The following discussion is intended to provide investors with an understanding of our financial condition and results of our operations and should be read in conjunction with our historical consolidated financial statements and accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations as presented in our 2011 Annual Report on Form 10-K. For more detailed information regarding the basis of presentation for the following financial information, see the condensed consolidated financial statements and related notes that are contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Overview of Operating Results, Capital Spending and Significant Activities

Adjusted EBITDA for the six months ended June 30, 2012 was approximately $57.5 million, a 22% increase over Adjusted EBITDA of approximately $47.0 million for the six months ended June 30, 2011. This increase was primarily the result of the completion of the Southern Pines Acquisition on February 9, 2011, incremental revenues attributable to capacity expansions (including additional caverns with working gas capacities of approximately 9 Bcf and 8 Bcf at our Pine Prairie facility during 2012 and 2011, respectively) and results of PNG Marketing, LLC (our commercial optimization company). See "- Results of Operations" for further discussion and analysis of our operating results. Expansion capital expenditures for the six months ended June 30, 2012 were approximately $29.0 million.

During June 2012, we partially exercised the accordion feature of our revolving credit facility, increasing borrowing capacity from $250 million to $350 million and we reached an agreement with applicable lenders to amend certain terms and provisions of our senior unsecured credit agreement. As a result of this amendment, the revolving credit facility commitments may be further increased to $550 million, subject to certain terms and conditions. See Note 7 to the condensed consolidated financial statements for further discussion.

Results of Operations



The tables below summarize our results of operations for the periods indicated
(in thousands, except working capacity and monthly operating metrics data):



                                      Three Months Ended           Favorable/(Unfavorable)
                                           June 30,                     Variance (1)
                                      2012           2011              $                %
Revenues
Firm storage services              $    35,475    $   35,415    $            60             -
Hub services and merchant
storage (2)                             64,336        18,207             46,129           253 %
Other                                      330           742               (412 )         (56 )%
Total revenues                         100,141        54,364             45,777            84 %

Storage related costs - Hub
services and merchant storage
(3)                                    (61,473 )     (16,308 )          (45,165 )        (277 )%
Storage related costs - Firm
storage services (4)                    (3,037 )      (4,263 )            1,226            29 %
Field operating costs                   (3,009 )      (2,915 )              (94 )          (3 )%
General and administrative
expenses                                (4,616 )      (4,641 )               25             1 %
Other income/(expense), net                 28            17
Acquisition-related expenses                 -            55
Equity compensation expense              1,093         1,262
Mark-to-market of open
derivative positions                       542           (64 )
Adjusted EBITDA                    $    29,669    $   27,507    $         2,162             8 %

Reconciliation to net income
Adjusted EBITDA                    $    29,669    $   27,507    $         2,162             8 %
Depreciation, depletion and
amortization                            (9,318 )      (8,940 )             (378 )          (4 )%
Interest expense, net of
capitalized interest                    (1,709 )      (1,445 )             (264 )         (18 )%
Equity compensation expense             (1,093 )      (1,262 )
Acquisition-related expenses                 -           (55 )
Mark-to-market of open
derivative positions                      (542 )          64
Net income                         $    17,007    $   15,869    $         1,138             7 %

Operating Data:
Net revenue margin(5)(6)           $    36,173    $   33,729    $         2,444             7 %
Field operating costs / G&A /
Other                                   (6,504 )      (6,222 )             (282 )          (5 )%
Adjusted EBITDA                    $    29,669    $   27,507    $         2,162             8 %

Average working storage
capacity (Bcf)                              80            75                  5             7 %

Monthly Operating Metrics
($/Mcf):
Net revenue margin (5)(6)          $      0.15    $     0.15    $             -             -
Field operating costs / G&A /
Other                                    (0.03 )       (0.03 )                -             -
Adjusted EBITDA                    $      0.12    $     0.12    $             -             -

(2) Includes revenues associated with sales of natural gas through commercial marketing activities.

(3) Includes costs associated with natural gas sold through commercial marketing activities and storage related costs (including fuel expense) attributable to hub services and merchant storage revenues.

(4) Includes storage related costs (including fuel expense) attributable to firm storage services revenues.

(5) Net revenue margin equals total revenues minus storage related costs.

(6) Net revenue margin excludes the impact of mark-to-market of open derivative positions.

                                            Six Months Ended         Favorable/(Unfavorable)
                                                June 30,                  Variance (1)
                                            2012         2011             $              %
Revenues
Firm storage services                     $  69,282    $ 64,539    $         4,743           7 %
Hub services and merchant storage (2)       138,092      38,704             99,388         257 %
Other                                         1,489       1,541                (52 )        (3 )%
Total revenues                              208,863     104,784            104,079          99 %

Storage related costs - Hub services
and merchant storage (3)                   (131,552 )   (35,710 )          (95,842 )      (268 )%
Storage related costs - Firm storage
services (4)                                 (6,813 )    (9,362 )            2,549          27 %
Field operating costs                        (6,056 )    (6,002 )              (54 )        (1 )%
General and administrative expenses          (9,663 )   (13,825 )            4,162          30 %
Other income/(expense), net                      17          17
Acquisition-related expenses                      -       4,050
Insurance deductible related to
property damage                                   -         500
Equity compensation expense                   2,132       2,658
Mark-to-market of open derivative
positions                                       556        (103 )
Adjusted EBITDA                           $  57,484    $ 47,007    $        10,477          22 %

Reconciliation to net income
Adjusted EBITDA                           $  57,484    $ 47,007    $        10,477          22 %
Depreciation, depletion and
amortization                                (18,394 )   (15,409 )           (2,985 )       (19 )%
Interest expense, net of capitalized
interest                                     (3,377 )    (2,279 )           (1,098 )       (48 )%
Equity compensation expense                  (2,132 )    (2,658 )
Acquisition-related expenses                      -      (4,050 )
Mark-to-market of open derivative
positions                                      (556 )       103
Insurance deductible related to
property damage                                   -        (500 )
Net income                                $  33,025    $ 22,214    $        10,811          49 %

Operating Data:
Net revenue margin(5)(6)                  $  71,054    $ 59,609    $        11,445          19 %
Field operating costs / G&A / Other         (13,570 )   (12,602 )             (968 )        (8 )%
Adjusted EBITDA                           $  57,484    $ 47,007    $        10,477          22 %

Average working storage capacity (Bcf)           78          67                 11          17 %

Monthly Operating Metrics ($/Mcf):
Net revenue margin (5)(6)                 $    0.15    $   0.15    $             -           -
Field operating costs / G&A / Other           (0.03 )     (0.03 )                -           -
Adjusted EBITDA                           $    0.12    $   0.12    $             -           -

(2) Includes revenues associated with sales of natural gas through commercial marketing activities.

(3) Includes costs associated with natural gas sold through commercial marketing activities and storage related costs (including fuel expense) attributable to hub services and merchant storage revenues.

(4) Includes storage related costs (including fuel expense) attributable to firm storage services revenues.

(5) Net revenue margin equals total revenues minus storage related costs.

(6) Net revenue margin excludes the impact of mark-to-market of open derivative positions.

Non-GAAP and Segment Financial Measures

To supplement our financial information presented in accordance with GAAP, management uses Adjusted EBITDA and distributable cash flow in its evaluation of past performance and prospects for the future. Management believes that the presentation of such additional financial measures provides useful information to investors regarding our financial condition and results of operations because these measures, when used in conjunction with related GAAP financial measures,
(i) provide additional information about our core operations and ability to generate and distribute cash flow, (ii) provide investors with the financial analytical framework upon which management bases financial, operational, compensation and planning decisions and (iii) present measurements that investors, rating agencies and debt holders have indicated are useful in assessing us and our results of operations. Adjusted EBITDA and/or distributable cash flow may exclude, for example, the impact of unique and infrequent items, items outside of management's control and/or items that are not indicative of our core operating results and business outlook, which we have defined hereinafter as "selected items impacting comparability." These additional financial measures are reconciled to net income, the most directly comparable measures as reported in accordance with GAAP, in the following table and should be viewed in addition to, and not in lieu of, our consolidated financial statements and footnotes.

We define Adjusted EBITDA as earnings before interest expense, taxes, depreciation, depletion and amortization, equity compensation plan charges, unrealized gains and losses from derivative activities and applicable "selected items impacting comparability."

Distributable cash flow, as determined by our general partner, is defined as:
(i) net income; plus or minus, as applicable, (ii) any amounts necessary to offset the impact of any items included in net income that do not impact the amount of available cash; plus (iii) any acquisition-related expenses deducted from net income and associated with (a) successful acquisitions or (b) any other potential acquisitions that have not been abandoned; minus (iv) any acquisition related expenses covered by clause (iii)(b) immediately preceding that relate to
(a) potential acquisitions that have since been abandoned or (b) potential acquisitions that have not been consummated within one year following the date such expense was incurred (except that if the potential acquisition is the subject of a pending purchase and sale agreement as of such one-year date, such one-year period of time shall be extended until the first to occur of the termination of such purchase and sale agreement or the first day following the closing of the acquisition contemplated by such purchase and sale agreement); and minus (v) maintenance capital expenditures. The types of items covered by clause (ii) above include (a) depreciation, depletion and amortization expense,
(b) any gain or loss from the sale of assets not in the ordinary course of business, (c) any gain or loss as a result of a change in accounting principle,
(d) any non-cash gains or items of income and any non-cash losses or expenses, including asset impairments, amortization of debt discounts, premiums or issue costs, mark-to-market activity associated with hedging and with non-cash revaluation and/or fair valuation of assets or liabilities and (e) earnings or losses from unconsolidated subsidiaries except to the extent of actual cash distributions received. Distributable cash flow does not reflect actual cash on hand that is available for distribution to our unitholders.

The following table reconciles Non-GAAP and segment financial measures to the most directly comparable measures as reported in accordance with GAAP (in thousands):

                                      Three Months Ended June 30,         Six Months Ended June 30,
                                         2012              2011             2012             2011
Adjusted EBITDA reconciliation
Net income                          $       17,007    $       15,869    $      33,025    $      22,214
Interest expense, net of amounts
capitalized                                  1,709             1,445            3,377            2,279
Depreciation, depletion and
amortization                                 9,318             8,940           18,394           15,409
Selected items impacting
Adjusted EBITDA
Equity compensation expense                  1,093             1,262            2,132            2,658
Acquisition-related expenses                     -                55                -            4,050
Mark-to-market of open
derivative positions                           542               (64 )            556             (103 )
Insurance deductible related to
property damage                                  -                 -                -              500
Adjusted EBITDA                     $       29,669    $       27,507    $      57,484    $      47,007

Distributable cash flow
reconciliation
Net income                          $       17,007    $       15,869    $      33,025    $      22,214
Depreciation, depletion and
amortization                                 9,318             8,940           18,394           15,409
Acquisition-related expenses                     -                55                -            4,050
Maintenance capital expenditures              (190 )            (109 )           (372 )           (215 )
Other non cash items:
Equity compensation expense, net
of cash payments                               508               662            1,454            2,039
Mark-to-market of open
derivative positions                           542               (64 )            556             (103 )
Distributable cash flow             $       27,185    $       25,353    $      53,057    $      43,394

Three Months Ended June 30, 2012 as Compared to the Three Months Ended June 30, 2011

Revenues, Volumes and Related Costs. As noted in the table above, our total revenue and related costs increased during the three months ended June 30, 2012 (the "2012 period") when compared to the three months ended June 30, 2011 (the "2011 period"). The primary reasons for such increase are the results of PNG Marketing, LLC (our commercial optimization company) and incremental revenues attributable to the expansion of our working gas capacity at our Pine Prairie and Southern Pines facilities. These and other significant variances related to these periods are discussed in more detail below:

† Firm storage services - Firm storage services revenues did not change significantly in the 2012 period as compared to the 2011 period. Incremental revenues attributable to the expansion of our working gas capacity at our Pine Prairie and Southern Pines facilities were offset by decreased storage rates on contracts executed to replace expiring contracts on existing capacity and lower fuel in kind revenues, both of which resulted from lower natural gas prices throughout 2011 and into 2012. Also, additional working storage capacity was retained for use by our commercial optimization company in the 2012 period as compared to the 2011 period. Revenues generated through the use of storage capacity by our commercial optimization company are reflected as merchant storage revenues when natural gas we own is withdrawn from storage and sold.

† Hub services and merchant storage - Hub services and merchant storage revenues (which include revenues from sales of natural gas by our commercial optimization company) increased in the 2012 period as compared to the 2011 period. The primary reason for the increase in 2012 as compared to 2011 is due to an increase in volumes of natural gas sold by our commercial optimization company.

† Other - Other revenues decreased in the 2012 period as compared to the 2011 period primarily due to an unrealized loss of approximately $0.5 million recognized in the 2012 period associated with certain commodity derivatives which no longer qualified for hedge accounting treatment and the impact of lower volumes of crude oil produced in conjunction with our ongoing liquids removal efforts at our Bluewater facility. These decreases were partially offset by approximately $0.4 million of access fee revenues generated under our natural gas services agreement with Plains Gas Solutions, LLC.

† Storage related costs - Hub services and merchant storage - Hub services and merchant storage related costs (which includes costs associated with natural gas sold by our commercial optimization company) increased in the 2012 period as

compared to the 2011 period. The primary reason for the increase in the 2012 period as compared to the 2011 period is due to the increase in volumes of natural gas sold by our commercial optimization company.

† Storage related costs - Firm storage services - Firm storage services related costs decreased in the 2012 period as compared to the 2011 period. The decrease in the 2012 period as compared to the 2011 period is primarily due to a reduction in storage and transportation capacity leased from third parties along with lower fuel costs resulting from a decline in natural gas prices.

Other Costs and Expenses. The significant variances are discussed further below:

† Field operating costs - Field operating costs did not change significantly in the 2012 period when compared to the 2011 period.

† General and administrative expenses - General and administrative expenses did not change significantly in the 2012 period as compared to the 2011 period. Additionally, we recognized approximately $0.3 million and $0.8 million of equity compensation expense associated with awards granted by PAA during the 2012 and 2011 periods, respectively. Although we will not bear the economic burden of these awards, we benefit from the services underlying these awards.

† Depreciation, depletion and amortization - Depreciation, depletion and amortization expense increased in the 2012 period as compared to the 2011 period. The increase resulted primarily from an increased amount of depreciable assets resulting from capacity expansions at our Pine Prairie and Southern Pines facilities.

† Interest expense, net of capitalized interest - Interest expense, net of capitalized interest, increased in the 2012 period when compared to the 2011 period. Interest expense, on a gross basis, decreased to approximately $3.8 million in the 2012 period as compared to approximately $4.5 million in the 2011 period due to lower average interest rates in the 2012 period as compared to the 2011 period and was partially offset by higher average debt balances in the 2012 period as compared to the 2011 period. Capitalized interest was approximately $2.1 million and $3.1 million in the 2012 and 2011 periods, respectively.

Six Months Ended June 30, 2012 as Compared to the Six Months Ended June 30, 2011

Revenues, Volumes and Related Costs. As noted in the table above, our total revenue and related costs increased during the six months ended June 30, 2012 (the "2012 period") when compared to the six months ended June 30, 2011 (the "2011 period"). The primary reasons for such increase are the completion of the Southern Pines Acquisition on February 9, 2011, results of PNG Marketing, LLC, and incremental revenues attributable to the expansion of our working gas capacity at our Pine Prairie and Southern Pines facilities. These and other significant variances related to these periods are discussed in more detail below:

† Firm storage services - Firm storage services revenues increased in the 2012 period as compared to the 2011 period primarily due to the completion of the Southern Pines Acquisition and incremental revenues attributable to the expansion of our working gas capacity at our Pine Prairie and Southern Pines facilities. These increases were partially offset by decreased storage rates on contracts executed to replace expiring contracts on existing capacity and lower fuel in kind revenues, both of which resulted from lower natural gas prices throughout 2011 and into 2012. Also, additional working storage capacity was retained for use by our commercial optimization company in the 2012 period as compared to the 2011 period.

† Hub services and merchant storage - Hub services and merchant storage revenues (which include revenues from sales of natural gas by our commercial optimization company) increased in the 2012 period as compared to the 2011 period. The primary reason for the increase in 2012 as compared to 2011 is due to an increase in volumes of natural gas sold by our commercial optimization company.

† Other - Other revenues did not change significantly in the 2012 period as compared to the 2011 period. The 2012 period includes approximately $0.8 million of access fee revenues generated under our natural gas services agreement with Plains Gas Solutions, LLC and an unrealized loss of approximately $0.5 million associated with certain commodity derivatives which no longer qualified for hedge accounting treatment Also, lower volumes of crude oil were produced in conjunction with our ongoing liquids removal efforts at our Bluewater facility during the 2012 period when compared to the 2011 period.

† Storage related costs - Hub services and merchant storage - Hub services and merchant storage related costs (which includes costs associated with natural gas sold by our commercial optimization company) increased in the 2012 period as compared to the 2011 period. The primary reason for the increase in the 2012 period as compared to the 2011 period is due to the increase in volumes of natural gas sold by our commercial optimization company.

† Storage related costs - Firm storage services - Firm storage services related costs decreased in the 2012 period as compared to the 2011 period. The decrease in the 2012 period as compared to the 2011 period is primarily due to a reduction in storage and transportation capacity leased from third parties along with lower fuel costs resulting from a decline in natural gas prices.

Other Costs and Expenses. The significant variances are discussed further below:

† Field operating costs - Field operating costs did not change significantly in the 2012 period when compared to the 2011 period. Increases in operating expenses during the 2012 period associated with the Southern Pines Acquisition and Pine Prairie expansion were approximately offset by $0.5 million of expense recognized during the 2011 period for the property insurance deductible related to the January 2011 operational incident and fire at our Bluewater facility.

† General and administrative expenses - General and administrative expenses decreased in the 2012 period as compared to the 2011 period. The 2011 period includes approximately $4.1 million of acquisition-related costs associated with the Southern Pines Acquisition. Additionally, we recognized approximately $0.8 million and $1.9 million of equity compensation expense associated with awards granted by PAA during the 2012 and 2011 periods, respectively. Although we will not bear the economic burden of these awards, we benefit from the services underlying these awards.

† Depreciation, depletion and amortization - Depreciation, depletion and amortization expense increased in the 2012 period as compared to the 2011 period. The increase resulted primarily from an increased amount of depreciable assets resulting from the Southern Pines acquisition and our internal capital expansion projects at our Pine Prairie and Southern Pines facilities. Additionally, amortization of intangible assets acquired in conjunction with the Southern Pines Acquisition was approximately $8.2 million and $6.5 million during the 2012 and 2011 periods, respectively.

† Interest expense, net of capitalized interest - Interest expense, net of capitalized interest, increased in the 2012 period when compared to the 2011 period. Interest expense, on a gross basis, of approximately $7.9 million in the 2012 period was consistent with approximately $8.0 million in the 2011 period. Higher average debt balances in the 2012 period were approximately offset by lower average interest rates. Capitalized interest was approximately $4.5 million and $5.7 million in the 2012 and 2011 periods, respectively.

Outlook

Overall market conditions during the three months ended June 30, 2012 for both hub services and firm storage services were comparable to those from the three months ended June 30, 2011, but still reflected seasonal spreads (October-January) and volatility levels that were low relative to historical trends. During the three months ended June 30, 2012, seasonal spreads for 2012-2013, which are a proxy for the current fundamental value of storage, ranged from $0.60 to $0.81, an increase in range from $0.18 to $0.28 as compared to the three months ended June 30, 2011, but at the low end of the range during . . .