UNITED STATES GASOLINE FUND, LP
10-Ks and 10-Qs
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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x
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Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended March 31,
2010.
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OR
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¨
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Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the transition period
from to .
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Commission File Number: 001-33975
United
States Gasoline Fund, LP
(Exact
name of registrant as specified in its charter)
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Delaware
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20-8837263
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|
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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1320
Harbor Bay Parkway, Suite 145
Alameda,
California 94502
(Address
of principal executive offices) (Zip code)
(510)
522-9600
(Registrant’s
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
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.
x
Yes
¨
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
Yes
¨
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer
¨
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Accelerated
filer
x
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Non-accelerated
filer
¨
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Smaller
reporting company
¨
|
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(Do
not check if a smaller reporting
company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨
Yes
x
No
UNITED
STATES GASOLINE FUND, LP
Table
of Contents
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Page
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Part
I. FINANCIAL INFORMATION
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Item
1. Condensed Financial Statements.
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3
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Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
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17
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Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
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32
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Item
4. Controls and Procedures.
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33
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Part
II. OTHER INFORMATION
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Item
1. Legal Proceedings.
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34
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Item
1A. Risk Factors.
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34
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Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
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34
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Item
3. Defaults Upon Senior Securities.
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34
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Item
4. Reserved.
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34
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Item
5. Other Information.
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34
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Item
6. Exhibits.
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34
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2
Index
to Condensed Financial Statements
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Documents
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Page
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Condensed
Statements of Financial Condition at March 31, 2010 (Unaudited) and
December 31, 2009
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4
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Condensed
Schedule of Investments (Unaudited) at March 31, 2010
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5
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Condensed
Statements of Operations (Unaudited) for the three months ended March 31,
2010 and 2009
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6
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Condensed
Statement of Changes in Partners’ Capital (Unaudited) for the three months
ended March 31, 2010
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7
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Condensed
Statements of Cash Flows (Unaudited) for the three months ended March 31,
2010 and 2009
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8
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Notes
to Condensed Financial Statements for the period ended March 31, 2010
(Unaudited)
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9
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3
United
States Gasoline Fund, LP
At
March 31, 2010 (Unaudited) and December 31, 2009
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March 31, 2010
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December 31, 2009
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|||||||
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Assets
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||||||||
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Cash
and cash equivalents (Note 5)
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$ | 62,971,697 | $ | 61,883,040 | ||||
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Equity
in UBS Securities LLC trading accounts:
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||||||||
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Cash
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9,372,352 | 1,354,561 | ||||||
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Unrealized
gain (loss) on open commodity futures contracts
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(67,884 | ) | 5,883,944 | |||||
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Receivable
from General Partner
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144,624 | 256,355 | ||||||
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Interest
receivable
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1,387 | 2,868 | ||||||
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Other
assets
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211,004 | 197,365 | ||||||
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Total
assets
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$ | 72,633,180 | $ | 69,578,133 | ||||
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Liabilities
and Partners’ Capital
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||||||||
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General
Partner management fees payable (Note 3)
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$ | 36,270 | $ | 34,774 | ||||
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Professional
fees payable
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170,560 | 350,250 | ||||||
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Brokerage
commission fees payable
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2,700 | 2,700 | ||||||
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Other
liabilities
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4,870 | 4,669 | ||||||
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Total
liabilities
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214,400 | 392,393 | ||||||
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Commitments and Contingencies
(Notes 3, 4 and 5)
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||||||||
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Partners’
Capital
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||||||||
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General
Partner
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- | - | ||||||
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Limited
Partners
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72,418,780 | 69,185,740 | ||||||
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Total
Partners’ Capital
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72,418,780 | 69,185,740 | ||||||
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Total
liabilities and partners’ capital
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$ | 72,633,180 | $ | 69,578,133 | ||||
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Limited
Partners’ units outstanding
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1,900,000 | 1,900,000 | ||||||
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Net
asset value per unit
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$ | 38.12 | $ | 36.41 | ||||
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Market
value per unit
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$ | 37.87 | $ | 36.58 | ||||
See
accompanying notes to condensed financial statements.
4
United
States Gasoline Fund, LP
Condensed
Schedule of Investments (Unaudited)
At
March 31, 2010
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Loss on Open
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% of
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|||||||||||
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Number
of
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Commodity
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Partners’
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||||||||||
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Contracts
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Contracts
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Capital
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||||||||||
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Open
Futures Contracts— Long
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||||||||||||
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United
States Contracts
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||||||||||||
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NYMEX
RBOB Gasoline Futures RB contracts, expire May 2010
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748 | $ | (67,884 | ) | (0.09 | ) | ||||||
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Principal
Amount
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Market
Value
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|
||||||||||
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Cash
Equivalents
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||||||||||||
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United
States - Money Market Funds
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||||||||||||
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Fidelity
Institutional Government Portfolio - Class I
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$ | 25,040,817 | $ | 25,040,817 | 34.58 | |||||||
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Goldman
Sachs Financial Square Funds - Government Fund – Class SL
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21,399,013 | 21,399,013 | 29.55 | |||||||||
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Morgan
Stanley Institutional Liquidity Fund - Government
Portfolio
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10,000,789 | 10,000,789 | 13.81 | |||||||||
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Total
Cash Equivalents
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$ | 56,440,619 | 77.94 | |||||||||
See
accompanying notes to condensed financial statements.
5
United
States Gasoline Fund, LP
For
the three months ended March 31, 2010 and 2009
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Three
months ended
March
31, 2010
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Three
months ended
March
31, 2009
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|||||||
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Income
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||||||||
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Gains
(loss) on trading of commodity futures contracts:
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||||||||
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Realized
gain on closed positions
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$ | 9,548,503 | $ | 7,734,947 | ||||
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Change
in unrealized loss on open positions
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(5,951,828 | ) | (2,995,902 | ) | ||||
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Interest
income
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3,611 | 22,101 | ||||||
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Other
income
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2,000 | 12,000 | ||||||
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Total
income
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3,602,286 | 4,773,146 | ||||||
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Expenses
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||||||||
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General
Partner management fees (Note 3)
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103,745 | 48,005 | ||||||
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Professional
fees
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170,560 | - | ||||||
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Brokerage
commission fees
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15,712 | 15,801 | ||||||
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Other
expenses
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7,229 | 39,630 | ||||||
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Total
expenses
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297,246 | 103,436 | ||||||
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Expense
waiver
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(144,624 | ) | (24,899 | ) | ||||
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Net
expenses
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152,622 | 78,537 | ||||||
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Net
income
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$ | 3,449,664 | $ | 4,694,609 | ||||
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Net
income per limited partnership unit
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$ | 1.71 | $ | 3.95 | ||||
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Net
income per weighted average limited partnership unit
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$ | 1.78 | $ | 3.26 | ||||
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Weighted
average limited partnership units outstanding
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1,943,333 | 1,439,889 | ||||||
See
accompanying notes to condensed financial statements.
6
United
States Gasoline Fund, LP
Condensed
Statement of Changes in Partners’ Capital (Unaudited)
For
the three months ended March 31, 2010
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General Partner
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Limited Partners
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Total
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||||||||||
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Balances,
at December 31, 2009
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$ | - | $ | 69,185,740 | $ | 69,185,740 | ||||||
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Addition
of 100,000 partnership units
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- | 3,475,129 | 3,475,129 | |||||||||
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Redemption
of 100,000 partnership units
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- | (3,691,753 | ) | (3,691,753 | ) | |||||||
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Net
income
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- | 3,449,664 | 3,449,664 | |||||||||
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Balances,
at March 31, 2010
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$ | - | $ | 72,418,780 | $ | 72,418,780 | ||||||
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Net
Asset Value Per Unit
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||||||||||||
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At
December 31, 2009
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$ | 36.41 | ||||||||||
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At
March 31, 2010
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$ | 38.12 | ||||||||||
See
accompanying notes to condensed financial statements.
7
United
States Gasoline Fund, LP
For
the three months ended March 31, 2010 and 2009
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Three
months ended
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Three
months ended
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|||||||
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March
31, 2010
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March
31, 2009
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|||||||
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Cash
Flows from Operating Activities:
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||||||||
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Net
income
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$ | 3,449,664 | $ | 4,694,609 | ||||
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Adjustments
to reconcile net income to net cash provided by
operating activities:
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||||||||
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Increase
in commodity futures trading account – cash
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(8,017,791 | ) | (6,220,846 | ) | ||||
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Unrealized
loss on futures contracts
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5,951,828 | 2,995,902 | ||||||
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Decrease
in receivable from General Partner
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111,731 | 101,449 | ||||||
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Increase
in interest receivable and other assets
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(12,158 | ) | (8,250 | ) | ||||
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Increase
in General Partner management fees payable
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1,496 | 16,503 | ||||||
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Decrease
in professional fees payable
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(179,690 | ) | (150,794 | ) | ||||
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Increase
in brokerage commission fees payable
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- | 1,700 | ||||||
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Increase
in other liabilities
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201 | 38,393 | ||||||
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Net
cash provided by operating activities
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1,305,281 | 1,468,666 | ||||||
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Cash
Flows from Financing Activities:
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||||||||
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Subscription
of partnership units
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3,475,129 | 37,966,100 | ||||||
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Redemption
of partnership units
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(3,691,753 | ) | - | |||||
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Net
cash provided by (used in) financing activities
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(216,624 | ) | 37,966,100 | |||||
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Net
Increase in Cash and Cash Equivalents
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1,088,657 | 39,434,766 | ||||||
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Cash and Cash
Equivalents
, beginning of period
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61,883,040 | 11,691,510 | ||||||
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Cash and Cash
Equivalents
, end of period
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$ | 62,971,697 | $ | 51,126,276 | ||||
See
accompanying notes to condensed financial statements.
8
United
States Gasoline Fund, LP
Notes
to Condensed Financial Statements
For
the period ended March 31, 2010 (Unaudited)
The
United States Gasoline Fund, LP (“UGA”) was organized as a limited partnership
under the laws of the state of Delaware on April 13, 2007. UGA is a
commodity pool that issues limited partnership units (“units”) that may be
purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”). Prior to November
25, 2008, UGA’s units traded on the American Stock Exchange (the “AMEX”). UGA
will continue in perpetuity, unless terminated sooner upon the occurrence of one
or more events as described in its Amended and Restated Agreement of Limited
Partnership dated as of February 11, 2008 (the “LP Agreement”). The investment
objective of UGA is for the changes in percentage terms of its units’ net asset
value to reflect the changes in percentage terms of the spot price of gasoline,
as measured by the changes in the price of the futures contract for unleaded
gasoline (also known as reformulated gasoline blendstock for oxygen blending, or
“RBOB”, for delivery to the New York harbor), traded on the New York Mercantile
Exchange (the “NYMEX”) that is the near month contract to expire, except when
the near month contract is within two weeks of expiration, in which case the
futures contract will be the next month contract to expire, less UGA’s expenses.
UGA accomplishes its objective through investments in futures contracts for
gasoline, crude oil, natural gas, heating oil and other petroleum-based fuels
that are traded on the NYMEX, ICE Futures or other U.S. and foreign exchanges
(collectively, “Futures Contracts”) and other gasoline-related investments such
as cash-settled options on Futures Contracts, forward contracts for gasoline,
cleared swap contracts and over-the-counter transactions that are based on the
price of gasoline, crude oil and other petroleum-based fuels, Futures Contracts
and indices based on the foregoing (collectively, “Other Gasoline-Related
Investments”). As of March 31, 2010, UGA held 748 Futures Contracts for gasoline
traded on the NYMEX.
