UNITED STATES 12 MONTH NATURAL GAS FUND, LP
10-Ks and 10-Qs
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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x
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Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31,
2009.
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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: 001-33859
United
States 12 Month Natural Gas Fund, LP
(Exact
name of registrant as specified in its charter)
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Delaware
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20-0431897
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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)
Securities
registered pursuant to Section 12(b) of the Act:
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Units
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NYSE
Arca, Inc.
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(Title
of each class)
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(Name
of exchange on which registered)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
¨
Yes
x
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
¨
Yes
x
No
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
x
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
¨
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Non-accelerated
filer
x
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Smaller
reporting company
¨
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨
Yes
x
No
The
aggregate market value of the registrant’s units held by non-affiliates of the
registrant as of June 30, 2009 was: $0.
The
registrant had 800,000 outstanding units as of March 29, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE:
None.
Table
of Contents
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Page
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Part
I.
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Item
1. Business.
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1
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Item
1A. Risk Factors.
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54
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Item
1B. Unresolved Staff Comments.
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70
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Item
2. Properties.
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71
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Item
3. Legal Proceedings.
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71
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Item
4. Reserved.
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71
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Part
II.
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Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
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71
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Item
6. Selected Financial Data.
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71
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Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
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72
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Item
7A. Quantitative and Qualitative Disclosures About Market
Risk.
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87
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Item
8. Financial Statements and Supplementary Data.
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89
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Item
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
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124
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Item
9A. Controls and Procedures.
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124
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Item
9B. Other Information.
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124
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Part
III.
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Item
10. Directors, Executive Officers and Corporate
Governance.
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124
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Item
11. Executive Compensation.
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130
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Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
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131
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Item
13. Certain Relationships and Related Transactions, and Director
Independence.
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131
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Item
14. Principal Accountant Fees and Services.
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131
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Part
IV.
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Item
15. Exhibits and Financial Statement Schedules.
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132
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Exhibit
Index.
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132
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Signatures
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134
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What
is US12NG?
The
United States 12 Month Natural Gas Fund, LP (“US12NG”) is a Delaware
limited partnership organized on June 27, 2007. US12NG maintains its main
business office at 1320 Harbor Bay Parkway, Suite 145, Alameda, California
94502. US12NG is a commodity pool that issues limited partnership interests
(“units”) traded on the NYSE Arca, Inc. (the “NYSE Arca”). It operates pursuant
to the terms of the Amended and Restated Agreement of Limited
Partnership dated as of October 30, 2009 (the “LP Agreement”), as amended
from time to time, which grants full management control to United States
Commodity Funds LLC (the “General Partner”).
The
investment objective of US12NG 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 natural gas delivered at the Henry Hub,
Louisiana, as measured by the changes in the average of the prices of 12 futures
contracts on natural gas traded on the New York Mercantile Exchange (the
“NYMEX”), consisting of the near month contract to expire and the contracts for
the following 11 months, for a total of 12 consecutive months’ contracts (the
“Benchmark Futures Contracts”), except when the near month contract is within
two weeks of expiration, in which case it will be measured by the futures
contracts that are the next month contract to expire and the contracts for the
following 11 consecutive months, less US12NG’s expenses. When
calculating the daily movement of the average price of the 12 contracts, each
contract month is equally weighted. US12NG’s units began trading on
November 18, 2009. The General Partner is the general partner of US12NG and is
responsible for the management of US12NG.
Who
is the General Partner?
The
General Partner is a single member limited liability company that was formed in
the state of Delaware on May 10, 2005. Prior to June 13, 2008, the General
Partner was known as Victoria Bay Asset Management, LLC. It maintains its main
business office at 1320 Harbor Bay Parkway, Suite 145, Alameda, California
94502. The General Partner is a wholly-owned subsidiary of Wainwright Holdings,
Inc., a Delaware corporation (“Wainwright”). Mr. Nicholas Gerber (discussed
below) controls Wainwright by virtue of his ownership of Wainwright’s shares.
Wainwright is a holding company. Wainwright previously owned an
insurance company organized under Bermuda law, which has been liquidated, and a
registered investment adviser firm named Ameristock Corporation, which has been
distributed to the Wainwright shareholders. The General Partner is a member of
the National Futures Association (the “NFA”) and registered as a commodity pool
operator (“CPO”) with the Commodity Futures Trading Commission (the “CFTC”) on
December 1, 2005.
On May
12, 2005, the General Partner formed the United States Oil Fund, LP (“USOF”),
another limited partnership that is a commodity pool
and issues units traded on the NYSE Arca. The investment
objective of USOF is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of light, sweet
crude oil delivered to Cushing, Oklahoma, as measured by the changes in the
price of the futures contract on light, sweet crude oil as traded on the NYMEX,
less USOF’s expenses. USOF’s units began trading on April 10, 2006. The General
Partner is the general partner of USOF and is responsible for the management of
USOF.
On
September 11, 2006, the General Partner formed the United States Natural Gas
Fund, LP (“USNG”), another limited partnership that is a commodity pool
and issues units traded on the NYSE Arca. The investment
objective of USNG is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of natural gas
delivered at the Henry Hub, Louisiana, as measured by the changes in the price
of the futures contract on natural gas traded on the NYMEX, less USNG’s
expenses. USNG’s units began trading on April 18, 2007. The General Partner is
the general partner of USNG and is responsible for the management of
USNG.
On June
27, 2007, the General Partner formed the United States 12 Month Oil Fund, LP
(“US12OF”), also a limited partnership that is a commodity pool and issues units
traded on the NYSE Arca. The investment objective of US12OF is for the changes
in percentage terms of its units’ NAV to reflect the changes in percentage terms
of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as
measured by the changes in the average of the prices of 12 futures contracts on
light, sweet crude oil traded on the NYMEX, consisting of the near month
contract to expire and the contracts for the following 11 months, for a total of
12 consecutive months’ contracts, less US12OF’s expenses. US12OF’s units began
trading on December 6, 2007. The General Partner is the general partner of
US12OF and is responsible for the management of US12OF.
1
On April
12, 2007, the General Partner formed the United States Gasoline Fund, LP
(“UGA”), also a limited partnership that is a commodity pool and issues units
traded on the NYSE Arca. The investment objective of UGA is for the changes
in percentage terms of its units’ NAV to reflect the changes in percentage terms
of the price of unleaded gasoline delivered to the New York harbor, as measured
by the changes in the price of the futures contract on gasoline traded on the
NYMEX, less UGA’s expenses. UGA’s units began trading on February 26, 2008. The
General Partner is the general partner of UGA and is responsible for the
management of UGA.
On April
13, 2007, the General Partner formed the United States Heating Oil Fund, LP
(“USHO”), also a limited partnership that is a commodity pool and issues units
traded on the NYSE Arca. The investment objective of USHO is for the
changes in percentage terms of its units’ NAV to reflect the changes in
percentage terms of the spot price of heating oil (also known as No. 2 fuel oil)
delivered to the New York harbor, as measured by the changes in the price of the
futures contract on heating oil traded on the NYMEX, less USHO’s expenses.
USHO’s units began trading on April 9, 2008. The General Partner is the
general partner of USHO and is responsible for the management of
USHO.
On June
30, 2008, the General Partner formed the United States Short Oil Fund, LP
(“USSO”), also a limited partnership that is a commodity pool and issues units
traded on the NYSE Arca. The investment objective of USSO is for the
changes in percentage terms of its units’ NAV to inversely reflect the changes
in percentage terms of the spot price of light, sweet crude oil delivered to
Cushing, Oklahoma, as measured by the changes in the price of the futures
contract on light, sweet crude oil as traded on the NYMEX, less USSO’s
expenses. USSO’s units began trading on September 24,
2009. The General Partner is the general partner of USSO and is
responsible for the management of USSO.
USOF,
USNG, US12OF, UGA, USHO and USSO are collectively referred to herein as the
“Related Public Funds”. For more information about each of the Related Public
Funds, investors in US12NG may call 1-800-920-0259 or go online to
www.unitedstatescommodityfunds.com.
The
General Partner has filed a registration statement for two other exchange traded
security funds, the United States Brent Oil Fund, LP (“USBO”) and the United
States Commodity Index Funds Trust (“USCI”). The investment objective of USBO
will be for the daily changes in percentage terms of its units’ NAV to reflect
the daily changes in percentage terms of the spot price of Brent crude oil, as
measured by the changes in the price of the futures contract on Brent crude oil
traded on the ICE Futures, less USBO’s expenses. The investment
objective of USCI will be for the daily changes in percentage terms of its
units’ NAV to reflect the daily changes in percentage terms of the SummerHaven
Dynamic Commodity Index (“SDCI”) Total Return, less USCI’s
expenses.
The
General Partner is required to evaluate the credit risk of US12NG to the futures
commission merchant, oversee the purchase and sale of US12NG’s units by certain
authorized purchasers (“Authorized Purchasers”), review daily positions and
margin requirements of US12NG and manage US12NG’s investments. The General
Partner also pays the fees of ALPS Distributors, Inc., which acts as the
marketing agent for US12NG (the “Marketing Agent”) and Brown Brothers Harriman
& Co. (“BBH&Co.”), which acts as the administrator (the “Administrator”)
and the custodian (the “Custodian”) for US12NG.
Limited
partners have no right to elect the General Partner on an annual or any other
continuing basis. If the General Partner voluntarily withdraws, however, the
holders of a majority of US12NG’s outstanding units (excluding for purposes of
such determination units owned, if any, by the withdrawing General Partner
and its affiliates) may elect its successor. The General Partner may not be
removed as general partner except upon approval by the affirmative vote of the
holders of at least 66 and 2/3 percent of US12NG’s outstanding units (excluding
units owned, if any, by the General Partner and its affiliates), subject to
the satisfaction of certain conditions set forth in the LP
Agreement.
2
The
business and affairs of the General Partner are managed by a board of directors
(the “Board”), which is comprised of four management directors, some of whom are
also its executive officers (the “Management Directors”), and three independent
directors who meet the independent director requirements established by the NYSE
Arca and the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Notwithstanding the foregoing, the Management Directors have the authority to
manage the General Partner pursuant to its limited liability company agreement,
as amended from time to time. Through its Management Directors, the General
Partner manages the day-to-day operations of US12NG. The Board has an audit
committee which is made up of the three independent directors (Peter M.
Robinson, Gordon L. Ellis and Malcolm R. Fobes III). For additional information
relating to the audit committee, please see “Item 10. Directors, Executive
Officers and Corporate Governance – Audit Committee” in this annual report on
Form 10-K.
How
Does US12NG Operate?
The net
assets of US12NG consist primarily of investments in futures contracts for
natural gas, but may also consist of investment contracts for other types of
crude oil, heating oil, gasoline, and other petroleum-based fuels that are
traded on the NYMEX, ICE Futures or other U.S. and foreign exchanges
(collectively, “Futures Contracts”). US12NG may also invest in other natural
gas-related investments such as cash-settled options on Futures Contracts,
forward contracts for natural gas, cleared swap contracts, and over-the-counter
transactions that are based on the price of natural gas, oil and other
petroleum-based fuels, Futures Contracts and indices based on the foregoing
(collectively, “Other Natural Gas-Related Investments”). For convenience and
unless otherwise specified, Futures Contracts and Other Natural Gas-Related
Investments collectively are referred to as “Natural Gas Interests” in this
annual report on Form 10-K.
US12NG
invests in Natural Gas 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
Natural Gas-Related Investments. In pursuing this objective, the primary focus
of the General Partner is the investment in Futures Contracts and the management
of US12NG’s investments in short-term obligations of the United States of two
years or less (“Treasuries”), cash and/or cash equivalents for margining
purposes and as collateral.
The
investment objective of US12NG is for the changes in percentage terms of its
units’ NAV to reflect the changes in percentage terms of the spot price of
natural gas delivered at the Henry Hub, Louisiana, as measured by the changes in
the average of the prices of 12 futures contracts on natural gas traded on the
NYMEX, as measured by the changes in the average of the prices of the Benchmark
Futures Contracts, less US12NG’s expenses. When calculating the daily movement
of the average price of the 12 contracts each contract month is equally
weighted. It is not the intent of US12NG to be operated in a fashion such that
its NAV will equal, in dollar terms, the spot price of natural gas or any
particular futures contract based on natural gas.
US12NG
seeks to achieve its investment objective by investing in a mix of Futures
Contracts and Other-Natural Gas Related Investments such that the changes in its
NAV will closely track the changes in the price of the NYMEX Futures Contracts
for natural gas delivered to Henry Hub Louisiana (the “Benchmark Futures
Contracts”). The General Partner believes changes in the price of the Benchmark
Futures Contracts have historically exhibited a close correlation with the
changes in the spot price of natural gas. On any valuation day (a valuation day
is any NYSE Arca trading day as of which US12NG calculates its NAV as described
herein), the Benchmark Futures Contract is the near month contract for natural
gas traded on the NYMEX unless the near month contract will expire within two
weeks of the valuation day, in which case the Benchmark Futures Contract is the
next month contract for natural gas on the NYMEX.
3
The
General Partner believes that holding futures contracts whose expiration dates
are spread out over a 12 month period of time will cause the total return of
such a portfolio to vary compared to a portfolio that holds only a single
month’s contract (such as the near month contract). In particular, the General
Partner believes that the total return of a portfolio holding contracts with a
range of expiration months will be impacted differently by the price
relationship between different contract months of the same commodity future
compared to the total return of a portfolio consisting of the near month
contract. For example, in cases in which the near month contract’s price is
higher than the price of contracts that expire later in time (a situation known
as “backwardation” in the futures markets), then absent the impact of the
overall movement in natural gas prices the value of the near month contract
would tend to rise as it approaches expiration. Conversely, in cases in which
the near month contract’s price is lower than the price of contracts that expire
later in time (a situation known as “contango” in the futures markets), then
absent the impact of the overall movement in natural gas prices the value of the
near month contract would tend to decline as it approaches expiration. The total
return of a portfolio that owned the near month contract and “rolled” forward
each month by selling the near month contract as it approached expiration and
purchasing the next month contract to expire would be positively impacted by a
backwardation market, and negatively impacted by a contango market. Depending on
the exact price relationship of the different month’s prices, portfolio
expenses, and the overall movement of natural gas prices, the impact of
backwardation and contango could have a major impact on the total return of such
a portfolio over time. The General Partner believes that based on historical
evidence a portfolio that held futures contracts with a range of expiration
dates spread out over a 12 month period of time would typically be impacted less
by the positive effect of backwardation and the negative effect of contango
compared to a portfolio that held contracts of a single near month. As a result,
absent the impact of any other factors, a portfolio of 12 different monthly
contracts would tend to have a lower total return than a near month only
portfolio in a backwardation market and a higher total return in a contango
market. However there can be no assurance that such historical relationships
would provide the same or similar results in the future.
As a
specific benchmark, the General Partner endeavors to place US12NG’s trades in
Futures Contracts and Other Natural Gas-Related Investments and otherwise manage
US12NG’s investments so that A will be within plus/minus 10 percent of B,
where:
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·
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A
is the average daily change in US12NG’s NAV for any period of 30
successive valuation days;
i.e
., any NYSE Arca
trading day as of which US12NG calculates its NAV,
and
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·
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B
is the average daily change in the prices of the Benchmark Futures
Contracts over the same period.
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The
General Partner believes that market arbitrage opportunities cause daily changes
in US12NG’s unit price on the NYSE Arca to closely track daily changes in
US12NG’s NAV per unit. The General Partner further believes that the daily
changes in prices of the Benchmark Futures Contracts have historically closely
tracked the daily changes in the spot price of natural gas. The General Partner
believes that the net effect of these two relationships and the expected
relationship described above between US12NG’s NAV and the Benchmark Futures
Contracts will be that the daily changes in the price of US12NG’s units on the
NYSE Arca will continue to closely track the daily changes in the spot price of
10,000 million British thermal units (“mmBtu”) of natural gas, less US12NG’s
expenses. The following two graphs demonstrate the correlation between the daily
changes in the NAV of US12NG and the daily changes in the Benchmark Futures
Contracts both since the initial public offering of US12NG’s units on November
18, 2009 through December 31, 2009 and during the last thirty valuation days
ended December 31, 2009.
4
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
5
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
An
investment in the units provides a means for diversifying an investor’s
portfolio or hedging exposure to changes in natural gas prices. An
investment in the units allows both retail and institutional investors to easily
gain this exposure to the natural gas market in a transparent, cost-effective
manner.
The
expected correlation of the price of US12NG’s units, US12NG’s NAV and the spot
price of natural gas is illustrated in the following diagram:
6
The
General Partner employs a “neutral” investment strategy intended to track
changes in the price of the Benchmark Futures Contracts regardless of whether
the price goes up or goes down. US12NG’s “neutral” investment strategy is
designed to permit investors generally to purchase and sell US12NG’s units for
the purpose of investing indirectly in natural gas in a cost-effective manner,
and/or to permit participants in the natural gas or other industries to hedge
the risk of losses in their natural gas-related transactions. Accordingly,
depending on the investment objective of an individual investor, the risks
generally associated with investing in natural gas and/or the risks involved in
hedging may exist. In addition, an investment in US12NG involves the risk that
the changes in the price of US12NG’s units will not accurately track the changes
in the Benchmark Futures Contracts.
The
Benchmark Futures Contracts change from the near month contract to expire and
the 11 following months to the next month contact to expire and the 11 following
months during one day each month. On that day US12NG will “roll” its positions
by closing, or selling, its natural gas interests and reinvesting the proceeds
from closing these positions in new natural gas
interests.
The
anticipated monthly dates on which the Benchmark Futures Contracts will be
changed and US12NG’s Other Natural Gas-Related Investments will be “rolled” in
2010 are posted on US12NG’s website at
www.unitedstates12monthnaturalgasfund.com, and are subject to change without
notice.
US12NG’s
total portfolio composition is disclosed on its website each day that the NYSE
Arca is open for trading. The website disclosure of portfolio holdings is made
daily and includes, as applicable, the name and value of each Natural Gas
Interest, the specific types of Other Natural Gas-Related Investments and
characteristics of such Other Natural Gas-Related Investments, Treasuries, and
amount of cash and/or cash equivalents held in US12NG’s portfolio. US12NG’s
website is publicly accessible at no charge. US12NG’s assets are held in
segregated accounts pursuant to the Commodity Exchange Act (the “CEA”) and CFTC
regulations.
The units
issued by US12NG may only be purchased by Authorized Purchasers and only in
blocks of 100,000 units called Creation Baskets. The amount of the purchase
payment for a Creation Basket is equal to the aggregate NAV of units in the
Creation Basket. Similarly, only Authorized Purchasers may redeem units and only
in blocks of 100,000 units called Redemption Baskets. The purchase
price for Creation Baskets, and the redemption price for Redemption Baskets is
the actual NAV of the units purchased or redeemed calculated at the end of the
business day when notice for a purchase or redemption is received by US12NG. In
addition, Authorized Purchasers pay US12NG a $1,000 fee for each order placed
to create one or more Creation Baskets or redeem one or more Redemption
Baskets. The NYSE Arca publishes an approximate NAV intra-day based on the prior
day’s NAV and the current price of the Benchmark Futures Contracts, but the
basket price is determined based on the actual NAV at the end of the
day.
While
US12NG issues units only in Creation Baskets, units may also be purchased and
sold in much smaller increments on the NYSE Arca. These transactions, however,
are effected at the bid and ask prices established by specialist firm(s). Like
any listed security, units can be purchased and sold at any time a secondary
market is open.
What
is US12NG’s Investment Strategy?
In
managing US12NG’s assets, the General Partner does not use a technical trading
system that issues buy and sell orders. The General Partner instead employs a
quantitative methodology whereby each time a Creation Basket is sold, the
General Partner purchases natural gas interests, such as the Benchmark Futures
Contracts, that have an aggregate market value that approximates the amount of
Treasuries and/or cash received upon the issuance of the Creation
Basket.
7
As an
example, assume that a Creation Basket is sold by US12NG, and that US12NG’s
closing NAV per unit is $50.00. In that case, U12SNG would receive $5,000,000 in
proceeds from the sale of the Creation Basket ($50.00 NAV per unit multiplied by
100,000 units, and excluding the Creation Basket fee of $1,000). If one were to
assume further that the General Partner wants to invest the entire proceeds from
the Creation Basket in the Benchmark Futures Contract and that the market value
of the Benchmark Futures Contract is $59,950, US12NG would be unable to buy the
exact number of Benchmark Futures Contracts with an aggregate market value equal
to $5,000,000. Instead, US12NG would be able to purchase 83 Benchmark
Futures Contracts with an aggregate market value of $4,975,850. Assuming a
margin requirement equal to 10% of the value of the Benchmark Futures Contract,
US12NG would be required to deposit $497,585 in Treasuries and cash with the
futures commission merchant through which the Benchmark Futures Contracts were
purchased. The remainder of the proceeds from the sale of the Creation Basket,
$4,502,415, would remain invested in cash, cash equivalents, and Treasuries as
determined by the General Partner from time to time based on factors such as
potential calls for margin or anticipated redemptions.
The
specific Futures Contracts purchased depends on various factors, including a
judgment by the General Partner as to the appropriate diversification of
US12NG’s investments in futures contracts with respect to the month of
expiration, and the prevailing price volatility of particular contracts. While
the General Partner has made significant investments in NYMEX Futures Contracts,
as US12NG reaches position
limits on the NYMEX, or for other
reasons, it may invest in Futures Contracts traded on other exchanges or may
invest in Other Natural Gas-Related Investments such as cleared swap contracts
and other contracts in the “over-the-counter” market.
The
General Partner does not anticipate letting US12NG’s Futures Contracts expire
and taking delivery of the underlying commodity. Instead, the General Partner
closes existing positions,
e.g.,
when it changes the
Benchmark Futures Contract or it otherwise determines it would be appropriate to
do so and reinvests the proceeds in new Futures Contracts or Other Natural-Gas
Related Investments. Positions may also be closed out to meet orders for
Redemption Baskets and in such case proceeds for such baskets will not be
reinvested.
By
remaining invested as fully as possible in Futures Contracts or Other Natural
Gas-Related Investments, the General Partner believes that the changes in
percentage terms in US12NG’s NAV will continue to closely track the changes in
percentage terms in the prices of the Benchmark Futures Contracts. The General
Partner believes that certain arbitrage opportunities result in the price of the
units traded on the NYSE Arca closely tracking the NAV of US12NG. Additionally,
natural gas Futures Contracts traded on the NYMEX have closely tracked the spot
price of natural gas. Based on these expected interrelationships, the
General Partner believes that the changes in the price of US12NG’s units as
traded on the NYSE Arca have closely tracked and will continue to closely track
the changes in the spot price of natural gas. For performance data
relating to US12NG’s ability to track its benchmark, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—
Tracking US12NG’s Benchmark” in this annual report on Form 10-K.
What
are Futures Contracts?
Futures
Contracts are agreements between two parties. One party agrees to buy natural
gas from the other party at a later date at a price and quantity agreed upon
when the contract is made. Futures Contracts are traded on futures exchanges,
including the NYMEX. For example, natural gas Futures Contracts on the NYMEX
trade in units of 10,000 million British Thermal Units (“mmBtu”). The natural
gas Futures Contracts traded on the NYMEX are priced by floor brokers and other
exchange members both through an “open outcry” of offers to purchase or sell the
contracts and through an electronic, screen-based system that determines the
price by matching electronically offers to purchase and sell.
Certain
typical and significant characteristics of Futures Contracts are discussed
below. Additional risks of investing in Futures Contracts are included in “What
are the Risk Factors Involved with an Investment in US12NG?”
Impact of Accountability Levels,
Position Limits and Price Fluctuation Limits.
Futures
contracts include typical and significant characteristics. Most significantly,
the CFTC and U.S. designated contract markets such as the NYMEX have established
accountability levels and position limits on the maximum net long or net short
futures contracts in commodity interests that any person or group of persons
under common trading control (other than as a hedge, which an investment by
US12NG is not) may hold, own or control. The net position is the difference
between an individual or firm’s open long contracts and open short contracts in
any one commodity. In addition, most U.S. futures exchanges, such as the NYMEX,
limit the daily price fluctuation for futures contracts. Currently, the ICE
Futures imposes position and accountability limits that are similar to those
imposed by the NYMEX but does not limit the maximum daily price
fluctuation.
8
The
accountability levels for the Benchmark Futures Contracts and other Futures
Contracts traded on the NYMEX are not a fixed ceiling, but rather a threshold
above which the NYMEX may exercise greater scrutiny and control over an
investor’s positions. The current accountability level for any one month in the
Benchmark Futures Contract) is 6,000 net contracts. In addition, the NYMEX
imposes an accountability level for all months of 12,000 net futures contracts
in natural gas. If US12NG and the Related Public Funds exceed these
accountability levels for investments in the futures contract for natural gas,
the NYMEX will monitor US12NG’s and the Related Public Funds’ exposure and ask
for further information on their activities, including the total size of all
positions, investment and trading strategy, and the extent of liquidity
resources of US12NG and the Related Public Funds. If deemed necessary by the
NYMEX, it could also order US12NG and the Related Public Funds to reduce their
aggregate position back to the accountability level. As of December 31, 2009,
US12NG and the Related Public Funds held a net of 14,590 NYMEX Natural Gas
Futures NG contracts. As of December 31, 2009, US12NG held no natural gas
cleared-swap contracts traded on the ICE.
If the
NYMEX or the ICE Futures orders US12NG to reduce its position back to the
accountability level, or to an accountability level that the NYMEX or the ICE
Futures deems appropriate for US12NG, such an accountability level may impact
the mix of investments in Natural Gas Interests made by US12NG. To illustrate,
assume that the price of the Benchmark Futures Contract and the unit price of
US12NG are each $10, and that the NYMEX has determined that US12NG may not own
more than 10,000 natural gas Futures Contracts. In such case, US12NG could
invest up to $1 billion of its daily net assets in the Benchmark Futures
Contract (i.e., $10 per contract multiplied by 10,000 (a Benchmark Futures
Contract is a contract for 10,000 mmBtu) multiplied by 10,000 contracts) before
reaching the accountability level imposed by the NYMEX. Once the daily net
assets of the portfolio exceed $1 billion in the Benchmark Futures Contract, the
portfolio may not be able to make any further investments in the Benchmark
Futures Contract. If the NYMEX were to impose limits at the $1 billion level (or
another level), US12NG anticipates that it would invest the majority of its
assets above that level in a mix of other Futures Contracts or Other Natural
Gas-Related Investments in order to meet its investment objectives. U.S. futures
exchanges, including the NYMEX, currently do not implement fixed position limits
for Futures Contracts held outside of the last few days of trading in the near
month contract to expire.
See “Risk Factors—Risks Associated
With Investing Directly or Indirectly in Natural Gas—Regulation of the commodity
interests and energy markets is extensive and constantly changing; future
regulatory developments are impossible to predict but may significantly and
adversely affect US12NG.”
In
addition to accountability levels, the NYMEX and the ICE Futures impose position
limits on contracts held in the last few days of trading in the near month
contract to expire. It is unlikely that US12NG will run up against such position
limits because US12NG’s investment strategy is to close out its positions and
“roll” from the near month contract to expire to the next month contract during
a four-day period beginning two weeks from expiration of the
contract.
U.S.
futures exchanges, including the NYMEX, also limit the amount of price
fluctuation for Futures Contracts. For example, the NYMEX imposes a $3.00 per
mmBtu ($30,000 per contract) price fluctuation limit for natural gas Futures
Contracts. This limit is initially based off the previous trading day’s
settlement price. If any natural gas Futures Contract is traded, bid, or offered
at the limit for five minutes, trading is halted for five minutes. When trading
resumes it begins at the point where the limit was imposed and the limit is
reset to be $3.00 per mmBtu in either direction of that point. If another halt
were triggered, the market would continue to be expanded by $3.00 per mmBtu in
either direction after each successive five-minute trading halt. There is no
maximum price fluctuation limit during any one trading session.
U.S.
futures exchanges, including the NYMEX, currently do not implement fixed
position limits for Futures Contracts held outside of the last few days of
trading in the near month contract to expire. However, on January 26,
2010, the CFTC published a proposed rule that, if implemented, would set fixed
position limits on energy Futures Contracts, including the NYMEX Henry Hub
natural gas futures contract, NYMEX Light Sweet crude oil futures contract,
NYMEX New York Harbor No. 2 heating oil futures contract, and NYMEX New York
Harbor gasoline blendstock (“RBOB”) gasoline futures contract, along with any
contract based upon these contracts. The proposed position limits
would be set as a percentage of the open interest in these contracts for the
spot month, any single month, and all months combined. Additionally,
the proposed rule would aggregate positions in the enumerated contracts and
those based upon such contracts, including contracts listed on separate
exchanges. This proposal is currently undergoing a 90-day public
comment period.
9
US12NG
anticipates that to the extent it invests in Futures Contracts other
than natural gas contracts (such as futures contracts for light, sweet
crude oil, heating oil, and gasoline) and Other Natural Gas-Related Investments,
it will enter into various non-exchange-traded derivative contracts to hedge the
short-term price movements of such natural gas Futures Contracts and Other
Natural Gas-Related Investments against the current Benchmark Futures
Contracts.
|
Futures Contract
|
Position Accountability
Levels and Limits
|
Maximum Daily
Price Fluctuation
|
||
|
NYMEX
Natural Gas
(physically
settled)
|
Any
one month: 6,000 net futures / all months: 12,000 net futures, but not to
exceed 1,000 contracts in the last three days of trading in the spot
month
|
$3.00
per mmBtu ($30,000 per contract) for all months. If any contract is
traded, bid, or offered at the limit for five minutes, trading is halted
for five minutes. When trading resumes, the limit is expanded by $3.00 per
mmBtu in either direction. If another halt were triggered, the market
would continue to be expanded by $3.00 per mmBtu in either direction after
each successive five-minute trading halt. There will be no maximum price
fluctuation limits during any one trading session.
|
||
|
ICE
Natural Gas (cleared swaps)
|
Any
one month: 6,000 net futures / all months: 12,000 net futures, but not to
exceed 1,000 contracts in the last three days of trading in the spot
month
|
There
is no maximum daily price fluctuation limit
|
||
|
NYMEX
Light, Sweet Crude Oil
(physically
settled)
|
Any
one month: 10,000 net futures / all months: 20,000 net futures, but not to
exceed 3,000 contracts in the last three days of trading in the spot
month.
|
$10.00
per barrel ($10,000 per contract) for all months. If any contract is
traded, bid, or offered at the limit for five minutes, trading is halted
for five minutes. When trading resumes, the limit is expanded by $10.00
per barrel in either direction. If another halt were triggered, the market
would continue to be expanded by $10.00 per barrel in either direction
after each successive five-minute trading halt. There will be no maximum
price fluctuation limits during any one trading
session.
|
||
|
NYMEX
Light, Sweet Crude Oil
(financially
settled)
|
Any
one month: 20,000 net futures / all months: 20,000 net futures, but not to
exceed 2,000 contracts in the last three days of trading in the spot
month.
|
There
is no maximum daily price fluctuation limit.
|
||
|
ICE
West Texas Intermediate (“WTI”) Crude Futures
(financially
settled)
|
Any
one month: 10,000 net futures / all months: 20,000 net futures, but not to
exceed 3,000 contracts in the last three days of trading in the spot
month.
|
There
is no maximum daily price fluctuation limit.
|
||
|
ICE
Brent Crude Futures
(physically
settled)
|
There
are no position limits.
|
There
is no maximum daily price fluctuation
limit.
|
10
|
NYMEX
Heating Oil
(physically
settled)
|
Any
one month: 5,000 net futures / all months: 7,000 net futures, but not to
exceed 1,000 contracts in the last three days of trading in the spot
month
|
$0.25
per gallon ($10,500 per contract) for all months. If any contract is
traded, bid, or offered at the limit for five minutes, trading is halted
for five minutes. When trading resumes, the limit is expanded by $0.25 per
gallon in either direction. If another halt were triggered, the market
would continue to be expanded by $0.25 per gallon in either direction
after each successive five-minute trading halt. There will be no maximum
price fluctuation limits during any one trading
session.
|
||
|
NYMEX
Gasoline
(physically
settled)
|
Any
one month: 5,000 net futures / all months: 7,000 net futures, but not to
exceed 1,000 contracts in the last three days of trading in the spot
month.
|
$0.25
per gallon ($10,500 per contract) for all months. If any contract is
traded, bid, or offered at the limit for five minutes, trading is halted
for five minutes. When trading resumes, the limit is expanded by $0.25 per
gallon in either direction. If another halt were triggered, the market
would continue to be expanded by $0.25 per gallon in either direction
after each successive five-minute trading halt. There will be no maximum
price fluctuation limits during any one trading
session.
|
Price Volatility
. Despite
daily price limits, the price volatility of Futures Contracts generally has been
historically greater than that for traditional securities such as stocks and
bonds. Price volatility often is greater day-to-day as opposed to intra-day.
Futures Contracts tend to be more volatile than stocks and bonds because price
movements for natural gas are more currently and directly influenced by economic
factors for which current data is available and are traded by natural gas
futures traders throughout the day. These economic factors include changes in
interest rates; governmental, agricultural, trade, fiscal, monetary and exchange
control programs and policies; weather and climate conditions; changing supply
and demand relationships; changes in balances of payments and trade; U.S. and
international rates of inflation; currency devaluations and revaluations; U.S.
and international political and economic events; and changes in philosophies and
emotions of market participants. Because US12NG invests a significant portion of
its assets in Futures Contracts, the assets of US12NG, and therefore the prices
of US12NG units, may be subject to greater volatility than traditional
securities.
Marking-to-Market Futures
Positions
. Futures Contracts are marked to market at the end of each
trading day and the margin required with respect to such contracts is adjusted
accordingly. This process of marking-to-market is designed to prevent losses
from accumulating in any futures account. Therefore, if US12NG’s futures
positions have declined in value, US12NG may be required to post
additional variation margin to cover this decline. Alternatively, if US12NG
futures positions have increased in value, this increase will be credited to
US12NG’s account.
What
is the Natural Gas Market and the Petroleum-Based Fuel Market?
Natural
Gas
. Natural gas accounts for almost a quarter of U.S. energy
consumption. The price of natural gas is established by the supply and demand
conditions in the North American market, and more particularly, in the main
refining center of the U.S. Gulf Coast. The natural gas market essentially
constitutes an auction, where the highest bidder wins the supply. When markets
are “strong” (
i.e
.,
when demand is high and/or supply is low), the bidder must be willing to pay a
higher premium to capture the supply. When markets are “weak” (
i.e
., when demand is low
and/or supply is high), a bidder may choose not to outbid competitors, waiting
instead for later, possibly lower priced, supplies. Demand for natural gas by
consumers, as well as agricultural, manufacturing and transportation industries,
determines overall demand for natural gas. Since the precursors of product
demand are linked to economic activity, natural gas demand will tend to reflect
economic conditions. However, other factors such as weather significantly
influence natural gas demand.
11
Light, Sweet Crude
Oil
. Crude oil is the world’s most actively traded commodity.
The Futures Contracts for light, sweet crude oil that are traded on the NYMEX
are the world’s most liquid forum for crude oil trading, as well as the world’s
largest volume futures contract trading on a physical commodity. Due to the
liquidity and price transparency of oil Futures Contracts, they are used as a
principal international pricing benchmark. The Futures Contracts for light,
sweet crude oil trade on the NYMEX in units of 1,000 U.S. barrels (42,000
gallons) and, if not closed out before maturity, will result in delivery of oil
to Cushing, Oklahoma, which is also accessible to the international spot markets
via pipelines.
Demand
for petroleum products by consumers, as well as agricultural, manufacturing and
transportation industries, determines demand for crude oil by refiners. Since
the precursors of product demand are linked to economic activity, crude oil
demand will tend to reflect economic conditions. However, other factors such as
weather also influence product and crude oil demand.
Crude oil
supply is determined by both economic and political factors. Oil prices (along
with drilling costs, availability of attractive prospects for drilling, taxes
and technology, among other factors) determine exploration and development
spending, which influence output capacity with a lag. In the short run,
production decisions by the Organization of Petroleum Exporting Countries
(“OPEC”) also affect supply and prices. Oil export embargoes and the current
conflict in Iraq represent other routes through which political developments
move the market. It is not possible to predict the aggregate effect of all or
any combination of these factors.
Heating Oil.
Heating oil,
also known as No. 2 fuel oil, accounts for about 25% of the yield of a barrel of
crude oil, the second largest “cut” from oil after gasoline. The heating oil
Futures Contract listed and traded on the NYMEX trades in units of 42,000
gallons (1,000 barrels) and is based on delivery in the New York harbor, the
principal cash market trading center. The price of heating oil has historically
been volatile.
Gasoline.
Gasoline is the
largest single volume refined product sold in the U.S. and accounts for almost
half of national oil consumption. The gasoline Futures Contract listed and
traded on the NYMEX trades in units of 42,000 gallons (1,000 barrels) and is
based on delivery at petroleum products terminals in the New York harbor, the
major East Coast trading center for imports and domestic shipments from
refineries in the New York harbor area or from the Gulf Coast refining centers.
The price of gasoline has historically been volatile.
Why
Does US12NG Purchase and Sell Futures Contracts?
The
investment objective of US12NG is for the changes in percentage terms of its
units’ NAV to reflect the changes in percentage terms of the spot price of
natural gas delivered at the Henry Hub, Louisiana, as measured by the changes in
the average of the prices of 12 futures contracts on natural gas traded on
the NYMEX, consisting of the near month contract to expire and the
contracts for the following 11 months, for a total of 12 consecutive months’
contracts, except when the near month contract is within two weeks of
expiration, in which case it will be measured by the futures contracts that are
the next month contract to expire and the contracts for the following 11
consecutive months, less US12NG’s expenses. When calculating the
daily movement of the average price of the 12 contracts, each contract month is
equally weighted.
12
Other
than investing in Futures Contracts and Other Natural Gas-Related Investments,
US12NG only invests in assets to support these investments in Natural Gas
Interests. At any given time, most of US12NG’s investments are in Treasuries,
cash and/or cash equivalents that serve as segregated assets supporting US12NG’s
positions in Futures Contracts and Other Natural Gas-Related Investments. For
example, the purchase of a Futures Contract with a stated value of $10 million
would not require US12NG to pay $10 million upon entering into the contract;
rather, only a margin deposit, generally of 5% to 10% of the stated value of the
Futures Contract, would be required. To secure its Futures Contract obligations,
US12NG would deposit the required margin with the futures commission merchant
and would separately hold, through its Custodian, Treasuries, cash and/or cash
equivalents in an amount equal to the balance of the current market value of the
contract, which at the contract’s inception would be $10 million minus the
amount of the margin deposit, or $9 million (assuming a 10%
margin).
As a
result of the foregoing, typically between 5% and 10% of US12NG’s assets are
held as margin in segregated accounts with a futures commission merchant. In
addition to the Treasuries or cash it posts with the futures commission merchant
for the Futures Contracts it owns, US12NG holds, through the Custodian,
Treasuries, cash and/or cash equivalents that can be posted as margin or as
collateral to support its over-the-counter contracts. US12NG earns interest
income from the Treasuries and/or cash equivalents that it purchases, and on the
cash it holds through the Custodian. US12NG anticipates that the earned interest
income will increase the NAV and limited partners’ capital contribution
accounts. US12NG reinvests the earned interest income, holds it in cash, or uses
it to pay its expenses. If US12NG reinvests the earned interest income, it makes
investments that are consistent with its investment objective.
13
What
is the Flow of Units?
What
are the Trading Policies of US12NG?
Liquidity
US12NG
invests only in Futures Contracts and Other Natural Gas-Related Investments that
are traded in sufficient volume to permit, in the opinion of the General
Partner, ease of taking and liquidating positions in these financial
interests.
While the
Futures Contracts traded on the NYMEX can be physically settled, US12NG does not
intend to take or make physical delivery. US12NG may from time to time trade in
Other Natural Gas-Related Investments, including contracts based on the
spot price of natural gas.
14
Leverage
While US12NG’s historical ratio of
initial margin to total assets has generally ranged from 5% to 10%, the General
Partner endeavors to have the value of US12NG’s Treasuries, cash and cash
equivalents, whether held by US12NG or posted as margin or collateral, at all
times approximate the aggregate market value of its obligations under US12NG’s
Futures Contracts and Other Natural Gas-Related Investments.
While the General Partner does not
intend to leverage US12NG’s assets, it is not prohibited from doing so under the
LP Agreement.
Borrowings
Borrowings
are not used by US12NG, unless US12NG is required to borrow money in the event
of physical delivery, US12NG trades in cash commodities, or for short-term needs
created by unexpected redemptions. US12NG maintains the value of its Treasuries,
cash and cash equivalents whether held by US12NG or posted as margin or
collateral, to at all times approximate the aggregate market value of its
obligations under its Futures Contracts and Other Natural Gas-Related
Investments. US12NG has not established and does not plan to establish credit
lines.
Over-the-Counter
Derivatives (Including Spreads and Straddles)
In
addition to Futures Contracts, there are also a number of listed options on the
Futures Contracts on the principal futures exchanges. These contracts offer
investors and hedgers another set of financial vehicles to use in managing
exposure to the natural gas market. Consequently, US12NG may purchase options on
natural gas Futures Contracts on these exchanges in pursuing its investment
objective.
In
addition to the Futures Contracts and options on the Futures Contracts, there
also exists an active non-exchange-traded market in derivatives tied to natural
gas. These derivatives transactions (also known as over-the-counter contracts)
are usually entered into between two parties. Unlike most of the exchange-traded
Futures Contracts or exchange-traded options on the Futures Contracts, each
party to such contract bears the credit risk that the other party may not be
able to perform its obligations under its contract.
Some
natural gas-based derivatives transactions contain fairly generic terms and
conditions and are available from a wide range of participants. Other natural
gas-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 natural gas- 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 natural gas spot price, forward natural gas price, the Benchmark Futures
Contract price, or other natural gas futures contract price. For example, US12NG
may enter into over-the-counter derivative contracts whose value will be tied to
changes in the difference between the natural gas spot price, the Benchmark
Futures Contract price, or some other futures contract price traded on the NYMEX
or ICE Futures and the price of other Futures Contracts that may be invested in
by US12NG.
To
protect itself from the credit risk that arises in connection with such
contracts, US12NG may enter into agreements with each counterparty that provide
for the netting of its overall exposure to its counterparty, such as the
agreements published by the International Swaps and Derivatives Association,
Inc. US12NG also may require that the counterparty be highly rated and/or
provide collateral or other credit support to address US12NG’s exposure to the
counterparty.
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. Furthermore,
the General Partner, on behalf of US12NG, only enters into over-the-counter
contracts with counterparties who are, or affiliates of, (a) banks regulated by
a United States federal bank regulator, (b) broker-dealers regulated by the U.S.
Securities and Exchange Commission (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 General Partner’s Board of Directors after consultation with its
legal counsel. Existing counterparties are also reviewed periodically by the
General Partner.
15
US12NG
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. US12NG 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 US12NG to changes in the price relationship between
futures contracts which will expire sooner and those that will expire later.
US12NG 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 US12NG, 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 natural gas prices. US12NG 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. US12NG 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 US12NG or
if it would lead to an overall lower cost of trading to achieve a given level of
economic exposure to movements in natural gas prices.
US12NG
has not employed any hedging methods since all of its investments have been made
over an exchange. Therefore, US12NG has not been exposed to counterparty
risk.
US12NG
has not and will not employ the technique, commonly known as pyramiding, in
which the speculator uses unrealized profits on existing positions as variation
margin for the purchase or sale of additional positions in the same or another
commodity interest.
Who
are the Service Providers?
BBH&Co.
is the registrar and transfer agent for the units. BBH&Co. is also the
Custodian for US12NG. In this capacity, BBH&Co. holds
US12NG’s Treasuries, cash and/or cash equivalents pursuant to a
custodial agreement. In addition, in its capacity as Administrator for US12NG,
BBH&Co. performs certain administrative and accounting services for US12NG
and prepares certain SEC and CFTC reports on behalf of US12NG. The General
Partner pays BBH&Co.’s fees for these services.
