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-Q
|
x
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Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30,
2010.
|
OR
|
¨
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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: 001-34535
United
States 12 Month Natural Gas Fund, LP
(Exact
name of registrant as specified in its charter)
|
Delaware
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26-0431733
|
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
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1320
Harbor Bay Parkway, Suite 145
Alameda,
California 94502
(Address
of principal executive offices) (Zip code)
(510)
522-9600
(Registrant’s
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
x
Yes
¨
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
Yes
¨
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ | ||
| Non-accelerated filer x | Smaller reporting company ¨ | ||
|
(Do
not check if a smaller reporting
company)
|
|||
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨
Yes
x
No
UNITED
STATES 12 MONTH NATURAL GAS FUND, LP
Table
of Contents
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Page
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Part
I. FINANCIAL INFORMATION
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Item 1. Condensed Financial Statements
.
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1
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Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
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15
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|
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Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
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32
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Item
4. Controls and Procedures.
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33
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Part
II. OTHER INFORMATION
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Item
1. Legal Proceedings.
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34
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Item
1A. Risk Factors.
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34
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Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
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34
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Item
3. Defaults Upon Senior Securities.
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34
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Item
4. Reserved.
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34
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Item
5. Other Information.
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34
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Item
6. Exhibits.
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34
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Index
to Condensed Financial Statements
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Documents
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Page
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|||
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Condensed
Statements of Financial Condition at September 30, 2010 (Unaudited) and
December 31, 2009
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2
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|||
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Condensed
Schedule of Investments (Unaudited) at September 30, 2010
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3
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|||
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Condensed
Statements of Operations (Unaudited) for the three and nine months ended
September 30, 2010
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4
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|||
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Condensed
Statement of Changes in Partners’ Capital (Unaudited) for the nine months
ended September 30, 2010
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5
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|||
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Condensed
Statements of Cash Flows (Unaudited) for the nine months ended September
30, 2010 and 2009
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6
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|||
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Notes
to Condensed Financial Statements for the period ended September 30,
2010 (Unaudited)
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7
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|||
1
United
States 12 Month Natural Gas Fund, LP
At
September 30, 2010 (Unaudited) and December 31, 2009
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September 30, 2010
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December 31, 2009
|
|||||||
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Assets
|
||||||||
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Cash
and cash equivalents (Note 5)
|
$ | 36,994,697 | $ | 32,056,391 | ||||
|
Equity
in UBS Securities LLC trading accounts:
|
||||||||
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Cash
|
12,128,155 | 3,940,416 | ||||||
|
Unrealized
gain (loss) on open commodity futures contracts
|
(7,877,550 | ) | 1,662,670 | |||||
|
Receivable
from General Partner (Note 3)
|
169,020 | 136,678 | ||||||
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Dividend
receivable
|
1,175 | 729 | ||||||
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Other
assets
|
539 | - | ||||||
|
Total
assets
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$ | 41,416,036 | $ | 37,796,884 | ||||
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Liabilities
and Partners’ Capital
|
||||||||
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Professional
fees payable
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$ | 191,765 | $ | 140,800 | ||||
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General
Partner management fees payable (Note 3)
|
24,448 | 14,983 | ||||||
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Brokerage
commission fees payable
|
3,185 | 3,200 | ||||||
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Other
liabilities
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1,808 | 753 | ||||||
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Total
liabilities
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221,206 | 159,736 | ||||||
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Commitments and Contingencies
(Notes 3, 4 and 5)
|
||||||||
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Partners’
Capital
|
||||||||
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General
Partner
|
- | - | ||||||
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Limited
Partners
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41,194,830 | 37,637,148 | ||||||
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Total
Partners’ Capital
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41,194,830 | 37,637,148 | ||||||
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Total
liabilities and partners’ capital
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$ | 41,416,036 | $ | 37,796,884 | ||||
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Limited
Partners’ units outstanding
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1,200,000 | 700,000 | ||||||
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Net
asset value per unit
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$ | 34.33 | $ | 53.77 | ||||
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Market
value per unit
|
$ | 34.23 | $ | 54.20 | ||||
See
accompanying notes to financial statements.
2
United
States 12 Month Natural Gas Fund, LP
Condensed
Schedule of Investments (Unaudited)
At
September 30, 2010
|
Loss on Open
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% of
|
|||||||||||
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Number of
|
Commodity
|
Partners'
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||||||||||
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Contracts
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Contracts
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Capital
|
||||||||||
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Open
Futures Contracts - Long
|
||||||||||||
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United
States Contracts
|
||||||||||||
|
NYMEX
Natural Gas Futures NG contracts, expire November 2010
|
80 | $ | (913,660 | ) | (2.22 | ) | ||||||
|
NYMEX
Natural Gas Futures NG contracts, expire December 2010
|
80 | (993,570 | ) | (2.41 | ) | |||||||
|
NYMEX
Natural Gas Futures NG contracts, expire January 2011
|
80 | (1,048,010 | ) | (2.54 | ) | |||||||
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NYMEX
Natural Gas Futures NG contracts, expire February 2011
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80 | (972,520 | ) | (2.36 | ) | |||||||
|
NYMEX
Natural Gas Futures NG contracts, expire March 2011
|
80 | (825,080 | ) | (2.00 | ) | |||||||
|
NYMEX
Natural Gas Futures NG contracts, expire April 2011
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80 | (545,010 | ) | (1.32 | ) | |||||||
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NYMEX
Natural Gas Futures NG contracts, expire May 2011
|
81 | (525,310 | ) | (1.28 | ) | |||||||
|
NYMEX
Natural Gas Futures NG contracts, expire June 2011
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80 | (626,530 | ) | (1.52 | ) | |||||||
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NYMEX
Natural Gas Futures NG contracts, expire July 2011
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80 | (536,360 | ) | (1.30 | ) | |||||||
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NYMEX
Natural Gas Futures NG contracts, expire August 2011
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80 | (382,240 | ) | (0.93 | ) | |||||||
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NYMEX
Natural Gas Futures NG contracts, expire September 2011
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80 | (310,080 | ) | (0.75 | ) | |||||||
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NYMEX
Natural Gas Futures NG contracts, expire October 2011
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80 | (199,180 | ) | (0.49 | ) | |||||||
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Total
Open Futures Contracts
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961 | $ | (7,877,550 | ) | (19.12 | ) | ||||||
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Principal
Amount
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Market
Value
|
|||||||||||
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Cash
Equivalents
|
||||||||||||
|
United
States - Money Market Funds
|
||||||||||||
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Fidelity
Institutional Government Portfolio - Class I
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$ | 13,505,192 | $ | 13,505,192 | 32.78 | |||||||
|
Goldman
Sachs Financial Square Funds - Government Fund - Class SL
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2,501,469 | 2,501,469 | 6.07 | |||||||||
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Morgan
Stanley Institutional Liquidity Fund - Government
Portfolio
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6,002,147 | 6,002,147 | 14.57 | |||||||||
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Total
Cash Equivalents
|
$ | 22,008,808 | 53.42 | |||||||||
See
accompanying notes to financial statements.
