
8.	NET INCOME PER LIMITED PARTNER UNIT

We calculate net income available to limited partners based on the distributions pertaining to each period’s net income. After considering 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 other participating securities in accordance with the contractual terms of our partnership agreement and as prescribed under the two-class method. Participating securities include IDRs and awards under our Valero Energy Partners LP 2013 Incentive Compensation Plan (2013 ICP) that receive DERs. However, the terms of our partnership agreement limit the general partner’s incentive distribution to the amount 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.

Net losses of our Predecessor are allocated to the general partner. Subsequent to the effective dates of the acquisitions from Valero, we calculate net income available to limited partners based on the methodology described above.

Basic net income per limited partner unit is determined pursuant to the two-class method for master limited partnerships. 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 (i) distributions pertaining to each period’s net income and (ii) participation rights in undistributed earnings.

Diluted net income per limited partner unit is also determined using the two-class method, unless the treasury stock method is more dilutive. For the three months ended March 31, 2017 and 2016, we used the two-class method to determine diluted net income per limited partner unit. We did not have any potentially dilutive instruments outstanding during the three months ended March 31, 2017 and 2016.

Effective August 10, 2016, all of our subordinated units, which were owned by Valero, were converted on a one-for-one basis into common units. The subordinated units were only allocated earnings generated by us through the conversion date. See Note 9 for further discussion of the conversion of subordinated units.

Net income per unit was computed as follows (in thousands, except per unit amounts):



	Three Months Ended March 31, 2017
	General Partner		Limited Partners Common Units		Restricted Units		Total
Allocation of net income to determine net income available to limited partners:
Distributions, excluding general partner’s IDRs	$	595	$	29,136	$	—	$	29,731
General partner’s IDRs	8,307		—		—		8,307
DERs	—		—		5		5
Distributions and DERs declared	8,902		29,136		5		38,043
Undistributed earnings	565		19,525		4		20,094
Net income available to limited partners – basic and diluted	$	9,467	$	48,661	$	9	$	58,137

Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding			67,664

Net income per limited partner unit – basic and diluted			$	0.72



	Three Months Ended March 31, 2016
			Limited Partners
	General Partner		Common Units		Subordinated Units		Restricted Units		Total
Allocation of net income to determine net income available to limited partners:
Distributions, excluding general partner’s IDRs	$	512	$	12,665	$	9,788	$	—	$	22,965
General partner’s IDRs	2,638		—		—		—		2,638
DERs	—		—		—		5		5
Distributions and DERs declared	3,150		12,665		9,788		5		25,608
Undistributed earnings	354		9,692		7,640		4		17,690
Net income available to limited partners – basic and diluted	$	3,504	$	22,357	$	17,428	$	9	$	43,298

Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding			36,520		28,790

Net income per limited partner unit – basic and diluted			$	0.61	$	0.61