United States 12 Month Natural Gas Fund (UNL)
Filed: 31 Mar 10, 12:00am
UNITED STATES COMMODITY FUNDS LLC
General Partner of the United States 12 Month Natural Gas Fund, LP
March 30, 2010
Dear United States 12 Month Natural Gas Fund, LP Investor,
Enclosed with this letter is your copy of the 2009 financial statements for the United States 12 Month Natural Gas Fund, LP (ticker symbol “UNL”). We have mailed this statement to all investors in UNL who held shares as of December 31, 2009 to satisfy our annual reporting requirement under federal commodities laws. In addition, we have enclosed a copy of the current UNL Privacy Policy. Additional information concerning UNL's 2009 results may be found by referring to the Annual Report on Form 10-K (“Form 10-K”), which has been filed with the U.S. Securities and Exchange Commission (the “SEC”). You may obtain a copy of the Form 10-K by going to the SEC’s website at www.sec.gov, or by going to UNL’s own website at www.unitedstates12monthnaturalgasfund.com. You may also call UNL at 1-800-920-0259 to speak to a representative and request additional material, including a current UNL Prospectus.
United States Commodity Funds LLC is the general partner of UNL. United States Commodity Funds LLC is also the general partner and manager of several other commodity based exchange traded security funds that are structured like UNL. These other funds are referred to in the attached financial statements and include:
| United States Oil Fund, LP | (ticker symbol: USO) | |
| United States Natural Gas Fund, LP | (ticker symbol: UNG) | |
| United States 12 Month Oil Fund, LP | (ticker symbol: USL) | |
| United States Gasoline Fund, LP | (ticker symbol: UGA) | |
| United States Heating Oil Fund, LP | (ticker symbol: UHN) | |
| United States Short Oil Fund, LP | (ticker symbol: DNO) |
Information about these other funds is contained within the Annual Report as well as in the current UNL Prospectus. Investors in UNL who wish to receive additional information about these other funds may do so by going to their respective websites.* The websites may be found at:
www.unitedstatesoilfund.com
www.unitedstatesnaturalgasfund.com
www.unitedstates12monthoilfund.com
www.unitedstatesgasolinefund.com
www.unitedstatesheatingoilfund.com
www.unitedstatesshortoilfund.com
You may also call United States Commodity Funds LLC at 1-800-920-0259 to request additional information.
Thank you for your continued interest in UNL.
Regards,
/s/ Nicholas Gerber |
Nicholas Gerber President and CEO United States Commodity Funds LLC |
* This letter is not an offer to buy or sell securities. Investment in any of these other funds is only made by prospectus. Please consult the relevant prospectus for a description of the risks and expenses involved in any such investment.
| PRIVACY POLICY |
| UNITED STATES COMMODITY FUNDS LLC |
This privacy policy explains the policies of United States Commodity Funds LLC (the “General Partner”), a commodity pool operator registered with the Commodity Futures Trading Commission, and each commodity pool for which it serves as the general partner, including the United States Oil Fund, LP, United States 12 Month Oil Fund, LP, United States Natural Gas Fund, LP, United States Heating Oil Fund, LP, United States Gasoline Fund, LP, United States 12 Month Natural Gas Fund, LP, United States Short Oil Fund, LP, United States Brent Oil Fund, LP and United States Short Natural Gas Fund, LP (collectively, the “Funds”), relating to the collection, maintenance and use of nonpublic personal information about the Funds’ investors, as required under Federal legislation. This privacy policy applies to the nonpublic personal information of investors who are individuals and who obtain financial products or services primarily for personal, family or household purposes.
Collection of Investor Information
Units of the Funds are registered in the name of Cede & Co., as nominee for the Depository Trust Company. However, the General Partner may collect or have access to personal information about Fund investors for certain purposes relating to the operation of the Funds, including for the distribution of certain required tax reports to investors. This information may include information received from investors and information about investors’ holdings and transactions in units of the Funds.
Disclosure of Nonpublic Personal Information
The General Partner does not sell or rent investor information. The General Partner does not disclose nonpublic personal information about Fund investors, except as required by law or as described below. Specifically, the General Partner may share nonpublic personal information in the following situations:
| · | To service providers in connection with the administration and servicing of the Funds, which may include attorneys, accountants, auditors and other professionals. The General Partner may also share information in connection with the servicing or processing of Fund transactions. |
| · | To respond to subpoenas, court orders, judicial process or regulatory authorities; |
| · | To protect against fraud, unauthorized transactions (such as money laundering), claims or other liabilities; and |
| · | Upon consent of an investor to release such information, including authorization to disclose such information to persons acting in a fiduciary or representative capacity on behalf of the investor. |
Fund investors have no right to opt out of the General Partner’s disclosure of non-public personal information under the circumstances described above.
Protection of Investor Information
The General Partner holds Fund investor information in the strictest confidence. Accordingly, the General Partner’s policy is to require that all employees, financial professionals and companies providing services on its behalf keep client information confidential.
The General Partner maintains safeguards that comply with federal standards to protect investor information. The General Partner restricts access to the personal and account information of investors to those employees who need to know that information in the course of their job responsibilities. Third parties with whom the General Partner shares investor information must agree to follow appropriate standards of security and confidentiality, which includes safeguarding such information physically, electronically and procedurally.
