<PAGE>

                                                                    EXHIBIT 10.7

Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment and such portions have been filed separately with the
Commission.

PRIVILEGED AND CONFIDENTIAL

                                December 3, 2003

Stephen P. Adik
488 Wexford Road
Valparaiso, IN 46385

Dear Steve:

This Letter Agreement confirms our decision concerning your employment status.
As we discussed, your employment with NiSource Corporate Services Company will
be terminated as a result of your voluntary retirement. If you sign this Letter
Agreement, it will constitute the mutual agreement between you and the Company
regarding the termination of your employment. As used herein, "the Company"
shall mean NiSource Inc. or any of its affiliates or subsidiaries, including
NiSource Corporate Services Company, and "NiSource" shall mean exclusively
NiSource Inc.

1.       Employment Status

         Unless you are discharged for cause, you will continue as an active
         employee of the Company through December 31, 2003 for purposes of
         determining your NiSource post-retirement health, life insurance and
         retirement benefits, as well as participation in the 2003 NiSource
         bonus plan. You will be treated as retiring as an active employee on
         January 1, 2004 for purposes of vesting (a) any restricted and
         contingent stock in NiSource owned by you and (b) any NiSource stock
         options owned by you; provided, however, you shall be treated as
         retiring as an active employee on January 29, 2004 for purposes of
         vesting the contingent stock grant awarded to you by NiSource January
         29, 2000. Thereafter, you will retire from the Company with the
         benefits which you are entitled to as a retired employee of the Company
         and only those additional benefits set forth in Paragraphs 2 and 3,
         provided that you shall be entitled to the benefits set forth in
         Paragraphs 2 and 3 after you timely execute a release in the form
         attached as Exhibit 1 hereto.

         You will resign as an officer and director of the Company on December
         31, 2003, except you will not resign as a director of NiSource.

         After your retirement, you agree to cooperate whenever needed in the
         preparation for and/or defense of any litigation in which the Company
         is involved.

2.       Retirement Payments

<PAGE>

         A.       Special Retirement Cash Bonus

         On December 31, 2003, and in recognition for your past services to the
         Company, you will receive a cash bonus in the amount of $450,000 (the
         "Special Bonus"). The Special Bonus will be subject to legally-mandated
         deductions for Social Security and federal, state and local taxes.

         B.       Special Restricted Stack Grant

         On January 2, 2004, and in recognition for your past services to the
         Company, you will receive $450,000 in value of NiSource restricted
         common stock, with the number of restricted shares to be issued to
         equal $450,000 divided by the closing stock price of a share of
         NiSource common stock on January 2, 2004 (the "Special Restricted Stock
         Grant"). The terms of the Special Restricted Stock Grant agreement are
         attached as Exhibit 2.

         C.       Previously Issued Stock Options and Restricted Stock Grants

         Exhibit 3 lists the terms of all stock options, restricted stock grants
         and contingent stock grants previously issued to you and which remain
         outstanding as of January 1, 2004.

3.       Change In Control

         You acknowledge that you are not currently owed any benefits under your
         Change in Control Agreement dated as of February 5, 1990, and as
         amended and restated as of September 1, 1997 and April 19, 2000 (the
         "CIC"). Nonetheless, as additional consideration for your execution of
         this Agreement, the Company agrees that, if

         (a)      an Acquisition of NiSource (as defined below) (**) is
announced on or before June 30, 2005, or

         (b)      (**) then you will receive 34,101 shares of NiSource common
stock (determined by taking the difference between 55,529 TARSAP shares
forfeited upon your retirement less 21,428 shares granted to you under the
Special Restricted Stock Grant and based on the assumption the shares issued
under the Restricted Stock Grant are valued at $21.00 per share). You will not
receive any payments in the event there is an Acquisition of NiSource under
circumstances not specifically described in the previous sentence. For purposes
of this Paragraph 3, the phrase "Acquisition of NiSource" means a transaction
which is defined as a "Change in Control" in the CIC.(**)

---------------------
(**) Text has been omitted pursuant to a request for confidential treatment and
such text has been filed separately with the Commission.

                                      -2-

<PAGE>

4.       Vacation

         You are eligible to receive a lump sum payment representing
         compensation for your accrued and unused vacation in the amount of
         $80,288.49. This payment will be subject to legally-mandated deductions
         for Social Security and federal, state and local taxes, as well as
         deductions for any contributory benefit plans in which you elect to
         continue participation.

5.       COBRA Coverage

         Your retirement is a qualifying event under the Consolidated Omnibus
         Budget Reconciliation Act ("COBRA"). The Company will notify you and/or
         your dependents of the insurance coverage which you may continue on a
         self-pay basis as provided by COBRA upon termination of your
         employment. You are entitled to 18 months of COBRA for dental and
         vision insurance on a self-pay basis commencing January 1, 2004.

         Notwithstanding the foregoing, you will be reimbursed by the Company
         for the first 12 months of COBRA for dental and vision insurance.

6.       Waiver of Severance Payments

         You agree to waive any rights to severance payments under the NiSource
         Executive Severance Policy that became effective as of June 1, 2002

7.       Long Term Incentive Program

         You will be treated as an active employee of the Company through
         January 1, 2004 for purposes of the 1994 Long Term Incentive Plan as
         amended, including the vesting of any contingent or restricted stock or
         stock options.

8.       Indemnification

         You will be entitled to indemnification by the Company pursuant to the
         provisions of Article 6 of NiSource Corporate Services Company's
         by-laws in effect on December 31, 2003 notwithstanding any change made
         thereafter, except as such change may be required by law. You will also
         be entitled to coverage under the directors and officers liability
         insurance coverage maintained by the Company (as in effect from time to
         time) to the same extent as other former officers of the Company.

9.       Company Property

         The Company will transfer to you, title to your current Company
         automobile, at no cost to you, at a time of your choosing, but in no
         event later than January 31, 2004. The Company, in accordance with
         practices previously in place, will reimburse any income tax liability
         incurred by you as a result of this transfer.

                                      -3-
<PAGE>

         You agree to return to the Company any and all of its property,
         including but not limited to, keys, employee identification or security
         access cards, telephones, computing equipment, PDAs, credit cards and
         cars on or before January 1, 2004.

         Notwithstanding the foregoing, you may continue to use your Company
         mobile telephones until January 31, 2004.

10.      Confidentiality

         You acknowledge that preservation of a continuing business relationship
         between the Company and their respective customers, representatives,
         and employees is of critical importance to the continued business
         success of the Company and that it is the active policy of the Company
         to guard as confidential certain information not available to the
         public and relating to the business affairs of the Company. In view of
         the foregoing, you agree that you shall not disclose to any person or
         entity any such confidential information that was obtained by you in
         the course of your employment by the Company (including your employment
         as a director of NiSource) without the prior written consent of the
         Company. It will not be considered a violation of this Paragraph 10 if
         you are required to disclose confidential information in a proceeding
         to enforce your rights under this Letter Agreement or pursuant to a
         subpoena, order of court or other governmental or administrative
         directive, compliance with which is mandatory, provided you give the
         Company notice that you have been served with such a subpoena or order
         immediately upon receiving service.

         Moreover, you agree that upon termination of your employment, you will
         promptly deliver to the Company all documentation and other materials
         relating to the Company's business or the business of any NiSource
         company which are in your possession or under your control, including
         customer and potential customer lists, product lists, and marketing
         material, whether in written or electronic data form; and you will
         delete, destroy or discard all copies of such confidential information
         remaining in your possession, provided, however, you shall be entitled
         to retain documentation and other materials relating to the Company's
         business that is necessary for you to serve as a director of NiSource.

         To facilitate the foregoing, the Company will allow you to use your
         existing office space and will provide you with secretarial assistance
         on an as-needed basis, until the earlier of the date upon which you
         certify that you have complied with the foregoing, or April 1, 2004.

         You further acknowledge and agree that the Company's remedy in the form
         of monetary damages for any breach by you of any of the provisions of
         this paragraph may be inadequate and that, in addition to any monetary
         damages for such breach, the Company shall be entitled to institute and
         maintain any appropriate proceeding or proceedings, including an action
         for specific performance and/or injunction.

                                      -4-
<PAGE>

11.      Status as a Director

         Unless nominated by NiSource, you hereby agree not to stand for
         re-election as a director of NiSource upon the expiration of your
         current term as a director of NiSource.

         Subsequent to December 31, 2003, you will have the status of a
         non-employee director of NiSource and shall be entitled to such
         compensation for board and committee duties as is accorded to
         non-employee directors of NiSource.

12.      Release of Claims

         In consideration of the payment and benefits described above, you, on
         behalf of yourself and your heirs, executors, and administrators, fully
         and finally settle, release, and waive any and all local, state
         (including but not limited to the Indiana Civil Frights Law), and
         federal civil, common law, statutory (including, but not limited to,
         the AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, Title VII of the
         Civil Rights Act of 1964, the Americans with Disabilities Act of 1990,
         the Family and Medical Leave Act of 1993, and the Employee Retirement
         Income Security Act of 1974, as those Acts are amended), and equitable
         claims against the Company and NiSource, Inc. and its subsidiaries and
         affiliated companies, and all the stockholders, predecessors,
         successors, agents, directors, officers, employees, representatives,
         and attorneys of NiSource, and its subsidiaries and affiliated
         companies, known or unknown, occurring or arising prior to you signing
         this Letter Agreement, except for claims relating to the enforcement of
         this Letter Agreement.

         You acknowledge and agree that this release is being given only in
         exchange for consideration to which you are not otherwise entitled.

         Based on the knowledge the Company has of the date of this Letter
         Agreement, the Company has no intention to sue you or your heirs,
         executors or administrators.

13.      Outstanding Charges

         You hereby agree to pay the Company any outstanding amounts owed to the
         Company, and further agree that by signing this Letter Agreement you
         hereby authorize the Company to deduct any outstanding charges from
         your lump sum or salary continuation payments.

14.      Governing Law

         This Letter Agreement shall be construed in accordance with the laws of
         Indiana.

                                      -5-
<PAGE>

15.      Severability

         In the event that one or more of the provisions contained in this
         Letter Agreement shall for any reason be held to be invalid, illegal or
         unenforceable in any respect, the Company shall have the right to
         enforce the remainder of this Letter Agreement.

16.      Non-Disclosure

         Except to the extent that disclosure is required to enforce your rights
         under this Letter Agreement or otherwise is required by subpoena, order
         of court or other governmental or administrative directive, compliance
         with which is mandatory, you expressly agree to keep the terms of this
         Letter Agreement strictly confidential and that you will not disclose
         the terms of this Letter Agreement to anyone other than your spouse,
         your legal counsel or your tax advisor, provided that they each agree
         to preserve the confidentiality of the terms of this Letter Agreement.

         You agree not to make any false and disparaging statements about the
         Released Parties to any media outlet, industry group, financial
         institution or analyst, or current or former employee, consultant,
         client or customer of the Company.

         NiSource and the officers of NiSource shall not make any false and
         disparaging statements about you to any media outlet, individual group,
         financial institution or analyst.

         Nothing herein should be construed as a limitation on your ability to
         consult with your counsel or with an administrative agency.

17.      Complete Agreement

         You acknowledge that in accepting this Letter Agreement, you have not
         relied upon any representation or promise other than those expressly
         stated in this Letter Agreement.

         This Letter Agreement and those sections of other Agreements
         specifically referenced herein, constitute the complete understanding
         between you and the Company relating to your separation and supersede
         any and all prior agreements, promises, representations or inducements,
         no matter their form, concerning your employment with the Company. No
         promises or agreements made subsequent to the execution of this
         Agreement by these parties shall be binding unless reduced to writing
         and signed by authorized representatives of these parties.

18.      Important Information

         YOU ACKNOWLEDGE THAT THE COMPANY HAS ADVISED YOU TAKE UP TO 21 DAYS TO
         CONSIDER THE TERMS AND CONDITIONS OUTLINED ABOVE, AND THAT THE COMPANY
         HAS ALSO ADVISED YOU TO CONSULT AN ATTORNEY BEFORE SIGNING THIS LETTER

                                      -6-
<PAGE>

         AGREEMENT. YOU ALSO HAVE THE RIGHT TO REVOKE YOUR EXECUTION OF THIS
         LETTER AGREEMENT WITHIN 7 DAYS AFTER EXECUTION IN ACCORDANCE WITH THE
         NOTICE TO EMPLOYEE ATTACHED HERETO.

         IF YOU ACCEPT THE TERMS AND CONDITIONS OUTLINED ABOVE, INCLUDING
         PARAGRAPH 12, PLEASE SIGN BOTH COPIES OF THIS LETTER AGREEMENT IN THE
         SPACE PROVIDED BELOW TO SIGNIFY YOUR ACCEPTANCE, AND RETURN BOTH COPIES
         TO GARY L. NEALE BY DECEMBER 24, 2003, ON WHICH DATE THIS OFFER WILL
         EXPIRE IF NOT ACCEPTED. IF YOU ACCEPT THE TERMS AND CONDITIONS OUTLINED
         ABOVE, YOUR ACCEPTANCE IS IN LIEU OF ANY AND ALL OTHER SEVERANCE
         PROGRAMS OFFERED BY THE COMPANY AND YOU KNOWINGLY AND VOLUNTARILY WAIVE
         PARTICIPATION IN ALL OTHER SEVERANCE PROGRAMS OFFERED BY THE COMPANY.
         YOU ACKNOWLEDGE THAT THE COMPANY'S PERFORMANCE UNDER THIS AGREEMENT
         CONSTITUTES FULL AND COMPLETE PAYMENT OF ALL AMOUNTS DUE TO YOU FROM
         THE COMPANY AND CONSTITUTES ADDITIONAL CONSIDERATION TO WHICH YOU ARE
         NOT OTHERWISE ENTITLED.

                                             Very truly yours,

                                             /s/   Gary L. Neale
                                             Gary L. Neale

Accepted:

/s/   Stephen P. Adik
Stephen P. Adik

Date: ____________________

Witness: /s/   Peter V. Fazio, Jr.

Date:_________________

                                      -7-
<PAGE>

                                                                       EXHIBIT 1

GENERAL RELEASE

ATTN: THIS GENERAL RELEASE SHOULD NOT BE SIGNED PRIOR TO EMPLOYEE'S TERMINATION
DATE, JANUARY 1, 2004.

         In consideration of the payments and benefits set forth in the Letter
Agreement attached hereto, the sufficiency of which consideration is hereby
acknowledged, I, for myself and my heirs, executors and administrators, do
hereby fully, finally and unconditionally release and forever discharge NiSource
Inc. and all of its parent, sister and subsidiary corporations and all of its
affiliates, as well as all of its former and current directors, officers,
employees, stockholders, attorneys, agents, predecessor, successors and assigns,
in their personal and corporate capacities (hereinafter "Released Parties"),
from any and all liabilities, actions, causes of action, claims, rights,
obligations, charges, damages, costs, attorneys' fees, suits, re-employment
rights and demands of any and every kind, nature, and character, known and
unknown, liquidated or unliquidated, absolute or contingent, in law or in
equity, enforceable under and local, state, or federal statute or ordinance, or
under the common laws of the United States, FROM THE BEGINNING OF TIME TO THE
DATE OF THIS GENERAL RELEASE, including but not limited to, all claims relating
to THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, AS AMENDED, 29 U.S-C.
SECTION 621 ET SEQ. and the specific statutes referred to in footnote 1(1), any
and all claims relative to any agreement relating to my employment with any of
the Released Parties, including but not limited to any claims under the
doctrines of defamation, libel, slander, invasion of privacy, intentional
infliction of emotional distress, interference with contractual relations,
retaliatory discharge, breach of contract, wrongful discharge, breach of implied
contract or implied covenant of good faith or fair dealing, and any other
statute, authority or law, providing a cause of action relating to my employment
with NiSource and all of its parent, sister and subsidiary corporations and all
of its affiliates, and/or its termination. I also agree not to sue NiSource or
any of the other Released Parties with respect to the claims covered by the
foregoing General Release.

         This General Release shall not apply to: (1) any third party claims
against me relating to or arising from my employment with the released Parties;
or any of its related parties; or (2) the Letter Agreement attached hereto.

         I acknowledge that prior to entering into the Letter Agreement to which
this General Release is attached and made a part of, I was advised in writing to
consult with an attorney before executing the Letter Agreement and that I was
given a period of at least twenty-one (21)

----------------------------
(1)        Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C.
Section 2000e et seq.; the Employee Retirement Income Security Act, as amended,
29 U.S.C. Section 1001 et seq.; the Rehabilitation Act of 1973, as amended, 29
U.S.C. Section 701 et seq.; the Americans with Disabilities Act of 1990, as
amended, 42 U.S.C. Section 12101 et seq.; the Family and Medical Leave Act of
1993, 29 U.S.C. Section 2601 et seq.; the Fair Labor Standards Act, as amended,
29 U.S.C. Section 201 et seq.; the Civil Rights Act of 1866, 42 U.S.C. Section
1981 et seq.; the Worker Adjustment Retraining Notification Act, 29 U.S.C. 2101
Section et seq., the Occupational Safety and Health Act, 29 U.S.C. Section 651
et seq. and the Indiana Civil Rights Act.

                                      -8-
<PAGE>

days within which to consider the Letter Agreement, including the terms of this
General Release. Moreover, I was advised in writing of my right, for seven days
following my execution of the Letter Agreement, to revoke the Letter Agreement
and thereby decline to execute this General Release. I expressly represent that
I did not revoke the Letter Agreement. Accordingly, I acknowledge and agree that
the Letter Agreement is effective and enforceable.

         I hereby represent that I have read and understand the terms of this
General Release and represent that my execution of this General Release
constitutes my knowing and voluntary act, made without coercion or intimidation.
I understand that this General Release in applicable to any claims arising prior
to the date of this General Release and is binding upon me, my heirs, executors
and assigns.

__________________________
Stephen P. Adik

Date: __________________________

__________________________
Witness' Signature

Date: __________________________

                                NISOURCE RELEASE

         Based on the knowledge NiSource Inc. and its affiliates have as of the
date of this Release, NiSource Inc. has no intention to sue you or your heirs,
executors or administrators.

                                               NISOURCE INC.

                                               By:_____________________________
                                               Its:_____________________________

                                      -9-
<PAGE>

                                                                       EXHIBIT 2

                                  NISOURCE INC.
                         1994 LONG-TERM INCENTIVE PLAN,
                             AS AMENDED AND RESTATED

                           RESTRICTED STOCK AGREEMENT

         This Agreement is made as of the 2nd day of January, 2004 ("Date of
Award"), between NiSource Inc. (the "Company") and Stephen P. Adik (the
"Grantee"). In consideration of the agreements set forth below, the Company an
the Grantee agree as follows:

         1.       Grant. A restricted stock award ("Award") of 20,736 shares
("Restricted Shares") of the Company's common stock, par value $.01 per share,
is hereby granted by the Company to the Grantee, subject to the following terms
and conditions, and, to the extent relevant and not covered by this Agreement,
to the provisions of the NiSource Inc. 1994 Long-Term Incentive Plan, as Amended
and Restated Effective January 1, 2004 (the "Plan"), the terms of which are
incorporated by reference herein.

         2.       Transfer Restrictions. None of the Restricted Shares shall be
sold, assigned, pledged or otherwise transferred, voluntarily or involuntarily,
by the Grantee prior to the lapse of restrictions pursuant to Sections 3, 4 and
5 below.

         3.       Lapse of Restrictions. The restrictions set forth in Section 2
above shall lapse with respect to the Restricted Shares as follows:

         The restrictions shall lapse on the first to occur of (i) April 17,
         2005 and (ii) the date of the Grantee's death.

         4.       Change in Control. Notwithstanding the provisions of Section 3
above, in the event of a Change in Control of the Company, as defined in the
Flan, all restrictions applicable to the Restricted Shares shall lapse.

         5.       Forfeiture. All of the Restricted Shares shall be forfeited to
the Company if, on or before April 1.7, 2015, the Grantee enters into an
employment, commercial or consulting relationship with (i) another public
utility, public utility holding company or a subsidiary of a public utility
holding company, (ii) a regulated or nonregulated energy company or subsidiary
of a regulated or nonregulated energy company, or (iii) an independent power
producer; or solicits any employee of the Company or its subsidiaries to work
for a business entity described in this Section 5; provided, however, the
Grantee shall be allowed to undertake an employment, commercial or consulting
arrangement with a business entity whose business operations are described above
if the Chief Executive Officer of the Company agrees in writing that such
activities would not conflict with the best interests of the Company, which
agreement shall not he unreasonably withheld.

         6.       Rights as Stockholder. During the restriction period, the
Grantee shall be entitled to all of the rights of a stockholder with respect to
the Restricted Shares, including without

<PAGE>

limitation the right to vote and tender such Restricted Shares, and to receive
dividends and other distributions payable with respect to such Restricted Shares
since the Date of Award.

         7.       Escrow of Share Certificates. Certificates for the Restricted
Shares shall be issued in the Grantee's name and shall be held in escrow by the
Company until all restrictions lapse or such Shares are forfeited as provided
herein. A certificate or certificates representing the Restricted Shares as to
which restrictions have lapsed shall be delivered from escrow by the Company to
the grantee upon such lapse.

         8.       Government Regulations. Notwithstanding anything contained
herein to the contrary, the Company's obligation to issue or deliver
certificates evidencing the Restricted Shares shall be subject to all applicable
laws, rules and regulations, and to such approvals by any governmental agencies
or rational securities exchanges as may be required.

         9.       Withholding Taxes. The Company shall have the right to require
the Grantee to remit to the Company, or to withhold from other amounts payable
to the Grantee, as compensation or otherwise, an amount sufficient to satisfy
all federal, state and local withholding tax requirements as provided in the
Plan.

         10.      Governing Law. This Agreement shall be construed under the
laws of the State of Indiana.

         In Witness Whereof, the Company has caused this Award to be granted,
and the Grantee has accepted this Award, as of the date first above written.

                                      NISOURCE INC.

                                      By: ____________________________
                                          Chairman of the Nominating and
                                          Compensation Committee Board of
                                          Directors

                                      _________________________________
                                      Stephen P. Adik, Grantee

                                      -2-

<PAGE>

                                                                       EXHIBIT 3

A.       Vested NiSource Stock Options

<TABLE>
<CAPTION>
  GRANT        EXPIRATION    PLAN         GRANT       OPTIONS       OPTION         OPTIONS         OPTIONS      OPTIONS
  DATE            DATE        ID          TYPE        GRANTED        PRICE       OUTSTANDING        VESTED     EXERCISABLE
---------      ----------    ----     -------------   -------     ----------     -----------       -------     -----------
<S>            <C>           <C>      <C>             <C>         <C>            <C>               <C>         <C>
8/23/1994      8/23/2004     1988     Non-Qualified   16,000      $14.375000        16,000          16,000        16,000

8/22/1995      8/22/2005     1988     Non-Qualified   20,000      $16.218800        20,000          20,000        20,000

8/27/1996      8/27/2006     1988     Non-Qualified   20,000      $18.906300        20,000          20,000        20,000

8/26/1997      8/26/2007     1994     Non-Qualified   20,000      $20.640700        20,000          20,000        20,000

8/25/1998      8/25/2008     1994     Non-Qualified   20,000      $29.218800        20,000          20,000        20,000

8/24/1999      8/24/2009     1994     Non-Qualified   30,000      $24.593800        30,000          30,000        30,000

1/31/2000      1/31/2010     1994     Non-Qualified   45,000      $18.437500        45,000          45,000        45,000

8/22/2000      8/22/2010     1994     Non-Qualified   45,000      $22.22000         45,000          45,000        45,000

1/1/2001       1/1/2011      1994     Non-Qualified   56,604      $25.940000        56,604          56,604        56,604

1/25/2002      1/25/2012     1994     Non-Qualified   68,493      $21.005000        68,493          68,493        68,493

1/1/2003       1/1/2013      1994     Non-Qualified   135,546     $19.840000        135,546         135,546       135,546
</TABLE>

B.       Vested Restricted Shares

         1.       151,992 restricted NiSource shares which vest on January 1,
                  2004.

C.       Vested NiSource Contingent Shares

         1.       25,000 contingent NiSource shares granted in 2000 and vesting
                  on January 29, 2004.

         2.       25,000 contingent NiSource shares granted in 2000 and vesting
                  on January 29, 2005.

         3.       16,361 contingent NiSource shares granted in 2001 and vesting
                  on January 1, 2004.

         4.       16,360 contingent NiSource shares granted in 2001 and vesting
                  on January 1, 2005.

         5.       27,765 contingent TARSAP NiSource shares granted in 2003 and
                  vesting on January 1, 2004.

                                      -3-