OVERVIEW

Cleco is a regional energy company that conducts substantially all of its business operations through its two primary subsidiaries:

• Cleco Power, a regulated electric utility company, which owns 9 generating units with a total nameplate capacity of 2,565 MW and serves approximately 283,000 customers in Louisiana through its retail business and 10 communities across Louisiana and Mississippi through wholesale power contracts, and

• Midstream, a wholesale energy business, which owns Evangeline (which owns and operates Coughlin).

Cleco Power
Many factors affect Cleco Power's primary business of selling electricity. These factors include the presence of a stable regulatory environment, which can impact cost recovery and return on equity, as well as the recovery of costs related to growing energy demand and rising fuel prices; the ability to increase energy sales while containing costs; and the ability to meet increasingly stringent regulatory and environmental standards. A key initiative Cleco Power completed during 2012 was the Acadiana Load Pocket transmission project. Key initiatives on which Cleco Power is currently working include completion of the AMI project, completion of the transfer of ownership and control of Coughlin from Evangeline, and integration into MISO by January 2014. These initiatives are discussed below.

Acadiana Load Pocket Transmission Project In September 2008, Cleco Power entered into an agreement with two other utilities to upgrade and expand interconnected

transmission systems in south central Louisiana in an area known as the Acadiana Load Pocket. At December 31, 2012, Cleco Power had spent $123.7 million, including AFUDC, on the project. A return on and recovery of the costs associated with the completed portions of the Acadiana Load Pocket transmission project are included in base rates. The project was completed in December 2012. For information on the impact the Acadiana Load Pocket transmission project is expected to have on base revenue, see "- Cleco Power's Results of Operations - Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 - Base." For more information, see "- Financial Condition - Regulatory and Other Matters
- Acadiana Load Pocket Transmission Project."

AMI Project
In May 2010, Cleco Power accepted the terms of a $20.0 million grant from the DOE under the DOE's small-grant process to implement advanced metering technology for all of Cleco Power's retail customers. Cleco Power estimates the project will cost $73.0 million, with the DOE grant providing $20.0 million toward the project and Cleco Power providing the remaining $53.0 million. The grant program is a part of the American Recovery and Reinvestment Act of 2009, an economic stimulus package passed by Congress in February 2009. Advanced metering technology includes the installation of electric meters that enable two-way communication capabilities between a home or business and a utility company. At December 31, 2012, Cleco Power had incurred $55.5 million in project costs, of which $20.0 million has been submitted to and reimbursed by the DOE. The project is expected to be completed in the third quarter of 2013. For

more information on the AMI Project, see "- Financial Condition - Regulatory and Other Matters - AMI Project."
The risks associated with cybersecurity issues increase as Cleco moves toward more dependence on digital technology to conduct its daily operations, such as, but not limited to, AMI. Cleco has security measures in place to protect its technology systems from hacking, viruses, and other causes. In addition, Cleco is under the jurisdiction of the NERC Critical Infrastructure Protection cybersecurity standards and has implemented mechanisms, policies, and procedures to meet those standards. If Cleco's security measures were to fail, revenues could decrease and costs to repair the assets could have a material adverse effect on the Registrants' business, operating results, financial condition, and cash flows. For more information on cybersecurity, see Part 1, Item 1A, "Risk Factors - Technology and Terrorism Threats."

Power Supply Options/Coughlin Transfer from Midstream Cleco Power is continuing to update its IRP to look at future sources of supply to meet its capacity and energy requirements and to comply with new environmental standards. In August 2011, Cleco Power issued an RFP for resources to enhance reliability for January through April 2012 and selected and negotiated two agreements from the RFP, a power purchase agreement with NRG Power Marketing LLC and a tolling agreement with Evangeline. Both agreements began on January 1, 2012 and ended on April 30, 2012. In October 2011, a second RFP, seeking up to approximately 750 MW of capacity and energy, for a three- or five-year period was issued for supply starting May 1, 2012. Cleco Power selected Evangeline's proposal for a 730-MW product beginning May 1, 2012, and ending April 30, 2015. The definitive agreement between Evangeline and Cleco Power was executed in January 2012 and approved by the LPSC in March 2012 and FERC in April 2012. In May 2012, Cleco Power issued a draft RFP seeking long-term resources beyond April 2015. The final RFP was issued in July 2012 and proposals were received from potential suppliers in August 2012. On October 30, 2012, Cleco Power announced Evangeline as the winning bidder in Cleco Power's 2012 Long-Term RFP. In December 2012, Cleco Power and Evangeline executed definitive agreements to transfer ownership and control of Coughlin from Evangeline to Cleco Power. For more information on the RFP, see "- Financial Condition - Regulatory and Other Matters - Generation RFP."

MISO
Cleco Power's transmission system is heavily interconnected with Entergy's system; therefore, Cleco Power plans to follow Entergy and join MISO by January 2014. On December 6, 2012, Cleco Power filed an application with the LPSC indicating Cleco's intent to join MISO, asking the commission to find that transferring control of certain transmission assets to MISO is in the public interest, to create an accounting order deferring costs related to Cleco Power's transition into the MISO market, and to expedite treatment. For more information on MISO, see "- Financial Condition - Regulatory and Other Matters - Market Restructuring" and Part 1, Item 1A, "Risk Factors - MISO."

Cleco Midstream

Evangeline
In March 2010, Evangeline restructured its tolling agreement with JPMVEC and entered into the Evangeline 2010 Tolling Agreement whereby the parties shortened the expiration of the prior long-term agreement from 2020 to December 31, 2011 (with a JPMVEC option to extend one year). JPMVEC did not exercise the option to extend the Evangeline 2010 Tolling Agreement and as a result, Coughlin's capacity and energy became available to Midstream beginning January 1, 2012. Evangeline was one of the successful bidders in Cleco Power's RFP for short-term 2012 resources beginning January 1, 2012, and began providing 250 MW of capacity and energy to Cleco Power under a tolling agreement through April 30, 2012. In addition, in December 2011, Evangeline also was notified that Cleco Power selected its proposal to fulfill Cleco Power's capacity and energy needs as defined in the Cleco Power RFP for contractual resources beginning in 2012. The proposal was for a 730-MW product beginning May 1, 2012, and ending April 30, 2015. The definitive agreement between Evangeline and Cleco Power was executed in January 2012 and was approved by the LPSC in March 2012 and FERC in April 2012. Midstream had been marketing Coughlin's capacity for periods beginning after April 30, 2015, and had been evaluating various options to optimize Coughlin's value. On October 30, 2012, Cleco Power announced that Evangeline was the winning bidder in Cleco Power's 2012 Long-Term RFP. In December 2012, Cleco Power and Evangeline executed definitive agreements to transfer ownership and control of Coughlin from Evangeline to Cleco Power. For more information, see "- Financial Condition - Regulatory and Other Matters - Generation RFP."

Acadia
In October 2009, Acadia and Entergy Louisiana executed definitive agreements whereby Entergy Louisiana would purchase Acadia Unit 2. On April 29, 2011, Acadia completed its disposition of Acadia Unit 2 to Entergy Louisiana for $298.8 million. APH's portion of the proceeds from the sale were used to repay Cleco Corporation's $150.0 million bank term loan. For more information on the Acadia Unit 2 transaction, see Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 18 - Acadia Transactions - Acadia Unit 2."

RESULTS OF OPERATIONS

Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.

Cleco Consolidated Results of Operations -
Year ended December 31, 2012,
Compared to Year ended December 31, 2011
                                                                  FOR THE YEAR ENDED DEC. 31,
                                                                      FAVORABLE/(UNFAVORABLE)
(THOUSANDS)                       2012               2011           VARIANCE           CHANGE
Operating revenue, net  $      993,697     $    1,117,313     $     (123,616 )          (11.1 )%
Operating expenses             712,046            819,066            107,020             13.1  %
Operating income        $      281,651     $      298,247     $      (16,596 )           (5.6 )%
Allowance for other
funds used during
construction            $        6,711     $        4,947     $        1,764             35.7  %
Equity income from
investees, before tax   $            -     $       62,050     $      (62,050 )         (100.0 )%
Other income            $       29,117     $        8,914     $       20,203            226.6  %
Interest charges        $       84,156     $       70,658     $      (13,498 )          (19.1 )%
Federal and state
income taxes            $       65,327     $      102,897     $       37,570             36.5  %
Net income applicable
to common stock         $      163,648     $      195,710     $      (32,062 )          (16.4 )%

Consolidated net income applicable to common stock decreased $32.1 million, or 16.4%, in 2012 compared to 2011 primarily due to the absence of the gain from the disposition of Acadia Unit 2 during 2011, partially offset by the contractual expiration of underlying indemnifications resulting from the disposition of Acadia Units 1 and 2. Also contributing to the decrease were lower corporate earnings. Partially offsetting these decreases were higher Cleco Power earnings.
Operating revenue, net decreased $123.6 million, or 11.1%, in 2012 compared to 2011 largely as a result of lower fuel cost recovery revenue at Cleco Power due to lower per unit costs of fuel used for electric generation and power purchased for utility customers and lower volumes of fuel used for electric generation. Operating expenses decreased $107.0 million, or 13.1%, in 2012 compared to 2011 primarily due to lower per unit costs and volumes of fuel used for electric generation.
Allowance for other funds used during construction increased $1.8 million, or 35.7%, in 2012 compared to 2011, primarily due to higher AFUDC accruals related to the AMI Project and miscellaneous transmission projects, partially offset by lower amounts from the Acadiana Load Pocket transmission project and the absence of accruals related to the completion of Teche Unit 4.
Equity income from investees decreased $62.1 million, or 100.0%, in 2012 compared to 2011 primarily due to the absence of the gain from the disposition of Acadia Unit 2 during 2011. For more information on the Acadia Unit 2 transaction, see Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 18 - Acadia Transactions." Other income increased $20.2 million, or 226.6%, in 2012 compared to 2011 primarily due to the contractual expiration of underlying indemnifications resulting from the disposition of Acadia Units 1 and 2 and higher royalty payments.
Interest charges increased $13.5 million, or 19.1%, in 2012 compared to 2011 largely due to the absence of a favorable tax settlement recorded in 2011 relating to Evangeline. Partially offsetting this increase was lower interest charges at Cleco Power and lower corporate interest charges related to the repayment of a bank term loan in April 2011.

Federal and state income taxes decreased $37.6 million, or 36.5%, in 2012 compared to 2011. Tax expense decreased primarily due to the change in pre-tax income, excluding AFUDC equity, the settlement of legacy tax issues, and an increase in tax credits, partially offset by increases for the absence of a valuation allowance reversal recorded in 2011 and tax returns filed. The effective income tax rate is 28.5% which is different than the federal statutory rate primarily due to the effect of state income taxes, tax credits, and the effects of settlements of legacy tax issues.
On July 3, 2012, Cleco and Cleco Power filed a PLR request with the IRS in order to determine the appropriateness and timing of the special allowance for depreciation for Madison Unit 3. Subsequently, on December 28, 2012, Cleco received a favorable PLR from the IRS, consistent with the request allowing for the additional first year depreciation deduction in the amount of $411.0 million as reflected on Cleco Corporation's 2011 federal income tax return. Cleco and Cleco Power consider it more likely than not that these income tax losses generated on the 2011 income tax return will be utilized to reduce future payments of income taxes and both Cleco and Cleco Power expect to utilize the entire net operating loss carryforward within the statuatory deadlines. Results of operations for Cleco Power and Midstream are more fully described below.

CLECO POWER

Significant Factors Affecting Cleco Power

Revenue is primarily affected by the following factors:
As an electric utility, Cleco Power is affected, to varying degrees, by a number of factors influencing the electric utility industry in general. These factors include, among others, an increasingly competitive business environment, the cost of compliance with environmental and reliability regulations, conditions in the credit markets and global economy, and changes in the federal and state regulation of generation, transmission, and the sale of electricity. For a discussion of various regulatory changes and competitive forces affecting Cleco Power and other electric utilities, see Part I, Item 1 "Business - Regulatory Matters, Industry Developments, and Franchises - Franchises" and "- Financial Condition - Regulatory and Other Matters - Market Restructuring." For a discussion of risk factors affecting Cleco Power's business, see Item 1A, "Risk Factors - Transmission Constraints," "- LPSC Audits," "- Hedging and Risk Management Activities," "- Commodity Prices," "- Global Economic Environment and Uncertainty; Access to Capital," "- Future Electricity Sales," "- Cleco Power Generation Facilities," "- MISO," "- Reliability and Infrastructure Protection Standards Compliance," "- Environmental Compliance," "- Regulatory Compliance," "- Cleco Power's Rates," "- Retail Electric Service," "- Wholesale Electric Service," "- Weather Sensitivity," "- Cleco Credit Ratings," "- Alternative Generation Technology," "- Insurance," "- Litigation," "- Taxes," "- Health Care Reform," "- Technology and Terrorism Threats," and "- Cleco Power Unsecured and Unsubordinated Obligations."
Cleco Power's residential customers' demand for electricity is largely affected by weather. Weather generally is measured in cooling degree-days and heating degree-days. A cooling degree-day is an indication of the likelihood that a consumer will use air conditioning, while a heating degree-day

