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EXHIBIT 10.3




FORM
OF EAGLE ROCK ENERGY PARTNERS, L.P.

LONG-TERM INCENTIVE PLAN




     SECTION 1. Purpose of the Plan.



     The
Eagle Rock Energy Partners, L.P. Long-Term Incentive Plan (the “Plan”) has been adopted by Eagle
Rock Energy G&P, LLC, a Delaware limited liability company (the “General Partner”), the general
partner of Eagle Rock Energy GP, L.P., which is, in turn, the general partner of Eagle Rock Energy
Partners, L.P., a Delaware limited partnership (the “Partnership”). The Plan is intended to
promote the interests of the Partnership and its Affiliates by providing to Employees, Consultants
and Directors incentive compensation awards based on Units to encourage superior performance. The
Plan is also contemplated to enhance the ability of the Partnership and its Affiliates to attract
and retain the services of individuals who are essential for the growth and profitability of the
Partnership and to encourage them to devote their best efforts to advancing the business of the
Partnership.



     SECTION 2. Definitions.



     As used in the Plan, the following terms shall have the meanings set forth below:



     “Affiliate” means, with respect to any Person, any other Person that directly or indirectly
through one or more intermediaries controls, is controlled by or is under common control with, the
Person in question. As used herein, the term “control” means the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of a Person, whether
through ownership of voting securities, by contract or otherwise.



     “Award” means an Option, Restricted Unit, Phantom Unit, Substitute Award or Unit Award granted
under the Plan, and shall include any tandem DERs granted with respect to a Phantom Unit.



     “Award Agreement” means the written or electronic agreement by which an Award shall be
evidenced.



     “Board” means the Board of Directors of the General Partner.



     “Change of Control” means, and shall be deemed to have occurred upon one or more of the
following events:



          (i) any “person” or “group” within the meaning of those terms as used in Sections 13(d) and
14(d)(2) of the Exchange Act, other than or members of the NRG Group, shall become the beneficial
owner, by way of merger, consolidation, recapitalization, reorganization or otherwise, of 50% or
more of the voting power of the voting securities of the General Partner or the Partnership;




 









 








          (ii) the limited partners of the General Partner or the Partnership approve, in one or a
series of transactions, a plan of complete liquidation of the General Partner or the Partnership;




          (iii) the sale or other disposition by the General Partner or the Partnership of all or
substantially all of its assets in one or more transactions to any Person other than an Affiliate;
or




          (iv) the General Partner or an Affiliate of the General Partner or the Partnership ceases to
be the general partner of the Partnership.



For purposes of this Plan, “NRG Group” shall mean Natural Gas Partners VII, L.P., Natural Gas
Partners VIII, L.P., Natural Gas Partners, L.L.C. d/b/a NGP Energy Capital Management, and their
respective Affiliates (other than the Partnership, the General Partner, the general partner of the
Partnership and their respective subsidiaries) and their Affiliate’s respective directors,
officers, shareholders, members, managers, representatives of management committees and employees
(and members of their respective families and trusts for the primary benefit of such family
members).



Notwithstanding the foregoing, with respect to an Award that is subject to Section 409A of the
Internal Revenue Code, “Change of Control” shall have the meaning ascribed to “change of control
events” in the regulations issued with respect to Section 409A.




     “Committee” means the Board, the Compensation Committee of the Board or such other committee
as may be appointed by the Board to administer the Plan.



     “Consultant” means an individual who renders consulting or advisory services to General
Partner or an Affiliate thereof, other than a member of the NRG Group.



     “DER” means a distribution equivalent right, being a contingent right, granted in tandem with
a specific Phantom Unit, to receive with respect to each Unit subject to the Award an amount in
cash equal to the cash distributions made by the Partnership with respect to a Unit during the
period such Award is outstanding.



     “Director” means a member of the Board or the board of an Affiliate of the General Partner who
is not an Employee or a Consultant (other than in that individual’s capacity as a Director).



     “Employee” means an employee of the Partnership or an Affiliate of the Partnership, other than
a member of the NRG Group.



     “Exchange Act” means the Securities Exchange Act of 1934, as amended.



     “Fair Market Value” means, on any relevant date, the closing sales price of a Unit on the
principal national securities exchange or other market in which trading in Units occurs on the last
market trading day prior to the applicable day (or, if there is no trading in the Units on such
date, on the next preceding day on which there was trading) as reported in The Wall Street Journal
(or other reporting service approved by the Committee). If Units are not traded on a national



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securities exchange or other market at the time a determination of Fair Market Value is
required to be made hereunder, the determination of Fair Market Value shall be made in good faith
by the Committee.



     “Option” means an option to purchase Units granted under the Plan.



     “Participant” means an Employee, Consultant or Director granted an Award under the Plan.



     “Partnership Agreement” means the Agreement of Limited Partnership of the Partnership, as it
may be amended or amended and restated from time to time.



     “Person” means an individual or a corporation, limited liability company, partnership, joint
venture, trust, unincorporated organization, association, governmental agency or political
subdivision thereof or other entity.



     “Phantom Unit” means a notional Unit granted under the Plan which upon vesting entitles the
Participant to receive a Unit or an amount of cash equal to the Fair Market Value of a Unit, as
determined by the Committee in its discretion.



     “Restricted Period” means the period established by the Committee with respect to an Award
during which the Award remains subject to forfeiture and is either not exercisable by or payable to
the Participant, as the case may be.



     “Restricted Unit” means a Unit granted under the Plan that is subject to a Restricted Period.



     “Rule 16b-3” means Rule 16b-3 promulgated by the SEC under the Exchange Act or any successor
rule or regulation thereto as in effect from time to time.



     “SEC” means the Securities and Exchange Commission, or any successor thereto.



     “Substitute Award” means an award granted pursuant to Section 6(d) of the Plan.



     “UDR” means a distribution made by the Partnership with respect to a Restricted Unit.



     “Unit” means a Common Unit of the Partnership.



     “Unit Award” means an award granted pursuant to Section 6(c) of the Plan.



     SECTION 3. Administration.



     The Plan shall be administered by the Committee. A majority of the Committee shall constitute
a quorum, and the acts of the members of the Committee who are present at any meeting thereof at
which a quorum is present, or acts unanimously approved by the members of the Committee in writing,
shall be the acts of the Committee. Subject to the following and any applicable law, the
Committee, in its sole discretion, may delegate any or all of its powers and duties under the Plan,
including the power to grant Awards under the Plan, to the Chief



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Executive Officer of the General Partner, subject to such limitations on such delegated powers
and duties as the Committee may impose, if any. Upon any such delegation all references in the
Plan to the “Committee”, other than in Section 7, shall be deemed to include the Chief Executive
Officer. Any such delegation shall not limit the Chief Executive Officer’s right to receive Awards
under the Plan; provided, however, the Chief Executive Officer may not grant Awards to himself, a
Director or any executive officer of the General Partner or an Affiliate, or take any action with
respect to any Award previously granted to himself, a person who is an executive officer or a
Director. Subject to the terms of the Plan and applicable law, and in addition to other express
powers and authorizations conferred on the Committee by the Plan, the Committee shall have full
power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to
be granted to a Participant; (iii) determine the number of Units to be covered by Awards; (iv)
determine the terms and conditions of any Award; (v) determine whether, to what extent, and under
what circumstances Awards may be settled, exercised, canceled, or forfeited; (vi) interpret and
administer the Plan and any instrument or agreement relating to an Award made under the Plan; (vii)
establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall
deem appropriate for the proper administration of the Plan; and (viii) make any other determination
and take any other action that the Committee deems necessary or desirable for the administration of
the Plan. The Committee may correct any defect or supply any omission or reconcile any
inconsistency in the Plan or an Award Agreement in such manner and to such extent as the Committee
deems necessary or appropriate. Unless otherwise expressly provided in the Plan, all designations,
determinations, interpretations, and other decisions under or with respect to the Plan or any Award
shall be within the sole discretion of the Committee, may be made at any time and shall be final,
conclusive, and binding upon all Persons, including, without limitation, the General Partner, the
Partnership, any Affiliate, any Participant, and any beneficiary of any Participant.



     SECTION 4. Units.



     (a) Limits on Units Deliverable. Subject to adjustment as provided in Section 4(c),
the number of Units that may be delivered with respect to Awards under the Plan is 1,000,000.
Units withheld from an Award to satisfy the Partnership’s or an Affiliate’s tax withholding
obligations with respect to the Award shall not be considered to be Units delivered under the Plan
for this purpose. If any Award is forfeited, cancelled, exercised, or otherwise terminates or
expires without the actual delivery of Units pursuant to such Award (the grant of Restricted Units
is not a delivery of Units for this purpose), the Units subject to such Award shall again be
available for Awards under the Plan. There shall not be any limitation on the number of Awards
that may be granted and paid in cash.



     (b) Sources of Units Deliverable Under Awards. Any Units delivered pursuant to an
Award shall consist, in whole or in part, of Units acquired in the open market, from any Affiliate,
the Partnership or any other Person, or any combination of the foregoing, as determined by the
Committee in its discretion.



     (c) Adjustments. In the event of any distribution (whether in the form of Units,
other securities or property other than cash), recapitalization, split, reverse split,
reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of
Units or other securities of the Partnership, issuance of warrants or other rights to purchase
Units or other



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securities of the Partnership, or other similar transaction or event, the Committee shall
proportionally adjust the number of Units covered by each outstanding Award and the terms,
including the exercise price (if any), of such Award to reflect such transaction and shall also
adjust the number and type of Units (or other securities or property) with respect to which Awards
may be granted.



     SECTION 5. Eligibility.



     Any Employee, Consultant or Director shall be eligible to be designated a Participant and
receive an Award under the Plan.



     SECTION 6. Awards.



     (a) Options. The Committee shall have the authority to determine the Employees,
Consultants and Directors to whom Options shall be granted, the number of Units to be covered by
each Option, the purchase price therefor and the Restricted Period and other conditions and
limitations applicable to the exercise of the Option, including the following terms and conditions
and such additional terms and conditions, as the Committee shall determine, that are not
inconsistent with the provisions of the Plan.




     (i) Exercise Price. The exercise price per Unit purchasable under an Option
shall be determined by the Committee at the time the Option is granted but, except with
respect to Substitute Awards, may not be less than the Fair Market Value of a Unit as of the
date of grant of the Option.




     (ii) Time and Method of Exercise. The Committee shall determine the exercise
terms and the Restricted Period with respect to an Option grant, which may include, without
limitation, a provision for accelerated vesting upon the achievement of specified
performance goals or other events, and the method or methods by which payment of the
exercise price with respect thereto may be made or deemed to have been made, which may
include, without limitation, cash, check acceptable to the General Partner, a
“cashless-broker” exercise through procedures approved by the General Partner, or any
combination of methods, having a Fair Market Value on the exercise date equal to the
relevant exercise price.




     (iii) Forfeitures. Except as otherwise provided in the terms of the Option
grant, upon termination of a Participant’s employment with the General Partner and its
Affiliates or membership on the Board, whichever is applicable, for any reason during the
applicable Restricted Period, all unvested Options shall be forfeited by the Participant.
The Committee may, in its discretion, waive in whole or in part such forfeiture with respect
to a Participant’s Options.



     (b) Restricted Units and Phantom Units. The Committee shall have the authority to
determine the Employees, Consultants and Directors to whom Restricted Units or Phantom Units shall
be granted, the number of Restricted Units or Phantom Units to be granted to each such Participant,
the Restricted Period, the conditions under which the Restricted Units or Phantom Units may become
vested or forfeited and such other terms and conditions as the Committee may establish with respect
to such Awards.



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     (i) DERs. To the extent provided by the Committee, in its discretion, a grant
of Phantom Units may include a tandem DER grant, which may provide that such DERs shall be
paid directly to the Participant, be credited to a bookkeeping account (with or without
interest in the discretion of the Committee) subject to the same vesting restrictions as the
tandem Phantom Unit Award, or be subject to such other provisions or restrictions as
determined by the Committee in its discretion. Absent a contrary provision in the Award
Agreement, DERs shall be paid to the Participant without restriction.




     (ii) UDRs. To the extent provided by the Committee, in its discretion, a grant
of Restricted Units may provide that distributions made by the Partnership with respect to
the Restricted Units shall be subject to the same forfeiture and other restrictions as the
Restricted Unit and, if restricted, such distributions shall be held, without interest,
until the Restricted Unit vests or is forfeited with the UDR being paid or forfeited at the
same time, as the case may be. Absent such a restriction on the UDRs in the Award
Agreement, UDRs shall be paid to the holder of the Restricted Unit without restriction.




     (iii) Forfeitures. Except as otherwise provided in the terms of the Restricted
Units or Phantom Units Award Agreement, upon termination of a Participant’s employment with,
or consultant services to, the General Partner and its Affiliates or membership on the
Board, whichever is applicable, for any reason during the applicable Restricted Period, all
outstanding, unvested Restricted Units and Phantom Units awarded the Participant shall be
automatically forfeited on such termination. The Committee may, in its discretion, waive in
whole or in part such forfeiture with respect to a Participant’s Restricted Units and/or
Phantom Units.




     (iv) Lapse of Restrictions.




     (A) Phantom Units. Upon or as soon as reasonably practical following
the vesting of each Phantom Unit, subject to the provisions of Section 8(b), the
Participant shall be entitled to receive one Unit or cash equal to the Fair Market
Value of a Unit, as determined by the Committee in its discretion.




     (B) Restricted Units. Upon or as soon as reasonably practical
following the vesting of each Restricted Unit, subject to satisfying the tax
withholding obligations of Section 8(b), the Participant shall be entitled to have
the restrictions removed from his or her Unit certificate so that the Participant
then holds an unrestricted Unit.



     (c) Unit Awards. Units not subject to a Restricted Period may be granted under the
Plan to any Employee, Consultant or Director as a bonus or additional compensation or in lieu of
cash compensation the individual is otherwise entitled to receive, in such amounts as the Committee
determines to be appropriate.



     (d) Substitute Awards. Awards may be granted under the Plan in substitution for
similar awards held by individuals who become Employees, Consultants or Directors as a result of a
merger, consolidation or acquisition by the Partnership or an Affiliate of another entity or



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the assets of another entity. Such Substitute Awards that are Options may have exercise
prices less than the Fair Market Value of a Unit on the date of such substitution.



        (e) General.




     (i) Awards May Be Granted Separately or Together. Awards may, in the
discretion of the Committee, be granted either alone or in addition to, in tandem with, or
in substitution for any other Award granted under the Plan or any award granted under any
other plan of the Partnership or any Affiliate. Awards granted in addition to or in tandem
with other Awards or awards granted under any other plan of the Partnership or any Affiliate
may be granted either at the same time as or at a different time from the grant of such
other Awards or awards.




     (ii) Limits on Transfer of Awards.




     (A) Except as provided in Paragraph (C) below, each Option shall be exercisable
only by the Participant during the Participant’s lifetime, or by the person to whom
the Participant’s rights shall pass by will or the laws of descent and distribution.




     (B) Except as provided in Paragraph (C) below, no Award and no right under any
such Award may be assigned, alienated, pledged, attached, sold or otherwise
transferred or encumbered by a Participant and any such purported assignment,
alienation, pledge, attachment, sale, transfer or encumbrance shall be void and
unenforceable against the General Partner, the Partnership or any Affiliate.




     (C) To the extent specifically provided by the Committee with respect to an
Option, an Option may be transferred by a Participant without consideration to
immediate family members or related family trusts, limited partnerships or similar
entities or on such terms and conditions as the Committee may from time to time
establish.




     (iii) Term of Awards. The term of each Award shall be for such period as may
be determined by the Committee.




     (iv) Unit Certificates. All certificates for Units or other securities of the
Partnership delivered under the Plan pursuant to any Award or the exercise thereof shall be
subject to such stop transfer orders and other restrictions as the Committee may deem
advisable under the Plan or the rules, regulations, and other requirements of the SEC, any
stock exchange upon which such Units or other securities are then listed, and any applicable
federal or state laws, and the Committee may cause a legend or legends to be inscribed on
any such certificates to make appropriate reference to such restrictions.




     (v) Consideration for Grants. Awards may be granted for such consideration,
including services, as the Committee shall determine.



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     (vi) Delivery of Units or other Securities and Payment by Participant of
Consideration. Notwithstanding anything in the Plan or any Award Agreement to the
contrary, delivery of Units pursuant to the exercise or vesting of an Award may be deferred
for any period during which, in the good faith determination of the Committee, the General
Partner is not reasonably able to obtain Units to deliver pursuant to such Award without
violating applicable law or the applicable rules or regulations of any governmental agency
or authority or securities exchange. No Units or other securities shall be delivered
pursuant to any Award until payment in full of any amount required to be paid pursuant to
the Plan or the applicable Award Agreement (including, without limitation, any exercise
price or tax withholding) is received by the General Partner.




     (vii) Change of Control. Unless specifically provided otherwise in the Award
Agreement, upon a Change of Control all outstanding Awards shall automatically vest and be
payable at their maximum level (all performance criteria, if any, shall be deemed fully
achieved at the maximum level) or become exercisable in full, as the case may be.



     SECTION 7. Amendment and Termination.



     Except to the extent prohibited by applicable law:




     (a) Amendments to the Plan. Except as required by the rules of the principal
securities exchange on which the Units are traded and subject to Section 7(b) below, the
Board may amend, alter, suspend, discontinue, or terminate the Plan in any manner, including
increasing the number of Units available for Awards under the Plan, without the consent of
any partner, Participant, other holder or beneficiary of an Award, or any other Person.




     (b) Amendments to Awards. Subject to Section 7(a), the Committee may waive any
conditions or rights under, amend any terms of, or alter any Award theretofore granted,
provided no change, other than pursuant to Section 7(c), in any Award shall materially
reduce the benefit to a Participant without the consent of such Participant.




     (c) Actions Upon the Occurrence of Certain Events. Upon the occurrence of a
Change of Control, any change in applicable law or regulation affecting the Plan or Awards
thereunder, or any change in accounting principles affecting the financial statements of the
Partnership, the Committee, in its sole discretion and on such terms and conditions as it
deems appropriate, may take any one or more of the following actions in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be made available
under the Plan or an outstanding Award:




     (A) provide for either (i) the termination of any Award in exchange for an
amount of cash, if any, equal to the amount that would have been attained upon the
exercise of such Award or realization of the Participant’s rights (and, for the
avoidance of doubt, if as of the date of the occurrence of such transaction or event
the Committee determines in good faith that no amount would have been attained upon
the exercise of such Award or realization of the Participant’s rights, then such
Award may be terminated by the Company without payment) or (ii) the



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replacement of such Award with other rights or property selected by the
Committee in its sole discretion;




     (B) provide that such Award be assumed by the successor or survivor entity, or
a parent or subsidiary thereof, or be exchanged for similar options, rights or
awards covering the equity of the successor or survivor, or a parent or subsidiary
thereof, with appropriate adjustments as to the number and kind of equity interests
and prices;




     (C) make adjustments in the number and type of Units (or other securities or
property) subject to outstanding Awards, and in the number and kind of outstanding
Awards and/or in the terms and conditions of (including the exercise price), and the
vesting and performance criteria included in, outstanding Awards, or both;




     (D) provide that such Award shall be exercisable or payable, notwithstanding
anything to the contrary in the Plan or the applicable Award Agreement; and




     (E) provide that the Award cannot be exercised or become payable after such
event, i.e., shall terminate upon such event.




Notwithstanding the foregoing, with respect to an above event that is also described in
Section 4(c), the mandatory adjustment provisions in Section 4(c) shall control to the
extent they are in conflict with the discretionary provisions of this Section 7 if the
exercise of such discretion would result in adverse compensation charges to the Partnership
for accounting purposes.



        SECTION 8. General Provisions.



     (a) No Rights to Award. No Person shall have any claim to be granted any Award under
the Plan, and there is no obligation for uniformity of treatment of Participants. The terms and
conditions of Awards need not be the same with respect to each recipient.



     (b) Tax Withholding. Unless other arrangements have been made that are acceptable to
the General Partner or an Affiliate, the Partnership or Affiliate is authorized to withhold from
any Award, from any payment due or transfer made under any Award or from any compensation or other
amount owing to a Participant the amount (in cash, Units, Units that would otherwise be issued
pursuant to such Award or other property) of any applicable taxes payable in respect of the grant
of an Award, its exercise, the lapse of restrictions thereon, or any payment or transfer under an
Award or under the Plan and to take such other action as may be necessary in the opinion of the
General Partner or Affiliate to satisfy its withholding obligations for the payment of such taxes.



     (c) No Right to Employment or Services. The grant of an Award shall not be construed
as giving a Participant the right to be retained in the employ of the General Partner or any
Affiliate or to remain on the Board, as applicable. Furthermore, the General Partner or an
Affiliate may at any time dismiss a Participant from employment free from any liability or any



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claim under the Plan, unless otherwise expressly provided in the Plan, any Award Agreement or
other agreement.



     (d) Governing Law. The validity, construction, and effect of the Plan and any rules
and regulations relating to the Plan shall be determined in accordance with the laws of the State
of Texas without regard to its conflicts of laws principles.



     (e) Severability. If any provision of the Plan or any Award is or becomes or is
deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award,
or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such
provision shall be construed or deemed amended to conform to the applicable law or, if it cannot be
construed or deemed amended without, in the determination of the Committee, materially altering the
intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person
or Award and the remainder of the Plan and any such Award shall remain in full force and effect.



     (f) Other Laws. The Committee may refuse to issue or transfer any Units or other
consideration under an Award if, in its sole discretion, it determines that the issuance or
transfer of such Units or such other consideration might violate any applicable law or regulation,
the rules of the principal securities exchange on which the Units are then traded, or entitle the
Partnership or an Affiliate to recover the same under Section 16(b) of the Exchange Act, and any
payment tendered to the General Partner by a Participant, other holder or beneficiary in connection
with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or
beneficiary.



     (g) No Trust or Fund Created. Neither the Plan nor any Award shall create or be
construed to create a trust or separate fund of any kind or a fiduciary relationship between the
General Partner or any Affiliate and a Participant or any other Person. To the extent that any
Person acquires a right to receive payments from the General Partner or any Affiliate pursuant to
an Award, such right shall be no greater than the right of any general unsecured creditor of the
General Partner or such Affiliate.



     (h) No Fractional Units. No fractional Units shall be issued or delivered pursuant to
the Plan or any Award, and the Committee shall determine whether cash, other securities, or other
property shall be paid or transferred in lieu of any fractional Units or whether such fractional
Units or any rights thereto shall be canceled, terminated, or otherwise eliminated.



     (i) Headings. Headings are given to the Sections and subsections of the Plan solely
as a convenience to facilitate reference. Such headings shall not be deemed in any way material or
relevant to the construction or interpretation of the Plan or any provision thereof.



     (j) Facility Payment. Any amounts payable hereunder to any person under legal
disability or who, in the judgment of the Committee, is unable to manage properly his financial
affairs, may be paid to the legal representative of such person, or may be applied for the benefit
of such person in any manner that the Committee may select, and the General Partner shall be
relieved of any further liability for payment of such amounts.



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     (k) Participation by Affiliates. In making Awards to Employees employed by an entity
other than the General Partner, the Committee shall be acting on behalf of the Affiliate, and to
the extent the Partnership has an obligation to reimburse the Affiliate for compensation paid for
services rendered for the benefit of the Partnership, such payments or reimbursement payments may
be made by the Partnership directly to the Affiliate.



     (l) Gender and Number. Words in the masculine gender shall include the feminine
gender, the plural shall include the singular and the singular shall include the plural.



     SECTION 9. Term of the Plan.



     The Plan shall be effective on the date of its approval by the Board and shall continue until
the earliest of (i) the date terminated by the Board, (ii) all Units available under the Plan have
been paid to Participants, or (iii) the 10th anniversary of the date the Plan is approved by the
Board. Unless otherwise expressly provided in the Plan or in an applicable Award Agreement,
however, any Award granted prior to such termination, and the authority of the Committee to amend,
alter, adjust, suspend, discontinue, or terminate any such Award or to waive any conditions or
rights under such Award, shall extend beyond such termination date.




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