NuStar GP Holdings, LLC (Form: 10-Q, Received: 08/09/2007 15:28:16)

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

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 ___

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
In crease 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	12 1
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 has no 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 its debarment 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 its results of operations in the period in which it would be required to record a liability, and could be material to its cash flows in the periods in which it would 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 basic units 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 basic units 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 diluted units 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 comprehensive income	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

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.

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 applicable to limited partners	$	0.74		$	0.59		$	0.15
Cash distributions per unit applicable 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 June 30, 2007, compared to the same period in 2006, due to our public company costs. 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 June 30, 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 net income of NuStar Energy L.P.	13,378	13,706	(328)
Amortization of step-up in basis related to NuStar Energy 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 six months ended June 30, 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 public offering 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 six months ended June 30, 2007, compared to the six 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.

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 all partners (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	1 9,073	1 8,097
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

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

SECTION 1.

Purpose of the Plan.

SECTION 2.

Definitions.

2.1

“ Affiliate ” means, with respect to any Person, any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with, the Person in question. As used herein, the term “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. Notwithstanding the immediately preceding two sentences, to the extent that Section 409A of the Code applies to Options or other equity-based Awards granted under the Plan, the term “Affiliate” means all persons with whom the Company could be considered a single employer under Section 414(b) or Section (c) of the Code, substituting (for the purpose of determining whether Options or other equity-based Awards that may be subject to Section 409A of the Code are derived in respect of Units of the service recipient in order to comply with any applicable requirements of Section 1.409A-1(b)(5)(iii) of the proposed regulations issued under Section 409A of the Code or any successor regulation or other regulatory guidance relating thereto) “20 percent” in place of “80 percent” in determining a controlled group under Section 414(b) of the Code and in determining trades or businesses that are under common control for purposes of Section 414(c) of the Code.

2.2

“ Award ” means a grant of one or more Options, Performance Units, Performance Cash or Restricted Units pursuant to the Plan, and any tandem DERs granted with respect to such Award.

2.3

“ Board ” means the Board of Directors of the Company.

2.4

“ Cause ” shall mean the (i) conviction of the Participant by a state or federal court of a felony involving moral turpitude, (ii) conviction of the Participant by a state or federal court of embezzlement or misappropriation of funds of the Company, (iii) the Company’s (or applicable Affiliate’s) reasonable determination that the Participant has committed an act of fraud, embezzlement, theft, or misappropriation of funds in connection with such Participant’s duties in the course of his or her employment with the Company (or applicable Affiliate), (iv) the Company’s (or its applicable Affiliate’s) reasonable determination that the Participant has engaged in gross mismanagement, negligence or misconduct which causes or could potentially cause material loss, damage or injury to the Company, any of its Affiliates or their respective employees, or (v) the Company’s (or applicable Affiliate’s) reasonable determination that (a) the Participant has violated any policy of the Company (or applicable Affiliate), including but not limited to, policies regarding sexual harassment, insider trading, confidentiality, substance abuse and/or conflicts of interest, which violation could result in the termination of the Participant’s employment or service as a non-employee Director of the Company (or applicable Affiliate), or (b) the Participant has failed to satisfactorily perform the material duties of Participant’s position with the Company or any of its Affiliates.

2.5

“ Change of Control ” means, and shall be deemed to have occurred upon the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company or the Partnership to any Person or its Affiliates, unless immediately following such sale, lease, exchange or other transfer such assets are owned, directly or indirectly, by NuStar GP Holdings, LLC and its Affiliates or the Company; (ii) the consolidation or merger of the Partnership or the Company with or into another Person pursuant to a transaction in which the outstanding voting interests of the Company are changed into or exchanged for cash, securities or other property, other than any such transaction where, in the case of the Company, (a) all outstanding voting interests of the Company are changed into or exchanged for voting stock or interests of the surviving corporation or entity or its parent and (b) the holders of the voting interests of the Company immediately prior to such transaction own, directly or indirectly, not less than a majority of the voting stock or interests of the surviving corporation or entity or its parent immediately after such transaction and, in the case of the Partnership, NuStar GP Holdings, LLC retains operational control, whether by way of holding a general partner interest, managing member interest or a majority of the outstanding voting interests of the surviving corporation or entity or its parent; NuStar GP Holdings, LLC or (iii) a “person” or “group” (within the meaning of Sections 13(d) or 14(d)(2) of the Exchange Act) being or becoming the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of more than 50% of all voting interests of NuStar GP Holdings, LLC or the Company then outstanding, other than, in the case of the Company, (a) in a merger or consolidation which would not constitute a Change of Control under clause (ii) above and (b) Valero Energy Corporation and its Affiliates; or (iv) in the case of NuStar GP Holdings, LLC, the consummation of a reorganization, merger, consolidation or other form of business transaction or series of business transactions, in each case, with respect to which more than 50% of the voting power of the outstanding equity interests in NuStar GP Holdings, LLC cease to be owned by the persons who owned such interests immediately prior to such reorganization, merger, consolidation or other form of business transaction or series of business transactions.

2.6

“ Code ” means the Internal Revenue Code of 1986, as amended.

2.7

“ Committee ” means the Compensation Committee of the Board or such other committee of the Board appointed to administer the Plan.

2.8

“ Covered Participants ” means a Participant who is a “covered employee” as defined in Section 162(m)(3) of the Code, and the regulations promulgated thereunder, and any individual the Committee determines should be treated like such a covered employee.

