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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10Q


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2002

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

For the Transition Period From _______________ to _____________

Commission File Number
----------------------
l-10290



DQE, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)


Pennsylvania 25-1598483
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

411 Seventh Avenue
Pittsburgh, Pennsylvania 15219
--------------------------------------------------
(Address of principal executive offices)(Zip Code)

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


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----


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

DQE Common Stock, no par value - 74,070,144 shares outstanding as of July 31,
2002.




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.




DQE Condensed Consolidated Statements of Operations (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
(Millions of Dollars, Except Per Share Amounts)
-----------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
-----------------------------------------------
2002 2001 2002 2001

Operating Revenues:
Electricity sales $ 228.6 $ 257.4 $ 474.2 $ 496.6
Water sales 28.1 26.3 53.9 52.0
Other 26.5 29.7 63.2 85.4
- ------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 283.2 313.4 591.3 634.0
- ------------------------------------------------------------------------------------------------------------------
Operating expenses:
Purchased power 104.0 104.1 202.9 197.6
Other operating 75.5 71.5 154.7 165.3
Maintenance 8.3 6.1 13.7 11.7
Impairment of long-lived assets (Note D) 100.9 109.2 100.9 109.2
Depreciation and amortization 51.3 89.9 131.7 177.7
Taxes other than income taxes 18.6 15.9 36.8 31.2
- ------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 358.6 396.7 640.7 692.7
- ------------------------------------------------------------------------------------------------------------------
Operating Loss (75.4) (83.3) (49.4) (58.7)
- ------------------------------------------------------------------------------------------------------------------
Other income:
Investment income 18.0 8.2 39.l 31.6
Investment impairment (Note D) (10.8) (47.3) (10.8) (47.3)
- ------------------------------------------------------------------------------------------------------------------
Total Other income 7.2 (39.1) 28.3 (15.7)
- ------------------------------------------------------------------------------------------------------------------
Interest and Other Charges 23.0 27.6 44.8 56.0
- ------------------------------------------------------------------------------------------------------------------
Loss Before Income Taxes and Cumulative
Effect of a Change in Accounting Principle (91.2) (150.0) (65.9) (130.4)
- ------------------------------------------------------------------------------------------------------------------
Income Taxes 5.8 (28.2) 14.4 (20.9)
- ------------------------------------------------------------------------------------------------------------------
Loss Before Cumulative Effect
of a Change in Accounting Principle (97.0) (121.8) (80.3) (109.5)
- ------------------------------------------------------------------------------------------------------------------
Cumulative Effect of a Change in Accounting Principle (Note D) -- -- (113.7) --
- ------------------------------------------------------------------------------------------------------------------
Net Loss (97.0) (121.8) (194.0) (109.5)
- ------------------------------------------------------------------------------------------------------------------
Dividends on Preferred Stock 0.1 0.2 0.3 0.2
- ------------------------------------------------------------------------------------------------------------------
Loss Attributable to Common Stock $ (97.1) $ (122.0) $ (194.3) $(109.7)
==================================================================================================================
Average Number of Common Shares
Outstanding (Millions of Shares) 57.4 55.9 56.8 55.9
==================================================================================================================
Basic and Diluted Loss Per Share of Common Stock:
Before cumulative effect of a change in accounting principle $ (1.69) $ (2.18) $ (l.42) $ (1.96)
Cumulative effect of a change in accounting principle $ -- $ -- $ (2.00) $ --
- ------------------------------------------------------------------------------------------------------------------
Basic and Diluted Loss Per Share of Common Stock $ (1.69) $ (2.18) $ (3.42) $ (1.96)
==================================================================================================================
Dividends Declared Per Share of Common Stock $ 0.42 $ 0.42 $ 0.84 $ 0.84
==================================================================================================================

See notes to condensed consolidated financial statements.



2





DQE Condensed Consolidated Balance Sheets (Unaudited)
- -------------------------------------------------------------------------------------------
(Millions of Dollars)
--------------------------
June 30, December 31,
ASSETS 2002 2001
- -------------------------------------------------------------------------------------------

Current Assets:
Cash and temporary cash investments $ 206.8 $ 7.3
Receivables 184.6 193.0
Other current assets 72.2 123.6
- -------------------------------------------------------------------------------------------
Total Current Assets 463.6 323.9
- -------------------------------------------------------------------------------------------
Long-Term Investments 591.6 628.2
- -------------------------------------------------------------------------------------------
Property, Plant and Equipment 2,406.4 2,448.0
Less: Accumulated depreciation (779.9) (759.7)
- -------------------------------------------------------------------------------------------
Total Property, Plant and Equipment-Net 1,626.5 1,688.3
- -------------------------------------------------------------------------------------------
Other Non-Current Assets:
Transition costs 45.7 134.3
Regulatory assets 272.4 267.2
Other 69.6 184.0
- -------------------------------------------------------------------------------------------
Total Other Non-Current Assets 387.7 585.5
- -------------------------------------------------------------------------------------------
Total Assets $ 3,069.4 $ 3,225.9
===========================================================================================

CAPITALIZATION AND LIABILITIES
- -------------------------------------------------------------------------------------------
Current Liabilities:
Notes payable and current debt maturities $ 36.2 $ 151.4
Other current liabilities 253.7 235.4
- -------------------------------------------------------------------------------------------
Total Current Liabilities 289.9 386.8
- -------------------------------------------------------------------------------------------
Non-Current Liabilities:
Deferred income taxes - net 586.3 611.4
Deferred income 95.4 103.5
Other non-current liabilities 148.7 174.1
- -------------------------------------------------------------------------------------------
Total Non-Current Liabilities 830.4 889.0
- -------------------------------------------------------------------------------------------
Commitments and contingencies (Note H)
- -------------------------------------------------------------------------------------------
Capitalization:
Long-Term Debt 1,203.6 l,l98.8
- -------------------------------------------------------------------------------------------
DLC Obligated Mandatorily Redeemable Preferred Trust Securities 150.0 150.0
- -------------------------------------------------------------------------------------------
Preferred Stock:
DQE preferred stock 16.4 16.4
Preferred stock of subsidiaries 62.6 62.6
Preference stock of subsidiaries 14.4 13.8
- -------------------------------------------------------------------------------------------
Total Preferred Stock 93.4 92.8
- -------------------------------------------------------------------------------------------
Common Shareholders' Equity:
Common stock - no par value (authorized - 187,500,000
shares; issued - 126,929,154 and 109,679,154 shares) 1,219.0 994.8
Retained earnings 516.2 759.7
Treasury stock (at cost) (53,185,258 and 53,770,877 shares) (1,233.l) (1,246.7)
Accumulated other comprehensive income -- 0.7
- -------------------------------------------------------------------------------------------
Total Common Shareholders' Equity 502.1 508.5
- -------------------------------------------------------------------------------------------
Total Capitalization l,949.1 1,950.l
- -------------------------------------------------------------------------------------------
Total Liabilities and Capitalization $ 3,069.4 $ 3,225.9
===========================================================================================



See notes to condensed consolidated financial statements.

3




DQE Condensed Consolidated Statements of Cash Flows (Unaudited)



- ----------------------------------------------------------------------------------------
(Millions of Dollars)
---------------------------
Six Months Ended June 30,
---------------------------
2002 2001
- ----------------------------------------------------------------------------------------

Cash Flows From Operating Activities:
Operations $ 140.8 $ 173.7
Changes in working capital other than cash (3.8) (55.5)
Other 28.6 (28.8)
- ----------------------------------------------------------------------------------------
Net Cash Provided from Operating Activities 165.6 89.4
- ----------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Capital expenditures (59.1) (71.1)
Proceeds from disposition of investments 23.2 26.7
Collection of note receivable 7.0 --
Other (4.0) (15.6)
- ----------------------------------------------------------------------------------------
Net Cash Used in Activities (32.9) (60.0)
- ----------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Issuance of debt (Note G) 300.0 --
Commercial paper borrowings 35.0 20.0
Reductions of long-term obligatins (Note G) (443.9) (15.3)
Issuance of common stock (Note F) 223.4 --
Dividends on common and preferred stock (48.5) (47.8)
Other 0.8 2.8
- ----------------------------------------------------------------------------------------
Net Cash Provided from (Used in) Financing Activities 66.8 (40.3)
- ----------------------------------------------------------------------------------------
Net increase (decrease) in cash and temporary cash investments 199.5 (10.9)
Cash and temporary cash investments at beginning of period 7.3 15.8
- ----------------------------------------------------------------------------------------
Cash and temporary cash investments at end of peirod $ 206.8 $ 4.9
========================================================================================


See notes to condensed consolidated financial statements.


DQE Condensed Consolidated Statements of Comprehensive Income (Unaudited)



- -------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
-------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------------------------
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------

Net loss $ (97.0) $ (121.8) $ (194.0) $ (109.5)
- -------------------------------------------------------------------------------------------------------------
Other comprehensive income:
Unrealized holding gains (losses) arising during the period,
net of tax of $0, $2.1, $0 and $(3.2) -- 5.1 -- (5.9)
- -------------------------------------------------------------------------------------------------------------
Comprehensive Loss $ (97.0) $ (116.7) $ (194.0) $ (115.4)
=============================================================================================================



See notes to condensed consolidated financial statements.




Notes to Condensed Consolidated Financial Statements (Unaudited)

A. CONSOLIDATION AND ACCOUNTING POLICIES

Consolidation

DQE, Inc. delivers essential products and related services, including
electricity, water and communications, to more than one million customers
throughout the United States. Our subsidiaries include Duquesne Light Company;
AquaSource, Inc.; DQE Energy Services, LLC; Duquesne Power, Inc.; DQE Financial
Corp.; DQE Enterprises, Inc.; DQE Communications, Inc.; ProAm, Inc.; Cherrington
Insurance, Ltd.; and DQE Capital Corporation.

Duquesne Light, our largest operating subsidiary, is an electric utility
engaged in the transmission and distribution of electric energy.

AquaSource is a water resource management company that acquires, develops and
manages water and waste-water systems and complementary businesses.

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

Duquesne Power was formed in April 2002 to explore various alternative
generation supply options.

DQE Financial 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, a 100 percent-owned finance subsidiary, provides financing for
the operations of our subsidiaries other than Duquesne Light. We fully and
unconditionally guarantee payment of DQE Capital's debt securities including
$100.0 million of Public Income Notes, due 2039, and a $200.0 million revolving
credit facility. At June 30, 2002 no borrowings were outstanding under the
credit facility.

DQE Enterprises manages our remaining electronic commerce and energy
technologies investment portfolios.

Our other business lines include the following: propane distribution,
communications systems, and insurance services for DQE and various affiliates.

The consolidated financial statements include the accounts of DQE and our
wholly and majority owned subsidiaries. The equity method of accounting is used
when we have a 20 to 50 percent interest in other companies. Under the equity
method, original investments are recorded at cost and adjusted by our share of
undistributed earnings or losses of these companies. All material intercompany
balances and transactions have been eliminated in the consolidation.

Basis of Accounting

DQE and Duquesne Light are subject to the accounting and reporting
requirements of the Securities and Exchange Commission (SEC). Duquesne Light's
electricity delivery business is also subject to regulation by the Pennsylvania
Public Utility Commission (PUC) and the Federal Energy Regulatory Commission
(FERC) with respect to rates for delivery of electric power, accounting and
other matters. Additionally, AquaSource's water utility operations are regulated
by various authorities within the states where they operate as to rates,
accounting and other matters.

As a result of our PUC-approved restructuring plan, the electricity supply
segment does not meet the criteria of Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation." Pursuant to the PUC's final restructuring order, and as provided in
the Pennsylvania Electricity Generation Customer Choice and Competition Act
(Customer Choice Act), generation-related transition costs are being recovered
through a competitive transition charge (CTC) collected in connection with
providing transmission and distribution services, and these assets have been
reclassified accordingly. The electricity delivery business segment continues to
meet SFAS No. 71 criteria, and accordingly reflects regulatory assets and
liabilities consistent with cost-based ratemaking regulations. The regulatory
assets represent probable future revenue, because provisions for these costs are
currently included, or are expected to be included, in charges to electric
utility customers through the ratemaking process. (See Note B.)

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

The interim financial information for the three and six month periods ended
June 30, 2002 is unaudited and has been prepared on the same basis as the
audited financial statements. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information. This
information does not include all footnotes which would be required for complete
annual financial statements in accordance with accounting principles generally
accepted in the United States of America.




5



These statements should be read with the financial statements and notes
included in our Annual Report on Form 10-K for the year ended December 31, 2001
filed with the SEC. The results of operations for the three and six months ended
June 30, 2002, are not necessarily indicative of the results that may be
expected for the full year.

Recent Accounting Pronouncements

On January 1, 2002, we adopted SFAS No. 141, "Business Combinations," and
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
the impact of which was not significant to our financial statements.

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
Specifically, this standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred, if a reasonable estimate of fair value can be made. The entity is
required to capitalize the cost by increasing the carrying amount of the related
long-lived asset. The capitalized cost is then depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss. The standard is
effective for fiscal years beginning after June 15, 2002. We are currently
evaluating, but have yet to determine, the impact that the adoption of SFAS No.
143 will have on our financial statements.

Reclassification

The 2001 condensed consolidated financial statements have been reclassified
to conform with the 2002 presentation.

B. RATE MATTERS

Competition and the Customer Choice Act

The Customer Choice Act enables electric utility customers to purchase
electricity at market prices from a variety of electric generation suppliers. As
of June 30, 2002, approximately 77.6 percent of Duquesne Light's customers
measured on a kilowatt-hour (KWH) basis and approximately 75.6 percent on a
non-coincident peak load basis received electricity through our provider of last
resort service arrangement (discussed below). The remaining customers are
provided with electricity through alternative generation suppliers. The number
of customers participating in our provider of last resort service will fluctuate
depending on market prices and the number of alternative generation suppliers in
the retail supply business.

Customers who select an alternative generation supplier pay for generation
charges set competitively by that supplier, and pay Duquesne Light CTC
(discussed below) and/or transmission and distribution charges. Electricity
delivery (including transmission, distribution and customer service) remains
regulated in substantially the same manner as under historical regulation.

In November 2001, the Pennsylvania Department of Revenue established an
increased revenue neutral reconciliation tax (RNR) in order to recover a current
shortfall that resulted from electricity generation deregulation. Since January
2002, Duquesne Light's customer bills have reflected an approximately two
percent increase to recover its costs related to the RNR. (See Note H.)

Regional Transmission Organization

FERC Order No. 2000 calls on transmission-owning utilities such as Duquesne
Light to join regional transmission organizations (RTOs). Duquesne Light is
committed to ensuring a stable, plentiful supply of electricity for its
customers. Toward that end, Duquesne Light planned to join the PJM West RTO. In
late 2001 and early 2002, Duquesne Light entered into agreements with two
generation suppliers to provide the electric capacity required to meet Duquesne
Light's anticipated capacity credit obligations in PJM West through 2004.

Duquesne Light's participation in the PJM West RTO was to be conditioned upon
PUC approval of the recovery of the cost of capacity under these agreements, and
we petitioned the PUC for such approval. However, on July 31, 2002, the FERC
issued a series of proposals designed to establish a standard market design and
transmission service for interstate electricity transactions, and extend its
deadline for joining an RTO until September 2004. In light of the FERC's
proposals, the PUC dismissed Duquesne Light's petition without prejudice. As a
result, neither of the capacity agreements will take effect. Duquesne Light will
continue to evaluate the FERC's proposals and their impact on the possibility of
joining an RTO.

Competitive Transition Charge

In its final restructuring order, 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 CTC from
electric utility customers. Following our application of net generation asset
sale proceeds to reduce transition costs, the CTC was fully collected for most
of our residential customers during the first quarter of 2002 and a large number
of our commercial customers during the second quarter of 2002. As of June 30,
2002, the CTC balance has been fully collected for approximately 95 percent of
Duquesne Light's customers, and 46 percent of the KWH sales for the first six
months of 2002. The transition costs, as reflected on the consolidated balance
sheet, are being amortized over the same period that the CTC revenues are being
recognized.

6



For regulatory purposes, the unrecovered balance of transition costs was
approximately $48.4 million ($29.5 million net of tax) at June 30, 2002, on
which Duquesne Light is allowed to earn an 11 percent pre-tax return. A lower
amount is shown on the balance sheet due to the accounting for unbilled
revenues.

Provider of Last Resort

Although no longer a generation supplier, as the provider of last resort for
all customers in its service territory, Duquesne Light must provide electricity
for any customer who does not choose an alternative generation supplier, or
whose supplier fails to deliver. As part of the generation asset sale, a third
party agreed to supply all of the electric energy necessary to satisfy Duquesne
Light's provider of last resort obligations during the CTC collection period.
Duquesne Light has extended the arrangement (and the PUC-approved rates for the
supply of electricity) beyond the final CTC collection through December 31, 2004
(POLR II). The agreement also permits Duquesne Light, following CTC collection
for each rate class, an average margin of 0.5 cents per KWH supplied through
this arrangement. Except for this margin, these agreements, in general,
effectively transfer to the supplier the financial risks and rewards associated
with Duquesne Light's provider of last resort obligations.

While there are certain safeguards in the provider of last resort
arrangements designed to mitigate losses in the event that the supplier defaults
on its performance under the arrangement, Duquesne Light may face the credit
risk of such a default. Contractually, Duquesne Light has various credit
enhancements that would become activated upon certain events. If the supplier
were to fail to deliver, Duquesne Light would have to contract with another
supplier and/or make purchases in the market at the time of default at a time
when market prices could be higher. While the Customer Choice Act provides
generally for provider of last resort supply costs to be borne by customers,
recent litigation suggests that it may not be clear whether Duquesne Light could
pass any costs in excess of the existing PUC-approved provider of last resort
prices on to its customers. Additionally, the supplier has recently been
downgraded by the rating agencies. Although we are following the situation
closely, our knowledge is limited to public disclosure, and we do not know
whether the downgrade could affect the supplier's ability to perform. Duquesne
Light also retains the risk that customers will not pay for the provider of last
resort generation supply. However, a component of Duquesne Light's delivery rate
is designed to cover the cost of a normal level of uncollectible accounts.

Rate Freeze

In connection with POLR II, Duquesne Light negotiated a rate freeze for
generation, transmission and distribution rates. The rate freeze fixes new
generation rates for retail customers who take electricity under the extended
provider of last resort arrangement through 2004, and continues the transmission
and distribution rates for all customers at current levels through at least
2003. Under certain circumstances, affected interests may file a complaint
alleging that, under these frozen rates, Duquesne Light has exceeded reasonable
earnings, in which case the PUC could make adjustments to rectify such earnings.

AquaSource Rate Applications

In June 2000, AquaSource filed consolidated, statewide water and sewer rate
change applications with the Texas Natural Resource Conservation Commission
(TNRCC) and 17 municipalities. As previously reported, four municipalities
denied or altered the rate increase, and AquaSource appealed. The parties have
since entered into a settlement agreement which provides for, among other
things, the following: the establishment of AquaSource's rate base; the
establishment of four regional rates for service areas within the TNRCC's
original jurisdiction, and three separate rates for the four municipalities who
appealed; and the phase-in of the rates beginning January 1 of 2002, 2003 and
2004 (with the first phase being retroactive to the initial application filing
date of July 17, 2000). AquaSource has also agreed not to file another rate case
application for a rate increase that would be effective prior to July 1, 2004,
unless the utility encounters financial hardship. In addition, the decision on
whether AquaSource may recover costs in excess of net book value related to
acquiring its companies through its rates has been deferred until the next rate
case. AquaSource expects the revised rate increase will result, ultimately, in
additional annual water and sewer revenues of approximately $5 million.
Substantially all of this rate increase has been implemented, subject to refund,
pending final TNRCC approval of the settlement agreement, which could occur as
soon as the third quarter of 2002.

In March 2001, AquaSource also filed a rate increase petition with the
Indiana Utility Regulatory Commission (IURC) regarding water and sewer rates for
its Utility Center, Inc. subsidiary (AquaSource's largest regulated subsidiary).
Hearings were held in January 2002. We currently anticipate a final order from
the IURC in the third quarter of 2002. If the petition is approved, annual water
and sewer revenues for Utility Center will increase by approximately $2.7
million.

We entered into an agreement to sell AquaSource's investor-owned utilities on
July 29, 2002. (See Note I.)


7



C. RECEIVABLES

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

- -------------------------------------------------------------
(Millions of Dollars)
--------------------------
June 30, December 31,
2002 2001
- -------------------------------------------------------------
Electric customers $ 88.9 $ 97.1
Water customers 15.3 14.8
Unbilled revenue accrual 45.4 44.9
Other utility 5.4 3.2
Other 40.7 42.9
Less: Allowance for
uncollectible accounts (11.1) (9.9)
- -------------------------------------------------------------
Total $184.6 $193.0
=============================================================

D. IMPAIRMENT CHARGES

Goodwill

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

The required test for impairment consists of a two-step process that begins
with an estimation of the fair value of our reporting units. The first step is a
screen for potential impairment and the second measures the amount of
impairment, if any. The new standard required that we complete the first step of
the goodwill impairment test by June 30, 2002. To the extent that an indication
of impairment exists upon completion of the first step, we must perform a second
test to measure the amount of the impairment. The second test must be performed
as soon as possible, but no later than December 31, 2002. However, if the second
step of the goodwill impairment test is not complete, but a goodwill impairment
loss is probable and can be reasonably estimated, the best estimate of that loss
shall be recognized. Any impairment measured as of the date of adoption will be
recognized as the cumulative effect of a change in accounting principle.

Our goodwill relates to both our water distribution and propane delivery
businesses. As of June 30, 2002, we had independent valuations performed on both
of these reporting units in order to determine their fair values as of January
1, 2002. These valuations determined the implied fair values of each of the
reporting units using a discounted cash flow analysis and public company trading
multiples. These valuations indicated that the fair values of both the water
distribution and propane delivery reporting units were less than their carrying
values, an indication of impairment. We then assessed the fair value of the
tangible assets and liabilities of each of these reporting units, and determined
that substantially all of the goodwill related to the water distribution
reporting unit and a portion of the goodwill related to the propane delivery
reporting unit was impaired as of January 1, 2002. The valuation of the water
distribution reporting unit was further supported by the terms of the July 29,
2002 agreement to sell AquaSource's investor-owned water utilities, which
represent approximately 85 percent of AquaSource's 2001 total assets, for a
purchase price that was significantly less than the carrying amount of the
reporting unit. (See Note I.) Accordingly, we have recognized a $113.7 million
charge, recorded as of January 1, 2002, as the cumulative effect of a change in
accounting principle for the write-down of goodwill to its fair value. A
cumulative effect charge of $103 million related to the water distribution
reporting unit was recorded, consisting of $107.5 million recorded in the water
distribution business segment, reduced by the effects of the 4.17 percent
minority interest in AquaSource of $4.5 million recorded in the all other
category. (See Note J.) In addition, a $10.7 million charge was recorded in the
all other category relating to the propane delivery reporting unit. The impaired
goodwill was not deductible for tax purposes, and as a result, no tax benefit
was recorded in relation to the charge.

After the cumulative effect charge is recorded, total goodwill of $23.3
million remains, principally at the propane delivery reporting unit ($19.8
million). In addition, $3.5 million of goodwill remains related to other
AquaSource reporting units, most of which are under contract for sale as of
June 30, 2002, and the purchase price approximates the carrying amount of the
reporting units, including goodwill.

The following table reconciles the prior year's reported net loss and loss
per share, adjusted to exclude goodwill amortization expense that is no longer
recorded under the provisions of SFAS No. 142.




8




- ------------------------------------------------------------------
Three Months Ended
---------------------------
June 30, June 30,
2002 2001
- ------------------------------------------------------------------
Reported net loss $(97.0) $(121.8)
Goodwill amortization -
water distribution -- 1.5
Goodwill amortization -
propane delivery -- 0.4
- ------------------------------------------------------------------
Adjusted net loss $(97.0) $(119.9)
==================================================================
Basic and diluted loss per share:
Reported loss per share $(l.69) $ (2.18)
Adjusted loss per share $(1.69) $ (2.14)
- ------------------------------------------------------------------




- ------------------------------------------------------------------
Six Months Ended
---------------------------
June 30, June 30,
2002 2001
- ------------------------------------------------------------------
Reported net loss $(l94.0) $(109.5)
Goodwill amortization -
water distribution -- 2.9
Goodwill amortization -
propane delivery -- 0.6
- ------------------------------------------------------------------
Adjusted net loss $(194.0) $(106.0)
==================================================================
Basic and diluted loss per share:
Reported loss per share $ (3.42) $ (1.96)
Adjusted loss per share $ (3.42) $ (1.90)
- ------------------------------------------------------------------


AquaSource

During the second half of 2001, we announced a change in our strategic
direction, focusing on a Back-to-Basics strategy featuring a more concentrated
focus on core electric utility operations and complementary businesses. At that
time, we indicated that we were exploring opportunities to sell, in an orderly
manner, certain non-complementary assets. In May 2002, we indicated that we were
also exploring the sale of our water and wastewater management business. In late
June 2002, we received indications of interest for this business, and ultimately
determined that the likely outcome would be a sale of this business. Based on
the information received, an indication of impairment of long-lived assets
existed.

We estimated the proceeds to be received from a sale and compared them to the
carrying amount of the long-lived assets that remained after the goodwill
impairment, described above. This comparison indicated that the carrying amount
of the investor-owned water utilities to be sold significantly exceeded the
expected proceeds to be received. As a result, we recorded an impairment charge
of $100.9 million in the second quarter of 2002, which reduced the amount of
property, plant and equipment and other long-lived assets. This charge consisted
of $102.9 million recorded in the water distribution business segment, reduced
by the minority interest effect recorded in the all other category. No tax
benefit was recognized in connection with this impairment charge due to the
uncertainty of the recoverability of the resulting deferred tax asset.

During 2001, our management team evaluated AquaSource's future direction and
the capabilities of its operating platforms. This evaluation determined that the
company's potential future performance would result in lower returns than
originally anticipated. AquaSource therefore recorded a second quarter 2001
pre-tax impairment charge of $109.2 million, or $99.7 million after tax, to
write down various aspects of its business, primarily related to contract
operations and construction. The assets determined to be impaired consisted of
$79.4 million of goodwill, $26.4 million of property, plant and equipment, and
$3.4 million of other assets.

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

DQE Enterprises

During 2001, as a result of our strategic review process, we formalized plans
for an orderly divestiture of our DQE Enterprises business as opportunities
presented themselves. This business is not consistent with our focus on our core
regulated utility businesses and opportunities related to these investments have
not developed as expected, due to market conditions.

During the second quarter of 2002, Enterprises wrote down three investments
in publicly traded applied technology businesses to their quoted market value as
of the balance sheet date, and recognized the associated impairment charge of
$10.0 million. This charge reflects an other-than-temporary decline in the
market value of the underlying securities. Enterprises also recorded a $0.8
million impairment charge for the write-off of two investments in privately-held
entities which have recently filed for protection under Chapter 7 of the U.S.
Bankruptcy Code.

During the second quarter of 2001, Enterprises sold two investments and
recognized an impairment charge to write off all or parts of seven other
investments, resulting in a pre-tax charge of $47.3 million, or $27.7 million
after tax. We determined the value of the impairment of each of these
investments by analyzing their business prospects. This analysis included an
evaluation of the business' cash on-hand, its fundraising abilities, its number
of customers and contracts, and its overall ability to continue as a going
concern. In addition, we obtained an independent external valuation for certain
of the businesses.



9




E. RESTRUCTURING CHARGES

During the fourth quarter of 2001, we recorded a pre-tax restructuring charge
of $31.1 million. The restructuring plan included the (1) consolidation and
reduction of certain administrative and back-office functions through an
involuntary termination plan; (2) abandonment of certain office facilities to
relocate employees to one centralized location; and (3) write-off of certain
leasehold improvements related to abandoned office facilities. Of the $31.1
million, $20.1 million was for employee termination benefits for approximately
200 management, professional and administrative personnel; $8.0 million was for
future lease payments; and $3.0 million was for other lease costs associated
with the restructuring plan. To date, approximately 160 employees have been
terminated. The restructuring liability at June 30, 2002 was $15.6 million and
is included in "other current liabilities" on the condensed consolidated balance
sheet.

The following table summarizes the current year activity for the accrued
restructuring liability for the period ended June 30, 2002:

- --------------------------------------------------------------------------------
Restructuring liability
---------------------------------------
(Million of Dollars)
---------------------------------------
Employee
Termination Lease
Benefits costs Total
- --------------------------------------------------------------------------------
Balance at December 31, 2001 $ 15.8 $ 8.7 $ 24.5
2002 payments (7.5) (1.4) (8.9)
- --------------------------------------------------------------------------------
Balance at June 30, 2002 $ 8.3 $ 7.3 $ 15.6
================================================================================

We believe that the remaining provision is adequate to complete the
restructuring plan. We expect the remaining restructuring liabilities to be paid
on a monthly basis throughout 2006.

F. COMMON STOCK OFFERING

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

G. DEBT

On April 15, 2002, Duquesne Light issued $200 million of 6.7 percent first
mortgage bonds due 2012. On April 30, 2002, Duquesne Light issued $100 million
of 6.7 percent 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. The balance at June 30, 2002, was $35 million. Cash generated from
operations and equity offering proceeds was used to reduce the balance.

H. COMMITMENTS AND CONTINGENCIES

Construction

We estimate that in 2002 we will spend, excluding the allowance for funds
used during construction, approximately $70 million for electric utility
construction; $53 million for water utility construction; and $10 million for
construction by our other business lines.

Guarantees

As part of our investment portfolio in affordable housing, we have received
fees in exchange for guaranteeing a minimum defined yield to third-party
investors. The original amount guaranteed was approximately $250 million, and
has declined as investors have earned the guaranteed returns and have been paid
for a partial release from the guaranty. The remaining amount of such guarantees
at June 30, 2002, was $77.2 million (assuming the favorable tax treatment
accorded these investments continues). A portion of the fees received has been
deferred to absorb any required payments with respect to these transactions.
Based on an evaluation of and recent experience with the underlying housing
projects, we believe that such deferrals are sufficient for this purpose.

Employees

Duquesne Light is a party to a labor contract with the International
Brotherhood of Electrical Workers (IBEW), which represents the majority of
Duquesne Light's employees. This contract expires September 30, 2003.

Legal Proceedings

In February 2001, 39 former and current employees of our subsidiary
AquaSource, Inc., all minority investors in AquaSource, commenced an action
against DQE, AquaSource and others in the District Court of Harris County,
Texas. The complaint alleges that the defendants fraudulently induced the
plaintiffs to agree to sell their AquaSource Class B stock back to AquaSource by
falsely promising orally that DQE would invest $1 billion or more in AquaSource,
which, plaintiffs allege, would have permitted them to realize significant
returns on their investments in AquaSource. The complaint also alleges that the
defendants mismanaged AquaSource, and thus decreased the value of plaintiffs'
AquaSource stock. Plaintiffs seek, among other relief, an order rescinding their
agreements to sell their stock back to AquaSource, an award of actual damages
not to exceed $100 million and exemplary damages not to exceed $400 million.


10





In the first quarter of 2002, DQE and AquaSource filed counterclaims alleging
that 10 plaintiffs who held key AquaSource management positions engaged in
deceptive practices designed to obtain funding for acquisitions and to make
those acquisitions appear to meet certain return on investment requirements, and
that all plaintiffs were unjustly enriched by these wrongful actions. DQE,
AquaSource and AquaSource Utility, Inc. also filed a counterclaim against two
plaintiffs alleging claims for breach of contract, breach of warranty,
indemnification, fraud and unjust enrichment in connection with the acquisition
of various water and wastewater companies from these two plaintiffs.

The parties are currently engaged in settlement negotiations. Although we
cannot predict the ultimate outcome of this case or any settlement thereof, an
estimated reserve for this matter was made at June 30, 2002. We do not believe
final settlement will significantly affect our future results of operations or
cash flows.

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

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

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.

As discussed elsewhere in this report, Duquesne Light requested and received
PUC approval to recover approximately $13 million of costs it will incur in 2002
due to the RNR. On November 19, 2001, the Pennsylvania Office of Consumer
Advocate (OCA) filed a complaint with the PUC, objecting to the recovery
approval and stating various matters, such as rate of return and offsetting
savings, that should be considered before allowing RNR recovery in excess of
rate caps. An initial hearing on the OCA's complaint was held May 2, 2002 before
a PUC administrative law judge, who denied the OCA's objections. However, on May
9, 2002, the PUC ordered that Duquesne Light's quarterly earnings may be
considered in the RNR proceedings. Additional hearings were held in July 2002.
On August 8, 2002, the PUC voted to uphold dismissal of the OCA's case. The OCA
has until early September 2002 to appeal.

Although we cannot predict the ultimate outcome of this matter, we believe
the final resolution will not significantly affect our results of operations or
cash flows.

Income Taxes

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

The proposed adjustment relates to an investment by one of our subsidiaries
in certain structured lease transactions. We have paid the proposed adjustment
and filed a protest, which is currently pending with the IRS Appeals Office. As
part of their current audit of our 1995 through 1997 years, the IRS has
indicated that it is considering proposed adjustments for these years relating
to the same transactions as well as to other similar transactions. If the IRS
were to propose adjustments relating to these transactions for the years 1995
through 2001 similar to those proposed for 1994 and if those adjustments were
sustained, we would project that the proposed assessment of additional tax would
be approximately $175 million (before interest and penalties). We intend to
deposit $55 million with the IRS to be applied toward any adjustments which may
ultimately be proposed. The tax years 1998 through 2001 remain subject to IRS
review.

11



One of our subsidiaries entered into other structured lease transactions from
1995 through 1997. In l999, the IRS published a revenue ruling setting forth its
official position which is to disallow deductions attributable to certain
leasing transactions. We believe the IRS is likely to challenge our subsidiary's
structured lease transactions by characterizing them as those described in the
revenue ruling. However, the IRS has not yet proposed any adjustments with
respect to these transactions, and we cannot predict the nature, extent or
timing of any proposed adjustments.

It is not possible to predict if, when or to what extent any IRS adjustments
ultimately proposed for the period 1994 through 2001 will be sustained. We do
not believe that the ultimate resolution of our federal tax liability for this
period will have a material adverse effect on our financial position. However,
the resolution of this tax liability, depending on the extent and timing
thereof, could have a material adverse effect on our results of operations and
cash flows for the period in which the liability is determined or paid.

Other

DQE Financial maintains a limited partnership investment in a waste-to-energy
facility. In January 2002, Moody's Investor Service downgraded the credit rating
of the general partner's parent, who also guaranteed the partnership's
obligations. This credit condition led to an event of default under the
partnership's service agreement to operate the underlying waste-to-energy
facility for a local authority. On April 1, 2002, the general partner, its
parent and the partnership filed for bankruptcy protection under Chapter 11 of
the U.S. Bankruptcy Code. The local authority issued a notice to terminate the
service agreement; however, the termination has been suspended under the
automatic stay protection afforded the partnership by the bankruptcy filing.
Subsequent to the bankruptcy filing, the general partner obtained
debtor-in-possession financing to meet ongoing cash needs and has obtained a
non-binding letter of intent to be acquired upon emergence from Chapter 11. The
partnership group, including DQE Financial, has begun negotiations with the
local authority to restructure the service agreement. DQE Financial is currently
assessing the effect of these events on the recoverability of its asset carrying
value, which is approximately $15.7 million as of June 30, 2002, but cannot
predict the extent of any potential charge at this time.

DQE Financial has a twenty-year lease for the gas rights to New York City's
Fresh Kills landfill. DQE Financial also maintains an investment in a gas
processing facility at the landfill and was constructing additional processing
capacity when the World Trade Center tragedy occurred. The debris from the World
Trade Center was transported to the Fresh Kills landfill and currently rests on
top of the landfill's largest hill. Landfill gas volumes have declined
substantially at the landfill due to, among other reasons, the excess weight of
the debris causing damage to the gas collection system. The decline in gas
volumes caused DQE Financial to suspend its construction of additional
processing capacity. At December 31, 2001, management determined that the Fresh
Kills investment was impaired, and recognized an impairment charge of $45.7
million on a pre-tax basis.

During 2002, DQE Financial has realized further reductions in available gas
volumes. Management is continuing discussions with the New York City Department
of Sanitation in order to improve financial performance of the facility. DQE
Financial continues to assess the effect of these events on the recoverability
of its asset carrying value, which is approximately $29.6 million as of June 30,
2002.

I. SUBSEQUENT EVENTS

Only July 25, 2002, our Board of Directors declared a $0.25 per share
quarterly dividend, payable October 1, 2002 for common shareholders of record on
September 10, 2002.

On July 29, 2002, we entered into an agreement to sell AquaSource's
investor-owned water utilities to Philadelphia Suburban Corporation (PSC) for
approximately $205 million in cash. In addition, PSC is acquiring selected
operating and maintenance contract operations in seven states that are closely
integrated with the investor-owned water utilities being acquired. The
businesses being acquired represent approximately 85 percent of AquaSource's
2001 total assets. The final purchase price could vary from $180 to $215
million, as various purchase price adjustments are applied. These adjustments
relate to the achievement of specific operating performance metrics during the
interim period until closing, involving revenue, rate base and customer
connections. In addition, within 45 days of the agreement, we have the option to
sell operations representing up to six percent of the total customers of the
investor-owned utilities in separate transactions, with consequent purchase
price reductions. The closing is expected to occur in the second half of 2003,
contingent upon regulatory approvals. We are evaluating proposals for some or
all of AquaSource's remaining operations, and announcements will occur to the
extent that definitive agreements are completed. We expect to use the proceeds
to enhance our financial flexibility in order to fund future growth
opportunities identified as part of the Back-to-Basics strategy.

On August 5, 2002, we announced the sale of an AquaSource water utility
subsidiary to California Water Services Group for $7.7 million. This sale was
contemplated as an option under our agreement with PSC, and


12



a purchase price adjustment will be applied with respect to the assets to be
acquired by PSC. The closing is also expected to occur in the second half of
2003, contingent upon regulatory approval.

Beginning with the third quarter of 2002, we anticipate that the components
of AquaSource under contract for sale will be treated as discontinued
operations.

In July 2002, Duquesne Light reduced its outstanding commercial paper balance
by $35 million. On August 5, 2002, we redeemed the following: (i) $10 million
aggregate principal amount of Duquesne Light's 8.20 percent first mortgage bonds
due 2022, at a redemption price of 104.51 percent of the principal amount
thereof, and (ii) $100 million aggregate principal amount of Duquesne Light's
7 5/8 percent first mortgage bonds due 2023, at a redemption price of 103.9458
percent of the principal amount thereof.

J. BUSINESS SEGMENTS AND RELATED INFORMATION

We report the results of our business segments, determined by products,
services and regulatory environment as follows: (1) Duquesne Light's
transmission and distribution of electricity (electricity delivery business
segment), (2) Duquesne Light's supply of electricity (electricity supply
business segment), (3) Duquesne Light's collection of transition costs (CTC
business segment), (4) AquaSource's management of water systems (water
distribution business segment), (5) DQE Energy Services' development, operation
and maintenance of energy facilities and, for a single customer, alternative
fuel facilities (Energy Services business segment), (6) DQE Financial's
collection and processing of landfill gas and management of structured finance
and alternative energy investments (Financial business segment) and (7) DQE
Enterprises' management of electronic commerce and energy technologies
investment portfolios (Enterprises business segment).

We also report an "all other" category, to include our other subsidiaries
below the quantitative threshold for disclosure, and corporate administrative
functions, financing, and insurance services for our various affiliates.
Operating revenues in our "all other" category are comprised of revenues from
our propane delivery and telecommunications business lines, and from our bottled
water business in 2001.

13






Business Segments for the Three Months Ended:
- ------------------------------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
-------------------------------------------------------------------------------------------------------
Electricity Electricity Water Energy Elimina- Consol-
Delivery Supply CTC Distribution Services Financial Enterprises Other tions idated
-------------------------------------------------------------------------------------------------------

June 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 85.5 $113.9 $33.6 $ 28.1 $11.3 $ 3.9 $ 0.4 $ 7.1 $(0.6) $ 283.2
Operating expenses 42.0 109.0 1.5 23.3 5.3 10.4 1.1 15.4 (1.6) 206.4
Depreciation and
amortization expense 14.0 -- 30.9 2.4 0.5 1.9 -- 1.6 -- 51.3
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 29.5 4.9 1.2 2.4 5.5 (8.4) (0.7) (9.9) 1.0 25.5
Other income 8.1 -- -- 0.7 0.9 13.7 0.2 1.9 (7.5) 18.0
Interest and other charges 20.1 -- -- 0.3 0.2 0.5 -- 7.9 (6.0) 23.0
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 17.5 4.9 1.2 2.8 6.2 4.8 (0.5) (15.9) (0.5) 20.5
Income taxes 7.0 2.0 0.4 1.1 2.2 (1.0) (0.3) (5.6) -- 5.8
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)
before impairment 10.5 2.9 0.8 1.7 4.0 5.8 (0.2) (10.3) (0.5) 14.7
Impairment, net -- -- -- (102.9) -- -- (10.8) 2.0 -- (111.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 10.5 2.9 0.8 (101.2) 4.0 5.8 (11.0) (8.3) (0.5) (97.0)
Dividends on
preferred stock -- -- -- -- -- -- -- 0.1 -- 0.1
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss)
available for common $ 10.5 $ 2.9 $ 0.8 $(101.2) $ 4.0 $ 5.8 $(11.0) $ (8.4) $(0.5) $ (97.1)
====================================================================================================================================
Assets $2,019.5 $ -- $45.7 $ 202.9 $44.8 $615.4 $ 14.2 $126.9 $ -- $3,069.4
====================================================================================================================================
Capital expenditures $ 21.0 $ -- $ -- $ 7.5 $ 0.1 $ 0.6 $ -- $ 2.0 $ -- $ 31.2
====================================================================================================================================





14






Business Segments for the Three Months Ended:
- ------------------------------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
---------------------------------------------------------------------------------------------------------
Electricity Electricity Water Energy Elimina- Consol-
Delivery Supply CTC Distribution Services Financial Enterprises Other tions idated
- ------------------------------------------------------------------------------------------------------------------------------------

June 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 80.7 $108.8 $ 73.9 $ 26.4 $ 5.2 $ 5.9 $ 4.9 $ 10.6 $ (3.0) $ 313.4
Operating expenses 38.4 108.8 3.3 20.7 3.8 8.6 3.9 13.6 (3.5) 197.6
Depreciation and
amortization expense 14.8 -- 65.2 4.9 0.5 0.9 0.7 2.9 -- 89.9
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 27.5 -- 5.4 0.8 0.9 (3.6) 0.3 (5.9) 0.5 25.9
Other income (expense) 11.4 -- -- 0.7 4.1 17.4 1.8 (14.7) (12.5) 8.2
Interest and other charges 20.1 -- -- 0.3 0.2 2.0 -- 16.5 (11.5) 27.6
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss)
before taxes 18.8 -- 5.4 1.2 4.8 11.8 2.1 (37.1) (0.5) 6.5
Income taxes 7.7 -- 1.9 0.8 1.6 0.6 0.4 (12.1) -- 0.9
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)
before impairment 11.1 -- 3.5 0.4 3.2 11.2 1.7 (25.0) (0.5) 5.6
Impairment, net -- -- -- (99.7) -- -- (27.7) -- -- (127.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 11.1 -- 3.5 (99.3) 3.2 11.2 (26.0) (25.0) (0.5) (121.8)
Dividends on
preferred stock -- -- -- -- -- -- -- 0.2 -- 0.2
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) available
for common $ 11.1 $ -- $ 3.5 $(99.3) $ 3.2 $ 11.2 $(26.0) $(25.2) $ (0.5) $ (122.0)
====================================================================================================================================
Assets (1) $1,702.5 $ -- $134.3 $389.7 $35.2 $623.6 $ 35.2 $305.4 $ -- $3,225.9
====================================================================================================================================
Capital expenditures $ 15.4 $ -- $ -- $ 8.8 $ 0.2 $ 17.2 $ -- $ 4.4 $ -- $ 46.0
====================================================================================================================================


(1) Relates to assets as of December 31, 2001





15







Business Segments for the Six Months Ended:
- ------------------------------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
--------------------------------------------------------------------------------------------------------
Electricity Electricity Water Energy Elimina- Consol-
Delivery Supply CTC Distribution Services Financial Enterprises Other tions idated
--------------------------------------------------------------------------------------------------------
June 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------

Operating revenues $165.7 $218.1 $98.6 $ 53.9 $22.1 $ 7.9 $ 0.9 $ 25.1 $ (1.0) $ 591.3
Operating expenses 76.1 212.4 4.4 46.4 11.6 22.4 1.7 36.1 (3.0) 408.1
Depreciation and
amortization expense 28.2 -- 91.0 4.9 1.0 3.5 0.1 3.0 -- 131.7
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 61.4 5.7 3.2 2.6 9.5 (18.0) (0.9) (14.0) 2.0 51.5
Other income 20.3 -- -- 1.6 1.3 28.7 0.4 2.1 (15.3) 39.1
Interest and other charges 38.9 -- -- 0.5 0.3 0.7 -- 16.7 (12.3) 44.8
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 42.8 5.7 3.2 3.7 10.5 10.0 (0.5) (28.6) (1.0) 45.8
Income taxes 17.1 2.3 1.1 1.5 3.6 (0.9) (0.3) (10.0) -- 14.4
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)
before impairment and
cumulative effect 25.7 3.4 2.1 2.2 6.9 10.9 (0.2) (18.6) (1.0) 31.4
Impairment, net -- -- -- (102.9) -- -- (10.8) 2.0 -- (111.7)
Cumulative effect -- -- -- (107.5) -- -- -- (6.2) -- (113.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 25.7 3.4 2.1 (208.2) 6.9 10.9 (11.0) (22.8) (1.0) (194.0)
Dividends on
preferred stock -- -- -- -- -- -- -- 0.3 -- 0.3
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss)
available for common $ 25.7 $ 3.4 $ 2.1 $(208.2) $ 6.9 $ 10.9 $(11.0) $(23.1) $ (1.0) $(194.3)
====================================================================================================================================
Capital expenditures $ 34.9 $ -- $ -- $17.9 $ 0.3 $ 2.5 $ -- $ 3.5 $ -- $ 59.1
====================================================================================================================================



16





Business Segments for the Six Months Ended:
- ------------------------------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
---------------------------------------------------------------------------------------------------------
Electricity Electricity Water Energy Elimina- Consol-
Delivery Supply CTC Distribution Services Financial Enterprises Other tions idated
---------------------------------------------------------------------------------------------------------
June 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------

Operating revenues $154.4 $206.4 $148.0 $ 52.0 $9.0 $14.9 $ 10.9 $ 44.5 $ (6.1) $ 634.0
Operating expenses 79.2 206.4 6.6 42.8 7.6 20.6 9.4 42.1 (8.9) 405.8
Depreciation and
amortization expense 29.6 -- 129.5 9.4 0.9 2.1 1.6 4.6 -- 177.7
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 45.6 -- 11.9 (0.2) 0.5 (7.8) (0.1) (2.2) 2.8 50.5
Other income (expense) 21.7 -- -- 2.2 5.9 34.5 2.8 (16.3) (19.2) 31.6
Interest and other charges 40.4 -- -- 0.5 0.3 4.2 0.1 25.9 (15.4) 56.0
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 26.9 -- 11.9 1.5 6.1 22.5 2.6 (44.4) (1.0) 26.1
Income taxes 11.0 -- 4.2 1.2 2.0 1.2 0.2 (11.6) -- 8.2
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)
before impairment change 15.9 -- 7.7 0.3 4.1 21.3 2.4 (32.8) (1.0) 17.9
Impairment charge,
net of tax -- -- -- (99.7) -- -- (27.7) -- -- (127.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 15.9 -- 7.7 (99.4) 4.1 21.3 (25.3) (32.8) (1.0) (109.5)
Dividends on
preferred stock -- -- -- -- -- -- -- 0.2 -- 0.2
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss)
available for common $ 15.9 $ -- $ 7.7 $(99.4) $4.1 $21.3 $(25.3) $(33.0) $ (1.0) $(109.7)
====================================================================================================================================
Capital expenditures $ 26.5 $ -- $ -- $ 18.0 $0.9 $20.3 $ -- $ 5.4 $ -- $ 71.1
====================================================================================================================================




17



ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Part I, Item 2 of this Quarterly Report on Form 10-Q should be read in
conjunction with our Annual Report on Form 10-K for the year ended December
31,2001 filed with the Securities and Exchange Commission (SEC), and the
condensed consolidated financial statements, which are set forth in Part I,
Item 1 of this Report.

DQE, Inc. delivers essential products and related services, including
electricity, water and communications, to more than one million customers
throughout the United States. Our subsidiaries include Duquesne Light Company;
AquaSource, Inc.; DQE Energy Services, LLC; Duquesne Power, Inc.; DQE Financial
Corp.; DQE Enterprises, Inc.; DQE Communications, Inc.; ProAm, Inc.; Cherrington
Insurance, Ltd.; and DQE Capital Corporation.

Duquesne Light, our largest operating subsidiary, is an electric utility
engaged in the transmission and distribution of electric energy.

AquaSource is a water resource management company that acquires, develops and
manages water and waste-water systems and complementary businesses.

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

Duquesne Power Inc. was formed in April 2002 to explore various alternative
generation supply options.

DQE Financial 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 Enterprises manages our remaining electronic commerce and energy
technologies investment portfolios.

Our other business lines include the following: propane distribution,
communications systems, and financing and insurance services for DQE and various
affiliates.

Service Areas

Duquesne Light's electric utility operations provide service to approximately
586,000 direct customers in southwestern Pennsylvania (including in the City of
Pittsburgh), a territory of approximately 800 square miles.

AquaSource's water utility operations currently provide service to more than
520,000 water and wastewater customer connections in 18 states.

ProAm, our propane delivery business, provides service to over 70,000
customers in seven states.

Our other business lines have operations and investments in several states
and Canada.

Regulation

DQE and Duquesne Light are subject to the accounting and reporting
requirements of the SEC. Duquesne Light's electric delivery business is also
subject to regulation by the Pennsylvania Public Utility Commission (PUC) and
the Federal Energy Regulatory Commission (FERC) with respect to rates for
delivery of electric power, accounting and other matters. Additionally,
AquaSource's water utility operations are subject to regulation by various
authorities within the states where they operate as to rates, accounting and
other matters.

Business Segments

This information is set forth in "Results of Operations" below and in
"Business Segments and Related Information," Note J to our condensed
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 in "Outlook" below.

Recent Accounting Pronouncements

In June 2001 the Financial Accounting Standards Board (FASB) issued a new
accounting standard, Statement of Financial Accounting Standards (SFAS) No. 143,
"Accounting for Asset Retirement Obligations."

SFAS No. 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. Specifically, this standard requires entities to record
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred, if a reasonable estimate of fair value can be made. The
entity is required to capitalize the cost by increasing the carrying amount of
the related long-lived asset. The capitalized cost is then depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss.
The standard is effective for fiscal years beginning after June 15, 2002.

18



We are currently evaluating, but have yet to determine, the impact that the
adoption of SFAS No. 143 will have on our financial statements.

RESULTS OF OPERATIONS

Overall Performance

Three months ended June 30, 2002. The loss attributable to common
shareholders was $97.1 million or $1.69 per share in the second quarter of 2002,
compared to a loss of $122.0 million or $2.18 per share in the second quarter of
2001. The average shares outstanding increased 1.5 million, or 2.7 percent.
After-tax impairment charges totaling $111.7 million were recorded in the second
quarter of 2002, while after-tax impairment charges of $127.4 million were
recorded in the second quarter of 2001, all of which are discussed below. (See
Note D.)

The second quarter 2002 impairment charges totaling $111.7 million
consisted of $100.9 million related to the impairment of long-lived assets and
$10.8 million related to the impairment of investments.

The $100.9 million after-tax long-lived asset impairment charge related to
the write-down of fixed assets and other long-lived assets of AquaSource to
their fair value. We had previously announced that we were exploring the sale of
our water and wastewater management business, and during late June 2002, we
received indications of interest for this business. We ultimately determined
that the likely outcome would be a sale of this business, and based on the
information received, an indication of impairment of long-lived assets existed.

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

The $10.8 million after-tax investment impairment charge was recorded at
the Enterprises business segment and related to the write-down of three
investments in publicly traded applied technology businesses to their quoted
market value as of the balance sheet date, and the write-off of two investments
in privately-held entities which have recently filed for protection under
Chapter 7 of the U.S. Bankruptcy Code.

Included in the second quarter 2001 charges was a $99.7 million after-tax
charge related primarily to the impairment of the contract operations and
construction businesses of the water distribution business segment. An after-tax
impairment charge of $27.7 million was also recorded in the second quarter of
2001 related primarily to sale of two investments and the write-off of all or
parts of seven energy technology investments held by the Enterprises business
segment.

Excluding the aforementioned impairment charges in both years, net income
increased from $5.6 million in the second quarter of 2001 to $14.7 million in
the second quarter of 2002. This increase can be attributed, in part, to an
after-tax loss of $4.9 million in 2001 related to the sale of our bottled water
business. In addition, interest expense decreased significantly in the second
quarter of 2002 as compared to the same period in 2001, due to lower short-term
borrowing levels, favorable interest rates on the $418.0 million of variable
rate, tax-exempt debt, and the retirement of $150.0 million of floating rate
notes in the first quarter of 2002.

Six months ended June 30, 2002. The loss attributable to common
shareholders was $194.3 million or $3.42 per share in the first six months of
2002 compared to a loss of $109.7 million or $1.96 per share in the first six
months of 2001. The average shares outstanding increased 0.9 million, or
1.6 percent.

After-tax impairment charges totaling $111.7 million, described above, were
recorded in the first six months of 2002, as well as a charge related to the
cumulative effect of a change in accounting principle of $113.7 million,
relating to the impairment of goodwill resulting from the adoption of SFAS No.
142, "Goodwill and Other Intangible Assets," effective as of January 1, 2002.
This standard requires that goodwill and intangible assets with indefinite
useful lives not be amortized but, instead, be tested at least annually for
impairment, and more frequently if certain indicators appear. We adopted this
standard effective January 1, 2002, and accordingly ceased amortization of
goodwill, our only intangible asset with an indefinite useful life.

Our goodwill relates to both our water distribution and propane delivery
businesses. As of June 30, 2002 we had independent valuations performed on both
of these reporting units in order to determine their fair values as of January
1, 2002. These valuations determined the implied fair values of each of the
reporting units using a discounted cash flow analysis and public company trading
multiples. These valuations indicated that the fair values of both the water
distribution and propane delivery reporting units were less than their carrying
values, an indication of impairment. We then assessed the fair value of the
tangible assets and liabilities of each of these reporting units, and determined
that substantially all of the goodwill related to the water distribution
reporting unit and a portion of the goodwill related to the propane delivery
reporting unit was impaired as of January 1, 2002. The valuation of the water
distribution reporting unit was


19



further supported by the terms of the July 29, 2002 agreement to sell
AquaSource's investor-owned water utilities, which represent approximately 85
percent of AquaSource's 2001 total assets, for a purchase price that was
significantly less than the carrying amount of the reporting unit.

Accordingly, we have recognized a $113.7 million charge, recorded as of
January 1, 2002, as the cumulative effect of a change in accounting principle
for the write-down of goodwill to its fair value. The cumulative effect charge
consisted of $103 million related to the water distribution reporting unit and
$10.7 million related to the propane delivery reporting unit. The impaired
goodwill was not deductible for tax purposes, and as a result, no tax benefit
was recorded in relation to the charge.

After-tax impairment charges totaling $127.4 million, described above, were
recorded in the first six months of 2001.

Excluding the aforementioned impairment and cumulative effect charges in
both years, net income increased from $17.9 million in the first six months of
2001 to $31.4 million in the first six months of 2002. This can be attributed,
in part, to an after-tax loss of $4.9 million in 2001 related to the sale of our
bottled water business. In addition, interest expense decreased significantly in
the first six months of 2002 as compared to the same period in 2001, due to
lower short-term borrowing levels, favorable interest rates on the $418.0
million of variable rate, tax-exempt debt, and the retirement of $150.0 million
of floating rate notes in the beginning of the first quarter of 2002.
Additionally, increased earnings from the electricity delivery and energy
services business segments significantly offset the lower earnings from the
Financial business segment, as discussed below.

Results of Operations by Business Segment

We report the results of our business segments, determined by products,
services and regulatory environment as follows: (1) Duquesne Light's
transmission and distribution of electricity (electricity delivery business
segment), (2) Duquesne Light's supply of electricity (electricity supply
business segment), (3) Duquesne Light's collection of transition costs (CTC
business segment), (4) AquaSource's management of water systems (water
distribution business segment), (5) DQE Energy Services' development, operation
and maintenance of energy facilities and, for a single customer, alternative
fuel facilities (Energy Services business segment), (6) DQE Financial's
collection and processing of landfill gas and the management of structured
finance and alternative energy investments (Financial business segment), and (7)
DQE Enterprises' management of electronic commerce and energy technologies
investment portfolios (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.

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

Electricity Delivery Business Segment.

Three months ended June 30, 2002. The electricity delivery business segment
reported $10.5 million of net income in the second quarter of 2002 compared to
$11.1 million in the second quarter of 2001, a decrease of $0.6 million, or 5.4
percent, as a result of lower other income in 2002. Other income in the second
quarter of 2001 included a $0.9 million after-tax gain from the sale of property
and higher interest earnings.

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 residential, commercial and industrial customers are
influenced by national and global economic conditions.

Operating revenues increased by $4.8 million or 5.9 percent compared to the
second quarter of 2001. The increase can be primarily attributed to the increase
in the excise taxes that are collected through revenue. The largest excise tax
increase is 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. (See "Legal Proceedings.") In addition, sales to electric utility
customers increased approximately 3.4 percent, contributing to higher operating
revenues.

Residential sales increased 5.9 percent, primarily due to hotter than
normal weather in June 2002. Commercial sales increased 2.4 percent due to an
increase in the number of commercial customers and the hotter weather.
Industrial sales increased 2.7 percent due to increased consumption by steel
manufacturers. The following table sets forth kilowatt-hours (KWH) delivered to
electric utility customers.

20


- ------------------------------------------------------------------
KWH Delivered
--------------------------
(In Millions)
--------------------------
Second Quarter 2002 2001 Change
- ------------------------------------------------------------------
Residential 866 818 5.9%
Commercial 1,606 1,568 2.4%
Industrial 843 821 2.7%
- -------------------------------------------------------
Sales to Electric
Utility Customers 3,315 3,207 3.4%
==================================================================

Operating expenses for the electricity delivery business segment consist
primarily 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 $3.6 million or 9.4 percent
compared to the second quarter of 2001, primarily due to the increased RNR tax
rate.

Other income decreased $3.3 million or 28.9 percent compared to the second
quarter of 2001, primarily due to a $1.6 million pre-tax gain on the sale of
property, and higher interest earnings, in the second quarter of 2001.

Six months ended June 30, 2002. The electricity delivery business segment
reported $25.7 million of net income in the first six months of 2002 compared to
$15.9 million in the first six months of 2001, an increase of $9.8 million, or
61.6 percent. This improvement is a result of lower operating expenses due to
the corporate restructuring that occurred in the fourth quarter of 2001, as well
as our cost reduction initiatives, which continue to generate incremental cost
savings.

Operating revenues increased by $11.3 million or 7.3 percent compared to
the first six months of 2001. The increase can be primarily attributed to the
$10.0 million increase in the excise taxes that are collected through revenue,
in particular the RNR increase. In addition, sales to electric utility customers
increased approximately 1.7%, contributing to higher operating revenues.

Residential sales increased 2.3 percent, primarily due to hotter June
weather, which more than offset the adverse effects of warmer than normal winter
weather in the first quarter. Commercial sales increased 2.1 percent due to an
increase in the number of commercial customers and the hotter weather.
Industrial sales increased 0.3 percent as well. The following table sets forth
KWH delivered to electric utility customers.

- ------------------------------------------------------------------
KWH Delivered
------------------------------
(In Millions)
------------------------------
First Six Months 2002 2001 Change
- ------------------------------------------------------------------
Residential 1,758 1,719 2.3%
Commercial 3,119 3,054 2.1%
Industrial 1,663 1,658 0.3%
- ----------------------------------------------------
Sales to Electric
Utility Customers 6,540 6,431 1.7%
==================================================================

Operating expenses decreased by $3.1 million or 3.9 percent compared to the
first six months of 2001. This decrease is due to the corporate restructuring
that occurred in the fourth quarter of 2001 as well as our cost reduction
initiatives, which continue to generate incremental cost savings. Offsetting
these decreases is an increase in gross receipts tax of approximately $7.5
million due to the increased RNR.

Other income decreased $1.4 million or 6.5 percent compared to the first
six months of 2001. During the first six months of 2002, a $1.3 million pre-tax
gain was recognized on the sale of certain securities. During the first six
months of 2001, we recognized a $1.6 million pre-tax gain on the sale of
property and experienced higher interest earnings.

Interest and other charges include interest on long-term debt, other
interest and preferred stock dividends of Duquesne Light. Interest and other
charges decreased $1.5 million or 3.7 percent compared to the first six months
of 2001 due to favorable interest rates on the $418.0 million of variable rate,
tax-exempt debt.

Electricity Supply Business Segment.

Three months ended June 30, 2002. The electricity supply business segment
reported net income of $2.9 million in the second quarter of 2002, compared with
net income of zero in the second quarter of 2001. For the period April 28, 2000
through December 31, 2001, this segment's financial results reflected our
initial provider of last resort service arrangement (POLR I), which was designed
to be income neutral to Duquesne Light. During the first quarter of 2002,
Duquesne Light began operating under the new provider of last resort arrangement
(POLR II), which extends the provider of last resort 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 of 0.5 cents per
KWH supplied.

21



Operating revenues for this business segment 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 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 increased $5.1 million or 4.7 percent compared to the
second quarter of 2001, due to higher average generation rates. The average
generation rate increased January 1, 2002, due to scheduled rate increases. In
addition, the average rates increase incrementally as rate classes become
subject to the POLR II arrangement. Those higher average generation rates more
than offset the decline in total KWH supplied.

The following table sets forth KWH supplied for customers who had not
chosen an alternative generation supplier, segregated by those customers
supplied under the POLR I or the POLR II contract.

- -------------------------------------------------------------------
KWH Supplied
----------------------------
(In Millions)
----------------------------
Second Quarter 2002 2001
- -------------------------------------------------------------------
POLR I POLR II Total POLR I
- -------------------------------------------------------------------
Residential 59 530 589 522
Commercial 813 387 1,200 1,339
Industrial 727 54 781 787
- -------------------------------------------------------------------
KWH Sales 1,599 971 2,570 2,648
Sales to Other Utilities 48 94
- -------------------------------------------------------------------
Total Sales 2,618 2,742
===================================================================

Six months ended June 30, 2002. The electricity supply business segment
reported net income of $3.4 million in the first six months of 2002, compared to
net income of zero in the first six months of 2001. During the first quarter of
2002, Duquesne Light began operating under the POLR II arrangement, discussed
above.

Operating revenues increased $11.7 million or 5.7 percent compared to the
first six months of 2001, due to higher average generation rates, discussed
above. These higher average generation rates more than offset the decline in
total KWH supplied.

The following table sets forth KWH supplied for customers who had not
chosen an alternative generation supplier, segregated by those customers
supplied under the POLR I or the POLR II arrangement.

