Employees, Retirement and Incentive Plans

Direct support for our operations is provided by Holly Logistic Services, L.L.C., an HFC subsidiary, which utilizes personnel employed by HFC who are dedicated to performing services for us. 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 $7.4 million, $7.4 million and $6.9 million for the years ended December 31, 2014, 2013 and 2012, respectively. These costs include retirement costs of $4.4 million, $5.0 million and $4.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.

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 or phantom units, performance units, unit options and unit appreciation rights. 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.

As of December 31, 2014, we have three types of incentive-based awards which are described below. The compensation cost charged against income was $3.5 million, $3.6 million and $2.9 million for the years ended December 31, 2014, 2013 and 2012, 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. As of December 31, 2014, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 1,530,748 have not yet been granted, assuming no forfeitures of the unvested units and full achievement of goals for the performance units already granted.

Restricted and Phantom Units

Under our Long-Term Incentive Plan, we grant restricted units to non-employee directors and selected employees 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.

In addition, we grant phantom units to certain employees, which vest over a period of one year. Vested units are paid in common units. Full ownership of the units does not transfer to the recipient until the units vest, and the recipients do not have voting or distribution rights on these units until they vest.

The fair value of each restricted unit and phantom 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 and phantom unit activity and changes during the year ended December 31, 2014, is presented below:



Restricted and Phantom Units	Units		Weighted- Average Grant-Date Fair Value
Outstanding at January 1, 2014 (nonvested)	122,951		$	33.36
Granted	91,852		33.49
Vesting and transfer of full ownership to recipients	(80,645	)	33.22
Forfeited	(8,081	)	35.28
Outstanding at December 31, 2014 (nonvested)	126,077		$	33.43

The fair values of restricted and phantom units that were vested and transferred to recipients during the years ended December 31, 2014, 2013 and 2012 were $2.7 million, $1.2 million and $2.4 million respectively. As of December 31, 2014, there was $3.0 million of total unrecognized compensation expense related to nonvested restricted unit and phantom unit grants, which is expected to be recognized over a weighted-average period of 1.5 years. For the years ended December 31, 2013 and 2012, the grant date closing unit price applied to the number of restricted units and phantom units ultimately awarded was $34.66 and $31.01 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 three years.

We granted 13,967 target performance units to certain officers in October 2014. These units will vest over a three year period ending December 31, 2017. The performance units granted 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 target 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. The fair value of these performance units is based on the grant date closing unit price of $33.57 for the performance units granted in October 2014 and will apply to the number of units ultimately awarded. For the years ended December 31, 2013 and 2012, the weighted average grant date closing unit price applied to the number of units awarded was $37.90 and $30.61 respectively.

A summary of performance unit activity and changes during the twelve months ended December 31, 2014, is presented below:



Performance Units	Units
Outstanding at January 1, 2014 (nonvested)	75,216
Granted	13,967
Vesting and transfer of common units to recipients	(17,938	)
Outstanding at December 31, 2014 (nonvested)	71,245

The grant date fair value of performance units vested and transferred to recipients was $0.5 million during each of the three years ended December 31, 2014, 2013 and 2012. Based on the weighted average fair value of performance units outstanding at December 31, 2014, of $2.6 million, there was $1.1 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of 1.2 years.

During the year ended December 31, 2014, we paid $3.6 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.