directly or through an Affiliate) acquires knowledge of a potential transaction, agreement, arrangement or other matter that may be an opportunity for the Company shall have any duty to communicate or offer such opportunity to the Company or any other Member, and such Member shall not be liable to the Company, to any other Member or any other Person for breach of any fiduciary or other duty by reason of the fact that such Member pursues or acquires such opportunity for itself or any of its Affiliates, directs such opportunity to another Person or does not communicate such opportunity or information to the Company and (C) neither the Company nor any Member shall have any right, by virtue of this Agreement, to share or participate in such other businesses, investments or activities of a Member or to the income or proceeds derived therefrom.

(b) Notwithstanding anything else in this Agreement to the contrary (including, for the avoidance of doubt, Section 3.15 ), in no event shall the Managing Member be considered to be in breach of any of its obligations under this Agreement as Managing Member (or liable to the Non-Managing Member Indemnified Parties with respect to the performance of any such obligations), unless (and then only to the extent that) such breach results from the Managing Member’s negligence or willful misconduct.

(c) Each Member hereby represents and warrants to the Company and each other Member that, as of the Effective Date, and with respect to any Transfer, as of the date of such Transfer (i) it is duly incorporated or formed, as applicable, validly existing and in good standing under the Laws of the state of its formation, and, if required by Law, is duly qualified to do business and is in good standing in each jurisdiction in which it conducts any of its business, (ii) it has full limited liability company or corporate, as applicable, power and authority to execute and deliver this Agreement and to perform its obligations hereunder and all necessary actions by the managers, members or other Persons necessary for the due authorization, execution, delivery and performance of this Agreement by such Member have been duly taken or received, as applicable, (iii) it has duly executed and delivered this Agreement, and this Agreement is enforceable against such Member in accordance with its terms, subject to applicable bankruptcy, moratorium, insolvency and other applicable Laws generally affecting creditors’ rights and general principles of equity (whether applied in an Action in a court of law or equity), (iv) its authorization, execution, delivery and performance of this Agreement does not conflict with, or result in a breach, default or violation of (A) the organizational documents of such Member, or (B) any material obligation under any material agreement or arrangement to which such Member is a party or by which it is (or any of its assets are) bound, (v) it (A) has been furnished with such information about the Company and the Company Interests as such Member has requested, (B) has made its own independent inquiry and investigation into, and based thereon has formed an independent judgment concerning, the Company and the Company Interests, (C) has adequate means of providing for its current needs and possible individual contingencies and is able to bear the economic risks of an investment in the Company (and the Company Interests) and has a sufficient net worth to sustain a loss of its entire investment in the Company (and the Company Interests), (D) is an “accredited investor” within the meaning of “accredited investor” under Regulation D of the Securities Act and (E) it understands and agrees that its Company Interest shall not be Transferred or Disposed, except in accordance with the terms of this Agreement and the C&O Agreement.

Section 2.12 Vega Carryco . Vega Carryco and each other Member agrees that Vega Carryco shall only be considered a “Member” and shall only have rights or obligations as a “Member” under or with respect to Section 3.10(b) , Section 7.2 , Article II , Article IV , Article VIII , Article IX , Article X and Article XI .

ARTICLE III

MANAGEMENT

Section 3.1 Generally .

(a) The management of the Company (which, for all purposes of this Article III , shall include any Subsidiaries of the Company) is fully vested in the Members, acting exclusively in their member capacities; provided, however, that WGL will serve as the Managing Member of the Company with the power and authority described in this Section 3.1(a) in addition to any authority expressly granted to the Managing Member elsewhere in this Agreement. The Managing Member shall constitute a “manager,” as the term is used in the Act, but no manager, employee or agent of the Company, or the Non-Managing Member Parties, shall constitute “managers.” Decisions or actions taken by the Managing Member in accordance with the provisions of this Agreement shall constitute decisions or actions by the Company and shall be binding on the Company, and to the extent set forth in this Agreement, each Member. Subject to the limitations set forth below, including any requirement for Required Consent, Super Majority Consent, or Unanimous Consent, and except as otherwise expressly provided in this Agreement (it being understood and agreed that in the event of any inconsistency between this Section 3.1(a) and any other provision of this Agreement, such other provision shall control), the Managing Member shall have the exclusive right and full authority to manage, conduct and control the business of the Company consistent with the purposes of the Company.

(b) Any Person dealing with the Company, other than a Member or a Member’s Affiliate, may rely on the authority of the Managing Member or the Board of Managers in taking any action in the name of the Company without inquiry into the provisions of this Agreement or compliance with it, regardless of whether such action actually is taken in compliance with the provisions of this Agreement. Except as otherwise agreed by Unanimous Consent, and in furtherance of Section 2.9 , no Member, other than the Managing Member acting within the scope of its authority, shall have any unilateral right or authority to take any action on behalf of the Company or to bind or commit the Company to any agreements, transactions or other arrangements with respect to third parties or otherwise to hold itself out as an agent of the Company. The Board of Managers may delegate to the Managing Member any of its authority relating to the Business; provided, however , that, to the extent that the exercise by the Board of Managers of any authority delegated to the Managing Member would require a Required Consent, a Unanimous Consent or a Super Majority Consent vote of the Board of Managers, then the delegation of such authority to such Member may only be made upon such Required Consent, Unanimous Consent or Super Majority Consent of the Board of Managers, as applicable. Except as otherwise expressly provided in this Agreement, each Member hereby (i) specifically delegates to the Managing Member and the Board of Managers its rights and powers to manage and control the business and affairs of the Company in accordance with the provisions of Section 18-407 of the Act and (ii) waives its right to bind the Company, as contemplated by the provisions of Section 18-402 of the Act.

(c) Notwithstanding anything to the contrary herein, neither the Managing Member nor any Member shall have any obligation under the terms of this Agreement to take any action or make any expenditures that would require spending any amount that any Member has failed to fund in Default and any amount in excess of the amounts that the Board of Managers is permitted to spend in accordance with the Capital Budget or any approved In-Service Budget, Post-Lease In-Service Budget, Annual Budget or Post-Lease Annual Budget or otherwise in accordance with the provisions of this Agreement. Neither the Managing Member nor any Member shall have any liability for any failure to take any such action or make any such expenditures.

Section 3.2 Company Board . A Board of Managers (the “ Board of Managers ” or the “ Board ”) shall be established by the Company. The purpose of the Board shall be to consider and make the Unanimous Consent Decisions, the Super Majority Consent Decisions and the Required Consent Decisions. To the extent not expressly designated as a Unanimous Consent Decision, a Super Majority Consent Decision or a Required Consent Decision, and except as otherwise provided in Section 2.9 or otherwise in this Agreement, all decisions regarding the management of the business and affairs of the Company shall be made by the Managing Member.

Section 3.3 Meetings .

(a) Place of Meetings . Meetings of the Board of Managers, regular or special, will be held at such places as are convenient to a majority of Members, as may be specified by the Managing Member or a Manager in the case of a special meeting, as the case may be. In the absence of specific designation, meetings of the Board of Managers shall be held at the principal office of the Company.

(b) Regular Meetings . The Board of Managers shall meet on a quarterly basis at such times and places as may be fixed from time to time by the Board or the Managing Member and communicated to all Managers. Any and all business may be transacted at any regular meeting.

(c) Special Meetings . Special meetings of the Board of Managers shall be held at any time upon the call of any Manager. If a Manager desires the Company to take or authorize any action that requires approval of the Board of Managers, the Manager shall request that the Board of Managers take action with respect thereto by so notifying the Board of Managers and describing in such notification (i) the nature of the transaction or business and (ii) the proposed course of action recommended by the Manager. The Manager shall deliver the notification referred to above, together with any available information that is reasonably necessary to enable the Board of Managers to consider the advisability of the proposed course of action, to the Board of Managers a reasonable period of time prior to the date by which action is to be taken as proposed therein. Notice of any such special meeting shall be in writing and shall be given personally or by facsimile or electronic mail to each member of the Board of Managers at least two Business Days prior to the date of the meeting.

(d) Attendance at and Notice of Meetings . Attendance at a meeting of the Board of Managers shall constitute a waiver of notice of such meeting, except where a Manager attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened, not authorized by the Agreement or impermissible as a matter of Law.

(e) Quorum . At all meetings of the Board of Managers, the quorum required for the transaction of any business shall consist of the presence, either in person or by proxy, of at least a majority of Managers and a Manager appointed by the Managing Member. A meeting at which a quorum is initially present may continue to transact business, notwithstanding the withdrawal of Managers.

(f) Chairman. The Chairman of the Board, if present and acting, shall preside at all meetings of the Board of Managers. Otherwise, any other Manager chosen by the Managing Member shall preside.

(g) Proxy . Each Board of Managers Designee entitled to vote at a meeting of the Board of Managers may authorize another Board of Managers Designee appointed by the same Designating Party to act for such Board of Managers Designee by proxy, but no such proxy shall be voted or acted upon

after 11 months from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in Law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in an Interest itself or an interest in the Company generally.

(h) Telephonic Meetings. The Board of Managers may hold meetings by means of conference telephone or similar communications equipment by means of which all of the Managers participating in the meeting can hear each other, and participation in such meeting shall constitute attendance and presence in person at such meeting.

Section 3.4 Written Consent . To the extent permitted by applicable Law, any action required or permitted to be taken at any regular or special meeting of the Board of Managers may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken shall have been sent in advance to all Managers and shall be signed by the Managers representing the Percentage Interest of the Members required to take such action hereunder.

Section 3.5 Minutes . All decisions and resolutions of the Board of Managers shall be reported in the minutes of its meetings, which shall state the date, time and place of the meeting (or the date of the written consent in the case of a consent executed in lieu of a meeting), the persons present at the meeting, the resolutions put to a vote (or the subject of a written consent) and the results of such voting (or written consent). The minutes of all meetings of the Board of Managers shall be circulated to all Managers as soon as practical after each meeting and shall be kept at the principal office of the Company.

Section 3.6 Board of Managers Composition; Initial Managers . The Board shall consist of two Managers appointed by each Member. One of the Managers appointed by the Managing Member shall be designated by the Board to act as the Chairman of the Board (the “ Chairman of the Board ”). Each Manager appointed to the Board of Managers shall serve until his or her successor is duly appointed or until his or her earlier death, removal or resignation. Each Member’s cumulative vote shall hold the relative weight corresponding to its respective Percentage Interest. Each Member shall have the right to bring one or more observers to meetings of the Board.

Section 3.7 Manager Qualifications . Each Manager shall be a natural person. A Manager need not be a resident of the State of Delaware or a Member of the Company.

Section 3.8 Removal and Replacement of Managers .

(a) If any member of the Board of Managers appointed by COG, WGL, RRI or Vega (in such capacity, the “ Designating Party ”) pursuant to Section 3.6 above (each, a “ Board of Managers Designee ”) shall cease to serve as a member of the Board of Managers for any reason, the vacancy resulting thereby shall be filled by another individual to be designated by that Designating Party.

(b) Each Board of Managers Designee may be removed and replaced, with or without cause, at any time by his or her respective Designating Party in such Designating Party’s sole discretion, but, may not be removed or replaced by any other means. A Designating Party who removes one or more of its Board of Managers Designees from the Board of Managers shall promptly notify the other Designating Parties as to the name of its replacement designee(s). Should any Board of Managers Designee be unwilling or unable to continue to serve, or otherwise cease to serve (including by reason of his or her involuntary removal or the expiration of any applicable term of office), then the Designating Party of such Board of Managers Designee shall designate another Person to fill the resulting vacancy on the Board of Managers.

(c) A Manager may resign from the Board of Managers at any time by giving written notice to the Company and his or her Designating Party. Such resignation shall take effect three Business Days following receipt of that notice or at such later time as shall be specified in the notice. Unless otherwise specified in the notice, the acceptance of a resignation shall not be necessary to make it effective.

Section 3.9 Compensation .

(a) The Managers shall not receive any compensation, payments or reimbursements from the Company for their service hereunder.

(b) The Company shall reimburse the Managing Member for all reasonable costs and expenses, including all overhead, administrative and general charges, and in-house expenses, incurred by it in performing its obligations as Managing Member and Tax Matters Member under this Agreement. All reimbursement due to the Managing Member under this Section 3.9(b) will be approved as part of the Annual Budget and Post-Lease Annual Budget.

Section 3.10 Actions by the Board of Managers .

(a) All Super Majority Consent Decisions and Unanimous Consent Decisions shall be approved and passed by Super Majority Consent or Unanimous Consent (as applicable) at a meeting at which a quorum is present (or through a written consent in accordance with the provisions of Section 3.4 ). To the extent not specifically designated as a Unanimous Consent Decision or a Super Majority Consent Decision, all decisions otherwise expressly designated in this Agreement for approval by the Board of Managers shall be approved and passed by Required Consent (each a “ Required Consent Decision ”).

(b) Notwithstanding the foregoing, the Company shall not at any time without the express written consent of Vega Carryco, which Vega Carryco may withhold in its sole discretion:

(i) through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, or by amendment of this Agreement, (A) alter or change the terms related to Vega Carryco’s distribution rights under Section 8.5 , or any other rights of Vega Carryco under any provision of this Agreement where it is considered a Member; provided, however, that the foregoing shall not limit the right of WGL to Transfer its Percentage Interest, or (B) impose any additional obligations on Vega Carryco under this Agreement; or

(ii) grant any Liens on, or otherwise encumber, any assets of the Company (other than in the ordinary course of business by operation of law (including mechanics’ and other statutory Liens)) or take any other action to modify or subordinate the distribution rights of Vega Carryco under Section 8.5 of this Agreement; provided that the foregoing shall not restrict the Company from entering into any indebtedness approved by Unanimous Consent Decision, and granting Liens in connection therewith where the proceeds of such indebtedness are (A) directly used by the Company for the Business and are not distributed to the Members or (B) distributed to the Members (including Vega Carryco) pursuant to the terms of Section 8.5 .

Section 3.11 Super Majority Consent Decisions and Unanimous Consent Decisions .

(a) Neither the Company nor the Board of Managers shall cause the Company to take any of the following actions without first having obtained Super Majority Consent (each, a “ Super Majority Consent Decision ”):

(i) subject to Section 3.11(b)(i) , sell, exchange, transfer, lease, dispose, surrender or abandon any assets of the Company having a Fair Market Value (at such time) of more than $5,000,000, in one or more related transactions in any Fiscal Year;

(ii) initiate, settle, compromise, resolve or dismiss any litigation, arbitrations or administrative proceedings where the estimated amount in controversy, or the estimated settlement amount to be paid or received, in each case, is greater than $1,000,000; provided, that with respect to any litigation to be filed against Owner Operator under the Lease Agreement, such action shall only require Required Consent;

(iii) approve any (A) Capital Budget, Annual Budget, In-Service Budget, Post-Lease Annual Budget or Post-Lease In-Service Budget; provided that the amounts set forth in the definition of “Capital Budget” shall be deemed approved by the Board of Managers, (B) except to the extent constituting an Emergency Expenditure, any amendment, supplement or modification to the Capital Budget, the In-Service Budget or subject in each case to the Permitted Variance Amount, any approved Post-Lease In-Service Budget, Annual Budget or Post-Lease Annual Budget, or (C) Emergency Expenditure (i) before the termination of the Lease Agreement in excess of $1,000,000 and (ii) after the termination of the Lease Agreement in excess of $10,000,000 that requires a Required Contribution and is not required under the C&O Agreement;

(iv) enter into, modify, amend, terminate or replace any Affiliate Contract or any of the Project Agreements;

(v) approve any Major Cost Overrun Capital Call, as further described in Section 6.2 ;

(vii) change the name of the Company;

(viii) approve of the FERC Authorization and any other material filings regarding the Company with any state or federal regulatory agency, including FERC or other regulatory authority; provided, that any such action related to an early termination of the Lease without at least twelve months’ prior notice shall only require Required Consent;

(ix) approve or enter into any contract, not otherwise approved and included in the In-Service Budget or the Annual Budget, as to which the expected total cost of performing such contract or revenue expected in the ordinary course exceeds $1,000,000 per annum or $10,000,000 over the life of the contract;

(x) determine the Fair Market Value of any property or services contributed by a Member to the Company;

(xi) agree, through the Tax Matters Member on behalf of the Company, to any extension of the statute of limitations for making assessments, as further described in Section 9.3(d) ;

(xii) approve the Company Insurance under Section 3.16 ;

(xiii) replace or approve the Managing Member;

(xiv) select a replacement auditor under Section 4.2 ; and

(xv) approve additional Pre-Effective Date Expenditures as Equalization Expenses under Section 7.1(a)(iii) .

(b) Neither the Company nor the Board of Managers shall cause the Company to take any of the following actions without first having obtained Unanimous Consent (each, a “ Unanimous Consent Decision ”):

(i) sell, exchange, transfer, lease, dispose, surrender or abandon all or substantially all of the assets of the Company;

(ii) except as otherwise provided in Section 8.5 and Section 10.2 , make any distributions to the Members of cash or otherwise;

(iii) merge or consolidate the Company with any other Person or enter into any business combination with any other Person;

(iv) form any Subsidiary of the Company;

(v) issue or sell any equity or profits interest in the Company or repurchase any Company Interests, or admit new Members as a result of any such sale or issuance;

(vi) acquire an equity interest in any other Person;

(vii) except for the initial certified public accountants in Section 4.2 , select the Company’s independent certified public accountants;

(viii) except to the extent attributable to any indebtedness approved by the Board of Managers pursuant to Section 3.11(b)(x) , and subject to Section 3.10(b) , grant any Liens on, or otherwise encumber, any assets of the Company other than in the ordinary course of business by operation of law (including mechanics’ and other statutory Liens);

(ix) lend money (other than customary trade debt and accounts receivable) to, enter into any agreement guaranteeing the obligations of any Person or Member or create any arrangement permitting either of the foregoing;

(x) except for trade payables incurred by the Company and de minimis obligations incurred in the ordinary course of business (but excluding indebtedness for borrowed funds), incur or refinance any indebtedness, create arrangements permitting such incurrence or otherwise incur or refinance or early prepayment of, any indebtedness;

(xi) cause the Company to voluntarily declare bankruptcy, or file a petition or otherwise seek protection under any federal or state bankruptcy, insolvency or reorganization Law;

(xii) subject to Section 3.10(b) , amend this Agreement, except in accordance with Section 11.8 ;

(xiii) hire any employee of the Company (or any Subsidiary of the Company);

(xiv) replace the Chairman of the Board by designating a Manager appointed by a Member (other than the Managing Member) to act as the Chairman of the Board.

(xv) convert the Company from a limited liability company to any other entity type;

(xvi) amend the Certificate;

(xvii) register any equity or debt securities of the Company or any of its Subsidiaries under United States federal or foreign securities Laws or any public offering of equity or debt securities of the Company or any of its Subsidiaries;

(xviii) purchase all of a Delinquent Member’s Company Interest pursuant to Section 7.1(b)(ii) ;

(xix) enter into any line of business other than the Business or otherwise amend or change the definition of “Business”;

(xx) the matters set forth in the definition of “Capital Contribution” and Sections 3.1(b) , 7.1(a) and 10.1(a) requiring a Unanimous Consent Decision; and

(xxi) exercise any termination right under the C&O Agreement.

Section 3.12 Project Agreements .

(a) During the term of the Project Agreements, the terms of the joint ownership and development of the Project will be determined by multiple agreements between the Company and Owner Operator (the “ Project Agreements ”). The Company’s execution, delivery and performance of such Project Agreements, and any actions taken with respect to such Project Agreements on behalf of the Company prior to the date hereof, are hereby, in all respects, confirmed, adopted, authorized and approved. Without limiting the ability of either the Company or the Board to exercise its rights, authority and discretion hereunder, it is contemplated that the Project Agreements will include:

(b) a construction and ownership agreement, the form of which is attached hereto as Annex C , to be dated on or about February 14, 2014 (“ C&O Agreement ”) with Owner Operator, pursuant to which Owner Operator will construct, and Owner Operator and the Company will jointly own and develop, the Project, as more particularly described in the C&O Agreement;

(c) an operations and maintenance agreement to be dated on or about February 14, 2014 (“ O&M Agreement ”) with Owner Operator pursuant to which Owner Operator will provide operation and maintenance services for the Project, as more particularly described in the O&M Agreement;

(d) a lease agreement to be dated on or about February 14, 2014 (“ Lease Agreement ”) with Owner Operator pursuant to which the Company shall lease its undivided joint ownership interest in the Project to Owner Operator, as more particularly described in the Lease Agreement; and

(e) a memorandum of understanding to be dated on or about February 14, 2014 (the “ MOU Agreement ”) with Owner Operator pursuant to which Owner Operator will conduct a supplemental open season for its Atlantic Sunrise Project, the result of which may reduce the Company Original Capital Estimate.

Section 3.13 Budgets .

(a) Subject and pursuant to Section 3.11(a)(iii) (if applicable), for each Fiscal Year, except as otherwise set forth in this Agreement, the Capital Budget, In-Service Budget and Annual Budget shall be prepared by the Managing Member and approved or disapproved by the Board of Managers in the following manner:

(i) As soon as reasonably practicable after the Effective Date, the Managing Member shall deliver to the Board of Managers the Capital Budget which includes the amounts set forth in the definition of “Capital Budget” and any additional costs, expenses and capital expenditures that the Managing Member reasonably anticipates will be incurred by or on behalf of the Company with respect to the Project (without regard for any Project Opportunity) prior to the In-Service Date. No later than the date that is 30 days prior to the date that the Managing Member reasonably anticipates that the Project will be commissioned and placed in-service (the “ Anticipated In-Service Date ”), the Managing Member shall prepare and cause the Chairman of the Board to deliver to the Board of Managers, a budget (the “ In-Service Budget ”) that covers all revenues, costs, expenses and capital expenditures (including any remaining capital costs and expenses associated with the Project (without regard to any possible Project Opportunity) that the Managing Member reasonably anticipates will be received or incurred by or on behalf of the Company with respect to the Project (without regard to any Project Opportunity) or otherwise during (A) the remainder of the applicable Fiscal Year (if the Anticipated In-Service Date occurs prior to the end of the sixth month following the start of such Fiscal Year) or (B) the remainder of the applicable Fiscal Year and the immediately following Fiscal Year (if the Anticipated In-Service Date occurs more than six months following the start of such Fiscal Year). The Members acknowledge and agree that the Capital Budget, together with the In-Service Budget, shall serve as a template for all of the Company’s future Annual Budgets.

(ii) At least 90 days prior to the end of the last Fiscal Year covered by the In-Service Budget and, subject to Section 3.13(b) , of each Fiscal Year thereafter, the Managing Member shall prepare and submit for the approval of the Board of Managers a budget for the Company’s activities for the following Fiscal Year (the “ Annual Budget ”), which Annual Budget shall (A) set forth the estimated revenues, costs, expenses and capital expenditures, (B) include the estimated total amount of all other costs, expenses and fees (other than those described in clause (A)) to be paid pursuant to the C&O Agreement, O&M Agreement and the Lease Agreement in the following Fiscal Year and (C) include amounts necessary with respect to any other expenditures that the Managing Member anticipates will be required to be made by the Company during such Fiscal Year.

(iii) The Managers shall use reasonable efforts to resolve any disagreements and approve or disapprove (A) the In-Service Budget no later than 15 days prior to the Anticipated In-Service Date and (B) an Annual Budget no later than 30 days prior to the beginning of the next succeeding Fiscal Year. If the Board of Managers is unable to resolve any disagreement regarding the In-Service Budget or an Annual Budget by the date specified in the immediately preceding sentence, then (1) the Managers shall attempt to resolve such disagreement pursuant to Section 3.14 prior to the Anticipated In-Service Date or the beginning of such Fiscal Year, as applicable, (2) the undisputed items of the In-Service Budget or the Annual Budget, as applicable, shall be considered approved and (3) until the Managers resolve any such dispute, the Managers shall be deemed to have approved (a) an In-Service Budget consistent with the In-Service Budget presented by the Managing Member or (b) an Annual Budget that includes the amounts included in the immediately preceding Fiscal Year’s In-Service Budget or Annual Budget (adjusted upward by an amount equal to the amounts necessary to cover all amounts required to be paid by the Company under the Project Agreements, and an amount equal to 3% of the total amount unrelated to the Project Agreements of the preceding Fiscal Year’s In-Service Budget or Annual Budget plus , to the extent any disputed items were not included in the immediately preceding Fiscal Year’s In-

Service Budget or Annual Budget, the minimum amount with respect to such items that the Managing Member believes (in its reasonable discretion) to be necessary to meet the Company’s prior commitments and obligations or to conduct and maintain the Company’s operations and properties (including the Project or any expansion thereof constituting a Project Opportunity) in a safe and efficient manner in accordance with industry practice. Upon the resolution of any disputed items by the Members, the In-Service Budget or the Annual Budget, as applicable, relating to such disputed item shall be considered approved by the Board of Managers and such In-Service Budget or Annual Budget, as applicable, shall be amended to include the applicable item as resolved.

(iv) If, during the period covered by the Capital Budget or an approved In-Service Budget or Annual Budget, the Managing Member determines that an adjustment to any of the estimated costs set forth in such Capital Budget, In-Service Budget or Annual Budget is necessary or appropriate, then the Managing Member shall submit to the Board of Managers for approval an amendment to the Capital Budget, In-Service Budget or Annual Budget with respect thereto. The Board of Managers shall approve by Super Majority Consent or reject such amended Capital Budget, In-Service Budget or Annual Budget within fifteen (15) days after its receipt thereof.

(b) Subject and pursuant to Section 3.11(a)(iii) (if applicable), for each Fiscal Year following the termination of the Lease Agreement, except as otherwise set forth in this Agreement, the Post-Lease In-Service Budget and Post-Lease Annual Budget shall be prepared by the Managing Member and approved or disapproved by the Board of Managers in the following manner:

(i) No later than the date that is 90 days prior to the date that the Managing Member reasonably anticipates that the Lease Agreement will be terminated (the “ Anticipated Lease Termination Date ”), the Managing Member shall prepare and cause the Chairman of the Board to deliver to the Board of Managers, a budget (the “ Post-Lease In-Service Budget ”) that covers all revenues, costs, expenses and capital expenditures (including any remaining capital costs and expenses associated with the Project (without regard to any possible Project Opportunity) that the Managing Member reasonably anticipates will be received or incurred by or on behalf of the Company with respect to the Project (without regard to any Project Opportunity) or otherwise during (A) the remainder of the applicable Fiscal Year (if the Anticipated Lease Termination Date occurs prior to the end of the sixth month following the start of such Fiscal Year) or (B) the remainder of the applicable Fiscal Year and the immediately following Fiscal Year (if the Anticipated Lease Termination Date occurs more than six months following the start of such Fiscal Year). The Members acknowledge and agree that, following the termination of the Lease Agreement, the Post-Lease In-Service Budget, shall serve as a template for all of the Company’s future Post-Lease Annual Budgets.

