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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the Fiscal Year Ended December 31, 2003

or

For the Transition Period From              to             

Duquesne Light Holdings, Inc.

Registrant

1-10290

Commission File Number

25-1598483

IRS Employer Identification No.

(A Pennsylvania Corporation)

411 Seventh Avenue

Pittsburgh, Pennsylvania 15219

412-393-6000

State of Incorporation; Address; Telephone Number

Duquesne Light Company

Registrant

1-956

Commission File Number

25-0451600

IRS Employer Identification No.

(A Pennsylvania Corporation)

411 Seventh Avenue

Pittsburgh, Pennsylvania 15219

412-393-6000

State of Incorporation; Address; Telephone Number

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

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

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.    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.  ¨

Indicate by check mark whether each registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

The aggregate market value of Duquesne Light Holdings, Inc. voting common stock held by non-affiliates as of June 30, 2003 (the last business day of its most recently completed second fiscal quarter) was $1,121,747,551, based on the New York Stock Exchange closing price of $15.07 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, 2004, there were 75,650,705 shares of Duquesne Light Holdings, Inc.’s single class of common stock outstanding.

As of March 1, 2004, 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 2004 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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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.

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.

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 “Rate Matters.”)

REGIONAL TRANSMISSION ORGANIZATION (RTO) – Organization formed by transmission-owning utilities to put transmission facilities within a region under common control.

REGULATORY ASSETS – Pennsylvania 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 PUC 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 Services and Financial business segments, and the all other category, is not so included.

References in this report to “we,” “us” and “our” are to Holdings and its subsidiaries, collectively.

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. Its subsidiaries are primarily involved in operating our automated meter reading technology and providing financing to certain affiliates. On October 24, 2003, Duquesne Power, LP, a newly formed subsidiary of Duquesne Light, announced its agreement to purchase the Sunbury generation station from WPS Resources Corporation for approximately $120 million. The Sunbury plant would be used to serve Duquesne Light’s residential and small commercial customers as part of POLR III, its post-2004 POLR plan currently under review by the PUC. Closing on the pending acquisition is conditioned on PUC approval of POLR III, currently anticipated in the summer of 2004, as well as other regulatory approvals.

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 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.

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 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. (See Note 13.)

Service Areas and Customer Concentrations

Duquesne Light’s electric utility operations provide service to approximately 588,000 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. DQE Energy Services relies on a single synthetic fuel facility customer for a significant portion 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 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.

Business Segments

This information is set forth in Item 7 under “Results of Operations” and in Note 19 to our 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.

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EMPLOYEES

At December 31, 2003, Holdings and its subsidiaries had 1,406 employees. Duquesne Light is party to a labor contract with the International Brotherhood of Electrical Workers (IBEW), which represents 941 of Duquesne Light’s 1,310 employees. In October 2003, Duquesne Light and the IBEW entered a new, three-year collective bargaining agreement.

ENVIRONMENTAL MATTERS

Continuing Operations

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. We expect the costs of compliance to be approximately $6.6 million with respect to sites we will continue to own. These costs were recovered in the CTC, and the corresponding liability has been recorded for current and future obligations.

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. Duquesne Light’s current estimated liability for closing the Warwick Mine, including final site reclamation, mine water treatment and certain labor liabilities, is approximately $27 million. A liability for this amount is recorded on the 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.

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

See Note 1 for a discussion of 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.duquesnelight.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, 2004, and positions during the past five years of the executive officers for Holdings and for Duquesne Light.

Morgan K. O’Brien, age 44. 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. Treasurer from November 1998 to July 1999.

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.

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Joseph G. Belechak, age 44. 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 43. 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. Assistant General Counsel from 1996 to September 1999.

Stevan R. Schott, age 41. At Holdings: Senior Vice President and Chief Financial Officer since August 2003. Vice President and Controller from October 2001 to August 2003. At DQE Financial: Controller from September 1998 to August 1999.

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 38. 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. Controller from July 1999 to March 2000. Assistant Controller from 1996 to July 1999.

At Duquesne Light: Director since April 2003. Senior Vice President and Chief Strategic Officer since August 2003. 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. Previously Controller from November 1998 to August 1999.

William F. Fields, Age 53. At Holdings: Vice President and Treasurer since December 2002. At DQE Financial: President and Treasurer since December 2002. President from June 2001 to December 2002. President and Treasurer from April 2000 to June 2001. Acting President and Treasurer from August 1999 to April 2000. Vice President and Treasurer from December 1997 to August 1999.

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 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 9 transmission substations and 556 distribution substations (364 of which are located on customer-owned land and are used to service only that customer). Duquesne Light has 592 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, 2003 and 2002 are as follows:

Holdings PP&E and Related Accumulated Depreciation

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Duquesne Light electric plant PP&E 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, all used in our electricity delivery business segment. The other PP&E is comprised of office furniture and fixtures. The other energy facilities and landfill gas recovery equipment are used in our Energy Services and Financial business segments, respectively. The fiber optic network is reported in our all other category.

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 (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.

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More particularly, the complaint alleges that Holdings 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 Holdings 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 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. The court recently extended fact discovery through April 2004, with expert witness discovery to continue until August 2004.

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 (GSF), a DQE Financial subsidiary, 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 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 surrender date was extended to facilitate settlement discussions.

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.

On January 7, 2004, GSF and the City executed an amended and restated concession agreement. Closing on the agreement occurred February 18, 2004, at which time GSF paid $4.5 million to the City and was released from all financial obligations under the prior concession agreement (including the remaining $21.4 million note payable balance to the City). Under the new agreement GSF will perform routine and non-routine maintenance of the landfill gas processing facility and routine maintenance of the landfill gas collection system through June 30, 2006. Future revenues from gas sales at the site will be shared between the City and GSF if such revenues exceed the agreed-upon costs of providing the services. The lawsuit was withdrawn with prejudice on February 18, 2004.

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.

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

Not applicable.

PART II

Item 5. Market for Registrants’ Common Equity and Related Shareholder Matters.

Information relating to the market price for Holdings common stock is set forth in Note 20 hereto, and incorporated here by reference.

The Holdings board declared quarterly common stock dividends totaling $1.00 per share in 2003 and $1.34 in 2002. (See “Dividends” discussion at Item 7.) At March

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1, 2004, there were 50,781 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 $65.0 million in 2003 and $75.0 million in 2002.

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Item 6. Selected Financial Data.

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

RESULTS OF OPERATIONS

Overall Performance

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:

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

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 Philadelphia Suburban Corporation (PSC). The 2002 loss from discontinued operations included the results of both AquaSource and Pro Am, Inc. (our former propane distribution subsidiary), 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 13.)

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 Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” was recorded as of January 1, 2002. (See Note 1.)

2002 Compared to 2001

Our loss attributable to common stock was $215.2 million, or $3.28 basic loss per share, in 2002, compared to a loss attributable to common stock of $153.9 million, or $2.75 basic loss per share, in 2001.

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Our earnings from continuing operations available for common stock were $26.1 million, or $0.40 basic earnings per share in 2002, compared to a loss attributable to common stock of $45.0 million, or $0.80 basic loss per share in 2001, an increase of $71.1 million. The average shares outstanding increased by 9.7 million, or 17.4%, principally due to our June 2002 common stock offering.

Duquesne Light’s earnings available for common stock were $72.1 million in 2002, compared to $50.0 million in 2001. The $22.1 million increase in earnings at Duquesne Light was primarily due to the following:

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

In addition to the above items, our continued focus on cost reductions, including cost savings from our 2001 and 2002 corporate restructurings, contributed positively to net earnings in 2002.

DQE Financial (the Financial business segment) recorded $29.8 million and $43.7 million of after-tax asset and investment impairment charges in 2002 and 2001. (See Note 3.)

During 2002, DQE Enterprises (part of the “all other” category) recorded after-tax investment impairment charges totaling $18.1 million. During 2001, impairment charges totaling $36.1 million after-tax were recorded. (See Note 3.)

The loss from discontinued operations in 2002 was $127.6 million, compared to a loss of $108.9 million from discontinued operations in 2001. After-tax impairment charges relating to the AquaSource discontinued operations totaling $100.9 million were recorded in 2002. A $21.2 million loss on disposal relating to Pro Am was recorded in 2002, as a result of the sale of the propane business on December 13, 2002 (See Note 13.)

After-tax impairment charges of $99.7 million related to AquaSource were recorded in 2001.

A charge of $113.7 million was recorded effective as of January 1, 2002 related to the cumulative effect of a change in accounting principle for the impairment of goodwill related to these discontinued operations resulting from the adoption of SFAS No. 142. (See Note 1.)

RESULTS OF OPERATIONS BY BUSINESS SEGMENT

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) DQE Energy Services’ development, operation and maintenance of energy and, for a single customer, synthetic fuel facilities (Energy Services business segment), and (5) DQE Financial’s collection and processing of landfill gas and management of structured

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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 (i) revenues from DQE Communications, (ii) revenue from an energy services investment held by DQE Enterprises until its sale in 2002, and (iii) revenues from our bottled water business, the Pittsburgh Airport energy facility and rental property until their sales in 2001.

We have restated prior periods, where appropriate, to present segment information consistent with the manner that is currently used by management. Note 19 shows the financial results of each principal business segment in tabular form. Following is a discussion of these results.

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 higher operating expenses in 2003.

Operating revenues for this business segment 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 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, that 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 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 for the electricity delivery business segment 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. 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 of 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 include interest on long-term debt, other interest and preferred stock dividends of Duquesne Light. 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.

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Electricity Supply Business Segment. During the first quarter of 2002, Duquesne Light began operating under POLR II, which extends 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 permits Duquesne Light, following CTC collection for each rate class, an average margin per MWh supplied. The actual margin earned depends on the mix of rate classes and the number of customers participating in POLR II. Prior to the start of the POLR II arrangement, our initial POLR 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%, is 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 for this business segment are derived primarily from the supply of electricity for delivery to retail customers and the supply of electricity to wholesale customers. Retail energy requirements fluctuate as the number of customers participating in POLR changes. 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 for industrial customers are primarily influenced by national and global economic conditions.

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

Operating revenues decreased $22.0 million, or 4.7%, compared to 2002. The decrease is due to customers’ shopping for their generation supply, causing a decline in the percentage of customer load delivered through our POLR arrangements.

The following tables set forth MWh supplied for POLR customers.

MWh Supplied

MWh Supplied

Operating expenses for the electricity supply business segment consist of costs to obtain energy for our POLR service and gross receipts tax, both of which fluctuate in direct relation to operating revenues. 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. In its final restructuring order issued in the second quarter of 1998, the PUC determined that Duquesne Light should recover most of the above-market costs of its generation assets, including plant and regulatory assets, through the collection of the competitive transition charge (CTC) from electric utility customers. On January 18, 2001, the PUC issued an order approving our final accounting for the proceeds of our April 2000 generation asset sale, including the net recovery of sale-related transaction costs.

For the CTC business segment, operating revenues are derived by billing electricity 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 and recognize the associated gross receipts tax expense. The resulting decrease in the CTC balance causes a decline in the return earned by Duquesne Light.

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. Collection of the CTC balance continued through December 31, 2003, at which time the CTC balance had been fully collected for all but one customer class which represents less than 1% of Duquesne Light’s customers. Duquesne Light anticipates this class will continue to receive generation through POLR I at least through the end of 2004.

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The full collection of the CTC balance for most of the rate classes has caused a corresponding decrease in the operating revenues, operating expenses, depreciation and amortization expense and the net income derived from the CTC business segment.

Energy Services Business Segment. The Energy Services 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 for this segment are primarily derived from the facility management services for industrial, airport and synthetic fuel customers. Operating revenues increased $8.8 million, or 16.1%, compared to 2002. This increase is principally due to higher synthetic fuel production related to the new services contract discussed above.

Operating expenses consist of the operating and maintenance costs to manage the facilities, as well as general corporate overhead. 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 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 processed landfill gas and $3.4 million of increased earnings from the synthetic fuel investment.

Operating revenues in this business segment are primarily derived from the sale of landfill gas. Operating revenues increased $5.8 million, or 26.4%, compared to 2002. This increase is 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 consist of various costs to operate and maintain the landfill gas sites, as well as expenses related to synthetic fuel and natural gas investments. 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 consists of income from structured lease and affordable housing investments and gains recognized on the sale of investments. 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.

Income taxes consist of our provision for federal income taxes as well as the tax credits generated from our synthetic fuel, landfill gas, affordable housing and (until their expiration in 2002) natural gas 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 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

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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 consist 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 is 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.

2002 Compared to 2001

Electricity Delivery Business Segment. The electricity delivery business segment reported $55.3 million of earnings in 2002, consisting of $57.6 million before an after-tax restructuring charge of $2.3 million, previously discussed. This is compared to $37.7 million of earnings in 2001, consisting of $44.4 million before an after-tax restructuring charge of $6.7 million. Excluding the restructuring charges in both years, earnings from the electricity delivery business segment were $13.2 million, or 29.7%, higher in 2002, due to the hotter than normal summer weather in 2002 and lower interest and operating costs, as discussed below.

Operating revenues increased by $30.4 million, or 9.5%, compared to 2001. The increase can be primarily attributed to a $15.9 million increase in 2002 in gross receipts taxes that are collected through revenue. The largest component increase was in the Pennsylvania revenue neutral reconciliation (RNR) tax rate, which became effective January 1, 2002. Electric distribution companies such as Duquesne Light are permitted to recover this cost from consumers on a current basis. In addition, there was a 5.1% increase in MWh sales to customers as compared to 2001, which caused a $9.6 million increase in revenues.

The hotter than normal summer temperatures in the Pittsburgh region in 2002 contributed to residential and commercial sales increasing 9.5% and 4.6%, compared to 2001, in response to higher cooling demands. Industrial sales, which are less sensitive to weather, also increased by 1.4%, due to higher sales to industrial customers in the primary metals sector.

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

MWh Delivered

Operating expenses increased by $8.2 million, or 5.5%, compared to 2001, primarily due to the increase in gross receipts tax expense of approximately $14.3 million from the increased RNR in 2002. This increase was partially offset by the cost savings from corporate restructurings that occurred in the fourth quarters of both 2001 and 2002 and other cost reduction initiatives, which continue to generate incremental cost savings.

Other income decreased $7.2 million, or 18.4%, compared to 2001, primarily due to lower earnings on invested cash as a result of lower interest rates in 2002.

In 2002, there was $6.0 million, or 7.7%, less interest and other charges primarily due to debt retirements during August 2002 totaling $110 million, which reduced interest expense by $3.4 million. In addition, there were lower interest rates on the variable rate, tax-exempt debt in 2002.

Electricity Supply Business Segment. In 2002, the electricity supply business segment reported earnings of $13.9 million, compared with zero earnings in 2001. For the period April 28, 2000 through December 31, 2001, this segment’s financial results reflected POLR I, which was designed to be income neutral to Duquesne Light. During the first quarter of 2002, Duquesne Light began operating under POLR II.

Operating revenues increased $41.9 million, or 9.7%, compared to 2001. The increase is due to an increase in the average generation rate charged to customers, partially offset by a decrease in the percentage of customers who received electricity through our POLR arrangements.

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The following table sets forth MWh supplied for POLR customers.

MWh Supplied

Operating expenses increased $18.3 million, or 4.3%, compared to 2001, despite a decrease in the MWh supplied. The increase in expense is due to the higher rate charged by our supplier under POLR II.

CTC Business Segment In 2002, the CTC business segment reported earnings of $2.9 million compared to earnings of $12.3 million in 2001, a decrease of $9.4 million, or 76.4%.

Operating revenues decreased $181.3 million, or 59.7%, due to the full collection of the allocated CTC balance as of December 31, 2002, for most of our customers as well as scheduled decreases in the average CTC rate charged to customers from 2001 to 2002. As of December 31, 2002, the CTC balance had been fully collected for approximately 95% of Duquesne Light’s customers, representing approximately 87% of the MWh sales for the year.

Operating expenses consist solely of gross receipts tax, which fluctuates in direct relation to operating revenues. Operating expenses decreased $8.1 million, or 60%, compared to 2001.

Depreciation and amortization expense consists of the amortization of transition costs. There was a decrease of $158.7 million, or 58.5%, compared to 2001, primarily due to the full collection of the allocated CTC balance for most customers.

Energy Services Business Segment. The Energy Services business segment reported earnings of $17.1 million in 2002, compared to earnings of $6.3 million in 2001, an increase of $10.8 million, or 171.4%. This increase resulted primarily from a full year of earnings from synthetic fuel service contracts that were entered into during 2001 and new contracts entered into in 2002.

Operating revenues increased $23.4 million, or 74.8%, compared to 2001. This increase is primarily due to the increased facility management revenue of $17.4 million from the additional synthetic fuel service contracts.

Operating expenses increased $1.6 million, or 5.8%, compared to 2001. An increase of $8.6 million resulted from the additional synthetic fuel facility management service contracts, and was partially offset by decreased overhead costs.

Other income consists of income from early completion bonuses, construction management fee income and gains recognized on the sale of assets. Other income decreased $5.3 million, or 67.1%, compared to 2001 due primarily to gains recognized on sales of alternative fuel property of $2.6 million and recognition of an early completion bonus and construction management fee of $2.6 million on a new alternative fuel facility in 2001.

Financial Business Segment. The Financial business segment reported a loss of $8.0 million in 2002, consisting of income of $21.8 million before after-tax impairment charges of $29.8 million. This is compared to a loss of $2.6 million in 2001, which consisted of income of $41.1 million before after-tax impairment charges of $43.7 million. (See Note 3.) Absent these impairment charges, income decreased $19.3 million, or 47.0%. The decrease resulted primarily from $9.8 million fewer tax credits generated in 2002, due primarily to the sale of the majority of the affordable housing portfolio in 2001. In addition, earnings from the structured lease investments decreased $3.4 million after-tax due to scheduled declines in the earnings of these investments. Lower landfill gas production and lower gas sales prices in 2002 also contributed to the decline in income.

Operating revenues decreased $7.8 million, or 26.2%, compared to 2001. This decrease is primarily due to lower landfill gas production and lower landfill gas sales prices in 2002 that reduced revenues by $3.0 million and $2.0 million, respectively.

Depreciation and amortization expense increased $2.2 million, or 21.8%, compared to 2001. This increase resulted from additional depreciation on portions of the Fresh Kills landfill gas investment.

Other income decreased $5.8 million, or 20.3%, as compared to 2001, primarily due to a $5.2 million decrease in earnings from structured lease investments.

Interest and other charges include interest on long-term debt and other interest. There was a decrease of $4.3 million, or 71.7%, compared to 2001, due to the retirement of $85.0 million of term loan debt in 2001.

Our income tax benefit decreased $7.0 million, or 16.8%, from 2001. This decrease is due to a decrease in the total income tax credits generated, primarily from our affordable housing investments, partially offset by an increase in the federal income tax benefit recorded related to our pre-tax losses in both years. The income tax credits recognized declined significantly, from $40.0 million in 2001 to $30.2 million in 2002.

The income tax credits generated from our affordable housing investments decreased $8.5 million

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due to the sale of a significant portion of our remaining portfolio in 2002. Tax credits from our synthetic fuel investment increased $5.8 million, while credits from our landfill gas and natural gas investments decreased $3.8 million and $3.3 million from 2001.

Our pre-tax loss in 2002 was $12.8 million, prior to the impairment charges, which are shown net of tax, compared to a pre-tax loss of $0.5 million in 2001, prior to the impairment charges in that year. As the pre-tax loss increased in 2002, there was a corresponding $4.3 million increase in the federal income tax benefit recorded.

All Other. The all other category reported a loss of $51.9 million in 2002, consisting 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. This is compared to a loss of $96.6 million in 2001, which consisted of a loss of $48.9 million before after-tax impairment charges of $36.1 million, after-tax restructuring charges of $11.1 million and preferred dividends of $0.5 million. Absent the impairment charges, restructuring charges and the preferred dividends, this improvement of $16.5 million was primarily due to lower interest expense in 2002 and the $4.9 million after-tax loss on the sale of the bottled water business recognized in 2001.

Operating revenues are comprised of revenues from DQE Communications and, until their sales in 2001, revenues from our bottled water business, the Pittsburgh Airport energy facility and rental property. Operating revenues decreased $30.1 million, or 82.0%, compared to 2001, due to decreased revenues of $8.1 million from the sale of our bottled water business, $8.1 million from sales-type leases recognized in 2001 by DQE Communications, $7.8 million from the sale of the energy facility and $4.4 million from the sale of rental property.

Operating expenses consist of expenses to operate and maintain our fiber optic based network and, until their sales, expenses to operate our bottled water business, the energy facility and the rental properties. In 2002, operating expenses decreased $20.3 million, or 43.1%, compared to 2001. This decrease was primarily due to an $8.4 million decrease in expenses following the sale of the bottled water business, $5.7 million following the sale of the energy facility, $4.6 million following the sale of the rental properties and a decrease in expenses from the cost savings associated with the 2001 restructuring. Offsetting this was a $5.9 million increase in expenses in 2002 due to the write-off of a receivable from a telecommunications customer who filed for bankruptcy and a $1.9 million increase in expenses associated with the write-off of the costs associated with the previously proposed generating station.

Interest expense decreased $18.5 million, or 38.3%, in 2002. This decrease was primarily due to lower interest rates, lower short-term borrowing levels and the retirement of $150.0 million of floating rate notes in January 2002.

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.

Unbilled Energy Revenues. Duquesne Light records revenues related to the sale of energy when delivery is made to customers. However, the determination of such

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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, Duquesne Light estimates the amounts delivered to customers since the date of the last meter reading and records the corresponding unbilled revenue. Duquesne Light estimates this unbilled revenue each month based on daily volumes, estimated customer usage by class, delivery losses and applicable customer rates based on regression analyses reflecting significant historical trends and experience. Customer accounts receivable as of December 31, 2003, and 2002, include unbilled revenues of $29.7 million and $31.9 million.

Impairment of Long-Lived Assets and Investments. We evaluate long-lived assets (including other intangibles) of identifiable business activities and investments for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable. In addition to those long-lived assets and investments for which impairment charges were recorded (see Note 3), 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, fundraising abilities, customers, contracts and overall ability to continue as a going concern.