The General Partner’s privacy policy applies to both current and former investors. The General Partner will only disclose nonpublic personal information about a former investor to the same extent as for a current investor.
Changes to Privacy Policy
The General Partner may make changes to its privacy policy in the future. The General Partner will not make any change affecting Fund investors without first sending investors a revised privacy policy describing the change. In any case, the General Partner will send Fund investors a current privacy policy at least once a year as long as they continue to be Fund investors.
UNITED STATES 12 MONTH NATURAL GAS FUND, LP
A Delaware Limited Partnership
FINANCIAL STATEMENTS
For the years ended December 31, 2009 and 2008 and the period from June 27, 2007 (inception) to December 31, 2007
AFFIRMATION OF THE COMMODITY POOL OPERATOR
To the Unitholders of the United States 12 Month Natural Gas Fund, LP:
Pursuant to Rule 4.22(h) under the Commodity Exchange Act, the undersigned represents that, to the best his knowledge and belief, the information contained in this Annual Report for the years ended December 31, 2009 and 2008 and the period from June 27, 2007 (inception) to December 31, 2007 is accurate and complete.
| By: | /s/ Nicholas Gerber | |
Nicholas Gerber United States 12 Month Natural Gas Fund, LP President & CEO of United States Commodity Funds LLC (General Partner of the United States 12 Month Natural Gas Fund, LP) | ||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
United States 12 Month Natural Gas Fund, LP
We have audited the accompanying statements of financial condition of United States 12 Month Natural Gas Fund, LP, (the “Fund”) as of December 31, 2009 and 2008, including the schedule of investments as of December 31, 2009 and the related statements of operations, changes in partners’ capital and cash flows for the years ended December 31, 2009 and 2008 and the period from June 27, 2007 (inception) to December 31, 2007. These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of United States 12 Month Natural Gas Fund, LP as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years ended December 31, 2009 and 2008, and the period from June 27, 2007 (inception) to December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
Greenwood Village, Colorado
March 30, 2010
| United States 12 Month Natural Gas Fund, LP | ||||||||
| Statements of Financial Condition | ||||||||
| At December 31, 2008 and 2009 | ||||||||
| 2009 | 2008 | |||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 32,056,391 | $ | 1,000 | ||||
| Equity in UBS Securities LLC trading accounts: | ||||||||
| Cash | 3,940,416 | - | ||||||
| Unrealized gain on open commodity futures contracts | 1,662,670 | - | ||||||
| Receivable from General Partner | 136,678 | - | ||||||
| Interest receivable | 729 | - | ||||||
| Total assets | $ | 37,796,884 | $ | 1,000 | ||||
| Liabilities and Partners' Capital | ||||||||
| General Partner management fees payable (Note 3) | $ | 14,983 | $ | - | ||||
| Professional fees payable | 140,800 | - | ||||||
| Brokerage commission fees payable | 3,200 | - | ||||||
| Other liabilities | 753 | - | ||||||
| Total liabilities | 159,736 | - | ||||||
Commitments and Contingencies (Notes 3, 4 and 5) | ||||||||
| Partners' Capital | ||||||||
| General Partner | - | 20 | ||||||
| Limited Partners | 37,637,148 | 980 | ||||||
| Total Partners' Capital | 37,637,148 | 1,000 | ||||||
| Total liabilities and partners' capital | $ | 37,796,884 | $ | 1,000 | ||||
| Limited Partners' units outstanding | 700,000 | - | ||||||
| Net asset value per unit | $ | 53.77 | $ | - | ||||
| Market value per unit | $ | 54.20 | $ | - | ||||
See accompanying notes to financial statements.