3
United
States 12 Month Natural Gas Fund, LP
For
the three and nine months ended September 30, 2010
|
Three months
|
Nine months
|
|||||||
|
ended
September 30,
2010
|
ended
September 30,
2010
|
|||||||
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Income
|
||||||||
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Loss
on trading of commodity futures contracts:
|
||||||||
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Realized
loss on closed positions
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$ | (1,781,810 | ) | $ | (4,554,460 | ) | ||
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Change
in unrealized loss on open positions
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(4,756,700 | ) | (9,540,220 | ) | ||||
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Dividend
income
|
4,198 | 9,070 | ||||||
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Interest
income
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520 | 1,295 | ||||||
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Other
income
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2,000 | 6,000 | ||||||
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Total
loss
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(6,531,792 | ) | (14,078,315 | ) | ||||
|
Expenses
|
||||||||
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Professional
fees
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3,265 | 191,765 | ||||||
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General
Partner management fees (Note 3)
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61,326 | 176,121 | ||||||
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Brokerage
commission fees
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2,660 | 8,873 | ||||||
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Other
expenses
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2,850 | 12,717 | ||||||
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Total
expenses
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70,101 | 389,476 | ||||||
|
|
||||||||
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Expense
waiver (Note 3)
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- | (169,020 | ) | |||||
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Net
expenses
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70,101 | 220,456 | ||||||
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Net
loss
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$ | (6,601,893 | ) | $ | (14,298,771 | ) | ||
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Net
loss per limited partnership unit
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$ | (8.03 | ) | $ | (19.44 | ) | ||
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Net
loss per weighted average limited partnership unit
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$ | (7.78 | ) | $ | (17.80 | ) | ||
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Weighted
average limited partnership units outstanding
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848,913 | 803,297 | ||||||
See
accompanying notes to financial statements.
4
United
States 12 Month Natural Gas Fund, LP
Condensed
Statement of Changes in Partners’ Capital (Unaudited)
For
the nine months ended September 30, 2010
|
General Partner
|
Limited Partners
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Total
|
||||||||||
|
Balances,
at December 31, 2009
|
$ | - | $ | 37,637,148 | $ | 37,637,148 | ||||||
|
Addition
of 800,000 partnership units
|
- | 30,789,052 | 30,789,052 | |||||||||
|
Redemption
of 300,000 partnership units
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- | (12,932,599 | ) | (12,932,599 | ) | |||||||
|
Net
loss
|
- | (14,298,771 | ) | (14,298,771 | ) | |||||||
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Balances,
at September 30, 2010
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$ | - | $ | 41,194,830 | $ | 41,194,830 | ||||||
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Net
Asset Value Per Unit:
|
||||||||||||
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At
December 31, 2009
|
$ | 53.77 | ||||||||||
|
At
September 30, 2010
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$ | 34.33 | ||||||||||
See
accompanying notes to financial statements.
5
United
States 12 Month Natural Gas Fund, LP
For
the nine months ended September 30, 2010 and 2009
|
Nine Months Ended
September 30, 2010
|
Nine Months Ended
September 30, 2009
|
|||||||
|
Cash
Flows from Operating Activities:
|
||||||||
|
Net
loss
|
$ | (14,298,771 | ) | $ | - | |||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Increase
in commodity futures trading account – cash
|
(8,187,739 | ) | - | |||||
|
Unrealized
loss on futures contracts
|
9,540,220 | - | ||||||
|
Increase
in receivable from General Partner
|
(32,342 | ) | - | |||||
|
Increase
in dividend receivable and other assets
|
(985 | ) | - | |||||
|
Increase
in professional fees payable
|
50,965 | - | ||||||
|
Increase
in General Partner management fees payable
|
9,465 | - | ||||||
|
Decrease
in brokerage commission fees payable
|
(15 | ) | - | |||||
|
Increase
in other liabilities
|
1,055 | - | ||||||
|
Net
cash used in operating activities
|
(12,918,147 | ) | - | |||||
|
Cash
Flows from Financing Activities:
|
||||||||
|
Addition
of partnership units
|
30,789,052 | - | ||||||
|
Redemption
of partnership units
|
(12,932,599 | ) | - | |||||
|
Net
cash provided by financing activities
|
17,856,453 | - | ||||||
|
Net
Increase in Cash and Cash Equivalents
|
4,938,306 | - | ||||||
|
Cash and Cash
Equivalents
, beginning of period
|
32,056,391 | 1,000 | ||||||
|
Cash and Cash
Equivalents
, end of period
|
$ | 36,994,697 | $ | 1,000 | ||||
See
accompanying notes to financial statements.
6
Notes
to Condensed Financial Statements
For
the period ended September 30, 2010 (Unaudited)
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 for 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 contract that is
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 for
natural gas and indices based on the foregoing (collectively, “Other
Natural Gas-Related Investments”). As of September 30, 2010, US12NG
held
961
Futures Contracts
for natural gas 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 (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
(the “CFTC”)
effective December 1, 2005.
T
he General Partner is also the
g
eneral
p
artner 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”) and
the United States Brent Oil Fund, LP (“USBO”), which listed their limited
partnership units on the NYSE Arca under the ticker symbols “DNO” on September
24, 2009 and “BNO” on June 2, 2010, respectively. The General Partner is
also the sponsor of the United States Commodity Index Fund (“USCI”) which listed
its units on the NYSE Arca under the ticker symbol “USCI” on August 10,
2010.
The
accompanying unaudited condensed financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X promulgated by the U.S.
Securities and Exchange Commission (the “SEC”) and, therefore, do not include
all information and footnote disclosure required under accounting principles
generally accepted in the United States of America (“GAAP”). The financial
information included herein is unaudited; however, such financial
information reflects all adjustments which are, in the opinion of management,
necessary for the fair presentation of the condensed financial statements
for the interim period.
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 to redeem one
or more baskets consisting of 100,000 units (“Redemption Baskets”). Units
may be purchased or sold on a nationally recognized securities exchange in
smaller increments than a Creation Basket or Redemption Basket. Units
purchased or sold on a nationally recognized securities exchange are not
purchased or sold at the net asset value of US12NG but rather at market prices
quoted on such exchange.
7
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 $10,00
0
,000. US12NG also commenced
investment operations on November 18, 2009 by purchasing Futures Contracts
traded on the NYMEX based on natural gas.
As of September 30, 2010, US12NG had
registered a total of
30,000,000
units.
