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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarter Ended September 30, 2004

Commission File Number 0-50272

SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II

(Exact name of registrant as specified in its charter)


New York 03-0407557

(State or other jurisdiction of
incorporation or organization
(I.R.S. Employer
Identification No.)

c/o Citigroup Managed Futures LLC
399 Park Avenue. – 7th Fl.
New York, New York 10022

(Address and Zip Code of principal executive offices)

(212) 559-2011

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X        No    

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes X        No    




SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II

FORM 10-Q

INDEX


    Page
Number
PART I - Financial Information:
    Item 1. Financial Statements:
  Statements of Financial Condition at September 30, 2004 and December 31, 2003 (unaudited) 3
  Statements of Income and Expenses and Partners' Capital for the three and nine months ended September 30, 2004 and 2003 (unaudited) 4
  Statements of Cash Flows for the three and nine months ended September 30, 2004 and 2003 (unaudited) 5
  Notes to Financial Statements, including the Financial Statements of SB AAA Master Fund LLC (unaudited) 6 – 14
    Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations     
15 – 17
    Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
    Item 4. Controls and Procedures 18
PART II - Other Information 19

2




PART I

Item 1. Financial Statements

Salomon Smith Barney AAA Energy Fund L.P. II
Statements of Financial Condition
(Unaudited)


  September 30,
2004
December 31,
2003
Assets:            
Investment in the Master, at fair value $ 116,969,456   $ 98,995,554  
Cash   97,569     42,632  
  $ 117,067,025   $ 99,038,186  
Liabilities and Partners' Capital:            
Liabilities:            
Accrued expenses:            
Management fees $ 191,791   $ 168,162  
Administrative fees   47,948     42,041  
Incentive fees   223,007      
Other   74,324     39,589  
Redemptions payable   1,726,736     2,185,482  
    2,263,806     2,435,274  
Partners' Capital:            
General Partner, 2,501.2826 and 2,476.2826 Unit equivalents outstanding in 2004 and 2003, respectively   2,732,726     1,954,753  
Limited Partners, 102,578.7535 and 119,900.7712 Redeemable Units of Limited Partnership Interest outstanding in 2004 and 2003, respectively   112,070,493     94,648,159  
    114,803,219     96,602,912  
  $ 117,067,025   $ 99,038,186  

See Accompanying Notes to Unaudited Financial Statements.

3




Salomon Smith Barney AAA Energy Fund L.P. II
Statements of Income and Expenses and Partners' Capital
(Unaudited)


  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2004 2003 2004 2003
Income:                        
Realized gains (losses) on closed positions from Master $ 9,939,409   $ 4,519,493   $ 20,682,171   $ (33,953,233
Change in unrealized gains (losses) on open positions from Master   14,283,505   $ (1,905,831   16,809,409     9,437,541  
Income allocated from Master   285,368     204,528     634,358     781,768  
Expenses allocated from Master   (1,178,996   (718,526   (2,878,647   (4,895,276
    23,329,286     2,099,664     35,247,291     (28,629,200
Expenses:                        
Management fee   552,444     566,323     1,510,080     1,687,451  
Administrative fee   138,112     141,580     377,521     421,860  
Incentive fees   223,007         223,007      
Other expenses   64,100     48,881     126,903     72,793  
    977,663     756,784     2,237,511     2,182,104  
Net income (loss)   22,351,623     1,342,880     33,009,780     (30,811,304
                         
Additions – Limited Partners   4,277,000         4,277,000     22,491,000  
Redemptions – Limited Partners   (5,674,585   (5,040,525   (19,086,473   (9,368,225
Net increase (decrease) in Partners' capital   20,954,038     (3,697,645   18,200,307     (17,688,529
Partners' capital, beginning of period   93,849,181     112,854,398     96,602,912     126,845,282  
                         
Partners' capital, end of period $ 114,803,219   $ 109,156,753   $ 114,803,219   $ 109,156,753  
Net asset value per Redeemable Unit (105,080.0361 and 127,636.4582 Redeemable Units outstanding at September 30, 2004 and 2003, respectively) $ 1,092.53   $ 855.22   $ 1,092.53   $ 855.22  
Net income (loss) per Redeemable Unit of Limited Partnership Interest and General Partner Unit equivalent $ 209.37   $ 10.23   $ 303.14   $ (223.44

See Accompanying Notes to Unaudited Financial Statements.

4




Salomon Smith Barney AAA Energy Fund L.P. II
Statements of Cash Flows
(Unaudited)


  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2004 2003 2004 2003
Cash flows from operating activities:                        
Net income (loss) $ 22,351,623   $ 1,342,880   $ 33,009,780   $ (30,811,304
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                        
Changes in operating assets and liabilities:                        
(Increase) decrease in investment in Master, at fair value   (21,862,027   1,434,987     (17,973,902   18,521,013  
Accrued expenses:                        
Increase (decrease) in management fees   35,823     (2,336   23,629     (37,569
Increase (decrease) in administrative fees   8,956     (584   5,907     (9,393
Increase (decrease) in incentive fees   223,007         223,007      
Increase (decrease) in due to CGM       (11,855       (40,426
Increase (decrease) in other   57,258     (65,985   34,735     (42,856
Increase (decrease) in redemptions payable   630,670     2,281,107     (458,746   (734,197
Net cash provided by (used in) operating activities   1,445,310     4,978,214     14,864,410     (13,154,732
Cash flows from financing activities:                        
Proceeds from additions – Limited Partners   4,277,000         4,277,000     22,491,000  
Payments for redemptions – Limited Partners   (5,674,585   (5,040,525   (19,086,473   (9,368,225
Net cash provided by (used in) financing activities   (1,397,585   (5,040,525   (14,809,473   13,122,775  
Net change in cash   47,725     (62,311   54,937     (31,957
Cash, at beginning of period   49,844     62,311     42,632     31,957  
Cash, at end of period $ 97,569   $   $ 97,569   $  

See Accompanying Notes to Unaudited Financial Statements

5




Salomon Smith Barney AAA Energy Fund L.P. II
Notes to Financial Statements
September 30, 2004
(Unaudited)

1.    General:

Salomon Smith Barney AAA Energy Fund L.P. II (the "Partnership") is a limited partnership organized on March 25, 2002 under the partnership laws of the State of New York to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests, including commodity options and commodity futures contracts on United States exchanges and certain foreign exchanges. The Partnership may trade commodity futures and options contracts of any kind but currently trades solely energy and energy-related products. In addition, the Partnership may enter into swap contracts on energy-related products. The commodity interests that are traded by the Partnership are volatile and involve a high degree of market risk. During the initial offering period (May 31, 2002 through July 1, 2002), the Partnership sold 93,975 redeemable units of Limited Partnership Interest ("Redeemable Units"). The Partnership commenced trading on July 1, 2002.

Citigroup Managed Futures LLC, formerly Smith Barney Futures Management LLC, acts as the General Partner (the "General Partner") of the Partnership and the managing member of the Master, as defined below. The Partnership's/Master's commodity broker is Citigroup Global Markets Inc. ("CGM"), formerly Salomon Smith Barney Inc. CGM is an affiliate of the General Partner. The General Partner is wholly owned by Citigroup Global Markets Holdings Inc. ("CGMHI"), formerly Smith Barney Holdings Inc., which is the sole owner of CGM. CGMHI is a wholly owned subsidiary of Citigroup Inc. ("Citigroup").

Effective July 1, 2002, the Partnership allocated all of its capital to SB AAA Master Fund LLC, a New York limited liability company (the "Master"). With this cash, the Partnership purchased 64,945.0387 Units of the Master with a fair value of $94,925,000. The Master was formed in order to permit commodity pools managed by AAA Capital Management, Inc. (the "Advisor") using the Energy with Swaps Program, the Advisor's proprietary trading program, to invest together in one trading vehicle. In addition, the Advisor is a Special Limited Partner of the Partnership, an employee of CGM and a related party. Individual and pooled accounts currently managed by the Advisor, including the Partnership (collectively, the "Feeder Funds"), are permitted to be non-managing members of the Master. The General Partner and the Advisor believe that trading through this master/feeder structure should promote efficiency and economy in the trading process. Expenses to investors as a result of the investment in the Master are approximately the same and redemption rights are not affected.

As of September 30, 2004, the Partnership owned approximately 36.2% of the Master. It is the Partnership's intention to continue to invest substantially all of its assets in the Master. The performance of the Partnership is directly affected by the performance of the Master. The Master's Statements of Financial Condition, Statements of Income and Expenses and Members' Capital, Condensed Schedules of Investments and Statements of Cash Flows are included herein.

The accompanying financial statements are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Partnership's financial condition at September 30, 2004 and December 31, 2003 and the results of its operations and cash flows for the three and nine months ended September 30, 2004 and 2003. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. You should read these financial statements together with the financial statements and notes included in the Partnership's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2003.

Due to the nature of commodity trading, the results of operations for the interim periods presented should not be considered indicative of the results that may be expected for the entire year.

The Master's Statements of Financial Condition and Condensed Schedules of Investments as of September 30, 2004 and December 31, 2003 and Statements of Income and Expenses and Members' Capital and Statements of Cash Flows for the three and nine months ended September 30, 2004 and 2003 are presented below:

6




Salomon Smith Barney AAA Energy Fund L.P. II
Notes to Financial Statements
September 30, 2004
(Unaudited)
(Continued)

SB AAA Master Fund LLC
Statements of Financial Condition
(Unaudited)


  September 30,
2004
December 31,
2003
Assets:
Equity in commodity futures trading account:
Cash (restricted $3,300,000 and $48,471,997, respectively) $ 255,990,968   $ 231,361,103  
Net unrealized appreciation on open futures positions       8,845,539  
Unrealized appreciation on open swaps positions   116,933,769     50,093,912  
Commodity options owned, at fair value (cost $39,437,558 and $49,687,512, respectively)   102,903,199     42,630,230  
    475,827,936     332,930,784  
             
Due from brokers   2,462,268     2,148,690  
Interest receivable   307,745     159,050  
  $ 478,597,949   $ 335,238,524  
Liabilities and Members' Capital:
Liabilities:            
Net unrealized depreciation on open futures positions $ 251,712   $  
Unrealized depreciation on open swap positions   111,227,812     18,654,566  
Commodity options written, at market value (premium received $39,232,586 and $47,549,852, respectively)   39,280,220     57,804,597  
Accrued expenses:            
Commissions   2,252,525     1,670,425  
Professional fees   34,522     59,625  
Due to brokers   2,385,634     1,815,015  
Due to CGM   22,978     22,978  
Distribution payable   304,158     153,681  
    155,759,561     80,180,887  
Members' Capital:            
Members' Capital, 189,940.2505 and 211,023.7320 Units outstanding in 2004 and 2003, respectively   322,838,388     255,057,637  
  $ 478,597,949   $ 335,238,524  

7




Salomon Smith Barney AAA Energy Fund L.P. II
Notes to Financial Statements
September 30, 2004
(Unaudited)
(Continued)

SB AAA Master Fund LLC
Condensed Schedule of Investments
September 30, 2004
(Unaudited)


Sector Number of
Contracts
Contract Fair Value
Energy
        Futures contracts purchased 14.28% $ 46,091,006  
        Futures contracts sold (14.36)%   (46,342,718
            Total futures contracts (0.08)%   (251,712
 
        Options owned 31.88%
    5,389   NYMEX Crude Call Nov. 04 – Feb. 05 14.61%   47,173,530  
    2,499   NYMEX Natural Gas Call Nov. 04 – June 05 11.07%   35,729,680  
        Other 6.20%   19,999,989  
            102,903,199  
 
        Options written (12.17)%   (39,280,220
                     
        Unrealized appreciation on Swaps contracts 36.22%   116,933,769  
               
        Unrealized depreciation on Swaps contracts (34.45)%   (111,227,812
 
  Total Energy Fair Value 21.40% $ 69,077,224  

Country Composition Investment at
Fair Value
% of Investment at
Fair Value
United Kingdom $ (4,983,491   (7.21 )% 
United States   74,060,715     107.21  
  $ 69,077,224     100.00

Percentages are based on Members' Capital unless otherwise indicated.

8




Salomon Smith Barney AAA Energy Fund L.P. II
Notes to Financial Statements
September 30, 2004
(Unaudited)
(Continued)

SB AAA Master Fund LLC
Condensed Schedule of Investments
December 31, 2003


Sector Number of
Contracts
Contract Fair Value
Energy       Futures contracts purchased 5.35% $ 13,637,465  
        Futures contracts sold (1.88)%   (4,791,926
        Total futures contracts 3.47%   8,845,539  
        Options owned 16.71%      
    6,488   NYMEX Natural Gas Put Feb. 04 – Oct. 04 8.98%   22,900,060  
        Other 7.73%   19,730,170  
            42,630,230  
        Options written (22.66)%      
    7,335   NYMEX Natural Gas Call Feb. 04 – Dec. 04 (16.04)%   (40,916,710
        Other (6.62)%   (16,887,887
            (57,804,597
        Unrealized appreciation on Swaps contracts 19.64%      
    1,000   HH Natural Gas Feb. 04 8.22%   20,967,521  
        Other 11.42%   29,126,391  
            50,093,912  
        Unrealized depreciation on Swaps contracts (7.31)%   (18,654,566
Total Energy Fair Value 9.85% $ 25,110,518  

Country Composition Investments at
Fair Value
% of Investments at
Fair Value
United Kingdom $ (113,943   (0.45 )% 
United States   25,224,461     100.45  
  $ 25,110,518     100.00

Percentages are based on Members' Capital unless otherwise indicated.

9




Salomon Smith Barney AAA Energy Fund L.P. II
Notes to Financial Statements
September 30, 2004
(Unaudited)
(Continued)

SB AAA Master Fund LLC
Statements of Income and Expenses and Members' Capital
(Unaudited)


  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2004 2003 2004 2003
Income:
Net gains (losses) on trading of commodity interests:
Realized gains (losses) on closed positions $ 27,629,155   $ 11,364,220   $ 56,198,699   $ (81,204,492
Change in unrealized gains (losses) on open positions   39,042,430     (4,834,883   45,899,394     22,219,816  
    66,671,585     6,529,337     102,098,093     (58,984,676
Interest income   811,095     527,067     1,777,054     1,946,481  
    67,482,680     7,056,404     103,875,147     (57,038,195
Expenses:
Brokerage commissions including clearing fees of $381,223, $398,062, $972,386 and $1,434,608, respectively   3,204,994     1,638,456     7,716,001     11,424,814  
Professional fees   15,862     195,727     43,291     214,218  
    3,220,856     1,834,183     7,759,292     11,639,032  
Net income (loss)   64,261,824     5,222,221     96,115,855     (68,677,227
Additions   9,747,039     6,258,158     15,658,065     51,437,472  
Redemptions   (11,884,965   (10,907,469   (42,240,945   (49,779,551
Distribution of interest to feeder funds   (803,439   (511,012   (1,752,224   (1,873,090
Net increase (decrease) in Members' capital   61,320,459     61,898     67,780,751     (68,892,396
Members' capital, beginning of period   261,517,929     281,329,159     255,057,637     350,283,453  
Members' capital, end of period $ 322,838,388   $ 281,391,057   $ 322,838,388   $ 281,391,057  
Net asset value per Unit (189,940.2505 and 215,995.4878 Units outstanding in September 30, 2004 and 2003, respectively) $ 1,699.68   $ 1,302.76   $ 1,699.68   $ 1,302.76  
Net income (loss) per Unit of Member Interest $ 338.61   $ 24.07   $ 500.05   $ (309.06

10




Salomon Smith Barney AAA Energy Fund L.P. II
Notes to Financial Statements
September 30, 2004
(Unaudited)
(Continued)

SB AAA Master Fund LLC
Statements of Cash Flows
(Unaudited)


  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2004 2003 2004 2003
Cash flows from operating activities:
Net income (loss) $ 64,261,824   $ 5,222,221   $ 96,115,855   $ (68,677,227
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:      
Changes in operating assets and liabilities:
(Increase) decrease in net unrealized appreciation/depreciation on open futures positions   15,562,303     (7,630,185   9,097,251     2,884,641  
(Increase) decrease in unrealized appreciation on open swaps contracts   (60,007,377   20,589,486     (66,839,857   4,529,577  
(Increase) decrease in commodity options owned, at fair value   (69,362,057   18,030,221     (60,272,969   49,560,742  
(Increase) decrease in due from brokers   2,379,646     4,379,758     (313,578   12,106,737  
(Increase) decrease in interest receivable   (123,634   (175,680   (148,695   (173,852
Increase (decrease) in unrealized depreciation on open swaps contracts   57,972,414     (10,006,644   92,573,246     (30,572,554
Increase (decrease) in commodity options written, at fair value   1,099,580     (7,436,247   (18,524,377   (33,051,154
Accrued expenses:
Increase (decrease) in commissions   577,706     (1,016,938   582,100     (3,305,842
Increase (decrease) in professional fees   (8,018   (38,602   (25,103   (20,113
Increase (decrease) in due to brokers   14,621     (2,755,512   570,619     (883,523
Increase (decrease) in distribution payable   121,575     174,830     150,477     174,830  
Net cash provided by (used in) operating activities   12,488,583     19,336,708     52,964,969     (67,427,738
Cash flows from financing activities:
Proceeds from additions   9,747,039     6,258,158     15,658,065     51,437,472  
Payments for redemptions   (11,884,965   (10,907,469   (42,240,945   (49,779,551
Distribution of interest to feeder funds   (803,439   (511,012   (1,752,224   (1,873,090
Net cash provided by (used in) financing activities   (2,941,365   (5,160,323   (28,335,104   (215,169
Net change in cash   9,547,218     14,176,385     24,629,865     (67,642,907
Cash, at beginning of period   246,443,750     248,398,785     231,361,103     330,218,077  
Cash, at end of period $ 255,990,968   $ 262,575,170   $ 255,990,968   $ 262,575,170  

11




Salomon Smith Barney AAA Energy Fund L.P. II
Notes to Financial Statements
September 30, 2004
(Unaudited)
(Continued)

2.    Financial Highlights:

Changes in Net Asset Value per Redeemable Unit for the three and nine months ended September 30, 2004 and 2003 were as follows:


  Three Months Ended
September 30,
Nine Months Ended
September 30,
 
  2004 2003 2004 2003
Net realized and unrealized gains (losses) * $ 215.89   $ 15.09   $ 317.75   $ (212.23
Interest income   2.66     1.57     5.73     5.85  
Expenses **   (9.18   (6.43   (20.34   (17.06
Increase (decrease) for the period   209.37     10.23     303.14     (223.44
Net Asset Value per Redeemable Unit, beginning of period   883.16     844.99     789.39     1,078.66  
Net Asset Value per Redeemable Unit,
end of period
$ 1,092.53   $ 855.22   $ 1,092.53   $ 855.22  
* Includes brokerage commissions allocated from the Master.
** Excludes brokerage commissions allocated from the Master.

Ratios to average net assets:***                        
Net investment loss before incentive fee allocation****   (6.3 )%    (4.4 )%    (5.8 )%    (7.7 )% 
Operating expense   7.4   5.3   6.6   8.4
Incentive fee allocation   0.2     0.2  
Total expenses and incentive fee allocation   7.6   5.3   6.8   8.4
Total return:                              
Total return before incentive fee allocation   23.9   1.2   38.7   (20.7 )% 
Incentive fee allocation   (0.2 )%      (0.3 )%   
Total return after incentive fee allocation   23.7   1.2   38.4   (20.7 )% 
*** Annualized (except for incentive fee allocation)
**** Interest income less total expenses (exclusive of incentive fee allocation)

The above ratios may vary for individual investors based on the timing of capital transactions during the year. Additionally, these ratios are calculated for the Limited Partner class using the Limited Partners' share of income, expenses and average net assets.

12




Salomon Smith Barney AAA Energy Fund L.P. II
Notes to Financial Statements
September 30, 2004
(Unaudited)
(Continued)

Financial Highlights of the Master:


  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2004 2003 2004 2003
Net realized and unrealized gains (losses) * $ 334.42   $ 22.68   $ 491.11   $ (317.27
Interest Income   4.27     2.44     9.15     9.01  
Expenses **   (0.08   (1.05   (0.21   (0.80
Increase (decrease) for the period   338.61     24.07     500.05     (309.06
Distributions   (4.23   (2.37   (9.04   (8.67
Net Asset Value per Unit, beginning of period   1,365.30     1,281.06     1,208.67     1,620.49  
Net Asset Value per Unit, end of period $ 1,699.68   $ 1,302.76   $ 1,699.68   $ 1,302.76  
*  Includes brokerage commissions
**  Excludes brokerage commissions
Ratios to average net assets:***
Net investment loss****   (3.3 )%    (2.1 )%    (3.0 )%    (4.4 )% 
Operating expense   4.4   2.6   3.8   4.9
Total return   24.8   1.9   41.4   (19.1 )% 
*** Annualized
**** Interest income less total expenses

The above ratios may vary for individual investors based on the timing of capital transactions during the year.

3.    Trading Activities:

The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The Partnership invests the majority of its assets through a "master fund/feeder fund" structure. The results of the Partnership's investment in the Master are shown in the Statements of Income and Expenses and Partners' Capital and are discussed in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.

The respective Customer Agreements between the Partnership and CGM and the Master and CGM give the Partnership and the Master, respectively, the legal right to net unrealized gains and losses.

All of the commodity interests owned by the Master are held for trading purposes. The average fair values of these interests during the nine and twelve months ended September 30, 2004 and December 31, 2003, based on a monthly calculation, were $25,250,094 and $39,703,607, respectively. The fair values of these commodity interests, including options and swaps thereon, if applicable, at September 30, 2004 and December 31, 2003 were $69,077,224 and $25,110,518, respectively. Fair values for exchange traded commodity futures and options are based on quoted market prices for those futures and options. Fair values for all other financial instruments for which market quotations are not readily available are based on calculations approved by the General Partner.

13




Salomon Smith Barney AAA Energy Fund L.P. II
Notes to Financial Statements
September 30, 2004
(Unaudited)
(Continued)

4.    Financial Instrument Risks:

In the normal course of its business, the Partnership, through its investment in the Master, is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash flows, to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter ("OTC"). Exchange-traded instruments are standardized and include futures and certain option contracts. OTC contracts are negotiated between contracting parties and include forwards and certain options. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. The Master's swaps contracts are OTC contracts.

Market risk is the potential for changes in the value of the financial instruments traded by the Master due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded.

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. Credit risk with respect to exchange-traded instruments is reduced to the extent that an exchange or clearing organization acts as a counterparty to the transactions. The Partnership's/Master's risk of loss in the event of counterparty default is typically limited to the amounts recognized in the statements of financial condition and not represented by the contract or notional amounts of the instruments. The Partnership, through its investment in the Master, has concentration risk because the sole counterparty or broker with respect to the Master's assets is CGM.

The General Partner monitors and controls the Partnership's/Master's risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership/Master is subject. These monitoring systems allow the General Partner to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics. In addition, on-line monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.

The majority of these instruments mature within one year of September 30, 2004. However, due to the nature of the Partnership's/Master's business, these instruments may not be held to maturity.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity and Capital Resources

The Partnership does not engage in the sale of goods or services. Its only assets are its investment in the Master and cash. The Master does not engage in the sale of goods or services. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a decrease in liquidity, no such losses occurred during the third quarter of 2004.

The Partnership's capital consists of the capital contributions of the partners as increased or decreased by its investment in the Master, expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.

For the nine months ended September 30, 2004, Partnership capital increased 18.8% from $96,602,912 to $114,803,219. This increase was attributable to net income from operations of $33,009,780 coupled with the addition of 4,402.5101 Redeemable Units totaling $4,277,000, partially offset by the redemption of 21,699.5278 Redeemable Units totaling $19,086,473. Future redemptions can impact the amount of funds available for investment in the Master in subsequent periods.

The Master's capital consists of the capital contributions of the members as increased or decreased by realized and/or unrealized gains or losses on commodity futures trading, expenses, interest income, redemptions of Units and distributions of profits, if any.

For the nine months ended September 30, 2004, the Master's capital increased 26.6% from $255,057,637 to $322,838,388. This increase was attributable to net income from operations of $96,115,855, coupled with the addition of 11,026.3567 Units totaling $15,658,065 which was partially offset by the redemption of 32,109.8382 Units totaling $42,240,945 and distributions of interest totaling $1,752,224 to the non-managing members of the Master. Future redemptions can impact the amount of funds available for investments in commodity contract positions in subsequent periods.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

All commodity interests (including derivative financial instruments and derivative commodity instruments) are used for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded in the statement of financial condition at fair value on the last business day of the period, which represents market value for those commodity interests for which market quotations are readily available or other measures of fair value deemed appropriate by management of the General Partner for those commodity interests and foreign currencies for which market quotations are not readily available, including dealer quotes for swaps and certain option contracts. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing on the last business day of the period. Realized gains (losses) and changes in unrealized values on commodity interests and foreign currencies are recognized in the period in which the contract is closed or the changes occur and are included in net gains (losses) on trading of commodity interests.

Foreign currency contracts are those contracts where the Partnership agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency contracts are valued daily, and the Partnership's net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting dates, is included in the statement of financial condition. Realized gains (losses) and changes in unrealized values on foreign currency contracts are recognized in the period in which the contract is closed or the changes occur and are included in the statements of income and expenses and partners' capital.

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Results of Operations

During the Partnership's third quarter of 2004, the Net Asset Value per Redeemable Unit increased 23.7% from $883.16 to $1,092.53 as compared to an increase of 1.2% in the third quarter of 2003. The Partnership experienced a net trading gain before brokerage commissions and related fees in the third quarter of 2004 of $24,222,914. Gains were primarily attributable to the Master's trading of commodity futures in NYMEX Crude Oil, NYMEX Natural Gas, NYMEX Unleaded Gas, IPE Gas Oil, and energy swaps and were partially offset by losses in NYMEX Heating Oil. The Partnership experienced a net trading gain before commissions and related fees in the third quarter of 2003 of $2,613,662. Gains were primarily attributable to the Master's trading of commodity futures in NYMEX Crude Oil, NYMEX Heating Oil, NYMEX Natural Gas and energy swaps and were partially offset by losses in NYMEX Unleaded Gas and IPE Brent Crude oil.

During the nine months ended September 30, 2004, the Net Asset Value per Redeemable Unit increased 38.4% from $789.39 to $1,092.53 as compared to a decrease of 20.7% in the same period of 2003. The Partnership experienced a net trading gain before brokerage commissions and related fees in the nine months ended September 30, 2004 of $37,491,580. Gains were primarily attributable to the Master's trading of commodity futures in NYMEX Crude Oil, NYMEX Heating Oil, NYMEX Natural Gas, NYMEX Unleaded Gas, IPE Gas Oil and energy swaps. The Partnership experienced a net trading loss before brokerage commissions and related fees in the nine months ended September 30, 2003 of $24,515,692. Losses were primarily attributable to the Master's trading of commodity futures in NYMEX Natural Gas, NYMEX Unleaded Gas and NYMEX Heating Oil and were partially offset by gains in NYMEX Crude Oil and IPE Brent Crude Oil.

The third quarter of 2004 was characterized by profitable trading across all sectors of the energy markets. Strong price trends in crude oil, gas oil and natural gas provided the bulk of the Partnership's profits for the quarter. Oil prices were also supported by the impact of Hurricane Ivan on both U.S. crude oil imports and Gulf Coast refinery activity levels. This came against a backdrop of oil markets already made jittery by the instability in Iraq, OPEC's apparent inability to rein in prices, and low commercial inventory cover ahead of the northern hemisphere winter. Bullish technical considerations pushed crude oil to new all time highs above $50.00/barrel.

After grinding lower much of the summer, natural gas futures posted a low of $4.52/MM BTU before exploding on the upside during the second half of September. The nearby futures easily topped $7.00/MM BTU by late September and spent the past last weeks of the quarter between $7.00-$7.50/MM BTU. The Advisor benefited from both long positions and long volatility positions in natural gas. Recent high storage numbers suggest this rally may be on borrowed time once more of the offshore production returns and/or until a pick-up in real seasonal demand becomes more evident.

Market prices for crude and natural gas may not be in place yet although fundamentals are expected to remain very supportive going forward. That said, the month of October has frequently yielded important seasonal highs/turning points in the oil market and even a technical correction/liquidation phase on crude can mean a rapid $4.00-$8.00/barrel drop in prices. As a result, the Advisor has been scaling back positions and looking to potential breaks as more attractive long-term buying opportunities.

Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership (and the Master Fund) depends on the Advisor's ability to forecast price changes in energy and energy-related commodities. Such price changes are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that the Advisor correctly makes such forecasts, the Partnership (and the Master Fund) expects to increase capital through operations.

Interest income on 80% of the Partnership's average daily equity allocated to it by the Master was earned at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days. CGM may continue to maintain the Master's assets in cash and/or place all of the Master's assets in 90-day Treasury bills and pay the

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Partnership its allocated share of 80% of the interest earned on the Treasury bills purchased. CGM will retain 20% of any interest earned on Treasury bills purchased. Interest income allocated from Master for the three months ended September 30, 2004 increased by $80,840, as compared to the corresponding period in 2003. The increase in interest income is primarily due to an increase in interest rates during the three months ended September 30, 2004 as compared to 2003. Interest income allocated from the Master for the nine months ended September 30, 2004 decreased by $147,410 as compared to the corresponding period in 2003. The decrease in interest income is primarily due to lower average assets during the nine months ended September 30, 2004 as compared to 2003.

Management fees are calculated as a percentage of the Partnership's net asset value as of the end of each month and are affected by trading performance and redemptions. Management fees for the three and nine months ended September 30, 2004 decreased by $13,879 and $177,371, respectively, as compared to the corresponding periods in 2003. The decrease in management fees is due to a decrease in average assets during the three and nine months ended September 30, 2004 as compared to 2003.

Administrative fees are calculated as a percentage of the Partnership's net asset value as of the end of each month and are affected by trading performance and redemptions. Administrative fees for the three and nine months ended September 30, 2004 decreased by $3,468 and $44,339, as compared to the corresponding periods in 2003. The decrease in administrative fees is due to a decrease in average assets during the three and nine months ended September 30, 2004 as compared to 2003.

Special limited partner profit share allocations (incentive fees) are based on the new trading profits generated by the Advisor at the end of the year, as defined in the advisory agreements between the Partnership, the General Partner and the Advisor. The profit share allocation accrued for the three and nine months ended September 30, 2004 was $223,007. There was no allocation accrued for the three and nine months ended September 30, 2003.

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Item 3.    Quantitative and Qualitative Disclosures about Market Risk

All of the Partnership's assets are subject to the risk of trading loss through its investment in the Master. The Master is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and all or substantially all of the Master's assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Master's main line of business.

Market movements result in frequent changes in the fair value of the Master's open positions and, consequently, in its earnings and cash flow. The Master's market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the value of financial instruments and contracts, the diversification effects of the Master's open positions and the liquidity of the markets in which it trades.

The Master rapidly acquires and liquidates both long and short positions in a range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Master's past performance is not necessarily indicative of its future results.

Value at Risk is a measure of the maximum amount which the Master could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Master's speculative trading and the recurrence in the markets traded by the Master of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Master's experience to date (i.e., "risk of ruin"). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Master's losses in any market sector will be limited to Value at Risk or by the Master's attempts to manage its market risk.

Exchange maintenance margin requirements have been used by the Master as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day interval. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.

The following table indicates the trading Value at Risk associated with the Master's open positions by market category as of September 30, 2004 and the highest, lowest and average value during the three months ended September 30, 2004. All open position trading risk exposures of the Master have been included in calculating the figures set forth below. As of September 30, 2004, the Master's total capitalization was $322,838,388. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2003.

September 30, 2004


      Three Months Ended September 30, 2004
Market Sector Value at Risk % of Total
Capitalization
High
Value at Risk
Low
Value at Risk
Average
Value at Risk*
Energy $ 20,846,641     6.46 $ 40,780,129   $ 19,456,778   $ 28,013,914  
Energy Swaps   3,300,000     1.02 $ 3,300,000   $ 1,700,000   $ 2,233,333  
Total $ 24,146,641     7.48                  
* Average monthly Values at Risk

Item 4.    Controls and Procedures

Based on their evaluation of the Partnership's disclosure controls and procedures as of September 30, 2004, the President and Chief Financial Officer of the General Partner have concluded that such controls and procedures are effective.

During the Partnership's last fiscal quarter, no changes occurred in the Partnership's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Partnership's internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

The following information supplements and updates our discussion set forth under Item 3 "Legal Proceedings" in the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and under Part II, Item 1 "Legal Proceedings" in the Partnership's Quarterly Report on Form 10Q for the quarters ended March 31, 2004 and June 30, 2004.

Enron Corp.

A Citigroup affiliate, along with other defendants, settled all claims against it in IN RE NEWPOWER HOLDINGS SECURITIES LITIGATION, a class action brought on behalf of certain investors in NewPower securities. Citigroup reached this settlement agreement without admitting any wrongdoing. On September 13, 2004, the United States District Court for the Southern District of New York preliminarily approved the settlement.

Dynegy Inc.

On October 7, 2004, the United States District Court for the Southern District of Texas granted the motion to dismiss all claims against the Citigroup defendants in IN RE DYNEGY INC. SECURITIES LITIGATION. The District Court also denied lead plaintiff's request for leave to replead. The case was a putative class action brought on behalf of purchasers of publicly traded Dynegy debt and equity securities.

WorldCom, Inc.

The United States Court of Appeals for the Second Circuit has affirmed the orders of the United States District Court for the Southern District of New York denying plaintiffs' motions to remand to state court a large group of WorldCom-related actions. On September 13, 2004, plaintiffs filed a petition for a writ of certiorari to the United States Supreme Court seeking review of the Second Circuit's ruling.

On September 17, 2004, WEINSTEIN, ET AL. V. EBBERS, ET AL., a putative class action against CGM and others brought on behalf of holders of WorldCom securities asserting claims based on, among other things, CGM's research reports concerning WorldCom, was dismissed with prejudice in its entirety by the United States District Court for the Southern District of New York. Plaintiffs have noticed an appeal of the dismissal to the United States Court of Appeals for the Second Circuit.

Citigroup and CGM, along with a number of other defendants, have settled RETIREMENT SYSTEMS OF ALABAMA, ET AL. V. J.P. MORGAN CHASE & CO., ET AL., a WorldCom individual action that had been remanded to the Circuit Court of Montgomery County, Alabama. The settlement became final on September 30, 2004.

On June 28, 2004, the United States District Court for the Southern District of New York dismissed all claims under the Securities Act of 1933 and certain claims under the Securities Exchange Act of 1934 in IN RE TARGETS SECURITIES LITIGATION, a putative class action against Citigroup and CGM and certain former employees, leaving only claims under the 1934 Act for purchases of Targeted Growth Enhanced Terms Securities With Respect to the Common Stock of MCI WorldCom, Inc. ("TARGETS") after July 30, 1999. On October 20, 2004, the parties signed a Memorandum of Understanding setting forth the terms of a settlement of all remaining claims in this action. The settlement must be approved by the Court.

A fairness hearing will be held on November 5, 2004 in connection with the proposed class settlement between plaintiffs and the Citigroup-related defendants in IN RE WORLDCOM, INC. SECURITIES LITIGATION.

Research

Several individual actions have been filed against Citigroup and CGM relating to, among other things, research on Qwest Communications International, Inc. alleging violations of state and federal securities laws.

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Other

On October 13, 2004, the United States District Court for the Southern District of New York certified a class in various representative cases with respect to the allocation of shares for certain initial public offerings and related aftermarket transactions.

An appeal of the dismissal granted to CGM in November 2003 with respect to the antitrust case relating to the allocation of shares for certain initial public offerings is scheduled to be argued in December 2004.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

For the three months ended September 30, 2004 there were additional sales of 4,402.5101 Redeemable Units totaling $4,277,000. The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated thereunder.

Proceeds from the sale of additional Redeemable Units are used in the trading of commodity interests including futures contracts, options, forwards and swap contracts.

The following chart sets forth the purchases of Redeemable Units by the Partnership.


Period (a) Total Number
of Shares
(or Units) Purchased*
(b) Average
Price Paid per
Share (or Unit)**
(c) Total Number
of Shares (or Units)
Purchased as Part
of Publicly Announced
Plans or Programs
(d) Maximum Number
(or Approximate
Dollar Value) of Shares
(or Units) that
May Yet Be
Purchased Under the
Plans or Programs
July 1, 2004 -
July 31, 2004
  1,076.7010   $ 981.16     N/A     N/A  
August 1, 2004 -
August 31, 2004
  2,930.9119   $ 986.53     N/A     N/A  
September 1, 2004 -
September 30, 2004
  1,580.4926   $ 1,092.53     N/A     N/A  
Total   5,588.1055   $ 1,020.07     N/A     N/A  
* Generally, Limited Partners are permitted to redeem their Redeemable Units as of the end of each month on 10 days' notice to the General Partner. Under certain circumstances, the General Partner can compel redemption but to date, the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership's business in connection with effecting redemptions for Limited Partners.
** Redemptions of Redeemable Units are effected as of the last day of each month at the Net Asset Value per Redeemable Unit as of that day.

Item 3.    Defaults Upon Senior Securities – None

Item 4.    Submission of Matters to a Vote of Security Holders – None

Item 5.    Other Information – None

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Item 6.    Exhibits

  The exhibits required to be filed by Item 601 of Regulation S-K are incorporated herein by reference to the exhibit index of the Partnership's Annual Report on Form 10-K for the period ended December 31, 2003.

Exhibit - 31.1 - Rule 13a-14(a)/15d-14(a) Certification
(Certification of President and Director).

Exhibit – 31.2 – Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer and Director).

Exhibit – 32.1 – Section 1350 Certification (Certification of President and Director).

Exhibit – 32.2 – Section 1350 Certifications (Certification of Chief Financial Officer and Director).

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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.

SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II


By: Citigroup Managed Futures LLC
  (General Partner)
By: /s/ David J. Vogel
  David J. Vogel
President and Director
Date: November 9, 2004
By: /s/ Daniel R. McAuliffe, Jr.
  Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
Date: November 9, 2004

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