(Reuters) - TransCanada Corp (TRP.TO), the company behind the controversial Keystone XL oil pipeline, said it would buy Columbia Pipeline Group Inc (CPGX.N) for $10.2 billion, creating one of North America's largest regulated natural gas transmission businesses.

TransCanada will offer $25.50 per share in cash for each Columbia Pipeline share, an 8.5 percent premium to the stock's Thursday close. 

Columbia Pipeline shares were at $24.75 in extended trading, while TransCanada's U.S.-listed shares were down nearly 4 percent at $36.50.

The deal, which is valued at $13 billion including debt, comes months after U.S. President Barack Obama blocked the cross-border Keystone XL pipeline, handing a victory to environmentalists who had campaigned against the project for more than seven years.

Columbia Pipeline Group owns and operates about 15,000 miles of natural gas pipelines, connecting the U.S. Gulf Coast to the Midwest, Mid-Atlantic and Northeast United States.

"With a combined portfolio of $23 billion in near-term projects secured by cost of service regulation or long-term contracts, we are well positioned to generate significant growth in earnings into the next decade," TransCanada Chief Executive Russ Girling said in a statement.

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TransCanada said the deal would add to per-share earnings in the first full year of ownership and that it may increase its annual dividend growth rate of 8 to 10 percent per year.

The company said it would finance the deal by selling its U.S. Northeast merchant power assets and a minority interest in its Mexican natural gas pipeline business. The company said it had also secured $10.3 billion of credit facilities.

Following deal close, expected in the second half of the year, TransCanada will own the general partner of Columbia Pipeline Partners LP (CPPL.N).

Columbia Pipeline Partners, whose general partner is currently owned by Columbia Pipeline Group, will remain a publicly traded partnership, the companies said.

TransCanada's proposed Energy East oil pipeline faced a setback this month, when the Quebec government filed a motion for an injunction to ensure that the pipeline complied with the province's environmental laws.

Goldman, Sachs & Co and Lazard advised Columbia Pipeline, while Sullivan & Cromwell LLP and Bennett Jones LLP were its legal advisers.

Wells Fargo Securities LLC was TransCanada's financial adviser and Mayer Brown LLP, Blake, Cassels & Graydon LLP and Osler, Hoskin & Harcourt LLP were its legal advisers.

 

(Reporting by Swetha Gopinath in Bengaluru; Editing by Shounak Dasgupta and Anil D'Silva)