Form
of Units
Registered
Form.
Units
are issued in registered form in accordance with the LP Agreement. The
Administrator has been appointed registrar and transfer agent for the purpose
of
transferring units in certificated form. The Administrator keeps a record
of all
holders of the units in the registry (the “Register”). The General Partner
recognizes transfers of units in certificated form only if done in accordance
with the LP Agreement. The beneficial interests in such units are held
in
book-entry form through participants and/or accountholders in the Depository
Trust Company ("DTC").
Book
Entry.
Individual certificates are not issued for the units. Instead, units are
represented by one or more global certificates, which are deposited by
the
Administrator with DTC and registered in the name of Cede & Co., as nominee
for DTC. The global certificates evidence all of the units outstanding
at any
time. Unitholders are limited to (1) participants in DTC such as banks,
brokers, dealers and trust companies ("DTC Participants"), (2) those who
maintain, either directly or indirectly, a custodial relationship with
a DTC
Participant ("Indirect Participants"), and (3) those banks, brokers,
dealers, trust companies and others who hold interests in the units through
DTC
Participants or Indirect Participants, in each case who satisfy the requirements
for transfers of units. DTC Participants acting on behalf of investors
holding
units through such participants’ accounts in DTC follow the delivery
practice applicable to securities eligible for DTC’s Same-Day Funds Settlement
System. Units are credited to DTC Participants’ securities accounts following
confirmation of receipt of payment.
DTC.
DTC is
a limited purpose trust company organized under the laws of the State of
New
York and is a member of the Federal Reserve System, a “clearing corporation”
within the meaning of the New York Uniform Commercial Code and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). DTC holds securities for
DTC Participants and facilitates the clearance and settlement of transactions
between DTC Participants through electronic book-entry changes in accounts
of
DTC Participants.
Transfer
of Units
Transfers
of Units Only Through
DTC. The units are only transferable through the book-entry
system
of DTC. Limited partners who are not DTC Participants may transfer their
units
through DTC by instructing the DTC Participant holding their units (or
by
instructing the Indirect Participant or other entity through which their
units
are held) to transfer the units. Transfers are made in accordance with
standard
securities industry practice.
Transfers
of interests in units with DTC are made in accordance with the usual rules
and
operating procedures of DTC and the nature of the transfer. DTC has established
procedures to facilitate transfers among the participants and/or accountholders
of DTC. Because DTC can only act on behalf of DTC Participants, who in
turn act
on behalf of Indirect Participants, the ability of a person or entity having
an
interest in a global certificate to pledge such interest to persons or
entities
that do not participate in DTC, or otherwise take actions in respect of
such
interest, may be affected by the lack of a definitive security in respect
of
such interest.
DTC
has
advised us that it takes any action permitted to be taken by a unitholder
(including, without limitation, the presentation of a global certificate
for
exchange) only at the direction of one or more DTC Participants in whose
account
with DTC interests in global certificates are credited and only in respect
of
such portion of the aggregate principal amount of the global certificate
as to
which such DTC Participant or Participants has or have given such
direction.
Transfer/Application
Requirements. All purchasers of USNG’s units, and potentially any
purchasers of units in the future, who wish to become limited partners
or other
record holders and receive cash distributions, if any, or have certain
other
rights, must deliver an executed transfer application in which the purchaser
or
transferee must certify that, among other things, he, she or it agrees
to be
bound by USNG’s LP Agreement and is eligible to purchase USNG’s securities. Each
purchaser of units must execute a transfer application and certification.
The
obligation to provide the form of transfer application is imposed on the
seller
of units or, if a purchase of units is made through an exchange, the form
may be
obtained directly through USNG. Further, the General Partner may request
each
record holder to furnish certain information, including that holder’s
nationality, citizenship or other related status. A record holder is a
unitholder that is, or has applied to be, a limited partner. An investor
who is
not a U.S. resident may not be eligible to become a record holder or one
of the
USNG’s limited partners if that investor’s ownership would subject USNG to the
risk of cancellation or forfeiture of any of USNG’s assets under any federal,
state or local law or regulation. If the record holder fails to furnish
the
information or if the General Partner determines, on the basis of the
information furnished by the holder in response to the request, that such
holder
is not qualified to become one of USNG’s limited partners, the General Partner
may be substituted as a holder for the record holder, who will then be
treated
as a non-citizen assignee, and USNG will have the right to redeem those
securities held by the record holder.
A
transferee’s broker, agent or nominee may complete, execute and deliver a
transfer application and certification. USNG may, at its discretion, treat
the
nominee holder of a unit as the absolute owner. In that case, the beneficial
holder’s rights are limited solely to those that it has against the nominee
holder as a result of any agreement between the beneficial owner and the
nominee
holder.
A
person
purchasing USNG’s existing units, who does not execute a transfer application
and certify that the purchaser is eligible to purchase those securities
acquires
no rights in those securities other than the right to resell those securities.
Whether or not a transfer application is received or the consent of the
General
Partner obtained, USNG's units are securities and are transferable according
to
the laws governing transfers of securities.
Any
transfer of units will not be recorded by the transfer agent or recognized
by
the General Partner unless a completed transfer application is delivered
to the
General Partner or the Administrator. When acquiring units, the transferee
of
such units that completes a transfer application will:
·
be
an
assignee until admitted as a substituted limited partner upon the consent
and
sole discretion of the General Partner and the recording of the assignment
on
the books and records of the partnership;
·
automatically
request admission as a substituted limited partner;
·
agree
to
be bound by the terms and conditions of, and execute, the LP
Agreement;
·
represent
that such transferee has the capacity and authority to enter into the LP
Agreement;
·
grant
powers of attorney to the General Partner and any liquidator of USNG;
and
·
make
the
consents and waivers contained in the LP Agreement.
An
assignee will become a limited partner in respect of the transferred units
upon
the consent of the General Partner and the recordation of the name of the
assignee on our books and records. Such consent may be withheld in the
sole
discretion of the General Partner.
If
consent of the General Partner is withheld, such transferee shall be an
assignee. An assignee shall have an interest in the partnership equivalent
to
that of a limited partner with respect to allocations and distributions,
including, without limitation, liquidating distributions, of the partnership.
With respect to voting rights attributable to units that are held by assignees,
the General Partner shall be deemed to be the limited partner with respect
thereto and shall, in exercising the voting rights in respect of such units
on
any matter, vote such units at the written direction of the assignee who
is the
recordholder of such units. If no such written direction is received, such
units
will not be voted. An assignee shall have no other rights of a limited
partner.
Until
a
unit has been transferred on USNG's books, we and the transfer agent may
treat
the record holder of the unit as the absolute owner for all purposes, except
as
otherwise required by law or stock exchange regulations.
Withdrawal
of Limited
Partners
As
discussed in the LP Agreement, if the General Partner gives at least fifteen
(15) days’ written notice to a limited partner, then the General Partner may for
any reason, in its sole discretion, require any such limited partner to
withdraw
entirely from the partnership or to withdraw a portion of its partner capital
account. If the General Partner does not give at least fifteen (15) days’
written notice to a limited partner, then it may only require withdrawal
of all
or any portion of the capital account of any limited partner in the following
circumstances: (i) the unitholder made a misrepresentation to the General
Partner in connection with its purchase of units; or (ii) the limited
partner’s ownership of units would result in the violation of any law or
regulations applicable to the partnership or a partner. In these circumstances,
the General Partner without notice may require the withdrawal at any time,
or
retroactively. The limited partner thus designated shall withdraw from
the
partnership or withdraw that portion of its partner capital account specified,
as the case may be, as of the close of business on such date as determined
by
the General Partner. The limited partner thus designated shall be deemed
to have
withdrawn from the partnership or to have made a partial withdrawal from
its
partner capital account, as the case may be, without further action on
the part
of the limited partner and the provisions of the LP Agreement shall
apply.
Calculating
NAV
USNG’s
NAV is calculated by:
|
·
|
Taking
the current market value of its total
assets
|
|
·
|
Subtracting
any liabilities
|
The
Administrator calculates the NAV of USNG once each trading day. The NAV
for a
particular trading day is released after 4:15 p.m. New York time. It calculates
the NAV as of the earlier of the close of the NYSE or 4:00 p.m. New York
time.
Trading on the AMEX typically closes at 4:15 p.m. New York time. USNG 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 as of the earlier of
the
close of the NYSE or 4:00 p.m. New York time.
In
addition, in order to provide updated information relating to USNG for
use by
investors and market professionals, the AMEX calculates and disseminates
throughout the trading day an updated indicative fund value. The indicative
fund
value is calculated by using the prior day’s closing NAV per unit of USNG as a
base and updating that value throughout the trading day to reflect changes
in
the most recently reported trade price for the Benchmark Futures Contracts
on the NYMEX. The prices reported for the active Benchmark Futures Contract
month are adjusted based on the prior day’s spread differential between
settlement values for that contract and the spot month contract. In the
event
that the spot month contract is also the active contract, the last sale
price
for the active contract is not adjusted. The indicative fund value unit
basis
disseminated during AMEX trading hours should not be viewed as an actual
real
time update of the NAV, because the NAV is calculated only once at the
end of
each trading day.
The
indicative fund value is disseminated on a per unit basis every 15 seconds
during regular AMEX trading hours of 9:30 a.m. New York time to 4:15 p.m.
New
York time. The normal trading hours of the NYMEX are 10:00 a.m. New York
time to
2:30 p.m. New York time. This means that there is a gap in time at the
beginning
and the end of each day during which USNG’s units are traded on the AMEX, but
real-time NYMEX trading prices for futures contracts traded on the NYMEX
are not available. As a result, during those gaps there is no update to
the
indicative fund value.
The
AMEX
disseminates the indicative fund value through the facilities of CTA/CQ
High
Speed Lines. In addition, the indicative fund value is published on the
AMEX's
website and is available through on-line information services such as Bloomberg
and Reuters.
Dissemination
of the indicative fund value provides additional information that is not
otherwise available to the public and is useful to investors and market
professionals in connection with the trading of USNG units on the AMEX.
Investors and market professionals are able throughout the trading day
to
compare the market price of USNG and the indicative fund value. If the
market
price of USNG units diverges significantly from the indicative fund value,
market professionals have an incentive to execute arbitrage trades. For
example, if USNG appears to be trading at a discount compared to the indicative
fund value, a market professional could buy USNG units on the AMEX and
sell
short futures contracts. Such arbitrage trades can tighten the tracking
between the market price of USNG and the indicative fund value and thus
can be
beneficial to all market participants.
In
addition, other Futures Contracts, Other Natural Gas Related Investments
and Treasuries held by USNG are valued by the Administrator, using rates
and
points received from client approved third party vendors (such as Reuters
and WM
Company) and advisor quotes. These investments are not included in the
indicative value. The indicative fund value is based on the prior day’s NAV and
moves up and down solely according to changes in the average of the prices
of
the Benchmark Futures Contracts for natural gas traded on the
NYMEX.
Creation
and Redemption of
Units
USNG
creates and redeems units from time to time, but only in one or more Creation
Baskets or Redemption Baskets. The creation and redemption of baskets are
only
made in exchange for delivery to USNG or the distribution by USNG of the
amount
of Treasuries and any cash represented by the baskets being created or
redeemed,
the amount of which is based on the combined NAV of the number of units
included
in the baskets being created or redeemed determined as of 4:00 p.m. New
York
time on the day the order to create or redeem baskets is properly
received.
Authorized
Purchasers are the only persons that may place orders to create and redeem
baskets. Authorized Purchasers must be (1) registered broker-dealers or
other
securities market participants, such as banks and other financial institutions,
that are not required to register as broker-dealers to engage in securities
transactions as described below, and (2) DTC Participants. To become an
Authorized Purchaser, a person must enter into an Authorized Purchaser
Agreement
with the General Partner. The Authorized Purchaser Agreement provides the
procedures for the creation and redemption of baskets and for the delivery
of
the Treasuries and any cash required for such creations and redemptions.
The
Authorized Purchaser Agreement and the related procedures attached thereto
may
be amended by USNG, without the consent of any limited partner or unitholder
or
Authorized Purchaser. Authorized Purchasers pay a transaction fee of $1,000
to
USNG for each order they place to create or redeem one or more baskets.
Authorized Purchasers who make deposits with USNG in exchange for baskets
receive
no fees, commissions or other form of compensation or inducement of any
kind
from either USNG or the General Partner, and no such person has any obligation
or responsibility to the General Partner or USNG to effect any sale or
resale of
units. As of December 31, 2007, 4 Authorized Purchasers had entered into
agreements with USNG to purchase Creation Baskets.
Certain
Authorized Purchasers are expected to have the facility to participate
directly
in the physical natural gas market and the natural gas futures market.
In some
cases, an Authorized Purchaser or its affiliates may from time to time
acquire
natural gas or sell natural gas and may profit in these instances. The
General
Partner believes that the size and operation of the natural gas market
make it
unlikely that an Authorized Purchaser’s direct activities in the natural gas or
securities markets will impact the price of natural gas, Futures Contracts,
or
the price of the units.
Each
Authorized Purchaser is required to be registered as a broker-dealer under
the
Exchange Act and is a member in good standing with FINRA, or exempt from
being
or otherwise not required to be licensed as a broker-dealer or a member
of
FINRA, and qualified to act as a broker or dealer in the states or other
jurisdictions where the nature of its business so requires. Certain Authorized
Purchasers may also be regulated under federal and state banking laws and
regulations. Each Authorized Purchaser has its own set of rules and procedures,
internal controls and information barriers as it determines is appropriate
in
light of its own regulatory regime.
Under
the
Authorized Purchaser Agreement, the General Partner has agreed to indemnify
the
Authorized Purchasers against certain liabilities, including liabilities
under
the Securities Act of 1933, as amended, and to contribute to the payments
the
Authorized Purchasers may be required to make in respect of those
liabilities.
The
following description of the procedures for the creation and redemption
of
baskets is only a summary and an investor should refer to the relevant
provisions of the LP Agreement and the form of Authorized Purchaser Agreement
for more detail, each of which is attached as an exhibit to this annual
report
on Form 10-K.
Creation
Procedures
On
any
business day, an Authorized Purchaser may place an order with the Marketing
Agent to create one or more baskets. For purposes of processing purchase
and
redemption orders, a “business day” means any day other than a day when any of
the AMEX, the NYMEX or the NYSE is closed for regular trading. Purchase
orders
must be placed by 12:00 p.m. New York time or the close of regular trading
on
the NYSE, whichever is earlier; except in the case of the initial Authorized
Purchaser’s or any other Authorized Purchaser’s initial order to purchase one or
more Creation Baskets on the first day the baskets are to be offered and
sold,
when such orders shall be placed by 9:00 a.m. New York time on the day
agreed to
by the General Partner and the initial Authorized Purchaser. The day on
which
the Marketing Agent receives a valid purchase order is the purchase order
date.
By
placing a purchase order, an Authorized Purchaser agrees to deposit Treasuries,
cash or a combination of Treasuries and cash with USNG, as described below.
Prior to the delivery of baskets for a purchase order, the Authorized Purchaser
must also have wired to the Custodian the non-refundable transaction fee
due for
the purchase order. Authorized Purchasers may not withdraw a creation
request.
Determination
of Required Deposits
The
total deposit required to create each basket (“Creation Basket Deposit”) is the
amount of Treasuries and/or cash that is in the same proportion to the
total
assets of USNG (net of estimated accrued but unpaid fees, expenses and
other
liabilities) on the date the order to purchase is accepted as the number
of
units to be created under the purchase order is in proportion to the
total
number of units outstanding on the date the order is received. The General
Partner determines, directly in its sole discretion or in consultation
with the
Administrator, the requirements for Treasuries and the amount of cash,
including
the maximum permitted remaining maturity of a Treasury and proportions
of
Treasury and cash that may be included in deposits to create baskets.
The
Marketing Agent publishes such requirements at the beginning of each
business
day. The amount of cash deposit required is the difference between the
aggregate
market value of the Treasuries required to be included in a Creation
Basket
Deposit as of 4:00 p.m. New York time on the date the order to purchase
is
properly received and the total required deposit.
Delivery
of Required Deposits
An
Authorized Purchaser who places a purchase order is responsible for transferring
to USNG’s account with the Custodian the required amount of Treasuries and cash
by the end of the third business day following the purchase order date.
Upon
receipt of the deposit amount, the Administrator directs DTC to credit
the
number of baskets ordered to the Authorized Purchaser’s DTC account on the third
business day following the purchase order date. The expense and risk
of delivery
and ownership of Treasuries until such Treasuries have been received
by the
Custodian on behalf of USNG is borne solely by the Authorized
Purchaser.
Because
orders to purchase baskets must be placed by 12:00 p.m., New York time,
but the
total payment required to create a basket during the continuous offering
period
will not be determined until 4:00 p.m., New York time, on the date the
purchase
order is received, Authorized Purchasers will not know the total amount
of the
payment required to create a basket at the time they submit an irrevocable
purchase order for the basket. USNG’s NAV and the total amount of the payment
required to create a basket could rise or fall substantially between
the time an
irrevocable purchase order is submitted and the time the amount of the
purchase
price in respect thereof is determined.
Rejection
of Purchase Orders
The
General Partner acting by itself or through the Marketing Agent may reject
a
purchase order or a Creation Basket Deposit if:
·
|
it
determines that the investment alternative available to USNG
at that time
will not enable it to meet its investment
objective;
|
·
|
it
determines that the purchase order or the Creation Basket Deposit
is not
in proper form;
|
·
|
it
believes that the purchase order or the Creation Basket Deposit
would have
adverse tax consequences to USNG or its
unitholders;
|
·
|
the
acceptance or receipt of the Creation Basket Deposit would,
in the opinion
of counsel to the General Partner, be unlawful;
or
|
·
|
circumstances
outside the control of the General Partner, Marketing Agent
or Custodian
make it, for all practical purposes, not feasible to process
creations of
baskets.
|
None
of the General Partner, Marketing Agent or Custodian will be liable for
the
rejection of any purchase order or Creation Basket Deposit.
Redemption
Procedures
The
procedures by which an Authorized Purchaser can redeem one or more baskets
mirror the procedures for the creation of baskets. On any business day,
an
Authorized Purchaser may place an order with the Marketing Agent to redeem
one
or more baskets. Redemption orders must be placed by 12:00 p.m. New York
time or
the close of regular trading on the NYSE, whichever is earlier. A redemption
order so received will be effective on the date it is received in satisfactory
form by the Marketing Agent. The redemption procedures allow Authorized
Purchasers to redeem baskets and do not entitle an individual unitholder
to
redeem any units in an amount less than a Redemption Basket, or to redeem
baskets other than through an Authorized Purchaser. By placing a redemption
order, an Authorized Purchaser agrees to deliver the baskets to be redeemed
through DTC’s book-entry system to USOF not later than 3:00 p.m. New York time
on the third business day following the effective date of the redemption
order.
Prior to the delivery of the redemption distribution for a redemption order,
the
Authorized Purchaser must also have wired to USOF’s account at the Custodian the
non-refundable transaction fee due for the redemption order. Authorized
Purchasers may not withdraw a redemption request.
Determination
of Redemption Distribution
The
redemption distribution from USNG consists of a transfer to the redeeming
Authorized Purchaser of an amount of Treasuries and/or cash that is in
the same
proportion to the total assets of USNG (net of estimated accrued but
unpaid
fees, expenses and other liabilities) on the date the order to redeem
is
properly received as the number of units to be redeemed under the redemption
order is in proportion to the total number of units outstanding on the
date the
order is received. The General Partner, directly or in consultation with
the
Administrator, determines the requirements for Treasuries and the amounts
of
cash, including the maximum permitted remaining maturity of a Treasury,
and the
proportions of Treasuries and cash that may be included in distributions
to
redeem baskets. The Marketing Agent publishes such requirements as of
4:00 p.m.
New York time on the redemption order date.
Delivery
of Redemption Distribution
The
redemption distribution due from USNG will be delivered to the Authorized
Purchaser by 3:00 p.m. New York time on the third business day following
the
redemption order date if, by 3:00 p.m. New York time on such third business
day,
USNG’s DTC account has been credited with the baskets to be redeemed. If USNG’s
DTC account has not been credited with all of the baskets to be redeemed
by such
time, the redemption distribution will be delivered to the extent of
whole
baskets received. Any remainder of the redemption distribution will be
delivered
on the next business day to the extent of remaining whole baskets received
if
USNG receives the fee applicable to the extension of the redemption distribution
date which the General Partner may, from time to time, determine and
the
remaining baskets to be redeemed are credited to USNG’s DTC account by 3:00 p.m.
New York time on such next business day. Any further outstanding amount
of the
redemption order shall be cancelled. Pursuant to information from the
General
Partner, the Custodian will also be authorized to deliver the redemption
distribution notwithstanding that the baskets to be redeemed are not
credited to
USNG’s DTC account by 3:00 p.m. New York time on the third business day
following the redemption order date if the Authorized Purchaser has
collateralized its obligation to deliver the baskets through DTC’s book
entry-system on such terms as the General Partner may from time to time
determine.
Suspension
or Rejection of Redemption Orders
The
General Partner may, in its discretion, suspend the right of redemption,
or
postpone the redemption settlement date, (1) for any period during which
the
AMEX or the NYMEX is closed other than customary weekend or holiday closings,
or
trading on the AMEX or the NYMEX is suspended or restricted, (2) for
any period
during which an emergency exists as a result of which delivery, disposal
or
evaluation of Treasuries is not reasonably practicable, or (3) for such
other
period as the General Partner determines to be necessary for the protection
of
the limited partners. None of the General Partner, the Marketing Agent,
the
Administrator, or the Custodian will be liable to any person or in any
way for
any loss or damages that may result from any such suspension or
postponement.
The
General Partner will reject a redemption order if the order is not in
proper
form as described in the Authorized Purchaser Agreement or if the fulfillment
of
the order, in the opinion of its counsel, might be unlawful.
Creation
and Redemption Transaction
Fee
To
compensate USNG for its expenses in connection with the creation and redemption
of baskets, an Authorized Purchaser is required to pay a transaction fee
to USNG
of $1,000 per order to create or redeem baskets. An order may include multiple
baskets. The transaction fee may be reduced, increased or otherwise changed
by
the General Partner. The General Partner shall notify DTC of any change
in the
transaction fee and will not implement any increase in the fee for the
redemption of baskets until 30 days after the date of the
notice.
Tax
Responsibility
Authorized
Purchasers are responsible for any transfer tax, sales or use tax, stamp
tax,
recording tax, value added tax or similar tax or governmental charge applicable
to the creation or redemption of baskets, regardless of whether or not
such tax
or charge is imposed directly on the Authorized Purchaser, and agree to
indemnify the General Partner and USNG if they are required by law to pay
any
such tax, together with any applicable penalties, additions to tax or interest
thereon.
Secondary
Market
Transactions
As
discussed above, Authorized Purchasers are the only persons that may place
orders to create and redeem baskets. Authorized Purchasers must be registered
broker-dealers or other securities market participants, such as banks and
other
financial institutions that are not required to register as broker-dealers
to
engage in securities transactions. An Authorized Purchaser is under no
obligation to create or redeem baskets, and an Authorized Purchaser is
under no
obligation to offer to the public units of any baskets it does create.
Authorized Purchasers that do offer to the public units from the baskets
they
create do so at per-unit offering prices that are expected to reflect,
among other factors, the trading price of the units on the AMEX, the NAV
of USNG
at the time the Authorized Purchaser purchased the Creation Baskets and
the
NAV at the time of the offer of the units to the public, the supply of and
demand for units at the time of sale, and the liquidity of the Futures
Contract
market and the market for Other Natural Gas Related Investments. The prices
of
units offered by Authorized Purchasers are expected to fall between USNG’s NAV
and the trading price of the units on the AMEX at the time of sale. Units
initially comprising the same basket but offered by Authorized Purchasers
to the
public at different times may have different offering prices. An order
for one
or more baskets may be placed by an Authorized Purchaser on behalf of multiple
clients. Authorized Purchasers who make deposits with USNG in exchange
for
baskets receive no fees, commissions or other form of compensation or inducement
of any kind from either USNG or the General Partner, and no such person
has any
obligation or responsibility to the General Partner or USNG to effect any
sale
or resale of units. Units are expected to trade in the secondary market
on the
AMEX. Units may trade in the secondary market at prices that are lower
or higher
relative to their NAV per unit. The amount of the discount or premium in
the
trading price relative to the NAV per unit may be influenced by various
factors,
including the number of investors who seek to purchase or sell units in
the
secondary market and the liquidity of the Futures Contracts market and the
market for Other Natural Gas Related Investments. While the units trade
on the
AMEX until 4:15 p.m. New York time, liquidity in the market for Futures
Contracts and Other Natural Gas Related Investments may be reduced after
the
close of the NYMEX at 2:30 p.m. New York time. As a result, during this
time,
trading spreads, and the resulting premium or discount, on the units may
widen.
Prior
Performance of USNG and
Affiliates
USNG’s
offering began on April 18, 2007 and is a continuous offering. As of
December 31, 2007, the total amount of money raised by USNG from Authorized
Purchasers was $1,458,787,976; the total number of Authorized Purchasers
was 4,
the number of baskets purchased by Authorized Purchasers was 379; and
the
aggregate amount of units purchased was 37.9 million. For more information
on
the performance of USNG, see the Performance Tables below.
PAST
PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
Experience
in Raising and Investing
in Funds through
December 31, 2007
Dollar
Amount Offered:
|
$
|
3,664,500,000
|
|
|
|
Dollar
Amount Raised:
|
$
|
1,458,787,976
|
|
|
|
Offering
Expenses*:
|
|
|
SEC
registration fee**:
|
$
|
104,010
|
FINRA registration fee**: |
|
151,000 |
AMEX
Listing fee**:
|
$
|
5,000
|
Auditor's
fees and expenses**:
|
$
|
29,000
|
Legal
fees and expenses**:
|
$
|
526,746
|
Printing
expenses:
|
$
|
40,323
|
|
|
|
Length
of Offering:
|
|
Continuous
|
——————
*
Amounts are for organizational and offering expenses incurred in connection
with offerings from April 18, 2007 through December 31, 2007.
**
Paid
for
by the General Partner in connection with the initial public
offering.
Performance
Capsule
Name
of Commodity Pool:
|
|
USNG
|
|
Type
of Commodity Pool:
|
|
Exchange
traded security
|
|
Inception
of Trading:
|
|
April
18, 2007
|
|
Aggregate
Gross Capital Subscriptions (from inception through
December 31, 2007):
|
|
$
|
1,458,787,977
|
|
Total
Net Assets as of December 31, 2007:
|
|
$
|
593,394,981
|
*
|
Initial
NAV Per Unit as of Inception:
|
|
$
|
50.00
|
|
NAV
per Unit as of December 31, 2007:
|
|
$
|
36.18
|
|
Worst
Monthly Percentage Draw-down:
|
|
|
November
2007 (-16.16
|
%)
|
Worst
Peak-to-Valley Draw-down:
|
|
|
April
2007- August 2007 (-34.74
|
%)
|
Total
Rate of Return Since Inception:
|
|
|
(27.64
|
%)
|
——————
* Inclusive
of transactions recorded on a trade date + 1 basis.
Month
|
|
Rates of Return
For the Year 2007
|
|
April
|
|
|
4.30
|
%
|
May
|
|
|
(0.84
|
%)
|
June
|
|
|
(15.90
|
%)
|
July
|
|
|
(9.68
|
%)
|
August
|
|
|
(13.37
|
%)
|
September
|
|
|
12.28
|
%
|
October
|
|
|
12.09
|
%
|
November
|
|
|
(16.16
|
%)
|
December
|
|
|
0.75
|
%
|
The
General Partner is also currently the general partner of USOF, US12OF and
USG.
Each of the General Partner, USOF, US12OF and USG is located in
California.
USOF
is a
publicly traded limited partnership which seeks to have the changes in
percentage terms of its units' NAV track the changes in percentage terms
of the
spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as
measured by the changes in the price of the futures contract on light,
sweet
crude oil as traded on the NYMEX that is the near month contract to expire,
except when the near month contract is within two weeks of expiration,
in which
case the futures contract will be the next month contract to expire, less
USOF's
expenses. USOF invests in a mixture of listed crude oil futures contracts,
other
non-listed oil related investments, Treasuries, cash and cash equivalents.
USOF
began trading on the AMEX on April 10, 2006 and is a continuous offering.
As of
December 31, 2007, the total amount of money raised by USOF from Authorized
Purchasers was $6,142,802,106; the total number of Authorized Purchasers
was 12;
the number of baskets purchased by Authorized Purchasers was 1,074; and
the
aggregate amount of units purchased was 107.4 million.
US12OF
is
a publicly traded limited partnership which seeks to have the changes in
percentage terms of its units’ NAV track the changes in percentage
terms of the price of light, sweet crude oil delivered to Cushing, Oklahoma,
as
measured by the changes in the average of the prices of 12 futures contracts
on
crude oil traded on the 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 US12OF’s expenses. US12OF invests in a
mixture of listed crude oil futures contracts, other non-listed oil related
investments, Treasuries, cash and cash equivalents. US12OF began
trading on the AMEX on December 6, 2007 and is a continuous
offering. As of December 31, 2007, the total amount of money raised
by US12OF from Authorized Purchasers was $20,127,316; the total number
of
Authorized Purchasers was 2; the number of baskets purchased by Authorized
Purchasers was 4; and the aggregate amount of units purchased was
400,000.
USG
is a
publicly traded limited partnership which seeks to have the changes in
percentage terms of its units’ NAV track the changes in percentage terms of the
price of unleaded gasoline delivered to the New York harbor, as measured
by the
changes in the price of the futures contract on gasoline traded on the
NYMEX,
less USG’s expenses. USG invests in a mixture of listed gasoline
futures contracts, other gasoline related investments, Treasuries, cash
and cash
equivalents. USG began trading on the AMEX on February 26, 2008 and
is a continuous offering. During the year ended December 31, 2007,
USG had not yet commenced investment activities nor issued units.
Since
the
offering of USOF units to the public on April 10, 2006 to December 31,
2007, the
simple average daily change in the price
of
a specified oil futures contract (the “Benchmark Oil Futures Contract”)
was -0.031%, while the simple average daily change in the NAV of USOF over
the
same time period was 0.042%. The average daily difference was 0.011% (or
1.1
basis point, where 1 basis point equals 1/100 of 1%). As a percentage of
the
daily movement of the Benchmark Oil Futures Contract, the average error
in daily
tracking by the NAV was 2.98%, meaning that over this time period USOF’s
tracking error was within the plus or minus 10% range established as its
benchmark tracking goal.
Since
the
offering of US12OF units to the public on December 6, 2007 to December
31, 2007,
the simple average daily change in the
average of the prices of 12 futures contracts on crude oil traded on the
NYMEX
(the “Benchmark 12 Month Oil Futures Contracts”) was 0.480%, while
the simple average daily change in the NAV of US12OF over the same time
period
was 0.489%. The average daily difference was 0.009% (or 0.9 basis point,
where 1
basis point equals 1/100 of 1%). As a percentage of the daily movement
of the
Benchmark 12 Month Oil Futures Contracts, the average error in daily tracking
by
the NAV was 2.651%, meaning that over this time period US12OF’s tracking error
was within the plus or minus 10% range established as its benchmark tracking
goal.
There
are
significant differences between investing in USOF and US12OF and investing
directly in the futures market. The General Partner’s results with USOF and
US12OF may not be representative of results that may be experienced with
a fund
directly investing in futures contracts or other managed funds investing
in
futures contracts. For more information on the performance of USOF and
US12OF,
see the Performance Tables below. Since
USG
did not commence investment activities nor issue units during the year
ended
December 31, 2007, performance information has not been included for
USG.
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Experience
in Raising and Investing in Funds through December 31, 2007
Dollar
Amount Offered in USOF Offering*:
|
|
$ |
7,094,860,000 |
|
Dollar
Amount Raised in USOF Offering:
|
|
$ |
6,142,801,102 |
|
Organizational
Expenses in USOF Offering:
|
|
|
|
|
SEC
registration fee**:
|
|
$ |
800,474 |
|
FINRA
registration fee**:
|
|
$ |
377,500 |
|
AMEX
listing fee**:
|
|
$ |
5,000 |
|
Auditor’s
fees and expenses**:
|
|
$ |
59,000 |
|
Legal
fees and expenses**:
|
|
$ |
1,249,109 |
|
Printing
expenses**:
|
|
$ |
241,977 |
|
Length
of USOF offering:
|
|
Continuous
|
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
**
|
Through
December 31, 2006, these expenses were paid for by an affiliate
of the
General Partner in connection with the initial public offering.
Following
December 31, 2006, USOF has recorded these expenses.
|
Dollar
Amount Offered in US12OF Offering*:
|
|
$ |
550,000,000 |
|
Dollar
Amount Raised in US12OF Offering:
|
|
$ |
20,127,316 |
|
Organizational
Expenses in US12OF Offering:
|
|
|
|
|
SEC
registration fee**:
|
|
$ |
16,885 |
|
FINRA
registration fee**:
|
|
$ |
75,500 |
|
AMEX
listing fee**:
|
|
$ |
5,000 |
|
Auditor’s
fees and expenses**:
|
|
$ |
10,700 |
|
Legal
fees and expenses**:
|
|
$ |
233,799 |
|
Printing
expenses**:
|
|
$ |
23,755 |
|
Length
of US12OF offering:
|
|
Continuous
|
|
*
|
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
**
|
These
expenses were paid for by the General Partner.
|
Compensation
to the General Partner and Other Compensation
USOF:
Expenses
Paid
by USOF through December 31, 2007 in dollar terms
(unaudited):
Expense
|
|
Amount
in Dollar
Terms
|
|
Amount
Paid to General Partner in USOF Offering:
|
|
$ |
3,622,613 |
|
Amount
Paid in Portfolio Brokerage Commissions in USOF offering:
|
|
$ |
1,184,956 |
|
Other
Amounts Paid in USOF Offering:
|
|
$ |
1,530,281 |
|
Total
Expenses Paid in USOF Offering:
|
|
$ |
6,337,850 |
|
Expenses
Paid
by USOF through December 31, 2007 as a Percentage of Average Daily
Net Assets
(unaudited):
Expenses
in USOF Offering:
|
Amount
As a Percentage ofAverage
Daily Net Assets
|
|
General
Partner:
|
0.50%
annualized
|
|
Portfolio
Brokerage Commissions:
|
0.16%
annualized
|
|
Other
Amounts Paid in USOF Offering
|
0.21%
annualized
|
|
Total
Expense Ratio:
|
0.87%
annualized
|
|
|
USOF
Performance:
|
|
|
Name
of Commodity Pool:
|
USOF
|
|
Type
of Commodity Pool:
|
Exchange
traded security
|
|
Inception
of Trading:
|
April
10, 2006
|
|
Aggregate
Subscriptions (from inception through December 31, 2007):
|
$6,142,801,105
|
|
Total
Net Assets as of December 31, 2007:
|
$485,222,737
|
|
Initial
NAV Per Unit as of Inception:
|
$67.39
|
|
NAV
per Unit as of December 31, 2007:
|
$75.82
|
|
Worst
Monthly Percentage Draw-down:
|
September
2006 (11.71%)
|
|
Worst
Peak-to-Valley Draw-down:
|
June
2006 - January 2007 (30.60%)
|
US12OF:
Expenses
Paid
by US12OF through December 31, 2007 in dollar terms
(unaudited):
Expense
|
|
Amount
in Dollar
Terms
|
|
Amount
Paid to General Partner in US12OF Offering:
|
|
$ |
8,790 |
|
Amount
Paid in Portfolio Brokerage Commissions in US12OF
offering:
|
|
$ |
892 |
|
Other
Amounts Paid in US12OF Offering:
|
|
$ |
3,479 |
|
Total
Expenses Paid in US12OF Offering:
|
|
$ |
13,161 |
|
Expenses
Paid
by US12OF through December31, 2007 as a Percentage of Average Daily
Net Assets
(unaudited):
Expenses
in US12OF Offering:
|
Amount
As a Percentage ofAverage
Daily Net Assets
|
General
Partner:
|
0.60%
annualized
|
Portfolio
Brokerage Commissions:
|
0.06%
annualized
|
Other
Amounts Paid in US12OF Offering
|
0.24%
annualized
|
Total
Expense Ratio:
|
0.90%
annualized
|
US12OF
Performance:
|
|
Name
of Commodity Pool:
|
US12OF
|
Type
of Commodity Pool:
|
Exchange
traded security
|
Inception
of Trading:
|
December
6, 2007
|
Aggregate
Subscriptions (from inception through December 31, 2007):
|
$20,126,316
|
Total
Net Assets as of December 31, 2007:
|
$21,691,479
|
Initial
NAV Per Unit as of Inception:
|
$50.00
|
NAV
per Unit as of December 31, 2007:
|
$54.23
|
Worst
Monthly Percentage Draw-down:
|
N/A
|
Worst
Peak-to-Valley Draw-down:
|
N/A
|
COMPOSITE
PERFORMANCE DATA FOR USOF
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Month
|
|
Rates
of Return For
the Year 2006
|
|
April*
|
|
|
3.47 |
% |
May
|
|
|
(2.91 |
%) |
June
|
|
|
3.16 |
% |
July
|
|
|
(0.50 |
%) |
August
|
|
|
(6.97 |
%) |
September
|
|
|
(11.71 |
%) |
October
|
|
|
(8.46 |
%) |
November
|
|
|
4.73 |
% |
December
|
|
|
(5.21 |
%) |
Annual
Rate of Return (since inception through December 31,
2006)
|
|
|
(23.03 |
%) |
*
Partial from April 10, 2006.
Month
|
|
Rates
of Return For
the Year 2007
|
|
January
|
|
|
(6.55 |
%) |
February
|
|
|
5.63 |
% |
March
|
|
|
4.61 |
% |
April
|
|
|
(4.26 |
%) |
May
|
|
|
(4.91 |
%) |
June
|
|
|
9.06 |
% |
July
|
|
|
10.57 |
% |
August
|
|
|
(4.95 |
%) |
September
|
|
|
12.11 |
% |
October
|
|
|
16.98 |
% |
November
|
|
|
(4.82 |
%) |
December
|
|
|
8.67 |
% |
Annual
Rate of Return (through December 31, 2007)
|
|
|
46.17 |
% |
COMPOSITE
PERFORMANCE DATA FOR US12OF
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Month
|
|
Rates
of Return For
the Year 2007
|
|
December*
|
|
|
8.46 |
% |
Annual
Rate of Return (through December 31, 2007)
|
|
|
8.46 |
% |
*
Partial from December 6, 2007.
Draw-down:
Losses experienced over a specified period. Draw-down is measured
on the basis
of monthly returns only and does not reflect intra-month
figures.
Worst
Monthly Percentage Draw-down: The largest single month loss sustained
since
inception of trading.
Worst
Peak-to-Valley Draw-down: The largest percentage decline in the NAV
per unit
over the history of the fund. This need not be a continuous decline,
but can be
a series of positive and negative returns where the negative returns
are larger
than the positive returns. Worst Peak-to-Valley Draw-down represents
the greatest percentage decline from any month-end NAV per unit that
occurs
without such month-end NAV per unit being equaled or exceeded as
of a subsequent
month-end. For example, if the NAV per unit declined by $1 in each
of January
and February, increased by $1 in March and declined again by $2 in
April, a
“peak-to-trough drawdown” analysis conducted as of the end of April would
consider that “drawdown” to be still continuing and to be $3 in amount, whereas
if the NAV per unit had increased by $2 in March, the January-February
drawdown
would have ended as of the end of February at the $2 level.
Nicholas
Gerber, the president and CEO of the General Partner, ran the Marc
Stevens
Futures Index Fund over 10 years ago. This fund combined commodity
futures with
equity stock index futures. It was a very small private offering,
which had
under $1 million in assets. The Marc Stevens Futures Index Fund was
a commodity
pool and Mr. Gerber was the CPO. Ameristock Corporation is an affiliate
of the
General Partner and it is a California-based registered investment
advisor
registered under the Investment Advisers Act of 1940, as amended
(the "Advisers
Act") that has been sponsoring and providing portfolio management
services to
mutual funds since 1995. Ameristock Corporation is the investment
adviser to the
Ameristock Mutual Fund, Inc., a mutual fund registered under the
Investment
Company Act of 1940, as amended (the "1940 Act") that focuses on
large cap U.S.
equities that has approximately $425 million in assets as of December
31, 2007.
Ameristock Corporation is also the investment advisor to the Ameristock
ETF
Trust, an open-end management investment company registered under
the 1940 Act
that seeks investment results that correspond to the performance
of U.S.
Treasury indices owned and compiled by Ryan Holdings LLC and Ryan
ALM,
Inc.
Investments
The
General Partner applies substantially all of USNG’s assets toward trading
in Futures Contracts and Other Natural Gas Related Investments, Treasuries,
cash and/or cash equivalents. The General Partner has sole authority
to
determine the percentage of assets that are:
|
·
|
held
on deposit with the futures commission merchant or other
custodian,
|
|
·
|
used
for other investments, and
|
|
·
|
held
in bank accounts to pay current obligations and as
reserves.
|
The
General Partner deposits substantially all of USNG’s net assets with the
Custodian or other custodian. When USNG purchases a Futures Contract
and certain
exchange traded Other Natural Gas Related Investments, USNG is also required
to
deposit with the futures commission merchant on behalf of the exchange a
portion of the value of the contract or other interest as security to
ensure
payment for the obligation under natural gas at maturity. This deposit is
known as “margin.” USNG invests the remainder of its assets equal to the
difference between the margin deposited and the face value of the Futures
Contract in Treasuries, cash and/or cash equivalents.
The
General Partner believes that all entities that hold or trade USNG’s assets are
based in the United States and are subject to United States
regulations.
Approximately
5% to 10% of USNG’s assets have normally been committed as margin
for Futures Contracts. However, from time to time, the percentage of assets
committed as margin may be substantially more, or less, than such range.
The
General Partner invests the balance of USNG’s assets not invested in natural gas
interests or held in margin as reserves to be available for changes in
margin.
All interest income is used for USNG’s benefit.
The
futures commission merchant, a government agency or a commodity exchange
could
increase margins applicable to USNG to hold trading positions at any
time.
Moreover, margin is merely a security deposit and has no bearing on the
profit
or loss potential for any positions taken.
USNG’s
assets are held in segregation pursuant to the CEA and CFTC
regulations.
The
Commodity Interest
Markets
General
The CEA
governs the regulation of commodity interest transactions, markets and
intermediaries. In December 2000, the CEA was amended by the Commodity
Futures
Modernization Act of 2000 (the "CFMA"), which substantially revised the
regulatory framework governing certain commodity interest transactions
and the
markets on which they trade. The CEA, as amended by the CFMA, now provides
for
varying degrees of regulation of commodity interest transactions depending
upon
the variables of the transaction. In general, these variables include
(1) the
type of instrument being traded (e.g., contracts for future delivery,
options,
swaps or spot contracts), (2) the type of commodity underlying the instrument
(distinctions are made between instruments based on agricultural commodities,
energy and metals commodities and financial commodities), (3) the nature
of the
parties to the transaction (retail, eligible contract participant, or
eligible
commercial entity), (4) whether the transaction is entered into on a
principal-to-principal or intermediated basis, (5) the type of market
on which
the transaction occurs, and (6) whether the transaction is subject to
clearing
through a clearing organization. Information regarding commodity interest
transactions, markets and intermediaries, and their associated regulatory
environment, is provided below.
Futures
Contracts
A
futures
contract such as a Futures Contract is a standardized contract traded
on, or
subject to the rules of, an exchange that calls for the future delivery
of a
specified quantity and type of a commodity at a specified time and place.
Futures contracts are traded on a wide variety of commodities, including
agricultural products, bonds, stock indices, interest rates, currencies,
energy
and metals. The size and terms of futures contracts on a particular commodity
are identical and are not subject to any negotiation, other than with
respect to
price and the number of contracts traded between the buyer and
seller.
The
contractual obligations of a buyer or seller may generally be satisfied
by
taking or making physical delivery of the underlying commodity or by making
an offsetting sale or purchase of an identical futures contract on the
same or
linked exchange before the designated date of delivery. The difference
between
the price at which the futures contract is purchased or sold and the
price paid
for the offsetting sale or purchase, after allowance for brokerage commissions,
constitutes the profit or loss to the trader. Some futures contracts,
such as
stock index contracts, settle in cash (reflecting the difference between
the
contract purchase/sale price and the contract settlement price) rather
than by
delivery of the underlying commodity.
In
market
terminology, a trader who purchases a futures contract is long in the
market and
a trader who sells a futures contract is short in the market. Before
a trader
closes out his long or short position by an offsetting sale or purchase,
his
outstanding contracts are known as open trades or open positions. The
aggregate
amount of open positions held by traders in a particular contract is
referred to
as the open interest in such contract.
Forward
Contracts
A
forward
contract is a contractual obligation to purchase or sell a specified
quantity of
a commodity at or before a specified date in the future at a specified
price
and, therefore, is economically similar to a futures contract. Unlike
futures
contracts, however, forward contracts are typically traded in the
over-the-counter markets and are not standardized contracts. Forward
contracts
for a given commodity are generally available for various amounts and
maturities
and are subject to individual negotiation between the parties involved.
Moreover, generally there is no direct means of offsetting or closing
out a
forward contract by taking an offsetting position as one would a futures
contract on a U.S. exchange. If a trader desires to close out a forward
contract
position, he generally will establish an opposite position in the contract
but
will settle and recognize the profit or loss on both positions simultaneously
on
the delivery date. Thus, unlike in the futures contract market where
a trader
who has offset positions will recognize profit or loss immediately, in
the
forward market a trader with a position that has been offset at a profit
will
generally not receive such profit until the delivery date, and likewise
a trader
with a position that has been offset at a loss will generally not have
to pay
money until the delivery date. In recent years, however, the terms of
forward
contracts have become more standardized, and in some instances such contracts
now provide a right of offset or cash settlement as an alternative to
making or
taking delivery of the underlying commodity.
The
forward markets provide what has typically been a
highly liquid market for foreign exchange trading, and in certain cases
the
prices quoted for foreign exchange forward contracts may be more favorable
than
the prices for foreign exchange futures contracts traded on U.S. exchanges.
The
forward markets are largely unregulated. Forward contracts are, in general,
not
cleared or guaranteed by a third party. Commercial banks participating
in
trading foreign exchange forward contracts often do not require margin
deposits,
but rely upon internal credit limitations and their judgments regarding
the
creditworthiness of their counterparties. In recent years, however, many
over-the-counter market participants in foreign exchange trading have
begun to
require that their counterparties post margin.
Further,
as the result of the CFMA, over-the-counter derivative instruments
such as
forward contracts and swap agreements (and options on forwards and
physical
commodities) may begin to be traded on lightly-regulated exchanges
or electronic
trading platforms that may, but are not required to, provide for clearing
facilities. Exchanges and electronic trading platforms on which over-the-counter
instruments may be traded and the regulation and criteria for that
trading are
more fully described below under “Futures Exchanges and Clearing Organizations.”
Nonetheless, absent a clearing facility, USNG’s trading in foreign exchange and
other forward contracts is exposed to the creditworthiness of the counterparties
on the other side of the trade.
Options
on Futures
Contracts
Options
on futures contracts are standardized contracts traded on an exchange.
An option
on a futures contract gives the buyer of the option the right, but not the
obligation, to take a position at a specified price (the striking, strike,
or
exercise price) in the underlying futures contract or underlying interest.
The
buyer of a call option acquires the right, but not the obligation, to
purchase
or take a long position in the underlying interest, and the buyer of
a put
option acquires the right, but not the obligation, to sell or take a
short
position in the underlying interest.
The
seller, or writer, of an option is obligated to take a position in the
underlying interest at a specified price opposite to the option buyer
if the
option is exercised. Thus, the seller of a call option must stand ready
to take
a short position in the underlying interest at the strike price if the
buyer
should exercise the option. The seller of a put option, on the other
hand, must
stand ready to take a long position in the underlying interest at the
strike
price.
A
call
option is said to be in-the-money if the strike price is below current
market
levels and out-of-the-money if the strike price is above current market
levels.
Conversely, a put option is said to be in-the-money if the strike price
is above
the current market levels and out-of-the-money if the strike price is
below
current market levels.
Options
have limited life spans, usually tied to the delivery or settlement date
of the
underlying interest. Some options, however, expire significantly in advance
of
such date. The purchase price of an option is referred to as its premium,
which
consists of its intrinsic value (which is related to the underlying market
value) plus its time value. As an option nears its expiration date, the
time
value shrinks and the market and intrinsic values move into parity. An
option
that is out-of-the-money and not offset by the time it expires becomes
worthless. On certain exchanges, in-the-money options are automatically
exercised on their expiration date, but on others unexercised options
simply
become worthless after their expiration date.
Regardless
of how much the market swings, the most an option buyer can lose is the
option
premium. The option buyer deposits his premium with his broker, and the
money
goes to the option seller. Option sellers, on the other hand, face risks
similar
to participants in the futures markets. For example, since the seller
of a call
option is assigned a short futures position if the option is exercised,
his risk
is the same as someone who initially sold a futures contract. Because
no one can
predict exactly how the market will move, the option seller posts margin
to
demonstrate his ability to meet any potential contractual
obligations.
Options
on Forward Contracts or
Commodities
Options
on forward contracts or commodities operate in a manner similar to
options on
futures contracts. An option on a forward contract or commodity gives
the buyer
of the option the right, but not the obligation, to take a position
at a
specified price in the underlying forward contract or commodity.
However,
similar to forward contracts, options on forward contracts or on
commodities are
individually negotiated contracts between counterparties and are
typically
traded in the over-the-counter market. Therefore, options on forward
contracts
and physical commodities possess many of the same characteristics
of forward
contracts with respect to offsetting positions and credit risk that
are
described above.
Swap
Contracts
Swap
transactions generally involve contracts between two parties to exchange
a
stream of payments computed by reference to a notional amount and
the price of
the asset that is the subject of the swap. Swap contracts are principally
traded
off-exchange, although recently, as a result of regulatory changes
enacted as
part of the CFMA, certain swap contracts are now being traded in
electronic
trading facilities and cleared through clearing organizations.
Swaps
are
usually entered into on a net basis, that is, the two payment streams
are netted
out in a cash settlement on the payment date or dates specified in
the
agreement, with the parties receiving or paying, as the case may
be, only the
net amount of the two payments. Swaps do not generally involve the
delivery of
underlying assets or principal. Accordingly, the risk of loss with
respect to
swaps is generally limited to the net amount of payments that the
party is
contractually obligated to make. In some swap transactions one or
both parties
may require collateral deposits from the counterparty to support that
counterparty’s obligation under the swap agreement. If the counterparty to such
a swap defaults, the risk of loss consists of the net amount of payments
that
the party is contractually entitled to receive less any collateral deposits
it is holding.
Participants
The
two
broad classes of persons who trade commodities are hedgors and speculators.
Hedgors include financial institutions that manage or deal in interest
rate-sensitive instruments, foreign currencies or stock portfolios,
and
commercial market participants, such as farmers and manufacturers,
that market
or process commodities. Hedging is a protective procedure designed
to lock in
profits that could otherwise be lost due to an adverse movement in
the
underlying commodity, for example, the adverse price movement between
the time a
merchandiser or processor enters into a contract to buy or sell a
raw or
processed commodity at a certain price and the time he must perform
the
contract. In such a case, at the time the hedgor contracts to physically
sell
the commodity at a future date he will simultaneously buy a futures
or forward
contract for the necessary equivalent quantity of the commodity.
At the time for
performance of the contract, the hedgor may accept delivery under
his futures
contract and sell the commodity quantity as required by his physical
contract or
he may buy the actual commodity, sell if under the physical contract
and close
out his position by making an offsetting sale of a futures
contract.
Unlike
the hedgor, the speculator generally expects neither to make nor take
delivery
of the underlying commodity. Instead, the speculator risks his capital
with the
hope of making profits from price fluctuations in the commodities.
The
speculator is, in effect, the risk bearer who assumes the risks that
the hedgor
seeks to avoid. Speculators rarely make or take delivery of the underlying
commodity; rather they attempt to close out their positions prior to
the
delivery date. Because the speculator may take either a long or short
position
in commodities, it is possible for him to make profits or incur losses
regardless of whether prices go up or down.
Futures
Exchanges and Clearing
Organizations
Futures
exchanges provide centralized market facilities in which multiple
persons have
the ability to execute or trade contracts by accepting bids and offers
from
multiple participants. Futures exchanges may provide for execution
of trades at
a physical location utilizing trading pits and/or may provide for
trading to be
done electronically through computerized matching of bids and offers
pursuant to
various algorithms. Members of a particular exchange and the trades
executed on
such exchange are subject to the rules of that exchange. Futures
exchanges and
clearing organizations are given reasonable latitude in promulgating
rules and
regulations to control and regulate their members. Examples of regulations
by
exchanges and clearing organizations include the establishment of
initial margin
levels, rules regarding trading practices, contract specifications,
speculative
position limits, daily price fluctuation limits, and execution and
clearing
fees.
U.S.
Futures
Exchanges
Futures
exchanges in the United States are subject to varying degrees of
regulation by
the CFTC based on their designation as one of the following: a designated
contract market, a derivatives transaction execution facility, an
exempt board
of trade or an electronic trading facility.
A
designated contract market is the most highly regulated level of
futures
exchange. Designated contract markets may offer products to retail
customers on
an unrestricted basis. To be designated as a contract market, the
exchange must
demonstrate that it satisfies specified general criteria for designation,
such
as having the ability to prevent market manipulation, rules and procedures
to
ensure fair and equitable trading, position limits, dispute resolution
procedures, minimization of conflicts of interest and protection
of market
participants. Among the principal designated contract markets in
the United
States are the Chicago Board of Trade, the Chicago Mercantile Exchange
and the
NYMEX. Each of the designated contract markets in the United States
must provide
for the clearance and settlement of transactions with a CFTC-registered
derivatives clearing organization.
A
derivatives transaction execution facility (a "DTEF"), is a new type
of exchange
that is subject to fewer regulatory requirements than a designated
contract
market but is subject to both commodity interest and participant
limitations.
DTEFs limit access to eligible traders that qualify as either eligible
contract
participants or eligible commercial entities for futures and option
contracts on
commodities that have a nearly inexhaustible deliverable supply,
are highly
unlikely to be susceptible to the threat of manipulation, or have
no cash
market, security futures products, and futures and option contracts
on
commodities that the CFTC may determine, on a case-by-case basis,
are highly
unlikely to be susceptible to the threat of manipulation. In addition,
certain
commodity interests excluded or exempt from the CEA, such as swaps,
etc. may be
traded on a DTEF. There is no requirement that a DTEF use a clearing
organization, except with respect to trading in security futures
contracts, in
which case the clearing organization must be a securities clearing
agency.
However, if futures contracts and options on futures contracts on
a DTEF are
cleared, then it must be through a CFTC-registered derivatives clearing
organization, except that some excluded or exempt commodities traded
on a DTEF
may be cleared through a clearing organization other than one registered
with
the CFTC.
An
exempt
board of trade is also a newly designated form of exchange. An exempt
board of
trade is substantially unregulated, subject only to CFTC anti-fraud
and
anti-manipulation authority. An exempt board of trade is permitted
to trade
futures contracts and options on futures contracts provided that the
underlying
commodity is not a security or securities index and has an inexhaustible
deliverable supply or no cash market. All traders on an exempt board
of trade
must qualify as eligible contract participants. Contracts deemed eligible
to be
traded on an exempt board of trade include contracts on interest rates,
exchange
rates, currencies, credit risks or measures, debt instruments, measures
of
inflation, or other macroeconomic indices or measures. There is no
requirement
that an exempt board of trade use a clearing organization. However,
if contracts
on an exempt board of trade are cleared, then it must be through a
CFTC-registered derivatives clearing organization. A board of trade
electing to
operate as an exempt board of trade must file a written notification
with the
CFTC.
An
electronic trading facility is a new form of exchange that operates
by means of
an electronic or telecommunications network and maintains an automated
audit
trail of bids, offers, and the matching of orders or the execution
of
transactions on the electronic trading facility. The CEA does not apply
to, and
the CFTC has no jurisdiction over, transactions on an electronic trading
facility in certain excluded commodities that are entered into between
principals that qualify as eligible contract participants, subject
only to CFTC
anti-fraud and anti-manipulation
authority. In general, excluded commodities include interest rates,
currencies,
securities, securities indices or other financial, economic or commercial
indices or measures.
The
General Partner intends to monitor the development of and opportunities
and
risks presented by the new less-regulated exchanges and exempt boards
and may,
in the future, allocate a percentage of USNG’s assets to trading in products on
these exchanges. Provided USNG maintains assets exceeding $5 million,
USNG would
qualify as an eligible contract participant and thus would be able
to trade on
such exchanges.
Non-U.S.
Futures
Exchanges
Non-U.S.
futures exchanges differ in certain respects from their U.S. counterparts.
Importantly, non-U.S. futures exchanges are not subject to regulation
by the
CFTC, but rather are regulated by their home country regulator. In
contrast to
U.S. designated contract markets, some non-U.S. exchanges are principals’
markets, where trades remain the liability of the traders involved,
and the
exchange or an affiliated clearing organization, if any, does not become
substituted for any party. Due to the absence of a clearing system,
such
exchanges are significantly more susceptible to disruptions. Further,
participants in such markets must often satisfy themselves as to the
individual
creditworthiness of each entity with which they enter into a trade.
Trading on
non-U.S. exchanges is often in the currency of the exchange’s home jurisdiction.
Consequently, USNG is subject to the additional risk of fluctuations
in the
exchange rate between such currencies and U.S. dollars and the possibility
that
exchange controls could be imposed in the future. Trading on non-U.S.
exchanges
may differ from trading on U.S. exchanges in a variety of ways and,
accordingly,
may subject USNG to additional risks.
Accountability
Levels and Position
Limits
The
CFTC
and U.S. designated contract markets have established accountability
levels and
position limits on the maximum net long or net short futures contracts in
commodity interests that any person or group of persons under common
trading control (other than a hedgor, which USNG is not) may hold,
own or
control. Among the purposes of accountability levels and position limits
is to
prevent a corner or squeeze on a market or undue influence on prices
by any
single trader or group of traders. The position limits currently established
by
the CFTC apply to certain agricultural commodity interests, such as
grains
(oats, barley, and flaxseed), soybeans, corn, wheat, cotton, eggs,
rye, and
potatoes, but not to interests in energy products. In addition, U.S.
exchanges
may set accountability levels and position limits for all commodity
interests
traded on that exchange. For example, the current accountability level
for
investments at any one time in the Benchmark Futures Contract is
12,000 contracts. The NYMEX also imposes position limits on contracts
held in
the last few days of trading in the near month contract to expire.
Certain
exchanges or clearing organizations also set limits on the total net
positions
that may be held by a clearing broker. In general, no position limits
are in
effect in forward or other over-the-counter contract trading or in
trading on
non-U.S. futures exchanges, although the principals with which USNG
and the
clearing brokers may trade in such markets may impose such limits as
a matter of
credit policy. For purposes of determining accountability levels and
position
limits USNG’s commodity interest positions will not be attributable to investors
in their own commodity interest trading.
Daily
Price
Limits
Most
U.S.
futures exchanges (but generally not non-U.S. exchanges) limit the amount
of fluctuation in some futures contract or options on futures contract
prices during a single trading period by regulations. These regulations
specify
what are referred to as daily price fluctuation limits or more commonly,
daily
limits. The daily limits establish the maximum amount that the price
of a
futures or options on futures contract may vary either up or down from
the
previous day’s settlement price. Once the daily limit has been reached in a
particular futures or options on futures contract, no trades may be
made at a
price beyond the limit. Positions in the futures or options contract
may then be
taken or liquidated, if at all, only at inordinate expense or if traders
are
willing to effect trades at or within the limit during the period for
trading on
such day. Because the daily limit rule governs price movement only
for a
particular trading day, it does not limit losses and may in fact substantially
increase losses because it may prevent the liquidation of unfavorable
positions.
Futures contract prices have occasionally moved to the daily limit
for several
consecutive trading days, thus preventing prompt liquidation of positions
and
subjecting the trader to substantial losses for those days. The concept
of daily
price limits is not relevant to over-the-counter contracts, including
forwards
and swaps, and thus such limits are not imposed by banks and others
who deal in
those markets.
In
contrast, the NYMEX does not impose daily limits but rather limits
the amount of
price fluctuation for Futures Contracts. For example, the NYMEX imposes a
$3.00 per mmBtu ($30,000 per contract) price fluctuation limit for the
Benchmark Futures Contracts. This limit is initially based off of the
previous
trading day’s settlement price. If any Benchmark Futures Contract is
traded, bid, or offered at the limit for five minutes, trading is halted
for
five minutes. When trading resumes it begins at the point where the
limit was
imposed and the limit is reset to be $3.00 per mmBtu in either direction
of that
point. If another halt were triggered, the market would continue to
be expanded
by $3.00 per mmBtu in either direction after each successive five-minute
trading
halt. There is no maximum price fluctuation limit during any one trading
session.
Commodity
Prices
Commodity
prices are volatile and, although ultimately determined by the interaction
of
supply and demand, are subject to many other influences, including
the
psychology of the marketplace and speculative assessments of future
world and
economic events. Political climate, interest rates, treaties, balance
of
payments, exchange controls and other governmental interventions as
well as
numerous other variables affect the commodity markets, and even with
comparatively complete information it is impossible for any trader
to predict
reliably commodity prices.
Regulation
Futures
exchanges in the United States are subject to varying degrees of regulation
under the CEA depending on whether such exchange is a designated contract
market, DTEF, exempt board of trade or electronic trading facility.
Derivatives
clearing organizations are also subject to the CEA and CFTC regulation.
The CFTC
is the governmental agency charged with responsibility for regulation
of futures
exchanges and commodity interest trading conducted on those exchanges.
The
CFTC’s function is to implement the CEA’s objectives of preventing price
manipulation and excessive speculation and promoting orderly and efficient
commodity interest markets. In addition, the various exchanges and
clearing
organizations themselves exercise regulatory and supervisory authority
over
their member firms.
The
CFTC
possesses exclusive jurisdiction to regulate the activities of CPOs
and
commodity trading advisors and has adopted regulations with respect
to the
activities of those persons and/or entities. Under the CEA, a registered
CPO,
such as the General Partner, is required to make annual filings with
the CFTC
describing its organization, capital structure, management and controlling
persons. In addition, the CEA authorizes the CFTC to require and review
books
and records of, and documents prepared by, registered CPOs. Pursuant
to this
authority, the CFTC requires CPOs to keep accurate, current and orderly
records
for each pool that they operate. The CFTC may suspend the registration
of a CPO
(1) if the CFTC finds that the operator’s trading practices tend to disrupt
orderly market conditions, (2) if any controlling person of the operator
is
subject to an order of the CFTC denying such person trading privileges
on any
exchange, and (3) in certain other circumstances. Suspension, restriction
or
termination of the General Partner’s registration as a CPO would prevent it,
until that registration were to be reinstated, from managing USNG,
and might
result in the termination of USNG. USNG itself is not required to be
registered with the CFTC in any capacity.
The
CEA
gives the CFTC similar authority with respect to the activities of
commodity
trading advisors. If a trading advisor’s commodity trading advisor registration
were to be terminated, restricted or suspended, the trading advisor
would be
unable, until the registration were to be reinstated, to render trading
advice
to USNG.
The
CEA
requires all futures commission merchants, such as USNG’s clearing brokers, to
meet and maintain specified fitness and financial requirements, to
segregate
customer funds from proprietary funds and account separately for all
customers’
funds and positions, and to maintain specified books and records open
to
inspection by the staff of the CFTC. The CFTC has similar authority
over
introducing brokers, or persons who solicit or accept orders for commodity
interest trades but who do not accept margin deposits for the execution
of
trades. The CEA authorizes the CFTC to regulate trading by futures
commission
merchants and by their officers and directors, permits the CFTC to
require
action by exchanges in the event of market emergencies, and establishes
an
administrative procedure under which customers may institute complaints
for
damages arising from alleged violations of the CEA. The CEA also gives
the
states powers to enforce its provisions and the regulations of the
CFTC.
Pursuant
to authority in the CEA, the NFA has been formed and registered with
the CFTC as
a registered futures association. At the present time, the NFA is the
only
self-regulatory organization for commodity interest professionals,
other than
futures exchanges. The CFTC has delegated to the NFA responsibility
for the
registration of commodity trading advisors, CPOs, futures commission
merchants,
introducing brokers, and their respective associated persons and floor
brokers.
The General Partner, each trading advisor, the selling agents and the
clearing
brokers are members of the NFA. As such, they are subject to NFA standards
relating to fair trade practices, financial condition and consumer
protection.
USNG itself is not required to become a member of the NFA. As the
self-regulatory body of the commodity interest industry, the NFA promulgates
rules governing the conduct of professionals and disciplines those
professionals
that do not comply with these rules. The NFA also arbitrates disputes
between
members and their customers and conducts registration and fitness screening
of
applicants for membership and audits of its existing members.
The
regulations of the CFTC and the NFA prohibit any representation by
a person
registered with the CFTC or by any member of the NFA, that registration
with the
CFTC, or membership in the NFA, in any respect indicates that the CFTC
or the
NFA, as the case may be, has approved or endorsed that person or that
person’s
trading program or objectives. The registrations and memberships of
the parties
described in this summary must not be considered as constituting any
such
approval or endorsement. Likewise, no futures exchange has given or
will give
any similar approval or endorsement.
The
regulation of commodity interest trading in the United States and other
countries is an evolving area of the law. The various statements made
in this
summary are subject to modification by legislative action and changes
in the
rules and regulations of the CFTC, the NFA, the futures exchanges,
clearing
organizations and other regulatory bodies.
The
function of the CFTC is to implement the objectives of the CEA of preventing
price manipulation and other disruptions to market integrity, avoiding
systemic
risk, preventing fraud and promoting innovation, competition and financial
integrity of transactions. As mentioned above, this regulation, among
other
things, provides that the trading of commodity interest contracts generally
must
be upon exchanges designated as contract markets or DTEFs and that
all trading
on those exchanges must be done by or through exchange members. Under
the CFMA,
commodity interest trading in some commodities between sophisticated
persons may
be traded on a trading facility not regulated by the CFTC. As a general
matter,
trading in spot contracts, forward contracts, options on forward contracts
or
commodities, or swap contracts between eligible contract participants
is not
within the jurisdiction of the CFTC and may therefore be effectively
unregulated. The trading advisors may engage in those transactions
on behalf of
USNG in reliance on this exclusion from regulation.
In
general, the CFTC does not regulate the interbank and forward foreign
currency
markets with respect to transactions in contracts between certain sophisticated
counterparties such as USNG or between certain regulated institutions
and retail
investors. Although U.S. banks are regulated in various ways by the
Federal
Reserve Board, the Comptroller of the Currency and other U.S. federal
and state
banking officials, banking authorities do not regulate the forward
markets.
While
the
U.S. government does not currently impose any restrictions on the movements
of
currencies, it could choose to do so. The imposition or relaxation
of exchange
controls in various jurisdictions could significantly affect the market
for that
and other jurisdictions’ currencies. Trading in the interbank market also
exposes USNG to a risk of default since failure of a bank with which
USNG had
entered into a forward contract would likely result in a default and
thus
possibly substantial losses to USNG.
The
CFTC
is prohibited by statute from regulating trading on non-U.S. futures
exchanges
and markets. The CFTC, however, has adopted regulations relating to
the
marketing of non-U.S. futures contracts in the United States. These
regulations
permit certain contracts traded on non-U.S. exchanges to be offered
and sold in
the United States.
Commodity
Margin
Brokerage
firms, such as USNG’s clearing brokers, carrying accounts for traders in
commodity interest contracts may not accept lower, and generally require
higher,
amounts of margin as a matter of policy to further protect themselves.
The
clearing brokers require USNG to make margin deposits equal to exchange
minimum
levels for all commodity interest contracts. This requirement may be
altered
from time to time in the clearing brokers’ discretion.
Trading
in the over-the-counter markets where no clearing facility is provided
generally
does not require margin but generally does require the extension of
credit
between counterparties.
When
a
trader purchases an option, there is no margin requirement; however,
the option
premium must be paid in full. When a trader sells an option, on the
other hand,
he or she is required to deposit margin in an amount determined by
the margin
requirements established for the underlying interest and, in addition,
an amount
substantially equal to the current premium for the option. The margin
requirements imposed on the selling of options, although adjusted to
reflect the
probability that out-of-the-money options will not be exercised, can
in fact be
higher than those imposed in dealing in the futures markets directly.
Complicated margin requirements apply to spreads and conversions, which
are
complex trading strategies in which a trader acquires a mixture of
options
positions and positions in the underlying interest.
Margin
requirements are computed each day by a trader’s clearing broker. When the
market value of a particular open commodity interest position changes
to a point
where the margin on deposit does not satisfy maintenance margin requirements,
a
margin call is made by the broker. If the margin call is not met within
a
reasonable time, the broker may close out the trader’s position. With respect to
USNG’s trading, USNG (and not its investors personally) is subject to margin
calls.
Finally,
many major U.S. exchanges have passed certain cross margining arrangements
involving procedures pursuant to which the futures and options positions
held in
an account would, in the case of some accounts, be aggregated and margin
requirements would be assessed on a portfolio basis, measuring the
total risk of
the combined positions.
SEC
Reports
USNG
makes available, free of charge, on its website, its Annual Reports
on
Form 10-K, its Quarterly Reports on Form 10-Q, its Current Reports on
Form 8-K and amendments to these reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after these forms are filed with, or furnished to, the
SEC.
The
risk
factors should be read in connection with the other information
included in this
annual report on Form 10-K, including Management’s Discussion and Analysis of
Financial Condition and Results of Operations and USNG’s condensed financial
statements and the related notes.
Risks
Associated With Investing Directly or Indirectly in Natural Gas
Investing
in Natural Gas Interests subjects USNG to the risks of the natural
gas industry
and this could result in large fluctuations in the price of USNG’s
units.
USNG
is
subject to the risks and hazards of the natural gas industry
because it invests
in Natural Gas Interests. The risks and hazards that are inherent in the natural
gas industry may cause the price of natural gas to widely fluctuate.
If the
changes in percentage terms of USNG’s units accurately track the percentage
changes in the Benchmark Futures Contract or the spot price of
natural gas, then
the price of its units may also fluctuate. The exploration for,
and production
of, natural gas is an uncertain process with many risks. The
cost of drilling,
completing and operating wells for natural gas is often uncertain,
and a number
of factors can delay or prevent drilling operations or production,
including:
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unexpected
drilling conditions;
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pressure
or irregularities in formations;
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equipment
failures or repairs;
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fires
or other accidents;
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adverse
weather conditions;
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pipeline
ruptures or spills; and
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shortages
or delays in the availability of drilling rigs and
the delivery of
equipment.
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Natural
gas transmission, distribution, gathering, and processing activities
involve
numerous risks that may affect the price of natural gas.
There
are
a variety of hazards inherent in natural gas transmission, distribution,
gathering, and processing, such as leaks, explosions, pollution,
release of
toxic substances, adverse weather conditions (such as hurricanes
and flooding),
pipeline failure, abnormal pressures, uncontrollable flows of
natural gas,
scheduled and unscheduled maintenance, physical damage to the
gathering or
transportation system, and other hazards which could affect the
price of natural
gas. To the extent these hazards limit the supply or delivery
of natural gas,
natural gas prices will increase.
The
price of natural gas may fluctuate on a seasonal and quarterly
basis and this
would result in fluctuations in the price of USNG’s units.
Natural
gas prices fluctuate seasonally. For example, in some parts of
the United States
and other markets, the natural gas demand for power peaks during
the cold winter
months, with market prices peaking at that time. As a result,
in the future, the
overall price of natural gas may fluctuate substantially on a
seasonal and
quarterly basis and thus make consecutive period to period comparisons
less
relevant.
Natural
gas transmission and storage operations are subject to government
regulations
and rate proceedings which could have an impact on the price
of natural
gas.
Natural
gas transmission and storage operations in North America are
subject to
regulation and oversight by the Federal Energy Regulatory Commission,
various
state regulatory agencies, and Canadian regulatory authorities.
These regulatory
bodies have the authority to effect rate settlements on natural
gas storage,
transmission and distribution services. As a consequence, the
price of natural
gas may be affected by a change in the rate settlements effected
by one or more
of these regulatory bodies.
The
price of USNG’s units may be influenced by factors such as the short-term
supply
and demand for natural gas and the short-term supply and demand
for USNG’s
units. This may cause the units to trade at a price that is
above or below
USNG’s NAV per unit. Accordingly, changes in the price of units
may
substantially vary from the changes in the spot price of natural
gas. If this
variation occurs, then investors may not be able to effectively
use USNG as a
way to hedge against natural gas-related losses or as a way
to indirectly invest
in natural gas.
While
it
is expected that the trading prices of the units will fluctuate
in accordance
with the changes in USNG’s NAV, the prices of units may also be influenced by
other factors, including the short-term supply and demand for
natural gas and
the units. There is no guarantee that the units will not trade
at appreciable
discounts from, and/or premiums to, USNG’s NAV. This could cause the changes in
the price of the units to substantially vary from the changes
in the price of
natural gas. This may be harmful to investors because if changes
in the price of
units vary substantially from changes in the Benchmark Futures
Contract or the
spot price of natural gas, then investors may not be able to
effectively use
USNG as a way to hedge the risk of losses in their natural
gas-related
transactions or as a way to indirectly invest in natural
gas.
Changes
in USNG’s NAV may not correlate with changes in the price of the Benchmark
Futures Contract. If this were to occur, investors may not be able
to
effectively use USNG as a way to hedge against natural gas-related
losses or as
a way to indirectly invest in natural gas.
The
General Partner endeavors to invest USNG’s assets as fully as possible in
short-term Futures Contracts and Other Natural Gas-Related Investments
so that
the changes in percentage terms in the NAV closely correlates with
the changes
in percentage terms in the price of the Benchmark Futures Contract.
However,
changes in USNG’s NAV may not correlate with the changes in the price of the
Benchmark Futures Contract for several reasons as set forth below:
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USNG
(i) may not be able to buy/sell the exact amount of Futures
Contracts and
Other Natural Gas-Related Investments to have a perfect
correlation with
NAV; (ii) may not always be able to buy and sell Futures
Contracts or
Other Natural Gas-Related Investments at the market price;
(iii) may not
experience a perfect correlation between the spot price
of natural gas and
the underlying investments in Futures Contracts, Other
Natural Gas-Related
Investments and Treasuries, cash and cash equivalents;
and (iv) is
required to pay fees, including the brokerage fees and
the management fee,
which will have an effect on the
correlation.
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Short-term
supply and demand for natural gas may cause the changes
in the market
price of the Benchmark Futures Contract to vary from
changes in USNG’s NAV
if USNG has fully invested in Futures Contracts that
do not reflect such
supply and demand and it is unable to replace such contracts
with Futures
Contracts that do reflect such supply and demand. In
addition, there are
also technical differences between the two markets, e.g.,
one is a physical
market while the other is a futures market traded on
exchanges, that may
cause variations between the spot price of natural gas
and the prices of
related futures contracts.
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USNG
plans to buy only as many Futures Contracts and Other
Natural Gas-Related
Investments that it can to get the changes in percentage
terms of the NAV
as close as possible to the changes in percentage terms
in the price of
the Benchmark Futures Contract. The remainder of its
assets will be
invested in Treasuries, cash and cash equivalents and
will be used to
satisfy initial margin and additional margin requirements,
if any, and to
otherwise support its investments in Natural Gas Interests.
Investments in
Treasuries, cash and cash equivalents, both directly
and as margin, will
provide rates of return that will vary from changes in
the value of the
spot price of natural gas and the price of the Benchmark
Futures
Contract.
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In
addition, because USNG will incur certain expenses in
connection with its
investment activities, and will hold most of its assets
in more liquid
short-term securities for margin and other liquidity
purposes and for
redemptions that may be necessary on an ongoing basis,
the General Partner
will not be able to fully invest USNG’s assets in Futures Contracts or
Other Natural Gas-Related Investments and there cannot
be perfect
correlation between changes in USNG’s NAV and changes in the price of the
Benchmark Futures Contract.
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As
USNG grows, there may be more or less correlation. For
example, if USNG
only has enough money to buy three Benchmark Futures
Contracts and it
needs to buy four contracts to track the price of natural
gas then the
correlation will be lower, but if it buys 20,000 Benchmark
Futures
Contracts and it needs to buy 20,001 contracts then the
correlation will
be higher. At certain asset levels, USNG may be limited
in its ability to
purchase the Benchmark Futures Contract or other Futures
Contracts due to
accountability levels imposed by the relevant exchanges.
To the extent
that USNG invests in these other Futures Contracts or
Other Natural
Gas-Related Investments, the correlation with the Benchmark
Futures
Contract may be lower. If USNG is required to invest
in other Futures
Contracts and Other Natural Gas-Related Investments that
are less
correlated with the Benchmark Futures Contract, USNG
would likely invest
in over-the-counter contracts to increase the level of
correlation of
USNG’s assets. Over-the-counter contracts entail certain risks
described
below under “Over-the-Counter Contract
Risk.”
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USNG
may not be able to buy the exact number of Futures Contracts
and Other
Natural Gas-Related Investments to have a perfect correlation
with the
Benchmark Futures Contract if the purchase price of Futures
Contracts
required to be fully invested in such contracts is higher
than the
proceeds received for the sale of a Creation Basket on
the day the basket
was sold. In such case, USNG could not invest the entire
proceeds from the
purchase of the Creation Basket in such futures contracts
(for example,
assume USNG receives $4,000,000 for the sale of a Creation
Basket and
assume that the price of a Futures Contract for natural
gas is $59,950,
then USNG could only invest in only 66 Futures Contracts
with an aggregate
value of $3,956,700), USNG would be required to invest
a percentage of the
proceeds in Treasuries to be deposited as margin with
the futures
commission merchant through which the contract was purchased.
The
remainder of the purchase price for the Creation Basket
would remain
invested in Treasuries, cash and/or cash equivalents as determined
by
the General Partner from time to time based on factors
such as potential
calls for margin or anticipated redemptions. If the trading
market for
Futures Contracts is suspended or closed, USNG may not
be able to purchase
these investments at the last reported price for such
investments.
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If
changes in USNG’s NAV do not correlate with changes in the price of the
Benchmark Futures Contract, then investing in USNG may not be an
effective way
to hedge against natural gas-related losses or indirectly invest
in natural
gas.
The
Benchmark Futures Contract may not correlate with the price of
natural gas and
this could cause the changes in the price of the units to substantially
vary
from the changes in the spot price of natural gas. If this were
to occur, then
investors may not be able to effectively use USNG as a way to hedge
against
natural gas-related losses or as a way to indirectly invest in
natural
gas.
When
using the Benchmark Futures Contract as a strategy to track the
spot price of
natural gas, at best the correlation between changes in prices
of such Natural
Gas Interests and the delivery price of natural gas can be only
approximate. The
degree of imperfection of correlation depends upon circumstances
such as
variations in the speculative natural gas market, supply of and
demand for such
Natural Gas Interests and technical influences in futures trading.
If there is a
weak correlation between the Natural Gas Interests and the spot
price of natural
gas, then the price of units may not accurately track the spot
price of natural
gas and investors may not be able to effectively use USNG as a
way to hedge the
risk of losses in their natural gas-related transactions or as
a way to
indirectly invest in natural gas.
USNG
may experience a loss if it is required to sell Treasuries at a price
lower than
the price at which they were acquired.
The
value
of Treasuries generally moves inversely with movements in interest
rates. If
USNG is required to sell Treasuries at a price lower than the price
at which
they were acquired, USNG will experience a loss. This loss may
adversely impact
the price of the units and may decrease the correlation between
the price of the
units, the price of USNG’s Futures Contracts and Other Natural Gas-Related
Investments, and the delivery price of natural gas.
Certain
of USNG’s investments could be illiquid which could cause large losses
to
investors at any time or from time to time.
USNG
may
not always be able to liquidate its positions in its investments
at the desired
price. It is difficult to execute a trade at a specific price when
there is a
relatively small volume of buy and sell orders in a market. A market
disruption,
such as a foreign government taking political actions that disrupt
the market in
its currency, its natural gas production or exports, or in another
major export,
can also make it difficult to liquidate a position. Alternatively,
limits
imposed by futures exchanges or other regulatory organizations,
such as
accountability levels, position limits and price fluctuation limits,
may
contribute to a lack of liquidity with respect to some commodity
interests.
Unexpected
market illiquidity may cause major losses to investors at any time
or from time
to time. In addition, USNG does not intend at this time to establish
a credit
facility, which would provide an additional source of liquidity
and instead will
rely only on the Treasuries, cash and/or cash equivalents that
it holds. The
anticipated large value of the positions in Futures Contracts that
the General
Partner will acquire or enter into for USNG increases the risk
of illiquidity.
Other Natural Gas-Related Investments that USNG invests in, such
as negotiated
over-the-counter contracts, may have a greater likelihood of being
illiquid
since they are contracts between two parties that take into account
not only
market risk, but also the relative credit, tax, and settlement
risks under such
contracts. Such contracts also have limited transferability that
results from
such risks and from the contract’s express limitations.
Because
both Futures Contracts and Other Natural Gas-Related Investments
may be
illiquid, USNG’s Natural Gas Interests may be more difficult to liquidate at
favorable prices in periods of illiquid markets and losses may
be incurred
during the period in which positions are being liquidated.
If
the nature of hedgors and speculators in futures markets has shifted
such that
natural gas purchasers are the predominant hedgors in the market,
USNG might
have to reinvest at higher futures prices or choose Other Natural
Gas-Related
Investments.
The
changing nature of the hedgors and speculators in the natural gas
market will
influence whether futures prices are above or below the expected
future spot
price. In order to induce speculators to take the corresponding
long side of the
same futures contract, natural gas producers must generally be
willing to sell
futures contracts at prices that are below expected future spot
prices.
Conversely, if the predominant hedgors in the futures market are
the purchasers
of the natural gas who purchase futures contracts to hedge against
a rise in
prices, then speculators will only take the short side of the futures
contract
if the futures price is greater than the expected future spot price
of natural
gas. This can have significant implications for USNG when it is
time to reinvest
the proceeds from a maturing Futures Contract into a new Futures
Contract.
While
USNG does not intend to take physical delivery of natural gas under
Futures
Contracts, physical delivery under such contracts impacts the value
of the
contracts.
While
it
is not the current intention of USNG to take physical delivery
of natural gas
under its Futures Contracts, futures contracts are not required
to be
cash-settled and it is possible to take delivery under these contracts.
Storage
costs associated with purchasing natural gas could result in costs
and other
liabilities that could impact the value of Futures Contracts or
Other Natural
Gas-Related Investments. Storage costs include the time value of
money invested
in natural gas as a physical commodity plus the actual costs of
storing the
natural gas less any benefits from ownership of natural gas that
are not
obtained by the holder of a futures contract. In general, Futures
Contracts have
a one-month delay for contract delivery and the back month (the
back month is
any future delivery month other than the spot month) includes storage
costs. To
the extent that these storage costs change for natural gas while
USNG holds
Futures Contracts or Other Natural
Gas-Related Investments, the value of the Futures Contracts or
Other Natural
Gas-Related Investments, and therefore USNG’s NAV, may change as
well.
The
price relationship between the near month contract and the next
month contract
that compose the Benchmark Futures Contract will vary and may
impact both the
total return over time of USNG’s NAV, as well as the degree to which its total
return tracks other natural gas price indices’ total returns.
The
design of USNG’s Benchmark Futures Contract is such that every month it begins
by using the near month contract to expire until the near month
contract is
within two weeks of expiration, when it will use the next month
contract to
expire as its benchmark contract and keeps that contract as
its benchmark until
it becomes the near month contract and close to expiration.
In the event of a
natural gas futures market where near month contracts trade
at a higher price
than next month to expire contracts, a situation described
as “backwardation” in
the futures market, then absent the impact of the overall movement
in natural
gas prices the value of the benchmark contract would tend to
rise as it
approaches expiration. As a result the total return of the
Benchmark Futures
Contract would tend to track higher. Conversely, in the event
of a natural gas
futures market where near month contracts trade at a lower
price than next to
near month contracts, a situation described as “contango” in the futures market,
then absent the impact of the overall movement in natural gas
prices the value
of the benchmark contract would tend to decline as it approaches
expiration. As
a result the total return of the Benchmark Futures Contract
would tend to track
lower. When compared to total return of other price indices,
such as the spot
price of natural gas, the impact of backwardation and contango
may lead the
total return of USNG’s NAV to vary significantly. In the event of a prolonged
period of contango, and absent the impact of rising or falling
natural gas
prices, this could have a significant negative impact on USNG’s NAV and total
return.
Regulation
of the commodity interests and energy markets is extensive
and constantly
changing; future regulatory developments are impossible to
predict but may
significantly and adversely affect USNG.
The
regulation of commodity interest transactions in the United
States is a rapidly
changing area of law and is subject to ongoing modification
by governmental and
judicial action. In addition, various national governments
have expressed
concern regarding the disruptive effects of speculative trading
in the energy
markets and the need to regulate the derivatives markets in
general. The effect
of any future regulatory change on USNG is impossible to predict,
but could be
substantial and adverse.
Investing
in USNG for purposes of hedging may be subject to several risks
including the
possibility of losing the benefit of favorable market movement.
Participants
in the natural gas or in other industries may use USNG as a
vehicle to hedge the
risk of losses in their natural gas-related transactions. There
are several
risks in connection with using USNG as a hedging device. While
hedging can
provide protection against an adverse movement in market prices,
it can also
preclude a hedgor’s opportunity to benefit from a favorable market movement.
In
a hedging transaction, the hedgor may be concerned that the
hedged item will
increase in price, but must recognize the risk that the price
may instead
decline and if this happens he will have lost his opportunity
to profit from the
change in price because the hedging transaction will result
in a loss rather
than a gain. Thus, the hedgor foregoes the opportunity to profit
from favorable
price movements.
In
addition, if the hedge is not a perfect one, the hedgor can
lose on the hedging
transaction and not realize an offsetting gain in the value
of the underlying
item being hedged.
When
using futures contracts as a hedging technique, at best, the
correlation between
changes in prices of futures contracts and of the items being
hedged can be only
approximate. The degree of imperfection of correlation depends
upon
circumstances such as: variations in speculative markets, demand
for futures and
for natural gas products, technical influences in futures trading,
and
differences between anticipated energy costs being hedged and
the instruments
underlying the standard futures contracts available for trading.
Even a
well-conceived hedge may be unsuccessful to some degree because
of unexpected
market behavior as well as the expenses associated with creating
the
hedge.
In
addition, using an investment in USNG as a hedge for changes
in energy costs
(e.g., investing
in
natural gas, crude oil, gasoline, or other fuels, or electricity)
may not
correlate because changes in the spot price of natural gas may
vary from changes
in energy costs because the spot price of natural gas may not
be at the same
rate as changes in the price of other energy products and, in
any case, the
price of natural gas does not reflect the refining, transportation,
and other
costs that may impact the hedgor’s energy costs.
An
investment in USNG may provide little or no diversification
benefits. Thus, in a
declining market, USNG may have no gains to offset losses from
other
investments, and an investor may suffer losses on its investment
in USNG while
incurring losses with respect to other asset classes.
Historically,
Futures Contracts and Other Natural Gas-Related Investments
have generally been
non-correlated to the performance of other asset classes such
as stocks and
bonds. Non-correlation means that there is a low statistically
valid
relationship between the performance of futures and other commodity
interest
transactions, on the one hand, and stocks or bonds, on the
other hand. However,
there can be no assurance that such non-correlation will continue
during future
periods. If, contrary to historic patterns, USNG’s performance were to move in
the same general direction as the financial markets, investors
will obtain
little or no diversification benefits from an investment in
the units. In such a
case, USNG may have no gains to offset losses from other investments,
and
investors may suffer losses on their investment in USNG at
the same time they
incur losses with respect to other investments.
Variables
such as drought, floods, weather, embargoes, tariffs and other
political events
may have a larger impact on natural gas prices and natural
gas-linked
instruments, including Futures Contracts and Other Natural
Gas-Related
Investments, than on traditional securities. These additional
variables may
create additional investment risks that subject USNG’s investments to greater
volatility than investments in traditional securities.
Non-correlation
should not be confused with negative correlation, where the
performance of two
asset classes would be opposite of each other. There is no
historic evidence
that the spot price of natural gas and prices of other financial
assets, such as
stocks and bonds, are negatively correlated. In the absence
of negative
correlation, USNG cannot be expected to be automatically profitable
during
unfavorable periods for the stock market, or vice versa.
USNG’s
Operating Risks
USNG
is not a registered investment company so unitholders do not
have the
protections of the 1940 Act.
USNG
is
not an investment company subject to the 1940 Act. Accordingly,
investors do not
have the protections afforded by that statute which, for example,
requires
investment companies to have a majority of disinterested directors
and regulates
the relationship between the investment company and its investment
manager.
The
General Partner is leanly staffed and relies heavily on key
personnel to manage
trading activities.
In
managing and directing the day-to-day activities and affairs
of USNG, the
General Partner relies heavily on Messrs. Nicholas Gerber, John Love
and John Hyland. If Messrs. Gerber, Love or Hyland were to leave or be
unable to carry out their present responsibilities, it may
have an adverse
effect on the management of USNG. Furthermore, Messrs. Gerber,
Love and Hyland
are currently involved in the management of USOF, US12OF and
USG, and the
General Partner is currently in the process of registering
two other exchange
traded securities, USHO and US12NG. Messrs. Gerber and Love are
also employed by Ameristock Corporation, a registered investment
adviser that
manages a public mutual fund. It is estimated that Mr. Gerber
will spend
approximately 50% of his time on USOF, USNG, USHO, USG, US12OF
and US12NG
matters. Mr. Love will spend approximately 95% of his time
on USOF, USNG, USHO,
USG, US12OF and US12NG matters and Mr. Hyland will spend approximately
75% of
his time on USOF, USNG, USHO, USG, US12OF and US12NG matters.
To the extent that
the General Partner establishes additional funds, even greater
demands will be
placed on Messrs. Gerber, Love and Hyland, as well as the other officers of
the General Partner, including Mr. Mah, the Chief Financial
Officer, and its
Board of Directors.
Accountability
levels, position limits, and daily price fluctuation limits set
by the exchanges
have the potential to cause a tracking error, which could cause
the price of
units to substantially vary from the price of the Benchmark Futures
Contract and
prevent investors from being able to effectively use USNG as a
way to hedge
against natural gas-related losses or as a way to indirectly invest
in natural
gas.
U.S.
designated contract markets such as the NYMEX have established
accountability
levels and position limits on the maximum net long or net short
futures
contracts in commodity interests that any person or group of
persons under
common trading control (other than as a hedge, which an investment
in USNG is
not) may hold, own or control. For example, the current accountability
level for
investments at any one time in the Benchmark Futures Contract is 12,000.
While this is not a fixed ceiling, it is a threshold above which
the NYMEX may
exercise greater scrutiny and control over an investor, including
limiting an
investor to holding no more than 12,000 Benchmark Futures Contracts.
With regard
to position limits, the NYMEX limits an investor from holding
more than 1,000
net futures in the last 3 days of trading in the near month contract
to
expire.
In
addition to accountability levels and position limits, the NYMEX
also sets daily
price fluctuation limits on the Futures Contracts. The daily
price fluctuation
limit establishes the maximum amount that the price of a futures
contract may
vary either up or down from the previous day’s settlement price. Once the daily
price fluctuation limit has been reached in a particular Futures
Contract, no
trades may be made at a price beyond that limit.
For
example, the NYMEX imposes a $3.00 per mmBtu ($30,000 per contract)
price
fluctuation limit for the Benchmark Futures Contracts. This limit
is initially
based off of the previous trading day’s settlement price. If any Benchmark
Futures Contract is traded, bid, or offered at the limit for
five minutes,
trading is halted for five minutes. When trading resumes it begins
at the point
where the limit was imposed and the limit is reset to be $3.00
per mmBtu in
either direction of that point. If another halt were triggered,
the market would
continue to be expanded by $3.00 per mmBtu in either direction
after each
successive five-minute trading halt. There is no maximum price
fluctuation limit
during any one trading session.
All
of
these limits may potentially cause a tracking error between the
price of the
units and the price of the Benchmark Futures Contract. This may
in turn prevent
investors from being able to effectively use USNG as a way to
hedge against
natural gas-related losses or as a way to indirectly invest in
natural
gas.
USNG
is
not limiting the size of the offering and is committed to utilizing
substantially all of its proceeds to purchase Futures Contracts
and Other
Natural Gas-Related Investments. If USNG encounters accountability
levels,
position limits, or price fluctuation limits for natural gas
contracts on the
NYMEX, it may then, if permitted under applicable regulatory
requirements,
purchase Futures Contracts on the ICE Futures (formerly, the
International
Petroleum Exchange) or other exchanges that trade listed natural
gas futures.
The Futures Contracts available on the ICE Futures are comparable
to the
contracts on the NYMEX, but they may have different underlying
commodities,
sizes, deliveries, and prices.
There
are technical and fundamental risks inherent in the trading system
the General
Partner intends to employ.
The
General Partner’s trading system is quantitative in nature and it is possible
that the General Partner might make a mathematical error. In
addition, it is
also possible that a computer or software program may malfunction
and cause an
error in computation.
USNG
and the General Partner may have conflicts of interest, which
may permit them to
favor their own interests to the detriment of unitholders.
USNG
and
the General Partner may have inherent conflicts to the extent
the General
Partner attempts to maintain USNG’s asset size in order to preserve its fee
income and this may not always be consistent with USNG’s objective of having the
value of its unit’s NAV track changes in the Benchmark Futures Contract. The
General Partner’s officers, directors and employees do not devote their time
exclusively to USNG. These persons are directors, officers
or employees of other
entities that may compete with USNG for their services. They
could have a
conflict between their responsibilities to USNG and to those
other
entities.
In
addition, the General Partner’s principals, officers, directors or employees may
trade futures and related contracts for their own account.
A conflict of
interest may exist if their trades are in the same markets
and at the same time
as USNG trades using the clearing broker to be used by USNG.
A potential
conflict also may occur if the General Partner’s principals, officers, directors
or employees trade their accounts more aggressively or take
positions in their
accounts which are opposite, or ahead of, the positions taken
by
USNG.
The
General Partner has sole current authority to manage the investments
and
operations of USNG, and this may allow it to act in a way that
furthers its own
interests which may create a conflict with the best interests
of investors.
Limited partners have limited voting control, which will limit
the ability to
influence matters such as amendment of the LP Agreement, change
in USNG’s basic
investment policy, dissolution of this fund, or the sale or
distribution of
USNG’s assets.
The
General Partner serves as the general partner to each of USG, USOF, US12OF,
USHO and US12NG, as well as USNG. The General Partner may have
a conflict to the
extent that its trading decisions for USNG may be influenced
by the effect they
would have on the other funds it manages. These trading decisions
may be
influenced since the General Partner also serves as the general
partner for all
of the funds and is required to meet all of the funds’ investment objectives as
well as USNG’s. If the General Partner believes that a trading decision
it made
on behalf of USNG might (i) impede its other funds from reaching
their
investment objectives, or (ii) improve the likelihood of meeting
its other
funds’ objectives, then the General Partner may choose to change its
trading
decision for USNG, which could either impede or improve the
opportunity for USNG
from meeting its investment objective. In addition, the General
Partner is
required to indemnify the officers and directors of its other
funds if the need
for indemnification arises. This potential indemnification
will cause the
General Partner’s assets to decrease. If the General Partner’s other sources of
income are not sufficient to compensate for the indemnification,
then the
General Partner may terminate and investors could lose their
investment.
Unitholders
may only vote on the removal of the General Partner and limited
partners have
only limited voting rights. Unitholders and limited partners
will not
participate in the management of USNG and do not control the
General Partner so
they will not have influence over basic matters that affect
USNG.
Unitholders
that have not applied to become limited partners have no voting
rights, other
than to remove the General Partner. Limited partners will have
limited voting
rights with respect to USNG’s affairs. Unitholders may remove the General
Partner only if 66 2/3% of the unitholders elect to do so.
Unitholders and
limited partners will not be permitted to participate in the
management or
control of USNG or the conduct of its business. Unitholders
and limited partners
must therefore rely upon the duties and judgment of the General
Partner to
manage USNG’s affairs.
The
General Partner may manage a large amount of assets and this
could affect USNG’s
ability to trade profitably.
Increases
in assets under management may affect trading decisions. In
general, the General
Partner does not intend to limit the amount of assets of USNG
that it may
manage. The more assets the General Partner manages, the more
difficult it may
be for it to trade profitably because of the difficulty of
trading larger
positions without adversely affecting prices and performance
and of managing
risk associated with larger positions.
USNG
could terminate at any time and cause the liquidation and potential
loss of an
investor’s investment and could upset the overall maturity and timing
of an
investor’s investment portfolio.
USNG
may
terminate at any time, regardless of whether USNG has incurred
losses, subject
to the terms of the LP Agreement. In particular, unforeseen
circumstances,
including the death, adjudication of incompetence, bankruptcy,
dissolution, or
removal of the General Partner could cause USNG to terminate
unless a majority
interest of the limited partners within 90 days of the event
elects to continue
the partnership and appoints a successor general partner, or
the affirmative
vote of a majority interest of the limited partners subject
to conditions.
However, no level of losses will require the General Partner
to terminate USNG.
USNG’s termination would cause the liquidation and potential loss
of an
investor’s investment. Termination could also negatively affect the
overall
maturity and timing of an investor’s investment portfolio.
Limited
partners may not have limited liability in certain circumstances,
including
potentially having liability for the return of wrongful
distributions.
Under
Delaware law, a limited partner might be held liable for our
obligations as if
it were a General Partner if the limited partner participates
in the control of
the partnership’s business and the persons who transact business with the
partnership think the limited partner is the General Partner.
A
limited
partner will not be liable for assessments in addition to its
initial capital
investment in any of our capital securities representing limited
partnership
interests. However, a limited partner may be required to repay
to us any amounts
wrongfully returned or distributed to it under some circumstances.
Under
Delaware law, USNG may not make a distribution to limited partners
if the
distribution causes our liabilities (other than liabilities
to partners on
account of their partnership interests and nonrecourse liabilities)
to exceed
the fair value of our assets. Delaware law provides that a
limited partner who
receives such a distribution and knew at the time of the distribution
that the
distribution violated the law will be liable to the limited
partnership for the
amount of the distribution for three years from the date of
the
distribution.
With
adequate notice, a limited partner may be required to withdraw
from the
partnership for any reason.
If
the
General Partner gives at least fifteen (15) days’ written notice to a limited
partner, then the General Partner may for any reason, in its
sole discretion,
require any such limited partner to withdraw entirely from
the partnership or to
withdraw a portion of its partner capital account. The General
Partner may
require withdrawal even in situations where the limited partner
has complied
completely with the provisions of the LP Agreement.
USNG’s
existing units are, and any units USNG issues in the future will
be, subject to
restrictions on transfer. Failure to satisfy these requirements
will preclude a
transferee from being able to have all the rights of a limited
partner.
No
transfer of any unit or interest therein may be made if such
transfer would (a)
violate the then applicable federal or state securities laws
or rules and
regulations of the SEC, any state securities commission, the
CFTC or any other
governmental authority with jurisdiction over such transfer,
or (b) cause USNG
to be taxable as a corporation or affect USNG’s existence or qualification as a
limited partnership. In addition, investors may only become
limited partners if
they transfer their units to purchasers that meet certain conditions
outlined in
the LP Agreement, which provides that each record holder or
limited partner or
unitholder applying to become a limited partner (each a record
holder) may be
required by the General Partner to furnish certain information,
including that
holder’s nationality, citizenship or other related status. A transferee
who is
not a U.S. resident may not be eligible to become a record
holder or a limited
partner if its ownership would subject USNG to the risk of
cancellation or
forfeiture of any of its assets under any federal, state or
local law or
regulation. All purchasers of USNG’s units, who wish to become limited partners
or record holders, and receive cash distributions, if any,
or have certain other
rights, must deliver an executed transfer application in which
the purchaser or
transferee must certify that, among other things, he, she or
it agrees to be
bound by USNG’s LP Agreement and is eligible to purchase USNG’s securities. Any
transfer of units will not be recorded by the transfer agent
or recognized by us
unless a completed transfer application is delivered to the
General Partner or
the Administrator. A person purchasing USNG’s existing units, who does not
execute a transfer application and certify that the purchaser
is eligible to
purchase those securities acquires no rights in those securities
other than the
right to resell those securities. Whether or not a transfer
application is
received or the consent of the General Partner obtained, our
units will be
securities and will be transferable according to the laws governing
transfers of
securities. See “Transfer of Units.”
USNG
does not expect to make cash distributions.
The
General Partner has not previously made any cash distributions
and intends to
re-invest any realized gains in Natural Gas Interests rather
than distributing
cash to limited partners. Therefore, unlike mutual funds, commodity
pools or
other investment pools that actively manage their investments
in an attempt to
realize income and gains from their investing activities and
distribute such
income and gains to their investors, USNG generally does not
expect to
distribute cash to limited partners. An investor should not
invest in USNG if it
will need cash distributions from USNG to pay taxes on its
share of income and
gains of USNG, if any, or for any other reason. Although USNG
does not intend to
make cash distributions, the income earned from its investments
held directly or
posted as margin may reach levels that merit distribution,
e.g., at levels where
such income is not necessary to support its underlying investments
in natural
gas interests and investors adversely react to being taxed
on such income
without receiving distributions that could be used to pay such
tax. If this
income becomes significant then cash distributions may be made.
There
is a risk that USNG will not earn trading gains sufficient
to compensate for the
fees and expenses that it must pay and as such USNG may not
earn any
profit.
USNG
pays
brokerage charges of approximately 0.17% (based on futures
commission merchant
fees of $4.00 per buy or sell, management fees of 0.60% of
NAV on the first
$1,000,000,000 of assets and 0.50% of NAV after the first $1,000,000,000
of
assets, and over-the-counter spreads and extraordinary expenses
(i.e.
expenses not in the
ordinary course of business, including the indemnification
of any person against
liabilities and obligations to the extent permitted by law
and required under
the LP Agreement and under agreements entered into by the General
Partner on
USNG’s behalf and the bringing and defending of actions at law or
in equity and
otherwise engaging in the conduct of litigation and the incurring
of legal
expenses and the settlement of claims and litigation) that
can not be
quantified. These fees and expenses must be paid in all cases
regardless of
whether USNG’s activities are profitable. Accordingly, USNG must earn trading
gains sufficient to compensate for these fees and expenses
before it can earn
any profit.
USNG,
historically, has depended upon its affiliates to pay all its
expenses. If this
offering of units does not raise sufficient funds to pay USNG’s future expenses
and no other source of funding of expenses is found, USNG may
be forced to
terminate and investors may lose all or part of their investment.
Prior
to
the offering of units that commenced on April 17, 2007, all
of USNG’s expenses
were funded by the General Partner and its affiliates. These
payments by the
General Partner and its affiliates were designed to allow USNG
the ability to
commence the public offering of its units. USNG now directly
pays certain of
these fees and expenses. The General Partner will continue
to pay other fees and
expenses, as set forth in the LP Agreement. If the General
Partner and USNG are
unable to raise sufficient funds to cover their expenses or
locate any other
source of funding, USNG may be forced to terminate and investors
may lose all or
part of their investment.
USNG
may incur higher fees and expenses upon renewing existing or
entering into new
contractual relationships.
The
clearing arrangements between the clearing brokers and USNG
generally are
terminable by the clearing brokers once the clearing broker
has given USNG
notice. Upon termination, the General Partner may be required
to renegotiate or
make other arrangements for obtaining similar services if USNG
intends to
continue trading in Futures Contracts or Other Natural Gas-Related
Investments
at its present level of capacity. The services of any clearing
broker may not be
available, or even if available, these services may not be
available on the
terms as favorable as those of the expired or terminated clearing
arrangements.
USNG
may miss certain trading opportunities because it will not
receive the benefit
of the expertise of independent trading advisors.
The
General Partner does not employ trading advisors for USNG;
however, it reserves
the right to employ them in the future. The only advisor to
USNG is the General
Partner. A lack of indepedent trading advisors may be disadvantageous to
USNG because it will not receive the benefit of a trading advisor’s
expertise.
An
unanticipated number of redemption requests during a short
period of time could
have an adverse effect on the NAV of USNG.
If
a
substantial number of requests for redemption of Redemption
Baskets are received
by USNG during a relatively short period of time, USNG may
not be able to
satisfy the requests from USNG’s assets not committed to trading. As a
consequence, it could be necessary to liquidate positions in
USNG’s trading
positions before the time that the trading strategies would
otherwise dictate
liquidation.
The
failure or bankruptcy of a clearing broker could result in
a substantial loss of
USNG’s assets.
Under
CFTC regulations, a clearing broker maintains customers’ assets in a bulk
segregated account. If a clearing broker fails to do so, or
is unable to satisfy
a substantial deficit in a customer account, its other customers
may be subject
to risk of substantial loss of their funds in the event of
that clearing
broker’s bankruptcy. In that event, the clearing broker’s customers, such as
USNG, are entitled to recover, even in respect of property
specifically
traceable to them, only a proportional share of all property
available for
distribution to all of that clearing broker’s customers. USNG also may be
subject to the risk of the failure of, or delay in performance
by, any exchanges
and markets and their clearing organizations, if any, on which
commodity
interest contracts are traded.
From
time
to time, the clearing brokers may be subject to legal or regulatory
proceedings
in the ordinary course of their business. A clearing broker’s involvement in
costly or time-consuming legal proceedings may divert financial
resources or
personnel away from the clearing broker’s trading operations, which could impair
the clearing broker’s ability to successfully execute and clear USNG’s
trades.