**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

Washington, D.C. 20549

 

**FORM 10-Q**

**(Mark One)**

[                X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT                OF 1934

**For the quarterly period ended June 30, 2007**

 

OR

 

o TRANSITION REPORT PURSUANT TO                SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to                ____________

 

Commission File Number 1-32940

 

**NUSTAR GP HOLDINGS, LLC**

(Exact name of registrant as specified in its charter)

 

| Delaware                        | 85-0470977          |
|---------------------------------|---------------------|
| (State or other jurisdiction of | (I.R.S. Employer    |
| incorporation or organization)  | Identification No.) |

 

2330 North Loop 1604 West

San Antonio, Texas

(Address of principal executive offices)

78248

(Zip Code)

 

Telephone number: (210) 918-2000

(Registrant’s telephone number, including area                code)

 

Indicate by check mark whether the registrant (1) has filed all                reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act                of 1934 during the preceding 12 months (or for such shorter period that the                registrant was required to file such reports), and (2) has been subject to such                filing requirements for the past 90 days.**Yes****X_****No___** 

 

Indicate by check mark whether the registrant is a large accelerated                filer, an accelerated filer, or a non-accelerated filer. The definition of                “accelerated filer and large accelerated filer” is in Rule 12b-2 of the                Securities Exchange Act. (Check one):

Large accelerated filer                ___      Accelerated filer__Non-accelerated filer**X**_

 

Indicate by check mark whether the registrant is a shell company (as                defined in Rule 12b-2 of the Exchange Act).

| **Yes ___** | **No** | **X** |
|-------------|--------|-------|

 

The number of units outstanding as of August 1, 2007 was                42,503,303.

 

                 

**NUSTAR GP HOLDINGS, LLC AND SUBSIDIARIES**

**FORM 10-Q**

                 

**TABLE OF CONTENTS**

 

 

| **PART I –                            FINANCIAL INFORMATION**                                                                                                                           |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                          |   |  |
| Item 1. Financial                            Statements:                                                                                                                                      |        |
|     Consolidated                            Balance Sheets as of June 30, 2007 and December 31, 2006                                                                      | 3      |
|     Consolidated                            Statements of Income for the Three and Six Months Ended June 30,2007                            and 2006                      | 4      |
|                                Consolidated Statements                            of Cash Flows for the Six Months Ended June 30,2007 and                            2006      | 5      |
|     Condensed                            Notes to Consolidated Financial Statements                                                                                       | 6      |
|                                                                                                                                                                                               |        |
| Item 2.                            Management’s Discussion and Analysis of Financial Condition and                            Results of Operations

                              | 15     |
|                                                                                                                                                                                          |   |  |
| Item 4. Controls and                            Procedures                                                                                                                                    | 23     |
|                                                                                                                                                                                          |   |  |
| PART II - OTHER                            INFORMATION                                                                                                                                        |        |
|                                                                                                                                                                                          |   |  |
| Item 1A. Risk                            Factors                                                                                                                                              | 24     |
|                                                                                                                                                                                          |   |  |
| Item 4. Submission of Matters to a                            Vote of Security Holders                                                                                                        | 24     |
|                                                                                                                                                                                          |   |  |
| Item 6. Exhibits                                                                                                                                                                              | 24     |
|                                                                                                                                                                                          |   |  |
| SIGNATURES                                                                                                                                                                                    |   | 26 |

|  |  |
|--|--|

PART I – FINANCIAL                INFORMATION

Item 1. Financial Statements

**NUSTAR                GP HOLDINGS, LLC**

****

CONSOLIDATED                BALANCE SHEETS

**(Thousands of Dollars)**
|                                                                                                                                                                        | **June                            30,**                                                   | **December                            31,**                                                            |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                        | **2007**                                                                                  | **2006**                                                                                               |
|                                                                                                                                                                        | (Unaudited)                                                                               |                                                                                                   |
| **Assets**                                                                                                                                                                  |                                                                                      |                                                                                                   |
| Current assets:                                                                                                                                                             |                                                                                      |                                                                                                   |
|    Cash and cash                            equivalents                                                                                  | $      2,731                                                | $                                1,107                                             |
|    Accounts                            receivable                                                                                        | 103                                                                                       | 624                                                                                                    |
|    Receivable from                            NuStar Energy L.P.                                                                         | 4,410                                                                                     | 2,315                                                                                                  |
|    Income                            tax receivable                                                                                      | 1,431                                                                                     | -                                                                                                      |
|                               Prepaid expenses                                                                                           | 90                                                                                        | 210                                                                                                    |
|                               Deferred income tax asset                                                                                  |                               2,138                                             |                                  776                                          |
|                                       Total current assets                                       |  10,903                                                                              |                               5,032                                                          |
|                                                                                                                                                                        |                                                                                      |                                                                                                   |
| Investment in NuStar Energy                            L.P.                                                                                        | 554,187                                                                                   | 557,775                                                                                                |
| Long-term receivable from                            NuStar Energy L.P.                                                                            | 5,717                                                                                     | 5,749                                                                                                  |
| Deferred income tax                            asset                                                                                               | 1,939                                                                                     | 1,929                                                                                                  |
| Deferred charges and other                            assets, net                                                                                  |                                       - |                                       8                   |
|            Total                            assets     

                              | $                            572,746                                                      | $                            570,493                                                                   |
|                                                                                                                                                                        |                                                                                      |                                                                                                   |
| **Liabilities                            and****Members****’ Equity**                                                                                                 |                                                                                      |                                                                                                   |
| Current                            liabilities:                                                                                                                             |                                                                                      |                                                                                                   |
|    Accounts                            payable                                                                                           | $                                   268                | $                                        - |
|    Income                            taxes payable                                                                                       | -                                                                                         | 811                                                                                                    |
|                               Accrued compensation                            expense                                                    | 6,913                                                                                     | 3,001                                                                                                  |
|                               Accrued liabilities                                                                                        | 425                                                                                       | 704                                                                                                    |
|    Taxes                            other than income taxes                                                                              |                                   470                       |                                       -              |
|                                      Total current liabilities                                        |                                8,076                                       |                               4,516                                                          |
|                                                                                                                                                                        |                                                                                      |                                                                                                   |
| Employee benefit plan                            liabilities                                                                                       | 13,529                                                                                    | 10,334                                                                                                 |
| Commitments and                            contingencies (Note 8)                                                                                                           |                                                                                      |                                                                                                   |
|                                                                                                                                                                        |                                                                                      |                                                                                                   |
| Members’                            equity                                                                                                   | 547,715                                                                                   | 554,884                                                                                                |
| Accumulated other                            comprehensive income                                                                                  |                                3,426                                       |                                   759                                    |
|                                    Total members’ equity                                                  | 551,141                                                                                   | 555,643                                                                                                |
|                                    Total liabilities and members’                            equity                 | $                            572,746                                                      | $                            570,493                                                                   |

See Condensed                Notes to Consolidated Financial Statements.

----

****NUSTAR GP HOLDINGS, LLC                CONSOLIDATED STATEMENTS OF INCOME                (Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)****

 

|                                                                                |   | **Three                                Months Ended June 30,** |       | **Six                                Months Ended June 30,** |   |
|-------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|------------|--------------------------------------------------------------|--------|
|                                                                                |   | **2007**                                                       |       | **2006**                                                     |   | **2007** |   | **2006** |   |
|                                                                                |   |                                                           |       |                                                         |   |   |   |   |   |   |   |   |   |
|                                                                                |   |                                                           |       |                                                         |   |   |   |   |   |   |   |   |   |
| Equity in earnings of NuStar Energy L.P.                                            |   | $                                                              | 11,951     |                                                         | $      | 9,329 |   | $ | 21,508 |   | $ | 20,504 |   |
|                                                                                |   |                                                           |       |                                                         |   |   |   |   |   |   |   |   |   |
| General and administrative expenses                                                 |   |                                                           | (747       | )                                                            |   | (18 | ) |   | (1,543 | ) |   | (26 | ) |
| Other income (expense), net                                                         |   |                                                           | 24         |                                                         |   | 36 |   |   | (2 | ) |   | 37 |   |
| Interest expense, net – affiliated                                            |   |                                                           | —    |                                                         |   | (4,704 | ) |   | — |   |   | (9,414 | ) |
| Interest income, net                                                                |   |                                                           | 18         |                                                         |   | — |   |   | 14 |   |   | — |   |
|                                                                                |   |                                                           |       |                                                         |   |   |   |   |   |   |   |   |   |
| Income before income tax benefit                                (expense)           |   |                                                           | 11,246     |                                                         |   | 4,643 |   |   | 19,977 |   |   | 11,101 |   |
| Income tax benefit (expense)                                                        |   |                                                           | 2          |                                                         |   | (320 | ) |   | 42 |   |   | (403 | ) |
| Net income                                                                          |   | $                                                              | 11,248     |                                                         | $      | 4,323 |   | $ | 20,019 |   | $ | 10,698 |   |
|                                                                                |   |                                                           |       |                                                         |   |   |   |   |   |   |   |   |   |
| Basic net income per unit                                                           |   | $                                                              | 0.26       |                                                         | $      | 0.10 |   | $ | 0.47 |   | $ | 0.25 |   |
|                                                                                |   |                                                           |       |                                                         |   |   |   |   |   |   |   |   |   |
| Weighted average number of basic units                                outstanding   |   |                                                           | 42,500,000 |                                                         |   | 42,500,000 |   |   | 42,500,000 |   |   | 42,500,000 |   |
|                                                                                |   |                                                           |       |                                                         |   |   |   |   |   |   |   |   |   |
| Diluted net income per unit                                                         |   | $                                                              | 0.26       |                                                         | $      | 0.10 |   | $ | 0.47 |   | $ | 0.25 |   |
|                                                                                |   |                                                           |       |                                                         |   |   |   |   |   |   |   |   |   |
| Weighted average number of diluted units                                outstanding |   |                                                           | 42,501,705 |                                                         |   | 42,500,000 |   |   | 42,501,540 |   |   | 42,500,000 |   |

 

 

See Condensed                Notes to Consolidated Financial Statements.

