UPDATE 2-Plains All American ups stake in gas storage business

* Acquires remaining stake in PNGS for $220 mln

* CEO sees deal immediately adding to results

* Deal expected to close on Sept. 3

* To ask board to raise quarterly distribution by 3 pct (Adds source comment, details about Vulcan Capital ownership)

Aug 27 (Reuters) - Pipeline operator Plains All American Pipeline LP (PAA.N) said one of its units will buy investment firm Vulcan Capital's 50 percent indirect stake in PAA Natural Gas Storage (PNGS) LLC for $220 million.

A source familiar with the transaction said the deal had amounted to a low double-digit return for Vulcan, which invested in the asset in 2005.

Vulcan Capital is owned by Microsoft Corp (MSFT.O) co-founder Paul Allen. The firm did not immediately return a call seeking comment.

"This transaction provides economic returns solidly in excess of our weighted average cost of capital and will result in immediate accretion to the partnership," Plains All American Chief Executive Greg Armstrong said in a statement.

The acquisition will make Plains All American, which already had a 50 percent stake in PNGS, the sole owner of the natural gas storage business.

The aggregate purchase price of $220 million consists of $90 million cash, 1.9 million PAA common units valued at $90 million, and deferred contingent cash consideration of up to $40 million, the company said.

The transaction is expected to close on Sept. 3.

The Houston-based company said it also intends to recommend to its board a 3 percent increase in quarterly distribution to 92 cents a unit, effective Nov. 2009

Shares of the company closed at $47.44 Thursday on the New York Stock Exchange.

For the alerts, double-click. [ID:nWNAB4460] (Reporting by Shradhha Sharma in Bangalore and Megan Davies in New York; Editing by Anil D'Silva)