(ii) At least 90 days prior to the end of the last Fiscal Year covered by the Post-Lease In-Service Budget and of each Fiscal Year thereafter, the Managing Member shall prepare and submit for the approval of the Board of Managers a budget for the Company’s activities for the following Fiscal Year (the “ Post-Lease Annual Budget ”), which Post-Lease Annual Budget shall (A) set forth the estimated revenues, costs, expenses and capital expenditures, (B) include the estimated total amount of all other costs, expenses and fees (other than those described in clause (A)) to be paid pursuant to the C&O Agreement, the O&M Agreement and any other applicable Post-Lease Project Agreement in the following Fiscal Year and (C) include amounts necessary with respect to any other expenditures that the Managing Member anticipates will be required to be made by the Company during such Fiscal Year.

(iii) The Managers shall use reasonable efforts to resolve any disagreements and approve or disapprove (A) the Post-Lease In-Service Budget no later than 55 days prior to the Anticipated Lease Termination Date and (B) a Post-Lease Annual Budget no later than 55 days prior to the beginning of the next succeeding Fiscal Year. If the Board of Managers is unable to resolve any disagreement

regarding the Post-Lease In-Service Budget or a Post-Lease Annual Budget by the date specified in the immediately preceding sentence, then (1) the Managers shall attempt to resolve such disagreement pursuant to Section 3.14 prior to the Anticipated Lease Termination Date or the beginning of such Fiscal Year, as applicable, (2) the undisputed items of the Post-Lease In-Service Budget or the Post-Lease Annual Budget, as applicable, shall be considered approved and (3) until the Managers resolve any such dispute, the Managers shall be deemed to have approved (a) a Post-Lease In-Service Budget consistent with the Post-Lease In-Service Budget presented by the Managing Member or (b) a Post-Lease Annual Budget that includes the amounts included in the immediately preceding Fiscal Year’s Post-Lease In-Service Budget or Post-Lease Annual Budget (adjusted upward by an amount equal to the amounts necessary to cover all amounts required to be paid by the Company under the C&O Agreement, the O&M Agreement and any other applicable Post-Lease Project Agreements, and an amount equal to 3% of the total amount unrelated to the applicable Post-Lease Project Agreements of the preceding Fiscal Year’s Post-Lease In-Service Budget or Post-Lease Annual Budget plus , to the extent any disputed items were not included in the immediately preceding Fiscal Year’s Post-Lease In-Service Budget or Post-Lease Annual Budget, the minimum amount with respect to such items that the Managing Member believes (in its reasonable discretion) to be necessary to meet the Company’s prior commitments and obligations or to conduct and maintain the Company’s operations and properties (including the Project or any expansion thereof constituting a Project Opportunity) in a safe and efficient manner in accordance with industry practice. Upon the resolution of any disputed items by the Members, the Post-Lease In-Service Budget or the Post-Lease Annual Budget, as applicable, relating to such disputed item shall be considered approved by the Board of Managers and such Post-Lease In-Service Budget or Post-Lease Annual Budget, as applicable, shall be amended to include the applicable item as resolved.

(iv) If, during the period covered by approved Post-Lease In-Service Budget or Post-Lease Annual Budget, the Managing Member determines that an adjustment to any of the estimated costs set forth in such Post-Lease In-Service Budget or Post-Lease Annual Budget is necessary or appropriate, then the Managing Member shall submit to the Board of Managers for approval an amendment to the Post-Lease In-Service Budget or Post-Lease Annual Budget with respect thereto. The Board of Managers shall approve by Super Majority Consent or reject such amended Post-Lease In-Service Budget or Post-Lease Annual Budget within fifteen (15) days after its receipt thereof.

Section 3.14 Deadlocks .

(a) Failure to Approve Actions Requiring Approval by Board of Managers. If the Board of Managers has disagreed regarding any action when properly submitted to it for a vote such that the required vote is not satisfied (a “ Business Dispute ”), then the Managers will consult and negotiate with each other in good faith to find a solution that would be approved by the Board of Managers. If the Managers do not reach such a solution within 10 Business Days from the date the disagreement occurred, then any Member may give written notice to the other Members that the Board of Managers’ failure to approve such action will, in such Member’s judgment, adversely affect the Company (a “ Dispute Notice ”).

(b) Consideration by Member Executives. Within five Business Days after the delivery of the Dispute Notice, the Business Dispute will be referred by the Managers to the chief executive officer or other senior executive officer of the Parent of each Member (each, a “ Parent Executive ”) in an attempt to reach resolution. The Parent Executives will consult and negotiate with each other in good faith and, if they are unable to agree within thirty days of the date of delivery of the Dispute Notice, then they will adjourn such attempts for a further period of five Business Days during which the Parent Executives will not be obligated to consult with each other. On the first Business Day following such period, the Parent Executives may consult with each other again in an effort to resolve the Business Dispute. If the Parent Executives are unable to resolve the Business Dispute within ten Business Days following such period, then the action shall be considered not approved by the Board of Managers.

Section 3.15 Limitation of Liability; Indemnification .

(a) Limitation of Liability. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, THE MEMBERS AND THE COMPANY EXPRESSLY AGREE THAT THE MANAGING MEMBER SHALL NOT BE LIABLE TO THE NON-MANAGING MEMBER INDEMNIFIED PARTIES, NO NON-MANAGING MEMBER SHALL BE LIABLE TO THE MANAGING MEMBER INDEMNIFIED PARTIES AND THE COMPANY SHALL NOT BE LIABLE TO ANY PERSON (INCLUDING THE NON-MANAGING MEMBER INDEMNIFIED PARTIES AND THE MANAGING MEMBER INDEMNIFIED PARTIES), FOR ANY EXEMPLARY, PUNITIVE, INDIRECT, CONSEQUENTIAL, REMOTE OR SPECULATIVE DAMAGES OR LOST PROFITS; PROVIDED, HOWEVER , THAT THE FOREGOING LIMITATIONS SHALL NOT APPLY TO DAMAGES PAYABLE WITH RESPECT TO THIRD PARTY CLAIMS FOR WHICH A MEMBER OR THE COMPANY IS OBLIGATED TO PROVIDE INDEMNIFICATION PURSUANT TO THIS SECTION 3.15.

(b) Indemnification Obligations of the Company. Subject to Section 3.15(a) , the Company shall INDEMNIFY, PROTECT, DEFEND, RELEASE and HOLD HARMLESS the Members and the directors, officers, directors, stockholders, partners, members, managers, employees, affiliates, representatives or agents of any Member or of any Member’s Affiliates (individually, a “ Covered Person ” and collectively the “ Covered Persons ”) from and against any and all Claims suffered by such Covered Person, as a result of, caused by or arising out of such Covered Person’s being (or being threatened to be made) a party to, or involved in, any threatened, pending or completed Action, or any appeal of any Action or any inquiry or investigation that could lead to any Action, by reason of the fact that he, she or it is a Covered Person or which relates to or arises out of the Company or its property, business or affairs. A Covered Person shall not be entitled to indemnification under this Section 3.15(b) with respect to (i) any Claim with respect to which such Covered Person has engaged in fraud, willful misconduct, bad faith or gross negligence or (ii) any Claim initiated by such Covered Person unless such Claim (A) was brought to enforce such Covered Person’s rights to indemnification hereunder or (B) was authorized or consented to by the Board of Directors. The Company may (but shall have no obligation to) advance expenses to, and reimburse the expenses of, any Person to which the Company owes any defense or indemnity obligation pursuant to this Section 3.15(b) . If a Covered Person directly or indirectly receives any amount under any insurance coverage (other than self insurance) with respect to such Claim (collectively, “ Recoverable Amounts ”) after the Company has indemnified the Covered Person for such Claim and paid the full amount that it is required to pay under this Section 3.15(b) , then the Covered Person shall promptly pay the Company all such Recoverable Amounts up to the amount paid to such Covered Person by the Company under this Section 3.15(b) . By way of example: (1) if the Covered Person was paid $1 million by the Company and ultimately received $1.5 million in Recoverable Amounts, the Covered Person would owe the Company $1 million; and (2) if the Covered Person was paid $1 million by the Company and received $500,000, the Covered Person would owe the Company $500,000.

(c) Indemnification Obligations of Each Member. Subject to Section 3.15(a), each Member shall INDEMNIFY, PROTECT, DEFEND, RELEASE AND HOLD HARMLESS the other Members and the other Covered Persons from and against all Claims suffered by such Person, as a result of, caused by or arising out of such Covered Person’s being (or being threatened to be made) a party to, or involved in, any threatened, pending, or completed Action, or any appeal of any Action or any inquiry or investigation that could lead to any Action to the extent such Action relates to or arises out of the indemnifying Member’s fraud, willful misconduct, bad faith or gross negligence, as determined by a court of competent jurisdiction.

Section 3.16 Insurance . The Managing Member shall propose for approval of the Board of Managers by Super Majority Consent, and upon such approval, shall obtain and maintain (or cause to be obtained and maintained) on behalf or in the name of the Company, insurance coverage for the Project (and any other assets or properties of the Company) and the Company that it determines is necessary or appropriate in connection with the conduct of the Business (the “ Company Insurance ”). Each Member will obtain and maintain (or cause one of its Affiliates to obtain and maintain) insurance covering its respective officers, Managers and employees arising from their actions as members of the Board of Managers or otherwise on behalf of the Company. The allocated costs of any Company Insurance approved by the Board, including applicable deductibles and self-insured retentions, obtained and maintained on behalf of the Company by the Managing Member’s making available for the benefit of the Company the insurance of any of its Affiliates, shall be reimbursed to the Managing Member by the Company.

Section 3.17 Affiliate Contracts; Matters Involving Affiliates . The Members acknowledge that the Company may from time to time enter into Affiliate Contracts in accordance with the terms and provisions of this Agreement. In the case of any decision with respect to any Action involving the Company as a party to which a Member, or an Affiliate of a Member, is a party, such decision shall be reviewed and subject to approval by only the Managers appointed by any Members that are not (and whose Affiliates are not) a party.

Section 3.18 Voting Rights During Default . Notwithstanding anything to the contrary set forth herein (including, for the avoidance of doubt, the definitions of Required Consent, Super Majority Consent and Unanimous Consent and the provisions of Section 3.11 ), while a Member is in Default, such Member shall not be permitted to consent to, vote (directly or through its Managers) or otherwise participate in or make any decisions with respect to any action (or inaction) to be taken by (or on behalf of) the Company, and the other Members shall have the sole right to consent to, vote (directly or through their respective Managers) and otherwise participate in or make any decisions with respect to such action (or inaction) to be taken by (or on behalf of) the Company.

ARTICLE IV

BOOKS AND RECORDS; REPORTS AND

INFORMATION AND ACCOUNTS

Section 4.1 Maintenance of Books and Records . The Managing Member shall cause the Company to keep records and books of account (including those required by the Act) and all transactions and other matters relative to the Company’s business as are usually entered into records and books of account maintained by Persons engaged in business of like character shall be entered therein. The Managing Member shall cause the Company to maintain the books and records in accordance with GAAP.

Section 4.2 Auditors; Company Reports; Annual Financial Statements .

(a) Auditors. The auditors of the Company shall be Deloitte & Touche LLP, or if Managing Member proposes to change auditors, a nationally recognized accounting firm selected by the Board of Managers.

(b) Company Reports.

(i) Each Member and its respective representatives shall be entitled to reasonable access, during regular business hours and upon reasonable advance notice, to the corporate books and records and properties of the Company and its Subsidiaries, for any reasonable purpose, including in order to conduct any investigation or audit of the business, financial position and financial statements of any such entity; provided that nothing herein shall authorize access to classified or controlled unclassified information, except as required by applicable Law.

(ii) The Managing Member shall cause the Company to prepare and supply to each Member, not later than 60 days after the end of each fiscal quarter, with unaudited financial statements of the Company and each of its Subsidiaries on a consolidated basis, including a balance sheet, a statement of income, a statement of cash flows and a statement of each Member’s Capital Account. Within 90 days after the end of a Fiscal Year, the Board of Managers shall prepare and deliver to each Member a statement of income and a statement of cash flows for such year, a balance sheet and a statement of each Member’s Capital Account as of the end of such year provided, however, upon the written request of one or more Members at least 60 days prior to the applicable Fiscal Year end, which request shall be a standing request effective for subsequent Fiscal Years unless and until revoked by the requesting Member, the Board of Managers shall prepare and deliver to the requesting Member(s) within 45 days after the end of each such Fiscal Year the foregoing information.

(i) The Managing Member shall cause the Company to prepare annual financial statements for the Company and its Subsidiaries on a consolidated basis shall be prepared in accordance with GAAP, which annual financial statements shall be subject to an audit by the auditors of the Company.

(ii) The Board of Managers shall use reasonable best efforts to ensure that the auditors will issue their reports on the annual financial statements of the Company and its Subsidiaries by the date that is 120 days after the end of the applicable prior Fiscal Year; provided , however , upon the written request of one or more Members at least 60 days prior to the applicable Fiscal Year end, which request shall be a standing request effective for subsequent Fiscal Years unless and until revoked by the requesting Member, the Board of Managers shall prepare and deliver to the requesting Member(s) within 65 days after the end of each such Fiscal Year the audited report.

(d) Reports from Owner Operator. The Managing Member shall use commercially reasonable efforts to deliver a copy of any material notice or report received from Owner Operator under any of the Project Agreements to all other Members within seven Business Days of receiving such notice or report.

Section 4.3 Confidentiality .

(a) The Members acknowledge that, from time to time, they may receive information from or regarding any other Member or its Affiliates or their respective customers in the nature of trade secrets or secret or proprietary information or information that is otherwise confidential, the release of which may be damaging to such other Member, its Affiliates or Persons with which they do business. Each Member shall hold in strict confidence, and shall not use, any such information it receives for the period equal to two years after the later to occur of (i) the In-Service Date and (ii) the date on which it is no longer a Member, and during such period, may not disclose such information to any Person other than (i) such Member’s Affiliates and such Member’s and its Affiliates’ employees, officers, directors, agents and, to

the extent the following Persons have a need to know such information, advisors (including attorneys, accountants, consultants, financial advisors, financing entities, bankers and other capital providers), (ii) the Managers and (iii) any other Member.

(b) The restrictions in Section 4.3(a) shall not apply to:

(i) information that enters the public domain otherwise than by breach of this Agreement;

(ii) information already in the possession of a Member or any of its Affiliates before disclosure to it pursuant to this Agreement, which was not acquired directly or indirectly from the Company or any other Member or any of its Affiliates and which is, to the best of such Member’s knowledge, not the subject of a confidentiality agreement in favor of the Member (or its Affiliate) that was the source of such information;

(iii) information lawfully obtained from a third party that is, to the best of such Member’s knowledge, permitted to disclose such information;

(iv) information developed or created by a Member or any of its Affiliates (other than the Company or its Subsidiaries) independent of this Agreement;

(v) information required to be disclosed by a Member or any of its Affiliates to a third party contemplating purchasing the Company Interest of, or any direct or indirect interest in, such Member in order to permit such third party to decide whether or not to proceed with the purchase and what price to offer; provided , that such third party shall have, prior to any such disclosure, entered into a written confidentiality agreement with such Member or its Affiliate on terms no less strict than the terms of this Section 4.3 ;

(vi) information requested by any Governmental Entity entitled by Law to require the same; provided that prior to such disclosure, if practicable and legally permissible, the disclosing Member shall notify in writing the Member on whose behalf the information was disclosed that such request has been made; and, provided, further that the Member or its Affiliate seeking to rely on an exemption contained in this Section 4.3(b)(vi) shall provide such evidence as the owner of such information (where the identity of such owner can be reasonably determined) may reasonably require to prove that the information sought to be exempted falls within the relevant category; and

(vii) information that a Member or its Affiliates must disclose under applicable securities Laws or stock exchange regulations; provided, however , that prior to such disclosure, if practicable, the disclosing Member shall notify in writing the owner of such information (where the identity of such owner can be reasonably determined) that the disclosing Member believes such disclosure is required and, in any event, the disclosing Member may disclose only such portion of the subject information as advised by its counsel that it is legally required to disclose.

(c) The Members acknowledge and agree that, effective as of the Effective Date, that certain Confidentiality Agreement, dated as of September 5, 2013, by and between WGL Holdings, Inc. and Vega Energy Partners, Ltd. shall terminate and be of no further force and effect (except as may be necessary to enforce any obligations or liabilities arising thereunder prior to the Effective Date) without any further action by any such Member party to such agreement or any other Person.

Section 4.4 Publicity . No Member will issue or make, or permit any agent or Affiliate of it to issue or make, any public statements or other public disclosures with respect to this Agreement or any of

the activities contemplated hereby (any such release, statement or disclosure, a “ Press Release ”) without first receiving the prior written consent (which can be by electronic mail and which shall not be unreasonably withheld, conditioned or delayed) of each other Member, except such prior written consent shall not be required if such Press Release is deemed in good faith by the releasing or disclosing Member to be required by applicable Law or under the rules and regulations of a recognized stock exchange on which any stock or equity interests of such Member (or any of its Affiliates) are listed. Notwithstanding the foregoing, no Press Release shall be issued by any Party or their Affiliates prior to 5:00 p.m. (Eastern Standard Time) on February 20, 2014.

ARTICLE V

TRANSFERS OF A COMPANY INTEREST

Section 5.1 General Provisions . Any Transfer or Disposition of a Company Interest of a Member may only be made in accordance with applicable Laws and the remaining provisions of this Article V . Any purported Transfer or Disposition in breach of the terms of this Agreement shall be null and void ab initio , and the Company shall not recognize any such prohibited Transfer or Disposition.

Section 5.2 Additional Provisions .

(a) Except (i) as set forth in Section 5.3 , (ii) a Transfer by Vega of all or a portion of its Company Interest to WGL under the WGL Side Letter, or (iii) with respect to any Transfer to a Parent or an Affiliate of a Member, notwithstanding anything to the contrary contained herein, without receiving the prior written consent of each other Member, no Member may effect a Transfer of its Company Interest.

(b) A Company Interest of a Member shall not be Transferred except pursuant to an applicable exemption from registration under the Securities Act and other securities Laws.

(c) The Company may, in its reasonable discretion, charge a Transferring Member the out-of-pocket expenses incurred by the Company in affecting any Transfer.

(d) No Transfer of a Company Interest of a Member shall effect a release of the Transferring Member (or its applicable Affiliates) from any liabilities or obligations to the Company or any other Members that accrued prior to the Transfer effective date.

(e) A Member in Default shall not Transfer (and shall not permit a Transfer of) all or any portion of its Company Interests (except as set forth in Section 7.1(b) or as otherwise provided in this Agreement).

(f) Each Member shall use reasonable, good faith efforts to cooperate with any Transferring Member or Transferee attempting to obtain, and to assist in timely obtaining, any consent or approval of a Governmental Entity required with respect to any Transfer permitted pursuant to the terms of this Article V ; provided , that no Member shall be required to incur any out-of-pocket costs or expenses or additional liability in connection with such cooperation and assistance that the Transferring Member does not agree to reimburse.

(g) The Company shall not recognize for any purpose any purported Transfer of a Company Interest unless and until (i) the foregoing provisions of this Article V have been satisfied with respect to such Transfer, (ii) the Company has received the C&O Credit Support required for the Transferred Company Interests pursuant to the terms of the C&O Agreement and (iii) the Company has received a document in a form reasonably acceptable to the Company executed by both the Transferring Member

and the Transferee that (A) includes the notice address of the Transferee and such Person’s agreement to be legally bound by this Agreement with respect to the Company Interest Transferred to it, (B) contains a representation and warranty that the Transfer was made in accordance with all Laws (including state and federal securities Laws) and the terms and conditions of this Agreement and the terms and conditions of the C&O Agreement and (C) includes its representation and warranty that the representations and warranties in Section 2.11(c) are true and correct with respect to such Transferee. Each Transfer complying with the provisions of this Article V shall be effective against the Company as of the first Business Day of the month immediately succeeding the month in which all such provisions have been satisfied or as of the first Business Day of the month, except a Transfer by Vega of all or a portion of its Company Interest to WGL under the WGL Side Letter, which shall be effective on the earlier of (i) the first Business Day of the month immediately succeeding the month in which all such provisions have been satisfied or (ii) the Assigned Interest Closing Date (as defined in the WGL Side Letter), if all such provisions have been satisfied as of such day, it being understood and agreed by the Members that until such time (x) the Transferee in any Transfer shall have no right to exercise any of the powers, rights and privileges of a Member hereunder, (y) the Member who attempted to Transfer all or any part of its Company Interest to a Transferee shall retain all powers, rights and privileges as a Member hereunder with respect to such Company Interest and shall remain liable for all obligations and duties as a Member with respect to such Company Interest and (z) any payment by the Company to the Transferring Member shall acquit the Company and the Members of all liability to any other Persons who may be interested in such payment by reason of a Transfer by such Member.

(h) Notwithstanding anything to the contrary in this Article V , any Transfer and any other event constituting a Disposition shall also be subject to and must comply with the transfer restrictions contained in the C&O Agreement, and for the avoidance of doubt, a breach of such restrictions constitutes a Default of the Member under this Agreement. On an annual basis, the Managing Member shall request of each Member and each Member shall, within ten Business Days of receipt of such request, represent and warrant that it is in compliance with this Section 5.2(h); for the avoidance of doubt, failure to so represent and warrant constitutes a Default under this Agreement.

Section 5.3 Right of First Offer . Except as specifically provided in Section 5.2(a) , or with respect to any Transfer to the Parent or an Affiliate of a Member, if at any time a Member (a “ Selling Member ”) desires to Transfer all or any portion of its Company Interest (the “ Offered Interest ”), it shall provide written notice of its intention to make such a Transfer to the other Members (the “ Non-Selling Members ”) and shall make an irrevocable and unconditional offer (a “ ROFO Offer ”) to sell the Offered Interest to the Non-Selling Members on a pro rata basis based on their respective Percentage Interest (without giving effect to the Selling Member’s Percentage Interest) at the price and on the terms set forth in the ROFO Offer. Upon receipt of a ROFO Offer, any of the Non-Selling Members may, in their sole discretion, accept the ROFO Offer by delivering written notice (a “ ROFO Acceptance Notice ”) to the Selling Member and the other Non-Selling Members within thirty (30) days of receipt of the ROFO Offer (the “ ROFO Deadline ”). If any Non-Selling Member fails to accept the ROFO Offer but other Non-Selling Member(s) have delivered a ROFO Acceptance Notice, then the Non-Selling Member(s) who have delivered a ROFO Acceptance Notice shall (i) be obligated to accept the ROFO Offer and acquire such Non-Selling Member’s Percentage Interest in the Offered Interest on a pro rata basis based on its or their respective Percentage Interest (without giving effect to the Percentage Interest of the declining Non-Selling Member(s) or the Selling Member’s Percentage Interest) or (ii) withdraw its ROFO Acceptance Notice within one (1) Business Day after the ROFO Deadline. If any Non-Selling Member so accepts the ROFO Offer, then the closing of the Transfer of the Offered Interest must occur within sixty (60) days (as such time period may be extended to obtain any required approval, consent or authorization of a Governmental Entity) following the date of the ROFO Deadline. If none of the Non-Selling Members accept the ROFO Offer by the ROFO Deadline, then the Selling Member will have the right, for a period of [*****] days thereafter to Transfer the Offered Interest to a third party transferee at a price and on

terms no less favorable than the price and terms set forth in the ROFO Offer; provided that the Selling Member first complies with any right of first offer in favor of Owner Operator required under the C&O Agreement (which compliance may occur simultaneously to the procedure outlined in this Section 5.3 ). If such Transfer is not consummated within such period or the Selling Member wishes to Transfer the Offered Interest to a to a third party transferee at a price or on terms less favorable to such Selling Member than the price and terms set forth in the ROFO Offer, then any such subsequent Transfer by the Selling Member must again be subject to the right of first offer as set forth in this Section 5.3 .

ARTICLE VI

PROJECT OPPORTUNITIES; MAJOR COST OVERRUN CAPITAL CALLS

Section 6.1 C&O Opportunities . The following provisions shall constitute the exclusive procedure by which Project Opportunities, ROFO Offers (as defined in the C&O Agreement) by Transco under the C&O Agreement and Meade purchase options under the C&O Agreement (individually and collectively, the “ C&O Opportunities ”) may be considered and approved by the Company:

(a) Promptly following the notification by Owner Operator of a proposed C&O Opportunity, the Managing Member shall notify each Member of the nature of such proposed C&O Opportunity and any amendments to the In-Service Budget, Post-Lease In-Service Budget, Annual Budget or Post-Lease Annual Budget that the Managing Member anticipates will be necessary or appropriate in connection with such C&O Opportunity, and at a special meeting of the Board of Managers specially called by the Managing Member proposing such C&O Opportunity, in accordance with Section 3.3 or through a written consent in accordance with the provisions of Section 3.4 , the Board of Managers shall consider the pursuit by the Company of such C&O Opportunity.

