UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
x
|
Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31,
2009.
|
or
|
¨
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from
to
.
|
Commission
file number: 001-33096
United
States Natural Gas Fund, LP
(Exact
name of registrant as specified in its charter)
|
Delaware
|
20-5576760
|
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
1320
Harbor Bay Parkway, Suite 145
Alameda,
California 94502
(Address
of principal executive offices) (Zip code)
(510)
522-9600
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
|
Units
|
NYSE
Arca, Inc.
|
|
(Title
of each class)
|
(Name
of exchange on which
registered)
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. ¨ Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. ¨ Yes
x
No
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
x
Yes ¨ No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). ¨Yes ¨ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ¨
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 x
|
Accelerated
filer ¨
|
|
Non-accelerated
filer ¨
|
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
The
aggregate market value of the registrant’s units held by non-affiliates of the
registrant as of June 30, 2009 was: $3,742,126,000.
The
registrant had 409,400,000 outstanding units as of February 26,
2010.
DOCUMENTS
INCORPORATED BY REFERENCE:
None.
UNITED
STATES NATURAL GAS FUND, LP
Table
of Contents
|
|
Page
|
|
|
Part
I.
|
||
|
Item
1. Business.
|
1
|
|
|
Item
1A. Risk Factors.
|
53
|
|
|
Item
1B. Unresolved Staff Comments.
|
70
|
|
|
Item
2. Properties.
|
70
|
|
|
Item
3. Legal Proceedings.
|
70
|
|
|
Item
4. Reserved.
|
70
|
|
|
Part
II.
|
||
|
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
|
70
|
|
|
Item
6. Selected Financial Data.
|
71
|
|
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
|
71
|
|
|
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk.
|
92
|
|
|
Item
8. Financial Statements and Supplementary Data.
|
95
|
|
|
Item
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
|
115
|
|
|
Item
9A. Controls and Procedures.
|
115
|
|
|
Item
9B. Other Information.
|
116
|
|
|
Part
III.
|
||
|
Item
10. Directors, Executive Officers and Corporate
Governance.
|
116
|
|
|
Item
11. Executive Compensation.
|
122
|
|
|
Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
122
|
|
|
Item
13. Certain Relationships and Related Transactions, and Director
Independence.
|
122
|
|
|
Item
14. Principal Accountant Fees and Services.
|
123
|
|
|
Part
IV.
|
||
|
Item
15. Exhibits and Financial Statement Schedules.
|
123
|
|
|
Exhibit
Index.
|
124
|
|
|
Signatures
|
125
|
What
is USNG?
The
United States Natural Gas Fund, LP (“USNG”) is a Delaware limited partnership
organized on September 11, 2006. USNG maintains its main business office at 1320
Harbor Bay Parkway, Suite 145, Alameda, California 94502. USNG is a commodity
pool that issues limited partnership interests (“units”) traded on the NYSE Arca
Inc. (the “NYSE Arca”). It operates pursuant to the terms of the Second Amended
and Restated Agreement of Limited Partnership dated as of October 13, 2008 (the
“LP Agreement”), which grants full management control to United States Commodity
Funds LLC (the “General Partner”).
The
investment objective of USNG 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 price of the futures contract for natural gas traded on the
New York Mercantile Exchange (the “NYMEX”), less USNG’s expenses. USNG’s units
began trading on April 18, 2007. The General Partner is the general partner of
USNG and is responsible for the management of USNG.
Who
is the General Partner?
The
General Partner is a single member limited liability company that was formed in
the state of Delaware on May 10, 2005. Prior to June 13, 2008, the General
Partner was known as Victoria Bay Asset Management, LLC. It maintains its main
business office at 1320 Harbor Bay Parkway, Suite 145, Alameda, California
94502. The General Partner is a wholly-owned subsidiary of Wainwright Holdings,
Inc., a Delaware corporation (“Wainwright”). Mr. Nicholas Gerber (discussed
below) controls Wainwright by virtue of his ownership of Wainwright’s shares.
Wainwright is a holding company. Wainwright previously owned an
insurance company organized under Bermuda law, which has been liquidated, and a
registered investment adviser firm named Ameristock Corporation which has been
distributed to the Wainwright shareholders. The General Partner is a member of
the National Futures Association (the “NFA”) and registered as a commodity pool
operator (“CPO”) with the Commodity Futures Trading Commission (the “CFTC”) on
December 1, 2005.
On May
12, 2005, the General Partner formed the United States Oil Fund, LP (“USOF”),
another limited partnership that is a commodity pool
and issues units traded on the NYSE Arca. The investment
objective of USOF is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of light, sweet
crude oil delivered to Cushing, Oklahoma, as measured by the changes in the
price of the futures contract on light, sweet crude oil as traded on the NYMEX,
less USOF’s expenses. USOF’s units began trading on April 10, 2006. The General
Partner is the general partner of USOF and is responsible for the management of
USOF.
On June
27, 2007, the General Partner formed the United States 12 Month Oil Fund, LP
(“US12OF”), also a limited partnership that is a commodity pool and issues units
traded on the NYSE Arca. The investment objective of US12OF is for the changes
in percentage terms of its units’ NAV to reflect the changes in percentage terms
of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as
measured by the changes in the average of the prices of 12 futures contracts on
light, sweet crude oil traded on the NYMEX, consisting of the near month
contract to expire and the contracts for the following 11 months, for a total of
12 consecutive months’ contracts, less US12OF’s expenses. US12OF’s units began
trading on December 6, 2007. The General Partner is the general partner of
US12OF and is responsible for the management of US12OF.
On April
12, 2007, the General Partner formed the United States Gasoline Fund, LP
(“UGA”), also a limited partnership that is a commodity pool and issues units
traded on the NYSE Arca. The investment objective of UGA is for the changes
in percentage terms of its units’ NAV to reflect the changes in percentage terms
of the price of unleaded gasoline delivered to the New York harbor, as measured
by the changes in the price of the futures contract on gasoline traded on the
NYMEX, less UGA’s expenses. UGA’s units began trading on February 26, 2008. The
General Partner is the general partner of UGA and is responsible for the
management of UGA.
1
On April
13, 2007, the General Partner formed the United States Heating Oil Fund, LP
(“USHO”), also a limited partnership that is a commodity pool and issues units
traded on the NYSE Arca. The investment objective of USHO is for the
changes in percentage terms of its units’ NAV to reflect the changes in
percentage terms of the spot price of heating oil (also known as No. 2 fuel
oil) delivered to the New York harbor, as measured by the changes in the price
of the futures contract on heating oil traded on the NYMEX, less USHO’s
expenses. USHO’s units began trading on April 9, 2008. The General Partner
is the general partner of USHO and is responsible for the management of
USHO.
On June
30, 2008, the General Partner formed the United States Short Oil Fund, LP
(“USSO”), also a limited partnership that is a commodity pool and issues units
traded on the NYSE Arca. The investment objective of USSO is for the
changes in percentage terms of its units’ NAV to inversely reflect the changes
in percentage terms of the spot price of light, sweet crude oil delivered to
Cushing, Oklahoma, as measured by the changes in the price of the futures
contract on light, sweet crude oil as traded on the NYMEX, less USSO’s
expenses. USSO’s units began trading on September 24,
2009. The General Partner is the general partner of USSO and is
responsible for the management of USSO.
On June
27, 2007, the General Partner formed the United States 12 Month Natural Gas
Fund, LP (“US12NG”), also a limited partnership that is a commodity pool and
issues units traded on the NYSE Arca. The investment objective of US12NG is for
the changes in percentage terms of its units’ NAV to reflect the changes in
percentage terms of the spot price of natural gas delivered at the Henry
Hub, Louisiana, as measured by the changes in the average of the prices of 12
futures contracts on natural gas traded on the NYMEX, consisting of
the near month contract to expire and the contracts for the following 11 months,
for a total of 12 consecutive months’ contracts, less US12NG’s expenses.
US12NG’s units began trading on November 18, 2009. The General
Partner is the general partner of US12NG and is responsible for the management
of US12NG.
USOF,
US12OF, UGA, USHO, USSO and US12NG are collectively referred to herein as the
“Related Public Funds”. For more information about each of the Related Public
Funds, investors in USNG may call 1-800-920-0259 or go online to
www.unitedstatescommodityfunds.com.
The
General Partner has filed a registration statement for two other exchange traded
security funds, the United States Brent Oil Fund, LP (“USBO”) and the United
States Commodity Index Funds Trust (“USCI”). The investment objective of USBO
will be for the daily changes in percentage terms of its units’ NAV to reflect
the daily changes in percentage terms of the spot price of Brent crude oil, as
measured by the changes in the price of the futures contract on Brent crude oil
traded on the ICE Futures, less USBO’s expenses. The investment
objective of USCI will be for the daily changes in percentage terms of its
units’ NAV to reflect the daily changes in percentage terms of the SummerHaven
Dynamic Commodity Index (“SDCI”) Total Return, less USCI’s
expenses.
The
General Partner is required to evaluate the credit risk of USNG to the futures
commission merchant, oversee the purchase and sale of USNG’s units by certain
authorized purchasers (“Authorized Purchasers”), review daily positions and
margin requirements of USNG and manage USNG’s investments. The General Partner
also pays the fees of ALPS Distributors, Inc., which acts as the marketing agent
for USNG (the “Marketing Agent”) and Brown Brothers Harriman & Co.
(“BBH&Co.”), which acts as the administrator (the “Administrator”)
and the custodian (the “Custodian”) for USNG.
Limited
partners have no right to elect the General Partner on an annual or any other
continuing basis. If the General Partner voluntarily withdraws, however, the
holders of a majority of USNG’s outstanding units (excluding for purposes of
such determination units owned, if any, by the withdrawing General Partner
and its affiliates) may elect its successor. The General Partner may not be
removed as general partner except upon approval by the affirmative vote of the
holders of at least 66 and 2/3 percent of USNG’s outstanding units (excluding
units owned, if any, by the General Partner and its affiliates), subject to
the satisfaction of certain conditions set forth in the LP
Agreement.
The
business and affairs of the General Partner are managed by a board of directors
(the “Board”), which is comprised of four management directors, some of whom are
also its executive officers (the “Management Directors”), and three independent
directors who meet the independent director requirements established by the NYSE
Arca and the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Notwithstanding the foregoing, the Management Directors have the authority to
manage the General Partner pursuant to its limited liability company agreement.
Through its Management Directors, the General Partner manages the day-to-day
operations of USNG. The Board has an audit committee which is made up of the
three independent directors (Peter M. Robinson, Gordon L. Ellis and Malcolm R.
Fobes III). For additional information relating to the audit committee, please
see “Item 10. Directors, Executive Officers and Corporate Governance – Audit
Committee” in this annual report on Form 10-K.
2
How
Does USNG Operate?
USNG
invests in Natural Gas Interests to the fullest extent possible without being
leveraged or unable to satisfy its current or potential margin or collateral
obligations with respect to its investments in Futures Contracts and Other
Natural Gas-Related Investments. In pursuing this objective, the primary focus
of the General Partner is the investment in Futures Contracts and the management
of USNG’s investments in short-term obligations of the United States of two
years or less (“Treasuries”), cash and/or cash equivalents for margining
purposes and as collateral.
The
investment objective of USNG is for the changes in percentage terms of its
units’ NAV to reflect the changes in percentage terms of the spot price of
natural gas delivered at the Henry Hub, Louisiana as measured by the changes in
the Futures Contract on natural gas traded on the NYMEX that is the near month
contract to expire, except when the near month contract is within two weeks of
expiration, in which case the futures contract will be the next month contract
to expire, less USNG’s expenses. It is not the intent of USNG to be operated in
a fashion such that its NAV will equal, in dollar terms, the spot price of
natural gas or any particular futures contract based on natural
gas.
USNG
seeks to achieve its investment objective by investing in a mix of Futures
Contracts and Other Natural Gas-Related Investments such that the changes in its
NAV will closely track the changes in the price of the NYMEX Futures Contract
for natural gas delivered to Henry Hub Louisiana (the “Benchmark Futures
Contract”). The General Partner believes changes in the price of the Benchmark
Futures Contract have historically exhibited a close correlation with the
changes in the spot price of natural gas. On any valuation day (a valuation day
is any NYSE Arca trading day as of which USNG calculates its NAV as described
herein), the Benchmark Futures Contract is the near month contract for natural
gas traded on the NYMEX unless the near month contract will expire within two
weeks of the valuation day, in which case the Benchmark Futures Contract is the
next month contract for natural gas on the NYMEX.
As a
specific benchmark, the General Partner endeavors to place USNG’s trades in
Futures Contracts and Other Natural Gas-Related Investments and otherwise manage
USNG’s investments so that A will be within plus/minus 10 percent of B,
where:
|
|
·
|
A
is the average daily change in USNG’s NAV for any period of 30 successive
valuation days; i.e., any NYSE Arca trading day as of which USNG
calculates its NAV, and
|
|
|
·
|
B
is the average daily change in the price of the Benchmark Futures Contract
over the same period.
|
The
General Partner believes that market arbitrage opportunities cause daily changes
in USNG’s unit price on the NYSE Arca to closely track daily changes in USNG’s
NAV per unit. The General Partner further believes that the daily changes in
prices of the Benchmark Futures Contract have historically closely tracked the
daily changes in the spot price of natural gas. The General Partner believes
that the net effect of these two relationships and the expected relationship
described above between USNG’s NAV and the Benchmark Futures Contract will be
that the daily changes in the price of USNG’s units on the NYSE Arca will
continue to closely track the daily changes in the spot price of 10,000 million
British thermal units (“mmBtu”) of natural gas, less USNG’s expenses. The
following two graphs demonstrate the correlation between the daily changes in
the NAV of USNG and the daily changes in the Benchmark Futures Contract both
since the initial public offering of USNG’s units on April 18, 2007 through
December 31, 2009 and during the last thirty valuation days ended December 31,
2009.
3
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
4
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
An
investment in the units provides a means for diversifying an investor’s
portfolio or hedging exposure to changes in natural gas prices. An investment in
the units allows both retail and institutional investors to easily gain this
exposure to the natural gas market in a transparent, cost-effective
manner.
The
expected correlation of the price of USNG’s units, USNG’s NAV and the price of
the Benchmark Futures Contract and the spot price of natural gas is illustrated
in the following diagram:
5
The
General Partner employs a “neutral” investment strategy intended to track
changes in the price of the Benchmark Futures Contract regardless of whether the
price goes up or goes down. USNG’s “neutral” investment strategy is designed to
permit investors generally to purchase and sell USNG’s units for the purpose of
investing indirectly in natural gas in a cost-effective manner, and/or to permit
participants in the natural gas or other industries to hedge the risk of losses
in their natural gas-related transactions. Accordingly, depending on the
investment objective of an individual investor, the risks generally associated
with investing in natural gas and/or the risks involved in hedging may exist. In
addition, an investment in USNG involves the risk that the changes in the price
of USNG’s units will not accurately track the changes in the Benchmark Futures
Contract.
From
inception to March 2009, the Benchmark Futures Contract of USNG was changed from
the near month contract to expire to the next month contract to expire, starting
on the date two weeks prior to the expiration of the near month
contract. The change in the Benchmark Futures Contract occurred in
its entirety from one day until the next day.
Since
March 2009, the Benchmark Futures Contract has changed each month from the near
month contract to the next month contract over a four-day period. The
Benchmark Futures Contract changes starting at the end of the day on the date
two weeks prior to expiration of the near month contract for that month. During
the first three days of the period, the applicable value of the Benchmark
Futures Contract is based on a combination of the near month contract and the
next month contract as follows: (1) day 1 consists of 75% of the then near month
contract’s price plus 25% of the price of the next month contract, divided by
75% of the near month contract’s prior day’s price plus 25% of the price of the
next month contract, (2) day 2 consists of 50% of the then near month
contract’s price plus 50% of the price of the next month contract, divided by
50% of the near month contract’s prior day’s price plus 50% of the price of the
next month contract, and (3) day 3 consists of 25% of the then near
month contract’s price plus 75% of the price of the next month contract, divided
by 25% of the near month contract’s prior day’s price plus 75% of the price of
the next month contract. On day 4, the Benchmark Futures Contract is
the next month contract to expire at that time and that contract remains the
Benchmark Futures Contract until the beginning of the following month’s change
in the Benchmark Futures Contract over a four-day period.
On each
day during the four-day period, the General Partner “rolls” USNG’s positions in
Natural Gas Interests by closing, or selling, a percentage of USNG’s positions
in Natural Gas Interests and reinvesting the proceeds from closing those
positions in new Natural Gas Interests that reflect the change in the Benchmark
Futures Contract.
The
anticipated dates that the monthly four-day roll period will commence for 2010
will be posted on USNG’s website at www.unitedstatesnaturalgasfund.com,
and are subject to change without notice.
USNG’s
total portfolio composition is disclosed on its website each day that the NYSE
Arca is open for trading. The website disclosure of portfolio holdings is made
daily and includes, as applicable, the name and value of each Natural Gas
Interest, the specific types of Other Natural Gas-Related Investments and
characteristics of such Other Natural Gas-Related Investments, Treasuries, and
amount of cash and/or cash equivalents held in USNG’s portfolio. USNG’s website
is publicly accessible at no charge. USNG’s assets are held in segregated
accounts pursuant to the Commodity Exchange Act (the “CEA”) and CFTC
regulations.
The units
issued by USNG may only be purchased by Authorized Purchasers and only in blocks
of 100,000 units called Creation Baskets. The amount of the purchase payment for
a Creation Basket is equal to the aggregate NAV of units in the Creation Basket.
Similarly, only Authorized Purchasers may redeem units and only in blocks of
100,000 units called Redemption Baskets. The purchase price for
Creation Baskets, and the redemption price for Redemption Baskets is the actual
NAV of the units purchased or redeemed calculated at the end of the business day
when notice for a purchase or redemption is received by USNG. In addition,
Authorized Purchasers pay USNG a $1,000 fee for each order placed to create
one or more Creation Baskets or redeem one or more Redemption Baskets. The NYSE
Arca publishes an approximate NAV intra-day based on the prior day’s NAV and the
current price of the Benchmark Futures Contract, but the basket price is
determined based on the actual NAV at the end of the day.
6
While
USNG issues units only in Creation Baskets, units may also be purchased and sold
in much smaller increments on the NYSE Arca. These transactions, however, are
effected at the bid and ask prices established by specialist firm(s). Like any
listed security, units can be purchased and sold at any time a secondary market
is open.
What
is USNG’s Investment Strategy?
In
managing USNG’s assets, the General Partner does not use a technical trading
system that issues buy and sell orders. The General Partner instead employs a
quantitative methodology whereby each time a Creation Basket is sold, the
General Partner purchases natural gas interests, such as the Benchmark Futures
Contract, that have an aggregate market value that approximates the amount of
Treasuries and/or cash received upon the issuance of the Creation
Basket.
As an
example, assume that a Creation Basket is sold by USNG, and that USNG’s closing
NAV per unit is $50.00. In that case, USNG would receive $5,000,000 in proceeds
from the sale of the Creation Basket ($50.00 NAV per unit multiplied by 100,000
units, and excluding the Creation Basket fee of $1,000). If one were to assume
further that the General Partner wants to invest the entire proceeds from the
Creation Basket in the Benchmark Futures Contract and that the market value of
the Benchmark Futures Contract is $59,950, USNG would be unable to buy the exact
number of Benchmark Futures Contracts with an aggregate market value equal to
$5,000,000. Instead, USNG would be able to purchase 83 Benchmark
Futures Contracts with an aggregate market value of $4,975,850. Assuming a
margin requirement equal to 10% of the value of the Benchmark Futures Contract,
USNG would be required to deposit $497,585 in Treasuries and cash with the
futures commission merchant through which the Benchmark Futures Contracts were
purchased. The remainder of the proceeds from the sale of the Creation Basket,
$4,502,415, would remain invested in cash, cash equivalents, and Treasuries as
determined by the General Partner from time to time based on factors such as
potential calls for margin or anticipated redemptions.
The
specific Futures Contracts purchased depends on various factors, including a
judgment by the General Partner as to the appropriate diversification of USNG’s
investments in futures contracts with respect to the month of expiration, and
the prevailing price volatility of particular contracts. While the General
Partner has made significant investments in NYMEX Futures Contracts, as USNG
reaches position limits on the NYMEX, or for other reasons, it
may invest in Futures Contracts traded on other exchanges or may invest in Other
Natural Gas-Related Investments such as cleared swap contracts and other
contracts in the “over-the-counter” market.
The
General Partner does not anticipate letting USNG’s Futures Contracts expire and
taking delivery of the underlying commodity. Instead, the General Partner closes
existing positions, e.g., when it changes the
Benchmark Futures Contract or it otherwise determines it would be appropriate to
do so and reinvests the proceeds in new Futures Contracts or Other Natural
Gas-Related Investments. Positions may also be closed out to meet orders for
Redemption Baskets and in such case proceeds for such baskets will not be
reinvested.
By
remaining invested as fully as possible in Futures Contracts or Other Natural
Gas-Related Investments, the General Partner believes that the changes in
percentage terms in USNG’s NAV will continue to closely track the changes in
percentage terms in the prices of the Benchmark Futures Contract. The General
Partner believes that certain arbitrage opportunities result in the price of the
units traded on the NYSE Arca closely tracking the NAV of USNG. Additionally,
natural gas Futures Contracts traded on the NYMEX have closely tracked the spot
price of natural gas. Based on these expected interrelationships, the
General Partner believes that the changes in the price of USNG’s units as traded
on the NYSE Arca have closely tracked and will continue to closely track the
changes in the spot price of natural gas. For performance data
relating to USNG’s ability to track its benchmark, see “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Tracking USNG’s
Benchmark” in this annual report on Form 10-K.
What
are Futures Contracts?
Futures
Contracts are agreements between two parties. One party agrees to buy natural
gas from the other party at a later date at a price and quantity agreed upon
when the contract is made. Futures Contracts are traded on futures exchanges,
including the NYMEX. For example, natural gas Futures Contracts on the NYMEX
trade in units of 10,000 million British Thermal Units (“mmBtu”). The natural
gas Futures Contracts traded on the NYMEX are priced by floor brokers and other
exchange members both through an “open outcry” of offers to purchase or sell the
contracts and through an electronic, screen-based system that determines the
price by matching electronically offers to purchase and sell.
