EXHIBIT 10.78

 

POWERGEN

 

UK LONG TERM INCENTIVE PLAN

 

NOVEMBER 2002

 

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I

 

EXECUTIVE SUMMARY

 

 

This document sets out detailed proposals for the design and operation of the UK
Long-term Incentive Plan (“the Plan”).

 

Purpose of the Plan

 

The primary purpose of the plan is to provide senior executives under a UK
contract of employment with an incentive, beyond the annual bonus, linked to
company performance.

 

In addition, the plan is intended to assist in the retention of executives and
to ensure that, when considered with the E.ON Stock Option Award Programme, the
level of long-term incentive reward available is competitive in the UK market.

 

Eligibility

 

The following categories of executives employed by Powergen UK plc are eligible
to be considered for awards in 2002 and future years subject to Board approval:

 

1.                                       Directors in the Powergen UK business.

2.                                       Corporate Powergen Directors based in
the UK.

3.                                       UK Directors on secondment to LG&E.

4.                                       Selected Senior Managers

 

In addition, for the awards in 2003 and onwards, it is proposed that selected
senior managers may be included in the plan.  Currently it is estimated that
approximately 25 senior managers have sufficiently broad impact on either
Powergen UK or the Corporate Centre to be included, although that figure may be
revised as the business changes.

 

For the avoidance of doubt, former TXU employees will not be included in the
2002 grant.

 

Plan Overview

 

Awards will be granted on an annual basis.  Each award will be earned over three
financial years.  Target award levels will be expressed as a percentage of
annual salary valued at time of grant.

 

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The target award will be adjusted according to business performance in each of
the three financial years and the adjusted award paid in cash following the
approval of E.ON AG’s results at the end of the third financial year by E.ON
AG’s shareholders

 

The adjustment following each year’s results may be up or down by up to 30%. 
So, for example, if an executive’s initial award is £100:

 

1.                                       The maximum award at the end of three
years would be 100 x 1.3 x 1.3 x 1.3 = £219.70.

2.                                       The minimum award at the end of three
years would be 100 x 0.7 x 0.7 x 0.7 = £34.30.

 

Performance Measures

 

The performance measures will be agreed at the beginning of each year. 
Performance measures for 2002 will be as follows using the definition of
Internal Operating Profit (IOP) in the E.ON Planning and Controlling Manual:

 

1.                                       Powergen UK Internal Operating Profit
for those working in that business.

2.                                       LG&E Internal Operating Profit for UK
expatriates working in LG&E.

3.                                       Powergen Group Internal Operating
Profit for those working in the Corporate Centre.

 

The adjustment to the target award will be by 3% of the target award for each 1%
variation from target.  So the maximum adjustment of 30% to the target award
applies for results 10% or more above target, and conversely the maximum
reduction of 30% applies for results 10% or more below target.

 

Key design issues

 

The following are the key design issues that have been discussed with the UK and
E.ON HR management, and the recommended approach that has been incorporated in
the draft documentation.

 

1.               The company has the right in exceptional circumstances such as
very poor business results or a major accident to cancel or defer the payments
under the plan.

 

2.               Where participant moves between business units the company has
the option to change the performance measure to the new business unit for
current and subsequent years of existing awards as well as for future awards.

 

3.               The award should be paid to employees who are in service on the
last day of the three year period.  This is different from the position
previously notified which was that people working out notice at the end of the
award period would not be entitled to payment.  It was considered that the
complication of

 

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pro-rating and the negative impact of proposing to cancel or reduce awards
outweighed any cost saving or extended retention.

 

4.               Individual performance is a factor in the plan in that poor
performers may not be granted an award.  However, once an award has been
granted, only company performance and remaining in service determine whether the
award is paid and the amount of the award.

 

5.               If the business is restructured, the Board has the right to
revise targets to reflect the new business structure.

 

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II

 

RULES OF THE POWERGEN LONG-TERM INCENTIVE PLAN

 

 

These rules govern the operation of the Powergen UK and Corporate Centre
Long-Term Incentive Plan (“the Plan”) which has been established to provide
selected Powergen executives under a UK contract of employment with a long-term
incentive opportunity related to business performance.

