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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



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



For the Fiscal Year Ended December 31, 2004



or



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



For the Transition Period From
 to



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



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                  





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



|                              |  |                                         |  | 
|----------------------------- |  | --------------------------------------- |  | 
|Registrant                    |  | Title of Each Class                     |  | 
|Duquesne Light Holdings, Inc. |  | Preferred Stock, Series A (Convertible) |  | 
|                              |  |                                        
|Duquesne Light Company        |  | None                                    |  | 



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. ̈



Duquesne
Light Company x



Indicate by check mark
whether each registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).



Duquesne Light Holdings, Inc. Yes x No ̈



Duquesne Light Company Yes x No ̈



The aggregate market value of Duquesne Light Holdings, Inc. voting common stock held by non-affiliates as of June 30, 2004 (the last business day of its most recently completed second fiscal quarter) was
$1,457,575,378, based on the New York Stock Exchange closing price of $19.31 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 March 1, 2005, there were 77,356,100 shares of Duquesne Light Holdings, Inc.s single class of common stock outstanding.



As of March 1, 2005, there were 10 shares of Duquesne Light Companys
single class of common stock outstanding, all held by Duquesne Light Holdings, Inc.



Documents incorporated by reference:Specified portions of the Duquesne Light Holdings, Inc. Proxy Statement relating to the 2005 Annual Meeting of Shareholders, to be filed with the Commission not later than 120 days after the close
of such registrants fiscal year, are incorporated by reference into Part III.



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TABLE OF CONTENTS



|                                                         |  |                                                                                                              |  |     
|-------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|                                                         |  |                                                                                                              |  | Page
|GLOSSARY                                                 |  | 4                                                                                                           
|                                                         |  |                                                                                                             
|                                                         |  | PART I                                                                                                       |  |     
|                                                         |  |                                                                                                             
|ITEM 1.                                                  |  | BUSINESS                                                                                                     |  | 5   
|Corporate Structure                                      |  | 5                                                                                                           
|Forward-Looking Statements                               |  | 7                                                                                                           
|Employees                                                |  | 7                                                                                                           
|Environmental Matters                                    |  | 7                                                                                                           
|Other                                                    |  | 7                                                                                                           
|Executive Officers of the Registrants                    |  | 8                                                                                                           
|                                                         |  |                                                                                                             
|ITEM 2.                                                  |  | PROPERTIES                                                                                                   |  | 8   
|                                                         |  |                                                                                                             
|ITEM 3.                                                  |  | LEGAL PROCEEDINGS                                                                                            |  | 9   
|                                                         |  |                                                                                                             
|ITEM 4.                                                  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                          |  | 10  
|                                                         |  |                                                                                                             
|                                                         |  | PART II                                                                                                      |  |     
|                                                         |  |                                                                                                             
|ITEM 5.                                                  |  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |  | 10  
|                                                         |  |                                                                                                             
|ITEM 6.                                                  |  | SELECTED FINANCIAL DATA                                                                                      |  | 11  
|                                                         |  |                                                                                                             
|ITEM 7.                                                  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        |  | 13  
|Results of Operations                                    |  | 13                                                                                                          
|Liquidity and Capital Resources                          |  | 22                                                                                                          
|Rate Matters                                             |  | 26                                                                                                          
|Outlook                                                  |  | 27                                                                                                          
|Forward-Looking Statements                               |  | 29                                                                                                          
|                                                         |  |                                                                                                             
|ITEM 7A.                                                 |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                   |  | 29  
|                                                         |  |                                                                                                             
|ITEM 8.                                                  |  | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                     |  | 31  
|Reports of Independent Registered Public Accounting Firm |  | 31                                                                                                          
|Holdings Financial Statements                            |  | 33                                                                                                          
|Duquesne Light Financial Statements                      |  | 38                                                                                                          
|                                                         |  |                                                                                                             
|ITEM 9.                                                  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                         |  | 79  
|                                                         |  |                                                                                                             
|ITEM 9A.                                                 |  | CONTROLS AND PROCEDURES                                                                                      |  | 79  
|                                                         |  |                                                                                                             
|ITEM 9B.                                                 |  | OTHER INFORMATION                                                                                            |  | 81  
|                                                         |  |                                                                                                             
|                                                         |  | PART III                                                                                                     |  |     
|                                                         |  |                                                                                                             
|ITEM 10.                                                 |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS                                                          |  | 81  
|                                                         |  |                                                                                                             
|ITEM 11.                                                 |  | EXECUTIVE COMPENSATION                                                                                       |  | 82  
|                                                         |  |                                                                                                             
|ITEM 12.                                                 |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                               |  | 82  
|                                                         |  |                                                                                                             
|ITEM 13.                                                 |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                               |  | 82  
|                                                         |  |                                                                                                             
|ITEM 14.                                                 |  | PRINCIPAL ACCOUNTING FEES AND SERVICES                                                                       |  | 82  
|                                                         |  |                                                                                                             
|                                                         |  | PART IV                                                                                                      |  |     
|                                                         |  |                                                                                                             
|ITEM 15.                                                 |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                   |  | 83  
|                                                         |  |                                                                                                             
|                                                         |  | SCHEDULE II                                                                                                  |  | 87  
|                                                         |  |                                                                                                             
|                                                         |  | SIGNATURES                                                                                                   |  | 88  



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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, 2004, Duquesne Light is collecting the CTC from a single customer class, comprised of two industrial customers.



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.



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.



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



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. On January 1, 2005, Duquesne Light joined PJM Interconnection, an RTO, which coordinates the movement of electricity in all or
parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, 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, with a return from customers. These deferred costs are capitalized as regulatory assets by the
regulated utility.



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 AND DISTRIBUTION Transmission is the flow of electricity from generating stations over high voltage lines to substations where voltage
is reduced. Distribution is the flow of electricity over lower voltage facilities to the ultimate customer (businesses and homes).



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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 and Financial 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.



Continuing Operations



Duquesne Light, our largest subsidiary, 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, the full requirements arrangement with Orion Power Midwest (a subsidiary of Reliant Resources, Inc.) under which Orion provided Duquesne Light the necessary electricity to satisfy Duquesne Lights provider of last
resort obligation during the CTC collection period. POLR I, which was designed to be an income neutral arrangement, remains in place for customers under special contracts, as well as a single customer class (comprised of two industrial customers)
from which the CTC continues to be collected. In January 2002, Duquesne Light began operating under POLR II, which extended Orions full requirements arrangement to service customers from whom the CTC had been fully collected. In addition, the
POLR II arrangement permitted Duquesne Light to collect a margin on the energy supplied. POLR II expired on December 31, 2004.



In December 2003, Duquesne Light submitted POLR III (its rate plan and related generation supply plan intended to cover the period beginning in 2005) to
the Pennsylvania Public Utility Commission (PUC) for approval. In the third quarter of 2004, the PUC accepted POLR III with certain modifications. On September 30, 2004, Duquesne Light announced it would implement POLR III, as modified. POLR III
became effective on January 1, 2005. Duquesne Light joined PJM effective January 1, 2005, as part of its commitment to ensuring reliability to its customers.



Duquesne Power L.P. was formed in 2003 as an unregulated subsidiary of Duquesne Light, primarily to acquire and manage (i) the Sunbury generating station
in central Pennsylvania and (ii) a portfolio of energy commodity contracts to provide full-requirements energy supply contracts for both Duquesne Lights residential and small commercial POLR customers and large commercial and industrial
customers of Holdings unregulated subsidiary, Duquesne Light Energy, LLC (discussed below). When the PUC ordered that the POLR III period would end December 31, 2007, the planned Sunbury acquisition was cancelled. As part of acquiring the
energy supply portfolio, Duquesne Power has entered into energy commodity contracts with unrelated parties with payment guarantees from Holdings.



Under POLR III, residential and small commercial customers receive electric supply for the period January



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1, 2005 through December 31, 2007 at fixed rates that, although approximately 11.5% above POLR II generation rates, are still below those charged prior to
deregulation in 1996. In addition, residential and small commercial customers who switch back to using Duquesne Lights POLR service are no longer required, as they previously were, to remain on that service for 12 months.



For our large commercial and industrial customers, the POLR III supply
options are:



| |  |  | A fixed-price service based upon the results of a competitive request-for-proposal process for the period January 1, 2005 through May 31, 2006 (this period may be extended through
May 31, 2007, at the PUCs discretion). Duquesne Light receives an adder as compensation for costs and risks involved in providing energy to those customers. This request-for-proposal process has been completed and approved by the PUC. Duquesne
Light has contracted with two investment-grade suppliers to receive the necessary supply for customers who choose this option.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An hourly price service that passes through real-time spot market electricity prices within the PJM Interconnection (PJM) regional transmission organization. This is the default
option for customers who do not choose the fixed price option described above, and the sole option once fixed price service is eliminated. Duquesne Light receives the same adder on this service as described above.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



To date, electric generation suppliers have competed mainly to supply energy
to our large commercial and industrial customers. During 2005, we anticipate the majority of these customers will choose to obtain their electricity from competitive supply alternatives, including Duquesne Light Energy. The POLR load retention for
our residential and small commercial customers has, in recent years, exceeded 70% of the megawatt-hours consumed by these customer classes. However, it is possible that electric generation suppliers may more actively market to these customers during
the POLR III period.



The transmission and distribution rate
freeze previously agreed to by Duquesne Light is no longer in effect. Although Duquesne Light has not obtained a transmission or distribution rate increase since 1987, as a result of the many changes that have occurred since that time, Duquesne
Light plans to request such increases. Duquesne Light does not anticipate making any filings to request rate increases before the first quarter of 2006.



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



DQE Financial Corp. owns and operates landfill gas collection and processing systems, and is an investment and portfolio management organization focused on structured finance and alternative energy investments. In
November 2004, DQE Financial acquired, through a subsidiary, sole ownership of Waste Energy Technology, LLC (WET), a leading landfill gas engineering, design, construction and operations firm.



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.



Duquesne Light Energy, LLC (DLE) is a 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. DLE obtains its electric energy through a full-requirements contract with Duquesne
Power.



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



Discontinued Operations



During 2003, AquaSource, Inc. (formerly our water resource management
subsidiary) completed the sale of its assets. During 2002, we sold the propane distribution business of our subsidiary, Pro Am. (See Note 17.)



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 $11.9 million, $8.7 million and $8.8 million in 2004, 2003 and 2002. Associated long-lived assets,
excluding financial instruments, were $4.2 million, $4.8 million and $5.4 million as of December 31, 2004, 2003 and 2002. Duquesne Energy Solutions 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 Federal Energy Regulatory Commission (FERC) with respect to rates for delivery of
electric power, accounting and other matters.



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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 STATEMENTS



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 following the Outlook section in Item 7.



EMPLOYEES



At December 31, 2004,
Holdings and its subsidiaries had 1,427 employees. Duquesne Light is party to a labor contract with the International Brotherhood of Electrical Workers (IBEW), which represents 955 of Duquesne Lights 1,339 employees. Duquesne Light and the
IBEW are parties to a collective bargaining agreement which expires in 2006.



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, 2004, we expect the costs of compliance to be approximately $5 million with
respect to sites we will 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, 2004, 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 $27 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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 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. We do not believe that AquaSources indemnity obligations in respect of any of these compliance issues will
have a material effect on Holdings financial position, results of operations or cash flows.



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. Although AquaSource has agreed to indemnify the purchasers of its former operations for certain pre-closing environmental
liabilities, we do not believe that any of these indemnity obligations will have a material effect on Holdings financial position, results of operations or cash flows.



OTHER



Recent Accounting Pronouncements



Share-Based Payments



In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (revised December 2004), which will eliminate the use of Accounting Principles Board No. 25. SFAS No. 123R requires entities to recognize the cost of
employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. This standard is effective at the beginning



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of the first interim period that begins after June 15, 2005. We are currently evaluating the impact of the adoption of this standard on our financial
statements.



See Note 1 to the consolidated financial
statements for a discussion of other recent accounting pronouncements.



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 OFFICERS OF THE REGISTRANTS



Set forth below are the names, ages as of March 15, 2005, and positions during the past five years of the executive officers for Holdings and for Duquesne Light.



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



Morgan
K. OBrien, age 45. At Holdings: President and Chief Executive Officer since September 2001. Chief Operating Officer from August 2000 to September 2001. Executive Vice President - Corporate Development from January 2000 to August 2000. Vice
President - Corporate Development from July 1999 to January 2000.



At Duquesne Light: Director since June 1999. President and Chief Executive Officer since August 2003. Previously Vice President - Finance from November 1998 to May 2000.



Joseph G. Belechak, age 45. At Holdings: Senior Vice President and Chief Operations Officer since August 2003. Senior
Vice President - Operations and Customer Service from December 2002 to August 2003.



At Duquesne Light: Director since April 2003. Senior Vice President and Chief Operations Officer since August 2003. Senior Vice President - Operations and Customer Service from October 2001 to August 2003. Vice
President, Asset Management & Operations from August 2000 to October 2001. General Manager, Asset Management from 1999 to August 2000.



Maureen L. Hogel, age 44. 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. Vice President - Development, Legal and Administrative Affairs from January 2001 through October 2001. Vice President - Legal from September 1999 through
December 2000.



Stevan R. Schott, age 42. At Holdings:
Senior Vice President and Chief Financial Officer since August 2003. Vice President and Controller from October 2001 to August 2003.



At Duquesne Light: Director since April 2003. Senior Vice President and Chief Financial Officer since August 2003. Vice President and Controller from
October 2001 to August 2003. Vice President - Finance and Customer Service from August 2000 to October 2001. Vice President and Controller from August 1999 to August 2000.



James E. Wilson, age 39. At Holdings: Senior Vice President and Chief Strategic Officer since August 2003. Vice
President - Corporate Development and Rates from December 2002 to August 2003. Vice President - Corporate Development from October 2001 to December 2002. Vice President and Controller from March 2000 to October 2001.



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. Vice President and
Chief Accounting Officer from August 2000 to October 2001.



William F. Fields, Age 54. 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.



|Item 2. | Properties.
|------- | -----------



Our principal properties consist of Duquesne Lights electric transmission and distribution facilities and supplemental properties and appurtenances,
located substantially in Allegheny and Beaver counties in southwestern Pennsylvania. Substantially all of the



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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 10 transmission substations and 556 distribution
substations (375 of which are located on customer-owned land and are used to service only that customer). 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.



Our total investment in property, plant and equipment (PP&E) and the related accumulated depreciation balances for major
classes of property at December 31, 2004 and 2003 are as follows:



Holdings
PP&E and Related Accumulated Depreciation



|                              |  |                                               |         |                         |   |                |  |   |        
|----------------------------- |  | --------------------------------------------- | ------- | ----------------------- | - | -------------- |  | - | -------
|                              |  | (Millions of Dollars) as of December 31, 2004
|                              |  | Investment                                    |         | AccumulatedDepreciation |   | Net Investment
|Duquesne Light electric plant |  | $                                             | 2,120.8 |                         | $ | 714.5          |  | $ | 1,406.3
|Fiber optic network           |  |                                               | 30.1    |                         |   | 7.2            |  |   | 22.9   
|Other energy facilities       |  |                                               | 28.3    |                         |   | 10.4           |  |   | 17.9   
|Landfill gas                  |  |                                               | 22.2    |                         |   | 13.4           |  |   | 8.8    
|Other - Holdings              |  |                                               | 9.0     |                         |   | 5.5            |  |   | 3.5    
|                              |  |                                               |         |                         |   |                |  |   |        
|Total                         |  | $                                             | 2,210.4 |                         | $ | 751.0          |  | $ | 1,459.4
|                              |  |                                               |         |                         |   |                |  |   |        



|                              |  |                                               |         |                         |   |                |  |   |        
|----------------------------- |  | --------------------------------------------- | ------- | ----------------------- | - | -------------- |  | - | -------
|                              |  | (Millions of Dollars) as of December 31, 2003
|                              |  | Investment                                    |         | AccumulatedDepreciation |   | Net Investment
|Duquesne Light electric plant |  | $                                             | 2,063.7 |                         | $ | 681.0          |  | $ | 1,382.7
|Fiber optic network           |  |                                               | 28.2    |                         |   | 5.4            |  |   | 22.8   
|Other energy facilities       |  |                                               | 28.2    |                         |   | 8.5            |  |   | 19.7   
|Landfill gas                  |  |                                               | 14.1    |                         |   | 6.6            |  |   | 7.5    
|Other - Holdings              |  |                                               | 9.7     |                         |   | 5.1            |  |   | 4.6    
|                              |  |                                               |         |                         |   |                |  |   |        
|Total                         |  | $                                             | 2,143.9 |                         | $ | 706.6          |  | $ | 1,437.3
|                              |  |                                               |         |                         |   |                |  |   |        



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 fiber optic network owned by DQE Communications
is reported in our all other category. The other energy facilities and landfill gas equipment are used in our Energy Solutions and Financial business segments, respectively. The other PP&E is comprised of office furniture and
fixtures.



|Item 3. | Legal Proceedings.
|------- | ------------------



Shareholder Class Action. In October and November 2001, a number of putative class action lawsuits were filed by purported shareholders of Holdings
against Holdings and David Marshall, our former chairman, chief executive officer and president, in the United States District Court for the Western District of Pennsylvania. These cases were consolidated under the caption In re DQE, Inc. Securities
Litigation, Master File No. 01-1851 (W.D. Pa.), and the plaintiffs filed a second consolidated amended complaint on April 15, 2002. The complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule
10b-5 promulgated thereunder, and Section 12(a)(2) of the Securities Act of 1933 (Securities Act). The complaint also alleges controlling person liability under Section 20(a) of the Exchange Act and Section 15 of the Securities Act. The complaint
alleges that between December 6, 2000 and April 30, 2001, the defendants issued a number of materially false and misleading statements concerning investments made by our subsidiary, DQE Enterprises, Inc., and the impact that these investments would
have on our current and future financial results.



On May 20,
2003, the court certified a class to include purchasers of our common stock during the period from December 6, 2000 through April 30, 2001, and a sub-class to include purchasers of our common stock through our dividend reinvestment and stock
purchase plan during the same period.



In March 2005, we
reached an oral agreement in principle with counsel for the plaintiffs to settle all claims of the class and sub-class. The proposed settlement is contingent on execution of a definitive settlement agreement and court approval. We expect the
settlement to be covered in full by our insurance.



Other. We are involved in various other 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.



9



---

##### Table of Contents

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



No matters were submitted to a vote of Holdings or Duquesne Lights security holders during the last quarter of their fiscal years ended
December 31, 2004.



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.



The Holdings board declared quarterly common stock dividends of $0.25 per share in each of 2004 and 2003. (See Dividends discussion at Item
7.) At March 1, 2005, there were 48,137 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. The Duquesne Light board
declared quarterly common stock dividends totaling $58 million in 2004 and $65 million in 2003.



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, 2004.



|            |  |                                  |  |                              |        |                                                                                  |   |                                                                                |  
|----------- |  | -------------------------------- |  | ---------------------------- | ------ | -------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------ | -
|            |  | (a)                              |  | (b)                          |        | (c)                                                                              |   | (d)                                                                           
|Period      |  | Total number of shares purchased |  | Average price paid per share |        | Total number of shares purchased as part of publicly announced plans or programs |   | Maximum number of shares that may yet be purchased under the plans or programs
|Oct. 1 - 31 |  |                                 |  | $                            |       |                                                                                  |  |                                                                                | 
|            |  |                                  |  |                              |        |                                                                                  |   |                                                                                |  
|Nov. 1 - 30 |  |                                 |  | $                            |       |                                                                                  |  |                                                                                | 
|            |  |                                  |  |                              |        |                                                                                  |   |                                                                                |  
|Dec. 1 - 31 |  | 18,263                           |  | $                            | 18.915 |                                                                                  |  |                                                                                | 
|            |  |                                  |  |                              |        |                                                                                  |   |                                                                                |  
|Total       |  | 18,263                           |  | $                            | 18.915 |                                                                                  |  |                                                                                | 
|            |  |                                  |  |                              |        |                                                                                  |   |                                                                                |  



For information
regarding equity compensation plans, see Item 12.



10



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##### Table of Contents

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



|                                                                                                                                                  |  |                                                 |         |      |   |         |  |   |         |   |  |      |         |   |  |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ------- | ---- | - | ------- |  | - | ------- | - |  | ---- | ------- | - |  | - | -------
|Duquesne Light Holdings                                                                                                                           |  | (Millions of Dollars, Except Per Share Amounts)
|                                                                                                                                                  |  | 2004                                            |         | 2003 |   | 2002    |  |   | 2001    |   |  | 2000
|Income Statement Items                                                                                                                            |  |                                                 |         |      |   |         |  |   |         |   |  |      |         |   |  |   |        
|Total operating revenues (a)                                                                                                                      |  | $                                               | 897.3   |      | $ | 902.8   |  | $ | 1,026.0 |   |  | $    | 1,142.4 |   |  | $ | 1,168.8
|Operating income (b)                                                                                                                              |  |                                                 | 150.7   |      |   | 150.9   |  |   | 95.7    |   |  |      | 3.8     |   |  |   | 121.8  
|Income (loss) from continuing operations before taxes, limited partners interest and cumulative effect of change in accounting principle
(b) (c) |  |                                                 | 100.4   |      |   | 110.9   |  |   | 15.1    |   |  |      | (121.9  | ) |  |   | 171.4  
|Income tax expense (benefit)                                                                                                                      |  |                                                 | 20.6    |      |   | 17.7    |  |   | (11.6   | ) |  |      | (77.4   | ) |  |   | 26.1   
|Income (loss) from continuing operations (b) (c)                                                                                                  |  |                                                 | 87.2    |      |   | 93.2    |  |   | 26.7    |   |  |      | (44.5   | ) |  |   | 145.3  
|Cumulative effect of change in accounting principle (d)                                                                                           |  |                                                 |        |      |   |        |  |   | (113.7  | ) |  |      |        |   |  |   | 15.5   
|Earnings (loss) available for common stock                                                                                                        |  |                                                 | 87.0    |      |   | 175.5   |  |   | (215.2  | ) |  |      | (153.9  | ) |  |   | 154.4  
|Basic EPS from continuing operations (e)                                                                                                          |  |                                                 | 1.14    |      |   | 1.24    |  |   | 0.40    |   |  |      | (0.80   | ) |  |   | 2.30   
|Basic EPS (e)                                                                                                                                     |  |                                                 | 1.14    |      |   | 2.34    |  |   | (3.28   | ) |  |      | (2.75   | ) |  |   | 2.44   
|                                                                                                                                                  |  |                                                 |         |      |   |         |  |   |         |   |  |      |         |   |  |   |        
|Balance Sheet Items                                                                                                                               |  |                                                 |         |      |   |         |  |   |         |   |  |      |         |   |  |   |        
|Property, plant and equipment  net                                                                                                               |  | $                                               | 1,459.4 |      | $ | 1,437.3 |  | $ | 1,425.5 |   |  | $    | 1,431.5 |   |  | $ | 1,458.2
|Total assets                                                                                                                                      |  |                                                 | 2,632.8 |      |   | 2,540.8 |  |   | 2,800.8 |   |  |      | 3,235.7 |   |  |   | 3,844.2
|                                                                                                                                                  |  |                                                 |         |      |   |         |  |   |         |   |  |      |         |   |  |   |        
|Capitalization                                                                                                                                    |  |                                                 |         |      |   |         |  |   |         |   |  |      |         |   |  |   |        
|Common shareholders equity                                                                                                                       |  | $                                               | 610.4   |      | $ | 575.4   |  | $ | 452.6   |   |  | $    | 508.5   |   |  | $ | 783.8  
|Preferred and preference stock (f)                                                                                                                |  |                                                 | 146.9   |      |   | 70.7    |  |   | 93.2    |   |  |      | 85.6    |   |  |   | 90.9   
|Duquesne Light obligated mandatorily redeemable preferred securities (g)                                                                          |  |                                                 |        |      |   |        |  |   | 150.0   |   |  |      | 150.0   |   |  |   | 150.0  
|Long-term debt (g) (h)                                                                                                                            |  |                                                 | 958.0   |      |   | 977.5   |  |   | 1,082.0 |   |  |      | 1,184.5 |   |  |   | 1,337.0
|                                                                                                                                                  |  |                                                 |         |      |   |         |  |   |         |   |  |      |         |   |  |   |        
|Total Capitalization                                                                                                                              |  | $                                               | 1,715.3 |      | $ | 1,623.6 |  | $ | 1,777.8 |   |  | $    | 1,928.6 |   |  | $ | 2,361.7
|                                                                                                                                                  |  |                                                 |         |      |   |         |  |   |         |   |  |      |         |   |  |   |        
|Dividends declared per share                                                                                                                      |  | $                                               | 1.00    |      | $ | 1.00    |  | $ | 1.34    |   |  | $    | 1.68    |   |  | $ | 1.62   
|                                                                                                                                                  |  |                                                 |         |      |   |         |  |   |         |   |  |      |         |   |  |   |        



|(a) | Total operating revenues have declined in 2002, 2003 and 2004 due to the full collection of Duquesne Lights allocated CTC balance for substantially all rate classes.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Results have been negatively impacted by asset impairment and restructuring charges recorded in both 2001 and 2002. (See Notes 9 and 18.) Results have been negatively impacted by
the Sunbury acquisition termination cost in 2004. (See Note 2.)
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Results have been negatively impacted by investment impairment charges in both 2001 and 2002 (see Note 18) and positively impacted by the gain on the sale of the synthetic fuel
facilities in 2000.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) | Duquesne Light adopted unbilled revenue accounting in 2000; Holdings changed its method of accounting for goodwill and other intangible assets in 2002. (See Note 1.)
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(e) | Beginning in 2002, earnings per share were impacted by the public offering of approximately 17 million shares of common stock. (See Note 16.)
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------



|(f) | This reflects the 2004 issuance, at par, of $75 million of Duquesne Light preferred stock. (See Note 15.)
|--- | ---------------------------------------------------------------------------------------------------------



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



|(h) | Proceeds from the sale of AquaSource were used to reduce long-term debt in 2003.
|--- | --------------------------------------------------------------------------------



11



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##### Table of Contents

|                                                                  |  |                       |         |      |   |         |  |      |         |      |   |         |  |   |        
|----------------------------------------------------------------- |  | --------------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|Duquesne Light Company                                            |  | (Millions of Dollars)
|                                                                  |  | 2004                  |         | 2003 |   | 2002    |  | 2001 |         | 2000
|Income Statement Items                                            |  |                       |         |      |   |         |  |      |         |      |   |         |  |   |        
|Total operating revenues (a)                                      |  | $                     | 789.3   |      | $ | 806.1   |  | $    | 944.6   |      | $ | 1,053.6 |  | $ | 1,075.9
|Operating income (b)                                              |  |                       | 141.7   |      |   | 155.1   |  |      | 161.5   |      |   | 120.1   |  |   | 170.6  
|Income before cumulative effect of change in accounting principle |  |                       | 67.8    |      |   | 69.6    |  |      | 75.4    |      |   | 53.4    |  |   | 77.1   
|Cumulative effect of change in accounting principle (c)           |  |                       |        |      |   |        |  |      |        |      |   |        |  |   | 15.5   
|Net income                                                        |  |                       | 67.8    |      |   | 69.6    |  |      | 75.4    |      |   | 53.4    |  |   | 92.6   
|Earnings available for common stock                               |  |                       | 61.2    |      |   | 66.4    |  |      | 72.1    |      |   | 50.0    |  |   | 89.2   
|                                                                  |  |                       |         |      |   |         |  |      |         |      |   |         |  |   |        
|Balance Sheet Items                                               |  |                       |         |      |   |         |  |      |         |      |   |         |  |   |        
|Property, plant and equipment  net                               |  | $                     | 1,406.3 |      | $ | 1,382.7 |  | $    | 1,364.9 |      | $ | 1,344.9 |  | $ | 1,344.3
|Total assets                                                      |  |                       | 2,293.0 |      |   | 2,209.2 |  |      | 2,488.2 |      |   | 2,570.0 |  |   | 2,728.4
|                                                                  |  |                       |         |      |   |         |  |      |         |      |   |         |  |   |        
|Capitalization                                                    |  |                       |         |      |   |         |  |      |         |      |   |         |  |   |        
|Common shareholders equity                                       |  | $                     | 531.4   |      | $ | 530.1   |  | $    | 521.0   |      | $ | 526.7   |  | $ | 539.5  
|Non-redeemable preferred and preference stock (d)                 |  |                       | 145.9   |      |   | 69.7    |  |      | 69.8    |      |   | 68.2    |  |   | 72.1   
|Company obligated mandatorily redeemable preferred securities (e) |  |                       |        |      |   |        |  |      | 150.0   |      |   | 150.0   |  |   | 150.0  
|Long-term debt (e) (f)                                            |  |                       | 956.4   |      |   | 857.7   |  |      | 959.5   |      |   | 1,061.1 |  |   | 1,060.8
|                                                                  |  |                       |         |      |   |         |  |      |         |      |   |         |  |   |        
|Total Capitalization                                              |  | $                     | 1,633.7 |      | $ | 1,457.5 |  | $    | 1,700.3 |      | $ | 1,806.0 |  | $ | 1,822.4
|                                                                  |  |                       |         |      |   |         |  |      |         |      |   |         |  |   |        



|(a) | Total operating revenues have declined in 2002, 2003 and 2004 due to the full collection of the allocated CTC balance for substantially all rate classes.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Results have been negatively impacted by restructuring charges recorded in both 2001 and 2002. (See Note 9.) Results have been negatively impacted by the Sunbury acquisition
termination cost in 2004. (See Note 2.)
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Duquesne Light adopted unbilled revenue accounting in 2000.
|--- | -----------------------------------------------------------



|(d) | This reflects the 2004 issuance, at par, of $75 million of Duquesne Light preferred stock. (See Note 15.)
|--- | ---------------------------------------------------------------------------------------------------------



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



|(f) | Duquesne Light reduced its investment in the DQE Capital cash pool to reduce long-term debt in 2003.
|--- | ----------------------------------------------------------------------------------------------------



12



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##### Table of Contents

|Item 7. | Managements Discussion 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.



RESULTS OF OPERATIONS



We report
the following business segments: (1) Duquesne Lights transmission and distribution of electricity (electricity delivery business segment), (2) Duquesne Lights supply of electricity through POLR (electricity supply business segment), (3)
Duquesne Lights collection of transition costs (CTC business segment), (4) Duquesne Energy Solutions development, operation and maintenance of energy and, for a single customer, synthetic fuel facilities (Energy Solutions business
segment), and (5) DQE Financials collection and processing of landfill gas and management of structured finance and alternative energy investments (Financial business segment). We also report an all other category which includes
our other subsidiaries that are below the quantitative threshold for disclosure, and corporate administrative functions, financing, and insurance services for our various affiliates. Operating revenues in our all other category are
comprised primarily of (i) revenues from DQE Communications, and (ii) revenue from an energy services investment held by DQE Enterprises until its sale in 2002.



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.



Overall Performance



2004 Compared to 2003



Our 2004 earnings available for common stock were $87.0 million, or $1.14 basic earnings per share, compared to $175.5
million, or $2.34 basic earnings per share, for 2003. The average shares outstanding increased 1.4 million, or 1.9%.



Our earnings from continuing operations available for common stock were $87.2 million, or $1.14 basic earnings per share, in 2004, compared to $92.8
million, or $1.24 basic earnings per share, in 2003.



Duquesne
Lights earnings available for common stock were $61.2 million in 2004, compared to $66.4 million in 2003. The $5.2 million decrease in earnings at Duquesne Light is primarily due to the $4.8 million after-tax charge for the write-off of
deposits and deferred costs related to the termination of the Sunbury acquisition.



Earnings from continuing operations at Holdings were also affected by the following:



| |  |  | Earnings from DQE Financial decreased $6.8 million from 2003, primarily due to a $9.7 million decrease in earnings from structured lease investments and a $7.0 million after-tax
gain, recognized in 2003, on the sale of an investment in a natural gas operating partnership. These decreases were partially offset by an $8.2 million increase in earnings related to our landfill gas business.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Earnings from Duquesne Energy Solutions increased $2.4 million primarily due to lower employee compensation costs.
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | Earnings from DQE Communications increased $0.9 million primarily due to revenue growth from new and existing customers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2003, DQE Enterprises recorded a $1 million after-tax investment impairment charge. (See Note 18.)
| | - |  | ---------------------------------------------------------------------------------------------------------



The 2004 loss from discontinued operations was $0.2 million, or zero basic earnings per share, compared to income of $82.7
million, or $1.10 basic earnings per share, in 2003. The 2003 income included a $66.6 million tax benefit related to the use of capital losses generated in connection with the sale of the AquaSource subsidiaries and an $11.5 million after-tax gain
related to the increase in fair value of AquaSources investor-owned utilities as a result of the sale of these utilities to Aqua America, Inc. (See Note 17.)



2003 Compared to 2002



Our 2003 earnings available for common stock were $175.5 million, or $2.34 basic earnings per share, compared to a loss of $215.2 million, or $3.28 basic
loss per share, for 2002. The average shares outstanding increased 9.4 million, or 14.3%, primarily due to our common stock offering in June 2002.



Our earnings from continuing operations available for common stock were $92.8 million, or $1.24 basic earnings per share, in 2003, compared to $26.1
million, or $0.40 basic earnings per share, in 2002, before the cumulative effect of a change in accounting principle, described below.



Duquesne Lights earnings available for common stock were $66.4 million in 2003, compared to $72.1 million in 2002. The $5.7 million decrease in
earnings at Duquesne Light is primarily due to the following:



| |  |  | Pittsburgh experienced cooler than normal weather in the summer months of 2003, which resulted in a lower demand for cooling. The net income impact to the electricity delivery
segment was $5.6 million of lower earnings as compared to 2002.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13



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##### Table of Contents

| |  |  | Although Duquesne Light began operating under its POLR II arrangement (described below) in 2002, only six rate classes became subject to the POLR II arrangement during 2002. All
remaining rate classes but one became subject to POLR II in 2003, which was the primary reason for the $5.8 million increase in earnings in 2003 from the electricity supply business segment.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other income was $11.6 million lower in 2003, primarily due to a $7.3 million reduction in interest earnings. The net impact to the electricity delivery segment was a reduction to
earnings of $6.8 million as compared to 2002.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The 2003 increase in earnings from continuing operations at Holdings was also affected by the following:



| |  |  | Earnings from DQE Financial increased $41.2 million, primarily as a result of $29.8 million of after-tax investment and asset impairment charges recorded in 2002, and an after-tax
gain of $7 million in 2003 as a result of the sale of its limited partnership investment in a natural gas operating partnership.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Duquesne Energy Solutions earnings increased $3.2 million due to higher earnings at its energy facilities, as well as a full years income from a new synthetic fuel
facility management services contract that commenced in the fourth quarter of 2002.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2003, DQE Enterprises recorded a $1.0 million after-tax investment impairment charge related to the write-down of two investments in publicly traded businesses from our cost
to their fair market values as of June 30, 2003. During 2002, after-tax investment impairment charges totaling $18.1 million were recorded to write down investments in publicly traded businesses from our cost to their fair market values due to an
other-than-temporary decline in their market value, and to write off investments in privately held entities which had filed for protection under Chapter 7 of the U.S. Bankruptcy Code. (See Note 18.)
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the first quarter of 2002, DQE Communications recorded a $3.5 million after-tax charge related to the write-off of a receivable from a telecommunications customer who filed
for bankruptcy protection in March 2002. There were no similar charges during 2003.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Included in Holdings earnings for 2003 was income from discontinued operations of $82.7 million, or $1.10 basic earnings per share, compared to a loss of
$127.6 million, or $1.95 basic loss per share, in 2002. The 2003 income included a $66.6 million tax benefit related to the use of capital losses generated in connection with the sale of the AquaSource subsidiaries and an $11.5 million after-tax
gain related to the increase in fair value of AquaSources investor-owned utilities as a result of the sale of these utilities to Aqua America. The 2002 loss from discontinued operations included the results of both AquaSource and Pro Am, as
well as a charge of $100.9 million relating to an impairment of the long-lived assets, and a $21.2 million loss resulting from the sale of Pro Am. (See Note 17.)



A charge of $113.7 million, or $1.73 basic loss per share, from the cumulative effect of a change in accounting principle
related to the impairment of goodwill resulting from the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, was recorded as of January 1, 2002. (See Note 1.)



RESULTS OF OPERATIONS BY BUSINESS SEGMENT



2004 Compared to 2003



Electricity Delivery Business Segment.The electricity delivery business segment reported $47.1 million of earnings in 2004, compared to $46.1
million in 2003, an increase of $1.0 million, or 2.2%. This increase was primarily due to higher revenue and lower interest and other charges, partially offset by higher operating expenses in 2004.



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.



Operating revenues increased by $6.3 million, or 1.9%, compared to 2003. The increase is primarily due to a 2.1% increase in megawatt-hours (MWh) sales
from 2003. Residential and commercial sales increased compared to 2003, as the effect of the hotter summer and the extra day due to leap year in 2004 more than offset the warmer 2004 winter.



