Partners’ Equity, Income Allocations and Cash Distributions

As of December 31, 2012, HFC held 24,255,030 of our common units and the 2% general partner interest, which together constituted a 44% ownership interest in us.

On November 29, 2012, we announced a two-for-one unit split, payable in the form of a common unit distribution for each issued and outstanding common unit. The unit distribution was paid January 16, 2013 to all unitholders of record on January 7, 2013. All references to unit and per unit amounts in this document and related disclosures have been adjusted to reflect the effect of the unit split for all periods presented.

Common Unit Issuances

2012 Issuances

On July 12, 2012, we issued HFC 2,059,800 of our common units as partial consideration for our acquisition of its 75% interest in UNEV.

We received aggregate capital contributions of $1.7 million from our general partner to maintain its 2% general partner interest concurrent with the 2012 common unit issuance described above.

2011 Issuances

We issued in a public offering 2,950,000 of our common units priced at $26.75 per unit in December 2011. Aggregate net proceeds of $75.8 million were used to pay a portion of outstanding principal of the Promissory Notes.

We issued 7,615,230 of our common units to HFC in November 2011 as partial consideration for the purchase of certain tankage, loading rack and crude receiving assets located at HFC's El Dorado and Cheyenne refineries.

We received aggregate capital contributions of $5.9 million from our general partner to maintain its 2% general partner interest concurrent with the 2011 common unit issuances described above.

Under our registration statement filed with the SEC using a “shelf” registration process, we currently have the ability to raise up to $2 billion by offering securities, through one or more prospectus supplements that would describe, among other things, the specific amounts, prices and terms of any securities offered and how the proceeds would be used. Any proceeds from the sale of securities would be used for general business purposes, which may include, among other things, funding acquisitions of assets or businesses, working capital, capital expenditures, investments in subsidiaries, the retirement of existing debt and/or the repurchase of common units or other securities.

Allocations of Net Income

Net income attributable to HEP is allocated between limited partners and the general partner interest in accordance with the provisions of the partnership agreement. HEP net income allocated to the general partner includes incentive distributions that are declared subsequent to quarter end. After the amount of incentive distributions is allocated to the general partner, the remaining net income attributable to HEP is allocated to the partners based on their weighted-average ownership percentage during the period.

The following table presents the allocation of the general partner interest in net income for the periods presented below:



	Years Ended December 31,
	2012		2011		2010
	(in thousands)
General partner interest in net income	$	1,464	$	1,287	$	903
General partner incentive distribution	20,986		15,519		11,181
Total general partner interest in net income	$	22,450	$	16,806	$	12,084

Cash Distributions

We consider regular cash distributions to unitholders on a quarterly basis, although there is no assurance as to the future cash distributions since they are dependent upon future earnings, cash flows, capital requirements, financial condition and other factors.

Within 45 days after the end of each quarter, we distribute all of our available cash (as defined in our partnership agreement) to unitholders of record on the applicable record date. The amount of available cash generally is all cash on hand at the end of the quarter; less the amount of cash reserves established by our general partner to provide for the proper conduct of our business, comply with applicable laws, any of our debt instruments, or other agreements; or provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters; plus all cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter.

We make distributions in the following manner: 98% to our common unitholders, pro rata, and 2% to the general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter and any arrearages in payment of the minimum quarterly distributions for any prior quarters, thereafter. Cash in excess of the minimum quarterly distributions is distributed to the unitholders and the general partner based on certain percentages presented below.

Our general partner, HEP Logistics, is entitled to incentive distributions if the amount we distribute with respect to any quarter exceeds specified target levels.



	Total Quarterly Distribution	Marginal Percentage Interest in Distributions
	Target Amount	Unitholders	General Partner
Minimum quarterly distribution	$0.25	98%	2%
First target distribution	Up to $0.275	98%	2%
Second target distribution	above $0.275 up to $0.3125	85%	15%
Third target distribution	above $0.3125 up to $0.375	75%	25%
Thereafter	Above $0.375	50%	50%

On January 24, 2013 we announced our cash distribution for the fourth quarter of 2012 of $0.47 per unit. The distribution is payable on all common and general partner units and will be paid February 14, 2013 to all unitholders of record on February 4, 2013.

The following table presents the allocation of our regular quarterly cash distributions to the general and limited partners for the periods in which they apply. Our distributions are declared subsequent to quarter end; therefore, the amounts presented do not reflect distributions paid during the periods presented below.



	Years Ended December 31,
	2012		2011		2010
	(In thousands, except per unit data)
General partner interest	$	2,566	$	1,981	$	1,724
General partner incentive distribution	20,986		15,519		11,181
Total general partner distribution	23,552		17,500		12,905
Limited partner distribution	102,222		81,508		73,223
Total regular quarterly cash distribution	$	125,774	$	99,008	$	86,128
Cash distribution per unit applicable to limited partners	$	1.835	$	1.740	$	1.660

As a master limited partnership, we distribute our available cash, which historically has exceeded our net income attributable to HEP because depreciation and amortization expense represents a non-cash charge against income. The result is a decline in our partners’ equity since our regular quarterly distributions have exceeded our quarterly net income attributable to HEP. Additionally, if the asset contributions and acquisitions from HFC had occurred while we were not a consolidated variable interest entity of HFC, our acquisition cost, in excess of HFC’s historical basis in the transferred assets of $305.6 million, exclusive of depreciation and amortization, would have been recorded in our financial statements, as increases to our properties and equipment and intangible assets instead of decreases to our partners’ equity.