Note 3—Net Income Per Common Unit

Basic and diluted net income per common 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, limited partners 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 preferred unitholders, 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 common unit by dividing net income attributable to PAA (after deducting the amount allocated to the preferred unitholders, the general partner’s interest, IDRs and participating securities) by the basic and diluted weighted-average number of common 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 common unit is computed based on the weighted average number of common units plus the effect of potentially dilutive securities outstanding during the period. When applying the if-converted method prescribed by FASB guidance, the possible conversion of our Series A preferred units was excluded from the calculation of diluted net income per common unit for the three months ended March 31, 2016 as the effect was antidilutive. See Note 7 to our Condensed Consolidated Financial Statements for additional information regarding our Series A preferred units. 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 common unit repurchase based on the remaining unamortized fair value, as prescribed by the treasury stock method in guidance issued by the FASB. See Note 15 to our Consolidated Financial Statements included in Part IV of our 2015 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 common unit (in millions, except per unit data):

	Three Months Ended March 31,
	2016			2015
Basic Net Income per Common Unit
Net income attributable to PAA	$	202		$	283
Less: Distributions to Series A preferred units (1)	(23		)	—
Less: Distributions to general partner (1)	(155		)	(148		)
Less: Distributions to participating securities (1)	(1		)	(2		)
Less: Undistributed loss allocated to general partner (1)	5			3

Net income attributable to common unitholders in accordance with application of the two-class method for MLPs	$	28		$	136


Basic weighted average common units outstanding	398			383

Basic net income per common unit	$	0.07		$	0.36


Diluted Net Income per Common Unit
Net income attributable to PAA	$	202		$	283
Less: Distributions to Series A preferred units (1)	(23		)	—
Less: Distributions to general partner (1)	(155		)	(148		)
Less: Distributions to participating securities (1)	(1		)	(2		)
Less: Undistributed loss allocated to general partner (1)	5			3

Net income attributable to common unitholders in accordance with application of the two-class method for MLPs	$	28		$	136


Basic weighted average common units outstanding	398			383
Effect of dilutive securities: Weighted average LTIP units	1			2

Diluted weighted average common units outstanding	399			385


Diluted net income per common unit	$	0.07		$	0.35

(1)

We calculate net income attributable to common unitholders 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, common unitholders 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 common 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 common 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.