The Contracts Behind the Curtain: Why We Own What We Own

“Show me the incentive, and I’ll show you the outcome.” — Charlie Munger

Dear Partners,

There is an old parable about a man who buys a house based on a photograph. The photograph shows a beautiful facade, a manicured lawn, a blue sky. He signs the papers. He moves in. On the first night, the roof leaks, the foundation is cracked, and the pipes are rusted. The photograph was real. The house was real. But the photograph showed only what the seller wanted him to see.

I have been thinking about this parable a great deal lately, because it captures something important about what is happening in the energy infrastructure buildout right now, and because it explains both why we avoided one side of this trade and why we chose the other.

The Promise of Load

This past utilities earnings season has been extraordinary, at least on paper. American Electric Power doubled its contracted load outlook from 28 GW to 56 GW. FirstEnergy increased its five-year capital expenditure plan by $8 billion. DTE by $6.5 billion. Entergy by $6 billion. The numbers are enormous. The narrative is compelling. The story is that data centers will consume unprecedented amounts of electricity, and that anyone who owns the pipes and wires feeding that demand will prosper for decades.

Markets love a clean narrative. Clean narratives feel safe. They give investors permission to pay premium valuations for what appears to be certainty. But I have learned, sometimes painfully, that the distance between a narrative and a fact can be very wide. And the job of a careful investor is not to accept the narrative. The job is to read the contract.

So I read the contracts.

What the Contracts Actually Say

The architecture behind these utility load projections is more fragile than most investors realise. Let me walk you through the structure, because I believe understanding it is essential to understanding where we have placed our capital and why.

When a hyperscaler like a major cloud provider wants to bring a large data center onto a utility’s grid, the process moves through several stages. The first stage is an engineering study, called a Substation Engineering Letter of Authority. The customer pays a flat fee of $1 to $5 million, regardless of how much power the project will eventually require. If the customer walks away at this point, that fee is all they lose.

The second stage authorises actual substation construction. This costs the customer roughly $17 to $35 million, depending on the voltage class and configuration. These costs are flat. They do not scale with the megawatts contracted.

The third and final stage is the Electric Service Agreement, a bilateral take-or-pay contract that requires approval from a state public utility commission. Once the meter is set and the generation assets come online, the customer commits to paying for at least 80 to 85 percent of contracted capacity, regardless of how much they actually use. This sounds binding, and it is, but only after the infrastructure is physically built and operational. Before that point, the customer’s total sunk cost is $26 to $40 million. On a $1.1 billion reference project, that is roughly 2.4 to 3.6 percent. On the supply side, the numbers are even thinner. An independent power producer entering the PJM interconnection queue posts about $2 million for a 500 MW project, with development costs bringing the total to $7.5 to $12.5 million. That is less than 1.1 percent of total project cost. In ERCOT, which is Texas, the supply side commitment can be as low as $1 to $2 million. Under 0.2 percent.

Let me put this plainly. The contracts that underpin tens of billions in projected utility capital expenditure create near-optional financial obligations on both sides. The customer can walk away for the cost of a rounding error. The generator can walk away for even less.

The Cracks

This is not a theoretical concern. The cracks have already appeared.

AEP built 750 MW of generation capacity in Indiana, West Virginia, and Kentucky in anticipation of data center contracts that never materialised. The company applied to FERC for a waiver to sell that stranded capacity into PJM’s incremental capacity auction. FERC rejected the request in February 2026. AEP now holds generation capacity with no offsetting revenue and no resolution mechanism.

Consider what happened there. The utility built the supply. The demand never showed up. And because the contracting structure placed no proportional take-or-pay obligation on the customer at the generation level, the utility absorbed the entire loss. It is like a farmer who ploughs a hundred acres, buys the seed, hires the labour, and then discovers the buyer never actually committed to purchasing the harvest.

Then there is the dispute between PacifiCorp and Amazon. PacifiCorp allegedly delivered significantly less power than contracted to one Amazon data center campus and zero power to a second, while refusing to complete contracts for two additional campuses with obligations dating to 2021. Amazon claims it invested $39.2 billion in Oregon development on the assumption that contracted delivery would occur. The case is proceeding to discovery. It is the first real test of whether a utility faces material consequences for not performing under an Electric Service Agreement.

The answer remains unresolved. Which tells you something about the certainty embedded in these projections.

The Photograph and the House

This is why I return to the parable of the photograph.

The load projections are real in the sense that they represent genuine demand intent. Hyperscalers want this power. They are willing to pay for it. The secular trend toward artificial intelligence, toward the digitisation of everything, is not imaginary. But demand intent is not the same as a binding financial commitment, and a signed letter of authority is not the same as a delivered megawatt.

Utilities are disclosing load projections derived from contracts that, at the point of signing, carry sunk costs of 2 to 4 percent of project value on the demand side and under 1 percent on the supply side. The market is pricing many utility equities as though these projections represent certainty. They do not. They represent the most optimistic scenario within a distribution of outcomes that includes delays, cancellations, and stranded capital.

The distinction matters. Not because the energy buildout will not happen. Parts of it almost certainly will. It matters because the distance between the narrative and the contractual reality is where risk lives. And where risk lives quietly, loss compounds just as surely as value does elsewhere.

This is exactly why we avoided the utility side of this trade. But it is also why we looked carefully at the other side of the table.

The Other Side of the Table

There is a critical difference between a utility projecting load based on letters of authority and an infrastructure company that has already signed binding, long-duration contracts directly with the hyperscalers themselves. That difference is the reason we own a basket of digital infrastructure companies, and it deserves a careful explanation.

When I look at our holdings in this space, the companies formerly rooted in bitcoin mining that have pivoted to high-performance computing infrastructure, I see something structurally different from the utility story I just described. The difference is not subtle. It is contractual.

Consider the contrast. A utility like AEP discloses 56 GW of projected load in ERCOT, much of it based on letters of authority where the customer’s walk-away cost is flat and immaterial relative to the project. The utility bears the risk of building generation and transmission infrastructure against what are, in financial terms, soft commitments. If the customer does not show up, the utility is left holding stranded assets. That is precisely what happened with AEP’s 750 MW.

Our infrastructure holdings sit on the opposite side of that dynamic. They are not projecting demand based on preliminary letters. They have executed contracts with counterparties like Microsoft, Amazon, and Google, contracts that in several cases involve billions of dollars in prepayments, 10 to 15 year terms, and explicit guarantees from the parent entities of the tenants. These are not options. These are obligations.

Let me be specific about what gives me comfort.

The first source of comfort is the nature of the counterparty commitment. When a hyperscaler signs a 15-year lease with an infrastructure provider and the parent company, Amazon.com itself, guarantees the base rent and expenses, that is a fundamentally different financial instrument than a letter of authority that costs $5 million to exit. When Google backstops over a billion dollars of a tenant’s lease obligations, that is not a soft signal of interest. That is capital at risk. The hyperscalers are not window-shopping with these infrastructure providers the way they might be with certain utility load requests. They are writing cheques that bind them.

The second source of comfort is the physical asset base. These companies own land, power capacity, substations, fibre connections, and data center shells. The assets exist independent of any single contract. If a tenant were to default tomorrow, the infrastructure would still be standing, the power would still be connected, and the sites would still be among the most valuable parcels of energy-connected real estate in the country. In an environment where securing grid-connected power capacity is the primary bottleneck in artificial intelligence infrastructure, the land and the megawatts are the scarce resource. These companies have already secured them. That is not a narrative. It is a physical fact.

The third source of comfort is the direction of the secular trend. I am not someone who invests on the basis of macro narratives alone. But I also do not ignore structural realities. Every major technology company on earth is racing to build computing capacity for artificial intelligence. The demand for power-dense, purpose-built data centers is not speculative. It is observable in the capital expenditure plans of companies that collectively spend hundreds of billions of dollars per year. Our infrastructure holdings are positioned directly in the path of that spending, with signed contracts that convert that macro trend into specific, measurable revenue obligations.

The Honest Accounting

I would not be doing my job as your fiduciary if I presented only the comfort and ignored the risks. Intellectual honesty requires the full picture.

The most important risk is that these companies have taken on significant debt to fund their buildouts. This is a departure from our usual preference, and I want to be transparent about why I have accepted it in this case and where my concern remains.

Several of our infrastructure holdings have issued billions of dollars in convertible notes and project-level bonds to finance the construction of their data center campuses. The debt is real and it is large. In some cases, the debt-to-equity ratios have risen to levels I would normally avoid. This introduces the very thing I have always warned about: a clock. Debt requires servicing regardless of whether construction is on schedule, regardless of whether energisation dates slip, regardless of whether the first dollar of contracted revenue arrives on time.

I have accepted this risk for a specific reason. The debt in these structures is not speculative leverage. It is project finance, matched against contracted revenue streams with creditworthy counterparties. In several cases, the construction is substantially funded by customer prepayments, meaning the hyperscaler is financing its own future capacity through the infrastructure provider. This is different from a company borrowing to fund an idea. This is a company borrowing against a signed contract with a Fortune 10 counterparty.

But I do not want to rationalise away the risk. If construction timelines slip, these companies will carry interest expense for longer before revenue begins. And anyone who has studied the realities of large-scale energy construction knows that timelines slip routinely. Gas turbines carry 18 to 24 month lead times. Large power transformers are backordered globally. Permitting, labour, and supply chain friction are not exceptions to the process. They are the process. The infrastructure providers are not immune to the physics of building things in the real world. Energisation dates that move from April to October, or from 2026 to 2027, are not just footnotes. They are periods during which capital is deployed, debt is accumulating, and revenue is zero.

I also want to be honest about what has changed in these businesses. Some of these companies were, until recently, bitcoin miners with simple balance sheets and no debt. The pivot to high-performance computing infrastructure has transformed them into capital-intensive developers with complex financing structures, multiple project-level entities, and in at least one case, a material financial restatement. The simplicity that I valued when we first invested in some of these names has given way to complexity. Complexity is not inherently bad, but it requires more vigilance. It requires us to read every filing more carefully, to track every construction milestone, and to be honest with ourselves about whether the original thesis still holds.

My current assessment is that it does, but with conditions. The contracted revenue base, the quality of the counterparties, the scarcity of the physical assets, and the near-term catalysts in the form of energisation dates and revenue commencement, all support continued ownership. But I am watching the balance sheets closely. If the debt grows without proportional progress on construction and revenue, I will reassess. Conviction is not the same as stubbornness.

Why a Basket, Not a Single Bet

There is one more dimension to our approach that I want to explain. We own a basket of infrastructure companies, not a single concentrated position. This is deliberate.

Each company in the basket has a different contract structure, a different set of counterparties, different sites at different stages of construction, and different risk profiles. One has Microsoft. Another has Amazon and Google. Their campuses are in different states, connected to different grids, with different energisation timelines. By owning the basket, we diversify away the idiosyncratic risk, the risk that a single site is delayed, a single permit is held up, or a single counterparty renegotiates terms, while maintaining full exposure to the structural trend.

This is the same logic a farmer uses when he plants multiple fields in different parts of the valley. If frost hits one field, the others survive. If a new irrigation channel opens near one field, that field benefits disproportionately. The portfolio is designed to capture the harvest from wherever it arrives first, while ensuring that no single disappointment can damage the whole.

A Tale of Two Farmers

I want to make the distinction between the utility trade and our infrastructure holdings as vivid as I can. The clearest way I know how is through a parable.

Imagine two farmers standing on opposite sides of the same valley, both looking at the same weather forecast. The forecast says rain is coming. Both believe it. Both want to profit from the growing season ahead.

The first farmer does not own his land. He leases it from a landlord under an agreement that either side can exit for a modest penalty. He does not have a well or an irrigation system. He is entirely dependent on the rain arriving when the forecast says it will. He has no signed buyer for his crop. He has a letter of intent from a grocer who has expressed interest but has committed nothing beyond a small deposit. Encouraged by the forecast, the first farmer borrows heavily to buy the best equipment, hires a full crew, and ploughs every acre he can reach. His entire plan depends on three things happening in sequence: the rain arriving on time, the crop growing on schedule, and the grocer honouring a commitment that was never truly binding.

The second farmer owns his land outright. The soil has been tested. There is a well on the property that produces water regardless of whether it rains. He has a signed contract with a large food distributor, one of the most creditworthy buyers in the country, who has prepaid a portion of the purchase price and committed to buying the harvest for the next ten years. The distributor cannot walk away without forfeiting significant capital. The second farmer has also taken on debt to build a new barn and improve his irrigation, more debt than he would normally carry. But the debt is secured against the land, the water, and the signed purchase agreement. It is not speculative. It is structural.

Now ask yourself: which farmer do you want to be?

Both are exposed to the same macro environment. Both believe in the same growing season. But the first farmer is farming the forecast. The second farmer is farming the land.

The utility investors I described earlier in this letter are, in many cases, farming the forecast. They are buying equities priced on load projections derived from contracts where both sides can walk away for pennies on the dollar. The projections may prove correct. The rain may come. But if it does not, or if it comes late, there is no well, no signed buyer, and no prepayment to fall back on.

Our infrastructure holdings are the second farmer. They own the land. They own the power capacity, the grid connections, the fibre, the acreage. These assets exist and hold value independent of any single contract. They have signed agreements with the largest and most creditworthy technology companies on earth, agreements that involve billions in prepayments, parent company guarantees, and 10 to 15 year terms. The buyers cannot walk away cheaply. The founders and executives own meaningful equity in these businesses, meaning their personal wealth is planted in the same soil as ours. And the harvest is not a distant hope. The energisation dates, the construction milestones, the commencement of contracted revenue, all sit within a 12 to 24 month window. The crop is nearly ready.

The market, meanwhile, still sees many of these companies through the lens of what they used to be: bitcoin miners, volatile, speculative, impossible to value. Most institutional investors have not yet updated their models to reflect the transformation. The analyst coverage is thin. The old label lingers. This is exactly the kind of quiet corner, the overlooked field at the edge of the valley, where we have historically found our best opportunities.

I will not pretend this investment is without compromise. The second farmer has taken on more debt than I would normally accept. The balance sheets have grown more complex. In at least one case, the financial reporting has required restatement. These are real concerns and I have explained earlier in this letter why I have accepted them and where I would draw the line. Honest investing means knowing which of your own rules you are bending, why you are bending them, and at what point the bend becomes a break.

The Discipline of Seeing Both Sides

The energy infrastructure buildout is the most important capital expenditure cycle in a generation. It will create enormous value and it will create enormous waste. The utility contracting analysis I shared earlier is a reminder that not every participant in this cycle will be rewarded, and that the structure of the commitments matters more than the size of the announcements.

We are not investing in announcements. We are investing in assets, in contracts, and in the physical scarcity of power-connected land. We are investing on the side of the table where the hyperscalers have committed real capital, not the side where they have signed non-binding letters.

But I do not want to overstate our certainty. The thesis depends on execution. It depends on construction timelines, on supply chains, on the continued willingness of hyperscalers to spend at this pace. The contracting fragility I described earlier in this letter is a sober reminder that the energy upcycle is not a straight line. There will be delays. There may be cancellations. The question is not whether disruptions will occur. It is whether our holdings are positioned to survive them and still deliver on the contracted revenue that underpins our valuation.

I believe they are. But I hold that belief with the humility of someone who knows that the market has a way of teaching lessons to anyone who confuses conviction with certainty.

The Patience to See Clearly

I want to close with something personal. When I was younger, I used to feel a pull toward the exciting trade, the hot sector, the narrative that everyone was talking about. It took me years to understand that the pull itself is the danger. The crowd’s enthusiasm is not a signal. It is noise dressed in conviction.

The greatest investors I have studied, Munger, Buffett, Klarman, Li Lu, share one quality above all others. It is not intelligence, though they have that. It is not access, though they have that too. It is the willingness to look foolish in the short run for the sake of being right in the long run. It is the discipline to say no when everyone else is saying yes, and to wait when everyone else is acting.

That is what I try to do with your capital. I try to separate the photograph from the house. I try to invest in things that are real and provable. And when I make a deliberate exception to our usual rules, as I have with the debt profiles in our infrastructure basket, I try to do so with eyes open, with clear reasoning, and with a willingness to reverse course if the facts change.

The energy buildout may well unfold as projected. I believe significant parts of it will. But I will not invest your capital on the basis of hope. I will invest it on the basis of contracts, assets, and principles that can survive the inevitable disappointments along the way.

Thank you for trusting me with that responsibility. I carry it with the same care today as the day you first placed it in my hands.

With warm regards and steadfast dedication,

Neel Khokhani