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



MWh Delivered



|            |  |                |  |        |  |        |  
|----------- |  | -------------- |  | ------ |  | ------ | -
|            |  | (In Thousands) | 
|            |  | 2004           |  | 2003   |  | Change |  
|Residential |  | 3,886          |  | 3,759  |  | 3.4    | %
|Commercial  |  | 6,522          |  | 6,415  |  | 1.7    | %
|Industrial  |  | 3,229          |  | 3,189  |  | 1.3    | %
|            |  |                |  |        |  |        |  
|            |  | 13,637         |  | 13,363 |  | 2.1    | %
|            |  |                |  |        |  |        |  



14



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##### Table of Contents

Operating expenses are primarily made up of costs to operate and maintain the transmission and
distribution system; meter reading, billing and collection costs; customer service; administrative expenses; and non-income taxes, such as gross receipts, property and payroll taxes. In 2003, we recognized a $4.9 million charge related to vacant
leased office space. Operating expenses increased by $7.4 million, or 4.7%, compared to 2003 ($12.3 million after considering the 2003 lease charge). Reasons for this increase include a $7.2 million increase in labor, pension and other fringe
benefit costs, a $1.7 million increase in insurance costs, and a $1.7 million increase in billing and collection costs.



Interest and other charges include interest on long-term debt, other interest and preferred stock dividends of Duquesne Light. Interest and other charges
decreased $10.8 million, or 17.0%, due to (i) $200 million of debt retirements in late 2003, which reduced interest expense by $11.6 million, and (ii) $151.5 million of 8.375% subordinated debenture redemptions in the first six months of 2004, which
reduced interest expense $9.6 million. These reductions more than offset the $7.1 million increase in interest expense resulting from the issuance of $200 million of 5.7% debt in May 2004, and the $3.4 million increase in dividends resulting from
the issuance of $75 million of 6.5% preferred stock in April 2004.



Electricity Supply Business Segment. In 2004, the electricity supply business segment reported earnings of $13.7 million, compared with $19.7 million in 2003. The decrease of $6.0 million, or 30.5%, is primarily due to the $4.8
million after-tax charge ($8.3 million pre-tax) incurred by Duquesne Power related to the termination of the Sunbury acquisition.



Operating revenues are derived primarily from the supply of electricity for delivery to retail customers and, to a much lesser extent, the supply of
electricity to wholesale customers. Retail energy requirements fluctuate as the number of customers participating in customer choice and their use of electricity changes; an increase or decline in POLR MWh supplied will cause a corresponding change
in total revenues and operating expenses. Energy requirements for residential and commercial customers are also influenced by weather conditions; temperature extremes lead to increased customer use of electricity for cooling and heating. Commercial
energy requirements are also affected by regional development. Energy requirements of industrial customers are primarily influenced by national and global economic conditions.



Short-term sales to other utilities are made at market rates. These sales result primarily from excess daily energy
deliveries to Duquesne Lights electricity delivery system.



Operating revenues decreased $15.7 million, or 3.5%, compared to 2003, due to the 6.1% decline in POLR MWh. The decline resulted from a higher percentage of our commercial and industrial customers choosing alternative generation suppliers.



The following tables set forth MWh supplied for POLR
customers.



MWh Supplied



|                           |  |                     |  |         |  |       |  
|-------------------------- |  | ------------------- |  | ------- |  | ----- | -
|                           |  | (In Thousands) 2004 | 
|                           |  | POLR I              |  | POLR II |  | Total |  
|Residential                |  |                    |  | 2,886   |  | 2,886 |  
|Commercial                 |  | 84                  |  | 3,707   |  | 3,791 |  
|Industrial                 |  | 1,538               |  | 850     |  | 2,388 |  
|                           |  |                     |  |         |  |       |  
|                           |  | 1,622               |  | 7,443   |  | 9,065 |  
|                           |  |                     |  |         |  |       |  
|POLR Retention (MWh basis) |  |                     |  |         |  | 66    | %
|                           |  |                     |  |         |  |       |  



MWh Supplied



|                           |  |                     |  |         |  |       |  
|-------------------------- |  | ------------------- |  | ------- |  | ----- | -
|                           |  | (In Thousands) 2003 | 
|                           |  | POLR I              |  | POLR II |  | Total |  
|Residential                |  | 57                  |  | 2,673   |  | 2,730 |  
|Commercial                 |  | 242                 |  | 4,110   |  | 4,352 |  
|Industrial                 |  | 1,641               |  | 931     |  | 2,572 |  
|                           |  |                     |  |         |  |       |  
|                           |  | 1,940               |  | 7,714   |  | 9,654 |  
|                           |  |                     |  |         |  |       |  
|POLR Retention (MWh basis) |  |                     |  |         |  | 72    | %
|                           |  |                     |  |         |  |       |  



Operating expenses
consist of costs to obtain energy for our POLR service, gross receipts tax and, beginning in the third quarter of 2004, costs related to Duquesne Power. Operating expenses decreased $13.7 million, or 3.3%, compared to 2003, primarily due to an $11.7
million decrease in purchased power expense. This decrease was caused by the decline in the POLR MWh supplied to customers.



CTC Business Segment. For the CTC business segment, operating revenues are derived by billing electric delivery customers for generation-related
transition costs. Duquesne Light is allowed to earn an 11% pre-tax return on the net of tax CTC balance. As revenues are billed to customers on a monthly basis, we amortize the CTC balance. The resulting decrease in the CTC balance causes a decline
in the return earned by Duquesne Light. The CTC balance has been fully collected from all but one customer class, which consists of two large industrial customers.



The CTC business segment reported earnings of $0.4 million in 2004, compared to $0.6 million in 2003, a decrease of $0.2
million, or 33.3%.



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Energy Solutions Business Segment. The Energy Solutions business segment reported earnings of
$22.7 million in 2004, compared to $20.3 million in 2003, an increase of $2.4 million, or 11.8%. The 2004 results were positively impacted by reductions in incentive compensation costs paid to former executives of this subsidiary.



Operating revenues for this segment are derived primarily from the facility
management services for industrial, airport and synthetic fuel customers. Operating revenues increased $4.9 million, or 7.7%, compared to 2003. The increase was primarily due to a $2.6 million increase in revenues related to the energy facility
operations, and a $2.0 million revenue adjustment in 2003 related to a scale calibration deficiency identified and corrected at one of the synthetic fuel facilities.



Operating expenses consist of the operating and maintenance costs to manage the facilities, as well as general corporate
overhead. Operating expenses decreased $0.6 million, or 1.8%, compared to 2003, primarily due to a $4.2 million decrease in the incentive compensation costs discussed above. This decrease was partially offset by increased energy commodity costs
related to the energy facility operations.



Financial
Business Segment.The Financial business segment reported earnings of $26.4 million in 2004, compared to $33.2 million in 2003, a decrease of $6.8 million, or 20.5%. This decrease was due in part to a $9.7 million decrease in 2004 earnings
recognized from the structured lease investments as a result of the Internal Revenue Service (IRS) settlement and a $7.0 million after-tax gain recognized in 2003 on the sale of an investment in a natural gas operating partnership. The 2004 decrease
was partially offset by a $4.0 million increase in earnings related to operations at the Fresh Kills landfill site that were affected by the settlement reached with the City of New York, increased earnings from equity investments, and higher
earnings from increased sales revenues related to landfill gas.



Operating revenues in this business segment are derived primarily from the sale of landfill gas and landfill gas site related services. Operating revenues increased $5.0 million, or 18%, compared to 2003. The increase is the result of a
$3.4 million increase in landfill gas sales primarily as a result of an 11.6% increase in average price and a 9% increase in volumes of pipeline quality landfill gas sold in 2004, as compared to 2003. In addition, $1.6 million of revenues are
included in the 2004 results that are related to the consolidation of operations of WET as a result of our purchase of the remaining 50% interest in the company in the fourth quarter of 2004. Prior to the purchase, we owned 50% of the company and
accounted for the investment using the equity method.



Operating expenses consist of various costs to operate and maintain the landfill gas sites, as well as expenses related to alternative fuel investments. Operating expenses decreased $4.7 million, or 10.4%, compared to 2003, primarily due to
a $3.6 million decrease in operating expenses at the landfill sites, and a $3.5 million decrease in expenses related to our limited partnership investment in a synthetic fuel partnership as a result of the sale of 50% of our investment in this
partnership in the fourth quarter of 2004. In addition, there was a $1.7 million decrease in legal fees related to the settlement of the Fresh Kills litigation. (See Note 18.) These decreases were partially offset by a $2.4 million expense
recognized for a fee due under a contract with an unrelated party, and the consolidation of $1.0 million in operating expenses related to the purchase discussed above.



Other income consists of income from the structured lease, affordable housing and equity investments, and various other
gains and losses. Other income decreased $19.9 million, or 67.7%, compared to 2003, primarily due to a $14.9 million decrease in pre-tax earnings from the structured lease investments as a result of the IRS settlement, the 2003 pre-tax gain of $10.8
million related to the sale of the investment in a natural gas partnership previously discussed, and a $6.8 million decrease in other income in 2004 due to the consolidation of the affordable housing investments resulting from the adoption of FASB
Interpretation No. 46R, Consolidation of Variable Interest Entities (revised December 2003) (FIN 46R) (see below). These decreases were partially offset by $5.9 million of pre-tax earnings primarily from the debt forgiveness related to
the Fresh Kills settlement, a $3.8 million increase in pre-tax earnings from equity investments, and lower expenses related to the affordable housing investments in 2004, as compared to 2003.



As of March 31, 2004, we adopted FIN 46R and accordingly consolidated the
seven low-income housing development guarantee funds in which a DQE Financial subsidiary owns a 1% general partner interest. The losses from these investments were recorded in other income, and 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 as well as the tax credits generated from our synthetic fuel limited partnership and
landfill gas and affordable housing investments. The income tax benefit decreased $4.8 million, or 16.2%, compared to 2003, due primarily to a $2.9 million decrease in tax credits generated in 2004 from our investment in the synthetic fuel
partnership in which we sold 50% of our



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investment in the fourth quarter of 2004, as discussed above, and a $2.4 million decrease in 2004 tax credits from the Fresh Kills landfill site as the
February 2004 settlement reached with the City of New York eliminated our ability to claim future tax credits from this site.



All Other.The all other category reported a loss of $22.5 million in 2004, compared with a $25.2 million loss in 2003. The loss in 2003 included
an after-tax impairment charge of $1.0 million.



2003 Compared to 2002



Electricity Delivery Business Segment.The
electricity delivery business segment reported $46.1 million of earnings in 2003, compared to $55.3 million in 2002. The 2002 earnings consisted of $57.6 million before an after-tax restructuring charge of $2.3 million. Excluding the restructuring
charge, income from the electricity delivery business segment was $11.5 million, or 20.0%, lower in 2003, primarily due to lower operating revenues and other income in 2003.



Operating revenues decreased by $11.6 million, or 3.3%, compared to 2002. The decrease is primarily due to a 3.0% decline in
megawatt-hours (MWh) delivered in 2003, which resulted in a $7.6 million decline in revenue.



Residential and commercial sales decreased 4.2% and 1.7%, compared to 2002. Reduced air conditioning loads during the cooler summer more than offset increased heating use during Pittsburghs colder winter in
2003. Industrial sales, which are less sensitive to weather, also decreased by 4.2%, due to lower sales to industrial customers in the durable goods manufacturing sector. The following table sets forth MWh delivered to electric utility customers.



MWh Delivered



|            |  |                |  |        |  |        |   
|----------- |  | -------------- |  | ------ |  | ------ | --
|            |  | (In Thousands) | 
|            |  | 2003           |  | 2002   |  | Change |   
|Residential |  | 3,759          |  | 3,924  |  | (4.2   | )%
|Commercial  |  | 6,415          |  | 6,528  |  | (1.7   | )%
|Industrial  |  | 3,189          |  | 3,328  |  | (4.2   | )%
|            |  |                |  |        |  |        |   
|            |  | 13,363         |  | 13,780 |  | (3.0   | )%
|            |  |                |  |        |  |        |   



In addition, revenue
declined $5.5 million due to lower revenue recovery of taxes other than income taxes through the state tax adjustment surcharge (STAS) as compared to 2002.



Operating expenses increased by $1.2 million, or 0.8%, compared to 2002. In 2003, pension expense increased $15.4 million, and we recognized a $4.9
million pre-tax charge related to vacant leased office space. These significant increases in expense were partially offset by a $4.3 million reduction in the gross receipts tax expense recognized, due to the reduction in the revenue recovery of this
item through the STAS. Costs allocated from Duquesne Light to its affiliates increased $3.2 million from 2002, which reduced the net expenses at Duquesne Light. In addition, compared to 2002, savings of at least $3 million in each of the following
areas were achieved: bad debt, legal and meter reading. Other cost savings were achieved in 2003 as a result of the fourth quarter 2002 restructuring.



Other income includes interest income on invested cash and intercompany loans, as well as gains and losses recognized on the sale of certain assets. Other
income decreased $11.6 million, or 36.4%, compared to 2002, due primarily to a $7.3 million reduction in interest earnings. In addition, other income was higher in 2002 due to a $1.9 million pre-tax gain recognized on the sale of securities and a
building during 2002.



Interest and other charges decreased
$8.8 million, or 12.2%, due to (i) $110.0 million of debt retirements in August 2002, which reduced interest expense by $5.0 million, (ii) $100.0 million of debt retirements in August 2003, which reduced interest expense $3.1 million, and (iii)
favorable interest rates on variable rate, tax-exempt debt.



Electricity Supply Business Segment. During the first quarter of 2002, Duquesne Light began operating under POLR II, which extended the POLR service (and the PUC-approved rates for the supply of electricity) beyond the final CTC
collection through December 31, 2004. POLR II also permitted Duquesne Light, following CTC collection for each rate class, a margin per MWh supplied. The actual margin earned depended on the mix of rate classes and the number of customers
participating in POLR II. Prior to the start of the POLR II arrangement, POLR I was designed to be income neutral.



In 2003, the electricity supply business segment reported earnings of $19.7 million, compared with earnings of $13.9 million in 2002. The increase of $5.8
million, or 41.7%, was primarily due to all significant rate classes being subject to the POLR II arrangement for all of 2003. In contrast, during 2002, these classes became subject to the POLR II arrangement at different times, as their CTC was
fully collected.



Operating revenues decreased $22.0 million,
or 4.7%, compared to 2002. The decrease is due to commercial and industrial customers shopping for their generation supply, causing a decline in the percentage of customer load delivered through our POLR arrangements. The revenue decline
attributable to shopping was partially mitigated by the 49% increase in POLR II MWh supplied, for which a higher rate applied.



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The following tables set forth MWh supplied for POLR customers.



MWh Supplied



|                           |  |                     |  |         |  |       |  
|-------------------------- |  | ------------------- |  | ------- |  | ----- | -
|                           |  | (In Thousands) 2003 | 
|                           |  | POLR I              |  | POLR II |  | Total |  
|Residential                |  | 57                  |  | 2,673   |  | 2,730 |  
|Commercial                 |  | 242                 |  | 4,110   |  | 4,352 |  
|Industrial                 |  | 1,641               |  | 931     |  | 2,572 |  
|                           |  |                     |  |         |  |       |  
|                           |  | 1,940               |  | 7,714   |  | 9,654 |  
|                           |  |                     |  |         |  |       |  
|POLR Retention (MWh basis) |  |                     |  |         |  | 72    | %
|                           |  |                     |  |         |  |       |  



MWh Supplied



|                           |  |                     |  |         |  |        |  
|-------------------------- |  | ------------------- |  | ------- |  | ------ | -
|                           |  | (In Thousands) 2002 | 
|                           |  | POLR I              |  | POLR II |  | Total  |  
|Residential                |  | 699                 |  | 2,045   |  | 2,744  |  
|Commercial                 |  | 2,355               |  | 2,512   |  | 4,867  |  
|Industrial                 |  | 2,433               |  | 618     |  | 3,051  |  
|                           |  |                     |  |         |  |        |  
|                           |  | 5,487               |  | 5,175   |  | 10,662 |  
|                           |  |                     |  |         |  |        |  
|POLR Retention (MWh basis) |  |                     |  |         |  | 77     | %
|                           |  |                     |  |         |  |        |  



Operating expenses
decreased $32.1 million, or 7.2%, compared to 2002 primarily due to a decrease in the MWh supplied for the reasons described above.



CTC Business Segment. The CTC business segment reported earnings of $0.6 million in 2003, compared to earnings of $2.9 million in 2002, a decrease
of $2.3 million, or 79.3%. Various customer rate classes had their CTC fully collected between March and September 2002. As of December 31, 2002, the CTC balance had been fully collected for approximately 95% of Duquesne Lights customers. As
of December 31, 2003, the CTC balance had been fully collected for all but one customer class, which represented less than 1% of Duquesne Lights customers.



Energy Solutions Business Segment.The Energy Solutions business segment reported earnings of $20.3 million in 2003,
compared to earnings of $17.1 million in 2002, an increase of $3.2 million, or 18.7%. This increase resulted primarily from higher earnings at the energy facilities as well as a full year of income from a new synthetic fuel facility management
services contract that commenced in the fourth quarter of 2002.



Operating revenues increased $8.8 million, or 16.1%, compared to 2002. This increase was principally due to higher synthetic fuel production related to the new services contract discussed above.



Operating expenses increased $3.8 million, or 13.0%, compared to 2002,
primarily due to higher employee compensation costs and additional operating expenses associated with the new services contract. These increases were partially offset by decreased operating costs at the energy facilities.



Financial Business Segment.The Financial business segment reported
earnings of $33.2 million in 2003, compared to a loss of $8.0 million in 2002, which consisted of income of $21.8 million before after-tax impairment charges of $29.8 million. Absent the impairment charges, earnings increased $11.4 million, or
52.3%. This increase resulted primarily from a $7.0 million after-tax gain on the sale of an investment in a natural gas operating partnership, higher earnings due to higher sales prices for landfill gas and $3.4 million of increased earnings from
the synthetic fuel investment.



Operating revenues increased
$5.8 million, or 26.4%, compared to 2002. This increase was primarily due to higher sales prices for pipeline quality landfill gas, which increased 61.7%, as the pipeline quality production volume remained relatively consistent between the years.



Operating expenses increased $1.9 million, or 4.4%, compared
to 2002. Expenses related to our synthetic fuel investment increased $5.5 million from 2002 due to higher production volumes in 2003, while general corporate overhead expenses decreased $1.8 million and landfill related costs decreased $1.2 million.



Depreciation and amortization expense consists of the
depreciation of landfill gas equipment and gas rights. The decrease of $5.9 million, or 48.0%, compared to 2002, was primarily due to the write-off of the Fresh Kills landfill gas investment as of December 31, 2002.



Other income increased $6.7 million, or 29.5%, as compared to 2002, primarily
due to a pre-tax gain of $10.8 million on the sale of the limited partnership investment previously discussed. This gain was partially offset by a $3.0 million scheduled decline in earnings from structured lease investments.



Our income tax benefit decreased $5.0 million or 14.5% from 2002, primarily
due to the increase in our pre-tax earnings, which caused a corresponding change in our provision for federal income taxes.



Our pre-tax earnings in 2003 were $3.6 million, compared to a pre-tax loss of $12.8 million in 2002, prior to the impairment charges, which are shown net
of tax. This increase in our pre-tax earnings caused a decrease to our income tax benefit of $5.7 million.



Income tax credits generated in 2003 were $30.8 million, compared to the $30.2 million of tax credits in 2002, however the source of the income tax
credits changed between the years. During 2003, the income tax credits generated from our synthetic fuel investment increased $7.0 million, while the credits from our natural gas investments decreased $2.7 million, due to



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their expiration at the end of 2002. The tax credits generated from our landfill gas investments decreased $3.2 million, primarily due to some landfill sites
that were tax credit qualified only through 2002. The tax credits from our affordable housing investments decreased $0.5 million from 2002.



All Other.The all other category reported a loss of $25.2 million in 2003, which consisted of a loss of $23.8 million before an after-tax
impairment charge of $1.0 million and preferred dividends of $0.4 million. This is compared to a loss of $51.9 million in 2002, which consisted of a loss of $32.4 million before after-tax impairment charges of $18.1 million, after-tax restructuring
charges of $0.8 million and preferred dividends of $0.6 million. Absent the impairment and restructuring charges (discussed previously) and the preferred dividends, the improvement of $8.6 million was primarily due to a $3.5 million after-tax
charge, or $5.9 million pre-tax, recorded in 2002 related to the write-off of a receivable from a telecommunications customer who filed for bankruptcy, and lower revolving credit agreement fees and interest charges in 2003.



Operating expenses consisted of expenses to operate and maintain our fiber
optic based network, expenses to manage our electronic commerce and energy technology portfolio and general corporate expenses. In 2003, operating expenses decreased $14.5 million, or 54.1%, compared to 2002. This decrease was primarily due to the
$5.9 million pre-tax receivable write-off discussed above. Expenses also decreased $3.4 million due to the lower fees discussed above and the sale of an energy services investment in the second quarter of 2002. In addition, the capital stock tax
liability was reduced by $5.4 million.



Interest and other
charges include interest on long-term debt, other interest, and, effective July 1, 2003, dividends on Holdings preferred stock. Interest expense decreased $4.3 million, or 14.4%, compared to 2002. This decrease was primarily due to lower
intercompany loan balances in 2003.



CRITICAL ACCOUNTING POLICIES 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 each customer 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. Customer accounts receivable as of
December 31, 2004, and 2003, include unbilled revenues of $31.3 million and $29.7 million at Holdings, and $31.1 million and $29.7 million at Duquesne Light.



Impairment of Long-Lived Assets and Investments. We evaluate long-lived assets (including other intangibles) of identifiable business activities
and



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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. In addition to those long-lived assets and investments for which impairment charges were recorded in 2002 and 2003 (see Note 18), others were reviewed for which no impairment was required. For long-lived assets to be held and used,
these computations used 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. No impairment charges were recorded in 2004.



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,
Employers Accounting for Pensions and SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. 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 5.75% as of December 31, 2004, compared to 6.25% as of December 31, 2003. We determine the discount rate by considering the yield rates on corporate high-grade bonds, including relative
year-over-year changes. 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 2003, the assumed rate of return on plan assets in the
pension plans was 7.5%. We revised this assumption to 8.0% for both 2004 and 2005 to more closely align with our expected long-term rate of return on plan assets.



Assumed health care cost trend rates have a significant effect on the liabilities for the postretirement plans. The health
care trend assumption used in the development of the fiscal 2004 postretirement benefit plan expense was 9.5% for fiscal year 2004, decreasing to an ultimate rate of 4.75% in 2015. In 2003, we modified the postretirement plan design, which,
beginning in 2004, provided for greater cost-sharing by the participants.



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 12 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 2004, 2003 and 2002. As of December 31, 2004, the fair value of the pension plan
assets of $715.8 million represented approximately 95% of the projected benefit obligation of our pension plans.



Our pension cost for 2004 was $2.3 million and our expected pension gain for 2005 is $0.7 million. Primarily because of the amortization of previous
years net investment gains, our pension cost for 2003 and 2002 was negative, resulting in an increase in net income in each year. The increase in our pension cost in 2004 reflects, among other factors, actual losses on the pension fund assets
in both 2002 and 2001, compared with an expected annual asset return assumption of 7.5% in each of the years. Although the actual return on plan assets in 2004 of $74.3 million and in 2003 of $120.2 million significantly exceeded the assumed rate of
return on plan assets of 8.0% and 7.5%, it does not fully mitigate the shortfall in the actual return on plan assets over the past few years. Our expense or credit for actual pension benefits in future periods will depend upon actual returns on plan
assets and the key assumptions we use for future periods.



Pursuant to the actuarial valuations that were performed, we were not required to make cash contributions to our pension plans in 2004, nor will we be required to do so in 2005. (See Note 12.) However, in January 2005, Duquesne Light
contributed $32.1 million to the pension plans to meet its regulatory obligation in connection with the PUCs approval of the recovery of costs associated with an early retirement program in 2001.



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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. Our overall effective tax rate is significantly reduced by the income tax credits generated
from our synthetic fuel, landfill gas 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.



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.)



Derivative Instruments. Duquesne Power has entered into energy commodity contracts in anticipation of fulfilling expected obligations during the
POLR III period, and not for trading purposes. At the inception of each contract, management assesses whether the contract qualifies as a derivative and formally documents the appropriate accounting treatment in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. Generally, contracts that are deemed derivative instruments are required to be marked to market and presented in the financial statements at fair
value. However, management may determine if the contracts qualify for the normal purchase and sale exemption as permitted by SFAS No. 133. This exemption permits, at our option, the use of the accrual basis of accounting as opposed to mark-to-market
accounting for the contracts.



The energy contracts entered
into by Duquesne Power have been determined to be derivative instruments as defined by SFAS No. 133. Duquesne Power accounts for the energy contracts using a combination of accrual and mark-to-market accounting based on contracted volumes and
anticipated obligations during the POLR III period.



Under the
accrual basis of accounting, recognition of the contracts fair value is not recorded in the consolidated financial statements until the settlement of the contract has occurred, whereas under mark-to-market accounting, we record the fair value
of these contracts as mark-to-market derivative assets or liabilities at the end of every reporting period. We record the changes in the mark-to-market derivative assets or liabilities on a net basis in purchased power in our consolidated statements
of income in the period of change.



The fair value of the
mark-to-market contracts is estimated through the use of a valuation model using quoted market prices, when available. 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, and those variations could have a material impact on our results. (See Note 4.)



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, restructuring liabilities (see Note 9), income tax matters (see Note 10), and other commitments and contingencies (see Note 13).



DIVIDENDS



Once all dividends on Holdings Preferred Stock, Series A (Convertible), $100 liquidation preference per share (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. As a holding company, substantially all of Holdings assets shown on its consolidated balance sheets
are held by subsidiaries. Accordingly, Holdings earnings and cash flow, and Holdings ability to meet its obligations, are largely dependent upon the earnings and cash flows of such subsidiaries and the distribution or other payment of
such earnings in the form of dividends, loans or advances, and repayment of loans and advances from Holdings. Holdings subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts due on securities or to make
any funds available for such payments. Holdings practice has been for its subsidiaries to dividend their earnings on a quarterly basis, if cash is available.



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Holdings subsidiaries ability to make dividend payments or other distributions 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.



If Duquesne Light cannot pay common dividends, we may not be able to pay dividends on our common stock or preferred stock. Payments of dividends on
Duquesne Lights common stock may be restricted by Duquesne Lights obligations to holders of preferred and preference stock pursuant to Duquesne Lights articles of incorporation. No dividends or distributions may be made on Duquesne
Lights common stock if Duquesne Light 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 agreements. Further, the aggregate amount of
Duquesne Lights common stock dividend payments or distributions may not exceed certain percentages of net income if the ratio of total common shareholders equity to total capitalization is less than specified percentages. (See Notes 15
and 16.) During 2004, 2003 and 2002, Duquesne Light paid dividends on common stock of $71 million, $69 million and $63.7 million.



Holdings has continuously paid dividends on its common stock since 1953. Annual dividends per share, paid quarterly, were $1.00, $1.00 and $1.51 for the
years 2004, 2003 and 2002. Most recently, in the first quarter of 2005 the board of directors declared a quarterly dividend of $0.25 per share (payable on April 1, 2005 to holders of record on March 10, 2005). The board regularly evaluates the
dividend policy and sets the amount each quarter. The level of dividends will continue to be influenced by many factors such as, among other things, earnings, financial condition and cash flows from subsidiaries, as well as general economic and
competitive conditions.



LIQUIDITY AND CAPITAL RESOURCES



Capital
Expenditures



Continuing Operations.In 2004, 2003
and 2002, Duquesne Light spent $83.5 million, $76.1 million and $72.5 million for electric utility construction. In addition, Holdings spent $2.9 million, $1.9 million, and $11.3 million on capital expenditures relating to our other business lines
and other investments. We estimate that for the period from 2005 through 2007, Duquesne Light will spend, excluding the allowance for funds used during construction, approximately $500 million to $600 million for electric utility construction
related to its transmission and distribution infrastructure, and Holdings will spend approximately $75 million to $100 million, primarily related to investments in landfill gas facilities.



Asset Acquisitions and Dispositions



Continuing Operations. In November 2004, DQE Financial acquired the
remaining 50% membership interest in Waste Energy Technology, LLC (WET) for $8.4 million in cash (net of cash received of $0.9 million). In November 2004, DQE Financial also agreed to an early termination of a leveraged lease. In consideration for
the termination, DQE Financial received net proceeds of $9.6 million and recorded an after-tax gain of $0.8 million. 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 an after-tax gain of $0.5 million. Additional sale proceeds may be received from the buyer through December 2007, but are contingent upon the generation of qualified tax credits related to synthetic fuel
production of the partnership. Due to the contingent nature of future sale proceeds, DQE Financial will recognize additional income from this sale as earned. The amount of any additional income to be recorded will depend on the amount of tax credits
allocated to the buyer, less the buyers portion of required capital contributions to the partnership. In September 2004, DQE Financial also sold an investment in a landfill gas operation and received $2.9 million of cash proceeds at closing,
and recognized an after-tax loss of $1.4 million. A portion of the sale is contingent upon the buyer receiving a favorable ruling from the Internal Revenue Service (IRS) by December 31, 2005 on the qualification of the tax credits to be generated.
As a result, no gain or loss has been recognized for any additional proceeds to be received related to the contingent portion of the sale.



In February 2003, DQE Financial sold its limited partnership investment in a natural gas operating partnership for $18.5 million and recognized an
after-tax gain of $7.0 million. DQE Enterprises received $2.5 million for the sale of stock in three publicly traded companies and recognized an after-tax gain of $0.6 million. Duquesne Light sold its 50% investment in a small coal mining operation
for $1.4 million, which resulted in an after-tax gain of $0.4 million.



In 2002, we sold a significant portion of our remaining affordable housing portfolio, receiving proceeds of approximately $17 million, which approximated book value. Duquesne Light received $1.3 million from the sale of securities and
recognized an after-tax gain of $0.8 million. Duquesne Light received $1.3 million from the sale of a building and recognized an after-tax gain of $0.3 million. We also received $3.4 million for the sale of an electronic commerce investment, which
approximated book value.



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Discontinued Operations.In May 2004, AquaSource repurchased the minority interest held by an
unrelated party for approximately $8.2 million. This caused a corresponding decline in the discontinued operations liabilities on the consolidated balance sheets.



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. AquaAmerica also assumed debt of $10.4 million 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. This $12 million payment caused a
corresponding decline in the discontinued operations liabilities on the consolidated balance sheets.



On April 30, 2003, AquaSource closed the sale of a water utility subsidiary to California Water Services Group, receiving $7.5 million of proceeds at
closing, though subsequent purchase price adjustments reduced the net amount to $6.1 million. Also on April 30, 2003, the Alabama contract operations were terminated and AquaSource received $0.9 million of proceeds. On March 31, 2003, AquaSource
closed the sale of its water and wastewater utility construction business to former members of AquaSource management for approximately $8 million, of which $3.3 million was a promissory note, which was paid in full in January 2005. Also in the first
quarter of 2003, AquaSource sold its New England contract operations for approximately $1.3 million.



On November 22, 2002, we sold the majority of AquaSources contract operations business to Southwest Water Company for $10.3 million. Southwest Water
also assumed $2.5 million in debt associated with the business.



We sold various assets in 2002, including several wastewater facilities and real property, and received proceeds of approximately $6 million, which approximated book value. In addition, we sold Pro Ams propane distribution
business for approximately $42 million, $32 million of which was paid in cash at the closing. (See Note 17.)



Financing



Holdings debt and equity financing activity in 2004 was as follows:



|                                    |  |           |       |             |   |      
|----------------------------------- |  | --------- | ----- | ----------- | - | -----
|                                    |  | Issuances |       | Retirements
|DQE Capital 8.375% PINES            |  | $         |      |             | $ | 100.0
|Duquesne Light 5.7% FMBs           |  |           | 200.0 |             |   |     
|Duquesne Light 6.5% Preferred Stock |  |           | 75.0  |             |   |     
|DQE Financial 8% Fresh Kills Note   |  |           |      |             |   | 21.4 
|Duquesne Light 8.375% Debentures    |  |           |      |             |   | 151.5
|                                    |  |           |       |             |   |      
|Total                               |  | $         | 275.0 |             | $ | 272.9
|                                    |  |           |       |             |   |      
|Net Change                          |  |           |       |             | $ | 2.1  
|                                    |  |           |       |             |   |      



In October 2004, DQE
Capital Corporation fully redeemed $100 million principal amount of its 8.375% public income notes (PINES), due 2039, at par. A $1.9 million after-tax charge related to the write-off of unamortized, original issuance costs of the PINES was recorded
in the fourth quarter of 2004.



In May 2004, Duquesne Light
issued $200 million of 5.7% first mortgage bonds due 2014. Proceeds were used to redeem the remaining $75 million of MIPS (discussed below), repay the remaining $40 million of outstanding revolving credit facility borrowings, replenish cash, and to
fund general corporate purposes.



In April 2004, Duquesne Light
issued 1.5 million shares of 6.5% Preferred Stock ($50 par and involuntary liquidation value per share). The net proceeds of approximately $73 million were used to partially repay short-term borrowings under Duquesne Lights credit facility and
to redeem long-term debt.



In February 2004, GSF Energy, L.L.C.
(GSF), a DQE Financial subsidiary, paid the City of New York $4.5 million and was released from all financial obligations of the prior Fresh Kills concession agreement, including a $21.4 million note payable balance. As a direct result of the
settlement, we are recognizing approximately $16 million in pre-tax income ratably over the new contract term, scheduled to end June 30, 2006.



During 2004, Duquesne Light redeemed $151.5 million of its 8 3/8% Subordinated Deferrable Interest Debentures, Series A, due May 31, 2044 held by Duquesne
Capital, L.P., a special purpose subsidiary of Duquesne Light. Simultaneously, Duquesne Capital redeemed $150 million principal amount of its 8.375% Cumulative Monthly Income Preferred Securities, Series A (MIPS).



Liquidity



We are focused on building a strong liquidity position and strengthening our balance sheet, thereby improving our credit
profile. We believe that cash on hand, operating cash flows, access to debt and equity capital markets, and bank borrowing capacity provide



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sufficient resources to fund our ongoing operating requirements, ongoing capital expenditures, and estimated future infrastructure investments. We anticipate
needing a minimum of $250 million over the next three years beyond the amount generated from our operations to fund Duquesne Lights estimated infrastructure improvements and DQE Financials capital expenditures. We expect to raise these
additional funds through the issuances of debt and/or equity in 2005 and 2006, as necessary. Our cash flows from operations and our cost-effective access to bank and capital markets are subject to risks and uncertainties, including but not limited
to, those outlined in Forward-Looking Statements.



Available cash at all subsidiaries, including Duquesne Light, is deposited in the DQE Capital cash pool. Duquesne Lights investments in or withdrawals from this cash pool are reflected as cash flows from investing activities on its
separate company consolidated statements of cash flows.



Bank Credit Facilities.In September 2004, Holdings and Duquesne Light entered into new unsecured credit facilities expiring in September 2007. Holdings $175 million facility replaced its prior $110 million, 364-day revolver.
Duquesne Lights amended and restated $100 million facility replaced its prior $180 million, 364-day revolver. Both credit facilities permit borrowings at interest rates of LIBOR (plus a margin of 0.75 % to 2.00%) or an alternate base rate, as
defined in the credit facilities (plus a margin from 0.0% to 1.00%). Both credit facilities have commitment fees that range from 0.125% to 0.30% of the remaining available amount. Interest rates and commitment fees are based on the borrowers
then-current senior unsecured credit rating. Both credit agreements 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 credit
agreements are fully available for the issuance of letters of credit.



Under our credit facilities, we are subject to financial covenants requiring each of Holdings and Duquesne Light to maintain a maximum debt-to-capitalization ratio of 65%, as defined in the facilities. In addition, Holdings is required to
maintain a minimum coverage ratio of 2-to-1, as defined in the facilities. At December 31, 2004, we were in compliance with these covenants.



At December 31, 2004, our total borrowing capacity under our credit facilities and the use of this borrowing capacity were as follows:



|               |  |                    |       |          |   |            |  |                   |      |  |   |      
|-------------- |  | ------------------ | ----- | -------- | - | ---------- |  | ----------------- | ---- |  | - | -----
|               |  | Committed Capacity |       | Borrowed |   | LOCsIssued |  | AvailableCapacity
|Holdings       |  | $                  | 175.0 |          | $ |           |  | $                 | 58.8 |  | $ | 116.2
|Duquesne Light |  |                    | 100.0 |          |   |           |  |                   | 10.4 |  |   | 89.6 
|               |  |                    |       |          |   |            |  |                   |      |  |   |      
|Total          |  | $                  | 275.0 |          | $ |           |  | $                 | 69.2 |  | $ | 205.8
|               |  |                    |       |          |   |            |  |                   |      |  |   |      



During 2004, for both
Holdings and Duquesne Light, the maximum amount of credit facility borrowings outstanding was $120 million (all at Duquesne Light), the average daily borrowings were $18.6 million and the weighted average daily interest rate was 2.3%. At December
31, 2004, Holdings had $7.5 million and Duquesne Light had $13.2 million of outstanding letters of credit (LOCs) unrelated to the credit facilities.



At February 28, 2005, our total borrowing capacity under our credit facilities and the use of this borrowing capacity were as follows:



|               |  |                   |       |          |   |            |  |                   |      |  |   |      
|-------------- |  | ----------------- | ----- | -------- | - | ---------- |  | ----------------- | ---- |  | - | -----
|               |  | CommittedCapacity |       | Borrowed |   | LOCsIssued |  | AvailableCapacity
|Holdings       |  | $                 | 175.0 |          | $ |           |  | $                 | 68.8 |  | $ | 106.2
|Duquesne Light |  |                   | 100.0 |          |   |           |  |                   | 10.4 |  |   | 89.6 
|               |  |                   |       |          |   |            |  |                   |      |  |   |      
|Total          |  | $                 | 275.0 |          | $ |           |  | $                 | 79.2 |  | $ | 195.8
|               |  |                   |       |          |   |            |  |                   |      |  |   |      



In addition, at
February 28, 2005, Holdings had $7.5 million and Duquesne Light had $12.7 million of outstanding LOCs unrelated to the credit facilities.



