Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
o Preliminary Proxy Statement		o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

WGL Holdings, Inc.

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

	þ		No fee required.
	o		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
	(1)		Title of each class of securities to which transaction applies:

(2)

Aggregate number of securities to which transaction applies:

(3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):

(4)

Proposed maximum aggregate value of transaction:

(5)

Total fee paid:

o

Fee paid previously with preliminary materials.

o

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

(1)

Amount previously paid:

(2)

Form, schedule or registration statement no.:

(3)

Filing party:

(4)

Date filed:

 

WGL Holdings, Inc.
101 Constitution Ave., N.W.
Washington, D.C. 20080

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

The annual meeting of shareholders of WGL Holdings, Inc. will be held at the National Press Club, 529 14th St., N.W.; Washington, D.C. 20045 on Thursday, March 3, 2011, at 10:00 a.m., Eastern Time, for the following purposes, as more fully set forth in the attached proxy statement:

 

(1) To elect seven directors;

 

(2) To ratify the appointment of Deloitte & Touche LLP as independent public accountants for fiscal year 2011;

 

(3) To consider and act on a shareholder proposal relating to cumulative voting, if this proposal is brought before the meeting;

 

(4) To consider and act on an advisory vote regarding the approval of compensation paid to certain executive officers;

 

(5) To consider and act on an advisory vote regarding the frequency of shareholder approval of the compensation paid to certain executive officers; and

 

(6) To transact any other business properly brought before the meeting and any adjournment thereof.

 

Only holders of record of the common stock of WGL Holdings, Inc. at the close of business on January 3, 2011, the record date fixed by the board of directors, will be entitled to vote on each matter submitted to a vote of shareholders at the meeting. To assure your representation at the annual meeting, you are urged to cast your vote, as instructed in the Notice of Internet Availability of Proxy Materials, over the Internet or by telephone as promptly as possible. You may also request a paper proxy card to submit your vote by mail, if you prefer.

 

Any shareholder of record attending the annual meeting may vote in person, even if she or he has voted over the Internet, by telephone or returned a completed proxy card. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the meeting, you must obtain a valid form issued in your name from that record holder. Each holder of common stock is entitled to one vote for each share of stock standing in the name of the holder on the records of WGL Holdings, Inc. at the close of business on January 3, 2011.

 

By order of the board of directors,

 

Arden T. Phillips

Secretary and Corporate Governance Officer

 

January 19, 2011

 

 

IMPORTANT NOTICE

 

YOUR VOTE IS IMPORTANT. TO ASSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, PLEASE VOTE YOUR SHARES AS PROMPTLY AS POSSIBLE OVER THE INTERNET AT WWW.PROXYVOTE.COM OR BY TELEPHONE AT 1-800-690-6903. ALTERNATIVELY, YOU MAY REQUEST A PAPER PROXY CARD, WHICH YOU MAY COMPLETE, SIGN AND RETURN BY MAIL.

 

 

ADMISSION PROCEDURES

 

Admission to the annual meeting will be limited to persons who: (a) are listed on WGL Holdings, Inc.’s records as shareholders as of January 3, 2011 (the “record date”), or (b) bring documentation to the meeting that demonstrates their beneficial ownership of WGL Holdings, Inc. common stock through a broker, bank or other nominee as of the record date.

 

Proxy Statement

 

January 19, 2011

 

Table of Contents

 

PROXY STATEMENT

 

WGL HOLDINGS, INC.

 

101 Constitution Ave., N.W.

Washington, D.C. 20080

 

January 19, 2011

 

This proxy statement is provided in connection with a solicitation of proxies by the board of directors of WGL Holdings, Inc. to be used at the annual meeting of shareholders to be held on Thursday, March 3, 2011 at 10:00 a.m., Eastern Time, and at any adjournment thereof. The annual meeting will be held at the National Press Club, 529 14th St., N.W.; Washington, D.C. 20045. This proxy statement is first being provided to our shareholders on or about January 19, 2011. Throughout this proxy statement, “WGL Holdings,” “the company,” “we,” “our” or “us” are intended to refer to WGL Holdings, Inc. and its consolidated subsidiaries, unless specifically indicated otherwise.

 

You are invited to attend the annual meeting, and we request that you vote on the proposals described in this proxy statement. You do not need to attend the meeting to vote your shares. If you have received a printed copy of these materials by mail, you may complete, sign and return your proxy card or follow the instructions below to submit your proxy vote by telephone or over the Internet. If you did not receive a printed copy of these materials by mail and are accessing them via the Internet, you may follow the instructions below to submit your proxy vote over the Internet or by telephone.

 

Notice Regarding the Availability of Proxy Materials

 

In accordance with rules and regulations adopted by the Securities and Exchange Commission, instead of mailing a printed copy of our proxy materials to each shareholder of record, we may furnish proxy materials via the Internet. We intend to mail a printed copy of this proxy statement and proxy card to certain shareholders of record entitled to vote at the annual meeting. All other shareholders will receive a Notice Regarding the Availability of Proxy Materials (sometimes referred to in this proxy statement as the “Notice”). The Notice will first be mailed on or about January 19, 2011.

 

On the date of mailing of the Notice, shareholders will be able to access all of the proxy materials on a web site referred to in the Notice. The proxy materials will be available free of charge. The Notice will instruct you as to how you may access and review all of the information contained in the proxy materials (including our annual report to shareholders) over the Internet. The Notice also instructs you as to how you may submit your proxy vote over the Internet. If you received a Notice and would like to receive printed copies of the proxy materials, you should follow the instructions for requesting such materials included in the Notice.

 

Washington Gas Light Company Savings and Capital Appreciation Plans

 

If you participate in either the Washington Gas Light Company Savings or Capital Appreciation Plan (the “401(k) plans”) and you own WGL Holdings common stock in one of those plans, your proxy card will serve as a voting instruction to the 401(k) plan trustee. If you are also a shareholder of record outside of the 401(k) plans, your proxy card (or Internet or telephone vote) will vote both your record shares and your 401(k) plan shares, as long as your registration information is identical in both accounts. For example, if your registered stock account is in your single name and also lists the same address as your 401(k) account, you should receive one proxy card, or Notice for both the 401(k) plan shares and for the shares held by our transfer agent. However, if your shares held by the transfer agent are in joint names, or at a different address, you will receive separate proxy materials for each account. To allow sufficient time for voting by the administrator of the 401(k) plans, your voting instructions must be received by 11:59 p.m. Eastern Time on March 1, 2011.

One Vote For Each Share Held

 

At the annual meeting, each holder of WGL Holdings common stock will be entitled to one vote for each share of common stock standing in the name of the holder on the records of WGL Holdings at the close of business on January 3, 2011. Outstanding voting securities as of January 3, 2011, consisted of 51,112,968 shares of common stock.

 

Shareholders of Record

 

If your shares are registered directly in your name with Bank of New York Mellon, our transfer agent, you are considered, with respect to those shares, the shareholder of record, and the Notice or this proxy statement is being sent directly to you by our agent. As the shareholder of record, you have the right to vote by proxy or to vote in person at the annual meeting.

 

Beneficial Owners

 

If your shares are held in a brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in “street name,” and the Notice or this proxy statement and voting instruction form will be forwarded to you by your broker or nominee. The broker or nominee is considered, with respect to those shares, the shareholder of record. As the beneficial owner, you have the right to direct your broker how to vote.

 

Voting Methods and Procedures

 

Shareholders of record may vote in any one of four ways:

 

 

The procedures for voting by proxy are as follows:

 

 

Beneficial owners that received a Notice from the shareholder of record should follow the instructions included in the Notice to view the proxy statement and transmit voting instructions. Beneficial owners that receive a printed copy of the proxy materials also may receive a voting instruction form and voting instructions. Those beneficial owners may mail the voting instruction form, or may vote by telephone or over the Internet as instructed in the voting form.

 

If you vote via Internet or telephone, your vote must be received by 11:59 p.m. Eastern Time on March 1, 2011 to be counted. Proxy cards must be received before 4:00 p.m. Eastern Time on March 1, 2011 or submitted at the annual meeting in order to be counted.

 

We provide Internet proxy voting to allow you to vote your shares online, with procedures designed to ensure the authenticity and correctness of your proxy vote. However, please be aware that you must bear any costs associated with your Internet access, such as usage charges from Internet access providers and/or telephone companies.

Receipt of More Than One Notice or Proxy Card

 

If you received more than one Notice or proxy card, your shares are probably registered in more than one name or are registered in different accounts. Please follow the voting instructions included in each Notice and proxy card to ensure that all of your shares are voted.

 

Voting Shares in Person at the Annual Meeting

 

Shares held directly in your name as the shareholder of record may be voted in person at the annual meeting. In order to vote at the annual meeting, shareholders of record must bring their Notice or proof of ownership. Beneficial owners must obtain a valid proxy from the record owner to vote in person at the annual meeting. Beneficial owners should follow the instructions provided by their broker or contact their broker to request the requisite proxy form. Even if you currently plan to attend the annual meeting, we recommend that you also submit your proxy as described above so that your vote will be counted if you later decide not to attend the meeting. You may still attend the meeting and vote in person if you have already voted by proxy.

