Five years ago, three private equity firms paid $45 billion to acquire the Texas energy giant TXU, which was one of the largest leveraged buyouts in history. Unfortunately, the lucrative venture has not turned out as planned by the private equity groups. Kohlberg Kravis Roberts, TPG Capital, and the buyout arm of Goldman Sachs, ended up renaming the company Energy Future Holdings which announced last week a 2011 loss of $1.9 billion due to low natural gas prices.

On top of that its retail business has lost 17% of its customers to cheaper rivals. To make matters even worse, the firm has a unflattering debt load of $35 billion. This company was once one of the most profitable utility firms in the US. However, after the financial crisis, natural gas went to all time lows which really hit Energy Future Holdings bottom line.

Warren Buffett was also a believer in Energy Future Holdings and its impressive history. However, in Buffett’s annual letter to shareholders he told of his “$2 billion wrong way” investment which he calls a “big mistake” and later commented that he believes the bonds were at risk to lose all their value. Buffett isn’t the only one taking a hit. KKR says its investment in the ailing utilities firm is worth 10 cents on the dollar or a loss of 90%.

The private equity firms are now worried that Energy Future Holdings could default on its debt. However, Allan Koenig, a spokesman for Energy Future Holdings, said that default is not likely because the firm has restructured its balance sheet and the first of the bonds do not mature until 2014. The firm’s 2015 bonds are currently trading at 28 cents on the dollar offering a 60% yield.

So far, the PE firms believe that if natural gas does not rise over the next couple of years, their investment could effectively go to zero. This was once a utility company that was profitable and reliable. All sorts of private equity and investment firms wanted a piece of what was then TXU, even Lehman Brothers was fighting for a piece of the company back in 2006-2007.

Unfortunately, in investing all our decisions are not winners and every once in awhile we get a big loser that reminds us to get back to basics or change your due diligence tactics. It happens to everyone, even Warren Buffett. The unfortunate situation for these PE firms is that they can’t just sell the company like a stock or some other investment vehicle. All they can do now is hope for a natural gas price boom.