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

FORM 10-Q

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

DQE Common Stock, no par value - 74,806,511 shares outstanding as of April 30, 2003.

DQE Condensed Consolidated Statements of Income (Unaudited)
(All amounts in millions, expect per share data)

See notes to condensed consolidated financial statements.

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DQE Condensed Consolidated Balance Sheets (Unaudited)

See notes to condensed consolidated financial statements.

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DQE Condensed Consolidated Statements of Cash Flows (Unaudited)

See notes to condensed consolidated financial statements.

DQE Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

See notes to condensed consolidated financial statements.

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Notes to Condensed Consolidated Financial Statements (Unaudited)

Consolidation

          DQE, Inc. is an energy services holding company.  Our subsidiaries include those discussed below.

          The consolidated financial statements include the accounts of DQE and our wholly and majority owned subsidiaries.  The equity method of accounting is used when we have a 20% to 50% interest 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.

Continuing Operations

          Duquesne Light Company, our largest subsidiary, is an electric utility engaged in the supply (as provider of last resort), transmission and distribution of electric energy.

          DQE Energy Services, LLC is an energy facilities management company that provides energy outsourcing solutions including development, operation and maintenance of energy and alternative fuel facilities.

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

          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 Capital Corporation and Cherrington Insurance, Ltd. provide financial and insurance services for DQE and various affiliates.

Discontinued Operations

          AquaSource, Inc. is a water resource management company.  We have entered into agreements to dispose of all of AquaSource’s assets. AquaSource is now reported as a discontinued operation. (See Note H.)

Basis of Accounting

          DQE 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. Additionally, AquaSource’s water utility operations are regulated by various authorities within the states where they operate as to rates, accounting and other matters.

          As a result of our 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 B.) These assets are currently being recovered over a period of approximately 28 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 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.

          The interim financial information for the three month period ended March 31, 2003 is unaudited and has been prepared on the same basis as the audited financial statements. In the opinion of management, such unaudited information includes all adjustments (consisting

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only of normal recurring adjustments) necessary for a fair presentation of the interim information. This information does not include all footnotes which would be required for complete annual financial statements in accordance with accounting principles generally accepted in the United States of America.

          These statements should be read with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2002 filed with the SEC. The results of operations for the three months ended March 31, 2003, are not necessarily indicative of the results that may be expected for the full year.

Stock-Based Compensation

          In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123,” which provides alternative methods of transition for companies that voluntarily adopt the fair value based method of accounting for stock-based employee compensation. This standard also amends the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” by requiring prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and prescribing a specific tabular format to show the effect of the method used on reported results.

          We continue to account for our stock-based employee compensation using the intrinsic value method under the recognition and measurement principles of Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations.

          Prior to December 2001, no compensation expense was recorded on certain option grants because the option terms were fixed and the exercise price equaled the market price of the DQE common stock on the date of grant. However, some option grants have stock appreciation rights (SARs) and/or dividend equivalent accounts (DEAs) attached to the option. We recognize compensation expense for the SARs and DEAs, as appropriate. Compensation expense for the SARs is based upon the quoted market price of DQE common stock at month end.

          The December 2001 and December 2002 option grants are performance-based option awards that become exercisable, subject to an 18-month vesting provision, only if the average of the DQE common stock price over 30 consecutive trading days exceeds certain target prices. We recognize compensation expense for these options when the performance criteria have been met, spreading the expense over the vesting period, if applicable.

          The following table illustrates the effect on reported income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123.

(Millions of Dollars, Except Per Share Amounts)

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, DQE preferred stock and stock options, unless a 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

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computing the diluted earnings per share for the three months ended March 31, 2003 and March 31, 2002.

Diluted Earnings Per Share
For the Three Months Ended March 31,

Recent Accounting Pronouncements

          On January 1, 2003, we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” and Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45), which had no impact on our financial position, results of operations or cash flows. (See Note G for discussion of guarantees.)

