ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                    AND RESULTS OF OPERATIONS

OVERVIEW

          Cleco is a diversified regional energy services holding company that has two principal operating business segments:

          While Cleco Power has always been Cleco's foundation, Cleco began to expand its merchant energy business in the late 1990s.  As of December 31, 2003, Cleco owned all or part of three merchant generation facilities with a net capacity of 2,073 MW.  In connection with building the facilities, the subsidiaries of Cleco that owned the respective facilities entered into long-term tolling agreements.  With the downturn in the wholesale energy market, Cleco pulled back from its plans to continue expanding its merchant energy business and has focused on maximizing the value of its merchant energy assets.  During 2003, Cleco was successful in restructuring the Acadia Tolling Agreements to eliminate a parental guarantee and credit risk associated with the Aquila counterparty, and to increase the amount of credit support that could be drawn on in case of a default by the remaining tolling agreement counterparty, Calpine.  In addition, in early 2004, Cleco reached an agreement to sell the Perryville facility to Entergy Louisiana, Inc. for $170.0 million, subject to certain adjustments.  In order to facilitate an orderly sales process, Perryville and PEH filed voluntary petitions for bankruptcy protection.  During 2003, Cleco recorded a $148.0 million noncash impairment charge relating to the Perryville facility.  For information on Perryville, the sale agreement, a related power purchase agreement and the bankruptcy filings, see Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 27 - Perryville," and Note 30 - "Subsequent Events - Perryville."

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          While management believes that Cleco remains a fundamentally strong company, Cleco faces the following near-term challenges:

          Cleco Power currently has three power purchase contracts for 760 MW of capacity, all but 100 MW of which expire on December 31, 2004.  While Cleco Power initiated a solicitation to identify existing or new generation resources for 2005 and beyond in the second quarter of 2003, no satisfactory proposals were received.  Cleco Power has created an IRP team to evaluate generation supply options.

          Cleco Power's current rate stabilization plan expires in September 2004.  On February 13, 2004, Cleco Power filed to obtain a one-year extension without modification.  This extension would allow Cleco Power time to develop a long-range IRP, solicit new market proposals and evaluate the best options to create an efficient generation portfolio.

          In the second half of 2002, the LPSC commenced a fuel audit of Cleco Power.  A Cleco Power customer has intervened and is involved in the LPSC fuel audit proceeding.  The LPSC Staff has stated that it expects to issue its preliminary findings and recommendations related to the fuel audit proceeding by March 31, 2004.  Management is unable to predict the results of the fuel audit, which could require Cleco Power to refund previously recovered revenue and could adversely impact the Registrants' results of operations and financial condition.

          Cleco's merchant energy business is heavily dependent on the performance of the Acadia and Evangeline tolling agreements.  The credit ratings of the parent companies of these tolling agreement counterparties, The Williams Companies, Inc. and Calpine, have been downgraded below investment grade, and in some cases, placed on negative outlook.  Failure of the counterparties to perform under their respective tolling agreements will likely adversely impact Cleco's results of operations, financial condition and cash flows.

          Certain reclassifications have been implemented to make the 2002 and 2001 consolidated financial statements conform to the presentation used in the 2003 consolidated financial statements.  These reclassifications had no effect on net income applicable to common stock or total common shareholders' equity.

RESULTS OF OPERATIONS

Cleco Consolidated Results of Operations - Year ended December 31, 2003, Compared to Year ended December 31, 2002 

          Consolidated net (loss) income applicable to common stock decreased $106.8 million in 2003 compared to 2002, principally due to $156.3 million of impairment charges recorded at Midstream during 2003.  Also contributing to the decrease were higher interest expense and higher corporate legal and consulting fees associated with the FERC and LPSC investigations of certain trading activities.  On July 25, 2003, the FERC approved a settlement resolving its investigation of Cleco's energy marketing and trading practices, a review of which was initially disclosed in November 2002.  The settlement included penalties and remedies that resulted in a $0.9 million decrease in consolidated pre-tax net income.  For information on the trading activities, the investigations, and the settlement of the FERC's investigation, see "- Financial Condition - Regulatory Matters - Gas Put Options," "- Review of Trading Activities," "- Fuel Audit," "- Gas Transportation Charge", Item 8 - "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 19 - "Review of Trading Activities," and Note 25 - "FERC Settlement."