BBH&Co.’s
principal business address is 50 Milk Street, Boston, MA
02109-3661. BBH&Co., a private bank founded in 1818, is not a publicly
held company nor is it insured by the Federal Deposit Insurance Corporation.
BBH&Co. is authorized to conduct a commercial banking business in accordance
with the provisions of Article IV of the New York State Banking Law, New York
Banking Law §§160–181, and is subject to regulation, supervision, and
examination by the New York State Banking Department. BBH&Co. is also
licensed to conduct a commercial banking business by the Commonwealths of
Massachusetts and Pennsylvania and is subject to supervision and examination by
the banking supervisors of those states.
US12NG
also employs ALPS Distributors, Inc. as a Marketing Agent. The General
Partner pays the Marketing Agent an annual fee plus an incentive fee. In no
event may the aggregate compensation paid to the Marketing Agent and any
affiliate of the General Partner for distribution-related services in connection
with the offering of units exceed ten percent (10%) of the gross proceeds of the
offering.
ALPS’s
principal business address is 1290 Broadway, Suite 1100, Denver, CO
80203. ALPS is the marketing agent for US12NG. ALPS is a
broker-dealer registered with the Financial Industry Regulatory
Authority (“FINRA”) and a member of the Securities Investor Protection
Corporation.
UBS
Securities LLC (“UBS Securities”) is US12NG’s futures commission
merchant. US12NG and UBS Securities have entered into an
Institutional Futures Client Account Agreement. This Agreement requires UBS
Securities to provide services to US12NG in connection with the purchase and
sale of natural gas interests that may be purchased or sold by or through UBS
Securities for US12NG’s account. US12NG pays the fees of UBS
Securities.
16
UBS
Securities’s principal business address is 677 Washington Blvd, Stamford, CT
06901. UBS Securities is a futures clearing broker for US12NG. UBS Securities is
registered in the U.S. with FINRA as a broker-dealer and with the CFTC as a
futures commission merchant. UBS Securities is a member of the NFA and of
various U.S. futures and securities exchanges.
UBS
Securities is the defendant in two purported securities class actions pending in
District Court of the Northern District of Alabama, brought by holders of stocks
and bonds of HealthSouth, captioned
In re HealthSouth
Corporation Stockholder
, No. CV-03-BE-1501-S and
In re HealthSouth
Corporation Bondholder Litigation
, No. CV-03-BE-1502-S. Both complaints
assert liability under the Exchange Act.
On June
27, 2007, the Securities Division of the Secretary of the Commonwealth of
Massachusetts (“Massachusetts Securities Division”) filed an administrative
complaint (the “Complaint”) and notice of adjudicatory proceeding against UBS
Securities LLC, captioned In The Matter of UBS Securities, LLC, Docket No.
E-2007-0049, which alleges, in sum and substance, that UBS Securities has been
violating the Massachusetts Uniform Securities Act (the “Act”) and related
regulations by providing the advisers for certain hedge funds with gifts and
gratuities in the form of below market office rents, personal loans with below
market interest rates, event tickets, and other perks, in order to induce those
hedge fund advisers to increase or retain their level of prime brokerage fees
paid to UBS Securities. The Complaint seeks a cease and desist order from
conduct that violates the Act and regulations, to censure UBS Securities, to
require UBS Securities to pay an administrative fine of an unspecified amount,
and to find as fact the allegations of the Complaint.
On June
26, 2008, the Massachusetts Securities Division filed an administrative
complaint and notice of adjudicatory proceeding against UBS Securities and UBS
Financial Services, Inc. (“UBS Financial”), captioned In the Matter of UBS
Securities, LLC and UBS Financial Services, Inc., Docket No. 2008-0045, which
alleged that UBS Securities and UBS Financial violated the Act in connection
with the marketing and sale of auction rate securities.
On July
22, 2008, the Texas State Securities board filed an administrative proceeding
against UBS Securities and UBS Financial captioned the Matter of the Dealer
Registrations of UBS Financial Services, Inc. and UBS Securities LLC, SOAH
Docket No ###-###-###, SSB Docket No. 08-IC04, alleging violations of the
anti-fraud provision of the Texas Securities Act in connection with the
marketing and sale of auction rate securities.
On July
24, 2008 the New York Attorney General (“NYAG”) filed a complaint in Supreme
Court of the State of New York against UBS Securities and UBS Financial
captioned State of New York v. UBS Securities LLC and UBS Financial Services,
Inc., No. 650262/2008, in connection with UBS’s marketing and sale of auction
rate securities. The complaint alleges violations of the anti-fraud provisions
of New York state statutes and seeks a judgment ordering that the firm buy back
auction rate securities from investors at par, disgorgement, restitution and
other remedies.
On August
8, 2008, UBS Securities and UBS Financial reached agreements in principle with
the SEC, the NYAG, the Massachusetts Securities Division and other state
regulatory agencies represented by the North American Securities Administrators
Association (“NASAA”) to restore liquidity to all remaining client’s holdings of
auction rate securities by June 30, 2012. On August 20, 2008, the Texas
proceeding was dismissed and withdrawn. On October 2, 2008, UBS Securities and
UBS Financial entered into a final consent agreement with the Massachusetts
Securities Division settling all allegations in the Massachusetts Securities
Division’s administrative proceeding against UBS Securities and UBS Financial
with regards to the auction rate securities matter. On December 11, 2008, UBS
Securities and UBS Financial executed an Assurance of Discontinuance in the
auction rate securities settlement with the NYAG. On the same day, UBS
Securities and UBS Financial finalized settlements with the SEC.
17
On August
14, 2008, the New Hampshire Bureau of Securities Regulation filed an
administrative action against UBS Securities relating to a student loan issuer,
the New Hampshire Higher Education Loan Corp. (NHHELCO). The complaint alleges
fraudulent and unethical conduct in violation of New Hampshire state statues.
The complaint seeks an administrative fine, a cease and desist order, and
restitution to NHHELCO. The claim does not impact the global settlement with the
SEC, NYAG and NASAA relating to the marketing and sale of auction rate
securities to investors.
Further,
UBS Securities, like most full service investment banks and broker-dealers,
receives inquiries and is sometimes involved in investigations by the SEC,
FINRA, the New York Stock Exchange (the “NYSE”) and various other regulatory
organizations, exchanges and government agencies. UBS Securities fully
cooperates with the authorities in all such requests. UBS Securities regularly
discloses to the FINRA arbitration awards, disciplinary action and regulatory
events. These disclosures are publicly available on the FINRA’s website at
www.finra.org
. Actions with
respect to UBS Securities’ futures commission merchant business are publicly
available on the website of the National Futures Association (
http://www.nfa.futures.org/
).
UBS
Securities will act only as clearing broker for US12NG and as such will be paid
commissions for executing and clearing trades on behalf of US12NG. UBS
Securities has not passed upon the adequacy or accuracy of this annual report on
Form 10-K. UBS Securities neither will act in any supervisory capacity with
respect to the General Partner nor participate in the management of the General
Partner or US12NG.
UBS
Securities is not affiliated with US12NG or the General Partner. Therefore,
US12NG does not believe that US12NG has any conflicts of interest with UBS
Securities or their trading principals arising from their acting as US12NG’s
futures commission merchant.
Currently,
the General Partner does not employ commodity trading advisors. If,
in the future, the General Partner does employ commodity trading advisors, it
will choose each advisor based on arm’s-length negotiations and will consider
the advisor’s experience, fees and reputation.
Fees
of US12NG
Fees
and Compensation Arrangements with the General Partner and Non-Affiliated
Service Providers*
|
Service Provider
|
Compensation Paid by the General
Partner
|
|
|
Brown
Brothers Harriman & Co.,
Custodian
and Administrator
|
Minimum
amount of $75,000 annually for its custody, fund accounting and fund
administration services rendered to all funds, as well as a $20,000 annual
fee for its transfer agency services. In addition, an asset-based charge
of (a) 0.06% for the first $500 million of US12NG’s and the Related Public
Funds’ combined net assets, (b) 0.0465% for US12NG’s and the Related
Public Funds’ combined net assets greater than $500 million but less than
$1 billion, and (c) 0.035% once US12NG’s and the Related Public Funds’
combined net assets exceed $1 billion.**
|
|
|
ALPS
Distributors, Inc., Marketing Agent
|
0.06%
on US12NG’s assets up to $3 billion; 0.04% on US12NG’s assets in excess of
$3
billion.
|
* The
General Partner pays this compensation.
|
**
|
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 will
pay transaction charge fees to BBH&Co., ranging from $7.00 to $15.00
per transaction for the funds.
|
18
Compensation
to the General Partner
|
Assets
|
Management Fee
|
|
|
0.60%
of
NAV
|
Fees are
calculated on a daily basis (accrued at 1/365 of the applicable percentage of
NAV on that day) and paid on
a monthly
basis. NAV is calculated by taking the current market value of USOF’s total
assets and subtracting any liabilities.
Fees
and Compensation Arrangements between US12NG and Non-Affiliated Service
Providers***
|
Service Provider
|
Compensation Paid by US12NG
|
|
|
UBS
Securities LLC, Futures Commission Merchant
|
Approximately
$3.50 per buy or sell; charges may vary
|
|
|
Non-Affiliated
Brokers
|
Approximately
0.21% of
assets
|
|
***
|
US12NG
pays this compensation.
|
New
York Mercantile Exchange Licensing Fee****
|
Assets
|
Licensing Fee
|
|
|
First
$1,000,000,000
|
0.04%
of NAV
|
|
|
After
the first $1,000,000,000
|
0.02%
of
NAV
|
|
****
|
Fees
are calculated on a daily basis (accrued at 1/365 of the applicable
percentage of NAV on that day) and paid on a monthly basis. US12NG is
responsible for its pro rata share of the assets held by US12NG and the
Related Public Funds.
|
Expenses
Paid by US12NG through December 31, 2009 in dollar terms:
|
Expenses:
|
Amount in Dollar Terms
|
|||
|
Amount
Paid to General Partner:
|
$ | 16,490 | ||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$ | 9,284 | ||
|
Other
Amounts Paid*****:
|
$ | 141,553 | ||
|
Total
Expenses Paid:
|
$ | 167,327 | ||
|
Expenses
Waived******:
|
$ | (136,678 | ) | |
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
$ | 30,649 | ||
|
*****
|
Includes
expenses relating to legal fees, auditing fees, printing expenses,
licensing fees and tax reporting fees and fees paid to the independent
directors of the General Partner.
|
|
******
|
The
General Partner, though under no obligation to do so, agreed to pay
certain expenses, to the extent that such expenses exceeded 0.15% (15
basis points) of US12NG’s NAV, on an annualized basis. The General Partner
has no obligation to continue such payment into subsequent
periods.
|
Expenses
Paid by US12NG through December 31, 2009 as a Percentage of Average Daily Net
Assets:
|
Expenses:
|
Amount as a Percentage
of Average Daily Net Assets
|
|
|
Amount
Paid to General Partner:
|
0.60%
annualized
|
|
|
Amount
Paid in Portfolio Brokerage Commissions:
|
0.34%
annualized
|
|
|
Other
Amounts Paid:
|
5.15%
annualized
|
|
|
Total
Expenses Paid:
|
6.09%
annualized
|
|
|
Expenses
Waived:
|
(4.97)%
annualized
|
|
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
1.12%
annualized
|
19
Other Fees.
US12NG
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. These
fees are estimated to be $164,000 for the period ended December 31,
2009. In addition, US12NG is responsible for the fees and expenses,
which may include director and officers’ liability insurance, of the independent
directors of the General Partner in connection with their activities with
respect to US12NG. These director fees and expenses may be shared
with other funds managed by the General Partner. These fees and
expenses for 2009 were $433,046, and US12NG’s portion of such fees was
$125.
Form
of Units
Registered
Form
. Units are issued in registered form in accordance with the LP
Agreement. The Administrator has been appointed registrar and transfer agent for
the purpose of transferring units in certificated form. The Administrator keeps
a record of all limited partners and holders of the units in certificated form
in the registry (the “Register”). The General Partner recognizes transfers of
units in certificated form only if done in accordance with the LP Agreement. The
beneficial interests in such units are held in book-entry form through
participants and/or accountholders in the Depository Trust Company
(“DTC”).
Book
Entry
. Individual certificates are not issued for the units. Instead,
units are represented by one or more global certificates, which are deposited by
the Administrator with DTC and registered in the name of Cede & Co., as
nominee for DTC. The global certificates evidence all of the units outstanding
at any time. Unitholders are limited to (1) participants in DTC such as
banks, brokers, dealers and trust companies (“DTC Participants”), (2) those
who maintain, either directly or indirectly, a custodial relationship with a DTC
Participant (“Indirect Participants”), and (3) those banks, brokers,
dealers, trust companies and others who hold interests in the units through DTC
Participants or Indirect Participants, in each case who satisfy the requirements
for transfers of units. DTC Participants acting on behalf of investors holding
units through such participants’ accounts in DTC will follow the delivery
practice applicable to securities eligible for DTC’s Same-Day Funds Settlement
System. Units are credited to DTC Participants’ securities accounts following
confirmation of receipt of payment.
DTC
. DTC
is a limited purpose trust company organized under the laws of the State of New
York and is a member of the Federal Reserve System, a “clearing corporation”
within the meaning of the New York Uniform Commercial Code and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC holds securities for DTC Participants and facilitates the clearance and
settlement of transactions between DTC Participants through electronic
book-entry changes in accounts of DTC Participants.
Transfer
of Units
Transfers of
Units Only Through DTC
. The units are only transferable through the
book-entry system of DTC. Limited partners who are not DTC Participants may
transfer their units through DTC by instructing the DTC Participant holding
their units (or by instructing the Indirect Participant or other entity through
which their units are held) to transfer the units. Transfers are made in
accordance with standard securities industry practice.
Transfers
of interests in units with DTC are made in accordance with the usual rules and
operating procedures of DTC and the nature of the transfer. DTC has established
procedures to facilitate transfers among the participants and/or accountholders
of DTC. Because DTC can only act on behalf of DTC Participants, who in turn act
on behalf of Indirect Participants, the ability of a person or entity having an
interest in a global certificate to pledge such interest to persons or entities
that do not participate in DTC, or otherwise take actions in respect of such
interest, may be affected by the lack of a definitive security in respect of
such interest.
20
DTC has
advised US12NG that it will take any action permitted to be taken by a
unitholder (including, without limitation, the presentation of a global
certificate for exchange) only at the direction of one or more DTC Participants
in whose account with DTC interests in global certificates are credited and only
in respect of such portion of the aggregate principal amount of the global
certificate as to which such DTC Participant or Participants has or have given
such direction.
Transfer/Application
Requirements
. All purchasers of US12NG’s units, and potentially any
purchasers of units in the future, who wish to become limited partners or other
record holders and receive cash distributions, if any, or have certain other
rights, must deliver an executed transfer application in which the purchaser or
transferee must certify that, among other things, he, she or it agrees to be
bound by US12NG’s LP Agreement and is eligible to purchase US12NG’s securities.
Each purchaser of units must execute a transfer application and certification.
The obligation to provide the form of transfer application is imposed on the
seller of units or, if a purchase of units is made through an exchange, the form
may be obtained directly through US12NG. Further, the General Partner may
request each record holder to furnish certain information, including that record
holder’s nationality, citizenship or other related status. A record holder is a
unitholder that is, or has applied to be, a limited partner. An investor who is
not a U.S. resident may not be eligible to become a record holder or one of
US12NG’s limited partners if that investor’s ownership would subject US12NG to
the risk of cancellation or forfeiture of any of US12NG’s assets under any
federal, state or local law or regulation. If the record holder fails to furnish
the information or if the General Partner determines, on the basis of the
information furnished by the holder in response to the request, that such holder
is not qualified to become one of US12NG’s limited partners, the General Partner
may be substituted as a holder for the record holder, who will then be treated
as a non-citizen assignee, and US12NG will have the right to redeem those
securities held by the record holder.
A
transferee’s broker, agent or nominee may complete, execute and deliver a
transfer application and certification. US12NG may, at its discretion, treat the
nominee holder of a unit as the absolute owner. In that case, the beneficial
holder’s rights are limited solely to those that it has against the nominee
holder as a result of any agreement between the beneficial owner and the nominee
holder.
A person
purchasing US12NG’s existing units, who does not execute a transfer application
and certify that the purchaser is eligible to purchase those securities acquires
no rights in those securities other than the right to resell those securities.
Whether or not a transfer application is received or the consent of the General
Partner obtained, US12NG’s units are securities and are transferable according
to the laws governing transfers of securities.
Any
transfer of units will not be recorded by the transfer agent or recognized by
the General Partner unless a completed transfer application is delivered to the
General Partner or the Administrator. When acquiring units, the transferee of
such units that completes a transfer application will:
|
|
·
|
be
an assignee until admitted as a substituted limited partner upon the
consent and sole discretion of the General Partner and the recording of
the assignment on the books and records of the
partnership;
|
|
|
·
|
automatically
request admission as a substituted limited
partner;
|
|
·
|
agree
to be bound by the terms and conditions of, and execute, US12NG’s LP
Agreement;
|
|
·
|
represent
that such transferee has the capacity and authority to enter into US12NG’s
LP Agreement;
|
|
·
|
grant
powers of attorney to US12NG’s General Partner and any liquidator of
US12NG; and
|
|
·
|
make
the consents and waivers contained in US12NG’s LP
Agreement.
|
An
assignee will become a limited partner in respect of the transferred units upon
the consent of US12NG’s General Partner and the recordation of the name of the
assignee on US12NG’s books and records. Such consent may be withheld in the sole
discretion of US12NG’s General Partner.
21
If
consent of the General Partner is withheld, such transferee shall be an
assignee. An assignee shall have an interest in the partnership equivalent to
that of a limited partner with respect to allocations and distributions,
including, without limitation, liquidating distributions, of the partnership.
With respect to voting rights attributable to units that are held by assignees,
the General Partner shall be deemed to be the limited partner with respect
thereto and shall, in exercising the voting rights in respect of such units on
any matter, vote such units at the written direction of the assignee who is the
record holder of such units. If no such written direction is received, such
units will not be voted. An assignee shall have no other rights of a limited
partner.
Until a
unit has been transferred on US12NG’s books, US12NG and the transfer agent may
treat the record holder of the unit as the absolute owner for all purposes,
except as otherwise required by law or stock exchange regulations.
Withdrawal
of Limited Partners
As
discussed in the LP Agreement, if the General Partner gives at least fifteen
(15) days’ written notice to a limited partner, then the General Partner may for
any reason, in its sole discretion, require any such limited partner to withdraw
entirely from the partnership or to withdraw a portion of its partner capital
account. If the General Partner does not give at least fifteen (15) days’
written notice to a limited partner, then it may only require withdrawal of all
or any portion of the capital account of any limited partner in the following
circumstances: (i) the unitholder made a misrepresentation to the General
Partner in connection with its purchase of units; or (ii) the limited
partner’s ownership of units would result in the violation of any law or
regulations applicable to the partnership or a partner. In these circumstances,
the General Partner without notice may require the withdrawal at any time, or
retroactively. The limited partner thus designated shall withdraw from the
partnership or withdraw that portion of its partner capital account specified,
as the case may be, as of the close of business on such date as determined by
the General Partner. The limited partner thus designated shall be deemed to have
withdrawn from the partnership or to have made a partial withdrawal from its
partner capital account, as the case may be, without further action on the part
of the limited partner and the provisions of the LP Agreement shall apply.
Calculating
NAV
US12NG’s
NAV is calculated by:
|
·
|
Taking
the current market value of its total assets;
and
|
|
·
|
Subtracting
any liabilities.
|
In
addition, in order to provide updated information relating to US12NG for use by
investors and market professionals, the NYSE Arca calculates and disseminates
throughout the core trading session on each trading day an updated indicative
fund value. The indicative fund value is calculated by using the prior day’s
closing NAV per unit of US12NG as a base and updating that value throughout the
trading day to reflect changes in the most recently reported trade price for the
active natural gas Futures Contracts on the NYMEX. The prices reported for those
Futures Contract months are adjusted based on the prior day’s spread
differential between settlement values for the relevant contract and the spot
month contract. In the event that the spot month contract is also the Benchmark
Futures Contracts, the last sale price for that contract is not adjusted. The
indicative fund value unit basis disseminated during NYSE Arca core trading
session hours should not be viewed as an actual real time update of the NAV,
because the NAV is calculated only once at the end of each trading day based
upon the relevant end of day values of US12NG’s investments.
22
The
indicative fund value is disseminated on a per unit basis every 15 seconds
during regular NYSE Arca core trading session hours of 9:30 a.m. New York time
to 4:00 p.m. New York time. The normal trading hours of the NYMEX are 10:00 a.m.
New York time to 2:30 p.m. New York time. This means that there is a gap in time
at the beginning and the end of each day during which US12NG’s units are traded
on the NYSE Arca, but real-time NYMEX trading prices for futures contracts
traded on the NYMEX are not available. As a result, during those gaps there will
be no update to the indicative fund value.
The NYSE
Arca disseminates the indicative fund value through the facilities of CTA/CQ
High Speed Lines. In addition, the indicative fund value is published on the
NYSE Arca’s website and is available through on-line information services such
as Bloomberg and Reuters.
In
addition, other Futures Contracts, Other Natural Gas-Related Investments and
Treasuries held by US12NG are valued by the Administrator, using rates and
points received from client-approved third party vendors (such as Reuters and WM
Company) and advisor quotes. These investments are not included in the
indicative value. The indicative fund value is based on the prior day’s NAV and
moves up and down solely according to changes in the Benchmark Futures Contracts
for natural gas traded on the NYMEX.
Creation
and Redemption of Units
Authorized
Purchasers are the only persons that may place orders to create and redeem
baskets. Authorized Purchasers must be (1) registered broker-dealers or other
securities market participants, such as banks and other financial institutions,
that are not required to register as broker-dealers to engage in securities
transactions as described below, and (2) DTC Participants. To become an
Authorized Purchaser, a person must enter into an Authorized Purchaser Agreement
with the General Partner. The Authorized Purchaser Agreement provides the
procedures for the creation and redemption of baskets and for the delivery of
the Treasuries and any cash required for such creations and redemptions. The
Authorized Purchaser Agreement and the related procedures attached thereto may
be amended by US12NG, without the consent of any limited partner or unitholder
or Authorized Purchaser. Authorized Purchasers pay a transaction fee of $1,000
to US12NG for each order they place to create or redeem one or more baskets.
Authorized Purchasers who make deposits with US12NG in exchange for baskets
receive no fees, commissions or other form of compensation or inducement of any
kind from either US12NG or the General Partner, and no such person will have any
obligation or responsibility to the General Partner or US12NG to effect any sale
or resale of units. As of December 31, 2009, 8 Authorized Purchasers had entered
into agreements with US12NG. As of December 31, 2009, US12NG issued 2 Creation
Baskets and redeemed 1 Redemption Basket.
23
Certain
Authorized Purchasers are expected to have the facility to participate directly
in the physical natural gas market and the natural gas futures market. In some
cases, an Authorized Purchaser or its affiliates may from time to time acquire
natural gas or sell natural gas and may profit in these instances. The General
Partner believes that the size and operation of the natural gas market make it
unlikely that an Authorized Purchaser’s direct activities in the natural gas or
securities markets will impact the price of natural gas, Futures Contracts, or
the price of the units.
Each
Authorized Purchaser is required to be registered as a broker-dealer under the
Exchange Act and is a member in good standing with FINRA, or exempt from being
or otherwise not required to be licensed as a broker-dealer or a member of
FINRA, and qualified to act as a broker or dealer in the states or other
jurisdictions where the nature of its business so requires. Certain Authorized
Purchasers may also be regulated under federal and state banking laws and
regulations. Each Authorized Purchaser has its own set of rules and procedures,
internal controls and information barriers as it determines is appropriate in
light of its own regulatory regime.
Under the
Authorized Purchaser Agreement, the General Partner has agreed to indemnify the
Authorized Purchasers against certain liabilities, including liabilities under
the Securities Act of 1933, as amended, and to contribute to the payments the
Authorized Purchasers may be required to make in respect of those
liabilities.
The
following description of the procedures for the creation and redemption of
baskets is only a summary and an investor should refer to the relevant
provisions of the LP Agreement and the form of Authorized Purchaser Agreement
for more detail, each of which is incorporated by reference into this annual
report on Form 10-K.
Creation
Procedures
On any
business day, an Authorized Purchaser may place an order with the Marketing
Agent to create one or more baskets. For purposes of processing purchase and
redemption orders, a “business day” means any day other than a day when any of
the NYSE Arca, the NYMEX or the NYSE is closed for regular trading. Purchase
orders must be placed by 12:00 p.m. New York time or the close of regular
trading on the NYSE Arca, whichever is earlier. The day on which the Marketing
Agent receives a valid purchase order is the purchase order date.
By
placing a purchase order, an Authorized Purchaser agrees to deposit Treasuries,
cash, or a combination of Treasuries and cash with US12NG, as described below.
Prior to the delivery of baskets for a purchase order, the Authorized Purchaser
must also have wired to the Custodian the non-refundable transaction fee due for
the purchase order. Authorized Purchasers may not withdraw a creation
request.
Determination
of Required Deposits
The total
deposit required to create each basket (“Creation Basket Deposit”) is the amount
of Treasuries and/or cash that is in the same proportion to the total assets of
US12NG (net of estimated accrued but unpaid fees, expenses and other
liabilities) on the date the order to purchase is accepted as the number of
units to be created under the purchase order is in proportion to the total
number of units outstanding on the date the order is received. The General
Partner determines, directly in its sole discretion or in consultation with the
Administrator, the requirements for Treasuries and the amount of cash, including
the maximum permitted remaining maturity of a Treasury and proportions of
Treasury and cash that may be included in deposits to create baskets. The
Marketing Agent will publish such requirements at the beginning of each business
day. The amount of cash deposit required is the difference between the aggregate
market value of the Treasuries required to be included in a Creation Basket
Deposit as of 4:00 p.m. New York time on the date the order to purchase is
properly received and the total required deposit.
Delivery
of Required Deposits
An
Authorized Purchaser who places a purchase order is responsible for transferring
to US12NG’s account with the Custodian the required amount of Treasuries and
cash by the end of the third business day following the purchase order date.
Upon receipt of the deposit amount, the Administrator directs DTC to credit the
number of baskets ordered to the Authorized Purchaser’s DTC account on the third
business day following the purchase order date. The expense and risk of delivery
and ownership of Treasuries until such Treasuries have been received by the
Custodian on behalf of US12NG is borne solely by the Authorized
Purchaser.
24
Because
orders to purchase baskets must be placed by 12:00 p.m., New York time, but the
total payment required to create a basket during the continuous offering period
will not be determined until after 4:00 p.m. New York time on the date the
purchase order is received, Authorized Purchasers will not know the total amount
of the payment required to create a basket at the time they submit an
irrevocable purchase order for the basket. US12NG’s NAV and the total amount of
the payment required to create a basket could rise or fall substantially between
the time an irrevocable purchase order is submitted and the time the amount of
the purchase price in respect thereof is determined.
Rejection
of Purchase Orders
The
General Partner acting by itself or through the Marketing Agent may reject a
purchase order or a Creation Basket Deposit if:
|
|
·
|
it
determines that the investment alternative available to US12NG at that
time will not enable it to meet its investment
objective;
|
|
|
·
|
it
determines that the purchase order or the Creation Basket Deposit is not
in proper form;
|
|
|
·
|
it
believes that the purchase order or the Creation Basket Deposit would have
adverse tax consequences to US12NG or its
unitholders;
|
|
|
·
|
the
acceptance or receipt of the Creation Basket Deposit would, in the opinion
of counsel to the General Partner, be unlawful;
or
|
|
|
·
|
circumstances
outside the control of the General Partner, Marketing Agent or Custodian
make it, for all practical purposes, not feasible to process creations of
baskets.
|
None of
the General Partner, Marketing Agent or Custodian will be liable for the
rejection of any purchase order or Creation Basket Deposit.
Redemption
Procedures
The
procedures by which an Authorized Purchaser can redeem one or more baskets
mirror the procedures for the creation of baskets. On any business day, an
Authorized Purchaser may place an order with the Marketing Agent to redeem one
or more baskets. Redemption orders must be placed by 12:00 p.m. New York time or
the close of regular trading on the NYSE, whichever is earlier. A redemption
order so received will be effective on the date it is received in satisfactory
form by the Marketing Agent. The redemption procedures allow Authorized
Purchasers to redeem baskets and do not entitle an individual unitholder to
redeem any units in an amount less than a Redemption Basket, or to redeem
baskets other than through an Authorized Purchaser. By placing a redemption
order, an Authorized Purchaser agrees to deliver the baskets to be redeemed
through DTC’s book-entry system to US12NG not later than 3:00 p.m. New York time
on the third business day following the effective date of the redemption order.
Prior to the delivery of the redemption distribution for a redemption order, the
Authorized Purchaser must also have wired to US12NG’s account at the Custodian
the non-refundable transaction fee due for the redemption order. Authorized
Purchasers may not withdraw a redemption request.
Determination
of Redemption Distribution
The
redemption distribution from US12NG consists of a transfer to the redeeming
Authorized Purchaser of an amount of Treasuries and cash that is in the same
proportion to the total assets of US12NG (net of estimated accrued but unpaid
fees, expenses and other liabilities) on the date the order to redeem is
properly received as the number of units to be redeemed under the redemption
order is in proportion to the total number of units outstanding on the date the
order is received. The General Partner, directly or in consultation with the
Administrator, determines the requirements for Treasuries and the amounts of
cash, including the maximum permitted remaining maturity of a Treasury, and the
proportions of Treasuries and cash that may be included in distributions to
redeem baskets. The Marketing Agent will publish such requirements as of 4:00
p.m. New York time on the redemption order date.
25
Delivery
of Redemption Distribution
The
redemption distribution due from US12NG will be delivered to the Authorized
Purchaser by 3:00 p.m. New York time on the third business day following the
redemption order date if, by 3:00 p.m. New York time on such third business day,
US12NG’s DTC account has been credited with the baskets to be redeemed. If
US12NG’s DTC account has not been credited with all of the baskets to be
redeemed by such time, the redemption distribution will be delivered to the
extent of whole baskets received. Any remainder of the redemption distribution
will be delivered on the next business day to the extent of remaining whole
baskets received if US12NG receives the fee applicable to the extension of the
redemption distribution date which the General Partner may, from time to time,
determine and the remaining baskets to be redeemed are credited to US12NG’s DTC
account by 3:00 p.m. New York time on such next business day. Any further
outstanding amount of the redemption order shall be cancelled. Pursuant to
information from the General Partner, the Custodian will also be authorized to
deliver the redemption distribution notwithstanding that the baskets to be
redeemed are not credited to US12NG’s DTC account by 3:00 p.m. New York time on
the third business day following the redemption order date if the Authorized
Purchaser has collateralized its obligation to deliver the baskets through DTC’s
book entry-system on such terms as the General Partner may from time to time
determine.
Suspension
or Rejection of Redemption Orders
The
General Partner may, in its discretion, suspend the right of redemption, or
postpone the redemption settlement date, (1) for any period during which the
NYSE Arca or the NYMEX is closed other than customary weekend or holiday
closings, or trading on the NYSE Arca or the NYMEX is suspended or restricted,
(2) for any period during which an emergency exists as a result of which
delivery, disposal or evaluation of Treasuries is not reasonably practicable, or
(3) for such other period as the General Partner determines to be necessary for
the protection of the limited partners. For example, the General Partner may
determine that it is necessary to suspend redemptions to allow for the orderly
liquidation of US12NG’s assets at an appropriate value to fund a redemption. If
the General Partner has difficulty liquidating its positions,
e.g.
, because of a market
disruption event in the futures markets, a suspension of trading by the exchange
where the futures contracts are listed or an unanticipated delay in the
liquidation of a position in an over the counter contract, it may be appropriate
to suspend redemptions until such time as such circumstances are rectified. None
of the General Partner, the Marketing Agent, the Administrator, or the Custodian
will be liable to any person or in any way for any loss or damages that may
result from any such suspension or postponement.
Redemption
orders must be made in whole baskets. The General Partner will reject a
redemption order if the order is not in proper form as described in the
Authorized Purchaser Agreement or if the fulfillment of the order, in the
opinion of its counsel, might be unlawful. The General Partner may also reject a
redemption order if the number of units being redeemed would reduce the
remaining outstanding units to 100,000 units (
i.e.
, one basket) or less,
unless the General Partner has reason to believe that the placer of the
redemption order does in fact possess all the outstanding units and can deliver
them.
Creation
and Redemption Transaction Fee
To
compensate US12NG for its expenses in connection with the creation and
redemption of baskets, an Authorized Purchaser is required to pay a transaction
fee to US12NG of $1,000 per order to create or redeem baskets. An order may
include multiple baskets. The transaction fee may be reduced, increased or
otherwise changed by the General Partner. The General Partner shall notify DTC
of any change in the transaction fee and will not implement any increase in the
fee for the redemption of baskets until 30 days after the date of the
notice.
Tax
Responsibility
Authorized
Purchasers are responsible for any transfer tax, sales or use tax, stamp tax,
recording tax, value added tax or similar tax or governmental charge applicable
to the creation or redemption of baskets, regardless of whether or not such tax
or charge is imposed directly on the Authorized Purchaser, and agree to
indemnify the General Partner and US12NG if they are required by law to pay any
such tax, together with any applicable penalties, additions to tax or interest
thereon.
26
Secondary
Market Transactions
As noted,
US12NG creates and redeems units from time to time, but only in one or more
Creation Baskets or Redemption Baskets. The creation and redemption of baskets
are only made in exchange for delivery to US12NG or the distribution by US12NG
of the amount of Treasuries and cash represented by the baskets being created or
redeemed, the amount of which will be based on the aggregate NAV of the number
of units included in the baskets being created or redeemed determined on the day
the order to create or redeem baskets is properly received.
As
discussed above, Authorized Purchasers are the only persons that may place
orders to create and redeem baskets. Authorized Purchasers must be registered
broker-dealers or other securities market participants, such as banks and other
financial institutions that are not required to register as broker-dealers to
engage in securities transactions. An Authorized Purchaser is under no
obligation to create or redeem baskets, and an Authorized Purchaser is under no
obligation to offer to the public units of any baskets it does create.
Authorized Purchasers that do offer to the public units from the baskets they
create will do so at per-unit offering prices that are expected to reflect,
among other factors, the trading price of the units on the NYSE Arca, the NAV of
US12NG at the time the Authorized Purchaser purchased the Creation Baskets and
the NAV of the units at the time of the offer of the units to the public, the
supply of and demand for units at the time of sale, and the liquidity of the
Futures Contract market and the market for Other Natural Gas-Related
Investments. The prices of units offered by Authorized Purchasers are expected
to fall between US12NG’s NAV and the trading price of the units on the NYSE Arca
at the time of sale. Units initially comprising the same basket but offered by
Authorized Purchasers to the public at different times may have different
offering prices.
An order
for one or more baskets may be placed by an Authorized Purchaser on behalf of
multiple clients. Authorized Purchasers who make deposits with US12NG in
exchange for baskets receive no fees, commissions or other form of compensation
or inducement of any kind from either US12NG or the General Partner, and no such
person has any obligation or responsibility to the General Partner or US12NG to
effect any sale or resale of units. Units trade in the secondary market on the
NYSE Arca. Units may trade in the secondary market at prices that are lower or
higher relative to their NAV per unit. The amount of the discount or premium in
the trading price relative to the NAV per unit may be influenced by various
factors, including the number of investors who seek to purchase or sell units in
the secondary market and the liquidity of the Futures Contracts market and the
market for Other Natural Gas-Related Investments. While the units trade during
the core trading session on the NYSE Arca until 4:00 p.m. New York time,
liquidity in the market for Futures Contracts and Other Natural Gas-Related
Investments may be reduced after the close of the NYMEX at 2:30 p.m. New York
time. As a result, during this time, trading spreads, and the resulting premium
or discount, on the units may widen.
Prior
Performance of US12NG
US12NG’s
units began trading on the NYSE Arca on November 18, 2009 and are offered on a
continuous basis. As of December 31, 2009, the total amount of money
raised by US12NG from Authorized Purchasers was $40,652,357; the total number of
Authorized Purchasers was 2; the number of baskets purchased by Authorized
Purchasers was 8; the number of baskets redeemed by Authorized Purchasers was 1;
and the aggregate amount of units purchased was 800,000. For more information on
the performance of US12NG, see the Performance Tables below.
Since its
initial offering of 30,000,000 units, US12NG not made any subsequent
offerings of its units. As of December 31, 2009, there were
29,200,000 units registered but not yet issued.
Since the
offering of US12NG units to the public on November 18, 2009 to December 31,
2009, the simple average daily change in its benchmark futures contract was
0.291%, while the simple average daily change in the NAV of US12NG over the same
time period was 0.287%. The average daily difference was -0.004 % (or -0.4 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 0.089%, meaning that over this time period US12NG’s tracking
error was within the plus or minus 10% range established as its benchmark
tracking goal.
27
Experience
in Raising and Investing in Funds through December 31, 2009
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Dollar
Amount Offered*:
|
$ | 1,500,000,000 | ||
|
Dollar
Amount Raised:
|
$ | 40,652,357 | ||
|
Organizational
and Offering Expenses**:
|
||||
|
SEC registration
fee:
|
$ | 82,445 | ||
|
FINRA registration
fee:
|
$ | 75,500 | ||
|
Listing fee:
|
$ | 5,000 | ||
|
Auditor’s fees and
expenses:
|
$ | 2,500 | ||
|
Legal fees and
expenses:
|
$ | 202,252 | ||
|
Printing
expenses:
|
$ | 31,588 | ||
|
Length
of US12NG Offering:
|
Continuous
|
|||
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
|
**
|
These
expenses were paid for by the General
Partner.
|
Compensation
to the General Partner and Other Compensation US12NG:
Expenses
paid by US12NG through December 31, 2009 in dollar terms:
|
Expenses:
|
Amount in Dollar Terms
|
|||
|
Amount
Paid to General Partner:
|
$ | 16,490 | ||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$ | 9,284 | ||
|
Other
Amounts Paid*:
|
$ | 141,553 | ||
|
Total
Expenses Paid:
|
$ | 167,327 | ||
|
Expenses
Waived**:
|
$ | (136,678 | ) | |
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
$ | 30,649 | ||
|
*
|
Includes
expenses relating to legal fees, auditing fees, printing expenses,
licensing fees and tax reporting fees and fees paid to the independent
directors of the General Partner.
|
|
**
|
The
General Partner, though under no obligation to do so, agreed to pay
certain expenses, to the extent that such expenses exceeded 0.15% (15
basis points) of US12NG’s NAV, on an annualized basis. The General Partner
has no obligation to continue such payment into subsequent
periods.
|
Expenses
paid by US12NG through December 31, 2009 as a Percentage of Average Daily Net
Assets:
|
Expenses:
|
Amount as a Percentage
of Average Daily Net Assets
|
|
|
Amount
Paid to General Partner:
|
0.60%
annualized
|
|
|
Amount
Paid in Portfolio Brokerage Commissions:
|
0.34%
annualized
|
|
|
Other
Amounts Paid:
|
5.15%
annualized
|
|
|
Total
Expenses Paid:
|
6.09%
annualized
|
|
|
Expenses
Waived:
|
(4.97)%
annualized
|
|
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
1.12%
annualized
|
28
|
US12NG
Performance:
|
||||
|
Name
of Commodity Pool:
|
US12NG
|
|||
|
Type
of Commodity Pool:
|
Exchange traded security
|
|||
|
Inception
of Trading:
|
November
18, 2009
|
|||
|
Aggregate
Subscriptions (from inception through December 31, 2009):
|
$ | 40,652,357 | ||
|
Total
Net Assets as of December 31, 2009:
|
$ | 37,637,148 | ||
|
Initial
NAV per Unit as of Inception:
|
$ | 50.00 | ||
|
NAV
per Unit as of December 31, 2009:
|
$ | 53.77 | ||
|
Worst
Monthly Percentage Draw-down:
|
November 2009 (0.02)%
|
|||
|
Worst
Peak-to-Valley Draw-down:
|
November
2009 (0.02)%
|
|||
|
Number
of Unitholders (as of December 31, 2009)
|
1,276 | |||
COMPOSITE
PERFORMANCE DATA FOR US12NG
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Rates of return*
|
||||
|
Month
|
2009
|
|||
|
January
|
- | |||
|
February
|
- | |||
|
March
|
- | |||
|
April
|
- | |||
|
May
|
- | |||
|
June
|
- | |||
|
July
|
- | |||
|
August
|
- | |||
|
September
|
- | |||
|
October
|
- | |||
|
November
|
(0.02 | )%** | ||
|
December
|
7.56 | % | ||
|
Annual
Rate of Return
|
7.54 | %** | ||
|
*
|
The
monthly rate of return is calculated by dividing the ending NAV of a given
month by the ending NAV of the previous month, subtracting 1 and
multiplying this number by 100 to arrive at a percentage increase or
decrease.
|
|
**
|
Partial
from November 18, 2009.
|
Terms
Used in Performance Tables
Draw-down
: Losses experienced
over a specified period. Draw-down is measured on the basis of monthly returns
only and does not reflect intra-month figures.
Worst Monthly Percentage
Draw-down
: The largest single month loss sustained since inception of
trading.
29
Worst Peak-to-Valley
Draw-down
: The largest percentage decline in the NAV per unit over the
history of the fund. This need not be a continuous decline, but can be a series
of positive and negative returns where the negative returns are larger than the
positive returns. Worst Peak-to-Valley Draw-down represents the
greatest percentage decline from any month-end NAV per unit that occurs without
such month-end NAV per unit being equaled or exceeded as of a subsequent
month-end. For example, if the NAV per unit declined by $1 in each of January
and February, increased by $1 in March and declined again by $2 in April, a
“peak-to-trough drawdown” analysis conducted as of the end of April would
consider that “drawdown” to be still continuing and to be $3 in amount, whereas
if the NAV per unit had increased by $2 in March, the January-February drawdown
would have ended as of the end of February at the $2 level.
Prior
Performance of the Related Public Funds
The
General Partner is also currently the general partner of the Related Public
Funds. Each of the General Partner and the Related Public Funds is located in
California.
USOF is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of USOF is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the price of light, sweet crude oil
delivered to Cushing, Oklahoma, as measured by the changes in the price of the
futures contract on light, sweet crude oil traded on the NYMEX, less USOF’s
expenses. USOF’s units began trading on April 10, 2006 and are offered on a
continuous basis. USOF may invest in a mixture of listed crude oil futures
contracts, other non-listed oil related investments, Treasuries, cash and cash
equivalents. As of December 31, 2009, the total amount of money raised by USOF
from its authorized purchasers was $24,257,292,570; the total number of
authorized purchasers of USOF was 17; the number of baskets purchased by
authorized purchasers of USOF was 4,752; the number of baskets redeemed by
authorized purchasers of USOF was 4,121; and the aggregate amount of units
purchased was 475,200,000. USOF employs an investment strategy in its operations
that is similar to the investment strategy of US12NG, except that its benchmark
is the near month contract to expire for light, sweet crude oil delivered to
Cushing, Oklahoma.
Since the
offering of USOF units to the public on April 10, 2006 to December 31, 2009, the
simple average daily change in its benchmark oil futures contract was -0.027%,
while the simple average daily change in the NAV of USOF over the same time
period was -0.022%. The average daily difference was 0.005% (or 0.5 basis
points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement of the benchmark oil futures contract, the average error in daily
tracking by the NAV was 1.56%, meaning that over this time period USOF’s
tracking error was within the plus or minus 10% range established as its
benchmark tracking goal.