          In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), which addresses the consolidation of variable interest entities (VIE’s) 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 46 applies immediately to VIE’s created after January 31, 2003 and to VIE’s in which an enterprise obtains an interest after January 31, 2003. For VIE’s created earlier, the consolidation requirements apply in the first fiscal year or interim period beginning after June 15, 2003. Several of our subsidiaries invest in entities, such as affordable housing partnerships, service agreements and structured lease transactions, which may be considered VIE’s. We do not believe that the adoption of FIN 46 will have a material impact on our consolidated financial position, earnings or cash flows.

Reclassification

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

Competitive Transition Charge

          Under Customer Choice, customers must choose to receive their electric energy from an alternative generation supplier or through our provider-of-last-resort (POLR) arrangements:  POLR I, which applies so long as a rate class’s CTC is still being collected, and POLR II, which applies from full CTC collection for a rate class through December 31, 2004. Customers who select an alternative generation supplier pay for generation charges set competitively by that supplier, and pay Duquesne Light transmission and distribution charges and the CTC (unless the CTC has already been collected for a customer’s rate class). 

          Duquesne Light has completed the CTC collection from most of its customers. As of March 31, 2003, the CTC balance has been fully collected for approximately 99% of customers, representing approximately 89% of the megawatt-hour (MWh) sales for the first quarter of 2003. The transition costs, as reflected on the condensed consolidated balance sheets, 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 net of tax CTC balance.

Provider of Last Resort

          Orion Power Midwest (a subsidiary of Reliant Resources, Inc.) is Duquesne Light’s POLR supplier. POLR II permits Duquesne Light a margin per MWh supplied based on the mix of rate classes, and number of customers, participating in POLR II. Except for this margin, POLR I and POLR II effectively transfer to Orion the financial risks and rewards associated with Duquesne Light’s POLR obligations. As of March

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31, 2003, approximately 73% of Duquesne Light’s customers, measured on a MWh basis, received electricity through POLR I or POLR II. The number of POLR customers will fluctuate depending on market prices and the number of alternative generation suppliers in the retail supply business. 

          There are certain safeguards in POLR I and POLR II designed to mitigate losses in the event that Orion defaults on its performance under the arrangement. Contractually, Duquesne Light has various credit enhancements to address market exposure if Orion failed to deliver the required POLR supply. Duquesne Light holds an irrevocable $10 million letter of credit (that can be increased based on Orion’s investment ratings and net worth). Duquesne Light also remits the POLR customer payments 35 days after billing the customer. Duquesne Light has the right not to remit these payments in the event of an Orion default.

          If Orion were to fail to deliver, Duquesne Light would be required to procure its POLR supply requirements in the energy markets. If market prices for energy were higher than the POLR rate at the time of default, Duquesne Light could potentially be acquiring energy for sale to POLR customers at a loss. If that were to happen and the contractual provisions with Orion were not sufficient to cover any loss, Duquesne Light would seek regulatory recovery of any additional loss. While the Customer Choice Act provides generally for POLR supply costs to be borne by customers, recent litigation suggests that it may not be clear whether Duquesne Light could pass any costs in excess of the existing PUC-approved POLR prices on to its customers.

          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.

PUC Proceedings

          On October 25, 2002, Duquesne Light petitioned the PUC to issue a declaratory order regarding a provision in its retail tariff that affected its largest industrial customer. Orion and Duquesne Light had interpreted the tariff differently. On February 6, 2003 the PUC issued an order, to be effective prospectively, affirming Orion’s interpretation. The effect of this order could increase the customer’s annual billings significantly. The ultimate impact will be influenced by operational changes the customer may make to reduce its energy costs. Duquesne Light is responsible for paying Orion the amount billed, and retains the risk of recovering any increased billings from the customer. This risk is not included in the “normal level” of uncollectible accounts described above.

          On February 21, 2003, the customer petitioned the PUC to reconsider its ruling, which the PUC denied, leaving the original February 6, 2003 order in effect.  The customer has until May 31, 2003 to appeal to the Commonwealth Court of Pennsylvania.