Pension and Other Postretirement Benefit Plan Assumptions. We provide pension benefit plans covering substantially all of our full-time employees. We also provide postretirement benefits for some retired employees. The retiree medical benefits terminate when retirees reach age 65. We account for these benefits in accordance with SFAS No. 87, “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 noncash 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 6.25% as of December 31, 2003, compared to 6.75% as of December 31, 2002. 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 have revised this assumption for 2004, and will assume a rate of return on plan assets in the pension plans of 8.0%.

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 2003 postretirement benefit plan expense was 10.5% for fiscal year 2003, decreasing to an ultimate rate of 5.25% in 2014. In 2003, we modified the postretirement plan design, which provides for greater cost-sharing by the participants beginning in 2004.

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 14 for information about these assumptions, actual performance, amortization of investment and other actuarial gains and losses and calculated plan costs for 2003, 2002 and 2001. As of December 31, 2003, the fair value of the pension plan assets of $679.0 million represented approximately 98% of the projected benefit obligation of our pension plans.

Primarily because of the amortization of previous years’ net investment gains, our pension expense for 2003, 2002 and 2001 was negative, resulting in an increase in net income in each year. 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. Our current estimate for 2004 is an increase in our pre-tax pension expense of approximately $4 million compared to 2003. This increase 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 2003 of $120.2 million significantly exceeded the assumed rate of return on plan assets of 7.5%, it does not fully mitigate the shortfall in the actual return on plan assets over the past few years.

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Pursuant to the actuarial valuations that were performed, we were not required to make cash contributions to our pension plans in 2003, nor will we be required to do so in 2004. However, Duquesne Light has an obligation to contribute approximately $32.1 million to the pension plans over future years. (See Note 14.)

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 agreement 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.)

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. Revisions to contingent liabilities are reflected in income in the period in which different facts or information become known, or circumstances change, that affect the previous assumptions with respect to the likelihood or amount of loss. 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 the ultimate outcome differ from the assumptions and estimates, revisions to the estimated reserves for contingent liabilities would be recognized. Such contingent liabilities include, but are not limited to, restructuring liabilities (see Note 4), income tax matters (see Note 10), and other commitments and contingencies (see Note 12).

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. 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 and by obligations of a Duquesne Light subsidiary to holders of its securities. (See Note 15.) 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. During 2003, 2002 and 2001, Duquesne Light paid dividends on common stock of $69.0 million, $63.7 million and $56.0 million.

Holdings has continuously paid dividends on its common stock since 1953. Annual dividends per share, paid quarterly, were $1.00, $1.51 and $1.68 for the years 2003, 2002 and 2001. Most recently, in the first

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quarter of 2004 the board of directors declared a quarterly dividend of $0.25 per share (payable on April 1, 2004 to holders of record on March 10, 2004). 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 2003, 2002 and 2001, Duquesne Light spent $76.1 million, $72.5 million and $59.1 million for electric utility construction. In addition, Holdings spent $1.9 million, $11.3 million and $61.3 million on capital expenditures relating to our other business lines and other investments. We estimate that during 2004, 2005 and 2006 Duquesne Light will spend, excluding the allowance for funds used during construction, approximately $80 million, $80 million and $78 million for electric utility construction related to its transmission and distribution infrastructure, and Holdings will spend $3 million, $4 million and $3 million for construction by our other businesses.

Discontinued Operations. In 2003, 2002 and 2001, Holdings spent $16.8 million, $39.9 million and $39.5 million for water utility construction.

Asset Dispositions

Continuing Operations. In 2003, we 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. We 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 also 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, 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 $2.3 million for the sale of an electronic commerce investment, which approximated book value.

In 2001, we sold a portion of our affordable housing portfolio, receiving proceeds of approximately $34 million ($3.4 million at Duquesne Light), which approximated book value. We also sold an office building, receiving proceeds of $18.5 million, which approximated book value.

Also in 2001, the Allegheny County Airport Authority purchased the Pittsburgh International Airport energy facility from a DQE Enterprises subsidiary, and entered into a 15-year operations and maintenance agreement regarding the facility with DQE Energy Services. The transaction resulted in an after-tax gain of $8.4 million.

We sold our bottled water assets in 2001. The sale resulted in an after-tax loss of approximately $15 million, of which $10.0 million had been recorded in December 2000. We also received $4.3 million for the sale of other non-strategic assets.

Discontinued Operations. On July 31, 2003, AquaSource closed the sale of its investor-owned utilities (and certain related contract operations) to PSC, receiving cash proceeds of approximately $195 million, including approximately $5 million related to working capital. PSC also assumed $10.4 million of debt associated with the business. The final purchase price will be determined once various purchase price adjustments are applied. These adjustments will be based on the pre-closing achievement of specific performance measures related to revenue, rate base and customer connections, as well as working capital. In October 2003, AquaSource returned $2.8 million to PSC related to purchase price adjustments attributable to the difference between the estimated and proposed final closing purchase price. In November 2003, AquaSource returned $2.0 million to PSC related to purchase price adjustments and working capital. The maximum remaining purchase price adjustment that could result is approximately $12 million. However, we have been unable to resolve the purchase price issues and, with PSC, will be appointing an arbitrator. We do not expect that any additional purchase price adjustments will have a material adverse effect on our financial position or results of operations.

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. Also in the first quarter of 2003, AquaSource sold its New England contract operations for approximately $1.3 million.

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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 our more detailed discussion of these sales in Note 13.)

In 2001, we sold 50,000 shares of AquaSource Class A Common Stock to a third party in exchange for approximately $4 million of services. We will share proceeds from the sale of AquaSource with this third party. We also sold real property, receiving proceeds of $0.1 million, and acquired four water companies for approximately $0.9 million.

