f10q0314ex10v_carbon.htm


Exhibit 10.5


 





 


Carbon Natural Gas Company


 


 


Annual Incentive Plan


 


 


2014






 




  





  











  












Carbon Natural Gas Company


2014 Annual Incentive Plan


 


Plan Objectives







The Annual Incentive Plan (the “Plan”) is designed to meet the following objectives:








	
  

	
·

	
Provide an annual incentive plan that is performance driven and focused on objectives that are critical to the success of Carbon Natural Gas Company and the creation of value for shareholders.













	
  

	
·

	
Offer competitive cash compensation opportunities to employees.













	
  

	
·

	
Reward outstanding achievement.













	
  

	
·

	
Recruit and retain key employees.







 


Plan Concept







The Plan provides Annual Incentive Awards which will be determined primarily on the basis of the Company’s results on financial and operating performance measures.







Sixty percent of the Incentive Award shall be based on financial and operating performance measures selected by the Board of Directors.







Forty percent of the Incentive Award will be based upon discretion of the Board of Directors.







The Plan period is from January 1, 2014 to December 31, 2014.







Performance Objective Measures and Weighting







The Board of Directors will establish the Performance Measures and Objectives, the Threshold, Target and Outstanding performance levels and the weighting for each Performance Measure.









	
Measure

	 	
Weighting

	 	 	
Target


	  	 	 	 	 	  
	
EBITDA per Debt Adjusted Share Growth

	 	 	20.00	%	 	
20% increase


	  	 	 	 	 	 	  
	
Increase in Net Total Proved Reserves

	 	 	10.00	%	 	
5% increase


	  	 	 	 	 	 	  
	
Net Annual Production Growth

	 	 	20.00	%	 	
10% increase


	  	 	 	 	 	 	  
	
Lease Operating Expenses ($/unit)

	 	 	20.00	%	 	
$1.10/mcfe (6:1)


	  	 	 	 	 	 	  
	
G&A per Unit of Production

	 	 	10.00	%	 	
$.80 per unit of production equivalent


	  	 	 	 	 	 	  
	
F&D Cost per Unit of Reserves

	 	 	20.00	%	 	
$1.70 per unit of reserve equivalent


	  	 	 	 	 	 	  
	
Total of Performance Measures

	 	 	100.00	%	 	
 









 




  





2











  












Carbon Natural Gas Company


2014 Annual Incentive Plan


 


Plan Administration


 


The Plan will be administered by the Committee and the Chief Executive Officer (for all positions except his own).  The Chief Financial Officer will verify the performance calculation for the financial and operating measures in consultation with the President, who shall be responsible for the estimation of the Company’s oil and gas reserves.







The CEO will establish the Incentive Award Pool for the non-officer employees and will allocate Incentive Awards to the Pool Participants at his discretion.







The Board cannot increase payout amounts above the outstanding level under performance categories that depend on the achievement of specific Company targets. Payments related to performance categories that are tied to the achievement of specific targets are capped once the highest level is achieved.  The Board can, in its reasonable discretion, reduce or increase the payout amounts for these performance categories after taking into account special or unusual factors that may have contributed to the achievement of target performance measures such as acquisitions, commodity prices or other factors considered appropriate by the Board.







Award Achievement Levels







Award Achievement Levels for the Plan will be:








	●	
Threshold

	
Minimum level at which Incentive Award payouts occur


	 	  	  
	●	
Target

	
Level at which the participant receives the Incentive Target Award percentage.


	 	  	  
	●	
Outstanding

	
Level at which the participant receives 200% of the Incentive Target Award percentage.







 


Completion percentages between Threshold, Target and Outstanding will be determined by interpolation.









Targets can be adjusted for material changes made during the year to the business plan or scope thereof, including the capital expenditure budget.


 




  





3











  











Carbon Natural Gas Company


2014 Annual Incentive Plan


 


Performance Levels







Performance levels will be set for each measure.  Performance results below the Threshold will equate to a zero completion percentage.







A minimum 30% completion threshold is required for the total Plan in order for Award payments to be made under the Plan.







Completion Calculation







Completion percentages for each individual measure will be equal to the calculated completion percentage of the measure times the weighting for that measure. The overall completion percentage for the Plan for financial and operating measures and department objectives will be the sum of the weighted completion percentages for each individual measure.







Participants







The CEO shall determine which employees are to be participants in the Plan.  If a participant’s employment with the Company terminates for any reason prior to payment, bonus awards (if any) will be paid at the discretion of the Board of Directors.







The Target Award percentages for the CEO and other officers of the Company (Exhibit A) are established by the Board of Directors.  Changes to Target Award percentages for Company officers are subject to the approval of the Board. The CEO is authorized to establish and adjust at his discretion the Target Award percentages for non-officer Plan participants and the allocation of incentive awards to the pool participants. All awards to officers under the Plan are subject to approval of the Board.







Incentive  Awards will be calculated based upon the participant’s average base salary during the Plan year or earned salary during the Plan year if the participant was a new hire during the year, took a leave of absence, or was absent due to a worker’s compensation issue.









  





4











  






 


Carbon Natural Gas Company


2014 Annual Incentive Plan


 



	
Performance Measure

	
EBITDA per Debt Adjusted Share Growth


	  	  
	
Objective

	
20% increase in EBITDA per Debt Adjusted Share Growth.


	  	  
	
Definition

	
The percentage increase in EBITDA per Debt Adjusted Share Growth from January 1, 2014 to December 31, 2014.







 



	
Awards Level

	
·

	
Threshold

	
12.5% increase


 


	  	
·

	
Target

	
20% increase


 


	  	
·

	
Outstanding

	
30% increase














  





5











  






 


Carbon Natural Gas Company


2014 Annual Incentive Plan


 



	
Performance Measure

	
Increase in Net Total Proved Reserves


	  	  
	
Objective

	
5% increase in Net Total Proved Reserves. All reserve calculations are based on SEC reserve rules.


	  	  
	  	
For purposes of the Plan, proved reserves shall be measured by calculating the natural gas equivalent value as determined by the ratio of the individual product annual average SEC prices at December 31, 2014.


	  	  
	
Definition

	
The percentage increase in the company’s Net Total Proved Reserves from January 1, 2014 to December 31, 2014.







 



	
Awards Level


 

	
·

	
Threshold

	
1% Reserve Growth


	  	
·

	
Target

	
5% Reserve Growth


 


	  	
·

	
Outstanding

	
15% Reserve Growth














  





6











  






 


Carbon Natural Gas Company


2014 Annual Incentive Plan


 



	
Performance Measure

	
Growth in Net Annual Production


	  	  
	
Objective

	
10% increase in net annual production.


	  	  
	  	
For purposes of the Plan, net equivalent production shall be measured by calculating the natural gas equivalent value as determined by the ratio of the individual product annual average SEC prices at December 31, 2014.


	  	  
	
Definition

	
The percentage increase in net production from January 1, 2014 to December 31, 2014.







 



	
Awards Level

	
·

	
Threshold


 

	
7.5% Increase


	  	
·

	
Target

	
10% Increase


 


	  	
·

	
Outstanding

	
15% Increase







                                




  





7











  






 


Carbon Natural Gas Company


2014 Annual Incentive Plan


 



	
Performance Measure

	
Lease Operating Cost $/unit of Net Production


	  	  
	
Objective

	
Lease Operating Expenses of $1.10/mcfe (6:1)


	  	  
	
Definition

	
Actual cash costs of the Company’s lease operating expenses.







 



	
Awards Level


 

	
·

	
Threshold

	
$1.21 per Unit


	  	
·

	
Target

	
$1.10 per Unit


 


	  	
·

	
Outstanding

	
$  .90 per Unit














  





8











  






 


Carbon Natural Gas Company


2014 Annual Incentive Plan


 



	
Performance Measure

	
G&A Cost  $/unit of Net Production


	  	  
	
Objective

	
General and Administrative Expense of $.80 per unit of Net Production Equivalent.


	  	  
	  	
For purposes of the Plan, net equivalent production shall be measured by calculating the natural gas equivalent value as determined by the ratio of the individual product annual average SEC prices at December 31, 2014.


	  	  
	
Definition

	
Actual cash costs of the company’s general and administrative expenses.







 



	
Awards Level


 

	
·

	
Threshold

	
$ .88 per Unit


	  	
·

	
Target

	
$ .80 per Unit


 


	  	
·

	
Outstanding

	
$ .72 per Unit














  





9











  






 


Carbon Natural Gas Company


2014 Annual Incentive Plan


 



	
Performance Measure

	
Finding and Development Cost  $/unit of Net Equivalent Reserve Additions


	  	  
	
Objective

	
Finding and Development Costs at $1.70 per unit of net  equivalent reserve additions through drilling and completion activities.


	  	  
	  	
For purposes of the Plan, net equivalent reserve additions shall be measured by calculating the natural gas equivalent value as determined by the ratio of the individual product annual average SEC prices at December 31, 2014.


	  	  
	
Definition

	
The quotient of capital expenditures divided by the change in proved reserves during 2014 after the addition of 2014 production.







 



	
Awards Level                                       


 

	
·

	
Threshold

	
$1.96 per Unit


	  	
·

	
Target

	
$1.70 per Unit


 


	  	
·

	
Outstanding

	
$1.40 per Unit














  





10











  











Exhibit A










	
Target Bonus Award Levels

	  	 	
%

	 
	  	  	 	 	 
	
Patrick R. McDonald

	
Chief Executive Officer

	 	 	100	 
	
Kevin D. Struzeski

	
Chief Financial Officer

	 	 	60	 
	
Mark D. Pierce

	
President

	 	 	60	 





 


 


11