** **

**EXHIBIT 10.78**

 

**POWERGEN**

** **

**UK LONG TERM INCENTIVE PLAN**

 

**NOVEMBER 2002**

 

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**I**

 

**EXECUTIVE SUMMARY**

 

 

This documentsets out detailed proposals for the design and operation of the UK Long-termIncentive Plan (“the Plan”).

 

**Purpose of the Plan**

 

The primarypurpose of the plan is to provide senior executives under a UK contract ofemployment with an incentive, beyond the annual bonus, linked to companyperformance.

 

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

 

**Eligibility**

 

The followingcategories of executives employed by Powergen UK plc are eligible to beconsidered 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 seniormanagers may be included in the plan. Currently it is estimated that approximately 25 senior managers havesufficiently broad impact on either Powergen UK or the Corporate Centre to beincluded, although that figure may be revised as the business changes.

 

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

 

**Plan Overview**

 

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

 

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

 

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

 

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

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

 

**Performance Measures**

 

Theperformance measures will be agreed at the beginning of each year.  Performance measures for 2002 will be asfollows using the definition of Internal Operating Profit (IOP) in the E.ONPlanning 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 inLG&E.

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

 

The adjustmentto the target award will be by 3% of the target award for each 1% variationfrom target.  So the maximum adjustmentof 30% to the target award applies for results 10% or more above target, andconversely the maximum reduction of 30% applies for results 10% or more belowtarget.

 

**Key design issues**

 

The followingare the key design issues that have been discussed with the UK and E.ON HRmanagement, and the recommended approach that has been incorporated in thedraft documentation.

 

1.               Thecompany has the right in exceptional circumstances such as very poor businessresults or a major accident to cancel or defer the payments under the plan.

 

2.               Whereparticipant moves between business units the company has the option to changethe performance measure to the new business unit for current and subsequentyears of existing awards as well as for future awards.

 

3.               Theaward should be paid to employees who are in service on the last day of thethree year period.  This is differentfrom the position previously notified which was that people working out noticeat 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 ofproposing to cancel or reduce awards outweighed any cost saving or extendedretention.

 

4.               Individualperformance is a factor in the plan in that poor performers may not be grantedan award.  However, once an award hasbeen granted, only company performance and remaining in service determinewhether the award is paid and the amount of the award.

 

5.               Ifthe business is restructured, the Board has the right to revise targets toreflect the new business structure.

 

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**II**

 

**RULES OF THE POWERGEN LONG-TERM INCENTIVE PLAN**

 

 

These rulesgovern the operation of the Powergen UK and Corporate Centre Long-TermIncentive Plan (“the Plan”) which has been established to provide selectedPowergen executives under a UK contract of employment with a long-termincentive opportunity related to business performance.

 

The plan isoperated on behalf of the Board of Powergen plc whose decision on questions ofinterpretation of the rules is final. It is anticipated that this Plan will be adopted by the Powergen Boardat the last meeting of 2002.  ThePowergen Board delegates full authority to the Senior Vice President CorporateExecutive Human Resources of E.ON AG (currently Stefan Vogg) in all mattersrelating to the operation of the Plan including participants and performancemeasures.

 

**Definitions**

 

**Award period** meansthe period of 36 months commencing at the start of the financial year in whichthe award is granted.

 

**Board** means theBoard of Powergen plc.

 

**Award** means acontingent entitlement to payment under the plan granted under rule 2.

 

**Award period** meansthe three financial years of Powergen starting with the year in which the awardis granted.

 

**E.ON Group** meansE.ON AG and all its subsidiary and associated companies.

 

**1.****                        Eligibility**

 

Participationin the Plan is by invitation at the discretion of the Board who may selectparticipants 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.ONGroup

 

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

 

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**2.****                        Grant of Awards**

 

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

 

Following eachfinancial year, the target award will be increased or reduced according to aperformance measure and scale included in the award letter.

 

**3.****                        Payment of the Award**

 

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

 

The paymentwill be subject to the normal deductions for taxation and social securitycontributions that apply to cash bonuses. Payments are not pensionable.

 

**4.****                        Transferring with the E.ON Group**

 

If an awardholder transfers from one business to another within the E.ON Group past awardswill continue as normal; performance measures for past awards will, unlessnotification to the contrary is given to the award holder, continue to beoperated based on the performance of the business units as stated in the originalaward letter for each award.  Anysubsequent awards, if granted, would normally be based on performance of theunit in which the participant was working at the date of that award.

 

**5.****                        Sale of a Business**

 

If thebusiness in which the participant is working ceases to be part of the E.ONGroup the Board may terminate those awards in accordance with rule 8 or mayagree with the new owner that awards continue in operation and become theresponsibility of the new owner.  In thecase of awards held by employees no longer working in the business being soldbut elsewhere in the E.ON Group, the Board will determine whether those awardscontinue with revised performance measure or are terminated in accordance withrule 8.

 

**6.****                        Restructuring of the Business**

 

If all or anypart of the business is restructured, the Board has the right to revise targetsto reflect the new business structure.

 

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**7.****                        Leaving the E.ON Group**

 

If an awardholder ceases to be employed within the E.ON Group for any reason then nopayment will be made unless cessation of employment takes place after the endof 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)                                 deathin service; or

(c)                                  redundancy.

 

In thosecircumstances the amount of award, adjusted for each completed financial yearof service relating to the award, will be pro-rated for completed months ofemployment since the start of the financial year in which the award was grantedas compared to the 36 months of the award period.  That is:

 

Amount ofpayment = Latest adjusted   x   Completed months of service in awardperiod

                                     value ofaward                                           36

 

**8.****                        Cancellation or deferral of payment**

 

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

 

**9.****                        Termination of Plan or Awards**

 

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

 

**10.****                 Discretion of the Board**

 

If anycircumstances arise that are not covered by these rules, the Board, havingtaken advice from the Senior Vice President Corporate Executive Human Resourcesof E.ON AG E.ON AG (currently Stefan Vogg), will decide on the approach to betaken and that decision will be final.

 

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**11.****                 Adjustments to Awards**

 

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

 

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

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

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

 

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

 

No adjustmentto awards will be made in the case of salary increases or promotion during theaward period.

 

**11.****                               Amendment to Rules**

 

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

 

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**III**

 

**ADMINISTRATION GUIDE**

 

 

This guideforms part of the governance of the Powergen Long-Term Incentive Plan (“thePlan”) approved by the Board of Powergen plc and is intended as a referencedocument for the Board and for the administration of the plan. It is to be readin conjunction with the Rules of the Plan.

 

The PowergenBoard will delegate full authority to the Senior Vice President CorporateExecutive Human Resources of E.ON AG (currently Stefan Vogg) in all mattersrelating to the operation of the Plan including participants and performancemeasures.

 

Key decisionsregarding changes to the design of the Plan are referred formally by theBoard.  In all cases the Board will takeadvice from the Senior Vice President Corporate Executive Human Resources ofE.ON AG (currently Stefan Vogg) prior to taking its decision.  However, the Powergen Board delegates fullauthority to the Senior Vice President Corporate Executive Human Resources ofE.ON AG (currently Stefan Vogg) in all matters relating to the operation of thePlan including participants and performance measures.

 

**1.****                        Eligibility**

 

Awards areintended to be made annually, subject to Board approval and to satisfactoryindividual performance to:

 

1.               Directors in the UKbusiness.

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

3.               UK Directors onsecondment elsewhere in the E.ON Group.

4.               Atdiscretion, selected other senior managers based in the UK or on secondmentelsewhere in E.ON Group.

 

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

 

**2.****                        Size of award**

 

For 2003 theaward is to be calculated as the following percentage of salary on 1stJanuary 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 offuture awards will be recommended to the Board on an annual basis.

 

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

 

**3.****                        Performance measures**

 

The performancemeasure for each award is announced in the award letter.  The performance measure for 2002 will beInternal Operating Profit as defined in the E.ON Planning and ControllingManual.  This could change forsubsequent years; any change in performance measure will apply to existingawards part way through their award period as well as to subsequent awards sothat only one measure is in use for any year for each company.

 

The intentionis that the performance measured will be that of the business in which theparticipant is working when the award is granted; subsequent changes in rolewill 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 thatbusiness.

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

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

 

For 2002 and2003 the performance scale for adjustment will be a 3% change in award valuefor each 1% variance from target.  Thevariance should be calculated as a percentage to one decimal place so forexample if final results are 96.3% of target this is a variance of -3.7%; thisvariance would result in awards being reduced by 3 x 3.7% = 11.1%.

 

**4.****                        New entrants to the population**

 

New entrantsto the population of Directors and Senior Managers that may be considered forthe plan will be considered for an award at the next award date following theirdate of joining that population.  Thiswill apply irrespective of whether they join the population by externalrecruitment, by promotion within Powergen or by transfer from elsewhere in theE.ON Group.

 

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

 

**5.****                        Adjustment of awards**

 

The rulesallow discretion for adjustment in awards where the participant works for a proportionof full-time that is substantially different from that envisaged at the awarddate.  This could happen where anemployee changes from full-time to part-time or vice versa, or has a period ofabsence for whatever reason at reduced pay or on an unpaid basis.

 

Cases will beconsidered by the SVP Corporate Executive Human Resources on an individualbasis.  In general the principle foradjustment would be to calculate the proportion of time paid at base salaryduring the three year award period as compared to that expected.  For example, someone working 60% of time (3days per week) at the time of the award who changed to full-time six monthsbefore 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.  Thiscompares to an expected 3 years x 0.6 = 1.8.

 

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

 

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

 

Someone who ison unpaid maternity leave or other leave at the end of the three year periodrelating to an award is treated as being in service at that date and qualifiesfor payment of the award.

 

**6.****                        Payment of awards**

 

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

 

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

 

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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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