Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30,
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)
522-3336
(Registrant’s
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
x
Yes ¨ No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer 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
UNITED
STATES NATURAL GAS FUND, LP
Table
of Contents
|
|
Page
|
Part
I. FINANCIAL INFORMATION
|
|
|
Item
1. Condensed Financial Statements.
|
|
1
|
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
|
|
14
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|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
|
|
31
|
|
|
|
Item
4. Controls and Procedures.
|
|
32
|
|
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|
Part
II. OTHER INFORMATION
|
|
|
Item
1. Legal Proceedings.
|
|
33
|
|
|
|
Item
1A. Risk Factors.
|
|
33
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
|
|
33
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|
|
|
Item
3. Defaults Upon Senior Securities.
|
|
33
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|
|
|
Item
4. Submission of Matters to a Vote of Security Holders.
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33
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|
|
|
Item
5. Other Information.
|
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33
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|
|
|
Item
6. Exhibits.
|
|
33
|
Part
I. FINANCIAL INFORMATION
Item 1.
Condensed Financial Statements.
Index
to Condensed Financial Statements
Documents
|
|
|
Page
|
|
Condensed
Statements of Financial Condition at June 30, 2009 (Unaudited) and
December 31, 2008
|
|
|
2
|
|
|
|
|
|
|
Condensed
Schedule of Investments (Unaudited) at June 30, 2009
|
|
|
3
|
|
|
|
|
|
|
Condensed
Statements of Operations (Unaudited) for the three and six months ended
June 30, 2009 and 2008
|
|
|
4
|
|
|
|
|
|
|
Condensed
Statement of Changes in Partners’ Capital (Unaudited) for the six months
ended June 30, 2009
|
|
|
5
|
|
|
|
|
|
|
Condensed
Statements of Cash Flows (Unaudited) for the six months ended June 30,
2009 and 2008
|
|
|
6
|
|
|
|
|
|
|
Notes
to Condensed Financial Statements for the periods ended June 30, 2009
(Unaudited)
|
|
|
7
|
|
United
States Natural Gas Fund, LP
Condensed
Statements of Financial Condition
At
June 30, 2009 (Unaudited) and December 31, 2008
|
|
June 30,
2009
|
|
|
December 31, 2008
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,588,232,011 |
|
|
$ |
419,929,831 |
|
Equity
in UBS Securities LLC trading accounts:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
1,424,298,545 |
|
|
|
293,619,554 |
|
Unrealized
loss on open commodity futures and cleared swap contracts
|
|
|
(406,169,570 |
) |
|
|
(7,704,870 |
) |
Receivable
for units sold
|
|
|
117,468,095 |
|
|
|
- |
|
Interest
receivable
|
|
|
389,544 |
|
|
|
355,156 |
|
Other
assets
|
|
|
1,041,997 |
|
|
|
137,786 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,725,260,622 |
|
|
$ |
706,337,457 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Partners' Capital
|
|
|
|
|
|
|
|
|
Payable
for units redeemed
|
|
$ |
- |
|
|
$ |
9,307,208 |
|
General
Partner management fees payable (Note 3)
|
|
|
1,503,083 |
|
|
|
370,060 |
|
Brokerage
commission fees payable
|
|
|
392,250 |
|
|
|
39,500 |
|
Other
liabilities
|
|
|
1,164,195 |
|
|
|
906,179 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
3,059,528 |
|
|
|
10,622,947 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
(Notes 3, 4 and 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners'
Capital
|
|
|
|
|
|
|
|
|
General
Partner
|
|
|
- |
|
|
|
- |
|
Limited
Partners
|
|
|
3,722,201,094 |
|
|
|
695,714,510 |
|
Total
Partners' Capital
|
|
|
3,722,201,094 |
|
|
|
695,714,510 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and partners' capital
|
|
$ |
3,725,260,622 |
|
|
$ |
706,337,457 |
|
|
|
|
|
|
|
|
|
|
Limited
Partners' units outstanding
|
|
|
269,800,000 |
|
|
|
29,900,000 |
|
Net
asset value per unit
|
|
$ |
13.80 |
|
|
$ |
23.27 |
|
Market
value per unit
|
|
$ |
13.87 |
|
|
$ |
23.17 |
|
See
accompanying notes to condensed financial statements.
United
States Natural Gas Fund, LP
Condensed
Schedule of Investments (Unaudited)
At
June 30, 2009
|
|
Number
of
|
|
|
Loss
on Open
Commodity
|
|
|
%
of
Partners'
|
|
|
|
Contracts
|
|
|
Contracts
|
|
|
Capital
|
|
Open
Cleared Swap Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Contracts
|
|
|
|
|
|
|
|
|
|
ICE
Natural Gas Cleared Swap ICE LOT contracts, expire August
2009
|
|
|
244,432 |
|
|
$ |
(276,225,565 |
) |
|
|
(7.42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Open
Futures Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
NYMEX
Natural Gas Futures NG contracts, expire August 2009
|
|
|
21,778 |
|
|
|
(53,861,540 |
) |
|
|
(1.45 |
) |
NYMEX
Natural Gas Futures NN contracts, expire August 2009
|
|
|
56,746 |
|
|
|
(76,082,465 |
) |
|
|
(2.04 |
) |
|
|
|
78,524 |
|
|
|
(129,944,005 |
) |
|
|
(3.49 |
) |
|
|
|
322,956 |
|
|
|
(406,169,570 |
) |
|
|
(10.91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Market Value
|
|
|
|
|
|
United
States - Money Market Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity
Institutional Government Portfolio – Class I
|
|
$ |
1,000,185,974 |
|
|
|
1,000,185,974 |
|
|
|
26.87 |
|
Goldman
Sachs Financial Square Funds — Government Fund
|
|
|
949,739,992 |
|
|
|
949,739,992 |
|
|
|
25.52 |
|
Morgan
Stanley Institutional Liquidity Fund – Government
Portfolio
|
|
|
100,007,127 |
|
|
|
100,007,127 |
|
|
|
2.69 |
|
|
|
$ |
2,049,933,093 |
|
|
|
2,049,933,093 |
|
|
|
55.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
538,298,918 |
|
|
|
14.46 |
|
Total
Cash and Cash Equivalents
|
|
|
|
|
|
|
2,588,232,011 |
|
|
|
69.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
on deposit with broker
|
|
|
|
|
|
|
1,424,298,545 |
|
|
|
38.26 |
|
Other
assets and receivables in excess of liabilities
|
|
|
|
|
|
|
115,840,108 |
|
|
|
3.11 |
|
Total
Partners' Capital
|
|
|
|
|
|
$ |
3,722,201,094 |
|
|
|
100.00 |
|
See
accompanying notes to condensed financial statements.
United
States Natural Gas Fund, LP
Condensed
Statements of Operations (Unaudited)
For
the three and six months ended June 30, 2009 and 2008
|
|
Three
months
ended
|
|
|
Three
months
ended
|
|
|
Six
months
ended
|
|
|
Six
months
ended
|
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on trading of commodity futures and cleared swap
contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
gain (loss) on closed positions
|
|
$ |
227,995,663 |
|
|
$ |
162,955,880 |
|
|
$ |
(50,574,917 |
) |
|
$ |
315,980,590 |
|
Change
in unrealized gain (loss) on open positions
|
|
|
(379,194,180 |
) |
|
|
10,375,240 |
|
|
|
(398,464,700 |
) |
|
|
11,059,010 |
|
Interest
income
|
|
|
774,539 |
|
|
|
2,956,601 |
|
|
|
1,273,145 |
|
|
|
5,895,328 |
|
Other
income
|
|
|
109,000 |
|
|
|
29,000 |
|
|
|
174,000 |
|
|
|
71,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income (loss)
|
|
|
(150,314,978 |
) |
|
|
176,316,721 |
|
|
|
(447,592,472 |
) |
|
|
333,005,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Partner management fees (Note 3)
|
|
|
2,736,408 |
|
|
|
1,028,901 |
|
|
|
3,764,676 |
|
|
|
1,787,298 |
|
Brokerage
commissions
|
|
|
3,604,808 |
|
|
|
135,907 |
|
|
|
3,977,763 |
|
|
|
280,578 |
|
Other
expenses
|
|
|
1,443,289 |
|
|
|
331,119 |
|
|
|
1,769,548 |
|
|
|
793,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
7,784,505 |
|
|
|
1,495,927 |
|
|
|
9,511,987 |
|
|
|
2,861,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(158,099,483 |
) |
|
$ |
174,820,794 |
|
|
$ |
(457,104,459 |
) |
|
$ |
330,144,785 |
|
Net
income (loss) per limited partnership unit
|
|
$ |
(1.43 |
) |
|
$ |
13.87 |
|
|
$ |
(9.47 |
) |
|
$ |
26.48 |
|
Net
income (loss) per weighted average limited partnership
unit
|
|
$ |
(1.17 |
) |
|
$ |
13.89 |
|
|
$ |
(5.27 |
) |
|
$ |
26.80 |
|
Weighted
average limited partnership units outstanding
|
|
|
135,309,890 |
|
|
|
12,585,714 |
|
|
|
86,815,470 |
|
|
|
12,317,582 |
|
See
accompanying notes to condensed financial statements.
United
States Natural Gas Fund, LP
Condensed
Statement of Changes in Partners’ Capital (Unaudited)
For
the six months ended June 30, 2009
|
|
General Partner
|
|
|
Limited Partners
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
at December 31, 2008
|
|
$ |
- |
|
|
$ |
695,714,510 |
|
|
$ |
695,714,510 |
|
Addition
of 297,400,000 partnership units
|
|
|
- |
|
|
|
4,399,305,986 |
|
|
|
4,399,305,986 |
|
Redemption
of 57,500,000 partnership units
|
|
|
- |
|
|
|
(915,714,943 |
) |
|
|
(915,714,943 |
) |
Net
loss
|
|
|
- |
|
|
|
(457,104,459 |
) |
|
|
(457,104,459 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
at June 30, 2009
|
|
$ |
- |
|
|
$ |
3,722,201,094 |
|
|
$ |
3,722,201,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value Per Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2008
|
|
$ |
23.27 |
|
|
|
|
|
|
|
|
|
At
June 30, 2009
|
|
$ |
13.80 |
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed financial statements.
United
States Natural Gas Fund, LP
Condensed
Statements of Cash Flows (Unaudited)
For
the six months ended June 30, 2009 and 2008
|
|
Six
months ended
|
|
|
Six
months ended
|
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(457,104,459 |
) |
|
$ |
330,144,785 |
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Increase
in commodity futures and cleared swap trading account –
cash
|
|
|
(1,130,678,991 |
) |
|
|
(11,777,860 |
) |
Unrealized
(gain) loss on futures contracts
|
|
|
398,464,700 |
|
|
|
(11,059,010 |
) |
Increase
in interest receivable and other assets
|
|
|
(938,599 |
) |
|
|
(328,119 |
) |
Increase
in management fees payable
|
|
|
1,133,023 |
|
|
|
165,594 |
|
Increase
in commission fees payable
|
|
|
352,750 |
|
|
|
5,500 |
|
Increase
in other liabilities
|
|
|
258,016 |
|
|
|
151,588 |
|
Net
cash provided by (used in) operating activities
|
|
|
(1,188,513,560 |
) |
|
|
307,302,478 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Subscription
of partnership units
|
|
|
4,281,837,891 |
|
|
|
829,517,478 |
|
Redemption
of partnership units
|
|
|
(925,022,151 |
) |
|
|
(631,327,340 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
3,356,815,740 |
|
|
|
198,190,138 |
|
|
|
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
|
|
2,168,302,180 |
|
|
|
505,492,616 |
|
|
|
|
|
|
|
|
|
|
Cash and Cash
Equivalents, beginning of period
|
|
|
419,929,831 |
|
|
|
488,067,199 |
|
Cash and Cash
Equivalents, end of period
|
|
$ |
2,588,232,011 |
|
|
$ |
993,559,815 |
|
See
accompanying notes to condensed financial statements.
United
States Natural Gas Fund, LP
Notes
to Condensed Financial Statements
For
the periods ended June 30, 2009 (Unaudited)
NOTE
1 - ORGANIZATION AND BUSINESS
The
United States Natural Gas Fund, LP (“USNG”) was organized as a limited
partnership under the laws of the state of Delaware on September 11, 2006. USNG
is a commodity pool that issues limited partnership units (“units”) that may be
purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”). Prior to November
25, 2008, USNG’s units traded on the American Stock Exchange (the “AMEX”). USNG
will continue in perpetuity, unless terminated sooner upon the occurrence of one
or more events as described in its Second Amended and Restated Agreement of
Limited Partnership dated as of December 4, 2007 (the “LP Agreement”).
The investment objective of USNG is to have the changes in percentage terms of
its units’ net asset value reflect the changes in percentage terms of
the spot price of natural gas delivered at the Henry Hub, Louisiana as
measured by the changes in the price of the futures contract on natural gas as
traded on the New York Mercantile Exchange (the “NYMEX”) that is the near month
contract to expire, except when the near month contract is within two weeks of
expiration, in which case the futures contract will become, over a 4-day period,
the next month contract to expire, less USNG’s expenses. USNG accomplishes its
objective through investments in futures contracts for natural gas, crude oil,
heating oil, gasoline and other petroleum-based fuels that are traded on the
NYMEX, ICE Futures or other U.S. and foreign exchanges (collectively, “Futures
Contracts”) and other natural gas-related investments such as cash-settled
options on Futures Contracts, forward contracts for natural gas, cleared
swap contracts and over-the-counter transactions that are based on the price of
natural gas, crude oil and other petroleum-based fuels, Futures
Contracts and indices based on the foregoing (collectively, “Other Natural
Gas-Related Investments”). As of June 30, 2009, USNG held 78,524 Futures
Contracts traded on the NYMEX and 244,432 cleared swap contracts
traded on the ICE Futures.
USNG
commenced investment operations on April 18, 2007 and has a fiscal year ending
on December 31. United States Commodity Funds LLC (formerly known as Victoria
Bay Asset Management, LLC) (the “General Partner”) is responsible for the
management of USNG. The General Partner is a member of the National Futures
Association (the “NFA”) and became a commodity pool operator registered with the
Commodity Futures Trading Commission effective December 1, 2005. The
General Partner is also the general partner of the United States Oil Fund, LP
(“USOF”), the United States 12 Month Oil Fund, LP (“US12OF”), the United States
Gasoline Fund, LP (“UGA”) and the United States Heating Oil Fund, LP (“USHO”),
which listed their limited partnership units on the AMEX under the ticker
symbols “USO” on April 10, 2006, “USL” on December 6, 2007, “UGA” on February
26, 2008 and “UHN” on April 9, 2008, respectively. As a result of the
acquisition of the AMEX by NYSE Euronext, each of USOF’s, US12OF’s, UGA’s and
USHO’s units commenced trading on the NYSE Arca on November 25,
2008. The General Partner has also filed registration statements to
register units of the United States Short Oil Fund, LP and the United States 12
Month Natural Gas Fund, LP.
The
accompanying unaudited condensed financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X promulgated by the U.S. Securities
and Exchange Commission (the “SEC”) and, therefore, do not include all
information and footnote disclosure required under accounting principles
generally accepted in the United States of America. The financial
information included herein is unaudited, however, such financial information
reflects all adjustments which are, in the opinion of management, necessary for
the fair presentation of the condensed financial statements for the interim
period.
USNG issues
units to certain authorized purchasers (“Authorized Purchasers”) by offering
baskets consisting of 100,000 units (“Creation Baskets”) through ALPS
Distributors, Inc. (the “Marketing Agent”). The purchase price for a Creation
Basket is based upon the net asset value of a unit calculated shortly after
the close of the core trading session on the NYSE Arca on the day the order to
create the basket is properly received.
In
addition, Authorized Purchasers pay USNG a $1,000 fee for each order to
create one or more Creation Baskets or redeem one or more baskets consisting of
100,000 units (“Redemption Baskets”). Units may be purchased or sold on a
nationally recognized securities exchange in smaller increments than a Creation
Basket or Redemption Basket. Units purchased or sold on a nationally recognized
securities exchange are not purchased or sold at the net asset value of USNG but
rather at market prices quoted on such exchange.
In April
2007, USNG initially registered 30,000,000 units on Form S-1 with the SEC. On
April 18, 2007, USNG listed its units on the AMEX under the ticker symbol “UNG”.
On that day, USNG established its initial net asset value by setting the price
at $50.00 per unit and issued 200,000 units in exchange for
$10,001,000. USNG also commenced investment operations on April 18,
2007 by purchasing Futures Contracts traded on the NYMEX based on natural gas.
As of June 30, 2009, USNG had registered a total of 480,000,000
units.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue
Recognition
Commodity
futures contracts, forward contracts, physical commodities and related options
are recorded on the trade date. All such transactions are recorded on the
identified cost basis and marked to market daily. Unrealized gains or losses on
open contracts are reflected in the condensed statement of financial condition
and in the difference between the original contract amount and the market value
(as determined by exchange settlement prices for futures contracts and related
options and cash dealer prices at a predetermined time for forward contracts,
physical commodities, and their related options) as of the last business day of
the year or as of the last date of the condensed financial statements. Changes
in the unrealized gains or losses between periods are reflected in the condensed
statement of operations. USNG earns interest on its assets denominated
in U.S. dollars on deposit with the futures commission merchant at the
overnight Federal Funds Rate less 32 basis points. In addition, USNG earns
interest on funds held at the custodian at prevailing market rates earned on
such investments.
Brokerage
Commissions
Brokerage
commissions on all open commodity futures contracts are accrued on a full-turn
basis.
Income
Taxes
USNG is
not subject to federal income taxes; each partner reports his/her allocable
share of income, gain, loss deductions or credits on his/her own income tax
return.
Additions
and Redemptions
Authorized
Purchasers may purchase Creation Baskets or redeem Redemption Baskets only in
blocks of 100,000 units equal to the net asset value of the units calculated
shortly after the close of the core trading session on the NYSE Arca on the day
the order is placed.
USNG
receives or pays the proceeds from units sold or redeemed within three business
days after the trade date of the purchase or redemption. The amounts
due from Authorized Purchasers are reflected in USNG’s condensed statement of
financial condition as receivable for units sold, and amounts payable to
Authorized Purchasers upon redemption are reflected as payable for units
redeemed.
Partnership
Capital and Allocation of Partnership Income and Losses
Profit or
loss shall be allocated among the partners of USNG in proportion to the number
of units each partner holds as of the close of each month. The General Partner
may revise, alter or otherwise modify this method of allocation as described in
the LP Agreement.
Calculation
of Net Asset Value
USNG’s
net asset value is calculated on each NYSE Arca trading day by taking the
current market value of its total assets, subtracting any liabilities and
dividing the amount by the total number of units issued and outstanding.
USNG uses the closing price for the contracts on the relevant exchange on
that day to determine the value of contracts held on such
exchange.
Net
Income (Loss) per Unit
Net
income (loss) per unit is the difference between the net asset value per
unit at the beginning of each period and at the end of each period. The weighted
average number of units outstanding was computed for purposes of disclosing net
income (loss) per weighted average unit. The weighted average units are
equal to the number of units outstanding at the end of the period, adjusted
proportionately for units redeemed based on the amount of time the units were
outstanding during such period. There were no units held by the General
Partner at June 30, 2009.
Offering
Costs
Offering
costs incurred in connection with the registration of additional units after the
initial registration of units are borne by USNG. These costs include
registration fees paid to regulatory agencies and all legal, accounting,
printing and other expenses associated therewith. These costs will be accounted
for as a deferred charge and thereafter amortized to expense over twelve months
on a straight-line basis or a shorter period if warranted.
Cash
Equivalents
Cash and
cash equivalents include money market funds and overnight deposits or
time deposits with original maturity dates of three months or
less.
Use
of Estimates
The
preparation of condensed financial statements in conformity with accounting
principles generally accepted in the United States of America requires USNG’s
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the condensed financial statements, and the reported amounts of the
revenue and expenses during the reporting period. Actual results could differ
from those estimates and assumptions.
NOTE
3 - FEES PAID BY THE FUND AND RELATED PARTY TRANSACTIONS
General
Partner Management Fee
Under the
LP Agreement, the General Partner is responsible for investing the assets of
USNG in accordance with the objectives and policies of USNG. In addition, the
General Partner has arranged for one or more third parties to provide
administrative, custody, accounting, transfer agency and other necessary
services to USNG. For these services, USNG is contractually obligated to
pay the General Partner a fee, which is paid monthly and based on average
daily net assets, that is equal to 0.60% per annum on average daily net assets
of $1,000,000,000 or less and 0.50% per annum on average daily net assets that
are greater than $1,000,000,000.
Ongoing
Registration Fees and Other Offering Expenses
USNG pays
all costs and expenses associated with the ongoing registration of its units
subsequent to the initial offering. These costs include registration or
other fees paid to regulatory agencies in connection with the offer and sale of
units, and all legal, accounting, printing and other expenses associated with
such offer and sale. For the six month periods ended June 30, 2009 and
2008, USNG incurred $322,719 and $88,958, respectively, in registration fees and
other offering expenses.
Directors’
Fees
USNG is
responsible for paying its portion of the directors’ and officers’ liability
insurance of the General Partner and the fees and expenses of the independent
directors of the General Partner who are also the General Partner’s audit
committee members. USNG shares these fees with USOF, US12OF, UGA and USHO
based on the relative assets of each fund, computed on a daily basis. These fees
for the calendar year 2009 are estimated to be a total of $477,000 for all
funds.
Licensing
Fees
As
discussed in Note 4, USNG entered into a licensing agreement with the NYMEX
on May 30, 2007. Pursuant to the agreement, USNG and the affiliated funds
managed by the General Partner pay a licensing fee that is equal to 0.04% for
the first $1,000,000,000 of combined assets of the funds and 0.02% for
combined assets above $1,000,000,000. During the six month periods
ended June 30, 2009 and 2008, USNG incurred $161,191 and $107,472, respectively,
under this arrangement.
Investor
Tax Reporting Cost
The fees
and expenses associated with USNG’s audit expenses and tax accounting and
reporting requirements, with the exception of certain initial implementation
service fees and base service fees which are borne by the General Partner, are
paid by USNG.
Other
Expenses and Fees
In
addition to the fees described above, USNG pays all brokerage fees, taxes
and other expenses in connection with the operation of USNG, excluding costs and
expenses paid by the General Partner as outlined in Note 4.
NOTE
4 - CONTRACTS AND AGREEMENTS
USNG is
party to a marketing agent agreement, dated as of April 17, 2007, with the
Marketing Agent, whereby the Marketing Agent provides certain marketing services
for USNG as outlined in the agreement. The fee of the Marketing Agent, which is
borne by the General Partner, is equal to 0.06% on USNG’s assets up to $3
billion; and 0.04% on USNG’s assets in excess of $3 billion.
The above
fee does not include the following expenses, which are also borne by the General
Partner: the cost of placing advertisements in various periodicals; web
construction and development; or the printing and production of various
marketing materials.
USNG is
also party to a custodian agreement, dated January 12, 2007, with Brown Brothers
Harriman & Co. (“BBH&Co.”), whereby BBH&Co. holds investments on
behalf of USNG. The General Partner pays the fees of the custodian, which
are determined by the parties from time to time. In addition, USNG is party to
an administrative agency agreement, dated March 5, 2007, with the General
Partner and BBH&Co., whereby BBH&Co. acts as the administrative
agent, transfer agent and registrar for USNG. The General Partner also pays the
fees of BBH&Co. for its services under this agreement and such fees are
determined by the parties from time to time.
Currently,
the General Partner pays BBH&Co. for its services, in the foregoing
capacities, a minimum amount of $75,000 annually for its custody, fund
accounting and fund administration services rendered to USNG and each of the
affiliated funds managed by the General Partner, as well as a $20,000 annual fee
for its transfer agency services. In addition, the General Partner pays
BBH&Co. an asset-based charge of (a) 0.06% for the first $500 million of
USNG’s, USOF’s, US12OF’s, UGA’s and USHO’s combined net assets, (b) 0.0465% for
USNG’s, USOF’s, US12OF’s, UGA’s and USHO’s combined net assets greater than $500
million but less than $1 billion, and (c) 0.035% once USNG’s, USOF’s, US12OF’s,
UGA’s and USHO’s combined net assets exceed $1 billion. The annual minimum
amount will not apply if the asset-based charge for all accounts in the
aggregate exceeds $75,000. The General Partner also pays transaction fees
ranging from $7.00 to $15.00 per transaction.