----

**NUSTAR GP                HOLDINGS, LLC**

**C**ONSOLIDATED                STATEMENTS OF CASH FLOWS

**(Unaudited, Thousands of Dollars)**
|                                                                                                                                                                                                                                                                 | **Six                            Months Ended June 30,**                            |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                 | **2007**                                                                            | **2006** |
| **Cash Flows from                            Operating Activities:**                                                                                                                                                                                                 |                                                                                |   |
| Net income                                                                                                                                                                                                                                  | $                               20,019                               | $                               10,698 |
| Adjustments to                            reconcile net income to net cash                                                                                                                                                                                           |                                                                                |   |
|   provided by operating                            activities:                                                                                                                                                                                                  |                                                                                |   |
|   Equity in                            earnings of NuStar Energy L.P.                                                                                                                                                                  | (21,508)                                                                            | (20,504) |
|                              Distributions of equity in earnings of NuStar Energy                            L.P.                                                                                                                      | 21,508                                                                              | 20,504 |
|   (Benefit)                            provision for deferred income                            taxes                                                                                                                                  | (1,372)                                                                             | 251 |
|                                                          Increase                            in employee benefit plan                            liabilities                                                                           | 3,195                                                                               | - |
|   Changes in                            current assets and liabilities                                                                                                                                                                 | 675                                                                                 | 217 |
|   Other,                            net                                                                                                                                                                                                |                                   64                  |                                   (37) |
| **     Net                            cash provided by operating                            activities**                                                                                                           | 22,581                                                                              |  11,129 |
|                                                                                                                                                                                                                                                                 |                                                                                |   |
| **Cash Flows from                            Investing Activities:**                                                                                                                                                                                                 |                                                                                |   |
| Distributions in                            excess of equity in earnings of NuStar Energy                            L.P.                                                                                                                   | 6,924                                                                               | 5,602 |
| Investment in                            NuStar Energy L.P.                                                                                                                                                                                 | (1,667)                                                                             | (1,695) |
| Proceeds from sale                            of NuStar Energy L.P. units in connection with

     employee                            benefit                            plans           |       986                                                  |    1,665 |
| **     Net                            cash provided by****investing                            activities**                                                                                                        |                               6,243                                       |                               5,572 |
|                                                                                                                                                                                                                                                                 |                                                                                |   |
| **Cash Flows from                            Financing Activities:**                                                                                                                                                                                                 |                                                                                |   |
| Distributions to                            unitholders                                                                                                                                                                                     | (27,200)                                                                            | (16,170) |
| Decrease in notes                            payable to affiliates                                                                                                                                                                          | -                                                                                   | (593) |
| Contributions from                            Valero Energy                                                                                                                                                                                 |                                      - |                                    63 |
| **     Net                            cash used in financing                            activities**                                                                                                               | (27,200)                                                                            | (16,700) |
|                                                                                                                                                                                                                                                                 |                                                                                |   |
| Net increase in                            cash and cash equivalents                                                                                                                                                                        | 1,624                                                                               | 1 |
| Cash and cash                            equivalents at the beginning of the                            period                                                                                                                              |                               1,107                                       |                                   121 |
| Cash and cash                            equivalents at the end of the                            period                                                                                                                                    | $                                  2 ,731        | $                                      122 |
|                                                                                                                                                                                                                                                                 |                                                                                |   |

See Condensed                Notes to Consolidated Financial Statements.

----

**NUSTAR GP HOLDINGS, LLC******CONDENSED NOTES** TO CONSOLIDATED FINANCIAL                STATEMENTS**

**1. ORGANIZATION****AND****BASIS OF PRESENTATION**

***Organization***

NuStar GP Holdings, LLC (NuStar GP                Holdings), a Delaware limited liability company, was formed in June 2000 as UDS                Logistics, LLC (UDS Logistics). Valero Energy Corporation (Valero Energy), acquired                UDS Logistics in connection with its December 2001 acquisition (the UDS                Acquisition) of Ultramar Diamond Shamrock Corporation (UDS). UDS Logistics changed                its name to Valero GP Holdings, LLC in January 2006, completed its initial public                offering in July 2006 and completed its secondary public offering of its remaining                limited liability company interests in December 2006. As a result of the December                2006 offering, Valero Energy no longer owns any interest in us. We changed our name                to NuStar GP Holdings in April 2007.

As used in this report, references to                “we,” “us,” or “our” collectively refer,                depending on the context, to NuStar GP Holdings, LLC or a wholly owned                subsidiary.                 

Our unitholders have no liability under                our Second Amended and Restated Limited Liability Company Agreement, or for any of                our debts, obligations or liabilities, in their capacity as a                unitholder.

                 

We have no operations or sources of                income or cash flows other than our investment in NuStar Energy L.P. On June 30,                2007, we owned approximately 23.4% of NuStar Energy L.P., consisting of the                following:
| ·      | the 2% general                            partner interest in NuStar Energy L.P.; |
|----------------------------------------|-----------------------------------------------------------------------------------|
| ·      | 100% of the                            incentive distribution rights issued by NuStar Energy L.P., which                            entitles us to receive increasing percentages of the cash distributed                            by NuStar Energy L.P., currently at the maximum percentage of 23%;                            and |
|----------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·      | 10,226,068 common                            units of NuStar Energy L.P. representing a 21.4% limited partner                            interest in NuStar Energy L.P. |
|----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

                 

NuStar Energy L.P. (NYSE: NS) is a                publicly traded Delaware limited partnership engaged in the crude oil and refined                product transportation, terminalling and storage business. NuStar Energy L.P. has                terminal facilities in the United States, the Netherland Antilles, Canada, Mexico,                the Netherlands and the United Kingdom.                 

***Basis of Presentation***

These unaudited consolidated financial                statements include the accounts of NuStar GP Holdings and subsidiaries in which it                has a controlling interest. Intercompany balances and transactions have been                eliminated in consolidation. On June 1, 2006, Valero Energy contributed its                ownership interest in NuStar GP, LLC to NuStar GP Holdings in exchange for an                additional ownership interest in NuStar GP Holdings. The contribution was accounted                for as a transaction between entities under common control. Therefore, the                consolidated financial statements include the financial position and results of                operations of NuStar GP, LLC for all periods presented. Such amounts are included                at their historical balances. 

We account for our ownership interest in                NuStar Energy L.P. using the equity method. Therefore, our financial results                reflect a portion of NuStar Energy L.P.’s net income based on our ownership                interest in NuStar Energy L.P. We have no separate operating activities apart from                those conducted by NuStar Energy L.P. and therefore generate no revenues from                operations.

                These unaudited consolidated financial statements have been prepared in accordance                with United States generally accepted accounting principles (GAAP) for interim                financial information and with the instructions to Form 10-Q and Article 10 of                Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not                include all of the information and notes required by GAAP for complete consolidated                financial statements.  In the opinion of management, all adjustments                considered necessary for a fair presentation have been included. All such                adjustments are of a normal recurring nature unless disclosed otherwise. Financial                information for the three and six months ended June 30, 2007 and 2006 included in                these Condensed Notes to Consolidated Financial Statements is derived from our                unaudited consolidated financial statements. Operating results for the three and                six months ended June 30, 2007 are not necessarily indicative of the results that                may be expected for the year ending December 31, 2007.

----

**NUSTAR GP HOLDINGS, LLC****CONDENSED NOTES****TO CONSOLIDATED FINANCIAL                STATEMENTS — (Continued)**

                 

                The consolidated balance sheet as of December 31, 2006 has been derived from the                audited consolidated financial statements as of that date. You should read these                consolidated financial statements in conjunction with the consolidated financial                statements and notes thereto included in our Annual Report on Form 10-K for the                year ended December 31, 2006.

**2.                ACCOUNTING PRONOUNCEMENTS**

                 

***FASB Statement 159***

                In February 2007, the Financial Accounting Standards Board (FASB) issued Statement                No. 159, “The Fair Value Option for Financial Assets and Financial                Liabilities.” Statement No. 159 creates a fair value option under which an                entity may irrevocably elect fair value as the initial and subsequent measurement                attribute for certain financial assets and financial liabilities on an                instrument-by-instrument basis, with changes in fair value recognized in earnings                as those changes occur. The adoption of Statement No. 159 is effective for fiscal                years beginning after November 15, 2007. We are currently evaluating the effect of                Statement No. 159.

***FASB Interpretation No. 48***

                In June 2006, the FASB issued Interpretation No. 48, “Accounting for                Uncertainty in Income Taxes—an interpretation of FASB Statement No.                109” (FIN 48). FIN 48 clarifies the accounting for uncertain income tax                positions recognized in an enterprise’s financial statements in accordance                with FASB Statement No. 109, “Accounting for Income Taxes,” by                defining a recognition threshold and measurement attribute for the financial                statement recognition and measurement of a tax position taken or expected to be                taken in a tax return. An enterprise recognizes a tax position if it is                more-likely-than-not that the tax position will be sustained, based on the                technical merits of the position, upon examination. An uncertain tax position is                measured in the financial statements at the largest amount of benefit that is                more-likely-than-not to be realized. We adopted FIN 48 effective January 1, 2007,                which did not affect our financial position or results of operations. We had no                unrecognized tax benefits as of January 1, 2007 or June 30, 2007.                 

                NuStar GP Holdings or certain of its subsidiaries file income tax returns in the                U.S. federal jurisdiction and various state jurisdictions. For U.S. federal and                state purposes, tax years subject to examination are 2002 through 2006.

***EITF Issue No. 06-11***

                In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue                No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based                Payment Awards” (EITF No. 06-11). According to EITF 06-11, the income tax                benefit realized from dividends related to unvested share-based payment awards that                are charged to retained earnings should be recorded in additional paid-in capital.                The amount recorded in additional paid-in capital for the realized income tax                benefit should be included in the pool of excess tax benefits available to absorb                tax deficiencies on share-based payment awards. EITF No. 06-11 is effective for tax                benefits of dividends declared in fiscal years beginning after December 15, 2007.                The adoption of EITF 06-11 is not expected to materially affect our financial                position or results of operations.

**3****. INVESTMENT IN****NUSTAR ENERGY****L.P.**

                As of June 30, 2007 and December 31, 2006, our ownership interest in NuStar Energy                L.P. was composed of a 2% general partner interest, incentive distribution rights                and an approximate 21.4% limited partner interest.