2.9

“ Date of Grant ” means the effective date on which an Award is made to a Participant as set forth in the applicable Award Agreement.

2.10

“ DER ” means a contingent right, granted in tandem with a specific Award, to receive an amount in cash equal to the cash distributions made by the Partnership with respect to a Unit during the period such Award is outstanding.

2.11

“ Director ” means a “non-employee director” of the Company, as defined in Rule 16b-3.

2.12

“ Employee ” means any employee of the Company or an Affiliate, as determined by the Committee.

2.13

“ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

2.14

“ Fair Market Value ” means the closing sales price of a Unit on the New York Stock Exchange on the applicable date (or if there is no trading in the Units on such date, on the next preceding date on which there was trading). If Units are not publicly traded at the time a determination of fair market value is required to be made hereunder, the determination of fair market value shall be made in good faith by the Committee.

2.15

“ Good Reason ” means:

(i)

a reduction in the Participant’s annual base salary;

(ii)

failure to pay the Participant any compensation due under an employment agreement, if any;

(iii)

failure to continue to provide benefits substantially similar to those then enjoyed by the Participant unless the Partnership, the Company or their Affiliates provide aggregate benefits equivalent to those then in effect; or

(iv)

failure to continue a compensation plan or to continue the Participant’s participation in a plan on a basis not materially less favorable to the Participant, subject to the power of the Partnership, the Company or their Affiliates to amend such plans in their reasonable discretion; or

(v)

the Partnership, the Company or their Affiliates purported termination of the Participant’s employment for Cause or disability not pursuant to a procedure indicating the specific provision of the definition of Cause contained in this Plan as the basis for such termination of employment;

2.16

“ Option ” means an option to purchase Units as described in Section 6.1.

2.17

“ Participant ” means any Employee or Director granted an Award under the Plan.

2.18

“ Performance Award ” means an Award made pursuant to this Plan to a Participant which Award is subject to the attainment of one or more Performance Goals. Performance Awards may be in the form of either Performance Units, Performance Cash or DERs.

2.19

“ Performance Cash ” means an Award, designated as Performance Cash and denominated in cash, granted to a Participant pursuant to Section 6.4 hereof, the value of which is conditioned, in whole

2.20

“ Performance Criteria ” or “ Performance Goals ” or “ Performance Measures ” mean the objectives established by the Committee for a Performance Period, for the purpose of determining when an Award subject to such objectives is earned.

2.21

“ Performance Period ” means the time period designated by the Committee during which performance goals must be met.

2.22

“ Performance Unit ” means an Award, designated as a Performance Unit in the form of Units or other securities of the Company, granted to a Participant pursuant to Section 6.4 hereof, the value of which is determined, in whole or in part, by the value of Units and/or conditioned on the attainment of Performance Goals in a manner deemed appropriate by the Committee and described in the Award agreement.

2.23

“ Person ” means an individual or a corporation, limited liability company, partnership, joint venture, trust, unincorporated organization, association, government agency or political subdivision thereof or other entity.

2.24

“ Restricted Period ” means the period established by the Committee with respect to the vesting of an Award during which the Award either remains subject to forfeiture or is not exercisable by the Participant.

2.25

“ Restricted Unit ” means a phantom unit granted under the Plan which is equivalent in value and in divided and interest rights to a Unit, and which upon or following vesting entitles the Participant to receive a Unit.

2.26

“ Rule 16b-3 ” means Rule 16b-3 promulgated by the SEC under the Exchange Act, or any successor rule or regulation thereof as in effect from time to time.

2.27

“ SEC ” means the Securities and Exchange Commission.

2.28

“ Unit ” means a common unit of the Partnership.

SECTION 3.

Administration.

SECTION 4.

Units Available for Awards.

4.1

Units Available . Subject to adjustment as provided in Section 4.3, the number of Units with respect to which Awards may be granted under the Plan is 1,500,000. If any Award expires, is canceled, exercised, paid or otherwise terminates without the delivery of Units, then the Units covered by such Award, to the extent of such expiration, cancellation, exercise, payment or termination, shall again be Units with respect to which Awards may be granted. In the event that Units issued under the Plan are reacquired by the Partnership or the Company pursuant to any forfeiture provision, such Units shall again be available for the purposes of the Plan. In the event a Participant pays for any Award through the delivery of previously acquired Units, the number of Units available shall be increased by the number of Units delivered by the Participant.

4.2

Sources of Units Deliverable Under Awards . Any Units delivered pursuant to an Award shall consist, in whole or in part, of Units acquired in the open market, from any Affiliate, the Partnership or any other Person, or any combination of the foregoing, as determined by the Committee in its discretion.

4.3

Adjustments . If the Committee determines that any distribution (whether in the form of cash, Units, other securities, or other property), recapitalization, split, reverse split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Units or other securities of the Partnership, issuance of warrants or other rights to purchase Units or other securities of the Partnership, or other similar transaction or event affects the Units such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Units (or other securities or property) with respect to which Awards may be granted, (ii) the number and type of Units (or other securities or property) subject to outstanding Awards, and (iii) if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, that the number of Units subject to any Award shall always be a whole number.

SECTION 5.

Eligibility.

6.1

Options . The Committee shall have the authority to determine the Employees and Directors to whom Options shall be granted, the number of Units to be covered by each Option, the purchase price therefor and the conditions and limitations applicable to the exercise of the Option, including the following terms and conditions and such additional terms and conditions, as the Committee shall determine, that are not inconsistent with the provisions of the Plan.

(i)

Exercise Price . The purchase price per Unit purchasable under an Option shall be determined by the Committee at the time the Option is granted but shall not be less than its Fair Market Value as of the date of grant.

(ii)

Time and Method of Exercise . The Committee shall determine the Restricted Period (i.e., the time or times at which an Option may be exercised in whole or in part) and the method or methods by which payment of the exercise price with respect thereto may be made or deemed to have been made which may include, without limitation, cash, check acceptable to the Company, a “cashless-broker” exercise (through procedures approved by the Company), other securities or other property, a note from the Participant (in a form acceptable to the Company), or any combination thereof, having a value on the exercise date equal to the relevant exercise price.

(iii)

Term . Subject to earlier termination as provided in the grant agreement or the Plan, each Option shall expire on the 10th anniversary of its date of grant.

(iv)

Forfeiture . Except as otherwise provided in this Plan, in the terms of an Award agreement, or in a written employment agreement (if any) between the Participant and the Company or one of its Affiliates, upon termination of a Participant’s employment with the Company or its Affiliates or membership on the Board of the Company or its Affiliates, whichever is applicable, involuntarily for Cause or on a voluntary basis (other than for retirement, death or disability of the Participant (see Section 6.3(ix) below)) during the applicable Restricted Period, (i) that portion of any Option that has not vested on or prior to such date of termination shall automatically lapse and be forfeited by the Participant at the close of business on the date of the Participant’s termination and (ii) all vested but unexercised Options previously granted shall automatically lapse and be forfeited by the Participant at the close of business on the 30th day following the date of such Participant’s termination, unless an Option expires earlier according to its original terms. If a Participant’s employment or service as a Director is involuntarily terminated by the Company other than for Cause: (i) that portion of any Option that has not vested on or prior to such date of termination shall automatically lapse and be forfeited by the Participant at the close of business on the date of the Participant’s termination and (ii) all vested but unexercised Options previously granted shall automatically lapse and be forfeited by the Participant at the close of business on last day of the twelfth month following the date of such Participant’s termination, unless an Option expires earlier according to its original terms. The Committee or the Chief Executive Officer may waive in whole or in part such forfeiture with respect to a Participant’s Options.

(v)

In connection with the sale by Valero Energy Corporation (“VEC”) of its ownership interest in NuStar GP Holdings, LLC to public unitholders in a series of public offerings, VEC ceased to be an Affiliate of the Company effective December 22, 2006. Employees of VEC were deemed to have experienced a termination of employment as a result of the loss of the Affiliate relationship. However, notwithstanding the provisions in Section 6.1(iv) above, immediately prior to the closing of the public offering of the Units on December 22, 2006, all Options that (a) were granted under the Plan and are held by VEC Employees, and (b) are in full force and effect on December 22, 2006, shall remain outstanding, shall be fully vested and shall not be subject to lapse and forfeiture as provided in Section 6.1(iv) above. Such Options shall remain outstanding and in full force and shall expire on the close of business on December 22, 2007.

6.2

Restricted Units . The Committee shall have the authority to determine the Employees and Directors to whom Restricted Units shall be granted, the number of Restricted Units to be granted to each such Participant, the duration of the Restrict Period (if any), the conditions under which the Restricted Units may become vested (which may be immediate upon grant) or forfeited, and such other terms and conditions as the Committee may establish respecting such Awards, including whether DERs are granted with respect to such Restricted Units.

(i)

DERs . To the extent provided by the Committee, in its discretion, a grant of Restricted Units may include a tandem DER grant, which may provide that such DERs shall be paid directly to the Participant, be credited to a bookkeeping account (with or without interest in the discretion of the Committee) subject to the same restrictions as the tandem Award, or be subject to such other provisions or restrictions as determined by the Committee in its discretion.

(ii)

(iii)

Lapse of Restrictions . Upon the vesting of each Restricted Unit, the Participant shall be entitled to receive from the Company one Unit subject to the provisions of Section 8.2.

(iv)

As described in Section 6.1(v) above, Employees of VEC were deemed to have experienced a termination of employment as a result of the loss of the Affiliate relationship with VEC in connection with the sale by VEC of its ownership interest in NuStar GP Holdings, LLC. However, notwithstanding the provisions in Section 6.2(ii) above, any Restricted Unit granted under the terms of the Plan to, and held by, any VEC Employee which remains unvested as of December 22, 2006 shall immediately vest and become non-forfeitable as of December 22, 2006.

(i)

Awards May be Granted Separately or Together . Awards may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution for any other Award granted under the Plan or any award granted under any other plan of the Company or any Affiliate, including the Annual Incentive Plan or the Intermediate Incentive Compensation Plan. Awards granted in addition to or in tandem with other Awards or awards granted under any other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards.

(ii)

Limits on Transfer of Awards . No Award and no right under any such Award may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant otherwise than by will or by the laws of descent and distribution and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate.

(iii)

Terms of Awards . The term of each Award shall be for such period as may be determined by the Committee.

(iv)

Unit Certificates . All certificates for Units or other securities of the Partnership delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the SEC, any stock exchange upon which such Units or other securities are then listed, and any applicable federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.

(v)

Consideration for Grants . Awards may be granted for no cash consideration or for such consideration as the Committee determines including, without limitation, such minimal cash consideration as may be required by applicable law.

(vi)

Delivery of Units or other Securities and Payment by Participant of Consideration . Notwithstanding anything in the Plan or any grant agreement to the contrary, delivery of Units pursuant to the exercise or vesting of an Award may be deferred for any period during which, in the good faith determination of the Committee, the Company is not reasonably able to obtain Units to deliver pursuant to such Award without violating the rules or regulations of any applicable law or securities exchange. No Units or other securities shall be delivered pursuant to any Award until payment in full of any amount

(vii)

Change of Control . Upon a Change of Control, all Awards shall automatically vest and become payable or exercisable, as the case may be, in full. In this regard, all Restricted Periods shall terminate and all performance criteria, if any, shall be deemed to have been achieved at the maximum level.

(viii)

Sale of Significant Assets . In the event the Company or the Partnership sells or otherwise disposes of a significant portion of the assets under its control, (such significance to be determined by action of the Board of the Company in its sole discretion) and as a consequence of such disposition (a) a Participant’s employment is terminated by the Partnership, the Company or their affiliates without Cause or by the Participant for Good Reason or (b) as a result of such sale or disposition, the Participant’s employer shall no longer be the Partnership, the Company or one of their Affiliates, then all of such Participant’s Awards shall automatically vest and become payable or exercisable, as the case may be, in full. In this regard, all Restricted Periods shall terminate and all performance criteria, if any, shall be deemed to have been achieved at the maximum level.

(ix)

Retirement, Death, Disability . Except as otherwise determined by the Committee and included in the Participant’s Award agreement, if a Participant’s employment is terminated because of retirement, death or disability (with the determination of disability to be made within the sole discretion of the Committee), any Award held by the Participant shall remain outstanding and vest or become exercisable according to the Award’s original terms, provided, however, that any Restricted Units held by such Participant which remain unvested as of the date of retirement, death or disability shall immediately vest and become non-forfeitable as of such date.

6.4

Performance Based Awards .

(i)

Grant of Performance Awards . The Committee may issue Performance Awards in the form of Performance Units, Performance Cash, or DERs to Participants subject to the Performance Goals and Performance Period as it shall determine. The terms and conditions of each Performance Award will be set forth in the related Award agreement. The Committee shall have complete discretion in determining the number and/or value of Performance Awards granted to each Participant. Any Performance Units granted under the Plan shall have a minimum Restricted Period of one year from the Date of Grant, provided that the Committee may provide for earlier vesting following a Change in Control or upon an Employee’s termination of employment by reason of death, disability or retirement. Participants receiving Performance Awards are not required to pay the Company therefor (except for applicable tax withholding) other than the rendering of services.

(ii)

Value of Performance Awards . The Committee shall set Performance Goals in its discretion for each Participant who is granted a Performance Award. Such Performance Goals may be particular to a Participant, may relate to the performance of the Affiliate which employs him or her, may be based on the division which employs him or her, may be based on the performance of the Partnership generally, or a combination of the

(iii)

Form of Payment . Payment of the amount to which a Participant shall be entitled upon the settlement of a Performance Award shall be made in a lump sum or installments in cash, Units, or a combination thereof as determined by the Committee.

SECTION 7.

Amendment and Termination.

7.1

Amendments to the Plan . Except as required by applicable law or the rules of the principal securities exchange on which the Units are traded and subject to Section 7(ii) below, the Board or the Committee may amend, alter, suspend, discontinue, or terminate the Plan in any manner, including increasing the number of Units available for Awards under the Plan, without the consent of any partner, Participant, other holder or beneficiary of an Award, or other Person.

7.2

Amendments to Awards . The Committee may waive any conditions or rights under, amend any terms of, or alter any Award therefore granted, provided no change, other than pursuant to Section 7(iii), in any Award shall materially reduce the benefit to Participant without the consent of such Participant.

7.3

Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events . The Committee is hereby authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4.3 of the Plan) affecting the Partnership or the financial statements of the Partnership, or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan.

SECTION 8.

General Provisions.

8.1

No Rights to Awards . No Person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Participants. The terms and conditions of Awards need not be the same with respect to each Participant.

8.2

Withholding . The Company or any Affiliate is authorized to withhold from any Award, from any payment due or transfer made under any Award or from any compensation or other amount owing to a Participant the amount (in cash, Units, other securities, Units that would otherwise be issued pursuant to such Award or other property) of any applicable taxes payable in respect of the grant of an Award, the lapse of restrictions thereon, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes.

8.3

No Right to Employment . The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate or to remain on the Board, as applicable. Further, the Company or an Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award agreement.

8.4

Governing Law . The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware and applicable federal law.

8.5

Severability . If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect.

8.6

Other Laws . The Committee may refuse to issue or transfer any Units or other consideration under an Award if, in its sole discretion, it determines that the issuance or transfer of such Units or such other consideration might violate any applicable law or regulation, the rules of the principal securities exchange on which the Units are then traded, or entitle the Partnership or an Affiliate to recover the entire then Fair Market Value thereof under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary.

8.7

No Trust or Fund Created . Neither the Plan nor the Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any general unsecured creditor of the Company or any Affiliate.

8.8

No Fractional Units . No fractional Units shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Units or whether such fractional Units or any rights thereto shall be canceled, terminated, or otherwise eliminated.

8.9

Headings . Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.

8.10

Gender and Number . Words in the masculine gender shall include the feminine gender, the plural shall include the singular and the singular shall include the plural.

8.11

Code Section 409A . Notwithstanding anything in this Plan to the contrary, Awards granted under the Plan shall contain terms that (i) are designed to avoid application of Section 409A of the Code to the Award or (ii) are designed to avoid adverse tax consequences under Section 409A of the Code should that section apply to the Award. If any Plan provision or Award under the Plan would result in the imposition of an applicable tax under Code Section 409A and related regulations and Treasury pronouncements (“ Section 409A ”), that Plan provision or Award may be reformed to avoid imposition of the applicable tax and no action taken to comply with Section 409A shall be deemed to adversely affect the Participant’s rights to an Award.

SECTION 9.

Term of the Plan.

SECTION 10.

Special Provisions Applicable to Covered Participants.

10.1

Establishment of Performance Measures, Goals or Criteria . All Performance Measures, Goals, or Criteria relating to Covered Participants for a relevant Performance Period shall be established by the Committee in writing prior to the beginning of the Performance Period, or by such other later date for the Performance Period as may be permitted under Section 162(m) of the Code. The Performance Goals may be identical for all Participants or, at the discretion of the Committee, may be different to reflect more appropriate measures of individual performance.

10.2

Performance Goals . The Committee shall establish the Performance Goals relating to Covered Participants for a Performance Period in writing. Performance Goals may include alternative and multiple Performance Goals and may be based on one or more business and/or financial criteria. In establishing the Performance Goals for the Performance Period, the Committee in its discretion may include one or any combination of the following criteria in either absolute or relative terms, for the Partnership or any Affiliate:

(i)

Increased revenue;

(ii)

Net income measures (including but not limited to income after capital costs and income before or after taxes);

(iii)

Unit price measures (including but not limited to growth measures and total unitholder return);

(v)

Earnings per unit (actual or targeted growth);

(vi)

Earnings before interest, taxes, depreciation, and amortization (“ EBITDA ”);

(vii)

Economic value added (“ EVA® ”);

(viii)

Cash flow measures (including but not limited to net cash flow and net cash flow before financing activities);

(ix)

Return measures (including but not limited to return on equity, return on average assets, return on capital, risk-adjusted return on capital, return on investors’ capital and return on average equity);

(x)

Operating measures (including operating income, funds from operations, cash from operations, after-tax operating income, sales volumes, production volumes, and production efficiency);

(xi)

Expense measures (including but not limited to overhead cost and general and administrative expense);

(xiii)

Unitholder value;

(xiv)

Total unitholder return;

(xv)

Proceeds from dispositions;

(xvi)

Pipeline and terminal utilization;

(xvii)

Total market value; and

(xviii)

Corporate values measures (including ethics compliance, environmental, and safety).

10.3

Compliance with Section 162(m) . The Performance Goals must be objective and must satisfy third party “objectivity” standards under Section 162(m) of the Code, and the regulations promulgated thereunder. In interpreting Plan provisions relating to Awards subject to Performance Goals paid to Covered Participants, it is the intent of the Plan to conform with the standards of Section 162(m) of the Code and Treasury Regulation §1.162-27(e)(2)(i), and the Committee in establishing such goals and interpreting the Plan shall be guided by such provisions.

10.4

Adjustments . The Committee is authorized to make adjustments in the method of calculating attainment of Performance Goals in recognition of: (i) extraordinary or non-recurring items, (ii) changes in tax laws, (iii) changes in generally accepted accounting principles or changes in accounting principles, (iv) charges related to restructured or discontinued operations, (v) restatement of prior period financial results, and (vi) any other unusual, non-recurring gain or loss that is separately identified and quantified in the Company’s financial statements. Notwithstanding the foregoing, the Committee may, at its sole discretion, reduce the performance results upon which Awards are based under the Plan, to offset any unintended result(s) arising from events not anticipated when the Performance Goals were established, or for any other purpose, provided that such adjustment is permitted by Section 162(m) of the Code.

10.5

Discretionary Adjustments . The Performance Goals shall not allow for any discretion by the Committee as to an increase in any Award, but discretion to lower an Award is permissible.

10.6

Certification . The Award and payment of any Award under this Plan to a Covered Participant with respect to a relevant Performance Period shall be contingent upon the attainment of the Performance Goals that are applicable to such Covered Participant. The Committee shall certify in writing prior to payment of any such Award that such applicable Performance Goals relating to the Award are satisfied. Approved minutes of the Committee may be used for this purpose.

10.7

Other Considerations . All Awards to Covered Participants under this Plan shall be further subject to such other conditions, restrictions, and requirements as the Committee may determine to be necessary to carry out the purpose of this Section 10.

(a)

“ Affiliate ” means an entity that controls, is controlled by, or is under common control with the Company, as defined in Sections 424(e) and (f) of the Code (but substituting “the Company” for “employer corporation”), including entities which become such after adoption of the Plan.

(b)

“ Agreement ” means a written agreement granting an Option that is executed by the Company and the Optionee.

(c)

“ Award ” means a grant of one or more Options pursuant to the Plan.

(d)

“ Beneficiary ” means the person or persons described in Section XI(j).

(e)

“ Board ” means the Board of Directors of the Company.

(f)

(g)

“ Code ” means the Internal Revenue Code of 1986, as amended.

(h)

“ Committee ” means the Compensation Committee of the Board, the committee appointed by the Board to administer the Plan.

(i)

“ Company ” means NuStar GP, LLC, a Delaware limited liability company.

(j)

“ Date of Exercise ” means the date on which the Company receives notice of the exercise of an Option in accordance with Section VI(c) of the Plan.

(k)

“ Date of Grant ” means the date on which an Option is granted under the Plan.

(l)

“ Director ” means a member of the Board of Directors of the Company or any Affiliate.

(m)

“ Employee ” means any employee of the Company or an Affiliate, as determined by the Committee.

(n)

“ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

(o)

“ Fair Market Value ” means the closing price of a Unit on the New York Stock Exchange on the applicable date (or if there is no trading in the Units on such date, on the next preceding date on which there was trading). If Units are not publicly traded at the time a determination of fair market value is required to be made hereunder, the determination of fair market value shall be made in good faith by the Committee.

(p)

“ Option ” means an option to purchase Units granted under the Plan. Such Options will be nonqualified unit options and are not intended to be Incentive Stock Options as defined in Section 422 of the Code.

(q)

“ Option Period ” means the period during which an Option may be exercised.

(r)

“ Optionee ” means a Participant to whom an Option has been granted.

(s)

“ Participant ” means any Employee or Director granted an Award under the Plan.

(t)

“ Partnership ” means NuStar Energy L.P., a Delaware limited partnership.

(u)

“ Plan ” means the NuStar GP, LLC 2002 Unit Option Plan as set forth herein.

(v)

(w)

“ Unit ” means a common unit of the Partnership.

III.	Administration of the Plan

(a)

The Committee shall administer the Plan.

(b)

The Committee shall have full power and authority to interpret the provisions of the Plan and supervise its administration. All decisions and selections made by the Committee pursuant to the provisions of the Plan shall be made by a majority of its members. Any decision reduced to writing and signed by a majority of the members shall be fully effective as if adopted by a majority at a meeting duly held. Subject to the provisions of the Plan, the Committee shall have full and final authority to determine the Participants

(c)

Unless expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award or Option shall be within the sole discretion of the Committee, may be made at any time, and shall be final, conclusive, and binding upon the Company, the Partnership, any Affiliate, any Participant, and any beneficiary of any Award or Option.

IV.	Units Available for Awards

(a)

Units Available . Subject to adjustment as provided in Section IV. (c) hereunder, the number of Units with respect to which Awards may be granted under the Plan is 200,000. If any Award is forfeited or otherwise terminates or is canceled without the exercise of such Option grant, then the Units covered by such Award, to the extent of such forfeiture, termination, or cancellation, shall again be Units with respect to which Awards may be granted.

(b)

Sources of Units Deliverable Under Awards . Any Units delivered pursuant to the exercise of an Option shall consist, in whole or in part, of Units acquired in the open market, from any Affiliate, the Partnership or any other person, or any combination of the foregoing, as determined by the Committee in its discretion.

(c)

Adjustments . If the Committee determines that any distribution (whether in the form of cash, Units, other securities, or other property), recapitalization, split, reverse split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Units or other securities of the Partnership, issuance of warrants or other rights to purchase Units or other securities of the Partnership, or other similar transaction or event affects the Units such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and types of Units (or other securities or property) with respect to which Awards may be granted, (ii) the number and type of Units (or other securities or property) subject to outstanding Awards or Options, and (iii) if deemed appropriate, make provision for a cash payment to the holder of an outstanding Option; provided, that the number of Units subject to any Award or Option shall always be a whole number.

(a)

(b)

Time and Method of Exercise . The Committee shall determine the time or times at which an Option may be exercised in whole or in part, and the method or methods by which payment of the exercise price with respect thereto may be made or deemed to have been made which may include, without limitation, cash, check acceptable to the Company, a “cashless-broker” exercise (through procedures approved by the Company), other securities or other property, a note from the Participant (in a form acceptable to the Company), or any combination thereof, having a value on the exercise date equal to the relevant exercise price. The Participant shall provide written notice to the Company Secretary of his intent to exercise on or before the Date of Exercise.

(c)

Term . Subject to earlier termination as provided in the Agreement or the Plan, each Option shall expire on the tenth (10 ^th ) anniversary of its Date of Grant.

(d)

(e)

(h)

Except as otherwise determined by the Committee and included in the Participant’s Award agreement, if a Participant’s employment or Board membership is terminated because of retirement, death or disability (with the determination of disability to be made within the sole discretion of the Committee), any Option held by the Participant shall remain outstanding and vest or become exercisable according to the Option’s original terms.

(f)

Notwithstanding the other provisions of this Section VI of the Plan, in no event may an Option be exercised after the expiration of 10 years from the Date of Grant.

VII.	Assignability of Awards or Options

VIII.

Effective Date and Term of the Plan

X.	Amendment and Termination of Awards

(a)

Amendments to Awards . The Committee may waive any conditions or rights under, amend any terms of, or alter any Award or Option theretofore granted, provided no

(b)

Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events . The Committee is hereby authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards and Options in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section IV(c) of the Plan) affecting the Partnership or the financial statements of the Partnership, or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan.

The following general provisions shall be applicable to the Plan:

(a)

No Rights to Awards . No Employee or Director shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Participants. The terms and conditions of Awards need not be the same with respect to each Participant.

(b)

No Right to Employment . The grant of an Award or Option shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate or to remain on the Board, as applicable. Further, the Company or an Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in an Agreement.

