PREM14A 1 dprem14a.htm PRELIMINARY PROXY STATEMENT. Preliminary Proxy Statement.
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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

(Rule 14a-101)

Filed by the Registrant x                                                     Filed by a Party other than the Registrant ¨

Check the appropriate box:

 

x Preliminary Proxy Statement

 

¨ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

¨ Definitive Proxy Statement

 

¨ Definitive Additional Materials

 

¨ Soliciting Material Pursuant to §240.14a-12

DYNEGY INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

¨ No fee required.

 

x Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  (1) Title of each class of securities to which transaction applies:

Common stock, par value $0.01 per share.

 

  (2) Aggregate number of securities to which transaction applies:

120,737,451 shares of the Registrant’s common stock and 3,387,884 of the Registrant’s phantom stock units.

 

  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

Solely for the purpose of calculating the registration fee, the underlying value of the transaction was calculated as the sum of (A) 120,737,451 of the Registrant’s shares of common stock (including restricted common stock), multiplied by $4.50 per share and (B) 3,387,884 of the Registrant’s phantom stock units multiplied by $4.50 per phantom stock unit.

 

  (4) Proposed maximum aggregate value of transaction:

$558,564,008

 

  (5) Total fee paid:

$39,825.61, determined based upon multiplying 0.00007130 by the proposed maximum aggregate value of transaction of $558,564,008.

 

¨ Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

 

  (1) Amount Previously Paid:

 

 

  (2) Form, Schedule or Registration Statement No.:

 

 

  (3) Filing Party:

 

 

  (4) Date Filed:

 

 

 

 

 


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LOGO

[], 2010

Dear Stockholder:

We cordially invite you to attend a special meeting of stockholders of Dynegy Inc., a Delaware corporation, which we refer to as the Company, to be held on [], 2010 at [], at Dynegy’s headquarters, Wells Fargo Plaza, 1000 Louisiana Street, Houston, Texas, 77002.

On August 13, 2010, the Company entered into a merger agreement providing for the acquisition of the Company by Denali Parent Inc., an entity formed by an affiliate of The Blackstone Group L.P. At the special meeting, you will be asked to consider and vote upon a proposal to adopt the merger agreement.

Concurrently with the execution of the merger agreement, an entity formed and wholly owned by Denali Parent Inc. entered into a purchase and sale agreement with NRG Energy, Inc., which we refer to as NRG, pursuant to which NRG will purchase four of our natural gas-fired assets. The completion of the merger is contingent upon the concurrent closing of the transaction with NRG. No approval of the holders of our common stock is required in order to complete the transaction with NRG and no such approval is being sought from you. The transaction with NRG will not occur if the merger is not consummated.

If the merger contemplated by the merger agreement is completed, you will be entitled to receive $4.50 in cash, without interest, less any applicable withholding taxes, for each share of our common stock owned by you (unless you have properly exercised your appraisal rights with respect to such shares), which represents a premium of approximately 62% to the closing price of our common stock on August 12, 2010, the last trading day prior to the public announcement of the execution of the merger agreement, and a premium of approximately 26% to the average closing price of our common stock during the 30-day trading period ended on August 12, 2010. The $4.50 per share is a discount to the trading price of our common stock for recent periods prior to June 28, 2010.

The board of directors of the Company has determined that the merger is fair to, and in the best interests of, the Company and its stockholders and approved and declared advisable the merger agreement and the merger and the other transactions contemplated by the merger agreement. The Company’s board of directors made its determination after consultation with its legal and financial advisors and consideration of a number of factors. The board of directors of the Company recommends that you vote “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Approval of the proposal to adopt the merger agreement requires the affirmative vote of holders of a majority of the outstanding shares of our common stock entitled to vote thereon.

Your vote is very important. Whether or not you plan to attend the special meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy card in the accompanying prepaid reply envelope, or submit your proxy by telephone or the Internet. If you attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted. The failure to vote will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement.

If your shares of our common stock are held in “street name” by your bank, brokerage firm or other nominee, your bank, brokerage firm or other nominee will be unable to vote your shares of our common stock without instructions from you. You should instruct your bank, brokerage firm or other nominee to vote your shares of our common stock in accordance with the procedures provided by your bank, brokerage firm or other


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nominee. The failure to instruct your bank, brokerage firm or other nominee to vote your shares of our common stock “FOR” approval of the proposal to adopt the merger agreement will have the same effect as voting “AGAINST” approval of the proposal to adopt the merger agreement.

The accompanying proxy statement provides you with detailed information about the special meeting, the merger agreement, the merger, the NRG purchase and sale agreement and the NRG transaction. A copy of each of the merger agreement and the NRG purchase and sale agreement is attached as Annex A to the proxy statement. We encourage you to read the entire proxy statement and its annexes, including the merger agreement and the NRG purchase and sale agreement, carefully. You may also obtain additional information about the Company from documents we have filed with the Securities and Exchange Commission.

If you have any questions or need assistance voting your shares of our common stock, please contact MacKenzie Partners, Inc., our proxy solicitor, by calling toll-free at (800) 322-2885 or (212) 929-5500 (call collect) or by e-mailing dynegy@mackenziepartners.com.

Thank you in advance for your cooperation and continued support.

Sincerely,

LOGO

Bruce A. Williamson

Chairman of the Board, President and Chief Executive Officer

The proxy statement is dated [], 2010, and is first being mailed to our stockholders on or about [], 2010.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE MERGER, PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE PROPOSED MERGER AND THE NRG SALE, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.


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LOGO

DYNEGY INC.

1000 Louisiana Street, Suite 5800

Houston, TX 77002

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS [], 2010

 

 

 

DATE:

[], 2010

 

TIME:

[]

 

PLACE:

Dynegy’s headquarters, Wells Fargo Plaza, 1000 Louisiana Street, Houston, Texas, 77002

 

ITEMS OF BUSINESS:

 

1.      To consider and vote on a proposal to adopt the Agreement and Plan of Merger, dated as of August 13, 2010, as it may be amended from time to time, which we refer to as the merger agreement, among the Company, Denali Parent Inc., a Delaware corporation, which we refer to as Parent, and Denali Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Parent, which we refer to as Merger Sub. A copy of the merger agreement is attached as Annex A to the accompanying proxy statement.

 

2.      To consider and vote on a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement.

 

3.      To transact any other business incident to the conduct of the meeting that may properly come before the special meeting, or any adjournment or postponement of the special meeting, by or at the direction of the board of directors of the Company.

 

RECORD DATE:

Only stockholders of record at the close of business on [], 2010 are entitled to notice of, and to vote at, the special meeting. All stockholders of record as of that date are cordially invited to attend the special meeting in person.

 

PROXY VOTING:

Your vote is very important, regardless of the number of shares of common stock of the Company you own. The merger cannot be completed unless the merger agreement is adopted by the affirmative vote of the holders of a majority of the outstanding shares of the Company’s common stock entitled to vote thereon. Even if you plan to attend the special meeting in person, we request that you complete, sign, date and return, as promptly as possible, the enclosed proxy card


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in the accompanying prepaid reply envelope or submit your proxy by telephone or the Internet prior to the special meeting to ensure that your shares of common stock of the Company will be represented at the special meeting if you are unable to attend. If you fail to return your proxy card or fail to submit your proxy by phone or the Internet, your shares of common stock of the Company will not be counted for purposes of determining whether a quorum is present at the special meeting and will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement.

 

  If you are a stockholder of record, voting in person at the special meeting will revoke any proxy previously submitted. If you hold your shares of common stock of the Company through a bank, brokerage firm or other nominee, you should follow the procedures provided by your banker, brokerage firm or other nominee in order to vote.

 

RECOMMENDATION:

The board of directors of the Company has determined that the merger is fair to, and in the best interests of, the Company and its stockholders and approved and declared advisable the merger agreement and the merger and the other transactions contemplated by the merger agreement. The board of directors of the Company made its determination after consultation with its legal and financial advisors and consideration of a number of factors. The board of directors of the Company recommends that you vote “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

ATTENDANCE:

Only stockholders of record, their duly authorized proxy holders, beneficial stockholders with proof of ownership and our guests may attend the special meeting. To gain admittance, you must present valid photo identification, such as a driver’s license or passport. If your shares of common stock of the Company are held through a bank, brokerage firm or other nominee, please bring to the special meeting a copy of your brokerage statement evidencing your beneficial ownership of the common stock of the Company and valid photo identification. If you are the representative of a corporate or institutional stockholder, you must present valid photo identification along with proof that you are the representative of such stockholder. Please note that cameras, recording devices and other electronic devices will not be permitted at the special meeting.

 

APPRAISAL:

Stockholders of the Company who do not vote in favor of the proposal to adopt the merger agreement will have the right to seek appraisal of the fair value of their shares of common stock of the Company if they deliver a demand for appraisal before the vote is taken on the merger agreement and comply with all the requirements of Delaware law, which are summarized in the accompanying proxy statement and reproduced in their entirety in Annex D to the accompanying proxy statement.


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WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY CARD IN THE ACCOMPANYING PREPAID REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THE INTERNET. IF YOU ATTEND THE SPECIAL MEETING AND VOTE IN PERSON, YOUR VOTE BY BALLOT WILL REVOKE ANY PROXY PREVIOUSLY SUBMITTED.

By Order of the Board of Directors,

LOGO

Kimberly M. O’Brien

Corporate Secretary

Dated: [], 2010

Houston, Texas


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SUMMARY

   1

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

   13

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

   20

PARTIES TO THE MERGER

   22

The Company

   22

Parent

   22

Merger Sub

   23

THE SPECIAL MEETING

   24

Time, Place and Purpose of the Special Meeting

   24

Record Date and Quorum

   24

Attendance

   24

Vote Required

   24

Proxies and Revocation

   27

Adjournments

   27

Anticipated Date of Completion of the Merger

   27

Rights of Stockholders Who Seek Appraisal

   27

Solicitation of Proxies; Payment of Solicitation Expenses

   28

Questions and Additional Information

   28

THE MERGER

   29

Merger Consideration

   29

Background of the Merger

   29

Reasons for the Merger; Recommendation of the Board of Directors

   34

Opinions of Financial Co-Advisors

   40

Certain Company Forecasts

   52

Financing of the Merger

   55

Limited Guaranty

   56

Closing and Effective Time of Merger

   57

Payment of Merger Consideration and Surrender of Stock Certificates

   57

Interests of Certain Persons in the Merger

   57

Material U.S. Federal Income Tax Consequences of the Merger

   62

Regulatory Approvals

   63

Litigation Relating to the Merger

   64

THE MERGER AGREEMENT

   66

Explanatory Note Regarding the Merger Agreement

   66

Effects of the Merger; Directors and Officers; Certificate of Incorporation; Bylaws

   66

Closing and Effective Time of the Merger

   67

Treatment of Common Stock, Options and Other Equity Awards

   67

Capitalization of Parent

   68

Exchange and Payment Procedures

   68

Representations and Warranties

   69

Conduct of Our Business Pending the Merger

   73

Solicitation of Acquisition Proposals

   75

Stockholders Meeting

   77

Filings; Other Actions; Notification

   77

Company Cooperation with Refinancing

   78

Employee Benefit Matters

   79

Conditions to the Merger

   80

Termination

   81

Termination Fees

   82

 

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Expenses

   84

Remedies

   84

Indemnification; Directors’ and Officers’ Insurance

   85

Access to the Company and its Trading Operations

   86

Modification or Amendment

   86

The NRG PSA

   87

Enforcement Rights of the Company

   87

Representations and Warranties

   87

Filings; Other Actions; Notification

   89

Conditions to the NRG Sale

   90

Termination

   91

Termination Fees

   92

Specific Performance

   92

MARKET PRICE OF COMMON STOCK

   93

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   94

APPRAISAL RIGHTS

   96

DELISTING AND DEREGISTRATION OF COMMON STOCK

   99

STOCKHOLDER PROPOSALS

   99

WHERE YOU CAN FIND MORE INFORMATION

   101

 

Annex A Agreement and Plan of Merger, dated as of August 13, 2010, among Dynegy Inc., Denali Parent Inc. and Denali Merger Sub Inc., and the exhibits thereto, including a copy of the Purchase and Sale Agreement, dated as of August 13, 2010, between Denali Merger Sub Inc. and NRG Energy, Inc., which is attached as Exhibit A thereto

 

Annex B Opinion of Greenhill & Co., LLC, dated August 13, 2010

 

Annex C Opinion of Goldman Sachs & Co., dated August 13, 2010

 

Annex D Section 262 of the General Corporation Law of the State of Delaware

 

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This proxy statement and a proxy card are first being mailed on or about [], 2010 to stockholders who owned shares of the Company’s common stock as of the close of business on [], 2010.

SUMMARY

The following summary highlights selected information in this proxy statement and may not contain all the information that may be important to you. Accordingly, we encourage you to read carefully this entire proxy statement, its annexes and the documents referred to in this proxy statement. Each item in this summary includes a page reference directing you to a more complete description of that topic. You may obtain the information incorporated by reference in this proxy statement without charge by following the instructions under “Where You Can Find More Information” beginning on page [].

 

 

Parties to the Merger (Page [])

Dynegy Inc., or Dynegy, the Company, we or us, is a Delaware corporation headquartered in Houston, Texas. Our primary business is the production and sale of electric energy, capacity and ancillary services to regional transmission organizations and independent system operators, integrated utilities, electric cooperatives, municipalities, transmission and distribution utilities, industrial customers, power marketers, financial participants, other power generators and commercial end-users in seven U.S. states in the midwest, the northeast and the west regions of the U.S.

Denali Parent Inc., or Parent, is a Delaware corporation that was created by an affiliate of The Blackstone Group L.P., which we refer to as Blackstone, solely for the purpose of entering into the merger agreement and completing the transactions contemplated by the merger agreement. Blackstone is one of the world’s leading investment and advisory firms. Its alternative asset management businesses include the management of private equity funds, real estate funds, hedge funds, credit-oriented funds, collateralized loan obligation vehicles (CLOs) and closed-end mutual funds. Blackstone also provides various financial advisory services, including mergers and acquisitions advisory, restructuring and reorganization advisory and fund placement services. Upon completion of the merger, the Company will be a direct wholly owned subsidiary of Parent.

Denali Merger Sub Inc., or Merger Sub, is a Delaware corporation that was formed by Parent solely for the purpose of entering into the merger agreement and completing the transactions contemplated by the merger agreement and entering into the NRG PSA and completing the transactions contemplated by the NRG PSA. For a description of the NRG PSA and the transactions contemplated thereby, see “The NRG PSA” beginning on page []. Upon completion of the merger, Merger Sub will cease to exist.

In this proxy, we refer to the Agreement and Plan of Merger, dated as of August 13, 2010, as it may be amended from time to time, among the Company, Parent and Merger Sub, as the merger agreement, and the merger of Merger Sub with and into the Company as the merger. We also refer to the Purchase and Sale Agreement, dated as of August 13, 2010, as it may be amended from time to time, between NRG Energy, Inc., which we refer to as NRG, and Merger Sub, as the NRG PSA.

 

 

The Special Meeting (Page [])

Time, Place and Purpose of the Special Meeting (Page [])

The special meeting will be held on [], 2010, at [], at Dynegy’s headquarters, Wells Fargo Plaza, 1000 Louisiana Street, Houston, Texas, 77002.

At the special meeting, holders of our common stock, par value $0.01 per share, which we refer to as our common stock or the common stock, will be asked to approve the proposal to adopt the merger agreement, and to

 

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approve the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement.

Record Date and Quorum (Page [])

You are entitled to receive notice of, and to vote at, the special meeting if you owned shares of our common stock at the close of business on [], 2010, which the Company has set as the record date for the special meeting and which we refer to as the record date. You will have one vote for each share of our common stock that you owned on the record date. As of the record date, there were [] shares of our common stock outstanding and entitled to vote at the special meeting. A majority of the shares of our common stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum for the purposes of the special meeting. Abstentions and broker non-votes are counted as present for the purpose of determining whether a quorum is present.

Vote Required (Page [])

Approval of the proposal to adopt the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote thereon. Abstentions and broker non-votes will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement.

Approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies requires the affirmative vote of the holders of a majority of the shares of our common stock present in person or represented by proxy and entitled to vote on the matter at the special meeting, whether or not a quorum is present. Abstentions will have the same effect as a vote “AGAINST” approval of this proposal. Broker non-votes are not counted for purposes of this proposal.

As of [], 2010, the record date, the directors and executive officers of the Company beneficially owned and were entitled to vote, in the aggregate, [] shares of our common stock (not including any shares of our common stock deliverable upon exercise or conversion of any options, or any phantom stock units), representing []% of the outstanding shares of our common stock. The directors that approved the merger and the merger agreement and the executive officers of the Company beneficially owned and were entitled to vote, in the aggregate, [] shares of our common stock, representing []% of the outstanding shares of our common stock, and these directors and executive officers have informed the Company that they currently intend to vote all of their shares of our common stock “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Proxies and Revocation (Page [])

Any stockholder of record entitled to vote at the special meeting may submit a proxy by telephone, over the Internet, by returning the enclosed proxy card in the accompanying prepaid reply envelope, or may vote in person by appearing at the special meeting. If your shares of our common stock are held in “street name” through a bank, brokerage firm or other nominee, you should instruct your bank, brokerage firm or other nominee on how to vote your shares of our common stock using the instructions provided by your bank, brokerage firm or other nominee. If you fail to submit a proxy or to vote in person at the special meeting, or do not provide your bank, brokerage firm or other nominee with instructions, as applicable, your shares of our common stock will not be voted on the proposal to adopt the merger agreement, which will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement, and your shares of our common stock will not have an effect on the proposal to adjourn the special meeting.

You have the right to revoke a proxy, whether delivered over the Internet, by telephone or by mail, at any time before it is exercised, by voting again at a later date through any of the methods available to you, by giving

 

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written notice of revocation to our Corporate Secretary, which must be filed with the Corporate Secretary by the time the special meeting begins, or by attending the special meeting and voting in person.

 

 

The Merger (Page [])

The merger agreement provides that Merger Sub will merge with and into the Company. The Company will be the surviving corporation in the merger, which we refer to as the surviving corporation, and will continue to do business following the merger. As a result of the merger, the Company will cease to be a publicly traded company. If the merger is completed, you will not own any shares of the capital stock of the surviving corporation.

Merger Consideration (Page [])

In the merger, each outstanding share of our common stock (except for shares owned by Parent, Merger Sub, the Company and their respective wholly owned subsidiaries and not held on behalf of third parties, and shares owned by stockholders who have properly demanded appraisal rights, which we refer to collectively as excluded shares) will be converted into the right to receive $4.50 in cash, without interest, which amount we refer to as the per share merger consideration, less any applicable withholding taxes.

 

 

The NRG Sale (Page [])

Concurrently with the execution of the merger agreement, Merger Sub and NRG entered into the NRG PSA pursuant to which NRG will purchase four of our natural gas-fired assets from the surviving corporation, which we refer to as the NRG sale. A copy of the NRG PSA is attached as Exhibit A to the merger agreement, which is attached hereto as Annex A. The completion of the merger between the Company and Merger Sub is contingent upon the concurrent closing of the NRG sale. The NRG sale will not occur if the merger is not consummated. The proceeds from the NRG sale will be paid to the surviving corporation, and will not be distributed to or held for the benefit of the holders of our common stock prior to the merger. No approval of the holders of our common stock is required to complete the NRG sale and no such approval is being sought from you. NRG has agreed with Merger Sub that it will not take certain actions related to the consummation of an acquisition of the Company by a third party, directly or indirectly, until the earliest to occur of (i) 270 days after the date the NRG PSA was signed, (ii) the consummation of an acquisition of the Company by a third party, and (iii) 90 days after the stockholder vote on the merger agreement.

 

 

Reasons for the Merger; Recommendation of the Board of Directors (Page [])

After careful consideration of various factors described in the section entitled “The Merger—Reasons for the Merger; Recommendation of the Board of Directors”, beginning on page [], the board of directors of the Company, which we refer to as the board of directors, (i) determined that the merger is fair to, and in the best interests of, the Company and our stockholders, (ii) approved and declared advisable the merger agreement and the merger and the other transactions contemplated by the merger agreement, (iii) resolved that the merger agreement be submitted for consideration by the stockholders of the Company at a special meeting of stockholders and (iv) recommended that our stockholders vote to adopt the merger agreement. One director of the Company voted against approval of the merger and the merger agreement. See “The Merger—Background of the Merger” beginning on page [].

In considering the recommendation of the board of directors with respect to the proposal to adopt the merger agreement, you should be aware that our directors and executive officers have interests in the merger that are different from, or in addition to, yours. The board of directors was aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending that the merger agreement be adopted by the stockholders of the Company. See the section entitled “The Merger—Interests of Certain Persons in the Merger” beginning on page [].

The board of directors recommends that you vote “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

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Opinions of Financial Co-Advisors (Page [])

Opinion of Greenhill & Co., LLC (Page [])

Greenhill & Co., LLC, which we refer to as Greenhill, delivered its opinion to the board of directors that, as of August 13, 2010 and based upon and subject to the factors and assumptions set forth therein, the per share merger consideration to be received by the holders of our common stock (excluding Parent, Merger Sub and any of their affiliates) pursuant to the merger agreement was fair, from a financial point of view, to such holders.

The full text of Greenhill’s written opinion dated August 13, 2010, which contains the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex B to this proxy statement. The summary of Greenhill’s opinion in this proxy statement is qualified in its entirety by reference to the full text of the opinion. Greenhill’s written opinion was addressed to the board of directors. It was not a recommendation to the board of directors as to whether it should approve the merger or the merger agreement, nor does it constitute a recommendation as to whether the stockholders of the Company should adopt the merger agreement or take any other action with respect to the merger at any meeting of the stockholders convened in connection with the merger. Greenhill was not requested to opine as to, and its opinion did not in any manner address, the Company’s underlying business decision to proceed with or effect the merger.

Under the terms of Greenhill’s engagement with the Company, the Company has agreed to pay Greenhill a fee of $10 million in the aggregate, of which $5 million was paid following delivery of Greenhill’s written opinion and $5 million is payable upon the consummation of the merger. For a more complete description, see “Opinions of Financial Co-Advisors—Opinion of Greenhill & Co., LLC” beginning on page []. See also Annex B to this proxy statement.

We encourage you to read the opinion of Greenhill described above in its entirety for a description of the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with such opinion.

Opinion of Goldman, Sachs & Co. (Page [])

Goldman, Sachs & Co., which we refer to as Goldman Sachs, delivered its opinion to the board of directors that, as of August 13, 2010 and based upon and subject to the factors and assumptions set forth therein, the per share merger consideration to be paid to the holders of our common stock pursuant to the merger agreement was fair from a financial point of view to such holders.

The full text of the written opinion of Goldman Sachs, dated August 13, 2010, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex C to this proxy statement. Goldman Sachs provided its opinion for the information and assistance of the board of directors in connection with its consideration of the proposed merger. Goldman Sachs’ opinion is not a recommendation as to how any holder of our common stock should vote with respect to the merger or any other matter.

Under the terms of Goldman Sachs’ engagement with the Company, the Company has agreed to pay Goldman Sachs a fee of $10 million in the aggregate, of which $5 million was paid following delivery of Goldman Sachs’ written opinion and $5 million is payable upon the consummation of the merger. For a more complete description, see “Opinions of Financial Co-Advisors—Opinion of Goldman, Sachs & Co.” beginning on page []. See also Annex C to this proxy statement.

We encourage you to read the opinion of Goldman Sachs described above carefully in its entirety for a description of the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with such opinion.

 

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Financing of the Merger (Page [])

We anticipate that the total funds needed by Parent and Merger Sub to complete the merger will be obtained as follows:

 

   

the funds needed to pay our stockholders the amounts due to them under the merger agreement as holders of common stock and/or restricted stock (which we anticipate, based upon the shares of our common stock and restricted stock outstanding as of August 31, 2010, will be approximately $543 million), certain amounts due in connection with the merger and certain fees and expenses related to the merger, will be funded by equity financing of up to $580 million to be provided or secured by Blackstone Capital Partners V L.P., which we refer to as the guarantor, or other parties to whom it assigns a portion of its commitment; and

 

   

the funds needed to (i) repay or refinance indebtedness outstanding under the Company’s existing credit facility that will come due as a result of the merger (which we anticipate, based upon indebtedness outstanding as of August 30, 2010, will be approximately $918 million, consisting of an $850 million term letter of credit facility (“Term LC Facility”) and a $68 million senior secured term loan facility) and (ii) replace or refinance the letters of credit issued under the Term LC Facility (as of August 30, 2010, letters of credit issued under the Term LC Facility were approximately $470 million), will collectively be funded from the cash on hand of the Company, restricted cash of the Company associated with the Term LC Facility and proceeds the surviving corporation receives in the NRG sale (as of August 30, 2010, (a) the cash on hand of the Company was approximately $650 million and (b) restricted cash of the Company associated with the Term LC Facility was approximately $850 million).

We anticipate the remaining proceeds from the NRG sale will be used to provide liquidity to the Company in support of its operations and for other corporate purposes.

Parent has obtained the equity commitment letter described below, and the funding under the equity commitment letter is subject to certain conditions. In addition, Merger Sub has entered into the NRG PSA with NRG, and the closing of the merger is subject to the concurrent closing of the NRG sale. We believe the amounts committed under the equity commitment letter and to be received by the surviving corporation from the NRG sale, together with cash on hand of the Company and cash of the Company that is restricted under our existing credit facility, will be sufficient to complete the merger and to repay or refinance any outstanding indebtedness that will come due as a result of the merger, but we cannot assure you of that. Those amounts may be insufficient if, among other things, the guarantor fails to fund the committed amount in breach of the equity commitment, the outstanding indebtedness of the Company at the closing of the merger is greater than anticipated, cash on hand of the Company and cash of the Company that is restricted under the Company’s existing credit facility are less than expected, or the fees, expenses or other amounts required to be paid in connection with the merger are greater than anticipated. Although obtaining the proceeds of the equity financing is not a condition to the completion of the merger, the failure of Parent and Merger Sub to obtain sufficient equity financing is likely to result in the failure of the merger to be completed. In that case, if a court of competent jurisdiction declines to specifically enforce the obligations of Parent and Merger Sub under the merger agreement, Parent may be obligated to pay the Company a fee of $100 million, which we refer to as the Parent fee. In addition, if the merger agreement is terminated or the merger is not consummated, Merger Sub may be obligated to pay the Company 50% of certain amounts Merger Sub or any of its affiliates receive from NRG negotiated in connection with a termination of the NRG PSA or a failure of the NRG sale to be consummated, which we refer to as the NRG payment. See “The Merger Agreement—Termination Fees” beginning on page [] for a further discussion of the Parent fee and the NRG payment. The Parent fee and the NRG payment are guaranteed by the guarantor pursuant to the limited guaranty referred to below.

Equity Financing (Page [])

Parent has entered into a letter agreement, which we refer to as the equity commitment letter, with the guarantor, dated August 13, 2010, pursuant to which the guarantor has committed to make or secure capital

 

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contributions to Parent at or prior to the closing of the merger up to an aggregate amount of $580 million. The guarantor is permitted to capitalize Parent directly or indirectly through one or more affiliated entities or other designated co-investors (other than NRG or any of its affiliates), including with debt financing to the extent available from lenders other than NRG or the Company or any of their respective affiliates. However, in connection with the closing of the merger (i) no credit support in connection with any debt financing utilized to capitalize Parent may be provided by NRG, the Company or any of their affiliates and (ii) no new indebtedness of the Company or any of its subsidiaries, and no assets of the Company or any of its subsidiaries, will be used to pay any portion of the aggregate merger consideration to be paid to holders of our common stock.

The guarantor’s obligation to fund the financing contemplated by the equity commitment letter is subject only to the satisfaction of the conditions to Parent’s and Merger Sub’s obligations to consummate the transactions contemplated by the merger agreement. The Company is a third party beneficiary of the equity commitment letter to the extent that the Company seeks specific performance of Parent’s obligation to cause the guarantor to fund its equity commitment in certain limited circumstances in accordance with the terms of the merger agreement.

 

 

Limited Guaranty (Page [])

Pursuant to the limited guaranty delivered by the guarantor in favor of the Company, dated August 13, 2010, the guarantor has guaranteed the due and punctual payment when due of (i) the obligations of Parent under the merger agreement to pay the Parent fee and any NRG payment to the Company as and when due and (ii) certain expense reimbursement and indemnification obligations of Parent to the Company in connection with the Company’s cooperation with certain financing and third party investment activities. See “The Merger Agreement—Termination Fees” beginning on page []. However, the guarantor’s obligations under the limited guaranty are subject to a cap equal to (x) the sum of the Parent fee, the amount of any NRG payment and any expenses incurred by the Company in connection with enforcing its right to such amounts minus (y) any expense reimbursement and indemnification payments actually paid by Parent or Merger Sub to the Company in connection with the Company’s cooperation with certain financing and third party investment activities.

 

 

Interests of Certain Persons in the Merger (Page [])

In considering the recommendation of our board of directors that you vote to approve the proposal to adopt the merger agreement, you should be aware that our directors and executive officers have interests in the merger that are different from, or in addition to, those of our stockholders generally. The board of directors was aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending that the merger agreement be adopted by the stockholders of the Company. These interests include the following:

 

   

the vesting and cashing-out of all unvested shares of restricted stock, phantom stock and certain performance units held by our executive officers, and the payment in cash of the directors’ deferred compensation balances under the Company’s Deferred Compensation Plan for Certain Directors; and

 

   

pursuant to an executive change in control severance plan, the payment of severance payments (including, if applicable, a tax gross-up relating to parachute payment excise taxes resulting from such severance payments) in connection with a termination of employment that may occur in connection with or following the merger.

 

 

Material U.S. Federal Income Tax Consequences of the Merger (Page [])

The exchange of shares of our common stock for cash pursuant to the merger generally will be a taxable transaction to U.S. holders for U.S. federal income tax purposes. Stockholders who are U.S. holders and who exchange their shares of our common stock in the merger will generally recognize gain or loss in an amount equal to the difference, if any, between the cash payments made pursuant to the merger and their adjusted tax basis in their shares of our common stock. Backup withholding may also apply to the cash payments made pursuant to the merger unless the U.S. holder or other payee provides a taxpayer identification number, certifies that such number is correct and otherwise complies with the backup withholding rules. You should read “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page [] for a definition of “U.S. holder” and a more detailed discussion of the U.S. federal income tax consequences of the merger. You

 

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should also consult your tax advisor for a complete analysis of the effect of the merger on your federal, state and local and/or foreign taxes.

 

 

Regulatory Approvals (Page [])

Under the terms of the merger agreement, the merger cannot be completed until the waiting periods applicable to the consummation of the merger and the NRG sale under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or the HSR Act, have expired or been earlier terminated. On August 27, 2010, the Company and the guarantor filed notification of the proposed merger with the Federal Trade Commission, or the FTC, and the Antitrust Division of the Department of Justice, or the DOJ, under the HSR Act. On August 27, 2010, the guarantor and NRG filed notification of the proposed NRG sale with the FTC and the DOJ under the HSR Act.

In addition, the merger and the NRG sale cannot be completed without prior approval of the merger and the NRG sale by the Federal Energy Regulatory Commission, or FERC. The Company, certain of the Company’s subsidiaries, Parent, Merger Sub and NRG filed with FERC a joint application for approval of the merger and the NRG sale under Section 203 of the Federal Power Act on August 27, 2010. FERC may grant approval subject to conditions, including conditions that would require divestiture of substantial assets of the Company, Parent, or NRG in order to consummate the merger and/or the NRG sale, and also retains the authority to issue supplemental orders imposing additional conditions at any time.

The merger and the NRG sale are, or may be, subject to the regulatory requirements of other state and federal regulatory agencies and authorities. The Company, Parent and Merger Sub filed a joint petition for approval, or a determination that no approval is required, for the merger with the New York Public Service Commission, or the NYPSC, under Sections 70 and 83 of the New York Public Service Law, or the PSL, on August 27, 2010. The NYPSC generally concludes that no approval is required by applying what is known as the “Wallkill presumption”, as further described under “The Merger—Regulatory Approvals”.

The Company, on behalf of itself, Blackstone and NRG, also filed voluntary notifications relating to the merger and the NRG sale with the California Public Utilities Commission, or the CPUC, and the California Independent System Operator Corporation, or the CAISO, under CPUC General Order No. 167 on August 13, 2010. Although CPUC General Order No. 167 contemplates the filing of such notifications at least 90 days prior to consummation of the subject transactions, the CPUC has recognized that 90-day notice will not always be practical and has stated that the notice period will be enforced with reasonable flexibility, provided the notifications are made as soon as legally possible. No further action on these notifications is required.

 

 

Litigation Relating to the Merger (Page [])

In connection with the proposed merger, nineteen stockholder lawsuits have been filed against the Company, its directors and Blackstone in the District Courts of Harris County, Texas between August 13, 2010 and the date of this proxy statement; Parent, Merger Sub, the guarantor, NRG and/or certain executive officers of the Company have also been named as defendants in certain of these lawsuits. One stockholder lawsuit has been filed against the Company, its directors, Blackstone, Parent and Merger Sub in the United States District Court in the Southern District of Texas on August 31, 2010. Six similar stockholder actions against the Company, its directors and Blackstone were filed in the Court of Chancery of the State of Delaware between August 17, 2010 and August 23, 2010, and were consolidated on August 24, 2010. Each of the Texas and Delaware complaints generally alleges, among other things, that our board of directors and certain executive officers have violated various fiduciary duties. Further, certain of the complaints allege that the Company and/or Blackstone aided and abetted such alleged breaches of fiduciary duties. Among other remedies, the plaintiffs seek to enjoin the merger and/or the stockholder vote, declaratory relief with respect to the alleged breaches of fiduciary duty, and monetary damages including attorneys’ fees and expenses. All defendants deny any wrongdoing in connection with the proposed merger and plan to vigorously defend against all pending claims.

 

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The Merger Agreement (Page [])

Treatment of Common Stock, Options and Other Equity Awards (Page [])

 

   

Common Stock. At the effective time of the merger, each share of our common stock issued and outstanding (except for the excluded shares) will be converted into the right to receive the per share merger consideration of $4.50 in cash, without interest, less any applicable withholding taxes.

 

   

Options. None of the outstanding Company stock options has an exercise price that is lower than the per share merger consideration. Accordingly, holders of Company stock options will not be entitled to receive any payment in exchange for their options. All Company stock options will be cancelled for no payment at the effective time of the merger.

 

   

Restricted Stock. At the effective time of the merger, each outstanding share of restricted stock will fully vest and be cancelled and converted into the right to receive, as soon as reasonably practicable after the effective time of the merger, but in any event no later than the earlier of (i) the second payroll period or (ii) thirty (30) days following the effective time of the merger, an amount in cash equal to the per share merger consideration, less any applicable withholding taxes.

 

   

Phantom Stock Units. At the effective time of the merger, each outstanding phantom stock unit will fully vest and be cancelled and converted into the right to receive, as soon as reasonably practicable after the effective time of the merger, but in any event no later than the earlier of (i) the second payroll period or (ii) thirty (30) days following the effective time of the merger, an amount in cash equal to the per share merger consideration, less any applicable withholding taxes.

 

   

Performance Awards. At the effective time of the merger, the Company’s performance awards granted in 2009 and 2010 will be payable at 100% of “target”, fully vested and settled in cash, and each outstanding performance award granted prior to 2009 will be fully vested and cancelled for no payment in accordance with the terms of the agreements governing such Company performance awards.

Solicitation of Acquisition Proposals (Page [])

The merger agreement provides that for the period beginning on August 13, 2010 and continuing until 11:59 p.m., Eastern time, on September 22, 2010, which we refer to as the go-shop period, we are permitted to solicit any inquiry or the making of any acquisition proposals from third parties and to participate in any negotiations or discussions with third parties with respect to any acquisition proposals. From and after 12:00 a.m., Eastern time, on September 23, 2010, which we refer to as the no-shop period start date, and until the effective time of the merger or the termination of the merger agreement, we are not permitted to solicit any inquiry or the making of any acquisition proposals or engage in any negotiations or discussions with any person relating to an acquisition proposal. Notwithstanding these restrictions, under certain circumstances, we may, from and after the no-shop period start date and prior to the time our stockholders adopt the merger agreement, respond to a written acquisition proposal or engage in discussions or negotiations with the person making such an acquisition proposal. At any time before the merger agreement is adopted by our stockholders, if the board of directors determines that an acquisition proposal is a superior proposal, we may terminate the merger agreement and enter into any acquisition, merger or similar agreement, which we refer to as an alternative acquisition agreement, with respect to such superior proposal, so long as we comply with certain terms of the merger agreement, including paying a termination fee to Parent. See “The Merger Agreement—Solicitation of Acquisition Proposals” beginning on page [] and “The Merger Agreement—Termination Fees” beginning on page [].

Conditions to the Merger (Page [])

The respective obligations of the Company, Parent and Merger Sub to consummate the merger are subject to the satisfaction or waiver of certain customary conditions, including the adoption of the merger agreement by our stockholders, receipt of required regulatory approvals, the absence of any legal prohibitions, the accuracy of the representations and warranties of the parties and compliance by the parties with their respective obligations under

 

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the merger agreement. Parent’s and Merger Sub’s obligations to consummate the merger are also subject to the satisfaction or waiver of the conditions to the obligations of NRG and Merger Sub to effect the NRG sale under the NRG PSA (other than those conditions that by their nature are to be satisfied at the closing of the NRG sale, and the condition relating to the consummation of the merger) and to NRG being ready, willing and able to complete the NRG sale. See “The NRG PSA—Conditions to the NRG Sale” beginning on page [].

Termination (Page [])

We and Parent may, by mutual written consent, terminate the merger agreement and abandon the merger at any time prior to the effective time of the merger, whether before or after the adoption of the merger agreement by our stockholders.

The merger agreement may also be terminated and the merger abandoned at any time prior to the effective time of the merger as follows:

 

   

by either Parent or the Company, if:

 

   

the merger has not been consummated by February 13, 2011, which we refer to as the termination date and which may be extended by either Parent or the Company to May 13, 2011 if any of the conditions to the closing of the merger are not fulfilled or waived but remain capable of being satisfied on February 13, 2011;

 

   

our stockholders meeting has been held and completed and our stockholders have not adopted the merger agreement at such meeting or any adjournment or postponement of such meeting; or

 

   

a law or an order permanently restraining, enjoining or otherwise prohibiting or making illegal the consummation of the merger, which we refer to as an order, has become final and non-appealable.

However, none of the termination rights described in the preceding bullet points will be available to any party if the failure to consummate the merger prior to the termination date was primarily due to the failure of such party to perform any of its obligations under the merger agreement.

 

   

by the Company, if:

 

   

at any time prior to the adoption of the merger agreement by our stockholders, (i) the board of directors authorizes the Company to enter into an alternative acquisition agreement with respect to a superior proposal, (ii) immediately prior to or substantially concurrently with the termination of the merger agreement we enter into an alternative acquisition agreement with respect to a superior proposal and (iii) immediately prior to or substantially concurrently with such termination, we pay Parent or its designee the termination fee discussed under “The Merger Agreement—Termination Fees” beginning on page [] (provided that this right to terminate the merger agreement will not be available to us unless we have complied with certain notice and other requirements described under “The Merger Agreement—Solicitation of Acquisition Proposals” beginning on page ]);

 

   

there has been a breach of a representation, warranty, covenant or agreement made by Parent or Merger Sub in the merger agreement or any such representation and warranty becomes untrue after the date of the merger agreement, which breach or failure to be true would give rise to the failure of the condition to the closing of the merger relating to the accuracy of the representations and warranties of Parent and Merger Sub or compliance by Parent and Merger Sub with their obligations under the merger agreement, and such breach or failure to be true cannot be cured, or if curable, is not cured prior to the earlier of (i) 30 calendar days after written notice thereof is given by the Company to Parent and (ii) two business days prior to the termination date (provided that we will not have this right to terminate if we are then in material breach of the merger agreement); or

 

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the conditions to the obligations of Parent and Merger Sub to consummate the merger have been satisfied (other than those conditions that by their nature are to be satisfied by actions taken at the closing of the merger), and Parent and Merger Sub fail to consummate the transactions contemplated by the merger agreement within the earlier of (i) two business days following the date on which the closing of the merger should have occurred under the merger agreement and (ii) one business day before the termination date, and we stood ready, willing and able to consummate the merger during that period.

 

   

by Parent, if:

 

   

the board of directors (i) withholds, withdraws, qualifies or modifies its recommendation to our stockholders to approve the proposal to adopt the merger agreement, which we refer to as the Company recommendation, or approves or recommends any acquisition proposal, which we refer to collectively as a change of recommendation, or (ii) fails to include the Company recommendation in the proxy statement; or

 

   

there has been a breach of a representation, warranty, covenant or agreement made by the Company in the merger agreement or any such representation and warranty becomes untrue after the date of the merger agreement, which breach or failure to be true would give rise to the failure of the condition to closing of the merger relating to the accuracy of the representations and warranties of the Company or compliance by it with its obligations under the merger agreement, and such breach or failure to be true cannot be cured, or if curable, is not cured prior to the earlier of (i) 30 calendar days after written notice thereof is given by Parent to the Company and (ii) two business days prior to the termination date (provided that Parent will not have this right to terminate if it is then in material breach of the merger agreement);

Termination Fees (Page [])

If the merger agreement is terminated in certain circumstances described under “The Merger Agreement—Termination Fees” beginning on page []:

 

   

The Company may be obligated to (i) pay Parent a $16.3 million termination fee plus up to $6 million of the documented out-of-pocket expenses of Parent, Merger Sub and their affiliates to the extent the merger agreement is terminated in connection with an alternative acquisition agreement entered into with a party, which we refer to as an excluded party, from whom the Company has received (x) an alternative acquisition proposal prior to the no-shop period start date that the board of directors has determined in good faith constitutes a superior proposal or could reasonably be expected to result in a superior proposal and (y) by 11:59 p.m. on September 29, 2010, an alternative acquisition proposal that the board of directors determines constitutes a superior proposal, (ii) pay Parent a termination fee in an amount between $27.5 million and $50 million in certain circumstances in which the merger agreement is terminated and the Company consummates certain asset sales within 18 months of termination for aggregate consideration in excess of $1.0 billion (with the amount of the fee to be determined based upon aggregate consideration received by the Company in such asset sales), or (iii) in certain other circumstances, reimburse the documented out-of-pocket expenses of Parent, Merger Sub and their affiliates up to $10 million and pay Parent a $50 million termination fee less any expenses reimbursed; or

 

   

Parent may be obligated to pay the Company the Parent fee of $100 million, less the sum of certain expense reimbursement and indemnification amounts paid by Parent in connection with the Company’s cooperation with certain financing and third party investment activities, and/or the NRG payment. The guarantor has guaranteed the obligation of Parent to pay the Parent fee and the NRG payment, if any, pursuant to the guaranty.

