Summary of TC PIPELINES LP

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following discusses the results of operations and liquidity and capital resources of TC PipeLines, LP, along with those of Great Lakes Gas Transmission Limited Partnership (Great Lakes), Northern Border Pipeline Company (Northern Border) and Tuscarora Gas Transmission Company (Tuscarora), as a result of the Partnership's ownership interests.

As the acquisition of North Baja Pipeline, LLC (North Baja) occurred subsequent to June 30, 2009, the following does not include a discussion of the financial condition and results of operations of North Baja.

FORWARD-LOOKING STATEMENTS

The statements in this report that are not historical information, including statements concerning plans and objectives of management for future operations, economic performance or related assumptions, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Forward-looking statements may include words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "forecast" and other words and terms of similar meaning. The absence of these words, however, does not mean that the statements are not forward-looking.

These statements reflect our current views with respect to future events, based on what we believe are reasonable assumptions. Certain factors that could cause actual results to differ materially from those contemplated in the forward-looking statements include:

? the ability of Great Lakes and Northern Border to continue to make distributions at their current levels;

? the impact of unsold capacity on Great Lakes and Northern Border being greater or less than expected;

? competitive conditions in our industry and the ability of Great Lakes, Northern Border, Tuscarora and North Baja, (together "our pipeline systems"), to market pipeline capacity on favorable terms, which is affected by:

o future demand for and prices of natural gas;

o level of natural gas basis differentials;

o competitive conditions in the overall natural gas and electricity markets;

o availability of supplies of Canadian and United States (U.S.) natural gas, including newly discovered natural gas developments such as the Horn River and Montney shale gas developments in Western Canada, U.S. Rockies and U.S. Mid-Continent shale gas developments, and the Marcellus shale gas developments;

o availability of additional storage capacity and current storage levels;

o level of liquefied natural gas imports;

o weather conditions that impact supply and demand;

o ability of shippers to meet credit worthiness requirements; and

o competitive developments by Canadian and U.S. natural gas transmission companies;

? changes in relative cost structures of natural gas producing basins, such as changes in royalty programs, that may prejudice the development of the Western Canada Sedimentary Basin (WCSB);

? the decision by other pipeline companies to advance projects which will affect our pipeline systems and the regulatory, financing and construction risks related to construction of interstate natural gas pipelines;

? performance of contractual obligations by customers of our pipeline systems;

? the imposition of entity level taxation by states on partnerships;

? operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control;

? the impact of current and future laws, rulings and governmental regulations, particularly Federal Energy Regulatory Commission (FERC) regulations, and proposed and pending legislation by Congress and proposed and pending regulations by the U.S. Environmental Protection Agency (EPA) related to greenhouse gas emissions on us and our pipeline systems;

? our ability to control operating costs and the ability of TransCanada to implement its reorganization of U.S. pipeline operations, including the operations of our pipeline systems, and realize expected cost savings; and

? the severity and length of the current economic downturn, which impacts:

o the debt and equity capital markets and our ability to access these markets;

o the overall demand for natural gas by end users; and

o natural gas prices

Other factors described elsewhere in this document, or factors that are unknown or unpredictable, could also have material adverse effects on future results. Please also read Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. These forward-looking statements and information are made only as of the date of the filing of this report, and except as required by applicable law, we undertake no obligation to update these forward-looking statements and information to reflect new information, subsequent events or otherwise.

The following discussion and analysis should be read in conjunction with our 2008 Annual Report on Form 10-K and the unaudited financial statements and notes thereto included in Item 1. "Financial Statements" of this Quarterly Report on Form 10-Q. All amounts are stated in U.S. dollars.

PARTNERSHIP OVERVIEW

TC PipeLines, LP was formed in 1998 as a Delaware limited partnership by TransCanada PipeLines Limited, a wholly-owned subsidiary of TransCanada Corporation, to acquire, own and participate in the management of energy infrastructure assets in North America. Our strategic focus is on delivering stable, sustainable cash distributions to our unitholders and finding opportunities to increase cash distributions while maintaining a low risk profile.

TC PipeLines, LP and its subsidiaries are collectively referred to herein as "TC PipeLines" or "the Partnership." In this report, references to "we", "us" or "our" collectively refer to TC PipeLines or the Partnership. The general partner of the Partnership is TC PipeLines GP, Inc., a wholly-owned subsidiary of TransCanada. TransCanada and its subsidiaries are herein collectively referred to as "TransCanada".

We own a 46.45 per cent general partner interest in Great Lakes. The other 53.55 per cent partner interest in Great Lakes is held by TransCanada.

We own a 50 per cent general partner interest in Northern Border, while the other 50 per cent general partner interest is held by ONEOK Partners, L.P., a publicly traded limited partnership that is controlled by ONEOK, Inc.

We own 100 per cent of Tuscarora.

We own 100 per cent of North Baja, which we acquired on July 1, 2009 from TransCanada. Please read Recent Developments within this section for additional information regarding the acquisition.

Our general partner interests in Great Lakes, Northern Border, Tuscarora and North Baja represent our only material assets at July 1, 2009. As a result, we are dependent upon our pipeline systems for all of our available cash. Our pipeline systems derive their operating revenue from transportation of natural gas.

Great Lakes Overview

Great Lakes is a Delaware limited partnership formed in 1990. Great Lakes was originally constructed as an operational loop of the TransCanada Mainline Northern Ontario system. Great Lakes receives natural gas from TransCanada at the Canadian border near Emerson, Manitoba and extends across Minnesota, Northern Wisconsin and Michigan, and redelivers gas to TransCanada at the Canadian border at Sault Ste. Marie, Michigan and St. Clair, Michigan.

Northern Border Overview

Northern Border is a Texas general partnership formed in 1978. Northern Border transports natural gas from the Canadian border near Port of Morgan, Montana to a terminus near North Hayden, Indiana. Additionally, Northern Border transports natural gas produced in the Williston Basin of Montana and North Dakota, and in the Powder River Basin of Wyoming and Montana, as well as synthetic gas produced at the Dakota Gasification plant in North Dakota.

Tuscarora Overview

Tuscarora is a Nevada general partnership formed in 1993. Tuscarora originates at an interconnection point with existing facilities of Gas Transmission Northwest Corporation (GTN), a wholly-owned subsidiary of TransCanada, near Malin, Oregon and runs southeast through Northeastern California and Northwestern Nevada. Tuscarora's pipeline system terminates near Wadsworth, Nevada. Along its route, deliveries are made in Oregon, Northern California and Northwestern Nevada.

North Baja Overview

The Partnership acquired 100 per cent of North Baja from TransCanada on July 1, 2009. North Baja is a Delaware limited liability company formed in 2000. The North Baja system extends from an interconnection with El Paso Natural Gas Company near Ehrenberg, Arizona to a point near Ogilby, California on the California/Mexico border where it connects with the Gasoducto Bajanorte natural gas pipeline system which is owned by Sempra Energy International.

The pipeline system was initially placed in service in 2002 and was constructed to service demand from new electricity generators in Baja California, Mexico. In 2008, an expansion was completed to allow the pipeline to receive gas sourced from Sempra Energy International's Energia Costa Azul LNG terminal off the coast of Baja California, Mexico and flow this gas north into markets in Southern California and Arizona.

North Baja consists of an 80-mile pipeline with 30 and 36-inch diameter pipe and a physical capacity of up to 600 million cubic feet per day (MMcf/d). There is one compressor station with a total of 21,600 horsepower, and measurement facilities at two receipt points and three delivery points.

North Baja's transportation contracts are with electricity generators in Baja California, Mexico and owners of the Costa Azul LNG facility, which generated $32.9 million of transmission revenues and $16.2 million in net income in 2008. Due to North Baja's bi-directional capability, its contracted capacity is in excess of its physical capacity. At June 30, 2009, North Baja had firm transportation contracts for approximately 133 per cent of its physical capacity. Substantially all of these contracts expire between 2022 and 2028. The weighted average remaining life of these contracts at June 30, 2009 was 16.6 years with over 87 per cent of the volumes contracted under negotiated rates.

North Baja currently receives gas for transportation from its interconnection with El Paso Natural Gas Company near Ehrenberg, Arizona. The average throughput on the North Baja system was 283 MMcf/d in 2008. There was no throughput in 2008 sourced from the Costa Azul LNG facility.

Due to the long-term nature of North Baja's transportation contracts and the fact that its capacity is fully contracted, changes in the supply of and demand for natural gas have limited impact on North Baja's results.

North Baja is operated by TransCanada.

RECENT DEVELOPMENTS

North Baja Acquisition and IDR Restructuring

On July 1, 2009, the Partnership acquired a 100 per cent interest in North Baja from GTN, a wholly-owned subsidiary of TransCanada, for an initial total purchase price of $271.3 million, subject to certain closing adjustments. The acquisition was financed through a combination of (i) a draw of $170.0 million on the Partnership's $250.0 million revolving portion of its Senior Credit Facility, which previously had no outstanding borrowings, (ii) issuance of 2,609,680 common units at $30.042 per common unit to TransCan Northern Ltd., an wholly-owned subsidiary of TransCanada, for gross proceeds of $78.4 million,
(iii) issuance of additional general partner interest to the general partner of $1.6 million, which is required to maintain the general partner's two per cent general partner interest in the Partnership, and (iv) approximately $21.3 million in cash on hand.

If GTN completes an expansion of the pipeline from the Mexico/Arizona border to Yuma City, Arizona by June 30, 2010, the Partnership will pay GTN up to an additional $10.0 million for the expansion, which amount shall be determined using a formula that is based on transportation service agreements to be entered into in connection with the expansion.

Concurrent with the acquisition of North Baja, the Partnership entered into an exchange agreement (Exchange Agreement) with the general partner pursuant to which the Partnership issued 3,762,000 new common units to the general partner and provided for revised incentive distribution rights (Revised IDRs) in exchange for the cancellation of the incentive distribution rights available to the general partner (Old IDRs) under the Amended and Restated Agreement of Limited Partnership of the Partnership.

The Revised IDRs reset the IDRs to two per cent, down from the distribution levels of the Old IDRs at 50 per cent. The distribution levels of the Revised IDRs increase to 15 per cent and 25 per cent when quarterly distributions increase to $0.81 and $0.88 per common unit or $3.24 and $3.52 per common unit on an annualized basis, respectively.

As part of the Exchange Agreement, the Partnership's Amended and Restated Agreement of Limited Partnership was amended and restated effective as of July 1, 2009 to: (i) eliminate the Old IDRs and replace them with the Revised IDRs as described above, (ii) eliminate outdated provisions, (iii) incorporate all prior amendments and changes in one document and (iv) correct typographical errors. The Second Amended and Restated Agreement of Limited Partnership replaces the Amended and Restated Agreement of Limited Partnership in its entirety.

FACTORS THAT IMPACT OUR BUSINESS

Key factors that impact our business are the cash flows received from our investments and our ability to maintain a strong and balanced financial position. Cash flows from our investments are dependent upon the ability of Great Lakes and Northern Border to make distributions to us and of Tuscarora and North Baja to generate positive operating cash flows. Partnership cash flows from our investments are necessary to fund distributions to our unitholders. A strong financial position will ensure that we are able to maintain a prudent level of available cash to make distributions to our unitholders.

FACTORS THAT IMPACT THE BUSINESS OF OUR PIPELINE SYSTEMS

Our pipeline systems provide natural gas transportation services to their customers. Key factors that impact their business are the supply of and demand for natural gas in the markets in which our pipeline systems operate; the customers of our pipeline systems and the mix of services they require; competition; and government regulation of natural gas pipelines. These factors are discussed in more detail below.

Supply and Demand of Natural Gas

Our pipeline systems, excluding North Baja, depend upon the continued availability of natural gas production and reserves in the regions we access, primarily the WCSB. Our pipeline systems provide their customers with natural gas transportation services to market demand areas. The Net WCSB Flows to Markets are dependent upon natural gas production levels, demand for natural gas in Western Canada, and storage capacity for Western Canadian natural gas and demand for storage injection. The Net WCSB Flows to Markets were approximately one billion cubic feet per day lower in the second quarter of 2009 compared to the same period in 2008, due mainly to a decrease in production combined with a reduction in net withdrawals from Western Canadian storage. Low commodity prices for natural gas have resulted in reductions in exploration and development activity for natural gas in the WCSB. As well, with these low prices and reduced market demand, producers are reluctant to withdraw natural gas from storage. U.S. natural gas production, a supply competitor to the WCSB, continues to be strong, mainly due to the development of unconventional reserves in the lower 48 states.

Decreases in WCSB production are expected to continue throughout the remainder of 2009 due to a decline in drilling and exploration activity by WCSB producers, mainly related to the low commodity price environment. Decreases in U.S. natural gas production are also expected in the remainder of the year as a result of lower commodity prices and the related reduction in exploration and development activity. Natural gas prices are expected to continue to be under pressure during the remainder of 2009 due to declining oil prices, declining natural gas demand, current levels of gas in storage and the general economic slowdown.

Factors which may mitigate declines related to WCSB production in the future include strengthening gas prices and decreases in oil prices as they affect demand from Alberta oil sands production. Over the long-term, we expect WCSB producers will continue to explore and develop new fields in Western Canada as well as direct significant activity at unconventional resources such as coal bed methane and shale gas. Additional Canadian natural gas supply sources may be available in the future if new pipeline projects associated with the Montney and Horn River shale gas regions in Western Canada, the Mackenzie Delta in Northern Canada and the North Slope of Alaska are constructed.

Factors which may impact the overall demand for natural gas include weather conditions, economic conditions, government regulation, availability and price of alternative energy sources, fuel conservation measures, and technological advances in fuel economy and energy generation devices. Although demand for natural gas is expected to continue to decline in North America in 2009 with the current economic downturn, we expect a demand increase in the long term. In certain sectors, such as the electric generation sector, lower natural gas prices should lead to an increase in demand for natural gas.

Western Canadian natural gas in storage is currently at a five year high. U.S. working gas storage levels are also at near record high levels. High levels of injection into Western Canadian gas storage result in less WCSB gas available for export while high U.S. gas storage levels impact the demand for natural gas in the market areas that storage serves. High overall storage levels have a dampening effect on natural gas prices which in turn impacts ongoing production. High Western Canadian gas storage levels may impact WCSB gas available for export over the short term as producers may be forced to either transport or shut in production beyond the capacity of the storage facilities.

Demand for natural gas transportation service on our pipeline systems is directly related to the activity in the natural gas markets served by these systems. Factors that may impact demand for transportation service on any one system include the ability and willingness of natural gas shippers to utilize one system over alternative pipelines, transportation rates, and the volume of natural gas delivered to markets from other supply sources and storage facilities. The impact of changes in demand for natural gas transportation services on operating revenues for our pipeline systems is dependent upon the extent to which capacity has been contracted under long-term firm contracts. Net WCSB Flows to Markets is one of the factors which impacts the throughput on our Great Lakes and Northern Border pipeline systems. The other important factor impacting throughput is the activity in the natural gas markets served by our pipeline systems. We cannot predict the impact of any continued declines in Net WCSB Flows to Markets and uncertain market conditions are expected to continue to affect throughput for the remainder of 2009.

Throughput on the Great Lakes pipeline system in the second quarter of 2009 (average 2,053 MMcf/d) was slightly lower compared to the same period in 2008 (average 2,071 MMcf/d). Increases in short term and discretionary volumes were more than offset by the underutilization of firm contracts. Decreases in throughput related to underutilization of firm contracts have a minimal impact on revenue.

Throughput on Northern Border declined in the second quarter of 2009 (average 1,499 MMcf/d) relative to the same period in 2008 (average 1,620 MMcf/d) as the Midwest markets served by Northern Border continued to be impacted by the incremental supply from the Rockies natural gas basins transported to these markets on the western segment of the Rockies Express Pipeline (REX West). Decreased overall demand also reduces the ability to contract available pipeline capacity serving this market area.

Tuscarora transports natural gas supply from the WCSB; however, the transportation capacity on our Tuscarora pipeline system is substantially contracted under long term firm contracts. All of North Baja's physical capacity has been contracted under long-term firm contracts and North Baja transports gas sourced either from the Costa Azul LNG facility or from El Paso Natural Gas Company which is primarily gas originating from the Texas supply region. Therefore, although throughput may vary on these pipeline systems, there is minimal impact on revenue.

Customers and Contracting

Great Lakes' average contracted capacity was 97 per cent of its design capacity for the second quarter of 2009 compared to 95 per cent for the same period last year. At June 30, 2009, 96 per cent of its average design capacity was contracted on a firm basis for the remainder of the year and the weighted average remaining life of firm transport contracts was 2.4 years. Great Lakes' competitive rate combined with strong spread values between Alberta and Dawn, Ontario continued to support strong transportation values for Great Lakes, which was able to take advantage of daily sales in the short-term market.

Northern Border's average contracted capacity was 55 per cent of its design capacity for the second quarter of 2009 compared to 74 per cent for the same period last year. At June 30, 2009, Northern Border had approximately 49 per cent of its design capacity uncontracted beginning in the third quarter of 2009 and approximately 53 per cent uncontracted beginning in the fourth quarter of 2009. Prevailing market conditions and competitive factors in North America, including the Rockies Express Pipeline, will continue to impact the value of Northern Border's transportation and its ability to market available capacity. Northern Border expects to continue to discount transportation capacity as needed to optimize revenue. As at June 30, 2009, the weighted average remaining life of Northern Border's firm transportation contracts was 2.4 years.

Tuscarora operates under long-term contracts and had 98 per cent of its design capacity contracted for the second quarter of 2009 compared to 95 per cent for the same period last year. As at June 30, 2009, 98 per cent of its design capacity was contracted on a firm basis for the remainder of the year with a weighted average remaining life of 11.2 years.

North Baja operates under long-term contracts and, as at June 30, 2009, in excess of 100 per cent of its physical capacity was contracted on a firm basis for the remainder of the year. The weighted average remaining life of the contracts at June 30, 2009 was 16.6 years.

Competition

Our pipeline systems compete primarily with other interstate and intrastate pipelines in the transportation of natural gas. Additionally, supply competition from other natural gas sources can impact demand for transportation on our pipeline systems. Growth in supplies available from other natural gas producing regions can impact prices for natural gas delivered to some of the markets our pipeline systems serve relative to other market regions.

Factors impacting the competition for Net WCSB Flows to Markets during the remainder of 2009 will include high natural gas storage levels in Eastern Canada and California.

Changes in North American gas flow patterns are expected as a result of new pipeline projects which will change the supply competition in the markets served by our pipeline systems.

REX West introduced new gas supplies from the Rockies gas basin into the markets served by Northern Border in the second quarter of 2008. The Eastern segment of the Rockies Express Pipeline (REX East) was placed into interim service on June 29, 2009 to Lebanon, Ohio. Rockies Express Pipeline has announced that full in-service of REX East to Clarington, Ohio is scheduled for November 2009. REX East is mitigating excess supply in the Mid-Continent region which is resulting in a reduction in the downward pressure on prices experienced following the REX West project. The movement of these natural gas supplies further east is expected to create additional supply in the markets Great Lakes serves, but may also provide opportunities for Great Lakes to market its Eastern zone capacity for storage injection and withdrawal. As well, there may be increased supply in the Chicago market served by Northern Border as a result of the in-service of REX East.

Two new pipeline projects to transport volumes from the lower Mid-Continent east to the existing Gulf Coast pipeline infrastructure went into service in the second quarter of 2009. These pipelines transport volumes from the lower Mid-Continent east to existing pipelines that can deliver this supply to the Chicago market area, Eastern U.S. market area, or to the Gulf market depending on demand. Additional supply in the Chicago market may continue to impact Northern Border's ability to contract upstream available capacity for the remainder of 2009 if natural gas flows to Chicago materially decrease.

REGULATORY DEVELOPMENTS

Other Laws and Regulations

U.S. Congress is actively considering federal legislation to reduce emissions of "greenhouse gases" (including carbon dioxide and methane). The House of Representatives narrowly approved the Waxman-Markey Bill on June 26, 2009. The legislation is now under consideration by the Senate, and could be rejected by the Senate, or could be significantly amended before being approved by the Senate. If passed, such legislation could result in increased costs to (i) operate and maintain our pipeline systems' facilities; (ii) install new emission controls on our pipeline systems' facilities; (iii) require the construction of new facilities; and (iv) administer and manage any greenhouse gas emissions reduction program that may be applicable to our pipeline systems' operations. Separately, the EPA has proposed regulations relating to monitoring and reporting greenhouse gas emissions pursuant to its authority under the Clean Air Act. While our pipeline systems may be able to include some or all of the costs associated with this environmental compliance, including future compliance with greenhouse gas laws and regulations, in its transportation rates, the ability to recover such costs is uncertain and may depend on events beyond our pipeline systems' control including the outcome of future rate proceedings before the FERC and the provisions of any final legislation.

On February 2, 2009, Northern Border received a Notice of Violation (NOV) from the EPA alleging that Northern Border was in violation of certain regulations pursuant to the Clean Air Act regarding a compressor station on its system. Northern Border disputes the NOV. At this time, Northern Border is unable to reasonably estimate the cost of any associated corrective action or the possibility or amount of any penalty.

RESULTS OF OPERATIONS OF TC PIPELINES

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. generally . . .