Warren Buffett is known, the World over, for his spectacular skills of Investment, but things didn’t turn as expected in the case of Energy Future Holdings. Buffett himself admits it as his “major unforced error”.
Energy Future Holdings, which was previously known as TXU Group, along with its private-equity owners hired restructuring advisors. TXU was taken by KKR & Co. L.P. (NYSE:KKR) and TPG, when it was at the height of buyout in 2007. This buyout was the largest leveraged-buyout on record.
Energy Future Holding was deep in red and was burdened by heavy debt load. This debt increased the size of its earnings by almost 10% before interest and taxes, depreciation and amortization, which are considered as hazardous ratio.
At this point, Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) made an entry. As per its 2011 annual letter, Berkshire spent $2 billion some few years back to buy “several bond issues of Energy Future Holdings”. With the same mind-set, like that of TXU’s private-equity owners, Buffett was also looking forward to an increase in natural gas prices. The Power price in Texas are set in accordance with the cost of natural gas, so there was expectation that with the increase in natural gas price, prices of electricity will also rise.
But in contrast to everyone’s expectations, prices declined. The prices declined from $8 per million British Thermal Units, when the deal was signed, to just below $2 last spring.
Warren Buffett is pessimistic about his investment in the Energy Future Holdings, and this view of Buffett reveals the grim condition of the Texas Utility owned by the group of private equity firms led by Kohlberg Kravis Roberts, TPG Capital and the buyout firm of Goldman Sachs.
In its report, Energy Future Holdings posted a 2011 loss of $1.9 billion during the record low prices of natural gas. The customer base of its retail business has contracted around 17 percent over the last three years, amidst stiff competition from rivals. The company is carrying a heavy debt, which has accumulated to around $35 billion, major portions of which was added to the balance sheet to finance the buyout.
In 2005- 2007, during the boom in market, Energy Future Holding turned out to be the biggest buyout deal, but in the aftermath financial crisis these deals headed towards bankruptcy.
Allan Koeing, a spokesman of Energy Future Holding defended the company saying the company’s business is running pretty well across all the segments. Employment has hiked by 25 percent under the private equity ownership, and was prevaricated against low natural gas prices this year.
The financial health of the company will not allow any bad debt payments, according to Allan Koeing, because the balance sheet is restructured and the first maturities on its bonds will not come before 2014.