Revenue
Recognition
Commodity
futures contracts, forward contracts, physical commodities and related options
are recorded on the trade date. All such transactions are recorded on the
identified cost basis and marked to market daily. Unrealized gains or
losses on open contracts are reflected in the condensed statement of financial
condition and represent the difference between the original contract amount and
the market value (as determined by exchange settlement prices for futures
contracts and related options and cash dealer prices at a predetermined time for
forward contracts, physical commodities, and their related options) as of the
last business day of the year or as of the last date of the condensed financial
statements. Changes in the unrealized gains or losses between periods are
reflected in the condensed statement of operations. 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 income on funds held at the
custodian at prevailing market rates earned on such investments.
Brokerage
Commissions
Brokerage
commissions on all open commodity futures contracts are accrued on a full-turn
basis.
Income
Taxes
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.
In
accordance with GAAP, US12NG is required to determine whether a tax position is
more likely than not to be sustained upon examination by the applicable taxing
authority, including resolution of any tax related appeals or litigation
processes, based on the technical merits of the position. US12NG files an
income tax return in the U.S. federal jurisdiction, and may file income tax
returns in various U.S. states. US12NG is not subject to income tax return
examinations by major taxing authorities for years before 2007 (year of
inception). The tax benefit recognized is measured as the largest amount
of benefit that has a greater than fifty percent likelihood of being realized
upon ultimate settlement. De-recognition of a tax benefit previously
recognized results in US12NG recording a tax liability that reduces net
assets. However, US12NG’s conclusions regarding this policy may be subject
to review and adjustment at a later date based on factors including, but not
limited to, on-going analyses of and changes to tax laws, regulations and
interpretations thereof. US12NG recognizes interest accrued related to
unrecognized tax benefits and penalties related to unrecognized tax benefits in
income tax fees payable, if assessed. No interest expense or penalties
have been recognized as of and for the period ended September 30,
2010.
Creations
and Redemptions
Authorized
Purchasers may purchase Creation Baskets or redeem Redemption Baskets 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.
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 condensed statement of
financial condition as receivable for units sold, and amounts payable to
Authorized Purchasers upon redemption are reflected as payable for units
redeemed.
8
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 September 30, 2010.
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
are 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.
Reclassification
Certain
amounts in the accompanying condensed financial statements were reclassified to
conform with the current presentation.
Use
of Estimates
The
preparation of condensed financial statements in conformity with GAAP 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 condensed financial statements, and the reported
amounts of the revenue and expenses during the reporting period. Actual
results may 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, equal to 0.75% per
annum of average daily net assets. Since inception through April 30, 2010,
the General Partner was charging US12NG a management fee at a reduced rate of
0.60% per annum of average daily net assets. Effective May 1, 2010, the General
Partner resumed charging its standard rate of 0.75% per annum of average daily
net assets. The difference of 0.15% per annum of average daily net assets
since inception through April 30, 2010, was waived by the General Partner and
will not be recouped from US12NG.
9
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. During the nine months ended September 30, 2010, US12NG
did not incur registration fees or other offering expenses.
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. These fees and expenses for the calendar year 2010 are
estimated to be a total of $1,178,870 for all funds. Effective as of April
1, 2010, US12NG is responsible for paying its portion of any payments that may
become due to the independent directors pursuant to the deferred compensation
agreements entered into between the independent directors, the General Partner
and each of the affiliated funds. US12NG shares all director fees and
expenses, including any that may become due pursuant to the deferred
compensation agreements, with USOF, USNG, US12OF, UGA, USHO, USSO and USBO,
based on the relative assets of each fund, computed on a daily
basis.
Licensing
Fees
As
discussed in Note 4 below, US12NG entered into a licensing agreement with
the NYMEX on December 4, 2007. Pursuant to the agreement, US12NG and the
affiliated funds managed by the General Partner, other than USBO and USCI, 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 nine months ended September 30, 2010, US12NG
incurred $
6,137
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 were borne by the General Partner, are
paid by US12NG. These costs are estimated to be
$155,000
for the calendar year
2010.
Other
Expenses and Fees and Expense Waivers
In
addition to the fees described above, US12NG pays all brokerage fees and
other expenses in connection with the operation of US12NG, excluding costs and
expenses paid by the General Partner as outlined in Note 4 below. The
General Partner, though under no obligation to do so, agreed to pay certain
expenses, to the extent that such expenses exceed 0.15% (15 basis points) of
US12NG’s NAV, on an annualized basis, through at least December 31, 2010
.
The General Partner has
no obligation to continue such payment into subsequent periods. This
waiver is in addition to the waiver of a portion of the management fee disclosed
in Note 3 above.
US12NG is
party to a marketing agent agreement, dated as of October 30, 2009, as
amended from time to time, with the Marketing Agent and the General
Partner, whereby the Marketing Agent provides certain marketing services for
US12NG as outlined in the agreement. The fee of the Marketing Agent, which
is borne by the General Partner, is 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
fee does not include the following expenses, which are also borne by the General
Partner: the cost of placing advertisements in various periodicals; web
construction and development; or the printing and production of various
marketing materials.
US12NG is
also party to a custodian agreement, dated November 3, 2009, as amended from
time to time, 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 November 3, 2009, as amended from time to
time, 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 such
agreement and such fees are determined by the parties from time to
time.
10
Currently,
the General Partner pays BBH&Co. for its services, in the foregoing
capacities, a minimum amount of $75,000 annually for its custody, fund
accounting and fund administration services rendered to 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, USSO’s, USBO’s and USCI’s
combined net assets, (b) 0.0465% for US12NG’s, USOF’s, USNG’s, US12OF’s, UGA’s,
USHO’s, USSO’s, USBO’s and USCI’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, USSO’s, USBO’s and USCI’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.
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. In accordance with the agreement,
UBS Securities charges US12NG commissions of approximately $7 per round-turn
trade, including applicable exchange and NFA fees for Futures Contracts and
options on Futures Contracts.
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. Under the licensing agreement,
US12NG and the affiliated funds managed by the General Partner, other than USBO
and USCI, 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
engages in the trading of futures contracts and options on futures
contracts and may engage in cleared swaps (collectively, “derivatives”). US12NG
is exposed to both market risk, which is the risk arising from changes in the
market value of the contracts, and credit risk, which is the risk of failure by
another party to perform according to the terms of a contract.
US12NG
may enter into futures contracts, options on futures contracts and cleared swaps
to gain exposure to changes in the value of an underlying commodity. A
futures contract obligates the seller to deliver (and the purchaser to accept)
the future delivery of a specified quantity and type of a commodity at a
specified time and place. Some futures contracts may call for physical
delivery of the asset, while others are settled in cash. The contractual
obligations of a buyer or seller may generally be satisfied by taking or making
physical delivery of the underlying commodity or by making an offsetting sale or
purchase of an identical futures contract on the same or linked exchange before
the designated date of delivery.
The
purchase and sale of futures contracts, options on futures contracts and cleared
swaps 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 swaps 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.
