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


                                   FORM 10-K


        [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 

                For the Fiscal Year Ended December 31, 1998
                                          -----------------

        [_]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 

                For the Transition Period From ____________ to ____________


                             Commission File Number
                             ----------------------
                                     1-956


                             Duquesne Light Company
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


        Pennsylvania                                    25-0451600
        ------------                                    ----------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)

                               411 Seventh Avenue
                         Pittsburgh, Pennsylvania 15219
                         ------------------------------
               (Address of principal executive offices)(Zip Code)

       Registrant's telephone number, including area code: (412) 393-6000


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes  X  No
                     ----   ---- 

DQE is the holder of all shares of outstanding common stock, $1 par value, of
Duquesne Light Company consisting of 10 shares as of February 28, 1999.

        [X]     Indicate by check mark if disclosure of delinquent filers
                pursuant to Item 405 of Regulation S-K is not contained herein,
                and will not be contained, to the best of the registrant's
                knowledge, in definitive proxy or information statements
                incorporated by reference in Part III of this Form 10-K or any
                amendment to this Form 10-K.
<PAGE>
 
Securities registered pursuant to Section 12(b) of the Act:

<TABLE> 
<CAPTION> 
                                                                           Name of each exchange
     Registrant             Title of each class                             on which registered
     ----------             -------------------                             -------------------
   <S>                      <C>                                            <C> 
   Duquesne Light             Preferred Stock                              New York Stock Exchange
      Company

                                        Involuntary       
                     Series          Liquidation Value    
                     ------          -----------------    
                                                          
                      3.75%            $50 per share      
                      4.00%            $50 per share      
                      4.10%            $50 per share      
                      4.15%            $50 per share      
                      4.20%            $50 per share      
                     $2.10             $50 per share      
                      8.375%           $25 per share   (1) 
                                 
                      Sinking Fund Debentures, due March 1, 2010 (5%)      New York Stock Exchange
                      7 3/8% Quarterly Interest Bonds, due 2038            New York Stock Exchange


                     (1)  Issued by Duquesne Capital, L.P., and the payments of dividends and payments 
                          on liquidation or redemption are guaranteed by Duquesne Light Company.
</TABLE> 
<PAGE>
 
                               TABLE OF CONTENTS


                                                                           Page
                                                                           ----
GLOSSARY
                                     PART I
ITEM 1. BUSINESS
 General                                                                      1
 Property, Plant & Equipment (PP&E)                                           2
 Employees                                                                    3
 Electric Utility Operations                                                  3
 Environmental Matters                                                        5
 Other                                                                        7
 Executive Officers of the Registrant                                         8

ITEM 2. PROPERTIES                                                            9

ITEM 3. LEGAL PROCEEDINGS                                                    10

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                  10


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
        AND RELATED SHAREHOLDER MATTERS                                      11

ITEM 6. SELECTED FINANCIAL DATA                                              11

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS

Results of Operations                                                        11
Liquidity and Capital Resources                                              14
Rate Matters                                                                 16
Year 2000                                                                    18

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK          19

ITEM 8.  REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS;
         CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA;
         SELECTED FINANCIAL DATA                                             20


                                     PART III

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE                                 46

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                  46

ITEM 11. EXECUTIVE COMPENSATION                                              46

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT      47

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                      47


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K     47

         SCHEDULE II     

         SIGNATURES      
<PAGE>
 
                               Glossary of Terms

Competitive Transition Charge (CTC) -- During the electric utility restructuring
from the traditional regulatory framework to customer choice, electric utilities
will have the opportunity to recover transition costs from customers through a
per kilowatt-hour charge.

Customer Choice -- The Pennsylvania Electricity Generation Customer Choice and
Competition Act (see "Rate Matters" on page 16) gives consumers the right to
contract for electricity at market prices from PUC-approved electric generation
suppliers.

Decommissioning Costs -- Decommissioning costs are expenses to be incurred in
connection with the entombment, decontamination, dismantling, removal and
disposal of structures, systems and components of a power plant that has
permanently ceased the production of electric energy.

Deferred Energy Costs -- In conjunction with the Energy Cost Rate Adjustment
Clause, Duquesne historically recorded deferred energy costs to offset
differences between actual energy costs and the level of energy costs currently
recovered from its rate-regulated electric utility customers.

Distribution/Transmission -- Duquesne's "electricity delivery" business segment.
Transmission is the flow of electricity from generating stations over high
voltage lines to substations where voltage is reduced. Distribution is the flow
of electricity over lower voltage facilities to the ultimate customer
(businesses and homes).

Divestiture -- The selling of major assets. Duquesne currently anticipates
divestiture of its generation assets through an auction and the power station
exchange.

Energy Cost Rate Adjustment Clause (ECR) -- Until May 29, 1998, Duquesne
historically recovered through the ECR, to the extent that such amounts were not
included in base rates, the cost of nuclear fuel, fossil fuel and purchased
power costs.

Federal Energy Regulatory Commission (FERC) -- The FERC is an independent
five-member commission within the United States Department of Energy. Among its
many responsibilities, the FERC sets rates and charges for the wholesale
transportation and sale of electricity. 

Market Power -- When one company owns a sufficiently large percentage of
generation, transmission, or distribution capabilities in a region allowing it
to set the market price of electricity. 

Obligation to Serve -- Under traditional regulation, the duty of a regulated
utility to provide service to all customers in its service territory on a
non-discriminatory basis.

Pennsylvania Public Utility Commission (PUC) -- The governmental body that
regulates all utilities (electric, gas, telephone, water, etc.) that do business
in Pennsylvania.

Power Station Exchange -- Duquesne and FirstEnergy Corporation have an agreement
to exchange ownership interests in certain power plants. (See "Rate Matters" on
page 16.)

Price to Compare -- Duquesne will provide a credit to a customer for the
PUC-determined market price of electric generation. Customers will experience
savings to the extent that they can purchase power at a lower price from an
alternative electric generation supplier than the amount of the credit. 

Provider of Last Resort -- The local distribution utility is required to provide
electricity for customers who cannot or do not choose an alternative generation
supplier, or whose supplier fails to deliver. (See "Rate Matters" on page 16.)

Rate Base -- The amount representing the value of assets approved by a
regulatory agency for recognition in the rates charged to rate-regulated
customers.

Regulatory Assets -- Historical ratemaking practices granted exclusive
geographic franchises in exchange for the obligation to serve all customers.
Under this system, certain prudently incurred costs were approved by the PUC and
the FERC for deferral and future recovery with a return from customers. These
deferred costs were capitalized as regulatory assets by the regulated utility.

Restructuring Plan -- Duquesne's plan, approved by the PUC, for restructuring
and recovery of transition costs under Pennsylvania's Customer Choice Act.

Stranded Costs -- Stranded costs are the net present value of a utility's known
or measurable costs related to electric generation that are not recoverable
through the CTC. 

Tariff -- Public schedules that detail a utility's rates, rules, service
territory and terms of service; tariffs are filed for official approval with a
regulatory agency. 

Transition Costs -- Transition costs are the net present value of a utility's
known or measurable costs related to electric generation that are recoverable
through the CTC. 

Watt -- A watt is the rate at which electricity is generated or consumed. A
kilowatt (KW) is equal to 1,000 watts. A kilowatt-hour (KWH) is a measure of the
quantity of electricity generated or consumed in one hour by one kilowatt of
power. A megawatt (MW) is 1,000 kilowatts or one million watts.
<PAGE>
 
                                     Part I

Item 1.  Business.

General
--------------------------------------------------------------------------------

     Part I of this Annual Report on Form 10-K (Report) should be read in
conjunction with Duquesne Light Company's audited consolidated financial
statements, which are set forth on pages 22 through 45 in Part IV of this
Report. Explanations of certain financial and operating terms used in this
Report are set forth in a GLOSSARY at the front of this Report.

     Duquesne Light Company (Duquesne) is a wholly owned subsidiary of DQE, Inc.
(DQE), a multi-utility delivery and services company. Duquesne is engaged in the
generation, transmission, distribution and sale of electric energy. Duquesne has
one wholly owned subsidiary, Monongahela Light and Power Company, which
currently holds energy-related investments.

     On December 18, 1998, the Pennsylvania Public Utility Commission (PUC)
approved Duquesne's plan to divest itself of its generation assets through an
auction (including an auction of its provider of last resort service), and an
agreement in principle to exchange certain power stations with FirstEnergy
Corporation (FirstEnergy). Final agreements governing these transactions must be
approved by various regulatory agencies. Duquesne currently expects these
transactions to close in late 1999 or early 2000. (See "Rate Matters" on page
16.)

Service Territory 

Duquesne provides electric service to customers in the City of
Pittsburgh and surrounding areas. (See "Rate Matters" on page 16.) This
territory represents approximately 800 square miles in southwestern
Pennsylvania. The population of the area served by Duquesne's electric utility
operations, based on 1990 census data, is approximately 1,510,000, of whom
370,000 reside in the City of Pittsburgh. In addition to serving approximately
580,000 direct customers, Duquesne also sells electricity to other utilities.

Regulation 

     Duquesne is subject to the accounting and reporting requirements of the
Securities and Exchange Commission (SEC). In addition, Duquesne's electric
utility operations are subject to regulation by the PUC, including regulation
under the Pennsylvania Electricity Generation Customer Choice and Competition
Act (Customer Choice Act), and the Federal Energy Regulatory Commission (FERC)
under the Federal Power Act with respect to rates for interstate sales,
transmission of electric power, accounting and other matters. (See "Rate
Matters" on page 16.)

     Duquesne's electric utility operations are also subject to regulation by
the Nuclear Regulatory Commission (NRC) under the Atomic Energy Act of 1954, as
amended, with respect to the operation of its jointly owned/leased nuclear power
plants, Beaver Valley Unit 1 (BV Unit 1), Beaver Valley Unit 2 (BV Unit 2) and
Perry Unit 1. 

     As a result of the PUC's May 29, 1998, final order regarding Duquesne's
restructuring plan under the Customer Choice Act (see "Rate Matters" on page
16), the electricity generation portion of Duquesne's business no longer meets
the criteria of Statement of Financial Accounting Standards (SFAS) No. 71,
Accounting for the Effects of Certain Types of Regulation (SFAS No. 71).
Accordingly, application of SFAS No. 71 to this portion of Duquesne's business
has been discontinued and Duquesne now applies SFAS No. 101, Regulated
Enterprises - Accounting for the Discontinuation of Application of FASB
Statement No. 71 (SFAS No. 101), as interpreted by Emerging Issues Task Force 
97-4, Deregulation of the Pricing of Electricity - Issues Related to the
Application of FASB Statements No. 71 and 101. Under SFAS No. 101, the
regulatory assets and liabilities of the generation portion of Duquesne are
determined on the basis of the source from which the regulated cash flows to
realize such regulatory assets and settle such liabilities will be derived.
Pursuant to the PUC's final restructuring order, certain of Duquesne's
generation-related regulatory assets will be recovered through a competitive
transition charge (CTC) collected in connection with providing transmission and
distribution services (the electricity delivery business segment). Duquesne will
continue to apply SFAS No. 71 with respect to such assets. Fixed assets related
to the generation portion of Duquesne's business have been evaluated in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
to Be Disposed Of (SFAS No. 121). Applying SFAS No. 121 to the non-regulated
generation assets, it has been determined that Duquesne's generation assets are
impaired. However, pursuant to the PUC's final restructuring order, Duquesne
will recover its above-market investment in generation assets through the CTC.
Under Duquesne's plan to auction its generation assets (currently expected to
close in late 1999 or early 2000), the market value utilized by the PUC in
determining the value of the generation assets will be the net after-tax
proceeds received from the auction. Accordingly, the amount of book value
authorized by the PUC to be recovered has been reclassified on the consolidated
balance sheet from property, plant and equipment to transition costs, until the
auction has been completed and all approvals for the final CTC accounting have
been granted. The electricity delivery business segment continues to meet SFAS
No. 71 criteria, and accordingly reflects regulatory assets and liabilities
consistent with cost-based ratemaking regulations. The regulatory assets
represent probable future revenue to Duquesne, because provisions for these
costs are currently included, or are expected to be included, in charges to
electric utility customers through the ratemaking process. (See "Rate Matters"
on page 16.)

                                       1
<PAGE>
 
Business Segments 

     Historically, Duquesne has been treated as a single integrated business
segment due to its regulated operating environment. The PUC authorized a
combined rate for supplying and delivering electricity to customers. This rate
was based on Duquesne's cost of service, which was designed to recover
Duquesne's operating expenses and investment in electric utility assets and to
provide a return on the investment. As a result of the Customer Choice Act,
generation of electricity will be deregulated and charged at a separate rate
from the delivery of electricity beginning in 1999 (five percent of customers
chose alternative generation suppliers in 1998). For the purposes of complying
with SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS No. 131), Duquesne is required to disclose information about
its business segments separately. Accordingly, Duquesne has used the
PUC-approved separate rates for 1999 to develop the financial information of the
business segments for the periods ended December 31, 1998, 1997 and 1996.
(Additional information regarding Duquesne's business segments is set forth in
"Results of Operations" on page 11 and "Business Segments and Related
Information," Note N to the consolidated financial statements, on page 43.)

PP&E and Related Accumulated Depreciation as of December 31,
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                      (Thousands of Dollars)
                                                1998                                                    1997
                           ---------------------------------------------------------------------------------------------------------

                                             Accumulated              Net                            Accumulated           Net
                           Investment        Depreciation         Investment        Investment       Depreciation       Investment
------------------------------------------------------------------------------------------------------------------------------------

<S>                        <C>               <C>                  <C>               <C>              <C>                <C>
Electric delivery          $1,531,116          $522,531           $1,008,585        $1,528,128          $517,654        $1,010,474
Electric production         2,797,800         2,491,162(a)           306,638         2,528,927         1,187,001         1,341,926
Electric general              130,431            64,544               65,887           334,565           192,439           142,126
Capital leases                123,374            63,604(a)            59,770           113,662            50,725            62,937
Other                           6,419                --                6,419             5,456                --             5,456
------------------------------------------------------------------------------------------------------------------------------------

        Total              $4,589,140        $3,141,841           $1,447,299        $4,510,738        $1,947,819        $2,562,919
====================================================================================================================================

</TABLE>
(a)  See "Restructuring Plan" discussion on page 16.

     Electric delivery PP&E includes: (1) high voltage transmission wires used
in delivering electricity from the generating stations to substations; (2)
substations and transformers; (3) lower voltage distribution wires used in
delivering electricity to customers; and (4) related poles and equipment.
Electric production PP&E includes fossil and nuclear generating stations and, in
1998, an allocated portion of electric general PP&E. This allocation was done in
conjunction with the PUC restructuring order. Electric production accumulated
depreciation in 1998 reflects the write-down of production plant values to the
PUC-determined market value. (See "Restructuring Plan" discussion on page 16.)
Electric general PP&E includes internal telecommunication equipment, vehicles
and office equipment. Duquesne's capital leases are primarily associated with
leased nuclear fuel and, to a lesser extent, other electric plant. Other PP&E is
comprised mostly of landfill gas recovery equipment.

Joint Interests in Generating Units 

     Duquesne has various contracts with subsidiaries of FirstEnergy (Ohio
Edison Company, Pennsylvania Power Company, The Cleveland Electric Illuminating
Company (CEI) and The Toledo Edison Company), with respect to several jointly
owned/leased generating units, which include provisions for coordinated
maintenance responsibilities, limited and qualified mutual back-up in the event
of outages, and certain capacity and energy transactions.


     In September 1995, Duquesne commenced arbitration against CEI, seeking
damages, termination of the operating agreement for Eastlake Unit 5 (Eastlake)
and partition of the parties' interests in Eastlake through a sale and division
of the proceeds. The arbitration demand alleged, among other things, the
improper allocation by CEI of fuel and related costs; the mismanagement of the
administration of the Saginaw coal contract in connection with the closing of
the Saginaw mine, which historically supplied coal to Eastlake; and the
concealment by CEI of material information. CEI also seeks monetary damages from
Duquesne for alleged unpaid joint costs in connection with the operation of
Eastlake. Duquesne removed the action to the United States District Court for
the Northern District of Ohio, Eastern Division, where it is now pending.
Pursuant to the agreement in principle regarding the power station exchange
between Duquesne and FirstEnergy, the parties jointly sought and received, on
October 26, 1998, a court order staying all proceedings pending execution of
definitive exchange agreements. The parties will now seek a further stay of
proceedings pending the closing of the exchange. (See "Power Station Exchange"
discussion on page 17.)

                                       2
<PAGE>
 
Joint Interests in Power Stations 
--------------------------------------------------------------------------------
Nuclear Power Stations                            Beaver Valley          
                                                ------------------       Perry
                                                Unit 1      Unit 2       Unit 1
--------------------------------------------------------------------------------
Duquesne                                      * 47.50%    * 13.74%(a)    13.74%
FirstEnergy                                     52.50%      86.26%     * 86.26%
--------------------------------------------------------------------------------
Fossil Power Stations                      Bruce Mansfield              
                         Sammis      -----------------------------      Eastlake
                         Unit 7      Unit 1     Unit 2      Unit 3       Unit 5
--------------------------------------------------------------------------------
Duquesne                 31.20%      29.30%      8.00%      13.74%       31.20%
FirstEnergy            * 68.80%    * 70.70%   * 92.00%    * 86.26%     * 68.80%
--------------------------------------------------------------------------------
*Denotes Operator
(a)  In 1987, Duquesne sold and leased back its 13.74 percent interest in BV
     Unit 2. Duquesne leased back its interest in the unit for a term of 29.5
     years.

Employees
--------------------------------------------------------------------------------
     At December 31, 1998, Duquesne had 3,361 employees: 1,521 in the
electricity generation business segment, 1,258 in the electricity delivery
business segment and 582 in administration. Duquesne is party to a labor
contract expiring in September 2001 with the International Brotherhood of
Electrical Workers (IBEW), which represents approximately 2,000 of Duquesne's
employees. The contract provides, among other things, employment security,
income protection and 3 percent annual wage increases through September 2000.
Duquesne and the IBEW have agreed on a package of additional benefits and
protections for union employees affected by the divestiture of generation
assets. Any buyer of generation assets currently owned by Duquesne will be
required to offer work to current IBEW employees on a seniority basis, recognize
the IBEW as the exclusive bargaining representative, establish comparable
employee benefit plans, and assume the current labor contract. 

     In connection with the anticipated divestiture, Duquesne has developed
early retirement programs and enhanced separation packages available for
eligible IBEW and management employees. Duquesne expects to recover related
costs through the divestiture proceeds.

Electric Utility Operations 
--------------------------------------------------------------------------------
     Duquesne anticipates divesting itself of its generation assets through the
auction and the power station exchange by early 2000 and, depending on the
regulatory approvals of the final agreements regarding the divestiture, expects
certain obligations related to the divested assets will be transferred to the
future owners. 

     Duquesne's fossil plants operated at an availability factor of 80 percent
in 1998 and 84 percent in 1997. Duquesne's nuclear plants operated at an
availability factor of 52 percent in 1998 and 68 percent in 1997. The next
refueling outage for BV Unit 1 is currently scheduled to begin in the spring of
2000. BV Unit 2 began a scheduled refueling outage on February 26, 1999. The
next refueling outage for Perry Unit 1 is scheduled to begin on March 27, 1999.
The timing and duration of scheduled maintenance and refueling outages, as well
as the duration of forced outages, affect the availability of power stations.
Duquesne normally experiences its peak demand in the summer. The 1998 customer
system peak demand of 2,484 megawatts (MW) occurred on August 7, 1998.

Beaver Valley Power Station (BVPS) 

     BV Unit 1 went off-line on January 30, 1998, due to an issue identified in
a technical review completed by Duquesne. BV Unit 2 went off-line on December
16, 1997, to repair the emergency air supply system to the control room. BV Unit
2 remained off-line due to other issues identified by a technical review,
similar to that performed at BV Unit 1. These technical reviews, held in
response to a 1997 commitment made by Duquesne to the NRC, have been completed.
Duquesne was one of many utilities faced with similar issues, some of which date
back to the initial start-up of BVPS. BV Unit 1 returned to service on August
15, 1998, and BV Unit 2 returned to service on September 28, 1998. 

     BVPS's two units are equipped with steam generators designed and built by
Westinghouse Electric Corporation (Westinghouse). Similar to other Westinghouse
nuclear plants, outside diameter stress corrosion cracking (ODSCC) has occurred
in the steam generator tubes of both units. The units still have the capability
to operate at 100 percent reactor power, although approximately 17 percent of BV
Unit 1 and 3 percent of BV Unit 2 steam generator tubes have been removed from
service. Material acceleration in the rate of ODSCC could lead to a loss in
plant efficiency and significant repairs or replacement of BV Unit 1 steam
generators. The total replacement cost of the BV Unit 1 steam generators is
estimated at $125 million, $59 million of which would be Duquesne's
responsibility. The earliest that the BV Unit 1 steam generators could be
replaced during a currently scheduled refueling outage is the fall of 2001. BV
Unit 2, which was placed in service 11 years after BV Unit 1, has not yet
exhibited the degree of ODSCC experienced at BV Unit 1. It is too early in the
life of BV Unit 2 to determine the extent to which ODSCC may become a problem at
that unit.


                                       3
<PAGE>
 
Fossil Fuel 

     Duquesne believes that sufficient coal for its coal-fired generating units
will be available from various sources to satisfy its requirements for the
foreseeable future. During 1998, approximately 2.0 million tons of coal were
consumed at Duquesne's two wholly owned coal-fired stations, Cheswick Power
Station (Cheswick) and Elrama Power Station (Elrama). 

     Duquesne owns Warwick Mine, an underground mine located in southwestern
Pennsylvania. At December 31, 1998, Duquesne's net investment in the mine was
$4.4 million. Duquesne estimates that, at December 31, 1998, its economically
recoverable coal reserves at Warwick Mine were in excess of 1.4 million tons.
Commencing in 1997, an unaffiliated operator began producing up to 360,000 tons
of coal per year, for exclusive use at Elrama. This arrangement terminates in
March 2000. Duquesne purchases the remaining coal for use at Elrama on the open
market. The current estimated liability for mine closing, including final site
reclamation, mine water treatment and certain labor liabilities is $47.6
million, and Duquesne has recorded a liability on the consolidated balance sheet
of approximately $39.9 million toward these costs. The remaining $7.7 million
will be charged to expense during 1999 and the first quarter of 2000. 

     During 1998, 48 percent of Duquesne's coal supplies were provided by
contracts, including Warwick Mine, with the remainder satisfied through
purchases on the spot market. Duquesne had three long-term contracts in effect
at December 31, 1998, that, in combination with spot market purchases, are
expected to furnish an adequate future coal supply. Duquesne does not anticipate
any difficulty in replacing or renewing these contracts as they expire from 2000
through 2005. At December 31, 1998, Duquesne's wholly owned generating units had
on hand an average coal supply of 45 days. 

Nuclear Fuel

     The cycle of production and utilization of nuclear fuel consists of (1)
mining and milling of uranium ore and processing the ore into uranium
concentrates, (2) converting uranium concentrates to uranium hexafluoride, (3)
enriching the uranium hexafluoride, (4) fabricating fuel assemblies, (5)
utilizing the nuclear fuel in the generating station reactor, and (6) storing
and disposing of spent fuel. 

     An adequate supply of uranium is under contract to meet Duquesne's
requirements for its jointly owned/leased nuclear units through 2000. An
adequate supply of conversion services through the year 2002 is also under
contract. Enrichment services for Duquesne's joint interests in BV Units 1 and 2
and Perry Unit 1 will be supplied through fiscal year 1999 under a United States
Enrichment Corporation (USEC) Utility Services contract. Duquesne has
terminated, at zero cost, all of its enrichment services requirements under this
contract for the fiscal years 2000 through 2009 and is planning to secure
required enrichment services during this period from other suppliers. Duquesne
continues to review on an annual basis its alternatives for enrichment services
for the years 2010 through 2014 under the USEC contract and may terminate these
future years if it can arrange more cost-effective enrichment services. Fuel
fabrication contracts are in place to supply reload requirements through 2005
and 2004 respectively, for BV Unit 1 and BV Unit 2, and for the life of plant
for Perry Unit 1. Duquesne will continue to make arrangements for future uranium
supply and related services, as required. (See "Nuclear Fuel Leasing" discussion
on page 15.)

Nuclear Decommissioning 

     Duquesne expects to decommission BV Unit 1, BV Unit 2 and Perry Unit 1 no
earlier than the expiration of each plant's operating license in 2016, 2027 and
2026, respectively. At the end of its operating life, BV Unit 1 may be placed in
safe storage until BV Unit 2 is ready to be decommissioned, at which time the
units may be decommissioned together. 

     Based on site-specific studies conducted in 1997 for BV Unit 1 and BV Unit
2, and a 1997 update of the 1994 study for Perry Unit 1, Duquesne's approximate
share of the total estimated decommissioning costs, including removal and
decontamination costs, is $170 million, $55 million and $90 million,
respectively. The amount currently being used to determine Duquesne's cost of
service related to decommissioning all three nuclear units is $224 million.

     Funding for nuclear decommissioning costs is deposited in external,
segregated trust accounts and invested in a portfolio of corporate common stock
and debt securities, municipal bonds, certificates of deposit and United States
government securities. The market value of the aggregate trust fund balances at
December 31, 1998, totaled approximately $62.7 million. 

     As part of the power station exchange, FirstEnergy has agreed to assume the
decommissioning liability for each of the nuclear plants in exchange for the
balance in the decommissioning trust funds, plus the decommissioning costs
expected to be collected through the CTC.


                                       4
<PAGE>
 
Nuclear Insurance

     The Price-Anderson Amendments to the Atomic Energy Act of 1954 limit public
liability from a single incident at a nuclear plant to $9.8 billion. The maximum
available private primary insurance of $200 million has been purchased by
Duquesne. Additional protection of $9.6 billion would be provided by an
assessment of up to $88.1 million per incident on each licensed nuclear unit in
the United States. Duquesne's maximum total possible assessment, $66.1 million,
which is based on its ownership or leasehold interests in three nuclear
generating units, would be limited to a maximum of $7.5 million per incident per
year. This assessment is subject to indexing for inflation and may be subject to
state premium taxes. If assessments from the nuclear industry prove insufficient
to pay claims, the United States Congress could impose other revenue-raising
measures on the industry. 

     Duquesne's share of insurance coverage for property damage, decommissioning
and decontamination liability is $1.2 billion. Duquesne would be responsible for
its share of any damages in excess of insurance coverage. In addition, if the
property damage reserves of Nuclear Electric Insurance Limited (NEIL), an
industry mutual insurance company that provides a portion of this coverage, are
inadequate to cover claims arising from an incident at any United States nuclear
site covered by that insurer, Duquesne could be assessed retrospective premiums
totaling a maximum of $7.3 million. 

     In addition, Duquesne participates in a NEIL program that provides
insurance for the increased cost of generation and/or purchased power resulting
from an accidental outage of a nuclear unit. Subject to the policy deductible,
terms and limit, the coverage provides for a weekly indemnity of the estimated
incremental costs during the three-year period starting 17 weeks after an
accident, with no coverage thereafter. If NEIL's losses for this program ever
exceed its reserves, Duquesne could be assessed retrospective premiums totaling
a maximum of $2.6 million. 

Spent Nuclear Fuel Disposal 

     The Nuclear Waste Policy Act of 1982 established a federal policy for
handling and disposing of spent nuclear fuel and a policy requiring the
establishment of a final repository to accept spent nuclear fuel. Electric
utility companies have entered into contracts with the United States Department
of Energy (DOE) for the permanent disposal of spent nuclear fuel and high-level
radioactive waste in compliance with this legislation. The DOE has indicated
that its repository under these contracts will not be available for acceptance
of spent nuclear fuel before 2010. The DOE has not yet established an interim or
permanent storage facility, despite a ruling by the United States Court of
Appeals for the District of Columbia Circuit that the DOE was legally obligated
to begin acceptance of spent nuclear fuel for disposal by January 31, 1998.
Existing on-site spent nuclear fuel storage capacities at BV Unit 1, BV Unit 2
and Perry Unit 1 are expected to be sufficient until 2018, 2012 and 2011,
respectively. 

     In early 1997, Duquesne joined 35 other electric utilities and 46 states,
state agencies and regulatory commissions in filing suit in the United States
Court of Appeals for the District of Columbia Circuit against the DOE. The
parties requested the court to suspend the utilities' payments into the Nuclear
Waste Fund and to place future payments into an escrow account until the DOE
fulfills its obligation to accept spent nuclear fuel. The DOE had requested that
the court delay litigation while it pursued alternative dispute resolution under
the terms of its contracts with the utilities. The court ruling, issued November
14, 1997, and affirmed on rehearing May 5, 1998, denied the relief requested by
the utilities and states and permitted the DOE to pursue alternative dispute
resolution, but prohibited the DOE from using its lack of a spent fuel
repository as a defense. The United States Supreme Court declined to review the
decision. The utilities' remaining remedy is to sue the DOE in federal court for
money damages caused by the DOE's delay in fulfilling its obligations.

Uranium Enrichment Obligations 

     Nuclear reactor licensees in the United States are assessed annually for
the decontamination and decommissioning of DOE uranium enrichment facilities.
Assessments are based on the amount of uranium a utility had processed for
enrichment prior to enactment of the National Energy Policy Act of 1992 and are
to be paid by such utilities over a 15-year period. At December 31, 1998,
Duquesne's liability for contributions was approximately $6.2 million (subject
to an inflation adjustment), which will be recovered through the CTC as part of
transition costs. 

Environmental Matters 
--------------------------------------------------------------------------------
     Various federal and state authorities regulate Duquesne with respect to air
and water quality and other environmental matters. Duquesne believes it is in
current compliance with all material applicable environmental regulations. As
discussed above, Duquesne anticipates divesting itself of its generation assets,
and expects that environmental obligations related to divested assets will
transfer to the new owners. 

     As required by Title V of the Clean Air Act Amendments (Clean Air Act),
Duquesne filed comprehensive air operating permit applications for Cheswick,
Elrama, BI and Phillips in 1995. Approval is still pending for these
applications. Duquesne filed its Title IV Phase II Clean Air Act compliance plan
with the PUC on December 27, 1995. Duquesne also filed Title IV Phase II permit
applications for oxides of nitrogen (NOX) emissions from Cheswick, Elrama and
Phillips with the Allegheny County Health Department and the Pennsylvania
Department of Environmental Protection (DEP) on December 23, 1997. Approval is
also pending for these applications. 


                                       5
<PAGE>
 
     Acid Rain Program Requirements. Although Duquesne believes it has satisfied
all of the Phase I Acid Rain Program requirements of the Clean Air Act, the
Phase II Acid Rain Program requires significant additional reductions of sulfur
dioxide (SO2) through the end of 2000. Duquesne currently has 662 MW of nuclear
capacity and 887 MW of coal capacity equipped with SO2 emission-reducing
equipment. Through the year 2000, Duquesne will implement a combination of
compliance methods that include fuel switching; increased use of, and
improvements in, SO2 emission-reducing equipment; and the purchase of emission
allowances for those remaining stations where it is anticipated that emissions
will exceed allocated SO2 allowances. 

     Duquesne has developed, patented and installed low NOX burner technology
for the Elrama boilers. These cost-effective NOX reduction systems installed on
the Elrama roof-fired boilers were specified as the benchmark for the industry
for this class of boilers in the Environmental Protection Agency's (EPA) final
Group II rulemaking. In 1998, Duquesne installed low-cost burner modifications
to existing low NOX burner technology and a new flue gas conditioning system to
maximize the effects of combustion-related controls at Cheswick.

     Ozone Reduction Requirements. In addition to the Phase II Acid Rain Program
requirements, Duquesne is responsible for NOX reduction requirements to meet the
current Ozone Ambient Air Quality Standards under Title I of the Clean Air Act.
Compliance with the current ozone standard is based on pre-1997 ozone data,
using a one-hour average value approach. During the 1998 summer ozone season,
the western Pennsylvania "area" achieved compliance with the one-hour ozone
standard. Duquesne believes it will continue its current low NOX emission levels
under the maintenance plan being established by the DEP. Duquesne further
believes it will be able to meet any additional NOX reduction levels specified
under the maintenance plan, through reductions required in 1999 under the Ozone
Transport Commission control program described below.

     In September 1998, the EPA issued additional ozone-related NOX reduction
requirements under the Clean Air Act, which will affect Duquesne's power plants
and will supersede reduction levels specified for 2003 by the Ozone Transport
Commission control program. The EPA requires states in the northeast and midwest
to amend their implementation plans to impose NOX allowance caps on emissions
during the May to September control period. Because the DEP has only recently
proposed implementation regulations, the costs of compliance cannot be
determined by Duquesne at this time. However, Duquesne anticipates that
compliance would require additional capital and operation costs beyond those
already estimated through 2000. 

     Future Air Quality Requirements. Duquesne is closely monitoring other
future air quality programs and air emission control requirements that could
result from more stringent ambient air quality and emission standards for SO2
and NOX particulates and other by-products of coal combustion. In 1997, the DEP
finalized a regulation to implement additional NOX control requirements that
were recommended by the Ozone Transport Commission. The estimated costs to
comply with this program have been included in Duquesne's capital cost estimates
through the year 2000. Duquesne currently estimates that additional capital
costs to comply with the Clean Air Act requirements through the year 2000 will
be approximately $5 million. These capital costs may be reduced by short term
optimization of NOX reduction systems and the purchase of NOX emission
allowances.

     In July 1997, the EPA announced new national ambient air quality standards
for ozone and fine particulate matter. To allow each state time to determine
which areas may not meet the standards, and to adopt control strategies to
achieve compliance, the ozone standards will not be implemented until 2004, and
the fine particulate matter standards will not be implemented until 2007 or
later. Because appropriate state ambient air monitoring and implementation plans
have not been developed, the costs of compliance with these new standards cannot
be determined by Duquesne at this time. 

     In December 1997, more than 160 nations reached a preliminary agreement
(Kyoto Protocol), under which, among other things, the United States would be
required to reduce its greenhouse gas emissions during the years 2008 through
2012. The Kyoto Protocol has been signed by the Clinton administration. However,
until the Kyoto Protocol has been ratified by the Senate and the related
greenhouse gas reduction programs have been developed, the costs of compliance
cannot be determined by Duquesne at this time. 

     Other. In 1992, the DEP issued Residual Waste Management Regulations
governing the generation and management of non-hazardous residual waste, such as
coal ash. Duquesne is assessing the sites it utilizes and has developed
compliance strategies that are currently under review by the DEP. Capital costs
of $3.8 million were incurred by Duquesne in 1998 to comply with these DEP
regulations. Based on information currently available, approximately $4.5
million will be spent in 1999. The additional capital cost of compliance is
estimated, based on current information, to be approximately $4.8 million per
year for the next three years. This estimate is subject to the results of
groundwater assessments and DEP final approval of compliance plans.

     Under the Emergency Planning and Community Right-to-Know Act of 1986,
certain manufacturing and industrial companies are required to file annual toxic
release inventory reports. The first submission by coal- and oil-fired electric
utility generating stations is due July 1, 1999, to report on emissions and
discharges for 1998. Toxic release inventory reporting does not involve emission
reductions. Duquesne does not anticipate any material impact resulting from this
requirement.

                                       6
<PAGE>
 
     Duquesne is involved in various other environmental matters. Duquesne
believes that such matters, in total, will not have a materially adverse effect
on its financial position, results of operations or cash flows. 

Other 
--------------------------------------------------------------------------------
Customer Advanced Reliability System 

     The Customer Advanced Reliability System (CARS) is a communications service
that provides Duquesne with an electronic link to its customers, including the
ability to read customer meters. During 1998, Duquesne's service contract with
Itron, Inc. was expanded to include additional advanced commercial and
industrial customer metering capabilities and associated software. Installation
of this advanced metering subsystem commenced in 1998 and will continue during
1999. As of December 31, 1998, the base CARS system had essentially been
completed, with nearly all residential meters adapted for CARS, and
approximately 470,000 meters being read daily. 

Retirement Plan Measurement Assumptions

     Duquesne decreased the discount rate used to determine the projected
benefit obligation on Duquesne's retirement plans at December 31, 1998, to 6.5
percent. The assumed change in compensation levels and the assumed rate of
return on plan assets were also decreased to reflect current market and economic
conditions. The effects of these changes on Duquesne's retirement plan
obligations are reflected in the amounts shown in "Employee Benefits," Note M to
the consolidated financial statements, on page 41. The resulting change in
related expenses for subsequent years is not expected to be material. 

Recent Accounting Pronouncement 

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133).
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
The adoption of SFAS No. 133 is not expected to have a significant impact on
Duquesne's financial statements and disclosures.

                       ----------------------------------

     Except for historical information contained herein, the matters discussed
in this Annual Report on Form 10-K are forward-looking statements which involve
risks and uncertainties including, but not limited to, economic, competitive,
governmental and technological factors affecting Duquesne's operations, markets,
products, services and prices and other factors discussed in Duquesne's filings
with the Securities and Exchange Commission.


                                       7
<PAGE>
 
Executive Officers of the Registrant
--------------------------------------------------------------------------------

     Set forth below are the names, ages as of March 10, 1999, positions and
brief accounts of the business experience during the past five years of the
executive officers of Duquesne.

<TABLE>
<CAPTION>

      Name              Age                           Office
<S>                     <C>     <C>
David D. Marshall       46      President and Chief Executive Officer since August 1996.
                                 President and Chief Operating Officer from February
                                 1995 to August 1996. Executive Vice President from
                                 February 1992 to February 1995.

James E. Cross          52      President, Generation Group since September 1996.
                                 Senior Vice President - Nuclear from February 1995 to                                           
                                 September 1996. Vice President - Nuclear from 
                                 September 1994 to February 1995. Formerly Vice 
                                 President, Thermal Operations, and Chief Nuclear
                                 Officer of Portland General Electric from May 1993
                                 to September 1994.

Victor A. Roque         52      Senior Vice President since November 1998 and General 
                                 Counsel since November 1994. Vice President from 
                                 April 1995 to November 1998. Previously Vice President,
                                 General Counsel and Secretary for Orange and
                                 Rockland Utilities from April 1989 to November 1994.

Gary L. Schwass         53      Senior Vice President since February 1995 and 
                                 Chief Financial Officer since July 1989. Vice President -
                                 Finance and Principal Financial Officer from May 1988 to
                                 February 1995.

Gary R. Brandenberger   61      Vice President and Assistant to the President since January
                                 1999. Vice President - Customer Operations from May 1997 
                                 to December 1998. Vice President - Power Supply from August 
                                 1986 to May 1997.

William J. DeLeo        48      Vice President - Corporate Services since November 1998. 
                                 Vice President - Marketing and Corporate Performance
                                 from April 1995 to November 1998. Vice President -  Corporate
                                 Performance and Information Services from January 1991 to
                                 April 1995.

Edward N. Neal          52      Vice President - Customer Operations since January 1999. 
                                 Assistant General Manager - System Reliability from 
                                 September 1996 to January 1999. Assistant General 
                                 Manager - Customer Operations from May 1995 to 
                                 September 1996. Manager - Construction, Maintenance 
                                 and Engineering from May 1994 to May 1995. Manager -
                                 Substations Department from March 1990 to May 1994. 

Morgan K. O'Brien       38      Vice President - Finance since November 1998. Vice 
                                 President from October 1997 to November 1998 and 
                                 Controller and Principal Accounting Officer from
                                 October 1995 to November 1998. Assistant Controller                             
                                 from December 1993 to October 1995. 

</TABLE>

                                       8
<PAGE>
 
Item 2. Properties.

     Duquesne's properties consist of electric generating stations, transmission
and distribution facilities, and supplemental properties and appurtenances,
comprising as a whole an integrated electric utility system, located
substantially in Allegheny and Beaver counties in southwestern Pennsylvania.
Substantially all of Duquesne's electric utility properties are subject to a
first mortgage lien.

     Duquesne owns all or a portion of the following generating units except
Beaver Valley Unit 2, which is leased. These units are used in the electricity
generation business segment. Duquesne anticipates divesting itself of these
units through the auction and the power station exchange by early 2000. (See
"Restructuring Plan" discussion on page 16.)

<TABLE>
<CAPTION>

                                                            Duquesne's
                                                             Share of              Plant Output
                                                             Capacity               Year Ended
                                                            (Megawatts)          December 31, 1998
   Name and Location              Type                Summer            Winter    (Megawatt-hours)
   -----------------              ----                ------            ------    ----------------
<S>                               <C>                 <C>               <C>      <C>
Cheswick                          Coal                  562               570         2,294,365
        Springdale, Pa 
Elrama                            Coal                  474               487         2,326,506
        Elrama, Pa 
Sammis Unit 7 (1)                 Coal                  187               187         1,363,910
        Stratton, Ohio
Eastlake Unit 5 (1)               Coal                  186               186           989,035
        Eastlake, Ohio
Beaver Valley Unit 1 (1)          Nuclear               385               385         1,328,159
        Shippingport, Pa 
Beaver Valley Unit 2 (1)          Nuclear               113               113           244,879
        Shippingport, Pa 
Perry Unit 1 (1)                  Nuclear               161               164         1,400,345
        North Perry, Ohio
Bruce Mansfield Unit 1 (1)        Coal                  228               228         1,344,605
        Shippingport, Pa 
Bruce Mansfield Unit 2 (1)        Coal                   62                62           287,293
        Shippingport, Pa 
Bruce Mansfield Unit 3 (1)        Coal                  110               110           604,720
        Shippingport, Pa 
Brunot Island                     Oil                   166               178             5,740
        Brunot Island, Pa 
                                                      -----             -----        ----------
Total                                                 2,634             2,670        12,189,557
                                                     ======             =====        ==========

</TABLE>

(1)  Amounts represent Duquesne's share of the unit which is owned by Duquesne
     in common with one or more other electric utilities (or, in the case of
     Beaver Valley Unit 2, leased by Duquesne).

     Duquesne owns 24 transmission substations (including interests in common in
the step-up transformers at Sammis Unit 7; Eastlake Unit 5; Bruce Mansfield Unit
1; Beaver Valley Unit 1; Beaver Valley Unit 2; Perry Unit 1; Bruce Mansfield
Unit 2; and Bruce Mansfield Unit 3) and 562 distribution substations. Duquesne
has 714 circuit-miles of transmission lines, comprising 345,000, 138,000 and
69,000 volt lines. Street lighting and distribution circuits of 23,000 volts and
less include approximately 50,000 miles of lines and cable. These facilities are
used in the electricity delivery business segment.

     Duquesne owns the Warwick Mine, including 4,849 acres owned in fee of
unmined coal lands and mining rights, located on the Monongahela River in Greene
County, Pennsylvania. (See "Fossil Fuel" discussion on page 4.) This property is
used in the electricity generation business segment.

     Additional information relating to properties is set forth in Note C,
"Property, Plant and Equipment," of the consolidated financial statements on
page 28. The information is incorporated here by reference. 


                                       9
<PAGE>
 
Item 3.   Legal Proceedings.

Eastlake Unit 5

     In September 1995, Duquesne commenced arbitration against CEI, seeking
damages, termination of the operating agreement for Eastlake and partition of
the parties' interests in Eastlake through a sale and division of the proceeds.
The arbitration demand alleged, among other things, the improper allocation by
CEI of fuel and related costs; the mismanagement of the administration of the
Saginaw coal contract in connection with the closing of the Saginaw mine, which
historically supplied coal to Eastlake; and the concealment by CEI of material
information. CEI also seeks monetary damages from Duquesne for alleged unpaid
joint costs in connection with the operation of Eastlake. Duquesne removed the
action to the United States District Court for the Northern District of Ohio,
Eastern Division, where it is now pending. Pursuant to the agreement in
principle regarding the power station exchange between Duquesne and FirstEnergy,
the parties jointly sought and received, on October 26, 1998, a court order
staying all proceedings pending execution of definitive exchange agreements. The
parties will now seek a further stay of proceedings pending the closing of the
exchange. (See "Power Station Exchange" discussion on page 17.) 

Termination of the AYE Merger

     On October 5, 1998, DQE announced its unilateral termination of the merger
agreement with AYE. More information regarding this termination is set forth in
Duquesne's Current Report on Form 8-K dated October 5, 1998. AYE promptly filed
suit in the United States District Court for the Western District of
Pennsylvania, seeking to compel DQE to proceed with the merger and seeking a
temporary restraining order and preliminary injunction to prevent DQE from
certain actions pending a trial, or in the alternative seeking an unspecified
amount of money damages. On October 28, 1998, the judge denied AYE's motion for
the temporary restraining order and preliminary injunction. AYE appealed to the
United States Court of Appeals for the Third Circuit, asking for an injunction
pending the appeal and expedited treatment of the appeal. On November 6, 1998,
the Third Circuit denied the motion for an injunction and granted the motion to
expedite the appeal. 

     On March 11, 1999, the Third Circuit vacated the October 28 denial of a
preliminary injunction. The Third Circuit remanded the case to the District
Court for further proceedings to address certain issues, including whether AYE
could demonstrate a reasonable likelihood of success on the merits, before
determining whether any injunctive relief is warranted. On March 12, 1999, AYE
filed a motion for a temporary restraining order with the district court, and a
hearing was held that same day. On March 16, 1999, AYE and DQE entered into a
consent agreement, which was approved by the district court on March 18.
Pursuant to the consent agreement, AYE and DQE have agreed, among other things,
that pending the consolidated hearing on AYE's application for a preliminary
injunction and/or an expedited trial on the merits, both parties will give each
other 10 business days' notice before taking or omitting to take any action
which would prevent the merger from qualifying for "pooling of interests"
accounting treatment. This would not prevent either party from entering into any
agreement, but would require the 10 business days' notice prior to closing any
transaction which prevents pooling. The consent agreement shall terminate on
September 16, 1999, unless earlier terminated or extended by mutual agreement or
an order of the district court.

     DQE continues to believe that AYE's claim is entirely without merit in
light of the $1 billion disallowance of its stranded costs, which constituted a
material adverse effect under the merger agreement and entitled DQE to terminate
it as of October 5, 1998. DQE will continue to defend itself vigorously against
AYE's claims and intends to pursue a prompt resolution of the litigation. On
March 25, 1999, DQE petitioned the Third Circuit for rehearing. The ultimate
outcome of this suit cannot be determined at this time.

     Proceedings involving Duquesne's rates are reported in Item 7 under "Rate
Matters."


Item 4.   Submission of Matters to a Vote Of Security Holders.

     Not applicable.

                                       10
<PAGE>
 
                                    Part II


Item 5.   Market for Registrant's Common Equity and Related Shareholder Matters.

     Duquesne's common stock is not publicly traded. Effective July 7, 1989,
Duquesne became a wholly owned subsidiary of DQE, the holding company formed as
part of a shareholder-approved restructuring. As a result of the restructuring,
Duquesne's shareholders received DQE common stock in exchange for their shares
of Duquesne common stock, which were cancelled. DQE owns all of Duquesne's
outstanding common stock, which consists of 10 shares. As such, this item is not
applicable to Duquesne because all its common equity is held solely by DQE.
During 1998 and 1997, Duquesne declared quarterly dividends on its common stock
totaling $207 million and $129 million, respectively.


Item 6.   Selected Financial Data.

     Selected financial data for Duquesne for each of the six years in the
period ended December 31, 1998, are set forth on page 46. The financial data is
incorporated here by reference.


Item 7.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations.

Results of Operations
--------------------------------------------------------------------------------
Overall Performance

1998 Compared to 1997

     On May 29, 1998, the PUC issued its final order related to Duquesne's
restructuring plan. In the second quarter of 1998 Duquesne recorded an
extraordinary charge (Pennsylvania restructuring charge) against earnings for
$142.3 million ($82.5 million net of tax) for the generation-related stranded
costs not considered by the PUC's restructuring order to be recoverable from
customers. The Pennsylvania restructuring charge included Phillips Power Station
(Phillips), Brunot Island Power Station (BI), deferred caretaker costs related
to the two stations and deferred coal costs. (See "Rate Matters" on page 16.)

     Duquesne's earnings available for common stock were $144.5 million in 1998,
excluding the Pennsylvania restructuring charge, compared to $137.8 million in
1997, resulting in an increase of $6.7 million or 4.9 percent. The increase in
earnings available for common stock is due in part to reduced depreciation in
accordance with the PUC's restructuring order as well as a decrease in financing
costs. Partially offsetting these increases in earnings were higher energy costs
from purchasing additional power at higher prices due to increased nuclear
station outages during the year. 

1997 Compared to 1996 

     Duquesne's earnings for common stock were $137.8 million in 1997 compared
to $145.8 million in 1996, a decrease of $8.0 million or 5.5 percent. The
decrease is the result of increased depreciation and amortization related to
Duquesne's mitigation of fixed generation costs as well as a full year's
dividend requirement on the Monthly Income Preferred Securities (MIPS) issued in
May 1996. Partially offsetting these decreases in earnings were increased
long-term investment income, reduced interest costs and reduced income tax
expense. 

Results of Business Segments

     Beginning in 1999, Duquesne will have two principal business segments: (1)
the transmission and distribution of electricity (electricity delivery business
segment) and (2) the generation of electricity and collection of the CTC
(electricity generation business segment). To comply with SFAS No. 131, Duquesne
has reported the results for 1998, 1997 and 1996 by these business segments and
an "all other" category. The all other category includes Duquesne investments in
leasing and gas reserve transactions. Upon the anticipated completion of the
auction of Duquesne's generation assets and provider of last resort services,
the electricity generation business segment will be comprised solely of the
collection of the CTC. 

1998 Compared to 1997 

     Electricity Delivery Business Segment. The electricity delivery business
segment contributed $57.2 million to net income in 1998 compared to $61.9
million in 1997, a decrease of $4.7 million or 7.7 percent. Operating revenues
for this business segment are primarily derived from Duquesne's delivery of
electricity.

                                       11
<PAGE>
 
     Sales to residential and commercial customers are influenced by weather
conditions. Warmer summer and colder winter seasons lead to increased customer
use of electricity for cooling and heating. Commercial sales are also affected
by regional development. Sales to industrial customers are influenced by
national and global economic conditions.

     Operating revenues increased by $4.5 million or 1.4 percent compared to
1997 due to an increase in sales to electric utility customers of 1.0 percent in
1998. Residential and commercial sales increased as a result of warmer summer
temperatures during 1998 compared to 1997. Industrial sales decreased primarily
due to a reduction in electricity consumption by steel manufacturers, which
experienced a decline in demand. The following table sets forth kilowatt-hours
(KWH) delivered to electric utility customers.

--------------------------------------------------------------------------------
                                                        KWH Delivered
                                         ---------------------------------------
                                                       (In Thousands)
                                         ---------------------------------------
                                            1998            1997          Change
--------------------------------------------------------------------------------
Residential                               3,382,323       3,273,532        3.3%
Commercial                                5,896,036       5,785,745        1.9%
Industrial                                3,411,648       3,501,107       (2.6)%
---------------------------------------------------------------------
  Sales to Electric Utility Customers    12,690,007      12,560,384        1.0%
================================================================================

     Operating expenses for the electricity delivery business segment are
primarily made up of costs to operate and maintain the transmission and
distribution system; meter reading and billing costs; customer service;
collection; administrative expenses; and income taxes. Operating expenses
increased $5.9 million or 3.3 percent from 1997, primarily as a result of higher
costs of maintenance of the transmission and distribution system, and start-up
costs related to the Customer Advanced Reliability System, including electronic
meter reading and installation. The increase in the system maintenance was
primarily due to the increase in frequency and severity of storms during 1998.

     Depreciation and amortization expense increased $2.2 million or 4.8 percent
in 1998 due to additions to the plant and equipment balance throughout the year
partially offset by retirements. 

     Other income is primarily comprised of interest and dividend income. A
decrease of $2.2 million or 39.0 percent was the result of lower interest income
from a smaller amount of cash available for investing compared to the prior
year.

     Interest and other charges include interest on long-term debt, other
interest and preferred stock dividends of Duquesne. In 1998, there was $0.9
million or 2.3 percent less in interest and other charges compared to 1997. The
decrease was the result of the refinancing of long-term debt at lower interest
rates and the maturity of approximately $75 million of long-term debt during
1998. 

     Electricity Generation Business Segment. In 1998, the electricity
generation business segment reported net income of $71.9 million, excluding the
Pennsylvania restructuring charge, compared to $60.5 million in 1997, an
increase of $11.4 million or 18.8 percent. 

     For the electricity generation business segment, operating revenues are
primarily derived from Duquesne's supply of electricity for delivery to retail
customers and the supply of electricity to wholesale customers. Beginning in
1999, revenues will include the recovery of transition costs through the
collection of the CTC. Under prior fuel cost recovery provisions, fuel revenues
generally equaled fuel expense, as costs were recoverable from customers through
the Energy Cost Rate Adjustment Clause (ECR), including the fuel component of
purchased power, and did not affect net income. Beginning May 29, 1998 (the date
of the PUC's final restructuring order), fuel costs were expensed as incurred,
and had an impact on net income to the extent fuel costs exceeded amounts
included in Duquesne's authorized generation rates. (See "Rate Matters" on page
16.)

     Energy requirements for residential and commercial customers are influenced
by weather conditions. Warmer summer and colder winter seasons lead to increased
customer use of electricity for cooling and heating. Commercial energy
requirements are also affected by regional development. Energy requirements for
industrial customers are influenced by national and global economic conditions.

     Short-term sales to other utilities are made at market rates. Fluctuations
in electricity sales to other utilities are related to Duquesne's customer
energy requirements, the energy market and transmission conditions and the
availability of Duquesne's generating stations. Future levels of short-term
sales to other utilities will be affected by market rates, the level of
participation in customer choice, Duquesne's decision to sell 600 MW to licensed
generation suppliers and Duquesne's divestiture of its generation assets. (See
"Rate Matters" on page 16.) 

     Operating revenues decreased by $3.7 million or 0.4 percent compared to
1997. The decrease in revenues can be attributed to a decrease in energy
supplied to electric utility customers due to participation in the customer
choice pilot program, and a decrease in energy costs that were recovered through
the ECR. Partially offsetting these decreases were increased energy supplied to
other utilities of 32.2 percent in 1998, due to higher demand from other
utilities and increased capacity available to sell as a result of participation
in the customer choice pilot program. The following table sets forth KWH
supplied for customers who have not chosen an alternative generation supplier.

                                       12
<PAGE>
 
--------------------------------------------------------------------------------
                                                      KWH Supplied
                                         ---------------------------------------
                                                     (In Thousands)
                                         ---------------------------------------
                                            1998          1997         Change
--------------------------------------------------------------------------------
Residential                               3,190,451     3,267,941      (2.4)%
Commercial                                5,579,888     5,777,750      (3.4)%
Industrial                                3,357,371     3,499,699      (4.1)%
-------------------------------------------------------------------
  Sales to Electric Utility Customers    12,127,710    12,545,390      (3.3)%
-------------------------------------------------------------------
Sales to Other Utilities                  1,909,342     1,444,822      32.2%
-------------------------------------------------------------------
  Total Sales                            14,037,052    13,990,212       0.3%
================================================================================

     Operating expenses for the electricity generation business segment are
primarily made up of energy costs; costs to operate and maintain the power
stations; administrative expenses; and income taxes.

