Intrinsic value of TC PipeLines - TCP

Previous Close

$50.55

  Intrinsic Value

$7.09

stock screener

  Rating & Target

str. sell

-86%

  Value-price divergence*

+48%

Previous close

$50.55

 
Intrinsic value

$7.09

 
Up/down potential

-86%

 
Rating

str. sell

 
Value-price divergence*

+48%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of TCP stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 3.5

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  3.78
  3.50
  3.65
  3.78
  3.91
  4.02
  4.11
  4.20
  4.28
  4.35
  4.42
  4.48
  4.53
  4.58
  4.62
  4.66
  4.69
  4.72
  4.75
  4.77
  4.80
  4.82
  4.84
  4.85
  4.87
  4.88
  4.89
  4.90
  4.91
  4.92
  4.93
Revenue, $m
  357
  369
  383
  397
  413
  430
  447
  466
  486
  507
  530
  553
  578
  605
  633
  662
  693
  726
  761
  797
  835
  875
  918
  962
  1,009
  1,058
  1,110
  1,164
  1,222
  1,282
  1,345
Variable operating expenses, $m
 
  178
  184
  190
  197
  204
  212
  221
  230
  239
  249
  247
  258
  270
  282
  295
  309
  324
  339
  355
  372
  390
  409
  429
  450
  472
  495
  519
  544
  571
  599
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  162
  178
  184
  190
  197
  204
  212
  221
  230
  239
  249
  247
  258
  270
  282
  295
  309
  324
  339
  355
  372
  390
  409
  429
  450
  472
  495
  519
  544
  571
  599
Operating income, $m
  195
  192
  199
  207
  216
  225
  235
  245
  256
  268
  281
  307
  321
  335
  351
  367
  384
  403
  422
  442
  463
  485
  509
  533
  559
  587
  615
  646
  677
  711
  746
EBITDA, $m
  281
  288
  299
  310
  322
  335
  349
  363
  379
  395
  413
  431
  451
  472
  493
  516
  541
  566
  593
  621
  651
  683
  716
  750
  787
  825
  866
  908
  953
  1,000
  1,049
Interest expense (income), $m
  63
  64
  66
  69
  72
  75
  78
  81
  84
  88
  92
  96
  101
  105
  110
  116
  121
  127
  133
  139
  146
  153
  161
  169
  177
  186
  195
  205
  215
  225
  237
Earnings before tax, $m
  244
  128
  133
  138
  144
  151
  157
  164
  172
  180
  188
  210
  220
  230
  240
  252
  263
  276
  289
  302
  317
  332
  348
  365
  382
  401
  420
  441
  463
  485
  509
Tax expense, $m
  0
  34
  36
  37
  39
  41
  42
  44
  46
  49
  51
  57
  59
  62
  65
  68
  71
  74
  78
  82
  86
  90
  94
  98
  103
  108
  114
  119
  125
  131
  137
Net income, $m
  244
  93
  97
  101
  105
  110
  115
  120
  126
  131
  138
  154
  161
  168
  176
  184
  192
  201
  211
  221
  231
  242
  254
  266
  279
  293
  307
  322
  338
  354
  372

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  50
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  3,158
  3,213
  3,330
  3,456
  3,591
  3,736
  3,889
  4,053
  4,226
  4,410
  4,605
  4,811
  5,029
  5,259
  5,502
  5,759
  6,029
  6,313
  6,613
  6,929
  7,261
  7,611
  7,979
  8,367
  8,774
  9,202
  9,652
  10,125
  10,623
  11,146
  11,695
Adjusted assets (=assets-cash), $m
  3,108
  3,213
  3,330
  3,456
  3,591
  3,736
  3,889
  4,053
  4,226
  4,410
  4,605
  4,811
  5,029
  5,259
  5,502
  5,759
  6,029
  6,313
  6,613
  6,929
  7,261
  7,611
  7,979
  8,367
  8,774
  9,202
  9,652
  10,125
  10,623
  11,146
  11,695
Revenue / Adjusted assets
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
  0.115
Average production assets, $m
  1,915
  1,982
  2,054
  2,132
  2,215
  2,304
  2,399
  2,500
  2,607
  2,721
  2,841
  2,968
  3,102
  3,244
  3,394
  3,552
  3,719
  3,894
  4,079
  4,274
  4,479
  4,695
  4,922
  5,161
  5,412
  5,676
  5,954
  6,246
  6,553
  6,875
  7,214
Working capital, $m
  36
  9
  10
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  17
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  28
  29
  31
  32
  34
Total debt, $m
  1,858
  1,899
  1,970
  2,048
  2,130
  2,219
  2,313
  2,413
  2,520
  2,633
  2,752
  2,878
  3,012
  3,153
  3,302
  3,459
  3,625
  3,799
  3,983
  4,177
  4,380
  4,595
  4,820
  5,058
  5,307
  5,570
  5,846
  6,136
  6,441
  6,761
  7,098
Total liabilities, $m
  1,929
  1,970
  2,041
  2,119
  2,201
  2,290
  2,384
  2,484
  2,591
  2,704
  2,823
  2,949
  3,083
  3,224
  3,373
  3,530
  3,696
  3,870
  4,054
  4,248
  4,451
  4,666
  4,891
  5,129
  5,378
  5,641
  5,917
  6,207
  6,512
  6,832
  7,169
Total equity, $m
  1,229
  1,243
  1,289
  1,338
  1,390
  1,446
  1,505
  1,568
  1,636
  1,707
  1,782
  1,862
  1,946
  2,035
  2,129
  2,229
  2,333
  2,443
  2,559
  2,682
  2,810
  2,946
  3,088
  3,238
  3,395
  3,561
  3,735
  3,919
  4,111
  4,313
  4,526
Total liabilities and equity, $m
  3,158
  3,213
  3,330
  3,457
  3,591
  3,736
  3,889
  4,052
  4,227
  4,411
  4,605
  4,811
  5,029
  5,259
  5,502
  5,759
  6,029
  6,313
  6,613
  6,930
  7,261
  7,612
  7,979
  8,367
  8,773
  9,202
  9,652
  10,126
  10,623
  11,145
  11,695
Debt-to-equity ratio
  1.512
  1.530
  1.530
  1.530
  1.530
  1.530
  1.540
  1.540
  1.540
  1.540
  1.540
  1.550
  1.550
  1.550
  1.550
  1.550
  1.550
  1.550
  1.560
  1.560
  1.560
  1.560
  1.560
  1.560
  1.560
  1.560
  1.560
  1.570
  1.570
  1.570
  1.570
Adjusted equity ratio
  0.379
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  244
  93
  97
  101
  105
  110
  115
  120
  126
  131
  138
  154
  161
  168
  176
  184
  192
  201
  211
  221
  231
  242
  254
  266
  279
  293
  307
  322
  338
  354
  372
Depreciation, amort., depletion, $m
  86
  96
  99
  103
  106
  110
  114
  118
  123
  127
  132
  125
  130
  136
  143
  149
  156
  164
  171
  180
  188
  197
  207
  217
  227
  239
  250
  262
  275
  289
  303
Funds from operations, $m
  546
  189
  196
  204
  211
  220
  229
  238
  248
  259
  270
  278
  291
  304
  318
  333
  348
  365
  382
  400
  419
  440
  461
  483
  507
  531
  557
  584
  613
  643
  675
Change in working capital, $m
  165
  0
  0
  0
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
Cash from operations, $m
  381
  189
  196
  203
  211
  219
  228
  238
  248
  258
  269
  278
  290
  303
  317
  332
  348
  364
  381
  399
  419
  439
  460
  482
  505
  530
  556
  583
  612
  642
  673
Maintenance CAPEX, $m
  0
  -80
  -83
  -86
  -90
  -93
  -97
  -101
  -105
  -110
  -114
  -119
  -125
  -130
  -136
  -143
  -149
  -156
  -164
  -171
  -180
  -188
  -197
  -207
  -217
  -227
  -239
  -250
  -262
  -275
  -289
New CAPEX, $m
  -28
  -67
  -72
  -78
  -83
  -89
  -95
  -101
  -107
  -114
  -120
  -127
  -134
  -142
  -150
  -158
  -167
  -176
  -185
  -195
  -205
  -216
  -227
  -239
  -251
  -264
  -278
  -292
  -307
  -322
  -339
Cash from investing activities, $m
  -229
  -147
  -155
  -164
  -173
  -182
  -192
  -202
  -212
  -224
  -234
  -246
  -259
  -272
  -286
  -301
  -316
  -332
  -349
  -366
  -385
  -404
  -424
  -446
  -468
  -491
  -517
  -542
  -569
  -597
  -628
Free cash flow, $m
  152
  42
  40
  39
  38
  37
  37
  36
  35
  35
  35
  31
  31
  31
  31
  32
  32
  32
  33
  33
  34
  35
  35
  36
  37
  38
  40
  41
  42
  44
  45
Issuance/(repayment) of debt, $m
  -45
  64
  72
  77
  83
  88
  94
  100
  106
  113
  119
  126
  134
  141
  149
  157
  166
  175
  184
  194
  204
  214
  226
  237
  250
  262
  276
  290
  305
  320
  337
Issuance/(repurchase) of shares, $m
  167
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  121
  64
  72
  77
  83
  88
  94
  100
  106
  113
  119
  126
  134
  141
  149
  157
  166
  175
  184
  194
  204
  214
  226
  237
  250
  262
  276
  290
  305
  320
  337
Total cash flow (excl. dividends), $m
  273
  105
  112
  116
  121
  126
  131
  136
  142
  148
  154
  158
  165
  172
  180
  189
  197
  207
  216
  227
  238
  249
  261
  274
  287
  301
  316
  331
  347
  364
  382
Retained Cash Flow (-), $m
  -78
  -41
  -45
  -49
  -52
  -56
  -59
  -63
  -67
  -71
  -75
  -80
  -84
  -89
  -94
  -99
  -105
  -110
  -116
  -122
  -129
  -135
  -142
  -150
  -158
  -166
  -174
  -183
  -193
  -202
  -213
Prev. year cash balance distribution, $m
 
  27
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  91
  67
  68
  69
  70
  71
  73
  75
  77
  79
  78
  80
  83
  86
  89
  93
  97
  100
  105
  109
  114
  119
  124
  129
  135
  141
  148
  155
  162
  169
Discount rate, %
 
  9.50
  9.98
  10.47
  11.00
  11.55
  12.12
  12.73
  13.37
  14.04
  14.74
  15.47
  16.25
  17.06
  17.91
  18.81
  19.75
  20.74
  21.77
  22.86
  24.01
  25.21
  26.47
  27.79
  29.18
  30.64
  32.17
  33.78
  35.47
  37.24
  39.10
PV of cash for distribution, $m
 
  83
  55
  50
  45
  40
  36
  32
  27
  24
  20
  16
  13
  11
  9
  7
  5
  4
  3
  2
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

TC PipeLines, LP acquires, owns, and participates in the management of energy infrastructure businesses in North America. The company has four wholly-owned pipelines and equity ownership interests in three natural gas interstate pipeline systems that transport approximately 9.1 billion cubic feet per day of natural gas from producing regions and import facilities to market hubs and consuming markets primarily in the Western, Midwestern, and Eastern United States. It serves large utilities, local distribution companies, natural gas marketers and producing companies, and other interstate pipelines, including affiliates. TC PipeLines GP, Inc. operates as a general partner of the company. TC PipeLines, LP was founded in 1998 and is based in Houston, Texas.

FINANCIAL RATIOS  of  TC PipeLines (TCP)

Valuation Ratios
P/E Ratio 14.4
Price to Sales 9.8
Price to Book 2.9
Price to Tangible Book
Price to Cash Flow 9.2
Price to Free Cash Flow 9.9
Growth Rates
Sales Growth Rate 3.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -48.1%
Cap. Spend. - 3 Yr. Gr. Rate 13.3%
Financial Strength
Quick Ratio 2
Current Ratio 0.1
LT Debt to Equity 149.3%
Total Debt to Equity 151.2%
Interest Coverage 5
Management Effectiveness
Return On Assets 9.8%
Ret/ On Assets - 3 Yr. Avg. 6%
Return On Total Capital 7.9%
Ret/ On T. Cap. - 3 Yr. Avg. 4.6%
Return On Equity 20.5%
Return On Equity - 3 Yr. Avg. 11.1%
Asset Turnover 0.1
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 110.1%
EBITDA Margin - 3 Yr. Avg. 85.5%
Operating Margin 54.6%
Oper. Margin - 3 Yr. Avg. 51.9%
Pre-Tax Margin 68.3%
Pre-Tax Margin - 3 Yr. Avg. 45%
Net Profit Margin 68.3%
Net Profit Margin - 3 Yr. Avg. 39.9%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. 0%
Payout Ratio 107.4%

TCP stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the TCP stock intrinsic value calculation we used $357 million for the last fiscal year's total revenue generated by TC PipeLines. The default revenue input number comes from 2016 income statement of TC PipeLines. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our TCP stock valuation model: a) initial revenue growth rate of 3.5% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 9.5%, whose default value for TCP is calculated based on our internal credit rating of TC PipeLines, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of TC PipeLines.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of TCP stock the variable cost ratio is equal to 48.2%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for TCP stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for TC PipeLines.

Corporate tax rate of 27% is the nominal tax rate for TC PipeLines. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the TCP stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for TCP are equal to 536.4%.

Life of production assets of 23.8 years is the average useful life of capital assets used in TC PipeLines operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for TCP is equal to 2.5%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $1229 million for TC PipeLines - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 68.567 million for TC PipeLines is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of TC PipeLines at the current share price and the inputted number of shares is $3.5 billion.

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COMPANY NEWS

▶ ETFs with exposure to TC Pipelines LP : June 30, 2017   [Jun-30-17 03:27PM  Capital Cube]
▶ ETFs with exposure to TC Pipelines LP : June 20, 2017   [Jun-20-17 03:17PM  Capital Cube]
▶ 3 ways to play rising oil: Gartman   [Apr-11-17 05:52PM  CNBC Videos]
▶ Is TC Pipelines, LP (TCP) A Good Stock to Buy?   [Dec-21-16 06:04AM  at Insider Monkey]
Stock chart of TCP Financial statements of TCP
Valuation of Stocks

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