 

Consideration of Proposals Presented at the Annual Meeting

 

Other than the election of directors and the four other proposals described in this proxy statement, we do not expect any matters to be presented for a vote at the annual meeting. If you grant a proxy, Terry D. McCallister, Chairman and Chief Executive Officer, Adrian P. Chapman, President and Chief Operating Officer, and Vincent L. Ammann, Jr., Vice President and Chief Financial Officer (collectively referred to as the “proxyholders”) will have the discretion to vote your shares on any additional matters properly presented for a vote at the annual meeting. Under our bylaws, the deadline for notifying us of any additional proposals to be presented at the annual meeting has passed and, accordingly, shareholders may not present any additional proposals at the annual meeting.

 

Quorum and Vote Tabulation

 

As provided in our bylaws, a majority of the shares entitled to vote at the annual meeting, present in person or represented by proxy, will constitute a quorum for the meeting.

 

On Proposal (1), the election of directors, you may either vote “FOR” all the nominees to the Board of Directors or you may “WITHHOLD” your vote from any or all nominees. You may vote “FOR,” “AGAINST” or “ABSTAIN” from voting on: Proposal (2), the ratification of the appointment of Deloitte & Touche LLP, Proposal (3) relating to cumulative voting, Proposal (4) relating to an advisory vote regarding shareholder approval of the compensation paid to certain executive officers, and any other matter to be voted on at the annual meeting. You may vote for “1 Year”, “2 Years”, “3 Years” or “ABSTAIN” in regards to Proposal (5) which is an advisory vote regarding the frequency of shareholder approval of the compensation paid to certain executive officers.

 

All valid proxies properly executed and received by us will be voted in accordance with the instructions specified in the proxy. If a proxy is submitted without instructions, shares will be voted: (1) “FOR” the election of each of the named nominees for director, (2) “FOR” ratification of the appointment of Deloitte & Touche LLP as independent public accountants for fiscal year 2011, (3) “AGAINST” the shareholder proposal relating to cumulative voting, (4) “FOR” the advisory vote on executive compensation, and (5) “1 Year” under the advisory vote regarding the frequency of the advisory vote on executive compensation. At the annual meeting:

 

 

 

Adjournments

 

We currently expect to take votes and close the polls on all proposals at the annual meeting. However, we may:

 

 

If any of the above occurs, we could propose one or more adjournments of the annual meeting. For any adjournment to be approved, the votes cast in favor of it must represent a majority of the total number of votes cast by the shareholders present at the meeting in person or by proxy.

 

Proxies that we have solicited will be voted in favor of any adjournment that we propose. If any adjournment is properly proposed at the meeting on behalf of anyone else, the persons named as proxies, acting in that capacity, will have discretion to vote on the adjournment in accordance with their best judgment.

 

Solicitation of Proxies

 

The solicitation of proxies is being made on behalf of the board of directors, and the cost will be borne by WGL Holdings. Brokerage houses and other custodians will be reimbursed by WGL Holdings for their expenses in forwarding proxy materials to the beneficial owners of shares held in their name. Further solicitation of proxies may be made by telephone or other communication by regular employees of WGL Holdings. Morrow & Co., LLC, 470 West Avenue, Stamford, Connecticut, 06902 has been retained by WGL Holdings for a fee of $5,500, plus expenses, to assist in the solicitation of proxies.

 

Revocation of Proxies

 

You may revoke your proxy at any time before the final vote at the meeting. You may revoke your proxy in any one of three ways:

 

 

The Governance Committee of the Board of Directors is responsible for identifying nominees for election as directors. The Governance Committee may consider nominees suggested by several sources, including outside search firms, incumbent board members and shareholders. The Governance Committee did not use a third party to assist in finding the nominees listed in this proxy statement under, “Proposal 1 — Election of Directors.”

 

As provided in its charter, the Governance Committee will seek candidates having experience and abilities relevant to serving as a director of the company and who will represent the best interests of shareholders as a whole, and not any specific interest group or constituency. The Governance Committee, with recommendations and input from the Chairman of the Board and other directors, evaluates the qualifications of each director candidate in accordance with the criteria described in the director qualification standards section of our corporate governance guidelines. In evaluating the qualifications of director nominees, the Governance Committee considers factors, including, but not limited to, the following:

 

Commitment.  Directors should be able to contribute the time necessary to be actively involved on the board and its decision-making and should be able and willing to prepare for and attend required meetings.

 

Diversity.  Though the board does not have a formal policy regarding the consideration of diversity in identifying nominees for director, directors should be selected so that the board of directors is a diverse body. The board considers the term “diversity” to include differences of viewpoint, professional experience, education, skill and other individual qualities and attributes that contribute to board heterogeneity as well as differences in race, gender and ethnicity.

 

Experience.  Directors should be or have been in leadership positions in their field of endeavor and have a record of excellence in that field.

 

Independence.  Directors should neither have, nor appear to have, a conflict of interest that would impair his or her ability to represent the interests of all the company’s shareholders and other stakeholders and to fulfill the responsibilities of a director.

 

Integrity.  Directors should have a reputation of integrity and be of the highest ethical character.

 

Judgment.  Directors should have the ability to exercise sound business judgment on a large number of matters.

 

Knowledge.  Directors should have a firm understanding of our operations, business strategy, and corporate governance.

 

Skills.  Directors should be selected so that the board of directors has an appropriate mix of skills in core areas such as: accounting, compensation, finance, government relations, law, management, risk oversight and strategic planning.

 

The board may take into account other factors that are relevant to the success of a publicly traded utility company in addition to those listed above such as the current composition of the board, the operating requirements of the company, and the long-term interests of shareholders and other stakeholders in evaluating director nominees. As part of the annual nomination process, the Governance Committee reviews the qualifications of each board nominee, including currently serving board members and reports its findings to the board. On September 23, 2010, the Governance Committee determined that each board member satisfied the criteria described above and advised the board on September 29, 2010 that each of the director nominees listed under, “Proposal 1 — Election of Directors” was qualified to serve on the board.

Diversity

 

As indicated above, the director qualification standards of our corporate governance guidelines include a consideration of diversity in the evaluation of candidates for board membership. The Governance Committee discusses diversity considerations in connection with potential director nominees, as well as on a periodic basis in connection with the current composition of the board as a whole. The board conducted a self-evaluation during 2010 and concluded that its efforts to achieve board membership diversity had been effective. During fiscal year 2010, three out of eight directors were African-American, two out of eight directors were women, and all of the board members as a whole represented a diverse array of viewpoints, experience, education, skills and other attributes that contribute to board heterogeneity and effectiveness in overseeing the direction of the company.

 

The Governance Committee will consider board nominees recommended by shareholders. Those recommendations should be sent in writing to the Chair of the Governance Committee, c/o the Corporate Secretary of WGL Holdings, Inc.; 101 Constitution Ave., N.W.; Washington D.C. 20080. The recommendation must identify the writer as a shareholder of the company and provide sufficient detail for the Governance Committee to consider the recommended individual’s qualifications. The Governance Committee will evaluate the qualifications of candidates recommended by shareholders using the same criteria as used for other board candidates.

 

Director Retirement

 

After the end of our 2010 fiscal year, Mrs. Karen Hastie Williams retired from our Board of Directors following 18 years of dedicated and highly valued service on December 1, 2010. At the time of her retirement, Mrs. Williams was the chair of the Audit Committee and a member of the Executive and Governance Committees.

 

At the annual meeting, seven directors are to be elected. All of the nominees are presently members of the board of directors. Each nominee will be elected to serve until our next annual meeting of shareholders.

 

It is the intention of the proxyholders to vote proxies for the election of the nominees named below, unless such authority is withheld. We do not contemplate that any of the nominees will become unavailable for any reason, but if that should occur before the meeting, the proxies received for that nominee will be voted for another nominee or other nominees, to be selected by the board of directors in their discretion.

 

The board of directors recommends a vote “FOR” the election of each of the following nominees:

 

 

Combined Chairman of the Board and Chief Executive Officer Position

 

Mr. McCallister serves as the Chairman of the Board of Directors and Chief Executive Officer. The Board of Directors evaluated its leadership structure in 2010 and determined that the use of the Lead Director, as described below, along with the combined Chairman and Chief Executive Officer positions, is an effective leadership structure. Mr. McCallister has over 30 years of experience in a variety of positions of increasing responsibility and leadership in many facets of the utility and energy industry. As the individual primarily responsibility for the day-to-day management of business operations, he is best positioned to chair regular board meetings as the directors discuss key business and strategic issues. Coupled with an independent Lead Director, this leadership structure allows the board to exercise independent oversight and enables the board to have direct access to information related to the day-to-day management of business operations.

 

The leadership responsibilities of the board are shared among the chairs of the board’s four standing committees, the Lead Director and the Chairman of the Board. This structure has been developed over the past decade based on the recommendations of our Governance Committee and on the decisions of our full board — which is comprised of six independent directors and a single management director. Mr. McCallister is the only management director. All members of the four standing committees of the board are independent. Mr. McCallister is invited to attend committee meetings, but he does not have a vote on any committee matter.

