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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the Fiscal Year Ended December 31, 2006

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the Transition Period From  to



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|                       |  |                                                              |  |                                
|---------------------- |  | ------------------------------------------------------------ |  | -------------------------------
|Commission File Number |  | Registrant; State of Incorporation; Address;Telephone
Number |  | IRS Employer Identification No.
|1-10290                |  | Duquesne Light Holdings, Inc.                                |  | 25-1598483                     
|                       |  | (A Pennsylvania Corporation)                                 |  |                                
|                       |  | 411 Seventh Avenue                                           |  |                                
|                       |  | Pittsburgh, Pennsylvania 15219                               |  |                                
|                       |  | 412-393-6000                                                 |  |                                
|                       |  |                                                             
|1-956                  |  | Duquesne Light Company                                       |  | 25-0451600                     
|                       |  | (A Pennsylvania Corporation)                                 |  |                                
|                       |  | 411 Seventh Avenue                                           |  |                                
|                       |  | Pittsburgh, Pennsylvania 15219                               |  |                                
|                       |  | 412-393-6000                                                 |  |                                



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Securities registered pursuant to Section 12(b) of the Act:



|                              |  |                                                   |  |                                          
|----------------------------- |  | ------------------------------------------------- |  | -----------------------------------------
|Registrant                    |  | Title of Each Class                               |  | Name of Each Exchange on Which Registered
|Duquesne Light Holdings, Inc. |  | Common Stock (no par value)                       |  | New York Stock Exchange                  
|                              |  |                                                   |  | Philadelphia Stock Exchange              
|                              |  |                                                   |  | Chicago Stock Exchange                   
|                              |  |                                                  
|Duquesne Light Company        |  | Preferred Stock ($50 per share liquidation value) |  | New York Stock Exchange                  
|                              |  | 3.75% Series                                      |  |                                          
|                              |  | 4.00% Series                                      |  |                                          
|                              |  | 4.10% Series                                      |  |                                          
|                              |  | 4.15% Series                                      |  |                                          
|                              |  | 4.20% Series                                      |  |                                          
|                              |  | $2.10 Series                                      |  |                                          
|                              |  | 6.50% Series                                      |  |                                          
|                              |  |                                                  
|                              |  | 6.7% Public Income Notes, due 2032                |  | New York Stock Exchange                  

Securities registered pursuant to Section 12(g) of the Act:



|                       |  |                                
|---------------------- |  | -------------------------------
|Registrant             |  | Title of Each Class            
|Duquesne Light Company |  | Preference Stock, Plan Series A



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Indicate by check mark if either registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Duquesne Light
Holdings, Inc.    Yes  x    No ̈

Duquesne Light Company    Yes ̈No  x

Indicate by check mark if either registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Duquesne Light Holdings,
Inc.    Yes ̈No  x

Duquesne Light Company    Yes ̈No  x

Indicate by check mark whether each registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

Duquesne Light Holdings, Inc.    Yes  x    No ̈

Duquesne Light
Company    Yes  x    No ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of each 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.

Duquesne Light Holdings, Inc.    x

Duquesne Light
Company    x

Indicate by check mark whether each registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (check one):

Duquesne Light Holdings, Inc.    Large accelerated filer  x    Accelerated filer ̈Non-accelerated filer ̈

Duquesne Light Company    Large accelerated filer ̈Accelerated filer ̈Non-accelerated
filer  x

Indicate by check mark whether either registrant is a shell company (as defined in Rule 12b-2 of the
Act).

Duquesne Light Holdings, Inc.    Yes ̈No  x

Duquesne Light
Company    Yes ̈No  x

The aggregate market value of Duquesne Light Holdings, Inc. voting common stock held by non-affiliates as of June 30, 2006 (the last business day of its most
recently completed second fiscal quarter) was $1,282,884,813 based on the New York Stock Exchange closing price of $16.44 per share on that date.

No
common stock of Duquesne Light Company was held by non-affiliates as of the last business day of its most recently completed second fiscal quarter.

As of
January 31, 2007, there were 87,795,792 shares of Duquesne Light Holdings, Inc.s single class of common stock outstanding.

As of
January 31, 2007, there were 10 shares of Duquesne Light Companys single class of common stock outstanding, all held by Duquesne Light Holdings, Inc.



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##### Table of Contents

TABLE OF CONTENTS



|                                                         |  |                                                                                                              |  |     
|-------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|                                                         |  |                                                                                                              |  | Page
|GLOSSARY OF TERMS                                        |  | 4                                                                                                           
|                                                         |  |                                                                                                             
|                                                         |  | PART I                                                                                                       |  | 5   
|                                                         |  |                                                                                                             
|ITEM 1.                                                  |  | BUSINESS                                                                                                     |  | 5   
|Corporate Structure                                      |  | 5                                                                                                           
|Forward-Looking Statements                               |  | 7                                                                                                           
|Employees                                                |  | 7                                                                                                           
|Environmental Matters                                    |  | 8                                                                                                           
|Other                                                    |  | 8                                                                                                           
|Executive Officers of the Registrants                    |  | 9                                                                                                           
|                                                         |  |                                                                                                             
|ITEM 1A.                                                 |  | RISK FACTORS                                                                                                 |  | 10  
|                                                         |  |                                                                                                             
|ITEM 1B.                                                 |  | UNRESOLVED STAFF COMMENTS                                                                                    |  | 16  
|                                                         |  |                                                                                                             
|ITEM 2.                                                  |  | PROPERTIES                                                                                                   |  | 16  
|                                                         |  |                                                                                                             
|ITEM 3.                                                  |  | LEGAL PROCEEDINGS                                                                                            |  | 17  
|                                                         |  |                                                                                                             
|ITEM 4.                                                  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                          |  | 18  
|                                                         |  |                                                                                                             
|                                                         |  | PART II                                                                                                      |  |     
|                                                         |  |                                                                                                             
|ITEM 5.                                                  |  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |  | 18  
|                                                         |  |                                                                                                             
|ITEM 6.                                                  |  | SELECTED FINANCIAL DATA                                                                                      |  | 19  
|                                                         |  |                                                                                                             
|ITEM 7.                                                  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        |  | 20  
|Overview of Business Segments                            |  | 20                                                                                                          
|Results of Operations                                    |  | 22                                                                                                          
|Critical Accounting Policies and Estimates               |  | 30                                                                                                          
|Liquidity and Capital Resources                          |  | 32                                                                                                          
|Off-Balance Sheet Arrangements                           |  | 35                                                                                                          
|Post-Merger                                              |  | 35                                                                                                          
|Rate Matters                                             |  | 36                                                                                                          
|Recent Developments                                      |  | 37                                                                                                          
|Forward-Looking Statements                               |  | 38                                                                                                          
|                                                         |  |                                                                                                             
|ITEM 7A.                                                 |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                   |  | 38  
|                                                         |  |                                                                                                             
|ITEM 8.                                                  |  | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                     |  | 41  
|Reports of Independent Registered Public Accounting Firm |  | 41                                                                                                          
|Holdings Financial Statements                            |  | 43                                                                                                          
|Duquesne Light Financial Statements                      |  | 48                                                                                                          
|                                                         |  |                                                                                                             
|ITEM 9.                                                  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                         |  | 93  
|                                                         |  |                                                                                                             
|ITEM 9A.                                                 |  | CONTROLS AND PROCEDURES                                                                                      |  | 93  
|                                                         |  |                                                                                                             
|ITEM 9B.                                                 |  | OTHER INFORMATION                                                                                            |  | 97  
|                                                         |  |                                                                                                             
|                                                         |  | PART III                                                                                                     |  |     
|                                                         |  |                                                                                                             
|ITEM 10.                                                 |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                       |  | 97  
|                                                         |  |                                                                                                             
|ITEM 11.                                                 |  | EXECUTIVE COMPENSATION                                                                                       |  | 97  
|                                                         |  |                                                                                                             
|ITEM 12.                                                 |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS               |  | 97  
|                                                         |  |                                                                                                             
|ITEM 13.                                                 |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                    |  | 99  
|                                                         |  |                                                                                                             
|ITEM 14.                                                 |  | PRINCIPAL ACCOUNTING FEES AND SERVICES                                                                       |  | 99  
|                                                         |  |                                                                                                             
|                                                         |  | PART IV                                                                                                      |  |     
|                                                         |  |                                                                                                             
|ITEM 15.                                                 |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                   |  | 99  
|                                                         |  |                                                                                                             
|                                                         |  | SCHEDULE I                                                                                                   |  | 105 
|                                                         |  |                                                                                                             
|                                                         |  | SCHEDULE II                                                                                                  |  | 109 
|                                                         |  |                                                                                                             
|                                                         |  | SIGNATURES                                                                                                   |  | 110 



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GLOSSARY OF TERMS

COMPETITIVE TRANSITION CHARGE (CTC)  During the electric utility restructuring from the
traditional Pennsylvania regulatory framework to customer choice, electric utilities have the opportunity to recover transition costs from customers through this usage-based charge. As of December 31, 2005, Duquesne Light has fully collected
the CTC.

CUSTOMER CHOICE  The Pennsylvania Electricity Generation Customer Choice and Competition Act gives consumers the right to
contract for electricity at market prices from PUC-approved electric generation suppliers.

DISTRIBUTION Distribution is the flow of
electricity from our substations to the ultimate customer (businesses and homes).

ENERGY COMMODITY CONTRACTS  Contracts for the purchase or
sale of electric energy and capacity credits.

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 (i.e., transmission).

PENNSYLVANIA PUBLIC UTILITY COMMISSION (PUC) The governmental body that regulates all utilities (electric, gas, telephone, water, etc.) that do business in
Pennsylvania. In our case, the PUC regulates our distribution business.

PROVIDER OF LAST RESORT (POLR)  Under Customer Choice, the local
distribution utility is required to provide electricity for customers who do not choose an alternative generation supplier, or whose supplier fails to deliver. (See Item 1, Business, for a description of our historical and current
POLR arrangements.)

REGIONAL TRANSMISSION ORGANIZATION (RTO)  Organization formed by transmission-owning utilities to put transmission
facilities within a region under common control. Duquesne Light is a member of PJM Interconnection, the RTO which coordinates the movement of electricity in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North
Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.

REGULATORY ASSETS Ratemaking practices grant
regulated utilities exclusive geographic franchises in exchange for the obligation to serve all customers. Under this system, certain prudently incurred costs are approved by the regulators for deferral and future recovery. These deferred costs are
capitalized as regulatory assets by the regulated utility.

SEAMS ELIMINATION CHARGE ADJUSTMENT (SECA) A transitional pricing mechanism put
in place by the FERC through March 2006 in order to compensate transmission owners for the estimated revenue lost as a result of the elimination of the regional through and out rates (RTOR). SECA charges must be paid by load-serving entities,
including Duquesne Light and Duquesne Light Energy on a current basis. The PUC granted a request by Duquesne Light to pass SECA charges through to its POLR customers, effective for service beginning August 26, 2005. As of December 31,
2006, Duquesne Light has fully collected its SECA charges.

SECTION 45K Until January 1, 2006, Section 29 of the Internal Revenue
Code provided tax credits through 2007 for the production and sale of non-conventional fuels, including solid synthetic fuels and landfill gas. On August 8, 2005, the Energy Policy Act of 2005 was signed into law. This new federal law contains
key provisions affecting the electric power industry, including the redesignation of the Section 29 tax credit as a general business credit under Section 45K of the Code. The previous amount of Section 29 tax credits that we were
allowed to claim in any calendar year through December 31, 2005, was limited by the amount of our regular federal income tax liability. Section 29 tax credit amounts allowed but not utilized are currently carried forward indefinitely as
deferred alternative minimum tax credits. The redesignation of Section 29 tax credits as a Section 45K general business credit removes the regular federal income tax liability limit on synthetic fuel production and subjects the credits to
a 20-year carry forward period.

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.

TRANSMISSION Transmission is the flow of electricity from generating
stations over high voltage lines to substations. The electricity then flows from the substations into our distribution network.



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PART I



|Item 1. | Business.
|------- | ---------

CORPORATE STRUCTURE

Part I of this Annual Report on Form 10-K should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, and with the audited consolidated financial statements, set forth in Part II, Item 8.

This combined Annual Report on Form 10-K presents information on both Duquesne Light Holdings, Inc. (Holdings) and Duquesne Light Company (Duquesne
Light). Information on Holdings and its subsidiaries (not including Duquesne Light and its subsidiaries) shall not be deemed to be included as part of Duquesne Lights Annual Report on Form 10-K. Specifically, information on the Energy
Solutions, Financial and Communications business segments, the all other category, and discontinued operations is not so included.

References in this report to we, us and our are to Holdings and its subsidiaries, collectively. References to Notes are to the notes to the consolidated financial statements set forth in Item
8.

Holdings is an energy services holding company formed in 1989 to serve as the holding company for Duquesne Light and to engage in
unregulated energy and related businesses.

On July 5, 2006, we entered into the merger agreement with a consortium (the Macquarie
Consortium) led by Macquarie Infrastructure Partners and Diversified Utility and Energy Trusts (DUET). Under the terms of the agreement, the Macquarie Consortium will acquire all of the outstanding common shares of Holdings for $20.00 per share in
cash.

The Holdings Board of Directors and shareholders, and the Federal Energy Regulatory Commission (FERC) have approved the transaction,
but it is subject to customary closing conditions, including the approval of the Pennsylvania Public Utility Commission (PUC). A merger agreement application was filed with the PUC in September 2006.

On February 9, 2007, Duquesne Light entered into a Joint Petition of Settlement among all parties resolving all issues in the merger agreement
application. The settlement provides for rate benefits and protections to customers, corporate governance requirements, commitments to the community and service reliability protections. The settlement agreement has been submitted to the
administrative law judge presiding over the merger application. Final effectiveness of the settlement is subject to (i) the administrative law judges review and recommendation and (ii) PUC review and approval. Both the judge and the
PUC can accept, revise or reject the settlement, with the final determination being at the PUCs discretion. Although Duquesne Light cannot predict the ultimate timing or outcome of these proceedings, we anticipate a timeline that will allow
for a PUC decision during the second quarter of 2007.

The merger agreement contains termination rights for both Holdings and the Macquarie
Consortium, and further provides that, upon termination of the merger agreement under specified circumstances, including (a) by Holdings accepting a proposal by another entity to acquire 50% or more of Holdings common stock and
(b) Holdings board withdrawing or modifying its approval or recommendation of the merger, approving or recommending entering into an agreement with a party other than the Macquarie Consortium, Holdings may be required to pay the Macquarie
Consortium a termination fee equal to $40 million in cash plus certain documented out-of-pocket expenses and fees incurred by the Macquarie Consortium not in excess of $10 million. The merger agreement defines material adverse effect as
any material adverse effect on the business, assets, liabilities, properties, financial condition or results of operations of Holdings and its subsidiaries taken as a whole. If a material adverse effect occurs and is continuing at the time for
closing the transaction, it could be a failure of a closing condition and/or a breach of one or more of Holdings representations and warranties. The Macquarie Consortium may be required to pay Holdings an amount equal to all documented
out-of-pocket expenses incurred by Holdings not in excess of $10 million if the merger agreement is terminated due to a breach of the Macquarie Consortiums representations, warranties and covenants. In addition, the Macquarie Consortium may be
required to pay Holdings up to $70 million in the aggregate for damages resulting from willful and material breaches of the merger agreement by the Macquarie Consortium.

Under the terms of the merger agreement, all options (whether vested or unvested) to purchase our common stock outstanding at the time of the completion of the merger, including those held by executive officers and
directors, will be cashed out by Holdings for an amount equal to the number of shares of Holdings common stock such options were convertible into immediately prior to the merger multiplied by the excess, if any, of $20.00 over the per share exercise
price of such option, less any applicable withholding tax. In addition, all other equity-based grants (if not then vested) will vest immediately prior to the effective time at the target performance levels (if applicable) and will be eligible to
receive the $20.00 per share merger consideration, less any applicable withholding taxes. The merger agreement also contains provisions that require Holdings not to increase its common stock dividend.

As compensation for services in connection with the merger, Holdings has agreed to pay Lehman Brothers a fee of $10 million, of which $2 million was paid
upon



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public announcement of the transaction and $2 million upon stockholder approval of the sale, with the balance to be paid upon closing of the
transaction. We have also agreed to reimburse Lehman Brothers for certain expenses incurred by Lehman Brothers and to indemnify Lehman Brothers and related parties against liabilities arising out of Lehman Brothers engagement and the rendering
of its opinion.

The foregoing description of the merger agreement does not purport to be complete and is qualified in its entirety by
reference to the merger agreement, which is included as an exhibit to a Form 8-K filed with the SEC on July 6, 2006.

Continuing Operations

Duquesne Light was formed in 1912 by the consolidation and merger of three constituent companies. Duquesne Light is an electric utility
engaged in the supply (through its provider-of-last-resort service (POLR)), transmission and distribution of electric energy.

Under
Pennsylvania ratemaking practice, electric utilities were granted exclusive geographic franchises to sell electricity, in exchange for making investments and incurring obligations to serve customers. Through the rate making process, these prudently
incurred costs were recovered, along with a return on the investment, from customers. Additionally, certain operating costs were approved for deferral for future recovery from customers. As a result of this process, utilities had assets recorded on
their balance sheets at above-market costs, creating transition costs. With the 1996 passage of the Pennsylvania Electricity Generation Customer Choice and Competition Act, electric generation was deregulated, allowing customers to purchase
electricity at market prices from a variety of electric generation suppliers. Under the Competition Act, utilities are permitted to recover transition costs by collecting the competitive transition charge (CTC). Transmission and delivery of
electricity remain regulated in substantially the same manner as under historical regulation.

In early 2000, Duquesne Light completed the
divestiture of its generation assets, and applied the net sale proceeds to reduce transition costs, thus accelerating its CTC collection period for most customers. In conjunction with the sale of its generation assets, Duquesne Light entered into
POLR I, a full requirements arrangement with an unrelated vendor, which provided Duquesne Light the necessary electricity to satisfy its POLR obligation during the CTC collection period. Although the CTC collection period ended during the third
quarter of 2005, POLR I remains in place for a few industrial customers under special contracts. From January 2002 through December 2004, Duquesne Light operated under POLR II, which extended the full requirements arrangement to service customers
from whom the CTC had already been fully collected. Unlike POLR I, which was income neutral, the POLR II arrangement permitted Duquesne Light to collect a margin on the energy supplied.

POLR III is Duquesne Lights rate plan and related generation supply plan for the period which began January 1, 2005. Currently, most customers
who do not choose an alternative generation supplier are served through POLR III. Under POLR III, residential and small commercial customers receive electric supply through December 31, 2007 at fixed rates approximately 11.5% above POLR II
generation rates. For our large commercial and industrial customers, the current POLR III supply options are either a fixed price service based upon the results of a competitive request-for-proposal process (available through May 31, 2007), or
an hourly price service that passes through real-time spot market electricity prices. Duquesne Light receives an adder as compensation for costs and risks involved in providing energy to these customers. Concurrently with the beginning of POLR III,
Duquesne Light joined PJM Interconnection (PJM), as part of its commitment to ensuring reliability to its customers.

In November 2006, the
PUC approved a distribution rate increase of $117 million in annual operating revenues, and an automatic pass-through for charges that Duquesne Light will pay for transmission services it purchases under tariffs regulated by the FERC. The rate
increase was effective beginning in January 2007.

In September 2006, Duquesne Light filed a transmission rate case with the FERC
requesting a rate increase of approximately $27 million related to transmission services that Duquesne Light and other suppliers in the Duquesne Light zone purchase under tariffs regulated by the FERC. An initial order was issued in February 2007,
granting the requested increase, subject to refund, to be retroactively effective as of December 1, 2006.

In January 2007, Duquesne
Light filed a petition with the PUC requesting approval of a plan that will supply a secure source of electricity for customers from 2008 through 2010 (POLR IV). Generation rates then would stay fixed through the end of 2010. The filing seeks
approval of the petition by July 1, 2007, which will allow Duquesne Light time to communicate with customers and its supplier. We cannot predict the timing or outcome of the PUCs review and approval process.



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See Rate Matters under Managements Discussion and Analysis in Item 7 for more details
regarding the above filings.

Duquesne Power, LLC, an unregulated subsidiary, maintains a portfolio of energy commodity contracts to supply
energy to both (i) Duquesne Lights residential, commercial and industrial POLR customers and (ii) Duquesne Light Energy, LLCs (DLE) large commercial and industrial customers. These energy commodity contracts are with unrelated
parties and include payment guarantees from Holdings.

DLE is an unregulated, competitive, retail electric generation supplier that offers
customized solutions tailored to meet its customers specific electricity needs. DLEs primary focus is on the large commercial and industrial customer market segment in Duquesne Lights service territory.

Duquesne Generation Company owns minority interests in the coal-fired Keystone and Conemaugh power plants. It acquired a 2.47% interest in the Keystone
plant and a 3.83% interest in the Conemaugh plant, plus related inventories, equipment and other property interests, on September 1, 2006 for an aggregate purchase price of approximately $177 million, which includes applicable closing
costs and working capital adjustments.

Duquesne Energy Solutions, LLC (DES) is an energy facilities management company that provides
energy outsourcing solutions including operation and maintenance of synthetic fuel and energy facilities.

DQE Financial Corp. is an
investment and portfolio management organization focused on structured finance and alternative energy investments. DQE Financial previously owned and operated landfill gas collection and processing systems.

DQE Communications, Inc. owns, operates and maintains a high-speed, fiber optic based metropolitan network, and leases dark fiber from the network to
commercial, industrial and academic customers.

Discontinued Operations

Effective December 29, 2006, DQE Financial sold its landfill gas business. Holdings has agreed to guarantee certain of DQE Financials
obligations related to this transaction. During 2003, AquaSource, Inc. (formerly our water resource management subsidiary) completed the sale of its assets, pursuant to agreements entered into in 2002. We sold the propane distribution business of
our subsidiary, Pro Am, Inc. in December 2002. See Note 18 for additional information regarding our discontinued operations.

Service Areas and
Customer Concentrations

Duquesne Lights electric utility operations provide service to approximately 587,000 direct customers in
southwestern Pennsylvania (including in the City of Pittsburgh), a territory of approximately 800 square miles.

Our other business lines
have operations and investments in several states and Canada. Our Canadian operations recognized revenue of $14.4 million, $9.4 million and $11.9 million in 2006, 2005 and 2004. Associated long-lived assets, excluding financial instruments, were
zero, zero and $4.2 million as of December 31, 2006, 2005 and 2004. DES relies on a single customer, that owns several synthetic fuel facilities, for substantially all of its revenues and earnings.

Regulation

Holdings and Duquesne Light are subject
to the accounting and reporting requirements of the Securities and Exchange Commission (SEC). Duquesne Lights electricity delivery business is also subject to regulation by the PUC and the FERC with respect to rates for delivery of electric
power, accounting and other matters. The power supply business is regulated by the FERC for wholesale power sales.

Business Segments

This information is set forth in Item 7 under Results of Operations and in Note 21 to the consolidated financial statements.

FORWARD-LOOKING STATE
MENTS

We use forward-looking statements in this report. Statements that are not historical facts are
forward-looking statements, and are based on beliefs and assumptions of our management, and on information currently available to management. Forward-looking statements include statements preceded by, followed by or using such words as
believe, expect, anticipate, plan, estimate or similar expressions. Such statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in
light of new information or future events. Actual results may materially differ from those implied by forward-looking statements due to known and unknown risks and uncertainties, some of which are discussed in Item 7.

EMPLOYE
ES

As of December 31, 2006, Holdings and its subsidiaries had approximately 1,500 employees. Duquesne
Light is party to a labor contract with the



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International Brotherhood of Electrical Workers (IBEW), which represents 71% of Duquesne Lights approximately 1,400 employees. Duquesne Light and the
IBEW are parties to a collective bargaining agreement which was renegotiated in 2005 and expires in September 2010.

ENVIRONMENTAL
MATTERS

Legacy Liabilities

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.
Following the generation asset divestiture, Duquesne Light retained certain facilities which remain subject to these regulations. We have assessed our residual waste management sites, and the DEP has approved our compliance strategies. As of
December 31, 2006, we expect the costs of compliance to be approximately $4 million with respect to sites we continue to own. These costs were recovered in the CTC.

Duquesne Light also owns the closed Warwick Mine, located along the Monongahela River in Greene County, Pennsylvania. This property had been used in the
electricity supply business segment. Duquesne Light has been selling unused portions of the property and plans to continue to do so. As of December 31, 2006, Duquesne Lights current estimated liability for closing the Warwick Mine,
including final site reclamation, mine water treatment and certain health care liabilities, is approximately $34 million.

These amounts
are combined and included in legacy liabilities on both Holdings and Duquesne Lights consolidated balance sheets. Our operations are subject to environmental laws and regulation by federal, state and local authorities. Due to the inherent
uncertainties surrounding the development of federal and state environmental and energy laws and regulations, we cannot determine the impact such laws may have on our existing and future facilities.

Discontinued Operations

AquaSource Inc.s
(formerly our water resource management subsidiary) former water and water-related operations were, and remain, subject to the Federal Safe Drinking Water Act, which provides for uniform minimum national water quality standards, as well as
governmental authority to specify treatment processes to be used for drinking water. AquaSources former operations also were, and remain, subject to the Federal Clean Water Act, which regulates the discharge of pollutants into
waterways. AquaSource is aware of various compliance issues at its former water and wastewater facilities attributable to the period of time during which it owned these facilities. AquaSource has agreed to indemnify the purchasers of these
facilities for certain pre-closing environmental liabilities.

Prior to divesting its former operations, AquaSource entered into various
consent agreements regarding certain environmental compliance matters. In connection with divesting its former operations, AquaSource assigned these consent agreements to the relevant purchasers. AquaSource has agreed to indemnify the purchasers of
its former operations for certain pre-closing environmental liabilities.

As part of the transaction, we retained certain obligations
related to the business that was sold to Aqua America, Inc., including responsibility for certain existing litigation matters as well as a 10-year indemnity for certain pre-closing environmental claims. We purchased an environmental liability policy
to mitigate this indemnity.

We do not believe that any of AquaSources indemnity obligations described above will have a material
effect on Holdings financial position, results of operations or cash flows.

OTHER

Recent Accounting Pronouncements

On January 1, 2007, we adopted the Financial Accounting Standards Boards (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109 (FIN 48). The Interpretation clarifies the accounting for uncertainty in income taxes recognized and stipulates a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The Interpretation also provides guidance on various other items. We are currently evaluating the overall impact of FIN 48 on both Holdings and Duquesne Lights financial statements.

On January 1, 2007, we adopted FASB Staff Position No. 13-2 Accounting for a Change or Projected Change in the Timing of
Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction (FSP No. 13-2). As the December 2003 settlement with the Internal Revenue Service (IRS) regarding DQE Financials structured lease and other similar
investments modified our tax benefits under these leases, this FSP requires recognition of the modified tax benefits from the inception of the leases. Upon adoption, we expect to record an after-tax, non-cash cumulative effect charge of
approximately $85 million. After adopting this FSP, the amount of the cumulative effect charge initially recorded will be recognized as additional lease earnings over the remaining lives of these leases, which range from approximately 22 to 30 years
(with



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early buy-out periods ranging from 6 to 17 years). Our current and future cash flows are unaffected by the adoption.

In September 2006, the FASB issued Statement of Financial Accounting Standards (No. 157), Fair Value Measurements. This statement defines
fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement does not require any new fair value measurements. However, for some entities, the application of the statement will change
current practice. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. This statement applies to both Holdings and Duquesne Light. We are
currently evaluating the overall impact of this statement on both Holdings and Duquesne Lights financial statements.

In
February 2007, the FASB issued Statement of Financial Accounting Standards (No. 159), The Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115. This statement
permits entities to choose to measure eligible items at fair value at specified election dates. This statement is effective for the first fiscal year that begins after November 15, 2007. This statement applies to both Holdings and Duquesne
Light and we are currently evaluating the overall impact of this statement on both Holdings and Duquesne Lights financial statements.

In September 2006, the Emerging Issues Task Force (EITF) ratified EITF Issue No. 06-5, Accounting for the Purchases of Life Insurance  Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin
No. 85-4. This consensus reached in this issue requires policyholders of corporate-owned life insurance to consider additional amounts included in the contractual terms of the policy in determining the amount that could be realized under
the contract. This consensus is effective for fiscal years beginning after December 15, 2006. This statement applies to both Holdings and Duquesne Light and we are currently evaluating the overall impact of this statement on both Holdings
and Duquesne Lights financial statements.

Pending Litigation

See Item 3, Legal Proceedings, for a discussion of pending litigation.

Available Information

Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports for both
Holdings and Duquesne Light are available free of charge through our website (www.duquesnelightholdings.com) when they become available
on the SEC website.

EXECUTIVE OFF
ICERS OF THE REGISTRANTS

Set forth below are the names, ages as of January 31, 2007, and positions during
the past five years of the executive officers for Holdings and for Duquesne Light.

Ms. Hogel and Messrs. OBrien, Kaplan, Fields
and Schott are executive officers of both Holdings and Duquesne Light. Mr. Wilson is an executive officer only of Holdings.

Morgan
K. OBrien, age 46. At Holdings: President and Chief Executive Officer since September 2001.

At Duquesne Light: Director since
June 1999. President and Chief Executive Officer since August 2003.

Maureen L. Hogel, age 46. At Holdings: Senior Vice President
and Chief Legal & Administrative Officer since August 2003. Senior Vice President and Chief Administrative Officer from December 2002 to August 2003.

At Duquesne Light: Director since April 2003. Senior Vice President and Chief Legal & Administrative Officer since August 2003. Senior Vice President and Chief Administrative Officer from December 2002 to
August 2003. Senior Vice PresidentHuman Resources and Administration from October 2001 through November 2002.

Mark E. Kaplan,
age 45. At Holdings: Senior Vice President and Chief Financial Officer since September 2005.

At Duquesne Light: Director, Senior Vice
President and Chief Financial Officer since October 2005.

Previously: Managing Director of CLJ Consulting Group LLC (a management
consulting firm) from 2004 until September 2005. From 1995 until 2004, served in various capacities with Weirton Steel Corporation, including as President and Chief Financial Officer, Senior Vice President - Finance and Administration, and Vice
President and Controller. Also a director of WesMark Funds, an open-end, management investment company.

William F. Fields, age 56.
At Holdings: Vice President and Treasurer since December 2002. At DQE Financial: Treasurer since December 2002. President from June 2001 to August 2004.

At Duquesne Light: Vice President and Treasurer since December 2002.



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Stevan R. Schott, age 43. At Holdings: Vice PresidentFinance since September 2005. Senior
Vice President and Chief Financial Officer from August 2003 to September 2005. Vice President and Controller from October 2001 to August 2003.

At Duquesne Light: Director from April 2003 to October 2005. Vice PresidentFinance since October 2005. Senior Vice President and Chief Financial Officer from August 2003 to October 2005. Vice President and Controller from October 2001
to August 2003.

James E. Wilson, age 41. At Holdings: Vice PresidentCorporate Development since September 2005. Senior Vice
President and Chief Strategic Officer from August 2003 to September 2005. Vice PresidentCorporate Development and Rates from December 2002 to August 2003. Vice PresidentCorporate Development from October 2001 to December 2002.

At Duquesne Light: Director from April 2003 to June 2004. Senior Vice President and Chief Strategic Officer from August 2003 to June 2004.
Vice PresidentCorporate Development and Rates from December 2002 to July 2003. Vice PresidentCorporate Development from October 2001 to November 2002.



|Item 1A. | Risk Factors.
|-------- | -------------

There are risks if we do not
complete the proposed merger with the Macquarie Consortium.

If the merger is not completed for any reason, Holdings will remain an
independent public company and the common stock will continue to be listed and traded on the New York Stock Exchange (NYSE). While we expect that management will operate the business in a manner similar to that in which it is being operated today,
if the merger is not completed, Holdings may suffer negative financial ramifications, including the following:



| |  |  | The current market price of our common stock may reflect a market assumption that the merger will occur, and a failure to complete the merger could result in a
negative perception by investors in Holdings generally and could cause a decline in the market price of our common stock. This could affect our ability to access the equity markets for working capital.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We might be required to pay a $40 million termination fee, and up to $10 million of expenses, to the Macquarie Consortium.
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | We would have to repay our current $200 million term loan facility within one year, and could experience difficulty in accessing inexpensive sources of credit.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The reduced liquidity due to the termination fee and term loan repayment could put our dividend at risk.
| | - |  | --------------------------------------------------------------------------------------------------------

There are risks associated with a successful consummation of the proposed merger with the Macquarie Consortium.

If we complete the merger, Holdings will be a more leveraged company.

Following a successful merger, it is likely that we will remove the Duquesne Light preferred stock and 6.7% public income notes from listing on the NYSE, which could affect the liquidity of any trading market for
those securities. In addition, it is likely that we will deregister the preferred stock, the public income notes and all the remaining publicly held debt of Holdings and Duquesne Light, which means that neither Holdings nor Duquesne Light will
continue to file the SEC-mandated disclosure reports (e.g., 10-Ks, 10-Qs and 8-Ks).

Individual employees may experience uncertainty about
their post-merger roles. Issues relating to the uncertainty or a desire not to remain with Holdings and its affiliates after the merger may cause them to voluntarily leave for other career opportunities.

We are subject to substantial governmental regulation. If we receive unfavorable regulatory treatment, our business could be negatively affected.

Our transmission and distribution businesses are subject to regulation by various federal, state and local regulatory agencies that
significantly affects our operations. The PUC regulates, among other things, the rates we can charge retail customers for the delivery of electricity. In addition, the FERC regulates, among other things, the rates that we can charge for electricity
transmission. We cannot change transmission or delivery rates without approval by the applicable regulatory authority. While the approved transmission and delivery rates are intended to permit us to recover costs of service and earn a reasonable
rate of return, there is no guarantee that the rates authorized by regulators will match our actual costs or provide a particular return on capital at any given time. Additionally, we are in the midst of a three-year, $500 million to
$550 million capital expenditure program ending in 2007. While we will attempt to recover a portion of our capital expenditures by passing these costs along to our customers, there is a risk that governmental regulation of the rates we may
charge to customers will prevent, hinder or delay our recovery of these capital expenditures.

The FERC also regulates the rates that other
utilities charge to us for wholesale sales of electricity and can change the rates that other utilities charge for wholesale electricity sales. Since electric generation is now deregulated, we may not be able to recover increased costs associated
with higher rates charged to us by electric generation suppliers.



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We also are required to have numerous permits, approvals and certificates from governmental agencies that
regulate our business. We are unable to predict the impact of future regulatory activities of any of these agencies on our business.

The
FERC also has authority to review mergers and acquisitions.

Changes in, or reinterpretations of, existing laws or regulations, or the
imposition of new laws or regulations, may require us to change the way we conduct our operations or may result in substantial costs to us.

Shifting federal and state regulatory policies impose risks on our operations.

Our operations are subject to regulatory
policies that are evolving as a result of various initiatives, including initiatives regarding the deregulation of the production and sale of electricity and changes in transmission regulation. Any new requirements arising from these actions could
lead to increased operating expenses and capital expenditures, the amount of which cannot be predicted at this time.

Delays,
discontinuations or reversals of electricity market restructurings in the markets in which we operate, or may operate in the future, could have a material adverse effect on our results of operations and financial condition. For instance, at this
time the PUC has delayed the enactment of final rules that will apply to the default generation service to be provided by Duquesne Light after the expiration of its POLR III arrangements, which currently expire December 31, 2007. At a minimum,
these types of actions raise uncertainty concerning the continued development of competitive power markets.

Our financial obligations
under the Seams Elimination Charge Adjustment remain uncertain.

In addition to the regulatory risks described above, as a result of
the FERCs regulatory efforts to implement a new long-term rate design for public utilities in the Midwest and Mid-Atlantic regions, and specifically due to the FERCs elimination of the regional through and out rates (RTOR) for certain
transmission services between the Midwest Independent System Operator (MISO) and PJM, our transmission and distribution businesses may have costs shifted to them from other transmission owners. A transitional pricing mechanism called the seams
elimination charge adjustment (SECA) was put in place through March 2006 in order to compensate transmission owners for the estimated revenue lost as a result of the elimination of RTOR. The allocation of SECA charges has not yet been fully
resolved.

If the FERC ultimately adopts a SECA level and allocation method that differs from the proposed charges initially accepted by
the FERC for billing purposes, refunds or surcharges will be used to compensate or charge the appropriate entity for the difference between the amounts initially accepted by the FERC and the amounts ultimately determined to be just and reasonable by
the FERC. The final amount of our SECA obligations therefore remains uncertain.

Duquesne Light has recovered from its retail customers the
total expected liability of SECA obligations and will refund, if applicable, any over-collection to customers once all SECA obligations are determined.

We are subject to risks associated with our POLR obligations.

Duquesne Lights customers may
choose to receive their electric energy from an alternative generation supplier. If they do not choose an alternative generation supplier, they will be served through Duquesne Lights POLR arrangements. Customers who select an alternative
generation supplier pay for generation charges set by that supplier, and pay Duquesne Light both transmission and distribution charges. In connection with these POLR transactions, Duquesne Light retains the risk that such customers will not pay for
the POLR generation supply. Duquesne Light procures the energy and capacity needed to serve POLR III customers under a full-requirements contract with Duquesne Power. Failure or delay by Duquesne Power to provide the energy and capacity anticipated
in the contract could require Duquesne Light to incur additional expenses to meet the needs of its POLR customers.

In addition, our
proposed POLR IV arrangements, submitted to the PUC in January 2007, remain subject to PUC review and approval. We cannot predict the timing or outcome of the PUCs review process.

We are subject to risks associated with procuring energy and capacity for Duquesne Lights customers and DLEs customers.

In addition to supplying the energy and capacity needs of Duquesne Lights customers, Duquesne Power also supplies its affiliate DLE. Duquesne Power
has entered into wholesale power purchase contracts. The net result of these transactions is that, as of December 31, 2006, Duquesne Power has secured a substantial portion of the combined expected load obligation for its full-requirements
contracts with Duquesne Light through 2007.

Actual load may differ from expected load due to weather, customer switching, economic and
other factors. If Duquesne Power did not have sufficient



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supplies, Duquesne Power would be required to procure the requirements in the energy markets. If market prices were higher than the rates to be paid by
Duquesne Light to Duquesne Power under the full-requirements contracts, Duquesne Power could potentially be acquiring the energy or capacity at a loss, and any such losses could have a material adverse effect on our consolidated results of
operations, financial position and cash flows. Likewise, if Duquesne Power has contracted for supplies in excess of its needs, Duquesne Power could potentially be selling energy or capacity at a loss, and any such losses could have a material
adverse effect on our consolidated results of operations and financial condition. Duquesne Powers energy commodity contracts contain provisions designed to provide security for potential losses by requiring that Duquesne Power post collateral
depending on changes in energy or capacity prices. Because Holdings guarantees many of these contracts, any such collateral postings would reduce cash and/or the availability under Holdings credit facility.

Wholesale power secured under long-term contracts for 2008, 2009 and 2010 may not be permitted to be used to satisfy Duquesne Lights POLR
obligation.

Duquesne Power has secured a significant amount of power under long-term forward contracts for delivery in 2008, 2009 and
2010. Duquesne Light has not received approval from the PUC on its POLR IV plans. Should the PUC not permit an extension of Duquesne Lights current relationship with Duquesne Power, Duquesne Power will be left with power it would have to sell
to another wholesale customer or sell into the spot market at then-current market prices. As discussed above, Duquesne Power could potentially be selling energy at a loss (which could have a material adverse effect on our consolidated results of
operations, financial position and cash flows), and Duquesne Power could be required to post collateral depending on changes in prices (which could impact Holdings credit facility availability due to its guarantees of these contracts).

In February 2007, the PUC issued an advanced notice of proposed rulemaking that, if made final, would impact the procedures that electric
distribution companies such as Duquesne Light must follow in securing generation suppliers for POLR customers. As currently written, the proposal would require Duquesne Light to select a supplier through an auction or request for proposal process,
impacting the POLR IV plan to use Duquesne Power as the supplier.

Our interests in the Keystone and Conemaugh power plants subject us
to certain risks.

The ownership of interests in power plants involves numerous risks, including:



| |  |  | the plants ability to operate at expected capacity factors;
| | - |  | ------------------------------------------------------------



| |  |  | unforeseen operating problems and capital and other expenditures, including unforeseen environmental compliance costs;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | equipment failures;
| | - |  | -------------------



| |  |  | the ability to comply with applicable regulations;
| | - |  | --------------------------------------------------



| |  |  | unanticipated cost increases;
| | - |  | -----------------------------



| |  |  | labor force matters;
| | - |  | --------------------



| |  |  | weather-related incidents; and
| | - |  | ------------------------------



| |  |  | the impact of changes in environmental laws and regulations.
| | - |  | ------------------------------------------------------------

Any of these factors could give rise to lost revenues and/or increased expenses and/or capital expenditures. In addition, the financial results from our investment in the Keystone and Conemaugh power plants will
depend on:



| |  |  | cost and availability of fuel; and
| | - |  | ----------------------------------



| |  |  | changes in market prices of power.
| | - |  | ----------------------------------

Events or circumstances that adversely affect our financial position could result in defaults under our credit agreements.

Holdings and Duquesne Light are subject to financial covenants contained in their respective credit agreements. For instance, our credit agreement requires us to maintain at all times a ratio of consolidated debt to consolidated capital of
not more than 0.65 to 1.0 and an interest coverage ratio, with respect to each twelve-month period ending on the last day of each fiscal quarter, of at least 2.0 to 1.0. Duquesne Lights credit agreement requires Duquesne Light to maintain at
all times a ratio of indebtedness to total capitalization of not more than 0.65 to 1.0. As of December 31, 2006 we were in compliance with those covenants. However, any events or circumstances (including any charges to earnings) which have an
effect, directly or indirectly, of reducing our common equity, increasing our indebtedness or reducing interest coverage, in relative terms, could result in non-compliance with these covenants. If we default under our credit agreements, our lenders
could elect to declare all amounts borrowed to be immediately due and payable, together with accrued and unpaid interest; and/or terminate their commitments, if any, to make further extensions of credit. Both credit agreements include cross-default
provisions that would be triggered if the borrower or any of its subsidiaries defaults on any payment due under any indebtedness exceeding $50 million.

The cost of compliance with environmental laws is significant. The costs of compliance with new environmental laws and the incurrence of environmental liabilities could adversely affect our cash flow and
profitability.

The operations of our subsidiaries are subject to extensive federal, state and local environmental statutes, rules and
regulations relating to air quality, water quality, waste management, natural resources, site remediation, and health and safety. These statutes, rules and regulations require us to commit significant resources and funds to, among other things,



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conduct site remediation and perform environmental monitoring. We also may be required to pay significant remediation costs with respect to third party sites
in connection with previously divested assets. If we fail to comply with applicable environmental statutes, rules and regulations, even if caused by factors beyond our control, such failure could result in the assessment of civil or criminal
penalties and liabilities and the need to expend significant sums to come into compliance. Alleged violations of environmental laws and regulations may require us to expend significant resources defending ourselves against these claims.

New environmental statutes, rules and regulations, or amendments to or new interpretations of existing statutes, rules and regulations, could impose
additional or more stringent limitations on our operations or require us to incur significant additional costs. Our current compliance strategy may not successfully address the relevant standards and interpretations of the future.

Our operating results fluctuate on a seasonal basis and can be adversely affected by changes in weather.

Our electric utility business is sensitive to variations in weather conditions and significant variations from normal weather patterns can have a
material impact on our operating performance. Historically, demand for electricity is generally greater in the summer months associated with cooling compared to other times of the year. Accordingly, we have generated less revenues and income when
weather conditions are cooler than usual in the summer.

Severe weather, such as tornadoes, hurricanes, storms, ice and droughts, may cause
outages and property damage which may require us to incur additional costs that may not be insured and that may not be recoverable from customers.

We may be adversely affected by economic conditions.

Periods of slowed economic activity generally result in decreased
demand for power, particularly as industrial customers reduce production during such economic downturns, resulting in less consumption of electricity. Additionally, a general downturn in overall economic conditions may result in an increased number
of bankruptcy filings by our customers, which would restrict our ability to collect revenue from these customers. As a consequence, recessions or other downturns in the economy may result in decreased revenues and cash flows for us.

Our insurance coverage may not be sufficient to cover all casualty losses that we might incur.

We currently have insurance coverage for our facilities and operations in amounts and with deductibles that we consider appropriate. However, there is no
assurance that such insurance coverage will be available in the future on commercially reasonable terms. In addition, some risks, such as weather-related casualties, may not be insurable. In the case of loss or damage to property, plant or
equipment, there is no assurance that the insurance proceeds, if any, received by us will be sufficient to cover the entire cost of replacement or repair.

Changes in PJM market policies and rules may impact our financial results.

Substantially all of our
generation assets and power supply obligations are located within the PJM region. Any changes in PJM policies or market rules, including changes that are currently under consideration by FERC, could adversely affect our financial results.

Our transmission facilities are interconnected with the facilities of other transmission facility owners whose actions may have a
negative impact on our operations.

Our transmission facilities are directly interconnected with the transmission facilities of
contiguous utilities and as such are part of an interstate power transmission grid. The FERC has approved certain Regional Transmission Organizations (RTOs) that coordinate and have operational control of portions of the interstate transmission
grid. PJM and the other regional transmission operators have established sophisticated systems that are designed to ensure the reliability of the operation of transmission facilities and prevent the operations of one utility from having an adverse
impact on the operations of the other utilities. The systems put in place by PJM and the other RTOs may not, however, always be adequate to prevent problems at other utilities from causing service interruptions in our transmission facilities. If we
were to suffer such a service interruption due to an unexpected or uncontrollable event occurring on the system of another utility, it could have a negative impact on our business.

Physical limitations in the electricity transmission system may give rise to increases in electric transmission congestion charges.

Energy pricing within PJM includes the costs or benefits of transmission congestion experienced at each location within the region. This is known as
locational marginal pricing (LMP). LMP recognizes that the marginal price of electricity may be different at



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varying locations on the system and at different times. Differences in prices between two locations in the region at the same time reflect physical
limitations in the transmission lines used to move power across the system. These physical limitations may give rise to increases in electric transmission congestion charges.

We are dependent on our ability to cost-effectively access capital markets. Our inability to obtain capital on acceptable terms may adversely affect
our business. A reduction in our credit ratings could increase our borrowing costs.

We rely on access to both short-term debt markets
and longer-term capital markets as a source of liquidity and to satisfy our capital requirements in excess of cash flow from our operations. Any inability to maintain our current credit ratings could affect, especially during times of uncertainty in
the capital markets, our ability to raise capital on favorable terms that, in turn, could impact our ability to manage our business. Moodys Investors Service, Inc., Standard & Poors Ratings Services, and Fitch Ratings
periodically assign credit ratings on our debt and preferred securities. We raise capital primarily by issuing senior-unsecured debt (currently rated Baa3, BBB- and BBB-, respectively) and bank borrowings. Duquesne Light raises capital primarily by
issuing first mortgage bonds (currently rated Baa1, BBB+ and BBB, respectively), preferred stock (currently rated Ba1, BB+ and BBB-, respectively), senior-unsecured debt (currently rated Baa2, BBB- and BBB-, respectively) and bank borrowings. Any
downgrades in these ratings could have a negative impact on our liquidity, our access to capital markets, our costs of financing and could increase the amount of collateral required by energy-contract counterparties. Capital market disruptions could
also adversely affect our ability to access one or more financial markets.

In connection with the announcement of the merger,
Standard & Poors placed us on CreditWatch with negative implications, and Moodys placed us under review for possible downgrade.

A rating is not a recommendation to buy, sell or hold the notes, inasmuch as such rating does not comment as to market price or suitability for a particular investor. The ratings assigned to the notes address the
likelihood of payment of principal and interest on the notes pursuant to their terms. A rating may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating
that may be assigned to our securities.

We may have difficulty retaining our aging utility workforce or finding skilled personnel to
replace them.

Workforce demographic issues are a national phenomenon that is of particular concern to the electric utility industry.
The median age of utility workers is significantly higher than the national average. Currently, nearly one-half of the utility workforce is age 45 or higher. As of December 31, 2006, the median age of utility workers at Duquesne Light was
51.86. Consequently, the utility industry generally faces, and we specifically face, the difficult challenge of finding ways to retain our aging skilled workforce while recruiting new talent in the hopes of decreasing losses in critical knowledge
and skills due to retirements. Mitigating these risks may require additional financial commitments.

Labor disputes may have a material
adverse effect on our operations and profitability.

As of December 31, 2006, we, together with our various subsidiaries, had
approximately 1,500 employees. Of this total, approximately 1,400 were employed by Duquesne Light. We collectively bargain with a labor union that represents approximately 71% of these Duquesne Light employees. When the current collective bargaining
agreement expires September 30, 2010, failure to reach an agreement could result in strikes or other labor protests that could disrupt our operations. In addition, the collective bargaining agreement for employees at the Keystone and Conemaugh
power plants expires in September 2007. If we were to experience a strike or work stoppage, it would be difficult for us to find a sufficient number of employees with the necessary skills to replace these employees. We cannot assure you that we will
reach any such agreement or that we will not encounter strikes or other types of conflicts with the labor union of our personnel. Such labor disputes could have an adverse effect on our business, financial condition or results of operations, could
cause us to lose revenues and customers and might have permanent effects on our business.

Our revenues and results of operations are
subject to other risks beyond our control, including, but not limited to, accidents, storms, natural catastrophes and terrorism.

The
lost revenues and cost of repairing damage to our facilities due to storms, natural disasters, wars,



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terrorist acts and other catastrophic events may exceed reserves and/or insurance coverage established for repairs necessitated by such events, which may
adversely impact our results of operations and financial condition. We cannot assure you that our facilities will not face damage or disruptions from these or other events. In addition, in the current geopolitical climate, enhanced concern regarding
the risks of terrorism throughout the economy may impact our operations in unpredictable ways. Insurance coverage may not cover risks of this nature adequately or at all.

Changes in financial or regulatory accounting principles or policies could affect our future earnings or cash flows.

See Item 1, Recent Accounting Standards, for further discussion.

We may experience a
significant reduction in our earnings as a result of the December 31, 2007 expiration or the earlier phase-out of certain tax credits related to our synthetic fuel projects.

In addition to operating five synthetic fuel plants owned by an unrelated third party, we also hold a limited partnership interest in an entity that owns
and operates plants that produce and sell synthetic fuel. These synthetic fuel projects are important contributors to our earnings.

Section 45K tax credits are set to expire on December 31, 2007. Once such tax credits expire we do not believe that there will be a market for the sale of the synthetic fuel.

Section 45K tax credits are subject to a phase-out provision that reduces or eliminates the tax credits when the average annual wellhead price per
barrel of domestic crude oil increases into an inflation-adjusted phase-out range. The IRS publishes the phase-out range in April for the previous year. We estimate that for 2006 the tax credits would have begun to phase out when the annual average
wellhead price of domestic crude oil exceeded approximately $55 per barrel and would have completely phased out if that price exceeded approximately $69 per barrel. For 2006, the estimated average wellhead price was approximately $60 per barrel. The
wellhead price per barrel of domestic crude oil in recent years has averaged approximately 90% of the New York Mercantile Exchange price per barrel of domestic crude oil. We cannot predict the phase-out range for 2007.

If 2007 domestic crude oil prices mimic the high level of 2006, the annual tax credits to be generated from DQE Financials investment in a
synthetic fuel partnership, as well as DES annual after-tax earnings from its synthetic fuel facilities management contract, may be substantially reduced or eliminated.

The level of our indebtedness could adversely affect our business.

At December 31, 2006, Holdings had total indebtedness of approximately $1.2 billion (including approximately $700 million at Duquesne Light), which could have important consequences. For example, it could:



| |  |  | make it more difficult for us to satisfy our obligations related to any such indebtedness;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | increase our vulnerability to general adverse economic and industry conditions;
| | - |  | -------------------------------------------------------------------------------



| |  |  | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to
fund working capital, capital expenditures, acquisitions and other general corporate purposes;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | place us at a disadvantage compared to competitors that have less debt; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | limit our ability to borrow additional funds or refinance existing debt.
| | - |  | ------------------------------------------------------------------------

Any of these consequences could have a material adverse effect on our ability to satisfy our indebtedness. The indenture under which Duquesne
Lights first mortgage bonds are issued permits Duquesne Light to issue additional first mortgage bonds from time to time if certain financial requirements are satisfied. The terms of our credit agreements also do not prohibit us or our
subsidiaries from incurring additional indebtedness. As of December 31, 2006, approximately $220 million of unused commitments remain under Holdings credit agreements (including approximately $80 million at Duquesne Light), and our
credit agreements would permit additional borrowings. If new debt is added to our and our subsidiaries current debt levels, the leverage-related risks described above could intensify.

Our ability to pay dividends or service indebtedness is largely dependent upon the earnings of our subsidiaries and the distribution of such earnings
to us.

We are a holding company, and substantially all of the assets shown on our consolidated balance sheets are held by
subsidiaries. Our operating cash flow and our ability to service our indebtedness depend on the operating cash flow of our subsidiaries and the payment of funds by them to us in the form of dividends or advances. Our indebtedness is not guaranteed
by our subsidiaries and our subsidiaries are separate and distinct legal entities. We hold no assets and have no sources of revenue other than the



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ownership interests in our subsidiaries and the right to any dividends thereon and the right to receive payments on any existing or future loans made to our
subsidiaries.

Our subsidiaries are separate and distinct legal entities and have no obligation to make payments on their common stock, or
to make any funds available for such payment. Our subsidiaries ability to make dividend payments or other distributions to us may be restricted by their obligations to holders of their outstanding debt, their other creditors and holders of
their preferred and preference stock, and the availability of earnings and the needs of their businesses. For instance, no dividends or distributions may be made on Duquesne Lights common stock if it has not paid dividends on its preferred or
preference stock. Dividends on Duquesne Light stock may also be effectively limited by the terms of certain financing arrangements. Further, under Duquesne Lights articles of incorporation, the aggregate amount of 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. No part of Duquesne Lights retained earnings was
restricted at December 31, 2006.

In addition, as discussed above, Duquesne Light is regulated by the PUC, which generally possesses
broad powers to ensure that the needs of the utility customers are being met. To the extent that the PUC attempts to impose restrictions on the ability of Duquesne Light to pay dividends to us, it could adversely affect our ability to make payments
on our indebtedness or otherwise meet our financial obligations.

In the event of a bankruptcy, liquidation, winding-up, dissolution,
receivership, insolvency, reorganization, administration or similar proceeding relating to one of our subsidiaries, holders of such subsidiaries indebtedness, trade creditors of such subsidiaries and holders of such subsidiaries
preferred and/or preference stock will generally be entitled to payment of their claim from the assets of those subsidiaries before assets are made available for distribution to us.

We cannot assure investors that future dividend payments will be made, or if made, in what amounts they may be paid.

Our Board of Directors regularly evaluates our common stock dividend policy and sets the amount each quarter. The level of dividends will continue to be
influenced by many factors, including, among other things, our earnings, financial condition and cash flows from subsidiaries, as well as general economic and competitive conditions. We cannot assure investors that dividends will be paid in the
future, or that, if paid, dividends will be at the same amount or with the same frequency as in the past.

Because Duquesne Light is a
wholly owned subsidiary of Holdings, Holdings can exercise substantial control over its dividend policy and business and operations.

All of the members of Duquesne Lights board of directors and its executive officers are also officers of Holdings. Among other decisions, the Duquesne Light board is responsible for decisions regarding financing and capital raising
activities, and acquisition and disposition of assets. Within the limitations of applicable law, Duquesne Lights articles of incorporation and subject to the covenants under its outstanding debt instruments, the Duquesne Light board of
directors will base its business decisions on its earnings, cash flow and capital structure, but may also take into account the business plans and financial requirements of Holdings and its other subsidiaries.



|Item 1B. | Unres
olved Staff Comments
|-------- | --------------------------

Not applicable.



|Item 2. | Prop
erties.
|------- | ------------

Our principal properties consist of Duquesne Lights facilities for both
transmitting and distributing electricity, and supplemental properties and appurtenances, located substantially in Allegheny and Beaver counties in southwestern Pennsylvania. Substantially all of the electric utility properties are subject to a lien
under the Indenture of Mortgage and Deed of Trust dated as of April 1, 1992.

