UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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NRG Energy, Inc.

(Name of Registrant as Specified In Its Charter)

 

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March 16, 2007

 

Dear Stockholder:

 

We are pleased to invite you to attend NRG Energy, Inc.’s Annual Meeting of Stockholders, which will be held on Wednesday, April 25, 2007, at 9:30 a.m. Eastern Time at Hotel du Pont, 11th and Market Streets, Wilmington, Delaware. Details regarding admission to the meeting and the business to be conducted are more fully described in the accompanying Notice of Annual Meeting and Proxy Statement. A report on Company operations and a discussion of our plans will be made at the meeting and there will be time for your questions and comments.

 

Your vote is important. Whether or not you plan to attend the Annual Meeting, we hope you will vote as soon as possible. You may vote by completing and mailing a proxy card as set forth in the accompanying Notice of Annual Meeting and Proxy Statement.

 

Thank you for your ongoing interest and investment in NRG Energy, Inc.

 

Sincerely,

 

 

THIS PROXY STATEMENT AND PROXY CARD ARE

BEING DISTRIBUTED ON OR ABOUT MARCH 16, 2007.

 

2007 ANNUAL MEETING OF STOCKHOLDERS

 

NOTICE OF ANNUAL MEETING AND PROXY STATEMENT

 

TABLE OF CONTENTS

 

NRG Energy, Inc.
211 Carnegie Center, Princeton, New Jersey 08540

 

 

 

 

By Order of the Board of Directors

 

Tanuja M. Dehne

Corporate Secretary

 

The Board of Directors (the “Board”) of NRG Energy, Inc. (“NRG” or the “Company”) is soliciting proxies for the Annual Meeting of Stockholders. You are receiving a Proxy Statement because you own shares of NRG’s Common Stock, par value $.01 per share (the “Common Stock” or “Common Shares”) and/or shares of NRG’s 4% Convertible Perpetual Preferred Stock (the “4% Preferred Stock” or “4% Preferred Shares”) that entitle you to vote at the meeting. Holders of NRG’s 3.625% Convertible Perpetual Preferred Stock and NRG’s 5.75% Mandatory Convertible Preferred Stock are not entitled to vote at the Annual Meeting. By use of a proxy, you can vote whether or not you attend the meeting. The Proxy Statement describes the matters we would like you to vote on and provides information on those matters.

 

The purpose of the Annual Meeting is to elect directors, to ratify the appointment of KPMG LLP as NRG’s independent registered public accounting firm, and to conduct such other business as may properly come before the Annual Meeting. Other than the proposals described in this Proxy Statement, the Board is not aware of any other matters to be presented for a vote at the Annual Meeting. If you grant a proxy, either of the persons named as proxy holders — David Crane and Tanuja M. Dehne — will have the discretion to vote your shares on any additional matters properly presented for a vote at the meeting.

 

Stockholders of NRG may attend the Annual Meeting. However, only stockholders who owned Common Stock or 4% Preferred Stock at the close of business on March 12, 2007, the record date, or their duly appointed proxies, are entitled to vote at the meeting. Proof of ownership of NRG stock, along with personal identification, must be presented in order to be admitted to the Annual Meeting. If your shares are held in the name of a bank, broker or other holder of record, you must bring a brokerage statement or other proof of ownership with you to the Annual Meeting.

 

No cameras, recording equipment, electronic devices, large bags, briefcases, or packages will be permitted in the Annual Meeting.

 

A quorum is the minimum number of shares required to hold a meeting. Under NRG’s Bylaws, to have a quorum, a majority of the outstanding shares of stock entitled to vote at a meeting must be represented in person or by proxy at the meeting. Both abstentions and broker nonvotes, if any, are counted as present for determining the presence of a quorum. Generally, broker nonvotes occur when shares held by a broker for a beneficial owner are not voted with respect to a particular proposal because (a) the broker has not received voting instructions from the beneficial owner and (b) the broker lacks discretionary voting power to vote such shares. Brokers who do not receive instructions are entitled to vote on the election of directors and the ratification of the appointment of the independent auditors.

 

Only stockholders of record at the close of business on March 12, 2007 are entitled to vote at the Annual Meeting. As of the record date, 137,391,492 shares of Common Stock and 420,000 shares of 4% Preferred Stock were issued and outstanding. Each holder of NRG’s Common Stock and 4% Preferred Stock is entitled to one vote per share.

 

Many NRG stockholders hold their shares through a stockbroker, bank, trustee, or other nominee rather than directly in their own name. As summarized below, there are some distinctions between shares held of record and those owned beneficially:

 

* Stockholder of Record — If your shares are registered directly in your name with NRG’s transfer agent, Bank of New York, N.A., you are considered the stockholder of record of those shares and these proxy materials are being sent to you by NRG. As the stockholder of record, you have the right to grant your voting proxy directly to NRG or to vote in person at the meeting.

 

* Beneficial Owner — If your shares are held in a stock brokerage account, or by a bank, trustee, or other nominee, you are considered the beneficial owner of shares held in street name and these proxy materials are being forwarded to you by your broker, trustee, or nominee, who is considered the stockholder of record of those shares. As the beneficial owner, you have the right to direct your broker, trustee or nominee on how to vote and are also invited to attend the meeting. However, since you are not the stockholder of record, you may not vote these shares in person at the meeting. Your broker, trustee, or nominee is obligated to provide you with a voting instruction card for you to use.

 

Director Nominees — The nominees for election as directors at the Annual Meeting will be elected by a plurality of the votes cast at the meeting. This means that the director nominee with the most votes for a particular slot is elected for that slot. Votes withheld from a director nominee will have no effect on the election of the director from whom votes are withheld. Broker nonvotes, if any, will not be counted as having been voted and, thus, will have no effect on the outcome of the vote on the election of directors.

 

Ratification of the Appointment of the Independent Auditors — This proposal requires the affirmative “FOR” vote of a majority of those shares present in person or represented by proxy at the Annual Meeting and entitled to vote on the proposal. Abstentions will be counted toward the tabulation of votes cast on this proposal and will have the same effect as a vote against this proposal. Broker nonvotes, if any, will have no effect on the outcome of the vote on this proposal.

 

If you hold shares directly as the stockholder of record, you may vote by granting a proxy or, if you hold shares beneficially in street name, by submitting voting instructions to your broker, trustee, or nominee. Please refer to the summary instructions below and those included on your proxy card or, for shares held in street name, the voting instruction card included by your broker, trustee, or nominee.

 

You may vote by mail by signing your proxy card or, for shares held in street name, the voting instruction card included by your broker, trustee, or nominee, and mailing it in the enclosed, postage-paid, addressed envelope. If you provide specific voting instructions, your shares will be voted as you instruct. If you sign, but do not provide instructions, your shares will be voted as the Board recommended. Mark, sign, and date your proxy card and return it in the postage-paid envelope provided as soon as possible so that it is received by April 25, 2007, the meeting date.

 

All shares that have been properly voted and not revoked will be voted at the Annual Meeting.

 

You may change your proxy instructions or revoke your proxy at any time prior to the vote at the Annual Meeting. For shares held directly in your name, you may accomplish this by granting a new proxy or by voting in person at the Annual Meeting. For shares held beneficially by you, you may change your vote by submitting new voting instructions to your broker, trustee, or nominee.

 

In the election of directors, you may vote “FOR” all of the nominees or your vote may be “WITHHELD” from one or more of the nominees. For the other proposal, you may vote “FOR,” “AGAINST,” or “ABSTAIN.” If you “ABSTAIN,” it has the same effect as a vote “AGAINST.” If you sign your proxy card or broker voting instruction card with no further instructions, your shares will be voted in accordance with the recommendations of the Board. Representatives of Bank of New York, N.A., NRG’s transfer agent, will tabulate the votes and act as the inspectors of election.

 

Stockholder proxies, ballots, and tabulations that identify stockholders are confidential. They will not be available for examination, nor will the identity or vote of any stockholder be disclosed, except as necessary to meet legal requirements and allow the inspectors of election to certify the results of the stockholder vote. Occasionally, stockholders provide written comments on their proxy card that may be forwarded to NRG management.

 

The names of stockholders of record entitled to vote at the Annual Meeting will be available at the Annual Meeting and for 10 days prior to the meeting for any purpose germane to the meeting, between the hours of 8:45 a.m. and 4:30 p.m. (Eastern Time), at our principal executive offices at 211 Carnegie Center, Princeton, New Jersey 08540, by contacting the Corporate Secretary.

 

NRG will pay for the cost of preparing, assembling, printing, mailing, and distributing these proxy materials. In addition to mailing these proxy materials, the solicitation of proxies or votes may be made in person, by telephone, or by electronic communication by our directors, officers, and employees, who do not receive any additional compensation for these solicitation activities. We will also reimburse brokerage houses and other custodians, nominees, and fiduciaries for their reasonable out-of-pocket expenses for forwarding proxy and other solicitation materials to beneficial owners of stock.

 

Our transfer agent is The Bank of New York. All communications concerning stockholder inquires can be handled by contacting The Bank of New York, Investor Services Department, P.O. Box 11258, New York, NY 10286-1258, 1-800-524-4458. Outside the U.S. and Canada 1-212-815-3700 and Hearing Impaired — TTY Phone 1-888-269-5221. E-mail address is: shareowners@bankofny.com. Website is: https://www.stockbny.com. Send certificates for transfer and address changes to: Receive and Deliver Department, P.O. Box 11002, New York, NY 10286-1002.

 

The Board has adopted Corporate Governance Guidelines that, along with the Amended and Restated Certificate of Incorporation, the Bylaws and the charters of the Board committees, provide the framework for the governance of the Company. The Board’s Governance and Nominating Committee is responsible for periodically reviewing the Guidelines and recommending any proposed changes to the Board for approval. The Corporate Governance Guidelines are available on our website at http://www.nrgenergy.com/investor/corpgov/.htm, along with the charters of our Audit, Compensation, and Governance and Nominating committees and our Code of Conduct. The Corporate Governance Guidelines, the charters of all of our Board committees and our Code of Conduct are available in print to any stockholder who requests them.

 

The Board is made up of a majority of independent directors. An “independent” director is a director who meets the criteria for independence as required by the applicable law and the New York Stock Exchange (“NYSE”) listing standards and is affirmatively determined to be “independent” by the Board. The Board has determined that each of the current directors is independent under the listing standards of the NYSE, with the exception of David Crane, President and Chief Executive Officer, and Paul Hobby, whose sister-in-law is a current partner at KPMG LLP, the Company’s independent registered public accounting firm. William Hantke serves as director of Process Energy Solutions, which is one of many advisors to the Company on development projects; Maureen Miskovic serves as a director of State Street Corporation, a shareholder of NRG; and Thomas Weidemeyer serves as a director of Waste Management, Inc., a service provider to the Company as part of the ordinary course of business. The Board has evaluated the business relationships between the Company and each of these companies and has concluded that each business relationship is immaterial and does not interfere with Mr. Hantke’s, Ms. Miskovic’s or Mr. Weidemeyer’s exercise of independent judgment on the Board or on the Audit Committee, in the case of Mr. Hantke. Each of the Audit, Compensation, and Governance and Nominating Committees is made up solely of independent directors. In accordance with the Company’s Corporate Governance Guidelines (available on the Company’s website) and the NYSE listing standards, all members of the Audit Committee meet additional independence standards applicable to audit committee members.

 

The Board is set at 12 directors. The Board is divided into three classes, approximately equal in number, serving staggered three-year terms.

 

The Board presently has the following five Committees: Audit, Compensation, Governance and Nominating, Commercial Operations Oversight and Nuclear Oversight, which includes the Nuclear Oversight Subcommittee. The membership and the functions of each Committee are described below.

 

 

 

X = Committee Member

 

(1) Chairman of the Board

 

(2) Committee Chair

 

(3) Chair of the Nuclear Oversight Subcommittee

 

During 2006, the Board held 13 meetings. During 2006, no director attended less than 75% of the total of the Board meetings and the meetings of the committees upon which he or she served. In calendar year 2007, the Board has held one meeting through March 12, 2007.

 

The Company’s Corporate Governance Guidelines provide that the nonmanagement directors meet in executive session periodically following Board meetings. The Company’s nonexecutive Chairman, Howard Cosgrove, presides at these sessions.

 

Directors are encouraged to attend the Annual Meetings of Stockholders. All of the directors, except Lawrence Coben and Stephen Cropper, attended the 2006 Annual Meeting of Stockholders.

 

The Audit Committee represents and provides assistance to the Board with respect to matters involving the accounting, auditing, financial reporting, internal controls, and legal compliance functions of the Company and its subsidiaries, including assisting the Board in its oversight of the integrity of the Company’s financial statements, compliance with legal and regulatory requirements, the qualifications, independence, and performance of the Company’s independent auditors, the performance of the Company’s internal audit function, and effectiveness of the Company’s financial risk management. Among other things, the Committee:

 

 

 

The Board has determined that all Audit Committee members are independent under the New York Stock Exchange definition of independence for directors and audit committee members, and that all members of the Audit Committee are financially literate. In addition, the Board has determined that John Chlebowski and William Hantke qualify as “audit committee financial experts” within the meaning of Securities and Exchange Commission (“SEC”) regulations. In calendar year 2006, the Audit Committee held eight meetings. In calendar year 2007, the Audit Committee has held two meetings through March 12, 2007.

 

The Compensation Committee oversees the Company’s overall compensation structure, policies, and programs. Among other things, the Committee:

 

 

 

The Compensation Committee may delegate to one or more subcommittees such power and authority as the Compensation Committee deems appropriate. No subcommittee shall consist of fewer than two members, and the Compensation Committee shall not delegate to a subcommittee any power or authority that is required by any law, regulation or listing standard to be exercised by the Compensation Committee as a whole.

 

The Compensation Committee has retained Mercer Human Resources Consulting, referred to as Mercer, to provide it with market information, analysis and guidance in the development and assessment of NRG’s executive compensation program. For a more detailed discussion of the Compensation Committee’s processes and procedures for the consideration and determination of executive officer and director compensation, including the role of the executive officers and Mercer in determining and recommending the amount or form of compensation, please see the CD&A included in this Proxy Statement.

 

The Board has determined that all Compensation Committee members are independent under the listing standards of the New York Stock Exchange, and that they are “nonemployee directors” for purposes of Rule 16b-3 under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, and “outside directors” for purposes of Section 162(m) of the Internal Revenue Code (the “Code”). In calendar year 2006, the Compensation Committee held seven meetings. In calendar year 2007, the Compensation Committee has held one meeting through March 12, 2007.

 

The Governance and Nominating Committee recommends director candidates to the Board for election at the Annual Meeting of Stockholders, and periodically reviews the Company’s Corporate Governance Guidelines and recommends changes to the Board. Among other things, the Committee also:

 

 

 

The Board has determined that all Governance and Nominating Committee members are independent under the listing standards of the New York Stock Exchange. In calendar year 2006, the Governance and Nominating Committee held six meetings. In calendar year 2007, the Governance and Nominating Committee has held one meeting through March 12, 2007. The Board and each of the Audit Committee, Compensation Committee, Commercial Operations Oversight Committee, and Nuclear Oversight Subcommittee conduct annual self-evaluations to assess their effectiveness and review their Charters. Individual directors are also evaluated by the Board. The Governance and Nominating Committee coordinates the annual evaluations.

 

The Governance and Nominating Committee is responsible for identifying individuals that the Committee believes are qualified to become Board members in accordance with criteria set forth in the Company’s Corporate Governance Guidelines. These criteria include an individual’s business experience and skills, independence, judgment, integrity, and ability to commit sufficient time and attention to the activities of the Board. The Guidelines provide that the Committee will consider these criteria in the context of the perceived needs of the Board as a whole and seek to achieve a diversity of backgrounds and perspectives on the Board. The Governance and Nominating Committee’s process for identifying and evaluating director nominees also includes consultation with all directors, solicitation of proposed nominees from all directors, the engagement of one or more professional search firms, if deemed appropriate, interviews with prospective nominees by the Committee (and other directors, if deemed appropriate) and recommendations regarding qualified candidates to the full Board.

 

The Committee will consider nominations by stockholders who recommend candidates for election to the Board. A stockholder seeking to recommend a prospective candidate for the Committee’s consideration may do so by writing to the Corporate Secretary, NRG Energy, Inc., 211 Carnegie Center, Princeton, New Jersey 08540. Recommendations submitted for consideration by the Committee in preparation for the 2008 Annual Meeting of Stockholders must be received by November 15, 2007 and must contain the following information: (a) the name and address of the stockholder; (b) the name and address of the person to be nominated; (c) a representation that the stockholder is a holder of the Company’s stock entitled to vote at the meeting; (d) a statement in support of the stockholder’s recommendation, including a description of the candidate’s qualifications; (e) information regarding the candidate that would be required to be included in a proxy statement filed in accordance with the rules of the SEC; and (f) the candidate’s written, signed consent to serve if elected. The Governance and Nominating Committee will follow the process described above in considering nominees proposed by stockholders in accordance with the foregoing requirements.

 

Alternatively, as discussed under “Requirements for Submission of Stockholder Proposals for Next Year’s Annual Meeting,” stockholders intending to appear at the 2008 Annual Meeting of Stockholders in order to nominate a candidate for election by the stockholders at the meeting (in cases where the Board does not intend to nominate the candidate or where the Governance and Nominating Committee was not requested to consider his or her candidacy) must comply with the procedures in the Company’s Bylaws, a copy of which is available upon request to our Corporate Secretary.

 

The Commercial Operations Oversight Committee assists the Board in fulfilling its responsibilities with respect to the oversight of trading, power marketing and risk management issues at the Company. The Commercial Operations Oversight Committee consists of at least three directors, a majority of which must be independent, as defined under the listing standards of the New York Stock Exchange and as affirmatively determined to be “independent” by the Board. No member of the Commercial Operations Oversight Committee may be removed except by majority vote of the independent directors then in office.

 

The Commercial Operations Oversight Committee’s duties and responsibilities consist of the following:

 

 

In calendar year 2006, the Commercial Operations Oversight Committee held six meetings. In calendar year 2007, the Commercial Operations Oversight Committee has held one meeting through March 12, 2007.

 

The Nuclear Oversight Committee assists the Board in fulfilling its responsibilities with respect to the oversight of the Company’s ownership and operation, directly or indirectly, of its undivided interests in nuclear power plant facilities as the Company may hold from time to time. The Nuclear Oversight Committee consists of all of the members of the Board who are citizens of the United States of America and who otherwise meet the requirements of applicable law to serve on the Committee, a majority of which shall be independent, as defined under the listing standards of the New York Stock Exchange and as affirmatively determined to be “independent” by the Board. The Nuclear Oversight Committee formed the Nuclear Oversight Subcommittee in April 2006 to review and report to the Board and the Nuclear Oversight Committee on matters not expressly reserved for review by the Board. The Nuclear Oversight Subcommittee consists of Herbert Tate (Chair of the subcommittee), Paul Hobby and Anne Schaumburg.

 

In calendar year 2006, the Nuclear Oversight Committee held one meeting. In calendar year 2007, the Nuclear Oversight Committee has held one meeting through March 12, 2007. In calendar year 2006, the Nuclear Oversight Subcommittee held three meetings. In calendar year 2007, the Nuclear Oversight Subcommittee has held one meeting through March 12, 2007.

 

Review, Approval or Ratification of Transactions with Related Persons

 

The Board has adopted written policies and procedures to address potential or actual conflicts of interest and the appearance that decisions are based on considerations other than the best interests of NRG that may arise in connection with transactions with certain persons or entities (the “Policy”). The Policy operates in conjunction with NRG’s Code of Conduct and is applicable to all transactions, arrangements or relationships in which: (a) the aggregate amount involved will or may be expected to exceed $50,000 in any calendar year; (b) the Company is a participant; and (c) any Related Person (as that term is defined in Item 404 under Regulation S-K of the Securities Act of 1933, as amended) has or will have a direct or indirect interest (a “Related Person Transaction”).

 

A Related Person Transaction is subject to review and approval or ratification by the Governance and Nominating Committee. If the aggregate amount involved is expected to be less than $500,000, the transaction may be approved or ratified by the Chair of the Committee. As part of its review of each Related Person Transaction, the Governance and Nominating Committee will take into account, among other factors it deems appropriate, whether the transaction is on terms no less favorable than the terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the Related Person’s interest in the transaction. This Policy also provides that certain transactions, based on their nature and/or monetary amount, are deemed to be pre-approved or ratified by the Committee and do not require separate approval or ratification.

 

Transactions involving ongoing relationships with a Related Person will be reviewed and assessed at least annually by the Committee to ensure that such Related Person Transactions remain appropriate and in compliance with the Committee’s guidelines. The Committee’s activities with respect to the review and approval or ratification of all Related Person Transactions are reported periodically to the Board of Directors.

 

There were no Related Person Transactions for the year ended December 31, 2006.

 

Stockholders and other interested parties may communicate with the Board by writing to the Corporate Secretary, NRG Energy, Inc., 211 Carnegie Center, Princeton, New Jersey 08540. Communications intended for a specific director or directors should be addressed to their attention to the Corporate Secretary at the address provided above. Communications received from stockholders are forwarded directly to Board members as part of the materials mailed in advance of the next scheduled Board meeting following receipt of the communications. The Board has authorized the Corporate Secretary, in his or her discretion, to forward communications on a more expedited basis if circumstances warrant or to exclude a communication if it is illegal, unduly hostile or threatening, or similarly inappropriate. Advertisements, solicitations for periodical or other subscriptions, and other similar communications generally will not be forwarded to the directors.

 

PROPOSAL NO. 1

 

The Board is divided into three classes serving staggered three-year terms. Directors for each class are elected at the Annual Meeting of Stockholders held in the year in which the term for their class expires.

 

The terms of the four Class I directors will expire at the 2007 Annual Meeting. The Class I directors elected at the 2007 Annual Meeting will hold office for a three-year term expiring at the Annual Meeting in 2010 (or until their respective successors are elected and qualified, or until their earlier death, resignation, or removal). There are no family relationships among the Company’s executive officers and directors.

 

Each of the nominees for director have been recommended and nominated by the Governance and Nominating Committee. The persons named as proxies intend to vote the proxies for the election of the nominees to the Board. If any of the nominees should be unavailable to serve as a director, an event which is not anticipated, the persons named as proxies will vote your proxy for another candidate or candidates as may be nominated by the Board.

 

 

The Board recommends a vote “FOR” the election to the Board of each of the foregoing nominees. Proxies solicited by the Board will be voted “FOR” each of the nominees unless a contrary vote is specified.

 

Information regarding NRG’s directors continuing in office is provided below.

 

Class II Directors (Terms expire in 2008)

 

 

Class III Directors (Terms expire in 2009)

 

 

 

RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Audit Committee appointed the firm of KPMG LLP, independent registered public accounting firm, to audit the consolidated financial statements of the Company and its subsidiaries for the year 2007 at a meeting held in late April. If the stockholders do not ratify the appointment of KPMG LLP, the Audit Committee will reconsider its selection. Representatives of KPMG LLP are expected to attend the Annual Meeting where they will be available to respond to questions and, if they desire, to make a statement.

 

The Audit Committee first engaged KPMG LLP as the Company’s independent registered public accounting firm on May 24, 2004.

 

The Board recommends a vote “FOR” the ratification of the appointment of KPMG LLP as the Company’s independent registered public accounting firm. Proxies solicited by the Board will be voted “FOR” ratification unless a contrary vote is specified.

 

Our executive officers are elected by the Board annually to hold office until their successors are elected and qualified.

 

David Crane

Age 48

President and Chief Executive Officer

 

For biographical information for David Crane, see “Nominees for Director.”

 

Robert C. Flexon

Age 48

Executive Vice President and Chief Financial Officer

 

Mr. Flexon has been Executive Vice President and Chief Financial Officer of NRG since March 2004. In this capacity, he manages NRG’s corporate finance, accounting, tax, risk management, and overall internal control program. Prior to joining NRG, from June 2000 to March 2004, Mr. Flexon was Vice President, Corporate Development & Work Process and Vice President, Business Analysis and Controller of Hercules, Inc. Mr. Flexon also held various financial management positions from 1987 to June 2000, including General Auditor, Franchise Manager and Controller, during his 13 years with Atlantic Richfield Company. Mr. Flexon began his career with the former Coopers & Lybrand public accounting firm.

 

Jeffrey M. Baudier

Age 39

Senior Vice President and Regional President, South Central Region

 

Mr. Baudier was named Senior Vice President and Regional President, South Central Region in December 2006. He manages the asset portfolio for this region and most recently served as its General Counsel, a position he held since April 2005. Prior to joining NRG, Mr. Baudier was a Special Counsel and Partner from March 2001 to March 2005 with the New Orleans-based law firm Jones Walker. In private practice he represented public and closely-held companies in transactions and dispute resolution related to various aspects of the energy industry. Mr. Baudier also served from May 1993 to October 1998 and again from March 2000 to March 2001 as a Senior Attorney at Texaco, Inc., focusing on oil and gas exploration and development projects both domestically and abroad. From November 1998 to February 2000, he practiced with the Lafayette, Louisiana law firm of Caffery, Oubre, Dugas and Campbell.

 

John P. Brewster

Age: 53

Executive Vice President, Development Engineering, Procurement and Construction

 

Mr. Brewster has been Executive Vice President, Development Engineering, Procurement and Construction for NRG since December 2006. Prior to this position he served as Executive Vice President, International Operations and President South Central Region, a position he held since March 2004. Previously, he served as Vice President, Worldwide Operations of NRG, Vice President, North American Operations of NRG and Vice President of Production for NRG Louisiana Generating, Inc. Prior to joining NRG, Mr. Brewster spent 22 years with Cajun Electric Power Cooperative, where he served as Vice President of Production, Manager of Power System Operations and Assistant Plant Manager.

Carolyn J. Burke

Age: 39

Vice President and Controller

 

Ms. Burke has been Vice President and Controller of NRG since August 2006. She is responsible for directing NRG’s financial accounting and reporting activities, as well as ensuring NRG’s Sarbanes-Oxley compliance. Ms. Burke joined NRG in May 2004 as Executive Director, Financial Planning and Analysis, and oversaw NRG’s budget, forecasting, and long-term planning process. Prior to joining NRG, Ms. Burke served as Controller and Executive Director of Finance at the University of Pennsylvania’s School of Arts and Sciences, where she was responsible for financial accounting and reporting systems and federal reporting compliance. Prior to her tenure at Penn, Carolyn served as the Executive Director of Financial Administration at Yale University and in various finance positions during her four years at the Atlantic Richfield Corporation (ARCO).

 

John B. (Thad) Hill, III

Age: 39

Executive Vice President and Regional President, Texas

 

Thad Hill has been Executive Vice President and Regional President of NRG Texas since December 2006. Most recently, Mr. Hill served as NRG’s Executive Vice President, Corporate Business Development and Strategic Planning, as well as head of Environmental and New Business. Prior to joining NRG, he was Executive Vice President of Strategy & Business Development at Texas Genco LLC, a position he held until in February 2006, when NRG acquired Texas Genco LLC. Mr. Hill also served as Vice President and Director of The Boston Consulting Group, Inc., where he led the North American energy practice, serving companies in the power and gas sector with a focus on commercial and strategic issues. Mr. Hill joined The Boston Consulting Group, Inc. in 1995, was appointed an officer in 2001 and began leadership of the North American energy practice in 2003

 

M. Stephen Hoffmann

Age: 53

Senior Vice President and President, West Region

 

Mr. Hoffmann has been Senior Vice President and President of NRG’s West Region since May 2006. He is responsible for leading the management and development activities for the West Region. Prior to that, he led the West Region’s business development and origination efforts. Mr. Hoffmann joined NRG in 2001 as General Manager of San Diego Energy Center, following 28 years in key business development and industrial sales roles with such power and gas companies as Energy Masters International, Planergy International, Reliant Energy and Utilicorp.

 

Kevin T. Howell

Age: 49

Executive Vice President, Commercial Operations

 

Mr. Howell has been Executive Vice President, Commercial Operations since August 2005 and is responsible for the commercial management of the North America asset portfolio. Prior to joining NRG, he served as President of Dominion Energy Clearinghouse since 2001. From 1995 to 2001, Mr. Howell held various positions within Duke Energy companies including Senior Vice President of Duke Energy Trading and Marketing, Senior Vice President of Duke Energy International, and most recently, Executive Vice President of Duke Energy Merchants where he managed a global trading group dealing in refined products, LNG and coal. Prior to his five years at Duke, Mr. Howell worked in a variety of trading, marketing and operations functions at MG Natural Gas Corp., Associated Natural Gas and Panhandle Eastern Pipeline L.P.

Christine A. Jacobs

Age 54

Senior Vice President, Plant Operations

 

Christine Jacobs was named Senior Vice President, Plant Operations in August 2006. She previously served as Vice President, Plant Operations, a position she held since September 2004. She is responsible for domestic plant operations, including safety, physical security, and application of best operating practices. Ms. Jacobs has more than 30 years of diverse operating and commercial management experience. Prior to joining NRG, she served as Executive Vice President, Facility Services/Healthcare Management for Aramark Corporation from 2003 to 2004. Additionally, Ms. Jacobs served as Senior Vice President, Exelon Generation, and President, Exelon Power from 2000 to 2002.

 

J. Andrew Murphy

Age 46

Executive Vice President and General Counsel

 

Drew Murphy was appointed Executive Vice President and General Counsel effective December 18, 2006. Prior to joining NRG, Mr. Murphy as a partner in charge of the energy practice at the law firm of Hunton & Williams. Mr. Murphy has more than 15 years of experience representing issuers, developers, investors and lenders in a wide variety of US and cross-border energy projects and structured financings. His legal expertise includes supporting various development projects and financings including coal- and gas-fired power plants, transmission lines, gas storage facilities, waste-to-energy facilities, water treatment facilities and renewable energy projects. Mr. Murphy has a bachelor of arts degree from Harvard College and a law degree from George Washington University.

 

John W. Ragan

Age 47

Executive Vice President and Regional President, Northeast

 

John Ragan was appointed, effective December 18, 2006, Executive Vice President and Regional President, Northeast. Prior to joining, Mr. Ragan was Vice President of Trading, Transmission, and Operations at FPL Energy. Prior to this role, he served as Vice President of Business Management for FPLE’s Northeast Region. Ragan has more than 20 years of experience in the energy industry, including serving as Senior VP and Chief Executive Officer of Mirant’s International Group where he led operations in five countries and managed 3,450 MW of generation and integrated utility assets. Prior to working internationally, he served in various domestic roles during his eight years at Mirant/Southern Energy, including Senior Vice President of Commercial Operations for the company’s North American trading and asset portfolio. Mr. Ragan has a bachelor’s and master’s degree in of science from West Virginia University. He also holds a master’s degree in business administration from Tulane University, AB Freeman School of Business.

 

Denise M. Wilson

Age: 47

Executive Vice President and Chief Administrative Officer

 

As Executive Vice President and Chief Administrative Officer, Ms. Wilson oversees Information Technology (IT), Human Resources, Regulatory & Government Affairs, and Office Services. Prior to her current position, which she has held since August 2006, she served as the Company’s Vice President, Human Resources. Ms. Wilson joined NRG as Principal Consultant/Executive Director, International and Domestic Compensation, Benefits, Retirement, HRMS in September 2000. Prior to joining NRG, she served as Vice President, Human Resources Operations with Metris Companies Inc. and Director, Human Resources with General Electric ITS.

Steven C. Winn

Age: 41

Executive Vice President, Strategy and Environmental and New Business

 

Mr. Winn has been Executive Vice President, Strategy, and Environmental and New Business since December 2006. In this role, he is responsible for identifying opportunities to enhance NRG’s competitive position in the energy industry and increase revenue growth through synergistic acquisitions and business alliances. Winn also will continue to oversee NRG’s nuclear development efforts for South Texas Project (STP) units 3 and 4. Most recently, Mr. Winn served as Executive Vice President and Regional President for NRG Texas following NRG’s acquisition of Texas Genco LLC since February 2006. He served as Vice President, Mergers and Acquisitions from April 2005 to December 2005 and as Director, Mergers and Acquisitions from November 2004, when he joined NRG, to April 2005. Prior to joining NRG, Mr. Winn worked in Power and Energy Investment Banking at Lehman Brothers and Salomon Brothers.

 

The following table sets forth information concerning beneficial ownership of the Company’s Common Stock as of March 12, 2007, for: (a) each director and the nominees for director; (b) named executive officers set forth in the Summary Compensation Table; (c) the directors and executive officers as a group; and (d) each person known to the Company to own more than 5 percent of the Company’s Common Stock. None of the directors, nominees for director or named executive officers own any of the Company’s preferred stock, and the Company is not aware of any person who owns more than 5 percent of the Company’s preferred stock. Unless otherwise indicated, each person has sole investment and voting power with respect to the shares set forth in the following table.

 

Except as noted below, the address of the beneficial owners is NRG Energy, Inc., 211 Carnegie Center, Princeton, New Jersey 08540.

 

		Percent of
Name of Beneficial Owner		Class		Common Stock(1)
David Crane		*			785,895	(2)
Robert C. Flexon		*			144,467	(3)
Kevin T. Howell		*			18,194	(4)
Steven C. Winn		*			25,721	(5)
John P. Brewster		*			43,392	(6)
Howard E. Cosgrove		*			35,863	(7)
John F. Chlebowski		*			12,982	(8)
Lawrence S. Coben		*			15,702	(9)
Stephen L. Cropper		*			12,820	(10)
William E. Hantke		*			507	(11)
Paul W. Hobby		*			2,088	(12)
Maureen Miskovic		*			6,134	(8)
Anne C. Schaumburg		*			5,309	(8)
Herbert H. Tate		*			5,420	(13)
Thomas H. Weidemeyer		*			10,121	(14)
Walter R. Young		*			20,615
All Directors and Executive Officers		*			1,206,061	(15)
Janus Capital Management LLC		7.3%			8,898,539	(16)
151 Detroit Street Denver, Colorado 80206
Massachusetts Financial Services Company		6.0%			7,312,114	(17)
500 Boylston Street Boston, Massachusetts 02116
Orbis Investment Management Limited		6.1%			7,472,777	(18)
901 Marquette Avenue, Suite 2300 Minneapolis, Minnesota 55402
Prudential Financial, Inc.		6.9%			8,401,697	(19)
751 Broad Street Newark, New Jersey 07102-3777

 

 

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers to file with the SEC reports regarding their ownership and changes in ownership of our stock. Based on a review of these reports and the written representations of its directors and executive officers, NRG believes that during 2006, its directors and executive officers complied with all Section 16(a) filing requirements, except for late Section 16 filings filed on behalf of David Crane and Curtis Morgan.

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included in this Proxy Statement required by Item 402(b) of Regulation S-K with management and, based upon such review and discussion, the Compensation Committee has recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

Compensation Committee:

 

Lawrence S. Coben, Chair
Thomas H. Weidemeyer
Walter R. Young

 

 

The following discussion and analysis is focused on our executive compensation program as it relates to NRG’s Named Executive Officers, or NEOs. The NEOs are the Chief Executive Officer, the Chief Financial Officer and the three most highly compensated executive officers other than the Chief Executive Officer and Chief Financial Officer serving as executive officers at the end of the 2006 fiscal year. Our analysis is based on the following outline:

 

 

 

Objectives of NRG’s executive compensation program

 

The Compensation Committee of the Board, referred to as the Committee for purposes of this CD&A, is responsible for the development and implementation of NRG’s executive compensation program. The objectives of this program flow from the Committee’s philosophy that executive compensation should be aligned with shareholder value and improvements in corporate performance.

 

These objectives include elements of both short- and long-term values, therefore the program strives to effectively utilize elements of compensation under a total reward philosophy that combines annual and multi-year reward opportunities. The intent is to develop a compensation program that rewards the annual accomplishment of the Company’s goals and objectives while supporting the Company’s long-term business strategy.

 

What is NRG’s executive compensation program designed to reward

 

Shareholder value and corporate performance are realized through the Company’s ongoing business strategy to consistently optimize the value of our generation assets while using that asset base as a platform for enhanced financial performance. This is attained by maintaining and enhancing the Company’s position as a leading wholesale independent power generation company in a cost effective and risk-mitigating manner. This strategy consists of:

 

 

Our executive compensation program promotes this strategy by:

 

 

Elements of compensation provided under NRG’s executive compensation program

 

To assist in selecting and determining amounts for NRG’s executive compensation program, the Committee has retained Mercer Human Resources Consulting, or Mercer, a compensation consultant, to provide it with market information, analysis and guidance in the development and assessment of NRG’s executive compensation program. In this capacity, Mercer is retained by, and is directly accountable to, the Committee. The Committee pursuant to its Charter has the authority to retain, at the expense of the Company, compensation experts, and other advisors as it deems appropriate to assist the Committee in the full performance of its functions, including sole authority to retain and terminate any compensation consultant used to assist the Committee in the evaluation of director, Chief Executive Officer or executive compensation, and to approve the consultant’s fees and other retention terms. The Committee’s Charter authorizes the Committee to engage a compensation consultant to provide independent advice, support, and expertise to support the Committee in overseeing, and reviewing, the Company’s overall compensation strategy, structure, policies and programs, and to assess whether the Company’s compensation structure establishes appropriate incentives for management and employees.

 

Annually, the Committee reviews all elements of executive compensation individually and in the aggregate against market data for companies with which NRG competes for executive talent. Mercer works with NRG’s Human Resources Department in formulating recommendations for the Committee’s consideration to determine the levels and components of compensation to be provided for any fiscal year. The Committee evaluates NRG’s executive compensation based on competitive market information developed by Mercer via the development of a “peer group” targeting publicly-traded, independent power producers and utilities with power generation operations based on criteria targeting companies with:

 

 

In February 2006, NRG completed the acquisition of Texas Genco LLC. This transaction substantially increased the size of NRG and increased its annual revenues from approximately $2.7 billion to approximately $5.6 billion for the year ended December 31, 2006. In anticipation of the close of the Texas Genco acquisition, the Committee asked Mercer to develop a peer group for compensation review purposes more representative of the Company after the transaction.

 

The peer group for 2006 included the following companies:

 

Constellation Energy Group Inc. (NYSE: CEG), AES Corporation (NYSE: AES), TXU Corporation (NYSE: TXU), Calpine Corporation (OTC: CPNLQ), Reliant Energy, Inc. (NYSE: RRI), DTE Energy Company (NYSE: DTE), Dynegy Inc. (NYSE: DYN), El Paso Corporation (NYSE: EP), PPL Corporation (NYSE: PPL), CMS Energy Corporation (OTC: CMSRL), Mirant Corporation (NYSE: MIR), and Allegheny Energy, Inc.(NYSE: AYE).

