Management’s discussion and analysis

October 31, 2018

This management’s discussion and analysis (MD&A) contains information to help the reader make investment decisions about TransCanada Corporation. It discusses our business, operations, financial position, risks and other factors for the three and nine months ended September 30, 2018 , and should be read with the accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2018 , which have been prepared in accordance with U.S. GAAP.

This MD&A should also be read in conjunction with our December 31, 2017 audited consolidated financial statements and notes and the MD&A in our 2017 Annual Report. Capitalized and abbreviated terms that are used but not otherwise defined herein are identified in our 2017 Annual Report. Certain comparative figures have been adjusted to reflect the current period’s presentation.

FORWARD-LOOKING INFORMATION

We disclose forward-looking information to help current and potential investors understand management’s assessment of our future plans and financial outlook, and our future prospects overall.

Statements that are forward-looking are based on certain assumptions and on what we know and expect today. These statements generally include words like anticipate, expect, believe, may, will, should, estimate or other similar words.

Forward-looking statements in this MD&A include information about the following, among other things:

Forward-looking statements do not guarantee future performance. Actual events and results could be significantly different because of assumptions, risks or uncertainties related to our business or events that happen after the date of this MD&A.

Our forward-looking information is based on the following key assumptions, and is subject to the following risks and uncertainties:

Assumptions

Risks and uncertainties

You can read more about these factors and others in this MD&A and in other disclosure documents we have filed with Canadian securities regulators and the SEC, including the MD&A in our 2017 Annual Report.

As actual results could vary significantly from the forward-looking information, you should not put undue reliance on forward-looking information and should not use future-oriented information or financial outlooks for anything other than their intended purpose. We do not update our forward-looking statements due to new information or future events, unless we are required to by law.

FOR MORE INFORMATION

You can find more information about TransCanada in our Annual Information Form and other disclosure documents, which are available on SEDAR (www.sedar.com).

NON-GAAP MEASURES

This MD&A references the following non-GAAP measures:

These measures do not have any standardized meaning as prescribed by GAAP and therefore may not be similar to measures presented by other entities.

Comparable measures

We calculate comparable measures by adjusting certain GAAP and non-GAAP measures for specific items we believe are significant but not reflective of our underlying operations in the period. Except as otherwise described herein, these comparable measures are calculated on a consistent basis from period to period and are adjusted for specific items in each period, as applicable.

Our decision not to adjust for a specific item is subjective and made after careful consideration. Specific items may include:

We exclude the unrealized gains and losses from changes in the fair value of derivatives used to reduce our exposure to certain financial and commodity price risks. These derivatives generally provide effective economic hedges but do not meet the criteria for hedge accounting. As a result, the changes in fair value are recorded in net income. As these amounts do not accurately reflect the gains and losses that will be realized at settlement, we do not consider them reflective of our underlying operations.

The following table identifies our non-GAAP measures against their most directly comparable GAAP measures.

Comparable earnings and comparable earnings per common share

Comparable earnings represents earnings or loss attributable to common shareholders on a consolidated basis, adjusted for specific items. Comparable earnings is comprised of segmented earnings, interest expense, AFUDC, interest income and other, income taxes and non-controlling interests, adjusted for specific items. See the Consolidated results section for reconciliations to net income attributable to common shares and net income per common share.

Comparable EBIT and comparable EBITDA

Comparable EBIT represents segmented earnings, adjusted for specific items. We use comparable EBIT as a measure of our earnings from ongoing operations as it is a useful indicator of our performance and an effective tool for evaluating trends in each segment. Comparable EBITDA is calculated the same way as comparable EBIT but excludes the non-cash charges for depreciation and amortization. See the Reconciliation of non-GAAP measures section for a reconciliation to segmented earnings.

Funds generated from operations and comparable funds generated from operations

Funds generated from operations reflects net cash provided by operations before changes in operating working capital. We believe it is a useful measure of our consolidated operating cash flow because it does not include fluctuations from working capital balances, which do not necessarily reflect underlying operations in the same period, and is used to provide a consistent measure of the cash generating performance of our assets. Comparable funds generated from operations is adjusted for the cash impact of specific items. See the Financial condition section for a reconciliation to net cash provided by operations.

Comparable distributable cash flow and comparable distributable cash flow per common share

We believe comparable distributable cash flow is a useful supplemental measure of performance that defines cash available to common shareholders before capital allocation. Comparable distributable cash flow is defined as comparable funds generated from operations less preferred share dividends, distributions to non-controlling interests and non-recoverable maintenance capital expenditures.

Maintenance capital expenditures are expenditures incurred to maintain our operating capacity, asset integrity and reliability, and include amounts attributable to our proportionate share of maintenance capital expenditures on our equity investments. We have the opportunity to recover effectively all of our pipeline maintenance capital expenditures in Canadian Natural Gas Pipelines, U.S. Natural Gas Pipelines and Liquids Pipelines through tolls. Canadian natural gas pipelines maintenance capital expenditures are reflected in rate bases, on which we earn a regulated return and subsequently recover in tolls. Our U.S. natural gas pipelines can recover maintenance capital expenditures through tolls under current rate settlements, or have the ability to recover such expenditures through tolls established in future rate cases or settlements. Tolling arrangements in our liquids pipelines provide for the recovery of maintenance capital expenditures. As such, in 2018 our presentation of comparable distributable cash flow and comparable distributable cash flow per common share only includes a reduction for non-recoverable maintenance capital expenditures in their respective calculations. Comparative figures have been adjusted to reflect this presentation.

See the Financial condition section for a reconciliation to net cash provided by operations.

Net income attributable to common shares increased by $316 million and $311 million , or $0.32 and $0.26 per common share, for the three and nine months ended September 30, 2018 compared to the same periods in 2017 . Net income per common share in 2018 reflects the dilutive impact of common shares issued in 2017 and 2018 under our DRP and Corporate ATM program.

Net income in both periods included unrealized gains and losses from changes in risk management activities, which we exclude, along with other specific items as noted below to arrive at comparable earnings.

2018 results included:

2017 results included:

A reconciliation of net income attributable to common shares to comparable earnings is shown in the following table.

RECONCILIATION OF NET INCOME TO COMPARABLE EARNINGS

Comparable earnings increased by $288 million or $0.30 per common share for the three months ended September 30, 2018 compared to the same period in 2017 and was primarily the net effect of:

Comparable earnings increased by $563 million or $0.55 per common share for the nine months ended September 30, 2018 compared to the same period in 2017 and was primarily the net effect of:

Comparable earnings per common share for the three and nine months ended September 30, 2018 also reflect the dilutive impact of common shares issued in 2017 and 2018 under our DRP and our Corporate ATM program.

2018 FERC Actions

BACKGROUND

In December 2016, FERC issued a Notice of Inquiry (NOI) seeking comment on how to address the issue of whether its existing policies resulted in a ‘double recovery’ of income taxes in a pass-through entity such as a master limited partnership (MLP). This NOI was in response to a decision by the U.S. Court of Appeals for the District of Columbia Circuit in July 2016 in United Airlines, Inc., et al. v. FERC (the United case), directing FERC to address the issue.

On December 22, 2017, U.S. Tax Reform was signed resulting in significant changes to U.S. tax law including a decrease in the U.S. federal corporate income tax rate from 35 per cent to 21 per cent effective January 1, 2018. As a result of this change, accumulated deferred income tax (ADIT) assets and liabilities related to our U.S. businesses, including amounts related to our proportionate share of assets held in TC PipeLines, LP, were remeasured as at December 31, 2017 to reflect the new lower U.S. federal corporate income tax rate. With respect to our U.S. rate-regulated natural gas pipelines and storage entities, the impact of this remeasurement was recorded as a net regulatory liability.

On March 15, 2018, FERC issued (1) a Revised Policy Statement to address the treatment of income taxes for rate-making purposes for MLPs; (2) a Notice of Proposed Rulemaking (NOPR) proposing natural gas pipeline and storage entities file a one-time report to quantify the impact of the federal income tax rate reduction and the impact of the Revised Policy Statement on each entity's ROE assuming a single-issue adjustment to an entity's rates; and (3) a NOI seeking comment on how FERC should address changes related to ADIT and bonus depreciation. On July 18, 2018, FERC issued (1) an Order on Rehearing of the Revised Policy Statement dismissing rehearing requests; and (2) a Final Rule adopting and revising procedures from, and clarifying aspects of, the NOPR (Final Rule), (collectively, the “2018 FERC Actions”). The Final Rule became effective September 13, 2018, and is subject to requests for further rehearing and clarification. The impacts of the Final Rule relate to both FERC-regulated natural gas pipeline and gas storage assets. Discussion within this 2018 FERC Actions section describes the impact to our natural gas pipelines, but also applies to our FERC-regulated natural gas storage assets.

FERC Revised Policy Statement on Treatment of Income Taxes for MLPs

The Revised Policy Statement changes FERC's long-standing policy allowing income tax amounts to be included in rates subject to cost-of-service rate regulation for pipelines owned by an MLP. The Revised Policy Statement creates a presumption that entities whose earnings are not taxed through a corporation should not be permitted to recover an income tax allowance in their regulated cost-of-service rates. On July 18, 2018, FERC dismissed requests for rehearing and provided clarification of the Revised Policy Statement. In this Order on Rehearing, FERC noted that an MLP is not automatically precluded in a future proceeding from arguing and providing evidentiary support that it is entitled to an income tax allowance in its cost-of-service rates. Additionally, FERC provided guidance with regard to ADIT for MLP pipelines and other pass-through entities. FERC found that to the extent an entity’s income tax allowance should be eliminated from rates, it must also eliminate its existing ADIT balance from its rate base. As a result, the Revised Policy Statement also precludes the recognition and subsequent amortization of any related regulatory assets or liabilities that might have otherwise impacted rates charged to customers as a refund or collection of excess or deficient deferred income tax assets or liabilities.

Final Rule on Tax Law Changes for Interstate Natural Gas Pipelines and Storage Entities

The Final Rule established a schedule by which interstate pipelines must either (i) file a new uncontested rate settlement or (ii) file a one-time report, called FERC Form 501-G, that quantifies the isolated rate impact of U.S. Tax Reform on FERC-regulated pipelines and the impact of the Revised Policy Statement on pipelines held by MLPs. A pipeline filing the FERC Form 501-G must do so by established dates in fourth quarter 2018 and will have four options:

NOI Regarding the Effect of U.S. Tax Reform on Commission-Jurisdictional Rates

In the NOI, FERC sought comment on the effects of U.S. Tax Reform to determine additional action, if any, required by FERC related to ADIT balances that were reserved in anticipation of being paid to or refunded by the Internal Revenue Service, but which no longer accurately reflect the future income tax liability or asset. The NOI also sought comment on the elimination of bonus depreciation for regulated natural gas pipelines and other effects of U.S. Tax Reform on regulated rates or earnings.

As noted above, FERC's Order on Rehearing of the Revised Policy Statement provided guidance with regard to ADIT for MLP pipelines, finding that if an MLP pipeline's income tax allowance is eliminated from its cost-of-service rates, then its existing ADIT balance used for rate-making purposes should also be eliminated from its rate base.

IMPACT OF 2018 FERC ACTIONS ON TRANSCANADA

Our U.S. natural gas pipelines are held through a number of different ownership structures. We do not anticipate that the earnings and cash flows from our directly-held U.S. natural gas pipelines, including ANR, Columbia Gas and Columbia Gulf, will be materially impacted by the Revised Policy Statement as a significant proportion of their overall revenues are earned under non-recourse rates. Columbia Gas is required under existing settlements to adjust certain of its recourse rates for the decrease in the U.S. federal corporate income tax rate enacted December 22, 2017, with the changes implemented January 1, 2018. As ANR, Columbia Gas, Columbia Gulf and other wholly-owned regulated assets undergo future rate proceedings, future rates may be impacted prospectively as a result of U.S. Tax Reform, but the impact is expected to be largely mitigated by lower corporate income tax rates. Therefore, the impact on earnings and cash flows resulting from the 2018 FERC Actions on our U.S. natural gas pipelines held outside of TC PipeLines, LP is expected to be limited in comparison to pre-U.S. Tax Reform.

The following is an update on our filings outside of TC Pipelines, LP, in response to the Final Rule subsequent to September 30, 2018:

The Revised Policy Statement also prohibits an income tax allowance for liquids pipelines held in MLP structures. We do not expect an impact on our U.S. liquids pipelines as they are not held in MLP form.

Financing

In March 2018, as a result of the initially proposed 2018 FERC Actions, further drop downs of assets into TC PipeLines, LP were considered to no longer be a viable funding lever. In addition, the TC PipeLines, LP ATM program ceased to be utilized. Pursuant to the 2018 FERC Actions issued on July 18, 2018, it is yet to be determined if and when in the future these might be restored as competitive financing options. Regardless, we believe we have the financial capacity to fund our existing capital program through predictable and growing cash flow generated from operations, access to capital markets including through our Corporate ATM program and our DRP, portfolio management, cash on hand and substantial committed credit facilities.

Impact of 2018 FERC Actions on TC PipeLines, LP

On October 16, 2018, GTN filed with FERC an uncontested settlement with its customers to address the changes proposed by the 2018 FERC Actions via an amendment to its prior settlement in 2015 (“2018 GTN Settlement”). Among the terms of the latest settlement, GTN has agreed to (i) a refund of US$10 million to its firm customers in 2018, (ii) a reduction to its existing maximum system reservation rates by 10 per cent effective January 1, 2019, and (iii) an additional 6.6 per cent reduction effective January 1, 2020 through December 31, 2021. GTN and its customers have also agreed upon a moratorium on further rate changes prior to January 1, 2022. The uncontested settlement, subject to approval by the FERC, will relieve GTN of its obligation to file a Form 501-G.

The following is an update on other TC PipeLines, LP filings in response to the Final Rule subsequent to September 30, 2018:

Following the 2018 GTN Settlement, TC PipeLines, LP’s earnings, cash flows and financial position are less adversely impacted by the 2018 FERC Actions than initially expected. A number of uncertainties still exist with respect to the variability of outcomes around the ultimate resolution of the issues arising from the 2018 FERC Actions, but any additional impact in 2018 is expected to be limited for TC PipeLines, LP while subsequent periods could be more significantly affected. Mitigating this impact, approximately half of TC PipeLines, LP’s revenues, including those of equity investments, are earned under non-recourse rates which are not expected to be impacted by the 2018 FERC Actions. Furthermore, as our ownership in TC PipeLines, LP is approximately 25 per cent, the impact of the 2018 FERC Actions related to TC PipeLines, LP is not expected to be significant to TransCanada's consolidated earnings or cash flows.

Individual pipelines owned by TC PipeLines, LP do not currently have a requirement to file for new rates until 2022, however, that timing may be accelerated by the Final Rule, except where moratoria exist. As noted above, the change in the Final Rule to allow MLPs to remove the ADIT liability from rate base, thus increasing rate base in general, is expected to further mitigate the loss of the tax allowance in cost-of-service based rates.

As a result of the 2018 FERC Actions initially proposed in March 2018, and in order to retain cash in anticipation of a possible reduction of revenues, TC PipeLines, LP reduced its quarterly distribution to common unitholders by 35 per cent to US$0.65 per unit beginning with its first quarter 2018 distribution.

Impairment Considerations

We review plant, property and equipment and equity investments for impairment whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable.

Goodwill is tested for impairment on an annual basis, or more frequently if events or changes in circumstance indicate that it might be impaired. We can initially make this assessment based on qualitative factors. If we conclude that it is not more likely than not that the fair value of the reporting unit is less than its carrying value, then an impairment test is not performed.

We continue to monitor developments following the Final Rule on the 2018 FERC Actions. We will incorporate results to date, future filings for individual pipelines, as well as FERC responses to others in the industry into our annual goodwill impairment tests as well as our normal review of plant, property and equipment and equity investments for recoverability.

As at September 30, 2018 , the goodwill balances related to Great Lakes and Tuscarora are US$573 million and US$82 million ( December 31, 2017 – US$573 million and US$82 million), respectively. At December 31, 2017, the estimated fair value of Great Lakes exceeded its carrying value by less than 10 per cent. There is a risk that the goodwill balances related to both of these assets could be negatively impacted by the FERC developments, once finalized, or by other changes in management's estimates of fair value resulting in a goodwill impairment charge.

U.S. Tax Reform

Pursuant to the enactment of U.S. Tax Reform, we recorded net regulatory liabilities and a corresponding reduction in net deferred income tax liabilities in the amount of $1,686 million at December 31, 2017 related to our U.S. natural gas pipelines subject to RRA. Amounts recorded to adjust income taxes remain provisional as our interpretation, assessment and presentation of the impact of U.S. Tax Reform may be further clarified with additional guidance from tax authorities. Should additional guidance be provided by tax authorities during the one-year measurement period permitted by the SEC, we will review the provisional amounts and adjust as appropriate.

Commencing January 1, 2018, we have amortized the net regulatory liabilities using the Reverse South Georgia methodology. Under this methodology, rate-regulated entities determine and immediately begin recording amortization based on their composite depreciation rates. For the three and nine months ended September 30, 2018 , amortization of the net regulatory liabilities in the amount of $12 million and $36 million was recorded and included in Revenues. Once the final impact of the 2018 FERC Actions is determined there may be prospective adjustments to our net regulatory liabilities.

Capital Program

We are developing quality projects under our capital program. These long-life infrastructure assets are supported by long-term commercial arrangements with creditworthy counterparties or regulated business models and are expected to generate significant growth in earnings and cash flows.

Our capital program consists of approximately $36 billion of secured projects and approximately $20 billion of projects under development. Our secured projects include commercially supported, committed projects that are either under construction or that are in or preparing to commence the permitting stage but are not yet fully approved. Our projects under development are commercially supported except where noted, but have greater uncertainty with respect to timing and estimated project costs and are subject to certain approvals.

Three years of maintenance capital expenditures for all of our businesses are also included in the secured projects table. Maintenance capital expenditures on our regulated Canadian and U.S. natural gas pipelines are added to rate base on which we have the opportunity to earn a return and recover these expenditures through current or future tolls, which is similar to our capacity capital projects on these pipelines. Tolling arrangements in Liquids Pipelines provide for the recovery of maintenance capital expenditures.

All projects are subject to cost adjustments due to weather, market conditions, route refinement, permitting conditions, scheduling and timing of regulatory permits, among other factors. Amounts presented in the following tables exclude capitalized interest and AFUDC.

Outlook

Consolidated comparable earnings

In fourth quarter 2018, we expect continued strong performance across our business segments consistent with the results reported in the first nine months of 2018. Our overall comparable earnings outlook for 2018 has increased compared to what was included in the 2017 Annual Report primarily due to the net effect of:

The 2018 FERC Actions are not anticipated to have a significant impact on our earnings or cash flows in 2018. Refer to the 2018 FERC Actions section for additional details.

Consolidated capital spending

We expect to spend approximately $10.5 billion in 2018 on growth projects, maintenance capital expenditures and contributions to equity investments. The increase from the amount included in the 2017 Annual Report primarily reflects incremental spending required to complete construction of our secured projects capital program in 2018, as well as the capitalization of costs to further advance our projects under development.

Canadian Natural Gas Pipelines segmented earnings decreased by $49 million and $103 million for the three and nine months ended September 30, 2018 compared to the same periods in 2017 and are equivalent to comparable EBIT.

Net income and comparable EBITDA for our rate-regulated Canadian natural gas pipelines are generally affected by our approved ROE, our investment base, our level of deemed common equity and incentive earnings or losses. Changes in depreciation, financial charges and income taxes also impact comparable EBITDA but do not have a significant impact on net income as they are almost entirely recovered in revenues on a flow-through basis.

Net income for the NGTL System increased by $9 million and $28 million for the three and nine months ended

September 30, 2018 compared to the same periods in 2017 mainly due to a higher average investment base resulting from continued system expansions, partially offset by lower OM&A incentive earnings. On June 19, 2018, the NEB approved NGTL's 2018-2019 Revenue Requirement Settlement Application (the 2018-2019 Settlement). This settlement, which is effective from January 1, 2018 to December 31, 2019, includes an ROE of 10.1 per cent on 40 per cent deemed equity, a mechanism for sharing variances above and below a fixed annual OM&A amount, flow-through treatment of all other costs and an increase in depreciation rates. See the Recent developments section for additional details.

Net income for the Canadian Mainline decreased by $9 million and $28 million for the three and nine months ended September 30, 2018 compared to the same periods in 2017 primarily due to incentive earnings recorded in 2017. Incentive earnings have not been recognized in 2018 pending an NEB decision on the 2018-2020 Tolls Review. As a result of the pending decision, the Canadian Mainline earnings to date reflect the last approved ROE of 10.1 per cent on 40 per cent deemed equity.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization increased by $27 million and $89 million for the three and nine months ended September 30, 2018 compared to the same periods in 2017 mainly due to NGTL System facilities that were placed in service and an increase in the approved depreciation rates in the 2018-2019 Settlement.