UGA
commenced investment operations on February 26, 2008 and has a fiscal year
ending on December 31. United States Commodity Funds LLC (formerly known as
Victoria Bay Asset Management, LLC) (the “General Partner”) is responsible for
the management of UGA. The General Partner is a member of the National Futures
Association (the “NFA”) and became a commodity pool operator registered with the
Commodity Futures Trading Commission (the “CFTC”) effective December 1, 2005.
The General Partner is also the general partner of the United States Oil Fund,
LP (“USOF”), the United States Natural Gas Fund, LP (“USNG”), the United States
12 Month Oil Fund, LP (“US12OF”) and the United States Heating Oil Fund, LP
(“USHO”), which listed their limited partnership units on the AMEX under the
ticker symbols “USO” on April 10, 2006, “UNG” on April 18, 2007, “USL” on
December 6, 2007 and “UHN” on April 9, 2008, respectively. As a result of the
acquisition of the AMEX by NYSE Euronext, each of USOF’s, USNG’s, US12OF’s and
USHO’s units commenced trading on the NYSE Arca on November 25, 2008. The
General Partner is also the general partner of the United States Short Oil Fund,
LP (“USSO”) and the United States 12 Month Natural Gas Fund, LP (“US12NG”),
which listed their limited partnership units on the NYSE Arca on September 24,
2009 and November 18, 2009, respectively. The General Partner has
also filed registration statements to register units of the United States Brent
Oil Fund, LP (“USBO”) and the United States Commodity Index Fund
(“USCI”).
The
accompanying unaudited condensed financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X promulgated by the U.S. Securities
and Exchange Commission (the “SEC”) and, therefore, do not include all
information and footnote disclosure required under accounting principles
generally accepted in the United States of America. The financial information
included herein is unaudited; however, such financial information reflects all
adjustments which are, in the opinion of management, necessary for the fair
presentation of the condensed financial statements for the interim
period.
UGA
issues units to certain authorized purchasers (“Authorized Purchasers”) by
offering baskets consisting of 100,000 units (“Creation Baskets”) through ALPS
Distributors, Inc., as the marketing agent (the “Marketing Agent”). The purchase
price for a Creation Basket is based upon the net asset value of a unit
calculated shortly after the close of the core trading session on the NYSE Arca
on the day the order to create the basket is properly received.
In
addition, Authorized Purchasers pay UGA a $1,000 fee for each order placed to
create one or more Creation Baskets or to redeem one or more baskets consisting
of 100,000 units (“Redemption Baskets”). Units may be purchased or sold on a
nationally recognized securities exchange in smaller increments than a Creation
Basket or Redemption Basket. Units purchased or sold on a nationally recognized
securities exchange are not purchased or sold at the net asset value of UGA but
rather at market prices quoted on such exchange.
9
In
November 2007, UGA initially registered 30,000,000 units on Form S-1 with the
SEC. On February 26, 2008, UGA listed its units on the AMEX under the ticker
symbol “UGA”. On that day, UGA established its initial net asset value by
setting the price at $50.00 per unit and issued 300,000 units in exchange for
$15,001,000. UGA also commenced investment operations on February 26, 2008, by
purchasing Futures Contracts traded on the NYMEX based on gasoline. As of March
31, 2010, UGA had registered a total of 30,000,000 units.
Revenue
Recognition
Commodity
futures contracts, forward contracts, physical commodities, and related options
are recorded on the trade date. All such transactions are recorded on the
identified cost basis and marked to market daily. Unrealized gains or losses on
open contracts are reflected in the condensed statement of financial condition
and in the difference between the original contract amount and the market value
(as determined by exchange settlement prices for futures contracts and related
options and cash dealer prices at a predetermined time for forward contracts,
physical commodities, and their related options) as of the last business day of
the year or as of the last date of the condensed financial statements. Changes
in the unrealized gains or losses between periods are reflected in the condensed
statement of operations. UGA earns interest on its assets denominated in U.S.
dollars on deposit with the futures commission merchant at the 90-day Treasury
bill rate. In addition, UGA earns interest on funds held at the custodian at
prevailing market rates earned on such investments.
Brokerage
Commissions
Brokerage
commissions on all open commodity futures contracts are accrued on a full-turn
basis.
Income
Taxes
UGA is
not subject to federal income taxes; each partner reports his/her allocable
share of income, gain, loss deductions or credits on his/her own income tax
return.
Creations
and Redemptions
Authorized
Purchasers may purchase Creation Baskets or redeem Redemption Baskets only in
blocks of 100,000 units equal to the net asset value of the units calculated
shortly after the close of the core trading session on the NYSE Arca on the day
the order is placed.
UGA
receives or pays the proceeds from units sold or redeemed within three business
days after the trade date of the purchase or redemption. The amounts due from
Authorized Purchasers are reflected in UGA’s condensed statement of financial
condition as receivable for units sold, and amounts payable to Authorized
Purchasers upon redemption are reflected as payable for units
redeemed.
Partnership
Capital and Allocation of Partnership Income and Losses
Profit or
loss shall be allocated among the partners of UGA in proportion to the number of
units each partner holds as of the close of each month. The General Partner may
revise, alter or otherwise modify this method of allocation as described in the
LP Agreement.
Calculation
of Net Asset Value
UGA’s net
asset value is calculated on each NYSE Arca trading day by taking the current
market value of its total assets, subtracting any liabilities and dividing the
amount by the total number of units issued and outstanding. UGA uses the closing
price for the contracts on the relevant exchange on that day to determine the
value of contracts held on such exchange.
10
Net
Income (Loss) per Unit
Net
income (loss) per unit is the difference between the net asset value per unit at
the beginning of each period and at the end of each period. The weighted average
number of units outstanding was computed for purposes of disclosing net income
(loss) per weighted average unit. The weighted average units are equal to the
number of units outstanding at the end of the period, adjusted proportionately
for units redeemed based on the amount of time the units were outstanding during
such period. There were no units held by the General Partner at March 31,
2010.
Offering
Costs
Offering
costs incurred in connection with the registration of additional units after the
initial registration of units are borne by UGA. These costs include registration
fees paid to regulatory agencies and all legal, accounting, printing and other
expenses associated with such offerings. These costs will be accounted for as a
deferred charge and thereafter amortized to expense over twelve months on a
straight-line basis or a shorter period if warranted.
Cash
Equivalents
Cash
equivalents include money market funds and overnight deposits or time deposits
with original maturity dates of three months or less.
Use
of Estimates
The
preparation of condensed financial statements in conformity with accounting
principles generally accepted in the United States of America requires UGA’s
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the condensed financial statements, and the reported amounts of the
revenue and expenses during the reporting period. Actual results could differ
from those estimates and assumptions.
General
Partner Management Fee
Under the
LP Agreement, the General Partner is responsible for investing the assets of UGA
in accordance with the objectives and policies of UGA. In addition, the General
Partner has arranged for one or more third parties to provide administrative,
custody, accounting, transfer agency and other necessary services to UGA. For
these services, UGA is contractually obligated to pay the General Partner a fee,
which is paid monthly, that is equal to 0.60% per annum of average daily net
assets.
Ongoing
Registration Fees and Other Offering Expenses
UGA pays
all costs and expenses associated with the ongoing registration of its units
subsequent to the initial offering. These costs include registration or other
fees paid to regulatory agencies in connection with the offer and sale of units,
and all legal, accounting, printing and other expenses associated with such
offer and sale. For the three months ended March 31, 2010 and 2009, UGA incurred
$1,970 and $0, respectively, in registration fees and other offering
expenses.
Directors’
Fees and Expenses
UGA is
responsible for paying its portion of the directors’ and officers’ liability
insurance of the General Partner and the fees and expenses of the independent
directors of the General Partner who are also the General Partner’s audit
committee members. Effective as of April 1, 2010, UGA is responsible for paying
its portion of any payments that may become due to
the independent
directors
pursuant to
the
deferred
compensation
agreements entered into
between the independent directors, the General Partner and each of the
funds. UGA shares these fees and expenses with USOF, USNG, US12OF,
USHO, USSO and US12NG based on the relative assets of each fund, computed on a
daily basis. These fees and expenses for the calendar year 2010 are estimated to
be a total of $538,870 for all funds.
11
Licensing
Fees
As
discussed in Note 4, UGA entered into a licensing agreement with the NYMEX on
May 30, 2007. Pursuant to the agreement, UGA and the affiliated funds managed by
the General Partner pay a licensing fee that is equal to 0.04% for the first
$1,000,000,000 of combined assets of the funds and 0.02% for combined assets
above $1,000,000,000. During the three months ended March 31, 2010 and 2009, UGA
incurred $4,024 and $1,995, respectively, under this arrangement.
Investor
Tax Reporting Cost
The fees
and expenses associated with UGA’s audit expenses and tax accounting and
reporting requirements are paid by UGA. These costs were
approximately $2,575 for the three months ended March 31, 2010.
Other
Expenses and Fees and Expense Waivers
In
addition to the fees described above, UGA pays all brokerage fees and other
expenses in connection with the operation of UGA, excluding costs and
expenses paid by the General Partner as outlined in Note 4. The
General Partner, though under no obligation to do so, agreed to pay certain
expenses, to the extent that such expenses exceed 0.15% (15 basis points) of
UGA’s NAV, on an annualized basis, through June 30, 2010, after which date such
payments are no longer necessary. The General Partner has no
obligation to continue such payment into subsequent periods.
UGA is
party to a marketing agent agreement, dated as of January 18, 2008, with the
Marketing Agent and the General Partner, whereby the Marketing Agent provides
certain marketing services for UGA as outlined in the agreement. The fee of the
Marketing Agent, which is borne by the General Partner, is equal to 0.06% on
UGA’s assets up to $3 billion; and 0.04% on UGA’s assets in excess of $3
billion.
The above
fee does not include the following expenses, which are also borne by the General
Partner: the cost of placing advertisements in various periodicals; web
construction and development; or the printing and production of various
marketing materials.
UGA is
also party to a custodian agreement, dated January 16, 2008, with Brown Brothers
Harriman & Co. (“BBH&Co.”) and the General Partner, whereby BBH&Co.
holds investments on behalf of UGA. The General Partner pays the fees of the
custodian, which are determined by the parties from time to time. In addition,
UGA is party to an administrative agency agreement, dated February 7, 2008, with
the General Partner and BBH&Co., whereby BBH&Co. acts as the
administrative agent, transfer agent and registrar for UGA. The General Partner
also pays the fees of BBH&Co. for its services under this agreement and such
fees are determined by the parties from time to time.
Currently,
the General Partner pays BBH&Co. for its services, in the foregoing
capacities, a minimum amount of $75,000 annually for its custody, fund
accounting and fund administration services rendered to UGA and each of the
affiliated funds managed by the General Partner, as well as a $20,000 annual fee
for its transfer agency services. In addition, the General Partner pays
BBH&Co. an asset-based charge of (a) 0.06% for the first $500 million of
UGA’s, USOF’s, USNG’s, US12OF’s, USHO’s, USSO’s and US12NG’s combined net
assets, (b) 0.0465% for UGA’s, USOF’s, USNG’s, US12OF’s, USHO’s, USSO’s and
US12NG’s combined net assets greater than $500 million but less than $1 billion,
and (c) 0.035% once UGA’s, USOF’s, USNG’s, US12OF’s, USHO’s and USSO’s combined
net assets exceed $1 billion. The annual minimum amount will not apply if the
asset-based charge for all accounts in the aggregate exceeds $75,000. The
General Partner also pays transaction fees ranging from $7.00 to $15.00 per
transaction.
12
UGA has
entered into a brokerage agreement with UBS Securities LLC (“UBS Securities”).