7
Certain
typical and significant characteristics of Futures Contracts are discussed
below. Additional risks of investing in Futures Contracts are included in “What
are the Risk Factors Involved with an Investment in USNG?”
Impact of Accountability Levels,
Position Limits and Price Fluctuation Limits. Futures
contracts include typical and significant characteristics. Most significantly,
the CFTC and U.S. designated contract markets such as the NYMEX have established
accountability levels and position limits on the maximum net long or net short
futures contracts in commodity interests that any person or group of persons
under common trading control (other than as a hedge, which an investment by USNG
is not) may hold, own or control. The net position is the difference between an
individual or firm’s open long contracts and open short contracts in any one
commodity. In addition, most U.S. futures exchanges, such as the NYMEX, limit
the daily price fluctuation for futures contracts. Currently, the ICE Futures
imposes position and accountability limits that are similar to those imposed by
the NYMEX but does not limit the maximum daily price fluctuation.
The
accountability levels for the Benchmark Futures Contract and other Futures
Contracts traded on the NYMEX are not a fixed ceiling, but rather a threshold
above which the NYMEX may exercise greater scrutiny and control over an
investor’s positions. The current accountability level for any one month in the
Benchmark Futures Contract) is 6,000 net contracts. In addition, the NYMEX
imposes an accountability level for all months of 12,000 net futures contracts
in natural gas. If USNG and the Related Public Funds exceed these accountability
levels for investments in the futures contract for natural gas, the NYMEX will
monitor USNG’s and the Related Public Funds’ exposure and ask for further
information on their activities, including the total size of all positions,
investment and trading strategy, and the extent of liquidity resources of USNG
and the Related Public Funds. If deemed necessary by the NYMEX, it could also
order USNG and the Related Public Funds to reduce their aggregate position back
to the accountability level. As of December 31, 2009, USNG and the Related
Public Funds held a net of 14,590 NYMEX Natural Gas Futures NG contracts and
35,858 NYMEX Natural Gas Futures NN contracts. As of December 31, 2009, USNG
held 62,455 natural gas cleared-swap contracts traded on the ICE
Futures.
If the
NYMEX or the ICE Futures orders USNG to reduce its position back to the
accountability level, or to an accountability level that the NYMEX or the ICE
Futures deems appropriate for USNG, such an accountability level may impact the
mix of investments in Natural Gas Interests made by USNG. To illustrate, assume
that the price of the Benchmark Futures Contract and the unit price of USNG are
each $10, and that the NYMEX has determined that USNG may not own more than
10,000 natural gas Futures Contracts. In such case, USNG could invest up to $1
billion of its daily net assets in the Benchmark Futures Contract (i.e., $10 per
contract multiplied by 10,000 (a Benchmark Futures Contract is a contract for
10,000 mmBTU) multiplied by 10,000 contracts) before reaching the accountability
level imposed by the NYMEX. Once the daily net assets of the portfolio exceed $1
billion in the Benchmark Futures Contract, the portfolio may not be able to make
any further investments in the Benchmark Futures Contract. If the NYMEX were to
impose limits at the $1 billion level (or another level), USNG anticipates that
it would invest the majority of its assets above that level in a mix of other
Futures Contracts or Other Natural Gas-Related Investments in order to meet its
investment objectives. U.S. futures exchanges, including the NYMEX,
currently do not implement fixed position limits for Futures Contracts held
outside of the last few days of trading in the near month contract to
expire. See “Risk
Factors—Risks Associated With Investing Directly or Indirectly in Natural
Gas—Regulation of the commodity interests and energy markets is extensive and
constantly changing; future regulatory developments are impossible to predict
but may significantly and adversely affect USNG.”
In
addition to accountability levels, the NYMEX and the ICE Futures impose position
limits on contracts held in the last few days of trading in the near month
contract to expire. It is unlikely that USNG will run up against such position
limits because USNG’s investment strategy is to close out its positions and
“roll” from the near month contract to expire to the next month contract during
a four-day period beginning two weeks from expiration of the
contract.
8
U.S.
futures exchanges, including the NYMEX, also limit the amount of price
fluctuation for Futures Contracts. For example, the NYMEX imposes a $3.00 per
mmBtu ($30,000 per contract) price fluctuation limit for natural gas Futures
Contracts. This limit is initially based off the previous trading day’s
settlement price. If any natural gas Futures Contract is traded, bid, or offered
at the limit for five minutes, trading is halted for five minutes. When trading
resumes it begins at the point where the limit was imposed and the limit is
reset to be $3.00 per mmBtu in either direction of that point. If another halt
were triggered, the market would continue to be expanded by $3.00 per mmBtu in
either direction after each successive five-minute trading halt. There is no
maximum price fluctuation limit during any one trading session.
U.S.
futures exchanges, including the NYMEX, currently do not implement fixed
position limits for Futures Contracts held outside of the last few days of
trading in the near month contract to expire. However, on January 26,
2010, the CFTC published a proposed rule that, if implemented, would set fixed
position limits on energy Futures Contracts, including the NYMEX Henry Hub
natural gas futures contract, NYMEX Light Sweet crude oil futures contract,
NYMEX New York Harbor No. 2 heating oil futures contract, and NYMEX New York
Harbor gasoline blendstock (“RBOB”) gasoline futures contract, along with any
contract based upon these contracts. The proposed position limits
would be set as a percentage of the open interest in these contracts for the
spot month, any single month, and all months combined. Additionally,
the proposed rule would aggregate positions in the enumerated contracts and
those based upon such contracts, including contracts listed on separate
exchanges. This proposal is currently undergoing a 90-day public
comment period.
USNG
anticipates that to the extent it invests in Futures Contracts other
than natural gas contracts (such as futures contracts for light, sweet
crude oil, heating oil, and gasoline) and Other Natural Gas-Related Investments,
it will enter into various non-exchange-traded derivative contracts to hedge the
short-term price movements of such natural gas Futures Contracts and Other
Natural Gas-Related Investments against the current Benchmark Futures
Contract.
|
Futures Contract
|
|
Position Accountability
Levels and Limits
|
Maximum Daily
Price Fluctuation
|
||
|
NYMEX
Natural Gas
(physically
settled)
|
Any
one month: 6,000 net futures / all months: 12,000 net futures, but not to
exceed 1,000 contracts in the last three days of trading in the spot
month
|
$3.00
per mmBtu ($30,000 per contract) for all months. If any contract is
traded, bid, or offered at the limit for five minutes, trading is halted
for five minutes. When trading resumes, the limit is expanded by $3.00 per
mmBtu in either direction. If another halt were triggered, the market
would continue to be expanded by $3.00 per mmBtu in either direction after
each successive five-minute trading halt. There will be no maximum price
fluctuation limits during any one trading session.
|
|||
|
ICE
Natural Gas (cleared swaps)
|
Any
one month: 6,000 net futures / all months: 12,000 net futures, but not to
exceed 1,000 contracts in the last three days of trading in the spot
month
|
There
is no maximum daily price fluctuation limit.
|
|||
|
NYMEX
Light, Sweet Crude Oil
(physically
settled)
|
Any
one month: 10,000 net futures / all months: 20,000 net futures, but not to
exceed 3,000 contracts in the last three days of trading in the spot
month.
|
$10.00
per barrel ($10,000 per contract) for all months. If any contract is
traded, bid, or offered at the limit for five minutes, trading is halted
for five minutes. When trading resumes, the limit is expanded by $10.00
per barrel in either direction. If another halt were triggered, the market
would continue to be expanded by $10.00 per barrel in either direction
after each successive five-minute trading halt. There will be no maximum
price fluctuation limits during any one trading session.
|
9
|
NYMEX
Light, Sweet Crude Oil
(financially
settled)
|
Any
one month: 20,000 net futures / all months: 20,000 net futures, but not to
exceed 2,000 contracts in the last three days of trading in the spot
month.
|
There
is no maximum daily price fluctuation limit.
|
|||
|
ICE
West Texas Intermediate (“WTI”) Crude Futures
(financially
settled)
|
Any
one month: 10,000 net futures / all months: 20,000 net futures, but not to
exceed 3,000 contracts in the last three days of trading in the spot
month.
|
There
is no maximum daily price fluctuation limit.
|
|||
|
ICE
Brent Crude Futures
(physically
settled)
|
There
are no position limits.
|
There
is no maximum daily price fluctuation limit.
|
|||
|
NYMEX
Heating Oil
(physically
settled)
|
Any
one month: 5,000 net futures / all months: 7,000 net futures, but not to
exceed 1,000 contracts in the last three days of trading in the spot
month
|
$0.25
per gallon ($10,500 per contract) for all months. If any contract is
traded, bid, or offered at the limit for five minutes, trading is halted
for five minutes. When trading resumes, the limit is expanded by $0.25 per
gallon in either direction. If another halt were triggered, the market
would continue to be expanded by $0.25 per gallon in either direction
after each successive five-minute trading halt. There will be no maximum
price fluctuation limits during any one trading session.
|
|||
|
NYMEX
Gasoline
(physically
settled)
|
Any
one month: 5,000 net futures / all months: 7,000 net futures, but not to
exceed 1,000 contracts in the last three days of trading in the spot
month.
|
$0.25
per gallon ($10,500 per contract) for all months. If any contract is
traded, bid, or offered at the limit for five minutes, trading is halted
for five minutes. When trading resumes, the limit is expanded by $0.25 per
gallon in either direction. If another halt were triggered, the market
would continue to be expanded by $0.25 per gallon in either direction
after each successive five-minute trading halt. There will be no maximum
price fluctuation limits during any one trading session.
|
Price Volatility. Despite
daily price limits, the price volatility of Futures Contracts generally has been
historically greater than that for traditional securities such as stocks and
bonds. Price volatility often is greater day-to-day as opposed to intra-day.
Futures Contracts tend to be more volatile than stocks and bonds because price
movements for natural gas are more currently and directly influenced by economic
factors for which current data is available and are traded by natural gas
futures traders throughout the day. These economic factors include changes in
interest rates; governmental, agricultural, trade, fiscal, monetary and exchange
control programs and policies; weather and climate conditions; changing supply
and demand relationships; changes in balances of payments and trade; U.S. and
international rates of inflation; currency devaluations and revaluations; U.S.
and international political and economic events; and changes in philosophies and
emotions of market participants. Because USNG invests a significant portion of
its assets in Futures Contracts, the assets of USNG, and therefore the prices of
USNG units, may be subject to greater volatility than traditional
securities.
Marking-to-Market Futures
Positions. Futures Contracts are marked to market at the end of each
trading day and the margin required with respect to such contracts is adjusted
accordingly. This process of marking-to-market is designed to prevent losses
from accumulating in any futures account. Therefore, if USNG’s futures positions
have declined in value, USNG may be required to post additional variation
margin to cover this decline. Alternatively, if USNG’s futures positions have
increased in value, this increase will be credited to USNG’s
account.
10
What
is the Natural Gas Market and the Petroleum-Based Fuel Market?
Natural
Gas. Natural gas accounts for almost a quarter of U.S. energy
consumption. The price of natural gas is established by the supply and demand
conditions in the North American market, and more particularly, in the main
refining center of the U.S. Gulf Coast. The natural gas market essentially
constitutes an auction, where the highest bidder wins the supply. When markets
are “strong” (i.e.,
when demand is high and/or supply is low), the bidder must be willing to pay a
higher premium to capture the supply. When markets are “weak” (i.e., when demand is low
and/or supply is high), a bidder may choose not to outbid competitors, waiting
instead for later, possibly lower priced, supplies. Demand for natural gas by
consumers, as well as agricultural, manufacturing and transportation industries,
determines overall demand for natural gas. Since the precursors of product
demand are linked to economic activity, natural gas demand will tend to reflect
economic conditions. However, other factors such as weather significantly
influence natural gas demand.
Light, Sweet Crude
Oil. Crude oil is the world’s most actively traded commodity.
The Futures Contracts for light, sweet crude oil that are traded on the NYMEX
are the world’s most liquid forum for crude oil trading, as well as the world’s
largest volume futures contract trading on a physical commodity. Due to the
liquidity and price transparency of oil Futures Contracts, they are used as a
principal international pricing benchmark. The Futures Contracts for light,
sweet crude oil trade on the NYMEX in units of 1,000 U.S. barrels (42,000
gallons) and, if not closed out before maturity, will result in delivery of oil
to Cushing, Oklahoma, which is also accessible to the international spot markets
via pipelines.
Demand
for petroleum products by consumers, as well as agricultural, manufacturing and
transportation industries, determines demand for crude oil by refiners. Since
the precursors of product demand are linked to economic activity, crude oil
demand will tend to reflect economic conditions. However, other factors such as
weather also influence product and crude oil demand.
Crude oil
supply is determined by both economic and political factors. Oil prices (along
with drilling costs, availability of attractive prospects for drilling, taxes
and technology, among other factors) determine exploration and development
spending, which influence output capacity with a lag. In the short run,
production decisions by the Organization of Petroleum Exporting Countries
(“OPEC”) also affect supply and prices. Oil export embargoes and the current
conflict in Iraq represent other routes through which political developments
move the market. It is not possible to predict the aggregate effect of all or
any combination of these factors.
Heating Oil. Heating oil,
also known as No. 2 fuel oil, accounts for about 25% of the yield of a barrel of
crude oil, the second largest “cut” from oil after gasoline. The heating oil
Futures Contract listed and traded on the NYMEX trades in units of 42,000
gallons (1,000 barrels) and is based on delivery in the New York harbor, the
principal cash market trading center. The price of heating oil has historically
been volatile.
Gasoline. Gasoline is the
largest single volume refined product sold in the U.S. and accounts for almost
half of national oil consumption. The gasoline Futures Contract listed and
traded on the NYMEX trades in units of 42,000 gallons (1,000 barrels) and is
based on delivery at petroleum products terminals in the New York harbor, the
major East Coast trading center for imports and domestic shipments from
refineries in the New York harbor area or from the Gulf Coast refining centers.
The price of gasoline has historically been volatile.
11
Why
Does USNG Purchase and Sell Futures Contracts?
USNG’s
investment objective is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the Benchmark Futures Contract, less
USNG’s expenses. USNG invests primarily in Futures Contracts. USNG seeks to have
its aggregate NAV approximate at all times the aggregate market value of the
Futures Contracts and Other Natural Gas-Related Investments it
holds.
Other
than investing in Futures Contracts and Other Natural Gas-Related Investments,
USNG only invests in assets to support these investments in Natural Gas
Interests. At any given time, most of USNG’s investments are in Treasuries, cash
and/or cash equivalents that serve as segregated assets supporting USNG’s
positions in Futures Contracts and Other Natural Gas-Related Investments. For
example, the purchase of a Futures Contract with a stated value of $10 million
would not require USNG to pay $10 million upon entering into the contract;
rather, only a margin deposit, generally of 10% to 30% of the stated value of
the Futures Contract, would be required. To secure its Futures Contract
obligations, USNG would deposit the required margin with the futures commission
merchant and would separately hold, through its Custodian, Treasuries, cash
and/or cash equivalents in an amount equal to the balance of the current market
value of the contract, which at the contract’s inception would be $10 million
minus the amount of the margin deposit, or $9 million (assuming a 10%
margin).
As a
result of the foregoing, typically between 10% and 30% of USNG’s assets are held
as margin in segregated accounts with a futures commission merchant. In addition
to the Treasuries or cash it posts with the futures commission merchant for the
Futures Contracts it owns, USNG holds, through the Custodian, Treasuries, cash
and/or cash equivalents that can be posted as margin or as collateral to support
its over-the-counter contracts. USNG earns interest income from the Treasuries
and/or cash equivalents that it purchases, and on the cash it holds through the
Custodian. USNG anticipates that the earned interest income will increase the
NAV and limited partners’ capital contribution accounts. USNG reinvests the
earned interest income, holds it in cash, or uses it to pay its expenses. If
USNG reinvests the earned interest income, it makes investments that are
consistent with its investment objective.
12
What
is the Flow of Units?
What
are the Trading Policies of USNG?
Liquidity
USNG
invests only in Futures Contracts and Other Natural Gas-Related Investments that
are traded in sufficient volume to permit, in the opinion of the General
Partner, ease of taking and liquidating positions in these financial
interests.
13
Spot
Commodities
While the
Futures Contracts traded on the NYMEX can be physically settled, USNG does not
intend to take or make physical delivery. USNG may from time to time trade in
Other Natural Gas-Related Investments, including contracts based on the
spot price of natural gas.
Leverage
While USNG’s historical ratio of
initial margin to total assets has generally ranged from 10% to 30%, the General
Partner endeavors to have the value of USNG’s Treasuries, cash and cash
equivalents, whether held by USNG or posted as margin or collateral, at all
times approximate the aggregate market value of its obligations under USNG’s
Futures Contracts and Other Natural Gas-Related Investments. While the General Partner does not
intend to leverage USNG’s assets, it is not prohibited from doing so under the
LP Agreement.
Borrowings
Borrowings
are not used by USNG, unless USNG is required to borrow money in the event of
physical delivery, USNG trades in cash commodities, or for short-term needs
created by unexpected redemptions. USNG maintains the value of its Treasuries,
cash and cash equivalents whether held by USNG or posted as margin or
collateral, to at all times approximate the aggregate market value of its
obligations under its Futures Contracts and Other Natural Gas-Related
Investments. USNG has not established and does not plan to establish credit
lines.
Over-the-Counter
Derivatives (Including Spreads and Straddles)
In
addition to Futures Contracts, there are also a number of listed options on the
Futures Contracts on the principal futures exchanges. These contracts offer
investors and hedgers another set of financial vehicles to use in managing
exposure to the natural gas market. Consequently, USNG may purchase options on
natural gas Futures Contracts on these exchanges in pursuing its investment
objective.
In
addition to the Futures Contracts and options on the Futures Contracts, there
also exists an active non-exchange-traded market in derivatives tied to natural
gas. These derivatives transactions (also known as over-the-counter contracts)
are usually entered into between two parties. Unlike most of the exchange-traded
Futures Contracts or exchange-traded options on the Futures Contracts, each
party to such contract bears the credit risk that the other party may not be
able to perform its obligations under its contract.
Some
natural gas-based derivatives transactions contain fairly generic terms and
conditions and are available from a wide range of participants. Other natural
gas-based derivatives have highly customized terms and conditions and are not as
widely available. Many of these over-the-counter contracts are cash-settled
forwards for the future delivery of natural gas- or petroleum-based fuels that
have terms similar to the Futures Contracts. Others take the form of “swaps” in
which the two parties exchange cash flows based on pre-determined formulas tied
to the natural gas spot price, forward natural gas price, the Benchmark Futures
Contract price, or other natural gas futures contract price. For example, USNG
may enter into over-the-counter derivative contracts whose value will be tied to
changes in the difference between the natural gas spot price, the Benchmark
Futures Contract price, or some other futures contract price traded on the NYMEX
or ICE Futures and the price of other Futures Contracts that may be invested in
by USNG.
To
protect itself from the credit risk that arises in connection with such
contracts, USNG may enter into agreements with each counterparty that provide
for the netting of its overall exposure to its counterparty, such as the
agreements published by the International Swaps and Derivatives Association,
Inc. USNG also may require that the counterparty be highly rated and/or provide
collateral or other credit support to address USNG’s exposure to the
counterparty.
14
The
General Partner assesses or reviews, as appropriate, the creditworthiness of
each potential or existing counterparty to an over-the-counter contract pursuant
to guidelines approved by the General Partner’s Board of Directors. Furthermore,
the General Partner, on behalf of USNG, 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
U.S. Securities and Exchange Commission (the “SEC”), (c) insurance companies
domiciled in the United States, or (d) producers, users or traders of energy,
whether or not regulated by the CFTC. Any entity acting as a counterparty shall
be regulated in either the United States or the United Kingdom unless otherwise
approved by the General Partner’s Board of Directors after consultation with its
legal counsel. Existing counterparties are also reviewed periodically by the
General Partner.
USNG may
employ spreads or straddles in its trading to mitigate the differences in its
investment portfolio and its goal of tracking the price of the Benchmark Futures
Contract. USNG 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 USNG to changes in the price relationship between
futures contracts which will expire sooner and those that will expire later.
USNG 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 USNG, 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. USNG 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. USNG 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 USNG 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.
USNG has
employed hedging methods to the extent it invested in fully-collateralized
over-the-counter swap transactions designed to track percentage changes in the
price of the Benchmark Futures Contract. USNG has been exposed to
counterparty risk on these fully-collateralized over-the-counter swap
transactions.
USNG has
not and will not employ the technique, commonly known as pyramiding, in which
the speculator uses unrealized profits on existing positions as variation margin
for the purchase or sale of additional positions in the same or another
commodity interest.
Who
are the Service Providers?
BBH&Co.
is the registrar and transfer agent for the units. BBH&Co. is also the
Custodian for USNG. In this capacity, BBH&Co. holds USNG’s Treasuries,
cash and/or cash equivalents pursuant to a custodial agreement. In
addition, in its capacity as Administrator for USNG, BBH&Co. performs
certain administrative and accounting services for USNG and prepares certain SEC
and CFTC reports on behalf of USNG. The General Partner pays BBH&Co.’s fees
for these services.
BBH&Co.’s
principal business address is 50 Milk Street, Boston, MA
02109-3661. BBH&Co., a private bank founded in 1818, is not a publicly
held company nor is it insured by the Federal Deposit Insurance Corporation.
BBH&Co. is authorized to conduct a commercial banking business in accordance
with the provisions of Article IV of the New York State Banking Law, New York
Banking Law §§160–181, and is subject to regulation, supervision, and
examination by the New York State Banking Department. BBH&Co. is also
licensed to conduct a commercial banking business by the Commonwealths of
Massachusetts and Pennsylvania and is subject to supervision and examination by
the banking supervisors of those states.
USNG also
employs ALPS Distributors, Inc. as a Marketing Agent. The General Partner
pays the Marketing Agent an annual fee plus an incentive fee. In no event
may the aggregate compensation paid to the Marketing Agent and any affiliate of
the General Partner for distribution-related services in connection with the
offering of units exceed ten percent (10%) of the gross proceeds of the
offering.
15
ALPS’s
principal business address is 1290 Broadway, Suite 1100, Denver, CO
80203. ALPS is the marketing agent for USNG. ALPS is a broker-dealer
registered with the Financial Industry Regulatory Authority (“FINRA”) and a
member of the Securities Investor Protection Corporation.
UBS
Securities LLC (“UBS Securities”) is USNG’s futures commission
merchant. USNG and UBS Securities have entered into an Institutional
Futures Client Account Agreement. This Agreement requires UBS Securities to
provide services to USNG in connection with the purchase and sale of natural gas
interests that may be purchased or sold by or through UBS Securities for USNG’s
account. USNG pays the fees of UBS Securities.
UBS
Securities’s principal business address is 677 Washington Blvd, Stamford, CT
06901. UBS Securities is a futures clearing broker for USNG. UBS Securities is
registered in the U.S. with FINRA as a broker-dealer and with the CFTC as a
futures commission merchant. UBS Securities is a member of the NFA and of
various U.S. futures and securities exchanges.
UBS
Securities is the defendant in two purported securities class actions pending in
District Court of the Northern District of Alabama, brought by holders of stocks
and bonds of HealthSouth, captioned In re HealthSouth
Corporation Stockholder, No. CV-03-BE-1501-S and In re HealthSouth
Corporation Bondholder Litigation, No. CV-03-BE-1502-S. Both complaints
assert liability under the Exchange Act.
On June
27, 2007, the Securities Division of the Secretary of the Commonwealth of
Massachusetts (“Massachusetts Securities Division”) filed an administrative
complaint (the “Complaint”) and notice of adjudicatory proceeding against UBS
Securities LLC, captioned In The Matter of UBS Securities, LLC, Docket No.
E-2007-0049, which alleges, in sum and substance, that UBS Securities has been
violating the Massachusetts Uniform Securities Act (the “Act”) and related
regulations by providing the advisers for certain hedge funds with gifts and
gratuities in the form of below market office rents, personal loans with below
market interest rates, event tickets, and other perks, in order to induce those
hedge fund advisers to increase or retain their level of prime brokerage fees
paid to UBS Securities. The Complaint seeks a cease and desist order from
conduct that violates the Act and regulations, to censure UBS Securities, to
require UBS Securities to pay an administrative fine of an unspecified amount,
and to find as fact the allegations of the Complaint.
On June
26, 2008, the Massachusetts Securities Division filed an administrative
complaint and notice of adjudicatory proceeding against UBS Securities and UBS
Financial Services, Inc. (“UBS Financial”), captioned In the Matter of UBS
Securities, LLC and UBS Financial Services, Inc., Docket No. 2008-0045, which
alleged that UBS Securities and UBS Financial violated the Act in connection
with the marketing and sale of auction rate securities.
On July
22, 2008, the Texas State Securities board filed an administrative proceeding
against UBS Securities and UBS Financial captioned the Matter of the Dealer
Registrations of UBS Financial Services, Inc. and UBS Securities LLC, SOAH
Docket No. ###-##-####, SSB Docket No. 08-IC04, alleging violations of
the anti-fraud provision of the Texas Securities Act in connection with the
marketing and sale of auction rate securities.
On July
24, 2008 the New York Attorney General (“NYAG”) filed a complaint in Supreme
Court of the State of New York against UBS Securities and UBS Financial
captioned State of New York v. UBS Securities LLC and UBS Financial Services,
Inc., No. 650262/2008, in connection with UBS’s marketing and sale of auction
rate securities. The complaint alleges violations of the anti-fraud provisions
of New York state statutes and seeks a judgment ordering that the firm buy back
auction rate securities from investors at par, disgorgement, restitution and
other remedies.
On August
8, 2008, UBS Securities and UBS Financial reached agreements in principle with
the SEC, the NYAG, the Massachusetts Securities Division and other state
regulatory agencies represented by the North American Securities Administrators
Association (“NASAA”) to restore liquidity to all remaining client’s holdings of
auction rate securities by June 30, 2012. On August 20, 2008, the Texas
proceeding was dismissed and withdrawn. On October 2, 2008, UBS Securities and
UBS Financial entered into a final consent agreement with the Massachusetts
Securities Division settling all allegations in the Massachusetts Securities
Division’s administrative proceeding against UBS Securities and UBS Financial
with regards to the auction rate securities matter. On December 11, 2008, UBS
Securities and UBS Financial executed an Assurance of Discontinuance in the
auction rate securities settlement with the NYAG. On the same day, UBS
Securities and UBS Financial finalized settlements with the
SEC.
16
On August
14, 2008, the New Hampshire Bureau of Securities Regulation filed an
administrative action against UBS Securities relating to a student loan issuer,
the New Hampshire Higher Education Loan Corp. (“NHHELCO”). The complaint alleges
fraudulent and unethical conduct in violation of New Hampshire state statues.
The complaint seeks an administrative fine, a cease and desist order, and
restitution to NHHELCO. The claim does not impact the global settlement with the
SEC, NYAG and NASAA relating to the marketing and sale of auction rate
securities to investors.
Further,
UBS Securities, like most full service investment banks and broker-dealers,
receives inquiries and is sometimes involved in investigations by the SEC,
FINRA, the New York Stock Exchange (the “NYSE”) and various other regulatory
organizations, exchanges and government agencies. UBS Securities fully
cooperates with the authorities in all such requests. UBS Securities regularly
discloses to the FINRA arbitration awards, disciplinary action and regulatory
events. These disclosures are publicly available on the FINRA’s website at www.finra.org. Actions with
respect to UBS Securities’ futures commission merchant business are publicly
available on the website of the National Futures Association (http://www.nfa.futures.org/).
UBS
Securities will act only as clearing broker for USNG and as such will be paid
commissions for executing and clearing trades on behalf of USNG. UBS Securities
has not passed upon the adequacy or accuracy of this annual report on Form 10-K.
UBS Securities neither will act in any supervisory capacity with respect to the
General Partner nor participate in the management of USNG.
UBS
Securities is not affiliated with USNG or the General Partner. Therefore, USNG
does not believe that USNG has any conflicts of interest with UBS Securities or
their trading principals arising from their acting as USNG’s futures commission
merchant.
Currently,
the General Partner does not employ commodity trading advisors. If,
in the future, the General Partner does employ commodity trading advisors, it
will choose each advisor based on arm’s-length negotiations and will consider
the advisor’s experience, fees and reputation.
Fees
of USNG
Fees
and Compensation Arrangements with the General Partner and Non-Affiliated
Service Providers*
|
Service
Provider
|
Compensation
Paid by the General
Partner
|
|
|
Brown
Brothers Harriman & Co.,
Custodian
and Administrator
|
Minimum
amount of $75,000 annually* for its custody, fund accounting and fund
administration services rendered to all funds, as well as a $20,000 annual
fee for its transfer agency services. In addition, an asset-based charge
of (a) 0.06% for the first $500 million of USNG’s and the Related Public
Funds’ combined net assets, (b) 0.0465% for USNG’s and the Related Public
Funds’ combined net assets greater than $500 million but less than $1
billion, and (c) 0.035% once USNG’s and the Related Public Funds’ combined
net assets exceed $1 billion.**
|
|
|
ALPS
Distributors, Inc., Marketing Agent
|
|
0.06%
on USNG’s assets up to $3 billion; 0.04% on USNG’s assets in excess of $3
billion.
|
17
|
*
|
The
General Partner pays this
compensation.
|
|
**
|
The
annual minimum amount will not apply if the asset-based charge for all
accounts in the aggregate exceeds $75,000. The General Partner also will
pay transaction charge fees to BBH&Co., ranging from $7.00 to $15.00
per transaction for the
funds.
|
Compensation
to the General Partner
|
Assets
|
Management
Fee
|
|
|
First
$1,000,000,000
|
0.60%
of NAV
|
|
|
After
the first $1,000,000,000
|
0.50%
of
NAV
|
Fees are
calculated on a daily basis (accrued at 1/365 of the applicable percentage of
NAV on that day) and paid on a monthly basis. NAV is calculated by taking the
current market value of USOF’s total assets and subtracting any
liabilities.
Fees
and Compensation Arrangements between USNG and Non-Affiliated Service
Providers***
|
Service
Provider
|
Compensation
Paid by USNG
|
|
|
UBS
Securities LLC, Futures Commission Merchant
|
Approximately
$3.50 per buy or sell; charges may vary
|
|
|
Non-Affiliated
Brokers
|
Approximately
0.21 % of
assets
|
|
***
|
USNG
pays this compensation.
|
New
York Mercantile Exchange Licensing Fee****
|
Assets
|
Licensing
Fee
|
|
|
First
$1,000,000,000
|
0.04%
of NAV
|
|
|
After
the first $1,000,000,000
|
0.02%
of
NAV
|
|
****
|
Fees
are calculated on a daily basis (accrued at 1/365 of the applicable
percentage of NAV on that day) and paid on a monthly basis. USNG is
responsible for its pro rata share of the assets held by USNG and the
Related Public Funds.
|
Expenses
Paid by USNG through December 31, 2009 in dollar terms:
|
Expenses:
|
Amount
in Dollar Terms
|
|
|
Amount
Paid to General Partner:
|
$19,802,761
|
|
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$12,603,078
|
|
|
Other
Amounts Paid*****:
|
$8,074,997
|
|
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
$40,480,836
|
|
*****
|
Includes
expenses relating to the registration of additional units, legal fees,
auditing fees, printing expenses, licensing fees and tax reporting fees
and fees paid to the independent directors of the General
Partner.
|
18
Expenses
Paid by USNG through December 31, 2009 as a Percentage of Average Daily Net
Assets:
|
Expenses:
|
Amount
as a Percentage
of
Average Daily
Net Assets
|
|
|
Amount
Paid to General Partner:
|
0.55%
annualized
|
|
|
Amount
Paid in Portfolio Brokerage Commissions:
|
0.35%
annualized
|
|
|
Other
Amounts Paid:
|
0.23%
annualized
|
|
|
Total
Expenses Paid:
|
1.13%
annualized
|
Other
Fees. USNG also pays the fees and expenses associated with its
tax accounting and reporting requirements with the exception of certain initial
implementation service fees and base service fees which are paid by the General
Partner. These fees are estimated to be $2.6 million for the fiscal
year ended December 31, 2009. In addition, USNG is responsible for
the fees and expenses, which may include director and officers’ liability
insurance, of the independent directors of the General Partner in connection
with their activities with respect to USNG. These director fees and
expenses may be shared with other funds managed by the General
Partner. These fees and expenses for 2009 were $433,046, and USNG’s
portion of such fees was $159,942.
Form
of Units
Registered
Form. Units are issued in registered form in accordance with the LP
Agreement. The Administrator has been appointed registrar and transfer agent for
the purpose of transferring units in certificated form. The Administrator keeps
a record of all limited partners and holders of the units in certificated form
in the registry (the “Register”). The General Partner recognizes transfers of
units in certificated form only if done in accordance with the LP
Agreement. The beneficial interests in such units are held in book-entry form
through participants and/or accountholders in the Depository Trust Company
(“DTC”).
Book
Entry. Individual certificates are not issued for the units. Instead,
units are represented by one or more global certificates, which are deposited by
the Administrator with DTC and registered in the name of Cede & Co., as
nominee for DTC. The global certificates evidence all of the units outstanding
at any time. Unitholders are limited to (1) participants in DTC such as banks,
brokers, dealers and trust companies (“DTC Participants”), (2) those who
maintain, either directly or indirectly, a custodial relationship with a DTC
Participant (“Indirect Participants”), and (3) those banks, brokers, dealers,
trust companies and others who hold interests in the units through DTC
Participants or Indirect Participants, in each case who satisfy the requirements
for transfers of units. DTC Participants acting on behalf of investors holding
units through such participants’ accounts in DTC will follow the delivery
practice applicable to securities eligible for DTC’s Same-Day Funds Settlement
System. Units are credited to DTC Participants’ securities accounts following
confirmation of receipt of payment.
DTC. DTC
is a limited purpose trust company organized under the laws of the State of New
York and is a member of the Federal Reserve System, a “clearing corporation”
within the meaning of the New York Uniform Commercial Code and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC holds securities for DTC Participants and facilitates the clearance and
settlement of transactions between DTC Participants through electronic
book-entry changes in accounts of DTC Participants.
Transfer
of Units
Transfers of
Units Only Through DTC. The units are only transferable through the
book-entry system of DTC. Limited partners who are not DTC Participants may
transfer their units through DTC by instructing the DTC Participant holding
their units (or by instructing the Indirect Participant or other entity through
which their units are held) to transfer the units. Transfers are made in
accordance with standard securities industry practice.
Transfers
of interests in units with DTC are made in accordance with the usual rules and
operating procedures of DTC and the nature of the transfer. DTC has established
procedures to facilitate transfers among the participants and/or accountholders
of DTC. Because DTC can only act on behalf of DTC Participants, who in turn act
on behalf of Indirect Participants, the ability of a person or entity having an
interest in a global certificate to pledge such interest to persons or entities
that do not participate in DTC, or otherwise take actions in respect of such
interest, may be affected by the lack of a definitive security in respect of
such interest.
DTC has
advised USNG that it will take any action permitted to be taken by a unitholder
(including, without limitation, the presentation of a global certificate for
exchange) only at the direction of one or more DTC Participants in whose account
with DTC interests in global certificates are credited and only in respect of
such portion of the aggregate principal amount of the global certificate as to
which such DTC Participant or Participants has or have given such
direction.
Transfer/Application
Requirements. All purchasers of USNG’s units, and potentially any
purchasers of units in the future, who wish to become limited partners or other
record holders and receive cash distributions, if any, or have certain other
rights, must deliver an executed transfer application in which the purchaser or
transferee must certify that, among other things, he, she or it agrees to be
bound by USNG’s LP Agreement and is eligible to purchase USNG’s securities. Each
purchaser of units must execute a transfer application and certification. The
obligation to provide the form of transfer application is imposed on the seller
of units or, if a purchase of units is made through an exchange, the form may be
obtained directly through USNG. Further, the General Partner may request each
record holder to furnish certain information, including that record holder’s
nationality, citizenship or other related status. A record holder is a
unitholder that is, or has applied to be, a limited partner. An investor who is
not a U.S. resident may not be eligible to become a record holder or one of
USNG’s limited partners if that investor’s ownership would subject USNG to the
risk of cancellation or forfeiture of any of USNG’s assets under any federal,
state or local law or regulation. If the record holder fails to furnish the
information or if the General Partner determines, on the basis of the
information furnished by the holder in response to the request, that such holder
is not qualified to become one of USNG’s limited partners, the General Partner
may be substituted as a holder for the record holder, who will then be treated
as a non-citizen assignee, and USNG will have the right to redeem those
securities held by the record holder.
A
transferee’s broker, agent or nominee may complete, execute and deliver a
transfer application and certification. USNG may, at its discretion, treat the
nominee holder of a unit as the absolute owner. In that case, the beneficial
holder’s rights are limited solely to those that it has against the nominee
holder as a result of any agreement between the beneficial owner and the nominee
holder.
A person
purchasing USNG’s existing units, who does not execute a transfer application
and certify that the purchaser is eligible to purchase those securities acquires
no rights in those securities other than the right to resell those securities.
Whether or not a transfer application is received or the consent of the General
Partner obtained, USNG’s units are securities and are transferable according to
the laws governing transfers of securities.
Any
transfer of units will not be recorded by the transfer agent or recognized by
the General Partner unless a completed transfer application is delivered to the
General Partner or the Administrator. When acquiring units, the transferee of
such units that completes a transfer application will:
|
·
|
be
an assignee until admitted as a substituted limited partner upon the
consent and sole discretion of the General Partner and the recording of
the assignment on the books and records of the
partnership;
|
|
·
|
automatically
request admission as a substituted limited
partner;
|
|
·
|
agree
to be bound by the terms and conditions of, and execute, USNG’s LP
Agreement;
|
|
·
|
represent
that such transferee has the capacity and authority to enter into USNG’s
LP Agreement;
|
|
·
|
grant
powers of attorney to USNG’s General Partner and any liquidator of USNG;
and
|
|
·
|
make
the consents and waivers contained in USNG’s LP
Agreement.
|
An
assignee will become a limited partner in respect of the transferred units upon
the consent of USNG’s General Partner and the recordation of the name of the
assignee on USNG’s books and records. Such consent may be withheld in the sole
discretion of USNG’s General Partner.
20
If
consent of the General Partner is withheld, such transferee shall be an
assignee. An assignee shall have an interest in the partnership equivalent to
that of a limited partner with respect to allocations and distributions,
including, without limitation, liquidating distributions, of the partnership.
With respect to voting rights attributable to units that are held by assignees,
the General Partner shall be deemed to be the limited partner with respect
thereto and shall, in exercising the voting rights in respect of such units on
any matter, vote such units at the written direction of the assignee who is the
record holder of such units. If no such written direction is received, such
units will not be voted. An assignee shall have no other rights of a limited
partner.
Until a
unit has been transferred on USNG’s books, USNG and the transfer agent may treat
the record holder of the unit as the absolute owner for all purposes, except as
otherwise required by law or stock exchange regulations.
Withdrawal
of Limited Partners
As
discussed in the LP Agreement, if the General Partner gives at least fifteen
(15) days’ written notice to a limited partner, then the General Partner may for
any reason, in its sole discretion, require any such limited partner to withdraw
entirely from the partnership or to withdraw a portion of its partner capital
account. If the General Partner does not give at least fifteen (15) days’
written notice to a limited partner, then it may only require withdrawal of all
or any portion of the capital account of any limited partner in the following
circumstances: (i) the unitholder made a misrepresentation to the General
Partner in connection with its purchase of units; or (ii) the limited
partner’s ownership of units would result in the violation of any law or
regulations applicable to the partnership or a partner. In these circumstances,
the General Partner without notice may require the withdrawal at any time, or
retroactively. The limited partner thus designated shall withdraw from the
partnership or withdraw that portion of its partner capital account specified,
as the case may be, as of the close of business on such date as determined by
the General Partner. The limited partner thus designated shall be deemed to have
withdrawn from the partnership or to have made a partial withdrawal from its
partner capital account, as the case may be, without further action on the part
of the limited partner and the provisions of the LP Agreement shall apply.
Calculating
NAV
USNG’s
NAV is calculated by:
|
·
|
Taking
the current market value of its total assets;
and
|
|
·
|
Subtracting
any liabilities.
|
In
addition, in order to provide updated information relating to USNG for use by
investors and market professionals, the NYSE Arca calculates and disseminates
throughout the core trading session on each trading day an updated indicative
fund value. The indicative fund value is calculated by using the prior day’s
closing NAV per unit of USNG as a base and updating that value throughout the
trading day to reflect changes in the most recently reported trade price for the
active natural gas Futures Contracts on the NYMEX. The prices reported for those
Futures Contract months are adjusted based on the prior day’s spread
differential between settlement values for the relevant contract and the spot
month contract. In the event that the spot month contract is also the Benchmark
Futures Contract, the last sale price for that contract is not adjusted. The
indicative fund value unit basis disseminated during NYSE Arca core trading
session hours should not be viewed as an actual real time update of the NAV,
because the NAV is calculated only once at the end of each trading day based
upon the relevant end of day values of USNG’s investments.
21
The
indicative fund value is disseminated on a per unit basis every 15 seconds
during regular NYSE Arca core trading session hours of 9:30 a.m. New York time
to 4:00 p.m. New York time. The normal trading hours of the NYMEX are 10:00 a.m.
New York time to 2:30 p.m. New York time. This means that there is a gap in time
at the beginning and the end of each day during which USNG’s units are traded on
the NYSE Arca, but real-time NYMEX trading prices for futures contracts traded
on the NYMEX are not available. As a result, during those gaps there will be no
update to the indicative fund value.
The NYSE
Arca disseminates the indicative fund value through the facilities of CTA/CQ
High Speed Lines. In addition, the indicative fund value is published on the
NYSE Arca’s website and is available through on-line information services such
as Bloomberg and Reuters.
Dissemination
of the indicative fund value provides additional information that is not
otherwise available to the public and is useful to investors and market
professionals in connection with the trading of USNG units on the NYSE Arca.
Investors and market professionals are able throughout the trading day to
compare the market price of USNG and the indicative fund value. If the market
price of USNG units diverges significantly from the indicative fund value,
market professionals will have an incentive to execute arbitrage trades. For
example, if USNG appears to be trading at a discount compared to the indicative
fund value, a market professional could buy USNG units on the NYSE Arca and sell
short futures contracts. Such arbitrage trades can tighten the tracking between
the market price of USNG and the indicative fund value and thus can be
beneficial to all market participants.
In
addition, other Futures Contracts, Other Natural Gas-Related Investments and
Treasuries held by USNG are valued by the Administrator, using rates and points
received from client-approved third party vendors (such as Reuters and WM
Company) and advisor quotes. These investments are not included in the
indicative value. The indicative fund value is based on the prior day’s NAV and
moves up and down solely according to changes in the Benchmark Futures Contract
for natural gas traded on the NYMEX.
Creation
and Redemption of Units
Authorized
Purchasers are the only persons that may place orders to create and redeem
baskets. Authorized Purchasers must be (1) registered broker-dealers or other
securities market participants, such as banks and other financial institutions,
that are not required to register as broker-dealers to engage in securities
transactions as described below, and (2) DTC Participants. To become an
Authorized Purchaser, a person must enter into an Authorized Purchaser Agreement
with the General Partner. The Authorized Purchaser Agreement provides the
procedures for the creation and redemption of baskets and for the delivery of
the Treasuries and any cash required for such creations and redemptions. The
Authorized Purchaser Agreement and the related procedures attached thereto may
be amended by USNG, without the consent of any limited partner or unitholder or
Authorized Purchaser. Authorized Purchasers pay a transaction fee of $1,000 to
USNG for each order they place to create or redeem one or more baskets.
Authorized Purchasers who make deposits with USNG in exchange for baskets
receive no fees, commissions or other form of compensation or inducement of any
kind from either USNG or the General Partner, and no such person will have any
obligation or responsibility to the General Partner or USNG to effect any sale
or resale of units. Through December 31, 2009, 14 Authorized Purchasers had
entered into agreements with USNG. As of December 31, 2009, USNG issued 5,821
Creation Baskets and redeemed 1,326 Redemption Baskets.
Certain
Authorized Purchasers are expected to have the facility to participate directly
in the physical natural gas market and the natural gas futures market. In some
cases, an Authorized Purchaser or its affiliates may from time to time acquire
natural gas or sell natural gas and may profit in these instances. The General
Partner believes that the size and operation of the natural gas market make it
unlikely that an Authorized Purchaser’s direct activities in the natural gas or
securities markets will impact the price of natural gas, Futures Contracts, or
the price of the units.
22
Each
Authorized Purchaser is required to be registered as a broker-dealer under the
Exchange Act and is a member in good standing with FINRA, or exempt from being
or otherwise not required to be licensed as a broker-dealer or a member of
FINRA, and qualified to act as a broker or dealer in the states or other
jurisdictions where the nature of its business so requires. Certain Authorized
Purchasers may also be regulated under federal and state banking laws and
regulations. Each Authorized Purchaser has its own set of rules and procedures,
internal controls and information barriers as it determines is appropriate in
light of its own regulatory regime.
Under the
Authorized Purchaser Agreement, the General Partner has agreed to indemnify the
Authorized Purchasers against certain liabilities, including liabilities under
the Securities Act of 1933, as amended, and to contribute to the payments the
Authorized Purchasers may be required to make in respect of those
liabilities.
The
following description of the procedures for the creation and redemption of
baskets is only a summary and an investor should refer to the relevant
provisions of the LP Agreement and the form of Authorized Purchaser Agreement
for more detail, each of which is incorporated by reference into this annual
report on Form 10-K.
Creation
Procedures
On any
business day, an Authorized Purchaser may place an order with the Marketing
Agent to create one or more baskets. For purposes of processing purchase and
redemption orders, a “business day” means any day other than a day when any of
the NYSE Arca, the NYMEX or the NYSE is closed for regular trading. Purchase
orders must be placed by 12:00 p.m. New York time or the close of regular
trading on the NYSE Arca, whichever is earlier. The day on which the Marketing
Agent receives a valid purchase order is the purchase order date.
By
placing a purchase order, an Authorized Purchaser agrees to deposit Treasuries,
cash, or a combination of Treasuries and cash with USNG, as described below.
Prior to the delivery of baskets for a purchase order, the Authorized Purchaser
must also have wired to the Custodian the non-refundable transaction fee due for
the purchase order. Authorized Purchasers may not withdraw a creation
request.
Determination
of Required Deposits
The total
deposit required to create each basket (“Creation Basket Deposit”) is the amount
of Treasuries and/or cash that is in the same proportion to the total assets of
USNG (net of estimated accrued but unpaid fees, expenses and other liabilities)
on the date the order to purchase is accepted as the number of units to be
created under the purchase order is in proportion to the total number of units
outstanding on the date the order is received. The General Partner determines,
directly in its sole discretion or in consultation with the Administrator, the
requirements for Treasuries and the amount of cash, including the maximum
permitted remaining maturity of a Treasury and proportions of Treasury and cash
that may be included in deposits to create baskets. The Marketing Agent will
publish such requirements at the beginning of each business day. The amount of
cash deposit required is the difference between the aggregate market value of
the Treasuries required to be included in a Creation Basket Deposit as of 4:00
p.m. New York time on the date the order to purchase is properly received and
the total required deposit.
Delivery
of Required Deposits
An
Authorized Purchaser who places a purchase order is responsible for transferring
to USNG’s account with the Custodian the required amount of Treasuries and cash
by the end of the third business day following the purchase order date. Upon
receipt of the deposit amount, the Administrator directs DTC to credit the
number of baskets ordered to the Authorized Purchaser’s DTC account on the third
business day following the purchase order date. The expense and risk of delivery
and ownership of Treasuries until such Treasuries have been received by the
Custodian on behalf of USNG is borne solely by the Authorized
Purchaser.
23
Because
orders to purchase baskets must be placed by 12:00 p.m., New York time, but the
total payment required to create a basket during the continuous offering period
will not be determined until after 4:00 p.m. New York time on the date the
purchase order is received, Authorized Purchasers will not know the total amount
of the payment required to create a basket at the time they submit an
irrevocable purchase order for the basket. USNG’s NAV and the total amount of
the payment required to create a basket could rise or fall substantially between
the time an irrevocable purchase order is submitted and the time the amount of
the purchase price in respect thereof is determined.
Rejection
of Purchase Orders
The
General Partner acting by itself or through the Marketing Agent may reject a
purchase order or a Creation Basket Deposit if:
|
·
|
it
determines that the investment alternative available to USNG at that time
will not enable it to meet its investment
objective;
|
|
·
|
it
determines that the purchase order or the Creation Basket Deposit is not
in proper form;
|
|
·
|
it
believes that the purchase order or the Creation Basket Deposit would have
adverse tax consequences to USNG or its
unitholders;
|
|
·
|
the
acceptance or receipt of the Creation Basket Deposit would, in the opinion
of counsel to the General Partner, be unlawful;
or
|
|
·
|
circumstances
outside the control of the General Partner, Marketing Agent or Custodian
make it, for all practical purposes, not feasible to process creations of
baskets.
|
None of
the General Partner, Marketing Agent or Custodian will be liable for the
rejection of any purchase order or Creation Basket Deposit.
Redemption
Procedures
The
procedures by which an Authorized Purchaser can redeem one or more baskets
mirror the procedures for the creation of baskets. On any business day, an
Authorized Purchaser may place an order with the Marketing Agent to redeem one
or more baskets. Redemption orders must be placed by 12:00 p.m. New York time or
the close of regular trading on the NYSE, whichever is earlier. A redemption
order so received will be effective on the date it is received in satisfactory
form by the Marketing Agent. The redemption procedures allow Authorized
Purchasers to redeem baskets and do not entitle an individual unitholder to
redeem any units in an amount less than a Redemption Basket, or to redeem
baskets other than through an Authorized Purchaser. By placing a redemption
order, an Authorized Purchaser agrees to deliver the baskets to be redeemed
through DTC’s book-entry system to USNG not later than 3:00 p.m. New York time
on the third business day following the effective date of the redemption order.
Prior to the delivery of the redemption distribution for a redemption order, the
Authorized Purchaser must also have wired to USNG’s account at the Custodian the
non-refundable transaction fee due for the redemption order. Authorized
Purchasers may not withdraw a redemption request.
Determination
of Redemption Distribution
The
redemption distribution from USNG consists of a transfer to the redeeming
Authorized Purchaser of an amount of Treasuries and cash that is in the same
proportion to the total assets of USNG (net of estimated accrued but unpaid
fees, expenses and other liabilities) on the date the order to redeem is
properly received as the number of units to be redeemed under the redemption
order is in proportion to the total number of units outstanding on the date the
order is received. The General Partner, directly or in consultation with the
Administrator, determines the requirements for Treasuries and the amounts of
cash, including the maximum permitted remaining maturity of a Treasury, and the
proportions of Treasuries and cash that may be included in distributions to
redeem baskets. The Marketing Agent will publish such requirements as of 4:00
p.m. New York time on the redemption order date.
24
Delivery
of Redemption Distribution
The
redemption distribution due from USNG will be delivered to the Authorized
Purchaser by 3:00 p.m. New York time on the third business day following the
redemption order date if, by 3:00 p.m. New York time on such third business day,
USNG’s DTC account has been credited with the baskets to be redeemed. If USNG’s
DTC account has not been credited with all of the baskets to be redeemed by such
time, the redemption distribution will be delivered to the extent of whole
baskets received. Any remainder of the redemption distribution will be delivered
on the next business day to the extent of remaining whole baskets received if
USNG receives the fee applicable to the extension of the redemption distribution
date which the General Partner may, from time to time, determine and the
remaining baskets to be redeemed are credited to USNG’s DTC account by 3:00 p.m.
New York time on such next business day. Any further outstanding amount of the
redemption order shall be cancelled. Pursuant to information from the General
Partner, the Custodian will also be authorized to deliver the redemption
distribution notwithstanding that the baskets to be redeemed are not credited to
USNG’s DTC account by 3:00 p.m. New York time on the third business day
following the redemption order date if the Authorized Purchaser has
collateralized its obligation to deliver the baskets through DTC’s book
entry-system on such terms as the General Partner may from time to time
determine.
Suspension
or Rejection of Redemption Orders
The
General Partner may, in its discretion, suspend the right of redemption, or
postpone the redemption settlement date, (1) for any period during which the
NYSE Arca or the NYMEX is closed other than customary weekend or holiday
closings, or trading on the NYSE Arca or the NYMEX is suspended or restricted,
(2) for any period during which an emergency exists as a result of which
delivery, disposal or evaluation of Treasuries is not reasonably practicable, or
(3) for such other period as the General Partner determines to be necessary for
the protection of the limited partners. For example, the General Partner may
determine that it is necessary to suspend redemptions to allow for the orderly
liquidation of USNG’s assets at an appropriate value to fund a redemption. If
the General Partner has difficulty liquidating its positions, e.g., because of a market
disruption event in the futures markets, a suspension of trading by the exchange
where the futures contracts are listed or an unanticipated delay in the
liquidation of a position in an over the counter contract, it may be appropriate
to suspend redemptions until such time as such circumstances are rectified. None
of the General Partner, the Marketing Agent, the Administrator, or the Custodian
will be liable to any person or in any way for any loss or damages that may
result from any such suspension or postponement.
Redemption
orders must be made in whole baskets. The General Partner will reject a
redemption order if the order is not in proper form as described in the
Authorized Purchaser Agreement or if the fulfillment of the order, in the
opinion of its counsel, might be unlawful. The General Partner may also reject a
redemption order if the number of units being redeemed would reduce the
remaining outstanding units to 100,000 units (i.e., one basket) or less,
unless the General Partner has reason to believe that the placer of the
redemption order does in fact possess all the outstanding units and can deliver
them.
Creation
and Redemption Transaction Fee
To
compensate USNG for its expenses in connection with the creation and redemption
of baskets, an Authorized Purchaser is required to pay a transaction fee to USNG
of $1,000 per order to create or redeem baskets. An order may include multiple
baskets. The transaction fee may be reduced, increased or otherwise changed by
the General Partner. The General Partner shall notify DTC of any change in the
transaction fee and will not implement any increase in the fee for the
redemption of baskets until 30 days after the date of the
notice.
Tax
Responsibility
Authorized
Purchasers are responsible for any transfer tax, sales or use tax, stamp tax,
recording tax, value added tax or similar tax or governmental charge applicable
to the creation or redemption of baskets, regardless of whether or not such tax
or charge is imposed directly on the Authorized Purchaser, and agree to
indemnify the General Partner and USNG if they are required by law to pay any
such tax, together with any applicable penalties, additions to tax or interest
thereon.
25
Secondary
Market Transactions
As noted,
USNG creates and redeems units from time to time, but only in one or more
Creation Baskets or Redemption Baskets. The creation and redemption of baskets
are only made in exchange for delivery to USNG or the distribution by USNG of
the amount of Treasuries and cash represented by the baskets being created or
redeemed, the amount of which will be based on the aggregate NAV of the number
of units included in the baskets being created or redeemed determined on the day
the order to create or redeem baskets is properly received.
As
discussed above, Authorized Purchasers are the only persons that may place
orders to create and redeem baskets. Authorized Purchasers must be registered
broker-dealers or other securities market participants, such as banks and other
financial institutions that are not required to register as broker-dealers to
engage in securities transactions. An Authorized Purchaser is under no
obligation to create or redeem baskets, and an Authorized Purchaser is under no
obligation to offer to the public units of any baskets it does create.
Authorized Purchasers that do offer to the public units from the baskets they
create will do so at per-unit offering prices that are expected to reflect,
among other factors, the trading price of the units on the NYSE Arca, the NAV of
USNG at the time the Authorized Purchaser purchased the Creation Baskets and the
NAV of the units at the time of the offer of the units to the public, the supply
of and demand for units at the time of sale, and the liquidity of the Futures
Contract market and the market for Other Natural Gas-Related Investments. The
prices of units offered by Authorized Purchasers are expected to fall between
USNG’s NAV and the trading price of the units on the NYSE Arca at the time of
sale. Units initially comprising the same basket but offered by Authorized
Purchasers to the public at different times may have different offering
prices.
An order
for one or more baskets may be placed by an Authorized Purchaser on behalf of
multiple clients. Authorized Purchasers who make deposits with USNG in exchange
for baskets receive no fees, commissions or other form of compensation or
inducement of any kind from either USNG or the General Partner, and no such
person has any obligation or responsibility to the General Partner or USNG to
effect any sale or resale of units. Units trade in the secondary market on the
NYSE Arca. Units may trade in the secondary market at prices that are lower or
higher relative to their NAV per unit. The amount of the discount or premium in
the trading price relative to the NAV per unit may be influenced by various
factors, including the number of investors who seek to purchase or sell units in
the secondary market and the liquidity of the Futures Contracts market and the
market for Other Natural Gas-Related Investments. While the units trade during
the core trading session on the NYSE Arca until 4:00 p.m. New York time,
liquidity in the market for Futures Contracts and Other Natural Gas-Related
Investments may be reduced after the close of the NYMEX at 2:30 p.m. New York
time. As a result, during this time, trading spreads, and the resulting premium
or discount, on the units may widen.
Prior
Performance of USNG
USNG’s
units began trading on the American Stock Exchange (the “AMEX”) on April 18,
2007 and are offered on a continuous basis. As a result of the acquisition of
the AMEX by NYSE Euronext, USNG’s units commenced trading on the NYSE Arca on
November 25, 2008. As of December 31, 2009, the total amount of money raised by
USNG from Authorized Purchasers was $10,435,093,775; the total number of
Authorized Purchasers was 14; the number of baskets purchased by Authorized
Purchasers was 5,821; the number of baskets redeemed by Authorized Purchasers
was 1,326; and the aggregate amount of units purchased was 582,100,000. For more
information on the performance of USNG, see the Performance Tables below.
Since its
initial offering of 30,000,000 units, USNG has made four subsequent
offerings of its units: 50,000,000 units which were registered with the SEC
on November 21, 2007, 100,000,000 units which were registered with the SEC on
August 28, 2008, 300,000,000 units which were registered with the SEC on May 6,
2009 and an additional 1,000,000,000 units which were registered with the SEC on
August 12, 2009. Units offered by USNG in subsequent offerings were sold by it
for cash at the units’ NAV as described in the applicable prospectus. As of
December 31, 2009, USNG had issued 584,800,000 units, 449,500,000 of
which were outstanding. As of December 31, 2009, there were
897,900,000 units registered but not yet issued.
26
Since the
offering of USNG units to the public on April 18, 2007 to December 31, 2009, the
simple average daily change in its Benchmark Futures Contract was -0.181%, while
the simple average daily change in the NAV of USNG over the same time period was
-0.179%. The average daily difference was 0.002% (or 0.2 basis points, where 1
basis point equals 1/100 of 1%). As a percentage of the daily movement of the
benchmark futures contract, the average error in daily tracking by the NAV was
0.392%, meaning that over this time period USNG’s tracking error was within the
plus or minus 10% range established as its benchmark tracking goal.
Experience
in Raising and Investing in Funds through December 31, 2009
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Dollar
Amount Offered*:
|
$ | 24,056,500,000 | ||
|
Dollar
Amount Raised:
|
$ | 10,435,093,775 | ||
|
Organizational
and Offering Expenses**:
|
||||
|
SEC
registration fee:
|
$ | 1,361,084 | ||
|
FINRA
registration fee:
|
$ | 377,500 | ||
|
Listing
fee:
|
$ | 5,000 | ||
|
Auditor’s
fees and expenses:
|
$ | 274,350 | ||
|
Legal
fees and expenses:
|
$ | 1,614,956 | ||
|
Printing
expenses:
|
$ | 73,270 | ||
|
Length
of USNG Offering:
|
Continuous
|
|||
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
|
**
|
Through
April 18, 2007, these expenses were paid for by the General Partner.
Following April 18, 2007, USNG has recorded these
expenses.
|
Compensation
to the General Partner and Other Compensation USNG:
Expenses
paid by USNG through December 31, 2009 in dollar terms:
|
Expenses:
|
Amount in Dollar Terms
|
||
|
Amount
Paid to General Partner:
|
$ | 19,802,761 | |
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$ | 12,603,078 | |
|
Other
Amounts Paid *:
|
$ | 8,074,997 | |
|
Total
Expenses Paid:
|
$ | 40,480,836 | |
|
*
|
Includes
expenses relating to the registration of additional units, legal fees,
auditing fees, printing expenses, licensing fees and tax reporting fees
and fees paid to the independent directors of the General
Partner.
|
|
Expenses:
|
Amount as a Percentage
of Average Daily Net Assets
|
|
|
Amount
Paid to General Partner in USNG Offering:
|
0.55%
annualized
|
|
|
Amount
Paid in Portfolio Brokerage Commissions in USNG Offering:
|
0.35%
annualized
|
|
|
Other
Amounts Paid:
|
0.23%
annualized
|
|
|
Total
Expenses Paid:
|
1.13%
annualized
|
27
|
USNG Performance:
|
||||
|
Name
of Commodity Pool:
|
USNG
|
|||
|
Type
of Commodity Pool:
|
Exchange
traded security
|
|||
|
Inception
of Trading:
|
April
18, 2007
|
|||
|
Aggregate
Subscriptions (from
inception through December 31, 2009):
|
$ | 10,435,093,775 | ||
|
Total
Net Assets as of December 31, 2009:
|
$ | 4,525,107,163 | ||
|
Initial
NAV Per Unit as of Inception:
|
$ | 50.00 | ||
|
NAV
per Unit as of December 31, 2009:
|
$ | 10.07 | ||
|
Worst
Monthly Percentage Draw-down:
|
July
2008 (32.13)%
|
|||
|
Worst
Peak-to-Valley Draw-down:
|
June
2008-November 2009 (85.89)%
|
|||
|
Number
of Unitholders (as of December 31, 2009)
|
203,277 | |||
COMPOSITE
PERFORMANCE DATA FOR USNG
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Rates of return*
|
|||||||||||||||
|
Month
|
2007
|
2008
|
2009
|
||||||||||||
|
January
|
_
|
8.87 | % | (21.49 | ) | % | |||||||||
|
February
|
_
|
15.87 | % | (5.47 | ) | % | |||||||||
|
March
|
_
|
6.90 | % | (11.81 | ) | % | |||||||||
|
April
|
4.30 | %** | 6.42 | % | (13.92 | ) | % | ||||||||
|
May
|
(0.84 | ) | % | 6.53 | % | 10.37 | % | ||||||||
|
June
|
(15.90 | ) | % | 13.29 | % | (4.63 | ) | % | |||||||
|
July
|
(9.68 | ) | % | (32.13 | ) | % | (8.70 | ) | % | ||||||
|
August
|
(13.37 | ) | % | (13.92 | ) | % | (27.14 | ) | % | ||||||
|
September
|
12.28 | % | (9.67 | ) | % | 26.03 | % | ||||||||
|
October
|
12.09 | % | (12.34 | ) | % | (13.31 | ) | % | |||||||
|
November
|
(16.16 | ) | % | (6.31 | ) | % | (11.86 | ) | % | ||||||
|
December
|
0.75 | % | (14.32 | ) | % | 13.91 | % | ||||||||
|
Annual
Rate of Return
|
(27.64 | ) | %** | (35.68 | ) | % | (56.73 | ) | % | ||||||
|
*
|
The
monthly rate of return is calculated by dividing the ending NAV of a given
month by the ending NAV of the previous month, subtracting 1 and
multiplying this number by 100 to arrive at a percentage increase or
decrease.
|
|
**
|
Partial
from April 18, 2007
|
Terms
Used in Performance Tables
Draw-down: Losses experienced
over a specified period. Draw-down is measured on the basis of monthly returns
only and does not reflect intra-month figures.
Worst Monthly Percentage
Draw-down: The largest single month loss sustained since inception of
trading.
Worst Peak-to-Valley
Draw-down: The largest percentage decline in the NAV per unit over the
history of the fund. This need not be a continuous decline, but can be a series
of positive and negative returns where the negative returns are larger than the
positive returns. Worst Peak-to-Valley Draw-down represents the
greatest percentage decline from any month-end NAV per unit that occurs without
such month-end NAV per unit being equaled or exceeded as of a subsequent
month-end. For example, if the NAV per unit declined by $1 in each of January
and February, increased by $1 in March and declined again by $2 in April, a
“peak-to-trough drawdown” analysis conducted as of the end of April would
consider that “drawdown” to be still continuing and to be $3 in amount, whereas
if the NAV per unit had increased by $2 in March, the January-February drawdown
would have ended as of the end of February at the $2 level.
28
Prior
Performance of the Related Public Funds
The
General Partner is also currently the general partner of the Related Public
Funds. Each of the General Partner and the Related Public Funds is located in
California.
USOF is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of USOF is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the price of light, sweet crude oil
delivered to Cushing, Oklahoma, as measured by the changes in the price of the
futures contract on light, sweet crude oil traded on the NYMEX, less USOF’s
expenses. USOF’s units began trading on April 10, 2006 and are offered on a
continuous basis. USOF may invest in a mixture of listed crude oil futures
contracts, other non-listed oil related investments, Treasuries, cash and cash
equivalents. As of December 31, 2009, the total amount of money raised by USOF
from its authorized purchasers was $24,257,292,570; the total number of
authorized purchasers of USOF was 17; the number of baskets purchased by
authorized purchasers of USOF was 4,752; the number of baskets redeemed by
authorized purchasers of USOF was 4,121; and the aggregate amount of units
purchased was 475,200,000. USOF employs an investment strategy in its operations
that is similar to the investment strategy of USNG, except that its benchmark is
the near month contract to expire for light, sweet crude oil delivered to
Cushing, Oklahoma.
Since the
offering of USOF units to the public on April 10, 2006 to December 31, 2009, the
simple average daily change in its benchmark oil futures contract was -0.027%,
while the simple average daily change in the NAV of USOF over the same time
period was -0.022%. The average daily difference was 0.005% (or 0.5 basis
points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement of the benchmark oil futures contract, the average error in daily
tracking by the NAV was 1.56%, meaning that over this time period USOF’s
tracking error was within the plus or minus 10% range established as its
benchmark tracking goal.
