Intrinsic value of TC PipeLines - TCP

Previous Close

$50.45

  Intrinsic Value

$3.94

stock screener

  Rating & Target

str. sell

-92%

Previous close

$50.45

 
Intrinsic value

$3.94

 
Up/down potential

-92%

 
Rating

str. sell

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

Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Shares outstanding, mln

 

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
  9.90
  9.41
  8.97
  8.57
  8.21
  7.89
  7.60
  7.34
  7.11
  6.90
  6.71
  6.54
  6.38
  6.25
  6.12
  6.01
  5.91
  5.82
  5.74
  5.66
  5.60
  5.54
  5.48
  5.43
  5.39
  5.35
  5.32
  5.28
  5.26
  5.23
Revenue, $m
  357
  392
  429
  468
  508
  550
  593
  638
  685
  734
  784
  837
  892
  948
  1,008
  1,069
  1,134
  1,201
  1,270
  1,343
  1,419
  1,499
  1,582
  1,668
  1,759
  1,854
  1,953
  2,057
  2,166
  2,280
  2,399
Variable operating expenses, $m
 
  188
  204
  221
  239
  258
  277
  297
  318
  340
  362
  373
  397
  423
  449
  476
  505
  535
  566
  599
  632
  668
  705
  743
  784
  826
  870
  917
  965
  1,016
  1,069
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
  188
  204
  221
  239
  258
  277
  297
  318
  340
  362
  373
  397
  423
  449
  476
  505
  535
  566
  599
  632
  668
  705
  743
  784
  826
  870
  917
  965
  1,016
  1,069
Operating income, $m
  195
  205
  225
  246
  269
  292
  316
  341
  367
  394
  422
  464
  494
  526
  559
  593
  628
  666
  704
  745
  787
  831
  877
  925
  975
  1,028
  1,083
  1,140
  1,201
  1,264
  1,330
EBITDA, $m
  281
  306
  335
  365
  397
  429
  463
  498
  535
  573
  613
  654
  696
  741
  787
  835
  886
  938
  992
  1,049
  1,109
  1,171
  1,236
  1,303
  1,374
  1,448
  1,526
  1,607
  1,692
  1,781
  1,874
Interest expense (income), $m
  63
  65
  72
  79
  87
  95
  104
  113
  122
  131
  141
  151
  162
  173
  185
  197
  209
  222
  236
  250
  265
  280
  296
  313
  330
  349
  368
  388
  409
  431
  454
Earnings before tax, $m
  244
  139
  153
  167
  181
  196
  212
  228
  245
  263
  281
  313
  332
  353
  374
  396
  419
  443
  469
  495
  522
  551
  581
  612
  645
  679
  715
  752
  791
  833
  876
Tax expense, $m
  0
  38
  41
  45
  49
  53
  57
  62
  66
  71
  76
  84
  90
  95
  101
  107
  113
  120
  127
  134
  141
  149
  157
  165
  174
  183
  193
  203
  214
  225
  236
Net income, $m
  244
  102
  112
  122
  132
  143
  155
  167
  179
  192
  205
  228
  243
  258
  273
  289
  306
  324
  342
  361
  381
  402
  424
  447
  471
  496
  522
  549
  578
  608
  639