          Operating revenue increased $153.4 million, or 21.3%, in 2003 compared to 2002, largely as a result of higher base, fuel cost recovery, and transmission revenues from utility customer sales, higher tolling revenue from commencement of full commercial operation of the Perryville facility in the third quarter of 2002, and higher energy operations revenue due to increased prices and volumes of natural gas marketed.  Partially offsetting these increases were lower trading margins and lower other operations revenue.

          Operating expenses increased $329.0 million, or 58.3%, in 2003 compared to 2002, primarily due to the $156.3 million impairments of long-lived assets at Perryville and Cleco Energy.  Also contributing to this increase were higher prices for natural gas purchased for fuel generation and marketing purposes, increased depreciation expense at Perryville and Evangeline, and increased other operations and maintenance expenses at Perryville, Evangeline, and Cleco Power.  These increases in operating expenses were partially offset by the absence in 2003 of organizational restructuring expenses recognized in 2002.

          Equity income from investees increased $15.4 million, or 95.2%, in 2003 compared to 2002, primarily as a result of the

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commencement of full commercial operation of the Acadia facility in August 2002.  Interest charges increased $10.8 million, or 17.9%, compared to 2002, primarily due to the cessation of capitalizing interest-related expenses associated with the Perryville facility and Acadia once these facilities commenced commercial operation in addition to higher interest rates.

          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:

          Retail rates for residential, commercial, and industrial customers and other retail sales are regulated by the LPSC.  Retail rates consist of a base rate and a fuel rate.  Base rates are designed to allow recovery of the cost of providing service and a return on utility assets.  Fuel rates fluctuate while generally allowing recovery of, with no profit, the costs of purchased power and fuel used to generate electricity.  Rates for transmission service and wholesale power sales are regulated by the FERC.  An LPSC-approved rate stabilization plan is in place through September 2004.  This plan effectively allows Cleco Power the opportunity to realize a regulatory rate of return of up to 12.625%.  As part of the rate stabilization plan, the LPSC annually reviews revenue and return on equity.   A new plan may be ordered by the LPSC upon expiration of the existing plan, or the existing plan may be extended with or without modification.  In addition, the LPSC may compel a rate proceeding as part of any scenario.  On February 13, 2004, Cleco Power filed to obtain a one-year extension without modification.  This extension would allow Cleco time to develop a long-range IRP, solicit new market proposals, and evaluate the best options to create an efficient generation portfolio.  Any modification of the existing rate plan or a new rate plan may significantly impact both Cleco and Cleco Power's future results of operations, financial condition, and cash flows.

          Cleco Power's residential customers' demand for electricity largely is 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 customers can choose an alternative fuel source for heating, such as natural gas.  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 about 30 years.

          Cleco Power's commercial and industrial customers' demand for electricity is affected less by the weather and primarily is dependent upon the strength of the economy and by the worldwide demand for the customers' products compared to their ability to produce the products economically.  Cleco Power's two largest customers manufacture wood products, such as newsprint, cardboard, corrugated packaging, and kraft paper.  

          Kilowatt-hour sales to retail electric customers have grown an average of 1.8% annually over the last five years and are expected to grow from 1.0% to 1.4% per year during the next five years.  The growth of future sales will depend upon factors such as weather conditions, customer conservation efforts, retail marketing and business development programs, and the economy of Cleco Power's service area.  Some of the issues facing the electric utility industry that could affect sales include:

          For additional primary areas subject to potential energy legislation that could affect Cleco, see "- Financial Condition - Market Restructuring - Wholesale Electric Markets."

Fuel and purchased power are primarily affected by the following factors:

          Changes in fuel and purchased power expenses reflect fluctuations in fuel used for electric generation, fuel handling costs, availability of economical power for purchase, and deferral of expenses for recovery from customers through the fuel adjustment clause in subsequent months.  In comparison to other regional suppliers, Cleco's dependence on natural gas is greater.  As a result, Cleco's reliance on natural gas as a component of its fuel mix could impact future earnings as a result of existing competition, primarily wholesale competition, and if and when full retail choice emerges.