| United States 12 Month Natural Gas Fund, LP | ||||||||||||
| Schedule of Investments | ||||||||||||
| At December 31, 2009 | ||||||||||||
| Gain (Loss) | ||||||||||||
| on Open | % of | |||||||||||
| Number of | Commodity | Partners' | ||||||||||
| Contracts | Contracts | Capital | ||||||||||
| Open Futures Contracts - Long | ||||||||||||
| United States Contracts | ||||||||||||
| NYMEX Natural Gas Futures NG contracts, expire February 2010 | 54 | $ | 235,080 | 0.62 | ||||||||
| NYMEX Natural Gas Futures NG contracts, expire March 2010 | 53 | 212,290 | 0.56 | |||||||||
| NYMEX Natural Gas Futures NG contracts, expire April 2010 | 53 | 171,100 | 0.46 | |||||||||
| NYMEX Natural Gas Futures NG contracts, expire May 2010 | 53 | 184,900 | 0.49 | |||||||||
| NYMEX Natural Gas Futures NG contracts, expire June 2010 | 54 | 162,430 | 0.43 | |||||||||
| NYMEX Natural Gas Futures NG contracts, expire July 2010 | 54 | 175,060 | 0.47 | |||||||||
| NYMEX Natural Gas Futures NG contracts, expire August 2010 | 53 | 162,010 | 0.43 | |||||||||
| NYMEX Natural Gas Futures NG contracts, expire September 2010 | 53 | 167,090 | 0.44 | |||||||||
| NYMEX Natural Gas Futures NG contracts, expire October 2010 | 54 | 137,960 | 0.37 | |||||||||
| NYMEX Natural Gas Futures NG contracts, expire November 2010 | 54 | 96,940 | 0.26 | |||||||||
| NYMEX Natural Gas Futures NG contracts, expire December 2010 | 53 | 66,030 | 0.18 | |||||||||
| NYMEX Natural Gas Futures NG contracts, expire January 2011 | 53 | (108,220 | ) | (0.29 | ) | |||||||
| Total Open Futures Contracts | 641 | $ | 1,662,670 | 4.42 | ||||||||
Principal Amount | Market Value | |||||||||||
| Cash Equivalents | ||||||||||||
| United States - Money Market Funds | ||||||||||||
| Fidelity Institutional Government Portfolio - Class I | $ | 11,500,053 | $ | 11,500,053 | 30.56 | |||||||
| Goldman Sachs Financial Square Funds - Government Fund - Class SL | 8,500,000 | 8,500,000 | 22.58 | |||||||||
| Morgan Stanley Institutional Liquidity Fund - Government Portfolio | 6,000,000 | 6,000,000 | 15.94 | |||||||||
| Total Cash Equivalents | $ | 26,000,053 | 69.08 | |||||||||
| See accompanying notes to financial statements. | ||||||||||||
United States 12 Month Natural Gas Fund, LP
Statements of Operations
For the years ended December 31, 2009 and 2008 and the period from June 27, 2007 (inception) to December 31, 2007
| Period from | ||||||||||||
| Year ended | Year ended | June 27, 2007 to | ||||||||||
| December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||
| Income | ||||||||||||
| Gain on trading of commodity futures contracts: | ||||||||||||
| Realized gain on closed positions | $ | 934,900 | $ | - | $ | - | ||||||
| Change in unrealized gain on open positions | 1,662,670 | - | - | |||||||||
| Interest income | 951 | - | - | |||||||||
| Other income | 4,000 | - | - | |||||||||
| Total income | 2,602,521 | - | - | |||||||||
| Expenses | ||||||||||||
| General Partner management fees (Note 3) | 16,490 | - | - | |||||||||
| Professional fees | 140,800 | - | - | |||||||||
| Brokerage commission fees | 9,284 | - | - | |||||||||
| Other expenses | 753 | - | - | |||||||||
| Total expenses | 167,327 | - | - | |||||||||
| Expense waiver (Note 3) | (136,678 | ) | - | - | ||||||||
| Net expenses | 30,649 | - | - | |||||||||
| Net income | $ | 2,571,872 | $ | - | $ | - | ||||||
| Net income per limited partnership unit | $ | 3.77 | $ | - | $ | - | ||||||
| Net income per weighted average limited partnership unit | $ | 6.02 | $ | - | $ | - | ||||||
| Weighted average limited partnership units outstanding | 427,273 | - | - | |||||||||
See accompanying notes to financial statements.
United States 12 Month Natural Gas Fund, LP
Statements of Changes in Partners' Capital
For the years ended December 31, 2009 and 2008 and the period from June 27, 2007 (inception) to December 31, 2007
| General Partner | Limited Partners | Total | ||||||||||
| Balances, at Inception | $ | - | $ | - | $ | - | ||||||
| Initial contribution of capital | 20 | 980 | 1,000 | |||||||||
| Balances, at December 31, 2008 | 20 | 980 | 1,000 | |||||||||
| Addition of 800,000 partnership units | - | 40,652,357 | 40,652,357 | |||||||||
| Redemption of 100,000 partnership units | (20 | ) | (5,588,061 | ) | (5,588,081 | ) | ||||||
| Net income | - | 2,571,872 | 2,571,872 | |||||||||
| Balances, at December 31, 2009 | $ | - | $ | 37,637,148 | $ | 37,637,148 | ||||||
| Net Asset Value Per Unit | ||||||||||||
| At June 27, 2007 (inception) | $ | - | ||||||||||
| At December 31, 2008 | $ | - | ||||||||||
| At November 18, 2009 (commencement of operations) | $ | 50.00 | ||||||||||
| At December 31, 2009 | $ | 53.77 | ||||||||||
See accompanying notes to financial statements.