Duquesne Light owns 123 transmission substations (12 of
which are located on customer-owned land) and 478 distribution substations, of which over 65% are located on customer-owned land and are used to service that customer. They also own 26 substations that are comprised of both transmission and
distribution assets (four are on customer-owned land). Duquesne Light has 672 circuit-miles of transmission lines, comprised of 345,000, 138,000 and 69,000 volt lines. Street lighting and distribution circuits of 23,000 volts and less include
approximately 16,420 circuit-miles of lines and cable. These properties are used in the electricity delivery business segment.

Duquesne
Generation owns undivided interests in two coal-fired power plants located in Armstrong and Indiana counties in Pennsylvania.

Our total
investment in property, plant and equipment (PP&E) and the related accumulated depreciation balances for major classes of property are as follows:

Holdings PP&E and Related Accumulated Depreciation



|                              |  |                                               |         |                          |   |                |  |   |        
|----------------------------- |  | --------------------------------------------- | ------- | ------------------------ | - | -------------- |  | - | -------
|                              |  | (Millions of Dollars) as of December 31, 2006
|                              |  | Investment                                    |         | Accumulated Depreciation |   | Net Investment
|Duquesne Light electric plant |  | $                                             | 2,421.9 |                          | $ | 765.1          |  | $ | 1,656.8
|Jointly owned plants          |  |                                               | 167.6   |                          |   | 1.0            |  |   | 166.6  
|Fiber optic network           |  |                                               | 37.2    |                          |   | 11.5           |  |   | 25.7   
|Other energy facilities       |  |                                               | 8.6     |                          |   | 5.2            |  |   | 3.4    
|Other - Holdings              |  |                                               | 6.8     |                          |   | 5.5            |  |   | 1.3    
|                              |  |                                               |         |                          |   |                |  |   |        
|Total                         |  | $                                             | 2,642.1 |                          | $ | 788.3          |  | $ | 1,853.8
|                              |  |                                               |         |                          |   |                |  |   |        



16



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|                              |  |                                               |         |                          |   |                |  |   |        
|----------------------------- |  | --------------------------------------------- | ------- | ------------------------ | - | -------------- |  | - | -------
|                              |  | (Millions of Dollars) as of December 31, 2005
|                              |  | Investment                                    |         | Accumulated Depreciation |   | Net Investment
|Duquesne Light electric plant |  | $                                             | 2,235.8 |                          | $ | 738.5          |  | $ | 1,497.3
|Fiber optic network           |  |                                               | 32.9    |                          |   | 9.2            |  |   | 23.7   
|Other energy facilities       |  |                                               | 8.5     |                          |   | 4.4            |  |   | 4.1    
|Other - Holdings              |  |                                               | 6.8     |                          |   | 5.3            |  |   | 1.5    
|                              |  |                                               |         |                          |   |                |  |   |        
|Total                         |  | $                                             | 2,284.0 |                          | $ | 757.4          |  | $ | 1,526.6
|                              |  |                                               |         |                          |   |                |  |   |        

Duquesne Light electric plant includes: (1) distribution poles and equipment; (2) lower
voltage distribution wires used in delivering electricity to customers; (3) substations and transformers; (4) high voltage transmission wires used in delivering electricity to substations; (5) meters and automated meter reading
assets; and (6) internal telecommunication equipment, vehicles and office equipment, primarily used in our electricity delivery business segment. The jointly owned plants primary physical assets that are used in the electricity supply
segment consist of boilers, turbines, and the supporting structures (including emissions treatment facilities.) The fiber optic network owned by DQE Communications is reported in our Communications business segment. The other energy facilities
equipment is used in our Energy Solutions business segment. The other PP&E is comprised of office furniture and fixtures.



|Item 3. | Legal Procee
dings.
|------- | -------------------

On March 17, 2006, our then-subsidiary Monmouth Energy Inc. (Monmouth) received a
notice of violation (dated March 10, 2006) and penalty assessment in the amount of $480,000 from the New Jersey Department of Environmental Protection (NJDEP) relating to Monmouths landfill gas turbine operation located at the Monmouth
County Landfill in Monmouth, New Jersey. The notice of violation alleges non-compliance with the maximum allowable carbon monoxide steady state emission limitation for each of the two turbines operated at the facility during 2003 and 2004. The
permit for the facility provides both a maximum emission limitation and a steady state emission limit. Steady state represents 90% of the facilitys rated capacity. The facility has always operated in compliance with the maximum emission
limitation, but has not achieved the steady state emission limitation when the facility operates at less than steady state. We believe that the NJDEP is attempting to incorrectly impose the steady state emission limitation during non-steady state
conditions, as opposed to the maximum emission limitation which is the only other emission limit in the operating permit that could be applicable.

Monmouth has timely filed a notice of appeal challenging the bases for the alleged violations and the penalty assessment. Pending agreement on a permit modification clearly addressing less than steady state operations (discussed below)
Monmouth had also voluntarily constrained its operations to substantially comply with the steady state permit limit at all times. During that time Monmouth engaged in technical discussions with the NJDEP aimed at demonstrating the need for
clarification under the permit to account for non-steady state operating conditions, and filed a permit modification request to address this issue. These technical discussions were successful and in December 2006 an acceptable modification to the
permit was issued by NJDEP. It appears that, at all times, operations have been consistent and in compliance with the emission limitations that NJDEP in the permit modification has now recognized as being appropriate for this operation. In addition,
the right to additional landfill gas supplies associated with the active portions of the landfill has been secured alleviating the gas quality and quantity degradation issues that led to the notice of violation. Although Monmouth was sold with the
landfill gas business, we have retained the liabilities regarding this issue. We believe that we have credible defenses to the alleged violations and that the penalty assessment is excessive given all of the circumstances. We will vigorously defend
our position in the event it is not possible to reach an acceptable resolution of all issues.



17



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##### Table of Contents

We are involved in various other routine legal proceedings and environmental matters. We believe that the
resolution of such proceedings and matters, in total, will not have a materially adverse effect on our financial position, results of operations or cash flows.



|Item 4. | Submission of
Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

On December 5, 2006, we held a Special Meeting of
Stockholders, at which the stockholders voted on the proposed merger with the Macquarie Consortium. We solicited proxies pursuant to Regulation 14 under the Securities and Exchange Act of 1934, as amended. The merger approval was the sole proposal
submitted for stockholder vote. The vote on this proposal was as follows:



|           |  |           |  |        
|---------- |  | --------- |  | -------
|For        |  | Against   |  | Abstain
|62,001,860 |  | 3,715,827 |  | 622,771

Pursuant to a written consent of the sole stockholder dated July 24, 2006, the following
individuals (all of whom are employees) were elected as the full board of directors of Duquesne Light: Morgan K. OBrien, Joseph G. Belechak, Maureen L. Hogel and Mark E. Kaplan. Mr. Belechak is no longer a director, as his employment was
terminated in January 2007. All 10 outstanding shares of Duquesne Light common stock were voted in favor of each individual.

PART II



|Item 5. | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
|------- | -------------------------------------------------------------------------------------------------------------

Information relating to the market price for Holdings common stock is set forth in Note 22 to the consolidated financial statements hereto, and
incorporated herein by reference.

Holdings has continuously paid dividends on its common stock since 1953. Dividends of $0.25 per share
were declared and paid quarterly for the last two years. At January 31, 2007 there were approximately 42,000 holders of record of our common stock. Holdings common stock is listed and traded on the New York, Philadelphia and Chicago Stock
Exchanges.

Duquesne Light common stock is not publicly traded; Holdings owns all 10 shares outstanding. No quarterly common dividends were
declared in 2006 and $13 million were declared in 2005. Duquesne Light paid common stock dividends of zero, $20 million and $71 million in 2006, 2005 and 2004. During 2005 Duquesne Light embarked on a significant capital expenditure program, and
therefore has been retaining more of its earnings than in prior years.

We have no program regarding the repurchase of Holdings common
stock. However, we repurchase shares in connection with the issuance of so-called stock swap exercises of employee stock options or restricted stock in which shares are surrendered or deemed surrendered to Holdings to pay the exercise
price and/or to satisfy tax withholding obligations. The following table presents information with respect to such repurchases that occurred during the quarter ended December 31, 2006.



|           |  |                                  |  |                             |  |                                                                               |  |                                                                           
|---------- |  | -------------------------------- |  | --------------------------- |  | ----------------------------------------------------------------------------- |  | --------------------------------------------------------------------------
|           |  | (a)                              |  | (b)                         |  | (c)                                                                           |  | (d)                                                                       
|Period     |  | Total number of shares purchased |  | Average pricepaid per share |  | Total number of sharespurchased as part ofpublicly announcedplans or programs |  | Maximum numberof shares that mayyet be purchasedunder the plansor programs
|Oct. 1-31  |  |                                 |  |                            |  |                                                                              |  |                                                                          
|Nov. 1- 30 |  |                                 |  |                            |  |                                                                              |  |                                                                          
|Dec. 1- 31 |  | 28,140                           |  | 19.83                       |  |                                                                              |  |                                                                          
|           |  |                                  |  |                             |  |                                                                               |  |                                                                           
|Total      |  | 28,140                           |  | 19.83                       |  |                                                                              |  |                                                                          
|           |  |                                  |  |                             |  |                                                                               |  |                                                                           

For information regarding equity compensation plans, see Item 12.



18



---

##### Table of Contents

|Item 6. | Selected Financial Data.
|------- | ------------------------



|                                                                                                                                       |  |                                                 |         |      |   |         |  |      |         |      |   |         |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | -
|Duquesne Light Holdings                                                                                                                |  | (Millions of Dollars, Except Per Share Amounts) |        
|                                                                                                                                       |  | 2006                                            |         | 2005 |   | 2004    |  | 2003 |         | 2002 |  
|Income Statement Items                                                                                                                 |  |                                                 |         |      |   |         |  |      |         |      |   |         |  |   |         |  
|                                                                                                                                       |  |                                                 |         |      |  
|Total operating revenues (a)                                                                                                           |  | $                                               | 902.2   |      | $ | 871.9   |  | $    | 862.5   |      | $ | 873.1   |  | $ | 1,008.3 |  
|Operating income (b)                                                                                                                   |  |                                                 | 99.3    |      |   | 174.1   |  |      | 154.0   |      |   | 159.7   |  |   | 153.0   |  
|Income from continuing operations before taxes, limited partners interest and cumulative effect of change in accounting principle
(c) |  |                                                 | 23.6    |      |   | 141.1   |  |      | 96.8    |      |   | 111.3   |  |   | 42.4    |  
|Income tax expense (benefit) (d)                                                                                                       |  |                                                 | 23.4    |      |   | 57.0    |  |      | 30.9    |      |   | 31.7    |  |   | (1.1    | )
|Income from continuing operations                                                                                                      |  |                                                 | 8.7     |      |   | 94.2    |  |      | 73.3    |      |   | 79.6    |  |   | 43.5    |  
|Cumulative effect of change in accounting principle (e)                                                                                |  |                                                 |        |      |   |        |  |      |        |      |   |        |  |   | (113.7  | )
|Earnings (loss) available for common stock                                                                                             |  |                                                 | 54.7    |      |   | 114.2   |  |      | 87.0    |      |   | 175.5   |  |   | (215.2  | )
|Basic EPS from continuing operations (f)                                                                                               |  |                                                 | 0.11    |      |   | 1.21    |  |      | 0.96    |      |   | 1.06    |  |   | 0.66    |  
|Basic EPS (f)                                                                                                                          |  |                                                 | 0.67    |      |   | 1.47    |  |      | 1.14    |      |   | 2.34    |  |   | (3.28   | )
|                                                                                                                                       |  |                                                 |         |      |   |         |  |      |         |      |   |         |  |   |         |  
|                                                                                                                                       |  |                                                 |         |      |  
|Balance Sheet Items                                                                                                                    |  |                                                 |         |      |   |         |  |      |         |      |   |         |  |   |         |  
|                                                                                                                                       |  |                                                 |         |      |  
|Property, plant and equipment  net (g)                                                                                                |  | $                                               | 1,853.8 |      | $ | 1,526.6 |  | $    | 1,441.7 |      | $ | 1,420.3 |  | $ | 1,405.1 |  
|Total assets (g)                                                                                                                       |  |                                                 | 3,147.4 |      |   | 2,820.6 |  |      | 2,632.8 |      |   | 2,540.8 |  |   | 2,800.8 |  
|                                                                                                                                       |  |                                                 |         |      |   |         |  |      |         |      |   |         |  |   |         |  
|                                                                                                                                       |  |                                                 |         |      |  
|Capitalization                                                                                                                         |  |                                                 |         |      |   |         |  |      |         |      |   |         |  |   |         |  
|                                                                                                                                       |  |                                                 |         |      |  
|Common shareholders equity (h)                                                                                                        |  | $                                               | 785.0   |      | $ | 655.9   |  | $    | 610.4   |      | $ | 575.4   |  | $ | 452.6   |  
|Preferred and preference stock (i)                                                                                                     |  |                                                 | 147.4   |      |   | 146.5   |  |      | 145.9   |      |   | 69.7    |  |   | 92.2    |  
|Duquesne Light obligated mandatorily redeemable preferred securities (j)                                                               |  |                                                 |        |      |   |        |  |      |        |      |   |        |  |   | 150.0   |  
|Long-term debt (j) (k)                                                                                                                 |  |                                                 | 1,202.0 |      |   | 957.8   |  |      | 958.0   |      |   | 955.7   |  |   | 1,057.5 |  
|                                                                                                                                       |  |                                                 |         |      |   |         |  |      |         |      |   |         |  |   |         |  
|Total Capitalization                                                                                                                   |  | $                                               | 2,134.4 |      | $ | 1,760.2 |  | $    | 1,714.3 |      | $ | 1,600.8 |  | $ | 1,752.3 |  
|                                                                                                                                       |  |                                                 |         |      |   |         |  |      |         |      |   |         |  |   |         |  
|Dividends declared per share                                                                                                           |  | $                                               | 1.00    |      | $ | 1.00    |  | $    | 1.00    |      | $ | 1.00    |  | $ | 1.34    |  
|                                                                                                                                       |  |                                                 |         |      |   |         |  |      |         |      |   |         |  |   |         |  

---

|(a) | Total operating revenues increased in 2006 primarily due to higher revenue at DLE and new revenue at Duquesne Generation, partially offset by decreased revenue at Duquesne Light
resulting from milder weather in 2006 as compared to 2005 and decreased revenue at DES from the synthetic fuel facilities. Total operating revenues increased in 2005, primarily due to the higher average generation rates charged. Total operating
revenues declined from 2002 through 2004 due to the collection of Duquesne Lights allocated CTC balance.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Results in 2006 were negatively impacted by a $33.6 million reduction in the fair value of the derivative energy contracts and the $13.2 million charge related to a tax settlement.
(See Notes 5 and 10.) Results in 2005 were positively impacted by the $16.1 million increase in the fair value of certain derivative energy contracts, the $13.2 million gain on asset sales, and was negatively impacted by the $6.7 million charge
related to an energy facility management project. (See Notes 4 and 5.) Results were negatively impacted by the $8.3 million Sunbury acquisition termination cost in 2004. (See Note 4.) Results were negatively impacted by restructuring charges of $5.2
million in 2002.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Results in 2006 reflect a $10.3 million charge related to our closed Warwick mine and a $6.9 million gain on the sale of a limited partnership investment. Results in 2005 were
positively impacted by $24.1 million of gains on asset and investment sales. Results were negatively impacted by investment impairment charges of $33.7 million in 2002.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Results in 2006 were negatively impacted by settlements of state and IRS audits of $9.8 million and $7.8 million.
|--- | -----------------------------------------------------------------------------------------------------------------

|(e) | Holdings changed its method of accounting for goodwill and other intangible assets in 2002.
|--- | -------------------------------------------------------------------------------------------

|(f) | Beginning in 2006, earnings per share were impacted by the private placement of 8.8 million shares of common stock. (See Note 2.) Beginning in 2002, earnings per share were
impacted by the public offering of approximately 17 million shares of common stock.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) | Reflects the purchase of an interest in the Keystone and Conemaugh power plants in 2006 and Duquesne Lights significant capital expenditure program that started in 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(h) | Reflects the equity issuance in 2006 with proceeds of $141.4 million.
|--- | ---------------------------------------------------------------------

|(i) | This reflects the 2004 issuance, at par, of $75 million of Duquesne Light preferred stock. (See Note 16.)
|--- | ---------------------------------------------------------------------------------------------------------

|(j) | Adoption of SFAS No. 150 required reclassification to long-term debt.
|--- | ---------------------------------------------------------------------

|(k) | Reflects a $200 million term loan facility issued in 2006 primarily to fund the Keystone and Conemaugh plant purchase and $44.2 million of revolver borrowings that were repaid using
the proceeds from the PCRB issuance on January 3, 2007. Proceeds from the sale of AquaSource were used to reduce long-term debt in 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



19



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##### Table of Contents

|                                                                  |  |                       |         |   |      |   |         |  |      |         |      |   |         |  |   |        
|----------------------------------------------------------------- |  | --------------------- | ------- | - | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|Duquesne Light Company                                            |  | (Millions of Dollars)
|                                                                  |  | 2006                  |         |   | 2005 |   | 2004    |  | 2003 |         | 2002
|Income Statement Items                                            |  |                       |         |   |      |   |         |  |      |         |      |   |         |  |   |        
|                                                                  |  |                       |         |   |     
|Total operating revenues (a)                                      |  | $                     | 723.2   |   |      | $ | 792.4   |  | $    | 789.3   |      | $ | 806.1   |  | $ | 944.6  
|Operating income (b)                                              |  |                       | 71.8    |   |      |   | 147.3   |  |      | 141.7   |      |   | 155.1   |  |   | 161.5  
|Net income (c)                                                    |  |                       | 4.3     |   |      |   | 73.0    |  |      | 67.8    |      |   | 69.6    |  |   | 75.4   
|(Loss)/Earnings available for common stock                        |  |                       | (3.6    | ) |      |   | 65.0    |  |      | 61.2    |      |   | 66.4    |  |   | 72.1   
|                                                                  |  |                       |         |   |      |   |         |  |      |         |      |   |         |  |   |        
|                                                                  |  |                       |         |   |     
|Balance Sheet Items                                               |  |                       |         |   |      |   |         |  |      |         |      |   |         |  |   |        
|                                                                  |  |                       |         |   |     
|Property, plant and equipment  net (d)                           |  | $                     | 1,656.8 |   |      | $ | 1,497.3 |  | $    | 1,406.3 |      | $ | 1,382.7 |  | $ | 1,364.9
|Total assets (e)                                                  |  |                       | 2,275.8 |   |      |   | 2,123.1 |  |      | 2,293.0 |      |   | 2,209.2 |  |   | 2,488.2
|                                                                  |  |                       |         |   |      |   |         |  |      |         |      |   |         |  |   |        
|                                                                  |  |                       |         |   |     
|Capitalization                                                    |  |                       |         |   |      |   |         |  |      |         |      |   |         |  |   |        
|                                                                  |  |                       |         |   |     
|Common shareholders equity (f)                                   |  | $                     | 669.7   |   |      | $ | 630.6   |  | $    | 531.4   |      | $ | 530.1   |  | $ | 521.0  
|Non-redeemable preferred and preference stock (g)                 |  |                       | 147.4   |   |      |   | 146.5   |  |      | 145.9   |      |   | 69.7    |  |   | 69.8   
|Company obligated mandatorily redeemable preferred securities (h) |  |                       |        |   |      |   |        |  |      |        |      |   |        |  |   | 150.0  
|Long-term debt (h) (i)                                            |  |                       | 680.9   |   |      |   | 636.5   |  |      | 956.4   |      |   | 857.7   |  |   | 959.5  
|                                                                  |  |                       |         |   |      |   |         |  |      |         |      |   |         |  |   |        
|Total Capitalization                                              |  | $                     | 1,498.0 |   |      | $ | 1,413.6 |  | $    | 1,633.7 |      | $ | 1,457.5 |  | $ | 1,700.3
|                                                                  |  |                       |         |   |      |   |         |  |      |         |      |   |         |  |   |        
|Dividends declared (f)                                            |  | $                     |        |   |      | $ | 13.0    |  | $    | 58.0    |      | $ | 65.0    |  | $ | 75.0   
|                                                                  |  |                       |         |   |      |   |         |  |      |         |      |   |         |  |   |        

---

|(a) | Total operating revenues decreased in 2006 due to the reorganization of the supply business and milder weather in 2006 as compared to 2005, partially offset by an increase in POLR
and SECA revenue. Total operating revenues increased in 2005 due to the higher average generation rates charged under the POLR III arrangement, partially offset by a decline in large commercial and industrial customer retention. Total operating
revenues declined from 2002 through 2004 due to the collection of the allocated CTC balance.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Results were negatively impacted by the $13.2 million charge in 2006 related to a tax settlement. (See Note 10.) Results were positively impacted by the $16.1 million increase in
the fair value of certain derivative energy contracts in 2005. (See Note 5.) Results were negatively impacted by the $8.3 million Sunbury acquisition termination cost in 2004. (See Note 4.) Results were negatively impacted by restructuring charges
of $3.7 million in 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Results in 2006 reflect a $6.0 million charge related to our closed Warwick mine.
|--- | ---------------------------------------------------------------------------------

|(d) | During 2005, Duquesne Light embarked on a significant capital expenditure program, which continued through 2006.
|--- | ----------------------------------------------------------------------------------------------------------------

|(e) | This reflects the repayment from Holdings of a $250 million loan in 2005.
|--- | -------------------------------------------------------------------------

|(f) | As a result of the significant capital expenditure program started in 2005, Duquesne Light has been retaining more of its earnings. During 2006 and 2005, Duquesne Light received
$27.6 million and $82.5 million of equity contributions from Holdings.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) | This reflects the 2004 issuance, at par, of $75 million of Duquesne Light preferred stock.
|--- | ------------------------------------------------------------------------------------------

|(h) | Adoption of SFAS No. 150 required reclassification to long-term debt.
|--- | ---------------------------------------------------------------------

|(i) | Reflects $44.2 million of revolver borrowings in 2006 that were repaid using the proceeds from the PCRB issuance on January 3, 2007. Duquesne Light used proceeds from the
repayment of its loan to Holdings to reduce long-term debt in 2005. (See Note 15.) Duquesne Light reduced its investment in the DQE Capital cash pool to reduce long-term debt in 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 7. | Managements Dis
cussion and Analysis of Financial Condition and Results of Operations.
|------- | ---------------------------------------------------------------------------------------

Unless otherwise stated,
the terms earnings and loss used in this Item 7 refer to after-tax amounts.

OVERVIEW OF BUSINESS SE
GMENTS

Duquesne Light reports the following business segments: (1) transmission and distribution of
electricity (electricity delivery business segment) and (2) supply of electricity by Duquesne Light, which is our POLR business, and, in 2005, included Duquesne Power (Duquesne Light supply business segment).

Holdings reports the following business segments: (1) transmission and distribution of electricity (electricity delivery business segment),
(2) supply of electricity, which includes Duquesne Lights supply segment, DLE, Duquesne Power and, beginning September 1, 2006, the results from the Keystone and Conemaugh power plants (electricity supply business segment),
(3) DES operation and



20



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##### Table of Contents

maintenance of energy facilities and, for a single customer, synthetic fuel facilities (Energy Solutions business segment), (4) DQE Financials
management of structured finance and alternative energy investments (Financial business segment), and (5) DQE Communications operation, maintenance and leasing of its fiber optic based network (Communications business segment). We also
report an all other category to include our other subsidiaries below the quantitative threshold for disclosure. These subsidiaries provide corporate administrative functions, financing, and insurance services for our various affiliates.

In 2005 and 2004, both Holdings and Duquesne Light also reported the CTC business segment, which reported the collection of transition
costs that were fully collected as of December 31, 2005.

Note 21 to the consolidated financial statements shows the financial results
of each principal business segment in tabular form. Following is a discussion of these results.

Merger Activities. As previously
discussed, we entered into a merger agreement with the Macquarie Consortium on July 5, 2006. On August 11, 2006 Holdings sold an aggregate of 8.8 million shares of common stock to members of the Macquarie Consortium for total
consideration of $141.4 million. This common stock issuance increased the average number of shares of common stock outstanding for the year ended December 31, 2006. In addition, during the year ended December 31, 2006, we incurred $7.9
million of costs associated with the merger, which have been included in the all other category. We expect to incur additional merger-related costs until such time that the merger closes.

Supply Business. Effective January 1, 2006, the operations of Duquesne Power are reported as part of the Holdings electricity supply segment
only. During 2005, Duquesne Power was a wholly owned subsidiary of Duquesne Light, and its financial results were reported in both the Duquesne Light supply business segment and the electricity supply business segment of Holdings. The transfer of
Duquesne Power was completed to strategically align our unregulated businesses outside of Duquesne Light in order to provide flexibility to capitalize on future supply opportunities. The transfer has effectively eliminated the net income included in
the Duquesne Light supply business segment, as the full-requirements contract between Duquesne Light and Duquesne Power is designed to be income neutral for Duquesne Light. If this transfer had occurred on January 1, 2005, the earnings reported
in the Duquesne Light supply business segment would have been $27.3 million lower for the twelve months ended December 31, 2005, but there would have been no change in the earnings reported in the electricity supply business segment of
Holdings.

During the twelve months ended December 31, 2006, there was a large decline in the megawatt hours (MWh) supplied to large
commercial and industrial customers in the Duquesne Light supply business segment because the two largest industrial customers switched to alternative energy suppliers as their POLR I arrangement ended. The POLR I arrangement featured both a low
revenue and purchased power expense per MWh supplied as the pricing under these arrangements was determined years ago. The total MWh supplied in the electricity supply business segment increased in 2006 as compared to 2005, due to the increase in
MWh supplied to large commercial and industrial customers by our unregulated retail electric generation supplier, DLE. Both the revenues and purchased power expense recognized during 2006 increased at a greater rate than the increase in MWh supplied
as a result of the current pricing associated with the MWh supplied in 2006 compared to the POLR I pricing for the MWh supplied in 2005.

On September 1, 2006, we completed our purchase of undivided interests in two coal-fired power plants for an aggregate purchase price of approximately $177 million, including applicable closing costs and working capital adjustments.
The interests acquired represent a 2.47% interest, or 42 megawatts, in the Keystone plant and a 3.83% interest, or 66 megawatts, in the Conemaugh plant, plus related inventories, equipment and other property. The acquisition of the interests in
these plants will serve as a physical hedge to our supply portfolio of energy commodity contracts. A $200 million term loan issued by Holdings was used to finance the acquisition.

Section 45K Tax Credits and Synthetic Fuel (Energy Solutions and Financial business segments). Section 45K tax credits are subject to a
phase-out provision that reduces tax credits as the average annual wellhead price per barrel of domestic crude oil increases into an inflation-adjusted phase-out range, which is published by the IRS in April for the previous year. In recent years,
the wellhead price per barrel of domestic crude oil has averaged approximately 90% of the New York Mercantile Exchange (NYMEX) price per barrel of domestic crude oil. The possible Section 45K phase-out may impact (i) our Financial business
segment through our investment in a synthetic fuel partnership and (ii) our Energy Solutions business segment through the fees earned from the operation and maintenance of synthetic fuel facilities for a single customer.



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##### Table of Contents

During 2006, we estimated the average annual wellhead price per barrel of domestic crude oil based on the
actual NYMEX price per barrel of domestic crude oil through December. We also estimated the phase-out range for Section 45K tax credits based on the actual 2005 phase-out range, and an estimated inflation factor. This resulted in an annual
phase-out of Section 45K tax credits for 2006 at an estimated 34% level as of December 31, 2006.

As a result of the estimated
phase-out of Section 45K tax credits, effective July 17, 2006, we elected to temporarily cease participation in the synthetic fuel limited partnership interest held in our Financial business segment. However, due to the subsequent decrease
in the estimated phase-out of Section 45K tax credits, we elected, effective October 30, 2006, to resume our participation in the synthetic fuel limited partnership interest. Future participation in the partnership depends on our estimate
of future oil prices, potential legislative relief regarding Section 45K tax credits and the probability of production from the partnership.

The estimated Section 45K phase-out also negatively impacted our fees earned from the operation and maintenance of synthetic fuel facilities included in our Energy Solutions business segment. This impact resulted from price concessions
granted to the facilities owner for the synthetic fuel processed during August through December 2006. In addition, August production volumes were also reduced, at the owners request, to approximately 75% of the aggregate budgeted production
levels as a result of the anticipated phase-out. The concessions were agreed to because, without them, the synthetic fuel facilities may have ceased operations. The price concessions also include a true-up provision that could reduce the ultimate
price concessions granted to the facility owners. The true-up provisions are based in part on the actual 2006 Section 45K credit information to be published by the IRS in April 2007. We do not, however, anticipate a reduction in the price
concessions that were granted to the facility owners. The price and production concessions reduced earnings from the synthetic fuel facilities in 2006 by approximately $7.5 million. (See Recent Developments.)

Income tax settlements.During 2006, two significant tax legacy issues were settled with the IRS and the Pennsylvania Department of Revenue that
impacted our results.

In October 2006, we reached a definitive agreement with the Pennsylvania Department of Revenue regarding all of the
issues in dispute on Duquesne Lights 1997 through 2004 Pennsylvania state income tax returns and treatment of the disputed items on our 2005 income tax returns. Pursuant to this settlement agreement, Duquesne Light paid approximately $60
million, which includes interest, and recorded a net charge of $16.1 million in the third quarter. Included in the payment and net charge described above is $13.2 million of taxes other than income taxes which is included in operating expenses in
our electricity delivery business segments results.

In May 2006, we paid approximately $52.8 million to the IRS related to the
1998-2002 audit cycle. The net charge resulting from this audit, including the impact on state taxes, was $2.9 million.

See Note 10 to the
consolidated financial statements for a detailed discussion of the tax settlements.

Discontinued Operations. Effective
December 29, 2006, DQE Financial sold its landfill gas business. This is now reported as a discontinued operation.

RESULTS OF OPERATI
ONS

Overall Performance

2006 Compared to 2005

Our net income was $54.7 million, or $0.67 basic earnings per share in 2006, compared to $114.2
million, or $1.47 basic earnings per share in 2005. The average shares outstanding increased 4.3 million, or 5.5%, compared to 2005. Our income from continuing operations was $8.7 million, or $0.11 basic earnings per share in 2006,
compared to $94.2 million, or $1.21 basic earnings per share in 2005. This decrease of $85.5 million, or 90.8% is primarily due to the following:



| |  |  | Income from the electricity delivery business segment decreased $40.6 million from 2005, primarily as a result of the negative net $16.1 million charge as a result
of the state tax settlement and $13.6 million of lower after-tax other income consisting of a $6.0 million charge to increase our reserve for legacy issues associated with our Warwick mine, $4.6 million less interest from Holdings due to repayment
of an intercompany loan, and $1.2 million in lower interest on temporary cash investments. Also contributing to the decrease were lower operating revenues attributable to the milder weather in 2006 as compared to 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | Income from the Holdings electricity supply business segment decreased $14.9 million from 2005, primarily as a result of a $29.1 million decrease in earnings
resulting from a decline in the fair value of certain of Duquesne Powers derivative energy contracts, partially offset by increased electricity supply margins realized compared to 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Income from the Energy Solutions business segment decreased $15.7 million compared to 2005, as a result of a $10.0 million decrease in earnings from the operation
of the synthetic fuel facilities primarily as a result of price and production concessions to the owner of the facilities, coupled with a decrease in the amount of gains recognized on the sales of our energy management projects, as most projects
were sold in 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The loss reported in the all other category increased $15.7 million, primarily as a result of $7.9 million of merger-related costs in 2006 and increases in interest
expense.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our income from discontinued operations was $46.0 million, or $0.56 basic earnings per share in 2006, compared
to $20.0 million, or $0.26 basic earnings per share in 2005. This increase of $26.0 million is due primarily to the $30.2 million gain recognized in 2006 on the sale of the landfill gas business. This was partially offset by the effect in 2006 of
the estimated 34% phase-out of Section 45K tax credits, as there was no phase-out of tax credits in 2005.

Duquesne Lights loss
available for common stock was $3.6 million in 2006, compared to earnings of $65.0 million in 2005, a decrease of $68.6 million, primarily due to the $40.6 million decrease in the earnings from the electricity delivery business segment discussed
above, and the December 31, 2005 transfer of Duquesne Powers operations from Duquesne Lights supply segment. During the year ended December 31, 2005, Duquesne Power earned $27.3 million.

2005 Compared to 2004

Our net income was $114.2
million, or $1.47 basic earnings per share in 2005, compared to $87.0 million, or $1.14 basic earnings per share in 2004. The average shares outstanding increased 1.3 million, or 1.7%, compared to 2004. Our income from continuing operations was
$94.2 million, or $1.21 basic earnings per share in 2005, compared to $73.3 million, or $0.96 basic earnings per share in 2004. This increase of $20.9 million, or 28.5% primarily due to the following:



| |  |  | Income from the electricity delivery business segment decreased $10.6 million from 2004, primarily as a result of an increase in operating expenses, which includes
$3.9 million of additional after-tax administrative expenses previously borne by Holdings prior to the sale of several non-complementary businesses.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Income from the Holdings electricity supply business segment increased $14.7 million from 2004, primarily as a result of a $9.4 million increase in earnings
resulting from an increase in the fair value of certain of Duquesne Powers derivative energy contracts, and a $4.8 million after-tax charge included in the 2004 results related to the termination of the acquisition of the Sunbury generation
station.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Income from the Energy Solutions business segment increased $13.9 million, primarily as a result of $19.4 million in after-tax gains on the sale of investments in
three energy facility management projects during 2005, partially offset by $6.7 million of charges related to another energy facility management project.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The loss reported in the all other category decreased $4.6 million, primarily due to a $2.4 million after-tax gain resulting from the settlement of an interest rate
lock agreement during 2005 and the reduction of $3.9 million in after-tax administrative costs discussed above, partially offset by increased operating expenses associated with an IRS audit.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our income from discontinued operations was $20.0 million, or $0.26 basic earnings per share in 2005, compared to $13.7 million, or $0.18 basic earnings
per share in 2004. This increase of $6.3 million is due primarily to the higher average sales prices for the pipeline quality landfill gas sold in 2005 as compared to 2004.

Duquesne Lights earnings available for common stock were $65.0 million in 2005, compared to $61.2 million in 2004, an increase of $3.8 million, or
6.2%. Earnings from Duquesne Lights supply business segment increased $14.7 million from 2005, while earnings from the electricity delivery business segment decreased $10.6 million from the prior year, for the reasons discussed above.



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##### Table of Contents

RESULTS OF OPERATIONS BY BUSINESS SEGMENT

2006 Compared to 2005

Electricity Delivery Business Segment.This segment reported a loss of
$4.1 million in 2006, compared to earnings of $36.5 million in 2005, a decrease of $40.6 million or 111.2%. This decrease was primarily due to an after-tax charge of $16.1 million from the state income tax settlement discussed above and $13.6
million of lower after-tax other income consisting of a $6.0 million after-tax charge to increase our reserve for legacy issues associated with our Warwick mine, $4.6 million after-tax less in interest from Holdings due to a repayment of an
intercompany loan, and $1.2 million after-tax in lower interest on temporary cash investments. Also contributing to the decrease were lower operating revenues attributable to the milder weather in 2006 as compared to 2005.

Operating revenues are primarily derived from the delivery of electricity, including related excise taxes. Sales to residential and commercial customers
are primarily influenced by weather conditions. Warmer summer and colder winter seasons lead to increased customer use of electricity for cooling and heating. Commercial sales also are affected by regional development. Sales to industrial customers
are influenced by national and global economic and competitive conditions.

The following table sets forth the MWh delivered to electric
utility customers.



|            |  |                |  |        |  |        |   
|----------- |  | -------------- |  | ------ |  | ------ | --
|            |  | MWh Delivered  | 
|            |  | (In Thousands) | 
|            |  | 2006           |  | 2005   |  | Change |   
|Residential |  | 3,991          |  | 4,134  |  | (3.5   | %)
|Commercial  |  | 6,541          |  | 6,635  |  | (1.4   | %)
|Industrial  |  | 3,182          |  | 3,128  |  | 1.7    | % 
|            |  |                |  |        |  |        |   
|            |  | 13,714         |  | 13,897 |  | (1.3   | %)
|            |  |                |  |        |  |        |   

Operating revenues decreased $4.3 million, or 1.3%, compared to 2005. A $5.5 million increase in
SECA revenues was more than offset by decreases in revenues due to the 2006 summer not being as hot as in 2005 and the 2006 winter being milder than in 2005.

Operating expenses consist primarily of costs of operation and maintenance of the transmission systems and distribution systems; meter reading, billing and collection; customer service; administrative expenses; and
non-income taxes such as gross receipts, property, capital stock and payroll taxes. Operating expenses increased $15.1 million, or 8.5%, compared to 2005. The primary reason for the increase in operating expenses was the $13.2 million charge to
taxes other than income taxes as a result of the agreement reached with the Pennsylvania Department of Revenue on issues in dispute on the Pennsylvania state income tax returns.

Depreciation and amortization expense includes depreciation on property, plant and equipment and amortization of intangibles. Depreciation and
amortization expense increased $7.9 million, or 11.8%, compared to 2005. The increase is primarily the result of an additional $5.2 million of amortization related to SECA revenue, as well as additional depreciation expense attributable to our
ongoing infrastructure program.

Other income includes interest as well as income and expenses from legacy operations and activities not
directly associated with ongoing utility operations. Other income decreased $23.3 million, or 146.5%. Primary reasons for the decrease were a $10.3 million charge to increase the liability for legacy issues from our Warwick mine including a $9.1
million increase in expected future healthcare costs, $7.9 million less in interest received from Holdings as a result of the repayment of the $250 million intercompany loan in August 2005, and $2.1 million less in interest from temporary
investments as cash was deployed in the ongoing infrastructure program.

Interest and other charges include interest on long-term debt and
other interest. Interest and other charges decreased $5.5 million, or 11.7%, primarily as a result of $5.7 million of interest incurred in 2005 on pollution control revenue refunding bonds that were no longer outstanding in 2006.

Dividends on all issues of Duquesne Lights preferred stock are included in interest and other charges in the Holdings presentation of the
electricity delivery business segment.

Duquesne Light Supply Business Segment.As previously discussed, the factors impacting this
segment in 2006 have changed significantly compared to 2005. The following table summarizes the earnings from this segment.



|                                 |  |               |     |      |   |        |  |   |       |  
|-------------------------------- |  | ------------- | --- | ---- | - | ------ |  | - | ----- | -
|                                 |  | Earnings      |    
|                                 |  | (In Millions) |    
|                                 |  | 2006          |     | 2005 |   | Change | 
|Residential and small commercial |  | $             | 0.5 |      | $ | 19.0   |  | $ | (18.5 | )
|Derivative energy contracts      |  |               |    |      |   | 9.4    |  |   | (9.4  | )
|                                 |  |               |     |      |   |        |  |   |       |  
|Total Earnings                   |  | $             | 0.5 |      | $ | 28.4   |  | $ | (27.9 | )
|                                 |  |               |     |      |   |        |  |   |       |  



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##### Table of Contents

The decrease in total earnings reflects the organizational restructuring which moved Duquesne Power from
this segment effective January 1, 2006.

Operating revenues are derived primarily from the supply of electricity to POLR retail
customers. Retail energy requirements fluctuate as the number of customers choosing alternative generation suppliers changes. Energy requirements for residential and commercial customers are also influenced by weather conditions; temperature
extremes lead to changes in customer use of electricity for cooling and heating. Commercial energy requirements are also affected by regional economic development. Energy requirements for industrial customers are primarily influenced by national and
global economic conditions.

In addition, operating revenues include, to a lesser extent, the supply of electricity to wholesale customers.
In 2006, these sales primarily consisted of short-term sales to other utilities that were made at market rates. In 2005, these sales were primarily comprised of sales to DLE by Duquesne Power under its full-requirements energy supply contract.

The following tables set forth the MWh supplied.



|                                 |  |                |  |          |  |       |  
|-------------------------------- |  | -------------- |  | -------- |  | ----- | -
|                                 |  | MWh Supplied   | 
|                                 |  | (In Thousands) | 
|                                 |  |                |  | 2006     |  |       |  
|                                 |  | POLR I         |  | POLR III |  | Total |  
|Residential and small commercial |  |               |  | 5,914    |  | 5,914 |  
|Large commercial and industrial  |  | 56             |  | 218      |  | 274   |  
|                                 |  |                |  |          |  |       |  
|Total Retail                     |  | 56             |  | 6,132    |  | 6,188 |  
|                                 |  |                |  |          |  |       |  
|Wholesale                        |  |                |  |          |  | 70    |  
|                                 |  |                |  |          |  |       |  
|                                 |  |                | 
|POLR Customers (MWh basis):      |  |                |  |          |  |       |  
|Residential and small commercial |  |                |  |          |  | 80    | %
|                                 |  |                |  |          |  |       |  
|Large commercial and industrial  |  |                |  |          |  | 4     | %
|                                 |  |                |  |          |  |       |  



|                                 |  |                |  |         |  |       |  
|-------------------------------- |  | -------------- |  | ------- |  | ----- | -
|                                 |  | MWh Supplied   | 
|                                 |  | (In Thousands) | 
|                                 |  | 2005           | 
|                                 |  | POLR I         |  | POLR II |  | Total |  
|Residential and small commercial |  |               |  | 5,631   |  | 5,631 |  
|Large commercial and industrial  |  | 912            |  | 278     |  | 1,190 |  
|                                 |  |                |  |         |  |       |  
|Total Retail                     |  | 912            |  | 5,909   |  | 6,821 |  
|                                 |  |                |  |         |  |       |  
|Wholesale                        |  |                |  |         |  | 1,048 |  
|                                 |  |                |  |         |  |       |  
|                                 |  |                | 
|POLR Customers (MWh basis):      |  |                |  |         |  |       |  
|Residential and small commercial |  |                |  |         |  | 75    | %
|                                 |  |                |  |         |  |       |  
|Large commercial and industrial  |  |                |  |         |  | 19    | %
|                                 |  |                |  |         |  |       |  

Operating revenues decreased $59.8 million, or 13.5%, compared to 2005. There was an approximately
$44 million decrease in wholesale sales of electricity in 2006 related to sales by Duquesne Power to DLE that were included in this segment in 2005. An approximately $28 million decrease in revenue was due to the migration of most of the remaining
POLR I customers to alternate suppliers during 2006. The combination of the milder summer and milder winter in 2006 as compared to 2005 caused a further decrease in revenues. Partially offsetting the decreases was a $14.4 million increase in revenue
from customers who returned to POLR service.

In 2006, operating expenses consisted primarily of costs to obtain energy and capacity for
Duquesne Lights POLR service and gross receipts tax, both of which fluctuated directly with operating revenues. In 2005, operating expenses consisted of (i) costs to obtain energy and capacity for POLR service and to supply DLE,
(ii) certain changes in the fair value of derivative energy contracts, (iii) administrative expenses at Duquesne Power, and (iv) gross receipts tax.

Operating expenses decreased $11.7 million, or 3.0%, compared to 2005. Operating expenses in 2005 included $4.8 million of administrative costs and a $16.1 million benefit from changes in the fair value of the
derivative energy contracts, with no corresponding amounts in 2006. Purchased power expenses were $21.5 million lower in 2006 than 2005, due to a decline in the MWh supplied.



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##### Table of Contents

Electricity Supply Business Segment. The following table summarizes the income from this segment.



|                            |  |               |       |   |      |   |        |  |    |       |  
|--------------------------- |  | ------------- | ----- | - | ---- | - | ------ |  | -- | ----- | -
|                            |  | Earnings      |      
|                            |  | (In Millions) |      
|                            |  | 2006          |       |   | 2005 |   | Change | 
|Electricity supply          |  | $             | 33.2  |   |      | $ | 19.0   |  | $  | 14.2  |  
|Derivative energy contracts |  |               | (19.7 | ) |      |   | 9.4    |  |    | (29.1 | )
|                            |  |               |       |   |      |   |        |  |    |       |  
|Total Income                |  | $             | 13.5  |   |      | $ | 28.4   |  | ($ | 14.9  | )
|                            |  |               |       |   |      |   |        |  |    |       |  

Operating revenues were $52.4 million, or 11.6%, higher in 2006 primarily due to $55.8 million in
higher revenues at DLE and $11.2 million in new revenues from Duquesne Generation (beginning in the third quarter of 2006), partially offset by lower revenues from the Duquesne Light supply segment as discussed above.

The following table sets forth the MWh supplied to the electricity supply business segment customers.



|                |  |                |  |       |  |        |   
|--------------- |  | -------------- |  | ----- |  | ------ | --
|                |  | MWh Supplied   | 
|                |  | (In Thousands) | 
|                |  | 2006           |  | 2005  |  | Change |   
|Retail:         |  |                |  |       |  |        |   
|Duquesne Light  |  | 6,188          |  | 6,821 |  | (9.3   | %)
|DLE             |  | 1,814          |  | 932   |  | 94.6   | % 
|                |  |                |  |       |  |        |   
|Total Retail    |  | 8,002          |  | 7,753 |  | 3.2    | % 
|                |  |                |  |       |  |        |   
|                |  |                | 
|Wholesale:      |  |                |  |       |  |        |   
|Duquesne Light  |  | 70             |  | 83    |  | (15.7  | %)
|Generation      |  | 296            |  |      |  |       |   
|                |  |                |  |       |  |        |   
|Total Wholesale |  | 366            |  | 83    |  | 341.0  | % 
|                |  |                |  |       |  |        |   

Operating expenses consist primarily of purchased power, capacity and related ancillary services,
along with derivative accounting charges and credits. Operating expenses increased $76.0 million, or 18.9% primarily due to a $49.7 million decline in the fair market value of the derivative energy contracts since 2005, increased cost of power to
meet the additional supply needs of DLE, and $6.2 million in costs to operate the power plants. On a per MWh basis, Duquesne Powers cost for power decreased $1.92 per MWh between 2005 and 2006.

Energy Solutions Business Segment. The following table summarizes the income from this segment.



|                           |  |               |      |   |      |   |      |  
|-------------------------- |  | ------------- | ---- | - | ---- | - | ---- | -
|                           |  | Earnings      |     
|                           |  | (In Millions) |     
|                           |  | 2006          |      |   | 2005 |  
|Synthetic fuel facilities  |  | $             | 15.7 |   |      | $ | 25.7 |  
|Energy management projects |  |               | 5.6  |   |      |   | 11.5 |  
|Other                      |  |               | (0.8 | ) |      |   | (1.0 | )
|                           |  |               |      |   |      |   |      |  
|Net income                 |  | $             | 20.5 |   |      | $ | 36.2 |  
|                           |  |               |      |   |      |   |      |  

Income from this segment decreased $15.7 million, or 43.4%, in 2006 as compared to 2005. The
decrease is primarily due to a $10.0 million decrease in earnings from the management of synthetic fuel facilities mainly from decreased prices, and a $5.9 million decrease in earnings from the energy facility management projects mostly related to
the sale of several projects in 2005 and 2006. These decreases were partially offset by the absence in 2006 of a $3.9 million after-tax impairment charge taken in 2005 at an energy facility management project.

Operating revenues are derived primarily from the facility management services for synthetic fuel and industrial customers. Operating revenues for 2006
decreased $11.7 million, or 17.4%, compared to 2005. Revenues for the synthetic fuel facilities decreased $12.9 million from 2005 related primarily to the price concessions granted. There was also a $7.4 million decrease in revenue due to the
sale of the energy facility management projects. These decreases were partially offset by an increase in revenue at the remaining energy facility management projects resulting from higher commodity prices and the settlement of a revenue dispute.

Operating expenses consist of the operating and maintenance costs to manage the facilities, as well as general corporate overhead and
other gains and losses associated with the operations of the facilities. Operating expenses increased $3.2 million, or 13.3%, compared to 2005, primarily due to the $10.7 million net decrease in pre-tax gains recognized from the 2005 and 2006 sales
of several energy facility management projects. This was partially offset by a $4.7 million decrease in expenses in 2006 due to the sale of the energy facility management projects and the $3.9 million impairment charge taken in 2005 associated with
a remaining energy facility management project.

Other income consists of various other gains and losses. Other income decreased $18.1
million from 2005 primarily as a result of an $18.0 million pre-tax gain on the sale of an equity investment energy management project in 2005.



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##### Table of Contents

Financial Business Segment. This segment reported income of $11.9 million in 2006, compared to
$10.7 million in 2005, an increase of $1.2 million, or 11.2%. This increase was primarily due to a $4.5 million after-tax gain on the sale of a limited partnership investment in 2006 and was partially offset by decreased tax credits related to our
synthetic fuel limited partnership investment, which resulted from the 34% estimated tax credit phase-out in 2006.

Operating expenses
consist of expenses related to our synthetic fuel limited partnership investment. Operating expenses decreased $2.8 million, or 25.7%, compared to 2005, primarily due to the impact of the estimated tax credit phase-out and our related temporary
cessation of operations.

Other income consists of income from structured leases, affordable housing and equity investments, and various
other gains and losses. Other income for 2006 increased $7.2 million compared to 2005, primarily due to a $6.9 million pre-tax gain on the sale of a limited partnership investment.

The benefit from limited partners interest reflects the portion of the losses related to the affordable housing guarantee funds that are not owned
by the DQE Financial subsidiary.

Income taxes consist of our provision for federal income taxes and the tax credits generated from our
synthetic fuel limited partnership and affordable housing investments. The income tax benefit for 2006 decreased $7.1 million, or 67.6%, compared to 2005, due to a $4.8 million decrease in tax credits generated in 2006, which resulted from the
estimated 34% tax credit phase-out, and a $3.1 million increase in our provision due to the increase in pre-tax earnings in 2006 as compared to 2005.

Communications Business Segment. This segment reported income of $2.5 million in both 2006 and 2005. The increase in revenue from new and existing customers was offset by an increase in both operating and
depreciation expenses.

All Other. The all other category reported a loss of $35.3 million in 2006, compared to a loss of $19.6
million in 2005, an increase of $15.7 million, or 80.1%. The increase is primarily due to a $7.1 million after-tax increase in interest expense at Holdings resulting from increased borrowings and $7.9 million of merger-related costs incurred in
2006.

Operating expenses consist of general corporate expenses. Operating expenses increased $10.5 million, or 145.8%, from 2005,
primarily due to $7.9 million of merger costs.

Interest and other charges include interest on long-term debt, short-term borrowings and
other interest. Interest and other charges increased $10.5 million, or 53.6%, from 2005, primarily due to an $11.4 million increase related to the issuance of $320 million of senior notes in August 2005, an $8.1 million increase related to higher
short-term borrowings in 2006 and the entrance into a $200 million term loan facility in September 2006, partially offset by the elimination in 2006 of $7.9 million of interest to Duquesne Light on the $250 million note.

2005 Compared to 2004

Electricity Delivery
Business Segment.This segment reported $36.5 million of earnings in 2005, compared to $47.1 million in 2004, a decrease of $10.6 million or 22.5%. This decrease was primarily due to increased operating expenses in 2005.

The following table sets forth the MWh delivered to electric utility customers.



|            |  |                |  |        |  |        |   
|----------- |  | -------------- |  | ------ |  | ------ | --
|            |  | MWh Delivered  | 
|            |  | (In Thousands) | 
|            |  | 2005           |  | 2004   |  | Change |   
|Residential |  | 4,134          |  | 3,886  |  | 6.4    | % 
|Commercial  |  | 6,635          |  | 6,522  |  | 1.7    | % 
|Industrial  |  | 3,128          |  | 3,229  |  | (3.1   | %)
|            |  |                |  |        |  |        |   
|            |  | 13,897         |  | 13,637 |  | 1.9    | % 
|            |  |                |  |        |  |        |   

Operating revenues decreased $1.2 million, or 0.3%, compared to 2004. The decrease was primarily
due to ancillary services revenue being reported in the Duquesne Light supply segment in 2005. This reclassification of ancillary revenue ($11.8 million in 2004) offset the $3.2 million of revenue collected in 2005 to recover SECA charges. It also
offset the increased delivery revenues to residential and commercial customers resulting from the higher MWh sales in 2005 due to the warmer summer weather as compared to 2004.

Operating expenses increased $13.5 million, or 8.2%, compared to 2004. Following the sale of several of Holdings non-complementary businesses,
approximately $6.5 million of additional costs were borne by this segment in 2005 compared to 2004. Included in this amount was $3.4 million related to insurance. Rising energy prices in 2005 placed a strain on the budgets of the elderly and
low-income customers. Duquesne Light attempted to balance this impact with sound business practices through increased participation in customer assistance programs. This had the effect of a $7.2 million increase in uncollectible accounts expense. In
addition, $4.9 million of increased labor costs were incurred in 2005. These increases were partially offset by a $6.5 million decrease in the costs of ancillary services, because the majority of this cost is now being reported in the Duquesne Light
supply segment as a result of the POLR III arrangement.



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Depreciation and amortization expense increased $4.8 million, or 7.7%, compared to 2004. The increase was
primarily due to $3.0 million of amortization expense recognized in 2005 relating to SECA, as discussed in the revenue section above.

Preferred dividends increased $1.4 million, or 21.2%, compared to the prior year due to the $75 million of 6.5% preferred stock issued in April 2004. Dividends on all issues of Duquesne Lights preferred stock are included in interest
and other charges in the Holdings presentation of the electricity delivery business segment.

Duquesne Light Supply Business Segment.As previously discussed, the factors that impacted this segment in 2005 changed significantly compared to 2004. The following table summarizes the earnings from this segment.



|                                 |  |               |      |      |   |      |        |  |   |      |  
|-------------------------------- |  | ------------- | ---- | ---- | - | ---- | ------ |  | - | ---- | -
|                                 |  | Earnings      |     
|                                 |  | (In Millions) |     
|                                 |  | 2005          |      | 2004 |   |      | Change | 
|Residential and small commercial |  | $             | 19.0 |      | $ | 13.9 |        |  | $ | 5.1  |  
|Large commercial and industrial  |  |               |     |      |   | 4.6  |        |  |   | (4.6 | )
|Derivative energy contracts      |  |               | 9.4  |      |   |     |        |  |   | 9.4  |  
|Acquisition termination cost     |  |               |     |      |   | (4.8 | )      |  |   | 4.8  |  
|                                 |  |               |      |      |   |      |        |  |   |      |  
|Total Earnings                   |  | $             | 28.4 |      | $ | 13.7 |        |  | $ | 14.7 |  
|                                 |  |               |      |      |   |      |        |  |   |      |  

Under the POLR II arrangement in 2004, the margin on sales to residential and small commercial
customers was a fixed dollar amount per MWh supplied, while under the POLR III arrangement in 2005, the margin on these customers is no longer fixed.

The $5.1 million increase in the earnings from the residential and small commercial customers reflects the higher POLR III rates. Under the POLR II arrangement, Duquesne Light earned a margin per MWh on sales to large
commercial and industrial customers. However, there is no margin under the POLR III arrangement associated with these customers, which accounts for a $4.6 million decrease in earnings from 2004. In addition, some of the energy contracts entered into
by Duquesne Power are derivative instruments, the accounting for which results in certain changes in the fair value of these contracts being recorded currently in earnings. As shown above, there was a $9.4 million increase in earnings in 2005
resulting from certain changes in the fair value of these energy contracts since December 31, 2004. The results for 2004 included the $4.8 million after-tax charge related to the termination of the Sunbury acquisition.

Beginning in 2005, wholesale sales are primarily comprised of sales to DLE by Duquesne Power under its full-requirements energy supply contract. In 2004,
these sales primarily consisted of short-term sales to other utilities that were made at market rates, and resulted primarily from excess daily energy deliveries to Duquesne Lights electricity delivery system.