The agreement requires UBS Securities to provide services to UGA in connection
with the purchase and sale of Futures Contracts and Other Gasoline-Related
Investments that may be purchased and sold by or through UBS Securities for
UGA’s account. The agreement provides that UBS Securities charge UGA commissions
of approximately $7 per round-turn trade, including applicable exchange and NFA
fees for Futures Contracts and options on Futures Contracts.
On May
30, 2007, UGA and the NYMEX entered into a licensing agreement whereby UGA was
granted a non-exclusive license to use certain of the NYMEX’s settlement prices
and service marks. Under the licensing agreement, UGA and the affiliated
funds managed by the General Partner pay the NYMEX an asset-based fee for the
license, the terms of which are described in Note 3.
UGA
expressly disclaims any association with the NYMEX or endorsement of UGA by the
NYMEX and acknowledges that “NYMEX” and “New York Mercantile Exchange” are
registered trademarks of the NYMEX.
UGA
engages in the trading of futures contracts and options on futures contracts
(collectively, “derivatives”). UGA is exposed to both market risk, which is the
risk arising from changes in the market value of the contracts, and credit risk,
which is the risk of failure by another party to perform according to the terms
of a contract.
UGA may
enter into futures contracts and options on futures contracts to gain exposure
to changes in the value of an underlying commodity. A futures contract obligates
the seller to deliver (and the purchaser to accept) the future delivery of a
specified quantity and type of a commodity at a specified time and place. Some
futures contracts may call for physical delivery of the asset, while others are
settled in cash. The contractual obligations of a buyer or seller may generally
be satisfied by taking or making physical delivery of the underlying commodity
or by making an offsetting sale or purchase of an identical futures contract on
the same or linked exchange before the designated date of delivery.
The
purchase and sale of futures contracts and options on futures contracts require
margin deposits with a futures commission merchant. Additional deposits may be
necessary for any loss on contract value. The Commodity Exchange Act requires a
futures commission merchant to segregate all customer transactions and assets
from the futures commission merchant’s proprietary activities.
Futures
contracts involve, to varying degrees, elements of market risk (specifically
commodity price risk) and exposure to loss in excess of the amount of variation
margin. The face or contract amounts reflect the extent of the total exposure
UGA has in the particular classes of instruments. Additional risks associated
with the use of futures contracts are an imperfect correlation between movements
in the price of the futures contracts and the market value of the underlying
securities and the possibility of an illiquid market for a futures
contract.
All of
the futures contracts currently traded by UGA are exchange-traded. The risks
associated with exchange-traded contracts are generally perceived to be less
than those associated with over-the-counter transactions since, in
over-the-counter transactions, UGA must rely solely on the credit of its
respective individual counterparties. However, in the future, if UGA were to
enter into non-exchange traded contracts, it would be subject to the credit risk
associated with counterparty non-performance. The credit risk from counterparty
non-performance associated with such instruments is the net unrealized gain, if
any. UGA also has credit risk since the sole counterparty to all domestic and
foreign futures contracts is the clearinghouse for the exchange on which the
relevant contracts are traded. In addition, UGA bears the risk of financial
failure by the clearing broker.
UGA’s
cash and other property, such as U.S. Treasuries, deposited with a futures
commission merchant are considered commingled with all other customer funds
subject to the futures commission merchant’s segregation requirements. In the
event of a futures commission merchant’s insolvency, recovery may be limited to
a pro rata share of segregated funds available. It is possible that the
recovered amount could be less than the total of cash and other property
deposited. The insolvency of a futures commission merchant could result in the
complete loss of UGA’s assets posted with that futures commission merchant;
however, the vast majority of UGA’s assets are held in Treasuries, cash and/or
cash equivalents with UGA’s custodian and would not be impacted by the
insolvency of a futures commission merchant. Also, the failure or insolvency of
UGA’s custodian could result in a substantial loss of UGA’s
assets.
13
UGA
invests a portion of its cash in money market funds that seek to maintain a
stable net asset value. UGA is exposed to any risk of loss associated with an
investment in these money market funds. As of March 31, 2010 and December 31,
2009, UGA had deposits in domestic and foreign financial institutions
,
including cash investments in
money market funds, in the amounts of $72,344,049 and $63,237,601, respectively.
This amount is subject to loss should these institutions cease
operations.
For
derivatives, risks arise from changes in the market value of the contracts.
Theoretically, UGA is exposed to a market risk equal to the value of futures
contracts purchased and unlimited liability on such contracts sold short. As
both a buyer and a seller of options, UGA pays or receives a premium at the
outset and then bears the risk of unfavorable changes in the price of the
contract underlying the option.
UGA’s
policy is to continuously monitor its exposure to market and counterparty risk
through the use of a variety of financial, position and credit exposure
reporting controls and procedures. In addition, UGA has a policy of requiring
review of the credit standing of each broker or counterparty with which it
conducts business.
The
financial instruments held by UGA are reported in its condensed statement of
financial condition at market or fair value, or at carrying amounts that
approximate fair value, because of their highly liquid nature and short-term
maturity.
UGA
values its investments in accordance with Accounting Standards Codification 820
– Fair Value Measurements and Disclosures (“ASC 820”). ASC 820
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurement. The changes to past practice resulting from the application
of ASC 820 relate to the definition of fair value, the methods used to measure
fair value, and the expanded disclosures about fair value measurement. ASC 820
establishes a fair value hierarchy that distinguishes between (1) market
participant assumptions developed based on market data obtained from sources
independent of UGA (observable inputs) and (2) UGA’s own assumptions about
market participant assumptions developed based on the best information available
under the circumstances (unobservable inputs). The three levels defined by the
ASC 820 hierarchy are as follows:
Level I –
Quoted prices (unadjusted) in active markets for
identical
assets or
liabilities that the reporting entity has the ability to access at the
measurement date.
Level II
– Inputs other than quoted prices included within Level I that are observable
for the asset or liability, either directly or indirectly. Level II
assets include the following: quoted prices for
similar
assets or liabilities
in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, inputs other than quoted prices that are
observable for the asset or liability, and inputs that are derived principally
from or corroborated by observable market data by correlation or other means
(market-corroborated inputs).
Level III
– Unobservable pricing input at the measurement date for the asset or liability.
Unobservable inputs shall be used to measure fair value to the extent that
observable inputs are not available.
In some
instances, the inputs used to measure fair value might fall in different levels
of the fair value hierarchy. The level in the fair value hierarchy
within which the fair value measurement in its entirety falls shall be
determined based on the lowest input level that is significant to the fair value
measurement in its entirety.
The
following table summarizes the valuation of UGA’s securities at March 31, 2010
using the fair value hierarchy:
|
At March 31, 2010
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
Short-Term
Investments
|
$ | 56,440,619 | $ | 56,440,619 | $ | - | $ | - | ||||||||
|
Exchange-Traded
Futures Contracts
|
||||||||||||||||
|
United
States Contracts
|
(67,884 | ) | (67,884 | ) | - | - | ||||||||||
14
During
the three months ended March 31, 2010, there were no significant transfers
between Level I and Level II.
Effective
January 1, 2009, USOF adopted the provisions of Accounting Standards
Codification 815 —Derivatives and Hedging, which require presentation of
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts and gains and losses on
derivatives.
Fair
Value of Derivative Instruments
|
At
|
At
|
||||||||||
|
March
31, 2010
|
December
31, 2009
|
||||||||||
|
Derivatives
not
|
Statement
of
|
||||||||||
|
Accounted
|
Financial
|
||||||||||
|
for
as Hedging
|
Condition
|
||||||||||
|
Instruments
|
Location
|
Fair
Value
|
Fair
Value
|
||||||||
|
Futures
-
|
|||||||||||
|
Commodity
Contracts
|
Assets
|
$ | (67,884 | ) | $ | 5,883,944 | |||||
The
Effect of Derivative Instruments on the Statements of Operations
|
|
|
For the three months ended
|
For the three months ended
|
|||||||||||||||
|
|
|
March 31, 2010
|
March 31, 2009
|
|||||||||||||||
|
|
Location of
|
Realized
|
Change in
|
Realized
|
Change in
|
|||||||||||||
|
Derivatives not
|
Gain or (Loss)
|
Gain or (Loss)
|
Unrealized
|
Gain or (Loss)
|
Unrealized
|
|||||||||||||
|
Accounted
|
on Derivatives
|
on Derivatives
|
Gain or (Loss)
|
on Derivatives
|
Gain or (Loss)
|
|||||||||||||
|
for as Hedging
|
Recognized
|
Recognized
|
Recognized
|
Recognized
|
Recognized
|
|||||||||||||
|
Instruments
|
in Income
|
in Income
|
in Income
|
in Income
|
in Income
|
|||||||||||||
|
Futures
-
|
Realized
gain (loss) on
|
$ | 9,548,503 | $ | 7,734,947 | |||||||||||||
|
Commodity
|
closed
positions
|
|||||||||||||||||
|
Contracts
|
||||||||||||||||||
|
Change
in unrealized
|
$ | (5,951,828 | ) | $ | (2,995,902 | ) | ||||||||||||
|
gain
(loss) on open
|
||||||||||||||||||
|
positions
|
||||||||||||||||||
The
following table presents per unit performance data and other supplemental
financial data for the three months ended March 31, 2010 and 2009 for the
unitholders. This information has been derived from information presented in the
condensed financial statements.
|
For
the three months ended
|
For
the three months ended
|
|||||||
|
March
31, 2010
|
March
31, 2009
|
|||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||
|
Per Unit Operating
Performance:
|
||||||||
|
Net
asset value, beginning of period
|
$ | 36.41 | $ | 20.21 | ||||
|
Total
income
|
1.79 | 4.00 | ||||||
|
Net
expenses
|
(0.08 | ) | (0.05 | ) | ||||
|
Net
increase in net asset value
|
1.71 | 3.95 | ||||||
|
Net
asset value, end of period
|
$ | 38.12 | $ | 24.16 | ||||
|
Total
Return
|
4.70 | % | 19.54 | % | ||||
|
Ratios
to Average Net Assets
|
||||||||
|
Total
income
|
5.14 | % | 14.71 | % | ||||
|
Management
fees*
|
0.60 | % | 0.60 | % | ||||
|
Total
expenses excluding management fees*
|
1.12 | % | 0.69 | % | ||||
|
Expenses
waived*
|
(0.84 | )% | (0.31 | )% | ||||
|
Net
expenses excluding management fees*
|
0.28 | % | 0.38 | % | ||||
|
Net income
|
4.92 | % | 14.47 | % | ||||
|
*Annualized
|
||||||||
15
Total
returns are calculated based on the change in value during the period. An
individual unitholder’s total return and ratio may vary from the above total
returns and ratios based on the timing of contributions to and withdrawals from
UGA.
In
January 2010, the Financial Accounting Standards Board issued Accounting
Standards Update (“ASU”)
No. 2010-06 “Improving
Disclosures about Fair Value Measurements.” ASU No. 2010-06 clarifies existing
disclosure and
requires additional
disclosures regarding fair value measurements. Effective for fiscal years
beginning
after
December 15, 2010, and for interim periods within those fiscal years, entities
will need to disclose information
about purchases, sales,
issuances and settlements of Level 3 securities on a gross basis, rather than as
a net number as
currently required. The
General Partner is currently evaluating the impact ASU No. 2010-06 will have on
UGA’s financial statement
disclosures.
UGA has
performed an evaluation of subsequent events through the date the financial
statements were available to be issued. This evaluation did not result in any
subsequent events that necessitated disclosures and/or
adjustments.
16
The
following discussion should be read in conjunction with the condensed financial
statements and the notes thereto of the United States Gasoline Fund, LP (“UGA”)
included elsewhere in this quarterly report on Form 10-Q.