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



Credit Ratings. Moodys Investors Service, Inc., Standard & Poors Ratings Services (S&P), and Fitch Ratings periodically review the credit ratings on the debt and preferred securities of
Holdings and its subsidiaries. Based on their respective reviews, the rating agencies may make certain ratings revisions. These ratings are not a recommendation to buy, sell or hold any securities of Holdings, Duquesne Light or their subsidiaries,
may be subject to revisions or withdrawal by the agencies at any time, and should be evaluated independently of each other and any other rating that may be assigned to our securities.



In the first quarter of 2003, S&P reduced Holdings and Duquesne Lights short-term corporate credit and
commercial paper ratings by one level, thereby effectively restricting our access to the commercial paper market. These ratings downgrades do not limit our ability to access our credit facilities.



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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.



Holdings Preferred Stock, Series A



As of December 31, 2004, 66,149 shares ($6.6 million) of Holdings preferred
stock were outstanding and included in other current liabilities on the balance sheet. (See Note 15.) Each outstanding share is redeemable for cash or convertible at our option into the number of shares of our common stock computed by dividing the
preferred stocks $100 per share liquidation value by the five-day average closing sales price of common stock for the five trading days immediately prior to the conversion date.



Each outstanding share of Holdings preferred stock will automatically be converted on the first day of the first month
commencing after the sixth anniversary of its issuance. On January 1, 2005, we converted 41,183 shares into 216,273 shares of common stock; on February 1, 2005, we converted 23,960 shares into 130,297 shares of common stock. The final 1,006 shares
will be converted on April 1, 2005.



OFF-BALANCE SHEET ARRANGEMENTS



Except for the guarantees discussed in Note 13, neither
Holdings nor Duquesne Light has any material off-balance sheet arrangements. 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, 2004, we
have certain contractual obligations and commitments that extend beyond 2005, the amounts of which are set forth in the following table:



Payments Due By Period



|                                                |  |                       |         |                |   |          |  |          |       |                 |   |       |  |   |        
|----------------------------------------------- |  | --------------------- | ------- | -------------- | - | -------- |  | -------- | ----- | --------------- | - | ----- |  | - | -------
|                                                |  | (Millions of Dollars)
|                                                |  | Total                 |         | Lessthan 1Year |   | 1-3Years |  | 3-5Years |       | Morethan 5Years
|Long-Term Debt  Principal                      |  |                       |         |                |   |          |  |          |       |                 |   |       |  |   |        
|Duquesne Light                                  |  | $                     | 956.4   |                | $ |         |  | $        |      |                 | $ | 40.0  |  | $ | 916.4  
|Other Affiliates (a)                            |  |                       | 1.8     |                |   | 0.2      |  |          | 0.5   |                 |   | 0.6   |  |   | 0.5    
|Long-Term Debt  Interest                       |  |                       |         |                |   |          |  |          |       |                 |   |       |  |   |        
|Duquesne Light (b)                              |  |                       | 555.2   |                |   | 43.2     |  |          | 86.4  |                 |   | 81.6  |  |   | 344.0  
|Other Affiliates                                |  |                       | 0.3     |                |   | 0.1      |  |          | 0.1   |                 |   | 0.1   |  |   |       
|Energy Commodity Contracts  Duquesne Light     |  |                       | 778.1   |                |   | 264.7    |  |          | 513.4 |                 |   |      |  |   |       
|Operating Leases                                |  |                       |         |                |   |          |  |          |       |                 |   |       |  |   |        
|Duquesne Light                                  |  |                       | 28.9    |                |   | 4.1      |  |          | 8.4   |                 |   | 7.8   |  |   | 8.6    
|Other Affiliates                                |  |                       | 53.6    |                |   | 4.2      |  |          | 8.4   |                 |   | 9.8   |  |   | 31.2   
|IRS Settlement Payment                          |  |                       | 50.9    |                |   | 50.9     |  |          |      |                 |   |      |  |   |       
|Pension Funding Commitment  Duquesne Light (c) |  |                       | 32.1    |                |   | 32.1     |  |          |      |                 |   |      |  |   |       
|Legacy Liability Obligations  Duquesne Light   |  |                       | 32.1    |                |   | 4.3      |  |          | 5.2   |                 |   | 4.3   |  |   | 18.3   
|Restructuring                                   |  |                       |         |                |   |          |  |          |       |                 |   |       |  |   |        
|Duquesne Light                                  |  |                       | 2.5     |                |   | 1.3      |  |          | 1.2   |                 |   |      |  |   |       
|Holdings                                        |  |                       | 0.5     |                |   | 0.5      |  |          |      |                 |   |      |  |   |       
|                                                |  |                       |         |                |   |          |  |          |       |                 |   |       |  |   |        
|Total                                           |  | $                     | 2,492.4 |                | $ | 405.6    |  | $        | 623.6 |                 | $ | 144.2 |  | $ | 1,319.0
|                                                |  |                       |         |                |   |          |  |          |       |                 |   |       |  |   |        



|(a) | Includes current maturities. Does not include Holdings demand note held by Duquesne Light, which is eliminated in the consolidation of Holdings.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Variable rate interest obligations are based on the weighted average floating rate for 2004.
|--- | --------------------------------------------------------------------------------------------



|(c) | Paid in January 2005.
|--- | ---------------------



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RATE MATTERS

Competitive Transition Charge and Provider of Last Resort



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
transmission and distribution charges.



Duquesne Light retains
the risk that customers will not pay for the POLR generation supply. However, a component of Duquesne Lights delivery rate is designed to cover the cost of a normal level of uncollectible accounts.



Customers under special contracts, as well as a single customer class
(comprised of two industrial customers), continue to receive electric generation through Duquesne Lights POLR I supply arrangement with Orion, which was designed to be an income neutral arrangement. These two industrial customers are the only
customers from which Duquesne Light continues to collect the CTC. The transition costs are being amortized over the same period that the CTC revenues are being recognized. Duquesne Light is allowed to earn an 11.0% pre-tax return on the remaining
uncollected CTC balance.



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.



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, 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.



The following table provides selected financial and operating statistics for 2004 for the customer groups described above. The POLR II net income of $19.7
million shown in the table below represents the net income generated from Duquesne Lights POLR II arrangement, which permits Duquesne Light a margin per MWh supplied. Note 21 to the consolidated financial statements shows the net income of the
supply business segment for 2004 to be $13.7 million. The table below excludes the $4.8 million after-tax acquisition termination costs related to the termination of the Sunbury acquisition, as well as $1.2 million of after-tax costs incurred by
Duquesne Power that are not related to Duquesne Lights POLR II arrangement.



|                   |  |                              |       |   |                             |   |       |       |  |   |        |  
|------------------ |  | ---------------------------- | ----- | - | --------------------------- | - | ----- | ----- |  | - | ------ | -
|                   |  | Residential& SmallCommercial |       |   | LargeCommercial &Industrial |   |       | Total | 
|                   |  | (In Thousands)               |      
|Customers          |  |                              | 586   |   |                             |   | 1     |       |  |   | 587    |  
|MWh delivered      |  |                              | 7,234 |   |                             |   | 6,403 |       |  |   | 13,637 |  
|MWh supplied       |  |                              | 5,322 |   |                             |   | 3,743 |       |  |   | 9,065  |  
|POLR Retention     |  |                              | 74    | % |                             |   | 58    | %     |  |   | 66     | %
|                   | 
|                   |  | (Millions of Dollars)        |      
|POLR revenue       |  | $                            | 285.7 |   |                             | $ | 148.8 |       |  | $ | 434.5  |  
|POLR II net income |  | $                            | 15.1  |   |                             | $ | 4.6   |       |  | $ | 19.7   |  



PJM Participation



Duquesne Light joined PJM effective January 1, 2005, as part of its
commitment to ensuring reliability to its customers. Energy pricing within PJM now includes the costs or benefits of transmission congestion experienced at each location within the region. This is known as locational marginal pricing. An
auction-based system of financial transmission rights (FTR) allows participants to hedge congestion risks. FTR holders are paid or charged the day-ahead congestion value of the transmission path for which they hold an FTR. Upon joining PJM, Duquesne
Light received certain FTRs for the period January 1, 2005 through May 31, 2005. These FTRs have been determined to be derivative instruments, and will be accounted for using mark-to-market or hedge accounting. Duquesne Light allocated some of its
FTRs to its suppliers: (i) Duquesne Power, as part of its full-requirements contract to serve Duquesne Lights residential and small commercial POLR load, and (ii) the fixed-price service suppliers for the large commercial and industrial POLR
III customers.



PJM members are required to obtain
unforced capacity credits to ensure that the peak demand for electricity by each members customers is backed up by a generation source within PJM. As a result of its full requirements energy supply contract for both Duquesne Light
and Duquesne Light Energy, Duquesne Power has contracted for capacity credits with a notional amount of approximately $30 million as of December 31, 2004 to meet a significant portion of this projected megawatt capacity obligation.



The FERC has issued a series of orders eliminating the regional through and
out rates (RTOR) for certain



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transmission services between the Midwest Independent System Operator (MISO) and PJM effective December 1, 2004. A transitional pricing mechanism called the
seams elimination charge adjustment (SECA) will be put in place through April 2006 in order to compensate transmission owners for the estimated revenue lost as a result of the elimination of the RTOR. Each PJM zone, including the Duquesne Light
zone, will be allocated a portion of the SECA based on transmission services provided to that zone in 2002 and 2003. On February 10, 2005, the FERC issued an order accepting certain compliance filings that implement the SECA for other (i.e.,
non-Duquesne Light) PJM zones, subject to refund and surcharge, as appropriate, and setting the case in its entirety for a formal hearing. We expect that SECAs in the Duquesne Light zone will be treated in a similar fashion by the FERC, and likely
will be consolidated with the on-going hearing for the other zones. For Holdings and affiliates, the effective date of the SECAs will not be earlier then January 1, 2005. It is anticipated that the case may take over a year to reach a final
decision. There are several unresolved matters and legal challenges to the SECA itself that are pending before the FERC on rehearing. It is not known when the FERC will issue an order on these requests for rehearing. We have been notified by PJM
that billings for SECA charges will not occur before the March 2005 PJM billing cycle.



Through its hearing process, the FERC will determine both the total amount of SECA charges applicable to the Duquesne Light zone, and the appropriate allocation of those charges among load-serving entities in the
Duquesne Light zone (including Duquesne Light, DLE and other competitive retail suppliers). The proposed SECA charges, when filed and accepted by the FERC and billed by the appropriate entities, must be paid by load-serving entities within the
Duquesne Light zone on a current basis. 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 total SECA charge for the Duquesne Light zone is not yet known because charges for the April 2005 through April 2006
period have not yet been filed. However, using data applicable to the January through March 2005 period, the total SECA charges for the Duquesne Light zone for the entire January 2005 through April 2006 period could be as much as the sum of (i) $19
million in charges assessed by transmission owners in MISO, and (ii) $26 million in net charges assessed by transmission owners in PJM. During March 2005, Duquesne Light (together with other PJM participants) filed with the FERC a proposed
allocation of SECA charges among load-serving entities within the Duquesne Light zone. Under that proposal, Duquesne Light would, using 2002 data applicable to the January through March 2005 period, be allocated approximately (i) $12 million of the
charges from MISO transmission owners, and (ii) $2 million of the net charges from PJM transmission owners. The other load-serving entities in the Duquesne Light zone would be allocated the remainder of such charges, with DLEs allocation of
combined MISO and PJM charges expected to be approximately $1 million. The FERC is expected to act on this filing within 60 days. If the FERC accepts the filing, each load-serving entity within the Duquesne Light zone would be required to pay its
allocated share of the SECA, subject to refund or surcharge pending final resolution by the FERC of disputes over appropriate level and allocation of SECA charges.



In addition to the allocation of SECA charges among load-serving entities within the Duquesne Light zone, there are a number
of issues that could affect the total level of charges to load-serving entities in the Duquesne Light zone. For example, Duquesne Light has argued that a significant portion of the charges from MISO transmission owners (approximately $16 million of
the estimated $19 million) should not be allocated to the Duquesne Light zone because they represent transmission revenues that would have terminated even if the RTOR had not been eliminated. If the FERC agrees with Duquesne Light on this issue, the
SECA charges applicable to the Duquesne Light zone could be significantly reduced. There are other issues that have been or may be raised by Duquesne Light and other parties that also could affect the total amount of SECA charges for the Duquesne
Light zone that are ultimately approved by the FERC. We will continue to pursue all avenues available to us to eliminate or reduce the SECA obligations. In addition, Duquesne Light believes it will recover these costs from its retail customers and
will seek recovery once these issues are resolved by the FERC.



OUTLOOK



Building on the
Basics. As part of a focused strategy to build on successes at our core, regulated electric utility business, we have identified three major initiatives to enhance our financial strength.



| |  |  | Investing in Duquesne Lights transmission and distribution infrastructure.
| | - |  | ---------------------------------------------------------------------------



| |  |  | Supplying electricity to customers.
| | - |  | -----------------------------------



| |  |  | Modestly growing our complementary businesses, primarily through landfill gas site expansion and development.
| | - |  | -------------------------------------------------------------------------------------------------------------



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Infrastructure; Transmission and Distribution Rate Cases.Duquesne Lights future success
depends on its ability to continue delivering electricity to its customers safely and reliably. Going forward, this means investing in infrastructure. While we believe we have done a good job maintaining our infrastructure, significant investment is
required if we are to be able to maintain our high standards for reliability and continue to provide a high level of customer service.



The Department of Energy recently projected that national electricity demand will grow by 20% over the next decade, while the current pace of national
infrastructure investment is only growing by 6%. In response, Congress is considering mandating reliability standards for the power transmission grid. We have conducted an extensive assessment of our system requirements and have identified a number
of projects that need to be completed to maintain the reliability and quality of our service.



As a regulated utility, Duquesne Light may only change its transmission or distribution rates by applying, through the rate case process, to the FERC or the PUC 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. The last Duquesne Light rate case involving transmission and distribution costs dates back to 1987. Our transmission and distribution
rate freeze expired at the end of 2003. We plan to file transmission and distribution rate cases in 2006 or 2007.



Financial Restructuring.Duquesne Light plans to finance its additional infrastructure investments in a prudent manner to minimize financing costs
while maintaining the integrity of its capital structure. Currently, Duquesne Lights capital structure (common equity component of 32.5% at December 31, 2004) cannot support the issuance of additional debt or preferred stock to finance the
infrastructure investments because it could impair its credit profile, resulting in limited access to capital markets and higher borrowing costs. Consequently, increased equity and/or reduced debt will be needed at Duquesne Light to strengthen its
balance sheet. All of the common stock of Duquesne Light is held by Holdings. Accordingly, any increase in common equity at Duquesne Light will be provided by Holdings. Holdings capitalization structure reflects the consolidation of all of its
subsidiaries, including Duquesne Light. The effects on Holdings capital structure resulting from increasing Duquesne Lights common equity will depend on the manner in which Holdings obtains and deploys the funds, as explained below.



In 2000, Duquesne Light received approximately $1 billion in
net proceeds from selling its electric generating assets. Duquesne Light had previously issued tax-exempt pollution control revenue bonds (PCRBs) to finance pollution control assets at those generation stations. Duquesne Light decided to keep the
low-cost PCRBs outstanding and loaned $250 million of the sale proceeds to Holdings. In addition, $200 million was paid to Holdings as a special dividend. As a result, the equity component of Duquesne Light was significantly reduced by the combined
effects of keeping the PCRBs outstanding and paying the dividend to Holdings. The PCRBs and the $250 million intercompany note remain outstanding as of February 28, 2005.



Holdings plans to repay the $250 million intercompany loan and increase the equity component of Duquesne Lights
capitalization. In order to raise funds to repay the intercompany note, Holdings plans to issue up to $320 million of replacement debt. Duquesne Light will use the proceeds from the repayment of the intercompany note to retire a like amount of its
PCRBs, which will reduce the debt component of its capitalization. Holdings equity will remain unchanged with the simultaneous issuance and retirement of the same amount of debt on a consolidated basis. This financial restructuring should
result in higher credit ratings, improved access to the capital markets and lower borrowing costs for Duquesne Light and its ratepayers.



Energy Supply Opportunities.Energy supply has been a major source of earnings for the last three years. It will continue to be an important
element of our strategic plan for the next three years and, given the right regulatory treatment, beyond. We will seek to maximize the retention of customers, either through POLR III or through Holdings electric generation supplier, DLE.



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Landfill Gas Opportunities. We continue to improve the underlying operations of our key landfill
gas business. We now own 100% of WET, a nationally recognized firm specializing in landfill gas engineering, design, construction and operation. We also now manage the operations of certain key landfill gas production facilities and have
strategically invested modest capital dollars to maximize our existing production capacities. In addition, we have reduced operating costs and improved relationships with key stakeholders, such as landfill owners and pipeline customers. Today, we
have a business case that supports owning these assets well beyond the expiration of the Section 29 tax credit generation period.



At Duquesne Light Holdings, we are committed to delivering value for shareholders by continuing to build on the successes we have achieved at the core
electric utility and complementary businesses.



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 and landfill gas, changing market conditions and weather conditions could affect earnings levels.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Duquesne Lights earnings (including any POLR margin) will be affected by the number of customers who choose to receive electric generation through POLR III, by our ability to
negotiate appropriate terms with suitable generation suppliers, and by the performance of these suppliers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 and distribution rate base and earnings will depend on the ultimate structure of our rate cases, which in turn will be subject to PUC and FERC review and approval.
Earnings will also be affected by rate base, equity and allowed return levels.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Changes in electric energy prices could affect earnings as the recorded value of our mark-to-market 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.
| | - |  | --------------------------------------------------------------------------------------------------------------



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



| |  |  | Customer energy demand, fuel costs and plant operations could affect Duquesne Energy Solutions earnings.
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Competition and operating costs could affect earnings and expansion plans in our landfill gas business.
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | The outcome of the shareholder litigation initiated against Holdings may affect performance.
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Earnings with respect to synthetic fuel operations, landfill gas and affordable housing investments will depend, in part, on the continued viability of, and compliance with the
requirements for, applicable federal tax credits.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | The final resolution of proposed adjustments regarding state income tax liabilities (which could depend on negotiations with the appropriate authorities) could affect financial
position, earnings, and cash flows.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 Duquesne Light 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, commodity price risk and credit/default risk. Holdings also faces the potential risk of Section 29 tax credit phase-out. Holdings and Duquesne Light have risk management



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procedures to monitor and assist in controlling these market risks and may use derivative and other instruments to manage some of these exposures.



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



Currently, the variable interest rate debt for Holdings and for Duquesne
Light is $320.1 million, which represents approximately 33.5% of both Holdings and Duquesne Lights long-term debt. This variable rate debt is low-cost, tax-exempt debt with an average variable interest rate of 1.6% for the year ended
December 31, 2004. We also manage our interest rate risk by retiring and issuing debt from time to time and by maintaining a range of maturity dates. A 10% increase in interest rates would have affected both Holdings and Duquesne Lights
variable rate debt obligations by increasing interest expense by approximately $0.6 million, $0.3 million and $0.4 million for the years ended December 31, 2004, 2003 and 2002. A 10% reduction in interest rates would have increased the market value
of fixed-rate debt by approximately $29 million for both Holdings and Duquesne Light as of December 31, 2004. Such changes would not have had a significant near-term effect on our future earnings or cash flows.



Commodity Price Risk. Both Holdings and Duquesne Light are exposed to
commodity price risk arising from market price fluctuations in electricity supply. We manage this risk by entering into energy commodity contracts, principally through Duquesne Power.



The energy commodity contracts have been structured to begin and end during the POLR III time period. As of December 31,
2004, energy purchase contracts have a total notional value of approximately $748 million. For load shaping purposes, Duquesne Power also entered into energy contracts to sell power obtained in excess of its anticipated supply obligations, primarily
during off-peak periods. As of December 31, 2004, these sale contracts have a notional value of approximately $23 million. The net result of these transactions is that, as of December 31, 2004, Duquesne Power had secured a substantial portion of the
combined expected load obligation for its full-requirements contracts with Duquesne Light and DLE through 2007.



If Duquesne Power does not enter into contracts for the remaining portion of its anticipated obligations, 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% increase 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 $12 million for the POLR III period through 2007. The projected forward
market prices used in our valuation model are derived from broker quotes and industry publications with comparable delivery point prices within PJM 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.



All of the energy contracts are classified as derivative instruments under
SFAS No. 133, as amended and interpreted. As of December 31 2004, the fair value of the sale contracts and certain purchase contracts (with a notional value of approximately $225 million) have been recorded as mark-to-market derivative assets or
liabilities in the consolidated financial statements. The remaining purchase contracts (with a notional value of approximately $523 million) qualify for accrual accounting under the normal purchase and sale exemption.



The mark-to-market 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% increase in the projected forward market prices of electricity supply would increase the fair
value of our mark-to-market energy contracts by approximately $20 million, while a corresponding 10% decrease would decrease the fair value of our mark-to-market energy contracts by approximately $20 million as of December 31, 2004.



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 full requirements obligations
to Duquesne Light. Accordingly, Duquesne Power could be required to purchase or sell power in periods of high or low prices which could result in a loss.



We mitigate this risk as part of our overall risk management strategy by contracting for firm energy



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purchases within a range of probabilities based on historical customer retention rates and switching trends along with projected forward energy prices.



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.



As part of our overall risk management strategy, Duquesne Power has entered into fixed-price energy contracts with eight investment-grade suppliers and
has contracted for unforced capacity credits from five suppliers.



As of December 31, 2004, Duquesne Power has contracted to purchase from one supplier approximately 53%, 54% and 41% of the notional values of the energy commodity contracts for the years ended December 31, 2005, 2006 and 2007, with no other
supplier representing as much as 20% for each of the respective years.



Duquesne Powers energy commodity contracts contain certain safeguards designed to mitigate potential losses by requiring collateral to be posted by either party depending on changes in energy or capacity prices. Due to decreases in
the forward market price of electricity supply from the inception of certain energy contracts, we have posted $10 million of collateral with one counter-party as of February 28, 2005.



Duquesne Light purchases energy and capacity, beginning January 1, 2005, under a full-requirements contract from two
investment grade suppliers for sale to its large commercial and industrial customers receiving fixed-price POLR III service. Duquesne Lights contracts only require collateral to be posted by the counter-party. As of February 28, 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 its customers, Duquesne Light and DLE, 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 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.



Tax Credit Phase-Out.Section 29 tax credits are subject to a phase-out provision that could reduce tax credits as the average annual wellhead
price per barrel of domestic crude oil increases into an inflation-adjusted phase-out range. For 2003, the tax credit would have begun to phase-out when the annual average wellhead price per barrel of domestic crude oil exceeded $50.14 per barrel
and would have been completely phased out when the annual average wellhead price per barrel of domestic crude oil reached $62.94 per barrel. The 2004 inflation adjustment has not been published by the IRS but based on the prices of oil during the
year, we do not believe that a phase-out of the credit for 2004 will occur. We cannot predict the level of domestic crude oil prices for 2005 nor whether a phase-out of the credit is likely to occur.



|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, 2004 and 2003, and the related consolidated statements of income, retained earnings, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2004. 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



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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, 2004 and 2003, and the results
of their operations and their cash flows for each of the three years in the period ended December 31, 2004, 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, present fairly, in all material respects, the information set forth therein.



As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, Duquesne Light Holdings, Inc.
changed its method of accounting for goodwill and other intangible assets.



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, 2004, 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 March 24, 2005 expressed an unqualified opinion on
managements assessment of the effectiveness of the Companys internal control over financial reporting and an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.



|                                       
|---------------------------------------
|/s/ Deloitte & Touche LLP              
|                                       
|Pittsburgh, Pennsylvania March 24,
2005



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, 2004 and 2003, and the related consolidated statements of income, retained earnings, comprehensive income,
and cash flows for each of the three years in the period ended December 31, 2004. 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



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assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.



In our
opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Duquesne Light Company and subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2004, 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, present fairly, in all material respects, the information set forth therein.



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, 2004, 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 March 24, 2005 expressed an unqualified opinion on managements assessment of the effectiveness of the Companys internal control over financial reporting and an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.



|                                       
|---------------------------------------
|/s/ Deloitte & Touche LLP              
|                                       
|Pittsburgh, Pennsylvania March 24,
2005



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Duquesne Light Holdings, Inc.

Consolidated Statements of Income



|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ------- | -
|                                                                                     |  | (All Amounts in Millions,Except Per Share Amounts)Year Ended December 31, |      
|                                                                                     |  | 2004                                                                      |       |   | 2003 |   |       | 2002 | 
|Operating Revenues:                                                                  |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Retail sales of electricity                                                          |  | $                                                                         | 761.8 |   |      | $ | 780.8 |      |  | $ | 921.5   |  
|Other                                                                                |  |                                                                           | 135.5 |   |      |   | 122.0 |      |  |   | 104.5   |  
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Total Operating Revenues                                                             |  |                                                                           | 897.3 |   |      |   | 902.8 |      |  |   | 1,026.0 |  
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Operating Expenses:                                                                  |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Purchased power                                                                      |  |                                                                           | 382.0 |   |      |   | 393.7 |      |  |   | 428.1   |  
|Other operating and maintenance                                                      |  |                                                                           | 224.4 |   |      |   | 221.8 |      |  |   | 217.4   |  
|Acquisition termination cost (Note 2)                                                |  |                                                                           | 8.3   |   |      |   |      |      |  |   |        |  
|Impairment of long-lived assets (Note 18)                                            |  |                                                                           |      |   |      |   |      |      |  |   | 30.2    |  
|Restructuring (Note 9)                                                               |  |                                                                           |      |   |      |   |      |      |  |   | 5.2     |  
|Depreciation and amortization                                                        |  |                                                                           | 83.4  |   |      |   | 87.3  |      |  |   | 185.6   |  
|Taxes other than income taxes                                                        |  |                                                                           | 48.5  |   |      |   | 49.1  |      |  |   | 63.8    |  
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Total Operating Expenses                                                             |  |                                                                           | 746.6 |   |      |   | 751.9 |      |  |   | 930.3   |  
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Operating Income                                                                     |  |                                                                           | 150.7 |   |      |   | 150.9 |      |  |   | 95.7    |  
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Investment and other income                                                          |  |                                                                           | 12.7  |   |      |   | 35.4  |      |  |   | 36.6    |  
|Investment impairment (Note 18)                                                      |  |                                                                           |      |   |      |   | (1.0  | )    |  |   | (33.7   | )
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Total Other Income                                                                   |  |                                                                           | 12.7  |   |      |   | 34.4  |      |  |   | 2.9     |  
|Interest and Other Charges                                                           |  |                                                                           | (63.0 | ) |      |   | (74.4 | )    |  |   | (83.5   | )
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Income from Continuing Operations Before Income Taxes and Limited Partners Interest |  |                                                                           | 100.4 |   |      |   | 110.9 |      |  |   | 15.1    |  
|Income Tax (Expense) Benefit                                                         |  |                                                                           | (20.6 | ) |      |   | (17.7 | )    |  |   | 11.6    |  
|Benefit from Limited Partners Interest (Note 1)                                     |  |                                                                           | 7.4   |   |      |   |      |      |  |   |        |  
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Income from Continuing Operations                                                    |  |                                                                           | 87.2  |   |      |   | 93.2  |      |  |   | 26.7    |  
|Income (Loss) from Discontinued Operations  Net (Note 17)                           |  |                                                                           | (0.2  | ) |      |   | 82.7  |      |  |   | (127.6  | )
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Income (Loss) before Cumulative Effect of Change in Accounting Principle             |  |                                                                           | 87.0  |   |      |   | 175.9 |      |  |   | (100.9  | )
|Cumulative Effect of Change in Accounting Principle  Net                            |  |                                                                           |      |   |      |   |      |      |  |   | (113.7  | )
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Net Income (Loss)                                                                    |  |                                                                           | 87.0  |   |      |   | 175.9 |      |  |   | (214.6  | )
|Dividends on Preferred Stock (Note 15)                                               |  |                                                                           |      |   |      |   | 0.4   |      |  |   | 0.6     |  
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Earnings (Loss) Available for Common Stock                                           |  | $                                                                         | 87.0  |   |      | $ | 175.5 |      |  | $ | (215.2  | )
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Average Number of Common Shares Outstanding                                          |  |                                                                           | 76.4  |   |      |   | 75.0  |      |  |   | 65.6    |  
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Basic Earnings (Loss) Per Share of Common Stock:                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Earnings from Continuing Operations                                                  |  | $                                                                         | 1.14  |   |      | $ | 1.24  |      |  | $ | 0.40    |  
|Earnings (Loss) from Discontinued Operations                                         |  |                                                                           |      |   |      |   | 1.10  |      |  |   | (1.95   | )
|Cumulative Effect of Change in Accounting Principle                                  |  |                                                                           |      |   |      |   |      |      |  |   | (1.73   | )
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Basic Earnings (Loss) Per Share of Common Stock                                      |  | $                                                                         | 1.14  |   |      | $ | 2.34  |      |  | $ | (3.28   | )
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Diluted Earnings (Loss) Per Share of Common Stock:                                   |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Earnings from Continuing Operations                                                  |  | $                                                                         | 1.14  |   |      | $ | 1.22  |      |  | $ | 0.40    |  
|Earnings (Loss) from Discontinued Operations                                         |  |                                                                           |      |   |      |   | 1.07  |      |  |   | (1.95   | )
|Cumulative Effect of Change in Accounting Principle                                  |  |                                                                           |      |   |      |   |      |      |  |   | (1.73   | )
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Diluted Earnings (Loss) Per Share of Common Stock                                    |  | $                                                                         | 1.14  |   |      | $ | 2.29  |      |  | $ | (3.28   | )
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  
|Dividends Declared Per Share of Common Stock                                         |  | $                                                                         | 1.00  |   |      | $ | 1.00  |      |  | $ | 1.34    |  
|                                                                                     |  |                                                                           |       |   |      |   |       |      |  |   |         |  



See
notes to consolidated financial statements.



34



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##### Table of Contents

Duquesne Light Holdings, Inc.

Consolidated Balance Sheets



|                                                |  |                                          |         |   |      |   |         |  
|----------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                |  | (Millions of Dollars) As of December 31, |        
|                                                |  | 2004                                     |         |   | 2003 |  
|Assets                                          |  |                                          |         |   |      |   |         |  
|Current Assets:                                 |  |                                          |         |   |      |   |         |  
|Cash and temporary cash investments             |  | $                                        | 62.7    |   |      | $ | 33.8    |  
|                                                |  |                                         
|Receivables:                                    |  |                                          |         |   |      |   |         |  
|Electric customers                              |  |                                          | 75.8    |   |      |   | 80.6    |  
|Unbilled electric customers                     |  |                                          | 31.3    |   |      |   | 29.7    |  
|Other                                           |  |                                          | 26.5    |   |      |   | 24.6    |  
|Less: Allowance for uncollectible accounts      |  |                                          | (18.1   | ) |      |   | (19.9   | )
|                                                |  |                                          |         |   |      |   |         |  
|Total Receivables  Net                         |  |                                          | 115.5   |   |      |   | 115.0   |  
|                                                |  |                                          |         |   |      |   |         |  
|Materials and supplies (at average cost)        |  |                                          | 14.6    |   |      |   | 17.1    |  
|Prepaid expenses                                |  |                                          | 8.0     |   |      |   | 6.6     |  
|Other                                           |  |                                          | 20.0    |   |      |   | 6.6     |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Current Assets                            |  |                                          | 220.8   |   |      |   | 179.1   |  
|                                                |  |                                          |         |   |      |   |         |  
|                                                |  |                                         
|Long-Term Investments:                          |  |                                          |         |   |      |   |         |  
|Leases                                          |  |                                          | 512.1   |   |      |   | 515.1   |  
|Gas rights and related investments              |  |                                          | 16.9    |   |      |   | 40.9    |  
|Affordable housing                              |  |                                          | 42.9    |   |      |   | 2.5     |  
|Other                                           |  |                                          | 8.0     |   |      |   | 9.4     |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Long-Term Investments                     |  |                                          | 579.9   |   |      |   | 567.9   |  
|                                                |  |                                          |         |   |      |   |         |  
|                                                |  |                                         
|Property, Plant and Equipment:                  |  |                                          |         |   |      |   |         |  
|Electric plant in service                       |  |                                          | 2,052.9 |   |      |   | 1,999.5 |  
|Construction work in progress  electric        |  |                                          | 67.9    |   |      |   | 64.2    |  
|Fiber optic network                             |  |                                          | 30.1    |   |      |   | 28.2    |  
|Other energy facilities                         |  |                                          | 28.3    |   |      |   | 28.2    |  
|Landfill gas equipment                          |  |                                          | 22.2    |   |      |   | 14.1    |  
|Other                                           |  |                                          | 9.0     |   |      |   | 9.7     |  
|                                                |  |                                          |         |   |      |   |         |  
|Gross property plant and equipment              |  |                                          | 2,210.4 |   |      |   | 2,143.9 |  
|Less: Accumulated depreciation and amortization |  |                                          | (751.0  | ) |      |   | (706.6  | )
|                                                |  |                                          |         |   |      |   |         |  
|Property, Plant and Equipment  Net             |  |                                          | 1,459.4 |   |      |   | 1,437.3 |  
|                                                |  |                                          |         |   |      |   |         |  
|                                                |  |                                         
|Other Non-Current Assets:                       |  |                                          |         |   |      |   |         |  
|Regulatory assets                               |  |                                          | 295.1   |   |      |   | 290.0   |  
|Prepaid pension cost                            |  |                                          | 26.1    |   |      |   | 21.6    |  
|Intangible assets                               |  |                                          | 16.3    |   |      |   |        |  
|Other                                           |  |                                          | 35.2    |   |      |   | 44.9    |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Other Non-Current Assets                  |  |                                          | 372.7   |   |      |   | 356.5   |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Assets                                    |  | $                                        | 2,632.8 |   |      | $ | 2,540.8 |  
|                                                |  |                                          |         |   |      |   |         |  



See
notes to consolidated financial statements.



35



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##### Table of Contents

Duquesne Light Holdings, Inc.

Consolidated Balance Sheets



|                                                                                                  |  |                                          |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                  |  | (Millions of Dollars) As of December 31, |         
|                                                                                                  |  | 2004                                     |          |   | 2003 |  
|Liabilities and Capitalization                                                                    |  |                                          |          |   |      |   |          |  
|Current Liabilities:                                                                              |  |                                          |          |   |      |   |          |  
|Current debt maturities                                                                           |  | $                                        | 0.2      |   |      | $ | 51.5     |  
|Accounts payable                                                                                  |  |                                          | 91.7     |   |      |   | 112.0    |  
|Accrued liabilities                                                                               |  |                                          | 76.5     |   |      |   | 54.0     |  
|Common dividends declared                                                                         |  |                                          | 19.5     |   |      |   | 19.2     |  
|Other                                                                                             |  |                                          | 18.9     |   |      |   | 13.7     |  
|Discontinued operations                                                                           |  |                                          | 3.4      |   |      |   | 29.9     |  
|                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Current Liabilities                                                                         |  |                                          | 210.2    |   |      |   | 280.3    |  
|                                                                                                  |  |                                          |          |   |      |   |          |  
|                                                                                                  |  |                                         
|Non-Current Liabilities:                                                                          |  |                                          |          |   |      |   |          |  
|Deferred income taxes  net                                                                       |  |                                          | 408.2    |   |      |   | 398.2    |  
|Deferred income                                                                                   |  |                                          | 12.3     |   |      |   | 12.2     |  
|Pension liability                                                                                 |  |                                          | 62.9     |   |      |   | 50.0     |  
|Other post-retirement benefits                                                                    |  |                                          | 38.1     |   |      |   | 35.8     |  
|Legacy liabilities                                                                                |  |                                          | 32.1     |   |      |   | 33.6     |  
|Other                                                                                             |  |                                          | 105.7    |   |      |   | 107.1    |  
|                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Non-Current Liabilities                                                                     |  |                                          | 659.3    |   |      |   | 636.9    |  
|                                                                                                  |  |                                          |          |   |      |   |          |  
|Limited partners interest                                                                        |  |                                          | 48.0     |   |      |   |         |  
|                                                                                                  |  |                                          |          |   |      |   |          |  
|Commitments and contingencies (Note 13)                                                           |  |                                          |          |   |      |   |          |  
|                                                                                                  |  |                                         
|Capitalization:                                                                                   |  |                                          |          |   |      |   |          |  
|Long-term debt                                                                                    |  |                                          | 958.0    |   |      |   | 977.5    |  
|                                                                                                  |  |                                          |          |   |      |   |          |  
|Preferred and Preference Stock (aggregate involuntary liquidation value of $151.0 and $77.0):     |  |                                          |          |   |      |   |          |  
|Preferred stock of subsidiaries                                                                   |  |                                          | 136.6    |   |      |   | 61.6     |  
|Preference stock of subsidiaries                                                                  |  |                                          | 14.5     |   |      |   | 15.5     |  
|                                                                                                  |  |                                          |          |   |      |   |          |  
|Total preferred and preference stock before deferred employee stock ownership plan (ESOP) benefit |  |                                          | 151.1    |   |      |   | 77.1     |  
|                                                                                                  |  |                                          |          |   |      |   |          |  
|Deferred ESOP benefit                                                                             |  |                                          | (4.2     | ) |      |   | (6.4     | )
|                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Preferred and Preference Stock                                                              |  |                                          | 146.9    |   |      |   | 70.7     |  
|                                                                                                  |  |                                          |          |   |      |   |          |  
|                                                                                                  |  |                                         
|Common Shareholders Equity:                                                                      |  |                                          |          |   |      |   |          |  
|Common stock  no par value (authorized  187,500,000 shares; issued  126,929,154 shares)        |  |                                          | 1,206.7  |   |      |   | 1,215.4  |  
|Retained earnings                                                                                 |  |                                          | 563.6    |   |      |   | 553.1    |  
|Treasury stock (at cost) (49,927,343 and 51,505,469 shares)                                       |  |                                          | (1,157.3 | ) |      |   | (1,189.7 | )
|Unearned compensation (Note 12)                                                                   |  |                                          | (2.6     | ) |      |   | (3.4     | )
|                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Common Shareholders Equity                                                                 |  |                                          | 610.4    |   |      |   | 575.4    |  
|                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Capitalization                                                                              |  |                                          | 1,715.3  |   |      |   | 1,623.6  |  
|                                                                                                  |  |                                          |          |   |      |   |          |  
|Total Liabilities and Capitalization                                                              |  | $                                        | 2,632.8  |   |      | $ | 2,540.8  |  
|                                                                                                  |  |                                          |          |   |      |   |          |  



See
notes to consolidated financial statements.