     Fluctuations in energy costs generally result from changes in the cost of
fuel, the mix between coal and nuclear generation, total KWH supplied, and
generating station availability. Because of the ECR, changes in fuel and
purchased power costs did not impact earnings for the first five months of 1998
or any of 1997 or 1996. Beginning May 29, 1998, fuel costs for customers were
expensed as incurred, and had an impact on net income to the extent fuel costs
exceeded amounts included in Duquesne's authorized generation rates. (See "Rate
Matters" on page 16.)

     Operating expenses increased $24.7 million or 4.4 percent from 1997 as a
result of increased energy costs, partially offset by decreased maintenance
costs and reduced BV Unit 2 lease costs due to the PUC's final restructuring
order. 

     In 1998, fuel and purchased power expense increased by $39.1 million or
17.5 percent compared to 1997. This increase was the result of increased energy
costs due to an unfavorable power supply mix and higher purchased power prices.
Reduced availability of nuclear generating stations due to an increase in outage
hours required Duquesne to purchase power and generate power from the higher
fuel cost fossil stations. (See "Beaver Valley Power Station" discussion on page
3.) 

     Maintenance expense decreased in 1998, primarily related to the reversal of
fossil station maintenance outage accruals for outages scheduled after
Duquesne's planned divestiture of generation. (See "Rate Matters" on page 16.) A
reduction in nuclear station outage cost amortization in 1998 also contributed
to the decrease in maintenance expense.

     Depreciation and amortization expense includes the depreciation of the
power stations' plant and equipment and accrued nuclear decommissioning costs. A
decrease of $32.8 million or 17.2 percent compared to 1997 was the result of
reduced depreciation of generation assets in accordance with the PUC's final
restructuring order. Beginning in 1999, Duquesne will be recovering its $2,133
million ($1,485 million, net of tax) of transition costs, as may be adjusted to
account for the proceeds of the generation asset auction, through the CTC and
will reflect amortization expense related to this recovery. 

     Interest and other charges include interest on long-term debt, other
interest and preferred stock dividends of Duquesne. In 1998 there was a $5.2
million or 8.1 percent reduction in interest and other charges compared to 1997.
The decrease reflected the refinancing of long-term debt at lower interest rates
and the maturity of approximately $75 million of long-term debt during 1998. 

     All Other. The all other category is comprised of earnings from leasing and
gas reserves investments. The all other category contributed $15.5 million to
net income in 1998 compared to $15.4 million in 1997, an increase of $0.1
million or 0.9 percent. The increase can be attributed to an increase in other
income due to an investment made in the fourth quarter of 1997. 

1997 Compared to 1996 

     Electricity Delivery Business Segment. The electricity delivery business
segment contributed $61.9 million to net income in 1997 compared to $56.6
million in 1996, an increase of $5.3 million or 9.4 percent. 

     Operating revenues increased by $8.1 million or 2.6 percent compared to
1996, due to an increase in sales to electric utility customers of 1.1 percent
in 1997 and a settlement for pole rental revenue in 1997. Sales to electric
utility customers increased despite 1997's mild temperatures compared to 1996
primarily as a result of stronger industrial sales. The following table sets
forth KWH delivered for electric utility customers.

--------------------------------------------------------------------------------
                                                     KWH Delivered
                                         ---------------------------------------
                                                     (In Thousands)
                                         ---------------------------------------
                                            1997          1996        Change
Residential                               3,273,532     3,320,870     (1.4)%
Commercial                                5,785,745     5,820,585     (0.6)%
Industrial                                3,501,107     3,284,986      6.6%
-------------------------------------------------------------------
  Sales to Electric Utility Customers    12,560,384    12,426,441      1.1%
================================================================================

                                       13
<PAGE>
 
     Operating expenses increased $4.7 million or 2.7 percent from 1996, as a
result of increases in operating and maintenance costs of the transmission and
distribution system.

     Other income increased $3.2 million or 133.9 percent as the result of
higher interest income from a larger amount of cash available for investing
compared to 1996. 

     In 1997, there was a $1.4 million or 3.8 percent increase in interest and
other charges compared to 1996. This increase was the result of paying a full
year of dividends in 1997 related to the MIPS issued in May 1996. 

     Electricity Generation Business Segment. In 1997, the electricity
generation business segment reported net income of $60.5 million compared to
$77.6 million in 1996, a decrease of $17.0 million or 22.0 percent. 

     Operating revenues decreased by $19.6 million or 2.2 percent compared to
1996, due to a decrease in energy supplied to other utilities of 56.4 percent in
1997. This decrease was due to reduced availability resulting from the sale of
the Ft. Martin Power Station in the fourth quarter of 1996 and increased forced
outages. Partially offsetting the decrease in energy supplied to other utilities
was a $3.2 million increase related to charges to the other BVPS owners for
administrative costs. The following table sets forth KWH supplied for customers
who have not chosen an alternative generation supplier.

--------------------------------------------------------------------------------
                                                      KWH Supplied
                                         ---------------------------------------
                                                     (In Thousands)
                                         ---------------------------------------
                                            1997          1996         Change
--------------------------------------------------------------------------------
Residential                               3,267,941     3,320,870      (1.6)%
Commercial                                5,777,750     5,820,585      (0.7)%
Industrial                                3,499,699     3,284,986       6.5%
-------------------------------------------------------------------
  Sales to Electric Utility Customers    12,545,390    12,426,441       1.0%
-------------------------------------------------------------------
Sales to Other Utilities                  1,444,822     3,310,206     (56.4)%
-------------------------------------------------------------------
  Total Sales                            13,990,212    15,736,647     (11.1)%
================================================================================

     Operating expenses decreased $20.7 million or 3.6 percent from 1996, as a
result of decreased energy volume supplied, partially offset by increased
maintenance costs. 

     In 1997, fuel and purchased power expense decreased by $13.5 million or 5.7
percent compared to 1996, as a result of an 11.1 percent reduction in energy
volume supplied. This $26.7 million decrease due to energy volume supplied was
partially offset by increased energy costs of $13.2 million, primarily the
result of purchased power prices. Reduced availability of generating stations
due to an increase in outage hours forced Duquesne to purchase power during high
demand periods, resulting in increased costs. 

     Maintenance expense increased in 1997 compared to 1996. The increase was
due to more forced outage hours at nuclear stations than during 1996. 

     An increase in depreciation and amortization expense of $19.1 million or
11.1 percent over 1996 was due to the May 1, 1996, increase in Duquesne's
nuclear generation plant depreciation rate, resulting in higher depreciation for
the first four months of 1997. In addition, accelerated nuclear lease recovery,
which began on May 1, 1997, resulted in higher annualized amortization expense
of $25 million. Offsetting these increases by $8.5 million was the mid-1996
completion of the recovery of the investment in Perry Unit 2, the construction
of which was abandoned by Duquesne in 1986. The remaining increase can be
attributed to incremental depreciation for 1997 fixed asset additions and an
increased level of nuclear decommissioning cost recognition.

     Other income increased $1.4 million or 14.1 percent and was the result of
higher interest income, due to a larger amount of cash available for investing
compared to the prior year. 

     In 1997 there was a $0.4 million or 0.7 percent increase in interest and
other charges compared to 1996. The increase was the result of paying a full
year of dividends in 1997 related to the MIPS issued in May 1996. 

     All Other. The all other category contributed $15.4 million to net income
in 1997 compared to $11.6 million in 1996, an increase of $3.7 million or 32.0
percent. The increase can be attributed to an increase in other income due to an
investment made in the fourth quarter of 1997.

Liquidity and Capital Resources
--------------------------------------------------------------------------------

Capital Expenditures 

     Duquesne spent approximately $118.4 million in 1998, $93.7 million in 1997
and $88.5 million in 1996 for capital expenditures, of which $113.3 million in
1998, $90.4 million in 1997 and $87.9 million in 1996 was spent for electric
utility construction. The remaining capital expenditures were related to
Duquesne investments. Duquesne's capital expenditures for electric utility
construction focus on improving and/or expanding electric utility generation,
transmis-

                                       14
<PAGE>
 
sion and distribution systems. Duquesne currently estimates that it will spend,
excluding allowance for funds used during construction (AFC) and nuclear fuel,
approximately $110 million during 1999 (including $30 million for generation),
$75 million in 2000 (excluding generation) and $70 million in 2001 (excluding
generation) for electric utility construction.

Long-Term Investments 

     Duquesne's investing activities during 1998, 1997 and 1996 included
approximately $26 million, $15 million and $10 million, respectively, in the
decommissioning trust funds, gas reserves and affordable housing investments.

Financing 

     Duquesne currently expects to meet its current obligations and debt
maturities through the year 2003 with funds generated from operations, through
new financings and through the proceeds from the auction of generation assets.

     During 1998, $75 million of mortgage bonds matured and were retired and
$100 million of 8.75 percent mortgage bonds due in May 2022 were redeemed. The
retirement and redemption were financed using available cash, the proceeds of
the $40 million of 6.45 percent mortgage bonds due in February 2008 and the
proceeds of the $100 million of 7.375 percent mortgage bonds due in April 2038
issued by Duquesne. Mortgage bonds in the amount of $75 million will mature in
July 1999. Duquesne expects to retire these bonds with available cash, or to
refinance the bonds. 

     In connection with the power station exchange with FirstEnergy, Duquesne
anticipates terminating the BV Unit 2 lease, in which case the lease liability
recorded on the consolidated balance sheet would no longer be an obligation of
Duquesne. The underlying collateralized lease bonds ($371.0 million at December
31, 1998) would become direct obligations of Duquesne and be recorded on the
consolidated balance sheet. Duquesne would also pay approximately $230 million
in termination costs, a portion of which Duquesne expects to recover through the
proceeds of the generation asset auction. (See "Power Station Exchange"
discussion on page 17.) 

     A Duquesne subsidiary has 15 shares of preferred stock, par value $100,000
per share outstanding. The holders of such shares are entitled to a 6.5 percent
annual dividend to be paid each September 30. 

     In May 1996, Duquesne Capital L.P. (Duquesne Capital), a special-purpose
limited partnership of which Duquesne is the sole general partner, issued $150.0
million principal amount of 8-3/8 percent MIPS with a stated liquidation value
of $25.00. The holders of MIPS are entitled to annual dividends of 8-3/8
percent, payable monthly. Such dividends are guaranteed by Duquesne.

Short-Term Borrowings 

     At December 31, 1998, Duquesne had a $150 million extendible revolving
credit arrangement, expiring in October 1999. Interest rates can, in accordance
with the option selected at the time of the borrowing, be based on prime,
Eurodollar or certificate of deposit rates. Commitment fees are based on the
unborrowed amount of the commitments. The credit facility contains a two-year
repayment period for any amounts outstanding at the expiration of the revolving
credit period. At December 31, 1998 and December 31, 1997, there were no
short-term borrowings outstanding. 

Sale of Accounts Receivable 

     Duquesne and an unaffiliated corporation have an agreement that entitles
Duquesne to sell, and the corporation to purchase, on an ongoing basis, up to
$50 million of accounts receivable. Duquesne had no receivables sold at December
31, 1998 or December 31, 1997. The accounts receivable sales agreement, which
expires in June 1999, is one of many sources of funds available to Duquesne.
Duquesne may attempt to extend the agreement, replace it with a similar
facility, or eliminate it upon expiration. 

Nuclear Fuel Leasing

     Duquesne finances its acquisitions of nuclear fuel through a leasing
arrangement, under which it may finance up to $75 million of nuclear fuel. As of
December 31, 1998, the amount of nuclear fuel financed by Duquesne under this
arrangement totaled approximately $41.8 million. The actual nuclear fuel costs
to be financed will be influenced by such factors as changes in interest rates;
lengths of the respective fuel cycles; reload cycle design; operations; the
power station exchange; and changes in nuclear material costs and services, the
prices and availability of which are not known at this time. Such costs may also
be influenced by other events not presently foreseen. Duquesne plans to continue
leasing nuclear fuel to fulfill its requirements at least through September
1999, the remaining term of the leasing arrangement. Duquesne may attempt to
extend the arrangement, replace it with a similar facility, or eliminate it upon
expiration through the purchase of the balance of the nuclear fuel. Duquesne
anticipates divesting its nuclear stations. (See "Power Station Exchange"
discussion on page 17.)

                                       15
<PAGE>
 
Rate Matters
--------------------------------------------------------------------------------

Competition and the Customer Choice Act 

     The electric utility industry continues to undergo fundamental change in
response to development of open transmission access and increased availability
of energy alternatives. Under historical ratemaking practice, regulated electric
utilities were granted exclusive geographic franchises to sell electricity, in
exchange for making investments and incurring obligations to serve customers
under the then-existing regulatory framework. Through the ratemaking process,
those prudently incurred costs were recovered from customers, along with a
return on the investment. Additionally, certain operating costs were approved
for deferral for future recovery from customers (regulatory assets). As a result
of this historical ratemaking process, utilities had assets recorded on their
balance sheets at above-market costs, thus creating transition and stranded
costs.

     In Pennsylvania, the Customer Choice Act went into effect on January 1,
1997. The Customer Choice Act enables Pennsylvania's electric utility customers
to purchase electricity at market prices from a variety of electric generation
suppliers (customer choice). Although the Customer Choice Act will give
customers their choice of electric generation suppliers, the existing,
franchised local distribution utility is still responsible for delivering
electricity from the generation supplier to the customer. The local distribution
utility is also required to serve as the provider of last resort for all
customers in its service territory, unless other arrangements are approved by
the PUC. The provider of last resort must provide electricity for any customer
who cannot or does not choose an alternative electric generation supplier, or
whose supplier fails to deliver. The Customer Choice Act provides that the
existing franchised utility may recover, through a CTC, an amount of transition
costs that are determined by the PUC to be just and reasonable. Pennsylvania's
electric utility restructuring is being accomplished through a two-stage process
consisting of an initial customer choice pilot period (which ended in December
1998) and a phase-in to competition period (which began in January 1999).
Duquesne's estimated negative net income impact of the customer choice pilot
program during 1998, with five percent of customers participating, was
approximately $6 million. 

Phase-In to Competition 

     The phase-in to competition began in January 1999, when 66 percent of
customers became eligible to participate in customer choice (including customers
covered by the pilot program); all customers will have customer choice in
January 2000. As of February 28, 1999, approximately 12.5 percent of Duquesne's
customers had chosen alternative generation suppliers. Customers that have
chosen an electricity generation supplier other than Duquesne pay that supplier
for generation charges, and pay Duquesne a CTC (discussed below) and charges for
transmission and distribution. Customers that continue to buy their generation
from Duquesne pay for their service at current regulated tariff rates divided
into generation, transmission and distribution charges. Under the Customer
Choice Act, an electric distribution company, such as Duquesne, remains a
regulated utility and may only offer PUC-approved rates, including generation
rates. Also under the Customer Choice Act, electricity delivery (including
transmission, distribution and customer service) remains regulated in
substantially the same manner as under current regulation. 

     In an effort to "jump start" retail competition, Duquesne has made 600 MW
of power available to licensed electric generation suppliers, to be used in
supplying electricity to Duquesne's customers who have chosen alternative
generation suppliers. The power will be available for the first six months of
1999 at a price of 2.6 cents per KWH. This power availability will be structured
to ensure the power is used to benefit Duquesne's retail customers. 

Rate Cap 

     An overall four-and-one-half-year rate cap from January 1, 1997, has been
imposed on the transmission and distribution charges of Pennsylvania electric
utility companies under the Customer Choice Act. Additionally, electric utility
companies may not increase the generation price component of rates as long as
transition costs are being recovered, with certain exceptions. 

Restructuring Plan 

     In its May 29, 1998, final restructuring order, the PUC determined that
Duquesne should recover most of the above-market costs of the generation assets,
including plant and regulatory assets through the collection of the CTC from
electric utility customers. The total of the transition costs to be recovered is
$2,133 million ($1,485 million, net of tax) over a seven-year period beginning
January 1, 1999, as may be adjusted to account for the proceeds of the
generation asset auction. In addition, the transition costs as reflected on the
consolidated balance sheet will be amortized over the same period that the CTC
revenues are being recognized. Duquesne will earn an 11 percent pre-tax return
on the unrecovered balance. 

     In the second quarter of 1998, Duquesne recorded an extraordinary charge
(PUC restructuring charge) against earnings of $142.3 million ($82.5 million,
net of tax) for the generation-related stranded costs not considered by the
PUC's restructuring order to be recoverable from customers. The Pennsylvania
restructuring charge included Phillips, BI, deferred caretaker costs related to
the two stations and deferred coal costs. 

                                       16
<PAGE>
 
     Restructuring Plan and Auction Plan.  With respect to transition cost
recovery, the PUC's final order on the restructuring plan approved Duquesne's
proposal to auction its generation assets and use the proceeds to offset
transition costs. The remaining balance of such costs (with certain exceptions
described below) will be recovered from ratepayers through a CTC, collectible
through 2005. Until the divestiture is complete, Duquesne has been ordered to
use an interim system average CTC and price to compare based on the methodology
approved in its pilot program (approximately 2.9 cents per KWH for the CTC and
approximately 3.8 cents per KWH for the price to compare).

     On December 18, 1998, the PUC approved Duquesne's auction plan, including
an auction of its provider of last resort service, as well as an agreement in
principle to exchange certain generation assets with FirstEnergy. The assets to
be auctioned will include Duquesne's wholly owned Cheswick Power Station, Elrama
Power Station, Phillips and BI, as well as the stations to be received from
FirstEnergy in the power station exchange described below. The auction plan
calls for a two-phase, sealed bid process similar to that used in other power
plant divestitures. The initial confidential bidding process is expected to
begin in the spring of 1999, with potential buyers identified by Duquesne being
asked to submit non-binding bids. Final agreements governing the transactions
must be approved by various regulatory agencies, including the PUC, the FERC,
the NRC, the Department of Justice and/or the Federal Trade Commission. Duquesne
currently expects the sale to close at the end of 1999 or the beginning of 2000.

     Power Station Exchange.  Pursuant to the definitive agreements entered into
on March 25, 1999 (which remain subject to regulatory approval), Duquesne and
FirstEnergy will exchange ownership interests in certain power stations.
Duquesne will receive 100 percent ownership rights in three coal-fired power
plants located in Avon Lake and Niles, Ohio and New Castle, Pennsylvania
(totaling approximately 1,300 MW), which Duquesne expects to sell simultaneously
as part of the auction of generation assets. FirstEnergy will acquire Duquesne's
interests in BV Unit 1, BV Unit 2, Perry Unit 1, Sammis Unit 7, Eastlake Unit 5
and Bruce Mansfield Units 1, 2 and 3 (totaling approximately 1,400 MW). In
connection with the power station exchange, Duquesne anticipates terminating the
BV Unit 2 lease. (See "Financing" discussion on page 15.) Pursuant to the
December 18, 1998, PUC order and subject to final approval, the proceeds from
the sale of the power stations received in the exchange will be used to offset
the transition costs associated with Duquesne's currently-held generation assets
and the costs associated with completing the exchange. Duquesne expects this
exchange to enhance the value received from the auction, because participants
will bid on plants that are wholly owned by Duquesne, rather than plants that
are jointly owned and/or operated by another entity. Additionally, the auction
will include only coal- and oil-fired plants, which are anticipated to have a
higher market value than nuclear plants. These value-enhancing features, along
with a minimum level of auction proceeds guaranteed by FirstEnergy, are expected
to maximize auction proceeds, minimize transition costs required to be recovered
through the CTC (by shortening the length of the CTC recovery period), and thus
reduce customer bills as rapidly as possible. Other benefits of this exchange
include the resolution of all joint ownership issues, and other risks and costs
associated with the jointly-owned units. Although the PUC has said the exchange
appears to be in the public interest, the definitive exchange agreement must be
submitted for PUC approval, and certain aspects of the exchange will have to be
approved by, among other agencies, the FERC, the NRC and the Department of
Justice. The power station exchange is expected to occur simultaneously with the
anticipated closing of the sale of Duquesne's generation through the auction at
the end of 1999 or in early 2000. 

Termination of the AYE Merger 

     On July 28, 1998, DQE's board of directors concluded that it could not
consummate the merger with AYE, toward which Duquesne had been working. Duquesne
believes that AYE suffered a material adverse effect as a result of the PUC's
final restructuring order regarding AYE's utility subsidiary, West Penn Power
Company. More information regarding this decision is set forth in Duquesne's
Current Report on Form 8-K dated July 28, 1998. On July 30, 1998, AYE informed
DQE that it would continue to work toward consummation of the merger, and also
pursue all remedies available to protect the legal and financial interests of
AYE and its shareholders. 

     On September 17, 1998, the PUC issued an order stating that, unless the
parties jointly agreed to an extension of time to consummate the merger beyond
October 5, 1998 (the relevant date under the merger agreement), their merger
application with the PUC would be considered withdrawn. On October 5, 1998,
Duquesne announced its unilateral termination of the merger agreement. More
information regarding this termination is set forth in Duquesne's Current Report
on Form 8-K dated October 5, 1998. In a letter dated February 24, 1999, the PUC
informed Duquesne that the merger application was deemed withdrawn and the
docket was closed. 

     AYE filed suit in the United States District Court for the Western District
of Pennsylvania, seeking to compel Duquesne to proceed with the merger and
seeking a temporary restraining order and preliminary injunction to prevent
Duquesne from certain actions pending a trial, or in the alternative seeking an
unspecified amount of money damages. On October 28, 1998, the judge denied AYE's
motion for the temporary restraining order and preliminary injunction. AYE
appealed to the United States Court of Appeals for the Third Circuit, asking for
an injunction pending the appeal and expedited treatment of the appeal. On
November 6, 1998, the Third Circuit denied the motion for an injunction and
granted the motion to expedite the appeal.

                                       17
<PAGE>
 
     On March 11, 1999, the Third Circuit vacated the October 28 denial of a
preliminary injunction. The Third Circuit remanded the case to the District
Court for further proceedings to address certain issues, including whether AYE
could demonstrate a reasonable likelihood of success on the merits, before
determining whether any injunctive relief is warranted. On March 12, 1999, AYE
filed a motion for a temporary restraining order with the district court, and a
hearing was held that same day. On March 16, 1999, AYE and DQE entered into a
consent agreement, which was approved by the district court on March 18.
Pursuant to the consent agreement, AYE and DQE have agreed, among other things,
that pending the consolidated hearing on AYE's application for a preliminary
injunction and/or an expedited trial on the merits, both parties will give each
other 10 business days' notice before taking or omitting to take any action
which would prevent the merger from qualifying for "pooling of interests"
accounting treatment. This would not prevent either party from entering into any
agreement, but would require the 10 business days' notice prior to closing any
transaction which prevents pooling. The consent agreement shall terminate on
September 16, 1999, unless earlier terminated or extended by mutual agreement or
an order of the district court.

     DQE continues to believe that AYE's claim is entirely without merit in
light of the $1 billion disallowance of its stranded costs, which constituted a
material adverse effect under the merger agreement and entitled DQE to terminate
it as of October 5, 1998. DQE will continue to defend itself vigorously against
AYE's claims and intends to pursue a prompt resolution of the litigation. On
March 25, 1999, DQE petitioned the Third Circuit for rehearing. In the interim,
DQE intends to continue to pursue the implementation of customer choice under
its PUC-approved restructuring plan, including the power station exchange with
FirstEnergy and the generation asset auction. The ultimate outcome of this suit
cannot be determined at this time.

Deferred Energy Costs 

     As part of its restructuring plan filing, Duquesne requested recovery of
$11.5 million ($6.7 million, net of tax) through the CTC for energy costs
previously deferred under the ECR. Recovery of this amount was approved in the
PUC's final restructuring order. Duquesne also requested recovery of an
additional $31.2 million ($18.2 million, net of tax). This amount relates to
fuel costs that had been deferred between the time of the restructuring plan
filing and the restructuring order in accordance with a PUC order with respect
to Duquesne's ECR. As part of its December 18, 1998, order the PUC denied
recovery of this additional amount. Duquesne has appealed the PUC's denial of
recovery to the Pennsylvania Commonwealth Court. 

     Based upon the Customer Choice Act, which mandates recovery of all
regulatory assets, and the PUC's specific authorization for Duquesne to create a
regulatory asset for these costs, Duquesne believes that it is probable that
these costs will be recovered through retail rates. In the event that Duquesne
does not prevail in its appeal with the Pennsylvania Commonwealth Court, these
costs would be written off as a charge against income. 

Year 2000 
--------------------------------------------------------------------------------

     Many existing computer programs and embedded microprocessors use only two
digits to identify a year (for example, "98" is used to represent "1998"). Such
programs read "00" as the year 1900, and thus may not recognize dates beginning
with the year 2000, or may otherwise produce erroneous results or cease
processing when dates after 1999 are encountered. 

     Year 2000 Plan. In 1994, Duquesne began reviewing its critical information
systems that impact operations and financial reporting in order to develop a
strategy to address required computer software and system changes and upgrades.
Duquesne has since assembled a Year 2000 team, comprised of management
representatives from all functional areas of Duquesne, which continues to
explore the exposure to Year 2000-related issues in computer software and in
devices and equipment (such as plant components, substations, elevators, and
heating and cooling systems) containing embedded microprocessors that may not
correctly identify the year. The team is also exploring potential related issues
that may originate with third parties with whom Duquesne does business. To
support the planning, organization and management of its efforts, the team has
retained Year 2000 consultants. 

     In general, Duquesne's overall strategy to address the Year 2000 issue is
comprised of four phases that, in some cases, are performed simultaneously.
These phases are: inventory, assessment, remediation, and testing and
implementation. 

     Inventory consists of identifying the various components, equipment,
hardware, and software used in Duquesne's operations that may potentially be
faced with Year 2000 issues. This inventory effort was completed during the
fourth quarter of 1998.

     Assessment consists of evaluating all inventoried items for Year 2000
compliance or readiness. This is accomplished by contacting the vendors and
manufacturers, inspecting software and code, researching the results of other
companies' assessment of like components, and various other means. Assessment
activities have been completed as of the date of this Report. Duquesne's
business is dependent upon external suppliers for the reliable delivery of their
products and services. Duquesne has inquired in writing of its suppliers and
service providers with regard to their Year 2000 readiness. Duquesne is meeting
with critical suppliers and service providers to further corroborate evidence of
their Year 2000 readiness.

                                       18
<PAGE>
 
     Remediation refers to the activities necessary to fix or replace those
components that have Year 2000 issues that will adversely affect Duquesne's
operations. Remediation concentrates first on those systems, components, and
equipment that substantially impact Duquesne's ability to perform its essential
business functions (mission critical). Remediation is currently under way and is
scheduled to be substantially complete in the second quarter of 1999. This
remediation is in addition to previously planned improvements to Duquesne's
systems with benefits beyond Year 2000 solutions, such as total system
replacements discussed below. 

     Testing and implementation consists of placing renovated processes,
systems, equipment, and other items into use within Duquesne's operations.
Testing is performed on all mission critical processes, whether or not
remediation activities were involved in the process. Testing and implementation
will be substantially completed during the second quarter of 1999. 