USNG is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of USNG is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of natural gas
delivered at the Henry Hub, Louisiana as measured by the changes in the price of
the futures contract for natural gas traded on the NYMEX, less USNG’s expenses.
USNG’s units began trading on April 18, 2007 and are offered on a continuous
basis. USNG may invest in a mixture of listed natural gas futures contracts,
other non-listed natural gas related investments, Treasuries, cash and cash
equivalents. As of December 31, 2009, the total amount of money raised by USNG
from its authorized purchasers was $10,435,093,775; the total number of
authorized purchasers of USNG was 14; the number of baskets purchased by
authorized purchasers of USNG was 5,821; the number of baskets redeemed by
authorized purchasers of USNG was 1,326; and the aggregate amount of units
purchased was 582,100,000. USNG employs an investment strategy in its operations
that is similar to the investment strategy of US12NG, except its benchmark is
the near month contract for natural gas delivered at the Henry Hub,
Louisiana.
Since the
offering of USNG units to the public on April 18, 2007 to December 31, 2009, the
simple average daily change in its benchmark futures contract was -0.181%, while
the simple average daily change in the NAV of USNG over the same time period was
-0.179%. 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
0.392%, meaning that over this time period USNG’s tracking error was within the
plus or minus 10% range established as its benchmark tracking goal.
30
US12OF is
a commodity pool and issues units traded on the NYSE Arca. The investment
objective of US12OF is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of light, sweet crude
oil delivered to Cushing, Oklahoma, as measured by the changes in the average of
the prices of 12 futures contracts on light, sweet crude oil traded on the
NYMEX, consisting of the near month contract to expire and the contracts for the
following 11 months, for a total of 12 consecutive months’ contracts, less
US12OF’s expenses. US12OF’s units began trading on December 6, 2007 and are
offered on a continuous basis. US12OF invests in a mixture of listed crude oil
futures contracts, other non-listed oil related investments, Treasuries, cash
and cash equivalents. As of December 31, 2009, the total amount of money raised
by US12OF from its authorized purchasers was $224,069,815; the total number of
authorized purchasers of US12OF was 4; the number of baskets purchased by
authorized purchasers of US12OF was 75; the number of baskets redeemed by
authorized purchasers of US12OF was 34; and the aggregate amount of units
purchased was 7,500,000. US12OF employs an investment strategy in its operations
that is similar to the investment strategy of US12NG, except that its benchmark
is the average of the prices of the near month contract to expire and the
following eleven months contracts for light, sweet crude oil delivered to
Cushing, Oklahoma.
Since the
offering of US12OF units to the public on December 6, 2007 to December 31, 2009,
the simple average daily change in its benchmark futures contracts was -0.004%,
while the simple average daily change in the NAV of US12OF over the same time
period was -0.003%. 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 contracts, the average error in daily tracking
by the NAV was -0.107%, meaning that over this time period US12OF’s tracking
error was within the plus or minus 10% range established as its benchmark
tracking goal.
UGA is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of UGA is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms in the spot price of unleaded gasoline
for delivery to the New York harbor, as measured by the changes in the price of
the futures contract on gasoline traded on the NYMEX, less UGA’s expenses. UGA
may invest in a mixture of listed gasoline futures contracts, other non-listed
gasoline related investments, Treasuries, cash and cash equivalents. UGA’s units
began trading on February 26, 2008 and are offered on a continuous
basis. As of December 31, 2009, the total amount of money raised by UGA
from its authorized purchasers was $126,263,653; the total number of authorized
purchasers of UGA was 6; the number of baskets purchased by authorized
purchasers of UGA was 42; the number of baskets redeemed by authorized
purchasers of UGA was 23; and the aggregate amount of units purchased was
4,200,000. UGA employs an investment strategy in its operations that is similar
to the investment strategy of US12NG, except that its benchmark is the near
month contract for unleaded gasoline delivered to the New York
harbor.
Since the
offering of UGA units to the public on February 26, 2008 to December 31, 2009,
the simple average daily change in its benchmark futures contract was -0.011%,
while the simple average daily change in the NAV of UGA over the same time
period was -0.012%. 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 -0.674%, meaning that over this time period UGA’s tracking error
was within the plus or minus 10% range established as its benchmark tracking
goal.
USHO is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of USHO is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of heating oil for
delivery to the New York harbor, as measured by the changes in the price of the
futures contract on heating oil traded on the NYMEX, less USHO’s expenses. USHO
may invest in a mixture of listed heating oil futures contracts, other
non-listed heating oil-related investments, Treasuries, cash and cash
equivalents. USHO’s units began trading on April 9, 2008 and are offered on a
continuous basis. As of December 31, 2009, the total amount of money raised by
USHO from its authorized purchasers was $27,750,399; the total number of
authorized purchasers of USHO was 6; the number of baskets purchased by
authorized purchasers of USHO was 8; the number of baskets redeemed by
authorized purchasers of USHO was 2; and the aggregate amount of units purchased
was 800,000. USHO employs an investment strategy in its operations that is
similar to the investment strategy of US12NG, except that its benchmark is the
near month contract for heating oil delivered to the New York
harbor.
Since the
offering of USHO units to the public on April 9, 2008 to December 31, 2009, the
simple average daily change in its benchmark futures contract was -0.093%, while
the simple average daily change in the NAV of USHO over the same time period was
-0.093%. The average daily difference was 0%. As a percentage of the daily
movement of the benchmark futures contract, the average error in daily tracking
by the NAV was -0.696%, meaning that over this time period USHO’s tracking error
was within the plus or minus 10% range established as its benchmark tracking
goal.
31
USSO is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of USSO is for the changes in percentage terms of its units’ NAV to
inversely reflect the changes in percentage terms of the price of light, sweet
crude oil delivered to Cushing, Oklahoma as measured by the changes in the price
of the futures contract for light, sweet crude oil traded on the NYMEX, less
USSO’s expenses. USSO’s units began trading on September 24, 2009 and
are offered on a continuous basis. USSO invests in short positions in listed
crude oil futures contracts, other non-listed oil related investments,
Treasuries, cash and cash equivalents. As of December 31, 2009, the total amount
of money raised by USSO from its authorized purchasers was $14,290,534; the
total number of authorized purchasers of USSO was 7; the number of baskets
purchased by authorized purchasers of USSO was 3; no baskets were redeemed by
authorized purchasers of USSO; and the aggregate amount of units purchased was
300,000. USSO employs an investment strategy in its operations that is similar
to the investment strategy of US12NG, except that its benchmark is the inverse
of the near month contract for light, sweet crude oil delivered to Cushing,
Oklahoma.
Since the
offering of USSO units to the public on September 24, 2009 to December 31, 2009,
the inverse of the simple average daily change in its benchmark futures contract
was -0.164%, while the simple average daily change in the NAV of USSO over the
same time period was -0.167%. The average daily difference was -0.003% (or -0.3
basis points, where 1 basis point equals 1/100 of 1%). As a percentage of the
inverse of the daily movement of the benchmark futures contract, the average
error in daily tracking by the NAV was -0.179%, meaning that over this time
period USSO’s tracking error was within the plus or minus 10% range established
as its benchmark tracking goal.
The
General Partner has filed a registration statement for two other exchange traded
security funds, USBO and USCI. The investment objective of USBO will be
for the daily changes in percentage terms of its units’ NAV reflect the
daily changes in percentage terms of the spot price of Brent crude oil, as
measured by the changes in the price of the futures contract on Brent crude oil
traded on the ICE Futures, less USBO’s expenses. The investment objective of
USCI will be for the changes in percentage terms of its units’ NAV to reflect
the changes in percentage terms of the SDCI, less USCI’s expenses.
There are
significant differences between investing in US12NG and the Related Public Funds
and investing directly in the futures market. The General Partner’s results with
US12NG and the Related Public Funds may not be representative of results that
may be experienced with a fund directly investing in futures contracts or other
managed funds investing in futures contracts. Moreover, given the different
investment objectives of US12NG and the Related Public Funds, the performance of
US12NG may not be representative of results that may be experienced by the other
Related Public Funds. For more information on the performance of the Related
Public Funds, see the Performance Tables below.
USOF:
Experience
in Raising and Investing in Funds through December 31, 2009
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Dollar
Amount Offered*:
|
$ | 71,257,630,000 | ||
|
Dollar
Amount Raised:
|
$ | 24,257,292,570 | ||
|
Organizational
and Offering Expenses**:
|
||||
|
SEC
registration fee:
|
$ | 2,480,174 | ||
|
FINRA
registration fee:
|
$ | 603,500 | ||
|
Listing
fee:
|
$ | 5,000 | ||
|
Auditor’s
fees and expenses:
|
$ | 495,850 | ||
|
Legal
fees and expenses:
|
$ | 2,040,875 | ||
|
Printing
expenses:
|
$ | 285,230 | ||
|
Length
of USOF Offering:
|
Continuous
|
|||
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
|
**
|
Through
December 31, 2006, these expenses were paid for by an affiliate of the
General Partner in connection with the initial public offering. Following
December 31, 2006, USOF has recorded these
expenses.
|
32
Compensation
to the General Partner and Other Compensation USOF:
Expenses
Paid by USOF through December 31, 2009 in dollar terms:
|
Expenses:
|
Amount in Dollar Terms
|
|||
|
Amount
Paid to General Partner:
|
$ | 20,842,027 | ||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$ | 7,159,498 | ||
|
Other
Amounts Paid*:
|
$ | 8,770,873 | ||
|
Total
Expenses Paid:
|
$ | 36,772,398 | ||
|
*
|
Includes
expenses relating to the registration of additional units, legal fees,
auditing fees, printing expenses, licensing fees and tax reporting fees
and fees paid to the independent directors of the General
Partner.
|
Expenses
Paid by USOF through December 31, 2009 as a Percentage of Average Daily Net
Assets:
|
Expenses:
|
Amount as a Percentage of Average
Daily Net Assets
|
|
|
Amount
Paid to General Partner:
|
0.46%
annualized
|
|
|
Amount
Paid in Portfolio Brokerage Commissions:
|
0.16%
annualized
|
|
|
Other
Amounts Paid:
|
0.19%
annualized
|
|
|
Total
Expenses Paid:
|
0.81%
annualized
|
|
USOF Performance:
|
||||
|
Name
of Commodity Pool:
|
USOF
|
|||
|
Type
of Commodity Pool:
|
Exchange
traded security
|
|||
|
Inception
of Trading:
|
April
10, 2006
|
|||
|
Aggregate
Subscriptions (from inception
through
December 31, 2009):
|
$ | 24,257,292,570 | ||
|
Total
Net Assets as of December 31, 2009:
|
$ | 2,471,252,817 | ||
|
Initial
NAV Per Unit as of Inception:
|
$ | 67.39 | ||
|
NAV
per Unit as of December 31, 2009:
|
$ | 39.16 | ||
|
Worst
Monthly Percentage Draw-down:
|
October
2008 (31.57)
|
% | ||
|
Worst
Peak-to-Valley Draw-down:
|
June 2008 – February 2009 (75.84)
|
% | ||
|
Number
of Unitholders (as of December 31, 2009)
|
84,835 | |||
33
COMPOSITE
PERFORMANCE DATA FOR USOF
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Rates of return*
|
||||||||||||||||
|
Month
|
2006
|
2007
|
2008
|
2009
|
||||||||||||
|
January
|
– | (6.55 | )% | (4.00 | )% | (14.60 | )% | |||||||||
|
February
|
– | 5.63 | % | 11.03 | % | (6.55 | )% | |||||||||
|
March
|
– | 4.61 | % | 0.63 | % | 7.23 | % | |||||||||
|
April
|
3.47 | %** | (4.26 | )% | 12.38 | % | (2.38 | )% | ||||||||
|
May
|
(2.91 | )% | (4.91 | )% | 12.80 | % | 26.69 | % | ||||||||
|
June
|
3.16 | % | 9.06 | % | 9.90 | % | 4.16 | % | ||||||||
|
July
|
(0.50 | )% | 10.57 | % | (11.72 | )% | (2.30 | )% | ||||||||
|
August
|
(6.97 | )% | (4.95 | )% | (6.75 | )% | (1.98 | )% | ||||||||
|
September
|
(11.72 | )% | 12.11 | % | (12.97 | )% | 0.25 | % | ||||||||
|
October
|
(8.45 | )% | 16.98 | % | (31.57 | )% | 8.43 | % | ||||||||
|
November
|
4.73 | % | (4.82 | )% | (20.65 | )% | (0.51 | )% | ||||||||
|
December
|
(5.21 | )% | 8.67 | % | (22.16 | )% | (0.03 | )% | ||||||||
|
Annual
Rate of Return
|
(23.03 | )%** | 46.17 | % | (54.75 | )% | 14.14 | % | ||||||||
|
*
|
The
monthly rate of return is calculated by dividing the ending NAV of a given
month by the ending NAV of the previous month, subtracting 1 and
multiplying this number by 100 to arrive at a percentage increase or
decrease.
|
|
**
|
Partial
from April 10, 2006.
|
For a
definition of draw-down, please see text below “Composite Performance Data for
US12NG.”
USNG
:
Experience
in Raising and Investing in Funds through December 31, 2009
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Dollar
Amount Offered*:
|
$ | 24,056,500,000 | ||
|
Dollar
Amount Raised:
|
$ | 10,435,093,775 | ||
|
Organizational
and Offering Expenses**:
|
||||
|
SEC
registration fee:
|
$ | 1,361,084 | ||
|
FINRA
registration fee:
|
$ | 377,500 | ||
|
Listing
fee:
|
$ | 5,000 | ||
|
Auditor’s
fees and expenses:
|
$ | 274,350 | ||
|
Legal
fees and expenses:
|
$ | 1,614,956 | ||
|
Printing
expenses:
|
$ | 73,270 | ||
|
Length
of USNG Offering:
|
Continuous
|
|||
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
|
**
|
Through
April 18, 2007, these expenses were paid for by the General Partner.
Following April 18, 2007, USNG has recorded these
expenses.
|
34
Compensation
to the General Partner and Other Compensation USNG:
Expenses
paid by USNG through December 31, 2009 in dollar terms:
|
Expenses:
|
Amount in Dollar Terms
|
|||
|
Amount
Paid to General Partner:
|
$ | 19,802,761 | ||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$ | 12,603,078 | ||
|
Other
Amounts Paid*:
|
$ | 8,074,997 | ||
|
Total
Expenses Paid:
|
$ | 40,480,836 | ||
|
*
|
Includes
expenses relating to the registration of additional units, legal fees,
auditing fees, printing expenses, licensing fees and tax reporting fees
and fees paid to the independent directors of the General
Partner.
|
Expenses
paid by USNG through December 31, 2009 as a Percentage of Average Daily Net
Assets:
|
Expenses:
|
Amount as a Percentage
of Average Daily Net Assets
|
|
|
Amount
Paid to General Partner:
|
0.55%
annualized
|
|
|
Amount
Paid in Portfolio Brokerage
Commissions:
|
0.35%
annualized
|
|
|
Other
Amounts Paid:
|
0.23%
annualized
|
|
|
Total
Expenses Paid:
|
1.13%
annualized
|
|
USNG Performance:
|
||||
|
Name
of Commodity Pool:
|
USNG
|
|||
|
Type
of Commodity Pool:
|
Exchange
traded security
|
|||
|
Inception
of Trading:
|
April
18, 2007
|
|||
|
Aggregate
Subscriptions (from inception through December 31, 2009):
|
$ | 10,435,093,775 | ||
|
Total
Net Assets as of December 31, 2009:
|
$ | 4,525,107,163 | ||
|
Initial
NAV per Unit as of Inception:
|
$ | 50.00 | ||
|
NAV
per Unit as of December 31, 2009:
|
$ | 10.07 | ||
|
Worst
Monthly Percentage Draw-down:
|
July
2008 (32.13)
|
% | ||
|
Worst
Peak-to-Valley Draw-down:
|
June 2008 – November 2009 (85.89)
|
% | ||
|
Number
of Unitholders (as of December 31, 2009)
|
203,277 | |||
COMPOSITE
PERFORMANCE DATA FOR USNG
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Rates of return*
|
||||||||||||
|
Month
|
2007
|
2008
|
2009
|
|||||||||
|
January
|
– | 8.87 | % | (21.49 | )% | |||||||
|
February
|
– | 15.87 | % | (5.47 | )% | |||||||
|
March
|
– | 6.90 | % | (11.81 | )% | |||||||
|
April
|
4.30 | %** | 6.42 | % | (13.92 | )% | ||||||
|
May
|
(0.84 | )% | 6.53 | % | 10.37 | % | ||||||
|
June
|
(15.90 | )% | 13.29 | % | (4.63 | )% | ||||||
|
July
|
(9.68 | )% | (32.13 | )% | (8.70 | )% | ||||||
|
August
|
(13.37 | )% | (13.92 | )% | (27.14 | )% | ||||||
|
September
|
12.28 | % | (9.67 | )% | 26.03 | % | ||||||
|
October
|
12.09 | % | (12.34 | )% | (13.31 | )% | ||||||
|
November
|
(16.16 | )% | (6.31 | )% | (11.86 | )% | ||||||
|
December
|
0.75 | % | (14.32 | )% | 13.91 | % | ||||||
|
Annual
Rate of Return
|
(27.64 | )%** | (35.68 | )% | (56.73 | )% | ||||||
|
*
|
The
monthly rate of return is calculated by dividing the ending NAV of a given
month by the ending NAV of the previous month, subtracting 1 and
multiplying this number by 100 to arrive at a percentage increase or
decrease.
|
|
**
|
Partial
from April 18, 2007.
|
For a
definition of draw-down, please see text below “Composite Performance Data for
US12NG.”
35
US12OF
:
Experience
in Raising and Investing in Funds through December 31, 2009
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Dollar
Amount Offered*:
|
$ | 3,718,000,000 | ||
|
Dollar
Amount Raised:
|
$ | 224,069,815 | ||
|
Organizational
and Offering Expenses**:
|
||||
|
SEC
registration fee:
|
$ | 129,248 | ||
|
FINRA
registration fee:
|
$ | 151,000 | ||
|
Listing
fee:
|
$ | 5,000 | ||
|
Auditor’s
fees and expenses:
|
$ | 60,700 | ||
|
Legal
fees and expenses:
|
$ | 301,279 | ||
|
Printing
expenses:
|
$ | 44,402 | ||
|
Length
of US12OF Offering:
|
Continuous
|
|||
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
|
**
|
Through
March 31, 2009, a portion of these expenses were paid for by an affiliate
of the General Partner in connection with the initial public offering.
Following March 31, 2009, US12OF has recorded these
expenses.
|
Compensation
to the General Partner and Other Compensation US12OF:
Expenses paid by
US12OF
through December 31, 2009 in dollar
terms:
|
Expenses:
|
Amount in Dollar Terms
|
|||
|
Amount
Paid to General Partner:
|
$ | 922,534 | ||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$ | 52,790 | ||
|
Other
Amounts Paid*:
|
$ | 798,777 | ||
|
Total
Expenses Paid or Accrued:
|
$ | 1,774,101 | ||
|
Expenses
Waived**:
|
$ | (108,246 | ) | |
|
Net
Expenses Paid or Accrued Including Expenses Waived:
|
$ | 1,665,855 | ||
|
*
|
Includes
expenses relating to the registration of additional units, legal fees,
auditing fees, printing expenses, licensing fees and tax reporting fees
and fees paid to the independent directors of the General
Partner.
|
|
**
|
The
General Partner, though under no obligation to do so, agreed to pay
certain expenses, to the extent that such expenses exceeded 0.15% (15
basis points) of US12OF’s NAV, on an annualized basis through March 31,
2009, after which date such payments were no longer necessary. The General
Partner has no obligation to pay such expenses in subsequent
periods.
|
36
Expenses paid by
US12OF
through December 31, 2009 as a
Percentage of Average Daily Net Assets:
|
Expenses:
|
Amount as a Percentage of
Average Daily Net Assets
|
|
|
Amount
Paid to General Partner:
|
0.60%
annualized
|
|
|
Amount
Paid in Portfolio Brokerage
Commissions:
|
0.03%
annualized
|
|
|
Other
Amounts Paid:
|
0.52%
annualized
|
|
|
Total
Expenses Paid or Accrued:
|
1.15%
annualized
|
|
|
Expenses
Waived:
|
(0.07)%
annualized
|
|
|
Total
Expenses Paid or Accrued Including
Expenses
Waived:
|
1.08%
annualized
|
|
US12OF
Performance:
|
||||
|
Name
of Commodity Pool:
|
US12OF
|
|||
|
Type
of Commodity Pool:
|
Exchange
traded security
|
|||
|
Inception
of Trading:
|
December
6, 2007
|
|||
|
Aggregate
Subscriptions (from inception through December 31, 2009):
|
$ | 224,069,815 | ||
|
Total
Net Assets as of December 31, 2009:
|
$ | 165,523,309 | ||
|
Initial
NAV per Unit as of Inception:
|
$ | 50.00 | ||
|
NAV
per Unit as of December 31, 2009:
|
$ | 40.37 | ||
|
Worst
Monthly Percentage Draw-down:
|
October
2008 (29.59)
|
% | ||
|
Worst
Peak-to-Valley Draw-down:
|
June 2008 –February 2009 (66.97)
|
% | ||
|
Number
of Unitholders (as of December 31, 2009)
|
6,875 | |||
COMPOSITE
PERFORMANCE DATA FOR US12OF
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Rates of return*
|
||||||||||||
|
Month
|
2007
|
2008
|
2009
|
|||||||||
|
January
|
– | (2.03 | )% | (7.11 | )% | |||||||
|
February
|
– | 10.48 | % | (4.34 | )% | |||||||
|
March
|
– | (0.66 | )% | 9.22 | % | |||||||
|
April
|
– | 11.87 | % | (1.06 | )% | |||||||
|
May
|
– | 15.47 | % | 20.40 | % | |||||||
|
June
|
– | 11.59 | % | 4.51 | % | |||||||
|
July
|
– | (11.39 | )% | 1.22 | % | |||||||
|
August
|
– | (6.35 | )% | (2.85 | )% | |||||||
|
September
|
– | (13.12 | )% | (0.92 | )% | |||||||
|
October
|
– | (29.59 | )% | 8.48 | % | |||||||
|
November
|
– | (16.17 | )% | 2.31 | % | |||||||
|
December
|
8.46 | %** | (12.66 | )% | (1.10 | )% | ||||||
|
Annual
Rate of Return
|
8.46 | %** | (42.39 | )% | 29.23 | % | ||||||
|
*
|
The
monthly rate of return is calculated by dividing the ending NAV of a given
month by the ending NAV of the previous month, subtracting 1 and
multiplying this number by 100 to arrive at a percentage increase or
decrease.
|
|
**
|
Partial
from December 6, 2007.
|
For a
definition of draw-down, please see text below “Composite Performance Data for
US12NG.”
37
UGA
:
Experience
in Raising and Investing in Funds through December 31, 2009
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Dollar
Amount Offered*:
|
$ | 1,500,000,000 | ||
|
Dollar
Amount Raised:
|
$ | 126,263,653 | ||
|
Organizational
and Offering Expenses**:
|
||||
|
SEC
registration fee:
|
$ | 184,224 | ||
|
FINRA
registration fee:
|
$ | 151,000 | ||
|
Listing
fee:
|
$ | 5,000 | ||
|
Auditor’s
fees and expenses:
|
$ | 27,500 | ||
|
Legal
fees and expenses:
|
$ | 217,078 | ||
|
Printing
expenses:
|
$ | 162,901 | ||
|
Length
of UGA Offering:
|
Continuous
|
|||
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
|
**
|
Through
August 31, 2009, initial offering costs and a portion of ongoing expenses
were paid for by the General Partner. Following August 31, 2009, UGA has
paid the full portion of expenses related to registration of new units and
a portion of the expenses related to regular
operations.
|
Compensation
to the General Partner and Other Compensation UGA:
Expenses paid by UGA
through December 31, 2009 in dollar
terms:
|
Expenses:
|
Amount in Dollar Terms
|
|||
|
Amount
Paid to General Partner:
|
$ | 474,543 | ||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$ | 90,757 | ||
|
Other
Amounts Paid*:
|
$ | 529,839 | ||
|
Total
Expenses Paid:
|
$ | 1,095,139 | ||
|
Expenses
Waived**:
|
$ | (382,703 | ) | |
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
$ | 712,436 | ||
|
*
|
Includes
expenses relating to the registration of additional units, legal fees,
auditing fees, printing expenses, licensing fees and tax reporting fees
and fees paid to the independent directors of the General
Partner.
|
|
**
|
The
General Partner, though under no obligation to do so, agreed to pay
certain expenses, to the extent that such expenses exceeded 0.15% (15
basis points) of UGA’s NAV, on an annualized basis. The General Partner
has no obligation to continue such payment into subsequent
periods.
|
Expenses paid by UGA
through December 31, 2009 as a
Percentage of Average Daily Net Assets:
|
Expenses:
|
Amount as a Percentage
of Average Daily Net Assets
|
|
|
Amount
Paid to General Partner:
|
0.60%
annualized
|
|
|
Amount
Paid in Portfolio Brokerage Commissions:
|
0.11%
annualized
|
|
|
Other
Amounts Paid:
|
0.67%
annualized
|
|
|
Total
Expenses Paid:
|
1.38%
annualized
|
|
|
Expenses
Waived:
|
(0.48)%
annualized
|
|
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
0.90%
annualized
|
38
|
UGA
Performance:
|
||||
|
Name
of Commodity Pool:
|
UGA
|
|||
|
Type
of Commodity Pool:
|
Exchange
traded security
|
|||
|
Inception
of Trading:
|
February
26, 2008
|
|||
|
Aggregate
Subscriptions (from inception through December 31,
2009):
|
$ | 126,263,653 | ||
|
Total
Net Assets as of December 31, 2009:
|
$ | 69,185,740 | ||
|
Initial
NAV per Unit as of Inception:
|
$ | 50.00 | ||
|
NAV
per Unit as of December 31, 2009:
|
$ | 36.41 | ||
|
Worst
Monthly Percentage Draw-down:
|
October
2008 (38.48)
|
% | ||
|
Worst
Peak-to-Valley Draw-down:
|
June 2008 – December 2008 (69.02)
|
% | ||
|
Number
of Unitholders (as of December 31, 2009)
|
5,131 | |||
COMPOSITE
PERFORMANCE DATA FOR UGA
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Rates of return*
|
||||||||
|
Month
|
2008
|
2009
|
||||||
|
January
|
– | 16.23 | % | |||||
|
February
|
(0.56 | )%** | 0.26 | % | ||||
|
March
|
(2.39 | )% | 2.59 | % | ||||
|
April
|
10.94 | % | 2.07 | % | ||||
|
May
|
15.60 | % | 30.41 | % | ||||
|
June
|
4.80 | % | 1.65 | % | ||||
|
July
|
(12.79 | )% | 6.24 | % | ||||
|
August
|
(3.88 | )% | (3.71 | )% | ||||
|
September
|
(9.36 | )% | (3.38 | )% | ||||
|
October
|
(38.48 | )% | 10.96 | % | ||||
|
November
|
(21.35 | )% | 1.00 | % | ||||
|
December
|
(15.72 | )% | 0.55 | % | ||||
|
Annual
Rate of Return
|
(59.58 | )%** | 80.16 | % | ||||
|
*
|
The
monthly rate of return is calculated by dividing the ending NAV of a given
month by the ending NAV of the previous month, subtracting 1 and
multiplying this number by 100 to arrive at a percentage increase or
decrease.
|
|
**
|
Partial
from February 26, 2008.
|
For a
definition of draw-down, please see text below “Composite Performance Data for
US12NG.”
39
USHO
:
Experience
in Raising and Investing in Funds through December 31, 2009
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Dollar
Amount Offered*:
|
$ | 500,000,000 | ||
|
Dollar
Amount Raised:
|
$ | 27,750,399 | ||
|
Organizational
and Offering Expenses**:
|
||||
|
SEC
registration fee:
|
$ | 142,234 | ||
|
FINRA
registration fee:
|
$ | 151,000 | ||
|
Listing
fee:
|
$ | 5,000 | ||
|
Auditor’s
fees and expenses:
|
$ | 27,500 | ||
|
Legal
fees and expenses:
|
$ | 121,321 | ||
|
Printing
expenses:
|
$ | 106,584 | ||
|
Length
of USHO Offering:
|
Continuous
|
|||
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
|
**
|
Through
August 31, 2009, initial offering costs and a portion of ongoing expenses
were paid for by the General Partner. Following August 31, 2009, USHO has
paid the full portion of expenses related to registration of new units and
a portion of the expenses related to regular
operations.
|
Compensation
to the General Partner and Other Compensation USHO:
Expenses
paid by USHO through December 31, 2009 in dollar terms:
|
Expenses:
|
Amount in Dollar Terms
|
|||
|
Amount
Paid to General Partner:
|
$ | 109,681 | ||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$ | 18,418 | ||
|
Other
Amounts Paid*:
|
$ | 333,904 | ||
|
Total
Expenses Paid:
|
$ | 462,003 | ||
|
Expenses
Waived**:
|
$ | (299,225 | ) | |
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
$ | 162,778 | ||
|
*
|
Includes
expenses relating to the registration of additional units, legal fees,
auditing fees, printing expenses, licensing fees and tax reporting fees
and fees paid to the independent directors of the General
Partner.
|
|
**
|
The
General Partner, though under no obligation to do so, agreed to pay
certain expenses, to the extent that such expenses exceeded 0.15% (15
basis points) of USHO’s NAV, on an annualized basis. The General Partner
has no obligation to continue such payment into subsequent
periods.
|
Expenses
paid by USHO through December 31, 2009 as a Percentage of Average Daily Net
Assets:
|
Expenses:
|
Amount as a Percentage
of Average Daily Net Assets
|
|
|
Amount
Paid to General Partner:
|
0.60%
annualized
|
|
|
Amount
Paid in Portfolio Brokerage Commissions:
|
0.10%
annualized
|
|
|
Other
Amounts Paid:
|
1.83%
annualized
|
|
|
Total
Expenses Paid:
|
2.53%
annualized
|
|
|
Expenses
Waived:
|
(1.64)%
annualized
|
|
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
0.89%
annualized
|
40
|
USHO
Performance:
|
||||
|
Name
of Commodity Pool:
|
USHO
|
|||
|
Type
of Commodity Pool:
|
Exchange
traded security
|
|||
|
Inception
of Trading:
|
April
9, 2008
|
|||
|
Aggregate
Subscriptions (from inception through December 31, 2009):
|
$ | 27,750,399 | ||
|
Total
Net Assets as of December 31, 2009:
|
$ | 16,525,095 | ||
|
Initial
NAV per Unit as of Inception:
|
$ | 50.00 | ||
|
NAV
per Unit as of December 31, 2009:
|
$ | 27.54 | ||
|
Worst
Monthly Percentage Draw-down:
|
October
2008 (28.63)
|
% | ||
|
Worst
Peak-to-Valley Draw-down:
|
June 2008 – February 2009 (69.17)
|
% | ||
|
Number
of Unitholders (as of December 31, 2009)
|
1,154 | |||
COMPOSITE
PERFORMANCE DATA FOR USHO
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Rates of return*
|
||||||||
|
Month
|
2008
|
2009
|
||||||
|
January
|
– | 0.05 | % | |||||
|
February
|
– | (11.34 | )% | |||||
|
March
|
– | 6.73 | % | |||||
|
April
|
2.84 | %** | (3.85 | )% | ||||
|
May
|
15.93 | % | 23.13 | % | ||||
|
June
|
5.91 | % | 4.55 | % | ||||
|
July
|
(12.18 | )% | 0.39 | % | ||||
|
August
|
(8.41 | )% | (2.71 | )% | ||||
|
September
|
(9.77 | )% | (0.48 | )% | ||||
|
October
|
(28.63 | )% | 7.60 | % | ||||
|
November
|
(18.38 | )% | 0.19 | % | ||||
|
December
|
(17.80 | )% | 2.23 | % | ||||
|
Annual
Rate of Return
|
(56.12 | )%** | 25.52 | % | ||||
|
*
|
The
monthly rate of return is calculated by dividing the ending NAV of a given
month by the ending NAV of the previous month, subtracting 1 and
multiplying this number by 100 to arrive at a percentage increase or
decrease.
|
** Partial
from April 9, 2008.
For a
definition of draw-down, please see text below “Composite Performance Data for
US12NG.”
41
USSO
:
Experience
in Raising and Investing in Funds through December 31, 2009
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Dollar
Amount Offered*:
|
$ | 1,500,000,000 | ||
|
Dollar
Amount Raised:
|
$ | 14,290,534 | ||
|
Organizational
and Offering Expenses**:
|
||||
|
SEC
registration fee:
|
$ | 49,125 | ||
|
FINRA
registration fee:
|
$ | 75,500 | ||
|
Listing
fee:
|
$ | 5,000 | ||
|
Auditor’s
fees and expenses:
|
$ | 0 | ||
|
Legal
fees and expenses:
|
$ | 512,460 | ||
|
Printing
expenses:
|
$ | 23,945 | ||
|
Length
of USSO Offering:
|
Continuous
|
|||
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
|
**
|
These
expenses were paid for by the General
Partner.
|
Compensation
to the General Partner and Other Compensation USSO:
Expenses
paid by USSO through December 31, 2009 in dollar terms:
|
Expenses:
|
Amount in Dollar Terms
|
|||
|
Amount
Paid to General Partner:
|
$ | 20,150 | ||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$ | 4,695 | ||
|
Other
Amounts Paid*:
|
$ | 212,443 | ||
|
Total
Expenses Paid:
|
$ | 237,288 | ||
|
Expenses
Waived**:
|
$ | (206,444 | ) | |
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
$ | 30,844 | ||
|
*
|
Includes
expenses relating to legal fees, auditing fees, printing expenses,
licensing fees and tax reporting fees and fees paid to the independent
directors of the General Partner.
|
|
**
|
The
General Partner, though under no obligation to do so, agreed to pay
certain expenses, to the extent that such expenses exceeded 0.15% (15
basis points) of USSO’s NAV, on an annualized basis. The General Partner
has no obligation to continue such payment into subsequent
periods.
|
Expenses
paid by USSO through December 31, 2009 as a Percentage of Average Daily Net
Assets:
|
Expenses:
|
Amount as a Percentage
of Average Daily Net Assets
|
|
|
Amount
Paid to General Partner:
|
0.60%
annualized
|
|
|
Amount
Paid in Portfolio Brokerage Commissions:
|
0.14%
annualized
|
|
|
Other
Amounts Paid:
|
6.33%
annualized
|
|
|
Total
Expenses Paid:
|
7.07%
annualized
|
|
|
Expenses
Waived:
|
(6.15)%
annualized
|
|
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
0.92%
annualized
|
42
|
USS
O
Performance:
|
||||
|
Name
of Commodity Pool:
|
USSO
|
|||
|
Type
of Commodity Pool:
|
Exchange
traded security
|
|||
|
Inception
of Trading:
|
September
24, 2009
|
|||
|
Aggregate
Subscriptions (from inception through December 31, 2009):
|
$ | 14,290,534 | ||
|
Total
Net Assets as of December 31, 2009:
|
$ | 13,196,305 | ||
|
Initial
NAV per Unit as of Inception:
|
$ | 50.00 | ||
|
NAV
per Unit as of December 31, 2009:
|
$ | 43.99 | ||
|
Worst
Monthly Percentage Draw-down:
|
October
2009 (8.65)
|
% | ||
|
Worst
Peak-to-Valley Draw-down:
|
September 2009-December 2009 (12.02)
|
% | ||
|
Number
of Unitholders (as of December 31, 2009)
|
185 | |||
COMPOSITE
PERFORMANCE DATA FOR USSO
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Rates of return*
|
||||
|
Month
|
2009
|
|||
|
January
|
– | |||
|
February
|
– | |||
|
March
|
– | |||
|
April
|
– | |||
|
May
|
– | |||
|
June
|
– | |||
|
July
|
– | |||
|
August
|
– | |||
|
September
|
(2.90 | )%** | ||
|
October
|
(8.65 | )% | ||
|
November
|
(0.25 | )% | ||
|
December
|
(0.57 | )% | ||
|
Annual
Rate of Return
|
(12.02 | )%** | ||
|
*
|
The
monthly rate of return is calculated by dividing the ending NAV of a given
month by the ending NAV of the previous month, subtracting 1 and
multiplying this number by 100 to arrive at a percentage increase or
decrease.
|
|
**
|
Partial
from September 24, 2009.
|
For a
definition of draw-down, please see text below “Composite Performance Data for
US12NG.”
Other
Related Commodity Trading and Investment Management Experience
Until
December 31, 2009, Ameristock Corporation was an affiliate of the General
Partner. Ameristock Corporation is a California-based registered
investment advisor registered under the Investment Advisers Act of 1940, as
amended, that has been sponsoring and providing portfolio management services to
mutual funds since 1995. Ameristock Corporation is the investment adviser to the
Ameristock Mutual Fund, Inc., a mutual fund registered under the Investment
Company Act of 1940, as amended (the “1940 Act”), that focuses on large cap U.S.
equities that has $219,616,809 in assets as of December 31, 2009. Ameristock
Corporation was also the investment advisor to the Ameristock ETF Trust, an
open-end management investment company registered under the 1940 Act that
consisted of five separate investment portfolios, each of which sought
investment results, before fees and expenses, that corresponded generally to the
price and yield performance of a particular U.S. Treasury securities index owned
and compiled by Ryan Holdings LLC and Ryan ALM, Inc. The Ameristock
ETF Trust has liquidated each of its investment portfolios and has wound up its
affairs.
43
Investments
The
General Partner applies substantially all of US12NG’s assets toward trading in
Futures Contracts and Other Natural Gas-Related Investments, Treasuries, cash
and/or cash equivalents. The General Partner has sole authority to determine the
percentage of assets that are:
|
·
|
held
on deposit with the futures commission merchant or other
custodian,
|
|
·
|
used
for other investments, and
|
|
·
|
held
in bank accounts to pay current obligations and as
reserves.
|
The
General Partner deposits substantially all of US12NG’s net assets with the
Custodian or other custodian for trading. When US12NG purchases a Futures
Contract and certain exchange traded Other Natural Gas-Related Investments,
US12NG is required to deposit with the selling futures commission merchant on
behalf of the exchange a portion of the value of the contract or other interest
as security to ensure payment for the obligation under natural gas interests at
maturity. This deposit is known as “margin.” US12NG invests the remainder of its
assets equal to the difference between the margin deposited and the market value
of the futures contract in Treasuries, cash and/or cash
equivalents.
US12NG’s
assets are held in segregated accounts pursuant to the CEA and CFTC regulations.
The General Partner believes that all entities that hold or trade US12NG’s
assets are based in the United States and are subject to United States
regulations.
Approximately
5% to 10% of US12NG’s assets have normally been committed as margin for Futures
Contracts. However, from time to time, the percentage of assets committed as
margin may be substantially more, or less, than such range. The General Partner
invests the balance of US12NG’s assets not invested in natural gas interests or
held in margin as reserves to be available for changes in margin. All interest
income is used for US12NG’s benefit.
The
futures commission merchant, a government agency or a commodity exchange could
increase margins applicable to US12NG to hold trading positions at any time.
Moreover, margin is merely a security deposit and has no bearing on the profit
or loss potential for any positions taken.
US12NG’s
assets will be held in segregated accounts pursuant to the Commodity Exchange
Act and CFTC regulations.
The
Commodity Interest Markets
General
The CEA
governs the regulation of commodity interest transactions, markets and
intermediaries. In December 2000, the CEA was amended by the Commodity Futures
Modernization Act of 2000 (the “CFMA”), which substantially revised the
regulatory framework governing certain commodity interest transactions and the
markets on which they trade. The CEA, as amended by the CFMA, now provides for
varying degrees of regulation of commodity interest transactions depending upon
the variables of the transaction. In general, these variables include (1) the
type of instrument being traded (e.g., contracts for future delivery, options,
swaps or spot contracts), (2) the type of commodity underlying the instrument
(distinctions are made between instruments based on agricultural commodities,
energy and metals commodities and financial commodities), (3) the nature of the
parties to the transaction (retail, eligible contract participant, or eligible
commercial entity), (4) whether the transaction is entered into on a
principal-to-principal or intermediated basis, (5) the type of market on which
the transaction occurs, and (6) whether the transaction is subject to clearing
through a clearing organization. Information regarding commodity interest
transactions, markets and intermediaries, and their associated regulatory
environment, is provided below.
44
Futures
Contracts
A futures
contract is a standardized contract traded on, or subject to the rules of, an
exchange that calls for the future delivery of a specified quantity and type of
a commodity at a specified time and place. Futures contracts are traded on a
wide variety of commodities, including agricultural products, bonds, stock
indices, interest rates, currencies, energy and metals. The size and terms of
futures contracts on a particular commodity are identical and are not subject to
any negotiation, other than with respect to price and the number of contracts
traded between the buyer and seller.
The
contractual obligations of a buyer or seller may generally be satisfied by
taking or making physical delivery of the underlying of 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 difference between
the price at which the futures contract is purchased or sold and the price paid
for the offsetting sale or purchase, after allowance for brokerage commissions,
constitutes the profit or loss to the trader. Some futures contracts, such as
stock index contracts, settle in cash (reflecting the difference between the
contract purchase/sale price and the contract settlement price) rather than by
delivery of the underlying commodity.
In market
terminology, a trader who purchases a futures contract is long in the market and
a trader who sells a futures contract is short in the market. Before a trader
closes out his long or short position by an offsetting sale or purchase, his
outstanding contracts are known as open trades or open positions. The aggregate
amount of open positions held by traders in a particular contract is referred to
as the open interest in such contract.
Forward
Contracts
A forward
contract is a contractual obligation to purchase or sell a specified quantity of
a commodity at or before a specified date in the future at a specified price
and, therefore, is economically similar to a futures contract. Unlike futures
contracts, however, forward contracts are typically traded in the
over-the-counter markets and are not standardized contracts. Forward contracts
for a given commodity are generally available for various amounts and maturities
and are subject to individual negotiation between the parties involved.
Moreover, generally there is no direct means of offsetting or closing out a
forward contract by taking an offsetting position as one would a futures
contract on a U.S. exchange. If a trader desires to close out a forward contract
position, he generally will establish an opposite position in the contract but
will settle and recognize the profit or loss on both positions simultaneously on
the delivery date. Thus, unlike in the futures contract market where a trader
who has offset positions will recognize profit or loss immediately, in the
forward market a trader with a position that has been offset at a profit will
generally not receive such profit until the delivery date, and likewise a trader
with a position that has been offset at a loss will generally not have to pay
money until the delivery date. In recent years, however, the terms of forward
contracts have become more standardized, and in some instances such contracts
now provide a right of offset or cash settlement as an alternative to making or
taking delivery of the underlying commodity.
The
forward markets provide what has typically been a highly liquid market for
foreign exchange trading, and in certain cases the prices quoted for foreign
exchange forward contracts may be more favorable than the prices for foreign
exchange futures contracts traded on U.S. exchanges. The forward markets are
largely unregulated. Forward contracts are, in general, not cleared or
guaranteed by a third party. Commercial banks participating in trading foreign
exchange forward contracts often do not require margin deposits, but rely upon
internal credit limitations and their judgments regarding the creditworthiness
of their counterparties. In recent years, however, many over-the-counter market
participants in foreign exchange trading have begun to require that their
counterparties post margin.
Further,
as the result of the CFMA, over-the-counter derivative instruments such as
forward contracts and swap agreements (and options on forwards and physical
commodities) may begin to be traded on lightly-regulated exchanges or electronic
trading platforms that may, but are not required to, provide for clearing
facilities. Exchanges and electronic trading platforms on which over-the-counter
instruments may be traded and the regulation and criteria for that trading are
more fully described below under “Futures Exchanges and Clearing Organizations.”
Nonetheless, absent a clearing facility, US12NG’s trading in foreign exchange
and other forward contracts is exposed to the creditworthiness of the
counterparties on the other side of the trade.
45
Options
on Futures Contracts
Options
on futures contracts are standardized contracts traded on an exchange. An option
on a futures contract gives the buyer of the option the right, but not the
obligation, to take a position at a specified price (the striking, strike, or
exercise price) in the underlying futures contract or underlying interest. The
buyer of a call option acquires the right, but not the obligation, to purchase
or take a long position in the underlying interest, and the buyer of a put
option acquires the right, but not the obligation, to sell or take a short
position in the underlying interest.
The
seller, or writer, of an option is obligated to take a position in the
underlying interest at a specified price opposite to the option buyer if the
option is exercised. Thus, the seller of a call option must stand ready to take
a short position in the underlying interest at the strike price if the buyer
should exercise the option. The seller of a put option, on the other hand, must
stand ready to take a long position in the underlying interest at the strike
price.
A call
option is said to be in-the-money if the strike price is below current market
levels and out-of-the-money if the strike price is above current market levels.
Conversely, a put option is said to be in-the-money if the strike price is above
the current market levels and out-of-the-money if the strike price is below
current market levels.
Options
have limited life spans, usually tied to the delivery or settlement date of the
underlying interest. Some options, however, expire significantly in advance of
such date. The purchase price of an option is referred to as its premium, which
consists of its intrinsic value (which is related to the underlying market
value) plus its time value. As an option nears its expiration date, the time
value shrinks and the market and intrinsic values move into parity. An option
that is out-of-the-money and not offset by the time it expires becomes
worthless. On certain exchanges, in-the-money options are automatically
exercised on their expiration date, but on others unexercised options simply
become worthless after their expiration date.
Regardless
of how much the market swings, the most an option buyer can lose is the option
premium. The option buyer deposits his premium with his broker, and the money
goes to the option seller. Option sellers, on the other hand, face risks similar
to participants in the futures markets. For example, since the seller of a call
option is assigned a short futures position if the option is exercised, his risk
is the same as someone who initially sold a futures contract. Because no one can
predict exactly how the market will move, the option seller posts margin to
demonstrate his ability to meet any potential contractual
obligations.
Options
on Forward Contracts or Commodities
Options
on forward contracts or commodities operate in a manner similar to options on
futures contracts. An option on a forward contract or commodity gives the buyer
of the option the right, but not the obligation, to take a position at a
specified price in the underlying forward contract or commodity. However,
similar to forward contracts, options on forward contracts or on commodities are
individually negotiated contracts between counterparties and are typically
traded in the over-the-counter market. Therefore, options on forward contracts
and physical commodities possess many of the same characteristics of forward
contracts with respect to offsetting positions and credit risk that are
described above.
Swap
Contracts
Swap
transactions generally involve contracts between two parties to exchange a
stream of payments computed by reference to a notional amount and the price of
the asset that is the subject of the swap. Swap contracts are principally traded
off-exchange, although recently, as a result of regulatory changes enacted as
part of the CFMA, certain swap contracts are now being traded in electronic
trading facilities and cleared through clearing organizations.
Swaps are
usually entered into on a net basis, that is, the two payment streams are netted
out in a cash settlement on the payment date or dates specified in the
agreement, with the parties receiving or paying, as the case may be, only the
net amount of the two payments. Swaps do not generally involve the delivery of
underlying assets or principal. Accordingly, the risk of loss with respect to
swaps is generally limited to the net amount of payments that the party is
contractually obligated to make. In some swap transactions one or both parties
may require collateral deposits from the counterparty to support that
counterparty’s obligation under the swap agreement. If the counterparty to such
a swap defaults, the risk of loss consists of the net amount of payments that
the party is contractually entitled to receive less any collateral deposits
it is holding.
46
Some swap
transactions are cleared through central counterparties. These
transactions, known as cleared swaps, involve two counterparties first agreeing
to the terms of a swap transaction, then submitting the transaction to a
clearing house that acts as the central counterparty. Once submitted
to the clearing house, the original swap transaction is novated and the central
counterparty becomes the counterparty to a trade with each of the original
parties based upon the trade terms determined in the original
transaction. In this manner each individual swap counterparty reduces
its risk of loss due to counterparty nonperformance because the clearing house
acts as the counterparty to each transaction.
Participants
The two
broad classes of persons who trade commodities are hedgers and speculators.
Hedgers include financial institutions that manage or deal in interest
rate-sensitive instruments, foreign currencies or stock portfolios, and
commercial market participants, such as farmers and manufacturers, that market
or process commodities. Hedging is a protective procedure designed to
effectively lock in prices that would otherwise change due to an adverse
movement in the price of the underlying commodity, for example, the adverse
price movement between the time a merchandiser or processor enters into a
contract to buy or sell a raw or processed commodity at a certain price and the
time he must perform the contract. In such a case, at the time the hedger
contracts to physically sell the commodity at a future date he will
simultaneously buy a futures or forward contract for the necessary equivalent
quantity of the commodity. At the time for performance of the contract, the
hedger may accept delivery under his futures contract and sell the commodity
quantity as required by his physical contract or he may buy the actual
commodity, sell it under the physical contract and close out his position by
making an offsetting sale of a futures contract.
The
commodity interest markets enable the hedger to shift the risk of price
fluctuations. The usual objective of the hedger is to protect the profit that he
expects to earn from farming, merchandising, or processing operations rather
than to profit from his trading. However, at times the impetus for a hedge
transaction may result in part from speculative objectives and hedgers can end
up paying higher prices than they would have, for example, if current market
prices are lower than the locked in price.
Unlike
the hedger, the speculator generally expects neither to make nor take delivery
of the underlying commodity. Instead, the speculator risks his capital with the
hope of making profits from price fluctuations in the commodities. The
speculator is, in effect, the risk bearer who assumes the risks that the hedger
seeks to avoid. Speculators rarely make or take delivery of the underlying
commodity; rather they attempt to close out their positions prior to the
delivery date. Because the speculator may take either a long or short position
in commodities, it is possible for him to make profits or incur losses
regardless of whether prices go up or down.
Futures
Exchanges and Clearing Organizations
Futures
exchanges provide centralized market facilities in which multiple persons have
the ability to execute or trade contracts by accepting bids and offers from
multiple participants. Futures exchanges may provide for execution of trades at
a physical location utilizing trading pits and/or may provide for trading to be
done electronically through computerized matching of bids and offers pursuant to
various algorithms. Members of a particular exchange and the trades executed on
such exchange are subject to the rules of that exchange. Futures exchanges and
clearing organizations are given reasonable latitude in promulgating rules and
regulations to control and regulate their members. Examples of regulations by
exchanges and clearing organizations include the establishment of initial margin
levels, rules regarding trading practices, contract specifications, speculative
position limits, daily price fluctuation limits, and execution and clearing
fees.
47
Clearing
organizations provide services designed to mutualize or transfer the credit risk
arising from the trading of contracts on an exchange or other electronic trading
facility. Once trades made between members of an exchange or electronic trading
facility have been confirmed, the clearing organization becomes substituted for
the clearing member acting on behalf of each buyer and each seller of contracts
traded on the exchange or trading platform and in effect becomes the other party
to the trade. Thereafter, each clearing member party to the trade looks only to
the clearing organization for performance. The clearing organization generally
establishes some sort of security or guarantee fund to which all clearing
members of the exchange must contribute; this fund acts as an emergency buffer
that is intended to enable the clearing organization to meet its obligations
with regard to the other side of an insolvent clearing member’s contracts.
Furthermore, the clearing organization requires margin deposits and continuously
marks positions to market to provide some assurance that its members will be
able to fulfill their contractual obligations. Thus, a central function of the
clearing organization is to ensure the integrity of trades, and members
effecting transactions on an exchange need not concern themselves with the
solvency of the party on the opposite side of the trade; their only remaining
concerns are the respective solvencies of their own customers, their clearing
broker and the clearing organization. The clearing organizations do not deal
with customers, but only with their member firms and the guarantee of
performance for open positions provided by the clearing organization does not
run to customers.
U.S.
Futures Exchanges
Futures
exchanges in the United States are subject to varying degrees of regulation by
the CFTC based on their designation as one of the following: a designated
contract market, a derivatives transaction execution facility, an exempt board
of trade or an electronic trading facility.
A
designated contract market is the most highly regulated level of futures
exchange. Designated contract markets may offer products to retail customers on
an unrestricted basis. To be designated as a contract market, the exchange must
demonstrate that it satisfies specified general criteria for designation, such
as having the ability to prevent market manipulation, rules and procedures to
ensure fair and equitable trading, position limits, dispute resolution
procedures, minimization of conflicts of interest and protection of market
participants. Among the principal designated contract markets in the United
States are the Chicago Board of Trade, the Chicago Mercantile Exchange and the
NYMEX. Each of the designated contract markets in the United States must provide
for the clearance and settlement of transactions with a CFTC-registered
derivatives clearing organization.
A
derivatives transaction execution facility (a “DTEF”) is a new type of exchange
that is subject to fewer regulatory requirements than a designated contract
market but is subject to both commodity interest and participant limitations.
DTEFs limit access to eligible traders that qualify as either eligible contract
participants or eligible commercial entities for futures and option contracts on
commodities that have a nearly inexhaustible deliverable supply, are highly
unlikely to be susceptible to the threat of manipulation, or have no cash
market, security futures products, and futures and option contracts on
commodities that the CFTC may determine, on a case-by-case basis, are highly
unlikely to be susceptible to the threat of manipulation. In addition, certain
commodity interests excluded or exempt from the CEA, such as swaps, etc. may be
traded on a DTEF. There is no requirement that a DTEF use a clearing
organization, except with respect to trading in security futures contracts, in
which case the clearing organization must be a securities clearing agency.
However, if futures contracts and options on futures contracts on a DTEF are
cleared, then it must be through a CFTC-registered derivatives clearing
organization, except that some excluded or exempt commodities traded on a DTEF
may be cleared through a clearing organization other than one registered with
the CFTC.
An exempt
board of trade is also a newly designated form of exchange. An exempt board of
trade is substantially unregulated, subject only to CFTC anti-fraud and
anti-manipulation authority. An exempt board of trade is permitted to trade
futures contracts and options on futures contracts provided that the underlying
commodity is not a security or securities index and has an inexhaustible
deliverable supply or no cash market. All traders on an exempt board of trade
must qualify as eligible contract participants. Contracts deemed eligible to be
traded on an exempt board of trade include contracts on interest rates, exchange
rates, currencies, credit risks or measures, debt instruments, measures of
inflation, or other macroeconomic indices or measures. There is no requirement
that an exempt board of trade use a clearing organization. However, if contracts
on an exempt board of trade are cleared, then it must be through a
CFTC-registered derivatives clearing organization. A board of trade electing to
operate as an exempt board of trade must file a written notification with the
CFTC.
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An
electronic trading facility is a new form of trading platform that operates by
means of an electronic or telecommunications network and maintains an automated
audit trail of bids, offers, and the matching of orders or the execution of
transactions on the electronic trading facility. The CEA does not apply to, and
the CFTC has no jurisdiction over, transactions on an electronic trading
facility in certain excluded commodities that are entered into between
principals that qualify as eligible contract participants, subject only to CFTC
anti-fraud and anti-manipulation authority. In general, excluded commodities
include interest rates, currencies, securities, securities indices or other
financial, economic or commercial indices or measures.
The
General Partner intends to monitor the development of and opportunities and
risks presented by the new less-regulated exchanges and exempt boards as well as
other trading platforms currently in place or that are being considered by
regulators and may, in the future, allocate a percentage of US12NG’s assets to
trading in products on these exchanges. Provided US12NG maintains assets
exceeding $5 million, US12NG would qualify as an eligible contract participant
and thus would be able to trade on such exchanges.
Non-U.S.
Futures Exchanges
Non-U.S.
futures exchanges differ in certain respects from their U.S. counterparts.
Importantly, non-U.S. futures exchanges are not subject to regulation by the
CFTC, but rather are regulated by their home country regulator. In contrast to
U.S. designated contract markets, some non-U.S. exchanges are principals’
markets, where trades remain the liability of the traders involved, and the
exchange or an affiliated clearing organization, if any, does not become
substituted for any party. Due to the absence of a clearing system, such
exchanges are significantly more susceptible to disruptions. Further,
participants in such markets must often satisfy themselves as to the individual
creditworthiness of each entity with which they enter into a trade. Trading on
non-U.S. exchanges is often in the currency of the exchange’s home jurisdiction.
Consequently, US12NG is subject to the additional risk of fluctuations in the
exchange rate between such currencies and U.S. dollars and the possibility that
exchange controls could be imposed in the future. Trading on non-U.S. exchanges
may differ from trading on U.S. exchanges in a variety of ways and, accordingly,
may subject US12NG to additional risks.
Accountability
Levels and Position Limits
The CFTC and U.S. designated contract
markets have established accountability levels and position limits on the
maximum net long or net short futures contracts in commodity interests that any
person or group of persons under common trading control (other than a hedger,
which US12NG is not) may hold, own or control. Among the purposes of
accountability levels and position limits is to prevent a corner or squeeze on a
market or undue influence on prices by any single trader or group of traders.
The position limits currently established by the CFTC apply to certain
agricultural commodity interests, such as grains (oats, barley, and flaxseed),
soybeans, corn, wheat, cotton, eggs, rye, and potatoes, but not to interests in
energy products. In addition, U.S. exchanges may set accountability levels and
position limits for all commodity interests traded on that exchange. For
example, the current accountability level for investments at any one time in
natural gas Futures Contracts (including investments in the Benchmark Futures
Contract) on the NYMEX is 12,000 contracts. The NYMEX also imposes position
limits on contracts held in the last few days of trading in the near month
contract to expire. The ICE Futures has recently adopted similar accountability
levels and position limits for certain of its Futures Contracts that are traded
on the ICE Futures and settled against the price of a contract listed for
trading on a U.S. designated contract market such as NYMEX. In
particular, the Henry Hub natural gas contract on the ICE Futures is subjected
to the same accountability levels and positions limits as the NYMEX Henry Hub
natural gas contract upon which it settles as a result of the CFTC’s
determination in July 2009 that the ICE Futures Henry Hub contract was a
significant price discovery contract.
Certain exchanges or clearing
organizations also set limits on the total net positions that may be held by a
clearing broker. In general, no position limits are in effect in forward or
other over-the-counter contract trading or in trading on non-U.S. futures
exchanges, although the principals with which US12NG and the clearing brokers
may trade in such markets may impose such limits as a matter of credit policy.
For purposes of determining accountability levels and position limits, US12NG’s
commodity interest positions will not be attributable to investors in their own
commodity interest trading.
49
On
January 26, 2010, the CFTC published a proposed rule that, if implemented, would
set fixed position limits on certain energy Futures Contracts, including the
NYMEX RBOB gasoline futures contract, NYMEX Henry Hub natural gas futures
contract, NYMEX Light Sweet crude oil futures contract and NYMEX New York Harbor
No. 2 heating oil futures contract, along with any contract based upon these
contracts. The proposed position limits would be set as a percentage
of the open interest in these contracts for the spot month, any single month,
and all months combined. Additionally, the proposed rule would
aggregate positions in the enumerated contracts and those based upon such
contracts, including contracts listed on separate exchanges. This
proposal is currently undergoing a 90-day public comment period.
Daily
Price Limits
Most U.S.
futures exchanges (but generally not non-U.S. exchanges) may limit the amount of
fluctuation in some futures contract or options on a futures contract prices
during a single trading day by regulations. These regulations specify what are
referred to as daily price fluctuation limits or, more commonly, daily limits.
The daily limits establish the maximum amount that the price of a futures or
options on futures contract may vary either up or down from the previous day’s
settlement price. Once the daily limit has been reached in a particular futures
or options on futures contract, no trades may be made at a price beyond the
limit. Positions in the futures or options contract may then be taken or
liquidated, if at all, only at inordinate expense or if traders are willing to
effect trades at or within the limit during the period for trading on such day.
Because the daily limit rule governs price movement only for a particular
trading day, it does not limit losses and may in fact substantially increase
losses because it may prevent the liquidation of unfavorable positions. Futures
contract prices have occasionally moved to the daily limit for several
consecutive trading days, thus preventing prompt liquidation of positions and
subjecting the trader to substantial losses for those days. The concept of daily
price limits is not relevant to over-the-counter contracts, including forwards
and swaps, and thus such limits are not imposed by banks and others who deal in
those markets.
In
contrast, the NYMEX does not impose daily limits but rather limits the amount of
price fluctuation for Futures Contracts. For example, the NYMEX imposes a
$3.00 per mmBtu ($30,000 per contract) price fluctuation limit for the
Benchmark Futures Contract. This limit is initially based off the previous
trading day’s settlement price. If any Benchmark Futures Contract is traded,
bid, or offered at the limit for five minutes, trading is halted for five
minutes. When trading resumes it begins at the point where the limit was imposed
and the limit is reset to be $3.00 per mmBtu in either direction of that point.
If another halt were triggered, the market would continue to be expanded by
$3.00 per mmBtu in either direction after each successive five-minute trading
halt. There is no maximum price fluctuation limit during any one trading
session.
Commodity
Prices
Commodity
prices are volatile and, although ultimately determined by the interaction of
supply and demand, are subject to many other influences, including the
psychology of the marketplace and speculative assessments of future world and
economic events. Political climate, interest rates, treaties, balance of
payments, exchange controls and other governmental interventions as well as
numerous other variables affect the commodity markets, and even with
comparatively complete information it is impossible for any trader to predict
reliably commodity prices.
Regulation
Futures
exchanges in the United States are subject to varying degrees of regulation
under the CEA depending on whether such exchange is a designated contract
market, DTEF, exempt board of trade or electronic trading facility. Derivatives
clearing organizations are also subject to the CEA and CFTC regulation. The CFTC
is the governmental agency charged with responsibility for regulation of futures
exchanges and commodity interest trading conducted on those exchanges. The
CFTC’s function is to implement the CEA’s objectives of preventing price
manipulation and excessive speculation and promoting orderly and efficient
commodity interest markets. In addition, the various exchanges and clearing
organizations themselves exercise regulatory and supervisory authority over
their member firms.
50
The CFTC
possesses exclusive jurisdiction to regulate the activities of CPOs and
commodity trading advisors and has adopted regulations with respect to the
activities of those persons and/or entities. Under the CEA, a registered CPO,
such as the General Partner, is required to make annual filings with the CFTC
describing its organization, capital structure, management and controlling
persons. In addition, the CEA authorizes the CFTC to require and review books
and records of, and documents prepared by, registered CPOs. Pursuant to this
authority, the CFTC requires CPOs to keep accurate, current and orderly records
for each pool that they operate. The CFTC may suspend the registration of a CPO
(1) if the CFTC finds that the operator’s trading practices tend to disrupt
orderly market conditions, (2) if any controlling person of the operator is
subject to an order of the CFTC denying such person trading privileges on any
exchange, and (3) in certain other circumstances. Suspension, restriction or
termination of the General Partner’s registration as a CPO would prevent it,
until that registration were to be reinstated, from managing US12NG, and might
result in the termination of US12NG. US12NG itself is not required to be
registered with the CFTC in any capacity.
The CEA
gives the CFTC similar authority with respect to the activities of commodity
trading advisors. If a trading advisor’s commodity trading advisor registration
were to be terminated, restricted or suspended, the trading advisor would be
unable, until the registration were to be reinstated, to render trading advice
to US12NG.
The CEA
requires all futures commission merchants, such as US12NG’s clearing brokers, to
meet and maintain specified fitness and financial requirements, to segregate
customer funds from proprietary funds and account separately for all customers’
funds and positions, and to maintain specified books and records open to
inspection by the staff of the CFTC. The CFTC has similar authority over
introducing brokers, or persons who solicit or accept orders for commodity
interest trades but who do not accept margin deposits for the execution of
trades. The CEA authorizes the CFTC to regulate trading by futures commission
merchants and by their officers and directors, permits the CFTC to require
action by exchanges in the event of market emergencies, and establishes an
administrative procedure under which customers may institute complaints for
damages arising from alleged violations of the CEA. The CEA also gives the
states powers to enforce its provisions and the regulations of the
CFTC.
US12NG’s
investors are afforded prescribed rights for reparations under the CEA.
Investors may also be able to maintain a private right of action for violations
of the CEA. The CFTC has adopted rules implementing the reparation provisions of
the CEA, which provide that any person may file a complaint for a reparations
award with the CFTC for violation of the CEA against a floor broker or a futures
commission merchant, introducing broker, commodity trading advisor, CPO, and
their respective associated persons.
Pursuant
to authority in the CEA, the NFA has been formed and registered with the CFTC as
a registered futures association. At the present time, the NFA is the only
self-regulatory organization for commodity interest professionals, other than
futures exchanges. The CFTC has delegated to the NFA responsibility for the
registration of commodity trading advisors, CPOs, futures commission merchants,
introducing brokers, and their respective associated persons and floor brokers.
The General Partner, each trading advisor, the selling agents and the clearing
brokers are members of the NFA. As such, they are subject to NFA standards
relating to fair trade practices, financial condition and consumer protection.
US12NG itself is not required to become a member of the NFA. As the
self-regulatory body of the commodity interest industry, the NFA promulgates
rules governing the conduct of professionals and disciplines those professionals
that do not comply with these rules. The NFA also arbitrates disputes between
members and their customers and conducts registration and fitness screening of
applicants for membership and audits of its existing members.
The
regulations of the CFTC and the NFA prohibit any representation by a person
registered with the CFTC or by any member of the NFA, that registration with the
CFTC, or membership in the NFA, in any respect indicates that the CFTC or the
NFA, as the case may be, has approved or endorsed that person or that person’s
trading program or objectives. The registrations and memberships of the parties
described in this summary must not be considered as constituting any such
approval or endorsement. Likewise, no futures exchange has given or will give
any similar approval or endorsement.
The
regulation of commodity interest trading in the United States and other
countries is an evolving area of the law. The various statements made in this
summary are subject to modification by legislative action and changes in the
rules and regulations of the CFTC, the NFA, the futures exchanges, clearing
organizations and other regulatory bodies.
51
The
function of the CFTC is to implement the objectives of the CEA of preventing
price manipulation and other disruptions to market integrity, avoiding systemic
risk, preventing fraud and promoting innovation, competition and financial
integrity of transactions. As mentioned above, this regulation, among other
things, provides that the trading of commodity interest contracts generally must
be upon exchanges designated as contract markets or DTEFs and that all trading
on those exchanges must be done by or through exchange members. Under the CFMA,
commodity interest trading in some commodities between sophisticated persons may
be traded on a trading facility not regulated by the CFTC. As a general matter,
trading in spot contracts, forward contracts, options on forward contracts or
commodities, or swap contracts between eligible contract participants is not
within the jurisdiction of the CFTC and may therefore be effectively
unregulated. The trading advisors may engage in those transactions on behalf of
US12NG in reliance on this exclusion from regulation. However, legislation
currently under consideration by the U.S. Congress would remove the exclusion
provided to these transactions and place them under federal
regulation. The proposed legislation would subject these contracts to
new capital, margin, recordkeeping, and reporting requirements.
In
general, the CFTC does not regulate the interbank and forward foreign currency
markets with respect to transactions in contracts between certain sophisticated
counterparties such as US12NG or between certain regulated institutions and
retail investors. Although U.S. banks are regulated in various ways by the
Federal Reserve Board, the Comptroller of the Currency and other U.S. federal
and state banking officials, banking authorities do not regulate the forward
markets.
While the
U.S. government does not currently impose any restrictions on the movements of
currencies, it could choose to do so. The imposition or relaxation of exchange
controls in various jurisdictions could significantly affect the market for that
and other jurisdictions’ currencies. Trading in the interbank market also
exposes US12NG to a risk of default since failure of a bank with which US12NG
had entered into a forward contract would likely result in a default and thus
possibly substantial losses to US12NG.
The CFTC
is prohibited by statute from regulating trading on non-U.S. futures exchanges
and markets. The CFTC, however, has adopted regulations relating to the
marketing of non-U.S. futures contracts in the United States. These regulations
permit certain contracts traded on non-U.S. exchanges to be offered and sold in
the United States.
Commodity
Margin
Original
or initial margin is the minimum amount of funds that must be deposited by a
commodity interest trader with the trader’s broker to initiate and maintain an
open position in futures contracts. Maintenance margin is the amount (generally
less than the original margin) to which a trader’s account may decline before he
must deliver additional margin. A margin deposit is like a cash performance
bond. It helps assure the trader’s performance of the futures contracts that he
or she purchases or sells. Futures contracts are customarily bought and sold on
initial margin that represents a very small percentage (ranging upward from less
than 2%) of the aggregate purchase or sales price of the contract. Because of
such low margin requirements, price fluctuations occurring in the futures
markets may create profits and losses that, in relation to the amount invested,
are greater than are customary in other forms of investment or speculation. As
discussed below, adverse price changes in the futures contract may result in
margin requirements that greatly exceed the initial margin. In addition, the
amount of margin required in connection with a particular futures contract is
set from time to time by the exchange on which the contract is traded and may be
modified from time to time by the exchange during the term of the
contract.
Brokerage
firms, such as US12NG’s clearing brokers, carrying accounts for traders in
commodity interest contracts may not accept lower, and generally require higher,
amounts of margin as a matter of policy to further protect themselves. The
clearing brokers require US12NG to make margin deposits equal to exchange
minimum levels for all commodity interest contracts. This requirement may be
altered from time to time in the clearing brokers’ discretion.
Trading
in the over-the-counter markets where no clearing facility is provided generally
does not require margin but generally does require the extension of credit
between counterparties. This extension of credit generally takes the
form of transfers of collateral and/or independent amounts. Collateral is
transferred between counterparties during the term of an over-the-counter
transaction based upon the changing value of the transaction, while independent
amounts are fixed amounts posted by one or both counterparties at the start of
an over-the-counter transaction.
52
When a
trader purchases an option, there is no margin requirement; however, the option
premium must be paid in full. When a trader sells an option, on the other hand,
he or she is required to deposit margin in an amount determined by the margin
requirements established for the underlying interest and, in addition, an amount
substantially equal to the current premium for the option. The margin
requirements imposed on the selling of options, although adjusted to reflect the
probability that out-of-the-money options will not be exercised, can in fact be
higher than those imposed in dealing in the futures markets directly.
Complicated margin requirements apply to spreads and conversions, which are
complex trading strategies in which a trader acquires a mixture of options
positions and positions in the underlying interest.
Margin
requirements are computed each day by a trader’s clearing broker. When the
market value of a particular open commodity interest position changes to a point
where the margin on deposit does not satisfy maintenance margin requirements, a
margin call is made by the broker. If the margin call is not met within a
reasonable time, the broker may close out the trader’s position. With respect to
US12NG’s trading, US12NG (and not its investors personally) is subject to margin
calls.
Finally,
many major U.S. exchanges have passed certain cross margining arrangements
involving procedures pursuant to which the futures and options positions held in
an account would, in the case of some accounts, be aggregated and margin
requirements would be assessed on a portfolio basis, measuring the total risk of
the combined positions.
SEC
Reports
US12NG
makes available, free of charge, on its website, its annual reports on Form
10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and
amendments to these reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after these forms
are filed with, or furnished to, the SEC. These reports are also available
from the SEC though its website at: www.sec.gov.
CFTC
Reports
US12NG
also makes available its monthly reports and its annual reports required to be
prepared and filed with the NFA under the CFTC regulations.
Intellectual
Property
The
General Partner has filed trademark applications for UNITED STATES 12 MONTH
NATURAL GAS FUND (U.S. App. Serial No. 77881066) for “investment services in the
field of natural gas futures contracts and other natural gas related
investments,” in use since November 18, 2009, and UNL UNITED STATES 12 MONTH
NATURAL GAS FUND, LP (and Flame Design) (U.S. App. Serial No. 77881087) for
“investment services in the field of natural gas futures contracts and other
natural gas related investments,” in use since November 18,
2009. US12NG relies upon these trademarks through which it markets
its services and strives to build and maintain brand recognition in the market
and among current and potential investors. So long as US12NG
continues to use these trademarks to identify its services, without challenge
from any third party, and properly maintains and renews the trademark
registrations under applicable laws, rules and regulations, it will continue to
have indefinite protection for these trademarks under current laws, rules and
regulations.
53
The
risk factors should be read in connection with the other information included in
this annual report on Form 10-K, including Management’s Discussion and Analysis
of Financial Condition and Results of Operations and US12NG’s financial
statements and the related notes.
Risks
Associated With Investing Directly or Indirectly in Natural Gas
Investing
in Natural Gas Interests subjects US12NG to the risks of the natural gas
industry and this could result in large fluctuations in the price of US12NG’s
units.
US12NG is
subject to the risks and hazards of the natural gas industry because it invests
in Natural Gas Interests. The risks and hazards that are inherent in the natural
gas industry may cause the price of natural gas to widely fluctuate. If the
changes in percentage terms of US12NG’s units accurately track the percentage
changes in the Benchmark Futures Contract or the spot price of natural gas, then
the price of its units may also fluctuate. The exploration for, and production
of, natural gas is an uncertain process with many risks. The cost of drilling,
completing and operating wells for natural gas is often uncertain, and a number
of factors can delay or prevent drilling operations or production,
including:
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unexpected
drilling conditions;
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pressure
or irregularities in formations;
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equipment
failures or repairs;
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fires
or other accidents;
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adverse
weather conditions;
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pipeline
ruptures or spills; and
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shortages
or delays in the availability of drilling rigs and the delivery of
equipment.
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Natural
gas transmission, distribution, gathering, and processing activities involve
numerous risks that may affect the price of natural gas.
There are
a variety of hazards inherent in natural gas transmission, distribution,
gathering, and processing, such as leaks, explosions, pollution, release of
toxic substances, adverse weather conditions (such as hurricanes and flooding),
pipeline failure, abnormal pressures, uncontrollable flows of natural gas,
scheduled and unscheduled maintenance, physical damage to the gathering or
transportation system, and other hazards which could affect the price of natural
gas. To the extent these hazards limit the supply or delivery of natural gas,
natural gas prices will increase.
The
price of natural gas may fluctuate on a seasonal and quarterly basis and this
would result in fluctuations in the price of US12NG’s units.
Natural
gas prices fluctuate seasonally. For example, in some parts of the United States
and other markets, the natural gas demand for power peaks during the cold winter
months, with market prices peaking at that time. As a result, in the future, the
overall price of natural gas may fluctuate substantially on a seasonal and
quarterly basis and thus make consecutive period to period comparisons less
relevant.
Natural
gas transmission and storage operations are subject to government regulations
and rate proceedings which could have an impact on the price of natural
gas.
Natural
gas transmission and storage operations in North America are subject to
regulation and oversight by the Federal Energy Regulatory Commission, various
state regulatory agencies, and Canadian regulatory authorities. These regulatory
bodies have the authority to effect rate settlements on natural gas storage,
transmission and distribution services. As a consequence, the price of natural
gas may be affected by a change in the rate settlements effected by one or more
of these regulatory bodies.
54
The
price of US12NG’s units may be influenced by factors such as the short-term
supply and demand for natural gas and the short-term supply and demand for
US12NG’s units. This may cause the units to trade at a price that is above or
below US12NG’s NAV per unit. Accordingly, changes in the price of units may
substantially vary from the changes in the spot price of natural gas. If this
variation occurs, then investors may not be able to effectively use US12NG as a
way to hedge against natural gas-related losses or as a way to indirectly invest
in natural gas.
While it
is expected that the trading prices of the units will fluctuate in accordance
with changes in US12NG’s NAV, the prices of units may also be influenced by
other factors, including the short-term supply and demand for natural gas and
the units. There is no guarantee that the units will not trade at appreciable
discounts from, and/or premiums to, US12NG’s NAV. This could cause changes in
the price of the units to substantially vary from changes in the spot price of
natural gas. This may be harmful to investors because if changes in the price of
units vary substantially from changes in the spot price of natural gas, then
investors may not be able to effectively use US12NG as a way to hedge the risk
of losses in their natural gas-related transactions or as a way to indirectly
invest in natural gas.
Changes
in US12NG’s NAV may not correlate with changes in the price of the Benchmark
Futures Contract. If this were to occur, investors may not be able to
effectively use US12NG as a way to hedge against natural gas-related losses or
as a way to indirectly invest in natural gas.
The
General Partner endeavors to invest US12NG’s assets as fully as possible in
short-term Futures Contracts and Other Natural Gas-Related Investments so that
the changes in percentage terms of the NAV closely correlate with the changes in
percentage terms in the price of the Benchmark Futures Contract. However,
changes in US12NG’s NAV may not correlate with the changes in the price of the
Benchmark Futures Contract for several reasons as set forth below:
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US12NG
(i) may not be able to buy/sell the exact amount of Futures Contracts and
Other Natural Gas-Related Investments to have a perfect correlation with
NAV; (ii) may not always be able to buy and sell Futures Contracts or
Other Natural Gas-Related Investments at the market price; (iii) may not
experience a perfect correlation between the spot price of natural gas and
the underlying investments in Futures Contracts, Other Natural Gas-Related
Investments and Treasuries, cash and/or cash equivalents; and (iv) is
required to pay fees, including brokerage fees and the management fee,
which will have an effect on the
correlation.
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Short-term
supply and demand for natural gas may cause the changes in the market
price of the Benchmark Futures Contract to vary from the changes in
US12NG’s NAV if US12NG has fully invested in Futures Contracts that do not
reflect such supply and demand and it is unable to replace such contracts
with Futures Contracts that do reflect such supply and demand. In
addition, there are also technical differences between the two markets,
e.g.
, one is a
physical market while the other is a futures market traded on exchanges,
that may cause variations between the spot price of natural gas and the
prices of related futures
contracts.
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US12NG
plans to sell and buy only as many Futures Contracts and Other Natural
Gas-Related Investments that it can to get the changes in percentage terms
of the NAV as close as possible to the changes in percentage terms in the
price of the Benchmark Futures Contract. The remainder of its assets will
be invested in Treasuries, cash and/or cash equivalents and will be used
to satisfy initial margin and additional margin requirements, if any, and
to otherwise support its investments in Natural Gas Interests. Investments
in Treasuries, cash and/or cash equivalents, both directly and as margin,
will provide rates of return that will vary from changes in the value of
the spot price of natural gas and the price of the Benchmark Futures
Contract.
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In
addition, because US12NG incurs certain expenses in connection with its
investment activities, and holds most of its assets in more liquid
short-term securities for margin and other liquidity purposes and for
redemptions that may be necessary on an ongoing basis, the General Partner
is generally not able to fully invest US12NG’s assets in Futures Contracts
or Other Natural Gas-Related Investments and there cannot be perfect
correlation between changes in US12NG’s NAV and changes in the price of
the Benchmark Futures Contract.
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55
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As
US12NG grows, there may be more or less correlation. For example, if
US12NG only has enough money to buy three Benchmark Futures Contracts and
it needs to buy four contracts to track the price of natural gas then the
correlation will be lower, but if it buys 20,000 Benchmark Futures
Contracts and it needs to buy 20,001 contracts then the correlation will
be higher. At certain asset levels, US12NG may be limited in its ability
to purchase the Benchmark Futures Contract or other Futures Contracts due
to accountability levels imposed by the relevant exchanges. To the extent
that US12NG invests in these other Futures Contracts or Other Natural
Gas-Related Investments, the correlation with the Benchmark Futures
Contract may be lower. If US12NG is required to invest in other Futures
Contracts and Other Natural Gas-Related Investments that are less
correlated with the Benchmark Futures Contract, US12NG would likely invest
in over-the-counter contracts to increase the level of correlation of
US12NG’s assets. Over-the-counter contracts entail certain risks described
below under “Over-the-Counter Contract
Risk.”
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US12NG
may not be able to buy the exact number of Futures Contracts and Other
Natural Gas-Related Investments to have a perfect correlation with the
Benchmark Futures Contract if the purchase price of Futures Contracts
required to be fully invested in such contracts is higher than the
proceeds received for the sale of a Creation Basket on the day the basket
was sold. In such case, US12NG could not invest the entire proceeds from
the purchase of the Creation Basket in such Futures Contracts (for
example, assume US12NG receives $4,000,000 for the sale of a Creation
Basket and assume that the price of a Futures Contract for natural gas is
$59,950, then US12NG could only invest in only 66 Futures Contracts with
an aggregate value of $3,956,700), US12NG would be required to invest a
percentage of the proceeds in cash, Treasuries or other liquid securities
to be deposited as margin with the futures commission merchant through
which the contract was purchased. The remainder of the purchase price for
the Creation Basket would remain invested in Treasuries, cash and/or cash
equivalents or other liquid securities as determined by the General
Partner from time to time based on factors such as potential calls for
margin or anticipated redemptions. If the trading market for Futures
Contracts is suspended or closed, US12NG may not be able to purchase these
investments at the last reported price for such
investments.
|
If
changes in US12NG’s NAV do not correlate with changes in the price of the
Benchmark Futures Contract, then investing in US12NG may not be an effective way
to hedge against natural gas-related losses or indirectly invest in natural
gas.
The
Benchmark Futures Contract may not correlate with the spot price of natural gas
and this could cause changes in the price of the units to substantially vary
from the changes in the spot price of natural gas. If this were to occur, then
investors may not be able to effectively use US12NG as a way to hedge against
natural gas-related losses or as a way to indirectly invest in natural
gas.
When
using the Benchmark Futures Contract as a strategy to track the spot price of
natural gas, at best the correlation between changes in prices of such Natural
Gas Interests and the spot price of natural gas can be only approximate. The
degree of imperfection of correlation depends upon circumstances such as
variations in the speculative natural gas market, supply of and demand for such
Natural Gas Interests and technical influences in futures trading. If there is a
weak correlation between the Natural Gas Interests and the spot price of natural
gas, then the price of units may not accurately track the spot price of natural
gas and investors may not be able to effectively use US12NG as a way to hedge
the risk of losses in their natural gas-related transactions or as a way to
indirectly invest in natural gas.
US12NG
may experience a loss if it is required to sell Treasuries at a price lower than
the price at which they were acquired.
The value
of Treasuries generally moves inversely with movements in interest rates. If
US12NG is required to sell Treasuries at a price lower than the price at which
they were acquired, US12NG will experience a loss. This loss may adversely
impact the price of the units and may decrease the correlation between the price
of the units, the price of the Benchmark Futures Contract and Other Natural
Gas-Related Investments, and the spot price of natural gas.
56
Certain
of US12NG’s investments could be illiquid which could cause large losses to
investors at any time or from time to time.
US12NG
may not always be able to liquidate its positions in its investments at the
desired price. It is difficult to execute a trade at a specific price when there
is a relatively small volume of buy and sell orders in a market. A market
disruption, such as a foreign government taking political actions that disrupt
the market in its currency, its natural gas production or exports, or in another
major export, can also make it difficult to liquidate a position. Alternatively,
limits imposed by futures exchanges or other regulatory organizations, such as
accountability levels, position limits and daily price fluctuation limits, may
contribute to a lack of liquidity with respect to some commodity
interests.
Unexpected
market illiquidity may cause major losses to investors at any time or from time
to time. In addition, US12NG has not and does not intend at this time to
establish a credit facility, which would provide an additional source of
liquidity and instead will rely only on the Treasuries, cash and/or cash
equivalents that it holds. The anticipated large value of the positions in
Futures Contracts that the General Partner will acquire or enter into for US12NG
increases the risk of illiquidity. The Other Natural Gas-Related Investments
that US12NG invests in, such as negotiated over-the-counter contracts, may have
a greater likelihood of being illiquid since they are contracts between two
parties that take into account not only market risk, but also the relative
credit, tax, and settlement risks under such contracts. Such contracts also have
limited transferability that results from such risks and the contract’s express
limitations.
Because
both Futures Contracts and Other Natural Gas-Related Investments may be
illiquid, US12NG’s Natural Gas Interests may be more difficult to liquidate at
favorable prices in periods of illiquid markets and losses may be incurred
during the period in which positions are being liquidated.
If
the nature of hedgers and speculators in futures markets has shifted such that
natural gas purchasers are the predominant hedgers in the market, US12NG might
have to reinvest at higher futures prices or choose Other Natural Gas-Related
Investments.
The
changing nature of the hedgers and speculators in the natural gas market
influences whether futures prices are above or below the expected future spot
price. In order to induce speculators to take the corresponding long side of the
same futures contract, natural gas producers must generally be willing to sell
futures contracts at prices that are below expected future spot prices.
Conversely, if the predominant hedgers in the futures market are the purchasers
of the natural gas who purchase futures contracts to hedge against a rise in
prices, then speculators will only take the short side of the futures contract
if the futures price is greater than the expected future spot price of natural
gas. This can have significant implications for US12NG when it is time to
reinvest the proceeds from a maturing Futures Contract into a new Futures
Contract.
While
US12NG does not intend to take physical delivery of natural gas under its
Futures Contracts, physical delivery under such contracts impacts the value of
the contracts.
While it
is not the current intention of US12NG to take physical delivery of natural gas
under its Futures Contracts, futures contracts are not required to be
cash-settled and it is possible to take delivery under some of these contracts.
Storage costs associated with purchasing natural gas could result in costs and
other liabilities that could impact the value of Futures Contracts or Other
Natural Gas-Related Investments. Storage costs include the time value of money
invested in natural gas as a physical commodity plus the actual costs of storing
the natural gas less any benefits from ownership of natural gas that are not
obtained by the holder of a futures contract. In general, Futures Contracts have
a one-month delay for contract delivery and the back month (the back month is
any future delivery month other than the spot month) includes storage costs. To
the extent that these storage costs change for natural gas while US12NG holds
Futures Contracts or Other Natural Gas-Related Investments, the value of the
Futures Contracts or Other Natural Gas-Related Investments, and therefore
US12NG’s NAV, may change as well.
57
The
price relationship between the near month contract and the next month contract
that compose the Benchmark Futures Contract will vary and may impact both the
total return over time of US12NG’s NAV, as well as the degree to which its total
return tracks other natural gas price indices’ total returns.
The
design of US12NG’s Benchmark Futures Contract is such that every month it begins
by using the near month contract to expire until the near month contract is
within two weeks of expiration, when, over a four-day period, it transitions to
the next month contract to expire as its benchmark contract and keeps that
contract as its benchmark until it becomes the near month contract and close to
expiration. In the event of a natural gas futures market where near month
contracts trade at a higher price than next month to expire contracts, a
situation described as “backwardation” in the futures market, then absent the
impact of the overall movement in natural gas prices the value of the benchmark
contract would tend to rise as it approaches expiration. As a result the total
return of the Benchmark Futures Contract would tend to track higher. Conversely,
in the event of a natural gas futures market where near month contracts trade at
a lower price than next month contracts, a situation described as “contango” in
the futures market, then absent the impact of the overall movement in natural
gas prices the value of the benchmark contract would tend to decline as it
approaches expiration. As a result, the total return of the Benchmark Futures
Contract would tend to track lower. When compared to total return of other price
indices, such as the spot price of natural gas, the impact of backwardation and
contango may lead the total return of US12NG’s NAV to vary significantly. In the
event of a prolonged period of contango, and absent the impact of rising or
falling natural gas prices, this could have a significant negative impact on
US12NG’s NAV and total return
.
Regulation
of the commodity interests and energy markets is extensive and constantly
changing; future regulatory developments are impossible to predict but may
significantly and adversely affect US12NG.
The
futures markets are subject to comprehensive statutes, regulations, and margin
requirements. In addition, the CFTC and the exchanges are authorized to take
extraordinary actions in the event of a market emergency, including, for
example, the retroactive implementation of speculative position limits or higher
margin requirements, the establishment of daily price limits and the suspension
of trading. The regulation of futures transactions in the United States is a
rapidly changing area of law and is subject to modification by government and
judicial action.
The
regulation of commodity interest transactions in the United States is a rapidly
changing area of law and is subject to ongoing modification by governmental and
judicial action. Considerable regulatory attention has been focused on
non-traditional investment pools which are publicly distributed in the United
States. There is a possibility of future regulatory changes altering, perhaps to
a material extent, the nature of an investment in US12NG or the ability of
US12NG to continue to implement its investment strategy. In addition, various
national governments have expressed concern regarding the disruptive effects of
speculative trading in the energy markets and the need to regulate the
derivatives markets in general. The effect of any future regulatory change on
US12NG is impossible to predict, but could be substantial and
adverse.
In the
wake of the economic crisis of 2008 and 2009, the Administration, federal
regulators and Congress are revisiting the regulation of the financial sector,
including securities and commodities markets. These efforts are likely to result
in significant changes in the regulation of these markets.
Currently,
a number of proposals that would alter the regulation of Natural Gas Interests
are being considered by federal regulators and Congress. These proposals include
the imposition of fixed position limits on energy-based commodity futures
contracts, 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. Certain
proposals 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. While it cannot be
predicted at this time what reforms will eventually be made or how they will
impact US12NG, if any of the aforementioned proposals are implemented, US12NG’s
ability to meet its investment objective may be negatively impacted and
investors could be adversely affected.
58
Additionally,
on January 26, 2010, the CFTC published a proposed rule that, if implemented,
would set fixed position limits on certain energy Futures Contracts including
the NYMEX Henry Hub natural gas futures contract, NYMEX Light Sweet crude oil
futures contract, NYMEX New York Harbor No. 2 heating oil futures contract, and
NYMEX RBOB gasoline futures contract, along with any contract based upon these
contracts. The proposed position limits would be set as a percentage
of the open interest in these contracts for the spot month, any single month,
and all months combined. Additionally, the proposed rule would
aggregate positions in the enumerated contracts and those based upon such
contracts, including contracts listed on separate exchanges. This
proposal is currently undergoing a 90-day public comment period.
Investing
in US12NG for purposes of hedging may be subject to several risks including the
possibility of losing the benefit of favorable market movement.
Participants
in the natural gas or in other industries may use US12NG as a vehicle to hedge
the risk of losses in their natural gas-related transactions. There are several
risks in connection with using US12NG as a hedging device. While hedging can
provide protection against an adverse movement in market prices, it can also
preclude a hedger’s opportunity to benefit from a favorable market movement. In
a hedging transaction, the hedger may be concerned that the hedged item will
increase in price, but must recognize the risk that the price may instead
decline and if this happens he will have lost his opportunity to profit from the
change in price because the hedging transaction will result in a loss rather
than a gain. Thus, the hedger foregoes the opportunity to profit from favorable
price movements.
In
addition, if the hedge is not a perfect one, the hedger can lose on the hedging
transaction and not realize an offsetting gain in the value of the underlying
item being hedged.
When
using futures contracts as a hedging technique, at best, the correlation between
changes in prices of futures contracts and of the items being hedged can be only
approximate. The degree of imperfection of correlation depends upon
circumstances such as: variations in speculative markets, demand for futures and
for natural gas products, technical influences in futures trading, and
differences between anticipated energy costs being hedged and the instruments
underlying the standard futures contracts available for trading. Even a
well-conceived hedge may be unsuccessful to some degree because of unexpected
market behavior as well as the expenses associated with creating the
hedge.
In
addition, using an investment in US12NG as a hedge for changes in energy costs
(
e.g.
, investing in
natural gas, crude oil, gasoline, or other fuels, or electricity) may not
correlate because changes in the spot price may vary from changes in energy
costs because the spot price of natural gas may not be at the same rate as
changes in the price of other energy products, and, in any case, the price of
natural gas does not reflect the refining, transportation, and other costs that
may impact the hedger’s energy costs.
An
investment in US12NG may provide little or no diversification benefits. Thus, in
a declining market, US12NG may have no gains to offset losses from other
investments, and an investor may suffer losses on an investment in US12NG while
incurring losses with respect to other asset classes.
Historically,
Futures Contracts and Other Natural Gas-Related Investments have generally been
non-correlated to the performance of other asset classes such as stocks and
bonds. Non-correlation means that there is a low statistically valid
relationship between the performance of futures and other commodity interest
transactions, on the one hand, and stocks or bonds, on the other hand. However,
there can be no assurance that such non-correlation will continue during future
periods. If, contrary to historic patterns, US12NG’s performance were to move in
the same general direction as the financial markets, investors will obtain
little or no diversification benefits from an investment in the units. In such a
case, US12NG may have no gains to offset losses from other investments, and
investors may suffer losses on their investment in US12NG at the same time they
incur losses with respect to other investments.
Variables
such as drought, floods, weather, embargoes, tariffs and other political events
may have a larger impact on natural gas prices and natural gas-linked
instruments, including Futures Contracts and Other Natural Gas-Related
Investments, than on traditional securities. These additional variables may
create additional investment risks that subject US12NG’s investments to greater
volatility than investments in traditional securities.
59
Non-correlation
should not be confused with negative correlation, where the performance of two
asset classes would be opposite of each other. There is no historic evidence
that the spot price of natural gas and prices of other financial assets, such as
stocks and bonds, are negatively correlated. In the absence of negative
correlation, US12NG cannot be expected to be automatically profitable during
unfavorable periods for the stock market, or vice versa.
US12NG’s
Operating Risks
US12NG
is not a registered investment company so unitholders do not have the
protections of the 1940 Act.
US12NG is
not an investment company subject to the 1940 Act. Accordingly, investors
do not have the protections afforded by that statute which, for example,
requires investment companies to have a majority of disinterested directors and
regulates the relationship between the investment company and its investment
manager.
The
General Partner is leanly staffed and relies heavily on key personnel to manage
trading activities.
In
managing and directing the day-to-day activities and affairs of US12NG, the
General Partner relies heavily on Messrs. Howard Mah and John
Hyland. If Messrs. Mah or Hyland were to leave or be unable to
carry out their present responsibilities, it may have an adverse effect on the
management of US12NG. Furthermore, Messrs. Mah and Hyland are currently
involved in the management of the Related Public Funds, and the General Partner
has filed a registration statement for two other exchange traded security funds,
USBO and USCI. Mr. Mah is also employed by Ameristock Corporation, a registered
investment adviser that manages a public mutual fund. It is estimated that Mr.
Mah will spend approximately 90% of his time on US12NG and Related Public Fund
matters. Mr. Hyland will spend approximately 85% of his time on US12NG and
Related Public Fund matters. To the extent that the General Partner establishes
additional funds, even greater demands will be placed on Messrs. Gerber, Mah
and Hyland, as well as the other officers of the General Partner and its
Board of Directors.
Accountability
levels, position limits, and daily price fluctuation limits set by the exchanges
have the potential to cause a tracking error, which could cause the price of
units to substantially vary from the price of the Benchmark Futures Contract and
prevent investors from being able to effectively use US12NG as a way to hedge
against natural gas-related losses or as a way to indirectly invest in natural
gas.
U.S.
designated contract markets such as the NYMEX have established accountability
levels and position limits on the maximum net long or net short futures
contracts in commodity interests that any person or group of persons under
common trading control (other than as a hedge, which an investment by US12NG is
not) may hold, own or control. For example, the current accountability level for
investments at any one time in natural gas futures contracts (including
investments in the Benchmark Futures Contract) is 12,000. While this is not a
fixed ceiling, it is a threshold above which the NYMEX may exercise greater
scrutiny and control over an investor, including limiting an investor to holding
no more than 12,000 natural gas futures contracts. With regard to position
limits, the NYMEX limits an investor from holding more than 1,000 net futures in
the last 3 days of trading in the near month contract to expire.
In
addition to accountability levels and position limits, the NYMEX also sets daily
price fluctuation limits on futures contracts. The daily price fluctuation limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day’s settlement price. Once the daily price
fluctuation limit has been reached in a particular futures contract, no trades
may be made at a price beyond that limit.
For
example, the NYMEX imposes a $3.00 per mmBtu ($30,000 per contract) price
fluctuation limit for natural gas futures contracts. This limit is initially
based off of the previous trading day’s settlement price. If any natural gas
futures contract is traded, bid, or offered at the limit for five minutes,
trading is halted for five minutes. When trading resumes it begins at the point
where the limit was imposed and the limit is reset to be $3.00 per mmBtu in
either direction of that point. If another halt were triggered, the market would
continue to be expanded by $3.00 per mmBtu in either direction after each
successive five-minute trading halt. There is no maximum price fluctuation limit
during any one trading session.
60
U.S.
futures exchanges, including the NYMEX, currently do not implement fixed
position limits for Futures Contracts held outside of the last few days of
trading in the near month contract to expire. However, on January 26,
2010, the CFTC published a proposed rule that, if implemented, would set fixed
position limits on energy Futures Contracts, including the NYMEX Henry Hub
natural gas futures contract, NYMEX Light Sweet crude oil futures contract,
NYMEX New York Harbor No. 2 heating oil futures contract, and NYMEX RBOB
gasoline futures contract, along with any contract based upon these
contracts. The proposed position limits would be set as a percentage
of the open interest in these contracts for the spot month, any single month,
and all months combined. Additionally, the proposed rule would
aggregate positions in the enumerated contracts and those based upon such
contracts, including contracts listed on separate exchanges. This
proposal is currently undergoing a 90-day public comment period.
All of
these limits may potentially cause a tracking error between the price of the
units and the price of the Benchmark Futures Contract. This may in turn prevent
investors from being able to effectively use US12NG as a way to hedge against
natural gas-related losses or as a way to indirectly invest in natural
gas.
US12NG
has not limited the size of its offering and is committed to utilizing
substantially all of its proceeds to purchase Futures Contracts and Other
Natural Gas-Related Investments. If US12NG encounters accountability levels,
position limits, or price fluctuation limits for Futures Contracts on the NYMEX,
it may then, if permitted under applicable regulatory requirements, purchase
Futures Contracts and Other Natural Gas-Related Investments on the ICE Futures
or other exchanges that trade listed natural gas futures. The Futures Contracts
available on the ICE Futures are comparable to the contracts on the NYMEX, but
they may have different underlying commodities, sizes, deliveries, and prices.
In addition, certain of the Futures Contracts available on the ICE Futures are
subject to accountability levels and position limits.
There
are technical and fundamental risks inherent in the trading system the General
Partner intends to employ.
The
General Partner’s trading system is quantitative in nature and it is possible
that the General Partner might make a mathematical error. In addition, it is
also possible that a computer or software program may malfunction and cause an
error in computation.
To
the extent that the General Partner uses spreads and straddles as part of its
trading strategy, there is the risk that the NAV may not closely track the
changes in the Benchmark Futures Contract.
Spreads
combine simultaneous long and short positions in related futures contracts that
differ by commodity (
e.g.
, long crude oil and
short gasoline), by market (
e.g.
, long WTI crude futures,
short Brent crude futures), or by delivery month (
e.g.
, long December, short
November). Spreads gain or lose value as a result of relative changes in price
between the long and short positions. Spreads often reduce risk to investors,
because the contracts tend to move up or down together. However, both legs of
the spread could move against an investor simultaneously, in which case the
spread would lose value. Certain types of spreads may face unlimited risk,
e.g.
, because the price of a
futures contract underlying a short position can increase by an unlimited amount
and the investor would have to take delivery or offset at that
price.
A
commodity straddle takes both long and short option positions in the same
commodity in the same market and delivery month simultaneously. The buyer of a
straddle profits if either the long or the short leg of the straddle moves
further than the combined cost of both options. The seller of a straddle profits
if both the long and short positions do not trade beyond a range equal to the
combined premium for selling both options.
If the
General Partner were to utilize a spread or straddle position and the spread
performed differently than expected, the results could impact US12NG’s tracking
error. This could affect US12NG’s investment objective of having its NAV closely
track the changes in the Benchmark Futures Contract. Additionally, a loss on a
spread position would negatively impact US12NG’s absolute
return.
61
US12NG
and the General Partner may have conflicts of interest, which may permit them to
favor their own interests to the detriment of unitholders.
US12NG
and the General Partner may have inherent conflicts to the extent the General
Partner attempts to maintain US12NG’s asset size in order to preserve its fee
income and this may not always be consistent with US12NG’s objective of having
the value of its units’ NAV track changes in the Benchmark Futures Contract. The
General Partner’s officers, directors and employees do not devote their time
exclusively to US12NG. These persons are directors, officers or employees of
other entities that may compete with US12NG for their services. They could have
a conflict between their responsibilities to US12NG and to those other
entities.
In
addition, the General Partner’s principals, officers, directors or employees may
trade futures and related contracts for their own account. A conflict of
interest may exist if their trades are in the same markets and at the same time
as US12NG trades using the clearing broker to be used by US12NG. A potential
conflict also may occur if the General Partner’s principals, officers, directors
or employees trade their accounts more aggressively or take positions in their
accounts which are opposite, or ahead of, the positions taken by
US12NG.
The
General Partner has sole current authority to manage the investments and
operations of US12NG, and this may allow it to act in a way that furthers its
own interests which may create a conflict with the best interests of investors.
Limited partners have limited voting control, which will limit the ability to
influence matters such as amendment of the LP Agreement, change in US12NG’s
basic investment policy, dissolution of this fund, or the sale or distribution
of US12NG’s assets.
The
General Partner serves as the general partner to each of US12NG and the Related
Public Funds and will serve as the general partner for USBO and the sponsor for
USCI, if such funds offer their securities to the public or begin operations.
The General Partner may have a conflict to the extent that its trading decisions
for US12NG may be influenced by the effect they would have on the other funds it
manages. These trading decisions may be influenced since the General Partner
also serves as the general partner for all of the funds and is required to meet
all of the funds’ investment objectives as well as US12NG’s. If the General
Partner believes that a trading decision it made on behalf of US12NG might (i)
impede its other funds from reaching their investment objectives, or (ii)
improve the likelihood of meeting its other funds’ objectives, then the General
Partner may choose to change its trading decision for US12NG, which could either
impede or improve the opportunity for US12NG to meet its investment objective.
In addition, the General Partner is required to indemnify the officers and
directors of its other funds if the need for indemnification arises. This
potential indemnification will cause the General Partner’s assets to decrease.
If the General Partner’s other sources of income are not sufficient to
compensate for the indemnification, then the General Partner may terminate and
investors could lose their investment.
Unitholders
may only vote on the removal of the General Partner and limited partners have
only limited voting rights. Unitholders and limited partners will not
participate in the management of US12NG and do not control the General Partner
so they will not have influence over basic matters that affect
US12NG.
Unitholders
that have not applied to become limited partners have no voting rights, other
than to remove the General Partner. Limited partners will have limited voting
rights with respect to US12NG’s affairs. Unitholders may remove the General
Partner only if 66 2/3% of the unitholders elect to do so. Unitholders and
limited partners will not be permitted to participate in the management or
control of US12NG or the conduct of its business. Unitholders and limited
partners must therefore rely upon the duties and judgment of the General Partner
to manage US12NG’s affairs.
The
General Partner may manage a large amount of assets and this could affect
US12NG’s ability to trade profitably.
Increases
in assets under management may affect trading decisions. In general, the General
Partner does not intend to limit the amount of assets of US12NG that it may
manage. The more assets the General Partner manages, the more difficult it may
be for it to trade profitably because of the difficulty of trading larger
positions without adversely affecting prices and performance and of managing
risk associated with larger positions.
62
US12NG
could terminate at any time and cause the liquidation and potential loss of an
investor’s investment and could upset the overall maturity and timing of an
investor’s investment portfolio.
US12NG
may terminate at any time, regardless of whether US12NG has incurred losses,
subject to the terms of the LP Agreement. In particular, unforeseen
circumstances, including the death, adjudication of incompetence, bankruptcy,
dissolution, or removal of the General Partner could cause US12NG to terminate
unless a majority interest of the limited partners within 90 days of the event
elects to continue the partnership and appoints a successor general partner, or
the affirmative vote of a majority in interest of the limited partners subject
to certain conditions. However, no level of losses will require the General
Partner to terminate US12NG. US12NG’s termination would cause the liquidation
and potential loss of an investor’s investment. Termination could also
negatively affect the overall maturity and timing of an
investor’s investment portfolio.
Limited
partners may not have limited liability in certain circumstances, including
potentially having liability for the return of wrongful
distributions.
Under
Delaware law, a limited partner might be held liable for US12NG’s obligations as
if it were a General Partner if the limited partner participates in the control
of the partnership’s business and the persons who transact business with the
partnership think the limited partner is the General Partner.
A limited
partner will not be liable for assessments in addition to its initial capital
investment in any of US12NG’s capital securities representing units. However, a
limited partner may be required to repay to US12NG any amounts wrongfully
returned or distributed to it under some circumstances. Under Delaware law,
US12NG may not make a distribution to limited partners if the distribution
causes US12NG’s liabilities (other than liabilities to partners on account of
their partnership interests and nonrecourse liabilities) to exceed the fair
value of US12NG’s assets. Delaware law provides that a limited partner who
receives such a distribution and knew at the time of the distribution that the
distribution violated the law will be liable to the limited partnership for the
amount of the distribution for three years from the date of the
distribution.
With
adequate notice, a limited partner may be required to withdraw from the
partnership for any reason.
If the
General Partner gives at least fifteen (15) days’ written notice to a limited
partner, then the General Partner may for any reason, in its sole discretion,
require any such limited partner to withdraw entirely from the partnership or to
withdraw a portion of its partner capital account. The General Partner may
require withdrawal even in situations where the limited partner has complied
completely with the provisions of the LP Agreement.
US12NG’s
existing units are, and any units US12NG issues in the future will be, subject
to restrictions on transfer. Failure to satisfy these requirements will preclude
a transferee from being able to have all the rights of a limited
partner.
No
transfer of any unit or interest therein may be made if such transfer would (a)
violate the then applicable federal or state securities laws or rules and
regulations of the SEC, any state securities commission, the CFTC or any other
governmental authority with jurisdiction over such transfer, or (b) cause US12NG
to be taxable as a corporation or affect US12NG’s existence or qualification as
a limited partnership. In addition, investors may only become limited partners
if they transfer their units to purchasers that meet certain conditions outlined
in the LP Agreement, which provides that each record holder or limited partner
or unitholder applying to become a limited partner (each a record holder) may be
required by the General Partner to furnish certain information, including that
holder’s nationality, citizenship or other related status. A transferee who is
not a U.S. resident may not be eligible to become a record holder or a limited
partner if its ownership would subject US12NG to the risk of cancellation or
forfeiture of any of its assets under any federal, state or local law or
regulation. All purchasers of US12NG’s units, who wish to become limited
partners or record holders, and receive cash distributions, if any, or have
certain other rights, must deliver an executed transfer application in which the
purchaser or transferee must certify that, among other things, he, she or it
agrees to be bound by US12NG’s LP Agreement and is eligible to purchase US12NG’s
securities. Any transfer of units will not be recorded by the transfer agent or
recognized by US12NG unless a completed transfer application is delivered to the
General Partner or the Administrator. A person purchasing US12NG’s existing
units, who does not execute a transfer application and certify that the
purchaser is eligible to purchase those securities acquires no rights in those
securities other than the right to resell those securities. Whether or not a
transfer application is received or the consent of the General Partner obtained,
US12NG’s units will be securities and will be transferable according to the laws
governing transfers of securities. See “Transfer of Units.”
63
US12NG
does not expect to make cash distributions.
The
General Partner has not previously made any cash distributions and intends to
re-invest any realized gains in Natural Gas Interests rather than distributing
cash to limited partners. Therefore, unlike mutual funds, commodity pools or
other investment pools that actively manage their investments in an attempt to
realize income and gains from their investing activities and distribute such
income and gains to their investors, US12NG generally does not expect to
distribute cash to limited partners. An investor should not invest in US12NG if
it will need cash distributions from US12NG to pay taxes on its share of income
and gains of US12NG, if any, or for any other reason. Although US12NG does not
intend to make cash distributions, the income earned from its investments held
directly or posted as margin may reach levels that merit distribution,
e.g.
, at levels where such
income is not necessary to support its underlying investments in Natural Gas
Interests and investors adversely react to being taxed on such income without
receiving distributions that could be used to pay such tax. If this income
becomes significant then cash distributions may be made.
There
is a risk that US12NG will not earn trading gains sufficient to compensate for
the fees and expenses that it must pay and as such US12NG may not earn any
profit.
US12NG
pays brokerage charges of approximately 0.34%, based on futures commission
merchant fees of $3.50 per buy or sell, management fees of 0.60% of NAV per
annum on average net assets, and over-the-counter spreads and extraordinary
expenses (
e.g.,
subsequent offering expenses, other expenses not in the ordinary course of
business, including the indemnification of any person against liabilities and
obligations to the extent permitted by law and required under the LP Agreement
and under agreements entered into by the General Partner on US12NG’s behalf and
the bringing and defending of actions at law or in equity and otherwise engaging
in the conduct of litigation and the incurring of legal expenses and the
settlement of claims and litigation) that can not be quantified. These fees and
expenses must be paid in all cases regardless of whether US12NG’s activities are
profitable. Accordingly, US12NG must earn trading gains sufficient to compensate
for these fees and expenses before it can earn any profit.
If
offerings of the units do not raise sufficient funds to pay US12NG’s future
expenses and no other source of funding of expenses is found, US12NG may be
forced to terminate and investors may lose all or part of their
investment.
Prior to
the offering of units that commenced on November 18, 2009, all of US12NG’s
expenses were funded by the General Partner and its affiliates. These payments
by the General Partner and its affiliates were designed to allow US12NG the
ability to commence the public offering of its units. US12NG now directly pays
certain of these fees and expenses. The General Partner will continue to
pay other fees and expenses, as set forth in the LP Agreement. If the General
Partner and US12NG are unable to raise sufficient funds to cover their expenses
or locate any other source of funding, US12NG may be forced to terminate and
investors may lose all or part of their investment.
US12NG
may incur higher fees and expenses upon renewing existing or entering into new
contractual relationships.
The
clearing arrangements between the clearing brokers and US12NG generally are
terminable by the clearing brokers once the clearing broker has given US12NG
notice. Upon termination, the General Partner may be required to renegotiate or
make other arrangements for obtaining similar services if US12NG intends to
continue trading in Futures Contracts or Other Natural Gas-Related Investments
at its present level of capacity. The services of any clearing broker may not be
available, or even if available, these services may not be available on the
terms as favorable as those of the expired or terminated clearing
arrangements.
64
US12NG
may miss certain trading opportunities because it will not receive the benefit
of the expertise of independent trading advisors.
The
General Partner does not employ trading advisors for US12NG; however, it
reserves the right to employ them in the future. The only advisor to US12NG is
the General Partner. A lack of independent trading advisors may be
disadvantageous to US12NG because it will not receive the benefit of a trading
advisor’s expertise.
An
unanticipated number of redemption requests during a short period of time could
have an adverse effect on the NAV of US12NG.
If a
substantial number of requests for redemption of Redemption Baskets are received
by US12NG during a relatively short period of time, US12NG may not be able to
satisfy the requests from US12NG’s assets not committed to trading. As a
consequence, it could be necessary to liquidate positions in US12NG’s trading
positions before the time that the trading strategies would otherwise dictate
liquidation.
The
financial markets are currently in a period of disruption and US12NG does not
expect these conditions to improve in the near future.
Currently
and throughout 2008 and 2009, the financial markets have experienced very
difficult conditions and volatility as well as significant adverse trends. The
conditions in these markets have resulted in a decrease in availability of
corporate credit and liquidity and have led indirectly to the insolvency,
closure or acquisition of a number of major financial institutions and have
contributed to further consolidation within the financial services industry. A
continued recession or a depression could adversely affect the financial
condition and results of operations of US12NG’s service providers and Authorized
Purchasers which would impact the ability of the General Partner to achieve
US12NG’s investment objective.
The
failure or bankruptcy of a clearing broker could result in a substantial loss of
US12NG’s assets; the clearing broker could be subject to proceedings that impair
its ability to execute US12NG’s trades.
Under
CFTC regulations, a clearing broker maintains customers’ assets in a bulk
segregated account. If a clearing broker fails to do so, or is unable to satisfy
a substantial deficit in a customer account, its other customers may be subject
to risk of a substantial loss of their funds in the event of that clearing
broker’s bankruptcy. In that event, the clearing broker’s customers, such as
US12NG, are entitled to recover, even in respect of property specifically
traceable to them, only a proportional share of all property available for
distribution to all of that clearing broker’s customers. The bankruptcy of a
clearing broker could result in the complete loss of US12NG’s assets posted with
the clearing broker; though the vast majority of US12NG’s assets are held in
Treasuries, cash and/or cash equivalents with US12NG’s custodian and would not
be impacted by the bankruptcy of a clearing broker. US12NG also may be subject
to the risk of the failure of, or delay in performance by, any exchanges and
markets and their clearing organizations, if any, on which commodity interest
contracts are traded.
From time
to time, the clearing brokers may be subject to legal or regulatory proceedings
in the ordinary course of their business. A clearing broker’s involvement in
costly or time-consuming legal proceedings may divert financial resources or
personnel away from the clearing broker’s trading operations, which could impair
the clearing broker’s ability to successfully execute and clear US12NG’s
trades.
The
failure or insolvency of US12NG’s custodian could result in a substantial loss
of US12NG’s assets.
As noted
above, the vast majority of US12NG’s assets are held in Treasuries, cash and/or
cash equivalents with US12NG’s custodian. The insolvency of the custodian could
result in a complete loss of US12NG’s assets held by that custodian, which, at
any given time, would likely comprise a substantial portion of US12NG’s total
assets.
65
Third
parties may infringe upon or otherwise violate intellectual property rights or
assert that the General Partner has infringed or otherwise violated their
intellectual property rights, which may result in significant costs and diverted
attention.
Third
parties may utilize US12NG’s intellectual property or technology, including the
use of its business methods, trademarks and trading program software, without
permission. The General Partner has a patent pending for US12NG’s business
method and it is registering its trademarks. US12NG does not currently have any
proprietary software. However, if it obtains proprietary software in the future,
then any unauthorized use of US12NG’s proprietary software and other technology
could also adversely affect its competitive advantage. US12NG may have
difficulty monitoring unauthorized uses of its patents, trademarks, proprietary
software and other technology. Also, third parties may independently develop
business methods, trademarks or proprietary software and other technology
similar to that of the General Partner or claim that the General Partner has
violated their intellectual property rights, including their copyrights,
trademark rights, trade names, trade secrets and patent rights. As a result, the
General Partner may have to litigate in the future to protect its trade secrets,
determine the validity and scope of other parties’ proprietary rights, defend
itself against claims that it has infringed or otherwise violated other parties’
rights, or defend itself against claims that its rights are invalid. Any
litigation of this type, even if the General Partner is successful and
regardless of the merits, may result in significant costs, divert its resources
from US12NG, or require it to change its proprietary software and other
technology or enter into royalty or licensing agreements.
The
success of US12NG depends on the ability of the General Partner to accurately
implement trading systems, and any failure to do so could subject US12NG to
losses on such transactions.
The
General Partner uses mathematical formulas built into a generally available
spreadsheet program to decide whether it should buy or sell Natural Gas
Interests each day. Specifically, the General Partner uses the spreadsheet to
make mathematical calculations and to monitor positions in Natural Gas Interests
and Treasuries and correlations to the Benchmark Futures Contract. The General
Partner must accurately process the spreadsheets’ outputs and execute the
transactions called for by the formulas. In addition, US12NG relies on the
General Partner to properly operate and maintain its computer and communications
systems. Execution of the formulas and operation of the systems are subject to
human error. Any failure, inaccuracy or delay in implementing any of the
formulas or systems and executing US12NG’s transactions could impair its ability
to achieve US12NG’s investment objective. It could also result in decisions to
undertake transactions based on inaccurate or incomplete information. This could
cause substantial losses on transactions.
US12NG
may experience substantial losses on transactions if the computer or
communications system fails.
US12NG’s
trading activities, including its risk management, depend on the integrity and
performance of the computer and communications systems supporting them.
Extraordinary transaction volume, hardware or software failure, power or
telecommunications failure, a natural disaster or other catastrophe could cause
the computer systems to operate at an unacceptably slow speed or even fail. Any
significant degradation or failure of the systems that the General Partner uses
to gather and analyze information, enter orders, process data, monitor risk
levels and otherwise engage in trading activities may result in substantial
losses on transactions, liability to other parties, lost profit opportunities,
damages to the General Partner’s and US12NG’s reputations, increased operational
expenses and diversion of technical resources.
If
the computer and communications systems are not upgraded, US12NG’s financial
condition could be harmed.
The
development of complex computer and communications systems and new technologies
may render the existing computer and communications systems supporting US12NG’s
trading activities obsolete. In addition, these computer and communications
systems must be compatible with those of third parties, such as the systems of
exchanges, clearing brokers and the executing brokers. As a result, if these
third parties upgrade their systems, the General Partner will need to make
corresponding upgrades to continue effectively its trading activities. US12NG’s
future success will depend on US12NG’s ability to respond to changing
technologies on a timely and cost-effective basis.
66
US12NG
depends on the reliable performance of the computer and communications systems
of third parties, such as brokers and futures exchanges, and may experience
substantial losses on transactions if they fail.
US12NG
depends on the proper and timely function of complex computer and communications
systems maintained and operated by the futures exchanges, brokers and other data
providers that the General Partner uses to conduct trading activities. Failure
or inadequate performance of any of these systems could adversely affect the
General Partner’s ability to complete transactions, including its ability to
close out positions, and result in lost profit opportunities and significant
losses on commodity interest transactions. This could have a material adverse
effect on revenues and materially reduce US12NG’s available capital. For
example, unavailability of price quotations from third parties may make it
difficult or impossible for the General Partner to use its proprietary software
that it relies upon to conduct its trading activities. Unavailability of records
from brokerage firms may make it difficult or impossible for the General Partner
to accurately determine which transactions have been executed or the details,
including price and time, of any transaction executed. This unavailability of
information also may make it difficult or impossible for the General Partner to
reconcile its records of transactions with those of another party or to
accomplish settlement of executed transactions.
The
occurrence of a terrorist attack, or the outbreak, continuation or expansion of
war or other hostilities could disrupt US12NG’s trading activity and materially
affect US12NG’s profitability.
The
operations of US12NG, the exchanges, brokers and counterparties with which
US12NG does business, and the markets in which US12NG does business could be
severely disrupted in the event of a major terrorist attack or the outbreak,
continuation or expansion of war or other hostilities. The terrorist attacks of
September 11, 2001 and the war in Iraq, global anti-terrorism initiatives and
political unrest in the Middle East and Southeast Asia continue to fuel this
concern.
Risk
of Leverage and Volatility
If
the General Partner permits US12NG to become leveraged, investors could lose all
or substantially all of their investment if US12NG’s trading positions suddenly
turn unprofitable.
Commodity
pools’ trading positions in futures contracts or other commodity interests are
typically required to be secured by the deposit of margin funds that represent
only a small percentage of a futures contract’s (or other commodity interests’)
entire market value. This feature permits commodity pools to “leverage” their
assets by purchasing or selling futures contracts (or other commodity interests)
with an aggregate value in excess of the commodity pool’s assets. While this
leverage can increase the pool’s profits, relatively small adverse movements in
the price of the pool’s futures contracts can cause significant losses to the
pool. While the General Partner has not and does not currently intend to
leverage USN12G’s assets, it is not prohibited from doing so under the LP
Agreement or otherwise.
The
price of natural gas is volatile which could cause large fluctuations in the
price of units.
Movements
in the price of natural gas may be the result of factors outside of the General
Partner’s control and may not be anticipated by the General Partner. Among the
factors that can cause volatility in the price of natural gas are:
|
·
|
worldwide
or regional demand for energy, which is affected by economic
conditions;
|
|
·
|
the
domestic and foreign supply and inventories of oil and
gas;
|
|
·
|
weather
conditions, including abnormally mild winter or summer weather, and
abnormally harsh winter or summer
weather;
|
|
·
|
availability
and adequacy of pipeline and other transportation
facilities;
|
|
·
|
domestic
and foreign governmental regulations and
taxes;
|
67
|
·
|
political
conditions in gas or oil producing
regions;
|
|
·
|
the
ability of members of OPEC to agree upon and maintain oil prices and
production levels;
|
|
·
|
the
price and availability of alternative fuels;
and
|
|
·
|
the
impact of energy conservation
efforts.
|
Since
US12NG’s commencement of operations on November 18, 2009, there has been
tremendous volatility in the price of the Benchmark Futures
Contract. For example, the price of the NYMEX Futures Contract on
natural gas rose to a high of $13.577 on July 3, 2008 and dropped to a low of
$2.508 on September 3, 2009. The General Partner anticipates that
there will be continued volatility in the price of the NYMEX Futures Contract
for natural gas and futures contracts for other petroleum-based
commodities. Consequently, investors should know that this volatility
can lead to a loss of all or substantially all of their investment in
US12NG.
The
impact of environmental and other governmental laws and regulations may affect
the price of natural gas.
Environmental
and other governmental laws and regulations have increased the costs to plan,
design, drill, install, operate and abandon natural gas and oil wells. Other
laws have prevented exploration and drilling of natural gas in certain
environmentally sensitive federal lands and waters. Several environmental laws
that have a direct or an indirect impact on the price of natural gas include,
but are not limited to, the Clean Air Act, Clean Water Act, Resource
Conservation and Recovery Act, and the Comprehensive Environmental Response,
Compensation and Liability Act of 1980.
The
limited method for transporting and storing natural gas may cause the price of
natural gas to increase.
Natural
gas is primarily transported and stored throughout the United States by way of
pipeline and underground storage facilities. These systems may not be adequate
to meet demand, especially in times of peak demand or in areas of the United
States where gas service is already limited due to minimal pipeline and storage
infrastructure. As a result of the limited method for transporting and storing
natural gas, the price of natural gas may increase.
Over-the-Counter
Contract Risk
Over-the-counter
transactions are subject to little, if any, regulation.
A portion
of US12NG’s assets may be used to trade over-the-counter natural gas interest
contracts, such as forward contracts or swap or spot contracts. Over-the-counter
contracts are typically traded on a principal-to-principal basis through dealer
markets that are dominated by major money center and investment banks and other
institutions and are essentially unregulated by the CFTC. Investors therefore do
not receive the protection of CFTC regulation or the statutory scheme of the CEA
in connection with this trading activity by US12NG. The markets for
over-the-counter contracts rely upon the integrity of market participants in
lieu of the additional regulation imposed by the CFTC on participants in the
futures markets. The lack of regulation in these markets could expose US12NG in
certain circumstances to significant losses in the event of trading abuses or
financial failure by participants.
US12NG
will be subject to credit risk with respect to counterparties to
over-the-counter contracts entered into by US12NG or held by special purpose or
structured vehicles.
US12NG
faces the risk of non-performance by the counterparties to the over-the-counter
contracts. Unlike in futures contracts, the counterparty to these contracts is
generally a single bank or other financial institution, rather than a clearing
organization backed by a group of financial institutions. As a result, there
will be greater counterparty credit risk in these transactions. A counterparty
may not be able to meet its obligations to US12NG, in which case US12NG could
suffer significant losses on these contracts.
68
If a
counterparty becomes bankrupt or otherwise fails to perform its obligations due
to financial difficulties, US12NG may experience significant delays in obtaining
any recovery in a bankruptcy or other reorganization proceeding. US12NG may
obtain only limited recovery or may obtain no recovery in such
circumstances.
US12NG
may be subject to liquidity risk with respect to its over-the-counter
contracts.
Over-the-counter
contracts may have terms that make them less marketable than Futures Contracts.
Over-the-counter contracts are less marketable because they are not traded on an
exchange, do not have uniform terms and conditions, and are entered into based
upon the creditworthiness of the parties and the availability of credit support,
such as collateral, and in general, they are not transferable without the
consent of the counterparty. These conditions diminish the ability to realize
the full value of such contracts. In addition, even if collateral is
used to reduce counterparty credit risk, sudden changes in the value of
over-the-counter transactions may leave a party open to financial risk due to a
counterparty default since the collateral held may not cover a party’s exposure
on the transaction in such situations.
Risk
of Trading in International Markets
Trading
in international markets could expose US12NG to credit and regulatory
risk.
The
General Partner invests primarily in Futures Contracts, a significant portion of
which are traded on United States exchanges, including the NYMEX. However, a
portion of US12NG’s trades may take place on markets and exchanges outside the
United States. Some non-U.S. markets present risks because they are not subject
to the same degree of regulation as their U.S. counterparts. None of the CFTC,
NFA, or any domestic exchange regulates activities of any foreign boards of
trade or exchanges, including the execution, delivery and clearing of
transactions, nor has the power to compel enforcement of the rules of a foreign
board of trade or exchange or of any applicable non-U.S. laws. Similarly, the
rights of market participants, such as US12NG, in the event of the insolvency or
bankruptcy of a non-U.S. market or broker are also likely to be more limited
than in the case of U.S. markets or brokers. As a result, in these markets,
US12NG has less legal and regulatory protection than it does when it trades
domestically.
In some
of these non-U.S. markets, the performance on a contract is the responsibility
of the counterparty and is not backed by an exchange or clearing corporation and
therefore exposes US12NG to credit risk. Trading in non-U.S. markets also leaves
US12NG susceptible to swings in the value of the local currency against the U.S.
dollar. Additionally, trading on non-U.S. exchanges is subject to the risks
presented by exchange controls, expropriation, increased tax burdens and
exposure to local economic declines and political instability. An adverse
development with respect to any of these variables could reduce the profit or
increase the loss earned on trades in the affected international
markets.
International
trading activities subject US12NG to foreign exchange risk.
The price
of any non-U.S. Futures Contract, option on any non-U.S. Futures Contract, or
other non-U.S. Natural Gas-Related Investment, and, therefore, the potential
profit and loss on such contract, may be affected by any variance in the foreign
exchange rate between the time the order is placed and the time it is
liquidated, offset or exercised. As a result, changes in the value of the local
currency relative to the U.S. dollar may cause losses to US12NG even if the
contract traded is profitable.
US12NG’s
international trading could expose it to losses resulting from non-U.S.
exchanges that are less developed or less reliable than United States
exchanges.
Some
non-U.S. exchanges may be in a more developmental stage so that prior price
histories may not be indicative of current price dynamics. In addition, US12NG
may not have the same access to certain positions on foreign trading exchanges
as do local traders, and the historical market data on which the General Partner
bases its strategies may not be as reliable or accessible as it is for U.S.
exchanges.
69
Tax
Risk
An
investor’s tax liability may exceed the amount of distributions, if any, on its
units.
Cash or
property will be distributed at the sole discretion of the General Partner. The
General Partner has not and does not currently intend to make cash or other
distributions with respect to units. Investors will be required to pay U.S.
federal income tax and, in some cases, state, local, or foreign income tax, on
their allocable share of US12NG’s taxable income, without regard to whether they
receive distributions or the amount of any distributions. Therefore, the tax
liability of an investor with respect to its units may exceed the amount of
cash or value of property (if any) distributed.
An
investor’s allocable share of taxable income or loss may differ from its
economic income or loss on its units.
Due to
the application of the assumptions and conventions applied by US12NG in making
allocations for tax purposes and other factors, an investor’s allocable share of
US12NG’s income, gain, deduction or loss may be different than its economic
profit or loss from its units for a taxable year. This difference could be
temporary or permanent and, if permanent, could result in it being taxed on
amounts in excess of its economic income.
Items
of income, gain, deduction, loss and credit with respect to units could be
reallocated if the IRS does not accept the assumptions and conventions applied
by US12NG in allocating those items, with potential adverse consequences for an
investor.
The U.S.
tax rules pertaining to partnerships are complex and their application to large,
publicly traded partnerships such as US12NG is in many respects uncertain.
US12NG applies certain assumptions and conventions in an attempt to comply with
the intent of the applicable rules and to report taxable income, gains,
deductions, losses and credits in a manner that properly reflects unitholders’
economic gains and losses. These assumptions and conventions may not fully
comply with all aspects of the Internal Revenue Code (the “Code”) and applicable
Treasury Regulations, however, and it is possible that the U.S. Internal Revenue
Service will successfully challenge US12NG’s allocation methods and require
US12NG to reallocate items of income, gain, deduction, loss or credit in a
manner that adversely affects investors. If this occurs, investors may be
required to file an amended tax return and to pay additional taxes plus
deficiency interest.
US12NG
could be treated as a corporation for federal income tax purposes, which may
substantially reduce the value of the units.
US12NG
has received an opinion of counsel that, under current U.S. federal income tax
laws, US12NG will be treated as a partnership that is not taxable as a
corporation for U.S. federal income tax purposes, provided that (i) at least 90
percent of US12NG’s annual gross income consists of “qualifying income” as
defined in the Code, (ii) US12NG is organized and operated in accordance with
its governing agreements and applicable law and (iii) US1212NG does not elect to
be taxed as a corporation for federal income tax purposes. Although the General
Partner anticipates that US12NG has satisfied and will continue to satisfy the
“qualifying income” requirement for all of its taxable years, that result cannot
be assured. US12NG has not requested and will not request any ruling from the
IRS with respect to its classification as a partnership not taxable as a
corporation for federal income tax purposes. If the IRS were to successfully
assert that US12NG is taxable as a corporation for federal income tax purposes
in any taxable year, rather than passing through its income, gains, losses and
deductions proportionately to unitholders, US12NG would be subject to tax on its
net income for the year at corporate tax rates. In addition, although the
General Partner does not currently intend to make distributions with respect to
units, any distributions would be taxable to unitholders as dividend income.
Taxation of US12NG as a corporation could materially reduce the after-tax return
on an investment in units and could substantially reduce the value of the
units.
|
Item
1B.
|
Unresolved
Staff Comments.
|
Not
applicable.
70
|
Item
2.
|
Properties.
|
Not
applicable.
|
Item
3.
|
Legal
Proceedings.
|
Although
US12NG may, from time to time, be involved in litigation arising out of its
operations in the normal course of business or otherwise, US12NG is currently
not a party to any pending material legal proceedings.
|
Item
4.
|
Reserved.
|
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Price
Range of Units
US12NG’s
units have traded on the NYSE Arca under the symbol “US12NG” since November
18, 2009. The following table sets forth the range of reported high
and low sales prices of the units as reported on the NYSE Arca, for the periods
indicated below.
|
High
|
Low
|
|||||||
|
Fiscal year 2009
|
||||||||
|
Fourth
quarter (beginning November 18, 2009)
|
$ | 57.03 | $ | 46.32 | ||||
As of
December 31, 2009, US12NG had 1276 holders of units.
Dividends
US12NG
has not made and does not currently intend to make cash distributions to its
unitholders.
Issuer
Purchases of Equity Securities
US12NG
does not purchase units directly from its unitholders; however, in connection
with its redemption of baskets held by Authorized Purchasers, US12NG
redeemed
1 basket
(comprising 100,000 units) during the year ended December 31, 2009.
Financial
Highlights (for the years ended December 31, 2009 and 2008 and the period from
June 27, 2007 (inception) to December 31, 2007)
(Dollar
amounts in 000’s except for per unit information)
|
Year Ended
December 31, 2009
|
Year Ended
December 31, 2008
|
For the Period from
June 27, 2007 to
December 31, 2007
|
||||||||||
|
Total
assets
|
$ | 37,797 | $ | 1 | $ | 1 | ||||||
|
Net
realized and unrealized gain on futures transactions, inclusive of
commissions
|
$ | 2,588 | $ | - | $ | - | ||||||
|
Net
income
|
$ | 2,572 | $ | - | $ | - | ||||||
|
Weighted-average
limited partnership units
|
42,7273 | - | - | |||||||||
|
Net
income per unit
|
$ | 3.77 | $ | - | $ | - | ||||||
|
Net
income per weighted average unit
|
$ | 6.02 | $ | - | $ | - | ||||||
|
Cash
and cash equivalents at end of year/period
|
$ | 32,056 | $ | 1 | $ | 1 | ||||||
71
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The
following discussion should be read in conjunction with the financial statements
and the notes thereto of US12NG included elsewhere in this annual report on
Form 10-K.
Forward-Looking
Information
This
annual report on Form 10-K, 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 US12NG’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 US12NG’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 US12NG cannot
assure investors that these projections included in these forward-looking
statements will come to pass. US12NG’s actual results could differ
materially from those expressed or implied by the forward-looking statements as
a result of various factors.
US12NG
has based the forward-looking statements included in this annual report on Form
10-K on information available to it on the date of this annual report on
Form 10-K, and US12NG assumes no obligation to update any such
forward-looking statements. Although US12NG 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 US12NG may make directly to them or through
reports that US12NG in the future files with the SEC, including annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K.
Introduction
US12NG, a
Delaware limited partnership, is a commodity pool that issues units that may be
purchased and sold on the NYSE Arca. The investment objective of US12NG is for
the changes in percentage terms of its units’ NAV to reflect the changes in
percentage terms of the spot price of natural gas delivered at the Henry
Hub, Louisiana, as measured by the changes in the average of the prices of 12
futures contracts on natural gas traded on the NYMEX, consisting of the
near month contract to expire and the contracts for the following 11 months, for
a total of 12 consecutive months’ contracts, except when the near month contract
is within two weeks of expiration, in which case it will be measured by the
futures contracts that are the next month contract to expire and the contracts
for the following 11 consecutive months, less US12NG’s expenses. When
calculating the daily movement of the average price of the 12 contracts, each
contract month is equally weighted.
US12NG
seeks to achieve its investment objective by investing in a combination of
natural gas Futures Contracts and Other Natural Gas-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. US12NG’s General Partner believes changes in the price of the
Benchmark Futures Contract have historically exhibited a close correlation with
the changes in the spot price of natural gas. It is not the intent of US12NG to
be operated in a fashion such that the NAV will equal, in dollar terms, the spot
price of natural gas or any particular futures contract based on natural gas.
Management believes that it is not practical to manage the portfolio to achieve
such an investment goal when investing in listed natural gas Futures Contracts
and Other Natural-Gas Related Investments.
On any
valuation day, the Benchmark Futures Contracts are the near month futures
contract for natural gas traded on the NYMEX and the contracts for the
following 11 months for a total of 12 consecutive months’ contracts unless the
near month contract is within two weeks of expiration in which case the
Benchmark Futures Contracts are the next month contract for natural gas traded
on the NYMEX and the contracts for the following 11 consecutive months. “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.
72
US12NG
invests in Futures Contracts for natural gas, crude oil, heating oil, gasoline
and other petroleum-based fuels that are traded on the NYMEX, ICE Futures or
other U.S. and foreign exchanges and Other Natural Gas-Related Investments. Due,
in part, to the increased size of US12NG over the last several quarters and its
obligation to comply with regulatory limits, it is likely that it will invest in
increased numbers of Other Natural Gas-Related Investments in order to fulfill
its investment objective.
The regulation of Natural Gas 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 this annual report on Form 10-K, 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
US12NG.
Currently, a number of proposals to alter the regulation
of Natural Gas Interests are being considered by federal regulators and
legislators. These proposals include the imposition of fixed 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 CFTC has also recently published a
proposed rule that would impose fixed position limits on certain energy futures
contracts without the need for any new legislation to be passed.
If any of the aforementioned proposals is implemented,
US12NG’s ability to meet its investment objective may be negatively impacted and
investors could be adversely affected.
In addition, due to potential regulatory limitations,
US12NG may determine to hold greater amounts of cash and cash equivalents and
lesser amounts of Natural Gas Interests, or greater amounts of Other Natural
Gas-Related Investments if it determines that will most appropriately satisfy
US12NG's investment objective. Holding more cash and cash equivalents
and less Natural Gas Interests, or more Other Natural Gas-Related Investments
for some period of time may result in increased tracking error. Increasing
US12NG’s investments in Other Natural Gas-Related Investments, such as through
increased investments in over-the-counter swaps, may result in increased
tracking error due to the fact that transaction costs for over-the-counter swaps
are significantly higher as compared to those for exchange-traded Natural Gas
Interests, which to date are the principal investment of US12NG. In
the event that US12NG determines that suitable Other Natural Gas-Related
Investments are not obtainable, US12NG will need to consider other actions to
protect its unitholders and to permit US12NG to achieve its investment
objectives.
The
General Partner of US12NG, which is registered as a CPO with the CFTC, is
authorized by the LP Agreement to manage US12NG. The General Partner is
authorized by US12NG in its sole judgment to employ and establish the terms of
employment for, and termination of, commodity trading advisors or futures
commission merchants.
Natural gas futures prices exhibited a general downtrend
during the period from November 18, 2009 through December 31, 2009. The average
prices of the Benchmark Futures Contracts started the period at
$
5.34
. It hit a peak on
December 28,
2009
of $6.23
and a low price on December 3, 2009
when prices reached $4.95. The period from November 18,
2009 through December 31, 2009 ended with the average prices of the Benchmark
Futures Contracts at $
5.87
, up
approximately 9.88% over the period. US12NG’s NAV initially rose during the year
from a starting level of $
50.00
per unit to
a high on
December 28, 2009
of
$57.05
per unit. US12NG’s NAV reached its
low for the year on
December 3, 2009
at
$
46.32
per unit. The NAV on December 31,
2009 was $
53.77
, up approximately
7.54
% over the period.
For the first month of 2009, the natural gas futures
market remained in a state of backwardation, meaning that the price of the near
month natural gas futures contract was typically higher than the price of the
next month natural gas futures contract, or contracts further away from
expiration. For the rest of the first quarter and for the second and third and
the majority of the fourth quarters of 2009, the natural gas futures market
moved into a contango market. The natural gas market finished the
last few days of 2009 in a mild state of backwardation. A contango
market is one in which the price of the near month natural gas futures contract
is less than the price of the next month natural gas futures contract, or
contracts further away from expiration. As a result of contango or
backwardation, as the case may be, the return of approximately
-0.89
% on the Benchmark Futures Contract listed above is a
hypothetical return only and could not actually be achieved by an investor
holding futures contracts. For a discussion of the impact of backwardation and
contango on total returns, see “Term Structure of Natural Gas Futures Prices and
the Impact on Total Returns”.
73
Valuation
of Futures Contracts and the Computation of the NAV
The NAV
of US12NG 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. The 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 US12NG investments, including cleared swaps, or other futures
contracts, as of the earlier of the close of the NYSE Arca or 4:00 p.m. New York
time.
Results
of Operations and the Natural Gas Market
Results of
Operations.
On November 18, 2009, US12NG listed its units on
the NYSE Arca under the ticker symbol “UNL.” On that day, US12NG established its
initial offering price at $50.00 per unit and issued 30,000,000 units to the
initial Authorized Purchaser, Merrill Lynch Professional Clearing Corp., in
exchange for $10,001,000 in cash.
Since its
initial offering of 30,000,000 units, US12NG has not made any subsequent
offerings of its units. As of December 31, 2009, US12NG had issued
800,000 units, 700,000 of which were outstanding. As of December 31,
2009, there were 29,200,000 units registered but not yet issued.
More
units may have been issued by US12NG than are outstanding due to the redemption
of units. Unlike funds that are registered under the 1940 Act, units that have
been redeemed by US12NG cannot be resold by US12NG. As a result, US12NG
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 Period from November
18, 2009 to December 31, 2009
As of
December 31, 2009, the total unrealized gain on natural gas Futures
Contracts, cleared swap contracts and over-the-counter swap contracts owned or
held on that day was $1,662,670 and US12NG established cash deposits,
including cash investments in money market funds, that were equal to
$35,996,807. US12NG held 89.05% of its cash assets in overnight
deposits and money market funds at the Custodian, while 10.95% of the cash
balance was held as margin deposits for the Futures Contracts purchased. The
ending per unit NAV on December 31, 2009 was $53.77.
Portfolio Expenses
. US12NG’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
US12NG pays to the General Partner is calculated as a percentage of the total
net assets of US12NG. US12NG pays the General Partner a management
fee of 0.60% of NAV on its average net assets. The fee is accrued
daily.
As of
December 31, 2009, the daily average total net assets of US12NG
were $22,798,665. The management fee paid by US12NG during the period
amounted to $16,490. Management fees as a percentage of total net
assets averaged 0.60% over the course of the period ended December 31,
2009.
In
addition to the management fee, US12NG pays all brokerage fees, transaction
costs for over-the-counter swaps, taxes 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, 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, taxes and expenses
for the year ended December 31, 2009 was $150,837. For the period ended December
31, 2009, US12NG did not incur ongoing registration fees or other expenses
relating to the registration and offering of additional units.
74
US12NG 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. US12NG shares these fees and expenses with
the Related Public Funds based on the relative assets of each fund computed
on a daily basis. These fees and expenses for the calendar year 2009 amounted to
a total of $433,046 for all funds, and US12NG’s portion of such fees and
expenses was $125.
Effective
as of March 3, 2009, the General Partner 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.
US12NG
also incurs commissions to brokers for the purchase and sale of Futures
Contracts, Other Natural Gas-Related Investments or Treasuries. During the
period ended December 31, 2009, total commissions paid to brokers amounted to
$9,284. As an annualized percentage of total net assets,
the figure for the period ended December 31, 2009 represents approximately
0.34% 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.
US12NG
did not incur transaction costs related to investment in Other Natural
Gas-Related Investments, including over-the-counter swaps, during the period
ended December 31, 2009.
The fees
and expenses associated with US12NG’s audit expenses and tax accounting and
reporting requirements are paid by US12NG. These costs are estimated to be
$164,000 for the period ended December 31, 2009.
Interest Income
. US12NG seeks
to invest its assets such that it holds Futures Contracts and Other Natural
Gas-Related Investments in an amount equal to the total net assets of its
portfolio. Typically, such investments do not require US12NG to pay the full
amount of the contract value at the time of purchase, but rather require US12NG
to post an amount as a margin deposit against the eventual settlement of the
contract. As a result, US12NG retains an amount that is approximately equal to
its total net assets, which US12NG 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 US12NG’s Custodian. The Treasuries, cash and/or cash equivalents earn
interest that accrues on a daily basis. For the period ended December 31, 2009,
US12NG earned $951 in interest income on such cash holdings. Based on US12NG’s
average daily total net assets, this is equivalent to an annualized yield of
0.04%.
Tracking US12NG’s Benchmark
.
US12NG seeks to manage its portfolio such that changes in its average daily NAV,
on a percentage basis, closely track the changes in the average of the daily
prices of the Benchmark Futures Contracts, also on a percentage basis.
Specifically, US12NG seeks to manage the portfolio such that over any rolling
period of 30 valuation days, the average daily change in the 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 Contracts. As an example, if the average daily
movement of the average of the prices of the Benchmark Futures
Contracts for a particular 30-day time period was 0.5% per day, US12NG
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). US12NG’s portfolio management goals do not
include trying to make the nominal price of US12NG’s NAV equal to the average of
the nominal prices of the current Benchmark Futures Contracts or the spot
price for natural gas. Management believes that it is not practical to manage
the portfolio to achieve such an investment goal when investing in listed
Futures Contracts.
For the
30 valuation days ended December 31, 2009, the simple average daily change in
the Benchmark Futures Contract was 0.291%, while the simple average daily change
in the NAV of US12NG over the same time period was 0.287%. The average daily
difference was -0.004% (or 0.4 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 0.089%, meaning that over
this time period US12NG’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 US12NG’s NAV versus the daily movement of the Benchmark
Futures Contract for the 30 day period ended December 31, 2009.
75
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
76
Since the
offering of US12NG units to the public on November 18, 2009 to December 31,
2009, the simple average daily change in its Benchmark Futures Contracts was
0.291%, while the simple average daily change in the NAV of US12NG over the same
time period was 0.287%. The average daily difference was -0.004% (or -0.4 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 0.089%, meaning that over this time period US12NG’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 US12NG versus the
return of its Benchmark Futures Contracts can be calculated by comparing
the actual return of US12NG, measured by changes in its NAV, versus
the
expected
changes in its
NAV under the assumption that US12NG’s returns had been exactly the same as the
daily changes in its Benchmark Futures Contracts.
For the
period ended December 31, 2009, the actual total return of US12NG as
measured by changes in its NAV was 7.54%. This is based on an initial
NAV of $50.00 on November 18, 2009 and an ending NAV as of December
31, 2009 of $53.77. During this time period, US12NG made no distributions
to its unitholders. However, if US12NG’s daily changes in its NAV had instead
exactly tracked the changes in the daily return of the Benchmark Futures
Contract, US12NG would have ended 2009 with an estimated NAV of $53.83, for a
total return over the relevant time period of 7.64%. The difference between the
actual NAV total return of US12NG of 7.54% and the expected total return based
on the Benchmark Futures Contract of 7.64% was an error over the time period of
-0.10%, which is to say that US12NG’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 US12NG
collects on its cash and cash equivalent holdings. During the period
ended December 31, 2009, US12NG received interest income of $951, which is
equivalent to a weighted average interest rate of 0.04% for 2009. In addition,
during the period ended December 31, 2009, US12NG also collected $4,000 from its
Authorized Purchasers creating or redeeming baskets of units. This income also
contributed to US12NG’s actual return trailing the benchmark results. However,
if the total assets of US12NG 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 period ended
December 31, 2009, US12NG incurred total net expenses of $30,649. Income from
interest and Authorized Purchaser collections net of expenses was $(25,698)
which is equivalent to a weighted average net interest rate of (0.94)% for the
period ended December 31, 2009.
There are
currently three factors that have impacted or are most likely to impact
US12NG’s ability to accurately track its Benchmark Futures
Contracts.
First,
US12NG may buy or sell its holdings in the then current Benchmark Futures
Contracts at a price other than the closing settlement price of that contract on
the day during which US12NG executes the trade. In that case, US12NG may pay a
price that is higher, or lower, than that of the Benchmark Futures
Contracts, which could cause the changes in the daily NAV of US12NG to
either be too high or too low relative to the changes in the Benchmark Futures
Contracts. In 2009, management attempted to minimize the effect of
these transactions by seeking to execute its purchase or sale of the
Benchmark Futures Contracts at, or as close as possible to, the end of the
day settlement price. However, it may not always be possible for US12NG 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
US12NG’s attempt to track the Benchmark Futures Contracts over
time.
Second,
US12NG earns interest on its cash, cash equivalents and Treasury holdings.
US12NG is not required to distribute any portion of its income to its
unitholders and did not make any distributions to unitholders in 2009. Interest
payments, and any other income, were retained within the portfolio and added to
US12NG’s NAV. When this income exceeds the level of US12NG’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), US12NG will realize a net
yield that will tend to cause daily changes in the NAV of US12NG to track
slightly higher than daily changes in the Benchmark Futures Contracts.
During the period ended December 31, 2009, US12NG earned, on an annualized
basis, approximately 0.03% on its cash holdings. It also incurred cash expenses
on an annualized basis of 0.60% for management fees and approximately 0.34% in
brokerage commission costs related to the purchase and sale of Futures
Contracts, and 0.18% for other expenses. The foregoing fees and expenses
resulted in a net yield on an annualized basis of approximately (1.09)% and
affected US12NG’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 Contracts.
77
Third,
US12NG may hold Other Natural Gas-Related Investments in its portfolio that
may fail to closely track the Benchmark Futures Contracts’ total return
movements. In that case, the error in tracking the changes in the average of the
Benchmark Futures Contracts could result in daily changes in the NAV of US12NG
that are either too high, or too low, relative to the daily changes in the
average of the Benchmark Futures Contracts.
During the period ended
December 31, 2009, US12NG did not hold Other Natural Gas-Related
Investments.
Term Structure of Natural Gas
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 natural gas 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 natural gas for immediate delivery (the “spot”
price), was $7 per 10,000 mmBtu, and the value of a position in the near month
futures contract was also $7. Over time, the price of 10,000 mmBtu of natural
gas will fluctuate based on a number of market factors, including demand
for natural gas 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 natural gas, 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 natural gas 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 natural gas
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 $7 investment would tend
to rise faster than the spot price of natural gas, or fall slower. As a result,
it would be possible in this hypothetical example for the price of spot natural
gas to have risen to $9 after some period of time, while the value of the
investment in the futures contract would have risen to $10, assuming
backwardation is large enough or enough time has elapsed. Similarly, the spot
price of natural gas could have fallen to $5 while the value of an investment in
the futures contract could have fallen to only $6. 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 natural gas
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 $7 investment would tend to rise slower than
the spot price of natural gas, or fall faster. As a result, it would be possible
in this hypothetical example for the spot price of natural gas to have
risen to $9 after some period of time, while the value of the investment in the
futures contract will have risen to only $8, assuming contango is large enough
or enough time has elapsed. Similarly, the spot price of natural gas could have
fallen to $6 while the value of an investment in the futures contract could have
fallen to $5. Over time, if contango remained constant, the difference would
continue to increase.
78
The chart
below compares the price of the near month contract to the average price of
the near 12 month contracts over the last 10 years (2000-2009)
for natural gas. When the price of the near month contract is higher than the
average price of the near 12 month contracts, the market would be described as
being in backwardation. When the price of the near month contract is lower than
the average price of the near 12 month contracts, the market would be described
as being in contango. Although the prices of the near month contract and the
average price of the near 12 month contracts do tend to move up or down
together, it can be seen that at times the near month prices are clearly higher
than the average price of the near 12 month contracts (backwardation), and other
times they are below the average price of the near 12 month contracts
(contango). In addition, investors can observe that natural gas prices, both
front month and second month, often display a seasonal pattern in which the
price of natural gas tends to rise in the early winter months and decline in the
summer months. This mirrors the physical demand for natural gas, which typically
peaks in the winter.
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
*
PAST PERFORMANCE
IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
79
An
alternative way to view backwardation and contango data over time is to subtract
the dollar price of the near month natural gas Futures Contract from the dollar
price of the near 12 month natural gas Futures Contracts. If the resulting
number is a positive number, then the near month price is higher than the
average price of the near 12 months 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 average price of the near 12 months and the market
could be described as being in contango. The chart below shows the results from
subtracting the average dollar price of the near 12 month contracts from the
near month price for the 10 year period between 2000 and 2009. Investors will
note that the natural gas market spent time in both backwardation and contango.
Investors will further note that the markets display a seasonal pattern that
corresponds to the seasonal demand patterns for natural gas above. That is, in
many, but not all, cases the average price of the near 12 month contracts is
higher than the near month during the approach to the winter months as the price
of natural gas for delivery in those winter months rises on expectations of
demand. At the same time, the price of the near month, when that month is just
before
the
onset of winter, does not rise as far or as fast as the average price of the
near 12 month contracts whose delivery falls during the winter
season.
*
PAST PERFORMANCE
IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
An
investment in a portfolio that involved owning only the near month contract
would likely produce a different result than an investment in a portfolio that
owned an equal number of each of the near 12 months’ worth of contracts.
Generally speaking, when the natural gas futures market is in backwardation, the
near month only portfolio would tend to have a higher total return than the 12
month portfolio. Conversely, if the natural gas futures market was in contango,
the portfolio containing 12 months’ worth of contracts would tend to outperform
the near month only portfolio. The chart below shows the results of owning a
portfolio consisting of the near month contract versus a portfolio containing
the near 12 months’ worth of contracts. In this example, each month, the near
month only portfolio would sell the near month contract at expiration and buy
the next month out contract. The portfolio holding an equal number of the near
12 months’ worth of the contracts would sell the near month contract at
expiration and replace it with the contract that becomes the new twelfth month
contract.
80
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
As seen
in the chart above, there have been periods of both positive and negative annual
total returns for both hypothetical portfolios over the last 10 years. In
addition, there have been periods during which the near month only approach had
higher returns, and periods where the 12 month approach had higher total
returns. The above chart does not represent the performance history of US12NG or
any affiliated funds.
Historically,
the natural gas futures markets have experienced periods of contango and
backwardation. Because natural gas demand is seasonal, it is possible for the
price of natural gas Futures Contracts for delivery within one or two months to
rapidly move from backwardation into contango and back again within a relatively
short period of time of less than one year.
The
General Partner believes that holding futures contracts whose expiration dates
are spread out over a 12 month period of time will cause the total return of
such a portfolio to vary compared to a portfolio that holds only a single
month’s contract (such as the near month contract). In particular, the General
Partner believes that the total return of a portfolio holding contracts with a
range of expiration months will be impacted differently by the price
relationship between different contract months of the same commodity future
compared to the total return of a portfolio consisting of the near month
contract. The General Partner believes that based on historical evidence a
portfolio that held futures contracts with a range of expiration dates spread
out over a 12 month period of time would typically be impacted less by the
positive effect of backwardation, and less by the negative effect of contango,
compared to a portfolio that held contracts of a single near month. As a result,
absent the impact of any other factors, a portfolio of 12 different monthly
contracts would tend to have a lower total return than a near month only
portfolio in a backwardation market and a higher total return in a contango
market. However there can be no assurance that such historical relationships
would provide the same or similar results in the future.
81
Periods
of contango or backwardation do not materially impact US12NG’s investment
objective of having the percentage changes in its per unit NAV track the
percentage changes in the average of the price of the Benchmark Futures
Contracts since the impact of backwardation and contango tended to equally
impact the percentage changes in price of both US12NG’s units and the
Benchmark Futures Contracts. 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 and, because of
the seasonal nature of natural gas demand, both may occur within a single year’s
time.
Natural Gas Market.
During
the year ended December 31, 2009, natural gas prices in the United States were
impacted by several factors. At the beginning of the first quarter of
2009, the amount of natural gas in storage was at higher than average levels
versus the previous five years. During all of 2009, the seasonally adjusted
inventory levels of stored natural gas remained above five-year averages.
In addition, a combination of slowing U.S. economic growth and increased natural
gas production all contributed to a very significant decline in natural gas
prices during most of 2009, with prices reaching a low of $2.508 near the end of
the third quarter before finally ending the year with a price of
$5.572.
Natural Gas 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 natural gas prices versus the monthly movements of the prices of
several other energy commodities, such as crude oil, heating oil, and unleaded
gasoline, 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 natural gas 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 natural gas had a positive, but weak, correlation to
movements in heating oil. Finally, natural gas had a positive, but very weak,
correlation with crude oil and was not strongly correlated, either positively or
negatively, with unleaded gasoline.
|
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
|
Unleaded
Gasoline
|
Natural
Gas
|
|||||||||||||||||||||
|
Large
Cap U.S. Equities (S&P 500)
|
1.000 | -0.259 | 0.966 | 0.152 | 0.087 | 0.135 | 0.023 | |||||||||||||||||||||
|
U.S.
Govt. Bonds (EFFAS U.S. Government Bond Index)
|
1.000 | -0.237 | -0.127 | -0.078 | 0.214 | -0.128 | ||||||||||||||||||||||
|
Global
Equities (FTSE World Index)
|
1.000 | 0.246 | 0.165 | 0.196 | 0.084 | |||||||||||||||||||||||
|
Crude
Oil
|
1.000 | 0.783 | 0.724 | 0.334 | ||||||||||||||||||||||||
|
Heating
Oil
|
1.000 | 0.613 | 0.446 | |||||||||||||||||||||||||
|
Unleaded
Gasoline
|
1.000 | 0.257 | ||||||||||||||||||||||||||
|
Natural
Gas
|
1.000 | |||||||||||||||||||||||||||
|
Source:
Bloomberg, NYMEX
|
||||||||||||||||||||||||||||
PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
82
The chart
below covers a more recent, but much shorter, range of dates than the above
chart. It can be seen that over this particular time period, the movement of
natural gas on a monthly basis was not strongly correlated, positively or
negatively, with the movements of large-cap U.S. equities, U.S. government
bonds, global equities, or the other three energy commodities of crude oil,
gasoline or heating oil.
|
Correlation Matrix 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
|
Unleaded
Gasoline
|
Natural
Gas
|
|||||||||||||||||||||
|
Large
Cap U.S. Equities (S&P 500)
|
1.000 | 0.303 | 0.974 | 0.182 | 0.325 | 0.083 | 0.139 | |||||||||||||||||||||
|
U.S.
Govt. Bonds (EFFAS U.S. Government Bond Index)
|
1.000 | -0.284 | -0.264 | -0.347 | 0.544 | -0.016 | ||||||||||||||||||||||
|
Global
Equities (FTSE World Index)
|
1.000 | 0.216 | 0.320 | 0.043 | 0.149 | |||||||||||||||||||||||
|
Crude
Oil
|
1.000 | 0.769 | 0.576 | 0.255 | ||||||||||||||||||||||||
|
Heating
Oil
|
1.000 | 0.714 | 0.253 | |||||||||||||||||||||||||
|
Unleaded
Gasoline
|
1.000 | 0.267 | ||||||||||||||||||||||||||
|
Natural
Gas
|
1.000 | |||||||||||||||||||||||||||
|
source:
Bloomberg, NYMEX
|
||||||||||||||||||||||||||||
PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
Investors
are cautioned that the historical price relationships between natural gas 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
natural gas 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 natural gas could have long term
correlation results that indicate prices of natural gas more closely track the
movements of equities or bonds. In addition, the General Partner believes that,
when measured over time periods shorter than ten years, there will always be
some periods where the correlation of natural gas to equities and bonds will be
either more strongly positively correlated or more strongly negatively
correlated than the long term historical results suggest.
The correlations between
natural gas, crude oil, heating oil and gasoline are relevant because the
General Partner endeavors to invest US12NG’s assets in Futures Contracts and
Other Natural Gas-Related Investments so that daily changes in percentage terms
in US12NG’s NAV correlate as closely as possible with daily changes in
percentage terms in the average of the prices of the Benchmark Futures
Contracts. If certain other fuel-based commodity futures contracts do not
closely correlate with the natural gas Futures Contracts, then their use could
lead to greater tracking error. As noted, the General Partner also believes that
the changes in percentage terms in the average of the prices of the Benchmark
Futures Contracts will closely correlate with changes in percentage terms in the
spot price of natural gas.
83
Critical
Accounting Policies
Preparation
of the 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. US12NG’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 US12NG’s 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 US12NG for its forward 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, US12NG 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
US12NG
has not made, and does not anticipate making, use of borrowings or other lines
of credit to meet its obligations. US12NG has met, and it is anticipated that
US12NG 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.
US12NG’s liquidity needs include: redeeming units, providing margin deposits for
its existing natural gas Futures Contracts or the purchase of additional natural
gas Futures Contracts and posting collateral for its over-the-counter contracts
and payment of its expenses, summarized below under “Contractual
Obligations.”
US12NG
currently generates cash primarily from (i) the sale of Creation
Baskets and (ii) interest earned on Treasuries, cash and/or cash
equivalents. US12NG has allocated substantially all of its net assets to trading
in natural gas interests. US12NG invests in natural gas 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 Natural Gas-Related Investments. A significant
portion of the NAV is held in cash and cash equivalents that are used as
margin and as collateral for US12NG’s trading in natural gas interests. The
balance of the net assets is held in US12NG’s account at its custodian bank.
Interest earned on US12NG’s interest-bearing funds is paid to
US12NG. During the period ended December 31, 2009, US12NG’s expenses
exceeded the interest income US12NG earned and the cash earned from the sale of
Creation Baskets. To the extent expenses have exceeded interest
income, US12NG’s NAV will be negatively impacted.
US12NG’s
investment in Natural Gas 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 US12NG
from promptly liquidating its positions in futures
contracts. During the period ended December 31,
2009,
US12NG was not forced to purchase or
liquidate any of its positions while daily limits were in effect; however,
US12NG cannot predict whether such an event may occur in the
future.
84
Prior to
the initial offering of US12NG, all payments with respect to US12NG’s expenses
were paid by the General Partner. US12NG does not have an obligation
or intention to refund such payments by the General Partner. The General
Partner, though under no obligation to do so, agreed to pay certain expenses, to
the extent that such expenses exceeded 0.15% (15 basis points) of US12NG’s NAV,
on an annualized basis. The General Partner has no obligation to continue such
payment into subsequent periods. US12NG will be responsible for
expenses incurred subsequent to the initial offering of units 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) taxes and 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
the Marketing Agent, the Administrator and the Custodian. If the General
Partner and US12NG are unsuccessful in raising sufficient funds to cover these
respective expenses or in locating any other source of funding, US12NG will
terminate and investors may lose all or part of their
investment.
Market
Risk
Trading
in Futures Contracts and Other Natural Gas-Related Investments, such as
forwards, involves US12NG entering into contractual commitments to purchase or
sell natural gas at a specified date in the future. The aggregate market value
of the contracts will significantly exceed US12NG’s future cash requirements
since US12NG intends to close out its open positions prior to settlement. As a
result, US12NG is generally only subject to the risk of loss arising from the
change in value of the contracts. US12NG considers the “fair value” of its
derivative instruments to be the unrealized gain or loss on the contracts. The
market risk associated with US12NG’s commitments to purchase natural gas is
limited to the aggregate market value of the contracts held. However, should
US12NG enter into a contractual commitment to sell natural gas, it would be
required to make delivery of the natural gas at the contract price, repurchase
the contract at prevailing prices or settle in cash. Since there are no limits
on the future price of natural gas, the market risk to US12NG could be
unlimited.
US12NG’s
exposure to market risk depends on a number of factors, including the markets
for natural gas, the volatility of interest rates and foreign exchange rates,
the liquidity of the Futures Contracts and Other Natural Gas-Related Investments
markets and the relationships among the contracts held by US12NG. The
limited experience that US12NG has had in utilizing its model to trade in
Natural Gas Interests in a manner intended to track the changes in the spot
price of natural gas, as well as drastic market occurrences, could ultimately
lead to the loss of all or substantially all of an investor’s
capital.
Credit
Risk
When
US12NG enters into Futures Contracts and Other Natural Gas-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 foreign 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 US12NG in such circumstances
The
General Partner will attempt to manage the credit risk of US12NG by following
various trading limitations and policies. In particular, US12NG intends to post
margin and/or hold liquid assets that will be approximately equal to the market
value of its obligations to counterparties under the Futures Contracts and Other
Natural Gas-Related Investments it holds. The General Partner will implement
procedures that will include, but will not be 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 US12NG to limit its credit
exposure.
UBS
Securities LLC, US12NG’s commodity broker, or any other broker that may be
retained by US12NG in the future, when acting as US12NG’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 US12NG, all assets of US12NG relating
to domestic Futures Contracts trading. These futures commission merchants are
not allowed to commingle US12NG’s assets with its other assets. In addition, the
CFTC requires commodity brokers to hold in a secure account US12NG’s assets
related to foreign Futures Contracts trading.
85
In the
future, US12NG may purchase over-the-counter contracts. See
“Item 7A. Quantitative and Qualitative Disclosures
About Market Risk” of this annual report on Form 10-K for a discussion of
over-the-counter contracts.
As of December 31, 2009, US12NG had
deposits in domestic and foreign financial institutions, including cash
investments in money market funds, in the amount of $35,996,807. This amount is
subject to loss should these institutions cease operations.
Off
Balance Sheet Financing
As of
December 31, 2009, US12NG 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 US12NG. While US12NG’s exposure
under these indemnification provisions cannot be estimated, they are not
expected to have a material impact on US12NG’s financial position.
Redemption
Basket Obligation
In order
to meet its investment objective and pay its contractual obligations described
below, US12NG requires liquidity to redeem units, which redemptions must be
in blocks of 100,000 units called Redemption Baskets. US12NG 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
US12NG’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 US12NG’s NAV, currently 0.60% of US12NG’s NAV on its
average daily net assets.
The
General Partner agreed to pay the start-up costs associated with the
formation of US12NG, 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 US12NG and its units with the SEC, FINRA
and the NYSE Arca, respectively. However, since US12NG’s initial offering of
units, offering costs incurred in connection with registering and listing
additional units of US12NG are directly borne on an ongoing basis by US12NG, and
not by the General Partner.
The
General Partner pays the fees of the Marketing Agent and the fees of the
Custodian and transfer agent, BBH&Co., as well as BBH&Co.’s fees for
performing administrative services, including in connection with the preparation
of US12NG’s financial statements and its SEC and CFTC reports. The General
Partner and US12NG have also entered into a licensing agreement with
the NYMEX pursuant to which US12NG and the affiliated funds managed by the
General Partner pay a licensing fee to the NYMEX. US12NG 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 US12NG to the extent that such expenses exceeded
0.15% (15 basis points) of US12NG’s NAV, on an annualized basis, through at
least December 31, 2009. The General Partner has no obligation to continue such
payment into subsequent periods.
In
addition to the General Partner’s management fee, US12NG 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 US12NG’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. US12NG also pays a portion of the fees and expenses of the independent
directors of the General Partner. See Note 3 to the Notes to Financial
Statements.
86
The
parties cannot anticipate the amount of payments that will be required under
these arrangements for future periods, as US12NG’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 US12NG’s
existence. Either party may terminate these agreements earlier for certain
reasons described in the agreements.
On
December 31, 2009, US12NG’s portfolio consisted of 641 Natural Gas NG Futures
Contracts traded on NYMEX and 0 Natural Gas NN Futures Contracts traded on the
NYMEX. For a list of US12NG’s current holdings, please see US12NG’s
website at www.unitedstates12monthnaturalgasfund.com.
|
Item
7A.
|
Quantitative
and Qualitative Disclosure About Market
Risk
|
Over-the-Counter
Derivatives
In the
future, US12NG 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
natural gas-based derivatives transactions contain fairly generic terms and
conditions and are available from a wide range of participants. Other natural
gas-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 natural gas- 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 natural gas, forward natural gas
prices or natural gas futures prices. For example, US12NG may enter into
over-the-counter derivative contracts whose value will be tied to changes in the
difference between the spot price of natural gas, the price of Futures
Contracts traded on the NYMEX and the prices of other Futures Contracts in
which US12NG may invest.
To
protect itself from the credit risk that arises in connection with such
contracts, US12NG 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. US12NG also requires that the counterparty be highly rated and/or provide
collateral or other credit support to address US12NG’s exposure to the
counterparty (i.e., the amount the counterparty would have to pay to US12NG if
the transaction with the counterparty were to terminate on that
day). US12NG must, to the extent its counterparty has exposure to it
under the transaction, also post collateral. In addition, it is also
possible for US12NG 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, US12NG would no longer have credit risk
of its original counterparty, as the clearinghouse would now be US12NG’s
counterparty. US12NG would still retain any price risk associated with its
transaction and would be required to deposit margin to secure the
clearinghouse’s exposure to US12NG.
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 Board.
Furthermore, the General Partner on behalf of US12NG will only enter 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.
US12NG
anticipates that the use of Other Natural Gas-Related Investments together with
its investments in Futures Contracts will produce price and total return results
that closely track the investment goals of US12NG. 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 US12NG’s ability to
successfully track the Benchmark Futures Contracts.
87
US12NG
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 Contracts. US12NG 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 US12NG to changes in the
price relationship between futures contracts which will expire sooner and those
that will expire later. US12NG 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 US12NG, 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 natural gas prices.
US12NG 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.
US12NG 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 US12NG or if it would lead to an overall lower cost of
trading to achieve a given level of economic exposure to movements in natural
gas prices.
During
the period ended December 31, 2009, US12NG did not employ any hedging methods
such as those described above. Therefore, US12NG was not exposed to counterparty
risk.
88
|
Item
8.
|
Financial
Statements and Supplementary Data.
|
United
States 12 Month Natural Gas Fund, LP
Index
to Financial Statements
|
Documents
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm.
|
90
|
|
|
Statements
of Financial Condition at December 31, 2009 and 2008.
|
91
|
|
|
Schedule
of Investments at December 31, 2009.
|
92
|
|
|
Statements
of Operations for the years ended December 31, 2009 and 2008 and the
period from June 27, 2007 (inception) to December 31,
2007.
|
93
|
|
|
Statements
of Changes in Partners’ Capital for the years ended December 31, 2009 and
2008 and the period from June 27, 2007 (inception) to December 31,
2007.
|
94
|
|
|
Statements
of Cash Flows for the years ended December 31, 2009 and 2008 and the
period from June 27, 2007 (inception) to December 31,
2007.
|
95
|
|
|
Notes
to Financial Statements for the years ended December 31, 2009 and 2008 and
the period from June 27, 2007 (inception) to December 31,
2007.
|
96
|
89
Report
of Independent Registered Public Accounting Firm
To the
Partners of
United
States 12 Month Natural Gas Fund, LP
We have
audited the accompanying statements of financial condition of United
States 12 Month Natural Gas Fund, LP, (the “Fund”) as of December 31,
2009 and 2008, including the schedule of investments as of December 31,
2009 and the related statements of operations, changes in partners’ capital and
cash flows for the years ended December 31, 2009 and 2008, and the period from
June 27, 2007 (inception) to December 31, 2007. These financial statements are
the responsibility of the Fund’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Fund is not required
to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Fund’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of United States 12 Month Natural
Gas Fund, LP as of December 31, 2009 and 2008, and the results of its
operations and its cash flows for the years ended December 31, 2009 and 2008,
and the period from June 27, 2007 (inception) to December 31, 2007, in
conformity with accounting principles generally accepted in the United States of
America.
/s/
SPICER JEFFRIES LLP
Greenwood
Village, Colorado
March 30,
2010
90
United
States 12 Month Natural Gas Fund, LP
At
December 31, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 32,056,391 | $ | 1,000 | ||||
|
Equity
in UBS Securities LLC trading accounts:
|
||||||||
|
Cash
|
3,940,416 | - | ||||||
|
Unrealized
gain on open commodity futures contracts
|
1,662,670 | - | ||||||
|
Receivable
from General Partner
|
136,678 | - | ||||||
|
Interest
receivable
|
729 | - | ||||||
|
Total
assets
|
$ | 37,796,884 | $ | 1,000 | ||||
|
Liabilities
and Partners’ Capital
|
||||||||
|
General
Partner management fees payable (Note 3)
|
$ | 14,983 | $ | - | ||||
|
Professional
fees payable
|
140,800 | - | ||||||
|
Brokerage
commission fees payable
|
3,200 | - | ||||||
|
Other
liabilities
|
753 | - | ||||||
|
Total
liabilities
|
159,736 | - | ||||||
|
Commitments and Contingencies
(Notes 3, 4 and 5)
|
||||||||
|
Partners’
Capital
|
||||||||
|
General
Partner
|
- | 20 | ||||||
|
Limited
Partners
|
37,637,148 | 980 | ||||||
|
Total
Partners’ Capital
|
37,637,148 | 1,000 | ||||||
|
Total
liabilities and partners’ capital
|
$ | 37,796,884 | $ | 1,000 | ||||
|
Limited
Partners’ units outstanding
|
700,000 | - | ||||||
|
Net
asset value per unit
|
$ | 53.77 | $ | - | ||||
|
Market
value per unit
|
$ | 54.20 | $ | - | ||||
See
accompanying notes to financial statements.
91
United
States 12 Month Natural Gas Fund, LP
Schedule
of Investments
December
31, 2009
|
Gain (Loss) on
Open
|
||||||||||||
|
Number of
|
Commodity
|
% of Partners'
|
||||||||||
|
Contracts
|
Contracts
|
Capital
|
||||||||||
|
Open
Futures Contracts - Long
|
||||||||||||
|
United
States Contracts
|
||||||||||||
|
NYMEX
Natural Gas Futures NG contracts, expire February 2010
|
54 | $ | 235,080 | 0.62 | ||||||||
|
NYMEX
Natural Gas Futures NG contracts, expire March 2010
|
53 | 212,290 | 0.56 | |||||||||
|
NYMEX
Natural Gas Futures NG contracts, expire April 2010
|
53 | 171,100 | 0.46 | |||||||||
|
NYMEX
Natural Gas Futures NG contracts, expire May 2010
|
53 | 184,900 | 0.49 | |||||||||
|
NYMEX
Natural Gas Futures NG contracts, expire June 2010
|
54 | 162,430 | 0.43 | |||||||||
|
NYMEX
Natural Gas Futures NG contracts, expire July 2010
|
54 | 175,060 | 0.47 | |||||||||
|
NYMEX
Natural Gas Futures NG contracts, expire August 2010
|
53 | 162,010 | 0.43 | |||||||||
|
NYMEX
Natural Gas Futures NG contracts, expire September 2010
|
53 | 167,090 | 0.44 | |||||||||
|
NYMEX
Natural Gas Futures NG contracts , expire October 2010
|
54 | 137,960 | 0.37 | |||||||||
|
NYMEX
Natural Gas Futures NG contracts, expire November 2010
|
54 | 96,940 | 0.26 | |||||||||
|
NYMEX
Natural Gas Futures NG contracts, expire December 2010
|
53 | 66,030 | 0.18 | |||||||||
|
NYMEX
Natural Gas Futures NG contracts, expire January 2011
|
53 | (108,220 | ) | (0.29 | ) | |||||||
|
Total
Open Futures Contracts
|
641 | $ | 1,662,670 | 4.42 | ||||||||
|
Principal
Amount
|
Market
Value
|
|||||||||||
|
Cash
Equivalents
|
||||||||||||
|
United
States - Money Market Funds
|
||||||||||||
|
Fidelity
Institutional Government Portfolio – Class I
|
$ | 11,500,053 | $ | 11,500,053 | 30.56 | |||||||
|
Goldman
Sachs Financial Square Funds - Government Fund – Class SL
|
8,500,000 | 8,500,000 | 22.58 | |||||||||
|
Morgan
Stanley Institutional Liquidity Fund - Government
Portfolio
|
6,000,000 | 6,000,000 | 15.94 | |||||||||
|
Total
Cash Equivalents
|
$ | 26,000,053 | 69.08 | |||||||||
See
accompanying notes to financial statements.
92
United
States 12 Month Natural Gas Fund, LP
For
the years ended December 31, 2009 and 2008 and the period from June 27, 2007
(inception) to December 31, 2007
|
Year Ended
December 31,
2009
|
Year Ended
December 31,
2008
|
Period from
June 27, 2007 to
December 31,
2007
|
||||||||||
|
Income
|
||||||||||||
|
Gain
on trading of commodity futures contracts:
|
||||||||||||
|
Realized
gain on closed positions
|
$ | 934,900 | $ | - | $ | - | ||||||
|
Change
in unrealized gain on open positions
|
1,662,670 | - | - | |||||||||
|
Interest
income
|
951 | - | - | |||||||||
|
Other
income
|
4,000 | - | - | |||||||||
|
Total
income
|
2,602,521 | - | - | |||||||||
|
Expenses
|
||||||||||||
|
General
Partner management fees (Note 3)
|
16,490 | - | - | |||||||||
|
Professional
fees
|
140,800 | - | - | |||||||||
|
Brokerage
commission fees
|
9,284 | - | - | |||||||||
|
Other
expenses
|
753 | - | - | |||||||||
|
Total
expenses
|
167,327 | - | - | |||||||||
|
Expense
waiver (Note 3)
|
(136,678 | ) | - | - | ||||||||
|
Net
expenses
|
30,649 | - | - | |||||||||
|
Net
income
|
$ | 2,571,872 | $ | - | $ | - | ||||||
|
Net
income per limited partnership unit
|
$ | 3.77 | $ | - | $ | - | ||||||
|
Net
income per weighted average limited partnership unit
|
$ | 6.02 | $ | - | $ | - | ||||||
|
Weighted
average limited partnership units outstanding
|
427,273 | - | - | |||||||||
See
accompanying notes to financial statements.
93
United
States 12 Month Natural Gas Fund, LP
Statements
of Changes in Partners’ Capital
For
the years ended December 31, 2009 and 2008 and the period from June
27, 2007 (inception) to December 31, 2007
|
General
Partner
|
Limited Partners
|
Total
|
||||||||||
|
Balances,
at Inception
|
$ | - | $ | - | $ | - | ||||||
|
Initial
contribution of capital
|
20 | 980 | 1,000 | |||||||||
|
Balances,
at December 31, 2008
|
20 | 980 | 1,000 | |||||||||
|
Addition
of 800,000 partnership units
|
- | 40,652,357 | 40,652,357 | |||||||||
|
Redemption
of 100,000 partnership units
|
(20 | ) | (5,588,061 | ) | (5,588,081 | ) | ||||||
|
Net
income
|
- | 2,571,872 | 2,571,872 | |||||||||
|
Balances,
at December 31, 2009
|
$ | - | $ | 37,637,148 | $ | 37,637,148 | ||||||
|
Net
Asset Value Per Unit
|
||||||||||||
|
At
June 27, 2007 (inception)
|
$ | - | ||||||||||
|
At
December 31, 2008
|
$ | - | ||||||||||
|
At
November 18, 2009 (commencement of operations)
|
$ | 50.00 | ||||||||||
|
At
December 31, 2009
|
$ | 53.77 | ||||||||||
See
accompanying notes to financial statements.