36



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##### Table of Contents

Duquesne Light Holdings, Inc.

Consolidated Statements of Cash Flows



|                                                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                         |  | (Millions of Dollars) Year Ended December 31, |       
|                                                                                         |  | 2004                                          |        |   | 2003 |   |        | 2002 | 
|Cash Flows From Operating Activities:                                                    |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net income (loss)                                                                        |  | $                                             | 87.0   |   |      | $ | 175.9  |      |  | $ | (214.6 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                               |        |   |      |   |        |      |  |   |        |  
|Depreciation and amortization                                                            |  |                                               | 83.4   |   |      |   | 87.3   |      |  |   | 185.6  |  
|Bad debt expense                                                                         |  |                                               | 12.0   |   |      |   | 10.8   |      |  |   | 21.3   |  
|Acquisition termination cost                                                             |  |                                               | 8.3    |   |      |   |       |      |  |   |       |  
|Revised facility utilization charge                                                      |  |                                               |       |   |      |   | 4.9    |      |  |   |       |  
|Asset and investment impairments                                                         |  |                                               |       |   |      |   | 1.0    |      |  |   | 63.9   |  
|Capital lease and investment amortization                                                |  |                                               | 8.0    |   |      |   | 13.0   |      |  |   | 5.9    |  
|Restructuring                                                                            |  |                                               |       |   |      |   |       |      |  |   | 5.2    |  
|Investment income                                                                        |  |                                               | (8.2   | ) |      |   | (20.8  | )    |  |   | (24.9  | )
|Gain on disposition of investments/assets                                                |  |                                               |       |   |      |   | (12.1  | )    |  |   | (0.8   | )
|Deferred taxes                                                                           |  |                                               | 9.2    |   |      |   | (134.0 | )    |  |   | (73.7  | )
|Cumulative effect of a change in accounting principle  net                              |  |                                               |       |   |      |   |       |      |  |   | 113.7  |  
|Other                                                                                    |  |                                               | (7.0   | ) |      |   | (14.6  | )    |  |   | (24.1  | )
|Changes in working capital other than cash (Note 20)                                     |  |                                               | (9.0   | ) |      |   | (11.9  | )    |  |   | 59.5   |  
|Discontinued operations                                                                  |  |                                               | (5.4   | ) |      |   | (24.6  | )    |  |   | 147.2  |  
|                                                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net Cash Provided from Operating Activities                                              |  |                                               | 178.3  |   |      |   | 74.9   |      |  |   | 264.2  |  
|                                                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Cash Flows From Investing Activities:                                                    |  |                                               |        |   |      |   |        |      |  |   |        |  
|Proceeds from disposition of investments                                                 |  |                                               | 13.3   |   |      |   | 21.4   |      |  |   | 22.2   |  
|Long-term investments                                                                    |  |                                               | (0.2   | ) |      |   | (3.7   | )    |  |   | (5.4   | )
|Acquisitions                                                                             |  |                                               | (8.4   | ) |      |   |       |      |  |   |       |  
|Capital expenditures                                                                     |  |                                               | (86.4  | ) |      |   | (78.0  | )    |  |   | (83.8  | )
|Other                                                                                    |  |                                               | (5.0   | ) |      |   | 6.4    |      |  |   | 5.2    |  
|Discontinued operations                                                                  |  |                                               | (12.9  | ) |      |   | 194.9  |      |  |   | 6.2    |  
|                                                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net Cash (Used in) Provided from Investing Activities                                    |  |                                               | (99.6  | ) |      |   | 141.0  |      |  |   | (55.6  | )
|                                                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Cash Flows From Financing Activities:                                                    |  |                                               |        |   |      |   |        |      |  |   |        |  
|Issuance of long-term debt obligations                                                   |  |                                               | 200.0  |   |      |   |       |      |  |   | 300.0  |  
|Reductions of long-term debt obligations                                                 |  |                                               | (254.5 | ) |      |   | (204.8 | )    |  |   | (553.0 | )
|Issuance of common stock                                                                 |  |                                               |       |   |      |   |       |      |  |   | 223.4  |  
|Issuance of preferred stock                                                              |  |                                               | 73.1   |   |      |   |       |      |  |   |       |  
|Dividends on common and preferred stock (Note 16)                                        |  |                                               | (66.0  | ) |      |   | (64.4  | )    |  |   | (74.1  | )
|Repurchase of common and preferred stock                                                 |  |                                               | (0.9   | ) |      |   | (6.0   | )    |  |   |       |  
|Other                                                                                    |  |                                               | 6.7    |   |      |   | (0.6   | )    |  |   | (6.9   | )
|Discontinued operations                                                                  |  |                                               | (8.2   | ) |      |   | (0.2   | )    |  |   | (11.3  | )
|                                                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net Cash Used in Financing Activities                                                    |  |                                               | (49.8  | ) |      |   | (276.0 | )    |  |   | (121.9 | )
|                                                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net increase (decrease) in cash and temporary cash investments                           |  |                                               | 28.9   |   |      |   | (60.1  | )    |  |   | 86.7   |  
|Cash and temporary cash investments at beginning of year                                 |  |                                               | 33.8   |   |      |   | 93.9   |      |  |   | 7.2    |  
|                                                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Cash and temporary cash investments at end of year                                       |  | $                                             | 62.7   |   |      | $ | 33.8   |      |  | $ | 93.9   |  
|                                                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Supplemental Cash Flow Information                                                       |  |                                               |        |   |      |   |        |      |  |   |        |  
|Cash paid during the year:                                                               |  |                                               |        |   |      |   |        |      |  |   |        |  
|Interest (net of amount capitalized)                                                     |  | $                                             | 46.0   |   |      | $ | 67.7   |      |  | $ | 67.0   |  
|Income taxes paid (refunded)                                                             |  | $                                             | (5.6   | ) |      | $ | 86.1   |      |  | $ | (45.4  | )
|                                                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  



See
notes to consolidated financial statements.



37



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##### Table of Contents

Duquesne Light Holdings, Inc.

Consolidated Statements of Comprehensive Income



|                                                                                       |  |                                               |      |      |   |       |      |  |   |        |  
|-------------------------------------------------------------------------------------- |  | --------------------------------------------- | ---- | ---- | - | ----- | ---- |  | - | ------ | -
|                                                                                       |  | (Millions of Dollars) Year Ended December 31, |     
|                                                                                       |  | 2004                                          |      | 2003 |   |       | 2002 | 
|Net income (loss)                                                                      |  | $                                             | 87.0 |      | $ | 175.9 |      |  | $ | (214.6 | )
|Other comprehensive loss:                                                              |  |                                               |      |      |   |       |      |  |   |        |  
|Unrealized holding losses arising during the year, net of tax of $, $(0.3) and $(0.5) |  |                                               |     |      |   | (0.4  | )    |  |   | (1.0   | )
|Reclassification adjustment for holding loss, net of tax                               |  |                                               |     |      |   | 0.7   |      |  |   | 0.7    |  
|                                                                                       |  |                                               |      |      |   |       |      |  |   |        |  
|Comprehensive income (loss)                                                            |  | $                                             | 87.0 |      | $ | 176.2 |      |  | $ | (214.9 | )
|                                                                                       |  |                                               |      |      |   |       |      |  |   |        |  



See
notes to consolidated financial statements.



Duquesne Light Holdings, Inc.



Consolidated Statements of Retained Earnings



|                             |  |                                               |       |   |      |   |       |      |  |   |        |  
|---------------------------- |  | --------------------------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                             |  | (Millions of Dollars) Year Ended December 31, |      
|                             |  | 2004                                          |       |   | 2003 |   |       | 2002 | 
|Balance at beginning of year |  | $                                             | 553.1 |   |      | $ | 452.9 |      |  | $ | 759.7  |  
|Net income (loss)            |  |                                               | 87.0  |   |      |   | 175.9 |      |  |   | (214.6 | )
|Dividends declared           |  |                                               | (76.5 | ) |      |   | (75.7 | )    |  |   | (92.2  | )
|                             |  |                                               |       |   |      |   |       |      |  |   |        |  
|Balance at end of year       |  | $                                             | 563.6 |   |      | $ | 553.1 |      |  | $ | 452.9  |  
|                             |  |                                               |       |   |      |   |       |      |  |   |        |  



See
notes to consolidated financial statements.



38



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##### Table of Contents

Duquesne Light Company

Consolidated Statements of Income



|                                                                                              |  |                                               |       |   |      |   |       |      |  |   |       |  
|--------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                                              |  | (Millions of Dollars) Year Ended December 31, |      
|                                                                                              |  | 2004                                          |       |   | 2003 |   |       | 2002 | 
|Operating Revenues:                                                                           |  |                                               |       |   |      |   |       |      |  |   |       |  
|Retail Sales of Electricity:                                                                  |  |                                               |       |   |      |   |       |      |  |   |       |  
|Residential                                                                                   |  | $                                             | 314.1 |   |      | $ | 302.6 |      |  | $ | 335.2 |  
|Commercial                                                                                    |  |                                               | 308.5 |   |      |   | 334.9 |      |  |   | 410.5 |  
|Industrial                                                                                    |  |                                               | 139.2 |   |      |   | 143.3 |      |  |   | 175.8 |  
|                                                                                              |  |                                               |       |   |      |   |       |      |  |   |       |  
|Total Retail Sales Of Electricity                                                             |  |                                               | 761.8 |   |      |   | 780.8 |      |  |   | 921.5 |  
|Other                                                                                         |  |                                               | 27.5  |   |      |   | 25.3  |      |  |   | 23.1  |  
|                                                                                              |  |                                               |       |   |      |   |       |      |  |   |       |  
|Total Operating Revenues                                                                      |  |                                               | 789.3 |   |      |   | 806.1 |      |  |   | 944.6 |  
|                                                                                              |  |                                               |       |   |      |   |       |      |  |   |       |  
|Operating Expenses:                                                                           |  |                                               |       |   |      |   |       |      |  |   |       |  
|Purchased power                                                                               |  |                                               | 382.0 |   |      |   | 393.7 |      |  |   | 428.1 |  
|Other operating and maintenance                                                               |  |                                               | 138.0 |   |      |   | 129.5 |      |  |   | 121.8 |  
|Acquisition termination cost (Note 2)                                                         |  |                                               | 8.3   |   |      |   |      |      |  |   |      |  
|Restructuring (Note 9)                                                                        |  |                                               |      |   |      |   |      |      |  |   | 3.9   |  
|Depreciation and amortization                                                                 |  |                                               | 71.4  |   |      |   | 76.4  |      |  |   | 169.1 |  
|Taxes other than income taxes                                                                 |  |                                               | 47.9  |   |      |   | 51.4  |      |  |   | 60.2  |  
|                                                                                              |  |                                               |       |   |      |   |       |      |  |   |       |  
|Total Operating Expenses                                                                      |  |                                               | 647.6 |   |      |   | 651.0 |      |  |   | 783.1 |  
|                                                                                              |  |                                               |       |   |      |   |       |      |  |   |       |  
|Operating Income                                                                              |  |                                               | 141.7 |   |      |   | 155.1 |      |  |   | 161.5 |  
|Other Income                                                                                  |  |                                               | 16.6  |   |      |   | 20.3  |      |  |   | 31.9  |  
|Interest and Other Charges                                                                    |  |                                               | (46.2 | ) |      |   | (54.1 | )    |  |   | (56.5 | )
|Company Obligated Mandatorily Redeemable Preferred Securities Dividend Requirements (Note 14) |  |                                               |      |   |      |   | (6.3  | )    |  |   | (12.6 | )
|                                                                                              |  |                                               |       |   |      |   |       |      |  |   |       |  
|Income Before Income Taxes                                                                    |  |                                               | 112.1 |   |      |   | 115.0 |      |  |   | 124.3 |  
|Income Taxes                                                                                  |  |                                               | 44.3  |   |      |   | 45.4  |      |  |   | 48.9  |  
|                                                                                              |  |                                               |       |   |      |   |       |      |  |   |       |  
|Net Income                                                                                    |  |                                               | 67.8  |   |      |   | 69.6  |      |  |   | 75.4  |  
|Dividends on Preferred and Preference Stock                                                   |  |                                               | 6.6   |   |      |   | 3.2   |      |  |   | 3.3   |  
|                                                                                              |  |                                               |       |   |      |   |       |      |  |   |       |  
|Earnings Available for Common Stock                                                           |  | $                                             | 61.2  |   |      | $ | 66.4  |      |  | $ | 72.1  |  
|                                                                                              |  |                                               |       |   |      |   |       |      |  |   |       |  



See
notes to consolidated financial statements.



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Duquesne Light Company

Consolidated Balance Sheets



|                                                |  |                                          |         |   |      |   |         |  
|----------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                |  | (Millions of Dollars) As of December 31, |        
|                                                |  | 2004                                     |         |   | 2003 |  
|Assets                                          |  |                                          |         |   |      |   |         |  
|Current Assets:                                 |  |                                          |         |   |      |   |         |  
|Investment in DQE Capital cash pool             |  | $                                        | 135.8   |   |      | $ | 69.1    |  
|Customer Receivables:                           |  |                                          |         |   |      |   |         |  
|Electric customers                              |  |                                          | 75.8    |   |      |   | 80.6    |  
|Unbilled electric customers                     |  |                                          | 31.1    |   |      |   | 29.7    |  
|Other                                           |  |                                          | 10.1    |   |      |   | 10.7    |  
|Less: Allowance for uncollectible accounts      |  |                                          | (17.9   | ) |      |   | (19.9   | )
|                                                |  |                                          |         |   |      |   |         |  
|Total Customer Receivables - Net                |  |                                          | 99.1    |   |      |   | 101.1   |  
|                                                |  |                                          |         |   |      |   |         |  
|Affiliate Receivables:                          |  |                                          |         |   |      |   |         |  
|Loan receivable from parent                     |  |                                          | 250.0   |   |      |   | 250.0   |  
|Other                                           |  |                                          | 1.8     |   |      |   | 6.0     |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Affiliate Receivables - Net               |  |                                          | 251.8   |   |      |   | 256.0   |  
|                                                |  |                                          |         |   |      |   |         |  
|Materials and supplies (at average cost)        |  |                                          | 14.6    |   |      |   | 17.1    |  
|Other                                           |  |                                          | 7.0     |   |      |   | 9.8     |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Current Assets                            |  |                                          | 508.3   |   |      |   | 453.1   |  
|                                                |  |                                          |         |   |      |   |         |  
|Long-Term Investments:                          |  |                                          |         |   |      |   |         |  
|Investment in parents common stock             |  |                                          | 22.8    |   |      |   | 22.3    |  
|Other investments                               |  |                                          | 2.8     |   |      |   | 4.8     |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Long-Term Investments                     |  |                                          | 25.6    |   |      |   | 27.1    |  
|                                                |  |                                          |         |   |      |   |         |  
|Property, Plant and Equipment:                  |  |                                          |         |   |      |   |         |  
|Electric plant in service                       |  |                                          | 2,052.9 |   |      |   | 1,999.5 |  
|Construction work in progress                   |  |                                          | 67.9    |   |      |   | 64.2    |  
|                                                |  |                                          |         |   |      |   |         |  
|Gross property, plant and equipment             |  |                                          | 2,120.8 |   |      |   | 2,063.7 |  
|Less: Accumulated depreciation and amortization |  |                                          | (714.5  | ) |      |   | (681.0  | )
|                                                |  |                                          |         |   |      |   |         |  
|Property, Plant and Equipment  Net             |  |                                          | 1,406.3 |   |      |   | 1,382.7 |  
|                                                |  |                                          |         |   |      |   |         |  
|Other Non-Current Assets:                       |  |                                          |         |   |      |   |         |  
|Regulatory assets                               |  |                                          | 295.1   |   |      |   | 290.0   |  
|Prepaid pension cost                            |  |                                          | 26.1    |   |      |   | 21.6    |  
|Pension intangible asset                        |  |                                          | 5.8     |   |      |   |        |  
|Other                                           |  |                                          | 25.8    |   |      |   | 34.7    |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Other Non-Current Assets                  |  |                                          | 352.8   |   |      |   | 346.3   |  
|                                                |  |                                          |         |   |      |   |         |  
|Total Assets                                    |  | $                                        | 2,293.0 |   |      | $ | 2,209.2 |  
|                                                |  |                                          |         |   |      |   |         |  



See
notes to consolidated financial statements.



40



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##### Table of Contents

Duquesne Light Company

Consolidated Balance Sheets



|                                                                                              |  |                                          |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                              |  | (Millions of Dollars) As of December 31, |        
|                                                                                              |  | 2004                                     |         |   | 2003 |  
|Liabilities and Capitalization                                                                |  |                                          |         |   |      |   |         |  
|Current Liabilities:                                                                          |  |                                          |         |   |      |   |         |  
|Current debt maturities                                                                       |  | $                                        |        |   |      | $ | 50.5    |  
|Accounts payable                                                                              |  |                                          | 85.7    |   |      |   | 98.9    |  
|Payable to affiliates                                                                         |  |                                          | 4.4     |   |      |   | 62.0    |  
|Accrued liabilities                                                                           |  |                                          | 40.8    |   |      |   | 28.7    |  
|Other                                                                                         |  |                                          |        |   |      |   | 3.5     |  
|                                                                                              |  |                                          |         |   |      |   |         |  
|Total Current Liabilities                                                                     |  |                                          | 130.9   |   |      |   | 243.6   |  
|                                                                                              |  |                                          |         |   |      |   |         |  
|Non-Current Liabilities:                                                                      |  |                                          |         |   |      |   |         |  
|Deferred income taxes  net                                                                   |  |                                          | 323.1   |   |      |   | 318.7   |  
|Legacy liabilities                                                                            |  |                                          | 32.1    |   |      |   | 33.6    |  
|Pension liability                                                                             |  |                                          | 62.9    |   |      |   | 50.0    |  
|Other postretirement benefits                                                                 |  |                                          | 38.1    |   |      |   | 35.8    |  
|Other                                                                                         |  |                                          | 72.2    |   |      |   | 70.0    |  
|                                                                                              |  |                                          |         |   |      |   |         |  
|Total Non-Current Liabilities                                                                 |  |                                          | 528.4   |   |      |   | 508.1   |  
|                                                                                              |  |                                          |         |   |      |   |         |  
|Commitments and Contingencies (Note 13)                                                       |  |                                          |         |   |      |   |         |  
|                                                                                              |  |                                         
|Capitalization:                                                                               |  |                                          |         |   |      |   |         |  
|Long-term debt                                                                                |  |                                          | 956.4   |   |      |   | 857.7   |  
|                                                                                              |  |                                          |         |   |      |   |         |  
|Preferred and Preference Stock (aggregate involuntary liquidation value of $150.0 and $76.0): |  |                                          |         |   |      |   |         |  
|Non-redeemable preferred stock                                                                |  |                                          | 135.6   |   |      |   | 60.6    |  
|Non-redeemable preference stock                                                               |  |                                          | 14.5    |   |      |   | 15.5    |  
|                                                                                              |  |                                          |         |   |      |   |         |  
|Total preferred and preference stock before deferred ESOP benefit                             |  |                                          | 150.1   |   |      |   | 76.1    |  
|Deferred employee stock ownership plan (ESOP) benefit                                         |  |                                          | (4.2    | ) |      |   | (6.4    | )
|                                                                                              |  |                                          |         |   |      |   |         |  
|Total Preferred and Preference Stock                                                          |  |                                          | 145.9   |   |      |   | 69.7    |  
|                                                                                              |  |                                          |         |   |      |   |         |  
|Common Shareholders Equity:                                                                  |  |                                          |         |   |      |   |         |  
|Common stock (authorized  90,000,000 shares; issued and outstanding  10 shares)             |  |                                          |        |   |      |   |        |  
|Capital surplus                                                                               |  |                                          | 486.4   |   |      |   | 488.6   |  
|Retained earnings                                                                             |  |                                          | 46.0    |   |      |   | 42.9    |  
|Accumulated other comprehensive loss                                                          |  |                                          | (1.0    | ) |      |   | (1.4    | )
|                                                                                              |  |                                          |         |   |      |   |         |  
|Total Common Stockholders Equity                                                             |  |                                          | 531.4   |   |      |   | 530.1   |  
|                                                                                              |  |                                          |         |   |      |   |         |  
|Total Capitalization                                                                          |  |                                          | 1,633.7 |   |      |   | 1,457.5 |  
|                                                                                              |  |                                          |         |   |      |   |         |  
|Total Liabilities and Capitalization                                                          |  | $                                        | 2,293.0 |   |      | $ | 2,209.2 |  
|                                                                                              |  |                                          |         |   |      |   |         |  



See
notes to consolidated financial statements.



41



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##### Table of Contents

Duquesne Light Company

Consolidated Statements of Cash Flows



|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------- |  | --------------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                  |  | (Millions of Dollars) Year Ended December 31, |       
|                                                                                  |  | 2004                                          |        |   | 2003 |   |        | 2002 | 
|Cash Flows From Operating Activities:                                             |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net income                                                                        |  | $                                             | 67.8   |   |      | $ | 69.6   |      |  | $ | 75.4   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                               |        |   |      |   |        |      |  |   |        |  
|Depreciation and amortization                                                     |  |                                               | 71.4   |   |      |   | 76.4   |      |  |   | 169.1  |  
|Bad debt expense                                                                  |  |                                               | 11.9   |   |      |   | 10.2   |      |  |   | 21.3   |  
|Acquisition termination cost                                                      |  |                                               | 8.3    |   |      |   |       |      |  |   |       |  
|Revised facility utilization charge                                               |  |                                               |       |   |      |   | 4.9    |      |  |   |       |  
|Restructuring                                                                     |  |                                               |       |   |      |   |       |      |  |   | 3.9    |  
|Deferred taxes                                                                    |  |                                               | 3.5    |   |      |   | (27.0  | )    |  |   | (22.7  | )
|Other                                                                             |  |                                               | 4.1    |   |      |   | (4.2   | )    |  |   | (58.7  | )
|Changes in working capital other than cash (Note 20)                              |  |                                               | (54.8  | ) |      |   | (52.1  | )    |  |   | 104.6  |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net Cash Provided from Operating Activities                                       |  |                                               | 112.2  |   |      |   | 77.8   |      |  |   | 292.9  |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Cash Flows From Investing Activities:                                             |  |                                               |        |   |      |   |        |      |  |   |        |  
|Proceeds from disposition of investments                                          |  |                                               |       |   |      |   | 0.4    |      |  |   | 2.6    |  
|Construction expenditures                                                         |  |                                               | (83.5  | ) |      |   | (76.1  | )    |  |   | (72.5  | )
|Investment in DQE Capital cash pool                                               |  |                                               | (66.7  | ) |      |   | 276.8  |      |  |   | (31.1  | )
|Other                                                                             |  |                                               | (7.3   | ) |      |   |       |      |  |   | (4.7   | )
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net Cash (Used in) Provided from Investing Activities                             |  |                                               | (157.5 | ) |      |   | 201.1  |      |  |   | (105.7 | )
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Cash Flows From Financing Activities:                                             |  |                                               |        |   |      |   |        |      |  |   |        |  
|Issuance of long-term debt obligations                                            |  |                                               | 200.0  |   |      |   |       |      |  |   | 300.0  |  
|Issuance of preferred stock                                                       |  |                                               | 73.1   |   |      |   |       |      |  |   |       |  
|Reductions of long-term debt obligations                                          |  |                                               | (150.0 | ) |      |   | (202.8 | )    |  |   | (403.0 | )
|Dividends on common and preferred stock                                           |  |                                               | (76.9  | ) |      |   | (72.8  | )    |  |   | (67.7  | )
|Other                                                                             |  |                                               | (0.9   | ) |      |   | (3.3   | )    |  |   | (16.5  | )
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net Cash Provided from (Used in) Financing Activities                             |  |                                               | 45.3   |   |      |   | (278.9 | )    |  |   | (187.2 | )
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net increase (decrease) in cash and temporary cash investments                    |  |                                               |       |   |      |   |       |      |  |   |       |  
|Cash and temporary cash investments at beginning of year                          |  |                                               |       |   |      |   |       |      |  |   |       |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Cash and temporary cash investments at end of year                                |  | $                                             |       |   |      | $ |       |      |  | $ |       |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Supplemental Cash Flow Information                                                |  |                                               |        |   |      |   |        |      |  |   |        |  
|Cash paid during the year:                                                        |  |                                               |        |   |      |   |        |      |  |   |        |  
|Interest (net of amount capitalized)                                              |  | $                                             | 35.0   |   |      | $ | 45.6   |      |  | $ | 53.2   |  
|Income taxes (Note 19)                                                            |  | $                                             | 84.0   |   |      | $ | 94.5   |      |  | $ | 1.8    |  
|                                                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  



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, |     
|                                                                                               |  | 2004                                          |      | 2003 |   | 2002 | 
|Net income                                                                                     |  | $                                             | 67.8 |      | $ | 69.6 |  | $ | 75.4 |  
|Other comprehensive gains (losses):                                                            |  |                                               |      |      |   |      |  |   |      |  
|Unrealized holding gains (losses) arising during the year, net of tax of $0.2, $1.6 and $(1.9) |  |                                               | 0.4  |      |   | 2.3  |  |   | (2.7 | )
|                                                                                               |  |                                               |      |      |   |      |  |   |      |  
|Comprehensive income                                                                           |  | $                                             | 68.2 |      | $ | 71.9 |  | $ | 72.7 |  
|                                                                                               |  |                                               |      |      |   |      |  |   |      |  



See
notes to consolidated financial statements.



Duquesne Light Company

Consolidated Statements of Retained Earnings



|                             |  |                                          |       |   |      |   |       |      |  |   |       |  
|---------------------------- |  | ---------------------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                             |  | (Millions of Dollars) As of December 31, |      
|                             |  | 2004                                     |       |   | 2003 |   |       | 2002 | 
|Balance at beginning of year |  | $                                        | 42.9  |   |      | $ | 41.4  |      |  | $ | 44.4  |  
|Net income                   |  |                                          | 67.8  |   |      |   | 69.6  |      |  |   | 75.4  |  
|Dividends declared           |  |                                          | (64.7 | ) |      |   | (68.1 | )    |  |   | (78.4 | )
|                             |  |                                          |       |   |      |   |       |      |  |   |       |  
|Balance at end of year       |  | $                                        | 46.0  |   |      | $ | 42.9  |      |  | $ | 41.4  |  
|                             |  |                                          |       |   |      |   |       |      |  |   |       |  



See
notes to consolidated financial statements.



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 and Financial 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.



|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. All material intercompany balances and transactions have been eliminated in the
consolidation.



In addition, effective March 31, 2004, we
consolidate variable interest entities for which we are the primary beneficiary in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46R, Consolidation of Variable Interest Entities (revised December 2003)
(FIN 46R), regardless of the ownership percentage held by us. See Recent Accounting Pronouncements.



Continuing Operations



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



Duquesne Power L.P. was
formed in 2003 as an unregulated subsidiary of Duquesne Light primarily to acquire and manage (i) the Sunbury generating station in central Pennsylvania and (ii) a portfolio of energy commodity contracts to provide full-requirements energy supply
contracts for both Duquesne Lights residential and small commercial POLR customers and large commercial and industrial customers of Holdings unregulated subsidiary, Duquesne Light Energy, LLC



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(discussed below). When the PUC ordered that the POLR III period would end December 31, 2007, the planned Sunbury acquisition was cancelled. As part of
acquiring the energy supply portfolio, Duquesne Power has entered into energy commodity contracts with unrelated parties with payment guarantees from Holdings.



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



DQE Financial Corp. owns and operates landfill gas collection and processing systems, and 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 network, and leases dark fiber from the network to commercial, industrial and academic customers.



Duquesne Light Energy, LLC (DLE) is a 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. DLE obtains its electric energy through a
full-requirements contract with Duquesne Power.



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



Discontinued Operations



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
17.)



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 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.



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 are being recovered through a competitive transition charge (CTC) collected in connection with providing transmission and distribution services, and these assets have been reclassified accordingly. 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 2.) These regulatory assets as of December 31, 2004 and 2003 consist of regulatory tax receivables of $218.5
million and $222.0 million, unamortized debt costs of $49.3 million and $42.5 million, transition costs of $4.7 million and $8.4 million, and deferred employee and other costs of $22.6 million and $17.1 million. The majority of these assets are
currently being recovered over a period of approximately 26 years and are not earning a rate of return.



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.



Duquesne Energy Solutions 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 reflect actual customer usage in an
accounting period, regardless of when billed.



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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 in a taxes payable account at the time of sale and as an expense in taxes other than income taxes. The payable is relieved when payment is made to
the appropriate taxing agency. The excise and other taxes recorded in revenue were approximately $42 million, $43 million and $54 million in 2004, 2003 and 2002.



OTHER OPERATING REVENUES



Duquesne Lights other operating revenues include short-term sales to other utilities made at market rates resulting from excess daily deliveries to
Duquesne Lights electricity delivery system, transmission fees charged to others that use Duquesne Lights transmission system and late payment and other customer fees. In addition, Duquesne Light charges rental fees to 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.



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



OTHER INCOME



Duquesne Lights other income consists primarily of interest income from the loan receivable from Holdings and the investment in the DQE Capital cash
pool discussed below. 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, including gains and losses related to the disposition of certain assets. 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. See Recent Accounting Pronouncements.



STOCK-BASED COMPENSATION



We continue to
account for stock-based employee compensation using the intrinsic value method under the recognition and measurement principles of Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. Accordingly, compensation cost is measured as the excess, if any, of the quoted market price of Holdings common stock at the date of the grant over the amount an employee must pay to acquire the stock and is spread over the vesting
period, as applicable. For stock-based compensation with specified performance criteria, compensation cost is generally recognized as the excess, if any, of the quoted market price of Holdings common stock at the date the specified criteria are met,
over the amount an employee must pay to acquire the stock, and is spread over the vesting period, as applicable. The following tables illustrate the effect 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.



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Duquesne Light Holdings



|                                                                                                       |  |                                                |      |   |      |   |       |      |  |   |        |  
|------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------- | ---- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                                                                       |  | (Millions of Dollars, ExceptPer Share Amounts) |     
|                                                                                                       |  | Year Ended December 31,                        |     
|                                                                                                       |  | 2004                                           |      |   | 2003 |   |       | 2002 | 
|Reported net income (loss)                                                                             |  | $                                              | 87.0 |   |      | $ | 175.9 |      |  | $ | (214.6 | )
|Add:                                                                                                   |  |                                                | 1.1  |   |      |   | 0.6   |      |  |   | 0.6    |  
|Stock-based compensation determined under the intrinsic value method for all option awards, net of tax |  |                                                |      |   |      |   |       |      |  |   |        |  
|Deduct:                                                                                                |  |                                                | (0.9 | ) |      |   | (0.5  | )    |  |   | (1.2   | )
|                                                                                                       |  |                                                |      |   |      |   |       |      |  |   |        |  
|Stock-based compensation determined under the fair value method for all option awards, net of tax      |  |                                                |      |   |      |   |       |      |  |   |        |  
|Pro forma net income (loss)                                                                            |  | $                                              | 87.2 |   |      | $ | 176.0 |      |  | $ | (215.2 | )
|                                                                                                       |  |                                                |      |   |      |   |       |      |  |   |        |  
|Basic earnings (loss) per share:                                                                       |  |                                                |      |   |      |   |       |      |  |   |        |  
|Reported                                                                                               |  | $                                              | 1.14 |   |      | $ | 2.34  |      |  | $ | (3.28  | )
|Pro forma                                                                                              |  | $                                              | 1.14 |   |      | $ | 2.34  |      |  | $ | (3.29  | )
|                                                                                                       |  |                                                |      |   |      |   |       |      |  |   |        |  
|Diluted earnings (loss) per share:                                                                     |  |                                                |      |   |      |   |       |      |  |   |        |  
|Reported                                                                                               |  | $                                              | 1.14 |   |      | $ | 2.29  |      |  | $ | (3.28  | )
|Pro forma                                                                                              |  | $                                              | 1.14 |   |      | $ | 2.30  |      |  | $ | (3.28  | )
|                                                                                                       |  |                                                |      |   |      |   |       |      |  |   |        |  



Duquesne Light Company



|                                                                                                       |  |                         |      |   |      |   |      |      |  |   |      |  
|------------------------------------------------------------------------------------------------------ |  | ----------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                                                       |  | (Millions of Dollars)   |     
|                                                                                                       |  | Year Ended December 31, |     
|                                                                                                       |  | 2004                    |      |   | 2003 |   |      | 2002 | 
|Reported net income                                                                                    |  | $                       | 67.8 |   |      | $ | 69.6 |      |  | $ | 75.4 |  
|Add:                                                                                                   |  |                         |      |   |      |   |      |      |  |   |      |  
|Stock-based compensation determined under the intrinsic value method for all option awards, net of tax |  |                         | 0.4  |   |      |   | 0.2  |      |  |   | 0.6  |  
|Deduct:                                                                                                |  |                         | (0.4 | ) |      |   | (0.3 | )    |  |   | (1.2 | )
|Stock-based compensation determined under the fair value method for all option awards, net of tax      |  |                         |      |   |      |   |      |      |  |   |      |  
|                                                                                                       |  |                         |      |   |      |   |      |      |  |   |      |  
|Pro forma net income                                                                                   |  | $                       | 67.8 |   |      | $ | 69.5 |      |  | $ | 74.8 |  
|                                                                                                       |  |                         |      |   |      |   |      |      |  |   |      |  



DEPRECIATION AND AMORTIZATION



Depreciation expense of $69.3 million, $70.9 million and
$67.7 million was recorded at Holdings in 2004, 2003 and 2002. Depreciation expense of $61.6 million, $60.0 million and $56.3 million was recorded at Duquesne Light in 2004, 2003 and 2002. Depreciation of property, plant and equipment is recorded on
a straight-line basis over the estimated remaining useful lives of properties, which is approximately 26 years for both the transmission and distribution portions of electric plant in service. 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 of gas rights and depreciation of related property are on a straight-line basis over the estimated remaining useful
lives. 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
$9.1 million, $15.7 million and $112.6 million was recorded at Duquesne Light related to the CTC in 2004, 2003 and 2002.



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



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preferred stock, stock options and other types of stock-based compensation discussed in Note 12, unless a net loss from continuing operations occurs as 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 for 2004, 2003 and 2002.



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



|                                                             |  |                       |      |      |   |      |  |   |     
|------------------------------------------------------------ |  | --------------------- | ---- | ---- | - | ---- |  | - | ----
|                                                             |  | (Millions of Dollars)
|                                                             |  | 2004                  |      | 2003 |   | 2002
|Income from continuing operations                            |  | $                     | 87.2 |      | $ | 93.2 |  | $ | 26.7
|Less: Preferred dividends                                    |  |                       |     |      |   | 0.4  |  |   | 0.6 
|                                                             |  |                       |      |      |   |      |  |   |     
|Earnings from continuing operations for common stock         |  |                       | 87.2 |      |   | 92.8 |  |   | 26.1
|Dilutive effect of:                                          |  |                       |      |      |   |      |  |   |     
|ESOP dividends                                               |  |                       | 1.2  |      |   | 1.4  |  |   |    
|Preferred stock dividends                                    |  |                       | 0.4  |      |   | 0.8  |  |   |    
|                                                             |  |                       |      |      |   |      |  |   |     
|Diluted Earnings from Continuing Operations for Common Stock |  | $                     | 88.8 |      | $ | 95.0 |  | $ | 26.1
|                                                             |  |                       |      |      |   |      |  |   |     



|                                                      |  |                      |      |      |   |      |  |   |     
|----------------------------------------------------- |  | -------------------- | ---- | ---- | - | ---- |  | - | ----
|                                                      |  | (Millions of Shares)
|                                                      |  | 2004                 |      | 2003 |   | 2002
|Basic average shares                                  |  |                      | 76.4 |      |   | 75.0 |  |   | 65.6
|                                                      |  |                      |      |      |   |      |  |   |     
|Dilutive effect of:                                   |  |                      |      |      |   |      |  |   |     
|ESOP shares                                           |  |                      | 0.8  |      |   | 1.2  |  |   |    
|Holdings preferred stock                              |  |                      | 0.5  |      |   | 1.4  |  |   |    
|Performance share awards and stock options            |  |                      | 0.3  |      |   |     |  |   | 0.1 
|                                                      |  |                      |      |      |   |      |  |   |     
|Diluted average shares                                |  |                      | 78.0 |      |   | 77.6 |  |   | 65.7
|                                                      |  |                      |      |      |   |      |  |   |     
|Diluted Earnings Per Share from Continuing Operations |  | $                    | 1.14 |      | $ | 1.22 |  | $ | 0.40
|                                                      |  |                      |      |      |   |      |  |   |     



Note: In 2004, 2003 and 2002, 0.2
million, 1.4 million and 1.8 million options are not included because the exercise price of these options exceeds the average stock price. In 2002, the incremental shares from assumed conversions of ESOP shares and Holdings preferred stock are not
included in computing diluted per-share amounts because they are anti-dilutive.