Forward-Looking
Information
This
quarterly report on Form 10-Q, including this “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” contains
forward-looking statements regarding the plans and objectives of management for
future operations. This information may involve known and unknown risks,
uncertainties and other factors that may cause UGA’s actual results, performance
or achievements to be materially different from future results, performance or
achievements expressed or implied by any forward-looking statements.
Forward-looking statements, which involve assumptions and describe UGA’s future
plans, strategies and expectations, are generally identifiable by use of the
words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,”
“intend” or “project,” the negative of these words, other variations on these
words or comparable terminology. These forward-looking statements are based on
assumptions that may be incorrect, and UGA cannot assure investors that the
projections included in these forward-looking statements will come to pass.
UGA’s actual results could differ materially from those expressed or implied by
the forward-looking statements as a result of various factors.
UGA has
based the forward-looking statements included in this quarterly report on Form
10-Q on information available to it on the date of this quarterly report on Form
10-Q, and UGA assumes no obligation to update any such forward-looking
statements. Although UGA undertakes no obligation to revise or update any
forward-looking statements, whether as a result of new information, future
events or otherwise, investors are advised to consult any additional disclosures
that UGA may make directly to them or through reports that UGA in the future
files with the U.S. Securities and Exchange Commission (the “SEC”), including
annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form 8-K.
Introduction
UGA, a
Delaware limited partnership, is a commodity pool that issues units that may be
purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”). The investment
objective of UGA is for the changes in percentage terms of its units’ net asset
value (“NAV”) to reflect the changes in percentage terms of the spot price of
gasoline, as measured by the changes in the price of the futures contract for
unleaded gasoline (also known as reformulated gasoline blendstock for oxygen
blending, or “RBOB”, for delivery to the New York harbor), traded on the New
York Mercantile Exchange (the “NYMEX”) that is the near month contract to
expire, except when the near month contract is within two weeks of expiration,
in which case it will be measured by the futures contract that is the next month
contract to expire (the “Benchmark Futures Contract”), less UGA’s
expenses.
UGA seeks
to achieve its investment objective by investing in a combination of gasoline
futures contracts and other gasoline-related investments such that changes in
its NAV, measured in percentage terms, will closely track the changes in the
price of the Benchmark Futures Contract, also measured in percentage terms.
UGA’s general partner believes the daily changes in the prices of the Benchmark
Futures Contract have historically closely tracked the daily changes in the spot
price of gasoline. It is not the intent of UGA to be operated in a fashion such
that the NAV will equal, in dollar terms, the spot price of gasoline or any
particular futures contract based on gasoline. Management believes that it is
not practical to manage the portfolio to achieve such an investment goal when
investing in listed gasoline futures contracts and other gasoline-related
investments.
On any
valuation day, the Benchmark Futures Contract is the near month futures contract
for gasoline traded on the NYMEX, unless the near month contract is within two
weeks of expiration, in which case the Benchmark Futures Contract is the next
month contract for gasoline traded on the NYMEX. “Near month contract” means the
next contract traded on the NYMEX due to expire. “Next month contract” means the
first contract traded on the NYMEX due to expire after the near month
contract.
17
UGA
invests in futures contracts for gasoline, crude oil, natural gas, heating oil
and other petroleum-based fuels that are traded on the NYMEX, ICE Futures or
other U.S. and foreign exchanges (collectively, “Futures Contracts”) and other
gasoline-related investments such as cash-settled options on Futures Contracts,
forward contracts for gasoline, cleared swap contracts and over-the-counter
transactions that are based on the price of gasoline, crude oil and other
petroleum-based fuels, Futures Contracts and indices based on the foregoing
(collectively, “Other Gasoline-Related Investments”). For convenience and unless
otherwise specified, Futures Contracts and Other Gasoline-Related Investments
collectively are referred to as “Gasoline Interests” in this quarterly report on
Form 10-Q.
The
regulation of commodity interests in the United States is a rapidly
changing area of law and is subject to ongoing modification by governmental and
judicial action. As stated under the heading, “Risk Factors” in Item
1A of UGA’s annual report on Form 10-K for the year ended December 31, 2009,
regulation of the commodity interests and energy markets is extensive and
constantly changing; future regulatory developments in the commodity interests
and energy markets are impossible to predict but may significantly and adversely
affect UGA.
Currently,
a number of proposals to alter the regulation of commodity interests are
being considered by federal regulators and legislators. These proposals include
the imposition of hard position limits on energy-based commodity futures
contracts, the extension of position and accountability limits to futures
contracts on non-U.S. exchanges previously exempt from such limits, and the
forced use of clearinghouse mechanisms for all over-the-counter transactions. An
additional proposal would aggregate and limit all positions in energy futures
held by a single entity, whether such positions exist on U.S. futures exchanges,
non-U.S. futures exchanges, or in over-the-counter contracts. The U.S. Commodity
Futures Trading Commission (the “CFTC”) has also recently published a proposed
rule that would impose fixed position limits on certain energy futures
contracts, including the Benchmark Futures Contract, without the need for any
new legislation to be passed. If any of the aforementioned proposals is
implemented, UGA’s ability to meet its investment objective may be negatively
impacted and investors could be adversely affected.
The
general partner of UGA, United States Commodity Funds LLC (the “General
Partner”), which is registered as a commodity pool operator (“CPO”) with the
CFTC, is authorized by the Amended and Restated Agreement of Limited Partnership
of UGA (the “LP Agreement”) to manage UGA. The General Partner is authorized by
UGA in its sole judgment to employ and establish the terms of employment for,
and termination of, commodity trading advisors or futures commission
merchants.
Gasoline
futures prices exhibited an uneven upward trend during the three months ended
March 31, 2010. The price of the Benchmark Futures Contract started the period
at $2.053 per gallon. Prices fell over the next month and hit a low on February
5, 2010 of $1.886 per gallon, and then rose to a peak on March 17, 2010 of
$2.310 per gallon. The period ended with the Benchmark Futures Contract at
$2.307 per gallon, up approximately 12.39% over this time period (investors are
cautioned that these represent prices for gasoline on a wholesale basis and
should not be directly compared to retail prices at a gasoline service station).
Similarly, UGA’s NAV rose during the period from a starting level of $36.41 per
unit to a high of $38.22 per unit on January 8, 2010. UGA’s NAV reached its low
for the period on February 5, 2010 at $33.21 per unit. The NAV on March 31, 2010
was $38.12, up approximately 4.70% over the period. The return of approximately
12.39% on the Benchmark Futures Contract listed above is a hypothetical return
only and could not actually be achieved by an investor holding futures
contracts. An investment in gasoline futures contracts would need to be rolled
forward during the time period described in order to achieve such a
result.
During
the first quarter of 2010, the gasoline futures market exhibited periods of both
contango and slight backwardation. During periods of contango, the
price of the near month gasoline futures contract was typically lower than the
price of the next month gasoline futures contract, or contracts further away
from expiration. On days when the market was in backwardation, the
price of the near month gasoline futures contract was typically higher than the
price of the next month gasoline futures contract, or contracts further away
from expiration. For a discussion of the impact of backwardation and
contango on total returns, see “Term Structure of Gasoline Prices and the Impact
on Total Returns”.
Valuation
of Futures Contracts and the Computation of the NAV
The NAV
of UGA’s units is calculated once each NYSE Arca trading day. The NAV for a
particular trading day is released after 4:00 p.m. New York time. Trading during
the core trading session on the NYSE Arca typically closes at 4:00 p.m. New York
time. UGA’s administrator uses the NYMEX closing price (determined at the
earlier of the close of the NYMEX or 2:30 p.m. New York time) for the contracts
held on the NYMEX, but calculates or determines the value of all other UGA
investments, including ICE Futures contracts or other futures contracts, as of
the earlier of the close of the NYSE Arca or 4:00 p.m. New York
time.
18
Results
of Operations and the Gasoline Market
Results of Operations.
On
February 26, 2008, UGA listed its units on the American Stock Exchange (the
“AMEX”) under the ticker symbol “UGA.” On that day, UGA established its initial
offering price at $50.00 per unit and issued 300,000 units to the initial
authorized purchaser, Kellogg Capital Group, LLC, in exchange for $15,001,000 in
cash. As a result of the acquisition of the AMEX by NYSE Euronext, UGA’s units
no longer trade on the AMEX and commenced trading on the NYSE Arca on November
25, 2008.
Since its
initial offering of 30,000,000 units, UGA has not made any subsequent offering
of its units. As of March 31, 2010, UGA had issued 3,700,000 units, 1,900,000 of
which were outstanding. As of March 31, 2010, there were 26,300,000 units
registered but not yet issued.
More
units may have been issued by UGA than are outstanding due to the redemption of
units. Unlike funds that are registered under the Investment Company
Act of 1940, as amended, units that have been redeemed by UGA cannot be resold
by UGA. As a result, UGA contemplates that additional offerings of its units
will be registered with the SEC in the future in anticipation of additional
issuances and redemptions.
For the Three Months Ended
March 31, 2010 Compared to the Three Months Ended March 31,
2009
As of
March 31, 2010, the total unrealized loss on gasoline Futures Contracts owned or
held on that day was $67,884 and UGA established cash deposits
,
including cash investments in
money market funds, that were equal to $72,344,049. UGA held 87.04% of its cash
assets in overnight deposits and money market funds at its custodian bank, while
12.96% of the cash balance was held as margin deposits for the Futures Contracts
purchased. The ending per unit NAV on March 31, 2010 was $38.12.
By
comparison, as of March 31, 2009, the total unrealized loss on gasoline Futures
Contracts owned or held on that day was $1,564,181 and UGA established cash
deposits
,
including cash
investments in money market funds, that were equal to $64,461,963. UGA held
79.31% of its cash assets in overnight deposits and money market funds at its
custodian bank, while 20.69% of the cash balance was held as margin deposits for
the Futures Contracts purchased. The ending per unit NAV on March 31, 2009 was
$24.16. The increase in the per unit NAV from March 31, 2009 compared to March
31, 2010 was primarily a result of higher prices for gasoline and the related
increase in the value of the gasoline Futures Contracts that UGA had invested in
between the period ended March 31, 2009 and the period ended March 31,
2010.
Portfolio Expenses
. UGA’s
expenses consist of investment management fees, brokerage fees and commissions,
certain offering costs, licensing fees, the fees and expenses of the independent
directors of the General Partner and expenses relating to tax accounting and
reporting requirements. The management fee that UGA pays to the General Partner
is calculated as a percentage of the total net assets of UGA. UGA
pays the General Partner a management fee of 0.60% of its average net assets.
The fee is accrued daily and paid monthly.
During
the three months ended March 31, 2010, the daily average total net assets of UGA
were $70,123,778. The management fee paid by UGA during the period amounted to
$103,745, which was calculated at 0.60% of its average net assets and was
accrued daily. By comparison, during the three months ended March 31, 2009, the
daily average total net assets of UGA were $32,447,609. The management fee paid
by UGA during the period amounted to $48,005, which was calculated at 0.60% of
its average net assets and was accrued daily.
In
addition to the management fee, UGA pays all brokerage fees and other expenses,
including certain tax reporting costs, licensing fees for the use of
intellectual property, ongoing registration or other fees paid to the SEC, the
Financial Industry Regulatory Authority (“FINRA”) and any other regulatory
agency in connection with offers and sales of its units subsequent to the
initial offering and all legal, accounting, printing and other expenses
associated therewith. The total of these fees and expenses for the three months
ended March 31, 2010 was $193,501, as compared to $55,431 for the three months
ended March 31, 2009. The increase in expenses from the period from the three
months ended March 31, 2009 as compared to the three months ended March 31, 2010
was primarily due to UGA’s increased size and activity that resulted from its
increased size
,
including increased estimates for tax reporting, legal, accounting, printing,
and other expenses. These expense estimates may change in subsequent
quarters and their actual impact for the three months ended March 31, 2010 is
limited to $48,877 by the expense waiver discussed below.
UGA incurred
$1,970 and $0 in fees and other expenses relating to the registration and
offering of additional units during the three months ended March 31, 2010 and
2009, respectively.
During the three months
ended March 31, 2010, an expense waiver was in effect which offset certain of
the expenses incurred by the Fund. The total amount of the fee waiver totaled
$144,624. The total net expenses of the Fund, including management fees,
commissions, and all other expenses, after allowance for the expense waiver,
totaled $152,622 for the three months ended March 31, 2010
.
19
UGA is
responsible for paying its portion of the directors’ and officers’ liability
insurance of the General Partner and the fees and expenses of the independent
directors of the General Partner who are also the General Partner’s audit
committee members. UGA shares these fees and expenses with the United
States Oil Fund, LP (“USOF”), the United States Natural Gas Fund, LP (“USNG”),
the United States 12 Month Oil Fund, LP (“US12OF”), the United States Heating
Oil Fund, LP (“USHO”), the United States Short Oil Fund, LP (“USSO”) and the
United States 12 Month Natural Gas Fund, LP (“US12NG”), based on the relative
assets of each fund computed on a daily basis. These fees for calendar year 2010
are estimated to be a total of $538,870 for all funds. By comparison, for the
year ended December 31, 2009, these fees amounted to a total of $433,046 for all
funds, and UGA’s portion of such fees was $3,734. Directors’ expenses are
expected to increase in 2010 due to an increase in the amount of directors’
and officers’ liability insurance coverage. Effective as of March 3, 2009, the
General Partner has obtained directors’ and officers’ liability insurance
covering all of the directors and officers of the General Partner. Previously,
the General Partner did not have liability insurance for its directors and
officers; instead, the independent directors received a payment in lieu of
directors’ and officers’ liability insurance coverage. Effective as of April 1,
2010, UGA is also responsible for paying its portion of any payments that may
become due to
the
independent directors
pursuant to the
deferred compensation
agreements entered into
between the independent directors, the General Partner and each of the
funds.
UGA also
incurs commissions to brokers for the purchase and sale of Futures Contracts,
Other Gasoline-Related Investments or short-term obligations of the United
States of two years or less (“Treasuries”). During the three months ended March
31, 2010, total commissions paid to brokers amounted to $15,712. By comparison,
during the three months ended March 31, 2009, total commissions paid to brokers
amounted to $15,801. The decrease in the total commissions paid to brokers from
the three months ended March 31, 2010 compared to the three months ended March
31, 2009 was primarily a function of the decrease in UGA’s trading
activities during the three months ended March 31, 2010. The
increased assets during the three months ended March 31, 2009 required UGA to
purchase a greater number of Futures Contracts and incur a larger amount of
commissions. As an annualized percentage of total net assets, the figure for the
three months ended March 31, 2010 represents approximately 0.09% of total net
assets. By comparison, the figure for the three months ended March 31, 2009
represented approximately 0.20% of total net assets. However, there can be no
assurance that commission costs and portfolio turnover will not cause commission
expenses to rise in future quarters.
The fees
and expenses associated with UGA’s audit expenses and tax reporting requirements
are paid by UGA. These costs are estimated to be $298,295 for the
calendar year 2010.
Interest
Income
. UGA seeks to invest its assets such that it holds
Futures Contracts and Other Gasoline-Related Investments in an amount equal to
the total net assets of its portfolio. Typically, such investments do not
require UGA to pay the full amount of the contract value at the time of
purchase, but rather require UGA to post an amount as a margin deposit against
the eventual settlement of the contract. As a result, UGA retains an amount that
is approximately equal to its total net assets, which UGA invests in Treasuries,
cash and/or cash equivalents. This includes both the amount on deposit with the
futures commission merchant as margin, as well as unrestricted cash and cash
equivalents held with UGA’s custodian bank. The Treasuries, cash and/or cash
equivalents earn interest that accrues on a daily basis. For the three months
ended March 31, 2010, UGA earned $3,611 in interest income on such cash and/or
cash equivalents. Based on UGA’s average daily total net assets, this was
equivalent to an annualized yield of 0.02%. UGA did not purchase Treasuries
during the three months ended March 31, 2010 and held only cash and/or cash
equivalents during this time period. By comparison, for the three months ended
March 31, 2009, UGA earned $22,101 in interest income on such cash and/or cash
equivalents. Based on UGA’s average daily total net assets, this was
equivalent to an annualized yield of 0.28%. UGA did not purchase Treasuries
during the three months ended March 31, 2009 and held only cash and/or cash
equivalents during this time period. Interest rates on short-term investments in
the United States, including cash, cash equivalents, and short-term Treasuries,
were sharply lower during the three months ended March 31, 2010 compared to the
three months ended March 31, 2009. As a result, the amount of interest earned by
UGA as a percentage of total net assets was lower during the three months ended
March 31, 2010.
20
Tracking
UGA’s Benchmark
UGA seeks
to manage its portfolio such that changes in its average daily NAV, on a
percentage basis, closely track the changes in the average daily price of the
Benchmark Futures Contract, also on a percentage basis. Specifically, UGA seeks
to manage the portfolio such that over any rolling period of 30 valuation days,
the average daily change in its NAV is within a range of 90% to 110% (0.9 to
1.1) of the average daily change in the price of the Benchmark Futures Contract.
As an example, if the average daily movement of the price of the Benchmark
Futures Contract for a particular 30-day time period was 0.5% per day, UGA’s
management would attempt to manage the portfolio such that the average daily
movement of the NAV during that same time period fell between 0.45% and 0.55%
(
i.e
., between 0.9 and
1.1 of the benchmark’s results). UGA’s portfolio management goals do not include
trying to make the nominal price of UGA’s NAV equal to the nominal price of the
current Benchmark Futures Contract or the spot price for gasoline. Management
believes that it is not practical to manage the portfolio to achieve such an
investment goal when investing in listed gasoline Futures
Contracts.
For the
30 valuation days ended March 31, 2010, the simple average daily change in the
Benchmark Futures Contract was 0.282%, while the simple average daily change in
the NAV of UGA over the same time period was 0.280%. The average daily
difference was -0.002% (or -0.2 basis points, where 1 basis point equals
1/100 of 1%). As a percentage of the daily movement of the Benchmark Futures
Contract, the average error in daily tracking by the NAV was -0.003%, meaning
that over this time period UGA’s tracking error was within the plus or minus 10%
range established as its benchmark tracking goal. The first chart below shows
the daily movement of UGA’s NAV versus the daily movement of the Benchmark
Futures Contract for the 30-day period ended March 31, 2010.
*
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
21
*
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Since the
offering of UGA units to the public on February 26, 2008 to March 31, 2010, the
simple average daily change in the Benchmark Futures Contract was -0.013%, while
the simple average daily change in the NAV of UGA over the same time period was
-0.014%. The average daily difference was -0.001% (or -0.1 basis points, where 1
basis point equals 1/100 of 1%). As a percentage of the daily movement of the
Benchmark Futures Contract, the average error in daily tracking by the NAV was
-0.655%, meaning that over this time period UGA’s tracking error was within the
plus or minus 10% range established as its benchmark tracking goal.
An
alternative tracking measurement of the return performance of UGA versus the
return of its Benchmark Futures Contract can be calculated by comparing the
actual return of UGA, measured by changes in its NAV, versus the
expected
changes in its NAV
under the assumption that UGA’s returns had been exactly the same as the daily
changes in its Benchmark Futures Contract.
For the
three months ended March 31, 2010, the actual total return of UGA as measured by
changes in its NAV was 4.70%. This is based on an initial NAV of $36.41 on
December 31, 2009 and an ending NAV as of March 31, 2010 of $38.12. During this
time period, UGA made no distributions to its unitholders. However, if UGA’s
daily changes in its NAV had instead exactly tracked the changes in the daily
return of the Benchmark Futures Contract, UGA would have ended the first quarter
of 2010 with an estimated NAV of $38.27, for a total return over the relevant
time period of 4.91%. The difference between the actual NAV total return of UGA
of 4.70% and the expected total return based on the Benchmark Futures Contract
of 4.91% was an error over the time period of -0.21%, which is to say that UGA’s
actual total return trailed the benchmark result by that percentage. Management
believes that a portion of the difference between the actual return and the
expected benchmark return can be attributed to the net impact of the expenses
and the interest that UGA collects on its cash and cash equivalent holdings.
During the three months ended March 31, 2010, UGA received interest income of
$3,611, which is equivalent to a weighted average interest rate of 0.02% for
such period. In addition, during the three months ended March 31, 2010, UGA also
collected $2,000 from its authorized purchasers (“Authorized Purchasers”)
creating or redeeming baskets of units. This income contributed to UGA’s actual
return. However, if the total assets of UGA continue to increase, management
believes that the impact on total returns of these fees from creations and
redemptions will diminish as a percentage of the total return. During the three
months ended March 31, 2010, UGA incurred total net expenses of $152,622. Income
from interest and Authorized Purchaser collections net of expenses was
$(147,011), which is equivalent to a weighted average net interest rate of
(0.85)% for the three months ended March 31, 2010.
22
By
comparison, for the three months ended March 31, 2009, the actual total return
of UGA as measured by changes in its NAV was 19.54%. This was based on an
initial NAV of $20.21 on December 31, 2008 and an ending NAV as of March 31,
2009 of $24.16. During this time period, UGA made no distributions to its
unitholders. However, if UGA’s daily changes in its NAV had instead exactly
tracked the changes in the daily return of the Benchmark Futures Contract, UGA
would have ended the first quarter of 2009 with an estimated NAV of $24.22, for
a total return over the relevant time period of 19.84%. The difference between
the actual NAV total return of UGA of 19.54% and the expected total return based
on the Benchmark Futures Contract of 19.84% was an error over the time period of
-0.30%, which is to say that UGA’s actual total return trailed the benchmark
result by that percentage. Management believes that a portion of the difference
between the actual return and the expected benchmark return can be attributed to
the impact of the interest that UGA collected on its cash and cash equivalent
holdings. During the three months ended March 31, 2009, UGA received interest
income of $22,101, which is equivalent to a weighted average interest rate of
0.28% for such period. In addition, during the three months ended
March 31, 2009, UGA also collected $12,000 from Authorized Purchasers creating
or redeeming baskets of units. This income contributed to UGA’s actual return.
During the three months ended March 31, 2009, UGA incurred net expenses of
$78,537. Income from interest and Authorized Purchaser collections net of
expenses was $(44,436), which is equivalent to a weighted average net interest
rate of (0.56)% for the three months ended March 31, 2009.
There are
currently three factors that have impacted or are most likely to impact UGA’s
ability to accurately track its Benchmark Futures Contract.
First,
UGA may buy or sell its holdings in the then current Benchmark Futures Contract
at a price other than the closing settlement price of that contract on the day
during which UGA executes the trade. In that case, UGA may pay a price that is
higher, or lower, than that of the Benchmark Futures Contract, which could cause
the changes in the daily NAV of UGA to either be too high or too low relative to
the changes in the Benchmark Futures Contract. During the three months ended
March 31, 2010, management attempted to minimize the effect of these
transactions by seeking to execute its purchase or sale of the Benchmark Futures
Contract at, or as close as possible to, the end of the day settlement price.
However, it may not always be possible for UGA to obtain the closing settlement
price and there is no assurance that failure to obtain the closing settlement
price in the future will not adversely impact UGA’s attempt to track the
Benchmark Futures Contract over time.
Second,
UGA earns interest on its cash, cash equivalents and Treasury holdings. UGA is
not required to distribute any portion of its income to its unitholders and did
not make any distributions to unitholders during the three months ended March
31, 2010. Interest payments, and any other income, were retained within the
portfolio and added to UGA’s NAV. When this income exceeds the level of UGA’s
expenses for its management fee, brokerage commissions and other expenses
(including ongoing registration fees, licensing fees and the fees and expenses
of the independent directors of the General Partner), UGA will realize a net
yield that will tend to cause daily changes in the NAV of UGA to track slightly
higher than daily changes in the Benchmark Futures Contract. During the three
months ended March 31, 2010, UGA earned, on an annualized basis, approximately
0.02% on its cash holdings. It also incurred cash expenses on an annualized
basis of 0.60% for management fees and approximately 0.09% in brokerage
commission costs related to the purchase and sale of futures contracts, and
0.19% for other expenses. The foregoing fees and expenses resulted in a net
yield on an annualized basis of approximately (0.86)% and affected UGA’s ability
to track its benchmark. If short-term interest rates rise above the current
levels, the level of deviation created by the yield would decrease. Conversely,
if short-term interest rates were to decline, the amount of error created by the
yield would increase. When short-term yields drop to a level lower than the
combined expenses of the management fee and the brokerage commissions, then the
tracking error becomes a negative number and would tend to cause the daily
returns of the NAV to underperform the daily returns of the Benchmark Futures
Contract.
23
Third,
UGA may hold Other Gasoline-Related Investments in its portfolio that may fail
to closely track the Benchmark Futures Contract’s total return movements. In
that case, the error in tracking the Benchmark Futures Contract could result in
daily changes in the NAV of UGA that are either too high, or too low, relative
to the daily changes in the Benchmark Futures Contract. During the three months
ended March 31, 2010, UGA did not hold any Other Gasoline-Related Investments.
However, there can be no assurance that in the future UGA will not invest in
such Other Gasoline-Related Investments, which may have the effect of increasing
transaction related expenses and result in increased tracking
error.
Term Structure of Gasoline Futures
Prices and the Impact on Total Returns.
Several factors determine the
total return from investing in a futures contract position. One factor that
impacts the total return that will result from investing in near month gasoline
futures contracts and “rolling” those contracts forward each month is the price
relationship between the current near month contract and the next month
contract. For example, if the price of the near month contract is
higher than the next month contract (a situation referred to as “backwardation”
in the futures market), then absent any other change there is a tendency for the
price of a next month contract to rise in value as it becomes the near month
contract and approaches expiration. Conversely, if the price of a near month
contract is lower than the next month contract (a situation referred to as
“contango” in the futures market), then absent any other change there is a
tendency for the price of a next month contract to decline in value as it
becomes the near month contract and approaches expiration.
As an
example, assume that the price of gasoline for immediate delivery (the “spot”
price), was $2.00 per gallon, and the value of a position in the near month
futures contract was also $2.00. Over time, the price of a gallon of gasoline
will fluctuate based on a number of market factors, including demand for
gasoline relative to its supply. The value of the near month contract
will likewise fluctuate in reaction to a number of market factors. If investors
seek to maintain their position in a near month contract and not take delivery
of the gasoline, every month they must sell their current near month contract as
it approaches expiration and invest in the next month contract.
If the
futures market is in backwardation,
e.g.
, when the expected price
of gasoline in the future would be less, the investor would be buying a next
month contract for a lower price than the current near month contract.
Hypothetically, and assuming no other changes to either prevailing gasoline
prices or the price relationship between the spot price, the near month contract
and the next month contract (and ignoring the impact of commission costs and the
interest earned on Treasuries, cash and/or cash equivalents), the value of the
next month contract would rise as it approaches expiration and becomes the new
near month contract. In this example, the value of the $2.00 investment would
tend to rise faster than the spot price of gasoline, or fall slower. As a
result, it would be possible in this hypothetical example for the spot price of
gasoline to have risen to $2.50 after some period of time, while the value of
the investment in the futures contract would have risen to $2.60, assuming
backwardation is large enough or enough time has elapsed. Similarly, the spot
price of gasoline could have fallen to $1.50 while the value of an investment in
the futures contract could have fallen to only $1.60. Over time, if
backwardation remained constant, the difference would continue to
increase.
If the
futures market is in contango, the investor would be buying a next month
contract for a higher price than the current near month contract.
Hypothetically, and assuming no other changes to either prevailing gasoline
prices or the price relationship between the spot price, the near month contract
and the next month contract (and ignoring the impact of commission costs and the
interest earned on cash), the value of the next month contract would fall as it
approaches expiration and becomes the new near month contract. In this example,
it would mean that the value of the $2.00 investment would tend to rise slower
than the spot price of gasoline, or fall faster. As a result, it would be
possible in this hypothetical example for the spot price of gasoline to have
risen to $2.50 after some period of time, while the value of the investment in
the futures contract will have risen to only $2.40, assuming contango is large
enough or enough time has elapsed. Similarly, the spot price of
gasoline could have fallen to $1.50 while the value of an investment in the
futures contract could have fallen to $1.40. Over time, if contango remained
constant, the difference would continue to increase.
The chart
below compares the price of the near month contract to the price of the next
month contract over the last 10 years (2000-2009) for gasoline. When the price
of the near month contract is higher than the price of the next month contract,
the market would be described as being in backwardation. When the price of the
near month contract is lower than the price of the next month contract, the
market would be described as being in contango. Although the prices of the near
month contract and the price of the next month contract do tend to move up or
down together, it can be seen that at times the near month prices are clearly
higher than the price of the next month contract (backwardation), and other
times they are below the price of the next month contract (contango). In
addition, investors can observe that gasoline prices, both near month and next
month, often display a seasonal pattern in which the price of gasoline tends to
rise in the summer months and decline in the winter months. This mirrors the
physical demand for gasoline, which typically peaks in the
summer.
24
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
An
alternative way to view backwardation and contango data over time is to subtract
the dollar price of the next month gasoline futures contract from the dollar
price of the near month gasoline futures contract. If the resulting number is a
positive number, then the price of the near month contract is higher than the
price of the next month and the market could be described as being in
backwardation. If the resulting number is a negative number, then the near month
price is lower than the price of the next month and the market could be
described as being in contango. The chart below shows the results from
subtracting the next month contract price from the price of the near month
contract for the 10 year period between 2000 and 2009. Investors will note
that the near month gasoline futures contract spent time in both backwardation
and contango. Investors will further note that the markets display a very
seasonal pattern that corresponds to the seasonal demand patterns for gasoline
mentioned above. That is, in many, but not all cases, the price of the near
month is higher than the next month during the middle of the summer months as
the price of gasoline for delivery in those summer months rises to meet peak
demand. At the same time, the price of the near month contract, when that month
is just before the onset of spring, does not rise as far or as fast as the price
of a next month contract whose delivery falls closer to the start of the summer
season.
25
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
While the
investment objective of UGA is not to have the market price of its units match,
dollar for dollar, changes in the spot price of gasoline, contango and
backwardation have impacted the total return on an investment in UGA units
during the past year relative to a hypothetical direct investment in gasoline.
For example, an investment in UGA units made on December 31, 2009 and held to
March 31, 2010 increased based upon the changes in the NAV for UGA units on
those days, by 4.70%, while the spot price of gasoline for immediate delivery
during the same period increased by 12.39% (note: this comparison ignores the
potential costs associated with physically owning and storing gasoline, which
could be substantial). By comparison, an investment in UGA units made on
December 31, 2008 and held to March 31, 2009 increased, based upon the changes
in the NAV for UGA units on those days, by 19.54%, while the spot price of
gasoline for immediate delivery during the same period increased by 19.83%
(note: this comparison ignores the potential costs associated with physically
owning and storing gasoline, which could be substantial).
Periods
of contango or backwardation do not materially impact UGA’s investment objective
of having the percentage changes in its per unit NAV track the percentage
changes in the price of the Benchmark Futures Contract since the impact of
backwardation and contango tended to equally impact the percentage changes in
price of both UGA’s units and the Benchmark Futures Contract. It is impossible
to predict with any degree of certainty whether backwardation or contango will
occur in the future. It is likely that both conditions will occur during
different periods.
Gasoline Market.
During the
three months ended March 31, 2010, the price of unleaded gasoline in the United
States was impacted by several factors. The price of the Benchmark Futures
Contract began the quarter at $2.053 per gallon. It
rose over the course of the quarter and hit a peak on March 17th,
2010 of $2.310 per gallon. The quarter ended with the Benchmark Futures Contract
at $2.307 per gallon, up approximately 12.39% over this time period (investors
are cautioned that these represent prices for gasoline on a wholesale basis and
should not be directly compared to retail prices at a gasoline service
station).
26
During
the three months ended March 31, 2010, the price of crude oil, the raw material
from which gasoline is refined, rose by approximately 5.54% from approximately
$79.36 per barrel to approximately $83.76 per barrel. The price of crude oil was
influenced by several factors. On the consumption side, demand improved
inside and outside the United States as global economic growth, including
emerging economies such as China and India, improved for the first quarter of
the year. On the supply side, efforts to reduce production by the Organization
of the Petroleum Exporting Countries to more closely match global consumption
were partially successful. Crude oil prices did finish the first quarter of 2010
approximately 5.54% higher than at the beginning of the year, as investors
looked forward to continued improvements in the global economy. Management
believes, however, that should the global economic situation cease to improve,
or decline, there is a meaningful possibility that crude oil prices could
retreat from their current levels.
Management
believes that over both the medium-term and the long-term, changes in the price
of crude oil will exert the greatest influence on the price of refined petroleum
products such as gasoline. At the same time, there can be other factors that,
particularly in the short term, cause the price of gasoline to rise (or fall),
more (or less) than the price of crude oil. For example, higher gasoline prices
cause American consumers to reduce their gasoline consumption, particularly
during the high demand period of the summer driving season and gasoline prices
are impacted by the availability of refining capacity. Furthermore, a slowdown
or recession in the U.S. economy may have a greater impact on U.S. gasoline
prices than on global crude oil prices. As a result, it is possible that changes
in gasoline prices may not match the changes in crude oil prices.
Unleaded Gasoline Price Movements in
Comparison to Other Energy Commodities and Investment
Categories.
The General Partner believes that investors
frequently measure the degree to which prices or total returns of one investment
or asset class move up or down in value in concert with another investment or
asset class. Statistically, such a measure is usually done by measuring the
correlation of the price movements of the two different investments or asset
classes over some period of time. The correlation is scaled between 1 and -1,
where 1 indicates that the two investment options move up or down in price or
value together, known as “positive correlation,” and -1 indicating that they
move in completely opposite directions, known as “negative correlation.” A
correlation of 0 would mean that the movements of the two are neither positively
or negatively correlated, known as “non-correlation.” That is, the investment
options sometimes move up and down together and other times move in opposite
directions.
For the
ten year time period between 2000 and 2009, the chart below compares the monthly
movements of unleaded gasoline prices versus the monthly movements of the prices
of several other energy commodities, such as natural gas, crude oil and heating
oil, as well as several major non-commodity investment asset classes, such as
large cap U.S. equities, U.S. government bonds and global equities. It can be
seen that over this particular time period, the movement of unleaded gasoline on
a monthly basis was not strongly correlated, positively or negatively, with the
movements of large cap U.S. equities, U.S. government bonds or global equities.
However, movements in unleaded gasoline had a strong positive correlation to
movements in crude oil and heating oil. Finally, unleaded gasoline had a
positive, but weaker, correlation with natural gas.
|
10 Year Correlation
Matrix 2000-2009
|
Large
Cap U.S.
Equities
(S&P
500)
|
U.S. Govt.
Bonds
(EFFAS U.S.
