EX-10.28 23 a2036361zex-10_28.txt EXHIBIT 10.28 CAP ROCK ENERGY CORPORATION 2001 STOCK INCENTIVE PLAN ----------------------------------- SECTION 1 - ESTABLISHMENT OF PLAN; PURPOSE OF PLAN 1.1 ESTABLISHMENT OF PLAN. The Corporation hereby establishes the 2001 Stock Incentive Plan (the "Plan") for its directors, officers (including corporate, divisional and Subsidiary officers), employees, and advisers and consultants rendering services to or for the Corporation, its divisions and Subsidiaries. The Plan permits the grant and award of Stock Options, Stock Appreciation Rights, Restricted Stock, Stock Awards and Tax Benefit Rights. 1.2 PURPOSE OF PLAN. The purpose of the Plan is to provide non-employee directors, officers, employees and advisers and consultants of the Corporation, its divisions and its Subsidiaries with an increased incentive to make significant and extraordinary contributions to the long-term performance and growth of the Corporation and its Subsidiaries, to join the interests of directors, officers, employees and advisers and consultants with the interests of the Corporation's Shareholders through the opportunity for increased stock ownership and to attract and retain directors, officers, employees and advisers and consultants of exceptional abilities. The Plan is further intended to provide flexibility to the Corporation in structuring long-term incentive compensation to best promote the foregoing objectives. SECTION 2 - DEFINITIONS The following words have the following meanings unless a different meaning is plainly required by the context: 2.1 "Acquisition Plan" means the proposed restructuring and conversion of Cap Rock Electric Cooperative, Inc. (CREC) from a member-owned electric cooperative to a regular corporation through the acquisition of all of the assets of CREC by the Corporation. 2.2 "Act" means the Securities Exchange Act of 1934, as amended. 2.3 "Board" means the Board of Directors of the Corporation. 2.4 "Cause" means (a) the unauthorized disclosure of any trade secret or confidential information of the Corporation or any Subsidiary, (b) the commission of an act of embezzlement or fraud, or (c) conviction of a felony which, in the discretion of the Board, causes or could cause substantial injury and discredit to the Corporation or any Subsidiary. 2.5 "Change in Control" means (a) the failure of the Continuing Directors at any time to constitute at least a majority of the members of the Board; (b) the acquisition by any Person other than an Excluded Holder of beneficial ownership (within the meaning of 1 Rule 13d-3 issued under the Act) of 20% or more of the outstanding Common Stock or the combined voting power of the Corporation's outstanding securities entitled to vote generally in the election of directors; (c) the approval by the Shareholders of the Corporation of a reorganization, merger or consolidation, unless with or into a Permitted Successor; or (d) the approval by the Shareholders of the Corporation of a complete liquidation or dissolution of the Corporation or the sale or disposition of all or substantially all of the assets of the Corporation other than to a Permitted Successor. 2.6 "Code" means the Internal Revenue Code of 1986, as amended. 2.7 "Committee" means the Compensation Committee of the Board or such other committee as the Board shall designate to administer the Plan. The Committee shall consist of at least two members of the Board and all of its members shall be "Non-Employee Directors" as defined in Rule 16b-3 issued under the Act. 2.8 "Common Stock" means the Common Stock of the Corporation, no par value. 2.9 "Corporation" means Cap Rock Energy Corporation and its successors and assigns. 2.10 "Continuing Directors" mean the individuals constituting the Board as of the date this Plan was approved and any subsequent directors whose election or nomination for election by the Corporation's Shareholders was approved by a vote of two-thirds of the individuals who are then Continuing Directors, but specifically excluding any individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as the term is used in Rule 14a-11 of Regulation 14A issued under the Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. 2.11 "Employee Benefit Plan" means any plan or program established by the Corporation or a Subsidiary for the compensation or benefit of employees of the Corporation or any of its Subsidiaries. 2.12 "Excluded Holder" means (a) any Person who at the time this Plan was approved was the beneficial owner of 20% or more of the outstanding Common Stock; or (i) the Corporation, a Subsidiary or any Employee Benefit Plan of the Corporation or a Subsidiary or any trust holding Common Stock or other securities pursuant to the terms of an Employee Benefit Plan. 2.13 "Incentive Award" means the award or grant of a Stock Option, Stock Appreciation Right, Restricted Stock, Stock Award or Tax Benefit Right to a Participant pursuant to the Plan. 2.14 "Market Value" of Common Stock means (a) if the Stock is listed on a national securities exchange, the closing price on the Stock on a given date; (b) if the Stock is traded on an exchange or market in which prices are reported on a bid and asked price, the average of the mean between the bid and asked price for the Stock on a given date; and (c) if the Stock is not listed on a national securities exchange nor 2 traded on the over-the-counter market, such value as the Committee, in good faith, shall determine. 2.15 "Participant" means any officer of the Corporation, its divisions or its Subsidiaries, any employee of the Corporation, its divisions or its Subsidiaries, any nonemployee director of the Corporation, or any adviser or consultant rendering services to or for the Corporation, its divisions or its Subsidiaries who the Committee determines is eligible to participate in the Plan and who is designated to be granted an Incentive Award under the Plan. 2.16 "Permitted Successor" means a corporation which, immediately following the consummation of a transaction specified in clauses (c) and (d) of the definition of "Change in Control" above, satisfies each of the following criteria: (a) 60% or more of the outstanding common stock of the corporation and the combined voting power of the outstanding securities of the corporation entitled to vote generally in the election of directors (in each case determined immediately following the consummation of the applicable transaction) is beneficially owned, directly or indirectly, by all or substantially all of the Persons who were the beneficial owners of the Corporation's outstanding Common Stock and outstanding securities entitled to vote generally in the election of directors respectively) immediately prior to the applicable transaction; (b) no Person other than an Excluded Holder beneficially owns, directly or indirectly, 20% or more of the outstanding common stock of the corporation or the combined voting power of the outstanding securities of the corporation entitled to vote generally in the election of directors (for these purposes the term Excluded Holder shall include the corporation, any Subsidiary of the corporation and any Employee Benefit Plan of the corporation or any such Subsidiary or any trust holding common stock or other securities of the corporation pursuant to the terms of any such Employee Benefit Plan); and (c) at least a majority of the board of directors is comprised of Continuing Directors. 2.17 "Person" has the same meaning asset forth in Sections 13(d) and 14(d) (2) of the Act. 2.18 "Restricted Period" means the period of time during which Restricted Stock awarded under the Plan is subject to restrictions. The Restricted Period may differ among Participants and may have different expiration dates with respect to shares of Common Stock covered by the same Incentive Award. 2.19 "Restricted Stock" means Common Stock awarded to a Participant pursuant to Section 7 of the Plan. 2.20 "Retirement" means the voluntary termination of all employment by a Participant, or the voluntary termination of a Participant as a director of the Corporation (as applicable), after the Participant has attained 62 years of age, or such other age as shall be determined by the Committee in its sole discretion or as otherwise may be set forth in the Incentive Award agreement or other grant document with respect to a Participant and a particular Incentive Award. 3 2.21 "Stock Appreciation Right" means any right granted to a Participant pursuant to Section 6 of the Plan. 2.22 "Stock Award" means an award of Common Stock awarded to a Participant pursuant to Section 8 of the Plan. 2.23 "Stock Option" means the right to purchase Common Stock at a stated price for a specified period of time. For purposes of the Plan, a Stock Option may be either an incentive stock option within the meaning of Section 422(b) of the Code or a nonqualified stock option. 2.24 "Subsidiary" means any corporation or other entity of which 50% or more of the outstanding voting stock or voting ownership interest is directly or indirectly owned or controlled by the Corporation or by one or more Subsidiaries of the Corporation. 2.25 "Tax Benefit Right" means any right granted to a Participant pursuant to Section 9 of the Plan. SECTION 3 - ADMINISTRATION 3.1 POWER AND AUTHORITY. The Committee shall administer the Plan, shall have full power and authority to interpret the provisions of the Plan and Incentive Awards granted under the Plan and shall have full power and authority to supervise the administration of the Plan and Incentive Awards granted under the Plan. All determinations, interpretations and selections made by the Committee regarding the Plan shall be final and conclusive. The Committee shall hold its meetings at such times and places as it deems advisable. Action may be taken by a written instrument signed by a majority of the members of the Committee and any action so taken shall be fully as effective as if it had been taken at a meeting duly called and held. The Committee shall make such rules and regulations for the conduct of its business as it deems advisable. The members of the Committee shall not be paid any additional fees for their services. 3.2 GRANTS OR AWARDS TO PARTICIPANTS. In accordance with and subject to the provisions of the Plan, the Committee shall have the authority to determine all provisions of Incentive Awards as the Committee may deem necessary or desirable and as are consistent with the terms of the Plan, including, without limitation, the following: (a) the persons who shall be selected as Participants; (b) the nature and the extent of the Incentive Awards to be made to each Participant (including the number of shares of Common Stock to be subject to each Incentive Award, any exercise price, the manner in which an Incentive Award will vest or become exercisable and the form of payment for the Incentive Award); (c) the time or times when Incentive Awards will be granted; (d) the duration of each Incentive Award; and (e) the restrictions and other conditions to which payment or vesting of Incentive Awards may be subject. 3.3 AMENDMENTS OR MODIFICATIONS OF AWARDS. The Committee shall have the authority to amend or modify the terms of any outstanding Incentive Award in any manner, provided that the amended or modified terms are not prohibited by the Plan as then in effect, including, without 4 limitation, the authority to: (a) modify the number of shares or other terms and conditions of an Incentive Award; (b) extend the term of an Incentive Award; (c) accelerate the exercisability or vesting or otherwise terminate any restrictions relating to an Incentive Award; (d) accept the surrender of any outstanding Incentive Award; and (e) to the extent not previously exercised or vested, authorize the grant of new Incentive Awards in substitution for surrendered Incentive Awards. Notwithstanding the foregoing or any other provision of the Plan, the terms of Stock Options automatically granted to nonemployee directors under the Plan shall not be amended or modified without the approval of the Board, except as necessary or desirable to comply with applicable laws, rules and regulations. 3.4 INDEMNIFICATION OF COMMITTEE MEMBERS. Each person who is or shall have been a member of the Committee shall be indemnified and held harmless by the Corporation from and against any cost, liability or expense imposed or incurred in connection with such person's or the Committee's taking or failing to take any action under the Plan. Each such person shall be justified in relying on information furnished in connection with the Plan's administration by any appropriate person or persons. SECTION 4 - SHARES SUBJECT TO THE PLAN 4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.3 of the Plan, a maximum of Five Hundred Thousand (500,000) shares of Common Stock shall be available for Incentive Awards under the Plan. Such shares shall be authorized and may be either unissued or treasury shares. If an Incentive Award is canceled, surrendered, modified, exchanged for a substitute Incentive Award or expires or terminates during the term of the Plan but prior to the exercise or vesting of the Incentive Award in full, the shares subject to but not delivered under such Incentive Award shall be available for other Incentive Awards. If shares subject to and otherwise deliverable upon the exercise of an Incentive Award are surrendered to the Corporation in connection with the exercise or vesting of an Incentive Award, the surrendered shares subject to the Incentive Award shall be available for other Incentive Awards. 4.2 ADJUSTMENTS. If the number of shares of Common Stock outstanding changes by reason of a stock dividend, stock split, recapitalization, consolidation, combination, exchange of shares or any other change in the corporate structure or shares of the Corporation, the number and kind of securities subject to and reserved under the Plan, together with applicable exercise prices, shall be appropriately adjusted. No fractional shares shall be issued pursuant to the Plan and any fractional shares resulting from adjustments shall be eliminated from the respective Incentive Awards, with an appropriate cash adjustment for the value of any Incentive Awards eliminated. SECTION 5 - STOCK OPTIONS 5.1 GRANT. A Participant may be granted one or more Stock Options under the Plan. The Committee, in its discretion, may provide in the initial grant of a Stock Option for the subsequent automatic grant of additional Stock Options for the number of shares, if any, that are subject to the initial Stock Option and surrendered to the Corporation in connection with the exercise of the initial or any subsequently granted Stock Option. Stock Options shall be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee 5 in its sole discretion. In addition, the Committee may vary, among Participants and among Stock Options granted to the same Participant, any and all of the terms and conditions of the Stock Options granted under the Plan. The Committee shall have complete discretion in determining the number of Stock Options granted to each participant. The Committee may designate whether a Stock Option awarded to an employee is to be considered an incentive stock option as defined in Section 422(b) of the Code. In no event shall the aggregate Market Value (determined at the time the option is awarded) of Common Stock with respect to which incentive stock options are exercisable for the first time by an individual during any calendar year (under all plans of the Corporation and all Subsidiaries) exceed $100,000. Any options granted in excess of this limit shall be treated as nonqualified stock options. 5.2 GRANTS TO NON-EMPLOYEE DIRECTORS. (a) SEMI-ANNUAL GRANTS OF FORMULA AWARDS. All non-employee directors who are serving on the applicable date shall automatically receive semi-annually, on _______________ and _____________ of each year a Stock Option to purchase _________________ shares of Common Stock at 100% of the Market Value on the date of grant. Such stock options shall be issued for a term of ________ (___) years using a form of agreement substantially similar to the standard form of Stock Option Agreement established by the Committee for executive officer Participants, adjusted as necessary due to the recipient's status as a nonemployee director. Nonemployee directors may pay the exercise price in any manner permitted for exercises by other Participants. Stock Options granted to nonemployee directors of the Corporation shall not qualify as incentive stock options. b) DISCRETIONARY AWARDS. A nonemployee director Participant may be granted non-qualified Stock Options pursuant to Section 5.1 of the Plan. The Committee shall have complete discretion in determining the number of Stock Options granted to each nonemployee director Participant under this Section 5.1. 5.3 STOCK OPTION AGREEMENTS. Stock Options shall be evidenced by stock option agreements containing such terms and conditions, consistent with the provisions of the Plan, as the Committee shall from time to time determine. To the extent not covered by the stock option agreement, the terms and conditions of this Section 5 shall govern. 5.4 STOCK OPTION PRICE. The per share Stock option price shall be determined by the Committee, but shall be a price that is equal to or higher than the par value of the Corporation's Common Stock; provided, that the per share Stock Option price for any shares designated as incentive stock options shall be equal to or greater than 100% of the Market Value on the date of grant. 5.5 MEDIUM AND TIME OF PAYMENT. The exercise price for each share purchased pursuant to a Stock Option granted under the Plan shall be payable in cash or, if the Committee consents, in shares of Common Stock (including Common Stock to be received upon a simultaneous exercise) or other consideration substantially equivalent to cash. The time and terms of payment may be amended with the consent of a Participant before or after exercise of a Stock Option. The 6 Committee may from time to time authorize payment of all or a portion of the Stock Option price in the form of a promissory note or other deferred payment installments according to such terms as the Committee may approve. The Board may restrict or suspend the power of the Committee to permit such loans and may require that adequate security be provided. 5.6 STOCK OPTIONS GRANTED TO TEN PERCENT SHAREHOLDERS. No Stock Option granted to any Participant who at the time of such grant owns, together with stock attributed to such Participant under Section 424(d) of the Code, more than 10% of the total combined voting power of all classes of stock of the Corporation or any of its Subsidiaries may be designated as an incentive stock option, unless such Stock Option provides an exercise price equal to at least 110% of the Market Value of the Common Stock and the exercise of the Stock Option after the expiration of five (5) years from the date of grant of the Stock option is prohibited by its terms. 5.7 LIMITS ON EXERCISABILITY. Stock options shall be exercisable for such periods, not to exceed ten years from the date of grant, as may be fixed by the Committee. At the time of the exercise of a Stock Option, the holder of the Stock Option, if requested by the Committee, must represent to the Corporation that the shares are being acquired for investment and not with a view to the distribution thereof. The Committee may in its discretion require a Participant to continue the Participant's service with the Corporation and its Subsidiaries for a certain length of time prior to a Stock Option becoming exercisable and may eliminate such delayed vesting provisions. 5.8 RESTRICTIONS ON TRANSFERABILITY. (a) GENERAL. Unless the Committee otherwise consents (before or after the option grant) or unless the stock option agreement or grant provides otherwise; (i) no incentive stock option granted under the Plan may be sold, exchanged, transferred, pledged, assigned or otherwise alienated or hypothecated except by will or the laws of descent and distribution; and (ii) non-qualified stock options with or without tandem Stock Appreciation Rights may be transferred by a Participant to Permitted Transferees, and may be exercised either by the Participant, his guardian or legal representative, or by a Permitted Transferee, provided, that as a condition to any such transfer the transferee must execute a written agreement permitting the Corporation to withhold from the shares subject to the Incentive Award a number of shares having a Market Value at least equal to the amount of any federal, state or local withholding or other taxes associated with or resulting from the exercise of a Stock Option. "Permitted Transferees" means a member of an optionee's immediate family, trusts for the benefit of such immediate family members, and partnerships in which the optionee and/or such immediate family members are the only partners, provided that no consideration is provided for the transfer. Immediate family members shall include an optionee's spouse, descendants (children, grandchildren and more remote descendants), and shall include step-children and relationships arising from legal adoption. (b) OTHER RESTRICTIONS. The Committee may impose other restrictions on any shares of Common Stock acquired pursuant to the exercise of a Stock Option under the Plan as the Committee deems advisable, including, without limitation, restrictions under applicable federal or state securities laws. 7 5.9 TERMINATION OF STATUS. (a) GENERAL. If an employee ceases to be employed by the Corporation or one of its Subsidiaries for any reason, if a director ceases to serve as a director of the Corporation for any reason, or if a consultant ceases rendering services for the Corporation or one of its Subsidiaries for any reason other than the Participant's death, disability, or termination for Cause, the Participant may exercise his Stock Options only for a period of three months after such termination of employment, director or consultant status, but only to the extent the Participant was entitled to exercise the Stock Options on the date of termination, unless the Committee otherwise consents, or the terms of the stock option agreement or grant provide otherwise, or as provided in Subsection 5.9(d) with respect to nonqualified stock options. For purposes of the Plan, the following shall not be deemed a termination of employment status: (i) a transfer of an employee from the Corporation to any Subsidiary; (ii) an employee's leave of absence, duly authorized in writing by the Corporation, for military service or for any other purpose approved by the Corporation if the period of such leave does not exceed 90 days; (iii) an employee's leave of absence in excess of 90 days, duly authorized in writing by the Corporation, provided that the employee's right to reemployment is guaranteed either by statute or contract. (b) DEATH. If a Participant dies either while an employee of the Corporation or one of its Subsidiaries or after the termination of employment other than for Cause but during the time when the Participant could have exercised a Stock Option under the Plan, or if a director or consultant dies while serving as a director or consultant of the Corporation or after ceasing to be a director or consultant but during such time as the director, former director, consultant or former consultant could have exercised a Stock Option under the Plan, the Stock Option issued to such Participant shall be exercisable by the personal representative of such Participant or such other successor to the interest of the Participant for one year after the Participant's death, but only to the extent that the Participant was entitled to exercise the Stock Option on the date of death or termination of employment or status as a director or consultant, whichever first occurred, unless the Committee otherwise consents or the terms of the stock option agreement or grant provide otherwise. (c) DISABILITY. If a Participant ceases to be an employee, director or consultant of the Corporation or one of its Subsidiaries, due to the Participant's disability, the Participant may exercise a Stock Option for a period of one year following such termination of employment, director or consultant status, but only to the extent that the Participant or director was entitled to exercise the Stock Option on the date of such event, unless the Committee otherwise consents or the terms of the Stock Option agreement or grant provide otherwise. 8 (d) PARTICIPANT RETIREMENT. If a Participant Retires as an employee of the Corporation or one of its Subsidiaries or if a director retires, any nonqualified Stock Option granted under the Plan may be exercised during the remaining term of the Stock Option, unless the terms of the stock option agreement or grant provide otherwise. (e) TERMINATION FOR CAUSE. If a Participant is terminated for Cause, the Participant shall have no further right to exercise any Stock Option previously granted, unless the Committee and the Board determine otherwise. SECTION 6 - STOCK APPRECIATION RIGHTS 6.1 GRANT. A Participant may be granted one or more Stock Appreciation Rights under the Plan and such Stock Appreciation Rights shall be subject to such terms and conditions, consistent with the other provisions of the Plan, as shall be determined by the Committee in its sole discretion. A Stock Appreciation Right may relate to a particular Stock Option and may be granted simultaneously with or subsequent to the Stock Option to which it relates. Stock Appreciation Rights shall be subject to the same restrictions and conditions as Stock Options under subsections 5.6, 5.7 and 5.8 of the Plan. To the extent granted in tandem with a Stock Option, the exercise of a Stock Appreciation Right shall, in exchange for the right to exercise a related Stock Option, entitle a Participant to an amount equal to the appreciation in value of the shares covered by the related Stock Option surrendered. Such appreciation in value shall be equal to the excess of the Market Value of such shares at the time of the exercise of the Stock Appreciation Right over the option price of such shares. 6.2 EXERCISE; PAYMENT. To the extent granted in tandem with a Stock Option, Stock Appreciation Rights may be exercised only when a related Stock Option could be exercised and only when the Market Value of the stock subject to the Stock Option exceeds the exercise price of the Stock Option. The Committee shall have discretion to determine the form of payment made upon exercise of a Stock Appreciation Right, which could take the form of shares of Common Stock. SECTION 7 - RESTRICTED STOCK 7.1 GRANT. A Participant may be granted Restricted Stock under the Plan. Restricted Stock shall be subject to such terms and conditions, consistent with the other provisions of the Plan, as shall be determined by the Committee in its sole discretion. The Committee may impose such restrictions or conditions, consistent with the provisions of the Plan, to the vesting of Restricted Stock as it deems appropriate. 7.2 TERMINATION OF EMPLOYMENT STATUS. (a) GENERAL. In the event of termination of employment status during the Restricted Period for any reason other than death, disability, Retirement or termination for Cause, then any shares of Restricted Stock still subject to restrictions at the date of such termination shall automatically be forfeited and returned to the Corporation; provided, that in the event of a voluntary or 9 involuntary termination of the employment status of a Participant by the Corporation, the Committee may, in its sole discretion, waive the automatic forfeiture of any or all such shares of Restricted Stock and/or may add such new restrictions to such shares of Restricted Stock as it deems appropriate. For purposes of the Plan, the following shall not be considered a termination of employment status: (i) a transfer of an employee from the Corporation to any Subsidiary; (ii) a leave of absence, duly authorized in writing by the Corporation, for military service or for any other purpose approved by the Corporation if the period of such leave does not exceed of 90 days; (iii) a leave of absence in excess of 90 days duly authorized in writing by the Corporation, provided that the employee's right to reemployment is guaranteed either by statute or contract. (b) DEATH, RETIREMENT OF DISABILITY. Unless the Committee otherwise consents or unless the terms of the restricted stock agreement or grant provide otherwise, in the event a Participant terminates his employment with the Corporation because of death, disability or Retirement during the Restricted Period, the restrictions applicable to the shares of Restricted Stock shall terminate automatically with respect to that number of shares (rounded to the nearest whole number) equal to the total number of shares of Restricted Stock granted to such Participant multiplied by the number of full months that have elapsed since the date of grant divided by the maximum number of full months of the Restricted Period. All remaining shares shall be forfeited and returned to the Corporation; provided, that the Committee may, in its sole discretion, waive the restrictions remaining on any or all such remaining shares of Restricted Stock either before or after the death, disability or Retirement of the Participant. (c) TERMINATION FOR CAUSE. If a Participant's employment is terminated for Cause, the Participant shall have no further right to exercise or receive any Restricted Stock and all Restricted Stock still subject to restrictions at the date of such termination shall automatically be forfeited and returned to the Corporation, unless the Committee and the Board determine otherwise. 7.3 RESTRICTIONS ON TRANSFERABILITY. (a) GENERAL. Unless the Committee otherwise consents or unless the terms of the restricted stock agreement or grant provide otherwise: (i) shares of Restricted Stock shall not be sold, exchanged, transferred, pledged, assigned or otherwise alienated or hypothecated during the Restricted Period except by will or the laws of descent and distribution; and (ii) all rights with respect to Restricted Stock granted to a Participant under the Plan shall be exercisable during the Participant's lifetime only by such Participant, his guardian or legal representative. (b) OTHER RESTRICTIONS. The Committee may impose other restrictions on any shares of Common Stock acquired pursuant to an award of Restricted Stock 10 under the Plan as the Committee deems advisable, including, without limitation, restrictions under applicable federal or state securities laws. 7.4 LEGENDING OF RESTRICTED STOCK. Any certificates evidencing shares of Restricted Stock awarded pursuant to the Plan shall bear the following legend: The shares represented by this certificate were issued subject to certain restrictions under the Cap Rock Energy Corporation's 1998 Stock Incentive Plan (the "Plan"). A copy of the Plan is on file in the office of the Secretary of the Corporation. This certificate is held subject to the terms and conditions contained in a restricted stock agreement that includes a prohibition against the sale or transfer of the stock represented by this certificate except in compliance with that agreement and that provides for forfeiture upon certain events. 7.5 REPRESENTATIONS AND WARRANTIES. A Participant who is awarded Restricted Stock shall represent and warrant that the Participant is acquiring the Restricted Stock for the Participant's own account and investment and without any intention to resell or redistribute the Restricted Stock. The Participant shall agree not to resell or distribute such Restricted Stock after the Restricted Period except upon such conditions as the Corporation may reasonably specify to ensure compliance with federal and state securities laws. 7.6 RIGHTS AS A SHAREHOLDER. A Participant shall have all voting, dividend, liquidation and other rights with respect to Restricted Stock held of record by such Participant as if the Participant held unrestricted Common Stock; provided, that the unvested portion of any award of Restricted Stock shall be subject to any restrictions on transferability or risks of forfeiture imposed pursuant to Sections 7.2 and 7.3 of the Plan. Unless the Committee otherwise determines or unless the terms of the restricted stock agreement or grant provide otherwise, any noncash dividends or distributions paid with respect to shares of unvested Restricted Stock shall be subject to the same restrictions as the shares to which such dividends or distributions relate. SECTION 8 - STOCK AWARDS 8.1 GRANT. A Participant may be granted one or more Stock Awards under the Plan in lieu of, or as payment for, the rights of a Participant under any other compensation plan, policy or program of the Corporation or its Subsidiaries. Stock Awards shall be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. 8.2 RIGHTS AS A SHAREHOLDER. A Participant shall have all voting, dividend, liquidation and other rights with respect to shares of Common Stock issued to the Participant as a Stock Award under this Section 8 upon the Participant becoming the holder of record of the Common Stock granted pursuant to such Stock Awards; provided, that the Committee may impose such restrictions on the assignment or transfer of Common Stock awarded pursuant to a Stock Award as it deems appropriate. 11 SECTION 9 - TAX BENEFIT RIGHTS 9.1 GRANT. A Participant may be granted Tax Benefit Rights under the Plan to encourage a Participant to exercise Stock Options and provide certain tax benefits to the Corporation. A Tax Benefit Right entitles a Participant to receive from the Corporation or a Subsidiary a cash payment not to exceed the amount calculated by multiplying the ordinary income, if any, realized by the Participant for federal tax purposes as a result of the exercise of a nonqualified stock option, or the disqualifying disposition of shares acquired under an incentive stock option, by the maximum federal income tax rate (including any surtax or similar charge or assessment) for corporations, plus the applicable state and local tax imposed on the exercise of the Stock Option or the disqualifying disposition. 9.2 RESTRICTIONS. A Tax Benefit Right may be granted only with respect to a Stock Option issued and outstanding or to be issued under the Plan or any other plan of the Corporation or its Subsidiaries that has been approved by the Stockholders as of the date of the Plan and may be granted concurrently with or after the grant of the Stock Option. Such rights with respect to outstanding Stock Options shall be issued only with the consent of the Participant if the effect would be to disqualify an incentive stock option, change the date of grant or the exercise price or otherwise impair the Participant's existing Stock Options. 9.3 TERMS AND CONDITIONS. The Committee shall determine the terms and conditions of any Tax Benefit Rights granted and the Participants to whom such rights will be granted with respect to Stock Options under the Plan or any other plan of the Corporation. The Committee may amend, cancel, limit the term of or limit the amount payable under a Tax Benefit Right at any time prior to the exercise of the related Stock Option, unless otherwise provided under the terms of the Tax Benefit Right. The net amount of a Tax Benefit Right, subject to withholding, may be used to pay a portion of the Stock Option price, unless otherwise provided by the Committee. SECTION 10 - CHANGE IN CONTROL 10.1 ACCELERATION OF VESING. If a Change in Control of the Corporation shall occur, then, unless the Committee or the Board otherwise determines with respect to one or more Incentive Awards, without action by the Committee or the Board: (a) all outstanding Stock Options shall become immediately exercisable in full and shall remain exercisable during the remaining term thereof, regardless of whether the Participants to whom such Stock Options have been granted remain in the employ or service of the Corporation or any Subsidiary; and (b) all other outstanding Incentive Awards shall become immediately fully vested and nonforfeitable. 10.2 CASH PAYMENT FOR STOCK OPTIONS. If a Change in Control of the Corporation shall occur, then the Committee, in its sole discretion, and without the consent of any Participant affected thereby, may determine that some or all Participants holding outstanding Stock Options shall receive, with respect to some or all of the shares of Common Stock subject to such Stock Options, as of the effective date of any such Change in Control of the Corporation, cash in an amount equal to the greater of the excess of (a) the highest sales price of the shares on the securities exchange or market on the date immediately prior to the effective date of such Change in Control of the Corporation or (b) the highest price per share actually paid in connection with such Change in Control of the Corporation, over the exercise price per share of such Stock Options. 12 SECTION 11 - GENERAL PROVISIONS 11.1 NO RIGHTS TO AWARD. No Participant or other person shall have any claim to be granted any Incentive Award under the Plan and there is no obligation of uniformity of treatment of Participants or holders or beneficiaries of Incentive Awards under the Plan. The terms and conditions of Incentive Awards of the same type and the determination of the Committee to grant a waiver or modification of any Incentive Award and the terms and conditions thereof need not be the same with respect to each Participant. 11.2 WITHHOLDING. The Corporation or a Subsidiary shall be entitled to: (a) withhold and deduct from future wages of a Participant (or from other amounts that may be due and owing to a Participant from the Corporation or a Subsidiary), or make other arrangements for the collection of, all legally required amounts necessary to satisfy any and all federal, state and local withholding and employment-related tax requirements attributable to an Incentive Award, including, without limitation, the grant, exercise or vesting of, or payment of dividends with respect to, an Incentive Award or a disqualifying disposition of Common Stock received upon exercise of an incentive stock option; or (b) require a Participant promptly to remit the amount of such withholding to the Corporation before taking any action with respect to an Incentive Award. Unless the Committee determines otherwise, withholding may be satisfied by withholding Common Stock to be received upon exercise or by delivery to the Corporation of previously owned Common Stock. The Corporation may establish such rules and procedures concerning timing of any withholding election as it deems appropriate to comply with Rule 16b-3 under the Act. 11.3 COMPLIANCE WITH LAWS; LISTING AND REGISTRATION OF SHARES. All Incentive Awards granted under the Plan (and all issuances of Common Stock or other securities under the Plan) shall be subject to all applicable taws, rules and regulations, and to the requirement that if at any time the Committee shall determine, in its discretion, that the listing, registration or qualification of the shares covered thereby upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the grant of such Incentive Award or the issue or purchase of shares thereunder, such Incentive Award may not be exercised in whole or in part, or the restrictions on such Incentive Award shall not lapse, unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. 11.4 NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained in the Plan shall prevent the Corporation or any Subsidiary from approving or continuing in effect other or additional compensation arrangements, including the grant of stock options and other stock-based awards, and such arrangements may be either generally applicable or applicable only in specific cases. 11.5 NO RIGHT TO EMPLOYMENT. The grant of an Incentive Award shall not be construed as giving a Participant the right to be retained in the employ of the Corporation or any Subsidiary. The Corporation or any Subsidiary may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any written agreement with a Participant. 13 11.6 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 and applicable federal law. 11.7 SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of the Plan and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. SECTION 12 - TERMINATION AND AMENDMENT The Board may terminate the Plan at any time, or may from time to time amend the Plan as it deems proper and in the best interests of the Corporation, provided that no such amendment may impair any outstanding Incentive Award without the consent of the Participant, except according to the terms of the Plan or the Incentive Award. No termination, amendment or modification of the Plan shall become effective with respect to any Incentive Award previously granted under the Plan without the prior written consent of the Participant holding such Incentive Award unless such amendment or modification operates solely to the benefit of the Participant. No amendment of the Plan shall, without further approval of the stockholders of the Corporation, increase the total number of shares of Common Stock with respect to which awards may be made under the Plan, materially increase the benefits accruing to Participants under the Plan or materially modify the requirements as to eligibility for participation in the Plan, if stockholder approval of such amendment is a condition of Securities and Exchange Commission Rule 16b-3 or the Code at the time such amendment is adopted. SECTION 13 - EFFECTIVE DATE AND DURATION OF THE PLAN Subject to the approval of the holders of a majority of the Stock of the Corporation present, or represented, and entitled to vote at a meeting of its stockholders, the Plan shall be effective as of the Closing Date of the Acquisition Plan; provided, however, that awards made under the Plan prior to such approval of the Plan by the stockholders of the Corporation are contingent on such approval of the Plan by the stockholders of the Corporation and shall be null and void if such approval of the stockholders of the Corporation is withheld. Unless earlier terminated by the Board of Directors, the Plan shall terminate on the date ten years after the date the Plan is adopted, or the date the Plan is approved by the stockholders, whichever is earlier. No Incentive Award shall be granted under the Plan after such date. 14