 

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Remedies (Page [])

Our receipt of the Parent fee, the NRG payment and certain expense reimbursement and indemnification payments from Parent will, subject to certain specific performance rights described below, be our sole and exclusive remedy against Parent, Merger Sub, the guarantor and any of their respective former, current, or future general or limited partners, stockholders, managers, members, directors, officers, affiliates or agents for any loss suffered as a result of any breach of any covenant or agreement in the merger agreement or the failure of the merger to be consummated. Upon payment of such amounts, none of Parent, Merger Sub, the guarantor or any of their respective former, current, or future general or limited partners, stockholders, managers, members, directors, officers, affiliates or agents will have any further liability or obligation relating to or arising out of the merger agreement or any claims or actions arising out of any breach, termination or failure described in the preceding sentence.

Parent’s receipt of the termination fee payable by us or certain expenses reimbursed by us, as the case may be, will, subject to certain specific performance rights described below, be the sole and exclusive remedy of Parent, Merger Sub, the guarantor and their respective affiliates against the Company, its subsidiaries and any of their respective former, current, or future general or limited partners, stockholders, directors, officers, managers, members, affiliates or agents for any loss suffered as a result of any breach of any covenant or agreement in the merger agreement or the failure of the merger to be consummated. Upon payment of such amounts, none of the Company, its subsidiaries or any of their respective former, current, or future general or limited partners, stockholders, directors, officers, managers, members, affiliates or agents will have any further liability or obligation relating to or arising out of the merger agreement or the transactions contemplated by the merger agreement.

Under no circumstances will the Company be entitled to monetary damages in excess of the amount of the Parent fee and NRG payment payable by Parent and certain expense reimbursement and indemnification payments from Parent, or will Parent or Merger Sub be entitled to monetary damages in excess of the amount of the termination fee, other than, in each case, costs and expenses incurred in connection with any action to enforce the payment of any such fee.

The Company, Parent and Merger Sub are entitled to an injunction, specific performance and other equitable relief to prevent breaches of the merger agreement and to enforce specifically the terms of the merger agreement in addition to any other remedy to which they are entitled at law or in equity. Under certain conditions the merger agreement explicitly allows us to seek specific performance of Parent’s obligation to cause the equity financing for the merger to be funded.

NRG is an intended third party beneficiary of the merger agreement. NRG has the right to enforce the rights and obligations of Parent, Merger Sub and the Company to the extent such rights and obligations directly relate to the assets it is acquiring, and the liabilities it is assuming, in the NRG sale. No party to the merger agreement may amend or waive any condition thereunder if such waiver or amendment would be adverse to NRG as a third party beneficiary in any material respect without NRG’s consent.

The Company is an intended third party beneficiary of the NRG PSA. The Company has the right of enforcement in respect of Merger Sub’s and NRG’s obligations under the NRG PSA. No party to the NRG PSA may amend, supplement or otherwise modify the NRG PSA in a manner adverse to the Company as a third party beneficiary in any material respect without the Company’s consent. See “The NRG PSA—Specific Performance” beginning on page [].

 

 

Market Price of Common Stock (Page [])

The closing price of our common stock on the New York Stock Exchange, or NYSE, on August 12, 2010, the last trading day prior to the public announcement of the execution of the merger agreement, was $2.78 per share of common stock. On [], 2010, the most recent practicable date before this proxy statement was mailed to

 

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our stockholders, the closing price for our common stock on the NYSE was $[] per share of common stock. You are encouraged to obtain current market quotations for our common stock in connection with voting your shares of common stock.

 

 

Appraisal Rights (Page [])

Stockholders are entitled to appraisal rights under the General Corporation Law of the State of Delaware, or the DGCL, in connection with the merger, provided that stockholders meet all of the conditions set forth in Section 262 of the DGCL. This means that you are entitled to have the fair value of your shares of our common stock determined by the Delaware Court of Chancery and to receive payment based on that valuation in lieu of the merger consideration. The ultimate amount you receive in an appraisal proceeding may be less than, equal to or more than the amount you would have received under the merger agreement.

To exercise your appraisal rights, you must submit a written demand for appraisal to the Company before the vote is taken on the merger agreement and you must not submit a proxy to vote or otherwise vote in favor of the proposal to adopt the merger agreement. Your failure to follow exactly the procedures specified under the DGCL will result in the loss of your appraisal rights. See “Appraisal Rights” beginning on page [] and the text of the Delaware appraisal rights statute reproduced in its entirety as Annex D to this proxy statement. If you hold your shares of our common stock through a bank, brokerage firm or other nominee and you wish to exercise appraisal rights, you should consult with your bank, brokerage firm or other nominee to determine the appropriate procedures for the making of a demand for appraisal by such bank, brokerage firm or nominee. In view of the complexity of the DGCL, stockholders who may wish to pursue appraisal rights should consult their legal and financial advisors promptly.

 

 

Delisting and Deregistration of Common Stock (Page [])

If the merger is completed, our common stock will be delisted from the NYSE and deregistered under the Securities Exchange Act of 1934, as amended, or the Exchange Act. As a result, we would no longer file periodic reports with the Securities and Exchange Commission, or the SEC, on account of our common stock.

 

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

The following questions and answers are intended to address briefly some commonly asked questions regarding the merger, the merger agreement, the NRG sale, the NRG PSA and the special meeting. These questions and answers may not address all questions that may be important to you as a Company stockholder. Please refer to the “Summary” and the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to in this proxy statement, which you should read carefully and in their entirety. You may obtain the information incorporated by reference in this proxy statement without charge by following the instructions under “Where You Can Find More Information” beginning on page [].

 

Q. What is the proposed merger transaction and what effects will it have on the Company?

 

A. The proposed transaction is the acquisition of the Company by Parent pursuant to the merger agreement. If the proposal to adopt the merger agreement is approved by our stockholders and the other closing conditions under the merger agreement have been satisfied or waived, Merger Sub will merge with and into the Company, with the Company being the surviving corporation. We refer to this transaction as the merger. As a result of the merger, the Company will become a subsidiary of Parent and will no longer be a publicly held corporation, and you, as a holder of our common stock, will no longer have any interest in our future earnings or growth. In addition, following the merger, our common stock will be delisted from the NYSE and deregistered under the Exchange Act, and we will no longer file periodic reports with the SEC on account of our common stock.

 

Q. What is the proposed transaction with NRG?

 

A. Concurrently with the execution of the merger agreement, Merger Sub entered into the NRG PSA with NRG pursuant to which, simultaneously with the merger, NRG will acquire four natural gas-fired power generating facilities from the surviving corporation—the Casco Bay facility in Maine and the Moss Landing, Morro Bay and Oakland facilities in California—for cash consideration of approximately $1.36 billion. The NRG sale will not occur if the merger is not consummated. The proceeds of the NRG sale will be paid to the Company as the surviving corporation of the merger, and will not be distributed to or for the benefit of the holders of our common stock prior to the merger. The approval of the stockholders of the Company is not required and is not being sought for the NRG sale.

The consummation of the merger between the Company and Merger Sub is contingent upon the concurrent closing of the NRG sale. The Company is a third party beneficiary of the NRG PSA and has the right to enforce the obligations of NRG and Merger Sub under the NRG PSA, and no party to the NRG PSA may amend or waive any condition under the NRG PSA without the Company’s consent if such waiver or amendment would be adverse to the Company in any material respect.

 

Q. What will I receive if the merger is completed?

 

A. Upon completion of the merger, you will be entitled to receive the per share merger consideration of $4.50 in cash, without interest, less any applicable withholding taxes, for each share of our common stock that you own, unless you have properly exercised and not withdrawn your appraisal rights under the DGCL with respect to such shares. For example, if you own 100 shares of our common stock, you will receive $450.00 in cash in exchange for your shares of our common stock, less any applicable withholding taxes. You will not own any shares of the capital stock in the surviving corporation. Please do NOT return your stock certificate(s) with your proxy.

 

Q. How does the per share merger consideration compare to the market price of our common stock prior to announcement of the merger?

 

A.

The per share merger consideration represents a premium of approximately 26% to the average closing share price of our common stock during the 30-day trading period ended on August 12, 2010, the last trading day prior to the public announcement of the merger agreement, and a premium of approximately

 

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62% to the closing share price of our common stock on August 12, 2010. The $4.50 per share is a discount to the trading price of our common stock for recent periods prior to June 28, 2010.

 

Q. How does the board of directors recommend that I vote?

 

A. The board of directors recommends that you vote “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Q. When do you expect the merger to be completed?

 

A. We are working towards completing the merger as soon as possible. Assuming timely receipt of required regulatory approvals and satisfaction of other closing conditions, including approval by our stockholders of the proposal to adopt the merger agreement, we anticipate that the merger will be completed in the fourth quarter of 2010.

 

Q. What happens if the merger is not completed?

 

A. If the merger agreement is not adopted by the stockholders of the Company or if the merger is not completed for any other reason, the stockholders of the Company will not receive any payment for their shares of our common stock in connection with the merger. Instead, the Company will remain an independent public company and our common stock will continue to be listed and traded on the NYSE. In addition, the NRG sale contemplated by the NRG PSA will not occur. Under specified circumstances, the Company may be required to pay to Parent, or be entitled to receive from Parent, a fee with respect to the termination of the merger agreement or the NRG PSA, or to reimburse Parent, Merger Sub and their affiliates for their documented out-of-pocket expenses, as applicable, as described under “The Merger Agreement—Termination Fees” beginning on page [].

 

Q. Is the merger expected to be taxable to me?

 

A. Yes. The exchange of shares of our common stock for cash pursuant to the merger generally will be a taxable transaction to U.S. holders (as defined in “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” on page []) for U.S. federal income tax purposes. If you are a U.S. holder and you exchange your shares of our common stock in the merger for cash, you will generally recognize gain or loss in an amount equal to the difference, if any, between the amount of cash received with respect to such shares and your adjusted tax basis in such shares of our common stock. Backup withholding may also apply to the cash payments paid to a non-corporate U.S. holder pursuant to the merger unless the U.S. holder or other payee provides a taxpayer identification number, certifies that such number is correct and otherwise complies with the backup withholding rules. You should read “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page [] for a more detailed discussion of the U.S. federal income tax consequences of the merger. You should also consult your tax advisor for a complete analysis of the effect of the merger on your federal, state and local and/or foreign taxes.

 

Q. Do any of the Company’s directors or officers have interests in the merger that may differ from or be in addition to my interests as a stockholder?

 

A. Yes. In considering the recommendation of the board of directors with respect to the proposal to adopt the merger agreement, you should be aware that our directors and executive officers have interests in the merger that are different from, or in addition to, the interests of our stockholders generally. The board of directors was aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending that the merger agreement be adopted by the stockholders of the Company. See “The Merger—Interests of Certain Persons in the Merger” beginning on page [].

 

Q. Why am I receiving this proxy statement and proxy card or voting instruction form?

 

A. You are receiving this proxy statement and proxy card or voting instruction form because you own shares of the Company’s common stock. This proxy statement describes matters on which we urge you to vote and is intended to assist you in deciding how to vote your shares of our common stock with respect to such matters.

 

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Q. When and where is the special meeting?

 

A. The special meeting of stockholders of the Company will be held on [], 2010 at [], at Dynegy’s headquarters, Wells Fargo Plaza, 1000 Louisiana Street, Houston, Texas, 77002.

 

Q. What am I being asked to vote on at the special meeting?

 

A. You are being asked to consider and vote on a proposal to adopt the merger agreement, as amended from time to time, that provides for the acquisition of the Company by Parent and to approve a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement.

 

Q. Am I being asked to vote on the NRG sale?

 

A. You are not being asked to vote on the NRG sale. The closing of the NRG sale will occur concurrently with the consummation of the merger, and the proceeds of the NRG sale will be paid to the Company as the surviving corporation of the merger; such proceeds will not be distributed to or for the benefit of the holders of our common stock prior to the merger.

 

Q. What vote is required for the Company’s stockholders to approve the proposal to adopt the merger agreement?

 

A. The adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote thereon.

Because the affirmative vote required to approve the proposal to adopt the merger agreement is based upon the total number of outstanding shares of our common stock, if you fail to submit a proxy or vote in person at the special meeting, or abstain, or you do not provide your bank, brokerage firm or other nominee with instructions, as applicable, this will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement.

 

Q. What vote of our stockholders is required to approve the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies?

 

A. Approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies requires the affirmative vote of the holders of a majority of the shares of our common stock present in person or represented by proxy and entitled to vote on the matter at the special meeting, whether or not a quorum is present.

Abstaining will have the same effect as a vote “AGAINST” approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies. If you fail to submit a proxy or to vote in person at the special meeting or if your shares of our common stock are held through a bank, brokerage firm or other nominee and you do not instruct your bank, brokerage firm or other nominee to vote your shares of our common stock, your shares of our common stock will not be voted, but this will not have an effect on the proposal to adjourn the special meeting.

 

Q. What is the difference between holding shares as a stockholder of record and as a beneficial owner?

 

A. If your shares of our common stock are registered directly in your name with our transfer agent, Mellon Investor Services LLC (operating under the service name BNY Mellon Shareowner Services), you are considered, with respect to those shares of our common stock, the “stockholder of record”. This proxy statement, and your proxy card, have been sent directly to you by the Company.

If your shares of our common stock are held through a bank, brokerage firm or other nominee, you are considered the “beneficial owner” of shares of our common stock held in street name. In that case, this proxy statement has been forwarded to you by your bank, brokerage firm or other nominee who is considered, with respect to those shares of common stock, the stockholder of record. As the beneficial owner, you have the right to direct your bank, brokerage firm or other nominee how to vote your shares of our common stock by following their instructions for voting.

 

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Q. If my shares of common stock are held in “street name” by my bank, brokerage firm or other nominee, will my bank, brokerage firm or other nominee vote my shares of common stock for me?

 

A. Your bank, brokerage firm or other nominee will only be permitted to vote your shares of our common stock if you instruct your bank, brokerage firm or other nominee how to vote. You should follow the procedures provided by your bank, brokerage firm or other nominee regarding the voting of your shares of our common stock. Under the rules of the NYSE, banks, brokerage firms or other nominees who hold shares in street name for customers have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. However, banks, brokerage firms and other nominees are precluded from exercising their voting discretion with respect to approving non-routine matters such as the proposal to adopt the merger agreement and, as a result, absent specific instructions from the beneficial owner of such shares of our common stock, banks, brokerage firms or other nominees are not empowered to vote those shares of our common stock on non-routine matters. If you do not instruct your bank, brokerage firm or other nominee to vote your shares of our common stock, your shares of our common stock will not be voted, which we refer to as broker non-votes, and the effect will be the same as a vote “AGAINST” approval of the proposal to adopt the merger agreement, and your shares of our common stock will not have an effect on the proposal to adjourn the special meeting.

 

Q. Who can vote at the special meeting?

 

A. All of the holders of record of our common stock as of the close of business on [], 2010, the record date for the special meeting, are entitled to receive notice of, and to vote at, the special meeting. Each holder of our common stock is entitled to cast one vote on each matter properly brought before the special meeting for each share of our common stock that such holder owned as of the record date.

 

Q. What is a quorum?

 

A. A majority of the shares of our common stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum for the purposes of the special meeting. Abstentions are counted as present for the purpose of determining whether a quorum is present. Broker non-votes are counted as present for the purpose of determining whether a quorum is present.

 

Q. How do I vote?

 

A. Stockholder of Record. If you are a stockholder of record, you may have your shares of our common stock voted on matters presented at the special meeting in any of the following ways:

 

   

in person—you may attend the special meeting and cast your vote there;

 

   

by proxy—stockholders of record have a choice of voting by proxy:

 

   

over the Internet—the website for Internet voting is on your proxy card;

 

   

by using a toll-free telephone number noted on your proxy card; or

 

   

by signing, dating and returning the enclosed proxy card in the accompanying prepaid reply envelope.

A control number, located on your proxy card, is designed to verify your identity and allow you to vote your shares of our common stock, and to confirm that your voting instructions have been properly recorded when voting over the Internet or by telephone. Please be aware that if you vote over the Internet, you may incur costs such as telephone and Internet access charges for which you will be responsible.

Beneficial Owner. If you are a beneficial owner, please refer to the instructions provided by your bank, brokerage firm or other nominee to see which of the above choices are available to you. Please note that if you are a beneficial owner and wish to vote in person at the special meeting, you must provide a legal proxy from your bank, brokerage firm or other nominee at the special meeting.

 

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Q. How do I vote shares of common stock that I hold through a 401(k) Savings Plan of the Company?

 

A. If you are a participant in the Dynegy Midwest Generation, Inc. 401(k) Savings Plan for Employees Covered under a Collective Bargaining Agreement (as amended and restated effective January 1, 2009), the Dynegy Midwest Generation, Inc. 401(k) Savings Plan (as amended and restated effective January 1, 2009), the Dynegy Inc. 401(k) Savings Plan (as amended and restated effective January 1, 2009), or the Dynegy Northeast Generation, Inc. Savings Incentive Plan (as amended and restated effective January 1, 2009), which we collectively refer to as the 401(k) plans, and you have contributions invested in our common stock, you may give voting instructions by completing and returning the enclosed proxy card in the accompanying prepaid reply envelope prior to [], 2010. If a participant’s proxy card is not received by [•], 2010 or if such participant signs and returns his or her proxy card without instructions marked in the boxes, the trustee will vote the participant’s shares of our common stock in the same proportion as other shares of our common stock held in the plan for which the trustee received timely instructions. Participants in the plans must vote through the trustee and may not vote in person at the special meeting.

With respect to shares of our common stock held by our 401(k) plans, Fiduciary Counselors Inc. has been appointed to act as the independent fiduciary responsible for ensuring that procedures are in place to safeguard the confidentiality of your proxy directions to the trustee and that those procedures are being followed.

 

Q. How can I change or revoke my vote?

 

A. You have the right to revoke a proxy, whether delivered over the Internet, by telephone or by mail, at any time before it is exercised, by voting again at a later date through any of the methods available to you, by giving written notice of revocation to our Corporate Secretary, at Dynegy Inc., Attention: Corporate Secretary, 1000 Louisiana Street, Suite 5800, Houston, Texas 77002, which must be filed with the Corporate Secretary by the time the special meeting begins, or by attending the special meeting and voting in person.

 

Q. What is a proxy?

 

A. A proxy is your legal designation of another person, referred to as a “proxy”, to vote your shares of our common stock. The written document describing the matters to be considered and voted on at the special meeting is called a “proxy statement”. The document used to designate a proxy to vote your shares of our common stock is called a “proxy card”. Our board of directors has designated Bruce A. Williamson, Heidi D. Lewis and Kimberly M. O’Brien, and each of them, with full power of substitution, as proxies for the special meeting.

 

Q. If a stockholder gives a proxy, how are the shares of common stock voted?

 

A. Regardless of the method you choose to vote, the individuals named on the enclosed proxy card, or your proxies, will vote your shares of our common stock in the way that you indicate. When completing the Internet or telephone processes or the proxy card, you may specify whether your shares of our common stock should be voted for or against or to abstain from voting on all, some or none of the specific items of business to come before the special meeting.

If you properly sign your proxy card but do not mark the boxes showing how your shares should be voted on a matter, the shares represented by your properly signed proxy will be voted “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Q. How are votes counted?

 

A. For the proposal to adopt the merger agreement, you may vote “FOR”, “AGAINST” or “ABSTAIN”. Abstentions and broker non-votes will have the same effect as votes “AGAINST” approval of the proposal to adopt the merger agreement.

 

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For the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies, you may vote “FOR”, “AGAINST” or “ABSTAIN”. Abstentions will have the same effect as if you voted “AGAINST” approval of the proposal, but broker non-votes will not have an effect on the proposal.

 

Q. What do I do if I receive more than one proxy or set of voting instructions?

 

A. If you hold shares of our common stock in “street name” and also directly as a record holder or otherwise, you may receive more than one proxy and/or set of voting instructions relating to the special meeting. These should each be voted and/or returned separately in accordance with the instructions provided in this proxy statement in order to ensure that all of your shares of our common stock are voted.

 

Q. What happens if I sell my shares of common stock before the special meeting?

 

A. The record date for stockholders entitled to vote at the special meeting is earlier than both the date of the special meeting and the consummation of the merger. If you transfer your shares of our common stock after the record date but before the special meeting, unless special arrangements (such as provision of a proxy) are made between you and the person to whom you transfer your shares and each of you notifies the Company in writing of such special arrangements, you will retain your right to vote such shares at the special meeting but will transfer the right to receive the per share merger consideration to the person to whom you transfer your shares.

 

Q. Who will solicit and pay the cost of soliciting proxies?

 

A. The Company has engaged MacKenzie Partners, Inc. to assist in the solicitation of proxies for the special meeting. The Company estimates that it will pay MacKenzie Partners, Inc. a fee of $50,000, and telephone charges, up to a maximum of $100,000. The Company will reimburse MacKenzie Partners, Inc. for reasonable out-of-pocket expenses and will also indemnify MacKenzie Partners, Inc. and its affiliates against certain claims, liabilities, losses, damages and expenses. In addition, in the event that the merger agreement is adopted by the stockholders of the Company, the Company will pay MacKenzie Partners, Inc. an additional fee of $50,000 to $100,000, with the exact amount to be determined by the Company in its discretion. The Company may also reimburse brokers, banks and other custodians, nominees and fiduciaries representing beneficial owners of shares of our common stock for their expenses in forwarding soliciting materials to beneficial owners of our common stock and in obtaining voting instructions from those owners. Our directors, officers and employees may also solicit proxies by telephone, by facsimile, by mail, on the Internet or in person. They will not be paid any additional amounts for soliciting proxies.

 

Q. What do I need to do now?

 

A. Even if you plan to attend the special meeting, after carefully reading and considering the information contained in this proxy statement, please vote promptly to ensure that your shares are represented at the special meeting. If you hold your shares of our common stock in your own name as the stockholder of record, please submit a proxy to have your shares of our common stock voted at the special meeting by (i) completing, signing, dating and returning the enclosed proxy card in the accompanying prepaid reply envelope; (ii) using the telephone number printed on your proxy card; or (iii) using the Internet voting instructions printed on your proxy card. If you decide to attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted. If you are a beneficial owner, please refer to the instructions provided by your bank, brokerage firm or other nominee to see which of the above choices are available to you.

 

Q. Should I send in my stock certificates now?

 

A.

No. If the proposal to adopt the merger agreement is approved, you will be sent a letter of transmittal promptly, and in any event within two business days, after the completion of the merger, describing how you may exchange your shares of our common stock for the per share merger consideration. If your shares of our common stock are held in “street name” by your bank, brokerage firm or other nominee, you will

 

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receive instructions from your bank, brokerage firm or other nominee as to how to effect the surrender of your “street name” shares of our common stock in exchange for the per share merger consideration. Please do NOT return your stock certificate(s) with your proxy.

 

Q. Am I entitled to exercise appraisal rights under the DGCL instead of receiving the per share merger consideration for my shares of common stock?

 

A. Yes. As a holder of our common stock, you are entitled to exercise appraisal rights under the DGCL in connection with the merger if you take certain actions and meet certain conditions, including that you do not vote (in person or by proxy) in favor of adoption of the merger agreement. See “Appraisal Rights” beginning on page [].

 

Q. Who can help answer any other questions I might have?

 

A. If you have additional questions about the merger, need assistance in submitting your proxy or voting your shares of our common stock, or need additional copies of the proxy statement or the enclosed proxy card, please contact MacKenzie Partners, Inc., our proxy solicitor, by calling toll-free at (800) 322-2885 or (212) 929-5500 (call collect), or by e-mailing dynegy@mackenziepartners.com.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement, and the documents to which we refer you in this proxy statement, as well as oral statements made or to be made by us, contains statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements”. All statements included or incorporated by reference in this proxy statement, other than statements of historical fact, that address activities, events or developments that we or our management expect, believe or anticipate will or may occur in the future are forward-looking statements. These statements represent our reasonable judgment on the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties and other factors that could cause our actual results and financial position to differ materially from those contemplated by the statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Words such as “anticipate”, “estimate”, “project”, “forecast”, “plan”, “may”, “will”, “should”, “expect” and other words of similar meaning identify these forward-looking statements, which appear in a number of places in this proxy statement (and the documents to which we refer you in this proxy statement) and include, but are not limited to, all statements relating directly or indirectly to the timing or likelihood of completing the merger to which this proxy statement relates, plans for future growth, changes in the business and other business development activities as well as capital expenditures, financing sources and the effects of regulation and competition and all other statements regarding our intent, plans, beliefs or expectations or those of our directors or officers. Investors are cautioned that such forward-looking statements are not assurances for future performance or events and involve risks and uncertainties that could cause actual results and developments to differ materially from those covered in such forward-looking statements. These risks and uncertainties include, but are not limited to, the risks detailed in our filings with the SEC, including our most recent filings on Forms 10-Q and 10-K, factors and matters contained or incorporated by reference in this document, and the following factors:

 

   

the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement or NRG PSA, including a termination of the merger agreement under circumstances that could require us to pay a termination fee;

 

   

Parent’s failure to obtain the necessary equity financing set forth in the equity commitment letter received in connection with the merger agreement or the failure of that financing to be sufficient to complete the merger and the transactions contemplated thereby;

 

   

the inability to complete the merger due to the failure to obtain stockholder approval or the failure to satisfy other conditions to completion of the merger, including receipt of required regulatory approvals and the satisfaction or waiver of the conditions to the obligations of NRG and Merger Sub to effect the NRG sale under the NRG PSA (other than those that by their nature are to be satisfied at the closing of the NRG sale, and the condition relating to the consummation of the merger);

 

   

the failure of the merger to close for any other reason;

 

   

risks that the proposed transaction disrupts current plans and operations and the potential difficulties in retention of executive management and other key employees as a result of the merger or the NRG sale;

 

   

the outcome of any legal proceedings that have been or may be instituted against the Company and/or others relating to the merger agreement and/or the NRG PSA;

 

   

diversion of management’s attention from ongoing business concerns;

 

   

limitations placed on our ability to operate the business by the merger agreement;

 

   

limitations on our ability to utilize the Company’s previously incurred federal net operating losses or alternative minimum tax credits;

 

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the effect of the announcement of the merger or the NRG sale on our business relationships, standing with regulators, operating results and business generally; and

 

   

the amount of the costs, fees, expenses, impairments, and other charges related to the merger and the NRG sale.

Consequently, all of the forward-looking statements we make in this document are qualified by the information contained or incorporated by reference herein, including, but not limited to (a) the information contained under this heading and (b) the information contained under the headings “Risk Factors” and “Business” and information in our consolidated financial statements and notes thereto included in our most recent filings on Forms 10-Q and 10-K (see “Where You Can Find More Information” beginning on page []). We are under no obligation to publicly release any revision to any forward-looking statement contained or incorporated herein to reflect any future events or occurrences.

Any or all of our forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, many of which are beyond our control. You should carefully consider the cautionary statements contained or referred to in this section in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf.

 

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PARTIES TO THE MERGER

The Company

Dynegy Inc.

1000 Louisiana Street

Suite 5800

Houston, Texas 77002

(713) 507-6400

Dynegy’s primary business is the production and sale of electric energy, capacity and ancillary services from our fleet of eighteen operating power plants in seven states totaling approximately 12,200 MW of generating capacity. We report the results of our power generation business, based on geographical location and how we allocate our resources, as three separate segments in our consolidated financial statements: (i) generation—Midwest segment, (ii) generation—West segment and (iii) generation—Northeast segment. Dynegy sells electric energy, capacity and ancillary services on a wholesale basis from our power generation facilities. Energy is the actual output of electricity and is measured in MWh. The capacity of a power generation facility is its electricity production capability, measured in MW. Wholesale electricity customers will, for reliability reasons and to meet regulatory requirements, contract for rights to capacity from generating units. Ancillary services are the products of a power generation facility that support the transmission grid operation, follow real-time changes in load and provide emergency reserves for major changes to the balance of generation and load. We sell these products individually or in combination to our customers under short-, medium- and long-term contractual agreements or tariffs.

Dynegy’s customers include regional transmission organizations and independent service operations, integrated utilities, municipalities, electric cooperatives, transmission and distribution utilities, industrial customers, power marketers, financial participants such as banks and hedge funds, other power generators and commercial end-users. All of our products are sold on a wholesale basis for various lengths of time from hourly to multi-year transactions. Some of our customers, such as municipalities or integrated utilities, purchase our products for resale in order to serve their retail, commercial and industrial customers. Other customers, such as some power marketers, may buy from us to serve their own wholesale or retail customers or as a hedge against power sales they have made.

For more information about the Company, please visit our website at http://www.dynegy.com/. Our website address is provided as an inactive textual reference only. The information contained on our website is not incorporated into, and does not form a part of, this proxy statement or any other report or document on file with or furnished to the SEC. See also “Where You Can Find More Information” beginning on page [].

Dynegy’s common stock is listed on the New York Stock Exchange, which we refer to as the NYSE, under the symbol “DYN”.

Parent

Denali Parent Inc.

c/o The Blackstone Group

345 Park Avenue

New York, NY 10154

(212) 583-5000

Denali Parent Inc., or Parent, is a Delaware corporation that was formed by an affiliate of Blackstone solely for the purpose of entering into the merger agreement and completing the transactions contemplated by the merger agreement and has not engaged in any business except for activities incidental to its formation and as contemplated by the merger agreement.

 

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Blackstone is one of the world’s leading investment and advisory firms. Its alternative asset management businesses include the management of private equity funds, real estate funds, hedge funds, credit-oriented funds, collateralized loan obligation vehicles (CLOs) and closed-end mutual funds. Blackstone also provides various financial advisory services, including mergers and acquisitions advisory, restructuring and reorganization advisory and fund placement services.

Merger Sub

Denali Merger Sub Inc.

c/o The Blackstone Group

345 Park Avenue

New York, NY 10154

(212) 583-5000

Denali Merger Sub Inc., or Merger Sub, is a Delaware corporation that was formed by Parent solely for the purpose of entering into the merger agreement, the NRG PSA and completing the transactions contemplated by the merger agreement and the NRG PSA. Merger Sub is a wholly owned subsidiary of Parent and has not engaged in any business except for activities incidental to its formation and as contemplated by the merger agreement and the NRG PSA. Upon the completion of the merger, Merger Sub will cease to exist and the Company will continue as the surviving corporation.

 

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THE SPECIAL MEETING

Time, Place and Purpose of the Special Meeting

This proxy statement is being furnished to our stockholders as part of the solicitation of proxies by the board of directors for use at the special meeting to be held on [], 2010, at [], at Dynegy’s headquarters, Wells Fargo Plaza, 1000 Louisiana Street, Houston, Texas, 77002, or at any postponement or adjournment thereof. At the special meeting, holders of our common stock will be asked to approve the proposal to adopt the merger agreement and to approve the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement.

Our stockholders must approve the proposal to adopt the merger agreement in order for the merger to occur. If our stockholders fail to approve the proposal to adopt the merger agreement, the merger will not occur. A copy of the merger agreement is attached as Annex A to this proxy statement, which we encourage you to read carefully in its entirety.

Record Date and Quorum

We have fixed the close of business on [], 2010 as the record date for the special meeting, and only holders of record of our common stock on the record date are entitled to vote at the special meeting. You are entitled to receive notice of, and to vote at, the special meeting if you owned shares of our common stock at the close of business on the record date. On the record date, there were [] shares of our common stock outstanding and entitled to vote. Each share of our common stock entitles its holder to one vote on all matters properly coming before the special meeting.

A majority of the shares of our common stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum for the purposes of the special meeting. Shares of our common stock represented at the special meeting but not voted, including shares of our common stock for which a stockholder directs an “abstention” from voting, will be counted for purposes of establishing a quorum. Broker non-votes (as described below) will be counted for purposes of establishing a quorum. A quorum is necessary to transact business at the special meeting. Once a share of our common stock is represented at the special meeting, it will be counted for the purpose of determining a quorum at the special meeting and any adjournment of the special meeting. However, if a new record date is set for the adjourned special meeting, then a new quorum will have to be established. In the event that a quorum is not present at the special meeting, it is expected that the special meeting will be adjourned.

Attendance

Only stockholders of record, their duly authorized proxy holders, beneficial stockholders with proof of ownership and our guests may attend the special meeting. To gain admittance, you must present valid photo identification, such as a driver’s license or passport. If your shares of our common stock are held through a bank, brokerage firm or other nominee, please bring to the special meeting a copy of your brokerage statement evidencing your beneficial ownership of our common stock and valid photo identification. If you are the representative of a corporate or institutional stockholder, you must present valid photo identification along with proof that you are the representative of such stockholder. Please note that cameras, recording devices and other electronic devices will not be permitted at the special meeting.

Vote Required

Approval of the proposal to adopt the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote thereon. For the proposal to adopt the

 

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merger agreement, you may vote “FOR”, “AGAINST” or “ABSTAIN”. Abstentions will not be counted as votes cast in favor of the proposal to adopt the merger agreement, but will count for the purpose of determining whether a quorum is present. If you fail to submit a proxy or to vote in person at the special meeting, or abstain, it will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement.

If your shares of our common stock are registered directly in your name with our transfer agent, Mellon Investor Services LLC (operating under the service name BNY Mellon Shareowner Services), you are considered, with respect to those shares of our common stock, the “stockholder of record”. This proxy statement and proxy card have been sent directly to you by the Company.

If your shares of our common stock are held through a bank, brokerage firm or other nominee, you are considered the “beneficial owner” of shares of our common stock held in street name. In that case, this proxy statement has been forwarded to you by your bank, brokerage firm or other nominee who is considered, with respect to those shares of our common stock, the stockholder of record. As the beneficial owner, you have the right to direct your bank, brokerage firm or other nominee how to vote your shares by following their instructions for voting.

Under the rules of the NYSE, banks, brokerage firms or other nominees who hold shares in street name for customers have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. However, banks, brokerage firms and other nominees are precluded from exercising their voting discretion with respect to approving non-routine matters such as the proposal to adopt the merger agreement and, as a result, absent specific instructions from the beneficial owner of such shares of our common stock, banks, brokerage firms or other nominees are not empowered to vote those shares of our common stock on non-routine matters, which we refer to generally as broker non-votes. These broker non-votes will be counted for purposes of determining a quorum, and will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement.

The proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies requires the affirmative vote of the holders of a majority of the shares of our common stock present in person or represented by proxy and entitled to vote on the matter at the special meeting, whether or not a quorum is present. For the proposal to adjourn the special meeting, if necessary or appropriate, you may vote “FOR”, “AGAINST” or “ABSTAIN”. For purposes of this proposal, if your shares of our common stock are present at the special meeting but are not voted on this proposal, or if you have given a proxy and abstained on this proposal, this will have the same effect as if you voted “AGAINST” approval of the proposal. If you fail to submit a proxy, attend in person the special meeting, or there are broker non-votes on the issue, as applicable, the shares of our common stock held by you or your broker will not be counted in respect of, and will not have an effect on, the proposal to adjourn the special meeting.

If you are a stockholder of record, you may have your shares of our common stock voted on matters presented at the special meeting in any of the following ways:

 

   

in person—you may attend the special meeting and cast your vote there;

 

   

by proxy—stockholders of record have a choice of voting by proxy:

 

   

over the Internet—the website for Internet voting is on your proxy card;

 

   

by using a toll-free telephone number noted on your proxy card; or

 

   

by signing and dating the proxy card you receive and returning it in the enclosed prepaid reply envelope.

If you are a beneficial owner, you will receive instructions from your bank, brokerage firm or other nominee that you must follow in order to have your shares of our common stock voted. Those instructions will identify

 

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which of the above choices are available to you in order to have your shares voted. Please note that if you are a beneficial owner and wish to vote in person at the special meeting, you must provide a legal proxy from your bank, brokerage firm or other nominee.

A control number, located on your proxy card, is designed to verify your identity and allow you to vote your shares of our common stock, and to confirm that your voting instructions have been properly recorded when submitting a proxy over the Internet or by telephone. Please be aware that if you submit a proxy over the Internet, you may incur costs such as telephone and Internet access charges for which you will be responsible.

Please refer to the instructions on your proxy or voting instruction card to determine the deadlines for voting over the Internet or by telephone. If you choose to submit a proxy by mailing a proxy card, your proxy card should be mailed in the accompanying prepaid reply envelope, and your proxy card must be filed with our Corporate Secretary by the time the special meeting begins. Please do not send in your stock certificates with your proxy card. When the merger is completed, a separate letter of transmittal will be mailed to you that will enable you to receive the per share merger consideration in exchange for your stock certificates.

If you vote by proxy, regardless of the method you choose to vote, the individuals named on the enclosed proxy card, and each of them, with full power of substitution, or your proxies, will vote your shares of our common stock in the way that you indicate. When completing the Internet or telephone processes or the proxy card, you may specify whether your shares of our common stock should be voted for or against or to abstain from voting on all, some or none of the specific items of business to come before the special meeting.

If you properly sign your proxy card but do not mark the boxes showing how your shares of our common stock should be voted on a matter, the shares of our common stock represented by your properly signed proxy will be voted “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

If you have any questions or need assistance voting your shares, please contact MacKenzie Partners, Inc., our proxy solicitor, by calling toll-free at (800) 322-2885 or (212) 929-5500 (call collect) or e-mailing dynegy@mackenziepartners.com.

IT IS IMPORTANT THAT YOU VOTE YOUR SHARES OF OUR COMMON STOCK AT THE MEETING PROMPTLY. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY CARD IN THE ACCOMPANYING PREPAID REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THE INTERNET. STOCKHOLDERS WHO ATTEND THE SPECIAL MEETING MAY REVOKE THEIR PROXIES BY VOTING IN PERSON.

If you hold shares of our common stock through one of the 401(k) plans, you may give voting instructions by completing and returning the enclosed proxy card in the accompanying prepaid reply envelope prior to [], 2010. If a participant’s proxy card is not received by [], 2010 or if such participant signs and returns his or her proxy card without instructions marked in the boxes, the trustee will vote the participant’s shares of our common stock in the same proportion as other shares of our common stock held in the plan for which the trustee received timely instructions. Participants in the plans must vote through the trustee and may not vote in person at the special meeting.

With respect to shares of our common stock held by our 401(k) plans, Fiduciary Counselors Inc. has been appointed to act as the independent fiduciary responsible for ensuring that procedures are in place to safeguard the confidentiality of your proxy directions to the trustee and that those procedures are being followed.

As of [], 2010, the record date, the directors and executive officers of the Company beneficially owned and were entitled to vote, in the aggregate, [] shares of our common stock (not including any shares of our common

 

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stock deliverable upon exercise or conversion of any options, or phantom stock units), representing []% of the outstanding shares of our common stock. The directors that approved the merger and the merger agreement and the executive officers of the Company beneficially owned and were entitled to vote, in the aggregate, [] shares of our common stock, representing []% of the outstanding shares of our common stock, and these directors and officers have informed the Company that they currently intend to vote all of their shares of our common stock “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Proxies and Revocation

Any stockholder of record entitled to vote at the special meeting may submit a proxy by telephone, over the Internet, by returning the enclosed proxy card in the accompanying prepaid reply envelope, or may vote in person at the special meeting. If your shares of our common stock are held in “street name” by your bank, brokerage firm or other nominee, you should instruct your bank, brokerage firm or other nominee on how to vote your shares of our common stock using the instructions provided by your bank, brokerage firm or other nominee. If you fail to submit a proxy or vote in person at the special meeting, or abstain, or you do not provide your bank, brokerage firm or other nominee with instructions, as applicable, your shares of our common stock will not be voted on the proposal to adopt the merger agreement, which will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement.

You have the right to revoke a proxy, whether delivered over the Internet, by telephone or by mail, at any time before it is exercised, by voting at a later date through any of the methods available to you, by giving written notice of revocation to our Corporate Secretary, which must be filed with the Corporate Secretary by the time the special meeting begins, or by attending the special meeting and voting in person. Written notice of revocation should be mailed to: Dynegy Inc., Attention: Corporate Secretary, 1000 Louisiana Street, Suite 5800, Houston, Texas 77002.

Adjournments

Although it is not currently expected, the special meeting may be adjourned for the purpose of soliciting additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement or if a quorum is not present at the special meeting. Other than an announcement to be made at the special meeting of the time, date and place of an adjourned meeting, an adjournment generally may be made without notice. Any adjournment of the special meeting for the purpose of soliciting additional proxies will allow the Company’s stockholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned.

Anticipated Date of Completion of the Merger

We are working towards completing the merger as soon as possible. Assuming receipt of required regulatory approvals and timely satisfaction of other closing conditions, including the approval by our stockholders of the proposal to adopt the merger agreement, we anticipate that the merger will be completed in the fourth quarter of 2010. If our stockholders vote to approve the proposal to adopt the merger agreement, the merger will become effective as promptly as practicable following the satisfaction or waiver of the other conditions to the merger, subject to the terms of the merger agreement. See “The Merger—Effective Time of Merger” beginning on page [].

Rights of Stockholders Who Seek Appraisal

Stockholders are entitled to appraisal rights under the DGCL in connection with the merger. This means that you are entitled to have the fair value of your shares of our common stock determined by the Delaware Court of Chancery and to receive payment based on that valuation in lieu of the merger consideration if you follow

 

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exactly the procedures specified under the DGCL. The ultimate amount you receive in an appraisal proceeding may be less than, equal to or more than the amount you would have received under the merger agreement.

To exercise your appraisal rights, you must submit a written demand for appraisal to the Company before the vote is taken on the merger agreement and you must not vote (either in person or by proxy) in favor of the proposal to adopt the merger agreement. Your failure to follow exactly the procedures specified under the DGCL may result in the loss of your appraisal rights. See “Appraisal Rights” beginning on page [] and the text of the Delaware appraisal rights statute reproduced in its entirety as Annex D to this proxy statement. If you hold your shares of our common stock through a bank, brokerage firm or other nominee and you wish to exercise appraisal rights, you should consult with your bank, brokerage firm or other nominee to determine the appropriate procedures for the making of a demand for appraisal by your bank, brokerage firm or other nominee. In view of the complexity of the DGCL, stockholders who may wish to pursue appraisal rights should consult their legal and financial advisors.

Solicitation of Proxies; Payment of Solicitation Expenses

The Company has engaged MacKenzie Partners, Inc. to assist in the solicitation of proxies for the special meeting. The Company estimates that it will pay MacKenzie Partners, Inc. a fee of $50,000, and telephone charges, up to a maximum of $100,000. The Company will reimburse MacKenzie Partners, Inc. for reasonable out-of-pocket expenses and will also indemnify MacKenzie Partners, Inc. and its affiliates against certain claims, liabilities, losses, damages and expenses. In addition, in the event that the merger agreement is adopted by the stockholders of the Company, the Company will pay MacKenzie Partners, Inc. an additional fee of $50,000 to $100,000, with the exact amount to be determined by the Company in its discretion. The Company may also reimburse brokers, banks and other custodians, nominees and fiduciaries representing beneficial owners of shares of our common stock for their expenses in forwarding soliciting materials to beneficial owners of our common stock and in obtaining voting instructions from those owners. Our directors, officers and employees may also solicit proxies by telephone, by facsimile, by mail, on the Internet or in person. They will not be paid any additional amounts for soliciting proxies.

Questions and Additional Information

If you have more questions about the merger or how to submit your proxy, or if you need additional copies of this proxy statement or the enclosed proxy card or voting instructions, please contact MacKenzie Partners, Inc., our proxy solicitor, by calling toll-free at (800) 322-2885 or (212) 929-5500 (call collect), or by e-mailing dynegy@mackenziepartners.com.

 

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THE MERGER

This discussion of the merger is qualified in its entirety by reference to the merger agreement, which is attached to this proxy statement as Annex A. You should read the entire merger agreement carefully as it is the legal document that governs the merger.

The merger agreement provides that Merger Sub will merge with and into the Company. The Company will be the surviving corporation in the merger and will continue to do business following the merger. As a result of the merger, the Company will cease to be a publicly traded company. You will not own any shares of the capital stock of the surviving corporation.

Merger Consideration

In the merger, each outstanding share of our common stock (other than the excluded shares) will be converted into the right to receive the per share merger consideration, without interest, less any applicable withholding taxes.

Background of the Merger

The board of directors has engaged over a number of years in an ongoing review and discussion of strategic alternatives potentially available to the Company to enhance stockholder value. These potential strategic alternatives have included a sale of the Company as an entirety, sales of certain assets or portions of the Company, acquisitions and business combination transactions. In April 2007, the Company consummated a transaction with LSP Gen Investors, L.P., LS Power Partners, L.P., LS Power Equity Partners PIE I, L.P., LS Power Equity Partners, L.P. and LS Power Associates, L.P., which we refer to collectively as LS Power, pursuant to which LS Power contributed certain power generation assets to the Company in exchange for approximately 40% of the common stock. In connection with this transaction, LS Power had the right beginning in April 2009 to make an offer to purchase all of the remaining common stock upon certain terms and conditions, and if the Company declined the offer, LS Power had the right to cause the Company to initiate a sales process, although it had no right to require that the Company agree to any sale. LS Power did not exercise its right to make such an offer.

In the fall of 2008, representatives of the Company had conversations with representatives from NRG regarding a possible business combination, but while due diligence information was exchanged and discussions took place, no definitive agreement was executed.

In late 2008 and early 2009, representatives from Greenhill and Goldman Sachs, acting on behalf of the Company, contacted sixteen potential acquirors or merger partners to assess their interest in a potential transaction with the Company, including strategic and financial parties. Four of the parties signed confidentiality agreements and received access to non-public information about the Company; three of the parties engaged with the Company in preliminary discussions regarding a possible acquisition transaction or, in one case, a possible merger of equals. All the parties that expressed serious interest were companies engaged exclusively or extensively in the power generation industry. No discussions advanced beyond a preliminary stage and ultimately none of these parties was interested in pursuing a transaction with the Company at that time.

In the spring and summer of 2009, the Company engaged in negotiations with LS Power and ultimately agreed to a transaction regarding the purchase by LS Power of (i) the Company’s interests in eight power generating project companies and Dynegy Sandy Creek Holdings, LLC and (ii) $235 million aggregate principal amount of 7.5% Senior Unsecured Notes due 2015 of Dynegy Holdings Inc., a wholly-owned subsidiary of the Company, in exchange for approximately $970 million in cash and relinquishment of 245 million shares of Class B common stock of the Company by LS Power. The Company and LS Power entered into a definitive agreement with respect to this transaction in August 2009, and the transaction was completed in December 2009. In connection with the completion of this transaction, various special approval, board representation and other blocking and governance rights held by LS Power were eliminated.

 

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In late 2009, the board of directors continued its evaluation of strategic alternatives, both as to possible standalone transactions and strategies and as to potential business combination or sale transactions. In January 2010, representatives from the Company resumed discussions with one of the three parties with whom the Company had preliminary discussions in early 2009, but the subsequent discussions again failed to advance beyond a preliminary stage and ended in March 2010.

In April 2010, Jonathan Baliff, NRG’s Executive Vice President, Strategy, had an informal conversation with Holli Nichols, Executive Vice President and Chief Financial Officer of the Company, regarding a range of potential transactions. On April 11, 2010, Bruce Williamson, Chairman, President and Chief Executive Officer of the Company, and Ms. Nichols met with David Crane, President and Chief Executive Officer of NRG, and Mr. Baliff to discuss a possible transaction between the Company and NRG. Following this initial discussion, Mr. Williamson spoke individually with the other directors regarding NRG’s expression of interest in a potential transaction with the Company. Thereafter, representatives from the Company, NRG and their respective advisors commenced discussions regarding a potential stock acquisition of the Company by NRG. From the beginning of the spring 2010 discussions, representatives from NRG advised representatives from the Company that NRG would concurrently explore a possible sale of the Company’s coal generating assets, potentially to Blackstone, which would occur following the consummation of any transaction between the Company and NRG. On May 28, 2010, the Company and NRG entered into an updated confidentiality agreement and commenced an exchange of non-public information regarding their respective businesses and financial results. NRG and Blackstone subsequently entered into a confidentiality agreement, and Blackstone received access to non-public information about the Company’s coal generating assets. Representatives from the Company, NRG and their respective advisors also began to discuss the structure of the potential transaction, and on June 14, 2010, outside counsel for NRG provided a draft merger agreement to the Company and its outside counsel, Sullivan & Cromwell LLP, whom we refer to as Sullivan & Cromwell.

By mid-June 2010, NRG’s due diligence questions and discussions of transaction opportunities suggested an inability to dispose of the Company’s coal generating facilities on terms that NRG would find acceptable. Accordingly, while discussions continued with representatives of NRG and its advisors, the Company’s senior management was concurrently preparing plans for standalone alternatives, including a possible sale of some or all of its generating facilities.

On June 17, 2010, the board of directors held a meeting to discuss the potential transaction with NRG and the Company’s strategic alternatives. Several members of senior management and representatives from Greenhill, Goldman Sachs and Sullivan & Cromwell participated in this meeting. A representative from Sullivan & Cromwell reviewed with the directors their fiduciary duties under applicable law. Mr. Williamson updated the board of directors regarding the discussions with NRG with respect to the potential transaction, including NRG’s concern regarding its ability to dispose of the Company’s coal generating facilities on terms that NRG would find acceptable, and the concurrent preparation by senior management of the Company of plans for standalone alternatives, including a possible sale of some or all of its generating facilities.

On June 23, 2010, representatives from NRG informed representatives from the Company that NRG had determined not to proceed with an acquisition of the Company.

On June 24, 2010, an adviser to Blackstone contacted Mr. Williamson to inquire as to the Company’s willingness to permit Blackstone to perform due diligence on the Company in its entirety to determine whether Blackstone could submit an all cash acquisition proposal that would be attractive to the board of directors. On June 25, 2010, Mr. Williamson spoke with a representative of Blackstone, and then spoke individually with the Company’s other directors regarding the expression of interest by Blackstone. He also advised the other directors that, to avoid a conflict of interest, he would not intend to remain with the Company following any transaction

 

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with Blackstone; the other members of senior management of the Company would be leading any negotiations with Blackstone, and Mr. Williamson would review and consider any transaction with Blackstone in his role as Chairman of the board of directors. On June 28, 2010, Mr. Williamson and Ms. Nichols met with representatives of Blackstone, and agreed that Blackstone would be given access to non-public information of the Company for a limited period of time. On that same date, an affiliate of Blackstone and the Company entered into a confidentiality agreement and Blackstone was given access to non-public information about the Company shortly thereafter.

On July 14, 2010, the board of directors held a meeting. Several members of senior management and representatives from Sullivan & Cromwell participated in this meeting, and representatives from Greenhill and Goldman Sachs participated in this meeting at various points. Senior management of the Company updated the board of directors regarding the execution of the confidentiality agreement with an affiliate of Blackstone and the provision of non-public information to Blackstone. A representative from Sullivan & Cromwell then reviewed with the directors their fiduciary duties under applicable law. The board of directors discussed the potential transaction with senior management and representatives from Greenhill, Goldman Sachs and Sullivan & Cromwell, including the advisability of proceeding exclusively with Blackstone and the financial analysis and analysis of strategic alternatives that the board of directors wanted prepared in connection with its evaluation of the potential transaction with Blackstone. The board of directors authorized senior management and representatives of Sullivan & Cromwell to prepare a draft merger agreement to send to Blackstone and its advisors for Blackstone to consider in presenting its all cash acquisition proposal to the Company. At the conclusion of this meeting, and at the conclusion of each meeting of the board of directors described below, the directors held an executive session with only representatives of Sullivan & Cromwell and members of the board of directors present, followed by a further executive session with only the independent directors and representatives of Sullivan & Cromwell present.

On July 18, 2010, representatives from Sullivan & Cromwell provided representatives from Blackstone’s outside counsel, Simpson Thacher & Bartlett LLP, whom we refer to as Simpson Thacher, with a draft merger agreement.

On July 21, 2010, representatives from Blackstone provided representatives from the Company with a non-binding expression of interest to acquire all of the Company’s outstanding common stock for $5.00 per share, subject to satisfactory completion of remaining due diligence and other work necessary to enter into a definitive agreement for the proposed transaction. Blackstone also acknowledged its understanding that Mr. Williamson had elected not to have a continuing role with the Company following any such acquisition.

On July 23, 2010, representatives from Simpson Thacher provided the Company and representatives from Sullivan & Cromwell with a list of material issues with respect to the draft merger agreement.

Later on July 23, 2010, the board of directors held a meeting to discuss the Company’s strategic alternatives and the proposal received from Blackstone. Several members of senior management and representatives from Greenhill, Goldman Sachs and Sullivan & Cromwell participated in this meeting. A representative from Sullivan & Cromwell reviewed with the directors their fiduciary duties under applicable law. Senior management of the Company then reviewed the proposal received from Blackstone with the board of directors. Thereafter, representatives from Greenhill and Goldman Sachs discussed with the board of directors the strategic alternatives available to the Company, including continuing as an independent entity, a sale of the Company, a business combination with a strategic partner and a sale of the Company’s coal generating facilities or gas fired assets, including those gas fired assets located in the western region of the United States. Following discussion among the directors, senior management and representatives from Greenhill and Goldman Sachs regarding the Company’s strategic alternatives, the board of directors provided instructions to senior management and representatives from Greenhill and Goldman Sachs with respect to certain additional analyses to be conducted and information to be gathered, in each case, with respect to the Company’s strategic alternatives and to a potential transaction with Blackstone. The board of directors also instructed senior management not to discuss any management retention, post-closing employment or equity investment in a potential transaction with representatives from Blackstone without authorization from the board of directors.

 

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Following the meeting of the board of directors, representatives from Simpson Thacher delivered a revised draft of the merger agreement to representatives from Sullivan & Cromwell. From that day until the merger agreement and related documents were executed on the morning of August 13, 2010 (excluding the period from August 6, 2010 until August 10, 2010 during which, as described below, the Company and its respective advisors ceased discussions with Blackstone and NRG and their respective advisors), the parties and their respective representatives negotiated the terms of the definitive documents. Significant issues discussed included, but were not limited to, the conditions to closing of the merger, the amount of the termination fees payable by the Company and Parent and the circumstances under which the termination fees would be payable, whether the length of the go-shop period would be 30 days (Blackstone position) or 35 days (Company position), the definition of an excluded party, the definition of Company material adverse effect and the restrictions on the Company’s ability to engage in certain activities between signing and closing. During this same period, representatives of Blackstone continued their due diligence investigation of the Company.

On July 29, 2010, representatives of Blackstone delivered to representatives of the Company a revised proposal to acquire the Company at a price per share of $5.25. Blackstone’s revised proposal contemplated the execution by Blackstone and NRG of a purchase and sale agreement for certain of the Company’s gas fired assets concurrently with the execution of a merger agreement between Blackstone and the Company. Under Blackstone’s revised proposal, Blackstone’s obligation to close the merger with the Company would be conditioned on the receipt of required regulatory approvals for the asset sale to NRG.

Later on July 29, 2010, the board of directors held a meeting to discuss the Company’s strategic alternatives and the proposal received from Blackstone. Several members of senior management and representatives from Greenhill, Goldman Sachs and Sullivan & Cromwell participated in this meeting. Senior management reviewed with the board of directors the strategic alternatives available to the Company. Representatives of Greenhill and Goldman Sachs then discussed with the board of directors their joint preliminary financial analysis and provided the additional analyses and information that the board of directors had instructed them to prepare and gather at the July 23, 2010 meeting. Senior management of the Company then reviewed with the board of directors the revised proposal received from Blackstone. Thereafter, senior management of the Company and representatives from Greenhill, Goldman Sachs and Sullivan & Cromwell updated the board of directors with respect to the ongoing discussions with Blackstone and its advisors.

Following the meeting of the board of directors, representatives of the Company delivered a letter to representatives of Blackstone detailing the Company’s positions on several key issues, including the conditions to closing of the merger, the amount of the termination fees payable by the Company and Parent and the circumstances under which the termination fees would be payable, a go-shop period of 35 days and the definition of an excluded party and certain terms of the NRG PSA. Following discussions between representatives from the Company, Blackstone and their respective advisors, the parties were able to reach agreement on the conditions to closing, a go-shop period of 35 days, the definition of excluded party and certain terms of the NRG PSA but did not reach agreement at that time on the amount of the termination fees payable by the Company and Parent and the circumstances under which the termination fees would be payable.

On August 1, 2010, representatives from Blackstone sent representatives of the Company a draft of the NRG PSA. On the same date, representatives of Simpson Thacher sent representatives of Sullivan & Cromwell drafts of the limited guaranty and the equity commitment letter. From that day until the merger agreement and related documents were executed on the morning of August 13, 2010 (excluding the period from August 6, 2010 until August 10, 2010 during which, as described below, the Company and its respective advisors ceased discussions with Blackstone and NRG and their respective advisors), the parties and their respective representatives negotiated the terms of the limited guaranty, the equity commitment letter and the NRG PSA. Significant issues on the NRG PSA discussed with respect to the Company included the conditions to closing of the NRG sale, the definition of material adverse effect, the representations and warranties relating to the Company and the enforcement rights the Company would have with respect to the NRG PSA.

 

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On August 3, 2010, the board of directors held a meeting to discuss the potential transaction with Blackstone. Several members of senior management and representatives from Greenhill, Goldman Sachs and Sullivan & Cromwell participated in this meeting. Senior management reviewed with the board of directors the potential costs associated with executing the merger agreement, including change in control severance and related costs as well as estimated advisor fees. Representatives from Sullivan & Cromwell reviewed with the directors their fiduciary duties under applicable law and the terms of the draft merger agreement. Senior management and representatives of Greenhill, Goldman Sachs and Sullivan & Cromwell updated the board of directors on the status of discussions with Blackstone and its advisors. Representatives from Sullivan & Cromwell discussed with the board of directors Blackstone’s desire to retain the option to fund a portion of the merger consideration payable to holders of common stock with proceeds from the NRG sale and the legal implications of such a structure. Following discussion among the board of directors and representatives from Sullivan & Cromwell, the board directed Sullivan & Cromwell to inform Blackstone that it must agree to fund all payments to stockholders in the merger from the equity financing to be provided to Parent and Merger Sub by the guarantor.

Between the meeting of the board of directors on August 3, 2010 and the evening of August 5, 2010, the parties and their respective representatives continued discussions and negotiations on the terms of the merger agreement, the limited guaranty, the equity commitment letter and the NRG PSA. NRG had limited participation in certain of those discussions, solely with respect to issues regarding the NRG PSA.

On August 4, 2010, representatives of Blackstone informed representatives of the Company that they would agree not to fund any portion of the merger consideration with the proceeds of the NRG sale or use any assets of the Company or any new indebtedness of the Company for such a purpose but in order to do so Blackstone was revising its proposal to reduce the offer price from $5.25 per share to $5.00 per share and making it subject to its further due diligence investigation of the Company.

On August 5, 2010, representatives of Blackstone informed representatives of the Company that its discussions with NRG had reached an impasse due to valuation differences between Blackstone and NRG and indicated that, as a result, Blackstone’s offer price might need to be reduced further. Representatives of the Company informed representatives of Blackstone that the Company would not continue discussions with Blackstone with respect to a potential transaction until Blackstone resolved its issues on the NRG PSA and the NRG sale with NRG.

Over the course of the next week, Blackstone, NRG and their respective representatives continued discussions with respect to the NRG PSA. Representatives of the Company and Sullivan & Cromwell did not discuss the merger agreement with representatives of Blackstone or Simpson Thacher but did provide certain diligence and related information requested by Blackstone in connection with its ongoing discussions with NRG.

On August 11, 2010, representatives of Blackstone informed representatives of the Company that Blackstone had reached agreement with NRG on the terms and purchase price for the assets to be sold to NRG. From that day until the merger agreement, the NRG PSA, the equity commitment letter and the limited guaranty were executed on the morning of August 13, 2010, the parties and their respective representatives negotiated the terms of the merger agreement, the NRG PSA, the equity commitment letter and the limited guaranty. Again, NRG had limited participation in certain of those discussions, solely with respect to issues regarding the NRG PSA. On August 12, 2010, representatives of Blackstone provided the Company with a revised proposal to acquire the Company for $4.50 per share, which conditioned consummation of the merger on the concurrent consummation of the NRG sale but provided for a go-shop period of 35 days and a subsequent 5 business day period for a potentially interested party to become an excluded party. Representatives from Blackstone explained to representatives from the Company that the decrease in its proposal price from $5.00 per share to $4.50 per share was due to Blackstone’s views of the Company’s trading operations and the associated liquidity requirements, site visits Blackstone’s representatives made to the Company’s Moss Landing, Independence and Baldwin generating facilities and the unscheduled outages that occurred at those sites during the visits, and Blackstone’s updated views on forward power and gas prices, which had declined since June 7, 2010.

On August 12, 2010, the board of directors held a meeting to discuss the potential transaction with Blackstone, which meeting continued until the early morning (Eastern time) of August 13. Several members of senior management and representatives from Greenhill, Goldman Sachs and Sullivan & Cromwell participated in

 

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this meeting. Representatives from Sullivan & Cromwell reviewed with the directors their fiduciary duties under applicable law, as well as the terms of the draft merger agreement. Senior management and representatives of Greenhill, Goldman Sachs and Sullivan & Cromwell updated the board of directors on the revised proposal received from Blackstone and the status of discussions with Blackstone and its advisors with respect to the transaction and the transaction documents. Each of Greenhill and Goldman Sachs delivered its oral opinion to the board of directors (which was subsequently confirmed by delivery of a written opinion), to the effect that, as of August 13, 2010 and based on and subject to various assumptions and limitations described in its written opinion, the per share merger consideration to be received in cash by holders of the Company common stock (excluding Parent, Merger Sub and any of their affiliates, in the case of the Greenhill opinion) pursuant to the merger agreement was fair, from a financial point of view, to such holders. Following these discussions, the board of directors determined for the reasons detailed in “The Merger—Reasons for the Merger; Recommendation of the Board of Directors” beginning on page [] that moving forward with the terms contained in the revised Blackstone proposal at a price of $4.50 per share was in the best interests of the Company’s stockholders. Thereafter, the board of directors determined that the merger is fair to and in the best interests of the Company and its stockholders and approved and declared advisable the merger agreement, the merger and the transactions contemplated thereby, and resolved that the merger agreement be submitted for consideration by the stockholders of the Company at a meeting of stockholders, and recommended that the stockholders of the Company vote to adopt the merger agreement, with one director, Victor Grijalva, dissenting.

On the morning of August 13, 2010, Parent, Merger Sub and the Company executed the merger agreement, Merger Sub and NRG executed the NRG PSA, and the Company and Blackstone issued a joint press release announcing the execution of the merger agreement and the NRG PSA.

[The merger agreement provides that, until 11:59 p.m., Eastern time, on September 22, 2010, the Company is allowed to initiate, solicit and encourage any alternative acquisition proposals from third parties, provide non-public information and participate in discussions and negotiate with third parties with respect to acquisition proposals. At the direction of the board of directors, Greenhill and Goldman Sachs are conducting this “go-shop” process on behalf of the Company. The board of directors has not authorized senior management to discuss any management retention, post-closing employment or equity investment in a potential transaction with representatives from Blackstone or any other interested party.] [Updated discussion of go-shop process and its results will be included in the definitive proxy statement.]

Reasons for the Merger; Recommendation of the Board of Directors

At a meeting held on August 12, 2010, the board of directors (i) determined that the merger is fair to, and in the best interests of, the Company and its stockholders, (ii) approved and declared advisable the merger agreement, the merger and the other transactions contemplated by the merger agreement, (iii) resolved that the merger agreement be submitted for consideration by the stockholders of the Company at a special meeting of stockholders, and (iv) recommended that the stockholders of the Company vote to adopt the merger agreement, with one director, Victor Grijalva, dissenting. We refer to the foregoing determination, approval, declaration of advisability, resolution and recommendation of the board of directors as the board approval and recommendation.

In evaluating the merger agreement, the merger and the other transactions contemplated by the merger agreement and making the board approval and recommendation, the board of directors consulted with our management team, as well as our outside legal and financial advisors, and considered a number of factors. Some of the factors considered by the board of directors and described below weighed in favor of having the Company continue as an independent entity and not making the board approval and recommendation. However, the board of directors determined that more of the factors that it considered, including the qualitative importance of such factors, weighed in favor of the board recommendation and approval and outweighed the potential benefits of the Company continuing as an independent entity and waiting to see whether there were any improvements in commodities and financing conditions and other fundamentals underlying the Company’s business. In particular, the board of directors concluded that if such improvements occurred, continuing the Company as an independent entity could potentially permit our common stock to trade at prices higher than the per share merger consideration but that the Company’s ability to operate during the interim period before such improvements, if any, occurred would be attended by significant risk and made such a strategy inadvisable.

 

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In reaching the determination to effect the board approval and recommendation, the board of directors considered the following material factors as supporting its decision:

 

   

management’s and the board of directors’ views and opinions on the electric generation industry;

 

   

the board of directors’ understanding of the business, operations, financial condition, earnings and prospects of the Company, including the prospects and risk profile of the Company as an independent entity;

 

   

the board of directors’ belief that the merger is more favorable to our stockholders than the alternatives to the merger, which belief was formed based on the Company’s previous discussions with potentially interested parties with respect to potential strategic transactions, as more fully described under the caption “The Merger—Background of the Merger” beginning on page [], and the board of directors’ review, with the assistance of its financial advisors and senior management of the Company, of the strategic alternatives available to the Company, including the fact that the depressed market for sales of generating facilities as of August 13, 2010 makes it challenging to fund cash flow requirements through sales of assets. In particular, the board of directors believed that pursuing such a strategy would increase the leverage and risk profile of the Company and amplify the risk associated with a further deterioration in values of generating plants, or adverse regulatory, operating or financial developments. The board of directors further believed, on the basis of the above-described review, that on the whole the strategic alternatives available to the Company were not of themselves likely to yield long-term value to our stockholders, particularly in light of the attendant risks, above the per share merger consideration;

 

   

the presentation to the board of directors on August 12, 2010 and financial analyses reviewed therewith of Greenhill and Goldman Sachs, and the opinions, each dated August 13, 2010, of each of Greenhill and Goldman Sachs delivered to the board of directors to the effect that, as of August 13, 2010 and based on and subject to various assumptions and limitations described in its written opinion, the per share merger consideration to be received in cash by holders of the Company common stock (excluding Parent, Merger Sub and any of their affiliates, in the case of the Greenhill opinion) pursuant to the merger agreement was fair, from a financial point of view, to such holders, as more fully described below under the captions “The Merger—Opinions of Financial Co-Advisors—Opinion of Greenhill & Co.” beginning on page [] and “The Merger—Opinions of Financial Co-Advisors—Opinion of Goldman Sachs & Co.” beginning on page [];

 

   

the absence of any meaningful economic or industry indicator suggesting that the forward curves for natural gas and electricity prices were too low, which indicated that any increase in the fundamental value of the Company, which ordinarily would be expected to increase with increases in the price of natural gas and electricity, may not occur until at least several years into the future;

 

   

the fact that the per share merger consideration represented:

 

   

a premium of approximately 26% to the average closing share price of our common stock during the 30-day trading period ended on August 12, 2010, the last trading day prior to the public announcement of the merger agreement; and

 

   

a premium of approximately 62% to the closing share price of our common stock on August 12, 2010.

 

   

the fact that (i) the Company is projected, based upon the Company forecasts described under “—Certain Company Forecasts” beginning on page [] (which used commodity pricing assumptions through 2012 based upon June 7, 2010 price curves and commodity pricing assumptions after 2012 were based upon June 7, 2010 price curves and adjusted based upon management’s fundamental outlook), to have negative “operating cash flow less total capital expenditures” over the next four fiscal years starting in fiscal year 2011, (ii) while mandated environmental expenditures in Company plants under current law and under a consent decree to which the Company is subject are a significant factor in these negative cash flows, these Company forecasts

 

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do not assume any incremental expenditures mandated by new laws or regulations that may come into effect in the future, and (iii) the Company would be dependent on the bank and capital markets to fund these negative amounts through additional borrowings, sales of assets or sales of equity securities, and in light of the Company’s substantial leverage, access to the bank and capital markets, particularly on reasonable economic or operating terms, could be difficult or impossible;

 

   

the facts that (i) absent significant improvements in market and operating conditions or a successful refinancing, it is projected that the Company would require a waiver under the terms of its existing credit facility by the middle of 2011 of the requirement that it comply with certain financial covenants, (ii) the revolving portion of the Company’s credit facility expires by its terms in 2012 and the term letter of credit and senior secured term loan portions of the Company’s credit facility expire by their terms in 2013, (iii) management believes that the existing credit facility could be amended to address the projected need for a financial covenant waiver for the near term, but that the terms of the amendment, combined with the terms of other debt securities that would need to be issued, would likely significantly restrict the Company’s future financial flexibility and (iv) management believes that it would be uncertain that credit would be available in sufficient amounts after expiration of the credit facility to permit the Company to fund its operations on a reasonable basis, indicating that the amount of time available for improved electricity prices to emerge and to be of substantial benefit to the Company could be limited;

 

   

the fact that although a substantial majority of the Company’s indebtedness is trading at a discount to its principal amount, with an aggregate discount of approximately $800 million or approximately $6.63 per share of common stock outstanding as of August 10, 2010, the Company’s limited financial flexibility and past experience with debt repurchases suggested that fully capturing this discount for the benefit of the holders of common stock would likely not occur in practice;

 

   

the potential materially adverse earnings and cash flow impact on the Company if it is unable to enter into new coal transportation contracts on pricing terms comparable to its existing coal transportation contracts, which expire in 2013 and contain pricing terms significantly more favorable to the Company than current market rates;

 

   

the likelihood that the merger would be completed, based on, among other things (not necessarily in any relative order of importance):

 

   

the reputations of the guarantor and NRG;

 

   

the guarantor’s and NRG’s ability to complete large acquisition transactions and their familiarity with the Company;

 

   

the fact that there is no financing or due diligence condition to the completion of the merger in the merger agreement or the NRG sale in the NRG PSA;

 

   

the receipt of an executed equity commitment letter from guarantor to Parent for the merger in an amount sufficient to fund the per share merger consideration for all of our common stock, and the terms of the equity commitment letter, which, in the reasonable judgment of our board of directors, increase the likelihood of the equity financing being completed;

 

   

the Company’s ability, under certain circumstances pursuant to the merger agreement and the equity commitment letter, to seek specific performance of Parent’s obligation to cause the guarantor to make or secure equity contributions to Parent pursuant to the equity commitment letter;

 

   

the Company’s ability, under certain circumstances pursuant to the merger agreement, to seek specific performance to prevent breaches of the merger agreement by Parent and Merger Sub and to enforce specifically the terms of the merger agreement;

 

   

the fact that the merger agreement provides that in certain circumstances if a court of competent jurisdiction declines to specifically enforce the obligations of Parent and Merger Sub, Parent will pay us a termination fee of $100 million, and the guarantor’s guarantee of such payment obligation pursuant to the limited guaranty;

 

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Parent’s obligation, in the event the merger is not completed, to pay the Company 50% of certain amounts, if any, Merger Sub negotiates to receive from NRG in connection with a termination of the NRG PSA or a failure of the NRG Sale to be consummated; and

 

   

the Company’s right, under the NRG PSA, of enforcement in respect of Merger Sub’s and NRG’s obligations under the NRG PSA, and the inability of Merger Sub and NRG to amend or waive any provision thereunder without the Company’s consent if such waiver or amendment would be adverse to the Company in any material respect;

 

   

the fact that the all-cash per share merger consideration will provide our stockholders with immediate fair value, in cash, for their shares of common stock, while avoiding medium- and long-term business risk, and while also providing stockholders certainty of value for their shares of common stock and the opportunity to reinvest in other investments that would permit stockholders to benefit from any improvement in the prices of natural gas and electricity, with less risk of loss if those prices do not increase in the medium- or long-term;

 

   

the Company’s ability, under the merger agreement, during the period beginning on the date of the merger agreement and continuing until 11:59 p.m., Eastern time, on September 22, 2010, to initiate, solicit and encourage alternative acquisition proposals from third parties and to provide non-public information and to engage in discussions and negotiations with third parties with respect to such proposals;

 

   

the Company’s ability, under certain circumstances specified in the merger agreement, at any time from and after 12:00 a.m., Eastern time, on September 23, 2010 and prior to the time the Company stockholders adopt the merger agreement, to consider and respond to a written acquisition proposal or provide non-public information to or engage in discussions or negotiations with the person making such a proposal if the board of directors, prior to taking any such actions, determines in good faith, after consultation with its outside legal counsel, that failure to take such actions could be inconsistent with the board of directors’ fiduciary duties under applicable law and, after consultation with its financial advisor, that such acquisition proposal either constitutes a superior proposal or could reasonably be expected to result in a superior proposal, and to, or propose to, authorize, adopt, approve, recommend or otherwise declare advisable such acquisition proposal, if, prior to taking any such action, the board of directors complies with its obligations relating to the taking of such action under the merger agreement and determines in good faith after consultation with its financial advisor and outside legal counsel that such acquisition proposal is a superior proposal;

 

   

the Company’s ability, under certain circumstances, to terminate the merger agreement in order to enter into an agreement providing for a superior proposal; provided that the Company complies with its obligations relating to the entering into of any such agreement and immediately prior to or substantially concurrently with the termination of the merger agreement the Company pays a termination fee of $16.3 million and reimburses Parent for all out-of-pocket expenses incurred by it in connection with the merger agreement or the transactions contemplated therein up to $6 million, if the termination fee were to become payable as a result of the Company entering into an alternative acquisition agreement with an excluded party, or $50 million in all other circumstances, which termination fees and expense reimbursement obligations the board of directors concluded were reasonable in the context of termination fees and expense reimbursement obligations in comparable transactions and in light of the overall terms of the merger agreement, including the per share merger consideration;

 

   

the Company’s ability, under the merger agreement, to withhold, withdraw, qualify or modify the Company recommendation under any circumstance, subject to Parent’s subsequent right to terminate the merger agreement and, in such event, the Company’s obligation to pay to Parent a termination fee of $50 million;

 

   

the board of directors’ review of the potential costs associated with executing the merger agreement, including change in control severance and related costs as well as estimated advisor fees, which the

 

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board of directors concluded were reasonable and would not affect the advice from, or the work performed by, senior management of the Company or the Company’s co-financial advisors in connection with the evaluation of the merger and the merger agreement by the board of directors;

 

   

the availability of appraisal rights under the DGCL to holders of common stock who comply with all of the required procedures under the DGCL, which allows such holders to seek appraisal of the fair value of their shares of Company common stock as determined by the Delaware Court of Chancery; and

 

   

the fact that the termination date under the merger agreement allows for sufficient time to complete the merger.

As noted above, in reaching the decision to make the board approval and recommendation, the board of directors also considered a variety of potentially negative factors concerning the merger and the merger agreement, including the following (not necessarily in any relative order of importance):

 

   

the fact that the merger would preclude our stockholders from having the opportunity to participate in the future performance of the Company’s assets and any potential future appreciation of the value of our common stock;

 

   

the low proportion of equity value (approximately $335 million based on the closing price of our common stock on August 12, 2010) as a proportion of the Company’s enterprise value (approximately $4.7 billion, including capitalized lease obligations as of June 30, 2010 and based on the book value of the Company’s indebtedness as of June 30, 2010 and the per share merger consideration) means that relatively small percentage changes in enterprise value will have substantially larger percentage effects on equity value, which means that improvements in market or operating conditions or Company performance over those projected could increase the value of our common stock to levels in excess of the per share merger consideration (while corresponding declines in gas or electricity prices or Company performance under those projected could decrease the value of our common stock to levels below the per share merger consideration);

 

   

the fact that, at the time of making the board approval and recommendation, our common stock was trading at a low price level relative to recent trading prices and that the per share merger consideration represented a discount to the trading price of our common stock for recent periods prior to June 28, 2010;

 

   

the fact that (i) a substantial majority of the Company’s indebtedness is trading at a discount to its principal amount, with an aggregate discount of approximately $800 million or almost $7.00 per share of common stock, and (ii) if the Company were able to purchase the indebtedness at a discounted amount, that could benefit holders of common stock;

 

   

the fact that as of August 11, 2010, many research analysts had target prices for our common stock in excess of the per share merger consideration, with 11 analysts having an average target price of $4.51 per share of common stock;

 

   

although the board of directors believed it had a strong basis, based upon frequent periodic reviews of the Company’s value and strategic alternatives over the prior several years, past discussions with potential strategic acquirors and after considering the views of the financial co-advisors as to the likely universe of potential financial acquirors, for believing that the merger was the best transaction reasonably likely to be available, it is possible that a public auction would have discovered a buyer willing to pay more than the per share merger consideration;

 

   

the fact that significant costs are involved in connection with entering into and completing the merger and substantial time and effort of management is required to complete the merger, potentially resulting in disruptions to the operation of the Company’s business;

 

   

the restrictions placed on the conduct of the Company’s business prior to the completion of the merger pursuant to the terms of the merger agreement, which could delay or prevent the Company from

 

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undertaking business opportunities that may arise or any other action it would otherwise take with respect to the operations of the Company absent the pending completion of the merger, including a restriction which requires the Company, if requested by Parent, to terminate certain hedging arrangements following the later to occur of (i) September 22, 2010 and (ii) the expiration or termination of the waiting period applicable to the merger under the HSR Act;

 

   

the announcement and pendency of the merger, or failure to complete the merger, may cause substantial harm to relationships with the Company’s employees, suppliers and customers and may divert management and employee attention away from the day-to-day operation of our business;

 

   

the fact that while the Company expects that the merger will be consummated, there can be no assurance that all conditions to the parties’ obligations to complete the merger will be satisfied, including the condition that all of the conditions to the obligation of Merger Sub and NRG to effect the NRG sale be satisfied or waived (other than the consummation of the merger) and that NRG be standing ready, willing and able to consummate the NRG sale upon the consummation of the merger;

 

   

the terms of the merger agreement limit the Company’s ability to collect the $100 million Parent fee to certain circumstances where a court has decided not to specifically enforce the obligations of Parent and Merger Sub and the Company had certain merger agreement termination rights at the time such action was brought;

 

   

the terms of the merger agreement and the limited guaranty cap the damages the Company can collect from guarantor, Parent, Merger Sub and their affiliates at (i) the sum of the Parent fee, the amount of any NRG payment and any expenses incurred by the Company in connection with enforcing its right to such amounts minus (ii) any expense reimbursement and indemnification payments actually paid by Parent or Merger Sub to the Company in connection with the Company’s cooperation with certain financing and third party investment activities;

 

   

Parent and Merger Sub are newly-formed corporations with essentially no assets other than the equity commitment of the guarantor;

 

   

an all-cash transaction would be taxable to our stockholders that are U.S. holders for U.S. federal income tax purposes; and

 

   

our directors and executive officers have interests in the merger that are different from, or in addition to, our stockholders. See “The Merger—Interests of Certain Persons in the Merger.”

As noted above, one director, Victor Grijalva, voted against approval of the merger agreement and the merger. This director provided the following summary of his primary concerns, which are consistent with those he expressed over the course of several meetings of the board of directors, for inclusion in this proxy statement: This director believed more time should have been taken to consider the proposed merger because of what he considered a sharp and anomalous drop in the Company’s common stock price over the prior three-month period relative to the Company’s competitors and inversely to the price of gas; he did not believe it was advisable to sell the Company for the proposed price at a time when its common stock was trading at a historically low price and did not reflect its trading price over a longer period of time or its potential for future appreciation; and he did not believe it was in the best interest of the Company to approve the proposed merger given the evolution of its terms and conditions, including the significant diminution in the per share merger consideration and the inclusion of a condition requiring the concurrent sale of certain assets to NRG by Merger Sub.

The other six directors considered the dissenting director’s concerns over the course of several meetings of the board of directors. In particular, and as further reflected in the various factors described above, the board of directors reviewed (i) in consultation with its legal advisors, the process undertaken by the board of directors in considering the various strategic alternatives available to the Company, including the proposed merger, continuing as an independent company and the other potential business combination, acquisition and asset disposition transactions described under “The Merger—Background of the Merger”, and (ii) in consultation with

 

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its co-financial advisors, the Company’s trading price over various periods preceding the approval of the merger agreement and the merger, and the apparent impact of the Company’s substantial leverage on the trading prices for both its debt and equity securities during the more recent period of market volatility. After weighing the various factors described above, many of which address aspects of the concerns expressed by the dissenting director, the other six directors determined to vote in favor of the board approval and recommendation because they believed that, taking all relevant factors into account, the merger agreement and the merger were in the best interests of the Company and its stockholders.

Opinions of Financial Co-Advisors

Opinion of Greenhill & Co., LLC

On August 12, 2010, at a meeting of the board of directors held to consider the proposed merger, Greenhill rendered to the board of directors an oral opinion, which was confirmed by delivery of a written opinion, dated August 13, 2010, to the effect that, as of the date of the opinion, and based upon and subject to the limitations and assumptions set forth therein, the per share merger consideration to be received by the holders of the common stock (excluding Parent, Merger Sub and any of their affiliates) pursuant to the merger agreement was fair, from a financial point of view, to such holders.

The full text of Greenhill’s written opinion dated August 13, 2010, which contains the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex B to this proxy statement and is incorporated herein by reference. The summary of Greenhill’s opinion in this proxy statement is qualified in its entirety by reference to the full text of the opinion.

In arriving at its opinion, Greenhill, among other things:

 

   

reviewed the merger agreement, the NRG PSA and certain related documents;

 

   

reviewed certain publicly available financial statements of the Company;

 

   

reviewed certain other publicly available business and financial information relating to the Company that Greenhill deemed relevant;

 

   

reviewed certain information, including financial forecasts and other financial and operating data concerning the Company, prepared by the management of the Company, including the financial forecasts prepared by the management of the Company described under “The Merger—Certain Company Forecasts” beginning on page [], which we refer to as the financial forecasts;

 

   

discussed the past and present operations and financial condition and the prospects of the Company with senior executives of the Company;

 

   

reviewed the historical market prices and trading activity for the common stock and analyzed its implied valuation multiples;

 

   

compared the value of the per share merger consideration to a range of implied valuations for the common stock derived based on valuation multiples implied by the trading values of certain publicly traded companies that Greenhill deemed relevant;

 

   

compared the value of the per share merger consideration to a range of implied valuations for the common stock derived by discounting future cash flows and a terminal value of the Company at discount rates Greenhill deemed appropriate;

 

   

compared the value of the per share merger consideration to a range of implied valuations for the common stock derived based on multiples implied by certain publicly available transactions that Greenhill deemed relevant involving merchant generation companies;

 

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compared the value of the per share merger consideration to a range of implied valuations for the common stock derived based on premiums paid in certain publicly available transactions that Greenhill deemed relevant;

 

   

participated in discussions and negotiations among representatives of the Company and its legal advisors and representatives of Parent and its legal advisors; and

 

   

performed such other analyses and considered such other factors as Greenhill deemed appropriate.

Greenhill’s written opinion was addressed to the board of directors. It was not a recommendation to the board of directors as to whether it should approve the merger or the merger agreement, nor does it constitute a recommendation as to whether the stockholders of the Company should approve or take any other action with respect to the merger at any meeting of the stockholders convened in connection with the merger. Greenhill was not requested to opine as to, and its opinion did not in any manner address, the Company’s underlying business decision to proceed with or effect the merger. Greenhill did not express any opinion as to any aspect of the transactions contemplated by the merger agreement other than the fairness, from a financial point of view, of the per share merger consideration to the holders of common stock (excluding Parent, Merger Sub and any of their affiliates). Greenhill did not express any opinion as to any aspect of the NRG sale. Greenhill did not express any opinion on the amount or nature of any compensation to any officers, directors or employees of the Company, or any class of such persons, relative to the per share merger consideration to be received by the holders of the common stock in the merger or with respect to the fairness of any such compensation. Greenhill expressed no opinion as to the impact of the merger or the NRG sale on the solvency or viability of the Company or Parent or the ability of the Company or Parent to pay its obligations when they come due. Greenhill’s opinion was approved by its fairness committee.

In conducting its review and analysis and rendering its opinion, Greenhill assumed and relied upon, without independent verification, the accuracy and completeness of the information publicly available, supplied or otherwise made available to it by representatives and management of the Company for the purposes of its opinion and further relied upon the assurances of the representatives and management of the Company that they were not aware of any facts or circumstances that would make such information inaccurate or misleading. With respect to the financial forecasts and projections and other data that was furnished or otherwise provided to it, Greenhill assumed that such projections and data were reasonably prepared on a basis reflecting the best currently available estimates and good faith judgments of the management of the Company as to those matters, and Greenhill relied upon such financial forecasts and data in arriving at its opinion. Greenhill expressed no opinion with respect to such financial forecasts, projections and other data or the assumptions upon which they were based.

Greenhill did not make any independent valuation or appraisal of the assets or liabilities of the Company, nor was it furnished with any such appraisals. Greenhill assumed for purposes of its opinion that the merger will be consummated in accordance with the terms set forth in the merger agreement, without waiver of any material terms or conditions set forth in the merger agreement. Greenhill further assumed that all material governmental, regulatory and other consents and approvals necessary for the consummation of the merger will be obtained without any effect on the merger meaningful to its analysis.

Greenhill’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to it, as of August 13, 2010. Subsequent developments may affect its opinion, and Greenhill does not have any obligation to update, revise, or reaffirm its opinion.