USNG has
entered into a brokerage agreement with UBS Securities LLC (“UBS
Securities”). The agreement requires UBS Securities to provide services to USNG
in connection with the purchase and sale of Futures Contracts and Other
Natural Gas-Related Investments that may be purchased and sold by or through UBS
Securities for USNG’s account. The agreement provides that UBS
Securities charge USNG commissions of approximately $7 per round-turn
trade, plus applicable exchange and NFA fees for Futures Contracts and options
on Futures Contracts.
On May
30, 2007, USNG and the NYMEX entered into a licensing agreement whereby
USNG was granted a non-exclusive license to use certain of the NYMEX’s
settlement prices and service marks. Under the licensing agreement, USNG
and the affiliated funds managed by the General Partner pay
the NYMEX an asset-based fee for the license, the terms of which are
described in Note 3.
USNG
expressly disclaims any association with the NYMEX or endorsement of USNG by the
NYMEX and acknowledges that “NYMEX” and “New York Mercantile Exchange” are
registered trademarks of the NYMEX.
NOTE
5 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND
CONTINGENCIES
USNG engages
in the trading of futures contracts, options on futures contracts and
cleared swaps (collectively, “derivatives”). USNG is exposed to both market
risk, which is the risk arising from changes in the market value of the
contracts, and credit risk, which is the risk of failure by another party to
perform according to the terms of a contract.
USNG may
enter into futures contracts, options on futures contracts and cleared swaps to
gain exposure to changes in the value of an underlying commodity. A
futures contract obligates the seller to deliver (and the purchaser to accept)
the future delivery of a specified quantity and type of a commodity at a
specified time and place. The contractual obligations of a buyer or
seller may generally be satisfied by taking or making physical delivery of the
underlying commodity or by making an offsetting sale or purchase of an identical
futures contract on the same or linked exchange before the designated date of
delivery. Cleared
swaps are over-the-counter (“OTC”) agreements that are eligible to be cleared by
a clearinghouse, e.g.,
ICE Clear U.S., but which are not traded on an exchange. A cleared swap is
created when the parties to an off-exchange OTC transaction agree to extinguish
their OTC contract and replace it with a cleared swap. Cleared swaps are
intended to provide the efficiencies and benefits that centralized clearing on
an exchange offers to traders of futures contracts, including credit risk
intermediation and the ability to offset positions initiated with different
counterparties.
The
purchase and sale of futures contracts, options on futures contracts and cleared
swaps require margin deposits with a futures commission merchant.
Additional deposits may be necessary for any loss on contract value. The
Commodity Exchange Act requires a futures commission merchant to segregate all
customer transactions and assets from the futures commission merchant’s
proprietary activities.
Futures
contracts and cleared swaps involve, to varying degrees, elements of market risk
(specifically commodity price risk) and exposure to loss in excess of the amount
of variation margin. The face or contract amounts reflect the extent of the
total exposure USNG has in the particular classes of instruments. Additional
risks associated with the use of futures contracts are an imperfect correlation
between movements in the price of the futures contracts and the market value of
the underlying securities and the possibility of an illiquid market for a
futures contract.
All of
the contracts traded by USNG through June 30, 2009 have been exchange-traded
futures contracts of cleared swaps. The risks associated with exchange-traded
contracts and cleared swaps are generally perceived to be less than those
associated with over-the-counter transactions since, in over-the-counter
transactions, USNG must rely solely on the credit of its respective individual
counterparties. Although USNG was not a party to any over-the-counter
transactions as of June 30, 2009, it was in the process of negotiating
agreements governing over-the-counter transactions with multiple
counterparties. Subsequent to June 30, 2009, USNG has entered into an
over-the-counter transaction with one counterparty. Over-the counter
transactions subject USNG to the credit risk associated with counterparty
non-performance. The credit risk from counterparty non-performance associated
with such instruments is the net unrealized gain, if any. USNG also has credit
risk since the sole counterparty to all domestic and foreign futures contracts
is the exchange on which the relevant contracts are traded. In
addition, USNG bears the risk of financial failure by the clearing
broker.
USNG’s
cash and other property, such as U.S. Treasuries, deposited with a futures
commission merchant are considered commingled with all other customer funds
subject to the futures commission merchant’s segregation requirements. In the
event of a futures commission merchant’s insolvency, recovery may be limited to
a pro rata share of segregated funds available. It is possible that the
recovered amount could be less than the total of cash and other property
deposited. The insolvency of a futures commission merchant could result in the
complete loss of USNG’s assets posted with that futures commission merchant;
however, the vast majority of USNG’s assets are held in Treasuries, cash and/or
cash equivalents with USNG’s custodian and would not be impacted by the
insolvency of a futures commission merchant. Also, the failure or insolvency of
USNG’s custodian could result in a substantial loss of USNG’s
assets.
USNG invests
its cash in money market funds that seek to maintain a stable net asset
value. USNG is exposed to any risk of loss associated with an investment
in these money market funds. As of June 30, 2009 and December 31, 2008, USNG had
deposits in domestic and foreign financial institutions, including cash
investments in money market funds, in the amounts of $4,012,530,556 and
$713,549,385, respectively. This amount is subject to loss should these
institutions cease operations.
For
derivatives, risks arise from changes in the market value of the contracts.
Theoretically, USNG is exposed to a market risk equal to the value of
futures contracts purchased and unlimited liability on such contracts sold
short. As both a buyer and a seller of options, USNG pays or receives a premium
at the outset and then bears the risk of unfavorable changes in the price of the
contract underlying the option.
USNG’s
policy is to continuously monitor its exposure to market and counterparty risk
through the use of a variety of financial, position and credit exposure
reporting controls and procedures. In addition, USNG has a policy of
requiring review of the credit standing of each broker or counterparty with
which it conducts business.
The
financial instruments held by USNG are reported in its condensed statement of
financial condition at market or fair value, or at carrying amounts that
approximate fair value, because of their highly liquid nature and short-term
maturity.
NOTE 6 – FAIR VALUE OF FINANCIAL
INSTRUMENTS
Effective
January 1, 2008, USNG adopted FAS 157 – Fair Value Measurements (“FAS
157”). FAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurement. The changes to past
practice resulting from the application of FAS 157 relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurement. FAS 157 establishes a fair value hierarchy that
distinguishes between (1) market participant assumptions developed based on
market data obtained from sources independent of USNG (observable inputs) and
(2) USNG’s own assumptions about market participant assumptions developed based
on the best information available under the circumstances (unobservable
inputs). The three levels defined by the FAS 157 hierarchy are as
follows:
Level I –
Quoted prices (unadjusted) in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date.
Level II
– Inputs other than quoted prices included within Level I that are observable
for the asset or liability, either directly or indirectly. Level II assets
include the following: quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, inputs other than quoted prices that are
observable for the asset or liability, and inputs that are derived principally
from or corroborated by observable market data by correlation or other means
(market-corroborated inputs).
Level III
– Unobservable pricing input at the measurement date for the asset or liability.
Unobservable inputs shall be used to measure fair value to the extent that
observable inputs are not available.
In some
instances, the inputs used to measure fair value might fall in different levels
of the fair value hierarchy. The level in the fair value hierarchy within which
the fair value measurement in its entirety falls shall be determined based on
the lowest input level that is significant to the fair value measurement in its
entirety.
The
following table summarizes the valuation of USNG’s securities at June 30, 2009
using the fair value hierarchy:
At June
30, 2009
|
|
Total
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
Investments
|
|
$ |
2,049,933,093 |
|
|
$ |
2,049,933,093 |
|
|
$ |
- |
|
|
$ |
- |
|
Exchange-Traded
Futures Contracts
|
|
|
(129,944,005 |
) |
|
|
(129,944,005 |
) |
|
|
- |
|
|
|
- |
|
Exchange-Traded
Cleared Swap Contracts
|
|
|
(276,225,565 |
) |
|
|
(276,225,565 |
) |
|
|
- |
|
|
|
- |
|
NOTE 7
- FINANCIAL HIGHLIGHTS
The
following table presents per unit performance data and other supplemental
financial data for the six months ended June 30, 2009 and 2008 for the limited
partners. This information has been derived from information presented in the
condensed financial statements.
|
|
For
the six months ended
|
|
|
For
the six months ended
|
|
|
|
June 30, 2009 (Unaudited)
|
|
|
June 30, 2008 (Unaudited)
|
|
|
|
|
|
|
|
|
Per Unit Operating
Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value, beginning of period
|
|
$ |
23.27 |
|
|
$ |
36.18 |
|
Total
income (loss)
|
|
|
(9.36 |
) |
|
|
26.25 |
|
Total
expenses
|
|
|
(0.11 |
) |
|
|
0.23 |
|
Net
increase (decrease) in net asset value
|
|
|
(9.47 |
) |
|
|
26.48 |
|
Net
asset value, end of period
|
|
$ |
13.80 |
|
|
$ |
62.66 |
|
|
|
|
|
|
|
|
|
|
Total
Return
|
|
|
(40.70 |
)% |
|
|
73.19
|
% |
|
|
|
|
|
|
|
|
|
Ratios
to Average Net Assets
|
|
|
|
|
|
|
|
|
Total
income (loss)
|
|
|
(33.12 |
)% |
|
|
55.54
|
% |
Expenses
excluding management fees*
|
|
|
0.86
|
% |
|
|
0.36
|
% |
Management
fees*
|
|
|
0.56
|
% |
|
|
0.60
|
% |
Net
income (loss)
|
|
|
(33.83 |
)% |
|
|
55.07
|
% |
|
|
|
|
|
|
|
|
|
*Annualized
|
|
|
|
|
|
|
|
|
Total
returns are calculated based on the change in value during the period. An
individual limited partner’s total return and ratio may vary from the above
total returns and ratios based on the timing of contributions to and withdrawals
from USNG.
NOTE
8 – RECENTLY ADOPTED ACCOUNTING STANDARDS
In March
2008, the Financial Accounting Standards Board (the “FASB”) released FASB
Statement No. 161, “Disclosures about Derivative Instruments and Hedging
Activities” (“Statement No. 161”). Statement No. 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of, and gains and losses on,
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements. USNG adopted Statement
No. 161 on January 1, 2009.
NOTE 9
– SUBSEQUENT
EVENTS
In May
2009, the FASB issued FASB Statement No. 165, “Subsequent
Events”
(“Statement No. 165”). Statement No. 165 establishes general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
Statement No. 165 includes a new required disclosure of the date through
which an entity has evaluated subsequent events and is effective for interim
periods or fiscal years ending after June 15, 2009. USNG’s adoption of
Statement No. 165 did not have a material effect on its financial position
or results of operations.
USNG has
performed an evaluation of subsequent events through August 10, 2009, which is
the date the financial statements were issued. This is a new subsequent events
disclosure requirement under Statement No. 165 (now Accounting Standards
Codification 855
under the new codification).
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
The
following discussion should be read in conjunction with the condensed financial
statements and the notes thereto of the United States Natural Gas Fund, LP
(“USNG”) included elsewhere in this quarterly report on Form 10-Q.
Forward-Looking
Information
This
quarterly report on Form 10-Q, including this “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” contains
forward-looking statements regarding the plans and objectives of management for
future operations. This information may involve known and unknown risks,
uncertainties and other factors that may cause USNG’s actual results,
performance or achievements to be materially different from future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
USNG’s future plans, strategies and expectations, are generally identifiable by
use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend” or “project,” the negative of these words, other
variations on these words or comparable terminology. These forward-looking
statements are based on assumptions that may be incorrect, and USNG cannot
assure investors that the projections included in these forward-looking
statements will come to pass. USNG’s actual results could differ
materially from those expressed or implied by the forward-looking statements as
a result of various factors.
USNG has
based the forward-looking statements included in this quarterly report on Form
10-Q on information available to it on the date of this quarterly report on Form
10-Q, and USNG assumes no obligation to update any such forward-looking
statements. Although USNG undertakes no obligation to revise or update any
forward-looking statements, whether as a result of new information, future
events or otherwise, investors are advised to consult any additional disclosures
that USNG may make directly to them or through reports that USNG in the
future files with the U.S. Securities and Exchange Commission (the “SEC”),
including annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K.
Introduction
USNG, a
Delaware limited partnership, is a commodity pool that issues units that may be
purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”). The investment
objective of USNG is to have the changes in percentage terms of its
units’ net asset value (“NAV”) reflect the changes in percentage terms of
the spot price of natural gas delivered at the Henry Hub, Louisiana, as measured
by the changes in the price of the futures contract on natural gas as traded on
the New York Mercantile Exchange (the “Benchmark Futures Contract”) that is the
near month contract to expire, except when the near month contract is within two
weeks of expiration, in which case it will become, over a 4-day period, the
futures contract that is the next month contract to expire, less USNG’s
expenses.
USNG
seeks to achieve its investment objective by investing in a combination of
natural gas futures contracts and other natural gas-related investments such
that changes in its NAV, measured in percentage terms, will closely track
the changes in the price of the Benchmark Futures Contract, also measured
in percentage terms. USNG’s general partner believes the Benchmark Futures
Contract historically has exhibited a close correlation with the spot price of
natural gas. It is not the intent of USNG to be operated in a fashion such that
the NAV will equal, in dollar terms, the spot price of natural gas or any
particular futures contract based on natural gas. Management believes that it is
not practical to manage the portfolio to achieve such an investment goal when
investing in listed natural gas futures contracts and other natural gas-related
investments.
On any
valuation day, the Benchmark Futures Contract is the near
month futures contract for natural gas traded on the New York
Mercantile Exchange (the “NYMEX”) unless the near month contract will expire
within two weeks of the valuation day, in which case the Benchmark Futures
Contract becomes, over a 4-day period, the next month contract for natural
gas traded on the NYMEX. “Near month contract” means the next contract traded on
the NYMEX due to expire. “Next month contract” means the first contract traded
on the NYMEX due to expire after the near month contract.
USNG may
also invest in futures contracts for crude oil, heating oil, gasoline and other
petroleum-based fuels that are traded on the NYMEX, ICE Futures or other U.S.
and foreign exchanges (collectively, “Futures Contracts”) and other natural
gas-related investments such as cash-settled options on Futures Contracts,
forward contracts for natural gas, cleared swap contracts and
over-the-counter transactions that are based on the price of natural gas, crude
oil and other petroleum-based fuels, Futures Contracts and indices based on the
foregoing (collectively, “Other Natural Gas-Related
Investments”). For convenience and unless otherwise specified,
Futures Contracts and Other Natural Gas-Related Investments collectively are
referred to as “Natural Gas Interests” in this quarterly report on Form 10-Q.
Due, in part, to the increased size of USNG over the last several quarters, it
is likely that it will invest in increased numbers of Other Natural Gas-Related
Investments in order to fulfill its investment objective.
The
regulation of Natural Gas Interests in the United States is a rapidly changing
area of law and is subject to ongoing modification by governmental and judicial
action. As stated in the section “What are the Risk Factors Involved
with an Investment in USNG?” of USNG’s registration statement as filed with the
SEC, regulation of the commodity interests and energy markets is extensive and
constantly changing; future regulatory developments in the commodity interests
and energy markets are impossible to predict but may significantly and adversely
affect USNG.
Currently,
a number of proposals that would alter the regulation of Natural Gas Interests
are being considered by federal regulators and Congress. These
proposals include the imposition of fixed position limits on energy-based
commodity futures contracts, extension of position and accountability limits to
futures contracts on non-U.S. exchanges previously exempt from such limits, and
the forced use of clearinghouse mechanisms for all over-the-counter
transactions. Certain proposals would aggregate and limit all
positions in energy futures held by a single entity, whether such positions
exist on U.S. futures exchanges, non-U.S. futures exchanges, or in
over-the-counter contracts. While it cannot be predicted at this time
what reforms will eventually be made or how they will impact USNG, if any of the
aforementioned proposals are implemented, USNG’s ability to meet its investment
objective may be negatively impacted and investors could be adversely
affected.
In
addition, due to potential regulatory limitations, and pending an investment in
Other Natural Gas-Related Investments, USNG may determine to hold greater
amounts of cash and cash equivalents, and lesser amounts of Natural Gas
Interests, for some period of time while it obtains suitable new exposure if it
determines that will most appropriately satisfy USNG's investment
objective. Holding more cash and cash equivalents, and less Natural
Gas Interests, for some period of time may result in increased tracking error.
In the event that USNG determines that suitable Other Natural Gas-Related
Investments are not obtainable, USNG will need to consider other actions to
protect its unitholders and to permit USNG to achieve its investment
objectives.
The general
partner of USNG, United States Commodity Funds LLC (formerly, Victoria Bay Asset
Management, LLC) (the “General Partner”), which is registered as a commodity
pool operator (“CPO”) with the U.S. Commodity Futures Trading Commission (the
“CFTC”), is authorized by the Second Amended and Restated Agreement of
Limited Partnership of USNG (the “LP Agreement”) to manage USNG. The
General Partner is authorized by USNG in its sole judgment to employ and
establish the terms of employment for, and termination of, commodity trading
advisors or futures commission merchants.
Natural
gas futures prices exhibited a general downtrend during the six months ended
June 30, 2009. The price of the Benchmark Futures Contract started the year at
$5.971. It hit a peak on January
5, 2009 of $6.072 and then fell over the course of the period. The low
price of the period was on April
27, 2009 when prices reached the $3.362 level. The period ended
with the Benchmark Futures Contract at $3.835, down approximately 35.77% over the period.
Similarly, USNG’s NAV initially rose during the period from a starting level of
$23.27 per unit to a high
on January 5, 2009 of
$25.13 per unit. USNG’s NAV reached its low for the period on April 27, 2009 at $13.07 per
unit. The NAV on June 30, 2009 was $13.80, down approximately 40.70% over the period. The
return of approximately -35.77% on the Benchmark Futures Contract listed
above is a hypothetical return only and could not actually be achieved by an
investor holding futures contracts. An investment in natural gas futures
contracts would need to be rolled forward during the time period described in
order to achieve such a result.
For the
first month of 2009, the natural gas futures market remained in a state of
backwardation, meaning that the price of the near month natural gas futures
contract was typically higher than the price of the next month natural gas
futures contract, or contracts further away from expiration. For the rest of the
first quarter and for the second quarter of 2009, the natural gas futures market
moved into a contango market, with short periods of backwardation. A contango
market is one in which the price of the near month natural gas futures contract
is less than the price of the next month natural gas futures contract, or
contracts further away from expiration. For a discussion of the impact of
backwardation and contango on total returns, see “Term Structure of Natural Gas
Futures Prices and the Impact on Total Returns”.
Valuation
of Futures Contracts and the Computation of the NAV
The NAV
of USNG units is calculated once each NYSE Arca trading day. The NAV
for a particular trading day is released after 4:00 p.m. New York time.
Trading during the core trading session on the NYSE Arca typically closes
at 4:00 p.m. New York time. USNG’s administrator uses the NYMEX closing
price (determined at the earlier of the close of the NYMEX or 2:30 p.m. New
York time) for the contracts held on the NYMEX, but calculates or determines the
value of all other USNG investments, including cleared swaps or other futures
contracts, as of the earlier of the close of the NYSE or 4:00 p.m. New York
time.
Results
of Operations and the Natural Gas Market
Results of
Operations. On April 18, 2007, USNG listed its units on the
American Stock Exchange (the “AMEX”) under the ticker symbol “UNG.” On that day,
USNG established its initial offering price at $50.00 per unit and issued
200,000 units to the initial authorized purchaser, Merrill Lynch Professional
Clearing Corp., in exchange for $10,001,000 in cash. As a result of the
acquisition of the AMEX by NYSE Euronext, USNG’s units no longer trade on the
AMEX and commenced trading on the NYSE Arca on November 25, 2008.
Since its
initial offering of 30,000,000 units, USNG has made three 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 are pending registration with
the SEC. Units offered by USNG in the subsequent offerings were sold by it for
cash at the units’ NAV as described in the applicable prospectus. As of June 30,
2009, USNG had issued 480,000,000 units, 269,800,000 of which were outstanding.
As of June 30, 2009, there were 83,400,000 units registered but not yet
issued.
More
units may have been issued by USNG than are outstanding due to the redemption of
units. Unlike funds that are registered under the Investment Company Act of
1940, as amended, units that have been redeemed by USNG cannot be resold by
USNG. As a result, USNG contemplates that additional offerings of its units will
be registered with the SEC in the future in anticipation of additional
issuances and redemptions.
For the Six Months Ended
June 30, 2009 Compared to the Six Months Ended June 30, 2008
As of
June 30, 2009, the total unrealized loss on natural gas Futures Contracts and
cleared swap contracts owned or held on that day was $406,169,570 and USNG
established cash deposits, including cash investments in money market
funds, that were
equal to $4,012,530,556. USNG held 64.50% of its cash assets in
overnight deposits at its custodian bank, while 35.50% of the cash balance was
held with the futures commission merchant as margin deposits for
the Futures Contracts purchased. The ending per unit NAV on June 30, 2009
was $13.80.
By
comparison, as of June 30, 2008, the total unrealized gain on natural gas
Futures Contracts owned or held on that day was $31,102,890 and USNG established
cash deposits, including cash investments in money market funds, that were equal to
$1,090,453,564. USNG held 91.11% of its cash assets in
overnight deposits at its custodian bank, while 8.89% of the cash balance was
held as margin deposits with the futures commission merchant for
the Futures Contracts purchased. The ending per unit NAV on June 30, 2008
was $62.66. The change in the per unit NAV for June 30, 2009 compared to June
30, 2008 was primarily a result of sharply lower prices for natural gas and the
related decline in the value of the natural gas futures contracts that USNG had
invested in between the period ended June 30, 2008 and the period ended June 30,
2009.
Portfolio Expenses. USNG’s
expenses consist of investment management fees, brokerage fees and
commissions, certain offering costs, licensing fees, the fees and expenses of
the independent directors of the General Partner and other extraordinary
expenses. The management fee that USNG pays to the General Partner is
calculated as a percentage of the total net assets of USNG. For total net assets
of up to $1 billion, the management fee is 0.60%. For total net assets over $1
billion, the management fee is 0.50% on the incremental amount of assets. The
fee is accrued daily.
During
the six month period ended June 30, 2009, the daily average total net assets of
USNG were $1,351,337,642. The management fee paid by USNG during the period
amounted to $3,764,676,
which was calculated at the 0.60% rate on total net assets up to and including
$1 billion and at the rate of 0.50% on total net assets over $1 billion, and
accrued daily. Management fees as a percentage of average net assets averaged
0.56% over the course of this six month period. By comparison, during the six
month period ended June 30, 2008, the daily average total net assets of USNG
were $599,551,824. The management fee paid by USNG during the period
amounted to $1,787,298, which was calculated at the 0.60% rate for total net
assets up to and including $1 billion and at the rate of 0.50% on total net
assets over $1 billion, and accrued daily. Management fees as a percentage of
average net assets averaged 0.60% over the course of this six month period.
Management fees as a percentage of average net assets were lower for the six
months ended June 30, 2009 compared to the six months ended June 30, 2008 due to
the period ended June 30, 2008 having a fewer number of days in which total net
assets exceeded $1 billion and were therefore charged the lower rate of
0.50%.
In
addition to the management fee, USNG pays all brokerage fees, taxes and
other expenses, including certain tax reporting costs, licensing fees for the
use of intellectual property, ongoing registration or other fees paid to the
SEC, the Financial Industry Regulatory Authority (“FINRA”) and any
other regulatory agency in connection with offers and sales of its units
subsequent to the initial offering and all legal, accounting, printing and other
expenses associated therewith. The total of these fees, taxes and expenses
for the six months ended June 30, 2009 was $5,747,311, as compared to $1,073,845
for the six months ended June 30, 2008. The increase in expenses in the six
months ended June 30, 2009 as compared to the six months ended June 30, 2008 was
primarily due to the relative size of USNG and activity that resulted from its
increased size, including the registration and the offering of additional units,
increased brokerage fees, increased licensing fees and increased tax reporting
costs due to the greater number of unitholders during the period. For
the six months ended June 30, 2009, USNG incurred $322,719 in fees and
other expenses relating to the registration and offering of additional units. By
comparison, for the six months ended June 30, 2008, USNG incurred $88,958 in
ongoing registration fees and other expenses relating to the registration and
offering of additional units.
USNG is
responsible for paying its portion of the directors’ and officers’ liability
insurance of the General Partner and the fees and expenses of the independent
directors of the General Partner who are also the General Partner’s audit
committee members. USNG shares these fees with the United States Oil
Fund, LP (“USOF”), the United States 12 Month Oil Fund, LP (“US12OF”), the
United States Gasoline Fund, LP (“UGA”) and the United States Heating Oil Fund,
LP (“USHO”) based on the relative assets of each fund computed on a daily basis.
These fees for calendar year 2009 are estimated to be a total of $477,000 for
all funds. By comparison, for the year ended December 31, 2008, these fees
amounted to a total of $282,000 for all funds, and USNG’s portion of such fees
was $130,371. Directors’ expenses are expected to increase in 2009 due to
payment for directors’ and officers’ liability insurance and an increase in the
compensation awarded to the independent directors of the General Partner.
Effective as of March 3, 2009, the General Partner has obtained directors’ and
officers’ liability insurance covering all of the directors and officers of the
General Partner. Previously, the General Partner did not have liability
insurance for its directors and officers; instead, the independent directors
received a payment in lieu of directors’ and officers’ insurance
coverage.
USNG also
incurs commissions to brokers for the purchase and sale of Futures Contracts,
Other Natural Gas-Related Investments or short-term obligations of the
United States of two years or less (“Treasuries”). During the six month period
ended June 30, 2009, total commissions paid to brokers amounted to $3,977,763.
By comparison, during the six month period ended June 30, 2008, total
commissions paid to brokers amounted to $280,578. The increase in the total
commissions paid to brokers was primarily a function of increased brokerage fees
due to a higher number of Natural Gas Interests being held and traded as a
result of the increase in USNG’s average total net assets, the decrease in the
price of Natural Gas Interests and the increase in redemptions and
creations of units during the period. The increase in assets required
USNG to purchase a greater number of Natural Gas Interests and incur a larger
amount of commissions. As an annualized percentage of total net assets,
the figure for the six months ended June 30, 2009 represents approximately
0.59% of total net assets. By comparison, the figure for the six months ended
June 30, 2008 represented approximately 0.09% of total net assets. However,
there can be no assurance that commission costs and portfolio turnover will not
cause commission expenses to rise in future quarters. If USNG enters into Other
Natural Gas-Related Investments in the future, as anticipated, it is likely that
these expenses will increase.
Interest Income. USNG seeks
to invest its assets such that it holds Futures Contracts and Other Natural
Gas-Related Investments in an amount equal to the total net assets of its
portfolio. Typically, such investments do not require USNG to pay the full
amount of the contract value at the time of purchase, but rather require USNG to
post an amount as a margin deposit against the eventual settlement of the
contract. As a result, USNG retains an amount that is approximately equal to its
total net assets, which USNG invests in Treasuries, cash and/or cash
equivalents. This includes both the amount on deposit with the futures
commission merchant as margin, as well as unrestricted cash and cash equivalents
held with USNG’s custodian bank. The Treasuries, cash and/or cash equivalents
earn interest that accrues on a daily basis. For the six month period ended June
30, 2009, USNG earned $1,273,145 in interest income on such cash holdings. Based
on USNG’s average daily total net assets, this was equivalent to an annualized
yield of 0.19%. USNG did
not purchase Treasuries during the six month period ended June 30, 2009 and
held all of its funds in cash and/or cash equivalents during this time period.
By comparison, for the six month period ended June 30, 2008, USNG earned
$5,895,328 in interest income on such cash holdings. Based on USNG’s average
daily total net assets, this was equivalent to an annualized yield of 1.98%.
USNG did not purchase Treasuries during the six month period ended June 30,
2008 and held all of its funds in cash and/or cash equivalents during this time
period. Interest rates on short-term investments in the United States, including
cash, cash equivalents, and short-term Treasuries, were sharply lower during the
six month period ended June 30, 2009 compared to the same time period in 2008.
As a result, the amount of interest earned by USNG as a percentage of total net
assets was lower during the six month period ended June 30, 2009.
For the Three Months Ended
June 30, 2009 Compared to the Three Months Ended June 30,
2008
During
the three month period ended June 30, 2009, the daily average total net assets
of USNG were $2,000,429,893. The management fee paid by USNG during the period
amounted to $2,736,408, which was calculated at the 0.60% rate on total net
assets up to and including $1 billion and at the rate of 0.50% on total net
assets over $1 billion, and accrued daily. Management fees as a percentage of
average net assets averaged 0.55% over the course of this three month period.
By
comparison, during the three month period ended June 30, 2008, the daily average
total net assets of USNG were $690,727,423. The management fee paid by USNG
during the period amounted to $1,028,901, which was calculated at the 0.60% rate
for total net assets up to and including $1 billion and at the rate of 0.50% on
total net assets over $1 billion, and accrued daily. Management fees as a
percentage of average net assets averaged 0.60% over the course of this three
month period. Management fees as a percentage of average net assets were lower
for the three months ended June 30, 2009 compared to the three months ended June
30, 2008 due to the period ended June 30, 2008 having a fewer number of days in
which total net assets exceeded $1 billion.
In
addition to the management fee, USNG pays all brokerage fees, taxes and
other expenses, including certain tax reporting costs, licensing fees for the
use of intellectual property, ongoing registration or other fees paid to the
SEC, FINRA and any other regulatory agency in connection
with offers and sales of its units subsequent to the initial offering and
all legal, accounting, printing and other expenses associated
therewith. The total of these fees, taxes and expenses for the three months
ended June 30, 2009 was $5,048,098, as compared to $467,026 for the three months
ended June 30, 2008. The increase in expenses from the three months ended June
30, 2008 to the three months ended June 30, 2009 was primarily due to the
relative size of USNG and activity that resulted from its increased size,
including the registration and the offering of additional units, increased
brokerage fees, increased licensing fees and increased tax reporting costs due
to the greater number of unitholders during the period. For the three
months ended June 30, 2009, USNG incurred $286,527 in fees and other
expenses relating to the registration and offering of additional units. By
comparison, for the three months ended June 30, 2008, USNG incurred $20,741 in
ongoing registration fees and other expenses relating to the registration and
offering of additional units.
USNG is
responsible for paying for its portion of the directors’ and officers’ liability
insurance of the General Partner and the fees and expenses of the independent
directors of the General Partner who are also the General Partner’s audit
committee members. USNG shares these fees with USOF, US12OF, UGA
and USHO based on the relative assets of each fund computed on a daily basis.
These fees for the three months ended June 30, 2009 amounted to a total of
$79,781 for all funds, and USNG’s portion of such fees was $29,546. By
comparison, for the three months ended June 30, 2008, these fees amounted to a
total of $68,374 for all funds, and USNG’s portion of such fees was $31,950.
Directors’ expenses
increased
for the three months ended June 30, 2009 compared to the three months
ended June 30, 2008 due to payment for
directors’ and officers’ liability insurance and an increase in the compensation awarded
to the
independent directors of the General Partner. Effective as of March 3, 2009, the
General Partner has obtained directors’ and officers’ liability insurance
covering all of the directors and officers of the General Partner. Previously,
the General Partner did not have liability insurance for its directors and
officers; instead, the independent directors received a payment in lieu of
directors’ and officers’ insurance coverage.
USNG also
incurs commissions to brokers for the purchase and sale of Futures Contracts,
Other Natural Gas-Related Investments or Treasuries. During the three month
period ended June 30, 2009, total commissions paid to brokers amounted to
$3,604,808. By comparison, during the three month period ended June 30, 2008,
total commissions paid to brokers amounted to $135,907. The increase in the
total commissions paid to brokers was primarily a function of increased
brokerage fees due to a higher number of Natural Gas Interests being held and
traded as a result of the increase in USNG’s average total net assets, the
decrease in the price of Natural Gas Interests and the increase in redemptions
and creations of units during the period. The increase in assets
required USNG to purchase a greater number of Natural Gas Interests and incur a
larger amount of commissions. As an annualized percentage of total net assets,
the figure for the three months ended June 30, 2009 represents
approximately 0.72% of total net assets. By comparison, the figure for the three
months ended June 30, 2008 represented approximately 0.08% of total net assets.
However, there can be no assurance that commission costs and portfolio turnover
will not cause commission expenses to rise in future quarters. If USNG enters
into Other Natural Gas-Related Investments in the future, as anticipated, it is
likely that these expenses will increase.
Interest Income. USNG seeks
to invest its assets such that it holds Futures Contracts and Other Natural
Gas-Related Investments in an amount equal to the total net assets of its
portfolio. Typically, such investments do not require USNG to pay the full
amount of the contract value at the time of purchase, but rather require USNG to
post an amount as a margin deposit against the eventual settlement of the
contract. As a result, USNG retains an amount that is approximately equal to its
total net assets, which USNG invests in Treasuries, cash and/or cash
equivalents. This includes both the amount on deposit with the futures
commission merchant as margin, as well as unrestricted cash and cash equivalents
held with USNG’s custodian bank. The Treasuries, cash and/or cash equivalents
earn interest that accrues on a daily basis. For the three month period ended
June 30, 2009, USNG earned $774,539 in interest income on such cash holdings.
Based on USNG’s average daily total net assets, this was equivalent to an
annualized yield of 0.16%. USNG did not purchase Treasuries during the
three month period ended June 30, 2009 and held all of its funds in cash and/or
cash equivalents during this time period. By comparison, for the three month
period ended June 30, 2008, USNG earned $2,956,601 in interest income on such
cash holdings. Based on USNG’s average daily total net assets, this was
equivalent to an annualized yield of 1.72%. USNG did not
purchase Treasuries during the three month period ended June 30, 2008 and
held all of its funds in cash and/or cash equivalents during this time period.
Interest rates on short-term investments in the United States, including cash,
cash equivalents, and short-term Treasuries, were sharply lower during the three
month period ended June 30, 2009 compared to the same time period in 2008. As a
result, the amount of interest earned by USNG as a percentage of total net
assets was lower during the three month period ended June 30, 2009.
Tracking
USNG’s Benchmark
USNG
seeks to manage its portfolio such that changes in its average daily NAV, on a
percentage basis, closely track changes in the average daily price of the
Benchmark Futures Contract, also on a percentage basis. Specifically, USNG seeks
to manage the portfolio such that over any rolling period of 30 valuation days,
the average daily change in the NAV is within a range of 90% to 110% (0.9 to
1.1) of the average daily change in the price of the Benchmark Futures Contract.
As an example, if the average daily movement of the price of the Benchmark
Futures Contract for a particular 30-day time period was 0.5% per day, USNG’s
management would attempt to manage the portfolio such that the average daily
movement of the NAV during that same time period fell between 0.45% and 0.55%
(i.e., between 0.9 and
1.1 of the benchmark’s results). USNG’s portfolio management goals do not
include trying to make the nominal price of USNG’s NAV equal to the nominal
price of the current Benchmark Futures Contract or the spot price for natural
gas. Management believes that it is not practical to manage the portfolio to
achieve such an investment goal when investing in listed natural gas Futures
Contracts and other Natural Gas-Related Investments.
For the
30 valuation days ended June 30, 2009, the simple average daily change in the
Benchmark Futures Contract was -0.407%, while the simple average daily change in
the NAV of USNG over the same time period was -0.413%. The average daily
difference was -0.006% (or -0.00006 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 -0.0133%,
meaning that over this time period USNG’s tracking error was within the plus or
minus 10% range established as its benchmark tracking goal. The first chart
below shows the daily movement of USNG’s NAV versus the daily movement of the
Benchmark Futures Contract for the 30-day period ended June 30,
2009.
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Since the
offering of USNG’s units to the public on April 18, 2007 to June 30, 2009,
the simple average daily change in the Benchmark Futures Contract
was
-0.188%,
while the simple average daily change in the NAV of USNG over the same time
period was -0.184%. The average daily difference was 0.005% (or 0.00005 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 0.780%, meaning that over this time period USNG’s
tracking error was within the plus or minus 10% range established as its
benchmark tracking goal.
An
alternative tracking measurement of the return performance of USNG versus the
return of its Benchmark Futures Contract can be calculated by comparing the
actual return of USNG, measured by changes in its NAV, versus the expected changes in its NAV
under the assumption that USNG’s returns had been exactly the same as the daily
changes in its Benchmark Futures Contract.
For the
six month period ended June 30, 2009, the actual total return of USNG as
measured by changes in its NAV was -40.70%. This is based on an initial
NAV of $23.27 on December 31, 2008 and an ending NAV as of June 30,
2009 of $13.80. During this time period, USNG made no distributions to its
unitholders. However, if USNG’s daily changes in its NAV had instead exactly
tracked the changes in the daily return of the Benchmark Futures Contract, USNG
would have ended the second quarter of 2009 with an estimated NAV of $13.87, for
a total return over the relevant time period of -40.38%. The difference between
the actual NAV total return of USNG of -40.70% and the expected total return
based on the Benchmark Futures Contract of -40.38% was an error over the time
period of -0.32%, which is to say that USNG’s actual total return trailed the
benchmark result by that percentage. Management believes that a portion
of the difference between the actual return and the expected benchmark
return can be attributed to the net impact of the expenses and the interest that
USNG collects on its cash and cash equivalent holdings. During the six month
period ended June 30, 2009, USNG received interest income of $1,273,145, which
is equivalent to a weighted average interest rate of 0.19% for the six month
period ended June 30, 2009. In addition, during the six month period ended June
30, 2009, USNG also collected $174,000 from its authorized purchasers
(“Authorized Purchasers”) creating or redeeming baskets of units. This income
also contributed to USNG’s actual return exceeding the benchmark results.
However, if the total assets of USNG continue to increase, management believes
that the impact on total returns of these fees from creations and redemptions
will diminish as a percentage of the total return. During the six month period
ended June 30, 2009, USNG incurred total expenses of $9,511,987. Income from
interest and Authorized Purchaser collections net of expenses was $(8,064,842),
which is equivalent to a weighted average net interest rate of -1.20% for the
six month period ended June 30, 2009.
By
comparison, for the six month period ended June 30, 2008, the actual total
return of USNG as measured by changes in its NAV was 73.19%. This was based on
an initial NAV of $36.18 on December 31, 2007 and an ending NAV as of
June 30, 2008 of $62.66. During this time period, USNG made no distributions to
its unitholders. However, if USNG’s daily changes in its NAV had instead exactly
tracked the changes in the daily return of the Benchmark Futures Contract, USNG
would have ended the second quarter of 2008 with an estimated NAV of $62.39, for
a total return over the relevant time period of 72.44%. The difference between
the actual NAV total return of USNG of 73.19% and the expected total return
based on the Benchmark Futures Contract of 72.44% was an error over the
time period of 0.75%, which is to say that USNG’s actual total return exceeded
the benchmark result by that percentage. Management believes that a portion
of the difference between the actual return and the expected benchmark
return can be attributed to the impact of the interest that USNG collected on
its cash and cash equivalent holdings. During the six month period ended June
30, 2008, USNG received interest income of $5,895,328, which is equivalent to a
weighted average interest rate of 1.98% for the six month period ended June 30,
2008. In addition, during the six month period ended June 30, 2008, USNG also
collected $71,000 from Authorized Purchasers creating or redeeming baskets of
units. During the six month period ended June 30, 2008, USNG incurred total
expenses of $2,861,143. Income from interest and Authorized Purchaser
collections net of expenses was $3,105,185, which is equivalent to a weighted
average net interest rate of 1.04% for the six month period ended June 30, 2008.
This income also contributed to USNG’s actual return exceeding the benchmark
results.
There are
currently three factors that have impacted or are most likely
to impact USNG’s ability to accurately track its Benchmark Futures
Contract.
First,
USNG may buy or sell its holdings in the then current Benchmark Futures Contract
at a price other than the closing settlement price of that contract on the day
during which USNG executes the trade. In that case, USNG may pay a price that is
higher, or lower, than that of the Benchmark Futures Contract, which could
cause the changes in the daily NAV of USNG to either be too high or too low
relative to the changes in the Benchmark Futures Contract. During the six month
period ended June 30, 2009, management attempted to minimize the effect of these
transactions by seeking to execute its purchase or sale of the Benchmark Futures
Contract at, or as close as possible to, the end of the day settlement price.
However, it may not always be possible for USNG to obtain the closing settlement
price and there is no assurance that failure to obtain the closing settlement
price in the future will not adversely impact USNG’s attempt to track the
Benchmark Futures Contract over time.
Second,
USNG earns interest on its cash, cash equivalents and Treasury
holdings. USNG is not required to distribute any portion of its income to its
unitholders and did not make any distributions to unitholders during the six
month period ended June 30, 2009. Interest payments, and any other income, were
retained within the portfolio and added to USNG’s NAV. When this income exceeds
the level of USNG’s expenses for its management fee, brokerage commissions and
other expenses (including ongoing registration fees, licensing fees and
the fees and expenses of the independent directors of the General Partner),
USNG will realize a net yield that will tend to cause daily changes in the NAV
of USNG to track slightly higher than daily changes in the Benchmark Futures
Contract. During the six month period ended June 30, 2009, USNG earned, on an
annualized basis, approximately 0.19% on its cash holdings. It also incurred
cash expenses on an annualized basis of 0.56% for management fees and
approximately 0.59% in brokerage commission costs related to the purchase and
sale of futures contracts, and 0.27% for other expenses. The foregoing fees and
expenses resulted in a net yield on an annualized basis of approximately -1.23%
and affected USNG’s ability to track its benchmark. If short-term interest rates
rise above the current levels, the level of deviation created by the yield would
increase. Conversely, if short-term interest rates were to decline, the amount
of error created by the yield would decrease. When short-term yields drop to a
level lower than the combined expenses of the management fee and the brokerage
commissions, then the tracking error becomes a negative number and would tend to
cause the daily returns of the NAV to underperform the daily returns of the
Benchmark Futures Contract.
Third,
USNG may hold Other Natural Gas-Related Investments in its portfolio that
may fail to closely track the Benchmark Futures Contract’s total return
movements. In that case, the error in tracking the Benchmark Futures Contract
could result in daily changes in the NAV of USNG that are either too high, or
too low, relative to the daily changes in the Benchmark Futures Contracts.
During the six month period ended June 30, 2009, USNG did hold Other Natural
Gas-Related Investments. These holdings included a natural gas futures contract
traded on NYMEX whose settlement price tracks the settlement price of the
Benchmark Futures Contract. In addition, USNG also held investments in cleared
swaps traded on the ICE Futures whose settlement price also tracks the
settlement price of the Benchmark Futures Contract. However, there are other
Natural Gas-Related Investments that USNG is permitted to invest in whose price
movements may not track the settlement price of the Benchmark Futures Contract.
Due, in part, to the increased size of USNG over the last several quarters and
its obligations to comply with regulatory limits, USNG is likely to invest in
Other Natural Gas-Related Investments which may have the effect of increasing
transaction-related expenses and result in increased tracking error. In
addition, due to potential regulatory limitations, and pending an investment in
Other Natural Gas-Related Investments, USNG may determine to hold greater
amounts of cash and cash equivalents, and lesser amounts of Natural Gas
Interests, for some period of time while it obtains suitable new exposure if it
determines that will most appropriately satisfy USNG's investment
objective. Holding more cash and cash equivalents, and less Natural
Gas Interests, for some period of time may result in increased tracking error.
In the event that USNG determines that suitable Other Natural Gas-Related
Investments are not obtainable, USNG will need to consider other actions to
protect its unitholders and to permit UNSG to achieve its investment
objectives.
Term Structure of Natural Gas
Futures Prices and the Impact on Total Returns. Several factors determine
the total return from investing in a futures contract position. One factor that
impacts the total return that will result from investing in near
month natural gas futures contracts and “rolling” those contracts forward
each month is the price relationship between the current near month contract and
the next month contract. For example, if the price of the near month
contract is higher than the next month contract (a situation referred to as
“backwardation” in the futures market), then absent any other change there is a
tendency for the price of a next month contract to rise in value as it becomes
the near month contract and approaches expiration. Conversely, if the price of a
near month contract is lower than the next month contract (a situation referred
to as “contango” in the futures market), then absent any other change there is a
tendency for the price of a next month contract to decline in value as it
becomes the near month contract and approaches expiration.
As an
example, assume that the price of natural gas for immediate delivery (the “spot”
price), was $7 per 10,000 million British thermal units (“MMBtu”), and the value
of a position in the near month futures contract was also $7. Over time, the
price of 10,000 MMBtu of natural gas will fluctuate based on a number of
market factors, including demand for natural gas relative to its supply. The
value of the near month contract will likewise fluctuate in reaction to a
number of market factors. If investors seek to maintain their position in a near
month contract and not take delivery of the natural gas, every month they must
sell their current near month contract as it approaches expiration and invest in
the next month contract.
If the
futures market is in backwardation, e.g., when the expected price
of natural gas in the future would be less, the investor would be buying a next
month contract for a lower price than the current near month contract.
Hypothetically, and assuming no other changes to either prevailing natural gas
prices or the price relationship between the spot price, the near month contract
and the next month contract (and ignoring the impact of commission costs and the
interest earned on Treasuries, cash and/or cash equivalents), the value of the
next month contract would rise as it approaches expiration and becomes the new
near month contract. In this example, the value of the $7 investment would tend
to rise faster than the spot price of natural gas, or fall slower. As a result,
it would be possible in this hypothetical example for the price of spot natural
gas to have risen to $9 after some period of time, while the value of the
investment in the futures contract would have risen to $10, assuming
backwardation is large enough or enough time has elapsed. Similarly, the spot
price of natural gas could have fallen to $5 while the value of an investment in
the futures contract could have fallen to only $6. Over time, if backwardation
remained constant, the difference would continue to increase.
If the
futures market is in contango, the investor would be buying a next month
contract for a higher price than the current near month contract.
Hypothetically, and assuming no other changes to either prevailing natural gas
prices or the price relationship between the spot price, the near month contract
and the next month contract (and ignoring the impact of commission costs and the
interest earned on cash), the value of the next month contract would fall as it
approaches expiration and becomes the new near month contract. In this example,
it would mean that the value of the $7 investment would tend to rise slower than
the spot price of natural gas, or fall faster. As a result, it would be possible
in this hypothetical example for the spot price of natural gas to have
risen to $9 after some period of time, while the value of the investment in the
futures contract will have risen to only $8, assuming contango is large enough
or enough time has elapsed. Similarly, the spot price of natural gas could have
fallen to $6 while the value of an investment in the futures contract could have
fallen to $7. Over time, if contango remained constant, the difference would
continue to increase.
The chart
below compares the price of the near month contract to the price of the next
month contract over the last 10 years (1999-2008) for natural gas. When the
price of the near month contract is higher than the price of the next month
contract, the market would be described as being in backwardation. When the
price of the near month contract is lower than the price of the next month
contract, the market would be described as being in contango. Although the
prices of the near month contract and the price of the next month contract do
tend to move up or down together, it can be seen that at times the near month
prices are clearly higher than the price of the next month contract
(backwardation), and other times they are below the price of the next month
contract (contango). In addition, investors can observe that natural gas prices,
both near month and next month, often display a seasonal pattern in which the
price of natural gas tends to rise in the early winter months and decline in the
summer months. This mirrors the physical demand for natural gas, which typically
peaks in the winter.
Near
Month Natural Gas Price ("NG1") and Next Month Price ("NG2")
(10
years ending 12/31/08)
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Another
way to view backwardation and contango data over time is to subtract the dollar
price of the next month natural gas Futures Contract from the dollar price of
the near month natural gas Futures Contract. If the resulting number is a
positive number, then the near month price is higher than the price of the next
month and the market could be described as being in backwardation. If the
resulting number is a negative number, then the near month price is lower than
the price of the next month and the market could be described as being in
contango. The chart below shows the results from subtracting the next month
price from the price of the near month contract for the 10 year period between
1999 and 2008. Investors will note that the natural gas market spent time
in both backwardation and contango. Investors will further note that the markets
display a seasonal pattern that corresponds to the seasonal demand patterns for
natural gas described above. That is, in many, but not all, cases the price of
the next month is higher than the near month as the winter months approach, as
the price of natural gas for delivery in those winter months rises on
expectations of demand. At the same time, the price of the near month, when that
month is just before the onset of
winter, does not rise as far or as fast as the price of a next month contract
whose delivery falls during the winter season.
Natural
Gas Futures Next Month minus Next Month Price *
(10
years ending 12/31/08)
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
Historically,
the natural gas futures markets have experienced periods of contango
and backwardation. Because natural gas demand is seasonal, it is possible for
the price of Futures Contracts for delivery within one or two months to
rapidly move from backwardation into contango and back again within a relatively
short period of time of less than one year. While the investment objective of
USNG is not to have the market price of its units match, dollar for dollar,
changes in the spot price of natural gas, contango and backwardation, both of
which were present at times during the first half of 2009, have impacted
the total return on an investment in USNG units during the six months ended June
30, 2009 relative to a hypothetical direct investment in natural gas. For
example, an investment in USNG units made on December 31, 2008 and held to June
30, 2009 decreased, based upon the changes in the NAV for USNG units on those
days, by approximately 40.70%, while the spot price of natural gas for immediate
delivery during the same period decreased by approximately 31.79% (note: this
comparison ignores the potential costs associated with physically owning and
storing natural gas, which could be substantial). By comparison, during the
period from December 31, 2007 to June 30, 2008, contango impacted the total
return on an investment in USNG units relative to a hypothetical direct
investment in natural gas. For example, an investment in USNG units made on
December 31, 2007 and held to June 30, 2008 increased, based upon the changes in
the NAV for USNG units on those days, by approximately 73.19%, while the spot
price of natural gas for immediate delivery during the same period increased by
approximately 78.44% (note: this comparison ignores the potential costs
associated with physically owning and storing natural gas, which could be
substantial).
Periods
of contango or backwardation do not materially impact USNG’s investment
objective of having the percentage changes in its per unit NAV track the
percentage changes in the price of the Benchmark Futures Contract since the
impact of backwardation and contango tended to equally impact the percentage
changes in price of both USNG’s units and the Benchmark Futures Contract.
It is impossible to predict with any degree of certainty whether backwardation
or contango will occur in the future. It is likely that both conditions will
occur during different periods and, because of the seasonal nature of natural
gas demand, both may occur within a single year’s time.
Natural Gas Market. During
the six month period ended June 30, 2009, natural gas prices in the United
States were impacted by several factors. At the beginning of the first quarter
of 2009, the amount of natural gas in storage was at higher than average levels
versus the previous five years. During the entire first half of 2009, the
seasonally adjusted inventory levels of stored natural gas remained well above
five-year averages. In addition, a combination of slowing U.S. economic growth
and increased natural gas production all contributed to a very significant
decline in natural gas prices during the first half of 2009, with prices
reaching a low of $3.362 on April 27, 2009 and ending the second quarter of 2009
with a price of $3.835.
Natural Gas Price Movements in
Comparison to other Energy Commodities and Investment Categories. The
General Partner believes that investors frequently measure the degree to which
prices or total returns of one investment or asset class move up or down in
value in concert with another investment or asset class. Statistically, such a
measure is usually done by measuring the correlation of the price movements of
the two different investments or asset classes over some period of time. The
correlation is scaled between 1 and -1, where 1 indicates that the two
investment options move up or down in price or value together, known as
“positive correlation,” and -1 indicating that they move in completely opposite
directions, known as “negative correlation.” A correlation of 0 would mean that
the movements of the two are neither positively or negatively correlated, known
as “non-correlation.” That is, the investment options sometimes move up and down
together and other times move in opposite directions.
For the
ten year time period between 1998 and 2008, the chart below compares the monthly
movements of natural gas prices versus the monthly movements of the prices of
several other energy commodities, such as crude oil, heating oil, and unleaded
gasoline, as well as several major non-commodity investment asset classes, such
as large cap U.S. equities, U.S. government bonds and global equities. It can be
seen that over this particular time period, the movement of natural gas on a
monthly basis was not strongly correlated, positively or negatively, with the
movements of large cap U.S. equities, U.S. government bonds or global equities.
However, movements in natural gas had a positive correlation to movements in
heating oil. Finally, natural gas had a positive, but very weak, correlation
with crude oil and unleaded gasoline.
10 Year Correlation Matrix
1998-2008
|
|
Large Cap
U.S.
Equities
(S&P 500)
|
|
|
U.S. Govt.
Bonds
(EFFAS
U.S.
Government
Bond Index)
|
|
|
Global
Equities
(FTSE
World
Index)
|
|
|
Unleaded
Gasoline
|
|
|
Crude
Oil
|
|
|
Heating
Oil
|
|
|
Natural
Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
Cap U.S. Equities (S&P 500)
|
|
|
1.000 |
|
|
|
-0.223 |
|
|
|
0.936 |
|
|
|
0.266 |
|
|
|
0.063 |
|
|
|
0.003 |
|
|
|
0.045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Govt. Bonds (EFFAS U.S. Government Bond Index)
|
|
|
|
|
|
|
1.000 |
|
|
|
-0.214 |
|
|
|
-0.134 |
|
|
|
-0.027 |
|
|
|
0.037 |
|
|
|
0.054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Equities (FTSE World Index)
|
|
|
|
|
|
|
|
|
|
|
1.000 |
|
|
|
0.384 |
|
|
|
0.155 |
|
|
|
0.084 |
|
|
|
0.072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unleaded
Gasoline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000 |
|
|
|
0.747 |
|
|
|
0.663 |
|
|
|
0.254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude
Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000 |
|
|
|
0.738 |
|
|
|
0.292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000 |
|
|
|
0.394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000 |
|
source:
Bloomberg, NYMEX
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
The chart
below covers a more recent, but much shorter, range of dates than the above
chart. Over the one year period ended June 30, 2009, natural gas had a stronger
positive correlation with crude oil, heating oil and unleaded gasoline than it
had displayed over the ten year period ended December 31, 2008. The correlation
between natural gas and U.S. government bonds, which had been essentially
non-correlated over the ten year period ended December 31, 2008, appeared to
remain non-correlated over this shorter time period. Correlations compared to
global equities and U.S. large-cap equities appeared to be weakly correlated
over this shorter time period. This may have been as a result of the drop in
both industrial production in the U.S. as well as natural gas demand as a result
of the slowing economy.
Correlation Matrix –
12 months ended
June 30, 2009
|
|
Large Cap
U.S.
Equities
(S&P 500)
|
|
|
U.S. Govt.
Bonds
(EFFAS
U.S.
Government
Bond Index)
|
|
|
Global
Equities
(FTSE
World
Index)
|
|
|
Unleaded
Gasoline
|
|
|
Crude
Oil
|
|
|
Heating
Oil
|
|
|
Natural
Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
Cap U.S. Equities (S&P 500)
|
|
|
1.000 |
|
|
|
0.077 |
|
|
|
0.979 |
|
|
|
0.700 |
|
|
|
0.652 |
|
|
|
0.551 |
|
|
|
0.117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Govt. Bonds (EFFAS U.S. Government Bond Index)
|
|
|
|
|
|
|
1.000 |
|
|
|
0.089 |
|
|
|
-0.319 |
|
|
|
-0.317 |
|
|
|
-0.413 |
|
|
|
0.083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Equities (FTSE World Index)
|
|
|
|
|
|
|
|
|
|
|
1.000 |
|
|
|
0.716 |
|
|
|
0.673 |
|
|
|
0.588 |
|
|
|
0.196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unleaded
Gasoline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000 |
|
|
|
0.819 |
|
|
|
0.801 |
|
|
|
0.383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude
Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000 |
|
|
|
0.898 |
|
|
|
0.454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000 |
|
|
|
0.220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000 |
|
source:
Bloomberg, NYMEX
PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
Investors
are cautioned that the historical price relationships between natural gas and
various other energy commodities, as well as other investment asset classes, as
measured by correlation may not be reliable predictors of future price movements
and correlation results. The results pictured above would have been different if
a different range of dates had been selected. The General Partner believes that
natural gas has historically not demonstrated a strong correlation with equities
or bonds over long periods of time. However, the General Partner also believes
that in the future it is possible that natural gas could have long term
correlation results that indicate prices of natural gas more closely track the
movements of equities or bonds. In addition, the General Partner believes that,
when measured over time periods shorter than ten years, there will always be
some periods where the correlation of natural gas to equities and bonds will be
either more strongly positively correlated or more strongly negatively
correlated than the long term historical results suggest.
The correlations between
natural gas, crude oil, heating oil and gasoline are relevant because the
General Partner endeavors to invest USNG’s assets in natural gas Futures
Contracts and Other Natural Gas-Related Investments so that daily changes in
percentage terms in USNG’s NAV correlate as closely as possible with daily
changes in percentage terms in the price of the Benchmark Futures Contract. If
certain other fuel-based commodity futures contracts do not closely
correlate with the natural gas Futures Contract, then their use could lead to
greater tracking error. As noted, the General Partner also believes that the
changes in percentage terms in the price of the Benchmark Futures Contract will
closely correlate with changes in percentage terms in the spot price of natural
gas.
Critical
Accounting Policies
Preparation
of the condensed financial statements and related disclosures in compliance with
accounting principles generally accepted in the United States of America
requires the application of appropriate accounting rules and guidance, as well
as the use of estimates. USNG’s application of these policies involves judgments
and actual results may differ from the estimates used.
The
General Partner has evaluated the nature and types of estimates that
it makes in preparing USNG’s condensed financial statements and related
disclosures and has determined that the valuation of its investments which
are not traded on a United States or internationally recognized futures exchange
(such as forward contracts and over-the-counter contracts) involves a critical
accounting policy. The values which are used by USNG for its forward
contracts are provided by its commodity broker who uses market prices when
available, while over-the-counter contracts are valued based on the
present value of estimated future cash flows that would be received from or paid
to a third party in settlement of these derivative contracts prior to their
delivery date and valued on a daily basis. In addition, USNG estimates
interest income on a daily basis using prevailing interest rates earned on its
cash and cash equivalents. These estimates are adjusted to the actual amount
received on a monthly basis and the difference, if any, is not considered
material.
Liquidity
and Capital Resources
USNG has
not made, and does not anticipate making, use of borrowings or other lines of
credit to meet its obligations. USNG has met, and it is anticipated
that USNG will continue to meet, its liquidity needs in the normal
course of business from the proceeds of the sale of its investments, or from the
Treasuries, cash and/or cash equivalents that it intends to hold at all times.
USNG’s liquidity needs include: redeeming units, providing margin deposits for
its existing Futures Contracts or the purchase of additional Futures Contracts
and posting collateral for its over-the-counter contracts and payment of its
expenses, summarized below under “Contractual Obligations.”
USNG
currently generates cash primarily from (i) the sale of baskets consisting of
100,000 units (“Creation Baskets”) and (ii) interest earned on Treasuries, cash
and/or cash equivalents. USNG has allocated substantially all of its net assets
to trading in Natural Gas Interests. 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. A
significant portion of the NAV is held in cash and cash equivalents that
are used as margin and as collateral for USNG’s trading in Natural Gas
Interests. The balance of the net assets is held in USNG’s account at its
custodian bank. Interest earned on USNG’s interest-bearing funds is paid to
USNG. In prior periods, the amount of cash earned by USNG from the sale of
Creation Baskets and from interest earned has exceeded the amount of cash
required to pay USNG’s expenses. However, there can be no assurance that the
amount of cash earned will do so in a period of very low short-term interest
rates. In that event, USNG would be forced to use other assets to pay cash
expenses which could cause a drop in USNG’s NAV over time.
USNG’s
investment in Natural Gas Interests may be subject to periods of illiquidity
because of market conditions, regulatory considerations and other reasons. For
example, most commodity exchanges limit the fluctuations in futures
contracts prices during a single day by regulations referred to as “daily
limits.” During a single day, no trades may be executed at prices beyond the
daily limit. Once the price of a futures contract has increased or decreased by
an amount equal to the daily limit, positions in the contracts can neither be
taken nor liquidated unless the traders are willing to effect trades at or
within the specified daily limit. Such market conditions could prevent USNG
from promptly liquidating its positions in Natural Gas Interests. During
the six month period ended June 30, 2009, USNG was not forced to purchase or
liquidate any of its positions while daily limits were in effect; however,
USNG cannot predict whether such an event may occur in the
future.
Since the
initial offering of units, USNG has been responsible for expenses relating to
(i) investment management fees, (ii) brokerage fees and commissions, (iii)
licensing fees for the use of intellectual property, (iv) ongoing registration
expenses in connection with offers and sales of its units subsequent to the
initial offering, (v) taxes and other expenses, including certain tax reporting
costs, (vi) fees and expenses of the independent directors of the General
Partner and (vii) other extraordinary expenses not in the ordinary course of
business, while the General Partner has been responsible for expenses relating
to the fees of USNG’s marketing agent, administrator and custodian. If the
General Partner and USNG are unsuccessful in raising sufficient funds to cover
these respective expenses or in locating any other source of funding, USNG will
terminate and investors may lose all or part of their
investment.
Market
Risk
Trading
in Futures Contracts and Other Natural Gas-Related Investments, such as
forwards, involves USNG entering into contractual commitments to purchase
or sell natural gas at a specified date in the future. The aggregate market
value of the contracts will significantly exceed USNG’s future cash
requirements since USNG intends to close out its open positions prior to
settlement. As a result, USNG is generally only subject to the risk of
loss arising from the change in value of the contracts. USNG considers the “fair
value” of its derivative instruments to be the unrealized gain or loss on the
contracts. The market risk associated with USNG’s commitments to purchase
natural gas is limited to the aggregate market value of the contracts held.
However, should USNG enter into a contractual commitment to sell natural gas, it
would be required to make delivery of the natural gas at the contract price,
repurchase the contract at prevailing prices or settle in cash. Since there are
no limits on the future price of natural gas, the market risk to USNG could be
unlimited.
USNG’s
exposure to market risk depends on a number of factors, including the
markets for natural gas, the volatility of interest rates and foreign exchange
rates, the liquidity of the Futures Contracts and Other Natural Gas-Related
Investments markets and the relationships among the contracts held by USNG.
Drastic market occurrences could ultimately lead to the loss of all or
substantially all of an investor’s capital.
Credit
Risk
When USNG
enters into Futures Contracts and Other Natural Gas-Related Investments, it is
exposed to the credit risk that the counterparty will not be able to meet its
obligations. The counterparty for the Futures Contracts traded on the NYMEX and
on most other futures exchanges is the clearinghouse associated with the
particular exchange. In general, clearinghouses are backed by their members who
may be required to share in the financial burden resulting from the
nonperformance of one of their members and, therefore, this additional member
support should significantly reduce credit risk. Some foreign exchanges are not
backed by their clearinghouse members but may be backed by a consortium of banks
or other financial institutions. There can be no assurance that any
counterparty, clearinghouse, or their members or their financial backers will
satisfy their obligations to USNG in such circumstances.
The
General Partner attempts to manage the credit risk of USNG by following
various trading limitations and policies. In particular, USNG generally posts
margin and/or holds liquid assets that are approximately equal to the market
value of its obligations to counterparties under the Futures Contracts and Other
Natural Gas-Related Investments it holds. The General Partner has implemented
procedures that include, but are not limited to, executing and clearing trades
only with creditworthy parties and/or requiring the posting of collateral or
margin by such parties for the benefit of USNG to limit its credit exposure. UBS
Securities LLC, USNG’s commodity broker, or any other broker that may be
retained by USNG in the future, when acting as USNG’s futures commission
merchant in accepting orders to purchase or sell Futures Contracts on United
States exchanges, is required by CFTC regulations to separately account for
and segregate as belonging to USNG, all assets of USNG relating to domestic
Futures Contracts trading. These futures commission merchants are not allowed to
commingle USNG’s assets with its other assets. In addition, the CFTC requires
commodity brokers to hold in a secure account USNG’s assets related to foreign
Futures Contracts trading and, in some cases, to cleared swaps executed through
the Futures Commission Merchant.
Although
USNG was not a party to any over-the-counter transactions as of June 30, 2009,
it was in the process of negotiating agreements governing over-the-counter
transactions with multiple counterparties. Subsequent to June 30,
2009, USNG has entered into an over-the-counter transaction on a collateralized
basis with one counterparty. See “Item 3. Quantitative and Qualitative
Disclosures About Market Risk” of this quarterly report on Form 10-Q for a
discussion of over-the-counter contracts.
As of
June 30, 2009, USNG had deposits in domestic and foreign financial institutions,
including cash investments in money market funds, in the amount of
$4,012,530,556. This amount is subject to loss should these institutions cease
operations.
Off
Balance Sheet Financing
As of
June 30, 2009, USNG has no loan guarantee, credit support or other off-balance
sheet arrangements of any kind other than agreements entered into in the normal
course of business, which may include indemnification provisions relating to
certain risks that service providers undertake in performing services which are
in the best interests of USNG. While USNG’s exposure under these indemnification
provisions cannot be estimated, they are not expected to have a material impact
on USNG’s financial position.
Redemption
Basket Obligation
In order
to meet its investment objective and pay its contractual obligations described
below, USNG requires liquidity to redeem units, which redemptions must be
in blocks of 100,000 units called “Redemption Baskets”. USNG has to date
satisfied this obligation by paying from the cash or cash equivalents it holds
or through the sale of its Treasuries in an amount proportionate to the number
of units being redeemed.
Contractual
Obligations
USNG’s
primary contractual obligations are with the General Partner. In return for its
services, the General Partner is entitled to a management fee calculated as a
fixed percentage of USNG’s NAV, currently 0.60% for a NAV of $1 billion or less,
and thereafter 0.50% for a NAV above $1 billion.
The
General Partner agreed to pay the start-up costs associated with the
formation of USNG, primarily its legal, accounting and other costs in connection
with the General Partner’s registration with the CFTC as a CPO and the
registration and listing of USNG and its units with the SEC, FINRA and the
AMEX, respectively. However, following USNG’s initial offering of units,
offering costs incurred in connection with registering and listing additional
units of USNG are directly borne on an ongoing basis by USNG, and not by the
General Partner.
The
General Partner pays the fees of USNG’s marketing agent, ALPS Distributors,
Inc., and the fees of the custodian and transfer agent, Brown Brothers Harriman
& Co. (“BBH&Co.”), as well as BBH&Co.’s fees for performing
administrative services, including in connection with the preparation of USNG’s
condensed financial statements and its SEC and CFTC reports. The General Partner
and USNG have also entered into a licensing agreement with the NYMEX pursuant to
which USNG and the affiliated funds managed by the General Partner pay a
licensing fee to the NYMEX. 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.
In
addition to the General Partner’s management fee, USNG pays its brokerage fees
(including fees to a futures commission merchant), over-the-counter dealer
spreads, any licensing fees for the use of intellectual property, and,
subsequent to the initial offering, registration and other fees paid to the SEC,
FINRA, or other regulatory agencies in connection with the offer and sale of
units, as well as legal, printing, accounting and other expenses associated
therewith, and extraordinary expenses. The latter are expenses not incurred in
the ordinary course of USNG’s business, including expenses relating to the
indemnification of any person against liabilities and obligations to the extent
permitted by law and under the LP Agreement, the bringing or defending of
actions in law or in equity or otherwise conducting litigation and incurring
legal expenses and the settlement of claims and litigation. Commission payments
to a futures commission merchant are on a contract-by-contract, or round turn,
basis. USNG also pays a portion of the fees and expenses of the independent
directors of the General Partner. See Note 3 to the Notes to Condensed Financial
Statements (Unaudited).
The
parties cannot anticipate the amount of payments that will be required under
these arrangements for future periods, as USNG’s NAVs and trading levels to meet
its investment objectives will not be known until a future date. These
agreements are effective for a specific term agreed upon by the parties with an
option to renew, or, in some cases, are in effect for the duration of USNG’s
existence. Either party may terminate these agreements earlier for certain
reasons described in the agreements.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk.
Over-the-Counter
Derivatives
Although
USNG was not a party to any over-the-counter transactions as of June 30, 2009,
it was in the process of negotiating agreements governing over-the-counter
transactions with multiple counterparties. Subsequent to June 30,
2009, USNG has entered into an over-the-counter transaction with one
counterparty. Unlike most of the exchange-traded Futures Contracts, cleared
swaps or exchange-traded options on such futures, each party to an
over-the-counter contract bears the credit risk that the other party may not be
able to perform its obligations under its contract.
Some
natural gas-based derivatives transactions contain fairly generic terms and
conditions and are available from a wide range of participants. Other natural
gas-based derivatives have highly customized terms and conditions and are not as
widely available. Many of these over-the-counter contracts are cash-settled
forwards for the future delivery of natural gas- or petroleum-based fuels that
have terms similar to the Futures Contracts. Others take the form of
“swaps” in which the two parties exchange cash flows based on pre-determined
formulas tied to the spot price of natural gas, forward natural gas
prices or natural gas futures prices. For example, USNG may enter into
over-the-counter derivative contracts whose value will be tied to changes in the
difference between the spot price of natural gas, the price of Futures
Contracts traded on the NYMEX and the prices of other Futures Contracts in
which USNG may invest.
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 such 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. In addition, it is also possible for USNG and its counterparty to
agree to clear their agreement through an established futures clearinghouse such
as those connected to the NYMEX or the ICE Futures. In that event, USNG would no
longer have credit risk of its original counterparty, as the clearinghouse would
now be USNG’s counterparty. USNG would still retain any price risk associated
with its transaction.
The
creditworthiness of each potential counterparty is assessed by the General
Partner. The General Partner assesses or reviews, as appropriate, the
creditworthiness of each potential or existing counterparty to an
over-the-counter contract pursuant to guidelines approved by the General
Partner's board of directors (the “Board”). Furthermore, the
General Partner on behalf of 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 SEC, (c) insurance companies domiciled in the United
States, and (d) producers, users or traders of energy, whether or not
regulated by the CFTC. Any entity acting as a counterparty shall be
regulated in either the United States or the United Kingdom unless
otherwise approved by the Board after consultation with its legal counsel.
Existing counterparties are also reviewed periodically by the General
Partner.
USNG
anticipates that the use of Other Natural Gas-Related Investments together with
its investments in Futures Contracts will produce price and total return results
that closely track the investment goals of USNG. However, there can be no
assurance of this. Over-the-counter contracts may result in higher
transaction-related expenses than the brokerage commissions paid in connection
with the purchase of Futures Contracts, which may impact USNG’s ability to
successfully track the Benchmark Futures Contract.
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.
During
the six month period ended June 30, 2009, USNG did not employ any hedging
methods such as those described above since all of its investments were made
over an exchange. Therefore, during the six month period ended June 30, 2009,
USNG was not exposed to counterparty risk.
Item 4. Controls
and Procedures.
Disclosure
Controls and Procedures
USNG
maintains disclosure controls and procedures that are designed to ensure that
material information required to be disclosed in USNG’s periodic reports filed
or submitted under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time period specified in the SEC’s
rules and forms.
The duly
appointed officers of the General Partner, including its chief executive officer
and chief financial officer, who perform functions equivalent to those
of a principal executive officer and principal financial officer of
USNG if USNG had any officers, have evaluated the effectiveness of USNG’s
disclosure controls and procedures and have concluded that the
disclosure controls and procedures of USNG have been effective as of the end of
the period covered by this quarterly report on Form 10-Q.
Change
in Internal Control Over Financial Reporting
There
were no changes in USNG’s internal control over financial reporting during
USNG’s last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, USNG’s internal control over financial
reporting.
Part
II. OTHER INFORMATION
Item
1. Legal Proceedings.
Not
applicable.
Item
1A. Risk Factors.
There has
not been a material change from the risk factors previously disclosed in USNG's
Annual Report on Form 10-K for the fiscal year ended December 31,
2008.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
Not applicable.
Item
3. Defaults Upon Senior Securities.
Not applicable.
Item
4. Submission of Matters to a Vote of Security
Holders.
Not
applicable.
Item 5. Other
Information.
Monthly
Account Statements
Pursuant
to the requirement under Rule 4.22 under the Commodity Exchange Act, each month
USNG publishes an account statement for its unitholders, which includes a
Statement of Income (Loss) and a Statement of Changes in NAV. The account
statement is furnished to the SEC on a current report on Form 8-K pursuant
to Section 13 or 15(d) of the Exchange Act and posted each month on USNG’s
website at www.unitedstatesnaturalgasfund.com.
Item 6. Exhibits.
Listed
below are the exhibits which are filed as part of this quarterly report on Form
10-Q (according to the number assigned to them in Item 601 of Regulation
S-K):
Exhibit
|
|
|
Number
|
|
Description of Document
|
31.1*
|
|
Certification
by Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2*
|
|
Certification
by Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1*
|
|
Certification
by Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2*
|
|
Certification
by Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
Filed herewith
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
United
States Natural Gas Fund, LP (Registrant)
By: United
States Commodity Funds LLC, its general partner
By:
|
/s/
Nicholas
D. Gerber
|
Nicholas
D. Gerber
|
Chief
Executive Officer
|
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Date: August
10, 2009
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|
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By:
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Howard
Mah
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Chief
Financial Officer
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Date: August
10,
2009
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