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  64
  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
  3,354
  3,599
  3,938
  4,291
  4,659
  5,042
  5,440
  5,854
  6,284
  6,730
  7,195
  7,677
  8,179
  8,701
  9,245
  9,811
  10,400
  11,014
  11,655
  12,324
  13,021
  13,750
  14,511
  15,307
  16,139
  17,009
  17,919
  18,872
  19,869
  20,913
  22,007
Adjusted assets (=assets-cash), $m
  3,290
  3,599
  3,938
  4,291
  4,659
  5,042
  5,440
  5,854
  6,284
  6,730
  7,195
  7,677
  8,179
  8,701
  9,245
  9,811
  10,400
  11,014
  11,655
  12,324
  13,021
  13,750
  14,511
  15,307
  16,139
  17,009
  17,919
  18,872
  19,869
  20,913
  22,007
Revenue / Adjusted assets
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
  0.109
Average production assets, $m
  2,065
  2,269
  2,482
  2,705
  2,937
  3,178
  3,429
  3,690
  3,961
  4,242
  4,535
  4,839
  5,156
  5,485
  5,827
  6,184
  6,556
  6,943
  7,347
  7,768
  8,208
  8,667
  9,147
  9,649
  10,173
  10,721
  11,295
  11,896
  12,524
  13,183
  13,872
Working capital, $m
  23
  12
  13
  15
  16
  17
  18
  20
  21
  23
  24
  26
  28
  29
  31
  33
  35
  37
  39
  42
  44
  46
  49
  52
  55
  57
  61
  64
  67
  71
  74
Total debt, $m
  1,911
  2,055
  2,269
  2,492
  2,724
  2,966
  3,217
  3,478
  3,749
  4,031
  4,324
  4,628
  4,945
  5,274
  5,617
  5,974
  6,346
  6,734
  7,138
  7,560
  8,001
  8,460
  8,941
  9,443
  9,968
  10,517
  11,091
  11,692
  12,321
  12,980
  13,671
Total liabilities, $m
  2,127
  2,271
  2,485
  2,708
  2,940
  3,182
  3,433
  3,694
  3,965
  4,247
  4,540
  4,844
  5,161
  5,490
  5,833
  6,190
  6,562
  6,950
  7,354
  7,776
  8,217
  8,676
  9,157
  9,659
  10,184
  10,733
  11,307
  11,908
  12,537
  13,196
  13,887
Total equity, $m
  1,227
  1,328
  1,453
  1,584
  1,719
  1,861
  2,007
  2,160
  2,319
  2,483
  2,655
  2,833
  3,018
  3,211
  3,411
  3,620
  3,838
  4,064
  4,301
  4,547
  4,805
  5,074
  5,355
  5,648
  5,955
  6,276
  6,612
  6,964
  7,332
  7,717
  8,121
Total liabilities and equity, $m
  3,354
  3,599
  3,938
  4,292
  4,659
  5,043
  5,440
  5,854
  6,284
  6,730
  7,195
  7,677
  8,179
  8,701
  9,244
  9,810
  10,400
  11,014
  11,655
  12,323
  13,022
  13,750
  14,512
  15,307
  16,139
  17,009
  17,919
  18,872
  19,869
  20,913
  22,008
Debt-to-equity ratio
  1.557
  1.550
  1.560
  1.570
  1.580
  1.590
  1.600
  1.610
  1.620
  1.620
  1.630
  1.630
  1.640
  1.640
  1.650
  1.650
  1.650
  1.660
  1.660
  1.660
  1.670
  1.670
  1.670
  1.670
  1.670
  1.680
  1.680
  1.680
  1.680
  1.680
  1.680
Adjusted equity ratio
  0.353
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369
  0.369

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  244
  102
  112
  122
  132
  143
  155
  167
  179
  192
  205
  228
  243
  258
  273
  289
  306
  324
  342
  361
  381
  402
  424
  447
  471
  496
  522
  549
  578
  608
  639
Depreciation, amort., depletion, $m
  86
  102
  110
  119
  128
  138
  147
  158
  168
  179
  191
  190
  202
  215
  229
  243
  257
  272
  288
  305
  322
  340
  359
  378
  399
  420
  443
  466
  491
  517
  544
Funds from operations, $m
  546
  204
  222
  241
  261
  281
  302
  324
  347
  371
  396
  418
  445
  473
  502
  532
  563
  596
  630
  666
  703
  742
  783
  825
  870
  916
  965
  1,016
  1,069
  1,125
  1,183
Change in working capital, $m
  165
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  3
  4
  4
Cash from operations, $m
  381
  203
  221
  240
  259
  280
  301
  323
  346
  369
  394
  416
  443
  471
  500
  530
  561
  594
  628
  664
  701
  740
  780
  823
  867
  913
  962
  1,012
  1,066
  1,121
  1,180
Maintenance CAPEX, $m
  0
  -81
  -89
  -97
  -106
  -115
  -125
  -134
  -145
  -155
  -166
  -178
  -190
  -202
  -215
  -229
  -243
  -257
  -272
  -288
  -305
  -322
  -340
  -359
  -378
  -399
  -420
  -443
  -466
  -491
  -517
New CAPEX, $m
  -28
  -204
  -214
  -223
  -232
  -241
  -251
  -261
  -271
  -282
  -293
  -304
  -316
  -329
  -343
  -357
  -372
  -387
  -404
  -421
  -440
  -459
  -480
  -501
  -524
  -548
  -574
  -601
  -629
  -658
  -690
Cash from investing activities, $m
  -229
  -285
  -303
  -320
  -338
  -356
  -376
  -395
  -416
  -437
  -459
  -482
  -506
  -531
  -558
  -586
  -615
  -644
  -676
  -709
  -745
  -781
  -820
  -860
  -902
  -947
  -994
  -1,044
  -1,095
  -1,149
  -1,207
Free cash flow, $m
  152
  -83
  -82
  -80
  -79
  -77
  -75
  -72
  -70
  -67
  -65
  -66
  -63
  -60
  -58
  -55
  -53
  -50
  -48
  -46
  -44
  -42
  -40
  -38
  -36
  -34
  -33
  -31
  -30
  -28
  -27
Issuance/(repayment) of debt, $m
  -45
  196
  214
  223
  232
  242
  251
  261
  271
  282
  293
  305
  317
  329
  343
  357
  372
  388
  404
  422
  440
  460
  480
  502
  525
  549
  574
  601
  629
  659
  690
Issuance/(repurchase) of shares, $m
  167
  11
  13
  8
  3
  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
  207
  227
  231
  235
  242
  251
  261
  271
  282
  293
  305
  317
  329
  343
  357
  372
  388
  404
  422
  440
  460
  480
  502
  525
  549
  574
  601
  629
  659
  690
Total cash flow (excl. dividends), $m
  273
  125
  145
  151
  157
  165
  176
  189
  201
  214
  228
  239
  254
  269
  285
  302
  319
  337
  356
  376
  397
  418
  441
  464
  489
  515
  542
  570
  600
  631
  663
Retained Cash Flow (-), $m
  -76
  -113
  -125
  -130
  -136
  -141
  -147
  -153
  -159
  -165
  -171
  -178
  -185
  -193
  -201
  -209
  -218
  -227
  -236
  -247
  -257
  -269
  -281
  -294
  -307
  -321
  -336
  -352
  -368
  -385
  -404
Prev. year cash balance distribution, $m
 
  12
  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
 
  24
  20
  21
  21
  24
  30
  36
  43
  50
  57
  61
  68
  76
  84
  93
  102
  111
  120
  129
  139
  149
  160
  171
  182
  194
  206
  219
  232
  245
  260
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
 
  22
  17
  15
  14
  14
  15
  16
  16
  15
  14
  12
  11
  10
  8
  7
  6
  4
  3
  3
  2
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  99.7
  99.3
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1

TC PipeLines, LP is a master limited partnership. The Company acquires, owns and participates in the management of energy infrastructure businesses in North America. The Company's pipeline systems transport natural gas in the United States. As of December 31, 2016, the Company had four pipelines and equity ownership interests in three natural gas interstate pipeline systems that are collectively designed to 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. The Company's pipeline systems include Gas Transmission Northwest LLC (GTN), Bison Pipeline LLC (Bison), North Baja Pipeline, LLC (North Baja), Tuscarora Gas Transmission Company (Tuscarora), Northern Border Pipeline Company (Northern Border), Portland Natural Gas Transmission System (PNGTS), and Great Lakes Gas Transmission Limited Partnership (Great Lakes).

FINANCIAL RATIOS  of  TC PipeLines (TCP)

Valuation Ratios
P/E Ratio 14.3
Price to Sales 9.8
Price to Book 2.8
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 1
Current Ratio 0.1
LT Debt to Equity 151.5%
Total Debt to Equity 155.7%
Interest Coverage 5
Management Effectiveness
Return On Assets 9.5%
Ret/ On Assets - 3 Yr. Avg. 5.9%
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 9.9% 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 578.3%.

Life of production assets of 25.5 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 3.1%. 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 - $1227 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 69.68 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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Financial statements of TCP
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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