The following tables set forth the MWh supplied.



|                                 |  |                |  |          |  |       |  
|-------------------------------- |  | -------------- |  | -------- |  | ----- | -
|                                 |  | MWh Supplied   | 
|                                 |  | (In Thousands) | 
|                                 |  |                |  | 2005     |  |       |  
|                                 |  | POLR I         |  | POLR III |  | Total |  
|Residential and small commercial |  |               |  | 5,631    |  | 5,631 |  
|Large commercial and industrial  |  | 912            |  | 278      |  | 1,190 |  
|                                 |  |                |  |          |  |       |  
|Total Retail                     |  | 912            |  | 5,909    |  | 6,821 |  
|                                 |  |                |  |          |  |       |  
|Wholesale                        |  |                |  |          |  | 1,048 |  
|                                 |  |                |  |          |  |       |  
|                                 |  |                | 
|POLR Customers (MWh basis):      |  |                |  |          |  |       |  
|Residential and small commercial |  |                |  |          |  | 75    | %
|                                 |  |                |  |          |  |       |  
|Large commercial and industrial  |  |                |  |          |  | 19    | %
|                                 |  |                |  |          |  |       |  



|                                 |  |                |  |         |  |       |  
|-------------------------------- |  | -------------- |  | ------- |  | ----- | -
|                                 |  | MWh Supplied   | 
|                                 |  | (In Thousands) | 
|                                 |  |                |  | 2004    |  |       |  
|                                 |  | POLR I         |  | POLR II |  | Total |  
|Residential and small commercial |  |               |  | 5,322   |  | 5,322 |  
|Large commercial and industrial  |  | 1,622          |  | 2,121   |  | 3,743 |  
|                                 |  |                |  |         |  |       |  
|Total Retail                     |  | 1,622          |  | 7,443   |  | 9,065 |  
|                                 |  |                |  |         |  |       |  
|Wholesale                        |  |                |  |         |  | 311   |  
|                                 |  |                |  |         |  |       |  
|                                 |  |                | 
|POLR Customers (MWh basis):      |  |                |  |         |  |       |  
|Residential and small commercial |  |                |  |         |  | 74    | %
|                                 |  |                |  |         |  |       |  
|Large commercial and industrial  |  |                |  |         |  | 58    | %
|                                 |  |                |  |         |  |       |  

Operating revenues increased $9.3 million, or 2.1%, compared to 2004. The combination of the
higher average generation rate charged to residential and small commercial customers under the POLR III arrangement and the addition of the ancillary services revenue that is being reported in this segment in 2005 caused an approximate $51 million
increase in



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operating revenues in 2005 compared to the prior year. This was augmented by an approximate $12 million increase in retail revenue from increased MWh
sales due to the warmer summer weather that occurred in 2005 and an increase in the number of customers being served under the POLR III arrangement. In addition, there was an approximate $39 million increase in wholesale sales of electricity in
2005, due primarily to sales to DLE. As shown in the tables above, there has been a significant decrease in the MWh supplied to large commercial and industrial customers as a higher percentage of these customers chose an alternative generation
supplier in 2005. This resulted in an approximate $92 million decrease in operating revenues compared to 2004.

In 2005, operating
expenses consisted of (i) costs to obtain energy and capacity for Duquesne Lights POLR service and to supply DLE, (ii) certain changes in the fair value of derivative energy contracts, (iii) administrative expenses at Duquesne
Power, and (iv) gross receipts tax. In 2004, operating expenses consisted primarily of costs to obtain energy for our POLR service and gross receipts tax, both of which fluctuated directly with operating revenues. Beginning in the third quarter
of 2004, operating expenses also included administrative expenses at Duquesne Power.

Operating expenses decreased $8.0 million, or 2.0%,
compared to 2004. The primary reason for the decrease was a $15.2 million decrease in purchased power expense, primarily due to certain increases in the fair value of the derivative energy contracts. Partially offsetting this decrease was a $2.7
million increase in administrative costs, and increased gross receipts taxes.

CTC Business Segment.Collection of the CTC was
completed in the third quarter of 2005. Changes in revenue and expenses between 2005 and 2004 reflect the full collection of this regulatory asset in 2005.

Electricity Supply Business Segment. Earnings from this segment include the results for the Duquesne Light supply segment and, beginning January 1, 2005, the results of Holdings unregulated retail
electric generation supplier, DLE.

In 2005, the revenues relating to the full-requirements contract between Duquesne Power and DLE (which
were included in the Duquesne Light supply segment) were eliminated in this segments presentation, and instead DLEs retail sales to its large commercial and industrial customers are presented. As a result, overall earnings and operating
revenues and expenses of this segment are substantially unchanged from corresponding amounts discussed in the Duquesne Light supply segment above.

The following tables set forth the retail MWh supplied to the electricity supply business segment customers.



|               |  |                |  |      
|-------------- |  | -------------- |  | -----
|               |  | MWh Supplied  
|               |  | (In Thousands)
|               |  | 2005           |  | 2004 
|Duquesne Light |  | 6,821          |  | 9,065
|DLE            |  | 932            |  |     
|               |  |                |  |      
|Total Retail   |  | 7,753          |  | 9,065
|               |  |                |  |      

Energy Solutions Business Segment. This segment reported income of $36.2 million in 2005,
compared to $22.3 million in 2004, an increase of $13.9 million, or 62.3%. The increase is primarily due to the $19.4 million of after-tax gains on the sale of investments in certain energy facility management projects partially offset by $6.7
million of charges related to another energy facility management project.

Operating revenues for 2005 increased $0.9 million, or 1.4%,
compared to 2004. Revenues for the synthetic fuel facilities increased $3.2 million from 2004 due to an approximate 5% increase in production. This increase was partially offset by a cumulative reduction to revenue recognized in 2005 relating
to a contract dispute with the counter-party of another energy facility management project.

Operating expenses decreased $7.2 million, or
23.0%, compared to 2004, primarily due to the $13.2 million pre-tax gain on the sale of two energy facilities in the fourth quarter of 2005, partially offset by a $3.9 million impairment charge associated with another energy facility management
project and a $3.3 million increase in energy commodity costs related to the energy facility operations.

Other income increased $17.9
million from 2004 primarily as a result of an $18 million pre-tax gain on the sale of our equity investment as previously discussed.

Financial Business Segment. This segment reported income of $10.7 million in 2005, compared to $12.9 million in 2004, a decrease of $2.2 million, or 17.1%, primarily due to a decrease in tax credits resulting from the October 2004
sale of 50% of our investment in a synthetic fuel partnership.



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Communications Business Segment. This segment reported income of $2.5 million in 2005, compared to
$1.7 million in 2004, an increase of $0.8 million, or 47.1%. The increase is primarily due to increases in revenues from new and existing customers.

All Other. The all other category reported a loss of $19.6 million in 2005, compared to a loss of $24.2 million in 2004, an improvement of $4.6 million, or 19.0%. The improvement is primarily due to a $2.4
million after-tax gain recorded at Holdings resulting from the favorable settlement of an interest rate lock arrangement in 2005 and the reduction of $3.9 million in after-tax administrative costs allocated to Duquesne Light. These improvements were
partially offset by a $1.7 million after-tax increase in operating expenses related to an IRS audit.

CRITICAL ACCOUNTING POLICIE
S AND ESTIMATES

The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and assumptions with respect to values and conditions 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 also may be affected by the estimates and assumptions we are required to make. We evaluate these estimates on an ongoing basis, using historical
experience, consultation with experts and other methods we consider reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates.

In preparing our financial statements and related disclosures, we have adopted the following accounting policies which management believes are
particularly important to the financial statements and that require the use of estimates and assumptions in the financial preparation process.

Accounting for the Effects of Regulation. Duquesne Light prepares its financial statements in accordance with the provisions of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, which differs in
certain respects from the application of accounting principles generally accepted in the United States of America by non-regulated businesses. In general, SFAS No. 71 recognizes that accounting for rate-regulated enterprises should reflect the
economic effects of regulation. As a result, a regulated utility is required to defer the recognition of costs (a regulatory asset) if it is probable that, through the rate-making process, there will be a corresponding increase in future rates.
Accordingly, Duquesne Light defers certain costs, which will be amortized over future periods. To the extent that collection of such costs is no longer probable as a result of changes in regulation or competitive position, the associated regulatory
assets are charged to expense. (See Note 1.)

Unbilled Electricity Revenues. Holdings and Duquesne Light record revenues related to
the sale of electricity when delivery is made to customers. However, the determination of such sales to individual customers is based on the reading of their meters, which Duquesne Light reads on a systematic basis throughout the month. At the end
of each month, Holdings and Duquesne Light estimate the amount of electricity delivered to customers since the date of the last meter reading based on actual daily meter reads or, alternatively, estimated daily use based on rate-specific,
statistically estimated, hourly consumption patterns. Unbilled revenues are estimated each month based on the rate class-specific unbilled electricity sales and the corresponding average retail rate.

Impairment of Long-Lived Assets and Investments. We evaluate long-lived assets (including other intangibles) of identifiable business activities
and investments for impairment when events or changes in circumstances indicate, in managements judgment, that the carrying value of such assets may not be recoverable. For long-lived assets to be held and used, these computations use
judgments and assumptions inherent in managements estimate of undiscounted future cash flows to determine recoverability of the assets. It is possible that a computation under a held for sale situation for certain of these
long-lived assets could result in a significantly different assessment because of market conditions, specific transaction terms or a buyers different viewpoint of future cash flows. For investments, we considered our investees cash
on-hand, financing abilities, customers, contracts and overall ability to continue as a going concern.

Pension and Other Postretirement
Benefit Plan Assumptions. We provide pension benefit plans covering substantially all of our full-time employees. We also provide postretirement benefits for some retired employees. The retiree medical benefits terminate when retirees reach age
65. We account for these benefits in accordance with SFAS No. 87,



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Employers Accounting for Pensions, SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than
Pensions, and SFAS No. 158, Accounting for Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106 and 132(R). We record amounts related to our pension and other
postretirement benefit plans based on actuarial valuations. Inherent in those valuations are key assumptions including discount rates, expected returns on plan assets, compensation increases, and health care cost trend rates. These actuarial
assumptions are reviewed annually and modified as appropriate. Changes in these assumptions could have a significant effect on our non-cash pension income or expense or on our postretirement benefit costs. The effect of changes in these assumptions
is generally recorded or amortized over future periods.

We discounted our future pension and other postretirement plan obligations using a
rate of 5.80% as of December 31, 2006, compared to 5.70% as of December 31, 2005. The discount rate is determined by (i) considering the timing and amount of projected future benefit payments and (ii) using an outside advisor to
produce a yield curve model that represents the yields on high-quality corporate bonds. When applied to our projected future benefit payments, this model determines the weighted-average discount rate. Both the pension and other postretirement plan
obligations and related expense increase as the discount rate is reduced.

The assumed rate of return on plan assets in the pension plans
is the weighted average of long-term returns forecast for the type of investments held by the plans. As the expected rate of return on plan assets increases, the pension plan expense decreases, however the postretirement plan expense is unaffected
as this plan has no assets. For 2005 and 2006, the assumed rate of return on plan assets in the pension plans was 8.0%.

The health care
trend assumption reflected in the December 31, 2006, SFAS No. 106 year-end disclosure, which will also be used in the development of fiscal 2007 expense, is 8.75%, decreasing 0.75% per year to an ultimate rate of 5.0% (reached in
2012).

We believe the assumptions used in recording obligations under the plans are reasonable based on our prior experience, market
conditions, and the advice of plan actuaries. See Note 13 to the consolidated financial statements for information about these assumptions, actual performance, amortization of investment and other actuarial gains and losses and calculated plan costs
for the past three years.

As of December 31, 2006, the fair value of the pension plan assets of $860.3 million represented
approximately 101% of the projected benefit obligation of our pension plans.

Our pension cost for 2006 was $7.4 million and our expected
pension gain for 2007 is $1.9 million. Our cost or gain for actual pension benefits in future periods will depend upon actual returns on plan assets and the key assumptions we use for future periods.

We were not required to make cash contributions to our pension plans in 2006, nor do we expect to be required to do so in 2007, due to a sufficient
credit balance as determined by actuarial valuations. In accordance with current funding rules, this credit balance can be applied against the minimum funding requirements. However, as a result of the distribution rate increase, Duquesne Light has
committed to funding $20 million annually to its pension plans, provided that such funding does not exceed the maximum tax-deductible contribution allowed. In 2006 Duquesne Light made aggregate discretionary contributions of $27.5 million to the
pension plans.

Income Taxes. In accordance with SFAS No. 109, Accounting for Income Taxes, we use the liability
method in computing deferred taxes on all differences between book and tax bases of assets and liabilities. 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.

We file a consolidated U.S. federal income tax return with our subsidiaries, all of whom participate in an intercompany tax sharing arrangement which generally provides that taxable income for each subsidiary be
calculated as if it filed a separate return.

Duquesne Light recognizes a regulatory asset for deferred tax liabilities that are expected
to be recovered through rates. The difference in the provision for deferred income taxes related to depreciation of electric plant in service and the amount that otherwise would be recorded under generally accepted accounting principles is deferred
and included in regulatory assets on the consolidated balance sheets. (See Note 1.)

Our overall effective tax rate is significantly
reduced by the income tax credits generated from our synthetic fuel and affordable housing investments. During 2006, we estimated the average annual wellhead price per barrel of domestic crude oil based on the actual NYMEX price per barrel of
domestic



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crude oil through December. We also estimated the phase-out range for Section 45K tax credits based on the actual 2005 phase-out range, and an estimated
inflation factor. This resulted in an estimated annual phase-out of Section 45K tax credits for 2006 at an estimated 34% level.

Derivative Instruments. In the normal course of business, we have entered into various contracts to mitigate risks associated with fluctuations in market prices of electricity supply and interest rates that are accounted for as
derivatives under the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. The contracts are in compliance with a Board-approved risk management policy that permits
transactions for the prudent management of market related risks, and precludes any speculative transactions. The contracts that are determined to fall within the scope of SFAS No. 133, and that are required to be recorded at fair value, are
included as derivative assets and liabilities on the consolidated balance sheets. Changes in fair value, except those related to derivative instruments designated as cash flow hedges, are accounted for using mark-to-market accounting and are
included currently in earnings in each reporting period until the contracts are ultimately settled.

Managements expectations and
intentions are key factors in determining the appropriate accounting for a derivative instrument, and as a result, such expectations and intentions are formally documented at inception. Management continues to evaluate these initial expectations and
intentions as they relate to the underlying contract on an ongoing basis. Cash flow hedge accounting treatment may be used for contracts used to buy or sell a commodity at a fixed price for future delivery corresponding with anticipated physical
sales or purchases or to lock in current interest rates on existing or planned debt issuances. Fair value hedge accounting may be used to hedge the risk that the fair value of specific assets and liabilities or specific firm commitments may change
between inception and anticipated delivery date. To the extent that the hedge is fully effective in offsetting the transaction being hedged, there is no impact on earnings prior to settlement of the hedge. In addition, we apply the normal purchases
and sales exemption, provided by SFAS No. 133, to certain contracts. The normal purchases and sales exemption provides that no recognition of the contracts fair value in the consolidated financial statements is required until the
settlement of the contract.

The fair values of contracts are estimated through the use of valuation models using quoted market prices,
when available. We reduced the fair values by valuation adjustments for such items as discounting, liquidity and credit quality. Such estimates require significant judgment as to assumptions and valuation methodologies deemed appropriate by
management. Actual future results may vary from those assumptions utilized in the valuation models. See Item 7A Quantitative and Qualitative Disclosures About Market Risk for additional information regarding the fair value of
derivative instruments.

Contingent Liabilities. We establish reserves for estimated loss contingencies when it is managements
assessment that a loss is probable and the amount can be reasonably estimated. Reserves for contingent liabilities are based upon managements assumptions and estimates, advice of legal counsel, or other third parties regarding the probable
outcomes of the matter. Should additional information become known, or circumstances change with respect to the likelihood or amount of loss indicating that the ultimate outcome will differ from the estimates, revisions to the estimated reserves for
contingent liabilities would be recognized in income in that period. Such contingent liabilities include, but are not limited to, income tax matters (see Note 10), and other commitments and contingencies (see Note 14).

LIQUIDITY AND CAPITAL RESO
URCES

Our cash and cash equivalents decreased $14.4 million, or 18.2%, from $79.2 million at December 31,
2005 to $64.8 million at December 31, 2006. Duquesne Light had cash and cash equivalents of $8.0 million at December 31, 2006, a $68.1 million, or 89.5%, decrease from the December 31, 2005 cash balance of $76.1 million. Until the
fourth quarter of 2005, Duquesne Light invested in the DQE Capital cash pool.

We require cash principally for day-to-day operations,
energy purchases, debt service, capital expenditures and dividends. We have historically financed our cash needs primarily from cash from operations, debt and equity issuances, asset sales and bank or commercial paper borrowings. Duquesne Light has
historically financed its cash needs with cash from operations, capital contributions received from Holdings, debt issuances, and bank borrowings.

Cash Flows from Operating Activity.Cash flows from operating activities at Holdings were $11.7 million in 2006, compared to $119.7 million in 2005.



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The $52.8 million paid to the IRS in the second quarter of 2006 related to the 1998-2002 audit cycle and the $59.1
million paid to Pennsylvania to settle the treatment of taxable income related to an out-of-state subsidiary reduced cash from operations in 2006. Cash flows from operating activities at Duquesne Light were $72.1 million in 2006, compared to $81.9
million in 2005. Contributions by Duquesne Light of $24.4 million and $32.1 million to its pension plans as well as the payment to Pennsylvania mentioned above reduced cash from operations in 2006 and 2005.

Cash Flows from Investing Activity.In 2006, 2005 and 2004, Duquesne Lights capital expenditures were $222.8 million (with $0.5 million of
this amount reflected as a non-cash increase in accounts payable), $153.9 million (with $21.7 million of this amount reflected as a non-cash increase in accounts payable) and $83.5 million for electric utility construction. In addition,
Holdings incremental capital expenditures were $5.2 million, $3.3 million and $2.0 million in 2006, 2005 and 2004 relating to our other business lines and other investments.

In the third quarter of 2006, Holdings also purchased interests in two coal-fired power plants for an aggregate purchase price of approximately $177
million.

During 2006 we received $13.9 million of proceeds from the dispositions of investments/assets, primarily a leverage lease
investment and an energy facility management project. We also received $60 million of cash proceeds and a demand note from the sale of our landfill gas business. Payment on the demand note was received January 2, 2007.

Cash Flows from Financing Activity.Holdings paid cash dividends on common and preferred stock of $70.3 million, $67.1 million and $66.0 million
in 2006, 2005 and 2004. These amounts are net of the cash received back from our shareholders who participate in our dividend reinvestment plan.

In the third quarter of 2006, Holdings issued 8.8 million shares of common stock and received net proceeds of $140.9 million. In addition Holdings borrowed $200 million under the new term loan facility discussed below.

Duquesne Light paid cash dividends on common and preferred stock of $8.3 million, $28.4 million and $76.9 million in 2006, 2005 and 2004. During 2005,
Duquesne Light embarked on a significant capital expenditure program, and began retaining more of its earnings than in prior years. Also during 2006, Holdings made a $27.6 million equity investment in Duquesne Light Company as a result of an
agreement with the PUC.

Liquidity

We
believe that cash on hand, access to the capital markets, and bank borrowing capacity continue to provide sufficient resources to fund our ongoing operating requirements, capital expenditures, general corporate needs and to post collateral in
support of Duquesne Powers energy commodity contracts.

Beginning in 2007, Duquesne Lights transmission and distribution rate
increases will increase cash flow, thereby reducing Duquesne Lights external funding requirements. For the period 2007 through 2008, Duquesne Lights capital expenditures are expected to be approximately $275 to $300 million for electric
utility construction related to transmission and distribution infrastructure. During the same period, Holdings expects to spend approximately $20 million, primarily related to capital expenditures at the Keystone and Conemaugh power plants.

On December 29, 2006, DQE Financial sold its landfill gas business for approximately $102 million. During 2007, we used these
proceeds to (i) repay $30 million of revolver borrowings, (ii) pay Duquesne Light $22.5 million in connection with our inter-company tax sharing arrangement, and (iii) replenish cash.

On January 3, 2007, Duquesne Light sold $44.2 million of pollution control revenue refunding bonds (PCRBs) and used the net proceeds to repay a like
amount of revolver borrowings that had been incurred to fund capital expenditures and the Pennsylvania tax settlement payment. Duquesne Light has $275 million of PCRBs remaining that it can sell to fund future capital expenditures, security
refinancings and general corporate requirements.

DQE Financial is currently exploring the possible unwind of some or all of its structured
lease investments that may result in a material net loss, but will provide an additional source of liquidity if implemented.

Available
cash at all subsidiaries, including Duquesne Light, has historically been deposited in the DQE Capital cash pool. Duquesne Lights investments in or withdrawals from this cash pool have been reflected as cash flows from investing activities on
its consolidated statements of cash flows. Duquesne Light began investing its cash outside of the cash pool during the fourth quarter of 2005.

Bank Credit Facilities. Holdings and Duquesne Light maintain unsecured credit facilities (Revolvers) expiring in July 2010, Holdings for $250 million and Duquesne Light for $150 million. Both Revolvers (i) permit borrowings at
interest rates of LIBOR (plus a margin of 0.40% to 1.00%) or an alternate base rate, as defined in the credit facilities and (ii) have commitment fees applicable to the remaining available amount. Interest rates and commitment



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fees are based on the borrowers then-current senior unsecured credit rating. Both Revolvers are subject to cross-default if the borrower or any of its
subsidiaries defaults on any payment due under any indebtedness exceeding $50 million. Undrawn amounts under both Revolvers are fully available for the issuance of letters of credit.

Under our Revolvers, we are subject to financial covenants requiring each of Holdings and Duquesne Light to maintain a debt-to-capitalization ratio of
not more than 65%, as defined in the facilities. In addition, Holdings is required to maintain a minimum interest coverage ratio of 2-to-1, as defined in the facilities. As of December 31, 2006, we were in compliance with the applicable
covenants.

As of December 31, 2006, our total borrowing capacity under our Revolvers and the use of this borrowing capacity were as
follows:



|               |  |                       |       |          |   |            |  |                   |     |  |   |      
|-------------- |  | --------------------- | ----- | -------- | - | ---------- |  | ----------------- | --- |  | - | -----
|               |  | (Millions of Dollars)
|               |  | Committed Capacity    |       | Borrowed |   | LOCsIssued |  | AvailableCapacity
|Holdings       |  | $                     | 250.0 |          | $ | 30.0       |  | $                 | 0.6 |  | $ | 219.4
|Duquesne Light |  |                       | 150.0 |          |   | 63.0       |  |                   | 8.2 |  |   | 78.8 
|               |  |                       |       |          |   |            |  |                   |     |  |   |      
|Total          |  | $                     | 400.0 |          | $ | 93.0       |  | $                 | 8.8 |  | $ | 298.2
|               |  |                       |       |          |   |            |  |                   |     |  |   |      

During 2006, the maximum amount of Revolver borrowings outstanding at Holdings was $160 million,
the average daily borrowings were $70.6 million and the weighted average daily interest rate was 5.8%. In April and May 2006, Holdings moved letters of credit (LOCs), previously outstanding under the Holdings revolver, to new LOC facilities, thereby
increasing the available capacity under the revolver by a like amount. As of December 31, 2006, Holdings had $72.8 million of outstanding LOCs (including $12.7 million at Duquesne Light) unrelated to the credit facilities.

During 2006, Duquesne Lights maximum amount of Revolver borrowings outstanding was $63 million, the average daily borrowings were $9.3 million and
the weighted average daily interest rate was 5.9%. As of December 31, 2006, Duquesne Light had $12.7 million of outstanding LOCs unrelated to its Revolver.

As of January 31, 2007, our total borrowing capacity under our Revolvers and the use of this borrowing capacity were as follows:



|               |  |                       |       |          |   |            |  |                   |     |  |   |      
|-------------- |  | --------------------- | ----- | -------- | - | ---------- |  | ----------------- | --- |  | - | -----
|               |  | (Millions of Dollars)
|               |  | Committed Capacity    |       | Borrowed |   | LOCsIssued |  | AvailableCapacity
|Holdings       |  | $                     | 250.0 |          | $ |           |  | $                 | 0.6 |  | $ | 249.4
|Duquesne Light |  |                       | 150.0 |          |   |           |  | $                 | 8.2 |  |   | 141.8
|               |  |                       |       |          |   |            |  |                   |     |  |   |      
|Total          |  | $                     | 400.0 |          | $ |           |  | $                 | 8.8 |  | $ | 391.2
|               |  |                       |       |          |   |            |  |                   |     |  |   |      

In addition, as of January 31, 2007, Holdings had $72.8 million of outstanding LOCs
(including $12.7 million at Duquesne Light) unrelated to the credit facilities.

Bank Term Loan Facilities.The Macquarie Consortium
has obtained bank commitments (acquisition debt) in order to provide a source of funds to consummate the pending merger. On September 1, 2006, Holdings entered into a $200 million variable interest rate unsecured term loan facility with
the same lenders to purchase certain minority interests and fund transaction costs related to the Keystone and Conemaugh power plants and for general corporate purposes. The final maturity date is September 1, 2011. (See Note 4.) However, in
the event the merger is not consummated or in the event the merger is consummated but not with the proceeds of the acquisition debt, Holdings must prepay the term loan facility on the one-year anniversary of the date that is earliest to occur of
(i) January 5, 2008, (ii) the date of termination of the merger agreement, and (iii) the date of consummation of the merger other than with the proceeds of acquisition debt.

The term loan facility may be prepaid and/or cancelled in whole or in part, but any amount prepaid under the facility may not be reborrowed. The
outstanding balance under the facility will be charged an interest rate of LIBOR plus a margin of 0.625% to 1.75%, based on our then-current senior unsecured credit rating. Prior to the merger consummation date, the facility is subject to the same
terms and conditions as Holdings current $250 million Revolver (see above). From and after the merger consummation date, the terms and conditions of the facility will automatically change to match those in the acquisition debt.

Equity Offering. On August 11, 2006, Holdings sold an aggregate of 8.8 million shares of common stock (no par value) for
total consideration of $141.4 million. The issuance of the common stock to members of the Macquarie Consortium was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof for
transactions not involving a public offering. Holdings used the net proceeds to repay $133 million of Revolver borrowings and to fund approximately $8 million of general corporate requirements.

Current Maturities of Long-Term Debt. None of Duquesne Lights long-term debt is scheduled to mature before 2008. Holdings current
maturities represent scheduled principal payments on other long-term debt.



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Ratings Triggers. Holdings and its subsidiaries do not have material liquidity exposures caused by
a ratings downgrade below investment grade that would accelerate the due dates of borrowings or cause collateral to be posted under Duquesne Powers power purchase agreements.

OFF-BALANCE S
HEET ARRANGEMENTS

Except for the guarantees and fuel supply commitments discussed in Note 14 and the
letters of credit discussed in Liquidity, neither Holdings nor Duquesne Light has any material off-balance sheet arrangements. Holdings and Duquesne Light enter into power commodity contracts only to meet supply requirements or hedge commodity price
risk. As a wholly owned subsidiary of Holdings, Duquesne Light is involved in various transactions with affiliates. (See Notes 1 and 19.)

Contractual
Obligations and Commitments

As of December 31, 2006, we have certain contractual obligations and commitments that extend into and
beyond 2007, the amounts of which are set forth in the following table:

Payments Due By Period



|                                              |  |                       |         |                 |   |           |  |           |       |                  |   |       |  |   |        
|--------------------------------------------- |  | --------------------- | ------- | --------------- | - | --------- |  | --------- | ----- | ---------------- | - | ----- |  | - | -------
|                                              |  | (Millions of Dollars)
|                                              |  | Total                 |         | Less than1 Year |   | 1-3 Years |  | 3-5 Years |       | More than5 Years
|Short-Term Borrowings                         |  |                       |         |                 |   |           |  |           |       |                  |   |       |  |   |        
|Duquesne Light                                |  | $                     | 18.8    |                 | $ | 18.8      |  | $         |      |                  | $ |      |  | $ |       
|Holdings                                      |  |                       | 30.0    |                 |   | 30.0      |  |           |      |                  |   |      |  |   |       
|Long-Term Debt  Principal                    |  |                       |         |                 |   |           |  |           |       |                  |   |       |  |   |        
|Duquesne Light                                |  |                       | 682.1   |                 |   |          |  |           | 40.0  |                  |   | 47.9  |  |   | 594.2  
|Holdings and Other Affiliates (a) (b)         |  |                       | 521.3   |                 |   | 0.2       |  |           | 0.6   |                  |   | 200.5 |  |   | 320.0  
|Long-Term DebtInterest                       |  |                       |         |                 |   |           |  |           |       |                  |   |       |  |   |        
|Duquesne Light                                |  |                       | 397.2   |                 |   | 40.2      |  |           | 75.6  |                  |   | 74.6  |  |   | 206.8  
|Holdings and Other Affiliates (b)             |  |                       | 362.4   |                 |   | 30.8      |  |           | 61.7  |                  |   | 57.5  |  |   | 212.4  
|Energy Commodity ContractsHoldings           |  |                       | 784.5   |                 |   | 490.5     |  |           | 222.7 |                  |   | 71.3  |  |   |       
|Fuel ContractsHoldings                       |  |                       | 36.7    |                 |   | 13.4      |  |           | 19.2  |                  |   | 3.0   |  |   | 1.1    
|Operating Leases                              |  |                       |         |                 |   |           |  |           |       |                  |   |       |  |   |        
|Duquesne Light                                |  |                       | 19.2    |                 |   | 4.1       |  |           | 8.0   |                  |   | 7.1   |  |   |       
|Other Affiliates                              |  |                       | 2.6     |                 |   | 0.5       |  |           | 1.0   |                  |   | 1.0   |  |   | 0.1    
|Legacy Liability Obligations  Duquesne Light |  |                       | 37.5    |                 |   | 1.4       |  |           | 2.5   |                  |   | 1.6   |  |   | 32.0   
|Other Purchase Obligations (c)                |  |                       |         |                 |   |           |  |           |       |                  |   |       |  |   |        
|Duquesne Light                                |  |                       | 7.8     |                 |   | 7.8       |  |           |      |                  |   |      |  |   |       
|Holdings                                      |  |                       | 6.2     |                 |   | 2.0       |  |           | 3.9   |                  |   | 0.3   |  |   |       
|                                              |  |                       |         |                 |   |           |  |           |       |                  |   |       |  |   |        
|Total                                         |  | $                     | 2,906.3 |                 | $ | 639.7     |  | $         | 435.2 |                  | $ | 464.8 |  | $ | 1,366.6
|                                              |  |                       |         |                 |   |           |  |           |       |                  |   |       |  |   |        

---

|(a) | Includes current maturities.
|--- | ----------------------------

|(b) | Does not include merger related indebtedness that will be incurred when merger is consummated; nor does it reflect the acceleration in maturity or the higher interest costs
associated with Holdings $200 million term loan in the event the merger is terminated.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Includes other purchase obligations relating to other capital and operating expenditures.
|--- | -----------------------------------------------------------------------------------------

POST-MERGER

The table above does not reflect contractual obligations and commitments we would have should the
merger with the Macquarie Consortium be completed, such as payments to be made in connection with a change in control, payments related to conversion of the common stock in the merger, and transaction-related expenses.

From and after the merger closing date, Holdings will maintain a $200 million revolving credit facility and Duquesne Light, subject to PUC approval, will
maintain a $75 million revolving credit facility (both referred to as Facilities). Both Facilities have been sized taking into consideration each borrowers projected liquidity requirements and will expire five years from the merger closing
date. Amounts outstanding under both Facilities will bear interest



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rates of LIBOR plus a margin of 0.625% to 1.75% depending upon the credit ratings in effect from time to time or, at each borrowers discretion, an
alternate base rate plus a margin of 0% to 0.75%. Undrawn amounts under both Facilities will be subject to commitment fees and will be fully available for the issuance of letters of credit.

Both Facilities will be required to maintain certain financial ratios including (i) group funds from operations (FFO) less non-discretionary capital
expenditures/total interest, and (ii) FFO less borrower net interest/total indebtedness; however, this leverage restriction does not apply if the borrower maintains investment grade senior unsecured debt ratings from both Moodys and
S&P. In addition, Holdings Facility will be subject to a third financial ratio that is defined as cash available for borrower debt service/borrower net interest. Both Facilities are subject to certain other restrictions including a
cross-default if the borrower or any of its subsidiaries defaults on any payment due under any indebtedness exceeding $25 million as well as limitations on incremental indebtedness, capital and operating leases, permitted acquisitions, unregulated
capital expenditures, liens securing indebtedness, stand-alone letters of credit, and indebtedness from deferred purchases. Additionally, Holdings Facility will be subject to a cash lock-up agreement if Holdings fails to meet
certain cash flow tests. Cash flow generated during lock-up events will be held in a secured collateral account, subject to release in specified circumstances as necessary for required operation and maintenance, legally mandated capital
expenditures, and taxes.

As discussed above, the Macquarie Consortium plans to use a combination of equity and debt in connection with the
pending merger. Holdings will assume approximately $770 million of the acquisition debt upon consummation of the merger.

See Risk Factors
for additional details regarding post-merger issues.

RATE MATT
ERS

As a regulated utility, Duquesne Light may only change its distribution rates or transmission rates by
applying, through the rate case process, to the PUC or the FERC for approval. The goal of a rate case is to establish customer rates such that the utility (i) recovers its costs of providing the service, (ii) recovers its costs of
investing in the transmission and/or distribution infrastructure, and (iii) earns a reasonable and fair return on that investment. During a rate case, the utility must prove that its proposed rate increase is needed by showing its costs during
a given test year. The utilitys costs and expenditures are reviewed and challenged during this process. A rate case also considers a utilitys rate of return on its investment, as well as its costs of financing, in order to derive its
annual revenue requirement. The rates ultimately set are intended to give the utility a reasonable chance to achieve its revenue requirement.

Since customer choice was instituted in Pennsylvania in 1996, rate caps have prevented recovery of any new investment in transmission and distribution. Our transmission and distribution rate freeze expired at the end of 2003. Prior to 2006,
the last Duquesne Light rate case involving transmission and distribution costs dated back to 1987.

Distribution Rate Case

On April 7, 2006, Duquesne Light filed a distribution rate case with the PUC to recover the increased costs of service and to receive a fair return
on its investment. This was the first requested distribution base rate increase since 1987. On September 14, 2006, Duquesne Light entered into, and filed with the PUC, a Joint Petition of Settlement among all parties resolving all issues in the
distribution rate case. The settlement provides for a distribution rate increase of $117 million in annual operating revenues, and an automatic pass-through for charges that Duquesne Light will pay for transmission services it purchases under
tariffs regulated by the FERC. On October 11, 2006, the administrative law judge presiding over the rate case recommended approval of the settlement agreement. The PUC approved the settlement on November 30, 2006. The new distribution
rates went into effect as of January 6, 2007.

Transmission Rate Cases

On September 29, 2006, Duquesne Light filed a transmission rate case with the FERC requesting a rate increase of approximately $27 million related to
transmission services that Duquesne Light and others purchase under tariffs regulated by the FERC. On February 6, 2007, Duquesne Light received an initial order granting the requested increase, subject to refund, retroactively effective
December 1, 2006. The FERC is expected to issue a final order on the ultimate rate increase in the latter half of 2007. The transmission rate case includes a provision for true-ups of expenses, revenues and inclusion of new capital additions.
Under the formula, updated rates are expected to be effective for transmission rates every June 1 beginning in 2007. We cannot predict the outcome of the FERC proceedings.



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##### Table of Contents

POLR IV

In January 2007, Duquesne Light filed a petition with the PUC requesting approval of a plan that will supply a secure source of electricity for residential and small commercial customers from 2008 through 2010 (POLR IV). The proposed plan,
which is intended to provide a bridge to the time when generation rate caps will expire for most other major electricity distribution companies in the state, seeks approval of the following elements:



| |  |  | fixed-price generation service for residential customers through 2010;
| | - |  | ----------------------------------------------------------------------



| |  |  | fixed-price generation service for small commercial and industrial (C&I) customers over the same period that will be adjusted annually, in 2009 and 2010, to
reflect changes, up or down, in market prices; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continuation of hourly pricing as the default service for large commercial and industrial customers.
| | - |  | ----------------------------------------------------------------------------------------------------

The filing seeks approval of the petition by July 1, 2007, which will allow Duquesne Light time to communicate with customers and its supplier. We
cannot predict the timing or outcome of the PUCs review and approval process.

In February 2007, the PUC issued an advanced notice of
proposed rulemaking that, if made final, would impact the procedures that electric distribution companies such as Duquesne Light must follow in securing generation suppliers for POLR customers. As currently written, the proposal would require
Duquesne Light to select a supplier through an auction or request for proposal process, impacting the POLR IV plan to use Duquesne Power as the supplier. Although the PUC has indicated it expects to finalize these rules in mid-2007, we cannot
predict the timing or outcome of its process.

Seams Elimination Charge Adjustment

See Item 1A. Risk Factors, Our financial obligations under the Seams Elimination Charge Adjustment remain uncertain.

RECENT DEVELOPM
ENTS

DES agreed to price concessions for 2007 with the owners of the synthetic fuel facilities from which we
earn fees from the operation and maintenance of the facilities. The agreement provides that DES will be paid a fixed fee per month, as well as an operating fee per ton of synthetic fuel produced, however this operating fee is less than in previous
years. These price concessions were designed to provide a mechanism to equalize the benefits achieved by the parties in the event of a phase out of Section 45K tax credits in 2007, which would negatively impact the owner of the synthetic fuel
facilities.

The price concessions include a true-up provision that could reduce the ultimate price concessions granted to the facility
owners. The true-up provisions are based in part on the actual 2007 Section 45K credit information to be published by the IRS in April 2008.

In January 2007, Holdings entered into a series of hedges in the crude oil commodity market designed to protect approximately 50% of the price concessions given to the owner of the synthetic fuel facilities, assuming normal levels of
operations. Crude oil is the underlying commodity that drives the economics and availability of the Section 45K tax credits for the owner.

On January 10, 2007, 128,200 shares of Holdings stock were issued to officers as part of a performance award. The right to these shares is subject to the achievement of specified performance goals related to cumulative earnings before
interest, taxes, depreciation, and amortization (EBITDA). At the end of the performance period, which ends on December 31, 2008, shares may vest within a range of 0% to 150%. If a change in control occurs, we will grant cash representing the
fair market value of the stock certificates that would otherwise be due under the performance award, representing a cumulative EBITDA reward equal to the greater of 100% of the performance award or the actual performance award based upon EBITDA as
the date of change in control.

In the first quarter of 2007, Holdings initiated plans to reorganize its managerial workforce. This
reorganization will streamline spans of control within the organization. Holdings plans to implement this reorganization during 2007.

On
February 9, 2007, Duquesne Light entered into a Joint Petition of Settlement among all parties resolving all issues in the merger agreement application before the PUC. The settlement provides for, among other things:



| |  |  | rate benefits and protections to customers, including an agreement by Duquesne Light not to seek a distribution rate increase that would be effective prior to
January 1, 2010;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | corporate governance requirements;
| | - |  | ----------------------------------



| |  |  | commitments to the community, including an agreement to maintain the headquarters in Pittsburgh; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | service and reliability protections.
| | - |  | ------------------------------------

The settlement has been submitted to the administrative law judge presiding over the merger application. Final effectiveness of the settlement is subject to (i) the administrative law judges review



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and recommendation and (ii) PUC review and approval. Both the administrative law judge and the PUC can accept, revise or reject the settlement, with the
final determination being at the PUCs discretion. Although we cannot predict the ultimate timing or outcome of these proceedings, we anticipate a timeline that will allow for a PUC decision during the second quarter of 2007.

FORWARD-LOOKING
STATEMENTS

The preceding sections of Managements Discussion and Analysis of Financial Condition
and Results of Operations contain forward-looking statements, the results of which may materially differ from those implied due to known and unknown risks and uncertainties, some of which are discussed below.



| |  |  | Cash flow, earnings, earnings growth, capitalization, capital expenditures and dividends will depend on the performance of Holdings subsidiaries, and board
policy.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Demand for and pricing of electricity, changing market conditions, and weather conditions could affect earnings levels.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Earnings will be affected by the number of customers who choose to receive electric generation through Duquesne Lights provider-of-last-resort service (POLR),
by our ability to negotiate appropriate terms with suitable generation suppliers, by the performance of these suppliers, and by changes in market value of energy commodity products under contract.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Projected POLR supply requirements will depend on POLR customer retention, which in turn may depend on market generation prices, as well as the marketing efforts of
competing generation suppliers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Transmission rate base and earnings will depend on the ultimate outcome of our transmission rate case, which is subject to Federal Energy Regulatory Commission
(FERC) review and approval. Earnings will also be affected by rate base, equity and allowed return levels.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Regional transmission organization rules and FERC-mandated transmission charges could affect earnings.
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Changes in electric energy prices could affect earnings as the fair value of our energy commodity contracts fluctuates.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | The amount and timing of any debt reduction or refinancing will depend on the availability of cash flows and appropriate replacement or refinancing vehicles.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The amount and timing of any securities issuance (debt or equity) will depend on financial market performance and the need for funds.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in Keystone and/or Conemaugh power plant operations could affect Duquesne Generations earnings.
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Earnings and cash flows may be affected by the ultimate timing of the merger closing, which in turn depends on the receipt of PUC approval.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The credit ratings received from the rating agencies could affect the cost of borrowing, access to capital markets and liquidity.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in synthetic fuel plant operations could affect Duquesne Energy Solutions earnings.
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Earnings with respect to synthetic fuel operations and affordable housing investments will depend, in part, on the continued availability of, and compliance with
the requirements for, applicable federal tax credits. The availability of synthetic fuel tax credits depends in part on the average well-head price per barrel of domestic crude oil.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Demand for dark fiber will affect DQE Communications earnings.
| | - |  | ---------------------------------------------------------------



| |  |  | Financial results and position could be affected by changes in pronouncements periodically issued by accounting standard-setting bodies.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Overall performance by Holdings and its affiliates could be affected by economic, competitive, regulatory, governmental and technological factors affecting
operations, markets, products, services and prices, as well as the factors discussed in Holdings SEC filings made to date.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 7A. | Quantitative and Qualitative Disclosures About Market
Risk.
|-------- | -----------------------------------------------------------

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

Both Holdings and Duquesne
Light have potential market risk exposures to interest rate risk and credit/default risk. Holdings also faces the risks related to commodity prices and the potential of Section 45K tax credit phase-out. Holdings and Duquesne Light have risk
management procedures to monitor and assist in controlling these market risks and may use derivative and other instruments to manage some of these exposures.



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Interest Rate Risk.

We manage our interest rate risk by balancing our exposure between fixed and variable rates and exploring opportunities to lock in favorable interest rates on anticipated debt offerings, while attempting to minimize
our interest costs.

Currently, Holdings has $200 million of variable interest rate debt outstanding, which represents approximately 17% of
its long-term debt. Holdings variable rate debt is an unsecured term loan facility entered into on September 1, 2006 with an average variable interest rate of 6.1% for the four months ended December 31, 2006. Duquesne Light does not
have any variable interest rate long-term debt outstanding.

As of December 31, 2005 neither Holdings nor Duquesne Light had any
variable interest rate debt outstanding.

We manage our interest rate risk by retiring and issuing debt from time to time and by
maintaining a range of maturity dates. A 10% reduction in interest rates would have increased the market value of fixed-rate debt by approximately $43 million for Holdings and $25 million for Duquesne Light as of December 31, 2006 and $47
million for Holdings and $28 million for Duquesne Light as of December 31, 2005. Such changes would not have had a significant near-term effect on our future earnings or cash flows.

Commodity Price Risk.

We are exposed to commodity price risk arising from market price fluctuations
in electricity supply. We manage these risks by entering into various fixed price contracts as part of our overall board approved risk management strategy.

Electricity Supply. We mitigate this risk by entering into energy commodity contracts, principally through Duquesne Power, for anticipated electricity supply obligations within a range of probabilities based on
historical customer retention rates, switching trends and growth at DLE along with projected forward energy prices.

As of
December 31, 2006, Duquesne Power had secured a substantial portion of the combined expected load obligation for its full-requirements contract with Duquesne Light through December 31, 2007.

Beginning in December 2006, Duquesne Power began to secure supply for the years 2008 to 2010. Under the board-approved, risk management policy, Duquesne
Power entered into several forward, fixed-price contracts. This process continues into the first quarter of 2007. Duquesne Power does not have assurance that it will be the approved supplier to Duquesne Light for its POLR service. However, both
Duquesne Light and Duquesne Power are seeking PUC approval for an extension of the current full requirements agreement, which is presently set to expire on December 31, 2007.

If Duquesne Power does not enter into contracts for the remaining portion of its anticipated obligations through 2007, it will acquire the necessary
supply through spot market purchases, and will therefore be exposed to market risk. Assuming Duquesne Power were to make such spot market purchases, we performed a sensitivity analysis using a hypothetical 10% change in the projected forward market
prices of electricity supply in our valuation model. The analysis indicated that such market movements would change the projected cost of acquiring electricity supply by approximately $2.0 million as of December 31, 2006 and approximately $13
million as of December 31, 2005. The projected forward market prices used in our valuation model are derived from broker quotes for the applicable delivery points for both on-peak and off-peak power. Our valuation model seasonalizes annual or
quarterly prices based on historical trends. Actual costs in the future may differ significantly from our analysis, however, based on changes in the timing and amount of commodity price fluctuations and our actual exposures.

If Duquesne Power is not approved as the POLR provider to Duquesne Light Company, Duquesne Power may have contracts for the purchase of power without a
contractual commitment to sell. At that point, Duquesne Power would have several options, including settling the agreements with the various suppliers, selling the power to another counterparty, including DLE, and selling the power into the PJM spot
market. At this time, it is not possible to quantify the potential impacts of these alternatives.

The fair value of the sale contracts and
certain purchase contracts that are classified as derivative instruments, is recorded as derivative assets or liabilities in the consolidated financial statements.

The derivative energy contracts are exposed to commodity price risk based on price changes in the forward energy market. Therefore, as the forward market prices change, so will the fair value of these contracts. A
hypothetical 10% change in the projected forward market prices of electricity supply would increase or decrease the fair value of our derivative energy contracts by approximately $37 million (attributed to mark-to-market contracts) as of
December 31, 2006, and approximately $13 million (including $2 million related to our mark-to-market energy contracts) as of December 31, 2005. The amounts related to our mark-to-market energy contracts would also result in an
increase or decrease to purchased power expense.



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As a result of fixed POLR prices for our residential and small commercial customers through
December 31, 2007, and customers being able to initiate switches to and from POLR service, we have an additional risk of loss. Specifically, customers could opt for POLR service in a period of high energy prices or leave POLR service for an
alternative generation supplier in a period of low energy prices. Significant changes in customer switching behavior could cause Duquesne Powers energy supply portfolio to be disproportionate to its obligations to Duquesne Light and DLE.
Accordingly, Duquesne Power could be required to purchase or sell power in periods of high or low prices which could result in a loss.

Credit/Default
Risk.

Our credit risk is the exposure to the possibility of economic loss that would occur as a result of nonperformance by
counter-parties of their contractual obligations.

Duquesne Power has entered into fixed-price energy contracts and unforced capacity
credit agreements. As of December 31, 2006 all of the suppliers are investment grade.

As of December 31, 2006, Duquesne Power
has contracted to purchase from one supplier approximately 55% of the notional values of the energy commodity contracts for the period January 1, 2007, through December 31, 2010. No other supplier represents as much as 20% for the period.

Duquesne Powers energy commodity contracts contain certain provisions designed to mitigate potential losses by requiring collateral
to be posted by either party depending on changes in energy or capacity prices. As of January 31, 2007, no collateral was required to be posted under these contracts.

Duquesne Light purchases energy and capacity under a full-requirements contract with Duquesne Power, for sale to its large commercial and industrial
customers receiving fixed-price POLR III service through May 31, 2007. Duquesne Lights contract only requires collateral to be posted by the counter-party. As of January 31, 2007, no collateral was required to be posted under these
contracts.

In addition to collateral postings, supplier default risk is further mitigated by accelerated damage payment terms. If a
supplier fails to deliver the contracted power, we may exercise our right to force the supplier to compensate us for the difference between the market price and the contracted price of power. If such supplier would fail to make the accelerated
damage payments, the supplier would be in default and we would be permitted to apply any funds due that supplier against our excess energy costs.

Other than large commercial and industrial POLR III customers on hourly-priced service, Duquesne Light is obligated to serve its POLR III customers at fixed rates. Duquesne Power is also contractually obligated to serve Duquesne Light at
fixed rates. As part of the full-requirements contract between Duquesne Light and Duquesne Power, Duquesne Light is the beneficiary of a $17 million cash deposit.

If an energy supplier to Duquesne Light or Duquesne Power were to default on its contract, we could potentially be acquiring energy and/or capacity at a cost in excess of our revenues, resulting in a loss, if the
collateral provisions were not sufficient to cover such excess.

If this would occur it is uncertain, under the current PUC-approved POLR
III arrangement, that Duquesne Light could pass any additional costs related to these energy and capacity purchases on to its customers.

Duquesne Light retains the risk that customers will not pay for their electricity. However, a component of Duquesne Lights rates is designed to cover the cost of a normal level of uncollectible accounts.

Tax Credit Phase-Out.

Section 45K tax credits
are subject to a phase-out provision that reduces tax credits as the average annual wellhead price per barrel of domestic crude oil increases into an inflation-adjusted phase-out range.

The 2006 phase-out range will be calculated using inflation rates published in 2007 by the IRS. Due to the high level of domestic crude oil prices during
2006, we believe there is a high probability of a phase-out during 2006 and have decreased the amount of tax credits recognized during 2006 on the consolidated income statement by approximately 34%.

If 2007 domestic crude oil prices mimic the high level of 2006, the estimated annual tax credits to be generated from DQE Financials investment in
a synthetic fuel partnership may be substantially reduced or eliminated. However, due to significant levels of tax credit carry-forwards existing at Holdings, the potential phase-out of tax credits in 2007 would not adversely impact our cash flow in
that year. (See Recent Developments.)



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|Item 8. | Consolidated Financial Statements and Supplementary Data.
|------- | ---------------------------------------------------------

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Duquesne Light
Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of Duquesne Light Holdings, Inc. and subsidiaries (the Company)
as of December 31, 2006 and 2005, and the related consolidated statements of income, common shareholders equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2006. Our audits also
included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 Holdings, Inc. and subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 13 to the Consolidated Financial
Statements, the Company adopted SFAS 158, Employers Accounting for Defined Pension and Other Postretirement Plans, effective December 31, 2006.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of
December 31, 2006, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2007 expressed an
unqualified opinion on managements assessment of the effectiveness of the Companys internal control over financial reporting and an adverse opinion on the effectiveness of the Companys internal control over financial reporting
because of material weaknesses.

/s/ Deloitte & Touche LLP

Pittsburgh, Pennsylvania

February 28, 2007

To the Board of Directors and Shareholder of Duquesne Light Company:

We have audited the accompanying consolidated balance
sheets of Duquesne Light Company and subsidiaries (the Company) as of December 31, 2006 and 2005, and the related consolidated statements of operations, common shareholders equity, comprehensive income and cash flows for each
of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15. 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 the standards of the Public Company Accounting Oversight Board (United States). 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.



41



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##### Table of Contents

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position
of Duquesne Light Company and subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America. 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.

As discussed in Note 13 to the Consolidated Financial Statements, the Company adopted SFAS 158, Employers
Accounting for Defined Pension and Other Postretirement Plans, effective December 31, 2006.

We have also audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2007 expressed an unqualified opinion on managements assessment of the effectiveness
of the Companys internal control over financial reporting and an adverse opinion on the effectiveness of the Companys internal control over financial reporting because of a material weakness.



|                         
|-------------------------
|/s/ Deloitte & Touche LLP
|Pittsburgh, Pennsylvania 
|February 28, 2007        



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##### Table of Contents

Duquesne Light Holdings, Inc.

Consolidated Statements of Income



|                                                                                     |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                                     |  | (All Amounts in Millions, Except Per Share Amounts) Year Ended
December 31, |      
|                                                                                     |  | 2006                                                                        |       |   | 2005 |   |       | 2004 | 
|Operating Revenues:                                                                  |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|Retail sales of electricity                                                          |  | $                                                                           | 805.0 |   |      | $ | 772.6 |      |  | $ | 761.8 |  
|Other                                                                                |  |                                                                             | 97.2  |   |      |   | 99.3  |      |  |   | 100.7 |  
|                                                                                     |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|Total Operating Revenues                                                             |  |                                                                             | 902.2 |   |      |   | 871.9 |      |  |   | 862.5 |  
|                                                                                     |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|Operating Expenses:                                                                  |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|Fuel and purchased power                                                             |  |                                                                             | 435.9 |   |      |   | 366.8 |      |  |   | 382.0 |  
|Other operating and maintenance                                                      |  |                                                                             | 213.6 |   |      |   | 211.0 |      |  |   | 194.7 |  
|Acquisition termination cost (Note 4)                                                |  |                                                                             |      |   |      |   |      |      |  |   | 8.3   |  
|Depreciation and amortization                                                        |  |                                                                             | 80.7  |   |      |   | 75.8  |      |  |   | 75.4  |  
|Taxes other than income taxes (Note 10)                                              |  |                                                                             | 67.3  |   |      |   | 53.5  |      |  |   | 48.1  |  
|Other (Notes 2 and 4)                                                                |  |                                                                             | 5.4   |   |      |   | (9.3  | )    |  |   |      |  
|                                                                                     |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|Total Operating Expenses                                                             |  |                                                                             | 802.9 |   |      |   | 697.8 |      |  |   | 708.5 |  
|                                                                                     |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|                                                                                     |  |                                                                             |      
|Operating Income                                                                     |  |                                                                             | 99.3  |   |      |   | 174.1 |      |  |   | 154.0 |  
|Investment and Other Income                                                          |  |                                                                             | 1.0   |   |      |   | 29.5  |      |  |   | 5.7   |  
|Interest and Other Charges                                                           |  |                                                                             | (76.7 | ) |      |   | (62.5 | )    |  |   | (62.9 | )
|                                                                                     |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|Income from Continuing Operations Before Income Taxes and Limited Partners Interest |  |                                                                             | 23.6  |   |      |   | 141.1 |      |  |   | 96.8  |  
|Income Tax Expense (Note 10)                                                         |  |                                                                             | (23.4 | ) |      |   | (57.0 | )    |  |   | (30.9 | )
|Benefit from Limited Partners Interest                                              |  |                                                                             | 8.5   |   |      |   | 10.1  |      |  |   | 7.4   |  
|                                                                                     |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|                                                                                     |  |                                                                             |      
|Income from Continuing Operations                                                    |  |                                                                             | 8.7   |   |      |   | 94.2  |      |  |   | 73.3  |  
|Income from Discontinued Operations  Net (Note 18)                                  |  |                                                                             | 46.0  |   |      |   | 20.0  |      |  |   | 13.7  |  
|                                                                                     |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|Net Income                                                                           |  | $                                                                           | 54.7  |   |      | $ | 114.2 |      |  | $ | 87.0  |  
|                                                                                     |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|Average Number of Common Shares Outstanding                                          |  |                                                                             | 82.0  |   |      |   | 77.7  |      |  |   | 76.4  |  
|                                                                                     |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|Basic Earnings Per Share of Common Stock:                                            |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|Earnings from Continuing Operations                                                  |  | $                                                                           | 0.11  |   |      | $ | 1.21  |      |  | $ | 0.96  |  
|Earnings from Discontinued Operations                                                |  |                                                                             | 0.56  |   |      |   | 0.26  |      |  |   | 0.18  |  
|                                                                                     |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|Basic Earnings Per Share of Common Stock                                             |  | $                                                                           | 0.67  |   |      | $ | 1.47  |      |  | $ | 1.14  |  
|                                                                                     |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|Diluted Earnings Per Share of Common Stock:                                          |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|Earnings from Continuing Operations                                                  |  | $                                                                           | 0.11  |   |      | $ | 1.21  |      |  | $ | 0.96  |  
|Earnings from Discontinued Operations                                                |  |                                                                             | 0.56  |   |      |   | 0.26  |      |  |   | 0.18  |  
|                                                                                     |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|Diluted Earnings Per Share of Common Stock                                           |  | $                                                                           | 0.67  |   |      | $ | 1.47  |      |  | $ | 1.14  |  
|                                                                                     |  |                                                                             |       |   |      |   |       |      |  |   |       |  
|Dividends Declared Per Share of Common Stock                                         |  | $                                                                           | 1.00  |   |      | $ | 1.00  |      |  | $ | 1.00  |  
|                                                                                     |  |                                                                             |       |   |      |   |       |      |  |   |       |  

See notes to consolidated financial statements.



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Duquesne Light Holdings, Inc.

Consolidated Balance Sheets



|                                                |  |                                          |         |   |      |   |         |  
|----------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                |  | (Millions of Dollars) As of December 31, |        
|Assets                                          |  | 2006                                     |         |   | 2005 |  
|Current Assets:                                 |  |                                          |         |   |      |   |         |  
|Cash and cash equivalents                       |  | $                                        | 64.8    |   |      | $ | 79.2    |  
|                                                |  |                                         
|Receivables:                                    |  |                                          |         |   |      |   |         |  
|Electric customers                              |  |                                          | 69.6    |   |      |   | 76.2    |  
|Unbilled electric customers                     |  |                                          | 34.9    |   |      |   | 32.1    |  
|Other                                           |  |                                          | 31.7    |   |      |   | 19.0    |  
|Less: Allowance for uncollectible accounts      |  |                                          | (17.2   | ) |      |   | (21.1   | )
|                                                |  |                                          |         |   |      |   |         |  
|Total Receivables  Net                         |  |                                          | 119.0   |   |      |   | 106.2   |  
|                                                |  |                                          |         |   |      |   |         |  
|Materials and supplies (at average cost)        |  |                                          | 20.7    |   |      |   | 18.1    |  
|Demand note                                     |  |                                          | 41.8    |   |      |   |        |  
|Derivative instruments                          |  |                                          | 11.8    |   |      |   | 41.1    |  
|Deferred income taxes - net                     |  |                                          | 35.5    |   |      |   | 28.9    |  
|Other                                           |  |                                          | 17.8    |   |      |   | 7.9     |  
|Discontinued operations                         |  |                                          | 0.2     |   |      |   | 12.5    |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Current Assets                            |  |                                          | 311.6   |   |      |   | 293.9   |  
|                                                |  |                                          |         |   |      |   |         |  
|                                                |  |                                         
|Long-Term Investments:                          |  |                                          |         |   |      |   |         |  
|Leases                                          |  |                                          | 511.5   |   |      |   | 505.8   |  
|Affordable housing                              |  |                                          | 26.0    |   |      |   | 31.5    |  
|Other                                           |  |                                          | 5.1     |   |      |   | 2.7     |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Long-Term Investments                     |  |                                          | 542.6   |   |      |   | 540.0   |  
|                                                |  |                                          |         |   |      |   |         |  
|                                                |  |                                         
|Property, Plant and Equipment:                  |  |                                          |         |   |      |   |         |  
|Electric plant in service                       |  |                                          | 2,500.2 |   |      |   | 2,176.7 |  
|Construction work in progress  electric        |  |                                          | 89.3    |   |      |   | 59.1    |  
|Fiber optic network                             |  |                                          | 37.2    |   |      |   | 32.9    |  
|Other energy facilities                         |  |                                          | 8.6     |   |      |   | 8.5     |  
|Other                                           |  |                                          | 6.8     |   |      |   | 6.8     |  
|                                                |  |                                          |         |   |      |   |         |  
|Gross property plant and equipment              |  |                                          | 2,642.1 |   |      |   | 2,284.0 |  
|Less: Accumulated depreciation and amortization |  |                                          | (788.3  | ) |      |   | (757.4  | )
|                                                |  |                                          |         |   |      |   |         |  
|Property, Plant and Equipment  Net             |  |                                          | 1,853.8 |   |      |   | 1,526.6 |  
|                                                |  |                                          |         |   |      |   |         |  
|                                                |  |                                         
|Other Non-Current Assets:                       |  |                                          |         |   |      |   |         |  
|Regulatory assets                               |  |                                          | 340.0   |   |      |   | 300.0   |  
|Prepaid pension cost                            |  |                                          | 67.7    |   |      |   | 31.2    |  
|Intangible assets                               |  |                                          | 11.5    |   |      |   | 42.7    |  
|Other                                           |  |                                          | 20.2    |   |      |   | 50.3    |  
|Discontinued operations                         |  |                                          |        |   |      |   | 35.9    |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Other Non-Current Assets                  |  |                                          | 439.4   |   |      |   | 460.1   |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Assets                                    |  | $                                        | 3,147.4 |   |      | $ | 2,820.6 |  
|                                                |  |                                          |         |   |      |   |         |  

See notes to consolidated financial statements.



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Duquesne Light Holdings, Inc.

Consolidated Balance Sheets



|                                                                                                                  |  |                                          |          |   |      |   |          |  
|----------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                                  |  | (Millions of Dollars) As of December 31, |         
|                                                                                                                  |  | 2006                                     |          |   | 2005 |  
|Liabilities and Capitalization                                                                                    |  |                                          |          |   |      |   |          |  
|                                                                                                                  |  |                                         
|Current Liabilities:                                                                                              |  |                                          |          |   |      |   |          |  
|Short-term debt and current debt maturities                                                                       |  | $                                        | 49.0     |   |      | $ | 40.3     |  
|Accounts payable                                                                                                  |  |                                          | 106.8    |   |      |   | 88.6     |  
|Accrued taxes                                                                                                     |  |                                          | 7.9      |   |      |   | 64.6     |  
|Accrued compensation                                                                                              |  |                                          | 23.2     |   |      |   | 19.6     |  
|Derivative instruments                                                                                            |  |                                          | 25.1     |   |      |   | 12.4     |  
|Common stock dividends                                                                                            |  |                                          | 22.3     |   |      |   | 20.0     |  
|Pension liability                                                                                                 |  |                                          |         |   |      |   | 20.0     |  
|Accrued interest                                                                                                  |  |                                          | 17.5     |   |      |   | 16.3     |  
|Other                                                                                                             |  |                                          | 21.8     |   |      |   | 16.8     |  
|Discontinued operations                                                                                           |  |                                          | 3.0      |   |      |   | 19.9     |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Current Liabilities                                                                                         |  |                                          | 276.6    |   |      |   | 318.5    |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|                                                                                                                  |  |                                         
|Non-Current Liabilities:                                                                                          |  |                                          |          |   |      |   |          |  
|Deferred income taxes  net                                                                                       |  |                                          | 481.2    |   |      |   | 451.4    |  
|Pension liability                                                                                                 |  |                                          | 61.2     |   |      |   | 92.8     |  
|Other postretirement benefits                                                                                     |  |                                          | 58.2     |   |      |   | 40.7     |  
|Legacy liabilities                                                                                                |  |                                          | 37.5     |   |      |   | 29.8     |  
|Regulatory liability                                                                                              |  |                                          | 29.2     |   |      |   |         |  
|Other                                                                                                             |  |                                          | 39.8     |   |      |   | 86.6     |  
|Discontinued operations                                                                                           |  |                                          |         |   |      |   | 5.2      |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Non-Current Liabilities                                                                                     |  |                                          | 707.1    |   |      |   | 706.5    |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|                                                                                                                  |  |                                         
|Limited partners interest                                                                                        |  |                                          | 29.3     |   |      |   | 35.4     |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Commitments and contingencies (Note 14)                                                                           |  |                                          |          |   |      |   |          |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|                                                                                                                  |  |                                         
|Capitalization:                                                                                                   |  |                                          |          |   |      |   |          |  
|Long-term debt                                                                                                    |  |                                          | 1,202.0  |   |      |   | 957.8    |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Preferred and Preference Stock: (aggregate involuntary liquidation value of $147.4 and $148.8):                   |  |                                          |          |   |      |   |          |  
|Preferred stock of subsidiaries                                                                                   |  |                                          | 135.6    |   |      |   | 135.6    |  
|Preference stock of subsidiaries                                                                                  |  |                                          | 11.9     |   |      |   | 13.3     |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Total preferred and preference stock before deferred employee stock ownership plan (ESOP) benefit                 |  |                                          | 147.5    |   |      |   | 148.9    |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Deferred ESOP benefit                                                                                             |  |                                          | (0.1     | ) |      |   | (2.4     | )
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Preferred and Preference Stock                                                                              |  |                                          | 147.4    |   |      |   | 146.5    |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|                                                                                                                  |  |                                         
|Common Shareholders Equity:                                                                                      |  |                                          |          |   |      |   |          |  
|Common stock  no par value (authorized  187,500,000 shares; issued  135,765,386 shares and 126,929,154
shares) |  |                                          | 1,336.3  |   |      |   | 1,200.5  |  
|Retained earnings                                                                                                 |  |                                          | 571.8    |   |      |   | 600.0    |  
|Treasury stock (at cost) (48,128,407 and 48,935,435 shares)                                                       |  |                                          | (1,114.1 | ) |      |   | (1,132.5 | )
|Unearned compensation (Note 12)                                                                                   |  |                                          |         |   |      |   | (1.8     | )
|Accumulated other comprehensive loss                                                                              |  |                                          | (9.0     | ) |      |   | (10.3    | )
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Common Shareholders Equity                                                                                 |  |                                          | 785.0    |   |      |   | 655.9    |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Capitalization                                                                                              |  |                                          | 2,134.4  |   |      |   | 1,760.2  |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Liabilities and Capitalization                                                                              |  | $                                        | 3,147.4  |   |      | $ | 2,820.6  |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  

See notes to consolidated financial statements.



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Duquesne Light Holdings, Inc.

Consolidated Statements of Cash Flows



|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------- |  | --------------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                  |  | (Millions of Dollars) Year Ended December 31, |       
|                                                                                  |  | 2006                                          |        |   | 2005 |   |        | 2004 | 
|Cash Flows From Operating Activities:                                             |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net income                                                                        |  | $                                             | 54.7   |   |      | $ | 114.2  |      |  | $ | 87.0   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                               |        |   |      |   |        |      |  |   |        |  
|Depreciation and amortization                                                     |  |                                               | 80.7   |   |      |   | 75.8   |      |  |   | 75.4   |  
|Bad debt expense                                                                  |  |                                               | 15.9   |   |      |   | 19.3   |      |  |   | 12.0   |  
|Derivative instruments                                                            |  |                                               | 33.3   |   |      |   | (8.8   | )    |  |   |       |  
|Acquisition termination cost                                                      |  |                                               |       |   |      |   |       |      |  |   | 8.3    |  
|Capital lease and investment amortization                                         |  |                                               | 3.9    |   |      |   | 4.2    |      |  |   | 4.9    |  
|Investment income                                                                 |  |                                               | (5.7   | ) |      |   | (6.2   | )    |  |   | (7.1   | )
|Gain on disposition of investments/assets                                         |  |                                               | (11.2  | ) |      |   | (33.5  | )    |  |   | (2.1   | )
|Deferred taxes                                                                    |  |                                               | 19.9   |   |      |   | 17.4   |      |  |   | 9.2    |  
|Pension contribution                                                              |  |                                               | (24.4  | ) |      |   | (32.1  | )    |  |   |       |  
|Other                                                                             |  |                                               | (11.3  | ) |      |   | (8.2   | )    |  |   | (1.6   | )
|Changes in working capital other than cash (Note 20)                              |  |                                               | (83.1  | ) |      |   | (19.0  | )    |  |   | (8.5   | )
|Discontinued operations                                                           |  |                                               | (61.0  | ) |      |   | (3.4   | )    |  |   | 0.8    |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net Cash Provided from Operating Activities                                       |  |                                               | 11.7   |   |      |   | 119.7  |      |  |   | 178.3  |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|                                                                                  |  |                                               |       
|Cash Flows From Investing Activities:                                             |  |                                               |        |   |      |   |        |      |  |   |        |  
|Proceeds from disposition of investments/assets                                   |  |                                               | 13.9   |   |      |   | 48.0   |      |  |   | 10.4   |  
|Long-term investments                                                             |  |                                               |       |   |      |   | (1.1   | )    |  |   |       |  
|Power plant acquisitions                                                          |  |                                               | (177.7 | ) |      |   |       |      |  |   |       |  
|Capital expenditures                                                              |  |                                               | (227.5 | ) |      |   | (135.5 | )    |  |   | (85.5  | )
|Other                                                                             |  |                                               | (4.9   | ) |      |   | (0.1   | )    |  |   | (5.4   | )
|Discontinued operations                                                           |  |                                               | 43.0   |   |      |   | 12.8   |      |  |   | (19.1  | )
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net Cash Used in Investing Activities                                             |  |                                               | (353.2 | ) |      |   | (75.9  | )    |  |   | (99.6  | )
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|                                                                                  |  |                                               |       
|Cash Flows From Financing Activities:                                             |  |                                               |        |   |      |   |        |      |  |   |        |  
|Issuance of long-term debt obligations (Note 9)                                   |  |                                               | 200.0  |   |      |   | 320.0  |      |  |   | 200.0  |  
|Reductions of long-term debt obligations                                          |  |                                               |       |   |      |   | (320.1 | )    |  |   | (250.0 | )
|Issuance of common stock                                                          |  |                                               | 140.9  |   |      |   |       |      |  |   |       |  
|Issuance of preferred stock                                                       |  |                                               |       |   |      |   |       |      |  |   | 73.1   |  
|Revolving credit facility borrowings, net                                         |  |                                               | 53.0   |   |      |   | 40.0   |      |  |   |       |  
|Dividends on common and preferred stock (Note 17)                                 |  |                                               | (70.3  | ) |      |   | (67.1  | )    |  |   | (66.0  | )
|Repurchase of common and preferred stock                                          |  |                                               |       |   |      |   |       |      |  |   | (0.9   | )
|Other                                                                             |  |                                               | 3.5    |   |      |   | (0.1   | )    |  |   | 7.2    |  
|Discontinued operations                                                           |  |                                               |       |   |      |   |       |      |  |   | (13.2  | )
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net Cash Provided from (Used in) Financing Activities                             |  |                                               | 327.1  |   |      |   | (27.3  | )    |  |   | (49.8  | )
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net (decrease) increase in cash and cash equivalents                              |  |                                               | (14.4  | ) |      |   | 16.5   |      |  |   | 28.9   |  
|Cash and cash equivalents at beginning of year                                    |  |                                               | 79.2   |   |      |   | 62.7   |      |  |   | 33.8   |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Cash and cash equivalents at end of year                                          |  | $                                             | 64.8   |   |      | $ | 79.2   |      |  | $ | 62.7   |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Supplemental Cash Flow Information                                                |  |                                               |        |   |      |   |        |      |  |   |        |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|                                                                                  |  |                                               |       
|Cash paid during the year:                                                        |  |                                               |        |   |      |   |        |      |  |   |        |  
|Interest (net of amount capitalized)                                              |  | $                                             | 65.1   |   |      | $ | 44.2   |      |  | $ | 46.0   |  
|Income taxes paid (refunded) (Note 10)                                            |  | $                                             | 103.7  |   |      | $ | 34.7   |      |  | $ | (5.6   | )
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  

See notes to consolidated financial statements.



46



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##### Table of Contents

Duquesne Light Holdings, Inc.

Consolidated Statements of Comprehensive Income



|                                                                                                              |  |                                               |      |   |      |   |       |      |  |   |     
|------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ---- | - | ---- | - | ----- | ---- |  | - | ----
|                                                                                                              |  | (Millions of Dollars) Year Ended December 31,
|                                                                                                              |  | 2006                                          |      |   | 2005 |   |       | 2004
|Net income                                                                                                    |  | $                                             | 54.7 |   |      | $ | 114.2 |      |  | $ | 87.0
|Other comprehensive loss:                                                                                     |  |                                               |      |   |      |   |       |      |  |   |     
|Unrealized holding gains on interest rate hedging instruments, net of tax of $, $3.0, and $                 |  |                                               |     |   |      |   | 4.2   |      |  |   |    
|Unrealized holding (losses) gains on cash flow hedging instruments, net of tax of $(3.1), $6.4, and
$        |  |                                               | (4.3 | ) |      |   | 9.1   |      |  |   |    
|Minimum pension liability adjustment, net of tax of $16.4, $(16.8), and $                                    |  |                                               | 23.1 |   |      |   | (23.6 | )    |  |   |    
|Reclassification adjustment for holding losses on cash flow and interest rate hedging instruments, net of tax |  |                                               | (6.7 | ) |      |   |      |      |  |   |    
|                                                                                                              |  |                                               |      |   |      |   |       |      |  |   |     
|Comprehensive income                                                                                          |  | $                                             | 66.8 |   |      | $ | 103.9 |      |  | $ | 87.0
|                                                                                                              |  |                                               |      |   |      |   |       |      |  |   |     

See notes to consolidated financial statements.

Duquesne Light Holdings, Inc.

Consolidated Statements of Common Shareholders Equity



|                                     |  |             |         |   |                  |   |       |                |  |   |                       |   |  |                                       |      |   |       |   |       |   |  |   |       |  
|------------------------------------ |  | ----------- | ------- | - | ---------------- | - | ----- | -------------- |  | - | --------------------- | - |  | ------------------------------------- | ---- | - | ----- | - | ----- | - |  | - | ----- | -
|                                     |  | CommonStock |         |   | RetainedEarnings |   |       | Treasury Stock |  |   | Unearned Compensation |   |  | Accumulated Other ComprehensiveIncome |      |   | Total |  
|Balances at December 31, 2003        |  | $           | 1,215.4 |   |                  | $ | 553.1 |                |  | $ | (1,189.7              | ) |  | $                                     | (3.4 | ) |       | $ |      |   |  | $ | 575.4 |  
|                                     |  |             |         |   |                  |  
|Net Income                           |  |             |        |   |                  |   | 87.0  |                |  |   |                      |   |  |                                       |     |   |       |   |      |   |  |   | 87.0  |  
|Dividends on common stock ($1/share) |  |             |        |   |                  |   | (76.5 | )              |  |   |                      |   |  |                                       |     |   |       |   |      |   |  |   | (76.5 | )
|Issuance of treasury stock           |  |             | (6.8    | ) |                  |   |      |                |  |   | 32.4                  |   |  |                                       | 0.8  |   |       |   |      |   |  |   | 26.4  |  
|Preferred stock issuance costs       |  |             | (1.9    | ) |                  |   |      |                |  |   |                      |   |  |                                       |     |   |       |   |      |   |  |   | (1.9  | )
|                                     |  |             |         |   |                  |   |       |                |  |   |                       |   |  |                                       |      |   |       |   |       |   |  |   |       |  
|Balances at December 31, 2004        |  | $           | 1,206.7 |   |                  | $ | 563.6 |                |  | $ | (1,157.3              | ) |  | $                                     | (2.6 | ) |       | $ |      |   |  | $ | 610.4 |  
|                                     |  |             |         |   |                  |   |       |                |  |   |                       |   |  |                                       |      |   |       |   |       |   |  |   |       |  
|                                     |  |             |         |   |                  |  
|Net Income                           |  |             |        |   |                  |   | 114.2 |                |  |   |                      |   |  |                                       |     |   |       |   |      |   |  |   | 114.2 |  
|Dividends on common stock ($1/share) |  |             |        |   |                  |   | (77.7 | )              |  |   |                      |   |  |                                       |     |   |       |   |      |   |  |   | (77.7 | )
|Issuance of treasury stock           |  |             | (6.4    | ) |                  |   |      |                |  |   | 24.4                  |   |  |                                       | 0.8  |   |       |   |      |   |  |   | 18.8  |  
|Other comprehensive loss             |  |             |        |   |                  |   |      |                |  |   |                      |   |  |                                       |     |   |       |   | (10.3 | ) |  |   | (10.3 | )
|Other                                |  |             | 0.2     |   |                  |   | (0.1  | )              |  |   | 0.4                   |   |  |                                       |     |   |       |   |      |   |  |   | 0.5   |  
|                                     |  |             |         |   |                  |   |       |                |  |   |                       |   |  |                                       |      |   |       |   |       |   |  |   |       |  
|Balances at December 31, 2005        |  | $           | 1,200.5 |   |                  | $ | 600.0 |                |  | $ | (1,132.5              | ) |  | $                                     | (1.8 | ) |       | $ | (10.3 | ) |  | $ | 655.9 |  
|                                     |  |             |         |   |                  |   |       |                |  |   |                       |   |  |                                       |      |   |       |   |       |   |  |   |       |  
|                                     |  |             |         |   |                  |  
|Net Income                           |  |             |        |   |                  |   | 54.7  |                |  |   |                      |   |  |                                       |     |   |       |   |      |   |  |   | 54.7  |  
|Dividends on common stock ($1/share) |  |             |        |   |                  |   | (82.9 | )              |  |   |                      |   |  |                                       |     |   |       |   |      |   |  |   | (82.9 | )
|Issuance of common stock             |  |             | 140.9   |   |                  |   |      |                |  |   |                      |   |  |                                       |     |   |       |   |      |   |  |   | 140.9 |  
|Issuance of treasury stock           |  |             | (2.9    | ) |                  |   |      |                |  |   | 18.4                  |   |  |                                       |     |   |       |   |      |   |  |   | 15.5  |  
|Other comprehensive income           |  |             |        |   |                  |   |      |                |  |   |                      |   |  |                                       |     |   |       |   | 12.1  |   |  |   | 12.1  |  
|Adoption of SFAS No. 158             |  |             |        |   |                  |   |      |                |  |   |                      |   |  |                                       |     |   |       |   | (10.8 | ) |  |   | (10.8 | )
|Share-based compensation             |  |             | (2.2    | ) |                  |   |      |                |  |   |                      |   |  |                                       | 1.8  |   |       |   |      |   |  |   | (0.4  | )
|                                     |  |             |         |   |                  |   |       |                |  |   |                       |   |  |                                       |      |   |       |   |       |   |  |   |       |  
|Balances at December 31, 2006        |  | $           | 1,336.3 |   |                  | $ | 571.8 |                |  | $ | (1,114.1              | ) |  | $                                     |     |   |       | $ | (9.0  | ) |  | $ | 785.0 |  
|                                     |  |             |         |   |                  |   |       |                |  |   |                       |   |  |                                       |      |   |       |   |       |   |  |   |       |  

See notes to consolidated financial statements.



47



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##### Table of Contents

Duquesne Light Company

Consolidated Statements of Operations



|                                            |  |                                               |       |   |      |   |       |      |  |   |       |  
|------------------------------------------- |  | --------------------------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                            |  | (Millions of Dollars) Year Ended December 31, |      
|                                            |  | 2006                                          |       |   | 2005 |   |       | 2004 | 
|Retail sales of electricity                 |  | $                                             | 701.3 |   |      | $ | 723.2 |      |  | $ | 761.8 |  
|Other                                       |  |                                               | 21.9  |   |      |   | 69.2  |      |  |   | 27.5  |  
|                                            |  |                                               |       |   |      |   |       |      |  |   |       |  
|Total Operating Revenues                    |  |                                               | 723.2 |   |      |   | 792.4 |      |  |   | 789.3 |  
|                                            |  |                                               |       |   |      |   |       |      |  |   |       |  
|                                            |  |                                               |      
|Operating Expenses:                         |  |                                               |       |   |      |   |       |      |  |   |       |  
|Purchased power                             |  |                                               | 361.3 |   |      |   | 366.8 |      |  |   | 382.0 |  
|Other operating and maintenance             |  |                                               | 155.2 |   |      |   | 157.2 |      |  |   | 138.0 |  
|Acquisition termination cost (Note 4)       |  |                                               |      |   |      |   |      |      |  |   | 8.3   |  
|Depreciation and amortization               |  |                                               | 75.0  |   |      |   | 71.8  |      |  |   | 71.4  |  
|Taxes other than income taxes (Note 10)     |  |                                               | 59.9  |   |      |   | 49.3  |      |  |   | 47.9  |  
|                                            |  |                                               |       |   |      |   |       |      |  |   |       |  
|Total Operating Expenses                    |  |                                               | 651.4 |   |      |   | 645.1 |      |  |   | 647.6 |  
|                                            |  |                                               |       |   |      |   |       |      |  |   |       |  
|                                            |  |                                               |      
|Operating Income                            |  |                                               | 71.8  |   |      |   | 147.3 |      |  |   | 141.7 |  
|Investment and Other Income                 |  |                                               | (7.4  | ) |      |   | 16.2  |      |  |   | 16.6  |  
|Interest and Other Charges                  |  |                                               | (41.5 | ) |      |   | (48.0 | )    |  |   | (46.2 | )
|                                            |  |                                               |       |   |      |   |       |      |  |   |       |  
|Income Before Income Taxes                  |  |                                               | 22.9  |   |      |   | 115.5 |      |  |   | 112.1 |  
|Income Tax Expense (Note 10)                |  |                                               | 18.6  |   |      |   | 42.5  |      |  |   | 44.3  |  
|                                            |  |                                               |       |   |      |   |       |      |  |   |       |  
|                                            |  |                                               |      
|Net Income                                  |  |                                               | 4.3   |   |      |   | 73.0  |      |  |   | 67.8  |  
|Dividends on Preferred and Preference Stock |  |                                               | 7.9   |   |      |   | 8.0   |      |  |   | 6.6   |  
|                                            |  |                                               |       |   |      |   |       |      |  |   |       |  
|(Loss) Earnings Available for Common Stock  |  | $                                             | (3.6  | ) |      | $ | 65.0  |      |  | $ | 61.2  |  
|                                            |  |                                               |       |   |      |   |       |      |  |   |       |  

See notes to consolidated financial statements.



48



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##### Table of Contents

Duquesne Light Company

Consolidated Balance Sheets



|                                                |  |                                          |         |   |      |   |         |  
|----------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                |  | (Millions of Dollars) As of December 31, |        
|                                                |  | 2006                                     |         |   | 2005 |  
|Assets                                          |  |                                          |         |   |      |   |         |  
|Current Assets:                                 |  |                                          |         |   |      |   |         |  
|Cash and cash equivalents                       |  | $                                        | 8.0     |   |      | $ | 76.1    |  
|                                                |  |                                         
|Receivables:                                    |  |                                          |         |   |      |   |         |  
|Electric customers                              |  |                                          | 62.3    |   |      |   | 72.5    |  
|Unbilled electric customers                     |  |                                          | 29.7    |   |      |   | 28.9    |  
|Affiliate Receivables                           |  |                                          | 41.4    |   |      |   | 3.3     |  
|Other                                           |  |                                          | 11.7    |   |      |   | 9.9     |  
|Less: Allowance for uncollectible accounts      |  |                                          | (16.9   | ) |      |   | (20.8   | )
|                                                |  |                                          |         |   |      |   |         |  
|Total ReceivablesNet                           |  |                                          | 128.2   |   |      |   | 93.8    |  
|                                                |  |                                          |         |   |      |   |         |  
|Materials and supplies (at average cost)        |  |                                          | 19.4    |   |      |   | 18.1    |  
|Deferred income taxesnet                       |  |                                          | 5.5     |   |      |   | 14.4    |  
|Other                                           |  |                                          | 16.0    |   |      |   | 6.7     |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Current Assets                            |  |                                          | 177.1   |   |      |   | 209.1   |  
|                                                |  |                                          |         |   |      |   |         |  
|                                                |  |                                         
|Long-Term Investments:                          |  |                                          |         |   |      |   |         |  
|Investment in parents common stock             |  |                                          | 23.0    |   |      |   | 19.7    |  
|Other                                           |  |                                          | 2.3     |   |      |   | 2.5     |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Long-Term Investments                     |  |                                          | 25.3    |   |      |   | 22.2    |  
|                                                |  |                                          |         |   |      |   |         |  
|                                                |  |                                         
|Property, Plant and Equipment:                  |  |                                          |         |   |      |   |         |  
|Electric plant in service                       |  |                                          | 2,334.2 |   |      |   | 2,176.7 |  
|Construction work in progress                   |  |                                          | 87.7    |   |      |   | 59.1    |  
|                                                |  |                                          |         |   |      |   |         |  
|Gross property, plant and equipment             |  |                                          | 2,421.9 |   |      |   | 2,235.8 |  
|Less: Accumulated depreciation and amortization |  |                                          | (765.1  | ) |      |   | (738.5  | )
|                                                |  |                                          |         |   |      |   |         |  
|Property, Plant and Equipment  Net             |  |                                          | 1,656.8 |   |      |   | 1,497.3 |  
|                                                |  |                                          |         |   |      |   |         |  
|                                                |  |                                         
|Other Non-Current Assets:                       |  |                                          |         |   |      |   |         |  
|Regulatory assets                               |  |                                          | 340.0   |   |      |   | 300.0   |  
|Prepaid pension cost                            |  |                                          | 67.7    |   |      |   | 31.2    |  
|Pension intangible asset                        |  |                                          |        |   |      |   | 42.7    |  
|Other                                           |  |                                          | 8.9     |   |      |   | 20.6    |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Other Non-Current Assets                  |  |                                          | 416.6   |   |      |   | 394.5   |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Assets                                    |  | $                                        | 2,275.8 |   |      | $ | 2,123.1 |  
|                                                |  |                                          |         |   |      |   |         |  

See notes to consolidated financial statements.



49



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##### Table of Contents

Duquesne Light Company

Consolidated Balance Sheets



|                                                                                  |  |                                          |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | (Millions of Dollars) As of December 31, |        
|                                                                                  |  | 2006                                     |         |   | 2005 |  
|Liabilities and Capitalization                                                    |  |                                          |         |   |      |   |         |  
|Current Liabilities:                                                              |  |                                          |         |   |      |   |         |  
|Short-term debt                                                                   |  | $                                        | 18.8    |   |      | $ |        |  
|Accounts payable                                                                  |  |                                          | 56.7    |   |      |   | 46.8    |  
|Payable to affiliates                                                             |  |                                          | 75.7    |   |      |   | 42.6    |  
|Pension liability                                                                 |  |                                          |        |   |      |   | 20.0    |  
|Accrued compensation                                                              |  |                                          | 17.6    |   |      |   | 17.9    |  
|Accrued interest                                                                  |  |                                          | 9.4     |   |      |   | 9.3     |  
|Other                                                                             |  |                                          | 15.5    |   |      |   | 12.7    |  
|                                                                                  |  |                                          |         |   |      |   |         |  
|Total Current Liabilities                                                         |  |                                          | 193.7   |   |      |   | 149.3   |  
|                                                                                  |  |                                          |         |   |      |   |         |  
|                                                                                  |  |                                         
|Non-Current Liabilities:                                                          |  |                                          |         |   |      |   |         |  
|Deferred income taxes  net                                                       |  |                                          | 375.3   |   |      |   | 336.6   |  
|Pension liability                                                                 |  |                                          | 61.2    |   |      |   | 92.8    |  
|Other postretirement benefits                                                     |  |                                          | 58.2    |   |      |   | 40.7    |  
|Legacy liabilities                                                                |  |                                          | 37.5    |   |      |   | 29.8    |  
|Regulatory liability                                                              |  |                                          | 29.2    |   |      |   |        |  
|Other                                                                             |  |                                          | 22.7    |   |      |   | 60.3    |  
|                                                                                  |  |                                          |         |   |      |   |         |  
|Total Non-Current Liabilities                                                     |  |                                          | 584.1   |   |      |   | 560.2   |  
|                                                                                  |  |                                          |         |   |      |   |         |  
|Commitments and Contingencies (Note 14)                                           |  |                                          |         |   |      |   |         |  
|                                                                                  |  |                                          |         |   |      |   |         |  
|                                                                                  |  |                                         
|Capitalization:                                                                   |  |                                          |         |   |      |   |         |  
|Long-term debt                                                                    |  |                                          | 680.9   |   |      |   | 636.5   |  
|                                                                                  |  |                                          |         |   |      |   |         |  
|Preferred and Preference Stock:                                                   |  |                                          |         |   |      |   |         |  
|(aggregate involuntary liquidation value of $147.4 and $148.8):                   |  |                                          |         |   |      |   |         |  
|Non-redeemable preferred stock                                                    |  |                                          | 135.6   |   |      |   | 135.6   |  
|Non-redeemable preference stock                                                   |  |                                          | 11.9    |   |      |   | 13.3    |  
|                                                                                  |  |                                          |         |   |      |   |         |  
|Total preferred and preference stock before deferred ESOP benefit                 |  |                                          | 147.5   |   |      |   | 148.9   |  
|Deferred ESOP benefit                                                             |  |                                          | (0.1    | ) |      |   | (2.4    | )
|                                                                                  |  |                                          |         |   |      |   |         |  
|Total Preferred and Preference Stock                                              |  |                                          | 147.4   |   |      |   | 146.5   |  
|                                                                                  |  |                                          |         |   |      |   |         |  
|                                                                                  |  |                                         
|Common Shareholders Equity:                                                      |  |                                          |         |   |      |   |         |  
|Common stock (authorized  90,000,000 shares; issued and outstanding  10 shares) |  |                                          |        |   |      |   |        |  
|Capital surplus                                                                   |  |                                          | 596.5   |   |      |   | 568.9   |  
|Retained earnings                                                                 |  |                                          | 84.6    |   |      |   | 88.2    |  
|Accumulated other comprehensive loss                                              |  |                                          | (11.4   | ) |      |   | (26.5   | )
|                                                                                  |  |                                          |         |   |      |   |         |  
|Total Common Stockholders Equity                                                 |  |                                          | 669.7   |   |      |   | 630.6   |  
|                                                                                  |  |                                          |         |   |      |   |         |  
|Total Capitalization                                                              |  |                                          | 1,498.0 |   |      |   | 1,413.6 |  
|                                                                                  |  |                                          |         |   |      |   |         |  
|Total Liabilities and Capitalization                                              |  | $                                        | 2,275.8 |   |      | $ | 2,123.1 |  
|                                                                                  |  |                                          |         |   |      |   |         |  

See notes to consolidated financial statements.



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Duquesne Light Company

Consolidated Statements of Cash Flows



|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------- |  | --------------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                  |  | (Millions of Dollars) Year Ended December 31, |       
|                                                                                  |  | 2006                                          |        |   | 2005 |   |        | 2004 | 
|Cash Flows From Operating Activities:                                             |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net income                                                                        |  | $                                             | 4.3    |   |      | $ | 73.0   |      |  | $ | 67.8   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                               |        |   |      |   |        |      |  |   |        |  
|Depreciation and amortization                                                     |  |                                               | 75.0   |   |      |   | 71.8   |      |  |   | 71.4   |  
|Bad debt expense                                                                  |  |                                               | 15.8   |   |      |   | 19.1   |      |  |   | 11.9   |  
|Derivative instruments                                                            |  |                                               |       |   |      |   | (16.1  | )    |  |   |       |  
|Acquisition termination cost                                                      |  |                                               |       |   |      |   |       |      |  |   | 8.3    |  
|Deferred taxes                                                                    |  |                                               | 34.6   |   |      |   | 12.6   |      |  |   | 3.5    |  
|Pension contribution                                                              |  |                                               | (24.4  | ) |      |   | (32.1  | )    |  |   |       |  
|Other                                                                             |  |                                               | 10.3   |   |      |   | (8.0   | )    |  |   | 4.1    |  
|Changes in working capital other than cash (Note 20)                              |  |                                               | (43.5  | ) |      |   | (38.4  | )    |  |   | (54.8  | )
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net Cash Provided from Operating Activities                                       |  |                                               | 72.1   |   |      |   | 81.9   |      |  |   | 112.2  |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|                                                                                  |  |                                               |       
|Cash Flows From Investing Activities:                                             |  |                                               |        |   |      |   |        |      |  |   |        |  
|Construction expenditures                                                         |  |                                               | (222.3 | ) |      |   | (132.2 | )    |  |   | (83.5  | )
|Investment in DQE Capital cash pool                                               |  |                                               |       |   |      |   | 135.8  |      |  |   | (66.7  | )
|Collection of loan to parent (Note 15)                                            |  |                                               |       |   |      |   | 250.0  |      |  |   |       |  
|Other                                                                             |  |                                               | (0.9   | ) |      |   | (1.6   | )    |  |   | (7.3   | )
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net Cash (Used in) Provided from Investing Activities                             |  |                                               | (223.2 | ) |      |   | 252.0  |      |  |   | (157.5 | )
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|                                                                                  |  |                                               |       
|Cash Flows From Financing Activities:                                             |  |                                               |        |   |      |   |        |      |  |   |        |  
|Issuance of long-term debt obligations                                            |  |                                               |       |   |      |   |       |      |  |   | 200.0  |  
|Issuance of preferred stock, net                                                  |  |                                               |       |   |      |   |       |      |  |   | 73.1   |  
|Reductions of long-term debt obligations                                          |  |                                               |       |   |      |   | (320.1 | )    |  |   | (150.0 | )
|Revolving credit facility borrowings, net (Note 9)                                |  |                                               | 63.0   |   |      |   |       |      |  |   |       |  
|Net borrowings under affiliate demand note                                        |  |                                               |       |   |      |   | 7.8    |      |  |   |       |  
|Equity contributions from parent                                                  |  |                                               | 27.6   |   |      |   | 82.5   |      |  |   |       |  
|Dividends on common and preferred stock                                           |  |                                               | (8.3   | ) |      |   | (28.4  | )    |  |   | (76.9  | )
|Other                                                                             |  |                                               | 0.7    |   |      |   | 0.4    |      |  |   | (0.9   | )
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net Cash Provided from (Used in) Financing Activities                             |  |                                               | 83.0   |   |      |   | (257.8 | )    |  |   | 45.3   |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net (decrease) increase in cash and cash equivalents                              |  |                                               | (68.1  | ) |      |   | 76.1   |      |  |   |       |  
|Cash and cash equivalents at beginning of year                                    |  |                                               | 76.1   |   |      |   |       |      |  |   |       |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Cash and cash equivalents at end of year                                          |  | $                                             | 8.0    |   |      | $ | 76.1   |      |  | $ |       |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Supplemental Cash Flow Information                                                |  |                                               |        |   |      |   |        |      |  |   |        |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|                                                                                  |  |                                               |       
|Cash paid during the year:                                                        |  |                                               |        |   |      |   |        |      |  |   |        |  
|Interest (net of amount capitalized)                                              |  | $                                             | 39.1   |   |      | $ | 45.0   |      |  | $ | 35.0   |  
|Income taxes (Notes 10 and 19)                                                    |  | $                                             | 46.6   |   |      | $ | 26.0   |      |  | $ | 84.0   |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  

See notes to consolidated financial statements.



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Duquesne Light Company

Consolidated Statements of Comprehensive Income



|                                                                                         |  |                                               |      |   |      |   |       |      |  |   |     
|---------------------------------------------------------------------------------------- |  | --------------------------------------------- | ---- | - | ---- | - | ----- | ---- |  | - | ----
|                                                                                         |  | (Millions of Dollars) Year Ended December 31,
|                                                                                         |  | 2006                                          |      |   | 2005 |   |       | 2004
|Net income                                                                               |  | $                                             | 4.3  |   |      | $ | 73.0  |      |  | $ | 67.8
|Other comprehensive (loss) income:                                                       |  |                                               |      |   |      |   |       |      |  |   |     
|Unrealized holding gains on securities, net of tax of $1.9, $(1.2) and $0.2              |  |                                               | 3.0  |   |      |   | (1.9  | )    |  |   | 0.4 
|Unrealized holding gains on cash flow hedging instruments, net of tax of $, $5.5 and $ |  |                                               |     |   |      |   | 7.8   |      |  |   |    
|Minimum pension liability adjustment, net of tax of $16.4, $(16.8), and $               |  |                                               | 23.1 |   |      |   | (23.6 | )    |  |   |    
|Reclassification adjustment for holding losses on securities, net of tax                 |  |                                               | (0.2 | ) |      |   |      |      |  |   |    
|                                                                                         |  |                                               |      |   |      |   |       |      |  |   |     
|Comprehensive income                                                                     |  | $                                             | 30.2 |   |      | $ | 55.3  |      |  | $ | 68.2
|                                                                                         |  |                                               |      |   |      |   |       |      |  |   |     

See notes to consolidated financial statements.

Duquesne Light Company

Consolidated Statements of Common Shareholders Equity



|                                                          |  |                 |       |   |                   |   |       |                                     |  |   |       |   |  |   |       |  
|--------------------------------------------------------- |  | --------------- | ----- | - | ----------------- | - | ----- | ----------------------------------- |  | - | ----- | - |  | - | ----- | -
|                                                          |  | Capital Surplus |       |   | Retained Earnings |   |       | Accumulated OtherComprehensive Loss |  |   | Total |  
|Balances at December 31, 2003                             |  | $               | 488.6 |   |                   | $ | 42.9  |                                     |  | $ | (1.4  | ) |  | $ | 530.1 |  
|                                                          |  |                 |       |  
|Net Income                                                |  |                 |      |   |                   |   | 67.8  |                                     |  |   |      |   |  |   | 67.8  |  
|Dividends on common stock                                 |  |                 |      |   |                   |   | (58.0 | )                                   |  |   |      |   |  |   | (58.0 | )
|Dividends on preferred and preference stock (See Note 16) |  |                 |      |   |                   |   | (6.6  | )                                   |  |   |      |   |  |   | (6.6  | )
|Other comprehensive income                                |  |                 |      |   |                   |   |      |                                     |  |   | 0.4   |   |  |   | 0.4   |  
|Preferred stock issuance costs                            |  |                 | (1.9  | ) |                   |   |      |                                     |  |   |      |   |  |   | (1.9  | )
|Other                                                     |  |                 | (0.3  | ) |                   |   | (0.1  | )                                   |  |   |      |   |  |   | (0.4  | )
|                                                          |  |                 |       |   |                   |   |       |                                     |  |   |       |   |  |   |       |  
|Balances at December 31, 2004                             |  | $               | 486.4 |   |                   | $ | 46.0  |                                     |  | $ | (1.0  | ) |  | $ | 531.4 |  
|                                                          |  |                 |       |   |                   |   |       |                                     |  |   |       |   |  |   |       |  
|                                                          |  |                 |       |  
|Net Income                                                |  |                 |      |   |                   |   | 73.0  |                                     |  |   |      |   |  |   | 73.0  |  
|Dividends on common stock                                 |  |                 |      |   |                   |   | (13.0 | )                                   |  |   |      |   |  |   | (13.0 | )
|Dividends on preferred and preference stock (See Note 16) |  |                 |      |   |                   |   | (8.0  | )                                   |  |   |      |   |  |   | (8.0  | )
|Transfer subsidiary to parent                             |  |                 |      |   |                   |   | (9.9  | )                                   |  |   | (7.8  | ) |  |   | (17.7 | )
|Other comprehensive income                                |  |                 |      |   |                   |   |      |                                     |  |   | (17.7 | ) |  |   | (17.7 | )
|Equity contributions from parent                          |  |                 | 82.5  |   |                   |   |      |                                     |  |   |      |   |  |   | 82.5  |  
|Other                                                     |  |                 |      |   |                   |   | 0.1   |                                     |  |   |      |   |  |   | 0.1   |  
|                                                          |  |                 |       |   |                   |   |       |                                     |  |   |       |   |  |   |       |  
|Balances at December 31, 2005                             |  | $               | 568.9 |   |                   | $ | 88.2  |                                     |  | $ | (26.5 | ) |  | $ | 630.6 |  
|                                                          |  |                 |       |   |                   |   |       |                                     |  |   |       |   |  |   |       |  
|                                                          |  |                 |       |  
|Net Income                                                |  |                 |      |   |                   |   | 4.3   |                                     |  |   |      |   |  |   | 4.3   |  
|Dividends on preferred and preference stock (See Note 16) |  |                 |      |   |                   |   | (7.9  | )                                   |  |   |      |   |  |   | (7.9  | )
|Other comprehensive income                                |  |                 |      |   |                   |   |      |                                     |  |   | 25.9  |   |  |   | 25.9  |  
|Adoption of SFAS No. 158                                  |  |                 |      |   |                   |   |      |                                     |  |   | (10.8 | ) |  |   | (10.8 | )
|                                                          |  |                 |       |   |                   |   |       |                                     |  |   |       |   |  |   |       |  
|Equity contributions from parent                          |  |                 | 27.6  |   |                   |   |      |                                     |  |   |      |   |  |   | 27.6  |  
|                                                          |  |                 |       |   |                   |   |       |                                     |  |   |       |   |  |   |       |  
|Balance at December 31, 2006                              |  | $               | 596.5 |   |                   | $ | 84.6  |                                     |  | $ | (11.4 | ) |  | $ | 669.7 |  
|                                                          |  |                 |       |   |                   |   |       |                                     |  |   |       |   |  |   |       |  

See notes to consolidated financial statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following Notes present information on both Duquesne Light Holdings, Inc. (Holdings) and Duquesne Light Company (Duquesne Light). Information on
Holdings and its subsidiaries (not including Duquesne Light and its subsidiaries) shall not be deemed to be included as part of Duquesne Lights Notes. Specifically, information on the Energy Solutions, Financial and Communications business
segments, the all other category, and discontinued operations is not so included.

References in the Notes to we,
us and our are to Holdings and its subsidiaries, collectively.

On July 5, 2006, we entered into a definitive
merger agreement with a consortium (the Macquarie Consortium), led by Macquarie Infrastructure Partners and Diversified Utility and Energy Trusts (DUET). See Note 2 for additional details.



|1. | Accounting Policies
|-- | -------------------

CONSOLIDATION

Holdings is an energy services holding company. Our subsidiaries include those discussed below.

The consolidated financial statements of Holdings and Duquesne Light include their accounts and their wholly and majority owned subsidiaries. The equity
method of accounting is used for 20% to 50% interests in other companies. Under the equity method, original investments are recorded at cost and adjusted by our share of undistributed earnings or losses of these companies. We consolidate variable
interest entities for which we are the primary beneficiary, regardless of the ownership percentage held by us. All material intercompany balances and transactions have been eliminated in the consolidation.

Continuing Operations

Duquesne Light is an electric
utility engaged in the supply (through its provider-of-last-resort service (POLR)), transmission and distribution of electric energy.

Duquesne Power, LLC (formerly Duquesne Power, L.P.), an unregulated subsidiary, maintains a portfolio of energy commodity contracts to supply energy to both (i) Duquesne Lights residential, commercial and industrial POLR
customers and (ii) Duquesne Light Energy, LLCs (DLE) large commercial and industrial customers. These energy commodity contracts are with unrelated parties and include payment guarantees from Holdings. This entity was a subsidiary of
Duquesne Light until December 31, 2005, at which time ownership was transferred to another Holdings subsidiary.

DLE is an
unregulated, competitive, retail electric generation supplier that offers customized solutions tailored to meet its customers specific electricity needs. DLEs primary focus is on the large commercial and industrial customer market
segment in Duquesne Lights service territory.

Duquesne Generation Company owns minority interests in the coal-fired Keystone and
Conemaugh power plants. It acquired a 2.47% interest in the Keystone plant and a 3.83% interest in the Conemaugh plant, plus related inventories, equipment and other property interests, on September 1, 2006 for an aggregate purchase price of
approximately $177 million, which includes applicable closing costs and working capital adjustments.

Duquesne Energy Solutions, LLC
(DES) is an energy facilities management company that provides energy outsourcing solutions including operation and maintenance of synthetic fuel and energy facilities.

DQE Financial Corp. is an investment and portfolio management organization focused on structured finance and alternative energy investments.

DQE Communications, Inc. owns, operates and maintains a high-speed, fiber optic based metropolitan network, and leases dark fiber from the network to
commercial, industrial and academic customers.

DQE Capital Corporation provides financing to Holdings for use with its affiliates.

Discontinued Operations

During 2006,
DQE Financial sold its landfill gas business. This is now reported as a discontinued operation. The 2005 and 2004 consolidated financial statements for Holdings have been reclassified to present the landfill gas business as discontinued operations.
(See Note 18.)

During 2003, AquaSource, Inc. (formerly our water resource management subsidiary) completed the sale of its assets,
pursuant to agreements entered into in 2002. We sold the propane distribution business of our subsidiary, Pro Am, Inc. in December 2002. (See Note 18.)

BASIS OF ACCOUNTING

Holdings and Duquesne Light are subject to the accounting and reporting requirements of the Securities
and Exchange Commission (SEC). Duquesne Lights electricity delivery business is also



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subject to regulation by the Pennsylvania Public Utility Commission (PUC) and the Federal Energy Regulatory Commission (FERC) with respect to rates for
delivery of electric power, accounting and other matters. The power supply business is regulated by the FERC for wholesale power sales.

As
a result of Duquesne Lights PUC-approved restructuring plan in 1998, the electricity supply segment does not meet the criteria of Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types
of Regulation. Pursuant to the PUCs final restructuring order, and as provided in the Pennsylvania Electricity Generation Customer Choice and Competition Act (Customer Choice Act), generation-related transition costs were being recovered
through a competitive transition charge (CTC) collected in connection with providing transmission and distribution services. This collection period ended in the third quarter of 2005 when the remaining CTC balance was collected from the last
customer class. 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, 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 Note 3.)

Regulatory Assets as of December 31,



|                           |  |                       |       |      |   |      
|-------------------------- |  | --------------------- | ----- | ---- | - | -----
|                           |  | (Millions of Dollars)
|                           |  | 2006                  |       | 2005
|Regulatory tax receivables |  | $                     | 224.7 |      | $ | 224.7
|Unamortized debt costs     |  |                       | 46.3  |      |   | 48.8 
|Pension cost               |  |                       | 43.8  |      |   |     
|Deferred employee costs    |  |                       | 11.0  |      |   | 11.5 
|SECA charges (a)           |  |                       |      |      |   | 6.4  
|PJM charges                |  |                       | 7.0   |      |   |     
|Other                      |  |                       | 7.2   |      |   | 8.6  
|                           |  |                       |       |      |   |      
|Total                      |  | $                     | 340.0 |      | $ | 300.0
|                           |  |                       |       |      |   |      

---

|(a) | Seams elimination charge adjustment
|--- | -----------------------------------

The majority of these assets are
currently being recovered over a period of approximately 38 years and none of them is earning a rate of return.

We recorded a $43.8
million regulatory asset and a $29.2 million regulatory liability associated with pension costs upon adoption of SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, effective December 31,
2006. (See Note 13.)

In May 2006, Orion Power Midwest, L.P. (Orion) submitted a filing to the FERC requesting FERC approve tariff
sheets to implement cost of service recovery rates for its combined cycle generating facility at the Brunot Island generation station in Pennsylvania. In October 2006, the FERC issued an Order accepting the tariff sheets for filing subject to
refund and certain conditions. In its November 2006 Compliance Filing with FERC, Orion requested an annual fixed revenue requirement of $21.5 million, which could be reduced by any actual net revenues generated from the Brunot Island generation
station. These charges will likely remain in effect until September 1, 2008, but could be extended.

The annual fixed revenue
requirement will be billed by PJM to each load-serving entity (LSE) within the Duquesne Light zone within PJM. In December 2006, PJM advised Duquesne Light that it anticipated billing these charges to the LSEs within the Duquesne Light zone
beginning with the December PJM bill that was issued in January 2007. These charges, which are billed monthly, must be paid by LSEs within the Duquesne Light zone on a current basis.

Duquesne Light currently estimates its monthly charge for the Brunot Island cost of service to be approximately $1 million. This amount will vary
depending in part, on the amount of actual load served by Duquesne Light. Duquesne Light believes that these charges will be recoverable from its ratepayers. Recoverability of the charges is subject to PUC approval.

DLE will also be allocated a portion of the Brunot Island cost of service charges. DLE currently estimates its monthly charge for the Brunot Island cost
of service to be approximately $0.2 million. This amount will vary depending in part, on the amount of actual load served by DLE. DLE believes it has contractual rights to recover these charges from its customers.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions with respect to values and conditions 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 also may be affected by the estimates and assumptions management is required to make. Management evaluates these estimates on an ongoing basis, using historical experience and other methods
considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from these estimates.

CUSTOMER
CONCENTRATIONS

Duquesne Lights electric utility operations provide service to approximately 587,000 direct customers in
southwestern Pennsylvania (including in the City of Pittsburgh), a territory of approximately 800 square miles.



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DES relies on a single customer, who owns several synthetic fuel facilities for substantially all of its
revenues and earnings.

REVENUES FROM UTILITY SALES

Duquesne Lights meters are read monthly, and electric utility customers are billed on the same basis. Revenues for both Duquesne Light and DLE reflect estimated customer usage in an accounting period, regardless
of when billed.

Electricity sales revenue includes related excise and other taxes, primarily gross receipts taxes, that are collected from
ratepayers and remitted to the appropriate taxing agency. These taxes are recorded as an expense in taxes other than income taxes and as a payable in a taxes payable account at the time of sale. The payable is relieved when payment is made to the
appropriate taxing agency. The excise and other taxes recorded in Holdings revenue were approximately $43 million, $42 million and $42 million in 2006, 2005, and 2004 and $37 million, $39 million and $42 million at Duquesne Light for the same
period.

OTHER OPERATING REVENUES

Duquesne Lights other operating revenues include rental fees from third parties who have cable or other equipment attached to its utility poles and transmission towers, or who have cable included in its underground ducts. Also
included are transmission fees charged to others that use Duquesne Lights transmission system and late payment and other customer fees. Duquesne Lights other operating revenues also include short-term sales to other utilities made at
market rates, and in 2005, sales of electricity from Duquesne Power to Duquesne Light Energy under its full requirements contract, which are eliminated in consolidation at Holdings.

Holdings other operating revenues also include revenues from facility management services for synthetic fuel, industrial and airport customers and
revenues from the rental of dark fiber from our fiber optic based network.

OTHER INCOME

Duquesne Lights other income includes interest income and both income and expenses from changes in legacy liabilities and activities not directly
associated with the ongoing utility operations. Interest income was earned on the loan receivable from Holdings, until its repayment in the third quarter of 2005, and the investment in the DQE Capital cash pool (discussed below) until November 2005.
This interest income is eliminated in the consolidated statements of income of Holdings with the associated interest expense of Holdings and DQE Capital. Gains or losses resulting from the disposition of certain assets are also included here.

Holdings other income consists primarily of income from long-term investments, and various other gains or losses. On March 31, 2004,
we adopted FIN 46R and began consolidating seven low-income housing development guarantee funds, in which we own a 1% general partner interest. Beginning April 1, 2004, the results of these seven funds are included in our consolidated results
and are reflected as a decrease in other income offset by the benefit from limited partners interest.

STOCK-BASED COMPENSATION

We adopted the provisions of SFAS No. 123R, Share-Based Payment as of January 1, 2006, using the modified prospective application
method. (See Note 12.)

DEPRECIATION AND AMORTIZATION

Depreciation expense of $71.5 million, $68.1 million and $65.6 million was recorded at Holdings in 2006, 2005 and 2004. Depreciation expense of $66.8 million, $64.1 million and $61.6 million was recorded at Duquesne
Light in 2006, 2005 and 2004. Depreciation of property, plant and equipment is recorded on a straight-line basis over the estimated remaining useful lives of properties, which is approximately 38 years for both the transmission and distribution
portions of electric plant in service. For the power plants, the approximate average remaining life is 43 years. Depreciation of other property, plant and equipment is recorded on a straight-line basis over the estimated useful lives of properties,
which are between 3 and 30 years.

Amortization expense of $9.2 million, $7.7 million and $9.8 million was recorded at Holdings in 2006,
2005 and 2004. Amortization expense of $8.2 million, $7.7 million and $9.8 million was recorded at Duquesne Light in 2006, 2005 and 2004. SECA is amortized as it is billed to customers, with $8.2 million and $3.0 million of amortization recorded at
Duquesne Light in 2006 and 2005. Amortization of transition costs represents the difference between CTC revenues billed to customers (net of gross receipts tax) and the allowed 11% pre-tax return on the unrecovered net of tax transition cost
balance. Amortization expense of zero, $4.7 million and $9.1 million was recorded at Duquesne Light related to the CTC in 2006, 2005 and 2004.



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EARNINGS PER SHARE

Basic earnings per share are computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share are computed on the basis of the weighted average number of common shares
outstanding, plus the effect of the outstanding Employee Stock Ownership Plan shares, Holdings preferred stock, stock options and other types of stock-based compensation discussed in Note 12, unless the inclusion of these shares would be
anti-dilutive. The treasury stock method is used in computing the dilutive effect of stock options. This method assumes any proceeds obtained upon the exercise of options would be used to purchase common stock at the average market price during the
period. The following table presents the numerators and denominators used in computing the Holdings diluted earnings per share.

Holdings Diluted
Earnings Per Share for the Year Ended December 31,



|                                                             |  |                       |     |      |   |      |  |   |     
|------------------------------------------------------------ |  | --------------------- | --- | ---- | - | ---- |  | - | ----
|                                                             |  | (Millions of Dollars)
|                                                             |  | 2006                  |     | 2005 |   | 2004
|Earnings from continuing operations for common stock         |  | $                     | 8.7 |      | $ | 94.2 |  | $ | 73.3
|Dilutive effect of:                                          |  |                       |     |      |   |      |  |   |     
|ESOP dividends                                               |  |                       |    |      |   | 1.1  |  |   | 1.2 
|Preferred stock dividends                                    |  |                       |    |      |   |     |  |   | 0.4 
|                                                             |  |                       |     |      |   |      |  |   |     
|Diluted Earnings from Continuing Operations for Common Stock |  | $                     | 8.7 |      | $ | 95.3 |  | $ | 74.9
|                                                             |  |                       |     |      |   |      |  |   |     



|                                                      |  |                      |      |      |   |      |  |   |     
|----------------------------------------------------- |  | -------------------- | ---- | ---- | - | ---- |  | - | ----
|                                                      |  | (Millions of Shares)
|                                                      |  | 2006                 |      | 2005 |   | 2004
|Basic average shares                                  |  |                      | 82.0 |      |   | 77.7 |  |   | 76.4
|                                                      |  |                      |      |      |   |      |  |   |     
|Dilutive effect of:                                   |  |                      |      |      |   |      |  |   |     
|ESOP shares                                           |  |                      |     |      |   | 0.8  |  |   | 0.8 
|Holdings preferred stock                              |  |                      |     |      |   |     |  |   | 0.5 
|Performance share awards and stock options            |  |                      | 0.2  |      |   |     |  |   | 0.3 
|                                                      |  |                      |      |      |   |      |  |   |     
|Diluted average shares                                |  |                      | 82.2 |      |   | 78.5 |  |   | 78.0
|                                                      |  |                      |      |      |   |      |  |   |     
|Diluted Earnings Per Share from Continuing Operations |  | $                    | 0.11 |      | $ | 1.21 |  | $ | 0.96
|                                                      |  |                      |      |      |   |      |  |   |     

---

Note: In 2006, the incremental shares from assumed
conversions of ESOP shares are not included as they are anti-dilutive. In 2006, 2005 and 2004, zero, 0.2 million and 0.2 million options are not included because the exercise price of these options exceeds the average stock price.

CASH EQUIVALENTS

Cash equivalents are
short-term, highly liquid investments with original maturities of three or fewer months. They are stated at cost, which approximates market.

DQE
CAPITAL CASH POOL

As of December 31, 2006, Holdings and its subsidiaries, excluding Duquesne Light, participate in a cash pool
arrangement with their affiliate DQE Capital. Through this arrangement, available cash is deposited with DQE Capital and interest is earned daily at a market rate based on earnings on investments in the cash pool. DQE Capital from time to time lends
funds from the pool, on a demand basis, to Holdings which, in turn, makes loans and/or capital contributions to its other subsidiaries to provide funds for capital expenditures, new investments or operating expenses. An investor in the pool is
entitled to withdraw its investment at any time, and, to the extent that sufficient cash is not then on deposit, DQE Capital would have to demand full or partial repayment by Holdings of any loan to it. In order to repay DQE Capital, Holdings may be
required to borrow under its revolving credit facility. (See Note 9.) If the amount of the facility would be insufficient to satisfy this repayment, Holdings would be required to access the equity or debt markets. Until November 2005, Duquesne Light
participated in the cash pool arrangement and its investment in the pool was shown on its consolidated balance sheets as investment in DQE Capital cash pool.

RECEIVABLES

Receivables on the consolidated balance sheets are comprised of outstanding billings for electric customers,
other utilities, and amounts related to unbilled revenues. In addition, Duquesne Light has certain transactions with affiliates that give rise to receivables. (See Note 19.) At Holdings, receivables include the outstanding billings of our other
business lines.

INVESTMENT IN HOLDINGS STOCK

As of December 31, 2006 and 2005, the fair market value of Duquesne Lights investment in Holdings common stock was $23.0 million and $19.7 million, and the cost of the investment was $23.2 million and $24.6 million. This
investment is eliminated in the consolidated balance sheets of Holdings with the related shares and cost reflected as treasury stock.



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In the third quarter of 2006, Duquesne Light recognized a $0.4 million other than temporary
impairment on its consolidated statement of operations related to the difference between the cost of the stock and the price to be received from the merger. (See Note 2.)

PROPERTY, PLANT AND EQUIPMENT

The asset values of Duquesne Lights utility properties are
stated at original construction cost, which includes labor costs, 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.

Substantially all of the
electric utility properties are subject to the lien of Duquesne Lights first mortgage indenture.

The asset values of the Keystone
and Conemaugh power plants are stated at allocated purchase cost and are reported in the Holdings electricity supply business segment. Additions and retirements as well as maintenance, repairs and replacement of minor items are handled in a similar
fashion to Duquesne Light. The cost of normal retirements (plus cost of removal and less any salvage value) is charged to accumulated depreciation and amortization.

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets.

INCOME TAXES

In accordance with SFAS No. 109, Accounting for Income Taxes, Holdings and Duquesne Light use the liability method in computing deferred taxes on all differences between book and tax bases of assets
and liabilities. 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. Valuation allowances are provided against deferred tax assets for amounts which are not considered more likely than not to be realized. Holdings overall effective tax rate
is significantly reduced by the income tax credits generated from our synthetic fuel and affordable housing investments.

We file a
consolidated U.S. federal income tax return with our subsidiaries, all of whom participate in an intercompany tax sharing arrangement which generally provides that taxable income for each subsidiary be calculated as if it filed a separate return.
The federal tax liability for Duquesne Light is reflected in payable to affiliates on its consolidated balance sheets. (See Note 19.)

Duquesne Light recognizes a regulatory asset for deferred tax liabilities that are expected to be recovered through rates. The difference in the provision for deferred income taxes related to depreciation of electric plant in service and
the amount that otherwise would be recorded under generally accepted accounting principles is deferred and included in regulatory assets on the consolidated balance sheets.

PENSION AND OTHER POSTRETIREMENT BENEFITS

See Note 13 for a discussion of the accounting for pension
and other postretirement benefits.

CONTINGENT LIABILITIES

Holdings and Duquesne Light establish reserves for estimated loss contingencies when it is managements assessment that a loss is probable and the amount can be reasonably estimated. Reserves for contingent
liabilities are based upon managements assumptions and estimates, advice of legal counsel, consultants or others regarding the probable outcomes of the matter. Should additional information become known, or circumstances change with respect to
the likelihood or amount of loss indicating that the ultimate outcome will differ from the estimates, revisions to the estimated reserves for contingent liabilities would be recognized in income in



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that period. Such contingent liabilities include, but are not limited to income tax matters (see Note 10), and other commitments and contingencies (see Note
14).

GUARANTEES

In the normal course
of business, Holdings and certain subsidiaries enter into various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries. Such agreements include, for example, guarantees, stand-by letters of
credit and surety bonds. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the
subsidiaries intended business purposes. To determine if there is a liability, and its fair value, we use a probabilistic model to assess the possibilities of future payments under the indemnifications. We discount these future cash payments
using estimated interest rate values and, if necessary, record a liability. (See Note 14.)

DERIVATIVE INSTRUMENTS

Holdings and Duquesne Light account for derivative instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended and interpreted. Our derivative instruments consist of energy purchase and sale contracts and interest rate lock agreements. A Board-approved risk management policy permits transactions for the prudent management
of market related risks, and precludes any speculative transactions. All derivative instruments that do not qualify for accrual accounting under the normal purchase and sale exemption are recorded at fair value as derivative assets and liabilities.

When a derivative instrument is entered into, management also determines if the derivative qualifies as either a cash flow hedge (a hedge
of variable cash flows of a single transaction or a group of similar transactions) or as a fair value hedge (a hedge of the fair value of specific assets and liabilities or specific firm commitments), in accordance with SFAS No. 133. This
process includes formally documenting (i) the hedging relationships and its risk-management objective and strategy for undertaking the hedge transactions, (ii) the hedging instrument, (iii) the hedged item or transaction,
(iv) the nature of the risk being hedged, (v) how the hedging instruments effectiveness in offsetting the hedged risk will be assessed, and (vi) a description of the method of measuring ineffectiveness. Management also formally
assesses, both at the hedges inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows or fair values of hedged items.

Changes in the fair value of a derivative designated as a cash flow hedge that is determined to be highly effective are recorded in the statement of
comprehensive income, net of tax, and are recognized in earnings as the hedged item affects income. The ineffective portion of the change in fair value of a derivative instrument that qualifies as a cash flow hedge is recognized currently in
earnings. Changes in the fair value of a derivative designated as a fair value hedge that is determined to be highly effective, along with the corresponding gain or loss on the hedged item, are recognized currently in earnings.

When it is determined that a derivative has ceased to be a highly effective hedge or when a hedge is voluntarily dedesignated, hedge accounting is
discontinued prospectively. When hedge accounting is discontinued for cash flow hedges, the derivative asset or liability remains on the consolidated balance sheet at its fair value, and gains and losses that were in accumulated other comprehensive
income are frozen and amortized in earnings as the hedge transactions affect income. When hedge accounting is discontinued for fair value hedges, the derivative asset or liability remains on the consolidated balance sheet at its fair value and the
hedged asset or liability is no longer adjusted for changes in its fair value. (See Note 5).

DIVIDENDS

Holdings practice has been for its subsidiaries to dividend their earnings on a quarterly basis, if cash is available. In addition, special
dividends are declared periodically related to proceeds from asset sales and other special circumstances. During the years ended December 31, 2006, 2005 and 2004, Duquesne Light declared cash dividends on common stock of approximately zero, $13
million and $58 million to Holdings. Duquesne Light also declared a $17.7 million non-cash dividend to Holdings in 2005 related to the transfer of a subsidiary. During 2005 Duquesne Light embarked on a significant capital expenditure program,
and therefore has been retaining more of its earnings than in prior years. (See Note 17.)



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RECENT ACCOUNTING PRONOUNCEMENTS

Employers Accounting for Defined Benefit Pension and Other Postretirement Plans

In December
2006, we adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106 and 132(R). This statement requires employers to
recognize the overfunded or underfunded positions of defined benefit postretirement plans, including pension plans, in their balance sheets and to recognize changes in that funded status in the year in which the changes occur through comprehensive
income. This statement also requires employers to measure the plan assets and obligations as of their fiscal year end and to disclose additional information in the notes to financial statements, both of which we currently do. The effect of adoption
was the recognition of the overfunded or underfunded positions of our defined benefit postretirement plans, including pension plans, in the balance sheets. We also recognize changes in our funded status in the year in which the changes occur through
comprehensive income. (See Note 13.)



|2. | Pending Merger and Equity Issuance
|-- | ----------------------------------

On July 5,
2006, we entered into the merger agreement with the Macquarie Consortium. Under the terms of the agreement, the Macquarie Consortium will acquire all of the outstanding common shares of Holdings for $20.00 per share in cash.

The Holdings Board of Directors and shareholders, and the FERC have approved the transaction, but it is subject to customary closing conditions,
including the approval of the PUC. A merger agreement application was filed with the PUC in September 2006. On February 9, 2007, Duquesne Light entered into a Joint Petition of Settlement among all parties resolving all issues in the merger
agreement application. The settlement provides for rate benefits and protections to customers, corporate governance requirements, commitments to the community and service reliability protections. The settlement agreement has been submitted to the
administrative law judge presiding over the merger application. Final effectiveness of the settlement is



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subject to (i) the administrative law judges review and recommendation and (ii) PUC review and approval. Both the judge and the PUC can
accept, revise or reject the settlement, with the final determination being at the PUCs discretion. Although Duquesne Light cannot predict the ultimate timing or outcome of these proceedings, we anticipate a timeline that will allow for a PUC
decision during the second quarter of 2007.

The merger agreement contains termination rights for both Holdings and the Macquarie
Consortium, and further provides that, upon termination of the merger agreement under specified circumstances, including (a) by Holdings accepting a proposal by another entity to acquire 50% or more of Holdings common stock and
(b) Holdings board withdrawing or modifying its approval or recommendation of the merger, or approving or recommending entering into an agreement with a party other than the Macquarie Consortium, Holdings may be required to pay the
Macquarie Consortium a termination fee equal to $40 million in cash plus certain documented out-of-pocket expenses and fees incurred by the Macquarie Consortium not in excess of $10 million. The merger agreement defines material adverse
effect as any material adverse effect on the business, assets, liabilities, properties, financial condition or results of operations of Holdings and its subsidiaries taken as a whole. If a material adverse effect occurs and is continuing at
the time for closing the transaction, it could be a failure of a closing condition and/or a breach of one or more of Holdings representations and warranties. The Macquarie Consortium may be required to pay Holdings an amount equal to all
documented out-of-pocket expenses incurred by Holdings not in excess of $10 million if the merger agreement is terminated due to a breach of the Macquarie Consortiums representations, warranties and covenants. In addition, the Macquarie
Consortium may be required to pay Holdings up to $70 million in the aggregate for damages resulting from willful and material breaches of the merger agreement by the Macquarie Consortium.

Under the terms of the merger agreement, all options (whether vested or unvested) to purchase our common stock outstanding at the time of the completion
of the merger, including those held by executive officers and directors, will be cashed out by Holdings for an amount equal to the number of shares of Holdings common stock such options were convertible into immediately prior to the merger
multiplied by the excess, if any, of $20.00 over the per share exercise price of such option, less any applicable withholding tax. In addition, all other equity-based grants (if not then vested) will vest immediately prior to the effective time at
the target performance levels (if applicable) and will be eligible to receive the $20.00 per share merger consideration, less any applicable withholding taxes. The merger agreement also contains provisions that require Holdings not to increase its
common stock dividend.

On July 5, 2006, we also entered into a stock purchase agreement with certain members of the Macquarie
Consortium (the Purchasers), pursuant to which, on August 11, 2006, Holdings sold an aggregate of 8.8 million shares of common stock to the Purchasers for total consideration of $141.4 million

During 2006, we recorded $7.9 million in charges relating to the merger which are included in other operating expenses on our consolidated statements of
income. Upon consummation of the merger, Holdings could recognize a material amount of additional charges for matters related thereto. Such charges could relate to employment contracts of certain officers, outstanding stock awards and other direct
transaction-related costs. Direct costs include fees to Lehman Brothers for services rendered in relation to the merger. Their fees can total $10 million, of which $4 million was paid in 2006. Additional fees of $6 million are payable upon closing
of the transaction. We have also agreed to reimburse Lehman Brothers for certain expenses incurred by Lehman Brothers and to indemnify Lehman Brothers and related parties against liabilities arising out of Lehman Brothers engagement and the
rendering of its opinion.



|3. | Rate Matters
|-- | ------------

Duquesne Light customers may choose
to receive their electric energy from an alternative generation supplier; otherwise they will be served through Duquesne Lights POLR arrangements. Customers who select an alternative generation supplier pay for generation charges set by that
supplier, and pay Duquesne Light both transmission and distribution charges.

COMPETITIVE TRANSITION CHARGE AND POLR I AND II

The POLR I arrangement began in early 2000 in conjunction with Duquesne Lights divestiture of its generation assets and was designed to be an income
neutral arrangement. As of December 31, 2005, although the CTC has been fully collected, a few industrial customers under special contracts continue to receive electric generation through Duquesne Lights POLR I supply arrangement. Until
December 31, 2004, POLR customers from whom the CTC had been fully collected received their generation supply through POLR II. Duquesne Light earned a margin per MWh supplied under POLR II.

In connection with POLR II, Duquesne Light accepted a rate freeze for generation, transmission and distribution rates. The rate freeze fixed generation
rates for retail POLR II customers through December 31, 2004, and continued the transmission and distribution rates for all customers at then-current levels through 2003.



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POLR III

Currently, most customers who do not choose an alternative generation supplier are served through Duquesne Lights POLR III plan, which became effective January 1, 2005. Under POLR III, residential and small commercial customers
receive electric supply through December 31, 2007 at fixed rates approximately 11.5% above POLR II generation rates. For our large commercial and industrial customers, the current POLR III supply options are either a fixed price service based
upon the results of a competitive request-for-proposal process (available through May 31, 2007), or an hourly price service that passes through real-time spot market electricity prices. Duquesne Light receives an adder as compensation for costs
and risks involved in providing energy to these customers.

There are certain safeguards in our POLR III arrangements and our energy
commodity contracts designed to mitigate losses in the event that suppliers default on their performance under the arrangements. Contractually, both Duquesne Power and Duquesne Light have various credit enhancements to address market exposure, e.g.,
collateral may be required to be posted by their counterparties depending on changes in energy or capacity prices. In addition to collateral postings, supplier default risk is further mitigated by accelerated damage payment terms. If a supplier
fails to deliver the contracted power, we may exercise our right to force the supplier to compensate us for the difference between the market price and the contracted price of power. If such supplier would fail to make the accelerated damage
payments, the supplier would be in default and we would be permitted to apply any funds due that supplier against our excess energy costs.

Other than large commercial and industrial POLR III customers on hourly-priced service, Duquesne Light is obligated to serve its POLR III customers at fixed rates. Duquesne Power is also contractually obligated to serve Duquesne Light at
fixed rates. If an energy supplier to Duquesne Light or Duquesne Power were to default on its contract, we could potentially be acquiring energy and/or capacity at a cost in excess of our revenues, resulting in a loss, if the contractual provisions
were not sufficient to cover such excess. If this were to occur it is uncertain, under the current PUC-approved POLR III arrangement, that Duquesne Light could pass any additional costs related to these energy and capacity purchases onto its
customers.

POLR IV

In January 2007,
Duquesne Light filed a petition with the PUC requesting approval of a plan that will supply a secure source of electricity for residential and small commercial customers from 2008 through 2010 (POLR IV). The proposed plan, which is intended to
provide a bridge to the time when generation rate caps will expire for most other major electricity distribution companies in the state, seeks approval of the following elements:



| |  |  | fixed-price generation service for residential customers through 2010;
| | - |  | ----------------------------------------------------------------------



| |  |  | fixed-price generation service for small commercial and industrial (C&I) customers over the same period that will be adjusted annually, in 2009 and 2010, to
reflect changes, up or down, in market prices; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continuation of hourly pricing as the default service for large commercial and industrial customers.
| | - |  | ----------------------------------------------------------------------------------------------------

The filing seeks approval of the petition by July 1, 2007, which will allow Duquesne Light time to communicate with customers and its supplier. We
cannot predict the timing or outcome of the PUCs review and approval process.

In February 2007, the PUC issued an advanced notice of
proposed rulemaking that, if made final, would impact the procedures that electric distribution companies such as Duquesne Light must follow in securing generation suppliers for POLR customers. As currently written, the proposal would require
Duquesne Light to select a supplier through an auction or request for proposal process, impacting the POLR IV plan to use Duquesne Power as the supplier.

Seams Elimination Charge Adjustment

Effective January 1, 2005, concurrent with the beginning of POLR III, Duquesne
Light joined PJM, becoming (along with other electric generation suppliers) a load-serving entity within PJM.

As previously reported, the
FERC has issued a series of orders eliminating the regional through and out rates (RTOR) for certain transmission services between the Midwest Independent System Operator (MISO) and PJM effective December 1, 2004. A transitional pricing
mechanism called SECA was put in place through March 2006 in order to compensate transmission owners for the estimated revenue lost as a result of the elimination of the RTOR. Total SECA charges for the Duquesne Light zone were expected to be
approximately $39 million. The FERC has accepted revised compliance filings implementing SECA charges among load-serving entities within the Duquesne Light zone. Under that filing, Duquesne Light was allocated $11.3 million of the SECA charges. The
other load-serving entities in the Duquesne Light zone were allocated the remainder of such charges. DLEs allocation was $1.9 million.

The billing of SECA charges ended on March 31, 2006. If the FERC ultimately adopts a SECA level



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and allocation method that differs from the proposed charges initially accepted by the FERC for billing purposes, refunds or surcharges will be used to
compensate or charge the appropriate entity for the difference between the amounts initially accepted by the FERC and the amounts ultimately determined to be just and reasonable by the FERC. The final amount of our SECA obligations therefore remains
uncertain.

As Duquesne Light was billed SECA charges, these amounts were reflected as regulatory assets. Effective August 26, 2005,
Duquesne Light began passing these SECA charges through to its POLR customers. As SECA revenue is recognized, the regulatory asset is amortized. Because Duquesne Light is not earning a rate of return on the regulatory asset, SECA is an income
neutral arrangement.

As of December 31, 2006, Duquesne Light had no unamortized SECA charges in regulatory assets on the consolidated
balance sheets.

Distribution Rate Case

In April 2006, Duquesne Light filed a distribution rate case with the PUC to recover the increased costs of service and to receive a fair return on its investments.

On September 14, 2006, Duquesne Light entered into, and filed with the PUC, a Joint Petition of Settlement among all parties resolving all issues in
the distribution rate case. The settlement provides for a distribution rate increase of $117 million in annual operating revenues, and an automatic pass-through for charges that Duquesne Light will pay for transmission services it purchases
under tariffs regulated by the FERC.

On October 11, 2006 the administrative law judge presiding over the rate case recommended
approval of the settlement agreement.

On November 30, 2006, the PUC approved the settlement agreement. New rates were effective in
January 2007.

Transmission Rate Case

On September 29, 2006, Duquesne Light filed a transmission rate case with the FERC requesting a rate increase of approximately $27 million related to transmission services that Duquesne Light purchases under tariffs regulated by the
FERC. An initial order was issued in February 2007, granting the requested increase, subject to refund, to be retroactively effective as of December 2006. Receipt of a final order with the ultimate rate increase will depend on, among other things,
the settlement process with interveners. Duquesne Light cannot predict the ultimate timing or outcome of this regulatory proceeding.



|4. | Acquisitions and Dispositions
|-- | -----------------------------

In December 2006,
DQE Financial sold its landfill gas business. Please see the discontinued operations discussion in Note 18 for additional details.

In
December 2006, DQE Financial also sold its limited partnership investment in a waste-to-energy facility and received $6.9 million in cash. A pre-tax gain of $6.9 million was recorded in other income on the Holdings consolidated statement of income.

On September 1, 2006, Duquesne Generation Company completed the purchase of undivided interests in two coal-fired power plants for an
aggregate purchase price of approximately $177 million, which includes applicable closing costs and working capital adjustments. A $200 million term loan issued by Holdings was used to finance the acquisition (See Note 15). The interests
acquired represent a 2.47% interest, or 42 megawatts, in the Keystone plant and a 3.83% interest, or 66 megawatts, in the Conemaugh plant, plus related inventories, equipment and other property.

Each owner is responsible for financing its proportionate share of the plants liabilities and capital expenditures in exchange for the rights to
its proportionate share of the output from the plants. Our proportionate share of the direct expenses of the plants since the acquisition date is included in operating expenses on Holdings consolidated statements of income.

We have allocated the purchase price to the respective assets and liabilities based on estimated fair values. As part of the purchase price allocation, a
total of $163.0 million was allocated to property, plant and equipment and $8.5 million, representing intangible assets, was allocated to other non-current assets, with the balance included in inventory and other working capital accounts on the
consolidated balance sheet of Holdings. The intangible assets represent sulfur dioxide (SO2) and nitrogen oxide (NOX) emission allowances. These emission allowances are being amortized on a unit-of-production basis over their weighted-average useful
lives of approximately 13 years.

The following is supplemental information presented on a pro forma basis showing the results of
operations of Duquesne Generation Company as if the purchase of the Keystone and Conemaugh power plants occurred at the beginning of 2006. Also



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included are pro forma results for 2005 for comparison purposes. There were no material, nonrecurring items included in the pro forma results of operations.

Duquesne Generation Company Pro Forma Income Statement (Unaudited) for Financial Statement Disclosure December 31,



|                              |  |                       |      |      |   |     
|----------------------------- |  | --------------------- | ---- | ---- | - | ----
|                              |  | (Millions of Dollars)
|                              |  | 2006                  |      | 2005
|Revenues                      |  | $                     | 37.7 |      | $ | 44.0
|                              |  |                      
|Operating expenses            |  |                       | 17.8 |      |   | 15.8
|Depreciation and amortization |  |                       | 9.7  |      |   | 9.7 
|Income tax expense            |  |                       | 3.6  |      |   | 6.5 
|                              |  |                       |      |      |   |     
|Net Income                    |  | $                     | 6.6  |      | $ | 12.0
|                              |  |                       |      |      |   |     
|Basic earnings per share      |  | $                     | 0.08 |      | $ | 0.15
|Diluted earnings per share    |  | $                     | 0.08 |      | $ | 0.15

Jointly Owned Facilities  Utility Plant

Duquesne Generation has ownership interests in and is responsible for providing its share of the necessary financing for the following jointly owned
facilities. All amounts reflect the share of Duquesne Generations jointly owned projects. The corresponding direct expenses are included in Holdings consolidated statements of income as operating expenses.



|                |  |                                              |   |  |                 |       |                         |   |                         |  |   |    
|--------------- |  | -------------------------------------------- | - |  | --------------- | ----- | ----------------------- | - | ----------------------- |  | - | ---
|                |  | As of December 31, 2006(Dollars in millions)
|Plant           |  | OwnershipInterest                            |   |  | Plant inService |       | AccumulatedDepreciation |   | Plant UnderConstruction
|Coal Generating |  |                                              |   |  |                 |       |                         |   |                         |  |   |    
|Conemaugh       |  | 3.83                                         | % |  | $               | 108.9 |                         | $ | 0.7                     |  | $ | 0.4
|Keystone        |  | 2.47                                         | % |  |                 | 57.2  |                         |   | 0.3                     |  |   | 1.2

On May 1, 2006, DES closed on the sale of an energy facility management project, pursuant to
an agreement entered into in August 2005 (see below). DES received $2.5 million in cash and recorded a pre-tax gain of $2.5 million as a reduction to other operating expenses on Holdings consolidated statements of income.

In August 2005, DES entered into agreements to sell its investments in up to six on-site energy facility management projects to DTE Energy Services for
expected aggregate cash proceeds of between $35 and $40 million, subject to working capital adjustments. In 2005, DES closed on the sale of three of the energy facility management projects, received $34.6 million in cash and the assumption by
the buyer of certain lease related liabilities and recognized pre-tax gains of $18.0 million in other income and $13.2 million recorded as a reduction to other operating expenses on Holdings consolidated statement of income.

In October 2005, DES agreed to terminate the agreement to sell one of the six energy facility management projects entered into in August 2005. The
termination of this agreement does not materially change the total expected proceeds resulting from these sales. Subsequent to the termination of the agreement, we determined based on future expected cash flows associated with the project that the
fair value of the long-lived assets was less than the carrying value of the assets. Therefore, we recorded a $3.9 million impairment charge in other operating expenses on Holdings consolidated statement of income in 2005. The sale of the remaining
facility is currently in dispute.

In September 2005, DQE Financial sold its investment in a leveraged lease involving a gas processing
facility, received $9.9 million in cash and recorded a pre-tax loss of $1.3 million in other income on Holdings consolidated statement of income.

In October 2004, DQE Financial sold 50% of a limited partnership investment in a synthetic fuel partnership and received $0.8 million in cash at closing and recognized a pre-tax gain in other income on Holdings consolidated statement of
income. During 2006 and 2005, DQE Financial received $2.2 million and $3.4 million in additional cash sales proceeds related to the sale, and recognized additional pre-tax gains in other income on Holdings consolidated statement of income.
Additional sale proceeds may be received through December 2007, but are contingent upon the generation of qualified tax credits related to synthetic fuel production of the partnership.

In November 2004, DQE Financial agreed to an early termination of a leveraged lease, received net proceeds of $9.6 million and recorded a pre-tax gain of
$1.3 million in other income on Holdings consolidated statement of income.

In 2004, Duquesne Power terminated an acquisition
agreement entered into in 2003 and recorded an $8.3 million pre-tax ($4.8 million after-tax) charge related to the write-off of deferred costs and deposits made.



|5. | Derivative Instruments
|-- | ----------------------

The following table
summarizes the derivative assets, liabilities and related accumulated other comprehensive income (AOCI) that are included in the consolidated balance sheets for Holdings:



|                   |  |                                         |      |             |   |          |  |   |                                                     |   |  |   |      |  
|------------------ |  | --------------------------------------- | ---- | ----------- | - | -------- |  | - | --------------------------------------------------- | - |  | - | ---- | -
|                   |  | December 31, 2006 (Millions of Dollars) |     
|                   |  | Assets                                  |      | Liabilities |   | AOCI,net |  |   | AOCI Expectedto be Re-classifiedto Earnings in 2007 |  
|Mark-to-Market:    |  |                                         |      |             |   |          |  |   |                                                     |   |  |   |      |  
|Energy contracts   |  | $                                       | 12.2 |             | $ | 29.5     |  |   |                                                     |   |  |   |      |  
|Cash Flow Hedges:  |  |                                         |      |             |   |          |  |   |                                                     |   |  |   |      |  
|Energy contracts   |  |                                         |     |             |   | 3.3      |  | $ | (1.8                                                | ) |  | $ | (2.0 | )
|Interest rate lock |  |                                         |     |             |   |         |  |   | 4.1                                                 |   |  |   | 0.2  |  
|                   |  |                                         |      |             |   |          |  |   |                                                     |   |  |   |      |  
|Total              |  | $                                       | 12.2 |             | $ | 32.8     |  | $ | 2.3                                                 |   |  | $ | (1.8 | )
|                   |  |                                         |      |             |   |          |  |   |                                                     |   |  |   |      |  



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|                   |  |                                         |      |             |   |          |  |                                                     |      |  |   |    
|------------------ |  | --------------------------------------- | ---- | ----------- | - | -------- |  | --------------------------------------------------- | ---- |  | - | ---
|                   |  | December 31, 2005 (Millions of Dollars)
|                   |  | Assets                                  |      | Liabilities |   | AOCI,net |  | AOCI Expected to be Re-classifiedto Earnings in2006
|Mark-to-Market:    |  |                                         |      |             |   |          |  |                                                     |      |  |   |    
|Energy contracts   |  | $                                       | 42.9 |             | $ | 29.2     |  |                                                     |      |  |   |    
|Cash Flow Hedges:  |  |                                         |      |             |   |          |  |                                                     |      |  |   |    
|Energy contracts   |  |                                         | 15.8 |             |   |         |  | $                                                   | 7.8  |  | $ | 5.4
|Interest rate lock |  |                                         |     |             |   |         |  |                                                     | 4.2  |  |   | 0.2
|                   |  |                                         |      |             |   |          |  |                                                     |      |  |   |    
|Total              |  | $                                       | 58.7 |             | $ | 29.2     |  | $                                                   | 12.0 |  | $ | 5.6
|                   |  |                                         |      |             |   |          |  |                                                     |      |  |   |    

Energy Contracts

Under POLR III, Duquesne Power is responsible for providing all of the energy requirements for residential and small commercial POLR customers through December 31, 2007. To meet this obligation, Duquesne
Power entered into energy commodity contracts with multiple investment-grade suppliers for a substantial portion of our expected customer requirements. These purchase contracts are designed to provide for the delivery of energy as needed to supply
customer usage.

During the fourth quarter of 2006 and continuing into 2007, Duquesne Power entered into energy commodity contracts for
2008, 2009 and 2010 in anticipation of fulfilling an obligation under POLR IV, should that plan be approved by the PUC. These contracts are being accounted for under the mark-to-market provisions of SFAS No. 133.

The accounting for these contracts considers the provisions of SFAS No. 133. Under the terms of the contracts, some of the energy purchases are
delivered to the Duquesne Light zone as defined by PJM. These purchases qualify for the normal purchase and sale exemption under SFAS No. 133 and are reflected as purchased power expense in the consolidated statements of income at their
wholesale price upon delivery to us. As of December 31, 2006, the remaining notional value of these contracts was $180.6 million.

We
also entered into certain purchase contracts that are for delivery to points other than the Duquesne Light zone within PJM. Because these contracts are not settled at the Duquesne Light zone, they do not qualify for the normal purchase and sale
exemption and are recorded in the consolidated financial statements at fair value. Subsequent changes in the fair value of these contracts are recorded currently in earnings, unless certain hedge accounting criteria are met. To the extent the hedges
are determined to be effective, and certain other criteria are met, the changes in the value of these contracts are included in the statement of comprehensive income, net of deferred taxes. Amounts recorded in the statement of comprehensive income
related to cash flow hedges will be recognized in earnings as the related contracts are settled. The remaining notional amount of these contracts as of December 31, 2006, is $593.5 million. As of December 31, 2006, we elected to
discontinue cash flow hedge accounting for the remaining contracts. Subsequent changes in the fair value will be recorded in earnings. A $1.8 million charge in accumulated other comprehensive income at December 31, 2006 will be recognized in
earnings as the related contracts are settled.

We entered into sales contracts maturing through 2007 that are accounted for on a
mark-to-market basis. The remaining notional amount of these sales contracts was $175.1 million as of December 31, 2006. These contracts were entered into primarily for the purpose of offsetting volatility associated with the mark-to-market
accounting for the purchase contracts maturing in 2007, as described above. We record the revenue associated with our mark-to-market contracts on a net basis in purchased power expense in our consolidated statements of income.

Duquesne Power also contracted to secure unforced capacity credits for the POLR III period with notional amounts of $10.1 million for 2007. The capacity
contracts qualify for the normal purchase and sale exemption and are reflected as expense in the consolidated statements of income at their contract price upon delivery to us.



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The following table summarizes the impact of the change in fair value of the derivative energy contracts
on purchased power expense included in the Holdings consolidated statements of income in 2006 and in both the Holdings and Duquesne Light consolidated statement of income for 2005:



|                                |  |                                              |      |      |   |       |  
|------------------------------- |  | -------------------------------------------- | ---- | ---- | - | ----- | -
|                                |  | (Millions of Dollars)Year Ended December 31, |     
|                                |  | 2006                                         |      | 2005 |  
|Mark-to-market                  |  | $                                            | 31.0 |      | $ | (13.6 | )
|Cash flow hedge ineffectiveness |  |                                              | 2.6  |      |   | (2.5  | )
|                                |  |                                              |      |      |   |       |  
|Increase (decrease)             |  | $                                            | 33.6 |      | $ | (16.1 | )
|                                |  |                                              |      |      |   |       |  

Interest Rate Locks

In anticipation of the August 2005 issuance of $320 million of senior unsecured debt, Holdings entered into a series of interest rate lock agreements during the second quarter of 2005 to hedge exposure to interest
rate fluctuations for $250 million of the senior unsecured debt. These agreements were designated as cash flow hedges under SFAS No. 133. Holdings settled the rate lock agreements in conjunction with the issuance of the debt and received $7.4
million in cash, which will be recognized as a reduction of interest expense over the term of the debt. Holdings recognized a $0.3 million and $0.1 million reduction of interest expense related to the interest rate lock agreements in 2006 and 2005.

Also in 2005, we entered into an interest-rate lock agreement for $100 million of senior unsecured debt that we originally planned to
issue in 2005. The interest-rate lock was designated as a cash flow hedge under SFAS No. 133. Changes in our cash requirements resulted in the postponement of the debt offering. We subsequently unwound the interest-rate lock agreement,
resulting in a $4.0 million pre-tax gain that was recorded in other income on Holdings consolidated statements of income.



|6. | Long-Term Investments
|-- | ---------------------

DQE Financial participates
in selected structured and leveraged lease transactions and maintains equity investments in alternative fuel and affordable housing partnerships. Also, Duquesne Light holds an investment in Holdings stock. (See Note 1.)

Leases

As of December 31, 2006, we maintain
investments in seven structured lease transactions involving a waste-to-energy facility, high-speed ferries and electric generating equipment. In September 2005, we sold our investment in a leveraged lease involving a gas processing facility. (See
Note 4.) The remaining leases expire in various years beginning in 2029 through 2037. Holdings recognized $5.7 million, $5.8 million and $5.9 million of pre-tax lease income, with associated tax expense of $2.0 million, $2.0 million and $2.1
million, for the years ended December 31, 2006, 2005 and 2004, related to these leases.

The aggregate structured lease investment
represents approximately 20% of the total aggregate transaction. The remaining 80% was financed by non-recourse debt, which is substantially defeased. Equity in these transactions is protected by a combination of defeasance accounts, letters of
credit and lessee guarantees.

Net Lease Investments as of December 31,



|                         |  |                       |        |   |      |   |        |  
|------------------------ |  | --------------------- | ------ | - | ---- | - | ------ | -
|                         |  | (Millions of Dollars) |       
|                         |  | 2006                  |        |   | 2005 |  
|Rentals receivable  net |  | $                     | 593.7  |   |      | $ | 593.7  |  
|Less: Unearned Income    |  |                       | (82.2  | ) |      |   | (87.9  | )
|                         |  |                       |        |   |      |   |        |  
|Lease investments        |  |                       | 511.5  |   |      |   | 505.8  |  
|Less: Deferred taxes     |  |                       | (251.4 | ) |      |   | (239.7 | )
|                         |  |                       |        |   |      |   |        |  
|Net Lease Investments    |  | $                     | 260.1  |   |      | $ | 266.1  |  
|                         |  |                       |        |   |      |   |        |  

We also own a limited partnership interest in a synthetic fuel operating partnership, with no book
value as of December 31, 2006 and 2005.

Affordable Housing

Our affordable housing investments include equity investments in affordable housing guarantee partnerships.



|7. | Property, Plant and Equipment
|-- | -----------------------------

Property, plant and
equipment at Duquesne Light includes: (1) distribution poles and equipment; (2) lower voltage distribution wires used in delivering electricity to customers; (3) substations and transformers; (4) high voltage transmission wires
used in delivering electricity to substations; (5) meters and automated meter reading assets; and (6) internal telecommunication equipment, vehicles and office equipment, primarily used in the electricity delivery business segment.

Property, plant and equipment at Holdings consists of (i) Duquesne Generations jointly owned plants assets that are used
in the electricity supply segment consisting of boilers, turbines, and the supporting structures (including emissions treatment facilities), (ii) energy facilities used in our Energy



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Solutions business segment, and (iii) the fiber optic network used in our Communications business segment.

In conjunction with Duquesne Generations acquisitions in 2006, we assumed certain obligations with regard to closing ash disposal sites associated
with each plant. We recorded asset retirement obligations and corresponding asset retirement costs for these future obligations. The amounts, in total, are not material to our financial statements.

The adoption of accounting standards related to asset retirement obligations did not have a material impact on our financial statements.



|8. | Intangible Assets
|-- | -----------------

Pension

As a result of the recognition of an additional minimum pension liability in 2005, we recorded a corresponding $42.7 million intangible asset on both
Holdings and Duquesne Lights consolidated balance sheets as of December 31, 2005. Due to the adoption of SFAS 158, there was no intangible asset related to pensions recorded in 2006 and the intangible asset recorded in 2005 was removed.
(See Note 13.)

Purchased Intangibles

In conjunction with the acquisition of the Keystone and Conemaugh coal-fired power plants, we acquired both current and future SO2 and NOX emission allowances. Subsequent to the purchase, we acquired additional allowances in the open
market. Allowances acquired as part of the plant purchase received an allocation of the purchase price as their cost basis. Allowances purchased subsequently are recorded at cost. Emission allowances are being accounted for as intangible assets and
are amortized on a unit-of-production basis.



|9. | Short-Term Borrowing and Revolving Credit Arrangements
|-- | ------------------------------------------------------

On January 31, 2006, Holdings and Duquesne Light amended their revolvers, increasing the borrowing capacity of each by $50 million. Holdings revolver capacity is now $250 million and Duquesne Lights is now $150 million. All
other terms of the revolvers remain in effect.

Prior to July 27, 2005, Holdings and Duquesne Light maintained unsecured credit
facilities (Prior Revolvers) expiring in September 2007, Holdings for $175 million and Duquesne Light for $100 million. On July 27, 2005, the Prior Revolvers were amended and extended to July 2010 (2005 Revolvers). Holdings 2005 Revolver was
for $200 million and Duquesne Lights 2005 Revolver was for $100 million. Both 2005 Revolvers permit borrowings at interest rates of LIBOR (plus a margin of 0.40% to 1.00%) or an alternate base rate, as defined in the credit facilities. Both
2005 Revolvers have commitment fees applicable to the remaining available amount. Interest rates and commitment fees are based on the borrowers then-current senior unsecured credit rating. Both 2005 Revolvers are subject to cross-default if
the borrower or any of its subsidiaries defaults on any payment due under any indebtedness exceeding $50 million. Undrawn amounts under both 2005 Revolvers are fully available for the issuance of letters of credit.

Under our Prior Revolvers and 2005 Revolvers, we are subject to financial covenants requiring each

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of Holdings and Duquesne Light to maintain a debt-to-capitalization ratio of not more than 65%, as defined in the facilities. In addition, Holdings is
required to maintain a minimum interest coverage ratio of 2-to-1, as defined in the facilities. As of December 31, 2006, we were in compliance with the applicable covenants.

As of December 31, 2006, our total borrowing capacity under our 2005 Revolvers and the use of this borrowing capacity were as follows:



|               |  |                       |       |          |   |            |  |                   |     |  |   |      
|-------------- |  | --------------------- | ----- | -------- | - | ---------- |  | ----------------- | --- |  | - | -----
|               |  | (Millions of Dollars)
|               |  | Committed Capacity    |       | Borrowed |   | LOCsIssued |  | AvailableCapacity
|Holdings       |  | $                     | 250.0 |          | $ | 30.0       |  | $                 | 0.6 |  | $ | 219.4
|Duquesne Light |  |                       | 150.0 |          |   | 63.0       |  |                   | 8.2 |  |   | 78.8 
|               |  |                       |       |          |   |            |  |                   |     |  |   |      
|Total          |  | $                     | 400.0 |          | $ | 93.0       |  | $                 | 8.8 |  | $ | 298.2
|               |  |                       |       |          |   |            |  |                   |     |  |   |      

Holdings. As of December 31, 2006, we had $93.0 million of revolver borrowings
outstanding and $0.3 million of current debt maturities. Only $48.8 million of the revolver borrowings are classified as short-term debt on the consolidated balance sheets. The remaining amount is presented as long-term debt due to the January 2007
issuance of $44.2 million of pollution control revenue refunding bonds (PCRBs) used to repay the revolver borrowings. (See Note 15.) During 2006, the maximum amount of credit facility borrowings outstanding was $160 million, the average daily
borrowings were $70.6 million and the weighted average daily interest rate was 5.8%. In April and May 2006, Holdings moved letters of credit (LOCs), previously outstanding under the Holdings revolver, to new LOC facilities, thereby increasing the
available capacity under the revolver by a like amount. As of December 31, 2006, Holdings had $72.8 million of outstanding LOCs (including $12.7 million at Duquesne Light) unrelated to the credit facilities.

As of December 31, 2005, we had $40 million of revolver borrowings outstanding and $0.3 million of current debt maturities. During 2005, the maximum
amount of credit facility borrowings outstanding was $50 million, the average daily borrowings were $4.8 million and the weighted average daily interest rate was 4.2%. As of December 31, 2005, we had $18.2 million of outstanding LOCs unrelated
to the credit facilities (including $12.7 million at Duquesne Light).

Duquesne Light. As of December 31, 2006, Duquesne Light
had $63.0 million of revolver borrowings outstanding and no current debt maturities. Only $18.8 million of the revolver borrowings are classified as short-term debt due to the January 2007 issuance of $44.2 million of PCRBs, as discussed previously.
During 2006, the maximum amount of credit facility borrowings outstanding was $63 million, the average daily borrowings were $9.3 million and the weighted average daily interest rate was 5.9%. As of December 31, 2006, Duquesne Light had $12.7
million of outstanding LOCs unrelated to the credit facilities.

As of December 31, 2005, Duquesne Light had no short-term debt
outstanding or current debt maturities. During 2005, there were no bank loans or short-term borrowings outstanding. As of December 31, 2005, Duquesne Light had $12.7 million of outstanding LOCs unrelated to the credit facilities.



|10. | Income Taxes
|--- | ------------

The Internal Revenue Service (IRS)
has audited all Federal corporate tax returns for the years through 2002 and these years are closed. The IRS completed the 1998-2002 audit cycle during March 2006 and all adjustments to reflect this audit, including the impact on state taxes, were
recorded during 2006. In addition to the recording of charges for additional taxes and interest due related to the audit of $7.8 million, we also recorded $4.9 million of certain state tax benefits expected to be realized. In total, these
adjustments resulted in a net charge of $2.9 million. In completing the IRS audit, $11 million of tax credit carryforwards were used to offset increases in our taxable income in prior years. Accordingly, our cumulative tax credit carryforwards of
approximately $121 million as of December 31, 2005 were reduced to approximately $110 million. In May 2006, we paid $52.8 million to the IRS related to the 1998-2002 audit cycle. The IRS is currently auditing the 2003 through 2005 tax years.

The Pennsylvania Department of Revenue had issued assessments of additional tax for 1999 through 2004, primarily to include income of a
Duquesne Light out-of-state subsidiary corporation in Pennsylvania taxable income. In October 2006 we reached a definitive agreement regarding all of the issues in dispute on our 1997 through 2004 Pennsylvania state tax returns and the treatment of
the disputed items on our 2005 returns. Pursuant to this settlement agreement, during the fourth quarter of 2006, Duquesne Light paid approximately $60 million, including interest to the Pennsylvania Department of Revenue. As of December 31,
2005, $35 million was included in other non-current liabilities on both Holdings and Duquesne Lights consolidated balance sheets related to this matter. Duquesne Light recorded a net charge of $16.1 million pursuant to this settlement.
Included in the



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payment and net charge discussed above, is $13.2 million of Pennsylvania Capital Stock and Gross Receipts Tax, which is included in taxes other than income
taxes on both Holdings and Duquesne Lights 2006 consolidated statements of income.

Duquesne Light Holdings

Deferred Tax Assets (Liabilities) as of December 31,



|                                    |  |                       |        |   |      |   |        |  
|----------------------------------- |  | --------------------- | ------ | - | ---- | - | ------ | -
|                                    |  | (Millions of Dollars) |       
|                                    |  | 2006                  |        |   | 2005 |  
|Federal tax credits                 |  | $                     | 125.2  |   |      | $ | 121.1  |  
|Federal net operating losses        |  |                       | 21.9   |   |      |   |       |  
|Capital loss carryforwards          |  |                       |       |   |      |   | 17.5   |  
|State net operating losses          |  |                       | 4.9    |   |      |   |       |  
|Legacy liabilities                  |  |                       | 15.6   |   |      |   | 12.0   |  
|Pension and benefit costs           |  |                       | 54.4   |   |      |   | 79.2   |  
|Regulatory liability  pension      |  |                       | 12.1   |   |      |   |       |  
|Derivative instruments              |  |                       | 8.6    |   |      |   |       |  
|Other                               |  |                       | 34.8   |   |      |   | 35.8   |  
|                                    |  |                       |        |   |      |   |        |  
|Deferred tax assets                 |  |                       | 277.5  |   |      |   | 265.6  |  
|                                    |  |                       |        |   |      |   |        |  
|Property depreciation               |  |                       | (303.7 | ) |      |   | (276.5 | )
|Lease investments                   |  |                       | (251.4 | ) |      |   | (239.7 | )
|Unamortized loss on reacquired debt |  |                       | (18.1  | ) |      |   | (19.2  | )
|Regulatory asset  property         |  |                       | (93.2  | ) |      |   | (93.0  | )
|Regulatory asset  pension          |  |                       | (18.2  | ) |      |   |       |  
|Prepaid pension costs               |  |                       | (28.1  | ) |      |   | (12.9  | )
|Pension intangible assets           |  |                       |       |   |      |   | (17.7  | )
|Derivative instruments              |  |                       | (2.9   | ) |      |   | (16.2  | )
|Other                               |  |                       | (7.6   | ) |      |   | (12.9  | )
|                                    |  |                       |        |   |      |   |        |  
|Deferred tax liabilities            |  |                       | (723.2 | ) |      |   | (688.1 | )
|                                    |  |                       |        |   |      |   |        |  
|Net                                 |  | $                     | (445.7 | ) |      | $ | (422.5 | )
|                                    |  |                       |        |   |      |   |        |  

As of December 31, 2006, the Company has Federal tax credit carryforwards of $125.2 million,
including general business tax credit carryforwards of $71.8 million, which expire in varying amounts between 2012 and 2026 and alternative minimum tax credits of $53.4 million which do not expire.

For 2006, the Company incurred a Federal tax loss of approximately $63 million which will expire in 2026. The Company also recorded the benefit of
$4.9 million of state tax net operating losses, most of which will expire in 15 to 20 years.

Income Tax Expense (Benefit)



|             |  |                                               |       |   |      |   |      |  |   |      |  
|------------ |  | --------------------------------------------- | ----- | - | ---- | - | ---- |  | - | ---- | -
|             |  | (Millions of Dollars) Year Ended December 31, |      
|             |  | 2006                                          |       |   | 2005 |   | 2004 | 
|Current:     |  |                                               |       |   |      |   |      |  |   |      |  
|Federal      |  | $                                             | (16.9 | ) |      | $ | 30.6 |  | $ | 14.4 |  
|State        |  |                                               | 20.4  |   |      |   | 9.0  |  |   | 7.3  |  
|Deferred:    |  |                                               |       |   |      |   |      |  |   |      |  
|Federal      |  |                                               | 21.8  |   |      |   | 15.0 |  |   | 10.3 |  
|State        |  |                                               | (1.9  | ) |      |   | 2.4  |  |   | (1.1 | )
|             |  |                                               |       |   |      |   |      |  |   |      |  
|Income Taxes |  | $                                             | 23.4  |   |      | $ | 57.0 |  | $ | 30.9 |  
|             |  |                                               |       |   |      |   |      |  |   |      |  

Total income taxes differ from the amount computed by applying the statutory federal income tax
rate to income before income taxes, as set forth in the following table.

Income Tax Expense Reconciliation



|                                                       |  |                                               |      |   |      |   |       |      |  |   |       |  
|------------------------------------------------------ |  | --------------------------------------------- | ---- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                       |  | (Millions of Dollars) Year Ended December 31, |     
|                                                       |  | 2006                                          |      |   | 2005 |   |       | 2004 | 
|Computed federal income tax statutory rate (35%)       |  | $                                             | 8.3  |   |      | $ | 49.5  |      |  | $ | 33.9  |  
|Increase (decrease) in taxes resulting from:           |  |                                               |      |   |      |   |       |      |  |   |       |  
|State income taxes, net of federal income tax benefits |  |                                               | 2.1  |   |      |   | 8.3   |      |  |   | 4.7   |  
|State audit settlement                                 |  |                                               | 9.8  |   |      |   |      |      |  |   |      |  
|IRS audit settlement                                   |  |                                               | 7.8  |   |      |   |      |      |  |   |      |  
|State net operating losses                             |  |                                               | (4.9 | ) |      |   |      |      |  |   |      |  
|Worthless stock benefit                                |  |                                               | (3.8 | ) |      |   |      |      |  |   |      |  
|Tax credits                                            |  |                                               | (7.7 | ) |      |   | (11.2 | )    |  |   | (15.2 | )
|Non-deductible expenses                                |  |                                               | 7.5  |   |      |   | 2.8   |      |  |   | 2.2   |  
|Other                                                  |  |                                               | 4.3  |   |      |   | 7.6   |      |  |   | 5.3   |  
|                                                       |  |                                               |      |   |      |   |       |      |  |   |       |  
|Total Income Tax Expense                               |  | $                                             | 23.4 |   |      | $ | 57.0  |      |  | $ | 30.9  |  
|                                                       |  |                                               |      |   |      |   |       |      |  |   |       |  



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Duquesne Light Company

Deferred Tax Assets (Liabilities) as of December 31,



|                                    |  |                       |        |   |      |   |        |  
|----------------------------------- |  | --------------------- | ------ | - | ---- | - | ------ | -
|                                    |  | (Millions of Dollars) |       
|                                    |  | 2006                  |        |   | 2005 |  
|Pension and benefit costs           |  | $                     | 53.8   |   |      | $ | 78.7   |  
|Legacy liabilities                  |  |                       | 15.6   |   |      |   | 12.0   |  
|Receivables                         |  |                       | 5.4    |   |      |   | 4.0    |  
|Regulatory liability  pension      |  |                       | 12.1   |   |      |   |       |  
|Other                               |  |                       | 10.0   |   |      |   | 14.9   |  
|                                    |  |                       |        |   |      |   |        |  
|Deferred tax assets                 |  |                       | 96.9   |   |      |   | 109.6  |  
|                                    |  |                       |        |   |      |   |        |  
|Property depreciation               |  |                       | (300.0 | ) |      |   | (281.2 | )
|Unamortized loss on reacquired debt |  |                       | (18.1  | ) |      |   | (19.2  | )
|Regulatory asset  property         |  |                       | (93.2  | ) |      |   | (93.0  | )
|Regulatory asset  pension          |  |                       | (18.2  | ) |      |   |       |  
|Prepaid pension costs               |  |                       | (28.1  | ) |      |   | (12.9  | )
|Pension intangible assets           |  |                       |       |   |      |   | (17.7  | )
|Other                               |  |                       | (9.1   | ) |      |   | (7.8   | )
|                                    |  |                       |        |   |      |   |        |  
|Deferred tax liabilities            |  |                       | (466.7 | ) |      |   | (431.8 | )
|                                    |  |                       |        |   |      |   |        |  
|Net                                 |  | $                     | (369.8 | ) |      | $ | (322.2 | )
|                                    |  |                       |        |   |      |   |        |  

Income Tax Expense



|             |  |                                               |       |   |      |   |      |  |   |      |  
|------------ |  | --------------------------------------------- | ----- | - | ---- | - | ---- |  | - | ---- | -
|             |  | (Millions of Dollars) Year Ended December 31, |      
|             |  | 2006                                          |       |   | 2005 |   | 2004 | 
|Current:     |  |                                               |       |   |      |   |      |  |   |      |  
|Federal      |  | $                                             | (32.5 | ) |      | $ | 23.9 |  | $ | 33.8 |  
|State        |  |                                               | 16.5  |   |      |   | 6.0  |  |   | 7.0  |  
|Deferred:    |  |                                               |       |   |      |   |      |  |   |      |  
|Federal      |  |                                               | 29.1  |   |      |   | 10.3 |  |   | 4.5  |  
|State        |  |                                               | 5.5   |   |      |   | 2.3  |  |   | (1.0 | )
|             |  |                                               |       |   |      |   |      |  |   |      |  
|Income Taxes |  | $                                             | 18.6  |   |      | $ | 42.5 |  | $ | 44.3 |  
|             |  |                                               |       |   |      |   |      |  |   |      |  

Total income taxes differ from the amount computed by applying the statutory federal income tax
rate to income before income taxes (after deducting dividends on preferred and preference stock), as set forth in the following table.

Income Tax
Expense Reconciliation



|                                                       |  |                                               |      |   |      |   |      |      |  |   |      |  
|------------------------------------------------------ |  | --------------------------------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                       |  | (Millions of Dollars) Year Ended December 31, |     
|                                                       |  | 2006                                          |      |   | 2005 |   |      | 2004 | 
|Computed federal income tax statutory rate (35%)       |  | $                                             | 5.2  |   |      | $ | 37.7 |      |  | $ | 36.9 |  
|Increase (decrease) in taxes resulting from:           |  |                                               |      |   |      |   |      |      |  |   |      |  
|State income taxes, net of federal income tax benefits |  |                                               | 1.5  |   |      |   | 6.3  |      |  |   | 4.5  |  
|State audit settlement                                 |  |                                               | 9.8  |   |      |   |     |      |  |   |     |  
|Non-deductible expenses                                |  |                                               | 2.9  |   |      |   | 2.8  |      |  |   | 2.2  |  
|Tax credits                                            |  |                                               | (0.3 | ) |      |   | (0.2 | )    |  |   | (0.3 | )
|Other                                                  |  |                                               | (0.5 | ) |      |   | (4.1 | )    |  |   | 1.0  |  
|                                                       |  |                                               |      |   |      |   |      |      |  |   |      |  
|Total Income Tax Expense                               |  | $                                             | 18.6 |   |      | $ | 42.5 |      |  | $ | 44.3 |  
|                                                       |  |                                               |      |   |      |   |      |      |  |   |      |  



|11. | Leases
|--- | ------

We lease office buildings and other
property and equipment.

Duquesne Light Holdings

Capital Leases as of December 31,



|                               |  |                       |      |   |      |   |      |  
|------------------------------ |  | --------------------- | ---- | - | ---- | - | ---- | -
|                               |  | (Millions of Dollars) |     
|                               |  | 2006                  |      |   | 2005 |  
|Electric plant                 |  | $                     | 10.4 |   |      | $ | 10.1 |  
|Less: Accumulated amortization |  |                       | (9.5 | ) |      |   | (8.8 | )
|                               |  |                       |      |   |      |   |      |  
|Capital Leases  Net           |  | $                     | 0.9  |   |      | $ | 1.3  |  
|                               |  |                       |      |   |      |   |      |  

Summary of Rental Expense



|                               |  |                                               |      |      |   |      |  |   |     
|------------------------------ |  | --------------------------------------------- | ---- | ---- | - | ---- |  | - | ----
|                               |  | (Millions of Dollars) Year Ended December 31,
|                               |  | 2006                                          |      | 2005 |   | 2004
|Operating leases               |  | $                                             | 10.3 |      | $ | 9.2  |  | $ | 11.4
|Amortization of capital leases |  |                                               | 0.6  |      |   | 0.5  |  |   | 0.5 
|Interest on capital leases     |  |                                               | 0.1  |      |   | 0.2  |  |   | 0.2 
|                               |  |                                               |      |      |   |      |  |   |     
|Total Rental Expense           |  | $                                             | 11.0 |      | $ | 9.9  |  | $ | 12.1
|                               |  |                                               |      |      |   |      |  |   |     



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Future Minimum Lease Payments



|                                   |  |                       |      |               |   |    
|---------------------------------- |  | --------------------- | ---- | ------------- | - | ---
|                                   |  | (Millions of Dollars)
|Year Ended December 31,            |  | OperatingLeases       |      | CapitalLeases
|2007                               |  | $                     | 4.6  |               | $ | 0.8
|2008                               |  |                       | 4.5  |               |   |   
|2009                               |  |                       | 4.5  |               |   |   
|2010                               |  |                       | 4.1  |               |   |   
|2011                               |  |                       | 4.0  |               |   |   
|2012 and thereafter                |  |                       | 0.1  |               |   | 0.2
|                                   |  |                       |      |               |   |    
|Total                              |  | $                     | 21.8 |               | $ | 1.0
|                                   |  |                       |      |               |   |    
|Less: Amount representing interest |  |                       |      |               |   | 0.1
|                                   |  |                       |      |               |   |    
|Present value                      |  |                       |      |               | $ | 0.9
|                                   |  |                       |      |               |   |    

Duquesne Light Company

Capital Leases at December 31,



|                               |  |                       |      |   |      |   |      |  
|------------------------------ |  | --------------------- | ---- | - | ---- | - | ---- | -
|                               |  | (Millions of Dollars) |     
|                               |  | 2006                  |      |   | 2005 |  
|Electric plant                 |  | $                     | 10.1 |   |      | $ | 10.1 |  
|Less: Accumulated amortization |  |                       | (9.4 | ) |      |   | (8.8 | )
|                               |  |                       |      |   |      |   |      |  
|Capital Leases  Net           |  | $                     | 0.7  |   |      | $ | 1.3  |  
|                               |  |                       |      |   |      |   |      |  

Summary of Rental Expense



|                               |  |                         |     |      |   |      |  |   |    
|------------------------------ |  | ----------------------- | --- | ---- | - | ---- |  | - | ---
|                               |  | (Millions of Dollars)  
|                               |  | Year Ended December 31,
|                               |  | 2006                    |     | 2005 |   | 2004
|Operating leases               |  | $                       | 8.8 |      | $ | 6.0  |  | $ | 7.2
|Amortization of capital leases |  |                         | 0.6 |      |   | 0.5  |  |   | 0.5
|Interest on capital leases     |  |                         |    |      |   | 0.2  |  |   | 0.2
|                               |  |                         |     |      |   |      |  |   |    
|Total Rental Expense           |  | $                       | 9.4 |      | $ | 6.7  |  | $ | 7.9
|                               |  |                         |     |      |   |      |  |   |    

Future Minimum Lease Payments



|                                   |  |                       |      |               |   |    
|---------------------------------- |  | --------------------- | ---- | ------------- | - | ---
|                                   |  | (Millions of Dollars)
|Year Ended December 31,            |  | OperatingLeases       |      | CapitalLeases
|2007                               |  | $                     | 4.1  |               | $ | 0.7
|2008                               |  |                       | 4.0  |               |   |   
|2009                               |  |                       | 4.0  |               |   |   
|2010                               |  |                       | 3.6  |               |   |   
|2011                               |  |                       | 3.5  |               |   |   
|2012 and thereafter                |  |                       |     |               |   |   
|                                   |  |                       |      |               |   |    
|Total                              |  | $                     | 19.2 |               | $ | 0.7
|                                   |  |                       |      |               |   |    
|Less: Amount representing interest |  |                       |      |               |   |   
|                                   |  |                       |      |               |   |    
|Present value                      |  |                       |      |               | $ | 0.7
|                                   |  |                       |      |               |   |    

Future minimum lease payments for operating leases are related principally to certain corporate
offices. Future minimum capital lease payments relate to a building.



|12. | Share-Based Compensation
|--- | ------------------------

We adopted the provisions
of SFAS No. 123R, Share-Based Payment (SFAS No. 123R) as of January 1, 2006, using the modified prospective application method. Upon adoption, we reclassified $1.8 million of unearned compensation to common stock. We had
previously applied Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees through December 31, 2005. The effects on reported income and earnings per share if we had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as required under SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure  an amendment of FASB
Statement No. 123 are reflected in the following tables.

Duquesne Light Holdings



|                                                                                                       |  |                                                                         |       |   |      |   |      |  
|------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------- | ----- | - | ---- | - | ---- | -
|                                                                                                       |  | (Millions of Dollars, Except Per Share Amounts) Year Ended December 31, |      
|                                                                                                       |  | 2005                                                                    |       |   | 2004 |  
|Reported net income                                                                                    |  | $                                                                       | 114.2 |   |      | $ | 87.0 |  
|                                                                                                       |  |                                                                        
|Add:                                                                                                   |  |                                                                         |       |   |      |   |      |  
|Stock-based compensation determined under the intrinsic value method for all option awards, net of tax |  |                                                                         | 0.9   |   |      |   | 1.1  |  
|Deduct:                                                                                                |  |                                                                         |       |   |      |   |      |  
|Stock-based compensation determined under the fair value method for all option awards, net of tax      |  |                                                                         | (2.2  | ) |      |   | (0.9 | )
|                                                                                                       |  |                                                                         |       |   |      |   |      |  
|Pro forma net income                                                                                   |  | $                                                                       | 112.9 |   |      | $ | 87.2 |  
|                                                                                                       |  |                                                                         |       |   |      |   |      |  
|                                                                                                       |  |                                                                        
|Basic earnings per share:                                                                              |  |                                                                         |       |   |      |   |      |  
|Reported                                                                                               |  | $                                                                       | 1.47  |   |      | $ | 1.14 |  
|Pro forma                                                                                              |  | $                                                                       | 1.45  |   |      | $ | 1.14 |  
|                                                                                                       |  |                                                                         |       |   |      |   |      |  
|                                                                                                       |  |                                                                        
|Diluted earnings per share:                                                                            |  |                                                                         |       |   |      |   |      |  
|Reported                                                                                               |  | $                                                                       | 1.47  |   |      | $ | 1.14 |  
|Pro forma                                                                                              |  | $                                                                       | 1.45  |   |      | $ | 1.14 |  
|                                                                                                       |  |                                                                         |       |   |      |   |      |  



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Duquesne Light Company



|                                                                                                       |  |                                              |      |   |      |   |      |  
|------------------------------------------------------------------------------------------------------ |  | -------------------------------------------- | ---- | - | ---- | - | ---- | -
|                                                                                                       |  | (Millions of Dollars)Year Ended December 31, |     
|                                                                                                       |  | 2005                                         |      |   | 2004 |  
|Reported net income                                                                                    |  | $                                            | 73.0 |   |      | $ | 67.8 |  
|                                                                                                       |  |                                             
|Add:                                                                                                   |  |                                              |      |   |      |   |      |  
|Stock-based compensation determined under the intrinsic value method for all option awards, net of tax |  |                                              | 0.3  |   |      |   | 0.4  |  
|Deduct:                                                                                                |  |                                              |      |   |      |   |      |  
|Stock-based compensation determined under the fair value method for all option awards, net of tax      |  |                                              | (1.4 | ) |      |   | (0.4 | )
|                                                                                                       |  |                                              |      |   |      |   |      |  
|Pro forma net income                                                                                   |  | $                                            | 71.9 |   |      | $ | 67.8 |  
|                                                                                                       |  |                                              |      |   |      |   |      |  

See Note 2 for information on the impact of the pending merger.

Under the 2002 Long-Term Incentive Plan, as amended (the 2002 Plan), the aggregate number of shares of common stock authorized for issuance is 3,690,468,
and of this total, up to 700,000 shares may be issued as restricted shares. Shares issued for the plan will be funded out of existing treasury shares. The 2002 Plan permits the grant of stock option awards, alternative stock appreciation rights and
dividend equivalent accounts, unvested restricted share awards and performance-based share awards to both employee and non-employee directors.

Stock options awarded to eligible employees will be granted at an option price not less than 100% of the fair market value of our common stock on the date of grant. All stock options to directors will be granted at an option price equal to
100% of the fair market value of our common stock on the date of grant. The 2002 Plan will terminate on December 31, 2011. Any stock options granted prior to January 1, 2002, are not affected by the adoption of the 2002 Plan, and are
administered according to the prior Long-Term Incentive Plan (the Prior Plan). No new options may be granted under the Prior Plan.

STOCK OPTIONS

No stock option awards were granted in 2006, 2005 or 2004 to either employees or non-employee directors.

As of January 1, 2006, all outstanding stock options were exercisable and fully vested. The total cash received for options exercised during 2006
and 2005 was $0.8 million and $1.1 million. The intrinsic value of these options exercised was $0.2 million and $0.3 million for 2006 and 2005.

In June 2006, 151,329 options, including all 98,719 remaining stock appreciation rights (SARS) associated with the outstanding options, representing all outstanding option grants with exercise prices above $20 were canceled upon mutual
agreement with the holders of the options. The consideration paid and incremental compensation expense incurred to cancel these options and associated SARS was not material. As of December 31, 2006, no SARS remained outstanding. In addition,
39,422 outstanding options were also forfeited during 2006.

The following tables summarize the transactions of our stock option plans for
the three-year period ended December 31, 2006, and certain information about outstanding stock options as of December 31, 2006:



|                                                |  |                   |  |                        |  |           |  |      |       |      |   |       |  |   |      
|----------------------------------------------- |  | ----------------- |  | ---------------------- |  | --------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                                |  | Number of Options |  | Weighted Average Price
|                                                |  | 2006              |  | 2005                   |  | 2004      |  | 2006 |       | 2005 |   | 2004 
|Options outstanding, beginning of year          |  | 552,004           |  | 946,085                |  | 2,056,979 |  | $    | 23.10 |      | $ | 20.53 |  | $ | 24.39
|Options granted                                 |  |                  |  |                       |  |          |  |      |      |      |   |      |  |   |     
|Options exercised                               |  | 50,900            |  | 71,793                 |  | 384,887   |  |      | 15.86 |      |   | 15.16 |  |   | 24.55
|Options canceled/forfeited                      |  | 190,751           |  | 322,288                |  | 726,007   |  |      | 36.46 |      |   | 17.34 |  |   | 29.32
|                                                |  |                   |  |                        |  |           |  |      |       |      |   |       |  |   |      
|Options outstanding, end of year                |  | 310,353           |  | 552,004                |  | 946,085   |  |      | 16.07 |      |   | 23.10 |  |   | 20.53
|                                                |  |                   |  |                        |  |           |  |      |       |      |   |       |  |   |      
|Options exercisable, end of year                |  | 310,353           |  | 552,004                |  | 659,985   |  |      | 16.07 |      |   | 23.10 |  |   | 22.93
|                                                |  |                   |  |                        |  |           |  |      |       |      |   |       |  |   |      
|Shares available for future grants, end of year |  | 2,876,123         |  | 2,622,280              |  | 2,353,363 |  |      |       |      |   |       |  |   |      
|                                                |  |                   |  |                        |  |           |  |      |       |      |   |       |  |   |      



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As of December 31, 2006, no stock appreciation rights (SARS) were outstanding. As of
December 31, 2005 and 2004, previously issued SARS were outstanding in connection with 98,719 and 115,107 of options outstanding with weighted average exercise prices of $39.03 and $39.53. No SARS were issued during 2006, 2005 or 2004. No SARS
were exercised in either 2006 or 2005 and 147,247 SARS were exercised in 2004.

The following table summarizes the options outstanding as of
December 31, 2006.



|                     |  |                   |  |                                   |  |                                 |  |                   |  |                                
|-------------------- |  | ----------------- |  | --------------------------------- |  | ------------------------------- |  | ----------------- |  | -------------------------------
|Outstanding          |  | Exercisable      
|Exercise Price Range |  | Number of Options |  | Average Remaining Life (In Years) |  | Weighted Average Exercise Price |  | Number of Options |  | Weighted Average Exercise Price
|Under $20            |  | 310,353           |  | 5.5                               |  | $16.07                          |  | 310,353           |  | $16.07                         
|                     |  |                   |  |                                   |  |                                 |  |                   |  |                                

UNVESTED RESTRICTED SHARE AWARDS

On November 10, 2003, 198,417 shares of nonvested Holdings stock with voting and dividend rights were issued to officers of Holdings. In 2005, an
additional 14,000 shares were issued to officers of Holdings. The right to the shares is subject to continued employment. During 2004, 12,000 shares were forfeited, and an additional 2,900 shares were forfeited in 2006. The result was a reversal of
$0.1 million of compensation expense in 2006. An equal portion of the total shares for each issuance are earned each year over the vesting period that ended on December 31, 2006. As of December 31, 2004, 2005 and 2006, 62,139, 65,039 and
70,339 shares were earned. As of December 31, 2006, no shares remain unvested. The market value of the nonvested stock at the grant dates was charged to stockholders equity and reflected as unearned compensation on the consolidated
balance sheets of Holdings. This unearned compensation was charged evenly to expense over the vesting period. In 2006, 2005 and 2004, total compensation expense of $1.2 million, $1.1 million and $1.0 million was recognized. Associated tax benefits
of $0.5 million, $0.4 million and $0.4 million were recorded for each period. Of the compensation expense amounts, $0.6 million, $0.6 million and $0.5 million was recorded at Duquesne Light for 2006, 2005 and 2004, with associated tax benefits of
$0.3 million, $0.3 million and $0.2 million recorded in the same periods.

Between January 2000 and February 2003, a total of 20,750 shares
of Holdings unvested stock with voting and dividends rights were granted to various non-employee directors. These shares vest equally over a ten-year period. Between June 2004 and June 2006, a total of 62,292 shares of Holdings unvested
stock with voting and dividends rights were also granted to non-employee directors. These shares vest two years after issue date.

In June
2006, 6,660 shares of Holdings unvested stock were forfeited, resulting in a reversal of $0.1 million of compensation expense. The remaining unearned compensation is being charged evenly to expense over the vesting periods. For 2006, 2005 and
2004, compensation expense of $0.3 million, $0.4 million and $0.3 million was recognized. Associated tax benefits of $0.1 million, $0.2 million and $0.1 million were recorded for each period. As of December 31, 2006, unrecognized
compensation cost associated with these shares was $0.6 million. The remaining compensation cost will be recognized through February 2013.

The following table summarizes the transactions related to unvested restricted share awards for 2006:



|                                     |  |         |  |                                       |      
|------------------------------------ |  | ------- |  | ------------------------------------- | -----
|                                     |  | Shares  |  | Weighted Average Grant-DateFair
Value
|Unvested shares, beginning of period |  | 129,641 |  | $                                     | 18.27
|Unvested shares granted              |  | 20,000  |  |                                       | 16.52
|Shares vested                        |  | 89,914  |  |                                       | 17.47
|Unvested shares canceled/ forfeited  |  | 9,560   |  |                                       | 23.02
|                                     |  |         |  |                                       |      
|Unvested shares, end of period       |  | 50,167  |  |                                       | 17.97
|                                     |  |         |  |                                       |      



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PERFORMANCE BASED AWARDS

On January 1, 2003, 58,500 shares of Holdings stock were issued to officers as part of a performance award. As of December 31, 2005, all shares were forfeited, as Holdings total shareholder return
(TSR) did not achieve its required TSR rank against the TSR of its peer group. No compensation expense was recorded in 2005 or 2004 by either Holdings or Duquesne Light.

On November 10, 2003, 387,400 shares of Holdings stock were issued to the same officers under a performance-based deferred stock unit award. In 2005, an additional 33,367 shares of Holdings stock were issued
under the same award. Due to forfeitures, only 385,100 shares remained to be earned as of December 31, 2006. The right to the shares was subject to the achievement of specified performance goals related to earnings per share (EPS) from
continuing operations and TSR over the defined performance period. At the end of the performance period, shares vest within a range of 0% to 100%, with no more than 50% of the shares subject to each performance target.

For the 50% of the shares subject to the EPS performance requirement, the EPS performance period commenced on January 1, 2004, and ended on
December 31, 2006. This performance target was met, and 192,550 shares of stock were earned. This obligation was settled in cash in 2007, and accordingly this obligation was reflected in accrued compensation on the consolidated balance sheet of
Holdings as of December 31, 2006. Beginning in January 2006, compensation expense was being charged evenly to expense for the portion of the award for which the requisite service period had not been rendered over the remaining service period as
these shares were expected to vest. The weighted average grant date fair value of $16.79 per share for these shares was calculated as the closing share price on the respective grant dates. Holdings recorded compensation expense for this award of
$1.1 million in 2006, with associated tax benefits of $0.5 million. Of these amounts $0.6 million was recorded at Duquesne Light, with an associated tax benefit of $0.3 million in 2006. No compensation expense was recorded in 2005 or 2004 by either
Holdings or Duquesne Light. In November 2006, a modification to the terms of this award was made, in anticipation of the sale of the landfill gas business and the resulting classification of its results as discontinued operations. This
classification change to discontinued operations made it probable that the performance target would not be met. The modification date fair value of $20.25 per share was calculated as the closing share price on the modification date. As a result of
the modification, additional compensation expense was recognized in the fourth quarter of 2006. Holdings recorded additional compensation expense for this award of $2.8 million, with associated tax benefits of $1.1 million. Of these amounts, $1.7
million was recorded at Duquesne Light, with an associated tax benefit of $0.7 million.

The other 50% of the shares were subject to the
TSR performance requirement, and the TSR performance period commenced on October 20, 2003, and ended on December 31, 2006. This performance target was not met, and no shares of stock were earned related to this award. The grant date fair
value and compensation expense recorded by Holdings in 2006 was $0.1 million. Neither Holdings nor Duquesne Light recorded compensation expense for this portion of the award in either 2005 or 2004.

On January 1, 2004, 56,427 shares of Holdings common stock were granted to non-officers of Holdings under a performance-based restricted stock unit
award. As of December 31, 2006, due to forfeitures, only 48,960 shares remained to be earned. The right to the shares was based upon Holdings TSR range against the TSR of its peer group, as defined, over a three year performance period
that ended December 31, 2006. This performance target was not met, and no shares of stock were earned related to this award. The grant date fair value and compensation expense recorded by Holdings in 2006 was immaterial. Neither Holdings nor
Duquesne Light recorded compensation expense for this award in either 2005 or 2004.



|13. | Employee Benefits
|--- | -----------------

PENSION BENEFITS

We maintain several qualified retirement plans and one unqualified plan to provide pensions for all eligible full-time employees. Upon retirement, an
eligible 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. Our 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



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does not exceed the maximum tax-deductible amount for the year. Pension costs charged (credited) to expense or construction were $7.4 million for 2006,
$(0.4) million for 2005, and $2.3 million for 2004.

During 2006, we approved amendments to the unqualified plan that provided for funding
and a gross up for related tax liabilities. In December 2006, we funded the vested accumulated benefits, including the applicable tax gross-up. This funding, coupled with additional plan amendments made in early 2007, resulted in a 2006 curtailment
and partial settlement of this plan, which increased pension cost by $3.7 million.

During 2005, we approved amendments to the pension
plans which broadened the cash balance feature in the qualified plans, and updated the past service window period used in the calculation of pension benefits. These amendments caused an increase in the projected benefit obligation of $10.6 million
as of December 31, 2005. As of December 31, 2005, we changed our assumption regarding the age at which certain terminated vested participants would elect to receive benefits under our pension plans based on our expectation that our
historical experience would continue. The result was an increase in the projected benefit obligation of approximately $49 million.

During
2006, Duquesne Light made aggregate discretionary contributions of $27.5 million to the pension plans. In January 2005, Duquesne Light met its obligation, pursuant to the January 18, 2001 PUC order regarding Duquesne Lights final
generation asset sale proceeds accounting, by contributing $32.1 million to the pension plans. We made no cash contributions to our pension plans in 2004.

As a result of the distribution rate increase, Duquesne Light has committed to funding $20 million annually to its pension plans, provided that such funding does not exceed the maximum tax-deductible contribution
allowed.

POSTRETIREMENT BENEFITS

In
addition to pension benefits, we provide certain health care benefits and life insurance for some retired employees. The life insurance plan is non-contributory. Participating retirees make contributions, which may be adjusted annually, to the
health care plan. Health care benefits terminate when retirees reach age 65. We fund actual expenditures for obligations under the plans on a pay-as-you-go basis. We have the right to modify or terminate the plans.

We accrue the actuarially determined costs of the postretirement benefits over the period from the date of hire until the date the employee becomes fully
eligible for benefits. We have elected to amortize the transition obligation over a 20-year period.

The health care trend assumption used
in the development of the fiscal 2006 expense was 9.5%, decreasing each year to an ultimate rate of 4.75% (reached in 2013). The health care trend assumption reflected in the December 31, 2006, SFAS No. 106 year-end disclosure, which will
also be used in the development of fiscal 2007 expense, is 8.75%, decreasing 0.75% per year to an ultimate rate of 5.00% (reached in 2012).

Holdings follows the guidance of SFAS 87, Employers Accounting for Pensions and SFAS 106, Employers Accounting for Postretirement Benefits Other Than Pensions when accounting for pension and
postretirement benefits. In addition, Holdings adopted the recognition and measurement date provisions of SFAS 158, effective December 31, 2006.

SFAS 158 requires that a sponsor of defined benefit plans: (i) record an asset or liability to recognize the funded status of the plans in its consolidated balance sheet using a measurement date that corresponds with its fiscal year end,
(ii) recognize in other comprehensive income, net of tax, gains and losses and prior service costs and credits, that arise during the period but are not currently recognized as a component of net periodic benefit cost, (iii) amortize gains and
losses, prior service costs and credits, and transition assets or obligations recorded in accumulated other comprehensive income to net periodic benefit cost, and (iv) provide additional disclosures of, among other things, items deferred in
accumulated other comprehensive income. In accordance with SFAS 158, accounting and related disclosures for 2004 and 2005 were not affected by the adoption of the new standard. The incremental impact of adopting of SFAS 158, resulted in the
following increases (decreases) to the consolidated balance sheets of Holdings and Duquesne Light as of December 31, 2006.



|                                                 |  |                              |       |   |             |       |   |                             |       |  
|------------------------------------------------ |  | ---------------------------- | ----- | - | ----------- | ----- | - | --------------------------- | ----- | -
|                                                 |  | (Millions of Dollars)        |      
|                                                 |  | BeforeApplicationof SFAS 158 |       |   | Adjustments |       |   | AfterApplicationof SFAS 158 |      
|Regulatory assets                                |  | $                            |      |   |             | 43.8  |   |                             | 43.8  |  
|Other non-current assets                         |  |                              | 65.5  |   |             | 2.2   |   |                             | 67.7  |  
|Other current liabilities                        |  |                              |      |   |             | (3.9  | ) |                             | (3.9  | )
|Pension liability                                |  |                              | (44.8 | ) |             | (16.4 | ) |                             | (61.2 | )
|Other postretirement benefits                    |  |                              | (43.4 | ) |             | (14.8 | ) |                             | (58.2 | )
|Regulatory liability                             |  |                              |      |   |             | (29.2 | ) |                             | (29.2 | )
|Deferred income taxes                            |  |                              | 0.4   |   |             | 7.6   |   |                             | 8.0   |  
|Accumulated other comprehensive loss (after-tax) |  |                              | 0.5   |   |             | 10.8  |   |                             | 11.3  |  

We use a December 31 measurement date for all of our pension and postretirement plans. All of
our plans for postretirement benefits, other than pensions, have no plan assets. The following tables apply to both Holdings and Duquesne Light, and provide a reconciliation of the changes in the pension and postretirement plans benefit
obligations and fair value of plan assets over the two-year period ended December 31, 2006, a statement of the funded status as of December 31, 2006 and 2005, and a summary of assumptions used in the measurement of our benefit obligations:



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Funded Status of the Pension and Postretirement Benefit Plans as of December 31,



|                                               |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|---------------------------------------------- |  | --------------------- | ----- | - | -------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                               |  | (Millions of Dollars) |      
|                                               |  | Pension               |       |   | Postretirement |  
|                                               |  | 2006                  |       |   | 2005           |   |       | 2006 |  |   | 2005  |  
|Change in benefit obligation:                  |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|Benefit obligation at beginning of year        |  | $                     | 836.4 |   |                | $ | 750.3 |      |  | $ | 50.9  |   |  | $ | 52.7  |  
|Service cost                                   |  |                       | 12.5  |   |                |   | 8.9   |      |  |   | 1.4   |   |  |   | 1.4   |  
|Interest cost                                  |  |                       | 46.9  |   |                |   | 42.6  |      |  |   | 3.3   |   |  |   | 3.4   |  
|Plan participants contributions               |  |                       |      |   |                |   |      |      |  |   | 0.6   |   |  |   | 0.5   |  
|Actuarial (gain) loss                          |  |                       | (0.1  | ) |                |   | 62.4  |      |  |   | 10.5  |   |  |   | (2.4  | )
|Benefits paid                                  |  |                       | (40.4 | ) |                |   | (38.4 | )    |  |   | (4.6  | ) |  |   | (4.7  | )
|Plan amendments                                |  |                       | 3.1   |   |                |   | 10.6  |      |  |   |      |   |  |   |      |  
|Curtailment                                    |  |                       | (1.5  | ) |                |   |      |      |  |   |      |   |  |   |      |  
|Settlements                                    |  |                       | (3.1  | ) |                |   |      |      |  |   |      |   |  |   |      |  
|                                               |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|Benefit obligation at end of year              |  |                       | 853.8 |   |                |   | 836.4 |      |  |   | 62.1  |   |  |   | 50.9  |  
|                                               |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|                                               |  |                       |       |  
|Change in plan assets:                         |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|Fair value of plan assets at beginning of year |  |                       | 759.8 |   |                |   | 715.8 |      |  |   |      |   |  |   |      |  
|Actual return on plan assets                   |  |                       | 116.5 |   |                |   | 50.3  |      |  |   |      |   |  |   |      |  
|Plan participants contributions               |  |                       |      |   |                |   |      |      |  |   | 0.6   |   |  |   | 0.5   |  
|Employer contributions                         |  |                       | 27.5  |   |                |   | 32.1  |      |  |   | 4.0   |   |  |   | 4.2   |  
|Benefits paid                                  |  |                       | (40.4 | ) |                |   | (38.4 | )    |  |   | (4.6  | ) |  |   | (4.7  | )
|Settlements                                    |  |                       | (3.1  | ) |                |   |      |      |  |   |      |   |  |   |      |  
|                                               |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|Fair value of plan assets at end of year       |  |                       | 860.3 |   |                |   | 759.8 |      |  |   |      |   |  |   |      |  
|                                               |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|Funded status at end of year                   |  |                       | 6.5   |   |                |   | (76.6 | )    |  |   | (62.1 | ) |  |   | (50.9 | )
|Unrecognized net actuarial loss                |  |                       |      |   |                |   | 45.5  |      |  |   |      |   |  |   | 0.1   |  
|Unrecognized prior service cost                |  |                       |      |   |                |   | 32.6  |      |  |   |      |   |  |   | 5.2   |  
|Unrecognized net transition obligation         |  |                       |      |   |                |   |      |      |  |   |      |   |  |   | 4.9   |  
|                                               |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|Net recorded asset (liability)                 |  | $                     | 6.5   |   |                | $ | 1.5   |      |  | $ | (62.1 | ) |  | $ | (40.7 | )
|                                               |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  

Amounts reflected on the consolidated balance sheets of Holdings and Duquesne Light as of December 31,



|                                                 |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|------------------------------------------------ |  | --------------------- | ----- | - | -------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                 |  | (Millions of Dollars) |      
|                                                 |  | Pension               |       |   | Postretirement |  
|                                                 |  | 2006                  |       |   | 2005           |   |       | 2006 |  |   | 2005  |  
|Prepaid pension cost                             |  | $                     | 67.7  |   |                | $ | 31.2  |      |  | $ |      |   |  | $ |      |  
|Regulatory assets                                |  |                       | 43.8  |   |                |   |      |      |  |   |      |   |  |   |      |  
|Pension intangible assets                        |  |                       |      |   |                |   | 42.7  |      |  |   |      |   |  |   |      |  
|Accrued current benefit liability                |  |                       |      |   |                |   | (20.0 | )    |  |   | (3.9  | ) |  |   |      |  
|Accrued non-current benefit liability            |  |                       | (61.2 | ) |                |   | (92.8 | )    |  |   | (58.2 | ) |  |   | (40.7 | )
|Regulatory liability                             |  |                       | (29.2 | ) |                |   |      |      |  |   |      |   |  |   |      |  
|Deferred income taxes                            |  |                       | 0.2   |   |                |   | 16.8  |      |  |   | 7.8   |   |  |   |      |  
|Accumulated other comprehensive loss (after-tax) |  |                       | 0.3   |   |                |   | 23.6  |      |  |   | 11.0  |   |  |   |      |  
|                                                 |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|Net recorded asset (liability)                   |  | $                     | 21.6  |   |                | $ | 1.5   |      |  | $ | (43.3 | ) |  | $ | (40.7 | )
|                                                 |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  

Amounts recognized in accumulated other comprehensive loss as of December 31, 2006,



|                                                 |  |                       |       |   |                |   |     
|------------------------------------------------ |  | --------------------- | ----- | - | -------------- | - | ----
|                                                 |  | (Millions of Dollars)
|                                                 |  | Pension               |       |   | Postretirement
|Components                                       |  |                       |       |   |                |   |     
|Transition obligation                            |  | $                     |      |   |                | $ | 4.1 
|Prior service cost                               |  |                       | 28.2  |   |                |   | 4.3 
|Accumulated (gain) loss                          |  |                       | (13.1 | ) |                |   | 10.4
|                                                 |  |                       |       |   |                |   |     
|Accumulated other comprehensive loss (pre-tax)   |  | $                     | 15.1  |   |                | $ | 18.8
|                                                 |  |                       |       |   |                |   |     
|Recorded as                                      |  |                       |       |   |                |   |     
|Regulatory assets                                |  | $                     | 43.8  |   |                | $ |    
|Regulatory liability                             |  |                       | (29.2 | ) |                |   |    
|Deferred income taxes                            |  |                       | 0.2   |   |                |   | 7.8 
|Accumulated other comprehensive loss (after-tax) |  |                       | 0.3   |   |                |   | 11.0
|                                                 |  |                       |       |   |                |   |     
|Accumulated other comprehensive loss (pre-tax)   |  | $                     | 15.1  |   |                | $ | 18.8
|                                                 |  |                       |       |   |                |   |     

We recorded an SFAS 71 regulatory asset and a regulatory liability for qualifying SFAS 158 costs
of our regulated operations that for ratemaking purposes will be deferred for future recovery and refund.

The accumulated benefit
obligation for all defined benefit pension plans was $829.7 million and $810.0 million as of December 31, 2006, and 2005.



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Information for Pension Plans with an Accumulated Benefit Obligation in Excess of Plan Assets as of December 31,



|                               |  |                       |       |                |   |       |  |      |      |  |   |     
|------------------------------ |  | --------------------- | ----- | -------------- | - | ----- |  | ---- | ---- |  | - | ----
|                               |  | (Millions of Dollars)
|                               |  | Pension               |       | Postretirement
|                               |  | 2006                  |       | 2005           |   | 2006  |  | 2005
|Projected benefit obligation   |  | $                     | 785.4 |                | $ | 769.0 |  | $    | 62.1 |  | $ | 50.9
|Accumulated benefit obligation |  |                       | 768.9 |                |   | 751.3 |  |      |     |  |   |    
|Fair value of plan assets      |  |                       | 724.1 |                |   | 638.5 |  |      |     |  |   |    
|                               |  |                       |       |                |   |       |  |      |      |  |   |     

Weighted-Average Assumptions Used to Determine Projected Benefits Obligation as of December 31,



|                                      |  |         |   |  |                |   |  |      |   |  |      |  
|------------------------------------- |  | ------- | - |  | -------------- | - |  | ---- | - |  | ---- | -
|                                      |  | Pension |   |  | Postretirement |  
|                                      |  | 2006    |   |  | 2005           |   |  | 2006 |   |  | 2005 |  
|Discount rate                         |  | 5.80    | % |  | 5.70           | % |  | 5.80 | % |  | 5.70 | %
|Assumed change in compensation levels |  | 4.00    | % |  | 4.00           | % |  |     |   |  |     |  
|Ultimate health care cost trend rate  |  |        |   |  |               |   |  | 5.00 | % |  | 4.75 | %
|                                      |  |         |   |  |                |   |  |      |   |  |      |  

Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost for the Years Ended December 31,



|                                         |  |                  |   |  |                |   |  |      |   |  |      |  
|---------------------------------------- |  | ---------------- | - |  | -------------- | - |  | ---- | - |  | ---- | -
|                                         |  | Pension Benefits |   |  | Postretirement |  
|                                         |  | 2006             |   |  | 2005           |   |  | 2006 |   |  | 2005 |  
|Discount rate                            |  | 5.70             | % |  | 5.75           | % |  | 5.70 | % |  | 5.75 | %
|Expected long-term return on plan assets |  | 8.00             | % |  | 8.00           | % |  |     |   |  |     |  
|Rate of compensation increase            |  | 4.00             | % |  | 4.00           | % |  |     |   |  |     |  
|Ultimate health care costs trend rate    |  |                 |   |  |               |   |  | 5.00 | % |  | 4.75 | %
|                                         |  |                  |   |  |                |   |  |      |   |  |      |  

Components of Net Periodic Pension Cost for the Years Ended December 31,



|                                                       |  |                       |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------------ |  | --------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                       |  | (Millions of Dollars) |      
|                                                       |  | 2006                  |       |   | 2005 |   |       | 2004 | 
|Service cost                                           |  | $                     | 12.5  |   |      | $ | 8.9   |      |  | $ | 8.1   |  
|Interest cost                                          |  |                       | 46.9  |   |      |   | 42.6  |      |  |   | 42.2  |  
|Expected return on plan assets                         |  |                       | (60.3 | ) |      |   | (55.3 | )    |  |   | (51.7 | )
|Amortization of unrecognized net transition obligation |  |                       |      |   |      |   |      |      |  |   | 0.8   |  
|Amortization of prior service cost                     |  |                       | 4.4   |   |      |   | 3.4   |      |  |   | 3.4   |  
|Amortization of actuarial gain                         |  |                       | 0.2   |   |      |   |      |      |  |   | (0.5  | )
|                                                       |  |                       |       |   |      |   |       |      |  |   |       |  
|Net periodic pension cost (gain)                       |  |                       | 3.7   |   |      |   | (0.4  | )    |  |   | 2.3   |  
|Curtailment and settlement cost                        |  |                       | 3.7   |   |      |   |      |      |  |   |      |  
|                                                       |  |                       |       |   |      |   |       |      |  |   |       |  
|Net cost after curtailment and settlement              |  | $                     | 7.4   |   |      | $ | (0.4  | )    |  | $ | 2.3   |  
|                                                       |  |                       |       |   |      |   |       |      |  |   |       |  

Components of Net Periodic Postretirement Cost for the Years Ended December 31,



|                                                       |  |      |     |      |   |      |  |   |    
|------------------------------------------------------ |  | ---- | --- | ---- | - | ---- |  | - | ---
|                                                       |  | 2006 |     | 2005 |   | 2004
|Service cost                                           |  | $    | 1.4 |      | $ | 1.4  |  | $ | 1.1
|Interest cost                                          |  |      | 3.3 |      |   | 3.4  |  |   | 3.0
|Amortization of unrecognized net transition obligation |  |      | 0.7 |      |   | 0.7  |  |   | 0.7
|Amortization of prior service cost                     |  |      | 0.9 |      |   | 1.0  |  |   | 1.0
|Amortization of net loss                               |  |      | 0.3 |      |   | 0.4  |  |   |   
|                                                       |  |      |     |      |   |      |  |   |    
|Net periodic postretirement cost                       |  | $    | 6.6 |      | $ | 6.9  |  | $ | 5.8
|                                                       |  |      |     |      |   |      |  |   |    



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Other Changes in Pension Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income for the Year
Ended December 31,



|                                                                             |  |      |     
|---------------------------------------------------------------------------- |  | ---- | ----
|                                                                             |  | 2006
|Total recognized in other comprehensive income                               |  | $    | 39.5
|Total recognized in net periodic pension cost and other comprehensive income |  | $    | 32.1
|                                                                             |  |      |     

Other Changes in Postretirement Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
for the Year Ended December 31,



|                                                                                    |  |      |    
|----------------------------------------------------------------------------------- |  | ---- | ---
|                                                                                    |  | 2006
|Total recognized in other comprehensive income                                      |  | $    |   
|Total recognized in net periodic postretirement cost and other comprehensive income |  | $    | 6.6
|                                                                                    |  |      |    

The estimated net loss and prior service cost for the Pension Plans that will be amortized from
accumulated other comprehensive income into net periodic benefit cost (gain) in 2007 are $(0.2) million and $4.0 million, respectively. The estimated net loss, prior service cost and transition obligation amounts for the Postretirement Plan that
will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2007 are $0.4 million, $1.0 million and $0.7 million, respectively.

Effect of a One Percent Change in Health Care Cost Trend Rates as of December 31, 2006



|                                                                                                                |  |                       |     |                     |   |      |  
|--------------------------------------------------------------------------------------------------------------- |  | --------------------- | --- | ------------------- | - | ---- | -
|                                                                                                                |  | (Millions of Dollars) |    
|                                                                                                                |  | One PercentIncrease   |     | One PercentDecrease |  
|Effect on total of service and interest cost components of net periodic postretirement health care benefit cost |  | $                     | 0.5 |                     | $ | (0.4 | )
|Effect on the health care component of the accumulated postretirement benefit obligation                        |  | $                     | 4.4 |                     | $ | (4.0 | )
|                                                                                                                |  |                       |     |                     |   |      |  

Expected Rate of Return On Plan Assets and Investment Policy

We used an 8.00% expected long-term rate of return on plan assets in determining the 2006 and 2005 net periodic benefit cost. We developed the long-term
rate of return using a building block approach, taking into account the target asset class allocations contained in the table below as well as the investment management mix. Under this approach, current market factors such as inflation, interest
rates, asset class risks and asset class returns are evaluated and considered before long-term capital market assumptions are determined. Long-term historical returns and relationships between the asset classes are reviewed to verify reasonability
and appropriateness. The long-term rate of return is established through this building block approach with proper consideration of diversification to reduce volatility of expected return.



|                        |  |                             
|----------------------- |  | ----------------------------
|Asset Category          |  | Target Investment Allocation
|Equity securities       |  | 25% - 70%                   
|Fixed income securities |  | 25% - 55%                   
|Real estate investments |  | 0% - 15%                    
|Other investments       |  | 0% - 10%                    



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Pension Plan Assets

The pension plan weighted-average asset allocations by asset category are as follows:



|                        |  |                                |   |  |       |  
|----------------------- |  | ------------------------------ | - |  | ----- | -
|                        |  | Plan Assets as of December 31, |  
|Asset Category          |  | 2006                           |   |  | 2005  |  
|Equity securities       |  | 60.4                           | % |  | 60.5  | %
|Fixed income securities |  | 28.1                           | % |  | 25.5  | %
|Real estate investments |  | 8.5                            | % |  | 11.4  | %
|Other investments       |  | 3.0                            | % |  | 2.6   | %
|                        |  |                                |   |  |       |  
|Total                   |  | 100.0                          | % |  | 100.0 | %
|                        |  |                                |   |  |       |  

Pension plan assets as of December 31, 2006 and 2005, do not include any common stock of
either Holdings or Duquesne Light.

Expected Benefit Payments for Future Years

The following benefit payments (shown net of postretirement plan participants contributions), which reflect expected future service as appropriate,
are expected to be paid:



|            |  |                       |       |                |   |     
|----------- |  | --------------------- | ----- | -------------- | - | ----
|            |  | (Millions of Dollars)
|Year        |  | Pension               |       | Postretirement
|2007        |  | $                     | 40.4  |                | $ | 3.9 
|2008        |  |                       | 39.1  |                |   | 4.3 
|2009        |  |                       | 39.4  |                |   | 4.7 
|2010        |  |                       | 40.1  |                |   | 5.1 
|2011        |  |                       | 42.1  |                |   | 5.8 
|2012 - 2016 |  |                       | 227.9 |                |   | 33.0
|            |  |                       |       |                |   |     

RETIREMENT SAVINGS PLANS

There are separate 401(k) retirement savings plans for our management and IBEW-represented employees.

The
Holdings 401(k) Retirement Savings Plan provides for employer contributions that vary by Holdings subsidiary. These contributions may include one or more of the following: a participant base match, automatic contributions, and a participant
incentive match, if certain targets are met. The incentive match was achieved in 2004 but not in 2005 and 2006. In 2006, a discretionary one-time contribution of $0.4 million was made to the plan for employees who contributed to the plan and were
eligible for the annual incentive match. We have been funding our automatic and matching contributions to this plan through an ESOP established in December 1991. (See Note 16.) Compensation costs charged to expense or construction related to this
401(k) plan were $1.4 million, $0.9 million and $1.3 million in 2006, 2005 and 2004 at Holdings and $1.2 million, $0.7 million and $1.2 million in 2006, 2005 and 2004 at Duquesne Light.

The Duquesne Light 401(k) Retirement Savings Plan for IBEW Represented Employees provides that Duquesne Light will match employee contributions with a
base match and an additional incentive match (paid in Holdings common stock), if certain targets are met. The incentive match was achieved in 2004 but not in 2005 and 2006. In 2006, a discretionary one-time contribution of $0.3 million was made to
the plan for IBEW employees who contributed to the plan and were eligible for the annual incentive match. Duquesne Light recognized compensation expense of $0.7 million, $0.4 million and $1.0 million in 2006, 2005 and 2004 related to this plan.



|14. | Commitments and Contingencies
|--- | -----------------------------

GUARANTEES

As part of DQE Financials investment portfolio in seven affordable housing funds, we have received fees in exchange for guaranteeing a minimum
defined yield to third-party investors. We entered into these transactions between 1995 and 1999 because of the attractive risk/reward characteristics available to guarantors. This group of guarantees will expire by 2015. In the event the underlying
affordable housing properties do not generate the necessary minimum yield before their expiration, we will make cash payments necessary to achieve the minimum yield. The original amount guaranteed was approximately $250 million, and has declined as
investors have earned the guaranteed returns. We estimate the maximum potential amount of undiscounted future payments that we could be required to make under the guarantees if the investors earn no future returns was $19.6 million at
December 31, 2006. Currently, we are projecting two funds with a deficit balance as of the guarantee pay date on December 31, 2013. If this deficit balance was funded on December 31, 2006, the amount needed to cover this shortfall
would be approximately $0.3 million.

In connection with the sale of six synthetic fuel facilities in 2000 by our indirect subsidiary,
Duquesne Energy, Inc., we agreed to guarantee the subsidiarys obligation under the sales agreement to indemnify the purchaser against breach of warranties, representations or covenants. The guarantee generally extends up to six years or
otherwise as stipulated under statute of limitations, based on the expiration of the underlying warranty, representation, or covenant. We have determined our exposure to be limited, as both legal and factual representations and



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warranties have been primarily limited to matters within the control and knowledge of our subsidiary. As such, no liability has been recorded on the
consolidated balance sheets.

In connection with DES sale of an investment in an energy facility management project in 2005, DES
provided the buyer with a guarantee that DES will repay a portion of the purchase price if the counterparty to the management contract terminates the contract for convenience, as defined by the agreement (the Repayment Guarantee). As of
December 31, 2006, the maximum Repayment Guarantee amount is approximately $3.4 million. The Repayment Guarantee is reduced daily, based on the passage of time, through January 1, 2016, at which time the Repayment Guarantee expires. The
estimated liability for the fair value of the Repayment Guarantee is not material.

Holdings has guaranteed portions of the obligations of
Duquesne Power under its energy commodity contracts in order to use Holdings stronger credit profile to obtain better pricing and contract terms for Duquesne Power. In general, if Duquesne Power is required to make a payment under these
contracts and fails to do so, Holdings would be required to make such payment. The notional value of the contracts (and consequently the guarantee amounts) changes as additional energy commodities are bought or sold, and as Duquesne Power pays for
its energy commodity deliveries. As of December 31, 2006, the maximum amount of Holdings payment guarantee related to the energy and capacity obligations totaled $689.8 million, or approximately 88.0%, of the total remaining notional
value under these contracts. In addition, Holdings guarantees Duquesne Powers obligations to deliver energy under the energy sales contracts, to the extent that Duquesne Power would be obligated to compensate the counterparty for the
difference in the counterpartys cost to procure the energy and the contract price. As of December 31, 2006, no guarantee amount has been recorded as a liability on the consolidated balance sheets. In addition, Holdings posts collateral on
behalf of Duquesne Power as needed under the energy commodity contracts. As of December 31, 2006, no collateral was outstanding.

In
conjunction with certain transactions, primarily divestitures, we provide routine indemnifications (e.g., retention of previously existing environmental, tax and employee liabilities) whose terms range in duration and often are not explicitly
defined. Where appropriate, an obligation for such indemnifications is recorded as a liability. Because the obligated amounts of these types of indemnifications often are not explicitly stated, the overall maximum amount of the obligation under such
indemnifications cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of divestiture, historically we have not made significant payments for these indemnifications.

EMPLOYEES

Duquesne Light is a party to a labor
contract with the International Brotherhood of Electrical Workers, which represents 71% of Duquesne Lights approximately 1,400 employees. This contract expires in September 2010.

SECTION 45K TAX CREDITS AND SYNTHETIC FUEL

Holdings recognizes Section 45K tax credits from DQE Financials investment in a synthetic fuel partnership.

Section 45K tax credits are subject to a phase-out provision that reduces tax credits as the average annual wellhead price per barrel of domestic crude oil increases into an inflation-adjusted phase-out range. During 2006, we estimated
the average annual wellhead price per barrel of domestic crude oil based on the actual NYMEX price per barrel of domestic crude oil through December 2006. We also estimated the phase-out range for Section 45K tax credits based on the actual
2005 phase-out range, and an estimated inflation factor. This resulted in an estimated annual phase-out of Section 45K tax credits for 2006 at an approximate 34% level as of December 31, 2006, which led to a $3.3 million reduction in tax
credits recognized in 2006 from our Financial business segment. During 2006, after recording the effects of the estimated phase-out described above, we recorded $6.4 million of Section 45K tax credits.

As a result of the estimated phase-out of Section 45K tax credits, effective July 17, 2006, we elected to temporarily cease participation in
the synthetic fuel limited partnership interest held by DQE Financial. Effective October 30, 2006, due to the subsequent decrease in the estimated phase-out, we elected to resume our participation in the synthetic fuel limited partnership
interest.

If 2007 domestic crude oil prices mimic the high level of 2006, the annual tax credits to be generated from DQE Financials
investment in the synthetic fuel partnership may be substantially reduced or eliminated.

DES operates synthetic fuel facilities for a
single customer, earning fees based on production.



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Earnings in 2006 from the operation of synthetic fuel facilities were approximately $15.7 million, which could also be
substantially reduced if the operation of these facilities is curtailed. Earnings from the operation of these facilities, once earned, are not subject to repayment for any Section 45K tax-credit phase-out.

DES agreed to price concessions with the facilities owner for the synthetic fuel processed during August through December 2006. In addition, August
production volumes were also reduced, at the owners request, to approximately 75% of the aggregate budgeted production levels as a result of the anticipated phase-out. The concessions were agreed to because, without them, the synthetic fuel
facilities may have ceased operations. The price concessions also include a true-up provision that could be payable to DES based in part on the actual 2006 Section 45K credit information to be published by the IRS in April 2007. We do not,
however, anticipate a reduction in the price concessions that were granted to the facility owners. (See Note 23.)

FUEL SUPPLY COMMITMENTS

As a result of the purchase of the undivided interests in the two coal-fired power plants, Duquesne Generation is responsible for
financing its proportionate share of the plants operating and capital costs, which include future commitments related to fuel supply contracts for each of the plants. As of December 31, 2006, Duquesne Generations proportionate share
of future commitments under these fuel contracts totaled $36.7 million. The contracts expire in varying amounts through 2012.

OTHER

Legacy Liabilities

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. Following the generation asset divestiture, Duquesne Light
retained certain facilities that remain subject to these regulations. We have assessed our residual waste management sites, and the DEP has approved our compliance strategies. As of December 31, 2006 and 2005, the expected costs of compliance
were approximately $4 million with respect to sites we continue to own. These costs were recovered in the CTC.

Duquesne Light also owns
the closed Warwick Mine, located along the Monongahela River in Greene County, Pennsylvania. This property had been used in the electricity supply business segment. Duquesne Light has been selling unused portions of the property and will continue to
do so. As of December 31, 2006 and 2005, Duquesne Lights estimated liability for closing the Warwick Mine, including final site reclamation, mine water treatment and certain healthcare liabilities, was approximately $34 million and $26
million. The increase in the liability was primarily as a result of an actuarial study that showed future health care costs would be higher than projected at the end of 2005.

These amounts are combined and included in legacy liabilities on both Holdings and Duquesne Lights consolidated balance sheets.

Discontinued Operations

AquaSources former
water and water-related operations were, and remain, subject to the Federal Safe Drinking Water Act, which provides for uniform minimum national water quality standards, as well as governmental authority to specify treatment processes to be
used for drinking water. AquaSources former operations were also, and remain, subject to the Federal Clean Water Act, which regulates the discharge of pollutants into waterways. AquaSource is aware of various compliance issues at its
former water and wastewater facilities attributable to the period of time during which it owned these facilities. AquaSource has agreed to indemnify the purchasers of these facilities for certain pre-closing environmental liabilities.

Prior to divesting its former operations, AquaSource entered into various consent agreements regarding certain environmental compliance matters. In
connection with divesting its former operations, AquaSource assigned these consent agreements to the relevant purchasers. AquaSource has agreed to indemnify the purchasers of its former operations for certain pre-closing environmental liabilities.

As part of the transaction, we retained certain obligations related to the business that was sold to Aqua America, Inc., including
responsibility for certain existing litigation matters as well as a 10-year indemnity for certain pre-closing environmental claims. We purchased an environmental liability policy to mitigate this indemnity. We also had a maximum three-year indemnity
obligation for certain other pre-closing liabilities that was limited by a $15 million indemnity cap. Because Aqua America had not made the minimum required threshold of indemnification requests during the first year after closing, this
indemnity obligation was reduced to a $7.5 million cap over a two year period. We have



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notified Aqua America that with the passage of the second anniversary of the closing of the transaction, the indemnification has terminated, and no further
claims can be made under the indemnity obligation.

We do not believe that any of AquaSources indemnity obligations described above
will have a material effect on Holdings financial position, results of operations or cash flows.



|15. | Long-Term Debt
|--- | --------------

Long-Term Debt as of December 31,



|                                                      |  |                                             |  |           |  |      |         |   |      |   |       |  
|----------------------------------------------------- |  | ------------------------------------------- |  | --------- |  | ---- | ------- | - | ---- | - | ----- | -
|                                                      |  | (Millions of Dollars) Principal Outstanding | 
|                                                      |  | Interest Rate                               |  | Maturity  |  | 2006 |         |   | 2005 |  
|Duquesne Light first mortgage bonds (a)               |  | 5.7%-6.7%                                   |  | 2008-2032 |  | $    | 540.0   |   |      | $ | 540.0 |  
|Duquesne Light pollution control notes (b)            |  | 4.05%-4.35%                                 |  | 2011-2013 |  |      | 97.9    |   |      |   | 97.9  |  
|Duquesne Light Revolver borrowings (c)                |  |                                             |  |           |  |      | 44.2    |   |      |   |      |  
|Holdings senior notes                                |  | 5.5%-6.25%                                  |  | 2015-2035 |  |      | 320.0   |   |      |   | 320.0 |  
|Holdings term note (d)                                |  | Variable                                    |  | 2011      |  |      | 200.0   |   |      |   |      |  
|Holdings miscellaneous                                |  |                                             |  |           |  |      | 1.3     |   |      |   | 1.6   |  
|Less: Unamortized debt discount and premium  net (e) |  |                                             |  |           |  |      | (1.2    | ) |      |   | (1.4  | )
|Current maturities                                    |  |                                             |  |           |  |      | (0.2    | ) |      |   | (0.3  | )
|                                                      |  |                                             |  |           |  |      |         |   |      |   |       |  
|Total Long-Term Debt                                  |  |                                             |  |           |  | $    | 1,202.0 |   |      | $ | 957.8 |  
|                                                      |  |                                             |  |           |  |      |         |   |      |   |       |  

---

|(a) | Excludes first mortgage bonds issued to secure pollution control notes.
|--- | -----------------------------------------------------------------------

|(b) | Secured by an equal principal amount of first mortgage bonds.
|--- | -------------------------------------------------------------

|(c) | See discussion below.
|--- | ---------------------

|(d) | The 2006 average rate was 6.1%.
|--- | -------------------------------

|(e) | Relates to Duquesne Light debt.
|--- | -------------------------------

Holdings.As of
December 31, 2006, maturities of long-term debt outstanding for the next five years were $0.3 million, $40.3 million, $0.3 million, $0.3 million and $248.1 million.

Total interest and other charges were $76.7 million in 2006, $62.5 million in 2005 and $62.9 million in 2004. Interest costs attributable to debt were $70.0 million, $55.3 million and $57.1 million in 2006, 2005 and
2004. Included in the 2004 interest costs attributable to debt is $3.1 million related to the 8 3/8% Monthly Income Preferred Securities (MIPS). Of the interest costs attributable to debt, $1.2 million, $0.7 million and $0.8 million in 2006, 2005
and 2004 were capitalized as AFC. Debt discount or premium and related issuance expenses are amortized over the lives of the applicable issues. (See Note 1.)

As of December 31, 2006, the fair value of long-term debt, including current maturities, estimated on the basis of quoted market prices for the same or similar issues, or current rates offered for debt of the
same remaining maturities, was $1,216.8 million. The principal amount, excluding unamortized discounts and premiums, is $1,203.4 million as of December 31, 2006.

As of December 31, 2006 and 2005, we were in compliance with all of our debt covenants.

On
September 1, 2006, we entered into a $200 million variable interest rate unsecured term loan facility to fund certain minority interests and transaction costs related to the Keystone and Conemaugh power plant acquisition (see Note 4) and
for general corporate purposes. The final maturity date is September 1, 2011. However, in the event the merger is not consummated or in the event the merger is consummated but not with the proceeds of the acquisition debt to be raised by the
Macquarie Consortium to finance the merger, we must prepay the term loan facility on the one-year anniversary of the date that is earliest to occur of (i) January 5, 2008, (ii) the date of termination of the merger agreement, and
(iii) the date of consummation of the merger other than with the proceeds of acquisition debt.

The term loan facility may be prepaid
and/or cancelled in whole or in part, but any amount prepaid under the facility may not be reborrowed. The outstanding balance under the facility will be charged an interest rate of LIBOR plus a margin of 0.625 % to



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1.75%, based on our then-current senior unsecured credit rating. Prior to the merger consummation date, the facility is subject to the same terms and
conditions as our current $250 million revolving credit facility dated July 27, 2005 which include but are not limited to (i) a cross-default if we or any of our subsidiaries default on any payment due under any indebtedness exceeding
$50 million, (ii) maintaining a maximum debt-to-capitalization ratio of 65% as defined by the facility, and (iii) maintaining a minimum interest coverage ratio of 2-to-1 as defined by the facility. From and after the merger consummation
date, the terms and conditions of the facility will automatically change to match those in the acquisition debt.

During August 2005, we
issued $200 million of 5.5% senior notes due August 15, 2015 and $120 million of 6.25% senior notes due August 15, 2035. Proceeds were used to repay the $250 million intercompany loan with Duquesne Light and approximately $37
million of variable rate borrowings under our credit facility. The remaining balance was used for general corporate purposes.

In October
2004, DQE Capital fully redeemed its $100 million of 8.375% Public Income Notes, due 2039, at par. A $1.9 million after-tax charge related to the write-off of the unamortized, original issue costs was recorded.

Duquesne Light As of December 31, 2006, maturities of long-term debt outstanding for the next five years were zero in 2007, $40.0 million in
2008, zero in 2009 and 2010 and $47.9 million in 2011.

Total interest and other charges were $41.5 million in 2006, $48.0 million in 2005
and $46.2 million in 2004. Interest costs attributable to debt were $41.8 million, $47.4 million and $45.6 million in 2006, 2005 and 2004. Included in the 2004 interest costs attributable to debt is $3.1 million related to the MIPS. Prior to the
July 2003 adoption of SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, MIPS dividend requirements were shown separately on the consolidated statements of income. Of the
interest costs attributable to debt, $1.2 million in 2006, $0.7 million in 2005 and $0.8 million in 2004 were capitalized as AFC. The unamortized debt discount is amortized over the lives of the applicable issues. (See Note 1.)

As of December 31, 2006, the fair value of long-term debt, including current maturities, estimated on the basis of quoted market prices for the same
or similar issues, or current rates offered for debt of the same remaining maturities, was $698.3 million. The principal amount, excluding unamortized discounts and premiums, is $682.1 million as of December 31, 2006.

On January 3, 2007, Duquesne Light sold $44.2 million of the PCRBs that it had purchased during the third quarter of 2005. The bonds bear a fixed
rate of interest of 4.50%, will mature on November 1, 2029 and are subject to redemption, in whole or in part, on or after January 1, 2017 at redemption price of 100%. Proceeds were used to repay the $44.2 million of revolver borrowings
listed in the table above. (See Note 9.)

In the third quarter of 2005, Duquesne Light used the proceeds received from the repayment of the
Holdings intercompany loan plus available cash to purchase at par upon mandatory tender $320.1 million of variable rate PCRBs with maturity dates ranging from 2020 to 2033. The purchased bonds are presented as extinguished debt in conformity
with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.

In May
2004, Duquesne Light issued $200 million of 5.7% first mortgage bonds (due 2014). Proceeds were used to redeem $75 million of MIPS, repay $40 million of outstanding revolving credit facility borrowings and replenish working capital.

During 2004, pursuant to the terms of MIPS, Duquesne Light redeemed $151.5 million of its 8 3/8% Subordinated Deferrable Interest Debentures, Series
A, due May 31, 2044 (Subordinated Debentures) held by Duquesne Capital, L.P., a special purpose subsidiary of Duquesne Light. Duquesne Capital simultaneously redeemed $150 million principal amount of its MIPS.



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|16. | Preferred and Preference Stock
|--- | ------------------------------

Preferred and Preference Stock
as of December 31,



|                                         |  |                       |       |        |           |        |   |       |        |  |           |  |   |       |  
|---------------------------------------- |  | --------------------- | ----- | ------ | --------- | ------ | - | ----- | ------ |  | --------- |  | - | ----- | -
|                                         |  | (Millions of Dollars) |      
|                                         |  | 2006                  |       |        | 2005      |       
|                                         |  | Call Price Per Share  |       | Shares |           | Amount |   |       | Shares |  | Amount    | 
|Preferred Stock Series of Subsidiaries:  |  |                       |       |        |           |        |   |       |        |  |           |  |   |       |  
|Duquesne Light 3.75% (a)                 |  | $                     | 51.00 |        | 148,000   |        | $ | 7.4   |        |  | 148,000   |  | $ | 7.4   |  
|Duquesne Light 4.00% (a)                 |  |                       | 51.50 |        | 549,709   |        |   | 27.5  |        |  | 549,709   |  |   | 27.5  |  
|Duquesne Light 4.10% (a)                 |  |                       | 51.75 |        | 119,860   |        |   | 6.0   |        |  | 119,860   |  |   | 6.0   |  
|Duquesne Light 4.15% (a)                 |  |                       | 51.73 |        | 132,450   |        |   | 6.7   |        |  | 132,450   |  |   | 6.7   |  
|Duquesne Light 4.20% (a)                 |  |                       | 51.71 |        | 100,000   |        |   | 5.0   |        |  | 100,000   |  |   | 5.0   |  
|Duquesne Light $2.10 (a)                 |  |                       | 51.84 |        | 159,400   |        |   | 8.0   |        |  | 159,400   |  |   | 8.0   |  
|Duquesne Light 6.50% (a)                 |  |                       | 50.00 |        | 1,500,000 |        |   | 75.0  |        |  | 1,500,000 |  |   | 75.0  |  
|                                         |  |                       |       |        |           |        |   |       |        |  |           |  |   |       |  
|Total Preferred Stock of Subsidiaries    |  |                       |       |        |           |        | $ | 135.6 |        |  |           |  | $ | 135.6 |  
|                                         |  |                       |       |        |           |        |   |       |        |  |           |  |   |       |  
|Preference Stock Series of Subsidiaries: |  |                       |       |        |           |        |   |       |        |  |           |  |   |       |  
|Duquesne Light Plan Series A (b)         |  |                       |       |        | 337,034   |        |   | 11.9  |        |  | 374,615   |  |   | 13.3  |  
|                                         |  |                       |       |        |           |        |   |       |        |  |           |  |   |       |  
|Deferred ESOP benefit                    |  |                       |       |        |           |        |   | (0.1  | )      |  |           |  |   | (2.4  | )
|                                         |  |                       |       |        |           |        |   |       |        |  |           |  |   |       |  
|Total Preferred and Preference Stock     |  |                       |       |        |           |        | $ | 147.4 |        |  |           |  | $ | 146.5 |  
|                                         |  |                       |       |        |           |        |   |       |        |  |           |  |   |       |  

---

|(a) | 4,000,000 authorized shares; $50 par value; cumulative; $50 per share involuntary liquidation value.
|--- | ----------------------------------------------------------------------------------------------------

|(b) | 8,000,000 authorized shares; $1 par value; cumulative; $35.50 per share liquidation value; annual dividends of $2.80 per share.
|--- | -------------------------------------------------------------------------------------------------------------------------------

In April 2004, Duquesne Light issued 1.5 million shares of 6.5% non-convertible preferred stock ($50 par and liquidation value), receiving net
proceeds of approximately $73 million. The holders of the preferred stock are entitled to cumulative quarterly dividends beginning on July 1, 2004. This stock is callable at par, plus accrued dividends, on or after April 1, 2009.

The Duquesne Light preferred stock ranks senior to Duquesne Light preference and common stock as to payment of dividends and the
distribution of assets on liquidation, dissolution or winding-up of Duquesne Light.

Holders of Duquesne Light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 Lights board of directors until all dividends
have been paid.

Holders of Duquesne Light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 Lights directors until all dividends have been paid. As
of December 31, 2006, Duquesne Light had made all dividend payments.

Outstanding Duquesne Light preferred stock is generally callable
on notice of not less than 30 days, at stated prices plus accrued dividends. The outstanding preference stock is callable at the liquidation price plus accrued dividends. None of the Duquesne Light preferred or preference stock issues has mandatory
purchase requirements.

Preferred and preference dividends of Holdings and its affiliates included in interest and other charges were $7.9
million, $8.0 million and $6.9 million in 2006, 2005 and 2004. Total preferred and preference stock had involuntary liquidation values of $147.4 million and $148.8 million, which exceeded par by $11.6 million and $12.9 million as of
December 31, 2006 and 2005.

Preferred and preference dividends of Duquesne Light were $7.9 million, $8.0 million and $6.6 million in
2006, 2005 and 2004. Total preferred and preference stock had involuntary liquidation values of $147.4 million and $148.8 million, which exceeded par by $11.6 million and $12.9 million as of December 31, 2006 and 2005.

We have an Employee Stock Ownership Plan (ESOP) to provide matching contributions for the Holdings 401(k) Retirement Savings Plan. (See Note 13.) We
issued and sold 845,070 shares of



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Duquesne Light preference stock, plan series A, to the trustee of the ESOP. As consideration for the stock, we 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 the greater of one and one-half shares of Holdings common stock or $35.50 worth of Holdings common stock.
Dividends on the preference stock and cash contributions from Holdings are used to fund the repayment of the ESOP note. We made cash contributions of approximately $0.5 million, $0.2 million and $0.5 million for 2006, 2005 and 2004. These cash
contributions were the difference between the ESOP debt service and the amount of dividends on ESOP shares ($1.0 million, $1.1 million and $1.2 million in 2006, 2005 and 2004). As shares of preference stock are allocated to the accounts of
participants in the ESOP, we recognize compensation expense, and the amount of the deferred compensation benefit is amortized.



|17. | Equity
|--- | ------

Holdings.

Changes in the Number of Shares of Holdings Common Stock Outstanding as of December 31,



|            |  |                      |  |      |  |     
|----------- |  | -------------------- |  | ---- |  | ----
|            |  | (Millions of Shares)
|            |  | 2006                 |  | 2005 |  | 2004
|January 1   |  | 78.0                 |  | 77.0 |  | 75.4
|Issuances   |  | 9.6                  |  | 1.0  |  | 1.6 
|            |  |                      |  |      |  |     
|December 31 |  | 87.6                 |  | 78.0 |  | 77.0
|            |  |                      |  |      |  |     

On August 11, 2006, Holdings sold an aggregate of 8.8 million shares of common stock to
the Purchasers for an aggregate price of $141.4 million. (See Note 2.)

Once all dividends on Holdings preferred stock have been paid,
dividends may be paid on Holdings common stock as permitted by law and as declared by the board of directors. Since we are a holding company, substantially all of the assets shown on our consolidated balance sheets are held by our subsidiaries.
Accordingly, our earnings and cash flow, and our ability to meet our obligations, are largely dependent upon the earnings and cash flows of such subsidiaries and the distribution or other payment of such earnings to us in the form of dividends,
loans or advances, and repayment of loans and advances from us. Our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts due on our securities or to make any funds available for such payments. Our
subsidiaries ability to make dividend payments or other distributions to us may be restricted by their obligations to holders of their outstanding debt and preferred securities and to their creditors, the availability of earnings and the needs
of their businesses.

No part of the retained earnings of Holdings was restricted at December 31, 2006.

During 2006, we paid total common stock dividends of $81.7 million (including $1.2 million paid to Duquesne Light), and of this amount, $10.2 million was
reinvested to purchase approximately 592,000 shares of treasury stock for those shareholders who participated in our Dividend Reinvestment and Direct Stock Purchase Plan (DRIP).

Also during 2006, we issued approximately 123,000 shares of treasury stock for purchases made by shareholders under our DRIP.

During 2005, we paid total common stock dividends of $78.7 million (including $1.2 million paid to Duquesne Light), and of this amount, $10.4 million was
reinvested to purchase approximately 570,000 shares of treasury stock for those shareholders who participated in our DRIP.

Also during
2005, we issued approximately 199,000 shares of treasury stock for purchases made by shareholders under our DRIP and 352,244 shares as a result of the conversion of Holdings preferred stock.

During 2004, we paid total common stock dividends of $76.1 million (including $1.2 million paid to Duquesne Light), and of this amount, $10.5 million was
reinvested to purchase approximately 556,000 shares of treasury stock for those shareholders who participated in our DRIP.

Also during
2004, we issued approximately 191,000 shares of treasury stock for purchases made by shareholders under our DRIP and 406,000 shares as a result of the conversion of Holdings preferred stock.

When treasury stock is issued, the difference between the market price of our common stock, or the option exercise price, and the average cost of the
treasury stock causes an increase or decrease in the value of common stock on the consolidated balance sheets.

Accumulated other
comprehensive income consists of unrealized holding gains and losses on interest rate and cash flow hedging instruments and adjustments to the minimum pension liability.

Duquesne Light.In July 1989, Duquesne Light became a wholly owned subsidiary of Holdings,



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whose common stock replaced the outstanding shares of Duquesne Lights common stock, except for the 10 shares Holdings owns.

Payments of dividends on Duquesne Light common stock may be restricted by obligations to holders of its preferred and preference stock, pursuant to its
Restated Articles of Incorporation. No dividends or distributions may be made on Duquesne Lights common stock if it has not paid dividends on its preferred or preference stock. Dividends may also be effectively limited by the terms of certain
financing agreements. As of December 31, 2006, $242.2 million of net assets at Duquesne Light were restricted from transfer to Holdings under certain debt covenants. Further, the aggregate amount of 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. No part of Duquesne Lights retained earnings was restricted
as of December 31, 2006.

During 2006, 2005 and 2004, Duquesne Light paid dividends on common stock to Holdings of zero,
$20 million and $71 million.

In February 2006, Holdings made equity contributions of $27.6 million to Duquesne Light as part of an
agreement with the PUC. This amount represents the difference in interest that would have been charged on a note to Holdings had the interest rate not been lowered during the term of the note.

During 2005, Holdings made equity contributions to Duquesne Light totaling $82.5 million.

Accumulated other comprehensive income consists of unrealized gains or losses on available for sale investments and adjustments to the minimum pension
liability.



|18. | Discontinued Operations
|--- | -----------------------

Pursuant to agreements
entered into as well as our subsequent sale of our investments in our landfill gas business, AquaSource and Pro Am, these subsidiaries have been reflected as discontinued operations in the consolidated financial statements.

LANDFILL GAS

On December 29, 2006, DQE
Financial closed on the sale of its landfill gas business to Blue Wolf Energy Holdings LLC for a purchase price of approximately $102 million, which reflects certain anticipated closing and post-closing adjustments with respect to indebtedness,
working capital, capital expenditures, put options and the unwinding of certain hedging arrangements.

We received $60 million in cash on
December 29, 2006. The buyer signed a demand note for the remaining $41.8 million. The note was paid in full on January 2, 2007.

The purchase agreement contains customary representations and warranties of DQE Financial with respect to contracts, permits, taxes, litigation, benefit plans, labor matters and environmental matters. The purchase agreement also contains
certain customary covenants, including, among others, covenants regarding the operations prior to the closing, covenants to obtain all necessary regulatory approvals and other consents, covenants regarding employees of the business, and covenants
not to own or operate a landfill gas-to-energy business for two years after closing.

The purchase agreement also includes customary
indemnification provisions that are applicable after the closing.

The effective tax rate of our landfill gas business was impacted by
Section 45K tax credits. These tax credits were $6.9 million, $9.6 million and $10.1 million in 2006, 2005 and 2004.

AQUASOURCE

In July 2003, AquaSource closed the sale of its investor-owned water utilities (and certain related contract operations) to Aqua America for a purchase
price of approximately $178 million in cash, after working capital and purchase price adjustments, including the one described below. Aqua America also assumed $10.4 million of debt associated with the business.

Unable to resolve purchase price adjustment issues regarding rate base and customer connections, AquaSource and Aqua America agreed to arbitrate their
dispute. In August 2004, the arbitration panel found in Aqua Americas favor, reducing the final purchase price by approximately $12 million. The resulting payment to Aqua America had been reserved for, and accordingly did not have a material
adverse effect on our financial position or results of operations.

In May 2004, AquaSource repurchased the minority interest held by an
unrelated party for approximately $8.2 million.

In 2003, AquaSource sold various other operations for $17.7 million, though subsequent
purchase price adjustments reduced the net amount to $16.3 million. Of the total purchase price, $3.3 million was in the form of a personally guaranteed promissory note, which was paid in full in January 2005. Also during 2003, we spent
approximately $16.8 million for water utility construction prior to the sale of AquaSource.

In connection with the assignment of certain
rights to a previous construction contract, AquaSource received $1.7 million in January 2006 in settlement of a receivable that had been previously fully reserved. This amount is included on Holdings consolidated

balance sheet as a current asset from discontinued operations as of December 31, 2005.



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PRO AM

On December 13, 2002, we sold Pro Ams propane distribution business to Ferrellgas Partners, L.P., for approximately $42 million, $32 million of which was paid in cash at the closing. We received an unsecured note for the
remaining $10 million, which matured on December 13, 2003. We collected $9.4 million in full settlement of this note.

The following
table summarizes income statement data from discontinued operations:



|                                                            |  |                                               |      |      |   |      |  |   |     
|----------------------------------------------------------- |  | --------------------------------------------- | ---- | ---- | - | ---- |  | - | ----
|                                                            |  | (Millions of Dollars) Year Ended December 31,
|                                                            |  | 2006                                          |      | 2005 |   | 2004
|Revenues                                                    |  | $                                             | 49.5 |      | $ | 50.3 |  | $ | 34.7
|                                                            |  |                                               |      |      |   |      |  |   |     
|Operating Results, net of tax of $(1.0), $(4.0), and $(9.9) |  | $                                             | 16.5 |      | $ | 18.7 |  | $ | 13.0
|Gain from sale, net of tax of $16.7, $0.8, and $0.4         |  |                                               | 29.5 |      |   | 1.3  |  |   | 0.7 
|                                                            |  |                                               |      |      |   |      |  |   |     
|Income from Discontinued Operations                         |  | $                                             | 46.0 |      | $ | 20.0 |  | $ | 13.7
|                                                            |  |                                               |      |      |   |      |  |   |     

The following table summarizes major assets and liabilities of discontinued operations:



|                              |  |                                         |     |      |   |     
|----------------------------- |  | --------------------------------------- | --- | ---- | - | ----
|                              |  | (Millions of Dollars)As of December 31,
|                              |  | 2006                                    |     | 2005
|Other current assets          |  | $                                       | 0.2 |      | $ | 12.5
|Long-term investments         |  |                                         |    |      |   | 9.9 
|Property and equipment, net   |  |                                         |    |      |   | 15.5
|Other non-current assets      |  |                                         |    |      |   | 10.5
|Other current liabilities     |  |                                         | 3.0 |      |   | 19.9
|Other non-current liabilities |  |                                         |    |      |   | 5.2 



|19. | Duquesne Light Transactions With Affiliates
|--- | -------------------------------------------

As a
wholly owned subsidiary of Holdings, Duquesne Light has various transactions with its parent company and affiliates.

Duquesne Light
generally pays quarterly dividends to Holdings. During 2005, Duquesne Light embarked on a significant capital expenditure program, and began retaining more of its earnings than in prior years. As of December 31, 2006 and 2005, Duquesne
Lights dividend payable to Holdings was zero.

Duquesne Light participates in a tax sharing arrangement with Holdings to provide,
among other things, for the payment of taxes for periods during which Holdings and Duquesne Light are included in the same consolidated group for federal tax purposes. Duquesne Light shares in the consolidated tax liability to the extent of its
income or loss for the year. (See Note 10.) As of December 31, 2006 and 2005, Duquesne Lights tax receivable from Holdings under this arrangement was $39.6 million and $6.0 million and was included in receivable from or payable to
affiliates on Duquesne Lights consolidated balance sheets.

Following the sale of generation assets in 2000, Duquesne Light loaned
$250 million of the sale proceeds to Holdings. Duquesne Light recorded interest income from Holdings on this note until its redemption in 2005.

Duquesne Light participated in a cash pool arrangement with DQE Capital, until November 2005, and earned interest income on available cash that was deposited with DQE Capital. As a holder of Holdings common stock, Duquesne Light receives
dividend income from Holdings.

Duquesne Light charges an administrative fee to Holdings and its affiliates based on an allocation method
that considers the cost of actual or estimated services performed and other expenses incurred on behalf of Holdings or its affiliates. Following the sale of several of Holdings non-complementary businesses, administrative cost allocations to
affiliates is lower in 2005 as compared to 2004. In 2006 Holdings began charging an administrative fee to Duquesne Light, as well as its other subsidiaries.

Duquesne Light collects pole and duct revenue from its communications affiliate and pays the same affiliate for the rental of communication fiber. Duquesne Light purchases energy for its internal use from Duquesne
Light Energy, and collects transmission revenues from the same affiliate.

During 2005, Duquesne Lights former subsidiary, Duquesne
Power, made wholesale sales of energy to Duquesne Light Energy and incurred interest expense to Holdings on a working capital note. On December 31, 2005, Duquesne Light made a $17.7 million non-cash dividend to Holdings through the transfer of
its subsidiary, Duquesne Power. This entity was subsequently distributed to another Holdings subsidiary. This transfer effectively eliminated the net income in Duquesne Lights supply segment after 2005. As of December 31, 2006 and 2005,
Duquesne Lights payable to Duquesne Power for energy supplied under the full-requirements



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contract was $49.0 million and $46.2 million and was included in payable to affiliates on Duquesne Lights consolidated balance sheets.

Certain of Duquesne Lights revenues and expenses relate to transactions with Holdings and its affiliates, including the following:



|                                           |  |                                               |       |   |      |   |      |      |  |   |      |  
|------------------------------------------ |  | --------------------------------------------- | ----- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                           |  | (Millions of Dollars) Year Ended December 31, |      
|                                           |  | 2006                                          |       |   | 2005 |   |      | 2004 | 
|Revenues and Other Income:                 |  |                                               |       |   |      |   |      |      |  |   |      |  
|Interest income                            |  | $                                             | 0.1   |   |      | $ | 10.1 |      |  | $ | 14.3 |  
|Dividend income from Holdings common stock |  |                                               | 1.2   |   |      |   | 1.2  |      |  |   | 1.2  |  
|Wholesale energy sales                     |  |                                               |      |   |      |   | 45.1 |      |  |   |     |  
|Transmission revenue                       |  |                                               | 3.2   |   |      |   | 1.8  |      |  |   |     |  
|Duct and pole rental revenue               |  |                                               | 1.3   |   |      |   | 1.2  |      |  |   | 1.1  |  
|                                           |  |                                               |       |   |      |   |      |      |  |   |      |  
|                                           |  |                                               |      
|Expenses:                                  |  |                                               |       |   |      |   |      |      |  |   |      |  
|Purchased power                            |  | $                                             | 346.3 |   |      | $ |     |      |  | $ |     |  
|Administrative cost allocations (a)        |  |                                               | (5.5  | ) |      |   | (2.6 | )    |  |   | (8.8 | )
|Interest on Powers note with Holdings     |  |                                               |      |   |      |   | 1.0  |      |  |   |     |  
|Rental of communication fiber              |  |                                               | 1.0   |   |      |   | 0.5  |      |  |   | 0.4  |  
|Company use energy                         |  |                                               | 1.5   |   |      |   | 1.5  |      |  |   |     |  
|                                           |  |                                               |       |   |      |   |      |      |  |   |      |  

---

|(a) | Allocated labor charges include the associated fringe benefits, including pension and health care costs.
|--- | --------------------------------------------------------------------------------------------------------



|20. | Supplemental Cash Flow Disclosure
|--- | ---------------------------------

Non-cash
investing activity in 2006 at Holdings included the receipt of a $41.8 million demand note as part of the 2006 sale of our landfill gas business. Non-cash investing activity in 2006 at both Holdings and Duquesne Light consisted of a $0.5 million
increase in accounts payable related to construction expenditures.

Non-cash activity related to the pension plans in 2006 consisted of a
$37.1 million increase in prepaid pension costs, a $42.7 million decrease in pension intangible assets, a $43.8 million increase in pension regulatory assets, a $12.1 million decrease in pension liabilities, a $29.2 million increase in pension
regulatory liabilities, a $8.8 million increase in deferred income taxes and a $12.3 million increase in accumulated other comprehensive income.

Non-cash investing activity in 2005 at both Holdings and Duquesne Light consisted of a $21.7 million increase in accounts payable related to construction expenditures. Non-cash financing activity in 2005 at Duquesne Light consisted of a
$17.7 million non-cash dividend of a subsidiary to Holdings. The subsidiarys balance sheet consists primarily of derivative assets and liabilities and the related deferred tax liabilities and accumulated other comprehensive income.

Non-cash activity related to the pension plans in 2005 consisted of a $5.1 million increase in prepaid pension costs, a $36.9 million increase in
pension intangible assets, a $82.4 million increase in pension liabilities, a $16.8 million decrease in deferred income taxes and a $23.6 million decrease in accumulated other comprehensive income.

Non-cash activity related to the pension plans in 2004 consisted of a $4.5 million increase in prepaid pension costs, a $5.8 million increase in pension
intangible assets and a $10.3 million increase in pension liabilities.

Holdings Changes in Working Capital Other than Cash (a) for the Year Ended
December 31,



|                          |  |                       |       |   |      |   |       |      |  |   |       |  
|------------------------- |  | --------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                          |  | (Millions of Dollars) |      
|                          |  | 2006                  |       |   | 2005 |   |       | 2004 | 
|Receivables               |  | $                     | (30.1 | ) |      | $ | (13.4 | )    |  | $ | (10.9 | )
|Other current assets      |  |                       | (2.2  | ) |      |   | 5.6   |      |  |   | 3.7   |  
|Accounts payable          |  |                       | 9.0   |   |      |   | (21.0 | )    |  |   | (12.8 | )
|Other current liabilities |  |                       | (59.8 | ) |      |   | 9.8   |      |  |   | 11.5  |  
|                          |  |                       |       |   |      |   |       |      |  |   |       |  
|Total                     |  | $                     | (83.1 | ) |      | $ | (19.0 | )    |  | $ | (8.5  | )
|                          |  |                       |       |   |      |   |       |      |  |   |       |  

---

|(a) | The amounts shown exclude the effects of acquisitions and dispositions.
|--- | -----------------------------------------------------------------------

Duquesne Light Changes in Working Capital Other than Cash (a) for the Year Ended December 31,



|                          |  |                       |       |   |      |   |       |      |  |   |       |  
|------------------------- |  | --------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                          |  | (Millions of Dollars) |      
|                          |  | 2006                  |       |   | 2005 |   |       | 2004 | 
|Receivables               |  | $                     | (50.3 | ) |      | $ | (18.7 | )    |  | $ | (5.7  | )
|Other current assets      |  |                       | (2.4  | ) |      |   | (4.3  | )    |  |   | 3.4   |  
|Accounts payable          |  |                       | 14.5  |   |      |   | (20.7 | )    |  |   | (3.8  | )
|Other current liabilities |  |                       | (5.3  | ) |      |   | 5.3   |      |  |   | (48.7 | )
|                          |  |                       |       |   |      |   |       |      |  |   |       |  
|Total                     |  | $                     | (43.5 | ) |      | $ | (38.4 | )    |  | $ | (54.8 | )
|                          |  |                       |       |   |      |   |       |      |  |   |       |  

---

|(a) | The amounts shown exclude the effects of the transfer of the subsidiary.
|--- | ------------------------------------------------------------------------



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|21. | Business Segments and Related Information
|--- | -----------------------------------------

Duquesne
Light reports the following business segments: (1) transmission and distribution of electricity (electricity delivery business segment) and (2) supply of electricity by Duquesne Light, which is our POLR business, and, in 2005, included
Duquesne Power (Duquesne Light supply business segment).

Holdings reports the following business segments: (1) transmission and
distribution of electricity (electricity delivery business segment), (2) supply of electricity, which includes Duquesne Lights supply segment, DLE, Duquesne Power and, beginning September 1, 2006, the results from the Keystone
and Conemaugh power plants (electricity supply business segment), (3) DES operation and maintenance of energy facilities and, for a single customer, synthetic fuel facilities (Energy Solutions business segment), (4) DQE
Financials collection and processing of landfill gas and management of structured finance and alternative energy investments (Financial business segment), and (5) DQE Communications operation, maintenance and leasing of its fiber
optic based network (Communications business segment). We also report an all other category to include our other subsidiaries below the quantitative threshold for disclosure. These subsidiaries provide corporate administrative functions,
financing, and insurance services for our various affiliates.

In 2005 and 2004, both Holdings and Duquesne Light also reported the CTC
business segment, which reported the collection of transition costs that were fully collected as of December 31, 2005.

Duquesne Light Company

Business Segments for the Twelve Months Ended December 31, 2006



|                                            |  |                       |         |   |                     |   |              |  |   |         |  
|------------------------------------------- |  | --------------------- | ------- | - | ------------------- | - | ------------ |  | - | ------- | -
|                                            |  | (Millions of Dollars) |        
|                                            |  | ElectricityDelivery   |         |   | DuquesneLightSupply |   | Consolidated | 
|Operating revenues                          |  | $                     | 339.2   |   |                     | $ | 384.0        |  | $ | 723.2   |  
|Operating expenses                          |  |                       | 193.3   |   |                     |   | 383.1        |  |   | 576.4   |  
|Depreciation and amortization expense       |  |                       | 75.0    |   |                     |   |             |  |   | 75.0    |  
|                                            |  |                       |         |   |                     |   |              |  |   |         |  
|Operating income                            |  |                       | 70.9    |   |                     |   | 0.9          |  |   | 71.8    |  
|Other incomenet                            |  |                       | (7.4    | ) |                     |   |             |  |   | (7.4    | )
|Interest and other charges                  |  |                       | 41.5    |   |                     |   |             |  |   | 41.5    |  
|                                            |  |                       |         |   |                     |   |              |  |   |         |  
|Income before income taxes                  |  |                       | 22.0    |   |                     |   | 0.9          |  |   | 22.9    |  
|Income tax expense                          |  |                       | 18.2    |   |                     |   | 0.4          |  |   | 18.6    |  
|                                            |  |                       |         |   |                     |   |              |  |   |         |  
|Net (Loss) Income                           |  |                       | 3.8     |   |                     |   | 0.5          |  |   | 4.3     |  
|Dividends on preferred and preference stock |  |                       | 7.9     |   |                     |   |             |  |   | 7.9     |  
|                                            |  |                       |         |   |                     |   |              |  |   |         |  
|(Loss) earnings available for common stock  |  | $                     | (4.1    | ) |                     | $ | 0.5          |  | $ | (3.6    | )
|                                            |  |                       |         |   |                     |   |              |  |   |         |  
|Assets                                      |  | $                     | 2,275.8 |   |                     | $ |             |  | $ | 2,275.8 |  
|                                            |  |                       |         |   |                     |   |              |  |   |         |  
|Capital expenditures                        |  | $                     | 222.8   |   |                     | $ |             |  | $ | 222.8   |  
|                                            |  |                       |         |   |                     |   |              |  |   |         |  



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Business Segments for the Twelve Months Ended December 31, 2005



|                                            |  |                       |         |                      |   |       |  |              |     |  |   |        
|------------------------------------------- |  | --------------------- | ------- | -------------------- | - | ----- |  | ------------ | --- |  | - | -------
|                                            |  | (Millions of Dollars)
|                                            |  | ElectricityDelivery   |         | DuquesneLight Supply |   | CTC   |  | Consolidated
|Operating revenues                          |  | $                     | 343.5   |                      | $ | 443.8 |  | $            | 5.1 |  | $ | 792.4  
|Operating expenses                          |  |                       | 178.2   |                      |   | 394.8 |  |              | 0.3 |  |   | 573.3  
|Depreciation and amortization expense       |  |                       | 67.1    |                      |   |      |  |              | 4.7 |  |   | 71.8   
|                                            |  |                       |         |                      |   |       |  |              |     |  |   |        
|Operating income                            |  |                       | 98.2    |                      |   | 49.0  |  |              | 0.1 |  |   | 147.3  
|Other income - net                          |  |                       | 15.9    |                      |   | 0.3   |  |              |    |  |   | 16.2   
|Interest and other charges                  |  |                       | 47.0    |                      |   | 1.0   |  |              |    |  |   | 48.0   
|                                            |  |                       |         |                      |   |       |  |              |     |  |   |        
|Income before income taxes                  |  |                       | 67.1    |                      |   | 48.3  |  |              | 0.1 |  |   | 115.5  
|Income tax expense                          |  |                       | 22.6    |                      |   | 19.9  |  |              |    |  |   | 42.5   
|                                            |  |                       |         |                      |   |       |  |              |     |  |   |        
|Net Income                                  |  |                       | 44.5    |                      |   | 28.4  |  |              | 0.1 |  |   | 73.0   
|Dividends on preferred and preference stock |  |                       | 8.0     |                      |   |      |  |              |    |  |   | 8.0    
|                                            |  |                       |         |                      |   |       |  |              |     |  |   |        
|Earnings available for common stock         |  | $                     | 36.5    |                      | $ | 28.4  |  | $            | 0.1 |  | $ | 65.0   
|                                            |  |                       |         |                      |   |       |  |              |     |  |   |        
|Assets                                      |  | $                     | 2,123.1 |                      | $ |      |  | $            |    |  | $ | 2,123.1
|                                            |  |                       |         |                      |   |       |  |              |     |  |   |        
|Capital expenditures                        |  | $                     | 153.9   |                      | $ |      |  | $            |    |  | $ | 153.9  
|                                            |  |                       |         |                      |   |       |  |              |     |  |   |        

Business Segments for the Twelve Months Ended December 31, 2004



|                                            |  |                       |         |                      |   |       |  |              |      |  |   |        
|------------------------------------------- |  | --------------------- | ------- | -------------------- | - | ----- |  | ------------ | ---- |  | - | -------
|                                            |  | (Millions of Dollars)
|                                            |  | ElectricityDelivery   |         | DuquesneLight Supply |   | CTC   |  | Consolidated
|Operating revenues                          |  | $                     | 344.7   |                      | $ | 434.5 |  | $            | 10.1 |  | $ | 789.3  
|Operating expenses                          |  |                       | 164.7   |                      |   | 402.8 |  |              | 0.4  |  |   | 567.9  
|Acquisition termination cost                |  |                       |        |                      |   | 8.3   |  |              |     |  |   | 8.3    
|Depreciation and amortization expense       |  |                       | 62.3    |                      |   |      |  |              | 9.1  |  |   | 71.4   
|                                            |  |                       |         |                      |   |       |  |              |      |  |   |        
|Operating income                            |  |                       | 117.7   |                      |   | 23.4  |  |              | 0.6  |  |   | 141.7  
|Other income - net                          |  |                       | 16.6    |                      |   |      |  |              |     |  |   | 16.6   
|Interest and other charges                  |  |                       | 46.2    |                      |   |      |  |              |     |  |   | 46.2   
|                                            |  |                       |         |                      |   |       |  |              |      |  |   |        
|Income before income taxes                  |  |                       | 88.1    |                      |   | 23.4  |  |              | 0.6  |  |   | 112.1  
|Income tax expense                          |  |                       | 34.4    |                      |   | 9.7   |  |              | 0.2  |  |   | 44.3   
|                                            |  |                       |         |                      |   |       |  |              |      |  |   |        
|Net Income                                  |  |                       | 53.7    |                      |   | 13.7  |  |              | 0.4  |  |   | 67.8   
|Dividends on preferred and preference stock |  |                       | 6.6     |                      |   |      |  |              |     |  |   | 6.6    
|                                            |  |                       |         |                      |   |       |  |              |      |  |   |        
|Earnings available for common stock         |  | $                     | 47.1    |                      | $ | 13.7  |  | $            | 0.4  |  | $ | 61.2   
|                                            |  |                       |         |                      |   |       |  |              |      |  |   |        
|Assets                                      |  | $                     | 2,287.1 |                      | $ | 1.2   |  | $            | 4.7  |  | $ | 2,293.0
|                                            |  |                       |         |                      |   |       |  |              |      |  |   |        
|Capital expenditures                        |  | $                     | 83.4    |                      | $ | 0.1   |  | $            |     |  | $ | 83.5   
|                                            |  |                       |         |                      |   |       |  |              |      |  |   |        



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Duquesne Light Holdings

Business Segments for the Twelve Months Ended December 31, 2006



|                                         |  |                       |         |   |                   |   |                  |  |           |      |  |                 |       |           |  |   |               |  |   |               |   |  |   |      |   |  |   |        
|---------------------------------------- |  | --------------------- | ------- | - | ----------------- | - | ---------------- |  | --------- | ---- |  | --------------- | ----- | --------- |  | - | ------------- |  | - | ------------- | - |  | - | ---- | - |  | - | -------
|                                         |  | (Millions of Dollars)
|                                         |  | ElectricityDelivery   |         |   | ElectricitySupply |   | Energy Solutions |  | Financial |      |  | Communi-cations |       | All Other |  |   | Elimina-tions |  |   | Consoli-dated
|Operating revenues                       |  | $                     | 339.2   |   |                   | $ | 503.8            |  | $         | 55.6 |  | $               |      |           |  | $ | 11.1          |  | $ |              |   |  | $ | (7.5 | ) |  | $ | 902.2  
|Operating expenses                       |  |                       | 193.3   |   |                   |   | 478.4            |  |           | 27.3 |  |                 | 8.1   |           |  |   | 4.9           |  |   | 17.7          |   |  |   | (7.5 | ) |  |   | 722.2  
|Depreciation and amortization expense    |  |                       | 75.0    |   |                   |   | 2.4              |  |           | 0.8  |  |                 |      |           |  |   | 2.3           |  |   | 0.2           |   |  |   |     |   |  |   | 80.7   
|                                         |  |                       |         |   |                   |   |                  |  |           |      |  |                 |       |           |  |   |               |  |   |               |   |  |   |      |   |  |   |        
|Operating income (loss)                  |  |                       | 70.9    |   |                   |   | 23.0             |  |           | 27.5 |  |                 | (8.1  | )         |  |   | 3.9           |  |   | (17.9         | ) |  |   |     |   |  |   | 99.3   
|Other income  net                       |  |                       | (7.4    | ) |                   |   | 0.5              |  |           | 1.2  |  |                 | 8.2   |           |  |   | 0.2           |  |   | 5.4           |   |  |   | (7.1 | ) |  |   | 1.0    
|Interest and other charges               |  |                       | 49.4    |   |                   |   | 4.1              |  |           | 0.1  |  |                 |      |           |  |   |              |  |   | 30.1          |   |  |   | (7.0 | ) |  |   | 76.7   
|Benefit from limited partners interest  |  |                       |        |   |                   |   |                 |  |           |     |  |                 | 8.4   |           |  |   | 0.1           |  |   |              |   |  |   |     |   |  |   | 8.5    
|                                         |  |                       |         |   |                   |   |                  |  |           |      |  |                 |       |           |  |   |               |  |   |               |   |  |   |      |   |  |   |        
|Income (loss) before income taxes        |  |                       | 14.1    |   |                   |   | 19.4             |  |           | 28.6 |  |                 | 8.5   |           |  |   | 4.2           |  |   | (42.6         | ) |  |   | (0.1 | ) |  |   | 32.1   
|Income tax expense (benefit)             |  |                       | 18.2    |   |                   |   | 5.9              |  |           | 8.1  |  |                 | (3.4  | )         |  |   | 1.7           |  |   | (7.3          | ) |  |   | 0.2  |   |  |   | 23.4   
|                                         |  |                       |         |   |                   |   |                  |  |           |      |  |                 |       |           |  |   |               |  |   |               |   |  |   |      |   |  |   |        
|(Loss) income from continuing operations |  | $                     | (4.1    | ) |                   | $ | 13.5             |  | $         | 20.5 |  | $               | 11.9  |           |  | $ | 2.5           |  | $ | (35.3         | ) |  | $ | (0.3 | ) |  | $ | 8.7    
|                                         |  |                       |         |   |                   |   |                  |  |           |      |  |                 |       |           |  |   |               |  |   |               |   |  |   |      |   |  |   |        
|Assets (a)                               |  | $                     | 2,211.4 |   |                   | $ | 223.7            |  | $         | 6.1  |  | $               | 578.0 |           |  | $ | 31.5          |  | $ | 96.5          |   |  | $ |     |   |  | $ | 3,147.2
|                                         |  |                       |         |   |                   |   |                  |  |           |      |  |                 |       |           |  |   |               |  |   |               |   |  |   |      |   |  |   |        
|Capital expenditures                     |  | $                     | 222.8   |   |                   | $ | 0.8              |  | $         |     |  | $               |      |           |  | $ | 4.4           |  | $ |              |   |  | $ |     |   |  | $ | 228.0  
|                                         |  |                       |         |   |                   |   |                  |  |           |      |  |                 |       |           |  |   |               |  |   |               |   |  |   |      |   |  |   |        

---

|(a) | Excludes discontinued operations assets.
|--- | ----------------------------------------

Business Segments for the
Twelve Months Ended December 31, 2005



|                                         |  |                       |         |                   |   |       |  |                 |     |           |   |      |                 |   |          |   |  |               |      |  |               |       |   |  |   |       |   |  |   |        
|---------------------------------------- |  | --------------------- | ------- | ----------------- | - | ----- |  | --------------- | --- | --------- | - | ---- | --------------- | - | -------- | - |  | ------------- | ---- |  | ------------- | ----- | - |  | - | ----- | - |  | - | -------
|                                         |  | (Millions of Dollars)
|                                         |  | ElectricityDelivery   |         | ElectricitySupply |   | CTC   |  | EnergySolutions |     | Financial |   |      | Communi-cations |   | AllOther |   |  | Elimina-tions |      |  | Consoli-dated
|Operating revenues                       |  | $                     | 343.5   |                   | $ | 451.4 |  | $               | 5.1 |           | $ | 67.3 |                 | $ |         |   |  | $             | 9.5  |  | $             |      |   |  | $ | (4.9  | ) |  | $ | 871.9  
|Operating expenses                       |  |                       | 178.2   |                   |   | 402.4 |  |                 | 0.3 |           |   | 24.1 |                 |   | 10.9     |   |  |               | 3.8  |  |               | 7.2   |   |  |   | (4.9  | ) |  |   | 622.0  
|Depreciation and amortization expense    |  |                       | 67.1    |                   |   |      |  |                 | 4.7 |           |   | 1.1  |                 |   |         |   |  |               | 2.1  |  |               | 0.8   |   |  |   |      |   |  |   | 75.8   
|                                         |  |                       |         |                   |   |       |  |                 |     |           |   |      |                 |   |          |   |  |               |      |  |               |       |   |  |   |       |   |  |   |        
|Operating income (loss)                  |  |                       | 98.2    |                   |   | 49.0  |  |                 | 0.1 |           |   | 42.1 |                 |   | (10.9    | ) |  |               | 3.6  |  |               | (8.0  | ) |  |   |      |   |  |   | 174.1  
|Other income  net                       |  |                       | 15.9    |                   |   | 0.4   |  |                 |    |           |   | 19.3 |                 |   | 1.0      |   |  |               | 0.2  |  |               | 6.2   |   |  |   | (13.5 | ) |  |   | 29.5   
|Interest and other charges               |  |                       | 55.0    |                   |   | 1.1   |  |                 |    |           |   | 0.1  |                 |   |         |   |  |               |     |  |               | 19.6  |   |  |   | (13.3 | ) |  |   | 62.5   
|Benefit from limited partners interest  |  |                       |        |                   |   |      |  |                 |    |           |   |     |                 |   | 10.1     |   |  |               |     |  |               |      |   |  |   |      |   |  |   | 10.1   
|                                         |  |                       |         |                   |   |       |  |                 |     |           |   |      |                 |   |          |   |  |               |      |  |               |       |   |  |   |       |   |  |   |        
|Income (loss) before income taxes        |  |                       | 59.1    |                   |   | 48.3  |  |                 | 0.1 |           |   | 61.3 |                 |   | 0.2      |   |  |               | 3.8  |  |               | (21.4 | ) |  |   | (0.2  | ) |  |   | 151.2  
|Income tax expense (benefit)             |  |                       | 22.6    |                   |   | 19.9  |  |                 |    |           |   | 25.1 |                 |   | (10.5    | ) |  |               | 1.3  |  |               | (1.8  | ) |  |   | 0.4   |   |  |   | 57.0   
|                                         |  |                       |         |                   |   |       |  |                 |     |           |   |      |                 |   |          |   |  |               |      |  |               |       |   |  |   |       |   |  |   |        
|Income (loss) from continuing operations |  | $                     | 36.5    |                   | $ | 28.4  |  | $               | 0.1 |           | $ | 36.2 |                 | $ | 10.7     |   |  | $             | 2.5  |  | $             | (19.6 | ) |  | $ | (0.6  | ) |  | $ | 94.2   
|                                         |  |                       |         |                   |   |       |  |                 |     |           |   |      |                 |   |          |   |  |               |      |  |               |       |   |  |   |       |   |  |   |        
|Assets (a)                               |  | $                     | 2,100.1 |                   | $ | 68.1  |  | $               |    |           | $ | 9.5  |                 | $ | 537.8    |   |  | $             | 29.9 |  | $             | 26.8  |   |  | $ |      |   |  | $ | 2,772.2
|                                         |  |                       |         |                   |   |       |  |                 |     |           |   |      |                 |   |          |   |  |               |      |  |               |       |   |  |   |       |   |  |   |        
|Capital expenditures                     |  | $                     | 153.9   |                   | $ |      |  | $               |    |           | $ | 0.1  |                 | $ |         |   |  | $             | 3.2  |  | $             |      |   |  | $ |      |   |  | $ | 157.2  
|                                         |  |                       |         |                   |   |       |  |                 |     |           |   |      |                 |   |          |   |  |               |      |  |               |       |   |  |   |       |   |  |   |        

---

|(a) | Excludes discontinued operations assets.
|--- | ----------------------------------------



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Business Segments for the Twelve Months Ended December 31, 2004



|                                         |  |                       |         |                   |   |       |  |                 |      |           |   |      |                 |   |          |   |  |               |      |  |               |       |   |  |   |       |   |  |   |        
|---------------------------------------- |  | --------------------- | ------- | ----------------- | - | ----- |  | --------------- | ---- | --------- | - | ---- | --------------- | - | -------- | - |  | ------------- | ---- |  | ------------- | ----- | - |  | - | ----- | - |  | - | -------
|                                         |  | (Millions of Dollars)
|                                         |  | ElectricityDelivery   |         | ElectricitySupply |   | CTC   |  | EnergySolutions |      | Financial |   |      | Communi-cations |   | AllOther |   |  | Elimina-tions |      |  | Consoli-dated
|Operating revenues                       |  | $                     | 344.7   |                   | $ | 434.5 |  | $               | 10.1 |           | $ | 66.4 |                 | $ |         |   |  | $             | 8.1  |  | $             | 0.4   |   |  | $ | (1.7  | ) |  | $ | 862.5  
|Operating expenses                       |  |                       | 164.7   |                   |   | 402.8 |  |                 | 0.4  |           |   | 31.3 |                 |   | 11.8     |   |  |               | 3.3  |  |               | 12.1  |   |  |   | (1.6  | ) |  |   | 624.8  
|Acquisition termination cost             |  |                       |        |                   |   | 8.3   |  |                 |     |           |   |     |                 |   |         |   |  |               |     |  |               |      |   |  |   |      |   |  |   | 8.3    
|Depreciation and amortization expense    |  |                       | 62.3    |                   |   |      |  |                 | 9.1  |           |   | 1.2  |                 |   |         |   |  |               | 1.9  |  |               | 0.9   |   |  |   |      |   |  |   | 75.4   
|                                         |  |                       |         |                   |   |       |  |                 |      |           |   |      |                 |   |          |   |  |               |      |  |               |       |   |  |   |       |   |  |   |        
|Operating income (loss)                  |  |                       | 117.7   |                   |   | 23.4  |  |                 | 0.6  |           |   | 33.9 |                 |   | (11.8    | ) |  |               | 2.9  |  |               | (12.6 | ) |  |   | (0.1  | ) |  |   | 154.0  
|Other incomenet                         |  |                       | 16.6    |                   |   |      |  |                 |     |           |   | 1.4  |                 |   | 2.5      |   |  |               | 0.1  |  |               | 1.3   |   |  |   | (16.2 | ) |  |   | 5.7    
|Interest and other charges               |  |                       | 52.8    |                   |   |      |  |                 |     |           |   | 0.1  |                 |   |         |   |  |               |     |  |               | 26.0  |   |  |   | (16.0 | ) |  |   | 62.9   
|Benefit from limited partners interest  |  |                       |        |                   |   |      |  |                 |     |           |   |     |                 |   | 7.4      |   |  |               |     |  |               |      |   |  |   |      |   |  |   | 7.4    
|                                         |  |                       |         |                   |   |       |  |                 |      |           |   |      |                 |   |          |   |  |               |      |  |               |       |   |  |   |       |   |  |   |        
|Income (loss) before income taxes        |  |                       | 81.5    |                   |   | 23.4  |  |                 | 0.6  |           |   | 35.2 |                 |   | (1.9     | ) |  |               | 3.0  |  |               | (37.3 | ) |  |   | (0.3  | ) |  |   | 104.2  
|Income tax expense (benefit)             |  |                       | 34.4    |                   |   | 9.7   |  |                 | 0.2  |           |   | 12.9 |                 |   | (14.8    | ) |  |               | 1.3  |  |               | (13.1 | ) |  |   | 0.3   |   |  |   | 30.9   
|                                         |  |                       |         |                   |   |       |  |                 |      |           |   |      |                 |   |          |   |  |               |      |  |               |       |   |  |   |       |   |  |   |        
|Income (loss) from continuing operations |  | $                     | 47.1    |                   | $ | 13.7  |  | $               | 0.4  |           | $ | 22.3 |                 | $ | 12.9     |   |  | $             | 1.7  |  | $             | (24.2 | ) |  | $ | (0.6  | ) |  | $ | 73.3   
|                                         |  |                       |         |                   |   |       |  |                 |      |           |   |      |                 |   |          |   |  |               |      |  |               |       |   |  |   |       |   |  |   |        
|Assets                                   |  | $                     | 1,879.5 |                   | $ | 1.1   |  | $               | 4.7  |           | $ | 23.6 |                 | $ | 556.6    |   |  | $             | 28.6 |  | $             | 81.9  |   |  | $ |      |   |  | $ | 2,576.0
|                                         |  |                       |         |                   |   |       |  |                 |      |           |   |      |                 |   |          |   |  |               |      |  |               |       |   |  |   |       |   |  |   |        
|Capital expenditures                     |  | $                     | 83.4    |                   | $ | 0.1   |  | $               |     |           | $ | 0.1  |                 | $ |         |   |  | $             | 1.9  |  | $             |      |   |  | $ |      |   |  | $ | 85.5   
|                                         |  |                       |         |                   |   |       |  |                 |      |           |   |      |                 |   |          |   |  |               |      |  |               |       |   |  |   |       |   |  |   |        



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|22. | Quarterly Financial Information (Unaudited)
|--- | -------------------------------------------

Summary of Selected
Quarterly Financial Data

Duquesne Light Holdings



|                                             |  |                                                 |       |                |   |               |  |   |                |   |  |   |       |  
|-------------------------------------------- |  | ----------------------------------------------- | ----- | -------------- | - | ------------- |  | - | -------------- | - |  | - | ----- | -
|                                             |  | (Millions of Dollars, Except Per Share Amounts) |      
|2006 (a)                                     |  | First Quarter                                   |       | Second Quarter |   | Third Quarter |  |   | Fourth Quarter |  
|Operating revenues                           |  | $                                               | 208.4 |                | $ | 211.0         |  | $ | 262.6          |   |  | $ | 220.2 |  
|Operating income                             |  |                                                 | 30.3  |                |   | 32.8          |  |   | 25.5           |   |  |   | 10.7  |  
|Income (loss) from continuing operations (b) |  |                                                 | 8.6   |                |   | 9.1           |  |   | (2.3           | ) |  |   | (6.7  | )
|Income from discontinued operations          |  |                                                 | 5.8   |                |   | 2.1           |  |   | 3.2            |   |  |   | 34.9  |  
|Net income                                   |  |                                                 | 14.4  |                |   | 11.2          |  |   | 0.9            |   |  |   | 28.2  |  
|Basic earnings (loss) per share:             |  |                                                 |       |                |   |               |  |   |                |   |  |   |       |  
|Continuing operations                        |  |                                                 | 0.11  |                |   | 0.11          |  |   | (0.03          | ) |  |   | (0.08 | )
|Discontinued operations                      |  |                                                 | 0.07  |                |   | 0.03          |  |   | 0.04           |   |  |   | 0.40  |  
|Total                                        |  |                                                 | 0.18  |                |   | 0.14          |  |   | 0.01           |   |  |   | 0.32  |  
|Stock price:                                 |  |                                                 |       |                |   |               |  |   |                |   |  |   |       |  
|High                                         |  |                                                 | 18.27 |                |   | 17.10         |  |   | 19.94          |   |  |   | 20.25 |  
|Low                                          |  |                                                 | 16.50 |                |   | 15.82         |  |   | 16.44          |   |  |   | 19.51 |  
|                                             |  |                                                 |       |                |   |               |  |   |                |   |  |   |       |  
|                                             |  |                                                 |       |               
|2005 (a)                                     |  | First Quarter                                   |       | Second Quarter |   | Third Quarter |  |   | Fourth Quarter |  
|Operating revenues                           |  | $                                               | 209.1 |                | $ | 209.9         |  | $ | 251.7          |   |  | $ | 201.2 |  
|Operating income                             |  |                                                 | 46.7  |                |   | 37.9          |  |   | 59.0           |   |  |   | 30.5  |  
|Income from continuing operations (c)        |  |                                                 | 26.5  |                |   | 17.8          |  |   | 41.7           |   |  |   | 8.2   |  
|Income from discontinued operations          |  |                                                 | 8.5   |                |   | 3.7           |  |   | 1.9            |   |  |   | 5.9   |  
|Net income                                   |  |                                                 | 35.0  |                |   | 21.5          |  |   | 43.6           |   |  |   | 14.1  |  
|Basic earnings per share:                    |  |                                                 |       |                |   |               |  |   |                |   |  |   |       |  
|Continuing operations                        |  |                                                 | 0.34  |                |   | 0.23          |  |   | 0.54           |   |  |   | 0.10  |  
|Discontinued operations                      |  |                                                 | 0.11  |                |   | 0.05          |  |   | 0.02           |   |  |   | 0.08  |  
|Total                                        |  |                                                 | 0.45  |                |   | 0.28          |  |   | 0.56           |   |  |   | 0.18  |  
|Stock price:                                 |  |                                                 |       |                |   |               |  |   |                |   |  |   |       |  
|High                                         |  |                                                 | 19.17 |                |   | 19.25         |  |   | 19.43          |   |  |   | 17.40 |  
|Low                                          |  |                                                 | 17.43 |                |   | 17.30         |  |   | 17.17          |   |  |   | 16.14 |  
|                                             |  |                                                 |       |                |   |               |  |   |                |   |  |   |       |  

---

|(a) | The quarterly data reflect seasonal weather variations in the electric utilitys service territory. Stock prices reflect New York Stock Exchange data.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | In addition to the Duquesne Light items described in the following table, the following items also affected results. Due to the estimated phase-out of Section 45K tax credits,
results include a decrease (increase) in tax credits of $1.2 million, $3.3 million, $(1.4) million and $0.2 million in the first, second, third and fourth quarters. Results also include a $1.5 million, $4.3 million, $5.3 million and $8.6 million
decrease in the fair value of certain derivative energy contracts in the first, second, third and fourth quarters. Merger costs of $0.9 million, $4.3 million and $2.7 million affect results in the second, third and fourth quarter. (See Note 2.)
First quarter results include a charge of $2.9 million related to an IRS settlement. (See Note 10.) Fourth quarter results include $0.7 million of incremental stock-based compensation expense. (See Note 12.)
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | First quarter results include a $8.3 million increase in the fair value of certain derivative energy contracts at Duquesne Light and a $4.6 million gain on the sale of an investment
at DQE Financial. Third quarter results include a $11.7 million gain on the sale of an energy facility management project at DES and an $6.5 million increase in the fair value of certain derivative energy contracts at Duquesne Light. Fourth quarter
results include a $7.8 million gain on the sale of two energy facility management projects at DES, a $3.7 million decrease in the fair value of certain derivative energy contracts at Duquesne Light and $6.7 million of charges related to an energy
facility management project.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Duquesne Light Company



|                     |  |                       |       |                |   |               |  |   |                |   |  |   |       |  
|-------------------- |  | --------------------- | ----- | -------------- | - | ------------- |  | - | -------------- | - |  | - | ----- | -
|                     |  | (Millions of Dollars) |      
|2006 (a)             |  | First Quarter         |       | Second Quarter |   | Third Quarter |  |   | Fourth Quarter |  
|Operating revenues   |  | $                     | 174.0 |                | $ | 168.2         |  | $ | 208.8          |   |  | $ | 172.2 |  
|Operating income (b) |  |                       | 21.1  |                |   | 18.7          |  |   | 18.4           |   |  |   | 13.6  |  
|Net income (loss)    |  |                       | 8.4   |                |   | 5.9           |  |   | (3.5           | ) |  |   | (6.5  | )
|                     |  |                       |       |                |   |               |  |   |                |   |  |   |       |  
|                     |  |                       |       |               
|2005 (a)             |  | First Quarter         |       | Second Quarter |   | Third Quarter |  |   | Fourth Quarter |  
|Operating revenues   |  | $                     | 191.5 |                | $ | 189.9         |  | $ | 225.8          |   |  | $ | 185.2 |  
|Operating income (c) |  |                       | 42.6  |                |   | 32.3          |  |   | 52.5           |   |  |   | 19.9  |  
|Net income           |  |                       | 21.9  |                |   | 14.6          |  |   | 27.3           |   |  |   | 9.2   |  
|                     |  |                       |       |                |   |               |  |   |                |   |  |   |       |  

---

|(a) | The quarterly data reflect seasonal weather variations in our service territory.
|--- | --------------------------------------------------------------------------------

|(b) | Third quarter results include a net $16.1 million charge related to the Pennsylvania tax settlement. (See Note 10.) Fourth quarter results include $1.0 million of incremental
stock-based compensation expense, a $2.2 million pension plan curtailment and settlement cost and a $6.0 million charge related to our closed Warwick mine. (See Notes 12, 13 and 14.)
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | First quarter results include a $8.3 million increase in the fair value of certain derivative energy contracts. Third quarter results include an $6.5 million increase in the fair
value of certain derivative energy contracts. Fourth quarter results include a $3.7 million decrease in the fair value of certain derivative energy contracts.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|23. | Subsequent Events
|--- | -----------------

DES agreed to price concessions
for 2007 with the owners of the synthetic fuel facilities from which we earn fees from the operation and maintenance of the facilities. The agreement provides that DES will be paid a fixed fee per month, as well as an operating fee per ton of
synthetic fuel produced, however this operating fee is less than in previous years. These price concessions were designed to provide a mechanism to equalize the benefits achieved by the parties in the event of a phase out of Section 45K tax
credits in 2007, which would negatively impact the owner of the synthetic fuel facilities.

