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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549****FORM 10-Q**   þ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934****For the Quarterly Period Ended September 30, 2006****or**   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934****For the Transition Period From                      to                     **       Registrant; State of Incorporation;  Commission File Number Address; Telephone Number IRS Employer Identification No.          1-10290 **Duquesne Light Holdings, Inc.**25-1598483  (A Pennsylvania Corporation)    411 Seventh Avenue    Pittsburgh, Pennsylvania 15219    412-393-6000       1-956 **Duquesne Light Company**25-0451600  (A Pennsylvania Corporation)    411 Seventh Avenue    Pittsburgh, Pennsylvania 15219    412-393-6000     Indicate by check mark whether each registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and(2) has been subject to such filing requirements for the past 90 days.Duquesne Light Holdings, Inc. Yes þ No oDuquesne Light Company Yes þ No o   Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (check one):Duquesne Light Holdings, Inc. Large accelerated filer þ Accelerated filer o Non-accelerated filer oDuquesne Light Company Large accelerated filero Accelerated filero Non-accelerated filerþ   Indicate by check mark whether either registrant is a shell company (as defined in Rule 12b-2 of the Act).Duquesne Light Holdings, Inc. Yes o No þDuquesne Light Company Yes o No þAs of October 31, 2006, there were 87,612,654 shares of Duquesne Light Holdings, Inc.’s singleclass of common stock outstanding.As of October 31, 2006, there were 10 shares of Duquesne Light Company’s single class of commonstock outstanding, all held by Duquesne Light Holdings, Inc.  
 

**TABLE OF CONTENTS**
 PART I. FINANCIAL INFORMATION Item 1. Financial StatementsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and Procedures PART II. OTHER INFORMATIONItem 1. Legal Proceedings Item 6. Exhibits SIGNATURESEX-12.1EX-12.2EX-31.1EX-31.2EX-31.3EX-31.4EX-32.1EX-32.2EX-32.3EX-32.4

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**PART I. FINANCIAL INFORMATION****Item1. Financial Statements****Duquesne Light Holdings, Inc.****Condensed Consolidated Statements of Income (Unaudited)**                   (All Amounts in Millions,   Except Per Share Amounts)   Three Months  Nine Months   Ended September 30,  Ended September 30,   **2006**  2005  **2006**  2005  Operating Revenues:                Retail sales of electricity **$****235.6**  $222.7  **$****611.9**  $593.6 Other  **35.7**   40.6   **107.6**   110.3  **Total Operating Revenues**  **271.3**   263.3   **719.5**   703.9  Operating Expenses:                Fuel and purchased power  **131.2**   103.0   **324.7**   272.1 Other operating and maintenance  **58.6**   66.1   **175.2**   184.2 Depreciation and amortization  **22.0**   20.6   **63.4**   61.4 Taxes other than income taxes (Note 9)  **29.2**   14.8   **56.3**   41.6 Other (Notes 2, 5 and 9)  **4.3**   —   **5.0**   —  **Total Operating Expenses**  **245.3**   204.5   **624.6**   559.3  **Operating Income**  **26.0**   58.8   **94.9**   144.6 Investment and Other Income  **1.6**   20.3   **7.0**   39.1 Interest and Other Charges  **(19.5****)**  (16.5)  **(55.6****)**  (45.7) Income from Continuing Operations BeforeIncome Taxes and Limited Partners’ Interest  **8.1**   62.6   **46.3**   138.0 Income Tax Expense (Note 9)  **(9.8****)**  (21.8)  **(27.3****)**  (45.9)Benefit from Limited Partners’ Interest  **2.6**   2.7   **7.6**   7.6  **Income from Continuing Operations**  **0.9**   43.5   **26.6**   99.7 Income(Loss) from Discontinued Operations —Net (Note 10)  **—**   0.1   **(0.1****)**  0.4  **Net Income** **$****0.9**  $43.6  **$****26.5**  $100.1  Average Number of Common Shares Outstanding  **83.5**   77.8   **80.0**   77.6  Basic Earnings Per Share of Common Stock:                Earnings from Continuing Operations **$****0.01**  $0.56  **$****0.33**  $1.28 Earnings from Discontinued Operations  **—**   —   **—**   0.01  Basic Earnings Per Share of Common Stock **$****0.01**  $0.56  **$****0.33**  $1.29  Diluted Earnings Per Share of Common Stock**:**                Earnings from Continuing Operations **$****0.01**  $0.56  **$****0.33**  $1.28 Earnings from Discontinued Operations  **—**   —   **—**   0.01  Diluted Earnings Per Share of Common Stock **$****0.01**  $0.56  **$****0.33**  $1.29  Dividends Declared Per Share of Common Stock **$****0.25**  $0.25  **$****0.75**  $0.75  See notes to condensed consolidated financial statements.
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**Duquesne Light Holdings, Inc.****Condensed Consolidated Balance Sheets (Unaudited)**           (Millions of Dollars)   **September 30,**  December 31,   **2006**  2005  **Assets**        **Current Assets:**        Cash and temporary cash investments **$****16.2**  $79.2 Receivables  **128.8**   114.3 Prepaid expenses  **12.9**   6.9 Other  **63.9**   91.8 Discontinued operations  **—**   1.7  **Total Current Assets**  **221.8**   293.9  **Long-Term Investments**  **556.5**   549.9  **Property, Plant and Equipment:**        Property plant and equipment  **2,625.0**   2,315.6 Less: Accumulated depreciation and amortization  **(805.6****)**  (773.5) **Property,Plant and Equipment — Net**  **1,819.4**   1,542.1  **Other Non-Current Assets:**        Regulatory assets  **292.1**   300.0 Other  **121.7**   134.7  **Total Other Non-Current Assets**  **413.8**   434.7  **Total Assets** **$****3,011.5**  $2,820.6           **Liabilities and Capitalization**         **Current Liabilities:**        Short-term debt and current debt maturities **$****15.3**  $40.3 Accounts payable  **90.4**   93.0 Other  **161.5**   182.7 Discontinued operations  **1.3**   2.5  **Total Current Liabilities**  **268.5**   318.5  **Non-Current Liabilities:**        Deferredincome taxes — net  **452.1**   451.4 Other  **188.0**   254.1  **Total Non-Current Liabilities**  **640.1**   705.5  Limited partners’ interest  **28.0**   35.4 Commitments and Contingencies (Note 9)         **Capitalization:**        **Long-term debt**  **1,157.7**   957.8 **Preferred and Preference Stock**  **148.2**   147.5  **Common Shareholders’ Equity:**        Common stock— no par value (authorized —187,500,000 shares; issued — 135,765,386 shares and126,929,154 shares)  **1,337.5**   1,200.5 Retained earnings  **565.4**   600.0 Treasury stock (at cost) (48,294,768 and 48,935,435 shares)  **(1,117.9****)**  (1,132.5)Unearned compensation  **—**   (1.8)Accumulated other comprehensive loss  **(16.0****)**  (10.3) **Total Common Shareholders’ Equity**  **769.0**   655.9  **Total Capitalization**  **2,074.9**   1,761.2  **Total Liabilities and Capitalization** **$****3,011.5**  $2,820.6  See notes to condensed consolidated financial statements.
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**Duquesne Light Holdings, Inc.****Condensed Consolidated Statements of Cash Flows (Unaudited)**           (Millions of Dollars)   Nine Months Ended September 30,   **2006**  2005  **Cash Flows from Operating Activities:**        Net income **$****26.5**  $100.1 Adjustments to reconcile net income to net cash providedfrom operating activities  **80.7**   (8.6)Changes in working capital other than cash  **(78.6****)**  (11.7)Discontinued operations  **0.5**   (1.1) **Net Cash Provided from Operating Activities**  **29.1**   78.7  **Cash Flows from Investing Activities:**        Capital expenditures  **(171.6****)**  (76.7)Proceeds from disposition of investments/assets  **5.7**   49.9 Acquisition of power plant interests, net  **(177.7****)**  — Long-term investments  **(10.0****)**  (0.3)Other  **(5.2****)**  0.4 Discontinued operations  **—**   0.9  **Net Cash Used in Investing Activities**  **(358.8****)**  (25.8) **Cash Flows from Financing Activities:**        Revolving credit facility borrowings, net  **(25.0****)**  — Issuance of long-term obligations  **200.0**   320.0 Issuance of common stock, net  **140.9**   — Reductions of long-term obligations  **—**   (320.1)Dividends on common and preferred stock  **(51.0****)**  (50.2)Other  **1.8**   (0.5) **Net Cash Provided from (Used in) Financing Activities**  **266.7**   (50.8) Net (decrease) increase in cash and temporary cash investments  **(63.0****)**  2.1 Cash and temporary cash investments at beginning of period  **79.2**   62.7  Cash and temporary cash investments at end of period **$****16.2**  $64.8  **Supplemental Cash Flow Information**        Capital expenditures included in accounts payable **$****13.5**  $—  Cash paid during the period:        Interest **$****49.1**  $32.2 Income taxes paid **$****57.9**  $17.6  See notes to condensed consolidated financial statements.**Duquesne Light Holdings, Inc.****Condensed Consolidated Statements of Comprehensive Income (Unaudited)**                   (Millions of Dollars)   Three Months Ended  Nine Months Ended   September 30,  September 30,   **2006**  2005  **2006**  2005  Net income **$****0.9**  $43.6  **$****26.5**  $100.1 Other comprehensive income:                Unrealized holding gains on cash flow hedginginstruments, net of tax of $(0.4), $6.0, $0.6 and $6.6  **0.1**   8.5   **2.8**   9.3 Unrealized holding gains on interest rate hedginginstruments, net of tax of $—, $4.2 ,$— and $3.1  **—**   5.9   **—**   4.3 Reclassification adjustment for holding gains (losses) on cashflow and interest rate hedging instruments, net of tax  **0.6**   —   **(8.5****)**  —  Comprehensive income **$****1.6**  $58.0  **$****20.8**  $113.7  See notes to condensed consolidated financial statements.
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**Duquesne Light Company****Condensed Consolidated Statements of Income (Unaudited)**                   (Millions of Dollars)   Three Months Ended  Nine Months Ended   September 30,  September 30,   **2006**  2005  **2006**  2005  Operating Revenues:                Retail sales of electricity **$****205.3**  $205.9  **$****535.4**  $558.5 Other  **3.5**   19.9   **15.6**   48.7  **Total Operating Revenues**  **208.8**   225.8   **551.0**   607.2  Operating Expenses:                Purchased power  **106.5**   103.3   **275.8**   273.2 Other operating and maintenance  **37.4**   38.7   **110.2**   115.1 Depreciation and amortization  **19.5**   17.8   **56.5**   53.1 Taxes other than income taxes (Note 9)  **27.0**   13.5   **50.3**   38.4  **Total Operating Expenses**  **190.4**   173.3   **492.8**   479.8  **Operating Income**  **18.4**   52.5   **58.2**   127.4 Investment and Other Income  **0.3**   6.0   **3.9**   17.1 Interest and Other Charges  **(10.5****)**  (12.3)  **(30.7****)**  (37.9) Income Before Income Taxes  **8.2**   46.2   **31.4**   106.6 Income Tax Expense (Note 9)  **11.7**   18.9   **20.6**   42.8  **Net (Loss) Income**  **(3.5****)**  27.3   **10.8**   63.8 Dividends on Preferred and Preference Stock  **1.9**   2.0   **5.9**   6.0  **(Loss) Earnings Available for Common Stock** **$****(5.4****)** $25.3  **$****4.9**  $57.8   See notes to condensed consolidated financial statements.
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**Duquesne Light Company****Condensed Consolidated Balance Sheets (Unaudited)**           (Millions of Dollars)   **September 30,**  December 31,   **2006**  2005  **Assets**        **Current Assets:**        Cash and temporary cash investments **$****14.3**  $76.1 Receivables  **88.3**   93.8 Prepaid expenses  **11.9**   6.0 Other  **36.4**   33.2  **Total Current Assets**  **150.9**   209.1           **Long-Term Investments**  **25.7**   22.2           **Property, Plant and Equipment:**        Property, plant and equipment  **2,371.0**   2,235.8 Less: Accumulated depreciation and amortization  **(765.8****)**  (738.5) **Property,Plant and Equipment — Net**  **1,605.2**   1,497.3           **Other Non-Current Assets:**        Regulatory assets  **292.1**   300.0 Other  **82.1**   94.5  **Total Other Non-Current Assets**  **374.2**   394.5  **Total Assets** **$****2,156.0**  $2,123.1           **Liabilities and Capitalization**         **Current Liabilities:**        Accounts payable **$****37.3**  $46.8 Payable to affiliates  **27.9**   42.6 Other  **115.4**   59.9  **Total Current Liabilities**  **180.6**   149.3           **Non-Current Liabilities:**        Deferredincome taxes — net  **358.8**   336.6 Other  **167.1**   223.6  **Total Non-Current Liabilities**  **525.9**   560.2  Commitments and Contingencies (Note 9)                  **Capitalization:**        **Long-term debt**  **636.6**   636.5 **Preferred and Preference Stock**  **147.2**   146.5  **Common Shareholder’s Equity:**        Common stock(authorized — 90,000,000 shares;issued and outstanding — 10 shares)  **—**   — Capital surplus  **596.5**   568.9 Retained earnings  **93.1**   88.2 Accumulated other comprehensive loss  **(23.9****)**  (26.5) **Total Common Stockholder’s Equity**  **665.7**   630.6  **Total Capitalization**  **1,449.5**   1,413.6  **Total Liabilities and Capitalization** **$****2,156.0**  $2,123.1  See notes to condensed consolidated financial statements.
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**Duquesne Light Company****Condensed Consolidated Statements of Cash Flows (Unaudited)**           (Millions of Dollars)   Nine Months Ended September 30,   **2006**  2005  **Cash Flows from Operating Activities:**        Net income **$****10.8**  $63.8 Adjustments to reconcile net income to net cash providedfrom operating activities  **72.5**   5.3 Changes in working capital other than cash  **(1.1****)**  (8.2) **Net Cash Provided from Operating Activities**  **82.2**   60.9  **Cash Flows from Investing Activities:**        Investment in DQE Capital cash pool  **—**   84.8 Construction expenditures  **(163.0****)**  (73.9)Collection of loan to parent  **—**   250.0 Other  **(2.9****)**  (1.2) **Net Cash (Used in) Provided from Investing Activities**  **(165.9****)**  259.7  **Cash Flows from Financing Activities:**        Equity contribution from parent  **27.6**   — Reductions of long-term obligations  **—**   (320.1)Net borrowings under affiliate demand note  **—**   25.3 Dividends on common and preferred stock  **(6.3****)**  (26.3)Other  **0.6**   0.5  **Net Cash Provided from (Used in) Financing Activities**  **21.9**   (320.6) Net decrease in cash and temporary cash investments  **(61.8****)**  — Cash and temporary cash investments at beginning of period  **76.1**   —  Cash and temporary cash investments at end of period **$****14.3**  $—  **Supplemental Cash Flow Information**        Capital expenditures included in accounts payable **$****13.5**  $—  Cash paid during the period:        Interest **$****26.7**  $33.0 Income taxes paid **$****1.6**  $5.5  See notes to condensed consolidated financial statements.**Duquesne Light Company****Condensed Consolidated Statements of Comprehensive Income (Unaudited)**                       (Millions of Dollars)       Three Months Ended  Nine Months Ended   September 30,  September 30,   **2006**  2005  **2006**  2005  Net (loss) income **$****(3.5****)** $27.3  **$****10.8**  $63.8 Other comprehensive income (loss):                Unrealized holding gains (losses) on securities,net of tax of $1.9, $(0.7), $2.0 and $(0.8)  **2.6**   (1.1)  **2.8**   (1.2)Unrealized holding gains on cash flow hedginginstruments, net of tax of $—, $6.0, $— and $6.6  **—**   8.5   **—**   9.3 Reclassification adjustment for holding losses onsecurities, net of tax  **(0.2****)**  —   **(0.2****)**  —  Comprehensive (loss) income **$****(1.1****)** $34.7  **$****13.4**  $71.9  See notes to condensed consolidated financial statements.