94
United
States12 Month Natural Gas Fund, LP
For
the years ended December 31, 2009 and 2008 and the period from
June 27, 2007 (inception) to December 31, 2007
|
Year Ended
December 31,
2009
|
Year Ended
December
31,
2008
|
Period from
June 27, 2007
to December
31,
2007
|
||||||||||
|
Cash
Flows from Operating Activities:
|
||||||||||||
|
Net
income
|
$ | 2,571,872 | $ | - | $ | - | ||||||
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
||||||||||||
|
Increase
in commodity futures trading account – cash
|
(3,940,416 | ) | - | - | ||||||||
|
Unrealized
gain on futures contracts
|
(1,662,670 | ) | - | - | ||||||||
|
Increase
in receivable from General Partner
|
(136,678 | ) | - | - | ||||||||
|
Increase
in interest receivable
|
(729 | ) | - | - | ||||||||
|
Increase
in management fees payable
|
14,983 | - | - | |||||||||
|
Increase
in professional fees payable
|
140,800 | - | - | |||||||||
|
Increase
in brokerage commission fees payable
|
3,200 | - | - | |||||||||
|
Increase
in other liabilities
|
753 | - | - | |||||||||
|
Net
cash used in operating activities
|
(3,008,885 | ) | - | |||||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||
|
Subscription
of partnership units
|
40,652,357 | - | 1,000 | |||||||||
|
Redemption
of partnership units
|
(5,588,081 | ) | - | - | ||||||||
|
Net
cash provided by financing activities
|
35,064,276 | - | 1,000 | |||||||||
|
Net
Increase in Cash and Cash Equivalents
|
32,055,391 | - | 1,000 | |||||||||
|
Cash and Cash
Equivalents
, beginning of period
|
1,000 | 1,000 | - | |||||||||
|
Cash and Cash
Equivalents
, end of period
|
$ | 32,056,391 | $ | 1,000 | $ | 1,000 | ||||||
See
accompanying notes to financial statements.
95
United
States 12 Month Natural Gas Fund, LP
Notes
to Financial Statements
For
the years ended December 31, 2009 and 2008 and the period from June 27, 2007
(inception) to December 31, 2007
The
United States 12 Month Natural Gas Fund, LP (“US12NG”) was organized as a
limited partnership under the laws of the state of Delaware on June 27,
2007. US12NG is a commodity pool that issues limited partnership
units (“units”) that may be purchased and sold on the NYSE Arca, Inc. (the “NYSE
Arca”). US12NG 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 October 30, 2009 (the “LP
Agreement”). The investment objective of US12NG 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 natural gas delivered at the Henry Hub,
Louisiana, as measured by the changes in the average of the prices of 12 futures
contracts on natural gas traded on the New York Mercantile Exchange (the
“NYMEX”), consisting of the near month contract to expire and the contracts
for the following 11 months for a total of 12 consecutive months’ contracts,
except when the near month contract is within two weeks of expiration, in which
case it will be measured by the futures contracts that are the next month
contract to expire and the contracts for the following 11 consecutive months,
less US12NG’s expenses. US12NG accomplishes its objective through
investments in futures contracts for natural gas, crude oil, heating oil,
gasoline 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 natural gas-related investments such as cash-settled options on
Futures Contracts, forward contracts for natural gas, cleared swap contracts and
over-the-counter transactions that are based on the price of natural gas, crude
oil and other petroleum-based fuels, Futures Contracts and indices based on the
foregoing (collectively, “Other Natural Gas-Related
Investments”). As of December 31, 2009, US12NG held 641 Futures Contracts
traded on the NYMEX.
US12NG
commenced investment operations on November 18, 2009 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 US12NG. 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 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”), the United States Gasoline Fund,
LP (“UGA”) and the United States Heating Oil Fund, LP (“USHO”), which listed
their limited partnership units on the American Stock Exchange (the “AMEX”)
under the ticker symbols “USO” on April 10, 2006, “UNG” on April 18, 2007,
“USL” on December 6, 2007, “UGA” on February 26, 2008 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, UGA’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”), which listed its
limited partnership units on the NYSE Arca on September 24, 2009 under the
ticker symbol “DNO”. 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 Funds Trust (“USCI”).
US12NG 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 US12NG a $1,000 fee for each order placed
to create one or more Creation Baskets or 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 US12NG but rather at market prices quoted on such
exchange.
In
November 2009, US12NG initially registered 30,000,000 units on Form S-1 with the
SEC. On November 18, 2009, US12NG listed its units on the NYSE Arca under the
ticker symbol “UNL”. On that day, US12NG established its initial net asset value
by setting the price at $50.00 per unit and issued 200,000 units in
exchange for $10,001,000. US12NG also commenced investment operations
on November 18, 2009 by purchasing Futures Contracts traded on the NYMEX based
on natural gas.
96
As of
December 31, 2009, US12NG issued 8 Creation Baskets.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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 financial statements. Changes in the
unrealized gains or losses between periods are reflected in the statement of
operations. US12NG earns interest on its assets denominated in U.S.
dollars on deposit with the futures commission merchant at the overnight
Federal Funds Rate less 32 basis points. In addition, US12NG earns interest on
funds held at the custodian at prevailing market rates earned on such
investments.
Investments
in over-the-counter swap contracts (see Note 5) are arrangements to exchange a
periodic payment for a market-linked return, each based on a notional
amount. To the extent that the total return of the security or index
underlying the transaction exceeds or falls short of the offsetting periodic
payment obligation, US12NG receives a payment from, or makes a payment to, the
swap counterparty. The over-the-counter swap contracts are valued
daily based upon the appreciation or depreciation of the underlying securities
subsequent to the effective date of the contract. Changes in the
value of the swaps are reported as unrealized gains and losses and periodic
payments are recorded as realized gains or losses in the accompanying condensed
statements of operations.
Brokerage
Commissions
Brokerage
commissions on all open commodity futures contracts are accrued on a full-turn
basis.
Swap
Premiums
Upfront
fees paid by US12NG for over-the-counter swap contracts are reflected on the
Statements of Financial Condition and represent payments made upon entering into
a swap agreement to compensate for differences between the stated terms of the
agreement and prevailing market conditions. The fees are amortized
daily over the term of the swap agreement.
Income
Taxes
US12NG 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.
Additions
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.
US12NG
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 US12NG’s statement of financial
condition as receivable for units sold, and amounts payable to Authorized
Purchasers upon redemption are reflected as payable for units
redeemed.
97
Partnership
Capital and Allocation of Partnership Income and Losses
Profit or
loss shall be allocated among the partners of US12NG 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
US12NG’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. US12NG
uses the closing price for the contracts on the relevant exchange on that
day to determine the value of contracts held on such exchange.
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 December 31, 2009.
Offering
Costs
Offering
costs incurred in connection with the registration of additional units after the
initial registration of units are borne by US12NG. 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 financial statements in conformity with accounting principles
generally accepted in the United States of America requires US12NG’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 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
US12NG in accordance with the objectives and policies of US12NG. 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 US12NG. For these services, US12NG 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
US12NG 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 year ended December 31, 2009, US12NG did not incur any
registration fees and other offering expenses.
98
Directors’
Fees and Expenses
US12NG 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. US12NG shares these fees and expenses with USOF, USNG,
US12OF, UGA, USHO and USSO based on the relative assets of each fund, computed
on a daily basis. These fees and expenses for the calendar year 2009 amounted to
a total of $433,046 for all funds, and US12NG’s portion of such fees and
expenses was $125.
Licensing
Fees
As
discussed in Note 4, US12NG entered into a licensing agreement with the
NYMEX on December 4, 2007. The agreement has an effective date of April 10,
2006. Pursuant to the agreement, US12NG 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 year ended December 31, 2009, US12NG
incurred $628 under this arrangement.
Investor
Tax Reporting Cost
The fees
and expenses associated with US12NG’s audit expenses and tax accounting and
reporting requirements, with the exception of certain initial implementation
service fees and base service fees, which are borne by the General Partner, are
paid by US12NG. These costs are approximately $164,000 as of the year ended
December 31, 2009.
Other
Expenses and Fees
In
addition to the fees described above, US12NG pays all brokerage fees,
transaction costs for over-the-counter swaps, taxes and other expenses in
connection with the operation of US12NG, excluding costs and expenses paid
by the General Partner as outlined in Note 4.
US12NG is
party to a marketing agent agreement, dated as of October 30, 2009,
with the Marketing Agent and the General Partner, whereby the Marketing
Agent provides certain marketing services for US12NG as outlined in the
agreement. The fees of the Marketing Agent, which are borne by the General
Partner, are equal to 0.06% on US12NG’s assets up to $3 billion; and 0.04% on
US12NG’s assets in excess of $3 billion.
The above
fees do 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.
US12NG is
also party to a custodian agreement, dated November 3, 2009, with Brown Brothers
Harriman & Co. (“BBH&Co.”) and the General Partner, whereby BBH&Co.
holds investments on behalf of US12NG. The General Partner pays the fees of
the custodian, which are determined by the parties from time to time. In
addition, US12NG is party to an administrative agency agreement, dated as of
November 3, 2009, with the General Partner and BBH&Co., whereby BBH&Co.
acts as the administrative agent, transfer agent and registrar for US12NG. 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, the greater of a minimum amount of $75,000 annually for its custody,
fund accounting and fund administration services rendered to US12NG 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
US12NG’s, USOF’s, USNG’s, US12OF’s, UGA’s, USHO’s and USSO’s combined net
assets, (b) 0.0465% for US12NG’s, USOF’s, USNG’s, US12OF’s, UGA’s, USHO’s and
USSO’s combined net assets greater than $500 million but less than $1 billion,
and (c) 0.035% once US12NG’s, USOF’s, USNG’s, US12OF’s, UGA’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.
99
US12NG
has entered into a brokerage agreement with UBS Securities LLC (“UBS
Securities”). The agreement requires UBS Securities to provide services to
US12NG in connection with the purchase and sale of Futures Contracts and
Other Natural Gas-Related Investments that may be purchased and sold by or
through UBS Securities for US12NG’s account. The agreement provides that UBS
Securities charge US12NG commissions of approximately $7 per round-turn trade,
plus applicable exchange and NFA fees for Futures Contracts and options on
Futures Contracts.
US12NG
invests primarily in Futures Contracts traded on the NYMEX. On December 4,
2007, US12NG and the NYMEX entered into a licensing agreement whereby US12NG was
granted a non-exclusive license to use certain of the NYMEX’s settlement prices
and service marks. The agreement has an effective date of December 4, 2007.
Under the licensing agreement, US12NG 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.
US12NG
expressly disclaims any association with the NYMEX or endorsement of US12NG by
the NYMEX and acknowledges that “NYMEX” and “New York Mercantile Exchange” are
registered trademarks of the NYMEX.
US12NG intends
to engage in the trading of futures contracts, options on futures contracts
and cleared swap contracts (collectively, “derivatives”). US12NG will be 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.
US12NG
may enter into futures contracts, options on futures contracts and cleared swap
contracts to gain exposure to changes in the value of an underlying commodity.
Some futures contracts may call for physical delivery of the asset, while others
are settled in cash. 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. 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, options on futures contracts and cleared
swap 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 and cleared swap 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 US12NG 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
US12NG’s investment contracts through December 31, 2009 have been
exchange-traded futures contracts, cleared swaps or fully-collateralized
over-the-counter swaps. The liquidity and credit risks associated with
exchange-traded contracts and cleared swaps are generally perceived to be less
than those associated with over-the-counter transactions since, in
over-the-counter transactions, US12NG must rely solely on the credit of its
respective individual counterparties. As of December 31, 2009, US12NG has not
entered into any over-the-counter transactions. Over-the counter
transactions subject US12NG 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, on the transaction.
US12NG also has credit risk under its futures contracts since the sole
counterparty to all domestic and foreign futures contracts is the exchange on
which the relevant contracts are traded. However, as compared to its
over-the-counter transactions, it may more easily realize value by reselling its
futures contracts. In addition, US12NG bears the risk of financial
failure by the clearing broker.
100
US12NG’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 US12NG’s assets posted with that futures commission merchant;
however, the vast majority of US12NG’s assets are held in Treasuries, cash
and/or cash equivalents with US12NG’s custodian and would not be impacted by the
insolvency of a futures commission merchant. Also, the failure or insolvency of
US12NG’s custodian could result in a substantial loss of US12NG’s
assets.
US12NG invests
a portion of its cash in money market funds that seek to maintain a stable net
asset value. US12NG is exposed to any risk of loss associated with an
investment in these money market funds. As of December 31, 2009, US12NG had
deposits in domestic and foreign financial institutions, including cash
investments in money market funds, in the amount of $35,966,807. 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, US12NG 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, US12NG 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.
US12NG’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, US12NG 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 US12NG are reported in its 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.
The
following table presents per unit performance data and other supplemental
financial data for the years ended December 31, 2009 and 2008 and for the period
from June 27, 2007 (inception) to December 31, 2007. This information has been
derived from information presented in the financial statements.
|
|
For the
Year Ended
December 31, 2009
|
For the Year Ended
December 31, 2008
|
For the period
from
June 27, 2007
to
December 31, 2007
|
|||||||||
|
|
|
|
||||||||||
|
Per
Unit Operating Performance:
|
||||||||||||
|
Net
asset value, beginning of period
|
$ | 50.00 | $ | - | $ | - | ||||||
|
Total
income
|
3.84 | - | - | |||||||||
|
Net
expenses
|
(0.07 | ) | - | - | ||||||||
|
Net
increase in net asset value
|
3.77 | - | - | |||||||||
|
Net
asset value, end of period
|
$ | 53.77 | $ | - | $ | - | ||||||
|
Total
Return
|
7.54 | % | - | % | - | % | ||||||
|
Ratios
to Average Net Assets
|
||||||||||||
|
Total income
|
11.42 | % | - | % | - | % | ||||||
|
Management
fees
|
0.60 | %* |
|
%
|
- | % | ||||||
|
Total
expenses excluding management fees
|
5.49 | %* | - | % | - | % | ||||||
|
Expenses
waived
|
(4.97 | ) %* | - | % | - | % | ||||||
|
Net
expenses excluding management fees
|
0.52 | %* | - | % | - | % | ||||||
|
Net income
|
11.28 | % | - | % | - | % | ||||||
|
*Annualized
|
||||||||||||
101
Total
returns are calculated based on the change in value during the period. An
individual limited partner’s total return and ratio may vary from the above
total returns and ratios based on the timing of contributions to and withdrawals
from US12NG.
The
following summarized (unaudited) quarterly financial information presents the
results of operations and other data for three-month periods ended March 31,
June 30, September 30 and December 31, 2009.
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
2009
|
2009
|
2009
|
2009
|
|||||||||||||
|
Total
Income
|
$ | - | $ | - | $ | - | $ | 2,602,521 | ||||||||
|
Total
Expenses
|
- | - | - | 167,327 | ||||||||||||
|
Expense
Waivers
|
- | - | - | (136,678 | ) | |||||||||||
|
Net
Expenses
|
- | - | - | 30,649 | ||||||||||||
|
Net
Income
|
$ | - | $ | - | $ | - | $ | 2,571,872 | ||||||||
|
Net
Income per Unit
|
$ | - | $ | - | $ | - | $ | 3.77 | ||||||||
Effective
January 1, 2008, US12NG adopted 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 US12NG
(observable inputs) and (2) US12NG’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.
102
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 US12NG’s securities at December 31,
2009 using the fair value hierarchy:
|
At December
31, 2009
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
Short-Term
Investments
|
||||||||||||||||
|
Exchange-Traded
Futures Contracts
|
$ | 26,000,053 | $ | 26,000,053 | $ | - | $ | - | ||||||||
|
United
States Contracts
|
1,662,670 | 1,662,670 | - | - | ||||||||||||
Effective
January 1, 2009, US12NG adopted the provisions of Accounting Standards
Codification 815 – Derivatives and Hedging (“ASC 815”), 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 December 31, 2009
|
At December 31, 2008
|
|||||||||
|
Derivatives not
Accounted for as
Hedging Instruments
|
Statement of Financial
Condition Location
|
Fair Value
|
Fair Value
|
|||||||
|
Futures
-
|
||||||||||
|
Commodity
Contracts
|
Assets
|
$ | 1,662,670 | $ | - | |||||
The
Effect of Derivative Instruments on the Statements of Operations
|
For the year ended December 31, 2009
|
For the year ended December 31, 2008
|
||||||||||||||||||
|
Derivatives not
Accounted for as
Hedging Instruments
|
Location of Gain
or (Loss) on
Derivatives
Recognized in
Income
|
Realized Gain or
(Loss) on
Derivatives
Recognized in
Income
|
Change in
Unrealized Gain
or (Loss)
Recognized in
Income
|
Realized Gain or
(Loss) on
Derivatives
Recognized in
Income
|
Change in
Unrealized Gain
or (Loss)
Recognized in
Income
|
||||||||||||||
|
Futures
-
|
Realized
gain
|
$ | 934,900 | $ | - | $ | - | $ | - | ||||||||||
|
Commodity
Contracts
|
(loss)
on closed futures contracts
|
||||||||||||||||||
|
Change
in unrealized gain (loss) on open futures contracts
|
$ | - | $ | 1,662,670 | $ | - | $ | - | |||||||||||
In March 2008, the Financial Accounting Standards Board
released ASC 815. ASC 815 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of, and gains and losses on derivative instruments and
disclosures about credit-risk-related contingent features in derivative
agreements. US12NG adopted ASC 815 on January 1, 2009.
103
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 interim and annual
reporting periods
beginning after December
15, 2009, entities will be required to disclose significant transfers into and
out of Level 1
and 2
measurements in the fair value hierarchy and the reasons for those transfers.
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
the financial statement
disclosures.
US12NG
has performed an evaluation of subsequent events through March 30, 2010, which
is 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.
104
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
CONTENTS
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm
|
106
|
|
|
Consolidated
Statements of Financial Condition
|
107
|
|
|
Consolidated
Statements of Operations and Other Comprehensive Income
(Loss)
|
108
|
|
|
Consolidated
Statements of Changes in Equity (Deficit)
|
109
|
|
|
Consolidated
Statements of Cash Flows
|
110
|
|
|
Notes
to Consolidated Financial Statements
|
111
|
105
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Member of
United
States Commodity Funds LLC and Subsidiaries
We have
audited the accompanying consolidated statements of financial condition of
United States Commodity Funds LLC (formerly Victoria Bay Asset Management, LLC)
and Subsidiaries (the “Company”), as of December 31, 2009 and 2008, and the
related consolidated statements of operations and other comprehensive income
(loss), changes in equity (deficit) and cash flows for the years then ended.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of United States
Commodity Funds LLC (formerly Victoria Bay Asset Management, LLC) and
Subsidiaries as of December 31, 2009 and 2008, and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of
America.
/s/
SPICER JEFFRIES LLP
Greenwood
Village, Colorado
March 30,
2010
106
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,789,182 | $ | 125,815 | ||||
|
Management
fees receivable
|
2,973,237 | 893,111 | ||||||
|
Investments
(Notes 2 and 4)
|
43,304 | 34,579 | ||||||
|
Deferred
offering costs (Notes 2 and 3)
|
453,351 | 352,794 | ||||||
|
Other
assets
|
4,171 | 1,960 | ||||||
|
Total
assets
|
$ | 5,263,245 | $ | 1,408,259 | ||||
|
LIABILITIES AND EQUITY
|
||||||||
|
LIABILITIES:
|
||||||||
|
Accounts
payable
|
$ | 505,858 | $ | 624,688 | ||||
|
Income
tax payable
|
181,031 | 285,400 | ||||||
|
Expense
waiver payable (Note 3)
|
811,004 | 311,038 | ||||||
|
Total
liabilities
|
1,497,893 | 1,221,126 | ||||||
|
COMMITMENTS AND
CONTINGENCIES
(Notes 6 and 8)
|
||||||||
|
EQUITY:
|
||||||||
|
Member's
equity (Notes 3 and 7)
|
3,763,392 | 185,173 | ||||||
|
Noncontrolling
interests (Note 3)
|
1,960 | 1,960 | ||||||
|
Total
equity
|
3,765,352 | 187,133 | ||||||
|
Total
liabilities and equity
|
$ | 5,263,245 | $ | 1,408,259 | ||||
The
accompanying notes are an integral part of these statements.
107
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND
OTHER COMPREHENSIVE INCOME (LOSS)
|
Year
Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
REVENUE:
|
||||||||
|
Management
fees
|
$ | 27,224,589 | $ | 8,631,883 | ||||
|
EXPENSES:
|
||||||||
|
Salaries,
wages, payroll taxes and benefits
|
3,705,288 | 1,389,888 | ||||||
|
Distribution
fees
|
2,896,155 | 1,026,625 | ||||||
|
Administration
fees
|
1,866,968 | 665,696 | ||||||
|
General
and administrative
|
968,114 | 460,794 | ||||||
|
Professional
fees
|
767,669 | 1,159,643 | ||||||
|
Custodial
fees
|
306,575 | 118,453 | ||||||
|
Fees
and licenses expense
|
138,074 | 27,683 | ||||||
|
Expense
waiver expense (Note 3)
|
822,231 | 311,038 | ||||||
|
Transfer
agent fees
|
110,126 | 208,274 | ||||||
|
Advertising
and promotion
|
78,224 | 79,202 | ||||||
|
Total
expenses
|
11,659,424 | 5,447,296 | ||||||
|
OTHER
INCOME:
|
||||||||
|
Other
income
|
53,444 | - | ||||||
|
Dividend
income
|
3,934 | 14 | ||||||
|
Total
other income
|
57,378 | 14 | ||||||
|
NET
INCOME BEFORE INCOME TAXES
|
15,622,543 | 3,184,601 | ||||||
|
PROVISION
FOR INCOME TAXES:
|
||||||||
|
Income
tax expense (Note 5)
|
6,229,595 | 1,260,622 | ||||||
|
NET
INCOME
|
9,392,948 | 1,923,979 | ||||||
|
OTHER
COMPREHENSIVE INCOME (LOSS):
|
||||||||
|
Unrealized
gain (loss) on investments (Note 7)
|
8,725 | (88,820 | ) | |||||
|
COMPREHENSIVE
INCOME
|
$ | 9,401,673 | $ | 1,835,159 | ||||
The
accompanying notes are an integral part of these statements.
108
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
|
Member's
|
||||||||
|
Equity
|
Noncontrolling
|
|||||||
|
(Deficit)
|
Interests
|
|||||||
|
(Note 3)
|
||||||||
|
BALANCES,
December 31,
2007
|
$ | (311,393 | ) | $ | 2,940 | |||
|
Purchase
of interest in United States Short Oil Fund, LP
|
- | 980 | ||||||
|
Redemption
of interest in United States Heating Oil Fund, LP
|
- | (980 | ) | |||||
|
Redemption
of interest in United States Gasoline Fund, LP
|
- | (980 | ) | |||||
|
Other
comprehensive loss (Note 7)
|
(88,820 | ) | - | |||||
|
Offering
costs (Note 2)
|
(553,756 | ) | - | |||||
|
Distributions
|
(784,837 | ) | - | |||||
|
Net
income
|
1,923,979 | - | ||||||
|
BALANCES,
December 31,
2008
|
185,173 | 1,960 | ||||||
|
Other
comprehensive income (Note 7)
|
8,725 | - | ||||||
|
Redemption
of interest in United States Short Oil Fund, LP
|
- | (980 | ) | |||||
|
Redemption
of interest in United States 12 Month Natural Gas Fund, LP
|
- | (980 | ) | |||||
|
Purchase
of interest in United States Short Natural Gas Fund, LP
|
- | 980 | ||||||
|
Purchase
of interest in United States Brent Oil Fund, LP
|
- | 980 | ||||||
|
Offering
costs (Note 2)
|
(932,418 | ) | - | |||||
|
Distributions
|
(4,891,036 | ) | - | |||||
|
Net
income
|
9,392,948 | - | ||||||
|
BALANCES,
December 31,
2009
|
$ | 3,763,392 | $ | 1,960 | ||||
The
accompanying notes are an integral part of these statements.
109
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
income
|
$ | 9,392,948 | $ | 1,923,979 | ||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
|
Increase
in management fees receivable
|
(2,080,126 | ) | (392,983 | ) | ||||
|
Increase
in deferred offering costs
|
(1,032,975 | ) | (719,495 | ) | ||||
|
(Increase)
decrease in other assets
|
(2,211 | ) | 980 | |||||
|
Decrease
in due to parent
|
- | (109,539 | ) | |||||
|
(Decrease)
increase in income taxes payable
|
(104,369 | ) | 254,498 | |||||
|
Increase
in expense waiver payable
|
499,966 | 311,038 | ||||||
|
Decrease
in accounts payable
|
(118,830 | ) | (410,756 | ) | ||||
|
Net
cash provided by operating activities
|
6,554,403 | 857,722 | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Distributions
|
(4,891,036 | ) | (784,837 | ) | ||||
|
Increase
(decrease):
|
||||||||
|
Noncontrolling
interest in United States Heating Oil Fund, LP
|
- | (980 | ) | |||||
|
Noncontrolling
interest in United States Gasoline Fund, LP
|
- | (980 | ) | |||||
|
Noncontrolling
interest in United States Brent Oil Fund, LP
|
980 | - | ||||||
|
Noncontrolling
interest in United States 12 Month Natural Gas Fund
|
(980 | ) | - | |||||
|
Noncontrolling
interest in United States Short Natural Gas Fund
|
980 | - | ||||||
|
Noncontrolling
interest in United States Short Oil Fund, LP
|
(980 | ) | 980 | |||||
|
Net
cash used in financing activities
|
(4,891,036 | ) | (785,817 | ) | ||||
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
1,663,367 | 71,905 | ||||||
|
CASH AND CASH EQUIVALENTS,
beginning of year
|
125,815 | 53,910 | ||||||
|
CASH AND CASH EQUIVALENTS,
end of year
|
$ | 1,789,182 | $ | 125,815 | ||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
|
Cash
paid for taxes
|
$ | 4,485,400 | $ | 1,119,761 | ||||
The
accompanying notes are an integral part of these
statements.
110
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Victoria
Bay Asset Management, LLC was formed as a single-member limited liability
company in the State of Delaware on May 10, 2005. On June 13, 2008,
Victoria Bay Asset Management, LLC changed its name to United States Commodity
Funds LLC (the “Company”). The Company is the General Partner (the
“General Partner”) of United States Oil Fund, LP (“USOF”), United States Natural
Gas Fund, LP (“USNG”), United States Heating Oil Fund, LP (“USHO”), United
States Gasoline Fund, LP (“USG”), United States 12 Month Oil Fund, LP
(“US12OF”), United States 12 Month Natural Gas Fund, LP (“US12NG”), United
States Short Oil Fund, LP (“USSO”), United States Brent Oil Fund, LP (“USBO”),
United States Short Natural Gas Fund, LP (“USSNG”), and is the Sponsor
(“Sponsor”) of United States Commodity Index Funds Trust
(“Trust”). The Company is registered as a commodity pool operator
with the Commodity Futures Trading Commission (“CFTC”) and is a member of the
National Futures Association (“NFA”). USOF, USNG, USHO, USG, US12OF, US12NG and
USSO (collectively, the “Funds”) are commodity pools registered with the CFTC
and members of the NFA that issue units that may be purchased and sold on the
NYSE Arca, Inc. (“NYSE Arca”) under the ticker symbols “USO,” “UNG,” “UHN,”
“UGA,” “USL,” “UNL” and “DNO.” USBO is a commodity pool that is
in the process of registering its units that may be purchased and sold on the
NYSE Arca
and the
United States Commodity Index Fund (“USCI”), a series of the Trust, will also be
a commodity pool and the Trust is in the process of registering USCI’s units to
be purchased and sold on the NYSE Arca
. USSNG is a commodity
pool that has been formed but has not yet begun the process of registering
its units.
USOF
began trading on April 10, 2006 by purchasing futures contracts for light, sweet
crude oil that are traded on the New York Mercantile Exchange (the
“Exchange”). The investment objective of USOF 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 light, sweet crude oil delivered to
Cushing, Oklahoma, as measured by the changes in the price of the futures
contract on light sweet crude oil
traded on the
Exchange, 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
, less
USOF’s expenses. USOF seeks to accomplish its objective through
investments in futures contracts for light, sweet crude oil, other types of
crude oil, heating oil, gasoline, natural gas and other petroleum-based fuels
that are traded on the Exchange and other U.S. and foreign exchanges and other
oil interests such as cash-settled options on futures contracts, forward
contracts for crude oil, cleared swap contracts and over-the-counter
transactions that are based on the price of crude oil, heating oil, gasoline,
natural gas and other petroleum-based fuels, futures contracts and indices based
on the foregoing.
USNG
began trading on April 18, 2007 by purchasing futures contracts for natural gas
that are traded on the Exchange. The investment objective of USNG 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 natural gas delivered to the
Henry Hub, Louisiana, as measured by the changes in the price of the futures
contract on natural gas traded on the Exchange 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, less USNG’s expenses.
USNG seeks to accomplish its objective through
investments in
futures contracts for
natural gas, crude oil, heating oil, gasoline, and other petroleum-based fuels
that are traded on the Exchange and other U.S. and foreign exchanges and other
natural gas-related investments such as cash-settled options on futures
contracts, forward contracts for natural gas, cleared swap contracts and
over-the-counter transactions that are based on the price of natural gas, crude
oil and other petroleum-based fuels, futures contracts and indices based on the
foregoing.
111
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
US12OF
began trading on December 6, 2007 by purchasing futures contracts for light,
sweet crude oil that are traded on the Exchange. The investment
objective of US12OF 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
light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the
changes in the average of the prices of 12 futures contracts on crude oil traded
on the Exchange, consisting of the near month contract to expire and the
contracts for the following eleven months, for a total of 12 consecutive months’
contracts, except when the near month contract is within two weeks of
expiration, in which case it will be measured by the futures contracts that are
the next month contract to expire and the contracts for the following eleven
consecutive months, less US12OF’s expenses. When calculating the daily movement
of the average price of the 12 contracts each contract month will be equally
weighted.
US12OF seeks to accomplish its objective through
investments in futures contracts for light, sweet crude oil, other types of
crude oil, heating oil, gasoline, natural gas, and other petroleum-based fuels
that are traded on the Exchange and other U.S. and foreign exchanges and other
oil interests such as cash-settled options on futures contracts, forward
contracts for oil, cleared swap contracts and over-the-counter transactions that
are based on the price of crude oil, other petroleum-based fuels, futures
contracts and indices based on the foregoing.
US12NG began trading on November 18, 2009 by purchasing
futures contracts for
natural gas that are traded on the
Exchange. The investment objective of US12NG 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 natural gas delivered at the Henry Hub,
Louisiana, as measured by the changes in the average of the prices of 12 futures
contracts on natural gas traded on the Exchange, consisting of the near month
contract to expire and the contracts for the following 11 months for a total of
12 consecutive months’ contracts, except when the near month contract is within
two weeks of expiration, in which case it will be measured by the futures
contracts that are the next month contract to expire and the contracts for the
following 11 consecutive months, less US12NG’s expenses. When
calculating the daily movement of the average price of the 12 contracts each
contract month will be equally weighted. US12NG seeks to accomplish
its objective through investments in futures contracts for natural gas, crude
oil, heating oil, gasoline and other petroleum-based fuels that are traded on
the Exchange and other U.S. and foreign exchanges and other natural gas-related
investments such as cash-settled options on futures contracts, forward contracts
for natural gas, cleared swap contracts and over-the-counter transactions that
are based on the price of natural gas, crude oil and other petroleum-based
fuels, futures contracts and indices based on the foregoing.
USG began
trading on February 26, 2008 by purchasing futures contracts on gasoline that
are traded on the Exchange. The investment objective of USG 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 unleaded gasoline, as measured
by the changes in the price of the futures contract on gasoline traded on the
Exchange 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 contact to expire, less USG’s
expenses. USG seeks to accomplish 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 Exchange and other U.S. and foreign
exchanges 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.
112
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
USHO
began trading on April 9, 2008 by purchasing futures contracts on heating oil
that are traded on the Exchange. The investment objective of USHO 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 heating oil, as measured by the
changes in the price of the futures contract on heating oil traded on the
Exchange 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 contact to expire, less USHO’s
expenses. USHO seeks to accomplish its objective through investments in futures
contracts for heating oil, crude oil, gasoline, natural gas and other
petroleum-based fuels that are traded on the Exchange and other U.S.
and foreign exchanges and other heating oil-related investments such
as cash-settled options on futures contracts, forward contracts for heating oil,
cleared swap contracts and over-the-counter transactions that are based on the
price of heating oil, crude oil and other petroleum-based fuels, futures
contracts and indices based on the foregoing.
USSO
began trading on September 24, 2009 by selling futures contracts on light, sweet
crude oil that are traded on the Exchange. The investment objective
of USSO is for the changes in percentage terms of its units’ net asset value to
inversely reflect the changes in percentage terms of the spot price of light,
sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in
the price of the futures contract on light, sweet crude oil as traded on the
Exchange 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 USSO’s expenses. USSO
accomplishes its objective through taking short positions in futures contracts
for light, sweet crude oil and other types of crude oil, heating oil, gasoline,
natural gas and other petroleum-based fuels that are traded on the Exchange and
other crude oil-related investments such as cash-settled options on Futures
Contracts, forward contracts for crude oil, cleared swap contracts and
over-the-counter transactions that are based on the price of crude oil, heating
oil, gasoline, natural gas and other petroleum-based fuels, futures contracts
and indices based on the foregoing.
As of
December 31, 2009, USBO, USCI and USSNG had not formally begun
operations. USBO and the Trust on behalf of USCI filed a registration
statement on Form S-1 with the Securities and Exchange Commission (the “SEC”)
and the Company is in the process of filing amendments to Form S-1 for USBO and
USCI.
The
Company is a wholly owned subsidiary of Wainwright Holdings, Inc.
(“Wainwright”), a Delaware corporation. Wainwright is a holding
company that is controlled by the president of the Company and served as the
initial limited partner of the Funds. It also serves as the initial
limited partner for USBO and USSNG.
As the
General Partner of the Funds, the Company is required to evaluate the credit
risk of the Funds to their futures commission merchant, oversee the purchases
and sales of the Funds’ units by certain “authorized purchasers,” review the
daily positions and margin requirements of the Funds, and manage the Funds’
investments. The Company also pays continuing service fees to the marketing
agent for communicating with the authorized purchasers.
113
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Principles of
consolidation
The
Company, as General Partner of the Funds, USBO and USSNG and as Sponsor to the
Trust and USCI, has included the accounts of USBO, USSNG and USCI since their
inception in the consolidated financial statements. The Company has recorded a
noncontrolling interest for the amount directly owned by the limited partner
(representing the limited partner interest owned by Wainwright, except with
respect to the Trust, which does not have a limited
partner). Subsequent to the Funds commencing operations, the Company
and Wainwright redeemed their partnership interests. Therefore, as of December
31, 2009, the accounts of each of the Funds were no longer included in the
accompanying consolidated statement of financial condition. All
intercompany accounts and balances have been eliminated in
consolidation.
Revenue
recognition
The
Company recognizes revenue in the period earned under the terms of the Funds’
respective Limited Partnership Agreements, as amended from time to time (the
“Limited Partnership Agreements”). These agreements provide for fees based upon
a percentage of the daily average net asset value of the Funds. In
connection with the Funds’ trading activities, commodity futures contracts,
cleared swap contracts, forward contracts, physical commodities, and related
options are recorded on the trade-date basis. All such transactions are recorded
on the identified cost basis and marked to market daily. Unrealized gains and
losses on open contracts are reflected in the statement of financial condition
and represent the difference between original contract amount and 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 financial statements. Changes in the
unrealized gains or losses between periods are reflected in the statement of
operations.
The
Company earns interest on its assets on deposit at the broker at the 90-day
Treasury bill rate for deposits denominated in U.S. dollars. In
addition, the Funds earn interest on funds held with their custodian at
prevailing market rates earned on such investments.
General Partner management
fee
Under the
Funds’ respective Limited Partnership Agreements, the Company is responsible for
investing the assets of the Funds in accordance with the objectives and policies
of the Funds. In addition, the Company has arranged for one or more
third parties to provide administrative, custody, accounting, transfer agency
and other necessary services to the Funds. For these services, the
Funds are contractually obligated to pay the Company a management fee, which is
paid monthly, based on the average daily net assets of the
Funds. Through December 31, 2008 USOF paid a fee equal to 0.50% per
annum on average daily net assets of $1,000,000,000 or less and 0.20% of average
daily net assets that were greater than $1,000,000,000. Effective
January 1, 2009, USOF pays a management fee of 0.45% per annum on its average
daily net assets. USNG pays a fee equal to 0.60% per annum on average
daily net assets of $1,000,000,000 or less and 0.50% of average daily net assets
that are greater than $1,000,000,000. US12OF, USHO, USG and USSO each
pay a fee of 0.60% per annum on their average daily net
assets. US12NG pays a fee of 0.75% per annum on its average daily net
assets.
114
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(continued)
General
Partner management fee
(concluded)
The Funds
pay for all brokerage fees, taxes and other expenses, including licensing fees
for the use of intellectual property, registration or other fees paid to the
SEC, the Financial Industry Regulatory Authority (“FINRA”) formerly the National
Association of Securities Dealers, or any other regulatory agency in connection
with the offer and sale of subsequent units after their initial registration and
all legal, accounting, printing and other expenses associated therewith. The
Funds also pay the fees and expenses of the independent
directors.
Investments
The
Company’s investments in common stock are classified as
available-for-sale-securities and are considered to be held for an indefinite
period. Securities investments not classified as either
held-to-maturity or trading securities are classified as available-for-sale
securities. Available-for-sale-securities are recorded at fair value
on the statement of financial condition, with the change in fair value excluded
from earnings and recorded as a component of other comprehensive income (loss)
included in member’s equity. Unrealized holding gain (loss) on such
securities, which were added to (subtracted from) member’s equity were $8,725
and $(88,820) for the years ended December 31, 2009 and 2008 (Note
7).
Realized
gains or losses are recorded upon disposition of investments calculated based
upon the difference between the proceeds and the cost basis determined using the
specific identification method.
Brokerage
commissions
Brokerage
commissions on all open commodity futures contracts are accrued on a full-turn
basis.
Additions and
redemptions
Authorized
purchasers may purchase creation baskets of the Funds only in blocks of 100,000
units at a price 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. Authorized purchasers may redeem units from the
Funds only in blocks of 100,000 units called “Redemption
Baskets.” The amount of the redemption proceeds for a Redemption
Basket will be equal to the net asset value of the Funds’ units in the
Redemption Basket as of the end of each business day.
The Funds
receive or pay 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 the Funds’ statement of
financial condition as receivables 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 the Funds in proportion to the
number of units each partner holds as of the close of each month. The
Company, as General Partner, may revise, alter or otherwise modify this method
of allocation as described in the Limited Partnership
Agreements.
115
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(continued)
Calculation of net asset
value
The Funds
calculate their net asset value on each NYSE Arca trading day by taking the
current market value of their total assets, subtracting any liabilities and
dividing the amount by the total number of units issued and
outstanding. The Funds use the closing price for the contracts on the
relevant exchange on that day to determine the value of contracts held on such
exchange.
Cash
equivalents
Cash
equivalents are highly liquid investments with original maturity dates of three
months or less.
Accounting
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Income
taxes
The
Company has filed an election with the Internal Revenue Service to be treated as
an association taxable as a corporation. The Company files a
consolidated federal income tax return with Wainwright and provides for income
taxes as if the Company filed separately. The Company, however, does
not file on a consolidated basis for state income tax purposes. The
Company accounts for income taxes in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Classification (“ASC”) Topic
740-10,
Accounting for Income
Taxes
(“FASB ASC Topic 740-10”). Under the asset and liability
method of FASB ASC Topic 740-10, deferred tax assets and liabilities are
recognized for the estimated future tax consequences or benefits attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets
and liabilities are measured using the enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or
settled.
Deferred offering
costs
The
Company capitalizes all initial offering costs associated with the registration
of the Funds, USBO, USSNG and USCI until such time as the registration process
with the SEC is complete. At this time, the Company charges the
capitalized costs to member’s equity. Deferred offering costs
include, but are not limited to, legal fees pertaining to the Funds’, USBO’s,
USSNG’s and USCI’s units offered for sale, SEC and state registration fees,
initial fees paid to be listed on an exchange and underwriting and other similar
costs.
116
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Recent accounting
pronouncements
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 1 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 Company’s adoption of FASB ASC Topic 820 did not have a
material effect on its consolidated financial position, results of operations or
liquidity.
In
December 2007, the FASB issued FASB ASC Topic 810-10-65,
Non-controlling Interests in
Consolidated Financial Statements
, an amendment of ARB No.
51. FASB ASC Topic 810-10-65 requires all entities to report
noncontrolling (minority) interests in subsidiaries as equity in the
consolidated financial statements. Additionally, FASB ASC Topic 810-10-65
requires that transactions between an entity and noncontrolling interests be
treated as equity transactions. FASB ASC Topic 810-10-65 is effective for fiscal
years beginning after December 15, 2008. Adoption on January 1, 2009, as
required, did not have a material effect on the Company’s financial condition,
results of operations or liquidity. The minority interests previously
reflected in the Company’s financial statements have been reclassified to
conform to the current presentation.
117
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Recent
accounting pronouncements
(concluded)
In March
2008, the FASB released FASB ASC Topic 815-10,
Disclosures about Derivative
Instruments and Hedging Activities
. FASB ASC Topic 815-10
requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of and gains and
losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. The Company adopted FASB ASC Topic
815-10 on January 1, 2009. The Company’s adoption of FASB ASC Topic
815-10 did not have a material effect on the Company’s financial condition,
results of operations or liquidity.
In May
2009, the FASB issued FASB ASC Topic 855-10-05,
Subsequent
Events
. This standard is intended to establish general
standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. Specifically, this standard sets forth the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet
date. FASB ASC Topic 855-10-05 is effective for fiscal years and
interim periods ending after June 15, 2009.
During
the years ended December 31, 2009 and 2008, the Company paid $4,891,036 and
$784,837 in distributions to its member. The Company and USOF have incurred
offering and organizational costs in the amount of $2,023,991 which are not
included in the accompanying consolidated financial statements at December 31,
2008. Wainwright has provided funding for these costs, but is under
no obligation to do so or continue funding these costs. The Company
and USOF are not required to reimburse Wainwright or its affiliates for any such
costs incurred. Included in deferred offering costs at December 31,
2009 and 2008 (for USCI, USSNG and USBO, as of December 31, 2009 and US12NG as
of December 31, 2008) is $453,351 and $352,794, of initial offering and
organizational costs incurred by the Funds. These initial offering
and organization costs incurred by the Trust on behalf of USCI, USSNG, USBO and
US12NG will be borne by the Company and not be charged to such
funds.
The
Funds, USBO and USSNG were each capitalized with $1,000, of which the Company
contributed $20 and Wainwright contributed $980. The Trust was
capitalized with $1,000, which was contributed solely by the Company
which is
included in cash and cash equivalents in the accompanying statement of
financial condition.
