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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the Fiscal Year Ended December 31, 2004

or

For the Transition Period From                      to                     

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

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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.

Duquesne Light Holdings, Inc. Yes x No ¨

Duquesne Light Company Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Duquesne Light Holdings, Inc. ¨

Duquesne Light Company x

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

Duquesne Light Holdings, Inc. Yes x No ¨

Duquesne Light Company Yes x No ¨

The aggregate market value of Duquesne Light Holdings, Inc. voting common stock held by non-affiliates as of June 30, 2004 (the last business day of its most recently completed second fiscal quarter) was $1,457,575,378, based on the New York Stock Exchange closing price of $19.31 per share on that date.

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

As of March 1, 2005, there were 77,356,100 shares of Duquesne Light Holdings, Inc.’s single class of common stock outstanding.

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

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

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GLOSSARY OF TERMS

COMPETITIVE TRANSITION CHARGE (CTC) – During the electric utility restructuring from the traditional Pennsylvania regulatory framework to customer choice, electric utilities have the opportunity to recover transition costs from customers through this usage-based charge. As of December 31, 2004, Duquesne Light is collecting the CTC from a single customer class, comprised of two industrial customers.

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

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

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

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

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

REGIONAL TRANSMISSION ORGANIZATION (RTO) – Organization formed by transmission-owning utilities to put transmission facilities within a region under common control. On January 1, 2005, Duquesne Light joined PJM Interconnection, an RTO, which coordinates the movement of electricity in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.

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

TRANSITION COSTS – Transition costs are the net present value of a utility’s known or measurable costs related to electric generation that are recoverable through the CTC.

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

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PART I

CORPORATE STRUCTURE

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

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

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

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

Continuing Operations

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

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

In early 2000, Duquesne Light completed the divestiture of its generation assets, and applied the net sale proceeds to reduce transition costs, thus accelerating its CTC collection period for most customers. In conjunction with the sale of its generation assets, Duquesne Light entered into POLR I, the full requirements arrangement with Orion Power Midwest (a subsidiary of Reliant Resources, Inc.) under which Orion provided Duquesne Light the necessary electricity to satisfy Duquesne Light’s provider of last resort obligation during the CTC collection period. POLR I, which was designed to be an income neutral arrangement, remains in place for customers under special contracts, as well as a single customer class (comprised of two industrial customers) from which the CTC continues to be collected. In January 2002, Duquesne Light began operating under POLR II, which extended Orion’s full requirements arrangement to service customers from whom the CTC had been fully collected. In addition, the POLR II arrangement permitted Duquesne Light to collect a margin on the energy supplied. POLR II expired on December 31, 2004.

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

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

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

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

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

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

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

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

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

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

Duquesne Light Energy, LLC (DLE) is a competitive retail electric generation supplier that offers customized solutions tailored to meet its customers specific electricity needs. DLE’s primary focus is on the large commercial and industrial customer market segment in Duquesne Light’s service territory. DLE obtains its electric energy through a full-requirements contract with Duquesne Power.

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

Discontinued Operations

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

Service Areas and Customer Concentrations

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

Our other business lines have operations and investments in several states and Canada. Our Canadian operations recognized revenue of $11.9 million, $8.7 million and $8.8 million in 2004, 2003 and 2002. Associated long-lived assets, excluding financial instruments, were $4.2 million, $4.8 million and $5.4 million as of December 31, 2004, 2003 and 2002. Duquesne Energy Solutions relies on a single customer, that owns several synthetic fuel facilities, for substantially all of its revenues and earnings.

Regulation

Holdings and Duquesne Light are subject to the accounting and reporting requirements of the Securities and Exchange Commission (SEC). Duquesne Light’s electricity delivery business is also subject to regulation by the PUC and the Federal Energy Regulatory Commission (FERC) with respect to rates for delivery of electric power, accounting and other matters.

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Business Segments

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

FORWARD-LOOKING STATEMENTS

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

EMPLOYEES

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

ENVIRONMENTAL MATTERS

Legacy Liabilities

In 1992, the Pennsylvania Department of Environmental Protection (DEP) issued Residual Waste Management Regulations governing the generation and management of non-hazardous residual waste, such as coal ash. Following the generation asset divestiture, Duquesne Light retained certain facilities which remain subject to these regulations. We have assessed our residual waste management sites, and the DEP has approved our compliance strategies. As of December 31, 2004, we expect the costs of compliance to be approximately $5 million with respect to sites we will continue to own. These costs were recovered in the CTC.

Duquesne Light also owns the closed Warwick Mine, located along the Monongahela River in Greene County, Pennsylvania. This property had been used in the electricity supply business segment. Duquesne Light has been selling unused portions of the property and will continue to do so. As of December 31, 2004, Duquesne Light’s current estimated liability for closing the Warwick Mine, including final site reclamation, mine water treatment and certain health care liabilities, is approximately $27 million.

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

Discontinued Operations

AquaSource’s former water and water-related operations were, and remain, subject to the Federal Safe Drinking Water Act, which provides for uniform minimum national water quality standards, as well as governmental authority to specify treatment processes to be used for drinking water. AquaSource’s former operations also were, and remain, subject to the Federal Clean Water Act, which regulates the discharge of pollutants into waterways. AquaSource is aware of various compliance issues at its former water and wastewater facilities attributable to the period of time during which it owned these facilities. AquaSource has agreed to indemnify the purchasers of these facilities for certain pre-closing environmental liabilities. We do not believe that AquaSource’s indemnity obligations in respect of any of these compliance issues will have a material effect on Holding’s financial position, results of operations or cash flows.

Prior to divesting its former operations, AquaSource entered into various consent agreements regarding certain environmental compliance matters. In connection with divesting its former operations, AquaSource assigned these consent agreements to the relevant purchasers. Although AquaSource has agreed to indemnify the purchasers of its former operations for certain pre-closing environmental liabilities, we do not believe that any of these indemnity obligations will have a material effect on Holding’s financial position, results of operations or cash flows.

OTHER

Recent Accounting Pronouncements

Share-Based Payments

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

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

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

Pending Litigation

See Item 3, “Legal Proceedings,” for a discussion of pending litigation.

Available Information

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

EXECUTIVE OFFICERS OF THE REGISTRANTS

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

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

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

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

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

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

Maureen L. Hogel, age 44. At Holdings: Senior Vice President and Chief Legal & Administrative Officer since August 2003. Senior Vice President and Chief Administrative Officer from December 2002 to August 2003.

At Duquesne Light: Director since April 2003. Senior Vice President and Chief Legal & Administrative Officer since August 2003. Senior Vice President and Chief Administrative Officer from December 2002 to August 2003. Senior Vice President - Human Resources and Administration from October 2001 through November 2002. Vice President - Development, Legal and Administrative Affairs from January 2001 through October 2001. Vice President - Legal from September 1999 through December 2000.

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

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

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

At Duquesne Light: Director from April 2003 to June 2004. Senior Vice President and Chief Strategic Officer from August 2003 to June 2004. Vice President - Corporate Development and Rates from December 2002 to July 2003. Vice President - Corporate Development from October 2001 to November 2002. Vice President and Chief Accounting Officer from August 2000 to October 2001.

William F. Fields, Age 54. At Holdings: Vice President and Treasurer since December 2002. At DQE Financial: Treasurer since December 2002. President from June 2001 to August 2004.

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

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

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electric utility properties are subject to a lien under the Indenture of Mortgage and Deed of Trust dated as of April 1, 1992.

Duquesne Light owns 10 transmission substations and 556 distribution substations (375 of which are located on customer-owned land and are used to service only that customer). Duquesne Light has 672 circuit-miles of transmission lines, comprised of 345,000, 138,000 and 69,000 volt lines. Street lighting and distribution circuits of 23,000 volts and less include approximately 16,420 circuit-miles of lines and cable. These properties are used in the electricity delivery business segment.

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

Holdings PP&E and Related Accumulated Depreciation

Duquesne Light electric plant includes: (1) distribution poles and equipment; (2) lower voltage distribution wires used in delivering electricity to customers; (3) substations and transformers; (4) high voltage transmission wires used in delivering electricity to substations; (5) meters and automated meter reading assets; and (6) internal telecommunication equipment, vehicles and office equipment, primarily used in our electricity delivery business segment. The fiber optic network owned by DQE Communications is reported in our “all other” category. The other energy facilities and landfill gas equipment are used in our Energy Solutions and Financial business segments, respectively. The other PP&E is comprised of office furniture and fixtures.

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

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

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

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

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

PART II

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

The Holdings board declared quarterly common stock dividends of $0.25 per share in each of 2004 and 2003. (See “Dividends” discussion at Item 7.) At March 1, 2005, there were 48,137 holders of record of our common stock. Holdings common stock is listed and traded on the New York, Philadelphia and Chicago Stock Exchanges.

Duquesne Light common stock is not publicly traded; Holdings owns all 10 shares outstanding. The Duquesne Light board declared quarterly common stock dividends totaling $58 million in 2004 and $65 million in 2003.

We have no program regarding the repurchase of Holdings common stock. However, we repurchase shares in connection with the issuance of so-called “stock swap exercises” of employee stock options or restricted stock in which shares are surrendered or deemed surrendered to Holdings to pay the exercise price and/or to satisfy tax withholding obligations. The following table presents information with respect to such repurchases that occurred during the quarter ended December 31, 2004.

For information regarding equity compensation plans, see Item 12.

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

RESULTS OF OPERATIONS

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

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

Overall Performance

2004 Compared to 2003

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

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

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

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

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

2003 Compared to 2002

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

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

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

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The 2003 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 Aqua America. The 2002 loss from discontinued operations included the results of both AquaSource and Pro Am, as well as a charge of $100.9 million relating to an impairment of the long-lived assets, and a $21.2 million loss resulting from the sale of Pro Am. (See Note 17.)

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

RESULTS OF OPERATIONS BY BUSINESS SEGMENT

2004 Compared to 2003

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

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

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

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

MWh Delivered

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

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

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

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

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

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

The following tables set forth MWh supplied for POLR customers.

MWh Supplied

MWh Supplied

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

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

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

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

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

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

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

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

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

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

As of March 31, 2004, we adopted FIN 46R and accordingly consolidated the seven low-income housing development guarantee funds in which a DQE Financial subsidiary owns a 1% general partner interest. The losses from these investments were recorded in other income, and the benefit from limited partners’ interest reflects the portion of the losses related to the affordable housing guarantee funds that are not owned by the DQE Financial subsidiary.

Income taxes consist of our provision for federal income taxes as well as the tax credits generated from our synthetic fuel limited partnership and landfill gas and affordable housing investments. The income tax benefit decreased $4.8 million, or 16.2%, compared to 2003, due primarily to a $2.9 million decrease in tax credits generated in 2004 from our investment in the synthetic fuel partnership in which we sold 50% of our

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

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

2003 Compared to 2002

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

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

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

MWh Delivered

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

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

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

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

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

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

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

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The following tables set forth MWh supplied for POLR customers.

MWh Supplied

MWh Supplied

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

Unbilled Electricity Revenues. Holdings and Duquesne Light record revenues related to the sale of electricity when delivery is made to customers. However, the determination of such sales to individual customers is based on the reading of their meters, which Duquesne Light reads on a systematic basis throughout the month. At the end of each month, Holdings and Duquesne Light estimate the amount of electricity delivered to each customer since the date of the last meter reading based on actual daily meter reads or, alternatively, estimated daily use based on rate-specific, statistically estimated, hourly consumption patterns. Unbilled revenues are estimated each month based on the rate class-specific unbilled electricity sales and the corresponding average retail rate. Customer accounts receivable as of December 31, 2004, and 2003, include unbilled revenues of $31.3 million and $29.7 million at Holdings, and $31.1 million and $29.7 million at Duquesne Light.

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

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investments for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable. In addition to those long-lived assets and investments for which impairment charges were recorded in 2002 and 2003 (see Note 18), others were reviewed for which no impairment was required. For long-lived assets to be held and used, these computations used judgments and assumptions inherent in management’s estimate of undiscounted future cash flows to determine recoverability of the assets. It is possible that a computation under a “held for sale” situation for certain of these long-lived assets could result in a significantly different assessment because of market conditions, specific transaction terms or a buyer’s different viewpoint of future cash flows. For investments, we considered our investee’s cash on-hand, financing abilities, customers, contracts and overall ability to continue as a going concern. No impairment charges were recorded in 2004.

Pension and Other Postretirement Benefit Plan Assumptions. We provide pension benefit plans covering substantially all of our full-time employees. We also provide postretirement benefits for some retired employees. The retiree medical benefits terminate when retirees reach age 65. We account for these benefits in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” We record amounts related to our pension and other postretirement benefit plans based on actuarial valuations. Inherent in those valuations are key assumptions including discount rates, expected returns on plan assets, compensation increases, and health care cost trend rates. These actuarial assumptions are reviewed annually and modified as appropriate. Changes in these assumptions could have a significant effect on our non-cash pension income or expense or on our postretirement benefit costs. The effect of changes in these assumptions is generally recorded or amortized over future periods.

We discounted our future pension and other postretirement plan obligations using a rate of 5.75% as of December 31, 2004, compared to 6.25% as of December 31, 2003. We determine the discount rate by considering the yield rates on corporate high-grade bonds, including relative year-over-year changes. Both the pension and other postretirement plan obligations and related expense increase as the discount rate is reduced.

The assumed rate of return on plan assets in the pension plans is the weighted average of long-term returns forecast for the type of investments held by the plans. As the expected rate of return on plan assets increases, the pension plan expense decreases, however the postretirement plan expense is unaffected as this plan has no assets. For 2003, the assumed rate of return on plan assets in the pension plans was 7.5%. We revised this assumption to 8.0% for both 2004 and 2005 to more closely align with our expected long-term rate of return on plan assets.

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

We believe the assumptions used in recording obligations under the plans are reasonable based on our prior experience, market conditions, and the advice of plan actuaries. See Note 12 to the consolidated financial statements for information about these assumptions, actual performance, amortization of investment and other actuarial gains and losses and calculated plan costs for 2004, 2003 and 2002. As of December 31, 2004, the fair value of the pension plan assets of $715.8 million represented approximately 95% of the projected benefit obligation of our pension plans.

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

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

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Income Taxes. In accordance with SFAS No. 109, “Accounting for Income Taxes,” we use the liability method in computing deferred taxes on all differences between book and tax bases of assets and liabilities. These book/tax differences occur when events and transactions recognized for financial reporting purposes are not recognized in the same period for tax purposes. The deferred tax liability or asset is also adjusted in the period of enactment for the effect of changes in tax laws or rates. Our overall effective tax rate is significantly reduced by the income tax credits generated from our synthetic fuel, landfill gas and affordable housing investments.

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

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

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

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

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

The fair value of the mark-to-market contracts is estimated through the use of a valuation model using quoted market prices, when available. Such estimates require significant judgment as to assumptions and valuation methodologies deemed appropriate by management. Actual future results may vary from those assumptions utilized in the valuation models, and those variations could have a material impact on our results. (See Note 4.)

Contingent Liabilities. We establish reserves for estimated loss contingencies when it is management’s assessment that a loss is probable and the amount can be reasonably estimated. Reserves for contingent liabilities are based upon management’s assumptions and estimates, advice of legal counsel, or other third parties regarding the probable outcomes of the matter. Should additional information become known, or circumstances change with respect to the likelihood or amount of loss indicating that the ultimate outcome will differ from the estimates, revisions to the estimated reserves for contingent liabilities would be recognized in income in that period. Such contingent liabilities include, but are not limited to, restructuring liabilities (see Note 9), income tax matters (see Note 10), and other commitments and contingencies (see Note 13).

DIVIDENDS

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

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Holdings’ subsidiaries’ ability to make dividend payments or other distributions may be restricted by their obligations to holders of their outstanding debt and preferred securities and to their creditors, the availability of earnings and the needs of their businesses.

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

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

LIQUIDITY AND CAPITAL RESOURCES

Capital Expenditures

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

Asset Acquisitions and Dispositions

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

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

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

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

In July 2003, AquaSource closed the sale of its investor-owned water utilities (and certain related contract operations) to Aqua America for a purchase price of approximately $178 million in cash, after working capital and purchase price adjustments, including the one described below. AquaAmerica also assumed debt of $10.4 million associated with the business. Unable to resolve purchase price adjustment issues regarding rate base and customer connections, AquaSource and Aqua America agreed to arbitrate their dispute. In August 2004 the arbitration panel found in Aqua America’s favor, reducing the final purchase price by approximately $12 million. The resulting payment to Aqua America had been reserved for, and accordingly did not have a material adverse effect on our financial position or results of operations. This $12 million payment caused a corresponding decline in the discontinued operations liabilities on the consolidated balance sheets.

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

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

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

Financing

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

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

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

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

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

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

Liquidity

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

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

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

Bank Credit Facilities. In September 2004, Holdings and Duquesne Light entered into new unsecured credit facilities expiring in September 2007. Holdings’ $175 million facility replaced its prior $110 million, 364-day revolver. Duquesne Light’s amended and restated $100 million facility replaced its prior $180 million, 364-day revolver. Both credit facilities permit borrowings at interest rates of LIBOR (plus a margin of 0.75 % to 2.00%) or an alternate base rate, as defined in the credit facilities (plus a margin from 0.0% to 1.00%). Both credit facilities have commitment fees that range from 0.125% to 0.30% of the remaining available amount. Interest rates and commitment fees are based on the borrower’s then-current senior unsecured credit rating. Both credit agreements are subject to cross-default if the borrower or any of its subsidiaries defaults on any payment due under any indebtedness exceeding $50 million. Undrawn amounts under both credit agreements are fully available for the issuance of letters of credit.

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

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

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

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

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

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

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

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

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

Holdings Preferred Stock, Series A

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

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

OFF-BALANCE SHEET ARRANGEMENTS

Except for the guarantees discussed in Note 13, neither Holdings nor Duquesne Light has any material off-balance sheet arrangements. As a wholly owned subsidiary of Holdings, Duquesne Light is involved in various transactions with affiliates. (See Notes 1 and 19.)

Contractual Obligations and Commitments

As of December 31, 2004, we have certain contractual obligations and commitments that extend beyond 2005, the amounts of which are set forth in the following table:

Payments Due By Period

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RATE MATTERS

Competitive Transition Charge and Provider of Last Resort

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

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

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

Until December 31, 2004, POLR customers from whom the CTC had been fully collected received their generation supply through POLR II. Duquesne Light earned a margin per MWh supplied under POLR II.

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

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