US12OF is
a commodity pool and issues units traded on the NYSE Arca. The investment
objective of US12OF is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of light, sweet crude
oil delivered to Cushing, Oklahoma, as measured by the changes in the average of
the prices of 12 futures contracts on light, sweet crude oil traded on the
NYMEX, consisting of the near month contract to expire and the contracts for the
following 11 months, for a total of 12 consecutive months’ contracts, less
US12OF’s expenses. US12OF’s units began trading on December 6, 2007 and are
offered on a continuous basis. US12OF invests in a mixture of listed crude oil
futures contracts, other non-listed oil related investments, Treasuries, cash
and cash equivalents. As of December 31, 2009, the total amount of money raised
by US12OF from its authorized purchasers was $224,069,813; the total number of
authorized purchasers of US12OF was 4; the number of baskets purchased by
authorized purchasers of US12OF was 75; the number of baskets redeemed by
authorized purchasers of US12OF was 34; and the aggregate amount of units
purchased was 7,500,000. US12OF employs an investment strategy in its operations
that is similar to the investment strategy of USNG, except that its benchmark is
the average of the prices of the near month contract to expire and the following
eleven months contracts for light, sweet crude oil delivered to Cushing,
Oklahoma.
Since the
offering of US12OF units to the public on December 6, 2007 to December 31, 2009,
the simple average daily change in its Benchmark Futures Contracts was -0.004%,
while the simple average daily change in the NAV of US12OF over the same time
period was -0.003%. The average daily difference was 0.001% (or 0.1 basis
points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement of the Benchmark Futures Contracts, the average error in daily tracking
by the NAV was -0.107%, meaning that over this time period US12OF’s tracking
error was within the plus or minus 10% range established as its benchmark
tracking goal.
29
UGA is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of UGA is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms in the spot price of unleaded gasoline
for delivery to the New York harbor, as measured by the changes in the price of
the futures contract on gasoline traded on the NYMEX, less UGA’s expenses. UGA
may invest in a mixture of listed gasoline futures contracts, other non-listed
gasoline related investments, Treasuries, cash and cash equivalents. UGA’s units
began trading on February 26, 2008 and are offered on a continuous
basis. As of December 31, 2009, the total amount of money raised by UGA
from its authorized purchasers was $126,263,653; the total number of authorized
purchasers of UGA was 6; the number of baskets purchased by authorized
purchasers of UGA was 42; the number of baskets redeemed by authorized
purchasers of UGA was 23; and the aggregate amount of units purchased was
4,200,000. UGA employs an investment strategy in its operations that is similar
to the investment strategy of USNG, except that its benchmark is the near month
contract for unleaded gasoline delivered to the New York harbor.
Since the
offering of UGA units to the public on February 26, 2008 to December 31, 2009,
the simple average daily change in its benchmark futures contract was -0.011%,
while the simple average daily change in the NAV of UGA over the same time
period was -0.012%. The average daily difference was -0.001% (or -0.1 basis
points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement of the benchmark futures contract, the average error in daily tracking
by the NAV was -0.674%, meaning that over this time period UGA’s tracking error
was within the plus or minus 10% range established as its benchmark tracking
goal.
USHO is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of USHO is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of heating oil for
delivery to the New York harbor, as measured by the changes in the price of the
futures contract on heating oil traded on the NYMEX, less USHO’s expenses. USHO
may invest in a mixture of listed heating oil futures contracts, other
non-listed heating oil-related investments, Treasuries, cash and cash
equivalents. USHO’s units began trading on April 9, 2008 and are offered on a
continuous basis. As of December 31, 2009, the total amount of money raised by
USHO from its authorized purchasers was $27,750,399; the total number of
authorized purchasers of USHO was 6; the number of baskets purchased by
authorized purchasers of USHO was 8; the number of baskets redeemed by
authorized purchasers of USHO was 2; and the aggregate amount of units purchased
was 800,000. USHO employs an investment strategy in its operations that is
similar to the investment strategy of USNG, except that its benchmark is the
near month contract for heating oil delivered to the New York
harbor.
Since the
offering of USHO units to the public on April 9, 2008 to December 31, 2009, the
simple average daily change in its benchmark futures contract was -0.093%, while
the simple average daily change in the NAV of USHO over the same time period was
-0.093%. The average daily difference was 0%. As a percentage of the daily
movement of the benchmark futures contract, the average error in daily tracking
by the NAV was -0.696%, meaning that over this time period USHO’s tracking error
was within the plus or minus 10% range established as its benchmark tracking
goal.
USSO is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of USSO is for the changes in percentage terms of its units’ NAV to
inversely reflect the changes in percentage terms of the price of light, sweet
crude oil delivered to Cushing, Oklahoma as measured by the changes in the price
of the futures contract for light, sweet crude oil traded on the NYMEX, less
USSO’s expenses. USSO’s units began trading on September 24, 2009 and
are offered on a continuous basis. USSO invests in short positions in listed
crude oil futures contracts, other non-listed oil related investments,
Treasuries, cash and cash equivalents. As of December 31, 2009, the total amount
of money raised by USSO from its authorized purchasers was $14,290,534; the
total number of authorized purchasers of USSO was 7; the number of baskets
purchased by authorized purchasers of USSO was 3; no baskets were redeemed by
authorized purchasers of USSO; and the aggregate amount of units purchased was
300,000. USSO employs an investment strategy in its operations that is similar
to the investment strategy of USNG, except that its benchmark is the inverse of
the near month contract for light, sweet crude oil delivered to Cushing,
Oklahoma.
Since the
offering of USSO units to the public on September 24, 2009 to December 31, 2009,
the inverse of the simple average daily change in its benchmark futures contract
was -0.164%, while the simple average daily change in the NAV of USSO over the
same time period was -0.167%. The average daily difference was -0.003% (or -0.3
basis points, where 1 basis point equals 1/100 of 1%). As a percentage of the
inverse of the daily movement of the benchmark futures contract, the average
error in daily tracking by the NAV was -0.179%, meaning that over this time
period USSO’s tracking error was within the plus or minus 10% range established
as its benchmark tracking goal.
30
US12NG is
a commodity pool and issues units traded on the NYSE Arca. The investment
objective of US12NG for have the changes in percentage terms of its units’ NAV
to reflect the changes in percentage terms of the price of natural gas delivered
at the Henry Hub, Louisiana, as measured by the changes in the average of the
prices of 12 futures contracts on natural gas traded on the NYMEX, consisting of
the near month contract to expire and the contracts for the following 11 months,
for a total of 12 consecutive months’ contracts, less US12NG’s expenses.
US12NG’s units began trading on November 18, 2009 and are offered on a
continuous basis. US12NG invests in a mixture of listed natural gas futures
contracts, other non-listed natural gas related investments, Treasuries, cash
and cash equivalents. As of December 31, 2009, the total amount of money raised
by US12NG from its authorized purchasers was $40,652,355; the total number of
authorized purchasers of US12NG was 8; the number of baskets purchased by
authorized purchasers of US12NG was 2; the number of baskets redeemed by
authorized purchasers of US12NG was 1; and the aggregate amount of units
purchased was 800,000. US12NG employs an investment strategy in its operations
that is similar to the investment strategy of USNG, except that its benchmark is
the average of the prices of the near month contract to expire and the following
eleven months contracts for natural gas delivered at the Henry Hub,
Louisiana.
Since the
offering of US12NG units to the public on November 18, 2009 to December 31,
2009, the simple average daily change in its benchmark futures contract was
0.291%, while the simple average daily change in the NAV of US12NG over the same
time period was 0.287%. The average daily difference was -0.004 % (or -0.4 basis
points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement of the benchmark futures contract, the average error in daily tracking
by the NAV was 0.089%, meaning that over this time period US12NG’s tracking
error was within the plus or minus 10% range established as its benchmark
tracking goal.
The
General Partner has filed a registration statement for two other exchange traded
security funds, USBO and USCI. The investment objective of USBO would
be to have the daily changes in percentage terms of its units’ NAV
reflect the daily changes in percentage terms of the spot price of Brent crude
oil, as measured by the changes in the price of the futures contract on Brent
crude oil traded on the ICE Futures, less USBO’s expenses. The investment
objective of USCI will be for the changes in percentage terms of its units’ NAV
to reflect the changes in percentage terms of the SDCI Total Return, less USCI’s
expenses.
There are
significant differences between investing in USNG and the Related Public Funds
and investing directly in the futures market. The General Partner’s results with
USNG and the Related Public Funds may not be representative of results that may
be experienced with a fund directly investing in futures contracts or other
managed funds investing in futures contracts. Moreover, given the different
investment objectives of USNG and the Related Public Funds, the performance of
USNG may not be representative of results that may be experienced by the other
Related Public Funds. For more information on the performance of the Related
Public Funds, see the Performance Tables below.
USOF:
Experience
in Raising and Investing in Funds through December 31, 2009
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Dollar
Amount Offered*:
|
$ | 71,257,630,000 | ||
|
Dollar
Amount Raised:
|
$ | 24,257,292,570 | ||
|
Organizational
and Offering Expenses**:
|
||||
|
SEC
registration fee:
|
$ | 2,480,174 | ||
|
FINRA
registration fee:
|
$ | 603,500 | ||
|
Listing
fee:
|
$ | 5,000 | ||
|
Auditor’s
fees and expenses:
|
$ | 495,850 | ||
|
Legal
fees and expenses:
|
$ | 2,040,875 | ||
|
Printing
expenses:
|
$ | 285,230 | ||
|
Length
of USOF Offering:
|
Continuous
|
|||
31
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
|
**
|
Through
December 31, 2006, these expenses were paid for by an affiliate of the
General Partner in connection with the initial public offering. Following
December 31, 2006, USOF has recorded these
expenses.
|
Compensation
to the General Partner and Other Compensation USOF:
Expenses
Paid by USOF through December 31, 2009 in dollar terms:
|
Expenses:
|
Amount in Dollar Terms
|
||
|
Amount
Paid to General Partner:
|
$ | 20,842,027 | |
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$ | 7,159,498 | |
|
Other
Amounts Paid*:
|
$ | 8,770,873 | |
|
Total
Expenses Paid:
|
$ | 36,772,398 | |
|
*
|
Includes
expenses relating to the registration of additional units, legal fees,
auditing fees, printing expenses, licensing fees and tax reporting fees
and fees paid to the independent directors of the General
Partner.
|
Expenses
Paid by USOF through December 31, 2009 as a Percentage of Average Daily Net
Assets:
|
Expenses:
|
Amount as a Percentage
of Average Daily Net Assets
|
|
|
Amount
Paid to General Partner:
|
0.46%
annualized
|
|
|
Amount
Paid in Portfolio Brokerage Commissions:
|
0.16%
annualized
|
|
|
Other
Amounts Paid:
|
0.19%
annualized
|
|
|
Total
Expenses Paid:
|
0.81%
annualized
|
|
USOF Performance:
|
|||
|
Name
of Commodity Pool:
|
USOF
|
||
|
Type
of Commodity Pool:
|
Exchange
traded security
|
||
|
Inception
of Trading:
|
April
10, 2006
|
||
|
Aggregate
Subscriptions (from inception through
December 31, 2009):
|
$ | 24,257,292,570 | |
|
Total
Net Assets as of December 31, 2009:
|
$ | 2,471,252,817 | |
|
Initial
NAV Per Unit as of Inception:
|
$ | 67.39 | |
|
NAV
per Unit as of December 31, 2009:
|
$ | 39.16 | |
|
Worst
Monthly Percentage Draw-down:
|
October
2008 (31.57)%
|
||
|
Worst
Peak-to-Valley Draw-down:
|
June
2008 – February 2009 (75.84)%
|
||
|
Number
of Unitholders (as of December 31, 2009)
|
84,835 | ||
32
COMPOSITE
PERFORMANCE DATA FOR USOF
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Rates of return*
|
||||||||||||||||
|
Month
|
2006
|
2007
|
2008
|
2009
|
||||||||||||
|
January
|
– | (6.55 | )% | (4.00 | )% | (14.60 | )% | |||||||||
|
February
|
– | 5.63 | % | 11.03 | % | (6.55 | )% | |||||||||
|
March
|
– | 4.61 | % | 0.63 | % | 7.23 | % | |||||||||
|
April
|
3.47 | %** | (4.26 | )% | 12.38 | % | (2.38 | )% | ||||||||
|
May
|
(2.91 | )% | (4.91 | )% | 12.80 | % | 26.69 | % | ||||||||
|
June
|
3.16 | % | 9.06 | % | 9.90 | % | 4.16 | % | ||||||||
|
July
|
(0.50 | )% | 10.57 | % | (11.72 | )% | (2.30 | )% | ||||||||
|
August
|
(6.97 | )% | (4.95 | )% | (6.75 | )% | (1.98 | )% | ||||||||
|
September
|
(11.72 | )% | 12.11 | % | (12.97 | )% | 0.25 | % | ||||||||
|
October
|
(8.45 | )% | 16.98 | % | (31.57 | )% | 8.43 | % | ||||||||
|
November
|
4.73 | % | (4.82 | )% | (20.65 | )% | (0.51 | )% | ||||||||
|
December
|
(5.21 | )% | 8.67 | % | (22.16 | )% | (0.03 | )% | ||||||||
|
Annual
Rate of Return
|
(23.03 | )%** | 46.17 | % | (54.75 | )% | 14.14 | % | ||||||||
|
*
|
The
monthly rate of return is calculated by dividing the ending NAV of a given
month by the ending NAV of the previous month, subtracting 1 and
multiplying this number by 100 to arrive at a percentage increase or
decrease.
|
|
**
|
Partial
from April 10, 2006.
|
For a
definition of draw-down, please see text below “Composite Performance Data for
USNG”.
US12OF:
Experience
in Raising and Investing in Funds through December 31, 2009
PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
|
Dollar
Amount Offered*:
|
$ | 3,718,000,000 | ||
|
Dollar
Amount Raised:
|
$ | 224,069,815 | ||
|
Organizational
and Offering Expenses**:
|
||||
|
SEC registration
fee:
|
$ | 129,248 | ||
|
FINRA registration
fee:
|
$ | 151,000 | ||
|
Listing fee:
|
$ | 5,000 | ||
|
Auditor’s fees and
expenses:
|
$ | 60,700 | ||
|
Legal fees and
expenses:
|
$ | 301,279 | ||
|
Printing
expenses:
|
$ | 44,402 | ||
|
Length
of US12OF Offering:
|
Continuous
|
|||
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
33
|
**
|
Through
March 31, 2009, a portion of these expenses were paid for by an affiliate
of the General Partner in connection with the initial public offering.
Following March 31, 2009, US12OF has recorded these
expenses.
|
Compensation
to the General Partner and Other Compensation US12OF:
Expenses
paid by US12OF through December 31, 2009 in dollar terms:
|
Expenses:
|
Amount in Dollar Terms
|
|||
|
Amount
Paid to General Partner:
|
$ | 922,534 | ||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$ | 52,790 | ||
|
Other
Amounts Paid*:
|
$ | 798,777 | ||
|
Total
Expenses Paid or Accrued:
|
$ | 1,774,101 | ||
|
Expenses
Waived**:
|
$ | (108,246 | ) | |
|
Net
Expenses Paid or Accrued Including Expenses Waived:
|
$ | 1,665,855 | ||
|
*
|
Includes
expenses relating to the registration of additional units, legal fees,
auditing fees, printing expenses, licensing fees and tax reporting fees
and fees paid to the independent directors of the General
Partner.
|
|
**
|
The
General Partner, though under no obligation to do so, agreed to pay
certain expenses, to the extent that such expenses exceeded 0.15% (15
basis points) of US12OF’s NAV, on an annualized basis through March 31,
2009, after which date such payments were no longer necessary. The General
Partner has no obligation to pay such expenses in subsequent
periods.
|
Expenses
paid by US12OF through December 31, 2009 as a Percentage of Average Daily Net
Assets:
|
Expenses in US12OF Offering:
|
Amount as a Percentage of
Average Daily Net Assets
|
||
|
Amount
Paid to General Partner:
|
0.60%
annualized
|
||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
0.03%
annualized
|
||
|
Other
Amounts Paid:
|
0.52%
annualized
|
||
|
Total
Expenses Paid or Accrued:
|
1.15%
annualized
|
||
|
Expenses
Waived:
|
(0.07)%
annualized
|
||
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
1.08%
annualized
|
|
US12OF Performance:
|
||||
|
Name
of Commodity Pool:
|
US12OF
|
|||
|
Type
of Commodity Pool:
|
Exchange
traded security
|
|||
|
Inception
of Trading:
|
December
6, 2007
|
|||
|
Aggregate
Subscriptions (from inception through December 31, 2009):
|
$ | 224,069,815 | ||
|
Total
Net Assets as of December 31, 2009:
|
$ | 165,523,309 | ||
|
Initial
NAV per Unit as of Inception:
|
$ | 50.00 | ||
|
NAV
per Unit as of December 31, 2009:
|
$ | 40.37 | ||
|
Worst
Monthly Percentage Draw-down:
|
October
2008 (29.59)%
|
|||
|
Worst
Peak-to-Valley Draw-down:
|
June
2008–February 2009 (66.97)%
|
|||
|
Number
of Unitholders (as of December 31, 2009)
|
6,875 | |||
34
COMPOSITE
PERFORMANCE DATA FOR US12OF
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Rates of return*
|
||||||||||||||
|
Month
|
2007
|
2008
|
2009
|
|||||||||||
|
January
|
– | (2.03 | ) |
%
|
(7.11 | ) |
%
|
|||||||
|
February
|
– | 10.48 |
%
|
(4.34 | ) |
%
|
||||||||
|
March
|
– | (0.66 | ) |
%
|
9.22 |
%
|
||||||||
|
April
|
– | 11.87 |
%
|
(1.06 | ) |
%
|
||||||||
|
May
|
– | 15.47 |
%
|
20.40 |
%
|
|||||||||
|
June
|
– | 11.59 |
%
|
4.51 |
%
|
|||||||||
|
July
|
– | (11.39 | ) |
%
|
1.22 |
%
|
||||||||
|
August
|
– | (6.35 | ) |
%
|
(2.85 | ) |
%
|
|||||||
|
September
|
– | (13.12 | ) |
%
|
(0.92 | ) |
%
|
|||||||
|
October
|
– | (29.59 | ) |
%
|
8.48 |
%
|
||||||||
|
November
|
– | (16.17 | ) |
%
|
2.31 |
%
|
||||||||
|
December
|
8.46 | %** | (12.66 | ) |
%
|
(1.10 | ) |
%
|
||||||
|
Annual
Rate of Return
|
8.46 | %** | (42.39 | ) |
%
|
29.23 |
%
|
|||||||
|
*
|
The
monthly rate of return is calculated by dividing the ending NAV of a given
month by the ending NAV of the previous month, subtracting 1 and
multiplying this number by 100 to arrive at a percentage increase or
decrease.
|
|
**
|
Partial
from December 6, 2007.
|
For a
definition of draw-down, please see text below “Composite Performance Data for
USNG”
UGA:
Experience
in Raising and Investing in Funds through December 31, 2009
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Dollar
Amount Offered*:
|
$ | 1,500,000,000 | ||
|
Dollar
Amount Raised:
|
$ | 126,263,653 | ||
|
Organizational
and Offering Expenses**:
|
||||
|
SEC
registration fee:
|
$ | 184,224 | ||
|
FINRA
registration fee:
|
$ | 151,000 | ||
|
Listing
fee:
|
$ | 5,000 | ||
|
Auditor’s
fees and expenses:
|
$ | 27,500 | ||
|
Legal
fees and expenses:
|
$ | 217,078 | ||
|
Printing
expenses:
|
$ | 162,901 | ||
|
Length
of UGA Offering:
|
Continuous
|
|||
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
|
**
|
Through
August 31, 2009, initial offering costs and a portion of ongoing expenses
were paid for by the General Partner. Following August 31, 2009, UGA has
paid the full portion of expenses related to registration of new units and
a portion of the expenses related to regular
operations.
|
35
Compensation
to the General Partner and Other Compensation UGA:
Expenses paid by UGA through December 31, 2009 in dollar
terms:
|
Expenses:
|
Amount in Dollar Terms
|
|||
|
Amount
Paid to General Partner:
|
$ | 474,543 | ||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$ | 90,757 | ||
|
Other
Amounts Paid*:
|
$ | 529,839 | ||
|
Total
Expenses Paid:
|
$ | 1,095,139 | ||
|
Expenses
Waived**:
|
$ | (382,703 | ) | |
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
$ | 712,436 | ||
|
*
|
Includes
expenses relating to the registration of additional units, legal fees,
auditing fees, printing expenses, licensing fees and tax reporting fees
and fees paid to the independent directors of the General
Partner.
|
|
**
|
The
General Partner, though under no obligation to do so, agreed to pay
certain expenses, to the extent that such expenses exceeded 0.15% (15
basis points) of UGA’s NAV, on an annualized basis. The General Partner
has no obligation to continue such payment into subsequent
periods.
|
Expenses paid by UGA through December 31, 2009 as a
Percentage of Average Daily Net Assets:
|
Expenses:
|
Amount as a Percentage
of Average Daily Net Assets
|
|
|
Amount
Paid to General Partner:
|
0.60%
annualized
|
|
|
Amount
Paid in Portfolio Brokerage Commissions:
|
0.11%
annualized
|
|
|
Other
Amounts Paid:
|
0.67%
annualized
|
|
|
Total
Expenses Paid:
|
1.38%
annualized
|
|
|
Expenses
Waived:
|
(0.48)%
annualized
|
|
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
0.90%
annualized
|
|
UGA Performance:
|
|||
|
Name
of Commodity Pool:
|
UGA
|
||
|
Type
of Commodity Pool:
|
Exchange
traded security
|
||
|
Inception
of Trading:
|
February
26, 2008
|
||
|
Aggregate
Subscriptions (from inception through December 31, 2009):
|
$ | 126,263,653 | |
|
Total
Net Assets as of December 31, 2009:
|
$ | 69,185,740 | |
|
Initial
NAV per Unit as of Inception:
|
$ | 50.00 | |
|
NAV
per Unit as of December 31, 2009:
|
$ | 36.41 | |
|
Worst
Monthly Percentage Draw-down:
|
October
2008 (38.48%)
|
||
|
Worst
Peak-to-Valley Draw-down:
|
June
2008 – December 2008 (69.02%)
|
||
|
Number
of Unitholders (as of December 31, 2009)
|
5,131 | ||
36
COMPOSITE
PERFORMANCE DATA FOR UGA
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Rates of return*
|
||||||||||
|
Month
|
2008
|
2009
|
||||||||
|
January
|
– | 16.23 | % | |||||||
|
February
|
(0.56 | ) | %** | 0.26 | % | |||||
|
March
|
(2.39 | ) | % | 2.59 | % | |||||
|
April
|
10.94 | % | 2.07 | % | ||||||
|
May
|
15.60 | % | 30.41 | % | ||||||
|
June
|
4.80 | % | 1.65 | % | ||||||
|
July
|
(12.79 | ) | % | 6.24 | % | |||||
|
August
|
(3.88 | ) | % | (3.71 | ) | % | ||||
|
September
|
(9.36 | ) | % | (3.38 | ) | % | ||||
|
October
|
(38.48 | ) | % | 10.96 | % | |||||
|
November
|
(21.35 | ) | % | 1.00 | % | |||||
|
December
|
(15.72 | ) | % | 0.55 | % | |||||
|
Annual
Rate of Return
|
(59.58 | ) | %** | 80.16 | % | |||||
|
*
|
The
monthly rate of return is calculated by dividing the ending NAV of a given
month by the ending NAV of the previous month, subtracting 1 and
multiplying this number by 100 to arrive at a percentage increase or
decrease.
|
|
**
|
Partial
from February 26, 2008.
|
For a
definition of draw-down, please see text below “Composite Performance Data for
USNG”.