 

The peer group for 2005 prior to the Texas Genco acquisition consisted of the following companies:

 

AES Corporation (NYSE: AES), Dynegy, Inc. (NYSE: DYN) Calpine Corporation (OTC: CPNLQ), Mirant Corporation (NYSE: MIR), Reliant Energy, Inc. (NYSE: RRI), Edison Mission Energy (NYSE: EME), and Covanta (NYSE: CVA).

 

The various elements of NRG’s executive compensation program for 2006 were benchmarked relative to the compensation provided to executives of this peer group, as well as other published survey data. For the survey analysis, Mercer benchmarked NRG’s NEOs to survey data based on functional job responsibility, using energy data where available and supplementing it with general industry data. NRG’s plan design, plan features, and level of participation were also considered during the benchmarking exercise.

 

For each element, and in the aggregate, NRG targeted the peer group median for its NEO population for both total cash compensation (base salary plus annual cash incentives) and the median for total direct compensation (total cash compensation plus expected value of long-term incentives). The Committee aims to emphasize performance-based pay balancing short- and long-term results through the use of an effective mix of cash, equity and other benefits.

 

Based on Mercer’s analysis of NRG’s peer group and in conjunction with the objectives determined above, the Committee established the following six components of NRG’s executive compensation program:

 

 

The foundation for NRG’s total reward philosophy is to align the short- and long-term interests of the Company with that of its shareholders, business goals and objectives, and to foster improvements in corporate performance. To fulfill this philosophy, we have selected various tools to address this strategic desire viewing reward in the aggregate with respect to base salary, annual incentives, equity, and benefits, with each serving a different function.

 

Base Salary

 

Base salary — Annual base salary is designed to compensate NEOs for their level of experience and continued expectation of superior performance. Base salary is expected to increase year-on-year in relation to market competitiveness and individual performance.

 

For the fiscal year 2006, annual base salaries for NEOs were reviewed relative to the median base salary levels for each executive’s position based on NRG’s peer group. In alignment with the Company’s pay-for-performance approach to total compensation, levels of base salary are targeted at the market median. The base salary recommendations also incorporate the NEO individual performance, the general contributions of the NEO to overall corporate performance and the level of responsibility of the NEO with respect to their specific position. In general, in January 2006, base salary levels for NEOs were increased between 3.5% to 5.5% to reflect the above mentioned criteria. We expect merit increases to remain within this range in the future, subject to actual performance, business conditions, and market performance. On occasion, it may become necessary to make adjustments to the salary of a NEO based on exceptional individual performance or due to a change in the competitive market.

 

Annual Incentive Compensation

 

Overview

 

Annual incentive compensation is designed to compensate NEOs for meeting specific individual and Company goals, and is determined as a percentage of each NEO’s annual base salary. Annual incentives are designed to reward individuals for meeting financial and non-financial goals and objectives established as part of the Company’s annual business plan. Incentive plan design is mindful of best practices and market competitiveness as benchmarked with NRG’s peer group.

 

The Annual Incentive Plan, or AIP, is calculated using actual performance results from a weighted percentage of performance criteria. These criteria are chosen to align NEOs clear line-of-sight responsibility to available quantitative financial measures as well as to qualitative measures that NRG values in the leadership of the business, which includes safety, budget control, staff development, and individual performance compared to the Company’s goals. Annually, quantitative and qualitative performance goals are recommended by the NRG Senior Management Team for approval by the Committee. These criteria were chosen as they are the primary short-term benchmarks to the strategies chosen for attaining the Company’s business objectives of increasing shareholder value and the improvement in corporate performance.

 

2006 AIP

 

Range of AIP — The Chief Executive Officer is accountable for developing the goals for all other NEOs, while the Committee, with input from the Chief Executive Officer, determines the goals for the Chief Executive Officer. These goals are established at the beginning of each fiscal year. For the fiscal year 2006, these goals were reviewed and approved by the Committee on January 24, 2006. For the fiscal year 2006, the target annual incentive opportunity for NEOs ranged from 75 percent to 100 percent of base salary. An additional maximum opportunity was established for each NEO ranging from 37.5 percent to 100 percent of base salary above the target opportunity. Mercer has reported that the AIP plan design, as displayed in the table below, is consistent with market practice both in terms of target percentages and range of opportunity.

 

The threshold, target and maximum incentive opportunities for the NEOs for 2006 were as follows:

 

 

 

 

AIP Performance Criteria — The following table provides the 2006 performance criteria established for the NEOs.

 

 

AIP Calculation — Payment of the AIP is contingent on attaining the AIP Threshold, as described below. If the AIP Threshold is met or exceeded, the annual incentive payment is calculated in two steps: as a percentage up to the AIP Target and as a percentage above the AIP Target. The first step calculates each of the performance criteria for performance between the AIP Threshold and the AIP Target amounts. Then, if the AIP Target is exceeded, a second calculation is performed to compute the portion of the incentive payment attributable to performance between the AIP Target and the AIP Maximum. The sum of the two pieces (the AIP Threshold-the AIP Target components + the AIP Target-the AIP Maximum components) equals the NEO incentive earned under the AIP.

 

AIP Threshold — For fiscal year 2006, the AIP Threshold was set at a level appropriate for a minimally acceptable level of Company financial performance – $1,076M of Consolidated Free Cash Flow for 2006. Thus, if the AIP Threshold “gate” has been opened, then each performance criteria of the AIP is eligible for payment, per actual performance compared to goals. If the AIP Threshold goal is not achieved, no annual incentives would have been paid for 2006 performance.

 

AIP Target — For fiscal year 2006, AIP incentives for NEOs are based on the achievement of a combination of pre-established, quantitative Company financial and qualitative performance goals. The 2006 Company financial goals included Free Cash Flow and Consolidated Adjusted EBITDA criteria and were established to equal the Company’s internally approved budget. Qualitative goals may include up to all of the following components for an individual NEO: Staff Development, Environmental, Safety, Budget Control, Strategic Development, and Individual Performance compared to the Company’s goals. Both the budget and the qualitative goals have been chosen as the criteria for AIP payments because they best represent the Company’s primary short-term benchmarks for attaining the Company’s strategy.

 

For performance between the AIP Threshold and AIP Target, AIP payments are based on the weight of each performance criterion. If the AIP Threshold for Free Cash Flow is achieved, each criterion will be used on a weighted average to calculate the AIP payment, per the percentages set forth below. The table below sets forth the 2006 annual performance criteria for each NEO and the weight given to each in determining the AIP for performance between the AIP Threshold and the AIP Target.

 

 

AIP payments above the AIP Target will only be possible if the Free Cash Flow and/or the Consolidated Adjusted EBITDA Targets are achieved. Continued focus and delivery on these metrics best support the Company’s objectives of increasing shareholder value and performance improvement and ensure continued access to capital for growth, enhanced risk-adjusted returns, and flexibility in executing the Company’s business strategy to meet these objectives.

 

The following table provides the Free Cash Flow and Consolidated Adjusted EBITDA Thresholds and Targets:

 

 

AIP Maximum — For fiscal year 2006, the AIP Maximum amounts can only be achieved if the Free Cash Flow and Consolidated Adjusted EBITDA Targets are surpassed. In the event that these financial performance criteria exceed maximum levels, the NEO is still capped to the AIP Maximum. The AIP Maximum Free Cash Flow and Consolidated Adjusted EBITDA are based on the achievement of a number of financial, competitive, and strategic goals over and above the Company’s budget.