 

Our corporate governance guidelines and bylaws establish a Lead Director of the board and designate the Chair of the Governance Committee to serve in that position. Among other powers and responsibilities, the Lead Director will:

 

 

The board and board committees regularly meet in executive sessions without the presence of any management representatives. The Lead Director presides in those executive sessions. If the executive session includes or is devoted to a report of a board committee, the chair of that committee presides in that portion of the executive session.

 

Our board leadership structure facilitates proper risk oversight for the company for a number of reasons, the most significant of which are the following:

 

 

 

The Lead Director also informs the Chairman of the Board and Chief Executive Officer, subject to the discretion of the independent directors, about the substance of the discussions that took place during each executive session meeting of the independent directors.

 

The board is aware of the potential conflicts that may arise when an insider chairs the board, but believes these are offset by existing safeguards which include: the designation of a Lead Director, regular meetings of the independent directors in executive session without the presence of insiders, the fact that management compensation is determined by a committee of independent directors who make extensive use of peer benchmarking, and the fact that much of our operations are highly regulated.

 

The board recognizes that WGL Holdings and its subsidiaries are exposed to certain financial, operational and strategic risks that can affect our earnings and ability to provide value to our shareholders and service to our customers. The board of directors has delegated certain risk oversight responsibilities to its Audit Committee. In accordance with NYSE requirements and as set forth in its charter, the Audit Committee periodically reviews and discusses our risk management and risk assessment policies with senior management. The Audit Committee incorporates its risk assessment function into its regular reports to the board. The Audit Committee is directly responsible for overseeing our risk assessment and risk management policies.

 

At the direction of the Audit Committee and in consultation with the full board and executive management, the company created a Risk Management Committee. The Risk Management Committee is comprised of senior members of management, and is chaired by the Treasurer of the company. The Risk Management Committee is responsible for ensuring that the company is managing its principal enterprise wide risks. The Risk Management Committee does this by using an enterprise risk management (ERM) process which is based on the company’s risk management policy. The ERM process involves the application of a well-defined, enterprise-wide methodology that enables our executives to identify, categorize, prioritize, and mitigate the principal risks to the company, such as business continuity, compliance, credit, environmental, information technology, strategic, financial, operational and reputational risks. In addition to known risks, ERM focuses on emerging risks as well as risks that are rare and difficult to predict, but which, if they were to occur, would have a significant impact on the company. The findings of the ERM process are reported regularly to the Audit Committee by the chair of the Risk Management Committee. The Risk Management Committee periodically conducts a full review and update of its assessment of the risks facing the company and presents the updated assessment to the Audit Committee for its review.

 

Also, in fulfilling its risk oversight function, the Audit Committee periodically, and as needed, discusses key risks with the Chief Executive Officer, President and Chief Operating Officer, Vice President and Chief Financial Officer, Vice President and General Counsel, internal auditors, and with the company’s independent registered public accounting firm. The board evaluated the risk assessment function as part of its board evaluation process in 2010 and determined that the company’s risk management structure (including its risk management policy and risk management committee), plus regular reports to the board from management and board committees, enable the board to perform its risk oversight responsibilities in an appropriate and effective manner.

Additionally, each board committee oversees risks within its area of responsibility and has principal responsibility for reviewing and discussing with management the risk exposures specified in their charters or identified from time to time by the committees themselves.

 

In 2010, the Human Resources Committee’s executive compensation consultant, Meridian Compensation Partners, LLC (“Meridian”), conducted a risk evaluation of the company’s compensation policies and practices for all employees, including executives, which management reviewed with the Human Resources Committee and Meridian. This evaluation sought to identify any features of the company’s compensation policies and practices that could encourage excessive risk-taking. The evaluation utilized a process that inventoried existing incentive plans and their salient features and examined design and administrative features of these plans to determine risk aggravating or mitigating factors.

 

In order to focus employees on performance objectives that promote the best interests of the company and its shareholders, short-term and long-term incentive-based compensation is linked to the achievement of measurable financial and business and, in the case of short-term incentives, individual performance goals. The risk evaluation conducted by Meridian found that these arrangements are coupled with compensation design elements and other controls that discourage business decision-making that is focused solely on the compensation consequences and mitigate risks.

 

Based on the results of the evaluation, we believe that our executive compensation program reflects an appropriate mix of compensation elements and balances current and long-term performance objectives, cash and equity compensation, and risks and rewards associated with executive roles. The following features of our executive incentive compensation program illustrate this point:

 

 

Based on the above combination of program features, we believe that (i) our executives are encouraged to manage the company in a prudent manner, and (ii) our incentive programs are not designed in a manner to encourage our senior business leaders to take risks that are inconsistent with the company’s best interests.

 

The board of directors has determined that all of the current directors and each of the nominees for election as director, except Mr. McCallister, are independent within the meaning of New York Stock Exchange (NYSE) rules. In determining independence, the board of directors considered the specific criteria for independence under the NYSE rules and also the facts and circumstances of any other relationships of individual directors with the company.

 

The board has also adopted a code of conduct. The corporate governance guidelines, bylaws and the code of conduct may be viewed on our web site, www.wglholdings.com, and copies may be obtained by request to the Secretary of the company. Those requests should be sent to: Corporate Secretary; WGL Holdings, Inc.; 101 Constitution Ave., N.W.; Washington, D.C. 20080.

The board of directors has a policy under which directors who are not employees of the company and its subsidiaries may not stand for re-election after reaching the age of 75. Also, under this policy, directors who are employees of the company must retire from the board upon their retirement from the company. This policy can be changed at any time by an action of the board of directors.

 

The company expects all board members to attend the annual meeting of shareholders, but from time to time, other commitments may prevent all directors from attending each annual meeting. Six of the then eight directors attended the most recent annual meeting of shareholders which was held on March 4, 2010.

 

The board of directors of the company held eight meetings during fiscal year 2010. Each current board member attended 75% or more of the meetings of the board, and the committees on which he or she served that were held during the period for which he or she was a director or committee member.

 

The board of directors has established four standing committees: 1) the Executive Committee; 2) the Audit Committee; 3) the Governance Committee, and 4) the Human Resources Committee. Each of these committees is described in more detail below. The Audit, Governance and Human Resources Committees have each adopted a charter for their respective committees. These charters may be viewed on our web site, www.wglholdings.com.

 

Shareholders and all other interested parties may send communications regarding financial accounting, internal accounting controls, auditing, code of conduct or other concerns to non-management board members by using the toll-free number established for such purposes, which is 1-800-249-5360.

 

The Executive Committee members are:  Terry D. McCallister (Chairman), Michael D. Barnes, Melvyn J. Estrin, and George P. Clancy, Jr. There are three alternate members: James W. Dyke, Jr., James F. Lafond and Debra L. Lee. This committee may exercise all of the authority of the board of directors when the board is not in session. This committee did not meet during fiscal year 2010.

 

The Audit Committee members are:  George P. Clancy, Jr. (Chairman), Melvyn J. Estrin and James F. Lafond. Members of the Audit Committee are independent under the rules of the Securities and Exchange Commission (SEC) and the NYSE. The board of directors has determined that Messrs. Clancy, Estrin and Lafond meet the qualifications of an “audit committee financial expert,” as that term is defined by rules of the SEC.^1/ As provided in its charter, functions of the Audit Committee include the appointment, compensation and oversight of independent public accountants, reviewing with management and the independent public accountants the financial statements, the accompanying report of the independent accountants and reviewing the system of internal controls and the adequacy of the internal audit program. The Audit Committee also is directly responsible for overseeing the company’s risk assessment and risk management policies. The Audit Committee Report, which appears later in this proxy statement and the Audit Committee charter, provide a further description of the responsibilities of this committee. The Audit Committee held six meetings during fiscal year 2010.

 

 

^1/  In accordance with rules of the SEC, persons determined to be audit committee financial experts will not be deemed an expert for any purpose, including, without limitation for purposes of Section 11 of the Securities Act of 1933, as a result of being so designated. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations or liabilities that are greater than those imposed on such person as a member of the audit committee and the board of directors in the absence of such designation or identification.

 

The Governance Committee members are:  Michael D. Barnes (Chairman) and James W. Dyke, Jr. Members of the Governance Committee are independent under the rules of the NYSE. As provided in its charter, functions of the Governance Committee include consideration of criteria for selection of candidates for election to the board of directors and committees of the board and adoption of policies and principles concerning board service and corporate governance. This committee also considers criteria for oversight and evaluation of the board and management and the adoption of a code of conduct. The Governance Committee held three meetings during fiscal year 2010.

 

The Human Resources Committee (the “HR Committee”) members are:  Melvyn J. Estrin (Chairman), George P. Clancy, Jr. and Debra L. Lee. Members of the HR Committee are independent under the rules of the NYSE. The HR Committee met four times in fiscal year 2010. The HR Committee discharges the board’s responsibilities relating to compensation of our executive officers. As provided in its charter, primary functions of the HR Committee include setting corporate goals and objectives relevant to compensation of the Chief Executive Officer (CEO), evaluating the CEO’s performance and setting the CEO’s compensation based on this evaluation. The HR Committee also recommends compensation levels, sets performance targets and evaluates the performance of our other executive officers and determines any incentive and equity-based compensation to be awarded to those officers. The HR Committee also considers succession planning for the company’s leadership positions.

 

The HR Committee may, in accordance with its charter, “delegate authority to act upon specific matters within specified parameters to a subcommittee consisting of one or more members, or to management.” Any such delegates are required to report any action to the full HR Committee at its next meeting. Please see the discussion under the Compensation Discussion and Analysis section below for information relating to processes and procedures for the consideration and determination of executive compensation.

 

Governance.  The HR Committee focuses on good governance practices in its operation. In fiscal year 2010, this included, among other matters:

 

 

Compensation Consultant.  The HR Committee has the sole authority to retain and terminate any compensation consultant engaged to assist the HR Committee in the evaluation of the compensation of our executive officers, including all of the Named Executive Officers. During fiscal year 2010, the HR Committee’s retained consultant began the year as an employee of Hewitt Associates (Hewitt)

but on February 1, 2010, became a partner of Meridian Compensation Partners, LLC (Meridian). The consultant attended two of the four HR Committee meetings held during fiscal year 2010.

 

Meridian is an independent firm that provides only executive and director compensation consulting services. Hewitt provides other services in addition to executive and director compensation consulting services, but during the consultant’s tenure with Hewitt in fiscal year 2010, Hewitt provided no services to the company other than for executive compensation.

 

The consultant provided data and information to the HR Committee, but did not make recommendations with respect to specific levels of compensation. Services by the consultant’s firm to the HR Committee during fiscal year 2010 included the following:

 

 

Consultant Independence.  It is important for the HR Committee to receive advice from an independent source. The following information describes the independence of Hewitt, Meridian and the individual consultant that provides advice to the HR Committee.

 

 

Given the factors described above, the HR Committee has concluded that the individual consultant and consulting firm are independent and that the HR Committee can rely on the consultant’s advice.

 

As previously described, the Human Resources Committee currently is composed of three independent, non-employee directors. Each such director served as a member of the HR Committee

during the entire 2010 fiscal year. No member of the HR Committee has ever been an officer or employee of WGL Holdings or any of its subsidiaries. No member of the board or HR Committee has served, at any time since October 1, 2009, as an executive officer of any entity that at such time had one or more of WGL Holdings’ executive officers serving as a member of that entity’s board or compensation committee.

 

Compensation for directors during fiscal year 2010 consisted of an annual retainer, fees for attending meetings, and an annual equity award. Directors were offered the opportunity to receive all of their cash compensation on a deferred basis under the WGL Holdings and Washington Gas Light Company’s Deferred Compensation Plan for Outside Directors described later in this proxy statement. Mr. McCallister, our Chairman and Chief Executive Officer, does not receive compensation for his service as a director.

 

The non-employee directors receive shares of WGL Holdings common stock annually in accordance with the Directors’ Stock Compensation Plan in addition to a retainer paid in cash. Directors receive an amount of WGL Holdings common stock equal to $75,000 in value. Non-employee directors of WGL Holdings also serve as directors of its utility subsidiary, Washington Gas Light Company (Washington Gas). The directors serve on the same committees of each board. Non-employee directors receive only one cash retainer which is payable by Washington Gas. Usually, the board meetings of WGL Holdings and Washington Gas are held consecutively. The fiscal year 2010 compensation arrangements of non-employee directors were coordinated as described below:

 

 

 

 

The following table presents information regarding the compensation paid during fiscal year 2010 to the non-employee directors of the company.

 

Compensation Paid to Directors in FY2010

 

 

 

 

All non-employee directors are compensated in accordance with the terms of our director compensation program. Usually, the board reviews the level of compensation it receives for its service every two years. In connection with this review, Meridian Compensation Partners, LLC (“Meridian”), the board’s executive compensation consulting firm, conducts a director pay review survey to identify board compensation practices of a peer group of companies. The most recent study was conducted during fiscal year 2010. The board takes this survey information into consideration when determining the meeting fees, retainers and other forms of compensation it will be paid. The board may take action at any time to amend the amount or type of compensation it receives. Directors employed by the company do not receive compensation for their role as a director. The executive officers of the company do not have a role in determining or recommending the amount or form of compensation received by directors. Other than conducting the director pay review previously mentioned, Meridian has no role in determining the compensation of the board of directors.

 

Non-employee directors of the company are eligible to defer up to 100% of their cash board compensation under the WGL Holdings and Washington Gas Light Company Deferred Compensation Plan for Outside Directors, as amended and restated (the “Director Deferred Compensation Plan”). This includes the deferral of the payment of annual board and committee cash retainers, board meeting fees, committee meeting fees, fees for attendance at annual and special shareholder meetings and fees paid by us for attending director education programs. Deferrals are set at percentage increments of 10%. Interest is earned on deferred amounts, compounded quarterly, at a rate equal to the weekly average yield to maturity for 10-year U.S. Government fixed interest rate securities issued at the time of the deferral, with a minimum rate of 8% per year. Non-employee directors may elect to defer distribution of their compensation for a minimum period of one year following the end of the year in which compensation is deferred or until the director’s retirement from the board. Compensation deferred under the Director Deferred Compensation Plan may be distributed earlier than the time period specified by a director in the event of the director’s retirement, disability, death or upon the occurrence of a severe financial hardship. Non-employee directors may elect to receive payment of deferred amounts in a lump sum or in equal annual installments up to a ten-year period. Non-employee directors must elect the time and method of distribution at the same time they submit a deferral application. Payments commence within 30 days of the event which triggers payout.

 

The amount of early withdrawals or accelerated payments made in connection with a severe financial hardship are limited in accordance with applicable tax laws. The administrator of the Director Deferred Compensation Plan has the sole discretion to determine whether such an early withdrawal or accelerated payment in the event of a severe financial hardship will be permitted.

 

Pursuant to the terms of the WGL Holdings, Inc. Directors’ Stock Compensation Plan, as amended and restated (“Directors’ Stock Plan), shares of WGL Holdings common stock are awarded to each non-employee director annually. The amount of WGL Holdings common stock awarded is equal to $75,000 in value. The Directors’ Stock Plan is administered by the Human Resources Committee of the board. Employee directors are not eligible to participate in this plan. The shares of common stock awarded under the plan are immediately vested and non-forfeitable. The Directors’ Stock Plan is unfunded and will expire on March 4, 2020, if not previously terminated by the board or by the shareholders.

 

A retirement plan for non-employee directors of Washington Gas adopted in 1995 was terminated by the Board of Washington Gas effective January 1, 1998, subject to vesting of benefits earned by the directors as of that date. Of the current directors, only Messrs. Barnes and Estrin have vested benefits under this plan. The benefits are frozen and will be paid out in a fixed amount per year to each of them for a ten-year period commencing after their retirement from the board. Under the plan, Messrs. Barnes and Estrin will receive $10,200 per year during the ten-year payout period. Mrs. Karen Hastie Williams retired from the board of directors on December 1, 2010 and will receive $8,500 from the company per year over a period of ten years beginning in 2011.

 

Washington Gas has a long-standing tradition of supporting charitable and civic organizations within the Washington, DC metropolitan area by contributing financial donations and employee volunteer resources. None of the donations in fiscal year 2010 were made in the name of a director of WGL Holdings or Washington Gas.

 

The board of directors has stock ownership guidelines pursuant to which each board member should own shares of WGL Holdings having a value of at least five times the amount of his or her annual cash retainer. New directors have five years from the date of their election to the board of directors to acquire this level of ownership. Based on the closing price of the common stock of WGL Holdings on January 3, 2011, each of the current directors was in compliance with these ownership guidelines as of that date.

 

The following table sets forth the information as of January 3, 2011, regarding outstanding common stock of WGL Holdings beneficially owned by each director, each nominee for election as a director, the executive officers named in the Summary Compensation Table in this proxy statement, and all directors, nominees and executive officers as a group. Each of the individuals listed, as well as all directors and executive officers as a group, beneficially owned less than 1% of the company’s outstanding common stock.

 

 

 

 

The following table sets forth information regarding any person who is known to WGL Holdings to be the beneficial owner of more than five percent of WGL Holdings common stock. This information is based on the most recently publicly available information at the time of preparation of this proxy statement.

 

 

 

 

 

Section 16(a) of the Securities Exchange Act of 1934 as amended, requires our executive officers and directors to file reports of securities ownership and changes in such ownership with the SEC. Based on our records and information, in fiscal year 2010, all of our directors and executive officers met the applicable reporting requirements under Section 16(a).

 

Policies and Procedures for Review, Approval or Ratification of Related-Person Transactions

 

Our policies and procedures for the review, approval or ratification of related person transactions are set forth in our Related Person Transactions Policy. In summary, a related person transaction is a consummated or currently proposed transaction in which we were or are to be a participant and the amount involved exceeds $120,000, and in which a related person (i.e., any director or executive officer or nominee for director, or any member of the immediate family of such person) has or will have a direct or indirect material interest.

 

The Governance Committee of the board of directors is responsible for reviewing and approving all material transactions with any related person. This obligation is set forth in writing in the Governance Committee charter. A copy of the Governance Committee charter is available at www.wglholdings.com.

 

To identify related party transactions, each year we submit and require our directors and officers to complete director and officer questionnaires identifying any transactions with us in which the officer or director or their family members have an interest. We also distribute questionnaires to directors, executive officers and others within the company to identify related party transactions for purposes of meeting accounting and disclosure requirements under the Statement of Financial Accounting Standard No. 57 (SFAS 57). We review related party transactions due to the potential for a conflict of interest. A conflict of interest occurs when an individual’s private interest interferes, or appears to interfere, in any way with the company’s interests. Our code of conduct requires all directors, officers and employees who may have a potential or apparent conflict of interest to notify their supervisor or the Corporate Compliance Officer.

 

We expect our directors, officers and employees to act and make decisions that are in the company’s best interests and encourage them to avoid situations which present a conflict between our interests and their own personal interests. Our directors, officers and employees are prohibited from taking any action that may make it difficult for them to perform their duties, responsibilities and services to the company in an objective and fair manner. In addition, we are prohibited from extending personal loans to, or guaranteeing the personal obligations of, any director or officer.

 

There were no material related person transactions during fiscal year 2010 and no transactions were considered or reviewed for approval in connection with our related person transactions policy.

 

The following Compensation Discussion and Analysis section has been prepared by the management of the company. The company is responsible for the Compensation Discussion and Analysis and for the disclosure controls relating to executive compensation. The Compensation Discussion and Analysis is not a report or disclosure of the Human Resources Committee.

 

The Human Resources Committee has reviewed and discussed with management the Compensation Discussion and Analysis section of this proxy statement. Based upon this review and its discussions, the Human Resources Committee recommended to the Board of Directors that the following Compensation Discussion and Analysis section be included in this proxy statement.

 

HUMAN RESOURCES COMMITTEE

Melvyn J. Estrin (Chairman)

George P. Clancy, Jr.

Debra L. Lee

 

This Compensation Discussion and Analysis (CD&A) contains a discussion of the material elements of compensation awarded to, earned by, or paid to the principal executive officer, the principal financial officer, and the other three most highly compensated executive officers of WGL Holdings and Washington Gas. These individuals are listed in the Summary Compensation Table provided later in this proxy statement and are referred to in this CD&A as the “Named Executive Officers.” References to the “HR Committee” are to the Human Resources Committee of the Board of Directors. None of the Named Executive Officers are members of the HR Committee.

 

FY 2010 in Review

 

WGL Holdings performed well in FY2010 against internal measures of success reflected in our short-term incentive plan and in stock performance for shareholders which is reflected in our long-term incentive programs. As a result:

 

 

Note that base salary increases and other pay elements are a function of factors other than performance. A discussion of these pay elements and further detail regarding our incentives payouts are provided below.

 

Objectives of Executive Compensation Program

 

The HR Committee’s philosophy is that total compensation for each of our executive officers should be competitive with executives with similar experience and responsibility. This compensation also should reflect the individual performance of each officer as well as corporate performance.

 

 

* Notwithstanding anything to the contrary set forth in any of the company’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate other filings with the SEC, including this proxy statement, in whole or in part, the following Human Resources Committee Report shall not be deemed to be incorporated by reference into any such filings.

The executive compensation program of WGL Holdings is intended to achieve three fundamental objectives:

 

 

We provide the Named Executive Officers competitive total compensation opportunities based on the size-adjusted 50th percentile of the range of compensation paid by similar utility industry companies for similar positions, with actual pay that reflects WGL Holdings’ short and long-term performance and the individual’s performance. The program aligns the short-term and long-term interests of management with those of our shareholders to maximize shareholder value.

 

The program’s performance goals and factors also align management’s interests with utility company customers by rewarding the provision of a safe and reliable gas supply to customers at a reasonable cost. Several of these performance goals and factors are discussed below. The programs in place for fiscal year 2010 support our pay-for-performance philosophy.

 

Elements of Executive Compensation Program

 

In 2010*, our compensation program for our executive officers, including the Named Executive Officers, consisted of several compensation elements, each of which is discussed in more detail below. Each element of the executive compensation program is appropriately structured to help achieve one or more of the compensation objectives described above. Decisions with respect to one element of pay tend not to impact other elements of pay, but are made in the context of total compensation. The following are the material elements of our executive compensation program:

 

 

Mix of Pay

 

A significant percentage of total compensation is allocated to incentives, both short-term and long-term. Short-term incentives focus on internal performance measures and goals that we set each year, and are paid in cash. Long-term incentives focus on our stock performance against peers and are both denominated in and paid in a combination of stock and cash.

 

There is no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term compensation. Rather, the HR Committee uses market data and its business judgment to determine the appropriate level and mix of incentive compensation. The allocation between current and long-term compensation is based primarily on competitive market practices relative to base salaries, annual short term incentive awards and long-term incentive award values.

 

 

* Unless stated otherwise, references to the year “2010” in this CD&A mean our fiscal year 2010 which began on October 1, 2009 and ended on September 30, 2010.

Market Data and Peer Groups

 

During 2009, as background to compensation decisions for 2010, the HR Committee’s independent executive compensation consultant collected and analyzed comprehensive market data on base salary, short and long-term incentives, and the sum of those components. The consultant separately analyzed the market competitiveness of our executive benefits program and the prevalence of perquisites. To develop market information for our executive officers, including the Named Executive Officers, the consultant developed compensation opportunities for comparable positions at comparable companies of comparable revenue size, using various statistical techniques to adjust the market data to be appropriate for our particular revenues size. The elements of pay were benchmarked both individually and in total to the same peer companies.

 

The total compensation peer group of companies used as background to 2010 pay decisions is shown below. The list is subject to change each year depending on the availability of the companies’ data through the Hewitt Associates Total Compensation Measurement database (used by the consultant for fiscal year 2010), and the continued appropriateness of the companies. All companies included are utility companies, consistent with our philosophy of paying at the size-adjusted 50th percentile of the utilities market. While we periodically review market data of general industry companies, to date it has not impacted our actual pay levels or practices.

 

Fiscal 2010 Total Compensation Peer Group

 

 

Base Salary and Pay Changes for FY2010

 

Base salary levels of executive officers (which includes the Chairman and Chief Executive Officer), in 2010 and for the last several years, were set at a level approximately equal to the size-adjusted 50th percentile of the utility market for officers of similar experience and responsibility. The HR Committee utilized comprehensive executive compensation data provided by its consultant in determining these market levels and in establishing a competitive level of compensation for all of our officers.

 

This approach was taken to place base salaries at overall market rates, and to leave the opportunity for each officer to achieve or exceed total target compensation through incentive pay. This continuing practice is designed to encourage higher levels of performance by the officers. It also is seen as a way to align the interests of the officers of WGL Holdings and Washington Gas more closely with the interests of the shareholders.

 

The compensation data demonstrated a higher level of market base pay for the Chairman and Chief Executive Officer position as compared to other executive officers. Therefore, the HR Committee granted Mr. McCallister higher levels of short and long-term compensation than other officers. Short-term and long-term incentive opportunities for the Chairman and Chief Executive Officer and for the other executive officers were established based on considerations of market data and internal pay equity.

Mr. McCallister, our Chairman and Chief Executive Officer, made specific recommendations for 2010 salary adjustments for all officers except himself, considering the data provided by the HR Committee’s consultant on industry compensation levels, the scope of each Named Executive Officer’s role, and the Named Executive Officer’s sustained individual performance, results, and time in position.

 

These recommendations were presented to the HR Committee for discussion and recommendation to the board of directors at the September 18, 2009 HR Committee meeting and were effective October 1, 2009. The HR Committee met with its consultant in executive session at that meeting to consider Mr. McCallister’s base salary and target incentives for fiscal year 2010, which it has sole authority to approve. Based on the market data for Mr. McCallister’s new role as Chairman and Chief Executive Officer, and using an approach of closing significant gaps to market over a two-year period, the HR Committee increased Mr. McCallister’s 2010 base salary 27.8%, his short-term incentive opportunity by 10% of base salary, and his long-term incentive opportunity by 30% of base salary. In September 2010, the HR Committee made the second increase needed to bring Mr. McCallister’s pay near market levels, effective for fiscal year 2011, by increasing: base salary by 21.8%, short-term incentive opportunity by 5% of base salary, and long-term incentive opportunity by 5% of base salary.

 

The other named executive officers also received increases in base salary and, in some cases, to incentive opportunities. For similar reasons as Mr. McCallister, the increase for Mr. Chapman was substantial for both 2010 and 2011 (19.1% and 16.0%) in order to close a significant gap between his base salary and the market for his position due to his promotion to President and Chief Operating Officer, with increases also made to 2010 and 2011 short-term incentive opportunity (15% and 5% of base salary) and long-term incentive opportunity (10% and 5% of base salary) for the same reason.

 

The base salary that was paid to each Named Executive Officer in 2010 is the amount reported for such officer in column (c) of the Summary Compensation Table that appears later in this proxy statement. Short-term incentive target opportunities are reflected in column (d) of the Grants of Plan-Based Awards Table that appears later in this proxy statement.