(b) If the Board of Managers approves the pursuit of such C&O Opportunity by Required Consent (an “ Approved Project ”), then (i) the Board of Managers shall cause (A) the Managing Member to proceed with the development of such C&O Opportunity in accordance with and on the terms so approved by the Board of Managers and (B) the Company to fund such Approved Project, (ii) the then In-Service Budget, Post-Lease In-Service Budget, Annual Budget or Post-Lease Annual Budget shall be amended to reflect the amendments and modification thereto approved by the Board of Managers in connection with such approval of the Approved Project and (iii) subject to the provisions of Section 6.1(c) each of the Members who approved the Approved Project (each a “ Funding Member ”) shall be responsible to fund their respective amount of all costs and obligations arising with respect to such C&O Opportunity on a pro rata basis based on their respective Percentage Interest (without giving effect to the Percentage Interest of any Non-Funding Member) and agrees to contribute such amount to the Company (within ten Business Days of any capital call issued by the Managing Member with respect thereto, which capital call may be given via electronic mail);

(c) If the Board of Managers Designee of one or more Members vote against an Approved Project (each a “ Non-Funding Member ”), then (i) any such Non-Funding Member shall not be required to make any Capital Contribution to the Company pursuant to Section 7.1 in connection with the such Approved Project and shall not be considered to be in Default, and (ii) such Non-Funding Member’s Percentage Interest shall, upon the contribution by the Funding Members of any Capital Contribution required in connection with such Approved Project, be reduced by multiplying it by a fraction (the “ Dilution Ratio ”), (A) the numerator of which is the aggregate of all positive balances in the Members’ Capital Accounts, with such balances being determined immediately following their adjustment pursuant to Section 7.2 , and (B) the denominator of which is the sum of (I) the amount set forth in such numerator and (II) the total of all Capital Contributions that the Managing Member then estimates will be required of all Funding Members in connection with such Approved Project (with the Percentage Interests of such Funding Members being proportionately increased). As soon as the actual amount of such Capital

Contributions has been determined by the Managing Member, such Non-Funding Member’s Percentage Interest shall be readjusted, using the Dilution Ratio described in clause (ii) above, but, in the denominator, using the actual amount of such Capital Contributions instead of any estimate.

Section 6.2 Major Cost Overrun Capital Calls . The following provisions shall constitute the exclusive procedure by which decisions to send to Owner Operator a notice of intent not to fund a Major Cost Overrun Capital Call may be considered and approved by the Company:

(a) Immediately following the notification by Owner Operator of a Major Cost Overrun Capital Call, the Managing Member shall notify each Member of (i) the amount by which such Major Cost Overrun Capital Call, when added to the aggregate amount of all previous Capital Calls, exceeds [*****]% of the Company Original Capital Estimate and (ii) any amendments to the In-Service Budget, Post-Lease In-Service Budget, Annual Budget or Post-Lease Annual Budget that the Managing Member anticipates will be necessary or appropriate in connection with such Major Cost Overrun Capital Call, and at a special meeting of the Board of Managers specially called by the Managing Member, in accordance with Section 3.3 or through a written consent in accordance with the provisions of Section 3.4 , the Board of Managers shall consider the funding by the Company of such Major Cost Overrun Capital Call.

(b) If the Board of Managers decides not to fund a Major Cost Overrun Capital Call by Super Majority Consent, then the Company shall provide notice to Owner Operator of its intent not to so fund, in compliance with the requirements of Section 3.2(a) of the C&O Agreement. If the Board of Managers decides to fund a Major Cost Overrun Capital Call by Super Majority Consent (an “ Approved Overage ”), then (i) the Board of Managers shall cause the Company to fund such Major Cost Overrun Capital Call, (ii) the then In-Service Budget, Post-Lease In-Service Budget, Annual Budget or Post-Lease Annual Budget shall be amended to reflect the amendments and modification thereto approved by the Board of Managers in connection with such approval of the Approved Overage and (iii) subject to the provisions of Section 6.2(c) each of the Members who approved the Approved Overage (each an “ Overage Funding Member ”) shall be responsible to fund their respective amount of all costs and obligations arising with respect to such Major Cost Overrun Capital Call (including Capital Calls arising after the Major Cost Overrun Capital Call under Section 2.6 of the C&O Agreement to the extent such subsequent Major Cost Overrun Capital Call is approved by the Overage Funding Members) on a pro rata basis based on their Percentage Interest (without giving effect to the Percentage Interest of any Overage Non-Funding Member) and agrees to contribute such amount to the Company (within the earlier to occur of (i) ten Business Days of any capital call issued by the Managing Member with respect thereto, and (ii) one Business Day prior to the date such Capital Call is due pursuant to the terms of the C&O Agreement, which capital call may be given via electronic mail); and

(c) If the Board of Managers Designee of one or more Members vote against an Approved Overage (each an “ Overage Non-Funding Member ”), then (i) any such Overage Non-Funding Member shall not be required to make any Capital Contribution to the Company pursuant to Section 7.1 in connection with such Approved Overage and shall not be considered to be in Default, and (ii) such Overage Non-Funding Member’s Percentage Interest shall, upon the contribution by the Overage Funding Members of the Capital Contributions required by such Major Cost Overrun Capital Call and any subsequent Capital Calls arising after the Major Cost Overrun Capital Call under Section 2.6 of the C&O Agreement which the Overage Funding Members fund, be reduced by multiplying it by a fraction (the “ Overage Dilution Ratio ”), (A) the numerator of which is the aggregate of all positive balances in the Members’ Capital Accounts, with such balances being determined immediately following their adjustment pursuant to Section 7.2 , and (B) the denominator of which is the sum of (I) the amount set forth in such numerator and (II) the total of all Capital Contributions that Managing Member then estimates will be required of all Overage Funding Members in connection with such Approved Overage and all subsequent Capital Calls arising after the Major Cost Overrun Capital Call under Section 2.6 of

the C&O Agreement which the Overage Funding Members fund (with the Percentage Interests of such Overage Funding Members being proportionately increased). As soon as the actual amount of all Capital Calls funded by the Members has been determined by the Managing Member, such Non-Funding Member’s Percentage Interest shall be readjusted, using the Overage Dilution Ratio described in clause (ii) above, but, in the denominator, using the actual amount of such Capital Contributions instead of any estimate.

Section 6.3 Members in Default . The Members acknowledge and agree that, in accordance with Section 3.18 , a Member that is in Default shall not be permitted to vote (directly or through its Managers) on any C&O Opportunity or Major Cost Overrun Capital Call proposed (pursuant to the foregoing provisions of this Article VI ) and that if such C&O Opportunity or Major Cost Overrun Capital Call is ultimately pursued by the Company pursuant to the foregoing provisions of this Article VI , then the Percentage Interest of each such Member that is in Default shall be diluted by the Dilution Ratio, as described in Section 6.1(c) , or Overage Dilution Ration, as described in Section 6.2(c) , as applicable.

ARTICLE VII

CAPITAL CONTRIBUTIONS AND CAPITAL ACCOUNTS

Section 7.1 Capital Contributions; Failure to Contribute .

(a) Capital Contributions .

(i) Except as set forth in this Section 7.1(a) and in Article V , no Member shall be required to make any additional Capital Contribution without such Capital Contribution first being approved by the Board of Managers by Unanimous Consent.

(ii) Subject to the provisions of Section 6.1(c) and Section 6.2(c) , each Member agrees to contribute to the Company (within six Business Days of any capital call issued by the Managing Member with respect thereto, which capital call may be given via electronic mail), its Percentage Interest of amounts necessary to fund (A) the Capital Budget, In-Service Budget, Post-Lease In-Service Budget, Annual Budget or Post-Lease Annual Budget, (B) without duplication and to the extent not included in the Capital Budget, any Capital Contributions attributable to the Project, and called under the C&O Agreement, in amounts up to [*****]% of the Company Original Capital Estimate in effect as of the Effective Date, (C) any Capital Contributions attributable to any Emergency, (D) any Capital Contribution relating to an Equalization Expense required pursuant to Section 7.1(a)(iii) , and (E) any Capital Contributions required pursuant to Section 7.1(b)(ii) (in each case, a “ Required Contribution ”) and (F) in the case of the guaranty, letter of credit or escrow agreement required under Section 6.7(e)(v) of the C&O Agreement, the required guaranty, letter of credit or escrow agreement from or on behalf of each Member equal to such Member’s Percentage Interest of the amount required to be provided under Section 6.7(e)(v) of the C&O Agreement (in each case, the “ C&O Credit Support ”); provided however , (i) prior to the date that is [*****] months following the Effective Date (the “ Vega Funding Date ”), if Vega provides WGL at least four Business Days’ notice prior to the date upon which funding for capital calls issued by the Managing Member is required under this Section 7.1(a)(ii) then, subject to the terms of the WGL Side Letter, WGL shall contribute to the Company on behalf of Vega all amounts necessary to fund such requested portion of Vega’s aggregate Required Contributions in excess of $[*****] and (ii) subject to the terms of the WGL Side Letter, WGL shall provide the C&O Credit Support on behalf of Vega from the Effective Date until the Vega Funding Date.

(iii) Set forth in Annex B are the amounts of Pre-Effective Date Expenditures that have been incurred with respect to each Member. If any Member or Affiliate thereof has made expenditures or incurred costs that are not set forth in Annex B but which such Member desires to be

considered as Pre-Effective Date Expenditures, such Member shall have the right to request approval thereof by Super Majority Consent as soon as practicable after the Effective Date (but not later than 90 Days after the Effective Date). As soon as such additional expenditures and costs to be considered as Pre-Effective Date Expenditures hereunder have been approved or disapproved by the Members, which approval or disapproval shall not be unreasonably delayed, the Managing Member shall issue a capital call for the applicable Members to make cash Capital Contributions in an amount equal to such Members’ Equalization Expense. The assets, if any, acquired by means of the Pre-Effective Date Expenditures of the Members shall be and are hereby contributed to the Company free of any Liens. All applicable Members agree to execute and deliver any and all assignments and conveyances as may be necessary or appropriate to evidence such contribution.

(b) Remedies for Failures to Contribute . If a Member becomes in Default as a result of its failure to contribute all or any portion of a Required Contribution or the C&O Credit Support that such Member is required to make as provided in this Agreement (such Member, a “ Delinquent Member ”), then, from and after the time such Member becomes a Delinquent Member, the provisions and remedies set forth below in this Section 7.1(b) shall apply:

(i) Unless otherwise agreed in writing by each of the other non-Delinquent Members), the Delinquent Member shall be permanently considered in Default for all purposes of this Agreement and shall, thereafter, be prohibited from making any Capital Contributions (including any Required Contributions); provided that if a Delinquent Member repays in full all advances described in the following sentence by the due date in Section 7.1(b)(i)(B) , such Delinquent Member shall no longer be considered in Default under this Agreement. In such event, each non-Delinquent Member may elect to advance their respective amount on a pro rata basis based on their respective Percentage Interest (without giving effect to the Percentage Interest of the Delinquent Member or any non-Delinquent Member who elects not to advance funds) plus its pro rata share of any of such shortfall that is not funded by other non-Delinquent Members (which pro rata share shall be based on the relative Percentage Interests of all non-Delinquent Members electing to fund a portion of such remaining shortfall unless otherwise agreed among such non-Delinquent Members) of the entire amount of the Delinquent Member’s Required Contribution or C&O Credit Support that caused such Delinquent Member to be in Default.

(A) In the event Non-Delinquent Member(s) make an advance as described in Section 7.1(b)(i) and such advance is not repaid in full under Section 7.1(b)(i)(B) , by such due date, the Percentage Interests of the Members shall be adjusted and recomputed by solving the following equation for “X” for each Member:

X = A / B

Where “X” is such Member’s recomputed Percentage Interest, “A” is equal to the total of all Capital Contributions made by such Member and “B” is equal to the sum of all Capital Contributions made by all Members; or

(B) immediately after each such advance by such non-Delinquent Member, interest shall accrue on the amount of such advance at the prime lending rate quoted in the “Money Rates” section of The Wall Street Journal on the date of such advance plus 2%; provided however , if such Delinquent Member fails to pay back any sums so advanced within ten Business Days, the Percentage Interests of the Members shall be adjusted using the mechanism described in clause (A) above to reflect any sums not repaid, plus accrued and unpaid interest.

(ii) In the event that a Member becomes a Delinquent Member and the non-Delinquent Members either do not elect to advance such Delinquent Member’s Required Contribution or

C&O Credit Support under Section 7.1(b)(i) or do advance such Delinquent Member’s Required Contribution or C&O Credit Support and are not repaid in full under Section 7.1(b)(i)(B) , the Company shall, following a Unanimous Consent Decision by those Members not in Default by written notice to the Delinquent Member, purchase all of the Delinquent Member’s Company Interest at a purchase price equal to 80% of the amount of such Delinquent Member’s Capital Contributions made to date (the “ Delinquent Interest Purchase Price ”), in which case (1) the Delinquent Member shall be obligated to sell all of its Company Interest to the Company at the Delinquent Interest Purchase Price as promptly as reasonably possible and permissible and (2) each Member not in Default shall contribute to the Company its Default Percentage Interest share of the Delinquent Interest Purchase Price.

(iii) The Members agree that irreparable damage would occur in the event that any of the provisions of Section 7.1(a) or (b) were not to be performed in accordance with the terms hereof and that the Company, or the Members, as applicable, will be entitled to specific performance of the terms hereof in addition to any other remedy available at law or in equity.

Section 7.2 Capital Accounts . A Capital Account shall be established and maintained by the Company for each Member in accordance with the requirements of Treasury Regulation Section 1.704-1(b)(2)(iv). Each Member’s Capital Account (a) shall be increased by (i) the amount of money contributed by such Member to the Company, (ii) the Book Value of property contributed by such Member to the Company (net of liabilities secured by the contributed property that the Company is considered to assume or take under Code Section 752) and (iii) allocations to such Member of Profits and any other items of income and gain allocated to such Member and (b) shall be decreased by (i) the amount of money distributed to such Member by the Company, (ii) the Book Value of property distributed to such Member by the Company (net of liabilities secured by the distributed property that such Member is considered to assume or take under Code Section 752) and (iii) allocations to such Member of Losses and any other items of loss or deduction allocated to such Member. On the Transfer of a Member’s Company Interest, the Capital Account of the Transferring Member that is attributable to the Transferred Company Interest shall carry over to the Transferee in accordance with the provisions of Treasury Regulation Section 1.704-1(b)(2)(iv)(1). A Member that has more than one interest in the Company shall have a single Capital Account that reflects all such interests. No Member shall be required to make up a negative balance in its Capital Account nor to pay any Person the amount of any such deficit balance.

Section 7.3 Return of Contributions . Although a Member has the right to receive distributions in accordance with the express terms of this Agreement, a Member is not entitled to the return of any part of its Capital Contributions or to be paid interest in respect of either its Capital Account or its Capital Contributions. An un-repaid Capital Contribution is not a liability of the Company or of any Member. No Member will be required to contribute or to lend any cash or property to the Company to enable the Company to return any Member’s Capital Contributions.

ARTICLE VIII

PROFITS AND LOSSES; DISTRIBUTIONS

Section 8.1 Allocation of Profits and Losses . For purposes of maintaining the Capital Accounts, Profits and Losses shall be allocated among the Members in each Fiscal Year or Allocation Period (or portion thereof) in accordance with the provisions of Section 8.2 .

Section 8.2 Allocations .

(a) After giving effect to the allocations under Section 8.2(b) , Profits and Losses (and to the extent determined necessary and appropriate by the Tax Matters Member to achieve the resulting Capital Account balances described below, any allocable items of gross income, gain, loss and expense

includable in the computation of Profits and Losses) for each Allocation Period shall be allocated among the Members during such Allocation Period, in such a manner as shall cause the Capital Account of each Member (as adjusted to reflect all allocations under this Section 8.2 and all distributions and Capital Contributions through the end of such Allocation Period) to equal, as nearly as possible, (a) the amount such Member would receive if all assets of the Company on hand at the end of such Allocation Period were sold for cash equal to their Book Values, all liabilities of the Company were satisfied in cash in accordance with their terms (limited in the case of non-recourse liabilities to the Book Value of the property securing such liabilities), and all remaining or resulting cash were distributed to the Members in accordance with Section 8.5 and Section 10.2 as if a Dissolution Event had occurred, minus (b) such Member’s share of Minimum Gain and Member Nonrecourse Debt Minimum Gain, computed immediately prior to the hypothetical sale of assets, and the amount any such Member is treated as obligated to contribute to the Company, computed immediately after the hypothetical sale of assets.

(b) Special Allocations. The following allocations shall be made in the following order:

(i) Nonrecourse Deductions shall be allocated to the Members in proportion to their Percentage Interests; provided, that WGL’s Percentage Interest share of such Nonrecourse Deductions shall be further allocated [*****]% to Vega CarryCo and [*****]% to WGL.

(ii) Member Nonrecourse Deductions attributable to Member Nonrecourse Debt shall be allocated to the Members bearing the Economic Risk of Loss for such Member Nonrecourse Debt as determined under Treasury Regulation Section 1.704-2(b)(4). If more than one Member bears the Economic Risk of Loss for such Member Nonrecourse Debt, the Member Nonrecourse Deductions attributable to such Member Nonrecourse Debt shall be allocated among the Members according to the ratio in which they bear the Economic Risk of Loss. This Section 8.2(b)(ii) is intended to comply with the provisions of Treasury Regulation Section 1.704-2(i) and shall be interpreted consistently therewith.

(iii) Notwithstanding any other provision hereof to the contrary, if there is a net decrease in Minimum Gain for an Allocation Period (or if there was a net decrease in Minimum Gain for a prior Allocation Period and the Company did not have sufficient amounts of income and gain during prior periods to allocate among the Members under this Section 8.2(b)(iii) ), items of income and gain shall be allocated to each Member in an amount equal to such Member’s share of the net decrease in such Minimum Gain (as determined pursuant to Treasury Regulation Section 1.704-2(g)(2)). This Section 8.2(b)(iii) is intended to constitute a minimum gain chargeback under Treasury Regulation Section 1.704-2(f) and shall be interpreted consistently therewith.

(iv) Notwithstanding any provision hereof to the contrary except Section 8.2(b)(iii) (dealing with Minimum Gain), if there is a net decrease in Member Nonrecourse Debt Minimum Gain for an Allocation Period (or if there was a net decrease in Member Nonrecourse Debt Minimum Gain for a prior Allocation Period and the Company did not have sufficient amounts of income and gain during prior periods to allocate among the Members under this Section 8.2(b)(iv) , items of income and gain shall be allocated to each Member in an amount equal to such Member’s share of the net decrease in Member Nonrecourse Debt Minimum Gain (as determined pursuant to Treasury Regulation Section 1.704-2(i)(4)). This Section 8.2(b)(iv) is intended to constitute a partner nonrecourse debt minimum gain chargeback under Treasury Regulation Section 1.704-2(i)(4) and shall be interpreted consistently therewith.

(v) Notwithstanding any provision hereof to the contrary except Section 8.2(b)(i) and Section 8.2(b)(ii) , no Losses or other items of loss or expense shall be allocated to any Member to the extent that such allocation would cause such Member to have a deficit balance in its Adjusted Capital Account (or increase any existing deficit balance in its Adjusted Capital Account) at the end of such Allocation Period. All Losses and other items of loss and expense in excess of the limitation set forth in

this Section 8.2(b)(v) shall be allocated to the Members who do not have a deficit balance in their Adjusted Capital Accounts in proportion to their relative positive Adjusted Capital Accounts but only to the extent that such Losses and other items of loss and expense do not cause any such Member to have a deficit in its Adjusted Capital Account.

(vi) Notwithstanding any provision hereof to the contrary except Section 8.2(b)(iii) and Section 8.2(b)(iv) , a Member that unexpectedly receives an adjustment, allocation or distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) shall be allocated items of income and gain (consisting of a pro rata portion of each item of income, including gross income and gain for the Allocation Period) in an amount and manner sufficient to eliminate any deficit balance in such Member’s Adjusted Capital Account as quickly as possible; provided that an allocation pursuant to this Section 8.2(b)(vi) shall be made only if and to the extent that such Member would have deficit Adjusted Capital Account balance after all other allocations provided for in this Article VIII have been tentatively made as if this Section 8.2(b)(vi) were not in this Agreement. This Section 8.2(b)(vi) is intended to constitute a qualified income offset under Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.

(vii) In the event that any Member has a deficit balance in its Adjusted Capital Account at the end of any Allocation Period, such Member shall be allocated items of Company gross income and gain in the amount of such deficit as quickly as possible; provided that an allocation pursuant to this Section 8.2(b)(vii) shall be made only if and to the extent that such Member would have a deficit balance in its Adjusted Capital Account after all other allocations provided for in this Article VIII have been tentatively made as if Section 8.2(b)(vi) and this Section 8.2(b)(vii) were not in this Agreement.

(viii) To the extent an adjustment to the adjusted tax basis of any Company properties pursuant to Code Section 734(b) or 743(b) is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)( m )(2) or 1.704-1(b)(2)(iv)( m )(4) to be taken into account in determining Capital Accounts as the result of a distribution to any Member in complete liquidation of such Member’s Company Interest, the amount of such adjustment to Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be allocated to the Members in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)( m )(2) if such Treasury Regulation Section applies, or to the Member to whom such distribution was made if Treasury Regulation Section 1.704-1(b)(2)(iv)( m )(4) applies.

Section 8.3 Income Tax Allocations .

(a) All items of income, gain, loss and deduction for U.S. federal income tax purposes shall be allocated in the same manner as the corresponding item is allocated pursuant to Section 8.1 or Section 8.2 , except as otherwise provided in this Section 8.3 .

(b) In accordance with the principles of Code Section 704(c) and the Treasury Regulations thereunder (including the Treasury Regulations applying the principles of Code Section 704(c) to changes in Book Values), income, gain, deduction and loss with respect to any Company property having a Book Value that differs from such property’s adjusted U.S. federal income tax basis shall, solely for U.S. federal income tax purposes, be allocated among the Members in order to account for any such difference using the “remedial allocation method” under Treasury Regulation Section 1.704-3(d).

(c) Any (i) recapture of depreciation or any other item of deduction shall be allocated, in accordance with Treasury Regulations Sections 1.1245-1(e) and 1.1254-5, to the Members who received the benefit of such deductions (taking into account the effect of allocations made pursuant to Section 8.3(b) ) and (ii) recapture of credits shall be allocated to the Members in accordance with Law.

(d) Tax credits of the Company shall be allocated among the Members as provided in Treasury Regulation Sections 1.704-1(b)(4)(ii) and 1.704-1(b)(4)(viii).

(e) If, as a result of an exercise of a non-compensatory option to acquire an interest in the Company, a Capital Account reallocation is required under Treasury Regulation Section 1.704-1(b)(2)(iv)(s)(3), the Company shall make corrective allocations pursuant to Treasury Regulation Section 1.704-1(b)(4)(x).

(f) Allocations pursuant to this Section 8.3 are solely for purposes of U.S. federal, state and local Taxes and, except as otherwise specifically provided, shall not affect, or in any way be taken into account in computing, any Member’s Capital Account or share of Profits, Losses, other items or distributions pursuant to any provision of this Agreement.

Section 8.4 Other Allocation Rules .

(a) All items of income, gain, loss, deduction and credit allocable to a Company Interest that may have been Transferred shall be allocated between the Transferring Member and the Transferee based on the portion of the Fiscal Year during which each was recognized as the owner of such interest, without regard to the results of Company operations during any particular portion of that year and without regard to whether cash distributions were made to the Transferring Member or the Transferee during that year; provided, however, that this allocation must be made in accordance with a method permissible under Code Section 706 and the Treasury Regulations thereunder.

(b) The Members’ proportionate shares of the “excess nonrecourse liabilities” of the Company, within the meaning of Treasury Regulation Section 1.752-3(a)(3), shall be allocated to the Members in proportion to their Percentage Interests; provided , that WGL’s Percentage Interest share of such “excess nonrecourse liabilities” shall be further allocated [*****]% to Vega CarryCo and [*****]% to WGL.

(c) The maintenance of each Member’s Capital Account pursuant to Section 7.2 and the allocations set forth in Section 8.1 , Section 8.2 and Section 8.3 and the preceding provisions of this Section 8.4 are intended to comply with the Treasury Regulations. If the Tax Matter Member reasonably determines that the determination of a Member’s Capital Account or the allocations to a Member are not in compliance with the Treasury Regulations, the Board of Managers is authorized to make any appropriate adjustments and notify the Members of the adjustments made within ninety (90) days of this determination.

Section 8.5 Distributions .

(a) Immediately after the Company receives any Capital Contributions of Equalization Expenses attributable to a Member’s Pre-Effective Date Expenditures, as required under Section 7.1(a)(iii) , the Board of Managers shall cause the Company to distribute an amount equal to such Capital Contributions to the Member that incurred the Pre-Effective Date Expenditures to which the Capital Contributions of Equalization Expenses are attributable. Distributions pursuant to this Section 8.5(a) shall be treated as a reimbursement of preformation expenditures within the meaning of Treasury Regulation Section 1.707-4(d).

(b) Following the end of each month of the Company, subject to the last sentence of this Section 8.5 , notwithstanding anything to the contrary set forth in this Agreement, the Board of Managers shall cause the Company to distribute to the Members, in accordance with the Members’ applicable Percentage Interests, an amount equal to one hundred percent (100%) of all Available Cash provided that

WGL’s Percentage Interest share of such Available Cash (the “ WGL Distributions ”) shall be further apportioned between WGL and Vega Carryco and distributed as follows:

(i) prior to the occurrence of a Dissolution Event, [*****]% to WGL and [*****]% to Vega Carryco, and

(ii) upon and following the occurrence of a Dissolution Event, 100% to WGL until the WGL Preference Amount is reduced to $0, and thereafter [*****]% to WGL and [*****]% to Vega Carryco.

All distributions required to be made under this Agreement shall be made subject to Sections 18–607 and 18–804 of the Act, as applicable, and, if the Company is dissolved and liquidated in accordance with the provisions of Section 10.1 , then in addition to the distribution of Equalization Expenses and Available Cash pursuant to the foregoing, all of the other assets of the Company shall be distributed to each Member in accordance with such Member’s applicable Percentage Interest and the other applicable terms and provisions of this Agreement; provided that distributions in kind shall be distributed as if such property had been sold for an amount of cash equal to its Fair Market Value as reasonably determined by the Board of Managers.

ARTICLE IX

TAX STATUS, TAX ELECTIONS AND TAX MATTERS MEMBER

Section 9.1 Tax Status . It is the intention of the Members that the Company be classified as a partnership for U.S. federal and state income tax purposes. Neither the Company nor any Member shall make an election for the Company to be excluded from the application of the provisions of subchapter K of chapter 1 of subtitle A of the Code or any similar provisions of applicable state Law or to be classified as other than a partnership pursuant to Treasury Regulation Section 301.7701-3.

Section 9.2 Tax Elections . The Company shall make the following elections on the appropriate forms or Tax returns:

(a) to adopt the accrual method of accounting;

(b) if there is a distribution of Company property as described in Code Section 734 or a transfer of a Company Interest as described in Code Section 743, upon request by notice from any Member, to elect, pursuant to Code Section 754, to adjust the basis of Company property;

(d) any other election the Board of Managers may deem appropriate and in the best interests of the Members; provided, that the Board of Managers shall not make any election that could reasonably be expected to materially and adversely affect a Member without the advance written consent of such Member.

Section 9.3 Tax Matters Member .

(a) The tax matters partner of the Company pursuant to Code Section 6231(a)(7) shall be a Member designated from time to time by the Board of Managers subject to replacement by the Board of Managers. (Any Member that is designated as the tax matters partner is referred to herein as the “ Tax Matters Member ”). The initial Tax Matters Member is the Managing Member. The Tax Matters Member

shall take such action as may be necessary to cause to the extent possible each other Member to become a notice partner within the meaning of Code Section 6231(a)(8). The Tax Matters Member shall inform each other Member of all significant matters that may come to its attention in its capacity as Tax Matters Member by giving notice thereof on or before the fifth day after becoming aware thereof and, within that time, shall forward to each other Member copies of all significant written communications it may receive in that capacity.

(b) No Member shall file a request pursuant to Code Section 6227 for an administrative adjustment of Company items for any taxable year without first notifying the other Members. If the Board of Managers consents to the requested adjustment, the Tax Matters Member shall file the request for the administrative adjustment on behalf of the Members. If such consent is not obtained within 30 days from such notice, or within the period required to timely file the request for administrative adjustment, if shorter, any Member, including the Tax Matters Member, may file a request for administrative adjustment on its own behalf. Any Member intending to file a petition under Code Section 6226 or 6228 or any other Code Section with respect to any item involving the Company shall notify the other Members of such intention and the nature of the contemplated Action. In the case where the Tax Matters Member is the Member intending to file such petition on behalf of the Company, such notice shall be given within a reasonable period of time to allow the other Members to participate in the choosing of the forum in which such petition will be filed.

(c) If any Member intends to file a notice of inconsistent treatment under Code Section 6222(b), such Member shall give reasonable notice under the circumstances to the other Members of such intent and the manner in which the Member’s intended treatment of an item is (or may be) inconsistent with the treatment of that item by the other Members.

(d) The Tax Matters Member shall not agree to any extension of the statute of limitations for making assessments on behalf of the Company without first obtaining the Super Majority Consent of the Board of Managers. The Tax Matters Member shall not bind any other Member to a settlement agreement in any Tax matter without obtaining the written consent of any such Member. Notwithstanding anything to the contrary in this Agreement, the Company can, to the extent permitted by law, extend the time within which to file any U.S. federal, state and local and foreign tax return required to be filed by the Company.

(e) The Tax Matters Member shall keep the Members informed of all administrative and/or judicial Actions for the adjustment of partnership items (as defined in Code Section 6231(a)(3) and the Treasury Regulations promulgated thereunder) and shall otherwise provide the other Members with such notice as is required under Treasury Regulation Section 301.6223(g)-1(b).

Section 9.4 Tax Returns . The Company shall prepare and timely file (taking into account any extension of time within which to file) all U.S. federal, state and local and foreign tax returns required to be filed by the Company. Any income tax return of the Company shall be prepared by an independent public accounting firm selected by the Board of Managers. Each Member shall furnish to the Company all pertinent information in its possession relating to the Company’s operations that is reasonably necessary to enable the Company’s tax returns to be timely prepared and filed. The Company shall deliver to each Member as soon as applicable after the end of each Fiscal Year, but in any event no later than one hundred twenty (150) days after the end of the Fiscal Year, a Schedule K-1 together with such additional information as may be required by the Members (or their owners) in order to file their individual returns reflecting the Company’s operations. The Company shall also cause an estimated Internal Revenue Service Schedule K-1 or any successor form to be prepared and delivered to the Members within ninety (90) days after the end of each Fiscal Year, including any appropriate state and local apportionment information. The Company shall bear the costs of the preparation and filing of its tax returns.

Section 9.5 Withholding . The Company may withhold from allocations of income, distributions or portions thereof if it is required to do so by any Law, and each Member hereby authorizes the Company to withhold from and pay on behalf of or with respect to such Member any amount of U.S. federal, state or local or non-U.S. Taxes that the Board of Managers determines that the Company is required to withhold and pay with respect to any amount distributable or allocable to such Member pursuant to this Agreement. The Company may require a Member to contribute amounts to the Company upon the request of the Board of Managers to satisfy such withholding obligations, and except for amounts so contributed, any amounts withheld pursuant to this Section 9.5 shall be treated as having been distributed to such Member for all purposes of this Agreement at the time such withholding is made. Each Member hereby agrees to indemnify and hold harmless the Company, the other Members and the Board of Managers from and against any liability (including any liability for Taxes, penalties, additions to Tax or interest) with respect to income attributable to or distributions or other payments to such Member.

Section 9.6 Tax Consolidation . If the Company is treated as a member of a consolidated, combined or unitary group for Tax purposes with any Member or an Affiliate thereof (a “ Member Consolidated Group ”), such Member (the “ Reporting Member ”) shall cause one of the members of such Member Consolidated Group other than the Company to be the reporting or parent entity for any tax return of such Member Consolidated Group and pay the Tax liability due with respect to such Member Consolidated Group. The Members agree that the Company shall promptly reimburse the Reporting Member for any Applicable Tax (defined below) paid by or on behalf of the Reporting Member or any other member of such Member Consolidated Group; provided, however, that the parties agree that (i) any such Applicable Tax shall be considered as paid on behalf of the Company for U.S. federal income tax purposes, (ii) except as provided in clause (iii), below, the Company shall deduct for U.S. federal income tax purposes one hundred percent (100%) of the Applicable Tax, and (iii) in the event that it is determined, pursuant to a final determination as defined in Section 1313 of the Code, that all or a portion of such deduction may be properly claimed by the Reporting Member, its Affiliate or any other member of the Member Consolidated Group, but not the Company, the Company shall reimburse the Reporting Member only for the after-tax cost of such payment of Applicable Tax. With respect to any Tax of a Member Consolidated Group of which the Company is a member, the “Applicable Tax” shall be equal to the Tax of the Member Consolidated Group that the Company would have paid if it had computed its Tax liability for the applicable period on a separate entity basis (rather than as a member of the Member Consolidated Group). Except as provided in this Section 9.6 with respect to the amount of such Member Consolidated Group’s Tax that the Company is required to reimburse the Reporting Member, the Reporting Member shall indemnify and hold the Company harmless from and against any and all Taxes of the Member Consolidated Group.

ARTICLE X

DISSOLUTION, WINDING-UP AND TERMINATION

Section 10.1 Dissolution . The Company shall dissolve and its affairs shall be wound up on the first to occur of the following events (each a “ Dissolution Event ”):

(a) a Unanimous Consent; or

(b) a sale of all or substantially all of the assets of the Company.

(c) No other event, including the retirement, insolvency, liquidation, dissolution, insanity, expulsion, bankruptcy, death, incapacity or adjudication of incompetency of a Member, shall cause the

Company to be dissolved; provided , however , that in the event of any occurrence resulting in the termination of the continued membership of the last remaining Member of the Company, the Company shall be dissolved unless, within 90 days following such event, the personal representative of the last remaining Member agrees in writing to continue the Company and to the admission of such personal representative (or any other Person designed by such personal representative) as a Member of the Company, effective upon the event resulting in the termination of the continued membership of the last remaining Member of the Company. Each Member hereby waives the right of judicial dissolution under Section 18-802 of the Act.

Section 10.2 Winding-Up and Termination . On the occurrence of a Dissolution Event, the Board of Managers shall act as liquidator, unless it elects to appoint one or more other Persons, who may or may not be Members, to act as liquidator, and the winding up of the Company shall occur in accordance with the following provisions of this Section 10.2 .

(a) In the event that a Dissolution Event shall occur, then the Company shall be liquidated and its affairs shall be wound up by the Managing Member in accordance with Section 18-803 of the Act. All proceeds from such liquidation shall be distributed in accordance with the provisions of Section 18-804 of the Act, and all Company Interests in the Company shall be cancelled.

(b) The liquidator shall proceed diligently to wind up the affairs of the Company and make final distributions in accordance with Section 8.5 and in the Act. The costs of winding up shall be borne as a Company expense. Until final distribution, the liquidator shall continue to operate the Company properties with all of the power and authority of the Managing Member and the Board of Managers.

(c) Any distributions in kind to the Members shall be made subject to the liability of each distributee for costs, expenses and liabilities theretofore incurred or for the payment of which the Company has committed prior to the date of termination. The distribution of cash or property to a Member in accordance with the provisions of Section 8.5 and this Section 10.2 shall constitute a complete return to the Member of its Capital Contributions and a complete distribution to the Member of its share of all the Company’s property and constitutes a compromise to which all Members have consented within the meaning of Section 18-502(b) of the Act.

(d) On completion of such final distribution, the Company shall be terminated and the liquidator shall file a Certificate of Cancellation with the Secretary of State of the State of Delaware and take such other actions as may be necessary to terminate the existence of the Company and the Members hereby acknowledge and agree that upon such Certificate of Cancellation become effective, this Agreement shall terminate and be of no further force and effect (except as may be necessary to enforce any obligations or liabilities arising hereunder prior thereto) without any further action by any Member or any other Person.

Section 10.3 Deficit Capital Accounts . Except to the extent a negative balance is due to a Default, no Member shall be required to make up a negative balance in its Capital Account nor to pay any Person the amount of any such deficit balance upon liquidation of the Company.

ARTICLE XI

MISCELLANEOUS

Section 11.1 Counterparts . This Agreement may be executed by facsimile and in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each Member and delivered (including by facsimile, electronic communication in portable document format (.pdf) or similar transmission) to the other Members.

Section 11.2 Governing Law; Jurisdiction and Forum; Waiver of Jury Trial .

(a) This Agreement shall be governed by and construed in accordance with the Laws of the State of Delaware without reference to the choice of Law principles thereof.

(b) Each Member irrevocably submits to the exclusive jurisdiction of any Delaware state court or any federal court sitting in the State of Delaware in any Action arising out of or relating to this Agreement, and hereby irrevocably agrees that all Claims in respect of such Action may be heard and determined in such Delaware state or federal court. Each Member hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such Action. The Members further agree, to the fullest extent permitted by applicable Law, that a final and unappealable judgment against any of them in any Action contemplated above shall be conclusive and may be enforced in any other jurisdiction within or outside the United States by suit on the judgment, a certified copy of which shall be conclusive evidence of the fact and amount of such judgment.

(c) To the extent that any Member has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, each Member hereby irrevocably waives such immunity in respect of its obligations with respect to this Agreement.

(d) Each Member waives, to the fullest extent permitted by applicable Law, any right it may have to a trial by jury in respect of any Action arising out of or relating to this Agreement. Each Member certifies that it has been induced to enter into this Agreement by, among other things, the mutual waivers and certifications set forth above in this Section 11.2 .

(e) Each Member irrevocably waives any right it may have to maintain any action for partition with respect to the property of the Company.

Section 11.3 No Third Party Beneficiaries . The provisions of this Agreement (including, for the avoidance of doubt, the provisions set forth in Section 2.11 ) are not intended to confer (and shall not confer) upon any Person not a Party any rights or remedies hereunder.

Section 11.4 Entire Agreement; Interpretation . This Agreement (including the Annexes), read as a whole, set forth all of the Members’ rights, responsibilities, liabilities and obligations with respect to the transactions contemplated by this Agreement and constitute the entire agreement between the Members with respect to the subject matter hereof. This Agreement supersedes all previous agreements, negotiations or communications between the Members (and their Affiliates), verbal or written, with respect to the subject matter hereof. No Member (nor any of its Affiliates) has made any representation, warranty, covenant or agreement with respect to this Agreement (and/or the transactions contemplated hereby), other than those expressly set forth in this Agreement (including the Annexes). This Agreement shall not be construed against, and no consideration shall be given or presumption made, in each case, against any Member, on the basis that such Member drafted this Agreement (or any provision of this Agreement). Each Member agrees that this Agreement has been purposefully drawn and correctly reflects its understanding of (and intent with respect to) the transactions contemplated hereby and, therefore, waives the application of any Law or rule of construction providing that ambiguities in an agreement will be construed against the drafter thereof.

Section 11.5 Notices . All notices and other communications to be given to any Party hereunder (a) shall be sufficiently given for all purposes hereunder if (I) in writing and delivered by hand, courier or overnight delivery service, certified or registered mail, return receipt requested, with appropriate postage prepaid, (II) in the form of a facsimile (with written confirmation or receipt) or (III) by a form of electronic transmission as that term is defined in Section 232 of the General Corporation Law of Delaware and (b) shall be directed, if to the Company or a Member, to the address, electronic address or facsimile number set forth below (or at such other address, electronic address or facsimile number as the Company or such Member shall designate by like notice):

(i)

If to Vega or Vega Carryco:

Vega Energy Partners, Ltd.

3701 Kirby, Suite 1290

Houston, Texas 77098

Attention: David A. Modesett

Phone No.: 713-527-0557

Fax No.: 713-527-0850

Email: david@vegaenergy.com

With a copy to:

Norton Rose Fulbright

1301 McKinney St, Suite 5100

Houston, TX 77010-3095

Attention: Ned Crady

Fax No.: 713-651-5246

Email: ned.crady@nortonrosefulbright.com

(ii)

If to WGL:

WGL Midstream, Inc.

c/o WGL Holdings, Inc.

Attention: Anthony Nee

101 Constitution Ave, NW

Washington, D.C. 20080

Fax Number: 202-842-2880

Email: anee@washgas.com

(iii)

If to the Company:

Meade Pipeline Co LLC

c/o WGL Holdings, Inc.

Attention: Anthony Nee

101 Constitution Ave, NW

Washington, D.C. 20080

Fax Number: 202-624-6655

Email: anee@washgas.com

(iv)

If to COG:

COG Holdings LLC

840 Gessner, Suite 1400

Houston, Texas 77024

Attention: Corporate Secretary

Fax No.:(281) 589-4613

(v)

If to RRI:

c/o Energy Investors Funds

Three Charles River Place

63 Kendrick Street, Suite 101

Needham, MA 02494

Attn: Legal Department

Fax: (781) 292-7099

With a copy to:

c/o Energy Investors Funds

591 Redwood Highway, Suite 3100

Mill Valley, CA 94941

Attn: Jose A. Torres

Fax: (415) 380-0527

and

Vega Energy Partners, Ltd.

3701 Kirby, Suite 1290

Houston, Texas 77098

Attention: David A. Modesett

Phone No.: 713-527-0557

Fax No.: 713-527-0850

Email: david@vegaenergy.com

and

Norton Rose Fulbright

1301 McKinney St, Suite 5100

Houston, TX 77010-3095

Attention: Ned Crady

Fax No.: 713-651-5246

Email: ned.crady@nortonrosefulbright.com

Section 11.6 Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the Members and their respective successors and permitted assigns.

Section 11.7 Headings . The Section and Article headings contained in this Agreement are inserted for convenience of reference only and will not affect the meaning or interpretation of this Agreement.

Section 11.8 Amendments .

(a) Each Member agrees that the Board of Managers, in accordance with and subject to the limitations contained in Article III , may execute, swear to, acknowledge, deliver, file and record whatever documents may be required to reflect:

(i) a change in the registered agent or registered office of the Company;

(ii) the admission of any Person as a Member to the extent such admission complies with (or is required by) the provisions of Article V ; or

(iii) a change that the Board of Managers believes is reasonable and necessary to qualify or continue the qualification of the Company as a limited liability company under applicable Law or that is necessary or advisable in the opinion of counsel for the Company to ensure that the Company will not be taxable as a corporation or otherwise taxed as an entity for U.S. federal income tax purposes.

(b) Except as otherwise provided in this Section 11.8 , all amendments to this Agreement must be in writing and signed by all the Members.

Section 11.9 Waivers . Any Member may, only by an instrument in writing, waive compliance by any other Member with any term or provision of this Agreement. The waiver by any Member of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach. Except as otherwise expressly provided herein, no failure to exercise, delay in exercising or single or partial exercise of any right, power or remedy by any Member, and no course of dealing between the Members, shall constitute a waiver of any such right, power or remedy.

Section 11.10 Severability . If any provision of this Agreement shall be held invalid, illegal or unenforceable, the validity, legality or enforceability of the other provisions of this Agreement shall not be affected thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue.

Section 11.11 Interpretation . In the event an ambiguity or questions of intent or interpretation arises with respect to this Agreement, this Agreement shall be construed as if it was drafted jointly by the Members, and no presumption or burden of proof shall arise favoring or disfavoring any Member by virtue of the authorship of any provisions of this Agreement.

Section 11.12 Further Assurances . The Members agree that, from time to time, each of them will execute and deliver, or cause to be executed and delivered, such further agreements and instruments and take such other action as may be necessary to effectuate the provisions, purposes and intents of this Agreement.

Signature Page Follows

IN WITNESS WHEREOF, each of the undersigned has executed this Agreement as of the Effective Date.


WGL MIDSTREAM, INC.

By:
Terry McCallister
Chairman of the Board

COG HOLDINGS LLC

By:
Name:
Title:

VEGA MIDSTREAM MPC LLC

By:
David A. Modesett
President

RIVER ROAD INTERESTS LLC

By:
David A. Modesett
President

VED NPI I, LLC

By:
David A. Modesett
President

Signature Page to LLC Agreement

ANNEX A

DESCRIPTION OF THE “PROJECT”

The Project shall consist of Meade’s joint ownership interest in the following natural gas pipeline facilities and equipment. The Members acknowledge that the specific references below to mileage and locations reflect Owner Operator’s estimates as of the Effective Date and that the actual mileages and locations will not be known until Owner Operator has completed construction of such facilities.

The Project will provide transportation of natural gas from Susquehanna County, Pennsylvania to Owner Operator’s mainline in Lancaster County, Pennsylvania. The facilities will include approximately 177 miles of contiguous greenfield pipeline, two (2) compressor stations, three (3) measurement facilities, and other appurtenant underground and aboveground facilities.

The Project consists of two connected pipeline segments as further described below:

Central Penn Line North

The Central Penn Line North pipeline facilities will provide transportation of natural gas from the discharge of WFS’s Zick Station in Susquehanna County to a point of interconnection with the Central Penn Line South segment in Columbia County, Pennsylvania. The Central Penn Line North facilities will include:

•

Approximately 56 miles of thirty (30)-inch diameter pipeline;

•

One compressor station;

•

Proposed measurement and regulator stations on the Central Penn Line North at (1) the discharge side of WFS’s Zick Station in Susquehanna County, Pennsylvania, (2) the suction side of Owner Operator’s proposed East Wilcox Station in Susquehanna County, Pennsylvania, and (3) the proposed Springville Interconnection near milepost 30.6 in Wyoming County, Pennsylvania; and

•

Appurtenant underground and aboveground facilities.

Central Penn Line South

The Central Penn Line South pipeline facilities will provide transportation of natural gas from the Central Penn Line North pipeline to an interconnection with Owner Operator’s mainline in Lancaster County, Pennsylvania at a point called “River Road.” The Central Penn Line South facilities will include:

•

Approximately 121 miles of forty-two (42)-inch diameter pipeline;

•

One compressor station;

•

A regulator station at the interconnection between the Central Penn Line South and Owner Operator’s mainline at “River Road”; and

•

Appurtenant underground and aboveground facilities.

ANNEX B

PRE-EFFECTIVE DATE EXPENDITURES,

EQUALIZATION EXPENSES & DISTRIBUTIONS


	Pre-Effective Date Expenditures (“ PEDE ”)	Capital Contributions of Equalization Expenses under Section 7.1(a)(iii)	Distributions to Reimburse Pre-Effective Date Expenditures under Section 8.5(a)

WGL	$0		$0

COG	$0		$0

RRI	$0		$0

Vega	$		$

ANNEX C

C&O AGREEMENT

Exhibit 10.2

CONSTRUCTION AND OWNERSHIP AGREEMENT

between

TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC

and

MEADE PIPELINE CO LLC

February 14, 2014

In this document, “[*****]” indicates that confidential portions of this document have been redacted and filed separately with the Securities and Exchange Commission.

CONSTRUCTION AND OWNERSHIP AGREEMENT

THIS CONSTRUCTION AND OWNERSHIP AGREEMENT (“ Agreement ”) is entered into as of the 14th day of February, 2014 (“ Effective Date ”), by and between TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC (“ Transco ”), a Delaware limited liability company, and MEADE PIPELINE CO LLC (“ Meade ”), a Delaware limited liability company. Transco and Meade are sometimes referred to herein individually as a “ Party ” and collectively as the “ Parties .”

RECITALS

WHEREAS, Transco and Meade are jointly developing new natural gas pipeline facilities as part of Transco’s proposed “Atlantic Sunrise Project” (such new natural gas pipeline facilities, as further described in Exhibit A hereto, are referred to herein as the “ Central Penn Line ”);

WHEREAS, Transco and Meade are executing contemporaneously herewith a Lease Agreement, under which Transco will lease from Meade that portion of the Central Penn Line owned by Meade, and an Operation and Maintenance Agreement, under which Transco will provide operation and maintenance services for the Central Penn Line; and

WHEREAS, Transco and Meade now desire to set forth the terms and conditions for the construction, ownership and operation of the Central Penn Line.

NOW THEREFORE, in consideration of the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Transco and Meade hereby agree as follows:

ARTICLE I

DEFINITIONS AND INTERPRETATION

1.1	Definitions. As used in this Agreement, the following terms have the following meanings:

“ Affiliate ” means a Person that Controls, is Controlled by or is under common Control with the Person in question.

“ Agreement ” has the meaning given in the introductory paragraph.

“ Alternate Representative ” has the meaning given in Section 2.1(b).

“ Anchor PA ” has the meaning given in Section 6.4(a).

“ Anchor PA Termination ” has the meaning given in Section 6.4(a).

“ Anchor Shipper ” means the shipper under Transco’s Atlantic Sunrise Project that has executed a precedent agreement with Transco for 420,000 dt/d of firm transportation capacity under such project.

“ Atlantic Sunrise Project ” means Transco’s proposed natural gas pipeline expansion project designed to provide new firm transportation capacity from various supply points in northeast Pennsylvania to delivery points along Transco’s mainline in southeast Pennsylvania and extending southward to Transco’s Zone 4/4A Pools at Transco’s Station 85 in Choctaw Co., Alabama.

“ Baseline Development Plan ” has the meaning given in Section 2.4(a).

“ Business Day ” means any day other than a Saturday, a Sunday, or a holiday on which national banking associations in the State of Texas are closed.

“ Cabot ” means Cabot Oil & Gas Corporation.

“ Cabot PA Termination ” has the meaning given in Section 6.4(b).

“ Cabot Precedent Agreement ” means that certain Precedent Agreement (Atlantic Sunrise Project), dated February 5, 2014, between Transco and Cabot.

“ Capital Call ” has the meaning given in Section 2.6(c).

“ Central Penn Line ” has the meaning given in the above Recitals. The Central Penn Line will consist of both the Central Penn Line North and Central Penn Line South segments, as further described in Exhibit A. As used herein, the term “Central Penn Line” shall be subject to the provisions of Section 3.4.

“ Central Penn Line North ” has the meaning given in Exhibit A.

“ Central Penn Line South ” has the meaning given in Exhibit A.

“ Chairman ” has the meaning given in Section 2.1(c).

“ Construction Committee ” has the meaning given in Section 2.1(a).

“ Control ” (including the terms “Controlled by” and “under common Control with”) means the possession, directly or indirectly, and whether acting alone or in conjunction with others of the authority to direct or cause the direction of the management or policies of a Person (a voting interest of 50 percent or more creates a rebuttable presumption of Control.

“ CPL-N Original Project Costs ” means $631,646,000 (the amount equal to the Project Costs associated with the Central Penn Line North estimated as of the Effective Date).

“ CPL-S Original Project Costs ” means $1,273,571,000 (the amount equal to the Project Costs associated with the Central Penn Line South estimated as of the Effective Date).

“ CPL Assets ” has the meaning given in Section 2.11(a).

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“ CPL Original Capital Estimate ” means $1,905,217,000 (the amount equal to the sum of the CPL-N Original Project Costs and CPL-S Original Project Costs estimated as of the Effective Date).

“ Default ” means:

(a) the failure of a Party (“ Non-Funding Party ”) to make all or any portion of a capital contribution by the date required (pursuant to a Capital Call properly issued hereunder), and the continuance of such failure for a period of fifteen (15) days following receipt of notice from the other Party that the Non-Funding Party has failed to make such capital contribution by the date required; provided, however, that Meade shall not be obligated to fund any Capital Call to Meade in excess of [****] of Meade’s Original Capital Estimate (a “ Major Cost Overrun Capital Call ”); or

(b) the failure of a Party to comply in any material respect with any of its other obligations under this Agreement, or the failure of any representation or warranty made by a Party in this Agreement to have been true and correct in all material respects at the time it was made, in each case if such breach is not cured by the applicable Party within sixty (60) days of its receiving notice of such breach from the other Party (or, if such breach is not capable of being cured within such 60-day period, if such Party fails to promptly commence substantial efforts to cure such breach or to prosecute such curative efforts to completion with continuity and diligence).

“ Defaulting Party ” has the meaning given in Section 6.6.

“ Dekatherms ” or “ dt ” has the meaning given in Section 2 of the General Terms and Conditions of Transco’s Tariff.

“ Dispose or Disposition ” means, with respect to a Party’s Ownership Share or any portion thereof, the direct or indirect sale, assignment, transfer, conveyance, gift, exchange or other disposition of the legal or beneficial interest in such asset, whether such disposition be voluntary, involuntary or by operation of Law, including the following: (a) in the case of such asset owned by a natural person, a transfer of such asset upon the death of its owner, whether by will, intestate succession or otherwise; (b) in the case of such asset owned by an entity, (i) a merger or consolidation of such entity (other than where such entity is the survivor thereof), or (ii) a sale or distribution of such asset, including in connection with the dissolution, liquidation, winding-up or termination of such entity (unless, in the case of dissolution, such entity’s business is continued without the commencement of liquidation or winding-up); (c) a disposition in connection with, or in lieu of, a foreclosure of an Encumbrance; but such terms shall not include the creation of an Encumbrance.

“ Disposing Party ” has the meaning given in Section 3.3(a).

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“ dt/d ” means Dekatherms per day.

“ Effective Date ” has the meaning given in the introductory paragraph.

“ Eligible Expansion ” has the meaning given in Section 3.4(a).

“ Eligible Expansion Shipper ” has the meaning given in Section 3.4(b).

“ Eligible Share ” has the meaning given in Section 3.4(b).

“ Encumbrance ” means any lien, pledge, condemnation proceeding, security interest, mortgage, or similar encumbrance.

“ Exchange ” means any public exchange, such as the New York Stock Exchange, American Stock Exchange, The NASDAQ Stock Market or other similar listed securities exchange.

“ Expansion ” has the meaning given in Section 3.4(e).

“ FERC ” means the Federal Energy Regulatory Commission or its successor.

“ FERC Application ” has the meaning given in Section 2.3(a).

“ FERC Authorizations ” means the necessary authorizations from the FERC under the NGA to construct, own and operate the Central Penn Line as contemplated under this Agreement, the Lease and the Operation and Maintenance Agreement.

“ First Threshold Payment Date ” has the meaning given in Section 6.7(e)(i).

“ Force Majeure ” has the meaning given in Section 7.1(a).

“ Governmental Authority ” means any federal, state, local, municipal or, governmental department, commission, court, board, bureau, agency or instrumentality or any judicial, regulatory or administrative body having jurisdiction as to the matter in question.

“ In-Service Date ” means the date that the facilities constituting the Central Penn Line (as described in Exhibit A hereto) are placed in service.

“ Law ” means any statute, law (including common law), order, rule, regulation, decree or other legal or regulatory determination, including any of the foregoing as may be enacted, amended or issued after the execution of this Agreement.

“ Lease ” means that certain Lease Agreement, dated of even date herewith, by and between Transco and Meade, under which Transco will lease from Meade, and Meade will lease to Transco, Meade’s Ownership Share of the Central Penn Line.

“ Lease Reduction Percentage ” has the meaning given in Section 3.2(b).

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“ Lease Term ” has the meaning given in the Lease.

“ Major Cost Overrun Capital Call ” has the meaning given in the definition of Default.

“ Make-Whole Payment ” has the meaning given in Section 6.7(e)(i).

“ Marketing Period ” has the meaning given in Section 6.4(a) and 6.4(b), as applicable.

“ Meade ” has the meaning given in the introductory paragraph.

“ Meade’s Original Capital Estimate ” means $746,136,000 (this amount is equal to Meade’s Ownership Share of the CPL Original Capital Estimate).

“ NGA ” means the Natural Gas Act, 15 U.S.C. § 717, et seq. , as amended.

“ Non-Defaulting Party ” has the meaning given in Section 6.6.

“ Non-Funding Major Cost Overrun Notice ” has the meaning given in Section 3.2.

“ Non-Funding Party ” has the meaning given in the definition of Default.

“ Observer ” has the meaning given in Section 2.1(b).

“ Operation and Maintenance Agreement ” means that certain Operating and Maintenance Agreement, dated of even date herewith, by and between Transco and Meade, under which Transco will provide operation and maintenance services for the Central Penn Line.

“ Other Governmental Approvals ” has the meaning given in Section 2.3(b).

“ Operator ” has the meaning given in the Operation and Maintenance Agreement.

“ Ownership Share ” has the meaning given in Section 3.1(a).

“ Party ” and “ Parties ” have the meanings given in the introductory paragraph.

“ Person ” means any party or individual or any type of corporation, company or partnership.

“ Project Costs ” has the meaning given in Section 2.6(a).

“ Real Property Rights ” has the meaning given in Section 2.3(b).

“ Receipt Interconnections ” means the proposed points of interconnection between the Central Penn Line and WFS on the discharge of WFS’ Zick Station in Susquehanna County, Pennsylvania, at the proposed East Wilcox Station in Susquehanna County, Pennsylvania, and at the proposed Springville Interconnection near milepost 30.6 on the Central Penn Line North in Wyoming County, Pennsylvania.

-5-

“ Representative ” has the meaning given in Section 2.1(b).

“ Restricted Expansions ” has the meaning given in Section 3.4(d).

“ River Road Service Agreement ” means the service agreement under Transco’s Rate Schedule FT providing for firm transportation service of 500,000 dt/d to be entered into between Transco and Cabot pursuant to the terms and conditions of the Cabot Precedent Agreement.

“ ROFO Offer ” has the meaning given in Section 3.3(a).

“ ROFO Party ” has the meaning given in Section 3.3(a).

“ ROFO Period ” has the meaning given in Section 3.3(a).

“ Second Threshold Payment Date ” has the meaning given in Section 6.7(e)(ii).

“ Target In-Service Date ” means September 1, 2017.

“ Transco ” has the meaning given in the introductory paragraph.

“ Transco’s Board ” has the meaning given in Section 6.3.

“ Transco’s Tariff ” means Volume No. 1 of Transco’s FERC Gas Tariff on file with FERC, as amended from time to time.

“ Transferee ” has the meaning given in Section 5.1(b).

“ Updated Development Plan ” has the meaning given in Section 2.4(b).

“ WFS ” means Williams Field Services Company, LLC.

1.2	Rules of Interpretation.

References herein to Sections, Exhibits, clauses and paragraphs are references to sections of, exhibits to, clauses of, and paragraphs of, this Agreement.

Unless otherwise specified, “hereunder,” “herein,” “hereto,” “hereof” and words of similar import refer to this Agreement as a whole and not to any particular provision hereof.

Words denoting the singular include the plural and vice versa .

References to any Person shall include such Person’s successors and permitted assigns in that designated capacity.

References to days, months and years are references to calendar days, months and years unless otherwise specified.

-6-

Words not otherwise defined herein that have well known and generally accepted technical or trade meanings are used in accordance with such meanings.

Any reference to “dollars” or “$” or to “cents” or “¢” shall be to United States dollars or cents, respectively.

The use of the words “include,” “includes,” or “including” shall be by way of example only and shall not be considered in any way to limit the generality of the description preceding the use of such word.

The words “shall” and “will” shall have equal effect.

This Agreement shall be considered for all purposes as prepared through the joint efforts of the Parties and shall not be construed against either Party as a result of the preparation, substitution, submission or other event of negotiation, drafting or execution hereof.

The headings in this Agreement are for purposes of reference only and shall not limit or define the meaning hereof.

Unless the context otherwise requires, the use of any of the words “action,” “claim,” “suit,” “proceeding,” or “judgment,” includes any and all such terms.

Any references to specific section numbers of Transco’s Tariff shall be deemed to include any renumbering thereof or duly authorized amendments thereto.

ARTICLE II

DESIGN AND CONSTRUCTION

2.1	Construction Committee.

(a) Promptly following the Effective Date, the Parties shall form a construction committee (“ Construction Committee ”) in accordance with this Section 2.1.

(b) To facilitate the orderly and efficient conduct of Construction Committee meetings, each Party shall notify in writing the other Party, from time to time, of the identity of (i) one of its officers, employees, directors or agents (a “ Representative ”) and up to three other officers, employees, directors or agents (each an “ Observer ”) who, at no cost or expense to the other Party, will represent it at such meetings, and (ii) at least one, but not more than two, of its officers, employees or agents, who will represent it at any meeting that the Party’s Representative is unable to attend (each an “ Alternate Representative ”). The term Representative as used herein shall also refer to any Alternate Representative that is actually performing the duties of the applicable Representative. A Party may designate a different Representative, Observer or Alternate Representatives for any meeting of the Construction Committee by notifying in writing the other Party at least two Business Days prior to the scheduled date for such meeting; provided, however , that if giving such advance notice is not feasible, then such new Representative, Observer or Alternate Representatives shall present written evidence of his or her authority at the commencement of such meeting.

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(c) Transco’s Representative will be the chairman of the Construction Committee (the “ Chairman ”) and will preside over meetings of the Construction Committee. To facilitate efficient meetings of the Construction Committee, Transco shall send written progress reports monthly to the Construction Committee regarding the development and construction of the Central Penn Line commencing on the Effective Date until the In-Service Date. From the Effective Date through the issuance of the FERC Authorizations to construct the Central Penn Line, the Construction Committee shall meet quarterly, subject to more or less frequent meetings upon approval of the Construction Committee. Following the date of issuance of the FERC Authorizations to construct the Central Penn Line, the Construction Committee shall meet monthly. Notice of, and an agenda for, all Construction Committee meetings shall be provided by the Chairman to the Parties at least one Business Day prior to the date of each meeting. Special meetings of the Construction Committee may be called at such times, and in such manner, as any Party reasonably deems necessary. Any Party calling for any such special meeting shall notify the Representatives of such meeting at least five Business Days prior to the date of such meeting. The notice and agenda requirements set forth herein may be shortened by the Construction Committee.

(d) Meetings of the Construction Committee shall be held in person at a location designated by the Chairman or by means of conference telephone, videoconference or similar communications equipment by means of which all persons participating in the meeting can hear each other.

2.2	Designation of Transco as Constructor.

The Parties hereby designate Transco as the constructor of the Central Penn Line. As constructor, Transco shall be responsible for the planning, design, permitting, procurement, construction and installation of the Central Penn Line.

2.3	Acquisition of Governmental Approvals and Real Property Rights .

(a) Transco shall prepare or cause the preparation of, and shall file, the necessary application (and amendments and exhibits thereto) requesting authorization from the FERC pursuant to the NGA to construct, own and operate Transco’s proposed Atlantic Sunrise Project, which shall include a request to construct, own and operate the Central Penn Line in accordance with the terms of this Agreement and the Lease (such application and any amendments and exhibits thereto are collectively referred to as the “ FERC Application ”). The FERC Application shall provide that Transco shall be the sole applicant for a certificate of public convenience and necessity under Section 7(c) of the NGA in connection with the Central Penn Line, it being expressly understood by the Parties that Meade shall not, by virtue of the FERC Application or the authorizations requested therein, be a holder of a certificate of public convenience and necessity under Section 7(c) of the NGA. Transco shall provide Meade with a draft copy of the FERC Application prior to filing the FERC Application with the FERC, and Transco shall, to the extent practicable, consider any comments timely provided by Meade.

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(b) The Parties recognize that in addition to the FERC Authorizations, various other permits, licenses, authorizations and approvals of Governmental Authorities (“ Other Governmental Approvals ”) will be required for construction and operation of the Central Penn Line. Accordingly, Transco shall seek such Other Governmental Approvals as may be required for construction and operation of the Central Penn Line. Unless otherwise required by Law or as otherwise agreed to by the Parties, Transco will seek to obtain such Other Governmental Approvals in Transco’s name. In addition, Transco shall seek to obtain in Transco’s name all of the rights-of-way, easements, leases, consents, fee ownership, and other real property rights required in connection with the Central Penn Line (collectively, the “ Real Property Rights ”). Meade hereby authorizes Transco to execute all necessary documents and to issue all necessary assurances and indemnities for the Other Governmental Approvals and Real Property Rights as may be required; provided, however , that Meade shall have the opportunity to review and provide reasonable consent to any agreement requiring any representations, warranties and indemnities of Meade. Transco shall exercise due diligence in acting and assuming obligations on behalf of the Parties. Meade agrees to reasonably cooperate with Transco in seeking such Other Governmental Approvals and Real Property Rights.

2.4	Baseline Development Plan .

(a) Promptly following the Effective Date, Transco shall prepare and provide to Meade (i) a detailed project scope, which shall include a description of tasks, work and actions required for preparation of construction of the Central Penn Line, (ii) a project schedule supporting the Target In-Service Date, and (iii) a funding schedule supporting the CPL Original Capital Estimate with a forecast of capital requirements (by calendar quarter relating to the Project Costs) (the items described in (i) through (iii) are hereinafter referred to collectively as the “ Baseline Development Plan ”).

(b) Transco shall provide an updated Baseline Development Plan (“ Updated Development Plan ”) to Meade at least once each calendar quarter. In addition, when available, Transco will include in the Updated Development Plan the design and specifications for the Central Penn Line facilities, which shall be in accordance with the applicable regulations in 49 C.F.R Parts 192 and 199 and with sound and prudent practices in the pipeline industry. If there are any significant variances in any Updated Development Plan from the prior Updated Development Plan, then the Construction Committee shall meet to review and discuss such Updated Development Plan in as much detail as reasonably requested by either Party, and Transco shall consider in good faith any revisions to such Updated Development Plan proposed by any Representative, including revisions to address any material increase to the estimated Project Costs.

(c) Without limitation of the foregoing, if at any time the Construction Committee reasonably determines that (i) the In-Service Date is likely to occur six (6) months or more after the Target In-Service Date, or (ii) the estimated total Project Costs are likely to exceed 110% of the CPL Original Capital Estimate, then the Construction Committee shall convene a meeting at which Transco shall have in attendance the necessary personnel to fully address the circumstances causing such delay and/or cost overrun and the Parties shall discuss in good faith any proposed revisions to the Updated Development Plan.

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2.5	Bidding and Negotiating the Construction .

(a) Prior to the bidding or negotiating of any contract or related series of contracts valued at $10,000,000 or more, Transco shall submit to Meade a list of the proposed contractors and their respective proposed scopes of work including the proposed schedule and the estimated costs for each proposed contract. Meade shall promptly review such information and may propose additions to or deletions from the list of proposed contractors bidding on the work before Transco bids and negotiates the contract; provided, however , that if Transco is not agreeable to such additions or deletions from the list of proposed contractors, then the Parties shall negotiate in good faith to finalize such list.

(b) Upon request, Transco will provide Meade with a copy of all executed contracts or related series of contracts valued at $10,000,000 or more for the construction of the Central Penn Line.

(c) At each meeting of the Construction Committee and at such other times as reasonably requested by Meade, Transco will provide reasonable progress reports for the execution of the Central Penn Line project.

(d) In the acquisition of materials and services for construction of the Central Penn Line, Transco will use reasonable efforts to obtain the agreement of suppliers and manufacturers that undivided interests in all warranties applicable to such goods and services will be assignable by Transco to Meade to the extent of Meade’s Ownership Share. To the extent that such warranties are not so assignable, Transco will (i) notify Meade of such fact and will thereafter reasonably cooperate with Meade if Meade seeks to obtain warranties directly from such suppliers and manufacturers and (ii) provide Meade the benefit of any warranties Transco retains that relate to Meade’s Ownership Share of the CPL Assets.

2.6	Project Costs .

(a) The Parties shall each provide funding for the Project Costs for the Central Penn Line North and Central Penn Line South in proportion to their respective Ownership Shares as set forth in Exhibit B hereto. The term “ Project Costs ” shall mean all costs, expenses, and overheads incurred for the planning, design, permitting, materials, equipment, supplies, services, insurance, labor, transportation, construction, installation and all other procurement or work associated with the Central Penn Line, including:

(i) All payments due under contracts for engineering, construction, environmental work, construction support, legal services and inspection of the Central Penn Line;

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(ii) Personnel compensation, including employee benefits and expenses of full-time employees and of contract labor retained directly by Transco, directly incurred with regard to Transco’s duties and obligations hereunder;

(iii) The pro-rata share of personnel compensation, on a time devoted basis, including employee benefits and expenses of Transco’s employees who render part-time service, directly incurred with regard to Transco’s duties and obligations hereunder;

(iv) Material, equipment, supplies, and services purchased or furnished for construction of the Central Penn Line, net of discounts, including transportation costs; provided, however , that all materials, equipment and supplies furnished out of stock accounts and not purchased specifically for the Central Penn Line shall be charged at book cost plus [****] percent to cover applicable purchase and storage expenses to the extent that such total amount does not exceed the current market rate for such material equipment and supplies;

(v) Any natural gas required for installation, purging, testing and line pack for the Central Penn Line;

(vi) Charges for the use of equipment, such charges to be at the standard use rate for owned equipment and at the prevailing commercial rate for leased equipment;

(vii) Taxes assessed or levied upon or in connection with the construction of the Central Penn Line;

(viii) Permits, fees, and all other charges paid to any governmental entity for the right or privilege of constructing the Central Penn Line;

(ix) The costs and expenses incurred in seeking and obtaining regulatory and environmental authorizations and any certificates, permits, licenses, and other approvals required by Governmental Authorities;

(x) Insurance costs, including premiums, deductible and retentions, for those insurance policies required to be carried by Transco in connection with the construction of the Central Penn Line, including the insurance specified in Section 2.12(a);

(xi) Inspection, testing and start-up costs, including travel-related expenses;

(xii) All costs and payments in connection with the Real Property Rights;

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(xiii) If applicable, any costs and expenses associated with demobilization of work and cancellation of work; and

(xiv) Costs incurred by Transco for other overhead expenses including, but not limited to, office supplies and expenses, office rentals and other space cost, salaries and wages, bonuses and expenses for personnel who render capital related work for the benefit of Transco (in the performance of its obligations hereunder), allocated to the Central Penn Line based on its percentage share of Transco’s total amount of direct capital cost for the given month.

(b) Promptly following the Effective Date, Transco shall submit to Meade a notice setting forth the Project Costs that Transco has incurred to-date, each Party’s share of such costs, a description (in reasonable detail) of the work associated with such costs, and an invoice for Meade’s share of such costs. Meade shall pay to Transco (to the account specified in such invoice) the full amount of such invoice within thirty (30) days of its receipt of such invoice.

(c) Transco shall issue or cause to be issued a written demand to each Party for the making of capital contributions at such times and in such amounts as Transco shall reasonably determine are required for the Project Costs (each such written demand is referred to herein as a “ Capital Call ”). Such capital contributions shall be made in cash. Each Capital Call issued pursuant to this Section shall indicate whether it pertains to the Central Penn Line North or the Central Penn Line South, and shall contain the following information:

(i) The total amount of capital contributions requested from the Parties;

(ii) The amount of capital contribution requested from the Party to whom the request is addressed, such amount to be calculated in proportion to the Ownership Share of such Party;

(iii) The purpose for which the funds are to be applied (in reasonable detail); and

(iv) The date by which payments of the capital contribution shall be made (which date shall not be less than eight (8) Business Days following the date the Capital Call is given or, in the case of a Major Cost Overrun Capital Call, which date shall not be less than twenty (20) days following the date the Capital Call is given, unless in either such case a sooner due date is mutually agreed to by the Parties) and the method of payment, provided that such date and method shall be the same for each Party.

(d) Subject to Section 6.4, each Party agrees that it shall make payment of its respective capital contributions in accordance with Capital Calls issued pursuant to Section 2.6(c); provided, however , that Meade shall not be required to fund a Major Cost Overrun Capital Call.

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(e) Together with each Capital Call, Transco shall deliver to Meade a statement showing, for the Project in total and for the Central Penn Line North and Central Penn Line South, respectively, the following: the aggregate amount of capital contributions made prior to such Capital Call; the aggregate amount applied by Transco to pay the Project Costs; and an estimate of the total Project Costs anticipated to be incurred.

(f) As soon as practical after Transco has completed its final accounting of the Project Costs, Transco shall render to Meade a final notice of the actual Project Costs and an itemized inventory of the real and personal property related to the Central Penn Line showing the cost of all material items of such facilities and all services purchased by Transco. Such itemized inventory shall show the total Project Costs and the portion thereof contributed by each Party. Upon reasonable request by Meade, Transco shall furnish copies of source documents supporting the Project Costs, provided that such documents are requested within two years after the date of Transco’s final notice. If Meade’s share of the actual Project Costs exceeds the amounts funded by Meade hereunder, then Transco will include with such final notice an invoice for the amount owed by Meade and Meade shall pay the full amount of such invoice to Transco within thirty (30) days of the date of the invoice. If Meade’s share of the actual Project Costs is less than the amounts funded by Meade hereunder, then Transco will include with such final notice a refund for the amount of Meade’s overpayments. Notwithstanding the foregoing, the Parties expressly acknowledge and agree that there may be Project Costs incurred or invoiced after the completion of the final accounting and that the Parties shall be responsible for payment of all such costs pursuant to the terms hereof.

2.7	Interconnections .

(a) The facilities comprising the Receipt Interconnections shall be set forth in interconnect agreements between Transco and WFS at such points, provided that Meade shall have the right to be a party to such interconnect agreements. If Meade elects to be a party to such interconnect agreements, then Transco shall negotiate the agreements with WFS and shall provide Meade with a reasonable opportunity to review and provide comments on the agreements prior to execution; provided, however , that in no event shall Meade unduly withhold, delay or condition its acceptance of such interconnect agreements. The facilities at the Receipt Interconnections to be considered as part of the Central Penn Line shall be as set forth in such interconnect agreements; the cost of such facilities shall be included in the Project Costs and shall be constructed, owned and operated as set forth in this Agreement.

(b) The point of demarcation between the facilities comprising the Central Penn Line and the facilities comprising Transco’s mainline at the terminus of the Central Penn Line in Lancaster County, Pennsylvania shall be at the isolating flange located immediately downstream of the regulator station to be constructed as part of the Central Penn Line. If this Agreement remains in effect following the termination of the Lease, then the Parties shall negotiate in good faith an interconnect and reimbursement agreement under which (i) a measuring facility shall be installed at the interconnection

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between the Central Penn Line and Transco’s mainline in Lancaster County, Pennsylvania, and (ii) Meade shall reimburse Transco for all costs, expenses, overheads and tax-related charges incurred for the planning, design, permitting, materials, equipment, supplies, services, insurance, labor, transportation, construction, installation and all other procurement or work associated with such measuring facility.

2.8	Commencement of Construction .

Subject to the other provisions of this Agreement, Transco shall proceed with construction of the Central Penn Line with reasonable diligence following the receipt and acceptance by Transco of all necessary rights and regulatory approvals authorizing the construction of such facilities. Transco shall cause the Central Penn Line to be constructed, installed, tested and placed in service (and shall provide such supervisory, administrative, technical and other services as shall be required therefor) subject to the provisions of the approved design specifications and construction contract(s), in compliance with the requirements of all applicable and valid federal, state and local laws, orders and regulations of Governmental Authorities, in accordance with sound and prudent natural gas pipeline industry practices, and in accordance with the terms and conditions of this Agreement. Transco shall perform its services and fulfill its responsibilities hereunder, and shall require all consultants, contractors, subcontractors, and materialmen furnishing labor, material or services for the design, construction, installation and testing of the Central Penn Line to carry out their responsibilities, in a good and workmanlike manner. Meade shall have the right at any time to inspect or cause to be inspected, at its sole cost, the construction, installation, and testing activities and the equipment and materials to be used in the construction of the Central Penn Line.

2.9	Inspection .

Transco will advise Meade in writing approximately fifteen (15) days in advance of the projected In-Service Date, and Meade will have the right to jointly inspect the Central Penn Line to determine that the facilities have been installed properly and are operational in accordance with the approved design and specifications.

2.10	Documentation .

(a) As soon as reasonably practicable following the In-Service Date, Transco will provide to Meade final “as built” drawings.

(b) Transco shall retain, and shall provide to Meade as soon as reasonably practicable following the In-Service Date, copies of all documentation required pursuant to applicable regulations for the ownership and operation of such facilities. Such documentation may include, without limitation, material warranties, mill test records, radiographic inspection records, hydrostatic testing records, construction reports, welding procedures and qualification tests.

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2.11	Title and Risk of Loss .

(a) Transco and Meade shall each own an undivided interest in the work product, Real Property Rights, pipeline, compressors and any other tangible and intangible assets constituting the Central Penn Line, including the assets identified on Exhibit A (the “ CPL Assets ”), as set forth in Section 3.1 below, regardless of the name or names in which legal title to all or any part of the Central Penn Line may be held (except as otherwise specifically agreed to by the Parties and except as provided in Section 3.4). As soon as is commercially practicable, Meade and/or Transco will execute such documents required to evidence each Party’s legal title to their respective Ownership Share in the CPL Assets.

(b) During the Lease Term, Transco shall be responsible for the risk of loss of the Central Penn Line or any part thereof. At all other times, each Party shall be responsible for the risk of loss of the Central Penn Line or any part thereof in proportion to its respective Ownership Share, subject to each Party’s respective obligations under the Operation and Maintenance Agreement, including Section 8.2 of the Operation and Maintenance Agreement.

2.12	Insurance and Claims .

(a) During construction of the Central Penn Line and prior to the In-Service Date, Transco shall carry and maintain or cause to be carried and maintained for the Central Penn Line the insurance described below for the benefit of and on behalf of Transco and Meade and their respective Affiliates. To the extent that such insurance does not cover the total amount of any loss, then each Party shall be responsible for the amount of such uninsured loss in proportion to its respective Ownership Share of the portion of the Central Penn Line in question.

(i) Builder’s Risk insurance covering physical loss and/or damage to the work on the Central Penn Line for the entire construction period insuring on an all risk policy form and a replacement cost value basis, including coverage during pre-commissioning, commissioning, testing, start-up, transit, including ocean marine cargo coverage (unless such coverage is furnished by applicable supplier) and offsite storage. The Parties, through their respective risk management and insurance representatives, shall reasonably consult and negotiate in good faith to determine the limits, deductible and retention amounts and coverage of such insurance.

(ii) Third Party Liability insurance with limits per occurrence and annual aggregate of $[****] providing coverage for bodily injury and property damage, including premises-operations, personal injury liability, blanket contractual liability, broad form property damage, independent contractors, products/completed operations, cross liability, sudden and accidental pollution, explosion, collapse and underground exposures, and non-owned auto liability.

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(iii) The Parties, through their respective risk management and insurance representatives, shall reasonably consult and negotiate in good faith to determine any other insurance to be maintained during construction of the Central Penn Line.

(b) Following the In-Service Date, the Operator shall carry and maintain or cause to be carried and maintained for the Central Penn Line the insurance as set forth in the Operation and Maintenance Agreement.

(i) The Parties and their Affiliates will be insureds.

(ii) The Parties will be loss payees with respect to their interests in the property insured under all property policies.

(iii) Waiver of all of insurers’ rights of subrogation or recovery shall apply to all insureds.

(iv) Other appropriate Persons shall be named additional insureds and provided waivers of all of insurers’ rights of subrogation or recovery as necessary for construction of the Central Penn Line.

(v) Upon request of a Party, certificates of insurance, copies of policies and/or other documents relevant to such insurance shall be delivered evidencing any or all of the insurance provided and maintained hereunder. If insurance is included in policies pursuant to item (vii) below, copies of policies and/or other documents will be provided in a reasonably redacted form to preserve confidentiality.

(vi) Transco shall handle or cause to be handled any and all claims arising out of the construction and operation of the Central Penn Line and that pertains to the insurance Transco is responsible to provide and maintain.

(vii) Transco may obtain all or part of the Property and/or Third Party Liability insurance under an insurance policy (policies) that insures other operations, businesses, companies, assets or properties of Transco or its Affiliates.

(d) Transco shall require that all contractors and subcontractors performing construction work on the Central Penn Line carry and maintain the types and amounts of insurance as determined by Transco in accordance with customary requirements of the nature of the work to be performed.

(e) Transco shall require that all contractors and subcontractors present evidence of their compliance with a drug-free work environment in compliance with all applicable regulations of the Department of Transportation.

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ARTICLE III

OWNERSHIP

3.1	Ownership Interests .

(a) Subject to Section 3.4, each Party shall have an undivided ownership interest in the CPL Assets as set forth in Exhibit B hereto (referred to herein as a Party’s “ Ownership Share ”). Transco shall (i) assign to Meade its Ownership Share of the CPL Assets (other than the Real Property Rights, which shall be assigned pursuant to Section 3.1(b)) acquired on or prior to the In-Service Date as soon as commercially practicable (but in no event later than the In-Service Date), and (ii) assign to Meade its Ownership Share of the CPL Assets acquired after the In-Service Date as soon as commercially practicable.

(b) Transco shall use commercially reasonable efforts to include in the agreements for the Real Property Rights the right to partially assign the Real Property Rights to Meade, and, promptly following execution of such agreements which include such assignment rights, Transco shall enter into the necessary partial assignment agreements with Meade to reflect ownership of the Real Property Rights by the Parties in proportion to their respective Ownership Shares. For those Real Property Rights agreements for which Transco is unable, despite its use of commercially reasonable efforts, to include the right to partially assign the Real Property Rights to Meade, Transco and Meade shall negotiate in good faith a mutually agreeable alternative to such assignment.

(c) The line pack gas necessary for operating the Central Penn Line will be acquired and owned by the Parties in proportion to their respective Ownership Shares.

(d) Each Party shall be responsible for any taxes and fees of any Governmental Authority associated with its ownership interest in the Central Penn Line.

3.2	Major Cost Overrun Capital Calls .

(a) In the event Meade elects not to fund a Major Cost Overrun Capital Call, Meade shall send written notice (the “ Non-Funding Major Cost Overrun Notice ”) to Transco of its intent not to fund such Major Cost Overrun Capital Call on or before the date payment of such Major Cost Overrun Capital Call is otherwise required under Section 2.6(c)(iv). The election by Meade not to fund a Major Cost Overrun Capital Call shall be irrevocable and shall apply to all future Major Cost Overrun Capital Calls.

(b) Upon receipt of the Non-Funding Major Cost Overrun Notice, Transco shall have the option, to be exercised within [****] days of receiving the Non-Funding Major Cost Overrun Notice, to either: (i) purchase Meade’s Ownership Share at a price equal to [****]% of the amount paid by Meade for the Project Costs (such purchase price shall be payable in cash); or (ii) fund all of the remaining costs of the Central Penn Line, in which event the rent payable to Meade under the Lease shall be reduced by an amount equal to the product of the Monthly Lease Charge (as defined in the Lease) multiplied by the lease reduction percentage (the “ Lease Reduction Percentage ”), which shall be equal to “X”, where X = “D” divided by “A” (as defined below).

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•

“A” equals Meade’s Original Capital Estimate;

•

“B” equals the Project Costs funded by Meade as of and through the date of the Non-Funding Major Cost Overrun Notice;

•

“C” equals Meade’s Ownership Share of the total actual Project Costs incurred to complete the Central Penn Line; and

•

“D” equals C minus B, or Meade’s Ownership Share of the total actual Project Costs funded by Transco from and after the date of the Non-Funding Major Cost Overrun Notice to complete the Central Penn Line.

For example if:

(i) Meade’s Ownership Share of the total actual Project Costs incurred to complete the Central Penn Line is $[****] (or “C” above) which represents [****]% of Meade’s Original Capital Estimate; (ii) as of and through the date of the Non-Funding Major Cost Overrun Notice, Meade has funded $[****] (or “B” above) which represents [****]% of Meade’s Original Capital Estimate; and (iii) from and after the date of the Non-Funding Major Cost Overrun Notice, Transco funds the remaining $[****] (or “D” above) otherwise payable by Meade, then the Lease Reduction Percentage would be[****]% ($[****] (D) divided by $746,136,000 (A)).

(c) If Transco elects to purchase Meade’s Ownership Share of the CPL Assets pursuant to Section 3.2(b), then Transco shall purchase such assets for cash within ten (10) Business Days of exercising such purchase option and Meade shall assign its Ownership Share of the CPL Assets to Transco pursuant to the title transfer process referenced in Section 6.7(d).

(d) If Transco elects not to exercise either of the rights set forth in Section 3.2(b), then the Parties shall discuss in good faith any revisions to the Updated Development Plan and/or reasonable alternatives to the Central Penn Line project in general.

3.3	Right of First Offer .

(a) If at any time Meade or a member of Meade (for purposes of this Section 3.3, the term “Ownership Share” shall include such member’s membership interest in Meade), wishes to Dispose of all or a portion of its Ownership Share to any Person other than to an existing member of Meade or an Affiliate of an existing member of Meade, then Meade or its member, as applicable (the “ Disposing Party ”) must first offer to Dispose of its Ownership Share (the “ ROFO Offer ”) to Transco (the “ ROFO Party ”) by delivering written notice to the ROFO Party of the purchase price (payable in cash) and proposed terms of sale at which it is willing to sell such Ownership Share. If at any time Transco wishes to Dispose of all or a portion of its Ownership Share to any Person other than its Affiliate, then Transco (the “ Disposing Party ”) must first offer to Dispose of its

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Ownership Share (the “ ROFO Offer ”) to Meade (the “ ROFO Party ”) by delivering written notice to the ROFO Party of the purchase price (payable in cash) and proposed terms of sale at which it is willing to sell such Ownership Share. The ROFO Party shall have thirty (30) days after receipt of such written notice (“ ROFO Period ”) to notify the Disposing Party of either (i) its acceptance of the ROFO Offer or (ii) that the ROFO Party will not make an offer to purchase such Ownership Share (if the ROFO Party fails to deliver such notice within the ROFO Period, then the ROFO Party shall be deemed to have elected not to make an offer to purchase such Ownership Share).

(b) If the ROFO Party accepts the ROFO Offer, closing shall occur promptly (and no later than sixty (60) days following acceptance), and shall be held at the principal place of business of the Disposing Party, unless the Parties mutually agree upon a different place or date. At the closing, (i) the Disposing Party shall execute and deliver to the ROFO Party (A) an assignment of the Ownership Share, in form and substance reasonably acceptable to the ROFO Party, containing a special warranty of title as to such portion of the Ownership Share (including that such portion of the Ownership Share is free and clear of all Encumbrances) and (B) any other instruments reasonably requested by the ROFO Party to give effect to the purchase, and (ii) the ROFO Party shall deliver the purchase price to the Disposing Party in immediately available funds.

(c) If the ROFO Party does not accept the ROFO Offer, then, for a period of [****] days immediately following the ROFO Period, the Disposing Party shall have the right to transfer the offered Ownership Share to any third party transferee at a price not less than the price in the ROFO Offer and on such other terms and conditions not more favorable in any material respect to the third party transferee than those offered in the ROFO Offer. If, however, the Disposing Party fails to so Dispose of the Ownership Share within such [****]-day period, then any Disposition after the expiration of such [****]-day period shall again become subject to the right of first offer set forth in this Section 3.3.

(d) Notwithstanding the foregoing: (i) no issuance, sale, assignment, transfer, conveyance, gift, exchange or other disposition (including through merger, acquisition, consolidation or other business combination transaction) of any equity interest in any entity the equity securities of which are listed on an Exchange shall constitute a Disposition; (ii) Transco, or any member of Meade or any parent of Transco or parent of a member of Meade the equity securities of which are listed on an Exchange, shall at all times have the right, without any restriction hereunder, to Dispose of its Ownership Share through a merger, acquisition, consolidation or other business combination transaction; (iii) the sale, assignment, transfer, conveyance, gift, exchange or other disposition of the Ownership Share to a partnership or limited liability company in connection with the public offering of partnership interests or membership interests in such partnership or limited liability company shall not constitute a Disposition; (iv) no sale, assignment, transfer, conveyance, gift, exchange or other disposition (including through merger, acquisition, consolidation or other business combination transaction) of a limited partnership interest in Vega Energy Partners, Ltd. or EIF United States Power Fund IV, L.P. shall constitute a Disposition in Meade or any member of Meade so long as the general partner of Vega Energy Partners, Ltd., MMC, LLC, or EIF United States Power Fund IV, L.P., EIF US Power IV, LLC, remains in Control of Vega Energy Partners, Ltd. or EIF United States Power

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Fund IV, L.P.; (v) no issuance, offering or recapitalization of Vega Energy Partners, Ltd. or EIF United States Power Fund IV, L.P. shall constitute a Disposition so long as the general partner of Vega Energy Partners, Ltd , MMC, LLC, or EIF United States Power Fund IV, L.P., EIF US Power IV, LLC, remains in Control of Vega Energy Partners, Ltd. or EIF United States Power Fund IV, L.P.; and (vi) no sale, assignment, transfer, conveyance, gift, exchange or other disposition (including through merger, acquisition, consolidation or other business combination transaction) by Vega Energy Partners, Ltd. or EIF United States Power Fund IV, L.P. to their respective Affiliates of an indirect equity interest in any member of Meade shall constitute a Disposition.

3.4	Expansions .

(a) As used herein, the term “ Eligible Expansion ” means (i) an expansion of the Central Penn Line which will increase the firm transportation capacity of all or a portion of the Central Penn Line, and/or (ii) the construction of an interconnection(s) (other than the Receipt Interconnections) on the Central Penn Line. If Transco desires to pursue or develop an Eligible Expansion, then Transco shall notify Meade thereof. As part of such notification, Transco shall provide the following information about the Eligible Expansion: (A) a description of the facilities to be installed; (B) the total estimated cost of the facilities; (C) the amount of firm transportation capacity to be added; (D) flow diagrams for such capacity; (E) the proposed project schedule, including the expected construction period and target in-service date; and (F) a brief description of the approvals required of any Governmental Authority.

(b) As to any Eligible Expansion, Meade shall have the option, exercisable within [****] days after receipt of such notification from Transco, to participate in such Eligible Expansion as an owner of an undivided ownership interest in the Eligible Expansion facilities up to, but not exceeding, Meade’s Eligible Share of the ownership interest in such facilities. If Cabot, Meade, Vega Energy Partners, Ltd., WGL Holdings, EIF USPV, L.P., or any other investor in Meade or their respective affiliates or successors (each an “ Eligible Expansion Shipper ”) has executed a binding precedent agreement for firm transportation service under such Eligible Expansion, then the term “ Eligible Share ” shall mean the lower of (i) [****]%, or (ii) the percentage equivalent of a fraction, the numerator of which is the sum of the firm transportation capacity (measured in dt/d) subscribed in total by the Eligible Expansion Shippers under the Eligible Expansion and the denominator of which is the total firm transportation capacity (measured in dt/d) under the Eligible Expansion. If no Eligible Expansion Shipper has executed a binding precedent agreement for firm transportation service under such Eligible Expansion, then the term “ Eligible Share ” shall mean [****]%. If such option is triggered and Meade exercises such option within such [****]-day period, then the Parties shall negotiate in good faith an overall plan for such Eligible Expansion. Transco shall have the right but not the obligation to construct and operate (or cause the construction and operation) of any Eligible Expansion and to lease from Meade the undivided joint ownership interest in the Eligible Expansion facilities owned by Meade on mutually agreeable terms setting forth each Party’s rights as it relates to such Eligible

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Expansion. In that regard, the Parties shall negotiate in good faith to reach such mutually agreeable terms. If despite their good faith efforts the Parties are unable to reach mutual agreeable terms within [****] days following the date that Meade exercises such option, but Meade nevertheless desires to participate as an owner of an undivided ownership interest in the Eligible Expansion facilities, then (y) Meade’s participation in such Eligible Expansion shall be as an interstate gas pipeline company subject to the jurisdiction of the FERC, and (z) Meade’s pipeline capacity rights on the Central Penn Line under such Eligible Expansion shall equal Meade’s Eligible Share of the pipeline capacity to be added on the Central Penn Line under such Eligible Expansion.

(c) If Meade does not exercise such option within such [****]-day period, then Transco may proceed with such Eligible Expansion, and the following shall apply: (i) Meade shall not oppose, obstruct, or otherwise interfere with, in any manner whatsoever, the efforts of Transco to obtain the necessary governmental authorizations for such Eligible Expansion or to develop, construct, install, and operate such Eligible Expansion, provided, however , that the foregoing shall not be construed to prohibit Meade or its Affiliates from competing with the Central Penn Line or such Eligible Expansion; and (ii) except to the extent otherwise agreed to in writing by the Parties, (A) Meade shall not have any right to approve, own, participate in, construct, or install (or cause to be constructed or installed) such Eligible Expansion, (B) Meade shall not be required to pay any development, construction, or installation costs for such Eligible Expansion, and (C) Transco or its designee shall own the facilities and pipeline capacity associated with such Eligible Expansion.

(d) Any expansion of the Central Penn Line that would not qualify as an Eligible Expansion shall be deemed “ Restricted Expansions .” Transco shall have the right at any time, in its sole discretion and without the need to obtain Meade’s consent, to construct, install, own and operate any Restricted Expansions. Meade shall not oppose, obstruct, or otherwise interfere with, in any manner whatsoever, the efforts of Transco to obtain the necessary governmental authorizations for any Restricted Expansions or to develop, construct, install, and operate any Restricted Expansions; provided, however , that the foregoing shall not be construed to prohibit Meade or its Affiliates from competing with the Central Penn Line or any Restricted Expansions. Except to the extent otherwise agreed to in writing by the Parties, (i) Meade shall not have any right to approve, own, participate in, construct, or install (or cause to be constructed or installed) any Restricted Expansions, (ii) Meade shall not be required to pay any development, construction, or installation costs for any Restricted Expansions, and (iii) Transco or its designee shall own the facilities and pipeline capacity associated with any Restricted Expansions.

(e) Upon the completion of any Eligible Expansion or Restricted Expansion (collectively, “ Expansion ”), the Parties agree to promptly amend this Agreement to reflect any changes hereto reasonably required in connection with such Expansion, including (i) amending Exhibits B and C hereto to reflect the ownership interests of the Party(ies) participating in the Expansion, the Ownership Shares as set forth in the original Exhibit B, the capacity rights in the expanded Central Penn Line (if applicable), and the date each such ownership interests became effective, and (ii) addressing the ownership of any line pack gas and Real Property Rights associated with such Expansion.

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(f) Each Expansion shall be designed such that the Expansion will not affect a non-participating Party’s undivided ownership rights hereunder. Construction of any Expansion must not impair the ability of the non-participating Party to fully use its capacity rights under this Agreement other than for temporary interruptions to install the facilities required for such Expansion.

(g) This Section 3.4 sets forth the exclusive procedures for pursuing an Expansion, and neither Party shall have the right to pursue or develop an Expansion except in strict compliance with this Section 3.4.

ARTICLE IV

CAPACITY RIGHTS

4.1	Parties’ Rights to Capacity on Central Penn Line .

During the Lease Term, Transco will have rights to 100% of the pipeline capacity of the Central Penn Line. Upon termination of the Lease, the Parties shall have the capacity rights set forth on Exhibit C hereto.

4.2	Operating Costs .

(a) The Parties acknowledge that the Operation and Maintenance Agreement sets forth the responsibilities of the Parties with regard to the costs to operate and maintain the Central Penn Line. Except as otherwise mutually agreed, the costs to operate and maintain any Expansion facilities shall be borne by Transco and any other party participating in the Expansion in proportion to their respective ownership percentages in the Expansion facilities.

(b) Gas and electric power used for compression of the gas and gas lost or unaccounted for will be allocated solely to Transco during the Lease Term. Upon termination of the Lease, subject to the receipt of the necessary abandonment and certificate authorizations from the FERC, gas and electric power used for compression of the gas and gas lost or unaccounted for will be allocated to each Party based on the quantity of gas delivered in a given month through such Party’s capacity in the Central Penn Line (as such capacity may be increased pursuant to any Expansions), without regard to receipt or delivery points.

ARTICLE V

OPERATION AND MAINTENANCE

5.1	Operation and Maintenance Agreement .

(a) Beginning on the In-Service Date, Transco shall operate and maintain such facilities pursuant to the terms and conditions of the Operation and Maintenance Agreement.

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(b) Notwithstanding the foregoing, if pursuant to the applicable provisions of this Agreement Transco transfers all of its Ownership Share in the Central Penn Line to a Person that is not an Affiliate of Transco (“ Transferee ”), then Meade shall have the right to either assume the role of operator of the Central Penn Line or designate an Affiliate of Meade to be the new operator for the Central Penn Line. If Meade does not elect to become the new operator of the Central Penn Line and does not designate an Affiliate of Meade to become the new operator, then a third party operator shall be promptly selected by mutual consent of Meade and the Transferee. The new operator determined in accordance with the foregoing shall perform the operation services for the Central Penn Line pursuant to such terms and conditions as shall be set forth in a mutually agreeable operating agreement between Meade, the Transferee and the new operator.

ARTICLE VI

TERM AND TERMINATION

6.1

Term .

This Agreement shall be effective as of the Effective Date and shall remain in force and effect unless and until terminated in accordance with the terms hereof. No Party shall have the right to unilaterally terminate or withdraw from this Agreement except as expressly set forth in this Article VI.

6.2	Termination for Insufficient Economic Support .

Transco may terminate this Agreement immediately upon written notice to Meade if Transco is unable to secure binding agreements relating to Transco’s commercial development of the Atlantic Sunrise Project that are sufficient, in Transco’s sole determination, to economically justify Transco proceeding with the Atlantic Sunrise Project; provided that such termination right must be exercised, if at all, by Transco delivering notice of termination to Meade on or before February 17, 2014, or else such termination right shall be waived.

6.3	Termination for Lack of Board Approvals .

Transco shall seek in good faith the necessary approvals from its management committee and the board(s) of directors of its parent company(ies) (such committee and board(s) are collectively referred to herein as “ Transco’s Board ”) to construct, own and operate the Atlantic Sunrise Project facilities necessary to provide firm transportation service under the Anchor PA and the Cabot Precedent Agreement. Transco shall provide prompt notice to Meade of the decision by Transco’s Board on such request for such necessary approvals. Transco may terminate this Agreement immediately upon written notice to Meade if Transco is unable to secure such necessary approvals; provided that such termination right must be exercised, if at all, by Transco delivering notice of termination to Meade on or before the earlier of March 4, 2014 or the tenth (10th) Business Day following Meade’s receipt of Transco’s notice that Transco’s Board has denied such approvals, or else such termination right shall be waived.

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6.4	Termination in Connection with Anchor PAs .

(a) If Transco’s precedent agreement with the Anchor Shipper (referred to herein as the “ Anchor PA ”) is terminated after February 28, 2014 but prior to the In-Service Date (“ Anchor PA Termination ”) and no substitute shipper(s) contracts for capacity in the amount of such terminated Anchor PA within [****] days of such termination (as used in this Section 6.4(a), “ Marketing Period ”) and Transco elects not to go forward with the construction of the Central Penn Line, then Transco shall have the right to terminate this Agreement upon written notice to Meade; provided that such termination right must be exercised, if at all, within [****] days following the effective date of the Anchor PA Termination or else such right shall be waived; provided, further, that prior to Transco exercising such termination right, the Parties shall negotiate in good faith reasonable alternatives to the current design of the Central Penn Line and the terms and conditions of this Precedent Agreement that would effectively replace the Anchor Shipper’s subscription under the Atlantic Sunrise Project. The Parties shall have no obligation hereunder to fund Capital Calls during the Marketing Period. Transco shall provide notice to Meade of the Anchor PA Termination promptly following the Anchor PA Termination. Exhibit D hereto provides a description of the rights set forth in the Anchor PA under which such agreement may be terminated after February 28, 2014 but prior to the In-Service Date.

(b) If the Cabot Precedent Agreement is terminated after February 28, 2014 but prior to the In-Service Date (“ Cabot PA Termination ”) and no substitute shipper(s) contracts for capacity in the amount of the capacity set forth in the Cabot Precedent Agreement within [****] days of such termination (as used in this Section 6.4(b), “ Marketing Period ”), then Transco shall have the right to terminate this Agreement upon written notice to Meade; provided that such termination right must be exercised, if at all, within [****] days following the effective date of the Cabot PA Termination or else such right shall be waived; provided, further, that prior to Transco exercising such termination right, the Parties shall negotiate in good faith reasonable alternatives to the current design of the Central Penn Line and the terms and conditions of this Precedent Agreement that would effectively replace Cabot’s subscription under the Atlantic Sunrise Project. The Parties shall have no obligation hereunder to fund Capital Calls during the Marketing Period. Transco shall provide notice to Meade of the Cabot PA Termination promptly following the Cabot PA Termination. Exhibit D hereto provides a description of the rights set forth in the Cabot Precedent Agreement under which such agreement may be terminated after February 28, 2014 but prior to the In-Service Date.

6.5	Termination in Connection with FERC Authorizations .

If the FERC Authorizations issued for the Central Penn Line include a condition requiring Meade to be a natural gas company subject to the jurisdiction of the FERC under the NGA, then the Parties shall negotiate in good faith reasonable modifications to the Project structure to address such condition. Such negotiations shall include the

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practical considerations of Meade complying with such condition and establishing itself as a natural gas company subject to the jurisdiction of the FERC. If Meade elects to comply with such condition (such election by Meade shall be at its sole discretion), then the Parties shall promptly negotiate in good faith any revisions to this Agreement, the Lease and the Operation and Maintenance Agreement reasonably necessary to effectuate such election by Meade. If within [****] days following the date of the FERC order issuing the FERC Authorizations for the Central Penn Line, Meade has not elected to comply with such condition or if the Parties have failed to reach mutual agreement regarding a resolution, then either Party may terminate this Agreement upon written notice to the other Party, provided that such termination right must be exercised, if at all, within [****] days following the date of the FERC order issuing the FERC Authorizations for the Central Penn Line or else such termination right shall be waived.

6.6	Termination in Connection with Default .

If a Party commits a Default and such Default is not cured within the time period, if any, applicable to such Default as set forth herein, then the other Party (“ Non-Defaulting Party ”) may terminate this Agreement upon written notice to the Party in Default (“ Defaulting Party ”), provided that such termination right must be exercised, if at all, within [****] days following the date that such termination right becomes available, or else such right shall be waived.

6.7	Effect of Termination .

(a) If this Agreement is terminated by Transco in accordance with Section 6.2 or Section 6.3, then Transco shall promptly refund to Meade in cash any amounts paid by Meade for the Project Costs.

(b) If this Agreement is terminated in accordance with Section 6.4 or Section 6.5 and, in either case, Transco elects not to go forward with the construction of the Central Penn Line, then Transco shall have the right but not the obligation to purchase Meade’s Ownership Share in the CPL Assets; provided that such purchase right must be exercised, if at all, by Transco providing written notice thereof to Meade within [****] days following the effective date of termination of this Agreement, or else such right shall be waived. If such purchase right of Transco is waived, then Meade shall have the right but not the obligation to purchase Transco’s Ownership Share in the CPL Assets; provided that such purchase right must be exercised, if at all, by Meade providing written notice thereof to Transco within [****] days following the effective date of waiver of Transco’s purchase right, or else Meade’s purchase right shall be waived. If the purchasing Party timely delivers written notice to the non-purchasing Party, then the purchasing Party’s purchase right shall be deemed exercised, and the closing of the purchase of the non-purchasing Party’s Ownership Share in the CPL Assets shall occur promptly following such exercise. The purchase price for such CPL Assets shall equal the amount paid by the non-purchasing Party for the Project Costs. At the closing: (i) the non-purchasing Party shall execute and deliver to the purchasing Party (A) an assignment of the Ownership Share in form and substance reasonably acceptable to the purchasing Party, containing a special warranty of title as to such portion of the Ownership Share

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(including that such portion of the Ownership Share is free and clear of all Encumbrances), and (B) any other instruments reasonably requested by the purchasing Party to give effect to the purchase; and (ii) the purchasing Party shall deliver the purchase price to the non-purchasing Party in immediately-available funds.

(c) If this Agreement is terminated in accordance with Section 6.4(b) or Section 6.5 and, in either case, Transco elects to go forward with the construction of the Central Penn Line, then Transco shall have the obligation to purchase the Ownership Share of Meade in the CPL Assets. The purchase price for such CPL Assets shall equal the amount paid by Meade for the Project Costs. At the closing: (i) Meade shall execute and deliver to Transco (A) an assignment of the Ownership Share in form and substance reasonably acceptable to Transco, containing a special warranty of title as to such portion of the Ownership Share (including that such portion of the Ownership Share is free and clear of all Encumbrances), and (B) any other instruments reasonably requested by Transco to give effect to the purchase; and (ii) Transco shall deliver the purchase price to Meade in immediately-available funds.

(d) If this Agreement is terminated in accordance with Section 6.6, then (i) if Meade was the Defaulting Party giving rise to the termination and Transco elects to go forward with the construction of the Central Penn Line, Transco shall have the obligation to purchase the Ownership Share of Meade in the CPL Assets, (ii) if Meade was the Defaulting Party giving rise to the termination but Transco does not elect to go forward with the construction of the Central Penn Line, Transco shall have the right, but not the obligation, to purchase the Ownership Share of Meade in the CPL Assets, and (iii) if Transco was the Defaulting Party giving rise to the termination, Meade shall have the right but not the obligation to purchase the Ownership Share of Transco in the CPL Assets; provided that, in each of (ii) and (iii) above, such purchase right must be exercised, if at all, by the Non-Defaulting Party providing written notice thereof to the Defaulting Party within [****] days following the effective date of termination of this Agreement, or else such right shall be waived. The closing of the purchase of the Defaulting Party’s Ownership Share in the CPL Assets under this Section 6.7(d) shall take place within [****] days following the effective date of termination of this Agreement. At the closing: the Defaulting Party shall execute and deliver to the Non-Defaulting Party (A) an assignment of such Party’s Ownership Share in the CPL Assets in form and substance reasonably acceptable to the Non-Defaulting Party, containing a special warranty of title as to such portion of the Ownership Share in the CPL Assets (including that such portion of the Ownership Share is free and clear of all Encumbrances), and (B) any other instruments reasonably requested by the Non-Defaulting Party to give effect to the purchase. Transco agrees to use reasonable efforts to assist Meade in seeking the assignment of the FERC Authorizations to Meade in the event of a Transco Default under Section 6.6 and Meade’s election of its remedy under Section 6.7(d)(iii).

(e) If this Agreement is terminated in accordance with Section 6.6 and Transco purchases Meade’s Ownership Share in the CPL Assets pursuant to Section 6.7(d)(i) above, then the following shall apply:

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(i) if Meade’s Default giving rise to such termination occurs on or before the date that the total amount that Meade has paid toward the Project Costs equals [****]% of Meade’s Original Capital Estimate (the “ First Threshold Payment Date ”), then Meade shall make a payment to Transco in the amount of Limit redaction to the amount $[****] minus the amount paid by Meade for the Project Costs (the “ Make-Whole Payment ”) and the purchase price to be paid by Transco for Meade’s Ownership Share in the CPL Assets shall be zero;

(ii) if Meade’s Default giving rise to such termination occurs after the First Threshold Payment Date but on or before the date that the total amount that Meade has paid toward the Project Costs equals [****]% of Meade’s Original Capital Estimate (the “ Second Threshold Payment Date ”), then the amount of the Make-Whole Payment shall be zero and the purchase price to be paid by Transco for Meade’s Ownership Share in the CPL Assets shall be the amount paid by Meade for the Project Costs minus $[****];

(iii) if Meade’s Default giving rise to the termination occurs after the Second Threshold Payment Date, then the Make-Whole Amount shall be zero and the purchase price to be paid by Transco for Meade’s Ownership Share in the CPL Assets shall be [****]% of the amount paid by Meade for the Project Costs;

(iv) promptly following the determination of the Make-Whole Payment, Transco shall submit to Meade an invoice for the amount of the Make-Whole Payment, and Meade shall pay to Transco (to the account specified in such invoice) the full amount of such invoice within thirty (30) days of its receipt of such invoice;

(v) on or before February 28, 2014, Meade shall present to Transco either (i) an unconditional and irrevocable guarantee of payment from Meade’s creditworthy members in a form mutually agreeable to the Parties, (ii) a letter of credit in form and substance mutually agreeable to the Parties and from a bank reasonably acceptable to Transco, or (iii) an escrow agreement mutually agreeable to the Parties, which, in each case, shall be for the period from the Effective Date until the First Threshold Payment Date and, in the aggregate, shall be in an amount equal to the Make-Whole Payment; provided however, that in each case of (i), (ii) and (iii) above, the payment obligations of Meade’s members shall be several and not joint and no member of Meade shall be liable for any failure to pay or other default of any other member of Meade;

(vi) the parties intend the Make-Whole Payment to be liquidated damages constituting compensation and not a penalty.

(f) If this Agreement is terminated in accordance with Section 6.6 and either Transco purchases Meade’s Ownership Share in the CPL Assets pursuant to Section 6.7(d)(ii) above or Meade purchases Transco’s Ownership Share in the CPL Assets pursuant to Section 6.7(d)(iii) above, then the following shall apply: from the Effective Date to the Second Threshold Payment Date, the purchase price for the CPL Assets shall

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be [****]% of the amount paid by the Defaulting Party for the Project Costs; following the Second Threshold Payment Date, the purchase price for such CPL Assets shall be [****]% of the amount paid by the Defaulting Party for the Project Costs.

(g) Sections 6.7(d) and (f) set forth Meade’s exclusive remedy for Transco’s Default giving rise to termination under Section 6.6, and Sections 6.7(d), (e) and (f) set forth Transco’s exclusive remedies for Meade’s Default giving rise to termination under Section 6.6. Otherwise, termination of this Agreement shall not relieve either Party from any obligation already accrued prior to the date of such termination nor shall such termination deprive a Party of any remedy at law otherwise available to it.

(h) Any provision of this Agreement that must survive termination hereof in order to give proper effect to its intent shall survive the expiration or earlier termination of this Agreement for the period specified in the applicable provision or, if no period is specified, for the period required in order to give effect to its intent.

6.8	Abandonment .

(a) If at any time the Parties mutually agree to terminate the use of the Central Penn Line, the facilities and equipment comprising the Central Penn Line shall be abandoned and, if applicable, disposed of in a mutually agreeable manner, with costs incurred or revenues received from such abandonment and disposition to be shared based on each Party’s Ownership Share.

(b) Except for any request for pre-granted abandonment as may be set forth in the FERC Application, a Party may not file an application with the FERC to abandon its ownership interest or capacity entitlement hereunder without the prior written agreement of the other Party; provided, however , that a Party may file such an abandonment application to implement any Disposition permitted hereunder.

ARTICLE VII

MISCELLANEOUS

7.1	Force Majeure .

(a) Transco shall not be deemed in breach of any of its obligations under this Agreement because of any delay, inability or failure, whether in whole or in part, in performance of such obligations (other than failure to pay money when due) to the extent such delay, inability or failure is due to an event of Force Majeure. As used in this Agreement, the term “ Force Majeure ” shall mean acts of God, strikes, lockouts, industrial disturbances, acts of the public enemy or terrorists, wars, blockades, insurrections, riots, epidemics, landslides, lightning, earthquakes, fires, droughts, tornados, hurricanes, storms, crevasses, floods, washouts, arrests, the order of any Governmental Authority, quarantines, expropriation or confiscation, vandalism, sabotage, civil disturbances, relocation of facilities, explosions, breakage or accidents to machinery or lines of pipe, freezing of or damage to wells or delivery facilities, National Weather Service warnings or advisories, whether official or unofficial, that result in the evacuation of facilities, well

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blowouts, failure of surface equipment or pipelines, accidents, breakdowns, inability to obtain or unavoidable delay in obtaining material, equipment, supplies, permits, rights-of-way or labor to perform or to comply with any obligation or condition of this Agreement, or any other causes, whether of the kind enumerated in this Agreement or otherwise, that are not reasonably within the control Transco. Nothing herein shall be construed to require Transco to settle any strikes, lockouts, industrial disturbance or disagreements with landowners by acceding to the demands of any opposing party when such course is inadvisable in the discretion of Transco.

(b) As soon as practical after the occurrence of an event of Force Majeure affecting the Central Penn Line, Transco shall submit to Meade a written report describing in as much detail as then possible: (i) the nature and causation of the event of Force Majeure; (ii) the effects of the event of Force Majeure on the construction of the Central Penn Line; (iii) the actions needed to be taken to overcome the effects of the Force Majeure and estimates of the costs entailed in and time required for overcoming the effects of the event of Force Majeure; (iv) the extent to which Transco could continue to pursue construction of the Central Penn Line and additional costs which would be incurred in so doing; and (v) any changes to this Agreement or the manner of constructing the Central Penn Line which would be needed to provide for the orderly construction of the Central Penn Line and administration of this Agreement during the continuation of the effects of the event of Force Majeure after such effects have been overcome. Promptly following Meade’s receipt of said report, Meade and Transco shall negotiate in good faith and attempt to reach agreement on all such matters. Pending agreement on all such matters, Transco shall continue to pursue construction of the Central Penn Line to the extent reasonable under this Agreement, but Transco shall not be obligated to assume any different or additional obligations or liabilities or to incur any Project Costs not funded or reimbursable by Meade hereunder unless and until all such matters are agreed to and incorporated into this Agreement.

7.2

Audit .

All Project Costs will be accumulated and recorded in accordance with the FERC’s Uniform System of Accounts. Meade shall have the right, during normal business hours and upon at least thirty (30) days advance written notice to Transco, to audit Transco’s books and records relating to the Project Costs to verify the same, and Transco shall retain all accounts and records relating to the Project Costs for a two year period following the date the final invoice is rendered to Meade pursuant to Section 2.6(f) hereunder and as otherwise required by Governmental Authorities having jurisdiction; provided, however , that any such audit must be completed within two years following the date of the final invoice referenced above or else such right to audit shall be waived. The Parties agree that payments theretofore made by Meade shall be adjusted upward or downward, and appropriate compensating payments promptly made by the owing Party, contractor or vendor, to correct any errors detected by such audit and agreed to by Transco.

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7.3

Notices .

(a) All notices and other communications by a Party shall be in writing and shall be sent by one (1) of the following means: electronic mail, facsimile transmission, hand delivery or courier to the other Party at the electronic or physical addresses/fax transmission numbers as provided in this Section:

If to Transco :

Transcontinental Gas Pipe Line Company, LLC

Attention: Vice President, Commercial Operations

P.O. Box 1396

Houston, Texas 77251-1396

Fax Number: (713) 215-4269

or at such other address as may be designated by Transco from time to time by written notice.

If to Meade :

Meade Pipeline Co LLC

c/o WGL Midstream, Inc.

Attention: Anthony M. Nee, President

101 Constitution Ave, NW

Washington, D.C. 20080

Fax Number: (202) 842-2880

or at such other address as may be designated by Meade from time to time by written notice.

(b) For all purposes of this Agreement, a notice or communication will be deemed delivered on the day that the notification as set forth in subparagraph (a) above has occurred, as follows:

(i) if delivered by hand or sent by courier, on the day it is delivered unless (A) that day is not a Business Day, or (B) if delivered after the close of business on a Business Day, in either of which cases it is deemed effective on the next succeeding Business Day; and

(ii) if sent by electronic mail or facsimile transmission, on the date transmitted, provided that confirmation of receipt is obtained by the sender, unless the date of transmission is not a Business Day or if it was received after the receiving Party’s regular business hours, in which case it is deemed effective on the next succeeding Business Day.

7.4	Representations and Warranties .

Each Party represents and warrants, on its own behalf, that (i) it is duly formed or organized, validly existing and in good standing under the laws of the jurisdiction of its formation or incorporation and has full company or corporate power to execute, deliver

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and perform this Agreement, (ii) except as otherwise expressly set forth herein, its execution, delivery and performance of this Agreement have been duly authorized by all necessary company or corporate and governmental action and do not contravene any provision of law or of its constitutional documents or any contractual restriction binding on it or its assets, (iii) it is legally bound by the terms of this Agreement and the terms of this Agreement are enforceable against it in accordance with the terms hereof, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors’ rights and to general equity principles, and (iv) there is no pending or, to the best of such Party’s knowledge, threatened action or proceeding affecting such Party before any court, government authority or arbitrator that could reasonably be expected to materially and adversely affect the ability of such Party to perform its obligations hereunder, or that purports to affect the legality, validity or enforceability of this Agreement.

7.5	Choice of Law .

THIS AGREEMENT AND ANY CLAIMS HEREUNDER SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICTS OF LAWS RULES OR PRINCIPLES THAT MIGHT REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION. ANY SUIT BROUGHT WITH RESPECT TO OR RELATING TO THIS AGREEMENT SHALL BE BROUGHT IN THE COURTS OF HARRIS COUNTY, TEXAS OR THE SOUTHERN DISTRICT OF TEXAS, HOUSTON DIVISION.

7.6	Disputes .

Any dispute between the Parties arising under this Agreement shall be resolved in accordance with the provisions of this Section. The Parties shall initially attempt to resolve a dispute by the following informal dispute resolution process. Each Party shall designate in writing to the other Party a representative who shall be authorized to resolve any dispute with due consideration of law, equity and good faith. Each dispute shall be initially referred by written notice to such designated representative for resolution. If the designated representatives are unable to resolve any such dispute within thirty (30) days of such referral, each Party shall designate in writing to the other Party an officer who shall be authorized to resolve the dispute, and such officers shall attempt to resolve such dispute within a further period of fifteen (15) days. The Parties shall attempt to resolve all disputes promptly, equitably and in good faith, and shall provide each other in a timely manner reasonable documentation relating to the dispute. Neither Party shall be under an obligation to provide any privileged or confidential documents that it is not otherwise obligated to provide under this Agreement and each Party may seek equitable relief as it determines in its sole judgment is necessary. Unless the Parties otherwise agree, if the period of forty five (45) days referred to above has expired and the dispute remains unresolved, the Parties may, by mutual agreement, submit the dispute to arbitration or, if no such agreement is reached, either Party may submit the dispute to the appropriate court or Governmental Authority.

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7.7	Limitation of Liability .

Neither Party shall be liable to the other Party for consequential, incidental, indirect, exemplary, special or punitive damages (including lost profits, loss of production or other damages attributable to business interruption) arising in connection with this Agreement.

7.8	No Waiver .

No waiver by a Party of any default by the other Party in the performance of any provision, condition or requirement in this Agreement shall be deemed to be a waiver of, or in any manner release the other Party from, performance of any other provision, condition or requirement in this Agreement, nor shall such waiver be deemed to be a waiver of, or in any manner a release of, the defaulting Party from future performance of the same provision, condition or requirement. Except to the extent otherwise expressly set forth herein, any delay or omission of any Party to exercise any right in this Agreement shall not impair the exercise of any such right or any like right accruing to it thereafter.

7.9	Assignment .

(a) A Disposing Party may, without the consent of the other Party, assign this Agreement to any third party transferee provided that the requirements of Section 3.3 hereof have been fully complied with by the Disposing Party. The Disposing Party shall provide written notice of such assignment to the other Party as soon as practicable after such assignment.

(b) Except as provided in Section 7.9(a) above or pursuant to an Encumbrance, any purported assignment of this Agreement by either Party shall be null and void ab initio without the prior written consent of the other Party, which consent may be withheld in the sole discretion of the non-assigning Party.

(c) This Agreement and all of the rights, duties and obligations herein established shall extend to and be binding upon and shall inure to the benefit of the respective successors and permitted assigns of the Parties.

7.10 Entire Agreement .

This Agreement represents the entire agreement between the Parties with respect to the construction and ownership of the Central Penn Line, and the obligations of the Parties expressed in this Agreement are the sole and exclusive obligations of the Parties with respect to the subject matter of this Agreement. Neither Party accepts or has imposed upon it, by virtue of this Agreement or otherwise, any implied obligations or covenants with respect to the subject matter of this Agreement.

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7.11	No Modifications .

No modifications of the terms and provisions of this Agreement shall be effective except by the execution of a supplementary written agreement executed by both Parties.

7.12	Subject to Laws .

This Agreement and the obligations of the Parties are subject to all Laws of Governmental Authorities having jurisdiction, and, in the event of conflict, such Laws of Governmental Authorities having jurisdiction shall control.

7.13	No Joint Venture or Partnership .

Nothing in this Agreement shall be construed to create a joint venture or partnership between the Parties or to constitute one Party as the agent of the other for any purpose.

7.14	No Third Party Beneficiaries .

Nothing in this Agreement is intended to confer, or shall be construed as conferring, upon any Person other than the Parties and permitted assigns any right, remedy or claim under this Agreement.

7.15	Severability .

If a Governmental Authority of competent jurisdiction declares any provision of this Agreement unenforceable, then that provision shall be severed from this Agreement and this Agreement shall otherwise remain in full force and effect and be construed as if it did not contain the severed provision; provided, however , that if severing such provision from this Agreement has a material adverse effect on the rights or obligations of either Party as set forth in this Agreement, then the Parties agree to negotiate in good faith replacement terms that are consistent with the Governmental Authority’s declaration or directive and that maintain the relative economic positions of, and risks to, the Parties as reflected in this Agreement as of the Effective Date.

7.16	Waiver of Trial by Jury .

To the extent permitted by Law, the Parties hereby waive all rights to trial by jury on any cause of action directly or indirectly involving the terms, covenants or conditions of this Agreement or any matters whatsoever arising out of, or in any way connected with, this Agreement. This Section shall survive the termination or expiration of this Agreement.

7.17	Counterparts .

This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.

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7.18	Further Assurances .

The Parties agree to execute all other additional instruments and documents, and to do all other acts, as may be reasonably necessary to effectuate the terms and provisions of this Agreement but which do not impose on either Party any obligation or liability which is inconsistent with, in addition to, or in conflict with, any provision of this Agreement.

[Signature page follows.]

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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date.


TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC

By:
		Rory L. Miller
		Senior Vice President


MEADE PIPELINE CO LLC By: WGL Midstream, Inc., its Managing Member

By:
		Anthony M. Nee
		President

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EXHIBIT A

DESCRIPTION OF CENTRAL PENN LINE

The Central Penn Line shall consist of the following natural gas pipeline facilities and equipment. The Parties acknowledge that the specific references below to mileage and locations reflect Transco’s estimates as of the Effective Date and that the actual mileages and locations will not be known until Transco has completed construction of such facilities. Accordingly, promptly following the In-Service Date, the Parties shall enter into an amendment to this Agreement, if necessary, to revise this Exhibit A to set forth the actual mileages and locations of the Central Penn Line.

The Central Penn Line will provide transportation of natural gas from Susquehanna County, Pennsylvania to Transco’s mainline in Lancaster County, Pennsylvania. The facilities will include approximately 177 miles of contiguous greenfield pipeline, two (2) compressor stations, three (3) measurement facilities, and other appurtenant underground and aboveground facilities.

The Central Penn Line consists of two connected pipeline segments as further described below:

Central Penn Line North

•

Approximately 56 miles of thirty (30)-inch diameter pipeline;

•

One compressor station;

•

Proposed measurement and regulator stations on the Central Penn Line North at (1) the discharge side of WFS’s Zick Station in Susquehanna County, Pennsylvania, (2) the suction side of Transco’s proposed East Wilcox Station in Susquehanna County, Pennsylvania, and (3) the proposed Springville Interconnection near milepost 30.6 in Wyoming County, Pennsylvania; and

•

Appurtenant underground and aboveground facilities.

Central Penn Line South

The Central Penn Line South pipeline facilities will provide transportation of natural gas from the Central Penn Line North pipeline to an interconnection with Transco’s mainline in Lancaster County, Pennsylvania at a point called “River Road.” The Central Penn Line South facilities will include:

•

Approximately 121 miles of forty-two (42)-inch diameter pipeline;

•

One compressor station;

•

A regulator station at the interconnection between the Central Penn Line South and Transco’s mainline at “River Road”; and

•

Appurtenant underground and aboveground facilities.

EXHIBIT B

OWNERSHIP SHARES


Segment of Central Penn Line:	Ownership Share:
	Transco			Meade
Central Penn Line North		41.18	%		58.82	%

Central Penn Line South		70.59	%		29.41	%

EXHIBIT C

CAPACITY RIGHTS

1. During the Lease Term, Transco will have full possessory and operational rights to the Central Penn Line, including 100% of the pipeline capacity of the Central Penn Line.

2. Subject to the terms and conditions of this Agreement and the receipt of the necessary authorizations from the FERC, upon termination of the Lease (i) Meade shall have the right to 500,000 dt/d of capacity on the Central Penn Line, (ii) Transco shall have the right to all remaining capacity on the Central Penn Line, and (iii) the Parties shall negotiate in good faith revisions to this Agreement to set forth the terms and conditions governing the orderly utilization by the Parties of their respective capacities in the Central Penn Line.

3. The daily design capacity of the Central Penn Line and any Expansions (and the engineering design data supporting such capacity) shall be as set forth in the respective applications for certificates of public convenience and necessity filed with the FERC for the Central Penn Line and any such Expansions.

EXHIBIT D

ANCHOR PA AND CABOT PRECEDENT

AGREEMENT TERMINATION RIGHTS

Transco represents and warrants that the following is a complete and accurate restatement of the rights set forth in each Anchor PA under which such agreements may be terminated after February 28, 2014 but prior to the In-Service Date. The “Buyer” is the shipper under the Atlantic Sunrise Project and the “Seller” is Transco.

Either Party may terminate this Precedent Agreement immediately upon written notice to the other Party if Seller has not filed the FERC Application on or before July 1, 2016; provided that such termination right must be exercised, if at all, by the terminating Party delivering written notice of termination to the other Party on or before July 16, 2016, or else such termination right shall be waived.

Seller may terminate this Precedent Agreement and the Service Agreement immediately upon written notice to Buyer if (A) the FERC rejects the FERC Application, or (B) the FERC denies the FERC Authorization requested in the FERC Application, or (C) the FERC issues an order on the FERC Application (as the same may be amended) that (I) does not grant the FERC Authorization substantially in form and substance as requested by Seller and (II) has a material adverse effect on the rights or obligations of Seller, in Seller’s reasonable discretion (each event described in (A), (B) and (C) is referred to respectively as a “ FERC Event ”). With respect to each such FERC Event, the foregoing termination right must be exercised, if at all, by Seller delivering notice of termination to Buyer on or before the date that is sixty (60) days after such FERC Event occurs, or else such termination right shall be waived; provided that if any person seeks rehearing and/or appeal of any such FERC Event, then such sixty (60)-day period shall not begin to run until the date that the FERC order on such rehearing or appeal becomes final and no longer subject to further rehearing or appeal.

Buyer may terminate this Precedent Agreement if the certificate of public convenience and necessity issued by the FERC and accepted by Seller for the Atlantic Sunrise Project includes a material change to the TCQ, Primary Term or Negotiated Reservation Rate or deletion of the Point of Receipt or any Points of Delivery described on Attachment A hereto (“ Buyer Material Adverse Effect ”); provided that such termination right must be exercised, if at all, within twenty (20) days from the date that Seller provides notice to Buyer of the Buyer Material Adverse Effect, and in any event prior to Buyer’s execution and delivery of the Service Agreement, or else such termination right shall be waived.

Either Party may terminate this Precedent Agreement and the Service Agreement immediately upon written notice to the other Party if Seller has not commenced construction of the Atlantic Sunrise Project facilities on or before September 1, 2017; provided that such termination right must be exercised, if at all, by the terminating Party delivering written notice of termination to the other Party on or before September 16, 2017, or else such right shall be waived. Seller

shall be deemed to have “commenced construction” of the Atlantic Sunrise Project facilities when Seller has received the FERC authorizations to commence construction and has subsequently released a construction contractor to commence construction of the Atlantic Sunrise Project facilities. Seller shall deliver prompt written notice to Buyer of (A) Seller’s receipt of such FERC authorizations and (B) such commencement of construction.

Either Party may terminate this Precedent Agreement and the Service Agreement immediately upon written notice to the other Party if the Effective Date of the Service Agreement does not occur on or before November 1, 2018; provided that such termination right must be exercised, if at all, by the terminating Party delivering notice of termination to the other Party on or before November 16, 2018, or else such termination right shall be waived.

Seller may terminate this Precedent Agreement and the Service Agreement immediately upon written notice to Buyer if (A) Buyer, in Seller’s reasonable judgment, fails to meet the creditworthiness requirements set forth in Paragraph 6 below, and (B) Buyer fails to provide security in accordance with Paragraph 6 below.

Seller may terminate this Precedent Agreement and Service Agreement immediately upon written notice to Buyer if the precedent agreement between Seller and any “Anchor Shipper” under the Atlantic Sunrise Project (as defined in Seller’s Open Season announcement for the Atlantic Sunrise Project) is terminated for any reason prior to the Effective Date of the Service Agreement (“ Anchor PA Termination ”) and, as a result of the Anchor PA Termination, Seller elects not to continue development of the Atlantic Sunrise Project; provided that such termination right must be exercised, if at all, by Seller delivering notice of termination to Buyer within sixty (60) days following the Anchor PA Termination, or else such termination right shall be waived; provided, further, that prior to Seller exercising such termination right, the Parties shall negotiate, in good faith, reasonable alternatives to the current Atlantic Sunrise Project design and the terms and conditions of this Precedent Agreement that would effectively replace such Anchor Shipper’s capacity subscription under the Atlantic Sunrise Project. Seller shall provide notice to Buyer of the Anchor PA Termination within five (5) Business Days following the Anchor PA Termination, provided that failure to give such notification on a timely basis shall not affect Seller’s termination right provided hereunder except to the extent that Buyer shall have been actually prejudiced as a result of such failure.

D-2

Exhibit 10.3

LEASE AGREEMENT

between

TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC

and

MEADE PIPELINE CO LLC

February 14, 2014

In this document, “[*****]” indicates that confidential portions of this document have been redacted and filed separately with the Securities and Exchange Commission.

LEASE AGREEMENT

THIS LEASE AGREEMENT (this “ Lease ”) is made and entered into as of the 14th day of February, 2014 (“ Effective Date ”), by and between MEADE PIPELINE CO LLC (“ Meade ”), a Delaware limited liability company, and TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC (“ Transco ”), a Delaware limited liability company. Meade and Transco may be referred to in this Lease individually as a “ Party ” or collectively as the “ Parties .”

RECITALS

WHEREAS, Transco and Meade are executing contemporaneously herewith a Construction and Ownership Agreement pursuant to which Transco will construct, and Transco and Meade will jointly own, the Central Penn Line (the “ Construction and Ownership Agreement ”), and an Operation and Maintenance Agreement pursuant to which Transco will provide operation and maintenance services for the Central Penn Line (the “ Operation and Maintenance Agreement ”); and

WHEREAS, Transco and Meade now desire to set forth the terms and conditions under which Meade shall lease its undivided joint ownership interest in the Central Penn Line facilities to Transco.

NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained in this Lease, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby covenant and agree as follows:

ARTICLE I.

DEFINITIONS AND INTERPRETATION

1.1 Definitions . As used in this Lease, the following terms have the following meanings:

“ Article VI Interruption ” has the meaning given in Section 6.4

“ Business Day ” means any day other than a Saturday, a Sunday, or a holiday on which national banking associations in the State of Texas are closed.

“ Cabot ” has the meaning given in Section 4.3.

“ Cabot Precedent Agreement ” has the meaning given in Section 4.3.

“ Construction and Ownership Agreement ” has the meaning given in the Recitals.

“ Cost Overrun ” has the meaning given in Section 5.5.

“ CPL Original Capital Estimate ” has the meaning given in the Construction and Ownership Agreement.

“ Early Termination Date ” has the meaning given in Section 4.3.

“ Effective Date ” has the meaning given in the introductory paragraph.

“ Encumbrance ” means any lien, pledge, condemnation proceeding, security interest, mortgage or similar encumbrance.

“ FERC ” means the Federal Energy Regulatory Commission or its successor.

“ FERC Authorizations ” has the meaning given in Section 7.1.

“ Force Majeure ” has the meaning given in Section 6.2.

“ Lease ” has the meaning given in the introductory paragraph.

“ Lease Commencement Date ” means the first day of service under the River Road Service Agreement.

“ Leased Facilities ” has the meaning given in Section 2.1.

“ Lease Term ” has the meaning given in Section 4.2.

“ Meade ” has the meaning given in the introductory paragraph.

“ Monthly Lease Charge ” has the meaning given in Section 5.1.

“ Operation and Maintenance Agreement ” has the meaning given in the Recitals.

“ Party ” and “ Parties ” have the meanings given in the introductory paragraph.

“ Person ” means any party or individual or any type of corporation, company or partnership.

“ Project Costs ” has the meaning given in the Construction and Ownership Agreement.

“ River Road Service Agreement ” has the meaning given in Section 4.3.

“ Transco ” has the meaning given in the introductory paragraph.

“ Transco’s Tariff ” means Volume No. 1 of Transco’s FERC Gas Tariff on file with FERC, as amended from time to time.

1.2 Rules of Interpretation .

(a) References herein to Sections, Exhibits, clauses and paragraphs are references to sections of, exhibits to, clauses of, and paragraphs of, this Lease.

(b) Unless otherwise specified, “hereunder,” “herein,” “hereto,” “hereof” and words of similar import refer to this Lease as a whole and not to any particular provision hereof.

(d) References to any Person shall include such Person’s successors and permitted assigns in that designated capacity.

(e) References to days, months and years are references to calendar days, months and years unless otherwise specified.

(f) Words not otherwise defined herein that have well known and generally accepted technical or trade meanings are used in accordance with such meanings.

(g) Any reference to “dollars” or “$” or to “cents” or “¢” shall be to United States dollars or cents, respectively.

(h) The use of the words “include,” “includes,” or “including” shall be by way of example only and shall not be considered in any way to limit the generality of the description preceding the use of such word.

(i) The words “shall” and “will” shall have equal effect.

(j) This Lease shall be considered for all purposes as prepared through the joint efforts of the Parties and shall not be construed against either Party as a result of the preparation, substitution, submission or other event of negotiation, drafting or execution hereof.

(k) The headings in this Lease are for purposes of reference only and shall not limit or define the meaning hereof.

(l) Unless the context otherwise requires, the use of any of the words “action,” “claim,” “suit,” “proceeding,” or “judgment,” includes any and all such terms.

(m) Any references to specific section numbers of Transco’s Tariff shall be deemed to include any renumbering thereof or duly authorized amendments thereto.

ARTICLE II.

SCOPE OF LEASE

2.1 Leased Facilities . Effective as of the Lease Commencement Date, Meade hereby leases to Transco, and Transco hereby leases from Meade, Meade’s undivided joint ownership interest in the Central Penn Line (“ Leased Facilities ”).

2.2 Use of Leased Facilities . During the effective term of this Lease, Transco will have full possessory and operational rights to the Leased Facilities, including 100% of the pipeline capacity of the Central Penn Line.

2.3 Facilities Upon Termination . Upon termination of this Lease and receipt by Transco of the necessary authorizations from the FERC, the Leased Facilities shall revert to Meade. Subject to the terms and conditions of the Operation and Maintenance Agreement and the Construction and Ownership Agreement, Transco shall return the Leased Facilities to the condition existing as of the Lease Commencement Date, ordinary wear and tear excepted.

2.4 Meade’s Facilities Obligations . Meade shall preserve and maintain, throughout the effective term of this Lease, all of its ownership rights in and to the Central Penn Line to ensure the continued use by Transco of the Leased Facilities in the operation of Transco’s pipeline system. Provided that Transco performs its obligations hereunder, Meade hereby covenants that Transco shall have and enjoy the quiet and peaceable possession and use of the Leased Facilities during the effective term of this Lease. For the avoidance of doubt, this Section 2.4 is not intended to, and shall not, restrict any right of Meade under the Construction and Ownership Agreement to sell or assign its ownership rights in the Central Penn Line.

ARTICLE III.

OPERATIONS

3.1 Operation and Maintenance . Transco shall operate and maintain the Central Penn Line pursuant to the terms and conditions of the Operation and Maintenance Agreement.

3.2 Applicability of Transco’s Tariff to Day-to-Day Operations . Matters respecting the provision of transmission services by Transco through the Leased Facilities shall be governed by the provisions of Transco’s Tariff.

ARTICLE IV.

TERM OF LEASE

4.1 Effective Date . This Lease shall be effective as of the Effective Date and shall remain in effect until terminated in accordance with the terms hereof. The effective term of this Lease shall be determined pursuant to Sections 4.2 and 4.3 below.

4.2 Term . This Lease shall remain in force and effect for a term of twenty (20) years beginning with the Lease Commencement Date unless terminated earlier in accordance with Section 4.3 (“ Lease Term ”). Subject to the receipt of any necessary authorizations from the FERC, this Lease shall terminate upon the expiration of the Lease Term.

4.3 Early Termination of Lease Term . Notwithstanding the foregoing: (i) if the primary term of the service agreement under Transco’s Rate Schedule FT providing for firm transportation service of 500,000 dt/day to be entered into between Transco and Cabot Oil & Gas Corporation (“ Cabot ”) pursuant to the terms and conditions of that certain Precedent Agreement (Atlantic Sunrise Project), dated February 5, 2014, between Transco and Cabot (such precedent agreement is referred to herein as the “ Cabot Precedent Agreement ” and such service agreement, as the same may be assigned or released to another Person, is referred to herein as the “ River Road Service Agreement ”) is not extended to remain in effect for twenty (20) years following the Lease Commencement Date in accordance with the terms and conditions of the River Road Service Agreement, then Transco shall have the right to terminate this Lease at the end of the fifteenth (15th) year following the Lease Commencement Date (“ Early Termination Date ”), subject to the receipt of any necessary authorizations from the FERC, provided that such termination right must be exercised, if at all, by Transco providing written notice thereof to Meade at least [*****] months prior to the Early Termination Date, or else such right shall be waived; (ii) Transco shall have the right to terminate this Lease effective as of the termination of the River Road Service Agreement if such termination of the River Road Service Agreement is due to the shipper’s failure to pay reservation charges thereunder (after any applicable cure periods) or shipper’s failure to provide credit support in an amount not greater than three (3) months of reservation charges thereunder; (iii) Transco shall have the right to terminate this Lease effective as of the termination of the Construction and Ownership Agreement; and (iv) Meade shall have the right to terminate this Lease in accordance with Section 5.4(a). If Transco terminates this Lease under (ii) above, then Transco shall use good faith efforts to collect any monies it is entitled to from the shipper and shall pay to Meade its proportionate share of all proceeds it receives under such agreement in order to mitigate Meade’s loss of revenue resulting from the Lease termination. Meade’s proportionate share for purposes of the foregoing sentence shall be equal to (1) the daily charge per dt equivalent of the Monthly Lease Charge, divided by (2) the daily reservation rate per dt being charged by Transco under the River Road Service Agreement as of the date of termination of such agreement.

4.4 Effect of Termination . Upon termination of this Lease, the Parties shall be discharged from any further obligations hereunder to the other Party, including any obligation to provide (in the case of Meade) or to pay for (in the case of Transco) the lease of facilities hereunder; provided, however , that termination of this Lease shall not relieve either Party from any obligation already accrued prior to the date of such termination nor shall such termination deprive a Party of any remedy otherwise available to it.

ARTICLE V.

CHARGES AND PAYMENT

5.1 Monthly Lease Charge . Beginning with the Lease Commencement Date and continuing through the Lease Term, Transco shall pay to Meade a monthly lease charge of $[*****] (“ Monthly Lease Charge ”) subject to renegotiation under Section 5.5 hereof and reduction under Section 3.2(b) of the Construction and Ownership Agreement, as appropriate. If the first day of the Lease Term occurs after the first day of a month, then the Monthly Lease Charge for such month shall be the Monthly Lease Charge multiplied by a fraction, the numerator of which is the number of days in such month that the Lease was in effect divided by the total number of days in such month. If the last day of the Lease Term occurs other than on the last day of a month, then the Monthly Lease Charge for the final month of the term of this Lease shall be likewise pro-rated for the number of days in the month that this Lease was in effect.

5.2 Terms of Payment . Meade shall submit an invoice to Transco on or before the tenth (10th) day of each month for the Monthly Lease Charge due hereunder for the preceding month. Transco shall pay Meade the amount of such invoice within ten (10) days after receipt thereof. Such payment shall be by wire transfer of immediately available funds to the account specified by Meade.

5.3 Non-Payment under River Road Service Agreement . Notwithstanding the foregoing, Transco’s obligation hereunder to pay the Monthly Lease Charge shall be suspended for any period of time that the shipper under the River Road Service Agreement fails to pay to Transco the applicable reservation charges thereunder, provided that (i) during such period Transco uses good faith efforts to collect the amounts owed by the shipper under the River Road Service Agreement, and (ii) upon payment by the shipper of the amounts owed under the River Road Service Agreement, Transco shall likewise make payments of amounts owed for Monthly Lease Charges due hereunder (such payments by Transco shall be in the same proportion to the amounts owed for the Monthly Lease Charges as the shipper’s payments are to the amounts owed for the reservation charges under the River Road Service Agreement). If despite Transco’s good faith efforts to collect the amounts owed under the River Road Service Agreement the shipper’s failure to pay continues beyond all waiting periods set forth in the applicable provisions of Transco’s Tariff governing a shipper’s failure to pay, Transco shall either (y) exercise its right to terminate the River Road Service Agreement in accordance with Section 4.3, or (z) promptly commence good faith negotiations with Meade to determine a mutually agreeable course of action.

5.4 Late Payment .

(a) If Transco fails to make timely payment of the amount of an invoice under this Lease, then Meade shall be entitled to collect the amount of such invoice together with interest thereon calculated at a rate (which in no event shall be higher than the maximum rate permitted by applicable law) equal to two percent (2%) per annum over the prime rate as published by the Wall Street Journal from time to time and in effect during the applicable period. Interest shall accrue on unpaid amounts, including unpaid interest compounded daily, beginning on the payment due date of the invoice and shall terminate when such invoice is paid. If such failure to pay continues for thirty (30) days after payment is due, Meade, in addition to any other remedy it may have at law (except for termination of this Lease, which shall be subject to the following), may notify Transco in writing of its nonpayment, allowing Transco sixty (60) days to make payment of any unpaid amount and to provide assurances satisfactory to Meade that such non-payment will not recur. If Transco fails to make payment of any unpaid amount within such sixty (60) day period, then Meade may terminate this Lease upon ten (10) days written notice to Transco and the FERC, provided that if Transco makes payment in full within such 10-day period, such termination shall not be effected and this Lease shall remain in full force and effect pursuant to the terms hereof. If Meade terminates this Lease in accordance with the foregoing and Transco does not make payment within such 10-day period, then Transco agrees that Meade may seek relief at law and/or in equity, including without limitation injunctive relief and/or specific performance (and in that regard, injunctive relief and/or specific performance may be sought by Meade without proof of any actual or special damages).

(b) If Transco fails to make timely payments more than two (2) times in any six (6) consecutive month period, then, until Transco thereafter makes timely payments for twelve (12) consecutive months, Meade may require Transco to pay the Monthly Lease Charge for the upcoming three (3) months quarterly in advance.

5.5 Renegotiation of Monthly Lease Charge . If the Project Costs (either estimated or actual) for the Central Penn Line exceed the CPL Original Capital Estimate (“ Cost Overrun ”) and in connection with the Cost Overrun Transco and Cabot execute an amendment to the Cabot Precedent Agreement and/or the River Road Service Agreement to set forth a higher negotiated daily reservation rate than originally set forth in such agreement(s), then Transco shall promptly notify Meade thereof. Such notification shall include the amount of the increase in the negotiated daily reservation rate attributable to the Cost Overrun. Promptly following Meade’s receipt of such notification, the Parties shall negotiate in good faith to amend this Lease to increase the Monthly Lease Charge to reflect the same percentage increase in the negotiated daily reservation rate under the Cabot Precedent Agreement and/or the River Road Service Agreement attributable to the Cost Overrun. The effective date of such increase in the Monthly Lease Charge shall be the same as the effective date of the above-described amendment to the Cabot Precedent Agreement and/or the River Road Service Agreement.

ARTICLE VI.

FORCE MAJEURE

6.1 Effect of Force Majeure . If by reason of Force Majeure either Party hereto is rendered unable, wholly or in part, to carry out its obligations under this Lease, and if such Party gives notice and reasonably full particulars of such event of Force Majeure in writing, by electronic mail or by facsimile, to the other within a reasonable period of time (which shall not exceed, in any event, two (2) Business Days) after the occurrence of the event of Force Majeure, the Party giving such notice, so far as and to the extent that it is affected by such Force Majeure shall, subject to Section 6.3, be relieved of its obligations under this Lease affected by such event of Force Majeure and shall not be liable in damages during the continuance of any inability so caused so long as the affected Party is using its reasonable efforts to remedy or otherwise to alleviate such event of Force Majeure as quickly as reasonably possible.

6.2 Definition of Force Majeure . As used in this Lease, the term “Force Majeure” shall mean acts of God, strikes, lockouts, industrial disturbances, acts of the public enemy or terrorists, wars, blockades, insurrections, riots, epidemics, landslides, lightning, earthquakes, fires, droughts, tornados, hurricanes, storms, crevasses, floods, washouts, arrests, the order of any Governmental Authority, quarantines, expropriation or confiscation, vandalism, sabotage, civil disturbances, relocation of facilities, explosions, breakage or accidents to machinery or lines of pipe, freezing of or damage to wells or delivery facilities, National Weather Service warnings or advisories, whether official or unofficial, that result in the evacuation of facilities, well blowouts, failure of surface equipment or pipelines, accidents, breakdowns, inability to obtain or unavoidable delay in obtaining material, equipment, supplies, permits, rights-of-way or labor to perform or to comply with any obligation or condition of this Agreement, or any other causes,

whether of the kind enumerated in this Agreement or otherwise, that are not reasonably within the control of the Party claiming Force Majeure. Nothing herein shall be construed to require a Party to settle any strikes, lockouts, industrial disturbance or disagreements with landowners by acceding to the demands of any opposing party when such course is inadvisable in the discretion of the Party having difficulty.

6.3 Negligence or Willful Misconduct . An event of Force Majeure shall not relieve the affected Party of its obligations hereunder to the extent that its negligence or willful misconduct created such event of Force Majeure nor shall an event of Force Majeure relieve a Party from its obligations to make payments due hereunder, nor shall an event of Force Majeure relieve a Party from its obligations to remedy or alleviate the event of Force Majeure.

6.4 Monthly Lease Charge Credits . If by reason of Force Majeure pursuant to Section 6.1 herein, Meade is rendered unable, wholly or in part, to carry out its obligations under this Lease and as a result Transco is unable to redeliver the quantities of gas tendered for delivery through the Central Penn Line under the Cabot Service Agreement (“ Article VI Interruption ”), and, due to such Article VI Interruption Transco is required pursuant to Transco’s Tariff or FERC order to provide reservation charge credits, then (i) Transco shall promptly provide written notice to Meade of Transco’s requirement to provide reservation charge credits (including the sum of such reservation charge credits and reasonable supporting data), and (ii) the Monthly Lease Charge for the month in which such suspension occurs shall be reduced by an amount equal to (A) the Monthly Lease Charge multiplied by (B) a fraction, the numerator of which is the number of days in such month that this Lease was suspended and the denominator of which is the total number of days in such month; provided, however , that in no event shall such credit exceed the sum of the reservation charge credits that Transco provides under the Cabot Service Agreement in connection with such Article VI Interruption.

ARTICLE VII.

APPLICATIONS FOR GOVERNMENTAL APPROVALS

7.1 Applications for Governmental Approvals . After the Effective Date, Transco shall proceed with due diligence to obtain from any Governmental Authority having competent jurisdiction over the matters covered by this Lease the authorizations necessary to implement the terms of this Lease, including the necessary authorizations from the FERC (“ FERC Authorizations ”), all as further described in the Construction and Ownership Agreement.

ARTICLE VIII.

MISCELLANEOUS

8.1 Governing Law . THIS LEASE AND ANY CLAIMS HEREUNDER SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICTS OF LAWS RULES OR PRINCIPLES THAT MIGHT REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION. ANY SUIT BROUGHT WITH RESPECT TO OR RELATING TO THIS LEASE SHALL BE BROUGHT IN THE COURTS OF HARRIS COUNTY, TEXAS OR THE SOUTHERN DISTRICT OF TEXAS, HOUSTON DIVISION.

8.2 Disputes . Any dispute between the Parties arising under this Lease shall be resolved in accordance with the provisions of this Section. The Parties shall initially attempt to resolve a dispute by the following informal dispute resolution process. Each Party shall designate in writing to the other Party a representative who shall be authorized to resolve any dispute with due consideration of law, equity and good faith. Each dispute shall be initially referred by written notice to such designated representative for resolution. If the designated representatives are unable to resolve any such dispute within thirty (30) days of such referral, each Party shall designate in writing to the other Party an officer who shall be authorized to resolve the dispute, and such officers shall attempt to resolve such dispute within a further period of fifteen (15) days. The Parties shall attempt to resolve all disputes promptly, equitably and in good faith, and shall provide each other in a timely manner reasonable documentation relating to the dispute. Neither Party shall be under an obligation to provide any privileged or confidential documents that it is not otherwise obligated to provide under this Lease and each Party may seek equitable relief as it determines in its sole judgment is necessary. Unless the Parties otherwise agree, if the period of forty five (45) days referred to above has expired and the dispute remains unresolved, the Parties may, by mutual agreement, submit the dispute to arbitration or, if no such agreement is reached, either Party may submit the dispute to the appropriate court or governmental authority.

8.3 Limitation of Liability . Neither party shall be liable to the other party for consequential, incidental, indirect, exemplary, special or punitive damages (including lost profits, loss of production or other damages attributable to business interruption) arising in connection with this Lease.

8.4 Insurance . The Parties acknowledge that the provisions regarding the maintenance of insurance for the Leased Facilities are set forth in the Construction and Ownership Agreement and the Operation and Maintenance Agreement.

8.5 No Waiver . No waiver by a Party of any default by the other Party in the performance of any provision, condition or requirement in this Lease shall be deemed to be a waiver of, or in any manner release the other Party from, performance of any other provision, condition or requirement in this Lease, nor shall such waiver be deemed to be a waiver of, or in any manner a release of, the defaulting Party from future performance of the same provision, condition or requirement. Except to the extent otherwise expressly set forth herein, any delay or omission of any Party to exercise any right in this Lease shall not impair the exercise of any such right or any like right accruing to it thereafter.

8.6 Entire Agreement . This Lease represents the entire agreement between the Parties with respect to the subject matter hereof, and the obligations of the Parties expressed in this Lease are the sole and exclusive obligations of the Parties with respect to the subject matter of this Lease. Neither Party accepts or has imposed upon it, by virtue of this Lease or otherwise, any implied obligations or covenants with respect to the subject matter of this Lease.

8.7 No Modifications . No modifications of the terms and provisions of this Lease shall be effective except by the execution of a supplementary written agreement executed by both Parties.

8.8 Notices .

If to Transco :

Transcontinental Gas Pipe Line Company, LLC

Attention: Vice President, Commercial Operations

P.O. Box 1396

Houston, Texas 77251-1396

Fax Number: (713) 215-4269

or at such other address as may be designated by Transco from time to time by written notice.

If to Meade :

Meade Pipeline Co LLC

c/o WGL Midstream, Inc.

Attention: Anthony M. Nee, President

101 Constitution Ave, NW

Washington, D.C. 20080

Fax Number: (202) 842-2880

or at such other address as may be designated by Meade from time to time by written notice.

(b) For all purposes of this Lease, a notice or communication will be deemed effective on the day that the notification as set forth in subparagraph (a) above has occurred, as follows:

8.9 Assignment . Other than pursuant to an Encumbrance, any purported assignment of this Lease by either Party shall be null and void ab initio without the prior written consent of the other Party, which consent may be withheld in the sole discretion of the non-assigning Party. This Lease and all of the rights, duties and obligations herein established shall extend to and be binding upon and shall inure to the benefit of the respective successors and permitted assigns of the Parties.

8.10 Subject to Laws . This Lease and the obligations of the Parties are subject to all Laws of Governmental Authorities having jurisdiction, and, in the event of conflict, such Laws of Governmental Authorities having jurisdiction shall control.

8.11 No Joint Venture or Partnership . Nothing in this Lease shall be construed to create a joint venture or partnership between the Parties or to constitute one Party as the agent of the other for any purpose.

8.12 No Third Party Beneficiaries . Nothing in this Lease is intended to confer, or shall be construed as conferring, upon any Person other than the Parties and permitted assigns any right, remedy or claim under this Lease.

8.13 Severability . If a Governmental Authority of competent jurisdiction declares any provision of this Lease unenforceable, then that provision shall be severed from this Lease and this Lease shall otherwise remain in full force and effect and be construed as if it did not contain the severed provision; provided, however , that if severing such provision from this Lease has a material adverse effect on the rights or obligations of either Party as set forth in this Lease, then the Parties agree to negotiate in good faith replacement terms that are consistent with the Governmental Authority’s declaration or directive and that maintain the relative economic positions of, and risks to, the Parties as reflected in this Lease as of the Effective Date.

8.14 Waiver of Trial by Jury . To the extent permitted by Law, the Parties hereby waive all rights to trial by jury on any cause of action directly or indirectly involving the terms, covenants or conditions of this Lease or any matters whatsoever arising out of, or in any way connected with, this Lease. This Section shall survive the termination or expiration of this Lease.

8.15 Exhibits . Exhibit A hereto is hereby incorporated herein by this reference.

8.16 Counterparts . This Lease may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.

8.17 Further Assurances . The Parties agree to execute all other additional instruments and documents, and to do all other acts, as may be reasonably necessary to effectuate the terms and provisions of this Lease but which do not impose on either Party any obligation or liability which is inconsistent with, in addition to, or in conflict with, any provision of this Lease.

[Signature page follows.]

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date.


TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC

By:
		Rory L. Miller Senior Vice President


MEADE PIPELINE CO LLC
By: WGL Midstream, Inc., its Managing Member

By:
		Anthony M. Nee President

EXHIBIT A

DESCRIPTION OF CENTRAL PENN LINE

The Central Penn Line shall consist of the following natural gas pipeline facilities and equipment. The Parties acknowledge that the specific references below to mileage and locations reflect Transco’s estimates as of the Effective Date and that the actual mileages and locations will not be known until Transco has completed construction of such facilities. Accordingly, promptly following the in-service date of the Central Penn Line, the Parties shall enter into an amendment to this Lease, if necessary, to revise this Exhibit A to set forth the actual mileages and locations of the Central Penn Line.

The Central Penn Line consists of two connected pipeline segments as further described below:

Central Penn Line North

•

Approximately 56 miles of thirty (30)-inch diameter pipeline;

•

One compressor station;

•

Proposed measurement and regulator stations on the Central Penn Line North at (1) the discharge side of WFS’s Zick Station in Susquehanna County, Pennsylvania, (2) the suction side of Transco’s proposed East Wilcox Station in Susquehanna County, Pennsylvania, and (3) the proposed Springville Interconnection near milepost 30.6 in Wyoming County, Pennsylvania; and

•

Appurtenant underground and aboveground facilities.

Central Penn Line South

•

Approximately 121 miles of forty-two (42)-inch diameter pipeline;

•

One compressor station;

•

A regulator station at the interconnection between the Central Penn Line South and Transco’s mainline at “River Road”; and

•

Appurtenant underground and aboveground facilities.

WGL Holdings, Inc.

Washington Gas Light Company

Exhibit 31.1

CERTIFICATION OF WGL HOLDINGS, INC.

I, Terry D. McCallister, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of WGL Holdings, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2014

/s/ Terry D. McCallister

Terry D. McCallister

Chairman and Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF WGL HOLDINGS, INC.

I, Vincent L. Ammann, Jr., certify that:

1.	I have reviewed this quarterly report on Form 10-Q of WGL Holdings, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2014

/s/ Vincent L. Ammann, Jr.

Vincent L. Ammann, Jr.

Senior Vice President and Chief Financial Officer

WGL Holdings, Inc.

Washington Gas Light Company

Exhibit 31.3

CERTIFICATION OF WASHINGTON GAS LIGHT COMPANY

I, Terry D. McCallister, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Washington Gas Light Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2014

/s/ Terry D. McCallister

Terry D. McCallister

Chairman and Chief Executive Officer

WGL Holdings, Inc.

Washington Gas Light Company

Exhibit 31.4

CERTIFICATION OF WASHINGTON GAS LIGHT COMPANY

I, Vincent L. Ammann, Jr., certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Washington Gas Light Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2014

/s/ Vincent L. Ammann, Jr.

Vincent L. Ammann, Jr.

Senior Vice President and Chief Financial Officer

WGL Holdings, Inc.

Washington Gas Light Company

Exhibit 32

CERTIFICATION OF THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER

AND THE SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the combined Quarterly Report of WGL Holdings, Inc. and Washington Gas Light Company (the “Companies”) on Form 10-Q for the quarterly period ended March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Terry D. McCallister, Chairman and Chief Executive Officer of the Companies, and Vincent L. Ammann, Jr., Senior Vice President and Chief Financial Officer of the Companies, each hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of their knowledge, that:

(1)

The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Companies.

This certification is being made for the exclusive purpose of compliance by the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer of the Companies with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may not be disclosed, distributed, or used by any person for any reason other than as specifically required by law.

/s/ Terry D. McCallister

Terry D. McCallister

Chairman and Chief Executive Officer

/s/ Vincent L. Ammann, Jr.

Vincent L. Ammann, Jr.

Senior Vice President and Chief Financial Officer

May 7, 2014