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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2013

OR

Commission file number: 1-34722

PAA Natural Gas Storage, L.P.

(Exact name of registrant as specified in its charter)

(713) 646-4100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

As of October 31, 2013, there were 61,158,699 common units outstanding.

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PAA NATURAL GAS STORAGE, L.P. AND SUBSIDIARIES

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PART I. FINANCIAL INFORMATION

Item 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PAA Natural Gas Storage, L.P. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except units)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PAA Natural Gas Storage, L.P. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per unit data)

(1)         Excludes Series B subordinated units. See Note 8, “Net Income per Limited Partner Unit.”

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PAA Natural Gas Storage, L.P. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

PAA Natural Gas Storage, L.P. and Subsidiaries

Condensed Consolidated Statement of Changes in Accumulated Other Comprehensive Income/(Loss)

(in thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PAA Natural Gas Storage, L.P. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PAA Natural Gas Storage, L.P. and Subsidiaries

Condensed Consolidated Statement of Changes in Partners’ Capital

(in thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PAA Natural Gas Storage, L.P. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(unaudited)

Note 1—Organization and Basis of Presentation

PAA Natural Gas Storage, L.P. (the “Partnership” or “PNG”) is a Delaware limited partnership formed on January 15, 2010 to own the natural gas storage business of Plains All American Pipeline, L.P. (“PAA”). The Partnership is a fee-based, growth-oriented partnership engaged in the ownership, acquisition, development, operation and commercial management of natural gas storage facilities.

We currently own and operate three natural gas storage facilities located in Louisiana, Mississippi and Michigan. Our Pine Prairie and Southern Pines facilities are recently constructed, high-deliverability salt cavern natural gas storage complexes located in Evangeline Parish, Louisiana and Greene County, Mississippi, respectively. Our Bluewater facility is a depleted reservoir natural gas storage complex located approximately 50 miles from Detroit in St. Clair County, Michigan. As of September 30, 2013, through these facilities, PNG had a total of nine operational salt storage caverns and two depleted reservoirs used for natural gas storage, with an aggregate owned working gas storage capacity of approximately 97 billion cubic feet (“Bcf”). We also own PNG Marketing, LLC, a wholly owned commercial optimization company that captures short-term market opportunities by leasing a portion of our storage capacity and engaging in related commercial marketing activities.

As of September 30, 2013, PAA owned approximately 63% of the equity interests in the Partnership, including our 2.0% general partner interest and limited partner interests consisting of 28,155,526 common units, 11,934,351 Series A subordinated units and 13,500,000 Series B subordinated units.

The condensed consolidated interim financial statements include the accounts of PNG and its subsidiaries, all of which are wholly owned, and should be read in conjunction with our consolidated financial statements and notes thereto presented in our 2012 Annual Report on Form 10-K. The financial statements have been prepared in accordance with the instructions for interim reporting as prescribed by the SEC. All adjustments (consisting only of normal recurring adjustments) that in the opinion of management were necessary for a fair statement of the results for the interim periods have been reflected. All significant intercompany transactions have been eliminated in consolidation, and certain reclassifications have been made to information from previous years to conform to the current presentation. These reclassifications do not affect net income attributable to the Partnership. The condensed balance sheet data as of December 31, 2012 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three and nine months ended September 30, 2013 should not be taken as indicative of the results to be expected for the full year.

As used in this document, the terms “we,” “us,” “our” and similar terms refer to the Partnership, unless the context indicates otherwise.

Note 2—Recent Accounting Pronouncements

Other than as discussed below and in our 2012 Annual Report on Form 10-K, no new accounting pronouncements have become effective or have been issued during the nine months ended September 30, 2013 that are of significance or potential significance to us.

In February 2013, the FASB issued guidance requiring an entity to present either in a single note or parenthetically on the face of the financial statements (i) the amount of significant items reclassified from each component of accumulated other comprehensive income (“AOCI”) and (ii) the income statement line items affected by the reclassification. This guidance became effective for interim and annual periods beginning after December 15, 2012. We adopted this guidance during the first quarter of 2013. During the three and nine months ended September 30, 2013 and 2012, all reclassifications out of AOCI were related to derivative instruments. Other than requiring disclosure, which is included in Note 10, our adoption did not have an impact on our financial position, results of operations or cash flows.