 

Omnibus Incentive Compensation Plan

 

The WGL Holdings, Inc. Omnibus Incentive Compensation Plan (“Omnibus Plan”) provides the opportunity for short-term and long-term incentive compensation of our executive officers, including the Named Executive Officers. Short-term incentive compensation is “at risk,” in that payment of any of this compensation depends upon performance of the individual officer and our company performance. Long-term incentive compensation is also “at risk” in that it relates directly to the performance of WGL Holdings common stock against that of other utilities.

 

Short-Term Incentive Compensation

 

Purpose of Short-Term Incentives

 

The short-term incentive program is designed to encourage and to recognize high levels of performance by officers of WGL Holdings and its subsidiaries.

Short-Term Incentive Awards

 

The 2010 short-term incentive program set target percentages of base salary that may be earned for the achievement of corporate and individual performance goals. Payouts may be higher or lower than target depending on 2010 corporate and individual performance. Payouts may range from 0% to 172.5% of target per the scale below.

 

 

The amounts listed in columns (c), (d) and (e) of the “Grants of Plan-Based Awards” table in this proxy statement show the potential range of short-term cash awards for 2010 for each Named Executive Officer.

 

At its September 18, 2009 meeting, the HR Committee set 2010 target short-term incentive award opportunities for each Named Executive Officer at or near the size-adjusted 50th percentile of the market data provided by the HR Committee’s consultant. It also approved 2010 performance factors and goals that governed payout under the plan.

 

The performance factors recognize that shareholders in a regulated utility achieve their investing goals when customers are well served through efficient operations. The 2010 performance goals, targets and results are set forth below.

 

For the company:

 

 

 

The company’s progress in the areas described above strengthens our ability to grow and to provide a competitive return for investors while maintaining a safe, reliable natural gas distribution system that provides sustainable value for our customers.

 

For fiscal year 2010, the company’s return on equity threshold and nine other performance criteria were met or exceeded and as a result, on November 17, 2010, Mr. McCallister recommended, and the HR Committee approved, a Corporate Factor of 105% for 2010.

 

Named Executive Officers had individual goals for FY2010, which encompassed:

 

 

After a comprehensive performance appraisal of each executive officer and a review of their achievement of the personal goals which had been set for them, Mr. McCallister recommended an Individual Factor specific to each Named Executive Officer, except for himself. The HR Committee discussed and approved the Individual Factors recommended by the Chief Executive Officer for the Named Executive Officers.

 

In executive session, the HR Committee developed an Individual Factor of 1.5 for Mr. McCallister. These Individual Factors reflected the personal effectiveness of the executives in achieving the results of the corporate scorecard which are described above. Mr. McCallister’s Individual Factor in particular reflects an outstanding first year as a new CEO, a smooth transition from the prior CEO, and effective decision-making.

 

For tax purposes, the HR Committee set a limitation on 2010 short-term incentive payouts for Messrs. McCallister and Chapman of 0.72% and 0.40% of 2010 net income, respectively. The HR Committee then used negative discretion as provided under Section 162(m) of the Internal Revenue Code to arrive at actual, lower 2010 payouts based on our performance for the year.

 

The amounts of short-term incentive awards relating to the 2010 fiscal year were paid in December, 2010 and are set forth under column (g) entitled Non-Equity Incentive Plan Compensation in the Summary Compensation Table. The amounts of such short-term incentive awards range from 104% to 132% of target.

Forfeiture and Recoupment of Short-Term Incentives

 

On December 18, 2009, the Board of Directors of the company adopted a Forfeiture and Recoupment Policy in order to recoup short-term incentive awards paid to certain officers of the company and its subsidiaries, including the Named Executive Officers. Pursuant to the policy, the company’s board of directors, upon recommendation by the HR Committee, may direct that all or a portion of any short-term incentive payout made to certain officers be recovered if such payout is based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria.

 

The HR Committee will determine whether such recovery will be effectuated by: (i) seeking repayment from the officer, (ii) reducing the amount that would otherwise be payable to the officer under any compensatory plan, program, or arrangement maintained by the company, (iii) withholding payment of future increases in compensation (including the payment of any discretionary bonus amount) or grants of compensatory awards that would otherwise have been made in accordance with the company’s otherwise applicable compensation practices, or (iv) any combination of the foregoing. In each instance in which the potential for recovery of short-term incentives exists, the company will not seek recovery after a period of 24 months following the first public issuance or filing with the Securities and Exchange Commission (which ever first occurs) of a financial report containing a materially inaccurate statement or the achievement of performance metric criteria where the achievement of such criteria is later deemed to have been materially inaccurate.

 

Long-Term Incentive Compensation

 

Purpose of Long-Term Incentive Awards

 

The 2010 long-term incentive program was designed to achieve the following goals:

 

 

Stock Options

 

In fiscal year 2008, we changed the program to eliminate the granting of stock options and instead began granting performance shares and performance units in a 50%-50% ratio. In both cases, the combinations were chosen as the best method to motivate executive officers to generate, and reward them for, shareholder value creation. The performance units are earned on the same basis as the performance shares. The program change was done in order to achieve the same goals listed above, while lowering the dilutive effect of the program and bringing it more in line with competitive practice.

 

How 2010 Award Sizes Were Determined

 

The target values of the long-term incentive awards for Named Executive Officers were determined by the HR Committee based on the size-adjusted 50th percentile of the market data provided by its consultant and on internal pay equity. To arrive at the actual award sizes for performance shares

and performance units, we divide the executive officer’s target value applicable to performance units (50% of the total) by the value of one performance unit on the date of grant, and the target value applicable to performance shares (50% of the total) by the value of one performance share on the date of grant, both as calculated by the HR Committee consultant.

 

Performance Share and Performance Unit Awards

 

Performance share awards are denominated in shares of WGL Holdings common stock and are paid out in shares of WGL Holdings stock. Performance unit awards are denominated in dollars and are paid out in cash. In all other respects, the two awards are the same.

 

Performance shares and performance units will be paid out at the end of the performance period if certain long-term performance criteria are achieved and the Named Executive Officer remains an employee. If the Named Executive Officer leaves the company before the performance period has ended, he or she will forfeit any payouts for all open performance periods. Upon retirement, death or disability, however, the HR Committee has discretion to prorate awards based on the number of months worked in the performance period.

 

The measure of performance for performance shares and performance units is Total Shareholder Return relative to a specified peer group. Total Shareholder Return is calculated as follows:

 

Total Shareholder Return		=		Change in stock price + dividend paid Beginning stock price

 

Performance/Payout Relationship

 

The table below shows the performance and payout scale for performance share and performance unit awards.

 

 

Generally, the percentile rank will not fall directly on one of the ranks listed in the left column. When this occurs, performance must be interpolated between the percentiles listed in the columns.

 

Peer Group Selection

 

As noted in the performance/payout relationship table above, grants made in 2010 (i.e., on October 1, 2009) measure our 2010-2012 Total Shareholder Return against peer companies. The 2010-2012 performance period runs from October 1, 2009 through September 30, 2012. The 2010-2012 peer companies were approved at the HR Committee’s September 18, 2009 meeting based on the following criteria:

 

 

 

Companies that meet most, but not all of the above criteria are considered and included in the peer group if deemed to be comparable from other market indicators. The companies chosen using that criteria were as follows:

 

2010 — 2012 Performance Share and Performance Unit Peer Group

 

 

Payout of 2008-2010 Performance Share and Unit Awards

 

In September 2007, the HR Committee awarded performance shares and units for the 2008-2010 performance period (the “2008-2010 performance period”). The 2008-2010 performance period ran from October 1, 2007 through September 30, 2010. The awards for the 2008-2010 performance period were made on the same terms as described above.

 

The 2008-2010 peer group was developed using the same criteria listed above under “Peer Group Selection,” except that companies were excluded based on having unregulated generation assets rather than electric generation assets. The peer group used for the 2008-2010 period is shown below.

 

2008 — 2010 Performance Share and Unit Peer Group

 

 

The 2008-2010 performance shares and units vested and were paid out on October 1, 2010 at 181% of target. This was the result of our Total Shareholder Return performance at the 82nd percentile of the peer group during the 2008-2010 performance period.

 

Other Prior Year Awards

 

Performance share and unit awards also were made for the 2009-2011 performance period which runs from October 1, 2008 through September 30, 2011. The terms of those awards are similar to those described above.

Analysis

 

Key Analytic Tools

 

The HR Committee uses specific analytic tools as well as its seasoned business judgment in forming recommendations and decisions on executive compensation matters. To facilitate the HR Committee’s decision-making process for fiscal year 2010, its consultant prepared: an executive compensation market study, compensation tally sheets for each executive, pay and performance comparisons, a dilution study, and data on executive compensation trends. These materials were delivered to the HR Committee members in advance of HR Committee meetings and were the subject of discussion between HR Committee members and the consultant.

 

In addition, the HR Committee received and considered comprehensive reports from management on corporate and individual executive performance. Corporate performance was specifically discussed with the HR Committee at the time our financial results for fiscal year 2010 were being released to the public. The HR Committee considered our corporate performance as measured by our reported financial results for fiscal year 2010, the corporate scorecard for fiscal year 2010 and in comparison to our financial goals. Details regarding the targets and results for our corporate scorecard are reported elsewhere in this CD&A.

