Dynegy Inc. has settled a lawsuit with Enron Corp. over control of the Northern Natural Gas pipeline, a key Enron asset that was part of a dispute between the two energy companies after a merger agreement fell apart.

Dynegy said in a news release late Thursday night that Enron has agreed to turn over the pipeline by the end of the month. Enron would have the option to repurchase the pipeline by June 30 and is to provide transition services related to the pipeline until then. 

"We acquired the pipeline under the terms originally agreed upon by the two companies, with the exception of the date extension," said Chuck Watson, chairman and chief executive officer of Dynegy Inc. 

The original option agreement calls for the payment of a $23 million exercise price at closing, subject to working capital adjustments. 

Dynegy had claimed Enron signed away its right to the prized 16,500-mile pipeline system running between Texas and the Midwest in exchange for $1.5 billion invested in Enron before a proposed merger of the two competitors fell apart in late November. Enron filed for bankruptcy shortly after the deal unraveled. 

Enron claimed its smaller rival illegally terminated the $8.4 billion deal and therefore had no right to the pipeline. Enron had argued that Dynegy's claim should be part of Enron's massive bankruptcy case filed in federal court in New York. 

Enron spokesman Mark Palmer on Friday said the settlement will allow Enron to focus on a relatively speedy resolution to the bankruptcy. He said Enron will pursue its $10 billion lawsuit claiming that Dynegy wrongly abandoned the merger. 

Dynegy also said the settlement doesn't affect the companies' bigger battle over the failed merger agreement. 

"Control of Northern Natural Gas is what we need," said David Burns, the Houston attorney representing Dynegy in its pipeline claim. "We'll fight what we view as a meritless lawsuit." 

Shares of both companies surged on the news. In early trading Friday, shares of Dynegy rose $1.42, or 5.5 percent, to $26.70 on the New York Stock Exchange. Shares of Enron were up 3 cents at 67 cents. 

Dynegy backed out of the deal to buy the company after Enron said it was in worse financial straits than it had originally disclosed. 

Enron quickly fell from a Wall Street darling to junk bond rated failure because of questionable accounting practices that the Securities and Exchange Commission and others are investigating. 

Enron filed for bankruptcy in New York Dec. 2 as the energy trader disclosed mounting debts and its stock fell from a high of $90 a share a year ago to less than $1. 

Dynegy is among many creditors who will ask U.S. Bankruptcy Judge Arthur Gonzalez in New York on Monday to transfer the bankruptcy case to Houston, where Enron and Dynegy are based. 

Morgan Stanley Dean Witter analyst Jim McAuliffe said late Thursday that Dynegy suffered for its efforts to save Enron, particularly when Moody's Investors Service downgraded its credit rating to one step above junk status. 

Dynegy reacted by unveiling a plan to strengthen its balance sheet by gaining cash from asset sales, reductions in capital spending and a stock offering. McAuliffe said the pipeline settlement adds another positive for Dynegy. 

"Now it looks like they're getting the pipeline," he said. "That solves a chunk of their problems." 

Northern Natural Gas provides transportation and storage services for its customers. It also provides transportation between other interstate and intrastate pipelines in the Permian, Anadarko, Hugoton and Midwest areas. 

"This action ensures continuity of quality service to the customers of Northern Natural Gas and stability for the outstanding employees who have run the pipeline carefully and safely over many years," said Stan Horton, chairman and chief executive officer of Enron Transportation Services Co.