The Pipeline Nobody Talks About

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TransCanada's (NYSE: TRP) Mainline pipeline stretches 8,762 miles from Alberta east to Ontario. The pipeline represents 15% of the company's assets, but shipments through the system have plummeted 70% over the last five years -- not what you'd expect in the middle of a natural-gas boom.

The problem
The natural-gas boom in the U.S. has pushed new supplies of natural gas into a market traditionally dominated by the Mainline. A significant drop in volume in the pipeline results in an increased toll to ship gas via the pipeline, to the point where it is prohibitively expensive to use the pipeline at all, decreasing volumes even further. The result is that the crown jewel in TransCanada's pipeline system now sits half empty.

It could get worse
Ironically, increased development in the oil sands brought on by TransCanada's Keystone XL project will cannibalize volumes in the Mainline even further. The unconventional oil play requires burning up large quantities of gas to generate steam for the extraction process. Current methods burn about 1.5 billion cubic feet of gas per day, but experts expect that number to jump to 3 billion in less than 10 years.

On top of that, regulatory approval for the Apache (NYSE: APA) , Encana (NYSE: ECA) , and EOG Resources' (NYSE: EOG) LNG export facility is moving right along. Just last week Canada's National Energy Board granted the project and LNG export license, leaving just one regulatory approval to go before it gets the official green light from the government.

Revenue breakdown
The Mainline has the ability to move 7 Bcf of gas across Canada each day; cutting that volume in half will certainly affect your bottom line. Here's a look at net income for the company and the pipeline over the last three years.

Year
Net Income
Mainline
Net Income
2008CA$1,440CA$278
2009CA$1,380CA$273
2010CA$1,272CA$267

Source: Company reports. Dollar figures in millions. 

Net income from the Mainline pipeline has declined steadily since 2008, falling off despite increased tolls to mitigate the revenue loss. Overall net income is also trending down. A quick look at the first six months of this year reveals that net income for the pipeline is sitting at CA$125 million, down CA$5 million over the same period last year.

Looking ahead
If the pipeline that everyone talks about, Keystone XL, ends up getting approved, it will certainly provide a bit of breathing room for TransCanada. If it doesn't, however, investors need to pay very close attention to how TransCanada deals with its empty pipeline. 

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