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Dominion, San Francisco Fund Reach $910 Million Deal

July 3, 2008

By Kim Leonard, The Pittsburgh Tribune-Review

Jul. 3–Dominion Resources Inc. is making a second try at selling its Dominion Peoples natural gas utility in the Pittsburgh area and Dominion Hope in West Virginia, looking this time to an investment fund that owns major electric and gas lines and shipping ports.

Babcock & Brown Infrastructure Fund North America was the winner in a bidding process for the two companies, though Richmond-based Dominion wouldn’t say Wednesday how many offers it received. The San Francisco-based fund agreed to pay $910 million.

Yesterday’s deal is Richmond, Va.-based Dominion’s second attempt to sell, following an earlier agreement with Equitable Resources Inc. that was scuttled in January because federal regulators considered it a potential monopoly.

The new Peoples and Hope buyer is affiliated with Babcock & Brown, Australia’s second-largest asset manager. The Australian company’s stock has fallen by more than half in recent months amid worries about its practice of paying for purchases with debt, in light of a tighter credit climate worldwide.

U.S. private equity firm Kohlberg Kravis Roberts and other suitors — possibly Australia’s Macquarie Group, which bought Duquesne Light Co. last year — may be looking to acquire a stake in the Australian business, according to published reports in Australia.

Michael Cyrus, chief operating officer for the San Francisco fund, said yesterday that its investors and balance sheet are separate from its Australian parent. Babcock & Brown Infrastructure’s investors are North American and European pension plans and insurance companies, and it looks for stable properties to operate over a long term, he said.

Cyrus said his firm plans to retain all 700 Peoples and Hope workers and to invest in and expand the companies. “These are quality assets, quality people that fit right into our wheelhouse of infrastructure,” he said.

Babcock & Brown Infrastructure considered buying Peoples and Hope before Dominion announced a $970 million sales agreement with Equitable in March 2005. The Federal Trade Commission battled to block that sale on antitrust grounds, because Peoples and Equitable compete to serve office buildings, hospitals and other big customers in the Pittsburgh area.

Dominion began seeking a new buyer just after agreeing with Equitable to drop their deal, long mired in court procedures. Yesterday’s announced sale could close next year, pending state and federal approvals.

The Dominion Peoples unit distributes natural gas to about 359,000 residential and business customers, while Hope serves 115,000 West Virginia customers. Dominion Resources will maintain its Dominion Peoples Plus natural gas and electric businesses and other units in the Pittsburgh area.

Cyrus said rising demand for natural gas, plus growing gas well-drilling activity in Marcellus shale regions in Western Pennsylvania and beyond, make this the right time for Babcock & Brown Infrastructure to buy its first gas utilities.

“The fact is, we don’t have any other local distribution companies,” he said. “We bought these businesses because of the current services and people.”

The transition should be seamless for customers, Cyrus added.

Dominion Resources spokesman Mark Lazenby said combined net income for the two utilities last year was around $60 million after taxes.

The energy company has been selling natural gas units to focus on its electric business in recent years. Lazenby wouldn’t provide details on the latest process to find a buyer for Peoples and Hope, including whether Babcock & Brown’s price was the highest offered.

Equitable, in fact, would have been “the best possible buyer” for the companies, a player in the same markets that could have streamlined the businesses to grow revenue, said Jim Halloran, who manages 2.2 million Dominion shares for National City Private Client Group in Cleveland.

That may be why the investment fund is getting the Dominion companies at a $60 million markdown from Equitable’s offer. “The guys to whom this meant the most weren’t around anymore,” he said.

Dominion said it plans to use its $675 million in after-tax proceeds from the sale to reduce debt.

About the Dominion deal

–Babcock & Brown Infrastructure Fund North America plans to buy the Dominion Peoples and Dominion Hope gas utilities from Dominion Resources Inc. for $910 million. Here are specifics about the investment fund:

–Headquarters: San Francisco

–Business: Owns and manages energy and infrastructure companies in North America.

–Holdings include: Trans Bay Cable, a 400-megawatt high-voltage electric submarine cable in California; the fund has interests in seaports in Florida, Louisiana and Alabama, and the Natural Gas Pipeline of America in the Chicago area.

Companies involved:

–Dominion Peoples, 500 employees, 359,000 customers, based in Wilkinsburg, with offices in Hampton, Hopewell, Monongahela, Greensburg and Kittanning.

–Dominion Hope, 200 employees, 115,000 customers, based in Clarksburg, W.Va.

–Dominion Resources Inc. will have 600 employees in the region after the sale of Peoples and Hope. Its North Shore offices include a call center and billing support services for Dominion Peoples Plus natural gas and electric services, which operates in 11 states. Local gas exploration and production operations based in Indiana, Pa., are drilling wells statewide. Gas pipeline storage unit is near Murrysville.

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