The board of directors retained Greenhill based on its qualifications and expertise in providing financial advice and on its reputation as an internationally recognized investment banking firm. Greenhill acted as financial advisor to the independent director committee of the board of directors in connection with the purchase by LS Power of (i) the Company’s interests in eight power generating project companies and Dynegy Sandy Creek Holdings, LLC and (ii) $235 million aggregate principal amount of 7.5% Senior Unsecured Notes due

 

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2015 of Dynegy Holdings Inc., a wholly-owned subsidiary of the Company, in exchange for approximately $1.0135 billion in cash and the relinquishment of 245 million shares of Class B common stock of the Company by LS Power, announced in August 2009. The Company understands that Greenhill has not had a material relationship with Blackstone or any of its affiliates during the past two years.

Under the terms of Greenhill’s engagement with the Company, the Company has agreed to pay Greenhill a fee of $10 million in the aggregate, of which $5 million was paid following delivery of Greenhill’s written opinion and $5 million is payable upon the consummation of the merger. The Company has also agreed to reimburse Greenhill for certain out-of-pocket expenses incurred by it in connection with its engagement and will indemnify Greenhill against certain liabilities that may arise out of its engagement.

Greenhill’s opinion was one of the many factors considered by the board of directors in evaluating the merger and should not be viewed as determinative of the views of the board of directors with respect to the merger.

Opinion of Goldman, Sachs & Co.

On August 12, 2010, at a meeting of the board of directors held to consider the proposed merger, Goldman Sachs rendered to the board of directors an oral opinion, which was confirmed by delivery of a written opinion, dated August 13, 2010, to the effect that, as of the date of the opinion, and based upon and subject to the factors, assumptions and limitations set forth therein, the $4.50 per share in cash to be paid to the holders of common stock pursuant to the merger agreement was fair from a financial point of view to such holders.

The full text of the written opinion of Goldman Sachs, dated August 13, 2010, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex C to this proxy statement. Goldman Sachs provided its opinion for the information and assistance of the board of directors in connection with its consideration of the proposed merger. The Goldman Sachs opinion is not a recommendation as to how any holder of common stock should vote with respect to the merger or any other matter.

In connection with rendering the opinion described above and performing its related financial analyses, Goldman Sachs reviewed, among other things:

 

   

the merger agreement;

 

   

the NRG PSA;

 

   

annual reports to stockholders and Annual Reports on Form 10-K of the Company for the five fiscal years ended December 31, 2009;

 

   

certain interim reports to stockholders and Quarterly Reports on Form 10-Q of the Company;

 

   

certain other communications from the Company to its stockholders;

 

   

certain publicly available research analyst reports for the Company; and

 

   

certain internal financial analyses and forecasts for the Company prepared by its management, including the financial forecasts disclosed under “The Merger—Certain Company Forecasts” beginning on page [], as approved for Goldman Sachs’ use by the Company.

Goldman Sachs also held discussions with members of the senior management of the Company regarding their assessment of the past and current business operations, financial condition and future prospects of the Company; reviewed the reported price and trading activity for the shares of the common stock and the publicly traded debt securities of the Company and its subsidiaries; compared certain financial and stock market information for the Company with similar information for certain other companies the securities of which are publicly traded; reviewed the financial terms of certain recent business combinations in the power generation industry and in other industries; and performed such other studies and analyses, and considered such other factors, as Goldman Sachs deemed appropriate.

 

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For purposes of rendering the opinion described above, Goldman Sachs relied upon and assumed, without assuming any responsibility for independent verification, the accuracy and completeness of all of the financial, legal, regulatory, tax, accounting and other information provided to, discussed with or reviewed by it and Goldman Sachs did not assume any responsibility for any such information. In that regard, Goldman Sachs assumed with the consent of the board of directors that the internal financial analyses and financial forecasts for the Company prepared by its management were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of the Company. Goldman Sachs did not make an independent evaluation or appraisal of the assets and liabilities (including any contingent, derivative or other off-balance-sheet assets and liabilities) of the Company or any of its subsidiaries, nor was any evaluation or appraisal of the assets or liabilities of the Company or any of its subsidiaries furnished to Goldman Sachs. Goldman Sachs assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the merger will be obtained without any adverse effect on the Company or on the expected benefits of the merger in any way meaningful to its analysis. Goldman Sachs also assumed that the merger will be consummated on the terms set forth in the merger agreement, without the waiver or modification of any term or condition of the merger agreement or the NRG PSA the effect of which would be in any way meaningful to its analysis.

Goldman Sachs’ opinion did not address the underlying business decision of the Company to engage in the merger, or the relative merits of the merger as compared to any strategic alternatives that may be available to the Company; nor did it address any legal, regulatory, tax or accounting matters. Goldman Sachs’ opinion addresses only the fairness from a financial point of view, as of August 13, 2010, of the per share merger consideration to be paid to the holders of the common stock pursuant to the merger agreement. Goldman Sachs’ opinion did not express any view on, and did not address, any other term or aspect of the merger agreement or the merger or any term or aspect of any other agreement or instrument contemplated by the merger agreement or entered into or amended in connection with the merger, including, without limitation, the NRG PSA or the impact thereof, the fairness of the merger to, or any consideration received in connection therewith by, the holders of any other class of securities, creditors, or other constituencies of the Company; nor as to the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of the Company, or class of such persons, in connection with the merger, whether relative to the per share merger consideration to be paid to the holders of shares of common stock pursuant to the merger agreement or otherwise. Goldman Sachs did not express any opinion as to the impact of the merger or any transaction entered into in connection therewith on the solvency or viability of the Company or Parent or the ability of the Company or Parent to pay its obligations when they come due. Goldman Sachs’ opinion was necessarily based on economic, monetary market and other conditions, as in effect on, and the information made available to it as of, August 13, 2010 and Goldman Sachs assumed no responsibility for updating, revising or reaffirming its opinion based on circumstances, developments or events occurring after August 13, 2010. Goldman Sachs’ opinion was approved by a fairness committee of Goldman Sachs.

Goldman Sachs’ opinion to the board of directors was one of many factors taken into consideration by the board of directors in making its determination to approve the merger agreement.

Goldman Sachs and its affiliates are engaged in investment banking and financial advisory services, commercial banking, securities trading, investment management, principal investment, financial planning, benefits counseling, risk management, hedging, financing, brokerage activities and other financial and non-financial activities and services for various persons and entities. In the ordinary course of these activities and services, Goldman Sachs and its affiliates may at any time make or hold long or short positions and investments, as well as actively trade or effect transactions, in the equity, debt and other securities (or related derivative securities) and financial instruments (including bank loans and other obligations) of third parties, the Company, NRG or any of their respective affiliates, Blackstone or any of the affiliates and portfolio companies of Blackstone or any currency or commodity that may be involved in the merger for their own account and for the accounts of their customers. Goldman Sachs has acted as financial advisor to the Company in connection with, and have participated in certain of the negotiations leading to, the merger.

 

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Goldman Sachs has provided certain investment banking services to the Company and its affiliates from time to time for which its investment banking division has received, and may receive, compensation, including having acted as financial advisor to the independent director committee of the board of directors in connection with the dissolution of the Company’s power development joint venture with LS Power in December 2008 and as financial advisor to the Company in connection with the exchange of the Company’s interests in eight power generation facilities and Dynegy Sandy Creek Holdings, LLC and $235 million aggregate principal amount of 7.5% Senior Unsecured Notes due 2015 of a subsidiary of the Company, for cash and shares of Class B common stock of the Company relinquished by LS Power, announced in August 2009. Goldman Sachs also has provided certain investment banking services to Blackstone and its affiliates and portfolio companies from time to time for which its investment banking division has received, and may receive, compensation, including having acted as joint bookrunner in connection with the private placement by subsidiaries of The Nielsen Company B.V., a portfolio company of Blackstone, of 11.625% Senior Notes due 2014 ($330 million aggregate principal amount) in January 2009 and 11.5% Senior Notes due 2016 ($500 million aggregate principal amount) in April 2009; as co-manager in connection with the private placement by a subsidiary of Blackstone of 6.625% Senior Notes due 2019 ($600 million aggregate principal amount) in August 2009; as financial advisor to funds affiliated with Blackstone in connection with its purchase of Busch Entertainment Corporation in December 2009; as joint bookrunner in connection with the private placement by subsidiaries of Vanguard Health Systems, Inc., a portfolio company of Blackstone, of 8% Senior Notes due 2018 ($950 million aggregate principal amount) in January 2010 and 8% Senior Notes due 2018 ($225 million aggregate principal amount) in June 2010; as co-manager in connection with the private placement by Republic Services, Inc., a portfolio company of Blackstone, of 5% Senior Notes due 2020 ($850 million aggregate principal amount) and 6.2% Senior Notes due 2040 ($650 million aggregate principal amount) in March 2010; and as financial advisor to funds affiliated with Blackstone in connection with the sale by the funds of equity interests in Merlin Entertainments Group, a portfolio company of Blackstone, in July 2010. Goldman Sachs also has provided certain investment banking services to NRG and its affiliates from time to time. Goldman Sachs may also in the future provide investment banking services to the Company, NRG and their respective affiliates and Blackstone and its affiliates and portfolio companies for which its investment banking division may receive compensation. Affiliates of Goldman Sachs also may have co-invested with Blackstone and its affiliates from time to time and may have invested in limited partnership units of affiliates of Blackstone from time to time and may do so in the future.

The board of directors selected Goldman Sachs as one of its financial co-advisors because it is an internationally recognized investment banking firm that has substantial experience in transactions similar to the merger. Under the terms of Goldman Sachs’ engagement with the Company, the Company has agreed to pay Goldman Sachs a fee of $10 million in the aggregate, of which $5 million was paid following delivery of Goldman Sachs’ written opinion and $5 million is payable upon the consummation of the merger. In addition, the Company has agreed to reimburse Goldman Sachs for its expenses, including attorneys’ fees and disbursements, and to indemnify Goldman Sachs and related persons against various liabilities, including certain liabilities under the federal securities laws.

Financial Analyses by Financial Co-Advisors

The following is a summary of the material financial analyses presented by Greenhill and Goldman Sachs, which we refer to collectively as the financial co-advisors, to the board of directors in connection with rendering the respective opinions described above. The following summary, however, does not purport to be a complete description of the financial analyses performed by the financial co-advisors, nor does the order of analyses described represent the relative importance or weight given to those analyses by the financial co-advisors. Some of the summaries of the financial analyses include information presented in tabular format. In order to fully understand the financial analyses performed by the financial co-advisors, the tables must be read together with the full text of each summary and are alone not a complete description of the financial co-advisors’ financial analyses. Considering the data set forth in the tables below without considering the narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a

 

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misleading or incomplete view of the financial co-advisors’ financial analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before August 11, 2010 and is not necessarily indicative of current market conditions.

Selected Companies Analysis

The financial co-advisors reviewed and compared certain financial information for the Company to corresponding financial information and public market multiples for the following publicly traded companies in the merchant power generation industry, which are collectively referred to below as the selected companies:

 

   

Calpine Corporation;

 

   

RRI Energy, Inc. / “GenOn” (adjusted for the announced merger of RRI Energy, Inc. and Mirant Corporation at the agreed-upon exchange ratio and the forecasted synergies for the combined company as publicly disclosed by the parties to that merger); and

 

   

NRG Energy, Inc.

Although none of the selected companies is directly comparable to the Company, these companies were chosen because they are publicly traded companies with operations that for the purposes of this analysis may be considered similar to certain operations of the Company. With respect to the Company and the selected companies, the financial co-advisors calculated:

 

   

The rent-adjusted enterprise value, referred to as Rent-Adjusted EV, which is defined as the market value of common equity plus the book value of debt and preferred stock, plus an estimate of the present value of anticipated rent expense, plus minority interest, less cash, as a multiple of estimated earnings plus rent expense, before interest, taxes, depreciation and amortization, referred to as Rent-Adjusted EBITDA, for calendar year 2010;

 

   

The Rent-Adjusted EV as a multiple of estimated Rent-Adjusted EBITDA for calendar year 2011; and

 

   

The Rent-Adjusted EV as a multiple of estimated Rent-Adjusted EBITDA for calendar year 2012.

For purposes of this analysis, the multiples for the Company and each of the selected companies were calculated using (i) Rent-Adjusted EV amounts derived using the closing price of the Company’s and the selected companies’ common stock on August 11, 2010, and book value of debt, preferred stock, minority interest and cash amount reflected in, and an estimate of the present value of anticipated rent expense under operating leases based on, publicly available information regarding the Company and the selected companies and (ii) Rent-Adjusted EBITDA estimates for the Company and the selected companies based on the median estimates of the Company’s and the selected companies’ earnings before interest, taxes, depreciation and amortization, referred to as EBITDA, most recently published by Institutional Broker’s Estimate System, or IBES, as of August 11, 2010 and publicly available information regarding the Company’s and the selected companies’ anticipated rent expense.

The results of these analyses are summarized as follows:

 

Rent-Adjusted EV as a Multiple of:   

Selected Companies

  

Company

  

Range

  

Median

  

2010E Rent-Adjusted EBITDA

   4.8x – 9.0x    5.7x    8.1x

2011E Rent-Adjusted EBITDA

   6.1x – 8.5x    6.6x    7.9x

2012E Rent-Adjusted EBITDA

   6.1x – 8.5x    6.6x    7.8x

 

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Based on this analysis and utilizing their professional judgment and experience, the financial co-advisors applied selected multiples ranging from 6.5x to 8.5x to estimated 2011 Rent-Adjusted EBITDA for the Company derived from the consensus estimates of the Company’s 2011 EBITDA most recently published by IBES and the Company’s estimated 2011 rent expense under its Central Hudson lease to derive a range of implied Rent-Adjusted EVs for the Company. The financial co-advisors then calculated an indicative range of implied equity values for the Company by reducing the range of implied Rent-Adjusted EVs by the book value of the Company’s net debt as of June 30, 2010 and by the present value of the Company management’s estimated future rent expenses under its Central Hudson lease, calculated using a 10% discount rate, based on public presentations made by Company management. By dividing this range of implied equity values by the number of fully-diluted shares of the common stock outstanding, the financial co-advisors calculated a range of illustrative value indications per share for the common stock, summarized as follows:

 

   

Illustrative Per Share Value Indications

Company 2011E IBES Rent-Adjusted EBITDA

  $(3.82) – $5.49

Selected Transactions Multiples Analysis

The financial co-advisors analyzed, to the extent publicly available, certain information relating to the following selected pending or previously proposed merchant power corporate transactions:

 

Date Announced

  

Acquiror

   Target    Status
04/11/2010    RRI Energy, Inc. (merger of equals)    Mirant Corporation    Pending

07/02/2009

(Second Bid)

   Exelon Corporation    NRG Energy, Inc.    Failed

10/19/2008

(First Bid)

   Exelon Corporation    NRG Energy, Inc.    Failed
05/21/2008    NRG Energy, Inc.    Calpine Corporation    Failed

For each of the selected transactions, the financial co-advisors calculated and reviewed the enterprise value of the target company as a multiple of estimated EBITDA for the first full fiscal year period beginning after the applicable transaction announcement date, or FY1 EBITDA, based on IBES estimates most recently published prior to the date of the announcement of the applicable transaction. For purposes of this analysis, the target companies’ enterprise values were generally calculated by multiplying the announced per-share transaction price by the number of that target company’s fully diluted outstanding shares as disclosed in the target company’s most recent filings with the SEC prior to the announcement of the applicable transaction and adding to that result the target company’s net debt as disclosed in the target company’s most recent public filings with the SEC prior to the announcement of the applicable transaction. While none of the companies that participated in the selected transactions are directly comparable to the Company, the companies that participated in the selected transactions are publicly traded companies with operations that, for the purposes of analysis, may be considered similar to certain of the Company’s operations. The results of this analysis are summarized as follows:

 

Enterprise Value as a Multiple of:   

Selected Transactions(1)

  

Transaction

  

Range

  

Median

  

FY1 EBITDA

   5.5x – 11.4x    6.4x    7.9x

 

(1) Excluding NRG’s attempted acquisition of Calpine Corporation from the analysis results in a range from 5.5x to 6.4x and a median of 6.2x.

 

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Based on this analysis, and utilizing their professional judgment and experience, the financial co-advisors applied selected multiples ranging from 5.5x to 6.5x to the unadjusted IBES consensus EBITDA estimate for the Company for calendar year 2011 to determine an indicative range of implied enterprise values of the Company. The financial co-advisors then calculated an indicative range of implied equity values for the Company by reducing the range of implied enterprise values by the amount of the Company’s net debt as of June 30, 2010. By dividing this range of implied equity values by the number of fully-diluted shares of the common stock outstanding, the financial co-advisors calculated a range of illustrative value indications per share for the common stock, summarized as follows:

 

     Illustrative Per Share Value Indications

Company 2011E IBES EBITDA

   $(5.52) – $(1.29)

Selected Transactions Premiums Analysis

Based on publicly-available information, the financial co-advisors analyzed the premiums paid in publicly announced change of control transactions (excluding self-tender offers, stock repurchases and exchange offers) within the United States during the five-year period ending August 11, 2010 having transaction values between $1 billion and $10 billion, and separately analyzed such change of control transactions only involving companies in the energy and power industries. None of the companies that participated in the transactions used in this analysis is directly comparable to the Company or the transaction.

The financial co-advisors reviewed the premiums paid in these transactions represented by the per share acquisition price in each of the selected transactions as compared to the average closing share price of the target company over the periods one day, one week and one month prior to the announcement of such selected transaction. The financial co-advisors also analyzed the premiums paid in these selected transactions based on the type of consideration (e.g., all cash, mixed consideration, all stock) offered in the transaction. The results of this analysis are summarized as follows:

 

Section / Consideration Type

   One Day   One Week   One Month

General M&A – All Cash

   26%   28%   28%

General M&A – Mixed Consideration

   21%   23%   24%

General M&A – All Stock

   17%   18%   19%

Energy / Power M&A – All Cash

   25%   24%   27%

Energy / Power M&A – Mixed Consideration

   20%   18%   23%

Energy / Power M&A – All Stock

   11%   15%   17%

Based on this review and their professional judgment and experience, the financial co-advisors applied a range of premiums from 20% to 30% to the average closing share price of the common stock over the periods one day, one week and one month prior to August 11, 2010, and derived a range of illustrative value indications for the common stock, summarized as follows:

 

Average Company Share Price Over Period

    

One Day

   One Week    One Month    Premium Range    Illustrative Per Share Value
Indications

$2.92

   $3.53    $3.79    20% – 30%    $4.10 – $4.44

 

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Illustrative Discounted Cash Flow Analysis

The financial co-advisors performed an illustrative discounted cash flow analysis of the Company using the financial forecasts, which are described under “The Merger—Certain Company Forecasts” beginning on page []. The financial co-advisors calculated an illustrative range of implied present values per share of common stock by discounting to present value as of December 31, 2010 (a) estimates of the Company’s unlevered free cash flow for the calendar years 2011 through 2015 calculated using the financial forecasts and (b) illustrative terminal values for the Company as of December 31, 2015 derived by multiplying the Company management’s estimates of the Company’s 2015 Rent-Adjusted EBITDA by multiples ranging from 6.5x to 8.5x. These illustrative unlevered free cash flows and terminal values were then discounted to calculate implied indications of present values using illustrative discount rates ranging from 8% to 12%, reflecting estimates of the Company’s weighted average cost of capital. The following table presents the results of this analysis:

 

     Illustrative Per Share Value Indications

Company management financial forecasts

   $(5.69) – $5.86

Illustrative Sum-of-the-Parts Analysis

The financial co-advisors performed an illustrative sum-of-the-parts analysis to determine a range of implied equity values of the common stock, based on hypothetical standalone valuations of each of the Company’s scrubbed coal generation assets, unscrubbed coal generation assets, simple cycle gas generation assets and combined cycle gas generation assets. In conducting this analysis, the financial co-advisors reviewed and analyzed, to the extent publicly available, certain information relating to three selected pending or closed coal asset transactions and 22 selected pending or closed natural gas asset transactions, including five natural gas asset transactions announced in 2010.

For each selected coal or natural gas asset transaction reviewed, the financial co-advisors calculated the standalone enterprise value of the applicable coal or natural gas assets (derived from the purchase price paid in the transaction) as a multiple, referred to as EV/kW, of the generating capacity of the coal assets (expressed in kilowatts). The following summarizes the review of the three pending or closed coal asset transactions performed by the financial co-advisors:

 

Date

Announced

   Acquiror   

Seller

  

Assets

   EV/kW
02/11/2010    First Energy Corporation    Allegheny Energy, Inc.    Allegheny Energy, Inc.’s Coal Fleet(1)    $620
04/12/2007    Cascade Investment LLC    PNM Resources, Inc.    Twin Oaks facility    $1,586
04/20/2006    International Power plc   

Sempra Energy /Riverstone

Holdings LLC

   Coleto Creek facility    $1,903

 

(1) Of the total $9.0 billion enterprise value of Allegheny Energy, Inc. implied by the transaction based on publicly available information, $5,637 million was attributed to Allegheny Energy’s regulated utility and $116 million was attributed to Allegheny Energy’s peaking and hydro facilities (total of 1,046 megawatts) based on an analyst research report published by an internationally recognized investment banking firm, as of February 1, 2010. The remaining value of $3,247 million was attributed to Allegheny Energy’s 5,236MW merchant baseload coal fleet.

 

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The following are the 22 natural gas asset transactions, including five transactions announced in 2010, reviewed by the financial co-advisors:

 

Date

Announced

   Acquiror    Seller    Assets

08/09/2010

   Constellation Energy    Boston Generating    Five Boston facilities

05/06/2010

   ArcLight Energy Partners
Fund III, L.P.
   KGen Power Corporation    Sandersville facility

04/21/2010

   Calpine Corporation    Pepco Holdings, Inc.    Conectiv Energy fleet

04/16/2010

   Constellation Energy    Navasota Holdings    Colorado Bend Energy and
Quail Run Energy facilities

04/05/2010

   Xcel Energy Inc.    Calpine Corporation    Rocky Mountain and Blue
Spruce facilities

03/23/2010

   Energy Capital Partners    BG Group plc.    Lake Road, Masspower and
Dighton facilities

08/03/2009

   Oglethorpe Power Corporation    Hartwell Energy Limited
Partnership
   Hartwell facility

08/10/2009

   L.S. Power Associates, L.P.    Dynegy, Inc.    Eight gas facilities and
stake in Sandy Creek

02/26/2009

   Cleco Power LLC    Acadia Power Partners, LLC    Acadia Power Station

10/13/2008

   Tenaska Capital Management,
LLC
   MACH Gen, LLC    Covert facility

09/25/2008

   Puget Sound Energy, Inc.    Wayzata Opportunities
Fund, LLC
   Mint Farm facility

09/02/2008

   SUEZ Energy North America,
Inc.
   FirstLight Power
Enterprises, Inc.
   15 facilities

06/10/2008

   Global Infrastructure Partners
and Foristar LLC
   GIM Channelview
Cogeneration, LLC
   Channelview facility

05/12/2008

   International Power plc    Tenaska Power Fund, L.P.
and Warburg Pincus LLC
   Four facilities

05/12/2008

   GSC Acquisition Company    Complete Energy Holdings,
LLC
   La Paloma and Batesville
facilities

04/22/2008

   Nevada Power Company    Reliant Energy, Inc.    Bighorn facility

04/30/2008

   Hastings Funds Management
Ltd. and IIF BH Investment
LLC
   Black Hills Corporation    Seven gas facilities

04/15/2008

   Hoosier Energy Rural Electric
Cooperative, Inc. and Wabash
Valley Power Association, Inc.
   Tenaska Power Fund, L.P.    Beecher City facility

04/03/2008

   Tennessee Valley Authority    Southaven Power, LLC    Southaven facility

03/31/2008

   TransCanada Corporation    National Grid plc    Ravenswood facility

01/29/2008

   FirstEnergy Corp.    Calpine Corporation    Fremont facility

01/21/2008

   Oklahoma Gas and Electric
Company
   Kelson Holdings LLC    Redbud facility

 

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The results of the review of these natural gas asset transactions are summarized as follows:

 

     Selected Transactions
   Range    Median

All Natural Gas Asset Transactions (EV/kW)

   $203/kW – $1,235/kW    $ 565/kW

2010 Natural Gas Asset Transactions (EV/kW)

   $203/kW – $794/kW    $ 367/kW

Based on the foregoing analysis and other factors considered in their professional judgment and experience, including an analysis of the spot price of natural gas on the date of the announcement of each of the selected transactions, current market dynamics, the current regulatory and legislative environment and guidance from the Company’s management, the financial co-advisors selected reference ranges for the EV/kW multiples with respect to each of the Company’s scrubbed coal generation assets, unscrubbed coal generation assets, simple cycle generation assets and combined cycle generation assets. By applying these reference ranges to the respective generating capacities of each of the Company’s generation assets (excluding the Plum Point development project ownership interest), this analysis indicated an indicative range of implied generation enterprise values for the Company’s standalone generation assets, individually and in the aggregate, as summarized in the following table:

 

(US$ in millions)

Asset Segment

   Generation
Capacity (MW)
   Illustrative Multiple
Ranges (EV/kW)
    Implied Generation
Enterprise  Value

Indications
      Low     High     Low    High

Scrubbed Coal

   2,241    $ 500      $ 700      $ 1,121    $ 1,569

Unscrubbed Coal

   1,273      100        150        127      191

Simple Cycle Gas Generation

   4,120      200        300        824      1,236

Combined Cycle Gas Generation

   4,447      300        500        1,334      2,224
                                  

Total Generation Enterprise Value

   12,081    $ 282 (1)    $ 432 (1)    $ 3,406    $ 5,219

 

(1) Range of EV/kW for total generation based on weighted average of capacity and ranges for each asset segment.

The financial co-advisors then calculated an indicative range of implied equity values for the Company by reducing the range of implied generation enterprise values by the amount of the Company’s projected net debt as of December 31, 2010 (including the present value (calculated using a 10% discount rate) of the Company management’s estimated future rent expenses under the Company’s Central Hudson lease and Company management’s estimated environmental capital expenditures) and by an implied value of the Company’s unallocated corporate overhead expenses, derived by applying a multiple of 7.5x to Company management’s estimated 2011 general and administrative expense. By dividing this range of implied equity values by the number of fully-diluted shares of the common stock outstanding, the financial co-advisors calculated a range of illustrative value indications per share for the common stock, summarized as follows:

 

     Illustrative Per Share Value Indications

Power Generation Assets (EV/kW)

   $(15.22) – $(0.18)

Research Analysts Stock Price Targets

Using publicly available information, the financial co-advisors reviewed and analyzed the most recent price targets as of August 11, 2010 for the common stock published by 13 equity research analysts. These targets

reflect each analyst’s estimate of the future public market trading price of the common stock and are not discounted to present value. The results of this review are summarized as follows:

 

     Range(1)    Median(2)    Mean(2)

Research Analysts Price Targets ($/share)

   $2.50 – $7.50    $4.25    $4.51

 

(1) Excludes the lowest ($1.00/share) and the highest ($25.00/share) published price targets

 

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(2) Median and Mean excludes price targets ($7.00/share and $25.00/share) published by two research analysts which, according to Company management, represented long-term price targets.

Historical Trading Share Prices

The financial co-advisors reviewed the highest and lowest daily closing trading share prices of the common stock during the 52-week and the 3-month periods ending on August 11, 2010. The results of this review are summarized as follows:

 

     Daily Closing Share Price

Period Ending August 11, 2010:

       Low            High    

52-week

   $ 2.92    $ 13.15

3-month

   $ 2.92    $ 6.65

Additional Financial Analysis

The financial co-advisors also reviewed and analyzed, referencing certain of the foregoing value indication analyses, the approximate market value of the Company’s outstanding publicly-traded debt securities referencing trading levels as of August 11, 2010 (rather than the book value of those debt securities). The results of these analyses are summarized below.

Selected Companies Analysis. Using the same methodology as the selected companies analysis described above, the financial co-advisors calculated the Rent-Adjusted EV for the Company using the market value of the Company’s debt securities. This Rent-Adjusted EV amount is referred to below as the Company Debt-Adjusted EV. The financial co-advisors calculated the Company Debt-Adjusted EV as a multiple of the Company’s estimated Rent-Adjusted EBITDA for calendar years 2010, 2011 and 2012, respectively. The financial co-advisors observed that the market value of the debt securities for each of the selected companies was trading approximately in line with the book value of those securities. These calculations yielded the following indicative multiples:

 

Rent-Adjusted EVas a Multiple of:

   Selected Companies Rent-Adjusted EV
(multiple)
   Company Debt-
Adjusted EV
(multiple)
           Range                    Median           

2010E Rent-Adjusted EBITDA

   4.8x – 9.0x    5.7x    6.6x

2011E Rent-Adjusted EBITDA

   6.1x – 8.5x    6.6x    6.5x

2012E Rent-Adjusted EBITDA

   6.1x – 8.5x    6.6x    6.3x

Illustrative Discounted Cash Flow Sensitivity to Debt Valuation Analysis. Using the same methodology as the illustrative discounted cash flow analysis described above, the financial co-advisors calculated the sensitivity of the results of the illustrative discounted cash flow analysis to variations in the assumed value of the Company’s debt, using illustrative discount rates ranging from 8% to 12% and an illustrative terminal value for the Company derived from a 2015 Rent-Adjusted EBITDA multiple of 6.5x. In performing this sensitivity analysis, the financial co-advisors varied the assumed values of the Company’s debt used in the illustrative discounted cash flow analysis by amounts ranging from book value of the debt to the observed market value of the debt, each reflecting projected debt balances as of December 31, 2010 but referencing trading levels as of August 11, 2010. The results of this sensitivity analysis are summarized as follows:

 

     Illustrative Per Share Value Indications

Variation in the Company’s debt value (book to observed market)

   $(5.69) – $5.85

Illustrative Sum-of-the-Parts Analysis. Using the same methodology as the illustrative sum-of-the-parts analysis described above, the financial co-advisors also calculated an indicative range of implied per share equity

 

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values of the common stock based on the Company’s projected net debt as of December 31, 2010, as adjusted to reflect a discount to book value based on the approximate market value of the Company’s debt as of August 11, 2010. The results of this sensitivity analysis are summarized as follows:

 

     Illustrative Per Share Value Indications

Variation in the Company’s debt value (book to observed market)

   $(8.40) – $6.64

General

The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying the respective opinions of Greenhill and Goldman Sachs. In arriving at their fairness determination, Greenhill and Goldman Sachs each considered the results of all of their analyses and did not attribute any particular weight to any factor or analysis considered by them. Rather, Greenhill and Goldman Sachs each made their determination as to fairness on the basis of their experience and professional judgment after considering the results of all of their analyses. No company or transaction used in the above analyses as a comparison is directly comparable to the Company or the merger.

Greenhill prepared these analyses for purposes of Greenhill’s providing its opinion to the board of directors that, as of August 13, 2010 and based upon and subject to the limitations and assumptions set forth therein, the per share merger consideration to be received by the holders of common stock (excluding Parent, Merger Sub and any of their affiliates) pursuant to the merger agreement is fair, from a financial point of view, to such holders. Goldman Sachs prepared these analyses for purposes of Goldman Sachs’ providing its opinion to the board of directors that, as of August 13, 2010, and based upon and subject to the factors, assumptions and limitations set forth therein, the $4.50 per share in cash to be paid to the holders of the common stock pursuant to the merger agreement is fair from a financial point of view to such holders. These analyses do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of the Company, Greenhill, Goldman Sachs or any other person assumes responsibility if future results are materially different from those forecast.

As described above, Greenhill’s and Goldman Sachs’ opinions to the board of directors were amongst many factors taken into consideration by the board of directors in making its determination to approve the merger agreement. The per share merger consideration was determined through arm’s-length negotiations between the board of directors and Parent and was approved by the board of directors. Greenhill and Goldman Sachs provided advice to the board of directors during these negotiations. Greenhill and Goldman Sachs did not, however, recommend any specific amount of consideration to the Company or the board of directors or that any specific amount of consideration constituted the only appropriate consideration for the transaction.

The foregoing summary does not purport to be a complete description of the analyses performed by Greenhill or Goldman Sachs in connection with their respective fairness opinions and is qualified in its entirety by reference to the written opinions of Greenhill and Goldman Sachs attached as Annex B and Annex C, respectively.

Certain Company Forecasts

While the Company provides public guidance in November of each year for its financial performance for the subsequent fiscal year, and periodically updates such guidance during the course of the subsequent fiscal year, it does not, as a matter of course, publicly disclose financial forecasts as to future financial performance, earnings or other results for periods longer than one year. The Company is especially cautious of making

 

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financial forecasts for periods longer than one fiscal year due to unpredictability of the underlying assumptions and estimates. However, in connection with the evaluation of a possible transaction involving the Company, the Company provided Blackstone, the board of directors and their respective advisors certain non-public financial forecasts covering multiple years that were prepared by management of the Company and not for public disclosure. Our public guidance provided in November 2009 and most recently updated in August 2010, does not reflect certain changes experienced in the first half of 2010, including working capital changes, whereas these financial forecasts include such changes.

A summary of these financial forecasts is not being included in this document to influence your decision whether to vote for or against the proposal to adopt the merger agreement, but is being included because financial forecasts were made available to Blackstone, the board of directors and its advisors. The inclusion of this information should not be regarded as an indication that the board of directors, its advisors or any other person considered, or now considers, such financial forecasts to be material or to be a reliable prediction of actual future results, and these financial forecasts should not be relied upon as such. Our management’s internal financial forecasts, upon which the financial forecasts were based, are subjective in many respects. There can be no assurance that these financial forecasts will be realized or that actual results will not be significantly higher or lower than forecasted. The financial forecasts cover multiple years and such information by its nature becomes subject to greater uncertainty with each successive year. As a result, the inclusion of the financial forecasts in this proxy statement should not be relied on as necessarily predictive of actual future events.

In addition, the financial forecasts were not prepared with a view toward public disclosure or toward complying with generally accepted accounting principles, which we refer to as GAAP, the published guidelines of the SEC regarding projections and the use of non-GAAP measures or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Neither our independent registered public accounting firm, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the financial forecasts contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability.

These financial forecasts were based on numerous variables and assumptions that were deemed to be reasonable as of early June, 2010, when the projections were finalized. Such assumptions are inherently uncertain and may be beyond the control of the Company. Important factors that may affect actual results and cause these financial forecasts to not be achieved include, but are not limited to, risks and uncertainties relating to the Company’s business (including its ability to achieve strategic goals, objectives and targets over the applicable periods), industry performance, the regulatory environment, general business and economic conditions and other factors described or referenced under “Cautionary Statement Concerning Forward-Looking Information” beginning on page []. In addition, the financial forecasts also reflect assumptions that are subject to change and do not reflect revised prospects for the Company’s business, changes in general business or economic conditions, or any other transaction or event that has occurred or that may occur and that was not anticipated at the time the financial forecasts were prepared, including assumptions with respect to the future prices of natural gas and electricity. The Company’s forecasted results of operations and cash flows depend, in large part, upon prevailing market prices for power and the fuel to generate such power. The forecasts were based on commodity pricing assumptions through 2012 based upon June 7, 2010 price curves and commodity pricing assumptions after 2012 were based upon June 7, 2010 price curves and adjusted based upon management’s fundamental outlook. We have not prepared revised forecasts to take into account other variables that may have changed since early June, including changes to the June 7, 2010 price curves. Accordingly, there can be no assurance that these financial forecasts will be realized or that the Company’s future financial results will not materially vary from these financial forecasts.

No one has made or makes any representation to any stockholder or anyone else regarding the information included in the financial forecasts set forth below. Readers of this proxy statement are cautioned not to rely on the forecasted financial information. Some or all of the assumptions which have been made regarding, among other things, the timing of certain occurrences or impacts, may have changed since the date such financial forecasts were made. We have not updated and do not intend to update, or otherwise revise the financial forecasts to reflect circumstances existing after the date when made or to reflect the occurrence of future events, even in

 

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the event that any or all of the assumptions on which such financial forecasts were based are shown to be in error. The Company has made no representation to Blackstone, Parent, Merger Sub or any other person in the merger agreement or otherwise, concerning these financial forecasts.

The financial forecasts are forward-looking statements. For information on factors that may cause the Company’s future financial results to materially vary, see “Cautionary Statement Concerning Forward-Looking Information” on page [].

The following is a summary of the financial forecasts prepared by management of the Company and given to the board of directors and their advisors. The projections given to Blackstone only covered fiscal years 2010, 2011 and 2012 and were adjusted to account for certain cost savings estimated by the management of the Company associated with operating as a private company.

Summary Financial Forecasts

 

    Fiscal Year Ending December 31,  
    2010E(1)     2011E(1)     2012E(1)     2013E(1)     2014E(1)     2015E(1)  
    (dollars in millions)  

Total Gross Margin

  $ 1,063      $ 948      $ 940      $ 1,105      $ 1,033      $ 1,140   

EBITDA

  $ 463      $ 384      $ 382      $ 537      $ 465      $ 555   

Adjusted EBITDA(2) (3)

  $ 517      $ 405      $ 348      $ 538      $ 466      $ 557   

Operating Cash Flow

  $ 384      $ (23   $ (126   $ 121      $ 25      $ 97   

Maintenance Capital Expenditures

  $ (143   $ (119   $ (113   $ (119   $ (97   $ (87

Environmental Capital Expenditures

  $ (201   $ (146   $ (87   $ (27   $ (12   $ (7

Operating Cash Flow less Total Capital Expenditures

  $ 40      ($ 289   ($ 326   ($ 25   ($ 83   $ 4   

Company Management’s Forward natural Gas Curve (4)

  $ 5.15      $ 5.62      $ 5.88      $ 6.03      $ 6.20      $ 6.43   

Total Debt (excluding capitalized lease Central Hudson lease)

    []      $ 4,577      $ 4,414      $ 4,332      $ 4,332      $ 4,332   

Debt Amortization Amounts

    []      $ 148      $ 163      $ 82      $ 0      $ 0   

Operating Cash Flow less Total Capital Expenditures and Debt Amortization Amounts

    []      ($ 437   ($ 489   ($ 107   ($ 83   $ 4   

Notes:

(1) Forecasted values.
(2) Adjusted EBITDA means EBITDA plus interest income and other adjustments related to mark-to-market changes.
(3) Rent-Adjusted EBITDA, which was used in certain financial analyses described under “The Merger—Opinions of Financial Co-Advisors” beginning on page [], means Adjusted EBITDA plus the $50.5 million annual rent expense associated with the Central Hudson lease obligation.
(4) Based on commodity pricing assumptions through 2012 based upon June 7, 2010 price curves and commodity pricing assumptions after 2012 based upon June 7, 2010 price curves and adjusted based upon management’s fundamental outlook.

In preparing the summary financial forecasts, our management made the following assumptions:

 

   

Apart from the Company’s existing contracts, commodity (power, fuel and transportation) pricing assumptions through 2012 were based upon June 7, 2010 price curves and commodity pricing assumptions after 2012 were based upon June 7, 2010 price curves and adjusted based upon management’s fundamental outlook, which includes tighter reserve margins in the Midwest Independent Transmission System Operator region and the PJM Interconnection, LLC region as a result of a meaningful number of coal plant retirements driven by existing and potential environmental regulations primarily impacting coal plants.

 

   

The Company would capture certain extrinsic value (which is generally the value created by buying and selling contracted positions to manage risk and capture differences in value) associated with its generation portfolio through its commercial activities, which depends on market conditions and other factors.

 

   

Implementation of a cost savings program focused on reducing general, administrative and operational expenses generates approximately $50 million in annual cost savings beginning in 2011, which implementation has not yet commenced and would result in cost savings incremental to the cost savings targets included in the Company’s previously announced 2010-2013 cost savings program, at a cost of $25 million in 2010.

 

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The occurrence of the following financing activities:

 

   

$750 million revolver refinancing at the London Interbank Offered Rate, or LIBOR, plus 450 basis points, or bps, at December 31, 2010;

 

   

$600 million term loan issuance at LIBOR plus 450 bps to replace the Company’s synthetic letter of credit facility at December 31, 2010;

 

   

$250 million second lien secured note issuance at 10% interest; and

 

   

Total collateral requirements of $555 million (comprising $75 million in cash collateral and $480 million in posted letters of credit);

 

   

Two plant retirements (Vermilion and Hennepin at the end of 2011 and 2013, respectively), one plant sale (Plum Point in 2010 for $0, which is de-consolidated for purposes of the financial forecast and accounted for through equity method) and one plant decommissioning (South Bay, beginning in 2011, with bulk of spending in 2013);

 

   

The absence of any incremental capital expenditures mandated by new environmental laws or regulations that may come into effect in the future, including any carbon tax or other environmental expenses; and

 

   

No material cash taxes paid.

Financing of the Merger

We anticipate that the total funds needed by Parent and Merger Sub to complete the merger will be obtained as follows:

 

   

the funds needed to pay our stockholders the amounts due to them under the merger agreement as holders of common stock and/or restricted stock (which we anticipate, based upon the shares of our common stock and restricted stock outstanding as of August 31, 2010, will be approximately $543 million), certain amounts due in connection with the merger and certain fees and expenses related to the merger, which will be funded by equity financing of up to $580 million to be provided or secured by Blackstone Capital Partners V L.P., which we refer to as the guarantor, or other parties to whom it assigns a portion of its commitment; and

 

 

   

the funds needed to (i) repay or refinance indebtedness outstanding under the Company’s existing credit facility that will come due as a result of the merger (which we anticipate, based upon indebtedness outstanding as of August 30, 2010, will be approximately $918 million, consisting of an $850 million term letter of credit facility (“Term LC Facility”) and a $68 million senior secured term loan facility) and (ii) replace or refinance the letters of credit issued under the Term LC Facility (as of August 30, 2010, letters of credit issued under the Term LC Facility were approximately $470 million), will collectively be funded from the cash on hand of the Company, restricted cash of the Company associated with the Term LC Facility and proceeds the surviving corporation receives in the NRG sale (as of August 30, 2010, (a) the cash on hand of the Company was approximately $650 million and (b) restricted cash of the Company associated with the Term LC Facility was approximately $850 million).

We anticipate the remaining proceeds from the NRG sale will be used to provide liquidity to the Company in support of its operations and for other corporate matters.