Financing

On March 3, 2004, and January 26, 2004, Duquesne Capital, L.P., a special purpose subsidiary of Duquesne Light, redeemed $25 million and $50 million principal amounts of its 8 ³/8% Monthly Income Preferred Securities (MIPS). Pursuant to the terms of the MIPS, Duquesne Light simultaneously redeemed $25.3 million and $50.5 million of its 8 ³/8% Subordinated Deferrable Interest Debentures, Series A, due May 31, 2044 (Subordinated Debentures). (See Note 1.)

As of March 3, 2004, $41 million was outstanding under the Duquesne Light revolving credit facility (described below), bearing an average interest rate of 2.2% annually.

On February 18, 2004, GSF 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 will recognize approximately $16 million into income ratably over the new contract term, scheduled to end June 30, 2006. (See Note 12.)

On December 30, 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.

On August 1, 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 5% Sinking Fund Debentures (due 2010) at a redemption price of 100.95% of the principal amount thereof.

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

In September 2002, Duquesne Light converted approximately $98 million of variable rate, tax-exempt debt to fixed rate with maturities in 2011 and 2013, resulting in a weighted average interest rate of 4.20%.

In August 2002, Duquesne Light redeemed the following: (i) $10 million aggregate principal amount of 8.20% first mortgage bonds (due 2022) at a redemption price of 104.51% of the principal amount thereof, and (ii) $100 million aggregate principal amount of 7 ⁵/8% first mortgage bonds (due 2023) at a redemption price of 103.9458% of the principal amount thereof.

In June 2002, we issued 17,250,000 shares of Holdings common stock at $13.50 per share in an underwritten public offering. This issuance was made under a shelf registration statement for up to $500.0 million of various debt and equity securities.

In April 2002, Duquesne Light issued $200 million of 6.7% first mortgage bonds (due 2012), and $100 million of 6.7% first mortgage bonds (due 2032). In each case it used the proceeds to call and refund existing debt, including debt scheduled to mature in 2003 and 2004.

In January 2002, we refinanced $150 million of matured DQE Capital floating rate notes through the issuance of commercial paper, primarily at Duquesne Light, which loaned the proceeds to Holdings. Cash generated from operations and equity offering proceeds was used to repay and retire this debt in full, leaving no outstanding balance at December 31, 2002.

Liquidity

We maintain two 364-day, unsecured revolving credit agreements, one for $180 million at Duquesne Light and one for $110 million at Holdings. Both expire in September 2004. We may convert each revolving credit facility into a one-year term loan facility for (i) the amount of letters of credit outstanding plus (ii) one-half of the principal loan amounts less the amount of letters of credit outstanding. At December 31, 2003, no borrowings were outstanding; however, we had $92.9 million in standby letters of credit (including $10.1 million relating to Duquesne Light), $69.8 million of which are backed by the revolving credit agreements, leaving $220.2 million available (including $169.9 million available at Duquesne Light). These letters of credit relate primarily to DQE Financial. As discussed above, Duquesne Light made borrowings under these facilities in the first quarter of 2004. See “Financing.”

Decreases in our credit ratings could result in an inverse change in the fees and interest rates charged under the facilities. Both revolving credit agreements are subject to cross-default if Duquesne Light or any subsidiary defaults on any payment due under any indebtedness exceeding $50 million. In addition, the $110 million revolver is subject to cross-default if Holdings or any subsidiary defaults on any payments due under any of its indebtedness exceeding $50 million.

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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, 2003, we were in compliance with these covenants.

None of our long-term debt is scheduled to mature before 2008. In December 2003, Duquesne Capital issued a call for $50.0 million of MIPS effective January 26, 2004. This caused Duquesne Light to simultaneously redeem $50.5 million of its Subordinated Debentures. As of December 31, 2003, we reclassified the $50.5 million from long-term debt to current maturities, as it would be paid within one year. The additional $1.0 million of current maturities represents scheduled principal payments on other long-term debt, primarily the Fresh Kills note payable balance. (See the Contractual Obligations table below.)

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, 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%.

As of December 31, 2002, we had no commercial paper borrowings outstanding, and $1.0 million of current debt maturities. During 2002, the maximum amount of bank loans and commercial paper borrowings outstanding at any date was $155 million, the amount of average daily borrowings was $45.8 million, and the weighted average daily interest rate was 2.34%.

As of December 31, 2001, we had $151.0 million of current debt maturities and no commercial paper borrowings outstanding. During 2001, the maximum amount of bank loans and commercial paper borrowings outstanding at any date was $55.0 million, the amount of average daily borrowings was $22.7 million, and the weighted average daily interest rate was 4.79%.

Duquesne Light. 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.

As of December 31, 2002, Duquesne Light had no commercial paper borrowings outstanding and no current debt maturities. During 2002, the maximum amount of bank loans and commercial paper borrowings outstanding at any date was $125 million, the amount of average daily borrowings was $43.7 million, and the weighted average daily interest rate was 2.34%.

As of December 31, 2001, Duquesne Light had no current debt maturities and no commercial paper borrowings outstanding. During 2001, there were no bank loans or commercial paper borrowings outstanding.

Holdings Preferred Stock, Series A

As of December 31, 2003, 151,800 shares of Holdings preferred stock were outstanding and included in liabilities on the balance sheet. (See Note 1.) On February 13, 2004, we repurchased 8,667 shares for $98.00 per share. 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, 2004, we converted 3,760 shares into 20,720 shares of common stock; on March 1, 2004, we converted 22,000 shares into 112,255 shares of common stock. The remaining conversions will take place as set forth in the following table:

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OFF-BALANCE SHEET ARRANGEMENTS

Except for the guarantees discussed in Note 12, neither Holdings nor Duquesne Light has any material off-balance sheet arrangements. Neither Holdings nor Duquesne Light is involved in any material contract trading activities. As a wholly owned subsidiary of Holdings, Duquesne Light is involved in various transactions with affiliates. (See Notes 1 and 16.) Duquesne Light owns a 1% general partnership interest in Duquesne Capital, the unconsolidated issuer of the MIPS. (See “Financing” and Notes 1 and 15.)

Contractual Obligations and Commitments

As of December 31, 2003, we have certain contractual obligations and commitments that extend beyond 2004, the principal amounts of which are set forth in the following table:

Payments Due By Period

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RATE MATTERS

Competitive Transition Charge

Under Customer Choice, customers must choose to receive their electric energy from an alternative generation supplier or through Duquesne Light’s POLR arrangements. 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 any CTC that has not already been collected for a customer’s rate class.

Duquesne Light has completed the CTC collection from most of its customers. As of December 31, 2003, the CTC balance has been fully collected for approximately 99.9% of customers, representing approximately 92% of the MWh sales for 2003. The transition costs, as reflected on the consolidated balance sheets, are being amortized over the same period that the CTC revenues are being recognized. For regulatory purposes, the unrecovered net of tax balance of transition costs was approximately $5 million as of December 31, 2003, and approximately $15 million as of December 31, 2002. Duquesne Light is allowed to earn an 11.0% pre-tax return on these amounts.

Provider of Last Resort

POLR I and II. Orion Power Midwest (a subsidiary of Reliant Resources, Inc.) is Duquesne Light’s supplier under POLR I and II. As discussed in “Results of Operations” above, POLR II extends through December 31, 2004, and permits Duquesne Light a margin per MWh supplied. This margin fluctuates based on the mix of rate classes and number of customers participating in 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 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. As of January 31, 2004, Duquesne Light held an irrevocable $4 million letter of credit that could 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, prior litigation suggests that the PUC may not permit Duquesne Light to 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.

POLR III. On December 9, 2003, Duquesne Light submitted POLR III, its rate plan and related generation supply plan intended to cover the period beginning in 2005, to the PUC for approval. The plan is currently under PUC review, with an administrative law judge expected to provide a recommended decision during the week of May 24, 2004. A final order is expected by July 8, 2004.

For our larger commercial and industrial customers, Duquesne Light proposed three basic supply options:

For the first and second options, Duquesne Light would include in the price a $5 per MWh margin designed to recover associated costs, compensate for market risks, and encourage retail competition.

For residential and small business customers, Duquesne Light proposed a fixed-price POLR service for the years 2005 through 2010. Although the proposed prices would increase generation rates by 12% effective January 1, 2005 and an additional 9% effective January 1, 2008, these rates would still be below those charged prior to deregulation in 1996.

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The following table provides selected financial and operating statistics for 2003 for the two customer groups described above.

On October 24, 2003, Duquesne Power, LP, a newly formed subsidiary of Duquesne Light, announced the signing of a definitive agreement to purchase WPS Resources Corporation’s Sunbury generation station for approximately $120 million, which includes inventories and other items. The Sunbury plant would be used in conjunction with Duquesne Light’s POLR III service to residential and small commercial electric customers. Closing on the transaction is conditioned on PUC approval of POLR III, as well as other related regulatory approvals.

Duquesne Power made a deposit of $2.7 million upon signing the purchase agreement. Additional deposits will be made on April 1, 2004 and July 1, 2004. In the event the closing occurs after October 1, 2004, Duquesne Power will make a final deposit on October 1, 2004, for a total of approximately $5.5 million. All deposits are non-refundable and will be applied to the final purchase price at closing.

The Sunbury station consists of six boilers supplying steam for four turbine generators, with a total rated coal-fired generating capacity of 402 megawatts. In addition, the station includes two oil-fired combustion-turbine generators and two diesel generators, with operating capacities of 42 megawatts and 5.5 megawatts, respectively. The facility is located in central Pennsylvania and provides power into the PJM RTO (defined below).

Duquesne Power would combine the output of the Sunbury station with a portfolio of wholesale power purchase contracts in order to provide Duquesne Light a full-requirements POLR III-supply contract for our residential and small business customers. As a means of managing the various risks related to this contract, and at the same time building long-term value for the company, Duquesne Power would focus on a portfolio strategy. This portfolio approach, which may include blocks of traditional wholesale contracts with multiple suppliers, is intended to increase long-term flexibility. The addition of Sunbury to the supply portfolio would benefit Duquesne Light’s POLR customers as well as help to diversify risk. As the cornerstone of the supply portfolio, a generating asset would:

FERC Order No. 2000, as amended, calls on transmission-owning utilities such as Duquesne Light to join regional transmission organizations (RTOs) by September 2004. Duquesne Light is committed to ensuring a stable, plentiful supply of electricity for its customers. Toward that end, Duquesne Light anticipates joining the Pennsylvania-New Jersey-Maryland (PJM) RTO as part of POLR III. Duquesne Light expects to recover its incremental expenses incurred due to joining PJM through its rates.

Rate Freeze

In connection with POLR II, Duquesne Light negotiated 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. Under certain circumstances, affected interests may file a complaint alleging that Duquesne Light has exceeded reasonable earnings, in which case the PUC could make adjustments to rectify such earnings.

OUTLOOK

During the past two years, we have successfully completed the sale of our investments in non-complementary businesses, including AquaSource and Pro Am. The proceeds from these sales have permitted the strengthening of our balance sheet through the reduction of over $215 million of long-term debt in 2003. In December 2003, we resolved our IRS tax disputes regarding our structured lease investments, and reached agreement on both the past tax liability as well as the future treatment of these investments. Also during 2003, the IRS completed its audit of the 1998 through 2001 tax years for the entity that owns and operates synthetic fuel facilities in which DQE Financial holds a limited partnership interest. The audit did not result in any tax credit disallowances. In February 2004, we settled our litigation with the City of New York regarding the Fresh Kills landfill and retired an additional $21 million of debt. Our focus on the core utility business and resolution of our legacy issues has provided a solid foundation for our business.