Through
September 30, 2010, all of US12NG’s investment contracts were exchange-traded
futures contracts. 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, a party must rely solely on the credit of its
respective individual counterparties. As of September 30, 2010, US12NG has not
entered into any cleared swaps or 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 has credit risk under its futures contracts
since the sole counterparty to all domestic and foreign futures contracts is the
clearinghouse for 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.
11
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 U.S. 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.
The
General Partner invests a portion of US12NG’s 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
September 30, 2010 and December 31, 2009, US12NG had deposits in domestic and
foreign financial institutions, including cash investments in money market
funds, in the amounts of $
49,122,852 and $
35,966,807,
respectively. This amount is subject to loss should these institutions
cease operations.
For
derivatives, risks arise from changes in the market value of the
contracts. Theoretically, US12NG is exposed to 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 condensed statement of
financial condition at market or fair value, or at carrying amounts that
approximate fair value, because of their highly liquid nature and short-term
maturity.
Level I –
Quoted prices (unadjusted) in active markets for
identical
assets or
liabilities that the reporting entity has the ability to access at the
measurement date.
Level II
– Inputs other than quoted prices included within Level I that are observable
for the asset or liability, either directly or indirectly. Level II assets
include the following: quoted prices for
similar
assets or
liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted prices that
are observable for the asset or liability, and inputs that are derived
principally from or corroborated by observable market data by correlation or
other means (market-corroborated inputs).
Level III
– Unobservable pricing input at the measurement date for the asset or
liability. Unobservable inputs shall be used to measure fair value to the
extent that observable inputs are not available.
In some
instances, the inputs used to measure fair value might fall within 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.
12
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
|
$ | 26,000,053 | $ | 26,000,053 | $ | - | $ | - | ||||||||
|
Exchange-Traded
Futures Contracts
|
||||||||||||||||
|
United
States Contracts
|
1,662,670 | 1,662,670 | - | - | ||||||||||||
During
the year ended December 31, 2009, there were no significant transfers between
Level I and Level II.
The
following table summarizes the valuation of US12NG’s securities at September 30,
2010 using the fair value hierarchy:
|
At September 30, 2010
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
Short-Term
Investments
|
$ | 22,008,808 | $ | 22,008,808 | $ | - | $ | - | ||||||||
|
Exchange-Traded
Futures Contracts
|
||||||||||||||||
|
United
States Contracts
|
(7,877,550 | ) | (7,877,550 | ) | - | - | ||||||||||
During
the nine months ended September 30, 2010, there were no significant transfers
between Level I and Level II.
US12NG
has adopted the provisions of Accounting Standards Codification 815 –
Derivatives and Hedging, which require presentation of qualitative disclosures
about objectives and strategies for using derivatives, quantitative disclosures
about fair value amounts and gains and losses on derivatives.
Fair
Value of Derivative Instruments
|
Derivatives not Accounted
for as Hedging Instruments
|
Statement of Financial
Condition Location
|
Fair Value
At September 30, 2010
|
Fair Value
At December 31, 2009
|
|||||||
|
Futures
-
|
||||||||||
|
Commodity
Contracts
|
Assets
|
$ | (7,877,550 | ) | $ | 1,662,670 | ||||
The
Effect of Derivative Instruments on the Statements of Operations
|
For the nine months ended
September 30, 2010
|
||||||||||
|
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
|
|||||||
|
Futures
-
|
Realized
gain
|
$ | (4,554,460 | ) | ||||||
|
Commodity
Contracts
|
(loss)
on closed futures contracts
|
|||||||||
|
Change
in unrealized gain (loss) on open futures contracts
|
$ | (9,540,220 | ) | |||||||
13
The
following table presents per unit performance data and other supplemental
financial data for the nine months ended September 30, 2010 for the
unitholders. This information has been derived from information presented
in the condensed financial statements.
|
For the nine months
ended
|
||||
|
September 30, 2010
|
||||
|
(Unaudited)
|
||||
|
Per Unit Operating
Performance:
|
||||
|
Net
asset value, beginning of period
|
$
|
53.77
|
||
|
Total
loss
|
(19.17
|
)
|
||
|
Net
expenses
|
(0.27
|
)
|
||
|
Net decrease in net asset value
|
(19.44
|
)
|
||
|
Net
asset value, end of period
|
$
|
34.33
|
||
|
Total
Return
|
(36.15
|
)%
|
||
|
Ratios
to Average Net Assets
|
||||
|
Total
loss
|
(40.75
|
)%
|
||
|
Management
fees*
|
0.68
|
%
|
||
|
Total
expenses excluding management fees*
|
0.83
|
%
|
||
|
Expense
waived*
|
(0.66
|
)%
|
||
|
Net
expenses excluding management fees*
|
0.17
|
%
|
||
|
Net
loss
|
(41.39
|
)%
|
||
| *Annualized | ||||
Total
returns are calculated based on the change in value during the period. An
individual unitholder’s total return and ratio may vary from the above total
returns and ratios based on the timing of contributions to and withdrawals from
US12NG.
In
January 2010, the Financial Accounting Standards Board issued Accounting
Standards Update (“ASU”) No. 2010-06 “Improving Disclosures about Fair Value
Measurements.” ASU No. 2010-06 clarifies existing disclosure and requires
additional disclosures regarding fair value measurements. Effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years, entities will need to disclose information about purchases,
sales, issuances and settlements of Level 3 securities on a gross basis, rather
than as a net number as currently required. The implementation of ASU No.
2010-06 is not expected to have a material impact on US12NG’s financial
statement disclosures.
US12NG
has performed an evaluation of subsequent events through the date the financial
statements were issued. This evaluation did not result in any subsequent events
that necessitated disclosures and/or adjustments.
14
Forward-Looking
Information
This
quarterly report on Form 10-Q, including this “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” contains
forward-looking statements regarding the plans and objectives of management for
future operations. This information may involve known and unknown risks,
uncertainties and other factors that may cause 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 the 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 quarterly report on
Form 10-Q on information available to it on the date of this quarterly
report on Form 10-Q, 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 U.S. Securities and
Exchange Commission (the “SEC”), including annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K.
Introduction
US12NG, a
Delaware limited partnership, is a commodity pool that issues units that may be
purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”). The
investment objective of 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, 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 and the contracts for the following 11 consecutive months (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.
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 (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”). For
convenience and unless otherwise specified, Futures Contracts and Other Natural
Gas-Related Investments collectively are referred to as “Natural Gas Interests”
in this quarterly report on Form 10-Q.
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 average of the prices of the Benchmark Futures Contracts,
also measured in percentage terms. US12NG’s general partner believes the changes
in the average of the prices of the Benchmark Futures Contracts 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 Futures Contracts and Other Natural-Gas Related Investments.
15
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.