The price concessions include a true-up
provision that could reduce the ultimate price concessions granted to the facility owners. The true-up provisions are based in part on the actual 2007 Section 45K credit information to be published by the IRS in April 2008.

In January 2007, Holdings entered into a series of hedges in the crude oil commodity market designed to protect approximately 50% of the price
concessions given to the owner of the synthetic fuel facilities, assuming normal levels of operations. Crude oil is the underlying commodity that drives the economics and availability of the Section 45K tax credits for the owner.

On January 10, 2007, 128,200 shares of Holdings stock were issued to officers as part of a performance award. The right to these shares is subject
to the achievement of specified performance goals related to cumulative earnings before interest, taxes, depreciation, and amortization (EBITDA). At the end of the performance period, which ends on December 31, 2008, shares may vest within a
range of 0% to 150%. If a change in control occurs, we will grant cash representing the fair market value of the stock certificates that would otherwise be due under the performance award, representing a cumulative EBITDA reward equal to the greater
of 100% of the performance award or the actual performance award based upon EBITDA as the date of change in control.

In the first quarter
of 2007, Holdings initiated plans to reorganize its managerial workforce. This reorganization will streamline spans of control within the organization. Holdings plans to implement this reorganization during 2007.



|Item 9. | Changes In and Disagreements With Accountants On Accounting and Financial Disclosure.
|------- | -------------------------------------------------------------------------------------

None.



|Item 9A. | Controls and Procedures
.
|-------- | -------------------------

Disclosure Controls and Procedures

Management of both Holdings and Duquesne Light, with the participation of each entitys Chief Executive Officer and the Chief Financial Officer, has
evaluated their respective disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Although these controls and
procedures were designed to ensure that the information required to be disclosed in Holdings and Duquesne



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Lights reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules
and forms of the SEC all control systems have limitations . Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of both entities concluded that the disclosure controls and procedures were not effective for the reasons
discussed in Managements Report below.

Managements Report on Internal Control Over Financial Reporting

Management of both Holdings and Duquesne Light is responsible for establishing and maintaining adequate internal control over financial reporting. These
internal control systems are designed to provide reasonable assurance to each entitys management and board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, implemented, and executed have inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

As discussed in
Note 4 to the consolidated financial statements, Holdings has undivided interests in the Keystone and Conemaugh power plants, which were acquired in September 2006 and whose financial statements constitute 23.9% and 6.1% of net and total assets,
respectively, 1.2% of total operating revenues, and 4.9% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2006. These interests have been excluded from managements assessment of
internal control over financial reporting at Holdings.

Management of both entities assessed the effectiveness of their respective internal
control over financial reporting as of December 31, 2006. In making these assessments, each entity used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control  Integrated
Framework. Our assessment included reviewing the documentation of our controls, evaluating their design effectiveness, and testing their operating effectiveness. As defined by the Public Accounting Oversight Board Auditing Standard No. 2, a
material weakness is a significant control deficiency or a combination of significant control deficiencies that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not
be prevented or detected.

Management of Holdings has concluded that material weaknesses existed and Duquesne Light has concluded that a
material weakness existed in their respective internal controls over financial reporting as of December 31, 2006. In light of these material weaknesses, management of both Holdings and Duquesne Light has concluded that, as of December 31,
2006, it did not maintain effective internal control over financial reporting.

A material weakness identified at both Duquesne Light and
Holdings as of December 31, 2006 was as follows. Duquesne Lights and Holdings disclosure controls failed to identify, on a timely basis, an unfavorable regulatory decision such that its impact could be properly evaluated by
appropriate personnel.

A material weakness identified at Holdings as of December 31, 2006 was as follows. Holdings controls
related to derivative valuation failed to result in an accurate valuation of Holdings derivative energy contracts.

Such weaknesses
did not result in a material impact to either Duquesne Lights or Holdings interim or annual consolidated financial statements for 2006.

The independent auditors for Holdings and Duquesne Light have issued the below attestation reports on each entitys assessment of its internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

There have been no changes in Holdings or Duquesne Lights internal controls over financial reporting that occurred during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting other than the material weaknesses noted in the Managements Report above.

REPORTS OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Duquesne Light Holdings, Inc.:

We have audited managements
assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting, that Duquesne Light Holdings, Inc. and subsidiaries (the Company) did not maintain effective internal control over financial
reporting as of December 31, 2006 because of the effect of the material weaknesses identified in managements assessment based on the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission. As described in Managements Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at the Companys
undivided interests in the Keystone and Conemaugh power plants, which were acquired in September 2006 and whose financial statements constitute 23.9 percent and 6.1 percent of net and total assets, respectively, 1.2 percent of total operating
revenues, and 4.9 percent of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2006. Accordingly, our audit did not include the internal control over financial reporting at the Companys
undivided interests in Keystone and Conemaugh. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal



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control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.

A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement
of the annual or interim financial statements will not be prevented or detected. Managements assessment identified the following material weaknesses. The Companys controls designed to identify, evaluate and record or disclose contingent
liabilities did not operate effectively to timely identify a regulatory decision which had a negative financial statement impact to facilitate recording the amount in the proper quarterly financial statement period. This weakness resulted in errors
that were not material to an interim period however, based on the potential misstatement that could have occurred as a result of the deficiency, management has concluded that there was a more than remote likelihood that a material misstatement to
the annual or interim financial statements could have occurred and not be prevented or detected. In addition, the Companys controls over the process to determine and record the fair value of derivative instruments did not operate effectively.
Management concluded that there was a more than remote likelihood that a material misstatement to the annual or interim financial statements could have occurred and not be prevented or detected. These material weaknesses were considered in
determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2006, of the Company and this report does not
affect our report on such financial statements and financial statement schedules.

In our opinion, managements assessment that the Company did not
maintain effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective
internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedules as of and for the year ended December 31, 2006 of the Company and our report dated February 28, 2007 expressed an unqualified opinion on those financial statements and financial statement schedules
and included an explanatory paragraph regarding the adoption of a new accounting pronouncement effective December 31, 2006.

/s/ Deloitte & Touche
LLP

Pittsburgh, Pennsylvania

February 28, 2007



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To the Board of Directors and Shareholder of Duquesne Light Company:

We have audited managements assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting, that Duquesne Light
Company and subsidiaries (the Company) did not maintain effective internal control over financial reporting as of December 31, 2006 because of the effect of the material weakness identified in managements assessment based on
the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys
internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A companys internal control over
financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood
that a material misstatement of the annual or interim financial statements will not be prevented or detected. Managements assessment identified the following material weakness. The Companys controls designed to identify, evaluate
and record or disclose contingent liabilities did not operate effectively to timely identify a regulatory decision which had a negative financial statement impact to facilitate recording the amount in the proper quarterly financial statement period.
This weakness resulted in errors that were not material to an interim period however, based on the potential misstatement that could have occurred as a result of the deficiency, management has concluded that there was a more than remote likelihood
that a material misstatement to the annual or interim financial statements could have occurred and not be prevented or detected. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit
of the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2006, of the Company and this report does not affect our report on such financial statements and financial statement schedule.

In our opinion, managements assessment that the Company did not maintain effective internal control over financial reporting as of December 31,
2006, is fairly stated, in all material respects, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of
the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2006, based on the criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.



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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2006 of the Company and our report dated February 28, 2007 expressed an unqualified opinion on those financial statements and
financial statement schedule and included an explanatory paragraph regarding the adoption of a new accounting pronouncement effective December 31, 2006.



|                         
|-------------------------
|/s/ Deloitte & Touche LLP
|Pittsburgh, Pennsylvania 
|February 28, 2007        



|Item 9B. | Other Infor
mation.
|-------- | -------------------

As reported in Note 12 to the consolidated financial statements above, in November 2006
the terms of deferred stock unit awards previously made in 2003 and 2005 to certain officers were modified. Information regarding these modifications is set forth in and incorporated by reference from Exhibit 99.1. In addition, performance share
awards were granted to certain officers in January 2007. Information regarding these awards is set forth in and incorporated by reference from Exhibit 99.1

P
ART III



|Item 10. | Directors, Executive Officers and Corporate Governance.
|-------- | -------------------------------------------------------

Information relating to Holdings executive officers and Duquesne Lights executive officers and directors is set forth in Part I of this Report under the caption Executive Officers of the Registrant. All other
information about Holdings or Duquesne Light required under this Item 10 is set forth in and incorporated by reference from Exhibit 99.1.

Because Holdings lists its common stock on the New York Stock Exchange (NYSE), Holdings Chief Executive Officer is required to make, and has made, an annual certification to the NYSE stating that he was not aware of any violation by
Holdings of the corporate governance listing standards of the NYSE. Holdings Chief Executive Officer made his annual certification to that effect to the NYSE as of June 6, 2006. Because Duquesne Light lists only debt and preferred
securities on the NYSE, it is not required to make such annual certifications.

Both Holdings and Duquesne Light have filed, as exhibits to
this combined Annual Report on Form 10-K, the Chief Executive Officer and Chief Financial Officer certifications required under Section 302 of the Sarbanes-Oxley Act of 2002 regarding the quality of our public disclosure.



|Item 11. | Executive Compensation.
|-------- | -----------------------

Information relating to executive compensation for Holdings and Duquesne Light is set forth in
and incorporated by reference from Exhibit 99.1.



|Item 12. | Security Ownership of Certain Beneficial Ow
ners and Management and Related Stockholder Matters.
|-------- | ------------------------------------------------------------------------------------------------

Information relating to the ownership of
Holdings equity securities by Holdings and Duquesne Lights directors, officers and certain beneficial owners is set forth in and incorporated by reference from Exhibit 99.1.



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Equity Compensation Plan Information

The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our
existing compensation plans as of December 31, 2006:



|                                                           |  |                                                                                                 |  |                                                                             |       |                                                                                                                                               |          
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ----- | --------------------------------------------------------------------------------------------------------------------------------------------- | ---------
|                                                           |  | (a)                                                                                             |  | (b)                                                                         |       | (c)                                                                                                                                          
|Plan Category                                              |  | Number of securities to be issued upon exercise of
outstanding options, warrants and rights (1) |  | Weighted average exercise price of outstanding options, warrants and rights |       | Number of securities remaining available for future issuance under equity compensation plans (excludingsecurities reflected in column (a)
(2)
|Equity compensation plans approved by security holders     |  | 553,070                                                                                         |  | $                                                                           | 16.07 |                                                                                                                                               | 2,876,123
|                                                           |  |                                                                                                 |  |                                                                             |       |                                                                                                                                               |          
|Equity compensation plans not approved by security holders |  |                                                                                                |  |                                                                             |      |                                                                                                                                               |         
|                                                           |  |                                                                                                 |  |                                                                             |       |                                                                                                                                               |          
|Total                                                      |  | 553,070                                                                                         |  | $                                                                           | 16.07 |                                                                                                                                               | 2,876,123
|                                                           |  |                                                                                                 |  |                                                                             |       |                                                                                                                                               |          

---

|(1) | Includes 151,474 shares of common stock issuable upon exercise of options granted under our prior Long-Term Incentive Plan (discontinued in 2002) and 158,879 shares of common stock
issuable upon exercise of options granted under our current Incentive Plan. Reflects 181,600 and 10,950 deferred stock units awarded in 2003 and 2005, which were earned based on our achieving cumulative earnings per share goals through 2006, and
were paid in cash in 2007. Reflects 7,470; 2,905; 19,792 and 20,000 restricted shares issued in 2002, 2003, 2005 and 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | All of these shares are available under our current Incentive Plan.
|--- | -------------------------------------------------------------------



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|Item 13. | Certain Relationships and Related Transactions, and Director Independence.
|-------- | --------------------------------------------------------------------------

Information regarding Director relationships and independence is set forth in and incorporated by reference from Exhibit 99.1.



|Item 14. | Principal Accounting Fees and Services.
|-------- | ---------------------------------------

Information regarding Deloitte & Touche LLPs fees and services is set forth in and incorporated by reference from Exhibit 99.1. Such fees and services apply to Deloitte & Touche LLPs work for all of
Holdings consolidated subsidiaries, including Duquesne Light.

PART IV



|Item 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------

(a)(1) The following
information is set forth in Part II, Item 8:

Reports of Independent Registered Public Accounting Firm.

Holdings Consolidated Statements of Income for the Three Years Ended December 31, 2006.

Holdings Consolidated Balance Sheets, December 31, 2006 and 2005.

Holdings Consolidated Statements of Cash Flows for
the Three Years Ended December 31, 2006.

Holdings Consolidated Statements of Comprehensive Income for the Three Years Ended December 31, 2006.

Holdings Consolidated Statements of Common Shareholders Equity for the Three Years Ended December 31, 2006.

Duquesne Light Consolidated Statements of Income for the Three Years Ended December 31, 2006.

Duquesne Light Consolidated Balance Sheets, December 31, 2006 and 2005.

Duquesne Light Consolidated Statements of
Cash Flows for the Three Years Ended December 31, 2006.

Duquesne Light Consolidated Statements of Comprehensive Income for the Three Years Ended
December 31, 2006.

Duquesne Light Consolidated Statements of Common Shareholders Equity for the Three Years Ended December 31, 2006.

Notes to Consolidated Financial Statements.

(a)(2) The
following financial statement schedules are filed here as a part of this Report:

Schedules for the Three Years Ended December 31, 2006:

ICondensed Financial Information of Registrant (Holdings)

IIValuation and Qualifying Accounts (Holdings)

IIValuation and Qualifying Accounts (Duquesne
Light)

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 consolidated financial statements.

(a)(3) Exhibits are set forth in the
Exhibit Index below, incorporated here by reference. Documents other than those designated as being filed here are incorporated here by reference. Documents incorporated by reference to a Holdings 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 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. 1-956.

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(b)(10)(iii) of Regulation S-K.



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(b) Exhibits Index.



|            |  |                                                                                                                                                                                                 |  |                                                                                      
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                     |  | Method of Filing                                                                     
|2.1         |  | Agreement and Plan of Merger by and among Holdings, Castor Holdings LLC and Castor Merger Sub, Inc., dated as of July 5, 2006.                                                                  |  | Exhibit 2.1 to Holdings Form 8-K filed July 6, 2006.                                
|            |  |                                                                                                                                                                                                
|3.1         |  | Holdings Articles of Incorporation effective January 5, 1989.                                                                                                                                   |  | Exhibit 3.1 to the Holdings Form 10-K for the year ended December 31, 1989.          
|            |  |                                                                                                                                                                                                
|3.2         |  | Holdings Articles of Amendment effective April 27, 1989.                                                                                                                                        |  | Exhibit 3.2 to the Holdings Form 10-K for the year ended December 31, 1989.          
|            |  |                                                                                                                                                                                                
|3.3         |  | Holdings Articles of Amendment effective February 8, 1993.                                                                                                                                      |  | Exhibit 3.3 to the Holdings Form 10-K for the year ended December 31, 1992.          
|            |  |                                                                                                                                                                                                
|3.4         |  | Holdings Articles of Amendment effective May 24, 1994.                                                                                                                                          |  | Exhibit 3.4 to the Holdings Form 10-K for the year ended December 31, 1994.          
|            |  |                                                                                                                                                                                                
|3.5         |  | Holdings Articles of Amendment effective April 20, 1995.                                                                                                                                        |  | Exhibit 3.5 to the Holdings Form 10-K for the year ended December 31, 1995.          
|            |  |                                                                                                                                                                                                
|3.6         |  | Holdings Articles of Amendment effective September 30, 2003.                                                                                                                                    |  | Exhibit 3.6 to the Holdings Form 10-K for the year ended December 31, 2002.          
|            |  |                                                                                                                                                                                                
|3.7         |  | Holdings Statement with respect to the Preferred Stock, Series A (Convertible).                                                                                                                 |  | Exhibit 3.1 to the Holdings Form 10-Q for the quarter ended September 30, 1997.      
|            |  |                                                                                                                                                                                                
|3.8         |  | Duquesne Light Restated Articles of Incorporation currently in effect.                                                                                                                          |  | Exhibit 3.1 to the Duquesne Light Form 10-Q for the quarter ended June 30, 1999.     
|            |  |                                                                                                                                                                                                
|3.9         |  | Holdings By-Laws, as amended through September 30, 2003, and as currently in effect.                                                                                                            |  | Exhibit 3.1 to the Holdings Form 10-Q for the quarter ended September 30, 2003.      
|            |  |                                                                                                                                                                                                
|3.10        |  | Duquesne Light By-Laws, as amended through October 13, 2003, and as currently in effect.                                                                                                        |  | Exhibit 3.1 to the Duquesne Light Form 10-Q for the quarter ended September 30, 2003.
|            |  |                                                                                                                                                                                                
|3.11        |  | Form of Duquesne Light Statement with respect to the 6.50% Preferred Stock.                                                                                                                     |  | Exhibit 3.3 to Registration Statement (Form S-3) No. 333-112929.                     
|            |  |                                                                                                                                                                                                
|4.1         |  | Indenture of Mortgage and Deed of Trust dated as of April 1, 1992, between Duquesne Light Company and JP Morgan Chase (a restatement of the Indenture in its entirety as amended through
2004). |  | Exhibit 4.1 to the Holdings Form 10-K for the year ended December 31, 2004.          



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|      |  |                                                                                                                                                     |  |                                                                                               
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                    
|4.2   |  | Indenture dated as of August 16, 2005 between Holdings and J.P. Morgan Trust Company, National Association, as Trustee.                             |  | Exhibit 4.1 to the Holdings Form 8-K dated August 17, 2005.                                   
|      |  |                                                                                                                                                    
|4.3   |  | Form of 2015 Senior Note.                                                                                                                           |  | Exhibit 4.2 to the Holdings Form 8-K dated August 17, 2005.                                   
|      |  |                                                                                                                                                    
|4.4   |  | Form of 2035 Senior Note.                                                                                                                           |  | Exhibit 4.3 to the Holdings Form 8-K dated August 17, 2005.                                   
|      |  |                                                                                                                                                    
|4.5   |  | Form of Officers Certificate for the 2015 Senior Note.                                                                                             |  | Exhibit 4.4 to the Holdings Form 8-K dated August 17, 2005.                                   
|      |  |                                                                                                                                                    
|4.6   |  | Form of Officers Certificate for the 2035 Senior Note.                                                                                             |  | Exhibit 4.5 to the Holdings Form 8-K dated August 17, 2005.                                   
|      |  |                                                                                                                                                    
|4.7   |  | Indenture, dated as of August 1, 1999, from DQE Capital Corporation and Holdings to The First National Bank of Chicago, as Trustee.                 |  | Exhibit 4.1 to the Form 8-A of DQE Capital Corporation and Holdings, filed September 16, 1999.
|      |  |                                                                                                                                                    
|4.8   |  | Form of Note.                                                                                                                                       |  | Exhibit 4.2 to the Form 8-A of DQE Capital Corporation and Holdings, filed September 16, 1999.
|      |  |                                                                                                                                                    
|10.1  |  | Deferred Compensation Plan for Directors of Duquesne Light Company, as amended to date.                                                             |  | Exhibit 10.1 to the Holdings Form 8-K filed with the SEC May 31, 2006.                        
|      |  |                                                                                                                                                    
|10.2  |  | Restated Pension Service Supplement Program.                                                                                                        |  | Filed here.                                                                                   
|      |  |                                                                                                                                                    
|10.3  |  | Duquesne Light Charitable Giving Program, as amended.                                                                                               |  | Exhibit 10.6 to the Holdings Form 10-K Annual Report for the year ended December 31, 2001.    
|      |  |                                                                                                                                                    
|10.4  |  | Severance Agreement dated December 23, 2003 for Morgan K. OBrien.                                                                                  |  | Exhibit 10.11 to the Holdings Form 10-K for the year ended December 31, 2003.                 
|      |  |                                                                                                                                                    
|10.5  |  | Schedule to Exhibit 10.4 listing substantially identical agreements with Joseph G. Belechak, Maureen L. Hogel, Mark E. Kaplan and Stevan R. Schott. |  | Exhibit 10.5 to the Holdings Form 10-K for the year ended December 31, 2005.                  
|      |  |                                                                                                                                                    
|10.6  |  | Form of Amendment to Severance Agreement.                                                                                                           |  | Filed here.                                                                                   
|      |  |                                                                                                                                                    
|10.7  |  | Employment Agreement dated as of September 14, 2001 between Holdings and Morgan K. OBrien.                                                         |  | Exhibit 10.8 to the Holdings Form 10-K for the year ended December 31, 2001.                  
|      |  |                                                                                                                                                    
|10.8  |  | Non-Competition and Confidentiality Agreement dated as of September 14, 2001 for Morgan K. OBrien.                                                 |  | Exhibit 10.13 to the Holdings Form 10-K for the year ended December 31, 2001.                 
|      |  |                                                                                                                                                    
|10.9  |  | Non-Competition and Confidentiality Agreement dated as of August 1, 2000 for Joseph G. Belechak.                                                    |  | Exhibit 10.7 to the Duquesne Light Form 10-K for the year ended December 31, 2001.            
|      |  |                                                                                                                                                    
|10.10 |  | Non-Competition and Confidentiality Agreement dated as of April 2, 1997 for Maureen L. Hogel.                                                       |  | Exhibit 10.8 to the Duquesne Light Form 10-K for the year ended December 31, 2001.            



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|      |  |                                                                                                                                                                                                                                                                              |  |                                                                              
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                                             
|10.11 |  | Schedule to Exhibit 10.9 listing substantially identical agreements with Mark E. Kaplan and Stevan R. Schott.                                                                                                                                                                |  | Exhibit 10.11 to the Holdings Form 10-K for the year ended December 31, 2005.
|      |  |                                                                                                                                                                                                                                                                             
|10.12 |  | Form of Stock Option Agreement for Officers (with change in control)                                                                                                                                                                                                         |  | Exhibit 10.11 to the Holdings Form 10-K for the year ended December 31, 2004.
|      |  |                                                                                                                                                                                                                                                                             
|10.13 |  | Form of Stock Option Agreement for Officers                                                                                                                                                                                                                                  |  | Exhibit 10.12 to the Holdings Form 10-K for the year ended December 31, 2004.
|      |  |                                                                                                                                                                                                                                                                             
|10.14 |  | Form of Deferred Stock Unit Agreement for Officers                                                                                                                                                                                                                           |  | Exhibit 10.13 to the Holdings Form 10-K for the year ended December 31, 2004.
|      |  |                                                                                                                                                                                                                                                                             
|10.15 |  | Form of Performance Share Agreement for Officers                                                                                                                                                                                                                             |  | Filed here.                                                                  
|      |  |                                                                                                                                                                                                                                                                             
|10.16 |  | Form of Restricted Stock Agreement for Officers                                                                                                                                                                                                                              |  | Exhibit 10.15 to the Holdings Form 10-K for the year ended December 31, 2004.
|      |  |                                                                                                                                                                                                                                                                             
|10.17 |  | Form of Stock Option Agreement for Directors                                                                                                                                                                                                                                 |  | Exhibit 10.16 to the Holdings Form 10-K for the year ended December 31, 2004.
|      |  |                                                                                                                                                                                                                                                                             
|10.18 |  | Form of Restricted Stock Agreement for Directors                                                                                                                                                                                                                             |  | Exhibit 10.17 to the Holdings Form 10-K for the year ended December 31, 2004.
|      |  |                                                                                                                                                                                                                                                                             
|10.19 |  | Description of Executive Benefits                                                                                                                                                                                                                                            |  | Exhibit 10.19 to the Holdings Form 10-K for the year ended December 31, 2005.
|      |  |                                                                                                                                                                                                                                                                             
|10.20 |  | Description of Directors Fees and Plans                                                                                                                                                                                                                                     |  | Filed here.                                                                  
|      |  |                                                                                                                                                                                                                                                                             
|10.21 |  | Holdings Amended and Restated $200 Million Credit Agreement dated as of July 27, 2005.                                                                                                                                                                                      |  | Exhibit 10.1 to the Holdings Form 10-Q for the quarter ended June 30, 2005.  
|      |  |                                                                                                                                                                                                                                                                             
|10.22 |  | Increasing Lender Agreement between Holdings and Union Bank of California, N.A., dated January 31, 2006, modifying Holdings Amended and Restated $200 Million Credit Agreement, together
with a schedule listing substantially identical agreements with the other lenders. |  | Exhibit 10.22 to the Holdings Form 10-K for the year ended December 31, 2005.
|      |  |                                                                                                                                                                                                                                                                             
|10.23 |  | Accession and Amendment Agreement between Holdings and Keybank National Association, dated January 31, 2006, including Keybank as a lender under Holdings Amended and Restated $200 Million
Credit Agreement.                                                               |  | Exhibit 10.23 to the Holdings Form 10-K for the year ended December 31, 2005.
|      |  |                                                                                                                                                                                                                                                                             
|10.24 |  | Duquesne Lights Third Amended and Restated $100 Million Credit Agreement dated as of July 27, 2005.                                                                                                                                                                         |  | Exhibit 10.2 to the Duquesne Light Form 8-K dated July 27, 2005.             



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|      |  |                                                                                                                                                                                                                                                                                       |  |                                                                                           
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                                                      
|10.25 |  | Increasing Lender Agreement between Duquesne Light and JPMorgan Chase, N.A., dated January 31, 2006, modifying Duquesne Lights Third Amended and Restated $100 Million Credit
Agreement, together with a schedule listing substantially identical agreements with the other lenders. |  | Exhibit 10.25 to the Duquesne Light Form 10-K for the year ended December 31, 2005.       
|      |  |                                                                                                                                                                                                                                                                                      
|10.26 |  | Accession and Amendment Agreement between Duquesne Light and Keybank National Association, dated January 31, 2006, including Keybank as a lender under Duquesne Lights Third Amended and
Restated $100 Million Credit Agreement.                                                     |  | Exhibit 10.26 to the Duquesne Light Form 10-K for the year ended December 31, 2005.       
|      |  |                                                                                                                                                                                                                                                                                      
|10.27 |  | POLR Agreement, dated as of September 24, 1999 by and between Duquesne Light Company and Orion Power Holdings, Inc.                                                                                                                                                                   |  | Exhibit 2.2 to the Holdings Form 8-K dated September 24, 1999.                            
|      |  |                                                                                                                                                                                                                                                                                      
|10.28 |  | Amended and Restated POLR II Agreement by and between Duquesne Light Company and Orion Power MidWest, L.P., dated as of December 7, 2000.                                                                                                                                             |  | Exhibit 10.11 to the Duquesne Light Form 10-K for the year ended December 31, 2000.       
|      |  |                                                                                                                                                                                                                                                                                      
|10.29 |  | Purchase and Sale Agreement by and between Atlantic City Electric Company and Holdings dated November 14, 2005.                                                                                                                                                                       |  | Exhibit 10.1 to the Holdings Form 8-K dated November 14, 2005.                            
|      |  |                                                                                                                                                                                                                                                                                      
|10.30 |  | Stock Purchase Agreement by and among Holdings, DUET Investment Holdings Limited and IFM (International Infrastructure) Wholesale Trust, dated as of July 5, 2006.                                                                                                                    |  | Exhibit 10.1 to Holdings Form 8-K filed July 6, 2006.                                    
|      |  |                                                                                                                                                                                                                                                                                      
|10.31 |  | Loan Agreement, dated as of September 1, 2006, and amended and restated as of December 20, 2006, among Holdings, Barclays Bank, PLC as facility agent, and the lenders party thereto.                                                                                                 |  | Exhibit 10.1 to Holdings Form 8-K filed December 21, 2006.                               
|      |  |                                                                                                                                                                                                                                                                                      
|10.32 |  | Amendment No. 1 to the Agreement and Plan of Merger, dated September 5, 2006.                                                                                                                                                                                                         |  | Exhibit 10.2 to Holdings Form 8-K filed September 8, 2006.                               
|      |  |                                                                                                                                                                                                                                                                                      
|10.33 |  | Joint Petition and Settlement Agreement, among Duquesne Light and various interveners.                                                                                                                                                                                                |  | Exhibit 10.1 to Holdings and Duquesne Lights combined Form 8-K filed September 15, 2006.
|      |  |                                                                                                                                                                                                                                                                                      
|10.34 |  | Distribution Rate Case Settlement Agreement between Duquesne Light and the Commonwealth of Pennsylvania.                                                                                                                                                                              |  | Exhibit 10.1 to Holdings and Duquesne Lights combined Form 8-K filed October 10, 2006.  
|      |  |                                                                                                                                                                                                                                                                                      
|10.35 |  | Letter of Credit and Reimbursement Agreement, dated April 28, 2006, between Holdings, various lenders and JPMorgan Chase Bank, N.A. as administrative agent and issuing bank.                                                                                                         |  | Exhibit 10.1 to Holdings Form 8-K filed May 4, 2006.                                     
|      |  |                                                                                                                                                                                                                                                                                      
|10.36 |  | Agreement for Standby Letter of Credit, dated May 2, 2006, between Holdings and Citibank, N.A.                                                                                                                                                                                        |  | Exhibit 10.2 to Holdings Form 8-K filed May 4, 2006.                                     
|      |  |                                                                                                                                                                                                                                                                                      
|10.37 |  | Membership Interest Purchase Agreement, dated as of November 22, 2006, by and between DQE Financial and Blue Wolf Energy Holdings LLC.                                                                                                                                                |  | Exhibit 10.1 to Holdings Form 8-K filed November 29, 2006.                               



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|      |  |                                                                                                                                                           |  |                                                            
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------
|      |  |                                                                                                                                                          
|10.38 |  | First Amendment to Membership Interest Purchase Agreement, dated as of December 29, 2006, by and between DQE Financial and Blue Wolf Energy Holdings LLC. |  | Filed here.                                                
|      |  |                                                                                                                                                          
|10.39 |  | Second Amendment to Membership Interest Purchase Agreement dated as of December 29, 2006, by and between DQE Financial and Blue Wolf Energy Holdings LLC. |  | Filed here.                                                
|      |  |                                                                                                                                                          
|10.40 |  | Merger Settlement Agreement dated February 9, 2007.                                                                                                       |  | Exhibit 10.1 to Holdings Form 8-K filed February 15, 2007.
|      |  |                                                                                                                                                          
|12.1  |  | Holdings Ratio of Earnings.                                                                                                                              |  | Filed here.                                                
|      |  |                                                                                                                                                          
|12.2  |  | Duquesne Lights Ratio of Earnings.                                                                                                                       |  | Filed here.                                                
|      |  |                                                                                                                                                          
|21.1  |  | Subsidiaries of the registrants.                                                                                                                          |  | Filed here.                                                
|      |  |                                                                                                                                                          
|23.1  |  | Consent of Independent Registered Public Accounting Firm regarding Holdings.                                                                              |  | Filed here.                                                
|      |  |                                                                                                                                                          
|23.2  |  | Consent of Independent Registered Public Accounting Firm regarding Duquesne Light.                                                                        |  | Filed here.                                                
|      |  |                                                                                                                                                          
|31.1  |  | Section 302 Certification of Holdings CEO.                                                                                                               |  | Filed here.                                                
|      |  |                                                                                                                                                          
|31.2  |  | Section 302 Certification of Holdings CFO.                                                                                                               |  | Filed here.                                                
|      |  |                                                                                                                                                          
|31.3  |  | Section 302 Certification of Duquesne Lights CEO.                                                                                                        |  | Filed here.                                                
|      |  |                                                                                                                                                          
|31.4  |  | Section 302 Certification of Duquesne Lights CFO.                                                                                                        |  | Filed here.                                                
|      |  |                                                                                                                                                          
|32.1  |  | Section 906 Certification of Holdings CEO.                                                                                                               |  | Filed here.                                                
|      |  |                                                                                                                                                          
|32.2  |  | Section 906 Certification of Holdings CFO.                                                                                                               |  | Filed here.                                                
|      |  |                                                                                                                                                          
|32.3  |  | Section 906 Certification of Duquesne Lights CEO.                                                                                                        |  | Filed here.                                                
|      |  |                                                                                                                                                          
|32.4  |  | Section 906 Certification of Duquesne Lights CFO.                                                                                                        |  | Filed here.                                                
|      |  |                                                                                                                                                          
|99.1  |  | Additional information regarding directors, executive compensation and security ownership.                                                                |  | Filed here.                                                

Copies of the exhibits listed above will be furnished, upon request, to holders or beneficial owners of any class
of our stock as of January 31, 2007, subject to payment in advance of the cost of reproducing the exhibits requested.



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SCHEDULE I

Condensed Financial Information of Registrant (Parent Company)

Duquesne Light Holdings, Inc.

Schedule I  Condensed
Financial Information of Registrant (Parent Company)

Statements of Income



|                                                                             |  |                                                                            |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------------------------------------- |  | -------------------------------------------------------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                             |  | (All Amounts in Millions, Except Per Share Amounts)Year Ended December 31, |      
|                                                                             |  | 2006                                                                       |       |   | 2005 |   |       | 2004 | 
|Operating Expenses:                                                          |  |                                                                            |       |   |      |   |       |      |  |   |       |  
|Operating and administrative                                                 |  | $                                                                          | 9.4   |   |      | $ | 6.9   |      |  | $ | 4.7   |  
|Merger costs                                                                 |  |                                                                            | 7.9   |   |      |   |      |      |  |   |      |  
|Intercompany administrative expenses                                         |  |                                                                            |      |   |      |   |      |      |  |   | 6.6   |  
|Depreciation and amortization                                                |  |                                                                            | 0.2   |   |      |   | 0.8   |      |  |   | 0.8   |  
|                                                                             |  |                                                                            |       |   |      |   |       |      |  |   |       |  
|Total Operating Expenses                                                     |  |                                                                            | 17.5  |   |      |   | 7.7   |      |  |   | 12.1  |  
|                                                                             |  |                                                                            |       |   |      |   |       |      |  |   |       |  
|                                                                             |  |                                                                            |      
|Operating Loss                                                               |  |                                                                            | (17.5 | ) |      |   | (7.7  | )    |  |   | (12.1 | )
|Intercompany Other Income                                                    |  |                                                                            | 4.2   |   |      |   | 1.0   |      |  |   |      |  
|Other Income                                                                 |  |                                                                            | 0.4   |   |      |   | 4.1   |      |  |   |      |  
|Intercompany Interest Expense                                                |  |                                                                            | (2.6  | ) |      |   | (11.3 | )    |  |   | (23.8 | )
|Interest and Other Charges                                                   |  |                                                                            | (27.2 | ) |      |   | (7.5  | )    |  |   | (0.4  | )
|                                                                             |  |                                                                            |       |   |      |   |       |      |  |   |       |  
|Loss Before Income Taxes and Equity in Income of Unconsolidated Subsidiaries |  |                                                                            | (42.7 | ) |      |   | (21.4 | )    |  |   | (36.3 | )
|Income Tax Expense                                                           |  |                                                                            | (5.5  | ) |      |   | (29.8 | )    |  |   | (15.6 | )
|Equity in Income of Unconsolidated Subsidiaries                              |  |                                                                            | 91.9  |   |      |   | 165.4 |      |  |   | 138.9 |  
|                                                                             |  |                                                                            |       |   |      |   |       |      |  |   |       |  
|                                                                             |  |                                                                            |      
|Net Income                                                                   |  | $                                                                          | 54.7  |   |      | $ | 114.2 |      |  | $ | 87.0  |  
|                                                                             |  |                                                                            |       |   |      |   |       |      |  |   |       |  
|Average Number of Common Shares Outstanding                                  |  |                                                                            | 82.0  |   |      |   | 77.7  |      |  |   | 76.4  |  
|                                                                             |  |                                                                            |       |   |      |   |       |      |  |   |       |  
|Basic Earnings Per Share of Common Stock                                     |  | $                                                                          | 0.67  |   |      | $ | 1.47  |      |  | $ | 1.14  |  
|                                                                             |  |                                                                            |       |   |      |   |       |      |  |   |       |  
|Diluted Earnings Per Share of Common Stock                                   |  | $                                                                          | 0.67  |   |      | $ | 1.47  |      |  | $ | 1.14  |  
|                                                                             |  |                                                                            |       |   |      |   |       |      |  |   |       |  
|Dividends Declared Per Share of Common Stock                                 |  | $                                                                          | 1.00  |   |      | $ | 1.00  |      |  | $ | 1.00  |  
|                                                                             |  |                                                                            |       |   |      |   |       |      |  |   |       |  

See notes to condensed financial statements.



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Duquesne Light Holdings, Inc.

Schedule I  Condensed Financial Information of Registrant (Parent Company)

Balance Sheets



|                                                                                                                  |  |                                          |          |   |      |   |          |  
|----------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                                  |  | (Millions of Dollars) As of December 31, |         
|                                                                                                                  |  | 2006                                     |          |   | 2005 |  
|Assets                                                                                                            |  |                                          |          |   |      |   |          |  
|Current Assets:                                                                                                   |  |                                          |          |   |      |   |          |  
|Cash and cash equivalents                                                                                         |  | $                                        |         |   |      | $ |         |  
|Receivables                                                                                                       |  |                                          |         |   |      |   |         |  
|Receivables  unconsolidated subsidiaries                                                                         |  |                                          | 8.9      |   |      |   | 1.0      |  
|Notes receivable  unconsolidated subsidiaries                                                                    |  |                                          | 187.3    |   |      |   | 7.8      |  
|Deferred income taxes  net                                                                                       |  |                                          | 22.1     |   |      |   | 18.1     |  
|Derivative instruments                                                                                            |  |                                          |         |   |      |   | 2.2      |  
|Other                                                                                                             |  |                                          | 0.1      |   |      |   | 0.1      |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Current Assets                                                                                              |  |                                          | 218.4    |   |      |   | 29.2     |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Investments in Unconsolidated Subsidiaries (Note 2)                                                               |  |                                          | 1,123.5  |   |      |   | 1,047.2  |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Other Non-Current Assets:                                                                                         |  |                                          |          |   |      |   |          |  
|Deferred income taxes  net                                                                                       |  |                                          | 132.8    |   |      |   | 117.3    |  
|Other                                                                                                             |  |                                          | 9.8      |   |      |   | 9.0      |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Other Non-Current Assets                                                                                    |  |                                          | 142.6    |   |      |   | 126.3    |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Assets                                                                                                      |  | $                                        | 1,484.5  |   |      | $ | 1,202.7  |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Liabilities and Capitalization                                                                                    |  |                                          |          |   |      |   |          |  
|Current Liabilities:                                                                                              |  |                                          |          |   |      |   |          |  
|Short-term debt                                                                                                   |  | $                                        | 30.0     |   |      | $ | 40.0     |  
|Accounts payable                                                                                                  |  |                                          | 2.9      |   |      |   | 0.5      |  
|Accounts payable  unconsolidated subsidiaries                                                                    |  |                                          | 0.5      |   |      |   | 44.9     |  
|Notes payable  unconsolidated subsidiaries                                                                       |  |                                          | 56.0     |   |      |   | 55.7     |  
|Income taxes payable                                                                                              |  |                                          | 54.0     |   |      |   | 56.2     |  
|Common stock dividends                                                                                            |  |                                          | 22.2     |   |      |   | 20.0     |  
|Other                                                                                                             |  |                                          | 12.8     |   |      |   | 8.8      |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Current Liabilities                                                                                         |  |                                          | 178.4    |   |      |   | 226.1    |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Non-Current Liabilities                                                                                     |  |                                          | 1.1      |   |      |   | 0.7      |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Commitments and Contingencies                                                                                     |  |                                          |          |   |      |   |          |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Capitalization: Long-term debt                                                                                    |  |                                          | 520.0    |   |      |   | 320.0    |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Common Shareholders Equity:                                                                                      |  |                                          |          |   |      |   |          |  
|Common stock  no par value (authorized  187,500,000 shares; issued  135,765,386 shares and 126,929,154
shares) |  |                                          | 1,336.3  |   |      |   | 1,200.5  |  
|Retained earnings                                                                                                 |  |                                          | 571.8    |   |      |   | 600.0    |  
|Treasury stock (at cost) (48,128,407 and 48,935,435 shares)                                                       |  |                                          | (1,114.1 | ) |      |   | (1,132.5 | )
|Unearned compensation                                                                                             |  |                                          |         |   |      |   | (1.8     | )
|Accumulated other comprehensive income                                                                            |  |                                          | (9.0     | ) |      |   | (10.3    | )
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Common Shareholders Equity                                                                                 |  |                                          | 785.0    |   |      |   | 655.9    |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Capitalization                                                                                              |  |                                          | 1,305.0  |   |      |   | 975.9    |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Liabilities and Capitalization                                                                              |  | $                                        | 1,484.5  |   |      | $ | 1,202.7  |  
|                                                                                                                  |  |                                          |          |   |      |   |          |  

See notes to condensed financial statements.



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Duquesne Light Holdings, Inc.

Schedule I  Condensed Financial Information of Registrant (Parent Company)

Statements of Cash Flows



|                                                      |  |                                               |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------- |  | --------------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                      |  | (Millions of Dollars) Year Ended December 31, |       
|                                                      |  | 2006                                          |        |   | 2005 |   |        | 2004 | 
|Net Cash (Used in) Provided from Operating Activities |  | $                                             | (120.8 | ) |      | $ | 123.3  |      |  | $ | 81.6   |  
|                                                      |  |                                               |        |   |      |   |        |      |  |   |        |  
|Cash Flows From Investing Activities:                 |  |                                               |        |   |      |   |        |      |  |   |        |  
|Loans to unconsolidated subsidiaries, net             |  |                                               | (179.5 | ) |      |   | (7.8   | )    |  |   |       |  
|Investments in unconsolidated subsidiaries            |  |                                               | (30.0  | ) |      |   | (85.0  | )    |  |   |       |  
|Return of capital from unconsolidated subsidiaries    |  |                                               | 8.0    |   |      |   | 10.0   |      |  |   | 179.5  |  
|Capital expenditures                                  |  |                                               |       |   |      |   |       |      |  |   |       |  
|                                                      |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net Cash (Used in) Provided from Investing Activities |  |                                               | (201.5 | ) |      |   | (82.8  | )    |  |   | 179.5  |  
|                                                      |  |                                               |        |   |      |   |        |      |  |   |        |  
|                                                      |  |                                               |       
|Cash Flows From Financing Activities:                 |  |                                               |        |   |      |   |        |      |  |   |        |  
|Issuance of long-term debt obligations                |  |                                               | 200.0  |   |      |   | 320.0  |      |  |   |       |  
|Borrowings from unconsolidated subsidiaries           |  |                                               | 47.0   |   |      |   | 96.8   |      |  |   | 17.0   |  
|Repayments of unconsolidated subsidiary borrowings    |  |                                               | (46.7  | ) |      |   | (425.6 | )    |  |   | (210.2 | )
|Issuance of common stock                              |  |                                               | 140.9  |   |      |   |       |      |  |   |       |  
|Revolving credit facility borrowings, net             |  |                                               | 53.0   |   |      |   | 40.0   |      |  |   |       |  
|Dividends on common and preferred stock               |  |                                               | (70.3  | ) |      |   | (67.1  | )    |  |   | (66.0  | )
|Other                                                 |  |                                               | (1.6   | ) |      |   | (4.7   | )    |  |   | (1.8   | )
|                                                      |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net Cash Provided from (Used in) Financing Activities |  |                                               | 322.3  |   |      |   | (40.6  | )    |  |   | (261.0 | )
|                                                      |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net (decrease) increase in cash and cash equivalents  |  |                                               |       |   |      |   | (0.1   | )    |  |   | 0.1    |  
|Cash and cash equivalents at beginning of year        |  |                                               |       |   |      |   | 0.1    |      |  |   |       |  
|                                                      |  |                                               |        |   |      |   |        |      |  |   |        |  
|Cash and cash equivalents at end of year              |  | $                                             |       |   |      | $ |       |      |  | $ | 0.1    |  
|                                                      |  |                                               |        |   |      |   |        |      |  |   |        |  
|Supplemental Cash Flow Information                    |  |                                               |        |   |      |   |        |      |  |   |        |  
|                                                      |  |                                               |        |   |      |   |        |      |  |   |        |  
|Dividends received from unconsolidated subsidiaries   |  | $                                             | 50.5   |   |      | $ | 97.1   |      |  | $ | 114.0  |  
|Cash paid during the year:                            |  |                                               |        |   |      |   |        |      |  |   |        |  
|Interest                                              |  | $                                             | 27.7   |   |      | $ | 13.6   |      |  | $ | 24.6   |  
|Income taxes paid (refunded)                          |  | $                                             | 55.5   |   |      | $ | 28.4   |      |  | $ | (20.4  | )
|                                                      |  |                                               |        |   |      |   |        |      |  |   |        |  

See notes to condensed financial statements.



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Duquesne Light Holdings, Inc.

Schedule ICondensed Financial Information of Registrant (Parent Company)

Notes to Condensed Financial Statements

1. Basis of Presentation

Pursuant to rules and regulations of the
Securities and Exchange Commission, the unconsolidated condensed financial statements of Duquesne Light Holdings, Inc. (Holdings) do not reflect all of the information and notes normally included with financial statements prepared in accordance with
accounting principles generally accepted in the United States of America. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in Item 8 in Holdings
annual report on Form 10-K.

Accounting for subsidiaries Holdings has accounted for the earnings of its subsidiaries under the equity method
in the unconsolidated condensed financial statements.

Income taxes Income taxes are computed for Holdings in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, and reflect the assets and liabilities of Holdings on a stand-alone basis. Holdings also records the effect of filing consolidated federal tax returns with
its subsidiaries.

2. Restricted Net Assets of Subsidiaries

As of December 31, 2006, Holdings proportionate share of net assets from consolidated subsidiaries which may not be transferred to Holdings in the form of loans, advances or cash dividends without the consent of a third party was
$248.9 million.

3. Supplemental Cash Flow Disclosure

Non-cash activity in 2006 consisted of the receipt of an $11.0 million non-cash dividend of our subsidiary, Monmouth Energy, Inc. (Monmouth), followed by the immediate non-cash contribution of Monmouth to another subsidiary. Non-cash
activity in 2005 consisted of the receipt of a $17.7 million non-cash dividend of our subsidiary, Duquesne Power, followed by the immediate non-cash contribution of Duquesne Power to another subsidiary.



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SCHEDULE II

Valuation and Qualifying Accounts

For the Years Ended December 31, 2006, 2005 and 2004

Reserve deducted from the Asset to which it applies:
Allowance for uncollectible accounts



|                             |  |                              |      |                              |   |                               |  |                |     |                        |   |      |  |   |     
|---------------------------- |  | ---------------------------- | ---- | ---------------------------- | - | ----------------------------- |  | -------------- | --- | ---------------------- | - | ---- |  | - | ----
|                             |  | (Millions of Dollars)       
|                             |  |                              |      | Additions                    |   |                               |  |               
|Description                  |  | Balance at Beginning of Year |      | Charged toCosts and Expenses |   | Charged to Other Accounts (a) |  | Deductions (b) |     | Balance at End of
Year
|DUQUESNE LIGHT HOLDINGS      |  |                              |      |                              |   |                               |  |                |     |                        |   |      |  |   |     
|                             |  |                              |      |                              |  
|Year Ended December 31, 2006 |  | $                            | 21.1 |                              | $ | 15.9                          |  | $              | 2.5 |                        | $ | 22.3 |  | $ | 17.2
|                             |  |                              |      |                              |  
|Year Ended December 31, 2005 |  |                              | 18.1 |                              |   | 19.3                          |  |                | 3.3 |                        |   | 19.6 |  |   | 21.1
|                             |  |                              |      |                              |  
|Year Ended December 31, 2004 |  |                              | 19.9 |                              |   | 12.0                          |  |                | 4.2 |                        |   | 18.0 |  |   | 18.1
|                             |  |                              |      |                              |  
|DUQUESNE LIGHT COMPANY       |  |                              |      |                              |   |                               |  |                |     |                        |   |      |  |   |     
|                             |  |                              |      |                              |  
|Year Ended December 31, 2006 |  | $                            | 20.8 |                              | $ | 15.8                          |  | $              | 2.5 |                        | $ | 22.2 |  | $ | 16.9
|                             |  |                              |      |                              |  
|Year Ended December 31, 2005 |  |                              | 17.9 |                              |   | 19.1                          |  |                | 3.2 |                        |   | 19.4 |  |   | 20.8
|                             |  |                              |      |                              |  
|Year Ended December 31, 2004 |  |                              | 19.9 |                              |   | 11.9                          |  |                | 4.1 |                        |   | 18.0 |  |   | 17.9

---

|       |  |                                                 
|------ |  | ------------------------------------------------
|Notes: |  | (a) Recovery of accounts previously written off.
|       |  | (b) Accounts receivable written off.            



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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 Holdings, Inc.        
|                    |  |                                       |  | (Registrant)         
|                    |  |                                      
|Date: March 1, 2007 |  | By:                                   |  | /s/ Morgan K. OBrien
|                    |  |                                       |  | (Signature)          
|                    |  |                                       |  | Morgan K. OBrien    
|                    |  | President and Chief Executive Officer

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.



|                      |  |                                                   |  |              
|--------------------- |  | ------------------------------------------------- |  | -------------
|Signature             |  | Title                                             |  | Date         
|                      |  |                                                  
|/s/ Morgan K. OBrien |  | President, Chief Executive Officer and Director   |  | March 1, 2007
|Morgan K. OBrien     |  |                                                   |  |              
|                      |  |                                                  
|/s/ Mark E. Kaplan    |  | Senior Vice President and Chief Financial Officer |  | March 1, 2007
|Mark E. Kaplan        |  |                                                   |  |              
|                      |  |                                                  
|/s/ Susan S. Betta    |  | Controller                                        |  | March 1, 2007
|Susan S. Betta        |  | (Principal Accounting Officer)                    |  |              
|                      |  |                                                  
|/s/ Pritam M. Advani  |  | Director                                          |  | March 1, 2007
|Pritam M. Advani      |  |                                                   |  |              
|                      |  |                                                  
|/s/ Doreen E. Boyce   |  | Director                                          |  | March 1, 2007
|Doreen E. Boyce       |  |                                                   |  |              
|                      |  |                                                  
|/s/ Robert P. Bozzone |  | Director                                          |  | March 1, 2007
|Robert P. Bozzone     |  |                                                   |  |              
|                      |  |                                                  
|/s/ Charles C. Cohen  |  | Director                                          |  | March 1, 2007
|Charles C. Cohen      |  |                                                   |  |              
|                      |  |                                                  
|/s/ Sigo Falk         |  | Director                                          |  | March 1, 2007
|Sigo Falk             |  |                                                   |  |              
|                      |  |                                                  
|/s/ Joseph C. Guyaux  |  | Director                                          |  | March 1, 2007
|Joseph C. Guyaux      |  |                                                   |  |              
|                      |  |                                                  
|/s/ David M. Kelly    |  | Director                                          |  | March 1, 2007
|David M. Kelly        |  |                                                   |  |              
|                      |  |                                                  
|/s/ John D. Turner    |  | Director                                          |  | March 1, 2007
|John D. Turner        |  |                                                   |  |              



110



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##### Table of Contents

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 1, 2007 |  | By:                                   |  | /s/ Morgan K. OBrien
|                    |  |                                       |  | (Signature)          
|                    |  |                                       |  | Morgan K. OBrien    
|                    |  | President and Chief Executive Officer

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.



|                      |  |                                                 |  |              
|--------------------- |  | ----------------------------------------------- |  | -------------
|Signature             |  | Title                                           |  | Date         
|                      |  |                                                
|/s/ Morgan K. OBrien |  | Director, President and Chief Executive Officer |  | March 1, 2007
|Morgan K. OBrien     |  |                                                 |  |              
|                      |  |                                                
|/s/ Mark E. Kaplan    |  | Director, Senior Vice President and             |  | March 1, 2007
|Mark E. Kaplan        |  | Chief Financial Officer                         |  |              
|                      |  |                                                
|/s/ Susan S. Betta    |  | Controller                                      |  | March 1, 2007
|Susan S. Betta        |  | (Principal Accounting Officer)                  |  |              
|                      |  |                                                
|/s/ Maureen L. Hogel  |  | Director                                        |  | March 1, 2007
|Maureen L. Hogel      |  |                                                 |  |              



111