118
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company’s consolidated statement of financial condition reflects noncontrolling
interests in its subsidiaries as of December 31, 2009 and 2008. A
schedule of the noncontrolling interests is presented
below:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Limited
partner interest in United States 12 Month Natural Gas Fund,
LP
|
$ | - | $ | 980 | ||||
|
Limited
partner interest in United States Short Natural Gas Fund,
LP
|
980 | - | ||||||
|
Limited
partner interest in United States Short Oil Fund, LP
|
- | 980 | ||||||
|
Limited
partner interest in United States Brent Oil Fund, LP
|
980 | - | ||||||
| $ | 1,960 | $ | 1,960 | |||||
The
following table summarizes the valuation of the Company’s investments at
December 31, 2009 and 2008 using the fair value hierarchy:
|
At December 31,
2009:
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
Investments
|
$ | 43,304 | $ | 43,304 | $ | - | $ | - | ||||||||
|
At December
31, 2008:
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
Investments
|
$ | 34,579 | $ | 34,579 | $ | - | $ | - | ||||||||
The
Company has filed an election with the Internal Revenue Service to be treated as
an association taxable as a corporation. The Company files a
consolidated federal income tax return with Wainwright and provides for income
taxes as if the Company filed separately. The Company, however, does
not file on a consolidated basis for state income tax purposes. In
connection with filing a consolidated federal income tax return, the Company has
recorded federal income tax expense and has recorded a corresponding due from
parent and due to parent for its federal tax liability.
Deferred
tax assets and liabilities reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant
components of the Company’s deferred tax liabilities and assets as of December
31, 2009 and 2008 are as follows:
119
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Deferred
tax liabilities
|
$ | - | $ | - | ||||
|
Deferred
tax assets:
|
||||||||
|
Unrealized
losses on investments
|
220,000 | 224,000 | ||||||
|
Valuation
allowance for deferred tax asset
|
(220,000 | ) | (224,000 | ) | ||||
| $ | - | $ | - | |||||
Due to
the uncertainty of the realization of the unrealized losses in future years, the
Company has recorded a valuation allowance for the deferred tax
asset.
The
valuation allowance decreased by $4,000 for the year ended December 31, 2009 and
increased by $38,000 for the year ended December 31, 2008.
The
deferred tax asset shown above relates to the unrealized losses on investments
and is accounted for as other comprehensive loss (see Note 7).
The
Company, together with each of the Funds, is a party to marketing agent
agreements with ALPS Distributors, Inc. (“ALPS”), a Colorado corporation,
whereby ALPS provides certain marketing services for the Funds as outlined in
their respective marketing agent agreements. Under the agreement dated as of
March 13, 2006, as amended, whereby ALPS provides certain marketing services for
USOF, the Company pays ALPS a marketing fee of $425,000 per annum plus the
following incentive fee: 0.00% on USOF’s assets from $0 — $500 million; 0.04% on
USOF’s assets from $500 million — $4 billion; and 0.03% on USOF’s assets in
excess of $4 billion. Under the agreement dated as of April 17, 2007, whereby
ALPS provides certain marketing services for USNG, and the agreement dated as of
November 13, 2007, whereby ALPS provides certain marketing services for US12OF,
the Company pays ALPS fees equal to 0.06% on each of USNG’s, US12OF’s and
US12NG’s assets up to $3 billion and 0.04% on each of USNG’s and US12OF’s assets
in excess of $3 billion. Under the agreement dated as of February 15,
2008, whereby ALPS provides certain marketing services for USG, and the
agreement dated March 10, 2008 whereby ALPS provides certain marketing services
for USHO, the Company pays ALPS fees equal to 0.06% on each of USG’s and USHO’s
assets up to $3 billion and 0.04% on each of USG’s and USHO’s assets in excess
of $3 billion. Under the agreement dated as of June 8, 2009, whereby
ALPS provides certain marketing services for USSO, the Company pays ALPS fees
equal to 0.06% on USSO’s assets up to $3 billion; and 0.04% on USSO’s assets in
excess of $3 billion.
The above
fees do not include the following expenses, which are also borne by the Company:
the cost of placing advertisements in various periodicals, web construction and
development, and the printing and production of various marketing
materials.
120
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company and each of the Funds are parties to custodian agreements with Brown
Brothers Harriman & Co. (“Brown Brothers”), whereby Brown Brothers holds
investments on behalf of the Funds. The Company pays the fees of the custodian,
which shall be determined by the parties from time to time. In addition, the
Company, with each of the Funds, are parties to administrative agency agreements
with Brown Brothers, whereby Brown Brothers acts as the administrative agent,
transfer agent and registrar for each of the Funds. The Company also pays the
fees of Brown Brothers for its services under these agreements and such fees
will be determined by the parties from time to time.
Currently,
the Company pays Brown Brothers for its services, in the foregoing capacities,
the greater of a minimum amount of $75,000 annually or an asset-based charge of
(a) 0.06% for the first $500 million of combined net assets, (b) 0.0465% for
combined net assets greater than $500 million but less than $1 billion, and (c)
0.035% of combined net assets in excess of $1 billion. The Company also pays a
$20,000 annual fee for transfer agency services and transaction fees ranging
from $7.00 to $15.00 per transaction.
Each of
the Funds has entered into brokerage agreements pursuant to which UBS Securities
LLC acts as the futures commission merchant (the “FCM”). The agreements provide
that the FCM will charge commissions of approximately $7 to $8 per round-turn
trade plus applicable exchange and NFA fees for futures contracts and options on
futures contracts.
Each of
the Funds has invested primarily in futures contracts traded on the Exchange
since the commencement of its operations. On May 30, 2007, USOF and USNG entered
into a license agreement with the Exchange whereby the Funds were granted a
non-exclusive license to use certain of the Exchange’s settlement prices and
service marks. The agreement has an effective date of April 10, 2006. Under the
license agreement, the Funds pay the Exchange an asset-based fee for the
license. Pursuant to the agreement, the Funds 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. US12OF, USG, USHO and USSO entered
into the above license agreement on the same terms with an effective date of
December 4, 2007. Other funds managed by the Company that invest primarily in
futures contracts traded on the Exchange will also be granted a similar
non-exclusive license on the same terms.
The Funds
expressly disclaim any association with the Exchange or endorsement of the Funds
by the Exchange and acknowledge that “NYMEX” and “New York Mercantile Exchange”
are registered trademarks of such Exchange.
The
Company has contracted an accounting firm to prepare each of the Funds, USBO,
USSNG and USCI’s yearly income tax filings with the Internal Revenue Service and
various states. The cost associated with any registered new fund is expected to
be comparable.
121
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Changes
in accumulated other comprehensive loss for the years ended December 31, 2009
and 2008 are as follows:
|
Balance,
December 31,
2007
|
$ | (433,189 | ) | |
|
Unrealized
holding losses on investments
|
(88,820 | ) | ||
|
Balance,
December 31,
2008
|
(522,009 | ) | ||
|
Unrealized
holding gains on investments
|
8,725 | |||
|
Balance,
December 31,
2009
|
$ | (513,284 | ) |
The
Company records its other comprehensive loss net of income tax expense
(benefit). As of December 31, 2009 and 2008, the Company has not
recorded an income tax expense or benefit associated with its accumulated other
comprehensive loss (see Note 5).
The Funds
engage in the trading of U.S. futures contracts, options on U.S. contracts,
cleared swap contracts and over-the-counter derivative
transactions (collectively “derivatives”). The Funds are
exposed to both market risk, the risk arising from changes in the market value
of the contracts; and credit risk, the risk of failure by another party to
perform according to the terms of a contract.
All of
the contracts currently traded by the Funds, with the exception of USNG, 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, the Funds must rely solely
on the credit of their respective individual counterparties. To the
extent the Funds enter into non-exchange traded contracts, they are 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. The Funds also have credit risk
since the sole counterparty to all domestic futures contracts is the exchange
clearing corporation. In addition, the Funds bear the risk of
financial failure by the clearing broker.
The
purchase and sale of futures and options on futures contracts require margin
deposits with an FCM. Additional deposits may be necessary for any loss on
contract value. The Commodity Exchange Act requires an FCM to segregate all
customer transactions and assets from the FCM’s proprietary
activities.
A
customer’s cash and other property, such as U.S. Treasury Bills, deposited with
an FCM are considered commingled with all other customer funds subject to the
FCM’s segregation requirements. In the event of an FCM’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.
122
UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES
(formerly
Victoria Bay Asset Management, LLC)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
derivatives, risks arise from changes in the market value of the contracts.
Theoretically, the Funds are exposed to market risk equal to the value of
futures and forward contracts purchased and unlimited liability on such
contracts sold short. As both buyers and sellers of options, the Funds pay or
receive a premium at the outset and then bear the risk of unfavorable changes in
the price of the contract underlying the option.
The
Company’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 and control procedures. In addition, the Company
has a policy of reviewing the credit standing of each clearing broker or
counter-party with which it conducts business.
The
financial instruments held by the Company are reported in the 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
maturities.
The
Company has securities for its own account and may incur losses if the market
value of the securities decreases subsequent to December 31,
2009.
The
Company has a substantial portion of its assets on deposit with banks. Assets
deposited with banks are subject to credit risk. In the event of a bank's
insolvency, recovery of the Company's assets on deposit may be limited to
account insurance or other protection afforded such deposits. As of December 31,
2009, the Company had cash of $1,531,655 in excess of the federally insured
amount of $250,000.
In
accordance with FASB ASC Topic 855-10-05, the Company has performed an
evaluation of subsequent events through March 30, 2010 which is the date the
financial statements were available to be issued.
123
Not
applicable.
Disclosure
Controls and Procedures
US12NG
maintains disclosure controls and procedures that are designed to ensure that
material information required to be disclosed in US12NG’s periodic reports
filed or submitted under the Exchange Act 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
US12NG if US12NG had any officers, have evaluated the effectiveness of US12NG’s
disclosure controls and procedures and have concluded that the disclosure
controls and procedures of US12NG have been effective as of the end of the
period covered by this annual report on Form 10-K.
Management’s
Annual Report on Internal Control Over Financial Reporting
This
annual report on Form 10-K does not include a report of management’s assessment
regarding internal control over financial reporting or an attestation report of
US12NG’s registered public accounting firm due to a transition period
established by the rules of the SEC for newly public companies.
Change
in Internal Control Over Financial Reporting
There
were no changes in US12NG’s internal control over financial reporting during
US12NG’s last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, US12NG’s internal control over financial
reporting.
Monthly
Account Statements
Pursuant
to the requirement under Rule 4.22 under the CEA, each month US12NG 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 US12NG’s website at
www.unitedstates12monthnaturalgasfund.com.
Nicholas
Gerber
has been the President and CEO of the General Partner since June
9, 2005 and a Management Director of the General Partner since May 10, 2005. He
maintains his main business office at 1320 Harbor Bay Parkway, Suite 145,
Alameda, California 94502. Mr. Gerber has also acted as a portfolio manager for
US12NG and the Related Public Funds. He has been listed with the CFTC
as a Principal of the General Partner since November 29, 2005, as Branch Manager
of the General Partner since May 15, 2009 and registered with the CFTC as an
Associated Person of the General Partner on December 1, 2005. Currently, Mr.
Gerber manages US12NG and the Related Public Funds. He will also manage USBO and
USCI. Mr. Gerber also served as Vice President/Chief Investment Officer of
Lyon’s Gate Reinsurance Company, Ltd., a company formed to reinsure workmen’s
compensation insurance, from June of 2003 to December 2009. Mr. Gerber has an
extensive background in securities portfolio management and in developing
investment funds that make use of indexing and futures contracts. He is also the
founder of Ameristock Corporation, a California-based investment adviser
registered under the Investment Advisers Act of 1940, that has been sponsoring
and providing portfolio management services to mutual funds since March 1995.
Since August 1995, Mr. Gerber has been the portfolio manager of the Ameristock
Mutual Fund, Inc. a mutual fund registered under the Investment Company Act of
1940, focused on large cap U.S. equities that, as of December 31, 2009, had
$219,616,809 in assets. He has also been a Trustee for the Ameristock ETF Trust
since June 2006, and served as a portfolio manager for the Ameristock/Ryan 1
Year, 2 Year, 5 Year, 10 Year and 20 Year Treasury ETF from June 2007 to June
2008 when such funds were liquidated. In these roles, Mr. Gerber has gained
extensive experience in evaluating and retaining third-party service providers,
including custodians, accountants, transfer agents, and distributors. Mr. Gerber
has passed the Series 3 examination for associated persons. He holds an MBA in
finance from the University of San Francisco and a BA from Skidmore College. Mr.
Gerber is 47 years old.
124
In
concluding that Mr. Gerber should serve as Management Director of the General
Partner, the General Partner considered his broad business experiences in the
industry including: forming and managing investment companies and commodity
pools, raising capital for such entities and founding and managing non-finance
related companies.
Howard Mah
has been a Management Director of the General Partner since May 10, 2005,
Secretary of the General Partner since June 9, 2005, and Chief Financial Officer
of the General Partner since May 23, 2006. He has been listed with the CFTC as a
Principal of the General Partner since November 29, 2005. In these roles, Mr.
Mah is currently involved in the management of US12NG and the Related Public
Funds and will be involved in the management of USBO and USCI. Mr. Mah also
serves as the General Partner’s Chief Compliance Officer. He received a Bachelor
of Education from the University of Alberta, in 1986 and an MBA from the
University of San Francisco in 1988. He served as Secretary and Chief Compliance
Officer of the Ameristock ETF Trust from February 2007 until June 2008 when the
trust was liquidated, Chief Compliance Officer of Ameristock Corporation since
January 2001; a tax and finance consultant in private practice since January
1995, Secretary of Ameristock Mutual Fund since June 1995 and Ameristock Focused
Value Fund from December 2000 to January 2005; Chief Compliance Officer of
Ameristock Mutual Fund since August 2004 and the Co-Portfolio Manager of the
Ameristock Focused Value Fund from December 2000 to January 2005. Mr. Mah is 45
years old.
In
concluding that Mr. Mah should serve as Management Director of the General
Partner, the General Partner considered his background in accounting and
finance, as well as his experience as Chief Compliance Officer for the General
Partner and Ameristock Corporation.
Andrew F.
Ngim
has been a Management Director of the General Partner since May 10,
2005 and Treasurer of the General Partner since June 9, 2005. He has been listed
with the CFTC as a Principal of the General Partner since November 29, 2005. As
Treasurer of the General Partner, Mr. Ngim is currently involved in the
management of US12NG and the Related Public Funds and will be involved in the
management of USBO and USCI. He received a Bachelor of Arts from the University
of California at Berkeley in 1983. Mr. Ngim has been Ameristock Corporation’s
Managing Director since January 1999 and co-portfolio manager of Ameristock
Corporation since January 2000, Trustee of the Ameristock ETF Trust since
February 2007, and served as a portfolio manager for the Ameristock/ Ryan 1
Year, 2 Year, 5 Year, 10 Year and 20 Year Treasury ETF from June 2007 to June
2008 when such funds were liquidated. Mr. Ngim is 49 years old.
In
concluding that Mr. Ngim should serve as Management Director of the General
Partner, the General Partner considered his broad career in the financial
services industry as well as experience as co-Portfolio Manager of the
Ameristock Mutual Fund.
Robert L.
Nguyen
has been a Management Director of the General Partner since May
10, 2005. He has been listed with the CFTC as a Principal of the General Partner
since November 29, 2005 and registered with the CFTC as an Associated Person on
November 9, 2007. As a Management Director of the General Partner, Mr. Nguyen is
currently involved in the management of US12NG and the Related Public Funds and
will be involved in the management of USBO and USCI. He received a Bachelor of
Science from California State University Sacramento in 1981. Mr. Nguyen has been
the Managing Principal of Ameristock Corporation since January 2000. Mr. Nguyen
is 50 years old.
125
In
concluding that Mr. Nguyen should serve as Management Director of the General
Partner, the General Partner considered his background in the financial services
industry as well as his experience in leading the marketing efforts for
Ameristock Corporation.
The
following individuals provide significant services to US12NG and are employed by
the General Partner.
John P.
Love
has acted as the Portfolio Operations Manager for US12NG since it
commenced operations in November, 2009 and the Related Public Funds since
January 2006 and, effective March 1, 2010, is the Senior Portfolio Manager for
UGA and the Related Public Funds. He is expected to be Senior
Portfolio Manager for USBO and USCI. Mr. Love is also employed by the General
Partner. He has been listed with the CFTC as a Principal of the General Partner
since January 17, 2006. Mr. Love also served as the operations manager of
Ameristock Corporation from October 2002 to January 2007, where he was
responsible for back office and marketing activities for the Ameristock Mutual
Fund and Ameristock Focused Value Fund and for the firm in general. Mr. Love
holds a Series 3 license and was registered with the CFTC as an Associated
Person of the General Partner from December 1, 2005 through April 16, 2009. Mr.
Love has passed the Level 1 Chartered Financial Analyst examination and is
currently a Level II candidate in the CFA Program. He holds a BFA in
cinema-television from the University of Southern California. Mr. Love is
38 years old.
John T. Hyland,
CFA
acts as a Portfolio Manager and as the Chief Investment Officer for
the General Partner. Mr. Hyland is employed by the General Partner. He
registered with the CFTC as an Associated Person of the General Partner on
December 1, 2005, and has been listed as a Principal of the General Partner
since January 17, 2006. Mr. Hyland became the Portfolio Manager for US12NG,
USNG, USOF, US12OF, UGA, USHO and USSO in November, 2009, April 2007, April
2006, December 2007, February 2008, April 2008 and September, 2009,
respectively, and as Chief Investment Officer of the General Partner since
January 2008, acts in such capacity on behalf of US12NG and the Related Public
Funds. He is also expected to become the Portfolio Manager for USBO and USCI. As
part of his responsibilities for US12NG and the Related Public Funds, Mr. Hyland
handles day-to-day trading, helps set investment policies, and oversees US12NG’s
and the Related Public Funds’ activities with their futures commission brokers,
custodian-administrator, and marketing agent. Mr. Hyland has an extensive
background in portfolio management and research with both equity and fixed
income securities, as well as in the development of new types of complex
investment funds. In July 2001, Mr. Hyland founded Towerhouse Capital
Management, LLC, a firm that provides portfolio management and new fund
development expertise to non-U.S. institutional investors. Mr. Hyland has been,
and remains, a Principal and Portfolio Manager for Towerhouse. Mr. Hyland
received his Chartered Financial Analyst (“CFA”) designation in 1994. Mr. Hyland
is a member of the CFA Institute (formerly AIMR). He is also a member of the
National Association of Petroleum Investment Analysts, a not-for-profit
organization of investment professionals focused on the oil industry. He serves
as an arbitrator for FINRA, as part of their dispute resolution program. He is a
graduate of the University of California, Berkeley. Mr. Hyland is 50 years
old.
Ray W.
Allen
acts as a Portfolio Operations Manager for US12NG, USHO, UGA and
USSO and is expected to be the Portfolio Operations Manager for USBO. He was
hired by the General Partner in October 2007 and has been employed by the
General Partner since January 14, 2008. He holds a Series 3 license
and is registered with the CFTC as an Associated Person of the General Partner
on March 25, 2008. He has been listed with the CFTC as a Principal of the
General Partner since March 18, 2009. Mr. Allen’s responsibilities include daily
trading and operations for USHO, USSO, UGA and US12NG. In addition, from
February 2002 to October 2007, Mr. Allen was responsible for analyzing and
evaluating the creditworthiness of client companies at Marble Bridge Funding
Group Inc., in Walnut Creek, CA. Marble Bridge Funding Group Inc. is a
commercial finance company providing capital to entrepreneurial companies. Mr.
Allen received a BA in Economics from the University of California at Berkeley
in 1980. Mr. Allen is 53 years old.
126
The
following individuals serve as independent directors of the General
Partner.
Peter M.
Robinson
has been an Independent Director of the General Partner since
September 30, 2005 and, as such, serves on the board of directors of the General
Partner, which acts on behalf of US12NG, and the Related Public Funds and will
serve on behalf of USBO and USCI, if such funds commence
operations. He has been listed with the CFTC as a Principal of the
General Partner since December 2005. Mr. Robinson has been employed
as a Research Fellow with the Hoover Institution since 1993. The Hoover
Institution is a public policy think tank located on the campus of Stanford
University. Mr. Robinson graduated from Dartmouth College in 1979 and Oxford
University in 1982. In 1990, Mr. Robinson received an MBA from the Stanford
University Graduate School of Business. Mr. Robinson has also written three
books and has been published in the
New York Times
,
Red Herring
, and
Forbes ASAP
and he is the
editor of
Can Congress Be
Fixed?: Five Essays on Congressional Reform
(Hoover Institution Press,
1995). Mr. Robinson is 52 years old.
In
concluding that Mr. Robinson should serve as Independent Director of the General
Partner, the General Partner considered his broad experience in the United
States government, including his employment at the Securities and Exchange
Commission, and his knowledge of and insight into public policy.
Gordon L.
Ellis
has been an Independent Director of the General Partner since
September 30, 2005 and, as such, serves on the board of directors of the General
Partner, which acts on behalf of US12NG, and the Related Public Funds and will
serve on behalf of USBO and USCI, if such funds commence operations. He has been
listed with the CFTC as a Principal of the General Partner since November 2005.
Mr. Ellis has been Chairman of International Absorbents, Inc., a holding company
of Absorption Corp., since July 1988, President and Chief Executive Officer
since November 1996 and a Class I Director of the company since July 1985. Mr.
Ellis is also a director of Absorption Corp., International Absorbents, Inc.’s
wholly-owned subsidiary which is engaged in developing, manufacturing and
marketing a wide range of animal care and industrial absorbent products. Mr.
Ellis is a director/trustee of Polymer Solutions, Inc., a former publicly-held
company that sold all of its assets effective as of February 3, 2004 and is
currently winding down its operations and liquidating following such sale.
Polymer Solutions previously manufactured paints, coatings, stains and primers
for wood furniture manufacturers. Mr. Ellis is a professional engineer with an
MBA in international finance. Mr. Ellis is 63 years old.
In
concluding that Mr. Ellis should serve as Independent Director of the General
Partner, the General Partner considered his experience serving as the Chairman
and Chief Executive Officer of a former publicly-traded corporation as well as
his experience as an entrepreneur.
Malcolm R. Fobes
III
has been an Independent Director of the General Partner since
September 30, 2005 and, as such, serves on the board of directors of the General
Partner, which acts on behalf of US12NG and the Related Public Funds and will
serve on behalf of USBO and USCI, if such funds commence operations. He has been
listed with the CFTC as a Principal of the General Partner since November 2005.
Mr. Fobes is the founder, Chairman and Chief Executive Officer of Berkshire
Capital Holdings, Inc., a California-based investment adviser registered under
the Investment Advisers Act of 1940, that has been sponsoring and providing
portfolio management services to mutual funds since June 1997. Since June 1997,
Mr. Fobes has been the Chairman and President of The Berkshire Funds, a mutual
fund investment company registered under the Investment Company Act of 1940. Mr.
Fobes also serves as portfolio manager of the Berkshire Focus Fund, a mutual
fund registered under the Investment Company Act of 1940, which concentrates its
investments in the electronic technology industry. From April 2000 to July 2006,
Mr. Fobes also served as co-portfolio manager of The Wireless Fund, a mutual
fund registered under the Investment Company Act of 1940, which concentrates its
investments in companies engaged in the development, production, or distribution
of wireless-related products or services. In these roles, Mr. Fobes has gained
extensive experience in evaluating and retaining third-party service providers,
including custodians, accountants, transfer agents, and distributors. Mr. Fobes
was also contributing editor of
Start a Successful Mutual Fund: The
Step-by-Step Reference Guide to Make It Happen
(JV Books, 1995). Mr.
Fobes holds a B.S. degree in Finance and Economics from San Jose State
University in California. Mr. Fobes is 45 years old.
127
In
concluding that Mr. Fobes should serve as Independent Director of the General
Partner, the General Partner considered his background as founder, Chairman and
Chief Executive Officer of a registered investment adviser as well as Chairman,
President, Chief Financial Officer and Portfolio Manager of a mutual fund
investment company.
The
following are individual Principals, as that term is defined in CFTC Rule 3.1,
for the General Partner: Melinda Gerber, the Gerber Family Trust, the Nicholas
and Melinda Gerber Living Trust, Howard Mah, Andrew Ngim, Robert Nguyen, Peter
Robinson, Gordon Ellis, Malcolm Fobes, John Love, John Hyland, Ray Allen and
Wainwright Holdings Inc. These individuals are principals due to their
positions, however, Nicholas Gerber and Melinda Gerber are also principals due
to their controlling stake in Wainwright. None of the principals owns or has any
other beneficial interest in US12NG. Nicholas Gerber and John Hyland make
trading and investment decisions for US12NG. John Love and John Hyland execute
trades on behalf of US12NG. In addition, Nicholas Gerber, John Hyland, Robert
Nguyen and Ray Allen are registered with the CFTC as Associated Persons of the
General Partner and are NFA Associate Members.
Audit
Committee
The Board
of the General Partner has an audit committee which is made up of the three
independent directors (Peter M. Robinson, Gordon L. Ellis, and Malcolm R. Fobes
III). The audit committee is governed by an audit committee charter that is
posted on US12NG’s website at www.unitedstates12monthnaturalgas.com. Any
unitholder of US12NG may also obtain a printed copy of the audit committee
charter, free of charge, by calling 1-800-920-0259. The Board has determined
that each member of the audit committee meets the financial literacy
requirements of the NYSE Arca and the audit committee charter. The Board has
further determined that each of Messrs. Ellis and Fobes have accounting or
related financial management expertise, as required by the NYSE Arca, such that
each of them is considered an “Audit Committee Financial Expert” as such term is
defined in Item 407(d)(5) of Regulation S-K.
Other
Committees
Since the individuals who perform work
on behalf of US12NG are not compensated by US12NG, but instead by the General
Partner, US12NG does not have a compensation committee. Similarly, since the
Directors noted above serve on the board of directors of the General Partner,
there is no nominating committee of the board of directors that acts on behalf
of US12NG. The General Partner believes that it is necessary for each
member of the Board of Directors to possess many qualities and skills. The
General Partner further believes that all directors should possess a
considerable amount of business management and educational
experience. There have not been any vacancies on the General
Partner’s Board of Directors since the commencement of operations of USOF in
April 2006; however, if such a vacancy were to occur, the members of the Board
of Directors would consider a candidate’s management experience as well as
his/her background, stature, conflicts of interest, integrity and
ethics. In connection with this, the Board of Directors would also
consider issues of diversity, such as diversity of gender, race and national
origin, education, professional experience and differences in viewpoints and
skills. The Board of Directors does not have a formal policy with respect to
diversity; however, the Board of Directors believes that it is essential that
the Board members represent diverse viewpoints.
Corporate
Governance Policy
The Board
of the General Partner has adopted a Corporate Governance Policy that applies to
US12NG, USNG, USOF, US12OF, UGA, USHO, USSO, USBO and USCI. US12NG has posted
the text of the Corporate Governance Policy on its website at
www.unitedstates12monthnaturalgasfund.com. Any unitholder of US12NG may
also obtain a printed copy of the Corporate Governance Policy, free of charge,
by calling 1-800-920-0259.
Code
of Ethics
The
General Partner of US12NG has adopted a Code of Business Conduct and Ethics (the
“Code of Ethics”) that applies to its principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions, and also to US12NG. US12NG has posted the
text of the Code of Ethics on its website at
www.unitedstates12monthnaturalgasfund.com. Any unitholder of US12NG may
also obtain a printed copy of the Code of Ethics, free of charge, by calling
1-800-920-0259. US12NG intends to disclose any amendments or waivers to the Code
of Ethics applicable to the General Partner’s principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions, on its website.
128
Executive
Sessions of the Non-Management Directors
In
accordance with the Corporate Governance Policy of the General Partner, the
non-management directors of the Board (who are the same as the independent
directors of the Board) meet separately from the other directors in regularly
scheduled executive sessions, without the presence of Management Directors or
executive officers of the General Partner. The non-management directors have
designated Malcolm R. Fobes III to preside over each such executive session.
Interested parties who wish to make their concerns known to the non-management
directors may communicate directly with Mr. Fobes by writing to 475 Milan Drive,
No. 103, San Jose, CA 95134-2453 or by e-mail at
uscf.director@gmail.com.
Board
Leadership Structure and Role in Risk Oversight
The Board
of the General Partner is led by a Chairman, Nicholas Gerber, who is also the
President and CEO of the General Partner. The Board’s
responsibilities include (i) the selection, evaluation, retention and succession
of the Chief Executive Officer and the oversight of the selection and
performance of other executive officers, (ii) understanding, reviewing and
monitoring the implementation of strategic plans, annual operating plans and
budgets, (iii) the selection and oversight of US12NG’s independent auditors and
the oversight of US12NG’s financial statements, (iv) advising management on
significant issues, (v) the review and approval of significant company actions
and certain other matters, (vi) nominating directors and committee members and
overseeing effective corporate governance and (vii) the consideration of other
constituencies, such as the General Partner’s and US12NG’s customers, employees,
suppliers and the communities impacted by US12NG. The non-management directors
have designated Malcolm R. Fobes III as the presiding independent
director. Mr. Fobes’s role as the presiding independent director
includes presiding over each executive session of the non-management directors,
facilitating communications by shareholders and employees with the
non-management directors and may also include representing the non-management
directors with respect to certain matters as to which the views of the
non-management directors are sought pursuant to US12NG’s Corporate Governance
Policy.
The Board
believes that Mr. Gerber is best situated to serve as Chairman of the General
Partner because he is the director most familiar with the business of the
General Partner, including investing in the futures contracts and other
commodity interests in order to track the benchmark futures contracts of US12NG
and the Related Public Funds. Because of his background, he is most
capable of effectively leading the discussion and execution of new strategic
objectives. The independent directors of the General Partner are
actively involved in the oversight of the General Partner and, because of their
varied backgrounds, provide different perspectives in connection with the
oversight of the General Partner, US12NG and the Related Public Funds. The
General Partner’s independent directors bring expertise from outside the General
Partner and the commodities industry, while Mr. Gerber brings company-specific
and industry-specific experience and expertise. The Board of Directors believes
that the combined role of Chairman and Chief Executive Officer facilitates
information flow between management and the Board of Directors, including the
independent directors, which is essential to effective governance.
Risk
Management
The full
Board of Directors is actively involved in overseeing the management and
operation of the General Partner, including oversight of the risks that face
US12NG and the Related Public Funds. For example, the Board of
Directors has adopted an Investment Policy and a Policy for Use of
Derivatives. The policies are intended to ensure that the General
Partner take prudent and careful action while entering into and managing
investments taken by US12NG including Futures Contracts or Other Natural
Gas-Related Investments such as over-the-counter swap
contracts. Additionally, the policies are intended to provide
assurance that there is sufficient flexibility in controlling risks and returns
associated with the use of investments by US12NG. The policies, among
other things, limit US12NG’s ability to have too high of a concentration of its
assets in non-exchange traded futures contracts or cleared swap contracts or
concentrating its investments in too few counterparties, absent prior approval
from the Board of Directors. Existing counterparties are reviewed
periodically by the Board of Directors to ensure that they continue to meet the
criteria outlined in the policies. The Board of Directors tasks
management with assessing risks, including market risk, credit risk, liquidity
risk, cash flow risk, basis risk, legal and tax risk, settlement risk, and
operational risk.
129
The Board
of Directors also determines compensation payable to employees of the General
Partner, including the portfolio managers of each of US12NG and the Related
Public Funds. The compensation of certain employees of the General
Partner is, in part, based on the amount of assets under management by US12NG
the Related Public Funds. The Board of Directors feels that
compensating certain employees, in part, based on the amount of assets under
management is appropriate since having more assets in a fund generally reflects
that investors perceive the fund’s investment objective is being
met. There are certain risks that may arise as a result of a growth
in assets under management. For example, if position limits are
imposed on US12NG and the assets under management continue to increase, then
US12NG not be able to invest solely in the Benchmark Futures Contract and may
have to invest in over-the-counter swap contracts or Other Natural Gas-Related
Investments as it seeks to track its benchmark. Other Futures
Contracts in which US12NG invest may not track changes in the price of the
Benchmark Futures Contract. Other Natural Gas-Related Investments,
including over-the-counter swap contracts, may also expose US12NG to increased
counterparty credit risk and may be less liquid and more difficult to value than
Futures Contracts. US12NG and the Related Public Funds ameliorate the
potential credit, liquidity and valuation risks by fully collateralizing any
over-the-counter swap contracts or other investments. The Board of
Directors in making compensation decisions consider whether a compensation
arrangement would expose US12NG or the Related Public Funds to additional risks
and whether the risks posed by such arrangement are consistent with the best
interests of US12NG’s investors.
Other
Information
In
addition to the certifications of the Chief Executive Officer and Chief
Financial Officer of the General Partner filed or furnished with this annual
report on Form 10-K regarding the quality of US12NG’s public disclosure, US12NG
will submit, within 30 days after filing this annual report on Form 10-K, to the
NYSE Arca a certification of the Chief Executive Officer of the General Partner
certifying that he is not aware of any violation by US12NG of NYSE Arca
corporate governance listing standards.
Compensation
to the General Partner and Other Compensation.
US12NG
does not directly compensate any of the executive officers noted above. The
executive officers noted above are compensated by the General Partner for
the work they perform on behalf of US12NG and other entities controlled by the
General Partner. US12NG does not reimburse the General Partner for, nor does it
set the amount or form of any portion of, the compensation paid to the executive
officers by the General Partner. US12NG pays fees to the General Partner
pursuant to the LP Agreement under which it is obligated to pay the General
Partner an annualized fee of 0.60% of its average daily net assets. For 2009,
US12NG paid the General Partner aggregate management fees of
$16,490.
Director
Compensation.
The
following table sets forth compensation earned during the year ended December
31, 2009, by the Directors of the General Partner. US12NG’s portion of the
aggregate fees paid to the Directors for the calendar year 2009 was
$125.
130
|
Change in
|
|||||||||||||||||||||
|
Pension
|
|||||||||||||||||||||
|
Fees
|
Value and
|
||||||||||||||||||||
|
Earned
or
|
Non-Equity
|
Nonqualified
Deferred
|
|||||||||||||||||||
|
Paid in
|
Stock
|
Option
|
Incentive Plan
|
Compensation
|
All Other
|
||||||||||||||||
|
Name
|
Cash
|
Awards
|
Awards
|
Compensation
|
Plan
|
Compensation
|
Total
|
||||||||||||||
|
Management
Directors
|
|||||||||||||||||||||
|
Nicholas
Gerber
|
$ | 0 |
NA
|
NA
|
NA
|
$ | 0 | $ | 0 | $ | 0 | ||||||||||
|
Andrew
F. Ngim
|
$ | 0 |
NA
|
NA
|
NA
|
$ | 0 | $ | 0 | $ | 0 | ||||||||||
|
Howard
Mah
|
$ | 0 |
NA
|
NA
|
NA
|
$ | 0 | $ | 0 | $ | 0 | ||||||||||
|
Robert
L. Nguyen
|
$ | 0 |
NA
|
NA
|
NA
|
$ | 0 | $ | 0 | $ | 0 | ||||||||||
|
Independent
Directors
|
|||||||||||||||||||||
|
Peter
M. Robinson
|
$ | 100,000 |
NA
|
NA
|
NA
|
$ | 0 | $ | 0 | $ | 100,000 | ||||||||||
|
Gordon
L. Ellis
|
$ | 101,000 |
NA
|
NA
|
NA
|
$ | 0 | $ | 0 | $ | 101,000 | ||||||||||
|
Malcolm
R. Fobes III(1)
|
$ | 121,000 |
NA
|
NA
|
NA
|
$ | 0 | $ | 0 | $ | 121,000 | ||||||||||
|
(1)
|
Mr.
Fobes serves as chairman of the audit committee of the General Partner and
receives additional compensation in recognition of the additional
responsibilities he has undertaken in this
role.
|
None of
the directors or executive officers of the General Partner, nor the employees of
US12NG own any units of US12NG. In addition, US12NG is not aware of any 5%
holder of its units.
Certain
Relationships and Related Transactions
US12NG
has and will continue to have certain relationships with the General Partner and
its affiliates. However, there have been no direct financial transactions
between US12NG and the directors or officers of the General Partner that have
not been disclosed herein. See “Item 11. Executive Compensation” and “Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.” Any transaction with a related person that must be
disclosed in accordance with SEC Regulation S-K item 404(a), including financial
transactions by US12NG with directors or executive officers of the General
Partner or holders of beneficial interests in the General Partner or US12NG of
more than 5%, will be subject to the provisions regarding “Resolutions of
Conflicts of Interest; Standard of Care” as set forth in Section 7.7 of the LP
Agreement and will be reviewed and approved by the audit committee of the Board
of the General Partner.
In
February 2010, the Board undertook a review of the independence of the directors
of the General Partner and considered whether any director has a material
relationship or other arrangement with the General Partner, US12NG, or the
Related Public Funds that could compromise his ability to exercise independent
judgment in carrying out his responsibilities. As a result of this review, the
Board determined that each of Messrs. Fobes, Ellis and Robinson is an
“independent director,” as defined under the rules of NYSE Arca.
The fees
for services billed to US12NG by its independent auditors for the period ended
December 31, 2009 are as follows:
|
2009
|
||||
|
Audit
fees
|
$ | 25,000 | * | |
|
Audit-related
fees
|
- | |||
|
Tax
fees
|
- | |||
|
All
other fees
|
- | |||
| $ | 25,000 | * | ||
* Amount
expected to be billed for 2009 services.
Audit
fees consist of fees paid to Spicer Jeffries LLP for (i) the audit of
US12NG’s annual financial statements included in the annual report on Form 10-K,
and review of financial statements included in the quarterly reports on
Form 10-Q and certain of US12NG’s current reports on Form 8-K; and (ii) services
that are normally provided by the Independent Registered Public Accountants in
connection with statutory and regulatory filings of registration
statements.
131
Tax fees
consist of fees paid to Spicer Jeffries LLP for professional services rendered
in connection with tax compliance and partnership income tax return
filings.
The audit
committee has established policies and procedures which are intended to control
the services provided by US12NG’s independent auditors and to monitor their
continuing independence. Under these policies and procedures, no
audit or permitted non-audit services (including fees and terms thereof), except
for the
de minimis
exceptions for non-audit services described in Section 10A(i)(1)(B) of the
Exchange Act, may be undertaken by US12NG’s independent auditors unless the
engagement is specifically pre-approved by the audit committee. The
audit committee may form and delegate authority to subcommittees consisting of
one or more members when appropriate, including the authority to grant
pre-approvals of audit and permitted non-audit services, provided that decisions
of such subcommittee to grant pre-approvals must be presented to the full audit
committee at its next scheduled meeting.
|
1.
|
See
Index to Financial Statements on page
89.
|
|
2.
|
No
financial statement schedules are filed herewith because (i) such
schedules are not required or (ii) the information required has been
presented in the aforementioned financial
statements.
|
|
3.
|
Exhibits
required to be filed by Item 601 of Regulation
S-K.
|
Exhibit
Index
Listed
below are the exhibits which are filed or furnished as part of this annual
report on Form 10-K (according to the number assigned to them in Item 601 of
Regulation S-K):
|
Exhibit
Number
|
Description
of Document
|
|
|
3.1*
|
Certificate
of Limited Partnership of the Registrant.
|
|
|
3.2*
|
Form
of Amended and Restated Agreement of Limited
Partnership.
|
|
|
3.4**
|
Fourth
Amended and Restated Limited Liability Company Agreement of the General
Partner.
|
|
|
10.1****
|
Form
of Authorized Purchaser Agreement.
|
|
|
10.2***
|
Form
of Marketing Agent Agreement.
|
|
|
10.4***
|
Form
of Custodian Agreement.
|
|
|
10.6***
|
Form
of Administrative Agency Agreement.
|
|
|
14.1*****
|
Code
of Ethics.
|
|
|
31.1*******
|
|
Certification
of Principal Executive Officer Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.
|
|
31.2*******
|
|
Certification
of Principal Financial Officer Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of
1934.
|
132
|
32.1*******
|
|
Certification
of Principal Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).
|
|
32.2*******
|
|
Certification
of Principal Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).
|
|
99.1******
|
Customer
Agreement for Futures Contracts.
|
|
|
*
|
Incorporated
by reference to Registrant’s Registration Statement on Form S-1 (File No.
333-144409) filed on July 6, 2007.
|
|
**
|
Incorporated
by reference to the quarterly report on Form 10-Q filed by United States
Oil Fund, LP on November 9, 2009
.
|
|
***
|
Incorporated
by reference to Registrant’s Pre-Effective Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-144409) filed on
September 24, 2009.
|
|
****
|
Incorporated
by reference to Registrant’s Pre-Effective Amendment No. 3 to the
Registration Statement on Form S-1 (File No. 333-144409) filed on November
2, 2009.
|
|
*****
|
Incorporated
by reference to the Annual Report on Form 10-K for the year ended December
31, 2008 filed by United States Natural Gas Fund, LP on March 2,
2009.
|
| ****** |
Incorporated
by reference to Registrant’s quarterly report on Form 10-Q for the quarter
ended September 30, 2009 filed on December 23,
2009.
|
|
*******
|
Filed
herewith.
|
133
Pursuant
to the requirements of Section 13 or 15(d) 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 12 Month Natural Gas Fund, LP (Registrant)
|
|
|
By: United
States Commodity Funds LLC, its general partner
|
|
|
(formerly
known as Victoria Bay Asset Management, LLC)
|
|
|
By:
|
/s/
Nicholas D. Gerber
|
|
Nicholas
D. Gerber
|
|
|
President
and Chief Executive Officer
|
|
|
(Principal
executive officer)
|
|
|
Date:
March 30, 2010
|
|
|
By:
|
/s/
Howard Mah
|
|
Howard
Mah
|
|
|
Chief
Financial Officer
|
|
|
(Principal
financial and accounting officer)
|
|
|
Date:
March 30,
2010
|
|
134
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
|
Signature
|
Title
(Capacity)
|
Date
|
||
|
/s/
Nicholas D. Gerber
|
Management
Director
|
March
30, 2010
|
||
|
Nicholas
D. Gerber
|
||||
|
/s/
Howard Mah
|
Management
Director
|
March
30, 2010
|
||
|
Howard
Mah
|
||||
|
/s/
Andrew Ngim
|
Management
Director
|
March
30, 2010
|
||
|
Andrew
Ngim
|
||||
|
/s/
Robert Nguyen
|
Management
Director
|
March
30, 2010
|
||
|
Robert
Nguyen
|
||||
|
/s/
Peter M. Robinson
|
Independent
Director
|
March
30, 2010
|
||
|
Peter
M. Robinson
|
||||
|
/s/
Gordon L. Ellis
|
Independent
Director
|
March
30, 2010
|
||
|
Gordon
L. Ellis
|
||||
|
/s/
Malcolm R. Fobes III
|
Independent
Director
|
March
30, 2010
|
||
|
Malcolm
R. Fobes III
|
135
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. ReservedPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosure About Market RiskItem 8. Financial Statements and Supplementary DataNote 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 - Financial HighlightsNote 7 - Quarterly Financial Data (unaudited)Note 8 - Fair Value Of Financial InstrumentsNote 9 Recent Accounting PronouncementsNote 10 Subsequent EventsNote 1 - Organization and OperationNote 1 - Organization and Operation (continued)Note 1 - Organization and Operation (concluded)Note 2 - Summary Of Significant Accounting Policies (continued)Note 2 - Summary Of Significant Accounting Policies (concluded)Note 3 - Capitalization and Related Party TransactionsNote 3 - Capitalization and Related Party Transactions (concluded)Note 4 - Fair Value MeasurementsNote 5 - Income TaxesNote 5 - Income Taxes (concluded)Note 6 - Contracts and AgreementsNote 6 - Contracts and Agreements (concluded)Note 7 - Accumulated Other Comprehensive Income (loss)Note 8 - Off-balance Sheet Risks and ContingenciesNote 8 - Off-balance Sheet Risks and Contingencies (concluded)Note 9 - Subsequent EventsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules