Form of Annual Incentive Compensation Opportunity Letter

EX-10.(C) 8 c89822exv10wxcy.txt FORM OF ANNUAL INCENTIVE COMPENSATION OPPORTUNITY LETTER EXHIBIT 10(c) PEOPLES ENERGY CORPORATION SHORT-TERM INCENTIVE COMPENSATION PLAN ADMINISTRATIVE GUIDELINES FISCAL 2005 OCTOBER 2004 1 SHORT-TERM INCENTIVE COMPENSATION PLAN ADMINISTRATIVE GUIDELINES FISCAL 2005 This document sets forth the Administrative Guidelines for fiscal 2005 established by the Compensation Committee under the Peoples Energy Corporation Short-Term Incentive Compensation Plan ("Plan"). Participants All full-time salaried employees of Peoples Energy Corporation or its subsidiaries who occupy a position in an officer salary grade prior to April 1, 2005. Award Opportunities The positions of participants are grouped by incentive award categories, I through III. The following schedule shows, for each incentive award category, the maximum award opportunity and the target award opportunity for fiscal 2005, each expressed as a percentage of a participant's annual base salary. Where a participant has substantial operating responsibility for a diversified business, the Chief Executive Officer may assign, to business unit measures for the participant, a maximum award opportunity that is different from the maximum award opportunity shown in the following schedule. Where a participant's maximum award opportunity is established by separate agreement with the participant, the maximum award opportunity for purposes of these guidelines shall be that established by such agreement. 2

Where an employee becomes eligible to participate in the Plan subsequent to the establishment of these Guidelines but prior to April 1 of fiscal 2005, the Chief Executive Officer shall notify the Committee of such employee's participation in the Plan and such employee's assignment to an award category consistent with the foregoing schedule, provided that an assignment to any category other than Category III shall be made by the Committee. 3 Performance/ Each participant's award opportunity will be Award segmented into several components, each tied Components to no more than four financial performance measures and one operational measure for Gas Distribution and Peoples Energy Production participants. For Senior Management (the Chairman, President and CEO in Category I) the entire award opportunity will be tied to the corporate financial performance measures as indicated in the following table.

The other participants will have up to 50% of their award opportunity tied to the EPS corporate performance measure. The remaining percentage of their award opportunity will be tied to other corporate or business unit financial or operational measures. One component's performance will not directly affect the portion of the award opportunity earnable from another component. Award Payment Incentive awards will be paid under the Plan Trigger for fiscal 2005 only if Peoples Energy's net income for the year equals or exceeds the dividend and Peoples Energy does not omit or reduce its common stock dividend during the year. 4 Individual If a participant's overall performance is Performance deemed unsatisfactory to some degree, a lower Requirement incentive award or no incentive award will be paid. Performance The Corporate Financial Measures, Business Measures Unit Financial Measures and Business Unit Operation Measures are defined in detail in Appendix A. The financial measures will be based on the performance that occurs within fiscal 2005 and payout percentages will be prorated between levels. Performance under the measures will be determined in the manner described in Appendix A. For all applicable measures, any effect related to the outcome of the Reconciliation Proceeding or a change in Aquila's status (including downgrade or purchase of contract) will not be included in the results for the performance measure. The Chief Executive Officer will be responsible for the designation and evaluation of business unit measures. Notice to At the beginning of fiscal 2005 or as soon as Participants is practicable thereafter, each participant will be notified of his or her participation and receive a copy of these Administrative Guidelines, and a statement showing the participant's maximum award opportunity, the participant's target award opportunity, the performance measures that will be utilized to determine the participant's award for fiscal 2005, and the weighting of the performance measures within the award opportunities. 5 Final Award The incentive award for a participant is computed as the sum of the awards earned based on corporate and/or business unit performance measures. The final award will be based on this computed award, adjusted up or down to reflect the participant's individual performance, such adjustment to be made at the sole discretion of the Compensation Committee for all participants other than the Chief Executive Officer. The final award for the Chief Executive Officer may be reduced from the computed award to reflect performance, such adjustment to be made at the sole discretion of the Compensation Committee subject to ratification by a majority of the non-employee and independent directors of the Board (as more fully described in the Plan). The final award for the Chief Executive Officer may not be increased from the computed award by a majority of all members of the Board who are not officers or employees of the Company. The final award for the Chief Executive Officer may not be increased from the computed award. It is intended that the final award for the CEO under these guidelines constitute "performance-based compensation" for purposes of Section 162(m) of the Internal Revenue Code. Accordingly, these Administrative Guidelines shall be interpreted and administered in accordance with such intention. Form and Timing Payments of awards will be made in cash as Payments soon as practicable following the end of fiscal 2005. 6 Appendix A CORPORATE AND BUSINESS UNIT PERFORMANCE MEASURES PEC - ONGOING OPERATING (NON-GAAP) - EARNINGS PER SHARE Peoples Energy attainment of targeted, diluted Non-GAAP EPS for fiscal 2005. Represents diluted EPS before restructuring related pension costs.

PEC - RETURN ON EQUITY Consolidated return on 13-month average common equity using PEC fiscal 2005 consolidated ongoing operating (non-GAAP) net income before restructuring related pension costs. The balance of Other Comprehensive Income (OCI) - net of tax is excluded from common equity for this calculation.

CORPORATE COST CENTER RESPONSIBILITY COSTS Includes all costs under the control of corporate cost centers. This includes costs rebilled to other companies and amounts capitalized. This measure does not include restructuring related pension costs. Costs in millions of dollars.

OPERATING INCOME - DIVERSIFIED ENERGY BUSINESSES Operating income from PEC's diversified business segments: power generation, midstream services, retail energy services, oil and gas, and other. It does not include corporate segment operating costs or corporate financing costs. Operating income in millions of dollars.

2 GAS DISTRIBUTION - NORMALIZED OPERATING INCOME Award is based on pre-tax operating income from PGL and NSG. This operating income will include HUB operating income and be adjusted for weather variations. Operating income in millions of dollars.

GAS DISTRIBUTION - RESPONSIBILITY COSTS Includes all costs under the control of Gas Distribution cost centers. This excludes environmental costs recovered through Rider 11 and the provision for bad debt. Costs in millions of dollars.

3 GAS DISTRIBUTION OPERATING MEASURE Reduction in the number of calls offered to the PGL and NSG call centers

Increase in combined revenue for PGL and NSG generated through services billed via Cfirst, revenue collected from jobbing contracts and revenue collected from the leasing of construction heaters.

4 OIL AND GAS - RETURN ON CAPITAL EMPLOYED Return on total capital investments each quarter, annualized, then averaged at the end of the year. The return will be calculated using the Oil & Gas segment's operating income (any other income would not be included) and the total capital investment, net of depreciation, from the consolidated balance sheet as disclosed in the 10-Q and 10-K. The calculation would include investments in equity investments.

OIL & GAS - OPERATING INCOME Operating income from the existing base assets, the capital program and the EnerVest Partnership. Operating income in millions of dollars.

5 OIL AND GAS - DAILY AVERAGE PRODUCTION Annual average daily oil & gas production as measured on a MMCF per day gas equivalent basis for the fiscal year from the existing assets and capital program. Conversions will be based on 6 MCF of gas per BBL of oil.

POWER GENERATION - OPERATING INCOME Operating income from continuing operations. The sale of the western sites are not included in this measure. Operating income in millions of dollars.

6 POWER GENERATION - SALE OF WESTERN SITES Gain on the sale of the western sites in millions of dollars.

MIDSTREAM SERVICES - OPERATING INCOME Operating income, excluding the PGL Hub. Operating income in millions of dollars.

7 RETAIL ENERGY - OPERATING INCOME Operating income in millions of dollars.

MIDWEST DIVERSIFIED ENERGY OPERATING INCOME Operating income from Retail, Power, Midstream and Other segments excluding Hub but including the gain from the sale of the western sites. Operating income in millions of dollars.