Partners’ Equity, Income Allocations and Cash Distributions

As of December 31, 2016, HFC held 22,380,030 of our common units and the 2% general partner interest, which together constituted a 37% ownership interest in us. Additionally, HFC owned all incentive distribution rights.

Common Unit Private Placement

On September 16, 2016, we entered into a common unit purchase agreement in which certain purchasers agreed to purchase in a private placement 3,420,000 common units representing limited partnership interests, at a price of $30.18 per common unit. The private placement closed on October 3, 2016, and we received proceeds of approximately $103 million, which were used to finance a portion of the Woods Cross acquisition discussed in Note 2. As a result of the private placement, HFC now owns a 37% interest in us (including the 2% general partner interest). To maintain the 2% general partner interest, HFC contributed $2.1 million in October 2016.

Continuous Offering Program

On May 10, 2016, we established a continuous offering program under which HEP may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. As of December 31, 2016, HEP has issued 703,455 units under this program, providing $23.5 million in gross proceeds. We incurred sales commissions of $0.5 million associated with the issuance of these units. In connection with this program and to maintain the 2% general partner interest, HFC made capital contributions totaling $0.5 million as of December 31, 2016.

We intend to use our net proceeds for general partnership purposes, which may include funding working capital, repayment of debt, acquisitions and capital expenditures. Amounts repaid under our credit facility may be reborrowed from time to time.

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 incentive distributions and other priority allocations are 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,
	2016			2015			2014
	(In thousands)
General partner interest in net income	$	3,165		$	1,936		$	1,446
General partner incentive distribution	54,008			40,401			33,221
Net loss attributable to predecessor	$	(10,657	)	$	(2,702	)	$	(1,747	)
Total general partner interest in net income	$	46,516		$	39,635		$	32,920

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:



	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%

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

On January 26, 2017, we announced our cash distribution for the fourth quarter of 2016 of $0.6075 per unit. The distribution is payable on all common and general partner units and was paid February 14, 2017, to all unitholders of record on February 6, 2017.

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,
	2016		2015		2014
	(In thousands, except per unit data)
General partner interest in distribution	$	4,088	$	3,563	$	3,264
General partner incentive distribution	54,008		40,401		33,221
Total general partner distribution	58,096		43,964		36,485
Limited partner distribution	143,796		129,192		121,714
Total regular quarterly cash distribution	$	201,892	$	173,156	$	158,199
Cash distribution per unit applicable to limited partners	$	2.3625	$	2.2025	$	2.0750

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, would have been recorded in our financial statements at the time of acquisition as increases to our properties and equipment and intangible assets instead of decreases to our partners’ equity.