EXHIBIT 10.78


 


POWERGEN


 


UK LONG TERM INCENTIVE PLAN


 


NOVEMBER 2002


 

















 


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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