Employees, Retirement and Incentive Plans

Employees who provide direct services to us are employed by Holly Logistic Services, L.L.C., an HFC subsidiary. Their costs, including salaries, bonuses, payroll taxes, benefits and other direct costs, are charged to us monthly in accordance with an omnibus agreement that we have with HFC. These employees participate in the retirement and benefit plans of HFC. Our share of retirement and benefit plan costs was $6.9 million, $3.6 million and $2.9 million for the years ended December 31, 2012, 2011 and 2010, respectively. These costs include retirement costs of $4.3 million, $2.2 million and $1.5 million for the years ended December 31, 2012, 2011 and 2010, respectively. Our accounting policy for the recognition of compensation expense for awards with pro-rata vesting (a significant proportion of our awards) is to expense the costs ratably over the vesting periods.

We have an incentive plan (“Long-Term Incentive Plan”) for employees and non-employee directors who perform services for us. The Long-Term Incentive Plan consists of four components: restricted units, performance units, unit options and unit appreciation rights.

As of December 31, 2012, we have two types of incentive-based awards which are described below. The compensation cost charged against income was $2.7 million, $2.1 million and $2.2 million for the years ended December 31, 2012, 2011 and 2010, respectively. We currently purchase units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan. Effective February 2012, the units authorized to be granted under our Long-Term Incentive Plan were increased from 700,000 to 2,500,000 units, of which 1,833,024 have not yet been granted, assuming no forfeitures of the unvested units and full achievement of goals for the performance units already granted.

Restricted Units

Under our Long-Term Incentive Plan, we grant restricted units to selected employees and non-employee directors who perform services for us, with most awards vesting over a period of one to three years. Although full ownership of the units does not transfer to the recipients until the units vest, the recipients have distribution and voting rights on these units from the date of grant. The fair value of each restricted unit award is measured at the market price as of the date of grant and is amortized over the vesting period.

A summary of restricted unit activity and changes during the year ended December 31, 2012 is presented below:



Restricted Units	Units		Weighted- Average Grant-Date Fair Value		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value ($000)
Outstanding at January 1, 2012 (nonvested)	59,072		$	25.23
Granted	90,528		31.01
Vesting and transfer of full ownership to recipients	(89,034	)	27.10
Forfeited	(2,094	)	28.66
Outstanding at December 31, 2012 (nonvested)	58,472		$	31.21	1.1 years	$	1,923

The fair values of restricted units that were vested and transferred to recipients during the years ended December 31, 2012, 2011 and 2010 were $2.4 million, $1.4 million and $1.6 million respectively. As of December 31, 2012, there was $1.0 million of total unrecognized compensation expense related to nonvested restricted unit grants which is expected to be recognized over a weighted-average period of 1.1 years. For the years ended December 31, 2011 and 2010, the grant date closing unit price applied to the number of units ultimately awarded was $29.05 and 21.57 respectively.

Performance Units

Under our Long-Term Incentive Plan, we grant performance units to selected executives who perform services for us. Performance units granted are payable based upon the growth in our distributable cash flow per common unit over the performance period, and vest over a period of 3 years. As of December 31, 2012, estimated unit payouts for outstanding nonvested performance unit awards were 110%.

We granted 11,436 performance units to certain officers in March 2012. These units will vest over a 3-year performance period ending December 31, 2014 and are payable in HEP common units. The number of units actually earned will be based on the growth of our distributable cash flow per common unit over the performance period, and can range from 50% to 150% of the number of performance units granted. Although common units are not transferred to the recipients until the performance units vest, the recipients have distribution rights with respect to the common units from the date of grant. For the year ended December 31, 2012, the fair value of these performance units is based on the grant date closing unit price of $30.61 and will apply to the number of units ultimately awarded. For the years ended December 31, 2011 and 2010, the grant date closing unit price applied to the number of units ultimately awarded was $29.83 and $21.30 respectively.

A summary of performance unit activity and changes during the twelve months ended December 31, 2012 is presented below:



Performance Units	Units
Outstanding at January 1, 2012 (nonvested)	85,982
Granted	11,436
Vesting and transfer of common units to recipients	(42,920	)
Outstanding at December 31, 2012 (nonvested)	54,498

The grant-date fair value of performance units vested and transferred to recipients during the years ended December 31, 2012, 2011 and 2010 was $0.5 million, $0.9 million and $0.6 million, respectively. Based on the weighted average fair value at December 31, 2012 of $26.06, there was $0.5 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of 0.6 years.

During the year ended December 31, 2012, we paid $4.9 million for the purchase of our common units in the open market for the issuance and settlement of all unit awards under our Long-Term Incentive Plan.