The
regulation of commodity interests in the United States is a rapidly changing
area of law and is subject to ongoing modification by governmental and judicial
action. On July 21, 2010, a broad financial regulatory reform bill, “The
Dodd-Frank Wall Street Reform and Consumer Protection Act,” was signed into law.
The legislation includes provisions altering the regulation of commodity
interests. Provisions in the new law include the requirement that position
limits on energy-based commodity futures contracts be established; new
registration, recordkeeping, capital and margin requirements for “swap dealers”
and “major swap participants” as determined by the new law and applicable
regulations; and the forced use of clearinghouse mechanisms for most
over-the-counter transactions. Additionally, the new law requires the
aggregation, for purposes of position limits, of all positions in energy futures
held by a single entity and its affiliates, whether such positions exist on U.S.
futures exchanges, non-U.S. futures exchanges, or in over-the-counter contracts.
The U.S. Commodity Futures Trading Commission (the “CFTC”), along with the SEC
and other federal regulators, has been tasked with developing the rules and
regulations enacting the provisions noted above. The new law and the rules
to be promulgated may negatively impact US12NG’s ability to meet its investment
objective either through limits or requirements imposed on it or upon its
counterparties. In particular, new position limits imposed on US12NG or
its counterparties may impact US12NG’s ability to invest in a manner that most
efficiently meets its investment objective, and new requirements, including
capital and mandatory clearing, may increase the cost of US12NG’s investments
and doing business, which could adversely affect US12NG’s
investors.
The
general partner of US12NG, United States Commodity Funds LLC (the “General
Partner”), which is registered as a commodity pool operator (“CPO”) with the
CFTC, is authorized by the Amended and Restated Agreement of Limited Partnership
of US12NG (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.
Price
Movements
Natural
gas futures prices exhibited a general downtrend during the nine months ended
September 30, 2010. The average price of the Benchmark Futures Contracts
started the year at $5.872. It hit a peak on January 6, 2010 of
$6.191 and then fell over the course of the period. The average low price
of the period was on September 27, 2010, when the average price of the Benchmark
Futures Contracts was $4.287. The average price of the Benchmark Futures
Contracts on September 30, 2010 was $4.289, for a return of approximately
-26.958% over the period. Similarly, US12NG’s NAV initially rose
during the period from a starting level of $53.77 per unit to a high on January
6, 2010 of $56.69 per unit. US12NG’s NAV reached its low for the period on
September 27, 2010 at $34.31 per unit. The NAV on September 30, 2010 was $34.33,
for a return of approximately -36.15% over the period. The Benchmark
Futures Contract prices listed above began with the February 2010- January 2011
contracts and ended with the November 2010-October 2011 contracts. The return of
approximately -26.958% on the average price of the Benchmark Futures Contracts
listed above is a hypothetical return only and could not actually be achieved by
an investor holding Futures Contracts. An investment in natural gas
Futures Contracts would need to be rolled forward during the time period
described in order to achieve such a result. Furthermore, the change in
the nominal price of these differing natural gas Futures Contracts, measured
from the start of the period to the end of the period, does not represent the
actual benchmark results that US12NG seeks to track, which are more fully
described below in the section titled “Tracking US12NG’s
Benchmark”.
16
From
January 1 to February 18, 2010, 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. From
February 18, 2010 through the end of the third quarter of 2010, the natural gas
futures market was in contango, with the exception of a very brief period of
backwardation in late July 2010. 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 -26.958% on the average of the Benchmark Futures
Contracts 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.”
Valuation
of Futures Contracts and the Computation of the NAV
The NAV
of US12NG’s units is calculated once each NYSE Arca trading day. The NAV
for a particular trading day is released after 4:00 p.m. New York
time. Trading during the core trading session on the NYSE Arca typically
closes at 4:00 p.m. New York time. US12NG’s administrator uses the NYMEX
closing price (determined at the earlier of the close of the NYMEX or
2:30 p.m. New York time) for the contracts held on the NYMEX, but
calculates or determines the value of all other 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 200,000 units to the initial authorized purchaser,
Merrill Lynch Professional Clearing Corp., in exchange for $10,000,000 in
cash.
Since its
initial offering of 30,000,000 units, US12NG has not registered any
subsequent offerings of its units. As of September 30, 2010, US12NG had
issued 1,600,000 units, 1,200,000 of which were outstanding. As of
September 30, 2010, there were 28,400,000 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 Investment Company
Act of 1940, as amended, 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 Nine Months Ended
September 30, 2010
A
comparison of US12NG’s results of operations for the nine months ended September
30, 2009 and 2010 has not been provided because US12NG had not
commenced operations as of September 30, 2009.
As of
September 30, 2010, the total unrealized loss on natural gas Futures
Contracts owned or held on that day was $7,877,550 and US12NG established
cash deposits, including cash investments in money market funds, that were equal
to $49,122,852. US12NG held 75.31% of its cash assets in overnight
deposits and money market funds at its custodian bank, while 24.69% of the cash
balance was held as margin deposits for the Futures Contracts purchased. The
ending per unit NAV on September 30, 2010 was $34.33.
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
0.75% of its average net assets. The fee is accrued daily and paid
monthly.
Since inception through April 30, 2010, the General Partner was
charging US12NG a management fee at a reduced rate of 0.60% per annum of average
daily net assets. Effective May 1, 2010, the General Partner resumed charging
its standard rate of 0.75% per annum of average daily net assets. The
difference of 0.15% per annum of average daily net assets since inception
through April 30, 2010 was waived by the General Partner and will not be
recouped from US12NG.
17
During
the nine months ended September 30, 2010, the daily average total net assets
of US12NG were $34,548,273. The management fee incurred by
US12NG during the period amounted to $176,121. Management fees as a
percentage of total net assets averaged 0.68% over the course of this nine month
period.
In
addition to the management fee, US12NG pays all brokerage fees and other
expenses, including certain tax reporting costs, licensing fees for the use of
intellectual property, ongoing registration or other fees paid to the SEC, the
Financial Industry Regulatory Authority (“FINRA”) and any other regulatory
agency in connection with offers and sales of its units subsequent to the
initial offering and all legal, accounting, printing and other expenses
associated therewith. The total of these fees and expenses for the nine
months ended September 30, 2010 was $213,355. During the nine months ended
September 30, 2010, US12NG did not incur ongoing registration fees or other
expenses relating to the registration and offering of additional units.
During
th
e nine
months ended September 30, 2010,
an
expense waiver was in
effect
which
offset
certain
of the expenses incurred
by US12NG
. The total amount
of the
expense waiver was
$169,020
. For the nine months ended September 30, 2010, the
expenses of US12NG,
including management fees, commissions, and all other expenses, before allowance
for the expense waiver, totaled $389,476, and after allowance for the expense
waiver, totaled $220,456.