USHO:
Experience
in Raising and Investing in Funds through December 31, 2009
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Dollar
Amount Offered*:
|
$ | 500,000,000 | ||
|
Dollar
Amount Raised:
|
$ | 27,750,399 | ||
|
Organizational
and Offering Expenses**:
|
||||
|
SEC registration
fee:
|
$ | 142,234 | ||
|
FINRA registration
fee:
|
$ | 151,000 | ||
|
Listing fee:
|
$ | 5,000 | ||
|
Auditor’s fees and
expenses:
|
$ | 27,500 | ||
|
Legal fees and
expenses:
|
$ | 121,321 | ||
|
Printing
expenses:
|
$ | 106,584 | ||
|
Length
of USHO Offering:
|
Continuous
|
|||
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
|
**
|
Through
August 31, 2009, initial offering costs and a portion of ongoing expenses
were paid for by the General Partner. Following August 31, 2009, USHO has
paid the full portion of expenses related to registration of new units and
a portion of the expenses related to regular
operations.
|
37
Compensation
to the General Partner and Other Compensation USHO:
Expenses
paid by USHO through December 31, 2009 in dollar terms:
|
Expenses:
|
Amount in Dollar Terms
|
|||
|
Amount
Paid to General Partner:
|
$ | 109,681 | ||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$ | 18,418 | ||
|
Other
Amounts Paid*:
|
$ | 333,904 | ||
|
Total
Expenses Paid:
|
$ | 462,003 | ||
|
Expenses
Waived**:
|
$ | (299,225 | ) | |
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
$ | 162,778 | ||
|
*
|
Includes
expenses relating to the registration of additional units, legal fees,
auditing fees, printing expenses, licensing fees and tax reporting fees
and fees paid to the independent directors of the General
Partner.
|
|
**
|
The
General Partner, though under no obligation to do so, agreed to pay
certain expenses, to the extent that such expenses exceeded 0.15% (15
basis points) of USHO’s NAV, on an annualized basis. The General Partner
has no obligation to continue such payment into subsequent
periods.
|
Expenses
paid by USHO through December 31, 2009 as a Percentage of Average Daily Net
Assets:
|
Expenses:
|
Amount as a Percentage
of Average Daily Net Assets
|
||
|
Amount
Paid to General Partner:
|
0.60%
annualized
|
||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
0.10%
annualized
|
||
|
Other
Amounts Paid:
|
1.83%
annualized
|
||
|
Total
Expenses Paid:
|
2.53%
annualized
|
||
|
Expenses
Waived:
|
(1.64)%
annualized
|
||
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
0.89%
annualized
|
|
USHO Performance:
|
||||
|
Name
of Commodity Pool:
|
USHO
|
|||
|
Type
of Commodity Pool:
|
Exchange
traded security
|
|||
|
Inception
of Trading:
|
April
9, 2008
|
|||
|
Aggregate
Subscriptions (from inception through December 31, 2009):
|
$ | 27,750,399 | ||
|
Total
Net Assets as of December 31, 2009:
|
$ | 16,525,095 | ||
|
Initial
NAV per Unit as of Inception:
|
$ | 50.00 | ||
|
NAV
per Unit as of December 31, 2009:
|
$ | 27.54 | ||
|
Worst
Monthly Percentage Draw-down:
|
October
2008 (28.63)%
|
|||
|
Worst
Peak-to-Valley Draw-down:
|
June
2008 – February 2009 (69.17)%
|
|||
|
Number
of Unitholders (as of December 31, 2009)
|
1,154 | |||
38
COMPOSITE
PERFORMANCE DATA FOR USHO
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Rates of return*
|
||||||||||
|
Month
|
2008
|
2009
|
||||||||
|
January
|
– | 0.05 | % | |||||||
|
February
|
– | (11.34 | ) | % | ||||||
|
March
|
– | 6.73 | % | |||||||
|
April
|
2.84 | %** | (3.85 | ) | % | |||||
|
May
|
15.93 | % | 23.13 | % | ||||||
|
June
|
5.91 | % | 4.55 | % | ||||||
|
July
|
(12.18 | ) | % | 0.39 | % | |||||
|
August
|
(8.41 | ) | % | (2.71 | ) | % | ||||
|
September
|
(9.77 | ) | % | (0.48 | ) | % | ||||
|
October
|
(28.63 | ) | % | 7.60 | % | |||||
|
November
|
(18.38 | ) | % | 0.19 | % | |||||
|
December
|
(17.80 | ) | % | 2.23 | % | |||||
|
Annual
Rate of Return
|
(56.12 | ) | %** | 25.52 | % | |||||
|
*
|
The
monthly rate of return is calculated by dividing the ending NAV of a given
month by the ending NAV of the previous month, subtracting 1 and
multiplying this number by 100 to arrive at a percentage increase or
decrease.
|
|
**
|
Partial
from April 9, 2008.
|
For a
definition of draw-down, please see text below “Composite Performance Data for
USNG”.
USSO:
Experience
in Raising and Investing in Funds through December 31, 2009
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Dollar
Amount Offered*:
|
$ | 1,500,000,000 | ||
|
Dollar
Amount Raised:
|
$ | 14,290,534 | ||
|
Organizational
and Offering Expenses**:
|
||||
|
SEC
registration fee:
|
$ | 49,125 | ||
|
FINRA
registration fee:
|
$ | 75,500 | ||
|
Listing
fee:
|
$ | 5,000 | ||
|
Auditor’s
fees and expenses:
|
$
|
0
|
||
|
Legal
fees and expenses:
|
$
|
512,460
|
||
|
Printing
expenses:
|
$
|
23,945
|
||
|
Length
of USSO Offering:
|
Continuous
|
|||
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
|
**
|
These
expenses were paid for by the General
Partner.
|
39
Compensation
to the General Partner and Other Compensation USSO:
Expenses
paid by USSO through December 31, 2009 in dollar terms:
|
Expenses:
|
Amount in Dollar Terms
|
|||
|
Amount
Paid to General Partner:
|
$ | 20,150 | ||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$ | 4,695 | ||
|
Other
Amounts Paid*:
|
$ | 212,443 | ||
|
Total
Expenses Paid:
|
$ | 237,288 | ||
|
Expenses
Waived**:
|
$ | (206,444 | ) | |
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
$ | 30,844 | ||
|
*
|
Includes
expenses relating to legal fees, auditing fees, printing expenses,
licensing fees and tax reporting fees and fees paid to the independent
directors of the General Partner.
|
|
**
|
The
General Partner, though under no obligation to do so, agreed to pay
certain expenses, to the extent that such expenses exceeded 0.15% (15
basis points) of USSO’s NAV, on an annualized basis. The General Partner
has no obligation to continue such payment into subsequent
periods.
|
Expenses
paid by USSO through December 31, 2009 as a Percentage of Average Daily Net
Assets:
|
Expenses:
|
Amount as a Percentage
of Average Daily Net Assets
|
|
|
Amount
Paid to General Partner:
|
0.60%
annualized
|
|
|
Amount
Paid in Portfolio Brokerage Commissions:
|
0.14%
annualized
|
|
|
Other
Amounts Paid:
|
6.33%
annualized
|
|
|
Total
Expenses Paid:
|
7.07%
annualized
|
|
|
Expenses
Waived:
|
(6.15)%
annualized
|
|
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
0.92%
annualized
|
|
USSO
Performance:
|
|||
|
Name
of Commodity Pool:
|
USSO
|
||
|
Type
of Commodity Pool:
|
Exchange
traded security
|
||
|
Inception
of Trading:
|
September
24, 2009
|
||
|
Aggregate
Subscriptions (from inception through December 31, 2009):
|
$ | 14,290,534 | |
|
Total
Net Assets as of December 31, 2009:
|
$ | 13,196,305 | |
|
Initial
NAV per Unit as of Inception:
|
$ | 50.00 | |
|
NAV
per Unit as of December 31, 2009:
|
$ | 43.99 | |
|
Worst
Monthly Percentage Draw-down:
|
October
2009 (8.65)%
|
||
|
Worst
Peak-to-Valley Draw-down:
|
September
2009-December 2009 (12.02)%
|
||
|
Number
of Unitholders (as of December 31, 2009)
|
185 | ||
40
COMPOSITE
PERFORMANCE DATA FOR USSO
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Rates of return*
|
||||
|
Month
|
2009
|
|||
|
January
|
– | |||
|
February
|
– | |||
|
March
|
– | |||
|
April
|
– | |||
|
May
|
– | |||
|
June
|
– | |||
|
July
|
– | |||
|
August
|
– | |||
|
September
|
(2.90 | )%** | ||
|
October
|
(8.65 | )% | ||
|
November
|
(0.25 | )% | ||
|
December
|
(0.57 | )% | ||
|
Annual
Rate of Return
|
(12.02 | )%** | ||
|
*
|
The
monthly rate of return is calculated by dividing the ending NAV of a given
month by the ending NAV of the previous month, subtracting 1 and
multiplying this number by 100 to arrive at a percentage increase or
decrease.
|
|
**
|
Partial
from September 24, 2009.
|
For a
definition of draw-down, please see text below “Composite Performance Data for
USNG”.
US12NG:
Experience
in Raising and Investing in Funds through December 31, 2009
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Dollar
Amount Offered*:
|
$ | 1,500,000,000 | ||
|
Dollar
Amount Raised:
|
$ | 40,652,357 | ||
|
Organizational
and Offering Expenses**:
|
||||
|
SEC
registration fee:
|
$ | 82,445 | ||
|
FINRA
registration fee:
|
$ | 75,500 | ||
|
Listing
fee:
|
$ | 5,000 | ||
|
Auditor’s
fees and expenses:
|
$
|
2,500
|
||
|
Legal
fees and expenses:
|
$
|
202,252
|
||
|
Printing
expenses:
|
$
|
31,588
|
||
|
Length
of US12NG Offering:
|
Continuous
|
|||
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
|
**
|
These
expenses were paid for by the General
Partner.
|
41
Expenses
paid by US12NG through December 31, 2009 in dollar terms:
|
Expenses:
|
Amount in Dollar Terms
|
|||
|
Amount
Paid to General Partner:
|
$ | 16,490 | ||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
$ | 9,284 | ||
|
Other
Amounts Paid*:
|
$ | 141,553 | ||
|
Total
Expenses Paid:
|
$ | 167,327 | ||
|
Expenses
Waived**:
|
$ | (136,678 | ) | |
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
$ | 30,649 | ||
|
*
|
Includes
expenses relating to legal fees, auditing fees, printing expenses,
licensing fees and tax reporting fees and fees paid to the independent
directors of the General Partner.
|
|
**
|
The
General Partner, though under no obligation to do so, agreed to pay
certain expenses, to the extent that such expenses exceeded 0.15% (15
basis points) of US12NG’s NAV, on an annualized basis. The General Partner
has no obligation to continue such payment into subsequent
periods.
|
Expenses
paid by US12NG through December 31, 2009 as a Percentage of Average Daily Net
Assets:
|
Expenses:
|
Amount as a Percentage
of Average Daily Net Assets
|
||
|
Amount
Paid to General Partner:
|
0.60%
annualized
|
||
|
Amount
Paid in Portfolio Brokerage Commissions:
|
0.34%
annualized
|
||
|
Other
Amounts Paid:
|
5.15%
annualized
|
||
|
Total
Expenses Paid:
|
6.09%
annualized
|
||
|
Expenses
Waived:
|
(4.97)%
annualized
|
||
|
Total
Expenses Paid or Accrued Including Expenses Waived:
|
1.12%
annualized
|
|
US12NG Performance:
|
||||
|
Name
of Commodity Pool:
|
US12NG
|
|||
|
Type
of Commodity Pool:
|
Exchange
traded security
|
|||
|
Inception
of Trading:
|
November
18, 2009
|
|||
|
Aggregate
Subscriptions (from inception through December 31, 2009):
|
$ | 40,652,357 | ||
|
Total
Net Assets as of December 31, 2009:
|
$ | 37,637,148 | ||
|
Initial
NAV per Unit as of Inception:
|
$ | 50.00 | ||
|
NAV
per Unit as of December 31, 2009:
|
$ | 53.77 | ||
|
Worst
Monthly Percentage Draw-down:
|
November 2009 | |||
|
Worst
Peak-to-Valley Draw-down:
|
November 2009 | |||
|
Number
of Unitholders (as of December 31, 2009)
|
November 2009 | |||
42
COMPOSITE
PERFORMANCE DATA FOR US12NG
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Rates of return*
|
|||||
|
Month
|
2009
|
||||
|
January
|
- | ||||
|
February
|
- | ||||
|
March
|
- | ||||
|
April
|
- | ||||
|
May
|
- | ||||
|
June
|
- | ||||
|
July
|
- | ||||
|
August
|
- | ||||
|
September
|
- | ||||
|
October
|
- | ||||
|
November
|
(0.02 | ) | %** | ||
|
December
|
7.56 | % | |||
|
Annual
Rate of Return
|
7.54 | %** | |||
|
*
|
The
monthly rate of return is calculated by dividing the ending NAV of a given
month by the ending NAV of the previous month, subtracting 1 and
multiplying this number by 100 to arrive at a percentage increase or
decrease.
|
|
**
|
Partial
from November 18, 2009.
|
For a
definition of draw-down, please see text below “Composite Performance Data for
USNG”.
Other
Related Commodity Trading and Investment Management Experience
Until
December 31, 2009, Ameristock Corporation was an affiliate of the General
Partner. Ameristock Corporation is a California-based registered
investment advisor registered under the Investment Advisers Act of 1940, as
amended, that has been sponsoring and providing portfolio management services to
mutual funds since 1995. Ameristock Corporation is the investment adviser to the
Ameristock Mutual Fund, Inc., a mutual fund registered under the Investment
Company Act of 1940, as amended (the “1940 Act”), that focuses on large cap U.S.
equities that has $219,616,809 in assets as of December 31, 2009. Ameristock
Corporation was also the investment advisor to the Ameristock ETF Trust, an
open-end management investment company registered under the 1940 Act that
consisted of five separate investment portfolios, each of which sought
investment results, before fees and expenses, that corresponded generally to the
price and yield performance of a particular U.S. Treasury securities index owned
and compiled by Ryan Holdings LLC and Ryan ALM, Inc. The Ameristock
ETF Trust has liquidated each of its investment portfolios and has wound up its
affairs.
Investments
The
General Partner applies substantially all of USNG’s assets toward trading in
Futures Contracts and Other Natural Gas-Related Investments, Treasuries, cash
and/or cash equivalents. The General Partner has sole authority to determine the
percentage of assets that are:
|
|
·
|
held
on deposit with the futures commission merchant or other
custodian,
|
|
|
·
|
used
for other investments, and
|
|
|
·
|
held
in bank accounts to pay current obligations and as
reserves.
|
43
The
General Partner deposits substantially all of USNG’s net assets with the
Custodian or other custodian for trading. When USNG purchases a Futures Contract
and certain exchange traded Other Natural Gas-Related Investments, USNG is
required to deposit with the selling futures commission merchant on behalf of
the exchange a portion of the value of the contract or other interest as
security to ensure payment for the obligation under natural gas interests at
maturity. This deposit is known as “margin.” USNG invests the remainder of its
assets equal to the difference between the margin deposited and the market value
of the futures contract in Treasuries, cash and/or cash
equivalents.
USNG’s
assets are held in segregated accounts pursuant to the CEA and CFTC regulations.
The General Partner believes that all entities that hold or trade USNG’s assets
are based in the United States and are subject to United States
regulations.
Approximately
10% to 30% of USNG’s assets have normally been committed as margin for Futures
Contracts. However, from time to time, the percentage of assets committed as
margin may be substantially more, or less, than such range. The General Partner
invests the balance of USNG’s assets not invested in natural gas interests or
held in margin as reserves to be available for changes in margin. All interest
income is used for USNG’s benefit.
The
futures commission merchant, a government agency or a commodity exchange could
increase margins applicable to USNG to hold trading positions at any time.
Moreover, margin is merely a security deposit and has no bearing on the profit
or loss potential for any positions taken.
USNG must
post both collateral and independent amounts to its swap
counterparties. The amount of collateral USNG posts changes according
to the amounts owed by USNG to its counterparty on a given swap transaction,
while independent amounts are fixed amounts posted by USNG at the
start of a swap transaction. Collateral and independent amounts posted to swap
counterparties are held by a third party custodian.
The
Commodity Interest Markets
General
The CEA
governs the regulation of commodity interest transactions, markets and
intermediaries. In December 2000, the CEA was amended by the Commodity Futures
Modernization Act of 2000 (the “CFMA”), which substantially revised the
regulatory framework governing certain commodity interest transactions and the
markets on which they trade. The CEA, as amended by the CFMA, now provides for
varying degrees of regulation of commodity interest transactions depending upon
the variables of the transaction. In general, these variables include (1) the
type of instrument being traded (e.g., contracts for future delivery, options,
swaps or spot contracts), (2) the type of commodity underlying the instrument
(distinctions are made between instruments based on agricultural commodities,
energy and metals commodities and financial commodities), (3) the nature of the
parties to the transaction (retail, eligible contract participant, or eligible
commercial entity), (4) whether the transaction is entered into on a
principal-to-principal or intermediated basis, (5) the type of market on which
the transaction occurs, and (6) whether the transaction is subject to clearing
through a clearing organization. Information regarding commodity interest
transactions, markets and intermediaries, and their associated regulatory
environment, is provided below.
Futures
Contracts
A futures
contract is a standardized contract traded on, or subject to the rules of, an
exchange that calls for the future delivery of a specified quantity and type of
a commodity at a specified time and place. Futures contracts are traded on a
wide variety of commodities, including agricultural products, bonds, stock
indices, interest rates, currencies, energy and metals. The size and terms of
futures contracts on a particular commodity are identical and are not subject to
any negotiation, other than with respect to price and the number of contracts
traded between the buyer and seller.
The
contractual obligations of a buyer or seller may generally be satisfied by
taking or making physical delivery of the underlying of commodity or by making
an offsetting sale or purchase of an identical futures contract on the same or
linked exchange before the designated date of delivery. The difference between
the price at which the futures contract is purchased or sold and the price paid
for the offsetting sale or purchase, after allowance for brokerage commissions,
constitutes the profit or loss to the trader. Some futures contracts, such as
stock index contracts, settle in cash (reflecting the difference between the
contract purchase/sale price and the contract settlement price) rather than by
delivery of the underlying commodity.
44
In market
terminology, a trader who purchases a futures contract is long in the market and
a trader who sells a futures contract is short in the market. Before a trader
closes out his long or short position by an offsetting sale or purchase, his
outstanding contracts are known as open trades or open positions. The aggregate
amount of open positions held by traders in a particular contract is referred to
as the open interest in such contract.
Forward
Contracts
A forward
contract is a contractual obligation to purchase or sell a specified quantity of
a commodity at or before a specified date in the future at a specified price
and, therefore, is economically similar to a futures contract. Unlike futures
contracts, however, forward contracts are typically traded in the
over-the-counter markets and are not standardized contracts. Forward contracts
for a given commodity are generally available for various amounts and maturities
and are subject to individual negotiation between the parties involved.
Moreover, generally there is no direct means of offsetting or closing out a
forward contract by taking an offsetting position as one would a futures
contract on a U.S. exchange. If a trader desires to close out a forward contract
position, he generally will establish an opposite position in the contract but
will settle and recognize the profit or loss on both positions simultaneously on
the delivery date. Thus, unlike in the futures contract market where a trader
who has offset positions will recognize profit or loss immediately, in the
forward market a trader with a position that has been offset at a profit will
generally not receive such profit until the delivery date, and likewise a trader
with a position that has been offset at a loss will generally not have to pay
money until the delivery date. In recent years, however, the terms of forward
contracts have become more standardized, and in some instances such contracts
now provide a right of offset or cash settlement as an alternative to making or
taking delivery of the underlying commodity.
The
forward markets provide what has typically been a highly liquid market for
foreign exchange trading, and in certain cases the prices quoted for foreign
exchange forward contracts may be more favorable than the prices for foreign
exchange futures contracts traded on U.S. exchanges. The forward markets are
largely unregulated. Forward contracts are, in general, not cleared or
guaranteed by a third party. Commercial banks participating in trading foreign
exchange forward contracts often do not require margin deposits, but rely upon
internal credit limitations and their judgments regarding the creditworthiness
of their counterparties. In recent years, however, many over-the-counter market
participants in foreign exchange trading have begun to require that their
counterparties post margin.
