Buffett warns holdings in TXU parent could become worthless

Buffett on TXU deal: “D’oh!” (AP)

As if we needed another sign that the biggest buyout in history was a colossal flop, even the Oracle of Omaha is eating crow. Warren Buffett, in his annual letter to shareholders of his company, Berkshire Hathaway, warned that weak natural gas prices could “virtually wipe out” the $2 billion worth of bonds he purchased in Energy Futures Holdings.

Berkshire bought the bonds in 2007, after the Dallas-based utility, then known as TXU,  was taken private by KKR and TPG, two private equity firms, in a $43.2 billion deal.

“That was a mistake — a big mistake,” Buffett said in the letter. Natural gas prices began to fall soon after he made the investment, and have remained weak. Berkshire wrote down the investment by $1 billion in 2010 and an additional $390 million last year, Buffett said.

At the end of last year, Berkshire still valued its holdings at $878 million, but Buffett warned further losses are likely unless gas prices improve.

“However things turn out, I totally miscalculated the gain/loss probabilities when I purchased the bonds, Buffett wrote. “In tennis parlance, this was a major unforced error by your chairman.”

The deal was a huge bet on natural gas prices, which were expected to rise, boosting TXU’s profit from coal-fired generation under Texas’ deregulated electricity market. Instead, gas prices fell as new deposits were discovered, creating a glut in the market.

As bad as things have been for Buffett, they’ve been even worse for the buyout firms that put the deal together.