Parent has obtained the equity commitment letter described below, and the funding under the equity commitment letter is subject to certain conditions. In addition, Merger Sub has entered into the NRG PSA with NRG, and the closing of the merger is subject to the concurrent closing of the NRG sale. We believe the amounts committed under the equity commitment letter and to be received by the surviving corporation from the NRG sale, together with cash on hand of the Company and cash of the Company that is restricted under our existing credit facility will be sufficient to complete the merger and to repay or refinance any outstanding indebtedness

 

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that will come due as a result of the merger, but we cannot assure you of that. Those amounts may be insufficient if, among other things, the guarantor fails to fund the committed amount in breach of the equity commitment, the outstanding indebtedness of the Company at the closing of the merger is greater than anticipated, cash on hand of the Company and cash of the Company that is restricted under the Company’s existing credit facility are less than expected, or the fees, expenses or other amounts required to be paid in connection with the merger are greater than anticipated. Although obtaining the proceeds of the equity financing is not a condition to the completion of the merger, the failure of Parent and Merger Sub to obtain sufficient equity financing is likely to result in the failure of the merger to be completed. In that case, if a court of competent jurisdiction declines to specifically enforce the obligations of Parent and Merger Sub under the merger agreement, Parent may be obligated to pay the Company a fee of $100 million, which we refer to as the Parent fee. In addition, if the merger agreement is terminated or the merger is not consummated, Merger Sub may be obligated to pay the Company 50% of certain amounts Merger Sub or any of its affiliates receive from NRG negotiated in connection with a termination of the NRG PSA or a failure of the NRG sale to be consummated, which we refer to as the NRG payment. See “The Merger Agreement—Termination Fees” beginning on page [] for a further discussion of the Parent fee and NRG payment. The Parent fee and the NRG payment are guaranteed by the guarantor pursuant to the limited guaranty referred to below.

Equity Financing

Parent has entered into a letter agreement, which we refer to as the equity commitment letter, with the guarantor, dated August 13, 2010, pursuant to which the guarantor has committed to make or secure capital contributions to Parent at or prior to the closing of the merger up to an aggregate amount of $580,000,000. The guarantor is permitted to capitalize Parent directly or indirectly through one or more affiliated entities or other designated co-investors (other than NRG or any of its affiliates), including with debt financing to the extent available from lenders other than NRG or the Company or any of their respective affiliates. However, in connection with the closing of the merger (i) no credit support in connection with any debt financing utilized to capitalize Parent may be provided by NRG, the Company or any of their affiliates and (ii) no new indebtedness of the Company or any of its subsidiaries, and no assets of Company or any of its subsidiaries, will be used to pay any portion of the aggregate merger consideration to be paid to holders of our common stock.

The guarantor’s obligation to fund the financing contemplated by the equity commitment letter is subject only to the satisfaction of the conditions to Parent’s and Merger Sub’s obligations to consummate the transactions contemplated by the merger agreement. The Company is a third party beneficiary of the equity commitment letter to the extent that the Company seeks specific performance of Parent’s obligation to cause the guarantor to fund its equity commitment in certain limited circumstances in accordance with the terms of the merger agreement.

The obligation of the guarantor to fund its equity commitment will terminate automatically and immediately upon the earliest to occur of (i) the closing of the merger, (ii) the valid termination of the merger agreement in accordance with its terms, and (iii) the Company or any of its affiliates asserting any claim against the guarantor or any of its affiliates in connection with the merger agreement or any of the transactions contemplated thereby (other than any claim relating to a breach or seeking to prevent a breach of the confidentiality agreement between the Company and Blackstone Management Partners L.L.C. or any claim by the Company against (a) Parent and Merger Sub to the extent permitted under the merger agreement, (b) guarantor to the extent permitted under the equity commitment or the limited guaranty or (c) Merger Sub to the extent permitted by the NRG PSA). The termination of the equity commitment will have no effect on the limited guaranty.

Limited Guaranty

Pursuant to the limited guaranty delivered by the guarantor in favor of the Company, dated August 13, 2010, the guarantor has guaranteed the due and punctual payment when due of (i) the obligations of Parent under the merger agreement to pay the Parent fee and any NRG payment to the Company as and when due and (ii) the expense reimbursement and indemnification obligations of Parent to the Company related to the Company’s cooperation, at Parent’s request, with Parent’s efforts (a) to refinance all or any portion of the existing indebtedness of the Company and (b) to arrange or consummate a third party investment in the Company (other

 

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than the NRG sale) in connection with or following the merger. See “The Merger Agreement—Termination Fees” beginning on page []. However, the guarantor’s obligations under the limited guaranty are subject to a cap equal to (x) the sum of the Parent fee, the amount of any NRG payment and any expenses incurred by the Company in connection with enforcing its right to such amounts minus (y) any expense reimbursement and indemnification payments actually paid by Parent or Merger Sub to the Company in connection with the Company’s cooperation with certain financing and third party investment activities.

Subject to certain exceptions, the limited guaranty will terminate upon the earliest of (i) the effective time of the merger, (ii) the six month anniversary after the date of termination of the merger agreement in accordance with its terms under circumstances in which Parent would not be obligated to make any payments under the merger agreement (unless the Company has made a claim under the limited guaranty prior to such date, in which case the relevant date will be the date that such claim is finally satisfied or otherwise resolved by agreement of the Company and the guarantor or a final, non-appealable judgment of a governmental entity of competent jurisdiction), (iii) August 13, 2012 (unless the Company has made a claim under the limited guaranty prior to such date, in which case the relevant date will be the date that such claim is finally satisfied or otherwise resolved by agreement of the Company and the guarantor or a final, non-appealable judgment of a governmental entity of competent jurisdiction) and (iv) the date the guarantor’s obligations payable under the limited guaranty have been paid in full.

Closing and Effective Time of Merger

The closing of the merger will take place on the third business day following the date on which the last of the conditions to closing of the merger (described under “The Merger Agreement—Conditions to the Merger” beginning on page []) has been satisfied or waived (other than the conditions that by their nature are to be satisfied at the closing of the merger, but subject to the fulfillment or waiver of those conditions). However, if it does not become reasonably apparent to the parties at least nine calendar days prior to such date that such conditions (other than the condition relating to the adoption of the merger agreement by our stockholders, which is deemed satisfied for this purpose) are likely to be satisfied, then the closing of the merger will take place on the later of such third business day referred to above or the 11th calendar day (or, if such day is not a business day, the next business day) after it becomes reasonably apparent that such conditions are likely to be satisfied as of a particular date.

The effective time of the merger will occur as soon as practicable following the closing of the merger upon the filing of a certificate of merger with the Secretary of State of the State of Delaware (or at such later time as we and Parent may agree and specify in the certificate of merger).

Payment of Merger Consideration and Surrender of Stock Certificates

Each record holder of shares of our common stock (other than holders of solely the excluded shares) will be sent a letter of transmittal describing how such holder may exchange its shares of our common stock for the per share merger consideration promptly, and in any event within two business days, after the completion of the merger.

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

You will not be entitled to receive the per share merger consideration until you deliver a duly completed and executed letter of transmittal to the paying agent. If your shares are certificated, you must also surrender your stock certificate or certificates to the paying agent. If ownership of your shares is not registered in the transfer records of the Company, a check for any cash to be delivered will only be issued if the applicable letter of transmittal is accompanied by all documents reasonably required to evidence and effect transfer and to evidence that any applicable stock transfer taxes have been paid or are not applicable.

Interests of Certain Persons in the Merger

In considering the recommendation of our board of directors that you vote to approve the proposal to adopt the merger agreement, you should be aware that our directors and executive officers have interests in the merger

 

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that are different from, or in addition to, those of our stockholders generally. The board of directors was aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending that the merger agreement be adopted by the stockholders of the Company. For the purposes of all of the agreements and plans described below, the completion of the transactions contemplated by the merger agreement will constitute a change in control.

Long-Term Incentive Awards

As of the date of this proxy statement, certain of the Company’s executive officers hold (i) stock options to purchase shares of our common stock, (ii) shares of restricted common stock, (iii) phantom stock units, which entitle the holder to cash awards in accordance with the terms and conditions of the applicable awards, and (iv) performance units, which entitle the holder to cash awards in accordance with the terms and conditions of the applicable awards. Except as otherwise agreed to by Parent and a holder of a stock option, at the effective time of the merger, each outstanding stock option to purchase shares of our common stock will vest but be cancelled for no payment because all outstanding stock options are out of the money, meaning that the option exercise price for each outstanding option is higher than the $4.50 per share merger consideration. At the effective time of the merger, each outstanding share of restricted stock will vest and be cancelled and converted into the right to receive the per share merger consideration, less any applicable withholding taxes. At the effective time of the merger, each outstanding phantom stock unit will vest and be cancelled and converted into the right to receive the per share merger consideration, less any applicable taxes required to be withheld. At the effective time of the merger, performance units granted in 2009 and 2010 will vest, be payable at 100% of “target” (as defined in the applicable agreements for such awards), and be settled for a payment of cash, less any applicable taxes required to be withheld. The performance units granted prior to 2009 will vest at the effective time of the merger, but the performance targets specified under the terms of those awards will not be met, so the awards will be cancelled without any payment to the holders thereof. For additional detail regarding the treatment of these incentive awards, see “The Merger Agreement—Common Stock, Options and Other Equity Awards”.

The following table sets forth, as of August 31, 2010, the long-term incentive award holdings of the Company’s executive officers and the gross value of such holdings assuming the merger is completed:

 

    Number of
Shares of
Restricted
Common
Stock
  Value of
Restricted
Common Stock
  Number of
Phantom
Stock Units
  Value of
Phantom
Stock Units
  Number of
Performance
Units
  Value  of
Performance
Units(1)

Bruce A.  Williamson(2)

  132,501   $ 596,254.50   318,584   $ 1,433,628.00   54,000   $ 5,400,000.00

Holli C. Nichols

  34,514   $ 155,308.50   79,646   $ 358,407.00   13,800   $ 1,380,000.00

J. Kevin Blodgett

  25,852   $ 116,334.00   59,236   $ 266,562.00   10,304   $ 1,030,400.00

Lynn A. Lednicky

  25,123   $ 113,053.50   59,236   $ 266,562.00   10,147   $ 1,014,700.00

Charles C. Cook

  26,861   $ 120,874.50   55,752   $ 250,884.00   9,818   $ 981,800.00

TOTAL

  244,850   $ 1,101,825.00   572,454   $ 2,576,043.00   98,069   $ 9,806,900.00

 

(1) Based on a target price of $100 per unit.
(2) Mr. Williamson also serves as the chairman of the board of directors.

As of the date of this proxy statement, our non-employee directors hold shares of phantom stock, which are granted on an annual basis and credited quarterly to the non-employee directors pursuant to the Company’s Deferred Compensation Plan for Certain Directors. Generally, upon termination of service as a director, the shares become payable in cash or our common stock, based on each director’s one-time election, and in a lump-sum payment or in monthly, quarterly or annual installments over a specified term, also at the director’s election. All of the Company’s current non-employee directors have previously elected to receive the value of the

 

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phantom stock in cash rather than our common stock. If a director’s service as a director terminates no later than two years following a change in control, the total unpaid balance in the director’s accounts under the plan (determined as of the later of the date of the change in control or the date the director has a termination of service with the Company or any successor, which we refer to as the computation date), will be paid to the director in a single, lump sum cash payment as soon as administratively feasible, but no later than 30 days, after the computation date. A change in control does not increase a director’s benefit under the plan and may also impose a time of payment of the benefit that is different from the director’s prior election.

Change in Control Arrangements

We maintain certain policies, plans and agreements, including our Executive Change in Control Severance Pay Plan, which provide for certain change in control benefits for our executives. The Executive Change in Control Severance Pay Plan provides for the payment of certain severance benefits to our executives if, (i) in connection with but no earlier than 60 days before or (ii) on or within two years after, in each case, a “change in control”, as defined in this plan, any such executive is subject to an “involuntary termination”, as defined in this plan. In general, an executive experiences an “involuntary termination” if such executive’s employment is terminated without cause or such executive resigns for “good reason”, generally meaning he or she suffers a material reduction in authority or duties, a material reduction in total compensation or relocation to a location 50 miles or more from the previous principal employment location.

Severance benefits for certain of our executive officers under the Executive Change in Control Severance Pay Plan include:

 

   

a lump sum cash payment equal to:

 

   

for our Chief Executive Officer, 2.99 times such executive’s “compensation”, which is defined under the plan as the sum of any covered executive’s (i) annual base salary based on the greater of the rate in effect immediately prior to the change in control, 60 days prior to an involuntary termination or the date of any such involuntary termination and (ii) the greater of a covered executive’s target annual bonus under our short-term incentive plan for the fiscal year in which the change in control occurs, any fiscal year beginning after the fiscal year in which the change in control occurs and before the year in which such covered executive’s involuntary termination occurs or the fiscal year in which such covered executive’s involuntary termination occurs; or

 

   

for any Executive Vice President, 2.5 times such executive’s compensation;

 

   

a lump sum cash payment equal to the aggregate target annual incentive compensation under any applicable short-term incentive compensation plan for the fiscal year during which such involuntary termination of employment occurs (determined as if all applicable goals and targets had been satisfied in full), pro-rated to the date of such executive’s termination;

 

   

all medical, dental, vision and life insurance benefits maintained for such executive as of the termination date, contingent upon continued payment of premiums by such executive based on rates no greater than the lesser of the cost of coverage paid by such executive immediately before the involuntary termination or the change in control, for a period equal to (i) 36 months from termination for our Chief Executive Officer and (ii) 30 months from termination for any Executive Vice President, so long as such executive does not obtain new employment and eligibility for coverage under a similar benefit plan maintained by the new employer; and

 

   

outplacement assistance benefits at least equivalent to those that would have been provided to the executive officer before the change in control.

In connection with a change in control, such as the completion of the merger, any outstanding stock options, restricted stock awards, phantom stock unit awards and other equity-based awards previously granted to our executives will vest in accordance with the terms of the underlying award agreements. For additional detail

 

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regarding the treatment of such awards in connection with the merger, see “The Merger—Interests of Certain Persons in the Merger—Long-term Incentive Awards” above.

In addition, pursuant to our Excise Tax Reimbursement Policy, any of our executive officers who incurs excise taxes under Section 4999 of the Internal Revenue Code of 1986, as amended, as a result of a payment in connection with a change in control is entitled to receive an additional payment in an amount equal to the excise tax, interest on the excise tax amount and any penalties related to the excise tax payment imposed.

Under the Dynegy Inc. Restoration Pension Plan and Restoration 401(k) Savings Plan, which are nonqualified supplemental executive retirement plans, participants, including all executives, fully vest in their benefits under the plans to the extent not already vested upon a change in control. However, all current participants under the plans are already fully vested based on their years of service, so a change in control will not alter their vesting under the plans.

The following table sets forth the estimated total payouts (excluding any effect related to long-term incentive awards discussed above) to our executive officers following a change in control transaction assuming each such executive’s employment is involuntarily terminated as contemplated by the change in control agreements:

 

     Bruce  A.
Williamson(1)
   Holli C.
Nichols
   J. Kevin
Blodgett
   Lynn A.
Lednicky
   Charles C.
Cook

Cash Severance (Multiple of Annual Compensation)

   $ 5,980,000    $ 2,625,000    $ 2,250,000    $ 2,175,000    $ 2,175,000

Pro-rated Short-term Incentive Bonus

   $ 917,808    $ 481,849    $ 413,014    $ 399,247    $ 399,247

Medical, Dental, Vision and Life Insurance Benefits

   $ 37,008    $ 10,290    $ 30,660    $ 31,020    $ 31,020

Outplacement Services

   $ 25,000    $ 25,000    $ 25,000    $ 25,000    $ 25,000

Tax Gross-Up

   $ 0    $ 1,773,447    $ 1,383,635    $ 1,375,030    $ 1,455,986

TOTAL(2)

   $ 6,959,816    $ 4,915,586    $ 4,102,309    $ 4,005,297    $ 4,086,253

 

(1) For a description of Mr. Williamson’s prior election not to have a continuing role with the Company following any acquisition by Blackstone, see “The Merger—Background of the Merger” beginning on page [].
(2) Amounts reflected assume that the consummation of the Merger and the executive’s termination occur on December 1, 2010; however, the actual timing of the Merger’s consummation depends on various factors and the satisfaction of certain conditions, as described under “The Merger Agreement—Conditions to the Merger” beginning on page [].

Receipt of the cash severance payment and other severance benefits under the Executive Change in Control Severance Pay Plan is subject to forfeiture if the executive materially breaches his or her confidentiality and non-disparagement agreement and is further subject to the executive’s execution of a general release of claims in favor of the Company.

Deferred Compensation Plan

Mr. Lednicky is the only named executive officer with a balance in our suspended non-qualified executive deferred compensation plan. This plan provides that, upon a change in control, participants fully vest in their employer contributions under the plan to the extent not already vested. However, Mr. Lednicky is already fully vested based on his years of service, so a change in control will not alter his vesting under the plan.

Indemnification; Directors’ and Officers’ Insurance

From and after the effective time of the merger, Parent and the surviving corporation will indemnify and hold harmless (and Parent will advance expenses to) our and our subsidiaries’ present and former officers and

 

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directors against any costs, expenses (including reasonable attorneys’ fees), judgments, fines, losses, claims, damages or liabilities incurred in connection with any claim, action, suit, proceeding or investigation, arising out of or related to such officer’s or director’s service as a director or officer of the Company or its subsidiaries (or services performed at our or our subsidiaries’ request) at or prior to the effective time of the merger (including in connection with the merger agreement or the transactions contemplated thereby and actions to enforce such indemnification or advancement rights) to the fullest extent permitted by law.

We are required to (and if we are unable to do so, Parent will cause the surviving corporation to) obtain a six-year “tail” insurance policy with respect to the currently existing officers’ and directors’ liability insurance policy and fiduciary liability insurance policy. Such policy must be obtained from an insurance carrier with the same or better credit rating as our insurance carrier as of the date of the merger agreement with respect to directors’ and officers’ liability insurance and fiduciary liability insurance and must have terms, conditions, retentions and limits of liability that are at least as favorable to the insureds as our existing policies with respect to any matter claimed against our and our subsidiaries’ present and former officers and directors serving in such capacity that existed or occurred at or prior to the effective time of the merger. This obligation is subject to a cap of 300% of the annual premium amount we are currently paying for such insurance.

If we or the surviving corporation fail to purchase such policies, then Parent has agreed to cause the surviving corporation to continue to maintain the current policies in place or to use reasonable best efforts to purchase comparable policies, in each case, for the six-year period following the effective time of the merger. Parent’s or the surviving corporation’s obligation to provide this insurance will be capped at 300% of the annual premium amount we are currently paying for such insurance. If the annual premium amount for such coverage exceeds the cap, the surviving corporation must obtain a policy with the greatest coverage available for a cost not exceeding the amount of the cap.

Following the effective time of the merger, the present and former directors and officers of the Company will have the right to enforce the provisions of the merger agreement relating to their indemnification.

Arrangements with the Surviving Corporation

Parent has previously indicated its belief that the continued involvement of our management team, excluding our president and chief executive officer, is integral to the Company’s future success; however, as of the date of this proxy statement, no members of our current management have entered into any agreement, arrangement or understanding with Parent, Merger Sub or their affiliates to provide continuing employment with, or the right to convert into or reinvest or participate in the equity of, the surviving corporation or Parent or any of its subsidiaries. Moreover, as of the date of this proxy statement, no substantive discussions have occurred between members of our current management and representatives of Parent, Merger Sub or their affiliates with respect to any such agreement, arrangement or understanding. Although it is possible that certain members of our current management team, other than our president and chief executive officer will enter into arrangements with Parent or its affiliates regarding employment (and severance arrangements) with, and the right to purchase or participate in the equity of, Parent (and/or a subsidiary of Parent), as of the date of this proxy statement no substantive discussions have occurred between members of our current management and representatives of Parent, Merger Sub or their affiliates regarding any such arrangements, and there can be no assurance that any parties will reach an agreement. Any new arrangements are currently expected to be entered into at or prior to completion of the merger and would not become effective until after the merger is completed.

Except as disclosed in this proxy statement, there is no present or proposed material agreement, arrangement, understanding or relationship between Parent, Merger Sub, or any of their respective executive officers, directors, controlling persons or subsidiaries, on the one hand, and the Company or any of its executive officers, directors, controlling persons or subsidiaries, on the other hand.

 

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Material U.S. Federal Income Tax Consequences of the Merger

The following is a summary of the material U.S. federal income tax consequences of the merger to U.S. holders (as defined below) whose shares of our common stock are converted into the right to receive cash in the merger. This summary does not purport to consider all aspects of U.S. federal income taxation that might be relevant to our stockholders. For purposes of this discussion, we use the term “U.S. holder” to mean a beneficial owner of shares of our common stock that is, for U.S. federal income tax purposes:

 

   

an individual who is a citizen or resident of the United States;

 

   

a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States or any of its political subdivisions;

 

   

a trust that (i) is subject to the supervision of a court within the United States and the control of one or more U.S. persons or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or

 

   

an estate that is subject to U.S. federal income tax on its income regardless of its source.

If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds our common stock, the tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. A partner of a partnership holding our common stock should consult the partner’s tax advisor regarding the U.S. federal income tax consequences of the merger to such partner.

This discussion is based on current law, which is subject to change, possibly with retroactive effect. The discussion applies only to beneficial owners who hold shares of our common stock as capital assets, and does not apply to shares of our common stock received in connection with the exercise of employee stock options or otherwise as compensation, stockholders who hold an equity interest, actually or constructively, in Parent or the surviving corporation after the merger, stockholders who have perfected and not withdrawn a demand for, or lost the right to, appraisal under the DGCL or to certain types of beneficial owners who may be subject to special rules (such as insurance companies, banks, tax-exempt organizations, financial institutions, broker-dealers, partnerships, S corporations or other pass-through entities, mutual funds, traders in securities who elect the mark-to-market method of accounting, stockholders subject to the alternative minimum tax, stockholders that have a functional currency other than the U.S. dollar or stockholders who hold our common stock as part of a hedge, straddle, constructive sale or conversion transaction). This discussion also does not address the U.S. tax consequences to any stockholder who, for U.S. federal income tax purposes, is a non-resident alien individual, foreign corporation, foreign partnership or foreign estate or trust, and does not address the receipt of cash in connection with the cancellation of phantom stock units, or options to purchase shares of our common stock, or the treatment of shares of restricted stock or performance awards, or any other matters relating to equity compensation or benefit plans (including the plans). This discussion does not address any aspect of state, local or foreign tax laws.

Exchange of Shares of Common Stock for Cash Pursuant to the Merger Agreement.

The exchange of shares of our common stock for cash in the merger will be a taxable transaction for U.S. federal income tax purposes. In general, a U.S. holder whose shares of our common stock are converted into the right to receive cash in the merger will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount of cash received with respect to such shares (determined before the deduction of any applicable withholding taxes, as described below under “—Backup Withholding and Information Reporting”) and the U.S. holder’s adjusted tax basis in such shares. A U.S. holder’s adjusted tax basis will generally equal the price the U.S. holder paid for such shares. Gain or loss will be determined separately for each block of shares of our common stock (i.e., shares of common stock acquired at the same cost in a single transaction). Such gain or loss will be long-term capital gain or loss provided that the U.S. holder’s holding period for such shares of common stock is more than 12 months at the effective time of the merger.

 

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Long-term capital gains of non-corporate U.S. holders are generally subject to tax at a maximum rate of 15% under current law. For taxable years beginning after December 31, 2010, the maximum rate is scheduled to return to the previously effective rate of 20%. There are limitations on the deductibility of capital losses.

Backup Withholding and Information Reporting.

Backup withholding of tax (at the rate of 28%) may apply to cash payments to which a non-corporate U.S. holder is entitled under the merger agreement, unless the U.S. holder or other payee provides a taxpayer identification number, certifies that such number is correct, and otherwise complies with the backup withholding rules. Each of our U.S. holders should complete and sign, under penalty of perjury, the Substitute Form W-9 included as part of the letter of transmittal and return it to the paying agent, in order to provide the information and certification necessary to avoid backup withholding, unless an exemption applies and is established in a manner satisfactory to the paying agent.

Backup withholding is not an additional tax. Any amounts withheld from cash payments to a U.S. holder pursuant to the merger under the backup withholding rules will be allowable as a refund or a credit against such U.S. holder’s U.S. federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.

Cash payments made pursuant to the merger will also be subject to information reporting unless an exemption applies.

The U.S. federal income tax consequences described above are not intended to constitute a complete description of all tax consequences relating to the merger. Because individual circumstances may differ, each stockholder should consult the stockholder’s tax advisor regarding the applicability of the rules discussed above to the stockholder and the particular tax effects to the stockholder of the merger in light of such stockholder’s particular circumstances, the application of state, local and foreign tax laws, and, if applicable, the tax consequences of the receipt of cash in connection with the cancellation of phantom stock or options to purchase shares of our common stock, or the treatment of shares of restricted stock or performance awards, including the transactions described in this proxy statement relating to our other equity compensation and benefit plans.

Regulatory Approvals

To complete the merger, the parties must make filings with and obtain authorizations, approvals, or consents from a number of federal and state public utility, antitrust, and other regulatory authorities. Under the terms of the merger agreement, the merger cannot be completed until the waiting periods applicable to the consummation of the merger and the NRG sale under the HSR Act have expired or been earlier terminated. On August 27, 2010, the Company and the guarantor filed notification of the proposed merger with the FTC and the DOJ under the HSR Act, and on August 27, 2010, the guarantor and NRG filed notification of the proposed NRG sale with the FTC and the DOJ under the HSR Act.

At any time before or after consummation of the merger and the NRG sale, notwithstanding the termination of the waiting period under the HSR Act, DOJ or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the completion of the merger and/or the NRG sale and seeking divestiture of substantial assets of the Company, Parent, or NRG. At any time before or after the completion of the merger and the NRG sale, and notwithstanding the termination of the waiting period under the HSR Act, any state could take such action under the antitrust laws as it deems necessary or desirable in the public interest. Such action could include seeking to enjoin the completion of the merger and/or the NRG sale and seeking divestiture of substantial assets of the Company, Parent, or NRG. Private parties may also seek to take legal action under the antitrust laws under certain circumstances.

 

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In addition, the merger and the NRG sale cannot be completed without prior approval of the merger and the NRG sale by FERC. The Company, certain of the Company’s subsidiaries, Parent, Merger Sub and NRG filed with FERC a joint application for approval of the merger and the NRG sale under Section 203 of the Federal Power Act on August 27, 2010. FERC has established a comment date of September 27, 2010 with respect to the application, and interested persons, including, but not limited to, customers, competitors, state public utility commissions, and consumer advocates, will have an opportunity to file comments on, and protests to, the application by that date. FERC will then evaluate the application to determine whether the proposed transactions are consistent with the public interest or whether they will result in cross-subsidization or the pledge or encumbrance of utility assets for the benefit of any “associate company” (as defined in the Public Utility Holding Company Act of 2005). FERC may grant approval subject to conditions, including conditions that would require divestiture of substantial assets of the Company, Parent, or NRG in order to consummate the merger and/or the NRG sale, and also retains the authority to issue supplemental orders imposing additional conditions at any time.

The merger and the NRG sale are, or may be, subject to the regulatory requirements of other state and federal regulatory agencies and authorities. The Company, Parent and Merger Sub filed a joint petition for approval, or a determination that no approval is required, for the merger with the NYPSC under Sections 70 and 83 of the PSL, on August 27, 2010. For transactions, like the merger, that involve only a change in upstream control of one or more entities subject to “lightened regulation” under the PSL, the NYPSC generally concludes that no approval is required by applying what is known as the “Wallkill presumption”.

The Company, on behalf of itself, Blackstone and NRG, filed voluntary notifications relating to the merger and the NRG sale with the CPUC, and the CAISO, under CPUC General Order No. 167 on August 13, 2010. No action on these notifications is required. Although CPUC General Order No. 167 contemplates the filing of such notifications at least 90 days prior to consummation of the subject transactions, the CPUC has recognized that 90-day notice will not always be practical and has stated that the notice period will be enforced with reasonable flexibility, provided the notifications are made as soon as legally possible.

The Company and certain affiliates operate wireless communications systems, which we refer to as private radio stations, which are licensed by the Federal Communications Commission, or FCC, and which are used solely in connection with and in support of the Company’s power generation and related activities. Subject to limited exceptions, Section 310(d) of the Communications Act of 1934, as amended, requires that licensees obtain the FCC’s prior consent to the assignment of licenses or the transfer of control of a licensee. Applications for assignment or transfer of control that pertain to private radio stations are often filed 30 to 90 days prior to the anticipated closing date of the underlying transaction and are typically granted within 14 days of submission to the FCC.

There can be no assurance that all of the regulatory approvals described above, or any other regulatory approvals that might be required to consummate the merger, will be sought or obtained and, if obtained, there can be no assurance as to the timing of any approvals, ability to obtain the approvals on satisfactory terms or the absence of any litigation challenging such approvals. There can also be no assurance that the DOJ, the FTC, or any other governmental entity or any private party will not attempt to challenge the merger on antitrust grounds, and, if such a challenge is made, there can be no assurance as to its result. For a description of the parties’ obligations with respect to regulatory approvals related to the merger and the NRG sale, see “The Merger Agreement—Filings; Other Actions; Notification” beginning on page [] and “The NRG PSA—Filings; Other Actions; Notification” beginning on page [].

Litigation Relating to the Merger

In connection with the proposed merger, nineteen lawsuits have been filed in the District Courts of Harris County, Texas between August 13, 2010 and the date of this proxy statement against the Company, its directors and Blackstone. Parent, Merger Sub, the guarantor, NRG and/or certain executive officers of the Company have also been named as defendants in certain of these suits. The actions that have been filed to date in Harris County

 

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have been assigned the following case numbers and courts: No. 2010-50609 (234th Judicial District Court); No. 2010-50590 (152nd Judicial District Court); No. 2010-50666 (129th Judicial District Court); No. 2010-50680 (11th Judicial District Court); No. 2010-50776 (133rd Judicial District Court); No. 2010-50782 (165th Judicial District Court); No. 2010-50846 (281st Judicial District Court); No. 2010-50863 (157th Judicial District Court ); No. 2010-51004 (334th Judicial District Court); No. 2010-51099 (133rd Judicial District Court); No. 2010-51100 (157th Judicial District Court); No. 2010-51101 (127th Judicial District Court); No. 2010-51143 (234th Judicial District Court); No. 2010-51408 (164th Judicial District Court); No. 2010-51721 (127th Judicial District Court); No. 2010-51737 (165th Judicial District Court); No. 2010-52085 (164th Judicial District Court); No. 2010-52136 (333rd Judicial District Court); and No. 2010-53093 (234th Judicial District Court).

One stockholder lawsuit has been filed against the Company, its directors, Blackstone, Parent and Merger Sub in the United States District Court in the Southern District of Texas on August 31, 2010. This action has been assigned case number 4:10-cv-03145.

Six similar shareholder actions against the Company, its directors and Blackstone were filed in the Court of Chancery of the State of Delaware between August 17, 2010 and August 23, 2010. These six Delaware actions were consolidated on August 24, 2010 and are captioned as In re Dynegy Inc. Shareholders Litigation, Cons. C.A. No. 5739-VCS.

Each of the Texas and Delaware complaints generally alleges, among other things, that our board of directors and, in certain cases, certain of our executive officers have violated various fiduciary duties relating to maximizing stockholder value in negotiating and approving the merger. Further, certain of the complaints allege that the Company and/or Blackstone aided and abetted such alleged breaches of fiduciary duties. Among other remedies, the plaintiffs seek to enjoin the merger and/or the stockholder vote, declaratory relief with respect to the alleged breaches of fiduciary duty, and monetary damages including attorneys’ fees and expenses.

All defendants deny any wrongdoing in connection with the proposed merger and plan to vigorously defend against all pending claims.

 

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THE MERGER AGREEMENT

This section describes the material terms of the merger agreement. The description in this section and elsewhere in this proxy statement is qualified in its entirety by reference to the complete text of the merger agreement, a copy of which is attached as Annex A and is incorporated by reference into this proxy statement. This summary does not purport to be complete and may not contain all of the information about the merger agreement that is important to you. We encourage you to read the merger agreement carefully and in its entirety. This section is not intended to provide you with any factual information about us. Such information can be found elsewhere in this proxy statement and in the public filings we make with the SEC, as described in the section entitled, “Where You Can Find More Information”, beginning on page [].

Explanatory Note Regarding the Merger Agreement

The merger agreement is included to provide you with information regarding its terms. Factual disclosures about the Company contained in this proxy statement or in the Company’s public reports filed with the SEC may supplement, update or modify the factual disclosures about the Company contained in the merger agreement. The representations, warranties and covenants made in the merger agreement by the Company, Parent and Merger Sub were qualified and subject to important limitations agreed to by the Company, Parent and Merger Sub in connection with negotiating the terms of the merger agreement. In particular, in your review of the representations and warranties contained in the merger agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the merger agreement may have the right not to consummate the merger if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise, and allocating risk between the parties to the merger agreement, rather than establishing matters as facts. The representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable to stockholders and reports and documents filed with the SEC and in some cases were qualified by the matters contained in the disclosure schedule that the Company delivered in connection with the merger agreement, which disclosures were not reflected in the merger agreement. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this proxy statement, may have changed since the date of the merger agreement and subsequent developments or new information qualifying a representation or warranty may have been included in this proxy statement.

Effects of the Merger; Directors and Officers; Certificate of Incorporation; Bylaws

The merger agreement provides for the merger of Merger Sub with and into the Company upon the terms, and subject to the conditions, set forth in the merger agreement. As the surviving corporation, the Company will continue to exist following the merger.

The board of directors of the surviving corporation will, from and after the effective time of the merger, consist of the directors of Merger Sub until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the certificate of incorporation and bylaws of the surviving corporation. The officers of the Company at the effective time of the merger will, from and after the effective time of the merger, be the officers of the surviving corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the certificate of incorporation and bylaws of the surviving corporation.

The certificate of incorporation of the surviving corporation will be in the form of the certificate of incorporation attached as an exhibit to the merger agreement, until amended in accordance with its terms or by applicable law. The bylaws of the surviving corporation will be the bylaws of the Company in effect immediately prior to the effective time of the merger, until amended in accordance with its terms or by applicable law.

 

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Following the completion of the merger, our common stock will be delisted from the NYSE, deregistered under the Exchange Act and cease to be publicly traded.

Closing and Effective Time of the Merger

The closing of the merger will take place on the third business day following the date on which the last of the conditions to closing of the merger (described under “The Merger Agreement—Conditions to the Merger” beginning on page []) have been satisfied or waived (other than the conditions that by their nature are to be satisfied at the closing of the merger, but subject to the fulfillment or waiver of those conditions). However, if it does not become reasonably apparent to the parties at least nine calendar days prior to such date that such conditions (other than the condition relating to the adoption of the merger agreement by our stockholders, which is deemed satisfied for this purpose) are likely to be satisfied, then the closing of the merger will take place on the later of such third business day referred to above or the 11th calendar day (of, if such day is not a business day, the next business day) after it becomes reasonably apparent that such conditions are likely to be satisfied as of a particular date.

Assuming timely satisfaction of the necessary closing conditions, we anticipate that the merger will be consummated in the fourth quarter of 2010. The effective time of the merger will occur as soon as practicable following the closing of the merger upon the filing of a certificate of merger with the Secretary of State of the State of Delaware (or at such later time as we and Parent may agree and specify in the certificate of merger).

Treatment of Common Stock, Options and Other Equity Awards

Common Stock

At the effective time of the merger, each share of our common stock issued and outstanding immediately prior thereto (other than excluded shares) will be converted into the right to receive the per share merger consideration. Each share of our common stock owned by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent and each share of our common stock owned by the Company or any other direct or indirect wholly owned subsidiary of the Company (in each case not held on behalf of third parties) will be converted into one share of a class of stock of the surviving corporation. Our common stock owned by stockholders who have perfected and not withdrawn a demand for, or lost the right to, appraisal under the DGCL will be cancelled without payment of consideration. Such stockholders will instead be entitled to the appraisal rights provided under the DGCL as described under “Appraisal Rights” beginning on page [].

Options

None of the outstanding Company stock options has an exercise price that is lower than the per share merger consideration. Accordingly, holders of Company stock options will not be entitled to receive any payment in exchange for their options. All Company stock options will be cancelled for no payment at the effective time of the merger.

Restricted Stock

At the effective time of the merger, each outstanding share of restricted stock will fully vest and be cancelled and converted into the right to receive, as soon as reasonably practicable after the effective time of the merger, but in any event no later than the earlier of (i) the second payroll period or (ii) thirty (30) days following the effective time of the merger, an amount in cash equal to the per share merger consideration, less any applicable withholding taxes.

 

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Phantom Stock Units

At the effective time of the merger, each outstanding phantom stock unit will fully vest and be cancelled and converted into the right to receive, as soon as reasonably practicable after the effective time of the merger, but in any event no later than the earlier of (i) the second payroll period or (ii) thirty (30) days following the effective time of the merger, an amount in cash equal to the per share merger consideration, less any applicable withholding taxes.

Performance Awards

At the effective time of the merger, the Company’s performance awards granted in 2009 and 2010 will be payable at 100% of “target” (as defined in the applicable agreements for such awards), fully vested and settled for a payment of cash, and each outstanding performance award granted by the Company prior to 2009 will be fully vested and cancelled for no payment in accordance with the terms of the agreements governing such Company performance awards.

Capitalization of Parent

In accordance with the equity commitment letter, the capitalization of Parent may be effected directly or indirectly through one or more affiliated entities or other designated co-investors of Blackstone (other than NRG or any of its affiliates), including with debt financing to the extent available from lenders other than NRG or the Company or any of their respective affiliates. In connection with the consummation of the merger, no credit support in connection with any such debt financing or capitalization of Parent will be provided by NRG, the Company or any of their respective affiliates and no new indebtedness of the Company or any of its subsidiaries, nor any assets of the Company or any of its subsidiaries, may be used in the provision of funding of the aggregate merger consideration to the paying agent described below.

Exchange and Payment Procedures

At the effective time of the merger, Parent will deposit, or will cause to be deposited, with the paying agent a cash amount in immediately available funds necessary for the paying agent to make payment of the aggregate per share merger consideration to the holders of shares of our common stock (other than excluded shares). Parent will make available, or will cause to be made available, any additional amounts necessary to make payments to such stockholders who withdraw or otherwise lose their demand for appraisal rights pursuant to the DGCL. With respect to the deposit of funds for shares of our common stock held by The Depository Trust Company, or DTC, if the closing of the merger occurs at or prior to 11:30 a.m., Eastern time, on the date of the closing of the merger, and if the closing of the merger occurs after 11:30 a.m., Eastern time, on the first business day after the date of the closing of the merger, the paying agent will transmit to DTC an amount in cash in immediately available funds equal to the number of shares of our common stock held of record by DTC immediately prior to the effective time of the merger multiplied by the per share merger consideration.

Promptly, and in any event within two business days, after the date of the effective time of the merger, each record holder of shares of our common stock (other than holders who solely hold the excluded shares) will be sent a letter of transmittal describing how it may exchange its shares of our common stock for the per share merger consideration.

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

You will not be entitled to receive the per share merger consideration until you deliver a duly completed and executed letter of transmittal to the paying agent. If your shares are certificated, you must also surrender your stock certificate or certificates to the paying agent. If ownership of your shares is not registered in the transfer

 

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records of the Company, a check for any cash to be delivered will only be issued if the applicable letter of transmittal is accompanied by all documents reasonably required to evidence and effect transfer and to evidence that any applicable stock transfer taxes have been paid or are not applicable.

No interest will be paid or accrued on the cash payable as the per share merger consideration upon your surrender of your certificate or certificates. Parent, the surviving corporation and the paying agent will be entitled to deduct and withhold any applicable taxes from the per share merger consideration. Any sum that is withheld will be deemed to have been paid to the person with regard to whom it is withheld.

From and after the effective time of the merger, there will be no transfers on our stock transfer books of shares of our common stock that were outstanding immediately prior to the effective time of the merger. If, after the effective time of the merger, any person presents to the surviving corporation, Parent or the paying agent any certificate, such certificate will be cancelled and, subject to compliance with the exchange procedures set forth in the merger agreement, exchanged for the cash amount to which such person is entitled pursuant to the merger agreement.

Any portion of the per share merger consideration deposited with the paying agent that remains unclaimed by former record holders of our common stock for 180 days after the effective time of the merger will be delivered to the surviving corporation. Record holders of our common stock (other than the excluded shares) who have not complied with the above-described exchange and payment procedures may thereafter only look to the surviving corporation for payment of the per share merger consideration. None of the surviving corporation, Parent, the paying agent or any other person will be liable to any former record holders of our common stock for any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar laws.

If you have lost a certificate, or if it has been stolen or destroyed, then before you will be entitled to receive the per share merger consideration, you will have to make an affidavit of the loss, theft or destruction, and if required by Parent, post a bond in a customary amount as indemnity against any claim that may be made against it or the surviving corporation with respect to such lost, stolen or destroyed certificate. These procedures will be described in the letter of transmittal that you will receive, which you should read carefully in its entirety.

Representations and Warranties

We made customary representations and warranties in the merger agreement that are subject, in some cases, to specified exceptions and qualifications contained in the merger agreement or in the disclosure schedule the Company delivered in connection with the merger agreement. These representations and warranties relate to, among other things:

 

   

due organization, existence, good standing and authority to carry on our businesses;

 

   

our capitalization;

 

   

the absence of encumbrances on our ownership of the equity interests of our subsidiaries;

 

   

our joint ventures in which we have a 5% or greater equity interest;

 

   

the absence of preemptive or other similar rights or any debt securities that give their holders the right to vote with our stockholders;

 

   

the absence of stockholder agreements, voting trusts or other agreements or understandings by which we or our subsidiaries are bound relating to the voting or registration of any of our or our subsidiaries’ equity securities;

 

   

our indebtedness for borrowed money;

 

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our corporate power and authority to enter into, and consummate the transactions under, the merger agreement, and the enforceability of the merger agreement against us;

 

   

the declaration of advisability of the merger agreement and the merger by the board of directors, and the approval of the merger agreement and the merger by the board of directors;

 

   

the absence of violations of, or conflicts with, our or our subsidiaries’ governing documents, governmental orders, applicable law and certain agreements as a result of our entering into and performing under the merger agreement;

 

   

governmental consents, approvals, notices and filings necessary to consummate the merger;

 

   

our regulatory and SEC filings since December 31, 2007 and the financial statements included therein;

 

   

compliance with the applicable listing and corporate governance rules and regulations of the NYSE;

 

   

compliance with the Foreign Corrupt Practices Act of 1977;

 

   

our disclosure controls and procedures and internal controls over financial reporting;

 

   

the absence of a Company material adverse effect (as described below) since December 31, 2009;

 

   

the conduct of business in accordance with the ordinary course consistent with past practice since December 31, 2009;

 

   

the absence of legal proceedings, investigations and governmental orders against us or our subsidiaries;

 

   

the absence of certain undisclosed liabilities;

 

   

employee benefit plans;

 

   

certain employment and labor matters;

 

   

compliance with applicable laws and permits;

 

   

the inapplicability of any anti-takeover law to the merger;

 

   

environmental matters;

 

   

tax matters;

 

   

intellectual property;

 

   

insurance policies;

 

   

the receipt of fairness opinions from Greenhill and Goldman Sachs;

 

   

the absence of any undisclosed broker’s or finder’s fees;

 

   

real property;

 

   

material contracts and the absence of any default under any material contract;

 

   

our corporate risk policy with respect to commodities trading and derivative products;

 

   

the mark-to-market value of our derivative products;

 

   

regulation as a public utility holding company, public utility or public service company; and

 

   

certain representations and warranties made by Merger Sub to NRG in the NRG PSA, which are described below in “The NRG PSA—Representations and Warranties”, beginning on page [].

Many of our representations and warranties are qualified by, among other things, exceptions relating to the absence of a “Company material adverse effect”, which means an event, effect, change, circumstance or occurrence that has a material adverse effect on the financial condition, business or results of operations of the

 

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Company and its subsidiaries, taken as a whole; provided that none of the following will constitute or be taken into account in determining whether a “Company material adverse effect” has occurred or may, would or could occur:

 

   

events, effects, changes, circumstances or occurrences arising out of or resulting from:

 

   

the execution, announcement or performance of obligations, covenants or agreements required by the merger agreement or the NRG PSA or the consummation of the transactions contemplated by the merger agreement or the NRG PSA, including the impact on relationships with customers, suppliers, distributors, partners, employees or regulators, or any litigation arising from allegations of breach of fiduciary duty or violation of law relating to the merger agreement or the NRG PSA or the transactions contemplated by the merger agreement or the NRG PSA;

 

   

any action taken by the Company or our subsidiaries that is required by the merger agreement or the NRG PSA or taken at Parent’s written request, or failure to take any action that is prohibited by the merger agreement or the NRG PSA;

 

   

any change resulting or arising from the identity of, or any facts or circumstances relating to, Parent, Merger Sub, NRG or their respective affiliates;

 

   

any actions taken by the Company or our subsidiaries that are permitted by the merger agreement to obtain approval or consent from any governmental entity in connection with the consummation of the merger or the NRG sale; or

 

   

any impact or effect on the rates that the Company or our subsidiaries may charge for electricity, energy, capacity and/or ancillary services or any other product or service subject to regulation by FERC as a result of the affiliation of the Company or such subsidiary with Parent under applicable law;

 

   

to the extent the following events, effects, circumstances, changes or occurrences do not have a disproportionate impact on the Company and its subsidiaries, taken as a whole, relative to other participants in the industries in which the Company and such subsidiaries conduct their businesses (taking into account the relative size of the Company and its subsidiaries and their affected businesses as compared to the other participants in the industries in which the Company and its subsidiaries conduct their business and such participants’ affected businesses):

 

   

changes, events, occurrences or effects generally affecting (1) the economy, credit, financial or capital markets, or political conditions in the United States, including changes in interest and exchange rates or (2) the electric generation industry;

 

   

changes in GAAP, regulatory accounting standards or law or in the interpretation or enforcement thereof after August 13, 2010;

 

   

an act of terrorism or an outbreak or escalation of hostilities or war (whether or not declared) or any natural disasters (whether or not caused by any person or any force majeure event) or any national or international calamity or crisis, other than any of the foregoing involving physical damage or destruction to or rendering physically unusable facilities or properties of the Company or any of our subsidiaries;

 

   

changes or developments in national, regional, state or local wholesale or retail markets or prices for electric power, capacity, emissions allowances, natural gas, fuel oil, coal, steel, concrete, water, fuel or the transportation of any of the foregoing, including those due to actions by competitors or due to changes in commodities prices or hedging markets; or

 

   

changes or developments in national, regional, state or local electric generating, transmission or distribution systems or natural gas transmission or distribution systems, other than changes or developments involving physical damage or destruction to or rendering physically unusable facilities or properties of the Company or any of our subsidiaries; or

 

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events, effects, circumstances, changes or occurrences arising out of or resulting from:

 

   

any change in our credit ratings;

 

   

any decline in the market price or change in trading volume of our capital stock; or

 

   

any failure to meet any internal or public forecasts, projections or estimates of revenue, earnings, cash flow or cash position,

provided, however, that the exceptions provided in the three bullet points immediately above will not prevent or otherwise affect a determination that the underlying cause of the change, decline or failure has resulted in, or contributed to, a Company material adverse effect.

The merger agreement also contains customary representations and warranties made by Parent and Merger Sub that are subject, in some cases, to specified exceptions and qualifications contained in the merger agreement or in the disclosure schedule Parent delivered in connection with the merger agreement. The representations and warranties of Parent and Merger Sub relate to, among other things:

 

   

their due organization, existence, good standing and authority to carry on their businesses;

 

   

their corporate power and authority to enter into, and consummate the transactions under, the merger agreement, and the enforceability of the merger agreement against them;

 

   

the absence of violations of, or conflicts with, their governing documents, governmental orders, applicable law and certain agreements as a result of entering into and performing under the merger agreement and completing the merger;

 

   

required governmental consents, approvals, notices and filings;

 

   

the absence of legal proceedings, investigations and governmental orders against Parent and Merger Sub;

 

   

sufficiency of funds;

 

   

the absence of any amendments or modifications to the equity commitment letter;

 

   

the absence of contingencies related to the funding of the equity financing other than as set forth in the equity commitment letter;

 

   

the capitalization of Merger Sub;

 

   

the absence of any undisclosed broker’s or finder’s fees;

 

   

delivery of the executed guaranty and enforceability thereof;

 

   

inapplicability of “interested stockholder” provisions of Section 203 of the DGCL to Parent or Merger Sub;

 

   

regulation as a public utility holding company, public utility or public service company;

 

   

the absence of certain agreements or compensation or equity arrangements;

 

   

no competing business;

 

   

delivery of the executed NRG PSA; and

 

   

acknowledgement as to the absence of any representations and warranties with respect to any estimates, projections, forecasts, forward-looking statements or business plans provided by the Company.

The representations and warranties in the merger agreement of each of the Company, Parent and Merger Sub will not survive the consummation of the merger or the termination of the merger agreement pursuant to its terms.

 

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Conduct of Our Business Pending the Merger

Under the merger agreement, we have agreed that, subject to certain exceptions in the merger agreement and disclosure schedule we delivered in connection with the merger agreement or as required by law, between the date of the merger agreement and the effective time of the merger, unless Parent gives its prior written approval (which cannot be unreasonably withheld, delayed or conditioned), we and our subsidiaries will cause our businesses to be conducted in the ordinary course and will use our reasonable best efforts to preserve our business organizations intact and maintain existing relations and goodwill with governmental entities, customers, suppliers, employees and business associates.

Subject to applicable law, certain exceptions set forth in the merger agreement and disclosure schedules we delivered in connection with the merger agreement, we will not, and we will not permit our subsidiaries to, take any of the following actions without Parent’s written approval (which cannot be unreasonably withheld, delayed or conditioned):

 

   

make changes to organizational documents;

 

   

issue, sell, pledge, transfer or otherwise encumber any equity interests of the Company or our subsidiaries (with customary exceptions);

 

   

declare, set aside or pay any dividends or other distributions (other than any dividends from any wholly owned subsidiary of the Company to the Company or to another such subsidiary of the Company);

 

   

split, combine, subdivide or reclassify any of the Company’s equity interests;

 

   

incur any indebtedness, except for (i) advances of credit incurred under the Company’s existing credit facilities not to exceed $2.5 million and (ii) letters of credit issued under the Company’s credit agreement (a) in the ordinary course of business consistent with past practices for non-trading activities but not to exceed $25 million, (b) in connection with certain permitted sales or purchases of derivative products, physical electricity products or fuel commodities for the Company’s assets (See “—Access to the Company and its Trading Operations beginning on page []) or (c) to support trading positions in place as of August 13, 2010;

 

   

make or authorize capital expenditures in excess of $5 million in the aggregate not (i) already in the Company’s business plan, (ii) required by law or (iii) in response to a casualty loss or property damage;

 

   

change any material accounting policies or principles;

 

   

waive, release, settle or compromise any pending or threatened action, litigation, claim or arbitration or other proceedings before a governmental entity (i) for more than $2.5 million individually or $5 million in the aggregate, (ii) that would entail the incurrence of any liability of the Company in excess of such amount or obligations that would impose any material restrictions on the business or operations of the Company or its subsidiaries or (iii) that is stockholder litigation related to the merger agreement and the transactions contemplated thereby;

 

   

acquire interests or assets outside the ordinary course of business consistent with past practice for consideration in excess of $1 million individually or $5 million in the aggregate;

 

   

sell, transfer or otherwise dispose of any entity, business, assets, rights or properties of the Company or any of our subsidiaries in excess of $1 million individually, or $5 million in the aggregate;

 

   

(i) except to the extent required by written agreements existing on August 13, 2010, grant or announce any stock option, equity or incentive awards or increase the salaries, bonuses or other compensation and benefits payable by the Company or any of its subsidiaries to any employees, officers, directors or individual independent contractors, (ii) except to the extent required by written agreements existing on August 13, 2010, pay any pension, retirement allowance, termination or severance pay, bonus or other employee benefits not required by any existing plan of the Company or take any action to accelerate vesting of any right to compensation or benefits, (iii) except to the extent required by written agreements existing on August 13, 2010, enter into or amend any employment, consulting, bonus,

 

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severance, retention, retirement or other similar agreement, (iv) change any actuarial or other assumptions used to calculate funding obligations with respect to any benefit plans or change the manner in which contributions to such plans are made or the basis on which such contributions are determined, (v) change the accrual rate for the Company’s short-term incentive plans from the rate reflected in the Company’s financial statements, (vi) forgive any loans to directors, officers or employees of the Company or any of its subsidiaries or (vii) adopt, amend or terminate any existing Company plan or benefit arrangement if such action would result in a material cost to the Company or any of its subsidiaries;

 

   

adopt or enter into a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any of its subsidiaries;

 

   

merge or consolidate the Company or any of its subsidiaries with and into any other person;

 

   

grant any liens other than certain permitted liens and except in connection with certain indebtedness;

 

   

hire any employee or individual independent contractor with total expected annual base salary, including commissions, in excess of $100,000, other than to fill vacancies arising in the ordinary course of business at annual base salary levels not in excess of 120% of prevailing market rates;

 

   

subject to certain conditions and exceptions, terminate the employment of any employee of the Company who participates in the Company’s executive change in control severance pay plan except for “cause”, as defined under such plan, or otherwise take any action that could reasonably result in the closure of the Company’s regional headquarters in California;

 

   

other than in the ordinary course of business consistent with past practice, make any material tax election, file any material amended tax return, settle or compromise any material tax liability, enter into any closing agreement with respect to any material tax or agree to an extension or waiver of the statute of limitations applicable to the assessment or collection of any material tax;

 

   

enter into any material contracts, terminate, materially amend, or waive any material rights or material default under any material contract;

 

   

modify in any material respect our risk policy regarding commodities trading, our trading guidelines or any similar policy, other than modifications that are more restrictive to the Company and its subsidiaries;

 

   

sell or purchase derivative products or commodities other than certain sales of capacity and certain trades to manage intra-month positions and to prevent certain net short and net long power positions (see also “—Access to the Company and its Trading Operations” beginning on page []);

 

   

subject to certain exceptions, enter into any energy, ancillary services, fuel, emissions allowance, credit or offset, transmission, transportation or storage transactions with a term extending through the later of November 15, 2010 and the end of the prompt month with respect to or related to the subsidiaries of the Company that are contemplated to be transferred to NRG pursuant to the NRG sale;

 

   

fail to maintain in full force and effect material insurance policies covering the Company and our subsidiaries in a form and amount consistent with past practice;

 

   

permit any letters of credit to be issued other than letters of credit issued by certain financial institutions under the Company’s credit agreement;

 

   

take any action which would reasonably be expected to result in any of the conditions to the merger not being satisfied or delaying the satisfaction of any such conditions, or that would reasonably be expected to prevent, delay, impair or interfere with our ability to consummate the merger; or

 

   

agree, authorize or commit to do any of the foregoing.

 

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Solicitation of Acquisition Proposals

Except as permitted by the terms of the merger agreement described below, we have agreed in the merger agreement that the board of directors will not withhold, withdraw, qualify or modify (or publicly propose or resolve to do so), in a manner adverse to Parent, the Company recommendation, or approve or recommend (or publicly propose to do so), an acquisition proposal, or cause or permit the Company to enter into any alternative acquisition agreement relating to any acquisition proposal.

During the go-shop period, we are permitted to:

 

   

initiate, solicit and encourage any inquiry or the making of acquisition proposals from third parties, including by providing third parties non-public information pursuant to acceptable confidentiality agreements (provided that we promptly, and in any event, within 24 hours thereafter, make available to Parent and Merger Sub any material non-public information concerning the Company or our subsidiaries provided to any such third parties if not previously made available to Parent or Merger Sub); and

 

   

engage or enter into, continue or otherwise participate in discussions or negotiations with any person with respect to any acquisition proposal.

From and after the no-shop period start date, we are required to immediately cease any discussions or negotiations with any persons that may be ongoing with respect to any acquisition proposals. At any time from and after the no-shop period start date and until the effective time of the merger or the termination of the merger agreement, we, our subsidiaries and our representatives may not:

 

   

initiate, solicit or knowingly facilitate or encourage any inquiry or the making of any acquisition proposals;

 

   

engage in, continue or otherwise participate in discussions or negotiations with any person with respect to any acquisition proposal;

 

   

provide any non-public information concerning the Company to any person relating to any acquisition proposal;

 

   

enter into any agreement or agreement in principle with respect to any acquisition proposal; or

 

   

otherwise knowingly facilitate any effort or attempt to make an acquisition proposal.

However, at any time from and after the no-shop period start date and prior to the time our stockholders adopt the merger agreement, if the Company receives a written acquisition proposal from any person that did not result from a material breach of the preceding paragraph:

 

   

we may contact such person to clarify the terms and conditions of such proposal;

 

   

we may engage in discussions or negotiations with such person, and furnish to such third party requested non-public information concerning the Company and its subsidiaries pursuant to an acceptable confidentiality agreement (provided that we promptly, and in any event, within 24 hours thereafter, make available to Parent and Merger Sub any material non-public information concerning the Company or our subsidiaries provided to any such third parties if not previously made available to Parent or Merger Sub), if our board of directors (x) prior to taking any such actions, determines in good faith after consultation with outside legal counsel that failure to take such action could be inconsistent with the directors’ fiduciary duties, and (y) determines in good faith after consultation with its financial advisor that such acquisition proposal either constitutes a superior proposal or could reasonably be expected to result in a superior proposal; and

 

   

our board of directors may authorize, approve, adopt, recommend or otherwise declare advisable an acquisition proposal or propose to do any of the foregoing (publicly or otherwise), if (i) the board of

 

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directors determines in good faith (after consultation with its financial advisor) that such acquisition proposal is a superior proposal, and (ii) the Company has complied with its obligations in relation to a change of recommendation as described below.

At any time before the merger agreement is adopted by our stockholders we may terminate the merger agreement and enter into an alternative acquisition agreement with respect to a superior proposal, so long as we comply with certain terms of the merger agreement, including paying a termination fee to Parent. See “The Merger Agreement—Termination Fees” beginning on page []. In addition, at any time prior to the time our stockholders adopt the merger agreement, the board of directors may effect a change of recommendation if it believes in good faith, after consultation with outside counsel, that the failure to do so could be inconsistent with its fiduciary obligations under applicable law.

However, prior to effecting a change of recommendation in connection with a superior proposal or terminating the merger agreement in order to enter into an alternative acquisition agreement with respect to a superior proposal:

 

   

we must notify Parent at least 96 hours in advance of our intention to effect a change of recommendation in respect of a superior proposal or to terminate the merger agreement in respect of a superior proposal, specifying the identity of the person making such superior proposal and the material terms of such superior proposal and attaching the most current version of such agreement;

 

   

after providing such notice and prior to taking any such action, we must negotiate with Parent in good faith (to the extent Parent desires to negotiate) during such 96-hour period to make revisions to the terms of the merger agreement, the equity commitment letter or the limited guaranty as would permit the board of directors not to take any such action with respect to such a superior proposal; and

 

   

the board of directors must have considered in good faith any changes to the merger agreement, the equity commitment letter and the limited guaranty offered in writing by Parent in a manner that would form a contract if accepted by the Company and must have determined that the superior proposal would still constitute a superior proposal if such changes were given effect.

Nothing in the provisions of the merger agreement relating to acquisition proposals prevents us from complying with our disclosure obligations under U.S. federal or state law with regard to an acquisition proposal, including taking and disclosing to our stockholders a position contemplated by Rules 14d-9 and 14e-2(a) under the Exchange Act or making any similar communication to our stockholders, or making any “stop-look-and-listen” or similar communication of the type contemplated by Rule 14d-9(f) under the Exchange Act to our stockholders; provided that any such disclosure (other than a “stop, look and listen” communication or similar communication of the type contemplated by Rule 14d-9(f) under the Exchange Act) will be deemed to be a change of recommendation unless the board of directors expressly reaffirms its recommendation at least two business days prior to the stockholders meeting.

In this proxy statement we refer to (i) any proposal or offer with respect to a merger, consolidation, business combination or similar transaction involving the Company or any of our significant subsidiaries or (ii) any acquisition by any person or group of persons resulting in, or proposal or offer to acquire by tender offer, share exchange or in any manner which if consummated would result in, any person or group of persons becoming the beneficial owner of, directly or indirectly, in one or a series of related transactions, (A) more than 20% of the outstanding shares of our common stock or the total voting power of the equity securities of the Company, (B) assets that during the most recently completed twelve month period for which financial information is available generated more than 20% of the consolidated total revenues of the Company and our subsidiaries, taken as a whole, or (C) assets constituting more than 20% of consolidated total assets, measured either by book value or fair market value (including, equity securities of our subsidiaries), of the Company and our subsidiaries, taken as a whole, other than the transactions contemplated in the merger agreement, as an “acquisition proposal”.

 

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In this proxy statement we refer to any acquisition proposal (with the percentages set forth in the definition of such term changed from 20% to 50%) that the board of directors has determined in its good faith judgment is reasonably likely to be consummated in accordance with its terms, taking into account all material legal, regulatory and financial aspects of the proposal (including the financing thereof) and the person making the proposal, and if consummated, would result in a transaction more favorable to our stockholders from a financial point of view than the transaction contemplated by the merger agreement, as a “superior proposal”.

Stockholders Meeting

Subject to fiduciary obligations under applicable law, we are required to take all reasonable action necessary to convene a meeting of our stockholders as promptly as practicable after the mailing of this proxy statement to consider and vote upon the adoption of the merger agreement. We may postpone or adjourn the stockholders meeting (i) with the consent of Parent, (ii) for the absence of a quorum, (iii) to allow reasonable additional time for the filing and mailing of any supplemental or amended disclosure which the board of directors has determined in good faith after consultation with outside counsel is necessary under applicable law and for such supplemental or amended disclosure to be disseminated and reviewed by our stockholders prior to the stockholders meeting, (iv) if required by law or (v) in the event we have provided timely written notice to Parent and Merger Sub of our intention to terminate the merger agreement in light of a superior proposal and the deadline with respect to such notice has not been reached. Subject to the provisions of the merger agreement discussed above under “The Merger Agreement—Solicitation of Acquisition Proposals” beginning on page [], the board of directors will recommend that our stockholders vote to adopt the merger agreement, include the Company recommendation in the proxy statement and take all reasonable lawful action to solicit adoption of the merger agreement. Notwithstanding any change in recommendation by the board of directors, unless the merger agreement is terminated in accordance with its terms, the merger agreement will be submitted to the record stockholders at the stockholders meeting for the purpose of adopting the merger agreement.

Parent has agreed to vote or cause to be voted any shares of our common stock beneficially owned by it or its subsidiaries in favor of the proposal to adopt the merger agreement.

Filings; Other Actions; Notification

We and Parent will cooperate with each other and use (and cause our respective affiliates to use) our respective reasonable best efforts to take or cause to be taken all actions and do or cause to be done all things reasonably necessary, proper or advisable to satisfy the conditions to closing described under “The Merger—Conditions to the Merger” beginning on page [] and to consummate the merger, the NRG sale and the other transactions contemplated by the merger agreement as soon as practicable, including, with respect to Parent, specifically enforcing its rights under the NRG PSA, and for both parties, preparing and filing as promptly as practicable the regulatory filings described under “The Merger—Regulatory Approvals” beginning on page [] and to obtain as promptly as practicable all consents, registrations, approvals, permits and authorizations necessary or advisable to be obtained from any third party or any governmental entity in order to consummate the merger, the NRG sale or any of the other transactions contemplated by the merger agreement or the NRG PSA.

We and Parent have agreed, subject to certain exceptions, to:

 

   

furnish the other, upon request, with all information concerning itself, its affiliates, directors, officers and stockholders and, with respect to Parent, NRG, and such other matters as may be reasonably necessary or advisable in connection with any statement, filing, notice or application made by or on behalf of Parent, the Company or their respective affiliates in connection with the merger, the NRG sale and the transactions contemplated by the merger agreement;

 

   

keep the other reasonably apprised of the status of matters relating to completion of the transactions contemplated in the merger agreement and the NRG sale, and neither the Company nor Parent will permit any of its affiliates, officers or any other representatives to participate in any meeting with any

 

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governmental entity in respect of any filing, investigation or other inquiry with respect to the merger, the NRG sale and the other transactions contemplated by the merger agreement and the NRG PSA unless it consults with the other party in advance and, to the extent permitted by that governmental entity, gives the other party the opportunity to attend and participate;

 

   

promptly provide each federal, state, local or foreign court or governmental entity with jurisdiction over any required governmental approval any non-privileged information and documents that they reasonably request or that are necessary, proper or advisable to permit completion of the transactions contemplated by the merger agreement or the NRG PSA;

 

   

use reasonable best efforts to obtain promptly all required governmental approvals with respect to the merger and the NRG sale and avoid the entry or enactment of any permanent, preliminary or temporary injunction or other order, decree, decision, determination, judgment, investigation or law that would delay in any material respect, restrain, prevent, enjoin or otherwise prohibit completion of the transactions contemplated by the merger agreement or the NRG PSA, including the proffer and agreement by Parent of its willingness to sell or otherwise dispose of, or hold separate pending such disposition, and promptly to effect the sale, disposal and holding separate of, such assets, categories of assets or businesses or other segments of us or Parent or our respective subsidiaries or affiliates if such action is reasonably necessary or advisable to avoid, prevent, eliminate or remove the actual, anticipated, or threatened commencement of any investigation or proceeding in any forum or issuance or enactment of any order, decree, decision, determination, judgment or law that would delay in any material respect, restrain, prevent, enjoin or otherwise prohibit consummation of the merger, the NRG sale and the other transactions contemplated by the merger agreement by any governmental entity; and

 

   

if any injunction, decision, order, judgment, determination, decree or law is entered, issued or enacted or becomes reasonably foreseeable to be entered, issued or enacted in any proceeding, review or inquiry that would make completion of the merger in accordance with the terms of the merger agreement or the NRG sale in accordance with the terms of the NRG PSA unlawful or that would delay, restrain, prevent, enjoin or otherwise prohibit consummation of the merger, the NRG sale or the other transactions contemplated by the merger agreement or the NRG PSA, use reasonable best efforts to take all steps necessary to resist, vacate, modify, reverse, suspend, prevent, eliminate, avoid or remove such actual, anticipated or threatened injunction, decision, order, judgment, determination, decree or enactment so as to permit the completion on a schedule as close as possible to that contemplated by the merger agreement or the NRG PSA.

Parent has also agreed to refrain from entering into any agreement, arrangement or other understanding to acquire any assets or properties that would reasonably be expected to prevent or materially delay the receipt of all governmental approvals required to consummate the Merger and the NRG sale.

Merger Sub and NRG have made certain covenants to each other in the NRG PSA related to governmental approvals needed to consummate the NRG sale; for a description of those covenants, see “The NRG PSA—Filings; Other Actions; Notification” beginning on page [].

Company Cooperation with Refinancing

Prior to the closing of the merger, the Company will use its reasonable efforts, at Parent’s sole expense, to assist Parent in a refinancing of all or any portion of indebtedness of the Company existing as of the date of the merger agreement; provided that (i) none of the Company or any of its subsidiaries will be subject to obligations under any related documentation until the effective time of the merger or will be required to take any action under such documents that is not contingent upon the closing of the merger or that would be effective prior to the effective time of the merger, (ii) such efforts do not unreasonably interfere with the ongoing operations of the Company or any of its subsidiaries and (iii) none of the Company or any of its subsidiaries will be required to issue any offering or information document. Parent will reimburse the Company for all reasonable and

 

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documented out-of-pocket expenses and indemnify the Company from all losses incurred in connection with the Company’s cooperation with such refinancing efforts.

Employee Benefit Matters

Parent has agreed for the sole benefit of the Company that Parent will, and will cause the surviving corporation after the completion of the merger to:

 

   

from the effective time of the merger until the first anniversary of the effective time of the merger, provide our employees and the employees of our subsidiaries (in each case, other than those subject to collective bargaining agreements) who continue employment with Parent, the surviving corporation or any subsidiary of the surviving corporation, which we refer to as affected employees, with total annual cash compensation opportunities and benefits that, taken together, are substantially comparable in the aggregate to those total annual cash compensation opportunities and benefits provided by the Company and its subsidiaries immediately prior to the effective time of the merger;

 

   

following the effective time of the merger, comply with the provisions of each of our change in control severance plans;

 

   

cause any employee benefit plan in which affected employees are entitled to participate to credit all service by such employees for purposes of eligibility, vesting and benefit accrual (other than for benefit accruals under defined benefit pension plans) to the extent such service was credited under one of our comparable employee benefit plans;

 

   

cause any welfare benefit plan in which affected employees are entitled to participate to (i) waive any pre-existing condition limitations, exclusions or waiting period requirements to the extent such limitations, exclusions and waiting periods were satisfied or inapplicable under our comparable plans or the comparable plans of our subsidiaries and (ii) give credit for amounts paid by such affected employees for any co-payments, deductibles and other out-of-pocket expenses prior to the effective time of the merger under the terms of any corresponding Company plan in satisfying any applicable co-payment, deductible or out-of-pocket requirements for the plan year in which the effective time of the merger occurs under any welfare benefit plan in which the affected employee participates on and after the effective time of the merger;

 

   

honor its obligations with the unions representing bargaining unit employees of the Company or its affiliates, including all contractual obligations under applicable collective bargaining agreements (subject to future bargaining between the unions and the Company or the Company’s affiliates); and

 

   

for all employees who continue employment with Parent, the surviving corporation or any subsidiary of the surviving corporation through the earlier of March 15, 2011 and the date on which Parent otherwise pays annual bonuses and incentive payments to similarly situated employees, pay bonuses and incentive payments to such employees on such earlier date in accordance with the bonus and incentive plans or programs of Parent; provided that Parent will ensure that the aggregate annual bonuses and incentive payments made to all such employees, measured as a group, in respect of the 2010 calendar year are no less than the aggregate amount accrued therefor as of December 31, 2010 for such employees.

Parent has acknowledged that a “change in control” or “change of control” within the meaning of each benefit plan will occur upon the effective time, subject to applicable tax rules.

 

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Conditions to the Merger

The respective obligations of the Company, Parent and Merger Sub to consummate the merger are subject to the satisfaction or waiver of the following conditions:

 

   

the merger agreement must have been duly adopted by holders of a majority of the outstanding shares of Company common stock entitled to vote thereon;

 

   

the waiting period applicable to the consummation of the merger under the HSR Act has expired or been terminated and the following approvals having been obtained and become final orders: (a) the approval of FERC under Section 203 of the Federal Power Act of 1935, as amended, (b) the approval, or a determination that no approval is required, of the NYPSC to the PSL, as amended, and (c) notification to the CPUC and the CAISO, and the expiration of any applicable notice period under CPUC General Order No. 167; and

 

   

no court or governmental entity of competent jurisdiction has enacted, issued, enforced or entered any order.

The obligations of Parent and Merger Sub to effect the merger are also subject to the satisfaction or waiver by Parent at or prior to the effective time of the merger of the following additional conditions:

 

   

our representations and warranties regarding:

 

   

our capitalization, our corporate power and authority and our approval of the merger agreement must be true and correct in all respects, subject to such inaccuracies with regard to capitalization as are de minimis relative to that section as a whole;

 

   

the absence of a Company material adverse effect must be true and correct; and

 

   

our other representations and warranties set forth in the merger agreement, and disregarding all qualifications and exceptions relating to materiality or Company material adverse effect, must be true and correct except where the failure to be true and correct would not reasonably be expected to have, individually or in the aggregate, a Company material adverse effect;

 

   

the Company has performed in all material respects its obligations under the merger agreement at or prior to the date of the closing of the merger;

 

   

the Company has delivered to Parent a certificate signed by a senior executive officer of the Company certifying that all of the above conditions with respect to the representations and warranties and performance of the obligations of the Company have been satisfied; and

 

   

the conditions to the obligation of Merger Sub and NRG to effect the NRG sale (other than those conditions that by their nature are to be satisfied at the closing of the NRG sale and the condition relating to the closing of the merger) have been satisfied, and NRG is ready, willing and able to consummate the NRG sale upon the consummation of the merger. For a description of these conditions, see “The NRG PSA—Conditions to the NRG Sale” beginning on page [].

Our obligation to effect the merger is subject to the satisfaction or waiver by us at or prior to the effective time of the merger of the following additional conditions:

 

   

the representations and warranties of Parent set forth in the merger agreement must be true and correct in all material respects, except where the failure of such representations and warranties to be so true and correct does not materially and adversely affect the ability of Parent or Merger Sub to consummate the merger and the other transactions contemplated by the merger agreement;

 

   

each of Parent and Merger Sub has performed in all material respects its obligations under the merger agreement at or prior to the date of the closing of the merger; and

 

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Parent has delivered to the Company a certificate signed by a senior executive officer of Parent certifying that all of the above conditions with respect to the representations and warranties and performance of the obligations of Parent and Merger Sub have been satisfied.

The conditions to each of the parties’ obligations to complete the merger are for the sole benefit of such party and may be waived by such party in whole or in part (to the extent permitted by applicable laws).

Termination

We and Parent may, by mutual written consent, terminate the merger agreement and abandon the merger at any time prior to the effective time of the merger, whether before or after the adoption of the merger agreement by our stockholders.

The merger agreement may also be terminated and the merger abandoned at any time prior to the effective time of the merger as follows:

 

   

by either Parent or the Company, if:

 

   

the merger has not been consummated by the termination date;

 

   

our stockholders meeting has been held and completed and our stockholders have not adopted the merger agreement at such meeting or any adjournment or postponement of such meeting; or

 

   

an order has become final and non-appealable.

However, none of the termination rights described in the preceding bullet points will be available to any party if the failure to consummate the merger prior to the termination date was primarily due to the failure of such party to perform any of its obligations under the merger agreement.

 

   

by the Company, if:

 

   

at any time prior to the adoption of the merger agreement by our stockholders (i) the board of directors authorizes the Company to enter into an alternative acquisition agreement with respect to a superior proposal, (ii) immediately prior to or substantially concurrently with the termination of the merger agreement we enter into an alternative acquisition agreement with respect to a superior proposal and (iii) immediately prior to or substantially concurrently with such termination, we pay Parent or its designee the termination fee discussed under “—Termination Fees” beginning on page [] (provided that this right to terminate the merger agreement will not be available to us unless we have complied with certain notice and other requirements described under “—Solicitation of Acquisition Proposals” beginning on page []), which we refer to as an alternative acquisition proposal termination;

 

   

there has been a breach of a representation, warranty, covenant or agreement made by Parent or Merger Sub in the merger agreement or any such representation and warranty becomes untrue after the date of the merger agreement, which breach or failure to be true would give rise to the failure of the condition to the closing of the merger relating to the accuracy of the representations and warranties of Parent and Merger Sub or compliance by Parent and Merger Sub with their obligations under the merger agreement, and such breach or failure to be true cannot be cured, or if curable, is not cured prior to the earlier of (i) thirty calendar days after written notice is given by us to Parent and (ii) two business days prior to the termination date (provided that we will not have this right to terminate if we are then in material breach of the merger agreement), which we refer to as a Parent breach termination event; or

 

   

the conditions to the obligations of Parent and Merger Sub to consummate the merger have been satisfied (other than those conditions that by their nature are to be satisfied by actions taken at the closing of the merger), and Parent and Merger Sub fail to consummate the transactions

 

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contemplated by the merger agreement within the earlier of (i) two business days following the date on which the closing of the merger should have occurred under the merger agreement and (ii) one business day before the termination date, and we stood ready, willing and able to consummate the merger during such period, which we refer to as a failure to close termination event.

 

   

by Parent, if:

 

   

the board of directors (i) makes and does not withdraw a change of recommendation, (ii) approves or recommends to our stockholders an acquisition proposal, or (iii) fails to include the Company recommendation in the proxy statement; or

 

   

there has been a breach of a representation, warranty, covenant or agreement made by the Company in the merger agreement or any such representation and warranty becomes untrue after the date of the merger agreement, which breach or failure to be true would give rise to the failure of the condition to closing of the merger relating to the accuracy of the representations and warranties of the Company or compliance by it with its obligations under the merger agreement, and such breach or failure to be true cannot be cured, or if curable, is not cured prior to the earlier of (i) thirty calendar days after written notice is given to us by Parent and (ii) two business days prior to the termination date (provided that Parent will not have this right to terminate if it is then in material breach of any of the merger agreement), which we refer to as a Company breach termination event.

Termination Fees

We are required to pay Parent a termination fee equal to $16.3 million and reimburse Parent for all out-of-pocket fees and expenses incurred by it, Merger Sub and their affiliates in connection with the merger agreement or the transactions contemplated therein up to $6 million, if we terminate the merger agreement pursuant to an alternative acquisition proposal termination and the alternative acquisition agreement is with an excluded party.

We are required to pay Parent a termination fee equal to $27.5 million less any Parent expenses paid by the Company with respect to the first $1.0 billion of any asset sales described below and an additional $1.5 million with respect to each additional $100 million of any such asset sales up to an aggregate of $2.5 billion of any such asset sales (and a maximum termination fee of $50 million in the aggregate (including any Parent expenses previously paid by the Company)) if the following three events occur:

 

   

before adoption of the merger agreement by our stockholders, the merger agreement is terminated due to the occurrence of the termination date or our stockholders not having adopted the merger agreement;

 

   

there is a bona fide acquisition proposal made after the date of the merger agreement but prior to such termination, which has not been publicly withdrawn without qualification in a manner that would reasonably be expected to adversely affect the adoption of the merger agreement by the stockholders in any material respect:

 

   

in a termination due to the stockholders not having adopted the merger agreement, at least five business days prior to the stockholders meeting; or

 

   

in a termination due to the occurrence of the termination date, at least 10 calendar days prior to the date of termination; and

 

   

we consummate any transaction or series of transactions within 18 months of termination providing for the sale of assets (including equity securities of any of the Company’s subsidiaries) for aggregate consideration (including assumption of any indebtedness by any purchaser of such assets) of greater than $1.0 billion.

 

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We are required to pay Parent a termination fee of $50 million (less any Parent expenses previously paid by the Company) if:

 

   

Parent terminates the merger agreement due to the board of directors having (i) made and not withdrawn a change of recommendation, (ii) approved or recommended to our stockholders an acquisition proposal, or (iii) failed to recommend adoption of the merger agreement in the proxy statement;

 

   

we terminate the merger agreement pursuant to an alternative acquisition proposal termination and the alternative acquisition agreement is with a party that is not an excluded party; or

 

   

each of the following three events occurs:

 

   

before adoption of the merger agreement by our stockholders, the merger agreement is terminated due to the occurrence of the termination date or our stockholders not having adopted the merger agreement;

 

   

there is a bona fide acquisition proposal made after the date of the merger agreement but prior to such termination, which has not been publicly withdrawn without qualification in a manner that would reasonably be expected to adversely affect the adoption of the merger agreement by the stockholders in any material respect:

 

   

in a termination due to the stockholders not having adopted the merger agreement, at least five business days prior to the stockholders meeting; or

 

   

in a termination due to the occurrence of the termination date, at least 10 calendar days prior to the date of termination; and

 

   

within 18 months of such termination, we enter into a definitive agreement with respect to an acquisition proposal (provided that references to 20% in the definition of “acquisition proposal” shall be changed to 50%) and such acquisition proposal is consummated.

In no event will the Company have to pay a termination fee on more than one occasion.

The Company must also pay Parent all out-of-pocket fees and expenses incurred by Parent, Merger Sub and their respective affiliates in connection with the merger agreement or the transactions contemplated therein up to $10 million if the merger agreement is terminated because either:

 

   

our stockholders do not adopt the merger agreement; or

 

   

Parent terminates the merger agreement pursuant to a Company breach termination event.

Parent Fee

Parent must pay us the Parent fee of $100 million, less certain Parent expense reimbursement and indemnification payments made by Parent to us in connection with the arrangement or consummation of certain third party investments and the refinancing of the existing indebtedness of the Company, in the event that the following three events occur:

 

   

a court of competent jurisdiction decides not to specifically enforce the obligations of Parent and Merger Sub to consummate the merger pursuant to a claim for specific performance brought by the Company in good faith and either (i) such decision has become final and non-appealable or (ii) the Company has irrevocably agreed to waive any rights it may have to appeal such decision;

 

   

on the date the Company initiated the action for specific performance, the Company could have terminated the merger agreement due to either:

 

   

a failure to close termination event; or

 

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a Parent breach termination event (and the breach of the representation, warranty, covenant or agreement, or the inaccuracy of any representation or warranty, must contribute materially to the failure of the closing of the merger to have occurred, unless a breach by NRG of any of its obligations under the NRG PSA is the proximate cause of the failure of the closing of the merger to have occurred); and

 

   

Parent and Merger Sub are not willing to consummate the merger within 11 calendar days of such decision becoming final and non-appealable or the Company irrevocably agreeing to waive any rights it may have to appeal such decision.

The guarantor has guaranteed the obligation of Parent to pay the Parent fee pursuant to the limited guaranty. In no event will Parent have to pay the Parent fee on more than one occasion.

NRG Payment

Merger Sub must pay us the NRG payment if (i) the NRG PSA is terminated, or the NRG sale is not consummated, for any reason, (ii) the merger agreement is terminated, or the merger is not consummated, for any reason and (iii) Merger Sub or any of its affiliates, on the one hand, and NRG or any of its affiliates, on the other hand, enter into any settlement, termination or similar negotiated agreement in which Merger Sub or any of its affiliates receives any payment (whether in cash, assets, properties or otherwise) from NRG or any of its affiliates in connection with the termination of the NRG PSA or the failure of the NRG sale to be consummated (other than certain payments NRG would be required to make in connection with NRG’s purchase of any of the entities or all or substantially all of the assets to be sold under the NRG PSA within 18 months of termination of the NRG PSA, as described under “The NRG PSA—Termination Fees” beginning on page []). The NRG payment is equal to 50% of the value of such amounts paid by NRG or any of its affiliates to Merger Sub or any of its affiliates.

The guarantor has guaranteed the obligation of Parent to pay the NRG payment pursuant to the limited guaranty.

Expenses

The surviving corporation will pay all charges and expenses in connection with the exchange and payment procedures (including those of the paying agent) and receipt of amounts due to equity holders. All other costs and expenses incurred in connection with the merger agreement, the merger and the other transactions contemplated by the merger agreement will be paid by the party incurring such expense, but Parent will reimburse the Company for all reasonable and documented out-of-pocket costs incurred by the Company, our subsidiaries and our representatives, and indemnify the Company for any losses suffered, in connection with cooperation provided with respect to (i) the arrangement or consummation of a third party investment in the Company in connection with or following the closing of the merger as may be reasonably requested and (ii) the refinancing of all or any portion of our indebtedness.

Remedies

Our receipt of the Parent fee, the NRG payment and certain expense reimbursement and indemnification payments from Parent will, subject to certain specific performance rights described below, be our sole and exclusive remedy against Parent, Merger Sub, the guarantor and any of their respective former, current, or future general or limited partners, stockholders, managers, members, directors, officers, affiliates or agents for any loss suffered as a result of any breach of any covenant or agreement in the merger agreement or the failure of the merger to be consummated. Upon payment of such amounts, none of Parent, Merger Sub, the guarantor or any of their respective former, current, or future general or limited partners, stockholders, managers, members, directors, officers, affiliates or agents will have any further liability or obligation relating to or arising out of the merger agreement or any claims or actions arising out of any breach, termination or failure described in the preceding sentence.

Parent’s receipt of the termination fee payable by us or certain expenses reimbursed by us, as the case may be, will, subject to certain specific performance rights described below, be the sole and exclusive remedy of

 

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Parent, Merger Sub, the guarantor and their respective affiliates against the Company, its subsidiaries and any of their respective former, current, or future general or limited partners, stockholders, directors, officers, managers, members, affiliates or agents for any loss suffered as a result of any breach of any covenant or agreement in the merger agreement or the failure of the merger to be consummated. Upon payment of such amounts, none of the Company, its subsidiaries or any of their respective former, current, or future general or limited partners, stockholders, directors, officers, managers, members, affiliates or agents will have any further liability or obligation relating to or arising out of the merger agreement or the transactions contemplated by the merger agreement.

Under no circumstances will the Company be entitled to monetary damages in excess of the amount of the Parent fee and NRG payment payable by Parent and certain expense reimbursement and indemnification payments from Parent, or will Parent or Merger Sub be entitled to monetary damages in excess of the amount of the termination fee, other than, in each case, costs and expenses incurred in connection with any action to enforce the payment of any such fee.

The parties are entitled to an injunction, specific performance and other equitable relief to prevent breaches of the merger agreement and to enforce specifically the terms of the merger agreement in addition to any other remedy to which they are entitled at law or in equity. If all conditions to Parent and Merger Sub’s obligations to effect the merger (other than those conditions that by their nature are to be satisfied at the closing of the merger) have been satisfied and Parent and Merger Sub fail to complete the closing by the date required under the merger agreement, the merger agreement explicitly allows us to seek specific performance to cause Parent and/or Merger Sub to draw down the full proceeds of the equity financing pursuant to the terms and conditions of the equity commitment letter and to prevent or cure breaches of the merger agreement by Parent or Merger Sub and/or to enforce specifically the terms and provisions of the merger agreement, including to cause Parent and/or Merger Sub to consummate the transactions contemplated thereby, including to effect the closing on the terms and subject to the conditions in the merger agreement.

NRG is an intended third party beneficiary of the merger agreement. NRG has the right to enforce the rights and obligations of Parent, Merger Sub and the Company to the extent such rights and obligations directly relate to the assets it is acquiring, and the liabilities it is assuming, in the NRG sale. No party to the merger agreement may amend or waive any condition thereunder if such waiver or amendment would be adverse to NRG as a third party beneficiary in any material respect without NRG’s consent.

The Company is an intended third party beneficiary of the NRG PSA. The Company has the right of enforcement in respect of Merger Sub’s and NRG’s obligations under the NRG PSA. No party to the NRG PSA may amend, supplement or otherwise modify the NRG PSA in a manner adverse to the Company as a third party beneficiary in any material respect without the Company’s consent.