Further,
as the result of the CFMA, over-the-counter derivative instruments such as
forward contracts and swap agreements (and options on forwards and physical
commodities) may begin to be traded on lightly-regulated exchanges or electronic
trading platforms that may, but are not required to, provide for clearing
facilities. Exchanges and electronic trading platforms on which over-the-counter
instruments may be traded and the regulation and criteria for that trading are
more fully described below under “Futures Exchanges and Clearing Organizations.”
Nonetheless, absent a clearing facility, USNG’s trading in foreign exchange and
other forward contracts is exposed to the creditworthiness of the counterparties
on the other side of the trade.
Options
on Futures Contracts
Options
on futures contracts are standardized contracts traded on an exchange. An option
on a futures contract gives the buyer of the option the right, but not the
obligation, to take a position at a specified price (the striking, strike, or
exercise price) in the underlying futures contract or underlying interest. The
buyer of a call option acquires the right, but not the obligation, to purchase
or take a long position in the underlying interest, and the buyer of a put
option acquires the right, but not the obligation, to sell or take a short
position in the underlying interest.
The
seller, or writer, of an option is obligated to take a position in the
underlying interest at a specified price opposite to the option buyer if the
option is exercised. Thus, the seller of a call option must stand ready to take
a short position in the underlying interest at the strike price if the buyer
should exercise the option. The seller of a put option, on the other hand, must
stand ready to take a long position in the underlying interest at the strike
price.
45
A call
option is said to be in-the-money if the strike price is below current market
levels and out-of-the-money if the strike price is above current market levels.
Conversely, a put option is said to be in-the-money if the strike price is above
the current market levels and out-of-the-money if the strike price is below
current market levels.
Options
have limited life spans, usually tied to the delivery or settlement date of the
underlying interest. Some options, however, expire significantly in advance of
such date. The purchase price of an option is referred to as its premium, which
consists of its intrinsic value (which is related to the underlying market
value) plus its time value. As an option nears its expiration date, the time
value shrinks and the market and intrinsic values move into parity. An option
that is out-of-the-money and not offset by the time it expires becomes
worthless. On certain exchanges, in-the-money options are automatically
exercised on their expiration date, but on others unexercised options simply
become worthless after their expiration date.
Regardless
of how much the market swings, the most an option buyer can lose is the option
premium. The option buyer deposits his premium with his broker, and the money
goes to the option seller. Option sellers, on the other hand, face risks similar
to participants in the futures markets. For example, since the seller of a call
option is assigned a short futures position if the option is exercised, his risk
is the same as someone who initially sold a futures contract. Because no one can
predict exactly how the market will move, the option seller posts margin to
demonstrate his ability to meet any potential contractual
obligations.
Options
on Forward Contracts or Commodities
Options
on forward contracts or commodities operate in a manner similar to options on
futures contracts. An option on a forward contract or commodity gives the buyer
of the option the right, but not the obligation, to take a position at a
specified price in the underlying forward contract or commodity. However,
similar to forward contracts, options on forward contracts or on commodities are
individually negotiated contracts between counterparties and are typically
traded in the over-the-counter market. Therefore, options on forward contracts
and physical commodities possess many of the same characteristics of forward
contracts with respect to offsetting positions and credit risk that are
described above.
Swap
Contracts
Swap
transactions generally involve contracts between two parties to exchange a
stream of payments computed by reference to a notional amount and the price of
the asset that is the subject of the swap. Swap contracts are principally traded
off-exchange, although recently, as a result of regulatory changes enacted as
part of the CFMA, certain swap contracts are now being traded in electronic
trading facilities and cleared through clearing organizations.
Swaps are
usually entered into on a net basis, that is, the two payment streams are netted
out in a cash settlement on the payment date or dates specified in the
agreement, with the parties receiving or paying, as the case may be, only the
net amount of the two payments. Swaps do not generally involve the delivery of
underlying assets or principal. Accordingly, the risk of loss with respect to
swaps is generally limited to the net amount of payments that the party is
contractually obligated to make. In some swap transactions one or both parties
may require collateral deposits from the counterparty to support that
counterparty’s obligation under the swap agreement. If the counterparty to such
a swap defaults, the risk of loss consists of the net amount of payments that
the party is contractually entitled to receive less any collateral deposits
it is holding.
Some swap
transactions are cleared through central counterparties. These
transactions, known as cleared swaps, involve two counterparties first agreeing
to the terms of a swap transaction, then submitting the transaction to a
clearing house that acts as the central counterparty. Once submitted
to the clearing house, the original swap transaction is novated and the central
counterparty becomes the counterparty to a trade with each of the original
parties based upon the trade terms determined in the original
transaction. In this manner each individual swap counterparty reduces
its risk of loss due to counterparty nonperformance because the clearing house
acts as the counterparty to each transaction.
46
Participants
The two
broad classes of persons who trade commodities are hedgers and speculators.
Hedgers include financial institutions that manage or deal in interest
rate-sensitive instruments, foreign currencies or stock portfolios, and
commercial market participants, such as farmers and manufacturers, that market
or process commodities. Hedging is a protective procedure designed to
effectively lock in prices that would otherwise change due to an adverse
movement in the price of the underlying commodity, for example, the adverse
price movement between the time a merchandiser or processor enters into a
contract to buy or sell a raw or processed commodity at a certain price and the
time he must perform the contract. In such a case, at the time the hedger
contracts to physically sell the commodity at a future date he will
simultaneously buy a futures or forward contract for the necessary equivalent
quantity of the commodity. At the time for performance of the contract, the
hedger may accept delivery under his futures contract and sell the commodity
quantity as required by his physical contract or he may buy the actual
commodity, sell it under the physical contract and close out his position by
making an offsetting sale of a futures contract.
The
commodity interest markets enable the hedger to shift the risk of price
fluctuations. The usual objective of the hedger is to protect the profit that he
expects to earn from farming, merchandising, or processing operations rather
than to profit from his trading. However, at times the impetus for a hedge
transaction may result in part from speculative objectives and hedgers can end
up paying higher prices than they would have, for example, if current market
prices are lower than the locked in price.
Unlike
the hedger, the speculator generally expects neither to make nor take delivery
of the underlying commodity. Instead, the speculator risks his capital with the
hope of making profits from price fluctuations in the commodities. The
speculator is, in effect, the risk bearer who assumes the risks that the hedger
seeks to avoid. Speculators rarely make or take delivery of the underlying
commodity; rather they attempt to close out their positions prior to the
delivery date. Because the speculator may take either a long or short position
in commodities, it is possible for him to make profits or incur losses
regardless of whether prices go up or down.
Futures
Exchanges and Clearing Organizations
Futures
exchanges provide centralized market facilities in which multiple persons have
the ability to execute or trade contracts by accepting bids and offers from
multiple participants. Futures exchanges may provide for execution of trades at
a physical location utilizing trading pits and/or may provide for trading to be
done electronically through computerized matching of bids and offers pursuant to
various algorithms. Members of a particular exchange and the trades executed on
such exchange are subject to the rules of that exchange. Futures exchanges and
clearing organizations are given reasonable latitude in promulgating rules and
regulations to control and regulate their members. Examples of regulations by
exchanges and clearing organizations include the establishment of initial margin
levels, rules regarding trading practices, contract specifications, speculative
position limits, daily price fluctuation limits, and execution and clearing
fees.
Clearing
organizations provide services designed to mutualize or transfer the credit risk
arising from the trading of contracts on an exchange or other electronic trading
facility. Once trades made between members of an exchange or electronic trading
facility have been confirmed, the clearing organization becomes substituted for
the clearing member acting on behalf of each buyer and each seller of contracts
traded on the exchange or trading platform and in effect becomes the other party
to the trade. Thereafter, each clearing member party to the trade looks only to
the clearing organization for performance. The clearing
organization generally establishes some sort of security or guarantee fund to
which all clearing members of the exchange must contribute; this fund acts as an
emergency buffer that is intended to enable the clearing organization to meet
its obligations with regard to the other side of an insolvent clearing member’s
contracts. Furthermore, the clearing organization requires margin deposits and
continuously marks positions to market to provide some assurance that its
members will be able to fulfill their contractual obligations. Thus, a central
function of the clearing organization is to ensure the integrity of trades, and
members effecting transactions on an exchange need not concern themselves with
the solvency of the party on the opposite side of the trade; their only
remaining concerns are the respective solvencies of their own customers, their
clearing broker and the clearing organization. The clearing organizations do not
deal with customers, but only with their member firms and the guarantee of
performance for open positions provided by the clearing organization does not
run to customers.
47
U.S.
Futures Exchanges
Futures
exchanges in the United States are subject to varying degrees of regulation by
the CFTC based on their designation as one of the following: a designated
contract market, a derivatives transaction execution facility, an exempt board
of trade or an electronic trading facility.
A
designated contract market is the most highly regulated level of futures
exchange. Designated contract markets may offer products to retail customers on
an unrestricted basis. To be designated as a contract market, the exchange must
demonstrate that it satisfies specified general criteria for designation, such
as having the ability to prevent market manipulation, rules and procedures to
ensure fair and equitable trading, position limits, dispute resolution
procedures, minimization of conflicts of interest and protection of market
participants. Among the principal designated contract markets in the United
States are the Chicago Board of Trade, the Chicago Mercantile Exchange and the
NYMEX. Each of the designated contract markets in the United States must provide
for the clearance and settlement of transactions with a CFTC-registered
derivatives clearing organization.
A
derivatives transaction execution facility (a “DTEF”) is a new type of exchange
that is subject to fewer regulatory requirements than a designated contract
market but is subject to both commodity interest and participant limitations.
DTEFs limit access to eligible traders that qualify as either eligible contract
participants or eligible commercial entities for futures and option contracts on
commodities that have a nearly inexhaustible deliverable supply, are highly
unlikely to be susceptible to the threat of manipulation, or have no cash
market, security futures products, and futures and option contracts on
commodities that the CFTC may determine, on a case-by-case basis, are highly
unlikely to be susceptible to the threat of manipulation. In addition, certain
commodity interests excluded or exempt from the CEA, such as swaps, etc. may be
traded on a DTEF. There is no requirement that a DTEF use a clearing
organization, except with respect to trading in security futures contracts, in
which case the clearing organization must be a securities clearing agency.
However, if futures contracts and options on futures contracts on a DTEF are
cleared, then it must be through a CFTC-registered derivatives clearing
organization, except that some excluded or exempt commodities traded on a DTEF
may be cleared through a clearing organization other than one registered with
the CFTC.
An exempt
board of trade is also a newly designated form of exchange. An exempt board of
trade is substantially unregulated, subject only to CFTC anti-fraud and
anti-manipulation authority. An exempt board of trade is permitted to trade
futures contracts and options on futures contracts provided that the underlying
commodity is not a security or securities index and has an inexhaustible
deliverable supply or no cash market. All traders on an exempt board of trade
must qualify as eligible contract participants. Contracts deemed eligible to be
traded on an exempt board of trade include contracts on interest rates, exchange
rates, currencies, credit risks or measures, debt instruments, measures of
inflation, or other macroeconomic indices or measures. There is no requirement
that an exempt board of trade use a clearing organization. However, if contracts
on an exempt board of trade are cleared, then it must be through a
CFTC-registered derivatives clearing organization. A board of trade electing to
operate as an exempt board of trade must file a written notification with the
CFTC.
An
electronic trading facility is a new form of trading platform that operates by
means of an electronic or telecommunications network and maintains an automated
audit trail of bids, offers, and the matching of orders or the execution of
transactions on the electronic trading facility. The CEA does not apply to, and
the CFTC has no jurisdiction over, transactions on an electronic trading
facility in certain excluded commodities that are entered into between
principals that qualify as eligible contract participants, subject only to CFTC
anti-fraud and anti-manipulation authority. In general, excluded commodities
include interest rates, currencies, securities, securities indices or other
financial, economic or commercial indices or measures.
The
General Partner intends to monitor the development of and opportunities and
risks presented by the new less-regulated exchanges and exempt boards as well as
other trading platforms currently in place or that are being considered by
regulators and may, in the future, allocate a percentage of USNG’s assets to
trading in products on these exchanges. Provided USNG maintains assets exceeding
$5 million, USNG would qualify as an eligible contract participant and thus
would be able to trade on such exchanges.
48
Non-U.S.
Futures Exchanges
Non-U.S.
futures exchanges differ in certain respects from their U.S. counterparts.
Importantly, non-U.S. futures exchanges are not subject to regulation by the
CFTC, but rather are regulated by their home country regulator. In contrast to
U.S. designated contract markets, some non-U.S. exchanges are principals’
markets, where trades remain the liability of the traders involved, and the
exchange or an affiliated clearing organization, if any, does not become
substituted for any party. Due to the absence of a clearing system, such
exchanges are significantly more susceptible to disruptions. Further,
participants in such markets must often satisfy themselves as to the individual
creditworthiness of each entity with which they enter into a trade. Trading on
non-U.S. exchanges is often in the currency of the exchange’s home jurisdiction.
Consequently, USNG is subject to the additional risk of fluctuations in the
exchange rate between such currencies and U.S. dollars and the possibility that
exchange controls could be imposed in the future. Trading on non-U.S. exchanges
may differ from trading on U.S. exchanges in a variety of ways and, accordingly,
may subject USNG to additional risks.
Accountability
Levels and Position Limits
The CFTC and U.S. designated contract
markets have established accountability levels and position limits on the
maximum net long or net short futures contracts in commodity interests that any
person or group of persons under common trading control (other than a hedger,
which USNG is not) may hold, own or control. Among the purposes of
accountability levels and position limits is to prevent a corner or squeeze on a
market or undue influence on prices by any single trader or group of traders.
The position limits currently established by the CFTC apply to certain
agricultural commodity interests, such as grains (oats, barley, and flaxseed),
soybeans, corn, wheat, cotton, eggs, rye, and potatoes, but not to interests in
energy products. In addition, U.S. exchanges may set accountability levels and
position limits for all commodity interests traded on that exchange. For
example, the current accountability level for investments at any one time in
natural gas Futures Contracts (including investments in the Benchmark Futures
Contract) on the NYMEX is 12,000 contracts. The NYMEX also imposes position
limits on contracts held in the last few days of trading in the near month
contract to expire. The ICE Futures has recently adopted similar accountability
levels and position limits for certain of its Futures Contracts that are traded
on the ICE Futures and settled against the price of a contract listed for
trading on a U.S. designated contract market such as NYMEX. In
particular, the Henry Hub natural gas contract on the ICE Futures is subjected
to the same accountability levels and positions limits as the NYMEX Henry Hub
natural gas contract upon which it settles as a result of the CFTC’s
determination in July 2009 that the ICE Futures Henry Hub contract was a
significant price discovery contract. Certain exchanges or clearing
organizations also set limits on the total net positions that may be held by a
clearing broker. In general, no position limits are in effect in forward or
other over-the-counter contract trading or in trading on non-U.S. futures
exchanges, although the principals with which USNG and the clearing brokers may
trade in such markets may impose such limits as a matter of credit policy. For
purposes of determining accountability levels and position limits, USNG’s
commodity interest positions will not be attributable to investors in their own
commodity interest trading.
On
January 26, 2010, the CFTC published a proposed rule that, if implemented, would
set fixed position limits on certain energy Futures Contracts including the
NYMEX Henry Hub natural gas futures contract, NYMEX Light Sweet crude oil
futures contract, NYMEX New York Harbor No. 2 heating oil futures contract, and
NYMEX RBOB gasoline futures contract, along with any contract based upon these
contracts. The proposed position limits would be set as a percentage
of the open interest in these contracts for the spot month, any single month,
and all months combined. Additionally, the proposed rule would
aggregate positions in the enumerated contracts and those based upon such
contracts, including contracts listed on separate exchanges. This
proposal is currently undergoing a 90-day public comment
period.
49
Daily
Price Limits
Most U.S.
futures exchanges (but generally not non-U.S. exchanges) may limit the amount of
fluctuation in some futures contract or options on a futures contract prices
during a single trading day by regulations. These regulations specify what are
referred to as daily price fluctuation limits or, more commonly, daily limits.
The daily limits establish the maximum amount that the price of a futures or
options on futures contract may vary either up or down from the previous day’s
settlement price. Once the daily limit has been reached in a particular futures
or options on futures contract, no trades may be made at a price beyond the
limit. Positions in the futures or options contract may then be taken or
liquidated, if at all, only at inordinate expense or if traders are willing to
effect trades at or within the limit during the period for trading on such day.
Because the daily limit rule governs price movement only for a particular
trading day, it does not limit losses and may in fact substantially increase
losses because it may prevent the liquidation of unfavorable positions. Futures
contract prices have occasionally moved to the daily limit for several
consecutive trading days, thus preventing prompt liquidation of positions and
subjecting the trader to substantial losses for those days. The concept of daily
price limits is not relevant to over-the-counter contracts, including forwards
and swaps, and thus such limits are not imposed by banks and others who deal in
those markets.
In
contrast, the NYMEX does not impose daily limits but rather limits the amount of
price fluctuation for Futures Contracts. For example, the NYMEX imposes a
$3.00 per mmBtu ($30,000 per contract) price fluctuation limit for the
Benchmark Futures Contract. This limit is initially based off the previous
trading day’s settlement price. If any Benchmark Futures Contract is traded,
bid, or offered at the limit for five minutes, trading is halted for five
minutes. When trading resumes it begins at the point where the limit was imposed
and the limit is reset to be $3.00 per mmBtu in either direction of that point.
If another halt were triggered, the market would continue to be expanded by
$3.00 per mmBtu in either direction after each successive five-minute trading
halt. There is no maximum price fluctuation limit during any one trading
session.
Commodity
Prices
Commodity
prices are volatile and, although ultimately determined by the interaction of
supply and demand, are subject to many other influences, including the
psychology of the marketplace and speculative assessments of future world and
economic events. Political climate, interest rates, treaties, balance of
payments, exchange controls and other governmental interventions as well as
numerous other variables affect the commodity markets, and even with
comparatively complete information it is impossible for any trader to predict
reliably commodity prices.
Regulation
Futures
exchanges in the United States are subject to varying degrees of regulation
under the CEA depending on whether such exchange is a designated contract
market, DTEF, exempt board of trade or electronic trading facility. Derivatives
clearing organizations are also subject to the CEA and CFTC regulation. The CFTC
is the governmental agency charged with responsibility for regulation of futures
exchanges and commodity interest trading conducted on those exchanges. The
CFTC’s function is to implement the CEA’s objectives of preventing price
manipulation and excessive speculation and promoting orderly and efficient
commodity interest markets. In addition, the various exchanges and clearing
organizations themselves exercise regulatory and supervisory authority over
their member firms.
The CFTC
possesses exclusive jurisdiction to regulate the activities of CPOs and
commodity trading advisors and has adopted regulations with respect to the
activities of those persons and/or entities. Under the CEA, a registered CPO,
such as the General Partner, is required to make annual filings with the CFTC
describing its organization, capital structure, management and controlling
persons. In addition, the CEA authorizes the CFTC to require and review books
and records of, and documents prepared by, registered CPOs. Pursuant to this
authority, the CFTC requires CPOs to keep accurate, current and orderly records
for each pool that they operate. The CFTC may suspend the registration of a CPO
(1) if the CFTC finds that the operator’s trading practices tend to disrupt
orderly market conditions, (2) if any controlling person of the operator is
subject to an order of the CFTC denying such person trading privileges on any
exchange, and (3) in certain other circumstances. Suspension, restriction or
termination of the General Partner’s registration as a CPO would prevent it,
until that registration were to be reinstated, from managing USNG, and might
result in the termination of USNG. USNG itself is not required to be registered
with the CFTC in any capacity.
The CEA
gives the CFTC similar authority with respect to the activities of commodity
trading advisors. If a trading advisor’s commodity trading advisor registration
were to be terminated, restricted or suspended, the trading advisor would be
unable, until the registration were to be reinstated, to render trading advice
to USNG.
50
The CEA
requires all futures commission merchants, such as USNG’s clearing brokers, to
meet and maintain specified fitness and financial requirements, to segregate
customer funds from proprietary funds and account separately for all customers’
funds and positions, and to maintain specified books and records open to
inspection by the staff of the CFTC. The CFTC has similar authority over
introducing brokers, or persons who solicit or accept orders for commodity
interest trades but who do not accept margin deposits for the execution of
trades. The CEA authorizes the CFTC to regulate trading by futures commission
merchants and by their officers and directors, permits the CFTC to require
action by exchanges in the event of market emergencies, and establishes an
administrative procedure under which customers may institute complaints for
damages arising from alleged violations of the CEA. The CEA also gives the
states powers to enforce its provisions and the regulations of the
CFTC.
USNG’s
investors are afforded prescribed rights for reparations under the CEA.
Investors may also be able to maintain a private right of action for violations
of the CEA. The CFTC has adopted rules implementing the reparation provisions of
the CEA, which provide that any person may file a complaint for a reparations
award with the CFTC for violation of the CEA against a floor
broker or a futures commission merchant, introducing broker, commodity trading
advisor, CPO, and their respective associated persons.
Pursuant
to authority in the CEA, the NFA has been formed and registered with the CFTC as
a registered futures association. At the present time, the NFA is the only
self-regulatory organization for commodity interest professionals, other than
futures exchanges. The CFTC has delegated to the NFA responsibility for the
registration of commodity trading advisors, CPOs, futures commission merchants,
introducing brokers, and their respective associated persons and floor brokers.
The General Partner, each trading advisor, the selling agents and the clearing
brokers are members of the NFA. As such, they are subject to NFA standards
relating to fair trade practices, financial condition and consumer protection.
USNG itself is not required to become a member of the NFA. As the
self-regulatory body of the commodity interest industry, the NFA promulgates
rules governing the conduct of professionals and disciplines those professionals
that do not comply with these rules. The NFA also arbitrates disputes between
members and their customers and conducts registration and fitness screening of
applicants for membership and audits of its existing members.
The
regulations of the CFTC and the NFA prohibit any representation by a person
registered with the CFTC or by any member of the NFA, that registration with the
CFTC, or membership in the NFA, in any respect indicates that the CFTC or the
NFA, as the case may be, has approved or endorsed that person or that person’s
trading program or objectives. The registrations and memberships of the parties
described in this summary must not be considered as constituting any such
approval or endorsement. Likewise, no futures exchange has given or will give
any similar approval or endorsement.
The
regulation of commodity interest trading in the United States and other
countries is an evolving area of the law. The various statements made in this
summary are subject to modification by legislative action and changes in the
rules and regulations of the CFTC, the NFA, the futures exchanges, clearing
organizations and other regulatory bodies.
The
function of the CFTC is to implement the objectives of the CEA of preventing
price manipulation and other disruptions to market integrity, avoiding systemic
risk, preventing fraud and promoting innovation, competition and financial
integrity of transactions. As mentioned above, this regulation, among other
things, provides that the trading of commodity interest contracts generally must
be upon exchanges designated as contract markets or DTEFs and that all trading
on those exchanges must be done by or through exchange members. Under the CFMA,
commodity interest trading in some commodities between sophisticated persons may
be traded on a trading facility not regulated by the CFTC. As a general matter,
trading in spot contracts, forward contracts, options on forward contracts or
commodities, or swap contracts between eligible contract participants is not
within the jurisdiction of the CFTC and may therefore be effectively
unregulated. The trading advisors may engage in those transactions on behalf of
USNG in reliance on this exclusion from regulation. However, legislation
currently under consideration by the U.S. Congress would remove the exclusion
provided to these transactions and place them under federal
regulation. The proposed legislation would subject these contracts to
new capital, margin, recordkeeping, and reporting requirements.
51
In
general, the CFTC does not regulate the interbank and forward foreign currency
markets with respect to transactions in contracts between certain sophisticated
counterparties such as USNG or between certain regulated institutions and retail
investors. Although U.S. banks are regulated in various ways by the Federal
Reserve Board, the Comptroller of the Currency and other U.S. federal and state
banking officials, banking authorities do not regulate the forward
markets.
While the
U.S. government does not currently impose any restrictions on the movements of
currencies, it could choose to do so. The imposition or relaxation of exchange
controls in various jurisdictions could significantly affect the market for that
and other jurisdictions’ currencies. Trading in the interbank market also
exposes USNG to a risk of default since failure of a bank with which USNG had
entered into a forward contract would likely result in a default and thus
possibly substantial losses to USNG.
The CFTC
is prohibited by statute from regulating trading on non-U.S. futures exchanges
and markets. The CFTC, however, has adopted regulations relating to the
marketing of non-U.S. futures contracts in the United States. These regulations
permit certain contracts traded on non-U.S. exchanges to be offered and sold in
the United States.
Commodity
Margin
Original
or initial margin is the minimum amount of funds that must be deposited by a
commodity interest trader with the trader’s broker to initiate and maintain an
open position in futures contracts. Maintenance margin is the amount (generally
less than the original margin) to which a trader’s account may decline before he
must deliver additional margin. A margin deposit is like a
cash performance bond. It helps assure the trader’s performance of the futures
contracts that he or she purchases or sells. Futures contracts are customarily
bought and sold on initial margin that represents a very small percentage
(ranging upward from less than 2%) of the aggregate purchase or sales price of
the contract. Because of such low margin requirements, price fluctuations
occurring in the futures markets may create profits and losses that, in relation
to the amount invested, are greater than are customary in other forms of
investment or speculation. As discussed below, adverse price changes in the
futures contract may result in margin requirements that greatly exceed the
initial margin. In addition, the amount of margin required in connection with a
particular futures contract is set from time to time by the exchange on which
the contract is traded and may be modified from time to time by the exchange
during the term of the contract.
Brokerage
firms, such as USNG’s clearing brokers, carrying accounts for traders in
commodity interest contracts may not accept lower, and generally require higher,
amounts of margin as a matter of policy to further protect themselves. The
clearing brokers require USNG to make margin deposits equal to exchange minimum
levels for all commodity interest contracts. This requirement may be altered
from time to time in the clearing brokers’ discretion.
Trading
in the over-the-counter markets where no clearing facility is provided generally
does not require margin but generally does require the extension of credit
between counterparties. This extension of credit generally takes the
form of transfers of collateral and/or independent amounts. Collateral is
transferred between counterparties during the term of an over-the-counter
transaction based upon the changing value of the transaction, while independent
amounts are fixed amounts posted by one or both counterparties at the start of
an over-the-counter transaction.
When a
trader purchases an option, there is no margin requirement; however, the option
premium must be paid in full. When a trader sells an option, on the other hand,
he or she is required to deposit margin in an amount determined by the margin
requirements established for the underlying interest and, in addition, an amount
substantially equal to the current premium for the option. The margin
requirements imposed on the selling of options, although adjusted to reflect the
probability that out-of-the-money options will not be exercised, can in fact be
higher than those imposed in dealing in the futures markets directly.
Complicated margin requirements apply to spreads and conversions, which are
complex trading strategies in which a trader acquires a mixture of options
positions and positions in the underlying interest.
Margin
requirements are computed each day by a trader’s clearing broker. When the
market value of a particular open commodity interest position changes to a point
where the margin on deposit does not satisfy maintenance margin requirements, a
margin call is made by the broker. If the margin call is not met within a
reasonable time, the broker may close out the trader’s position. With respect to
USNG’s trading, USNG (and not its investors personally) is subject to margin
calls.
52
Finally,
many major U.S. exchanges have passed certain cross margining arrangements
involving procedures pursuant to which the futures and options positions held in
an account would, in the case of some accounts, be aggregated and margin
requirements would be assessed on a portfolio basis, measuring the total risk of
the combined positions.
SEC
Reports
USNG
makes available, free of charge, on its website, its annual reports on Form
10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and
amendments to these reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after these forms
are filed with, or furnished to, the SEC. These reports are also available
from the SEC though its website at: www.sec.gov.
CFTC
Reports
USNG also
makes available its monthly reports and its annual reports required to be
prepared and filed with the NFA under the CFTC regulations.
Intellectual
Property
The
General Partner owns trademark registrations for UNITED STATES NATURAL GAS FUND
(U.S. Reg. No. 3407494) for “fund investment services in the field of natural
gas futures contracts, cash-settled options on natural gas futures contracts,
forward contracts for natural gas, over-the-counter transactions based on the
price of natural gas, and indices based on the foregoing,” in use since April
18, 2007, and UNG UNITED STATES NATURAL GAS FUND, LP (and Flame Design) (U.S.
Reg. No. 3683574) for “fund investment services in the field of natural gas
futures contracts, cash-settled options on natural gas futures contracts,
forward contracts for natural gas, over-the-counter transactions based on the
price of natural gas, and indices based on the foregoing,” in use since April
18, 2007. The General Partner also has filed a trademark application
to register USNG (U.S. App. Serial No. 77156040) based on an intent to use the
mark for “fund investment services in the field of natural gas futures
contracts, cash-settled options on natural gas futures contracts, forward
contracts for natural gas, over-the-counter transactions based on the price of
natural gas, and indices based on the foregoing.” USNG relies upon
these trademarks through which it markets its services and strives to build and
maintain brand recognition in the market and among current and potential
investors. So long as USNG continues to use these trademarks to
identify its services, without challenge from any third party, and properly
maintains and renews the trademark registrations under applicable laws, rules
and regulations, it will continue to have indefinite protection for these
trademarks under current laws, rules and regulations.
Item 1A.
Risk Factors.
The
risk factors should be read in connection with the other information included in
this annual report on Form 10-K, including Management’s Discussion and Analysis
of Financial Condition and Results of Operations and USNG’s financial statements
and the related notes.
Risks
Associated With Investing Directly or Indirectly in Natural Gas
Investing
in Natural Gas Interests subjects USNG to the risks of the natural gas industry
and this could result in large fluctuations in the price of USNG’s
units.
USNG is
subject to the risks and hazards of the natural gas industry because it invests
in Natural Gas Interests. The risks and hazards that are inherent in the natural
gas industry may cause the price of natural gas to widely fluctuate. If the
changes in percentage terms of USNG’s units accurately track the percentage
changes in the Benchmark Futures Contract or the spot price of natural gas, then
the price of its units may also fluctuate. The exploration for, and production
of, natural gas is an uncertain process with many risks. The cost of drilling,
completing and operating wells for natural gas is often uncertain, and a number
of factors can delay or prevent drilling operations or production,
including:
53
|
|
·
|
unexpected
drilling conditions;
|
|
|
·
|
pressure
or irregularities in formations;
|
|
|
·
|
equipment
failures or repairs;
|
|
|
·
|
fires
or other accidents;
|
|
|
·
|
adverse
weather conditions;
|
|
|
·
|
pipeline
ruptures or spills; and
|
|
|
·
|
shortages
or delays in the availability of drilling rigs and the delivery of
equipment.
|
Natural
gas transmission, distribution, gathering, and processing activities involve
numerous risks that may affect the price of natural gas.
There are
a variety of hazards inherent in natural gas transmission, distribution,
gathering, and processing, such as leaks, explosions, pollution, release of
toxic substances, adverse weather conditions (such as hurricanes and flooding),
pipeline failure, abnormal pressures, uncontrollable flows of natural gas,
scheduled and unscheduled maintenance, physical damage to the gathering or
transportation system, and other hazards which could affect the price of natural
gas. To the extent these hazards limit the supply or delivery of natural gas,
natural gas prices will increase.
The
price of natural gas may fluctuate on a seasonal and quarterly basis and this
would result in fluctuations in the price of USNG’s units.
Natural
gas prices fluctuate seasonally. For example, in some parts of the United States
and other markets, the natural gas demand for power peaks during the cold winter
months, with market prices peaking at that time. As a result, in the future, the
overall price of natural gas may fluctuate substantially on a seasonal and
quarterly basis and thus make consecutive period to period comparisons less
relevant.
Natural
gas transmission and storage operations are subject to government regulations
and rate proceedings which could have an impact on the price of natural
gas.
Natural
gas transmission and storage operations in North America are subject to
regulation and oversight by the Federal Energy Regulatory Commission, various
state regulatory agencies, and Canadian regulatory authorities. These regulatory
bodies have the authority to effect rate settlements on natural gas storage,
transmission and distribution services. As a consequence, the price of natural
gas may be affected by a change in the rate settlements effected by one or more
of these regulatory bodies.
The
price of USNG’s units may be influenced by factors such as the short-term supply
and demand for natural gas and the short-term supply and demand for USNG’s
units. This may cause the units to trade at a price that is above or below
USNG’s NAV per unit. Accordingly, changes in the price of units may
substantially vary from the changes in the spot price of natural gas. If this
variation occurs, then investors may not be able to effectively use
USNG as a way to hedge against natural gas-related losses or as a way to
indirectly invest in natural gas.
While it
is expected that the trading prices of the units will fluctuate in accordance
with changes in USNG’s NAV, the prices of units may also be influenced by other
factors, including the short-term supply and demand for natural gas and the
units. There is no guarantee that the units will not trade at appreciable
discounts from, and/or premiums to, USNG’s NAV. This could cause changes in the
price of the units to substantially vary from changes in the spot price of
natural gas. This may be harmful to investors because if changes in the price of
units vary substantially from changes in the spot price of natural gas, then
investors may not be able to effectively use USNG as a way to hedge the risk of
losses in their natural gas-related transactions or as a way to indirectly
invest in natural gas.
54
Changes
in USNG’s NAV may not correlate with changes in the price of the Benchmark
Futures Contract. If this were to occur, investors may not be able to
effectively use USNG as a way to hedge against natural gas-related losses or as
a way to indirectly invest in natural gas.
The
General Partner endeavors to invest USNG’s assets as fully as possible in
short-term Futures Contracts and Other Natural Gas-Related Investments so that
the changes in percentage terms of the NAV closely correlate with the changes in
percentage terms in the price of the Benchmark Futures Contract. However,
changes in USNG’s NAV may not correlate with the changes in the price of the
Benchmark Futures Contract for several reasons as set forth below:
|
|
·
|
USNG
(i) may not be able to buy/sell the exact amount of Futures Contracts and
Other Natural Gas-Related Investments to have a perfect correlation with
NAV; (ii) may not always be able to buy and sell Futures Contracts or
Other Natural Gas-Related Investments at the market price; (iii) may not
experience a perfect correlation between the spot price of natural gas and
the underlying investments in Futures Contracts, Other Natural Gas-Related
Investments and Treasuries, cash and/or cash equivalents; and (iv) is
required to pay fees, including brokerage fees and the management fee,
which will have an effect on the
correlation.
|
|
|
·
|
Short-term
supply and demand for natural gas may cause the changes in the market
price of the Benchmark Futures Contract to vary from the changes in USNG’s
NAV if USNG has fully invested in Futures Contracts that do not reflect
such supply and demand and it is unable to replace such contracts with
Futures Contracts that do reflect such supply and demand. In addition,
there are also technical differences between the two markets, e.g., one is a physical
market while the other is a futures market traded on exchanges, that may
cause variations between the spot price of natural gas and the prices of
related futures contracts.
|
|
|
·
|
USNG
plans to sell and buy only as many Futures Contracts and Other Natural
Gas-Related Investments that it can to get the changes in percentage terms
of the NAV as close as possible to the changes in percentage terms in the
price of the Benchmark Futures Contract. The remainder of its assets will
be invested in Treasuries, cash and/or cash equivalents and will be used
to satisfy initial margin and additional margin requirements, if any, and
to otherwise support its investments in Natural Gas Interests. Investments
in Treasuries, cash and/or cash equivalents, both directly and as margin,
will provide rates of return that will vary from changes in the value of
the spot price of natural gas and the price of the Benchmark Futures
Contract.
|
|
|
·
|
In
addition, because USNG incurs certain expenses in connection with its
investment activities, and holds most of its assets in more liquid
short-term securities for margin and other liquidity purposes and for
redemptions that may be necessary on an ongoing basis, the General Partner
is generally not able to fully invest USNG’s assets in Futures Contracts
or Other Natural Gas-Related Investments and there cannot be perfect
correlation between changes in USNG’s NAV and changes in the price of the
Benchmark Futures Contract.
|
|
|
·
|
As
USNG grows, there may be more or less correlation. For example, if USNG
only has enough money to buy three Benchmark Futures Contracts and it
needs to buy four contracts to track the price of natural gas then the
correlation will be lower, but if it buys 20,000 Benchmark Futures
Contracts and it needs to buy 20,001 contracts then the correlation will
be higher. At certain asset levels, USNG may be limited in its ability to
purchase the Benchmark Futures Contract or other Futures Contracts due to
accountability levels imposed by the relevant exchanges. To the extent
that USNG invests in these other Futures Contracts or Other Natural
Gas-Related Investments, the correlation with the Benchmark Futures
Contract may be lower. If USNG is required to invest in other Futures
Contracts and Other Natural Gas-Related Investments that are less
correlated with the Benchmark Futures Contract, USNG would likely invest
in over-the-counter contracts to increase the level of correlation of
USNG’s assets. Over-the-counter contracts entail certain risks described
below under “Over-the-Counter Contract
Risk.”
|
55
|
|
·
|
USNG
may not be able to buy the exact number of Futures Contracts and Other
Natural Gas-Related Investments to have a perfect correlation with the
Benchmark Futures Contract if the purchase price of Futures Contracts
required to be fully invested in such contracts is higher than the
proceeds received for the sale of a Creation Basket on the day the basket
was sold. In such case, USNG could not invest the entire proceeds from the
purchase of the Creation Basket in such Futures Contracts (for example,
assume USNG receives $4,000,000 for the sale of a Creation Basket and
assume that the price of a Futures Contract for natural gas is $59,950,
then USNG could only invest in only 66 Futures Contracts with an aggregate
value of $3,956,700), USNG would be required to invest a percentage of the
proceeds in cash, Treasuries or other liquid securities to be deposited as
margin with the futures commission merchant through which the contract was
purchased. The remainder of the purchase price for the Creation Basket
would remain invested in Treasuries, cash and/or cash equivalents or other
liquid securities as determined by the General Partner from time to time
based on factors such as potential calls for margin or anticipated
redemptions. If the trading market for Futures Contracts is suspended or
closed, USNG may not be able to purchase these investments at the last
reported price for such
investments.
|
If
changes in USNG’s NAV do not correlate with changes in the price of the
Benchmark Futures Contract, then investing in USNG may not be an effective way
to hedge against natural gas-related losses or indirectly invest in natural
gas.
The
Benchmark Futures Contract may not correlate with the spot price of natural gas
and this could cause changes in the price of the units to substantially vary
from the changes in the spot price of natural gas. If this were to occur, then
investors may not be able to effectively use USNG as a way to hedge
against natural gas-related losses or as a way to indirectly invest in natural
gas.
When
using the Benchmark Futures Contract as a strategy to track the spot price of
natural gas, at best the correlation between changes in prices of such Natural
Gas Interests and the spot price of natural gas can be only approximate. The
degree of imperfection of correlation depends upon circumstances such as
variations in the speculative natural gas market, supply of and demand for such
Natural Gas Interests and technical influences in futures trading. If there is a
weak correlation between the Natural Gas Interests and the spot price of natural
gas, then the price of units may not accurately track the spot price of natural
gas and investors may not be able to effectively use USNG as a way to hedge the
risk of losses in their natural gas-related transactions or as a way to
indirectly invest in natural gas.
USNG
may experience a loss if it is required to sell Treasuries at a price lower than
the price at which they were acquired.
The value
of Treasuries generally moves inversely with movements in interest rates. If
USNG is required to sell Treasuries at a price lower than the price at which
they were acquired, USNG will experience a loss. This loss may adversely impact
the price of the units and may decrease the correlation between the price of the
units, the price of the Benchmark Futures Contract and Other Natural Gas-Related
Investments, and the spot price of natural gas.
Certain
of USNG’s investments could be illiquid which could cause large losses to
investors at any time or from time to time.
USNG may
not always be able to liquidate its positions in its investments at the desired
price. It is difficult to execute a trade at a specific price when there is a
relatively small volume of buy and sell orders in a market. A market disruption,
such as a foreign government taking political actions that disrupt the market in
its currency, its natural gas production or exports, or in another major export,
can also make it difficult to liquidate a position. Alternatively, limits
imposed by futures exchanges or other regulatory organizations, such as
accountability levels, position limits and daily price fluctuation limits, may
contribute to a lack of liquidity with respect to some commodity
interests.
Unexpected
market illiquidity may cause major losses to investors at any time or from time
to time. In addition, USNG has not and does not intend at this time to establish
a credit facility, which would provide an additional source of liquidity and
instead will rely only on the Treasuries, cash and/or cash equivalents that it
holds. The anticipated large value of the positions in Futures Contracts that
the General Partner will acquire or enter into for USNG increases the risk of
illiquidity. The Other Natural Gas-Related Investments that USNG invests in,
such as negotiated over-the-counter contracts, may have a greater likelihood of
being illiquid since they are contracts between two parties that take into
account not only market risk, but also the relative credit, tax, and settlement
risks under such contracts. Such contracts also have limited transferability
that results from such risks and the contract’s express
limitations.
56
Because
both Futures Contracts and Other Natural Gas-Related Investments may be
illiquid, USNG’s Natural Gas Interests may be more difficult to liquidate at
favorable prices in periods of illiquid markets and losses may be incurred
during the period in which positions are being liquidated.
If
the nature of hedgers and speculators in futures markets has shifted such that
natural gas purchasers are the predominant hedgers in the market, USNG might
have to reinvest at higher futures prices or choose Other Natural Gas-Related
Investments.
The
changing nature of the hedgers and speculators in the natural gas market
influences whether futures prices are above or below the expected future spot
price. In order to induce speculators to take the corresponding long side of the
same futures contract, natural gas producers must generally be willing to sell
futures contracts at prices that are below expected future spot prices.
Conversely, if the predominant hedgers in the futures market are the purchasers
of the natural gas who purchase futures contracts to hedge against a rise in
prices, then speculators will only take the short side of the futures contract
if the futures price is greater than the expected future spot price of natural
gas. This can have significant implications for USNG when it is time to reinvest
the proceeds from a maturing Futures Contract into a new Futures
Contract.
While
USNG does not intend to take physical delivery of natural gas under its Futures
Contracts, physical delivery under such contracts impacts the value of the
contracts.
While it
is not the current intention of USNG to take physical delivery of natural gas
under its Futures Contracts, futures contracts are not required to be
cash-settled and it is possible to take delivery under some of these contracts.
Storage costs associated with purchasing natural gas could result in costs and
other liabilities that could impact the value of Futures Contracts or Other
Natural Gas-Related Investments. Storage costs include the time value of money
invested in natural gas as a physical commodity plus the actual costs of storing
the natural gas less any benefits from ownership of natural gas that are not
obtained by the holder of a futures contract. In general, Futures Contracts have
a one-month delay for contract delivery and the back month (the back month is
any future delivery month other than the spot month) includes storage costs. To
the extent that these storage costs change for natural gas while USNG holds
Futures Contracts or Other Natural Gas-Related Investments, the value of the
Futures Contracts or Other Natural Gas-Related Investments, and therefore USNG’s
NAV, may change as well.
The
price relationship between the near month contract and the next month contract
that compose the Benchmark Futures Contract will vary and may impact both the
total return over time of USNG’s NAV, as well as the degree to which its total
return tracks other natural gas price indices’ total returns.
The
design of USNG’s Benchmark Futures Contract is such that every month it begins
by using the near month contract to expire until the near month contract is
within two weeks of expiration, when, over a four-day period, it transitions to
the next month contract to expire as its benchmark contract and keeps that
contract as its benchmark until it becomes the near month contract and close to
expiration. In the event of a natural gas futures market where near month
contracts trade at a higher price than next month to expire contracts, a
situation described as “backwardation” in the futures market, then absent the
impact of the overall movement in natural gas prices the value of the benchmark
contract would tend to rise as it approaches expiration. As a result, the total
return of the Benchmark Futures Contract would tend to track higher. Conversely,
in the event of a natural gas futures market where near month contracts trade at
a lower price than next month contracts, a situation described as “contango” in
the futures market, then absent the impact of the overall movement in natural
gas prices the value of the benchmark contract would tend to decline as it
approaches expiration. As a result the total return of the Benchmark Futures
Contract would tend to track lower. When compared to total return of other price
indices, such as the spot price of natural gas, the impact of backwardation and
contango may lead the total return of USNG’s NAV to vary significantly. In the
event of a prolonged period of contango, and absent the impact of rising or
falling natural gas prices, this could have a significant negative impact on
USNG’s NAV and total return.