In July 2012, the FASB issued guidance intended to simplify the impairment test for indefinite-lived intangible assets other than goodwill by giving entities the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. The results of the qualitative assessment would be used as a basis in determining whether it is necessary to perform the two-step quantitative impairment testing. An entity can choose to perform the qualitative assessment on none, some or all of its indefinite-lived intangible assets, or may bypass the qualitative assessment and proceed directly to the quantitative impairment test. This guidance is effective for annual and interim

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impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted in certain circumstances. We adopted this guidance on January 1, 2013. Our adoption did not have an impact on our financial position, results of operations or cash flows.

In December 2011, the FASB issued guidance requiring disclosures of both gross and net information about recognized financial instruments and derivative instruments that are either (i) offset in accordance with the specified sections of GAAP or (ii) subject to an enforceable master netting arrangement or similar agreement. In January 2013, the FASB amended and clarified the scope of these disclosures to include only (i) derivative instruments, (ii) repurchase agreements and reverse repurchase agreements and (iii) securities lending transactions. Other than requiring additional disclosure, which is included in Note 10, our adoption did not have a material impact on our financial position, results of operations or cash flows.

Note 3—Proposed Merger with Plains All American Pipeline, L.P.

On October 22, 2013, the Partnership announced that it had entered into an Agreement and Plan of Merger with Plains All American Pipeline, L.P., a Delaware limited partnership (“PAA”), PAA Acquisition Company LLC., a Delaware limited liability company and wholly-owned subsidiary of PAA (“MergerCo”), and PNGS GP LLC, a Delaware limited liability company and the general partner of the Partnership (“PNG GP”).

The conflicts committee of the board of directors of PNG GP (the “PNG Conflicts Committee”) approved the Merger Agreement and the Merger Transactions and determined that the Merger Agreement and the Merger Transactions are fair and reasonable to the Partnership and to the holders of PNG common units (as defined below) unaffiliated with PAA. The PNG Conflicts Committee has caused PNG GP to approve the Merger Agreement and the Merger Transactions and directed that the Merger Agreement and the Merger Transactions be submitted to the unitholders of the Partnership at a special meeting of the unitholders for approval. The PNG Conflicts Committee recommended that the unitholders of the Partnership vote in favor of the proposal to approve the Merger Agreement and the Merger Transactions at the special meeting of the unitholders.

PAA owns 100% of the membership interests in PNG GP, approximately 46% of the Partnership’s 61.2 million outstanding common units (“PNG common units”) and all of the series A subordinated units and series B subordinated units (“PNG subordinated units”) representing limited partner interests in the Partnership. Pursuant to the Merger Agreement, MergerCo will merge with and into the Partnership at the effective time of the merger, with the Partnership surviving (the “Merger”), such that following the Merger, PNG GP will remain a wholly-owned subsidiary of PAA and the sole general partner of the Partnership, and PAA will be the sole limited partner of the Partnership. Except for the PNG common units owned by PAA, all PNG common units outstanding as of the effective time of the Merger will be cancelled and converted into the right to receive 0.445 common units representing limited partnership interests of PAA (“PAA common units”) per PNG common unit. The transaction is expected to result in approximately 14.7 million additional common units being issued by PAA.  In connection with the closing of the Merger, the owners of PAA’s general partner have agreed to reduce their incentive distribution rights under PAA’s agreement of limited partnership by $12 million in each of 2014 and 2015, $10 million in 2016 and $5 million per year thereafter. All of the PNG common units and PNG subordinated units owned by PAA will be unchanged and remain issued and outstanding representing limited partnership interests of the surviving entity, and no consideration will be delivered in respect thereof. Incentive distribution rights of PNG, which are owned by PNG GP, will also be unchanged and remain outstanding as incentive distribution rights of the surviving entity, and no consideration will be delivered in respect thereof. No fractional PAA common units will be issued in the Merger. Holders of PNG common units, other than PAA, will receive cash in lieu of receiving any fractional PAA common unit to which any holder of PNG common units would otherwise have been entitled in an amount equal to such fractional interest multiplied by the average of the closing price of PAA common units for the ten consecutive NYSE full trading days ending at the closing of the trading day on the last NYSE full trading day immediately preceding the day the merger closes. The parties anticipate that the Merger will close in the latter half of the fourth quarter of 2013, or early in the first quarter of 2014, pending the satisfaction of certain customary conditions thereto, and that the previously announced quarterly distribution of $0.3575 per PNG common unit payable to holders of record of such units on November 1, 2013 will be paid on November 14, 2013 as scheduled.

