SHAREHOLDER AGREEMENT

Exhibit 4.1

SHAREHOLDER AGREEMENT

among

DYNEGY ACQUISITION, INC.

and

LS POWER PARTNERS, L.P.,

LS POWER ASSOCIATES, L.P.,

LS POWER EQUITY PARTNERS, L.P.,

LS POWER EQUITY PARTNERS PIE I, L.P.

and

LSP GEN INVESTORS, L.P.

Dated as of September 14, 2006

TABLE OF CONTENTS

SHAREHOLDER AGREEMENT, dated as of September 14, 2006 (this “ Agreement ”), among DYNEGY ACQUISITION, INC., a Delaware corporation (“ New Dynegy ”), and LS POWER PARTNERS, L.P., LS POWER ASSOCIATES, L.P., LS POWER EQUITY PARTNERS, L.P., LS POWER EQUITY PARTNERS PIE I, L.P. and LSP GEN INVESTORS, L.P. (each, an “ Initial Shareholder ” and collectively, the “ Initial Shareholders ”).

WHEREAS, the Initial Shareholders, New Dynegy and other parties thereto have entered into a Plan of Merger, Contribution and Sale Agreement dated September 14, 2006 (the “ Merger Agreement ”), pursuant to which New Dynegy agreed, among other things, to acquire (i) all of the Shareholders’ ownership interests in entities that own certain power generating facilities and (ii) 50% of the ownership interest in an entity that owns certain development projects, each as specified in the Merger Agreement (the “ Acquisition ”) in exchange for, among other things, the issuance to the Shareholders of the number of Class B Shares (as defined below) specified in the Merger Agreement.

WHEREAS, in connection with the Merger Agreement and the Acquisition, the Shareholders and New Dynegy agreed to enter into this Agreement in order to set forth certain agreements relating to the ownership by the Shareholders of the Class B Shares.

NOW, THEREFORE, in consideration of the premises and the mutual and independent covenants hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I

Definitions

SECTION 1.01. Definitions. As used in this Agreement, each of the following capitalized terms is defined as follows:

“ Acquisition ” has the meaning specified in the recitals to this Agreement.

“ Affiliate ” means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, another Person; provided , however , that for purposes of this Agreement (a) none of New Dynegy or any of its subsidiaries shall be deemed an Affiliate of any Shareholder, (b) none of the Class B Directors shall be deemed an Affiliate of New Dynegy or any of its subsidiaries and (c) Luminus shall not be deemed an Affiliate of any Shareholder. For purposes of this definition “ control ” means, as to any Person, the sole power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. The term “ controlled ” has a correlative meaning.

“ Agreement ” has the meaning specified in the preamble to this Agreement.

“ Associate ”, when used in connection with any Person, means (a) any corporation, partnership, unincorporated association or other entity of which such Person is a

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director, officer or partner or is, directly or indirectly, the owner of greater than or equal to 20% of any class of voting stock, (b) any trust or other estate in which such Person has greater than or equal to 20% of the total beneficial interest, or of which such Person serves as a trustee or in a similar fiduciary capacity, (c) any relative or spouse of such Person, or any relative of the spouse of such Person, who has the same residence as such Person and (d) any heirs, executors, administrators, testamentary trustees, legatees or beneficiaries of such Person and any trust for the benefit of the heirs of such Person. Notwithstanding the foregoing, Luminus shall at no time be an Associate of any Shareholder.

“ Auction ” means a sale process for 100% of the total combined voting power of the outstanding voting securities of New Dynegy conducted by an investment banking firm of national reputation selected by New Dynegy and reasonably acceptable to the Shareholders Representative. Without limiting the generality of the foregoing, an Auction may include either (a) a broad or narrow solicitation of interest and may or may not involve multiple rounds of bidding as determined by the Board or a committee thereof and/or (b) any recapitalization, combination, reverse merger or other similar transaction.

“ Beneficially Own ” has the meaning referred to in Rule 13d-3 of the Exchange Act as in effect on the date hereof.

“ Board ” means the board of directors of New Dynegy.