TEMPORARY CASH INVESTMENTS



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



DQE CAPITAL CASH POOL



Holdings and its subsidiaries 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. 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 the loan to it. In order to repay DQE Capital, Holdings may be required to borrow under its revolving credit facility. (See Note 8.) If the amount of the facility would be
insufficient to satisfy this repayment, Holdings would be required to access the equity or debt markets. Duquesne Lights investment in the pool is 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, including a $250 million demand note from Holdings. (See Note 19.) At Holdings, receivables
include the outstanding billings of our other business lines.



INVESTMENT IN
HOLDINGS STOCK



As of December 31, 2004 and 2003, the fair
market value of Duquesne Lights investment in Holdings common stock was $22.8 million and $22.3 million, and the cost of the investment was $24.6 million and $24.7 million. This investment is eliminated in the consolidated balance sheets of
Holdings with the related shares and cost reflected as treasury stock.



This investment was in a continuous unrealized loss position for more than 12 months as of December 31, 2004, with a total unrealized loss of $1.8 million.



If the unrealized loss is determined to be other than temporary, it will be written off and an impairment charge will be
recognized on the statement of income.



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



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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.



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.



GOODWILL AND INTANGIBLE ASSETS



In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which establishes financial accounting and reporting for
acquired goodwill and other intangible assets. This standard requires that goodwill and intangible assets with indefinite useful lives not be amortized but, instead, be tested at least annually for impairment, and more frequently if certain
indicators appear. We adopted this standard effective January 1, 2002, and accordingly ceased amortization of goodwill, our only intangible asset with an indefinite useful life at that time. Our goodwill related to both AquaSource and Pro Am.



We considered independent valuations performed on both of
these reporting units in order to determine their fair values as of January 1, 2002. These valuations determined the implied fair values of each of the reporting units using a discounted cash flow analysis and public company trading multiples. These
valuations indicated that the fair values of both reporting units were less than their carrying values, an indication of impairment. We then assessed the fair value of the tangible assets and liabilities of each of these reporting units, and
determined that substantially all of the goodwill related to the water distribution reporting unit and a portion of the goodwill related to the propane delivery reporting unit was impaired as of January 1, 2002. Accordingly, we recognized a $113.7
million charge, recorded as of January 1, 2002, as the cumulative effect of a change in accounting principle for the impairment of goodwill, consisting of $103.0 million related to water distribution and $10.7 million related to propane delivery.
The impaired goodwill was not deductible for tax purposes, and as a result, no tax benefit was recorded in relation to the charge.



On November 15, 2004, as a result of our purchase of the remaining 50% interest in Waste Energy Technology, LLC (WET) we have allocated amounts to
separately identifiable intangible assets for customer related intangibles and certain covenant not-to-compete contracts with estimated lives between 2 and 14 years. We have also allocated amounts for goodwill and the WET trade name which have
indefinite useful lives. These assets will not be amortized, but will be tested at least annually for impairment in accordance with SFAS No. 142. (See Note 7.)



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, landfill gas 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.



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PENSION AND OTHER POSTRETIREMENT BENEFITS



See Note 12 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, 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, restructuring liabilities (see Note 9), income tax matters (see Note 10), and other commitments and contingencies (see Note 13).



GUARANTEES



In the normal course of business, Holdings, Duquesne Light and their
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 13.)



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 used to manage
risks associated with changes in market prices of energy. All derivative instruments that do not qualify for accrual accounting under the normal purchase and sale exemption are recorded at fair value as mark-to-market derivative assets and
liabilities. (See Note 4.)



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, 2004, 2003 and 2002, Duquesne
Light declared cash dividends on common stock of approximately $58 million, $65 million and $75 million to Holdings as estimates of earnings for the year. (See Note 16.)



RECLASSIFICATION



The 2003 and 2002 consolidated financial statements have been reclassified to conform with the 2004 presentation.



RECENT ACCOUNTING PRONOUNCEMENTS



Variable Interest Entities



In December 2003, the FASB issued FIN 46R, which addresses the consolidation
of variable interest entities (VIEs) by business enterprises that are the primary beneficiaries. A VIE is an entity that does not have sufficient equity investment at risk to permit it to finance its activities without additional subordinated
financial support, or whose equity investors lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the enterprise with the majority of the risks or rewards associated with the VIE. FIN 46R applies to
public entities that have an interest in a structure commonly referred to as a special-purpose entity for periods ending after December 15, 2003. For all other types of VIEs, FIN 46R requirements apply for periods ending after March 15, 2004.
Holdings and Duquesne Light adopted the provisions of FIN 46R that applied to special purpose entities as of December 31, 2003, and the remainder of the provisions as of March 31, 2004.



North Shore Affordable Housing, Inc. (NSAH), a DQE Financial subsidiary, owns a 1% general partner interest in seven
low-income housing development guarantee funds. NSAH has guaranteed returns to the limited partners in these funds, and under FIN 46R, these guarantees cause NSAH to be considered the primary beneficiary. (See Note 13.) Therefore, effective March
31, 2004, we began consolidating these funds and eliminated any intercompany balances. The main impact of this consolidation on the December 31, 2004 consolidated balance sheet was an increase of approximately $41 million in our long-term
investments and a $48 million increase in limited partners interest, primarily related to the equity of the limited partners. Beginning April 1, 2004, the results of the seven low-income housing development guarantee funds are



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included in our consolidated statements of income and are reflected as a decrease in other income offset by the $7.4 million benefit from limited
partners interest as of December 31, 2004. There was no impact on consolidated shareholders equity, earnings or cash flow as a result of this consolidation.



Duquesne Lights adoption of the remainder of the provisions of FIN 46R as of March 31, 2004, had no impact on its
consolidated financial position, earnings or cash flows.



Share-Based
Payments



In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment (revised December 2004), which will eliminate the use of APB No. 25. SFAS No. 123R requires entities to recognized the cost of employee services received in exchange for awards of equity instruments based on the
grant-date fair value of those awards. This standard is effective at the beginning of the first interim period that begins after June 15, 2005. We are currently evaluating the impact of the adoption of this standard on our financial statements.



|2. | 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 transmission and distribution charges.



Duquesne Light retains the risk that customers will not pay for the POLR
generation supply. However, a component of Duquesne Lights delivery rate is designed to cover the cost of a normal level of uncollectible accounts.



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. Customers under special contracts, as well as a single customer class (comprised of two industrial customers), continue to receive electric generation through Duquesne Lights POLR I supply arrangement with Orion Power
Midwest (a subsidiary of Reliant Resources, Inc.). These two industrial customers are the only customers from which Duquesne Light continues to collect the CTC. The transition costs are being amortized over the same period that the CTC revenues are
being recognized. Duquesne Light is allowed to earn an 11.0% pre-tax return on the remaining uncollected CTC balance.



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, and Orion Power Midwest was the supplier under this arrangement.



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.



POLR III



In December 2003, Duquesne Light submitted POLR III (its rate plan and related generation supply plan intended to commence beginning in 2005) to the PUC
for approval. In the third quarter of 2004, the PUC rejected POLR III as filed, and issued an order modifying the plan. On September 30, 2004, Duquesne Light announced it would implement POLR III, as modified. POLR III became effective on January 1,
2005.



In October 2003, Duquesne Power announced an agreement
to purchase WPS Resources Corporations (WPS) Sunbury generation station for approximately $120 million. When the PUC ordered that the POLR III period would end December 31, 2007 (instead of 2010), Duquesne Power terminated the Sunbury
acquisition agreement on September 30, 2004, 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. Duquesne Power has received notification from WPS that no additional
amounts are due to WPS related to the termination of the agreement.



As part of executing the energy supply plan, Duquesne Power entered into energy commodity contracts during 2004 with unrelated parties, with payment guarantees from Holdings. These contracts have been structured to begin and end during the
POLR III time period. To limit exposure to commodity price fluctuations, Duquesne Power entered into energy contracts with eight investment-grade suppliers to purchase a substantial portion of the combined expected load obligation for both Duquesne
Lights POLR III residential and small commercial customers (assuming a stable customer retention rate) and DLEs contracted large commercial and industrial customers through 2007. (See Notes 4 and 13.) As of December 31, 2004, Duquesne
Power has contracted to purchase from one supplier approximately 53%, 54% and 41% of the notional values of the energy commodity contracts for



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the years ended December 31, 2005, 2006 and 2007, with no other supplier representing as much as 20% for each of the respective years.



Under POLR III, residential and small commercial customers receive electric
supply for the period January 1, 2005 through December 31, 2007 at fixed rates that, although approximately 11.5% above POLR II generation rates, are still below those charged prior to deregulation in 1996. In addition, residential and small
commercial customers who switch back to using Duquesne Lights POLR service are no longer required, as they previously were, to remain on that service for 12 months.



For our large commercial and industrial customers, the POLR III supply options are:



| |  |  | A fixed-price service based upon the results of a competitive request-for-proposal process for the period January 1, 2005 through May 31, 2006 (this period may be extended through
May 31, 2007, at the PUCs discretion). Duquesne Light receives an adder as compensation for costs and risks involved in providing energy to those customers. This request-for-proposal process has been completed and approved by the PUC. Duquesne
Light has contracted with investment-grade suppliers to receive the necessary supply for customers who choose this option.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An hourly-price service that passes through hourly spot market electricity prices within the PJM Interconnection (PJM) regional transmission organization. This is the default option
for customers who do not choose the fixed-price option described above, and the sole option once fixed-price service is eliminated. Duquesne Light receives the same adder on this service as described above.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 its customers, Duquesne Light and DLE, at fixed rates. If an energy supplier to Duquesne Light or Duquesne Power were to default on its contact, 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.



PJM Participation



Duquesne Light joined PJM effective January 1, 2005, as part of its commitment to ensuring reliability to its customers. Energy pricing within PJM now
includes the costs or benefits of transmission congestion experienced at each location within the region. This is known as locational marginal pricing. An auction-based system of financial transmission rights (FTR) allows participants to hedge
congestion risks. FTR holders are paid or charged the day-ahead congestion value of the transmission path for which they hold an FTR. Upon joining PJM, Duquesne Light received certain FTRs for the period January 1, 2005 through May 31, 2005. These
FTRs have been determined to be derivative instruments, and will be accounted for using mark-to-market or hedge accounting. Duquesne Light allocated some of its FTRs to its suppliers: (i) Duquesne Power, as part of its full-requirements contract to
serve Duquesne Lights residential and small commercial POLR load, and (ii) the fixed-price service suppliers for the large commercial and industrial POLR III customers.



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 the seams elimination charge adjustment (SECA) will be put in place through April 2006 in order to compensate
transmission owners for the estimated revenue lost as a result of the elimination of the RTOR. Each PJM zone, including the Duquesne Light zone, will be allocated a portion of the SECA based on transmission services provided to that zone in 2002 and
2003. On February 10, 2005, the FERC issued an order accepting certain compliance filings that implement the SECA for other (i.e., non-Duquesne Light) PJM zones, subject to refund and surcharge, as appropriate, and setting the case in its
entirety for a formal hearing. We



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expect that SECAs in the Duquesne Light zone will be treated in a similar fashion by the FERC, and likely will be consolidated with the on-going hearing for
the other zones. For Holdings and affiliates, the effective date of the SECAs will not be earlier then January 1, 2005. It is anticipated that the case may take over a year to reach a final decision. There are several unresolved matters and legal
challenges to the SECA itself that are pending before the FERC on rehearing. It is not known when the FERC will issue an order on these requests for rehearing. We have been notified by PJM that billings for SECA charges will not occur before the
March 2005 PJM billing cycle.



Through its hearing process, the
FERC will determine both the total amount of SECA charges applicable to the Duquesne Light zone, and the appropriate allocation of those charges among load-serving entities in the Duquesne Light zone (including Duquesne Light, DLE and other
competitive retail suppliers). The proposed SECA charges, when filed and accepted by the FERC and billed by the appropriate entities, must be paid by load-serving entities within the Duquesne Light zone on a current basis. 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 total SECA charge for the Duquesne Light zone is not yet known because charges for the April 2005 through April 2006 period have not yet been filed.
However, using data applicable to the January through March 2005 period, the total SECA charges for the Duquesne Light zone for the entire January 2005 through April 2006 period could be as much as the sum of (i) $19 million in charges assessed by
transmission owners in MISO, and (ii) $26 million in net charges assessed by transmission owners in PJM. During March 2005, Duquesne Light (together with other PJM participants) filed with the FERC a proposed allocation of SECA charges among
load-serving entities within the Duquesne Light zone. Under that proposal, Duquesne Light would, using 2002 data applicable to the January through March 2005 period, be allocated approximately (i) $12 million of the charges from MISO transmission
owners, and (ii) $2 million of the net charges from PJM transmission owners. The other load-serving entities in the Duquesne Light zone would be allocated the remainder of such charges, with DLEs allocation of combined MISO and PJM charges
expected to be approximately $1 million. The FERC is expected to act on this filing within 60 days. If the FERC accepts the filing, each load-serving entity within the Duquesne Light zone would be required to pay its allocated share of the SECA,
subject to refund or surcharge pending final resolution by the FERC of disputes over appropriate level and allocation of SECA charges.



In addition to the allocation of SECA charges among load serving entities within the Duquesne Light zone, there are a number of issues that could affect
the total level of charges to load serving entities in the Duquesne Light zone. For example, Duquesne Light has argued that a significant portion of the charges from MISO transmission owners (approximately $16 million of the estimated $19 million)
should not be allocated to the Duquesne Light zone because they represent transmission revenues that would have terminated even if the RTOR had not been eliminated. If the FERC agrees with Duquesne Light on this issue, the SECA charges applicable to
the Duquesne Light zone could be significantly reduced. There are other issues that have been or may be raised by Duquesne Light and other parties that also could affect the total amount of SECA charges for the Duquesne Light zone that are
ultimately approved by the FERC. We will continue to pursue all avenues available to us to eliminate or reduce the SECA obligations. In addition, Duquesne Light believes it will recover these costs from its retail customers and will seek recovery
once these issues are resolved by the FERC.



|3. | Acquisitions and Dispositions
|-- | -----------------------------



On November 15, 2004, DQE Financial acquired the remaining 50% membership interest in WET for $8.4 million in cash (net of cash received of $0.9 million).
Prior to November 15, 2004, DQE Financial owned a 50% membership interest in WET with a net book value of $9.0 million and accounted for the investment using the equity method of accounting. WET is an engineering, design, construction and operations
company that primarily services the landfill gas industry. The results of operations for WET have been included in the consolidated financial statements since the acquisition date. Of the total investment of $17.4 million, $3.5 million has been
allocated to property, plant and equipment. In addition, $5.6 million has been allocated to intangible assets and $4.9 million has been allocated to goodwill. The goodwill is included in the Financial business segment and is expected to be
deductible for tax purposes. DQE Financial is in the process of evaluating third-party valuations of certain assets; thus the allocation of the purchase price is not complete and adjustments may be required.



In November 2004, DQE Financial agreed to an early termination of a leveraged
lease. In consideration for the termination, DQE Financial received net



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proceeds of $9.6 million and recorded an after-tax gain of $0.8 million. In October 2004, DQE Financial also sold 50% of a limited partnership investment in
a synthetic fuel partnership and received $0.8 million in cash at closing and recognized an after-tax gain of $0.5 million. Additional sale proceeds may be received from the buyer through December 2007, but are contingent upon the generation of
qualified tax credits related to synthetic fuel production of the partnership. Due to the contingent nature of future sale proceeds, DQE Financial will recognize additional income from this sale as earned. The amount of any additional income to be
recorded will depend on the amount of tax credits allocated to the buyer, less the buyers portion of required capital contributions to the partnership. In September 2004, DQE Financial sold an investment in a landfill gas operation and
received $2.9 million of cash at closing, and recognized an after-tax loss of $1.4 million. A portion of the sale is contingent upon the buyer receiving a favorable ruling from the Internal Revenue Service (IRS) by December 31, 2005 on the
qualification of the tax credits to be generated. As a result, no gain or loss has been recognized for any additional proceeds to be received related to the contingent portion of the sale.



In 2003, DQE Financial sold a limited partnership investment in a natural gas
operating partnership for $18.5 million and recognized an after-tax gain of $7.0 million. DQE Enterprises received $2.5 million for the sale of stock in three publicly traded companies and recognized an after-tax gain of $0.6 million. Duquesne Light
sold its 50% investment in a small mining operation for $1.4 million ($1.0 million of which was a note receivable), which resulted in an after-tax gain of $0.4 million.



In 2002 DQE Financial sold a significant portion of its remaining affordable housing portfolio, receiving proceeds of
approximately $17 million, which approximated book value. Duquesne Light received $1.3 million from the sale of securities and recognized an after-tax gain of $0.8 million. Duquesne Light received $1.3 million from the sale of a building and
recognized an after-tax gain of $0.3 million. DQE Enterprises also received $3.4 million for the sale of an electronic commerce investment, which approximated book value.



|4. | Derivative Instruments
|-- | ----------------------



Holdings and Duquesne Light account for derivative instruments in accordance with SFAS No. 133. Our derivative instruments consist of energy contracts
entered into by Duquesne Power during 2004. These contracts are used to manage risks associated with changes in market prices of electricity needed to satisfy anticipated obligations of Duquesne Light under POLR III and DLEs contracted supply
amounts, based on established risk management policies. For load shaping purposes, Duquesne Power entered into energy contracts to sell power obtained in excess of its anticipated obligations primarily during off-peak periods. The energy contracts
have all been structured to begin and end during the POLR III time period of January 1, 2005 through December 31, 2007.



Duquesne Power documents, at the inception of each contract, whether the contract qualifies for (i) the accrual basis of accounting under the normal
purchase and sale exemption, (ii) a cash flow or fair value hedge, or (iii) mark-to-market accounting under SFAS No. 133. The accrual basis of accounting allows the recognition of the contracts fair value when the settlement of the contract occurs,
whereas under mark-to-market accounting, the fair value of the contract is recorded as mark-to-market derivative assets or liabilities at inception. The changes in mark-to-market derivative assets or liabilities are recorded on a net basis in the
consolidated statements of income in the period of change.



Duquesne Power accounts for the energy contracts using a combination of accrual and mark-to-market accounting for the purchase contracts and mark-to-market accounting for the sale contracts. As of December 31, 2004, we have not designated
any energy contracts as cash flow or fair value hedges.



The
following table summarizes as of December 31, 2004, the energy contracts by maturity dates for the contracts for both Holdings and Duquesne Light:



|                                    |  |                              |       |      |   |       |  |       |       |  |   |      
|----------------------------------- |  | ---------------------------- | ----- | ---- | - | ----- |  | ----- | ----- |  | - | -----
|                                    |  | Notional amounts maturing in
|Contract Classification:            |  | 2005                         |       | 2006 |   | 2007  |  | Total
|                                    |  | (Millions of Dollars)       
|Normal exemption purchase contracts |  | $                            | 176.9 |      | $ | 172.8 |  | $     | 173.1 |  | $ | 522.8
|Mark-to-market purchase contracts   |  |                              | 76.4  |      |   | 74.2  |  |       | 74.2  |  |   | 224.8
|                                    |  |                              |       |      |   |       |  |       |       |  |   |      
|Total Purchase Contracts            |  | $                            | 253.3 |      | $ | 247.0 |  | $     | 247.3 |  | $ | 747.6
|                                    |  |                              |       |      |   |       |  |       |       |  |   |      
|Mark-to-market sale contracts       |  | $                            | 8.8   |      | $ | 7.3   |  | $     | 7.3   |  | $ | 23.4 
|                                    |  |                              |       |      |   |       |  |       |       |  |   |      



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Other current assets include $0.8 million of mark-to-market derivative assets and other non-current
liabilities include $0.7 million of mark-to-market derivative liabilities as of December 31, 2004 for both Holdings and Duquesne Light as shown in the following table.



|                                  |  |                                        |      |   |                                       |   |      |  
|--------------------------------- |  | -------------------------------------- | ---- | - | ------------------------------------- | - | ---- | -
|                                  |  | (Millions of Dollars)                  |     
|Contract Classification           |  | Short-term DerivativeAsset/(Liability) |      |   | Long-term DerivativeAsset/(Liability) |  
|Mark-to-market purchase contracts |  | $                                      | 1.3  |   |                                       | $ | (0.6 | )
|Mark-to-market sale contracts     |  |                                        | (0.5 | ) |                                       |   | (0.1 | )
|                                  |  |                                        |      |   |                                       |   |      |  
|Net Derivative Asset (Liability)  |  | $                                      | 0.8  |   |                                       | $ | (0.7 | )
|                                  |  |                                        |      |   |                                       |   |      |  



As discussed in Note
2, Duquesne Power also contracted to secure unforced capacity credits for the POLR III period with notional amounts of $11.4 million, $9.6 million and $9.5 million for 2005, 2006 and 2007. The capacity contracts were evaluated under SFAS No. 133 and
deemed not to be derivative instruments.



|5. | Long-Term Investments
|-- | ---------------------



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



Leases



As of December 31, 2004, we maintain investments in seven structured lease transactions involving a waste-to-energy
facility, high-speed ferries and electric generating equipment, and one leveraged lease involving a gas processing facility. In November 2004, we had agreed to an early termination of an existing leveraged lease involving mining equipment. (See Note
3.) The remaining leases expire in various years beginning in 2011 through 2037. The recorded residual value of the equipment at the end of the lease terms ranges from 0% to 10% of the original cost.



The aggregate leveraged lease investment represents 20% of the aggregate
original cost of the property. The remaining 80% was financed by non-recourse debt, provided by lenders who have been granted, as their sole remedy in the event of default by the lessees, an assignment of rentals due under the leases and a security
interest in the leased property. The lessees have investment grade credit ratings.



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 at December 31,



|                         |  |                       |        |   |      |   |        |  
|------------------------ |  | --------------------- | ------ | - | ---- | - | ------ | -
|                         |  | (Millions of Dollars) |       
|                         |  | 2004                  |        |   | 2003 |  
|Rentals receivable  net |  | $                     | 601.0  |   |      | $ | 610.4  |  
|Estimated residual value |  |                       | 8.0    |   |      |   | 11.5   |  
|Less: Unearned Income    |  |                       | (96.9  | ) |      |   | (106.8 | )
|                         |  |                       |        |   |      |   |        |  
|Lease investments        |  |                       | 512.1  |   |      |   | 515.1  |  
|Less: Deferred taxes     |  |                       | (238.6 | ) |      |   | (240.6 | )
|                         |  |                       |        |   |      |   |        |  
|Net Lease Investments    |  | $                     | 273.5  |   |      | $ | 274.5  |  
|                         |  |                       |        |   |      |   |        |  



Gas Rights and Related Investments



Our gas rights and related investments represent
investments in landfill gas rights at 20 landfills and limited partnership investments. The following table illustrates the net book values of these investments on Holdings consolidated balance sheet as of December 31, 2004 and 2003.



|                                |  |                       |      |      |   |     
|------------------------------- |  | --------------------- | ---- | ---- | - | ----
|                                |  | (Millions of Dollars)
|                                |  | 2004                  |      | 2003
|Landfill gas rights             |  | $                     | 12.3 |      | $ | 16.5
|Natural gas equity investment   |  |                       | 4.6  |      |   | 7.7 
|Landfill gas equity investments |  |                       |     |      |   | 16.7
|                                |  |                       |      |      |   |     
|Total                           |  | $                     | 16.9 |      | $ | 40.9
|                                |  |                       |      |      |   |     



Landfill gas rights
are amortized on a straight-line basis over the estimated remaining useful life. Holdings recognized amortization expense of $4.2 million, $2.8 million and $4.7 million for the years ended December 31, 2004, 2003 and 2002 related to the landfill gas
rights.



Our natural gas equity investment represents a 21.9%
limited partnership interest in a single natural gas operating partnership. (See Note 23.)



At December 31, 2003, our landfill gas equity investments consisted of a 50% interest in WET and a 50% interest in a landfill gas operating partnership. During 2004, we acquired the remaining 50% interest in WET and
sold the other landfill gas 50% limited partnership interest. We also own a limited partnership interest in a synthetic fuel operating partnership, with no book value as of December 31, 2004 and 2003. (See Note 3.)



Affordable Housing



Our affordable housing investments include equity investments in affordable housing guarantee funds. In March 2004, we
adopted FIN 46(R). (See Note 1.)



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|6. | 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 energy facilities used in our Energy Solutions business segment, the fiber optic network owned by DQE Communications (reported in the all other
category) and landfill gas equipment used in our Financial business segment.



SFAS No. 143, Accounting for Asset Retirement Obligations, requires entities to record the fair value of a liability by increasing the carrying amount of the related long-lived asset for an asset
retirement obligation in the period in which it is incurred, if a reasonable estimate of fair value can be made. Neither the adoption, nor the continued application, of SFAS No. 143 had a significant impact on the financial statements of either
Holdings or Duquesne Light.



|7. | Intangible Assets
|-- | -----------------



Pension



As a result of
the recognition of an additional minimum pension liability in 2004, we have recorded a corresponding $5.8 million intangible asset on both Holdings and Duquesne Lights consolidated balance sheets as of December 31, 2004. If the required
additional minimum pension liability changes in the future, the amount of the intangible asset will also change. (See Note 12.)



Purchased Intangibles



As a result of the purchase price allocation related to DQE Financials purchase of WET in November 2004, a portion of the purchase price has been
allocated to intangible assets with both definite and indefinite lives, including goodwill, on Holdings consolidated balance sheet as follows.



Goodwill and Indefinite Lived Intangible Assets. Goodwill is the cost of an acquisition over the fair value of the net assets acquired. The
other indefinite lived intangible asset relates to the WET trade name. As of December 31, 2004 the amount allocated to goodwill and the WET trade name was $4.9 million and $0.6 million. These assets are not amortized, but are evaluated for
impairment at least annually.



Intangible Assets
Subject to Amortization. Intangible assets with definite lives are subject to amortization over their estimated useful lives. The assets included in this category are related to existing customer relationships for both construction and
operations customers and covenants not-to-compete in the employment contracts with WETs key executives. The total amount allocated to these intangibles was approximately $5 million. The weighted average useful life is approximately 13 years.
The amortization expense related to these intangibles is immaterial for the year ended December 31, 2004.



|8. | Short-Term Borrowing and Revolving Credit Arrangements
|-- | ------------------------------------------------------



In September 2004, Holdings and Duquesne Light entered into unsecured revolving credit facilities expiring in September 2007. Holdings new $175
million revolver replaced its prior $110 million, 364-day revolver. Duquesne Lights amended and restated $100 million revolver replaced its prior $180 million, 364-day revolver.



Both credit facilities permit borrowings at interest rates of LIBOR (plus a margin of 0.75 % to 2.00%) or an alternate base
rate, as defined in the credit facilities (plus a margin from 0.0% to 1.00%). Both credit facilities have commitment fees that range from 0.125% to 0.30%. Interest rates and commitment 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.



At December 31, 2004, no
borrowings were outstanding; however, we had $89.9 million in standby letters of credit (including $23.6 million relating to Duquesne Light), $69.2 million of which are backed by the revolving credit agreements (including $10.4 million related to
Duquesne Light), leaving $205.8 million available (including $89.6 million available at Duquesne Light).



Under our credit facilities, we are subject to financial covenants requiring each of Holdings and Duquesne Light to maintain a maximum
debt-to-capitalization ratio of 65.0%, as defined in the facilities. In addition, Holdings is required to maintain a minimum coverage ratio of 2-to-1, as defined in the facilities. At December 31, 2004, we were in compliance with these covenants.



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In the first quarter of 2003, Standard & Poors reduced Holdings and Duquesne Lights
short-term corporate credit and commercial paper ratings by one level, thereby restricting our access to the commercial paper market. These ratings downgrades do not limit our ability to access our revolving credit facilities. These ratings are not
a recommendation to buy, sell or hold any securities of Holdings, Duquesne Light or their subsidiaries, may be subject to revisions or withdrawal by the agencies at any time, and should be evaluated independently of each other and any other rating
that may be assigned to our securities.



Holdings.As of
December 31, 2004, we had no commercial paper borrowings outstanding, and $0.2 million of current debt maturities. During 2004, the maximum amount of bank loans outstanding was $120 million, the amount of average daily borrowings was $18.6 million
and the weighted average daily interest rate was 2.3%.



As of
December 31, 2003, we had no commercial paper borrowings outstanding, and $51.5 million of current debt maturities. During 2003, the maximum amount of bank loans outstanding was $35 million (borrowed to facilitate the redemption of $100 million of
first mortgage bonds, and repaid within three days), the amount of average daily borrowings was $0.3 million and the weighted average daily interest rate was 2.38%.



Duquesne Light.As of December 31, 2004, Duquesne Light had no commercial paper borrowings outstanding or current
debt maturities. During 2004, the maximum amount of bank loans outstanding was $120 million, the amount of average daily borrowings was $18.6 million and the weighted average daily interest rate was 2.3%.



As of December 31, 2003, Duquesne Light had no commercial paper
borrowings outstanding, and $50.5 million of current debt maturities. During 2003, there were no bank loans or commercial paper borrowings outstanding.



|9. | Restructuring Charges
|-- | ---------------------



In 2001, we recorded a pre-tax restructuring charge of $27.9 million (including $10.8 million at Duquesne Light) related to (1) the consolidation and
reduction of certain administrative and back-office functions through an involuntary termination plan; (2) the abandonment of certain office facilities; and (3) the write-off of certain leasehold-improvements related to those office facilities.
Approximately 170 employees (96 at Duquesne Light) were terminated in connection with this restructuring.



In 2002, we recorded a pre-tax restructuring charge of $4.2 million (including $3.7 million at Duquesne Light) related to further consolidation and
centralization of certain administrative functions. The 2002 restructuring charge primarily included severance costs for 20 executive, management, professional and administrative personnel (14 at Duquesne Light), who were terminated in connection
with this restructuring.



In 2002, we increased our
restructuring liability and restructuring expense by approximately $1.0 million for revisions to our 2001 restructuring plan. Approximately $1.2 million of this increase (including $0.2 million at Duquesne Light) was due to revised estimates of
certain severance-related benefits to be paid. Offsetting this increase was a decrease to the 2001 restructuring liability of $0.2 million resulting from a partial lease termination at one of our former office facilities.



In 2003, we increased our restructuring liability by $0.8 million for revised
estimates of severance benefits to be paid under the 2002 restructuring plan. In addition, we decreased the 2001 restructuring liability by $1.4 million (including $0.2 million at Duquesne Light), primarily due to future sublease income for one of
our abandoned office locations.



In 2004, we decreased our
employee termination benefit restructuring liability by a net $0.8 million (including an increase of $0.1 million at Duquesne Light) for revised estimates of severance benefits to be paid under the restructuring plans. In addition, we increased the
2001 lease restructuring liability by $0.7 million due to lease escalation costs.



The following table summarizes the restructuring activities for the Holdings 2001 and 2002 restructuring plans.



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Holdings Restructuring Liability



|                                         |  |                             |       |   |            |   |      |       |  |   |       |  
|---------------------------------------- |  | --------------------------- | ----- | - | ---------- | - | ---- | ----- |  | - | ----- | -
|                                         |  | (Millions of Dollars)       |      
|                                         |  | EmployeeTerminationBenefits |       |   | LeaseCosts |   |      | Total | 
|Beginning Balance, November 30, 2001 (a) |  | $                           | 18.1  |   |            | $ | 9.8  |       |  | $ | 27.9  |  
|Payments in 2001                         |  |                             | (4.2  | ) |            |   | (2.0 | )     |  |   | (6.2  | )
|                                         |  |                             |       |   |            |   |      |       |  |   |       |  
|Balance, December 31, 2001 (a)           |  |                             | 13.9  |   |            |   | 7.8  |       |  |   | 21.7  |  
|Restructuring charge 2002                |  |                             | 4.9   |   |            |   |     |       |  |   | 4.9   |  
|Adjustments to 2001                      |  |                             | 1.2   |   |            |   | (0.2 | )     |  |   | 1.0   |  
|Payments on 2002                         |  |                             | (0.3  | ) |            |   |     |       |  |   | (0.3  | )
|Payments on 2001                         |  |                             | (11.4 | ) |            |   | (2.8 | )     |  |   | (14.2 | )
|                                         |  |                             |       |   |            |   |      |       |  |   |       |  
|Balance, December 31, 2002 (a)           |  |                             | 8.3   |   |            |   | 4.8  |       |  |   | 13.1  |  
|Adjustments to 2002                      |  |                             | 0.8   |   |            |   |     |       |  |   | 0.8   |  
|Adjustments to 2001                      |  |                             | (0.2  | ) |            |   | (1.2 | )     |  |   | (1.4  | )
|Payments on 2002                         |  |                             | (3.5  | ) |            |   |     |       |  |   | (3.5  | )
|Payments on 2001                         |  |                             | (2.1  | ) |            |   | (1.8 | )     |  |   | (3.9  | )
|                                         |  |                             |       |   |            |   |      |       |  |   |       |  
|Balance, December 31, 2003 (a)           |  | $                           | 3.3   |   |            | $ | 1.8  |       |  | $ | 5.1   |  
|Adjustments to 2002                      |  |                             | 0.3   |   |            |   |     |       |  |   | 0.3   |  
|Adjustments to 2001                      |  |                             | (1.1  | ) |            |   | 0.7  |       |  |   | (0.4  | )
|Payments on 2002                         |  |                             | (0.8  | ) |            |   |     |       |  |   | (0.8  | )
|Payments on 2001                         |  |                             | (0.1  | ) |            |   | (1.1 | )     |  |   | (1.2  | )
|                                         |  |                             |       |   |            |   |      |       |  |   |       |  
|Balance, December 31, 2004 (a)           |  | $                           | 1.6   |   |            | $ | 1.4  |       |  | $ | 3.0   |  
|                                         |  |                             |       |   |            |   |      |       |  |   |       |  



|(a) | Excludes $2.9 million, $2.8 million, $2.3 million, $0.9 million, and $0.1 million of restructuring liabilities as of November 30, 2001, December 31, 2001, December 31, 2002,
December 31, 2003 and December 31, 2004 that are included in discontinued operations.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Holdings $3.0 million combined remaining restructuring liability net of discontinued operations as of December 31, 2004 is included in other
liabilities on the consolidated balance sheets. We believe that the remaining provision is adequate to complete the restructuring plan. We expect that the restructuring liability will be paid on a monthly basis through 2006.



The following table summarizes the restructuring activities for the Duquesne
Light 2001 and 2002 restructuring plans.



Duquesne Light Restructuring
Liability



|                                     |  |                             |      |   |            |   |      |       |  |   |      |  
|------------------------------------ |  | --------------------------- | ---- | - | ---------- | - | ---- | ----- |  | - | ---- | -
|                                     |  | (Millions of Dollars)       |     
|                                     |  | EmployeeTerminationBenefits |      |   | LeaseCosts |   |      | Total | 
|Beginning Balance, November 30, 2001 |  | $                           | 8.3  |   |            | $ | 2.5  |       |  | $ | 10.8 |  
|Payments in 2001                     |  |                             | (1.7 | ) |            |   | (0.3 | )     |  |   | (2.0 | )
|                                     |  |                             |      |   |            |   |      |       |  |   |      |  
|Balance, December 31, 2001           |  |                             | 6.6  |   |            |   | 2.2  |       |  |   | 8.8  |  
|Restructuring charge 2002            |  |                             | 4.3  |   |            |   |     |       |  |   | 4.3  |  
|Adjustments to 2001                  |  |                             | 0.2  |   |            |   |     |       |  |   | 0.2  |  
|Payments on 2002                     |  |                             | (0.3 | ) |            |   |     |       |  |   | (0.3 | )
|Payments on 2001                     |  |                             | (5.9 | ) |            |   | (0.3 | )     |  |   | (6.2 | )
|                                     |  |                             |      |   |            |   |      |       |  |   |      |  
|Balance, December 31, 2002           |  |                             | 4.9  |   |            |   | 1.9  |       |  |   | 6.8  |  
|Adjustments to 2001                  |  |                             | (0.2 | ) |            |   |     |       |  |   | (0.2 | )
|Payments on 2002                     |  |                             | (2.3 | ) |            |   |     |       |  |   | (2.3 | )
|Payments on 2001                     |  |                             | (0.7 | ) |            |   | (0.3 | )     |  |   | (1.0 | )
|                                     |  |                             |      |   |            |   |      |       |  |   |      |  
|Balance, December 31, 2003           |  | $                           | 1.7  |   |            | $ | 1.6  |       |  | $ | 3.3  |  
|Adjustments to 2001                  |  |                             | 0.1  |   |            |   |     |       |  |   | 0.1  |  
|Payments on 2002                     |  |                             | (0.5 | ) |            |   |     |       |  |   | (0.5 | )
|Payments on 2001                     |  |                             | (0.1 | ) |            |   | (0.3 | )     |  |   | (0.4 | )
|                                     |  |                             |      |   |            |   |      |       |  |   |      |  
|Balance, December 31, 2004           |  | $                           | 1.2  |   |            | $ | 1.3  |       |  | $ | 2.5  |  
|                                     |  |                             |      |   |            |   |      |       |  |   |      |  



The Duquesne Light
$2.5 million combined remaining restructuring liability as of December 31, 2004 is included in other liabilities on the consolidated balance sheets. Duquesne Light believes that the remaining provision is adequate to complete the restructuring plan
and expects that the restructuring liability will be paid on a monthly basis through 2006.



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



The IRS is currently auditing the 1998 through 2002 tax years. They have audited all federal corporate tax returns for years through 1997 and these years
are closed. In December 2003, we reached a settlement agreement with the IRS regarding DQE Financials structured lease transactions and other similar investments that had been under review as a result of an IRS audit. The tax liability
associated with the settlement was determined for the years 1994 through 1997. In addition, treatment of the structured lease transactions has been agreed to for all future years affected by the transactions. As a result of the confidential
agreement, achieved through the IRS fast track settlement program, we agreed to make additional cash payments for the tax years 1999 through 2002 of $84.3 million, net of the $12.4 million tax benefit associated with the interest due. We paid
$48.6 million in December 2003. There was no earnings impact in



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2003 from this resolution. The balance, including interest due to the IRS, of $50.9 million and $48.1 million as of December 31, 2004 and 2003 is included in
accrued liabilities on the Holdings consolidated balance sheets.



During 2003, we sold the remainder of our investment in AquaSource. Due to this divestiture, capital losses were generated which were carried back against prior capital gains. In 2003, the results of discontinued operations reflect the tax
benefit of approximately $67 million resulting from the carryback claim. As of December 31, 2003, the expected cash refund was recorded as a reduction to our current tax liability. The cash refund of approximately $32 million was received in 2004.



Our state income tax returns are subject to review by the
relevant taxing jurisdictions, Pennsylvania being the most significant. The Pennsylvania Department of Revenue has issued assessments of additional tax for 1999 through 2002 primarily to include income of a Duquesne Light out of state subsidiary
corporation in Pennsylvania taxable income. If, as expected, the Department asserts the same positions for 2003 and 2004, Duquesne Lights total exposure for all years, without interest or penalty, could approximate $96 million (net of
associated federal benefit). Duquesne Light does not agree with the Department on this matter, and has filed an appeal for the 1999 tax year with the Pennsylvania Commonwealth Court. The assessments for the 2000, 2001 and 2002 tax years have been
appealed to various administrative levels within the state. Ultimately, Duquesne Light expects all years involved to be appealed to and decided at the Pennsylvania Commonwealth Court.



It is not possible to predict if, when or to what extent any state income tax adjustments ultimately proposed for the period
1999 through 2004 will be sustained. Duquesne Light does not believe that the ultimate resolution of its state tax issue for this period will have a material adverse effect on its financial position or results of operation. However, the resolution,
depending on the extent and timing thereof, could have a material adverse effect on cash flows for the period in which they are paid.



In connection with the above examinations, both Holdings and Duquesne Light have established tax reserves, which are included primarily in other
non-current liabilities on the consolidated balance sheets. We believe these reserves are adequate in relation to the above matters. We regularly assess the likelihood of additional assessments resulting from these and subsequent years
examinations. Once established, reserves are adjusted only when there is more information available or when an event occurs that necessitates a change to the reserves.



Duquesne Light Holdings



Deferred Tax Assets (Liabilities) as of December 31,



|                                      |  |                       |        |   |      |   |        |  
|------------------------------------- |  | --------------------- | ------ | - | ---- | - | ------ | -
|                                      |  | (Millions of Dollars) |       
|                                      |  | 2004                  |        |   | 2003 |  
|Restructuring charges and impairments |  | $                     | 4.0    |   |      | $ | 4.9    |  
|Tax credit carryforward               |  |                       | 118.3  |   |      |   | 92.4   |  
|Capital loss carryforward             |  |                       | 17.5   |   |      |   | 35.8   |  
|Warwick Mine closing costs            |  |                       | 11.2   |   |      |   | 11.2   |  
|Pension and benefit costs             |  |                       | 43.5   |   |      |   | 49.3   |  
|Other                                 |  |                       | 27.1   |   |      |   | 36.9   |  
|                                      |  |                       |        |   |      |   |        |  
|Deferred tax assets                   |  |                       | 221.6  |   |      |   | 230.5  |  
|                                      |  |                       |        |   |      |   |        |  
|Property depreciation                 |  |                       | (276.4 | ) |      |   | (274.1 | )
|Lease investments                     |  |                       | (238.6 | ) |      |   | (240.6 | )
|Loss on reacquired debt unamortized   |  |                       | (15.6  | ) |      |   | (17.6  | )
|Regulatory assets                     |  |                       | (90.7  | ) |      |   | (92.1  | )
|Other                                 |  |                       | (8.5   | ) |      |   | (4.3   | )
|                                      |  |                       |        |   |      |   |        |  
|Deferred tax liabilities              |  |                       | (629.8 | ) |      |   | (628.7 | )
|                                      |  |                       |        |   |      |   |        |  
|Net                                   |  | $                     | (408.2 | ) |      | $ | (398.2 | )
|                                      |  |                       |        |   |      |   |        |  



Income Tax Expense (Benefit)



|             |  |                         |      |   |      |   |        |      |  |   |       |  
|------------ |  | ----------------------- | ---- | - | ---- | - | ------ | ---- |  | - | ----- | -
|             |  | (Millions of Dollars)   |     
|             |  | Year Ended December 31, |     
|             |  | 2004                    |      |   | 2003 |   |        | 2002 | 
|Current:     |  |                         |      |   |      |   |        |      |  |   |       |  
|Federal      |  | $                       | 4.1  |   |      | $ | 142.8  |      |  | $ | 55.7  |  
|State        |  |                         | 7.3  |   |      |   | 8.9    |      |  |   | 6.4   |  
|Deferred:    |  |                         |      |   |      |   |        |      |  |   |       |  
|Federal      |  |                         | 10.3 |   |      |   | (132.9 | )    |  |   | (75.0 | )
|State        |  |                         | (1.1 | ) |      |   | (1.1   | )    |  |   | 1.3   |  
|             |  |                         |      |   |      |   |        |      |  |   |       |  
|Income Taxes |  | $                       | 20.6 |   |      | $ | 17.7   |      |  | $ | (11.6 | )
|             |  |                         |      |   |      |   |        |      |  |   |       |  



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.



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Income Tax Expense Reconciliation



|                                                       |  |                         |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------------ |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                       |  | (Millions of Dollars)   |      
|                                                       |  | Year Ended December 31, |      
|                                                       |  | 2004                    |       |   | 2003 |   |       | 2002 | 
|Computed federal income tax statutory rate (35%)       |  | $                       | 35.1  |   |      | $ | 38.8  |      |  | $ | 5.3   |  
|Increase (decrease) in taxes resulting from:           |  |                         |       |   |      |   |       |      |  |   |       |  
|State income taxes, net of federal income tax benefits |  |                         | 4.7   |   |      |   | 5.2   |      |  |   | 5.0   |  
|Tax credits                                            |  |                         | (25.7 | ) |      |   | (31.3 | )    |  |   | (31.5 | )
|Non-deductible expenses                                |  |                         | 2.2   |   |      |   | 2.5   |      |  |   | 6.3   |  
|Other                                                  |  |                         | 4.3   |   |      |   | 2.5   |      |  |   | 3.3   |  
|                                                       |  |                         |       |   |      |   |       |      |  |   |       |  
|Total Income Tax Expense (Benefit)                     |  | $                       | 20.6  |   |      | $ | 17.7  |      |  | $ | (11.6 | )
|                                                       |  |                         |       |   |      |   |       |      |  |   |       |  



Duquesne Light Company



Deferred Tax Assets (Liabilities) as of December 31,



|                                    |  |                       |        |   |      |   |        |  
|----------------------------------- |  | --------------------- | ------ | - | ---- | - | ------ | -
|                                    |  | (Millions of Dollars) |       
|                                    |  | 2004                  |        |   | 2003 |  
|Pension and benefit costs           |  | $                     | 42.7   |   |      | $ | 47.7   |  
|Warwick Mine closing costs          |  |                       | 11.2   |   |      |   | 11.2   |  
|Other                               |  |                       | 17.2   |   |      |   | 20.4   |  
|                                    |  |                       |        |   |      |   |        |  
|Deferred tax assets                 |  |                       | 71.1   |   |      |   | 79.3   |  
|                                    |  |                       |        |   |      |   |        |  
|Property depreciation               |  |                       | (281.0 | ) |      |   | (280.4 | )
|Loss on reacquired debt unamortized |  |                       | (15.6  | ) |      |   | (17.6  | )
|Regulatory assets                   |  |                       | (90.7  | ) |      |   | (92.1  | )
|Other                               |  |                       | (6.9   | ) |      |   | (7.9   | )
|                                    |  |                       |        |   |      |   |        |  
|Deferred tax liabilities            |  |                       | (394.2 | ) |      |   | (398.0 | )
|                                    |  |                       |        |   |      |   |        |  
|Net                                 |  | $                     | (323.1 | ) |      | $ | (318.7 | )
|                                    |  |                       |        |   |      |   |        |  



Income Tax Expense



|             |  |                         |      |   |      |   |       |      |  |   |       |  
|------------ |  | ----------------------- | ---- | - | ---- | - | ----- | ---- |  | - | ----- | -
|             |  | (Millions of Dollars)   |     
|             |  | Year Ended December 31, |     
|             |  | 2004                    |      |   | 2003 |   |       | 2002 | 
|Current:     |  |                         |      |   |      |   |       |      |  |   |       |  
|Federal      |  | $                       | 33.8 |   |      | $ | 63.3  |      |  | $ | 66.5  |  
|State        |  |                         | 7.0  |   |      |   | 9.1   |      |  |   | 5.1   |  
|Deferred:    |  |                         |      |   |      |   |       |      |  |   |       |  
|Federal      |  |                         | 4.5  |   |      |   | (26.4 | )    |  |   | (26.4 | )
|State        |  |                         | (1.0 | ) |      |   | (0.6  | )    |  |   | 3.7   |  
|             |  |                         |      |   |      |   |       |      |  |   |       |  
|Income Taxes |  | $                       | 44.3 |   |      | $ | 45.4  |      |  | $ | 48.9  |  
|             |  |                         |      |   |      |   |       |      |  |   |       |  



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, |     
|                                                       |  | 2004                    |      |   | 2003 |   |      | 2002 | 
|Computed federal income tax statutory rate (35%)       |  | $                       | 36.9 |   |      | $ | 39.1 |      |  | $ | 42.4 |  
|Increase (decrease) in taxes resulting from:           |  |                         |      |   |      |   |      |      |  |   |      |  
|State income taxes, net of federal income tax benefits |  |                         | 4.5  |   |      |   | 5.6  |      |  |   | 5.7  |  
|Tax credits                                            |  |                         | (0.3 | ) |      |   | (0.2 | )    |  |   | (0.3 | )
|Other                                                  |  |                         | 3.2  |   |      |   | 0.9  |      |  |   | 1.1  |  
|                                                       |  |                         |      |   |      |   |      |      |  |   |      |  
|Total Income Tax Expense                               |  | $                       | 44.3 |   |      | $ | 45.4 |      |  | $ | 48.9 |  
|                                                       |  |                         |      |   |      |   |      |      |  |   |      |  



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



We lease office buildings and other property and equipment.



Duquesne Light Holdings



Capital Leases as of December 31,



|                               |  |                       |      |   |      |   |      |  
|------------------------------ |  | --------------------- | ---- | - | ---- | - | ---- | -
|                               |  | (Millions of Dollars) |     
|                               |  | 2004                  |      |   | 2003 |  
|Electric plant                 |  | $                     | 10.1 |   |      | $ | 10.1 |  
|Less: Accumulated amortization |  |                       | (8.3 | ) |      |   | (7.8 | )
|                               |  |                       |      |   |      |   |      |  
|Capital Leases  Net           |  | $                     | 1.8  |   |      | $ | 2.3  |  
|                               |  |                       |      |   |      |   |      |  



Summary of Rental Expense



|                               |  |                         |      |      |   |      |  |   |     
|------------------------------ |  | ----------------------- | ---- | ---- | - | ---- |  | - | ----
|                               |  | (Millions of Dollars)  
|                               |  | Year Ended December 31,
|                               |  | 2004                    |      | 2003 |   | 2002
|Operating leases               |  | $                       | 11.4 |      | $ | 14.5 |  | $ | 9.2 
|Amortization of capital leases |  |                         | 0.5  |      |   | 0.4  |  |   | 0.4 
|Interest on capital leases     |  |                         | 0.2  |      |   | 1.1  |  |   | 1.1 
|                               |  |                         |      |      |   |      |  |   |     
|Total Rental Expense           |  | $                       | 12.1 |      | $ | 16.0 |  | $ | 10.7
|                               |  |                         |      |      |   |      |  |   |     



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Future Minimum Lease Payments



|                                   |  |                       |      |               |   |    
|---------------------------------- |  | --------------------- | ---- | ------------- | - | ---
|                                   |  | (Millions of Dollars)
|Year Ended December 31,            |  | OperatingLeases       |      | CapitalLeases
|2005                               |  |                       | 8.3  |               |   | 0.7
|2006                               |  |                       | 8.4  |               |   | 0.7
|2007                               |  |                       | 8.4  |               |   | 0.8
|2008                               |  |                       | 8.8  |               |   |   
|2009                               |  |                       | 8.8  |               |   |   
|2010 and thereafter                |  |                       | 39.8 |               |   |   
|                                   |  |                       |      |               |   |    
|Total                              |  | $                     | 82.5 |               | $ | 2.2
|                                   |  |                       |      |               |   |    
|Less: Amount representing interest |  |                       |      |               |   | 0.4
|                                   |  |                       |      |               |   |    
|Present value                      |  |                       |      |               | $ | 1.8
|                                   |  |                       |      |               |   |    



Duquesne Light Company



Capital Leases at December 31,



|                               |  |                       |      |   |      |   |      |  
|------------------------------ |  | --------------------- | ---- | - | ---- | - | ---- | -
|                               |  | (Millions of Dollars) |     
|                               |  | 2004                  |      |   | 2003 |  
|Electric plant                 |  | $                     | 10.1 |   |      | $ | 10.1 |  
|Less: Accumulated amortization |  |                       | (8.3 | ) |      |   | (7.8 | )
|                               |  |                       |      |   |      |   |      |  
|Capital Leases  Net           |  | $                     | 1.8  |   |      | $ | 2.3  |  
|                               |  |                       |      |   |      |   |      |  



Summary of Rental Expense



|                               |  |                         |     |      |   |      |  |   |    
|------------------------------ |  | ----------------------- | --- | ---- | - | ---- |  | - | ---
|                               |  | (Millions of Dollars)  
|                               |  | Year Ended December 31,
|                               |  | 2004                    |     | 2003 |   | 2002
|Operating leases               |  | $                       | 7.2 |      | $ | 11.4 |  | $ | 5.2
|Amortization of capital leases |  |                         | 0.5 |      |   | 0.4  |  |   | 0.4
|Interest on capital leases     |  |                         | 0.2 |      |   | 1.1  |  |   | 1.1
|                               |  |                         |     |      |   |      |  |   |    
|Total Rental Expense           |  | $                       | 7.9 |      | $ | 12.9 |  | $ | 6.7
|                               |  |                         |     |      |   |      |  |   |    



Future Minimum Lease Payments



|                                   |  |                       |      |               |   |    
|---------------------------------- |  | --------------------- | ---- | ------------- | - | ---
|                                   |  | (Millions of Dollars)
|Year Ended December 31,            |  | OperatingLeases       |      | CapitalLeases
|2005                               |  |                       | 4.1  |               |   | 0.7
|2006                               |  |                       | 4.2  |               |   | 0.7
|2007                               |  |                       | 4.2  |               |   | 0.8
|2008                               |  |                       | 3.9  |               |   |   
|2009                               |  |                       | 3.9  |               |   |   
|2010 and thereafter                |  |                       | 8.6  |               |   |   
|                                   |  |                       |      |               |   |    
|Total                              |  | $                     | 28.9 |               | $ | 2.2
|                                   |  |                       |      |               |   |    
|Less: Amount representing interest |  |                       |      |               |   | 0.4
|                                   |  |                       |      |               |   |    
|Present value                      |  |                       |      |               | $ | 1.8
|                                   |  |                       |      |               |   |    



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



In 2003, we revised the facility utilization plan at our downtown Pittsburgh offices, which resulted in a charge of $4.9
million at Duquesne Light for the vacant space identified. In addition, a $1.4 million charge was recorded in discontinued operations for the space previously occupied by AquaSource.



|12. | 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 does not exceed the maximum tax-deductible amount for the year. Pension costs charged (credited) to expense or construction were $2.3 million for 2004, ($2.0) million for 2003 and ($17.4)
million for 2002.



In 2003, we approved amendments to the
pension plan which reduced the charge for post-retirement payment options and moved the post-service period forward one year for the next three years. This caused an increase in the Projected Benefit Obligation of $9.8 million.



We made no cash contributions to our pension plans in either 2004 or 2003.
For 2005, no cash contributions are expected to be required to be made to the pension plans. (See Note 23.)



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.



In 2003, we modified the postretirement plan design, which provides for
greater cost-sharing by the participants beginning in 2004. In 2003, we also approved amendments to the postretirement health care



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benefits plan which caused an increase to the postretirement benefit obligation of $7.1 million. These changes included, among others, dental benefits to age
65, and an extension of certain spousal benefits.



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



Due to changes in health care costs over
recent years, the health care trend assumption used in the development of the fiscal 2005 expense will be decreased to better reflect the current cost environment. The health care trend assumption used in the development of the fiscal 2004 expense
was 10.0%, decreasing 0.5% per year to an ultimate rate of 5.0% (reached in 2014). The health care trend assumption reflected in the December 31, 2004, SFAS No. 106 year-end disclosure, which will also be used in the development of fiscal 2005
expense, is 9.5%, decreasing 0.5% per year to an ultimate rate of 4.75% (reached in 2015). A 1.0% spread between the discount rate (5.75% for 2005 expense) and the ultimate health care cost trend rate will be maintained.



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, 2004, a statement of the funded status as of December 31, 2004 and 2003, and a summary of assumptions used in the measurement of
our benefit obligations:



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



|                                               |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|---------------------------------------------- |  | --------------------- | ----- | - | -------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                               |  | (Millions of Dollars) |      
|                                               |  | Pension               |       |   | Postretirement |  
|                                               |  | 2004                  |       |   | 2003           |   |       | 2004 |  |   | 2003  |  
|Change in benefit obligation:                  |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|Benefit obligation at beginning of year        |  | $                     | 694.0 |   |                | $ | 624.9 |      |  | $ | 52.6  |   |  | $ | 48.3  |  
|Service cost                                   |  |                       | 8.1   |   |                |   | 6.8   |      |  |   | 1.1   |   |  |   | 1.5   |  
|Interest cost                                  |  |                       | 42.2  |   |                |   | 41.6  |      |  |   | 3.0   |   |  |   | 2.9   |  
|Plan participants contributions               |  |                       |      |   |                |   |      |      |  |   | 0.5   |   |  |   | 0.3   |  
|Actuarial loss (gain)                          |  |                       | 43.5  |   |                |   | 48.5  |      |  |   | (0.5  | ) |  |   | (3.2  | )
|Benefits paid                                  |  |                       | (37.5 | ) |                |   | (37.6 | )    |  |   | (4.0  | ) |  |   | (4.3  | )
|Plan amendments                                |  |                       |      |   |                |   | 9.8   |      |  |   |      |   |  |   | 7.1   |  
|                                               |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|Benefit obligation at end of year              |  |                       | 750.3 |   |                |   | 694.0 |      |  |   | 52.7  |   |  |   | 52.6  |  
|                                               |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|Change in plan assets:                         |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|Fair value of plan assets at beginning of year |  |                       | 679.0 |   |                |   | 596.4 |      |  |   |      |   |  |   |      |  
|Actual return on plan assets                   |  |                       | 74.3  |   |                |   | 120.2 |      |  |   |      |   |  |   |      |  
|Plan participants contributions               |  |                       |      |   |                |   |      |      |  |   | 0.5   |   |  |   | 0.3   |  
|Employer contributions                         |  |                       |      |   |                |   |      |      |  |   | 3.5   |   |  |   | 4.0   |  
|Benefits paid                                  |  |                       | (37.5 | ) |                |   | (37.6 | )    |  |   | (4.0  | ) |  |   | (4.3  | )
|                                               |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|Fair value of plan assets at end of year       |  |                       | 715.8 |   |                |   | 679.0 |      |  |   |      |   |  |   |      |  
|                                               |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|Funded status                                  |  |                       | (34.5 | ) |                |   | (15.0 | )    |  |   | (52.7 | ) |  |   | (52.6 | )
|Unrecognized net actuarial (gain) loss         |  |                       | (21.9 | ) |                |   | (43.1 | )    |  |   | 2.9   |   |  |   | 3.4   |  
|Unrecognized prior service cost                |  |                       | 25.4  |   |                |   | 28.9  |      |  |   | 6.2   |   |  |   | 7.2   |  
|Unrecognized net transition obligation         |  |                       |      |   |                |   | 0.8   |      |  |   | 5.5   |   |  |   | 6.2   |  
|                                               |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  
|Accrued benefit cost                           |  | $                     | (31.0 | ) |                | $ | (28.4 | )    |  | $ | (38.1 | ) |  | $ | (35.8 | )
|                                               |  |                       |       |   |                |   |       |      |  |   |       |   |  |   |       |  



The following table
summarizes the presentation of the accrued benefit cost related to the pension plans on the consolidated balance sheets of both Holdings and Duquesne Light as of December 31,



|                                   |  |                       |       |   |      |   |       |  
|---------------------------------- |  | --------------------- | ----- | - | ---- | - | ----- | -
|                                   |  | (Millions of Dollars) |      
|                                   |  | 2004                  |       |   | 2003 |  
|Prepaid pension cost               |  | $                     | 26.1  |   |      | $ | 21.6  |  
|Pension intangible assets          |  |                       | 5.8   |   |      |   |      |  
|Pension liability                  |  |                       | (62.9 | ) |      |   | (50.0 | )
|                                   |  |                       |       |   |      |   |       |  
|Accrued pension plans benefit cost |  | $                     | (31.0 | ) |      | $ | (28.4 | )
|                                   |  |                       |       |   |      |   |       |  



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The accumulated benefit obligation for all defined benefit pension plans was $719.8 million and $664.5
million as of December 31, 2004, and 2003.



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



|                               |  |                       |       |      |   |      
|------------------------------ |  | --------------------- | ----- | ---- | - | -----
|                               |  | (Millions of Dollars)
|                               |  | 2004                  |       | 2003
|Projected benefit obligation   |  | $                     | 683.0 |      | $ | 633.7
|Accumulated benefit obligation |  |                       | 661.6 |      |   | 613.9
|Fair value of plan assets      |  |                       | 598.8 |      |   | 570.6



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



|                                      |  |         |   |  |                |   |  |      |   |  |      |  
|------------------------------------- |  | ------- | - |  | -------------- | - |  | ---- | - |  | ---- | -
|                                      |  | Pension |   |  | Postretirement |  
|                                      |  | 2004    |   |  | 2003           |   |  | 2004 |   |  | 2003 |  
|Discount rate                         |  | 5.75    | % |  | 6.25           | % |  | 5.75 | % |  | 6.25 | %
|Assumed change in compensation levels |  | 4.00    | % |  | 4.00           | % |  |     |   |  |     |  
|Ultimate health care cost trend rate  |  |        |   |  |               |   |  | 4.75 | % |  | 5.00 | %



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



|                                         |  |                  |   |  |                |   |  |      |   |  |      |  
|---------------------------------------- |  | ---------------- | - |  | -------------- | - |  | ---- | - |  | ---- | -
|                                         |  | Pension Benefits |   |  | Postretirement |  
|                                         |  | 2004             |   |  | 2003           |   |  | 2004 |   |  | 2003 |  
|Discount rate                            |  | 6.25             | % |  | 6.75           | % |  | 6.25 | % |  | 6.75 | %
|Expected long-term return on plan assets |  | 8.00             | % |  | 7.50           | % |  |     |   |  |     |  
|Rate of compensation increase            |  | 4.00             | % |  | 4.00           | % |  |     |   |  |     |  
|Ultimate health care costs trend rate    |  |                 |   |  |               |   |  | 5.00 | % |  | 5.25 | %



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



|                                                       |  |                       |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------------ |  | --------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                       |  | (Millions of Dollars) |      
|                                                       |  | 2004                  |       |   | 2003 |   |       | 2002 | 
|Components of net periodic pension cost:               |  |                       |       |   |      |   |       |      |  |   |       |  
|Service cost                                           |  | $                     | 8.1   |   |      | $ | 6.8   |      |  | $ | 5.9   |  
|Interest cost                                          |  |                       | 42.2  |   |      |   | 41.6  |      |  |   | 40.7  |  
|Expected return on plan assets                         |  |                       | (51.7 | ) |      |   | (50.5 | )    |  |   | (54.4 | )
|Amortization of unrecognized net transition obligation |  |                       | 0.8   |   |      |   | 1.2   |      |  |   | 1.2   |  
|Amortization of prior service cost                     |  |                       | 3.4   |   |      |   | 2.6   |      |  |   | 2.6   |  
|Amortization of actuarial gain                         |  |                       | (0.5  | ) |      |   | (3.7  | )    |  |   | (13.4 | )
|                                                       |  |                       |       |   |      |   |       |      |  |   |       |  
|Net periodic pension cost (gain)                       |  | $                     | 2.3   |   |      | $ | (2.0  | )    |  | $ | (17.4 | )
|                                                       |  |                       |       |   |      |   |       |      |  |   |       |  



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



|                                                       |  |                       |     |      |   |      |  |   |    
|------------------------------------------------------ |  | --------------------- | --- | ---- | - | ---- |  | - | ---
|                                                       |  | (Millions of Dollars)
|                                                       |  | 2004                  |     | 2003 |   | 2002
|Components of net periodic postretirement cost:        |  |                       |     |      |   |      |  |   |    
|Service cost                                           |  | $                     | 1.1 |      | $ | 1.5  |  | $ | 1.7
|Interest cost                                          |  |                       | 3.0 |      |   | 2.9  |  |   | 3.2
|Amortization of unrecognized net transition obligation |  |                       | 0.7 |      |   | 0.7  |  |   | 0.8
|Amortization of prior service cost                     |  |                       | 1.0 |      |   |     |  |   |   
|                                                       |  |                       |     |      |   |      |  |   |    
|Net periodic postretirement cost                       |  | $                     | 5.8 |      | $ | 5.1  |  | $ | 5.7
|                                                       |  |                       |     |      |   |      |  |   |    



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Effect of a One Percent Change in Health Care Cost Trend Rates as of December 31, 2004



|                                                                                                                |  |                       |     |                     |   |      |  
|--------------------------------------------------------------------------------------------------------------- |  | --------------------- | --- | ------------------- | - | ---- | -
|                                                                                                                |  | (Millions of Dollars) |    
|                                                                                                                |  | One PercentIncrease   |     | One PercentDecrease |  
|Effect on total of service and interest cost components of net periodic postretirement health care benefit cost |  | $                     | 0.4 |                     | $ | (0.3 | )
|Effect on the health care component of the accumulated postretirement benefit obligation                        |  | $                     | 4.3 |                     | $ | (3.9 | )



Expected Rate of Return On Plan
Assets and Investment Policy



We used an 8.0% expected
long-term rate of return on plan assets in determining the 2004 net periodic benefit cost. We developed the long-term rate of return using a building block approach, taking into account the target allocations contained in the plans investment
policy in the table below. Under this approach, we performed separate analyses to determine the expected real rate of return for each asset class, the expected long-term rate of inflation, and the correlations among the returns for the various asset
classes. We also evaluated current market factors such as inflation and interest rates, as well as the long-term historical relationships between the asset classes. 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 InvestmentAllocation |  
|Equity securities       |  | 25% - 65                    | %
|Fixed income securities |  | 25% - 65                    | %
|Real estate investments |  | 0% - 10                     | %
|Other investments       |  | 0% -   5                    | %



Pension Plan Assets



The pension plan weighted-average asset allocations as of December 31,
2004 and 2003, by asset category are as follows:



|                        |  |                               |   |  |       |  
|----------------------- |  | ----------------------------- | - |  | ----- | -
|                        |  | Plan Assets as ofDecember 31, |  
|Asset Category          |  | 2004                          |   |  | 2003  |  
|Equity securities       |  | 57.2                          | % |  | 53.3  | %
|Fixed income securities |  | 30.8                          | % |  | 33.8  | %
|Real estate investments |  | 10.5                          | % |  | 11.5  | %
|Other investments       |  | 1.5                           | % |  | 1.4   | %
|                        |  |                               |   |  |       |  
|Total                   |  | 100.0                         | % |  | 100.0 | %
|                        |  |                               |   |  |       |  



Pension plan assets as
of December 31, 2004 and 2003, do not include any common stock of either Holdings or Duquesne Light.



Expected Benefit Payments for Future Years



The following benefit payments, which reflect expected future service as appropriate, are expected to be paid:



|            |  |                       |       |                |   |     
|----------- |  | --------------------- | ----- | -------------- | - | ----
|            |  | (Millions of Dollars)
|Year        |  | Pension               |       | Postretirement
|2005        |  | $                     | 37.5  |                | $ | 3.0 
|2006        |  |                       | 38.4  |                |   | 3.3 
|2007        |  |                       | 39.7  |                |   | 3.6 
|2008        |  |                       | 40.7  |                |   | 3.9 
|2009        |  |                       | 42.4  |                |   | 4.3 
|2010 - 2014 |  |                       | 245.1 |                |   | 26.5



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, a participant incentive match and automatic contributions.
The incentive match was achieved in 2004 and 2003, but not in 2002. We are funding our automatic and matching contributions to this plan through an ESOP established in December 1991. (See Note 15.) Compensation costs charged to expense or
construction related to the 401(k) plan were $1.3 million, $0.9 million and $1.9 million in 2004, 2003 and 2002 at Holdings and $1.2 million, $0.5 million and $0.6 million in 2004, 2003 and 2002 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 and



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2003, but not in 2002. Duquesne Light recognized compensation expense of $1.0 million, $0.3 million and $0.3 million in 2004, 2003 and 2002 related to this
plan.



STOCK OPTIONS



In 2004, our shareholders approved amendments to the Holdings 2002 Long-Term
Incentive Plan (the 2002 Plan). Under the Amended Incentive Plan the aggregate number of shares of common stock authorized for issuance increased from 2,690,468 to 3,690,468, and of this total, up to 700,000 shares, versus 500,000 shares under the
previous terms, may be issued as restricted shares. Additionally, the amendments expanded the eligibility provisions to permit the grant of all types of awards available under the Amended Incentive Plan to non-employee directors, add a provision
permitting grants of unrestricted shares of common stock to be made to non-employee directors as part of the regular compensation package of non-employee directors and/or Board Chairman, Vice Chairman, and Committee Chairman, and eliminated the
provisions of the 2002 Plan requiring only specific stock option grants to non-employee directors. The Amended Incentive Plan also includes restricted stock units as another type of award that may be granted, permits Holdings to change how dividend
equivalent accounts and dividends accumulated on restricted shares are paid, and authorizes dividend equivalent accounts to be established in connection with performance awards.



The original 2002 Plan became effective as of January 1, 2002, and replaced the prior Long-Term Incentive Plan (the Prior
Plan). Under the 2002 Plan, management may grant stock option awards, alternative stock appreciation rights and dividend equivalent accounts; restricted share awards; performance awards; and beginning in 2004, as described previously, restricted
stock unit awards. 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. 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 Plan. No new options
may be granted under the Prior Plan. The 2002 Plan will terminate on December 31, 2011.



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



During 2003 and 2002, 34,232 and 37,146 Holdings stock options were issued to non-employee directors. These options vest over a six-month period, and as
of December 31, 2003, were fully vested.



During December 2002,
774,500 stock options were granted to employees under the 2002 Plan with an exercise price of $15.015 per share. Due to cancellations, forfeitures, and exercises in 2003 and 2004, only 506,814 of these options remain outstanding as of December 31,
2004, of which 220,714 options are exercisable and fully vested. They will expire on December 15, 2012. Compensation expense related to the December 2002 grant of $0.4 million and $0.6 million was recognized in 2004 and 2003, of which $0.1 million
and $0.3 million was recorded at Duquesne Light. The remainder of the options will become exercisable if the closing price on the New York Stock Exchange of Holdings common stock averages $19.98 for 30 consecutive trading days. If
Holdings common stock price does not achieve the target price by December 15, 2005, the remaining options are forfeited. If vested, these options will also expire on December 15, 2012.



During December 2001, 787,300 stock options were granted to employees under
the Prior Plan with an exercise price of $16.90 per share. Due to cancellations, forfeitures, and exercises in 2002, 2003, and 2004, only 167,264 of these options remain as of December 31, 2004, all of which are exercisable, fully vested, and expire
on December 10, 2011. No compensation expense related to this award was recognized in 2004. In 2003, compensation expense related to the December 2001 grant of $0.2 million was recognized. The remaining options associated with this award were
forfeited on December 11, 2004, as the closing price on the New York Stock Exchange of Holdings common stock did not average $22.49 for 30 consecutive trading days by December 10, 2004.



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The following tables summarize the transactions of our stock option plans for the three-year period ended
December 31, 2004, and certain information about outstanding stock options as of December 31, 2004:



|                                                |  |                     |   |  |                        |   |  |      |   |  |      |       |      |   |       |  |   |      
|----------------------------------------------- |  | ------------------- | - |  | ---------------------- | - |  | ---- | - |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                                |  | Millions of Options |   |  | Weighted Average Price
|                                                |  | 2004                |   |  | 2003                   |   |  | 2002 |   |  | 2004 |       | 2003 |   | 2002 
|Options outstanding, beginning of year          |  | 2.0                 |   |  | 2.5                    |   |  | 2.2  |   |  | $    | 24.39 |      | $ | 24.48 |  | $ | 29.88
|Options granted                                 |  |                    |   |  |                       |   |  | 0.8  |   |  |      |      |      |   | 16.23 |  |   | 14.98
|Options exercised                               |  | (0.4                | ) |  |                       |   |  | (0.1 | ) |  |      | 24.55 |      |   | 38.77 |  |   | 31.92
|Options canceled/forfeited                      |  | (0.7                | ) |  | (0.5                   | ) |  | (0.4 | ) |  |      | 29.32 |      |   | 23.02 |  |   | 32.49
|                                                |  |                     |   |  |                        |   |  |      |   |  |      |       |      |   |       |  |   |      
|Options outstanding, end of year                |  | 0.9                 |   |  | 2.0                    |   |  | 2.5  |   |  |      | 20.53 |      |   | 24.39 |  |   | 24.48
|                                                |  |                     |   |  |                        |   |  |      |   |  |      |       |      |   |       |  |   |      
|Options exercisable, end of year                |  | 0.7                 |   |  | 1.1                    |   |  | 0.9  |   |  |      | 22.93 |      |   | 30.73 |  |   | 37.45
|                                                |  |                     |   |  |                        |   |  |      |   |  |      |       |      |   |       |  |   |      
|Shares available for future grants, end of year |  | 2.4                 |   |  | 1.3                    |   |  | 1.7  |   |  |      |       |      |   |       |  |   |      
|                                                |  |                     |   |  |                        |   |  |      |   |  |      |       |      |   |       |  |   |      



As of December 31,
2004, 2003 and 2002, stock appreciation rights (SARS) had been granted in connection with 115,107; 607,734; and 726,248 of the options outstanding. During 2004, 2003 and 2002, 147,247; 37,755; and 54,933 SARS were exercised.



|                     |  |                             |  |                                |  |                              |       |                             |     |                              |   |      
|-------------------- |  | --------------------------- |  | ------------------------------ |  | ---------------------------- | ----- | --------------------------- | --- | ---------------------------- | - | -----
|                     |  | Outstanding                 |  | Exercisable                   
|Exercise Price Range |  | NumberofOptions(InMillions) |  | AverageRemainingLife (InYears) |  | WeightedAverageExercisePrice |       | NumberofOptions(InMillions) |     | WeightedAverageExercisePrice
|Under $20            |  | 0.7                         |  | 7.7                            |  | $                            | 15.60 |                             | 0.5 |                              | $ | 15.96
|$20$30              |  |                            |  |                               |  |                              |      |                             |    |                              |   |     
|$30$40              |  | 0.1                         |  | 5.2                            |  |                              | 32.51 |                             | 0.1 |                              |   | 32.51
|Over $40             |  | 0.1                         |  | 5.1                            |  |                              | 42.76 |                             | 0.1 |                              |   | 42.76
|                     |  |                             |  |                                |  |                              |       |                             |     |                              |   |      
|Options, End of Year |  | 0.9                         |  |                                |  |                              |       |                             | 0.7 |                              |   |      
|                     |  |                             |  |                                |  |                              |       |                             |     |                              |   |      



The fair value of the
options granted during 2003 and 2002 was estimated on the date of grant using the Black-Scholes option pricing model. The estimated weighted average assumptions used and the fair values are as follows:



|                                     |  |      |  |      |       |   |      |   |       |  
|------------------------------------ |  | ---- |  | ---- | ----- | - | ---- | - | ----- | -
|                                     |  | 2004 |  | 2003 |       |   | 2002 |  
|Expected dividend yield              |  |     |  |      | 6.16  | % |      |   | 6.66  | %
|Risk-free interest rate              |  |     |  |      | 3.34  | % |      |   | 4.16  | %
|Expected stock price volatility      |  |     |  |      | 30.91 | % |      |   | 29.88 | %
|Expected term until exercise (years) |  |     |  |      | 10.0  |   |      |   | 10.0  |  
|Weighted average fair value          |  |     |  | $    | 2.40  |   |      | $ | 1.69  |  



OTHER STOCK-BASED COMPENSATION



On January 1, 2002, 110,000 shares of Holdings stock were
issued to officers of Holdings as part of a performance award. One half, or 55,000 shares, were subject to a two-year performance period that ended on December 31, 2003, with no shares earned. The other half were subject to a three-year performance
period that ended on December 31, 2004, with no shares earned.