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**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**     The following Notes present information on both Duquesne Light Holdings, Inc. (Holdings) andDuquesne Light Company (Duquesne Light). Information on Holdings and its subsidiaries (notincluding Duquesne Light and its subsidiaries) shall not be deemed to be included as part ofDuquesne Light’s Notes.     References in the Notes to “we,” “us” and “our” are to Holdings and its subsidiaries,collectively.     On July 5, 2006, we entered into a definitive merger agreement with a consortium led byMacquarie Infrastructure Partners and Diversified Utility and Energy Trusts (DUET), (“the MacquarieConsortium”). See Note 2 for additional details.**1. ACCOUNTING POLICIES****Consolidation**     Holdings is an energy services holding company. Our subsidiaries include those discussedbelow.     The consolidated financial statements of Holdings and Duquesne Light include their accountsand their wholly and majority owned subsidiaries. The equity method of accounting is used for 20%to 50% interests in other companies. Under the equity method, original investments are recorded atcost and adjusted by our share of undistributed earnings or losses of these companies. Weconsolidate variable interest entities for which we are the primary beneficiary, regardless of theownership percentage held by us. In addition, all material intercompany balances and transactionshave been eliminated in the consolidation.*Continuing Operations*     Duquesne Light is an electric utility engaged in the supply (through itsprovider-of-last-resort service (POLR)), transmission and distribution of electric energy.     Duquesne Power, LLC, an unregulated subsidiary, maintains a portfolio of energy commoditycontracts to provide full-requirements energy supply contracts for both (i) Duquesne Light’sresidential, commercial and industrial POLR customers and (ii) Duquesne Light Energy, LLC’s (DLE)large commercial and industrial customers. These energy commodity contracts are with unrelatedparties and include payment guarantees from Holdings.     DLE is an unregulated, competitive, retail electric generation supplier that offers customizedsolutions tailored to meet its customers’ specific electricity needs. DLE’s primary focus is on thelarge commercial and industrial customer market segment in Duquesne Light’s service territory.     Duquesne Generation Company owns minority interests in two coal-fired power plants.     Duquesne Energy Solutions, LLC (DES) is an energy facilities management company that providesenergy outsourcing solutions including operation and maintenance of synthetic fuel and energyfacilities.     DQE Financial Corp. owns, operates and maintains landfill gas collection and processingsystems, and is an investment and portfolio management organization focused on structured financeand alternative energy investments.     DQE Communications, Inc. owns, operates and maintains a high-speed, fiber optic basedmetropolitan network, and leases dark fiber from the network to commercial, industrial and academiccustomers.*Discontinued Operations*     During 2003, AquaSource, Inc. (formerly our water resource management subsidiary) completedthe sale of its assets, pursuant to agreements entered into in 2002. (See Note 10.)**Basis of Accounting**     The preparation of financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimates and assumptions withrespect to values and conditions that affect the reported amounts of assets and liabilities, anddisclosure of contingent assets and liabilities, at the date of the financial statements. Thereported amounts of revenues and expenses during the reporting period also may be affected by theseestimates and assumptions. Management evaluates these estimates on an ongoing basis, usinghistorical experience and other methods considered reasonable in the particular circumstances.Nevertheless, actual results may differ significantly from these estimates.     The interim financial information for the three and nine month periods ended September 30,2006 and 2005 is unaudited and has been prepared on the same basis as the audited financialstatements. In the opinion of management, such unaudited information includes all adjustments(consisting only of normal recurring adjustments) necessary for a fair presentation of the interiminformation. This information does not include all footnotes which would be required for completeannual financial statements in accordance with accounting principles generally accepted in theUnited States of America.     These statements should be read with the financial statements and notes included in our
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Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities andExchange Commission (SEC). The results of operations for the three and nine months ended September30, 2006, are not necessarily indicative of the results that may be expected for the full year.**Recent Accounting Pronouncements**     In September 2006, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standards (SFAS) No. 158, “Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R).” Thisstatement requires employers to recognize the overfunded or underfunded positions of definedbenefit postretirement plans, including pension plans, in their balance sheets and to recognizechanges in that funded status in the year in which the changes occur through comprehensive income.This statement also requires employers to measure the plan assets and obligations as of theirfiscal year end and to disclose additional information in the notes to financial statements, bothof which we currently do. An employer with publicly traded equity securities is required toinitially recognize the funded status of a defined benefit postretirement plan and to provide therequired disclosures as of the end of the fiscal year ending after December 15, 2006. Thisstatement applies to both Holdings and Duquesne Light. We are currently evaluating the overallimpact of this statement on both Holdings’ and Duquesne Light’s financial statements. Based on thesettlement that Duquesne Light reached among all parties resolving all issues in the distributionrate case (see Note 3), Duquesne Light may be able to establish a regulatory asset for a majorityof the underfunded position of the pension plan. However, final effectiveness of the settlement issubject to Pennsylvania Public Utility Commission (PUC) review and approval.     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” Thisstatement defines fair value in generally accepted accounting principles and expands disclosuresabout fair value measurements. This statement does not require any new fair value measurements.However, for some entities, the application of the statement will change current practice. Thisstatement is effective for financial statements issued for fiscal years beginning after November15, 2007 and interim periods within those fiscal years. This statement applies to both Holdings andDuquesne Light. We are currently evaluating the overall impact of this statement on both Holdings’and Duquesne Light’s financial statements.     In July 2006, the FASB issued FASB Staff Position No. 13-2 “Accounting for a Change orProjected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a LeveragedLease Transaction” (FSP No. 13-2). This FSP is effective for the first annual period beginningafter December 15, 2006. As the December 2003 settlement with the Internal Revenue Service (IRS)regarding DQE Financial’s structured lease and other similar investments modified our tax benefitsunder these leases, this FSP requires recognition of the modified tax benefits from the inceptionof the leases. Upon adoption of this standard, based on current estimates we expect to record anafter-tax, non-cash cumulative effect charge of approximately $85 million. We previously disclosedthat the earnings volatility of the lease investments was removed as a result of the settlementwith the IRS, and the revised earnings of $3 million to $4 million annually would be realized overthe remaining lives of these leases. After adopting this staff position, the amount of thecumulative effect charge initially recorded will be recognized as additional lease earnings overthe remaining lives of these leases, which range from approximately 22 to 30 years (with earlybuy-out periods ranging from 6 to 17 years). Our current and future cash flows would be unaffectedby the adoption.     In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes, an interpretation of FASB Statement No. 109” (FIN 48). This interpretation is effective forthe first annual period beginning after December 15, 2006. This interpretation applies to bothHoldings and Duquesne Light and requires recognition of a cumulative effect upon adoption. We arecurrently evaluating the overall impact of this interpretation on both Holdings’ and DuquesneLight’s financial statements.**Earnings Per Share**     Basic earnings per share are computed on the basis of the weighted average number of commonshares outstanding. Diluted earnings per share are computed on the basis of the weighted averagenumber of common shares outstanding, plus the effect of the outstanding Employee Stock OwnershipPlan shares, and stock options and other types of stock-based compensation, unless the inclusionwould be anti-dilutive. The treasury stock method is used in computing the dilutive effect of stockoptions. This method assumes any proceeds obtained upon the exercise of options would be used topurchase common stock at the average market price during the period. The following table presentsthe numerators and denominators used in computing the diluted
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earnings per share from continuing operations for Holdings for the three and nine months endedSeptember 30, 2006 and 2005.**Diluted Earnings Per Share for the Three Months Ended September 30,**         (Millions of Dollars) **2006**  2005  Income from continuingoperations **$****0.9**  $43.5 Dilutive effect of:        ESOP dividends  **—**   0.3  **Diluted Earnings fromContinuing Operationsfor Common Stock** **$****0.9**  $43.8           (Millions of Shares) **2006**  2005  Basic average shares  **83.5**   77.8  Dilutive effect of:        ESOP shares  **—**   0.8 Performance share awardsand stock options  **0.2**   0.1  Diluted average shares  **83.7**   78.7  **Diluted EarningsPer Share fromContinuing Operations** **$****0.01**  $0.56  Note: In the third quarter of 2006, the incremental shares from assumed conversions of ESOP sharesare not included in computing diluted per-share amounts because they are anti-dilutive.**Diluted Earnings Per Share for the Nine Months Ended September 30,**         (Millions of Dollars) **2006**  2005  Income from continuingoperations **$****26.6**  $99.7 Dilutive effect of:        ESOP dividends  **—**   0.8  **Diluted Earnings fromContinuing Operationsfor Common Stock** **$****26.6**  $100.5           (Millions of Shares) **2006**  2005  Basic average shares  **80.0**   77.6  Dilutive effect of:        ESOP shares  **—**   0.8 Performance share awardsand stock options  **0.1**   0.1  Diluted average shares  **80.1**   78.5  **Diluted EarningsPer Share fromContinuing Operations** **$****0.33**  $1.28  Note: In 2006, the incremental shares from assumed conversions of ESOP shares are not included incomputing diluted per-share amounts because they are anti-dilutive.**2. PENDING MERGER AND EQUITY ISSUANCE**     On July 5, 2006, we entered into the merger agreement with the Macquarie Consortium. Under theterms of the agreement, the Macquarie Consortium will acquire all of the outstanding common sharesof Holdings for $20.00 per share in cash.     The Holdings Board of Directors and the members of the Macquarie Consortium have approved thetransaction, but it is subject to customary closing conditions, including the approval of Holdings’shareholders and various regulatory agencies, including the PUC and the Federal Energy RegulatoryCommission (FERC). The shareholders will vote at a special meeting on December 5, 2006. Mergeragreement applications were filed with the PUC and FERC in September 2006. The PUC application hasbeen assigned to an administrative law judge, and the initial pre-hearing conference to set upprocedures and a timeline for the proceedings has been set for November 28, 2006. While theproceeding is in its initial stages and the procedural schedule is not yet approved, we expect atimeline that will allow for PUC approval by June 2007.     The merger agreement contains termination rights for both Holdings and the MacquarieConsortium, and further provides that, upon termination of the merger agreement under specifiedcircumstances, including (a) by Holdings accepting a proposal by another entity to acquire 50% ormore of Holdings’ common stock, (b) Holdings’ board withdrawing or modifying its approval orrecommendation of the merger, approving or recommending entering into an agreement with a partyother than the Macquarie Consortium, or failing to take a vote of Holdings’ shareholders, and (c)the failure to obtain Holdings’ shareholder’s approval of the merger, Holdings may be required topay the Macquarie Consortium a termination fee equal to $40 million in cash plus certain documentedout-of-pocket expenses and fees incurred by the Macquarie Consortium not in excess of $10 million.The Macquarie Consortium may be required to pay Holdings an amount equal to all documentedout-of-pocket expenses incurred by Holdings not in excess of $10 million if the merger agreement isterminated due to a breach of the Macquarie Consortium’s representations, warranties and covenants.In addition, the Macquarie
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Consortium may be required to pay Holdings up to $70 million in the aggregate for damages resultingfrom willful and material breaches of the merger agreement by the Macquarie Consortium.     Under the terms of the merger agreement, all options (whether vested or unvested) to purchaseour common stock outstanding at the time of the completion of the merger, including those held byexecutive officers and directors, will be cashed out by Holdings for an amount equal to the numberof shares of Holdings common stock such options were convertible into immediately prior to themerger multiplied by the excess, if any, of $20.00 over the per share exercise price of suchoption, less any applicable withholding tax. In addition, all other equity-based grants (if notthen vested) will vest immediately prior to the effective time at the target performance levels (ifapplicable) and will be eligible to receive the merger consideration, less any applicablewithholding taxes. The merger agreement also contains provisions that require Holdings not toincrease its common stock dividend.     On July 5, 2006, we also entered into a stock purchase agreement with DUET and InternationalInfrastructure Wholesale Trust (Purchasers), pursuant to which, on August 11, 2006, Holdings soldan aggregate of 8.8 million shares of common stock to the Purchasers for an aggregate price of$141.4 million.     During the three and nine month periods ending September 30, 2006, we recorded $4.3 millionand $5.2 million in pre-tax charges relating to the merger which are included in other operatingexpenses on our condensed consolidated statements of income. As compensation for services inconnection with the merger, Holdings has agreed to pay Lehman Brothers a fee of $10 million, ofwhich $2 million was paid upon public announcement of the transaction with $2 million due pendingstockholder approval of the sale, and the balance to be paid upon closing of the transaction. Wehave also agreed to reimburse Lehman Brothers for certain expenses incurred by Lehman Brothers andto indemnify Lehman Brothers and related parties against liabilities arising out of LehmanBrothers’ engagement and the rendering of its opinion.**3. RATE MATTERS**     Duquesne Light customers may choose to receive their electric energy from an alternativegeneration supplier; otherwise they will be served through Duquesne Light’s POLR arrangements.Customers who select an alternative generation supplier pay for generation charges set by thatsupplier, and pay Duquesne Light both transmission and distribution charges.     For our large commercial and industrial customers, the current POLR III supply options areeither a fixed price service based upon the results of a competitive request-for-proposal process(available through May 31, 2007), or an hourly price service that passes through real-time spotmarket electricity prices.     Total seams elimination charge adjustment (SECA) charges for the Duquesne Light zone wereexpected to be approximately $39 million, of which $11.3 million was allocated to Duquesne Lightduring the period of January 1, 2005 through March 31, 2006. The other load-serving entities in theDuquesne Light zone were allocated the remainder. DLE’s allocation of SECA charges for this sameperiod was $1.9 million. The billing of SECA charges ended on March 31, 2006. If the FERCultimately adopts a SECA level and allocation method that differs from the proposed chargesinitially accepted by the FERC for billing purposes, refunds or surcharges will be used tocompensate or charge the appropriate entity for the difference between the amounts initiallyaccepted by the FERC and the amounts ultimately determined to be just and reasonable by the FERC.The final amount of our SECA obligations therefore remains uncertain.     As Duquesne Light was billed SECA charges, these amounts were reflected as regulatory assets.Effective August 26, 2005, Duquesne Light began passing these SECA charges through to its POLRcustomers. As SECA revenue is recognized, the regulatory asset is amortized. Because DuquesneLight is not earning a rate of return on the regulatory asset, SECA is an income neutralarrangement.     As of September 30, 2006, Duquesne Light had unamortized SECA charges of $1.3 million inregulatory assets on the condensed consolidated balance sheets.     In April 2006, Duquesne Light filed a distribution rate case with the PUC to recover theincreased costs of service and to receive a fair return on its investments.     On September 14, 2006, Duquesne Light entered into, and filed with the PUC, a Joint Petitionof Settlement among all parties resolving all issues in the distribution rate case. The settlementprovides for a distribution rate increase of $117 million in annual operating revenues, and anautomatic pass-through for charges that Duquesne Light will pay for transmission services itpurchases under tariffs regulated by the FERC. The net income impact from this revenue increase hasnot yet been determined.
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     On October 11, 2006 the administrative law judge presiding over the rate case recommendedapproval of the settlement agreement. Final effectiveness of the settlement is subject to PUCreview and approval. A final order is anticipated in the fourth quarter of 2006.     On September 29, 2006, Duquesne Light filed a transmission rate case with the FERC requestinga rate increase of approximately $27 million related to transmission services that Duquesne Lightpurchases under tariffs regulated by the FERC. An initial order is anticipated during the fourthquarter granting the requested increase, subject to refund, to be effective in January 2007.Receipt of a final order with the ultimate rate increase will depend on, among other things, thesettlement process with interveners.     Duquesne Light cannot predict the ultimate timing or outcome of any of these regulatoryproceedings.**4. RECEIVABLES**     The components of receivables for the periods indicated are as follows:**Holdings**           (Millions of Dollars)   **September 30,**  December 31,   **2006**  2005  Electric customers **$****81.2**  $76.2 Unbilled electriccustomers  **30.1**   32.1 Other  **35.7**   27.1 Less: Allowance foruncollectible accounts  **(18.2****)**  (21.1) ***Total*** **$****128.8**  $114.3  **Duquesne Light**           (Millions of Dollars)   **September 30,**  December 31,   **2006**  2005  Electric customers **$****72.4**  $72.5 Unbilled electriccustomers  **24.9**   28.9 Affiliate receivables  **0.6**   3.3 Other  **8.2**   9.9 Less: Allowance foruncollectible accounts  **(17.8****)**  (20.8) ***Total*** **$****88.3**  $93.8  **5. ACQUISITIONS AND DISPOSITIONS**     On September 1, 2006, Duquesne Generation Company completed the purchase of undividedinterests in two coal-fired power plants for an aggregate purchase price of approximately $177.7million, which includes applicable closing costs and preliminary working capital adjustments. A$200 million term loan issued by Holdings was used to finance the acquisition (See Note 8). Theinterests acquired represent a 2.47% interest, or 42 megawatts, in the Keystone plant and a 3.83%interest, or 66 megawatts, in the Conemaugh plant, plus related inventories, equipment and otherproperty. The acquisition of the interests in these plants will serve as a physical hedge to oursupply portfolio of energy commodity contracts.     Each owner is responsible for financing its proportionate share of the plants’ liabilities andcapital expenditures in exchange for the rights to its proportionate share of the output from theplants. Our proportionate share of the direct expenses of the plants since the acquisition date isincluded in operating expenses on Holdings’ condensed consolidated statements of income for thethree and nine months ended September 30, 2006.     We have allocated the purchase price to the respective assets and liabilities based onestimated fair values. As part of the purchase price allocation, a total of $165.8 million wasallocated to property, plant and equipment and $8.1 million, representing intangible assets, wasallocated to other non-current assets on the condensed consolidated balance sheet of Holdings as ofSeptember 30, 2006. The intangible assets represent sulfur dioxide and nitrogen oxide emissionallowances. These emission allowances are being amortized on a unit-of-production basis over theirweighted-average useful lives of approximately 13 years. Due to the timing of the acquisitionwe are still in the process of finalizing the valuation of the acquired assets and liabilities, and therefore thepurchase price allocation is preliminary and therefore subject to change once finalized.     On August 15, 2006, DQE Financial acquired a 50% interest in a joint venture that owns twopipeline quality landfill gas processing plants for $9.3 million. The acquisition is accounted forusing the equity method of accounting.
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     On May 1, 2006, DES closed on the sale of an energy facility management project, pursuant toan agreement entered into in August 2005. DES received $2.5 million in cash and recorded a pre-taxgain of $2.5 million as a reduction to other operating expenses on Holdings condensed consolidatedstatements of income.**6. DERIVATIVE INSTRUMENTS**     In the normal course of business in order to mitigate risks associated with fluctuations inmarket prices, we have entered into various contracts that are accounted for as derivatives underthe provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” asamended and interpreted. The contracts are in compliance with a Board-approved risk managementpolicy that permits transactions for the prudent management of market related risks, and precludesany speculative transactions.     The following tables summarize the derivative assets, liabilities and related accumulatedother comprehensive income (AOCI) that are included in the Holdings condensed consolidated balancesheets:                   September 30, 2006   (Millions of Dollars)               AOCI               Expected               to be Re-               classified               to Earnings           AOCI,  within 12 Assets  Liabilities  net  months  Energy contracts $13.6  $17.9  $(0.8) $(0.4)Interest rate lock  —   —   4.1   0.2 Natural gas prices  6.9   —   4.3   3.1  Total $20.5  $17.9  $7.6  $2.9                 December 31, 2005   (Millions of Dollars)   Assets  Liabilities  AOCI, net  Energy contracts $58.7  $29.2  $7.8 Interest rate lock  —   —   4.2 Natural gas prices  2.2   —   1.3  Total $60.9  $29.2  $13.3  **Energy Contracts**     The following table summarizes the three and nine month impact of the change in fair value ofthe derivative energy contracts on purchased power expense included in the Holdings condensedconsolidated statements of income for 2006 and in both the Holdings and Duquesne Light condensedconsolidated statements of income for 2005:                   (Millions of Dollars)   Three months  Nine months   ended  ended   September 30,  September 30,   **2006**  2005  **2006**  2005  Mark-to-market **$****6.9**  $(11.5) **$****15.0**  $(22.8)Cash flow hedgeineffectiveness  **2.2**   0.4   **4.0**   0.4  Increase (Decrease) **$****9.1**  $(11.1) **$****19.0**  $(22.4) **Natural Gas Prices**     In April 2006, DQE Financial entered into zero-cost price collar arrangements for portions ofour 2007 and 2008 anticipated production of pipeline quality landfill gas. These collars weredesignated at inception as cash flow hedges. The collars were entered into in order to extend thehedging of natural gas prices for pipeline quality landfill gas beyond the existing 2006 priceswap.     For the three months ended September 30, 2006, a reduction of $0.2 million related to hedgeineffectiveness of the price swap agreement maintained at DQE Financial was recorded in otheroperating revenue. For the nine months ended September 30, 2006, a benefit of $0.3 million wasrecorded in other operating revenue in the Holdings condensed consolidated statements of income.**7. SHARE-BASED COMPENSATION**     We adopted the provisions of SFAS No. 123R, “Share-Based Payment” (SFAS No. 123R) as ofJanuary 1, 2006, using the modified prospective application method. We had previously appliedAccounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” throughDecember 31, 2005. The primary difference that resulted from the adoption of SFAS No. 123R is inthe recognition of pre-tax compensation expense related to our performance-based share awards of$0.4 million and $1.0 million for the three and nine months ended September 30, 2006. The effectson reported income and earnings per share if we had applied the fair value recognition provisionsof SFAS No. 123, “Accounting for Stock-Based Compensation,” as required under SFAS No. 148,“Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASBStatement No. 123” are not material for the three and nine months ended September 30, 2005.
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     Under the 2002 Long Term Incentive Plan, as amended (the 2002 Plan), the aggregate number ofshares of common stock authorized for issuance is 3,690,468, and of this total, up to 700,000shares may be issued as restricted unvested shares. Shares issued for the plan will be funded outof existing treasury shares. The 2002 Plan permits the grant of stock option awards, alternativestock appreciation rights and dividend equivalent accounts; unvested restricted share awards andperformance-based share awards to both employees and non-employee directors. Stock options awardedto eligible employees will be granted at an option price not less than 100% of the fair marketvalue of our common stock on the date of grant. Unvested share awards and performance-based shareawards are valued at the grant date fair value. The 2002 Plan will terminate on December 31, 2011.     See Note 2 for information on the impact of the pending merger.**Stock Options**     No stock option awards were granted during the three and nine months ended September 30, 2006to either employees or non-employee directors. As of January 1, 2006, all outstanding stockoptions were exercisable and fully vested. The total cash received for options exercised duringthe three and nine months ended September 30, 2006 was $0.2 million. The intrinsic value of theseoptions was not material. The total cash received from options exercised during the three and ninemonths ended September 30, 2005 was $0.1 million and $0.5 million. The total intrinsic value ofoptions exercised was $0.1 and $0.3 million for the same periods in 2005.     In June 2006, 151,329 options, including all 98,719 remaining stock appreciation rights (SARS)associated with the outstanding options, representing all outstanding option grants with exerciseprices above $20 were cancelled upon mutual agreement with the holders of the options. Theconsideration paid and incremental compensation expense incurred to cancel these options andassociated SARS was not material. As of September 30, 2006, no SARS remained outstanding. Inaddition, 36,372 outstanding options were also forfeited during 2006. The following tablesummarizes the transactions of our stock option plans for the nine months ended September 30, 2006,and certain information about outstanding stock options as of September 30, 2006:               **Weighted**      **Average**  **Shares** **Price** Options outstanding,beginning of period  **552,004**  **$****23.10** Options granted  **—**   **—** Options exercised  **12,050**  **$****15.71** Options canceled/forfeited  **187,701**  **$****36.81**  Options outstanding andexercisable, end of period  **352,253**  **$****16.05**  Shares available for futuregrants, end of period  **2,616,394**           The weighted average remaining life of the outstanding options was 5.7 years as ofSeptember 30, 2006.**Unvested Restricted Share Awards**     In relation to a November 2003 grant, after consideration of forfeitures, a total of 200,417shares of unvested Holdings stock with voting and dividend rights were issued to officers. A totalof 14,000 of these shares were issued in the first nine months of 2005 with a grant-date fair valueof $0.3 million. The right to the shares is subject to continued employment. An equal portion ofthe total shares for each issuance is earned each year over the vesting period ending on December31, 2006. As of September 30, 2006, 73,239 shares remain unvested. The unearned compensation isbeing charged evenly to expense over the vesting period. For the three and nine months endedSeptember 30, 2006, total compensation expense of $0.3 million and $0.9 million was recognized. Forthe three and nine months ended September 30, 2005, total compensation expense of $0.3 million and$0.8 million was recognized. Associated tax benefits of $0.1 million and $0.3 million were recordedfor each period in both 2006 and 2005. Of these amounts, $0.2 million and $0.5 million wererecorded as compensation expense at Duquesne Light for both 2006 and 2005, with associated taxbenefits of zero and $0.2 million for each period in 2006 and 2005. As of September 30, 2006,unrecognized compensation cost associated with these shares was $0.3 million for Holdings,including $0.2 million for Duquesne Light. The remaining compensation cost will be recognizedthrough December 2006.     Between January 2000 and February 2003, a total of 20,750 shares of Holdings’ unvested stockwith voting and dividends rights were granted to various non-employee directors. These shares vestequally over a ten-year period. Between June 2004 and June
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2006, a total of 62,292 shares of Holdings’ unvested stock with voting and dividends rights werealso granted to non-employee directors. These shares vest two years after issue date.     In June 2006, 6,660 shares of Holdings’ unvested stock were forfeited. The forfeiture resultedin a reversal of $0.1 million of compensation expense in June 2006. The remaining unearnedcompensation is being charged evenly to expense over the vesting periods. For the three and ninemonths ended September 30, 2006, total compensation expense of $0.1 million and $0.2 million wasrecognized. For the three and nine months ended September 30, 2005, total compensation expense of$0.1 million and $0.3 million was recognized. As of September 30, 2006, unrecognized compensationcost associated with these shares was $0.6 million. The remaining compensation cost is scheduled tobe recognized through February 2013.     The following table summarizes the transactions related to unvested restricted share awardsfor the nine months ended September 30, 2006:               **Weighted**      **Average**      **Grant-Date**  **Shares** **Fair Value** Unvested shares,beginning of period  **129,641**  **$****18.27** Unvested shares granted  **20,000**  **$****16.52** Shares vested  **19,575**  **$****19.77** Unvested shares canceled/forfeited  **6,660**  **$****24.79**  Unvested shares,end of period  **123,406**  **$****17.34**  **Performance Based Share Awards**     In relation to a November 2003 grant, after consideration of forfeitures, 396,567 shares ofHoldings stock issued to the officers of Holdings under a performance-based deferred stock unitaward remain to be earned as of September 30, 2006. A total of 33,367 of these shares were issuedin the first nine months of 2005 with a grant-date fair value of $0.3 million. The right to theshares is subject to the achievement of specified performance goals related to earnings per share(EPS) from continuing operations and total shareholder return (TSR) over the defined performanceperiods. The EPS performance period commenced on January 1, 2004 and ends on December 31, 2006.The TSR performance period commenced on October 20, 2003 and ends on December 31, 2006. At the endof the performance period, shares may vest within a range of 0% to 100%, with no more than 50% ofthe shares subject to each performance target.     For the 50% of the shares subject to the EPS performance requirements, beginning in January2006 compensation is being charged evenly to expense for the portion of the award for which therequisite service period had not been rendered over the remaining service period as these sharesare currently expected to vest at the end of the performance period. The weighted average grantdate fair value of $16.85 per share for these shares was calculated as the closing share price onthe respective grant dates. Holdings recorded compensation expense for this award of $0.3 millionand $0.9 million in the three and nine months of 2006, with associated tax benefits of $0.2million and $0.4 million. Of these amounts $0.2 million and $0.5 million was recorded at DuquesneLight, with an associated tax benefit of $0.1 million and $0.2 million for the three and ninemonths ended September 30, 2006. No compensation expense was recorded for the first nine months of2005 for either Holdings or Duquesne Light. As of September 30, 2006, unrecognized compensationcost associated with this portion of the award was $0.3 million for Holdings including $0.2million at Duquesne Light. The remaining compensation cost will be recognized through December2006.     The other 50% of the shares are subject to the TSR performance requirements. The grant-datefair value and the compensation expense recorded by Holdings and Duquesne Light for the three andnine months ended September 30, 2006 were not material. Neither Holdings nor Duquesne Lightrecorded compensation expense for this portion of the award in the three and nine months of 2005.     As of September 30, 2006, after forfeitures, 49,762 shares of Holdings common stock remain tobe earned related to a January 2004 grant to non-officers of Holdings under a performance-basedrestricted stock unit award. The grant-date fair value and the compensation expense recorded byHoldings and Duquesne Light for the three and nine months ended September 30, 2006 were notmaterial. The shares are earned based upon Holdings’ TSR rank against the TSR of its peer group,as defined, over a three-year performance period ending December 31, 2006. Neither Holdings norDuquesne Light recorded compensation expense for this award in the first three and nine months of2005.**8. NOTES PAYABLE AND LONG-TERM DEBT**     On September 1, 2006, we entered into a $200 million variable interest rate unsecured term
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loan facility to fund certain minority interests and transaction costs related to the Keystone andConemaugh generation acquisition (see Note 5) and for general corporate purposes. The finalmaturity date is September 1, 2011. However, in the event the merger is not consummated or in theevent the merger is consummated but not with the proceeds of the acquisition debt to be raised bythe Macquarie Consortium to finance the merger, we must prepay the term loan facility on theone-year anniversary of the date that is earliest to occur of (i) January 5, 2008, (ii) the date oftermination of the merger agreement, and (iii) the date of consummation of the merger other thanwith the proceeds of acquisition debt.     The term loan facility may be prepaid and/or cancelled in whole or in part, but any amountprepaid under the facility may not be reborrowed. The outstanding balance under the facility willbe charged an interest rate of LIBOR plus a margin of 0.625 % to 1.75%, based on our then-currentsenior unsecured credit rating. Prior to the merger consummation date, the facility is subject tothe same terms and conditions as our current $250 million revolving credit facility dated July 27,2005 which include but are not limited to (i) a cross-default if we or any of our subsidiariesdefault on any payment due under any indebtedness exceeding $50 million, (ii) maintaining a maximumdebt-to-capitalization ratio of 65% as defined by the facility, and (iii) maintaining a minimuminterest coverage ratio of 2-to-1 as defined by the facility. From and after the mergerconsummation date, the terms and conditions of the facility will automatically change to matchthose in the acquisition debt.     As of September 30, 2006, $15 million was outstanding under the Holdings revolver and therewere no borrowings outstanding under the Duquesne Light revolver. Letters of credit (LOCs) totaling$25.8 million at Holdings (including $8.2 million at Duquesne Light) were outstanding under therevolvers on September 30, 2006.     In April and May 2006, Holdings moved LOCs, previously outstanding under the Holdingsrevolver, to new LOC facilities, thereby increasing the available capacity under the revolver by alike amount. As of September 30, 2006, $61.2 million of LOCs at Holdings were outstanding underthese new facilities. In addition, Duquesne Light also had $12.7 million in LOCs outstanding notrelated to the revolver.**9. COMMITMENTS AND CONTINGENCIES****Guarantees**     As part of DQE Financial’s investment portfolio in seven affordable housing funds, we havereceived fees in exchange for guaranteeing a minimum defined yield to unrelated investors. Weentered into these transactions between 1995 and 1999 because of the attractive risk/rewardcharacteristics available to guarantors. The guarantee period will expire by 2015. In the event theunderlying affordable housing properties do not generate the necessary minimum yield during theguarantee period, we will make cash payments necessary to achieve the minimum yield. The originalamount guaranteed was approximately $250 million, and has declined as investors have earned theguaranteed returns. We estimate the maximum potential amount of undiscounted future payments thatwe could be required to make under the guarantees if the investors earn no future returns was $22.9million as of September 30, 2006.     In connection with the sale of six synthetic fuel facilities in 2000 by a subsidiary, weagreed to guarantee the subsidiary’s obligation under the sales agreement to indemnify thepurchaser against breach of warranties, representations or covenants. The guarantee generallyextends up to six years or otherwise as stipulated under the statute of limitations, based on theexpiration of the underlying warranty, representation, or covenant. We have determined our exposureto be minimal, as both legal and factual representations and warranties have been primarily limitedto matters within the control and knowledge of our subsidiary. As such, no liability has beenrecorded on the condensed consolidated balance sheets.     In connection with the 2005 sale of DES’s investment in an energy facility management project,DES provided the buyer with a guarantee that DES will repay a portion of the purchase price if thecounterparty to the management contract terminates the contract for convenience, as defined by theagreement (the Repayment Guarantee). As of September 30, 2006, the maximum Repayment Guaranteeamount is approximately $3.5 million. The Repayment Guarantee is reduced daily, based on thepassage of time, through January 1, 2016, at which time the Repayment Guarantee expires. Theestimated liability for the fair value of the Repayment Guarantee is not material.     Holdings has guaranteed portions of the obligations of Duquesne Power under its energycommodity contracts in order to use Holdings’ stronger credit profile to obtain better pricing andcontract terms for Duquesne Power. In general, if