Discontinued Operations

          In March 2001, AquaSource filed a rate increase petition with the Indiana Utility Regulatory Commission (IURC) to increase water and sewer rates for Utility Center, Inc., AquaSource’s largest regulated subsidiary. In the fourth quarter of 2002, the IURC issued a new order approving an 8% increase; however, AquaSource is meeting with the IURC and other parties to address certain technical amendments.

          In December 2002, AquaSource filed a rate increase petition in Sarasota County, Florida. No order is anticipated before the first quarter of 2004. The final rate outcomes in Indiana and Florida may cause purchase price adjustments under the sale agreement with Philadelphia Suburban Corporation (PSC). (See Note H.)

          The components of receivables for the periods indicated are as follows:

          During the fourth quarter of 2001, we recorded a pre-tax restructuring charge of $27.9 million 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

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facilities.  Approximately 170 employees were terminated in connection with this restructuring.

          During the fourth quarter of 2002, we recorded a pre-tax restructuring charge of $4.2 million related to further consolidation and centralization of certain administrative functions.  The 2002 restructuring charge primarily includes severance costs for 18 executive, management, professional and administrative personnel, all of whom were terminated by March 31, 2003. 

          In 2003, we increased our 2002 restructuring liability and restructuring expense by approximately $0.7 million for revised estimates of severance benefits to be paid under the 2002 restructuring plan.  Offsetting this increase was a decrease to the 2001 restructuring liability and restructuring expense of $1.0 million resulting from future sublease income for one of our abandoned office locations.

          The following table summarizes the restructuring activities for both the 2001 and 2002 restructuring plans for the three months ended March 31, 2003.

Restructuring Liability

          The combined remaining restructuring liability as of March 31, 2003 was $10.3 million, and is included in other liabilities on the condensed consolidated balance sheets.  We believe that the remaining provision is adequate to complete the restructuring plan.  We expect that the remaining restructuring liability will be paid on a monthly basis throughout 2006.

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

          In January 2002, we refinanced $150 million of matured DQE Capital floating rate notes primarily through the issuance of commercial paper. Cash generated from operations and equity offering proceeds was used to repay this debt in full during 2002.

          SFAS No. 142, “Goodwill and Other Intangible Assets,” established 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.  Any impairment measured as of the date of adoption would be recognized as the cumulative effect of a change in accounting principle.

          Our goodwill related to both our water resource management and propane delivery businesses.  We had independent valuations performed on both of these reporting units in order to determine their fair values as of January 1, 2002. 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. The valuation of the water distribution reporting unit was further supported by the terms of the July 29, 2002 agreement to sell a substantial portion of AquaSource’s total assets, for a purchase price that was significantly less than the carrying amount of the reporting unit. 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 write-down of goodwill to its fair value, 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. As of December 31, 2002 we had no goodwill remaining.

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Construction

          Continuing Operations.  In the first quarter of 2003, we spent approximately $14 million for electric utility construction. We made no capital expenditures relating to our other business lines. We estimate that in 2003 we will spend approximately $70 million for electric utility construction, and $5 million for construction by our other business lines.

          Discontinued Operations.  In the first quarter of 2003, we spent approximately $6 million for water utility construction. Future capital expenditures related to AquaSource are expected to be $3 million to $5 million on a monthly basis, mainly for environmental compliance purposes. The total capital expenditures for water utility construction in 2003 will depend, in part, on the timing of the sale of our AquaSource investment to PSC. (See Note H.)

Guarantees

          As part of our 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 was $68.7 million as of March 31, 2003. Of the fees received from third-party investors, a portion amounting to $10.1 million has been deferred to absorb any payments or tax recapture with respect to our guarantees. Based on an evaluation of and recent experience with the underlying housing projects, we believe that such deferrals are ample for this purpose.

          In connection with DQE Energy Services’ sale, through a subsidiary, of its alternative fuel facilities, DQE agreed to guarantee the subsidiary’s obligation under the sales agreement to indemnify the purchaser against breach of warranties, representations or covenants. The guarantee began in 2001, the date of the facilities sale, and generally extends from three 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 statement of financial position, and we do not believe this guarantee will have any material impact on our results of operations, financial position or cash flows.

          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 943 of Duquesne Light’s 1,297 employees. This contract expires September 30, 2003.

Pension Plans

          Duquesne Light has an obligation to contribute approximately $32.1 million to its pension plans over future years, resulting from the PUC-approved recovery of costs associated with Duquesne Light’s 1999 early retirement program.

Legal Proceedings

          Shareholder Class Action. In October and November 2001, a number of putative class action lawsuits were filed by purported shareholders of DQE against DQE and David Marshall, DQE’s 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

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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, and the impact that these investments would have on our current and future financial results.

          More particularly, the complaint alleges that DQE and Marshall stated their expectation that certain companies in which DQE Enterprises had invested would undertake initial public offerings of their shares, with the result that our earnings would be positively impacted by the public market valuation of DQE Enterprises’ interests in these companies, but failed to disclose allegedly adverse facts that made the possibility of successful public offerings of the securities of these companies unlikely. The complaint seeks an award of unspecified compensatory damages, and an order permitting class members who purchased DQE shares through a dividend reinvestment plan to rescind those purchases, pre- and post-judgment interest, attorneys’ fees and expenses of litigation and unspecified equitable and injunctive relief.

          On December 12, 2002, the lead plaintiffs asked the court to certify the class action. Since December 2002 we and the plaintiffs have been in pre-trial discovery. The court has directed that this phase be concluded by September 30, 2003.

          Although we cannot predict the ultimate outcome of this case or estimate the range of any potential loss that may be incurred in the litigation, we believe that the lawsuit is without merit, strenuously deny all of the plaintiffs’ allegations of wrongdoing and believe we have meritorious defenses to the plaintiffs’ claims. We are vigorously defending this lawsuit.

          Fresh Kills. GSF Energy, LLC (a DQE Financial subsidiary) has a 20 year concession agreement for the gas rights to New York City’s Fresh Kills landfill. GSF also maintains 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 currently rests 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 seeks rescission of the concession agreement and related relief and seeks an injunction to prevent the Department of Sanitation 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 180 day surrender period has been extended until October 28, 2003 as part of the parties’ effort to determine whether the litigation can be settled.

          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.

Income Taxes

          The annual federal corporate income tax returns have been audited by the Internal Revenue Service (IRS) and are closed for the tax years through 1993. The IRS examination of the 1994 tax year has been completed, and the IRS issued a notice of proposed adjustment increasing our 1994 income tax liability in the approximate amount of $22 million (including penalties and interest).

          The proposed adjustment relates to an investment by one of our subsidiaries in certain structured lease transactions. We have paid the proposed adjustment and filed a protest, which is currently pending with the IRS Appeals Office. As part of their current audit of our 1995 through 1997 years, the IRS has indicated that it is considering proposed adjustments for these years relating to the same transactions as well as to other similar transactions. If the IRS were to propose adjustments relating to these transactions for the years 1995 through 2002

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similar to those proposed for 1994 and if those adjustments were sustained, we would project that the total proposed assessment of additional tax would be approximately $175 million (before interest and penalties).

          In addition, one of our subsidiaries entered into other structured lease transactions from 1995 through 1997. In 1999, the IRS published a revenue ruling setting forth its official position which is to disallow deductions attributable to certain leasing transactions. In October 2002, the IRS published a revenue ruling reaffirming its position to disallow deductions attributable to certain leasing transactions. We believe the IRS is likely to challenge our subsidiary’s structured lease transactions by characterizing them as those described in the revenue ruling. However, the IRS has not yet proposed any adjustments with respect to these transactions, and we cannot predict the nature, extent or timing of any proposed adjustments.

          Although we expect to make additional deposits of at least $80 million with the IRS with respect to any adjustments which may ultimately be proposed, such deposits have not been made. As of December 31, 2002, we had federal income tax credits of $63.4 million  and capital losses of $32.8 million, generated in current and prior years, that are available to offset a portion of any assessment of additional tax made by the IRS. The tax years 1998 through 2002 remain subject to IRS review.

          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 and 2000 primarily to include income of an out of state subsidiary corporation in Pennsylvania taxable income. If the Department asserts the same positions for 2001 and 2002, our total exposure for all years, without interest or penalty, could approximate $85 million (net of associated federal benefit). We do not agree with the Department on this matter and intend to exercise our appeal rights, as necessary.

          It is not possible to predict if, when or to what extent any income tax adjustments ultimately proposed for the period 1994 through 2002 will be sustained. We do not believe that the ultimate resolution of our federal or state tax issues for this period will have a material adverse effect on our financial position or results of operation. However, the resolution of these tax issues, depending on the extent and timing thereof, could have a material adverse effect on our cash flows for the period in which they are paid.

Preferred Stock

          As of March 31, 2003, 223,520 shares of our Preferred Stock, Series A (Convertible) were outstanding. Each share is 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. In 2002, we issued 60,000 shares to AquaSource minority investors in connection with the settlement of litigation. The AquaSource minority investors have a put option to sell no less than all of their shares on the earlier of (1) the closing of the AquaSource divestiture (currently anticipated in the third quarter), or (2) October 7, 2004. Our purchase price will be the $100 liquidation value per share, payable at our election in cash or common stock.

          Each unredeemed share of preferred stock (including the 60,000 shares issued to the minority AquaSource minority investors) will automatically be converted on the first day of the first month commencing after the sixth anniversary of its issuance.

          In 2002 and 2003 we entered into agreements to sell our investment in AquaSource (described below).  In December 2002, we sold Pro Am, our propane distribution business.  Accordingly, these subsidiaries have been reflected as discontinued operations in the condensed consolidated financial statements for both years.

          On March 31, 2003, AquaSource sold its water and wastewater utility construction business to a related party for approximately $7 million before consideration of an earn-out provision. Of the total purchase price, $3.3 million is in the form of a personally guaranteed promissory note that bears interest at 3.5% per annum and shall be paid in full, including accrued but unpaid interest, on the second anniversary of the closing date. The estimated worth of the earn-out provision is in the range from $0 to $1 million.  Also in the first quarter of 2003, AquaSource sold its New England contract operations for approximately $1 million. 

          In July 2002, we entered into an agreement to sell AquaSource’s investor-owned water utilities (and selected operating and maintenance contract operations in seven states that are closely integrated with such utilities) to PSC for approximately $205 million in cash. The businesses being acquired represent a

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significant portion of AquaSource’s remaining assets. The final purchase price could vary from $180 to $215 million, as various purchase price adjustments are applied. These adjustments relate to the achievement of specific operating performance metrics during the interim period until closing, involving revenue, rate base and customer connections.

          In August 2002, we announced the sale of an AquaSource water utility subsidiary to California Water Services Group for $7.7 million, subject to purchase price adjustments. This sale was contemplated as an option under our agreement with PSC, and a purchase price adjustment (in addition to those discussed above) will be applied with respect to the assets to be acquired by PSC.

          AquaSource requires approvals from 13 states and local utility regulatory agencies and the Federal Trade Commission (FTC) in order to close the above-described divestitures. All 13 utility regulatory filings were completed in late 2002.

          On November 22, 2002, we sold the majority of AquaSource’s contract operations business to Southwest Water Company for $10.3 million.

          The following table summarizes income statement data from discontinued operations:

          The following table summarizes major assets and liabilities of discontinued operations:

          We report the results of our business segments, determined by products, services and regulatory environment as follows: (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) DQE Energy Services’ development, operation and maintenance of energy and alternative fuel facilities (Energy Services 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). Effective January 1, 2003, our subsidiary, DQE Enterprises, Inc., no longer meets the requirements of SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.” Therefore, we no longer report an Enterprises 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 of revenues from our telecommunications business line and, until its sale in 2002, revenue from an energy services investment held by DQE Enterprises.

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Business Segments for the Three Months Ended: