<PAGE>
                                                                   EXHIBIT 10.35


May 4, 2001

Mr. Stephen W. Naeve
2002 Buffalo Terrace
Houston, TX  77019

         Re: Retention Agreement

Dear Mr. Naeve:

                  As it is our belief that your continued employment with
Reliant Resources, Inc. (the Company) is important for the growth and
development of the Company, the Company hereby agrees to provide Stephen W.
Naeve (the Executive) with the following stock award pursuant to the Reliant
Resources, Inc. Long-Term Incentive Plan, but only if the vesting requirements
set forth in this agreement are satisfied.

                  1. DEFINITIONS: For purposes of this agreement, the following
terms will have the meanings indicated below:

                  "AFFILIATE" shall mean any company controlled by, controlling
or under common control with the Company within the meaning of Section 414 of
the Internal Revenue Code of 1986.

                  "CAUSE" shall mean Executive's (a) gross negligence in the
performance of Executive's duties, (b) intentional and continued failure to
perform Executive's duties, (c) intentional engagement in conduct which is
materially injurious to the Company or its Affiliates (monetarily or otherwise)
or (d) conviction of a felony or a misdemeanor involving moral turpitude. For
this purpose, an act or failure to act on the part of Executive will be deemed
"intentional" only if done or omitted to be done by Executive not in good faith
and without reasonable belief that his/her action or omission was in the best
interest of the Company, and no act or failure to act on the part of Executive
will be deemed "intentional" if it was due primarily to an error in judgment or
negligence.

                  A "CHANGE IN CONTROL" shall be deemed to have occurred upon
the occurrence of any of the following events:

                  (a) 30% OWNERSHIP CHANGE: Any Person makes an acquisition of
         Outstanding Voting Stock and is, immediately thereafter, the beneficial
         owner of 30% or more of the then Outstanding Voting Stock, unless such
         acquisition is made directly from the Company in a transaction approved
         by a majority of the Incumbent Directors; or any group is formed that
         is the beneficial owner of 30% or more of the Outstanding Voting Stock;
         or



<PAGE>

Mr. Stephen W. Naeve                  2                             May 4, 2001


                  (b) BOARD MAJORITY CHANGE: Individuals who are Incumbent
         Directors cease for any reason to constitute a majority of the members
         of the board of directors of the Company; or

                  (c) MAJOR MERGERS AND ACQUISITIONS: Consummation of a Business
         Combination unless, immediately following such Business Combination,
         (i) all or substantially all of the individuals and entities that were
         the beneficial owners of the Outstanding Voting Stock immediately prior
         to such Business Combination beneficially own, directly or indirectly,
         more than 70% of the then outstanding shares of voting stock of the
         parent corporation resulting from such Business Combination in
         substantially the same relative proportions as their ownership,
         immediately prior to such Business Combination, of the Outstanding
         Voting Stock, (ii) if the Business Combination involves the issuance or
         payment by the Company of consideration to another entity or its
         shareholders, the total fair market value of such consideration plus
         the principal amount of the consolidated long-term debt of the entity
         or business being acquired (in each case, determined as of the date of
         consummation of such Business Combination by a majority of the
         Incumbent Directors) does not exceed 50% of the sum of the fair market
         value of the Outstanding Voting Stock plus the principal amount of the
         Company's consolidated long-term debt (in each case, determined
         immediately prior to such consummation by a majority of the Incumbent
         Directors), (iii) no Person (other than any corporation resulting from
         such Business Combination) beneficially owns, directly or indirectly,
         30% or more of the then outstanding shares of voting stock of the
         parent corporation resulting from such Business Combination and (iv) a
         majority of the members of the board of directors of the parent
         corporation resulting from such Business Combination were Incumbent
         Directors of the Company immediately prior to consummation of such
         Business Combination; or

                  (d) MAJOR ASSET DISPOSITIONS: Consummation of a Major Asset
         Disposition unless, immediately following such Major Asset Disposition,
         (i) individuals and entities that were beneficial owners of the
         Outstanding Voting Stock immediately prior to such Major Asset
         Disposition beneficially own, directly or indirectly, more than 70% of
         the then outstanding shares of voting stock of the Company (if it
         continues to exist) and of the entity that acquires the largest portion
         of such assets (or the entity, if any, that owns a majority of the
         outstanding voting stock of such acquiring entity) and (ii) a majority
         of the members of the board of directors of the Company (if it
         continues to exist) and of the entity that acquires the largest portion
         of such assets (or the entity, if any, that owns a majority of the
         outstanding voting stock of such acquiring entity) were Incumbent
         Directors of the Company immediately prior to consummation of such
         Major Asset Disposition.




<PAGE>

Mr. Stephen W. Naeve                  3                             May 4, 2001


For purposes of the foregoing,

                  (1) the term "Person" means an individual, entity or group;

                  (2) the term "group" is used as it is defined for purposes of
         Section 13(d)(3) of the Securities Exchange Act of 1934 (the "Exchange
         Act");

                  (3) the term "beneficial owner" is used as it is defined for
         purposes of Rule 13d-3 under the Exchange Act;

                  (4) the term "Outstanding Voting Stock" means outstanding
         voting securities of the Company entitled to vote generally in the
         election of directors; and any specified percentage or portion of the
         Outstanding Voting Stock (or of other voting stock) shall be determined
         based on the combined voting power of such securities;

                  (5) the term "Incumbent Director" means a director of the
         Company (x) who was a director of the Company on March 6, 2001 or (y)
         who becomes a director subsequent to such date and whose election, or
         nomination for election by the Company's shareholders, was approved by
         a vote of a majority of the Incumbent Directors at the time of such
         election or nomination, except that any such director shall not be
         deemed an Incumbent Director if his or her initial assumption of office
         occurs as a result of an actual or threatened election contest or other
         actual or threatened solicitation of proxies by or on behalf of a
         Person other than the board of directors of the Company;

                  (6) the term "election contest" is used as it is defined for
         purposes of Rule 14a-11 under the Exchange Act;

                  (7) the term "Business Combination" means (x) a merger or
         consolidation involving the Company or its stock or (y) an acquisition
         by the Company, directly or through one or more subsidiaries, of
         another entity or its stock or assets;

                  (8) the term "parent corporation resulting from a Business
         Combination" means the Company if its stock is not acquired or
         converted in the Business Combination and otherwise means the entity
         which as a result of such Business Combination owns the Company or all
         or substantially all the Company's assets either directly or through
         one or more subsidiaries; and

                  (9) the term "Major Asset Disposition" means the sale or other
         disposition in one transaction or a series of related transactions of
         70% or more of the assets of the Company and its subsidiaries on a
         consolidated basis; and any

<PAGE>
Mr. Stephen W. Naeve                  4                             May 4, 2001


         specified percentage or portion of the assets of the Company shall be
         based on fair market value, as determined by a majority of the
         Incumbent Directors.

                 Notwithstanding anything herein to the contrary, neither the
IPO nor the proposed spin-off of the Company from Reliant Energy, Incorporated,
will constitute a Change in Control as contemplated herein.

                  "COMMON STOCK" shall mean the common stock, par value $0.001
per share, of the Company.

                  "COMPANY" shall mean Reliant Resources, Inc., a Delaware
corporation, and any successor thereto.

                  "DISABILITY" shall mean a physical or mental impairment of
sufficient severity such that the Executive is both eligible for and in receipt
of benefits under the Long-Term Disability Plan of the Company.

                  "EFFECTIVE DATE" shall mean May 4, 2001.

                  "FAIR MARKET VALUE" shall mean the price per share of Common
Stock as of a particular date, determined as follows:

                           (a) if shares of Common Stock are listed on a
                  national securities exchange, the average of the highest and
                  lowest sales price per share of Common Stock on the
                  consolidated transaction reporting system for the principal
                  national securities exchange on which shares of Common Stock
                  are listed on that date, or, if there shall have been no such
                  sale so reported on that date, on the next preceding date on
                  which such a sale was so reported;

                           (b) if shares of Common Stock are not so listed but
                  are quoted on the Nasdaq National Market, the average of the
                  highest and lowest sales price per share of Common Stock
                  reported by the Nasdaq National Market on that date, or, if
                  there shall have been no such sale so reported on that date,
                  on the next preceding date on which such a sale was so
                  reported;

                           (c) if the Common Stock is not so listed or quoted,
                  the average of the closing bid and asked price on that date,
                  or, if there are no quotations available for such date, on the
                  next preceding date on which such quotations shall be
                  available, as reported by the Nasdaq Stock Market, or, if not
                  reported by the Nasdaq Stock Market, by the National Quotation
                  Bureau Incorporated; or


<PAGE>

Mr. Stephen W. Naeve                  5                             May 4, 2001


                           (d) if shares of Common Stock are not publicly
                  traded, the most recent value determined by an independent
                  appraiser appointed by the Company for such purpose.

                  "GOOD REASON" shall mean any one or more of the following:

                           (a) a significant reduction in the duties or
                  responsibilities of Executive from those applicable to him on
                  the Effective Date;

                           (b) a significant reduction in Executive's total
                  remuneration (including salary, bonus, qualified retirement
                  benefits, nonqualified benefits, welfare benefits and any
                  other employee benefits) from that provided to Executive on
                  the Effective Date; provided, however, that (i) a reduction in
                  the amount of incentive compensation paid (including, but not
                  limited to, cash bonuses and restricted stock) that is based
                  on the attainment of pre-determined performance goals meeting
                  the requirements of Section 162(m) of the Internal Revenue
                  Code of 1986, as amended, shall be ignored and not be
                  considered a reduction in total remuneration for purposes of
                  this paragraph (b), and (ii) a contemporaneous diminution of
                  or reduction in qualified retirement benefits and/or welfare
                  benefits which is of general application and which uniformly
                  and contemporaneously reduces or diminishes the benefits of
                  all covered employees by the same percentage shall be ignored
                  and not be considered a reduction in total remuneration for
                  purposes of this paragraph (b);

                           (c) a change in the location of Executive's principal
                  place of employment with the Company or any of its Affiliates
                  by more than 35 miles from the location where Executive was
                  principally employed on the Effective Date; or

                           (d) a failure by the Company to provide directors and
                  officers liability insurance covering Executive comparable to
                  that provided to Executive on the Effective Date.

                  "IPO" shall mean the initial public offering of shares of
Common Stock completed on May 4, 2001.

                  "RETENTION PERIOD" shall mean the period commencing on the
Effective Date and ending on March 6, 2006.

                  "RETIREMENT" shall mean termination of employment with the
consent of the Company on or after the attainment of age 60.

                  "WITHOUT CAUSE" shall mean without Cause and for reasons other
than death, Disability or Retirement.



<PAGE>

Mr. Stephen W. Naeve                  6                             May 4, 2001


                  "WITHOUT GOOD REASON" shall mean without Good Reason and for
reasons other than death, Disability or Retirement.

                  2. STOCK AWARD. Effective upon the Effective Date, Executive
has been granted, subject to the terms and conditions herein set forth, an award
(the "Stock Award") of 26,667 restricted shares of Common Stock. The Stock Award
shall be implemented by a credit to a bookkeeping account maintained by the
Company evidencing the accrual in favor of the Executive of the unfunded right
to receive shares of Common Stock of the Company, subject to the terms and
conditions set forth in Section 3.

                  3. EXECUTIVE'S RIGHT TO THE STOCK AWARD: The Stock Award is
subject to the following terms and conditions:

                           (a) Executive shall not have any rights as a
                  stockholder in respect of the Stock Award, and the rights of
                  Executive in respect of the shares of Common Stock deliverable
                  thereunder may not be sold, assigned, transferred, pledged or
                  otherwise encumbered, from the Effective Date unless and until
                  the Executive is registered as the holder of such Common Stock
                  on the records of the Company as provided in paragraph (c),
                  below, following the vesting of the Executive's rights with
                  respect to such Stock Award as provided herein.

                           (b) The Executive's right to receive the shares of
                  Common Stock underlying the Stock Award shall vest on March 6,
                  2006, provided that the Executive has remained in the
                  continuous employment of the Company or its Affiliates during
                  the Retention Period. If, during the Retention Period, the
                  Company or one of its Affiliates terminates the Executive's
                  employment for Cause or the Executive terminates employment
                  Without Good Reason, the Executive shall forfeit his right to
                  receive the Stock Award as of such termination. If, during the
                  Retention Period, the Company or one of its Affiliates
                  terminates the Executive's employment Without Cause, the
                  Executive terminates employment for Good Reason, or the
                  Executive's employment terminates by reason of death,
                  Disability, or Retirement, the Executive's right to receive
                  the Stock Award shall vest as of such termination.
                  Notwithstanding anything herein to the contrary, upon any
                  Change in Control of the Company, the Executive's right to the
                  Stock Award shall vest immediately upon such Change in
                  Control; however, registration and delivery of the shares of
                  Common Stock awarded pursuant to the Stock Award shall be
                  postponed until the first month of the first calendar year
                  following the calendar year in which Executive's employment
                  with the Company and its Affiliates is terminated, as provided
                  in paragraph (c) below, unless otherwise provided in Section
                  6.


<PAGE>

Mr. Stephen W. Naeve                  7                             May 4, 2001


                           (c) If Executive's right to receive the shares of
                  Common Stock underlying the Stock Award has vested pursuant to
                  paragraph (b), above, the shares of Common Stock granted under
                  the Stock Award shall be registered in the name of the
                  Executive and certificates representing such shares of Common
                  Stock shall be delivered to the Executive during the first
                  month of the first calendar year following the calendar year
                  in which Executive's employment with the Company and its
                  Affiliates is terminated, unless otherwise provided in Section
                  6. In addition, upon delivery of the certificates representing
                  such shares of Common Stock, Executive shall also be entitled
                  to receive a cash payment equal to the sum of all dividends,
                  if any, announced or paid with respect to an equivalent number
                  of shares of Common Stock underlying the Stock Award after the
                  Effective Date but prior the date of such payment.

                  4. WITHHOLDING OF TAXES: The Company may withhold from any
benefits payable under this agreement all federal, state, city or other taxes as
may be required pursuant to any law or governmental regulation or ruling.

                  5. NO EMPLOYMENT AGREEMENT: Nothing in this agreement shall
give the Executive any rights to (or impose any obligations for) continued
employment by the Company or any Affiliate or subsidiary thereof or successor
thereto, nor shall it give such entities any rights (or impose any obligations)
with respect to continued performance of duties by the Executive.

                  6. NO ASSIGNMENT; SUCCESSORS: Executive's right to receive
payments or benefits hereunder shall not be assignable or transferable, whether
by pledge, creation of a security interest or otherwise, whether voluntary,
involuntary, by operation of law or otherwise, other than a transfer by will or
by the laws of descent or distribution, and in the event of any attempted
assignment or transfer contrary to this Section 6 the Company shall have no
liability to pay any amount so attempted to be assigned or transferred. This
agreement shall inure to the benefit of and be enforceable by Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.

                  This agreement shall be binding upon and inure to the benefit
of the Company, its successors and assigns (including, without limitation, any
company into or with which the Company may merge or consolidate by operation of
law or otherwise). The Company agrees that it will not effect a Major Asset
Disposition (as defined in paragraph 9 of the definition of Change in Control in
Section 1) unless either (a) the person or entity acquiring such assets or a
substantial portion thereof shall expressly assume by an instrument in writing
all duties and obligations of the Company hereunder or (b) prior to the
consummation of such Major Asset Disposition the Company has distributed to the
Executive a lump sum cash payment equal to the Fair Market Value of the Stock
Award immediately prior to such consummation.


<PAGE>

Mr. Stephen W. Naeve                  8                             May 4, 2001


                  7. ADJUSTMENTS:

                  (a) The existence of the Stock Award shall not affect in any
         manner the right or power of the Company or its stockholders to make or
         authorize any or all adjustments, recapitalizations, reorganizations or
         other changes in the capital stock of the Company or its business or
         any merger or consolidation of the Company, or any issue of bonds,
         debentures, preferred or prior preference stock (whether or not such
         issue is prior to, on a parity with or junior to the Common Stock) or
         the dissolution or liquidation of the Company, or any sale or transfer
         of all or any part of its assets or business, or any other corporate
         act or proceeding of any kind, whether or not of a character similar to
         that of the acts or proceedings enumerated above.

                  (b) In the event of any subdivision or consolidation of
         outstanding shares of Common Stock, declaration of a dividend payable
         in shares of Common Stock or other stock split, then the number of
         shares of Common Stock covered by the Stock Award shall be
         proportionately adjusted by the Board as appropriate to reflect such
         transaction. In the event of any other recapitalization or capital
         reorganization of the Company, any consolidation or merger of the
         Company with another corporation or entity, the adoption by the Company
         of any plan of exchange affecting the Common Stock or any distribution
         to holders of Common Stock of securities or property (other than normal
         cash dividends or dividends payable in Common Stock), the Board shall
         make appropriate adjustments to the number of shares of Common Stock
         covered by the Stock Award, to reflect such transaction; provided that
         such adjustments shall only be such as are necessary to maintain the
         proportionate interest of the holder of the Stock Award and preserve,
         without increasing, the value of such Stock Award.

                  8. RESTRICTIONS: No Common Stock or other form of payment
shall be issued with respect to the Stock Award unless the Company shall be
satisfied based on the advice of its counsel that such issuance will be in
compliance with applicable federal and state securities laws. Certificates
evidencing shares of Common Stock delivered under this agreement may be subject
to such stop transfer orders and other restrictions as the Company may deem
advisable under the rules, regulations and other requirements of the Securities
and Exchange Commission, any securities exchange or transaction reporting system
upon which the Common Stock is then listed or to which it is admitted for
quotation and any applicable federal or state securities law. The Company may
cause a legend or legends to be placed upon such certificates to make
appropriate reference to such restrictions.

                  9. ENTIRE AGREEMENT: This agreement represents the entire
agreement between the Company and Executive with respect to the subject matter
hereof, and supersedes and is in full substitution for any and all prior
agreements or understandings, whether oral or written, relating to the subject
matter hereof.




<PAGE>

Mr. Stephen W. Naeve                  9                             May 4, 2001


                  10. MODIFICATION OF AGREEMENT. Any modification of this
agreement shall be binding only if evidenced in writing and signed by an
authorized representative of the Company.

                  11. APPLICABLE LAW: This agreement is entered into under, and
shall be governed for all purposes by, the laws of the State of Texas.

                  12. SEVERABILITY: If a court of competent jurisdiction
determines that any provision of this agreement is invalid or unenforceable,
then the invalidity or unenforceability of that provision shall not affect the
validity or enforceability of any other provision of this agreement and all
other provisions shall remain in full force and effect.

                  If you agree to the terms of this letter agreement, please
sign and date below.

                                             Yours very truly,

                                             RELIANT RESOURCES, INC.



                                             By /s/ R. STEVE LETBETTER
                                                -------------------------------
                                                R. Steve Letbetter
                                                Chairman, President and
                                                Chief Executive Officer

/s/ STEPHEN W. NAEVE
-------------------------------
Stephen W. Naeve

August 16, 2001
-------------------------------
Execution Date