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Dominion Takes Second Stab at Selling PA, WV Gas Distributors

If at first you don't succeed, try, try again. After failing to sell its natural gas utilities in Pennsylvania and West Virginia to Pittsburgh-based Equitable Resources, Dominion Resources last Wednesday announced plans to sell its Dominion Peoples and Dominion Hope gas distribution companies to San Francisco-based Babcock & Brown Infrastructure Fund North America for $910 million under an agreement expected to close in 2009.

The deal comes six months after Dominion and Equitable were forced to terminate their agreement for the two gas distribution companies due to regulatory delays (see NGI, Jan. 21). The Pennsylvania Public Utility Commission approved the sale of Dominion Peoples to Equitable in April 2007, but the Federal Trade Commission (FTC) challenged the transaction (see NGI, April 16, 2007). The agency argued that a merger of Equitable and Dominion Peoples (both headquartered in Pittsburgh) would create a natural gas monopoly in certain areas of Allegheny County, PA, especially Pittsburgh.

In May 2007 a federal judge ruled against the FTC's request for an injunction to prevent the Dominion Peoples sale to Equitable (see NGI, May 21, 2007). The FTC appealed the ruling to the U.S. Third Circuit Court of Appeals, which granted the FTC's request to enjoin the sale pending the court's decision (see NGI, June 11, 2007). The two energy companies extended their agreement to allow time for the FTC challenge to be worked out, but in the end they decided to call it quits.

At the time Dominion said it would seek other offers for the purchase of the utilities. The new agreement between Dominion and Babcock & Brown Infrastructure Fund North America is subject to regulatory approvals in Pennsylvania and West Virginia as well as clearance under the federal Hart-Scott-Rodino Act and under the Exon-Fiorio provision of the Omnibus Trade and Competitiveness Act.

Dominion Peoples serves about 359,000 residential and business customers in Pennsylvania, while Clarksburg, WV-based Dominion Hope serves about 115,000 residential and business customers in West Virginia. Together, the two distributors serve approximately 12% of Dominion's four million electric and natural gas utility customer accounts in the Mid-Atlantic and Midwest, according to Dominion Resources of Richmond, VA.

"This opportunity perfectly fits our focus of making long-term investments in high-quality infrastructure companies throughout North America," said Chris Kinney, CEO of Babcock & Brown Infrastructure. "We have made a strong commitment to the dedicated employees of Peoples and Hope and we look forward to a smooth transition for all employees and customers."

Because income from Dominion Peoples and Dominion Hope is excluded from the company's operating earnings, Dominion Resources maintains its 2008 operating earnings guidance of $3.05-3.15/share and its 2009 operating earnings outlook of $3.25-3.40/share. Dominion said it plans to use all after-tax proceeds, which it expects to be about $675 million, to reduce debt.

Dominion Resources is one of the nation's largest producers and transporters of energy, with a portfolio of approximately 26,500 MWs of generation, 1.1 Tcf equivalent of proven natural gas and oil reserves, 14,000 miles of natural gas transmission, gathering and storage pipeline and 6,000 miles of electric transmission lines. It operates the nation's largest gas storage facility with 975 Bcf of capacity and serves retail energy customers in 11 states.

Babcock & Brown Infrastructure owns and manages energy and infrastructure companies throughout North America. It is a member of a Babcock & Brown consortium that owns the controlling interest (80%) of the Natural Gas Pipeline Company of America and partners with Knight Inc. (formerly Kinder Morgan Inc.), which also serves as the 20% partner and asset operator.

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