 

Individual performance is measured each year by the HR Committee and our management. Every other year the HR Committee assesses performance in part by the use of a multi-rater survey of our executives. This multi-rater survey is prepared and administered by a separate consultant to the company and the HR Committee. The HR Committee members also have direct knowledge of the performance of several of the executives through regular and special reports by these executives to the board of directors and board committees. In addition, our Chairman and Chief Executive Officer discusses the performance of our other executives in detail with the HR Committee.

 

Several specific corporate performance factors and individual performance factors were considered by the HR Committee in establishing the compensation of our Named Executive Officers for fiscal year 2010. Those corporate and leadership performance factors are specifically described elsewhere in this proxy statement.

 

Retirement Benefits

 

We provide retirement benefits to the Named Executive Officers under the terms of qualified and non-qualified defined-benefit and defined-contribution retirement plans. Retirement benefits provide post-employment security to our employees. They are an essential part of a total compensation package that is competitive with those offered by other companies, particularly other gas and electric utilities. Retirement benefit programs applicable to the Named Executive Officers are:

 

 

The Washington Gas Light Company Savings Plan for Management Employees (“401(k) Plan”) is a tax-qualified retirement plan in which the Named Executive Officers participate on the same terms as our other participating employees.

 

The Washington Gas Light Company Employees’ Pension Plan (“Pension Plan”) is a qualified, trusteed, non-contributory pension plan covering active employees (including certain executive officers) and vested former employees of Washington Gas. Effective July 1, 2009, the Pension Plan was closed to new management employee entrants. All employees hired after that date will participate in a defined contribution plan (the “DC Plan”). The DC Plan provides a company contribution between 4%-6% of base salary (depending on length of service) to subject employees. The Pension Plan was

closed in order to reduce the company’s risk and to provide a greater degree of predictability regarding the company’s long-term financial obligations.

 

The SERP is a defined benefit plan that allows accrual of a higher benefit than the qualified plan, but vests it more slowly. This plan allows us to: i) attract mid-career executive hires by replacing foregone pension benefits at former employers, and ii) be competitive with pensions provided to executives at peer companies which aids in the retention of our executive officers.

 

On December 18, 2009, the Washington Gas board of directors adopted a defined contribution form of Supplemental Executive Retirement Plan (the “DC SERP”). The prior defined benefit SERP was closed to new participants on December 31, 2009. Employees hired or promoted after December 31, 2009 will be eligible to participate only in the DC SERP, not the SERP. Current executives had a choice of either remaining in the SERP or joining the new DC SERP. The closing of the SERP to new participants was made for several reasons. By closing the SERP to new participants and creating the DC SERP, the company is able to: (i) reduce its risk, (ii) provide greater predictability of its long-term financial obligations, and (iii) align executive compensation with prevailing market practices. The benefits provided under the DC SERP are at the market median and comprise an element of our total compensation package that is competitive with those offered by other gas and electric utilities. Each of the Named Executive Officers is a participant under the SERP and Pension Plan.

 

The SERP and DC SERP include a “clawback” provision that requires a participant to forfeit benefit payments under certain circumstances. Under this clawback provision, if a SERP or DC SERP participant willfully performs any act or willfully fails to perform any act that may result in material discredit or substantial detriment to Washington Gas, then upon a majority vote of the board of directors, the participant, his or her surviving spouse and any beneficiary of those persons, will forfeit any benefit payments owing on and after a date fixed by the board of directors. After this fixed date, the company will have no further obligation under the SERP or DC SERP to the participant, his or her spouse or any beneficiary. Also, under the clawback provision, if a participant has received a lump-sum benefit, the participant or the surviving spouse would be required to return a proportionate share of that lump sum payment to Washington Gas.

 

None of the Named Executive Officers are participants in the DC SERP or DC Plan.

 

See “Pension benefits — Pension Plan” later in this proxy statement for a discussion of the other aspects of the Pension Plan.

 

See “Pension benefits — Supplemental Executive Retirement Plan” later in this proxy statement for a discussion of other aspects of the SERP.

 

Severance/Change in Control Protections

 

Our policy regarding severance protection for Named Executive Officers stems from its importance in recruiting and retaining executives in a competitive environment where executives are commonly being recruited from well-compensated positions in other companies or considering attractive opportunities with other companies.

 

We offer certain benefits to executive officers in the event of a change in control of WGL Holdings or Washington Gas. The occurrence, or potential occurrence, of a change in control transaction would create uncertainty regarding the continued employment of each Named Executive Officer. This uncertainty would result from the fact that many change in control transactions result in significant organizational changes, particularly at the senior executive level. Providing limited protections to the Named Executive Officers upon a change in control is in our shareholders’ best interests because doing so serves to promote a stable executive team during the transition process and is helpful in hiring executives into the company.

To encourage the Named Executive Officers to remain employed with us during a time when their prospects for continued employment following the transaction would be uncertain, and to permit them to remain focused on shareholders’ and customers’ interests during the change in control, the Named Executive Officers would be provided with severance benefits which include the value of two or three years’ worth of target-level compensation if their employment were actually or constructively terminated without cause in connection with a change in control.

 

Named Executive Officers should not be entitled to receive cash severance benefits merely because a change in control transaction occurs. Therefore, the WGL Holdings, Inc. and Washington Gas Light Company Change in Control Severance Plan for Certain Executives (the “CIC Plan”) provides for the payment of severance benefits upon a “dual trigger” event. A “dual trigger” event used in this context means that cash payments and vesting/payouts of one-half the outstanding long-term incentive awards happen only upon the occurrence of both a change in control and either: (i) an involuntary termination of employment or (ii) a voluntary termination with good reason.

 

Given that none of the Named Executive Officers has an employment agreement that provides for fixed positions or duties, or for a fixed base salary or actual or target annual bonus, we have concluded that a constructive termination severance trigger is appropriate to prevent potential acquirers from having an incentive to cause constructive termination of a Named Executive Officer’s employment to avoid paying any severance benefits at all. Without a constructive termination severance trigger, following a change in control, an acquirer could materially demote a Named Executive Officer, materially reduce his or her salary and reduce or eliminate his or her annual bonus opportunity in order to force the Named Executive Officer to terminate his or her own employment and thereby avoid paying severance. Thus, the CIC Plan provides certain benefits for Named Executive Officers in the event of a “qualified termination.”

 

If a change in control payment exceeds the limit for deductible payments under Section 280G of the Internal Revenue Code by 10% or more, reimbursement will be made for the full amount of any excise taxes (but not income taxes) imposed, and for all taxes due on the amount of that reimbursement. This provision is intended to preserve the level of change-in-control severance protections that we have determined to be appropriate. On November 17, 2010, the Board of Directors eliminated the reimbursement by the company of excise taxes imposed on such severance payments for any executive officers that become covered by the terms of the CIC Plan on or after January 1, 2011.

 

Levels of change-in-control payments were developed in prior years and were either reaffirmed or adjusted after a thorough reevaluation of such protection by the HR Committee in 2006. That re-evaluation included input from the HR Committee’s consultant and considered both market practice and best practice.

 

See “Potential Payments Upon Termination Or Change In Control — Change in Control Severance Plan for Certain Executives” later in this proxy statement for a discussion of the other aspects of the CIC Plan.

 

Perquisites

 

We provide limited perquisites to the Named Executive Officers. In general, we will provide Named Executive Officers with a specific perquisite only when the perquisite provides competitive value and promotes retention of executives, or when the perquisite provides shareholder value.

 

We have a program of income tax, estate and financial planning services for our executive officers. We pay the actual cost of these services provided to the executive officer up to a pre-determined ceiling. We also pay the cost of certain other perquisites for executive officers, including parking at our headquarters building, a vehicle allowance and an annual physical examination. We have memberships at three clubs held in the names of the Chairman and Chief Executive Officer and the President and Chief Operating Officer that are for use in business purposes. We also have rights to the use of a suite at a sports arena that is available for business purposes by employees. Other benefits available to the Named Executive Officers are noted in footnotes to the Summary Compensation Table.

The values of perquisites provided to each Named Executive Officer in 2010 are reported in Column (i) of the Summary Compensation Table in this proxy statement.

 

Timing of Compensation

 

Under our current policy, long-term incentive awards are granted effective each October 1, the first day of the fiscal year. Short-term awards are generally made in November. The HR Committee has the discretion to make awards at any time.

 

Following is a discussion of the timing of compensation decisions for fiscal year 2010:

 

 

Impact of Prior Compensation

 

Amounts realizable from prior compensation did not serve to increase or decrease 2010 compensation amounts. The HR Committee’s primary focus was on achieving market-level compensation opportunities.

 

Factors Considered in Decisions to Increase or Decrease Compensation Materially

 

As described above in this CD&A, market data, retention needs, performance and internal pay equity have been the primary factors considered in decisions to increase or decrease compensation opportunities materially. Corporate and individual performances are the primary factors in determining the ultimate value of those compensation opportunities.

 

Role of Executive Officers

 

Mr. McCallister, our Chairman and Chief Executive Officer, recommended to the HR Committee compensation opportunities for the other Named Executive Officers. Mr. McCallister was not involved in determining his own compensation. In determining short-term incentive payouts for 2010, Mr. McCallister recommended an Individual Factor specific to each Named Executive Officer, except for himself. None of the other Named Executive Officers had any role in determining their executive compensation.

