Partners’ Equity, Income Allocations and Cash Distributions

HFC currently holds 11,097,615 of our common units and the 2% general partner interest, which together constitutes a 42% ownership interest in us.

Common Unit Issuances

2011 Issuances

We issued in a public offering 1,475,000 of our common units priced at $53.50 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 3,807,615 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.

2009 Issuances

We issued 1,373,609 of our common units having a value of $53.5 million to Sinclair as partial consideration of our total $79.2 million purchase of Sinclair’s Tulsa logistics assets in December 2009.

We issued in a public offering 2,185,000 of our common units priced at $35.78 per unit in November 2009. Aggregate net proceeds of $74.9 million were used to fund the cash portion of our December 2009 asset acquisitions, to repay outstanding borrowings under the Credit Agreement and for general partnership purposes.

Additionally, we issued in a public offering 2,192,400 of our common units priced at $27.80 per unit in May 2009. Net proceeds of $58.4 million were used to repay outstanding borrowings under the Credit Agreement and for general partnership purposes.

We received aggregate capital contributions of $3.8 million from our general partner to maintain its 2% general partner interest concurrent with the 2009 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 $781 million 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 Holly Energy Partners, L.P. 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,
	2011		2010		2009
	(In thousands)
General partner interest in net income	$	1,250	$	971	$	1,210
General partner incentive distribution	15,519		11,181		6,737
Total general partner interest in net income attributable to HEP	$	16,769	$	12,152	$	7,947

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 presented below:



	Total Quarterly Distribution Target Amount	Marginal Percentage Interest in Distributions
	Total Quarterly Distribution Target Amount	Unitholders		General Partner
Minimum quarterly distribution	$0.50	98	%	2	%
First target distribution	Up to $0.55	98	%	2	%
Second target distribution	above $0.55 up to $0.625	85	%	15	%
Third target distribution	above $0.625 up to $0.75	75	%	25	%
Thereafter	Above $0.75	50	%	50	%

On January 25, 2012, we announced our cash distribution for the fourth quarter of 2011 of $0.885 per unit. The distribution is payable on all common and general partner units and will be paid February 14, 2012 to all unitholders of record on February 6, 2012.

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,
	2011		2010		2009
	(in thousands, except per unit data)
General partner interest	$	1,981	$	1,724	$	1,356
General partner incentive distribution	15,519		11,181		6,737
Total general partner distribution	17,500		12,905		8,093
Limited partner distribution	81,508		73,223		59,725
Total regular quarterly cash distribution	$	99,008	$	86,128	$	67,818
Cash distribution per unit applicable to limited partners	$	3.48	$	3.32	$	3.16

As a master limited partnership, we distribute our available cash, which has historically exceeded our net income 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. Additionally, if the assets contributed and acquired 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 $295 million 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.