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Duquesne Power is required to make a payment under these contracts and fails to do so, Holdingswould be required to make such payment. The notional value of the contracts (and consequently theguarantee amounts) changes as additional energy commodities are bought or sold, and as DuquesnePower pays for its energy commodity deliveries. As of September 30, 2006, the maximum amount ofHoldings’ payment guarantee related to the purchase and capacity obligations totaled $520.8million, or approximately 86%, of the total remaining notional value under these contracts. Inaddition, Holdings guarantees Duquesne Power’s obligations to deliver energy under the energy salescontracts, to the extent that Duquesne Power would be obligated to compensate the counterparty forthe difference in the counterparty’s cost to procure the energy and the contract price. As ofSeptember 30, 2006, no guarantee amount has been recorded as a liability on the condensedconsolidated balance sheets. In addition, Holdings posts collateral on behalf of Duquesne Power asneeded under the energy commodity contracts. As of September 30, 2006, there was no collateraloutstanding.     In conjunction with certain transactions, primarily divestitures, we provide routineindemnifications (e.g., retention of previously existing environmental, tax and employeeliabilities) whose terms range in duration and often are not explicitly defined. Where appropriate,an obligation for such indemnifications is recorded as a liability. Because the obligated amountsof these types of indemnifications often are not explicitly stated, the overall maximum amount ofthe obligation under such indemnifications cannot be reasonably estimated. Other than obligationsrecorded as liabilities at the time of divestiture, historically we have not made significantpayments for these indemnifications.**Income Taxes**     The Internal Revenue Service (IRS) has audited all federal corporate tax returns for the yearsthrough 1997 and these years are closed. The IRS completed the 1998-2002 audit cycle during March2006 and all adjustments to reflect this audit, including the impact on state taxes, were recordedin the financial statements in the first quarter. In addition to the recording of charges foradditional taxes and interest due related to the audit, we also recorded $2.3 million of certainstate tax benefits expected to be realized in 2006 and beyond. In total, these adjustmentsresulted in a net charge of $2.9 million for the first quarter. In completing the IRS audit, $11million of tax credit carryforwards were used to offset increases in our taxable income in prioryears. Accordingly, our cumulative tax credit carryforwards of approximately $121 million as ofDecember 31, 2005 were reduced to approximately $110 million.     In May 2006, we paid $52.8 million to the IRS related to the 1998-2002 audit cycle. The IRS iscurrently auditing the 2003 through 2005 tax years.     The Pennsylvania Department of Revenue has issued assessments of additional tax for 1999through 2004 primarily to include income of a Duquesne Light out of state subsidiary corporation inPennsylvania taxable income. In October 2006 we reached a definitive agreement regarding all of theissues in dispute on our 1997 through 2004 Pennsylvania state tax returns and treatment of thedisputed items on our 2005 returns. Pursuant to this settlement agreement Duquesne Light will payapproximately $60 million, which includes interest, and is included in other current liabilities onthe condensed consolidated balance sheets of Holdings and Duquesne Light as of September 30, 2006.Of this amount, approximately $54 million was remitted as of November 1, 2006. Duquesne Lightrecorded a net charge of $16.1 million in the third quarter pursuant to this settlement. Includedin the payment and net charge discussed above, is $13.2 million of Pennsylvania Capital Stock Tax,which is included in taxes other than income taxes on both Holdings’ and Duquesne Light’s condensedconsolidated statements of income for the three and nine months ended September 30, 2006.**Employees**     Duquesne Light is a party to a labor contract with the International Brotherhood of ElectricalWorkers, which represents more than 71% of Duquesne Light’s approximately 1,400 employees. Thiscontract expires in September 2010.**Section 29 Tax Credits and Synthetic Fuel**     Section 29 of the Internal Revenue Code provides tax credits through 2007 for the productionand sale of non-conventional fuels, including solid synthetic fuels and landfill gas. On August 8,2005, the Energy Policy Act of 2005 was signed into law. This new federal law contains keyprovisions affecting the electric power industry, including the redesignation of the Section 29 taxcredit as a general business credit under Section 45K of the Code (Section 45K). The previousamount of Section 29 tax credits that we were allowed to claim in any calendar year throughDecember 31, 2005, was limited by the amount of our regular federal income tax liability. Section29 tax credit amounts allowed but not utilized are currently carried forward indefinitely asdeferred alternative minimum tax credits. The redesignation of Section 29
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tax credits as a Section 45K general business credit was effective on January 1, 2006, and removesthe regular federal income tax liability limit on synthetic fuel and landfill gas production andsubjects the credits to a 20-year carry forward period. Holdings recognizes Section 29 tax creditsfrom DQE Financial’s landfill gas operations and an investment in a synthetic fuel partnership.     Section 29 tax credits are subject to a phase-out provision that reduces tax credits as theaverage annual wellhead price per barrel of domestic crude oil increases into an inflation-adjustedphase-out range. During the first nine months of 2006, we estimated the average annual wellheadprice per barrel of domestic crude oil based on the actual NYMEX price per barrel of domestic crudeoil through September, and the estimated future prices through December 2006. We also estimated thephase-out range for Section 29 tax credits based on the actual 2005 phase-out range, and anestimated inflation factor. This resulted in an estimated annual phase-out of Section 29 taxcredits for 2006 at an approximate 40% level as of September 30, 2006, which led to a $6.2 millionreduction in tax credits recognized in the first nine months of 2006 from our Financial businesssegment. We cannot predict with any certainty the level of domestic crude oil prices for 2006. Wealso cannot predict with any certainty whether a phase-out is likely to continue at 40% or anyother level. During the first nine months of 2006, after recording the effects of the estimatedphase-out described above, we recorded $8.5 million of Section 29 tax credits.     As a result of the estimated phase-out of Section 29 tax credits, DQE Financial recorded animpairment charge of $2.3 million in the second quarter of 2006 in other operating expenses inHoldings condensed consolidated statements of income. The impairment charge represents the majorityof the book value of landfill gas rights for the passive investment sites that were not projectedto operate past the December 31, 2007 expiration of Section 29 tax credits.     Also as a result of the estimated phase-out of Section 29 tax credits, effective July 17,2006, we elected to temporarily cease participation in the synthetic fuel limited partnershipinterest held by DQE Financial. Effective October 30, 2006, due to the recent decrease in theestimated phase-out, we have elected to resume our participation in the synthetic fuel limitedpartnership interest.     If domestic crude oil prices continue to stay at a high level in 2006 and/or 2007, tax creditsand net income may be further reduced substantially, due to the phase-out. During 2005, we recordedapproximately $20 million of Section 29 tax credits.     DES operates synthetic fuel facilities for a single customer, earning fees based onproduction. Earnings in 2005 from the operation of synthetic fuel facilities were approximately $20million, which could also be substantially reduced if the operation of these facilities iscurtailed. As of September 30, 2006, we had earned approximately $14.0 million from the operationof these facilities. Earnings from the operation of these facilities, once earned, are not subjectto repayment for any Section 29 tax-credit phase-out.     In the third quarter of 2006, DES agreed to price concessions with the facilities owner forthe synthetic fuel processed during August and September 2006. The concessions continue throughDecember 31, 2006 and were agreed to because, without the concessions, the synthetic fuelfacilities may have ceased operations. The price concessions also include a true-up provision thatcould be payable to DES based in part on the actual 2006 Section 29 credit information to bepublished by the IRS in April 2007. In the event of favorable legislative enactment regardingapplicable 2006 Section 29 tax credits, any price concessions granted to the owner of the syntheticfuel facilities would be recovered. In addition, August production volumes were also reduced, atthe owner’s request, to approximately 75% of the aggregate budgeted production levels as a resultof the anticipated phase-out. However, September 2006 production levels were not similarly reduced,nor have we received notice for future production curtailment requests from the owner. Ongoingoperating fee income may be further reduced or eliminated if actual and projected oil prices remainat or above current price levels.**Discontinued Operations**     As part of the sale of AquaSource, we retained certain obligations related to the businessthat was sold to Aqua America, Inc., including responsibility for certain existing litigationmatters as well as a 10-year indemnity for certain pre-closing environmental claims. We purchasedan environmental liability policy to mitigate this indemnity. We also had an indemnity obligationfor certain other pre-closing liabilities that was limited to a $7.5 million cap for claims madein the two year period following closing. No further claims can be made under the indemnityobligation.**Fuel Supply Commitments**     As a result of the purchase of the undivided interests in the two coal-fired power plants,Duquesne Generation is responsible for financing its proportionate share of the plants’liabilities, which include future commitments related to fuel supply
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contracts for each of the plants. As of September 30, 2006, Duquesne Generation’s proportionateshare of future commitments under these contracts totaled $39.5 million. The contracts expire invarying amounts through 2012.**10. DISCONTINUED OPERATIONS**     In connection with the assignment of certain rights to a previous construction contract,AquaSource received $1.7 million in January 2006 in settlement of a receivable. This amount wasincluded on Holdings’ condensed consolidated balance sheet as a current asset from discontinuedoperations as of December 31, 2005.**11. PENSION AND POSTRETIREMENT BENEFITS**     The following table summarizes the components of net periodic pension benefit cost:           (Millions of Dollars)   Three Months Ended   September 30,   **2006**  2005  Service cost **$****3.0**  $2.2 Interest cost  **11.6**   10.7 Expected return on plan assets  **(15.1****)**  (13.8)Amortization of prior service cost  **1.1**   0.8 Amortization of actuarial gain  **0.1**   —  Net periodic pension benefitcost (gain) **$****0.7**  $(0.1)            (Millions of Dollars)   Nine Months Ended   September 30,   **2006**  2005  Service cost **$****9.0**  $6.6 Interest cost  **34.8**   32.1 Expected return on plan assets  **(45.3****)**  (41.4)Amortization of prior service cost  **3.3**   2.4 Amortization of actuarial gain  **0.3**   —  Net periodic pension benefitcost (gain) **$****2.1**  $(0.3)      During the first quarter of 2006, Duquesne Light made aggregate discretionary contributions of$20 million to the pension plans. As of September 30, 2006, we do not anticipate being required tocontribute any additional amounts to fund the pension plans in 2006.     In January 2005, Duquesne Light met its obligation, pursuant to the January 2001 PUC Orderregarding Duquesne Light’s final generation asset sale proceeds accounting, by contributing $32.1million to the pension plans.     The following table summarizes the components of net periodic postretirement benefit cost:           (Millions of Dollars)   Three Months Ended   September 30,    **2006**  2005  Service cost **$****0.3**  $0.4 Interest cost  **0.7**   0.9 Amortization of unrecognizednet transition obligation  **0.2**   0.1 Amortization of prior service cost  **0.2**   —  Net periodic postretirementbenefit cost **$****1.4**  $1.4             (Millions of Dollars)   Nine Months Ended   September 30,  Service cost **$****0.9**  $1.2 Interest cost  **2.1**   2.7 Amortization of unrecognizednet transition obligation  **0.6**   0.5 Amortization of prior service cost  **0.6**   (0.1) Net periodic postretirementbenefit cost **$****4.2**  $4.3  **12. DUQUESNE LIGHT TRANSACTIONS WITH AFFILIATES**     As a wholly owned subsidiary of Holdings, Duquesne Light has various transactions with itsparent company and affiliates.     In February 2006, Holdings contributed approximately $27.6 million to Duquesne Light as partof an agreement with the PUC. This amount represents the difference in interest that would havebeen charged on a note to Holdings had the interest rate not been lowered during the term of thenote.     Effective with the December 31, 2005 transfer of Duquesne Power, Duquesne Light beganpurchasing substantially all of its power from an affiliate rather than a subsidiary. Thefull-requirements contract with Duquesne Power was designed to be an income neutral arrangement forDuquesne Light.
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**13. BUSINESS SEGMENTS AND RELATED INFORMATION**     Duquesne Light reports the following business segments: (1) transmission and distribution ofelectricity (electricity delivery business segment) and (2) supply of electricity by Duquesne Light(Duquesne Light supply business segment). In 2005, Duquesne Light also reported the CTC businesssegment, which reported the collection of the competitive transition costs (CTC) that were fullycollected as of December 31, 2005.     Holdings reports the following business segments: (1) transmission and distribution ofelectricity (electricity delivery business segment), (2) supply of electricity, which includes theresults of the Keystone and Conemaugh power plants effective September 1, 2006 (electricity supplybusiness segment), (3) DES’ development, operation and maintenance of energy facilities and, for asingle customer, synthetic fuel facilities (Energy Solutions business segment), (4) DQE Financial’scollection and processing of landfill gas and management of structured finance and alternativeenergy investments (Financial business segment), and (5) DQE Communications’ operation, maintenanceand leasing of its fiber optic based network (Communications business segment). We also report an“all other” category to include our other subsidiaries below the quantitative threshold fordisclosure. These subsidiaries provide corporate administrative functions, financing, and insuranceservices for our various affiliates. In 2005 , Holdings also reported the CTC business segment,which reported the collection of transition costs that were fully collected as of December 31,2005.
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**Duquesne Light Company****Business Segments for the Three Months Ended September 30, 2006**               (Millions of Dollars)  Electricity Duquesne Light    Delivery Supply Consolidated Operating revenues **$****95.4**  **$****113.4**  **$****208.8** Operating expenses  **57.9**   **113.0**   **170.9** Depreciation and amortization expense  **19.5**   **—**   **19.5**  Operating income  **18.0**   **0.4**   **18.4** Other income — net  **0.3**   **—**   **0.3** Interest and other charges  **10.5**   **—**   **10.5**  Income before income taxes  **7.8**   **0.4**   **8.2** Income tax expense  **11.5**   **0.2**   **11.7**  Net (Loss) Income  **(3.7****)**  **0.2**   **(3.5****)**Dividends on preferred and preference stock  **1.9**   **—**   **1.9**  (Loss) earnings available for common stock **$****(5.6****)** **$****0.2**  **$****(5.4****)**              Assets **$****2,156.0**  **$****—**  **$****2,156.0**               Capital expenditures **$****54.3**  **$****—**  **$****54.3**  **Business Segments for the Three Months Ended September 30, 2005**                   (Millions of Dollars)      Duquesne      Electricity Light      Delivery Supply CTC Consolidated Operating revenues $97.6  $127.2  $1.0  $225.8 Operating expenses  44.1   111.3   0.1   155.5 Depreciation and amortization expense  16.9   —   0.9   17.8  Operating income  36.6   15.9   —   52.5 Other income — net  6.0   —   —   6.0 Interest and other charges  11.8   0.5   —   12.3  Income before income taxes  30.8   15.4   —   46.2 Income tax expense  12.5   6.4   —   18.9  Net Income  18.3   9.0   —   27.3 Dividends on preferred and preference stock  2.0   —   —   2.0  Earnings available for common stock $16.3  $9.0  $**—**  $25.3                   Assets (a) $2,123.1  $**—**  $**—**  $2,123.1                   Capital expenditures $36.5  $**—**  $**—**  $36.5  (a) Relates to assets as of December 31, 2005.
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**Duquesne Light Company****Business Segments for the Nine Months Ended September 30, 2006**               (Millions of Dollars)  Electricity Duquesne Light    Delivery Supply Consolidated Operating revenues **$****257.3**  **$****293.7**  **$****551.0** Operating expenses  **143.8**   **292.5**   **436.3** Depreciation and amortization expense  **56.5**   **—**   **56.5**  Operating income  **57.0**   **1.2**   **58.2** Other income — net  **3.9**   **—**   **3.9** Interest and other charges  **30.7**   **—**   **30.7**  Income before income taxes  **30.2**   **1.2**   **31.4** Income tax expense  **20.1**   **0.5**   **20.6**  Net Income  **10.1**   **0.7**   **10.8** Dividends on preferred and preference stock  **5.9**   **—**   **5.9**  Earnings available for common stock **$****4.2**  **$****0.7**  **$****4.9**               Capital expenditures **$****154.8**  **$****—**  **$****154.8**  **Business Segments for the Nine Months Ended September 30, 2005**                   (Millions of Dollars)      Duquesne      Electricity Light      Delivery Supply CTC Consolidated Operating revenues $260.6  $341.5  $5.1  $607.2 Operating expenses  131.3   295.1   0.3   426.7 Depreciation and amortization expense  48.4   —   4.7   53.1  Operating income  80.9   46.4   0.1   127.4 Other income — net  16.8   0.3   —   17.1 Interest and other charges  36.7   1.2   —   37.9  Income before income taxes  61.0   45.5   0.1   106.6 Income tax expense  23.9   18.9   —   42.8  Net Income  37.1   26.6   0.1   63.8 Dividends on preferred and preference stock  6.0   —   —   6.0  Earnings available for common stock $31.1  $26.6  $0.1  $57.8                   Capital expenditures $59.8  $0.1  $—  $59.9  
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**Duquesne Light Holdings****Business Segments for the Three Months Ended September 30, 2006**                                   (Millions of Dollars)  Electricity Electricity Energy     Communi- All Elimina- Consoli-  Delivery Supply Solutions Financial cations Other tions dated Operating revenues **$****95.4**  **$****148.7**  **$****17.7**  **$****8.5**  **$****3.0**  **$****—**  **$****(2.0****)** **$****271.3** Operating expenses  **57.9**   **142.6**   **9.4**   **8.0**   **1.3**   **6.1**   **(2.0****)**  **223.3** Depreciation andamortization expense  **19.5**   **0.7**   **0.3**   **0.9**   **0.5**   **0.1**   **—**   **22.0**  Operating income (loss)  **18.0**   **5.4**   **8.0**   **(0.4****)**  **1.2**   **(6.2****)**  **—**   **26.0** Other income — net  **0.3**   **0.2**   **0.2**   **1.1**   **0.1**   **1.3**   **(1.6****)**  **1.6** Interest and other charges  **12.4**   **1.0**   **0.1**   **0.1**   **—**   **7.7**   **(1.8****)**  **19.5** Benefit from limitedpartners’ interest  **—**   **—**   **—**   **2.6**   **—**   **—**   **—**   **2.6**  Income (loss) beforeincome taxes  **5.9**   **4.6**   **8.1**   **3.2**   **1.3**   **(12.6****)**  **0.2**   **10.7** Income tax expense(benefit)  **11.5**   **2.0**   **3.0**   **(2.1****)**  **0.6**   **(5.2****)**  **—**   **9.8**  (Loss) income fromcontinuing operations **$****(5.6****)** **$****2.6**  **$****5.1**  **$****5.3**  **$****0.7**  **$****(7.4****)** **$****0.2**  **$****0.9**                                   Assets **$****2,132.4**  **$****225.7**  **$****6.8**  **$****590.9**  **$****30.7**  **$****25.0**  **$****—**  **$****3,011.5**                                   Capital expenditures **$****54.3**  **$****0.2**  **$****—**  **$****2.9**  **$****1.0**  **$****—**  **$****—**  **$****58.4**  **Business Segments for the Three Months Ended September 30, 2005**                                       (Millions of Dollars)  Electricity Electricity     Energy     Communi- All Elimina- Consoli-  Delivery Supply CTC Solutions Financial cations Other tions dated Operating revenues $97.6  $130.0  $1.0  $21.7  $11.3  $2.5  $—  $(0.8) $263.3 Operating expenses  44.1   113.5   0.1   10.3   12.9   0.9   2.9   (0.8)  183.9 Depreciation andamortization expense  16.9   **—**   0.9   0.4   1.6   0.5   0.3   —   20.6  Operating income (loss)  36.6   16.5   —   11.0   (3.2)  1.1   (3.2)  —   58.8 Other income — net  6.0   (0.1)  —   18.6   (1.6)  —   0.8   (3.4)  20.3 Interest and other charges  13.8   0.5   —   0.1   0.1   —   5.2   (3.2)  16.5 Benefit from limitedpartners’ interest  —   —   —   —   2.7   —   —   —   2.7  Income (loss) beforeincome taxes  28.8   15.9   —   29.5   (2.2)  1.1   (7.6)  (0.2)  65.3 Income tax expense(benefit)  12.5   6.6   —   10.4   (6.2)  0.4   (2.0)  0.1   21.8  Income (loss) fromcontinuing operations $16.3  $9.3  $—  $19.1  $4.0  $0.7  $(5.6) $(0.3) $43.5                                       Assets (a) $2,100.1  $68.1  $—  $17.9  $573.9  $29.9  $29.0  $—  $2,818.9                                       Capital expenditures $36.5  $—  $—  $0.1  $0.3  $0.9  $—  $—  $37.8  (a) Relates to assets as of December 31, 2005 and excludes discontinued operations assets.