----

**NUSTAR GP HOLDINGS, LLC****CONDENSED NOTES****TO CONSOLIDATED FINANCIAL                STATEMENTS — (Continued)**

***Summary                Financial Information***

Condensed                financial information reported by NuStar Energy L.P. is presented below (in                thousands of dollars):
|                                                                                                | **June                            30, 2007**                       | **December                            31, 2006**              |
|-----------------------------------------------------------------------------------------------------|--------------------------------------------------------------------|---------------------------------------------------------------|
|                                                                                                | (Unaudited)                                                        |                                                          |
|                                                                                                |                                                               |
| **Balance Sheet                            Information:**                                           |                                                               |
| Current                            assets                                  | $                                 215,564 | $                                 212,998 |
| Property and                            equipment, net                     | 2,398,287                                                          | 2,345,135                                                     |
| Goodwill                                                                   | 786,244                                                            | 774,441                                                       |
| Other long-term                            assets, net                     |                               161,404                    |                               161,634               |
|                                 Total assets           | $                              3,561,499                      | $                              3,494,208            |
|                                                                                                |                                                               |                                                          |
| Current                            liabilities                             | $                                 142,872      | $                                 156,735 |
| Long-term debt,                            less current portion            | 1,442,334                                                          | 1,353,720                                                     |
| Long-term payable                            to NuStar GP Holdings         | 5,717                                                              | 5,749                                                         |
| Deferred income tax                            liability                   | 35,897                                                             | 32,926                                                        |
| Other long-term                            liabilities                     |      72,206                               |      69,397                          |
|                                 Total liabilities      | 1,699,026                                                          | 1,618,527                                                     |
|                                                                                                |                                                               |                                                          |
| Partners’                            equity                          | 1,862,473                                                          | 1,875,681                                                     |
|                                                                                                |                                                               |                                                          |
|  Total                            liabilities and partners’ equity                       | $                              3,561,499                 | $                             3,494,208                  |
|                                                                      | **Three Months                            Ended June 30,** | **Six Months                            Ended June 30,** |
|---------------------------------------------------------------------------|------------------------------------------------------------|----------------------------------------------------------|
|                                                                      | **2007**                                                   | **2006**                                                 | **2007** | **2006** |
|                                                                      | (Thousands of                            Dollars)          |
|                                                                      |                                                       |                                                     |   |   |
| **Statement of                            Income Information:**           |                                                       |                                                     |   |   |
| Revenues                                         | $                             320,506                 | $                             279,968               | $                             617,330 | $                             553,972 |
| Operating                            income      | 41,560                                                     | 47,316                                                   | 86,995 | 103,283 |
| Net                            income            | 39,697                                                     | 31,553                                                   | 70,820 | 71,004 |

 

***Other***

                As of June 30, 2007 and December 31, 2006, our investment in NuStar Energy L.P.                reconciles to NuStar Energy L.P.’s total partners’ equity as                follows:
|                                                                                                                                                                                                                                                      | **June                            30, 2007**                                                   | **December                            31, 2006**                   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|--------------------------------------------------------------------|
|                                                                                                                                                                                                                                                      | (Thousands of                            Dollars)                                              |
|                                                                                                                                                                                                                                                      |                                                                                           |                                                               |
| NuStar Energy L.P.                            total partners’ equity                                                                                                                                                       | $                              1,862,473                                             | $                             1,875,681                       |
| NuStar GP                            Holdings’ ownership interest in NuStar

                               Energy L.P.                                                                                     |                                 23.4%                                      |                                 23.4%          |
| NuStar GP                            Holdings’ share of NuStar Energy L.P. ’s

                              partners’ equity                                                                        | 435,819                                                                                        | 438,909                                                            |
| Step-up in basis                            related to NuStar Energy L.P.’s

  assets and                            liabilities, including equity method

  goodwill,                            and other      |    118,368                                                                      |    118,866                                          |
|  Investment in                            NuStar Energy L.P.                                                                                                                                                                | $                                                             554,187 | $                                 557,775 |

                The step-up in basis related to NuStar Energy L.P.’s assets and liabilities,                including equity method goodwill, reflected in the table above relates to purchase                accounting adjustments resulting from the UDS Acquisition. The amount represents                the unamortized excess of the fair value over carrying amount applicable to Valero                Energy’s proportionate 73.6% interest in NuStar Energy L.P.’s                identifiable assets and liabilities as of the date of acquisition. This amount also                includes the portion of goodwill resulting from the UDS Acquisition that was                attributed to NuStar GP Holdings’ investment in NuStar Energy L.P. Since                26.4% of the equity interest in NuStar Energy L.P. was owned by public unitholders                as of the date of the UDS Acquisition, a significant portion of the total ownership                interest in NuStar Energy L.P. was deemed to

----

**NUSTAR GP HOLDINGS, LLC****CONDENSED NOTES****TO CONSOLIDATED FINANCIAL                STATEMENTS — (Continued)**

                 

                 be held by the public under generally accepted accounting principles, thereby                precluding the inclusion of these fair value adjustments in the reported financial                statements of NuStar Energy L.P. In addition, this amount also contains changes due                to the purchase and sale of NuStar Energy L.P.’s common units by NuStar GP,                LLC to satisfy unit option exercises and restricted unit vestings, which causes                insignificant changes in the ownership percentage.

**4****.****RELATED PARTY TRANSACTIONS**

                We manage NuStar Energy L.P. through our ownership of NuStar GP, LLC, and Riverwalk                Holdings LLC, which own the general partner of NuStar Energy L.P. Our officers are                also officers of NuStar GP, LLC. The Chairman of our Board of Directors, William E.                Greehey, is also the Chairman of the Board of Directors of NuStar GP, LLC. The                Board of Directors of NuStar GP, LLC is responsible for overseeing NuStar GP,                LLC’s role as the owner of the general partner of NuStar Energy L.P., and we,                as the sole owner of NuStar GP, LLC, must also approve matters that have or would                reasonably be expected to have a material effect on our interests as the sole owner                of NuStar GP, LLC.

                As of June 30, 2007 and December 31, 2006, we had a receivable from NuStar Energy                L.P. of $4.4 million and $2.3 million, respectively, with both amounts mainly                representing payroll and related benefit plan costs for employees. We also had a                long-term receivable as of June 30, 2007 and December 31, 2006 of $5.7 million from                NuStar Energy L.P. related to amounts payable for retiree medical benefits and                other post-employment benefits. Expenses for payroll and related benefit plans and                for stock-based compensation charged by us to NuStar Energy L.P. were $11.6 million                and $9.0 million for the three months ended June 30, 2007 and 2006, respectively                and $24.1 million and $16.4 million for the six months ended June 30, 2007 and                2006, respectively.

                 

**5****.                DISTRIBUTIONS FROM****NUSTAR ENERGY L.P.**

                NuStar Energy L.P.’s partnership agreement, as amended, determines the amount                and priority of cash distributions that NuStar Energy L.P.’s common                unitholders and general partner may receive. The general partner is entitled to                incentive distributions if the amount NuStar Energy L.P. distributes with respect                to any quarter exceeds $0.60 per unit, with the maximum percentage of 23% of the                amount of any quarterly distribution in excess of $0.66 per unit. The general                partner also receives a 2% distribution with respect to its general partner                interest.

                The following table reflects the allocation of NuStar Energy L.P.’s cash                distributions earned for the period indicated among its general and limited                partners:
|                                                                                                                                | **Three                            Months Ended June 30,**                        | **Six Months                            Ended June 30,**                                |
|-------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------|
|                                                                                                                                | **2007**                                                                          | **2006**                                                                                | **2007** | **2006** |
|                                                                                                                                | (Thousands of                            Dollars, except per unit data)           |
|                                                                                                                                |                                                                              |                                                                                    |   |   |
| General partner                            interest (2%)                                                   | $                                  997              | $                                   916                   | $                                1,951 | $                               1,832 |
| General partner                            incentive distribution                                          |   4,413                                                                 |   3,480                                                                       |   8,323 |   6,960 |
| Total general                            partner distribution                                              | 5,410                                                                             | 4,396                                                                                   | 10,274 | 8,792 |
| Limited partner                            distribution                                                    |   9,714                                                                 |   9,047                                                                       | 19,073 | 18,097 |
| Total distributions                            to NuStar GP Holdings                                       | 15,124                                                                            | 13,443                                                                                  | 29,347 | 26,889 |
| Public                            unitholders’                            distributions              | 34,755                                                                            | 32,380                                                                                  | 68,227 | 64,757 |
| Total cash                            distributions                                                        | $                              49,879                                   | $                                                          45,823             | $                             97,574 | $                             91,646 |
| Cash distributions                            per unit applicable to                                limited partners | $                                                            0.950 | $                                                             0.885 | $                                                           1.865 | $                                                           1.770 |

                On April 24, 2007, NuStar Energy L.P. declared cash distributions related to the                first quarter of 2007 of $0.915 per unit, which was paid on May 14, 2007 to                unitholders of record on May 7, 2007, totaling $47.7 million. On July 26, 2007,                NuStar Energy L.P. declared cash distributions related to the second quarter of                2007 of $0.950 per unit to be paid on August 14, 2007 to unitholders of record on                August 7, 2007, totaling $49.9 million.

