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Post of the Day
October 27, 1999

Board Name:
Berkshire Hathaway

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Subject:  Movers in the Utility Industry
Author:  GTGomes

I am currently an analyst for Burkenroad Reports, a student run analyst program at Tulane University. Funded with the money from some guy (perhaps deceased) named Burkenroad (whose name is plastered all over our B-school), the program assigns groups of three or four students to smaller public companies usually ignored by the Wall Street types. Some of the companies include Stewart Enterprises (funeral homes)Crystal Oil, and even Books-a Million. All the companies are south of the Mason Dixon line, making our traveling arrangements easier when we interview management. We begin analysis in September, and publish the reports around March. Brokerage firms all over the country request the reports and Tulane makes a nifty little royalty.

"But even before we met with management, I felt that [Cleco] was a very attractive takeover prospect."

Well, my group was assigned to a rural utility called Cleco Corp. It operates four power plants (3 natural gas, one coal) all over Louisiana, but not in New Orleans, and it generates, transmits, and distributes to households, commercial and industrial customers (all three are considered retail customers, all regulated). This past summer shareholders voted to reorganize as a holding company, so that Cleco could separate regulated income, from nonregulated income. Cleco's nonregulated income, in a nutshell, is electricity that the company generates, but instead of selling to retail customers, it sells it on the wholesale market, basically to other utilities. The wholesale market offers better margins than the retail market, and Cleco believes it will be a major player in that area. Another part of Cleco's nonregulated business is consulting and contracting, both dealing mostly with transmission line construction.

Cleco has a good enough relationship with the Louisiana Public Service Council that it was given a 12.25% ROE allowance. The industry allowance, at least in Louisiana is 11.5%. What that means is any ROE over 11.5% must be shared with customers in the form of credits/refunds. Some of you might have noticed this on your elec. bills, and I think the same sort of thing goes on in the cable TV industry. So Cleco gets to keep more of its money relative to the industry.

Other fun facts: Its customer service ratings are far better than any other provider in the state. It owns rights to gas pipelines form the gulf, and one of its sites is within spitting distance from the famous Henry Hub. The Henry Hub is THE trading point for natural gas for the entire nation. Cleco's proximity to Henry Hub allows it cheaper transmission and storage costs than its competitors. Oh one other thing, its debt rating is AAA.

That's just a snapshot. But even before we met with management, I felt that this company was a very attractive takeover prospect. Its practically in the lion's den with Entergy to the South, and Southern to the east. Back in September I predicted that Cleco would be bought out by the time we finished our reports next February, just in time for Mardi Gras.

"...I officially predict, on this board for all to see, that Buffett will purchase Cleco."

My thinking at the time was a more 'oh well' attitude. However, when we met with management a couple weeks ago, I was very impressed. Here was a group of intelligent, candid, experienced, and innovative people, who were actually kind enough to spend four hours of their day to meet with punk undergrads such as myself. Even headquarters gave me a good feeling, 3 1/2 hours north of New Orleans, away from everything, in the small, peaceful community of Pineville. By the middle of our meeting with management I was thinking to myself that this company would be a perfect candidate for Warren Buffett. But I was hung up on the ROE. Being a BRK.B shareholder, I always thought Buffett liked to focus his investments on companies with high ROEs, in the 20-25 range. Well, with this MidAmerican purchase, I can see I am wrong, and as I conclude this long winded message, I officially predict, on this board for all to see, that Buffett will purchase Cleco.

This is just my personal opinion. Just because I am covering this company does not mean I am privy to any sort of information not available to anyone else. Everyone who is familiar with Buffett should know that he is very quiet about his dealings, and if he has been speaking with management, he would insist on keeping it under wraps. If there are any questions about Cleco, or Burkenroad reports I'm always hanging around these message boards. Thanks, Gabe