“ Change of Control ” means the LS Holders ceasing to have direct or indirect control over holders of a majority of the Class B Shares then outstanding. For purposes of this definition “ control ” means, as to any Person, the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.

“ Class A Director ” means any Director that is not a Class B Director.

“ Class A Shares ” means shares of New Dynegy’s Class A Common Stock, par value $0.01.

“ Class B Director ” means any Director elected by a class vote of holders of the Class B Shares pursuant to New Dynegy’s Certificate of Incorporation.

“ Class B Shares ” means shares of New Dynegy’s Class B Common Stock, par value $0.01.

“ Closing Date ” has the meaning assigned thereto in the Merger Agreement.

“ Common Stock ” means Class A Shares, Class B Shares and/or any other class of common stock of New Dynegy that may be issued after the Closing Date.

“ Controlled Affiliate ” means, as to any Person (the “ Controlling Person ”), (a) any Affiliate that is consolidated with the financial statements of such Controlling Person, (b) any Affiliate in which the Controlling Person holds greater than or equal to 50% of the total combined voting power of its outstanding voting securities and (c) with respect to any specific

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matter, any Affiliate over which the Controlling Person has the power (by contract or otherwise) to prevent such entity from pursuing such matter (except that, for purposes of Section 3.02, the Controlled Affiliates of New Dynegy shall not include any such Person over which the Shareholder Control Group also has the power (by contract or otherwise) to prevent such entity from pursuing such matter).

“ direct ownership ” means ownership by an owner but excluding any such ownership with or through Associates and Affiliates of such owner. The terms “ directly own ” and “ directly owned ” have correlative meanings.

“ Director ” means a member of the Board.

“ Distribution ” has the meaning specified in Section 2.02(b).

“ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

“ Governmental Authority ” means any governmental or regulatory authority or agency.

“ Group ” has the meaning specified in Section 13(d)(3) of the Exchange Act as in effect on the date hereof.

“ Initial Shareholder ” and “ Initial Shareholders ” have the meanings specified in the preamble to this Agreement.

“ Lock-Up Period ” means the period from the Closing Date to the earliest of (a) the second anniversary of the Closing Date, (b) the date the Shareholders cease to collectively own Class B Shares representing greater than or equal to 15% of the total combined voting power of New Dynegy’s outstanding voting securities and (c) the occurrence of a Third Party Offer Termination Event.

“ LS Holders ” means (a) Persons holding equity interests in LS Power Development, LLC as of the date hereof (the “ Initial Persons ”), (b) any Controlled Affiliate of any such Initial Person, (c) any relative or spouse of any such Initial Person or any relative of the spouse of any such Initial Person, in each case having the same residence as such Initial Person and (d) any heirs, executors, administrators, testamentary trustees, legatees or beneficiaries of any such Initial Person and any trust for the benefit of the heirs of any such Initial Person, and, upon the death or disability of such Initial Person, any Controlled Affiliate of any such heirs, executors, administrators, testamentary trustees, legatees or beneficiaries.

“ LS Standstill Cap ” means the percentage of New Dynegy’s total outstanding Common Stock determined by dividing (a) 340,000,000 with (b) the total number of Class A Shares and Class B Shares outstanding as of the Effective Time (as defined in the Merger Agreement); provided , however , that such percentage shall be permanently reduced following any sale of Class B Shares that is not a Widely Dispersed Sale by a number equal to the percentage of New Dynegy’s total outstanding Common Stock that the applicable Person acquires in such sale in excess of the percentages that would have made such sale a Widely Dispersed Sale as set forth in the definition thereof. For purposes of the foregoing proviso, Transfers to Permitted Transferees and Distributions shall be deemed Widely Dispersed Sales.

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“ Luminus ” means, collectively, Luminus Management, LLC, its Controlled Affiliates and any of the assets or funds that they manage.

“ Merger Agreement ” has the meaning specified in the recitals to this Agreement.

“ New Dynegy ” has the meaning specified in the preamble to this Agreement.

“ owner ”, with respect to any stock or other equity interest, means a Person that individually or with or through any of its Affiliates or Associates:

(a) owns beneficially such stock or equity interest, whether directly or indirectly;

(b) has (i) the right to acquire such stock or equity interest (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; provided , however , that for purposes of this clause (b)(i) a Person shall be deemed the owner of stock or other equity interest tendered by other parties pursuant to a tender or exchange offer made by such Person or any of such Person’s Affiliates or Associates only when such tendered stock or equity interest is accepted for purchase or exchange by such Person or such Affiliate or Associate of such Person; or (ii) the right to vote such stock or equity interest pursuant to any agreement, arrangement or understanding; provided , however , that for purposes of this clause (b)(ii) a Person shall not be deemed the owner of any stock or equity interest if the agreement, arrangement or understanding to vote such stock or equity interest arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to 10 or more Persons; or

(c) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except as pursuant to a revocable proxy or consent as described in clause (b)(ii) above), or disposing of such stock or equity interest with any other Person that owns beneficially, or whose Affiliates or Associates own beneficially, directly or indirectly, such stock or equity interest.

The terms “ own ” and “ owned ” have correlative meanings.

“ Permitted Transferee ” means any Initial Shareholder and (a) any Affiliate (on the date hereof) of any Initial Shareholder and (b) any director, officer or employee (with a title of “manager” or higher) of any Shareholder or of any Affiliate (on the date hereof) of any Shareholder. Notwithstanding the foregoing, at no time shall Luminus be deemed a Permitted Transferee.

“ Person ” means a natural person, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including a Governmental Authority.

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“ Public Sale ” means (a) an underwritten public offering of Class B Shares (or other securities of New Dynegy into which such Class B Shares may convert) pursuant to an effective registration statement under the Securities Act or (b) a bona fide public sale of Class B Shares (or other securities of New Dynegy into which such Class B Shares may convert) in an open market transaction through a broker, dealer or market maker under Rule 144 (or any successor rule thereto) of the Securities Act.

“ Qualified Offer ” means a written offer to New Dynegy, by the Shareholders Representative on behalf of the Shareholders, to acquire all, but not less than all, the outstanding voting securities of New Dynegy for consideration consisting solely of cash or freely tradable securities listed on a national securities exchange or the Nasdaq Stock Market (or successors thereto), which offer is accompanied by a fairness opinion relating to such offer from an investment banking firm of national reputation.

“ SEC ” means the Securities and Exchange Commission or any successor organization.

“ Securities Act ” means the Securities Act of 1933, as amended.

“ Shareholder ” means each Initial Shareholder and (a) each Shareholder Control Group member that becomes party to this Agreement pursuant to Section 6.04 and (b) each Permitted Transferee that becomes party to this Agreement pursuant to Section 8.17.

“ Shareholder Control Group ” means, at any time, (a) any Person, combination of Persons or Group that owns Class B Shares representing greater than or equal to 10% of New Dynegy’s total outstanding Common Stock at such time, together with all of the Affiliates and Associates of such Person or of any member of any such combination or Group, and (b) any Permitted Transferee; provided , however , that notwithstanding the foregoing, Luminus shall at no time be a member of the Shareholder Control Group.

“ Shareholders Representative ” has the meaning specified in Section 7.01(a).

“ Significant Transaction ” means any sale, merger, share exchange, acquisition (including by way of tender offer or exchange offer), consolidation, dissolution, recapitalization or other business combination involving New Dynegy or any of its subsidiaries pursuant to which more than 25% of the voting securities of New Dynegy or more than 25% of the consolidated total assets of New Dynegy would be acquired or received by any Person (other than New Dynegy or its subsidiaries).

“ Third Party Offer Termination Event ” means (a) the Board recommends (over the objection of all Class B Directors present at the meeting during which such Significant Transaction is being voted on) a Significant Transaction by, or a Significant Transaction is consummated with, a Person other than a member of the Shareholder Control Group, Luminus or any Person acting on behalf of or in concert with any member of the Shareholder Control Group or Luminus, or (b) a Person (other than a member of the Shareholder Control Group, acting in compliance with this Agreement) makes a bona fide public offer to enter into a Significant Transaction and (i) such offer is recommended by the Board over the objection of all Class B Directors present at the meeting during which such offer is being voted on, (ii) such offer is not

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rejected by the Board within 10 business days of public disclosure thereof or (iii) such Person commences a tender offer for more than 25% of the voting securities of New Dynegy, where (A) the Shareholders Representative, on behalf of the Shareholders, has publicly stated that no Class B Shares will be tendered in connection with such tender offer, (B) such offer is not conditioned upon an event or state of facts within the control of the Shareholder Control Group or Luminus and (C) such offer has not been terminated or withdrawn within 15 business days of commencement.

“ Total Standstill Cap ” means LS Standstill Cap plus 1%.

“ Transfer ” means (a) when used as a noun, any direct or indirect transfer, sale, assignment, conveyance, pledge, hypothecation, encumbrance or other disposition; and (b) when used as a verb, to directly or indirectly transfer, sell, assign, convey, pledge, hypothecate, encumber or otherwise dispose of. The term “ Transferable ” and “ Transferee ” have correlative meanings.

“ Widely Dispersed Sale ” means (a) any Transfer of Common Stock (i) in which no Person, together with its Affiliates, acquires Class B Shares representing greater than 3% of New Dynegy’s total outstanding Common Stock at such time and (ii) immediately following which no Person, together with its Affiliates, would Beneficially Own more than 5% of New Dynegy’s total outstanding Common Stock after giving effect to such Transfer (in the case of a Transfer made through the New York Stock Exchange, as determined by reference to the relevant Schedule 13D and/or 13G filings publicly available with the SEC as of the date of such Transfer), or (b) any Public Sale.

ARTICLE II

Limitations on Acquisitions and Transfers

SECTION 2.01. Limitations on Certain Acquisitions by Shareholders. (a) Except as otherwise expressly provided for in this Section 2.01 or Article V, the Shareholders shall not, shall cause Luminus to not, and shall use their reasonable best efforts to cause the members of the Shareholder Control Group to not, acquire by purchase or otherwise, or solicit the acquisition of, any equity securities of New Dynegy, without the prior consent of the Board; provided , however , that (i) a member of the Shareholder Control Group may acquire equity securities of New Dynegy if, after giving effect to such acquisition, (A) members of the Shareholder Control Group do not collectively own Common Stock (excluding Common Stock received by members of the Shareholder Control Group pursuant to director or employee compensation plans) representing greater than the LS Standstill Cap and (B) members of the Shareholder Control Group, together with Luminus, do not collectively own Common Stock (excluding Common Stock received by members of the Shareholder Control Group pursuant to director or employee compensation plans) representing greater than the Total Standstill Cap and (ii) subject to the provisions of clause (i) above, (A) at any time when members of the Shareholder Control Group collectively own Class B Shares (excluding Class B Shares received by members of the Shareholder Control Group pursuant to director or employee compensation plans) representing greater than or equal to 30% of New Dynegy’s outstanding Common Stock, Luminus may acquire equity securities of New Dynegy if, after giving effect to such

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acquisition, Luminus does not own Common Stock of New Dynegy that represents in the aggregate more than 1% of New Dynegy’s total outstanding Common Stock at such time and (B) at any time when members of the Shareholder Control Group collectively own Class B Shares (excluding Class B Shares received by members of the Shareholder Control Group pursuant to director or employee compensation plans) representing less than 30%, but greater than or equal to 10%, of New Dynegy’s total outstanding Common Stock, Luminus may acquire equity securities of New Dynegy if, after giving effect to such acquisition, Luminus does not own Common Stock of New Dynegy that represents in the aggregate more than 5% of New Dynegy’s outstanding Common Stock at such time.

(b) (i) Following the expiration of the Lock-Up Period, the Shareholders Representative, on behalf of the Shareholders, shall have the right to make one or more Qualified Offers in accordance with the terms of this Agreement. In connection with a Qualified Offer, New Dynegy shall accept or reject such Qualified Offer in writing as promptly as practicable after receipt thereof. If New Dynegy does not accept such Qualified Offer in writing within 30 days after receipt thereof, such Qualified Offer shall be deemed rejected. If a Qualified Offer is rejected, New Dynegy shall, upon the request of the Shareholders Representative, on behalf of the Shareholders, made within five business days following such rejection, (A) conduct an Auction in which the Shareholders may participate, but shall have no special priority or other rights vis-à-vis other bidders, (B) conduct an Auction in which no member of the Shareholder Control Group or Luminus or the Controlled Affiliates of any such Person may participate, but at the successful conclusion of which the Shareholders shall have the right to acquire all, but not less than all, the outstanding voting securities of New Dynegy at a cash purchase price per share equal to 105% of the purchase price per share set forth in the bid selected by the Board, or (C) continue in its ordinary course of business without giving effect to the rejected Qualified Offer. Any Auction conducted pursuant to this Section 2.01(b) shall be completed within 120 days after New Dynegy receives the relevant Qualified Offer, and the corresponding sale shall close within 60 days after the completion of such Auction.

(ii) New Dynegy shall immediately notify the Shareholders Representative in writing, upon the conclusion of an Auction conducted pursuant to Section 2.01(b)(i)(B), which notice shall include the identity of the winning bidder and the purchase price per share set forth in the winning bid. If the Shareholders Representative, on behalf of the Shareholders, elects to acquire all, but not less than all, the outstanding voting securities of New Dynegy following the successful conclusion of an Auction conducted pursuant to Section 2.01(b)(i)(B), the Shareholders Representative shall deliver a written notice of such election for such acquisition to New Dynegy within 10 days of the conclusion of the relevant Auction. The Board shall promptly approve such acquisition by the Shareholders and, within 10 days of the date of the written notice from the Shareholders Representative, New Dynegy shall execute and enter into a definitive agreement with the Shareholders with respect to such acquisition. Such definitive agreement shall include customary terms and conditions, including (A) a termination fee payable upon termination of such definitive agreement (or customary “tail” provision) equal to 5% of the aggregate value of New Dynegy, based on the per share value payable by the Shareholders under such agreement multiplied by the number of shares of Common Stock outstanding at such time and (B) the right of New Dynegy to terminate the transaction and pay such termination fee to the Shareholders if the Board determines that it is necessary for New Dynegy to terminate the transaction in order for the Board to properly discharge its fiduciary duties. Failure to deliver the

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notice referred to in the second sentence of this clause (ii) shall be deemed to be an election by the Shareholder Representative, on behalf of the Shareholders, to not acquire all, and not less than all, the outstanding voting securities of New Dynegy.

(iii) If the Shareholders are not the winning bidder in an Auction conducted pursuant to Section 2.01(b)(i)(A) and that is successfully concluded, or do not provide notice of their election to purchase all, but not less than all, the outstanding voting securities of New Dynegy at the successful conclusion of an Auction conducted pursuant to Section 2.01(b)(i)(B), the Shareholders agree that, except as set forth in Section 2.01(b)(v), they shall vote their Class B Shares in favor of the successful bidder’s transaction and not exercise dissenter’s rights, shall tender their shares (in the event of a tender offer), and shall otherwise reasonably cooperate in consummating the transaction.

(iv) If the Shareholders Representative, on behalf of the Shareholders, elects to proceed with an Auction under Section 2.01(b)(i)(A) or 2.01(b)(i)(B), and the Auction is not successfully concluded within 120 days after New Dynegy receives the relevant Qualified Offer, the Shareholders may either (A) proceed with their Qualified Offer (which may take the form of a tender offer or exchange offer) and close such transaction within 60 days thereafter or (B) reinitiate the Auction process by submitting a new Qualified Offer.

(v) If (A) following the successful conclusion of an Auction the corresponding sale does not close within 60 days thereafter, (B) New Dynegy fails to enter into a definitive agreement with the Shareholders for the acquisition of all the outstanding voting securities of New Dynegy in accordance with Section 2.01(b)(ii), or (C) New Dynegy terminates any definitive agreement entered into with the Shareholders pursuant to Section 2.01(b)(ii) as a result of a Board determination that it is necessary for New Dynegy to terminate the transaction in order for the Board to properly discharge its fiduciary duties, the Shareholders shall have no obligation to vote in favor of any other transaction or tender their shares to any other third party, and may, in their discretion, proceed with a tender or exchange offer for all, but not less than all, the outstanding voting securities of New Dynegy not directly owned by the Shareholders, at such price as the Shareholders shall choose irrespective of any other provisions of this Agreement. The Shareholders shall in addition be free to pursue any other rights and remedies which they may then have against New Dynegy.

(vi) New Dynegy and each of the Shareholders agree that the purchase price set forth in any Qualified Offer is highly confidential and, as such, New Dynegy and each of the Shareholders shall not (and New Dynegy shall cause each of New Dynegy’s Controlled Affiliates to not, and the Shareholders shall cause each member of the Shareholder Control Group and its Controlled Affiliates and Luminus to not), to the extent legally permissible, disclose such purchase price to any Person without the prior written consent of the other parties.

(vii) To the extent that a successful bidder in an Auction proposes a purchase price that is not solely for cash, the stock component of such bid shall not be greater in value (on a per share basis at the time of execution) than the cash component of such bid, and the bid shall provide for sufficient cash (or be on such other terms) such that the Shareholders shall have the right and the ability to receive solely cash for their Class B Shares. In such a case, if the Shareholders elect to acquire all, but not less than all, the outstanding voting securities of New Dynegy following such Auction, the purchase price per share set forth in the successful bid shall be the average value per share at the time of execution in such bid.

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(viii) For purposes of this Section 2.01(b), an Auction shall be deemed not to have been successfully concluded unless the bid selected by the Board, other than a bid by the Shareholders, is for all the outstanding voting securities of New Dynegy or all or substantially all of New Dynegy’s assets.

(ix) To the extent that the Shareholders elect under this Section 2.01(b) to acquire all, but not less than all, the outstanding voting securities of New Dynegy not directly owned by the Shareholders through a tender offer, the Shareholders agree to not complete such tender offer unless and until holders of a majority of the Class A Shares then outstanding have tendered their Class A Shares to the Shareholders pursuant to the terms of such tender offer.

(x) If, during any 18-month period, the Class B Directors, pursuant to their rights under Article III, Section 7(B)(b)(1) and (2) of New Dynegy’s Bylaws, vote in such a way on at least two separate occasions (each with a different counterparty and pursuant to different terms) that it prevents the sale, merger or consolidation of New Dynegy or the sale of all or substantially all of New Dynegy’s assets, and within 45 days after the second such vote the majority of the Class A Directors elect to pursue a sale, merger or consolidation of New Dynegy or the sale of all or substantially all of New Dynegy’s assets that is distinct from (with a different counterparty and pursuant to different terms than) such transactions prevented by the Class B Directors:

(A) the Shareholders shall be deemed to have made a Qualified Offer, with such Qualified Offer being deemed rejected by New Dynegy and the Shareholders being deemed to have collectively elected for New Dynegy to conduct an Auction in accordance with Section 2.01(b)(i)(A) or, if the Shareholders Representative elects, Section 2.01(b)(i)(B) (except that the Shareholders shall not be entitled to the rights granted them under Section 2.01(b)(iv)); and

(B) the Class B Directors shall not be entitled to their rights under Article III, Section 7(B) of New Dynegy’s Bylaws with respect to any transaction resulting from such Auction other than as members of the whole Board.

SECTION 2.02. Transfer Restrictions. Until the expiration of the Lock-Up Period, the Shareholders shall not Transfer any Class B Shares except in a transaction pursuant to Article II or any rule, regulation, order, writ or decree of any Governmental Authority; provided , however , that:

(a) During the period beginning from the date that is 180 days after the Closing Date to the date that is 360 days after the Closing Date, 21,250,000 Class B Shares shall become Transferable by the Shareholders pursuant to one or more Widely