----

**NUSTAR GP HOLDINGS, LLC****CONDENSED NOTES****TO CONSOLIDATED FINANCIAL                STATEMENTS — (Continued)**

                 

**6. STATEMENTS OF CASH FLOWS                 **

Changes in                current assets and liabilities were as follows:                 

|                                                                                          |   | **Six                                Months Ended June 30,** |                   |
|-----------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|------------------------|
|                                                                                          |   | **2007**                                                     |                   | **2006** |   |
|                                                                                          |   |                                                         | (Thousands of Dollars) |   |
|    Decrease (increase) in current                                assets:            |   |                                                         |                   |   |   |   |   |
| Accounts receivable                                                                           |   | $                                                            | 521                    |   | $ | — |   |
| Receivable from NuStar Energy L.P.                                                            |   |                                                         | (2,095                 | ) |   | 1,151 |   |
| Prepaid expenses                                                                              |   |                                                         | 120                    |   |   | — |   |
| Other current asset                                                                           |   |                                                         | (1,431                 | ) |   | — |   |
|     Increase (decrease) in current                                liabilities: |   |                                                         |                   |   |   |   |   |
| Accounts payable                                                                              |   |                                                         | 268                    |   |   | (2 | ) |
| Payable to NuStar Energy L.P.                                                                 |   |                                                         | —                |   |   | 164 |   |
| Income taxes payable                                                                          |   |                                                         | (811                   | ) |   | (10 | ) |
| Accrued compensation expense                                                                  |   |                                                         | 3,912                  |   |   | — |   |
| Accrued liabilities                                                                           |   |                                                         | (279                   | ) |   | (1,086 | ) |
| Taxes other than income taxes                                                                 |   |                                                         | 470                    |   |   | — |   |
|     Changes in current assets and                                liabilities   |   | $                                                            | 675                    |   | $ | 217 |   |

 

Cash flows related                to interest and income taxes were as follows:

                 

|                                                                         |   | **Six                                Months Ended June 30,** |                   |
|------------------------------------------------------------------------------|--------|--------------------------------------------------------------|------------------------|
|                                                                         |   | **2007**                                                     |                   | **2006** |   |
|                                                                         |   |                                                         | (Thousands of Dollars) |   |
|                                                                         |   |                                                         |                   |   |   |   |   |
|   Cash paid for interest                                                |   | $                                                            | 13                     |   | $ | 9,467 |   |
|     Cash paid for income                                taxes |   | $                                                            | 972                    |   | $ | 36 |   |

 

**7. CREDIT                FACILITY**

                We are a party to a three-year revolving credit facility with a borrowing capacity                of up to $20 million (the Credit Facility), of which up to $10 million                may be available for letters of credit. Our obligations under the Credit Facility                are unsecured. As of June 30, 2007, we had no borrowings outstanding under the                Credit Facility.

                Under the terms of the Credit Facility, NuStar Energy L.P. must maintain a total                debt-to-EBITDA ratio of less than 4.75-to-1.0 for any four consecutive quarters,                subject to adjustment following certain acquisitions. We are also required to                receive cash distributions of at least $25.0 million in respect to our ownership                interests in NuStar Energy L.P. for the preceding four fiscal quarters ending on                the last day of each fiscal quarter. Our management believes that we are in                compliance with the requirements of the Credit Facility as of June 30, 2007.                 

**8****.****COMMITMENTS****AND****CONTINGENCIES**

***Litigation and Environmental Matter***

                We are not currently a party to any material legal proceedings. However, NuStar                Energy L.P. is subject to certain loss contingencies, the outcome of which could                have an effect on NuStar Energy L.P.’s results of operations and ability to                pay distributions, which would impact our results of operations and ability to pay                distributions. NuStar Energy L.P.’s most significant contingent liabilities                resulting from various litigation, claims and commitments are discussed below.

*Grace Energy Corporation Matter.* In 1997, Grace Energy Corporation (Grace                Energy) sued subsidiaries of Kaneb Pipe Line Partners, L.P. (KPP) and Kaneb                Services, LLC (KSL and, collectively with KPP and their respective subsidiaries,                Kaneb) in Texas state court. The complaint sought recovery of the cost of                remediation of fuel leaks in the 1970s from a pipeline that had once connected a                former Grace Energy terminal with Otis Air Force Base in Massachusetts (Otis AFB).                Grace Energy alleges the Otis AFB pipeline and related environmental liabilities                had been transferred in 1978 to an entity that was part of Kaneb’s                acquisition of Support Terminal Services, Inc. and its subsidiaries from Grace                Energy in

----

**NUSTAR GP HOLDINGS, LLC****CONDENSED NOTES****TO CONSOLIDATED FINANCIAL                STATEMENTS — (Continued)**

                 

                 1993. Kaneb contends that it did not acquire the Otis AFB pipeline and never                assumed any responsibility for any associated environmental damage.

                     

                In 2000, the court entered final judgment that: (i) Grace Energy could not recover                its own remediation costs of $3.5 million, (ii) Kaneb owned the Otis AFB                pipeline and its related environmental liabilities and (iii) Grace Energy was                awarded $1.8 million in attorney costs. Both Kaneb and Grace Energy appealed the                trial court’s final judgment to the Texas Court of Appeals in Dallas. In                2001, Grace Energy filed a petition in bankruptcy, which created an automatic stay                of actions against Grace Energy. Once that stay is lifted, NuStar Energy L.P.                intends to resume vigorous prosecution of the appeal.                                 The Otis AFB is a part of a Superfund Site pursuant to the Comprehensive                Environmental Response Compensation and Liability Act (CERCLA). The site contains a                number of groundwater contamination plumes, two of which are allegedly associated                with the Otis AFB pipeline. Relying on the Texas state court’s final judgment                assigning ownership of the Otis AFB pipeline to Kaneb, the U.S. Department of                Justice advised Kaneb in 2001 that it intends to seek reimbursement from Kaneb for                the remediation costs associated with the two spill areas. In 2002, the Department                of Justice asserted that it had incurred over $49.0 million in costs and expected                to incur additional costs of approximately $19.0 million for remediation of the two                spill areas. The Department of Justice has not filed a lawsuit against NuStar                Energy L.P. related to this matter, and it has not made any payments toward costs                incurred by the Department of Justice.

*Port of Vancouver Matter.* NuStar Energy L.P. owns a chemical and refined                products terminal on property owned by the Port of Vancouver, and leases the land                under the terminal from the Port of Vancouver. Under an Agreed Order entered into                with the Washington Department of Ecology when Kaneb purchased the terminal in                1998, Kaneb agreed to investigate and remediate groundwater contamination by the                previous owner and operator of the terminal originating from the terminal.                Investigation and remediation at the terminal are ongoing, in compliance with the                Agreed Order. In April 2006, the Washington Department of Ecology commented on the                site investigation work plan and asserted that the groundwater contamination at the                terminal was commingled with a groundwater contamination plume under other property                owned by the Port of Vancouver. NuStar Energy L.P. disputes this assertion. No                lawsuits have been filed against NuStar Energy L.P. in this matter, and it has not                made any payments toward remediation of the allegedly commingled plume. Factors                that could affect estimated remediation costs include whether Kaneb will be found                to have ultimate responsibility for some portion of the allegedly commingled plume,                the Port of Vancouver’s contribution to the remediation effort and the amount                the Port of Vancouver actually receives from other potentially responsible                parties.

*EPA Investigation.* On November 14, 2006, agents of the U.S. Environmental                Protection Agency (the EPA) presented a search warrant issued by a U.S. District                Court at one of NuStar Energy L.P.’s terminals. Since then, the U.S. District                Court has also served NuStar Energy L.P. with four subpoenas. The search warrant                and subpoenas all seek information regarding allegations of potential illegal                conduct by NuStar Energy L.P., certain of its subsidiaries and/or its employees                concerning compliance with certain environmental and safety laws and regulations.                NuStar Energy L.P. is cooperating fully with the EPA                in producing documents in response to the subpoenas. It hasno information as to when the EPA will conclude their                investigation, and it is also conducting an internal investigation of any possible                noncompliance. At this time, the EPA has not suggested any fines or penalties.                There can be no assurances that the conclusion of the EPA’s investigation                will not result in a determination that NuStar Energy L.P. violated applicable                laws. If it is found to have violated such laws, it could be subject to fines,                civil penalties and criminal penalties. A final determination that NuStar Energy                L.P. violated applicable laws could, among other things, result in itsdebarment from future federal government contracts.                Because of the preliminary nature of the investigation, NuStar Energy L.P. is not                able to estimate a loss or range of loss, if any. However, if any of the                consequences described above ultimately occur, it is reasonably possible that the                effects could be material to itsresults of                operations in the periodin whichitwould be                required to record a liability, and could be material to itscash flows in the periodsin whichitwould be required to pay such liability.

----

**NUSTAR GP HOLDINGS, LLC****CONDENSED NOTES****TO CONSOLIDATED FINANCIAL                STATEMENTS — (Continued)**

                 

***Other***

                NuStar Energy L.P. isalso a party to additional claims and legal proceedings                arising in the ordinary course of business. NuStar Energy L.P. believes the                possibility is remote that the final outcome of any of these claims or proceedings                to which it is a party would have a material adverse effect on its financial                position, results of operations or liquidity; however, due to the inherent                uncertainty of litigation, there can be no assurance that the resolution of any                particular claim or proceeding would not have a material adverse effect on NuStar                Energy L.P.’s results of operations, financial position or liquidity.

                 

**9.    MEMBERS’ EQUITYAND NET INCOME PER UNIT**

                On June 28, 2006, our existing membership interests were represented by 10,000,000                units. In connection with our IPO on July 19, 2006, a 4.25-for-1 unit split was                effected, resulting in total outstanding units of 42,500,000. Prior to June 28,                2006, we had no outstanding units. Our net income per unit amounts assume that                42,500,000 units were outstanding for all periods presented.

                We calculate basic net income per unit by dividing net income by the weighted                average number of units outstanding for the period. Diluted net income per unit is                calculated by dividing net income by the weighted average number of units                outstanding and the effect of non-vested restricted units granted under the NuStar                GP Holdings, LLC 2006 Long-Term Incentive Plan calculated using the treasury stock                method.                 

                Net income per unit amounts were computed as follows:

 

|                                                        |   | **Three                                Months Ended June 30,**                       |            | **Six                                Months Ended June 30,** |     |
|-------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|----------|
|                                                        |   | **2007**                                                                             |       | **2006**                                                     | **2007** |   | **2006** |   |
|                                                        |   | (Thousands of                                Dollars, Except Unit and Per Unit data) |
|                                                        |   |                                                                                 |       |                                                         |     |   |   |   |   |   |   |   |   |
| **Basic Net Income per Unit:**                              |   |                                                                                 |       |                                                         |     |   |   |   |   |   |   |   |   |
| Net income                                                  |   | $                                                                                    | 11,248     |                                                         | $        | 4,323 |   | $ | 20,019 |   | $ | 10,698 |   |
|                                                        |   |                                                                                 |       |                                                         |     |   |   |   |   |   |   |   |   |
| Weighted average number of basicunits outstanding           |   |                                                                                 | 42,500,000 |                                                         |     | 42,500,000 |   |   | 42,500,000 |   |   | 42,500,000 |   |
|                                                        |   |                                                                                 |       |                                                         |     |   |   |   |   |   |   |   |   |
| Basic net income per unit                                   |   | $                                                                                    | 0.26       |                                                         | $        | 0.10 |   | $ | 0.47 |   | $ | 0.25 |   |
|                                                        |   |                                                                                 |       |                                                         |     |   |   |   |   |   |   |   |   |
| **Diluted Net Income per Unit:**                            |   |                                                                                 |       |                                                         |     |   |   |   |   |   |   |   |   |
| Net income                                                  |   | $                                                                                    | 11,248     |                                                         | $        | 4,323 |   | $ | 20,019 |   | $ | 10,698 |   |
|                                                        |   |                                                                                 |       |                                                         |     |   |   |   |   |   |   |   |   |
| Weighted average number of basicunits outstanding           |   |                                                                                 | 42,500,000 |                                                         |     | 42,500,000 |   |   | 42,500,000 |   |   | 42,500,000 |   |
| Effect of dilutive securities –restricted unit grants |   |                                                                                 | 1,705      |                                                         |     | — |   |   | 1,540 |   |   | — |   |
| Weighted average number of dilutedunits outstanding         |   |                                                                                 | 42,501,705 |                                                         |     | 42,500,000 |   |   | 42,501,540 |   |   | 42,500,000 |   |
|                                                        |   |                                                                                 |       |                                                         |     |   |   |   |   |   |   |   |   |
| Diluted net income per unit                                 |        | $                                                                                    | 0.26       |                                                              | $        | 0.10 |  | $ | 0.47 |  | $ | 0.25 |  |

----

****NUSTAR GP HOLDINGS, LLC****CONDENSED NOTES****TO CONSOLIDATED FINANCIAL                STATEMENTS — (Continued)****

                 

The following table presents changes to                our members’ equity (in thousands):
|                                                                                                            |                                                                                 |
|-----------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------|
| Balance as of                            December 31, 2006                                       | $                              555,643                                     |
|                                                          Net                            income   | 20,019                                                                               |
|                              Distributions to unitholders                                                  |                              (27,200)                                 |
|                                Share of NuStar Energy L.P.’s other comprehensiveincome     | 2,656                                                                                |
|                                Other                                                        |                                      23 |
| Balance as of June                            30, 2007                                                          | $                             551,141                                           |

                 

***Comprehensive                Income***

For the three and six months ended June                30, 2007, the difference between our net income and our comprehensive income                resulted mainly from our proportionate share of NuStar Energy L.P.’s other                comprehensive income. Our total comprehensive income was as follows:

                 
|                                                                                                                                                                  | **Three Months                            Ended June 30,**                    | **Six Months                            Ended June 30,**                |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------|-------------------------------------------------------------------------|
|                                                                                                                                                                  | **2007**                                                                      | **2006**                                                                | **2007** | **2006** |
|                                                                                                                                                                  | (Thousands of                            Dollars)                             |
|                                                                                                                                                                  |                                                                          |                                                                    |   |   |
| Net                            income                                                                                                        | $ 11,248                                                                      | $ 4,323                                                                 | $ 20,019 | $ 10,698 |
| Share of NuStar                            Energy L.P.’s other

   comprehensive                            income      |  

2,420                                                                 |  

-                                                               |  

2,656 |  

- |
| Other                                                                                                                                        |                                     6 |                                    - |                                   11 |                                      - |
| Comprehensive                            income                                                                                              | $                            13,674                                           | $                            4,323                                      | $                            22,686 | $                            10,698 |

In the                Consolidated Statement of Members’ Equity and in the related note in our 2006                Annual Report on Form 10-K, we disclosed and included the $0.8 million loss                on cumulative effect of adopting FASB Statement No. 158,                “Employers’ Accounting for Defined Benefit Pension and Other                Postretirement Pension Plans,” in the line item “Total comprehensive                income.” We based that presentation on our interpretation of the principles                in FASB Statement 130, “Reporting Other Comprehensive Income,” which                requires accounting changes to be included in other comprehensive income for the                period. Subsequently, we became aware that transition provisions of Statement No.                158 required this cumulative effect be presented as a direct adjustment to the                ending balance of “Accumulated other comprehensive income” rather than                as part of comprehensive income for the period. Consequently, the amount reported                under the line item “Total comprehensive income” for 2006 should have                been $32.3 million, rather than the $31.5 million we reported. In our 2007 Annual                Report on Form 10-K, we will modify our presentation. This modification only                affects the display of the cumulative effect of the accounting change within equity                and does not otherwise affect our financial statements.

 

***Cash                Distributions***

                On April 24, 2007, we declared a quarterly cash distribution of $0.32 per unit,                which was paid on May 16, 2007 to unitholders of record on May 7, 2007, totaling                $13.6 million. On July 26, 2007, we declared a quarterly cash distribution of $0.34                per unit to be paid on August 16, 2007 to unitholders of record on August 7, 2007,                totaling $14.5 million.

**10****. EMPLOYEE BENEFIT PLANS****AND UNIT BASED COMPENSATION**

All costs incurred by us related to employee                benefit plans are reimbursed by NuStar Energy L.P. at cost. Additionally, NuStar                Energy L.P. reimburses us for the compensation expense of restricted unit and unit                option awards granted to employees of NuStar GP, LLC under various long-term                incentive plans. For the three and six months ended June 30, 2006, compensation                expense pertaining to awards of restricted units and unit options to corporate                officers of Valero Energy was reimbursed by Valero Energy affiliates. Our                liabilities for employee benefits are included in “Employee benefit plan                liabilities” and our liability related to the long-term incentive plans is                included in “Accrued compensation expense” on our consolidated balance                sheets.

----

**NUSTAR GP HOLDINGS, LLC****CONDENSED NOTES****TO CONSOLIDATED FINANCIAL                STATEMENTS — (Continued)**

                The components of net periodic benefit cost related to our defined benefit plans                were as follows:                 
|                                                                                                            |                                                              |   | **Other                            Postretirement** |
|-----------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------|--------|-----------------------------------------------------|
|                                                                                                            | **Pension Plans                            (a)**                  |   | **Benefit                            Plans**        |
| **For the                            t****hree months ended June 30****,                            2007****:** | (Thousands of                            Dollars)                 |
| Components of net                            periodic benefit cost:                                             |                                                              |   |                                                |
| Service                            cost                                                | $ 1,932                                                           |   | $ 141                                               |
| Interest                            cost                                               | 72                                                                |   | 103                                                 |
| Expected return on                            assets                                   | (78)                                                         |   | -                                                   |
| Amortization of net                            loss                                    |                                   8 |   |      -                          |
| Net periodic                            benefit cost                                   | $                            1,934                                |   | $                            244                    |

                 
|                                                                               |                                                   |   | **Other                            Postretirement**   |
|------------------------------------------------------------------------------------|--------------------------------------------------------|--------|-------------------------------------------------------|
|                                                                               | **Pension Plans                            (a)**       |   | **Benefit                            Plans**          |
| **For the six                            months ended June 30, 2007:**             | (Thousands of                            Dollars)      |
| Components of net                            periodic benefit cost:                |                                                   |   |                                                  |
| Service                            cost                   | $ 3,864                                                |   | $ 282                                                 |
| Interest                            cost                  | 143                                                    |   | 206                                                   |
| Expected return on                            assets      | (156)                                             |   | -                                                     |
| Amortization of net                            loss       |                                 11 |   |                                 - |
| Net periodic                            benefit cost      | $                            3,862                     |   | $                            488                      |
| (a) |     | Includes amounts                            related to the Pension Plan, the Excess Pension Plan and the                            SERP. |
|-----|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------|

                 

                For the three and six months ended June 30, 2006, employees of NuStar GP, LLC were                included in the various employee benefit plans of Valero Energy. For the six months                ended June 30, 2007, we contributed $1.3 million to our pension plans.                Additionally, in July 2007, we contributed $7.9 million to our qualified pension                plan.

----

****Item 2.**  Management's Discussion                and Analysis of Financial Condition and Results of Operations**                   

**FORWARD-LOOKING STATEMENTS**

*This Fo**rm 10-Q                c**ontains certain estimates, predictions,                projections, assumptions and other forward-looking statements that involve various                risks and uncertainties. While these forward-looking statements, and any                assumptions upon which they are based, are made in good faith and reflect our                current judgment regarding the direction of our business, actual results will                almost always vary, sometimes materially, from any estimates, predictions,                projections, assumptions or other future performance suggested in this report.                These forward-looking statements can generally be identified by the words                “anticipates,” “believes,” “expects,”                “plans,” “intends,” “estimates,”                “forecasts,” “budgets,” “projects,”**“**will,”**“could,” “should,”                “may” and similar expressions. These statements reflect our current                views with regard to future events and are subject to various risks, uncertainties                and**assumptions**.**Please read our**annual**report on Form 10-**K**for the**year**ended**December**3**1**, 2006, Part I, Item 1A**,**"Risk                Factors,**”**as well as our subsequent quarterly reports on Form                10-Q, Part II, Item 1A, “Risk Factors,”**for a discussion of certain of those risks,                uncertainties and assumptions.*

*If one or more of these risks or uncertainties materialize, or if the underlying                assumptions prove incorrect, our actual results may vary materially from those                described in any forward-looking statement. Other unknown or unpredictable factors                could also have material adverse effects on our future results. Readers are                cautioned not to place undue reliance on this forward-looking information, which is                as of the date of**this**Form 10-Q. We do not intend to update these                statements unless it is required by the securities laws to do so, and we undertake                no obligation to publicly release the result of any revisions to any such                forward-looking statements that may be made to reflect events or circumstances                after the date of this report or to reflect the occurrence of unanticipated                events.*

**Overview**

                NuStar GP Holdings, LLC (NuStar GP Holdings), a Delaware limited liability company,                was formed in June 2000 as UDS Logistics, LLC (UDS Logistics). Valero Energy                Corporation (Valero Energy), acquired UDS Logistics in connection with its December                2001 acquisition (the UDS Acquisition) of Ultramar Diamond Shamrock Corporation                (UDS). UDS Logistics changed its name to Valero GP Holdings, LLC in January 2006,                completed its initial public offering in July 2006 and completed its secondary                public offering of its remaining limited liability company interests in December                2006. As a result of the December 2006 offering, Valero Energy no longer owns any                interest in us. We changed our name to NuStar GP Holdings in April 2007.

                Our only cash generating assets are our indirect ownership interests in NuStar                Energy L.P. Our aggregate ownership interests in NuStar Energy L.P. consist of the                following:                 
|  | ·      | the 2% general                            partner interest in NuStar Energy L.P., which we hold through our 100%                            ownership interest in Riverwalk Logistics, L.P.; |
|--|----------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | ·      | 100% of the                            incentive distribution rights issued by NuStar Energy L.P., which                            entitle us to receive increasing percentages of the cash distributed by                            NuStar Energy L.P., currently at the maximum percentage of 23%;                            and |
|--|----------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | ·      | 10,226,068 common                            units of NuStar Energy L.P. representing a 21.4% limited partner                            interest in NuStar Energy L.P. |
|--|----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

                We account for our ownership interest in NuStar Energy L.P. using the equity                method. Therefore, our financial results reflect a portion of NuStar Energy                L.P.’s net income based on our ownership interest in NuStar Energy L.P. We                have no separate operating activities apart from those conducted by NuStar Energy                L.P. and therefore generate no revenues from operations.

                NuStar Energy L.P. conducts substantially all of its business through its wholly                owned subsidiaries, NuStar Logistics, L.P. and Kaneb Pipe Line Operating                Partnership, L.P. Through its subsidiaries, NuStar Energy L.P. is primarily engaged                in the crude oil and refined product transportation, terminalling and storage                business in the United States, the Netherland Antilles, Canada, Mexico, the                Netherlands and the United Kingdom.

                NuStar Energy L.P. is required by its partnership agreement to distribute all of                its available cash at the end of each quarter, less reserves established by its                general partner in its sole discretion to provide for the proper conduct of NuStar                Energy L.P.’s business or to provide funds for future distributions.                Similarly, we are required by our limited liability company agreement to distribute                all of our available cash at the end of each quarter, less reserves established by                our board of directors.

----

**Results of Operations**

                As discussed above, we account for our investment in NuStar Energy L.P. using the                equity method. As a result, our equity in earnings of NuStar Energy L.P., our only                source of income, directly fluctuates with the amount of NuStar Energy L.P.’s                distributions, which determines the amount of our incentive distribution earnings,                and the results of operations of NuStar Energy L.P., which determines the amounts                of earnings attributable to our general partner and limited partner interests.

***Three******Months******Ended******June******30, 2007******Compared******to Three******Months                Ended******June******30, 2006***
| **Financial                            Highlights**                                                                                                          |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Unaudited,                            Thousands of Dollars, Except Unit and Per Unit Data)                                                                  |
|                                                                                                                                                         |   |   |
|                                                                                                                                                         | **Three                            Months Ended June 30,** |  |
|                                                                                                                                                         | **2007** | **2006** | **Change** |
|                                                                                                                                                         |   |   |   |
|                                                                                                                                                         |   |   |   |
| Equity in earnings                            of NuStar Energy L.P.                                                                 | $                                 11,951 | $        9,329 | $                               2,622 |
|                                                                                                                                                         |   |   |   |
| General and                            administrative expenses                                                                      | (747) | (18)  | (729)  |
| Other income,                            net                                                               | 24 | 36 | (12)  |
| Interest expense, net                            – affiliated                                                                 | - | (4,704)  | 4,704 |
| Interest income,                            net                                                                                     |                                   18 |                                     - |                                  18 |
|                                                                                                                                                         |   |   |   |
| Income before                            income tax benefit                            (expense)           | 11,246 | 4,643 | 6,603 |
| Income tax benefit                            (expense)                                                                             |                                     2 |   (320)  |    322 |
| Net                            income                                                                      | $                                  11,248 | $                                     4,323 | $                                6,925 |
|                                                                                                                                                         |   |   |   |
| Basic net income                            per unit                                                                                | $                                                                 0.26 | $                                     0.10 | $                                  0.16 |
|                                                                                                                                                         |   |   |   |
| Weighted average                            number of basic units outstanding                                                                                | 42,500,000 | 42,500,000 | $                                                                   - |
|                                                                                                                                                         |   |   |   |
| Diluted net income                            per unit                                                                              | $                                    00.26 | $                                     0.10 | $                                   0.16 |
|                                                                                                                                                         |   |   |   |
| Weighted average                            number of diluted units                            outstanding                                                   | 42,501,705 | 42,500,000 | 1,705 |
|                                                                                                                                                         |   |   |   |

----

                The following table summarizes NuStar Energy L.P.’s results of operations and                our equity in earnings of NuStar Energy L.P. for the three months ended June 30,                2007 and 2006:

                 

|                                                                                                                            |   | **Three                                Months Ended June 30,**                  |         |     |
|---------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|---------|----------|
|                                                                                                                            |   | **2007**                                                                        |    | **2006** | **Change** |   |
|                                                                                                                            |   | **(Thousands                                of Dollars, Except Per Unit Data)** |
|                                                                                                                            |   |                                                                            |    |     |   |   |   |   |   |   |
| **NuStar Energy L.P. Statement of Income                                Data:**                                                 |   |                                                                            |    |     |   |   |   |   |   |   |
| Revenues                                                                                                                        |   | $                                                                               | 320,506 |     | $ | 279,968 |   | $ | 40,538 |   |
| Cost of product sales                                                                                                           |   |                                                                            | 148,061 |     |   | 118,283 |   |   | 29,778 |   |
| Operating expenses                                                                                                              |   |                                                                            | 85,444  |     |   | 79,155 |   |   | 6,289 |   |
| Depreciation and amortization                                                                                                   |   |                                                                            | 27,860  |     |   | 24,839 |   |   | 3,021 |   |
| Segment operating income                                                                                                        |   |                                                                            | 59,141  |     |   | 57,691 |   |   | 1,450 |   |
| General and administrative expenses                                                                                             |   |                                                                            | 17,581  |     |   | 10,375 |   |   | 7,206 |   |
| Operating income                                                                                                                |   | $                                                                               | 41,560  |     | $ | 47,316 |   | $ | (5,756 | ) |
|                                                                                                                            |   |                                                                            |    |     |   |   |   |   |   |   |
| Net income                                                                                                                      |   | $                                                                               | 39,697  |     | $ | 31,553 |   | $ | 8,144 |   |
| Net income per unit applicableto limited partners                                                                               |   | $                                                                               | 0.74    |     | $ | 0.59 |   | $ | 0.15 |   |
|   Cash distributions per unitapplicable to limited partners                                                                |   | $                                                                               | 0.950   |     | $ | 0.885 |   | $ | 0.065 |   |
|                                                                                                                                 |   |                                                                            |    |     |   |   |   |   |   |   |
|                                                                                                                            |   |                                                                            |    |     |   |   |   |   |   |   |
| **NuStar GP Holdings’ Equity                                in****Earnings of NuStar Energy L.P.:**                       |   |                                                                            |    |     |   |   |   |   |   |   |
| General partner interest                                                                                                        |   | $                                                                               | 705     |     | $ | 561 |   | $ | 144 |   |
| General partner incentive distribution                                                                                          |   |                                                                            | 4,413   |     |   | 3,480 |   |   | 933 |   |
| General partner’s interest in net income and                                incentive distributions of NuStar Energy L.P. |   |                                                                            | 5,118   |     |   | 4,041 |   |   | 1,077 |   |
| NuStar GP Holdings’ limited partner interest                                in net income of NuStar Energy L.P.           |   |                                                                            | 7,554   |     |   | 6,010 |   |   | 1,544 |   |
| Amortization of step-up in basis related to NuStar                                Energy L.P.’s assets and liabilities    |   |                                                                            | (721    | )        |   | (722 | ) |   | 1 |   |
| NuStar GP Holdings’ equity in earnings of                                NuStar Energy L.P.                               |   | $                                                                               | 11,951  |     | $ | 9,329 |   | $ | 2,622 |   |

 

***Three Months                Ended June 30, 2007 and 2006***

                NuStar Energy L.P.’s net income for the three months ended June 30, 2007                increased $8.1 million, compared to the three months ended June 30, 2006, due to                higher segmental operating income and an increase in other income, partially offset                by increased general and administrative expense, interest expense and income tax                expense.

                Our equity in earnings of NuStar Energy L.P. related to our general partner                interest and our limited partner interest increased for the three months ended June                30, 2007, compared to the three months ended June 30, 2006, due to higher earnings                at NuStar Energy L.P. for the three months ended June 30, 2007.  NuStar Energy                L.P.’s per unit distributions for the three months ended June 30, 2007                increased to $0.950 from $0.885 compared to the same period of 2006, which resulted                in NuStar Energy L.P. increasing its total cash distributions. Because our                incentive distribution rights entitle us to an increasing amount of NuStar Energy                L.P.’s cash distributions, our equity in earnings related to our incentive                distribution rights increased.

----

General and administrative expenses increased for the                three months ended June30, 2007,compared to the same period in 2006,due to ourpublic companycosts. For the period prior to our initial public                offering in July 2006, no corporate costs were allocated to us by Valero Energy as                Valero Energy management determined that no such corporate costs were incurred                specifically on our behalf.

Affiliated interest expense decreased for the three                months ended June30, 2007,compared to the three months ended June 30,                2006,due to Valero Energy's capital                contribution to us of the outstanding balance of the notes payable to Valero Energy                affiliates effective July 19, 2006.

                 

***Six******Months******Ended******June 30, 2007                Compared******to******Six******Months Ended******June 30, 2006***

 

| **Financial                                Highlights**                                         |
|-------------------------------------------------------------------------------------------------|
| (Unaudited,                                Thousands of Dollars, Except Unit and Per Unit Data) |   |
|                                                                                            |   | **Six                                Months Ended June 30,** |   |   |
|                                                                                            |   |   | **2007** |   |   | **2006** |   |   | **Change** |   |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |
| Equity in earnings of NuStar Energy L.P.                                                        |   | $ | 21,508 |   | $ | 20,504 |   | $ | 1,004 |   |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |
| General and administrative expenses                                                             |   |   | (1,543 | ) |   | (26 | ) |   | (1,517 | ) |
| Other (expense) income, net                                                                     |   |   | (2 | ) |   | 37 |   |   | (39 | ) |
| Interest expense, net – affiliated                                                        |   |   | — |   |   | (9,414 | ) |   | 9,414 |   |
| Interest income, net                                                                            |   |   | 14 |   |   | — |   |   | 14 |   |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |
| Income before income tax benefit                                (expense)                       |   |   | 19,977 |   |   | 11,101 |   |   | 8,876 |   |
| Income tax benefit (expense)                                                                    |   |   | 42 |   |   | (403 | ) |   | 445 |   |
| Net income                                                                                      |   | $ | 20,019 |   | $ | 10,698 |   | $ | 9,321 |   |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |
| Basic net income per unit                                                                       |   | $ | 0.47 |   | $ | 0.25 |   | $ | 0.22 |   |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of basic units                                outstanding               |   |   | 42,500,000 |   |   | 42,500,000 |   |   | — |   |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |
| Diluted net income per unit                                                                     |   | $ | 0.47 |   | $ | 0.25 |   | $ | 0.22 |   |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of diluted units                                outstanding             |   |   | 42,501,540 |   |   | 42,500,000 |   |   | 1,540 |   |

 

----

                The following table summarizes NuStar Energy L.P.’s results of operations and                our equity in earnings of NuStar Energy L.P. for the six months ended June 30, 2007                and 2006:
|                                                                                                                                                                             | **Six Months                            Ended June 30,**                       |                                                                          |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|-------------------------------------------------------------------------------|
|                                                                                                                                                                             | **2007**                                                                       | **2006**                                                                      | **Change** |
|                                                                                                                                                                             | (Thousands of                            Dollars, Except Per Unit Data)        |
|                                                                                                                                                                             |                                                                           |                                                                          |   |
| **NuStar Energy                            L.P. Statement of Income Data:**                                                                                                      |                                                                           |                                                                          |   |
| Revenues                                                                                                                                                | $                            617,330                                           | $                            553,972                                          | $                              63,358 |
| Cost of product                            sales                                                                                                        | 275,988                                                                        | 232,501                                                                       | 43,487 |
| Operating                            expenses                                                                                                           | 166,656                                                                        | 150,225                                                                       | 16,431 |
| Depreciation and                            amortization                                                                                                |   55,202                                                             |   49,028                                                            |     6,174 |
| Segment operating                            income                                                                                                     | 119,484                                                                        | 122,218                                                                       | (2,734) |
|      General                            and administrative expenses                                                            |   32,489                                                             |   18,935                                                            |   13,554 |
| Operating                            income                                                                                                                                 | $                               86,995                          | $                            103,283                                          | $                            (16,288) |
|                                                                                                                                                                             |                                                                           |                                                                          |   |
| Net                            income                                                                                                                   | $                               70,820                               | $                              71,004                               | $                                 (184) |
| Net income per unit                            applicable

     to                            limited partners                 |  

$                                   1.31 |  

$                                  1.34 |  

$                                (0.03) |
| Cash distributions                            per unit

     applicable                            to limited partners         |  

$                                 1.865            |  

$                                1.770            |  

$                                0.095 |
|                                                                                                                                                                             |                                                                           |                                                                          |   |
|                                                                                                                                                                             |                                                                           |                                                                          |   |
| **NuStar GP                            Holdings’ Equity in                              Earnings of NuStar Energy L.P.:**                                        |                                                                           |                                                                          |   |
| General partner                            interest     

                                                                                         | $                                 1,249                    | $                                1,280                    | $                                   (31) |
| General partner                            incentive distribution     

                                                                           |    8,323                                                        |   6,960                                                             | 1,363 |
| General                            partner’s interest in net income and                            incentive distributions of NuStar Energy L.P.                           |  

9,572                                                                  |  

8,240                                                                 |  

1,332 |
| NuStar GP                            Holdings’ limited partner interest in netincome of NuStar                            Energy L.P.             |  

13,378                                                                 |  

13,706                                                                |  

(328) |
| Amortization of                            step-up in basis related to NuStarEnergy L.P.’s                            assets and liabilities      |  

(1,442)                                                                |  

(1,442)                                                               |  

                                   - |
| NuStar GP                            Holdings’ equity in earnings of

    NuStar Energy                            L.P.       |  

$                              21,508                        |  

$                              20,504                       |  

$                               1,004 |

***Six******Months Ended******June 30, 2007******and                2006***

                NuStar Energy L.P.’s net income for the six months ended June 30, 2007                decreased $0.2 million, compared to the six months ended June 30, 2006, due to                lower segmental operating income and increased general and administrative expense,                interest expense and income tax expense, partially offset by an increase in other                income.

                Our equity in earnings of NuStar Energy L.P. related to our general partner                interest and our limited partner interest decreased for the six months ended June                30, 2007, compared to the six months ended June 30, 2006, due to lower earnings at                NuStar Energy L.P. NuStar Energy L.P.’s per unit distributions for the six                months ended June 30, 2007 increased to $1.865 from $1.770 compared to the same                period of 2006, which resulted in NuStar Energy L.P. increasing its total cash                distributions. Because our incentive distribution rights entitle us to an                increasing amount of NuStar Energy L.P.’s cash distributions, our equity in                earnings related to our incentive distribution rights increased.

----

General and administrative expenses increased for the                sixmonths ended June30, 2007,compared to the same period in 2006,due to the costs we incurred as a separate publicly                traded company. For the period prior to our initial publicoffering on July 19, 2006, no corporate costs were                allocated to us by Valero Energy as management determined that no such corporate                costs were incurred specifically on our behalf.

Affiliated interest expense decreased for the                sixmonths ended June 30, 2007,compared to the sixmonths ended June30, 2006,due to                Valero Energy's capital contribution to us of the outstanding balance of the notes                payable to Valero Energy affiliates effective July 19, 2006.

***Outlook***

NuStar Energy L.P. expects                Valero Energy’s McKee refinery fire to have a minimal effect on its                operations in the second half of 2007, as the refinery is currently running at or                near capacity. Even though NuStar Energy L.P. believes it has adequate insurance to                cover the amount of losses resulting from the McKee refinery fire, NuStar Energy                L.P. cannot precisely predict the timing or amounts of insurance proceeds it will                receive. As a result, the timing of receiving insurance proceeds will affect its                earnings and cash flows in any particular quarter over the next few quarters until                they finalize the insurance claim.                                  NuStar Energy L.P. expects the results for the second half of 2007 to benefit from                several of its terminal expansion projects coming on-line, increases in its                pipeline tariffs effective July 1 and fewer turnarounds at the refineries it                serves.

Additionally, NuStar Energy L.P. has                created a new product marketing and trading business to capitalize on opportunities                to optimize the use and profitability of its assets, to manage risk as it                diversifies its business and to enhance its competitive position when pursuing                acquisitions. NuStar Energy L.P. may experience additional volatility in its                earnings and cash flows, which should not be significant in 2007. Further, NuStar                Energy L.P. will be exposed to commodity price risk related to the product                marketing and trading business.

We expect our                general and administrative expenses to be higher in 2007 compared to historical                amounts as we incur a full year of administrative expenses as a separate publicly                traded company.

Our interest expense in future                periods will depend upon the amount of outstanding borrowings and the interest                rate related to our three-year revolving credit facility with a borrowing capacity                of up to $20 million.

**LIQUIDITY AND CAPITAL RESOURCES**

***General***

                Our cash flows consist of distributions from NuStar Energy L.P. on our partnership                interests, including our incentive distribution rights. Due to our ownership of                NuStar Energy L.P.’s incentive distribution rights, our portion of NuStar                Energy L.P.’s total distributions may exceed our percentage ownership                interest of 23.4%. Our primary cash requirements are for distributions to members,                capital contributions to maintain our 2% general partner interest in NuStar Energy                L.P. in the event NuStar Energy L.P. was to issue additional units, debt service                requirements, if any, and general and administrative expenses. In addition, because                NuStar GP, LLC elected to be treated as a taxable entity, we may be required to pay                income taxes, depending upon the taxable income of NuStar GP, LLC. These tax                payments may exceed the amount of tax expense recorded on the consolidated                financial statements. We expect to fund our cash requirements primarily with the                quarterly cash distributions we receive from NuStar Energy L.P. and borrowings on                our three-year revolving credit facility, if necessary.                 

***Cash Flows for the******Six******M******onths******Ended******June 30, 2007******and 200******6***

                Net cash provided by operating activities for the six months ended June 30, 2007                was $22.6 million, compared to $11.1 million for the six months ended June 30,                2006, primarily due to higher net income. Net cash provided by investing activities                for the six months ended June 30, 2007 was $6.2 million, compared to $5.6 million                for the six months ended June 30, 2006. The increase was primarily due to higher                distributions from NuStar Energy L.P. Net cash used in financing activities for the                six months ended June 30, 2007 was $27.2 million, compared to $16.7 million for the                six months ended June 30, 2006, primarily due to higher distributions paid to                unitholders.

----

***Cash                Distributions***

The table set forth below shows NuStar Energy                L.P.’s cash distributions with respect to our ownership interests in NuStar                Energy L.P.including our incentive                distribution rights applicable to the period in which the distributions were                earned:

 
|                                                                                                                                                       | **Three Months Ended June 30,**                                               | **Six Months Ended June 30,**                                           |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------|-------------------------------------------------------------------------|
|                                                                                                                                                       | **2007**                                                                      | **2006**                                                                | **2007** | **2006** |
| Cash distributions                            per unit                                                                            | $    0.950                                                     | $   0.885                                                     | $   1.865 | $   1.770 |
| Total cash                            distributions by NuStar Energy L.P. to allpartners                            (a)           |  

                            $  49,879                            |  

                            $ 45,823                            |  

                            $ 97,574 |  

                            $ 91,646 |
| Cash distributions                            to                            us:                          |                                                                          |                                                                    |   |   |
| Distributions on                            our general partner interest                            (2%)                          |  

                            $       997 |  

                            $      916 |  

                            $   1,951 |  

                            $  1,832 |
| Distributions on                            our incentive distribution                            rights                          |  

                            4,413                                     |  

                            3,480                               |  

                            8,323 |  

                            6,960 |
| Distributions on                            our limited partnership                            interests                          |  

                              9,714                         |  

                              9,047                   |  

                            19,073 |  

                            18,097 |
| Total cash                            distributions to us                                                                         | $                              15,124                               | $13,443                                                                 | $                               29,347 | $26,889 |
| Distributions to us                            as a percentage of total cash  distributions                                  |  

                            30.3%                                     |  

                            29.3%                               |  

                            30.1% |  

                            29.3% |
|  | (a)      | Distributions                            declared for a quarter are paid by NuStar Energy L.P.                            within 45 days following the end of each                            quarter based on the partnership interests outstanding as of a record                            date that is set after the end of each                            quarter. |
|--|-----------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Long-Term                Contractual Obligations                 ***

***Credit Facility***

                On July 19, 2006, we entered into a three-year revolving credit facility with                a borrowing capacity of up to $20 million (the Credit Facility) to enable us                to manage our cash flow obligations. For example, we expect to fund capital                contributions in NuStar Energy L.P. to maintain our 2% general partner interest in                the event NuStar Energy L.P. issues additional units through borrowings under the                Credit Facility, and we may initially meet other liquidity and capital resource                requirements through borrowings under the Credit Facility.                 

                Of the Credit Facility’s $20 million commitment, up to $10 million may                be available for letters of credit. Our obligations under the Credit Facility are                unsecured. The Credit Facility contains customary covenants and provisions                including limitations on indebtedness, liens, dispositions of material property,                mergers and asset transfers. Borrowings under the Credit Facility bear interest, at                our option, at either: (i) the higher of (a) JPMorgan Chase Bank,                N.A.’s prime rate or (b) the federal funds effective rate plus one-half                percent; or (ii) the Eurodollar rate, as adjusted for statutory reserve                requirements for Eurocurrency liabilities, plus an applicable margin that will vary                between 0.27% and 0.70% based upon our credit rating.                                 Under the terms of the Credit Facility, NuStar Energy L.P. will be required to                maintain a total debt-to-EBITDA ratio of less than 4.75-to-1.0 for any four                consecutive quarters, subject to adjustment following certain acquisitions. We are                also required to receive cash distributions of at least $25.0 million in respect to                our ownership interests in NuStar Energy L.P. for the preceding four fiscal                quarters ending on the last day of each fiscal quarter.                 

                As of June 30, 2007, we had $20.0 million available for borrowing under the Credit                Facility.

----

***Employee                Benefit Plans***

                All costs incurred by us related to employee benefit plans are reimbursed by NuStar                Energy L.P. at cost. Additionally, NuStar Energy L.P. reimburses us for the                compensation expense of restricted unit and unit option awards granted to employees                of NuStar GP, LLC under various long-term incentive plans. For the three and six                months ended June 30, 2006, compensation expense pertaining to awards of restricted                units and unit options to corporate officers of Valero Energy was reimbursed by                Valero Energy affiliates. Our liabilities for employee benefits are included in                “Employee benefit plan liabilities” and our liability related to the                long-term incentive plans is included in “Accrued compensation expense”                on our consolidated balance sheets.

                 

***Contingencies***

                As previously discussed, our only cash-generating assets are our indirect ownership                interests in NuStar Energy L.P. NuStar Energy L.P. is subject to certain loss                contingencies, the outcome of which could have an effect on NuStar Energy                L.P.’s cash flows. Specifically, NuStar Energy L.P. may be required to make                substantial payments to the U.S. Department of Justice for certain remediation                costs.

                 

**CRITICAL ACCOUNTING POLICIES**

**The preparation of financial statements in                accordance with United States generally accepted accounting principles requires                management to make estimates and assumptions that affect the amounts reported in                the consolidated financial statements and accompanying notes. Actual results could                differ from those estimates. Our critical accounting policies are disclosed in our                Annual Report on Form 10-K for the year ended December 31,                2006. **

----

Item 4.  Controls and Procedures
|  | *(a)     * | *Evaluation of disclosure                            controls and procedures.* |
|--|-------------------------------------|--------------------------------------------------------------------------------|

                Our management has evaluated, with the participation of our principal executive                officer and principal financial officer, the effectiveness of our disclosure                controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange                Act of 1934) as of the end of the period covered by this report, and has concluded                that our disclosure controls and procedures were effective as of June 30, 2007.
|  | *(b)     * | *Changes in                            internal control over financial reporting.* |
|--|-------------------------------------|------------------------------------------------------------------------------------|

                There has been no change in our internal control over financial reporting that                occurred during our last fiscal quarter that has materially affected, or is                reasonably likely to materially affect, our internal control over financial                reporting.

----

****PART II - OTHER INFORMATION****

****Item 1A.   Risk                Factors****

***NuStar Energy L.P. has adopted certain valuation methodologies that may                result in a shift of income, gain, loss and deduction between us and the public                unitholders of NuStar Energy L.P. The Internal Revenue Service (“IRS”)                may challenge this treatment, which could adversely affect the value of NuStar                Energy L.P.’s common units and our common units.***

                When we or NuStar Energy L.P. issue additional units or engage in certain other                transactions, NuStar Energy L.P. determines the fair market value of its assets and                allocates any unrealized gain or loss attributable to such assets to the capital                accounts of NuStar Energy L.P.’s public unitholders and us. NuStar Energy                L.P.’s methodology may be viewed as understating the value of NuStar Energy                L.P.’s assets. In that case, there may be a shift of income, gain, loss and                deduction between certain NuStar Energy L.P. public unitholders and us, which may                be unfavorable to such NuStar Energy L.P. unitholders. Moreover, under our current                valuation methods, subsequent purchasers of our common units may have a greater                portion of their Internal Revenue Code Section 743(b) adjustment allocated to                NuStar Energy L.P.’s intangible assets and a lesser portion allocated to                NuStar Energy L.P.’s tangible assets. The IRS may challenge NuStar Energy                L.P.’s valuation methods, or our or NuStar Energy L.P.’s allocation of                the Section 743(b) adjustment attributable to NuStar Energy L.P.’s tangible                and intangible assets, and allocations of income, gain, loss and deduction between                us and certain of NuStar Energy L.P.’s public unitholders.

                 

                A successful IRS challenge to these methods or allocations could adversely affect                the amount of taxable income or loss being allocated to our unitholders or the                NuStar Energy L.P. unitholders. It also could affect the amount of gain on the sale                of common units by our unitholders or NuStar Energy L.P.’s unitholders and                could have a negative impact on the value our common units or those of NuStar                Energy L.P. or result in audit adjustments to the tax returns of our or NuStar                Energy L.P.’s unitholders without the benefit of additional deductions.

**Item 4. Submission of Matters to a Vote of Security Holders                 **

                Our annual meeting of unitholders was held April 26, 2007. Matters voted on at                the meeting and the results thereof were as follows:                 
|   | *(a)* | a proposal to elect                            two Class I directors to serve until the 2010 annual meeting was                            approved as follows: |
|--------|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

                 
| **Directors**                                 |    | **Affirmative** |    | **Withheld** |    | **Non-Votes** |
|-----------------------------------------------|--------------|-----------------|--------------|--------------|--------------|---------------|
| William E.                            Greehey |    | 35,391,730      |    | 32,362       |    | n/a           |
| Stan L.                            McLelland  |    | 35,392,785      |    | 31,307       |    | n/a           |

                 
|   | *(b)* | a proposal to                            ratify the appointment of KPMG LLP to serve as our independent                            registered public accounting firm for the fiscal year ending                            December 31, 2007 was approved as follows: |
|--------|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

                 
|            |   |         |   |         |   |          |
|-----------------|--------|--------------|--------|--------------|--------|---------------|
| **Affirmative** |   | **Negative** |   | **Withheld** |   | **Non-Votes** |
| 35,392,830      |   | 20,594       |   | 10,668       |   | n/a           |

                Directors whose terms of office continued after the annual meeting were: Curtis V.                Anastasio, William B. Burnett, and James F. Clingman, Jr.

----

****Item                6.** Exhibits**
| *+Exhibit 10.01                                                                | NuStar GP, LLC Second Amended and Restated 2000 Long-Term Incentive                            Plan, amended and restated as of April 1, 2007.                  |
|--------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                           |                                                                                                                                                            |
| *+Exhibit 10.02                                                                | NuStar GP, LLC Amended and Restated 2002 Unit Option Plan, amended and                            restated as of April 1, 2007.                                 |
|                                                                           |                                                                                                                                                            |
| *+Exhibit 10.03                                                                | NuStar GP, LLC Amended and Restated 2003 Employee Unit Incentive Plan,                            amended and restated as of April 1, 2007.                     |
|                                                                           |                                                                                                                                                            |
| *+Exhibit 10.04

                                                         | NuStar GP Holdings, LLC Amended and Restated Long-Term Incentive Plan,                            amended and restated as of April 1, 2007.                     |
|                                                                           |                                                                                                                                                            |
| *+Exhibit 10.05

                                                         | Form of Non-Employee Director Restricted Unit Agreement under NuStar GP                            Holdings, LLC Amended and Restated Long-Term Incentive Plan. |
|                                                                           |                                                                                                                                                            |
| *                            Exhibit 31.01

                              | Rule 13a-14(a)                            Certifications (under Section 302 of the Sarbanes-Oxley Act of                            2002).                      |
|                                                                           |                                                                                                                                                            |
| *                            Exhibit 32.01

                              | Section 1350                            Certifications (as adopted pursuant to Section 906 of the                            Sarbanes-Oxley Act of 2002).       |

                ______________

                *      Filed herewith.

                +      Identifies management contracts or compensatory                plans or arrangements required to be filed as an exhibit

                        hereto.

----

**SIGNATURES**

                 

                 

                Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant                has duly caused this report to be signed on its behalf by the undersigned,                thereunto duly authorized.

**NUSTAR GP HOLDINGS, LLC****(Registrant)**

**By:****/s/ Curtis V. Anastasio     **

**     Curtis V.                Anastasio**

                     **President and****Chief Executive                Officer**

**     ****August 9****, 2007**

**By:****/s/ Steven A.                Blank          **

**     Steven A.                Blank**

                     **Senior Vice President, Chief Financial Officer and                Treasurer                    ****August 9****, 2007**

**By: ****/s/ Thomas R.                Shoaf          ****     **

**     Thomas R.                Shoaf**

                     **Vice President and Controller**

                     **August****9, 2007**