Government
Bond Index)
|
Global
Equities
(FTSE
World
Index)
|
Crude Oil
|
Heating
Oil
|
Natural
Gas
|
Unleaded
Gasoline
|
|||||||||||||||||||||
|
Large
Cap U.S. Equities (S&P 500)
|
1.000 | -0.259 | 0.966 | 0.152 | 0.087 | 0.023 | 0.135 | |||||||||||||||||||||
|
U.S.
Govt. Bonds (EFFAS U.S. Government Bond Index)
|
1.000 | -0.237 | -0.127 | -0.078 | 0.128 | -0.214 | ||||||||||||||||||||||
|
Global
Equities (FTSE World Index)
|
1.000 | 0.246 | 0.165 | 0.084 | 0.196 | |||||||||||||||||||||||
|
Crude
Oil
|
1.000 | 0.783 | 0.334 | 0.724 | ||||||||||||||||||||||||
|
Heating
Oil
|
1.000 | 0.466 | 0.613 | |||||||||||||||||||||||||
|
Natural
Gas
|
1.000 | 0.257 | ||||||||||||||||||||||||||
|
Unleaded
Gasoline
|
1.000 | |||||||||||||||||||||||||||
source:
Bloomberg, NYMEX
27
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
The chart
below covers a more recent, but much shorter, range of dates than the above
chart. Over the one year period ended March 31, 2010, unleaded gasoline
continued to have a strong positive correlation with crude oil and heating oil.
During this period, it also had a mildly negative correlation with the movements
of natural gas. The correlation between unleaded gasoline and both
large cap U.S. equities and global equities, which had been essentially
non-correlated over the ten year period ended December 31, 2009, exhibited mild
correlation over the one-year period ended December 31, 2009. Finally, the
results showed that unleaded gasoline and U.S. government bonds, which had
essentially been non-correlated for the ten year period ended December 31, 2009,
were negatively correlated over this more recent time period.
|
12 months ended March 31, 2010
|
Large
Cap U.S.
Equities
(S&P
500)
|
U.S. Gov't
Bonds
(EFFAS U.S.
Govt
Bond Index)
|
Global
Equities
(FTSE
World
Index)
|
Crude Oil
|
Heating Oil
|
Natural Gas
|
Unleaded
Gasoline
|
|||||||||||||||
|
Large
Cap U.S. Equities (S&P 500)
|
1.000 | -0.086 | 0.952 | 0.243 | 0.204 | -0.146 | 0.317 | |||||||||||||||
|
U.S.
Gov't Bonds (EFFAS U.S. Govt Bond Index)
|
1.000 | -0.229 | -0.273 | -0.321 | -0.088 | -0.316 | ||||||||||||||||
|
Global
Equities (FTSE World Index)
|
1.000 | 0.372 | 0.329 | -0.056 | 0.425 | |||||||||||||||||
|
Crude
Oil
|
1.000 | 0.937 | 0.098 | 0.848 | ||||||||||||||||||
|
Heating
Oil
|
1.000 | 0.152 | 0.856 | |||||||||||||||||||
|
Natural
Gas
|
1.000 | -0.267 | ||||||||||||||||||||
|
Unleaded
Gasoline
|
1.000 | |||||||||||||||||||||
Source:
Bloomberg, NYMEX
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Investors
are cautioned that the historical price relationships between gasoline and
various other energy commodities, as well as other investment asset classes, as
measured by correlation may not be reliable predictors of future price movements
and correlation results. The results pictured above would have been different if
a different range of dates had been selected. The General Partner believes that
gasoline has historically not demonstrated a strong correlation with equities or
bonds over long periods of time. However, the General Partner also believes that
in the future it is possible that gasoline could have long term correlation
results that indicate prices of gasoline more closely track the movements of
equities or bonds.
The
correlations between gasoline, crude oil, natural gas and heating oil are
relevant because the General Partner endeavors to invest UGA’s assets in Futures
Contracts and Other Gasoline-Related Investments so that daily changes in
percentage terms in UGA’s NAV correlate as closely as possible with daily
changes in percentage terms in the price of the Benchmark Futures Contract. If
certain other fuel-based commodity futures contracts do not closely correlate
with the gasoline Futures Contracts, then their use could lead to greater
tracking error. As noted
above,
the General Partner also believes that the changes in percentage terms in the
price of the Benchmark Futures Contract will closely correlate with changes in
percentage terms in the spot price of gasoline.
28
Critical
Accounting Policies
Preparation
of the condensed financial statements and related disclosures in compliance with
accounting principles generally accepted in the United States of America
requires the application of appropriate accounting rules and guidance, as well
as the use of estimates. UGA’s application of these policies involves judgments
and actual results may differ from the estimates used.
The
General Partner has evaluated the nature and types of estimates that it makes in
preparing UGA’s condensed financial statements and related disclosures and has
determined that the valuation of its investments which are not traded on a
United States or internationally recognized futures exchange (such as forward
contracts and over-the-counter contracts) involves a critical accounting policy.
The values which are used by UGA for its futures contracts are provided by its
commodity broker who uses market prices when available, while over-the-counter
contracts are valued based on the present value of estimated future cash flows
that would be received from or paid to a third party in settlement of these
derivative contracts prior to their delivery date and valued on a daily basis.
In addition, UGA estimates interest income on a daily basis using prevailing
interest rates earned on its cash and cash equivalents. These estimates are
adjusted to the actual amount received on a monthly basis and the difference, if
any, is not considered material.
Liquidity
and Capital Resources
UGA has
not made, and does not anticipate making, use of borrowings or other lines of
credit to meet its obligations. UGA has met, and it is anticipated that UGA will
continue to meet, its liquidity needs in the normal course of business from the
proceeds of the sale of its investments or from the Treasuries, cash and/or cash
equivalents that it intends to hold at all times. UGA’s liquidity needs include:
redeeming units, providing margin deposits for its existing Futures Contracts or
the purchase of additional Futures Contracts and posting collateral for its
over-the-counter contracts and, except as noted below, payment of its expenses,
summarized below under “Contractual Obligations.”
UGA
currently generates cash primarily from (i) the sale of baskets consisting of
100,000 units (“Creation Baskets”) and (ii) interest earned on Treasuries, cash
and/or cash equivalents. UGA has allocated substantially all of its net assets
to trading in Gasoline Interests. UGA invests in Gasoline Interests to the
fullest extent possible without being leveraged or unable to satisfy its current
or potential margin or collateral obligations with respect to its investments in
Futures Contracts and Other Gasoline-Related Investments. A significant portion
of the NAV is held in cash and cash equivalents that are used as margin and as
collateral for UGA’s trading in Gasoline Interests. The balance of the net
assets is held in UGA’s account at its custodian bank. Interest earned on UGA’s
interest-bearing funds is paid to UGA. During the three months ended March 31,
2010, UGA’s expenses exceeded the interest income UGA earned and the cash earned
from the sale of Creation Baskets and the redemption of Redemption Baskets. To
the extent expenses have exceeded interest income, UGA’s NAV will be negatively
impacted.
UGA’s
investments in Gasoline Interests may be subject to periods of illiquidity
because of market conditions, regulatory considerations and other reasons. For
example, most commodity exchanges limit the fluctuations in futures contracts
prices during a single day by regulations referred to as “daily limits.” During
a single day, no trades may be executed at prices beyond the daily limit. Once
the price of a futures contract has increased or decreased by an amount equal to
the daily limit, positions in the contracts can neither be taken nor liquidated
unless the traders are willing to effect trades at or within the specified daily
limit. Such market conditions could prevent UGA from promptly liquidating its
positions in futures contracts. During the three months ended March 31, 2010,
UGA was not forced to purchase or liquidate any of its positions while daily
limits were in effect; however, UGA cannot predict whether such an event may
occur in the future.
29
Prior to
the initial offering of UGA, all payments with respect to UGA’s expenses were
paid by the General Partner. UGA does not have an obligation or
intention to refund such payments by the General Partner. The General
Partner is under no obligation to pay UGA’s current or future expenses. Since
the initial offering of units, UGA has been responsible for expenses relating to
(i) management fees, (ii) brokerage fees and commissions, (iii) licensing fees
for the use of intellectual property, (iv) ongoing registration expenses in
connection with offers and sales of its units subsequent to the initial
offering, (v) other expenses, including certain tax reporting costs, (vi) fees
and expenses of the independent directors of the General Partner and (vii) other
extraordinary expenses not in the ordinary course of business, while the General
Partner has been responsible for expenses relating to the fees of UGA’s
marketing agent, administrator and custodian and registration expenses relating
to the initial offering of units. If the General Partner and UGA are
unsuccessful in raising sufficient funds to cover these respective expenses or
in locating any other source of funding, UGA will terminate and investors may
lose all or part of their investment.
Market
Risk
Trading
in Futures Contracts and Other Gasoline-Related Investments, such as forwards,
involves UGA entering into contractual commitments to purchase or sell gasoline
at a specified date in the future. The aggregate market value of the contracts
will significantly exceed UGA’s future cash requirements since UGA intends to
close out its open positions prior to settlement. As a result, UGA is generally
only subject to the risk of loss arising from the change in value of the
contracts. UGA considers the “fair value” of its derivative instruments to be
the unrealized gain or loss on the contracts. The market risk associated with
UGA’s commitments to purchase gasoline is limited to the aggregate market value
of the contracts held. However, should UGA enter into a contractual commitment
to sell gasoline, it would be required to make delivery of the gasoline at the
contract price, repurchase the contract at prevailing prices or settle in cash.
Since there are no limits on the future price of gasoline, the market risk to
UGA could be unlimited.
UGA’s
exposure to market risk depends on a number of factors, including the markets
for gasoline, the volatility of interest rates and foreign exchange rates, the
liquidity of the Futures Contracts and Other Gasoline-Related Investments
markets and the relationships among the contracts held by UGA. Drastic market
occurrences could ultimately lead to the loss of all or substantially all of an
investor’s capital.
Credit
Risk
When UGA
enters into Futures Contracts and Other Gasoline-Related Investments, it is
exposed to the credit risk that the counterparty will not be able to meet its
obligations. The counterparty for the Futures Contracts traded on the NYMEX and
on most other futures exchanges is the clearinghouse associated with the
particular exchange. In general, in addition to margin required to be posted by
the exchange or clearinghouse in connection with trades on the exchange or
through the clearinghouse, clearinghouses are backed by their members who may be
required to share in the financial burden resulting from the nonperformance of
one of their members and, therefore, this additional member support should
significantly reduce credit risk. Some foreign exchanges are not backed by their
clearinghouse members but may be backed by a consortium of banks or other
financial institutions. There can be no assurance that any counterparty,
clearinghouse, or their members or their financial backers will satisfy their
obligations to UGA in such circumstances.
The
General Partner attempts to manage the credit risk of UGA by following various
trading limitations and policies. In particular, UGA generally posts margin
and/or holds liquid assets that are approximately equal to the market value of
its obligations to counterparties under the Futures Contracts and Other
Gasoline-Related Investments it holds. The General Partner has implemented
procedures that include, but are not limited to, executing and clearing trades
only with creditworthy parties and/or requiring the posting of collateral or
margin by such parties for the benefit of UGA to limit its credit
exposure.
UBS
Securities LLC, UGA’s commodity broker, or any other broker that may be retained
by UGA in the future, when acting as UGA’s futures commission merchant in
accepting orders to purchase or sell Futures Contracts on United States
exchanges, is required by CFTC regulations to separately account for and
segregate as belonging to UGA, all assets of UGA relating to domestic Futures
Contracts trading. These futures commission merchants are not allowed to
commingle UGA’s assets with its other assets. In addition, the CFTC requires
commodity brokers to hold in a secure account UGA’s assets related to foreign
Futures Contracts trading.
