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, common 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, common 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 attributable to Plains, 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. As a result of our two-for-one unit split that was effected on October 1, 2012, we have adjusted the computation of limited partners’ net income per unit in our condensed consolidated statements of income and in the table below to present the amounts on a post-split basis for all periods presented.

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. See Note 10 to our Consolidated Financial Statements included in Part IV of our 2011 Annual Report on Form 10-K for a complete discussion of our LTIP awards including specific discussion regarding DERs.

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, 2012 and 2011 (amounts in millions, except per unit data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Numerator for Basic and Diluted Net Income per Limited Partner Unit:
Net income attributable to Plains	$	165		$	281		$	774		$	688
Less: General partner’s incentive distribution (1)	(74		)	(55		)	(208		)	(158		)
Less: General partner 2% ownership (1)	(2		)	(5		)	(12		)	(10		)
Net income available to limited partners	89			221			554			520
Less: Undistributed earnings allocated and distributions to participating securities (1)	(1		)	—			(3		)	—
Net income available to limited partners in accordance with application of the two-class method for MLPs	$	88		$	221		$	551		$	520

Denominator for Basic and Diluted Net Income per Limited Partner Unit:
Basic weighted average number of limited partner units outstanding	329			299			322			294
Effect of dilutive securities: Weighted average LTIP units	2			1			3			2
Diluted weighted average number of limited partner units outstanding	331			300			325			296

Basic net income per limited partner unit	$	0.27		$	0.74		$	1.71		$	1.77

Diluted net income per limited partner unit	$	0.27		$	0.74		$	1.70		$	1.76

(1) We calculate net income available to limited partners based on the distributions pertaining to the current period’s net income. After adjusting for the appropriate period’s distributions, the remaining undistributed earnings or excess distributions over earnings, if any, are allocated to the general partner, limited partners and participating securities in accordance with the contractual terms of the partnership agreement and as further prescribed under the two-class method.

The terms of our partnership agreement limit the general partner’s incentive distribution to the amount of available cash, which as defined in the partnership agreement is net of reserves deemed appropriate. As such, IDRs are not allocated undistributed earnings or distributions in excess of earnings for EPU calculation purposes. If, however, undistributed earnings were allocated to our IDRs beyond amounts distributed to them under the terms of the partnership agreement, basic and diluted earnings per limited partner unit as reflected in the table above would be impacted as follows: