The
following discussion should be read in conjunction with the financial
statements
and notes thereto of United States Natural Gas Fund, LP (“USNG”) included
elsewhere in this quarterly report on Form 10-Q.
Forward-Looking
Information
This
quarterly report on Form 10-Q contains forward-looking statements regarding
the
plans and objectives of management for future operations. This information
may
involve known and unknown risks, uncertainties and other factors which
may cause
USNG’s actual results, performance or achievements to be materially different
from future results, performance or achievements expressed or implied
by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe USNG’s future plans, strategies and expectations, are
generally identifiable by use of the words “may,” “will,” “should,” “expect,”
“anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of
these words or other variations on these words or comparable terminology.
These
forward-looking statements are based on assumptions that may be incorrect,
and
USNG cannot assure investors that the projections included in these
forward-looking statements will come to pass. USNG’s actual results could differ
materially from those expressed or implied by the forward-looking statements
as
a result of various factors.
USNG
has
based the forward-looking statements included in this quarterly report
on Form
10-Q on information available to it on the date of this quarterly report
on Form
10-Q, and USNG assumes no obligation to update any such forward-looking
statements. Although USNG undertakes no obligation to revise or update
any
forward-looking statements, whether as a result of new information,
future
events or otherwise, investors are advised to consult any additional
disclosures
that USNG may make directly to them or through reports that USNG in
the future
may file with the U.S. Securities and Exchange Commission (the "SEC"),
including
annual reports on Form 10-K, quarterly reports on Form 10-Q and current
reports
on Form 8-K. Except for historical information contained herein, this
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” contains forward-looking statements that involve known and
unknown risks and uncertainties that may cause USNG's actual results or
outcome to be materially different from any future results, performance
or
achievements expressed or implied by such forward-looking
statements.
Introduction
USNG,
a
Delaware limited partnership, is a commodity pool that issues units
that may be
purchased and sold on the American Stock Exchange (the “AMEX”). The investment
objective of USNG is for changes in percentage terms of the units’ net asset
value (“NAV”) on a daily basis to reflect the changes in percentage terms
in the price of natural gas delivered at the Henry Hub, Louisiana as
measured by
the “Benchmark Futures Contract,” also on a daily basis, less USNG’s
expenses.
USNG
seeks to achieve its investment objective by investing in a combination
of
natural gas futures contracts and other natural gas interests such
that changes
in USNG’s NAV, measured in percentage terms, will closely track the changes
in the price of a specified natural gas futures contract (the
“Benchmark Futures Contract”), also measured in percentage terms. USNG’s
General Partner believes the Benchmark Futures Contract historically has
exhibited a close correlation with the spot price of natural gas. It
is not the
intent of USNG to be operated in a fashion such that its NAV will equal,
in
dollar terms, the spot price of natural gas or any particular futures
contract
based on natural gas. Management believes that it is not practical
to manage the
portfolio to achieve such an investment goal when investing in listed
natural
gas futures contracts.
At
present, on any valuation day the Benchmark Futures Contract is the near
month contract for natural gas traded on the New York Mercantile Exchange
(the "NYMEX") unless the near month contract will expire within two
weeks of the
valuation day, in which case the Benchmark Futures Contract is the next
month contract for natural gas traded on the NYMEX. “Near month contract”
means the next contract traded on the NYMEX due to expire; “next month contract”
means the first contract traded on the NYMEX due to expire after the
near month
contract.
USNG
invests in futures contracts for natural gas, other types of crude
oil, heating
oil, gasoline and other petroleum-based fuels that are traded on the
NYMEX, ICE
Futures or other U.S. and
foreign exchanges (collectively, “Futures Contracts”) and other natural
gas-related investments such as cash-settled options on Futures Contracts,
forward contracts for natural gas, and over-the-counter transactions
that are
based on the price of natural gas, oil and other petroleum-based fuels,
Futures
Contracts and indices based on the foregoing (collectively, “Other Natural
Gas-Related Investments”). The general partner of USNG, Victoria Bay Asset
Management, LLC (the “General Partner”), which is registered as a commodity pool
operator, is authorized by the Amended and Restated Agreement of Limited
Partnership of USNG (the “LP Agreement”) to manage USNG. The General Partner is
authorized by USNG in its sole judgment to employ, establish the terms
of
employment for, and terminate commodity trading advisors or futures
commission
merchants.
Valuation
of Natural Gas Futures Contracts and the Computation of the
NAV
The
NAV
of USNG units is calculated once each trading day as of the earlier
of the close
of the New York Stock Exchange (the “NYSE”) or 4:00 p.m. New York time. The NAV
for a particular trading day is released after 4:15 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
that exchange
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.
Management’s
Discussion of Results of Operation and the Natural Gas
Market
Results
of operations. During
the three month period ended March 31, 2007, USNG had not yet commenced
investment activities nor issued units. In addition, USNG did not purchase
or
own any Futures Contracts or Other Natural Gas-Related
Investments during this reporting period, nor were there any receipts or
disbursements of cash from USNG during this reporting period. Also,
USNG did not
receive any revenue or capital gains (losses), or incur any expenses
during this
reporting period.
Expenses
incurred during the first quarter of 2007 in connection with organizing
USNG and
the initial offering costs of the units were borne by the General Partner,
and
are not subject to reimbursement by USNG.
Portfolio
Expenses.
USNG’s
expenses will consist of investment management fees, brokerage fees and
commissions, certain
offering costs, licensing fees and the fees and expenses of the independent
directors. The investment advisory fee that USNG will pay to the General
Partner is to be calculated as a percentage of the total net assets
of USNG. For
total net assets of up to $1 billion, the investment advisory fee will
be 0.60%,
and for total net assets over $1 billion, the investment advisory fee
will be
0.50% on the incremental amount of assets.
The
Fund
will pay for all brokerage fees, taxes and other expenses, including
licensing
fees for the use of intellectual property, registration or other
fees paid to
the SEC, the National Association of Securities Dealers (the "NASD"),
or any
other regulatory agency in connection with follow on offers and sales
of its
units and all legal, accounting, printing and other expenses associated
therewith. The Fund will also pay the fees and expenses, including
for directors
and officers' liability insurance, of the independent directors.
The Fund has
agreed to pay the independent directors a total of $92,000 to cover
their
expenses and pay for their services for 2007.
USNG
will
also incur commissions to brokers for the purchase and sale of Futures
Contracts, Other Natural Gas-Related Investments, or short-term obligations
of the United States of two years or less ("Treasuries").
Interest
Income.
USNG
seeks to invest its assets such that it holds Futures Contracts and Other
Natural Gas-Related Investments in an amount equal to the total net
assets of
the portfolio. Typically, such investments will not require USNG to
pay the full
amount of the contract value at the time of purchase, but rather require
USNG to
post an amount as a margin deposit against the eventual settlement
of the
contract. As a result, USNG will retain an amount that is approximately
equal to
its total net assets, which USNG will invest in cash deposits or in
Treasuries.
This includes both the amount on deposit with the futures commission
merchant as
margin as well as unrestricted cash held with USNG’s custodian bank. The cash or
Treasuries earn interest that accrues on a daily basis.
Tracking
USNG’s Benchmark.
USNG
seeks to manage its portfolio such that changes in its average daily
NAV, on a
percentage basis, closely track changes in the average daily price
of the
Benchmark Futures Contract, also on a percentage basis. Specifically, USNG
seeks to manage the portfolio such that over any rolling period of 30
valuation days, the average daily change in the NAV is within a range
of 90% to
110% (0.9 to 1.1), of the average daily change of the Benchmark Futures
Contract. As an example, if the average daily movement of the
Benchmark Futures Contract for a particular 30-day time period was 0.5% per
day, USNG management would attempt to manage the portfolio such that
the average
daily movement of the NAV during that same time period fell between
0.45% and
0.55% (i.e.,
between 0.9 and 1.1 of the benchmark’s results). USNG’s portfolio management
goals do not include trying to make the nominal price of USNG’s NAV equal to the
nominal price of the current Benchmark Futures Contract. Management
believes that it is not practical to manage the portfolio to achieve
such an
investment goal when investing in listed natural gas futures
contracts.
Of
the
various factors that could impact USNG’s ability to accurately track its
benchmark, there are currently three factors that are most likely to
impact these tracking results.
The
first
major factor that could affect tracking results is if USNG buys or
sells its
holdings in the then current Benchmark Futures Contract at a price other
than the closing settlement price of that contract on the day in which
USNG
executes the trade. In that case, USNG may get a price that is higher,
or lower,
than that of the Benchmark Futures Contract, which, if such transactions
did occur, could cause the changes in the daily NAV of USNG to either
be too
high or too low relative to the changes in the daily benchmark. Management
will attempt to minimize the effect of these transactions by seeking
to execute
its purchase or sales of the Benchmark Futures Contracts at, or as close as
possible to, the end of the day settlement price. However, it may not
always be
possible for USNG to obtain the closing settlement price and there
is no
assurance that failure to obtain the closing settlement price in the
future will
not adversely impact USNG’s attempt to track its benchmark over
time.
The
second major factor that could affect tracking results is the interest that
USNG earns on its cash and Treasury holdings. USNG is not required to
distribute any portion of its income to its unitholders. Interest payments,
and
any other income, retained within the portfolio would add to USNG’s NAV. When
this income exceeds the level of USNG’s expenses for its investment advisory
fee, brokerage commissions and other expenses (including ongoing registration
fees, licensing fees and the fees and expenses of the independent directors),
USNG will realize a net yield that will tend to cause daily changes
in the NAV
of USNG to track slightly higher than daily changes in the
Benchmark Futures Contracts.
The
third
major factor affecting tracking results is if USNG holds natural gas-related
investments in its portfolios other than the current Benchmark Futures
Contract that fail to closely track the Benchmark Futures Contract's
total
return movements. In that case, the error in tracking the benchmark
can result
in daily changes in the NAV of USNG that are either too high, or too
low,
relative to the daily changes in the benchmark.
Natural
gas market.
During
the first quarter of 2007, natural gas prices in the United States
were impacted
by several factors. At the beginning of the quarter, the amount of
natural gas
in storage was at higher than average levels versus the previous five
years. The
winter weather in the United States was moderate through much of the
quarter. As
a major use of natural gas in winter months is the heating of residential
and
commercial buildings, the mild weather had the effect of reducing the rate
at which the storage levels of natural gas fell. During the entire
quarter, the
seasonally adjusted inventory levels of stored natural gas remained
above five
year averages. Finally, crude oil prices fell during the early part
of the
quarter. As crude oil is used in the production of various alternatives
to
natural gas for both the heating of buildings and the production of
electricity,
the decline in the price of crude oil early in the quarter tended to
hold down
natural gas prices as well. As a result of all the factors mentioned
above, the
natural gas market in the United States remained reasonably well supplied.
The
price of natural gas did not experience any significant jumps; rather,
the price
remained fairly range-bound with prices ranging from a low of $6.16
to a high of
$7.87 per MMbtu with an average price of $7.18.
Term
Structure of Natural Gas Futures Prices and the Impact on Total Returns.
Several
factors determine the total return from investing in a futures contract
position. One factor that impacts the total return that will result
in investing
in near month natural gas futures contracts and “rolling” those contracts
forward each month is the price relationship between the current near
month
contract and the next month contract. If the price of near month contract
is
higher than the next month contract (a situation referred to as “backwardation”
in the futures market), then absent any other change there is a tendency
for the
price of a next month contract to rise in value as it becomes the near
month
contract and approaches expiration. Conversely, if the price of a near
month
contract is lower than the next month contract (a situation referred
to as
“contango” in the futures market), then absent any other change there is a
tendency for the price of a next month contract to decline in value
as it
becomes the near month contract and approaches expiration.
As
an
example, assume that the price of natural gas for immediate delivery
(the “spot”
price), was $7 per 10,000 million British thermal units (MMBtu), and
the value
of a position in the near month futures contract was also $7. Over
time, the
price of 10,000 MMBtu of natural gas will fluctuate based on a number of
market factors, including demand for natural gas relative to its supply.
The
value of the near month contract will likewise fluctuate in reaction to a
number of market factors. If investors seek to maintain their holding
in a near
month contract position and not take delivery of the natural gas, every
month
they must sell their current near month contract as it approaches expiration
and
invest in the next month contract.
If
the
futures market is in backwardation, e.g., when the expected price of
natural gas
in the future would be less, the investor would be buying a next month
contract
for a lower price than the current near month contract. Hypothetically,
and
assuming no other changes to either prevailing natural gas prices or
the price
relationship between the spot price, the near month contract and the
next month
contract (and ignoring the impact of commission costs and the interest
earned on
cash), the value of the next month contract would rise as it approaches
expiration and becomes the new near month contract. In this example,
the value
of the $7 investment would tend to rise faster than the spot price
of natural
gas, or fall slower. As a result, it would be possible in this hypothetical
example for the price of spot natural gas to have risen to $9 after
some period
of time, while the value of the investment in the futures contract
would have
risen to $10, assuming backwardation is large enough or enough time
has elapsed.
Similarly, the spot price of natural gas could have fallen to $5 while
the value
of an investment in the futures contract could have fallen to only
$6. Over
time, if backwardation remained constant, the difference would continue
to
increase.
If
the
futures market is in contango, the investor would be buying a next
month
contract for a higher price than the current near month contract.
Hypothetically, and assuming no other changes to either prevailing
natural gas
prices or the price relationship between the spot price, the near month
contract
and the next month contract (and ignoring the impact of commission
costs and the
interest earned on cash), the value of the next month contract would
fall as it
approaches expiration and becomes the new near month contract. In this
example,
it would mean that the value of the $7 investment would tend to rise
slower than
the spot price of natural gas, or fall faster. As a result, it would
be possible
in this hypothetical example for the spot price of natural gas to have
risen to $9 after some period of time, while the value of the investment
in the
futures contract will have risen to only $8, assuming contango is large
enough
or enough time has elapsed. Similarly, the spot price of natural gas
could have
fallen to $6 while the value of an investment in the futures contract
could have
fallen to $7. Over time, if contango remained constant, the difference
would
continue to increase.
Subsequent
Events
On
April
18, 2007, USNG listed its units on the AMEX under the ticker symbol
“USNG.” On
that day USNG established its initial NAV by setting the price at $50.00
per
unit and issued 200,000 units to the initial authorized purchaser,
Merrill Lynch
Professional Clearing Corp., in exchange for $10,001,000 in cash. USNG
also
commenced investment operations on that day by purchasing Futures Contracts
traded on the NYMEX that are based on natural gas. The total market
value of the
natural gas futures contracts purchased was $9,958,080 at the time
of purchase.
USNG established cash deposits equal to $10,001,000 at the time of
the initial
sale of units. The majority of those cash assets were held at USNG’s custodian
bank while less than 20% of the cash balance was held as margin deposits
with
USNG’s futures commission merchant relating to the natural gas futures contracts
purchased.
As
of May
17,
2007,
USNG had 900,000
outstanding Units. At that time, USNG owned 327
natural
gas futures contracts, which had a market value as of the close of
trading that
day of $48,290,380.
USNG
maintained cash deposits at the Fund’s custodian bank and margin with USNG’s
futures commission merchant in an aggregate amount of $38,000,000.
On
May
30, 2007, USNG and the General Partner, together with the other funds
which are
managed by the General Partner, entered into a licensing agreement
with the
NYMEX. The agreement has an effective date of April 10, 2006. Under
the terms of
the agreement, USNG and the affiliated funds managed by the General
Partner will
pay a licensing fee based on the funds’ aggregate daily NAV that equals .04% for
the first $1,000,000,000 of combined assets of the funds and .02%
for combined
assets above $1,000,000,000.
Critical
Accounting Policies
Preparation
of the financial statements and related disclosures in compliance with
accounting principles
generally accepted in the United States of America requires the application
of
appropriate accounting rules and guidance, as well as the use of estimates.
USNG's application of these policies involves judgments and actual
results may
differ from the estimates used. The General Partner has evaluated the
nature and
types of estimates that it will make in preparing USNG's financial
statements
and related disclosures once USNG commences trading operations and
has
determined that the valuation of its investments which are not traded
on a
United States or internationally recognized futures exchange (such
as forward
contracts and over-the-counter contracts) involves a critical accounting
policy.
While not currently applicable given the fact that USNG is not currently
involved in trading activities, the values which will be used by USNG
for its
forward contracts will be provided by its commodity broker who will
use market
prices when available, while over-the-counter contracts will be valued
based on
the present value of estimated future cash flows that would be received
from or
paid to a third party in settlement of these derivative contracts prior
to their
delivery date and will be valued on a daily basis.
Liquidity
and Capital Resources
USNG
does
not anticipate making use of borrowings or other lines of credit to
meet its
obligations. It is anticipated that USNG will continue to meet its
liquidity
needs in the normal course of business from the proceeds of the sale
of its
investments, or from cash, cash equivalents, and/or
short-term Treasuries that it intends to hold at all times. USNG’s
liquidity needs include: redeeming units, providing margin deposits
for its
existing natural gas futures contracts or the purchase of additional
natural gas
futures contracts and posting collateral for its over-the-counter contracts
and
payment of its expenses, summarized below under “Contractual
Obligations.”
USNG
will
generate cash primarily from (i) the sale of Creation Baskets and (ii)
interest
earned on cash and its investments in Treasuries. As of April 17, 2007,
USNG had not begun trading activities. USNG anticipates that all of
its net
assets will be allocated to trading in natural gas interests. A significant
portion of the NAV will be held in Treasuries and cash that could or
will be
used as margin for USNG's trading in natural gas interests. The percentage
that
Treasuries will bear to the total net assets will vary from period
to period as
the market values of the natural gas interests change. The balance
of the net
assets will be held in USNG's Futures Contracts and Other Natural
Gas-Related Investments trading account. Interest earned on USNG's
interest
bearing-funds will be paid to USNG.
USNG's
investment in natural gas interests will be subject to periods of illiquidity
because of market conditions,
regulatory considerations and other reasons. For example, commodity
exchanges
limit the fluctuations in Futures Contracts prices during a single day by
regulations referred to as “daily limits.” During a single day, no trades may be
executed at prices beyond the daily limit. Once the price of a Natural
Gas
Futures Contract has increased or decreased by an amount equal to the
daily
limit, positions in the contracts can neither be taken or liquidated
unless the
traders are willing to effect trades at or within the limit. Such market
conditions could prevent USNG from promptly liquidating its positions
in Futures Contracts. Through
April 10, 2006, all of the expenses of United States Oil Fund, LP (“USOF”),
which is also managed by the General Partner, and of the General Partner
were
funded by its affiliates. Since April 10, 2006, these expenses, as
well as the
expenses relating to the organization and formation of USNG and its
registration
of units with the SEC, have largely been borne by the General Partner
and its
affiliates, other than USOF and USNG. Ameristock Corporation, through
its
parent, Wainwright Holdings, Inc. has provided funds for USOF’s payment of SEC
and NASD registration fees for its most recent registration statement
that went
effective in October of 2006. Wainwright Holdings, Inc. wholly owns
both the
General Partner and Ameristock Corporation. However, there is no commitment
on
the part of Wainwright Holdings, Inc., Ameristock Corporation or any
other
affiliate to continue to pay the expenses of the General Partner, nor
is there
any obligation or intention to reimburse any such payment or pay the
expenses of
USNG. To date, all of USNG’s expenses, including its organization and offering
expenses
relating to the initial offering of its units, have been paid by the
General
Partner. Fees and expenses associated with SEC registrations of units
subsequent
to the initial offering will be borne by USNG. In addition, fees and
expenses
(including directors and officers liability insurance) of the independent
directors (currently estimated to be $92,000 in 2007, though this amount
may
change in future years), the management fee to the General Partner,
brokerage
fees and licensing fees will be paid by USNG. If the General Partner
and USNG
are unsuccessful in raising sufficient funds to cover USNG's expenses
or in
locating any other source of funding, USNG will terminate and investors
may lose
all or part of their investment.
Market
Risk
Trading
in Futures Contracts and Other Natural Gas-Related Investments, such as
forwards, will involve USNG entering into contractual commitments to
purchase or
sell natural gas at a specified date in the future. The gross or face
amount of
the contracts will significantly exceed USNG's future cash requirements
since
USNG intends to close out its open positions prior to settlement. As
a result,
USNG should only be subject only to the risk of loss arising from the
change in
value of the contracts. USNG considers the "fair value'' of its derivative
instruments to be the unrealized gain or loss on the contracts. The
market risk
associated with USNG's commitments to purchase natural gas will be
limited to
the gross face amount of the contacts held. However, should USNG enter
into a
contractual commitment to sell natural gas, it would be required to
make
delivery of the natural gas at the contract price, repurchase the contract
at
prevailing prices or settle in cash. Since there are no limits on the
future
price of natural gas, the market risk to USNG could be unlimited. USNG's
exposure to market risk will depend on a number of factors, including
the
markets for natural gas, the volatility of interest rates and foreign
exchange
rates, the liquidity of the Futures Contracts and Other Natural Gas-Related
Investments markets and the relationships among the contracts held
by USNG. The
limited experience that USNG has had in utilizing its model to trade
in natural
gas interests in a manner intended to track the spot price of natural
gas, as
well as drastic market occurrences, could ultimately lead to the loss
of all or
substantially all of an investor's capital.
Credit
Risk
When
USNG
enters into Futures Contracts and Other Natural Gas-Related Investments, it
will be exposed to the credit risk that its counterparty will not be
able to
meet its obligations. The counterparty for the Futures Contracts traded on
the NYMEX and on most other foreign futures exchanges is the clearinghouse
associated with the particular exchange. In general, clearinghouses
are backed
by their members who may be required to share in the financial burden
resulting
from the nonperformance of one of their members and, therefore, this
additional
member support should significantly reduce credit risk. Some foreign
exchanges
are not backed by their clearinghouse members but may be backed by
a consortium
of banks or other financial institutions. There can be no assurance
that any
counterparty, clearinghouse, or their members or their financial backers
will
satisfy their obligations to USNG in such circumstances. The General
Partner
will attempt to manage the credit risk of USNG by following various
trading
limitations and policies. In particular, USNG intends to post margin
and/or hold
liquid assets that will be approximately equal to the face amount of
its
obligations to counterparties under the Futures Contracts and Other Natural
Gas-Related Investments it holds. The General Partner will implement
procedures
that will include, but will not be limited to, executing and clearing
trades
only with creditworthy parties and/or requiring the posting of collateral
or
margin by such parties for the benefit of USNG to limit its credit
exposure. UBS
Securities LLC, USNG's commodity broker (the “Futures Commission Merchant”), or
any other broker that may be retained by USNG in the future, when acting
as
USNG's futures commission merchant in accepting orders to purchase
or
sell Futures Contracts on United States exchanges, will be required by the
U.S. Commodity Futures Trading Commission (the “CFTC”) regulations to separately
account for and segregate as belonging to USNG, all assets of USNG
relating to
domestic Futures Contracts trading. These commodity brokers are not allowed
to commingle USNG's assets with their other assets. In addition, the
CFTC
requires commodity brokers to hold in a secure account the USNG assets
related
to foreign Futures Contract trading.
Off
Balance Sheet Financing
As
of
March 31, 2007, USNG has no loan guarantee, credit support or other
off-balance
sheet arrangements of any kind other than agreements entered into in
the normal
course of business, which may include indemnification provisions relating
to
certain risks that service providers undertake in performing services
which are
in the best interests of USNG. While USNG's exposure under these indemnification
provisions cannot be estimated, they are not expected to have a material
impact
on USNG's financial position.
Redemption
Basket Obligation
In
order
to meet its investment objective and pay its contractual obligations
described
below, USNG will require liquidity to redeem units, which redemptions
must be in
blocks of 100,000 units called Redemption Baskets. USNG intends to
satisfy this
obligation by paying from the cash or cash equivalents it will hold
or through
the sale of its Treasuries in an amount proportionate to the number of
units being redeemed.
Contractual
Obligations
USNG’s
primary contractual obligations will be with the General Partner.
In return for
its services, the General Partner will be entitled to a management
fee
calculated as a fixed percentage of USNG’s NAV, currently 0.60% for a NAV of $1
billion or less, and thereafter 0.50% of a NAV above $1 billion.
The General
Partner has agreed to pay the start-up costs associated with the
formation of
USNG, primarily its legal, accounting and other costs in connection
with its
contracts with service providers and its registration with the SEC
and other
regulatory filings in connection with the initial public offering
of the units,
and the registration fees paid to the SEC, the NASD and the AMEX
in connection
with such offering. The General Partner has agreed to pay the fees
of the
custodian and transfer agent, Brown Brothers Harriman & Co., as well as
Brown Brothers Harriman & Co.’s fees for performing administrative services,
including in connection with USNG’s preparation of its financial statements and
its SEC and CFTC reports. The General Partner will also pay the fees
of USNG’s
accountants in connection with USNG's SEC and CFTC reporting, as
well as those
of its marketing agent.
In
addition to the General Partner’s management fee, USNG pays its brokerage fees
(including fees to a futures commission merchant), over-the-counter
dealer
spreads, any licensing fees for the use of intellectual property,
registration
and, subsequent to the initial offering, the fees paid to the SEC,
NASD, or
other regulatory agency in connection with the offer and sale of
the units, as
well as the legal, printing, accounting, and other expenses associated
therewith, and extraordinary expenses. The latter are expenses not
incurred in
the ordinary course of USNG's business, including expenses relating
to the
indemnification of any person against liabilities and obligations
to the extent
permitted by law and under the LP Agreement, the bringing or defending
of
actions in law or in equity or otherwise conducting litigation and
incurring
legal expenses and the settlement of claims and litigation. Commission
payments
to a futures commission merchant are on a contract-by-contract, or
round turn,
basis.
The
parties cannot anticipate the amount of payments that will be required
under
these arrangements for future periods, as USNG’s net asset values and trading
levels to meet its investment objectives will not be known until
a future date.
These agreements are effective for a specific term agreed upon by
the parties
and have an option to renew, or, in some cases, are in effect for
the duration
of USNG’s existence. Either party may terminate these agreements earlier
for
certain reasons listed in the agreements.
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Quantitative
and Qualitative Disclosures About Market
Risk
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Over-the-Counter
Derivatives (Including Spreads and Straddles)
In
the
future, USNG may purchase over-the-counter contracts. Unlike
most of the
exchange-traded natural gas futures contracts or exchange-traded
options on such
futures, each party to such contract bears the credit risk that
the other party
may not be able to perform its obligations under its contract.
Some
natural gas-based derivatives transactions contain fairly generic
terms and
conditions and are available from a wide range of participants.
Other natural
gas-based derivatives have highly customized terms and conditions
and are not as
widely available. Many of these over-the-counter contracts are
cash-settled
forwards for the future delivery of natural gas- or petroleum-based
fuels that
have terms similar to the Futures Contracts. Others take the form of
“swaps” in which the two parties exchange cash flows based on pre-determined
formulas tied to the spot price of natural gas, or forward natural gas
prices, or natural gas futures prices. For example, USNG may
enter into
over-the-counter derivative contracts whose value will be tied
to changes in the
difference between the spot price of natural gas, the price of Futures
Contracts traded on the NYMEX and the prices of other Futures Contracts
that may be invested in by USNG.
To
protect itself from the credit risk that arises in connection
with such
contracts, USNG may enter into agreements with each counterparty
that provide
for the netting of its overall exposure to its counterparty,
such as the
agreements published by the International Swaps and Derivatives
Association,
Inc. USNG also may require that the counterparty be highly rated and/or
provide collateral or other credit support to address USNG’s exposure to the
counterparty.
USNG
may
employ spreads or straddles in its trading to mitigate the differences
in its
investment portfolio and its goal of tracking the price of the
Benchmark Futures Contract. USNG would use a spread when it chooses to
take
simultaneous long and short positions in futures written on the
same underlying
asset, but with different delivery months. The effect of holding
such combined
positions is to adjust the sensitivity of USNG to changes in
the price
relationship between futures contracts which will expire sooner
and those that
will expire later. USNG would use such a spread if the General
Partner felt that
taking such long and short positions, when combined with the
rest of its
holdings, would more closely track the investment goals of USNG,
or if the
General Partner felt that it would lead to an overall lower cost
of trading to
achieve a given level of economic exposure to movements in oil
prices. USNG
would enter into a straddle when it chooses to take an option
position
consisting of a long (or short) position in both a call option
and put option.
The economic effect of holding certain combinations of put options
and call
options can be very similar to that of owning the underlying
futures contracts.
USNG would make use of such a straddle approach if, in the opinion
of the
General Partner, the resulting combination would more closely
track the
investment goals of USNG or if it would lead to an overall lower
cost of trading
to achieve a given level of economic exposure to movements in
oil
prices.
During
the three months ended March 31, 2007, USNG was not exposed to
counterparty
risk.
Disclosure
Controls and Procedures.
USNG
maintains disclosure controls and procedures that are designed
to ensure that
material information required to be disclosed in USNG’s periodic reports filed
or submitted under the Securities Exchange Act of 1934, as
amended (the
“Exchange Act”), is recorded, processed, summarized and reported within the
time
period specified in the SEC’s rules and forms.
The
duly
appointed officers of the General Partner, including its chief
executive officer
and chief financial officer, who perform functions equivalent to those
a principle executive officer and principal financial officer
of USNG would
perform if USNG had any officers, have evaluated the effectiveness
of USNG’s
disclosure controls and procedures and have concluded that the
disclosure controls and procedures of USNG have been effective
as of the end of
the period covered by this quarterly report.
Change
in Internal Control Over Financial Reporting.
There
were no changes in USNG’s internal control over financial reporting during
USNG’s last fiscal quarter that have materially affected, or are
reasonably
likely to materially affect, USNG’s internal control over financial
reporting.
There
has
not been a material change from the risk factors previously
disclosed in the
registrant's Form S-1, effective April 17, 2007.
Monthly
Account Statements
Pursuant
to the requirement under part 4.22 of the Commodities Exchange
Act, each month
USNG publishes an account statement for its unitholders, which
includes a
statement of income (loss) and a statement of changes in NAV.
The account
statement is filed with the SEC on a current report on Form
8-K pursuant to
Section 13 or 15(d) of the Exchange Act and posted each month on USNG’s
website at www.unitedstatesnaturalgasfund.com.
Listed
below are the exhibits which are filed or furnished as part
of this quarterly
report on Form 10-Q (according to the number assigned to them in Item 601
of Regulation S-K):
*
Filed herewith
**
Furnished herewith
#
Confidential treatment has been requested for portions of this
document. The
confidential portions have been omitted and have been filed
separately, on a
confidential basis, with the Securities and Exchange Commission.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934,
the registrant has
duly caused this report to be signed on its behalf by the undersigned
thereunto
duly authorized.
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United
States Natural Gas Fund, LP (Registrant)
By:
Victoria Bay Asset Management, LLC, its general partner
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|
By:
/s/ Nicholas D.
Gerber
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|
Nicholas
D. Gerber
|
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Chief
Executive Officer
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DateDate: June
1, 2007
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By:
/s/ Howard
Mah
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Howard
Mah
|
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Chief
Financial Officer
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|
DateDate: June
1, 2007
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