- --------------------------------------------------------------------
KWH Supplied
-----------------------------
(In Millions)
-----------------------------
First Six Months 2002 2001
- --------------------------------------------------------------------
POLR I POLR II Total POLR I
- --------------------------------------------------------------------
Residential 550 682 1,232 1,143
Commercial 1,946 388 2,334 2,476
Industrial 1,475 55 1,530 1,536
- --------------------------------------------------------------------
KWH Sales 3,971 1,125 5,096 5,155
Sales to Other Utilities 111 249
- --------------------------------------------------------------------
Total Sales 5,207 5,404
====================================================================

Operating expenses for the electricity supply business segment consist of
costs to obtain energy for our provider of last resort service and gross
receipts tax, both of which fluctuate in direct relation to operating revenues.
Operating expenses increased $6.0 million or 2.9 percent compared to the first
six months of 2001. As a result of the higher average generation rate charged to
customers in the first six months of 2002, the resulting cost of energy
increased due to the pass-through nature of the provider of last resort
agreements.

CTC Business Segment.

Three months ended June 30, 2002. 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
percent 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.

In the second quarter of 2002, the CTC business segment reported net income
of $0.8 million compared to $3.5 million during the same period in 2001, a
decrease of $2.7 million or 77.1 percent.

Operating revenues decreased $40.3 million or 54.5 percent, due to
scheduled decreases in the average CTC rate charged to customers from 2001 to
2002, as well as the full collection of the allocated CTC balance for most of
our residential customers during the first quarter of 2002, and for a large
number of our commercial customers in the second quarter of 2002. As of June 30,
2002, the CTC balance has been fully collected for approximately 95 percent of
Duquesne Light's customers, and 46 percent of the KWH sales for the first six
months of 2002.

22



Operating expenses consist solely of gross receipts tax, which fluctuates
in direct relation to operating revenues. Operating expenses decreased $1.8
million or 54.5 percent compared to the second quarter of 2001.

Depreciation and amortization expense consists of the amortization of
transition costs. There was a decrease of $34.3 million or 52.6 percent compared
to the second quarter of 2001, primarily due to the full collection of the
allocated CTC balance for certain customers, as discussed above.

Six months ended June 30, 2002. In the first six months of 2002, the CTC
business segment reported net income of $2.1 million compared to $7.7 million
during the same period in 2001, a decrease of $5.6 million or 72.7 percent. As
the CTC balance is collected from customers, this results in a decline in the
return earned by Duquesne Light.

Operating revenues decreased $49.4 million or 33.4 percent compared to the
first six months of 2001. This decrease is due to scheduled decreases in the
average CTC rate, as well as the full collection of the allocated CTC balance
for certain customers, as discussed above.

Operating expenses decreased $2.2 million or 33.3 percent compared to the
first six months of 2001, due to the decrease in operating revenues.

Depreciation and amortization expense decreased $38.5 million or 29.7
percent compared to the first six months of 2001, primarily due to the full
collection of the allocated CTC balance for certain customers, as discussed
above.

Water Distribution Business Segment.

Three months ended June 30, 2002. Excluding the impairment charge of $102.9
million discussed previously, the water distribution business segment reported
$1.7 million of net income for the second quarter of 2002. This is compared to
net income of $0.4 million, excluding an impairment charge of $99.7 million, in
the second quarter of 2001. The increase of $1.3 million was primarily due to
decreased depreciation and amortization expense due to the adoption of SFAS No.
142, which ceased amortization of goodwill. (See Note D.)

Operating revenues for this business segment are derived from the
following: billings related to water and sewer services for utilities (both
owned and contract-operated by AquaSource) and water and sewer-related
construction and engineering projects. Customer water use depends on weather
conditions. For the second quarter of 2002, operating revenues increased $1.7
million or 6.4 percent as compared to the second quarter of 2001. This is
attributable to increased contract operations and construction revenues, rate
increases and customer growth.

Operating expenses for the water distribution segment mainly consist of
costs to operate and maintain the water distribution systems, administrative
expenses and non-income taxes, such as property and payroll taxes. Operating
expenses for the second quarter of 2002 increased $2.6 million or 12.6 percent
compared to the second quarter of 2001 primarily due to higher construction
costs and the decentralization of administrative functions in late 2001.

Depreciation and amortization expense includes depreciation of utility
delivery systems and, in 2001, the amortization of goodwill on acquisitions.
Depreciation and amortization expense for the second quarter of 2002 decreased
$2.5 million or 51.0 percent, primarily due to the adoption of SFAS No. 142.
(See Note D.)

Six months ended June 30, 2002. Excluding the impairment charge of $102.9
million and the $107.5 million charge associated with a change in accounting
principle discussed previously, the water distribution business segment reported
$2.2 million of net income in the first six months of 2002. This is compared to
net income of $0.3 million, before the impairment charge of $99.7 million, in
the first six months of 2001. The increase of $1.9 million was primarily due to
decreased depreciation and amortization expense due to the adoption of SFAS No.
142. (See Note D.)

Operating revenues increased $1.9 million or 3.7 percent compared to the
six months ended June 2001. This is primarily attributable to increased contract
operations and construction revenues, rate increases and customer growth.

Operating expenses increased $3.6 million or 8.4 percent compared to the
six months ended June 2001, primarily due to higher construction costs and the
decentralization of administrative functions in late 2001.

Depreciation and amortization expense decreased $4.5 million or 47.9
percent, primarily due to the adoption of SFAS No. 142. (See Note D.)

Energy Services Business Segment.

Three months ended June 30, 2002. In the second quarter of 2002, the Energy
Services business segment reported net income of $4.0 million, compared to net
income of $3.2 million in the second quarter of 2001, an increase of $0.8
million or 25.0 percent. This increase is due primarily to increased facility
management income from alternative fuel service contracts entered into during
2001 and the commercial opening of the Detroit Metro Airport energy facility.

Operating revenues are primarily derived from the facility management
services for industrial, airport and alternative fuel customers. Operating
revenues increased $6.1 million or 117.3 percent compared to the second quarter


23



of 2001. This increase is due to increased alternative fuel facility management
revenue from the new service contracts and airport energy facility.

Operating expenses consist of the operating and maintenance costs to manage
the facilities. Operating expenses increased $1.5 million or 39.5 percent from
the second quarter of 2001 primarily due to the additional service contracts.

Other income consists of income from tax credits generated from alternative
fuel facilities and gains recognized on the sale of assets. Other income
decreased $3.2 million or 78.0 percent compared to the second quarter of 2001,
due primarily to a gain recognized on the sale of alternative fuel property in
2001 and recognition of an early completion bonus and construction management
fee on a new alternative fuel facility in the second quarter of 2001.

Six months ended June 30, 2002. The Energy Services business segment
reported net income of $6.9 million in the first six months of 2002, compared to
net income of $4.1 million in first six months of 2001, an increase of $2.8
million or 68.3 percent. This increase is due primarily to increased facility
management income from the additional alternative fuel service contracts and
airport energy facility.

Operating revenues increased $13.1 million or 145.6 percent compared to the
first six months of 2001. This increase is due to additional facility management
revenue from the alternative fuel service contracts and airport energy facility.

Operating expenses increased $4.0 million or 52.6 percent from the first
six months of 2001 primarily due to the additional service contracts.

Other income decreased $4.6 million or 78.0 percent compared to the first
six months of 2001, due primarily to the gain recognized on the sale of
alternative fuel property and recognition of an early completion bonus and
construction management fee on a new alternative fuel facility in 2001.

Financial Business Segment.

Three months ended June 30, 2002. In the second quarter of 2002, the
Financial business segment reported net income of $5.8 million, compared to
$11.2 million in the second quarter of 2001, a decrease of $5.4 million or 48.2
percent. This decrease is due primarily to lower landfill gas production, lower
gas sales prices and less income from the affordable housing portfolio, most of
which had been sold by the end of the first quarter of 2002.

Operating revenues are primarily derived from the sale of landfill gas.
Operating revenues decreased $2.0 million or 33.9 percent compared to the second
quarter of 2001. This decrease is due to lower landfill gas production and lower
gas sales prices.

Operating expenses consist of the various costs to operate and maintain the
landfill gas sites. Operating expenses were $1.8 million or 20.9 percent higher
than the second quarter of 2001. This increase is due to higher landfill gas
production costs and higher other operating costs.

Depreciation and amortization expense consists of the depreciation of
landfill gas equipment and gas rights. There was an increase of $1.0 million or
111.1 percent compared to the second quarter of 2001. This increase is due to
additional depreciation on portions of the Fresh Kills landfill gas investments.

Other income consists of income from leveraged lease investments, tax
credits generated from the landfill, natural gas and affordable housing
investments, and gains recognized on the sales of investments. Other income
decreased $3.7 million or 21.3 percent compared to the second quarter of 2001,
due to reduced tax credits as a result of the sale of most of the affordable
housing portfolio, and lower landfill gas production.

Interest and other charges decreased $1.5 million or 75.0 percent compared
to the second quarter of 2001, due to the retirement of $85.0 million of medium
term notes beginning in the second quarter of 2001.

Six months ended June 30, 2002. The Financial business segment reported net
income of $10.9 million in the first six months of 2002, compared to net income
of $21.3 million in the first six months of 2001, a decrease of $10.4 million or
48.8 percent. This decrease is due primarily to lower landfill gas production,
lower gas sales prices and less income due to the sale of most of the affordable
housing portfolio.

Operating revenues decreased $7.0 million or 47.0 percent compared to the
first six months of 2001. This decrease is due to lower landfill gas production
and lower landfill gas sales prices.

Operating expenses were $1.8 million or 8.7 percent higher compared to the
first six months of 2001. This increase is due to higher landfill gas production
costs and higher other operating costs.

Depreciation and amortization expense increased $1.4 million or 66.7
percent compared to the first six months of 2001. This increase is due to
additional depreciation on portions of the Fresh Kills landfill gas investments.

Other income decreased $5.8 million or 16.8 percent compared to the first
six months of 2001, due to reduced tax credits as a result of the sale of most
of the affordable housing portfolio, and lower landfill gas production.

Interest and other charges decreased $3.5 million or 83.3 percent compared
to the first six months of 2001, due to the retirement of $85.0 million of
medium term notes in 2001.

24



Enterprises Business Segment.

Three months ended June 30, 2002. The Enterprises business segment reported
an $11.0 million loss in the second quarter of 2002, compared to a $26.0 million
loss in the second quarter of 2001. Included in the 2002 loss is a $10.8 million
after-tax charge for the impairment of five investments. A $27.7 million
after-tax charge for the sale of two investments and impairment of seven other
investments was included in the second quarter of 2001 results. (See Note D.) We
are in the process of an orderly divestiture of the remaining investments of
this business segment as opportunities arise and market conditions permit.

Six months ended June 30, 2002. The Enterprises business segment reported
an $11.0 million loss for the six months ended June 30, 2002, compared to a
$25.3 million loss for the same period during 2001. These losses relate
primarily to the investment impairment charges previously discussed.

All Other.

Three months ended June 30, 2002. Excluding the $2.0 million related to the
net impairment discussed previously, the all other category reported a loss of
$10.3 million in the second quarter of 2002 compared to a $25.0 million loss in
the second quarter of 2001, due primarily to lower interest expense in 2002 and
the loss on the sale of the bottled water business in 2001.

In the second quarter of 2002, operating revenues decreased by $3.5
million, or 33.0 percent compared to the second quarter of 2001. This decrease
was primarily the result of decreased revenues of $2.2 million due to the sale
of our bottled water business in May 2001, and $1.3 million due to lower propane
prices and propane sales.

In the second quarter of 2002, other income was higher than 2001 by $16.6
million, or 112.9 percent. This increase is primarily due to the loss on the
sale of our bottled water business in 2001.

Interest and other charges include interest on long-term debt, other
interest, and preferred stock. A decrease of $8.6 million, or 52.1 percent in
the second quarter of 2002 as compared to the second quarter of 2001 was
primarily due to lower short-term borrowing levels, lower interest rates and the
retirement of $150.0 million of floating rate notes in the first quarter of
2002.

Six months ended June 30, 2002. Excluding the $6.2 million related to the
cumulative effect charge and the $2.0 million related to the net impairment,
both discussed previously, the all other category reported a loss of $18.6
million for the first six months of 2002 compared to a loss of $32.8 million for
the first six months of 2001. The improvement of $14.2 million was primarily due
to lower interest expense and the loss on the sale of the bottled water
business.

Operating revenues decreased $19.4 million, or 43.6 percent compared to the
first six months of 2001, primarily due to decreased revenues of $8.1 million
from the sale of our bottled water business and $8.7 million due to lower
propane prices and propane sales.

For the six-month period in 2002, operating expenses decreased $6.0
million, or 14.3 percent as compared to the six-month period in 2001. This
decrease was primarily due to a $8.4 million decrease in expenses due to the
sale of the bottled water business.

In the six months ended June 30, 2002, other income increased $18.4
million, or 112.9 percent compared to the second quarter of 2001. This increase
is primarily due to the loss on the sale of the bottled water business.

Interest expense decreased $9.2 million, or 35.5 percent in the six-month
period ended June 30, 2002 compared to the same period in 2001. This decrease
was primarily due to lower short-term borrowing levels and the retirement of
$150.0 million of floating rate notes.

LIQUIDITY AND CAPITAL RESOURCES

Capital Expenditures

We estimate that during 2002 we will spend, excluding the allowance for
funds used during construction, approximately $70 million for electric utility
construction; $53 million for water utility construction; and $10 million for
construction by our other business lines. During the first six months of 2002,
we have spent $59.1 million on capital expenditures, consisting of $34.9 million
at Duquesne Light, $17.9 million at AquaSource and the remaining $6.3 million on
other.

Asset Dispositions

In the first six months of 2002, we sold a significant portion of our
remaining affordable housing portfolio, receiving proceeds of approximately $17
million, which approximated book value. We also sold several waste-water
facilities and real property and received proceeds of approximately $1.2 million
and $0.8 million, respectively, which approximated book value. We received
approximately $1.3 million from the sale of securities and recognized an
after-tax gain of $0.8 million. We received approximately $1.3 million from the
sale of a building and recognized an after-tax gain of $0.3 million. We also
received approximately $2.3 million for the sale of an electronic commerce
investment, which approximated book value.

On July 29, 2002, we entered into an agreement to sell AquaSource's
investor-owned water utilities to Philadelphia Suburban Corporation (PSC) for
approximately $205 million in cash. In addition, PSC is acquiring selected
operating and maintenance contract operations


25



in seven states that are closely integrated with the investor-owned water
utilities being acquired. The businesses being acquired represent approximately
85 percent of AquaSource's 2001 total assets. The final purchase price could
vary from $180 to $215 million, as various purchase price adjustments are
applied. These adjustments relate to the achievement of specific operating
performance metrics during the interim period until closing, involving revenue,
rate base and customer connections. In addition, within 45 days of the
agreement, we have the option to sell operations representing up to six percent
of the total customers of the investor-owned utilities in separate transactions,
with consequent purchase price reductions. The closing is expected to occur in
the second half of 2003, contingent upon regulatory approvals.

On August 2, 2002, we announced the sale of an AquaSource water utility
subsidiary to California Water Services Group for $7.7 million. This sale was
contemplated as an option under our agreement with PSC, and a purchase price
adjustment will be applied with respect to the assets to be acquired by PSC. The
closing is also expected to occur in the second half of 2003, contingent upon
regulatory approval.

As part of our strategic review process, AquaSource sold its bottled water
assets on May 15, 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 approximately $4.3 million for the sale of other non-strategic assets.

Financing and Capital Availability

On June 26, 2002 we issued 17,250,000 shares of common stock at $13.50 per
share in an underwritten public offering. This issuance was made under our April
5, 2002, shelf registration statement for up to $500.0 million of various debt
and equity securities. We received net proceeds, after payment of underwriters
discounts and commissions and other expenses, of $223.4 million. We have
used net proceeds to reduce approximately $171 million principal amount of
outstanding short- and long-term debt (as discussed below), and have targeted
the remaining net proceeds for general corporate purposes, including payment of
a deposit to the IRS toward any adjustments in conjunction with certain
structured lease transactions. (See Note H.)

On August 5, 2002, we redeemed the following: (i) $10 million aggregate
principal amount of Duquesne Light's 8.20 percent first mortgage bonds due 2022
at a redemption price of 104.51 percent of the principal amount thereof, and
(ii) $100 million aggregate principal amount of Duquesne Light's 7 5/8 percent
first mortgage bonds due 2023 at a redemption price of 103.9458 percent of the
principal amount thereof. Duquesne Light has also reduced outstanding commercial
paper balances by $26 million in June 2002, and $35 million in July 2002. With
these debt reductions, we expect our debt-to-total-capitalization ratio
(discussed below) to be approximately 60 percent.


On April 15, 2002, Duquesne Light issued $200 million of 6.7 percent first
mortgage bonds due 2012. On April 30, 2002, Duquesne Light issued $100 million
of 6.7 percent 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 the first quarter of 2002, Moody's Investor Service, Standard & Poor's,
and Fitch Ratings assessed our short and long-term credit profiles. The ratings
reflect the agencies' opinion of our overall financial strength. Ratings impact
our ability to access capital markets for investment and capital requirements,
as well as the relative costs related to such liquidity capability. In general,
the agencies reduced our long-term credit ratings, although staying within the
range considered to be investment grade. The agencies maintained the existing
credit ratings for Duquesne Light's short-term debt. However Moody's and Fitch
reduced DQE Capital's short-term debt rating by one level, thereby restricting
DQE Capital from accessing the short-term commercial paper market. DQE Capital
is exploring alternative ways to fund its short-term liquidity needs. This
ratings downgrade does not limit our ability to access our revolving credit
facilities; it does, however, impact the cost of maintaining the credit
facilities and the cost of any new debt. These ratings are not a recommendation
to buy, sell or hold any securities of DQE or our 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 January 2002, we refinanced $150 million of matured DQE Capital floating
rate notes through the issuance of commercial paper, primarily at Duquesne
Light. The balance at June 30, 2002, was $35 million. Cash generated from
operations and equity offering proceeds was used to reduce the balance.

At June 30, 2002, we had $35 million of commercial paper borrowings
outstanding, and $1.2 million of current debt maturities. During the quarter,
the maximum amount of bank loans and commercial paper borrowings outstanding was
$98.0 million, the amount of average daily borrowings was $72.3 million, and the
weighted average daily interest rate was 2.3 percent.

We maintain two separate revolving credit agreements, one for $200 million
and one for $150 million, both expiring in October 2002. We may convert the
$150.0 million revolver into a term loan facility for a one-year period, for any
amounts then outstanding upon expiration of the revolving credit period.
Interest rates on both facilities can, in accordance with the option selected at
the time of the borrowing, be based on one of several indicators, including
prime and Eurodollar rates. Fees are based on the unborrowed amount of the
commitment.

26




We plan to extend both facilities prior to their expiration. At June 30, 2002
no borrowings were outstanding.

Under our credit facilities, we are subject to financial covenants
requiring each of DQE and Duquesne Light to maintain a maximum
debt-to-capitalization ratio of 65.0 percent. In addition, DQE is required to
maintain a minimum cash coverage ratio of 2-to-l. At June 30, 2002 we were in
compliance with these covenants, having debt-to-total-capitalization ratios of
approximately 62.5 percent at DQE and approximately 59.8 percent at Duquesne
Light, and a cash coverage ratio of approximately 3-to-1 at DQE.

Contractual Obligations and Commercial Commitments

As of June 30, 2002, we have certain contractual obligations and commercial
commitments that extend beyond this year, the principal amounts of which are set
forth in the following tables:




Payments Due By Period
- -------------------------------------------------------------------------------------------------------------------------------

(In Millions)
----------------------------------------------------------------
2002 2003 2004 2005 After Total
----------------------------------------------------------------
Long-Term Debt $ -- $ 0.9 $ 1.4 $ 1.5 $1,207.8 $1,211.6
Notes Payable and Current Maturities 36.2 -- -- -- -- 36.2
Capital Lease Obligations 0.2 0.4 0.4 0.5 1.4 2.9
Operating Leases 4.3 8.7 9.2 7.5 70.5 100.2
- -------------------------------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations $ 40.7 $ 10.0 $11.0 $ 9.5 $1,279.7 $1,350.9
===============================================================================================================================



Other Commercial Commitments
- -------------------------------------------------------------------------------------------------------------------------------

(In Millions)
----------------------------------------------------------------
2002 2003 2004 2005 After Total
----------------------------------------------------------------
Revolving Credit Agreements (a) $200.0 $150.0 $ -- $ -- $ -- $ 350.0
Standby Letters of Credit (a) 75.6 -- -- -- -- 75.6
Surety Bonds (b)
Commercial 129.9 -- -- -- -- 129.9
Contract 27.9 -- -- -- -- 27.9
Guarantees (See Note H) -- -- -- -- 77.2 77.2
- -------------------------------------------------------------------------------------------------------------------------------
Total Commercial Commitments $433.4 $150.0 $ -- $ -- $ 77.2 $ 660.6
===============================================================================================================================


(a) Revolving Credit Agreements and Letters of Credit typically are for a
364-period and are renewed annually.
(b) Surety bonds are renewed annually. Some commercial bonds cover regulatory
and contractual obligations which exceed a one-year period.

RATE MATTERS

Competition and the Customer Choice Act

The Pennsylvania Electricity Generation Customer Choice and Competition Act
(Customer Choice Act) enables electric utility customers to purchase electricity
at market prices from a variety of electric generation suppliers. As of June 30,
2002, approximately 77.6 percent of Duquesne Light's customers measured on a KWH
basis, and approximately 75.6 percent on a non-coincident peak load basis
received electricity through our provider of last resort service arrangement.
The remaining customers are provided with electricity through alternative
generation suppliers. The number of customers participating in our provider of
last resort service will fluctuate depending on market prices and the number of
alternative generation suppliers in the retail supply business.

Customers who select an alternative generation supplier pay for generation
charges set competitively by that supplier, and pay Duquesne Light a competitive
transition charge (discussed below) and/or transmission and distribution
charges. Electricity delivery (including transmission, distribution and customer
service) remains regulated in substantially the same manner as under historical
regulation.

In November 2001, the Pennsylvania Department of Revenue established an
increased RNR tax in order to recover a current shortfall that resulted from
electricity generation deregulation. Since January 2002, Duquesne Light's
customer bills have reflected an approximately two percent increase to recover
its costs related to the RNR. (See "Legal Proceedings.")

Regional Transmission Organization

FERC Order No. 2000 calls on transmission-owning utilities such as Duquesne
Light to join regional transmission organizations (RTOS). Duquesne Light is
committed to ensuring a stable, plentiful supply of electricity for its
customers. Toward that end, Duquesne Light planned to join the PJM West RTO. In
late 2001 and early 2002, Duquesne Light entered into agreements with two
generation suppliers to provide the electric capacity required to meet Duquesne
Light's anticipated capacity credit obligations in PJM West through 2004.



Duquesne Light's participation in the PJM West RTO was to be conditioned
upon PUC approval of the recovery of the cost of capacity under these
agreements, and we petitioned the PUC for such approval. However, on July 31,
2002, the FERC issued a series of proposals designed to establish a standard
market design and transmission service for interstate electricity transactions,
and extend its deadline for joining an RTO until September 2004. In light of the
FERC's proposals, the PUC dismissed Duquesne Light's petition without prejudice.
As a result, neither of the capacity agreements will take effect. Duquesne Light
will continue to evaluate the FERC's proposals and their impact on the
possibility of joining an RTO.

Competitive Transition Charge

In its final restructuring order, 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 CTC from
electric utility customers. Following our application of net generation asset
sale proceeds to reduce transition costs, the CTC was fully collected for most
of our residential customers during the first quarter of 2002 and a large number
of our commercial customers during the second quarter of 2002. As of June 30,
2002, the CTC balance has been fully collected for approximately 95 percent of
Duquesne Light's customers, and 46 percent of the KWH sales for the first six
months of 2002. The transition costs, as reflected on the consolidated balance
sheet, are being amortized over the same period that the CTC revenues are being
recognized.

For regulatory purposes, the unrecovered balance of transition costs was
approximately $48.4 million ($29.5 million net of tax) at June 30, 2002, on
which Duquesne Light is allowed to earn an 11.0 percent pre-tax return. A lower
amount is shown on the balance sheet due to the accounting for unbilled
revenues.

Provider of Last Resort

Although no longer a generation supplier, as the provider of last resort
for all customers in its service territory, Duquesne Light must provide
electricity for any customer who does not choose an alternative generation
supplier, or whose supplier fails to deliver. As part of the generation asset
sale, a third party agreed to supply all of the electric energy necessary to
satisfy Duquesne Light's provider of last resort obligations during the CTC
collection period. Under POLR II, Duquesne Light has extended the arrangement
(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 of 0.5 cents per
KWH supplied through this arrangement. Except for this margin, these agreements,
in general, effectively transfer to the supplier the financial risks and rewards
associated with Duquesne Light's provider of last resort obligations.

While there are certain safeguards in the provider of last resort
arrangements designed to mitigate losses in the event that the supplier defaults
on its performance under the arrangement, Duquesne Light may face the credit
risk of such a default. Contractually, Duquesne Light has various credit
enhancements that would become activated upon certain events. If the supplier
were to fail to deliver, Duquesne Light would have to contract with another
supplier and/or make purchases in the market at the time of default at a time
when market prices could be higher. While the Customer Choice Act provides
generally for provider of last resort supply costs to be borne by customers,
recent litigation suggests that it may not be clear whether Duquesne Light could
pass any costs in excess of the existing PUC-approved provider of last resort
prices on to its customers. Additionally, the supplier has recently been
downgraded by the rating agencies. Although we are following the situation
closely, our knowledge is limited to public disclosure, and we do not know
whether the downgrade could affect the supplier's ability to perform. Duquesne
Light also retains the risk that customers will not pay for the provider of last
resort generation supply. However, a component of Duquesne Light's delivery rate
is designed to cover the cost of a normal level of uncollectible accounts.

Duquesne Light is evaluating options to provide electricity for its
provider of last resort customers after POLR II expires. Such options include
one or more of the following: negotiating an extension of the POLR II
arrangement, negotiating a similar arrangement with one or more generation
suppliers, and entering into alternative supply arrangements, such as
constructing a gas-turbine electric generating facility (either independently or
with partners).

Our Board of Directors has authorized us to proceed, subject to receipt of
appropriate regulatory approvals, with the development of a generating station.
Any decision to build will be influenced by the recently renewed interest many
generating companies have shown in potentially supplying Duquesne Light with
long-term provider of last resort service. Duquesne Light is preparing to file
with the PUC in September 2002 a comprehensive plan that would extend fixed
prices for residential and small commercial provider of last resort customers as
protection from electric market volatility beyond 2004. Our goal is to mitigate
the risks associated with a supply plan and to enhance shareholder value through
a continuing earnings stream from the core electric business.

28



Rate Freeze

In connection with the POLR II agreement described above, Duquesne Light
negotiated a rate freeze for generation, transmission and distribution rates.
The rate freeze fixes new generation rates for retail customers who take
electricity under the extended provider of last resort arrangement through 2004,
and continues the transmission and distribution rates for all customers at
current levels through at least 2003. Under certain circumstances, affected
interests may file a complaint alleging that, under these frozen rates, Duquesne
Light has exceeded reasonable earnings, in which case the PUC could make
adjustments to rectify such earnings.

AquaSource Rate Applications

In June 2000, AquaSource filed consolidated, statewide water and sewer rate
change applications with the Texas Natural Resource Conservation Commission
(TNRCC) and 17 municipalities. As previously reported, four municipalities
denied or altered the rate increase, and AquaSource appealed. The parties have
since entered into a settlement agreement which provides for, among other
things, the following: the establishment of AquaSource's rate base; the
establishment of four regional rates for service areas within the TNRCC's
original jurisdiction, and three separate rates for the four municipalities who
appealed; and the phase-in of the rates beginning January 1 of 2002, 2003 and
2004 (with the first phase being retroactive to the initial application filing
date of July 17, 2000). AquaSource has also agreed not to file another rate case
application for a rate increase that would be effective prior to July 1, 2004,
unless the utility encounters financial hardship. In addition, the decision on
whether AquaSource may recover costs in excess of net book value related to
acquiring its companies through its rates has been deferred until the next rate
case. AquaSource expects the revised rate increase will result, ultimately, in
additional annual water and sewer revenues of approximately $5 million.
Substantially all of this rate increase has been implemented, subject to refund,
pending final TNRCC approval of the settlement agreement, which could occur as
soon as the third quarter of 2002.

In March 2001, AquaSource also filed a rate increase petition with the
Indiana Utility Regulatory Commission (IURC) regarding water and sewer rates for
its Utility Center, Inc. subsidiary (AquaSource's largest regulated subsidiary).
Hearings were held in January 2002. We currently anticipate a final order from
the IURC in the third quarter of 2002. If the petition is approved, annual water
and sewer revenues for Utility Center will increase by approximately $2.7
million.

As discussed elsewhere in this report, we entered into an agreement to sell
AquaSource's investor-owned water utilities on July 29, 2002.

Outlook

We continue to expect earnings, excluding any potential charges from asset
divestitures or other write-downs, to be $85 to $90 million for 2002 (comprised
of $77 to $81 million from continuing operations and $8 to $9 million from
AquaSource) and $95 to $100 million for 2003 (comprised of $84 to $88 million
from continuing operations and $11 to $12 million from AquaSource).

Beginning with the third quarter of 2002, we anticipate the components of
AquaSource that are under contract for sale will be treated as discontinued
operations. As definitive agreements are signed for the sale of the remaining
non-core businesses, we expect their results to be shown as discontinued
operations.

Future earnings will reflect a continued focus on recurring and sustainable
earnings through our Back-to-Basics strategy.

The foregoing "Outlook" section contains forward-looking statements, the
results of which may materially differ from those implied due to known and
unknown risks and uncertainties as discussed below.

. Projected DQE cash flow, net income, earnings, earnings growth,
capitalization, dividends and dividend payout ratio will depend
on the performance of its subsidiaries, on the effectiveness of the
divestiture of non-core businesses, the implementation of our growth
plan, and board policy.

. Demand for and pricing of water, electric and telecommunications
utility services and landfill gas, changing market conditions and weather
conditions, could affect income and earnings levels at DQE and each
subsidiary.

. Duquesne Light's earnings will be affected by the number of
customers who choose to receive electric generation through the
provider-of-last-resort arrangement, by final PUC approval of its
post-2004 provider-of-last-resort plan and by the continued performance
of the generation supplier.


. The development of the generation plant will depend on various regulatory
approvals, as well as the potential for arranging long-term supply with
alternative suppliers.

. The timing of the AquaSource sale's closing, the use of proceeds from the
sale, purchase price adjustments, and the accounting treatment of the
disposition and the retained assets and liabilities, may affect
AquaSource's and DQE's earnings.

. AquaSource's earnings may be affected by the outcome of its pending rate
filings, which will depend on the determinations made by the appropriate
public utility commissions.

29



. Customer energy demand, fuel costs and plant operations could affect DQE
Energy Services' earnings.

. The outcome of the shareholder litigation initiated against each of DQE
and AquaSource may affect DQE's performance.

. The final resolution of the IRS' proposed adjustments regarding our
federal income tax liabilities could affect cash flows.

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


. Market and business conditions, demand for services, and stock market
volatility may affect our ability to monetize non-core propane assets and
energy technology investments.

. The events of September 11, 2001 have created broad uncertainty in the
global economy, and we continues to assess the impact on our businesses,
including but not limited to DQE Financial.


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

Item 3. 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.

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 $418.0 million or 34.7 percent
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, medium-term and long-term debt. A 10
percent increase in interest rates would have affected our variable rate debt
obligations by increasing interest expense by approximately $0.3 million for the
six months ended June 30, 2002 and $1.0 million for the six months ended June
30, 2001. A 10 percent reduction in interest rates would have increased the
market value of our fixed-rate debt by approximately $62.1 million and $54.9
million as of June 30, 2002 and June 30, 2001. Such changes would not have had a
significant near-term effect on our future earnings or cash flows.


--------------------------


30



PART II. OTHER INFORMATION.


Item 1. Legal Proceedings.

In February 2001, 39 former and current employees of our subsidiary
AquaSource, Inc., all minority investors in AquaSource, commenced an action
against DQE, AquaSource and others in the District Court of Harris County,
Texas. The complaint alleges that the defendants fraudulently induced the
plaintiffs to agree to sell their AquaSource Class B stock back to AquaSource by
falsely promising orally that DQE would invest $1 billion or more in AquaSource,
which, plaintiffs allege, would have permitted them to realize significant
returns on their investments in AquaSource. The complaint also alleges that the
defendants mismanaged AquaSource, and thus decreased the value of plaintiffs'
AquaSource stock. Plaintiffs seek, among other relief, an order rescinding their
agreements to sell their stock back to AquaSource, an award of actual damages
not to exceed $100 million and exemplary damages not to exceed $400 million.

In the first quarter of 2002, DQE and AquaSource filed counterclaims
alleging that 10 plaintiffs who held key AquaSource management positions engaged
in deceptive practices designed to obtain funding for acquisitions and to make
those acquisitions appear to meet certain return on investment requirements, and
that all plaintiffs were unjustly enriched by these wrongful actions. DQE,
AquaSource and AquaSource Utility, Inc. also filed a counterclaim against two
plaintiffs alleging claims for breach of contract, breach of warranty,
indemnification, fraud and unjust enrichment in connection with the acquisition
of various water and wastewater companies from these two plaintiffs.

The parties are currently engaged in settlement negotiations. Although we
cannot predict the ultimate outcome of this case or any settlement thereof, an
estimated reserve for this matter was made at June 30, 2002. We do not believe
final settlement will significantly affect our future results of operations or
cash flows.

As discussed elsewhere in this report, Duquesne Light requested and
received PUC approval to recover approximately $13 million of costs it will
incur in 2002 due to the RNR. On November 19, 2001, the Pennsylvania Office of
Consumer Advocate (OCA) filed a complaint with the PUC, objecting to the
recovery approval and stating various matters, such as rate of return and
offsetting savings, that should be considered before allowing RNR recovery in
excess of rate caps. An initial hearing on the OCA's complaint was held May 2,
2002 before a PUC administrative law judge, who denied the OCA's objections.
However, on May 9, 2002, the PUC ordered that Duquesne Light's quarterly
earnings may be considered in the RNR proceedings. Additional hearings were held
in July 2002. On August 8, 2002, the PUC voted to uphold dismissal of the OCA's
case. The OCA has until early September 2002 to appeal.

Although we cannot predict the ultimate outcome of this matter, we believe
the final resolution will not significantly affect our results of operations or
cash flows.

We are also involved in various other legal proceedings. (See Note H.)


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

On June 26, 2002, we held our Annual Meeting of Stockholders. We solicited
proxies for the Annual Meeting pursuant to Regulation 14 under the Securities
and Exchange Act of 1934, as amended. There was no solicitation in opposition to
management's nominees for directors as listed in the proxy statement dated April
23, 2002, and all nominees were elected. Three proposals were submitted to
stockholders for a vote at the Annual Meeting.

Proposal 1 was the election of two directors to serve until the 2003 Annual
Meeting; to elect one director to serve until the 2004 Annual Meeting, and to
elect three directors to serve until the 2005 Annual Meeting. The vote on this
proposal was as follows:

To serve until 2003:

Tvpe of Stock For Withhold
------------- ---------- ---------
Daniel Berg Common 43,726,921 1,557,900
Preferred 249,390 0

Eric W. Springer Common 43,578,554 1,557,900
Preferred 249,390 0

To serve until 2004:

Charles C. Cohen Common 43,811,346 1,557,900
Preferred 249,390 0

To serve until 2005:

Type of Stock For Withhold
------------- ---------- ---------
Sigo Falk Common 44,253,814 1,557,900
Preferred 249,390 0

David M. Kelly Common 44,572,300 1,557,900
Preferred 249,390 0

John D. Turner Common 44,558,797 1,557,900
Preferred 249,390 0



31



The following directors' terms continue after the Annual Meeting of
Stockholders: until 2003 - Robert P. Bozzone and Steven S. Rogers; and until
2004 - Doreen E. Boyce and Morgan K. O'Brien.

Proposal 2 was for the approval of the DQE, Inc. 2002 Long-Term Incentive
Plan. The vote on this issue was as follows:

For Against Abstain
---------- --------- ---------
Common Stock 37,608,215 6,678,395 1,355,007
Preferred Stock 249,390 0 0

Proposal 3 was the ratification of the appointment, by the board of
directors, of Deloitte & Touche LLP as independent auditors to audit our books
for the year ending December 31, 2002. The vote on this proposal was as follows:

For Against Abstain
---------- --------- ---------
Common Stock 42,940,967 2,093,343 607,307
Preferred Stock 249,390 0 0

Item 5. Other Information.

The Sarbanes-Oxley Act of 2002, which became effective on July 30, 2002,
requires disclosure of any non-audit services performed by a company's auditor.
As previously disclosed in our 2001 Annual Report to Shareholders, our
independent public accountants provide non-audit, tax-related services.

Item 6. Exhibits and Reports on Form 8-K

a. Exhibits:

Exhibit 10.1 - Purchase Agreement by and among AquaSource, DQE, Philadelphia
Suburban Corporation and Aqua Acquisition Corporation, dated
as of July 29, 2002.

Exhibit 12.1 - Calculation of Ratio of Earnings to Fixed Charges and
Preferred and Preference Stock Dividend Requirements.

Exhibit 99.1 - Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 99.2 - Certification of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

b. We filed a Form 8-K on May 30, 2002, to disclose a press release announcing
our Back-to-Basics plan.

We filed a Form 8-K on June 13, 2002, to disclose the Preliminary
Prospectus Supplement in connection with our equity offering.

We filed a Form 8-K on June 24, 2002, to incorporate certain documents by
reference into our equity offering registration statement, and to disclose
the Final Prospectus Supplement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant identified below has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

DQE, Inc.
---------------------------------
(Registrant)

Date August 14, 2002 /s/ Frosina C. Cordisco
------------------------------ ---------------------------------
(Signature)
Frosina C. Cordisco
Vice President and Treasurer
(Principal Financial Officer)


Date August 14, 2002 /s/ Stevan R. Schott
------------------------------ ---------------------------------
(Signature)
Stevan R. Schott
Vice President and Controller
(Principal Accounting Officer)

33