Indemnification; Directors’ and Officers’ Insurance

From and after the effective time of the merger, Parent and the surviving corporation will indemnify and hold harmless (and Parent will advance expenses to) our and our subsidiaries’ present and former officers and directors against any costs, expenses (including reasonable attorneys’ fees), judgments, fines, losses, claims, damages or liabilities incurred in connection with any claim, action, suit, proceeding or investigation, arising out of or related to such officer’s or director’s service as a director or officer of the Company or its subsidiaries (or services performed at our or our subsidiaries’ request) at or prior to the effective time of the merger (including in connection with the merger agreement or the transactions contemplated thereby and actions to enforce such indemnification or advancement rights) to the fullest extent permitted by law.

We are required to (and if we are unable to do so, Parent will cause the surviving corporation to) obtain a six-year “tail” insurance policy with respect to the currently existing officers’ and directors’ liability insurance policy and fiduciary liability insurance policy. Such policy must be obtained from an insurance carrier with the

 

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same or better credit rating as our insurance carrier as of the date of the merger agreement with respect to directors’ and officers’ liability insurance and fiduciary liability insurance and must have terms, conditions, retentions and limits of liability that are at least as favorable to the insureds as our existing policies with respect to any matter claimed against our and our subsidiaries’ present and former officers serving in such capacity that existed or occurred at or prior to the effective time of the merger. This obligation is subject to a cap of 300% of the annual premium amount we are currently paying for such insurance.

If we or the surviving corporation fail to purchase such policies, then Parent has agreed to cause the surviving corporation to continue to maintain the current policies in place or to use reasonable best efforts to purchase comparable policies, in each case, for the six-year period following the effective time of the merger. Parent’s or the surviving corporation’s obligation to provide this insurance will be capped at 300% of the annual premium amount we are currently paying for such insurance. If the annual premium amount for such coverage exceeds the cap, the surviving corporation must obtain a policy with the greatest coverage available for a cost not exceeding the amount of the cap.

The present and former directors and officers of the Company will have the right to enforce the provisions of the merger agreement relating to their indemnification.

Access to the Company and its Trading Operations

Subject to certain exceptions and applicable law, we will afford Parent and its authorized representatives reasonable access to the Company and will furnish Parent information concerning our business, properties, facilities, operations and personnel as may reasonably be requested. Such access will include access to the derivative products trading operations of the Company and its subsidiaries and their respective books and records.

The Company will also develop appropriate procedures to permit Parent to appoint a representative to monitor the aggregate net position in the derivative products trading portfolio of the Company and its subsidiaries, subject to certain conditions and applicable law. Following the later to occur of (i) the no-shop period start date and (ii) the expiration or termination of the waiting period applicable to the consummation of the merger under the HSR Act, this monitor will have the right, using reasonable commercial judgment, to unwind the Company’s hedges and other derivative products transactions related to the entities and assets to be sold pursuant to the NRG sale in an orderly manner by means of reducing the “delta exposure” related to such hedges and other derivative products transactions. Furthermore, Parent’s derivative products trading activities will be limited to certain trades to manage intra-month positions and to prevent certain net short and net long power positions.

Modification or Amendment

At any time prior to the effective time of the merger, the parties to the merger agreement may modify or amend the merger agreement, by written agreement executed and delivered by duly authorized officers of the respective parties. However, no party to the merger agreement may amend or waive any condition thereunder if such waiver or amendment would be adverse to NRG as a third party beneficiary in any material respect, without NRG’s consent.

 

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THE NRG PSA

This section describes certain material terms of the NRG PSA that are important to the Company’s stockholders . The description in this section and elsewhere in this proxy statement is qualified in its entirety by reference to the complete text of the NRG PSA, a copy of which is attached as Exhibit A to the merger agreement, which is attached hereto as Annex A. This summary does not purport to be complete and may not contain all of the information about the NRG PSA that is important to you. We encourage you to read the NRG PSA carefully and in its entirety.

Concurrently with the execution of the merger agreement, Merger Sub entered into the NRG PSA with NRG, pursuant to which NRG will purchase four of our natural gas-fired assets from the surviving corporation – the Casco Bay facility in Maine and the Moss Landing, Morro Bay and Oakland facilities in California – for cash consideration of approximately $1.36 billion. The NRG sale will not occur if the merger is not consummated. The proceeds from the NRG sale will be paid to the surviving corporation, and will not be distributed to or held for the benefit of the holders of our common stock prior to the merger. No approval of the holders of our common stock is required to complete the NRG sale and no such approval is being sought

Explanatory Note Regarding the NRG PSA

The NRG PSA is included to provide you with information regarding its terms. Factual disclosures about the Company contained in this proxy statement or in the Company’s public reports filed with the SEC may supplement, update or modify the factual disclosures about the Company contained in the NRG PSA. The representations, warranties and covenants made in the NRG PSA by Merger Sub and NRG were qualified and subject to important limitations agreed to by Merger Sub and NRG in connection with negotiating the terms of the NRG PSA. In particular, in your review of the representations and warranties contained in the NRG PSA and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the NRG PSA may have the right not to consummate the NRG sale if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise, and allocating risk between the parties to the NRG PSA, rather than establishing matters as facts. The representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable to stockholders and reports and documents filed with the SEC and in some cases were qualified by the matters contained in the disclosure schedule that Merger Sub delivered in connection with the NRG PSA, which disclosures were not reflected in the NRG PSA. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this proxy statement, may have changed since the date of the NRG PSA and subsequent developments or new information qualifying a representation or warranty may have been included in this proxy statement.

Enforcement Rights of the Company

The Company is an intended third party beneficiary of the NRG PSA. The Company has the right to enforce specifically the terms and provisions of, and to prevent or cure breaches of the NRG PSA by Merger Sub or NRG. No party to the NRG PSA may amend, supplement or otherwise modify the NRG PSA in a manner adverse to the Company as a third party beneficiary in any material respect, without the Company’s consent.

Representations and Warranties

Merger Sub made customary representations and warranties in the NRG PSA that are subject, in some cases, to specified exceptions and qualifications contained in the NRG PSA or in the disclosure schedule Merger Sub delivered in connection with the NRG PSA. These representations and warranties relate to, among other things:

 

   

due organization, existence, good standing and authority to carry on its businesses;

 

   

its corporate power and authority to enter into, and consummate the transactions under, the NRG PSA, and the enforceability of the NRG PSA against it;

 

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the absence of violations of, or conflicts with, its governing documents, governmental orders, applicable law and certain agreements as a result of entering into and performing under the NRG PSA and completing the NRG sale;

 

   

required governmental consents, approvals, notices and filings; and

 

   

the absence of any undisclosed broker’s or finder’s fees.

In addition, Merger Sub made representations and warranties in the NRG PSA concerning the Company, our subsidiaries selling the entities to be sold to NRG and the entities and assets to be sold to NRG, that are subject, in some cases, to specified exceptions and qualifications contained in the NRG PSA or in the disclosure schedule Merger Sub delivered in connection with the NRG PSA. The Company represented to the accuracy of the following representations and warranties in the merger agreement as if it were Merger Sub. These representations and warranties relate to, among other things:

 

   

due organization, existence, good standing and authority to carry on the businesses of the Company, our subsidiaries selling the entities being sold to NRG and the entities being sold to NRG;

 

   

the corporate power and authority of the Company, our subsidiaries selling the entities being sold to NRG and the entities being sold to NRG to perform their obligations under and consummate the transactions contemplated by the NRG PSA and the additional agreements to be entered into at the closing of the NRG sale contemplated thereby, which we refer to as the additional NRG agreements, and the enforceability of the additional NRG agreements against such entities;

 

   

the absence of violations of, or conflicts with, our, our subsidiaries’ or the entities’ governing documents, governmental orders, applicable law and certain agreements as a result of the NRG sale;

 

   

required governmental consents and filings;

 

   

Merger Sub’s indirect legal and beneficial ownership of the entities being sold to NRG at the closing of the NRG sale, in each case free and clear of all material encumbrances;

 

   

Merger Sub’s indirect legal title to certain specified assets and contracts to be transferred in the NRG sale at the closing of the NRG sale, free and clear of all encumbrances other than permitted encumbrances;

 

   

Permits, contracts and real property relating to the assets and entities being sold to NRG;

 

   

the absence of certain undisclosed liabilities; and

 

   

tax matters relating to the entities being sold by NRG.

Some of the representations and warranties of Merger Sub in the NRG PSA are qualified by, among other things, exceptions relating to the absence of a “material adverse effect”, which we refer to as an NRG PSA material adverse effect. NRG PSA material adverse effect has a substantively similar meaning to the term Company material adverse effect in the merger agreement (see “The Merger Agreement—Representations and Warranties” beginning on page []), except that only the entities and assets to be sold in the NRG sale are to be considered in assessing such effect, and, with respect to certain representations and warranties, such assets are assumed to be 125% of their then-current size.

The NRG PSA also contains customary representations and warranties made by NRG that are subject, in some cases, to specified exceptions and qualifications contained in the NRG PSA or in the disclosure schedule NRG delivered in connection with the NRG PSA. The representations and warranties of NRG relate to, among other things:

 

   

due organization, existence, good standing and authority to carry on its businesses;

 

   

its corporate power and authority to enter into, and consummate the transactions under, the NRG PSA, and the enforceability of the NRG PSA against it;

 

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the absence of violations of, or conflicts with, its or its affiliates’ governing documents, governmental orders, applicable law and certain agreements as a result of entering into and performing under the NRG PSA and completing the NRG sale;

 

   

required governmental consents and filings;

 

   

sufficiency of funds;

 

   

the absence of any undisclosed broker’s or finder’s fees; and

 

   

its investment intent.

Filings; Other Actions; Notification

Merger Sub and NRG have agreed to use their commercially reasonable efforts (and Merger Sub has agreed to cause us to use our commercially reasonable efforts) to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable law to consummate the NRG sale, including using commercially reasonable efforts to ensure satisfaction of the conditions precedent to the NRG sale under the NRG PSA, obtaining all necessary consents, and making all required filings with third parties required to be obtained or made in connection with the transactions under the NRG PSA, provided that Merger Sub’s obligations are subject to and limited by Merger Sub’s ability to cause us to take actions under the merger agreement.

Merger Sub and NRG have agreed, subject to certain exceptions, to:

 

   

comply substantially with any additional requests for information, including requests for production of documents and production of witnesses for interviews or depositions, made by any antitrust authority and take all other reasonable actions to obtain clearance from antitrust authorities;

 

   

exercise their reasonable best efforts and cooperate with one another to prevent the entry in any proceeding brought by a governmental authority of an order that would prohibit, make unlawful or delay the consummation of the transactions contemplated by the NRG PSA, and, if such an order is entered, both parties have agreed to use reasonable best efforts to have such order lifted;

 

   

diligently pursue and use their reasonably best efforts to obtain all required consents of governmental authorities and cooperate with each other in seeking such consents;

 

   

make available the personnel and other resources of their respective organizations in order to obtain all such consents;

 

   

promptly inform the other party of any material communication received by such party from any governmental authority from which any required consent is required and of any material communication received or given in connection with any proceeding by a private party, in each case regarding the transactions contemplated by the NRG PSA, and consult with each other in advance of any meeting or conference with any such governmental authority or private party, and, to the extent permitted by such governmental authority or other person, give the other party the opportunity to attend and participate in such meetings and conferences.

NRG’s obligations include its acceptance of (i) the divestiture of any subsidiaries or assets of NRG or its affiliates (other than the Moss Landing Units 1 and 2 electric generating facilities in California currently owned by the Company, which we refer to as the Moss Landing Facility), (ii) any limitation on or condition on the manner in which NRG or any of its affiliates conduct their business and (iii) an agreement to hold any assets of NRG or its affiliates separate in any lawsuit or other legal proceeding, whether judicial or administrative and whether required by any applicable governmental authority, in connection with the transactions contemplated by the NRG PSA.

 

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NRG has also agreed to refrain from (i) acquiring or entering into an agreement to acquire any electric generation, transmission or distribution facilities, electric generation projects or inputs to electric power production or (ii) initiating development or entering into an agreement to develop any new electric generation projects, in each case, to the extent that such actions that would reasonably be expected to prevent or materially delay receipt of all governmental approvals which are necessary or advisable to consummate the transactions under the NRG PSA, provided that, subject to the previous paragraph, NRG will not be prohibited from continuing any existing development activities.

Merger Sub and NRG have also agreed not to take certain actions related to the acquisition of the Company by a third party, directly or indirectly, until the earliest to occur of (i) 270 days after the date the NRG PSA was signed, (ii) the consummation of an acquisition of the Company by a third party, and (iii) 90 days after the stockholder vote on the merger agreement.

Conditions to the NRG Sale

The respective obligations of Merger Sub and NRG to consummate the NRG sale are subject to the satisfaction or waiver of the following conditions:

 

   

the waiting period applicable to the closing of the NRG sale under the HSR Act has expired or been terminated and the following approvals have been obtained and such approvals have become final orders: (i) approval of the FERC under Section 203 of the Federal Power Act of 1935, as amended, (ii) notification to the CPUC and the CAISO and the expiration of any applicable notice period under CPUC General Order No. 167, (iii) approval of the FCC to transfer FCC radio licenses, and (iv) filing of updates in disclosure statements required by California Health and Safety Code Section 25112.5 by entities in California holding hazardous waste permits;

 

   

no governmental authority has adopted or imposed any order (whether temporary, preliminary or permanent) that remains in effect and prohibits, restrains, enjoins or renders illegal the closing of the NRG sale and no law is in effect prohibiting the closing of the NRG sale; and

 

   

the simultaneous closing of the merger with the closing of the NRG sale.

The conditions to the obligation of NRG to consummate the NRG sale are subject to the satisfaction or waiver by NRG at or prior to the closing of the NRG sale of the following additional conditions:

 

   

Merger Sub’s representations and warranties (i) regarding Merger Sub’s corporate power and authority, the enforceability of the NRG PSA against Merger Sub, the consents and filings required to close the NRG PSA, the absence of violations or conflicts and the absence of undisclosed broker’s or finder’s fees must be true and correct in all respects, (ii) regarding the organization of Merger Sub and the subsidiaries of the Company being sold to NRG must be true and correct in all respects, except for such inaccuracies with regard to organization that are de minimis relative to each respective section as a whole, (iii) otherwise regarding the Company, our subsidiaries selling the entities to be sold to NRG and the entities and assets to be sold to NRG that are qualified by reference to materiality or NRG PSA material adverse effect (as described above) are true and correct in all respects and (iv) otherwise regarding the Company, our subsidiaries selling the entities to be sold to NRG and the entities and assets to be sold to NRG that are not qualified by reference to materiality or NRG PSA material adverse effect are true and correct in all material respects;

 

   

Merger Sub has performed in all material respects its obligations under the NRG PSA at or prior to the closing of the NRG sale;

 

   

The absence of an NRG PSA material adverse effect occurring and continuing between the date of the NRG PSA and the date of the NRG sale closing (but only to the extent such NRG PSA material adverse effect would permit Merger Sub and its affiliates not to consummate the merger);

 

   

the absence of a total loss of the Moss Landing facility;

 

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Merger Sub has delivered to NRG a certificate signed by an authorized officer of Merger Sub certifying that all of the above conditions with respect to the representations and warranties and performance of the obligations of Merger Sub, the absence of an NRG PSA material adverse effect and the absence of a total loss of the Moss Landing facility have been satisfied;

 

   

Merger Sub has delivered or stands ready to deliver all of the items required to be delivered by Merger Sub under the NRG PSA, including the additional NRG agreements;

The conditions to the obligation of Merger Sub to consummate the NRG sale are subject to the satisfaction or waiver by Merger Sub at or prior to the closing of the NRG sale of the following additional conditions:

 

   

NRG’s representations and warranties must be true and correct in all respects except that NRG’s representations and warranties (i) regarding the organization of NRG must be true and correct except for such inaccuracies as are de minimis relative to that section as a whole and (ii) regarding availability of funding to NRG and NRG’s investment intent must be true and correct in all material respects;

 

   

NRG has performed in all material respects its obligations under the NRG PSA at or prior to the closing of the NRG sale;

 

   

NRG has delivered to Merger Sub a certificate signed by an authorized officer of NRG certifying that both of the above conditions with respect to the representations and warranties and performance of the obligations of NRG have been satisfied; and

 

   

NRG has delivered or stands ready to deliver all of the items required to be delivered by NRG under the NRG PSA, including the additional NRG agreements.

Termination

Merger Sub and NRG may terminate the NRG PSA by mutual written consent.

The NRG PSA may also be terminated and the NRG PSA abandoned at any time prior to the closing of the NRG sale as follows:

 

   

by either Merger Sub or NRG, if:

 

   

an order has become final and non-appealable and the party seeking to terminate has used its commercially reasonable efforts to seek relief from such order;

 

   

a law has been enacted or issued by any governmental authority which prohibits the consummation of the NRG sale; or

 

   

the NRG sale has not occurred or is not reasonably likely to be consummated by the termination date under the merger agreement and the party seeking to terminate has not breached the NRG PSA in a manner that has caused, or resulted in, the failure of the closing of the NRG sale to occur on or before such date;

 

   

by NRG, if there has been a material breach by Merger Sub of any covenant, agreement, representation or warranty contained in the NRG PSA, which breach has had an NRG PSA material adverse effect and which breach is not cured by the earlier of the date of the consummation of the merger and 30 days after notice of such breach has been received by Merger Sub; and

 

   

by Merger Sub, if:

 

   

there has been a material breach by NRG of any covenant, agreement, representation or warranty contained in the NRG PSA, which breach materially impairs NRG’s ability to consummate the NRG sale or to perform its material obligations under the NRG PSA and the additional NRG agreements, and which breach is not cured by the earlier of the date of the consummation of the merger or 30 days after notice of such breach has been received by NRG; or

 

   

the merger agreement has been terminated.

 

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Termination Fees

If the NRG PSA is terminated by Merger Sub due to the termination of the merger agreement and Merger Sub or any of its affiliates receives a termination fee from the Company, NRG is entitled to a pro rata share of such termination fee based on the total enterprise value of the transactions contemplated under the NRG PSA as compared to the total enterprise value of the transactions contemplated under the merger agreement. Furthermore, if Merger Sub or any of its affiliates receives a payment for its expenses from the Company pursuant to the Merger Agreement, NRG is entitled to reimbursement of its reasonable out-of-pocket expenses up to $2 million.

If, within 18 months of the termination of the NRG PSA, NRG or its affiliates acquires any of the entities contemplated to be sold pursuant to the NRG PSA or all or substantially all of the assets associated with any of the electric generating facilities to be sold under the NRG PSA, NRG must (i) reimburse Merger Sub the full amount of termination fees or reimbursement of expenses it received pursuant to the previous paragraph and (ii) pay Merger Sub an additional amount equal to 2% of the total enterprise value of the assets and liabilities acquired by NRG or its affiliates in such transaction or transactions.

Specific Performance

NRG and Merger Sub have agreed that each party to the NRG PSA is entitled to an injunction, specific performance and other equitable relief to prevent breaches of the NRG PSA and to enforce specifically the terms and provisions thereof. Prior to the closing of the NRG sale, specific performance is the sole and exclusive remedy of NRG and Merger Sub in respect of any breach or alleged breach thereunder.

For a description of the Company’s specific performance rights under the NRG PSA, see “—Enforcement Rights of the Company”.

 

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MARKET PRICE OF COMMON STOCK

Our common stock is listed for trading on the NYSE under the symbol “DYN”. The table below shows, for the periods indicated, the price range of our common stock, as reported by Bloomberg L.P. On May 21, 2010, the Company’s stockholders approved a reverse stock split of outstanding common stock at a ratio of 1-for-5. This reverse stock split was effected on May 25, 2010.

 

     Common Stock Price    Post-Reverse Stock
Split Equivalent
         High            Low        High    Low

2008

           

Quarter ended March 31

   $ 8.26    $ 6.44    $ 41.30    $ 32.20

Quarter ended June 30

   $ 9.64    $ 8.05    $ 48.20    $ 40.25

Quarter ended September 30

   $ 8.76    $ 3.20    $ 43.80    $ 16.00

Quarter ended December 31

   $ 4.06    $ 1.51    $ 20.30    $ 7.55

2009

           

Quarter ended March 31

   $ 2.69    $ 1.04    $ 13.45    $ 5.20

Quarter ended June 30

   $ 2.47    $ 1.45    $ 12.35    $ 7.25

Quarter ended September 30

   $ 2.55    $ 1.78    $ 12.75    $ 8.90

Quarter ended December 31

   $ 2.63    $ 1.81    $ 13.15    $ 9.05

2010

           

Quarter ended March 31

   $ 1.99    $ 1.22    $ 9.95    $ 6.10

Quarter ended June 30

   $ 6.80    $ 3.85      —        —  

Quarter ended September 30 (through August 16, 2010)

   $ 4.74    $ 2.78      —        —  

Quarter ending December 31

     —        —        —        —  

The closing price of our common stock on the NYSE on August 12, 2010, the last trading day prior to the public announcement of the execution of the merger agreement, was $2.78 per share of common stock. On [•], 2010, the most recent practicable date before this proxy statement was mailed to our stockholders, the closing price for our common stock on the NYSE was $[] per share of common stock. You are encouraged to obtain current market quotations for our common stock in connection with voting your shares of common stock.

The Company has not paid a dividend on its common stock since 2002, and the Company does not foresee a declaration of dividends on its common stock in the near term, particularly given the dividend restrictions in the Company’s current financing arrangements. Further, the terms of the merger agreement provide that, from the date of the merger agreement until the effective time of the merger, we may not declare, set aside, establish a record date for or pay any dividends on shares of our common stock without the consent of Parent.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the number of shares of Company common stock beneficially owned as of August 31, 2010, except as otherwise noted, by: (i) each director of the Company; (ii) our named executive officers, consisting of Mr. Williamson, Ms. Nichols, Mr. Blodgett, Mr. Lednicky and Mr. Cook; and (iii) all of our current directors and executive officers as a group; (iv) each person or entity the Company knows to beneficially own more than 5% of the outstanding shares of Company common stock:

 

   Number of Shares
Beneficially  Owned(1)
   Percent  of
Class(1)(2)
 
  

Directors**

     

David W. Biegler(3)

   30,429    *   

Thomas D. Clark Jr.(3)

   30,533    *   

Victor E. Grijalva(3)

   23,985    *   

Patricia A. Hammick(3)

   33,429    *   

Howard B. Sheppard(3)

   21,054    *   

William L. Trubeck(3)

   30,629    *   

Named Executive Officers**

     

Bruce A. Williamson

   1,475,845    1.2 %

Holli C. Nichols

   282,648    *  

J. Kevin Blodgett

   184,126    *  

Lynn A. Lednicky

   239,342    *  

Charles C. Cook

   168,829    *  

All Directors and Executive Officers as a group (11 persons)

   2,520,849    2.0 %

Other

     

UBS AG(9)
Bahnhofstrasse 45,
PO Box CH-8021,
Zurich, Switzerland

   14,330,921    11.9 %

Donald Smith & Co., Inc.(10)
152 W. 57th Street,
22nd Floor,
New York, NY 10019

   8,744,097    7.2 %

 

* Percentage ownership of less than one percent.
** The address of all our directors and named executive officers is the Company’s headquarters at 1000 Louisiana Street, Suite 5800, Houston, TX 77002.
(1) The number of shares are those beneficially owned, as determined under the rules of the SEC, and such information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which a person has sole or shared voting power or investment power and any shares which the person has the right to acquire within 60 days of August 31, 2010 through the exercise of any option, warrant or right, regardless of whether such arrangement is currently in the money, through conversion of any security or pursuant to the automatic termination of a power of attorney or revocation of a trust, discretionary account or similar arrangement. Except as otherwise indicated, each person and entity has the sole voting and investment power with respect to the shares set forth in the table.

 

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(2) Based upon 120,737,451 shares of common stock issued and outstanding at August 31, 2010.
(3) Amounts shown include the following number of shares of our common stock payable upon termination of service as a director, at the election of the director, with respect to certain phantom stock units awarded under the Dynegy Deferred Compensation Plan for Certain Directors: 27,833 shares payable to Mr. Clark; 28,429 shares payable to Messrs. Biegler and Trubeck and Ms. Hammick; 18,054 shares payable to Mr. Sheppard; and 20,985 shares payable to Mr. Grijalva. The amounts shown do not include certain stock units held by Mr. Clark and Ms. Hammick through our Deferred Compensation Plan which are payable, upon retirement, exclusively in cash and not in shares of common stock. For Mr. Sheppard, amount shown includes 3,000 shares held in a family trust.
(4) Amount shown includes 1,147,820 shares of common stock issuable upon the exercise of employee stock options held by Mr. Williamson and 132,501 shares of restricted common stock which vest upon closing of the merger. Amount shown also includes approximately 5,721 shares of common stock held by the Trustee of the Dynegy Inc. 401(k) Savings Plan, or the Dynegy 401(k) Plan, for the account of Mr. Williamson, based on the market value of units held by Mr. Williamson in the Dynegy 401(k) Plan’s Dynegy stock fund divided by the closing price of our common stock as of August 31, 2010. The amount shown does not include 318,584 phantom stock units held by Mr. Williamson through our Dynegy Inc. 2009 Phantom Stock Plan, or the Phantom Stock Plan, that are payable exclusively in cash and not in shares of common stock.
(5) Amount shown includes 230,554 shares of common stock issuable upon the exercise of employee stock options held by Ms. Nichols and 34,514 shares of restricted common stock which vest upon closing of the merger. Amount shown also includes approximately 6,460 shares of common stock held by the Trustee of the Dynegy 401(k) Plan for the account of Ms. Nichols, based on the market value of units held by Ms. Nichols in the Dynegy 401(k) Plan’s Dynegy stock fund divided by the closing price of our common stock as of August 31, 2010. The amount shown does not include 79,646 phantom stock units held by Ms. Nichols through our Phantom Stock Plan that are payable exclusively in cash and not in shares of common stock.
(6) Amount shown includes 148,099 shares of common stock issuable upon the exercise of employee stock options held by Mr. Blodgett and 25,852 shares of restricted common stock which vest upon closing of the merger. Amount shown also includes approximately 5,551 shares of common stock held by the Trustee of the Dynegy 401(k) Plan for the account of Mr. Blodgett, based on the market value of units held by Mr. Blodgett in the Dynegy 401(k) Plan’s Dynegy stock fund divided by the closing price of our common stock as of August 31, 2010. The amount shown does not include 59,236 phantom stock units held by Mr. Blodgett through our Phantom Stock Plan that are payable exclusively in cash and not in shares of common stock.
(7) Amount shown includes 196,769 shares of common stock issuable upon the exercise of employee stock options held by Mr. Lednicky and 25,123 shares of restricted common stock which vest upon closing of the merger. Amount shown also includes approximately 5,915 shares of common stock held by the Trustee of the Dynegy 401(k) Plan for the account of Mr. Lednicky, based on the market value of units held by Mr. Lednicky in the Dynegy 401(k) Plan’s Dynegy stock fund divided by the closing price of our common stock as of August 31, 2010. The amount shown does not include 59,236 phantom stock units held by Mr. Lednicky through our Phantom Stock Plan that are payable exclusively in cash and not in shares of common stock.
(8) Amount shown includes 134,607 shares of common stock issuable upon the exercise of employee stock options held by Mr. Cook and 26,681 shares of restricted common stock which vest upon closing of the merger. Amount shown also includes approximately 4,054 shares of common stock held by the Trustee of the Dynegy 401(k) Plan for the account of Mr. Cook, based on the market value of units held by Mr. Cook in the Dynegy 401(k) Plan’s Dynegy stock fund divided by the closing price of our common stock as of August 31, 2010. The amount shown does not include 55,752 phantom stock units held by Mr. Cook through our Phantom Stock Plan that are payable exclusively in cash and not in shares of common stock.
(9) For the benefit and on behalf of Global Asset Management (Americas), Inc. Based on its report on Schedule 13F, as filed August 10, 2010, reporting for the quarter ended June 30, 2010.
(10) Based on its report on Schedule 13F, as filed August 10, 2010, reporting for the quarter ended June 30, 2010.

 

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APPRAISAL RIGHTS

Under the DGCL, if you do not wish to accept the per share merger consideration provided for in the merger agreement, you have the right to seek appraisal of your shares of our common stock and to receive payment in cash for the fair value of your shares of common stock, exclusive of any element of value arising from the accomplishment or expectation of the merger, as determined by the Delaware Court of Chancery, together with interest, if any, to be paid upon the amount determined to be fair value. The “fair value” of your shares of our common stock as determined by the Delaware Court of Chancery may be more or less than, or the same as, the $4.50 per share that you are otherwise entitled to receive under the terms of the merger agreement. These rights are known as appraisal rights. The Company’s stockholders who elect to exercise appraisal rights must not vote in favor of the proposal to adopt the merger agreement and must comply with the provisions of Section 262 of the DGCL, in order to perfect their rights. Strict compliance with the statutory procedures in Section 262 is required. Failure to follow precisely any of the statutory requirements will result in the loss of your appraisal rights.

This section is intended as a brief summary of the material provisions of the Delaware statutory procedures that a stockholder must follow in order to seek and perfect appraisal rights. This summary, however, is not a complete statement of all applicable requirements, and is qualified in its entirety by reference to Section 262 of the DGCL, the full text of which appears in Annex D to this proxy statement. The following summary does not constitute any legal or other advice, nor does it constitute a recommendation that stockholders exercise their appraisal rights under Section 262.

Section 262 requires that where a merger agreement is to be submitted for adoption at a meeting of stockholders, the stockholders be notified that appraisal rights will be available not less than 20 days before the meeting to vote on the merger. A copy of Section 262 must be included with such notice. This proxy statement constitutes the Company’s notice to our stockholders that appraisal rights are available in connection with the merger, in compliance with the requirements of Section 262. If you wish to consider exercising your appraisal rights, you should carefully review the text of Section 262 contained in Annex D. Failure to comply timely and properly with the requirements of Section 262 will result in the loss of your appraisal rights under the DGCL.

If you elect to demand appraisal of your shares of our common stock, you must satisfy each of the following conditions: You must deliver to the Company a written demand for appraisal of your shares of our common stock before the vote is taken on the proposal to adopt the merger agreement, which must reasonably inform us of the identity of the holder of record of the Company’s common stock and that the stockholder intends thereby to demand appraisal of his, her or its shares of our common stock; and you must not vote or submit a proxy in favor of the proposal to adopt the merger agreement.

If you fail to comply with either of these conditions and the merger is completed, you will be entitled to receive payment for your shares of the Company’s common stock as provided for in the merger agreement, but you will have no appraisal rights with respect to your shares of the Company’s common stock. A holder of shares of the Company’s common stock wishing to exercise appraisal rights must hold of record the shares of common stock on the date the written demand for appraisal is made and must continue to hold the shares of our common stock of record through the effective time of the merger, because appraisal rights will be lost if the shares of our common stock are transferred prior to the effective time of the merger. Voting against or failing to vote for the proposal to adopt the merger agreement by itself does not constitute a demand for appraisal within the meaning of Section 262. A proxy that is submitted and does not contain voting instructions will, unless revoked, be voted in favor of the proposal to adopt the merger agreement, and it will constitute a waiver of the stockholder’s right of appraisal and will nullify any previously delivered written demand for appraisal. Therefore, a stockholder who submits a proxy and who wishes to exercise appraisal rights must either submit a proxy containing instructions to vote against the proposal to adopt the merger agreement or abstain from voting on the proposal to adopt the merger agreement. The written demand for appraisal must be in addition to and separate from any proxy or vote on the proposal to adopt the merger agreement.

 

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All demands for appraisal should be addressed to Dynegy Inc., Attention: Corporate Secretary, 1000 Louisiana Street, Suite 5800, Houston, Texas 77002, and must be delivered before the vote is taken on the proposal to adopt the merger agreement at the special meeting, and should be executed by, or on behalf of, the record holder of the shares of our common stock. The demand must reasonably inform the Company of the identity of the stockholder and the intention of the stockholder to demand appraisal of his, her or its shares of our common stock.

To be effective, a demand for appraisal by a stockholder of Company common stock must be made by, or in the name of, the record stockholder, fully and correctly, as the stockholder’s name appears on the stockholder’s stock certificate(s) or in the transfer agent’s records, in the case of uncertificated shares. The demand cannot be made by the beneficial owner if he or she does not also hold the shares of our common stock of record. The beneficial holder must, in such cases, have the registered owner, such as a bank, brokerage firm or other nominee, submit the required demand in respect of those shares of common stock. If you hold your shares of the Company’s common stock through a bank, brokerage firm or other nominee and you wish to exercise appraisal rights, you should consult with your bank, brokerage firm or the other nominee to determine the appropriate procedures for the making of a demand for appraisal by the nominee.

If shares of our common stock are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of a demand for appraisal should be made in that capacity. If the shares of our common stock are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or for all joint owners. An authorized agent, including an authorized agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, he or she is acting as agent for the record owner. A record owner, such as a bank, brokerage firm or other nominee, who holds shares of our common stock as a nominee for others, may exercise his or her right of appraisal with respect to the shares of our common stock held for one or more beneficial owners, while not exercising this right for other beneficial owners. In that case, the written demand should state the number of shares of our common stock as to which appraisal is sought. Where no number of shares of our common stock is expressly mentioned, the demand will be presumed to cover all shares of our common stock held in the name of the record owner.

Within ten days after the effective time of the merger, the surviving corporation must give notice of the date that the merger has become effective to each of the Company’s stockholders who has properly filed a written demand for appraisal and who did not vote in favor of the proposal to adopt the merger agreement. At any time within 60 days after the effective time of the merger, any stockholder who has not commenced an appraisal proceeding or joined a proceeding as a named party may withdraw the demand and accept the cash payment specified by the merger agreement for that stockholder’s shares of the Company’s common stock by delivering to the surviving corporation a written withdrawal of the demand for appraisal. However, any such attempt to withdraw the demand made more than 60 days after the effective time of the merger will require written approval of the surviving corporation. Unless the demand is properly withdrawn by the stockholder within 60 days after the effective date of the merger, no appraisal proceeding in the Delaware Court of Chancery will be dismissed as to any stockholder without the approval of the Delaware Court of Chancery, with such approval conditioned upon such terms as the Court deems just. If the surviving corporation does not approve a request to withdraw a demand for appraisal when that approval is required, or if the Delaware Court of Chancery does not approve the dismissal of an appraisal proceeding, the stockholder will be entitled to receive only the appraised value determined in any such appraisal proceeding, which value could be less than, equal to or more than the consideration offered pursuant to the merger agreement.

Within 120 days after the effective time of the merger, but not thereafter, either the surviving corporation or any stockholder who has complied with the requirements of Section 262 and is entitled to appraisal rights under Section 262 may commence an appraisal proceeding by filing a petition in the Delaware Court of Chancery demanding a determination of the value of the shares of our common stock held by all stockholders entitled to appraisal. Upon the filing of the petition by a stockholder, service of a copy of such petition will be made upon

 

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the surviving corporation. The surviving corporation has no obligation to file such a petition, and holders should not assume that the surviving corporation will file a petition. Accordingly, the failure of a stockholder to file such a petition within the period specified could nullify the stockholder’s previous written demand for appraisal. In addition, within 120 days after the effective time of the merger, any stockholder who has properly filed a written demand for appraisal and who did not vote in favor of the merger agreement, upon written request, will be entitled to receive from the surviving corporation, a statement setting forth the aggregate number of shares of our common stock not voted in favor of the merger agreement and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. The statement must be mailed to the stockholder within 10 days after such written request has been received by the surviving corporation. A person who is the beneficial owner of shares of the Company’s common stock held either in a voting trust or by a nominee on behalf of such person may, in such person’s own name, file a petition for appraisal or request from the surviving corporation such statement.

If a petition for appraisal is duly filed by a stockholder and a copy of the petition is delivered to the surviving corporation, then the surviving corporation will be obligated, within 20 days after receiving service of a copy of the petition, to file with the Delaware Register in Chancery a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares of our common stock and with whom agreements as to the value of their shares of our common stock have not been reached. After notice to stockholders who have demanded appraisal, if such notice is ordered by the Delaware Court of Chancery, the Delaware Court of Chancery is empowered to conduct a hearing upon the petition and to determine those stockholders who have complied with Section 262 and who have become entitled to the appraisal rights provided by Section 262. The Delaware Court of Chancery may require stockholders who have demanded an appraisal for their shares of our common stock to submit their stock certificates to the Register in Chancery for notation of the pendency of the appraisal proceedings; and if any stockholder fails to comply with that direction, the Delaware Court of Chancery may dismiss the proceedings as to that stockholder.

After determination of the stockholders entitled to appraisal of their shares of the Company’s common stock, the Delaware Court of Chancery will appraise the shares of common stock, determining their fair value as of the effective time of the merger after taking into account all relevant factors exclusive of any element of value arising from the accomplishment or expectation of the merger, together with interest, if any, to be paid upon the amount determined to be the fair value. When the value is determined, the Delaware Court of Chancery will direct the payment of such value together with interest, if any, upon surrender by those stockholders of the certificates representing their shares of our common stock. Unless the Court in its discretion determines otherwise for good cause shown, interest from the effective date of the merger through the date of payment of the judgment will be compounded quarterly and will accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective time of the merger and the date of payment of the judgment.

You should be aware that an investment banking opinion as to fairness from a financial point of view is not necessarily an opinion as to fair value under Section 262. Although we believe that the per share merger consideration is fair, no representation is made as to the outcome of an appraisal of fair value by the Delaware Court of Chancery and stockholders should recognize that such an appraisal could result in a determination of a value higher or lower than, or the same as, the per share merger consideration. Moreover, we reserve the right to assert, in any appraisal proceeding, that, for purposes of Section 262, the “fair value” of a share of our common stock is less than the per share merger consideration. In determining “fair value”, the Delaware Court is required to take into account all relevant factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court” should be considered and that “[f]air price obviously requires consideration of all relevant factors involving the value of a company”. The Delaware Supreme Court has stated that in making this determination of fair value the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts which could be

 

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ascertained as of the date of the merger which throw any light on future prospects of the merged corporation. Section 262 provides that fair value is to be “exclusive of any element of value arising from the accomplishment or expectation of the merger”. In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a “narrow exclusion [that] does not encompass known elements of value”, but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Delaware Supreme Court construed Section 262 to mean that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered”.

Costs of the appraisal proceeding (which do not include attorneys’ fees or the fees and expenses of experts) may be determined by the Delaware Court of Chancery and imposed upon the surviving corporation and the stockholders participating in the appraisal proceeding by the Delaware Court of Chancery, as it deems equitable in the circumstances. Upon the application of a stockholder, the Delaware Court of Chancery may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts used in the appraisal proceeding, to be charged pro rata against the value of all shares of our common stock entitled to appraisal. Any stockholder who demanded appraisal rights will not, after the effective time of the merger, be entitled to vote shares of our common stock subject to that demand for any purpose or to receive payments of dividends or any other distribution with respect to those shares of common stock, other than with respect to payment as of a record date prior to the effective time of the merger. However, if no petition for appraisal is filed within 120 days after the effective time of the merger, or if the stockholder otherwise fails to perfect, successfully withdraws or loses such holder’s right to appraisal, then the right of that stockholder to appraisal will cease and that stockholder will be entitled to receive the $4.50 per share cash payment (without interest) for his, her or its shares of our common stock pursuant to the merger agreement.

In view of the complexity of Section 262 of the DGCL, the Company’s stockholders who may wish to pursue appraisal rights should consult their legal and financial advisors.

DELISTING AND DEREGISTRATION OF COMMON STOCK

If the merger is completed, our common stock will be delisted from the NYSE and deregistered under the Exchange Act and we will no longer file periodic reports with the SEC on account of our common stock.

STOCKHOLDER PROPOSALS

If the merger is consummated, we will not have public stockholders and there will be no public participation in any future meeting of stockholders. However, if the merger is not completed, we expect to hold a 2011 annual meeting of stockholders next year. Under Rule 14a-8 promulgated under the Exchange Act, eligible stockholders may present proper proposals for inclusion in the Company’s proxy statement and proxy, and for consideration at the next annual meeting of its stockholders, by submitting their proposals to the Company in a timely manner. To be so included for the next annual meeting, stockholder proposals must be received by the Company no later than December 6, 2010, and must otherwise comply with the requirements of Rule 14a-8. Under Rule 14a-11 promulgated under the Exchange Act, eligible stockholders and eligible groups of stockholders may be permitted to properly nominate a limited number of directors for inclusion in the Company’s proxy statement and proxy, and for consideration at the next annual meeting of its stockholders, by submitting their nominations to the SEC and to the Company in a timely manner. To be so included for the next annual meeting, a notice filing on Schedule 14N must be made with the SEC and notice must be given to the Company not later than December 6, 2010 nor earlier than November 6, 2010. In addition, our bylaws establish an advance notice procedure with regard to certain matters, including stockholder proposals not included in the Company’s proxy statement, to be brought before an annual meeting of stockholders. To be timely, a stockholder’s notice must be submitted in

 

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writing to the secretary of the Company not later than the close of business on February 20, 2011 nor earlier than the close of business on January 21, 2011, regardless of the public announcement of the adjournment of that meeting to a later date; provided, however, that if the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder, to be timely, must be submitted not earlier than the close of business on the 120th day before such annual meeting and not later than the close of business on the later of (i) the 90th day before such annual meeting or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made.

 

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WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC public reference room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public at the SEC website at www.sec.gov. You also may obtain free copies of the documents we file with the SEC, including this proxy statement, by going to the Investors page of our corporate website at www.dynegy.com. Our website address is provided as an inactive textual reference only. The information provided on our website, other than copies of the documents listed below that have been filed with the SEC, is not part of this proxy statement, and therefore is not incorporated herein by reference.

Statements contained in this proxy statement, or in any document incorporated by reference in this proxy statement regarding the contents of any contract or other document, are not necessarily complete and each such statement is qualified in its entirety by reference to that contract or other document filed as an exhibit with the SEC. The SEC allows us to “incorporate by reference” into this proxy statement documents we file with the SEC. This means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this proxy statement, and later information that we file with the SEC will update and supersede that information. We incorporate by reference the documents listed below and any documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this proxy statement and before the date of the special meeting.

 

   

Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (filed with the SEC on February 25, 2010);

 

   

Quarterly Reports on Form 10-Q for the fiscal quarter ended June 30, 2010 (filed with the SEC on August 6, 2010); and for the fiscal quarter ended March 31, 2010 (filed with the SEC on May 10, 2010);

 

   

Current Reports on Form 8-K, as amended, filed with the SEC on August 25, 2010, August 24, 2010, August 19, 2010, August 13, 2010, August 6, 2010, May 25, 2010, May 10, 2010, March 5, 2010, February 25, 2010, February 2, 2010 and January 4, 2010; and

 

   

Definitive Proxy Statement for our 2010 Annual Meeting filed with the SEC on April 2, 2010.