(c)

(d)

Severability . If any provision of the Plan or any Award or Option is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any person or Award, or would disqualify the Plan or any Award or any Option under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, person, Award, or Option, and the remainder of the Plan and any such Award or Option shall remain in full force and effect.

(e)

Other Laws . The Committee may refuse to issue or transfer any Units or other consideration under an Award or Option if, in its sole discretion, it determines that the issuance or transfer of such Units or such other consideration might violate any applicable law or regulation, the rules of the principal securities exchange on which the Units are then traded, or entitle the Partnership or an Affiliate to recover the entire then Fair Market Value thereof under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with

(f)

No Trust or Fund Created . Neither the Plan nor the Award or Option shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award or Option, such right shall be no greater than the right of any general unsecured creditor of the Company or any Affiliate.

(g)

No Fractional Units . No fractional Units shall be issued or delivered pursuant to the Plan or any Award or Option, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Units or whether such fractional Units or any rights thereto shall be canceled, terminated, or otherwise eliminated.

(h)

(i)

Gender and Number . Words in the masculine gender shall include the feminine gender, the plural shall include the singular, and the singular shall include the plural.

(j)

Beneficiary . Each person whose name appears on the signature page of a Participant’s Agreement after the caption “Beneficiary” or is otherwise designated by Participant in accordance with the rules established by the Committee and who is Participant’s Beneficiary at the time of his or her death shall be recognized under the Plan as the Participant’s “Beneficiary” and shall be entitled to exercise the Option, to the extent it is exercisable, after the death of Participant. Any Participant may from time to time revoke or change his or her Beneficiary without the consent of any prior Beneficiary by filing a new designation with the Company. The last such designation received by the Company shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received (within the meaning of such term under Section XI (l) of the Plan) by the Company prior to the Participant’s death, and in no event shall any designation be effective as of a date prior to such receipt. If no Beneficiary designation is in effect at the time of the Participant’s death, or if no designated Beneficiary survives the Participant or if such designation conflicts with applicable law, each person entitled to the Option under the Participant’s last will or, in the absence of any such will, the laws of descent and distribution, shall be deemed to be the Participant’s Beneficiary who is entitled to exercise the Option, to the extent it is exercisable after the death of Participant. If the Committee administering the Plan is in doubt as to the right of any person to exercise the Option, the Company may refuse to recognize such exercise, without liability for any interest or distributions on the underlying Units, until the Committee determines the person entitled to exercise the Option, or the Company may apply to any court of appropriate jurisdiction for declaratory or other appropriate relief and such application shall be a complete discharge of the liability of the Company therefore.

(k)

The Company and its Affiliates will pay all expense that may arise in connection to the administration of this Plan.

(l)

Any notice required or permitted to be given under this Plan shall be sufficient if in writing and hand-delivered with appropriate proof of same, or sent by registered or certified mail, return receipt requested, to the Participant, Beneficiary or the Secretary (or equivalent person) of the Company, Affiliate, Partnership, Committee, or other person or entity at the address last furnished by such person or entity. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

(m)

No liability whatever shall attach to or be incurred by any past, present or future unitholders, stockholders, members, officers or directors, as such, of the Company and its Affiliates, under or by reason any of the terms, conditions or agreements contained in this Plan or implied therefrom, and any and all liabilities of, and any and all rights and claims against, the Company or its Affiliates, or any unitholder, stockholder, member, officer or director, as such, whether arising at common law or in equity or created by statute or constitution or otherwise, pertaining to this Plan (other than liability for the benefits, if any, provided hereunder), are hereby expressly waived and released by every Participant, as part of the consideration for any benefits provided by the Company and its Affiliates under this Plan.

(n)

Neither the Company nor any Affiliates nor the Committee makes any commitment or guarantee that any federal or state tax treatment will apply or be available to any person participating or eligible to participate in this Plan.

(o)

The provisions of the Plan shall be binding on all successors and assigns of (i) the Company or any Affiliates and (ii) a Participant, including without limitation, the estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant’s creditors.

(p)

Except as otherwise provided in any notification or agreement relating to an Award, a Participant shall have no rights as a unitholder of the Partnership until such Participant becomes the holder of record of Units.

(q)

This Plan is not intended by its terms or as a result of surrounding circumstances to provide retirement income or to defer the receipt of payments hereunder to the termination of the Participant’s covered employment or beyond. This Plan is strictly a Unit option program and not a pension or welfare benefit plan that is subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). All interpretations and determinations hereunder shall be made on a basis consistent with the status of the Plan as a Unit option program that is not subject to ERISA.

(r)

Code Section 409A . Notwithstanding anything in this Plan to the contrary, if any Plan provision or Award under the Plan would result in the imposition of an applicable tax under Code Section 409A and related regulations and Treasury pronouncements (“Section 409A”), that Plan provision or Award may be reformed to avoid imposition of the applicable tax and no action taken to comply with Section 409A shall be deemed to adversely affect the Participant’s rights to an Award.

SECTION 1.

Purpose of the Plan.

SECTION 2.

Definitions.

2.1

“Affiliate” means, with respect to any Person, any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the Person in question. As used herein, the term “ control ” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.

2.2

“Award” means a grant of one or more Options or Restricted Units pursuant to the Plan, and any tandem DERs granted with respect to such Award.

2.3

“Board” means the Board of Directors of the Company.

2.4

“Cause” means the (i) conviction of the Participant by a state or federal court of a felony involving moral turpitude, (ii) conviction of the Participant by a state or federal court of embezzlement or misappropriation of funds of the Company, (iii) the Company’s (or applicable Affiliate’s) reasonable determination that the Participant has committed an act of fraud, embezzlement, theft, or misappropriation of funds in connection with such Participant’s duties in the course of his or her employment with the Company (or applicable Affiliate), (iv) the Company’s (or its applicable Affiliate’s) reasonable determination that the Participant has engaged in gross mismanagement, negligence or misconduct which causes or could potentially cause material loss, damage or injury to the Company, any of its Affiliates or their respective employees, or (v) the Company’s (or applicable Affiliate’s) reasonable determination that (a) the Participant has violated any policy of the Company (or applicable Affiliate), including but not limited to, policies regarding sexual harassment, insider trading, confidentiality, substance abuse and/or conflicts of interest, which violation could result in the termination of the Participant’s employment, or (b) the Participant has failed to satisfactorily perform the material duties of Participant’s position with the Company or any of its Affiliates.

(b)

“ Change of Control ”»2.1 means, and shall be deemed to have occurred upon the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company or the Partnership to any Person or its Affiliates, unless immediately following such sale, lease, exchange or other transfer such assets are owned, directly or indirectly, by NuStar GP Holdings, LLC and its Affiliates or the Company; (ii) the consolidation or merger of the Partnership or the Company with or into another Person pursuant to a transaction in which the outstanding voting interests of the Company are changed into or exchanged for cash, securities or other property, other than any such transaction where, in the case of the Company, (a) all outstanding voting interests of the Company are changed into or exchanged for voting stock or interests of the surviving corporation or entity or its parent and (b) the holders of the voting interests of the Company immediately prior to such transaction own, directly or indirectly, not less than a majority of the voting stock or interests of the surviving corporation or entity or its parent immediately after such transaction and, in the case of the Partnership, NuStar GP Holdings, LLC retains operational control, whether by way of holding a general partner interest, managing member interest or a majority of the outstanding voting interests of the surviving corporation or entity or its parent; NuStar GP Holdings, LLC or (iii) a “person” or “group” (within the meaning of Sections 13(d) or 14(d)(2) of the Exchange Act) being or becoming the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of more than 50% of all voting interests of NuStar GP Holdings, LLC or the Company then outstanding, other than, in the case of the Company, (a) in a merger or consolidation which would not constitute a Change of Control under clause (ii) above and (b) Valero Energy and its Affiliates; or (iv) in the case of NuStar GP Holdings, LLC, the consummation of a reorganization, merger, consolidation or other form of business transaction or series of business transactions, in each case, with respect to which more than 50% of the voting power of the outstanding equity interests in NuStar GP Holdings, LLC cease to be owned by the persons who owned such interests immediately prior to such reorganization, merger, consolidation or other form of business transaction or series of business transactions.

2.2

“Committee” means the Compensation Committee of the Board or such other committee of the Board appointed to administer the Plan.

2.3

“DER” or “Distribution Equivalent Right” means a contingent right, granted in tandem with a specific Restricted Unit, to receive an amount in cash equal to the cash distributions made by the Partnership with respect to a Unit during the period such Restricted Unit is outstanding.

2.4

“Employee” means any employee of the Company or an Affiliate, who performs services for the Partnership, as determined by the Committee, provided, however that employees who are “officers” of the Company or an Affiliate (as such term is defined in Rule 16a-1(f) of the Exchange Act), are not to be “Employees” for purposes of this Plan.

2.5

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

2.6

2.7

“Good Reason” means:

(i)

a reduction in the Participant’s annual base salary;

(ii)

failure to pay the Participant any compensation due under an employment agreement, if any;

(iii)

failure to continue to provide benefits to the Participant that are substantially similar to those then enjoyed by similarly situated employees unless the Partnership, the Company or their Affiliates provide aggregate benefits equivalent to those then in effect; or

(iv)

2.8

“Option” means on option to purchase Units as further described in Section 6.1.

2.9

“Participant” means any Employee granted an Award under the Plan.

2.11

“Person” means an individual or a corporation, limited liability company, partnership, joint venture, trust, unincorporated organization, association, government agency or political subdivision thereof or other entity.

2.12

“Restricted Period” means the period established by the Committee with respect to the vesting of an Award during which the Award either remains subject to forfeiture or is not exercisable by the Participant.

2.13

“Restricted Unit” means a phantom unit granted under the Plan which is equivalent in value and in dividend and interest rights to a Unit, and which upon or following vesting entitles the Participant to receive a Unit or its Fair Market Value in cash, whichever is determined by the Committee.

2.14

“Rule 16b-3” means Rule 16b-3 promulgated by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time.

2.15

“SEC” means the Securities and Exchange Commission.

2.16

“Unit” means a common unit of the Partnership.

2.17

“Valero Energy” means Valero Energy Corporation.

SECTION 3.

Administration.

SECTION 4.

Units Available for Awards.

4.1

Units Available . Subject to adjustment as provided in Section 4.3, the number of Units with respect to which Awards may be granted under the Plan is 500,000. If any Award is forfeited or otherwise terminates or is canceled without the delivery of Units, then the Units covered by such Award, to the extent of such forfeiture, termination, or cancellation, shall again be Units with respect to which Awards may be granted.

4.2

4.3

SECTION 5.

Eligibility.