     Throughout the execution of its Year 2000 plan, Duquesne has been providing
and will continue to provide information on its activities to the PUC, the NRC
and the North American Electric Reliability Counsel (NERC), which coordinates
the network of interconnected utilities across the nation. Duquesne's plan is in
accordance with NRC guidelines, and Duquesne is working with the NRC to certify
that its nuclear power station safety and operations systems, and issues related
to suppliers, will be ready for the Year 2000. NERC has been requested by the
United States Department of Energy (DOE) to review the national electric power
production and delivery infrastructure to ensure a reliable power supply during
the Year 2000 transition period. Duquesne is working with NERC to address these
issues through monthly status reporting and participation in regional Year 2000
tests. Duquesne also participates in the Electric Power Research Institute's
project to share information about technical issues regarding Year 2000 with
other entities in the electric utility industry. 

     Risks and Contingency Plans. Duquesne currently believes that
implementation of its plan will minimize the Year 2000 issues relating to its
systems and equipment. Duquesne's goal is to ensure that all components and
services that in any material manner contribute to operational reliability,
customer relations, safety, revenue and regulatory compliance will be suitable
for continued use beyond December 31, 1999, in some cases with appropriate
work-arounds or contingency plans. Duquesne understands that many variables
outside the control of Duquesne may have an adverse affect on the ability of
Duquesne to perform its mission critical processes (e.g., telecommunication
providers may not be able to provide uninterrupted service). Therefore, Duquesne
is developing contingency plans for all mission critical processes in an effort
to mitigate these risks. Contingency plans will be developed and tested for all
mission critical processes by the end of the second quarter of 1999. Duquesne
continues to review its operations and its critical external suppliers and
service providers in order to determine any worst-case scenarios it could face
as a result of Year 2000 problems.

     Costs. The estimated total cost of implementing Duquesne's Year 2000 plan
is approximately $49 million, which includes costs related to total system
replacements (the Year 2000 solution comprises only a portion of the benefit
resulting from such replacements). These costs to date, primarily incurred as a
result of software and system changes and upgrades by Duquesne, have been
approximately $39 million. Of this amount, approximately $35 million represents
capital costs attributable to the licensing and installation of new software for
total system replacements. The remaining $4 million has been expensed as
incurred. Funds for Duquesne's Year 2000 plan have come from Duquesne's
operating and capital budgets. Approximately $10 million has been budgeted for
1999 to address Year 2000 issues. Duquesne does not anticipate that Year 2000
issues and related costs will be material to Duquesne's operations, financial
condition and results of operations.

     The foregoing paragraphs contain forward-looking statements regarding the
timetable, effectiveness and ultimate cost of Duquesne's Year 2000 strategy.
Actual results could materially differ from those implied by such statements due
to known and unknown risks and uncertainties, including, but not limited to: the
possibility that changes and upgrades are not timely completed, that corrections
to the systems of other companies on which Duquesne's systems rely may not be
timely completed, and that such changes and upgrades may be incompatible with
Duquesne's systems; the availability and cost of trained personnel; and the
ability to locate and correct all relevant computer code and microprocessors.


Item 7A.  Quantitative And Qualitative Disclosures About Market Risk.

     Market risk represents the risk of financial loss that may impact
Duquesne's consolidated financial position, results of operations or cash flows
due to adverse changes in market prices and rates.

     Funding for nuclear decommissioning costs is deposited by Duquesne in
external, segregated trust accounts and invested in a portfolio of corporate
common stock and debt securities, municipal bonds, certificates of deposit and
United States government securities. The market value of the aggregate trust
fund balances at December 31, 1998 totaled approximately $62.7 million. The
amount funded into the trusts is based on estimated returns which, if not
achieved as projected, could require additional unanticipated funding
requirements.


                                      19
<PAGE>
 
Item 8.   Consolidated Financial Statements and Supplementary Data.

Report of Independent Certified Public Accountants
--------------------------------------------------------------------------------

To the Directors and Stockholder of Duquesne Light Company:

     We have audited the accompanying consolidated balance sheets of Duquesne
Light Company (a wholly owned subsidiary of DQE, Inc.) and its subsidiaries as
of December 31, 1998 and 1997, and the related consolidated statements of
income, comprehensive income, retained earnings, and cash flows for each of the
three years in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits. 

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. 

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Duquesne Light Company and its
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
January 26, 1999


                                      20
<PAGE>
 
<TABLE> 
<CAPTION> 

Statement of Consolidated Income
-------------------------------------------------------------------------------------------------------------
                                                                           (Thousands of Dollars)
                                                                ---------------------------------------------
                                                                           Year Ended December 31,
                                                                ---------------------------------------------
                                                                     1998            1997            1996
-------------------------------------------------------------------------------------------------------------
<S>                                                             <C>             <C>             <C> 
Operating Revenues:
Sales of Electricity:
        Residential                                             $   410,960     $   405,915     $   405,392
        Commercial                                                  495,194         500,070         494,919
        Industrial                                                  189,617         198,708         190,723
-------------------------------------------------------------------------------------------------------------
        Net customer revenues                                     1,095,771       1,104,693       1,091,034
        Utilities                                                    36,203          24,861          58,292
-------------------------------------------------------------------------------------------------------------
Total Sales of Electricity                                        1,131,974       1,129,554       1,149,326
Other                                                                44,820          46,387          38,081
-------------------------------------------------------------------------------------------------------------
        Total Operating Revenues                                  1,176,794       1,175,941       1,187,407
-------------------------------------------------------------------------------------------------------------

Operating Expenses:
Fuel                                                                176,913         184,676         204,655
Purchased power                                                      85,647          38,735          32,269
Other operating                                                     269,944         269,063         263,691
Maintenance                                                          74,908          82,869          78,386
Depreciation and amortization                                       204,718         235,381         216,338
Taxes other than income taxes                                        80,035          81,049          84,625
Income taxes                                                         82,495          76,783          85,364
-------------------------------------------------------------------------------------------------------------
        Total Operating Expenses                                    974,660         968,556         965,328
-------------------------------------------------------------------------------------------------------------
Operating Income                                                    202,134         207,385         222,079
-------------------------------------------------------------------------------------------------------------

Other Income and (Deductions):
Interest and dividend income                                         13,242          16,014          12,216
Income taxes                                                         (7,582)         (2,945)          2,356
Other                                                                33,503          19,761           9,991
-------------------------------------------------------------------------------------------------------------
        Total Other Income                                           39,163          32,830          24,563
-------------------------------------------------------------------------------------------------------------
Income Before Interest and Other Charges                            241,297         240,215         246,642
-------------------------------------------------------------------------------------------------------------

Interest Charges:
Interest on long-term debt                                           81,076          87,420          88,478
Other interest                                                        1,290             752           1,632
Allowance for borrowed funds used during construction                (2,179)         (2,339)         (1,249)
-------------------------------------------------------------------------------------------------------------
        Total Interest Charges                                       80,187          85,833          88,861
-------------------------------------------------------------------------------------------------------------
Monthly Income Preferred Securities Dividend Requirements            12,562          12,562           7,921
-------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Item                                    148,548         141,820         149,860
Extraordinary Item, Net of Tax                                      (82,548)             --              --
-------------------------------------------------------------------------------------------------------------
Net Income, After Extraordinary Item                                 66,000         141,820         149,860
=============================================================================================================
Dividends on Preferred and Preference Stock                           4,036           4,022           4,045
        Earnings for Common Stock, Before Extraordinary Item    $   144,512     $   137,798     $   145,815
=============================================================================================================
        Earnings for Common Stock, After Extraordinary Item     $    61,964     $   137,798     $   145,815
=============================================================================================================
</TABLE> 
See notes to consolidated financial statements.

                                      21
<PAGE>
 
<TABLE> 
<CAPTION> 

Consolidated Balance Sheet
------------------------------------------------------------------------------------------
                                                                (Thousands of Dollars)
                                                             -----------------------------   
                                                                  As of December 31,
                                                             -----------------------------   
Assets                                                           1998             1997
------------------------------------------------------------------------------------------
<S>                                                          <C>             <C> 
Property, Plant and Equipment:
Electric plant in service                                    $ 4,379,703     $ 4,335,149
Property held under capital leases                               123,374         113,662
Construction work in progress                                     79,644          56,471
Other                                                              6,419           5,456
------------------------------------------------------------------------------------------
        Gross property, plant and equipment                    4,589,140       4,510,738
        Less: Accumulated depreciation and amortization       (3,141,841)     (1,947,819)
------------------------------------------------------------------------------------------
                Total Property, Plant and Equipment - Net      1,447,299       2,562,919
------------------------------------------------------------------------------------------

Long-Term Investments:
Investment in DQE common stock                                    69,067          57,617
Other investments                                                133,189         128,947
------------------------------------------------------------------------------------------
                Total Long-Term Investments                      202,256         186,564
------------------------------------------------------------------------------------------

Current Assets:
Cash and temporary cash investments                               53,151         165,169
------------------------------------------------------------------------------------------
Receivables:
        Electric customer accounts receivable                     87,262          90,149
        Other utility receivables                                 25,412          23,106
        Other receivables                                         22,419          23,736
        Less: Allowance for uncollectible accounts                (9,137)        (15,016)
------------------------------------------------------------------------------------------
                Total Receivables - Net                          125,956         121,975
------------------------------------------------------------------------------------------
Materials and supplies (at average cost):
        Operating and construction                                58,747          53,088
        Coal                                                      25,702          20,418
------------------------------------------------------------------------------------------
                Total Materials and Supplies                      84,449          73,506
------------------------------------------------------------------------------------------
Other current assets                                               7,670           7,478
------------------------------------------------------------------------------------------
                Total Current Assets                             271,226         368,128
------------------------------------------------------------------------------------------

Other Non-Current Assets:
Transition costs                                               2,132,980              --
Regulatory assets                                                 64,568         680,885
Other                                                             56,799          41,683
------------------------------------------------------------------------------------------
                Total Other Non-Current Assets                 2,254,347         722,568
------------------------------------------------------------------------------------------
                Total Assets                                 $ 4,175,128     $ 3,840,179
==========================================================================================
</TABLE> 
See notes to consolidated financial statements.


                                      22
<PAGE>
 
<TABLE> 
<CAPTION> 

Consolidated Balance Sheet
-----------------------------------------------------------------------------------------------------------------
                                                                                       (Thousands of Dollars)
                                                                                     ----------------------------
                                                                                         As of December 31,
                                                                                     ----------------------------
Capitalization and Liabilities                                                          1998            1997
-----------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>             <C> 
Capitalization:
Common stock (authorized - 90,000,000 shares, issued and outstanding - 10 shares)    $       --      $       --
Capital surplus                                                                         813,528         815,561
Retained earnings                                                                        27,646         172,682
Accumulated other comprehensive income                                                   27,326          15,590
-----------------------------------------------------------------------------------------------------------------
                Total Common Stockholder's Equity                                       868,500       1,003,833
-----------------------------------------------------------------------------------------------------------------
Non-redeemable preferred stock                                                           65,108          64,608
Non-redeemable Monthly Income Preferred Securities                                      150,000         150,000
Non-redeemable preference stock                                                          26,914          28,295
-----------------------------------------------------------------------------------------------------------------
        Total preferred and preference stock before deferred ESOP benefit               242,022         242,903
Deferred employee stock ownership plan (ESOP) benefit                                   (14,240)        (16,400)
-----------------------------------------------------------------------------------------------------------------
                Total Preferred and Preference Stock                                    227,782         226,503
-----------------------------------------------------------------------------------------------------------------
Long-term debt                                                                        1,160,348       1,218,276
-----------------------------------------------------------------------------------------------------------------
                Total Capitalization                                                  2,256,630       2,448,612
-----------------------------------------------------------------------------------------------------------------
Obligations Under Capital Leases                                                         36,596          37,540
-----------------------------------------------------------------------------------------------------------------
Current Liabilities:
Accrued liabilities                                                                     116,056          87,607
Accounts payable                                                                        105,624          76,224
Current maturities and sinking fund requirements                                         96,137          97,523
Dividends declared                                                                       39,597           2,349
Other                                                                                     6,864          14,338
-----------------------------------------------------------------------------------------------------------------
                Total Current Liabilities                                               364,278         278,041
-----------------------------------------------------------------------------------------------------------------
Non-Current Liabilities:
Deferred income taxes - net                                                             610,272         574,248
Beaver Valley lease liability                                                           475,570              --
Deferred income                                                                         117,508         183,304
Deferred investment tax credits                                                          24,076          97,782
Other                                                                                   290,198         220,652
-----------------------------------------------------------------------------------------------------------------
                Total Non-Current Liabilities                                         1,517,624       1,075,986
-----------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes B through N)
-----------------------------------------------------------------------------------------------------------------
                Total Capitalization and Liabilities                                $ 4,175,128     $ 3,840,179
=================================================================================================================
</TABLE> 
See notes to consolidated financial statements.


                                      23
<PAGE>
 
<TABLE> 
<CAPTION> 

Statement of Consolidated Cash Flows
------------------------------------------------------------------------------------------------------------------
                                                                                  (Thousands of Dollars)
                                                                          ----------------------------------------
                                                                                  Year Ended December 31,
                                                                          ----------------------------------------
                                                                             1998           1997          1996
------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C>           <C> 
Cash Flows From Operating Activities:
Net income                                                                $  66,000      $ 141,820     $ 149,860
Principal non-cash charges (credits) to net income:
                Extraordinary item, net of tax                               82,548             --            --
                Depreciation and amortization                               204,718        235,381       216,338
                Capital lease, nuclear fuel and other amortization           49,547         39,179        24,006
                Deferred income taxes and investment tax credits - net       32,536         (7,611)      (81,325)
                Gain on dispositions                                         (1,322)        (5,856)           --
                Investment income                                           (66,552)       (19,353)      (23,841)
Increase in ECR                                                             (19,219)       (25,318)       (3,948)
Changes in working capital other than cash                                   36,300        (19,432)      (16,924)
Other                                                                       (61,407)       (22,648)       23,202
------------------------------------------------------------------------------------------------------------------
                Net Cash Provided By Operating Activities                   323,149        316,162       287,368
------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Construction expenditures                                                  (118,447)       (93,743)      (88,546)
Long-term investments                                                       (26,172)       (15,422)       (9,953)
Proceeds from disposition of investments                                      1,322          5,856         4,203
Sale of generating station                                                       --             --       169,100
Other                                                                         2,958        (13,692)         (700)
------------------------------------------------------------------------------------------------------------------
                Net Cash (Used In) Provided By Investing Activities        (140,339)      (117,001)       74,104
------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Dividends on capital stock                                                 (211,954)      (133,970)     (281,015)
Reductions of long-term obligations:
                Long-term debt                                             (198,172)       (52,100)      (50,812)
                Capital leases                                              (12,897)       (13,551)      (19,326)
Issuance of preferred stock                                                      --             --       150,000
Issuance of long-term debt                                                  140,000             --            --
Other                                                                       (11,805)        11,215        (8,395)
------------------------------------------------------------------------------------------------------------------
                Net Cash Used In Financing Activities                      (294,828)      (188,406)     (209,548)
------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and temporary cash investments             (112,018)        10,755       151,924
Cash and temporary cash investments at beginning of year                    165,169        154,414         2,490
------------------------------------------------------------------------------------------------------------------
                Cash and Temporary Cash Investments at End of Year        $  53,151      $ 165,169     $ 154,414
==================================================================================================================

Supplemental Cash Flow Information 
Cash paid during the year for:
Interest (net of amount capitalized)                                      $  78,046      $  82,343     $  86,409
------------------------------------------------------------------------------------------------------------------
Income taxes                                                              $ 117,094      $ 120,548     $ 165,948
------------------------------------------------------------------------------------------------------------------
Non-cash investing and financing activities:
Capital lease obligations recorded                                        $   7,855      $  27,514     $  13,050
Preferred stock issued in conjunction with long-term investments          $      --      $   1,500     $      --
------------------------------------------------------------------------------------------------------------------
</TABLE> 
See notes to consolidated financial statements.

                                       24
<PAGE>
 
<TABLE> 
<CAPTION> 
Statement of Consolidated Comprehensive Income
-------------------------------------------------------------------------------------------------------------
                                                                              (Thousands of Dollars)         
                                                                      ---------------------------------------
                                                                              Year Ended December 31,        
                                                                      ---------------------------------------
                                                                         1998          1997          1996    
-------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>           <C>           <C>  
Net income                                                            $  66,000     $ 141,820     $ 149,860  
-------------------------------------------------------------------------------------------------------------
Other comprehensive income:                                                                                  
        Unrealized holding gains (losses) arising during the year,                                           
                net of tax of $8,084, $3,184 and $(1,627)                11,736         4,488        (2,298) 
        Less: reclassification adjustment for gains included                                                 
                in net income, net of tax of $503, $1,609 and $451         (709)       (2,269)         (635) 
-------------------------------------------------------------------------------------------------------------
                Total Other Comprehensive Income                         11,027         2,219        (2,933) 
-------------------------------------------------------------------------------------------------------------
                Comprehensive Income                                  $  77,027     $ 144,039     $ 146,927  
=============================================================================================================
</TABLE> 
See notes to consolidated financial statements 

<TABLE> 
<CAPTION> 

Statement of Consolidated Retained Earnings
-------------------------------------------------------------------------------------------------------------
                                                                              (Thousands of Dollars)         
                                                                      --------------------------------------- 
                                                                                 As of December 31,          
                                                                      --------------------------------------- 
                                                                         1998          1997          1996    
-------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>           <C>           <C>   
Balance at beginning of year                                          $ 172,682     $ 163,884     $ 294,069  
-------------------------------------------------------------------------------------------------------------
Net income                                                               66,000       141,820       149,860  
-------------------------------------------------------------------------------------------------------------
Dividend declared:                                                                                           
        Preferred stock                                                   2,772         2,712         2,712  
        Preferred stock (net of tax benefit of ESOP dividend)             1,264         1,310         1,333  
        Common stock                                                    207,000       129,000       276,000  
-------------------------------------------------------------------------------------------------------------
                Total Dividends declared                                211,036       133,022       280,045  
-------------------------------------------------------------------------------------------------------------
                Balance at End of Year                                $  27,646     $ 172,682     $ 163,884  
=============================================================================================================
</TABLE> 
See notes to consolidated financial statements.

Notes to Consolidated Financial Statements

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation

     Duquesne Light Company (Duquesne) is a wholly owned subsidiary of DQE, Inc.
(DQE), a multi-utility delivery and services company. Duquesne is engaged in the
generation, transmission, distribution and sale of electric energy. Duquesne has
one wholly owned subsidiary, Monongahela Light and Power Company, which makes
long-term investments.

     On December 18, 1998, the Pennsylvania Public Utility Commission (PUC)
approved Duquesne's plan to divest itself of its generation assets through an
auction (including an auction of its provider of last resort service), and an
agreement in principle to exchange certain power stations with FirstEnergy
Corporation (FirstEnergy). Final agreements governing these transactions must be
approved by various regulatory agencies. Duquesne currently expects these
transactions to close in late 1999 or early 2000. (See "Rate Matters," Note E,
on page 29.)

Basis of Accounting 

     Duquesne is subject to the accounting and reporting requirements of the
Securities and Exchange Commission (SEC). In addition, Duquesne's electric
utility operations are subject to regulation by the PUC, including regulation
under the Pennsylvania Electricity Generation Customer Choice and Competition
Act (Customer Choice Act), and the Federal Energy Regulatory Commission (FERC)
under the Federal Power Act with respect to rates for interstate sales,
transmission of electric power, accounting and other matters.

                                       25
<PAGE>
 
     As a result of the PUC's final order regarding Duquesne's restructuring
plan under the Customer Choice Act (see "Rate Matters," Note E, on page 29), the
electricity generation portion of Duquesne's business no longer meets the
criteria of Statement of Financial Accounting Standards (SFAS) No. 71,
Accounting for the Effects of Certain Types of Regulation (SFAS No. 71).
Accordingly, application of SFAS No. 71 to this portion of Duquesne's business
has been discontinued and Duquesne now applies SFAS No. 101, Regulated
Enterprises - Accounting for the Discontinuation of Application of FASB
Statement No 71 (SFAS No. 101) as interpreted by Emerging Issues Task Force
97-4, Deregulation of the Pricing of Electricity - Issues Related to the
Application of FASB Statements No. 71 and 101. Under SFAS No. 101, the
regulatory assets and liabilities of the generation portion of Duquesne are
determined on the basis of the source from which the regulated cash flows to
realize such regulatory assets and settle such liabilities will be derived.
Pursuant to the PUC's final restructuring order, certain of Duquesne's
generation-related regulatory assets will be recovered through a competitive
transition charge (CTC) collected in connection with providing transmission and
distribution services (the electricity delivery business segment). Duquesne will
continue to apply SFAS No. 71 with respect to such assets. Fixed assets related
to the generation portion of Duquesne's business have been evaluated in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
to Be Disposed Of (SFAS No. 121). Applying SFAS No. 121 to the non-regulated
generation assets, it has been determined that Duquesne's generation assets are
impaired. However, pursuant to the PUC's final restructuring order, Duquesne
will recover its above-market investment in generation assets through the CTC.
Under Duquesne's plan to auction its generation assets, the market value
utilized by the PUC in determining the value of the generation assets will be
the net after-tax proceeds received from the auction. Accordingly, the amount of
book value authorized by the PUC to be recovered has been reclassified on the
consolidated balance sheet from property, plant and equipment to transition
costs, until the auction has been completed and all approvals for the final CTC
accounting have been granted. The electricity delivery business segment
continues to meet SFAS No. 71 criteria and accordingly reflects regulatory
assets and liabilities consistent with cost-based ratemaking regulations. The
regulatory assets represent probable future revenue to Duquesne, because
provisions for these costs are currently included, or are expected to be
included, in charges to electric utility customers through the ratemaking
process. (See "Rate Matters," Note E, on page 29.) 

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements. The reported amounts of revenues and expenses during the reporting
period may also be affected by the estimates and assumptions management is
required to make. Actual results could differ from those estimates. 

Energy Cost Rate Adjustment Clause (ECR) 

     Through the ECR, Duquesne previously recovered (to the extent that such
amounts were not included in base rates) nuclear fuel, fossil fuel and purchased
power expenses. Also through the ECR, Duquesne passed to its customers the
profits from short-term power sales to other utilities (collectively, ECR energy
costs). As a consequence of the PUC's final order regarding Duquesne's
restructuring plan (see "Rate Matters," Note E, on page 29), such fuel costs are
no longer recoverable through the ECR. Instead, effective May 29, 1998 (the date
of the PUC's final restructuring order), fuel costs are expensed as incurred and
thus impact net income. 

     Under-recoveries from customers prior to May 29, 1998, were recorded on the
consolidated balance sheet as a regulatory asset. At December 31, 1998, $42.7
million was receivable from customers. Duquesne expects to recover this amount
through the CTC. (See "Restructuring Plan" discussion, Note E, on page 30.) At
December 31, 1997, $23.5 million was receivable from customers. 

Revenues from Utility Sales

     Duquesne's electric utility operations provide service to customers in the
City of Pittsburgh and surrounding areas. (See "Rate Matters," Note E, on page
29.) This territory represents approximately 800 square miles in southwestern
Pennsylvania. The population of the area served by Duquesne's electric utility
operations, based on 1990 census data, is approximately 1,510,000, of whom
370,000 reside in the City of Pittsburgh. In addition to serving approximately
580,000 direct customers, Duquesne's utility operations also sell electricity to
other utilities.

                                       26
<PAGE>
 
     Meters are read monthly and utility customers are billed on the same basis.
Revenues are recorded in the accounting periods for which they are billed, with
the exception of energy cost recovery revenues. (See "Energy Cost Rate
Adjustment Clause" discussion above.) 

Maintenance

     Effective January 1, 1999, as a result of the PUC's final restructuring
order, all electric utility maintenance costs will be expensed as incurred.
Historically, incremental maintenance costs incurred for refueling outages at
Duquesne's nuclear units were deferred for amortization over the period between
refueling outages (generally 18 months); Duquesne would accrue, over the periods
between outages, anticipated costs for scheduled major fossil generating station
outages. Maintenance costs incurred for non-major scheduled outages and for
forced outages were charged to expense as such costs were incurred. During the
fourth quarter of 1998, a reversal of the fossil maintenance outage accrual was
made for outages planned to occur after the divestiture of the generation
assets. 

Depreciation and Amortization 

     Depreciation of property, plant and equipment, including plant-related
intangibles, is recorded on a straight-line basis over the estimated remaining
useful lives of properties. Amortization of gas reserve investments and
depreciation of related property are on a units of production method over the
total estimated gas reserves. Amortization of interests in affordable housing
partnerships is based upon a method that approximates the equity method; and
amortization of certain other leases is on the basis of benefits recorded over
the lives of the investments. Depreciation and amortization of other properties
are calculated on various bases. 

     Duquesne records nuclear decommissioning costs under the category of
depreciation and amortization expense, and accrues a liability, equal to that
amount, for nuclear decommissioning expense. On Duquesne's consolidated balance
sheet, the decommissioning trusts have been reflected in other long-term
investments, and the related liability has been recorded as other non-current
liabilities. Trust fund earnings increase the fund balance and the recorded
liability. (See "Nuclear Decommissioning" discussion, Note I, on page 36.)

     Duquesne's composite depreciation rate increased from 3.5 percent to 4.25
percent effective May 1, 1996. Also in 1996, Duquesne expensed $9 million
related to the depreciation portion of deferred rate synchronization costs in
conjunction with Duquesne's 1996 PUC-approved mitigation plan. As a result of
the May 29, 1998, PUC restructuring order, Duquesne reduced its rate of
depreciation on its generation assets, including plant and transition costs, to
achieve a net book value as of December 31, 1998, equal to the level approved
for recovery as transition costs. 

Income Taxes 

     Duquesne uses the liability method in computing deferred taxes on all
differences between book and tax bases of assets. These book/tax differences
occur when events and transactions recognized for financial reporting purposes
are not recognized in the same period for tax purposes. The deferred tax
liability or asset is also adjusted in the period of enactment for the effect of
changes in tax laws or rates. 

     For its electricity delivery business segment, Duquesne recognizes a
regulatory asset for the deferred tax liabilities that are expected to be
recovered from customers through rates. (See "Rate Matters," Note E, and "Income
Taxes," Note G, on pages 29 and 33.) 

     Duquesne reflects the amortization of the regulatory tax receivable
resulting from reversals of deferred taxes as depreciation and amortization
expense. Reversals of accumulated deferred income taxes are included in income
tax expense. 

     When applied to reduce Duquesne's income tax liability, investment tax
credits related to the electricity delivery business segment generally are
deferred. Such credits are subsequently reflected, over the lives of the related
assets, as reductions to income tax expense.

Property, Plant and Equipment

     The asset values of Duquesne's electric utility properties are stated at
original construction cost, which includes related payroll taxes, pensions and
other fringe benefits, as well as administrative costs. Also included in
original construction cost is an allowance for funds used during construction
(AFC), which represents the estimated cost of debt and equity funds used to
finance construction.

     Additions to, and replacements of, property units are charged to plant
accounts. Maintenance, repairs and replacement of minor items of property are
recorded as expenses when they are incurred. The costs of electricity delivery
business segment properties that are retired (plus removal costs and less any
salvage value) are charged to accumulated depreciation and amortization. 

                                       27
<PAGE>
 
     The asset values of Duquesne's electricity generation business segment
properties were written down to market value in accordance with SFAS No. 121 in
conjunction with the final PUC restructuring order. (See "Basis of Accounting"
discussion on page 25.) Substantially all of Duquesne's electric utility
properties are subject to a first mortgage lien. 

Temporary Cash Investments

     Temporary cash investments are short-term, highly liquid investments with
original maturities of three or fewer months. They are stated at market, which
approximates cost. Duquesne considers temporary cash investments to be cash
equivalents. 