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Duquesne Light’s POLR III plan is designed to provide important price protection to our residential and small commercial customers through 2010. It would also incorporate an investment in electric generation to provide our POLR customers with a portion of their power needs. Additional power needs would be met through supply contracts, load-following purchases and/or other procurement methods. This investment would be funded primarily with available cash and new borrowings, as necessary. We will remain focused on (i) the delivery of continued superior service to our Duquesne Light customers, and (ii) keeping our total costs at or near the levels experienced in 2003.

Our 2004 financing plan includes the continued strengthening of our balance sheet. In December 2003, Duquesne Light retired $100 million of 7.55% first mortgage bonds, using cash on hand. In the first quarter of 2004, Duquesne Light retired $75 million of MIPS. The redemptions were funded with available cash and borrowings under the revolving credit facility. In February 2004, Duquesne Light filed a shelf registration statement with the SEC to permit the issuance of up to $300 million of first mortgage bonds and preferred stock. Under this shelf, Duquesne Light plans to issue approximately $250 million of securities, the proceeds of which would be used to retire the remaining $75 million of MIPS, to repay amounts borrowed under its revolving credit facility, to replenish its working capital,and for general corporate purposes.

We will continue to increase our common equity by issuing shares of common stock in connection with our dividend reinvestment plan, the conversion of Holdings preferred stock, and employee stock option conversions. Finally, we will examine opportunities to refinance DQE Capital’s $100 million of 8 3/8% public income notes that are callable at par beginning September 15, 2004.

As part of the IRS settlement, our earnings stream from our structured lease investments was modified, causing a $9 million reduction in earnings from 2003 to 2004. However, the earnings volatility of these investments has been removed, and the revised earnings of $3 million to $4 million annually will be realized over the remaining lives of these leases. In addition, as of December 31, 2003, we have over $90 million of tax credit carryforwards that will be used to reduce our future cash payments required for Federal income taxes to the alternative minimum tax level.

During the first quarter of 2004, we began a comprehensive review of our unregulated businesses, including our landfill gas operations and investments, the energy services contract operations, and our fiber optic network. The goal of this review is to improve the operational efficiency and earnings of these businesses in the near term, as well as to assess the growth capabilities of these businesses now and beyond the Section 29 tax credit period, currently set to expire at the end of 2007. We expect to complete this review during the summer of 2004. We continue to evaluate the passive investments held by DQE Financial, including the structured lease investments and investments that provide additional Section 29 tax credits, for opportunities to increase future earnings and/or to monetize those investments.

FORWARD-LOOKING STATEMENTS

The “Outlook” section above contains forward-looking statements. Actual results may materially differ from those implied by such statements due to known and unknown risks and uncertainties, some of which are discussed below.

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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.

Holdings. We manage our interest rate risk by balancing our exposure between fixed and variable rates, while attempting to minimize our interest costs. Currently, our variable interest rate debt is approximately $320.1 million, or 32.7%, of long-term debt. This variable rate debt is low-cost, tax-exempt debt. We also manage our interest rate risk by retiring and issuing debt from time to time and by maintaining a balance of short-term and long-term debt. A 10% increase in interest rates would have affected our variable rate debt obligations by increasing interest expense by approximately $0.3 million, $0.4 million and $1.1 million for the years ended December 31, 2003, 2002 and 2001. A 10% reduction in interest rates would have increased the market value of our fixed-rate debt by approximately $28.6 million and $49.7 million as of December 31, 2003 and 2002. Such changes would not have had a significant near-term effect on our future earnings or cash flows.

Duquesne Light. Duquesne Light manages its interest rate risk by balancing its exposure between fixed and variable rates, while attempting to minimize its interest costs. Currently, its variable interest rate debt is approximately $320.1 million, or 37.3%, of long-term debt. This variable rate debt is low-cost, tax-exempt debt. Duquesne Light also manages its interest rate risk by retiring and issuing debt from time to time and by maintaining a balance of short-term and long-term debt. A 10% increase in interest rates would have affected its variable rate debt obligations by increasing interest expense by approximately $0.3 million, $0.4 million and $0.7 million for the years ended December 31, 2003, 2002 and 2001. A 10% reduction in interest rates would have increased the market value of its fixed-rate debt by approximately $18.2 million and $37.6 million as of December 31, 2003 and 2002. Such changes would not have had a significant near-term effect on its future earnings or cash flows.

See our Provider of Last Resort discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for discussion of market risk associated with our POLR obligation.

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Item 8. Consolidated Financial Statements and Supplementary Data.

INDEPENDENT AUDITORS’ REPORTS

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

We have audited the accompanying consolidated balance sheets of Duquesne Light Holdings, Inc. (formerly DQE, Inc.) and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, comprehensive income, retained earnings, and cash flows for each of the three years in the period ended December 31, 2003. 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 Duquesne Light Holdings, Inc.’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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Duquesne Light Holdings, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 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.

/s/ Deloitte & Touche LLP

Pittsburgh, Pennsylvania

March 5, 2004

To the Directors and Shareholder of Duquesne Light Company:

We have audited the accompanying consolidated balance sheets of Duquesne Light Company (a wholly owned subsidiary of Duquesne Light Holdings, Inc.) and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, comprehensive income, retained earnings, and cash flows for each of the three years in the period ended December 31, 2003. 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 Duquesne Light 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Duquesne Light Company and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

Pittsburgh, Pennsylvania

March 5, 2004

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Duquesne Light Holdings

Consolidated Statements of Income