United States 12 Month Natural Gas Fund, LP
Statements of Cash Flows
For the years ended December 31, 2009 and 2008 and the period from June 27, 2007 (inception) to December 31, 2007
| Period from | ||||||||||||
| Year ended | Year ended | June 27, 2007 to | ||||||||||
| December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||
| Cash Flows from Operating Activities: | ||||||||||||
| Net income | $ | 2,571,872 | $ | - | $ | - | ||||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||||
| Increase in commodity futures trading account - cash | (3,940,416 | ) | - | - | ||||||||
| Unrealized gain on futures contracts | (1,662,670 | ) | - | - | ||||||||
| Increase in receivable from General Partner | (136,678 | ) | - | - | ||||||||
| Increase in interest receivable | (729 | ) | - | - | ||||||||
| Increase in management fees payable | 14,983 | - | - | |||||||||
| Increase in professional fees payable | 140,800 | - | - | |||||||||
| Increase in brokerage commission fees payable | 3,200 | - | - | |||||||||
| Increase in other liabilities | 753 | - | - | |||||||||
| Net cash used in operating activities | (3,008,885 | ) | - | - | ||||||||
| Cash Flows from Financing Activities: | ||||||||||||
| Subscription of partnership units | 40,652,357 | - | 1,000 | |||||||||
| Redemption of partnership units | (5,588,081 | ) | - | - | ||||||||
| Net cash provided by financing activities | 35,064,276 | - | 1,000 | |||||||||
| Net Increase in Cash and Cash Equivalents | 32,055,391 | - | 1,000 | |||||||||
Cash and Cash Equivalents, beginning of period | 1,000 | 1,000 | - | |||||||||
Cash and Cash Equivalents, end of period | $ | 32,056,391 | $ | 1,000 | $ | 1,000 | ||||||
See accompanying notes to financial statements.
United States 12 Month Natural Gas Fund, LP
Notes to Financial Statements
For the years ended December 31, 2009 and 2008 and the period from June 27, 2007 (inception) to December 31, 2007
NOTE 1 - ORGANIZATION AND BUSINESS
The United States 12 Month Natural Gas Fund, LP (“US12NG”) was organized as a limited partnership under the laws of the state of Delaware on June 27, 2007. US12NG is a commodity pool that issues limited partnership units (“units”) that may be purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”). US12NG will continue in perpetuity, unless terminated sooner upon the occurrence of one or more events as described in its Amended and Restated Agreement of Limited Partnership dated as of October 30, 2009 (the “LP Agreement”). The investment objective of US12NG is for the changes in percentage terms of its units’ net asset value to reflect the changes in percentage terms of the spot price of natural gas delivered at the Henry Hub, Louisiana, as measured by the changes in the average of the prices of 12 futures contracts on natural gas traded on the New York Mercantile Exchange (the “NYMEX”), consisting of the near month contract to expire and the contracts for the following 11 months for a total of 12 consecutive months’ contracts, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contracts that are the next month contract to expire and the contracts for the following 11 consecutive months, less US12NG’s expenses. US12NG accomplishes its objective through investments in futures contracts for natural gas, crude oil, heating oil, gasoline and other petroleum-based fuels that are traded on the NYMEX, ICE Futures or other U.S. and foreign exchanges (collectively, “Futures Contracts”) and other natural gas-related investments such as cash-settled options on Futures Contracts, forward contracts for natural gas, cleared swap contracts and over-the-counter transactions that are based on the price of natural gas, crude oil and other petroleum-based fuels, Futures Contracts and indices based on the foregoing (collectively, “Other Natural Gas-Related Investments”). As of December 31, 2009, US12NG held 641 Futures Contracts traded on the NYMEX.
US12NG commenced investment operations on November 18, 2009 and has a fiscal year ending on December 31. United States Commodity Funds LLC (formerly known as Victoria Bay Asset Management, LLC) (the “General Partner”) is responsible for the management of US12NG. The General Partner is a member of the National Futures Association (the “NFA”) and became a commodity pool operator registered with the Commodity Futures Trading Commission effective December 1, 2005. The General Partner is also the general partner of the United States Oil Fund, LP (“USOF”), the United States Natural Gas Fund, LP (“USNG”), the United States 12 Month Oil Fund, LP (“US12OF”), the United States Gasoline Fund, LP (“UGA”) and the United States Heating Oil Fund, LP (“USHO”), which listed their limited partnership units on the American Stock Exchange (the “AMEX”) under the ticker symbols “USO” on April 10, 2006, “UNG” on April 18, 2007, “USL” on December 6, 2007, “UGA” on February 26, 2008 and “UHN” on April 9, 2008, respectively. As a result of the acquisition of the AMEX by NYSE Euronext, each of USOF’s, USNG’s, US12OF’s, UGA’s and USHO’s units commenced trading on the NYSE Arca on November 25, 2008. The General Partner is also the general partner of the United States Short Oil Fund, LP (“USSO”), which listed its limited partnership units on the NYSE Arca on September 24, 2009 under the ticker symbol “DNO”. The General Partner has also filed registration statements to register units of the United States Brent Oil Fund, LP (“USBO”) and the United States Commodity Index Funds Trust (“USCI”).
US12NG issues units to certain authorized purchasers (“Authorized Purchasers”) by offering baskets consisting of 100,000 units (“Creation Baskets”) through ALPS Distributors, Inc. as the marketing agent (the “Marketing Agent”). The purchase price for a Creation Basket is based upon the net asset value of a unit calculated shortly after the close of the core trading session on the NYSE Arca on the day the order to create the basket is properly received. In addition, Authorized Purchasers pay US12NG a $1,000 fee for each order placed to create one or more Creation Baskets or redeem one or more baskets consisting of 100,000 units (“Redemption Baskets”). Units may be purchased or sold on a nationally recognized securities exchange in smaller increments than a Creation Basket or Redemption Basket. Units purchased or sold on a nationally recognized securities exchange are not purchased or sold at the net asset value of US12NG but rather at market prices quoted on such exchange.
