Dynegy Inc said it was selling some of its power plants to LS Power for $1.0 billion in cash as the U.S. power producer seeks to pay back debt and improve its liquidity position.

As part of the deal, LS Power will return 245 million of Class B Dynegy shares held by it in exchange for Dynegy's five peaking and three combined-cycle generation assets.

The deal also includes the sale of Dynegy's remaining interest in a project under construction in Texas.

LS Power will receive $235 million principal amount of 7.5 percent senior unsecured notes due 2015, Dynegy said in a statement.

Dynegy said it would also eliminate its dual-class stock structure and was initiating a cost reduction program aimed at lowering expenses by about $400 million to $450 million over the next four years.

The remaining 95 million Class B shares held by LS Power will be converted into the equivalent number of Class A shares, giving LS Power about a 15 percent stake in Dynegy.

Additionally, LS Power has agreed to terminate the existing shareholder agreement between it and Dynegy, and has entered into a new agreement restricting it from increasing its future ownership in Dynegy for a specified period.

Dynegy expects to take a restructuring charge of less than $5 million in the third quarter related to a workforce reduction associated with the cost savings program.

Separately, the company announced a second-quarter loss hurt by lower realized prices.

Shares of Dynegy closed at $1.93 Friday on the New York Stock Exchange.

(Reporting by Hezron Selvi in Bangalore, Editing by Dinesh Nair)

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