Step 1: Code Analysis: "CAT" transforms to "DBU".
This is achieved by incrementing the alphabetical position of each letter: C(3) → D(4), A(1) → B(2), T(20) → U(21).
Step 2: Application to "DOG": D(4), O(15), G(7).
Increment each position by 1:
\[ 4+1=5 \Rightarrow E, \quad 15+1=16 \Rightarrow P, \quad 7+1=8 \Rightarrow H \]
The encoded form of "DOG" is "EPH".
Step 3: Validation: Corresponds to option (1).