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                                                                   EXHIBIT 10(h)

[PEOPLES ENERGY LETTERHEAD]

                                  May 22, 2002

Thomas A. Nardi
Senior Vice President, Chief
 Financial Officer and Treasurer
Peoples Energy Corporation
130 E. Randolph Drive
Chicago, IL 60601

Dear Tom:

      As you are aware, certain terms and conditions of the employment letter
agreement between Peoples Energy Services Corporation ("PESCO") and you, dated
October 9, 2000 (the "2000 Agreement") are no longer apposite to your situation
and other matters require restatement or clarification.

      Set forth below are provisions that I believe should replace the terms in
the 2000 Agreement. Your acceptance of this letter will constitute a new
agreement (this "Agreement") that supercedes the 2000 Agreement.

      1.    Accelerated Paid Time Off Benefits

      You are eligible for 31 days of paid time off ("PTO") under the Peoples
      Energy Corporation Paid Time Off Plan. You will be eligible for additional
      PTO days when you have accrued five years of actual employment service.

      2.    Pension Benefit

      In the event you are terminated other than for Cause (as defined in the
      Confidentiality and Severance Agreement between PEC and you, effective May
      22, 2002 (the C&S Agreement")) and your termination occurs prior to the
      date of a Change of Control, as defined in the C&S Agreement, your pension
      benefit will be enhanced generally in the same manner as described in the
      second, third and fourth sentences of paragraph 3a of the C&S Agreement.
      It is understood and agreed that in the event you are terminated on or
      after the date of a Change of Control, as defined in the C&S Agreement,
      you shall not be entitled to any enhanced pension benefit under the terms
      of this Agreement, and any entitlement you may



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Thomas A. Nardi
May 22, 2002
Page 2

      have to severance benefits shall be pursuant to the C&S Agreement. For
      purposes of clarification, the determination of your enhanced pension
      benefit is described in Attachment A, hereto and by reference made a part
      of this Agreement.

      3.    Confidential Information.

                  a. Executive understands and acknowledges that, by virtue of
      his position with the Company, he will have access to confidential
      information belonging to the Company, the disclosure or use of which may
      damage the Company. "Confidential Information" includes, but is not
      limited to, information regarding the Company's hydrocarbon interests and
      prospects, computer programs; unpatented inventions, discoveries or
      improvements; marketing, manufacturing, or organizational research and
      development, or business plans; sales forecasts; personnel information,
      including the identity of other employees of the Company, their
      responsibilities, competence, abilities, and compensation; pricing and
      financial information; current and prospective customer lists and
      information on customers or their employees; information concerning
      planned or pending acquisitions or divestitures; and information
      concerning purchases of major equipment or property. "Confidential
      Information" does not include information which is in or hereafter enters
      the public domain through no fault of Executive, is obtained by Executive
      from a third party having the legal right to use and disclose the same, or
      was in the possession of Executive before the date of his employment with
      the Company. Executive agrees that all Confidential Information is and
      shall remain the sole property of the Company, and he agrees to maintain
      the confidential information in strict confidence at all times during and
      after his employment. During the term of his employment, Executive agrees
      not to use any Confidential Information except in furtherance of his
      duties for the Company, nor to disclose any Confidential Information
      except to officers or other employees of the Company when it is necessary,
      in the course of business, to do so. Upon termination of employment with
      the Company, Executive shall not use the Confidential Information for any
      reason or disclose it to any person.

                  b. This Paragraph 3 shall not prevent Executive from using
      general skills and experience developed in positions with the Company or
      other employers, or from accepting a position of employment with another
      company, firm, or other organization which, provided that such position
      does not require the divulgence or use of the Confidential Information.

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Thomas A. Nardi
May 22, 2002
Page 3

                  c. For a one-year period following termination of employment
      with the Company, Executive will not directly or indirectly solicit,
      induce or encourage any other person to leave his or her employment with
      the Company or any of its Affiliates to take employment or accept a
      committing relationship with any entity that invests in, produces,
      transports or markets hydrocarbons or minerals.

                  d. Executive acknowledges that his failure to comply with the
      terms of this Paragraph 3 will cause irreparable damage to PEC and/or its
      Affiliates. Therefore, he agrees that, in addition to any other remedies
      at law or in equity available to PEC or the Affiliates for his breach or
      threatened breach of this Paragraph 3, PEC or any of its Affiliates are
      entitled to injunctive relief against him to prevent such damage or
      breach. If any restriction in this Paragraph 3 is found to be too broad to
      permit enforcement to its full extent, such restriction shall be enforced
      to the maximum extent permitted by law, and Executive agrees that such
      restriction may be judicially modified to permit such maximum enforcement.

      4.    Waiver and Releases.

                  a. In consideration of the covenants under this Agreement,
      including, but not limited to, paragraph 2, the Executive hereby waives,
      releases and forever discharges the Company from any and all claims he has
      or may have against the Company thereof arising out of or relating to The
      PEC SRB, Part A and Part B, provided that any amount paid to the Executive
      equivalent to the Present Value Amount of the benefits accrued by
      Executive under the PEC SRB Part A and Part B as calculated pursuant to
      paragraph 2 exceeds the amount of the Executive's accrued benefits under
      the PEC SRB, Part A and Part B as of the date of the Executive's
      termination of employment.

                  b. In consideration of the covenants under this Agreement,
      including, but not limited to, paragraph 2, and as a condition precedent
      to receiving any payments under this Agreement, the Executive agrees to
      execute after the date of his termination of employment, a release
      substantially in the form of Attachment B attached hereto and by this
      reference made a part hereof.

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Thomas A. Nardi
May 22, 2002
Page 4

      5.    Entire Understanding

      This Agreement contains the entire understanding between PEC and you with
      respect to the subject matter hereof and supersedes any prior agreement
      between PEC, PESCO and you, except that the provisions of this Agreement
      shall not affect or operate to reduce any benefit or compensation owing to
      you of any kind elsewhere provided including, without limitation, the C&S
      Agreement, and not expressly provided for in this Agreement. PEC and you
      agree that the 2000 Agreement is terminated and of no further force and
      effect, effective as of the date of your acceptance of this Agreement.

      If you accept this Agreement, please evidence your acceptance by signing
below in the indicated space.

                                   Sincerely,

                                   /s/ T.M.Patrick

Accepted this 22nd day of
May, 2002.

By: /s/ Thomas A. Nardi
    -------------------------------
    Thomas A. Nardi
    Senior Vice President, Chief
     Financial Officer and Treasurer

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        Attachment A to Agreement between Peoples Energy Corporation and
                      Thomas A. Nardi, dated May 22, 2002

      Pension Benefit

      If Mr. Thomas A. Nardi ("Executive") has been employed by PEC or an
Affiliate for at least five (5) years prior to termination of employment, the
Executive will be paid in cash within ten (10) business days after termination
of employment, an amount equal to the remainder of (x) the Present Value Amount
of the benefits that would have been accrued by the Executive under the PEC
Retirement Plan and the PEC SRB, Part A and Part B on the date of termination of
employment, determined as if the Executive (i) had received credit for an
additional twenty-one (21) years of Benefit Service, and (ii) had commenced
participation in the PEC Retirement Plan and the PEC SRB as of the first date of
Executive's actual employment with PESCO less (y) the Present Value Amount of
the benefits accrued by the Executive under the PEC Retirement Plan and the PEC
SRB, Part A and Part B on the date of termination of employment. If the
Executive has been employed by PEC or an Affiliate for less than five (5) years
at the date of termination of employment, then the Executive will be paid in
cash within ten (10) business days after termination of employment, an amount
equal to the Present Value Amount of the benefits that would have been accrued
by the Executive under the PEC Retirement Plan and PEC SRB, Part A and Part B on
the date of termination of employment, determined as if the Executive (i) had
commenced participation in the PEC Retirement Plan and the PEC SRB as of the
first date of Executive's actual employment with PESCO and (ii) had received
credit for the number of years of Benefit Service equal to the sum of (x) the
number of years that the Executive has been employed by the Company and (y) the
product of 20 multiplied by a fraction, the numerator of which is equal to the
number of whole months the Executive has been employed by PEC or Affiliate at
the date of termination of employment and the denominator of which is equal to
sixty (60). The following shall apply for purposes of determining the
Executive's benefits under the preceding provisions.

      1.    Such benefits shall be determined as full benefits, without
            actuarial reduction, as if the Executive qualified for the Rule of
            Eighty-Five under the PEC Retirement Plan and PEC SRB (regardless of
            whether the Executive so qualifies).

      2.    Executive's benefit under the preceding provisions shall be
            determined as if Executive's participation in the PEC Retirement
            Plan and the PEC SRB commenced as of the first date of Executive's
            actual employment with Peoples Energy Services Corporation.

      3.    If Executive is terminated prior to completing three (3) years of
            employment with PEC or an Affiliate, Executive's 12-month average

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                                                                    Attachment A
                                                                     Page 2 of 2

            compensation for the purpose of calculating a benefit under the
            proceeding provisions shall be determined by utilizing all months of
            Executive's actual compensation that may be used to calculate a
            pension benefit under the PEC Retirement Plan and the PEC SRB.

      All capitalized terms not otherwise specifically defined in this
Attachment A, shall have the same meaning as defined in the Confidentiality and
Severance Agreement between Peoples Energy Corporation and Thomas A. Nardi,
Senior Vice President, Chief Financial Officer and Treasurer, effective as of
May 22, 2002.

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        Attachment B To Agreement Between Peoples Energy Corporation and
                      Thomas A. Nardi, Dated May 22, 2002

                                RELEASE AGREEMENT

            This Release Agreement is entered into on this 22nd day of May,
2002, between Thomas A. Nardi, Senior Vice President, Chief Financial Officer
and Treasurer ("Executive") and Peoples Energy Corporation on behalf of Peoples
Energy Corporation and any Affiliate and successor or successors to Peoples
Energy Corporation. Any defined term not explicitly defined herein shall have
the same meaning as defined in the Agreement.

      1. In consideration of the benefits to be paid and provided to the
Executive under that certain Agreement between Peoples Energy Corporation
("PEC") and the Executive, dated as of May 22, 2002, ("Agreement") Executive
waives, releases and forever discharges PEC (including its current and former
Affiliates, and their current and former officers, directors, employees and
agents) from all claims which he may have against PEC (including its current and
former Affiliates, and their current and former officers, directors, employees
and agents and PEC's and its Affiliates', benefit plans and fiduciaries thereof)
arising out of the Americans With Disabilities Act, the Age Discrimination in
Employment Act, Title VII of the Civil Rights Act of 1964, the Illinois Human
Rights Act, the Employee Retirement Income Security Act, or any other federal,
state or local statute, regulation, ordinance, or doctrine of common law.

      2. The Executive acknowledges that, prior to his execution of this Release
Agreement, he was encouraged to review it with counsel or anyone else of his
choosing. Executive states that he understands its meaning and that he
knowingly, freely and voluntarily executes it.

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                                                                    Attachment B
                                                                     Page 2 of 2

      3. The Executive agrees that any change made to the Agreement and to this
Release Agreement, whether or not material, will not extend the twenty-one day
period for accepting this Release Agreement.

      PEC encourages the Executive to consult with an attorney regarding this
Release Agreement. If after review, the Executive wishes to accept, he should
sign the document and return it to the Secretary of Peoples Energy Corporation.
This Release Agreement will not become effective until seven days thereafter,
and if the Executive changes his mind within that period, he may revoke this
Release Agreement by notifying the Secretary of Peoples Energy Corporation. The
Executive understands and agrees that no benefits will be paid or provided to
the Executive under the Agreement prior to the (i) this Release Agreement being
executed by and delivered by the Executive to the Secretary of PEC; and (ii)
this Release Agreement becoming irrevocable.

PEOPLES ENERGY CORPORATION:

By:__________________________________                  _________________________
                                                                 Date

By:__________________________________                  _________________________
           Thomas A. Nardi                                       Date