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**Duquesne Light Holdings****Business Segments for the Nine Months Ended September 30, 2006**                                   (Millions of Dollars)  Electricity Electricity Energy     Communi- All Elimina- Consoli-  Delivery Supply Solutions Financial cations Other tions dated Operating revenues **$****257.3**  **$****376.1**  **$****46.8**  **$****36.7**  **$****8.0**  **$****—**  **$****(5.4****)** **$****719.5** Operating expenses  **143.8**   **354.5**   **20.1**   **32.7**   **3.5**   **12.0**   **(5.4****)**  **561.2** Depreciation andamortization expense  **56.5**   **0.7**   **1.0**   **3.4**   **1.6**   **0.2**   **—**   **63.4**  Operating income (loss)  **57.0**   **20.9**   **25.7**   **0.6**   **2.9**   **(12.2****)**  **—**   **94.9** Other income — net  **3.9**   **0.3**   **0.9**   **3.6**   **0.1**   **2.0**   **(3.8****)**  **7.0** Interest and other charges  **36.6**   **1.2**   **0.1**   **0.2**   **—**   **20.9**   **(3.4****)**  **55.6** Benefit from limitedpartners’ interest  **—**   **—**   **—**   **7.5**   **0.1**   **—**   **—**   **7.6**  Income (loss) beforeincome taxes  **24.3**   **20.0**   **26.5**   **11.5**   **3.1**   **(31.1****)**  **(0.4****)**  **53.9** Income tax expense(benefit)  **20.1**   **8.4**   **10.9**   **(3.9****)**  **1.3**   **(9.5****)**  **—**   **27.3**  Income (loss) fromcontinuing operations **$****4.2**  **$****11.6**  **$****15.6**  **$****15.4**  **$****1.8**  **$****(21.6****)** **$****(0.4****)** **$****26.6**                                   Capital expenditures **$****154.8**  **$****0.2**  **$****—**  **$****5.1**  **$****3.3**  **$****—**  **$****—**  **$****163.4**  **Business Segments for the Nine Months Ended September 30, 2005**                                       (Millions of Dollars)  Electricity Electricity     Energy     Communi- All Elimina- Consoli-  Delivery Supply CTC Solutions Financial cations Other tions dated Operating revenues $260.6  $347.2  $5.1  $53.9  $32.3  $7.2  $—  $(2.4) $703.9 Operating expenses  131.3   300.3   0.3   25.1   34.6   2.7   6.0   (2.4)  497.9 Depreciation andamortization expense  48.4   **—**   4.7   1.3   4.8   1.5   0.7   —   61.4  Operating income (loss)  80.9   46.9   0.1   27.5   (7.1)  3.0   (6.7)  —   144.6 Other income — net  16.8   0.3   —   18.7   10.3   0.1   5.9   (13.0)  39.1 Interest and other charges  42.7   1.2   —   0.1   0.1   —   14.0   (12.4)  45.7 Benefit from limitedpartners’ interest  —   —   —   —   7.6   —   —   —   7.6  Income (loss) beforeincome taxes  55.0   46.0   0.1   46.1   10.7   3.1   (14.8)  (0.6)  145.6 Income tax expense(benefit)  23.9   19.1   —   16.6   (12.1)  1.2   (2.9)  0.1   45.9  Income (loss) fromcontinuing operations $31.1  $26.9  $0.1  $29.5  $22.8  $1.9  $(11.9) $(0.7) $99.7                                       Capital expenditures $73.9  $—  $—  $0.1  $0.4  $2.3  $—  $—  $76.7  
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**Item 2.** **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**     *Part I, Item 2 of this combined Quarterly Report on**Form 10-Q**should be read in conjunctionwith our combined Annual Report on**Form 10-K**for the year ended December 31, 2005 filed with theSecurities and Exchange Commission (SEC), and with the condensed consolidated financial statements,set forth in Part I, Item 1 of this Report.*     This combined Quarterly Report on Form 10-Q presents information on both Duquesne LightHoldings, Inc. (Holdings) and Duquesne Light Company (Duquesne Light).     References in this report to “we,” “us” and “our” are to Holdings and its subsidiaries,collectively. References to “Notes” are to the notes to the condensed consolidated financialstatements, set forth in Part I, Item 1 of this report.**Pending Merger**     On July 5, 2006, we entered into the merger agreement with a consortium led by MacquarieInfrastructure Partners and Diversified Utility and Energy Trusts (DUET), (the MacquarieConsortium). Under the terms of the agreement, the Macquarie Consortium will acquire all of theoutstanding common shares of Holdings for $20.00 per share in cash.     The Holdings Board of Directors and the members of the Macquarie Consortium have approved thetransaction, but it is subject to customary closing conditions, including the approval of Holdings’shareholders and various regulatory agencies, including the Pennsylvania Public Utility Commission(PUC) and the Federal Energy Regulatory Commission (FERC). The shareholders will vote at a specialmeeting on December 5, 2006. Merger agreement applications were filed with the PUC and FERC inSeptember 2006. The PUC application has been assigned to an administrative law judge, and theinitial pre-hearing conference to set up procedures and a timeline for the proceedings has been setfor November 28, 2006. While the proceeding is in its initial stages and the procedural schedule isnot yet approved, we expect a timeline that will allow for PUC approval by June 2007.     The merger agreement contains termination rights for both Holdings and the MacquarieConsortium, and further provides that, upon termination of the merger agreement under specifiedcircumstances, including (a) by Holdings accepting a proposal by another entity to acquire 50% ormore of Holdings’ common stock, (b) Holdings’ board withdrawing or modifying its approval orrecommendation of the merger, approving or recommending entering into an agreement with a partyother than the Macquarie Consortium, or failing to take a vote of Holdings’ shareholders, and (c)the failure to obtain Holdings’ shareholder’s approval of the merger, Holdings may be required topay the Macquarie Consortium a termination fee equal to $40 million in cash plus certain documentedout-of-pocket expenses and fees incurred by the Macquarie Consortium not in excess of $10 million.The Macquarie Consortium may be required to pay Holdings an amount equal to all documentedout-of-pocket expenses incurred by Holdings not in excess of $10 million if the merger agreement isterminated due to a breach of the Macquarie Consortium’s representations, warranties and covenants.In addition, the Macquarie Consortium may be required to pay Holdings up to $70 million in theaggregate for damages resulting from willful and material breaches of the merger agreement by theMacquarie Consortium.     Under the terms of the merger agreement, all options (whether vested or unvested) to purchaseour common stock outstanding at the time of the completion of the merger, including those held byexecutive officers and directors, will be cashed out by Holdings for an amount equal to the numberof shares of Holdings common stock such options were convertible into immediately prior to themerger multiplied by the excess, if any, of $20.00 over the per share exercise price of suchoption, less any applicable withholding tax. In addition, all other equity-based grants (if notthen vested) will vest immediately prior to the effective time at the target performance levels (ifapplicable) and will be eligible to receive the merger consideration, less any applicablewithholding taxes. The merger agreement also contains provisions that require Holdings not toincrease its common stock dividend.     As compensation for services in connection with the merger, Holdings has agreed to pay LehmanBrothers a fee of $10 million, of which $2 million was paid upon public announcement of thetransaction with $2 million pending stockholder approval of the sale, and the balance to be paidupon closing of the transaction. We have also agreed to reimburse Lehman Brothers for certainexpenses incurred by Lehman Brothers and to indemnify Lehman Brothers and related parties againstliabilities arising out of Lehman Brothers’ engagement and the rendering of its opinion.     The foregoing descriptions of the merger agreement and stock purchase agreement do not
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purport to be complete and are qualified in their entirety by reference to the merger agreement andthe stock purchase agreement, which are included as exhibits to a Form 8-K filed with the SEC onJuly 6, 2006.     We are currently exploring the possible monetization of our landfill gas investments, andare seeking bids from potential purchasers. We believe the market is currently advantageous formonetizing these assets. Any such transaction will be subject to Holdings board of directors’approval as well as the Macquarie Consortium’s consent pursuant to the terms of the mergeragreement. At this time, we have not met the criteria for “held for sale” classification related tosuch assets since we have not yet committed to a formal plan to dispose of these assets and havenot received the required board of directors’ approval.**Critical Accounting Policies**     As of September 30, 2006, there have been no significant changes with regard to the criticalaccounting policies disclosed in Management’s Discussion and Analysis in our Annual Report on Form10-K for the year ended December 31, 2005. The policies disclosed included the accounting for: theeffects of regulation, unbilled electricity revenues, impairment of long-lived assets andinvestments, pension and other postretirement benefit plan assumptions, income taxes, derivativeinstruments and contingent liabilities.**Recent Accounting Pronouncements**     See Note 1 to the condensed consolidated financial statements.**Forward-looking Statements**     We use forward-looking statements in this report. Statements that are not historical facts areforward-looking statements, and are based on beliefs and assumptions of our management, and oninformation currently available to management. Forward-looking statements include statementspreceded by, followed by or using such words as “believe,” “expect,” “anticipate,” “plan,”“estimate” or similar expressions. Such statements speak only as of the date they are made, and weundertake no obligation to update publicly any of them in light of new information or futureevents. Actual results may materially differ from those implied by forward-looking statements dueto known and unknown risks and uncertainties, some of which are discussed below. **•** Cash flow, earnings, earnings growth, capitalization, capital expenditures and dividendswill depend on the performance of Holdings’ subsidiaries, and board policy.  **•** Demand for and pricing of electricity and landfill gas, changing market conditions, andweather conditions could affect earnings levels.  **•** Earnings will be affected by the number of customers who choose to receive electricgeneration through Duquesne Light’s provider-of-last-resort service (POLR), by our ability tonegotiate appropriate terms with suitable generation suppliers, by the performance of thesesuppliers, and by changes in market value of energy commodity products under contract.  **•** Projected POLR supply requirements will depend on POLR customer retention, which in turnmay depend on market generation prices, as well as the marketing efforts of competinggeneration suppliers.  **•** Distribution rate base and earnings will depend on the outcome of our distribution ratecase, which in turn is subject to Pennsylvania Public Utility Commission (PUC) review andapproval. Transmission rate base and earnings will depend on the ultimate outcome of ourtransmission rate case, which is subject to Federal Energy Regulatory Commission (FERC) reviewand approval. Earnings will also be affected by rate base, equity and allowed return levels.  **•** Regional transmission organization rules and FERC-mandated transmission charges couldaffect earnings.  **•** Changes in electric energy prices could affect earnings as the fair value of our energycommodity contracts fluctuates.  **•** The amount and timing of any debt reduction or refinancing will depend on the availabilityof cash flows and appropriate replacement or refinancing vehicles.  **•** The amount and timing of any securities issuance (debt or equity) will depend on financialmarket performance and the need for funds.  **•** Changes in Keystone and/or Conemaugh power plant operations could affect DuquesneGenerations’ earnings.  **•** Earnings and cash flows may be affected by the ultimate timing of the merger closing, whichin turn depends on, among other things, the receipt of shareholder, PUC, FERC and otherregulatory approval. Regulatory approval depends on the procedures of the agencies involved.  **•** The credit ratings received from the rating agencies could affect the cost of borrowing,access to capital markets and liquidity.  **•** Changes in synthetic fuel plant operations could affect Duquesne Energy Solutions’earnings.  **•** Competition, operating costs and gas prices could affect earnings and expansion plans inour landfill gas business, as well as the anticipated operating life of our landfill gassites.  **•** Earnings with respect to synthetic fuel operations, landfill gas and affordable housinginvestments will depend, in part, on the continued availability of, and compliance with therequirements for, applicable federal tax credits. The availability of synthetic fuel andlandfill gas tax credits depends in part on the average well-head price per barrel of domesticcrude oil.  **•** Demand for dark fiber will affect DQE Communications’ earnings.