 

The plan is operated on behalf of the Board of Powergen plc whose decision on
questions of interpretation of the rules is final.  It is anticipated that this
Plan will be adopted by the Powergen Board at the last meeting of 2002.  The
Powergen Board delegates full authority to the Senior Vice President Corporate
Executive Human Resources of E.ON AG (currently Stefan Vogg) in all matters
relating to the operation of the Plan including participants and performance
measures.

 

Definitions

 

Award period means the period of 36 months commencing at the start of the
financial year in which the award is granted.

 

Board means the Board of Powergen plc.

 

Award means a contingent entitlement to payment under the plan granted under
rule 2.

 

Award period means the three financial years of Powergen starting with the year
in which the award is granted.

 

E.ON Group means E.ON AG and all its subsidiary and associated companies.

 

1.                        Eligibility

 

Participation in the Plan is by invitation at the discretion of the Board who
may select participants from directors and senior managers in the following
categories:

 

(a)                                  those working in the Powergen UK business;

(b)                                 those working in the Powergen Corporate
Centre based in the UK;

(c)                                  UK employees on secondment to LG&E or
elsewhere in the E.ON Group

 

The grant of an award in a particular plan cycle does not imply that the
participant will be granted awards in subsequent cycles of the plan.

 

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2.                        Grant of Awards

 

Awards granted will be expressed as a target monetary amount and will be
notified to participants in writing.  Each award will relate to a period of
three financial years of Powergen starting with the year in which the award is
granted.

 

Following each financial year, the target award will be increased or reduced
according to a performance measure and scale included in the award letter.

 

3.                        Payment of the Award

 

Provided the award holder is employed within the E.ON Group continuously from
the date of the award until the end of the award period the monetary value of
the amount of the award following the adjustment after the end of the third
financial year will be paid within 90 days of the approval of E.ON AG’s results
at the end of the third financial year by E.ON AG’s shareholders.

 

The payment will be subject to the normal deductions for taxation and social
security contributions that apply to cash bonuses.  Payments are not
pensionable.

 

4.                        Transferring with the E.ON Group

 

If an award holder transfers from one business to another within the E.ON Group
past awards will continue as normal; performance measures for past awards will,
unless notification to the contrary is given to the award holder, continue to be
operated based on the performance of the business units as stated in the
original award letter for each award.  Any subsequent awards, if granted, would
normally be based on performance of the unit in which the participant was
working at the date of that award.

 

5.                        Sale of a Business

 

If the business in which the participant is working ceases to be part of the
E.ON Group the Board may terminate those awards in accordance with rule 8 or may
agree with the new owner that awards continue in operation and become the
responsibility of the new owner.  In the case of awards held by employees no
longer working in the business being sold but elsewhere in the E.ON Group, the
Board will determine whether those awards continue with revised performance
measure or are terminated in accordance with rule 8.

 

6.                        Restructuring of the Business

 

If all or any part of the business is restructured, the Board has the right to
revise targets to reflect the new business structure.

 

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7.                        Leaving the E.ON Group

 

If an award holder ceases to be employed within the E.ON Group for any reason
then no payment will be made unless cessation of employment takes place after
the end of the first financial year of the award period as a result of:

 

(a)                                  retirement, whether at normal retirement
date, early or late or due to ill-health; or

(b)                                 death in service; or

(c)                                  redundancy.

 

In those circumstances the amount of award, adjusted for each completed
financial year of service relating to the award, will be pro-rated for completed
months of employment since the start of the financial year in which the award
was granted as compared to the 36 months of the award period.  That is:

 

Amount of payment = Latest adjusted   x   Completed months of service in award
period

                                     value of award           
                               36

 

8.                        Cancellation or deferral of payment

 

In exceptional circumstances the Board may at its discretion cancel, reduce or
defer payment of any award due for payment. In this context exceptional
circumstances would include, but not be limited to, severely adverse financial
results; serious financial irregularities or wider group policy decision.

 

9.                        Termination of Plan or Awards

 

The Board may at its discretion at any time terminate the plan or terminate
awards that have been made previously.  In that event, awards will be paid in
cash pro rata for months completed during the award period at a level reflecting
adjustments for all completed financial years prior to termination of the
award.  Payment will be made in cash within 90 days after the effective date of
termination.

 

10.                 Discretion of the Board

 

If any circumstances arise that are not covered by these rules, the Board,
having taken advice from the Senior Vice President Corporate Executive Human
Resources of E.ON AG E.ON AG (currently Stefan Vogg), will decide on the
approach to be taken and that decision will be final.

 

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11.                 Adjustments to Awards

 

At the discretion of the Senior Vice President Corporate Executive Human
Resources of E.ON AG (currently Stefan Vogg), the size of an award may be
adjusted to reflect circumstances such as:

 

1.                                       Absence from work on reduced pay or
unpaid, for example through leave of absence, extended maternity leave or
sickness.

2.                                       Change to working hours such as a move
from full-time to part-time or vice versa.

3.                                       Change in the financial year end of
Powergen and/or E.ON AG.

 

If such adjustment is made it should be calculated to reflect the actual time
paid at full rate (or pro rata at a reduced rate) during the award period as
compared to that anticipated when the award was made.

 

No adjustment to awards will be made in the case of salary increases or
promotion during the award period.

 

11.                               Amendment to Rules

 

The Board, having taken advice from the Senior Vice President Corporate
Executive Human Resources of E.ON AG (currently Stefan Vogg), may amend these
Rules.  Any amendment will be effective only for awards granted after the
amendment is made.

 

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III

 

ADMINISTRATION GUIDE

 

 

This guide forms part of the governance of the Powergen Long-Term Incentive Plan
(“the Plan”) approved by the Board of Powergen plc and is intended as a
reference document for the Board and for the administration of the plan. It is
to be read in conjunction with the Rules of the Plan.

 

The Powergen Board will delegate full authority to the Senior Vice President
Corporate Executive Human Resources of E.ON AG (currently Stefan Vogg) in all
matters relating to the operation of the Plan including participants and
performance measures.

 

Key decisions regarding changes to the design of the Plan are referred formally
by the Board.  In all cases the Board will take advice from the Senior Vice
President Corporate Executive Human Resources of E.ON AG (currently Stefan Vogg)
prior to taking its decision.  However, the Powergen Board delegates full
authority to the Senior Vice President Corporate Executive Human Resources of
E.ON AG (currently Stefan Vogg) in all matters relating to the operation of the
Plan including participants and performance measures.

 

1.                        Eligibility

 

Awards are intended to be made annually, subject to Board approval and to
satisfactory individual performance to:

 

1.               Directors in the UK business.

2.               Directors based in the UK in the Powergen Corporate Centre.

3.               UK Directors on secondment elsewhere in the E.ON Group.

4.               At discretion, selected other senior managers based in the UK
or on secondment elsewhere in E.ON Group.

 

Note: Secondees to Powergen from elsewhere in E.ON Group, on expatriate terms or
otherwise, are not normally eligible for the plan.

 

2.                        Size of award

 

For 2003 the award is to be calculated as the following percentage of salary on
1st January in the financial year in which the award is granted:

 

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Position

 

Target Award
as percentage of Salary

 

UK Chief Executive

 

40

%

Directors

 

25

%

Senior Managers

 

15

%

 

The basis of future awards will be recommended to the Board on an annual basis.

 

Awards will be expressed as a money amount calculated on annual basic salary as
at 1st January at the start of the financial year in which the award is
granted.  No adjustment will be made for subsequent salary increases or
promotions.

 

3.                        Performance measures

 

The performance measure for each award is announced in the award letter.  The
performance measure for 2002 will be Internal Operating Profit as defined in the
E.ON Planning and Controlling Manual.  This could change for subsequent years;
any change in performance measure will apply to existing awards part way through
their award period as well as to subsequent awards so that only one measure is
in use for any year for each company.

 

The intention is that the performance measured will be that of the business in
which the participant is working when the award is granted; subsequent changes
in role will not affect the measures applied to the awards granted previously. 
Performance measured will therefore be:

 

1.                                       Powergen UK Internal Operating Profit
for those working in that business.

2.                                       LG&E Internal Operating Profit for UK
expatriates working in LG&E.

3.                                       Powergen Group Internal Operating
Profit for those working in the Corporate Centre.

 

For 2002 and 2003 the performance scale for adjustment will be a 3% change in
award value for each 1% variance from target.  The variance should be calculated
as a percentage to one decimal place so for example if final results are 96.3%
of target this is a variance of -3.7%; this variance would result in awards
being reduced by 3 x 3.7% = 11.1%.

 

4.                        New entrants to the population

 

New entrants to the population of Directors and Senior Managers that may be
considered for the plan will be considered for an award at the next award date
following their date of joining that population.  This will apply irrespective
of whether they join the population by external recruitment, by promotion within
Powergen or by transfer from elsewhere in the E.ON Group.

 

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In exceptional cases, the Board has discretion to make an award at a date other
than the normal award date for the year; the amount of the award may differ from
the normal formula.

 

5.                        Adjustment of awards

 

The rules allow discretion for adjustment in awards where the participant works
for a proportion of full-time that is substantially different from that
envisaged at the award date.  This could happen where an employee changes from
full-time to part-time or vice versa, or has a period of absence for whatever
reason at reduced pay or on an unpaid basis.

 

Cases will be considered by the SVP Corporate Executive Human Resources on an
individual basis.  In general the principle for adjustment would be to calculate
the proportion of time paid at base salary during the three year award period as
compared to that expected.  For example, someone working 60% of time (3 days per
week) at the time of the award who changed to full-time six months before the
end of the award period has been paid at base salary for 2.5 years x .6 + 0.5
years x 1 = 2 years.  This compares to an expected 3 years x 0.6 = 1.8.

 

There would therefore be a case for increasing the award in the ratio of 2:1.8.

 

Similarly someone who had a period of six months unpaid leave during the three
year period might have their award reduced in the ratio 2.5:3.

 

Someone who is on unpaid maternity leave or other leave at the end of the three
year period relating to an award is treated as being in service at that date and
qualifies for payment of the award.

 

6.                        Payment of awards

 

Awards are to be paid via payroll within 90 days of the approval of E.ON AG’s
results at the end of the third financial year by E.ON AG’s shareholders.  The
payment amount will be net of the usual tax and National Insurance (or
equivalent) deductions.

 

Payments on early termination of awards, for example on retirement or on sale of
a business, to be made by cheque within 90 days after the effective date of
termination.

 

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Illustration Only

 

POWERGEN LONG-TERM INCENTIVE PLAN

 

Statement of awards for: A Director

 

 

 

March 2003

 

Year Award Granted

 

2002

 

2003

 

2004

 

2005

 

Total

 

Award Period – Financial Years

 

2002 - 2004

 

 

 

 

 

 

 

 

 

Initial Award

 

£10,000

 

£20,000

 

 

 

 

 

 

 

Adjustments based on performance of

 

Powergen
UK

 

Powergen
UK

 

 

 

 

 

 

 

2002

Award value as at 1st January

 

£10,000

 

 

 

 

 

 

 

 

 

Performance measure and target

 

IOP £300m

 

 

 

 

 

 

 

 

 

Performance outcome

 

£297m (99%)

 

 

 

 

 

 

 

 

 

Adjustment to award

 

-3%

 

 

 

 

 

 

 

 

 

2003

Award value as at 1st January

 

£9,700

 

£20,000

 

 

 

 

 

 

 

Performance measure and target

 

IOP £320m

 

IOP £320m

 

 

 

 

 

 

 

Performance outcome

 

 

 

 

 

 

 

 

 

 

 

Adjustment to award

 

 

 

 

 

 

 

 

 

 

 

2004

Award value as at 1st January

 

 

 

 

 

 

 

 

 

 

 

Performance measure and target

 

 

 

 

 

 

 

 

 

 

 

Performance outcome

 

 

 

 

 

 

 

 

 

 

 

Adjustment to award

 

 

 

 

 

 

 

 

 

 

 

2005

Award value as at 1st January

 

 

 

 

 

 

 

 

 

 

 

Performance measure and target

 

 

 

 

 

 

 

 

 

 

 

Performance outcome

 

 

 

 

 

 

 

 

 

 

 

Adjustment to award

 

 

 

 

 

 

 

 

 

 

 

 

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