Other Operating Revenues and Other Income 

     Other operating revenues are primarily comprised of revenues from joint
owners of Beaver Valley Unit 1 (BV Unit 1) and Beaver Valley Unit 2 (BV Unit 2)
for their shares of the administrative and general costs of operating these
units. Other income is primarily made up of income from long-term investments
entered into by the subsidiary of the utility and from short-term investments.
The other income is separated from other revenues as the investment income does
not result from operating activities.

Stock-Based Compensation 

     Duquesne accounts for stock-based compensation using the intrinsic value
method prescribed in APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of
Duquesne's stock at the date of the grant over the amount any employee must pay
to acquire the stock. Compensation cost for stock appreciation rights is
recorded annually, based on the quoted market price of Duquesne's stock at the
end of the period. 

Reclassification

     The 1997 and 1996 consolidated financial statements have been reclassified
to conform with 1998 presentation. 

Recent Accounting Pronouncement

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133).
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
The adoption of SFAS No. 133 is not expected to have a significant impact on
Duquesne's financial statements and disclosures.

B.  CHANGES IN WORKING CAPITAL OTHER THAN CASH

Changes in Working Capital Other than Cash 
(Net of Dispositions and Acquisitions) for the Year Ended December 31, 
--------------------------------------------------------------------------------
                                                  (Thousands of Dollars)        
                                           -------------------------------------
                                              1998         1997         1996    
--------------------------------------------------------------------------------
Receivables                                $ (3,981)    $(16,330)    $  7,539  
Materials and supplies                      (10,943)      (1,740)       1,286   
Other current assets                           (192)       1,350         (873)  
Accounts payable                             29,400       (8,048)       9,437   
Other current liabilities                    22,016        5,336      (34,313)  
--------------------------------------------------------------------------------
  Total                                    $ 36,300     $(19,432)    $(16,924)  
================================================================================

C.  PROPERTY, PLANT AND EQUIPMENT
                                           
     In addition to its wholly owned generating units, Duquesne, together with
FirstEnergy, has an ownership or leasehold interest in certain jointly owned
units. Duquesne is required to pay its share of the construction and operating
costs of the units. Duquesne's share of the operating expenses of the units is
included in the statement of consolidated income. Duquesne anticipates divesting
itself of its generation assets at the end of 1999 or in early 2000. (See "Rate
Matters," Note E, on page 29.) 

                                       28
<PAGE>
 
Generating Units
--------------------------------------------------------------------------------
                                             Generating      
                                             Capability           Fuel
Unit                                         (Megawatts)         Source
--------------------------------------------------------------------------------
Cheswick                                         570             Coal    
Elrama (a)                                       487             Coal    
Eastlake Unit 5 (f)                              186             Coal    
Sammis Unit 7 (f)                                187             Coal    
Bruce Mansfield Units 1, 2 and 3 (a)(f)          400             Coal    
Beaver Valley Unit 1 (b)(f)                      385             Nuclear 
Beaver Valley Unit 2 (c)(d)(f)                   113             Nuclear 
Perry Unit 1 (e)(f)                              164             Nuclear 
Brunot Island Units 1 and 2                      178             Fuel Oil
--------------------------------------------------------------------------------
        Total Generating Capability            2,670             
================================================================================

(a)  The units are equipped with flue gas desulfurization equipment.
(b)  The Nuclear Regulatory Commission (NRC) has granted a license to operate
     through January 2016.
(c)  In 1987, Duquesne sold and leased back its 13.74 percent interest in Beaver
     Valley Unit 2.
(d)  The NRC has granted a license to operate through May 2027.
(e)  The NRC has granted a license to operate through March 2026.
(f)  Jointly owned with FirstEnergy.

     Additionally, Duquesne has an ownership interest in certain generating
units not currently included in electric plant in service on the consolidated
balance sheet. The Brunot Island (BI) Units 3 and 4 and the Phillips Power
Station (Phillips) will be offered as part of Duquesne's generation asset
auction. 

D.  LONG-TERM INVESTMENTS

     At December 31, 1998 and 1997, the fair market value of Duquesne's
investment in DQE common stock was $69.1 million and $57.6 million,
respectively. At December 31, 1998 and 1997, the cost of Duquesne's investment
in DQE common stock was $32.0 million and $33.6 million, respectively. 

     Duquesne makes equity investments in affordable housing. At December 31,
1998, Duquesne had investments in nine affordable housing developments.

     Deferred income primarily relates to Duquesne's lease investments and
certain gas reserve investments. Deferred amounts will be recognized as income
over the lives of the underlying lease investments over periods generally not
exceeding 15 years. 

E.  RATE MATTERS

Competition and the Customer Choice Act

     The electric utility industry continues to undergo fundamental change in
response to development of open transmission access and increased availability
of energy alternatives. Under historical ratemaking practice, regulated electric
utilities were granted exclusive geographic franchises to sell electricity, in
exchange for making investments and incurring obligations to serve customers
under the then-existing regulatory framework. Through the ratemaking process,
those prudently incurred costs were recovered from customers, along with a
return on the investment. Additionally, certain operating costs were approved
for deferral for future recovery from customers (regulatory assets). As a result
of this historical ratemaking process, utilities had assets recorded on their
balance sheets at above-market costs, thus creating transition and stranded
costs. 

     In Pennsylvania, the Customer Choice Act went into effect on January 1,
1997. The Customer Choice Act enables Pennsylvania's electric utility customers
to purchase electricity at market prices from a variety of electric generation
suppliers (customer choice). Although the Customer Choice Act will give
customers their choice of electric generation suppliers, the existing,
franchised local distribution utility is still responsible for delivering
electricity from the generation supplier to the customer. The local distribution
utility is also required to serve as the provider of last resort for all
customers in its service territory, unless other arrangements are approved by
the PUC. The provider of last resort must provide electricity for any customer
who cannot or does not choose an alternative electric generation supplier, or
whose supplier fails to deliver. The Customer Choice Act provides that the
existing franchised utility may recover, through a CTC, an amount of transition
costs that are determined by the PUC to be just and reasonable. Pennsylvania's
electric utility restructuring is being accomplished through a two-stage process
consisting of an initial customer choice pilot period (which ended in December
1998) and a phase-in to competition period (which began in January 1999).
Duquesne's estimated negative net income impact of the customer choice pilot
program during 1998, with five percent of customers participating, was
approximately $6 million. 

                                       29
<PAGE>
 
Phase-In to Competition

     The phase-in to competition began in January 1999, when 66 percent of
customers became eligible to participate in customer choice (including customers
covered by the pilot program); all customers will have customer choice in
January 2000. As of February 28, 1999, approximately 12.5 percent of Duquesne's
customers had chosen alternative generation suppliers. Customers that have
chosen an electricity generation supplier other than Duquesne pay that supplier
for generation charges, and pay Duquesne a CTC (discussed below) and charges for
transmission and distribution. Customers that continue to buy their generation
from Duquesne pay for their service at current regulated tariff rates divided
into generation, transmission and distribution charges. Under the Customer
Choice Act, an electric distribution company, such as Duquesne, remains a
regulated utility and may only offer PUC-approved rates, including generation
rates. Also under the Customer Choice Act, electricity delivery (including
transmission, distribution and customer service) remains regulated in
substantially the same manner as under current regulation. 

     In an effort to "jump start" retail competition, Duquesne has made 600
megawatts (MW) of power available to licensed electric generation suppliers, to
be used in supplying electricity to Duquesne's customers who have chosen
alternative generation suppliers. The power will be available for the first six
months of 1999 at a price of 2.6 cents per kilowatt-hour (KWH). This power
availability will be structured to ensure the power is used to benefit
Duquesne's retail customers. 

Rate Cap 

     An overall four-and-one-half-year rate cap from January 1, 1997, has been
imposed on the transmission and distribution charges of Pennsylvania electric
utility companies under the Customer Choice Act. Additionally, electric utility
companies may not increase the generation price component of rates as long as
transition costs are being recovered, with certain exceptions. 

Restructuring Plan 

     In its May 29, 1998, final restructuring order, the PUC determined that
Duquesne should recover most of the above-market costs of the generation assets,
including plant and regulatory assets through the collection of the CTC from
electric utility customers. The total of the transition costs to be recovered is
$2,133 million ($1,485 million, net of tax) over a seven-year period beginning
January 1, 1999, as may be adjusted to account for the proceeds of the
generation asset auction. In addition, the transition costs as reflected on the
consolidated balance sheet will be amortized over the same period that the CTC
revenues are being recognized. Duquesne will earn an 11 percent pre-tax return
on the unrecovered balance. 

     In the second quarter of 1998, Duquesne recorded the Pennsylvania
restructuring charge against earnings of $142.3 million ($82.5 million, net of
tax) for the generation-related stranded costs not considered by the PUC's
restructuring order to be recoverable from customers. The Pennsylvania
restructuring charge included Phillips, BI, deferred caretaker costs related to
the two stations and deferred coal costs. The following table sets forth the
amounts reclassified from regulatory assets and property, plant, and equipment
to transition costs.

                                       30
<PAGE>
 
<TABLE> 
<CAPTION> 
Other Non-Current Assets as of December 31,
-------------------------------------------------------------------------------------------------
                                                                          Other
                                                           Transition   Regulatory     Regulatory
                                                             Costs        Assets         Assets
                                                          --------------------------------------- 
(Thousands of Dollars)                                       1998          1998           1997
-------------------------------------------------------------------------------------------------
<S>                                                       <C>           <C>           <C>  
Power plants (a)                                          $1,073,730    $       --    $       --
Beaver Valley Unit 2 lease liability (See Note H)            475,570            --            --
Regulatory tax receivable                                    236,480        23,177       301,664
Beaver Valley Unit 2 sale/leaseback deferred taxes (b)        55,130            --            --
Unamortized debt costs                                        45,770        33,612        87,915
Beaver Valley Unit 2 sale/leaseback costs                     37,790            --        38,299
Deferred rate synchronization costs                           25,370            --        37,231
Deferred employee costs                                       14,240         7,779        25,130
Deferred energy costs                                         11,510            --        23,514
DOE decontamination and decommissioning receivable             5,580            --         8,847
Deferred nuclear maintenance outage costs                      3,250            --        17,013
Brunot Island and Phillips cold reserve units (c)                 --            --       105,693
Deferred coal costs (c)                                           --            --        15,711
Other (c) (d)                                                148,560            --        19,868
-------------------------------------------------------------------------------------------------
        Total                                             $2,132,980    $   64,568    $  680,885
=================================================================================================
</TABLE> 

(a)  Amount represents the above-market costs of the power plants and was
     reclassified in the second quarter of 1998 from property, plant, and
     equipment to transition costs. A final determination of plant market value
     will be determined in conjunction with the generation auction. 
(b)  Amount represents deferred taxes related to the taxable gain on the
     sale/leaseback of Beaver Valley Unit 2 and was reclassified from deferred
     tax liabilities to transition costs.
(c)  In the second quarter of 1998 amounts were written off as an extraordinary
     charge to the consolidated statement of income as part of the Pennsylvania
     restructuring charge.
(d)  Amounts reflected in transition costs include reclassifications from other
     non-current assets and other non-current liabilities. In addition, there
     are amounts included in transition costs that had not previously been
     recorded on the consolidated balance sheet but were determined in the final
     PUC restructuring order to be costs recoverable from customers through the
     CTC. In the case of amounts not recorded, a regulatory liability was
     recorded for the same amount as the transition costs.

     As part of its restructuring plan filing, Duquesne requested recovery of
$11.5 million ($6.7 million, net of tax) through the CTC for energy costs
previously deferred under the ECR. Recovery of this amount was approved in the
PUC's final restructuring order. Duquesne also requested recovery of an
additional $31.2 million ($18.2 million, net of tax) in deferred fuel costs. On
December 18, 1998, the PUC denied recovery of this additional amount. Duquesne
has appealed the PUC's denial of recovery to the Pennsylvania Commonwealth
Court. Based upon the Customer Choice Act, which mandates recovery of all
regulatory assets, and the PUC's specific authorization for Duquesne to create a
regulatory asset for these costs, Duquesne believes that it is probable that
these costs will be recovered through retail rates. In the event that Duquesne
does not prevail in its appeal, these costs would be written off as a charge
against income during 1999. 

     Restructuring Plan and Auction Plan. With respect to transition cost
recovery, the PUC's final order on the restructuring plan approved Duquesne's
proposal to auction its generation assets and use the proceeds to offset
transition costs. The remaining balance of such costs (with certain exceptions
described below) will be recovered from ratepayers through a CTC, collectible
through 2005. Until the divestiture is complete, Duquesne has been ordered to
use an interim system average CTC and price to compare based on the methodology
approved in its pilot program (approximately 2.9 cents per KWH for the CTC and
approximately 3.8 cents per KWH for the price to compare). 

     On December 18, 1998, the PUC approved Duquesne's auction plan, including
an auction of its provider of last resort service, as well as an agreement in
principle to exchange certain generation assets with FirstEnergy. The assets to
be auctioned will include Duquesne's wholly owned Cheswick Power Station, Elrama
Power Station, Phillips and BI, as well as the stations to be received from
FirstEnergy in the power station exchange described below. The auction plan
calls for a two-phase, sealed bid process similar to that used in other power
plant divestitures. The initial confidential bidding process is expected to
begin in the spring of 1999, with potential buyers identified by Duquesne being
asked to submit non-binding bids. Final agreements governing the transactions
must be approved by various regulatory agencies, including the PUC, the FERC,
the NRC, the Department of Justice and/or the Federal Trade Commission. Duquesne
currently expects the sale to close at the end of 1999 or the beginning of 2000.

                                       31
<PAGE>
 
     Power Station Exchange. Pursuant to the definitive agreements entered into
on March 25, 1999 (which remain subject to regulatory approval), Duquesne and
FirstEnergy will exchange ownership interests in certain power stations.
Duquesne will receive 100 percent ownership rights in three coal-fired power
plants located in Avon Lake and Niles, Ohio and New Castle, Pennsylvania
(totaling approximately 1,300 MW), which Duquesne expects to sell simultaneously
as part of the auction of generation assets. FirstEnergy will acquire Duquesne's
interests in Beaver Valley Unit 1 (BV Unit 1), Beaver Valley Unit 2 (BV Unit 2),
Perry Unit 1, Sammis Unit 7, Eastlake Unit 5 and Bruce Mansfield Units 1, 2 and
3 (totaling approximately 1,400 MW). In connection with the power station
exchange, Duquesne anticipates terminating the BV Unit 2 lease. (See "Leases,"
Note H, on page 34.) Pursuant to the December 18, 1998, PUC order and subject to
final approval, the proceeds from the sale of the power stations received in the
exchange will be used to offset the transition costs associated with Duquesne's
currently-held generation assets and costs associated with completing the
exchange. Duquesne expects this exchange to enhance the value received from the
auction, because participants will bid on plants that are wholly owned by
Duquesne, rather than plants that are jointly owned and/or operated by another
entity. Additionally, the auction will include only coal- and oil-fired plants,
which are anticipated to have a higher market value than nuclear plants. These
value-enhancing features, along with a minimum level of auction proceeds
guaranteed by FirstEnergy, are expected to maximize auction proceeds, minimize
transition costs required to be recovered through the CTC (by shortening the
length of the CTC recovery period), and thus reduce customer bills as rapidly as
possible. Other benefits of this exchange include the resolution of all joint
ownership issues, and other risks and costs associated with the jointly-owned
units. Although the PUC has said the exchange appears to be in the public
interest, the definitive exchange agreement must be submitted for PUC approval,
and certain aspects of the exchange will have to be approved by, among other
agencies, the FERC, the NRC and the Department of Justice. The power station
exchange is expected to occur simultaneously with the anticipated closing of the
sale of Duquesne's generation through the auction at the end of 1999 or in early
2000. 

Termination of the AYE Merger

     On July 28, 1998, DQE's board of directors concluded that it could not
consummate the merger with AYE, toward which Duquesne had been working. Duquesne
believes that AYE suffered a material adverse effect as a result of the PUC's
final restructuring order regarding AYE's utility subsidiary, West Penn Power
Company. More information regarding this decision is set forth in Duquesne's
Current Report on Form 8-K dated July 28, 1998. On July 30, 1998, AYE informed
DQE that it would continue to work toward consummation of the merger, and also
pursue all remedies available to protect the legal and financial interests of
AYE and its shareholders.

     On September 17, 1998, the PUC issued an order stating that, unless the
parties jointly agreed to an extension of time to consummate the merger beyond
October 5, 1998 (the relevant date under the merger agreement), their merger
application with the PUC would be considered withdrawn. On October 5, 1998,
Duquesne announced its unilateral termination of the merger agreement. More
information regarding this termination is set forth in Duquesne's Current Report
on Form 8-K dated October 5, 1998. In a letter dated February 24, 1999, the PUC
informed Duquesne that the merger application was deemed withdrawn and the
docket was closed. 

     AYE filed suit in the United States District Court for the Western District
of Pennsylvania, seeking to compel Duquesne to proceed with the merger and
seeking a temporary restraining order and preliminary injunction to prevent
Duquesne from certain actions pending a trial, or in the alternative seeking an
unspecified amount of money damages. On October 28, 1998, the judge denied AYE's
motion for the temporary restraining order and preliminary injunction. AYE
appealed to the United States Court of Appeals for the Third Circuit, asking for
an injunction pending the appeal and expedited treatment of the appeal. On
November 6, 1998, the Third Circuit denied the motion for an injunction and
granted the motion to expedite the appeal. 

     On March 11, 1999, the Third Circuit vacated the October 28 denial of a
preliminary injunction. The Third Circuit remanded the case to the District
Court for further proceedings to address certain issues, including whether AYE
could demonstrate a reasonable likelihood of success on the merits, before
determining whether any injunctive relief is warranted. On March 12, 1999, AYE
filed a motion for a temporary restraining order with the district court, and a
hearing was held that same day. On March 16, 1999, AYE and DQE entered into a
consent agreement, which was approved by the district court on March 18.
Pursuant to the consent agreement, AYE and DQE have agreed, among other things,
that pending the consolidated hearing on AYE's application for a 

                                       32
<PAGE>
 
preliminary injunction and/or an expedited trial on the merits, both parties
will give each other 10 business days' notice before taking or omitting to take
any action which would prevent the merger from qualifying for "pooling of
interests" accounting treatment. This would not prevent either party from
entering into any agreement, but would require the 10 business days' notice
prior to closing any transaction which prevents pooling. The consent agreement
shall terminate on September 16, 1999, unless earlier terminated or extended by
mutual agreement or an order of the district court.

     DQE continues to believe that AYE's claim is entirely without merit in
light of the $1 billion disallowance of its stranded costs, which constituted a
material adverse effect under the merger agreement and entitled DQE to terminate
it as of October 5, 1998. DQE will continue to defend itself vigorously against
AYE's claims and intends to pursue a prompt resolution of the litigation. On
March 25, 1999, DQE petitioned the Third Circuit for rehearing. In the interim,
DQE intends to continue to pursue the implementation of customer choice under
its PUC-approved restructuring plan, including the power station exchange with
FirstEnergy and the generation asset auction. The ultimate outcome of this suit
cannot be determined at this time.

F.                                                       
SHORT-TERM BORROWING AND REVOLVING CREDIT ARRANGEMENTS   
                                                         
     At December 31, 1998, Duquesne had a $150 million extendible revolving
credit arrangement, expiring in October 1999. Interest rates can, in accordance
with the option selected at the time of the borrowing, be based on prime,
Eurodollar or certificate of deposit rates. Commitment fees are based on the
unborrowed amount of the commitment. The credit facility contains a two-year
repayment period for any amounts outstanding at the expiration of the revolving
credit period. At December 31, 1998 and December 31, 1997, there were no
short-term borrowings outstanding. 
                                                         
G.                                                       
INCOME TAXES                                                   

Since DQE's formation in 1989, Duquesne has filed consolidated federal
income tax returns with its parent and other companies in the affiliated group.
The annual federal corporate income tax returns have been audited by the
Internal Revenue Service (IRS) for the tax years through 1992. The IRS is
reviewing the 1993 and 1994 returns, and the tax years 1995, 1996, 1997 and 1998
remain subject to IRS review. Duquesne does not believe that final settlement of
the federal income tax returns for the years 1990 through 1998 will have a
materially adverse effect on its financial position, results of operations or
cash flows. 

Deferred Tax Assets (Liabilities) as of December 31,
--------------------------------------------------------------------------------
                                                    (Thousands of Dollars)
                                                --------------------------------
                                                     1998            1997      
--------------------------------------------------------------------------------
Tax benefit - long-term investments             $   196,184     $   190,375
BV lease liability                                  167,440              --
Unbilled revenue                                     16,589          19,637
Investment tax credits unamortized                    9,990          40,573
Gain on sale/leaseback of BV Unit 2                      --          58,137
Other                                                57,565          57,037
--------------------------------------------------------------------------------
        Deferred tax assets                         447,768         365,759
--------------------------------------------------------------------------------
Transition costs                                   (664,810)             -- 
Property depreciation                              (285,783)       (712,247)
Deferred coal and energy costs                      (16,525)        (15,910)
Loss on reacquired debt unamortized                 (12,976)        (31,360)
Regulatory assets                                    (9,620)       (125,171)
Other                                               (68,326)        (55,319)
--------------------------------------------------------------------------------
        Deferred tax liabilities                 (1,058,040)       (940,007)
--------------------------------------------------------------------------------
                Net Deferred Tax Liabilities    $  (610,272)    $  (574,248)
================================================================================


                                      33
<PAGE>
 
--------------------------------------------------------------------------------

Income Taxes
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                           (Thousands of Dollars)
                                                                    --------------------------------------
                                                                           Year Ended December 31,
                                                                    --------------------------------------
                                                                       1998         1997         1996
----------------------------------------------------------------------------------------------------------
<S>                     <C>                                         <C>          <C>          <C> 
Currently payable:      Federal                                     $  93,493    $  98,843    $  95,524
                        State                                          25,599       28,608       29,325
Deferred - net:         Federal                                       (31,642)     (42,712)     (30,950)
                        State                                           2,211         (152)        (697)
Investment tax credits deferred - net                                  (7,166)      (7,804)      (7,838)
----------------------------------------------------------------------------------------------------------
                Total Included in Operating Expenses                $  82,495    $  76,783    $  85,364
----------------------------------------------------------------------------------------------------------
Included in other income and deductions:
Currently payable:      Federal                                     $ (62,409)   $ (39,536)   $  24,774
                        State                                            (757)        (575)      14,710
Deferred - net:         Federal                                        73,968       43,672      (25,944)
                        State                                              --           --      (14,176)
Investment tax credits                                                 (3,220)        (616)      (1,720)
----------------------------------------------------------------------------------------------------------
                Total Included in Other Income and Deductions       $   7,582    $   2,945    $  (2,356)
----------------------------------------------------------------------------------------------------------
                Total Income Tax Expense                            $  90,077    $  79,728    $  83,008
==========================================================================================================
</TABLE> 
     Total income taxes differ from the amount computed by applying the
statutory federal income tax rate to income before income taxes.

Income Tax Expense Reconciliation
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                           (Thousands of Dollars)
                                                                    --------------------------------------
                                                                           Year Ended December 31,
                                                                    --------------------------------------
                                                                       1998         1997         1996
----------------------------------------------------------------------------------------------------------
<S>                                                                 <C>          <C>          <C> 
Computed federal income tax at statutory rate                       $ 83,519     $  77,542    $  81,504
Increase (decrease) in taxes resulting from:
        State income taxes, net of federal income tax benefits        16,639        18,595       18,955
        Investment tax benefits - net                                   (641)       (7,734)      (9,641)
        Amortization of deferred investment tax credits              (10,385)       (8,420)      (9,559)
        Other                                                            945          (255)       1,749
----------------------------------------------------------------------------------------------------------
                Total Income Tax Expense                            $ 90,077     $  79,728    $  83,008
==========================================================================================================
</TABLE> 
H. 
LEASES
   
  Duquesne leases nuclear fuel, a portion of a nuclear generating plant,
certain office buildings, computer equipment, and other property and equipment.

Capital Leases as of December 31,
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                                 (Thousands of Dollars)
                                                                                    1998        1997
----------------------------------------------------------------------------------------------------------
<S>                                                                              <C>          <C> 
Nuclear fuel                                                                     $ 100,756    $ 92,901
Electric plant                                                                      19,923      20,761
Other                                                                                2,695          --
----------------------------------------------------------------------------------------------------------
        Total                                                                      123,374     113,662
Less: Accumulated amortization                                                     (63,604)    (50,725)
----------------------------------------------------------------------------------------------------------
                Property Held Under Capital Leases - Net (a)                     $  59,770    $ 62,937
==========================================================================================================
</TABLE> 
(a)  Includes $2,037 in 1998 and $2,874 in 1997 of capital leases with
     associated obligations retired.

     In 1987, Duquesne sold and leased back its 13.74 percent interest in BV
Unit 2; the sale was exclusive of transmission and common facilities. Duquesne
subsequently leased back its interest in the unit for a term of 29.5 years. The
lease provides for semi-annual payments and was accounted for as an operating
lease. In conjunction with the PUC restructuring order, it was determined that
the costs 

                                      34
<PAGE>
 
related to the lease were transition costs to be recovered through the CTC.
Duquesne recorded the lease liability and a corresponding regulatory asset for
the present value of the future lease payments. Duquesne is responsible under
the terms of the lease for all costs related to its interest in the unit. In
December 1992, Duquesne participated in the refinancing of collateralized lease
bonds to take advantage of lower interest rates, thus reducing the annual lease
payments. The bonds were originally issued in 1987 to partially fund the lease
of BV Unit 2. The associated letter of credit securing the lessor's equity
interest in the unit is $194 million and the term of the letter of credit
extends to 1999. Duquesne currently anticipates terminating the lease in
connection with the power station exchange with FirstEnergy, in which case the
lease liability recorded on the consolidated balance sheet would no longer be an
obligation of Duquesne. The underlying collateralized lease bonds ($371.0
million at December 31, 1998) would become direct obligations of Duquesne and be
recorded as debt on the consolidated balance sheet. (See "Rate Matters," Note E,
on page 29.) 

     Leased nuclear fuel is amortized as the fuel is burned and charged to fuel
and purchased power expense on the statement of consolidated income. The
amortization of all other leased property is based on rental payments made
(except the BV Unit 2 lease). These lease-related expenses are charged to
operating expenses on the statement of consolidated income.

Summary of Rental Payments
--------------------------------------------------------------------------------
                                                 (Thousands of Dollars)
                                         ---------------------------------------
                                                 Year Ended December 31,
                                         ---------------------------------------
                                           1998       1997       1996
--------------------------------------------------------------------------------
Operating leases                         $57,324    $60,684    $59,503
Amortization of capital leases            12,943     16,847     19,378
Interest on capital leases                 4,386      3,435      3,703
--------------------------------------------------------------------------------
     Total Rental Payments               $74,653    $80,966    $82,584
--------------------------------------------------------------------------------
Future Minimum Lease Payments
--------------------------------------------------------------------------------

                                                   (Thousands of Dollars)
                                            ------------------------------------
                                            BV Unit 2     Operating     Capital
Year Ended December 31,                       Lease         Leases       Leases
--------------------------------------------------------------------------------
1999                                        $  45,476     $  11,393    $  24,839
2000                                           45,670        11,160       13,516
2001                                           45,643        11,102       10,028
2002                                           47,305        10,991        5,132
2003                                           53,100         2,551        3,085
2004 and thereafter                           756,994         1,916       16,919
--------------------------------------------------------------------------------
     Total Minimum Lease Payments           $ 994,188     $  49,113    $  73,519
--------------------------------------------------------------------------------
Less: Amount representing interest                                      (15,786)
--------------------------------------------------------------------------------
     Present value of mimimum lease payments for capital leases (a)    $  57,733
================================================================================
(a)  Includes current obligations of $21.1 million at December 31, 1998.

     Future minimum lease payments for operating leases are related principally
to certain corporate offices. Future minimum lease payments for capital leases
are related principally to the estimated use of nuclear fuel financed through
leasing arrangements expiring in 1999 and building leases. 

     Future payments due to Duquesne, as of December 31, 1998, under subleases
of certain corporate office space are approximately $6.0 million in 1999, $6.0
million in 2000 and $12.7 million thereafter.

I.
COMMITMENTS AND CONTINGENCIES

     Duquesne anticipates divesting itself of its generation assets through the
auction and the power station exchange by early 2000 and, depending on the
regulatory approvals of the final agreements regarding the divestiture, expects
certain obligations related to the divested assets will be transferred to the
future owners. (See "Restructuring Plan" discussion, Note E, on page 30.)

Construction, Investments and Acquisitions 

     Duquesne estimates that it will spend, excluding AFC and nuclear fuel,
approximately $110 million in 1999 (including $30 million for generation), $75
million in 2000 (excluding generation) and $70 million in 2001 (excluding
generation) for electric utility construction.


                                      35
<PAGE>
 
Nuclear-Related Matters

     Duquesne has an interest in three nuclear units, two of which it operates.
The operation of a nuclear facility involves special risks, potential
liabilities, and specific regulatory and safety requirements. Specific
information about risk management and potential liabilities is discussed below.

     Nuclear Decommissioning. Duquesne expects to decommission BV Unit 1, BV
Unit 2 and Perry Unit 1 no earlier than the expiration of each plant's operating
license in 2016, 2027 and 2026, respectively. At the end of its operating life,
BV Unit 1 may be placed in safe storage until BV Unit 2 is ready to be
decommissioned, at which time the units may be decommissioned together. 

     Based on site-specific studies conducted in 1997 for BV Unit 1 and BV Unit
2, and a 1997 update of the 1994 study for Perry Unit 1, Duquesne's approximate
share of the total estimated decommissioning costs, including removal and
decontamination costs, is $170 million, $55 million and $90 million,
respectively. The amount currently used to determine Duquesne's cost of service
related to decommissioning all three nuclear units is $224 million. 

     Funding for nuclear decommissioning costs is deposited in external,
segregated trust accounts and invested in a portfolio of corporate common stock
and debt securities, municipal bonds, certificates of deposit and United States
government securities. The market value of the aggregate trust fund balances at
December 31, 1998, totaled approximately $62.7 million. 

     As part of the power station exchange, FirstEnergy has agreed to assume the
decommissioning liability for each of the nuclear plants in exchange for the
balance in the decommissioning trust funds, plus the decommissioning costs
expected to be collected through the CTC. 

     Nuclear Insurance. The Price-Anderson Amendments to the Atomic Energy Act
of 1954 limit public liability from a single incident at a nuclear plant to $9.8
billion. The maximum available private primary insurance of $200 million has
been purchased by Duquesne. Additional protection of $9.6 billion would be
provided by an assessment of up to $88.1 million per incident on each licensed
nuclear unit in the United States. Duquesne's maximum total possible assessment,
$66.1 million, which is based on its ownership or leasehold interests in three
nuclear generating units, would be limited to a maximum of $7.5 million per
incident per year. This assessment is subject to indexing for inflation and may
be subject to state premium taxes. If assessments from the nuclear industry
prove insufficient to pay claims, the United States Congress could impose other
revenue-raising measures on the industry. 

     Duquesne's share of insurance coverage for property damage, decommissioning
and decontamination liability is $1.2 billion. Duquesne would be responsible for
its share of any damages in excess of insurance coverage. In addition, if the
property damage reserves of Nuclear Electric Insurance Limited (NEIL), an
industry mutual insurance company that provides a portion of this coverage, are
inadequate to cover claims arising from an incident at any United States nuclear
site covered by that insurer, Duquesne could be assessed retrospective premiums
totaling a maximum of $7.3 million.

     In addition, Duquesne participates in a NEIL program that provides
insurance for the increased cost of generation and/or purchased power resulting
from an accidental outage of a nuclear unit. Subject to the policy deductible,
terms and limit, the coverage provides for a weekly indemnity of the estimated
incremental costs during the three-year period starting 17 weeks after an
accident, with no coverage thereafter. If NEIL's losses for this program ever
exceed its reserves, Duquesne could be assessed retrospective premiums totaling
a maximum of $2.6 million. 

     Beaver Valley Power Station (BVPS). BVPS's two units are equipped with
steam generators designed and built by Westinghouse Electric Corporation
(Westinghouse). Similar to other Westinghouse nuclear plants, outside diameter
stress corrosion cracking (ODSCC) has occurred in the steam generator tubes of
both units. BV Unit 1, which was placed in service in 1976, has removed
approximately 17 percent of its steam generator tubes from service through a
process called "plugging." However, BV Unit 1 still has the capability to
operate at 100 percent reactor power and has the ability to return tubes to
service by repairing them through a process called "sleeving." No tubes at
either BV Unit 1 or BV Unit 2 have been sleeved to date. BV Unit 2, which was
placed in service 11 years after BV Unit 1, has not yet exhibited the degree of
ODSCC experienced at BV Unit 1. Approximately 3 percent of BV Unit 2's tubes are
plugged; however, it is too early in the life of the unit to determine the
extent to which ODSCC may become a problem at that unit. 

     Duquesne has undertaken certain measures, such as increased inspections,
water chemistry control and tube plugging, to minimize the operational impact of
and reduce susceptibility to ODSCC. Although Duquesne has taken these steps to
allay the effects of ODSCC, the inherent potential for future ODSCC in steam
generator tubes of the Westinghouse design still exists. 


                                      36
<PAGE>
 
Material acceleration in the rate of ODSCC could lead to a loss of plant
efficiency, significant repairs or the possible replacement of the BV Unit 1
steam generators. The total replacement cost of the BV Unit 1 steam generators
is currently estimated at $125 million. Duquesne would be responsible for $59
million of this total, which includes the cost of equipment removal and
replacement steam generators, but excludes replacement power costs. The earliest
that the BV Unit 1 steam generators could be replaced during a currently
scheduled refueling outage is the fall of 2001. 

     Duquesne continues to explore all viable means of managing ODSCC, including
new repair technologies, and plans to continue to perform 100 percent tube
inspections during future refueling outages. However, Duquesne may be required
to perform an earlier inspection of BV Unit 1's tubes and other equipment during
a mid-cycle outage in 1999, to comply with NRC requirements to conduct such
inspections at BV Unit 1 at least every 20 months. Duquesne has requested
permission from the NRC to postpone these inspections until BV Unit 1's next
refueling outage, currently scheduled to begin in the spring of 2000. Duquesne
completed its inspection of BV Unit 2's tubes during a forced outage in 1998 to
comply with NRC requirements to conduct such inspections at BV Unit 2 at least
every 24 months. The next refueling outage for BV Unit 2 is currently scheduled
to begin at the end of February 1999. No steam generator tube inspections will
be performed until the subsequent refueling outage, currently scheduled for the
fall of 2000. Duquesne will continue to monitor and evaluate the condition of
the BVPS steam generators. 

     BV Unit 1 went off-line on January 30, 1998, due to an issue identified in
a technical review completed by Duquesne. BV Unit 2 went off-line on December
16, 1997, to repair the emergency air supply system to the control room. BV Unit
2 remained off-line due to other issues identified by a technical review,
similar to that performed at BV Unit 1. These technical reviews, held in
response to a 1997 commitment made by Duquesne to the NRC, have been completed.
Duquesne was one of many utilities faced with similar issues, some of which date
back to the initial start-up of BVPS. BV Unit 1 returned to service on August
15, 1998, and BV Unit 2 returned to service on September 28, 1998.

     Spent Nuclear Fuel Disposal. The Nuclear Waste Policy Act of 1982
established a federal policy for handling and disposing of spent nuclear fuel
and a policy requiring the establishment of a final repository to accept spent
nuclear fuel. Electric utility companies have entered into contracts with the
United States Department of Energy (DOE) for the permanent disposal of spent
nuclear fuel and high-level radioactive waste in compliance with this
legislation. The DOE has indicated that its repository under these contracts
will not be available for acceptance of spent nuclear fuel before 2010. The DOE
has not yet established an interim or permanent storage facility, despite a
ruling by the United States Court of Appeals for the District of Columbia
Circuit that the DOE was legally obligated to begin acceptance of spent nuclear
fuel for disposal by January 31, 1998. Existing on-site spent nuclear fuel
storage capacities at BV Unit 1, BV Unit 2 and Perry Unit 1 are expected to be
sufficient until 2018, 2012 and 2011, respectively. 

     In early 1997, Duquesne joined 35 other electric utilities and 46 states,
state agencies and regulatory commissions in filing suit in the United States
Court of Appeals for the District of Columbia Circuit against the DOE. The
parties requested the court to suspend the utilities' payments into the Nuclear
Waste Fund and to place future payments into an escrow account until the DOE
fulfills its obligation to accept spent nuclear fuel. The DOE had requested that
the court delay litigation while it pursued alternative dispute resolution under
the terms of its contracts with the utilities. The court ruling, issued November
14, 1997, and affirmed on rehearing May 5, 1998, denied the relief requested by
the utilities and states and permitted the DOE to pursue alternative dispute
resolution, but prohibited the DOE from using its lack of a spent fuel
repository as a defense. The United States Supreme Court declined to review the
decision. The utilities' remaining remedy is to sue the DOE in federal court for
money damages caused by the DOE's delay in fulfilling its obligations. 

     Uranium Enrichment Obligations. Nuclear reactor licensees in the United
States are assessed annually for the decontamination and decommissioning of DOE
uranium enrichment facilities. Assessments are based on the amount of uranium a
utility had processed for enrichment prior to enactment of the National Energy
Policy Act of 1992, and are to be paid by such utilities over a 15-year period.
At December 31, 1998, Duquesne's liability for contributions was approximately
$6.2 million (subject to an inflation adjustment), which will be recovered
through the CTC as part of transition costs.


                                      37
<PAGE>
 
Fossil Decommissioning

     Based on studies conducted in 1997, the amount for fossil decommissioning
is currently estimated to be $130 million for Duquesne's interest in 17 units at
six sites. Each unit is expected to be decommissioned upon the cessation of the
unit's final operations. Duquesne was not permitted to recover these costs as
part of its restructuring plan. (See "Rate Matters," Note E, on page 29.)

Guarantees

     Duquesne and the other owners of Bruce Mansfield Power Station (Bruce
Mansfield) have guaranteed certain debt and lease obligations related to a coal
supply contract for Bruce Mansfield. At December 31, 1998, Duquesne's share of
these guarantees was $10.4 million. 

Residual Waste Management Regulations 

     In 1992, the Pennsylvania Department of Environmental Protection (DEP)
issued Residual Waste Management Regulations governing the generation and
management of non-hazardous residual waste, such as coal ash. Duquesne is
assessing the sites it utilizes and has developed compliance strategies that are
currently under review by the DEP. Based on information currently available,
$4.5 million will be spent in 1999 to comply with these DEP regulations. The
additional capital cost of compliance is estimated, based on current
information, to be approximately $4.8 million per year for the next three years.
This estimate is subject to the results of groundwater assessments and DEP final
approval of compliance plans. 

Employees 

     Duquesne is party to a labor contract expiring in September 2001 with the
International Brotherhood of Electrical Workers (IBEW), which represents
approximately 2,000 of Duquesne's employees. The contract provides, among other
things, employment security, income protection and 3 percent annual wage
increases through September 2000. Duquesne and the IBEW have agreed on a package
of additional benefits and protections for union employees affected by the
divestiture of generation assets. Any buyer of generation assets currently owned
by Duquesne will be required to offer work to current IBEW employees on a
seniority basis, recognize the IBEW as the exclusive bargaining representative,
establish comparable employee benefit plans, and assume the current labor
contract. 

     In connection with the anticipated divestiture, Duquesne has developed
early retirement programs and enhanced separation packages available for
eligible IBEW and management employees. Duquesne expects to recover related
costs through the divestiture proceeds. 

Other

     Duquesne is involved in various other legal proceedings and environmental
matters. Duquesne believes that such proceedings and matters, in total, will not
have a materially adverse effect on its financial position, results of
operations or cash flows. 

J. LONG-TERM DEBT

     The pollution control notes arise from the sale of bonds by public
authorities for the purposes of financing construction of pollution control
facilities at Duquesne's plants or refunding previously issued bonds. Duquesne
is obligated to pay the principal and interest on these bonds. For certain of
the pollution control notes, there is an annual commitment fee for an
irrevocable letter of credit. Under certain circumstances, the letter of credit
is available for the payment of interest on, or redemption of, all or a portion
of the notes. 

<TABLE> 
<CAPTION> 

Long-Term Debt as of December 31,
---------------------------------------------------------------------------------------------------
                                                                           (Thousands of Dollars)
                                                                        ---------------------------
                                           Interest                        Principal Outstanding
                                             Rate        Maturity           1998           1997
---------------------------------------------------------------------------------------------------
<S>                                      <C>             <C>           <C>            <C>  
First mortgage bonds                     5.90%-8.375%    1999-2038       $743,000(a)    $778,000(b)
Pollution control notes                  Adjustable(c)   2009-2030        417,985        417,985
Sinking fund debentures                      5.00%          2010            2,791          2,791
Miscellaneous                                                                  --         23,172
Less: Unamortized debt discount 
        and premium - net                                                  (3,428)        (3,672)
---------------------------------------------------------------------------------------------------
                Total Long-Term Debt                                   $1,160,348     $1,218,276
===================================================================================================
</TABLE> 
(a)  Excludes $75.0 million related to current maturities during 1999.
(b)  Excludes $75.0 million related to current maturities during 1998.
(c)  The pollution control notes have adjustable interest rates. The interest
     rates at year-end averaged 3.9 percent in 1998 and 3.9 percent in 1997.

                                       38
<PAGE>
 
     At December 31, 1998, sinking fund requirements and maturities of long-term
debt out-standing for the next five years were $75.0 million in 1999, $100.0
million in 2000, none in 2001 and 2002, and $100.0 million in 2003. 

     Total interest charges were $80.2 million in 1998, $85.8 million in 1997,
and $88.9 million in 1996. Interest costs attributable to long-term debt and
other interest were $82.4 million, $88.1 million and $90.1 million in 1998, 1997
and 1996, respectively. Of these amounts, $2.2 million in 1998, $2.3 million in
1997 and $1.2 million in 1996 was capitalized as AFC. Debt discount or premium
and related issuance expenses are amortized over the lives of the applicable
issues.

     At December 31, 1998, the fair value of Duquesne's long-term debt,
including current maturities and sinking fund requirements, estimated on the
basis of quoted market prices for the same or similar issues or current rates
offered to Duquesne for debt of the same remaining maturities, was $1,258.5
million. The principal amount included in Duquesne's consolidated balance sheet
is $1,238.8 million. 

      At December 31, 1998 and 1997, Duquesne was in compliance
with all of its debt covenants. 

K. PREFERRED AND PREFERENCE STOCK

<TABLE> 
<CAPTION> 

Preferred and Preference Stock as of December 31,
-------------------------------------------------------------------------------------------------------
                                                                  (Thousands of Dollars)
                                                   ----------------------------------------------------     
                                                           1998                         1997
                                 Call Price        ----------------------------------------------------
                                  Per Share         Shares        Amount         Shares         Amount
-------------------------------------------------------------------------------------------------------
<S>                              <C>               <C>           <C>          <C>              <C>   
Preferred Stock Series:  
3.75% (a)(b)                        $51.00         148,000       $  7,407       148,000        $  7,407
4.00% (a)(b)                         51.50         549,709         27,486       549,709          27,486
4.10% (a)(b)                         51.75         119,860          6,012       119,860           6,012
4.15% (a)(b)                         51.73         132,450          6,643       132,450           6,643
4.20% (a)(b)                         51.71         100,000          5,021       100,000           5,021
$2.10 (a)(b)                         51.84         159,000          8,039       159,400           8,039
9.00% (c)                               --              10          3,000            10           3,000
8.375% (d)                              --       6,000,000        150,000     6,000,000         150,000
6.5% (e)                                --              15          1,500            10           1,000
-------------------------------------------------------------------------------------------------------
        Total Preferred Stock                                     215,108                       214,608
-------------------------------------------------------------------------------------------------------
Preference Stock Series:
Plan Series A (b)(f)                 36.90         779,394         26,914       799,456          28,295
-------------------------------------------------------------------------------------------------------
Deferred ESOP benefit                                             (14,240)                      (16,400)
-------------------------------------------------------------------------------------------------------
        Total Preferred and Preference Stock                     $227,782                      $226,503
=======================================================================================================
</TABLE> 

(a)  Preferred stock: 4,000,000 authorized shares; $50 par value; cumulative;
     $50 per share involuntary liquidation value
(b)  Non-redeemable
(c)  500 authorized shares; $300,000 par value; involuntary liquidation value
     $300,000 per share; mandatory redemption beginning August 2000
(d)  Cumulative Monthly Income Preferred Securities, Series A (MIPS): 6,000,000
     authorized shares; $25 involuntary liquidation value
(e)  1,500 authorized shares; $100,000 par value; $100,000 involuntary
     liquidation value
(f)  Preference stock: 8,000,000 authorized shares; $1 par value; cumulative
     $35.50 per share involuntary liquidation value

     A Duquesne subsidiary has 15 shares of preferred stock, par value $100,000
per share, outstanding. The holders of such shares are entitled to a 6.5 percent
annual dividend to be paid each September 30. In 1995, another Duquesne
subsidiary issued 10 shares of preferred stock, par value $300,000 per share.
The holders of such shares are entitled to a 9.0 percent annual dividend paid
quarterly. 

     In May 1996, Duquesne Capital L.P. (Duquesne Capital), a special-purpose
limited partnership of which Duquesne is the sole general partner, issued $150.0
million principal amount of 83/8 percent Monthly Income Preferred Securities
(MIPS), Series A, with a stated liquidation value of $25.00. The holders of MIPS
are entitled to annual dividends of 83/8 percent, payable monthly. The sole
assets of Duquesne Capital are Duquesne's 83/8 percent debentures, with a
principal amount of $151.5 million. These debt securities may be redeemed at
Duquesne's option on or after May 31, 2001. Duquesne has guaranteed the payment
of distributions on, and redemption price and liquidation amount in respect of
the MIPS, to the extent that Duquesne Capital has funds available for such
payment from the debt securities. Upon maturity or prior redemption of such debt
securities, the MIPS will be mandatorily redeemed. Duquesne's consolidated
balance sheet reflects only the $150.0 million of MIPS. 

                                       39
<PAGE>
 
     Holders of Duquesne's preferred stock are entitled to cumulative quarterly
dividends. If four quarterly dividends on any series of preferred stock are in
arrears, holders of the preferred stock are entitled to elect a majority of
Duquesne's board of directors until all dividends have been paid. Holders of
Duquesne's preference stock are entitled to receive cumulative quarterly
dividends if dividends on all series of preferred stock are paid. If six
quarterly dividends on any series of preference stock are in arrears, holders of
the preference stock are entitled to elect two of Duquesne's directors until all
dividends have been paid. At December 31, 1998, Duquesne had made all dividend
payments. Preferred and preference dividends were $16.6 million, $16.6 million
and $12.0 million in 1998, 1997 and 1996. Total preferred and preference stock
had involuntary liquidation values of $278.4 million and $244.4 million, which
exceeded par by $26.9 million and $27.6 million at December 31, 1998 and 1997.

     In December 1991, Duquesne established an Employee Stock Ownership Plan
(ESOP) to provide matching contributions for a 401(k) Retirement Savings Plan
for Management Employees. (See "Employee Benefits," Note M, on page 41.)
Duquesne issued and sold 845,070 shares of preference stock, plan series A to
the trustee of the ESOP. As consideration for the stock, Duquesne received a
note valued at $30 million from the trustee. The preference stock has an annual
dividend rate of $2.80 per share, and each share of the preference stock is
exchangeable for one and one-half shares of DQE common stock. At December 31,
1998, $14.2 million of preference stock issued in connection with the
establishment of the ESOP had been offset, for financial statement purposes, by
the recognition of a deferred ESOP benefit. Dividends on the preference stock
and cash contributions from Duquesne are used to fund the repayment of the ESOP
note. Duquesne was not required to make a cash contribution for 1998. Duquesne
made cash contributions of approximately $1.1 million for 1997 and $1.4 million
for 1996. These cash contributions were the difference between the ESOP debt
service and the amount of dividends on ESOP shares ($2.2 million in 1998, $2.3
million in 1997 and 1996). As shares of preference stock are allocated to the
accounts of participants in the ESOP, Duquesne recognizes compensation expense,
and the amount of the deferred compensation benefit is amortized. Duquesne
recognized compensation expense related to the 401(k) plans of $1.6 million in
1998, $3.2 million in 1997 and $2.3 million in 1996. Although outstanding
preferred stock is generally callable on notice of not less than 30 days, at
stated prices plus accrued dividends, the outstanding MIPS and preference stock
are not currently callable. None of the remaining Duquesne preferred or
preference stock issues has mandatory purchase requirements. 

L. EQUITY

     In July 1989, Duquesne became a wholly owned subsidiary of DQE, the holding
company formed as part of a shareholder-approved restructuring. As a result of
the restructuring, DQE common stock replaced all outstanding shares of Duquesne
common stock, except for ten shares which DQE holds.

     DQE or its predecessor, Duquesne, has continuously paid dividends on common
stock since 1953. Payments of dividends on Duquesne's common stock may be
restricted by Duquesne's obligations to holders of preferred and preference
stock pursuant to Duquesne's Restated Articles of Incorporation and by
obligations of Duquesne's subsidiaries to holders of their preferred securities.
No dividends or distributions may be made on Duquesne's common stock if Duquesne
has not paid dividends or sinking fund obligations on its preferred or
preference stock. Further, the aggregate amount of Duquesne's common stock
dividend payments or distributions may not exceed certain percentages of net
income if the ratio of total common shareholder's equity to total capitalization
is less than specified percentages. As all of Duquesne's common stock is owned
by DQE, to the extent that Duquesne cannot pay common dividends, DQE may not be
able to pay dividends on its common or preferred stock. No part of the retained
earnings of Duquesne was restricted at December 31, 1998. (See "Rate Matters,"
Note E, on pages 29 through 33.)

     Effective December 31, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income (SFAS No. 130). This statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. The objective of the statement is to report a measure of all changes
in equity of a business enterprise that result from recognized transactions and
other economic events of the period other than transactions with owners in their
capacity as owners (comprehensive income). 

Accumulated Other Comprehensive Income Balances as of December 31,

<TABLE> 
<CAPTION> 
--------------------------------------------------------------------------------
                                                     (Thousands of Dollars)
                                              ----------------------------------
                                                1998        1997         1996
--------------------------------------------------------------------------------
<S>                                           <C>         <C>         <C>   
Balance at beginning of year                  $ 15,590    $ 11,102    $ 13,400
Unrealized gains on securities, net of tax      11,736       4,488      (2,298)
--------------------------------------------------------------------------------
     Balance at end of year                   $ 27,326    $ 15,590    $ 11,102
================================================================================
</TABLE> 

                                       40
<PAGE>
 
     In accordance with SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities (SFAS No. 115), these investments are classified as
available-for-sale and are stated at market value. The amount of unrealized
holding gains related to marketable securities was $46.5 million ($27.3 million
net of tax) at December 31, 1998, and $26.6 million ($15.6 million net of tax)
at December 31, 1997. 

M. EMPLOYEE BENEFITS

Pension and Postretirement Benefits

     Duquesne maintains retirement plans to provide pensions for all eligible
employees. Upon retirement, an employee receives a monthly pension based on his
or her length of service and compensation. The cost of funding the pension plan
is determined by the unit credit actuarial cost method. Duquesne's policy is to
record this cost as an expense and to fund the pension plans by an amount that
is at least equal to the minimum funding requirements of the Employee Retirement
Income Security Act of 1974, but which does not exceed the maximum
tax-deductible amount for the year. Pension costs charged to expense or
construction were $12.2 million for 1998, $12.7 million for 1997, and $11.9
million for 1996. 

     In addition to pension benefits, Duquesne provides certain health care
benefits and life insurance for some retired employees. Participating retirees
make contributions, which may be adjusted annually, to the health care plan. The
life insurance plan is non-contributory. Company-provided health care benefits
terminate when covered individuals become eligible for Medicare benefits or
reach age 65, whichever comes first. Duquesne funds actual expenditures for
obligations under the plans on a "pay-as-you-go" basis. Duquesne has the right
to modify or terminate the plans. 

     Duquesne accrues the actuarially determined costs of the aforementioned
postretirement benefits over the period from the date of hire until the date the
employee becomes fully eligible for benefits. Duquesne has elected to amortize
the transition obligation over a 20 year period.

     In 1998, Duquesne adopted SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. This statement revises employers'
disclosures about pension and other postretirement benefit plans.

     Duquesne sponsors several qualified and nonqualified pension plans and
other postretirement benefit plans for its employees. The following tables
provide a reconciliation of the changes in the plans' benefit obligations and
fair value of plan assets over the two-year period ending December 31, 1998, a
statement of the funded status as of December 31, 1998 and 1997, and summary of
assumptions used in the measurement of Duquesne's benefit obligation: 

<TABLE> 
<CAPTION> 

Funded Status of the Pension and Postretirement Benefit Plans as of December 31,
---------------------------------------------------------------------------------------------------------
                                                                     (Thousands of Dollars)
                                                       --------------------------------------------------  
                                                             Pension                  Postretirement         
                                                       --------------------------------------------------  
                                                       1998          1997          1998          1997
---------------------------------------------------------------------------------------------------------
<S>                                                 <C>           <C>           <C>           <C>     
Change in benefit obligation: 
  Benefit obligation at beginning of year           $ 554,302     $ 497,098     $  46,330     $  39,021
  Service cost                                         14,042        12,340         1,832         1,603
  Interest cost                                        37,723        36,571         3,078         3,048
  Actuarial loss (gain)                                26,231        26,117        (3,003)        2,299
  Benefits paid                                       (26,592)      (25,612)       (1,879)       (1,424)
  Curtailments                                             --         2,923            --         1,783
  Settlements                                            (109)         (544)           --            --
  Special termination benefits                             --         5,409            --            --
---------------------------------------------------------------------------------------------------------
    Benefit obligation at end of year                 605,597       554,302        46,358        46,330
---------------------------------------------------------------------------------------------------------
Change in plan assets:
  Fair value of plan assets at beginning of year      605,457       525,871            --            --
  Actual return on plan assets                         91,561        95,444            --            --
  Employer contributions                               10,706         9,675            --            --
  Benefits paid                                       (26,480)      (25,533)           --            --
---------------------------------------------------------------------------------------------------------
    Fair value of plan assets at end of year          681,244       605,457            --            --
---------------------------------------------------------------------------------------------------------
  Funded status                                        75,647        51,155       (46,358)      (46,330)
  Unrecognized net actuarial loss (gain)             (173,974)     (153,682)       (1,795)        1,208
  Unrecognized prior service cost                      36,285        39,800            --            --
  Unrecognized net transition obligation               10,227        12,039        23,607        25,294
---------------------------------------------------------------------------------------------------------
    Accrued benefit cost                            $ (51,815)    $ (50,688)    $ (24,546)    $ (19,828)
=========================================================================================================
</TABLE> 

                                       41
<PAGE>
 
Weighted-Average Assumptions for the Year Ended December 31,
--------------------------------------------------------------------------------
                                                   Pension        Postretirement
                                               ---------------------------------
                                                1998     1997     1998     1997
--------------------------------------------------------------------------------
Discount rate used to determine projected
     benefits obligation                        6.50%    7.00%    6.50%    7.00%
Assumed rate of return on plan assets           7.50%    8.00%      --       -- 
Assumed change in compensation levels           4.25%    4.75%      --       -- 
Ultimate health care cost trend rate              --       --     5.00     5.50%

     All of Duquesne's plans for postretirement benefits, other than pensions,
have no plan assets. The aggregate benefit obligation for those plans was $46.4
million as of December 31, 1998, and $46.3 million as of December 31, 1997. The
accumulated postretirement benefit obligation comprises the present value of the
estimated future benefits payable to current retirees, and a pro rata portion of
estimated benefits payable to active employees after retirement. 