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 **•** Financial results and position could be affected by changes in pronouncements periodicallyissued by accounting standard-setting bodies.  **•** Overall performance by Holdings and its affiliates could be affected by economic,competitive, regulatory, governmental and technological factors affecting operations, markets,products, services and prices, as well as the factors discussed in Holdings’ SEC filings madeto date.**EXECUTIVE OVERVIEW**     *Merger Activities.*As previously discussed, we entered into a merger agreement with theMacquarie Consortium on July 5, 2006. On August 11, 2006 Holdings sold an aggregate of 8.8 millionshares of common stock for an aggregate price of $141.4 million. This common stock issuanceincreased the average number of shares of common stock outstanding for both the three and ninemonths ended September 30, 2006. In addition, during the three and nine months ended September 30,2006, we incurred $4.3 million and $5.2 million of pre-tax costs associated with the merger, whichhave been included in the all other category. We expect to incur additional merger-related costsuntil such time that the merger closes.     *Electricity Delivery Business*. In the third quarter of 2006, Duquesne Light entered into asettlement agreement resolving all issues between all parties in our distribution rate case filedin April 2006. If approved by the PUC, the settlement provides for an annual distribution revenueincrease of approximately $117 million and would allow an automatic pass-through of transmissionservices purchased by Duquesne Light under tariffs regulated by the FERC. In the third quarter of2006, Duquesne Light filed a transmission rate case with the FERC requesting an approximate $27million annual transmission revenue increase. Duquesne Light anticipates implementing the newtransmission and distribution rates in January 2007, pending approvals from the applicableregulatory commission.     We also continue to make significant progress on our investment program to upgrade both ourtransmission and distribution infrastructure in our continued effort to provide a stable, reliablesource of electric energy for our customers. Capital expenditures related to the program wereapproximately $150 million in the first nine months of 2006. We expect an additional $200 to $250million in capital expenditures through 2007.     *Supply Business.*Effective January 1, 2006, the operations of Duquesne Power are reported aspart of the Holdings electricity supply segment only. During 2005, Duquesne Power was a whollyowned subsidiary of Duquesne Light, and its financial results were reported in both the DuquesneLight supply business segment and the electricity supply business segment of Holdings. The transferof Duquesne Power was completed to strategically align our unregulated businesses outside ofDuquesne Light in order to provide flexibility to capitalize on future supply opportunities. Thetransfer has effectively eliminated the net income included in the Duquesne Light supply businesssegment, as the full-requirements contract between Duquesne Light and Duquesne Power is designed tobe income neutral for Duquesne Light. If this transfer had occurred on January 1, 2005, theearnings reported in the Duquesne Light supply business segment would have been $9.2 million and$26.1 million lower for the three and nine months ended September 30, 2005, but there would havebeen no change in the earnings reported in the electricity supply business segment of Holdings.     During both the three and nine months ended September 30, 2006, there was a large decline inthe megawatt hours (MWh) supplied to large commercial and industrial customers in the DuquesneLight supply business segment because the two largest industrial customers switched to alternativeenergy suppliers as their POLR I arrangement ended. The POLR I arrangement featured both a lowrevenue and purchased power expense per MWh supplied as the pricing under these arrangements wasdetermined years ago. The total MWh supplied in the electricity supply business segment increasedin both the three and nine months ended September 30, 2006 compared to the same periods in 2005,due to the increase in MWh supplied to large commercial and industrial customers by our unregulatedretail electric generation supplier, Duquesne Light Energy (DLE). Both the revenues and purchasedpower expense recognized during the three and nine months ended September 30, 2006 increased at agreater rate than the increase in MWh supplied as a result of the current pricing associated withthe MWh supplied in 2006 compared to the POLR I pricing for the MWh supplied in 2005.     On September 1, 2006, we completed our purchase of undivided interests in two coal-fired powerplants for an aggregate purchase price of $173.1 million, plus applicable closing costs andpreliminary working capital adjustments. The interests acquired represent a 2.47% interest, or 42megawatts, in the Keystone plant and a 3.83%
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interest, or 66 megawatts, in the Conemaugh plant, plus related inventories, equipment andother property. The acquisition of the interests in these plants will serve as a physical hedge toour supply portfolio of energy commodity contracts. A $200 million term loan issued by Holdings wasused to finance the acquisition.     *Section 29 Tax Credits and Synthetic Fuel.*Section 29 tax credits aresubject to a phase-out provision that reduces tax credits as the average annual wellhead price perbarrel of domestic crude oil increases into an inflation-adjusted phase-out range, which ispublished by the IRS in April for the previous year. In recent years, the wellhead price per barrelof domestic crude oil has averaged approximately 89% of the New York Mercantile Exchange (NYMEX)price per barrel of domestic crude oil. The possible Section 29 phase-out may impact (i) ourFinancial business segment through our landfill gas business and our investment in a synthetic fuelpartnership and (ii) our Energy Solutions business segment through the fees earned from theoperation and maintenance of synthetic fuel facilities for a single customer.     During the first nine months of 2006, we estimated the average annual wellhead price perbarrel of domestic crude oil based on the actual NYMEX price per barrel of domestic crude oilthrough September, and the estimated future prices through December 2006. We also estimated thephase-out range for Section 29 tax credits based on the actual 2005 phase-out range, and anestimated inflation factor. This resulted in an estimated annual phase-out of Section 29 taxcredits for 2006 at an estimated 40% level as of September 30, 2006, which has decreased from theestimated 65% level as of the end of the second quarter.     As a result of the estimated phase-out of Section 29 tax credits, in the second quarter of2006 we recorded a pre-tax impairment charge of $2.3 million in our Financial business segment. Thecharge relates to remaining net book values in the landfill gas rights for the passive investmentsites that were not projected to operate past the December 31, 2007 expiration of Section 29 taxcredits. We are currently evaluating our options relating to the continuing operations related tothese landfill sites. We do not plan on altering any operations at our other landfill sites, as webelieve these sites will continue to be profitable regardless of the Section 29 tax credits.     In addition, effective July 17, 2006, we elected to temporarily cease participation in thesynthetic fuel limited partnership interest held in our Financial business segment. However, due tothe recent decrease in the estimated phase-out of Section 29 tax credits, we have elected,effective October 30, 2006, to resume our participation in the synthetic fuel limited partnershipinterest. Future participation in the partnership depends on our estimate of future oil prices,potential legislative relief regarding Section 29 tax credits and the probability of productionfrom the partnership.     The estimated Section 29 phase-out also negatively impacted our fees earned from the operationand maintenance of synthetic fuel facilities included in our Energy Solutions business segment forthe three and nine months ended September 30, 2006. This impact resulted from price concessionsgranted to the facilities owner for the synthetic fuel processed during August and September 2006.The concessions continue through December 31, 2006 and were agreed to because, without theconcessions, the synthetic fuel facilities may have ceased operations. The price concessions alsoinclude a true-up provision that could reduce the ultimate price concessions granted to thefacility owners. The true-up provisions are based in part on the actual 2006 Section 29 creditinformation to be published by the IRS in April 2007. In the event of favorable legislativeenactment regarding applicable 2006 Section 29 tax credits, any price concessions granted to theowner of the synthetic fuel facilities would be recovered. The price concessions, assuming currenttargeted production levels are met and there is no legislative relief related to 2006 Section 29credits, and ignoring the true-up provision, are expected to reduce earnings from the syntheticfuel facilities in the fourth quarter of 2006 by approximately $4 million. In addition, Augustproduction volumes were also reduced, at the owner’s request, to approximately 75% of the aggregatebudgeted production levels as a result of the anticipated phase-out. September 2006 productionlevels were not similarly reduced, nor have we received notice for future production curtailmentrequests from the owner. Future operations will be determined by the owner based on itsexpectations of the value of the tax credits, continued concessions from counterparties through theexpiration of the tax credit period, and the likelihood of legislative relief.     *Landfill Gas Business.*The majority of earnings from our landfill gas business are derivedfrom pipeline quality production sites. Earnings at these sites are not driven by Section 29 taxcredits and the effects of any phase-out would not impact our decisions on how to operate thesesites. Our contract at one of these sites located in New York City was terminated on June 30, 2006.Our earnings for the
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first nine months of 2006 included $5.2 million related to this site.     *Income tax settlements.*During 2006, two significant tax legacy issues were settled with theIRS and the Pennsylvania Department of Revenue that impacted our results.     In October 2006, we reached a definitive agreement with the Pennsylvania Department of Revenueregarding all of the issues in dispute on Duquesne Light’s 1997 through 2004 Pennsylvania state taxreturns and treatment of the disputed items on our 2005 returns. Pursuant to this settlementagreement Duquesne Light will pay approximately $60 million, which includes interest, and hasrecorded a net charge of $16.1 million in the third quarter. Included in the payment and net chargedescribed above is $13.2 million of Pennsylvania Capital Stock Tax which is included in operatingexpenses in our Electricity Delivery business segment third quarter results.     The IRS completed the 1998-2002 audit cycle during March 2006 and all adjustments to reflectthis audit, including the impact on state taxes, were recorded in the financial statements in thefirst quarter of 2006. In addition to recording charges for additional taxes and interest duerelated to the audit, we also recorded $2.3 million of certain state tax benefits expected to berealized in 2006 and beyond. In total, the IRS and state tax adjustments resulted in a net chargeof $2.9 million in the first quarter.     See Note 9 to the condensed consolidated financial statements for a detailed discussion of thetax settlements.**BUSINESS SEGMENTS**     Note 13 to the condensed consolidated financial statements provides a description of eachprincipal business segment and shows the financial results of each in tabular form. Following is adiscussion of these results. Unless otherwise stated, the terms “earnings” and “loss” used in thefollowing discussion refer to after-tax amounts.**RESULTS OF OPERATIONS****Overall Performance**     *Three months ended September 30, 2006.*Our net income was $0.9 million, or $0.01 basicearnings per share in the third quarter of 2006, compared to $43.6 million, or $0.56 basic earningsper share in 2005. The average shares outstanding increased 5.7 million, or 7.3%, compared to thethird quarter of 2005. Our income from continuing operations was $0.9 million, or $0.01 basicearnings per share in the third quarter of 2006, compared to $43.5 million, or $0.56 basic earningsper share in 2005. This decrease of $42.6 million, or 97.9% is primarily due to the following:**•** Income from the electricity delivery business segment decreased$21.9 million from the third quarter of 2005, primarily as aresult of the negative net $16.1 million charge as a result of thestate tax settlement, lower operating revenues attributable tocooler summer weather in 2006 as compared to 2005 and lower otherincome. **•** Income from the Holdings electricity supply business segmentdecreased $6.7 million from the third quarter of 2005, primarilyas a result of a $11.8 million decrease in earnings resulting froma decline in the fair value of certain of Duquesne Power’sderivative energy contracts, partially offset by increasedelectricity supply margins realized compared to the third quarterof 2005. **•** Income from the Energy Solutions business segment decreased $14.0million from the third quarter of 2005, primarily as a result ofan $11.7 million after-tax gain related to the sale of an equityinvestment in an energy facility operating partnership during thethird quarter of 2005 and lower earnings from the management ofsynthetic fuel facilities following the price concessionspreviously discussed. **•** The loss reported in the all other category increased $1.8million, primarily as a result of $2.5 million in after-tax mergerrelated costs in 2006.     Duquesne Light reported a loss of $5.4 million in the third quarter of 2006, compared toearnings of $25.3 million in 2005, a decrease of $30.7 million, primarily as a result of thedecrease in the earnings from the electricity delivery business segment discussed above, and theDecember 31, 2005 transfer of Duquesne Power’s operations from Duquesne Light’s supply segment, aspreviously discussed. Duquesne Light’s 2005 results included $9.2 million of earnings from DuquesnePower.     *Nine months ended September 30, 2006.*Our net income was $26.5 million, or $0.33 basicearnings per share in the first nine months of 2006, compared to $100.1 million, or $1.29 basicearnings per share in 2005. The average shares outstanding increased 2.4 million, or 3.1%, comparedto 2005. Our income from continuing operations was $26.6 million, or $0.33 basic earnings per sharein the first nine
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months of 2006, compared to $99.7 million, or $1.28 basic earnings per share in 2005. This decreaseof $73.1 million, or 73.3%, is due to the following:**•** Income from the electricity delivery business segment decreased$26.9 million from 2005, primarily as a result of the state taxsettlement discussed above, lower operating revenues attributableto unfavorable weather in the first nine months of 2006 comparedto 2005, and lower other income. **•** Income from the Holdings electricity supply segment decreased$15.3 million from 2005, primarily as a result of a $24.2 millionafter-tax decline in the fair value of certain of Duquesne Power’sderivative energy contracts, partially offset by increasedelectricity supply margins realized as compared to the first ninemonths of 2005. **•** Income from the Energy Solutions business segment decreased $13.9million from 2005, primarily as a result of the after-tax gainrelated to the sale of an equity investment and lower earningsfrom the management of synthetic fuel facilities as discussedabove. **•** Income from the Financial segment decreased $7.4 million,primarily as a result of a $6.6 million decrease in earningsresulting from the estimated 2006 tax credit phase-out, the $4.6million after-tax gain from the sale of an investment in a naturalgas operating partnership included in the first nine months of2005 results and the $1.5 million after-tax impairment charge in2006 related to the passive landfill gas investments. These werepartially offset by a $3.7 million increase in earnings from thepipeline quality landfill gas sites in the first nine months of2006. **•** The loss reported in the all other category increased $9.7million, primarily as a result of $3.0 million in after-tax mergerrelated costs in 2006, the negative net $2.9 million impact toincome taxes resulting from the IRS settlement in 2006, the $2.4million after-tax gain in 2005 resulting from the favorablesettlement of an interest rate lock arrangement and higherinterest charges related to increased borrowings as compared to2005.     Duquesne Light’s earnings available for common stock were $4.9 million in the first ninemonths of 2006, compared to $57.8 million in 2005, a decrease of $52.9 million, or 91.5% primarilyas a result of the decrease in the earnings from the electricity delivery business segmentdiscussed above, and the December 31, 2005 transfer of Duquesne Power’s operations from DuquesneLight’s supply segment, as previously discussed. Duquesne Light’s 2005 results included $26.1million of earnings from Duquesne Power.**Business Segment Performance***Electricity Delivery Business Segment.*     *Three months ended September 30, 2006.*This segment reported a loss of $5.6 million in thethird quarter of 2006 compared to income of $16.3 million in 2005, a decrease of $21.9 million,primarily as a result of the negative net $16.1 million charge related to the state tax settlement,lower operating revenues and other income.     Operating revenues decreased $2.2 million, or 2.3%. This decrease is primarily due to a $4.0million decrease in revenue, resulting from a decline in MWh delivered to residential customersdue to the cooler summer in 2006 compared to 2005. This decrease was partially offset byadditional SECA revenue recognized in the third quarter of 2006, as SECA charges were notrecovered for the entire third quarter of 2005.     The following table shows the MWh delivered to customers.               **MWh Delivered**   (In Thousands) Third Quarter **2006**  2005  Change  Residential  **1,226**   1,313   (6.6%)Commercial  **1,825**   1,878   (2.8%)Industrial  **802**   789   1.6%        **3,853**   3,980   (3.2%)      Operating expenses increased $13.8 million or 31.3%, due primarily to a $13.2 millionpre-tax charge included in operating expenses related to the state tax settlement discussed above.     Depreciation and amortization expense increased $2.6 million, or 15.4%. The increase isprimarily the result of an additional $1.7 million of amortization of SECA charges recognized inthe third quarter of 2006. In addition, depreciation expense has increased as a result of thesignificant amount of capital expenditures related to the ongoing infrastructure program.     Other income decreased $5.7 million, or 95.0%, due primarily to the repayment of the $250million intercompany loan in August 2005 and a $2.1 million miscellaneous gain recorded in thirdquarter of 2005 as a result of the settlement of certain legacy issues.
