Merrillville, IN-based NiSource Inc. announced Tuesday that it expects to save about $530 million in operating and capital costs and make new efficiency gains and operating improvements over the 10-year term of a new outsourcing and business transformation agreement with IBM. The outsourcing contract is valued at about $1.6 billion.

As part of a proposed business transformation, about 572 NiSource employees are expected to become employees of IBM or its subcontractors and another 445 NiSource positions will be eliminated by Dec. 31, 2006 as work is moved to IBM. The computer giant will begin service delivery on July 1.

IBM will operate a broad range of business support functions for NiSource, including processes within the human resources, finance and accounting, supply chain (procurement), customer contact, meter-to-cash (billing and collections) and information technology areas. The agreement also includes a broad array of transformational consulting services and emerging technology expertise.

The deal is expected to lead to greater business efficiencies, technological advances and enhanced service capabilities at NiSource’s multiple energy businesses, which include gas pipeline operations, gas storage, and gas and electric distribution, NiSource said. It also expects the contract to allow it to redeploy capital toward pipeline and storage expansion projects, among others, that will lead to greater revenue and improved performance.

“This agreement will enable NiSource to transform its business to further focus on core strengths of providing safe, reliable utility and pipeline services to our customers,” said NiSource Chairman Gary L. Neale. “In addition, this agreement will enable us to access new technology and service capabilities for our company and state-of-the-art service for our customers, and redeploy capital toward growth opportunities. Working with IBM will help us achieve our goals of delivering basic support activities while freeing us to focus on our strategic business priorities.”

However, NiSource said in addition to the expected $1.6 billion in contract costs there also will be $35 million in one-time severance expenses and $35 million in transition costs. In addition, NiSource expects to incur $50 million in governance costs over the 10-year life of the contract.

Charges for NiSource’s cost to achieve are expected to be reported largely in 2005 and, to a lesser extent, in 2006. In addition, NiSource will report a $21 million one-time, noncash pension expense related to severed employees and employees who accept positions with IBM.

“IBM will work with NiSource to apply business insight, technology expertise and global delivery capabilities to optimize business performance and create long-term economic benefits,” said Maureen Sweeny, vice president of business transformation outsourcing at IBM. She said the contract is an example of the type of new partnerships IBM is targeting in the marketplace.

NiSource said it is focused on pursuing growth opportunities this year in its gas pipeline and storage business as well as implementing regulatory and commercial initiatives in its distribution business. NiSource plans to continue strengthening its balance sheet, identifying innovative ways to manage overall costs and free up additional capital for investment in its core gas and electric operations.

NiSource is a Fortune 500 company with subsidiaries in natural gas transmission, storage and distribution, as well as electric generation, transmission and distribution. Its operating companies deliver energy to 3.7 million customers in the eastern and midwestern United States.

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