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
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”), the United States Heating Oil Fund, LP (“USHO”), the
United States Short Oil Fund, LP (“USSO”), and the United States Brent Oil Fund,
LP (“USBO”) based on the relative assets of each fund computed on a daily
basis. These fees and expenses for the calendar year 2010 are estimated to
be a total of $1,178,870 for all funds. By comparison, for the year ended
December 31, 2009, these fees and expenses amounted to a total of $433,046 for
all funds, and US12NG’s portion of such fees and expenses was $5,259.
Directors’ expenses are expected to increase in 2010 due to an increase in the
amount of directors’ and officers’ liability insurance coverage and the
incurrence of the independent directors’ deferred compensation expense.
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. Effective as of April 1, 2010, US12NG is also responsible for
paying its portion of any payments that may become due to the independent
directors pursuant to the deferred compensation agreements entered into between
the independent directors, the General Partner and US12NG, USOF, USNG, US12OF,
UGA, USHO, USSO and USBO.
US12NG
also incurs commissions to brokers for the purchase and sale of Futures
Contracts, Other Natural Gas-Related Investments or short-term obligations of
the United States of two years or less (“Treasuries”). During the nine
months ended September 30, 2010, total commissions paid to brokers amounted to
$8,873. As an annualized percentage of total net assets, the figure
for the nine months ended September 30, 2010 represents approximately 0.04% 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 investments in Other Natural
Gas-Related Investments, including over-the-counter swaps, during the nine
months ended September 30, 2010.
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 were borne by the General Partner, are
paid by US12NG. These costs are estimated to be $155,000 for the calendar
year 2010. The General Partner, though under no obligation to do so,
agreed to pay certain expenses, to the extent that such expenses exceed 0.15%
(15 basis points) of US12NG’s NAV, on an annualized basis, through at least
December 31, 2010. The General Partner has no obligation to continue such
payments into subsequent periods.
18
Dividend and 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 bank.
The Treasuries, cash and/or cash equivalents earn income that accrues on a daily
basis. For the nine months ended September 30, 2010, US12NG earned $10,365
in dividend and interest income on such cash and/or cash equivalents.
Based on US12NG’s average daily total net assets, this was equivalent to an
annualized yield of 0.04%. US12NG did not purchase Treasuries during the nine
months ended September 30, 2010 and held only cash and/or cash equivalents
during this time period.
For the Three Months Ended
September 30, 2010
A
comparison of US12NG’s results of operations for the three months ended
September 30, 2009 and 2010 has not been provided because US12NG had not
commenced operations as of September 30, 2009.
Portfolio Expenses
. During
the three months ended September 30, 2010, the daily average total net assets
of US12NG were $32,440,513. The management fee incurred by
US12NG during the period amounted to $61,326.
In
addition to the management fee, US12NG pays all brokerage fees and other
expenses, including certain tax reporting costs, licensing fees for the use of
intellectual property, ongoing registration or other fees paid to the SEC, FINRA
and any other regulatory agency in connection with offers and sales of
its units subsequent to the initial offering and all legal, accounting, printing
and other expenses associated therewith. The total of these fees and
expenses for the three months ended September 30, 2010 was $8,775. During
the three months ended September 30, 2010, US12NG did not incur ongoing
registration fees or other expenses relating to the registration and offering of
additional units. During the three months ended September 30, 2010, an expense
waiver was in effect to offset certain of the expenses incurred by US12NG,
but US12NG’s expenses did not exceed 0.15% (15 basis points) of its NAV;
therefore, no expenses were waived by the General Partner. The General Partner
expects that this may change in subsequent periods, including as a result of a
decrease in assets or increase in expenses. For the three months ended September
30, 2010, the expenses of US12NG, including management fees, commissions, and
all other expenses, totaled $70,101.
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, USSO and USBO based on the relative assets of each fund
computed on a daily basis. These fees and expenses for the calendar year
2010 are estimated to be a total of $1,178,870 for all funds. Directors’
expenses are expected to increase in 2010 due to an increase in the amount of
directors’ and officers’ liability insurance coverage and the incurrence of the
independent directors’ deferred compensation expense. 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. Effective
as of April 1, 2010, US12NG is also responsible for paying its portion of any
payments that may become due to the independent directors pursuant to the
deferred compensation agreements entered into between the independent directors,
the General Partner and US12NG, USOF, USNG, US12OF, UGA, USHO, USSO and
USBO.
US12NG
also incurs commissions to brokers for the purchase and sale of Futures
Contracts, Other Natural Gas-Related Investments or Treasuries. During the
three months ended September 30, 2010, total commissions paid to brokers
amounted to $2,660. As an annualized percentage of total net assets,
the figure for the three months ended September 30, 2010 represents
approximately 0.03% 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 investments in Other Natural
Gas-Related Investments, including over-the-counter swaps, during the three
months ended September 30, 2010.
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 were borne by
the General Partner, are paid by US12NG. These costs are estimated to be
$155,000 for the calendar year 2010. The General Partner, though under no
obligation to do so, agreed to pay certain expenses, to the extent that such
expenses exceed 0.15% (15 basis points) of US12NG’s NAV, on an annualized basis,
through at least December 31, 2010. The General Partner has no obligation
to continue such payment into subsequent periods.
19
Dividend and 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 bank.
The Treasuries, cash and/or cash equivalents earn income that accrues on a daily
basis. For the three months ended September 30, 2010, US12NG earned $4,718
in dividend and interest income on such cash and/or cash equivalents.
Based on US12NG’s average daily total net assets, this was equivalent to an
annualized yield of 0.06%. US12NG did not purchase Treasuries during the three
months ended September 30, 2010 and held only cash and/or cash equivalents
during this time period.
Tracking US12NG’s
Benchmark
US12NG’s
management seeks to manage US12NG’s 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’s management seeks to manage the portfolio such that
over any rolling period of 30 valuation days, the average daily change in
US12NG’s 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-valuation 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
natural gas Futures Contracts and Other Natural Gas-Related
Investments.
For the
30 valuation days ended September 30, 2010, the simple average daily change in
the average of the Benchmark Futures Contracts was -0.354%, while the simple
average daily change in the NAV of US12NG over the same time period was
-0.357%. 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 daily
movement of the Benchmark Futures Contracts, the average error in daily tracking
by the NAV was -0.366%, 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 Contracts for the
30-valuation day period ended September 30, 2010. The second chart below
shows the monthly total returns of US12NG as compared to the monthly value of
the Benchmark Futures Contracts since inception.
Since the commencement of the
offering of US12NG units to the public on November 18, 2009 to September
30, 2010, the simple average daily change in the Benchmark Futures Contracts was
-0.149%, while the simple average daily change in the NAV of US12NG over the
same time period was -0.152%. The average daily difference was -0.003% (or
-0.3basis 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 -0.332%, meaning that over this time period
US12NG’s tracking error was within the plus or minus 10% range established as
its benchmark tracking goal.
20
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
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
nine months ended September 30, 2010, the actual total return of US12NG as
measured by changes in its NAV was -36.15%. This is based on an initial
NAV of $53.77 on December 31, 2009 and an ending NAV as of September
30, 2010 of $34.33. 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
Contracts, US12NG would have had an estimated NAV of $4.34 as of September 30,
2010, for a total return over the relevant time period of -36.023%. The
difference between the actual NAV total return of US12NG of -36.15% and the
expected total return based on the Benchmark Futures Contracts of -36.023% was
an error over the time period of -0.131%, which is to say that US12NG’s actual
total return underperformed 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
that US12NG pays, offset in part by the income that US12NG collects on its cash
and cash equivalent holdings. During the nine months ended September 30,
2010, US12NG received dividend and interest income of $10,365, which is
equivalent to a weighted average income rate of 0.04% for such period. In
addition, during the nine months ended September 30, 2010, US12NG also collected
$6,000 from its Authorized Purchasers for creating or redeeming baskets of
units. This income also contributed to US12NG’s actual return.
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 nine months
ended September 30, 2010, US12NG incurred total net expenses of $220,456. Income
from dividends and interest and Authorized Purchaser collections net of expenses
was $(204,091), which is equivalent to an annualized weighted average net income
rate of (0.79)% for the nine months ended September 30, 2010.
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
21
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. During the nine months ended September 30, 2010, 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 dividend and interest income on its cash and cash
equivalents. US12NG is not required to distribute any portion of its
income to its unitholders and did not make any distributions to unitholders
during the nine months ended September 30, 2010. 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 nine months ended September 30, 2010, US12NG earned,
on an annualized basis, approximately 0.04% on its cash holdings. It also
incurred cash expenses on an annualized basis of 0.68% for management fees and
approximately 0.04% in brokerage commission costs related to the purchase and
sale of futures contracts, and 0.13% for other net expenses. The foregoing fees
and expenses resulted in a net yield on an annualized basis of approximately
-0.81% 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.
22
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 nine months
ended September 30, 2010, US12NG did not hold any Other Natural Gas-Related
Investments. If US12NG increases in size, and due to its obligations to
comply with regulatory limits, US12NG may invest in Other Natural Gas-Related
Investments which may have the effect of increasing transaction related expenses
and may result in increased tracking error.
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 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 million British thermal units (“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 income earned on 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 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 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 income earned on cash and/or cash equivalents), 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.
23
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
24
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 annual results of owning a portfolio consisting of the near month
contract and a portfolio containing the near 12 months’ worth of
contracts. In addition, the chart shows the annual change in the spot
price of natural gas. 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 contracts would sell the near month contract at expiration and
replace it with the contract that becomes the new twelfth month
contract.
25
*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. While the
investment objective of US12NG is not to have the market price of its units
match, dollar for dollar, changes in the spot price of natural gas, contango
impacted the total return on an investment in US12NG units during the nine
months ended September 30, 2010 relative to a hypothetical direct
investment in natural gas. For example, an investment in US12NG units made
on December 31, 2009 and held to September 30, 2010 decreased based upon the
changes in the NAV for US12NG units on those days, by approximately 36.15%,
while the spot price of natural gas for immediate delivery during the same
period decreased by approximately 30.51% and the average price of the Benchmark
Futures Contracts decreased by approximately 37.77 (note: this comparison
ignores the potential costs associated with physically owning and storing
natural gas, which could be substantial).
26
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 prices of the Benchmark Futures
Contracts since the impact of backwardation and contango tend 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 nine months ended September 30, 2010, natural gas prices in the United
States were impacted by several factors. During the third quarter of 2010,
the amount of natural gas in storage rose to higher than average levels versus
the previous five years. Colder temperatures during January and February
2010, followed by warmer temperatures during March 2010, contributed to the
decline in prices. In addition, increased natural gas production also
contributed to a decline in natural gas prices during the nine months ended
September 30, 2010, with prices reaching a low at the end of the quarter of
$3.651 on August 27, 2010.
Natural Gas Pr
ice Movements in Comparison to
O
ther 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 crude oil and unleaded gasoline, and a slightly
stronger positive correlation to heating oil.
|
10 Year Correlation
Matrix 2000-2009
|
Large
Cap U.S.
Equities
(S&P
500)
|
U.S.
Gov’t.
Bonds
(EFFAS
U.S.
Gov’t.
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.
Gov’t. Bonds (EFFAS U.S. Gov’t. 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
27
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 two energy commodities of crude oil, gasoline and
heating oil.
|
Correlation Matrix 12
months ended
September 30, 2010
|
Large
Cap U.S.
Equities
(S&P
500)
|
U.S.
Gov't.
Bonds
(EFFAS
U.S.
Gov’t.
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 | -0.504 | 0.973 | 0.715 | 0.717 | 0.676 | -0.075 | |||||||||||||||||||||
|
U.S.
Gov't. Bonds (EFFAS U.S. Gov’t. Bond Index)
|
1.000 | -0.504 | -0.559 | -0.587 | -0.569 | -0.282 | ||||||||||||||||||||||
|
Global
Equities (FTSE World Index)
|
1.000 | 0.743 | 0.748 | 0.687 | -0.074 | |||||||||||||||||||||||
|
Crude
Oil
|
1.000 | 0.943 | 0.958 | 0.115 | ||||||||||||||||||||||||
|
Heating
Oil
|
1.000 | 0.914 | 0.003 | |||||||||||||||||||||||||
|
Unleaded
Gasoline
|
1.000 | -0.004 | ||||||||||||||||||||||||||
|
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 natural gas 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 Benchmark Futures Contracts,
then their use could lead to greater tracking error. As noted above, the
General Partner also believes that the changes in percentage terms in the
average of the prices of the Benchmark Futures Contracts will closely correlate
with changes in percentage terms in the spot price of natural gas.
Critical
Accounting Policies
Preparation
of the condensed financial statements and related disclosures in compliance with
accounting principles generally accepted in the United States of America
requires the application of appropriate accounting rules and guidance, as well
as the use of estimates. US12NG’s application of these policies involves
judgments and actual results may differ from the estimates used.
