U.S. state opposes NorthWestern sale to Babcock fund

SYDNEY, May 23 (Reuters) - Australia's Babcock & Brown Infrastructure (BBI) (BBI.AX) said its planned $2.2 billion acquisition of utility NorthWestern Corp. NWEC.O has been opposed by a U.S. state regulator, knocking its shares lower.

The Montana Public Servic Commission had instructed staff to draft an order to deny the purchase, the Australian-based infrastructure fund said in a statement. The order was expected to be voted on by commissioners by the end of June.

Babcock and Brown Infrastructure said all five commissioners came to the decision that the acquisition should not proceed.

NorthWestern serves about 640,000 electric and natural gas customers in Montana, South Dakota and Nebraska.

Two U.S. power industry mergers failed last year, due in part to state opposition over rate increases.

Exelon Corp. (EXC.N) and Public Service Enterprise Group Inc. (PEG.N) pulled the plug on their merger due to opposition in New Jersey, while FPL Group Inc. (FPL.N) and Constellation Energy Group Inc. (CEG.N) ended plans to join due to hostility in Maryland.

Northwestern, after seeing the events in other states, decided last year not to seek a rate increase that it was entitled to so it could concentrate on its pending acquisition.

Babcock and Brown Infrastructure said it was surprised by the Montana commission's stance and believed it had made a strong case that it would provide long-term stability for rate payers.

The company said the decision would not affect its distribution guidance of 14.25 cents per security in fiscal 2007, or its guidance for 2008 and 2009.

Its stock fell 3.8 percent to A$1.91 in morning trade in an overall market .AXJO up about 0.4 percent.