Notwithstanding the foregoing, information furnished under Items 2.02 and 7.01 of any Current Report on Form 8-K, including the related exhibits, is not incorporated by reference into this proxy statement.

Any person, including any beneficial owner, to whom this proxy statement is delivered may request copies of proxy statements and any of the documents incorporated by reference in this document or other information concerning us, without charge, by written or telephonic request directed to Dynegy Inc., Attn: Investor Relations, 1000 Louisiana Street, Suite 5800, Houston, Texas 77002, Telephone 713-507-6466 (toll-free at 1-800-800-8220), on the Investors page of our corporate website at www.dynegy.com; or MacKenzie Partners, Inc., our proxy solicitor, toll-free at (800) 322-2885 or (212) 929-5500 (call collect), or dynegy@mackenziepartners.com; or from the SEC through the SEC website at the address provided above. Documents incorporated by reference are available without charge, excluding any exhibits to those documents unless the exhibit is specifically incorporated by reference into those documents.

 

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THIS PROXY STATEMENT DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH PROXY SOLICITATION IN THAT JURISDICTION. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT TO VOTE YOUR SHARES OF COMMON STOCK AT THE SPECIAL MEETING. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED [], 2010. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND THE MAILING OF THIS PROXY STATEMENT TO STOCKHOLDERS DOES NOT CREATE ANY IMPLICATION TO THE CONTRARY.

 

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Annex A

EXECUTION COPY

AGREEMENT AND PLAN OF MERGER

among

DYNEGY INC.,

DENALI PARENT INC.

and

DENALI MERGER SUB INC.

Dated as of August 13, 2010


Table of Contents

TABLE OF CONTENTS

 

          Page
ARTICLE I
THE MERGER; CLOSING; EFFECTIVE TIME
1.1.      The Merger    A-1
1.2.    Closing    A-1
1.3.    Effective Time    A-2
ARTICLE II
CERTIFICATE OF INCORPORATION AND
BYLAWS OF THE SURVIVING CORPORATION
2.1.    The Certificate of Incorporation    A-2
2.2.    The Bylaws    A-2
ARTICLE III
OFFICERS AND DIRECTORS
OF THE SURVIVING CORPORATION
3.1.    Directors    A-2
3.2.    Officers    A-2
ARTICLE IV
EFFECT OF THE MERGER ON CAPITAL STOCK;
EXCHANGE OF CERTIFICATES
4.1.    Effect on Capital Stock    A-3
4.2.    Exchange of Certificates    A-3
4.3.    Treatment of Stock Plans    A-6
4.4.    Adjustments to Prevent Dilution    A-7
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1.    Representations and Warranties of the Company    A-7
5.2.    Representations and Warranties of Parent and Merger Sub    A-25
ARTICLE VI
COVENANTS
6.1.    Interim Operations    A-29
6.2.    Acquisition Proposals; Go-Shop Period    A-33
6.3.    Proxy Filings; Information Supplied    A-37
6.4.    Stockholders Meeting    A-37
6.5.    Filings; Reasonable Best Efforts; Other Actions; Notification    A-37
6.6.    Access and Reports    A-40

 

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6.7.    Stock Exchange De-listing    A-41
6.8.    Publicity    A-41
6.9.    Employee Benefits    A-41
6.10.    Expenses    A-43
6.11.    Indemnification; Directors’ and Officers’ Insurance    A-43
6.12.    Takeover Statutes    A-44
6.13.    Parent Vote    A-44
6.14.    Financing    A-44
6.15.    Casualty    A-45
6.16.    Stockholder Litigation    A-45
6.17.    Dynegy Power Generation, LLC.    A-45
6.18.    Credit Agreement Matters    A-45
6.19.    FCPA Matters    A-45
ARTICLE VII
CONDITIONS
7.1.    Conditions to Each Party’s Obligation to Effect the Merger    A-46
7.2.    Conditions to Obligations of Parent and Merger Sub    A-46
7.3.    Conditions to Obligation of the Company    A-47
7.4.    Frustration of Closing Conditions    A-47
ARTICLE VIII
TERMINATION
8.1.    Termination by Mutual Consent    A-47
8.2.    Termination by Either Parent or the Company    A-47
8.3.    Termination by the Company    A-48
8.4.    Termination by Parent    A-48
8.5.    Effect of Termination and Abandonment    A-48
ARTICLE IX
MISCELLANEOUS AND GENERAL
9.1.    Survival    A-51
9.2.    Modification or Amendment    A-51
9.3.    Waiver of Conditions    A-51
9.4.    Counterparts    A-51
9.5.    GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL; SPECIFIC PERFORMANCE    A-52
9.6.    Notices    A-54
9.7.    Entire Agreement    A-54

 

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9.8.    No Third Party Beneficiaries    A-55
9.9.    Obligations of Parent and of the Company    A-55
9.10.    Transfer Taxes    A-55
9.11.    Definitions    A-55
9.12.    Severability    A-55
9.13.    Interpretation; Construction    A-56
9.14.    Assignment    A-56

 

Annex A    Defined Terms    A-58
Exhibit A    NRG PSA    Ex. A-1
Exhibit B    Form of Certificate of Incorporation of the Surviving Corporation    Ex. B-1

 

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AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER (hereinafter called this “Agreement”), dated as of August 13, 2010, among Dynegy Inc., a Delaware corporation (the “Company”), Denali Parent Inc., a Delaware corporation (“Parent”), and Denali Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub,” with the Company and Merger Sub sometimes being hereinafter collectively referred to as the “Constituent Corporations”).

RECITALS

WHEREAS, the respective boards of directors of each of Parent, Merger Sub and the Company have approved the merger of Merger Sub with and into the Company (the “Merger”) upon the terms and subject to the conditions set forth in this Agreement and have approved and declared advisable this Agreement and the transactions contemplated hereby;

WHEREAS, concurrently with the execution and delivery of this Agreement, Merger Sub is entering into a Purchase and Sale Agreement (the “NRG PSA”), a true and complete copy of which is attached hereto as Exhibit A, with NRG Energy, Inc., a Delaware corporation (“NRG”), pursuant to which, upon the terms and subject to the conditions set forth therein, at the Effective Time, NRG will purchase and assume, and Merger Sub will sell and assign, or cause to be sold and assigned (it being understood that it will be the Surviving Corporation actually doing so), 100% of the issued and outstanding membership interests of each of Dynegy Moss Landing, LLC, Dynegy Morro Bay, LLC, Dynegy Oakland, LLC and Casco Bay Energy Company, LLC, each a Delaware limited liability company and an indirect, wholly owned Subsidiary of the Company, and certain other assets of the Surviving Corporation (the “NRG Sale”);

WHEREAS, concurrently with the execution and delivery of this Agreement, and as a condition to the willingness of the Company to enter into this Agreement, Blackstone Capital Partners V L.P., a Delaware limited partnership (the “Guarantor”) is entering into a guarantee in favor of the Company pursuant to which the Guarantor is guaranteeing certain obligations of Parent and Merger Sub in connection with this Agreement; and

WHEREAS, the Company, Parent and Merger Sub desire to make certain representations, warranties, covenants and agreements in connection with this Agreement.

NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein, the parties hereto hereby agree as follows:

ARTICLE I

The Merger; Closing; Effective Time

1.1. The Merger. Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time, Merger Sub shall be merged with and into the Company in accordance with the provisions of the General Corporation Law of the State of Delaware (the “DGCL”) and the separate corporate existence of Merger Sub shall thereupon cease. The Company shall be the surviving corporation in the Merger (sometimes hereinafter referred to as the “Surviving Corporation”), and the separate corporate existence of the Company, with all its rights, privileges, immunities, powers and franchises, shall continue unaffected by the Merger, except as set forth in Article II. The Merger shall have the effects specified in the DGCL and in this Agreement.

1.2. Closing. Unless otherwise mutually agreed in writing between the Company and Parent, the closing of the Merger (the “Closing”) shall take place at the offices of Sullivan & Cromwell LLP, 125 Broad

 

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Street, New York, New York, at 9:00 a.m. (Eastern Time) on the third (3rd) business day following the day on which the last to be satisfied or waived of the conditions set forth in Article VII (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment or waiver of those conditions) shall be satisfied or waived in accordance with this Agreement; provided, however, if it does not become reasonably apparent to the parties hereto that such conditions are likely to be satisfied (other than the condition set forth in Section 7.1(a), which shall, for purposes of determining whether a condition is reasonably apparent to the parties to be satisfied under this proviso, be deemed to be satisfied at all times) as of a particular date until the date that is eight (8) calendar days or fewer prior to such anticipated satisfaction date, the Closing will occur on the later to occur of (a) such third (3rd) business day following the day on which the last to be satisfied or waived of the conditions set forth in Article VII (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment or waiver of those conditions) shall be satisfied or waived in accordance with this Agreement and (b) the eleventh (11th) calendar day (or, if such day is not a business day, the next business day) after it becomes reasonably apparent that such conditions are likely to be satisfied as of a particular date. The date on which the Closing actually occurs is referred to as the “Closing Date”. For purposes of this Agreement, the term “business day” shall mean any day ending at 11:59 p.m. (Eastern Time) other than a Saturday or Sunday or other day on which banks are required or authorized to close in the City of New York.

1.3. Effective Time. As soon as practicable following the Closing, the Company and Parent will cause a certificate of merger (the “Delaware Certificate of Merger”) to be executed, acknowledged and filed with the Secretary of State of the State of Delaware as provided in Section 251 of the DGCL. The Merger shall become effective at the time when the Delaware Certificate of Merger has been duly filed with the Secretary of State of the State of Delaware or at such later time as may be agreed by the parties in writing and specified in the Delaware Certificate of Merger (the “Effective Time”).

ARTICLE II

Certificate of Incorporation and

Bylaws of the Surviving Corporation

2.1. The Certificate of Incorporation. The certificate of incorporation of the Company shall be amended in connection with the completion of the Merger so as to read in its entirety as set forth in Exhibit B hereto and, as so amended, shall be the certificate of incorporation of the Surviving Corporation (the “Charter”), until duly amended as provided therein or by applicable Law (subject to Section 6.11(e)).

2.2. The Bylaws. The parties hereto shall take all actions necessary so that the bylaws of the Company in effect immediately prior to the Effective Time shall be the bylaws of the Surviving Corporation (the “Bylaws”), until thereafter amended as provided therein or by applicable Law (subject to Section 6.11(e)).

ARTICLE III

Officers and Directors

of the Surviving Corporation

3.1. Directors. The parties hereto shall take, or cause to be taken, all actions necessary so that the directors of Merger Sub immediately prior to the Effective Time shall, from and after the Effective Time, be the directors of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Charter and the Bylaws.

3.2. Officers. The officers of the Company at the Effective Time shall, from and after the Effective Time, be the officers of the Surviving Corporation until their successors shall have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Charter and the Bylaws.

 

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ARTICLE IV

Effect of the Merger on Capital Stock;

Exchange of Certificates

4.1. Effect on Capital Stock. At the Effective Time, as a result of the Merger and without any action on the part of the Company, the holder of any capital stock of the Company or the sole stockholder of Merger Sub:

(a) Merger Consideration. Each share of the common stock, par value $0.01 per share, of the Company (a “Share” or, collectively, the “Shares”) issued and outstanding immediately prior to the Effective Time (other than (i) Shares owned by Parent, Merger Sub or any other direct or indirect wholly owned Subsidiary of Parent and Shares owned by the Company or any direct or indirect wholly owned Subsidiary of the Company, and in each case not held on behalf of third parties (the “Affiliated Shares”), and (ii) Shares owned by stockholders (“Dissenting Stockholders”) who have perfected and not withdrawn a demand for, or lost their right to, appraisal pursuant to Section 262 of the DGCL with respect to such Shares (the “Dissenting Shares,” and together with the Affiliated Shares, the “Excluded Shares”)) shall be converted into the right to receive $4.50 per Share in cash (the “Per Share Merger Consideration”), without interest. Except as provided in Section 4.1(b), at the Effective Time, all of the Shares shall cease to be outstanding, shall be cancelled and shall cease to exist, and each certificate (a “Certificate”) formerly representing any of the Shares (other than Excluded Shares) shall thereafter represent only the right to receive the Per Share Merger Consideration for each such Share, without interest.

(b) Treatment of Excluded Shares. At the Effective Time, each Affiliated Share shall not represent the right to receive the Per Share Merger Consideration and shall convert into one share of a class of stock of the Surviving Corporation designated by Parent. Each Dissenting Share, by virtue of the Merger and without any action on the part of the holder thereof, shall cease to be outstanding, shall be cancelled without payment of any consideration therefor and shall cease to exist, subject to the right of the Record Holder of any Dissenting Shares to receive the payment for such Dissenting Shares pursuant to Section 4.2(g). As used in this Article IV, the term “Record Holder” means, with respect to any Shares, a Person who was, immediately prior to the Effective Time, the holder of record of such Shares.

(c) Merger Sub. At the Effective Time, each share of common stock, par value $0.01 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into one share of common stock, par value $0.01 per share, of the Surviving Corporation and each share of preferred stock, par value $0.01 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time, if any, shall be converted into the right to receive one share of preferred stock, par value $0.01 per share, of the Surviving Corporation with the same rights and preferences.

4.2. Exchange of Certificates.

(a) Paying Agent. At the Effective Time, Parent shall deposit, or cause to be deposited, with a paying agent selected by Parent with the Company’s prior approval (such approval not to be unreasonably withheld, conditioned or delayed) (the “Paying Agent”), for the benefit of the Record Holders of Shares, a cash amount in immediately available funds obtained pursuant to the Equity Financing necessary for the Paying Agent to make payments under Section 4.1(a) (such cash amount being hereinafter referred to as the “Exchange Fund”). The parties acknowledge and agree that, in accordance with the Equity Financing Commitment, the capitalization of Parent may be effected directly or indirectly through one or more affiliated entities or other designated co-investors of BCP (other than NRG or any of its Affiliates), including with debt financing to the extent available from lenders other than NRG or the Company or any of their respective Affiliates (it being understood that in connection with the Closing no credit support in connection with any such debt financing or capitalization of Parent will be provided by the Company or any of its Affiliates and that no new Indebtedness of the Company or any of its Subsidiaries, nor any assets of the Company or any of its Subsidiaries, may be used in the provision of funding to the Paying Agent for the Exchange Fund), and the Equity Financing shall be comprised of funds obtained pursuant to such capitalization. If a Dissenting Stockholder effectively withdraws its demand for, or

 

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loses its rights to, appraisal pursuant to Section 262 of the DGCL with respect to any Dissenting Shares, (i) such Shares shall cease to be Excluded Shares and (ii) Parent shall make available or cause to be made available to the Paying Agent additional funds in an amount equal to the product of (x) the number of Dissenting Shares for which such Dissenting Stockholder has withdrawn its demand for, or lost its rights to, appraisal pursuant to Section 262 of the DGCL and (y) the Per Share Merger Consideration. The Paying Agent shall invest the Exchange Fund as directed by Parent; provided that such investments shall be in obligations of or guaranteed by the United States of America, in commercial paper obligations rated A-1 or P-1 or better by Moody’s Investors Service, Inc. or Standard & Poor’s Corporation, respectively, or in money market funds having a rating in the highest investment category granted by a recognized credit rating agency at the time of investment. Any interest and other income resulting from such investment shall become a part of the Exchange Fund, and any amounts in excess of the aggregate amounts payable under Section 4.1(a) shall be returned to the Surviving Corporation in accordance with Section 4.2(e). To the extent that there are any losses with respect to any such investments, or the Exchange Fund diminishes for any reason below the level required for the Paying Agent to make prompt cash payment under Section 4.1(a), Parent shall, or shall cause the Surviving Corporation to, promptly replace or restore the cash in the Exchange Fund so as to ensure that the Exchange Fund is at all times maintained at a level sufficient for the Paying Agent to make such payments under Section 4.1(a).

(b) Exchange Procedures. Promptly (and in any event within two (2) business days), after the Effective Time, the Surviving Corporation shall cause the Paying Agent to mail to each Record Holder of Shares (other than Excluded Shares) (i) a letter of transmittal specifying that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates (or affidavits of loss in lieu thereof as provided in Section 4.2(f)) to the Paying Agent, such letter of transmittal to be in customary form and to have such other provisions as Parent and the Company may reasonably agree, and (ii) instructions for use in effecting the surrender of the Certificates (or affidavits of loss in lieu thereof as provided in Section 4.2(f)) in exchange for the amount to which such Record Holder is entitled as a result of the Merger pursuant to Section 4.1(a). If any Excluded Shares cease to be Excluded Shares pursuant to Section 4.2(a), the Surviving Corporation shall cause the Paying Agent promptly (and in any event within two (2) business days) after such Excluded Shares cease to be Excluded Shares to mail to the Record Holder of such Shares the letter of transmittal and instructions referred to in the immediately preceding sentence, with respect to such Shares. Upon delivery of such letter of transmittal by any Record Holder of Shares (other than Excluded Shares), duly completed and duly executed in accordance with its instructions and the surrender to the Paying Agent of a Certificate that immediately prior to the Effective Time represented such Shares (or affidavit of loss in lieu thereof as provided in Section 4.2(f)), the holder of such Certificate shall be entitled to receive in exchange therefor a cash amount in immediately available funds (after giving effect to any required Tax withholdings as provided in Section 4.2(h)) equal to the product of (x) the number of Shares represented by such Certificate (or affidavit of loss in lieu thereof as provided in Section 4.2(f)) and (y) the Per Share Merger Consideration, and the Certificate so surrendered shall forthwith be cancelled. No interest will be paid or accrued on any amount payable upon due surrender of the Certificates. In the event of a transfer of ownership of Shares that is not registered in the transfer records of the Company, a check for any cash to be delivered upon compliance with the procedures described above may be issued to the transferee if the applicable letter of transmittal is accompanied by all documents reasonably required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid or are not applicable.

(c) Special Payment Procedures for DTC. Prior to the Effective Time, Parent and the Company shall cooperate to establish procedures with the Paying Agent and the Depository Trust Company (“DTC”) to ensure that (i) if the Closing occurs at or prior to 11:30 a.m. (Eastern time) on the Closing Date, the Paying Agent will transmit to DTC or its nominee on the Closing Date an amount in cash in immediately available funds equal to the product of (x) the number of Shares held of record by DTC or such nominee immediately prior to the Effective Time and (y) the Per Share Merger Consideration (such amount, the “DTC Payment”), and (ii) if the Closing occurs after 11:30 a.m. (Eastern time) on the Closing Date, the Paying Agent will transmit to DTC or its nominee on the first (1 st) business day after the Closing Date an amount in cash in immediately available funds equal to the DTC Payment.

 

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(d) Transfers. From and after the Effective Time, there shall be no transfers on the stock transfer books of the Company of the Shares that were outstanding immediately prior to the Effective Time. If, after the Effective Time, any Certificate is presented to the Surviving Corporation, Parent or the Paying Agent for transfer, it shall be cancelled and exchanged for the cash amount in immediately available funds to which the holder thereof is entitled pursuant to this Article IV.

(e) Termination of Exchange Fund. Any portion of the Exchange Fund (including the proceeds of any investments thereof) that remains unclaimed by the Record Holders of the Shares for 180 days after the Effective Time shall be delivered to the Surviving Corporation upon demand. Any Record Holder of Shares (other than Excluded Shares) who has not theretofore complied with this Article IV shall thereafter look only to the Surviving Corporation for payment of the amount to which such Record Holder is entitled as a result of the Merger pursuant to Section 4.1(a) (after giving effect to any required Tax withholdings as provided in Section 4.2(h)) upon due surrender of its Certificates (or affidavits of loss in lieu thereof as provided in Section 4.2(f)), without any interest thereon. Notwithstanding the foregoing, none of the Surviving Corporation, Parent, the Paying Agent or any other Person shall be liable to any Person for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar Laws. Any amounts remaining unclaimed by Record Holders of Shares at such date as is immediately prior to the time at which such amounts would otherwise escheat to or become property of any Governmental Entity shall, to the extent permitted by applicable Law, become the property of the Surviving Corporation, free and clear of any claims or interests of any such holders or their successors, assigns or personal representatives previously entitled thereto. For the purposes of this Agreement, (i) the term “Person” shall mean any individual, corporation (including not-for-profit), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, Governmental Entity or other entity of any kind or nature (including any person as defined in Section 13(d)(3) of the Exchange Act), (ii) the term “Law” or “Laws” shall mean any domestic or foreign laws, statutes, ordinances, rules (including rules of common law), regulations, codes, Orders or legally enforceable requirements enacted, issued, adopted, or promulgated by any Governmental Entity and any judicial interpretation thereof and (iii) the term “Final Order” shall mean action by the relevant Governmental Entity which has not been reversed, stayed, enjoined, set aside, annulled or suspended, with respect to which any waiting period prescribed by Law before the transactions contemplated hereby may be consummated has expired, and as to which all conditions (other than conditions the satisfaction of which are within the control of a party) to the consummation of such transactions prescribed by Law have been satisfied.

(f) Lost, Stolen or Destroyed Certificates. In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if required by Parent, the posting by such Person of a bond in customary amount and upon such terms as may be required by Parent as indemnity against any claim that may be made against it or the Surviving Corporation with respect to such Certificate, the Paying Agent will issue a check in the amount (after giving effect to any required Tax withholdings as provided in Section 4.2(h)) equal to the product of (i) the number of Shares represented by such lost, stolen or destroyed Certificate and (ii) the Per Share Merger Consideration.

(g) Dissenting Shares. No Person who has perfected a demand for appraisal rights pursuant to Section 262 of the DGCL with respect to any Dissenting Shares shall be entitled to receive the Per Share Merger Consideration with respect to such Dissenting Shares unless and until such Person shall have effectively withdrawn its demand for, or lost its right to, appraisal under the DGCL with respect to such Dissenting Shares. Unless and until a Dissenting Stockholder shall have effectively withdrawn its demand for, or lost its right to, appraisal under the DGCL with respect to Dissenting Shares, each Dissenting Stockholder shall be entitled to receive only the payment provided by Section 262 of the DGCL with respect to such Dissenting Shares. The Company shall give Parent prompt notice of any written demands for appraisal, attempted withdrawals of such demands, and any other instruments served pursuant to applicable Laws that are received by the Company relating to stockholders’ rights of appraisal and shall give Parent the opportunity to participate in all negotiations and proceedings with respect thereto. The Company shall not, except with the prior written consent of Parent, voluntarily make any payment with respect to any demands for appraisal or offer to settle or settle any such demands.

 

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(h) Withholding Rights. Each of Parent, the Surviving Corporation and the Paying Agent shall be entitled to deduct and withhold from the consideration otherwise payable in respect of the Shares cancelled in the Merger such amounts as it is required to deduct and withhold with respect to the making of such payment under the Internal Revenue Code of 1986, as amended (the “Code”), or any other applicable state, local or foreign Tax Law. To the extent that amounts are so withheld by the Surviving Corporation, Parent or the Paying Agent, as the case may be, such withheld amounts (i) shall be remitted by the Surviving Corporation, Parent or the Paying Agent, as applicable, to the applicable Governmental Entity, and (ii) shall be treated for all purposes of this Agreement as having been paid to the Record Holder of Shares in respect of which such deduction and withholding was made by the Surviving Corporation, Parent or the Paying Agent, as the case may be.

4.3. Treatment of Stock Plans.

(a) Options. At the Effective Time, unless otherwise agreed by Parent and the applicable holder, each outstanding Company Stock Option (as defined in Section 5.1(b)), vested or unvested, shall be cancelled for no payment if such option has an exercise price greater than the Per Share Merger Consideration and, if such option exercise price is not greater than the Per Share Merger Consideration, shall only entitle the holder thereof to receive, as soon as reasonably practicable after the Effective Time (but in any event no later than three (3) business days after the Effective Time), an amount in cash equal to the product of (i) the total number of Shares subject to the Company Stock Option immediately prior to the Effective Time and (ii) the excess, if any, of the Per Share Merger Consideration over the exercise price per Share under such Company Stock Option, less applicable Taxes required to be withheld with respect to such payment.

(b) Restricted Shares. At the Effective Time, each outstanding share of Company Restricted Stock (as defined in Section 5.1(b)) shall only entitle the holder thereof to receive, as soon as reasonably practicable after the Effective Time, but in any event no later than the earlier of (i) the second payroll period or (ii) thirty (30) days following the Effective Time, pursuant to Section 4.1(a), an amount in cash, for each share of Company Restricted Stock, equal to the Per Share Merger Consideration, less applicable Taxes required to be withheld with respect to such payment.

(c) Phantom Stock Units. At the Effective Time, each outstanding Phantom Stock Unit (as defined in Section 5.1(b)) shall be cancelled and shall only entitle the holder thereof to receive, as soon as reasonably practicable after the Effective Time, but in any event no later than the earlier of (i) the second payroll period or (ii) thirty (30) days following the Effective Time, an amount in cash, for each Phantom Stock Unit, equal to the Per Share Merger Consideration, less applicable Taxes required to be withheld with respect to such payment.

(d) Performance Awards. At the Effective Time, (i) Company Performance Awards granted in 2009 and 2010 shall be payable at 100% of “target” (as defined in the applicable agreements for such awards), fully vested and settled for a payment of cash, as required by the terms of the agreements governing such Company Performance Awards and (ii) each outstanding Company Performance Award granted prior to 2009 shall be fully vested and canceled for no payment in accordance with the terms of the agreements governing such Company Performance Awards.

(e) Corporate Actions. Prior to the Effective Time, the Company, the Board of Directors of the Company and the Compensation and Human Resources Committee of the Board of Directors of the Company, as applicable, shall adopt resolutions and will take such other appropriate actions to implement the provisions of Sections 4.3(a), 4.3(b), 4.3(c) and 4.3(d). Prior to the Effective Time, the Company shall take all actions necessary to ensure that from and after the Effective Time neither Parent nor the Surviving Corporation will be required to deliver Shares or other capital stock of the Company to any Person pursuant to or in settlement of any Company Equity Awards.

(f) Vesting. The parties acknowledge and agree that each outstanding Company Stock Option, share of Company Restricted Stock and Phantom Stock Unit shall vest in full at the Effective Time.

 

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4.4. Adjustments to Prevent Dilution. In the event that the Company changes the number of Shares or securities convertible or exchangeable into or exercisable for Shares issued and outstanding prior to the Effective Time as a result of a reclassification, stock split (including a reverse stock split), stock dividend or distribution, recapitalization, merger, issuer tender or exchange offer, or other similar transaction, and not in violation of Section 6.1, the Per Share Merger Consideration shall be equitably adjusted to reflect such change and as so adjusted shall, from and after the date of such event, be the Per Share Merger Consideration.

ARTICLE V

Representations and Warranties

5.1. Representations and Warranties of the Company. Except as set forth in the Company SEC Reports filed after December 31, 2007 and prior to the date hereof (other than disclosures in the “Risk Factors” sections thereof or any such disclosures included in such filings that are cautionary, predictive or forward-looking in nature) (it being agreed that such disclosures shall not be exceptions to Sections 5.1(b)(i), 5.1(c) or 5.1(d)) or in the corresponding sections or subsections of the disclosure letter delivered to Parent by the Company prior to or simultaneously with entering into this Agreement (the “Company Disclosure Letter”) (it being agreed that disclosure of any item in any section or subsection of the Company Disclosure Letter shall be deemed disclosure with respect to any other section or subsection to which the relevance of such item is reasonably apparent); provided that no such disclosure shall be deemed to qualify Section 5.1(f)(i) or Section 6.1, as applicable, of the Company Disclosure Letter unless expressly set forth in Section 5.1(f)(i) or Section 6.1 of the Company Disclosure Letter or expressly cross-referenced, the Company hereby represents and warrants to Parent and Merger Sub that:

(a) Organization, Good Standing and Qualification. Each of the Company and its Subsidiaries is a legal entity duly organized, validly existing and in good standing (with respect to jurisdictions that recognize the concept of good standing) under the Laws of the jurisdiction of its organization and has all requisite corporate or similar power and authority to own, lease and operate its properties and assets and to carry on its business as presently conducted and is qualified to do business and is in good standing (with respect to jurisdictions that recognize the concept of good standing) as a foreign corporation or other legal entity in each jurisdiction where the ownership, leasing or operation of its assets or properties or the conduct of its business requires such qualification, except where any such failure to be so organized, validly existing, qualified, in good standing or to have such power or authority, would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. The Company has made available to Parent complete and correct copies of the Company’s and its Significant Subsidiaries’ certificates of incorporation and bylaws or comparable governing documents, each as amended to the date of this Agreement, and each as so made available is in full force and effect on the date of this Agreement. As used in this Agreement, the term:

(i) “Affiliate” means, when used with respect to any Person, any other Person who is an “affiliate” of that Person within the meaning of Rule 405 promulgated under the Securities Act of 1933 and the rules and regulations promulgated thereunder, as amended (the “Securities Act”);

(ii) “Subsidiary” means, with respect to any Person, any other Person of which at least a majority of the securities or other ownership interests having by their terms ordinary voting power to elect a majority of the board of directors or other persons performing similar functions is directly or indirectly owned or controlled by such Person and/or by one or more of its Subsidiaries;

(iii) “Significant Subsidiary” has the meaning set forth in Rule 1.02(w) of Regulation S-X promulgated pursuant to the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder, as amended (the “Exchange Act”); and

(iv) “Company Material Adverse Effect” means any event, effect, change, circumstance or occurrence, which, when considered individually or together with all other events, effects, changes, circumstances or

 

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occurrences, has a material adverse effect on the business, financial condition or results of operations of the Company and its Subsidiaries taken as a whole; provided, however, that none of the following, and no events, effects, changes, circumstances or occurrences, individually or in the aggregate, arising out of or resulting from the following, shall constitute or be taken into account in determining whether a “Company Material Adverse Effect” has occurred or may, would or could occur:

(A) changes, events, occurrences or effects generally affecting (1) the economy, credit, financial or capital markets, or political conditions, in the United States, including changes in interest and exchange rates or (2) the electric generation industry;

(B) changes in GAAP, regulatory accounting standards or Law or in the interpretation or enforcement thereof after the date of this Agreement;

(C) an act of terrorism or an outbreak or escalation of hostilities or war (whether or not declared) or any natural disasters (whether or not caused by any Person or any force majeure event) or any national or international calamity or crisis, other than any of the foregoing involving physical damage or destruction to or rendering physically unusable facilities or properties of the Company or any of its Subsidiaries;

(D) the execution, announcement or performance of obligations, covenants or agreements required by this Agreement or the NRG PSA or the consummation of the transactions contemplated by this Agreement or the NRG PSA (except with respect to the Company’s representation in Section 5.1(d)(ii)), including the impact thereof on relationships, contractual or otherwise, with customers, suppliers, distributors, partners, employees or regulators or any litigation arising from allegations of breach of fiduciary duty or violation of Law relating to this Agreement or the NRG PSA or the transactions contemplated by this Agreement or the NRG PSA;

(E) any decline in the market price, or change in trading volume, of any capital stock of the Company (provided that the exception in this clause shall not prevent or otherwise affect a determination that any event, change or occurrence underlying such decline has resulted in, or contributed to, a Company Material Adverse Effect);

(F) any change in the Company’s credit ratings (provided that the exception in this clause shall not prevent or otherwise affect a determination that any event, effect, change, circumstance or occurrence underlying such change has resulted in, or contributed to, a Company Material Adverse Effect);

(G) any actions taken by the Company or any of its Subsidiaries that are permitted by this Agreement to obtain approval or consent from any Governmental Entity in connection with the consummation of the Merger or the NRG Sale;

(H) any impact or effect on the rates that the Company or any Subsidiary of the Company may charge for electricity, energy, capacity and/or ancillary services or any other product or service subject to regulation by FERC as a result of the affiliation of the Company or such Subsidiary with Parent under applicable Law;

(I) any change resulting or arising from the identity of, or any facts or circumstances relating to, Parent, Merger Sub, NRG or their respective affiliates;

(J) any failure to meet any internal or public projections, forecasts or estimates of revenue, earnings, cash flow or cash position (provided that the exception in this clause shall not prevent or otherwise affect a determination that any event, effect, change, circumstance or occurrence underlying such failure has resulted in, or contributed to, a Company Material Adverse Effect);

(K) changes or developments in national, regional, state or local wholesale or retail markets or prices for electric power, capacity, emissions allowances, natural gas, fuel oil, coal, steel, concrete, water, fuel or the transportation of any of the foregoing, including those due to actions by competitors or due to changes in commodities prices or hedging markets therefor;

 

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(L) changes or developments in national, regional, state or local electric generating, transmission or distribution systems or natural gas transmission or distribution systems, other than changes or developments involving physical damage or destruction to or rendering physically unusable facilities or properties of the Company or any of its Subsidiaries; and

(M) any action taken by the Company or the Company’s Subsidiaries that is required by this Agreement or the NRG PSA or taken at Parent’s written request, or the failure to take any action by the Company or its Subsidiaries if that action is prohibited by this Agreement or the NRG PSA.

provided, however, that the events, effects, circumstances, changes and occurrences set forth in clauses (A), (B), (C), (K) and (L) above shall be taken into account in determining whether a “Company Material Adverse Effect” has occurred to the extent (but only to such extent) such changes have a disproportionate (taking into account the relative size of the Company and its Subsidiaries and their affected businesses as compared to the other participants in the industries in which the Company and its Subsidiaries conduct their business and such participants’ affected businesses) impact on the Company and its Subsidiaries, taken as a whole, relative to the other participants in the industries in which the Company and its Subsidiaries conduct their businesses.

(b) Capital Structure.

(i) The authorized capital stock of the Company consists of 420,000,000 Shares and 20,000,000 shares of preferred stock, par value $.01 per share (the “Preferred Shares”). As of August 10, 2010, (i) 120,655,013 Shares were issued and outstanding, of which 501,962 Shares were subject to forfeiture or repurchase under restricted stock awards and were granted under the Company Stock Plans (as defined below) or otherwise (“Company Restricted Stock”), (ii) none of the Preferred Shares were issued and outstanding, (iii) 627,607 Shares were held by the Company in its treasury, and (iv) 14,269,414 Shares were reserved and available for issuance pursuant to the Dynegy Inc. 2000 Long Term Incentive Plan, the Dynegy Inc. 2001 Non-Executive Stock Incentive Plan, the Dynegy Inc. 2002 Long Term Incentive Plan, the Dynegy Inc. 2010 Long Term Incentive Plan, the Dynegy Midwest Generation, Inc. 401(k) Savings Plan for Employees Covered under a Collective Bargaining Agreement (as amended and restated effective January 1, 2009), the Dynegy Midwest Generation, Inc. 401(k) Savings Plan (as amended and restated effective January 1, 2009), the Dynegy Inc. 401(k) Savings Plan (as amended and restated effective January 1, 2009), and the Dynegy Northeast Generation, Inc. Savings Incentive Plan (as amended and restated effective January 1, 2009) (collectively, the “Stock Plans”), of which 3,345,596 Shares were subject to outstanding options to purchase Shares (such outstanding options, together with any options to purchase Shares granted after August 10, 2010, under the Company Stock Plans or otherwise, the “Company Stock Options”). Except for those Shares reserved for issuance pursuant to the immediately preceding sentence, no Shares or Preferred Shares have been issued since the close of business on August 10, 2010 through the date hereof. In addition, as of August 10, 2010, there were 188,484 Performance Units outstanding representing the right to receive an aggregate payment of $18,848,400 in cash in accordance with the underlying terms and conditions of such awards (the “Company Performance Awards”). Furthermore, as of August 10, 2010, there were 3,387,884 outstanding phantom stock unit awards granted under the 2009 Phantom Stock Plan representing the right to receive an aggregate payment of $15,245,478 in cash in accordance with the underlying terms and conditions of such awards (such unit awards, together with any other phantom stock unit awards granted after August 10, 2010, the “Phantom Stock Units” and, together with the Company Restricted Stock, the Company Stock Options and the Company Performance Awards, the “Company Equity Awards”). The exercise price per Share under each Option was equal to or greater than the fair market value of a Share on the applicable grant date thereof. None of the Subsidiaries of the Company own any Shares. Except as set forth above in this Section 5.1(b)(i), there are no preemptive or other outstanding rights, options, warrants, conversion rights, stock appreciation rights, performance units, redemption rights, repurchase rights, agreements, arrangements, calls, commitments or rights of any kind that obligate the Company or any of its Significant Subsidiaries to issue or sell any shares of capital stock or other equity securities of the Company or any of its Significant Subsidiaries or any securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire, any equity

 

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securities of the Company or any of its Significant Subsidiaries, and no securities or obligations evidencing such rights are authorized, issued or outstanding.

(ii) Section 5.1(b)(ii) of the Company Disclosure Letter sets forth a list, as of the date hereof, of the Company’s Subsidiaries and entities (other than Subsidiaries) in which the Company or a Subsidiary of the Company owns a 5% or greater equity interest as of the date hereof (each, a “Company Joint Venture”). Each of the outstanding shares of capital stock or other equity securities of each of the Company’s Subsidiaries is duly authorized, validly issued, fully paid and non-assessable, except for such failures as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. The ownership interest of the Company in each Subsidiary and interest of the Company in each Company Joint Venture is owned by the Company or by a direct or indirect wholly owned Subsidiary of the Company, free and clear of any lien, charge, pledge, security interest, claim or other encumbrance (each, a “Lien”) except for transfer restrictions of general applicability as provided under the Securities Act and other applicable securities Laws. Neither the Company nor any of its Subsidiaries has entered into any commitment, arrangement or agreement, or is otherwise obligated, to contribute capital, loan money or otherwise provide funds or make additional investments in any other Person, other than any such commitment, arrangement or agreement (x) entered into in the ordinary course of business consistent with past practice, (y) with respect to wholly owned Subsidiaries of the Company or (z) pursuant to a Contract binding on the Company or any of its Subsidiaries previously made available to Parent or Merger Sub. For purposes of this Agreement, a wholly owned Subsidiary of the Company shall include any Subsidiary of the Company of which all of the shares of capital stock are owned by the Company (or a wholly owned Subsidiary of the Company).

(iii) Upon any issuance of any Shares in accordance with the terms of the Stock Plans, such Shares will be duly authorized, validly issued, fully paid and non-assessable. The Company does not have outstanding any bonds, debentures, notes or other obligations the holders of which have the right to vote (or convertible into or exercisable for securities having the right to vote) with the stockholders of the Company on any matter.

(iv) There are no stockholder agreements, voting trusts or other agreements or understandings to which the Company or any of its Subsidiaries is a party or by which it is bound relating to the voting or registration of any equity securities of the Company or any of its Subsidiaries.

(v) As of the date of this Agreement and except as set forth in Section 5.1(b)(v) of the Company Disclosure Letter, the Company and its Subsidiaries have no indebtedness for borrowed money (other than intercompany indebtedness), except for amounts outstanding under the Fifth Amended and Restated Credit Agreement, dated as of April 2, 2007, by and among Dynegy Holdings Inc., as borrower, Dynegy Inc. (formerly named Dynegy Acquisition, Inc.) and Dynegy Inc., as parent guarantors, the other guarantors party thereto, the lenders party thereto and various other parties thereto (the “Credit Agreement”). As of the date of this Agreement, there are no outstanding letters of credit, bankers’ acceptance financing or similar instruments issued for the benefit of the Company or any of its Subsidiaries, except for outstanding undrawn letters of credit that have been issued for the benefit of the Company and its Subsidiaries under the Credit Agreement. The only issuers of outstanding letters of credit under the Credit Agreement are JPMorgan Chase Bank, N.A., Citibank, N.A, Credit Suisse, Cayman Islands Branch and ABN AMRO BANK N.V.

(c) Corporate Authority; Approval and Fairness.

(i) The Company has all requisite corporate power and authority to enter into and has taken all corporate action necessary to execute and deliver this Agreement and, subject only to, assuming the representations and warranties of Parent and Merger Sub set forth in Section 5.2(i) are true and correct, adoption of this Agreement by the holders of a majority of the outstanding Shares entitled to vote on such matter at a stockholders’ meeting duly called and held for such purpose (the “Company Requisite Vote”), to perform its obligations under this Agreement and to consummate the transactions contemplated by this Agreement, including the Merger. This Agreement has been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery hereof by Parent and Merger Sub, constitutes a

 

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valid and binding obligation of the Company enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar Laws of general applicability relating to or affecting creditors’ rights and to general equity principles (the “Bankruptcy and Equity Exception”).

(ii) As of the date hereof, the Board of Directors of the Company has, by resolutions duly adopted at a meeting duly called and held, which resolutions have not been rescinded, modified or withdrawn as of the time of the execution and delivery of this Agreement, by vote of those directors present, (A) determined that the Merger is fair to, and in the best interests of, the Company and its stockholders, approved and declared advisable this Agreement and the Merger and the other transactions contemplated hereby, and has resolved, subject to Section 6.2, to recommend adoption of this Agreement and approval of the Merger to the holders of Shares (the “Company Recommendation”), (B) directed that this Agreement be submitted to the holders of Shares for their adoption at a stockholders’ meeting duly called and held for such purpose and (C) received the opinion of each of Goldman Sachs & Co. and Greenhill & Co., Inc., to the effect that, as of the date of such opinion, and based upon and subject to the factors and assumptions set forth therein, the Per Share Merger Consideration to be received in the Merger by holders of Shares is fair, from a financial point of view, to such holders. It is agreed and understood that such opinion is for the benefit of the Company’s Board of Directors and may not be relied on by Parent or Merger Sub.

(d) Governmental Filings; No Violations; Certain Contracts.

(i) Except for (i) compliance with, and filings under, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the “HSR Act”); (ii) compliance with, and filings under, the Exchange Act and the Securities Act, including the filing with the Securities and Exchange Commission (the “SEC”) of a proxy statement in definitive form relating to the Stockholders Meeting to be held in connection with this Agreement and the transactions contemplated hereunder (together with any amendments or supplements thereto, the “Proxy Statement”); (iii) compliance with state securities, takeover and “blue sky” Laws and the filing of documents with various state securities authorities that may be required in connection with the transactions contemplated hereby; (iv) the filing of an application to, and approval of, the Federal Energy Regulatory Commission (the “FERC”) under Section 203 of the Federal Power Act of 1935, as amended (the “FPA”); (v) the filing of the Certificate of Merger and other appropriate merger documents required by the DGCL with the Secretary of State of the State of Delaware; (vi) the filing of a petition to, and approval, or a determination that no approval is required, of the New York State Public Service Commission (“NYPSC”) under the New York Public Service Law, as amended; (vii) required pre-approvals (the “FCC Pre-Approvals”) of license transfers with the Federal Communications Commission (the “FCC”); (viii) compliance with the applicable requirements of the New York Stock Exchange (the “NYSE”); (ix) such other items as disclosed in Section 5.1(d)(i) of the Company Disclosure Letter; and (x) filings and notices required as a result of facts and circumstances attributable to Parent or Merger Sub (the items set forth above in clauses (i) throug