 

Executive Officer Stock Ownership Requirements

 

We previously had a policy of encouraging our executive officers to accumulate an amount of shares equal in value to such executive officer’s base salary. On November 17, 2010, the Human Resources Committee recommended and the Board of Directors approved new stock ownership requirements for executive officers that became effective on January 1, 2011. Under the new requirement:

 

(i) the Chief Executive Officer is required to hold 3x base salary in WGL Holdings common stock;

 

(ii) the President and Chief Operating Officer, Vice President and Chief Financial Officer, and the Vice President and General Counsel are each required to hold 2x base salary in WGL Holdings common stock; and

 

(iii) all other executive officers are required to hold 1x base salary in WGL Holdings common stock.

 

Executive officers must retain performance shares issued through incentive plans (currently the Omnibus Incentive Compensation Plan) net of tax withholding until the threshold holding requirement is met. At the discretion of the Chief Executive Officer, holding requirement waivers may be granted from time to time, if an executive officer is able to demonstrate a financial hardship. Margined stock will not be counted towards satisfaction of the stock ownership requirement.

 

Company Policy Regarding the Economic Risk of Common Stock Ownership

 

Our code of conduct prohibits executive officers, directors and other individuals with material non-public information from engaging in purchase, sale or option exercises with respect to our common stock outside of certain window periods, except in accordance with trading plans that comply with Rule 10b5-1 promulgated under the Securities Exchange Act of 1934, as amended.

 

Other Compensation Matters

 

We do not have any written or unwritten employment agreements with any of the Named Executive Officers. Each Named Executive Officer is an employee at will.

 

All elements of executive compensation are regularly benchmarked against executive compensation in peer companies. Base salary, annual bonus, and long-term incentive compensation are benchmarked annually while other employee benefits and perquisites are benchmarked every two years.

 

The following tables and related footnotes and discussion present information about compensation for the Chief Executive Officer, the Chief Financial Officer and the three other most highly compensated executive officers of WGL Holdings and its subsidiaries (the “Named Executive Officers”). The “Summary Compensation Table” below quantifies the value of the different forms of compensation earned by or paid to Named Executive Officers in fiscal years 2008, 2009 and 2010.

 

The Summary Compensation Table should be read in connection with the tables and narrative descriptions that follow. The “Grants of Plan-Based Awards in Fiscal 2010” table, and the description of the material terms of the performance shares and units granted in fiscal year 2010 that follows it, provide information regarding the long-term equity incentives awarded to Named Executive Officers that are reported in the Summary Compensation Table. The “Outstanding Equity Awards at Fiscal 2010 Year End” and “Option Exercises and Stock Vested in Fiscal Year 2010” tables provide further information on the Named Executive Officers’ potential realizable value and actual value realized with respect to their equity awards.

 

The “Pension Benefits” table and related description of the material terms of the retirement plans describe each Named Executive Officer’s retirement benefits to provide context to the amounts listed in the Summary Compensation Table.

SUMMARY COMPENSATION TABLE

 

The following table presents information about compensation for the Named Executive Officers. It includes compensation awarded to, earned by or paid to the Named Executive Officers during fiscal years 2008, 2009 and 2010. Each of the below-named individuals was also an executive officer of Washington Gas Light Company (Washington Gas), our utility subsidiary. The compensation shown in the following table was paid to the individual by Washington Gas.

 

 

 

 

 

Perquisites

 

We have a program of income tax, estate and financial planning services for our executive officers. We pay the actual cost of these services provided to the executive up to a pre-determined ceiling depending on the level of the executive officer. The highest amount provided to any executive under the income tax, estate and financial planning program is $10,000 per year. We also pay the cost of certain other perquisites for executive officers, including: parking at our headquarters building, a gasoline allowance and an annual physical examination. We have memberships at three clubs held in the names of the Chairman and Chief Executive Officer and/or the President and/or Chief Operating Officer that are for use for business purposes. We also have rights to the use of a suite at a sports and entertainment facility that is available for use in business purposes by employees and directors. These suites generally are maintained for business entertainment, but may be used for personal use. The entire amount has been included in the table below, although we believe that only a portion of this cost represents a perquisite.

The following table sets forth the incremental value of perquisites for the Named Executive Officers in 2008, 2009 and 2010 included in the “All Other Compensation” column (i) of the Summary Compensation Table above.

 

Fiscal Years 2008, 2009 and 2010 Incremental Cost of Perquisites
Provided to Named Executive Officers

 

 

The amounts set forth in the “tax gross-up” column in the above table represent the amount of taxes paid by the company on behalf of officers relating to life insurance coverage with benefits in excess of $50,000. We provide the executive officers (and all employees) life insurance equal to one times the employees’ salary. Under the Internal Revenue Code, the cost of the first $50,000 of life insurance paid by us is not taxable income to the employee. However, the premiums we paid for insurance in excess of $50,000 is taxable income (imputed income) to the employee. The company “grosses up” the income of the Named Executive Officers for the taxes on this imputed income (i.e., we pay the taxes for the Named Executive Officers on this imputed income). The imputed income amount and the amount of the tax gross up are both taxable income to the Named Executive Officer.

 

The amounts under the column entitled, “insurance” in the above table represent the premiums paid by the company for the respective Named Executive Officer’s long term care and imputed income for life insurance.

 

The following Grants of Plan-Based Awards table sets forth information concerning the range of short-term incentive opportunities and opportunities under grants of performance shares and units to our Named Executive Officers during the fiscal year ended September 30, 2010. The grants in the following table were made under the Omnibus Incentive Compensation Plan.

 

 

 

 

No Employment Agreements with Named Executive Officers

 

None of the Named Executive Officers have employment agreements with the company.

Performance Shares and Performance Units

 

Performance share awards are denominated and paid out in shares of WGL Holdings common stock. Performance unit awards are denominated in dollars and are paid out in cash. In all other respects, the two awards are the same.

 

The vesting of performance share and performance unit awards is conditioned upon the performance of the company and the officer’s continued employment. As long as each Named Executive Officer continues to remain an employee, performance shares and units become earned and vested based on WGL Holdings’ comparative total shareholder return over a designated three-year performance period. Performance share award grantees do not have the rights of shareholders until the performance shares fully vest. Therefore, performance share grantees do not receive dividends or other earnings on the performance share until it fully vests. Since the performance units pay out in cash once vested, performance unit grantees do not receive dividends or other rights of shareholders.

 

For further information regarding the performance share and performance unit payout peer groups and the total shareholder return necessary for the vesting of performance shares, please see the discussion under the heading, “Long-Term Incentive Compensation-Performance Share and Performance Unit Awards” in the Compensation Discussion & Analysis section of this proxy statement.

 

Awards are converted to cash for shares to the extent necessary to satisfy minimum tax withholding or any governmental levies. Performance shares and performance units are generally forfeited for no value if a Named Executive Officer’s employment terminates prior to the end of the performance period. However, a Named Executive Officer, subject to the sole discretion of the Human Resources Committee of the company’s Board of Directors, may vest in all or a portion of his or her outstanding performance shares or performance units if his or her employment terminates as a result of retirement, death, or disability. In the event of a change in control, the target number of performance shares granted prior to December 15, 2006 will automatically vest as of the effective date of the change of control, and will be settled in stock as soon as practicable following the effective date of the change in control. Under certain circumstances, following a change in control, between 50% to 100% of an officer’s outstanding performance share or performance unit awards granted on or after December 15, 2006 would become fully vested at target levels.

 

Options

 

The company has not granted stock options since October 1, 2006 because the company’s compensation program changed in the following fiscal year to eliminate the granting of stock options and to begin granting performance shares and units. Each option award is a non-qualified option that may be exercised to purchase one share of WGL Holdings common stock at an exercise price equal to the fair market value of the underlying common stock on the grant date. The fair market value is the closing price of one share of WGL Holdings common stock, as reported on the New York Stock Exchange composite tape on the grant date, or if the common stock was not traded on such day, then on the next preceding day that the common stock was traded. The exercise price of options may be paid in cash, by delivery of already-owned shares of common stock of WGL Holdings or by any other method approved by the HR Committee. Awards are converted to cash to the extent necessary to satisfy minimum tax withholding or any governmental levies. Holders of option awards do not have the rights of shareholders until the option is exercised. Therefore, option holders do not receive dividends or other earnings on the underlying stock until the option is exercised.

 

Stock option awards have a three-year vesting period. Subject to continued employment, 100% of stock option awards vest and become exercisable on the third anniversary of the grant date. Options expire on the tenth anniversary of the date of grant. If employment is terminated because of death, permanent and total disability, or retirement, stock option awards will immediately vest and become exercisable. If employment terminates for any other reason, the unvested portion of stock option awards will immediately terminate. All options immediately become exercisable upon a change in

control. If employment is terminated for cause, then all unexercised options, whether or not vested, will expire as of the employment termination date. Stock option awards are generally only transferable to a beneficiary upon death.

 

The following table summarizes the equity awards we have made to our Named Executive Officers which were outstanding as of September 30, 2010. Outstanding equity awards at fiscal year-end consist of non-qualified stock options, performance shares and performance units.