Where TC PipeLines Is Trading Relative Its Historical Average Yield
Your Insider's Guide to TC PipeLines in 2016
TCP’s forward distribution yield
As of April 11, 2016, TC PipeLines (TCP) was trading at a forward distribution yield of about 7.8%. This is slightly higher than the company’s historical average distribution yield of 7.3%. The forward distribution yield of a company is calculated by dividing its estimated one-year future distribution per unit by its market price per unit.
Low commodity prices have pushed yields up for most midstream companies. But the fall in TC PipeLines’ stock price since the start of 2015 has contributed to the rise in its yield. For example, TCP’s forward yield rose to ~9.5% in February 2016, but the yield fell after that when the stock began to show recovery.
Forward EV-to-EBITDA multiple
The above graph compares TC PipeLines’ distribution yields with its historical average. TC PipeLines’ forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 12.5 is close to its historical average of 12.4.
Notably, TCP comprises 3.4% of the Global X MLP ETF (MLPA).
TC PipeLines’ low forward EV-to-EBITDA
TC PipeLines’ forward EV-to-EBITDA multiple is lower than its trailing-12-month EV-to-EBITDA multiple of 18.7. This indicates expectations of EBITDA growth in 2016.
We should note that EV-to-EBITDA can be misleading when trying to understand limited partner unit valuation. This is because the entire EBITDA in the EV-to-EBITDA ratio calculation may not be available to limited partners due to the presence of IDRs (incentive distribution rights). To learn more about IDRs, you’ll want to check out “The Importance of Incentive Distribution Rights for MLPs.”
IDRs in its structure
TC PipeLines has IDRs in its structure. Currently, the company operates in its highest distribution tier, which entitles its General Partner 25% to a quarterly distribution of more than $0.88 per unit.
We should note here that Enbridge Energy Partners (EEP), Western Gas Partners (WES), and Spectra Energy Partners (SEP) are among the other midstream MLPs with natural gas operations.
In the next part, we’ll see how TC PipeLines’ forward yield and EV-to-EBITDA multiple compares with peers.
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