 

Results for 2006 AIP — As defined, the Company’s AIP Threshold and AIP Target levels are based on the Company’s audited financial statements. The achievement towards the threshold and targets described in the table above is calculated beginning with the Company’s audited financial statements and is adjusted based on the impact of non-recurring events that may impact Free Cash Flow and/or Consolidated Adjusted EBITDA, but have a positive impact on the Company’s business objectives of increasing shareholder value and improving corporate performance. For example, the Company’s hedge reset program negatively impacted Free Cash Flow by nearly $1.4 billion, while the sales of Resource Recovery and the Flinders operation in Australia negatively impacted Free Cash Flow and Consolidated Adjusted EBITDA by $7 million and $69 million, respectively. Additionally, transactions may occur throughout the year that may impact Free Cash Flow and/or Consolidated Adjusted EBITDA positively or negatively but were not due to direct Company management. In addition to the hedge reset and sales of Resource Recovery and Flinders, the Committee approved adjustments of ($61) million and $62 million for the calculation of Free Cash Flow and Consolidated Adjusted EBITDA criteria, respectively.

 

Based on the calculations above, both the Free Cash Flow and Consolidated Adjusted EBITDA AIP Targets were exceeded for 2006. The Chief Executive Officer provided documentation to the Committee and the Board regarding the qualitative and quantitative achievement for each NEO. The Committee evaluated the performance of the Chief Executive Officer based on his achievement compared to goals established for him for 2006. Subsequently, the Committee reviewed and approved the annual incentive awards for the NEOs based on individual performance goals along with the Free Cash Flow and Consolidated Adjusted EBITDA criteria. Bonus payments were paid after the release of the Company’s audited financial results for 2006. The annual incentives awarded to each of the NEOs for 2006, expressed as a percentage of base salary and in dollars, were as follows:

 

 

Long-Term Incentive Compensation

 

The Long-Term Incentive Plan, or LTIP, is developed to align compensation of NEOs with the objective of increasing long-term shareholder value. The value of the LTIP is solely related to NRG’s stock price as it is the primary indicator of shareholder value. Long-term incentive compensation is made in the form of equity awards to align the interests of management with those of the Company’s shareholders.

 

Types of Awards — NRG’s LTIP is comprised of the following types of awards:

 

 

The design of PU’s is intended to reward NEOs based on total shareholder return over the three-year vesting period relative to the Company’s total cost of equity over this period. The target price of the award is based on an annual projected cost of equity established at the start of each three-year vesting period. The Committee will approve a target stock price based on a compounding share price growth factor over the vesting period. The maximum price represents 150% of the compounded target price. For fiscal year 2006, the annual projected cost of equity used in determining the target price was 12% for each year in the vesting period. For fiscal year 2006, the annual projected cost of equity used in determining the maximum price was 18% for each year in the vesting period. Accordingly, for PU’s granted on January 3, 2006, the target price was set at $66.37 per share and the maximum price was set at $79.49 per share.

 

 

Range of LTIP compensation — The aggregate expected value of equity awards granted to each NEO for the fiscal year 2006 was based on a review of the expected value of equity grants made to NEOs in NRG’s peer group, expressed as a multiple of base salary. Mercer provided equity benchmark data for the peer group and provided recommendations as a multiple of base salary to the Committee. For 2006, these multiples were four times base salary for the Chief Executive Officer, two times base salary for the Chief Financial Officer, and one and a half times base salary for all other NEOs. The Company’s practice is to issue annual equity awards on the first business day of the calendar year. For fiscal year 2006, the grant date was January 3, 2006. The price per share of the Company’s stock on the grant date was $47.95 per share.

 

Blended annual allocation — A blended allocation of award type was developed to further align NEO interests with shareholders. NQSO’s directly align the NEOs’ interests with the performance of NRG’s Common Stock. PU’s provide the NEOs an increased opportunity to hold NRG stock for performance above the target price set under the LTIP. Allocation of RSU’s reflects market trends favoring increased usage of restricted stock over stock options used as a retention incentive.

 

A substantially higher percentage of total equity awards are granted in the form of NQSO’s and PU’s to align with the goal of enhancing shareholder value with executive compensation. The allocation by equity type is reviewed annually by the Committee based on the Company’s overall strategy and existing market best practices.

 

For fiscal year 2006, the Committee approved equity compensation grants allocated among the types of awards as follows:

 

 

In December 2006, the following changes were made to the LTIP to support NRG’s commitment to increasing and maximizing shareholder value.

 

 

 

The total dollar value, number and types of equity awards made to the NEOs for 2006 are shown in the Grant of Plan-Based Awards table below.

 

Benefits

 

Benefits — Health benefits, life insurance, and retirement programs add a significant value to the overall reward package for NEOs. Company sponsorship (coupled with competitive employee cost-sharing arrangements) of these plans is critical to NRG’s ability to attract and retain the talent it needs to support the Company’s business objectives. NEOs participate in the same retirement, health and welfare plans as other salaried employees of the Company. To generally support more complicated financial planning and estate planning matters, NEOs are provided personal financial services up to $10,000 each year to assist with financial planning and tax counseling. Survey data indicates that participation in this form of benefit is consistent with market practice at the executive level and that $10,000 is a reasonable level of benefit for this type of service.

 

Pursuant to the terms of his negotiated employment agreement which allows for the continuation of previously awarded personal life and disability insurance, in 2006, Mr. Crane received additional benefits in the form of a $12,000 life insurance premium reimbursement and $10,120 disability insurance premium reimbursement. NRG also reimbursed Mr. Crane for the tax gross-up of these amounts totaling $16,995. Such arrangements do not exist for other NEOs.

 

Discretionary Payments

 

From time-to-time, the Committee will make off-cycle cash and/or equity awards to reward executives for reasons such as extraordinary performance, the hiring of a new executive, promotion, or recognition. Review and approval for any discretionary payment is subject to approval by the Chief Executive Officer. In cases of discretionary payments for designated officers, both Chief Executive Officer and Committee approval is required.

 

Potential Severance and Change in Control Benefits

 

Mr. Crane, pursuant to his employment agreement, and the other NEOs, pursuant to the Company’s Executive and Key Management Change-in-Control and General Severance Plan, also referred to as the CIC Plan, are entitled to severance payments and benefits in the event of termination of employment under certain circumstances, including following a change-in-control. NRG chooses to pay severance and change-in-control benefits to assist with career transitions of executives and the Company as well as to create an environment that provides for adequate business transition and knowledge transfer during times of change. The level of this severance protection is established to be competitive with market best practices.

 

Change-in-control agreements are considered market practice among publicly-held companies. Most often, agreements are utilized to encourage executives to remain with the Company during a period that is otherwise filled with job uncertainty and questions about the future. In order to enable a smooth transition during the interim period, change-in-control agreements provide a defined level of security for the executive, and the Company, to follow through on the elements of a particular acquisition, asset sale/purchase, and integration.

 

For a more detailed discussion, including the quantification of potential payments, please see the section entitled “Severance and Change-in-Control” following the executive compensation tables below.

 

Stock Ownership Guidelines

 

The Committee and the Board continue to require the Chief Executive Officer to hold Company stock with a value equal to five times his base salary until termination from the Company. Other NEOs are encouraged to hold equity instruments with a value equal to two times their base salary until termination from the Company. Only vested shares count towards the ownership multiple. As NRG has experienced a limited number of LTIP grant opportunities many NEOs have not yet achieved expected stock ownership multiples. It is anticipated, however, that NEOs will achieve expected ownership multiple thresholds over the course of a series of upcoming LTIP grants. The current stock ownership for NEOs as of December 31, 2006 is shown below:

 

 

Dilution concerns and other limitations

 

NRG and the Committee work to ensure that NRG’s equity awards balance both the interests of shareholders in controlling dilution and NRG’s business need to attract, motivate, and retain the level of executive talent needed to execute its business strategy. Observing established dilution rates help shareholders preserve anticipated share ownership percentages in NRG. The dilution interests are tracked by way of:

 

 

The Committee remains focused on maintaining market prevailing dilution rates of less than 15 percent, as well as a three-year average run rate at or below two percent. NRG’s potential dilution rate at the end of 2006 was approximately 6.3 percent, with an actual dilution rate of three percent reflecting shares granted at year-end. The run rate was less than one percent. These rates are well within the recommended guidelines provided by Mercer.

 

Tax and Accounting Considerations

 

The Committee has considered the implications of Section 162(m) of the Code, which precludes the Company (as a public company) from taking a tax deduction for individual compensation in excess of $1 million for any of the NEOs, subject to certain exemptions. The Committee has also considered the exemptions to such limitation, which are also provided in Section 162(m) and specifically the exemption for compensation that is “performance based” within the meaning of section 162(m). The Committee believes tax deductibility of compensation is an important consideration and, where possible and considered appropriate, intends to preserve the deductibility of compensation to NEOs under Section 162(m). However, the Committee also believes that it is important to retain flexibility in designing compensation programs, and as a result, has not adopted a policy that any particular amount of compensation must be deductible to NRG under Section 162(m). The Committee also takes into account tax consequences to NEOs in designing the various elements of the Company’s compensation program, such as designing the terms of awards to defer immediate income recognition in accordance with Code Section 409A of the Code. The Committee remains informed of the accounting implications of its compensation programs, however, approves programs based on their total alignment with the Company’s strategy and long-term goals.

 

 

 

 

 

The Summary Compensation Table reflects the elements of compensation earned by the NEOs under NRG’s executive compensation programs for the 2006 fiscal year.

 

Salary ($): Values shown represent the base salary earnings of the NEO for 2006.

 

Bonus ($): Values reflect Discretionary Awards, as described earlier in the Elements of Compensations in the CD&A above. Mr. Winn was awarded a Discretionary Award of $165,000 for his leadership efforts in successfully negotiating the acquisition of Texas Genco.

 

Stock Awards ($): This column represents compensation expense recorded in NRG’s income statement for fiscal year 2006 as determined in accordance with FAS 123R and discussed in Item 15 — Note 19, Stock-Based Compensation, to the Consolidated Financial Statements in NRG’s 2006 Form 10-K.

 

Option Grants ($): This column represents compensation expense recorded in NRG’s income statement for fiscal year 2006 as determined in accordance with FAS 123R and discussed in Item 15 — Note 19, Stock-Based Compensation, to the Consolidated Financial Statements in NRG’s 2006 Form 10-K.

 

Non-Equity Incentive Plan Compensation ($): Represent values earned under NRG’s 2006 AIP payable in March 2007. NEOs were provided the opportunity to earn a cash incentive payment based on the attainment of certain pre-established Company and individual goals for fiscal year 2006. The performance criteria and weight given to each NEO are described in detail earlier in the CD&A above. The dollar amounts in the Table represent payouts for actual 2006 Company performance.

 

Change in Pension Value ($): Two NEOs participate in the NRG Pension Plan, which was closed to new employees hired on, or after, December 5, 2003. The value shown represents the 2006 year-on-year increase in the value of the defined benefit pension plan.

 

All Other Compensation ($): This value collectively captures the additional benefits payable by NRG including the employer match under the 401(k) plan, relocation expenses (if applicable), financial counseling services up to $10,000, and the amount payable under NRG’s all-employee discretionary match to the 401(k) plan.

 

Employment Agreements

 

Mr. Crane serves as the President and Chief Executive Officer of the Company pursuant to the terms of an employment agreement with the Company that was amended and restated, effective March 3, 2006. The initial term of the amended and restated employment agreement will end on December 1, 2008, however, the agreement will be renewed automatically for successive one-year terms on the same terms and conditions unless either party provides the other with notice to the contrary at least 90 days prior to the end of the initial term or any subsequent one-year term.

 

Effective March 3, 2006 through December 31, 2006, the amended and restated employment agreement provides for an annual base salary of $1,000,000. For each one-year period thereafter, Mr. Crane’s base salary will be reviewed and may be increased by the Board. Beginning with the 2006 fiscal year, Mr. Crane is entitled to an annual bonus with a target amount of up to 100 percent of his base salary, based upon the achievement of criteria determined at the beginning of the fiscal year by the Board, with input from Mr. Crane, for that fiscal year. In addition, beginning with the 2006 fiscal year, Mr. Crane is also entitled to a maximum annual bonus up to an additional 100 percent of his base salary, based upon the achievement of Free Cash Flow and Adjusted EBITDA criteria for that fiscal year.

 

In addition to salary and bonuses, the employment agreement provides that Mr. Crane is eligible to participate in the Company’s LTIP in accordance with its terms. Mr. Crane is also entitled to health, welfare and retirement benefits, term life insurance of $7.75 million, five weeks paid vacation, and coverage under the Company’s director and officer liability insurance coverage, in addition to reimbursement of reasonable business expenses and reimbursement of reasonable expenses for financial planning. Mr. Crane’s employment agreement also entitles him to certain severance payments and benefits in the event his employment terminates under certain circumstances. These severance payment and benefits are described and quantified under the section “Severance and Change-in-Control” below.

 

The Company has not entered into employment agreements with NEOs other than Mr. Crane.

 

 

 

 

2006 Annual Incentive Plan

 

NEOs were provided the opportunity to earn an AIP payment based on the attainment of certain pre-established Company and individual goals for fiscal year 2006. The performance criteria and weight given to each are described in detail in the CD&A above. The dollar amount of the possible payouts for achieving the threshold, target or maximum levels of performance during 2006 are shown in the above table.

 

2006 Long-Term Equity Incentives

 

For 2006, the NEOs were provided long-term incentives through grants of the following types of equity awards as indicated in the above table: (i) NQSO’s; (ii) RSU’s; and (iii) PU’s. Consistent with our policy, these awards were granted to NEOs as of the first business day of the fiscal year, i.e. January 3, 2006.

 

Each NQSO represents the right to purchase one share of Common Stock at a price equal to the fair market value of the stock determined as of the date of grant. NQSO’s granted in 2006 have a term of six years and vest in equal annual installments over a three year vesting schedule. Upon termination of service by reason of death, the NQSO shall vest in full and shall be exercisable by the executor or administrator of participant’s estate (or any person to whom the NQSO is transferred by will or the laws of descent and distribution) until the earlier of the expiration date or 12 months after the date of such termination of service, and thereafter the NQSO shall terminate and cease to be exercisable. Upon termination of service by reason of disability, the participant shall have the right until the earlier of the expiration date or 12 months after the date of such termination of service to exercise only that portion of the NQSO that was exercisable as of the date of such termination of service, and thereafter the option shall terminate and cease to be exercisable.

 

Each RSU represents the right to receive one share of Common Stock as of the vesting date for the award. RSU’s granted in 2006, will become 100% vested as of the third anniversary of the date of grant provided the NEO is still employed with the company as of that date. Upon termination of service by reason of death, the RSU shall vest in full and the Common Stock underlying the RSU shall be issued and delivered to the participant’s legal representatives, heirs, legatees, or distributees.

 

Each PU represents the right to receive a certain number of shares of Common Stock after the completion of three years of service from the date of grant, provided the price per share of Common Stock as of the date of vesting equals or exceeds the target price set under the award. The number of shares of Common Stock to be paid as of the vesting date is equal to: (i) one share if the target price is met; (ii) a pro rata amount between one and two shares if the target price is exceeded but the maximum price set under the award is not met; and (iii) two shares if the maximum price is met or exceeded. For PU’s granted on January 3, 2006 the target price is $67.37 and the maximum price is $79.49. For PU’s granted on February 3, 2006, the target price is $66.42 and the maximum price is $77.67. Upon termination of service by reason of death, the PU shall vest in full and the Common Stock underlying the PU shall be issued and delivered to the participant’s legal representatives, heirs, legatees, or distributees.