28
The
General Partner has evaluated the nature and types of estimates that
it makes in preparing US12NG’s condensed financial statements and related
disclosures and has determined that the valuation of its investments which
are not traded on a United States or internationally recognized futures exchange
(such as forward contracts and over-the-counter contracts) involves a critical
accounting policy. The values which are used by US12NG for its Futures
Contracts are provided by its commodity broker who uses market prices when
available, while over-the-counter contracts are valued based on the present
value of estimated future cash flows that would be received from or paid to a
third party in settlement of these derivative contracts prior to their delivery
date and valued on a daily basis. In addition, US12NG estimates interest and
dividend income on a daily basis using prevailing 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 Futures Contracts or the purchase of additional 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 baskets consisting
of 100,000 units (“Creation Baskets”) and (ii) income earned on 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 US12NG’s NAV is held in cash and
cash equivalents that are used as margin and as collateral for its trading
in Natural Gas Interests. The balance of the net assets is held in
US12NG’s account at its custodian bank. Income received from US12NG’s money
market funds is paid to US12NG. During the nine months ended September 30,
2010, US12NG’s expenses exceeded the income US12NG earned and the cash earned
from the sale of Creation Baskets. During the nine months ended September
30, 2010, US12NG was forced to use other assets to pay cash expenses, which
could cause a drop in US12NG’s NAV over time. To the extent expenses have
exceeded income, US12NG’s NAV will be negatively impacted.
US12NG’s
investments 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 nine months ended September
30, 2010, 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.
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 is under no obligation to pay US12NG’s current or future expenses.
US12NG is 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) 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 US12NG’s marketing agent, administrator and custodian
and registration expenses relating to the initial offering of units.
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.
29
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 attempts to manage the credit risk of US12NG by following
various trading limitations and policies. In particular, US12NG generally posts
margin and/or holds liquid assets that are approximately equal to the market
value of its obligations to counterparties under the Futures Contracts and Other
Natural Gas-Related Investments it holds. The General Partner has
implemented procedures that include, but are not limited to, executing and
clearing trades only with creditworthy parties and/or requiring the posting of
collateral or margin by such parties for the benefit of 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 their
other assets. In addition, the CFTC requires commodity brokers to hold in
a secure account US12NG’s assets related to foreign Futures Contracts
trading.
If, in
the future, US12NG purchases over-the-counter contracts, see “Item 3.
Quantitative and Qualitative Disclosures About Market Risk” of this quarterly
report on Form 10-Q for a discussion of over-the-counter contracts.
As of
September 30, 2010, US12NG had deposits in domestic and foreign financial
institutions, including cash investments in money market funds, in the amount of
$49,122,852. This amount is subject to loss should these institutions cease
operations.
30
Off
Balance Sheet Financing
As of
September 30, 2010, 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 0.75% of US12NG’s NAV on its
average daily net assets. Since inception through April 30, 2010, the
General Partner was charging US12NG a management fee at a reduced rate of 0.60%
per annum of average daily net assets. Effective May 1, 2010, the General
Partner resumed charging its standard rate of 0.75% per annum of average daily
net assets. The difference of 0.15% per annum of average daily net assets
since inception through April 30, 2010 was waived by the General Partner and
will not be recouped from US12NG.
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 US12NG’s marketing agent, ALPS
Distributors, Inc., and the fees of the custodian and transfer agent, Brown
Brothers Harriman & Co. (“BBH&Co.”), as well as BBH&Co.’s fees for
performing administrative services, including those in connection with the
preparation of US12NG’s condensed 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, other than USBO, 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 borne 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 exceed 0.15% (15 basis points) of
US12NG’s NAV, on an annualized basis, through at least December 31, 2010.
The General Partner has no obligation to continue such payments 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 and up front fees, 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 Condensed Financial Statements (Unaudited).
31
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.
As of
September 30, 2010, US12NG’s portfolio consisted of 961 Natural Gas Futures NG
contracts traded on the NYMEX. For a list of US12NG’s current holdings, please
see US12NG’s website at www.unitedstates12monthnaturalgasfund.com.
Over-the-Counter
Derivatives
In the
future, US12NG may purchase over-the-counter contracts. Unlike most of the
exchange-traded futures contracts, cleared swaps 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 may require 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 transactions under the agreement through an
established futures clearinghouse such as those connected to the NYMEX or the
ICE Futures. In that event, US12NG would no longer bear the 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 General
Partner’s board of directors (the “Board”). Furthermore, the General Partner on
behalf of US12NG only enters into over-the-counter contracts with counterparties
who are, or are affiliates of, (a) banks regulated by a United States federal
bank regulator, (b) broker-dealers regulated by the SEC, (c) insurance companies
domiciled in the United States, or (d) producers, users or traders of energy,
whether or not regulated by the CFTC. Any entity acting as a counterparty
shall be regulated in either the United States or the United Kingdom unless
otherwise approved by the Board after consultation with its legal counsel.
Existing counterparties are also reviewed periodically by the General
Partner.
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 changes in the average of the prices of the Benchmark
Futures Contracts.
32
US12NG
may employ spreads or straddles in its trading to mitigate the differences in
its investment portfolio and its goal of tracking the changes in the average of
the prices 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 nine months ended September 30, 2010, US12NG did not employ any hedging
methods such as those described above since all of its investments were made
over an exchange. Therefore, during such period, US12NG was not exposed to
counterparty risk.
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 Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time period specified in
the SEC’s rules and forms.
The duly
appointed officers of the General Partner, including its chief executive
officer and chief financial officer, who perform functions equivalent
to those of a principal executive officer and principal financial officer of
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 quarterly report on Form 10-Q.
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.
33
Not
applicable.
There has
not been a material change from the risk factors previously disclosed in
US12NG’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009,
filed on March 30, 2010, and US12NG's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2010, filed on August 16, 2010.
Not
applicable.
Not
applicable.
Monthly
Account Statements
Pursuant
to the requirement under Rule 4.22 under the Commodity Exchange Act, 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.
Listed
below are the exhibits which are filed as part of this quarterly report on Form
10-Q (according to the number assigned to them in Item 601 of Regulation
S-K):
|
Exhibit
|
||
|
Number
|
Description of Document
|
|
|
31.1*
|
Certification
by Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2*
|
Certification
by Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1*
|
Certification
by Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2*
|
|
Certification
by Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
Filed herewith.
34
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
United
States 12 Month Natural Gas Fund, LP (Registrant)
By:
United States Commodity Funds LLC, its General Partner
|
By:
|
/s/ Nicholas D. Gerber |
Nicholas
D. Gerber
President
and Chief Executive Officer
(Principal
executive officer)
Date: November 15 , 2010
|
By:
|
/s/ Howard Mah |
Howard
Mah
Chief
Financial Officer
(Principal
financial and accounting officer)
Date:
November
15
,
2010
35
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Condensed Financial StatementsNote 1 - Organization and BusinessNote 2 - Summary Of Significant Accounting PoliciesNote 3 - Fees Paid By The Fund and Related Party TransactionsNote 4 - Contracts and AgreementsNote 5 - Financial Instruments, Off-balance Sheet Risks and ContingenciesNote 6 Fair Value Of Financial InstrumentsNote 7- Financial HighlightsNote 8 Recent Accounting PronouncementsNote 9 Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4 . Controls and ProceduresPart II. Other InformationPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. ReservedItem 5. Other InformationItem 6. Exhibits