is an indication of the likelihood that a consumer will use heating. An increase in heating degree-days does not produce the same increase in revenue as an increase in cooling degree-days, because alternative heating sources are more available and because winter energy is priced below the rate charged for energy used in the summer. Normal heating degree-days and cooling degree-days are calculated for a month by separately calculating the average actual heating and cooling degree-days for that month over a period of 30 years.
Cleco Power has experienced over the last five years, and anticipates over the next five years, moderate growth in retail non-industrial sales volume. For the retail industrial class, Cleco Power expects new industrial load to be added in 2013, 2014, and 2015, principally driven by expected development in northwestern Louisiana associated with the development of Haynesville shale gas discovered in that area. In addition, Cleco Power also expects to begin providing service to expansions of current retail customers' operations, as well as service to a new retail customer. These expansions of service to current customers and service to a new customer are expected to contribute additional base revenue of $2.0 million in 2013, an additional $1.0 million in 2014, and an additional $2.8 million in 2015. Cleco Power's expectations and projections regarding retail sales are dependent upon factors such as weather conditions, natural gas prices, customer conservation efforts, retail marketing and business development programs, and the economy of Cleco Power's service area. For more information, see "Cautionary Note Regarding Forward-Looking Statements." Other issues facing the electric utility industry that could affect sales include:

• imposition of federal and/or state renewable portfolio standards,

• imposition of energy efficiency mandates,

• legislative and regulatory changes,

• increases in environmental regulations and compliance costs,

• cost of power impacted by the price movement of natural gas, the addition of solid-fuel plants which could increase or decrease costs depending on environmental regulations and commodity costs, and the addition of new generation capacity,

• increase in capital and operations and maintenance costs due to higher construction and labor costs,

• changes in electric rates compared to customers' ability to pay,

• access to transmission systems,

• need for additional transmission capacity for reliability purposes,

• changes in the credit markets and global economy,

• implementation of automated metering initiatives or advanced metering technologies, and

• integration into MISO.

For more information on energy legislation in regulatory matters that could affect Cleco, see "- Financial Condition - Regulatory and Other Matters - Market Restructuring - Wholesale Electric Markets." Cleco Power's revenues and earnings also are substantially affected by regulatory proceedings known as rate cases. During those cases, the LPSC and FERC determine Cleco Power's rate base, depreciation rates, operation and

maintenance costs, and administrative and general costs that Cleco Power may recover from its customers through the rates charged for electric service. These proceedings may examine, among other things, the prudence of Cleco Power's operation and maintenance practices, level of subject expenditures, allowed rates of return, and previously incurred capital expenditures. The LPSC has the authority to disallow costs found not to have been prudently incurred. These regulatory proceedings typically involve multiple parties, including governmental bodies and officials, consumer advocacy groups, and various consumers of energy, who have differing concerns but who have the common objective of limiting rate increases or reducing rates. Rate cases generally have long timelines which may be limited by statute. Decisions are typically subject to appeal, leading to additional uncertainty.

Other expenses are primarily affected by the following factors:
The majority of Cleco Power's non-fuel cost recovery expenses consist of other operations, maintenance, depreciation, and taxes other than income taxes. Other operations expenses are affected by, among other things, the cost of employee benefits, insurance expenses, and the costs associated with energy delivery and customer service. Maintenance expenses associated with Cleco Power's plants generally depend upon their physical characteristics, as well as the effectiveness of their preventive maintenance programs. Transmission and distribution maintenance expenses are generally affected by the level of repair and rehabilitation of lines to maintain reliability. Depreciation expense primarily is affected by the cost of the facilities in service, the time the facilities were placed in service, and the estimated useful life of the facilities. Taxes other than income taxes generally include payroll taxes, franchise taxes, and ad valorem taxes. Cleco Power anticipates certain non-fuel cost recovery expenses to be higher in 2013 compared to 2012. These expenses include higher plant maintenance expenses, higher taxes other than income taxes, and higher depreciation expense. In addition, Cleco Power expects its postretirement benefit expenses to be affected by changes in discount rates, actual returns on plan assets, level of benefits provided, and actuarial assumptions used in the calculations.
Cleco Power's Results of Operations -
Year ended December 31, 2012,
Compared to Year ended December 31, 2011

                                                                   FOR THE YEAR ENDED DEC. 31,
                                                                       FAVORABLE/(UNFAVORABLE)
(THOUSANDS)                         2012              2011           VARIANCE           CHANGE
Operating revenue
Base                       $     606,577     $     605,024     $        1,553              0.3  %
Fuel cost recovery               337,592           446,932           (109,340 )          (24.5 )%
Electric customer
credits                             (630 )          (6,811 )            6,181             90.8  %
Other operations                  48,156            50,948             (2,792 )           (5.5 )%
Affiliate revenue                  1,372             1,389                (17 )           (1.2 )%
Operating revenue, net     $     993,067     $   1,097,482     $     (104,415 )           (9.5 )%
Operating expenses
Fuel used for electric
generation - recoverable         277,605           379,771            102,166             26.9  %
Power purchased for
utility customers -
recoverable                       59,989            67,167              7,178             10.7  %
FAC non-recoverable fuel
and power purchased               21,338             6,778            (14,560 )         (214.8 )%
Other operations                 115,072           116,988              1,916              1.6  %
Maintenance                       72,386            74,603              2,217              3.0  %
Depreciation                     125,486           115,634             (9,852 )           (8.5 )%
Taxes other than income
taxes                             33,999            32,157             (1,842 )           (5.7 )%
Gain on sale of assets                (2 )              (9 )               (7 )           77.8  %
Total operating expenses   $     705,873     $     793,089     $       87,216             11.0  %
Operating income           $     287,194     $     304,393     $      (17,199 )           (5.7 )%
Allowance for other
funds used during
construction               $       6,711     $       4,947     $        1,764             35.7  %
Other income               $       5,847     $       3,163     $        2,684             84.9  %
Interest charges           $      80,502     $      97,090     $       16,588             17.1  %
Federal and state income
taxes                      $      68,133     $      69,409     $        1,276              1.8  %
Net income                 $     146,848     $     142,835     $        4,013              2.8  %

Cleco Power's net income for 2012 increased $4.0 million, or 2.8%, compared to 2011. Contributing factors include:

• lower interest charges,

• lower electric customer credits,

• lower other operations and maintenance expenses,

• higher other income,

• higher allowance for other funds used during construction,

• higher base revenue, and

• lower income taxes.

These were partially offset by:

• higher FAC non-recoverable fuel and power purchased,

• higher depreciation expense,

• lower other operations revenue, and

• higher taxes other than income taxes.

                                                  FOR THE YEAR ENDED DEC. 31,
                                                                   FAVORABLE/
(MILLION kWh)                               2012       2011     (UNFAVORABLE)
Electric sales
Residential                                3,624      3,877              (6.5 )%
Commercial                                 2,655      2,650               0.2  %
Industrial                                 2,311      2,366              (2.3 )%
Other retail                                 133        134              (0.7 )%
Total retail                               8,723      9,027              (3.4 )%
Sales for resale                           1,934      1,888               2.4  %
Unbilled                                     (43 )     (139 )            69.1  %

                                                        FOR THE YEAR ENDED DEC. 31,
                                                                         FAVORABLE/
(THOUSANDS)                                    2012          2011     (UNFAVORABLE)
Electric sales
Residential                               $ 281,378     $ 294,076              (4.3 )%
Commercial                                  181,093       179,786               0.7  %
Industrial                                   85,675        85,965              (0.3 )%
Other retail                                  9,908         9,815               0.9  %
Surcharge                                     9,133        10,695             (14.6 )%
Other                                        (6,252 )      (6,426 )             2.7  %
Total retail                              $ 560,935     $ 573,911              (2.3 )%
Sales for resale                             47,767        45,633               4.7  %
Unbilled                                     (2,125 )     (14,520 )            85.4  %
Total retail and wholesale customer sales $ 606,577     $ 605,024               0.3  %

The following chart shows how cooling and heating degree-days varied from normal conditions and from the prior period. Cleco Power uses temperature data collected by the National Oceanic and Atmospheric Administration to determine cooling and heating degree-days. . . .