On January 1, 2003, 58,500 shares of Holdings stock were issued to officers as part of a performance award. As of December 31, 2004, due to forfeitures, only 48,500 shares remain to be earned. These shares are earned based upon
Holdings total shareholder return (TSR) rank against the TSR of its peer group, as defined, over a three-year performance period ending on December 31, 2005. Additionally, Holdings must achieve a three-year annualized TSR of 6% or greater. Up
to 200% of the total shares awarded may be earned, conditioned upon Holdings performance. As of December 31, 2004, Holdings had not recognized compensation expense for this performance award.



On November 10, 2003, 198,417 shares of nonvested Holdings stock with voting
and dividend rights were issued to officers of Holdings. The right to the shares is subject to continued employment. One-third of the total shares are earned each year over the three-year vesting period ending on December 31, 2006. Due to
forfeitures in 2004, only 186,417 shares remain



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as of December 31, 2004, of which one-third, or 62,139 shares, is vested. The market value of the nonvested stock, which was $3.3 million at the grant date,
was charged to stockholders equity and reflected as unearned compensation on the consolidated balance sheet of Holdings. This unearned compensation will be charged evenly to expense over the vesting period. In 2004 and 2003, total compensation
expense of $1.0 million and $0.2 million was recognized, of which $0.5 million and $0.1 million was recorded at Duquesne Light.



On the same date, 387,400 shares of Holdings stock were issued to the same officers under a performance-based deferred stock unit award. As of December
31, 2004, due to forfeitures in 2004, only 363,200 shares remain to be earned. The right to the shares is subject to the achievement of specified performance goals related to earnings per share (EPS) from continuing operations and TSR over the
defined performance periods. The EPS performance period commences on January 1, 2004 and ends on December 31, 2006. The TSR performance period commenced on October 20, 2003 and ends on December 31, 2006. At the end of the performance period, shares
may vest within a range of 0% to 100%, with no more than 50% of the shares subject to each performance target. Holdings did not record compensation expense for the deferred stock unit award in 2003 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, 2004, due to forfeitures in 2004, only 52,713 shares remain to be earned. The right to shares is subject to the same TSR performance target as the
deferred stock units described previously. However, for the grant to non-officers, the performance period begins on January 1, 2004 and ends on December 31, 2006. Holdings did not record compensation expense related to this award in 2004.



On June 3, 2004, under the Amended Incentive Plan, 2,500
shares of Holdings nonvested stock with voting and dividends rights were granted to each of the eight non-employee directors for a total of 20,000 shares awarded. The shares vest over a two-year period ending on June 3, 2006. The market value
of the nonvested stock, which was $0.4 million at the grant date, was charged to stockholders equity and reflected as unearned compensation on the consolidated balance sheet of Holdings. This unearned compensation will be charged evenly to
expense over the vesting period. In 2004, total compensation expense recognized on these shares was $0.1 million.



On the same date, under the Amended Incentive Plan, 3,897 shares of Holdings common stock were issued to non-employee directors. In 2004, the total
compensation expense recognized on these shares was $0.1 million.



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|13. | 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 $47.5 million at December 31,
2004.



In connection with Duquesne Energy Solutions 2000
sale, through a subsidiary, of its synthetic fuel facilities, 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 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. Also, Holdings has backed certain limited
obligations during a long-term contract held by its subsidiary with a $1.5 million payment guarantee that has not been recorded as a liability on the consolidated balance sheets. We do not believe these guarantees will have any material impact on
our results of operations, financial position or cash flows.



Holdings has guaranteed portions of the obligations of Duquesne Power under its energy commodity contracts. As of December 31, 2004, Holdings has guaranteed $607.6 million, or 78.1% of the total notional value of the purchase and capacity
obligations under these contracts. 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 guarantees were provided in order to use Holdings
stronger credit profile to obtain better pricing and contract terms for Duquesne Power. No amount has been recorded as a liability on the consolidated balance sheets. In addition, Holdings posts mark-to-market collateral on behalf of Duquesne Power
as needed under the contracts.



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 more than 70% of Duquesne
Lights approximately 1,300 employees. This contract expires in September 2006.



LEGAL PROCEEDINGS



Shareholder Class
Action. In October and November 2001, a number of putative class action lawsuits were filed by purported shareholders of Holdings against Holdings and David Marshall, our former chairman, chief executive officer and president, in the United
States District Court for the Western District of Pennsylvania. These cases were consolidated under the caption In re DQE, Inc. Securities Litigation, Master File No. 01-1851 (W.D. Pa.), and the plaintiffs filed a second consolidated amended
complaint on April 15, 2002. The complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act) and Rule 10b-5 promulgated thereunder, and Section 12(a)(2) of the Securities Act of 1933 (the
Securities Act). The complaint also alleges controlling person liability under Section 20(a) of the Exchange Act and Section 15 of the Securities Act. The complaint alleges that between December 6, 2000 and April 30, 2001, the defendants
issued a number of materially false and misleading statements concerning investments made by our subsidiary, DQE Enterprises, Inc., and the impact that these investments would have on our current and future financial results.



On May 20, 2003, the court certified a class to include purchasers of our
common stock during the period from December 6, 2000 through April 30,2001, and a sub-class to include purchasers of our common stock through our dividend reinvestment and stock purchase plan during the same period. Since December 2002, we have been
engaged in pre-trial discovery. Fact



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discovery concluded at the end of April 2004. Expert witness discovery is now concluded. (See Note 23.)



SECTION 29 TAX CREDITS AND SYNTHETIC FUEL



Section 29 of the Internal Revenue Code provides tax credits through 2007
for the production and sale of non-conventional fuels, including solid synthetic fuels and landfill gas. Holdings recognizes Section 29 credits from DQE Financials landfill gas operations and an investment in a synthetic fuel partnership.
Duquesne Energy Solutions operates synthetic fuel facilities for a single customer, earning fees based on production.



To qualify for the Section 29 tax credits from synthetic fuel, the synthetic fuel must meet three primary conditions: (i) there must be a significant
chemical change in the coal feedstock, (ii) the product must be sold to an unaffiliated entity, and (iii) the production facility must have been placed in service before July 1, 1998. In recent years the synthetic fuel industry has been the focus of
increased scrutiny by the IRS. Most recently the IRS has heightened its review of the placed in service dates of synthetic fuel plants, and some producers have indicated that the IRS has challenged whether their plants were placed in
service by the required date in order to qualify for Section 29 tax credits.



Holdings is currently under audit by the IRS for the years 1998 through 2002. During that timeframe a subsidiary of the company constructed and operated six synthetic fuel plants, which were subsequently sold to an
unrelated party. As noted above, Duquesne Energy Solutions now operates these plants. At this time, the IRS has made no determinations regarding these plants. Holdings claimed approximately $10 million of Section 29 tax credits prior to their sale.



The synthetic fuel partnership that DQE Financial has invested
in was audited by the IRS for the tax years 1998 through 2001 and all of the relevant criteria for claiming the Section 29 credit from solid synthetic fuels has been accepted by the IRS.



Section 29 tax credits are subject to a phase-out provision that could reduce tax credits as the average annual wellhead
price per barrel of domestic crude oil increases into an inflation-adjusted phase-out range. For 2003, the tax credit would have begun to phase-out when the annual average wellhead price per barrel of domestic crude oil exceeded $50.14 per barrel
and would have been completely phased out when the annual average wellhead price per barrel of domestic crude oil reached $62.94 per barrel. The 2004 inflation adjustment has not been published by the IRS, but based on the prices of oil during the
year, we do not believe that a phase-out of the credit for 2004 will occur. We cannot predict the level of domestic crude oil prices for 2005, nor whether a phase-out of the credit is likely to occur.



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. As of December 31, 2004, we have assessed our residual
waste management sites, and the DEP has approved our compliance strategies. As of December 31, 2004 and 2003, the expected costs of compliance were approximately $5 million and $6.6 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, 2004 and 2003, Duquesne Lights estimated liability for closing the Warwick Mine, including final site reclamation, mine water treatment and certain labor liabilities, was approximately $27 million.



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 and is
communicating and working closely with the purchasers of its former operations and appropriate regulators to correct those issues in a timely manner. We do not believe that AquaSources indemnity obligations in respect of any of these
compliance issues will have a material effect on Holdings financial position, results of operations or cash flows.



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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. Although AquaSource has agreed to indemnify the purchasers of its former
operations for certain pre-closing environmental liabilities, we do not believe that any of these indemnity obligations will have a material effect on Holdings financial position, results of operations or cash flows.



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. We have notified Aqua America that with the passage of the first anniversary of the
closing of the transaction, and since the claims made by them under the indemnity provision during the first year did not reach the required dollar threshold, the indemnity cap is reduced to $7.5 million and the indemnity period will end on July 31,
2005 (the second anniversary of closing). To date, indemnity claims of which we are aware are not significant.



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|14. | Long-Term Debt
|--- | --------------



Long-Term Debt as of December 31,



|                                                      |  |               |  |                       |  |                       |       |   |  |   |       |  
|----------------------------------------------------- |  | ------------- |  | --------------------- |  | --------------------- | ----- | - |  | - | ----- | -
|                                                      |  | Interest Rate |  | Maturity              |  | (Millions of Dollars) |      
|                                                      |  |               |  | Principal Outstanding | 
|                                                      |  |               |  | 2004                  |  |                       | 2003  |  
|Duquesne Light first mortgage bonds (a)               |  | 5.7%-6.7%     |  | 2008-2032             |  | $                     | 540.0 |   |  | $ | 340.0 |  
|Duquesne Light pollution control notes (b) (c)        |  | Adjustable    |  | 2020-2033             |  |                       | 320.1 |   |  |   | 320.1 |  
|Duquesne Light pollution control notes (b)            |  | 4.05%-4.35%   |  | 2011-2013             |  |                       | 97.9  |   |  |   | 97.9  |  
|Duquesne Light subordinated debentures                |  | 8 3/8%        |  | 2044                  |  |                       |      |   |  |   | 151.5 |  
|DQE Capital public income notes                       |  | 8 3/8%        |  | 2039                  |  |                       |      |   |  |   | 100.0 |  
|Holdings miscellaneous (d)                            |  |               |  |                       |  |                       | 1.8   |   |  |   | 23.8  |  
|Less: Unamortized debt discount and premium  net (e) |  |               |  |                       |  |                       | (1.6  | ) |  |   | (4.3  | )
|Current maturities                                    |  |               |  |                       |  |                       | (0.2  | ) |  |   | (51.5 | )
|                                                      |  |               |  |                       |  |                       |       |   |  |   |       |  
|Total Long-Term Debt                                  |  |               |  |                       |  | $                     | 958.0 |   |  | $ | 977.5 |  
|                                                      |  |               |  |                       |  |                       |       |   |  |   |       |  



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



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



|(c) | These adjustable interest rates averaged 1.6%, 1.1% and 1.5% in 2004, 2003 and 2002.
|--- | ------------------------------------------------------------------------------------



|(d) | 2003 amount primarily represents obligations incurred in connection with our Fresh Kills investment.
|--- | ----------------------------------------------------------------------------------------------------



|(e) | $1.6 million in 2004 and $1.3 million in 2003 relates to Duquesne Light debt.
|--- | -----------------------------------------------------------------------------



Holdings.As of December 31, 2004, maturities of long-term debt outstanding for the next five years were $0.2 million in 2005, $0.2 million in
2006, $0.3 million in 2007, $40.3 million in 2008 and $0.3 million in 2009.



Total interest and other charges were $63.0 million in 2004, $74.4 million in 2003, and $83.5 million in 2002. Interest costs attributable to debt were $57.2 million, $65.4 million and $68.6 million in 2004, 2003 and
2002. Included in the interest costs attributable to debt is $3.1 million in 2004 and $12.6 million in 2003 and 2002 related to the MIPS (discussed below). Of the interest costs attributable to debt, $0.8 million, $0.5 million and $0.9 million in
2004, 2003 and 2002 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, 2004, 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 $1,012.6 million. The principal amount, excluding unamortized discounts and premiums, is $959.8 million as of December 31, 2004.



As of December 31, 2004 and 2003, we were in compliance with
all of our debt covenants.



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.



On February 18, 2004, as part of an amended and restated agreement with the City of New York, GSF Energy, L.L.C. (GSF), a
DQE Financial subsidiary, paid $4.5 million to the City and was released from all financial obligations under the prior concession agreement, including the $21.4 million note payable to the City. As a direct result of the settlement, we are
recognizing approximately $16 million in pre-tax income ratably over the new contract term, scheduled to end June 30, 2006.



In March 2003, we redeemed at par two long-term loans with principal amounts totaling $2.0 million relating to investments at DQE Financial.



Duquesne Light.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 (discussed below), repay $40 million of outstanding revolving credit facility borrowings and replenish working capital.



During 2004, pursuant to the terms of the 8 3/8% Monthly Income Preferred
Securities (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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As of December 31, 2004, maturities of long-term debt outstanding for the next five years were zero in
2005, 2006 and 2007, $40.0 million in 2008 and zero in 2009.



Total interest and other charges were $46.2 million in 2004, $54.1 million in 2003 and $56.5 million in 2002. Interest costs attributable to debt were $45.6 million, $53.1 million and $55.2 million in 2004, 2003 and 2002. Included in the
interest costs attributable to debt is $3.1 million in 2004, $6.3 million in 2003 and zero in 2002 related to the MIPS. Prior to the July 2003 adoption of SFAS No. 150, MIPS dividend requirements were shown separately on the consolidated statements
of income. Of the interest costs attributable to debt, $0.8 million in 2004, $0.5 million in 2003 and $0.9 million in 2002 were capitalized as AFC. The December 31, 2004 unamortized debt discount of $1.6 million is amortized over the lives of the
applicable issues. (See Note 1.)



As of December 31, 2004, 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 $1,010.9 million. The principal
amount, excluding unamortized discounts and premiums, is $958 million as of December 31, 2004.



At December 31, 2004 and 2003, Duquesne Light was in compliance with all of its debt covenants.



In December 2003, Duquesne Light redeemed $100 million principal amount of its 7.55% first mortgage bonds (due 2025) at a redemption price of 102.97% of
the principal amount thereof.



In August 2003, Duquesne Light
redeemed at par $100 million principal amount of its 7 3/8% first mortgage bonds due 2038.



In May 2003, Duquesne Light redeemed the $2.8 million outstanding balance of its 5% Sinking Fund Debentures (due 2010) at a redemption price of 100.95% of the principal amount thereof.



|15. | Preferred and Preference Stock
|--- | ------------------------------



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
This standard requires that an issuer classify a financial instrument that falls within its scope as a liability, or as an asset in some circumstances. This standard was adopted effective July 1, 2003.



Holdings Series A Preferred Stock (Holdings preferred stock) falls within the
scope of SFAS No. 150 due to its mandatory conversion feature, and the fact that the monetary value of the obligation is based solely on a fixed monetary amount that is known at inception. Dividends paid on the stock are classified as interest and
other charges, rather than dividends, effective July 1, 2003.



Prior to the adoption of SFAS No. 150, Holdings preferred stock was reflected in the following table, and as preferred stock on the consolidated balance sheets of Holdings. Upon adoption, we began classifying Holdings preferred stock as
both current and non-current liabilities based upon conversion dates.



As of December 31, 2004 and 2003, 66,149 and 151,800 shares of Holdings preferred stock with recorded values of $6.6 million and $15.2 million were outstanding. These balances reflect (i) the purchase in September 2003 of 60,000 shares
issued in October 2002 as part of the settlement of litigation with minority investors in AquaSource, (ii) the conversions in 2004 and 2003 of 76,984 and 11,720 shares in accordance with the terms of the preferred stock discussed below and (iii) the
repurchase of 8,667 shares for $98.00 per share in 2004.



The
Holdings preferred stock ranks senior to Holdings common stock as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding-up of Holdings. Annual dividends, which ranged from 2.7% to 4.3%, are paid quarterly
on each January 1, April 1, July 1 and October 1. As of December 31, 2004, we had made all dividend payments on Holdings preferred stock. Holdings preferred stockholders are entitled to vote on all matters submitted to a vote of the holders of
Holdings common stock, voting together with the holders of common stock as a single class. Each share of Holdings preferred stock is entitled to three votes.



Each share of Holdings preferred stock is convertible at our option into the number of shares of Holdings common stock computed by dividing the Holdings
preferred stocks $100 liquidation value by the five-day average closing sales price of Holdings common stock for the five trading days immediately prior to the conversion date. Each outstanding share of Holdings preferred stock will
automatically be converted on the first day of the first month commencing after the sixth anniversary of its issuance. There were 1,000,000 shares of no par value Holdings preferred stock authorized.



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Preferred and Preference Stock as of December 31,



|                                         |  |                      |        |                       |           |  |      |        |   |        |         |  |   |      |  
|---------------------------------------- |  | -------------------- | ------ | --------------------- | --------- |  | ---- | ------ | - | ------ | ------- |  | - | ---- | -
|                                         |  |                      |        | (Millions of Dollars) |          
|                                         |  | Call Price Per Share |        | 2004                  |           |  | 2003 |       
|                                         |  |                      | 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   |   |        |        |  |   |     |  
|EnviroGas 6.5% (b)                       |  |                      |       |                       | 10        |  |      | 1.0    |   |        | 10      |  |   | 1.0  |  
|                                         |  |                      |        |                       |           |  |      |        |   |        |         |  |   |      |  
|Total Preferred Stock of Subsidiaries    |  |                      |        |                       |           |  |      | 136.6  |   |        |         |  |   | 61.6 |  
|                                         |  |                      |        |                       |           |  |      |        |   |        |         |  |   |      |  
|Preference Stock Series of Subsidiaries: |  |                      |        |                       |           |  |      |        |   |        |         |  |   |      |  
|Duquesne Light Plan Series A (c)         |  |                      | 35.50  |                       | 408,609   |  |      | 14.5   |   |        | 438,243 |  |   | 15.5 |  
|                                         |  |                      |        |                       |           |  |      |        |   |        |         |  |   |      |  
|Deferred ESOP benefit                    |  |                      |        |                       |           |  |      | (4.2   | ) |        |         |  |   | (6.4 | )
|                                         |  |                      |        |                       |           |  |      |        |   |        |         |  |   |      |  
|Total Preferred and Preference Stock     |  |                      |        |                       |           |  |      | 146.9  |   |        |         |  | $ | 70.7 |  
|                                         |  |                      |        |                       |           |  |      |        |   |        |         |  |   |      |  



|(a) | 4,000,000 authorized shares; $50 par value; cumulative; $50 per share involuntary liquidation value.
|--- | ----------------------------------------------------------------------------------------------------



|(b) | 1,500 authorized shares; $100,000 par value; $100,000 involuntary liquidation value; if declared, holders entitled to 6.5 % annual dividend each September; $100,000 redemption price
per share. EnviroGas is a DQE Financial subsidiary.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | 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, 2004, 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 $6.9 million, $3.5 million and $3.3 million in 2004, 2003, 2002. Total preferred and preference stock had involuntary liquidation values of $151 million and $77 million, which exceeded par by $14.1 million and $15.1
million as of December 31, 2004 and 2003.



Preferred and
preference dividends of Duquesne Light included in interest and other charges were $6.6 million, $3.2 million and $3.3 million in 2004, 2003 and 2002. Total preferred and preference stock had involuntary liquidation values of $150 million and $76
million, which exceeded par by $14.1 million and $15.1 million as of December 31, 2004 and 2003.



We have an Employee Stock Ownership Plan (ESOP) to provide matching contributions for the Holdings 401(k) Retirement Savings Plan. (See Note 12.) We
issued and sold 845,070 shares of 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



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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, $0.3 million and $0.9 million for 2004, 2003 and, 2002. These cash contributions were the difference between the ESOP debt service and the amount of dividends on ESOP shares ($1.2 million, $1.3 million
and $1.5 million in 2004, 2003 and 2002). 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.



|16. | Equity
|--- | ------



Holdings.On June 26, 2002 we issued 17,250,000 shares of Holdings common stock at $13.50 per share in an underwritten public offering. We received
net proceeds, after payment of underwriters discounts and commissions and other expenses, of $223.4 million.



Changes in the Number of Shares of Holdings Common Stock Outstanding as of December 31,



|            |  |                      |  |      |  |     
|----------- |  | -------------------- |  | ---- |  | ----
|            |  | (Millions of Shares)
|            |  | 2004                 |  | 2003 |  | 2002
|January 1   |  | 75.4                 |  | 74.3 |  | 55.9
|Issuances   |  | 1.6                  |  | 1.1  |  | 18.4
|            |  |                      |  |      |  |     
|December 31 |  | 77.0                 |  | 75.4 |  | 74.3
|            |  |                      |  |      |  |     



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.



If Duquesne Light
cannot pay common dividends, we may not be able to pay dividends on Holdings common stock or preferred stock.



No part of the retained earnings of Holdings was restricted at December 31, 2004.



During 2004, we paid total common stock dividends of $76.1 million, 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 Dividend Reinvestment and Direct Stock Purchase Plan (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. (See Note 15.)



During 2003, we paid total common stock dividends of $75.1 million, and of this amount, $10.7 million was reinvested to purchase approximately 737,000 shares of treasury stock for those shareholders who participated
in our DRIP.



Also during 2003, we issued approximately 241,000
shares of treasury stock for purchases made by shareholders under our DRIP and 72,794 shares as a result of the conversion of Holdings preferred stock. (See Note 15.)



During 2002, we paid total common stock dividends of $90.2 million, and of this amount, $16.1 million was reinvested to
purchase approximately 926,000 shares of treasury stock for those shareholders who participated in our DRIP.



Also during 2002, we issued approximately 236,000 shares of treasury stock for purchases made by shareholders under our DRIP.



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.



Duquesne Light.In July 1989, Duquesne Light became a wholly owned subsidiary of Holdings, 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. 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



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percentages. No part of Duquesne Lights retained earnings was restricted at December 31, 2004.



During 2004, 2003 and 2002, Duquesne Light paid dividends on common stock to
Holdings of $71 million, $69 million and $63.7 million.



The
change in capital surplus is primarily due to the costs associated with the preferred stock issuance in April 2004. (See Note 15.)



Accumulated other comprehensive income consists of unrealized gains or losses on available for sale investments.



|17. | Discontinued Operations
|--- | -----------------------



Pursuant to agreements entered into in 2002 to sell the majority of our investment in AquaSource and our investment in Pro Am, as well as our subsequent
sale of the remaining net assets of AquaSource, these subsidiaries have been reflected as discontinued operations in the consolidated financial statements.



AQUASOURCE



In May 2004, AquaSource repurchased the minority interest held by an unrelated party for approximately $8.2 million. This caused a corresponding decline
in the discontinued operations liabilities on the consolidated balance sheets.



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. This $12 million payment caused a corresponding decline in the discontinued operations liabilities on the consolidated balance sheets.



Due to the earlier than anticipated closing of this sale, we were not
required to make certain expenditures, thereby increasing the net recorded value of AquaSource by approximately $11.5 million after-tax, which was recorded in June 2003. The 2003 income also included a $66.6 million tax benefit related to the use of
capital losses generated in connection with the sale of the AquaSource subsidiaries. (See Note 10.)



On April 30, 2003, AquaSource closed the sale of a water utility subsidiary to California Water Services Group, receiving $7.5 million of proceeds at
closing, though subsequent purchase price adjustments reduced the net amount to $6.1 million. Also, on April 30, 2003, the Alabama contract operations were terminated and AquaSource received $0.9 million of proceeds.



On March 31, 2003, AquaSource sold its water and wastewater utility
construction business to former members of management for approximately $8 million. Of the total purchase price, $3.3 million is in the form of a personally guaranteed promissory note. (See Note 23.) Also in the first quarter of 2003, AquaSource
sold its New England contract operations for approximately $1.3 million.



On November 22, 2002, we sold the majority of AquaSources contract operations business to Southwest Water Company for $10.3 million. Southwest Water also assumed $2.5 million in debt associated with the
business.



In May 2002, we had indicated that we were exploring
the sale of our water resource management business. In late June 2002, during our analysis of the fair value of AquaSources goodwill, we had received indications of interest for this business, and ultimately determined that the likely outcome
would be a sale of this business. Based on the bid information received and the analysis performed, all goodwill was determined to be impaired, and an indication of impairment of other long-lived assets existed.



We estimated the proceeds to be received from a sale and compared them to the
carrying amount of the long-lived assets that remained after the goodwill impairment. This comparison indicated that the carrying amount of the investor-owned water and wastewater utilities to be sold significantly exceeded the expected proceeds to
be received. As a result, we recorded an impairment charge of $100.9 million in the second quarter of 2002, which reduced the amount of property, plant and equipment and other long-lived assets. No tax benefit was recognized in connection with this
impairment charge.



In addition, during 2002, we sold various
assets, including several other wastewater facilities and real property, receiving proceeds of approximately $6 million, which approximated book value.



In 2004, 2003 and 2002, we spent approximately zero, $16.8 million and $42.1 million for water utility and propane construction.



PRO AM



On December 13, 2002, we sold Pro Ams propane distribution business to Ferrellgas Partners, L.P., for



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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 have collected $8.5 million of this note and are pursuing collection of the remaining amount. The sale resulted in an after-tax loss of $21.2 million.



The following table summarizes income statement data from discontinued operations:



|                                                              |  |                                               |      |   |      |   |      |      |  |   |        |  
|------------------------------------------------------------- |  | --------------------------------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ------ | -
|                                                              |  | (Millions of Dollars) Year Ended December 31, |     
|                                                              |  | 2004                                          |      |   | 2003 |   |      | 2002 | 
|Revenues                                                      |  | $                                             |     |   |      | $ | 41.5 |      |  | $ | 147.9  |  
|                                                              |  |                                               |      |   |      |   |      |      |  |   |        |  
|Operating Results, net of tax of $0.5, $1.8, and $3.9         |  | $                                             | (0.9 | ) |      | $ | (1.5 | )    |  | $ | 8.3    |  
|Gain (Loss) from sale, net of tax of $0.4, $(71.6) and $(4.8) |  |                                               | 0.7  |   |      |   | 84.2 |      |  |   | (135.9 | )
|                                                              |  |                                               |      |   |      |   |      |      |  |   |        |  
|(Loss) Income from Discontinued Operations                    |  | $                                             | (0.2 | ) |      | $ | 82.7 |      |  | $ | (127.6 | )
|                                                              |  |                                               |      |   |      |   |      |      |  |   |        |  



|18. | Impairment Charges
|--- | ------------------



DQE FINANCIAL



Fresh
Kills.GSF had a concession agreement expiring in October 2018 for the gas rights to New York Citys Fresh Kills landfill. GSF also maintained an investment in a gas processing facility at the landfill and was constructing additional
processing capacity when the World Trade Center tragedy occurred. The debris from the World Trade Center was transported to the Fresh Kills landfill and deposited on top of the landfills largest hill. During 2002, GSF realized reductions in
available gas due to the continued effects of the World Trade Center debris as well as other actions taken by the New York City Department of Sanitation resulting in further damage to its gas collection system. On January 16, 2003, GSF initiated
litigation against the City of New York acting by and through its Department of Sanitation in the United States District Court for the Southern District of New York. Concurrently, GSF tendered notice of its intent to surrender the concession
agreement in 180 days as permitted by the concession agreement.



The complaint sought rescission of the concession agreement and related relief and sought an injunction to prevent the City from taking any action to declare an event of default under the concession agreement, accelerate payment under a
promissory note or draw on letters of credit supporting GSFs obligations thereunder. On that same date, GSF filed a notice of claim with the New York City Comptroller seeking monetary relief as an alternative to its rescission and other claims
set forth in the complaint. The complaint was resolved in February 2004.



DQE Financial (the Financial business segment) recorded a $30.2 million pre-tax, or $19.7 million after-tax, asset impairment charge relating to the Fresh Kills landfill gas site during 2002. Based on reduced gas
flows experienced at the site and the actions taken to abandon the gas rights, management determined that the Fresh Kills investment was fully impaired, and recognized a charge to write its investment in the gas rights and long-lived assets to zero
as of December 31, 2002.



We determined the value of the DQE
Financial impairments by projecting the undiscounted future cash flows generated by the specific assets over the assets expected lives. To the extent that the undiscounted future cash flows did not exceed the book carrying value of the assets,
the future cash flows were discounted back at our cost of borrowing to determine the carrying value of the assets. The impairment charges recorded are the difference between the previous book carrying values and the carrying value determined by this
process.



Other.DQE Financial maintains a limited
partnership investment in a waste-to-energy facility. In 2002, Moodys Investor Service downgraded the credit rating of the general partners parent, who also guaranteed the partnerships obligations. This credit condition led to an
event of default under the partnerships service agreement to operate the underlying waste-to-energy facility for a local authority. On April 1, 2002, the general partner, its parent and the partnership filed for bankruptcy protection under
Chapter 11 of the U.S. Bankruptcy Code. The local authority issued a notice to terminate the service agreement; however, the termination was suspended under the automatic stay protection afforded the partnership by the bankruptcy filing.



The local authoritys original restructuring proposal, made in
December 2002, did not allow DQE Financial to recover its investment in this project. Management determined that the investment had been fully impaired. This investment impairment resulted in a pre-tax charge of $15.6 million, or $10.1 million
after-tax, in 2002. There is no remaining book value.



The
partnership group, including DQE Financial, the bondholders and the local authority agreed to a restructured service agreement in October 2003. The restructure is contingent upon the general partners parents emergence from bankruptcy. As
part of the



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restructuring, we received a distribution of $1.3 million of previously escrowed cash in 2003.



DQE ENTERPRISES



In 2001, we formalized plans to monetize our DQE Enterprises investments as opportunities presented themselves. This business was not consistent with our
focus on our core regulated utility businesses, and opportunities related to these investments did not develop as expected due to market conditions.



During the second quarter of 2003, DQE Enterprises wrote down two investments in publicly traded applied technology businesses to their quoted market
value as of the balance sheet date, and recognized the associated impairment charge of $1.0 million. This charge reflected an other-than-temporary decline in the market value of the underlying securities. DQE Enterprises sold all its publicly held
investments, and there is no book value remaining, as of December 31, 2003.



During 2002, Enterprises wrote down three investments in publicly traded applied technology businesses to their quoted market value as of the balance sheet date, and recognized the associated pre-tax impairment charge
of $10.9 million. This charge reflected an other-than-temporary decline in the market value of the underlying securities. Enterprises also recorded a $7.2 million pre-tax impairment charge for the write-off of five investments in privately held
entities, two of which had filed for protection under Chapter 7 of the U.S. Bankruptcy Code. No tax benefit was recorded relating to these impairment charges.



We determined the value of the impairment of each of the privately held investments by analyzing their business prospects. This analysis included an
evaluation of the business cash on-hand, its financing abilities, its number of customers and contracts, and its overall ability to continue as a going concern. In addition, we obtained an independent external valuation for certain of the
businesses.



|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 that
approximate net income. As of December 31, 2004 and 2003, Duquesne Lights dividend payable to Holdings was $7 million and $20 million and was included in the payable to affiliates on Duquesne Lights consolidated balance sheets. As a
holder of Holdings common stock, Duquesne Light receives dividend income from Holdings. Various Holdings affiliates, including Duquesne Light, participate in the DQE Capital cash pool arrangement. (See Note 1.)



Following the sale of generation assets in 2000, Duquesne Light loaned $250
million of the sale proceeds to Holdings, which remains outstanding as of December 31, 2004. The demand note bears a rate of interest that approximates the market rate and is reflected on Duquesne Lights consolidated balance sheets as a loan
receivable from parent. Holdings used substantially all the proceeds of the loan to make capital contributions to other subsidiaries, which in turn used the funds for capital expenditures, new investments or operating expenses.



In 2004, 2003 and 2002, Duquesne Light charged 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.



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, 2004 and 2003, Duquesne Lights tax liability to Holdings under this arrangement was $(2.6) million and $41.6 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, |     
|                                           |  | 2004                                         |      |   | 2003 |   |      | 2002 | 
|Revenues and Other Income:                 |  |                                              |      |   |      |   |      |      |  |   |      |  
|Interest income                            |  | $                                            | 14.3 |   |      | $ | 15.6 |      |  | $ | 21.4 |  
|Dividend income from Holdings common stock |  |                                              | 1.2  |   |      |   | 1.2  |      |  |   | 1.7  |  
|Duct and pole rental revenue               |  |                                              | 1.1  |   |      |   | 1.1  |      |  |   | 1.1  |  
|                                           |  |                                              |      |   |      |   |      |      |  |   |      |  
|Expenses:                                  |  |                                              |      |   |      |   |      |      |  |   |      |  
|Administrative cost allocations (a)        |  | $                                            | (8.3 | ) |      | $ | (6.9 | )    |  | $ | (3.7 | )
|Rental of communication fiber              |  |                                              | 0.4  |   |      |   | 0.2  |      |  |   | 0.2  |  
|Insurance                                  |  |                                              |     |   |      |   |     |      |  |   | 0.1  |  
|                                           |  |                                              |      |   |      |   |      |      |  |   |      |  



|(a) | Allocated labor charges include the associated fringe benefits, including pension and health care costs.
|--- | --------------------------------------------------------------------------------------------------------



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|20. | Supplemental Cash Flow Disclosure
|--- | ---------------------------------



Holdings Changes in Working Capital Other than Cash (a) for the Year Ended December 31,



|                          |  |                       |       |   |      |   |       |      |  |   |       |  
|------------------------- |  | --------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                          |  | (Millions of Dollars) |      
|                          |  | 2004                  |       |   | 2003 |   |       | 2002 | 
|Receivables               |  | $                     | (10.1 | ) |      | $ | 1.1   |      |  | $ | 23.3  |  
|Materials and supplies    |  |                       | 2.5   |   |      |   |      |      |  |   | 3.1   |  
|Other current assets      |  |                       | 0.9   |   |      |   | 8.9   |      |  |   | 51.8  |  
|Accounts payable          |  |                       | (11.2 | ) |      |   | (2.8  | )    |  |   | 5.1   |  
|Other current liabilities |  |                       | 8.9   |   |      |   | (19.1 | )    |  |   | (23.8 | )
|                          |  |                       |       |   |      |   |       |      |  |   |       |  
|Total                     |  | $                     | (9.0  | ) |      | $ | (11.9 | )    |  | $ | 59.5  |  
|                          |  |                       |       |   |      |   |       |      |  |   |       |  



|(a) | The amounts shown exclude the effects of acquisitions, dispositions and restructuring charges.
|--- | ----------------------------------------------------------------------------------------------



Duquesne Light Changes in Working Capital Other than Cash (a) for the Year Ended December 31,



|                          |  |                       |       |   |      |   |       |      |  |   |       |  
|------------------------- |  | --------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                          |  | (Millions of Dollars) |      
|                          |  | 2004                  |       |   | 2003 |   |       | 2002 | 
|Receivables               |  | $                     | (5.7  | ) |      | $ | 12.8  |      |  | $ | 47.8  |  
|Materials and supplies    |  |                       | 2.5   |   |      |   |      |      |  |   | 3.1   |  
|Other current assets      |  |                       | 0.9   |   |      |   | (4.5  | )    |  |   | (2.1  | )
|Accounts payable          |  |                       | (3.8  | ) |      |   | (26.0 | )    |  |   | (3.3  | )
|Other current liabilities |  |                       | (48.7 | ) |      |   | (34.4 | )    |  |   | 59.1  |  
|                          |  |                       |       |   |      |   |       |      |  |   |       |  
|Total                     |  | $                     | (54.8 | ) |      | $ | (52.1 | )    |  | $ | 104.6 |  
|                          |  |                       |       |   |      |   |       |      |  |   |       |  



|(a) | The amounts shown exclude the effects of restructuring charges.
|--- | ---------------------------------------------------------------



|21. | Business Segments and Related Information
|--- | -----------------------------------------



We report the following business segments: (1) Duquesne Lights transmission and distribution of electricity (electricity delivery business segment),
(2) Duquesne Lights supply of electricity (electricity supply business segment), (3) Duquesne Lights collection of transition costs (CTC business segment), (4) Duquesne Energy Solutions development, operation and maintenance of
energy and, for a single customer, synthetic fuel facilities (Energy Solutions business segment), and (5) DQE Financials collection and processing of landfill gas and management of structured finance and alternative energy investments
(Financial business segment). We also report an all other category to include our other subsidiaries below the quantitative threshold for disclosure, and corporate administrative functions, financing, and insurance services for our
various affiliates. Operating revenues in our all other category are comprised primarily of (i) revenues from DQE Communications, and (ii) revenue from an energy services investment held by DQE Enterprises until its sale in 2002.



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Business Segments for the Twelve Months Ended December 31, 2004



|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |        
|--------------------------------------------------------------------- |  | --------------------- | ------- | ----------------- | - | ----- |  | ------------------ | ---- | --------------- | - | --------- |  | - | -------- |  | - | ------------ | - |  | ------------ | ----- | - |  | - | ------ | - |  | - | -------
|                                                                      |  | (Millions of Dollars)
|                                                                      |  | ElectricityDelivery   |         | ElectricitySupply |   | CTC   |  | TotalDuquesneLight |      | EnergySolutions |   | Financial |  |   | AllOther |  |   | Eliminations |   |  | Consolidated
|Operating revenues                                                    |  | $                     | 344.7   |                   | $ | 434.5 |  | $                  | 10.1 |                 | $ | 789.3     |  | $ | 68.4     |  | $ | 32.8         |   |  | $            | 8.5   |   |  | $ | (1.7   | ) |  | $ | 897.3  
|Operating expenses                                                    |  |                       | 164.7   |                   |   | 402.8 |  |                    | 0.4  |                 |   | 567.9     |  |   | 32.5     |  |   | 40.7         |   |  |              | 15.4  |   |  |   | (1.6   | ) |  |   | 654.9  
|Acquisition termination costs                                         |  |                       |        |                   |   | 8.3   |  |                    |     |                 |   | 8.3       |  |   |         |  |   |             |   |  |              |      |   |  |   |       |   |  |   | 8.3    
|Depreciation and amortization expense                                 |  |                       | 62.3    |                   |   |      |  |                    | 9.1  |                 |   | 71.4      |  |   | 1.9      |  |   | 7.3          |   |  |              | 2.8   |   |  |   |       |   |  |   | 83.4   
|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |        
|Operating income (loss)                                               |  |                       | 117.7   |                   |   | 23.4  |  |                    | 0.6  |                 |   | 141.7     |  |   | 34.0     |  |   | (15.2        | ) |  |              | (9.7  | ) |  |   | (0.1   | ) |  |   | 150.7  
|Other income                                                          |  |                       | 16.6    |                   |   |      |  |                    |     |                 |   | 16.6      |  |   | 1.4      |  |   | 9.5          |   |  |              | 1.4   |   |  |   | (16.2  | ) |  |   | 12.7   
|Interest and other charges                                            |  |                       | 52.8    |                   |   |      |  |                    |     |                 |   | 52.8      |  |   | 0.1      |  |   | 0.1          |   |  |              | 26.0  |   |  |   | (16.0  | ) |  |   | 63.0   
|Benefit from limited partners interest                               |  |                       |        |                   |   |      |  |                    |     |                 |   |          |  |   |         |  |   | 7.4          |   |  |              |      |   |  |   |       |   |  |   | 7.4    
|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |        
|Income (loss) before taxes                                            |  |                       | 81.5    |                   |   | 23.4  |  |                    | 0.6  |                 |   | 105.5     |  |   | 35.3     |  |   | 1.6          |   |  |              | (34.3 | ) |  |   | (0.3   | ) |  |   | 107.8  
|Income tax expense (benefit)                                          |  |                       | 34.4    |                   |   | 9.7   |  |                    | 0.2  |                 |   | 44.3      |  |   | 12.6     |  |   | (24.8        | ) |  |              | (11.8 | ) |  |   | 0.3    |   |  |   | 20.6   
|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |        
|Earnings (loss) from continuing operations available for common stock |  | $                     | 47.1    |                   | $ | 13.7  |  | $                  | 0.4  |                 | $ | 61.2      |  | $ | 22.7     |  | $ | 26.4         |   |  | $            | (22.5 | ) |  | $ | (0.6   | ) |  | $ | 87.2   
|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |        
|Assets                                                                |  | $                     | 2,287.1 |                   | $ | 1.2   |  | $                  | 4.7  |                 | $ | 2,293.0   |  | $ | 32.6     |  | $ | 604.4        |   |  | $            | 110.5 |   |  | $ | (407.7 | ) |  | $ | 2,632.8
|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |        
|Capital expenditures                                                  |  | $                     | 83.4    |                   | $ | 0.1   |  | $                  |     |                 | $ | 83.5      |  | $ | 0.1      |  | $ | 0.9          |   |  | $            | 1.9   |   |  | $ |       |   |  | $ | 86.4   
|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |        



Business Segments for the Twelve
Months Ended December 31, 2003



|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|--------------------------------------------------------------------- |  | --------------------- | ------- | ----------------- | - | ----- |  | ------------------ | ---- | --------------- | - | --------- |  | - | -------- |  | - | ------------ | - |  | ------------ | ----- | - |  | - | ------ | - |  | - | ------- | -
|                                                                      |  | (Millions of Dollars) |        
|                                                                      |  | ElectricityDelivery   |         | ElectricitySupply |   | CTC   |  | TotalDuquesneLight |      | EnergySolutions |   | Financial |  |   | AllOther |  |   | Eliminations |   |  | Consolidated |      
|Operating revenues                                                    |  | $                     | 338.4   |                   | $ | 450.2 |  | $                  | 17.5 |                 | $ | 806.1     |  | $ | 63.5     |  | $ | 27.8         |   |  | $            | 7.0   |   |  | $ | (1.6   | ) |  | $ | 902.8   |  
|Operating expenses                                                    |  |                       | 157.3   |                   |   | 416.5 |  |                    | 0.8  |                 |   | 574.6     |  |   | 33.1     |  |   | 45.4         |   |  |              | 12.3  |   |  |   | (0.8   | ) |  |   | 664.6   |  
|Depreciation and amortization expense                                 |  |                       | 60.7    |                   |   |      |  |                    | 15.7 |                 |   | 76.4      |  |   | 2.1      |  |   | 6.4          |   |  |              | 2.4   |   |  |   |       |   |  |   | 87.3    |  
|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Operating income (loss)                                               |  |                       | 120.4   |                   |   | 33.7  |  |                    | 1.0  |                 |   | 155.1     |  |   | 28.3     |  |   | (24.0        | ) |  |              | (7.7  | ) |  |   | (0.8   | ) |  |   | 150.9   |  
|Other income                                                          |  |                       | 20.3    |                   |   |      |  |                    |     |                 |   | 20.3      |  |   | 1.8      |  |   | 29.4         |   |  |              | 1.7   |   |  |   | (17.8  | ) |  |   | 35.4    |  
|Interest and other charges                                            |  |                       | 63.6    |                   |   |      |  |                    |     |                 |   | 63.6      |  |   | 0.2      |  |   | 1.8          |   |  |              | 25.5  |   |  |   | (16.7  | ) |  |   | 74.4    |  
|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Income (loss) before taxes                                            |  |                       | 77.1    |                   |   | 33.7  |  |                    | 1.0  |                 |   | 111.8     |  |   | 29.9     |  |   | 3.6          |   |  |              | (31.5 | ) |  |   | (1.9   | ) |  |   | 111.9   |  
|Income taxes                                                          |  |                       | 31.0    |                   |   | 14.0  |  |                    | 0.4  |                 |   | 45.4      |  |   | 9.6      |  |   | (29.6        | ) |  |              | (7.7  | ) |  |   |       |   |  |   | 17.7    |  
|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Income (loss) before net impairment charge                            |  |                       | 46.1    |                   |   | 19.7  |  |                    | 0.6  |                 |   | 66.4      |  |   | 20.3     |  |   | 33.2         |   |  |              | (23.8 | ) |  |   | (1.9   | ) |  |   | 94.2    |  
|Impairment, net                                                       |  |                       |        |                   |   |      |  |                    |     |                 |   |          |  |   |         |  |   |             |   |  |              | (1.0  | ) |  |   |       |   |  |   | (1.0    | )
|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Income (loss) from continuing operations                              |  |                       | 46.1    |                   |   | 19.7  |  |                    | 0.6  |                 |   | 66.4      |  |   | 20.3     |  |   | 33.2         |   |  |              | (24.8 | ) |  |   | (1.9   | ) |  |   | 93.2    |  
|Dividends on preferred stock                                          |  |                       |        |                   |   |      |  |                    |     |                 |   |          |  |   |         |  |   |             |   |  |              | 0.4   |   |  |   |       |   |  |   | 0.4     |  
|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Earnings (loss) from continuing operations available for common stock |  | $                     | 46.1    |                   | $ | 19.7  |  | $                  | 0.6  |                 | $ | 66.4      |  | $ | 20.3     |  | $ | 33.2         |   |  | $            | (25.2 | ) |  | $ | (1.9   | ) |  | $ | 92.8    |  
|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Assets                                                                |  | $                     | 2,200.8 |                   | $ |      |  | $                  | 8.4  |                 | $ | 2,209.2   |  | $ | 34.2     |  | $ | 614.0        |   |  | $            | 59.6  |   |  | $ | (376.2 | ) |  | $ | 2,540.8 |  
|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Capital expenditures                                                  |  | $                     | 76.1    |                   | $ |      |  | $                  |     |                 | $ | 76.1      |  | $ | 0.4      |  | $ | 0.3          |   |  | $            | 1.2   |   |  | $ |       |   |  | $ | 78.0    |  
|                                                                      |  |                       |         |                   |   |       |  |                    |      |                 |   |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  



78



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##### Table of Contents

Business Segments for the Twelve Months Ended December 31, 2002



|                                                                      |  |                       |         |   |                   |   |       |  |                    |       |  |                 |         |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|--------------------------------------------------------------------- |  | --------------------- | ------- | - | ----------------- | - | ----- |  | ------------------ | ----- |  | --------------- | ------- | --------- |  | - | -------- |  | - | ------------ | - |  | ------------ | ----- | - |  | - | ------ | - |  | - | ------- | -
|                                                                      |  | (Millions of Dollars) |        
|                                                                      |  | ElectricityDelivery   |         |   | ElectricitySupply |   | CTC   |  | TotalDuquesneLight |       |  | EnergySolutions |         | Financial |  |   | AllOther |  |   | Eliminations |   |  | Consolidated |      
|Operating revenues                                                    |  | $                     | 350.0   |   |                   | $ | 472.2 |  | $                  | 122.4 |  | $               | 944.6   |           |  | $ | 54.7     |  | $ | 22.0         |   |  | $            | 6.6   |   |  | $ | (1.9   | ) |  | $ | 1,026.0 |  
|Operating expenses                                                    |  |                       | 156.1   |   |                   |   | 448.6 |  |                    | 5.4   |  |                 | 610.1   |           |  |   | 29.3     |  |   | 43.5         |   |  |              | 26.8  |   |  |   | (0.4   | ) |  |   | 709.3   |  
|Depreciation and amortization expense                                 |  |                       | 56.5    |   |                   |   |      |  |                    | 112.6 |  |                 | 169.1   |           |  |   | 2.1      |  |   | 12.3         |   |  |              | 2.1   |   |  |   |       |   |  |   | 185.6   |  
|                                                                      |  |                       |         |   |                   |   |       |  |                    |       |  |                 |         |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Operating income (loss)                                               |  |                       | 137.4   |   |                   |   | 23.6  |  |                    | 4.4   |  |                 | 165.4   |           |  |   | 23.3     |  |   | (33.8        | ) |  |              | (22.3 | ) |  |   | (1.5   | ) |  |   | 131.1   |  
|Other income                                                          |  |                       | 31.9    |   |                   |   |      |  |                    |      |  |                 | 31.9    |           |  |   | 2.6      |  |   | 22.7         |   |  |              | 2.3   |   |  |   | (22.9  | ) |  |   | 36.6    |  
|Interest and other charges                                            |  |                       | 72.4    |   |                   |   |      |  |                    |      |  |                 | 72.4    |           |  |   | 0.8      |  |   | 1.7          |   |  |              | 29.8  |   |  |   | (21.2  | ) |  |   | 83.5    |  
|                                                                      |  |                       |         |   |                   |   |       |  |                    |       |  |                 |         |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Income (loss) before taxes                                            |  |                       | 96.9    |   |                   |   | 23.6  |  |                    | 4.4   |  |                 | 124.9   |           |  |   | 25.1     |  |   | (12.8        | ) |  |              | (49.8 | ) |  |   | (3.2   | ) |  |   | 84.2    |  
|Income taxes                                                          |  |                       | 39.3    |   |                   |   | 9.7   |  |                    | 1.5   |  |                 | 50.5    |           |  |   | 8.0      |  |   | (34.6        | ) |  |              | (17.4 | ) |  |   |       |   |  |   | 6.5     |  
|                                                                      |  |                       |         |   |                   |   |       |  |                    |       |  |                 |         |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Income (loss) before net impairment and restructuring charges         |  |                       | 57.6    |   |                   |   | 13.9  |  |                    | 2.9   |  |                 | 74.4    |           |  |   | 17.1     |  |   | 21.8         |   |  |              | (32.4 | ) |  |   | (3.2   | ) |  |   | 77.7    |  
|Impairment, net                                                       |  |                       |        |   |                   |   |      |  |                    |      |  |                 |        |           |  |   |         |  |   | (29.8        | ) |  |              | (18.1 | ) |  |   |       |   |  |   | (47.9   | )
|Restructuring, net                                                    |  |                       | (2.3    | ) |                   |   |      |  |                    |      |  |                 | (2.3    | )         |  |   |         |  |   |             |   |  |              | (0.8  | ) |  |   |       |   |  |   | (3.1    | )
|                                                                      |  |                       |         |   |                   |   |       |  |                    |       |  |                 |         |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Income (loss) from continuing operations                              |  |                       | 55.3    |   |                   |   | 13.9  |  |                    | 2.9   |  |                 | 72.1    |           |  |   | 17.1     |  |   | (8.0         | ) |  |              | (51.3 | ) |  |   | (3.2   | ) |  |   | 26.7    |  
|Dividends on preferred stock                                          |  |                       |        |   |                   |   |      |  |                    |      |  |                 |        |           |  |   |         |  |   |             |   |  |              | 0.6   |   |  |   |       |   |  |   | 0.6     |  
|                                                                      |  |                       |         |   |                   |   |       |  |                    |       |  |                 |         |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Earnings (loss) from continuing operations available for common stock |  | $                     | 55.3    |   |                   | $ | 13.9  |  | $                  | 2.9   |  | $               | 72.1    |           |  | $ | 17.1     |  | $ | (8.0         | ) |  | $            | (51.9 | ) |  | $ | (3.2   | ) |  | $ | 26.1    |  
|                                                                      |  |                       |         |   |                   |   |       |  |                    |       |  |                 |         |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Assets (a)                                                            |  | $                     | 2,464.1 |   |                   | $ |      |  | $                  | 24.1  |  | $               | 2,488.2 |           |  | $ | 37.5     |  | $ | 570.3        |   |  | $            | 152.2 |   |  | $ | (627.6 | ) |  | $ | 2,620.6 |  
|                                                                      |  |                       |         |   |                   |   |       |  |                    |       |  |                 |         |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Capital expenditures                                                  |  | $                     | 72.5    |   |                   | $ |      |  | $                  |      |  | $               | 72.5    |           |  | $ | 0.6      |  | $ | 4.3          |   |  | $            | 6.4   |   |  | $ |       |   |  | $ | 83.8    |  
|                                                                      |  |                       |         |   |                   |   |       |  |                    |       |  |                 |         |           |  |   |          |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  



|(a) | Excludes assets related to discontinued operations.
|--- | ---------------------------------------------------



79



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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) |      
|2004 (a)                                   |  | First Quarter                                   |       |     | Second Quarter |   |       | Third Quarter |  |   | Fourth Quarter |    
|Operating revenues                         |  | $                                               | 217.1 |     |                | $ | 218.9 |               |  | $ | 242.8          |     |  | $ | 218.5 |    
|Operating income                           |  |                                                 | 35.2  |     |                |   | 36.4  |               |  |   | 40.2           | (b) |  |   | 38.9  |    
|Income from continuing operations          |  |                                                 | 21.7  |     |                |   | 23.0  |               |  |   | 23.4           |     |  |   | 19.1  |    
|Income (loss) from discontinued operations |  |                                                 | 0.1   |     |                |   | 0.4   |               |  |   | 0.2            |     |  |   | (0.9  | )  
|Net income                                 |  |                                                 | 21.8  |     |                |   | 23.4  |               |  |   | 23.6           |     |  |   | 18.2  |    
|Basic earnings (loss) per share:           |  |                                                 |       |     |                |   |       |               |  |   |                |     |  |   |       |    
|Continuing operations                      |  |                                                 | 0.29  |     |                |   | 0.30  |               |  |   | 0.31           |     |  |   | 0.25  |    
|Discontinued operations                    |  |                                                 |      |     |                |   | 0.01  |               |  |   |               |     |  |   | (0.01 | )  
|Total                                      |  |                                                 | 0.29  |     |                |   | 0.31  |               |  |   | 0.31           |     |  |   | 0.24  |    
|Stock price:                               |  |                                                 |       |     |                |   |       |               |  |   |                |     |  |   |       |    
|High                                       |  |                                                 | 20.44 |     |                |   | 19.70 |               |  |   | 19.62          |     |  |   | 19.25 |    
|Low                                        |  |                                                 | 18.05 |     |                |   | 17.71 |               |  |   | 17.96          |     |  |   | 17.01 |    
|                                           |  |                                                 |       |    
|2003 (a)                                   |  | First Quarter                                   |       |     | Second Quarter |   |       | Third Quarter |  |   | Fourth Quarter |    
|Operating revenues                         |  | $                                               | 220.3 |     |                | $ | 215.8 |               |  | $ | 246.0          |     |  | $ | 220.7 |    
|Operating income                           |  |                                                 | 36.0  |     |                |   | 36.6  |               |  |   | 49.0           |     |  |   | 29.3  |    
|Income from continuing operations          |  |                                                 | 27.9  |     |                |   | 20.9  |               |  |   | 30.2           |     |  |   | 14.2  |    
|Income from discontinued operations        |  |                                                 | 1.7   |     |                |   | 13.4  |               |  |   | 0.4            |     |  |   | 67.2  |    
|Net income                                 |  |                                                 | 29.6  | (c) |                |   | 34.3  | (c)           |  |   | 30.6           |     |  |   | 81.4  | (c)
|Basic earnings per share:                  |  |                                                 |       |     |                |   |       |               |  |   |                |     |  |   |       |    
|Continuing operations                      |  |                                                 | 0.37  |     |                |   | 0.28  |               |  |   | 0.40           |     |  |   | 0.19  |    
|Discontinued operations                    |  |                                                 | 0.02  |     |                |   | 0.18  |               |  |   | 0.01           |     |  |   | 0.89  |    
|Total                                      |  |                                                 | 0.39  |     |                |   | 0.46  |               |  |   | 0.41           |     |  |   | 1.08  |    
|Stock price:                               |  |                                                 |       |     |                |   |       |               |  |   |                |     |  |   |       |    
|High                                       |  |                                                 | 16.50 |     |                |   | 16.59 |               |  |   | 15.70          |     |  |   | 18.39 |    
|Low                                        |  |                                                 | 12.19 |     |                |   | 12.09 |               |  |   | 13.81          |     |  |   | 15.41 |    



|(a) | The quarterly data reflect seasonal weather variations in the electric utilitys service territory. Stock prices reflect New York Stock Exchange data.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Third quarter results include a pre-tax charge of $8.3 million at Duquesne Light for the write-off of deposits and deferred costs related to the termination of the acquisition of a
generation station. (See Note 2.)
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | First quarter results include an after-tax gain of $7.0 million related to the sale of a limited partnership investment in a natural gas operating partnership by DQE Financial. (See
Note 3.) Second quarter results include an $11.5 million after-tax gain related to the increase in fair value of AquaSources investor-owned utilities as a result of the sale of these utilities. (See Note 17.) Fourth quarter results include a
$5.8 million after-tax charge associated with vacant leased office space. (See Note 11.) Fourth quarter results include a $66.6 million tax benefit related to the use of capital losses generated in connection with the sale of the AquaSource
subsidiaries. (See Note 17.)
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Duquesne Light Company



|                   |  |                       |       |                |   |               |  |   |                |     |  |   |       |    
|------------------ |  | --------------------- | ----- | -------------- | - | ------------- |  | - | -------------- | --- |  | - | ----- | ---
|                   |  | (Millions of Dollars) |      
|2004 (a)           |  | First Quarter         |       | Second Quarter |   | Third Quarter |  |   | Fourth Quarter |    
|Operating revenues |  | $                     | 194.6 |                | $ | 193.8         |  | $ | 213.1          |     |  | $ | 187.8 |    
|Operating income   |  |                       | 36.6  |                |   | 36.2          |  |   | 34.9           | (b) |  |   | 34.0  |    
|Net income         |  |                       | 17.8  |                |   | 18.3          |  |   | 17.0           |     |  |   | 14.7  |    
|                   |  |                       |       |               
|2003 (a)           |  | First Quarter         |       | Second Quarter |   | Third Quarter |  |   | Fourth Quarter |    
|Operating revenues |  | $                     | 199.3 |                | $ | 193.2         |  | $ | 218.6          |     |  | $ | 195.0 |    
|Operating income   |  |                       | 38.2  |                |   | 37.4          |  |   | 49.3           |     |  |   | 30.2  |    
|Net income         |  |                       | 16.7  |                |   | 16.2          |  |   | 24.2           |     |  |   | 12.5  | (c)



|(a) | The quarterly data reflect seasonal weather variations in our service territory.
|--- | --------------------------------------------------------------------------------



|(b) | Third quarter results include an $8.3 million pre-tax charge for the write-off of deposits and deferred costs related to the termination of the acquisition of a generation station.
(See Note 2.)
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Fourth quarter results include a $4.9 million after-tax charge associated with vacant leased office space. (See Note 11.)
|--- | -------------------------------------------------------------------------------------------------------------------------



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|23. | Subsequent Events
|--- | -----------------



In January 2005, DQE Financial sold its investment in a natural gas operating partnership for $12.7 million in cash and recognized an after-tax gain of
$4.6 million. The $3.3 million promissory note, due April 1, 2005, from former members of AquaSource management from the sale of AquaSources water and wastewater utility construction business was paid in full in January 2005. 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. This order approved recovery of costs
associated with the early retirement program.



In February
2005, Duquesne Power entered into additional energy sales contracts related to 2006 and 2007 with a notional value of $81.8 million. These sales have reduced Duquesne Powers secured percentage of its anticipated load obligations for 2006 and
2007.



With respect to the shareholder class action litigation,
in March 2005 we reached an oral agreement in principle with counsel for the plaintiffs to settle all claims of the class and sub-class. The proposed settlement is contingent on execution of a definitive settlement agreement and court approval. We
expect the settlement to be covered in full by our insurance.



|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. Each entitys Chief Executive
Officer and the Chief Financial Officer have concluded that these controls and procedures are effective to ensure that the information required to be disclosed in Holdings and Duquesne 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.



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.



Management of both entities assessed the effectiveness of their respective
internal control over financial reporting as of December 31, 2004. 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. Based on our assessment, management of each entity believes that, as of December
31, 2004, the respective entitys internal control over financial reporting is effective based on those criteria.



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 has been no change in
Holdings or Duquesne Lights internal control over financial reporting that occurred during the fourth quarter that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.



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) maintained effective internal control over financial



81



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##### Table of Contents

reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued 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.



In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting as of December 31, 2004, 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal
ControlIntegrated Framework issued 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 schedule as of and for the year ended December 31, 2004 of the Company and our report dated March 24, 2005 expressed an unqualified opinion on those financial statements and financial statement schedule and
included an explanatory paragraph relating to a change in accounting for goodwill and other intangible assets .



/s/ Deloitte & Touche LLP



Pittsburgh, Pennsylvania

March 24, 2005



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) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria
established in Internal ControlIntegrated Framework issued 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



82



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##### Table of Contents

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.



In
our opinion, managements assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, 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, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2004, based on the criteria established in Internal ControlIntegrated Framework issued 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 schedule as of and for the year ended December 31, 2004 of the Company and our report dated March 24, 2005 expressed an unqualified opinion on those financial statements and financial
statement schedule.



/s/ Deloitte & Touche LLP



Pittsburgh, Pennsylvania

March 24, 2005



|Item 9B. | Other Information.
|-------- | ------------------



None.



PART III



|Item 10. | Directors and Executive Officers of the Registrants.
|-------- | ----------------------------------------------------



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 required under this Item 10 is set forth in and incorporated by reference from the 2005 Proxy Statement. All other information about 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), our 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. Our Chief Executive Officer made his annual certification to that effect to the NYSE as of June 23, 2004.
In addition, we have filed, as exhibits to this Annual Report on Form 10-K, the certifications of our Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002 to be filed with the SEC regarding
the quality of our public disclosure.



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|Item 11. | Executive Compensation.
|-------- | -----------------------



Information relating to executive compensation for Holdings is set forth in and incorporated by reference from the 2005 Proxy Statement. Information
relating to executive compensation for Duquesne Light is set forth in and incorporated by reference from Exhibit 99.1.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management.
|-------- | ---------------------------------------------------------------



Information relating to the ownership of Holdings equity securities by Holdings directors, officers and certain beneficial owners is set forth in
and incorporated by reference from the 2005 Proxy Statement.



Information relating to the ownership of Holdings equity securities by Duquesne Light directors, officers and certain beneficial owners is set forth in and incorporated by reference from Exhibit 99.1.



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, 2004:



|                                                           |  |                                                                                              |  |                                                                         |       |                                                                                                                                            |          
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------ | ---------
|                                                           |  | (a)                                                                                          |  | (b)                                                                     |       | (c)                                                                                                                                       
|Plan Category                                              |  | Number of securities to beissued upon exercise ofoutstanding options,warrants and rights (1) |  | Weighted averageexercise price ofoutstandingoptions, warrantsand rights |       | Number of securities remainingavailable for future issuanceunder equity compensationplans (excluding securitiesreflected in column (a)
(2)
|Equity compensation plans approved by security holders     |  | 1,616,915                                                                                    |  | $                                                                       | 20.53 |                                                                                                                                            | 2,353,363
|                                                           |  |                                                                                              | 
|Equity compensation plans not approved by security holders |  |                                                                                             |  |                                                                         |      |                                                                                                                                            |         
|                                                           |  |                                                                                              |  |                                                                         |       |                                                                                                                                            |          
|                                                           |  |                                                                                              | 
|Total                                                      |  | 1,616,915                                                                                    |  | $                                                                       | 20.53 |                                                                                                                                            | 2,353,363
|                                                           |  |                                                                                              |  |                                                                         |       |                                                                                                                                            |          



|(1) | Includes 385,311 shares of common stock issuable upon exercise of options granted under our prior Long-Term Incentive Plan (discontinued in 2002) and 560,774 shares of common stock
issuable upon exercise of options granted under our current Incentive Plan. Reflects 48,500 performance shares awarded in 2003 which may or may not be earned depending on our achieving total shareholder return goals in 2005; awardees may earn up to
200% of the amounts awarded. Reflects 363,200 deferred stock units awarded in 2003, which may or may not be earned depending on our achieving cumulative total shareholder return and earnings per share goals through 2006. Awardees may earn up to 100%
of the amounts awarded. Reflects 52,713 restricted stock units awarded in 2004, which may or may not be earned depending on our achieving cumulative total shareholder return goals through 2006. Awardees may earn up to 100% of the amounts awarded.
Reflects 186,417 and 20,000 restricted shares issued in 2003 and 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | All of these shares are available under our current Incentive Plan.
|--- | -------------------------------------------------------------------



|Item 13. | Certain Relationships and Related Transactions.
|-------- | -----------------------------------------------



Information relating to certain relationships and related transactions involving Holdings is set forth in and incorporated by reference from the 2005
Proxy Statement. There were no such relationships or transactions regarding Duquesne Light.



|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 the 2005 Proxy Statement. Such
fees and services apply to Deloitte & Touche LLPs work for all of Holdings consolidated subsidiaries, including Duquesne Light.



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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, 2004.



Holdings Consolidated Balance Sheets, December 31, 2004 and 2003.



Holdings Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2004.



Holdings Consolidated Statements of Comprehensive Income for the Three Years Ended December
31, 2004.



Holdings Consolidated Statements of Retained Earnings for the Three
Years Ended December 31, 2004.



Duquesne Light Consolidated Statements of
Income for the Three Years Ended December 31, 2004.



Duquesne Light
Consolidated Balance Sheets, December 31, 2004 and 2003.



Duquesne Light
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2004.



Duquesne Light Consolidated Statements of Comprehensive Income for the Three Years Ended December 31, 2004.



Duquesne Light Consolidated Statements of Retained Earnings for the Three Years Ended December 31, 2004.



Notes to Consolidated Financial Statements.



(a)(2) The following financial statement schedules are filed here as a part of this Report:



Schedule for the Three Years Ended December 31, 2004:



| | 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.



85



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(b) Exhibits Index.



|            |  |                                                                                                                                                                                                 |  |                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                     |  | Method of Filing                                                                              
|            |  |                                                                                                                                                                                                
|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). |  | Filed here.                                                                                   
|            |  |                                                                                                                                                                                                
|4.2         |  | 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.
|            |  |                                                                                                                                                                                                
|4.3         |  | 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 10-K for the year ended December 31, 1992.                  



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|            |  |                                                                                                                                                                                                                |  |                                                                                           
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                    |  | Method of Filing                                                                          
|            |  |                                                                                                                                                                                                               
|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, with a schedule listing substantially identical agreements with Joseph G. Belechak, Maureen L. Hogel, Stevan R. Schott and
James E. Wilson. |  | Exhibit 10.11 to the Holdings Form 10-K for the year ended December 31, 2003.             
|            |  |                                                                                                                                                                                                               
|10.5        |  | 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.              
|            |  |                                                                                                                                                                                                               
|10.6        |  | 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.             
|            |  |                                                                                                                                                                                                               
|10.7        |  | Non-Competition and Confidentiality Agreement dated as of August 17, 2000 for William F. Fields.                                                                                                               |  | Filed here.                                                                               
|            |  |                                                                                                                                                                                                               
|10.8        |  | 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.        
|            |  |                                                                                                                                                                                                               
|10.9        |  | 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.        
|            |  |                                                                                                                                                                                                               
|10.10       |  | Schedule to Exhibit 10.7 listing substantially identical agreements with Stevan R. Schott and James E. Wilson                                                                                                  |  | Exhibit 10.5 to the Duquesne Light Form 10-K for the year ended December 31, 2002.        
|            |  |                                                                                                                                                                                                               
|10.11       |  | Form of Stock Option Agreement for Officers (with change in control)                                                                                                                                           |  | Filed here.                                                                               
|            |  |                                                                                                                                                                                                               
|10.12       |  | Form of Stock Option Agreement for Officers                                                                                                                                                                    |  | Filed here.                                                                               
|            |  |                                                                                                                                                                                                               
|10.13       |  | Form of Deferred Stock Unit Agreement for Officers                                                                                                                                                             |  | Filed here.                                                                               
|            |  |                                                                                                                                                                                                               
|10.14       |  | Form of Performance Share Agreement for Officers                                                                                                                                                               |  | Filed here.                                                                               
|            |  |                                                                                                                                                                                                               
|10.15       |  | Form of Restricted Stock Agreement for Officers                                                                                                                                                                |  | Filed here.                                                                               
|            |  |                                                                                                                                                                                                               
|10.16       |  | Form of Stock Option Agreement for Directors                                                                                                                                                                   |  | Filed here.                                                                               
|            |  |                                                                                                                                                                                                               
|10.17       |  | Form of Restricted Stock Agreement for Directors                                                                                                                                                               |  | Filed here.                                                                               
|            |  |                                                                                                                                                                                                               
|10.18       |  | Description of Executive Benefits                                                                                                                                                                              |  | Filed here.                                                                               
|            |  |                                                                                                                                                                                                               
|10.19       |  | Description of Directors Fees and Plans                                                                                                                                                                       |  | Filed here.                                                                               
|            |  |                                                                                                                                                                                                               
|10.20       |  | Holdings $175 Million Credit Agreement dated as of September 15, 2004.                                                                                                                                        |  | Filed here.                                                                               



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|            |  |                                                                                                                                           |  |                                                                                    
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                               |  | Method of Filing                                                                   
|            |  |                                                                                                                                          
|10.21       |  | Duquesne Lights Second Amended and Restated $100 Million Credit Agreement dated as of September 15, 2004                                 |  | Filed here.                                                                        
|            |  |                                                                                                                                          
|10.22       |  | 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 September 24, 1999.                           
|            |  |                                                                                                                                          
|10.23       |  | 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.
|            |  |                                                                                                                                          
|12.1        |  | Holdings Ratio of Earnings.                                                                                                               |  | Filed here.                                                                        
|            |  |                                                                                                                                          
|12.2        |  | Duquesne Light 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.                                                                        
|            |  |                                                                                                                                          
|24.1        |  | Powers of Attorney.                                                                                                                       |  | 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        |  | Information regarding Duquesne Light 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 March 1, 2005, subject to payment in advance of the cost of reproducing the exhibits requested.



88



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##### Table of Contents

SCHEDULE II



Valuation and Qualifying Accounts

For the Years Ended December 31, 2004, 2003 and 2002

Reserve deducted from the Asset to which it applies: Allowance for uncollectible accounts



|                             |  |                            |                             |           |                             |                |  |                      |     |  |   |      |  |   |     
|---------------------------- |  | -------------------------- | --------------------------- | --------- | --------------------------- | -------------- |  | -------------------- | --- |  | - | ---- |  | - | ----
|                             |  | (Millions of Dollars)     
|                             |  | Balance atBeginningof Year |                             | Additions |                             | Deductions (b) |  | Balanceat Endof Year
|Description                  |  |                            | Charged toCosts andExpenses |           | Charged toOtherAccounts (a) |                | 
|DUQUESNE LIGHT HOLDINGS      |  |                            |                             |           |                             |                |  |                      |     |  |   |      |  |   |     
|                             |  |                            |                             |           |                            
|Year Ended December 31, 2004 |  | $                          | 19.9                        |           | $                           | 12.0           |  | $                    | 4.2 |  | $ | 18.0 |  | $ | 18.1
|Year Ended December 31, 2003 |  | $                          | 21.7                        |           | $                           | 10.8           |  | $                    | 3.6 |  | $ | 16.2 |  | $ | 19.9
|Year Ended December 31, 2002 |  | $                          | 20.1                        |           | $                           | 21.3           |  | $                    | 2.7 |  | $ | 22.4 |  | $ | 21.7
|                             |  |                            |                             |           |                            
|DUQUESNE LIGHT COMPANY       |  |                            |                             |           |                             |                |  |                      |     |  |   |      |  |   |     
|                             |  |                            |                             |           |                            
|Year Ended December 31, 2004 |  | $                          | 19.9                        |           | $                           | 11.9           |  | $                    | 4.1 |  | $ | 18.0 |  | $ | 17.9
|Year Ended December 31, 2003 |  | $                          | 21.7                        |           | $                           | 10.2           |  | $                    | 3.6 |  | $ | 15.6 |  | $ | 19.9
|Year Ended December 31, 2002 |  | $                          | 20.1                        |           | $                           | 21.3           |  | $                    | 2.7 |  | $ | 22.4 |  | $ | 21.7



|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 28, 2005 |  |  |  | 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BrienMorgan K. OBrien |  | President, Chief Executive Officer and Director   |  | March 28, 2005
|                                       |  |                                                  
|/s/ Stevan R. SchottStevan R. Schott   |  | Senior Vice President and Chief Financial Officer |  | March 28, 2005
|                                       |  |                                                  
|/s/ Susan S. MullinsSusan S. Mullins   |  | Controller (Principal Accounting Officer)         |  | March 28, 2005
|                                       |  |                                                  
|*Doreen E. Boyce                       |  | Director                                          |  |               
|                                       |  |                                                  
|*Robert P. Bozzone                     |  | Director                                          |  |               
|                                       |  |                                                  
|*Charles C. Cohen                      |  | Director                                          |  |               
|                                       |  |                                                  
|*Sigo Falk                             |  | Director                                          |  |               
|                                       |  |                                                  
|*Joseph C. Guyaux                      |  | Director                                          |  |               
|                                       |  |                                                  
|*David M. Kelly                        |  | Director                                          |  |               
|                                       |  |                                                  
|*Steven S. Rogers                      |  | Director                                          |  |               
|                                       |  |                                                  
|*John D. Turner                        |  | Director                                          |  |               



|    |  |                      |  |                  |  |               
|--- |  | -------------------- |  | ---------------- |  | --------------
|    |  |                      | 
|*By |  | /s/ Stevan R. Schott |  | Attorney-in-Fact |  | March 28, 2005



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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 Company (Registrant)
|                     |  |  | 
|Date: March 28, 2005 |  |  |  | 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BrienMorgan K. OBrien   |  | Director, President and Chief Executive Officer             |  | March 28, 2005
|                                         |  |                                                            
|/s/ Stevan R. SchottStevan R. Schott     |  | Director, Senior Vice President and Chief Financial Officer |  | March 28, 2005
|                                         |  |                                                            
|/s/ Susan S. MullinsSusan S. Mullins     |  | Controller (Principal Accounting Officer)                   |  | March 28, 2005
|                                         |  |                                                            
|/s/ Joseph G. BelechakJoseph G. Belechak |  | Director                                                    |  | March 28, 2005
|                                         |  |                                                            
|/s/ Maureen L. HogelMaureen L. Hogel     |  | Director                                                    |  | March 28, 2005



91