30
If, in
the future, UGA purchases over-the-counter contracts, see “Item 3. Quantitative
and Qualitative Disclosures About Market Risk” of this quarterly report on Form
10-Q for a discussion of over-the-counter contracts.
As of
March 31, 2010, UGA had deposits in domestic and foreign financial
institutions
,
including
cash investments in money market funds, in the amount of $72,344,049. This
amount is subject to loss should these institutions cease
operations.
Off
Balance Sheet Financing
As of
March 31, 2010, UGA has no loan guarantee, credit support or other off-balance
sheet arrangements of any kind other than agreements entered into in the normal
course of business, which may include indemnification provisions relating to
certain risks that service providers undertake in performing services which are
in the best interests of UGA. While UGA’s exposure under these indemnification
provisions cannot be estimated, they are not expected to have a material impact
on UGA’s financial position.
Redemption
Basket Obligation
In order
to meet its investment objective and pay its contractual obligations described
below, UGA requires liquidity to redeem units, which redemptions must be in
blocks of 100,000 units called “Redemption Baskets”. UGA has to date satisfied
this obligation by paying from the cash or cash equivalents it holds or through
the sale of its Treasuries in an amount proportionate to the number of units
being redeemed.
Contractual
Obligations
UGA’s
primary contractual obligations are with the General Partner. In return for its
services, the General Partner is entitled to a management fee calculated monthly
as a fixed percentage of UGA’s NAV, currently 0.60% of NAV on its average daily
net assets.
The
General Partner agreed to pay the start-up costs associated with the formation
of UGA, primarily its legal, accounting and other costs in connection with the
General Partner’s registration with the CFTC as a CPO and the registration and
listing of UGA and its units with the SEC, FINRA and the AMEX, respectively.
However, since UGA’s initial offering of units, offering costs incurred in
connection with registering and listing additional units of UGA are directly
borne on an ongoing basis by UGA, and not by the General Partner.
The
General Partner pays the fees of UGA’s marketing agent, ALPS Distributors, Inc.,
and the fees of the custodian and transfer agent, Brown Brothers Harriman &
Co. (“BBH&Co.”), as well as BBH&Co.’s fees for performing administrative
services, including those in connection with the preparation of UGA’s condensed
financial statements and its SEC and CFTC reports. The General
Partner and UGA have also entered into a licensing agreement with the NYMEX
pursuant to which UGA and the affiliated funds managed by the General Partner
pay a licensing fee to the NYMEX. UGA also pays the fees and expenses associated
with its tax accounting and reporting requirements with the exception of certain
initial implementation service fees and base service fees which are paid by the
General Partner. The General Partner, though under no obligation to do so,
agreed to pay certain costs for tax reporting and audit expenses normally borne
by UGA to the extent that such expenses exceed 0.15% (15 basis points) of UGA’s
NAV, on an annualized basis, through at least June 30, 2010. The General Partner
has no obligation to continue such payment into subsequent periods.
In
addition to the General Partner’s management fee, UGA pays its brokerage fees
(including fees to a futures commission merchant), over-the-counter dealer
spreads, any licensing fees for the use of intellectual property, and,
subsequent to the initial offering, registration and other fees paid to the SEC,
FINRA, or other regulatory agencies in connection with the offer and sale of
units, as well as legal, printing, accounting and other expenses associated
therewith, and extraordinary expenses. The latter are expenses not incurred in
the ordinary course of UGA’s business, including expenses relating to the
indemnification of any person against liabilities and obligations to the extent
permitted by law and under the LP Agreement, the bringing or defending of
actions in law or in equity or otherwise conducting litigation and incurring
legal expenses and the settlement of claims and litigation. Commission payments
to a futures commission merchant are on a contract-by-contract, or round turn,
basis. UGA also pays a portion of the fees and expenses of the
independent directors of the General Partner. See Note 3 to the Notes
to Condensed Financial Statements (Unaudited).
31
The parties cannot anticipate the
amount of payments that will be required under these arrangements for future
periods, as UGA’s NAVs and trading levels to meet its investment objectives will
not be known until a future date. These agreements are effective for a specific
term agreed upon by the parties with an option to renew, or, in some cases, are
in effect for the duration of UGA’s existence. Either party may terminate these
agreements earlier for certain reasons described in the
agreements.
On March
31, 2010, UGA’s portfolio consisted of 748 RBOB Gasoline Futures RB Contracts
traded on NYMEX. For a list of UGA’s current holdings, please see UGA’s website
at www.unitedstatesgasolinefund.com.
Over-the-Counter
Derivatives
In the
future, UGA may purchase over-the-counter contracts. Unlike most of the
exchange-traded Futures Contracts or exchange-traded options on such futures,
each party to an over-the-counter contract bears the credit risk that the other
party may not be able to perform its obligations under its
contract.
Some
gasoline-based derivatives transactions contain fairly generic terms and
conditions and are available from a wide range of participants. Other
gasoline-based derivatives have highly customized terms and conditions and are
not as widely available. Many of these over-the-counter contracts are
cash-settled forwards for the future delivery of gasoline- or petroleum-based
fuels that have terms similar to the Futures Contracts. Others take the form of
“swaps” in which the two parties exchange cash flows based on pre-determined
formulas tied to the spot price of gasoline, forward gasoline prices or gasoline
futures prices. For example, UGA may enter into over-the-counter derivative
contracts whose value will be tied to changes in the difference between the spot
price of gasoline, the price of Futures Contracts traded on the NYMEX and the
prices of other Futures Contracts in which UGA may invest.
To
protect itself from the credit risk that arises in connection with such
contracts, UGA may enter into agreements with each counterparty that provide for
the netting of its overall exposure to such counterparty, such as the agreements
published by the International Swaps and Derivatives Association, Inc. UGA also
may require that the counterparty be highly rated and/or provide collateral or
other credit support to address UGA’s exposure to the counterparty. In addition,
it is also possible for UGA and its counterparty to agree to clear their
agreement through an established futures clearinghouse such as those connected
to the NYMEX or the ICE Futures. In that event, UGA would no longer bear the
credit risk of its original counterparty, as the clearinghouse would now be
UGA’s counterparty. UGA would still retain any price risk associated with its
transaction.
The
creditworthiness of each potential counterparty is assessed by the General
Partner. The General Partner assesses or reviews, as appropriate, the
creditworthiness of each potential or existing counterparty to an
over-the-counter contract pursuant to guidelines approved by the General
Partner’s board of directors (the “Board”). Furthermore, the General Partner on
behalf of UGA only enters into over-the-counter contracts with counterparties
who are, or are affiliates of, (a) banks regulated by a United States federal
bank regulator, (b) broker-dealers regulated by the SEC, (c) insurance companies
domiciled in the United States, or (d) producers, users or traders of energy,
whether or not regulated by the CFTC. Any entity acting as a counterparty shall
be regulated in either the United States or the United Kingdom unless otherwise
approved by the Board after consultation with its legal counsel. Existing
counterparties are also reviewed periodically by the General
Partner.
UGA
anticipates that the use of Other Gasoline-Related Investments together with its
investments in Futures Contracts will produce price and total return results
that closely track the investment goals of UGA. However, there can be no
assurance of this. Over-the-counter contracts may result in higher
transaction-related expenses than the brokerage commissions paid in connection
with the purchase of Futures Contracts, which may impact UGA’s ability to
successfully track the Benchmark Futures Contract.
32
UGA may
employ spreads or straddles in its trading to mitigate the differences in its
investment portfolio and its goal of tracking the price of the Benchmark Futures
Contract. UGA would use a spread when it chooses to take simultaneous long and
short positions in futures written on the same underlying asset, but with
different delivery months. The effect of holding such combined positions is to
adjust the sensitivity of UGA to changes in the price relationship between
futures contracts which will expire sooner and those that will expire later. UGA
would use such a spread if the General Partner felt that taking such long and
short positions, when combined with the rest of its holdings, would more closely
track the investment goals of UGA, or if the General Partner felt it would lead
to an overall lower cost of trading to achieve a given level of economic
exposure to movements in gasoline prices. UGA would enter into a straddle when
it chooses to take an option position consisting of a long (or short) position
in both a call option and put option. The economic effect of holding certain
combinations of put options and call options can be very similar to that of
owning the underlying futures contracts. UGA would make use of such a straddle
approach if, in the opinion of the General Partner, the resulting combination
would more closely track the investment goals of UGA or if it would lead to an
overall lower cost of trading to achieve a given level of economic exposure to
movements in gasoline prices.
During
the three months ended March 31, 2010, UGA did not employ any hedging methods
such as those described above since all of its investments were made over an
exchange. Therefore, during the three months ended March 31, 2010, UGA was not
exposed to counterparty risk.
Disclosure
Controls and Procedures
UGA
maintains disclosure controls and procedures that are designed to ensure that
material information required to be disclosed in UGA’s periodic reports filed or
submitted under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time period specified in the SEC’s
rules and forms.
The duly
appointed officers of the General Partner, including its chief executive officer
and chief financial officer, who perform functions equivalent to those of a
principal executive officer and principal financial officer of UGA if UGA had
any officers, have evaluated the effectiveness of UGA’s disclosure controls and
procedures and have concluded that the disclosure controls and procedures of UGA
have been effective as of the end of the period covered by this quarterly report
on Form 10-Q.
Change
in Internal Control Over Financial Reporting
There
were no changes in UGA’s internal control over financial reporting during UGA’s
last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, UGA’s internal control over financial
reporting.
33
Not
applicable.
There has
not been a material change from the risk factors previously disclosed in UGA’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2009.
Not applicable.
Not applicable.
Monthly
Account Statements
Pursuant
to the requirement under Rule 4.22 under the Commodity Exchange Act, each month
UGA publishes an account statement for its unitholders, which includes a
Statement of Income (Loss) and a Statement of Changes in NAV. The account
statement is furnished to the SEC on a current report on Form 8-K pursuant to
Section 13 or 15(d) of the Exchange Act and posted each month on UGA’s website
at www.unitedstatesgasolinefund.com.
Listed
below are the exhibits which are filed as part of this quarterly report on Form
10-Q (according to the number assigned to them in Item 601 of Regulation
S-K):
|
Exhibit
|
||
|
Number
|
Description of Document
|
|
|
31.1*
|
Certification
by Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2*
|
Certification
by Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1*
|
Certification
by Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2*
|
Certification
by Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
99.1**
|
Form
of United States Commodity Funds LLC Director Deferred Compensation
Agreement.
|
|
*
|
Filed
herewith.
|
|
**
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed on April
1, 2010.
|
34
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.
|
United
States Gasoline Fund, LP (Registrant)
|
||
|
By:
United States Commodity Funds LLC, its general partner
|
||
|
By:
|
/s/ Nicholas D. Gerber | |
|
Nicholas
D. Gerber
|
||
|
President
and Chief Executive Officer
|
||
|
(Principal
executive officer)
|
||
|
Date: May
10, 2010
|
||
|
By:
|
/s/ Howard Mah | |
|
Howard
Mah
|
||
|
Chief
Financial Officer
|
||
|
(Principal
financial and accounting officer)
|
||
|
Date: May
10, 2010
|
||
TABLE OF CONTENTS
Part IItem 1. Condensed Financial StatementsNote 1 - Organization and BusinessNote 2 - Summary Of Significant Accounting PoliciesNote 3 - Fees Paid By The Fund and Related Party TransactionsNote 4 - Contracts and AgreementsNote 5 - Financial Instruments, Off-balance Sheet Risks and ContingenciesNote 6 Fair Value Of Financial InstrumentsNote 7 - Financial HighlightsNote 8 Recent Accounting PronouncementsNote 9 Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4 . Controls and ProceduresPart II. Other InformationPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. ReservedItem 5. Other InformationItem 6. Exhibits