Net Income Per Common Unit

After consideration of distributions to preferred unitholders (whether paid in cash or in-kind), basic and diluted net income per common unit is determined pursuant to the two-class method as prescribed in FASB guidance. This method is an earnings allocation formula that is used to determine allocations to our general partner (for periods prior to the Simplification Transactions), limited partners and participating securities according to distributions pertaining to the current period’s net income and participation rights in undistributed earnings or distributions in excess of earnings. Under the two-class method, net income is reduced by distributions pertaining to the period, and all remaining earnings or distributions in excess of earnings are then allocated to our general partner (for periods prior to the Simplification Transactions), common unitholders and participating securities based on their respective rights to share in distributions, regardless of whether those earnings would actually be distributed during a particular period from an economic or practical perspective. 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.

The Simplification Transactions, which closed on November 15, 2016, included the permanent elimination of our IDRs and the economic rights associated with our 2% general partner interest in exchange for the issuance by us to AAP of common units and the assumption by us of AAP’s debt. As such, beginning with the distribution pertaining to the fourth quarter of 2016, our general partner is no longer entitled to receive distributions on the IDRs or general partner interest. See Note 1 for additional discussion of the Simplification Transactions.

We calculate basic and diluted net income per common unit by dividing net income attributable to PAA (after deducting amounts allocated to the preferred unitholders and participating securities, and for periods prior to the closing of the Simplification Transactions, the 2% general partner’s interest and IDRs) by the basic and diluted weighted average number of common units outstanding during the period.

The diluted weighted average number of common units is computed based on the weighted average number of common units plus the effect of potentially dilutive securities outstanding during the period, which include (i) our Series A preferred units and (ii) our equity-indexed compensation plan awards. See Note 12 for additional information regarding our Series A preferred units. See Note 17 for a complete discussion of our equity-indexed compensation plan awards. 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 years ended December 31, 2017 and 2016 as the effect was antidilutive. Our equity-indexed compensation plan awards that contemplate the issuance of common units are considered dilutive unless (i) they become vested only upon the satisfaction of a performance condition and (ii) that performance condition has yet to be satisfied. Equity-indexed compensation plan awards that were deemed to be dilutive during the three years ended December 31, 2018 were 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.

The following table sets forth the computation of basic and diluted net income per common unit (in millions, except per unit data):



	Year Ended December 31,
	2018			2017			2016
Basic Net Income per Common Unit
Net income attributable to PAA	$	2,216		$	856		$	726
Distributions to Series A preferred unitholders	(149		)	(142		)	(122		)
Distributions to Series B preferred unitholders	(49		)	(11		)	—
Distributions to general partner	—			—			(412		)
Distributions to participating securities	(3		)	(2		)	(4		)
Undistributed loss allocated to general partner	—			—			14
Other	(6		)	(16		)	(2		)
Net income allocated to common unitholders ⁽¹⁾	$	2,009		$	685		$	200

Basic weighted average common units outstanding ⁽²⁾	726			717			464

Basic net income per common unit	$	2.77		$	0.96		$	0.43

Diluted Net Income per Common Unit
Net income attributable to PAA	$	2,216		$	856		$	726
Distributions to Series A preferred unitholders	—			(142		)	(122		)
Distributions to Series B preferred unitholders	(49		)	(11		)	—
Distributions to general partner	—			—			(412		)
Distributions to participating securities	(3		)	(2		)	(4		)
Undistributed loss allocated to general partner	—			—			14
Other	—			(16		)	(2		)
Net income allocated to common unitholders ⁽¹⁾	$	2,164		$	685		$	200

Basic weighted average common units outstanding ⁽²⁾	726			717			464
Effect of dilutive securities:
Series A preferred units	71			—			—
Equity-indexed compensation plan awards	2			1			2
Diluted weighted average common units outstanding	799			718			466

Diluted net income per common unit	$	2.71		$	0.95		$	0.43

⁽¹⁾

We calculate net income allocated to common unitholders based on the distributions pertaining to the current period’s net income (whether paid in cash or in-kind). After adjusting for the appropriate period’s distributions, the remaining undistributed earnings or excess distributions over earnings (“undistributed loss”), if any, are allocated to the general partner (for periods prior to the Simplification Transactions), common unitholders and participating securities in accordance with the contractual terms of our partnership agreement in effect for the period and as further prescribed under the two-class method.


⁽²⁾	We considered the common units issued in connection with the Simplification Transactions to be outstanding for the entire fourth quarter of 2016 in the calculation of weighted average common units outstanding to more closely reflect the ownership interests in us with rights to the distributions for the periods included in the calculation of net income allocated to common unitholders.