Yet again, the Oracle of Omaha's predictions have come true.
Last year, in his annual investor letter, Buffett lamented his $2 billion bond investment in Dallas-based Energy Future Holdings, saying it was a "huge mistake."
It's an interesting company, you may remember, because it was bought out by
You also may remember that few days ago, Bloomberg reported that Energy Future Holdings faced bankruptcy because it was facing a critical deadline on the maturity of some its loans.
Here's what Buffett said about the company back in February 2012:
A few years back, I spent about $2 billion buying several bond issues of Energy Future Holdings, an electric utility operation serving portions of Texas. That was a mistake – a big mistake. In large measure, the company’s prospects were tied to the price of natural gas, which tanked shortly after our purchase and remains depressed. Though we have annually received interest payments of about $102 million since our purchase, the company’s ability to pay will soon be exhausted unless gas prices rise substantially. We wrote down our investment by $1 billion in 2010 and by an additional $390 million last year.
At yearend, we carried the bonds at their market value of $878 million. If gas prices remain at present levels, we will likely face a further loss, perhaps in an amount that will virtually wipe out our current carrying value. Conversely, a substantial increase in gas prices might allow us to recoup some, or even all, of our write-down. However things turn out, I totally miscalculated the gain/loss probabilities when I purchased the bonds. In tennis parlance, this was a major unforced error by your chairman.
Bloomberg pointed out the exact same issues in its reporting.
Hedging contracts that Energy Future sold to shield it against fluctuations in gas prices are expiring and will disappear entirely by the end of 2014, an event that could render Energy Future insolvent, according to the creditor who declined to named. The hedges rolling off could deflate Ebitda to $1.3 billion by the end of next year, the lender said. That’s $2.2 billion less than Energy Future’s interest cost in 2012.
Buffett's annual letter for 2012 comes out at 4:00 p.m. today. Consider this a reminder that you should pay attention.