     Pension assets consist primarily of common stocks, United States
obligations and corporate debt securities.

Components of Net Pension Cost for the Year Ended December 31,
--------------------------------------------------------------------------------
                                                   (Thousands of Dollars)
                                             -----------------------------------
                                                1998       1997         1996
--------------------------------------------------------------------------------
Components of net pension cost:
 Service cost                                $ 14,042    $ 12,340    $ 12,209
 Interest cost                                 37,723      36,571      32,597
 Actual return on plan assets                 (91,561)    (95,444)    (58,173)
 Net amortization and deferrals                52,032      65,800      25,312
--------------------------------------------------------------------------------
        Net Pension Cost                     $ 12,236    $ 19,267    $ 11,945
================================================================================

Components of Postretirement Cost for the Year Ended December 31,
--------------------------------------------------------------------------------
                                                     (Thousands of Dollars)
                                             -----------------------------------
                                                1998        1997        1996
--------------------------------------------------------------------------------
Components of postretirement cost:
Service cost                                 $  1,832    $  1,603    $  1,182
Interest cost                                   3,078       3,048       2,046
Amortization of the transition obligation       1,687       1,686       1,700
Other                                              --         218        (812)
--------------------------------------------------------------------------------
      Total Postretirement Cost              $  6,597    $  6,555    $  4,116
================================================================================

     Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. 

Effect of a One Percent Change in Health Care Cost Trend Rates 
for the Year Ended December 31, 1998
--------------------------------------------------------------------------------
                                                        (Thousands of Dollars)
                                                      --------------------------
                                                         1 Percent  1 Percent
                                                          Increase   Decrease
--------------------------------------------------------------------------------
Effect on total of service and interest cost 
 components of net periodic postretirement health 
 care benefit cost                                         $  602    $  (521)
Effect on the health care component of the accumulated  
 postretirement benefit obligation                         $4,819    $(4,202)

                                       42
<PAGE>
 
Retirement Savings Plan and Other Benefit Options

     Duquesne sponsors separate 401(k) retirement plans for its management and
bargaining unit employees. 

     The 401(k) Retirement Savings Plan for Management Employees provides that
Duquesne will match employee contributions to a 401(k) account up to a maximum
of 6 percent of an employee's eligible salary. The Duquesne match consists of a
$0.25 base match per eligible contribution dollar and an additional $0.25
incentive match per eligible contribution dollar, if Board-approved targets are
achieved. The 1998 incentive target for management was not accomplished.
Duquesne is funding its matching contributions to the 401(k) Retirement Savings
Plan for Management Employees with payments to an ESOP established in December
1991. (See "Preferred and Preference Stock," Note K, on page 39.) 

     The 401(k) Retirement Savings Plan for IBEW Represented Employees provides
that Duquesne will match employee contributions to a 401(k) account up to a
maximum of 4 percent of an employee's eligible salary. The Duquesne match
consists of a $0.25 base match per eligible contribution dollar and an
additional $0.25 incentive match per eligible contribution dollar, if certain
targets are met. In 1998, the incentive target for bargaining unit employees was
not accomplished. 

     DQE's shareholders have approved a long-term incentive plan, as amended,
through which Duquesne may grant management employees options to purchase,
during the years 1987 through 2006, up to a total of 9.9 million shares of DQE's
common stock at prices equal to the fair market value of such stock on the dates
the options were granted. At December 31, 1998, approximately 3.8 million of
these shares were available for future grants. 

     As of December 31, 1998, 1997 and 1996, active grants totaled 1,230,946;
1,084,041; and 1,698,000 shares. Exercise prices of these options ranged from
$15.8334 to $43.4375 at December 31, 1998; $15.8334 to $33.7813 at December 31,
1997; and from $8.2084 to $30.875 at December 31, 1996. Expiration dates of
these grants ranged from 2000 to 2008 at December 31, 1998; from 2000 to 2007 at
December 31, 1997; and from 1997 to 2006 at December 31, 1996. As of December
31, 1998, 1997 and 1996, stock appreciation rights (SARs) had been granted in
connection with 867,104; 635,995; and 984,000 of the options outstanding. During
1998, 233,532 SARs were exercised; 170,476 options were exercised at prices
ranging from $15.8334 to $31.5625; and no options were cancelled. During 1997,
694,984 SARs were exercised; 638,494 options were exercised at prices ranging
from $8.2084 to $30.75; and no options were cancelled. During 1996, 715,000 SARs
were exercised; 267,000 options were exercised at prices ranging from $8.2084 to
$20.3334; and 150 options were cancelled. Of the active grants at December 31,
1998, 1997 and 1996, 750,463; 402,816; and 668,000 were not exercisable.

N.  BUSINESS SEGMENTS AND RELATED INFORMATION

     Effective December 31, 1998, Duquesne adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information (SFAS No. 131). This
statement establishes standards for the way that public business enterprises
report information about operating segments. Operating segments are components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. This statement also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. 

     Historically, Duquesne has been treated as a single integrated business
segment due to its regulated operating environment. The PUC authorized a
combined rate for supplying and delivering electricity to customers which was
cost-based and was designed to recover Duquesne's operating expenses and
investment in electric utility assets and to provide a return on the investment.
As a result of the Customer Choice Act, generation of electricity will be
deregulated and charged at a separate rate from the delivery of electricity
beginning in 1999 (five percent of customers chose alternative generation
suppliers in 1998). For the purposes of complying with SFAS No. 131, Duquesne is
required to disclose information about its business segments separately.
Accordingly, Duquesne has used the PUC-approved separate rates for 1999 to
develop the financial information of the business segments for the periods ended
December 31, 1998, 1997 and 1996. 

     Beginning in 1999, Duquesne's principal business segments (determined by
products and services) will consist of the transmission and distribution by
Duquesne of electricity (electricity delivery business segment) and the
generation by Duquesne of electricity and collection of the CTC (electricity
generation business segment). To comply with SFAS No. 131, Duquesne has reported
the results for 1998, 1997 and 1996 by these business segments and an "all
other" category. The all other category in the following table includes Duquesne
investments below the quantitative threshold for separate disclosure. 

     Financial data for business segments is provided as follows:

                                       43
<PAGE>
Business Segments for the Year Ended December 31,
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                          (Thousands of Dollars)
                                                 Electricity       Electricity             All     
                                                  Delivery          Generation            Other            Consolidated
1998
------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>                <C>                 <C>                 <C> 
Operating revenues                              $   321,484        $   855,310         $        --         $ 1,176,794
Operating expenses                                  183,320            579,969               6,653             769,942
Depreciation and
        amortization expense                         46,723            157,995                  --             204,718
------------------------------------------------------------------------------------------------------------------------
        Operating income (loss)                      91,441            117,346              (6,653)            202,134
Other income                                          3,425             13,161              22,577              39,163
Interest and other charges                           37,711             58,637                 437              96,785
------------------------------------------------------------------------------------------------------------------------
        Income before extraordinary item             57,155             71,870              15,487             144,512
Extraordinary item, net of tax                           --            (82,548)                 --             (82,548)
------------------------------------------------------------------------------------------------------------------------
        Net income (loss) after
                extraordinary item              $    57,155        $   (10,678)        $    15,487         $    61,964
========================================================================================================================

Assets                                          $ 1,314,266        $ 2,711,533         $   149,329         $ 4,175,128
========================================================================================================================

Capital expenditures                            $    71,699        $    41,629         $     5,119         $   118,447
========================================================================================================================
<CAPTION> 
                                                                          (Thousands of Dollars)
                                                 Electricity       Electricity             All     
                                                  Delivery          Generation            Other            Consolidated
1997
------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>                <C>                 <C>                 <C> 
Operating revenues                              $   316,938        $   859,003         $        --         $ 1,175,941
Operating expenses                                  177,468            555,276                 431             733,175
Depreciation and
        amortization expense                         44,573            190,808                  --             235,381
------------------------------------------------------------------------------------------------------------------------
        Operating income (loss)                      94,897            112,919                (431)            207,385
Other income                                          5,613             11,432              15,785              32,830
Interest and other charges                           38,612             63,805                  --             102,417
------------------------------------------------------------------------------------------------------------------------
        Net income                              $    61,898        $    60,546         $    15,354         $   137,798
========================================================================================================================

Assets                                          $ 1,476,133        $ 2,201,229         $   162,817         $ 3,840,179
========================================================================================================================

Capital expenditures                            $    57,646        $    32,763         $     3,334         $    93,743
========================================================================================================================
<CAPTION> 
                                                                          (Thousands of Dollars)
                                                 Electricity       Electricity             All     
                                                  Delivery          Generation            Other            Consolidated
1996    
------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>                <C>                 <C>                 <C> 
Operating revenues                              $  308,826         $   878,581         $        --         $ 1,187,407
Operating expenses                                 172,787             575,959                 244             748,990
Depreciation and
        amortization expense                        44,639             171,699                  --             216,338
------------------------------------------------------------------------------------------------------------------------
        Operating income (loss)                     91,400             130,923                (244)            222,079
Other income                                         2,400              10,015              12,148              24,563
Interest and other charges                          37,197              63,359                 271             100,827
------------------------------------------------------------------------------------------------------------------------
        Net income                              $   56,603         $    77,579         $    11,633         $   145,815
========================================================================================================================

Assets                                          $1,407,529         $ 2,355,294         $   134,263         $ 3,897,086
========================================================================================================================
 
Capital expenditures                            $   52,514         $    35,371         $       661         $    88,546
========================================================================================================================
</TABLE> 


                                      44
<PAGE>
 
O. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Summary of Selected Quarterly Financial Data (Thousands of Dollars)
--------------------------------------------------------------------------------

[The quarterly data reflect seasonal weather variations in the electric
utility's service territory.]

<TABLE> 
<CAPTION> 
-----------------------------------------------------------------------------------------------------------
1998                                     First Quarter    Second Quarter    Third Quarter    Fourth Quarter
-----------------------------------------------------------------------------------------------------------
<S>                                      <C>              <C>               <C>              <C>   
Operating revenues (a)                      $285,157         $287,333          $326,677         $277,627
Operating income                              45,331           45,818            63,181           47,804
Income before extraordinary item              33,445           30,560            48,243           36,300
Extraordinary item                                --          (82,548)               --               --
Net income after extraordinary item           33,445          (51,988)           48,243           36,300
===========================================================================================================

1997                                     First Quarter    Second Quarter    Third Quarter    Fourth Quarter
-----------------------------------------------------------------------------------------------------------
Operating revenues (a)                      $285,759         $275,026          $325,588         $289,568
Operating income                              55,042           45,291            64,773           42,279
Net income                                    36,415           27,156            46,074           32,175
===========================================================================================================
</TABLE> 
(a) Restated to conform with 1998 presentation.

                                       45
<PAGE>
 
SELECTED FINANCIAL DATA
<TABLE> 
<CAPTION> 
---------------------------------------------------------------------------------------------------------------------------
Amounts in Thousands of Dollars            1998            1997          1996          1995           1994         1993
---------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>             <C>            <C>            <C>            <C>            <C>  
INCOME STATEMENT ITEMS
Total operating revenues                 $1,176,794     $1,175,941    $1,187,407    $1,189,784    $1,180,624    $1,172,685
Operating income                         $  202,134     $  207,385    $  222,079    $  246,637    $  236,556    $  240,168
Income before extraordinary item         $  148,548     $  141,820    $  149,860    $  151,070    $  147,449    $  147,362
Extraordinary item                       $  (82,548)    $       --    $       --    $       --    $       --    $       -- 
Net income after extraordinary item      $   66,000     $  141,820    $  149,860    $  151,070    $  147,449    $  147,362
Earnings for common stock                                                                                        
    before extraordinary item            $  144,512     $  137,798    $  145,815    $  145,750    $  141,403    $  138,174
Earnings for common stock                                                                                        
    after extraordinary item             $   61,964     $  137,798    $  145,815    $  145,750    $  141,403    $  138,174
--------------------------------------------------------------------------------------------------------------------------
                                                                                                              
BALANCE SHEET ITEMS                                                                                           
Property, plant and equipment - net      $1,447,299     $2,562,919    $2,717,473    $2,978,903    $3,068,519    $3,123,948
Total assets                             $4,175,128     $3,840,179    $3,897,086    $4,067,665    $4,149,867    $4,388,103
--------------------------------------------------------------------------------------------------------------------------
Capitalization:                                                                                               
Common stockholder's equity              $  868,500     $1,003,833    $  989,424    $1,131,334    $1,115,512    $1,100,671
Non-redeemable preferred and                                                                                     
    preference stock                        227,782        226,503       223,072        70,966        95,345       124,736 
Redeemable preferred and                                                                                         
    preference stock                             --             --            --            --            --         8,392
Long-term debt                            1,160,348      1,218,276     1,271,961     1,322,531     1,368,930     1,416,705
----------------------------------------------------------------------------------------------------------------------------
Total capitalization                     $2,256,630     $2,448,612    $2,484,457    $2,524,831    $2,579,787    $2,650,504
----------------------------------------------------------------------------------------------------------------------------
</TABLE> 
Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.

  None.


                                    Part III


Item 10. Directors and Executive Officers of the Registrant.

     All directors of DQE are also directors of Duquesne. Information relating
to DQE's and Duquesne's board of directors is set forth in Exhibit 99.2 hereto.
The information is incorporated here by reference. Information relating to the
executive officers of the Registrant is set forth in Part I of this Report under
the caption "Executive Officers of the Registrant."


Item 11. Executive Compensation.

     The information relating to executive compensation is set forth in Exhibit
99.1, filed as part of this Report. The information is incorporated here by
reference.

                                       46
<PAGE>
 
Item 12. Security Ownership of Certain Beneficial Owners and Management.

     DQE is the beneficial owner and holder of all shares of outstanding Common
Stock, $1 par value, of Duquesne, consisting of 10 shares as of February 28,
1999. Information relating to the ownership of equity securities of DQE and
Duquesne by directors and executive officers of Duquesne is set forth in Exhibit
99.1, filed as part of this Report. The information is incorporated here by
reference.


Item 13. Certain Relationships and Related Transactions.

        None.


                                    Part IV


Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

     (a)(1) The following information is set forth here on pages 22 through 45:
     Report of Independent Certified Public Accountants. 

     Statement of Consolidated Income for the Three Years Ended December 31,
     1998. 

     Consolidated Balance Sheet, December 31, 1998 and 1997. 
     
     Statement of Consolidated Cash Flows for the Three Years Ended December 31,
     1998.

     Statement of Consolidated Retained Earnings for the Three Years Ended
     December 31, 1998. 

     Notes to Consolidated Financial Statements.

     (a)(2) The following financial statement schedule and the related Report of
     Independent Certified Public Accountants are filed here as a part of this
     Report:

     Schedule for the Three Years Ended December 31, 1998:

          II-  Valuation and Qualifying Accounts.

     The remaining schedules are omitted because of the absence of the
conditions under which they are required or because the information called for
is shown in the financial statements or notes to the financial statements.

     (a)(3) Exhibits are set forth in the Exhibits Index below, and
incorporated here by reference. Documents other than those designated as being
filed here are incorporated here by reference. Previously filed documents
incorporated by reference to a DQE Annual Report on Form 10-K, a Quarterly
Report on Form 10-Q or a Current Report on Form 8-K are at Securities and
Exchange Commission File No. 1-10290. Documents incorporated by reference to a
Duquesne Light Company Annual Report on Form 10-K, Quarterly Report on Form 10-Q
or a Current Report on Form 8-K are at Securities and Exchange Commission File
No. 1-956. The Exhibits include the management contracts and compensatory plans
or arrangements required to be filed as exhibits to this Form 10-K by Item
601(d)(10)(iii), of Regulation S-K.

     (b)  Two Reports on Form 8-K were filed during the fiscal quarter ended
          December 31, 1998, and two were filed thereafter. 

          A report was filed October 5, 1998, to report DQE's
          termination of the merger agreement with AYE. No financial statements
          were filed with this report. 

          A report was filed October 15, 1998, to report the execution by
          Duquesne and FirstEnergy of an agreement in principle to exchange
          interests in certain power stations. No financial statements were
          filed with this report.

          A report was filed March 19, 1999, to report the consent
          agreement entered into by DQE and AYE. No financial statements were
          filed with this report.

          A report was filed March 26, 1999, to report the execution of
          definitive power station exchange agreements. No financial statements
          were filed with this report.

                                       47
<PAGE>
 
<TABLE> 
<CAPTION> 


                                 Exhibits Index

Exhibit                                                                                    Method of
  No.                       Description                                                     Filing
<S>     <C>                                                                     <C> 
  2.1   Generation Exchange Agreement by and between                            Exhibit 2.1 to the Form 8-K
        Duquesne Light Company, on the one hand, and The Cleveland              Current Report of Duquesne
        Electric Illuminating Company, Ohio Edison Company and                  Light Company dated
        Pennsylvania Power Company, in the other, dated as of                   March 26, 1999.
        March 25, 1999.

  2.2   Nuclear Generation Conveyance Agreement by and between                  Exhibit 2.2 to the Form 8-K
        Duquesne Light Company, on the one hand, and Pennsylvania               Current Report of Duquesne
        Power Company and the Cleveland Electric Illuminating                   Light Company dated
        Company, on the other, dated as of March 25, 1999.                      March 26, 1999.

  3.1   Restated Articles of Duquesne Light Company, as                         Exhibit 3.1 to the Form 10-K 
        amended through December 19, 1991 and as currently                      Annual Report of Duquesne
        in effect.                                                              Light Company for the year
                                                                                ended December 31, 1991.

  3.2   By-Laws of Duquesne Light Company, as amended                           Exhibit 3.2 to the Form 10-K
        through December 18, 1996 and as currently in effect.                   Annual Report of Duquesne
                                                                                Light Company for the year 
                                                                                ended December 31, 1996.

  4.1   Indenture dated March 1, 1960, relating to Duquesne                     Exhibit 4.3 to the Form 10-K
        Light Company's 5% Sinking Fund Debentures.                             Annual Report of DQE for the
                                                                                year ended December 31, 1989.

  4.2   Indenture of Mortgage and Deed of Trust dated as of                     Exhibit 4.3 to Registration
        April 1, 1992, securing Duquesne Light Company's                        Statement (Form S-3)
        First Collateral Trust Bonds.                                           No. 33-52782.

  4.3   Supplemental Indentures supplementing the said
        Indenture of Mortgage and Deed of Trust -

        Supplemental Indenture No. 1.                                           Exhibit 4.4 to Registration
                                                                                Statement (Form S-3)
                                                                                No. 33-52782.

        Supplemental Indenture No. 2 through Supplemental                       Exhibit 4.4 to Registration
        Indenture No. 4.                                                        Statement (Form S-3)
                                                                                No. 33-63602.

        Supplemental Indenture No. 5 through Supplemental                       Exhibit 4.6 to the Form 10-K
        Indenture No. 7.                                                        Annual Report of Duquesne 
                                                                                Light Company for the year
                                                                                ended December 31, 1993.

        Supplemental Indenture No. 8 and Supplemental                           Exhibit 4.6 to the Form 10-K
        Indenture No. 9.                                                        Annual Report of Duquesne 
                                                                                Light Company for the year
                                                                                ended December 31, 1994.

        Supplemental Indenture No. 10 through Supplemental                      Exhibit 4.4 to the Form 10-K
        Indenture No. 12.                                                       Annual Report of Duquesne
                                                                                Light Company for the year
                                                                                ended December 31, 1995.

</TABLE> 

                                       48
<PAGE>
 
<TABLE> 
<CAPTION> 

Exhibit                                                                                    Method of
  No.                       Description                                                     Filing
<S>    <C>                                                                     <C> 

        Supplemental Indenture No. 13.                                          Exhibit 4.3 to the Form 10-K
                                                                                Annual Report of Duquesne
                                                                                Light Company for the year
                                                                                ended December 31, 1996.

        Supplemental Indenture No. 14.                                          Exhibit 4.3 to the Form 10-K
                                                                                Annual Report of Duquesne
                                                                                Light Company for the year
                                                                                ended December 31, 1997.

  4.4   Amended and Restated Agreement of Limited Partnership                   Exhibit 4.4 to the Form 10-K
        of Duquesne Capital L.P., dated as of May 14, 1996.                     Annual Report of Duquesne
                                                                                Light Company for the year 
                                                                                ended December 31, 1996.

  4.5   Payment and Guarantee Agreement dated as of May 14,                     Exhibit 4.5 to the Form 10-K
        1996 by Duquesne Light Company with respect to MIPS.                    Annual Report of Duquesne
                                                                                Light Company for the year 
                                                                                ended December 31, 1996.

  4.6   Indenture dated as of May 1, 1996 by Duquesne Light                     Exhibit 4.6 to the Form 10-K
        Company to the First National Bank of Chicago as                        Annual Report of Duquesne
        Trustee.                                                                Light Company for the year
                                                                                ended December 31, 1996.

             Agreements relating to Jointly Owned Generating Units:

  10.1  Administration Agreement dated as of September 14, 1967.                Exhibit 5.8 to Registration
                                                                                Statement (Form S-7)
                                                                                No. 2-43106.

  10.2  Transmission Facilities Agreement dated as of September 14,             Exhibit 5.9 to Registration
        1967.                                                                   Statement (Form S-7)
                                                                                No. 2-43106.

  10.3  Operating Agreement dated as of September 21, 1972                      Exhibit 5.1 to Registration
        for Eastlake Unit No. 5.                                                Statement (Form S-7)
                                                                                No. 2-48164.

  10.4  Memorandum of Agreement dated as of July 1, 1982 re                     Exhibit 10.14 to the Form 10-K 
        reallocation of rights and liabilities of                               Annual Report of Duquesne
        the companies  under uranium supply                                     Light Company for the year
        contracts.                                                              ended December 31, 1987.

  10.5  Operating Agreement dated August 5, 1982 as of                          Exhibit 10.17 to the Form 10-K
        September 1, 1971 for Sammis Unit No. 7.                                Annual Report of Duquesne
                                                                                Light Company for the year
                                                                                ended December 31, 1988.

</TABLE> 

                                       49
<PAGE>
 
<TABLE> 
<CAPTION> 

Exhibit                                                                                    Method of
  No.                       Description                                                     Filing
<S>     <C>                                                                     <C>         
 10.6   Memorandum of Understanding dated as of March 31,                       Exhibit 10.19 to the Form 10-K 
        1985 re implementation of company-by-company                            Annual Report of DQE for the
        management of uranium inventory and delivery.                           year ended December 31, 1989.
                                                   
 10.7   Restated Operating Agreement for Beaver Valley Unit                     Exhibit 10.23 to the Form 10-K
        Nos. 1 and 2 dated September 15, 1987.                                  Annual Report of Duquesne
                                                                                Light Company for the year
                                                                                ended December 31, 1987.

 10.8   Operating Agreement for Perry Unit No. 1 dated                          Exhibit 10.24 to the Form 10-K
        March 10, 1987.                                                         Annual Report of Duquesne
                                                                                Light Company for the year
                                                                                ended December 31, 1987.

 10.9   Operating Agreement for Bruce Mansfield Units Nos. 1,                   Exhibit 10.25 to the Form 10-K
        2 and 3 dated September 15, 1987 as of June 1, 1976.                    Annual Report of Duquesne
                                                                                Light Company for the year
                                                                                ended December 31, 1987.

 10.10  Basic Operating Agreement, as amended January 1, 1993.                  Exhibit 10.10 to the Form 10-K
                                                                                Annual Report of Duquesne                       
                                                                                Light Company for the year
                                                                                ended December 31, 1993.

 10.11  Amendment No. 1 dated December 23, 1993 to Transmission                 Exhibit 10.11 to the Form 10-K
        Facilities Agreement (as of January 1, 1993).                           Annual Report of Duquesne
                                                                                Light Company for the year
                                                                                ended December 31, 1993.

 10.12  Microwave Sharing Agreement (as amended                                 Exhibit 10.12 to the Form 10-K
        January 1, 1993) dated December 23, 1993.                               Annual Report of Duquesne
                                                                                Light Company for the year
                                                                                ended December 31, 1993.

 10.13  Agreement (as of September 1, 1980) dated                               Exhibit 10.13 to the Form 10-K
        December 23, 1993 for termination or construction                       Annual Report of Duquesne
        of certain agreements.                                                  Light Company for the year
                                                                                ended December 31, 1993.

                 Agreements relating to the Sale and Leaseback
                          of Beaver Valley Unit No. 2:

10.14   Order of the Pennsylvania Public Utility Commission                     Exhibit 28.2 to the Form 10-Q 
        dated September 25, 1987 regarding the application                      Quarterly Report of Duquesne
        of the Duquesne Light Company under Section 1102(a)(3)                  Light Company for the quarter
        of the Public Utility Code for approval in connection with              ended September 30, 1987.
        the sale and leaseback of its interest in                               
        Beaver Valley Unit No. 2.                                 

</TABLE> 
        

                                       50
<PAGE>
 
<TABLE> 
<CAPTION> 

Exhibit                                                                                    Method of
  No.                       Description                                                     Filing
<S>      <C>                                                                    <C>  
 10.15   Order of the Pennsylvania Public Utility Commission                    Exhibit 10.28 to the Form 10-K
         dated October 15, 1992 regarding the Securities                        Annual Report of Duquesne
         Certificate of Duquesne Light Company for the                          Light Company for the year
         assumption of contingent obligations under financing                   ended December 31, 1992.
         agreements in connection with the refunding of Collateralized
         Lease Bonds.

 x10.16  Facility Lease dated as of September 15, 1987 between                  Exhibit (4)(c) to Registration 
         The First National Bank of Boston, as Owner Trustee                    Statement (Form S-3)
         under a Trust Agreement dated as of September 15, 1987                  No. 33-18144.
         with the limited partnership Owner Participant named 
         therein, Lessor, and Duquesne Light Company, Lessee.

 y10.17  Facility Lease dated as of September 15, 1987 between                  Exhibit (4)(d) to Registration 
         The First National Bank of Boston, as Owner Trustee                    Statement (Form S-3)
         under a Trust Agreement dated as of September 15,                      No. 33-18144.
         1987, with the corporate Owner Participant named therein,
         Lessor, and Duquesne Light Company, Lessee.

 x10.18  Amendment No. 1 dated as of December 1, 1987 to Facility               Exhibit 10.30 to the Form 10-K 
         Lease dated as of September 15, 1987                                   Annual Report of Duquesne
         between  The First National Bank of                                    Light Company for the year
         Boston, as Owner Trustee  under a                                      ended December 31, 1987.
         Trust Agreement dated as of September 15, 1987                          
         with the limited partnership Owner Participant named
         therein, Lessor, and Duquesne Light Company, Lessee.

 y10.19  Amendment No. 1 dated as of December 1, 1987 to                        Exhibit 10.31 to the Form 10-K 
         Facility Lease dated as of September 15, 1987                          Annual Report of Duquesne
         between The First National Bank of Boston, as                          Light Company for the year
         Owner Trustee under a Trust Agreement dated as of                      ended December 31, 1987.
         September 15, 1987 with the corporate Owner 
         Participant named therein, Lessor, and Duquesne 
         Light Company, Lessee.

 x10.20  Amendment No. 2 dated as of November 15, 1992 to                       Exhibit 10.33 to the Form 10-K 
         Facility Lease dated as of September 15, 1987                          Annual Report of Duquesne
         between  The First National Bank of                                    Light Company for the year
         Boston, as Owner Trustee  under a Trust Agreement                      ended December 31, 1992.
         dated as of September 15, 1987 with the limited 
         partnership Owner Participant named
         therein, Lessor, and Duquesne Light Company, Lessee.

 y10.21  Amendment No. 2 dated as of November 15, 1992 to                       Exhibit 10.34 to the Form 10-K
         Facility Lease dated as of September 15, 1987                          Annual Report of Duquesne
         between  The First National Bank of                                    Light Company for the year
         Boston, as Owner Trustee under a Trust                                 ended December 31, 1992.
         Agreement dated as of September 15, 1987 
         with the corporate Owner Participant named therein,
         Lessor, and Duquesne Light Company, Lessee.

 x10.22  Amendment No. 3 dated as of October 13, 1994 to                        Exhibit 10.25 to the Form 10-K 
         Facility Lease dated as of September 15, 1987                          Annual Report of Duquesne
         between  The First National Bank of                                    Light Company for the year
         Boston, as Owner Trustee  under a Trust                                ended December 31, 1994.
         Agreement dated as of September 15, 1987 
         with the limited partnership Owner Participant named
         therein, Lessor, and Duquesne Light Company, Lessee.
</TABLE> 

                                       51
<PAGE>
 
<TABLE> 
<CAPTION> 

   Exhibit                                                                                    Method of
     No.                            Description                                                 Filing

<S>             <C>                                                                  <C> 
   y10.23       Amendment No. 3 dated as of October 13, 1994 to                      Exhibit 10.26 to the Form 10-K
                Facility Lease dated as of September 15, 1987 between                Annual Report of Duquesne
                The First National Bank of Boston, as Owner Trustee                  Light Company for the year 
                under a Trust Agreement dated as of September 15, 1987               ended December 31, 1994.
                with the corporate Owner Participant named therein,
                Lessor, and Duquesne Light Company, Lessee.

   x10.24       Participation Agreement dated as of September 15,                    Exhibit (28)(a) to Registration
                1987 among the limited partnership Owner Participant                 Statement (Form S-3)
                named therein, the Original Loan Participants listed                 No. 33-18144.
                in Schedule 1 thereto, as Original Loan Participants, 
                DQU Funding Corporation, as Funding Corp, The First 
                National Bank of Boston, as Owner Trustee, Irving 
                Trust Company, as Indenture Trustee and Duquesne Light 
                Company, as Lessee.

   y10.25       Participation Agreement dated as of September 15, 1987               Exhibit (28)(b) to Registration
                among the corporate Owner Participant named therein,                 Statement (Form S-3) 
                the Original Loan Participants listed in Schedule 1                  No. 33-18144. 
                thereto, as Original Loan Participants, DQU Funding 
                Corporation, as Funding Corp, The First National Bank 
                of Boston, as Owner Trustee, Irving Trust Company, as 
                Indenture Trustee and Duquesne Light Company, as Lessee.

   x10.26       Amendment No. 1 dated as of December 1, 1987 to                      Exhibit 10.34 to the Form 10-K
                Participation Agreement dated as of September 15, 1987               Annual Report of Duquesne
                among the limited partnership Owner Participant named                Light Company for the year
                therein, the Original Loan Participants listed therein,              ended December 31, 1987.
                as Original Loan Participants, DQU Funding Corporation, 
                as Funding Corp, The First National Bank of Boston, as 
                Owner Trustee, Irving Trust Company, as Indenture 
                Trustee and Duquesne Light Company, as Lessee.

   y10.27       Amendment No. 1 dated as of December 1, 1987 to                      Exhibit 10.35 to the Form 10-K 
                Participation Agreement dated as of September 15, 1987               Annual Report of Duquesne
                among the corporate Owner Participant named therein, the             Light Company for the year 
                Original Loan Participants listed therein, as Original               ended December 31, 1987.
                Loan Participants, DQU Funding Corporation, as Funding 
                Corp, The First National Bank of Boston, as Owner 
                Trustee, Irving Trust Company, as Indenture Trustee and 
                Duquesne Light Company, as Lessee.

   x10.28       Amendment No. 2 dated as of March 1, 1988 to                         Exhibit (28)(c)(3) to
                Participation Agreement dated as of September 15, 1987               Registration Statement
                among the limited partnership Owner Participant named                (Form S-3) No. 33-54648.
                therein, DQU Funding Corporation, as Funding Corp, 
                The First National Bank of Boston, as Owner Trustee, 
                Irving Trust Company, as Indenture Trustee and
                Duquesne Light Company, as Lessee.
</TABLE> 

                                       52
<PAGE>
 
<TABLE> 
<CAPTION> 

   Exhibit                                                                                    Method of
     No.                            Description                                                 Filing

<S>             <C>                                                                  <C>
   y10.29       Amendment No. 2 dated as of March 1, 1988 to                         Exhibit (28)(c)(4) to
                Participation Agreement dated as of September 15, 1987               Registration Statement
                among the corporate Owner Participant named therein,                 (Form S-3) No. 33-54648.
                DQU Funding Corporation, as Funding Corp, The First 
                National Bank of Boston, as Owner Trustee, Irving Trust 
                Company, as Indenture Trustee and Duquesne Light Company, 
                as Lessee.

   x10.30       Amendment No. 3 dated as of November 15, 1992 to                     Exhibit 10.41 to the Form 10-K 
                Participation Agreement dated as of September 15, 1987               Annual Report of Duquesne 
                among the limited partnership Owner Participant named                Light Company for the year 
                therein, DQU Funding Corporation, as Funding Corp,                   ended December 31, 1992.
                DQU II Funding Corporation, as New Funding Corp, The 
                First National Bank of Boston, as Owner Trustee, The 
                Bank of New York, as Indenture Trustee and Duquesne 
                Light Company, as Lessee.

   y10.31       Amendment No. 3 dated as of November 15, 1992 to                     Exhibit 10.42 to the Form 10-K 
                Participation Agreement dated as of September 15, 1987               Annual Report of Duquesne 
                among the corporate Owner Participant named therein,                 Light Company for the year 
                DQU Funding Corporation, as Funding Corp, DQU II                     ended December 31, 1992.
                Funding Corporation, as New Funding Corp, The First
                National Bank of Boston, as Owner Trustee, The Bank 
                of New York, as Indenture Trustee and Duquesne Light 
                Company, as Lessee.

   x10.32       Amendment No. 4 dated as of October 13, 1994 to                      Exhibit 10.35 to the Form 10-K 
                Participation Agreement dated as of September 15, 1987               Annual Report of Duquesne 
                among the limited partnership Owner Participant named                Light Company for the year 
                therein, DQU Funding Corporation, as Funding Corp,                   ended December 31, 1994.
                DQU II Funding Corporation, as New Funding Corp, The 
                First National Bank of Boston, as Owner Trustee, The 
                Bank of New York, as Indenture Trustee and Duquesne 
                Light Company, as Lessee.

   y10.33       Amendment No. 4 dated as of October 13, 1994 to                      Exhibit 10.36 to the Form 10-K 
                Participation Agreement dated as of September 15, 1987               Annual Report of Duquesne 
                among the corporate Owner Participant named therein,                 Light Company for the year 
                DQU Funding Corporation, as Funding Corp, DQU II                     ended December 31, 1994.
                Funding Corporation, as New Funding Corp, The First
                National Bank of Boston, as Owner Trustee, The Bank of 
                New York, as Indenture Trustee and Duquesne Light 
                Company, as Lessee.

   z10.34       Ground Lease and Easement Agreement dated as of                      Exhibit (28)(e) to Registration
                September 15, 1987 between Duquesne Light Company,                   Statement (Form S-3)
                Ground Lessor and Grantor, and The First National Bank               No. 33-18144.
                of Boston, as Owner Trustee under a Trust Agreement 
                dated as of September 15, 1987 with the limited 
                partnership Owner Participant named therein, Tenant 
                and Grantee.
</TABLE> 

                                       53
<PAGE>
 
<TABLE> 
<CAPTION> 

   Exhibit                                                                                    Method of
     No.                            Description                                                 Filing

<S>             <C>                                                                  <C>
   z10.35       Assignment, Assumption and Further Agreement dated as                Exhibit (28)(f) to Registration 
                of September 15, 1987 among The First National Bank of               Statement (Form S-3) 
                Boston, as Owner Trustee under a Trust Agreement dated               No. 33-18144.
                as of September 15, 1987 with the limited partnership
                Owner Participant named therein, The Cleveland Electric
                Illuminating Company, Duquesne Light Company, Ohio
                Edison Company, Pennsylvania Power Company and The 
                Toledo Edison Company.

   z10.36       Additional Support Agreement dated as of September 15,               Exhibit (28)(g) to Registration 
                1987 between The First National Bank of Boston, as                   Statement (Form S-3) 
                Owner Trustee under a Trust Agreement dated as of                    No. 33-18144. 
                September 15, 1987 with the limited partnership Owner 
                Participant named therein, and Duquesne Light Company.

   z10.37       Indenture, Bill of Sale, Instrument of Transfer and                  Exhibit (28)(h) to Registration
                Severance Agreement dated as of October 2, 1987                      Statement (Form S-3)
                between Duquesne Light Company, Seller, and The First                No. 33-18144.
                National Bank of Boston, as Owner Trustee under a Trust
                Agreement dated as of September 15, 1987 with the limited
                partnership Owner Participant named therein, Buyer.

   z10.38       Tax Indemnification Agreement dated as of September 15,              Exhibit 28.1 to the Form 8-K
                1987 between the Owner Participant named therein and                 Current Report of Duquesne 
                Duquesne Light Company, as Lessee.                                   Light Company dated 
                                                                                     November 20, 1987.

   z10.39       Amendment No. 1 dated as of November 15, 1992 to Tax                 Exhibit 10.48 to the Form 10-K
                Indemnification Agreement dated as of September 15, 1987             Annual Report of Duquesne
                between the Owner Participant named therein and Duquesne             Light Company for the year
                Light Company, as Lessee.                                            ended December 31, 1992.

   z10.40       Amendment No. 2 dated as of October 13, 1994 to Tax                  Exhibit 10.43 to the Form 10-K
                Indemnification Agreement dated as of September 15, 1987             Annual Report of Duquesne
                between the Owner Participant named therein and Duquesne             Light Company for the year
                Light Company, as Lessee.                                            ended December 31, 1994.

   z10.41       Extension Letter dated December 8, 1992 from Duquesne                Exhibit 10.49 to the Form 10-K 
                Light Company, each Owner Participant, The First National            Annual Report of Duquesne 
                Bank of Boston, the Lease Indenture Trustee, DQU Funding             Light Company for the year 
                Corporation and DQU II Funding Corporation addressed to              ended December 31, 1992.
                the New Collateral Trust Trustee extending their respective 
                representations and warranties and covenants set forth in 
                each of the Participation Agreements.

   x10.42       Trust Indenture, Mortgage, Security Agreement and                    Exhibit (4)(g) to Registration
                Assignment of Facility Lease dated as of September 15,               Statement (Form S-3)
                1987 between The First National Bank of Boston, as                   No. 33-18144.
                Owner Trustee under a Trust Agreement dated as of 
                September 15, 1987 with the limited partnership Owner 
                Participant named therein, and Irving Trust Company, 
                as Indenture Trustee.
</TABLE> 

                                       54
<PAGE>
 
<TABLE> 
<CAPTION> 

   Exhibit                                                                                    Method of
     No.                            Description                                                 Filing

<S>             <C>                                                                  <C>
   y10.43       Trust Indenture, Mortgage, Security Agreement and                    Exhibit (4)(h) to Registration
                Assignment of Facility Lease dated as of September 15, 1987          Statement (Form S-3)
                between The First National Bank of Boston, as Owner Trustee          No. 33-18144.
                under a Trust Agreement dated as of September 15, 1987 with 
                the corporate Owner Participant named therein, and Irving 
                Trust Company, as Indenture Trustee.

   x10.44       Supplemental Indenture No. 1 dated as of December 1, 1987            Exhibit 10.45 to the Form 10-K
                to Trust Indenture, Mortgage, Security Agreement and                 Annual Report of Duquesne
                Assignment of Facility Lease dated as of September 15, 1987          Light Company for the year
                between The First National Bank of Boston, as Owner Trustee          ended December 31, 1987.
                under a Trust Agreement dated as of September 15, 1987 with 
                the limited partnership Owner Participant named therein, and 
                Irving Trust Company, as Indenture Trustee.

   y10.45       Supplemental Indenture No. 1 dated as of December 1, 1987 to         Exhibit 10.46 to the Form 10-K 
                Trust Indenture, Mortgage, Security Agreement and                    Annual Report of Duquesne 
                Assignment of Facility Lease dated as of September 15, 1987          Light Company for the year 
                between The First National Bank of Boston, as Owner Trustee          ended December 31, 1987.
                under a Trust Agreement dated as of September 15, 1987 with 
                the corporate Owner Participant named therein, and Irving 
                Trust Company, as Indenture Trustee.

   x10.46       Supplemental Indenture No. 2 dated as of November 15, 1992           Exhibit 10.54 to the Form 10-K 
                to Trust Indenture, Mortgage, Security Agreement and                 Annual Report of Duquesne 
                Assignment of Facility Lease dated as of September 15, 1987          Light Company for the
                between The First National Bank of Boston, as Owner Trustee          year ended December 31, 1992.
                under a Trust Agreement dated as of September 15, 1987 with
                the limited partnership Owner Participant named therein, and
                The Bank of New York, as Indenture Trustee.

   y10.47       Supplemental Indenture No. 2 dated as of November 15, 1992           Exhibit 10.55 to the Form 10-K 
                to Trust Indenture, Mortgage, Security Agreement and                 Annual Report of Duquesne 
                Assignment of Facility Lease dated as of September 15, 1987          Light Company for the
                between The First National Bank of Boston, as Owner Trustee          year ended December 31, 1992.
                under a Trust Agreement dated as of September 15, 1987 with 
                the corporate Owner Participant named therein, and The Bank 
                of New York, as Indenture Trustee.

    10.48       Reimbursement Agreement dated as of October 1, 1994 among            Exhibit 10.51 to the Form 10-K 
                Duquesne Light Company, Swiss Bank Corporation, New York             Annual Report of Duquesne 
                Branch, as LOC Bank, Union Bank, as Administrating Bank,             Light Company for the year 
                Swiss Bank Corporation, New York Branch, as Administrating           ended December 31, 1994.
                Bank and The Participating Banks Named Therein.
</TABLE> 

                                       55
<PAGE>
 
<TABLE> 
<CAPTION> 

   Exhibit                                                                                    Method of
     No.                            Description                                                 Filing

<S>             <C>                                                                  <C>
    10.49       Collateral Trust Indenture dated as of November 15, 1992             Exhibit 10.58 to the Form 10-K 
                among DQU II Funding Corporation, Duquesne Light Company             Annual Report of Duquesne 
                and The Bank of New York, as Trustee.                                Light Company for the year
                                                                                     ended December 31, 1992.

    10.50       First Supplemental Indenture dated as of November 15, 1992           Exhibit 10.59 to the Form 10-K 
                to Collateral Trust Indenture dated as of November 15, 1992          Annual Report of Duquesne 
                among DQU II Funding Corporation, Duquesne Light Company             Light Company for the year 
                and The Bank of New York, as Trustee.                                ended December 31, 1992.
 
   x10.51       Refinancing Agreement dated as of November 15, 1992 among            Exhibit 10.60 to the Form 10-K 
                the limited partnership Owner Participant named therein, as          Annual Report of Duquesne 
                Owner Participant, DQU Funding Corporation, as Funding Corp,         Light Company for the year 
                DQU II Funding Corporation, as New Funding Corp, The First           ended December 31, 1992.
                National Bank of Boston, as Owner Trustee, The Bank of New 
                York, as Indenture Trustee, The Bank of New York, as 
                Collateral Trust Trustee, The Bank of New York, as New 
                Collateral Trust Trustee, and Duquesne Light Company, as 
                Lessee.

   y10.52       Refinancing Agreement dated as of November 15, 1992 among            Exhibit 10.61 to the Form 10-K
                the corporate Owner Participant named therein, as Owner              Annual Report of Duquesne
                Participant, DQU Funding Corporation, as Funding Corp, DQU           Light Company for the year 
                II Funding Corporation, as New Funding Corp, The First               ended December 31, 1992.
                National Bank of Boston, as Owner Trustee, The Bank of New 
                York, as Indenture Trustee, The Bank of New York, as 
                Collateral Trust Trustee, The Bank of New York, as New 
                Collateral Trust Trustee, and Duquesne Light Company, as 
                Lessee.

   x10.53       Addendum dated December 8, 1992 to Refinancing Agreement             Exhibit 10.62 to the Form 10-K 
                dated as of November 15, 1992 among the limited                      Annual Report of Duquesne 
                partnership Owner Participant named therein, as Owner                Light Company for the year 
                Participant, DQU Funding Corporation, as Funding Corp,               ended December 31, 1992.
                DQU II Funding Corporation, as New Funding Corp, The 
                First National Bank of Boston, as Owner Trustee, The 
                Bank of New York, as Indenture Trustee, The Bank of New 
                York, as Collateral Trust Trustee, The Bank of New York, 
                as New Collateral Trust Trustee, and Duquesne Light 
                Company, as Lessee.

   y10.54       Addendum dated December 8, 1992 to Refinancing Agreement             Exhibit 10.63 to the Form 10-K 
                dated as of November 15, 1992 among the corporate Owner              Annual Report of Duquesne 
                Participant named therein, as Owner Participant, DQU                 Light Company for the year 
                Funding Corporation, as Funding Corp, DQU II Funding                 ended December 31, 1992.
                Corporation, as New Funding Corp, The First National 
                Bank of Boston, as Owner Trustee, The Bank of New York, 
                as Indenture Trustee, The Bank of New York, as Collateral 
                Trust Trustee, The Bank of New York, as New Collateral 
                Trust Trustee, and Duquesne Light Company, as Lessee.
</TABLE> 

                                       56
<PAGE>
 
<TABLE> 
<CAPTION> 

   Exhibit                                                                                    Method of
     No.                            Description                                                 Filing

<S>             <C>                                                                  <C>
                                 Other Agreements:

    10.55       Deferred Compensation Plan for the Directors of Duquesne             Exhibit 10.1 to the Form 10-K 
                Light Company, as amended to date.                                   Annual Report of DQE for the
                                                                                     year ended December 31, 1992.

    10.56       Incentive Compensation Program for Certain Executive                 Exhibit 10.2 to the Form 10-K 
                Officers of Duquesne Light Company, as amended to date.              Annual Report of DQE for the 
                                                                                     year ended December 31, 1992.

    10.57       Description of Duquesne Light Company Pension Service                Exhibit 10.3 to the Form 10-K
                Supplement Program.                                                  Annual Report of DQE for the
                                                                                     year ended December 31, 1992.

    10.58       Duquesne Light Company Outside Directors' Retirement Plan,           Exhibit 10.59 to the Form 10-K
                as amended to date.                                                  Annual Report of Duquesne
                                                                                     Light Company for the year 
                                                                                     ended December 31, 1996.

    10.59       Duquesne Light/DQE Charitable Giving Program, as amended.            Exhibit 10.1 to the Form 10-Q
                                                                                     Quarterly Report of DQE for 
                                                                                     the quarter ended March 31, 1998.

    10.60       Performance Incentive Program for DQE, Inc. and Subsidiaries         Exhibit 10.7 to the Form 10-K 
                formerly known as the Duquesne Light Company Performance             Annual Report of DQE for the 
                Incentive Program.                                                   year ended December 31, 1996.

    10.61       Employment Agreement dated as of August 30, 1994 between             Exhibit 10.9 to the Form 10-K
                DQE, Duquesne Light Company and David D. Marshall.                   Annual Report of DQE for the
                                                                                     year ended December 31, 1994.

    10.62       First Amendment dated as of June 27, 1995 to Employment              Exhibit 10.68 to the Form 10-K 
                Agreement dated as of August 30, 1994 between DQE, Duquesne          Annual Report of Duquesne 
                Light Company and David D. Marshall.                                 Light Company for the year 
                                                                                     ended December 31, 1995.

    10.63       Employment Agreement dated as of August 30, 1994 between             Duquesne Light Company 
                DQE, Duquesne Light Company and Gary L. Schwass.                     Exhibit 10.10 to the Form 10-K
                                                                                     Annual Report of DQE for the
                                                                                     year ended December 31, 1994.

    10.64       Employment Agreement dated as of October 14, 1996 between            Exhibit 10.70 to the Form 10-K
                Duquesne Light Company and James E. Cross.                           Annual Report of Duquesne
                                                                                     Light Company for the year 
                                                                                     ended December 31, 1996.

    10.65       Non-Competition and Confidentiality Agreement dated as of            Exhibit 10.14 to the Form 10-K 
                October 3, 1996 by and among DQE, Inc., Duquesne Light               Annual Report of DQE for the 
                Company and David D. Marshall, together with a schedule              year ended December 31, 1996.
                listing substantially identical agreements with Victor A.
                Roque, James D. Mitchell and James E. Cross.
</TABLE> 

                                       57
<PAGE>
 
<TABLE> 
<CAPTION> 

   Exhibit                                                                                    Method of
     No.                            Description                                                 Filing

<S>             <C>                                                                  <C>

    10.66       Schedule to Non-Competition and Confidentiality Agreement            Exhibit 10.12 to the Form 10-K 
                dated as of October 3, 1996 (Exhibit 10.14 to the Form 10-K          Annual Report of DQE for the 
                Annual Report of DQE for the year ended December 31, 1996)           year ended December 31, 1998. 
                listing a substantially identical agreement with William J. 
                DeLeo.

    10.67       Severance Agreement dated April 4, 1997, between the Company         Exhibit 10.1 to the Form 10-Q 
                and David D. Marshall, together with a schedule describing           Quarterly Report of DQE for the 
                substantially identical agreements with Gary L. Schwass,             quarter ended March 31, 1997.
                Victor A. Roque, James E. Cross and James D. Mitchell.

    10.68       Schedule to Severance Agreement dated April 4, 1997 (Exhibit         Exhibit 10.14 to the Form 10-K 
                10.1 to the Form 10-Q Quarterly Report of DQE for the quarter        Annual Report of DQE for the 
                ended March 31, 1997) listing a substantially identical              year ended December 31, 1998. 
                agreement with William J. DeLeo.

    12.1        Calculation of Ratio of Earnings to Fixed Charges.                   Filed here.

    21.1        Subsidiaries of registrant: Duquesne has no significant
                subsidiaries.

    23.1        Independent Auditors' Consent.                                       Filed here.

    27.1        Financial Data Schedule.                                             Filed here.

    99.1        Executive Compensation of Duquesne Light Company Executive           Filed here.
                Officers for 1998 and Security Ownership of Duquesne Light 
                Company Directors and Executive Officers as of December 31, 
                1998.
</TABLE> 

                                       58
<PAGE>
 
Exhibit                                                        Method of
  No.                     Description                            Filing

99.2    Directors of DQE and Duquesne Light Company.          Filed here.

x    An additional document, substantially identical in all material respects to
     this Exhibit, has been entered into relating to one additional limited
     partnership Owner Participant. Although the additional document may differ
     in some respects (such as name of the Owner Participant, dollar amounts and
     percentages), there are no material details in which the document differs
     from this Exhibit.

y    Additional documents, substantially identical in all material respects to
     this Exhibit, have been entered into relating to four additional corporate
     Owner Participants. Although the additional documents may differ in some
     respects (such as names of the Owner Participants, dollar amounts and
     percentages), there are no material details in which the documents differ
     from this Exhibit.

z    Additional documents, substantially identical in all material respects to
     this Exhibit, have been entered into relating to six additional Owner
     Participants. Although the additional documents may differ in some respects
     (such as names of the Owner Participants, dollar amounts and percentages),
     there are no material details in which the documents differ from this
     Exhibit.

     Copies of the exhibits listed above will be furnished, upon request, to
holders or beneficial owners of any class of Duquesne's stock as of February 28,
1999, subject to payment in advance of the cost of reproducing the exhibits
requested.

                    ---------------------------------------

                                       59
<PAGE>
 
                                                                     SCHEDULE II


               SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 
             For the Years Ended December 31, 1998, 1997 and 1996 
                            (Thousands of Dollars)

<TABLE> 
<CAPTION> 

               Column A                             Column B       Column C       Column D         Column E          Column F
               --------                             --------       --------       --------         --------          --------
                                                                         Additions
                                                                  -------------------------
                                                   Balance at     Charged to     Charged to                          Balance
                                                   Beginning      Costs and         Other                            at End
              Description                           of Year       Expenses        Accounts         Deductions        of Year
              -----------                           -------       --------        --------         ----------        -------
<S>                                                <S>            <C>            <C>               <C>               <C> 
Year Ended December 31, 1998
Reserve Deducted from the Asset
        to which it applies:
        Allowance for uncollectible accounts        $15,016        $11,000        $ 3,290(A)        $20,169(B)        $ 9,137
                                                    -------       --------        --------         ----------        --------
Year Ended December 31, 1997
Reserve Deducted from the Asset
        to which it applies:
        Allowance for uncollectible accounts        $18,294        $11,000        $ 3,934(A)        $18,212(B)        $15,016
                                                    -------       --------        --------         ----------        --------
Year Ended December 31, 1996
Reserve Deducted from the Asset
        to which it applies:
        Allowance for uncollectible accounts        $17,920        $10,582        $ 4,080(A)        $14,288(B)        $18,294
                                                    -------       --------        --------         ----------        --------
</TABLE> 

Notes:  (A) Recovery of accounts previously written off.
        (B) Accounts receivable written off.

<PAGE>
 
                                   Signatures

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                             DUQUESNE LIGHT COMPANY
                                  (Registrant)

Date: March 26, 1999       By: /s/ David D. Marshall
                               ---------------------
                                    (Signature)
                                 David D. Marshall
                   President, Chief Executive Officer and Director

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE> 
<CAPTION> 

     Signature                              Title                                   Date
<S>                     <C>                                                     <C> 
/s/ David D. Marshall   President, Chief Executive Officer and Director         March 26, 1999
---------------------  
  David D. Marshall

/s/ Gary L. Schwass     Senior Vice President and Chief Financial Officer       March 26, 1999
---------------------
  Gary L. Schwass 

/s/ James E. Wilson     Controller                                              March 26, 1999
---------------------     (Principal Accounting Officer)  
  James E. Wilson           

/s/ Daniel Berg         Director                                                March 26, 1999
---------------------
  Daniel Berg

                        Director
---------------------
 Doreen E. Boyce

/s/ Robert P. Bozzone   Director                                                March 26, 1999
---------------------
 Robert P. Bozzone

/s/ Sigo Falk           Director                                                March 26, 1999
---------------------
 Sigo Falk

                        Director        
---------------------
 William H. Knoell

/s/ Thomas J. Murrin    Director                                                March 26, 1999
---------------------
 Thomas J. Murrin

/s/ Eric W. Springer    Director                                                March 26, 1999
---------------------
 Eric W. Springer

</TABLE>