          Changes in fuel costs historically have not significantly affected Cleco Power's net income.  Generally, fuel and purchased power expenses are recovered through the LPSC-established fuel adjustment clause, which enables Cleco Power to pass on to customers substantially all such charges.  Cleco Power's fuel adjustment clause is regulated by the LPSC (which represent about 93% of its total fuel costs) and the FERC.  In the second half of 2002, the LPSC informed Cleco Power that it was planning to conduct a periodic fuel audit.  A Cleco Power customer has intervened and is involved in the LPSC fuel audit proceeding.  Recovery of fuel adjustment clause costs is subject to refund until monthly approval is received from the LPSC; however, all amounts are subject to a periodic fuel audit by the LPSC.  The LPSC Staff has stated that it expects to issue its preliminary findings and recommendations related to the fuel audit proceeding by March 31, 2004.  Management is unable to predict the results of the fuel audit, which could require Cleco Power to refund previously

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recovered revenue and could adversely impact the Registrants' results of operations and financial condition.  For additional information on this audit, see "- Financial Condition - Regulatory Matters - Fuel Audit."

          Cleco Power obtains coal and lignite through long-term contracts and through the spot market.  Natural gas is purchased under short-term contracts.  Cleco Power has three power contracts with two power marketing companies, Williams Energy and Dynegy, for a total of 705 MW of capacity in 2002 and 2003, increasing to 760 MW of capacity in 2004, and decreasing to 100 MW of capacity in 2005.  Because substantially all of these contracts expire on December 31, 2004, Cleco Power continues to evaluate its capacity and energy needs.  Cleco Power initiated a solicitation during the second quarter of 2003 to identify existing or new generation resources for 2005 and subsequent years, including new power purchase contracts, to replace the Williams Energy contracts and the Dynegy contract.  Cleco Power plans to issue a new RFP in mid-2004 to identify existing or additional generation resources.  On January 30, 2004, Cleco Power agreed to terms for a one-year contract to purchase 500 MW of capacity from CES starting in January 2005.  Such one-year contracts are not subject to the LPSC's RFP general order requirements but do remain subject to certification approval by the LPSC.  Cleco Power anticipates that this contract will be executed by late March 2004 and the 500 MW of capacity from CES is expected to fill the shortfall left by the Williams Energy and Dynegy contracts expiring at the end of 2004.  This contract is expected to minimize risks associated with transmission constraints in the area.  However, Cleco Power continues to evaluate meeting capacity requirements in future periods.  During the third quarter of 2003, Cleco Power created an IRP team to evaluate generation supply options.  It is anticipated that the IRP effort will identify the leading alternatives that can provide customers with a long-term supply of power at stable, competitive prices.  For additional information on the IRP process, see Part 1, Item 1, "Business - Operations - Cleco Power - Fuel and Purchased Power - Power Purchases."  In addition to the power obtained under these contracts, Cleco Power purchases power from energy marketing companies and neighboring utilities to supplement its generation at times of relatively high demand or when the purchase price of the power is less than Cleco Power's cost of generation or other existing power agreements.  However, transmission capacity must be available to transport this purchased power to Cleco Power's system.  During 2003, 50.4% of Cleco Power's energy requirements were met with purchased power, up from 45.4% in 2002 and 40.3% in 2001.

          In future years, depending on the outcome of the IRP process, Cleco Power's power plants may not be able to supply enough power to meet its growing native load.  Because of its location on the transmission grid, Cleco Power relies on one main supplier of electric transmission, and constraints sometimes limit the amount of purchased power it can import into its system.  The power contracts described above may be affected by these transmission constraints.  For information on Cleco Power's purchased power and on certain Cleco Power obligations under the Williams Energy contracts and the Dynegy contract, see "- Financial Condition - Regulatory Matters - Purchased Power."

Other expenses are primarily affected by the following factors:

          The majority of other expenses include 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 providing customer service.  Maintenance expenses associated with Cleco Power's plants generally depend upon the physical characteristics of the plants, as well as planned preventive maintenance.  Depreciation expense primarily is affected by the cost of the facility in service, the time the facility was placed in service, and the estimated useful life of the facility.  Taxes other than income taxes generally are affected by payroll taxes and ad valorem taxes.

Cleco Power's Results of Operations - Year ended December 31, 2003, Compared to Year ended December 31, 2002

          Cleco Power's net income applicable to member's equity for 2003 was $57.0 million compared to $59.6 million for 2002.  Contributing factors include:

These were partially offset by:

          As reflected on the following page, the aggregation of fuel cost recovery revenue, power purchased for utility customers, and fuel used for electric generation significantly increased in 2003 compared to the same period in 2002.  However, changes in these items do not significantly impact net income, since fluctuations in fuel-related costs generally are recovered through fuel cost recovery revenue via Cleco Power's fuel cost adjustment process.

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          The following chart shows how cooling and heating degree-days varied from normal conditions and from the prior period.  In the fourth quarter of 2002, Cleco Power changed the method of determining heating and cooling degree-days and began to use temperature data collected by the National Oceanic and Atmospheric Administration for this purpose.  Cooling and heating degree-days for each period indicated have been adjusted to reflect the change in the temperature data source.

Base

          Base revenue during 2003 increased $6.6 million, or 2.2%, compared to the same period in 2002.  The increase was primarily due to slightly higher volumes of retail and wholesale customer kWh sales.  Base revenue also increased approximately $1.1 million as a result of energy management services contracts that commenced in May 2003.

          On July 7, 2003, one of Cleco Power's existing wholesale customers entered into a three-year contract with an energy marketing company.  This new contract is scheduled to begin once Cleco Power's contract expires on May 31, 2004.  The expiration of this contract is expected to reduce annual base revenue by approximately $4.8 million.  Also anticipated with the non-renewal of this contract will be a reduction of capacity expenses of approximately $2.0 million, resulting in an expected net annual reduction of $2.8 million in pre-tax operating income.

          On July 16, 2003, the LPSC approved Cleco Power's new five-year contract with one of its existing industrial customers.  As a result of the terms in the new contract, annual base revenue was $1.0 million lower in 2003 and is expected to be $2.0 million lower for the remaining years of the contract.

          During the second quarter of 2004, Cleco Power is expected to begin serving a new industrial customer and during the first quarter of 2005 is expected to begin providing service to an expansion of a current customer's operation.  The expected new service and expected expansion of current service are projected to increase 2004 base revenue by approximately $0.6 million and increase annual revenue by approximately $1.5 million beginning in 2005, in each case compared to 2003 base revenue.

Fuel Cost Recovery

          Fuel cost recovery revenue collected from customers increased $101.3 million, or 38.6%, primarily as a result of an increase of 37.2% in the average per unit cost of power purchased from the energy market in 2003 compared to 2002 and a 25.6% increase in the average per unit cost of fuel used for electric generation.  The increase in fuel used for electric generation is primarily the result of higher natural gas prices.  The increase in the per unit cost of purchased power was influenced by higher natural gas prices, as well as other market factors.  For information on Cleco Power's ability to recover fuel and purchase power costs, see "- Significant Factors Affecting Cleco Power - Fuel and purchased power are primarily affected by the following factors," above.

Electric Customer Credits

          Electric customer credits during 2003 were $1.3 million, or 46.1%, lower compared to the same period in 2002.  This decrease in electric customer credits is a result of the revised estimate of the

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accruals for the rate refund based on actual results for the twelve months ended September 30, 2003.  The potential refunds are based on results for each 12-month period ended September 30.  For additional information on the accrual for electric customer credits, see Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 12 - Accrual of Electric Customer Credits."

Energy Trading, Net

          Decreases in power and gas volumes from 2002 to 2003 were directly related to the discontinuation of speculative trading activities in the fourth quarter of 2002.  Most of Cleco Power's exposure to the market was mitigated in the summer of 2002 by transactions entered into specifically to offset open positions.  Volumes and associated revenue were affected by these positions during 2003.

          Generally, Cleco Power's energy trading transactions are considered non-hedging derivatives under SFAS No. 133, as amended, which requires that the transactions be reported at fair market value or "mark-to-market."  The chart below presents the components of energy trading, net.

          Energy trading, net, increased $1.4 million in 2003 compared to the same period in 2002.  This increase was primarily a result of amounts required to be paid to Cleco Power pursuant to the Consent Agreement and a negative adjustment for premiums on certain gas put options recorded in the third quarter of 2002.  In addition, Cleco Power's efforts to mitigate most of its exposure to the market following the discontinuation of speculative trading activities in the fourth quarter of 2002 and volatility in power and natural gas prices contributed to the fluctuations between each period.  For additional information on the Consent Agreement and FERC settlement, see Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 25 - FERC Settlement."

Operating Expenses

          Operating expenses increased $114.8 million, or 24.0%, in 2003 compared to the same period of 2002.  Fuel used for electric generation increased $25.3 million, or 18.2%, primarily due to an increase in the average per unit equivalent cost of fuel from $25.17 per MWh in 2002 to $32.30 per MWh in 2003.  Power purchased for utility customers increased $79.6 million, or 52.7%, largely due to an increase in the average per unit cost of purchased power and volume.  In addition, power purchased for utility customers increased as a result of higher capacity payments made during 2003.  The increase in power purchased for utility customers was partially offset by a $1.1 million decrease resulting from payments received under the Consent Agreement.  For additional information on the Consent Agreement and the FERC settlement, see Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 25 - FERC Settlement."  Increases in fuel used for electric generation and power purchased for utility customers both were influenced significantly by higher natural gas prices.  As a result, total system cost increased from $26.22 per MWh in 2002 to $35.04 per MWh in 2003.  Maintenance expense during 2003 increased $16.4 million, or 58.1%, compared to 2002.  The primary reasons for this increase were increased maintenance expenses from Cleco Power's transmission and distribution reliability initiative, the production availability initiative, restoration efforts associated with Tropical Storm Bill, and the amortization of deferred expenses related to Hurricane Lili and Tropical Storm Isidore.  Depreciation expense increased $1.9 million, or 3.5%, as a result of normal recurring additions to fixed assets.  Restructuring charge decreased $8.4 million during 2003 compared to 2002 as a result of the absence of an organizational restructuring in 2003.  The restructuring charge credit of $0.3 million for the year ended December 31, 2003, represents adjustments made during 2003 to 2002 original estimated amounts.

Other Expenses

          Other expenses increased $3.7 million, or 88.6%, during 2003 compared to 2002, primarily due to increased donations, increased community project involvement, and payments made to community action agencies to assist low-income customers.  Also contributing to the increase in other expenses was increased expenses related to work performed by Cleco Power employees for the restoration of power along the East Coast after Hurricane Isabel last fall.

Income Taxes

          Income tax expense in 2003 decreased $2.3 million, or 7.2%, compared to 2002.  The decrease was primarily due to lower taxable income compared to the same period of 2002.  For information about assumptions and estimates underlying Cleco Power's accounting for the effect of income taxes, see - "Critical Accounting Policies."

Midstream

Significant Factors Affecting Midstream

Revenue is primarily affected by the following factors:

          Midstream's revenue is derived predominantly from its power plant operations and energy operations.  Revenue from wholly owned power plant operations is derived primarily from tolling contracts.  Tolling revenue generally is affected by the overall performance related to the availability and efficiency of the facility to operate and the level at which it operates.  A facility's availability can be enhanced or protected by providing replacement power to the tolling counterparties.  Each tolling agreement gives a tolling counterparty the right to own, dispatch, and market all of the electric generation capacity of the respective facility.  Each tolling counterparty is responsible for providing its own natural gas to the respective facility.  Earnings from jointly owned power plant

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operations are derived from an equity investment, and they are reflected in equity income from investees.  Revenue from energy operations is derived from energy management services and wholesale natural gas marketed.

          Tolling revenue is partially derived from a 775-MW combined-cycle, natural gas-fired power plant through the Evangeline Tolling Agreement, and prior to September 15, 2003, tolling revenue was also derived from a 718-MW, natural gas-fired power plant through the Perryville Tolling Agreement.  For more information on the termination of the Perryville Tolling Agreement, see Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 27 - Perryville."  Pending the sale of the Perryville facility, tolling revenue at Perryville will be derived from the Entergy Services, Inc., power purchase agreement.  For additional information on the power purchase agreement, see Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 30 - Subsequent Events - Perryville." Through an investment in Acadia, equity earnings are derived primarily from a 1,160-MW combined-cycle, natural gas-fired power plant.  Acadia's output currently is sold through the Calpine Tolling Agreements.  Prior to May 2003, Acadia's output was sold through two separate tolling agreements:  one through the Aquila Tolling Agreement and the other through one of the Calpine Tolling Agreements.  In May 2003, Acadia terminated its 580-MW 20-year tolling agreement with Aquila Energy and entered into a replacement contract with CES.  For more information on the termination of the Aquila Tolling Agreement and replacement CES agreement, see Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 13 - Equity Investment in Investees."  For additional information on Acadia, Evangeline, Perryville, and the tolling agreements related to these facilities, see "- Financial Condition - Liquidity and Capital Resources."

          Evangeline and Acadia have certain performance obligations under their respective tolling agreements.  Failure to perform could expose each facility to possible adverse financial penalties and requirements which include, but are not limited to, maintaining plant performance characteristics such as heat rate and demonstrated generation capacity at specified levels and maintaining specified availability levels with a combination of plant availability and replacement power.  Obligations under the respective tolling agreements include, but are not limited to, maintaining various types of insurance at specified levels, maintaining power and natural gas metering equipment, and paying scheduled interest and principal payments on debt.  In addition to the performance obligations by Evangeline and Acadia, there are various guarantees and commitments required by Cleco Corporation.  For additional information on commitments by Cleco Corporation, see - "Financial Condition - Off-Balance Sheet Commitments" and Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 23 - Disclosures About Guarantees."

          If Evangeline and Acadia fail to operate within specified requirements, the respective facilities may need to purchase replacement power on the open market and provide it to the tolling counterparties.  Providing replacement power maintains availability levels, but exposes Evangeline and Acadia to power commodity price volatility and transmission constraints.  If availability targets under the tolling agreements are not met and economical purchase power and transmission are not available, Evangeline and Acadia's financial condition and results of operations could be materially adversely affected.

          Under the Evangeline Tolling Agreement, Williams Energy pays Evangeline a fixed fee and a variable fee for operating and maintaining the facility.  The Evangeline Tolling Agreement is accounted for as an operating lease.  For additional information on Cleco's operating leases, see - "Critical Accounting Policies - Midstream" and Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 14 - Operating Leases."  Evangeline Tolling Agreement revenue correlates with the seasonal usage of the plant.  Evangeline's 2003 revenue was recognized in the following manner:

          Revenue for 2004 under the Evangeline Tolling Agreement is anticipated to be recognized in a similar manner.  For additional information on recognition of revenue from the Evangeline Tolling Agreement, see "- Critical Accounting Policies - Midstream" and Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 2 - Summary of Significant Accounting Policies - Revenue and Fuel Costs - Tolling Revenue."

          Prior to the cancellation of the Perryville Tolling Agreement, MAEM paid Perryville a fixed fee and a variable fee for operating and maintaining the facility.  MAEM also paid a quarterly amount to Perryville, which represented its share of Perryville's quarterly parts and maintenance expenses under Perryville's long-term maintenance contract with General Electric Corporation.  This amount was based upon Perryville's run hours and factored starts for each quarter.  The Perryville Tolling Agreement was accounted for as an operating lease.  For additional information on the termination of this tolling agreement, see Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 27 - Perryville" and for information on Cleco's operating leases, see "- Critical Accounting Policies - Midstream," and Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 14 - Operating Leases."  Perryville Tolling Agreement revenue was recognized evenly throughout the year.  For additional information on recognition of revenue from the Perryville Tolling Agreement, see Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 2 - Summary of Significant Accounting Policies - Revenue and Fuel Costs - Tolling Revenue."

          Prior to the cancellation of the Aquila Tolling Agreement, Aquila Energy paid Acadia a fixed fee and a variable fee for operating and maintaining the facility.  Following the termination of the Aquila Tolling Agreement, Acadia entered into a replacement contract with CES.  Under the Calpine Tolling Agreements, CES pays Acadia a fixed fee and a variable fee for operating and maintaining the facility.  Under each of these tolling agreements,

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equity investment earnings from the tolling agreements were recognized evenly throughout the year.  For additional information on the termination of the Aquila Tolling Agreement and replacement CES agreement, see Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 13 - Equity Investment in Investees."

          The parent companies of Cleco's remaining tolling counterparties are The Williams Companies, Inc. and Calpine.  Each of these entities has issued guarantees of the payment obligations of the respective tolling counterparties under the tolling agreements.  Calpine also issued a $40.0 million letter of credit which provides additional credit support in the event CES does not fulfill its obligations under the Calpine Tolling Agreements.  The credit ratings of these parent companies have been downgraded below investment grade, and in some cases, placed on negative outlook.  Failure by The Williams Companies, Inc. or Calpine to perform under their respective tolling agreements could adversely impact Cleco's results of operations, financial condition, and cash flows.

          The following list discusses some possible adverse consequences if any of Cleco's remaining tolling counterparties should fail to perform their obligations under their respective tolling agreements, or if Cleco Corporation or its affiliates are not in compliance with loan agreements or bond indentures.  Cleco's remaining tolling counterparties are Williams Energy and CES.  The list is not all-inclusive, but represents examples of possible adverse consequences that could result from the nonperformance of Cleco's remaining tolling counterparties and certain defaults resulting from noncompliance with debt covenant agreements or bond indentures:

          Revenue from energy operations generally is affected by transmission constraints, supply and demand in the market, the financial viability of marketing counterparties, and volatility of market prices.  Energy operations revenue is comprised of two components: energy management services and wholesale natural gas marketed.  Marketing & Trading, prior to the second quarter of 2003, provided energy management services to several municipalities and, prior to the fourth quarter of 2002, marketed and traded wholesale natural gas and electricity.  Cleco Energy, also a subsidiary of Midstream, primarily markets wholesale natural gas in Louisiana and Texas and provides energy management services, including fixed-price gas hedges.  Cleco Energy generally takes physical delivery of natural gas marketed and sells physical gas instead of settling transactions through the financial markets.

          Other operations revenue was derived from services Generation Services provided to Perryville prior to Cleco's acquisition of the remaining interest in Perryville in the summer of 2002.  For additional information regarding the acquisition of Perryville, see Item 8, "Financial Statements and Supplementary

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 Data - Notes to the Financial Statements - Note 21- Acquisition."

Expenses are primarily affected by the following factors:

          Midstream's expenses include impairments of long-lived assets, purchases for energy operations, depreciation, maintenance and other operations expenses.  The impairment charges relate to triggering events as defined by SFAS No. 144.  Purchases for energy operations are affected primarily by the same factors as energy operations revenue.  Depreciation expense is affected by the cost of the facility in service, the time the facility was placed in service, and the estimated useful life of the facility.  Maintenance expenses generally depend on the physical characteristics of the facility, the frequency and duration of the facility's operations, and planned preventive maintenance.   Other operating expenses mainly relate to administrative expenses and employee benefits.

Midstream's Results of Operations - Year ended December 31, 2003, Compared to Year ended December 31, 2002

          Midstream's net loss applicable to member's equity for 2003 was $85.3 million, significantly below the $14.7 million earned in 2002.  Contributing factors include:

These were partially offset by:

Tolling Operations

          Tolling operations revenue increased $8.5 million, or 9.4%, in 2003 compared to 2002 primarily due to the Perryville facility commencing full commercial operation in the third quarter of 2002.  This increase was partially offset by decreased generation from the Evangeline facility, which was dispatched less frequently in 2003 compared to 2002.

Energy Trading, Net

          Decreases in power and gas volumes and trading margins from 2002 to 2003 were directly related to the discontinuation of Midstream's speculative trading activities in the fourth quarter of 2002.  Most of Midstream's exposure to the market from positions opened prior to the change in its speculative trading strategy was mitigated in the fourth quarter of 2002 by transactions entered into specifically to offset open positions.  Volumes and associated revenue were affected by these positions during 2003.  As of September 4, 2003, Marketing & Trading had closed all forward trading positions.

          Generally, Midstream's energy trading transactions are considered non-hedging derivatives under SFAS No. 133, as amended, which requires that the transactions be reported at fair

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market value or "mark-to-market."  The chart below presents the components of energy trading, net.