Note 3—Net Income Per Limited Partner Unit

Basic and diluted net income per limited partner unit is determined pursuant to the two-class method for MLPs as prescribed in FASB guidance. The two-class method is an earnings allocation formula that is used to determine earnings to our general partner, common unitholders 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 unitholders 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.

We calculate basic and diluted net income per limited partner unit by dividing net income attributable to PAA (after deducting the amount allocated to the general partner’s interest, 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 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 limited partner units plus the effect of dilutive potential limited partner 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 limited partner unit repurchase based on the remaining unamortized fair value, as prescribed by the treasury stock method in guidance issued by the FASB. See Note 16 to our Consolidated Financial Statements included in Part IV of our 2014 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 net income per limited partner unit for the periods indicated (in millions, except per unit data):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Basic Net Income per Limited Partner Unit
Net income attributable to PAA	$	249	$	323	$	657	$	994
Less: General partner’s incentive distribution (1)		(148)		(124)		(437)		(351)
Less: General partner 2% ownership (1)		(2)		(4)		(5)		(13)
Net income attributable to limited partners		99		195		215		630
Less: Undistributed earnings allocated and distributions to participating securities (1)		(1)		(1)		(4)		(5)
Net income attributable to limited partners in accordance with application of the two-class method for MLPs	$	98	$	194	$	211	$	625

Basic weighted average limited partner units outstanding		398		370		393		365

Basic net income per limited partner unit	$	0.25	$	0.52	$	0.54	$	1.71

Diluted Net Income per Limited Partner Unit
Net income attributable to PAA	$	249	$	323	$	657	$	994
Less: General partner’s incentive distribution (1)		(148)		(124)		(437)		(351)
Less: General partner 2% ownership (1)		(2)		(4)		(5)		(13)
Net income attributable to limited partners		99		195		215		630
Less: Undistributed earnings allocated and distributions to participating securities (1)		(1)		(1)		(4)		(5)
Net income attributable to limited partners in accordance with application of the two-class method for MLPs	$	98	$	194	$	211	$	625

Basic weighted average limited partner units outstanding		398		370		393		365
Effect of dilutive securities: Weighted average LTIP units		1		1		2		2
Diluted weighted average limited partner units outstanding		399		371		395		367

Diluted net income per limited partner unit	$	0.24	$	0.52	$	0.53	$	1.70

⁽¹⁾

We calculate net income attributable 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 our partnership agreement and as further prescribed under the two-class method.

Pursuant to the terms of our partnership agreement, the general partner’s incentive distribution is limited to a percentage of available cash, which, as defined in our partnership agreement, is net of reserves deemed appropriate. As such, IDRs are not allocated undistributed earnings or distributions in excess of earnings in the calculation of net income per limited partner unit. If, however, undistributed earnings were allocated to our IDRs beyond amounts distributed to them under the terms of our partnership agreement, basic and diluted net income per limited partner unit as reflected in the table above would not have been impacted, as we did not have undistributed earnings for any of the periods presented.