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     *Nine months ended September 30, 2006.*This segment reported income of $4.2 million in thefirst nine months of 2006 compared to $31.1 million in 2005, a decrease of $26.9 million, or 86.5%,primarily as a result of the state tax settlement discussed above, lower operating revenues, andother income.     Operating revenues decreased $3.3 million, or 1.3%. An overall decline in MWh delivered,primarily as a result of unfavorable weather in the first nine months of 2006 as compared to 2005,caused a $9.7 million decrease in revenue. This decrease was partially offset by increased SECArevenue recognized in the first nine months of 2006 compared to 2005.     The following table shows the MWh delivered to customers.               **MWh Delivered**   (In Thousands) First Nine Months **2006**  2005  Change  Residential  **3,061**   3,182   (3.8%)Commercial  **4,981**   5,130   (2.9%)Industrial  **2,413**   2,381   1.3%        **10,455**   10,693   (2.2%)      Operating expenses increased $12.5 million or 9.5%, due primarily to a $13.2 millionpre-tax charge included in operating expenses related to the state tax settlement previouslydiscussed.     Depreciation and amortization expense increased $8.1 million, or 16.7%. The increase isprimarily the result of an additional $6.0 million of amortization of SECA charges recognized inthe first nine months of 2006, as well as additional depreciation expense attributable to theongoing infrastructure program discussed above.     Other income decreased $12.9 million, or 76.8%, due primarily to the repayment of the $250million intercompany loan in August 2005 and a $2.1 million miscellaneous gain recorded in thirdquarter of 2005 as a result of the settlement of certain legacy issues.     Interest and other charges decreased $6.0 million, or 16.3%, primarily as a result of therepurchase of approximately $320 million of variable rate Pollution Control Revenue RefundingBonds in the third quarter of 2005.*Duquesne Light Supply Business Segment.*     *Three months ended September 30, 2006.*This segment reported income of $0.2 million in thethird quarter of 2006, compared to $9.0 million in 2005. As previously discussed, Duquesne Powerceased to be a subsidiary of Duquesne Light effective December 31, 2005, and during the thirdquarter of 2005, Duquesne Power earned $9.2 million. Since January 1, 2006, the results for thissegment reflect the full-requirements contract that Duquesne Light has with Duquesne Power toprovide the necessary energy and capacity required to serve its POLR obligation.     Operating revenues decreased $13.8 million, or 10.8%. This is due in part to the 69.9%decline in the MWh supplied to large commercial and industrial customers in 2006 compared to 2005.This MWh decline is primarily due to two of the largest industrial customers switching toalternative energy suppliers during the third quarter of 2005 as their CTC expired and their POLRI arrangement ended. This MWh decline resulted in a $5.1 million decrease in retail revenues inthe third quarter of 2006 compared to the same period in 2005. The MWh supplied to residential andsmall commercial customers increased 4.8% from the third quarter of 2005, resulting in a $5.3million increase in retail revenues in the third quarter of 2006. There was a $14.2 milliondecrease in wholesale sales of electricity in the third quarter of 2006, related to sales byDuquesne Power to DLE that were included in this segment in 2005, but not in 2006, for the reasonsdiscussed above.     The following tables set forth MWh supplied.               **MWh Supplied**   (In Thousands) Third Quarter **2006**   **POLR I**  **POLR III**  **Total**  Residential and smallcommercial  **—**   **1,744**   **1,744**              Large commercialand industrial  **9**   **50**   **59**  Total Retail  **9**   **1,794**   **1,803**  Wholesale          **10**  POLR Customers (MWh basis):             Residential and small commercial          **81****%** Large commercial and industrial          **4****%** 
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               MWh Supplied   (In Thousands) Third Quarter 2005   POLR I  POLR III  Total  Residential and smallcommercial  —   1,664   1,664              Large commercialand industrial  131   65   196  Total Retail  131   1,729   1,860  Wholesale          316  POLR Customers (MWh basis):             Residential and small commercial          74% Large commercial and industrial          11%      *Nine months ended September 30, 2006.*This segment reported income of $0.7 million in thefirst nine months of 2006, compared to $26.6 million in 2005. As previously discussed, DuquesnePower ceased to be a subsidiary of Duquesne Light effective December 31, 2005, and during the firstnine months of 2005, Duquesne Power earned $26.1 million.     Operating revenues decreased $47.8 million, or 14.0%, compared to the first nine months of2005. This is due in part to the 78.8% decline in the MWh supplied to large commercial andindustrial customers in 2006 as compared to 2005 for the reason discussed above, which resulted inan approximate $29.9 million decrease in retail revenues in the first nine months of 2006 comparedto the same period in 2005. The MWh supplied to residential and small commercial customersincreased 4.7% from the first nine months of 2005, resulting in an $13.5 million increase inretail revenues in the first nine months of 2006. There was a $30.4 million decrease in wholesalesales of electricity in the first nine months of 2006, related to sales by Duquesne Power to DLEthat were included in this segment in 2005.     The following tables set forth MWh supplied.               **MWh Supplied**   (In Thousands) First Nine Months **2006**   **POLR I**  **POLR III**  **Total**  Residential and smallcommercial  **—**   **4,498**   **4,498**  Large commercialand industrial  **54**   **178**   **232**  Total Retail  **54**   **4,676**   **4,730**  Wholesale          **46**  POLR Customers (MWh basis):             Residential and small commercial          **80****%** Large commercial and industrial          **5****%**                MWh Supplied   (In Thousands) First Nine Months 2005   POLR I  POLR III  Total  Residential and smallcommercial  —   4,295   4,295              Large commercialand industrial  858   238   1,096  Total Retail  858   4,533   5,391  Wholesale          716  POLR Customers (MWh basis):             Residential and small commercial          74% Large commercial and industrial          22% *Electricity Supply Business Segment.*     *Three months ended September 30, 2006.*The following table summarizes the incomefrom this segment.           Earnings   (In Millions) Third Quarter **2006**  2005  Electricity Supply **$****7.9**  $2.8 Derivative energy contracts  **(5.3****)**  6.5  Net income **$****2.6**  $9.3       Operating revenues increased $18.7 million, or 14.4% in the third quarter of 2006. There was a$15.7 million increase in the revenue recognized by DLE from sales to large commercial andindustrial customers resulting from an increase in MWh supplied by DLE at current market rates.Operating revenues for the third quarter of 2006 also include $2.5 million of wholesale revenuegenerated from the
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interests purchased in the Keystone and Conemaugh power plants on September 1, 2006.     The following table sets forth the MWh supplied to the electricity supply business segmentcustomers.               MWh Supplied    (In Thousands) Third Quarter **2006**  2005  Change  Retail:            Duquesne Light  **1,803**   1,860   (3.1%)DLE  **549**   301   82.4%     Total Retail  **2,352**   2,161   8.8% Wholesale:            Duquesne Light  **10**   4     Generation  **72**   —          Total Wholesale  **82**   4           Operating expenses increased $29.1 million, or 25.6%, compared to the third quarter of 2005.During the third quarter of 2006, purchased power expense included a net $20.3 million increaseover the same period in 2005 related to the change in fair value of certain derivative energycontracts and increased purchased power expense as a result of the increase in MWh supplied atcurrent market rates. Operating expenses for the third quarter of 2006 also include $1.5 millionof fuel and other operating expenses incurred from the interests purchased in the Keystone andConemaugh power plants on September 1, 2006.     Depreciation and amortization expense in the third quarter of 2006 represents thedepreciation and amortization associated with the interests purchased in the Keystone andConemaugh power plants discussed above.     *Nine months ended September 30, 2006.*The following table summarizes the incomefrom this segment.           Earnings   (In Millions) First Nine Months **2006**  2005  Electricity Supply **$****22.7**  $13.8 Derivative energy contracts  **(11.1****)**  13.1  Net income **$****11.6**  $26.9       Operating revenues increased $28.9 million, or 8.3% in the first nine months of 2006. Therewas a $43.7 million increase in the revenue recognized by DLE and the $2.5 million in wholesalerevenue generated from the interests purchased in the power plants discussed above. These increaseswere partially offset by the $16.4 million decrease in Duquesne Light’s retail sales from the firstnine months of 2005 as previously discussed.     The following table sets forth the MWh supplied to the electricity supply business segmentcustomers.               MWh Supplied    (In Thousands)  First Nine Months **2006**  2005  Change  Retail:            Duquesne Light  **4,730**   5,391   (12.3%)DLE  **1,346**   639   110.6%     Total Retail  **6,076**   6,030   0.8% Wholesale:            Duquesne Light  **46**   47     Generation  **72**   —          Total Wholesale  **118**   47           Operating expenses increased $54.2 million, or 18.0%, compared to the first nine months of2005. During the first nine months of 2006, purchased power expense reflected a net $41.5 millionincrease over the same period in 2005 related to the change in the fair value of certain derivativeenergy contracts and increased purchased power expense as a result of the increase in MWh suppliedat current market rates. Operating expenses also include the $1.5 million in fuel and otheroperating expenses incurred from the interests purchased in the power plants discussed above.*Energy Solutions Business Segment*.     *Three months ended September 30, 2006.*This segment reported income of $5.1 million in thethird quarter of 2006, compared to $19.1 million in the third quarter of 2005, a decrease of $14.0million, or 73.3%. This is primarily due to a 2005 after-tax gain of $11.7 million on the sale ofan investment in a energy facility management project and a $3.4 million decrease in earnings fromthe management of synthetic fuel facilities.     Operating revenues decreased $4.0 million, or 18.4%, compared to 2005. This was primarily dueto a $4.3 million decrease in revenue from the synthetic fuel facilities related to production andprice concessions.     Other income decreased $18.4 million, or 98.9%, compared to 2005 primarily as a result of the$18
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million pre-tax gain on the sale of an equity investment in 2005 as previously discussed.     *Nine months ended September 30, 2006.*This segment reported income of $15.6 million in thefirst nine months of 2006, compared to $29.5 million in the first nine months of 2005, a decreaseof $13.9 million, or 47.1%. This is primarily due to the 2005 after-tax gain of $11.7 million onthe sale of an investment in a energy facility management project and a $5.3 million decrease inearnings from the management of synthetic fuel facilities, partially offset by a $1.5 millionafter-tax gain on the sale of a management facility project in 2006.     Operating revenues decreased $7.1 million, or 13.2%, compared to 2005. This was primarily dueto a $6.0 million decline in revenue from the synthetic fuel facilities related to production andprice concessions.     Operating expenses decreased $5.0 million, or 19.9%, compared to 2005, primarily due to the$2.5 million pre-tax gain on the sale of the energy facility management project.     Other income decreased $17.8 million, or 95.2%, compared to 2005 primarily as a result of the$18 million pre-tax gain on the sale of an equity investment in 2005 as previously discussed.*Financial Business Segment.*     *Three months ended September 30, 2006*. This segment reported income of $5.3 million in thethird quarter of 2006, compared to $4.0 million in the third quarter of 2005, an increase of $1.3million, or 32.5%, primarily as a result of the absence of the $0.8 million after-tax lossrecognized in 2005 on the sale of an investment in a leveraged lease transaction.     Operating revenues decreased $2.8 million, or 24.8%, compared to 2005. The decrease isprimarily the result of a decline in the sales of pipeline quality landfill gas mainly due to thetermination of the contract at the Fresh Kills landfill site.     Operating expenses decreased $4.9 million, or 38%, compared to 2005, primarily due todecreased expenses associated with the Fresh Kills landfill site and a $2 million decrease relatedto the synthetic fuel limited partnership investment that was impacted by the estimated tax creditphase-out.     Other income increased $2.7 million, or 168.8% compared to 2005, primarily due to the lossrecognized in 2005 on the sale of an investment in a leveraged lease transaction.     Income taxes increased $4.1 million compared to 2005 primarily due to the absence of $3million of tax credits related to the synthetic fuel limited partnership investment.     *Nine months ended September 30, 2006*. This segment reported income of $15.4 million in thefirst nine months of 2006, compared to $22.8 million in the first nine months of 2005, a decreaseof $7.4 million, or 32.5%. This decline is primarily due to a $6.6 million decrease in earningsresulting from the estimated 2006 tax credit phase-out, the $1.5 million after-tax impairmentcharge in 2006 related to the passive landfill gas investments previously discussed and, includedin 2005 results, the $4.6 million after-tax gain from a sale of an investment in a natural gasoperating partnership, partially offset by a $3.7 million increase in earnings from operationsrelated to pipeline quality landfill gas, primarily as a result of the natural gas price swap.     Operating revenues increased $4.4 million, or 13.6%, compared to 2005, primarily due to a $7.4million increase related to the natural gas price swap, partially offset by the decrease in revenuedue to the termination of the contract at the Fresh Kills landfill site on June 30, 2006.     Operating expenses decreased $1.9 million, or 5.5%, compared to 2005, primarily due to thedecreased expenses associated with the Fresh Kills landfill site, which were partially offset bythe $2.3 million pre-tax impairment of passive landfill gas investments in 2006.     Other income decreased $6.7 million, or 65%, compared to 2005, primarily due to a $7.1 millionpre-tax gain from the sale of an investment in a natural gas operating partnership in 2005.     Income taxes increased $8.2 million compared to 2005 primarily due to the estimated 40%phase-out of tax credits in 2006.*Communications Business Segment*.     *Three and nine months ended September 30, 2006.*This segment reported income of $0.7 millionin the third quarters of both 2006 and 2005 and $1.8 million in the first nine months of 2006compared to $1.9 million in the first nine months of 2005.*All Other.*     *Three months ended September 30, 2006.*The all other category reported a loss of $7.4 millionin the third quarter of 2006, compared to a loss of $5.6 million in the same period in 2005, anincrease of $1.8 million, primarily due to $2.5 million of after-tax merger costs.
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     *Nine months ended September 30, 2006.*The all other category reported a loss of $21.6 millionin the first nine months of 2006, compared to a loss of $11.9 million in the same period in 2005,an increase of $9.7 million, primarily due to a $4.0 million after-tax increase in interest andother charges and a $3.0 million after-tax increase in operating expenses due to merger costs.     Operating expenses increased $6.0 million, or 100%, primarily due to $5.2 million of mergercosts.     Interest and other charges increased $6.9 million, or 49.3%, from 2005, due to an $11.4million increase related to the issuance of $320 million of senior notes in August 2005, a $3.5million increase related to higher short-term borrowings in 2006 and the entrance into a $200million term loan facility in September 2006, partially offset by the elimination in 2006 of $7.9million of interest to Duquesne Light on the $250 million note.**LIQUIDITY AND CAPITAL RESOURCES**     Our cash and temporary cash investments decreased $63 million, or 79.5%, from $79.2 million atDecember 31, 2005 to $16.2 million at September 30, 2006. Duquesne Light had cash and temporarycash investments of $14.3 million at September 30, 2006, a $61.8 million, or 81.2%, decrease fromthe December 31, 2005 cash balance of $76.1 million. Until the fourth quarter of 2005, DuquesneLight invested in the DQE Capital cash pool.     We require cash principally for day-to-day operations, energy purchases, debt service, capitalexpenditures and dividends. We have historically financed our cash needs primarily from cash fromoperations, debt and equity issuances, asset sales and bank borrowings. Duquesne Light hashistorically financed its cash needs with cash from operations, capital contributions received fromHoldings, debt issuances, and bank borrowings.     *Cash Flows from Operating Activity.*Cash flows provided from operating activities at Holdingswere $29.1 million in the first nine months of 2006, compared to $78.7 million in the first ninemonths of 2005. The $52.8 million paid to the IRS in the second quarter related to the 1998-2002audit cycle reduced cash from operations in the first nine months of 2006. Cash flows provided fromoperating activities at Duquesne Light were $82.2 million in the first nine months of 2006,compared to $60.9 million in the first nine months of 2005. Contributions by Duquesne Light of$20.0 million and $32.1 million to its pension plans reduced cash from operations in the first ninemonths of 2006 and 2005.     *Cash Flows from Investing Activity.*In the first nine months of 2006, Duquesne Light’scapital expenditures for electric utility construction were $154.8 million (excluding an $8.2million reduction in accounts payable related to capital expenditures). In addition, Holdings’incremental capital expenditures were $8.6 million relating to our other business lines and otherinvestments. In the first nine months of 2005, Duquesne Light’s capital expenditures for electricutility construction were $73.9 million and Holdings’ incremental capital expenditures were $2.8million relating to our other business lines and other investments. Holdings also purchasedinterests in two coal-fired power plants for an aggregate purchase price of $177.7 million duringthe third quarter of 2006.     *Cash Flows from Financing Activity.*Holdings paid cash dividends on common and preferredstock of $51.0 million and $50.2 million in the first nine months of 2006 and 2005. These amountsare net of the cash received back from our shareholders who participate in our dividendreinvestment plan.     In the third quarter of 2006, Holdings issued 8.8 million shares of common stock and receivednet proceeds of $140.9 million. In addition Holdings borrowed $200 million under the new term loanfacility discussed below.     Duquesne Light paid cash dividends on common and preferred stock of $6.3 million and $26.3million in the first nine months of 2006 and 2005. Also during the first nine months of 2006,Holdings contributed $27.6 million to Duquesne Light Company as a result of an agreement with thePUC.**Liquidity**     We believe that cash on hand, access to debt and equity capital markets, and bank borrowingcapacity continue to provide sufficient resources to fund our ongoing operating requirements,capital expenditures and investments.     *Bank Credit Facilities.*Holdings and Duquesne Light maintain unsecured creditfacilities (Revolvers) expiring in July 2010, Holdings for $250 million and Duquesne Light for $150million. Both Revolvers (i) permit borrowings at interest rates of LIBOR (plus a margin of 0.40% to1.00%) or an alternate base rate, as defined in the credit facilities and (ii) have commitment feesapplicable to the remaining available amount. Interest rates and commitment fees are based on theborrower’s then-current senior unsecured credit rating. Both Revolvers are subject to cross-defaultif the borrower or any of its
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subsidiaries defaults on any payment due under any indebtedness exceeding $50 million. Undrawnamounts under both Revolvers are fully available for the issuance of letters of credit.     Under our Revolvers, we are subject to financial covenants requiring each of Holdings andDuquesne Light to maintain a debt-to-capitalization ratio of not more than 65%, as defined in thefacilities. In addition, Holdings is required to maintain a minimum interest coverage ratio of2-to-1, as defined in the facilities. As of September 30, 2006, we were in compliance with theapplicable covenants.     As of September 30, 2006, our total borrowing capacity under our Revolvers and the use of thisborrowing capacity were as follows:                   **Committed**   **LOCs** **Available**  **Capacity** **Borrowed** **Issued** **Capacity** Holdings $250.0  $15.0  $17.6  $217.4 DuquesneLight  150.0   —   8.2   141.8  **Total** $400.0  $15.0  $25.8  $359.2       During the first nine months of 2006, the maximum amount of Revolver borrowingsoutstanding was $160 million (all at Holdings), the average daily borrowings were $84.9 million andthe weighted average daily interest rate was 5.7%.     As of September 30, 2006, Holdings also had $73.9 million of outstanding letters of credit(LOCs) (including $12.7 million at Duquesne Light) unrelated to the Revolvers.     As of October 31, 2006, our total borrowing capacity under our Revolvers and the use of thisborrowing capacity were as follows:                   **Committed**     **LOCs** **Available**  **Capacity** **Borrowed** **Issued** **Capacity** Holdings $250.0  $22.0  $17.6  $210.4 DuquesneLight  150.0   3.0   8.2   138.8  **Total** $400.0  $25.0  $25.8  $349.2       In addition, as of October 31, 2006, Holdings had $73.9 million of outstanding LOCs(including $12.7 million at Duquesne Light) unrelated to the Revolvers.     *Bank Term Loan Facilities.*The Macquarie Consortium has obtained bank commitments(acquisition debt) in order to provide a source of funds to consummate the pending merger. OnSeptember 1, 2006, Holdings entered into a $200 million variable interest rate unsecured term loanfacility with the same lenders to fund certain minority interests and transaction costs related tothe Keystone and Conemaugh generation acquisition and for general corporate purposes. The finalmaturity date is September 1, 2011. However, in the event the merger is not consummated or in theevent the merger is consummated but not with the proceeds of the acquisition debt, Holdings mustprepay the term loan facility on the one-year anniversary of the date that is earliest to occur of(i) January 5, 2008, (ii) the date of termination of the merger agreement, and (iii) the date ofconsummation of the merger other than with the proceeds of acquisition debt.     The term loan facility may be prepaid and/or cancelled in whole or in part, but any amountprepaid under the facility may not be reborrowed. The outstanding balance under the facility willbe charged an interest rate of LIBOR plus a margin of 0.625 % to 1.75%, based on our then-currentsenior unsecured credit rating. Prior to the merger consummation date, the facility is subject tothe same terms and conditions as Holdings’ current $250 million Revolver (see above). From andafter the merger consummation date, the terms and conditions of the facility will automaticallychange to match those in the acquisition debt.     *Equity Offering*. On August 11, 2006, Holdings sold an aggregate of 8.8 million shares ofcommon stock (no par value) for an aggregate price of $141.4 million. The issuance of the commonstock was exempt from the registration requirements of the Securities Act of 1933, as amended,pursuant to Section 4(2) thereof for transactions not involving a public offering. Holdings usedthe net proceeds to repay $133 million of Revolver borrowings and to fund approximately $8 millionof general corporate requirements.     *Pennsylvania State Tax Settlement.*In October 2006, Duquesne Light entered into anagreement to settle the treatment of taxable income related to an out-of-state subsidiary. Pursuantto the agreement, Duquesne Light will pay approximately $60 million, which includes interest. Ofthis amount, approximately $54 million was remitted as of November 1, 2006, with the remainder dueDecember 1, 2006. The amount remitted was funded primarily by Revolver borrowings, which we plan torepay with proceeds from future pollution control revenue bond remarketings.
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**OFF-BALANCE SHEET ARRANGEMENTS**     Except for the guarantees and fuel supply commitments discussed in Note 9 and the letters ofcredit discussed in Liquidity, neither Holdings nor Duquesne Light has any material off-balancesheet arrangements. Neither Holdings nor Duquesne Light is involved in any material contracttrading activities.**RATE MATTERS****Rate Cases**     On April 7, 2006, Duquesne Light filed a distribution rate case with the PUC to recover theincreased costs of service and to receive a fair return on its investment. This is the firstrequested rate increase since 1987.     On September 14, 2006, Duquesne Light entered into, and filed with the PUC, a Joint Petitionof Settlement among all parties resolving all issues in the distribution rate case. The settlementprovides for a distribution rate increase of $117 million in annual operating revenues, and anautomatic pass-through for charges that Duquesne Light will pay for transmission services itpurchases under tariffs regulated by the FERC. The net income impact of this revenue increase hasnot yet been determined.     On October 11, 2006, the administrative law judge presiding over the rate case recommendedapproval of the settlement agreement. Final effectiveness of the settlement is subject to PUCreview and approval. A final order is anticipated in the fourth quarter of 2006. If approvedaccording to the regulatory schedule, Duquesne Light expects this rate increase to go into effectin January 2007.     On September 29, 2006, Duquesne Light filed a transmission rate case with the FERC requestinga rate increase of approximately $27 million related to transmission services that Duquesne Lightpurchases under tariffs regulated by the FERC. Duquesne Light anticipates an initial order duringthe fourth quarter granting the requested increase, subject to refund, to be effective in January2007. Receipt of a final order with the ultimate rate increase will depend on, among other things,the settlement process with interveners.     We cannot predict the timing or outcome of any of these regulatory proceedings.**Item 3.** **Quantitative and Qualitative Disclosures About Market Risk.**     Market risk represents the risk of financial loss that may impact our consolidated financialposition, results of operations or cash flows due to adverse changes in market prices and rates.     Both Holdings and Duquesne Light have potential market risk exposures to interest rate riskand credit/default risk. Holdings also faces the risks related to commodity prices and thepotential of Section 29 tax credit phase-out. Holdings and Duquesne Light have risk managementprocedures to monitor and assist in controlling these market risks and may use derivative and otherinstruments to manage some of these exposures.**Interest Rate Risk**     We manage our interest rate risk by balancing our exposure between fixed and variable ratesand exploring strategic opportunities to lock in favorable interest rates on anticipated debtofferings, while attempting to minimize our interest costs.     Currently, Holdings has $200 million of variable interest rate debt outstanding, whichrepresents 17.3% of its long-term debt. Holdings’ variable rate debt is an unsecured term loanfacility entered into on September 1, 2006 with an average variable interest rate of 6.1% for themonth ended September 30, 2006. Duquesne Light does not have any variable interest rate long-termdebt outstanding. We manage our interest rate risk by retiring and issuing debt from time to timeand by maintaining a range of maturity dates. A 10% increase in interest rates would have affectedHoldings’ variable rate debt obligations by increasing interest expense by approximately $0.1million for the one month it was outstanding during the nine months ended September 30, 2006. A10% reduction in interest rates would have increased the market value of fixed-rate debt byapproximately $44 million for Holdings and $25 million for Duquesne Light as of September 30, 2006and approximately $36 million for Holdings and $28 million for Duquesne Light as of September 30,2005. This change would not have had a significant near-term effect on our future earnings or cashflows.**Commodity Price Risk**     We are exposed to commodity price risk arising from market price fluctuations in electricitysupply and for sales of pipeline quality landfill gas. We manage these risks by entering intovarious fixed price contracts as part of our overall board approved risk management strategy.     *Electricity Supply.*We mitigate this risk by entering into energy commodity contracts,principally through Duquesne Power, for anticipated electricity supply obligations within a rangeof probabilities based on historical customer retention rates and
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switching trends along with projected forward energy prices.     The energy commodity contracts have primarily been structured to begin and end during the POLRIII time period. The net result of these transactions is that, as of September 30, 2006, DuquesnePower had secured a substantial portion of the combined expected load obligation for itsfull-requirements contracts with Duquesne Light and DLE through December 31, 2007.     If Duquesne Power does not enter into contracts for the remaining portion of its anticipatedobligations, it will acquire the necessary supply through spot market purchases, and will thereforebe exposed to market risk. Assuming Duquesne Power were to make such spot market purchases, weperformed a sensitivity analysis using a hypothetical 10% increase in the projected forward marketprices of electricity supply in our valuation model. The analysis indicated that such marketmovements would change the projected cost of acquiring electricity supply by approximately $3million as of September 30, 2006 and approximately $4 million as of September 30, 2005. Theprojected forward market prices used in our valuation model are derived from broker quotes for theapplicable delivery points for both on-peak and off-peak power. Our valuation model seasonalizesannual or quarterly prices based on historical trends. Actual costs in the future may differsignificantly from our analysis, however, based on changes in the timing and amount of commodityprice fluctuations and our actual exposures.     The fair value of the sale contracts and certain purchase contracts that are classified asderivative instruments, is recorded as derivative assets or liabilities in the consolidatedfinancial statements.     The derivative energy contracts are exposed to commodity price risk based on price changes inthe forward energy market. Therefore, as the forward market prices change, so will the fair valueof these contracts. A hypothetical 10% change in the projected forward market prices of electricitysupply would increase or decrease the fair value of our derivative energy contracts byapproximately $15 million (including $7 million related to our mark-to-market energy contracts) asof September 30, 2006 and approximately $11 million (all of which related to our mark-to-marketenergy contracts) as of September 30, 2005. The amounts related to our mark-to-market energycontracts would also result in an increase or decrease to purchased power expense.     The fair value of the derivative energy contracts is also impacted by the expiration of thecontracts due to the passage of time. Including the impact of settlements, if forward marketprices do not change between September 30, 2006 and December 31, 2006, the fair value of ourexisting derivative energy contracts would not decrease.     As a result of fixed POLR prices for our residential and small commercial customers throughDecember 31, 2007, and customers being able to initiate switches to and from POLR service, we havean additional risk of loss. Specifically, customers could opt for POLR service in a period of highenergy prices or leave POLR service for an alternative generation supplier in a period of lowenergy prices. Significant changes in customer switching behavior could cause Duquesne Power’senergy supply portfolio to be disproportionate to its full requirements obligations to DuquesneLight and DLE. Accordingly, Duquesne Power could be required to purchase or sell power in periodsof high or low prices which could result in a loss.     *Landfill Gas Sales.*Revenues from our pipeline quality landfill gas operations are based oncurrent market prices of natural gas as calculated by the terms of the individual contracts. Highernatural gas prices compared to historical levels have resulted in the realization of increasedprofits from this line of business. In order to mitigate this exposure to fluctuations in marketprices of natural gas, we entered into cash flow hedges for a portion of our anticipated 2006through 2008 sales. For the anticipated sales, a hypothetical 10% change in the projected forwardmarket prices of natural gas in our valuation model would change projected revenues from pipelinequality landfill gas by approximately $1 million through 2008. The forward market prices used inour valuation model are derived from quoted market prices for the applicable pricing points. Actualamounts in the future may differ significantly from our analysis, however, based on changes in thetiming and amount of commodity price fluctuations and our actual exposures.**Credit/Default Risk**     Our credit risk is the exposure to the possibility of economic loss that would occur as aresult of nonperformance by counter-parties of their contractual obligations.     Duquesne Power has entered into fixed-price energy contracts and unforced capacity creditagreements. As of September 30, 2006, all of the suppliers are investment grade.     As of September 30, 2006, Duquesne Power has contracted to purchase from two suppliersapproximately 59% and 62% of the notional values of the energy commodity contracts for the yearsended
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December 31, 2006 and 2007. No other supplier represents as much as 20% for each of the respectiveyears.     Duquesne Power’s energy commodity contracts contain certain safeguards designed to mitigatepotential losses by requiring collateral to be posted by either party depending on changes inenergy or capacity prices. As of October 31, 2006, we had posted no collateral under thesecontracts.     Duquesne Light purchases energy and capacity, under a full-requirements contract with DuquesnePower for sale to its large commercial and industrial customers receiving fixed-price POLR IIIservice through May 31, 2007. Duquesne Light’s contract only requires collateral to be posted bythe counter-party. As of October 31, 2006, no collateral was required to be posted under this contract.     In addition to collateral postings, supplier default risk is further mitigated by accelerateddamage payment terms. If a supplier fails to deliver the contracted power, we may exercise ourright to force the supplier to compensate us for the difference between the market price and thecontracted price of power. If such supplier would fail to make the accelerated damage payments, thesupplier would be in default and we would be permitted to apply any funds due that supplier againstour excess energy costs.     Other than large commercial and industrial POLR III customers on hourly-priced service,Duquesne Light is obligated to serve its POLR III customers at fixed rates. Duquesne Power is alsocontractually obligated to serve its customers, Duquesne Light and DLE, at fixed rates. As part ofthis full-requirements contract between Duquesne Light and Duquesne Power, Duquesne Light is thebeneficiary of a $17 million LOC. If an energy supplier to Duquesne Light or Duquesne Power were todefault on its contract, we could potentially be acquiring energy and/or capacity at a cost inexcess of our revenues, resulting in a loss, if the collateral provisions were not sufficient tocover such excess.     If this would occur it is uncertain, under the current PUC-approved POLR III arrangement, thatDuquesne Light could pass any additional costs related to these energy and capacity purchases on toits customers.     Duquesne Light retains the risk that customers will not pay for their electricity. However, acomponent of Duquesne Light’s rates is designed to cover the cost of a normal level ofuncollectible accounts.**Tax Credit Phase-Out**     Section 29 tax credits are subject to a phase-out provision that reduces tax credits as theaverage annual wellhead price per barrel of domestic crude oil increases into an inflation-adjustedphase-out range. For 2005, the tax credit would have begun to phase-out if the annual averagewellhead price per barrel of domestic crude oil exceeded $53.20 per barrel and would have beencompletely phased out if the annual average wellhead price per barrel of domestic crude oilexceeded $66.79 per barrel. There was no phase-out in 2005. The 2006 phase-out range will becalculated using inflation rates published in 2007 by the IRS. We cannot predict the phase-outrange for either 2006 or 2007.     Due to the high level of domestic crude oil prices during the first nine months of 2006 andthe estimated future prices through December 2006, we believe there is a high probability of aphase-out during 2006 and have decreased the amount of tax credits recognized during the first ninemonths of 2006 on the condensed consolidated income statement by approximately 40%. However, due tosignificant levels of tax credit carry-forwards existing at Holdings, the potential phase-out oftax credits in either 2006 or 2007 would not adversely impact our cash flow in those years.**Item 4. Controls and Procedures.****Disclosure Controls and Procedures**     Management of both Holdings and Duquesne Light, with the participation of each entity’s ChiefExecutive Officer and the Chief Financial Officer, has evaluated their respective disclosurecontrols and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities ExchangeAct of 1934, as amended) as of the end of the period covered by this report. Each entity’s ChiefExecutive Officer and the Chief Financial Officer have concluded that these controls and proceduresare effective.**Changes in Internal Control Over Financial Reporting**     There has been no change in Holdings’ or Duquesne Light’s internal control over financialreporting that occurred during the third quarter that has materially affected, or is reasonablylikely to materially affect, such internal control over financial reporting.**PART II. OTHER INFORMATION.****Item 1. Legal Proceedings.**     On March 17, 2006, our subsidiary Monmouth Energy Inc. (Monmouth) received a notice ofviolation
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(dated March 10, 2006) and penalty assessment in the amount of $480,000 from the New JerseyDepartment of Environmental Protection (NJDEP) relating to Monmouth’s landfill gas turbineoperation located at the Monmouth County Landfill in Monmouth, New Jersey. The notice of violationalleges non-compliance with the maximum allowable carbon monoxide steady state emission limitationfor each of the two turbines operated at the facility during 2003 and 2004. The permit for thefacility provides both a maximum emission limitation and a steady state emission limit. Steadystate represents 90% of the facility’s rated capacity. The facility has always operated incompliance with the maximum emission limitation, but has not achieved the steady state emissionlimitation when the facility operates at less than steady state. We believe that the NJDEP isattempting to incorrectly impose the steady state emission limitation during non-steady stateconditions, as opposed to the maximum emission limitation which is the only other emission limit inthe operating permit that could be applicable.     Monmouth has timely filed a notice of appeal challenging the bases for the alleged violationsand the penalty assessment. Monmouth has also voluntarily constrained its operations tosubstantially comply with the steady state permit limit at all times pending resolution of theseissues. In addition, Monmouth has engaged in technical discussions with the NJDEP aimed atdemonstrating the need for clarification under the permit to account for non-steady stateoperating conditions, and has filed a permit modification request to address this issue. Thesetechnical discussions have been constructive and Monmouth is hopeful that they will lead to anacceptable resolution of all issues. We further believe that we have credible defenses to thealleged violations and that the penalty assessment is excessive given all of the circumstances.We will vigorously defend our position in the event it is not possible to reach an acceptableresolution of all issues.     We are involved in various other routine legal proceedings and environmental matters. Webelieve that the resolution of such proceedings and matters, in total, will not have a materiallyadverse effect on our financial position, results of operations or cash flows.**Item 6. Exhibits.**   10.1 Credit Agreement, dated as of September 1, 2006, among Holdings,Barclays Bank, PLC as facility agent, and the lenders party thereto(incorporated by reference to Exhibit 10.1 to Holdings’ Form 8-Kfiled with the SEC on September 8, 2006).   10.2 Amendment No. 1 to the Agreement and Plan of Merger, dated September5, 2006 (incorporated by reference to Exhibit 10.2 to Holdings’ Form8-K filed with the SEC on September 8, 2006).   10.3 Joint Petition and Settlement Agreement, among Duquesne Light andvarious interveners (incorporated by reference to Exhibit 10.1 toHoldings’ and Duquesne Light’s combined Form 8-K filed with the SECon September 15, 2006).   10.4 Settlement Agreement between Duquesne Light and the Commonwealth ofPennsylvania (incorporated by reference to Exhibit 10.1 to Holdings’and Duquesne Light’s combined Form 8-K filed with the SEC on October10, 2006).   12.1 Holdings Ratio of Earnings to Fixed Charges and Preferred andPreference Stock Dividend Requirements.   12.2 Duquesne Light Ratio of Earnings to Fixed Charges and Preferred andPreference Stock Dividend Requirements.   31.1 Holdings’ CEO Section 302 Certification.   31.2 Holdings’ CFO Section 302 Certification.   31.3 Duquesne Light’s CEO Section 302 Certification.   31.4 Duquesne Light’s CFO Section 302 Certification.   32.1 Holdings’ CEO Section 906 Certification.   32.2 Holdings’ CFO Section 906 Certification.   32.3 Duquesne Light’s CEO Section 906 Certification.   32.4 Duquesne Light’s CFO Section 906 Certification.
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**SIGNATURES**     Pursuant to the requirements the Securities Exchange Act of 1934, the registrantidentified below has duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.       **Duquesne Light Holdings, Inc.** (Registrant)       Date: November 9, 2006 /s/ Mark E. Kaplan (Signature)    Mark E. Kaplan    Senior Vice President and    Chief Financial Officer    (Duly Authorized Officer)       Date: November 9, 2006 /s/ Susan S. Betta (Signature)    Susan S. Betta    Controller    (Principal Accounting Officer)       Pursuant to the requirements of the Securities Exchange Act of 1934, the registrantidentified below has duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.       **Duquesne Light Company** (Registrant)       Date: November 9, 2006 /s/ Mark E. Kaplan (Signature)    Mark E. Kaplan    Senior Vice President and    Chief Financial Officer    (Duly Authorized Officer)       Date: November 9, 2006 /s/ Susan S. Betta (Signature)    Susan S. Betta    Controller    (Principal Accounting Officer)  
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