In November 2009, US12NG initially registered 30,000,000 units on Form S-1 with the SEC. On November 18, 2009, US12NG listed its units on the NYSE Arca under the ticker symbol “UNL”. On that day, US12NG established its initial net asset value by setting the price at $50.00 per unit and issued 200,000 units in exchange for $10,001,000. US12NG also commenced investment operations on November 18, 2009 by purchasing Futures Contracts traded on the NYMEX based on natural gas.
As of December 31, 2009, US12NG issued 8 Creation Baskets.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Commodity futures contracts, forward contracts, physical commodities and related options are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized gains or losses on open contracts are reflected in the statement of financial condition and in the difference between the original contract amount and the market value (as determined by exchange settlement prices for futures contracts and related options and cash dealer prices at a predetermined time for forward contracts, physical commodities, and their related options) as of the last business day of the year or as of the last date of the financial statements. Changes in the unrealized gains or losses between periods are reflected in the statement of operations. US12NG earns interest on its assets denominated in U.S. dollars on deposit with the futures commission merchant at the overnight Federal Funds Rate less 32 basis points. In addition, US12NG earns interest on funds held at the custodian at prevailing market rates earned on such investments.
Investments in over-the-counter swap contracts (see Note 5) are arrangements to exchange a periodic payment for a market-linked return, each based on a notional amount. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting periodic payment obligation, US12NG receives a payment from, or makes a payment to, the swap counterparty. The over-the-counter swap contracts are valued daily based upon the appreciation or depreciation of the underlying securities subsequent to the effective date of the contract. Changes in the value of the swaps are reported as unrealized gains and losses and periodic payments are recorded as realized gains or losses in the accompanying condensed statements of operations.
Brokerage Commissions
Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.
Swap Premiums
Upfront fees paid by US12NG for over-the-counter swap contracts are reflected on the Statements of Financial Condition and represent payments made upon entering into a swap agreement to compensate for differences between the stated terms of the agreement and prevailing market conditions. The fees are amortized daily over the term of the swap agreement.
Income Taxes
US12NG is not subject to federal income taxes; each partner reports his/her allocable share of income, gain, loss deductions or credits on his/her own income tax return.
Additions and Redemptions
Authorized Purchasers may purchase Creation Baskets or redeem Redemption Baskets only in blocks of 100,000 units equal to the net asset value of the units calculated shortly after the close of the core trading session on the NYSE Arca on the day the order is placed.
US12NG receives or pays the proceeds from units sold or redeemed within three business days after the trade date of the purchase or redemption. The amounts due from Authorized Purchasers are reflected in US12NG’s statement of financial condition as receivable for units sold, and amounts payable to Authorized Purchasers upon redemption are reflected as payable for units redeemed.
Partnership Capital and Allocation of Partnership Income and Losses
Profit or loss shall be allocated among the partners of US12NG in proportion to the number of units each partner holds as of the close of each month. The General Partner may revise, alter or otherwise modify this method of allocation as described in the LP Agreement.
Calculation of Net Asset Value
US12NG’s net asset value is calculated on each NYSE Arca trading day by taking the current market value of its total assets, subtracting any liabilities and dividing the amount by the total number of units issued and outstanding. US12NG uses the closing price for the contracts on the relevant exchange on that day to determine the value of contracts held on such exchange.
Net Income (Loss) per Unit
Net income (loss) per unit is the difference between the net asset value per unit at the beginning of each period and at the end of each period. The weighted average number of units outstanding was computed for purposes of disclosing net income (loss) per weighted average unit. The weighted average units are equal to the number of units outstanding at the end of the period, adjusted proportionately for units redeemed based on the amount of time the units were outstanding during such period. There were no units held by the General Partner at December 31, 2009.
Offering Costs
Offering costs incurred in connection with the registration of additional units after the initial registration of units are borne by US12NG. These costs include registration fees paid to regulatory agencies and all legal, accounting, printing and other expenses associated with such offerings. These costs will be accounted for as a deferred charge and thereafter amortized to expense over twelve months on a straight-line basis or a shorter period if warranted.
Cash Equivalents
Cash equivalents include money market funds and overnight deposits or time deposits with original maturity dates of three months or less.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires US12NG’s management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results could differ from those estimates and assumptions.
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 US12NG in accordance with the objectives and policies of US12NG. In addition, the General Partner has arranged for one or more third parties to provide administrative, custody, accounting, transfer agency and other necessary services to US12NG. For these services, US12NG is contractually obligated to pay the General Partner a fee, which is paid monthly, that is equal to 0.60% per annum of average daily net assets.
Ongoing Registration Fees and Other Offering Expenses
US12NG pays all costs and expenses associated with the ongoing registration of its units subsequent to the initial offering. These costs include registration or other fees paid to regulatory agencies in connection with the offer and sale of units, and all legal, accounting, printing and other expenses associated with such offer and sale. For the year ended December 31, 2009, US12NG did not incur any registration fees and other offering expenses.
Directors’ Fees and Expenses
US12NG is responsible for paying its portion of the directors’ and officers’ liability insurance of the General Partner and the fees and expenses of the independent directors of the General Partner who are also the General Partner’s audit committee members. US12NG shares these fees and expenses with USOF, USNG, US12OF, UGA, USHO and USSO based on the relative assets of each fund, computed on a daily basis. These fees and expenses for the calendar year 2009 amounted to a total of $433,046 for all funds, and US12NG’s portion of such fees and expenses was $125.
Licensing Fees
As discussed in Note 4, US12NG entered into a licensing agreement with the NYMEX on December 4, 2007. The agreement has an effective date of April 10, 2006. Pursuant to the agreement, US12NG and the affiliated funds managed by the General Partner pay a licensing fee that is equal to 0.04% for the first $1,000,000,000 of combined assets of the funds and 0.02% for combined assets above $1,000,000,000. During the year ended December 31, 2009, US12NG incurred $628 under this arrangement.
Investor Tax Reporting Cost
The fees and expenses associated with US12NG’s audit expenses and tax accounting and reporting requirements, with the exception of certain initial implementation service fees and base service fees, which are borne by the General Partner, are paid by US12NG. These costs are approximately $164,000 as of the year ended December 31, 2009.
Other Expenses and Fees
In addition to the fees described above, US12NG pays all brokerage fees, transaction costs for over-the-counter swaps, taxes and other expenses in connection with the operation of US12NG, excluding costs and expenses paid by the General Partner as outlined in Note 4.
NOTE 4 - CONTRACTS AND AGREEMENTS
US12NG is party to a marketing agent agreement, dated as of October 30, 2009, with the Marketing Agent and the General Partner, whereby the Marketing Agent provides certain marketing services for US12NG as outlined in the agreement. The fees of the Marketing Agent, which are borne by the General Partner, are equal to 0.06% on US12NG’s assets up to $3 billion; and 0.04% on US12NG’s assets in excess of $3 billion.
The above fees do not include the following expenses, which are also borne by the General Partner: the cost of placing advertisements in various periodicals; web construction and development; or the printing and production of various marketing materials.
US12NG is also party to a custodian agreement, dated November 3, 2009, with Brown Brothers Harriman & Co. (“BBH&Co.”) and the General Partner, whereby BBH&Co. holds investments on behalf of US12NG. The General Partner pays the fees of the custodian, which are determined by the parties from time to time. In addition, US12NG is party to an administrative agency agreement, dated as of November 3, 2009, with the General Partner and BBH&Co., whereby BBH&Co. acts as the administrative agent, transfer agent and registrar for US12NG. The General Partner also pays the fees of BBH&Co. for its services under this agreement and such fees are determined by the parties from time to time.
Currently, the General Partner pays BBH&Co. for its services, in the foregoing capacities, the greater of a minimum amount of $75,000 annually for its custody, fund accounting and fund administration services rendered to US12NG and each of the affiliated funds managed by the General Partner, as well as a $20,000 annual fee for its transfer agency services. In addition, the General Partner pays BBH&Co. an asset-based charge of (a) 0.06% for the first $500 million of US12NG’s, USOF’s, USNG’s, US12OF’s, UGA’s, USHO’s and USSO’s combined net assets, (b) 0.0465% for US12NG’s, USOF’s, USNG’s, US12OF’s, UGA’s, USHO’s and USSO’s combined net assets greater than $500 million but less than $1 billion, and (c) 0.035% once US12NG’s, USOF’s, USNG’s, US12OF’s, UGA’s, USHO’s and USSO’s combined net assets exceed $1 billion. The annual minimum amount will not apply if the asset-based charge for all accounts in the aggregate exceeds $75,000. The General Partner also pays transaction fees ranging from $7.00 to $15.00 per transaction.
US12NG has entered into a brokerage agreement with UBS Securities LLC (“UBS Securities”). The agreement requires UBS Securities to provide services to US12NG in connection with the purchase and sale of Futures Contracts and Other Natural Gas-Related Investments that may be purchased and sold by or through UBS Securities for US12NG’s account. The agreement provides that UBS Securities charge US12NG commissions of approximately $7 per round-turn trade, plus applicable exchange and NFA fees for Futures Contracts and options on Futures Contracts.
US12NG invests primarily in Futures Contracts traded on the NYMEX. On December 4, 2007, US12NG and the NYMEX entered into a licensing agreement whereby US12NG was granted a non-exclusive license to use certain of the NYMEX’s settlement prices and service marks. The agreement has an effective date of December 4, 2007. Under the licensing agreement, US12NG and the affiliated funds managed by the General Partner pay the NYMEX an asset-based fee for the license, the terms of which are described in Note 3.
US12NG expressly disclaims any association with the NYMEX or endorsement of US12NG by the NYMEX and acknowledges that “NYMEX” and “New York Mercantile Exchange” are registered trademarks of the NYMEX.
NOTE 5 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES
US12NG intends to engage in the trading of futures contracts, options on futures contracts and cleared swap contracts (collectively, “derivatives”). US12NG will be exposed to both market risk, which is the risk arising from changes in the market value of the contracts, and credit risk, which is the risk of failure by another party to perform according to the terms of a contract.
US12NG may enter into futures contracts, options on futures contracts and cleared swap contracts to gain exposure to changes in the value of an underlying commodity. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. A futures contract obligates the seller to deliver (and the purchaser to accept) the future delivery of a specified quantity and type of a commodity at a specified time and place. The contractual obligations of a buyer or seller may generally be satisfied by taking or making physical delivery of the underlying commodity or by making an offsetting sale or purchase of an identical futures contract on the same or linked exchange before the designated date of delivery.
The purchase and sale of futures contracts, options on futures contracts and cleared swap contracts require margin deposits with a futures commission merchant. Additional deposits may be necessary for any loss on contract value. The Commodity Exchange Act requires a futures commission merchant to segregate all customer transactions and assets from the futures commission merchant’s proprietary activities.
Futures contracts and cleared swap contracts involve, to varying degrees, elements of market risk (specifically commodity price risk) and exposure to loss in excess of the amount of variation margin. The face or contract amounts reflect the extent of the total exposure US12NG has in the particular classes of instruments. Additional risks associated with the use of futures contracts are an imperfect correlation between movements in the price of the futures contracts and the market value of the underlying securities and the possibility of an illiquid market for a futures contract.
All of US12NG’s investment contracts through December 31, 2009 have been exchange-traded futures contracts, cleared swaps or fully-collateralized over-the-counter swaps. The liquidity and credit risks associated with exchange-traded contracts and cleared swaps are generally perceived to be less than those associated with over-the-counter transactions since, in over-the-counter transactions, US12NG must rely solely on the credit of its respective individual counterparties. As of December 31, 2009, US12NG has not entered into any over-the-counter transactions. Over-the counter transactions subject US12NG to the credit risk associated with counterparty non-performance. The credit risk from counterparty non-performance associated with such instruments is the net unrealized gain, if any, on the transaction. US12NG also has credit risk under its futures contracts since the sole counterparty to all domestic and foreign futures contracts is the exchange on which the relevant contracts are traded. However, as compared to its over-the-counter transactions, it may more easily realize value by reselling its futures contracts. In addition, US12NG bears the risk of financial failure by the clearing broker.
US12NG’s cash and other property, such as U.S. Treasuries, deposited with a futures commission merchant are considered commingled with all other customer funds subject to the futures commission merchant’s segregation requirements. In the event of a futures commission merchant’s insolvency, recovery may be limited to a pro rata share of segregated funds available. It is possible that the recovered amount could be less than the total of cash and other property deposited. The insolvency of a futures commission merchant could result in the complete loss of US12NG’s assets posted with that futures commission merchant; however, the vast majority of US12NG’s assets are held in Treasuries, cash and/or cash equivalents with US12NG’s custodian and would not be impacted by the insolvency of a futures commission merchant. Also, the failure or insolvency of US12NG’s custodian could result in a substantial loss of US12NG’s assets.
US12NG invests a portion of its cash in money market funds that seek to maintain a stable net asset value. US12NG is exposed to any risk of loss associated with an investment in these money market funds. As of December 31, 2009 US12NG had deposits in domestic and foreign financial institutions, including cash investments in money market funds, in the amount of $35,966,807. This amount is subject to loss should these institutions cease operations.
For derivatives, risks arise from changes in the market value of the contracts. Theoretically, US12NG is exposed to a market risk equal to the value of futures contracts purchased and unlimited liability on such contracts sold short. As both a buyer and a seller of options, US12NG pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option.
US12NG’s policy is to continuously monitor its exposure to market and counterparty risk through the use of a variety of financial, position and credit exposure reporting controls and procedures. In addition, US12NG has a policy of requiring review of the credit standing of each broker or counterparty with which it conducts business.
The financial instruments held by US12NG are reported in its statement of financial condition at market or fair value, or at carrying amounts that approximate fair value, because of their highly liquid nature and short-term maturity.
NOTE 6 - - FINANCIAL HIGHLIGHTS
The following table presents per unit performance data and other supplemental financial data for the years ended December 31, 2009 and 2008 and for the period from June 27, 2007 (inception) to December 31, 2007. This information has been derived from information presented in the financial statements.
| For the period | ||||||||||||
| For the year ended | For the year ended | from June 27, 2007 to | ||||||||||
| December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||
| Per Unit Operating Performance: | ||||||||||||
| Net asset value, beginning of period | $ | 50.00 | $ | - | $ | - | ||||||
| Total income | 3.84 | - | - | |||||||||
| Total expenses | (0.07 | ) | - | - | ||||||||
| Net increase in net asset value | 3.77 | - | - | |||||||||
| Net asset value, end of period | $ | 53.77 | $ | - | $ | - | ||||||
| Total Return | 7.54 | % | - | % | - | % | ||||||
| Ratios to Average Net Assets | ||||||||||||
| Total income | 11.42 | % | - | % | - | % | ||||||
| Management fees | 0.60 | %* | - | % | - | % | ||||||
| Total expenses excluding management fees | 5.49 | %* | - | % | - | % | ||||||
| Expenses waived | (4.97 | )%* | - | % | - | % | ||||||
| Net expenses excluding management fees | 0.52 | %* | - | % | - | % | ||||||
| Net income | 11.28 | % | - | % | - | % | ||||||
| * Annualized | ||||||||||||
Total returns are calculated based on the change in value during the period. An individual limited partner’s total return and ratio may vary from the above total returns and ratios based on the timing of contributions to and withdrawals from US12NG.
NOTE 7 - - QUARTERLY FINANCIAL DATA (Unaudited)
The following summarized (unaudited) quarterly financial information presents the results of operations and other data for three-month periods ended March 31, June 30, September 30 and December 31, 2009.
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| 2009 | 2009 | 2009 | 2009 | |||||||||||||
| Total Income | $ | - | $ | - | $ | - | $ | 2,602,521 | ||||||||
| Total Expenses | - | - | - | 167,327 | ||||||||||||
| Expense Waivers | - | - | - | (136,678 | ) | |||||||||||
| Net Expenses | - | - | - | 30,649 | ||||||||||||
| Net Income | $ | - | $ | - | $ | - | $ | 2,571,872 | ||||||||
| Net Income per Unit | $ | - | $ | - | $ | - | $ | 3.77 | ||||||||
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective January 1, 2008, US12NG adopted Accounting Standards Codification 820 – Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurement. The changes to past practice resulting from the application of ASC 820 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurement. ASC 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of US12NG (observable inputs) and (2) US12NG’s own assumptions about market participant assumptions developed based on the best information available under the circumstances (unobservable inputs). The three levels defined by the ASC 820 hierarchy are as follows:
Level I – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level II – Inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly. Level II assets include the following: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).
Level III – Unobservable pricing input at the measurement date for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.
In some instances, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest input level that is significant to the fair value measurement in its entirety.
The following table summarizes the valuation of US12NG’s securities at December 31, 2009 using the fair value hierarchy:
| At December 31, 2009 | Total | Level I | Level II | Level III | ||||||||||||
| Short-Term Investments | $ | 26,000,053 | $ | 26,000,053 | $ | - | $ | - | ||||||||
| Exchange-Traded Futures Contracts | ||||||||||||||||
| United States Contracts | 1,662,670 | 1,662,670 | - | - | ||||||||||||
Effective January 1, 2009, US12NG adopted the provisions of Accounting Standards Codification 815 – Derivatives and Hedging (“ASC 815”), which require presentation of qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains and losses on derivatives.
Fair Value of Derivative Instruments
At December 31, | At December 31, | ||||||||
2009 | 2008 | ||||||||
Derivatives not | Statement of | ||||||||
| Accounted for as | Financial | ||||||||
| for as Hedging | Condition | ||||||||
| Instruments | Location | Fair Value | Fair Value | ||||||
| Futures - | |||||||||
Commodity Contracts | Assets | $ | 1,662,670 | $ | - | ||||
The Effect of Derivative Instruments on the Statements of Operations
| For the year ended | For the year ended | |||||||||||||||||
| December 31, 2009 | December 31, 2008 | |||||||||||||||||
| Location of | Realized | Change in | Realized | Change in | ||||||||||||||
| Derivatives not | Gain or (Loss) | Gain or (Loss) | Unrealized | Gain or (Loss) | Unrealized | |||||||||||||
| Accounted for as | on Derivatives | on Derivatives | Gain or (Loss) | on Derivatives | Gain or (Loss) | |||||||||||||
| for as Hedging | Recognized | Recognized | Recognized | Recognized | Recognized | |||||||||||||
| Instruments | in Income | in Income | in Income | in Income | in Income | |||||||||||||
| Futures - | Realized gain (loss) on | |||||||||||||||||
| Commodity Contracts | closed futures contracts | $ | 934,900 | $ | - | $ | - | $ | - | |||||||||
| Change in unrealized | ||||||||||||||||||
| gain (loss) on open | ||||||||||||||||||
| futures contracts | $ | - | $ | 1,662,670 | $ | - | $ | - | ||||||||||
NOTE 9 – RECENT ACCOUNTING PRONOUNCEMENTS
In March 2008, the Financial Accounting Standards Board released Accounting Standards Codification 815 – Derivatives and Hedging (“ASC 815”). ASC 815 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of, and gains and losses on, derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. US12NG adopted ASC 815 on January 1, 2009.
In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2010-06 “Improving Disclosures about Fair Value Measurements.” ASU No. 2010-06 clarifies existing disclosure and requires additional disclosures regarding fair value measurements. Effective for interim and annual reporting periods beginning after December 15, 2009, entities will be required to disclose significant transfers into and out of Level 1 and 2 measurements in the fair value hierarchy and the reasons for those transfers. Effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years, entities will need to disclose information about purchases, sales, issuances and settlements of Level 3 securities on a gross basis, rather than as a net number as currently required. The General Partner is currently evaluating the impact ASU No. 2010-06 will have on the financial statement disclosures.
NOTE 10 – SUBSEQUENT EVENTS
US12NG has performed an evaluation of subsequent events through March 30, 2010, which is the date the financial statements were available to be issued. This evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments.