By Tom Kleckner and Rich Heidorn Jr.

Warren Buffett’s bid for Oncor won an immediate endorsement from the head of the Texas Public Utility Commission’s staff Friday, suggesting the Oracle of Omaha may succeed where two other suitors for the state’s largest transmission and distribution utility failed. But first, Buffett may have to overcome a challenge from hedge fund Elliott Management, which is reportedly unhappy with the offering price.

Des Moines, Iowa-based Berkshire Hathaway Energy (BHE) announced Friday it had reached an agreement on an all-cash deal that will pay $9 billion for bankrupt Energy Future Holdings (EFH), Oncor’s parent. BHE said that is based on an equity value of $11.25 billion for 100% of Oncor. The Wall Street Journal, which reported Thursday that the deal was imminent, said the purchase has an enterprise value of about $18 billion including debt.

BHE said it expects the purchase to close in the fourth quarter, following approvals by federal and state regulators and the judge overseeing EFH’s bankruptcy.

The PUC rejected prior bids for Oncor by Florida-based NextEra Energy and Dallas-based Hunt Consolidated. But PUC Executive Director Brian Lloyd issued a statement praising the BHE offer, saying he looks “forward to an expeditious filing of this agreement for the commissioners to consider.”

“I applaud both Berkshire Hathaway Energy and Oncor for their productive efforts with PUC staff, the Office of Public Utility Counsel, the Steering Committee of Oncor Cities and Texas Industrial Energy Consumers,” he said. “These parties have developed a transaction that fortifies the successful ring-fence protections the commission ordered in 2007. Both BHE and Oncor are proposing additional assurances regarding Oncor’s independence, financial integrity and commitments to invest in infrastructure, cybersecurity and system reliability for the more than 10 million Texans served by Oncor.”

PUC spokesman Terry Hadley said Lloyd’s statement was based on meetings that preceded the merger announcement. “As is typical with this process, the PUC staff and other parties mentioned in the statement met informally to see what can be resolved prior to an official filing,” Hadley said. He said the first filings on the deal will likely be with the bankruptcy court.

Winning the Debtors

Winning regulators’ approval is only part of the challenge facing Berkshire, however.

Elliott Management, a $33 billion hedge fund that is the biggest holder of EFH bonds, is signaling it may make a competing bid for Oncor, the Journal and Reuters reported late Friday. Elliott added to its stake in the last several months, acquiring them from other funds tired of waiting for an Oncor sale.

Although the fund has no experience in an acquisition of this size, the Journal reported, it could threaten a higher bid to force Berkshire to improve its offer, which is insufficient to pay creditors 100 cents on the dollar. With a “blocking” position in two classes of EFH debt, Elliot has a pivotal role in whether creditors accept the Berkshire offer and complete EFH’s bankruptcy reorganization. Elliott had previously opposed NextEra’s higher bid for Oncor.

Reuters noted that Elliott filed a lawsuit in May asking EFH to consider a debt reorganization that could convert the hedge fund’s debt to equity, which could give it control of Oncor. EFH owns 80% of Oncor.

Prior Deals Rejected

The PUC rejected NextEra’s $18.7 billion bid for Oncor in April, ruling that the proposed merger was not in the public interest. (See NextEra-Oncor Deal Meets Third Denial.)

The commission said it believed the risks posed by NextEra’s acquisition outweighed the benefits, fearing that it would dilute Oncor’s credit profile and eliminate local control. The PUC insisted on strong ring-fencing provisions, including “a truly independent” Oncor board with control over decisions on capital expenditures and operating expenses — a requirement NextEra rejected as a “deal-killer.”

Hunt saw its bid fall apart last year when the commission placed conditions on the transaction that the Hunt family was unable to meet. (See Texas PUC Denies Rehearing on Oncor Sale, Ends Hunt Bid.)

The Dallas Morning News reported that BHE has agreed to 44 commitments to the PUC, including an independent board that would have complete control over how to use Oncor’s dividends. Only two of the 12 board members would be appointed by BHE, the paper said.

BHE says that it does not pay dividends “and can invest our profits back into our businesses to provide additional value for our customers. This relationship to our parent uniquely positions us to take a long-term view and to take on ambitious energy projects that other companies may not be able to afford.”

The company also reportedly committed to returning 90% of interest rate savings to customers in rate cuts until the next rate case after one currently pending is final. There would also be no involuntary layoffs or wage and benefit cuts for at least two years for Oncor’s 3,700 workers, the Morning News said.

“The bankruptcy court has to bless it, and it ultimately has to come to commission,” Geoffrey Gay, who represents the Oncor cities steering committee, told the paper. “If they follow the path of failures by Hunt and NextEra, they ought to be able to safely navigate through these obstacles.”

BHE contributed almost 10% of the earnings last year to Buffett’s Berkshire Hathaway conglomerate, whose holdings include GEICO, Kraft Heinz, Fruit of the Loom, Benjamin Moore and BNSF Railway. The company earned $24.07 billion last year, and its $223.6 billion in revenue last year ranked it No. 2 on the Fortune 500 list, behind only Walmart.

Texas Connections

In an apparent bid to curry favor with state regulators, the second paragraph of the press release announcing the deal noted the conglomerate’s other holdings with headquarters in Texas, listing 10 of them.

“Oncor is an excellent fit for Berkshire Hathaway, and we are pleased to make another long-term investment in Texas — when we invest in Texas, we invest big!” Buffett said in a statement. “Oncor is a great company with similar values and outstanding assets.”

Oncor CEO Bob Shapard said the merger would give his company “access to additional operational and financial resources as we continue to position Oncor to support the evolving energy needs of our state.”

“Being part of Berkshire Hathaway Energy is a great outcome for Oncor,” he added in a statement. “Oncor will remain a locally managed Texas company headquartered in Dallas, committed to the communities we serve, and our customers will continue to receive the safe and reliable service they have come to expect from our dedicated team of employees.”

Shapard, who announced plans to retire last October, will become executive chairman of the Oncor board. Senior Vice President and General Counsel Allen Nye will replace him as CEO, as previously announced, Oncor said.

Nye said he was “excited to begin the regulatory approval process,” adding “this transaction has significant support across our key stakeholders.”

Resolving Bankruptcy

Oncor has been ring-fenced since 2007, when EFH, a collaboration of several private-equity firms, acquired TXU Corp. in a leveraged buyout. EFH, saddled by nearly $50 billion in debt when it bet wrong on high gas prices, declared Chapter 11 bankruptcy in 2014.

Creditors last year reached a settlement of the bankruptcy contingent on Oncor’s sale. EFH has already spun off generator Luminant and retailer TXU Energy into a new publicly traded company, Vistra Energy. (See TXU Energy, Luminant Rebrand as Vistra Energy.)

With about 121,000 miles of transmission and distribution, Oncor owns and operates the grid for most of North Texas.

It would join BHE’s NV Energy, MidAmerican Energy and PacifiCorp, which collectively serve 11.6 million electric customers. As of 2016, BHE held $85 billion in assets, including almost 236,000 miles of transmission and ownership or control of more than 35 GW of generating capacity. The companies employ about 21,000.

BHE earned $2.29 billion last year, 9.5% of the conglomerate’s total. Had Oncor’s $431 million in profits been part of BHE in 2016, the energy unit would have generated 11.1% of the conglomerate’s earnings.

BHE is headed by CEO Greg Abel, who has been mentioned as a possible successor to the 86-year-old Buffett as chairman of Berkshire.

The Oncor purchase would be Berkshire’s largest acquisition since its $32 billion deal for Precision Castparts Corp. last year, according to the Journal. With more than $95 billion in cash and cash equivalents, Buffett told investors during Berkshire’s annual meeting in May, the time may come when the company has more cash than it can profitably use.

“Even at $9 billion, the takeover of Oncor … is tens of billions of dollars shy of the mega-deal Berkshire Hathaway Inc. shareholders have anticipated for more than a year,” Tara Lachapelle and Liam Denning wrote in a Bloomberg Gadfly column Friday. “Costco Wholesale Corp., 3M Co. and Hershey Co. are closer to the kinds of names investors had in mind for Berkshire’s next big transaction, as its cash pile grows uncomfortably high.”