EXHIBIT 10.6


 


NET PROFITS INTEREST BONUS PLAN


 


As Amended by the Board of Directors on July 30, 2010


 


The
Net Profits Interest Bonus Plan (the “Plan”) of SM Energy Company shall
function as follows:


 


1.             Annual Designation of
Participation.  Each year the Board
of Directors of the Company shall designate the key employees of the Company
eligible to participate in the Plan with respect to that calendar year.  It is anticipated that such participants
shall be more senior employees and fewer in number than the designated
participants in the Company’s Cash Bonus Plan.


 


2.             Determination of Aggregate Net
Profits Interest Benefit. 
Participants in the Plan shall receive a net profits interest in the
Company’s interest in oil and gas wells completed, plugged or abandoned or
acquired by the Company (a “Pool”) during the calendar year (the “Plan Year”).  The aggregate amount of such net profits
interest of all participants for such Plan Year shall be ten percent which
interest shall apply after recovery by the Company from such wells of one
hundred percent of all costs and expenses incurred by it with respect thereto,
including but not limited to land, geological and geophysical costs but
excluding (except as described in paragraph 5 below) interest, and such net
profits interest shall increase to an aggregate of twenty percent from and
after such time as the Company has recovered two hundred percent of all such
costs and expenses incurred by it with respect to such wells, including prior
compensation expenses resulting from application of the Plan at the preceding
ten percent interest level.  For purposes
of the foregoing calculations, such wells shall be accounted for as a single
pool (effective January 1, 1999 except as described in paragraph 5
below).  In determining net profits, any
recompletion, workover or similar expenditures for wells shall be charged
against the revenues of such wells, as well as direct lease operating expenses,
production taxes and overhead as determined solely by COPAS charges in the
relative areas.


 

















 


3.             Allocation of Net Profits
Interest Among Participants.  Each
key employee participating in the Plan with respect to a Plan Year shall be
allocated a portion of the net profits interest for such Plan Year in
proportion to his or her weighted base salary received during such Year
relative to the weighted base salary received by all participants during such
Plan Year, adjusted for a performance factor. 
The weighted base salary of the President and of the Executive Vice
Presidents of the Company shall be one hundred percent of their base salaries
received during such Plan Year and of all other participants shall be
two-thirds thereof; provided, however, that a reduced participation rate may be
established by the Board of Directors for certain key employees whose duties
involve them in only a portion of the Company’s activities.


 


4.             Payout Limit.  The total amount payable to an employee
participating in the Plan attributable to a Pool established with respect to
the Plan Year 2006 and any subsequent Plan Year shall not exceed three times
such participant’s base salary for the Plan Year for which the Pool was
established, proportionately reduced to the extent the factor used in
calculating the weighted base salary is less than two-thirds (with such limitation
referred to herein as the “Payout Limitation”). 
For example, if the factor used for calculating a participant’s weighted
base salary is one-third, then the limitation would be 50% of the participant’s
salary (i.e. one-third divided by two-thirds). 
With respect to each Multi-Year Pool established in the Plan Year 2006
or a later Plan Year, the Board of Directors shall specify appropriate
limitations so that, taking into account the Pool for the Plan Year and that
portion of a Multi-Year Pool allocated to such Plan Year, the aggregate amount
payable to any employee for such Plan Year is limited to three times such
participant’s weighted base salary.  Once
a participant’s payments with respect to a Pool have reached the limit, any
additional amounts that would otherwise be payable to such participant shall be
retained by the Company.


 


5.             Multi-Year Projects; Separate
Pool.  The Board of Directors, in its
discretion, may consider a significant acquisition or a multi-year project to
be accounted for as a separate pool (a “Multi-Year Pool”) with respect to the
Plan as follows:


 


(a)           If the total costs
incurred is greater than 75% of the average annual aggregate cost during the
current year and the preceding two calendar years, the net profits interest of
the participants with respect to such large acquisition or multi-year 


 


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project
shall be a portion of the ten percent and twenty percent amounts set forth in
paragraph 2 above equal to such percentages multiplied by a fraction of which
the numerator is 75 percent and the denominator is the percentage which the
cost of such acquisition or multi-year project is of the average annual
aggregate costs expended by the Company for all other oil and gas wells during
such year and during the preceding two calendar years (but exclusive of the
foregoing and any other projects designated as separate pools); and


 


(b)           Recovery of the
Company’s costs of such large acquisition or multi-year project shall include
interest thereon calculated at the prime rate in effect from time to time;


 


(c)           Notwithstanding the
provisions of paragraph 3 above, participants in the Plan with respect to such
Multi-Year Pool shall be allocated a portion of the net profits interest with
respect thereto based upon their weighted base salaries for the calendar year
such significant acquisition or multi-year project was completed or
closed.  The net profits interest in a
multi-year project shall be allocated among the participants in the Plan for
the calendar years in which the costs for such project are incurred until the
project is deemed to be substantially complete on the basis of their weighted
base salaries during such years;


 


(d)           A transaction in
which the Company acquires another company, or is acquired or merges, or
otherwise acquires what is considered by the Compensation Committee of the
Board of Directors of the Company another oil and gas business (in which event
the Compensation Committee shall determine what other incentive compensation is
appropriate, if any), as contrasted with what is considered a more customary
acquisition of oil and gas properties, shall not constitute the acquisition of
an oil and gas well project subject to the Plan.


 


6.             Vesting.  For all Pools with respect to Plan Years
prior to 2006, the right to a portion of a net profits interest of a
participant in the Pool shall vest in full in such participant on December 31
of the calendar year for which his or her participation is designated, provided
that 


 


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the
participant’s employment by the Company did not terminate prior to that date
for reasons other than disability (as defined below), retirement on or after
attaining age 65 or death.  Termination
of a participant’s employment subsequent to that date shall not affect his or
her right to such net profits interest. 
Commencing with Pools (including Multi-Year Pools) for the 2006 Plan
Year and for Pools for all subsequent Plan Years, the right to a portion of a
net profits interest of a participant in the Pool for a Plan Year shall vest
one-third (33 1/3%) in such participant on December 31 of the calendar
year for which his or her participation is designated for such Pool; two-thirds
(66 2/3%) on the next following December 31 and shall be fully vested
on the second following December 31 (each such date is referred to herein
as a “Vesting Date”) provided that the participant’s employment by the Company
does not terminate prior to each Vesting Date for reasons other than disability,
retirement on or after attaining age 65 or death.  If the participant’s employment with the
Company terminates prior to a Vesting Date other than for reasons of
disability, retirement on or after attaining age 65 or death, the participant
shall forfeit any portion of such participant’s interest in a Pool that is not
vested and the Payout Limitation shall be reduced in proportion to the portion
of the participant’s interest that is forfeited.  If a participant’s employment with the
Company terminates as a result of disability, retirement on or after attaining
age 65 or death, and on such date the participant is not fully vested, the
participant (or the participant’s successor in interest) shall vest in
accordance with the foregoing vesting schedule. 
Termination of a participant’s employment for any reason subsequent to a
Vesting Date shall not affect his or her right to the vested portion of the net
profits interests.  If a payment to a
participant under this Plan with respect to any Pool would occur prior to the
time the participant is 100% vested in the particular Pool (but before the
participant has incurred a forfeiture of any portion of the participant’s
interest in such pool), the Company shall make only that percentage of a
payment with respect to the Pool for which the participant is vested.  Unless the participant terminates employment
other than as a result of disability, retirement on or after attaining age 65
or death and prior to full vesting (in which case, upon termination any
unvested amounts retained by the Company shall be forfeited), the Company shall
pay the balance of any amount held by the Company for which the participant was
not vested when payment was made no later than 2 1⁄2 months following the
close of the Plan Year in which such participant becomes fully vested in such
Pool, and, for all Pools with respect to Plan Years after 2006, no later than
2 1⁄2 months following the close of the Plan Year in which such participant
becomes vested in an 


 


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additional
amount in such Pool.  For purposes of
this section, disability shall mean a physical or mental infirmity which
impairs the employee’s ability to substantially perform his employment duties
with the Company on a full-time basis for a period of 120 consecutive business
days, and the employee has not returned to full-time performance of his
employment duties within 30 days after notice by the Company of its intention
to terminate employment of the employee as a result thereof.


 


7.             Pool Payments Not Compensation
for Other Purposes.  Allocations or
payments to participants under the Plan shall not be deemed to constitute
compensation of any nature for purposes of any other compensation, retirement
or other benefit plan of the Company.  To
the extent that any such other plan contains provisions contrary to the
foregoing sentence, such other plan shall be deemed to be amended to conform to
the foregoing sentence.


 


8.             No Ownership of Underlying
Assets.  Net profits interests
allocated under the Plan shall not constitute for the participants therein the
ownership of real property interests in the mineral properties of the
Company.  Rather such net profits
interests shall constitute solely a right to receive payments from the Company,
or from a fund or trust established by the Company for that purpose, the amount
of which shall be determined by such net profits interests and the Plan.


 


9.             Timing of Payments.  Payments to participants under the Plan shall
be made annually, or more frequently as determined by the Board of
Directors.  Pursuant to the transition
provisions for Section 409A of the Internal Revenue Code of 1986 (the “Code”)
under Internal Revenue Service Notice 2006-79, the Company, in its discretion,
may allow a participant in the Plan to elect, on or before December 31,
2007, to change the time and form of payments due to such participant under the
Plan with respect to Pools for Plan Years after 2004, provided that such
election may not (i) change payments that would otherwise be payable under
the Plan to such participant during 2007, or (ii) cause an amount to be
paid to such participant in 2007 that otherwise would not be payable under the
Plan to such participant in 2007.


 


The
right to payments under the Plan shall not be subject to voluntary or
involuntary assignment by any participant thereunder other than as follows:


 


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(a)           upon death pursuant to:


 


(i)            a will;


 


(ii)           the laws of descent and distribution;
or


 


(iii)          a
beneficiary designation form approved by the Company and executed by the
participant which designates the persons or entities to receive, upon the
participant’s death, the right to payments under the Plan which the participant
had upon the participant’s death; or


 


(b)           pursuant to a
qualified domestic relations order, as defined under Section 414(p) of
the Code, relating to the provision of child support, alimony payments, or
marital property rights to a spouse, former spouse, child or other dependent of
the participant.


 


The
Company shall have the right to require that any recipient of payments under
the Plan who is not an employee of the Company at the time of payment shall be
responsible for the payment of all amounts required to satisfy all federal,
state and local withholding taxes applicable to such recipient with respect to
such payments under the Plan.


 


10.           Termination Rights.  With respect to Plan Years ending on or
before December 31, 2004, the Company shall have the right, as provided
under the terms of the Plan as in effect on October 3, 2004 and therefore
subject to the grandfather provisions of Section 409A of the Code pursuant
to Internal Revenue Service Notice 2005-1, at any time or from time to time to
acquire the rights of all participants in any Plan Year if the participants
holding no less than two-thirds of that Plan Year’s interests have agreed in
writing to the terms and conditions of a buy-out of that Plan Year.


 


Pursuant to the limited cashout provisions of Section 1.409A-3(j)(4)(v) of
the Treasury Regulations, the Company shall have the discretion to
require a mandatory lump sum payment to a participant of amounts due under the
Plan that do not exceed the then applicable dollar amount under Section 402(g)(1)(B) of
the Code, provided that:


 


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(a)           any required
exercise of discretion by the Company is evidenced in writing no later than the
date of such payment; and


 


(b)           The payment
results in the termination and liquidation of the entirety of the participant’s
interest under the Plan, including all agreements, methods, programs, or other
arrangements with respect to which deferrals of compensation are treated as
having been deferred under a single nonqualified deferred compensation plan
under Section 1.409A-1(c)(2) of the Treasury Regulations.


 


The
Company shall have the right at any time or from time to time to terminate and
liquidate the Plan and acquire the rights of all participants in the Plan for
their fair market values (reflecting the discounted present values of the
payment of such purchase price) if the participants holding no less than
two-thirds of the aggregate values of the interests in the Plan have agreed in
writing to the terms and conditions of a buy-out and if:


 


(a)           the termination and
liquidation of the Plan does not occur proximate to a downturn in the financial
health of the Company;


 


(b)           the Company
terminates and liquidates all arrangements sponsored by the Company that would
be aggregated with this Plan under Section 409A of the Code;


 


(c)           no payments in
liquidation of the Plan are made within 12 months of the date the Company takes
all necessary actions to irrevocably terminate and liquidate the Plan, other
than payments that would be payable under the terms of the Plan if the action
to terminate and liquidate the Plan had not occurred;


 


(d)           all termination and
liquidation payments are made within 24 months of the date the Company takes
all necessary action to irrevocably terminate and liquidate the Plan; and


 


(e)           the Company does not
adopt any new plan or arrangement that would be aggregated with this Plan if
any participant in this Plan would participate in such other 


 


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plan
or arrangement at any time within 3 years following the date the Company takes
all necessary action to irrevocably terminate and liquidate the Plan.


 


11.           Change of Control Provision.  Pursuant to the provisions of Section 409A(a)(2)(A)(v) of
the Code and Section 1.409A-3(i)(5) of the Treasury Regulations and
the following provisions of this Section 11, upon the occurrence of an
objectively determinable change in the ownership of the Company, change in
effective control of the Company, or change in the ownership of a substantial
portion of the assets of the Company (as such events are defined in Section 1.409A-3(i)(5)(v) -
(vii) of the Treasury Regulations), the Company shall be permitted to
purchase the net profits interests of all of the participants in the Plan with
respect to (i) all Plan Years from and after the Plan Year 2006, and (ii) the
Plan Year 2005, subject to the consent of the participants in such Plan Year
since such Plan Year was not subject to a change of control purchase provision
when the Pool for such Plan Year was originally established.  Any such purchase of interests shall be made
by the Company pursuant to an irrevocable action taken by the Company within
the 30 days preceding or the 12 months following the change of control event,
payments for any such purchase shall be made within 12 months of the date of
such irrevocable action, and in the event of any such purchase all agreements,
methods, programs, and other arrangements sponsored by the Company immediately
after the time of the change of control event with respect to which deferrals
of compensation are treated as having been deferred under a single plan under Section 1.409A-1(c)(2) of
the Treasury Regulations shall be terminated and liquidated.


 


The
purchase prices of such net profits interests shall be their fair market values
(reflecting the discounted present values of the payment of such purchase
price) determined by good faith negotiations between the Company and
representatives of the Plan, and such purchase prices shall be payable in cash
promptly following their determination. 
Such representatives shall be (i) with respect to the Plan Years
from and after the Plan Year 2006, the three participants who hold the three
aggregate largest interests by total value in all affected Plan Years from and
after the Plan Year 2006, as determined by the Company, and who are willing and
able to serve in such capacity, and (ii) with respect to the Plan Year
2005, the three participants who hold the three largest interests by value in
such Plan Year, as determined by the Company, and who are willing and able to
serve in such capacity.  The Company and
such 


 


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representatives
may, at the expense of the Company, engage such consultants to assist with such
determination as they may select.  In the
event that following a reasonable period of time the Company and such
representatives are unable to reach agreement on such fair market values or any
portion thereof, the determination of such fair market values shall be made by
an independent party of recognized national stature with competence and
experience with respect to the sale and purchase of interests in oil and gas
properties and the valuation thereof. 
The above described determination shall be final, conclusive and binding
on all participants in the Plan.


 


In
making such determination of the purchase prices of the net profits interests
set forth above, the Company and the representatives of the Plan, and the above
described independent party if applicable, shall consider all facts and
circumstances they deem to be reasonably relevant, including but not limited to
the terms of the transaction constituting the applicable change of control
event.  The Company and the
representatives of the Plan shall have no liability with respect to the above
described determination except for gross negligence or willful neglect and such
representatives shall be indemnified by the Company with respect to any claim
arising out of such determination, and any expense associated therewith,
including reasonable attorney’s fees, in the absence of gross negligence and
willful neglect.


 


12.           Interpretation of Plan.  All matters with respect to the
interpretation and application of the Plan shall be conclusively determined by
the Compensation Committee of the Board of Directors of the Company.


 


13.           Reservation of Right to Terminate
or Amend.  The Plan may be terminated
or modified prospectively at any time by the Board of Directors, subject to the
requirements of Section 10. 
Notwithstanding the foregoing, no payment of benefits shall be made to
participants except to the extent otherwise provided herein.  Nothing contained in the Plan shall
constitute a contract, express or implied, or any other type of obligation with
respect to the employment or the continued employment by the Company of any person.


 


14.           Section 409A Compliance.  This Plan is intended in all respects to
comply with the provisions of Section 409A of the Code and the Company
shall interpret and administer the Plan in all respects in a manner consistent
with such provisions.  Amounts that were
deferred and 


 


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vested
prior to January 1, 2005 are intended to be grandfathered and exempt from
Section 409A pursuant to the terms of Internal Revenue Service Notice
2005-1.  In accordance with
Section 1.409A-3(j)(4)(vii) of the Treasury Regulations (or any
subsequent corresponding provision of law), should there be a final
determination that this Plan fails to meet the requirements of Section 409A
and the regulations thereunder with respect to any participant, the Company may
distribute to the participant an amount not to exceed the amount required to be
included in income as a result of the failure to comply with the requirements
of Section 409A and the regulations. 
Notwithstanding anything herein to the contrary, in the event of any
payment to a “specified employee” as defined by Section 409A(a)(2)(B)(i) of
the Code, any payment that would otherwise be made on account of such employee’s
separation from service before the expiration of six months following the date
of such separation shall be made on the first day following the expiration of
six months from the date of separation of service.


 


*     *     *    
*     *


 


This
amended Net Profits Interest Bonus Plan was approved by the Board of Directors
of SM Energy Company on July 30, 2010.


 


	
   

  	
  SM
  ENERGY COMPANY

  
	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/ ANTHONY J. BEST

  
	
   

  	
  Chief
  Executive Officer and President

  



 


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