The Merger Agreement contains customary representations, warranties, covenants and agreements by each of the parties. Completion of the Merger is conditioned upon, among other things: (1) approval of the Merger Agreement and the transactions contemplated by the Merger Agreement, including the Merger (the “Merger Transactions”), by the affirmative vote of holders, as of the record date of the special meeting of the Partnership’s unitholders (including PAA), of a majority of the outstanding PNG common units, voting as a class, and a majority of the outstanding PNG subordinated units, voting as a class; (2) all required filings, consents, approvals, permits and authorizations in connection with the Merger having been made or obtained; (3) the absence of legal injunctions or impediments prohibiting the Merger Transactions; (4) the effectiveness of a registration statement on Form S-4 with respect to the issuance of PAA common units in the Merger; and (5) approval of the listing on the New York Stock Exchange, subject to official notice of issuance, of the PAA common units to be issued in the Merger.

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Pursuant to the Merger Agreement, PAA has agreed to vote the PNG common units and the PNG subordinated units owned beneficially or of record by it or any of its subsidiaries in favor of the merger proposal, including the 28,155,526 PNG common units currently held by PAA and the 25,434,351 PNG subordinated units currently held by PAA, which units represent approximately 46% of the outstanding PNG common units and 100% of the outstanding PNG subordinated units.

The Merger Agreement contains provisions granting both the Partnership and PAA the right to terminate the Merger Agreement for certain reasons, including, among others, if: (1) the Merger is not completed on or before April 30, 2014; (2) any governmental authority has issued a final and nonappealable statute, rule, order, decree or regulation enjoining or prohibiting consummation of the Merger; (3) under certain conditions, there has been a material breach of any of the representations, warranties, covenants or agreements set forth in the Merger Agreement by a party to the Merger Agreement which is not cured within 30 days following receipt by the breaching party of written notice from the non-breaching party; (4) the Partnership does not obtain the requisite unitholder approval of the Merger Agreement and the Merger Transactions at a special meeting of unitholders; or (5) either the PNG GP board of directors or the PNG Conflicts Committee, in accordance with the Merger Agreement, changes its recommendation to the unitholders of the Partnership with respect to approving the Merger Agreement and the Merger Transactions or publicly proposes to approve, adopt or recommend another proposal or offer from a third party relating to the acquisition of the Partnership (a “PNG Change in Recommendation”).

All costs and expenses incurred in connection with the Merger Agreement and the Merger Transactions will be paid by the party incurring such costs and expenses, except that if the Merger Agreement is terminated due to a PNG Change in Recommendation, the Partnership will pay the expenses incurred by PAA and if the Merger Agreement is terminated due to a material breach, the breaching party will pay the expenses incurred by the non-breaching party, in each case not to exceed $5 million.

During the three and nine months ended September 30, 2013, the Partnership incurred approximately $0.7 million in costs directly relating to the merger for investment banking fees, legal fees, and other transaction costs. Such amounts are reflected as a component of general and administrative expenses in our condensed consolidated statements of operations.

Note 4—Accounts Receivable

We review all outstanding accounts receivable balances on a monthly basis and record a reserve for amounts that we expect will not be fully recovered. We do not apply actual balances against the reserve until we have exhausted substantially all collection efforts. At September 30, 2013 and December 31, 2012, substantially all of our accounts receivable were current and we had no allowance for doubtful accounts.

Our accounts receivable are from a broad mix of customers, including local gas distribution companies, electric utilities, pipelines, direct industrial users, electric power generators, marketers, producers and affiliates of such entities.

To mitigate credit risk related to our accounts receivable, we have in place a rigorous credit review process. We closely monitor market conditions in order to make a determination with respect to the amount, if any, of credit to be extended to any given customer and the form and amount of financial performance assurances we require, in each case acting in accordance with the provisions of the credit terms and provisions set forth in our Federal Energy Regulatory Commission (“FERC”) approved tariffs, where applicable. Such financial assurances are commonly provided to us in the form of standby letters of credit, parental guarantees or advance cash payments. In addition, we enter into netting arrangements (contractual agreements that allow us and the counterparty to offset receivables and payables against each other) that cover substantially all of our natural gas purchases and sales transactions and also serve to mitigate credit risk.

Note 5—Inventory and Base Gas

Inventory and base gas consisted of the following as of the dates indicated (volumes and carrying values in thousands):

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(1)         Carrying value represents a weighted-average associated with various locations; accordingly, these values may not coincide with any published benchmarks for such products.

(2)         Includes fuel inventory held for operational purposes.

(3)         As of December 31, 2012, the carrying value of natural gas inventory reflects lower of cost or market adjustments of approximately $4.3 million. No lower of cost or market adjustments were included in the carrying value of natural gas inventory as of September 30, 2013. Lower of cost or market adjustments are reflected as a component of natural gas sales costs in our condensed consolidated statement of operations. The impacts of such adjustments are generally offset by the recognition of unrealized gains on derivative instruments being utilized to hedge the future sales of our natural gas inventory.

(4)         Natural gas inventory balances exclude derivative gains and losses associated with settled derivatives that were entered into to hedge natural gas inventory purchases.  As of September 30, 2013, net deferred gains of approximately $4.8 million associated with settled derivatives are reflected as a component of accumulated other comprehensive income/(loss) in our condensed consolidated balance sheet. Such amounts will be reclassified to earnings in conjunction with an earnings impact associated with the applicable purchase of inventory (typically when such inventory is sold).

(5)         As of September 30, 2013, we had outstanding loan agreements against base gas totaling approximately 5.0 Bcf of natural gas, which is scheduled to be returned to us by April 30, 2014 in accordance with the terms of the agreements.

(6)         During the nine months ended September 30, 2013, we purchased approximately 1.6 Bcf of additional base gas. Net cash payments of approximately $1.8 million were made during the nine months ended September 30, 2013 associated with the settlement of derivatives hedging base gas purchases. Such amounts are reflected as a component of accumulated other comprehensive income/(loss) in our condensed consolidated balance sheet as of September 30, 2013.

Note 6 — Goodwill

The table below reflects our changes in goodwill for the period indicated (in thousands):

Note 7—Debt

Debt consisted of the following as of the dates indicated (in thousands):

(1)         We classify as short-term debt any borrowings under our senior unsecured revolving credit facility that have been designated as working capital borrowings and must be repaid within one year. Such borrowings are primarily related

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to a portion of our funded hedged natural gas inventory (which includes the impact of cash settled derivative positions associated with owned inventory) and NYMEX margin requirements. Approximately $0.2 million and $0.9 million of interest expense attributable to such borrowings is reflected as a component of natural gas sales costs in our condensed consolidated statements of operations for the three and nine months ended September 30, 2013, respectively; and approximately $0.4 million and $0.9 million for the three and nine months ended September 30, 2012, respectively.

(2)         We estimate that the fair value of borrowings outstanding under our credit agreement (including the revolving credit facility and GO Bond Term Loans) and the PAA Promissory Note approximate carrying value due to the short maturity of both obligations and the variable interest rate terms set forth under our credit agreement. Our fair value estimate for amounts outstanding under our credit agreement is based upon observable market data and is classified within Level 2 of the fair value hierarchy. With regard to the PAA Promissory Note, our fair valuation estimation process incorporates our estimated credit spread, an unobservable input. As such, we consider this to be a Level 3 measurement within the fair value hierarchy.

Our revolving credit facility includes the ability to issue letters of credit. As of September 30, 2013, we had approximately $2.5 million of outstanding letters of credit under our revolving credit facility.

Total borrowings under our credit agreement for the nine months ended September 30, 2013 and 2012 were approximately $324.1 million and $188.0 million, respectively. Total repayments under our credit agreement were approximately $356.5 million and $241.9 million for the nine months ended September 30, 2013 and 2012, respectively.

As of September 30, 2013, we were in compliance with the covenants required by our credit agreement.

Interest payments on the PAA Promissory Note are paid semiannually on the last business day of June and December.  Interest paid to PAA during the nine months ended September 30, 2013 was approximately $4.0 million. Accrued interest payable due under the PAA Promissory Note (which is reflected as a component of accounts payable and accrued liabilities in our condensed consolidated balance sheet) was approximately $2.0 million as of September 30, 2013. There was no accrued interest payable due under the PAA Promissory Note as of December 31, 2012.

Note 8—Net Income per Limited Partner Unit

Basic and diluted net income per limited partner unit is determined pursuant to the two-class method for Master Limited Partnerships as prescribed in the FASB guidance.  The two-class method is an earnings allocation formula that is used to determine earnings to our general partner, limited partner unit holders and participating securities according to distributions pertaining to the current period’s net income and participation rights in undistributed earnings.  Under this method, all earnings are allocated to our general partner, limited partner unit holders and participating securities based on their respective rights to receive distributions, regardless of whether those earnings would actually be distributed during a particular period from an economic or practical perspective.

The Partnership calculates basic and diluted net income per limited partner unit by dividing net income, after deducting the amount allocated to the general partner’s interest, incentive distribution rights (“IDRs”) and participating securities, by the basic and diluted weighted-average number of limited partner units outstanding during the period.  Participating securities include LTIP awards that have vested distribution equivalent rights (“DERs”), which entitle the grantee to a cash payment equal to the cash distribution paid on our outstanding common units.

Diluted net income per limited partner unit is computed based on the weighted-average number of units plus the effect of dilutive potential units outstanding during the period using the two-class method.  Our LTIP awards that contemplate the issuance of common units are considered dilutive unless (i) vesting occurs only upon the satisfaction of a performance condition and (ii) that performance condition has yet to be satisfied.  LTIP awards that are deemed to be dilutive are reduced by a hypothetical unit repurchase based on the remaining unamortized fair value, as prescribed by the treasury stock method in guidance issued by the FASB.

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The following table sets forth the computation of basic and diluted earnings per limited partner unit for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands, except per unit data):

(1)         Participating securities consist of LTIP awards (see Note 10) containing vested distribution equivalent rights which entitle the grantee to a cash payment equal to the cash distribution paid on our outstanding common units.

(2)         For each of the periods presented, our Series B subordinated units were not entitled to participate in our earnings, losses or distributions in accordance with the terms of our partnership agreement as necessary performance conditions have not been satisfied. As a result, no earnings were allocated to the Series B subordinated units in our determination of basic and diluted net income per limited partner unit.

(3)         The determination of diluted weighted average units outstanding includes the impact of equity-classified LTIP awards which vest based solely on the passage of time.  Equity-classified LTIP awards which contain provisions whereby vesting occurs only upon the satisfaction of a performance condition, which have not been satisfied during the periods presented, are excluded from the determination of diluted weighted average units outstanding.

(4)         The conversion of (i) our Series A subordinated units to common units and (ii) our Series B subordinated units to Series A subordinated units or common units is subject to certain performance conditions. None of these performance conditions had been satisfied as of September 30, 2013 therefore, there is no dilutive impact of such units in our determination of diluted net income per limited partner unit.

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Note 9—Partners’ Capital and Distributions

Outstanding Units

From December 31, 2012 through September 30, 2013, changes in our issued and outstanding common, Series A subordinated or Series B subordinated units were as follows:

Distributions

The following table details the distributions on our common and Series A subordinated units declared for 2013 quarterly periods or paid during the nine months ended September 30, 2013 (in thousands, except per unit amounts):

(1)         Payable to unitholders of record on November 1, 2013, for the period July 1, 2013 through September 30, 2013.

Equity Offerings

During the first quarter of 2013, we entered into an equity distribution agreement with a financial institution pursuant to which we may offer and sell, through this financial institution as our sales agent, common units representing limited partner interests having an aggregate offering price of up to $75 million. Sales of such common units will be made by means of ordinary brokers’ transactions on the NYSE at market prices, in block transactions or as otherwise agreed upon by our sales agent and us. Under the terms of the agreement, we have the option to sell common units to our sales agent as principal for its own account at a price to be agreed upon at the time of the sale. For any such sales, we will enter into a separate terms agreement with the sales agent.  Through September 30, 2013, we issued an aggregate of 1.9 million common units under this agreement, generating net proceeds (after offering costs of approximately $0.7 million) of approximately $41.2 million, including our general partner’s proportionate capital contribution.

Note 10—Equity-Indexed Compensation

Long-Term Incentive Plan (“LTIP”)

For discussion of our equity-indexed compensation awards, see Note 13 to our consolidated financial statements included in Part IV of our 2012 Annual Report on Form 10-K.

Awards Granted Under the 2010 LTIP Plan

In February 2013, approximately 300,000 equity-classified phantom units were granted under the 2010 LTIP Plan. Such awards will vest in one-third tranches on the dates we pay annualized distributions of $1.45, $1.50 and $1.55. Fifty percent of any unvested phantom units in a particular tranche that remain outstanding as of the August 2016, 2017 and 2018 distribution dates will vest on such date and the remaining portion of such tranche and all associated DERs will be forfeited as of the August 2019 distribution date if the applicable performance conditions for such tranche have not been met by such

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date. DERs associated with these awards will vest in one-third increments on the August 2014, 2015 and 2016 distribution dates, provided that our quarterly distribution remains at least $1.43 (annualized) per unit.

In January 2013, approximately 100,000 awards were granted under the 2010 LTIP Plan. Approximately 70,000 of the awards will vest as follows: (i) one-third will vest upon the August 2015 distribution date; (ii) one-third will vest upon the August 2016 distribution date; and (iii) one-third will vest upon the later of the August 2017 distribution date and the date we pay a $1.48 annualized distribution.  In addition, 100% of any unvested awards that remain outstanding upon the August 2018 distribution date shall vest.  The other approximately 30,000 awards will vest upon the August 2016 distribution date. Of the approximately 100,000 awards granted, approximately 60,000 awards are liability-classified and approximately 40,000 awards are equity-classified.

Special PAA Awards

In February 2013, PAA granted 143,000 Special PAA awards to certain members of our management. These awards are denominated in units of PAA, and will vest 50% on PAA’s August 2018 distribution date and 50% on PAA’s August 2019 distribution date provided that PNG’s annualized distribution averages at least $1.48 and $1.43 per unit, respectively, for the twelve months prior to each vesting date. DERs associated with these awards will vest on the date PAA pays an annualized distribution of $2.40 per unit, provided that PNG’s quarterly distribution remains at least $1.43 (annualized) per unit. Any unvested Special PAA awards that remain outstanding on December 31, 2020 will be forfeited.  The entire economic burden of these awards will be borne solely by PAA and will not impact our cash or units outstanding.  As the recipients of these awards serve as officers of PNG and we benefit from the services they provide, we will recognize the fair value of these awards as compensation expense over the service period, with such expense recognized as a capital contribution. 

Consolidated Equity-Indexed Compensation Information

Our equity-indexed compensation activity for awards denominated in PNG units issued under the 2010 LTIP Plan is summarized in the following table (units in thousands): 

(1)                  Amounts do not include Special PAA awards or transaction awards granted by PAA.

(2)                  Includes approximately 850,000 equity-classified awards and 154,000 liability-classified awards.

The tables below summarize the expense recognized and cash settled vestings related to equity-indexed compensation awards during the three and nine months ended September 30, 2013 and 2012 (in thousands):